ARLO TECHNOLOGIES, INC. Forward-looking Statements
This 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, market position of our products and technology and the potential adverse impact of the COVID-19 pandemic on our business and operations. 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 and we assume no obligation to update any such forward-looking 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 toArlo Technologies, Inc. and our subsidiaries.
Business and Executive Overview
Arlo combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that are transforming the way people experience the connected lifestyle. Arlo's deep expertise in product design, wireless connectivity, cloud infrastructure and cutting-edge AI capabilities focuses on delivering a seamless, smart home experience for Arlo users that is easy to setup and interact with every day. Our cloud-based platform provides users with visibility, insight and a powerful means to help protect and connect in real-time with the people and things that matter most, from any location with a Wi-Fi or a cellular connection. Since the launch of our first product inDecember 2014 , we have shipped over 25.1 million smart connected devices, and as ofJuly 3, 2022 , the Arlo platform had approximately 6.6 million cumulative registered accounts across more than 100 countries around the world. We conduct business across three geographic regions-(i) theAmericas ; (ii)Europe ,Middle-East andAfrica ("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. International revenue was 49.6% and 32.5% of our revenue for the three months endedJuly 3, 2022 andJune 27, 2021 , respectively, and 48.6% and 35.9% of our revenue for the six months endedJuly 3, 2022 andJune 27, 2021 , respectively. For the three months endedJuly 3, 2022 andJune 27, 2021 , we generated revenue of$119.0 million and$98.6 million , respectively, representing a year-over-year increase of 20.7%. For the six months endedJuly 3, 2022 andJune 27, 2021 , we generated revenue of$243.7 million and$181.1 million , respectively, representing a year-over-year increase of 34.6%. Loss from operations were$11.3 million and$25.8 million for the three months endedJuly 3, 2022 andJune 27, 2021 , respectively. Loss from operations were$20.0 million and$37.3 million for the six months endedJuly 3, 2022 andJune 27, 2021 , respectively. OnNovember 4, 2019 , we concurrently entered into an Asset Purchase Agreement (the "Purchase Agreement") and Supply Agreement (the "Supply Agreement" and together with the Purchase Agreement, the "Verisure Agreements") withVerisure . Under the Supply Agreement,Verisure became the exclusive distributor of our products inEurope for all channels, and non-exclusively distribute our products through its direct channels globally for an initial term of five years. Our goal is to continue to develop innovative, world-class connected lifestyle solutions to expand and further monetize our current and future user and paid account bases. We believe that the growth of our business is dependent on 36 -------------------------------------------------------------------------------- ` 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 brand awareness and channel partnerships and to continue our global expansion. We expect to increase our investment in research and development going forward as we continue to introduce new and innovative products and services to enhance the Arlo platform and compete for engineering talent. We also expect to significantly increase our Sales and Marketing expense as we invest in new campaigns to increase awareness of and preference for the Arlo brand.
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
July 3, 2022 % Change June 27, 2021
(In thousands, except percentage data)
Cumulative registered accounts 6,640 20.1 % 5,527
Cumulative paid accounts 1,478 112.7 % 695
Annual recurring revenue $ 116,601 67.2 % $ 69,753
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 particular 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 people. We changed our definition from registered users to registered
accounts starting in the fourth quarter of 2019 due to the Verisure transaction.
Verisure will own the registered accounts but we will continue to provide
services to these European customers under the Verisure Agreements.
Cumulative Paid Accounts. Paid accounts worldwide measured as any account where
a subscription to a paid service is being collected (either by the Company or by
the Company's customers or channel partners), plus paid service plans of a
duration of more than 3 months bundled with products (such bundles being counted
as a paid account after 90 days have elapsed from the date of registration). In
the fourth quarter of 2019, we redefined paid subscribers as paid accounts to
include customers that were transferred to Verisure as part of the disposal of
our commercial operations in Europe because we will continue to provide services
to these European customers and receive payments associated with them, under the
Verisure Agreements.
