Life360, Inc. (360) Earnings Call Transcript & Summary

Good morning, and thank you for joining the call for Life360's acquisition of Tile and equity raising. This is Jolanta Masojada, and I head up Investor Relations for Life360. On the call today are Co-Founder and CEO, Chris Hulls; CFO, Russell Burke; Tile's CEO, CJ Prober; and representatives of the underwriters, Crédit Suisse and Bell Potter. The agenda for the call is outlined on Slide 4. We will begin with some prepared remarks followed by a Q&A session. This call is being conducted as a Zoom audio webinar. [Operator Instructions] I would now like to turn the call over to Chris.

Good morning, everyone, and thanks for joining this call on short notice. I'm very excited to gather everyone here today to announce our acquisition of Tile. This is genuinely the most impactful deal in our company's history and along with our Jiobit acquisition from earlier this year, our vision of linking people, pets and things all in one place is now complete. As an back story, I was a very small early-stage Tile investor. I met the company's cofounders, Nick Evans and Mike Farley in 2014. We connected immediately because it was clear to us that we would either be working together or be competitors at some point in the future, as we both had, what all called, the religious belief that location would be part of everything. We had the platform of mobile phones covering people. They had the hardware device covering things. We almost joined companies together many times in our history, and I have been closed with Tile's current CEO, CJ Prober, since he took the reigns in 2018. So this is not an opportunistic deal that came about from our strategic review, but rather the acquisition I've been hoping to make for the better part of a decade. Slide 6 and 7 provide a summary of the transaction, the strategic rationale and funding. We'll go into more detail on all these elements later in the presentation. At a high level, Life360 has agreed to enter into a binding agreement to acquire Tile for a purchase price of up to $170 million, plus $35 million in retention equity for Tile employees. Tile generates approximately $103 million in revenue. So the deal, which includes an earn out, is it an approximate 2x revenue multiple inclusive of Tile's subscription business. We'll be funding this transaction with a $280 million Australian equity raise, which will fund both the acquisition and additional capital for growth. I'm also excited to announce that CJ will be joining our Board. I'm very excited about this given we've known each other so long and have very complementary skills. Turning now to the strategic rationale for the transaction. First, as a quick reminder of what Life360 stands for, we are on a mission to simplify safety so families can live fully. We've taken a mobile and family-first approach to safety to disrupt the multibillion-dollar legacy safety and security incumbents, which have not adapted to the needs of digitally native consumers. Earlier this year, we extended the life stage use case for Life360 with the acquisition of Jiobit, the leading wearable for young kids and pets. The acquisition of Tile completes our 360 vision of an integrated membership offering that protects people, pets and things. As a few specific highlights, first, Tile pioneered the item binding category. They're almost a household name in the U.S. and similar to Life360, they are the definitive cross-platform leader in this space. Second, the technology in Tile is very differentiated from Jiobit. Tile is based on Bluetooth, which has a very long battery life, but only works when in range of your phone or other Tile users and access points in the finding network. Jiobit devices need to be charged every couple of weeks, but are able to update location in real time and with much higher accuracy as they have embedded cellular and GPS. So the use cases are both differentiated and complementary. As I mentioned in my introduction, this acquisition truly rounds out the 360 vision when it comes to protecting people, pets and things all in one place. As this slide illustrates, we now have what I'll call the map to rule them all, and Life360 will be the only vertically integrated cross-platform solution of scale in the entire market. So the last couple of slides were more about the vision. But in the short and midterm, we are focused on what Tile brings to our subscription business and what we can bring to Tile subscription business, because the 2 are highly synergistic. As we have long discussed, there remains a bias to things you can touch and feel and by bundling Tile with our membership plans, we will not only bring significantly more value to our customers, but also bring this long missing physical component to our offering. Additionally, we will also bundle Life360 membership benefits when customers upgrade to Tile's own subscription offering. I'll discuss it more later, but basically, we are going to advance Tile subscription road map a number of years into the future as much as what we've already built as part of Tile's long-term plan. There are also synergies on the distribution front. And while I won't go into details of this slide, we own the digital channels to the App Store and Tile dominates in brick-and-mortar, online direct-to-consumer and their own embedded line of business. As one example, Tile has a nearly 30,000 retail stores, providing a new footprint previously inaccessible to Life360. We're also very excited about how Tile will accelerate our international plans. As many know, with the introduction of Apple AirTag, which I'll discuss more later, the Bluetooth tag category is expanding rapidly and on non-iOS devices, Tile is absolutely dominant. As part of our international expansion, we're excited to be able to offer Tile devices, in particular to Android users who don't have many other alternatives. As illustrated here, we're a long way from maturity when it comes to international revenue and this marks the moment we are going all in on global growth. The acquisition of Tile is highly complementary to our recent acquisition of Jiobit. Aside from the technology, which is very different, there is significant overlap in what I'll call the pipes of the respective businesses. Tile is a much more mature business will bring these all forward for Jiobit. I know that many of you on this call are familiar with Life360. However, for the benefit of those that are new, I'll provide a quick overview of the company. Life360 is the world's first family safety services membership. We have achieved global scale with more than 33 million global monthly active users and over 1.1 million paying circles for subscribers. In September, we achieved an annualized monthly revenue of $120 million, up 48% year-on-year and had a cash balance of $50 million. We were San Francisco based with around 330 employees. We are a constituent of the ASX 300 with a market capitalization of approximately AUD 2 billion. The core of our service is location sharing and coordination, a category which we pioneered in the early days of mobile, and we layer on a large number of additional services, covering things like driving safety, digital safety, emergency systems and more. Our unique edge is that we are a mobile-first focused specifically on families and roll up the entire experience in a single user-friendly app. I'd like to emphasize that although people access through their phone, where in actuality a service that has most of its impact in the real world. Here are some examples of statistics we are very proud of including the fact that we dispatch more than 7,000 ambulances in the last 6 months alone. This testimonial is one of many we receive on a very regular basis and is a demonstration how we've literally saved thousands of lives. While Life360 listed on the ASX only 2.5 years ago, our core technology platform has a long heritage, having been established more than a decade ago. We have undertaken more than $130 million in pure R&D in the last 5 years and have 35 patents that are issued or pending. All of this adds up to a very hard-to-replicate technology platform. Slide 21 provides an overview of our freemium business model, whereby our users come in as free downloaders before paying us. While freemium is initially high risk before a user base is established, once it scale, it makes it very hard for other companies, even very large ones, to compete. To follow on the benefits of freemium, we're able to provide extremely high value to our users who do decide to become paid members. This is because we market to our existing user base, most of whom come purely from word of mouth. If you look at what is included in our platinum plan on the left for $19.99 a month, you can see that it would cost literally 10x more to purchase these features from our stand-alone competitors. While COVID-19 constrained our growth in the first half of 2020, the reopening and return to normalcy is acting as a tailwind. A silver lining of COVID is the step function change in comfort with digital communication tools, of which we are a significant net beneficiary. In the September '21 quarter, U.S. MAU increased 32% year-on-year and our revenue growth accelerated to 45% year-on-year. With that, I'll turn to Tile and introduce CJ, Tile's CEO, and soon to be Life360 Board member, who will tag team with me giving an overview of the Tile business.

