Life360, Inc. (360) Earnings Call Transcript

Good morning. I'm delighted to be joining you at the ASX Small and Mid-cap Conference. I'm presenting to you today, as [ Ian ] said, from San Francisco. However, as you can probably tell from the accent, I am Australian, although I've lived and worked in the U.S. for many years. I'm very pleased to have the opportunity to present to you today. For those unfamiliar with Life360, we're the world's leading safety service for families. The family is at the center of everything that we do, and this is what differentiates us from the products and services that we provide. You may know us through our mobile app, which is available in Australia and around the world. Here's a quick snapshot of the company. Life360 is headquartered in San Francisco with an employee base of around 200. We report our financials in U.S. dollars under U.S. GAAP, so please note that all references in this presentation to dollars are, in fact, to U.S. dollars, unless we otherwise specify. Our CDIs are listed on the ASX under the ticker 360 and we have a market capitalization of around AUD 650 million. Our IPO took place in May 2019, raising around $76 million and as of June 2020, we've got a net cash position of $58.4 million with no debt. Here's a snapshot of the Life360 business. At June 2020, we had 25 million monthly active users and 845,000 Paying Circles or subscribers mainly in the U.S., but also across 195 countries and 13 languages. Our annualized monthly revenue based on June 2020 was close to $78 million. During the first half of calendar 2020, Life360 delivered normalized revenues of $38.7 million or a 57% year-on-year increase. Underlying EBITDA loss for the same period was $2.6 million, an 82% year-on-year improvement. This slide provides an overview of the market opportunity that we see for Life360. The pie chart shows that the U.S. makes up 64% of the monthly active user base with a very broad spread amongst other countries around the world. The chart on the right shows the penetration of our MAU base against the population of each country. Even in our most established market of the U.S., MAU penetration is only -- still only 5%, with significantly lower penetration in other markets. Obviously, this highlights the considerable upside opportunity that lies ahead. And in addition, as you'll see shortly, our new membership offerings actually broaden the addressable market that we are accessing. In the next couple of slides, I wanted to provide some insights into Life360's freemium business model. There are multiple benefits as well as costs to maintaining a free service. As you can see in the diagram on the slide, we're able to monetize our entire user base through indirect revenue, which includes data and lead generation revenue streams. Importantly, the free user base also operates as the top of the funnel for our paid subscriptions, which provide our direct revenue. We maintain engagement with our free user base for years and, therefore, able to convert users into subscribers over a significant period of time with little incremental costs. In the first half of 2020, direct revenue contributed 73% of our total revenue across the international and U.S. markets with indirect contributing 27% of our total revenue. And the power of Life360's revenue retention model is displayed on this slide, where we focus on 1 quarterly user cohort with a long-term history, just as an example. The chart illustrates that revenue retention over time is much stronger than subscriber retention. This is due to the continuous refresh of free users into paid subscribers and the upsell of subscribers into higher price points. You can see that this occurs over an extended period of time, stretching beyond 27 months. The fact that net revenue retention for a user cohort is so dramatically higher than subscriber retention is what truly drives the long-term health of the business. The exact result will vary by cohort with different conditions, but the broad outcome is the same. This slide provides a long-term history of Life360's quarterly revenue and the EBITDA performance. The chart on the left shows that despite the lockdowns associated with COVID-19, revenue continued to increase quarter-on-quarter reflecting the resilient nature of our subscription model. The chart on the right shows Life360's EBITDA margin profile. In the second quarter of 2020, we achieved a positive EBITDA margin for the first time. Much of this was due to our temporary pivot to a defensive posture in these uncertain times where we really scaled back on our user acquisition marketing spend. We do expect this margin to come back down when conditions return to normal because we're going to continue to invest to really drive long-term growth. However, the achievement of EBITDA profitability demonstrates the flexibility of our business model, and we're well positioned to weather the crisis even though it's continuing longer than anyone initially anticipated. I spoke earlier about our direct and indirect revenue, and I wanted to provide some more detail on the drivers of these 2 revenue streams. The chart on the left shows the performance of our Paying Circles or subscribers, which increased 21% year-on-year to 845,000. Despite the impact of COVID-19 in the first half, Paying Circles was still 2% ahead of December 2019, and we're proud that we demonstrated this full period of growth in the face of difficult circumstances and a near-complete pause in user acquisition spend. The chart on the right shows average revenue per Paying Circle, which increased around 12% year-on-year. U.S. ARPPC continued to benefit from the shift to higher-priced Driver Protect product subscription and a higher proportion of monthly versus annual subscribers. We do expect continued acceleration of ARPPC due to the new membership offering that I'll talk about shortly. As I mentioned earlier, we monetize our entire user base through indirect revenue, which includes data and lead generation revenue. Year-on-year revenue growth was strong, however, we did see impacts from COVID on some data customers and our expectation