Arlo Technologies, Inc. [ARLO] Filings

10-Q 1 arlo-20231001.htm 10-Q arlo-20231001

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 1, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-38618

ARLO TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)


Delaware		38-4061754
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

2200 Faraday Ave.,	Suite #150
Carlsbad,	California	92008
(Address of principal executive offices)		(Zip Code)

(408) 890-3900

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

ARLO

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated filer

☐

Accelerated filer

☒

Non-Accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

The number of outstanding shares of the registrant’s Common Stock, $0.001 par value, was 94,628,607 as of November 3, 2023.

Table of Contents

Arlo Technologies, Inc.

Form 10-Q

For the Quarterly Period Ended October 1, 2023

TABLE OF CONTENTS


PART I: FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets	3
	Unaudited Condensed Consolidated Statements of Comprehensive Loss	4
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity	5
	Unaudited Condensed Consolidated Statements of Cash Flows	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33

PART II: OTHER INFORMATION

Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 5.	Other Information	34
Item 6.	Exhibits	35
Signatures		36

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PART I: FINANCIAL INFORMATION

Item 1.Financial Statements

ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


	As of
	October 1, 2023		December 31, 2022
	(In thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	51,133	$	84,024
Short-term investments	74,916		29,700
Accounts receivable, net	70,313		65,960
Inventories	53,496		46,554
Prepaid expenses and other current assets	11,100		6,544
Total current assets	260,958		232,782
Property and equipment, net	5,752		7,336
Operating lease right-of-use assets, net	12,190		12,809
Goodwill	11,038		11,038
Restricted cash	4,079		4,155
Other non-current assets	3,620		4,081
Total assets	$	297,637	$	272,201
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	82,479	$	52,132
Deferred revenue	17,678		11,291
Accrued liabilities	85,999		98,855
Total current liabilities	186,156		162,278
Non-current operating lease liabilities	17,970		19,279
Other non-current liabilities	3,318		2,949
Total liabilities	207,444		184,506
Commitments and contingencies (Note 8)
Stockholders’ Equity:
Preferred stock: $0.001 par value; 50,000,000 shares authorized; none issued or outstanding	—		—
Common stock: $0.001 par value; 500,000,000 shares authorized; shares issued and outstanding: 94,581,808 at October 1, 2023 and 88,887,139 at December 31, 2022	94		89
Additional paid-in capital	458,015		433,138
Accumulated other comprehensive income (loss)	237		(107)
Accumulated deficit	(368,153)		(345,425)
Total stockholders’ equity	90,193		87,695
Total liabilities and stockholders’ equity	$	297,637	$	272,201

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS


	Three Months Ended				Nine Months Ended
	October 1, 2023		October 2, 2022		October 1, 2023		October 2, 2022
	(In thousands, except per share data)
Revenue:
Products	$	78,961	$	92,720	$	210,770	$	273,736
Services	51,042		35,437		145,313		98,151
Total revenue	130,003		128,157		356,083		371,887
Cost of revenue:
Products	73,335		79,386		197,520		233,992
Services	13,529		12,021		38,349		33,830
Total cost of revenue	86,864		91,407		235,869		267,822
Gross profit	43,139		36,750		120,214		104,065

Operating expenses:
Research and development	16,829		16,471		52,197		50,252
Sales and marketing	15,863		22,193		48,137		49,867
General and administrative	12,460		12,253		43,089		38,023
Others	263		273		1,236		377
Total operating expenses	45,415		51,190		144,659		138,519

Loss from operations	(2,276)		(14,440)		(24,445)		(34,454)
Interest income, net	1,175		290		2,736		414
Other income, net	10		19		23		314
Loss before income taxes	(1,091)		(14,131)		(21,686)		(33,726)
Provision for income taxes	29		304		1,042		745
Net loss	$	(1,120)	$	(14,435)	$	(22,728)	$	(34,471)

Net loss per share:
Basic and diluted	$	(0.01)	$	(0.16)	$	(0.25)	$	(0.40)

Weighted average shares used to compute net loss per share:
Basic and diluted	94,243		88,124		92,069		86,677


Comprehensive loss:
Net loss	$	(1,120)	$	(14,435)	$	(22,728)	$	(34,471)
Other comprehensive income (loss), net of tax	85		(56)		344		(224)
Total comprehensive loss	$	(1,035)	$	(14,491)	$	(22,384)	$	(34,695)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


	Three Months Ended				Nine Months Ended
	October 1, 2023		October 2, 2022		October 1, 2023		October 2, 2022
	(In thousands)
Total stockholders’ equity, beginning balances	$	81,756	$	102,401	$	87,695	$	112,652

Common stock:
Beginning balances	$	94	$	88	$	89	$	84
Issuance of common stock under stock-based compensation plans	1		1		8		6

Restricted stock unit withholdings	(1)		(1)		(3)		(2)
Ending balances	$	94	$	88	$	94	$	88

Additional paid-in capital:
Beginning balances	$	448,543	$	411,316	$	433,138	$	401,367
Stock-based compensation expense	8,021		9,953		28,643		25,228
Settlement of liability classified restricted stock units	6,741		3,669		13,480		8,731
Issuance of common stock under stock-based compensation plans	681		—		3,667		1,419
Issuance of common stock under Employee Stock Purchase Plan	—		—		1,617		1,746
Restricted stock unit withholdings	(5,971)		(4,211)		(22,530)		(17,764)
Ending balances	$	458,015	$	420,727	$	458,015	$	420,727

Accumulated deficit:
Beginning balances	$	(367,033)	$	(308,835)	$	(345,425)	$	(288,799)
Net loss	(1,120)		(14,435)		(22,728)		(34,471)
Ending balances	$	(368,153)	$	(323,270)	$	(368,153)	$	(323,270)

Accumulated other comprehensive income (loss):
Beginning balances	$	152	$	(168)	$	(107)	$	—
Other comprehensive income (loss), net of tax	85		(56)		344		(224)
Ending balances	$	237	$	(224)	$	237	$	(224)

Total stockholders’ equity, ending balances	$	90,193	$	97,321	$	90,193	$	97,321

Common stock shares:
Beginning balances	93,654		87,530		88,887		84,453
Issuance of common stock under stock-based compensation plans	1,488		1,464		8,629		5,885
Issuance of common stock under Employee Stock Purchase Plan	—		—		460		304
Restricted stock unit withholdings	(560)		(584)		(3,394)		(2,232)
Ending balances	94,582		88,410		94,582		88,410

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended
	October 1, 2023		October 2, 2022
	(In thousands)
Cash flows from operating activities:
Net loss	$	(22,728)	$	(34,471)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock-based compensation expense	37,851		31,787
Depreciation and amortization	3,809		3,653
Allowance for credit losses and inventory reserves	1,218		(211)
Deferred income taxes	257		259
Others	(1,224)		39
Changes in assets and liabilities:
Accounts receivable, net	(4,262)		(3,171)
Inventories	(8,250)		(34,613)
Prepaid expenses and other assets	(4,353)		(105)
Accounts payable	31,049		23,229
Deferred revenue	6,202		(18,544)
Accrued and other liabilities	(9,202)		(2,635)
Net cash provided by (used in) operating activities	30,367		(34,783)
Cash flows from investing activities:
Purchases of property and equipment	(2,448)		(815)
Purchases of short-term investments	(110,905)		(69,305)
Proceeds from maturities of short-term investments	67,259		24,542
Net cash used in investing activities	(46,094)		(45,578)
Cash flows from financing activities:
Proceeds related to employee benefit plans	5,293		3,172
Restricted stock unit withholdings	(22,533)		(17,766)
Net cash used in financing activities	(17,240)		(14,594)
Net decrease in cash, cash equivalents, and restricted cash	(32,967)		(94,955)
Cash, cash equivalents, and restricted cash, at beginning of period	88,179		179,856
Cash, cash equivalents, and restricted cash, at end of period	$	55,212	$	84,901
Reconciliation of cash, cash equivalents, and restricted cash to Unaudited Condensed Consolidated Balance Sheets
Cash and cash equivalents	$	51,133	$	80,773
Restricted cash	4,079		4,128
Total cash, cash equivalents, and restricted cash	$	55,212	$	84,901
Supplemental cash flow information:
Non-cash investing activities:
Purchases of property and equipment included in accounts payable and accrued liabilities	$	726	$	209