Thank you, Chris, and hello, everyone. I am absolutely delighted to join this call on this landmark day for Tile. This acquisition not only brings together 2 incredible teams and complementary missions and vision, it paves the way for us to jointly build the world's leading solutions for peace of mind and safety. This is the perfect next step in our journey, and I could not be more excited to continue leading our incredible team at Tile and to be joining the Life360 Board. As Chris mentioned, Tile is the pioneer and global leader in helping you keep track of your things. In the U.S., we're the equivalent of the Kleenex brand for our category. And there's really no other cross-platform solution of relevance. Tile was founded in 2012 in San Mateo, California. And currently, we have 190 employees. We've sold more than 45 million Tiles and have over 440,000 subscribers. In 2021, we expect to report total revenue of approximately $103 million. And as of September 2021, we had an annual recurring revenue of approximately $15 million. Tile is best known for its category-leading devices that come into a range of form factors and are powered by a highly rated mobile app experience for iOS and Android. More recently, we've embedded our finding technology into third-party category-leading products with top brands like HP, Fitbit and Skullcandy. The third-party products we enable do not require the addition of any hardware. Our solution is software-based. And once integrated at the factory, these devices were just like a Tile device. This is a significant and unique differentiator over all other competitors. Most importantly though, we're in the early days of transitioning our business from a device sale to a membership model. And we've had some early success in doing so with now over 440,000 subscribers.

