Arlo Technologies, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended October 2, 2022; comparisons are to the periods ended October 3, 2021. Arlo sells connected-home devices and paid services through retail, distribution, carrier, security-provider, and direct channels. Figures below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $128.2 | $111.1 | $371.9 | $292.3 |
| Gross profit / margin | $36.8 / 28.7% | $24.3 / 21.9% | $104.1 / 28.0% | $76.3 / 26.1% |
| Operating loss | $(14.4) | $(15.6) | $(34.5) | $(52.9) |
| Net loss | $(14.4) | $(15.2) | $(34.5) | $(49.2) |
| Net loss per share, diluted | $(0.16) | $(0.18) | $(0.40) | $(0.60) |
- Q3 revenue grew 15.3%; nine-month revenue grew 27.2%. Product revenue was $92.7 million in Q3, up 10.2%, and services revenue was $35.4 million, up 31.3%.
- Q3 gross margin improved 6.8 percentage points. Product margin was 14.4% versus 10.1%; service margin was 66.1% versus 58.8%. For the first nine months, total gross margin improved 1.9 points.
- Q3 operating expenses rose to $51.2 million from $40.0 million, primarily reflecting sales and marketing, up $9.4 million amid brand-awareness advertising. Nine-month operating expenses increased to $138.5 million from $129.2 million, despite no repeat of the prior-year $9.1 million impairment charge.
- Q3 revenue growth was led by EMEA, up 69.9%; Americas revenue declined 4.7% and APAC declined 19.8%. EMEA represented 41.0% of Q3 revenue, compared with 27.8% a year earlier.
Liquidity, cash flow, and obligations
- At October 2, cash and cash equivalents were $80.8 million and short-term investments were $44.5 million, totaling $125.3 million; restricted cash was an additional $4.1 million. Cash and cash equivalents had been $175.7 million at December 31, 2021. The filing reports no funded borrowings.
- For the nine months, operating cash use was $34.8 million versus $32.7 million a year earlier; investing cash use was $45.6 million, mainly reflecting purchases of short-term investments; financing cash use was $14.6 million. Cash, cash equivalents, and restricted cash decreased $95.0 million to $84.9 million.
- Inventory rose to $73.2 million from $38.4 million at year-end. Management attributed higher working-capital use largely to seasonal inventory restocking and building inventory to support anticipated demand.
- Arlo has a $40 million revolving credit facility maturing October 2024, subject to a borrowing base; no amounts were drawn at quarter-end, and the company reported covenant compliance. A minimum-liquidity covenant requires at least $20 million until specified fixed-charge-coverage conditions are met.
- Non-cancelable supplier purchase commitments were approximately $42.5 million, with a further $37.7 million of purchase orders beyond contractual termination periods. Lease liabilities totaled $24.7 million.
Business metrics, outlook, and risks
- Cumulative registered accounts reached 6.93 million, up 19.0% year over year; cumulative paid accounts reached 1.67 million, up 90.8%. Annual recurring revenue was $125.4 million, up 56.0%. ARR is a company-defined metric, not a substitute for reported revenue.
- Management said growth depends on product launches, expanding the installed base and paid subscriptions, marketing, channel partnerships, and international expansion. It expected research and development spending to increase and described planned significant investment in sales and marketing. The filing gives no numerical revenue or earnings guidance.
- Management said cash, investments, and available liquidity were expected to meet anticipated cash requirements for at least 12 months. It also cited the possibility of further spending reductions, use of the credit facility, or other financing if conditions require.
- Risks highlighted include inflation, lower consumer confidence, rising rates, supply-chain disruption, geopolitical conflict and sanctions, and tariffs or trade restrictions affecting manufacturing and sourcing. Management reported transitioning operations out of Belarus and monitoring remaining Eastern European operations.
- In November 2022, after quarter-end, Arlo initiated a cost-reduction campaign that may include headcount reductions and termination of leases and vendor contracts. Scope and costs were still being determined as of the filing date.
- Legal matters include a pending appeal related to a state securities action and a derivative action dismissed in August 2022. The company said it did not believe existing claims were likely to materially adversely affect its financial position within 12 months, while noting outcomes and potential costs remain uncertain.
Most important facts for investors to verify
- Whether paid-account and ARR growth continue and translate into recognized service revenue and cash generation.
- Whether EMEA-led product growth is sustainable, and whether Americas and APAC demand stabilizes.
- Inventory levels, supplier commitments, returns and incentives, and resulting gross margins and working-capital needs.
- Execution, expected costs, and cash savings from the post-quarter cost-reduction campaign.
- Liquidity headroom, borrowing-base availability, and compliance with the revolving facility’s covenants.
- Developments in litigation and geopolitical, tariff, and supply-chain exposures.