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Description of Business and Basis of Presentation

Description of Business

Arlo Technologies, Inc. (“Arlo”) combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that transform the way people experience the connected lifestyle. Our deep expertise in product design, wireless connectivity, cloud infrastructure and cutting-edge AI capabilities focuses on delivering a seamless, smart home experience for Arlo users that is easy to setup and interact with every day. Our cloud-based platform provides users with visibility, insight and a powerful means to help protect and connect in real-time with the people and things that matter most, from any location with a Wi-Fi or a cellular connection.

We conduct business across three geographic regions—(i) the Americas; (ii) Europe, Middle-East and Africa (“EMEA”); and (iii) Asia Pacific (“APAC”)—and primarily generate revenue by selling devices through retail channels, wholesale distribution, wireless carrier channels, security solution providers, and Arlo’s direct to consumer store and paid subscription services.

Our corporate headquarters is located in Carlsbad, California, with other satellite offices across North America and various other global locations.

Basis of Presentation

We prepare our unaudited condensed consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and pursuant to the regulations of the U.S. Securities and Exchange Commission (“SEC”). The unaudited condensed consolidated financial statements include the accounts of Arlo and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

These unaudited condensed consolidated financial statements should be read in conjunction with the notes to the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for fair statement of the unaudited condensed consolidated financial statements for interim periods.

Fiscal periods

Our fiscal year begins on January 1 of the year stated and ends on December 31 of the same year. We report the results on a fiscal quarter basis rather than on a calendar quarter basis. Under the fiscal quarter basis, each of the first three fiscal quarters ends on the Sunday closest to the calendar quarter end, with the fourth quarter ending on December 31.

Reclassification

Certain prior periods amounts have been reclassified to conform to the current period’s presentation. None of these reclassifications had a material impact to the unaudited condensed consolidated financial statements.

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Use of estimates

The preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Management bases its estimates on various assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from those estimates and operating results for the nine months ended October 1, 2023 and are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or any future period.

Note 2. Significant Accounting Policies and Recent Accounting Pronouncements

Our significant accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no significant changes to such policies during the nine months ended October 1, 2023.

Emerging Growth Company Status

As an emerging growth company (“EGC”), we may, under the Jumpstart Our Business Startups Act, delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, unless we otherwise irrevocably elect not to avail ourselves of this exemption. We did not make such an irrevocable election and have not delayed the adoption of any applicable accounting standards. We will no longer qualify as an EGC on December 31, 2023. Accordingly, our Annual Report on Form 10-K for the year ending December 31, 2023 will include an attestation report of our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.

Accounting Pronouncements Recently Adopted

There were no accounting pronouncements adopted during the nine months ended October 1, 2023.

Accounting Pronouncements Not Yet Effective

We have considered all recent accounting pronouncements issued, but not yet effective, and do not expect any to have a material effect on our financial statements and related disclosures.

Note 3. Revenue

Performance Obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied and partially unsatisfied as of October 1, 2023:


	1 year		2 years		Greater than 2 years		Total
	(In thousands)
Performance obligations	$	18,920	$	24	$	4	$	18,948

The performance obligation classified as greater than one year pertains to revenue deferral from prepaid services.

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the nine months ended October 1, 2023 and October 2, 2022, $131.8 million and $82.5 million of revenue was deferred due to unsatisfied performance obligations, primarily relating to over time service revenue, and $125.6 million and $101.2 million of revenue was recognized for the satisfaction of performance obligations over time, respectively. Approximately $10.6 million and $13.6 million of this recognized revenue was included in the contract liability balance at the beginning of the periods. There were no significant changes in estimates during the period that would affect the contract balances.

During the five-year period that commenced on January 1, 2020, Verisure Sàrl (“Verisure”) has an aggregate purchase commitment of $500.0 million. As of October 1, 2023, $438.9 million of the purchase commitment has been fulfilled. Based on the Supply Agreement with Verisure, a purchase obligation is not deemed to exist until we receive and accept Verisure’s purchase order. As of October 1, 2023, we had a backlog of $25.9 million which represents performance obligations that will be recognized as revenue once fulfilled, which is expected to occur over the next three months.

Disaggregation of Revenue

We disaggregate our revenue into three geographic regions: the Americas, EMEA, and APAC, where we conduct our business. The following table presents revenue disaggregated by geographic regions.


	Three Months Ended				Nine Months Ended
	October 1, 2023		October 2, 2022		October 1, 2023		October 2, 2022
	(In thousands)
Americas	$	79,948	$	71,040	$	214,716	$	199,851
EMEA	42,887		52,542		122,317		157,000
APAC	7,168		4,575		19,050		15,036
Total	$	130,003	$	128,157	$	356,083	$	371,887

Note 4. Balance Sheet Components

Short-term investments


	As of October 1, 2023								As of December 31, 2022
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
	(In thousands)
U.S. Treasuries	$	74,679	$	243	$	(6)	$	74,916	$	29,849	$	—	$	(149)	$	29,700

Accounts receivable, net


	As of
	October 1, 2023		December 31, 2022
	(In thousands)
Gross accounts receivable	$	70,645	$	66,383
Allowance for credit losses	(332)		(423)
Total	$	70,313	$	65,960

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected.


	Three Months Ended				Nine Months Ended
	October 1, 2023		October 2, 2022		October 1, 2023		October 2, 2022
	(In thousands)
Balance at the beginning of the period	$	322	$	405	$	423	$	337
Provision for (release of) expected credit losses	10		(41)		(91)		27
Balance at the end of the period	$	332	$	364	$	332	$	364

Property and equipment, net

The components of property and equipment are as follows:


	As of
	October 1, 2023		December 31, 2022
	(In thousands)
Machinery and equipment	$	14,328	$	12,696
Software	16,134		15,606
Computer equipment	3,766		3,992
Leasehold improvements	4,661		4,657
Furniture and fixtures	2,547		2,554
Total property and equipment, gross	41,436		39,505
Accumulated depreciation	(35,684)		(32,169)
Total property and equipment, net (1)	$	5,752	$	7,336

_________________________

(1) $1.2 million and $1.7 million property and equipment, net, was included in the sublease arrangement for the San Jose office building as of October 1, 2023 and December 31, 2022, respectively.

Depreciation expense pertaining to property and equipment was $1.5 million and $3.8 million for the three and nine months ended October 1, 2023, and $1.1 million and $3.7 million for the three and nine months ended October 2, 2022.

