# Arlo Technologies, Inc.: Form 10-Q for the period ended Jun 30, 2024

- Company: [Arlo Technologies, Inc.](/companies/arlo.md) (CIK 1736946)
- Form: 10-Q
- Filed: 2024-08-08
- Accepted by EDGAR: Aug 8, 2024, 16:16 ET
- Period: 2024-06-30
- Accession: 0001736946-24-000035
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1736946/000173694624000035/arlo-20240630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1736946/000173694624000035/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-04-01 to 2024-06-30 | $127.4m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 6 months, 2024-01-01 to 2024-06-30 | $251.6m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2024-04-01 to 2024-06-30 | $80.6m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2024-01-01 to 2024-06-30 | $157.4m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2024-04-01 to 2024-06-30 | $46.9m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2024-01-01 to 2024-06-30 | $94.2m | us-gaap:GrossProfit |
| Research and development | 3 months, 2024-04-01 to 2024-06-30 | $19.6m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2024-01-01 to 2024-06-30 | $40.4m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2024-04-01 to 2024-06-30 | −$12.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2024-01-01 to 2024-06-30 | −$23.4m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2024-04-01 to 2024-06-30 | $236.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2024-01-01 to 2024-06-30 | $631.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-04-01 to 2024-06-30 | −$11.6m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2024-01-01 to 2024-06-30 | −$21.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-04-01 to 2024-06-30 | −$0.12 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2024-01-01 to 2024-06-30 | −$0.22 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-04-01 to 2024-06-30 | −$0.12 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2024-01-01 to 2024-06-30 | −$0.22 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-04-01 to 2024-06-30 | 97,843,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2024-01-01 to 2024-06-30 | 97,051,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2024-01-01 to 2024-06-30 | $26.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2024-01-01 to 2024-06-30 | $651.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2024-06-30 | $62.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-06-30 | $263.2m | us-gaap:AssetsCurrent |
| Total assets | at 2024-06-30 | $295.8m | us-gaap:Assets |
| Current liabilities | at 2024-06-30 | $177.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-06-30 | $196.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2024-06-30 | $99.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 32,734 characters.

### Forward-looking Statements

*This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words “believes,” “anticipates,” “plans,” “expects,” “intends,” “could,” “may,” “will,” and similar expressions are intended to identify forward-looking statements, including statements concerning our business and the expected performance characteristics, specifications, reliability, market acceptance, market growth, specific uses, user feedback, and market position of our products and technology. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in “Part II—Item 1A—Risk Factors” and “Liquidity and Capital Resources” below.*

*All forward-looking statements in this document are based on information available to us as of the date hereof, such information may be limited or incomplete, and we assume no obligation to update any such forward-looking statements. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report. Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us,” the “Company,” and “Arlo” refer to Arlo Technologies, Inc. and our subsidiaries.*

### Business and Executive Overview

Arlo is transforming the ways in which people can protect everything that matters to them with advanced home, business, and personal security services that combine a globally scaled cloud platform, advanced monitoring and analytics capabilities, and award-winning app-controlled devices to create a personalized security ecosystem. Arlo’s deep expertise in cloud services, cutting-edge AI and computer vision analytics, wireless connectivity and intuitive user experience design delivers seamless, smart home security for Arlo users that is easy to setup and engage with every day. Our highly secure, cloud-based platform provides users with visibility, insight and a powerful means to help protect and connect in real-time with the people and things that matter most, from any location with a Wi-Fi or a cellular connection – all rooted in a commitment to safeguard privacy for our users and their personal data.

Since the launch of our first product in December 2014, we have shipped over 34.6 million smart connected devices. As of June 30, 2024, the Arlo platform had approximately 10.0 million cumulative registered accounts across more than 100 countries around the world coupled with approximately 4.0 million cumulative paid subscribers and annual recurring revenue of $235.0 million.

