Arlo Reports Third Quarter 2019 Results

Arlo Technologies, Inc. (NYSE: ARLO), the #1 network connected camera brand ⁽¹⁾, today reported financial results for the third quarter ended September 29, 2019.

Third Quarter 2019 Financial Highlights

• Revenue of $106.1 million.
• GAAP gross margin of 9.9%; non-GAAP gross margin of 10.7%.
• GAAP net loss per diluted share of $0.41, non-GAAP net loss per diluted share of $0.32.

“Arlo delivered on numerous operational and financial fronts to make the last quarter truly transformative. To position Arlo for the holiday season, we brought two important new products to market with the launch of the Pro 3 and the first channel shipments of the new Video Doorbell generally available in late November. We announced an agreement with Verisure, the leading provider of monitored security solutions in Europe, that will provide a substantial cash infusion, revenue growth opportunities, and greater channel exposure. We have maintained a strong focus on operational discipline and implemented a restructuring plan to deliver cost savings while also securing a $40 million revolving credit line,” said Matthew McRae, Chief Executive Officer of Arlo Technologies. “With these accomplishments, we have substantially altered Arlo’s trajectory. As we diversify the business to capture growth opportunities, I believe our innovative products and strategic partnerships solidly position Arlo on the path to growth and profitability.”

Business Highlights

• Service revenue of $11.8 million for Q3’19, for growth of 20.2% year over year.
• 68.8% year over year paid subscriber growth in Q3.
• 47.8% year over year cumulative registered user growth in Q3.
• Launched the Arlo Pro 3, the newest camera in our popular Pro line with 2K resolution, color night vision, integrated spotlight, 160° field of view and mid-level price point paired with a three month subscription to Arlo Smart.
• Commenced shipping of the Video Doorbell into the channel for late November availability, our first video integrated product in this fast-growing space, which features an industry-leading vertical field-of-view with a unique 1:1 aspect ratio, and SIP technology for true video calls to your mobile device.
• Announced definitive agreements to enter into a strategic partnership with Verisure, a leading provider of professionally monitored security solutions. This partnership will provide cash, revenue, and diversification for Arlo on both a regional and channel basis. Verisure will pay Arlo $50 million for Arlo’s European commercial operations, creating the first European multi-channel go to market strategy for consumer security and surveillance services. Additionally, Verisure will purchase a minimum of $500 million cumulatively of Arlo products over the next five years to be distributed by Verisure and will also purchase associated Arlo cloud services.
• Announced a restructuring plan that has already resulted in lower operating expenses in Q3. We anticipate that savings from the restructuring plan will be fully actualized by the second quarter of 2020, and estimate that such savings will lower ongoing GAAP operating expenses to an annualized run rate of approximately $39-.0-$40.0 million per quarter, and ongoing non-GAAP operating expenses to an annualized run rate of approximately $33.0-$34.0 million per quarter, contingent on the successful closing of the Verisure transaction.⁽²⁾
• Secured a $40 million revolving credit line.
• As previously disclosed, in April 2019 the Company’s Board of Directors commenced a comprehensive strategic review of the Company. On November 7, 2019, the Company announced that the strategic review had formally concluded, but that the Company will continue to evaluate a wide range of strategic alternatives available to the Company to optimize the value of the Company and to improve returns to its stockholders.

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⁽¹⁾ The NPD Group, Inc., U.S. Retail Tracking Service, Security & Monitoring, Camera Technology: Decentralized IP Camera and Centralized IP Camera, based on Dollars, Jan 2018-June 2019.

⁽²⁾ The estimated ongoing non-GAAP operating expenses per quarter are adjusted for and do not include approximately $6.0 million of stock-based compensation expense per quarter.

Fourth Quarter 2019 Business Outlook ⁽³⁾

• Revenue of $115 million to $125 million
• GAAP gross margin between 9.9% and 12.9%, and non-GAAP gross margin between 10.5% and 13.5%
• GAAP net loss per diluted share of ($0.45) to ($0.39), and non-GAAP net loss per diluted share of ($0.34) to ($0.28)
• GAAP Operating loss of $35 million to $30 million and non-GAAP operating loss of $26 million to $21 million.
• GAAP and non-GAAP tax expense of $0.4 million

A reconciliation of our business outlook on a GAAP and non-GAAP basis is provided in the following table:

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⁽³⁾ Business outlook does not include estimates for any currently unknown income and expense items which, by their nature, could arise late in a quarter, including: litigation reserves, net; acquisition-related charges; impairment charges; discrete tax benefits or detriments relating to tax windfalls or shortfalls from equity awards; and any additional impacts relating to the implementation of U.S. tax reform. New material income and expense items such as these could have a significant effect on our guidance and future results.