is that growth in -- will be flat in the second half. While data makes a valuable contribution, it's not our core focus. The market for high-quality data partners is limited, and we're more focused on the ways in which we can use our data to really enhance our own internal product offerings. Our auto insurance lead generation partnership with Allstate launched in May 2019 and makes a monthly contribution of around $0.5 million. While COVID has impacted the pace of expansion, we do remain optimistic about this revenue opportunity in the longer term. I want to turn now to our membership model, which launched on time on June 30 with the full rollout achieved over the first 2 weeks of July. I should also highlight that at this time, our full membership offering is only available in the U.S. market. Before I go into the detail on the membership model, I wanted to explain that this initiative is actually the culmination of more than 10 years in the evolution of the vision for the company. We put the 360 into the Life360 name because our strategy has always been to be more than an app. Our goal is to provide a service that protects you physically while you're driving and in the cloud, all simultaneously. We use the proceeds of the IPO to fully execute what we've been envisaging since the company was founded. Prior to the membership launch, our product was focused on 2 life stages: families with teens and families with college-aged kids. Our premium offering was very appealing to families at these specific life stages, where kids were becoming more independent and were on the road with other teens. What's exciting about the membership offering is that our reach expands significantly. ID theft is relevant to young adults who are becoming financially independent and our SOS feature is tied to physical safety, which is relevant to a much broader array of people. As well as going older, our membership offering allows us to go younger with features like Family Safety Assist, which are highly relevant for younger families. Our driving features may not be relevant if your kids are not of driving age, but the 24/7 assistance is hugely useful if you're living with the chaos of younger kids and teens at home. We are seeing this offering as the beginning rather than the end of the range of valuable services that we can provide to families. There's an opportunity to roll out features into our offering and become a truly essential part of everyday life. Our goal is to become something that parents sign up for instinctively, just as 20 years ago people signed up for NRMA or RACV in Australia or the AAA in the U.S when they bought a car. There's a lot more detail on these products and services in the appendix to this presentation. This slide provides an overview of the tiering of our membership service. This was created to maximize both conversion and revenue. It supports our freemium model where users can access a basic account for free with premium options starting with Silver at $4.99, all the way through to Platinum at $19.99 a month. The tiering was based on considerable market research. Our current users were grandfathered into these tiers to minimize disruption to the existing base, plus users receive Silver at no additional charge and our Driver Protect subscribers receive Gold. The revenue benefits from this new model will largely come from new users as they take up the new premium tiers. So the revenue benefit will take some time to build. The value that our new membership model is providing is highlighted on this slide. As you can see on the left-hand side, subscribers would have to spend $256 a month for a family of 4 and subscribe to at least 8 different providers to match what we're offering with our -- at our Platinum level. We're able to do this by leveraging mobile economics. We're able to grow organically through word-of-mouth and leverage our existing infrastructure to launch these services at a fraction of the cost of legacy incumbents. As a result, we're going to be disrupting these markets. I mentioned earlier that we achieved full rollout of our membership model in mid-July, and this slide gives you an idea of the first 4 months' performance. We have more than 40,000 new and upsell subscribers into the new membership tier who now make up around 6% of our U.S. subscriber base. Most exciting of all is the uplift in ARPPC being achieved by this new cohort, with a 33% increase compared with new subscribers in the first half of 2020. The table on this slide provides an overview of Life360's gross margin expectations across the new membership offering, U.S. legacy and international subscribers and our free users. Gross margin takes into account hosting costs, membership benefits, customer support, technology costs and allocated salaries. For our 3 subscriber groups across membership, U.S. legacy and international, gross margins are between 85% and 95%. Taking into account the cost of serving our free users, overall gross margin is 65% to 70%. And then considering the cost of commissions, the contribution margin of our subscriber business is around 40% to 45%. And this doesn't include the higher-margin data and lead generation revenues. So in conclusion, I want to summarize the ways in which membership will directly benefit Life360's most important financial drivers. As I highlighted earlier, there is a significant increase in the total addressable market, our new features are relevant to families at all life stages. This broader offering provides a greater opportunity for premium conversion and as I just showed you, a meaningful increase in average revenue per paying circle. Over time, we expect that longer relevant life cycle and substantially greater value will reduce churn. All of these factors combine to deliver significantly higher lifetime value and company revenue and underpin the long-term growth opportunity for the company. Thank you very much for your attention. I look forward to the Q&A session. But if you have any other follow-up questions, please feel free to visit our Investor Relations website at investors.life360.com. Thank you very much.

