What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-08-10 · 78 added, 63 removed, 181 unchanged (44% of the section changed)

17 unchanged sentences

Since the launch of our first product in December 2014, we have shipped over 30.7 million smart connected devices.

As of July 2, 2023, the Arlo platform had approximately 7.9 million cumulative registered accounts across more than 100 countries around the world coupled with 2.3 million cumulative paid subscribers and annual recurring revenue of $193.6 million.

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;

1 unchanged sentence

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 July 2, 2023 and July 3, 2022, we generated total revenue of $115.1 million and $119.0 million, respectively.

Loss from operations was $8.0 million and $11.3 million for the three months ended July 2, 2023 and July 3, 2022, respectively.

For the six months ended July 2, 2023 and July 3, 2022, we generated total revenue of $226.1 million and $243.7 million, respectively.

Loss from operations was $22.2 million and $20.0 million for the six months ended July 2, 2023 and July 3, 2022, respectively.

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.

9 unchanged sentences

As of and for the Three Months Ended

2023 % Change July 3,

2023 % Change October 2,

(In thousands, except percentage data)

4 unchanged sentences

_________________________

(1) The increase for the three months ended July 2, 2023 compared to the prior year period reflects an increase in the number of paid accounts in our EMEA region which were managed by Verisure and now onboarded with us.

(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.

11 unchanged sentences

Impact of Global Geopolitical, Economic and Business Conditions

During the six months ended July 2, 2023, we remained focused on the ongoing conflict in Ukraine, 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.

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, 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.

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.

Results of Operations

1 unchanged sentence

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 Six Months Ended

Three Months Ended Nine Months Ended

2023 October 2,

2022 October 1,

2023 October 2,

(In thousands, except percentage data)

15 unchanged sentences

Interest income, net 1,175 0.9 % 290 0.2 % 2,736 0.8 % 414 0.1 %

Other income (expense), net 52 — % (116) (0.1) % 13 — % 295 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) %

9 unchanged sentences

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.

Three Months Ended Six Months Ended

2023 % Change July 3,

Three Months Ended Nine Months Ended

2023 % Change October 2,

2022 October 1,

2023 % Change October 2,

(In thousands, except percentage data)

6 unchanged sentences

Total revenue $ 130,003 1.4 % $ 128,157 $ 356,083 (4.2) % $ 371,887

Product revenue decreased by $21.4 million, or 24.9% and $49.2 million, or 27.2% for the three and six months ended July 2, 2023 compared to the prior year periods.

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.

Service revenue increased in all regions by $17.5 million, or 53.5% and $31.6 million, or 50.3% for the three and six months ended July 2, 2023 compared to the prior year periods, primarily due to a 54.9% increase in cumulative paid accounts and rates for our subscription plans.

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

7 unchanged sentences

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

Three Months Ended Six Months Ended

2023 % Change July 3,

Three Months Ended Nine Months Ended

2023 % Change October 2,

2022 October 1,

2023 % Change October 2,

(In thousands, except percentage data)

3 unchanged sentences

Total cost of revenue $ 86,864 (5.0) % $ 91,407 $ 235,869 (11.9) % $ 267,822

Product cost of revenue decreased 18.1% and 19.5% for the three and six months ended July 2, 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 11.9% and 12.4% for the three and six months ended July 2, 2023 compared to the prior year periods, respectively, as a result of service revenue growth, offset by cost optimizations.

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.

The following table presents gross profit for the periods indicated:

Three Months Ended Six Months Ended

2023 % Change July 3,

Three Months Ended Nine Months Ended

2023 % Change October 2,

2022 October 1,

2023 % Change October 2,

(In thousands, except percentage data)

7 unchanged sentences

Total gross margin 33.2 % 28.7 % 33.8 % 28.0 %

Product gross profit decreased for the three and six months ended July 2, 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.

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 six months ended July 2, 2023 compared to the prior year periods, primarily due to growth in paid service revenue in all regions as a result of a 54.9% increase in cumulative paid accounts and rates for our subscription plans as well as cost optimizations.

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.

Operating Expenses

6 unchanged sentences

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

Three Months Ended Six Months Ended

2023 % Change July 3,

Three Months Ended Nine Months Ended

2023 % Change October 2,

2022 October 1,

2023 % Change October 2,

(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 $0.2 million for the three months ended July 2, 2023 compared to the prior year period, primarily due to an increase of $0.5 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 corporate IT and facilities overhead.

Research and development expense increased by $1.6 million for the six months ended July 2, 2023 compared to the prior year period, primarily due to an increase of $2.5 million in personnel-related expenses mainly from stock-based compensation and merit increases, partially offset by a decrease of $0.9 million in corporate IT and facilities overhead.

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

2 unchanged sentences

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

Three Months Ended Six Months Ended

2023 % Change July 3,

Three Months Ended Nine Months Ended

2023 % Change October 2,

2022 October 1,

2023 % Change October 2,

(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 increased $2.4 million for the three months ended July 2, 2023 compared to the prior year period, primarily due to increases of $0.7 million in marketing expenditures, $0.7 million in customer care services, $0.7 million freight-out expenses, and $0.6 million in credit card processing fees as a result of increases in Arlo.com Store sales and paid subscriber accounts.

Sales and marketing expense increased $4.6 million for the six months ended July 2, 2023 compared to the prior year period, primarily due to increases of $1.7 million in marketing expenditures, $1.2 million in credit card processing fees as a result of increases in Arlo.com Store sales and paid subscriber accounts, $1.1 million freight-out expenses, and $1.0 million in customer care services.

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.

