Arlo Technologies, Inc. - ARLO
Q3 2023 update
Thought I would put forward a couple of thoughts on ARLO’s Q3 2023 report from yesterday.
First, the headlines say there was a beat on the top and bottom line. The company released their “Essential 2” camera (2nd generation Essential camera) during the quarter, and there appears to be a certain amount of channel fill in the product revenues number.
“We ramped our production to 800,000 units across more than 40 SKUs in less than 8 weeks in order to support a robust holiday sales plan in collaboration with our channel partners. This strong execution contributed to our Q3 revenue of $130 million, which is at the high-end of our guidance range.”
Worldwide, they say they shipped 1.3M cameras during the quarter, up from 954K in Q2 and even up from 1.2M in Q3 2022. Product revenues and volumes have been trending down between 10-20% over the past year or more, which makes me believe some channel fill helped it out. We’ll see if the introduction of Gen 2 leads to some discounting on Gen 1.
The company is also now up to $37M in stock-based compensation for the year, and getting rid of that on a non-GAAP basis always makes that number look a bit better. They’re basically diluting shareholders around 5% or so a year currently.
Second, the all-important “services” revenue was up less than $1M sequentially to $51.0M from $50.3M, and if their guidance proves to be correct, it will only be slightly higher in Q4.
“Service revenue is still forecasted to grow at approximately 45% over last year…”
Last year’s Q4 number was $38.3M so Q4 2023 should be around $51.4M if the CFO is right.
Third, despite a flat services number, the company claims to have added 197K paid accounts during the quarter, of which only 10k-15k are “catch-up” additions from Verisure. Last quarter you will recall the company added 245K paid accounts but about 60K of those were supposedly “catch up” accounts due to some firmware update that apparently didn’t quite register.
Fourth, the last 2 points seem to be in conflict with each other. How can you add 185K paid subscribers in a quarter and not increase your services revenues? How can you add 370K paid subscribers in 2 quarters and show no increase to your services revenues? It would seem to be a fairly easy thing to model, but for some reason it is proving to be anything but. If the company adds 200K subs in a quarter and they are each paying $10/month on average, then in the following quarter that should be an additional $6M worth of services revenues.
If you go back a few quarters, this appeared to be the way it worked. Q2 2023 services revenues were about $7M higher than Q1 which were $5M higher than Q4 which were $3M higher than Q3 which were $3M higher than Q2 and $3M higher than Q1 and on and on. There had been a steady progression. Each quarter prior to those increases the company added around 190K or so subscribers. Now, in Q1-Q2 2023 there was a bigger jump because the company instituted a price increase, but otherwise the $3M sequential bumps were fairly regular with the increase in their paid subscriber base, and given the price increase that number should be even higher today. For some reason, that relationship has broken down.
Fifth, the concerns over Verisure continue to hold true. Verisure was maybe 33% of overall revenues in Q3, up from 27% in Q2, but down from 44% in Q1. Their “commitment” increased by $35.8M in the quarter while the backlog declined to $25.9M, which, if the past couple of quarters holds true, should be about the level of product that Verisure takes in Q4. Add something over $7M in services revenues to that, and the combined $33M EMEA revenues would be roughly $6M less than the year ago period. If that holds true, then for them to hit their targeted revenue range of $129-$139M, either the USA is going to have to put forward a fairly huge year over year increase, or the APAC is going to need an even bigger increase.
Sixth, the company rolled out an “Arlo Total Security” package yesterday as well. For either $9.99, $19.99, or $49.99 a month you can have your home professionally monitored with all of the equipment included. The cheap package basically gives you a motion sensor in the home and a keypad while the higher end adds in some cameras to the package. The company says on their call that they get the full amount of the equipment up front, and that after 36 months they get some sort of services revenue fee. Who is taking the credit risk on all the signups? Yep, the folks at AFRM (Affirm Holdings). Taking a look at their short interest tells you all you need to know.
With a slightly different business model, this might actually be a fairly decent little business. Until they announced that “total security” package I was thinking they may actually decide to tweak it at some point and go for profitability. Now I’m not so sure.