Arlo Technologies, Inc. 10-Q

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 is transforming the ways in which people can protect everything that matters to them with advanced home, business, and personal security services that combine a globally scaled cloud platform, advanced monitoring and analytics capabilities, and award-winning app-controlled devices to create a personalized security ecosystem. Arlo’s deep expertise in cloud services, cutting-edge AI and computer vision analytics, wireless connectivity and intuitive user experience design delivers seamless, smart home security for Arlo users that is easy to setup and engage with every day. Our highly secure, 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 – all rooted in a commitment to safeguard privacy for our users and their personal data. Since the launch of our first product in December 2014, we have shipped over 34.6 million smart connected devices. As of June 30, 2024, the Arlo platform had approximately 10.0 million cumulative registered accounts across more than 100 countries around the world coupled with approximately 4.0 million cumulative paid subscribers and annual recurring revenue of $235.0 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 June 30, 2024 and July 2, 2023, we generated total revenue of $127.4 million and $115.1 million, respectively, and loss from operations was $12.8 million and $8.0 million, respectively. For the six months ended June 30, 2024 and July 2, 2023, we generated total revenue of $251.6 million and $226.1 million, respectively, and loss from operations was $23.4 million and $22.2 million, respectively. Our goal is to continue to develop innovative, world-class smart security 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 22 Table of Contents 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. 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 June 30, 2024 % Change July 2, 2023 (In thousands, except percentage data) Cumulative registered accounts 9,987 27.1 % 7,860 Cumulative paid accounts (1) 3,980 73.9 % 2,289 Annual recurring revenue (“ARR”) (2) $ 234,981 21.4 % $ 193,633 _________________________ (1) The number of cumulative paid accounts as of June 30, 2024 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. (2) As described further below, in the first fiscal quarter of 2024, we changed the methodology on paid service revenue recognition from a mid-month convention to a daily recognition model. As a result, ARR as of June 30, 2024 was calculated using the daily recognition model while ARR as of July 2, 2023 was calculated using our former methodology, the mid-month convention. ARR as of July 2, 2023 calculated using the daily recognition model does not represent a material change from the mid-month convention over the same period. 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 . 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. In the first fiscal quarter of 2024, we changed the methodology on paid service revenue recognition from a mid-month convention to a daily recognition model which recognizes paid service revenue based on the number of service days within the fiscal reporting period, commencing on the start date of the subscription and continuing over the term of the arrangement. Accordingly, the methodology used to calculate ARR was also changed in the first fiscal quarter of 2024 and is now calculated by taking the average daily paid service revenue of the last calendar month in the fiscal quarter, multiplied by 365 days. We believe the daily recognition model aligns with our customers’ subscription period and service usage and allows for a more precise measurement of paid service revenue relative to the former methodology of a mid-month convention, which was based on paid service revenue for the last calendar month in the fiscal quarter, multiplied by 12 months. This change in calculation methodology has no material impact on our financial statements or any previously reported ARR numbers. 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. 23 Table of Contents Impact of Global Geopolitical, Economic and Business Conditions During the six months ended June 30, 2024, we remained focused on the ongoing conflict in Ukraine, hostilities in the Middle-East, supply chain disruptions, the inflationary macro environment, 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, current financial conditions within the banking industry, including the effects of recent failures of other financial institutions, and liquidity levels. 