We conduct business across three geographic regions—(i) the Americas; (ii) Europe, Middle-East and Africa (“EMEA”); and (iii) Asia Pacific (“APAC”)—and we primarily generate revenue by selling devices through retail, wholesale distribution, wireless carrier channels, security solution providers, Arlo’s direct to consumer store and paid subscription services. For the three months ended June 30, 2024 and July 2, 2023, we generated total revenue of $127.4 million and $115.1 million, respectively, and loss from operations was $12.8 million and $8.0 million, respectively. For the six months ended June 30, 2024 and July 2, 2023, we generated total revenue of $251.6 million and $226.1 million, respectively, and loss from operations was $23.4 million and $22.2 million, respectively.

Our goal is to continue to develop innovative, world-class smart security solutions to expand and further monetize our current and future user and paid account bases. We believe that the growth of our business is dependent on many factors, including our ability to innovate and launch successful new products on a timely basis and grow our installed base, to increase subscription-based recurring revenue, to invest in channel partnerships and to continue our global expansion. We expect to increase our investment in research and development going forward as we continue to introduce new and innovative products and services to enhance the Arlo platform and compete for engineering talent. We also expect our sales and marketing expense to increase in the future as we invest in marketing to drive demand for our products and services.

### Key Business Metrics

In addition to the measures presented in our unaudited condensed consolidated financial statements, we use the following key metrics to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions. We believe these key business metrics provide useful information by offering the ability to make more meaningful period-to-period comparisons of our on-going operating results and a better understanding of how management plans and measures our underlying business. Our key business metrics may be calculated in a manner different from the same key business metrics used by other companies. We regularly review our processes for calculating these metrics, and from time to time we may discover inaccuracies in our metrics or make adjustments to better reflect our business or to improve their accuracy, including adjustments that may result in the recalculation of our historical metrics. We believe that any such inaccuracies or adjustments are immaterial unless otherwise stated.

*(In thousands, except percentage data)*

|  | As of June 30, 2024 | % Change | July 2, 2023 |
| --- | ---: | ---: | ---: |
| Cumulative registered accounts | 9,987 | 27.1% | 7,860 |
| Cumulative paid accounts (1) | 3,980 | 73.9% | 2,289 |
| Annual recurring revenue (“ARR”) (2) | $234,981 | 21.4% | $193,633 |

(1) The number of cumulative paid accounts as of June 30, 2024 included paid accounts managed by Verisure Sàrl (“Verisure”) in our EMEA region which are now onboarded with us. This does not have an impact to our financial statements and key business metrics other than our number of cumulative paid accounts.

(2) As described further below, in the first fiscal quarter of 2024, we changed the methodology on paid service revenue recognition from a mid-month convention to a daily recognition model. As a result, ARR as of June 30, 2024 was calculated using the daily recognition model while ARR as of July 2, 2023 was calculated using our former methodology, the mid-month convention. ARR as of July 2, 2023 calculated using the daily recognition model does not represent a material change from the mid-month convention over the same period.

**Cumulative Registered Accounts**. We believe that our ability to increase our user base is an indicator of our market penetration and growth of our business as we continue to expand and innovate our Arlo platform. We define our registered accounts at the end of a particular period as the number of unique registered accounts on the Arlo platform as of the end of such period. The number of registered accounts does not necessarily reflect the number of end-users on the Arlo platform as one registered account may be used by multiple end-users to monitor the devices attached to that household.

**Cumulative Paid Accounts**. Paid accounts are defined as any account worldwide where a subscription to a paid service is being collected (either by us or by our customers or channel partners, including Verisure).

