Matthew McRae: Great questions again. On the what we’ll call active unsubscribed customer base, that continues to grow as well, which is great. Obviously, we look to them with promotional activity, sometimes that’s maybe upgrading somebody’s device, maybe that’s promotion on service itself to being them into the space overtime and it is something we are constantly looking at. I would tell you some of the roadmap items, including several of the features that are in Arlo Secure 5 that will launch towards the end of this year, are specifically geared towards some of the features that users are asking for to become a paid subscriber. We gear our roadmap based on survey data and listening to what unsubscribed active customers are actually telling us.
I would also tell you that, and we talked about this on the previous call, we’re going to test in app advertising on the free tier as well. That may open up an additional monetization opportunity where an unsubscribed active customer could still generate service revenue for the company. That’s something we’re going to test as we get towards the end of this year and see how that applies to our 2025 strategy. I think both of those are areas that we’re excited about, and you’ll see more activity in the second half of this year. As we get into the capital allocation plan, which is the second question, you’re right, obviously we’re having some great success, we’re throwing off some cash. I think the market consolidation also lends itself to us looking at things beyond just the organic investment we’re doing from an R&D perspective.
Now I would say, like I said on the call, the next 24 months to 36 months, even though the market segment is maturing, there are new technologies being brought to bear, some work we’ve been doing over the last year that I’m extraordinarily excited about, what that means just from an organic investment in new technologies that can expand our market. But again, put that aside and come back to your question, I don’t think that’s the only thing we’ll be looking at. We are starting to look at some inorganic opportunities, maybe that’s new technologies, maybe that’s a consolidation play that leans into some of the natural market dynamics. We are exploring other things like buybacks and other things that might be inorganic and returns. These all may play a part in the capital allocation plan.
It’s under development. We’re in active discussion with the Board. There’s nothing I can communicate yet. But I think over the next several months, we are hoping to have a little bit more information that we can share with investors and start to lay out how the capital allocation plan will play a key role in getting us to our long-range targets. Those long-range targets are something that drive us every day inside this company. How do we get to 10 million paid accounts? How do we get to $700 million in ARR? And how do we drive profitability above 25% operating margin. That’s something that we’re all focused on, everybody in the company is focused on, and we’re all targeting. The capital allocation plan may play a key role in that as we go forward.
It’s something we’ll talk more about I think in the coming months or quarters.
Operator: Our next question comes from the line of Jacob Stephan with Lake Street Capital. Your line is now open.
Jacob Stephan: Appreciate you taking the questions. I’ve been hopping between calls. Sorry if this has already been asked, but just wanna follow-up on kind of the Arlo Secure 5 rollout and some of the monetization opportunities you talked about with your unpaid subscriber base. The ads kind of tier that you were had been previously talking about. Is that technology something that will be rolled out with Secure 5 or are you going to need to essentially acquire that or develop that further before rolling that out?
Matthew McRae: Good question. Arlo Secure 5 is a rollout that includes all the new AI features and some of the other functionality that we discussed on the prior call. It also includes, by the way, a lot of re-factoring, I would say simplification of both language and user experience, because we’re starting to see ourselves move into the mass market, right? Some of the success you’ve seen at big box retailers means our general population of users is going to broaden. That’s exciting, but it also means we need to take a fresh look at our user experience and make sure that support mechanisms are there, simple plain English descriptions of key features are there, the simplification and navigation is there. It’s twofold, Arlo Secure 5.
One is simplification and broadening the access to a wider population of users. It’s adding a lot of new technologies, including some of to me, some of the most exciting AI features you’ll see in the security space in a long time. That’s Secure 5. Now in parallel to that, there’s a couple of tests we’re going to be doing towards the end of the year to inform what our strategy will be based on the resulting data for what we want to do in 2025 and be able to build that into our annual operating plan. One of those tests is advertising. It’s related in that it will run on top of Arlo Secure 5, but it’s not technically part of that launch and rollout. It’s a parallel development that’s focused on doing a test allowing us to capture data as we go into next year’s planning cycle.
To your question about development, a lot of that is being developed in-house. But obviously there are a lot of third-party relationships with technology partners and industry partners that bring a lot of that capability from the back end to bear into the Arlo user experience. This is an area that both Kurt and I and many of the executives here back at physio and other companies we’ve been at, have had a lot of experience figuring out how to monetize a user experience, even if it doesn’t have a paid subscription attached to it.
