Arlo Technologies, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended April 3, 2022; comparisons are with the three months ended March 28, 2021. Arlo sells connected-home devices and provides cloud-based subscription services. It operates as one reportable segment.
Financial results and key metrics
| Metric | Q1 2022 | Prior-year period | Change or context |
|---|---|---|---|
| Revenue | $124.8 million | $82.6 million | Up 51.1% |
| Product revenue | $94.8 million | $59.8 million | Up 58.7% |
| Service revenue | $29.9 million | $22.8 million | Up 31.3% |
| Gross profit / margin | $33.6 million / 26.9% | $25.8 million / 31.3% | Profit increased; margin declined |
| Operating loss | $8.7 million | $11.5 million | Loss narrowed |
| Net loss | $8.5 million | $10.7 million | Loss per diluted share was $0.10, versus $0.13 |
| Cash used in operating activities | $24.6 million | $30.2 million | Cash outflow decreased |
- Product gross margin fell to 14.8% from 21.1%, largely due to higher freight-in costs and warranty expense. Services gross margin improved to 65.3% from 57.9%, reflecting cost optimization and a higher mix of recurring paid services.
- Operating expenses were $42.2 million, up from $37.3 million. Stock-based compensation expense was $9.6 million, versus $8.3 million.
- Registered accounts were 6.389 million, up 21.1%; paid accounts were 1.272 million, up 131.7%. Annual recurring revenue (ARR), a company-defined measure, was $101.3 million, up 74.0%.
- International revenue was 47.7% of total revenue, compared with 40.0% in the prior-year period. EMEA revenue more than doubled; APAC revenue declined 24.2%.
Liquidity, cash flow and obligations
- At April 3, 2022, cash and cash equivalents were $101.0 million and short-term investments were $44.6 million, totaling $145.5 million. Cash, cash equivalents and restricted cash totaled $105.1 million, down $74.8 million during the quarter; the quarter included $44.6 million of short-term investment purchases.
- Investing activities used $44.9 million, primarily for short-term investments; financing activities used $5.3 million, largely for taxes withheld on restricted stock unit releases.
- Arlo reported no borrowings under its $40 million revolving credit facility, which matures in October 2024, and said it complied with its covenants. The facility requires minimum liquidity of $20 million until specified coverage-ratio conditions are met.
- Operating lease liabilities totaled $24.8 million. Supplier purchase commitments were approximately $34.7 million, including $0.3 million of loss liability for committed purchases.
Management outlook, risks and contingencies
- Management believes existing liquidity and the credit facility will be sufficient for anticipated cash requirements for at least the next 12 months, while noting that additional financing may be needed and is not assured. No specific revenue or earnings guidance is provided.
- Management expects supply-chain constraints to persist through 2022. Component shortages, higher freight rates and longer transit times constrained deliveries; freight-in expense increased 606% year over year. The company warns that further disruption could adversely affect revenue and margins.
- Arlo expects research and development spending to rise and sales and marketing expense to increase significantly as it invests in products, engineering talent and brand awareness. It also described actions to preserve liquidity, including working-capital management and reduced or deferred spending.
- Risk disclosures include the Russia-Ukraine conflict and transition of operations out of Belarus, which could affect product-development timing and R&D costs. Arlo said it had not experienced material operational interruptions in the region as of the filing, but is monitoring staff and infrastructure.
- Legal matters include an appeal relating to a dismissed securities class action in state court, a pending derivative action, and a Skybell patent dispute on appeal after the ITC affirmed invalidity of the asserted patents. Arlo said it could not reasonably estimate a possible loss for the Skybell matter; it did not identify existing claims or proceedings likely to materially affect its financial position within 12 months.
- No goodwill impairment trigger was identified during the quarter. The filing notes that a significant stock-price decline combined with business deterioration could lead to an impairment charge of up to $11.0 million.
Important facts for investors to verify
- Whether subscription and paid-account growth continues and converts into recognized recurring revenue and cash generation.
- Whether product margins recover as freight costs, component availability and warranty costs evolve.
- Whether operating cash burn remains manageable relative to the $145.5 million of cash, cash equivalents and short-term investments and the facility’s covenant requirements.
- Whether supply-chain constraints, supplier commitments and the Belarus transition affect product delivery, costs or development schedules.
- Developments in the pending legal matters, particularly the Skybell appeal and derivative action, and any resulting financial exposure.