Arlo Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended July 1, 2018. The filing presents unaudited combined, carve-out financial statements; Arlo was part of NETGEAR during the periods shown. Unless noted otherwise, amounts are in U.S. dollars.
Business context and key results
Arlo sells connected cameras and other smart devices and offers related cloud and subscription services. It reported over 8.6 million devices shipped since launch and 2.2 million registered users as of July 1, 2018. Growth in the quarter was attributed primarily to the continued rollout of the Arlo Pro 2 camera.
| Metric | Three months ended July 1, 2018 | Prior-year quarter | Six months ended July 1, 2018 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $110.9 million | $79.2 million | $211.6 million | $141.0 million |
| Revenue growth | 40.1% | — | 50.1% | — |
| Gross profit / margin | $28.3 million / 25.5% | $16.7 million / 21.1% | $57.3 million / 27.1% | $33.1 million / 23.5% |
| Operating loss | $(16.2) million | $(2.6) million | $(21.8) million | $(2.7) million |
| Net loss | $(17.8) million | $(2.2) million | $(23.2) million | $(2.1) million |
| Diluted net loss per share | $(0.29) | $(0.03) | $(0.37) | $(0.03) |
Cash flow, balance sheet and liquidity
- For the six months, operating cash use was $2.7 million, investing cash use was $7.5 million, and financing cash provided was $10.3 million, primarily from NETGEAR. Cash increased by $25,000 to $133,000.
- At July 1, current assets were $241.0 million and current liabilities were $147.8 million. Inventory was $123.2 million, up from $83.0 million at December 31, 2017; accounts receivable was $111.1 million, down from $157.7 million.
- Total liabilities were $164.6 million and equity (net parent investment) was $111.4 million. The balance sheet reports no debt line item; the filing text does not provide a separate debt balance.
- Management expected liquidity to be sufficient for at least 12 months, based on operating cash flows, a $70.0 million contribution from NETGEAR before the IPO, and IPO proceeds. The IPO raised approximately $174.8 million net of underwriting discounts and commissions, before estimated offering costs of $7.4 million; it closed after the reporting date.
- Contractual obligations included $35.3 million of operating lease commitments and $46.7 million of non-cancelable purchase obligations.
Material changes and notable items
- Gross margin improved year over year, which management attributed largely to product-margin gains from the Arlo Pro 2 rollout; higher channel marketing promotions partly offset the improvement.
- Operating expenses rose materially. The quarter included $11.3 million of separation expense, versus none in the prior-year quarter; six-month separation expense was $17.8 million. R&D, sales and marketing, and general and administrative costs also increased.
- NETGEAR corporate expense allocations were $16.8 million for the quarter and $30.6 million for the six months, compared with $9.4 million and $16.3 million, respectively, in the comparable prior periods. Management cautioned that carve-out results may not reflect stand-alone costs or future performance.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. The opening net parent investment adjustment was a decrease of $3.1 million. Adoption affected reported revenue and balance-sheet classifications; comparative periods were not restated.
- Service revenue grew 37.8% to $9.0 million in the quarter and 40.2% to $17.3 million for the six months. Registered users increased 103.1% year over year to 2.204 million; devices shipped rose 32.4% in the quarter and 41.1% for the six months.
Outlook, risks and contingencies
- Management expected losses to increase in the second half of 2018 as Arlo established stand-alone operations. It estimated $35–$55 million of IT-related implementation costs over the next 12 months, including $10–$20 million of capital expenditures, and estimated transition services from NETGEAR at $5–$10 million.
- Management expected device sales to remain the majority of revenue, while anticipating growth in paid and prepaid services. It also expected R&D, sales and marketing, and general and administrative expenses to increase in absolute dollars.
- Key risks include dependence on a limited number of retail and distribution partners and third-party manufacturers; inventory and component-supply exposure; competition and product price erosion; cybersecurity, privacy and cloud-service availability; foreign-exchange exposure; and costs and execution risks of separating from NETGEAR. A hypothetical 10% foreign-exchange movement was estimated to create a $2.1 million pre-tax impact on net loss.
- NETGEAR retained approximately 84.2% ownership after the IPO and intended to pursue a later distribution, subject to approvals and market, tax and legal considerations; it could change or abandon that plan. Tax-free treatment of the distribution is not assured, and related agreements include potential indemnification obligations.
- Arlo disclosed $1.4 million of gross unrecognized tax benefits and related interest and penalties. Management reported no pending legal proceeding expected to have a material adverse effect and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether revenue growth, service adoption and gross-margin improvement continue after the Arlo Pro 2 rollout and channel promotions.
- Actual stand-alone operating costs, separation and IT implementation spending, and the timing and cost of replacing NETGEAR transition services.
- Inventory levels, inventory turns, non-cancelable purchase commitments and customer/channel concentration as demand and product mix change.
- Use of IPO proceeds, the effect of the $70 million NETGEAR contribution, and liquidity after the IPO and offering costs.
- NETGEAR’s eventual ownership distribution, related tax consequences and any restrictions or indemnification liabilities under separation agreements.