**Annual Recurring Revenue**. We believe ARR enables measurement of our business initiatives and serves as an indicator of our future growth. ARR represents the amount of paid service revenue that we expect to recur annually. In the first fiscal quarter of 2024, we changed the methodology on paid service revenue recognition from a mid-month convention to a daily recognition model which recognizes paid service revenue based on the number of service days within the fiscal reporting period, commencing on the start date of the subscription and continuing over the term of the arrangement. Accordingly, the methodology used to calculate ARR was also changed in the first fiscal quarter of 2024 and is now calculated by taking the average daily paid service revenue of the last calendar month in the fiscal quarter, multiplied by 365 days. We believe the daily recognition model aligns with our customers’ subscription period and service usage and allows for a more precise measurement of paid service revenue relative to the former methodology of a mid-month convention, which was based on paid service revenue for the last calendar month in the fiscal quarter, multiplied by 12 months. This change in calculation methodology has no material impact on our financial statements or any previously reported ARR numbers. ARR is a performance metric and should be viewed independently of revenue and deferred revenue, and is not intended to be a substitute for, or combined with, any of these items.

### Impact of Global Geopolitical, Economic and Business Conditions

During the six months ended June 30, 2024, we remained focused on the ongoing conflict in Ukraine, hostilities in the Middle-East, supply chain disruptions, the inflationary macro environment, fluctuating consumer confidence and rising interest rates by preserving our liquidity and managing our cash flow by taking preemptive action to enhance our ability to meet our short-term liquidity needs. These actions include, but are not limited to, proactively managing working capital by closely monitoring customers’ credit and collections, renegotiating payment terms with third-party manufacturers and key suppliers, closely monitoring inventory levels and purchases against forecasted demand, reducing or eliminating non-essential spending, and subleasing or reducing excess office space. We continue to monitor the situation and may, as necessary, reduce expenditures further, borrow under our revolving credit facility, or pursue other sources of capital that may include other forms of external financing in order to maintain our cash position and preserve financial flexibility in response to the uncertainty in the United States and global markets resulting from the ongoing conflict in Ukraine, hostilities in the Middle-East, supply chain disruptions, the inflationary macro environment, fluctuating consumer confidence and rising interest rates, current financial conditions within the banking industry, including the effects of recent failures of other financial institutions, and liquidity levels.

### 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:

*(In thousands, except percentage data)*

| Revenue: | Three Months Ended June 30, 2024 |  | July 2, 2023 |  | Six Months Ended June 30, 2024 |  | July 2, 2023 |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Products | $67,186 | 52.7% | $64,749 | 56.3% | $134,679 | 53.5% | $131,809 | 58.3% |
| Services | 60,261 | 47.3% | 50,327 | 43.7% | 116,968 | 46.5% | 94,271 | 41.7% |
| Total revenue | 127,447 | 100.0% | 115,076 | 100.0% | 251,647 | 100.0% | 226,080 | 100.0% |
| Cost of revenue: |  |  |  |  |  |  |  |  |
| Products | 66,036 | 51.8% | 60,446 | 52.5% | 129,260 | 51.4% | 124,487 | 55.1% |
| Services | 14,557 | 11.4% | 12,772 | 11.1% | 28,153 | 11.2% | 24,518 | 10.8% |
| Total cost of revenue | 80,593 | 63.2% | 73,218 | 63.6% | 157,413 | 62.6% | 149,005 | 65.9% |
| Gross profit | 46,854 | 36.8% | 41,858 | 36.4% | 94,234 | 37.4% | 77,075 | 34.1% |
| Operating expenses: |  |  |  |  |  |  |  |  |
| Research and development | 19,561 | 15.3% | 17,618 | 15.3% | 40,354 | 16.0% | 35,368 | 15.6% |
| Sales and marketing | 17,698 | 13.9% | 16,921 | 14.7% | 35,068 | 13.9% | 32,274 | 14.3% |
| General and administrative | 21,430 | 16.8% | 15,007 | 13.0% | 40,778 | 16.2% | 30,629 | 13.5% |
| Others | 966 | 0.8% | 341 | 0.4% | 1,445 | 0.6% | 973 | 0.5% |
| Total operating expenses | 59,655 | 46.8% | 49,887 | 43.4% | 117,645 | 46.7% | 99,244 | 43.9% |
| Loss from operations | (12,801) | (10.0)% | (8,029) | (7.0)% | (23,411) | (9.3)% | (22,169) | (9.8)% |
| Interest income, net | 1,495 | 1.1% | 835 | 0.8% | 2,881 | 1.1% | 1,561 | 0.7% |
| Other income, net | (18) | —% | 52 | —% | (43) | —% | 13 | —% |
| Loss before income taxes | (11,324) | (8.9)% | (7,142) | (6.2)% | (20,573) | (8.2)% | (20,595) | (9.1)% |
| Provision for income taxes | 236 | 0.2% | 221 | 0.2% | 631 | 0.2% | 1,013 | 0.5% |
| Net loss | $(11,560) | (9.1)% | $(7,363) | (6.4)% | $(21,204) | (8.4)% | $(21,608) | (9.6)% |