Annual Recurring Revenue ("ARR"). Effective as of the quarter ended October 3,
2021 , we have adopted ARR as one of the key indicators of our business
performance. We believe ARR enables measurement of our business initiatives, and
serves as an indicator of our future growth. ARR represents the amount of paid
service revenue that we expect to recur annually and is calculated by taking our
recurring paid service revenue for the last calendar month in the fiscal
quarter, multiplied by 12 months. Recurring paid service revenue represents the
revenue we recognize from our paid accounts and excludes prepaid service revenue
and Non-Recurring Engineering ("NRE") service revenue from strategic partners.
The ARR for the comparative period presented was derived following the same
methodology. ARR is a performance metric and should be viewed independently of
revenue and deferred revenue, and is not intended to be a substitute for, or
combined with, any of these items.
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Impact of COVID-19, Global Geopolitical, Economic and Business Conditions
We continue to closely monitor developments and are taking steps to mitigate the potential risks related to the COVID-19 pandemic to us, our employees and our customers. The extent of the impact of the COVID-19 pandemic on our business operations will depend on future developments, including the duration of the pandemic, the broader implications of the macro-economic recovery and the impact on overall customer demand, all of which are uncertain and cannot be predicted. Our priorities and actions during the COVID-19 pandemic continue to be focused on protecting the health and safety of all those we serve, our employees, our customers, our suppliers and our communities, including implementing continuous updates to our health and safety policies and processes and progress made through vaccinations. We continue to instruct all but a limited number of our global workforce to work remotely as a precautionary measure intended to minimize the risk of the virus to them and the communities in which we operate, while we continue to focus on providing our team with the resources that they need to meet the needs of our customers and deliver new innovations to the markets we serve, despite challenges presented by the COVID-19 pandemic. We also continue to work with our suppliers to address any supply chain disruptions, which might include larger component backlogs, component cost increases, travel restrictions and logistics changes that can impact our operations. For example, increased demand for electronics as a result of the COVID-19 pandemic increased demand for chips in the automotive industry and certain other factors have led to a global shortage of semiconductors. As a result, we have experienced component shortages, including longer lead times for components and supply constraints that have affected both our ability to meet scheduled product deliveries and worldwide demand for our products. Also, as a result of the COVID-19 pandemic, our supply chain partners are limited by production capacity, constrained by material availability, labor shortages, factory uptime and freight capacity, each of which constrains our ability to capitalize fully on end-market demand. As ofJuly 3, 2022 , international freight capacity remains depressed compared to pre-pandemic levels, and this has caused, and continues to cause, air and ocean freight rates to materially increase compared to pre-pandemic levels. Furthermore, transit times have also increased, causing us to rely more on air freight in order to meet our customers' demands. For the three and six months endedJuly 3, 2022 , we saw a 27% and 176% increase in freight-in expense compared to the prior year periods, respectively, as a result of the higher sea and air freight rates and component shortages which necessitated use of air freight to meet customer requested delivery dates. We expect supply chain constraints to persist through 2022. While we believe we have been broadly successful in navigating COVID-19 related challenges to date, any further disruptions to our supply chain and operations could have a significant negative impact on our net revenue, gross and operating margin performance. In addition, as a result of the COVID-19 pandemic, ongoing conflict inUkraine , supply chain disruptions, inflation, lower consumer confidence and rising interest rates, we could experience material charges from potential adjustments of the carrying value of our inventories and trade receivables, impairment charges on our long-lived assets, intangible assets and goodwill, and changes in the effectiveness of our hedging instruments, among others. During the first half of 2022, we remained focused on navigating these on-going challenges through preserving our liquidity and managing our cash flow through 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, subleasing excess office space, and deferment of hiring. We continue to monitor this rapidly developing 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 inthe United States and global markets resulting from the COVID-19 pandemic, the ongoing conflict inUkraine , supply chain disruptions, inflation, lower consumer confidence and rising interest rates. 38 -------------------------------------------------------------------------------- `