Goodwill

We have determined that no event occurred or circumstances changed during the three and nine months ended October 1, 2023 that would more likely than not reduce the fair value of goodwill below the carrying amount. No goodwill impairment was recognized in the three and nine months ended October 1, 2023.

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Other non-current assets


	As of
	October 1, 2023		December 31, 2022
	(In thousands)
Deferred income taxes	$	1,126	$	1,384
Sublease initial direct cost and adjustments	864		777
Other	1,630		1,920
Total	$	3,620	$	4,081

Accrued liabilities


	As of
	October 1, 2023		December 31, 2022
	(In thousands)
Sales incentives	$	27,526	$	36,271
Sales returns	15,971		18,656
Compensation	12,509		15,556
Cloud and other costs	11,200		11,154
Operating lease liabilities	4,239		4,190
Professional services	2,827		3,703
Warranty obligations	1,114		1,174
Freight cost	1,406		1,050
Service cost	1,348		806
Restructuring charges	603		1,265
Other	7,256		5,030
Total	$	85,999	$	98,855

Other non-current liabilities


	As of
	October 1, 2023		December 31, 2022
	(In thousands)
Non-current service cost	$	1,289	$	1,259
Non-current compensation	1,119		616
Non-current deferred revenue	28		212
Non-current income taxes payable	77		77
Other	805		785
Total	$	3,318	$	2,949

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 5. Fair Value Measurements

The following table summarizes assets measured at fair value on a recurring basis:


	As of
	October 1, 2023		December 31, 2022
	(In thousands)
Cash equivalents: money-market funds (<90 days)	$	9,927	$	12,614
Cash equivalents: U.S. Treasuries (<90 days)	257		20,274
Available-for-sale securities: U.S. Treasuries (1)	74,916		29,700
Total	$	85,100	$	62,588

_________________________

(1)Included in short-term investments on our unaudited condensed consolidated balance sheets.

Our investments in cash equivalents and available-for-sale securities are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.

As of October 1, 2023 and December 31, 2022, assets and liabilities measured as Level 2 fair value were not material and there were no Level 3 fair value assets or liabilities measured on a recurring basis.

Note 6. Restructuring

In November 2022, we initiated a restructuring plan to reduce our cost structure to better align the operational needs of the business to current economic conditions while continuing to support our long-term strategy. This restructuring includes the reduction of headcount as well as the abandonment of certain lease contracts and the cancellation of contractual services arrangements with certain suppliers. As of October 1, 2023, we have substantially incurred all costs pertaining to restructuring activities, with related cash outflows extending until the fourth quarter of 2024.

The restructuring liabilities are included in accrued liabilities in our unaudited condensed consolidated balance sheets. Restructuring activities for the nine months ended October 1, 2023 are as follows:


	Total		Severance Expense		Office Exit Expense		Other Exit Expense
	(In thousands)
Balance as of December 31, 2022	$	1,265	$	219	$	991	$	55
Restructuring charges	634		506		117		11
Cash payments	(1,270)		(596)		(634)		(40)
Non-cash and other adjustments	(26)		—		—		(26)
Balance as of October 1, 2023	$	603	$	129	$	474	$	—
Total costs incurred inception to date	$	2,688	$	1,551	$	1,073	$	64

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 7. Revolving Credit Facility

On October 27, 2021, we entered into a Loan and Security Agreement (the “Credit Agreement”) with Bank of America, N.A., a national banking association, as lender (the “Lender”).

The Credit Agreement provides for a three-year revolving credit facility (the “Credit Facility”) that matures on October 27, 2024. Borrowings under the Credit Facility are limited to the lesser of (x) $40.0 million, and (y) an amount equal to the borrowing base. The borrowing base will be the sum of (i) 90% of investment grade eligible receivables and (ii) 85% of non-investment grade eligible accounts, less applicable reserves established by the Lender. The Credit Agreement also includes a $5.0 million sublimit for the issuance by the Lender of letters of credit. In addition, the Credit Agreement includes an uncommitted accordion feature that allows us to request, from time to time, that the Lender increase the aggregate revolving loan commitments by up to an additional $25.0 million in the aggregate, subject to the satisfaction of certain conditions, including obtaining the Lender’s agreement to participate in each increase. The proceeds of the borrowings under the Credit Facility may be used for working capital and general corporate purposes. Based on certain terms and conditions including eligible accounts receivable as of October 1, 2023, we had unused borrowing capacity of $14.4 million.

Our obligations under the Credit Agreement are secured by substantially all of our domestic working capital assets, including accounts receivable, cash and cash equivalents, inventory, and other assets to the extent related to such working capital assets.

At our option, borrowings under the Credit Agreement will bear interest at a floating rate equal to: (i) the Bloomberg Short-Term Bank Yield Index rate plus the applicable rate of 2.0% to 2.5% determined based on our average daily availability for the prior fiscal quarter, or (ii) the base rate plus the applicable rate of 1.0% to 1.5% based on our average daily availability for the prior fiscal quarter. Among other fees, we are required to pay a monthly unused fee of 0.2% per annum on the amount by which the Lender’s aggregate commitment under the Credit Facility exceeds the average daily revolver usage during such month.

The Credit Agreement contains events of default, representations and warranties, and affirmative and negative covenants customary for credit facilities of this type. The Credit Agreement also contains financial covenants that require us to (a) until we achieve a fixed charge coverage ratio of at least 1.00 to 1.00 for two consecutive quarters, maintain minimum liquidity of not less than $20.0 million at all times and (b) thereafter, if the Financial Covenant Trigger Period (as defined in the Credit Agreement) is in effect, maintain a fixed charge coverage ratio, tested quarterly on a trailing twelve month basis, of at least 1.00 to 1.00 at any time. As of October 1, 2023, we were in compliance with all the covenants of the Credit Agreement.

If an event of default under the Credit Agreement occurs, then the Lender may cease making advances under the Credit Agreement and declare any outstanding obligations under the Credit Agreement to be immediately due and payable. In addition, if we file a bankruptcy petition, a bankruptcy petition is filed against us and is not dismissed or stayed within thirty days or we make a general assignment for the benefit of creditors, then any outstanding obligations under the Credit Agreement will automatically and without notice or demand become immediately due and payable.

No amounts had been drawn under the Credit Facility as of October 1, 2023.

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 8. Commitments and Contingencies

Operating Leases

Our operating lease obligations mostly include offices, equipment, data centers and distribution centers, with various expiration dates through June 2029. Certain lease agreements include options to renew or terminate the lease, which are not reasonably certain to be exercised and therefore are not factored into our determination of lease payments. The terms of certain leases provide for rental payments on a graduated scale. Gross lease expense was $1.5 million and $4.5 million for the three and nine months ended October 1, 2023, respectively, and $1.8 million and $5.4 million for the three and nine months ended October 2, 2022, respectively. We recorded sublease income as reduction of lease expense, in the amount of $0.5 million and $1.5 million for the three and nine months ended October 1, 2023 and October 2, 2022.

