Arlo Technologies, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended July 3, 2022; comparable periods ended June 27, 2021. Amounts below are in U.S. dollars unless noted.
Business context
Arlo sells connected home devices and paid cloud-based services through retail, distribution, carrier, security-provider, and direct channels. It operates as one reportable segment. At quarter-end, it reported 6.64 million cumulative registered accounts, 1.478 million cumulative paid accounts, and annual recurring revenue (ARR) of $116.6 million.
Financial results and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $119.0 million | $98.6 million | $243.7 million | $181.1 million |
| Gross profit / margin | $33.7 million / 28.4% | $26.2 million / 26.6% | $67.3 million / 27.6% | $52.0 million / 28.7% |
| Operating loss | $11.3 million | $25.8 million | $20.0 million | $37.3 million |
| Net loss | $11.6 million | $23.3 million | $20.0 million | $34.0 million |
| Basic and diluted loss per share | $0.13 | $0.28 | $0.23 | $0.42 |
Product revenue was $86.2 million and service revenue $32.8 million in Q2. Six-month operating cash flow was negative $29.4 million, versus negative $23.5 million a year earlier; cash and cash equivalents fell by $90.2 million during the period, including investment purchases. At July 3, cash and cash equivalents were $85.5 million and short-term investments $49.7 million, totaling $135.3 million in cash and short-term investments. Working capital was approximately $84.1 million.
Total liabilities were $197.3 million, including $26.1 million of operating lease liabilities. No borrowings were outstanding under the $40 million revolving facility. The company reported compliance with its covenants; before meeting a specified fixed-charge coverage test, the facility requires minimum liquidity of $20 million.
Material changes versus prior periods
- Revenue grew 20.7% in Q2 and 34.6% for the six-month period. EMEA revenue rose 117.1% in Q2, primarily from stronger demand and a customized Verisure-channel camera; Americas revenue declined 9.5% in Q2, and APAC revenue declined 38.9%.
- Service revenue rose 29.8% in Q2, primarily reflecting growth in paid accounts. Paid accounts increased 112.7% year over year and ARR increased 67.2%.
- Q2 gross margin improved year over year, but six-month gross margin declined from 28.7% to 27.6%. Product gross margin was lower in both comparisons, with higher materials, component, freight, and sales-return costs among the pressures.
- Operating and net losses narrowed versus 2021, when results included a $9.1 million San Jose office-related impairment charge. Prior-year other income also included $1.8 million of Employee Retention Credit income and higher Verisure transition-service income.
- Cash and cash equivalents declined from $175.7 million at December 31, 2021, while short-term investments increased to $49.7 million. Operating cash use increased year over year, partly due to working-capital needs and lower customer collections.
Outlook, risks, and contingencies
The filing provides no numerical revenue or earnings guidance. Management said existing liquidity and the revolving facility should meet anticipated cash needs for at least 12 months, while noting that future financing may be needed and may not be available on favorable terms. Management expects supply-chain constraints to persist through 2022 and expects research and development spending to rise as new products and services are developed; it also expects sales and marketing expense to increase as brand campaigns proceed.
Management cited component shortages, longer lead times, higher freight rates, inflation, rising interest rates, lower consumer confidence, the conflict in Ukraine, and geopolitical and trade risks as potential pressures on demand, costs, margins, product development, and liquidity. Freight-in expense increased 27% in Q2 and 176% in the first half versus the prior-year periods. The company had $67.3 million of non-cancelable supplier commitments and a further $55.7 million of purchase orders beyond contractual cancellation periods; the recorded loss liability for committed purchases was $0.3 million.
Legal matters include an appeal in a securities action and a patent dispute appealed to the Federal Circuit. The company said it could not reasonably estimate a possible loss range for the patent matter. It stated that it did not believe existing claims were likely to have a material adverse effect on financial position within the next 12 months, while acknowledging litigation outcomes and costs remain uncertain. No goodwill impairment trigger was identified in the first half; the company noted a potential impairment charge of up to $11.0 million if circumstances materially deteriorate.
Most important facts for investors to verify
- Whether paid-account and ARR growth converts into durable recognized service revenue and improved overall margins.
- Whether EMEA and Verisure-driven product growth can offset weaker Americas and APAC sales, and how concentrated growth is in that channel.
- Whether freight, component availability, customer returns, and working-capital trends improve; DSO rose to 57 days from 50 at year-end.
- How quickly cash is consumed and whether the company maintains liquidity above the facility’s $20 million covenant threshold.
- Progress and potential financial exposure in the pending legal appeals, along with the company’s supplier commitments and potential inventory-related charges.