Delaware | 38-4061754 | |
(State or other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) | |
350 East Plumeria Drive San Jose, California 95134 | 95134 | |
(Address of principal executive offices) | (Zip Code) |
Large Accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-Accelerated filer | x | Smaller reporting company | ¨ | |||
Emerging growth company | x | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ¨ |
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
Item 1. | Financial Statements |
As of | |||||||
September 30, 2018 | December 31, 2017 | ||||||
(In thousands) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 148,073 | $ | 108 | |||
Short-term investments | 39,773 | — | |||||
Accounts receivable, net | 117,119 | 157,680 | |||||
Receivables from NETGEAR | 27,588 | — | |||||
Inventories | 132,479 | 82,952 | |||||
Prepaid expenses and other current assets | 9,529 | 3,018 | |||||
Total current assets | 474,561 | 243,758 | |||||
Property and equipment, net | 39,610 | 3,883 | |||||
Intangibles, net | 3,204 | 4,348 | |||||
Goodwill | 15,638 | 15,638 | |||||
Other non-current assets | 10,198 | 2,193 | |||||
Total assets | $ | 543,211 | $ | 269,820 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 49,947 | $ | 20,711 | |||
Payables to NETGEAR | 15,204 | — | |||||
Deferred revenue | 26,514 | 34,072 | |||||
Accrued liabilities | 104,519 | 76,097 | |||||
Income tax payable | 199 | — | |||||
Total current liabilities | 196,383 | 130,880 | |||||
Non-current deferred revenue | 19,392 | 13,332 | |||||
Non-current financing lease obligation | 20,639 | — | |||||
Non-current income taxes payable | 22 | 189 | |||||
Other non-current liabilities | 1,066 | — | |||||
Total liabilities | 237,502 | 144,401 | |||||
Commitments and contingencies (Note 11) | |||||||
Stockholders’ Equity: | |||||||
Preferred stock: $0.001 par value; 50,000,000 shares authorized; none issued or outstanding | — | — | |||||
Common stock: $0.001 par value; 500,000,000 shares authorized; shares issued and outstanding: 74,247,250 as of September 30, 2018 and none as of December 31, 2017 | 74 | — | |||||
Additional paid-in capital | 312,397 | — | |||||
Accumulated other comprehensive income | 14 | — | |||||
Net parent investment | — | 125,419 | |||||
Accumulated deficit | (6,776 | ) | — | ||||
Total stockholders’ equity | 305,709 | 125,419 | |||||
Total liabilities and stockholders’ equity | $ | 543,211 | $ | 269,820 |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2018 | October 1, 2017 | September 30, 2018 | October 1, 2017 | ||||||||||||
(In thousands, except per share data) | |||||||||||||||
Revenue | $ | 131,174 | $ | 104,887 | $ | 342,760 | $ | 245,884 | |||||||
Cost of revenue | 101,427 | 76,535 | 255,666 | 184,467 | |||||||||||
Gross profit | 29,747 | 28,352 | 87,094 | 61,417 | |||||||||||
Operating expenses: | |||||||||||||||
Research and development | 16,100 | 8,289 | 41,929 | 24,886 | |||||||||||
Sales and marketing | 12,843 | 9,983 | 37,123 | 23,067 | |||||||||||
General and administrative | 8,357 | 4,337 | 19,553 | 10,426 | |||||||||||
Separation expense | 5,823 | — | 23,649 | — | |||||||||||
Total operating expenses | 43,123 | 22,609 | 122,254 | 58,379 | |||||||||||
Income (loss) from operations | (13,376 | ) | 5,743 | (35,160 | ) | 3,038 | |||||||||
Interest income | 503 | — | 503 | — | |||||||||||
Other income (expense), net | (129 | ) | 716 | (923 | ) | 1,649 | |||||||||
Income (loss) before income taxes | (13,002 | ) | 6,459 | (35,580 | ) | 4,687 | |||||||||
Provision for income taxes | 223 | 445 | 830 | 801 | |||||||||||
Net income (loss) | $ | (13,225 | ) | $ | 6,014 | $ | (36,410 | ) | $ | 3,886 | |||||
Net income (loss) per share: | |||||||||||||||
Basic | $ | (0.19 | ) | $ | 0.10 | $ | (0.56 | ) | $ | 0.06 | |||||
Diluted | $ | (0.19 | ) | $ | 0.10 | $ | (0.56 | ) | $ | 0.06 | |||||
Weighted average shares used to compute net income (loss) per share: | |||||||||||||||