Supplemental cash flow information related to operating leases was as follows:


	Nine Months Ended
	October 1, 2023		October 2, 2022
	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	5,274	$	5,208
Right-of-use assets obtained in exchange for lease liabilities
Operating leases	$	1,851	$	2,670

Weighted average remaining lease term and weighted average discount rate related to operating leases were as follows:


	As of
	October 1, 2023		December 31, 2022
Weighted average remaining lease term	5.1 years		5.1 years
Weighted average discount rate	5.74	%	5.69	%

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The future minimum undiscounted lease payments under operating leases and future non-cancelable rent payments from our subtenants for each of the next five years and thereafter as of October 1, 2023 were as follows:


	Operating Lease Payments		Sublease Payments		Net
	(In thousands)
2023 (Remaining three months)	$	949	$	(517)	$	432
2024	5,673		(1,947)		3,726
2025	4,450		(2,006)		2,444
2026	4,602		(2,066)		2,536
2027	4,569		(2,322)		2,247
Thereafter	5,411		(3,620)		1,791
Total future lease payments	25,654		$	(12,478)	$	13,176
Less: interest	(3,445)
Present value of future minimum lease payments	$	22,209

Accrued liabilities	$	4,239
Non-current operating lease liabilities	17,970
Total lease liabilities	$	22,209

Letters of Credit

In connection with the lease agreement for our office space located in San Jose, California, we executed a letter of credit with the landlord as the beneficiary. As of October 1, 2023, we had approximately $3.6 million of unused letters of credit outstanding, of which $3.1 million pertains to the lease arrangement in San Jose, California.

Purchase Obligations

We have entered into various inventory-related purchase agreements with suppliers. Generally, under these agreements, 50% of orders are cancelable by giving notice 46 to 60 days prior to the expected shipment date and 25% of orders are cancelable by giving notice 31 to 45 days prior to the expected shipment date. Orders are non-cancelable within 30 days prior to the expected shipment date. As of October 1, 2023, we had approximately $32.9 million in non-cancelable purchase commitments with suppliers.

As of October 1, 2023, an additional $14.3 million of purchase orders beyond contractual termination periods have been issued to supply chain partners in anticipation of demand requirements. Consequently, we may incur expenses for the materials and components, such as chipsets already purchased by the supplier to fulfill our orders if the purchase order is cancelled. Expenses incurred have historically not been significant relative to the original order value. As of October 1, 2023, the loss liability from committed purchases was not material.

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Warranty Obligations

Changes in warranty obligations, which are included in accrued liabilities in the unaudited condensed consolidated balance sheets, were as follows:


	Three Months Ended				Nine Months Ended
	October 1, 2023		October 2, 2022		October 1, 2023		October 2, 2022
	(In thousands)
Balance at the beginning of the period	$	1,093	$	1,285	$	1,174	$	1,330
Provision for warranty obligations	86		(88)		141		25
Settlements	(65)		(76)		(201)		(234)
Balance at the end of the period	$	1,114	$	1,121	$	1,114	$	1,121

Litigation and Other Legal Matters

We are involved in disputes, litigation, and other legal actions, including, but not limited to, the matters described below. In all cases, at each reporting period, we evaluate whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. In such cases, we accrue for the amount or, if a range, we accrue the low end of the range, only if there is not a better estimate than any other amount within the range, as a component of legal expense within general and administrative expenses. We monitor developments in these legal matters that could affect the estimate we had previously accrued. In relation to such matters, we currently believe that there are no existing claims or proceedings that are likely to have a material adverse effect on our financial position within the next 12 months, or the outcome of these matters is currently not determinable. There are many uncertainties associated with any litigation, and these actions or other third-party claims against us may cause us to incur costly litigation and/or substantial settlement charges. In addition, the resolution of any intellectual property litigation may require us to make royalty payments, which could have an adverse effect in future periods. If any of those events were to occur, our business, financial condition, results of operations, and cash flows could be adversely affected. The actual liability in any such matters may be materially different from our estimates, which could result in the need to adjust the liability and record additional expenses.

Securities Class Action Lawsuits and Derivative Suit

On December 11, 2018, purported stockholders of Arlo filed six putative securities class action complaints in the Superior Court of California, County of Santa Clara (the “State Action”), and one complaint in the U.S. District Court for the Northern District of California (the “Federal Action”) against us and certain of our executives and directors. The plaintiffs in the State Action allege that we failed to adequately disclose quality control problems and adverse sales trends ahead of our initial public offering (the “IPO”), violating the Securities Act of 1933, as amended (the “Securities Act”). The complaint seeks unspecified monetary damages and other relief on behalf of investors who purchased Company common stock issued pursuant and/or traceable to the IPO. In the Federal Action, the court appointed a shareholder named Matis Nayman as lead plaintiff. Lead plaintiff alleged violations of the Securities Act and the Securities Exchange Act of 1934, as amended, based on alleged materially false and misleading statements about our sales trends and products. In the amended complaint, lead plaintiff sought to represent a class of persons who purchased or otherwise acquired our common stock (i) during the period between August 3, 2018 through December 3, 2018 and/or (ii) pursuant to or traceable to the IPO. Lead plaintiff sought class certification, an award of unspecified damages, an award of costs and expenses, including attorneys’ fees, and other further relief as the court may deem just and proper.

On August 6, 2019, defendants filed a motion to dismiss. The federal court granted that motion, and lead plaintiff filed an amended complaint. On June 12, 2020, lead plaintiff filed an unopposed motion for preliminary approval of a class action settlement for $1.25 million, which was also the amount that we had accrued for loss

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

contingency. In October 2020, we made a $1.25 million payment to an escrow account administered by the court and plaintiff’s counsel (the “Settlement Fund”). The Settlement Fund was deemed to be in the custody of the court and remained subject to the jurisdiction of the court until such time as the Settlement Fund was distributed pursuant to the settlement agreement and/or further order of the court.

On February 5, 2021, lead plaintiff filed a motion for final approval of the settlement. In advance of the final approval hearing, three of the named plaintiffs in the State Action requested exclusion from the settlement. The court held a final approval hearing on March 11, 2021, and, on March 25, 2021, entered an order and final judgment approving the settlement and, among other things, dismissed with prejudice all claims of lead plaintiff and the Settlement Class (as defined in the settlement agreement). The Federal Action is now closed.

In the State Action, on May 5, 2021, the court held a status conference and instructed plaintiffs Perros, Patel, and Pham (“Plaintiffs”), who were the only Arlo stockholders to opt out of the federal settlement, to file an amended complaint by June 4, 2021. Plaintiffs filed their amended complaint, asserting their individual Securities Act claims, but also purporting to represent a new class of Arlo stockholders who purchased Arlo shares between December 3, 2018 and February 22, 2019. On June 21, 2021, the Arlo defendants filed a motion to dismiss the State Action (for forum non conveniens) based on the federal forum provision in Arlo’s certificate of incorporation. Plaintiffs opposed on July 28, 2021, and the Arlo defendants replied on August 13, 2021. On September 9, 2021, the court issued an order granting the Arlo defendants’ forum non conveniens motion, and on September 17, 2021, the court issued a final judgment dismissing the State Action in its entirety. On November 16, 2021, Plaintiffs filed a Notice of Appeal. The appeal occurred before the California Court of Appeal, Sixth Appellate District. Plaintiffs-Appellants filed their opening brief on May 20, 2022. Defendants-Respondents filed their responding brief on August 18, 2022, and Plaintiffs-Appellants filed their reply brief on September 7, 2022. On April 13, 2023, the court heard oral argument on the appeal and the case was submitted. On May 5, 2023, the Court of Appeal affirmed by written order the trial court’s dismissal of the State Action based on the federal forum provision in Arlo’s certificate of incorporation and awarded costs to Arlo. On June 14, 2023, Plaintiffs filed a petition for review in the Supreme Court of California. Defendants-Respondents filed their answer to the petition for review on July 5, 2023, and Plaintiffs filed their reply in support of the petition for review on July 17, 2023. On July 19, 2023, the Supreme Court of California denied Plaintiffs’ petition for review and closed the case. The deadline for Plaintiffs to file a petition for writ of certiorari to the Supreme Court of the United States appealing the dismissal of the State Action was October 17, 2023. To our knowledge, no such petition has been filed.