### Revenue

Our gross revenue consists primarily of sales of devices and prepaid and paid subscription service revenue. We generally recognize revenue from product sales at the time the product is shipped and transfer of control from us to the customer occurs. Our paid subscription services relate to sales of subscription plans to our registered accounts.

Our revenue consists of gross revenue, less customer rebates and other channel sales incentives, allowances for estimated sales returns, price protection, and net changes in deferred revenue. A significant portion of our marketing expenditure is with customers and is deemed to be a reduction of revenue under authoritative guidance for revenue recognition.

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.

*(In thousands, except percentage data)*

|  | Three Months Ended June 30, 2024 | % Change | July 2, 2023 | Six Months Ended June 30, 2024 | % Change | July 2, 2023 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $65,294 | (16.4)% | $78,136 | $122,463 | (9.1)% | $134,768 |
| Percentage of revenue | 51.2% |  | 67.9% | 48.7% |  | 59.6% |
| EMEA | 56,827 | 83.6% | 30,958 | 118,207 | 48.8% | 79,430 |
| Percentage of revenue | 44.6% |  | 26.9% | 47.0% |  | 35.1% |
| APAC | 5,326 | (11.0)% | 5,982 | 10,977 | (7.6)% | 11,882 |
| Percentage of revenue | 4.3% |  | 5.2% | 4.4% |  | 5.3% |
| Total revenue | $127,447 | 10.8% | $115,076 | $251,647 | 11.3% | $226,080 |

Revenue by classification is as follows:

*(In thousands, except percentage data)*

|  | Three Months Ended June 30, 2024 | % Change | July 2, 2023 | Six Months Ended June 30, 2024 | % Change | July 2, 2023 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenue | $67,186 | 3.8% | $64,749 | $134,679 | 2.2% | $131,809 |
| Service revenue | 60,261 | 19.7% | 50,327 | 116,968 | 24.1% | 94,271 |
| Total revenue | $127,447 | 10.8% | $115,076 | $251,647 | 11.3% | $226,080 |

Product revenue increased by $2.4 million, or 3.8%, and $2.9 million, or 2.2%, for the three and six months ended June 30, 2024 compared to the prior year periods, respectively, primarily driven by an increase in product shipments in EMEA due to stronger customer demand, partially offset by the decrease in product sales in the Americas and APAC due to seasonality and a reduction in average selling prices (“ASPs”) of our products as we increased promotional activities to stimulate household acquisition and subscriber growth. The increase in product revenue was also attributable to lower sales returns which are partially offset by higher sales incentives that are deemed to be reductions of revenue.

Service revenue increased in all regions by $9.9 million, or 19.7%, and $22.7 million, or 24.1%, for the three and six months ended June 30, 2024 compared to the prior year periods, respectively, primarily due to a 73.9% increase in cumulative paid accounts.