24 Table of Contents 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 Six Months Ended June 30, 2024 July 2, 2023 June 30, 2024 July 2, 2023 (In thousands, except percentage data) Revenue: Products $ 67,186 52.7 % $ 64,749 56.3 % $ 134,679 53.5 % $ 131,809 58.3 % Services 60,261 47.3 % 50,327 43.7 % 116,968 46.5 % 94,271 41.7 % Total revenue 127,447 100.0 % 115,076 100.0 % 251,647 100.0 % 226,080 100.0 % Cost of revenue: Products 66,036 51.8 % 60,446 52.5 % 129,260 51.4 % 124,487 55.1 % Services 14,557 11.4 % 12,772 11.1 % 28,153 11.2 % 24,518 10.8 % Total cost of revenue 80,593 63.2 % 73,218 63.6 % 157,413 62.6 % 149,005 65.9 % Gross profit 46,854 36.8 % 41,858 36.4 % 94,234 37.4 % 77,075 34.1 % Operating expenses: Research and development 19,561 15.3 % 17,618 15.3 % 40,354 16.0 % 35,368 15.6 % Sales and marketing 17,698 13.9 % 16,921 14.7 % 35,068 13.9 % 32,274 14.3 % General and administrative 21,430 16.8 % 15,007 13.0 % 40,778 16.2 % 30,629 13.5 % Others 966 0.8 % 341 0.4 % 1,445 0.6 % 973 0.5 % Total operating expenses 59,655 46.8 % 49,887 43.4 % 117,645 46.7 % 99,244 43.9 % Loss from operations (12,801) (10.0) % (8,029) (7.0) % (23,411) (9.3) % (22,169) (9.8) % Interest income, net 1,495 1.1 % 835 0.8 % 2,881 1.1 % 1,561 0.7 % Other income, net (18) — % 52 — % (43) — % 13 — % Loss before income taxes (11,324) (8.9) % (7,142) (6.2) % (20,573) (8.2) % (20,595) (9.1) % Provision for income taxes 236 0.2 % 221 0.2 % 631 0.2 % 1,013 0.5 % Net loss $ (11,560) (9.1) % $ (7,363) (6.4) % $ (21,204) (8.4) % $ (21,608) (9.6) % Revenue Our gross revenue consists primarily of sales of devices and 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. 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. 25 Table of Contents We conduct business across three geographic regions—(i) the Americas; (ii) EMEA; and (iii) APAC—and generally base revenue by geographic region on the bill-to location of the customer. Three Months Ended Six Months Ended June 30, 2024 % Change July 2, 2023 June 30, 2024 % Change July 2, 2023 (In thousands, except percentage data) Americas $ 65,294 (16.4) % $ 78,136 $ 122,463 (9.1) % $ 134,768 Percentage of revenue 51.2 % 67.9 % 48.7 % 59.6 % EMEA 56,827 83.6 % 30,958 118,207 48.8 % 79,430 Percentage of revenue 44.6 % 26.9 % 47.0 % 35.1 % APAC 5,326 (11.0) % 5,982 10,977 (7.6) % 11,882 Percentage of revenue 4.3 % 5.2 % 4.4 % 5.3 % Total revenue $ 127,447 10.8 % $ 115,076 $ 251,647 11.3 % $ 226,080 Revenue by classification is as follows: Three Months Ended Six Months Ended June 30, 2024 % Change July 2, 2023 June 30, 2024 % Change July 2, 2023 (In thousands, except percentage data) Product revenue $ 67,186 3.8 % $ 64,749 $ 134,679 2.2 % $ 131,809 Service revenue 60,261 19.7 % 50,327 116,968 24.1 % 94,271 Total revenue $ 127,447 10.8 % $ 115,076 $ 251,647 11.3 % $ 226,080 Product revenue increased by $2.4 million, or 3.8%, and $2.9 million, or 2.2%, for the three and six months ended June 30, 2024 compared to the prior year periods, respectively, primarily driven by an increase in product shipments in EMEA due to stronger customer demand, partially offset by the decrease in product sales in the Americas and APAC due to seasonality and a reduction in average selling prices (“ASPs”) of our products as we increased promotional activities to stimulate household acquisition and subscriber growth. The increase in product revenue was also attributable to lower sales returns which are partially offset by higher sales incentives that are deemed to be reductions of revenue. Service revenue increased in all regions by $9.9 million, or 19.7%, and $22.7 million, or 24.1%, for the three and six months ended June 30, 2024 compared to the prior year periods, respectively, primarily due to a 73.9% increase in cumulative paid accounts. 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 26 Table of Contents 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. Three Months Ended Six Months Ended June 30, 2024 % Change July 2, 2023 June 30, 2024 % Change July 2, 2023 (In thousands, except percentage data) Cost of revenue: Products $ 66,036 9.2 % $ 60,446 $ 129,260 3.8 % $ 124,487 Services 14,557 14.0 % 12,772 28,153 14.8 % 24,518 Total cost of revenue $ 80,593 10.1 % $ 73,218 $ 157,413 5.6 % $ 149,005 Product cost of revenue increased 9.2% and 3.8% for the three and six months ended June 30, 2024, respectively, compared to the prior year periods, primarily due to an increase in product shipments, partially offset by decreases in product warranty reserves and inventory reserves. Service cost of revenue increased 14.0% and 14.8% for the three and six months ended June 30, 2024, respectively, compared to the prior year periods, primarily due to service revenue growth as a result of the increase in cumulative paid accounts, partially offset by cost optimizations. Gross Profit Three Months Ended Six Months Ended June 30, 2024 % Change July 2, 2023 June 30, 2024 % Change July 2, 2023 (In thousands, except percentage data) Gross profit: Products $ 1,150 (73.3) % $ 4,303 $ 5,419 (26.0) % $ 7,322 Services 45,704 21.7 % 37,555 88,815 27.3 % 69,753 Total gross profit $ 46,854 11.9 % $ 41,858 $ 94,234 22.3 % $ 77,075 Gross margin percentage: Products 1.7 % 6.6 % 4.0 % 5.6 % Services 75.8 % 74.6 % 75.9 % 74.0 % Total gross margin 36.8 % 36.4 % 37.4 % 34.1 % Product gross profit decreased $3.2 million and $1.9 million for the three and six months ended June 30, 2024, respectively, 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 subscriber growth. The product gross profit decrease was partially offset by decreases in product warranty reserves and inventory reserves due to subsequent sale of the related inventory units. Service gross profit increased $8.1 million and $19.1 million for the three and six months ended June 30, 2024, respectively, compared to the prior year periods, primarily due to service revenue growth in all regions as a result of increases in cumulative paid accounts and cost optimizations. 27 Table of Contents 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 allocated 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. Three Months Ended Six Months Ended June 30, 2024 % Change July 2, 2023 June 30, 2024 % Change July 2, 2023 (In thousands, except percentage data) Research and development expense $ 19,561 11.0 % $ 17,618 $ 40,354 14.1 % $ 35,368 Research and development expense increased by $1.9 million for the three months ended June 30, 2024 compared to the prior year period, primarily due to increases of $1.7 million in personnel-related expenses mainly from stock-based compensation and merit increases and $0.4 million in professional services. Research and development expense increased by $5.0 million for the six months ended June 30, 2024 compared to the prior year period, primarily due to increases of $3.9 million in personnel-related expenses mainly from stock-based compensation and merit increases, $0.7 million in professional services, and $0.3 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, allocated 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. Three Months Ended Six Months Ended June 30, 2024 % Change July 2, 2023 June 30, 2024 % Change July 2, 2023 (In thousands, except percentage data) Sales and marketing expense $ 17,698 4.6 % $ 16,921 $ 35,068 8.7 % $ 32,274 Sales and marketing expense increased $0.8 million for the three months ended June 30, 2024 compared to the prior year period, primarily due to increases of $0.7 million in personnel-related expenses mainly from stock-based compensation and merit increases, $0.4 million in professional services as a result of continued investment in customer experience improvements across customer care and engineering, and $0.3 million in credit card processing fees as a result of increases in Arlo.com store sales and paid subscriber accounts, partially offset by a decrease of $0.4 million in freight-out expenses. Sales and marketing expense increased $2.8 million for the six months ended June 30, 2024 compared to the prior year period, primarily due to increases of $1.6 million in personnel-related expenses mainly from stock-based compensation and merit increases, $1.4 million in professional services as a result of continued investment in customer 28 Table of Contents experience improvements across customer care and engineering, and $0.5 million in credit card processing fees as a result of increases in Arlo.com store sales and paid subscriber accounts, partially offset by a decrease of $0.6 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, allocated 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. Three Months Ended Six Months Ended June 30, 2024 % Change July 2, 2023 June 30, 2024 % Change July 2, 2023 (In thousands, except percentage data) General and administrative expense $ 21,430 42.8 % $ 15,007 $ 40,778 33.1 % $ 30,629 General and administrative expense increased $6.4 million for the three months ended June 30, 2024 compared to the prior year period, primarily due to increases of $5.4 million in personnel-related expenses mainly from stock-based compensation due to the achievement of performance-based awards target and $0.9 million in professional services. General and administrative expense increased $10.1 million for the six months ended June 30, 2024 compared to the prior year period, primarily due to increases of $7.3 million in personnel-related expenses mainly from stock-based compensation due to the achievement of performance-based awards target and $2.8 million in professional services. Others Others include restructuring charges, which consist of severance costs, office exit expense, and other exit expense associated with the abandonment of certain lease contracts and cancellation of contractual services arrangements with certain suppliers, and separation expense, which consists primarily of costs of legal and professional services. Interest Income, Net and Other Income (Loss), Net Three Months Ended Six Months Ended June 30, 2024 % Change July 2, 2023 June 30, 2024 % Change July 2, 2023 (In thousands, except percentage data) Interest income, net $ 1,495 79.0 % $ 835 2,881 84.6 % 1,561 Other income (loss), net $ (18) ** $ 52 (43) ** 13 **Percentage change not meaningful. Interest income, net increased for the three and six months ended June 30, 2024 compared to the prior year periods, primarily due to the increase in our short-term investments as well as higher interest rates. 