Indemnifications

In the ordinary course of business, we may provide indemnification of varying scope and terms to customers, distributors, resellers, vendors, lessors, business partners, and other parties with respect to certain matters including, but not limited to, losses arising from breach of such agreements or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with members of our board of directors and certain of our executive officers that require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments we could be required to make under these indemnification agreements is, in many cases, unlimited. As of October 1, 2023 and December 31, 2022, we have not incurred any material costs as a result of such indemnifications and we are not currently aware of any indemnification claims.

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 9. Employee Benefit Plans

We grant options and restricted stock units (“RSUs”) under the 2018 Equity Incentive Plan (the “2018 Plan”), under which awards may be granted to all employees. We also grant performance-based and market-based restricted stock units (“PSUs”) to our executive officers periodically. Award vesting periods for the 2018 Plan are generally three to four years. As of October 1, 2023, approximately 3.6 million shares were available for future grants. Options may be granted for periods of up to 10 years or such shorter term as may be provided in the agreement and at prices no less than 100% of the fair market value of Arlo’s common stock on the date of grant. Options granted under the 2018 Plan generally vest over four years, the first tranche at the end of 12 months and the remaining shares underlying the option vesting monthly over the remaining three years.

On January 20, 2023, we registered an aggregate of up to 4,444,072 shares of common stock on a Registration Statement on Form S-8, including 3,555,258 shares issuable pursuant to the 2018 Plan that were automatically added to the shares authorized for issuance under the 2018 Plan and 888,814 shares issuable pursuant to the Employee Stock Purchase Plan (“ESPP”) that were automatically added to the shares authorized for issuance on January 1, 2023, both pursuant to an “evergreen” provision contained in the respective plans.

The following table sets forth the available shares for grants as of October 1, 2023:


			Number of Shares
			(In thousands)
Shares available for grants as of December 31, 2022			4,213
Additional authorized shares			3,555
Granted			(8,062)
Forfeited / cancelled			506
Shares traded for taxes			3,394
Shares available for grants as of October 1, 2023			3,606

Employee Stock Purchase Plan

We sponsor the ESPP to eligible employees. As of October 1, 2023, 2.0 million shares were available for issuance under the ESPP.

Option Activity

Stock option activity during the nine months ended October 1, 2023 was as follows:


	Number of Shares	Weighted Average Exercise Price Per Share
	(In thousands)	(In dollars)
Outstanding as of December 31, 2022	2,082	$	10.24
Granted	—	$	—
Exercised	(513)	$	7.15
Forfeited / cancelled	—	$	—
Expired	(12)	$	7.55
Outstanding as of October 1, 2023	1,557	$	11.28
Vested and expected to vest as of October 1, 2023	1,557	$	11.28
Exercisable Options as of October 1, 2023	1,557	$	11.28

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

RSU Activity

RSU activity, excluding PSU activity, during the nine months ended October 1, 2023 was as follows:


	Number of Shares	Weighted Average Grant Date Fair Value Per Share
	(In thousands)	(In dollars)
Outstanding as of December 31, 2022	9,487	$	6.36
Granted	6,015	$	5.10
Vested	(5,914)	$	5.50
Forfeited	(494)	$	6.27
Outstanding as of October 1, 2023	9,094	$	6.09

PSU Activity

Our executive officers and other senior employees have been granted performance-based awards with vesting occurring at the end of a three or five-year period if performance conditions or market conditions are met. The number of units earned and eligible to vest are determined based on the achievement of various performance conditions or market conditions, including the cumulative paid accounts targets, stock price, cash balances at reporting period, and the recipients’ continued services. At the end of each reporting period, we evaluate the probability of achieving the performance or market conditions and record the related stock-based compensation expense based on the achievement over the service period.

PSU activity during the nine months ended October 1, 2023 was as follows:


	Number of Shares	Weighted Average Grant Date Fair Value Per Share
	(In thousands)	(In dollars)
Outstanding as of December 31, 2022	4,041	$	6.22
Granted	2,050	$	4.56
Vested	(2,202)	$	5.54
Forfeited	(3)	$	8.28
Outstanding as of October 1, 2023	3,886	$	5.73

Stock-Based Compensation Expense

The following table sets forth the stock-based compensation expense included in our unaudited condensed consolidated statements of comprehensive loss:


	Three Months Ended				Nine Months Ended
	October 1, 2023		October 2, 2022		October 1, 2023		October 2, 2022
	(In thousands)
Cost of revenue	$	868	$	1,365	$	2,696	$	3,610
Research and development	2,847		2,679		10,069		8,602
Sales and marketing	1,224		1,389		4,616		4,559
General and administrative	5,348		4,520		20,470		15,016
Total	$	10,287	$	9,953	$	37,851	$	31,787

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As of October 1, 2023, there was no unrecognized compensation cost related to stock options. Approximately $65.7 million of unrecognized compensation cost related to unvested RSUs and PSUs is expected to be recognized over a weighted-average period of 2.0 years as of October 1, 2023.

Note 10. Income Taxes

The provision for income taxes for the three and nine months ended October 1, 2023 was $0.03 million and $1.04 million, or an effective tax rate of (2.7)% and (4.8)%. The provision for income taxes for the three and nine months ended October 2, 2022 was $0.3 million and $0.7 million, or an effective tax rate of (2.2)% and (2.2)%. During the three and nine months ended October 1, 2023 and October 2, 2022, we sustained U.S. book losses. Consistent with the prior year periods, we maintained a valuation allowance against our U.S. federal and state deferred tax assets and did not record a tax benefit on these deferred tax assets since it is more likely than not that these deferred tax assets will not be realized. Provision for income taxes decreased for the three months ended October 1, 2023, compared to the prior year period and increased for the nine months ended October 1, 2023, compared to the prior year period, primarily due to (i) the higher U.S. earnings, (ii) the application of Section 174 of the Internal Revenue Code requiring capitalization of research and experimental expenses, which increase was recognized mostly in the first quarter of 2023, and (iii) the recognition of a tax benefit from return to provision adjustments in the third quarter of 2023.

Note 11. Net Loss Per Share


	Three Months Ended				Nine Months Ended
	October 1, 2023		October 2, 2022		October 1, 2023		October 2, 2022
	(In thousands, except per share data)
Numerator:
Net loss	$	(1,120)	$	(14,435)	$	(22,728)	$	(34,471)
Denominator:
Weighted average common shares - basic and dilutive	94,243		88,124		92,069		86,677



Basic and diluted net loss per share	$	(0.01)	$	(0.16)	$	(0.25)	$	(0.40)


Anti-dilutive employee stock-based awards, excluded	989		8,400		2,137		2,610

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 12. Segment and Geographic Information

Segment Information

We operate as one operating and reportable segment. Our Chief Executive Officer (“CEO”) is identified as the Chief Operating Decision Maker (“CODM”), who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.

Geographic Information for Revenue

Revenue consists of gross product shipments and service revenue, less allowances for estimated sales returns, price protection, end-user customer rebates, net changes in deferred revenue, and other channel sales incentives deemed to be a reduction of revenue per the authoritative guidance. Sales and usage-based taxes are excluded from revenue. For reporting purposes, revenue by geography is generally based upon the ship-to location of the customer for device sales and device location for service sales. The following table presents revenue by geographic area. For comparative purposes, amounts in prior periods have been recast.