Investor Conference Call / Webcast Details

Arlo will review the third quarter of 2019 results and discuss management’s expectations for the fourth quarter of 2019 today, Thursday, November 7, 2019 at 5:00 p.m. ET (2:00 p.m. PT). The toll free dial-in number for the live audio call is (866) 393-4306. The international dial-in number for the live audio call is (734) 385-2616. The conference ID for the call is 5695255. A live webcast of the conference call will be available on Arlo’s Investor Relations website at https://investor.arlo.com. A replay of the call will be available via the web at https://investor.arlo.com.

About Arlo Technologies, Inc.

Arlo (NYSE: ARLO) is the award-winning, industry leader that is 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. Arlo’s 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. To date, Arlo has launched several categories of award-winning smart connected devices, including wire-free smart Wi-Fi and LTE-enabled cameras, advanced baby monitors and smart security lights.

© 2019 Arlo Technologies, Inc., Arlo and the Arlo logo are trademarks and/or registered trademarks of Arlo Technologies, Inc. and/or certain of its affiliates in the United States and/or other countries. Other brand and product names are for identification purposes only and may be trademarks or registered trademarks of their respective holder(s). The information contained herein is subject to change without notice. Arlo shall not be liable for technical or editorial errors or omissions contained herein. All rights reserved.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995:

This press release contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. The words “anticipate,” “expect,” “believe,” “will,” “may,” “should,” “estimate,” “project,” “outlook,” “forecast” or other similar words are used to identify such forward-looking statements. However, the absence of these words does not mean that the statements are not forward-looking. The forward-looking statements represent Arlo Technologies, Inc.’s expectations or beliefs concerning future events based on information available at the time such statements were made and include statements regarding: Arlo’s future operating performance and financial condition, expected revenue, GAAP and non-GAAP gross margins, operating margins, and tax expense; expectations regarding market expansion and future growth; plans to invest in product innovation; the expected closing of the transactions contemplated by the agreement with Verisure and the expected timing thereof, the Verisure minimum commitment amounts; the financial capacity available under the revolving credit line; and the impact and timing of the restructuring plan. These statements are based on management’s current expectations and are subject to certain risks and uncertainties, including the following: future demand for the Company’s products may be lower than anticipated; consumers may choose not to adopt the Company’s new product offerings or adopt competing products; product performance may be adversely affected by real world operating conditions; the Company may be unsuccessful or experience delays in manufacturing and distributing its new and existing products; telecommunications service providers may choose to slow their deployment of the Company’s products or utilize competing products; the Company may be unable to collect receivables as they become due; the Company may fail to manage costs, including the cost of developing new products and manufacturing and distribution of its existing offerings; the Company may fail to successfully continue to effect operating expense savings; changes in the level of Arlo’s cash resources and the Company’s planned usage of such resources; changes in the Company’s stock price and developments in the business that could increase the Company’s cash needs; fluctuations in foreign exchange rates; the actions and financial health of the Company’s customers; the Verisure transaction may not close in a timely manner or at all; the Company may incur additional costs and charges associated with the transactions contemplated by the Verisure agreement; the Company may not receive the minimum commitment amounts from Verisure; the anticipated financial capacity under the revolving credit line may not be available when expected, or at all; and the Company may not be able to carry out its restructuring plan. Further, certain forward-looking statements are based on assumptions as to future events that may not prove to be accurate. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. Further information on potential risk factors that could affect Arlo and its business are detailed in the Company’s periodic filings with the Securities and Exchange Commission, including, but not limited to, those risks and uncertainties listed in the section entitled “Part II – Item 1A. Risk Factors,” in the Company’s quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2019, filed with the Securities and Exchange Commission on August 6, 2019. Given these circumstances, you should not place undue reliance on these forward-looking statements. Arlo undertakes no obligation to release publicly any revisions to any forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Non-GAAP Financial Information:

To supplement our unaudited selected financial data presented on a basis consistent with U.S. Generally Accepted Accounting Principles (“GAAP”), we disclose certain non-GAAP financial measures that exclude certain charges, including non-GAAP gross profit, non-GAAP gross margin, non-GAAP research and development, non-GAAP sales and marketing, non-GAAP general and administrative, non-GAAP total operating expenses, non-GAAP operating income (loss), non-GAAP operating margin, non-GAAP provision for income taxes, non-GAAP net income (loss) and non-GAAP net income (loss) per diluted share. These supplemental measures exclude adjustments for separation expense, stock-based compensation expense, amortization of intangibles, activist shareholder response costs, restructuring and other charges, strategic initiative expense, litigation reserves, and the related tax effects. These non-GAAP measures are not in accordance with or an alternative for GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. We believe that these non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the most directly comparable GAAP measures. We compensate for the limitations of non-GAAP financial measures by relying upon GAAP results to gain a complete picture of our performance.

