Business context and reporting period
Arlo Technologies, Inc. filed this Form 10-K for the fiscal year ended December 31, 2021 (not a standalone fourth-quarter report). The company sells connected security cameras and related devices, alongside cloud-based services and paid subscriptions. It reported approximately 6.1 million cumulative registered accounts and 1.067 million paid accounts at year-end; annual recurring revenue (ARR) was $90.1 million.
Key financial metrics
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $435.1 million | $357.2 million |
| Gross profit / margin | $108.0 million / 24.8% | $55.4 million / 15.5% |
| Operating loss | $60.1 million | $104.9 million |
| Net loss | $56.0 million | $101.3 million |
| Net cash used in operating activities | $23.2 million | $46.5 million |
- Revenue increased 21.8% year over year: product revenue rose 16.4% to $331.6 million and services revenue rose 43.2% to $103.5 million.
- Product gross margin improved to 14.0% from 7.4%; service gross margin improved to 59.7% from 47.6%.
- Cash, cash equivalents and short-term investments totaled $175.7 million at year-end; short-term investments were zero, versus $20.0 million in 2020. Cash and cash equivalents alone were $175.7 million. Current assets were $303.6 million and current liabilities $210.9 million.
- Arlo used $23.2 million in operating cash, generated $17.7 million from investing activities (principally investment maturities), and used $5.0 million in financing activities. Cash, cash equivalents and restricted cash ended at $179.9 million.
- No borrowings were outstanding under the new $40 million revolving facility at year-end. The facility is borrowing-base limited and secured by substantially all domestic working-capital assets.
Material changes versus the prior year
- Revenue growth and substantially improved gross margin reduced the operating loss to $60.1 million from $104.9 million; Arlo nevertheless remained loss-making.
- Services revenue growth reflected increased paid accounts. Paid accounts rose 145.3% to 1.067 million and ARR rose 93.5% to $90.1 million. ARR is a company-defined performance metric, not reported revenue.
- EMEA revenue increased 117.1% to $134.2 million, largely reflecting sales to Verisure; the Americas grew 0.7% to $271.2 million. Verisure represented 30.8% of 2021 revenue.
- Freight-in expense increased 138% amid component shortages and higher freight rates. Inventory fell to $38.4 million from $64.7 million, with management citing extended lead times and supply constraints.
- Arlo recorded a $9.1 million impairment charge after deciding to sublease its San Jose office space. It also recognized $1.8 million of Employee Retention Credit income under the CARES Act.
Outlook, commentary, risks and unusual items
- Arlo provided no numerical revenue or earnings guidance in the filing. Management expects supply-chain constraints to persist in 2022 and says they could adversely affect revenue and gross and operating margins. Management believes available liquidity, including the credit facility, will cover anticipated cash needs for at least 12 months.
- Key risks include semiconductor and other component shortages, dependence on a limited number of Asian manufacturers, increased freight costs, competition and pricing pressure, reliance on major sales channels, and execution of paid-subscription growth.
- Customer concentration is material: Verisure contributed 30.8% of revenue and Best Buy and its affiliates 13.0%. Verisure has a $500 million product-purchase commitment for 2020–2024; $160.1 million had been fulfilled by year-end 2021. Its European distribution rights are exclusive.
- Other notable exposures include cybersecurity and privacy, reliance on Amazon Web Services (AWS), and the fact that Amazon is also a competitor and sales channel. The filing also describes operational and development risks from the conflict involving Russia and Ukraine and Arlo’s planned transition of operations out of Belarus.
- Legal matters include an appeal related to a securities class action settlement and a derivative suit. Skybell appealed an ITC ruling that invalidated the patents at issue; Arlo said it could not reasonably estimate a possible loss. The filing reports no material legal proceeding loss estimate that is both probable and reasonably estimable.
- The company reported a $56.0 million net loss and an accumulated deficit of $288.8 million. Its auditor issued an unqualified opinion on the financial statements; management concluded disclosure controls and internal control over financial reporting were effective. The auditor did not provide an internal-control attestation because Arlo was an emerging growth company.
Important facts for investors to verify
- Whether subscription-account growth and ARR convert into sustained recognized service revenue and improved cash generation.
- Whether supply availability and freight costs improve as expected, and how they affect product availability, margins and customer demand.
- Verisure’s purchasing pace against its remaining commitment, payment performance, and the continuing revenue concentration in major customers.
- Liquidity, operating cash burn, and compliance with the revolving facility’s borrowing-base and financial covenants.
- Potential outcomes and financial exposure from pending litigation, privacy or cybersecurity incidents, and the Belarus operational transition.