Basic | 69,600 | 62,500 | 64,867 | 62,500 | |||||||||||
Diluted | 69,600 | 62,500 | 64,867 | 62,500 |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2018 | October 1, 2017 | September 30, 2018 | October 1, 2017 | ||||||||||||
(In thousands) | |||||||||||||||
Net income (loss) | $ | (13,225 | ) | $ | 6,014 | $ | (36,410 | ) | $ | 3,886 | |||||
Other comprehensive income, before tax: | |||||||||||||||
Unrealized gain on derivative instruments | 20 | — | 20 | — | |||||||||||
Unrealized loss on available-for-sale securities | (4 | ) | — | (4 | ) | — | |||||||||
Total other comprehensive income, before tax | 16 | — | 16 | — | |||||||||||
Tax provision related to derivative instruments | (3 | ) | — | (3 | ) | — | |||||||||
Tax benefit related to available-for-sale securities | 1 | — | 1 | — | |||||||||||
Total other comprehensive income, net of tax | 14 | — | 14 | — | |||||||||||
Comprehensive income (loss) | $ | (13,211 | ) | $ | 6,014 | $ | (36,396 | ) | $ | 3,886 |
Common Stock | ||||||||||||||||||||||||||
Shares | Amount | Additional Paid-In Capital | Net Parent Investment | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total | ||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||
Balance as of December 31, 2016 | — | $ | — | $ | — | $ | 73,174 | $ | — | $ | — | $ | 73,174 | |||||||||||||
Net income | — | — | — | 6,549 | — | — | 6,549 | |||||||||||||||||||
Net transfer from Parent | — | — | — | 43,245 | — | — | 43,245 | |||||||||||||||||||
Stock-based compensation expense funded by NETGEAR | — | — | — | 2,451 | — | — | 2,451 | |||||||||||||||||||
Balance as of December 31, 2017 | — | $ | — | $ | — | $ | 125,419 | $ | — | $ | — | $ | 125,419 | |||||||||||||
Cumulative-effect adjustment from adoption of ASC 606, net of tax | — | — | — | (3,061 | ) | — | — | (3,061 | ) | |||||||||||||||||
Net loss, prior to the completion of the Contribution | — | — | — | (29,634 | ) | — | — | (29,634 | ) | |||||||||||||||||
Net loss, after the completion of the Contribution | — | — | — | — | — | (6,776 | ) | (6,776 | ) | |||||||||||||||||
Issuance of common stock from initial public offering | 11,747 | 12 | 174,725 | — | — | 174,737 | ||||||||||||||||||||
Initial public offering costs paid by the Company | (1,404 | ) | (1,404 | ) | ||||||||||||||||||||||
Initial public offering costs paid by NETGEAR | (3,148 | ) | (3,148 | ) | ||||||||||||||||||||||
Net transfer from Parent | — | — | — | 44,164 | — | — | 44,164 | |||||||||||||||||||
Conversion of Net parent investment into common stock | 62,500 | 62 | 139,645 | (139,645 | ) | — | — | 62 | ||||||||||||||||||
Stock-based compensation expense funded by NETGEAR | — | — | — | 2,757 | — | — | 2,757 | |||||||||||||||||||
Stock-based compensation expense post-initial public offering | — | — | 2,579 | — | — | — | 2,579 | |||||||||||||||||||
Change in unrealized gains and losses on available-for-sale securities, net of tax | — | — | — | — | (3 | ) | — | (3 | ) | |||||||||||||||||
Change in unrealized gains and losses on derivatives, net of tax | — | — | — | — | 17 | — | 17 | |||||||||||||||||||
Balance as of September 30, 2018 | 74,247 | $ | 74 | $ | 312,397 | $ | — | $ | 14 | $ | (6,776 | ) | $ | 305,709 |
Nine Months Ended | |||||||
September 30, 2018 | October 1, 2017 | ||||||
(In thousands) | |||||||
Cash flows from operating activities: | |||||||
Net income (loss) | $ | (36,410 | ) | $ | 3,886 | ||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | |||||||
Depreciation and amortization | 3,406 | 2,811 | |||||
Stock-based compensation | 5,336 | 1,855 | |||||
Deferred income taxes | (438 | ) | (220 | ) | |||
Premium amortization / discount accretion on investments, net | (3 | ) | — | ||||
Changes in assets and liabilities: | |||||||
Accounts receivable, net | (69,724 | ) | (12,292 | ) | |||
Receivables from NETGEAR | (24,611 | ) | — | ||||
Inventories | (50,009 | ) | (27,465 | ) | |||
Prepaid expenses and other assets | (6,845 | ) | (202 | ) | |||
Accounts payable | 53,717 | (2,398 | ) | ||||