### Cost of Revenue

Cost of revenue consists of both product costs and service costs. Product costs primarily consist of the cost of finished products from our third-party manufacturers and overhead costs, including personnel expense for operation staff, purchasing, product planning, inventory control, warehousing and distribution logistics, third-party software licensing fees, inbound freight, IT and facilities overhead, warranty costs associated with returned goods, write-downs for excess and obsolete inventory and excess components, and royalties to third parties. Service costs consist of costs attributable to the provision and maintenance of our cloud-based platform, including personnel, storage, security and computing, IT and facilities overhead.

Our cost of revenue as a percentage of revenue can vary based upon a number of factors, including those that may affect our revenue set forth above and factors that may affect our cost of revenue, including, without limitation, product mix, sales channel mix, registered accounts’ acceptance of paid subscription service offerings, and changes in our cost of goods sold due to fluctuations in prices paid for components, net of vendor rebates, cloud platform costs, warranty and overhead costs, inbound freight and duty costs, and charges for excess or obsolete inventory. We outsource our manufacturing, warehousing, and distribution logistics. We also outsource certain components of the required infrastructure to support our cloud-based back-end IT infrastructure. We believe this outsourcing strategy allows us to better manage our product and service costs and gross margin and allows us to adapt to changing market dynamics and supply chain constraints.

*(In thousands, except percentage data)*

| Cost of revenue: | Three Months Ended June 30, 2024 | % Change | July 2, 2023 | Six Months Ended June 30, 2024 | % Change | July 2, 2023 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Products | $66,036 | 9.2% | $60,446 | $129,260 | 3.8% | $124,487 |
| Services | 14,557 | 14.0% | 12,772 | 28,153 | 14.8% | 24,518 |
| Total cost of revenue | $80,593 | 10.1% | $73,218 | $157,413 | 5.6% | $149,005 |

Product cost of revenue increased 9.2% and 3.8% for the three and six months ended June 30, 2024, respectively, compared to the prior year periods, primarily due to an increase in product shipments, partially offset by decreases in product warranty reserves and inventory reserves.

Service cost of revenue increased 14.0% and 14.8% for the three and six months ended June 30, 2024, respectively, compared to the prior year periods, primarily due to service revenue growth as a result of the increase in cumulative paid accounts, partially offset by cost optimizations.

### Gross Profit

*(In thousands, except percentage data)*

| Gross profit: | Three Months Ended June 30, 2024 | % Change | July 2, 2023 | Six Months Ended June 30, 2024 | % Change | July 2, 2023 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Products | $1,150 | (73.3)% | $4,303 | $5,419 | (26.0)% | $7,322 |
| Services | 45,704 | 21.7% | 37,555 | 88,815 | 27.3% | 69,753 |
| Total gross profit | $46,854 | 11.9% | $41,858 | $94,234 | 22.3% | $77,075 |
| Gross margin percentage: |  |  |  |  |  |  |
| Products | 1.7% |  | 6.6% | 4.0% |  | 5.6% |
| Services | 75.8% |  | 74.6% | 75.9% |  | 74.0% |
| Total gross margin | 36.8% |  | 36.4% | 37.4% |  | 34.1% |

Product gross profit decreased $3.2 million and $1.9 million for the three and six months ended June 30, 2024, respectively, compared to the prior year periods, primarily driven by a reduction in the ASPs of our products as we increased promotional activities to stimulate household acquisition and subscriber growth. The product gross profit decrease was partially offset by decreases in product warranty reserves and inventory reserves due to subsequent sale of the related inventory units.

Service gross profit increased $8.1 million and $19.1 million for the three and six months ended June 30, 2024, respectively, compared to the prior year periods, primarily due to service revenue growth in all regions as a result of increases in cumulative paid accounts and cost optimizations.

### 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.

*(In thousands, except percentage data)*

|  | Three Months Ended June 30, 2024 | % Change | July 2, 2023 | Six Months Ended June 30, 2024 | % Change | July 2, 2023 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Research and development expense | $19,561 | 11.0% | $17,618 | $40,354 | 14.1% | $35,368 |

Research and development expense increased by $1.9 million for the three months ended June 30, 2024 compared to the prior year period, primarily due to increases of $1.7 million in personnel-related expenses mainly from stock-based compensation and merit increases and $0.4 million in professional services.