Thanks for joining us, Russell. I can see we've got a few people in the room here, so -- and we've got some questions coming through. The first one I've got is how sticky is your customer base? And who is your most obvious competitor? And what is your primary customer acquisition? So 3 in one go. So if you want to just start with the stickiness to the customer base, and then I'll remind you of the second and third parts of that question.

Sure. Sure. No, in terms of our customer base, it is amazingly sticky. And the freemium model is really about building a large base of very loyal users, which the company has done very successfully over a period of time. And then in recent years, has really started to monetize both the whole base and the paid subscriber base. But even in the recent COVID period where movement has been somewhat limited and therefore, location services may be restricted, our subscribers have been -- remain very loyal and have really continued with organic growth through that whole period.

Excellent. And interestingly, I suppose you've just mentioned there that COVID has resulted in less movement, but how has that affected people's perception of your offering? And is it still -- because I guess the corollary to that is that when people aren't together, they can't sort of travel back to each other. So has that had a balancing effect?

It has, to some extent. And the general impact of COVID, I think, has been to enhance the concept of safety and security for the family. So as I said, our subscribers have been -- remain very loyal. And the timing of the launch of our new membership program, which is -- includes a broad -- a much broader array of family safety and security features, I think, has worked very well.

Excellent. So the triple-barreled question that came in, in the first instance, the second part of that was, who is your most direct competitor?

It's interesting. We don't have any true direct competitors. We have some very small-scale competitors that have nowhere really near our base. People often mention the find-my-phone type apps that are incorporated within platforms. But they're really not directed towards the broad array of services that we're focused on. So we're very focused on continuing to enhance our services and keep that distance.

Excellent. Someone has asked, what do you consider to be your economic moat?

It's really that unique focus on family, safety and security, which, as I said, doesn't -- we're not finding any direct competitors in that specific field. And we've really been focused on that. The company has been around for quite a long time and has focused on that during that whole period. And has built up this very large base of dedicated and loyal users. So that's really our moat at the end of the day.

Excellent. In your presentation, one of the slides showed how you're able to offer products -- a range of products at a very compressed price compared to purchasing those services individually from different suppliers. And it was a very big difference in the consolidated price that you gave. So how are you able to achieve those significant cost savings for your customer base?

Right. It's -- and it is quite a marked difference, and that's where we're really going to disrupt those industries. And -- but it's about what we think of as mobile economics. With using our app, we've built this very large user base that we were able to access with -- and really upsell to these services at a very small incremental cost. So our cost of acquisition for those services is a fraction of the companies that are really set up to sell those services and spend a great deal of marketing dollars just to sell those services. At the same time, we're able to access the broad range of services for a relatively small cost for our purpose. And that's all rolled into this sort of mobile economics concept.

Excellent. Okay. Another one of your slides showed the difference between revenue retention, which is a lot higher than your subscriber retention. So can you explain a little bit about how that works?

Yes. That's -- we did that specifically, and there's a lot more detail in our sort of half yearly investor presentation that is available on our investor website. But we did that sort of specifically in response to some of the questions that we've received from investors over particularly the last 6 or 12 months. And it's to help differentiate our freemium model from the typical subscription or even sort of SaaS model. Because we're -- we've built this user base under the freemium model. And what we find is that those users stay for a very long period of time, but we're also able to upsell and really monetize those users over a very long period of time. So that results in what we've set out there is revenue retention that is really very, very solid over a long period of time as opposed to the typical measure of subscriber retention, which our model is not -- our sort of rate there is not dissimilar from many other subscription services, but we've been successful at monetizing that -- those cohorts over a long period of time.

Excellent. Can you also explain the concept of Paying Circles that was in those slides?

Yes. And it's to differentiate from the typical sort of measure of ARPU in a subscription model, which is really based on a sort of single-user subscription. So our entire model is based on a family concept. So the -- we have a subscriber who is typically one of the parents, and they bring their entire family into this Paying Circle. So therefore, we -- the way we measure our subscriber base is by reference to the Paying Circle, which really just means the family unit.

Excellent. And do individuals within those Paying Circles have different profiles monetarily? Or do -- does it just seem to be that, that unit is 1 economic unit?