Moving on, while the launch of Apple's AirTags could be seen as a competitive threat to Tile, our view is quite the opposite. We see Apple's entry into the device tracking category as a validation that the industry Tile -- of the industry that Tile has pioneered. In many ways, we see this mirroring Life360's experience with Apple's Find My Friends, which helped to expand the category, which we created and was one of our most significant catalysts for growth. AirPods are a further case study to support our thesis that Apple's products create rather than dominate categories. Apple was not the first to market in 2017 with wireless earphones. However, its involvement has catapulted the category from just $100 million to more than $37 billion in value. In the same time, Apple's market share has fallen in half, with substantial growth achieved by smaller players. We think it is highly likely that AirTag's launch is a similar iPod moment for the market. And as mentioned above, we are the only credible cross-platform player, and AirTags are likely to remain an iOS-only product. A significant advantage that we see for the combined Tile and Life360 business is our unique vertically integrated cross-platform solution. As this slide highlights, the majority of the world is on Android and 55% of Life360 is international paying circles or Android or cross platform. There are currently more than 600 million worldwide users of Google and Amazon voice assistance, which are already Tile and Life360 enabled. And there are 5 billion Bluetooth-enabled devices that are sold each year that are potentially Tile-embedded partners. The brands on this slide already partnered with Tile and require a cross-platform solution. We really are the only vertically integrated cross-platform solution of scale in the market and embedded partners, in particular, really need this platform-agnostic option given their customers spend iOS and Android. Before I hand it back to CJ, I'd also like to highlight one of the biggest synergies between our companies, the power of which is hard to overstate. Currently, Tile is a finding network that enables other Tile users to find lost devices. With approximately 3 million active users, it is already effective in finding over 80% of lost items, but it is admittedly weak in comparison to Apple's network. However, with Life360, the network will increase in scale by up to 10x as soon as our integration is complete. We expect the lost item recovery rate to move well into the 90s, providing near parity to Apple. This network scale was the single largest differentiator between Tile and the AirTags, and we will massively close this gap. No other acquirer would have provided this benefit to Tile.

Let me expand a little on our products. Tile's current lineup includes a number of different form factors that enable a broad array of use cases like keys, bags, wallets, passports, purses, remotes, bikes, et cetera. Because our products work out of the box, the cost of ownership is much lower than [indiscernible] which requires an expensive accessory for most use cases. We've also been investing heavily in ultra-wideband, otherwise known UWB for several years now. UWB will allow us to expand our product experience to include an augmented reality-based finding experience. As we announced in October, we're working closely with Google to ensure our UWB-enabled product works seamlessly with Android 12 phones, the first OS that includes UWB APIs. In addition, Apple recently opened up through UWP APIs to third parties. So when we launch our new Tile ultra in 2022, we expect this to be the first cross-platform product of its kind. As I mentioned earlier, Tile has some early success with our subscription offering. Our ultimate vision is to simply offer a membership that includes all the benefits of Tile, including the devices you need for your family. This acquisition is going to allow us to dramatically accelerate that by very quickly, including Tile as part of Life360's membership and also improving the value proposition of Tile's premium service by integrating Life360 benefits there. This is one of the biggest opportunities as a joint company. Tile is far, far more than a set of consumer devices. We have a broad and expanding ecosystem that we've been investing in for almost a decade. Many of our partnerships span several years, including several chip partnerships like Intel, where we've been partnering for 3 years to make Intel-based PCs findable via the Tile platform. To give you a sense of scale, our platform processes around 1 billion location updates per day. Consumers love Tile, which is the highest rated mobile app for Bluetooth finding in the App Store. The many testimonials that we receive daily validate the positive impact we have on our consumers' lives each and every day. Our products are also highly differentiated. Among our advantages, we were across platform, so not just on iOS or Android but both. And we also work across all of the main voice assistants, like Alexa, Google Assistant and Siri. We have several form factors that were got in the box, no accessory required. We have the deepest set of features, including the ability to ring your phone with your Tile's, which is one of our most popular features. And exclusive premium benefits, including lost item reimbursement, battery replacements and a worry-free warranty. So with that, I'll hand it over to Russell, who will run through the financials.