Research and development expense increased by $5.0 million for the six months ended June 30, 2024 compared to the prior year period, primarily due to increases of $3.9 million in personnel-related expenses mainly from stock-based compensation and merit increases, $0.7 million in professional services, and $0.3 million in corporate IT and facilities overhead.

### Sales and Marketing

Sales and marketing expense consists primarily of personnel expense for sales and marketing staff, technical support expense, advertising, trade shows, media and placement, corporate communications and other marketing expense, product marketing expense, allocated IT and facilities overhead, outbound freight costs, and credit card processing fees. We expect our sales and marketing expense to increase in the future as we invest in marketing to drive demand for our products and services.

*(In thousands, except percentage data)*

|  | Three Months Ended June 30, 2024 | % Change | July 2, 2023 | Six Months Ended June 30, 2024 | % Change | July 2, 2023 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales and marketing expense | $17,698 | 4.6% | $16,921 | $35,068 | 8.7% | $32,274 |

Sales and marketing expense increased $0.8 million for the three months ended June 30, 2024 compared to the prior year period, primarily due to increases of $0.7 million in personnel-related expenses mainly from stock-based compensation and merit increases, $0.4 million in professional services as a result of continued investment in customer experience improvements across customer care and engineering, and $0.3 million in credit card processing fees as a result of increases in Arlo.com store sales and paid subscriber accounts, partially offset by a decrease of $0.4 million in freight-out expenses.

Sales and marketing expense increased $2.8 million for the six months ended June 30, 2024 compared to the prior year period, primarily due to increases of $1.6 million in personnel-related expenses mainly from stock-based compensation and merit increases, $1.4 million in professional services as a result of continued investment in customer experience improvements across customer care and engineering, and $0.5 million in credit card processing fees as a result of increases in Arlo.com store sales and paid subscriber accounts, partially offset by a decrease of $0.6 million in freight-out expenses.

### General and Administrative

General and administrative expense consists primarily of personnel-related expense for certain executives, finance and accounting, investor relations, human resources, legal, information technology, professional fees, allocated IT and facilities overhead, strategic initiative expense, and other general corporate expense. We expect our general and administrative expense to fluctuate as a percentage of our revenue in future periods based on fluctuations in our revenue and the timing of such expense.

*(In thousands, except percentage data)*

|  | Three Months Ended June 30, 2024 | % Change | July 2, 2023 | Six Months Ended June 30, 2024 | % Change | July 2, 2023 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| General and administrative expense | $21,430 | 42.8% | $15,007 | $40,778 | 33.1% | $30,629 |

General and administrative expense increased $6.4 million for the three months ended June 30, 2024 compared to the prior year period, primarily due to increases of $5.4 million in personnel-related expenses mainly from stock-based compensation due to the achievement of performance-based awards target and $0.9 million in professional services.

General and administrative expense increased $10.1 million for the six months ended June 30, 2024 compared to the prior year period, primarily due to increases of $7.3 million in personnel-related expenses mainly from stock-based compensation due to the achievement of performance-based awards target and $2.8 million in professional services.

### Others

Others include restructuring charges, which consist of severance costs, office exit expense, and other exit expense associated with the abandonment of certain lease contracts and cancellation of contractual services arrangements with certain suppliers, and separation expense, which consists primarily of costs of legal and professional services.

### Interest Income, Net and Other Income (Loss), Net

*(In thousands, except percentage data)*

|  | Three Months Ended June 30, 2024 | % Change | July 2, 2023 | Six Months Ended June 30, 2024 | % Change | July 2, 2023 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest income, net | $1,495 | 79.0% | $835 | 2,881 | 84.6% | 1,561 |
| Other income (loss), net | $(18) | \*\* | $52 | (43) | \*\* | 13 |

\*\*Percentage change not meaningful.