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 operations data, which we derived from the accompanying unaudited
condensed consolidated financial statements:
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
2022 2021 2022 2021
(In thousands, except percentage data)
Revenue:
Products $ 86,191 72.4 % $ 73,311 74.4 % $ 181,016 74.3 % $ 133,072 73.5 %
Services 32,788 27.6 % 25,260 25.6 % 62,714 25.7 % 48,055 26.5 %
Total revenue 118,979 100.0 % 98,571 100.0 % 243,730 100.0 % 181,127 100.0 %
Cost of revenue:
Products 73,829 62.1 % 62,019 62.9 % 154,606 63.4 % 109,176 60.3 %
Services 11,410 9.6 % 10,383 10.5 % 21,809 8.9 % 19,975 11.0 %
Total cost of revenue 85,239 71.6 % 72,402 73.5 % 176,415 72.4 % 129,151 71.3 %
Gross profit 33,740 28.4 % 26,169 26.6 % 67,315 27.6 % 51,976 28.7 %
Operating expenses:
Research and development 17,402 14.6 % 16,251 16.5 % 33,781 13.9 % 31,042 17.1 %
Sales and marketing 14,506 12.2 % 12,459 12.6 % 27,674 11.4 % 23,666 13.1 %
General and administrative 13,149 11.1 % 13,559 13.8 % 25,770 10.6 % 24,786 13.7 %
Impairment charges - - % 9,116 9.2 % - - % 9,116 5.0 %
Separation expense 25 0.0 % 605 0.6 % 104 0.0 % 659 0.4 %
Total operating expenses 45,082 37.9 % 51,990 52.7 % 87,329 35.8 % 89,269 49.3 %
Loss from operations (11,342) (9.5) % (25,821) (26.2) % (20,014) (8.2) % (37,293) (20.6) %
Interest income (expense), net 129 0.1 % 3 - % 124 0.1 % 27 - %
Other income (expense), net (116) (0.1) % 2,662 2.7 % 295 0.1 % 3,571 2.1 %
Loss before income taxes (11,329) (9.5) % (23,156) (23.5) % (19,595) (8.0) % (33,695) (18.6) %
Provision for income taxes 228 0.2 % 164 0.2 % 441 0.2 % 344 0.2 %
Net loss $ (11,557) (9.7) % $ (23,320) (23.7) % $ (20,036) (8.2) % $ (34,039) (18.8) %
Revenue
Our gross revenue consists primarily of sales of devices, prepaid and paid
subscription service revenue and NRE service revenue from Verisure and our
customers. 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
first generation camera products come with a prepaid service that provides users
with rolling seven-day cloud video storage, the ability to connect up to five
cameras and 90 days of customer support. Our second generation camera, doorbell
and floodlight products come with a prepaid service that includes a one-year
free trial period of Arlo Secure bundled with our Arlo Ultra products launched
in early 2019, and a three-month free trial period of Arlo Secure bundled with
our products launched after September 2019 . Upon device shipment, we attribute a
portion of the sales price to the prepaid service, deferring this revenue at the
outset and subsequently recognizing it ratably over the estimated useful
economic life of the device or free trial period, as applicable. Our paid
subscription services relate to sales of subscription plans to our registered
accounts. Our services also include certain development services provided to
Verisure and other customers under NRE arrangements. In the third quarter of
2021, we introduced Arlo Secure, our new service plan with coverage for
unlimited cameras and an enhanced Emergency Response solution. Arlo Secure
replaced Arlo Smart , our previous service plan. Existing Arlo Smart customers
are entitled to either retain their existing plans or upgrade to the new Arlo
Secure plan of their choosing.
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Our revenue consists of gross revenue, less end-user customer rebates and other
channel sales incentives deemed to be a reduction of revenue per the
authoritative guidance for revenue recognition, 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.
Under the Supply Agreement, Verisure became the exclusive distributor of our
products in Europe for all channels, and will non-exclusively distribute our
products through its direct channels globally for an initial term of five years.
During the five-year period commencing January 1, 2020 , Verisure has an
aggregate product purchase commitment of $500.0 million . As of July 3, 2022 ,
$255.6 million of the purchase commitment has been fulfilled. The Supply
Agreement also provides for certain NRE services to Verisure , including
developing certain custom products specified by Verisure in exchange for an
aggregate of $13.5 million , payable in installments upon meeting certain
development milestones. As of July 3, 2022 , Verisure has paid the full cash
consideration of $13.5 million for these NRE services. For the three months
ended July 3, 2022 and June 27, 2021 , we recognized service revenue of $0.2
million and $2.0 million , respectively, for these NRE services.