Payables to NETGEAR | 14,137 | — | |||||
Deferred revenue | 7,169 | 13,914 | |||||
Accrued liabilities | 57,823 | 14,021 | |||||
Income taxes payable | 143 | 1,018 | |||||
Net cash used in operating activities | (46,309 | ) | (5,072 | ) | |||
Cash flows from investing activities: | |||||||
Purchases of property and equipment | (10,854 | ) | (2,182 | ) | |||
Purchases of short-term investments | (39,774 | ) | — | ||||
Payments made in connection with business acquisition, net of cash acquired | — | (737 | ) | ||||
Net cash used in investing activities | (50,628 | ) | (2,919 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from initial public offering, net of offering costs | 173,395 | — | |||||
Net investment from parent | 71,507 | 7,950 | |||||
Net cash provided by financing activities | 244,902 | 7,950 | |||||
Net increase (decrease) in cash and cash equivalents | 147,965 | (41 | ) | ||||
Cash and cash equivalents, at beginning of period | 108 | 220 | |||||
Cash and cash equivalents, at end of period | $ | 148,073 | $ | 179 | |||
Non-cash investing and financing activities: | |||||||
Purchases and transfers of property and equipment | $ | 5,279 | $ | 574 | |||
Estimated fair value of a facility under build-to-suit lease | $ | 21,858 | $ | — |
Note 1. | The Company and Basis of Presentation |
Note 2. | Summary of Significant Accounting Policies |
As of | Adjustments | As of | |||||||||
December 31, 2017 | January 1, 2018 | ||||||||||
(In thousands) | |||||||||||
Assets: | |||||||||||
Accounts receivable, net | $ | 157,680 | $ | 827 | $ | 158,507 | |||||
Inventories | $ | 82,952 | $ | (377 | ) | $ | 82,575 | ||||
Other non-current assets | $ | 2,193 | $ | 244 | $ | 2,437 | |||||
Liabilities: | |||||||||||
Accounts payable | $ | 20,711 | $ | (48 | ) | $ | 20,663 | ||||
Deferred revenue | $ | 34,072 | $ | (9,326 | ) | $ | 24,746 | ||||
Accrued liabilities | $ | 76,097 | $ | 13,370 | $ | 89,467 | |||||
Non-current deferred revenue | $ | 13,332 | $ | (241 | ) | $ | 13,091 | ||||
Equity: | |||||||||||
Net parent investment | $ | 125,419 | $ | (3,061 | ) | $ | 122,358 |
As reported | Adjustments | Balance without adoption of ASC 606 | |||||||||
(In thousands) | |||||||||||
Assets | |||||||||||
Accounts receivable, net | $ | 117,119 | $ | (6,262 | ) | $ | 110,857 | ||||
Inventories | $ | 132,479 | $ | 175 | $ | 132,654 | |||||
Other non-current assets | $ | 10,198 | $ | — | $ | 10,198 | |||||
Liabilities: | |||||||||||
Accounts payable | $ | 49,947 | $ | — | $ | 49,947 | |||||
Deferred revenue | $ | 26,514 | $ | 5,069 | $ | 31,583 | |||||
Accrued liabilities | $ | 104,519 | $ | (21,456 | ) | $ | 83,063 | ||||
Non-current deferred revenue | $ | 19,392 | $ | 1,852 | $ | 21,244 | |||||
Stockholders’ Equity: | |||||||||||
Retained earnings (Accumulated deficit) | $ | (6,776 | ) | $ | 8,448 | $ | 1,672 |
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
As reported | Adjustments | Balance without adoption of ASC 606 | As reported | Adjustments | Balance without adoption of ASC 606 | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Revenue | $ | 131,174 | $ | 3,195 | $ | 134,369 | $ | 342,760 | $ | 5,654 | $ | 348,414 | |||||||||||
Cost of revenue | $ | 101,427 | $ | 172 | $ | 101,599 | $ | 255,666 | $ | 202 | $ | 255,868 | |||||||||||
Gross profit | $ | 29,747 | $ | 3,023 | $ | 32,770 | $ | 87,094 | $ | 5,452 | $ | 92,546 | |||||||||||
Provision for income taxes | $ | 223 | $ | 29 | $ | 252 | $ | 830 | $ | 65 | $ | 895 | |||||||||||
Net loss | $ | (13,225 | ) | $ | 2,994 | $ | (10,231 | ) | $ | (36,410 | ) | $ | 5,387 | $ | (31,023 | ) |
1 year | 2 years | Greater than 2 years | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Performance obligations | $ | 47,793 | $ | 12,434 | $ | 8,174 | $ | 68,401 |
Balance Sheet Location | September 30, 2018 | January 1, 2018(1) | $ change(2) | % change | ||||||||||||
(In thousands) | ||||||||||||||||
