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 38.5 million smart connected devices. As of March 30, 2025, the Arlo platform had approximately 10.9 million cumulative registered accounts across more than 100 countries around the world coupled with approximately 4.9 million cumulative paid subscribers and annual recurring revenue of $276.4 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 paid subscription services, as well as devices through retail, wholesale distribution, wireless carrier channels, security solution providers, and Arlo’s direct to consumer store. For the three months ended March 30, 2025 and March 31, 2024, we generated total revenue of $119.1 million and $124.2 million, respectively, and a loss from operations was $1.5 million and $10.6 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 and other strategic 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 22 Table of Contents also expect our sales and marketing expenses 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 a need to make adjustments to better reflect our business or to improve their accuracy. We believe that any such adjustments are immaterial unless otherwise stated. As of March 30, 2025 % Change March 31, 2024 (In thousands, except percentage data) Cumulative registered accounts 10,930 19.2 % 9,173 Cumulative paid accounts 4,897 51.4 % 3,235 Annual recurring revenue (“ARR”) $ 276,357 21.8 % $ 226,968 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 and is defined as the annualized paid subscription and service revenue we expect to recognize from subscription contracts, as calculated by taking the average paid subscription and service revenue multiplied by the number of subscription accounts at the end of the reporting period. 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. Impact of Global Geopolitical, Economic and Business Conditions The U.S. government recently implemented new tariff measures and potential additional reciprocal tariffs affecting a broad range of imported materials. We have evaluated the potential impact of these actions on our operations and supply chain and do not expect them to have a material impact on our financial position or results of operations in the near term. However, given the uncertainty surrounding global markets and general global uncertainty as a result of new U.S. tariff policy, we do not have clarity at this point over the potential medium to long term impacts our business may face. The availability of certain goods could be affected if foreign suppliers choose to limit their exposure to U.S. markets in response to unfavorable trade policies, which could negatively impact our suppliers ability to deliver materials or manufacture equipment for us and, therefore, delay or impede our product deliveries. Furthermore, rising inflation, slower economic growth and increases in unemployment that may result from global trade disruptions could further deflate consumer demand and impact the demand for our products. 23 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 March 30, 2025 March 31, 2024 (In thousands, except percentage data) Revenue: Subscriptions and services $ 68,849 57.8 % $ 56,707 45.7 % Products 50,217 42.2 % 67,493 54.3 % Total revenue 119,066 100.0 % 124,200 100.0 % Cost of revenue: Subscriptions and services 12,265 10.3 % 13,596 10.9 % Products 54,074 45.4 % 63,224 51.0 % Total cost of revenue 66,339 55.7 % 76,820 61.9 % Gross profit 52,727 44.3 % 47,380 38.1 % Operating expenses: Research and development 16,165 13.6 % 20,793 16.7 % Sales and marketing 20,203 17.0 % 17,370 14.0 % General and administrative 17,785 14.9 % 19,348 15.6 % Other operating expense 25 0.0 % 479 0.3 % Total operating expenses 54,178 45.5 % 57,990 46.6 % Loss from operations (1,451) (1.2) % (10,610) (8.5) % Interest income, net 1,316 1.1 % 1,386 1.1 % Other non-operating expense, net (198) (0.2) % (25) — % Loss before income taxes (333) (0.3) % (9,249) (7.4) % Provision for income taxes 502 0.4 % 395 0.3 % Net loss $ (835) (0.7) % $ (9,644) (7.7) % Revenue Our gross revenue consists primarily of paid subscription and service revenue and sales of devices. Our paid subscription services are billed in advance of the start of the monthly subscription and revenue is recognized ratably over subscription period. 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 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. 