Arlo Reports Second Quarter 2021 Results

Exceeded High-End of both Revenue and Non-GAAP EPS Guidance for the Quarter

48% Year over Year growth in Service Revenue, Product Revenue and Total Revenue

133% Year over Year growth in Total Paid Accounts

Ended quarter with Cash, Cash Equivalents and Short-term Investments Balance at $178.7 million, with No Debt

Arlo Technologies, Inc. (NYSE: ARLO), a leading internet-connected security camera brand, today reported financial results for the second quarter ended June 27, 2021.

Financial Highlights ⁽¹⁾

• Revenue of $98.6 million, an increase of 47.9% year over year.
• GAAP gross profit of $26.2 million, an increase of 376.8% year over year; non-GAAP gross profit of $27.5 million, an increase of 328.5% year over year.
• GAAP gross margin of 26.6%; non-GAAP gross margin of 27.9%.
• GAAP net loss per diluted share of $(0.28); non-GAAP net loss per diluted share of $(0.04).
• Cash, cash equivalents and short-term investments of $178.7 million and no debt at the end of Q2.

“I am proud to say the Arlo team delivered exceptional results across the entire business in Q2, successfully navigating considerable supply chain challenges. Revenue and non-GAAP EPS both came in above the high end of our guidance range. Our new business model for services continued to gather momentum, adding a record 146,000 Paid Accounts in the quarter and surpassing 700,000 Paid Accounts in total on July 4th, propelling our service revenue to a record $25.3 million, up an impressive 48% year-over-year. Our refreshed product line-up also contributed to very strong product revenue growth of 48% year-over-year. We continued to execute to plan in our partnership with Verisure, delivering 123% year-over-year revenue growth in Europe and commencing production of a new camera system designed specifically for the needs of the Verisure Security Channel,” said Matthew McRae, Chief Executive Officer of Arlo Technologies. “Our impressive revenue growth of 48% was significantly over-indexed by non-GAAP gross profit, which grew 328% and by $21.0 million year-over-year. Our innovation in Services accelerated with the launch of Arlo Secure and Arlo Secure Plus, our new Service plans, which will extend Arlo’s technological leadership, while adding significant value to our customers. Our industry-leading hardware continued to garner acclaim, winning multiple awards and commendations. With this tremendous progress on all fronts, we believe we are well-positioned to achieve $100.0 million in service revenue and $410.0 to $420.0 million total revenue this year.”

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⁽¹⁾ Reconciliation of financial measures computed on a GAAP basis to financial measures computed on a non-GAAP basis are provided at the end of this press release.

Financial and Business Highlights

• Service revenue of $25.3 million for Q2, for growth of 48.3% year over year, the eighth consecutive quarter of record service revenue.
• Concluded an agreement to sublease our entire San Jose office which starts in February 2022 and runs to the end of our committed term in 2029. We expect the sublease will save $3 million to $4 million per annum across the business from next year, but due to the nature of the transaction it did generate a non-cash impairment charge of $9.1 million, which is included within our GAAP operating expenses in Q2.
• Added a record 146,000 Paid Accounts in Q2, a sequential increase of 28.1% over Q1, and a year over year increase of 239.5%.
• Launched Arlo Secure and Secure Plus, our next generation service offering to deliver the ultimate security experience.
• Won numerous awards including the Editors’ Choice award from TechHive (Pro 4 series), a Highly Recommended award from Tom’s Guide (Ultra 2), a recommendation by Digital Trends (Essential Indoor), acclaim from T3 (Essential Spotlight).

Third Quarter 2021 Business Outlook ⁽²⁾

• Revenue of $100.0 million to $110.0 million.
• GAAP net loss per diluted share of $(0.30) to $(0.23), and non-GAAP net loss per diluted share of $(0.19) to $(0.12).

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

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⁽²⁾ 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 second quarter of 2021 results and discuss management’s expectations for the third quarter of 2021 today, Wednesday, August 4, 2021 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 2694444. 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. The company’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 security cameras, indoor security cameras, video doorbells, and floodlight.

With a mission to bring users peace of mind, Arlo is as passionate about protecting user privacy as it is about safeguarding homes and families. Arlo is committed to supporting industry standards for data protection designed to keep users' personal information private and in their control. Arlo doesn't monetize personal data, provides enhanced controls for user data, supports privacy legislation, keeps user data safely secure, and puts security at the forefront of company culture.

© 2021 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 (the "Company") expectations or beliefs concerning future events based on information available at the time such statements were made and include statements regarding our potential future business, operating performance and financial condition, including descriptions of our expected revenue, GAAP and non-GAAP gross margins, operating margins, tax rates, expenses, and cash outlook; our transition to a services-first business model; the commercial launch and momentum of Arlo Secure and Arlo Secure Plus; strategic objectives and initiatives, including our collaboration with Verisure; the commercial launch and momentum of Arlo Secure and Arlo Secure Plus; strategic objectives and initiatives, including our collaboration with Verisure; expectations regarding market expansion and future growth; plans to invest in product innovation; the Company's future product offerings; supply chain challenges; and the quote from the Company's Chief Executive Officer. 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 incur additional costs and charges associated with the transactions contemplated by the Verisure partnership; the Company may not receive the minimum commitment amounts from Verisure; the COVID-19 pandemic could have an adverse impact on the Company's business, operations and the markets and communities in which the Company and its partners and customers operate; the Company may fail to successfully continue to effect operating expense savings; changes in the level of the Company'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 anticipated financial capacity under the Company's 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 the Company's 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 March 28, 2021, filed with the Securities and Exchange Commission on May 6, 2021 and subsequent filings with the Securities and Exchange Commission. Given these circumstances, you should not place undue reliance on these forward-looking statements. The Company 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 other income (expenses), net, 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, impairment charges, restructuring and other charges, strategic initiative and transaction expenses, gain on sale of business, 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 costs of legal and professional services for IPO-related litigation associated with our separation from NETGEAR. 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, performance-based restricted stock units, shares under the employee stock purchase plan granted to employees and employees' annual bonus in RSU form. 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.

Strategic initiative and transaction expenses consist of legal fees associated with the strategic review of the Company and legal fees, accounting fees and other one-time costs incurred to complete the Verisure transaction. 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.

Gain on sale of business represents gain from sale of the Company's commercial operations in Europe. We consider our operating results without this gain when evaluating our ongoing performance and forecasting our earnings trends, and therefore exclude such gain when presenting non-GAAP financial measures. We believe that the assessment of our operations excluding the gain 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, litigation reserves, net and Impairment charges. 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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