Thanks, CJ. Life360 and Tile together are a business at a significant scale with estimated combined calendar year '21 revenue of $214 million on a presynergy basis. This scale and accelerating growth, as we continue to emerge strongly from the COVID pandemic, put us in a strong position as we work towards a dual listing in the U.S. Looking forward, we see significant opportunities for synergy benefits to step up revenue growth and drive margin improvements. Tile's gross margins are well above average for our hardware business and are expected to expand as it moves towards more of a subscription-based business model. The subscription metrics of the combined businesses are highlighted on Slide 39. The Tile acquisition will increase Life360's subscriber base by about 40% to 1.6 million, with both businesses delivering year-on-year subscriber growth of 26% as of September 2021. For the same period, combined subscription ARR reached $112 million, a year-on-year growth rate well in excess of 50%. Tile's revenue performance in 2020 was impacted by the COVID pandemic. Despite current supply chain constraints, Tile's core revenue is expected to grow 26% year-on-year. This performance excludes the lower-margin legacy retail business, which is being phased out. Tile's internal forecast suggests that revenue growth would have been substantially higher had it not been for the supply constraints. We are optimistic about tailwinds for growth as COVID impacted international regions return to normal. I mentioned earlier, our expectation that Tile's gross margins will improve as it moves towards more of a subscription-based business model. And you can see that trend illustrated here. Between 2019 and 2021, subscription revenue more than doubled, increasing from 5% to 14% of total revenue. This is -- this has supported a 28% uplift in Tile's gross margins from 38% to 48%, and we see more upside ahead as the combination with Life360 turbocharges the subscription business. Now turning to the funding details. I'll touch on transaction funding terms at a high level. The purchase price of $170 million consists of $132.4 million in cash, subject to customary adjustments and up to $37.6 million in new Life360 common shares issued to Tile shareholders. In addition, there is $35 million in retention equity awards for Tile employees. $15 million of this consideration overall is subject to Tile achieving certain financial hurdles. This consideration represents a revenue multiple of approximately 1.5x calendar '21 estimated revenue before earn-out payments or approximately 2x, assuming earn-out payments are made in full. I'll now hand over to Ian Arnold from Crédit Suisse, who will provide an overview of the equity raising.

Thanks, Russell. The AUD 280 million equity offer is comprised of AUD 120 million accelerated nonrenounceable entitlement offer and a $160 million institutional placement. The entitlement offer ratio is 1 new CDI for every 15.6 for existing CDIs. Both tranches are fully underwritten, and the offer price is $8 -- $12 per CDI for both tranches. The offer is open now and books will close for investors in the Asia Pacific region at 6:00 p.m. Australian Eastern Daylight Time today, Tuesday, 23rd of November. Investors in the Northern Hemisphere will have until 11:00 a.m. Australian Eastern Daylight Time tomorrow, Wednesday, the 24th of November to submit their bids. Life360 shares will remain in trading hold for 2 days and recommence trading on the ASX on Thursday, the 25th of November, post the completion of the institutional offer. Please follow up with your contact at Crédit Suisse or Bell Potter, who can answer any further questions regarding the equity offer. I'll hand back to Chris, who will run through the strategy and implementation plan.

I've spoken frequently about Life360's strategic objectives to build our user base and grow membership. Tile is part of our long-term strategy to accelerate membership, providing the opportunity to speed up Tile's transition to subscription. We see the opportunity for an even richer product experience for our users with the integration of Tile Jiobit and third-party devices into the Life360 app experience. And we see the opportunity to capture this emerging category with a focus on international. For 2022, we will focus on a small number of highly leverable opportunities to complete our 360 vision of protecting people, pets and things. These will include the establishment of an integration office to drive focus, prioritization and execution, leveraging Tile as a membership upsell Life360, offering Life360 membership benefits to Tile subscribers, completing basic technology and product integration and creating a joint international team to lay the groundwork for global expansion. The additional capital raising will be used to fund the Tile integration and double down on growth. Key Life360 initiatives will include establishing our own dedicated international team to accelerate our global expansion; increased investment in the core Life360 user experience, specifically around our transition from where are you to how are you communication features; and accelerated investment in partner integrations, including laying the groundwork for a third-party developer platform. We're very excited about how quickly our vision is coming to life and the opportunity to accelerate growth and extend our lead in 2022 and beyond. With Tile, we have a new edge that massively differentiates us from the competition. COVID has flipped from a headwind to a tailwind as the world reopens, supply chain normalize and digitally native families become the norm. And finally, we'll use our momentum to pursue additional opportunities, in particular, a potential U.S. dual listing in 2022. The acquisition of Tile concludes the strategic review announced in February 2021. We will continue to evaluate strategic opportunities in the ordinary course of business. Finally, turning to our guidance. Life360 reiterates guidance of annualized monthly revenue by December 2021 in the range of $125 million to $130 million for the core business, which excludes Jiobit, including Jiobit, Life360 expects to report CY '21 revenue in the range of $109 million to $113 million and an underlying EBITDA loss, which excludes stocks-based compensation of $14 million to $18 million. Tile will not contribute to Life360's financial results for CY '21, given the acquisition is expected to close in Q1 CY '22. The equity raising will allow the company to accelerate growth and extend category dominance. During CY '22, significant investment in growth initiatives is anticipated for the combined businesses to accelerate the benefits and synergies flowing from the acquisition. As a result, operating cash flow is expected to increase in CY '22 versus CY '21, at the same time as revenue growth is expected to accelerate. Overall margins are expected to improve from the latter part of CY '22 onwards. Thank you for your attention, and I'll hand it over to Melissa to run the Q&A.