Accounts receivable, net | Accounts receivable, net | $ | 117,119 | $ | 158,507 | $ | (41,388 | ) | (26.1 | )% | ||||||
Contract liabilities - current | Deferred revenue | $ | 26,514 | $ | 24,746 | $ | 1,768 | 7.1 | % | |||||||
Contract liabilities - non-current | Non-current deferred revenue | $ | 19,392 | $ | 13,091 | $ | 6,301 | 48.1 | % |
(1) | Includes the adjustments made to those contracts which were not completed at the date of ASC 606 adoption using the modified retrospective method. |
(2) | Accounts receivable, net as of July 1, 2018 were not contributed to Arlo from NETGEAR. Accounts receivable, net as of September 30, 2018 were as a result of sales transactions generated subsequent to July 1, 2018. |
Note 4. | Business Acquisition |
Cash and cash equivalents | $ | 8 | |
Accounts receivable | 11 | ||
Prepaid expenses and other current assets | 130 | ||
Property and equipment | 83 | ||
Intangibles | 6,000 | ||
Goodwill | 3,742 | ||
Accounts payable | (40 | ) | |
Accrued liabilities | (74 | ) | |
Deferred tax liabilities | (308 | ) | |
Total purchase price | $ | 9,552 |
Note 5. | Balance Sheet Components |
As of September 30, 2018 | |||||||||||||||
Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | ||||||||||||
(In thousands) | |||||||||||||||
U.S. treasuries | $ | 39,777 | $ | — | $ | (4 | ) | $ | 39,773 | ||||||
Total short-term investments | $ | 39,777 | $ | — | $ | (4 | ) | $ | 39,773 |
As of | |||||||
September 30, 2018 | December 31, 2017 | ||||||
(In thousands) | |||||||
Gross accounts receivable | $ | 117,119 | $ | 164,157 | |||
Allowance for doubtful accounts | — | (207 | ) | ||||
Allowance for sales returns | — | * | (5,868 | ) | |||
Allowance for price protection | — | * | (402 | ) | |||
Total allowances | — | (6,477 | ) | ||||
Total accounts receivable, net | $ | 117,119 | $ | 157,680 |
As of | |||||||
September 30, 2018 | December 31, 2017 | ||||||
(In thousands) | |||||||
Machinery and equipment | $ | 9,879 | $ | 6,067 | |||
Computer equipment | 4,245 | 50 | |||||
Software | 9,499 | 180 | |||||
Leasehold improvements | 2,590 | 530 | |||||
Furniture and fixtures | 1,043 | 443 | |||||
Construction in progress (1) | 21,858 | — | |||||
Total property and equipment, gross | 49,114 | 7,270 | |||||
Accumulated depreciation and amortization | (9,504 | ) | (3,387 | ) | |||
Total property and equipment, net | $ | 39,610 | $ | 3,883 |
(1) | The Company has a build-to-suit lease arrangement under its headquarters lease in San Jose, California. Refer to Note 11, Commitments and Contingencies, for details of this lease. The construction is expected to be completed in January 2019. |
As of September 30, 2018 | As of December 31, 2017 | ||||||||||||||||||||||
Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Technology | $ | 9,800 | $ | (6,821 | ) | $ | 2,979 | $ | 9,800 | $ | (5,790 | ) | $ | 4,010 | |||||||||
Trademarks and trade names | 1,400 | (1,400 | ) | — | 1,400 | (1,400 | ) | — | |||||||||||||||
Other | 800 | (575 | ) | 225 | 800 | (462 | ) | 338 | |||||||||||||||
Total intangibles, net | $ | 12,000 | $ | (8,796 | ) | $ | 3,204 | $ | 12,000 | $ | (7,652 | ) | $ | 4,348 |
2018 (remaining three months) | $ | 381 | |
2019 | 1,517 | ||
2020 | 1,306 | ||
Total estimated amortization expense | $ | 3,204 |
As of December 31, 2017 | $ | 15,638 | |
As of September 30, 2018 | $ | 15,638 |
As of | |||||||
September 30, 2018 | December 31, 2017 | ||||||
(In thousands) | |||||||
Non-current deferred income taxes | $ | 438 | $ | 865 | |||
Deposits | 6,000 | — | |||||
Other | 3,760 | 1,328 | |||||
Total other non-current assets | $ | 10,198 | $ | 2,193 |
As of | |||||||
September 30, 2018 | December 31, 2017 | ||||||
(In thousands) | |||||||
Sales and marketing | $ | 36,142 | 31,613 | ||||
Sales returns (1) | 33,304 | — | |||||
Warranty obligation (1) | 3,618 | 31,756 | |||||
Accrued employee compensation | 7,969 | 3,184 | |||||
Freight | 2,023 | 3,862 | |||||
Current financing lease obligation (2) | 917 | — | |||||