24 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 for device location for subscription and service sales and device sales. Three Months Ended March 30, 2025 % Change March 31, 2024 (In thousands, except percentage data) Americas $ 70,097 22.6 % $ 57,169 Percentage of revenue 58.9 % 46.0 % EMEA 42,895 (30.1) % 61,380 Percentage of revenue 36.0 % 49.4 % APAC 6,074 7.5 % 5,651 Percentage of revenue 5.1 % 4.6 % Total revenue $ 119,066 (4.1) % $ 124,200 Revenue by classification is as follows: Three Months Ended March 30, 2025 % Change March 31, 2024 (In thousands, except percentage data) Revenue: Subscriptions and services $ 68,849 21.4 % $ 56,707 Products 50,217 (25.6) % 67,493 Total revenue $ 119,066 (4.1) % $ 124,200 Subscriptions and services revenue increased by $12.1 million or 21.4%, for the three months ended March 30, 2025 compared to the prior year period, respectively, primarily due to a 51.4% increase in cumulative paid accounts and continued increase in average revenue per user (“ARPU”) of retail and direct paid subscriptions. Products revenue decreased by $17.3 million or 25.6%, for the three months ended March 30, 2025 compared to the prior year period, respectively, primarily from the decrease in product sales in EMEA due to the seasonally driven reduction in demand from our largest customer and the reduction in average selling prices (“ASPs”) of our products as we increased promotional activities to stimulate household acquisition and subscriber growth. The decrease in products revenue was also due to the higher sales incentives that are deemed to be reductions of revenue which was partially offset by the lower sales returns that are deemed to be reductions of revenue. Cost of Revenue Cost of revenue consists of both subscription and service costs and product costs. Subscription and service costs consist of costs attributable to the provision and maintenance of our cloud-based platform, including personnel expense, data storage, security and computing, IT and facilities overhead. 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. 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 25 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 costs and subscription and service costs and gross margin and allows us to adapt to changing market dynamics and supply chain constraints. Three Months Ended March 30, 2025 % Change March 31, 2024 (In thousands, except percentage data) Cost of revenue: Subscriptions and services $ 12,265 (9.8) % $ 13,596 Products 54,074 (14.5) % 63,224 Total cost of revenue $ 66,339 (13.6) % $ 76,820 Subscription and service cost of revenue decreased by 9.8% for the three months ended March 30, 2025, compared to the prior year period, primarily due to cost savings as we optimize our cloud platform to improve customer experience which assists in reduced data storage and cloud costs. Products cost of revenue decreased by 14.5% for the three months ended March 30, 2025, compared to the prior year period, primarily due to the decrease in product sales partially offset by an increase in product costs as a result of higher inventory valuation adjustments. Gross Profit Three Months Ended March 30, 2025 % Change March 31, 2024 (In thousands, except percentage data) Gross profit: Subscriptions and services $ 56,584 31.3 % $ 43,111 Products (3,857) (190.3) % 4,269 Total gross profit $ 52,727 11.3 % $ 47,380 Gross margin percentage: Subscriptions and services 82.2 % 76.0 % Products (7.7) % 6.3 % Total gross margin 44.3 % 38.1 % Subscription and service gross profit increased by $13.5 million for the three months ended March 30, 2025, compared to the prior year period, primarily due to subscription and service revenue growth as a result of increases in cumulative paid accounts, continued increase in ARPU of retail subscriptions, and cost optimizations. Products gross profit decreased by $8.1 million for the three months ended March 30, 2025, compared to the prior year period, primarily driven by a reduction in the ASPs of our products as we increased promotional activities to stimulate household acquisition and subscriber growth and an increase in product costs as a result of higher inventory valuation adjustments. 26 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 March 30, 2025 % Change March 31, 2024 (In thousands, except percentage data) Research and development expense $ 16,165 (22.3) % $ 20,793 Research and development expense decreased by $4.6 million for the three months ended March 30, 2025 compared to the prior year period, primarily due to decreases of $2.0 million in professional service and $1.4 million in personnel-related expenses mainly as certain software development costs meet the criteria for capitalization, and $1.2 million in IT and facilities overhead related to allocation associated with corporate infrastructure. The decrease in research and development expense is partially offset by the increase in personnel-related expenses as a result of the headcount increase. 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 subscriptions and services and device products. Three Months Ended March 30, 2025 % Change March 31, 2024 (In thousands, except percentage data) Sales and marketing expense $ 20,203 16.3 % $ 17,370 Sales and marketing expense increased by $2.8 million for the three months ended March 30, 2025 compared to the prior year period, primarily due to increases of $1.7 million in credit card and in-app processing fees as a result of increases in paid subscriber accounts and focused efforts to improve our customer’s app experience, $0.8 million in personnel-related expenses mainly from stock-based compensation and merit increases, and $0.6 million in marketing expenditures, partially offset by a decrease of $0.4 million in freight-out expenses. 27 Table of Contents 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 March 30, 2025 % Change March 31, 2024 (In thousands, except percentage data) General and administrative expense $ 17,785 (8.1) % $ 19,348 General and administrative expense decreased by $1.6 million for the three months ended March 30, 2025 compared to the prior year period, primarily due to decreases of $1.0 million in personnel-related expenses mainly from stock-based compensation and $0.7 million in legal and professional services. Other operating expenses Other operating expenses include restructuring charges, which consist primarily of severance costs, and separation expenses, which consist primarily of costs of legal and professional services. Interest Income, Net and Other Non-Operating Expense, Net Three Months Ended March 30, 2025 % Change March 31, 2024 (In thousands, except percentage data) Interest income, net $ 1,316 (5.1) % $ 1,386 Other non-operating expense, net $ (198) ** $ (25) **Percentage change not meaningful. Interest income, net slightly decreased for the three months ended March 30, 2025 compared to the prior year, primarily due to the lower interest rates coupled with the decrease in our cash equivalents and short-term investments as we repurchased our common stock and made an investment in a strategic partner. Provision for Income Taxes Three Months Ended March 30, 2025 % Change March 31, 2024 (In thousands, except percentage data) Provision for income taxes $ 502 27.1 % $ 395 Effective tax rate (150.8) % (4.3) % The effective tax rate for the three months ended March 30, 2025 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. 28 Table of Contents Liquidity and Capital Resources As of March 30, 2025, our cash and cash equivalents and short-term investments totaled $153.1 million and the unused borrowing capacity of $45.0 million based on the terms and conditions of the Credit Agreement. The proceeds of the borrowings under this credit facility may be used for working capital and general corporate purposes. We have a history of losses and may incur operating and net losses in the future. As of March 30, 2025, our accumulated deficit was $398.8 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 subscription and 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 may increase our product and subscription rates in the future. Leases and Contractual Commitments Our operating lease obligations mostly include offices, equipment, data centers, 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 7. 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. Stock Repurchase Program Our Board of Directors authorized a stock repurchase program of up to an aggregate of $50.0 million of shares, which commenced in September 2024 and is expected to continue through December 31, 2026 unless extended or shortened by the Board of Directors. During the three months ended March 30, 2025, we repurchased and subsequently retired 1.4 million shares of Arlo common stock for an aggregate amount of $15.2 million. As of March 30, 2025, $30.3 million remained available and authorized for future repurchases. 29 Table of Contents Cash Flow Three Months Ended March 30, 2025 March 31, 2024 (In thousands) Net cash provided by operating activities $ 30,919 $ 19,806 Net cash used in investing activities (14,352) (440) Net cash used in financing activities (14,590) (13,782) Net cash increase $ 1,977 $ 5,584 Operating activities Net cash provided by operating activities increased by $11.1 million for the three months ended March 30, 2025 compared to the prior year period, primarily due to improved profitability coupled with favorable working capital movements as the results of (i) increase in deferred revenue due to the growth in our subscription paid accounts and rates; and (ii) higher accounts receivable collections due to our continued efforts in collections and effective account management; partially offset by decreased accounts payable balances mainly due to timing of payments. Investing activities Net cash used in investing activities increased by $13.9 million for the three months ended March 30, 2025 compared to the prior year period, primarily due to our strategic long-term investment in a privately-held company, partially offset by higher proceeds from maturities of short-term investments. Financing activities Net cash used in financing activities increased by $0.8 million for the three months ended March 30, 2025 compared to the prior year period, primarily due to the repurchases of common stock, offset by the decrease in withholding tax from RSU releases as a result of the sell-to-cover method applied to all Arlo employees for their tax withholding effective on January 1, 2025. 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, 2024. There have been no material changes to our critical accounting policies and estimates during the three months ended March 30, 2025, 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. 30 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk During the three months ended March 30, 2025, 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, 2024.