We conduct business across three geographic regions: Americas , EMEA, and APAC.
We generally base revenue by geography on the ship-to location of the customer
for device sales and device location for service sales.
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
2022 % Change 2021 2022 % Change 2021
(In thousands, exceptpercentage data)
Americas$ 60,345 (9.5) %$ 66,681 $ 128,811 10.7 %$ 116,317 Percentage of revenue 50.7 % 67.6 % 52.8 % 64.2 % EMEA 54,483 117.1 % 25,101 104,458 110.2 % 49,692 Percentage of revenue 45.8 % 25.5 % 42.9 % 27.4 % APAC 4,151 (38.9) % 6,789 10,461 (30.8) % 15,118 Percentage of revenue 3.5 % 6.9 % 4.3 % 8.4 % Total revenue$ 118,979 20.7 %$ 98,571 $
243,730 34.6 %
Revenue for the three and six months endedJuly 3, 2022 increased 20.7% and 34.6%, compared to the prior year periods, respectively, primarily due to higher product sales and service revenue. Product revenue increased by$12.9 million , or 17.6% and$47.9 million , or 36.0% for the three and six months endedJuly 3, 2022 compared to the prior year periods, respectively, primarily driven by an increase in product shipments in EMEA due to stronger customer demand and the launch of a customized camera in the Verisure Security channel, partially offset by decrease in product sales inAmericas and APAC, and higher provisions for sales returns inAmericas due to higher return rates in the current period that are deemed to be a reduction of revenue. Service revenue increased by$7.5 million , or 29.8% and$14.7 million , or 30.5% for the three and six months endedJuly 3, 2022 compared to the prior year periods, respectively, primarily due to an increase in paid accounts, partially offset by a decrease in Verisure NRE revenue recognition. Cost of Revenue Cost of revenue consists of both product costs and costs of service. 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. Cost of service consists of costs attributable to the provision and maintenance of our cloud-based platform, including personnel, storage, security and computing, IT and facilities overhead as well as NRE service costs incurred under the Verisure NRE arrangements. 40 -------------------------------------------------------------------------------- ` 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, fluctuation in foreign exchange rates and changes in our cost of goods sold due to fluctuations in prices paid for components, net of vendor rebates, cloud platform costs, warranty and overhead costs, inbound freight and duty product conversion costs, charges for excess or obsolete inventory, and amortization of acquired intangibles. 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. The following table presents cost of revenue and gross margin for the periods indicated: Three Months Ended Six Months Ended July 3, June 27, July 3, June 27, 2022 % Change 2021 2022 % Change 2021 (In thousands, except percentage data) Cost of revenue: Products$ 73,829 19.0 %$ 62,019 $ 154,606 41.6 %$ 109,176 Services 11,410 9.9 % 10,383 21,809 9.2 % 19,975 Total cost of revenue$ 85,239 17.7 %$ 72,402 $ 176,415 36.6 %$ 129,151 Cost of product revenue increased 19.0% and 41.6% for the three and six months endedJuly 3, 2022 compared to the prior year periods, respectively, primarily due to increases in gross shipments plus the increases in costs of materials and components of our products and freight cost. Cost of service revenue increased 9.9% and 9.2% for the three and six months endedJuly 3, 2022 compared to the prior year periods, respectively, as a result of service revenue growth, offset by cost optimizations. Gross Profit
The following table presents gross profit for the periods indicated:
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
2022 % Change 2021 2022 % Change 2021
(In thousands, except percentage data)
Gross profit:
Products $ 12,362 9.5 % $ 11,292 $ 26,410 10.5 % $ 23,896
Services 21,378 43.7 % 14,877 40,905 45.7 % 28,080
Total gross profit $ 33,740 28.9 % $ 26,169 $ 67,315 29.5 % $ 51,976
Gross margin percentage:
Products 14.3 % 15.4 % 14.6 % 18.0 %
Services 65.2 % 58.9 % 65.2 % 58.4 %
Total gross margin
percentage 28.4 % 26.6 % 27.6 % 28.7 %
Gross profit increased 28.9% and 29.5% for the three and six months ended
July 3, 2022 , compared to the prior year periods, respectively, due to a
combination of both product and service revenue increases. The product gross
profit increase is primarily due to an increase in product revenue and lower
provisions for marketing expenditures that are deemed to be reductions of
revenue, partially offset by higher product costs and provision for sale
returns. The service gross profit increase is primarily due to growth in paid
service revenue due to an increase in paid accounts and cost optimizations
implemented.
