Again, I think we’ll see probably a quarter of that at least. We’re seeing some catch-up now in the quarter that we’re currently in. And it may spill a little bit into Q3, but we’re hoping to have it mostly finished by the end of summer.
Hamed Khorsand: My last question was, do you have any data that you could share as far as, if there’s a change in the attach rate with the Essentials 2 introduction versus the rest of your Arlo product line?
Matthew McRae: Yes. We have some preliminary data. It’s a great question and it’s something we’re watching very carefully. As you know, we have conversion rates and then attach rates. Conversion rates are the metric of service being acquired by a customer within 30 days of a free trial ending. And then attach rates is we look at that cohort six months out. We’re not really at a point six months out where we can really see what the long-term attach rates are. But what I can tell you is, both the general mix of our platform is still within that 60% attach rate plus or minus, even though we haven’t had all the Essential 2 live on for six months or more in the current installed base. The initial conversion rates that we’re seeing actually across the board looks slightly better than the original Essential 1.
We think we’re in a similar position as where we would have been prior to the Essential 2 launch potentially for a little bit of upside as we get through the full life of the Essential 2 customer and we to judge their attach rates in the next, call it, three to four months.
Operator: Our next question comes from the line of Scott Searle with Roth MKM. Your line is now open.
Scott Searle: Good afternoon. Thanks for taking my questions. Matt, maybe to start, could you give us an update in terms of what you’re seeing with the customer channel right now in terms of responsiveness to driving further penetration of you versus other, I’ll call them Amazon linked devices and couple that then with the product gross margin expectations? As we’re looking out over the course of 2024. I know 8% is at the higher end of the range, but how are you thinking about that over the next couple of quarters? How aggressive do you plan to be?
Matthew McRae: Yes, great question. A couple of the channel dynamics that we’re seeing to provide a little bit of color. Towards the end of last year, obviously, we had a very successful Q4 and engagement across several retailers, including some of the biggest big box retailers. I think you’ll see that continue, meaning, the investment that we’ve placed into that relationship is being reciprocated in an investment in Arlo, not only from a shelf perspective, but also from a promotional calendar perspective. That’s exciting as we get into the second half and look at driving obviously future service revenue from device sales. I would say that, also from a color and competition perspective, we are seeing some consolidation in the space.
I think that’s a benefit for us. That’s an opportunity for us to capture share as some of the smaller brands start to struggle, especially brands that do not have a healthy service component, so that they can dig a little deeper on hardware. And then to your point and I think you were hinting at this in the question a little bit. There are several retailers, one in particular and one that’s in the middle of kind of strategizing their assortment, are weary about some of the larger competitors in the space and what they mean from a long-term perspective, but also from a customer ownership perspective. I think again that plays into our favor. I would say, Arlo, I think we’re in a really strong position. We feel like the strategy that we played last year around the rebalancing of our pricing to lean in and lower the barrier of entry for our products really did pay dividends in the service business, our service gross margin and our overall profitability of the company.
To the second part of your question, we’re looking out now at a year that we believe and to Kurt’s answer on a previous question, looks a lot like 2023. Maybe the holiday period gets a little bit deeper depending on what happens, maybe it’s a little bit better. But on a whole, we’re seeing this year start to play out very similar to last year. The good news is our strategy worked extraordinarily well last year. We’re going to replicate it this year. You’re right, our gross margin on hardware in Q1 was roughly 8%. It’s a bit higher than the mid-single-digits that we had laid out. I would tell you, as we’re looking for Q4 and given the benefit, the clear benefit and demonstrable benefit we already had last year in both service revenue and overall profitability of the company, when you look at how service revenue actually applies to our overall financials.
I think you can see us potentially go lower, right? That’s something we’re kind of planning through and trying to talk about on the call is, maybe it’s still mid-single-digits, maybe it’s somewhere between zero and mid-single-digits. If we think it would generate substantially more household formation, which turns into service revenue, and then obviously turns into shareholder value creation. I’ll give you hopefully some color. We’re going through some of that stuff right now. But the promotional calendar we have for the holiday is very strong. If we think there’s an opportunity to dig a little bit deeper and do the exact same trade, we did last year for similar results, it’s something we would do again.
Scott Searle: Very helpful. Matt, if I could follow-up, Arlo Secure AI looking at those currently unpaid accounts getting close to $6 million. I wonder if you could update us on your thoughts in terms of monetization opportunities there into some of the adjacencies be it with SMB, InsurTech, telehealth and maybe as well how you’re thinking about things from an inorganic perspective of the company now is starting to get into a regular position or generating positive free cash flow. Are your thoughts changing at all on that front? Thanks.