Interest income, net increased for the three and six months ended June 30, 2024 compared to the prior year periods, primarily due to the increase in our short-term investments as well as higher interest rates.

### Provision for Income Taxes

*(In thousands, except percentage data)*

|  | Three Months Ended June 30, 2024 | % Change | July 2, 2023 | Six Months Ended June 30, 2024 | % Change | July 2, 2023 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Provision for income taxes | $236 | 6.8% | $221 | $631 | (37.7)% | $1,013 |
| Effective tax rate | (2.1)% |  | (3.1)% | (3.1)% |  | (4.9)% |

The effective tax rate for the three and six months ended June 30, 2024 was lower than the U.S. federal income tax rate due to a lower effective tax rate on foreign earnings and valuation allowance on our net U.S. deferred tax assets and certain foreign tax attributes as it is more likely than not that some or all of our deferred tax assets will not be realized.

### Liquidity and Capital Resources

As of June 30, 2024, our cash and cash equivalents and short-term investments totaled $144.0 million and we had unused borrowing capacity of $6.2 million based on the terms and conditions of our revolving credit facility. We have a history of losses and may incur operating and net losses in the future. As of June 30, 2024, our accumulated deficit was $388.7 million. Historically, we have funded our principal business activities through cash flows generated from operations and available cash on hand.

### Material Cash Requirements

We believe that our existing sources of liquidity will be sufficient to meet our anticipated cash requirements for at least the next 12 months and beyond. However, in the future we may require or desire additional funds to support our operating expenses and capital requirements. To the extent that current and anticipated future sources of liquidity are insufficient, we may seek to raise additional funds through public or private equity. We have no commitments to obtain such additional financing and cannot provide assurance that additional financing will be available at all or, if available, that such financing would be obtainable on terms favorable to us and would not be dilutive.

Our future liquidity and cash requirements may vary from those currently planned and will depend on numerous factors, including the introduction of new products, the growth in our service revenue, the ability to increase our gross margin dollars, as well as cost optimization initiatives and controls over our operating expenditures. As we grow our installed base and related cost structure, there will be a need for additional working capital, hence, we increased our subscription rates effective February 3, 2023.

### Leases and Contractual Commitments

Our operating lease obligations mostly include offices, equipment, and distribution centers. Our contractual commitments are primarily inventory-related purchase obligations with suppliers.

### Contingencies

We are involved in disputes, litigation, and other legal actions. We evaluate whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. Significant judgment is required to determine both the probability and the estimated amount of loss. In such cases, we accrue for the amount or, if a range, we accrue the low end of the range, only if there is not a better estimate than any other amount within the range, as a component of legal expense within litigation reserves, net.

Refer to Note 8. *Commitments and Contingencies* in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report for further information about our operating leases, purchase obligations, and legal contingencies.

### Cash Flow

*(In thousands)*

|  | Six Months Ended June 30, 2024 | July 2, 2023 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $26,268 | $22,908 |
| Net cash used in investing activities | (268) | (33,150) |
| Net cash used in financing activities | (20,101) | (11,951) |
| Net cash increase (decrease) | $5,899 | $(22,193) |

31

### Operating activities

Net cash provided by operating activities increased by $3.4 million for the six months ended June 30, 2024 compared to the prior year period, primarily due to improved profitability offset by unfavorable working capital movements as a result of increased inventory purchases, partially offset by higher trade payable balances due to the timing of payments.

### Investing activities

Net cash used in investing activities decreased by $32.9 million for the six months ended June 30, 2024 compared to the prior year period, primarily due to lower net purchases of short-term investments and lower purchases of property and equipment.

### Financing activities

Net cash used in financing activities increased by $8.2 million for the six months ended June 30, 2024 compared to the prior year period, primarily due to the increase in withholding tax from restricted stock unit releases and lower proceeds related to employee benefit plans.