Other | 20,546 | 5,682 | |||||
Total accrued liabilities | $ | 104,519 | $ | 76,097 |
(1) | Upon adoption of ASC 606 on January 1, 2018, warranty reserve balances totaling $28.7 million were reclassified to sales returns as these liabilities are payable to the Company’s customers and settled in cash or by credit on account. Under ASC 606, these amounts are to be accounted for as sales with right of return. |
(2) | The Company has a build-to-suit lease arrangement under its headquarters lease in San Jose, California. $20.6 million was included in Non-current financing lease obligation on the Company’s unaudited condensed consolidated financial statements as of September 30, 2018. Refer to Note 11, Commitments and Contingencies, for details of this lease. The construction is expected to be completed in January 2019. |
Note 6. | Fair Value Measurements |
As of September 30, 2018 | |||||||||||
Total | Quoted market prices in active markets (Level 1) | Significant other observable inputs (Level 2) | |||||||||
(In thousands) | |||||||||||
Assets: | |||||||||||
Cash equivalents: U.S. treasuries (<90 days) | $ | 10,113 | $ | 10,113 | $ | — | |||||
Available-for-sale securities: U.S. treasuries (1) | 39,773 | 39,773 | — | ||||||||
Foreign currency forward contracts (2) | 272 | — | 272 | ||||||||
Total assets measured at fair value | $ | 50,158 | $ | 49,886 | $ | 272 | |||||
Liabilities: | |||||||||||
Foreign currency forward contracts (3) | $ | 59 | $ | — | $ | 59 | |||||
Total liabilities measured at fair value | $ | 59 | $ | — | $ | 59 |
(1) | Included in Short-term investments on the Company’s unaudited condensed consolidated balance sheets. |
(2) | Included in Prepaid expenses and other current assets on the Company’s unaudited condensed consolidated balance sheets. |
(3) | Included in Accrued liabilities on the Company’s unaudited condensed consolidated balance sheets. |
Note 7. | Derivative Financial Instruments |
Derivative Assets | Balance Sheet Location | September 30, 2018 | Balance Sheet Location | September 30, 2018 | ||||||||
(In thousands) | (In thousands) | |||||||||||
Derivative assets not designated as hedging instruments | Prepaid expenses and other current assets | $ | 248 | Other accrued liabilities | $ | 55 | ||||||
Derivative assets designated as hedging instruments | Prepaid expenses and other current assets | 24 | Other accrued liabilities | 4 | ||||||||
Total | $ | 272 | $ | 59 |
As of September 30, 2018 | Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets | |||||||||||||||||||||||
Gross Amounts of Recognized Assets | Gross Amounts Offset in the Unaudited Condensed Consolidated Balance Sheets | Net Amounts Of Assets Presented in the Unaudited Condensed Consolidated Balance Sheets | Financial Instruments | Cash Collateral Pledged | Net Amount | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
HSBC | $ | 272 | $ | — | $ | 272 | $ | (59 | ) | $ | — | $ | 213 |
As of September 30, 2018 | Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets | |||||||||||||||||||||||
Gross Amounts of Recognized Liabilities | Gross Amounts Offset in the Unaudited Condensed Consolidated Balance Sheets | Net Amounts Of Liabilities Presented in the Unaudited Condensed Consolidated Balance Sheets | Financial Instruments | Cash Collateral Pledged | Net Amount | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
HSBC | $ | 59 | $ | — | $ | 59 | $ | (59 | ) | $ | — | $ | — |
Location and Amount of Gains (Losses) Recognized in Income on Cash Flow Hedges | ||||||||||||||||||||
Three Months Ended September 30, 2018 | Revenue | Cost of revenue | Research and development | Sales and marketing | General and administrative | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Statements of operations | $ | 131,174 | $ | 101,427 | $ | 16,100 | $ | 12,843 | $ | 8,357 | ||||||||||
Gains (losses) on cash flow hedge | $ | 281 | $ | (1 | ) | $ | 2 | $ | (24 | ) | $ | (9 | ) |
Location and Amount of Gains (Losses) Recognized in Income on Cash Flow Hedges | ||||||||||||||||||||
Nine Months Ended September 30, 2018 | Revenue | Cost of revenue | Research and development | Sales and marketing | General and administrative | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Statements of operations | $ | 342,760 | $ | 255,666 | $ | 41,929 | $ | 37,123 | $ | 19,553 | ||||||||||
Gains (losses) on cash flow hedge | $ | 281 | $ | (1 | ) | $ | 2 | $ | (24 | ) | $ | (9 | ) |
Derivatives Not Designated as Hedging Instruments | Location of Gains (Losses) Recognized in Income on Derivative | Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2018 | October 1, 2017 | September 30, 2018 | October 1, 2017 | |||||||||||||||
(In thousands) | ||||||||||||||||||
Foreign currency forward contracts | Other income (expense), net | $ | (57 | ) | $ | — | $ | (57 | ) | $ | — |
Note 8. | Accumulated Other Comprehensive Income (Loss) |
Unrealized gains (losses) on available-for-sale securities | Unrealized gains (losses) on derivatives | Estimated tax benefit (provision) | Total | ||||||||||||
(In thousands) | |||||||||||||||
Balance as of December 31, 2017 | $ | — | $ | — | $ | — | $ | — | |||||||
Other comprehensive income (loss) before reclassifications | (4 | ) | 269 | (2 | ) | 263 | |||||||||
Less: Amount reclassified from accumulated other comprehensive income (loss) | — | 249 | — | 249 | |||||||||||
Net current period other comprehensive income (loss) | (4 | ) | 20 | (2 | ) | 14 | |||||||||
Balance as of September 30, 2018 | $ | (4 | ) | $ | 20 | $ | (2 | ) | $ | 14 |
Accumulated Other Comprehensive Income (Loss) Components | Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | ||||||||||||||||
Gains (Losses) Recognized in OCI - Effective Portion | Gains (Losses) Reclassified from OCI to Income - Effective Portion | Gains (Losses) Recognized in OCI - Effective Portion | Gains (Losses) Reclassified from OCI to Income - Effective Portion | Affected Line Item in the Statements of Operations | ||||||||||||||
(In thousands) | ||||||||||||||||||
Gains (losses) on cash flow hedge: | ||||||||||||||||||
Foreign currency contracts | $ | 269 | $ | 281 | $ | 269 | $ | 281 | Revenue | |||||||||
Foreign currency contracts | (1 | ) | (1 | ) | Cost of revenue | |||||||||||||
Foreign currency contracts | 2 | 2 | Research and development | |||||||||||||||
Foreign currency contracts | (24 | ) | (24 | ) | Sales and marketing | |||||||||||||
Foreign currency contracts | (9 | ) | (9 | ) | General and administrative | |||||||||||||
249 | 249 | Total before tax | ||||||||||||||||
— | — | Tax impact * | ||||||||||||||||
$ | 249 | $ | 249 | Total, net of tax |
Note 9. | Net Income (Loss) Per Share |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2018 | October 1, 2017 | September 30, 2018 | October 1, 2017 | ||||||||||||
(In thousands, except per share data) | |||||||||||||||
Numerator: | |||||||||||||||
Net income (loss) | $ | (13,225 | ) | $ | 6,014 | $ | (36,410 | ) | $ | 3,886 | |||||
Denominator: | |||||||||||||||
Weighted average common shares - basic | 69,600 | 62,500 | 64,867 | 62,500 | |||||||||||
Potentially dilutive common share equivalent | — | — | — | — | |||||||||||
Weighted average common shares - dilutive | 69,600 | 62,500 | 64,867 | 62,500 | |||||||||||
Basic net income (loss) per share | $ | (0.19 | ) | $ | 0.10 | $ | (0.56 | ) | $ | 0.06 | |||||
Diluted net income (loss) per share | $ | (0.19 | ) | $ | 0.10 | $ | (0.56 | ) | $ | 0.06 | |||||
Anti-dilutive employee stock-based awards, excluded | 1,929 | — | 643 | — |
Note 10. | Income Taxes |
Note 11. | Commitments and Contingencies |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2018 | October 1, 2017 | September 30, 2018 | October 1, 2017 | ||||||||||||
(In thousands) | |||||||||||||||
Balance at the beginning of the period | $ | 3,487 | $ | 18,000 | $ | 31,756 | $ | 15,949 | |||||||
Reclassified to sales returns upon adoption of ASC 606 | — | — | (28,713 | ) | * | — | |||||||||
