Arlo Technologies, Inc. — Q3 2019 Form 10-Q
Reporting period: Fiscal quarter ended September 29, 2019; comparisons are with the quarter ended September 30, 2018. Financial statements are unaudited. Arlo sells connected devices and paid subscription services and operates as one reportable segment.
Financial performance and liquidity
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Revenue | $106.1 | $131.2 | $247.6 | $342.8 |
| Gross profit / margin | $10.5 / 9.9% | $29.7 / 22.7% | $22.1 / 8.9% | $87.1 / 25.4% |
| Operating loss | $(31.1) | $(13.4) | $(107.0) | $(35.2) |
| Net loss | $(30.6) | $(13.2) | $(105.6) | $(36.4) |
| Net loss per share, diluted | $(0.41) | $(0.19) | $(1.41) | $(0.56) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(42.7) | $(46.3) |
- Quarterly revenue fell 19.1% year over year; nine-month revenue fell 27.8%. Product revenue declined to $94.3 million in Q3 from $121.3 million, while service revenue increased 20.2% to $11.8 million. For nine months, product revenue was $213.4 million and service revenue was $34.2 million.
- Gross margin contracted sharply. Management cited increased warranty costs, unfavorable product overhead and freight efficiencies, and channel promotions and price-protection provisions in the nine-month comparison.
- Operating expenses were $41.6 million in Q3 and $129.1 million for nine months. Nine-month R&D, sales and marketing, and G&A rose year over year; separation costs fell to $1.8 million from $23.6 million for nine months.
- At September 29, cash and cash equivalents were $113.9 million and short-term investments were $39.9 million, totaling $153.8 million. Cash, cash equivalents and restricted cash declined $37.4 million from year-end 2018. Current assets were $343.7 million versus current liabilities of $197.3 million, a current ratio of approximately 1.7x.
- There was no borrowings balance reported at quarter-end. Operating lease liabilities totaled $34.3 million and are distinct from funded debt. Inventory was $74.1 million, down from $124.8 million at year-end; accounts receivable was $99.7 million, down from $166.0 million.
- Arlo reported an accumulated deficit of $151.1 million and no tax benefit on U.S. losses because of a full valuation allowance on U.S. federal and state deferred tax attributes.
Changes, outlook and material items
- Management attributed lower device sales to softer connected-camera demand, competition and reduced Arlo Lights sales. Arlo Ultra launched in Q1 and Arlo Pro 3 launched late in Q3. Registered users rose 47.8% to 3.691 million and paid subscribers rose 68.8% to 211,000; devices shipped declined 19.9% in Q3.
- Management said it expected R&D expense to remain flat in Q4 versus Q3, and G&A to increase moderately. It expected interest income to decline as cash and investments fund operations. The filing provides no specific revenue or earnings guidance.
- Management said current liquidity, the subsequent bank financing agreement and market conditions should cover anticipated cash needs for at least 12 months, while noting additional financing could be needed and might not be available on favorable terms.
- Subsequent event—Verisure: Agreements signed November 4 provide for a proposed $50 million cash sale of certain European commercial assets, plus inventory and a working-capital adjustment. Subject to closing conditions, closing was expected by Q1 2020. Verisure would become Arlo’s exclusive European distributor, with a five-year aggregate minimum purchase commitment of $500 million and specified prepayments and development payments. The transaction was not closed as of the filing date.
- Subsequent event—credit facility: On November 5, Arlo entered a two-year revolving facility with a maximum of $40 million, limited to 60% of eligible receivables less lender reserves. It is secured by substantially all domestic personal property, excluding intellectual property, and includes a minimum domestic-cash covenant and other restrictions.
- Subsequent event—restructuring: Announced November 7, the plan reduces outside services, headcount, marketing and capital expenditures; expected charges were $1 million to $2 million, primarily headcount-related.
- Seven securities class actions and a related derivative action allege inadequate IPO disclosures concerning quality control and sales trends. The company said the financial impact could not yet be reasonably estimated and that it believed no current claims were likely to materially affect its financial position within 12 months, while acknowledging litigation-related costs and uncertainty.
- Supplier purchase commitments were $71.4 million, with a $2.6 million loss liability for committed purchases not expected to sell. Best Buy and affiliates generated 29.0% of Q3 revenue; Costco and affiliates generated 15.3%, underscoring channel concentration.
Key investor verification points
- Track revenue, product demand and device shipments against subscription growth, and determine whether service growth can offset hardware declines.
- Verify whether gross margins recover as warranty, freight, overhead, promotion and price-protection pressures evolve.
- Monitor operating cash burn, cash and investment balances, and the actual availability and covenant compliance of the Western Alliance facility.
- Confirm whether the Verisure asset sale closes and whether distribution performance, purchase commitments, prepayments and European exclusivity translate into expected cash flows and sales.
- Assess execution and costs of the restructuring, including whether projected savings exceed its charges without impairing product development or demand generation.
- Follow the IPO-related litigation, supplier commitments, product quality and warranty exposure, and dependence on major retail channels.