### Critical Accounting Policies and Estimates

For a complete description of what we believe to be the critical accounting policies and estimates used in the preparation of our Unaudited Condensed Consolidated Financial Statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes to our critical accounting policies and estimates during the six months ended June 30, 2024, other than as discussed in Note 2. *Significant Accounting Policies and Recent Accounting Pronouncements,* in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report.

## Market risk

As filed, 270 characters.

During the six months ended June 30, 2024, there were no material changes to our market risk disclosures as set forth in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2023.

## Controls and procedures

As filed, 4,784 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), has evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on this evaluation, our management, including our CEO and our CFO, has concluded that, due to the material weakness described below, our disclosure controls and procedures were not effective as of June 30, 2024 at a reasonable assurance level. A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within an organization have been detected.

Notwithstanding the material weakness in our internal control over financial reporting described below, our management believes that the unaudited condensed consolidated financial statements and related financial information included in this Quarterly Report for the six months ended June 30, 2024 fairly present in all material respects our financial condition, results of operations and cash flows as of the dates presented, and for the periods ended on such dates, in conformity with accounting principles generally accepted in the United States of America.

### Previously Reported Material Weaknesses

As reported in Part II, Item 9A. “Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2023, in connection with our assessment of the effectiveness of internal control over financial reporting, our management identified certain control deficiencies in the area of our Information Technology General Control (“ITGC”) related to (i) user access and segregation of duty controls that restrict user and privileged access to appropriate personnel; (ii) program change management controls; and (iii) certain computer operations controls that, when aggregated, arise to a material weakness.

Management is committed to remediating the material weakness in a timely manner. Our remediation process includes, but is not limited to: (i) increasing timely reviews of information technology system changes made; (ii) rationalizing access privileges for developer system users; (iii) implementing or modifying controls related to program change management and certain computer operations; and (iv) training of relevant personnel on the design and operation of any new or modified ITGCs. These steps are subject to ongoing management review, as well as oversight by the audit committee of our board of directors.

### Status of Remediation Efforts

Management has implemented measures designed to remediate the material weakness in fiscal year 2024. The remedial measures implemented include but are not limited to:

- Implementation of a software solution to identify and facilitate review of changes made to our Enterprise Resource Planning (“ERP”) system via newly designed detective controls to supplement our existing preventative controls.
- Implementation of a tool to better monitor access via a secure gateway to our operating systems, as well as better management of credentials across all financially impactful applications and the underlying infrastructure managed internally.
- Enhancement of our user access review procedures to increase precision.
- Reduction of elevated access within our ERP system.
- Redesign and implementation of ITGCs and deployment of additional trainings to further mature the overall control environment.

We have substantially implemented the remedial measures described above relating to the control deficiencies associated with the previously identified material weakness within the IT function. We believe that upon completion of such measures, we will have strengthened our ITGCs to address and successfully remediate the identified material weakness. However, the material weakness will not be considered remediated until the applicable remediated controls are fully implemented and have operated for a sufficient period of time and management has concluded, through formal testing, that these controls are operating effectively. We expect to continue to assess their operating effectiveness throughout fiscal 2024.

### Changes in Internal Control over Financial Reporting

Other than the ongoing remediation efforts described above, there were no changes in our internal control over financial reporting during the six months ended June 30, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 569 characters.

Our business, reputation, results of operations and financial condition, as well as the price of our stock, can be affected by a number of factors, whether currently known or unknown, including those described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023 under the heading “Risk Factors.” During the six months ended June 30, 2024, there have been no significant changes to the risk factors under the heading “Risk Factors” described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023.

Filed Aug 8, 2024.
Source: SEC EDGAR, the filing index for accession 0001736946-24-000035. Last ingested by Listed: Nov 10, 2026, 19:05 ET. No prices; not investment advice.