29 Table of Contents Provision for Income Taxes Three Months Ended Six Months Ended June 30, 2024 % Change July 2, 2023 June 30, 2024 % Change July 2, 2023 (In thousands, except percentage data) Provision for income taxes $ 236 6.8 % $ 221 $ 631 (37.7) % $ 1,013 Effective tax rate (2.1) % (3.1) % (3.1) % (4.9) % The effective tax rate for the three and six months ended June 30, 2024 was lower than the U.S. federal income tax rate due to a lower effective tax rate on foreign earnings and valuation allowance on our net U.S. deferred tax assets and certain foreign tax attributes as it is more likely than not that some or all of our deferred tax assets will not be realized. 30 Table of Contents Liquidity and Capital Resources As of June 30, 2024, our cash and cash equivalents and short-term investments totaled $144.0 million and we had unused borrowing capacity of $6.2 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 June 30, 2024, our accumulated deficit was $388.7 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 and beyond. However, in the future we may require or desire additional funds to support our operating expenses and capital requirements. To the extent that current and anticipated future sources of liquidity are insufficient, we may seek to raise additional funds through public or private equity. We have no commitments to obtain such additional financing and cannot provide assurance that additional financing will be available at all or, if available, that such financing would be obtainable on terms favorable to us and would not be dilutive. Our future liquidity and cash requirements may vary from those currently planned and will depend on numerous factors, including the introduction of new products, the growth in our service revenue, the ability to increase our gross margin dollars, as well as cost optimization initiatives and controls over our operating expenditures. As we grow our installed base and related cost structure, there will be a need for additional working capital, hence, we increased our subscription rates effective February 3, 2023. Leases and Contractual Commitments Our operating lease obligations mostly include offices, equipment, and distribution centers. Our contractual commitments are primarily inventory-related purchase obligations with suppliers. Contingencies We are involved in disputes, litigation, and other legal actions. 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. Significant judgment is required to determine both the probability and the estimated amount of loss. 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 litigation reserves, net. Refer to Note 8. Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report for further information about our operating leases, purchase obligations, and legal contingencies. Cash Flow Six Months Ended June 30, 2024 July 2, 2023 (In thousands) Net cash provided by operating activities $ 26,268 $ 22,908 Net cash used in investing activities (268) (33,150) Net cash used in financing activities (20,101) (11,951) Net cash increase (decrease) $ 5,899 $ (22,193) 31 Table of Contents Operating activities Net cash provided by operating activities increased by $3.4 million for the six months ended June 30, 2024 compared to the prior year period, primarily due to improved profitability offset by unfavorable working capital movements as a result of increased inventory purchases, partially offset by higher trade payable balances due to the timing of payments. Investing activities Net cash used in investing activities decreased by $32.9 million for the six months ended June 30, 2024 compared to the prior year period, primarily due to lower net purchases of short-term investments and lower purchases of property and equipment. Financing activities Net cash used in financing activities increased by $8.2 million for the six months ended June 30, 2024 compared to the prior year period, primarily due to the increase in withholding tax from restricted stock unit releases and lower 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, 2023. There have been no material changes to our critical accounting policies and estimates during the six months ended June 30, 2024, 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. 32 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk During the six months ended June 30, 2024, 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, 2023.