	Three Months Ended				Nine Months Ended
	October 1, 2023		October 2, 2022		October 1, 2023		October 2, 2022
	(In thousands)
United States	$	79,775	$	71,040	$	213,804	$	196,276
Spain	32,802		38,889		90,923		103,598
Ireland	3,535		8,616		12,521		41,368
Other countries	13,891		9,612		38,835		30,645
Total	$	130,003	$	128,157	$	356,083	$	371,887

Geographic Information for Long-Lived Assets

Long-lived assets include property and equipment, net and operating lease right-of-use assets, net. Our long-lived assets are based on the physical location of the assets. The following table presents long-lived assets by geographic area.


	As of
	October 1, 2023		December 31, 2022
	(In thousands)
United States	$	14,684	$	17,762
Other countries	3,258		2,383
Total	$	17,942	$	20,145

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words “believes,” “anticipates,” “plans,” “expects,” “intends,” “could,” “may,” “will,” and similar expressions are intended to identify forward-looking statements, including statements concerning our business and the expected performance characteristics, specifications, reliability, market acceptance, market growth, specific uses, user feedback, and market position of our products and technology. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in “Part II—Item 1A—Risk Factors” and “Liquidity and Capital Resources” below.

All forward-looking statements in this document are based on information available to us as of the date hereof, such information may be limited or incomplete, and we assume no obligation to update any such forward-looking statements. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report. Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us,” the “Company,” and “Arlo” refer to Arlo Technologies, Inc. and our subsidiaries.

Business and Executive Overview

Arlo combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that are transforming the way people experience the connected lifestyle. Arlo’s deep expertise in product design, wireless connectivity, cloud infrastructure and cutting-edge AI capabilities focuses on delivering a seamless, smart home experience for Arlo users that is easy to setup and interact with every day. Our cloud-based platform provides users with visibility, insight and a powerful means to help protect and connect in real-time with the people and things that matter most, from any location with a Wi-Fi or a cellular connection. Since the launch of our first product in December 2014, we have shipped over 30.7 million smart connected devices. As of October 1, 2023, the Arlo platform had approximately 8.2 million cumulative registered accounts across more than 100 countries around the world coupled with 2.5 million cumulative paid subscribers and annual recurring revenue of $200.0 million.

We conduct business across three geographic regions—(i) the Americas; (ii) Europe, Middle-East and Africa (“EMEA”); and (iii) Asia Pacific (“APAC”)—and we primarily generate revenue by selling devices through retail, wholesale distribution, wireless carrier channels, security solution providers, Arlo’s direct to consumer store and paid subscription services. For the three months ended October 1, 2023 and October 2, 2022, we generated total revenue of $130.0 million and $128.2 million, respectively. Loss from operations was $2.3 million and $14.4 million for the three months ended October 1, 2023 and October 2, 2022, respectively. For the nine months ended October 1, 2023 and October 2, 2022, we generated total revenue of $356.1 million and $371.9 million, respectively. Loss from operations was $24.4 million and $34.5 million for the nine months ended October 1, 2023 and October 2, 2022, respectively.

Our goal is to continue to develop innovative, world-class connected lifestyle solutions to expand and further monetize our current and future user and paid account bases. We believe that the growth of our business is dependent on many factors, including our ability to innovate and launch successful new products on a timely basis and grow our installed base, to increase subscription-based recurring revenue, to invest in channel partnerships and to continue our global expansion. We expect to increase our investment in research and development going forward as we continue to introduce new and innovative products and services to enhance the Arlo platform and compete for engineering talent. We also expect our sales and marketing expense to increase in the future as we invest in marketing to drive demand for our products and services.

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Key Business Metrics

In addition to the measures presented in our unaudited condensed consolidated financial statements, we use the following key metrics to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions. We believe these key business metrics provide useful information by offering the ability to make more meaningful period-to-period comparisons of our on-going operating results and a better understanding of how management plans and measures our underlying business. Our key business metrics may be calculated in a manner different from the same key business metrics used by other companies. We regularly review our processes for calculating these metrics, and from time to time we may discover inaccuracies in our metrics or make adjustments to better reflect our business or to improve their accuracy, including adjustments that may result in the recalculation of our historical metrics. We believe that any such inaccuracies or adjustments are immaterial unless otherwise stated.


	As of and for the Three Months Ended
	October 1, 2023		% Change		October 2, 2022
	(In thousands, except percentage data)
Cumulative registered accounts	8,193		18.2	%	6,930
Cumulative paid accounts (1)	2,486		48.6	%	1,673
Annual recurring revenue	$	199,993	59.5	%	$	125,402

_________________________

(1) The number of cumulative paid accounts as of October 1, 2023 included paid accounts managed by Verisure Sàrl (“Verisure”) in our EMEA region which are now onboarded with us. This does not have an impact to our financial statements and key business metrics other than our number of cumulative paid accounts.

Cumulative Registered Accounts. We believe that our ability to increase our user base is an indicator of our market penetration and growth of our business as we continue to expand and innovate our Arlo platform. We define our registered accounts at the end of a particular period as the number of unique registered accounts on the Arlo platform as of the end of such period. The number of registered accounts does not necessarily reflect the number of end-users on the Arlo platform as one registered account may be used by multiple end-users to monitor the devices attached to that household.

Cumulative Paid Accounts. Paid accounts are defined as any account worldwide where a subscription to a paid service is being collected (either by us or by our customers or channel partners, including Verisure).

Annual Recurring Revenue (“ARR”). We believe ARR enables measurement of our business initiatives, and serves as an indicator of our future growth. ARR represents the amount of paid service revenue that we expect to recur annually and is calculated by taking our recurring paid service revenue for the last calendar month in the fiscal quarter, multiplied by 12 months. Recurring paid service revenue represents the revenue we recognize from our paid accounts and excludes prepaid service revenue. ARR is a performance metric and should be viewed independently of revenue and deferred revenue, and is not intended to be a substitute for, or combined with, any of these items.

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Impact of Global Geopolitical, Economic and Business Conditions

During the nine months ended October 1, 2023, we remained focused on the ongoing conflict in Ukraine, hostilities in the Middle East, supply chain disruptions, inflation, fluctuating consumer confidence and rising interest rates by preserving our liquidity and managing our cash flow by taking preemptive action to enhance our ability to meet our short-term liquidity needs. These actions include, but are not limited to, proactively managing working capital by closely monitoring customers’ credit and collections, renegotiating payment terms with third-party manufacturers and key suppliers, closely monitoring inventory levels and purchases against forecasted demand, reducing or eliminating non-essential spending, and subleasing or reducing excess office space. We continue to monitor the situation and may, as necessary, reduce expenditures further, borrow under our revolving credit facility, or pursue other sources of capital that may include other forms of external financing in order to maintain our cash position and preserve financial flexibility in response to the uncertainty in the United States and global markets resulting from the ongoing conflict in Ukraine, hostilities in the Middle East, supply chain disruptions, the inflationary macro environment, fluctuating consumer confidence and rising interest rates and current financial conditions within the banking industry, including the effects of recent failures of other financial institutions, and liquidity levels.

