Arlo Technologies, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter ended June 27, 2021; year-to-date figures cover the six months ended June 27, 2021. Comparisons are with the periods ended June 28, 2020. Arlo sells connected-home devices and paid subscription services through retail, distribution, carrier, security-provider, and direct channels.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $98.6 million | $66.6 million | $181.1 million | $132.1 million |
| Gross profit / margin | $26.2 million / 26.6% | $5.5 million / 8.2% | $52.0 million / 28.7% | $9.4 million / 7.1% |
| Operating loss | $25.8 million | $30.3 million | $37.3 million | $71.2 million |
| Net loss | $23.3 million | $29.3 million | $34.0 million | $68.6 million |
| Diluted loss per share | $0.28 | $0.38 | $0.42 | $0.89 |
| Operating cash flow | Not stated for the quarter | $(23.5) million | $(48.7) million |
- Q2 revenue rose 47.9%; first-half revenue rose 37.1%. Product revenue was $73.3 million and service revenue was $25.3 million in Q2. First-half service revenue increased 51.3% year over year, which management attributed primarily to growth in paid accounts.
- Gross-margin improvement reflected lower sales-return, price-protection and marketing deductions, lower warranty and inventory provisions, and improved service economics. Q2 product gross margin was 15.4%, versus negative 3.2% a year earlier; service gross margin was 58.9%, versus 41.5%.
- Q2 operating expenses included a $9.1 million impairment charge related to the San Jose office lease and associated assets. Other income included a $1.8 million Employee Retention Credit; other income, net, was $2.7 million for the quarter.
- Cash and cash equivalents were $178.7 million at June 27, 2021; short-term investments were zero, compared with $20.0 million at year-end 2020. Cash, cash equivalents, and restricted cash totaled $182.8 million. The company reported no debt borrowings.
- Current assets were $285.6 million and current liabilities $188.4 million. Accounts receivable was $51.9 million and inventory $43.2 million, down from $77.6 million and $64.7 million, respectively, at year-end.
- First-half investing cash flow provided $18.9 million, mainly reflecting maturity of short-term investments. Financing used $2.9 million, including $9.1 million of restricted-stock tax withholdings, partly offset by employee-plan proceeds.
Material changes and business indicators
- Cumulative registered accounts reached 5.53 million, up 22.3% year over year; cumulative paid accounts reached 695,000, up 133.2%.
- International sales were 32.5% of Q2 revenue and 35.9% of first-half revenue, up from 25.2% and 25.7%, respectively, in the comparable periods.
- Verisure accounted for 25.5% of Q2 revenue and 27.4% of first-half revenue. Under the five-year supply agreement, Verisure had a $500 million aggregate product purchase commitment for 2020–2024; $89.7 million had been fulfilled by June 27, 2021.
- First-half operating cash use improved by $25.2 million year over year, though working capital used more cash. Management cited improved collections and inventory management; days sales outstanding fell to 48 days from 64 at year-end.
Outlook, risks, and contingencies
- Management said available liquidity and its financing agreement were expected to cover anticipated cash requirements for at least the next 12 months. It also noted possible future need for additional financing and no assurance it would be available on favorable terms.
- Management expects R&D spending to remain relatively flat in absolute dollars while continuing product and service development; it expects G&A spending to remain relatively flat. No numerical revenue, earnings, or margin guidance is provided.
- Arlo reported semiconductor and other component shortages, longer lead times, constrained freight capacity, and higher freight rates. Freight-in expense increased 89% year over year in both Q2 and the first half. Management expected supply constraints to continue through 2021 and potentially beyond, with possible adverse effects on sales and margins.
- COVID-19, supply-chain reliance on a limited number of manufacturers and component sources, freight costs, competition and pricing, customer/channel concentration, subscription growth, and cybersecurity/cloud-service availability are among the principal disclosed risks.
- The company recorded a $9.1 million impairment after deciding to sublease its San Jose office. A sublease for approximately 78,000 square feet became effective June 29, 2021, after quarter-end; rent is expected to escalate from approximately $167,000 to $206,000 per month during the sublease term, beginning February 2022.
- Non-cancelable supplier purchase commitments were approximately $19.0 million, with a $0.7 million loss liability for committed purchases. The $40 million revolving facility matures November 5, 2021, subject to possible extension by mutual agreement; the company was in covenant compliance and had not drawn on it at quarter-end.
- The federal securities class action settlement was approved and the federal case closed. Certain plaintiffs continue a state action, and a derivative action remains pending. A separate ITC patent-infringement proceeding was too early to estimate financially. The filing says potential impacts of the pending matters are not currently determinable.
Important facts for investors to verify
- Whether strong revenue and paid-account growth can continue despite supply constraints, higher freight costs, and channel concentration.
- Whether gross-margin gains are repeatable and how much they depend on lower return, warranty, and inventory provisions versus durable product and subscription economics.
- Cash burn and liquidity trends, including the timing and terms of any extension or replacement of the revolving facility maturing in November 2021.
- Verisure purchase performance and customer concentration, including the implications of its exclusive European distribution rights.
- Developments in the state and derivative litigation and the Skybell ITC patent case, for which financial exposure is not clearly quantified in the filing.