Arlo Technologies, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports unaudited fourth-quarter results; this is an annual report, not a standalone quarterly filing. Amounts below are in U.S. dollars.
Business context
Arlo sells connected security cameras and related devices, cloud services, and paid subscriptions. At year-end, it reported approximately 5.0 million cumulative registered accounts and 435,000 cumulative paid accounts. Its strategy centers on new products, growing its user base, and expanding recurring subscription revenue.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $357.2 million | $370.0 million |
| Product revenue | $284.9 million | $323.2 million |
| Services revenue | $72.3 million | $46.8 million |
| Gross profit / margin | $55.4 million / 15.5% | $35.8 million / 9.7% |
| Operating loss | $104.9 million | $85.2 million |
| Net loss | $101.3 million | $86.0 million |
| Net loss per diluted share | $1.30 | $1.14 |
| Operating cash flow | $(46.5) million | $9.2 million |
FY2020 revenue declined 3.5%. Product revenue fell while services revenue rose 54.6%; services grew to 20.2% of revenue from 12.6%. Gross margin improved, including product margin of 7.4% versus 4.9% and services margin of 47.6% versus 42.6%, but the company remained substantially loss-making. Operating expenses were $160.3 million, up from $121.0 million; FY2019 included a $54.9 million gain on sale of the European commercial business, compared with a $0.3 million final adjustment in FY2020.
Q4 2020: Revenue was $114.8 million and gross profit was $24.5 million; net loss was $15.2 million. In Q4 2019, revenue was $122.4 million, gross profit $13.7 million, and net income $19.6 million, including the European-business sale gain.
At December 31, 2020, cash, cash equivalents, and short-term investments totaled $206.1 million, down from $256.7 million; working capital was $119.2 million, down from $175.7 million. Total liabilities were $280.2 million and stockholders’ equity was $133.8 million. Arlo had no borrowings under its revolving credit facility, which provides up to $40 million subject to a receivables-based borrowing limit and covenants, including a $20 million domestic cash minimum. Management stated that available liquidity was expected to meet anticipated needs for at least 12 months. The facility matures November 5, 2021, unless extended by mutual agreement.
Operating cash use was driven in part by working-capital outflows, including a $49.3 million reduction in accounts payable. Accounts receivable was $77.6 million, inventory $64.7 million, and accounts payable $62.2 million at year-end. Non-cancelable supplier purchase commitments were $19.5 million; operating lease payments totaled $35.8 million. No off-balance-sheet arrangements were reported.
Material changes and unusual items
- Americas revenue declined 6.8%, while EMEA revenue increased 8.0% and APAC revenue increased 9.8%. Americas represented 75.4% of total revenue.
- Arlo recorded $35.2 million of stock-based compensation, up from $22.9 million. This included $7.4 million of accelerated expense after the CEO voluntarily forfeited certain options without replacement.
- The company completed a restructuring plan in Q1 2020; FY2020 restructuring charges were $44,000. R&D and sales and marketing expenses decreased, while general and administrative expense rose 7.3%.
- Verisure’s 2020 transition-services fees of $4.0 million were recorded as other income. Verisure’s five-year product purchase commitment is $500 million; $47.3 million had been fulfilled by year-end. Verisure prepaid $40 million for product purchases in FY2021 and FY2022.
- Paid accounts increased 89.1% to 435,000. However, four customers represented 64.7% of FY2020 revenue, including Costco at 20.6%, Verisure at 17.3%, Best Buy at 14.6%, and Amazon and affiliates at 12.2%.
Outlook, management commentary, and risks
Arlo did not provide quantified revenue or earnings guidance. Management expected FY2021 R&D and general and administrative expenses to remain relatively flat in absolute dollars. It cautioned that COVID-19 could continue to reduce revenue and increase costs and operating expenses.
- COVID-19 disrupted retail channels, product shipments, and freight. Americas revenue declined, and freight-in expense increased 56% in FY2020.
- Semiconductor and other component shortages began in Q4 2020; management expected supply constraints to affect deliveries and demand fulfillment in Q1 2021 and potentially beyond.
- Arlo depends on a limited number of Asian manufacturers and suppliers, has no long-term manufacturing purchase contracts, and faces risks from component availability, freight costs, and inventory forecasting.
- Competition and product price erosion may pressure sales and margins. Growth also depends on customer adoption of paid subscriptions and successful product launches.
- Amazon is simultaneously a competitor, sales channel, and provider of cloud infrastructure services. The company also depends on concentrated retailers and Verisure, and reported that three customers accounted for 66.5% of year-end receivables.
- Verisure has exclusive European distribution rights, and Arlo agreed not to compete with the transferred European commercial business for three years. The success and performance of this relationship are not assured.
- Pending legal matters include securities litigation with a proposed $1.25 million settlement awaiting final court approval, a stayed derivative action, and an ITC patent complaint filed by Skybell in December 2020. The filing states that the potential impact of the ITC matter could not yet be reasonably estimated.
- The IRS was auditing the 2018 consolidated return filed with NETGEAR, including matters related to the separation and distribution. Arlo disclosed possible tax indemnification exposure if the distribution fails to qualify for tax-free treatment.
Management reported effective disclosure controls and internal control over financial reporting as of year-end. The auditor did not provide an internal-control attestation because Arlo qualified for the emerging-growth-company exemption.
Most important facts for investors to verify
- Whether service revenue and paid-account growth can offset declining hardware sales, ongoing losses, and negative operating cash flow.
- Whether component shortages, freight costs, and COVID-related channel disruption ease, and how they affect shipments, inventory, and margins in 2021.
- Verisure’s purchase performance against its $500 million commitment, the conversion of prepayments into orders, and the economics of the European distribution arrangement.
- Available borrowing capacity under the receivables-based facility, covenant compliance, and liquidity after continued cash use; confirm the facility’s maturity or any extension.
- Customer concentration, especially exposure to Costco, Best Buy, Amazon, and Verisure, and the significant concentration of receivables.
- Final court approval and payment treatment of the securities settlement, developments in the Skybell ITC case, and outcomes of the IRS and related separation-tax matters.