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Results of Operations

We operate as one operating and reportable segment. The following table sets forth, for the periods presented, the unaudited condensed consolidated statements of comprehensive loss data, which we derived from the accompanying unaudited condensed consolidated financial statements:


	Three Months Ended								Nine Months Ended
	October 1, 2023				October 2, 2022				October 1, 2023				October 2, 2022
	(In thousands, except percentage data)
Revenue:
Products	$	78,961	60.7	%	$	92,720	72.3	%	$	210,770	59.2	%	$	273,736	73.6	%
Services	51,042		39.3	%	35,437		27.7	%	145,313		40.8	%	98,151		26.4	%
Total revenue	130,003		100.0	%	128,157		100.0	%	356,083		100.0	%	371,887		100.0	%
Cost of revenue:
Products	73,335		56.4	%	79,386		61.9	%	197,520		55.5	%	233,992		62.9	%
Services	13,529		10.4	%	12,021		9.4	%	38,349		10.8	%	33,830		9.1	%
Total cost of revenue	86,864		66.8	%	91,407		71.3	%	235,869		66.2	%	267,822		72.0	%
Gross profit	43,139		33.2	%	36,750		28.7	%	120,214		33.8	%	104,065		28.0	%
Operating expenses:
Research and development	16,829		12.9	%	16,471		12.9	%	52,197		14.7	%	50,252		13.5	%
Sales and marketing	15,863		12.2	%	22,193		17.3	%	48,137		13.5	%	49,867		13.4	%
General and administrative	12,460		9.6	%	12,253		9.6	%	43,089		12.1	%	38,023		10.3	%
Others	263		0.3	%	273		0.2	%	1,236		0.4	%	377		0.1	%
Total operating expenses	45,415		35.0	%	51,190		40.0	%	144,659		40.7	%	138,519		37.3	%
Loss from operations	(2,276)		(1.8)	%	(14,440)		(11.3)	%	(24,445)		(6.9)	%	(34,454)		(9.3)	%
Interest income, net	1,175		0.9	%	290		0.2	%	2,736		0.8	%	414		0.1	%
Other income, net	10		—	%	19		0.0	%	23		—	%	314		0.1	%
Loss before income taxes	(1,091)		(0.9)	%	(14,131)		(11.1)	%	(21,686)		(6.1)	%	(33,726)		(9.1)	%
Provision for income taxes	29		—	%	304		0.2	%	1,042		0.3	%	745		0.2	%
Net loss	$	(1,120)	(0.9)	%	$	(14,435)	(11.3)	%	$	(22,728)	(6.4)	%	$	(34,471)	(9.3)	%

Revenue

Our gross revenue consists primarily of sales of devices, prepaid and paid subscription service revenue. We generally recognize revenue from product sales at the time the product is shipped and transfer of control from us to the customer occurs. Upon device shipment, we attribute a portion of the sales price as prepaid service, deferring this revenue at the outset and subsequently recognizing it ratably over the estimated useful economic life of the device or free trial period, as applicable. Our paid subscription services relate to sales of subscription plans to our registered accounts.

Our revenue consists of gross revenue, less customer rebates and other channel sales incentives, allowances for estimated sales returns, price protection, and net changes in deferred revenue. A significant portion of our marketing expenditure is with customers and is deemed to be a reduction of revenue under authoritative guidance for revenue recognition.

We conduct business across three geographic regions—(i) the Americas; (ii) EMEA; and (iii) APAC—and generally base revenue by geography on the ship-to location of the customer for device sales and device location for service sales.

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	Three Months Ended								Nine Months Ended
	October 1, 2023			% Change		October 2, 2022			October 1, 2023			% Change		October 2, 2022
	(In thousands, except percentage data)
Americas	$	79,948		12.5	%	$	71,040		$	214,716		7.4	%	$	199,851
Percentage of revenue	61.5		%			55.4		%	60.3		%			53.7		%
EMEA	42,887			(18.4)	%	52,542			122,317			(22.1)	%	157,000
Percentage of revenue	33.0		%			41.0		%	34.4		%			42.2		%
APAC	7,168			56.7	%	4,575			19,050			26.7	%	15,036
Percentage of revenue	5.5		%			3.6		%	5.3		%			4.1		%
Total revenue	$	130,003		1.4	%	$	128,157		$	356,083		(4.2)	%	$	371,887

Product revenue decreased by $13.8 million, or 14.8% and $63.0 million, or 23.0% for the three and nine months ended October 1, 2023 compared to the prior year periods. The declines were experienced mainly in EMEA and Americas primarily driven by a reduction in the average selling prices (“ASPs”) of our products as we increased promotional activities to stimulate household acquisition and increased subscriber growth coupled with a shift in product mix driven by the softening consumer demand as a result of current macro-economic factors and seasonality. This decline in revenue was partially offset by the revenue generated from the launch of the Essential 2 camera portfolio during the three months ended October 1, 2023.

Service revenue increased in all regions by $15.6 million, or 44.0% and $47.2 million, or 48.1% for the three and nine months ended October 1, 2023 compared to the prior year periods, primarily due to increases in (1) cumulative paid accounts of 48.6%, and (2) rates for our subscription plans.

Cost of Revenue

Cost of revenue consists of both product costs and service costs. Product costs primarily consist of the cost of finished products from our third-party manufacturers and overhead costs, including personnel expense for operation staff, purchasing, product planning, inventory control, warehousing and distribution logistics, third-party software licensing fees, inbound freight, IT and facilities overhead, warranty costs associated with returned goods, write-downs for excess and obsolete inventory and excess components, and royalties to third parties. Service costs consist of costs attributable to the provision and maintenance of our cloud-based platform, including personnel, storage, security and computing, IT and facilities overhead.

Our cost of revenue as a percentage of revenue can vary based upon a number of factors, including those that may affect our revenue set forth above and factors that may affect our cost of revenue, including, without limitation product mix, sales channel mix, registered accounts’ acceptance of paid subscription service offerings, and changes in our cost of goods sold due to fluctuations in prices paid for components, net of vendor rebates, cloud platform costs, warranty and overhead costs, inbound freight and duty costs, and charges for excess or obsolete inventory. We outsource our manufacturing, warehousing, and distribution logistics. We also outsource certain components of the required infrastructure to support our cloud-based back-end IT infrastructure. We believe this outsourcing strategy allows us to better manage our product and service costs and gross margin and allows us to adapt to changing market dynamics and supply chain constraints.

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The following table presents cost of revenue and gross margin for the periods indicated:


	Three Months Ended						Nine Months Ended
	October 1, 2023		% Change		October 2, 2022		October 1, 2023		% Change		October 2, 2022
	(In thousands, except percentage data)
Cost of revenue:
Products	$	73,335	(7.6)	%	$	79,386	$	197,520	(15.6)	%	$	233,992
Services	13,529		12.5	%	12,021		38,349		13.4	%	33,830
Total cost of revenue	$	86,864	(5.0)	%	$	91,407	$	235,869	(11.9)	%	$	267,822

Product cost of revenue decreased 7.6% and 15.6% for the three and nine months ended October 1, 2023 compared to the prior year periods, respectively, primarily due to decreases in product shipments coupled with decreases in freight-in costs due to normalization of the supply chain and utilization of ocean freight, partially offset by increases in inventory reserves.

Service cost of revenue increased 12.5% and 13.4% for the three and nine months ended October 1, 2023 compared to the prior year periods, respectively, primarily due to service revenue growth as a result of increases in (1) cumulative paid accounts of 48.6%, and (2) rates for our subscription plans, partially offset by cost optimizations.

