Recent IPO and Netgear spin-off Arlo Technologies (ARLO 21.91, -1.17, -5.07%) has been
on quite a ride over the past week, surging by about 20% to hit new highs
yesterday. That move came ahead of this morning’s two key events for the company: its Q2
earnings report and the expiration of the 25-day quiet period. Given the sharp
run-up in the stock, it's clear investors were expecting these to translate
into bullish catalysts for the stock.
Whether that will be the case remains to be seen, as the news overall was rather mixed for ARLO. As we discuss in more detail below, its Q2 results were in-line with the guidance it provided in its IPO prospectus, but, its net loss was wider than consensus. Also, the analyst initiations today were skewed more towards the cautious side.
Before discussing today's events in more detail, here is some more background on the company:
ARLO, which is a spin-off from networking equipment maker Netgear (NTGR), is an Internet of Things (IoT) play selling wireless security cameras, baby cameras, powered cameras, and lights. The company launched its first product in December 2014 and has since shipped over 7.5 mln smart connected devices.
The company mainly sells its devices through retail, wholesale distribution, and wireless carrier channels. Here is a closer look at its key products:
- Arlo Security Camera: A 100% battery-operated Wi-Fi security camera that is weather resistant with night vision capability.
- Arlo Q and Arlo Q Plus: Indoor wireless cameras with 1080p HD video quality.
- Arlo Go: LTE-enabled wire-free camera with two-way audio and rechargeable batteries.
- Arlo Baby: Camera with smart features such as air quality, temperature sensors, motion and audio detectors, and advanced night vision.
- Arlo Audio Doorbell and Chime: Standalone smart audio products that can also be paired with any Arlo camera for complete view of an entryway.
Supporting its devices is its cloud-based platform that enables users to monitor their environments and engage in real-time with people from any location with a Wi-Fi or cellular network connection. This is offered through a paid-subscription service through in-app purchases, providing ARLO with a recurring revenue base. As of April 1, 2018, its platform had over 1.9 mln registered users across more than 100 countries.
This morning, ARLO issued its Q2 results, its first quarterly report since going public on August 3. As noted above, the company did provide preliminary Q2 results in its IPO prospectus, so, much of the surprise factor was already taken out of the equation. Specifically, revenue jumped by 40% year/year to $110.9 mln, in-line with its guidance of $117-$112 mln. The primary driver for its growth was the launch and roll-out of its Arlo Pro 2 camera, which it began marketing in 4Q17. Overall, devices shipped increased by 32% to 1.04 mln while registered users for its cloud-based monitoring platform soared by 103% to 2.2 mln.
Gross margin came in at 25.5%, right inline with its 25-26% expectation. This was up from the 21.1% figure in 2Q17, benefiting from favorable product mix -- particularly the launch of the Arlo Pro 2 camera.
Despite the strong revenue growth and improvement in margin, ARLO posted a GAAP new loss of ($0.29)/share, below the ($0.24) consensus, and sharply lower from the ($0.03) in the year ago period. However, a sizable portion of the loss was due to non-recurring separation costs from Netgear, totaling $11.3 mln in the quarter. ARLO also communicated in its prospectus that this would be the case, stating it expects losses to continue to increase in the second half of the year as it incurs costs to establish procedures and practices that will enable it to operate as a stand-alone public company. Furthermore, it expects the most significant component of these costs to be IT-related costs.
On a positive note, its cash flow from operating activities improved significantly to ($2.7) mln from ($15.6) mln in 2Q17.
Quiet Period Expiration
By far, the most bullish firm on ARLO is Imperial Capital, which initiated the stock with an Outperform and $39 target, a good 70% higher from the current price. The firm's thesis is based on the company being a category leader for DIY connected cameras in North America retail, with growing computer vision and AI capabilities. As such, they value Arlo's product sales at a premium to the traditional non-sophisticated connected camera providers, and the traditional alarm monitoring companies.
Deutsche Bank was also bullish on the stock, assigning it a Buy rating and $28 target.
However, there are a few more cautious notes that may offset these positive calls. Namely, BofA Merrill initiated it with a Neutral and $24 target, while Guggenheim also put a Neutral on the stock, with a $26 target. Rounding it out, Raymond James went with a Market Perform on the stock.
To conclude, ARLO has rocketed higher over the past several days in anticipation of these news events. With the strong rally, it isn't overly surprising that analysts took a more cautious tone on the stock. Overall, its Q2 results demonstrated that there is good momentum underlying its business, as shown by the 40% top-line growth and improvement in cash flow. Given the rally ahead of the print, it would not be surprising to see some profit-taking unfold.