Provision for warranty obligation made during the period | 344 | 16,476 | 1,166 | 36,660 | |||||||||||
Settlements made during the period | (213 | ) | (8,985 | ) | (591 | ) | (27,118 | ) | |||||||
Balance at the end of the period | $ | 3,618 | $ | 25,491 | $ | 3,618 | $ | 25,491 |
Note 12. | Employee Benefit Plans |
Number of shares | Weighted Average Exercise Price Per Share | |||||
(In thousands) | (In dollars) | |||||
Outstanding as of August 2, 2018 | — | $ | — | |||
Granted (1) | 3,343 | $ | 16.00 | |||
Outstanding as of September 30, 2018 | 3,343 | $ | 16.00 |
Number of shares | Weighted Average Exercise Price Per Share | |||||
(In thousands) | (In dollars) | |||||
Outstanding as of December 31, 2017 | 78 | $ | 35.56 | |||
Granted | 60 | $ | 70.15 | |||
Exercised | (10 | ) | $ | 19.87 | ||
Expired | (1 | ) | $ | 15.22 | ||
Transferred (1) | 154 | $ | 37.41 | |||
Outstanding as of September 30, 2018 | 281 | $ | 44.87 |
Number of shares | Weighted Average Grant Date Fair Value Per Share | |||||
(In thousands) | (In dollars) | |||||
Outstanding as of August 2, 2018 | — | $ | — | |||
Granted | 60 | $ | 18.51 | |||
Cancelled | (5 | ) | $ | 22.71 | ||
Outstanding as of September 30, 2018 | 55 | $ | 18.17 |
Number of shares | Weighted Average Grant Date Fair Value Per Share | |||||
(In thousands) | (In dollars) | |||||
Outstanding as of December 31, 2017 | 132 | $ | 45.54 | |||
Granted | 335 | $ | 67.22 | |||
Vested | (93 | ) | $ | 41.34 | ||
Cancelled | (3 | ) | $ | 51.69 | ||
Transferred (1) | 166 | $ | 43.71 | |||
Outstanding as of September 30, 2018 | 537 | $ | 59.09 |
(1) | Transferred RSUs are attributable to employees that transferred from other NETGEAR’s divisions. |
Three Months Ended | |||
September 30, 2018 | |||
Expected life (in years) | 6.3 | ||
Risk-free interest rate | 2.86 | % | |
Expected volatility | 40.0 | % | |
Dividend yield | — |
Three Months Ended | Nine Months Ended | ||||||||||||||||||||
Stock Options | ESPP | Stock Options | ESPP | ||||||||||||||||||
September 30, 2018 | October 1, 2017 | September 30, 2018 (1) | October 1, 2017 | September 30, 2018 | October 1, 2017 | September 30, 2018 (1) | October 1, 2017 | ||||||||||||||
Expected life (in years) | 4.4 | NA | NA | 0.5 | 4.4 | 4.4 | 0.5 | 0.5 | |||||||||||||
Risk-free interest rate | 2.79 | % | NA | NA | 1.12 | % | 2.32 | % | 1.65 | % | 1.81 | % | 0.93 | % | |||||||
Expected volatility | 33.5 | % | NA | NA | 31.3 | % | 30.9 | % | 31.6 | % | 37.1 | % | 29.7 | % | |||||||
Dividend yield | — | — | — | — | — | — | — | — |
(1) | Arlo employees have completed their participation into NETGEAR’s ESPP by the end of the second quarter of fiscal 2018. As of September 30, 2018, no shares had been purchased under the 2018 ESPP by Arlo employees, as the program is temporarily suspended until the completion of the Distribution. |
Three Months Ended | |||||||||||||||||||||||
September 30, 2018 | October 1, 2017 | ||||||||||||||||||||||
Direct | Indirect | Total | Direct | Indirect | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Cost of revenue | $ | 236 | $ | — | $ | 236 | $ | 26 | $ | 168 | $ | 194 | |||||||||||
Research and development | 872 | — | 872 | 314 | 125 | 439 | |||||||||||||||||
Sales and marketing | 754 | — | 754 | 163 | 234 | 397 | |||||||||||||||||
General and administrative | 1,575 | — | 1,575 | — | 723 | 723 | |||||||||||||||||
Total stock-based compensation | $ | 3,437 | $ | — | $ | 3,437 | $ | 503 | $ | 1,250 | $ | 1,753 |
Nine Months Ended | |||||||||||||||||||||||
September 30, 2018 | October 1, 2017 | ||||||||||||||||||||||
Direct | Indirect | Total | Direct | Indirect | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Cost of revenue | $ | 336 | $ | 583 | $ | 919 | $ | 74 | $ | 419 | $ | 493 | |||||||||||
Research and development | 2,186 | 396 | 2,582 | 1,545 | 318 | 1,863 | |||||||||||||||||
Sales and marketing | 1,239 | 969 | 2,208 | 236 | 581 | 817 | |||||||||||||||||