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

2 unchanged sentences

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

Three Months Ended Six Months Ended

2023 % Change July 3,

Three Months Ended Nine Months Ended

2023 % Change October 2,

2022 October 1,

2023 % Change October 2,

(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 $1.9 million for the three months ended July 2, 2023 compared to the prior year period, primarily due to an increase of $2.6 million in personnel-related expenses mainly from stock-based compensation, partially offset by decreases of $0.6 million in legal and professional services and corporate IT and facilities overhead.

General and administrative expense increased $4.9 million for the six months ended July 2, 2023 compared to the prior year period, primarily due to an increase of $6.6 million in personnel-related expenses mainly from stock-based compensation and merit increases, partially offset by decreases of $1.6 million in corporate IT and facilities overhead and legal and professional services.

Others include separation expense, which consists primarily of costs of legal and professional services for IPO-related litigation associated with our separation from NETGEAR, 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 (Expense), Net

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

Three Months Ended Six Months Ended

2023 % Change July 3,

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 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

2023 % Change October 2,

2022 October 1,

2023 % Change October 2,

(In thousands, except percentage data)

Interest income, net $ 1,175 ** $ 290 2,736 ** 414

Other income (expense), net $ 52 ** $ (116) 13 (95.6) % 295

Other income, net

$ 10 (47.4) % $ 19 23 (92.7) % 314

**Percentage change not meaningful.

Interest income, net increased for the three and six months ended July 2, 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.

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.

Provision for Income Taxes

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

Three Months Ended Six Months Ended

2023 % Change July 3,

Three Months Ended Nine Months Ended

2023 % Change October 2,

2022 October 1,

2023 % Change October 2,

(In thousands, except percentage data)

1 unchanged sentence

Effective tax rate (2.7) % (2.2) % (4.8) % (2.2) %

Provision for income taxes decreased slightly for the three months ended July 2, 2023, compared to the prior year period and increased for the six months ended July 2, 2023, compared to the prior year period, primarily due to the higher U.S.

earnings and also 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.

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.

Consistent with the prior year periods, we maintained a valuation allowance against our U.S.

1 unchanged sentence

Liquidity and Capital Resources

As of July 2, 2023, our cash and cash equivalents and short-term investments totaled $123.7 million and we had unused borrowing capacity of $13.8 million based on the terms and conditions of our revolving credit facility.

As of October 1, 2023, our cash and cash equivalents and short-term investments totaled $126.0 million and we had unused borrowing capacity of $14.4 million based on the terms and conditions of our revolving credit facility.

We have a history of losses and may incur operating and net losses in the future.

As of July 2, 2023, our accumulated deficit was $367.0 million.

As of October 1, 2023, our accumulated deficit was $368.2 million.

Historically, we have funded our principal business activities through cash flows generated from operations and available cash on hand.

Material Cash Requirements

We believe that our existing sources of liquidity will be sufficient to meet our anticipated cash requirements for at least the next 12 months.

We believe that our existing sources of liquidity will be sufficient to meet our anticipated cash requirements for at least the next 12 months and beyond.

However, in the future we may require or desire additional funds to support our operating expenses and capital requirements.

14 unchanged sentences

The following table presents our cash flows for the periods presented:

Six Months Ended

Nine Months Ended

2023 October 2,

(In thousands)

4 unchanged sentences

Operating activities

Net cash provided by operating activities increased by $52.3 million for the six months ended July 2, 2023 compared to the prior year period, primarily due to improved profitability and changes in working capital as a result of an increase in our service revenue driven by growth in paid accounts and increased subscription rates, lower payments to suppliers primarily as a result of reduced inventory purchases, and higher collection from customers on products sales due to enhanced collection efforts.

Net cash provided by operating activities increased by $65.2 million for the nine months ended October 1, 2023 compared to the prior year period, primarily due to improved profitability and changes in working capital as a result of an increase in our service revenue driven by growth in paid accounts and increased subscription rates and lower payments to our suppliers and vendors.

Investing activities

Net cash used in investing activities decreased by $17.3 million for the six months ended July 2, 2023 compared to the prior year period, primarily due to a decrease in net purchases, and maturities, of short-term investments.

Net cash used in investing activities increased by $0.5 million for the nine months ended October 1, 2023 compared to the prior year period, primarily due to an increase in purchases of property and equipment, partially offset by a decrease in net purchases, and maturities of short-term investments.

Financing activities

Net cash used in financing activities increased by $1.6 million for the six months ended July 2, 2023 compared to the prior year period, primarily due to the increase in withholding tax from restricted stock unit releases, partially offset by higher proceeds related to employee benefit plans.

Net cash used in financing activities increased by $2.6 million for the nine months ended October 1, 2023 compared to the prior year period, primarily due to the increase in withholding tax from restricted stock unit releases, partially offset by higher proceeds related to employee benefit plans.

Critical Accounting Policies and Estimates

For a complete description of what we believe to be the critical accounting policies and estimates used in the preparation of our Unaudited Condensed Consolidated Financial Statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2022.

There have been no material changes to our critical accounting policies and estimates during the six months ended July 2, 2023, other than as discussed in Note 2.

There have been no material changes to our critical accounting policies and estimates during the nine months ended October 1, 2023, other than as discussed in Note 2.

Significant Accounting Policies and Recent Accounting Pronouncements, in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report.

Quantitative and Qualitative Disclosures About Market Risk

During the six months ended July 2, 2023, there were no material changes to our market risk disclosures as set forth in Part II Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended December 31, 2022.

During the nine months ended October 1, 2023, there were no material changes to our market risk disclosures as set forth in Part II Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2022.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis