While it's still an overstatement to say that the IPO market
has gone cold, it is fair to say that conditions have notably softened over the
past couple of weeks. As you may recall, Sonos' (SONO) IPO yesterday priced
well below expectations at $15 vs. the $17-$19 projected range, which followed
three deals that were cut in size last week (CANG, BRY, JG).
And now, today, we have Arlo Technologies' (ARLO) 10.2 mln share IPO pricing weakly at $16 vs. the $18-$20 expected range. While SONO's disappointing preliminary Q2 results -- provided in its IPO prospectus -- could have been blamed for the poor pricing, the same can't be said of ARLO. In fact, its Q2 results are quite strong, as we discuss in more detail below. So, in other words, this lends more evidence to the idea that the IPO market is showing some signs of cracking.
As for ARLO's IPO, it generated $163.4 mln in gross proceeds, which is about 16% less than it had anticipated. The lead underwriters on the deal were BofA Merrill Lynch, Deutsche Bank, and Guggenheim. Shares opened for trading earlier this morning on the NYSE at $18.50.
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.
In its IPO prospectus, the company provided some preliminary
results for the three months ended July 1, 2018. Specifically, it is
anticipating revenue of $107-$112 mln, representing solid year/year growth of
38% at the mid-point of the guidance. It is also expecting gross margin to
improve to 25-26% compared to 21.1% in the year-ago period, although that would
be down from last quarter's 28.9% mark.
Taking a look at its FY17 results, revenue doubled year/year to $370.7 mln. The expansion of its sales channels, the rapid expansion of the consumer network connected camera systems market, the continued sales of its Arlo Pro camera launched in 3Q16 and the launch of its Arlo Pro 2 camera in 4Q17 contributed significantly to the revenue increase.
Gross margin also expanded sharply last year to 24.6% from 20.6% due to effective product cost reduction and growth in paid subscription service revenue compared to the prior year.
As a result of the strong top-line growth and significant improvement in margins, operating income improved dramatically, coming in at $5.7 mln versus a loss of ($13.1) mln in FY16.