In calculating non-GAAP financial measures, we exclude certain items to facilitate a review of the comparability of our operating performance on a period-to-period basis because such items are not, in our view, related to our ongoing operational performance. We use non-GAAP measures to evaluate the operating performance of our business, for comparison with forecasts and strategic plans, and for benchmarking performance externally against competitors. In addition, management’s incentive compensation is determined using certain non-GAAP measures. Since we find these measures to be useful, we believe that investors benefit from seeing results “through the eyes” of management in addition to seeing GAAP results. We believe that these non-GAAP measures, when read in conjunction with our GAAP measures, provide useful information to investors by offering:

• the ability to make more meaningful period-to-period comparisons of our on-going operating results;
• the ability to better identify trends in our underlying business and perform related trend analyses;
• a better understanding of how management plans and measures our underlying business; and
• an easier way to compare our operating results against analyst financial models and operating results of competitors that supplement their GAAP results with non-GAAP financial measures.

The following are explanations of the adjustments that we incorporate into non-GAAP measures, as well as the reasons for excluding them in the reconciliations of these non-GAAP financial measures:

Separation expense consists of expenses that are related to the separation of our business from NETGEAR. These consist primarily of third-party consulting fees, legal fees, IT costs, employee bonuses for services related to the separation, and other one-time expenses incurred to complete the separation. We consider our operating results without these charges when evaluating our ongoing performance and forecasting our earnings trends, and therefore exclude such charges when presenting non-GAAP financial measures. We believe that the assessment of our operations excluding these costs is relevant to our assessment of internal operations and comparisons to the performance of our competitors.

Stock-based compensation expense consists of non-cash charges for the estimated fair value of stock options, performance-based stock options, restricted stock units and shares under the employee stock purchase plan granted to employees. We believe that the exclusion of these charges provides for more accurate comparisons of our operating results to peer companies due to the varying available valuation methodologies, subjective assumptions and the variety of award types. In addition, we believe it is useful to investors to understand the specific impact stock-based compensation expense has on our operating results.

Amortization of intangibles consists primarily of non-cash charges that can be impacted by, among other things, the timing and magnitude of acquisitions. We consider our operating results without these charges when evaluating our ongoing performance and forecasting our earnings trends, and therefore exclude such charges when presenting non-GAAP financial measures. We believe that the assessment of our operations excluding these costs is relevant to an assessment of our internal operations and comparisons to our prior and future periods and to the performance of our competitors.

Activist shareholder response costs primarily consist of legal fees and third-party consulting costs incurred. We consider our operating results without these charges when evaluating our ongoing performance and forecasting our earnings trends, and therefore exclude such charges when presenting non-GAAP financial measures. We believe that the assessment of our operations excluding these costs is relevant to our assessment of internal operations and comparisons to the performance of our competitors.

Strategic initiative expense consist of legal fees incurred. We consider our operating results without these charges when evaluating our ongoing performance and forecasting our earnings trends, and therefore exclude such charges when presenting non-GAAP financial measures. We believe that the assessment of our operations excluding these costs is relevant to our assessment of internal operations and comparisons to the performance of our competitors.

Other items are the result of either unique or unplanned events, including, when applicable: restructuring and other charges and litigation reserves, net. It is difficult to predict the occurrence or estimate the amount or timing of these items in advance. Although these events are reflected in our GAAP financial statements, these unique transactions may limit the comparability of our on-going operations with prior and future periods. The amounts result from events that often arise from unforeseen circumstances, which often occur outside of the ordinary course of continuing operations. Therefore, the amounts do not accurately reflect the underlying performance of our continuing business operations for the period in which they are incurred.

Tax effects consist of the various above adjustments that we incorporate into non-GAAP measures in order to provide a more meaningful measure on non-GAAP net income. We also believe providing financial information with and without the income tax effects relating to our non-GAAP financial measures provides our management and users of the financial statements with better clarity regarding the on-going performance of our business.

Source: Arlo-F

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