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Operating Expenses
Research and Development
Research and development expense consists primarily of personnel-related
expense, safety, security, regulatory services and testing, other research and
development consulting fees, and corporate IT and facilities overhead. 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. Research and development expense directly attributable to
delivering the Verisure NRE is recognized in cost of service.
The following table presents research and development expense for the periods
indicated:
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
2022 % Change 2021 2022 % Change 2021
(In thousands, except percentage data)
Research and development expense $ 17,402 7.1 % $ 16,251 $ 33,781 8.8 % $ 31,042
Research and development expense increased $1.2 million for the three months
ended July 3, 2022 , compared to the prior year period, primarily due to an
increase of $0.8 million in outside professional services and an increase in
certain research and development expenses amounting to $0.8 million , as result
of a reduction in the amount of work performed on Verisure NRE projects
classified as a cost of service revenue, partially offset by a decrease of $0.4
million in IT and facility overhead and other expenses. Research and development
expense increased $2.7 million for the six months ended July 3, 2022 , compared
to the prior year period, primarily due to an increase of $1.7 million in
outside professional services and an increase in certain research and
development expenses amounting to $1.4 million , as a result of a reduction in
the amount of work performed on Verisure NRE projects which are classified as
cost of service revenue, partially offset by a decrease of $0.4 million in other
expenses.
Sales and Marketing
Sales and marketing expense consists primarily of personnel expense for sales
and marketing staff; technical support expense; advertising; trade shows;
corporate communications and other marketing expense; product marketing expense;
IT and facilities overhead; outbound freight costs; and credit card processing
fees. We expect our sales and marketing expense to significantly increase in the
future as we invest in marketing to drive awareness of our brand and drive
demand for our products and services.
The following table presents sales and marketing expense for the periods
indicated:
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
2022 % Change 2021 2022 % Change 2021
(In thousands, except
percentage data)
Sales and marketing expense
Sales and marketing expense increased$2.0 million for the three months endedJuly 3, 2022 , compared to the prior year period, primarily due to increases of$1.4 million in marketing expenditures, primarily for the production of creative content and other preparatory work for our upcoming awareness advertising campaign,$0.6 million in personnel-related expenses and$0.4 million in credit card processing fees, partially offset by a decrease of$0.3 million in outside professional services. Sales and marketing expense increased$4.0 million for the six months endedJuly 3, 2022 , compared 42 -------------------------------------------------------------------------------- ` to the prior year period, primarily due to increases of$2.3 million in marketing expenditures, primarily for the production of creative content and other preparatory work for our upcoming awareness advertising campaign,$1.4 million in personnel-related expenses,$0.8 million in credit card processing fees,$0.2 million in IT and facility overhead and$0.2 million in sales freight-out expenses, partially offset by decreases of$0.9 million in outside professional services.
General and Administrative
General and administrative expense consists primarily of personnel-related
expense for certain executives, finance and accounting, investor relations,
human resources, legal, information technology, professional fees, corporate IT
and facilities overhead, strategic initiative expense and other general
corporate expense. We expect our general and administrative expense to fluctuate
as a percentage of our revenue in future periods based on fluctuations in our
revenue and the timing of such expense.
The following table presents general and administrative expense for the periods
indicated:
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
2022 % Change 2021 2022 % Change 2021
(In thousands, except percentage data)
General and administrative expense $ 13,149 (3.0) % $ 13,559 $ 25,770 4.0 % $ 24,786
General and administrative expense decreased $0.4 million for the three months
ended July 3, 2022 , compared to the prior year period, primarily due to an
increase of $0.7 million in personnel-related expenses, offset by decreases of
$0.7 million in legal and professional services, $0.3 million in IT and facility
overhead, and $0.1 million in other expenses. General and administrative expense
increased $1.0 million for the six months ended July 3, 2022 , compared to the
prior year period, primarily due to an increase of $2.5 million in
personnel-related expenses, partially offset by decreases of $0.7 million in
legal and professional services, $0.6 million in IT and facility overhead, and
$0.2 million in other expenses.