[Operator Instructions] First up, we have James. James, you should be now allowed to talk.

Can you hear me okay?

We can, James.

I just had a couple of questions that I'd like to clear up. Firstly, the hardware sales for Tile have seen declines in FY '19 to '21. That was a pretty extraordinary period. How should we think about the underlying growth trajectory presynergies? And what do you think you can add when incorporated into the plans with Life360 going forward?

Sure. So there are 2 parts to that. Obviously, as mentioned, Tile did have the 1, 2 punch of COVID and then supply chain. Tile's forecast for underlying sales of hardware -- total revenue for '21, if it were not supply constrained, it was close to $120 million. So there was already in the range, I think, of 26% year-over-year growth from '20 to '21. It would have been significantly higher if it weren't for that supply constraint. So we are expecting significant growth, both in the core Tile business and the subscription business in CY '22. Then looking at how we can help, first off, to repeat something from the presentation, our primary focus is to use Tile to advance subscriptions. That is one of the things that made the deal so complementary is that we have such a good platform for Tile as they do for us. So we use -- we will use Tile as a carrot to get people into our higher-priced plans. Platinum, for example, was meant specifically to have promos that would allow upsells because it's such a much higher price point than gold. So I think it's going to be hugely powerful to be able to say you're going to get new 5 pack of Tiles every year when you sign up. We'll be able to bypass the App Store in a purchase payments regardless of kind of the sea changes there because we'll have a hardware device. So with very limited cost to us, we're going to have a much more compelling offer. So that's how it'll benefit Life360, and it will be just part of that big forward march of membership. From a Tile perspective, right now, the Tile premium service is offered to -- or limited to item protection, whereas the long-term Tile plan has always been to move like Life360's direction around people driving identity. So within a year, we will be offering Life360 membership benefits to Tile customers without the need for them to spin up significant R&D. And Tile was already growing at over 50% or around 50% year-over-year on the subscription business. We think we're really going to be able to help Tile keep up this pretty powerful growth rates on the subscription side, which will make this deal very accretive from a revenue multiple basis.

Okay. Great. So just a couple of follow-ups on some things you mentioned there. Firstly, the 2.8 million monthly actives that Tile has, can you give us some sense of the overlap with your existing base there?

We've done surveys which say about 10% of Tile customers already have Life360, so relatively limited as of now.

And what's Tile's ability to communicate with nonsubscribers within that monthly active base?

Extremely high because they're all app users and most Tiles are used on a very regular basis.

Got it. And I think, you mentioned increasing membership pricing on Page 3 of the press release. Is that just a mix impact of the platinum plans you were talking about? Or does that imply that there's going to be a change in planned pricing?

Short and midterm, it's much more about getting more people up into the platinum peers, which will have the ultimate impact of increased ARPPC. Slightly longer term, yes, we do anticipate being able to increase pricing, and Tile will be a big driver of that.

And unless we have any last questions, it looks like that may be it. Okay. And as there are no more questions, I will hand it back over to Chris to wrap up.

I don't have much more to say than that this is literally the biggest deal we've done in our company's history, a huge landmark day for us. I'm extremely excited about it and sharing the results to come. Thanks, everyone. Have a good day.

Thanks.