Arlo Technologies, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 28, 2021; compared with the three months ended March 29, 2020. Arlo sells connected-home devices and paid subscription services, supported by a cloud platform. It reported as one operating segment.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $82.6 million | $65.5 million |
| Product revenue | $59.8 million | $50.7 million |
| Service revenue | $22.8 million | $14.7 million |
| Gross profit / margin | $25.8 million / 31.3% | $4.0 million / 6.0% |
| Operating loss / margin | $11.5 million / 13.9% | $40.9 million / 62.5% |
| Net loss | $10.7 million | $39.3 million |
| Diluted loss per share | $0.13 | $0.51 |
| Operating cash flow | -$30.2 million | -$48.9 million |
Revenue increased 26.1% year over year. Service revenue rose 54.8%, primarily with growth in paid accounts. Cumulative paid accounts grew 115.3% to 549,000; cumulative registered accounts grew 24.3% to 5.275 million. International revenue was 40.0% of total, versus 26.2% a year earlier.
Gross margin improved substantially as product costs and provisions for sales returns and marketing incentives declined, warranty and excess-inventory costs fell, and service revenue increased alongside platform cost optimizations. Operating expenses were $37.3 million, down from $44.9 million; lower general and administrative expense primarily reflected a prior-year CEO stock-compensation charge and Verisure transaction costs. The company remained loss-making.
At March 28, 2021, cash and cash equivalents were $172.1 million and short-term investments were $5.0 million, totaling $177.1 million. Cash, cash equivalents and restricted cash were $176.3 million, down $14.0 million during the quarter. Current assets were $291.9 million and current liabilities were $179.4 million. Total liabilities were $210.9 million; the filing reports no drawn borrowings. A revolving facility provides for up to $40 million, subject to a receivables-based borrowing limit, and includes a $20 million domestic cash covenant. Arlo said it was compliant with covenants and believed available liquidity sufficient for at least 12 months.
Operating cash use improved by $18.7 million year over year, while investing activities provided $14.2 million, mainly from investment maturities; financing activities provided $2.0 million. Accounts receivable fell to $51.1 million, inventory to $56.0 million, and accounts payable to $27.1 million from year-end levels. The company reported an accumulated deficit of $243.5 million.
Material changes and management commentary
- EMEA revenue rose 238.8% to $24.6 million, while Americas revenue declined 1.1% to $49.6 million; APAC revenue increased 3.8% to $8.3 million. Growth was driven by services and EMEA shipments, partly offset by lower Americas product shipments.
- Freight-in expense increased 88% year over year amid reduced international freight capacity, higher rates and longer transit times.
- Semiconductor and other component shortages began affecting deliveries in late 2020 and Q1 2021. Management expected constraints to continue during 2021 and potentially beyond, potentially limiting shipments against demand.
- Management expects R&D expense to remain relatively flat in absolute dollars. It expects interest income to decline as cash and investments are used and interest rates remain low. The filing provides no formal revenue, earnings or margin guidance.
- Management’s stated priorities include growing paid subscriptions, developing new products and services, expanding globally, and managing liquidity and working capital. Its liquidity outlook depends on current plans and market conditions; additional financing may be sought if needed.
Risks, contingencies and unusual items
- COVID-19 and supply chain: The pandemic, global chip shortages, supplier concentration, freight disruption and economic uncertainty could impair product availability, demand, costs and cash flows. Arlo warned of possible inventory, receivable, asset-impairment and hedging-related charges.
- Verisure dependence: Verisure has exclusive European distribution rights and non-exclusive global direct-channel rights. Its five-year product purchase commitment is $500 million; $68.5 million had been fulfilled by March 28, 2021. Arlo recognized $1.5 million of Verisure NRE service revenue in the quarter. Performance, payment and customer concentration remain risks; Verisure and affiliates accounted for 29.8% of quarterly revenue.
- Legal matters: A federal securities class action settlement for $1.25 million received final court approval in March 2021 and the federal action was closed; a related derivative action was reactivated in April. A separate ITC patent complaint by Skybell alleges infringement involving Arlo cameras and video doorbells; the company said the potential financial impact could not yet be reasonably estimated.
- Commitments: Non-cancelable supplier purchase commitments were approximately $22.6 million, with a $0.9 million loss liability for committed purchases not expected to sell. Operating lease liabilities totaled $28.3 million. The quarter included a $0.4 million warranty provision release.
- Other risks: The filing highlights reliance on a limited number of manufacturers and sales channels, product quality and returns, competition, paid-subscription growth, cybersecurity and privacy, dependence on Amazon Web Services, foreign exchange, tariffs, and potential dilution from equity awards. A possible goodwill impairment charge could be up to $11.0 million if triggering conditions arise; none was identified in the quarter.
Important facts for investors to verify
- Whether supply constraints and elevated freight costs continue, and how they affect shipments, margins and inventory.
- Whether subscription-account growth translates into sustained recurring revenue and improved profitability.
- Liquidity and cash-burn trends, including availability under the receivables-based credit facility and compliance with its covenants.
- Verisure’s purchase performance, collections and contribution to revenue, and the progress and potential exposure of the Skybell and derivative litigation.
- Whether the quarter’s sharp gross-margin improvement is repeatable, given lower returns, warranty and inventory provisions and the unusual year-over-year comparison.