Gross Profit

The following table presents gross profit for the periods indicated:


	Three Months Ended								Nine Months Ended
	October 1, 2023			% Change		October 2, 2022			October 1, 2023			% Change		October 2, 2022
	(In thousands, except percentage data)
Gross profit:
Products	$	5,626		(57.8)	%	$	13,334		$	13,250		(66.7)	%	$	39,744
Services	37,513			60.2	%	23,416			106,964			66.3	%	64,321
Total gross profit	$	43,139		17.4	%	$	36,750		$	120,214		15.5	%	$	104,065
Gross margin percentage:
Products	7.1		%			14.4		%	6.3		%			14.5		%
Services	73.5		%			66.1		%	73.6		%			65.5		%
Total gross margin	33.2		%			28.7		%	33.8		%			28.0		%

Product gross profit decreased for the three and nine months ended October 1, 2023 compared to the prior year periods, primarily driven by a reduction in the ASPs of our products as we increased promotional activities to stimulate household acquisition and increased subscriber growth coupled with a shift in product mix driven by the softening consumer demand as a result of current macro-economic factors. The product gross profit decrease was partially offset by the decrease in freight-in costs due to normalization of the supply chain and utilization of ocean freight.

Service gross profit increased for the three and nine months ended October 1, 2023 compared to the prior year periods, primarily due to service revenue growth in all regions as a result of increases in (1) cumulative paid accounts of 48.6%, and (2) rates for our subscription plans, as well as cost optimizations.

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Operating Expenses

Research and Development

Research and development expense consists primarily of personnel-related expense, safety, security, regulatory services and testing, other research and development consulting fees, and corporate IT and facilities overhead. Generally, we recognize research and development expenses as they are incurred. We have invested in and expanded our research and development organization to enhance our ability to introduce innovative products and services. We expect research and development expense to increase in absolute dollars as we develop new product and service offerings and compete for engineering talent. We believe that innovation and technological leadership are critical to our future success, and we are committed to continuing a significant level of research and development to develop new technologies, products, and services, including our hardware devices, cloud-based software, AI-based algorithms, and machine learning capabilities.

The following table presents research and development expense for the periods indicated:


	Three Months Ended						Nine Months Ended
	October 1, 2023		% Change		October 2, 2022		October 1, 2023		% Change		October 2, 2022
	(In thousands, except percentage data)
Research and development expense	$	16,829	2.2	%	$	16,471	$	52,197	3.9	%	$	50,252

Research and development expense increased by $0.4 million for the three months ended October 1, 2023 compared to the prior year period, primarily due to an increase of $0.6 million in personnel-related expenses mainly from increase in base compensation as a result of headcount increase, partially offset by a decrease of $0.2 million in professional services.

Research and development expense increased by $1.9 million for the nine months ended October 1, 2023 compared to the prior year period, primarily due to an increase of $3.1 million in personnel-related expenses mainly from stock-based compensation and merit increases, partially offset by a decrease of $1.0 million in corporate IT and facilities overhead.

Sales and Marketing

Sales and marketing expense consists primarily of personnel expense for sales and marketing staff, technical support expense, advertising, trade shows, media and placement, corporate communications and other marketing expense, product marketing expense, IT and facilities overhead, outbound freight costs, and credit card processing fees. We expect our sales and marketing expense to increase in the future as we invest in marketing to drive demand for our products and services.

The following table presents sales and marketing expense for the periods indicated:


	Three Months Ended						Nine Months Ended
	October 1, 2023		% Change		October 2, 2022		October 1, 2023		% Change		October 2, 2022
	(In thousands, except percentage data)
Sales and marketing expense	$	15,863	(28.5)	%	$	22,193	$	48,137	(3.5)	%	$	49,867

Sales and marketing expense decreased $6.3 million for the three months ended October 1, 2023 compared to the prior year period, primarily due to decreases of $7.5 million in marketing expenditures as a result of the suspension of our brand awareness advertising campaign, partially offset by increases of $0.5 million in customer care services and $0.5 million in credit card processing fees as a result of increases in Arlo.com store sales and paid subscriber accounts.

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Sales and marketing expense decreased $1.7 million for the nine months ended October 1, 2023 compared to the prior year period, primarily due to decreases of $5.7 million in marketing expenditures as a result of the suspension of our brand awareness advertising campaign, partially offset by increases of $1.7 million in credit card processing fees as a result of increases in Arlo.com store sales and paid subscriber accounts, $1.6 million in customer care services, and $1.4 million in freight-out expenses.

General and Administrative

General and administrative expense consists primarily of personnel-related expense for certain executives, finance and accounting, investor relations, human resources, legal, information technology, professional fees, corporate IT and facilities overhead, strategic initiative expense, and other general corporate expense. We expect our general and administrative expense to fluctuate as a percentage of our revenue in future periods based on fluctuations in our revenue and the timing of such expense.

The following table presents general and administrative expense for the periods indicated:


	Three Months Ended						Nine Months Ended
	October 1, 2023		% Change		October 2, 2022		October 1, 2023		% Change		October 2, 2022
	(In thousands, except percentage data)
General and administrative expense	$	12,460	1.7	%	$	12,253	$	43,089	13.3	%	$	38,023

General and administrative expense increased $0.2 million for the three months ended October 1, 2023 compared to the prior year period, primarily due to an increase of $0.8 million in personnel-related expenses mainly from stock-based compensation, partially offset by decreases of $0.6 million in professional consulting services and corporate IT and facilities overhead.

General and administrative expense increased $5.1 million for the nine months ended October 1, 2023 compared to the prior year period, primarily due to an increase of $7.4 million in personnel-related expenses mainly from stock-based compensation and merit increases, partially offset by decreases of $2.3 million in corporate IT and facilities overhead and professional consulting services.

Others

Others include separation expense, which consists primarily of costs of legal and professional services and restructuring charges, which consist of severance costs and office exit expense associated with the abandonment of certain lease contracts.

Interest Income and Other Income, Net

The following table presents interest income and other income, net for the periods indicated:


	Three Months Ended						Nine Months Ended
	October 1, 2023		% Change		October 2, 2022		October 1, 2023	% Change		October 2, 2022
	(In thousands, except percentage data)
Interest income, net	$	1,175	**		$	290	2,736	**		414
Other income, net	$	10	(47.4)	%	$	19	23	(92.7)	%	314

**Percentage change not meaningful.

Interest income, net increased for the three and nine months ended October 1, 2023 compared to the prior year periods, primarily due to the increase in our short-term investments as well as a result of higher interest rates.

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Provision for Income Taxes

The following table presents provision for income taxes for the periods indicated:

Three Months Ended

Nine Months Ended

October 1,
2023

% Change

October 2,
2022

October 1,
2023

Arlo Technologies, Inc. [ARLO] Filings
10-Q	[2023-11-09]
10-Q	[2023-08-10]
10-Q	[2023-05-11]
10-K	[2023-03-07]
10-Q	[2022-11-09]
10-Q	[2022-08-10]
10-Q	[2022-05-11]
10-K	[2022-03-02]
10-Q	[2021-11-10]
10-Q	[2021-08-05]
10-Q	[2021-05-06]
10-K	[2021-02-26]
10-Q	[2020-11-05]
10-Q	[2020-08-06]
10-Q	[2020-05-11]
10-K	[2020-02-28]
10-Q	[2019-11-08]
10-Q	[2019-08-06]
10-Q	[2019-05-06]
10-K	[2019-02-22]
10-Q	[2018-11-02]
10-Q	[2018-08-27]
S-1	[2018-07-06]