Life360 lifts monthly active users, flags faster-than-expected shift to positive free cash flow

Due to an exceptionally strong third quarter back-to-school period, San Francisco-based Life360 (ASX: 360) inched closer to its stated goal of being profitable by the end of next year after the family safety app reported its largest ever quarterly monthly active user (MAU) growth.

Due to strong revenue growth from the price increase and lower-than-expected initial churn, the S&P/ASX300 company managed to accelerate its targeted positive adjusted earnings (EBITDA) and operating cash flow by one quarter to calendar year 2023 Q3 versus prior guidance of calendar year 2023 Q4.

To put the Life360’s pricing power into context, the company delivered more than 100,000 net Paying Circle additions in Q3 despite price increases of around 50% for new US monthly subscribers.

However, news that the company had delivered it largest ever growth in global MAU, up 39% year-on-year to more than 5m - with record net additions in US and international markets - did little to inspire investors this morning.

The company’s share price was down around -9% at the open while the broader market and the S&P All Tech Index were down around -0.33% and –0.31% respectively.

Benefits of bundling

At face value, the market appears to have been fixated on the company’s third quarter adjusted earnings (EBITDA) loss of -US$9.4m, compared to a loss of -US$3.7m in the previous period.

Overall, adjusted earnings (EBITDA) loss is expected to be in the range of -US$37m to -US$41m for 2022.

While CEO Chris Hulls attributed a reduction in consolidated revenue expectations to continuing headwinds in the standalone hardware business, he also reminded investors of the benefits of bundling.

“The benefits of bundling, together with our higher price points, give us the confidence to bring forward by a quarter our target for consistently positive adjusted EBITDA and operating cash flow to CY23 Q3,” Hulls noted.

“We will not have high levels of visibility on hardware revenues until after the traditional ‘black Friday’ holiday sales period in the US.”

Key performance indicators

Source: Life360

What the market didn’t like

What may have spooked investors’ this morning was the company’s warning of headwinds in the US consumer electronics market with major retailers taking a very cautious approach and significantly reducing targeted weeks of inventory for current orders into the holiday period.

While this will likely result in Q4 hardware sales being below previous forecasts, management reassured the market that the impact on 2022 adjusted earnings (EBITDA) and cash flow are expected to be much more limited due to continued strong momentum in membership, disciplined cost control, and a prudent approach to hardware inventory.

“We expect to exit CY22 with AMR (excluding hardware) in excess of $215 million, a growth rate in excess of 50%,” management noted.

Looking forward

Management guides to continued membership revenue momentum due to a successful price increase, which lifted US ARPPC by more than 47% year-on-year in October for new US Membership subscribers.

Management also expects significant improvement in paid user conversion and retention from the full integration of hardware bundling, which is on track for early 2023.

“We’re also encouraged by the steady progress we are making in driving efficiencies from integration and controlling costs even in the face of increasing inflationary pressures, while maintaining our focus on the core customer experience.”

As a result of a price increase, the company expects to exit 2022 with significantly higher than previously anticipated AMR and ARPPC.

What brokers think

Life360’s share price is down -50% over one year but has been on an upward trajectory since late June.

Consensus is Strong Buy.

Based on Morningstar’s fair value of $8.35 the stock appears to be undervalued.

With strong user growth and pricing momentum offsetting hardware headwinds, Goldman Sachs retains a Buy rating and $8.35 target price.

With higher sales, price increases and more annual plans suggesting a faster-than-expected shift to positive free cash flow, Morgan Stanley has raised its target price sharply to $8.50 from $6.80 and retains Overweight.

Life360 share price over 12 months.