Impairment Charges
The following table presents impairment charges for the periods indicated:
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
2022 % Change 2021 2022 % Change 2021
(In thousands, except percentage data)
Impairment charges $ - ** $ 9,116 $ - ** $ 9,116
During the second quarter of 2021, we reviewed certain of our right-of-use
assets and other lease-related assets for impairment in conjunction with our
decision to sublease our office space in San Jose, California . As a result, we
recorded an impairment charge of $9.1 million , which includes $6.8 million
associated with the right-of-use asset and $2.3 million associated with the
leasehold improvements and furniture, fixtures and equipment included in the San
Jose office asset group. Refer to Note 4, Balance Sheet Components, for further
information about the impairment of the right-of-use asset and long-lived
assets.
Separation Expense
Separation expense consists primarily of costs of legal and professional services for IPO-related litigation associated with our separation from NETGEAR.
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The following table presents separation expense for the periods indicated:
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
2022 % Change 2021 2022 % Change 2021
(In thousands, except percentage data)
Separation expense $ 25 (95.9) % $ 605 $ 104 (84.2) % $ 659 Interest Income and Other Income (Expense), Net
The following table presents other income (expense), net for the periods
indicated:
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
2022 % Change 2021 2022 % Change 2021
(In thousands, except percentage data)
Interest income (expense), net $ 129 ** $ 3 124 ** 27
Other income (expense), net $ (116) ** $ 2,662 295 ** 3,571
**Percentage change not meaningful.
Our interest income was primarily earned from our short-term investments and
cash and cash equivalents. We expect our interest income in absolute dollars to
marginally increase as interest rates are expected to increase, while we deploy
our short-term investments and cash and cash equivalents to fund our operations.
Other income (expense), net primarily represents gains and losses on
transactions denominated in foreign currencies, foreign currency contract gain
(loss), net, and other miscellaneous income and expense. We have also included
reimbursements under the Verisure Transition Service Agreement ("Verisure TSA")
and the Employee Retention Credit ("ERC") under the Coronavirus Aid, Relief, and
Economic Security Act (the "CARES Act") for qualified wages in Other income.
Other income (expense), net decreased $2.8 million for the three months ended
July 3, 2022 , compared to the prior year period, primarily due to a decrease of
$1.8 million in ERC under the CARES Act, which was recognized as Other income in
the second quarter of 2021, and a decrease of $0.8 million in Verisure TSA
related income. Other income (expense), net decreased $3.3 million for the six
months ended July 3, 2022 , compared to the prior year period, primarily due to a
decrease of $1.8 million in ERC under the CARES Act, which was recognized as
Other income in the second quarter of 2021, and a $1.5 million decrease in
Verisure TSA related income.
Provision for Income Taxes
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
2022 % Change 2021 2022 % Change 2021
(In thousands, except percentage data)
Provision for income taxes $ 228 39.0 % $ 164 $ 441 28.2 % $ 344
Effective tax rate (2.0) % (0.7) % (2.3) % (1.0) %
The Company's provision for income taxes was primarily attributable to income
taxes on foreign earnings. The increase in provision for income taxes for the
three and six months ended July 3, 2022 , compared to the prior year periods, was
primarily due to higher foreign earnings in the second quarter of 2022 and first
half of 2022, respectively. Consistent with the prior year, the Company
maintained a valuation allowance against its U.S. federal and state deferred tax
assets and did not record a tax benefit on these deferred tax assets since it is
more likely than not that these deferred tax assets will not be realized.
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Liquidity and Capital Resources
We have a history of losses and may continue to incur operating and net losses
for the foreseeable future. As of
Our principal sources of liquidity are cash, cash equivalents and short-term investments. Short-term investments are marketable government securities with an original maturity or a remaining maturity at the time of purchase of greater than three months and no more than 12 months. The marketable securities are held in our name with a high quality financial institution, which acts as our custodian and investment manager. As ofJuly 3, 2022 , we had cash, cash equivalents and short-term investments totaling$135.3 million . 34.6% of our cash and cash equivalents were held outside of theU.S. Starting in 2018, the Tax Cuts and Jobs Act of 2017 (the "Tax Act") impact on the repatriation of foreign earnings is generally immaterial. The cash and cash equivalents balance outside of theU.S. is subject to fluctuation based on the settlement of intercompany balances. OnOctober 27, 2021 , we entered into a Loan and Security Agreement withBank of America, N.A . for a$40.0 million three-year revolving credit facility. Refer to Note 8. Debt for further information about the terms and structure of the credit facility. Based on our current plans, the Loan and Security Agreement withBank of America, N.A , and market conditions, we believe that such sources of liquidity will be sufficient to satisfy our anticipated cash requirements for at least the next 12 months. However, in the future, including sooner than may be anticipated, we may require or desire additional funds to support our operating expenses and capital requirements or for other purposes, such as acquisitions, and may seek to raise such additional funds through public or private equity or debt financings or collaborative agreements or from other sources. However, the COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets, which have also been impacted by ongoing supply chain disruptions, rising interest rates, lower consumer confidence and inflation. If the disruption persists and deepens, we could experience an inability to access additional capital, which could in the future negatively affect our capacity to support our operating expenses and capital requirements or for other purposes, such as acquisitions. We have no commitments to obtain such additional financing and cannot assure you 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 will depend on numerous factors, including the introduction of new products, the growth in our service revenue, as well as the ability to increase our gross margin dollars and continue to maintain controls over our operating expenditures.
Cash Flow
The following table presents our cash flows for the periods presented:
Six Months Ended
July 3 , June 27,
2022 2021
(In thousands)
Net cash used in operating activities $ (29,381) $(23,466)
Net cash provided by (used in) investing activities (50,429)
18,934
Net cash used in financing activities (10,384)
(2,948)
Net cash decrease $ (90,194) $ (7,480)
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Operating activities
Net cash used in operating activities increased by$5.9 million for the six months endedJuly 3, 2022 compared to the prior year period. This increase comprised an increase in working capital used in operations of$13.3 million , offset by a$7.4 million reduction in adjusted net loss reconciled to net cash used in operating activities. The increase in working capital used in operations was mainly driven by lower collections from customers primarily as a result of a change in customer mix and associated payment terms and higher inventory purchases, partially offset by lower payments to suppliers. Our days' sales outstanding ("DSO") increased to 57 days as ofJuly 3, 2022 compared to 50 days as ofDecember 31, 2021 , primarily as a result of changes in customer mix and associated payment terms. Inventory increased marginally to$39.2 million as ofJuly 3, 2022 from$38.4 million as ofDecember 31, 2021 , due to higher inventory purchases in line with product shipments. Our ending inventory turns were 7.5x in the three months endedJuly 3, 2022 down from 10.5x turns in the three months endedDecember 31, 2021 , primarily as a result of the normal seasonality in our business. Our accounts payable decreased to$77.4 million as ofJuly 3, 2022 from$84.1 million as ofDecember 31, 2021 , primarily due to timing of supplier payments.
Investing activities
Net cash used in investing activities increased by$69.4 million for the six months endedJuly 3, 2022 compared to the prior year period, primarily due to purchases of short-term investments.
Financing activities
Net cash used in financing activities was$10.4 million for the six months endedJuly 3, 2022 , representing tax withholdings from restricted stock unit releases of$13.6 million , offset by proceeds from ESPP contributions and exercises of stock options of$3.2 million . Net cash used in financing activities was$2.9 million for the six months endedJune 27, 2021 , representing tax withholdings from restricted stock unit releases of$9.1 million , offset by proceeds from ESPP contributions and exercises of stock options of$6.1 million .
Contractual Obligations
Our principal commitments consist of obligations under operating leases for office space, equipment, data center facilities and distribution center facilities, as well as non-cancellable purchase commitments. Refer to Note 9. Commitments and Contingencies, in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for a complete discussion of our contractual obligations.
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 endedDecember 31, 2021 . There have been no material changes to our critical accounting policies and estimates during the six months endedJuly 3, 2022 , 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 on Form 10-Q. 46
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