General and administrative | 1,575 | 2,100 | 3,675 | — | 1,768 | 1,768 | |||||||||||||||||
Total stock-based compensation | $ | 5,336 | $ | 4,048 | $ | 9,384 | $ | 1,855 | $ | 3,086 | $ | 4,941 |
Note 13. | Segment and Geographic Information |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2018 | October 1, 2017 | September 30, 2018 | October 1, 2017 | ||||||||||||
(In thousands) | |||||||||||||||
United States (U.S.) | $ | 108,236 | $ | 77,370 | $ | 263,798 | $ | 185,347 | |||||||
Americas (excluding U.S.) | 4,613 | 5,064 | 10,455 | 10,009 | |||||||||||
EMEA | 11,760 | 17,433 | 50,416 | 37,662 | |||||||||||
APAC | 6,565 | 5,020 | 18,091 | $ | 12,866 | ||||||||||
Total revenue | $ | 131,174 | $ | 104,887 | $ | 342,760 | $ | 245,884 |
As of | |||||||
September 30, 2018 | December 31, 2017 | ||||||
(In thousands) | |||||||
United States (“U.S.”) | $ | 36,583 | $ | 2,053 | |||
Americas (excluding U.S.) | 212 | 61 | |||||
EMEA | 273 | 1 | |||||
China | 2,157 | 1,702 | |||||
APAC (excluding China) | 385 | 66 | |||||
Total property and equipment, net | $ | 39,610 | $ | 3,883 |
Note 14. | Related Party Transactions |
• | a transition services agreement governing NETGEAR’s provision of various services to the Company, and the Company’s provision of various services to NETGEAR, on a transitional basis (the “transition services agreement”). During the three months ended September 30, 2018, $4.2 million transition services agreement-related costs incurred, which included $0.1 million for cost of revenue, $0.4 million for research and development, $0.9 million for sales and marketing, and $2.8 million for general and administrative expense; |
• | a tax matters agreement with NETGEAR that governs the respective rights, responsibilities and obligations of NETGEAR and Arlo after the completion of the IPO with respect to tax matters (including responsibility for taxes attributable to the Company and its subsidiaries, entitlement to refunds, allocation of tax attributes, preparation of tax returns, control of tax contests and other matters) (the “tax matters agreement”); |
• | an employee matters agreement with NETGEAR that addresses employment, compensation and benefits matters, including the allocation and treatment of assets and liabilities relating to employees and compensation and benefit plans and programs in which the Company’s employees participate prior to the distribution, as well as other human resources, employment and employee benefit matters (the “employee matters agreement”); |
• | an intellectual property rights cross-license agreement with NETGEAR, which governs the Company’s and NETGEAR’s rights, responsibilities and obligations to use NETGEAR and Arlo intellectual property, respectively (the “intellectual property rights cross-license agreement”); and |
• | a registration rights agreement with NETGEAR, pursuant to which the Company granted NETGEAR and its affiliates certain registration rights with respect to Arlo’s common stock owned by them (the “registration rights agreement”). |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Three Months Ended | Nine Months Ended | ||||||||||||||||||||
September 30, 2018 | % Change | October 1, 2017 | September 30, 2018 | % Change | October 1, 2017 | ||||||||||||||||
(In thousands, except percentage data) | |||||||||||||||||||||
Cumulative registered users | 2,498 | 87.5 | % | 1,332 | 2,498 | 87.5 | % | 1,332 | |||||||||||||
Devices shipped | 1,421 | 31.5 | % | 1,081 | 3,402 | 38.2 | % | 2,462 | |||||||||||||
Service revenue | $ | 9,827 | 25.9 | % | $ | 7,803 | $ | 27,082 | 34.7 | % | $ | 20,109 |
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||
September 30, 2018 | October 1, 2017 | September 30, 2018 | October 1, 2017 | ||||||||||||||||||||||||
(In thousands, except percentage data) | |||||||||||||||||||||||||||
Revenue | $ | 131,174 | 100.0 | % | $ | 104,887 | 100.0 | % | $ | 342,760 | 100.0 | % | $ | 245,884 | 100.0 | % | |||||||||||
Cost of revenue | 101,427 | 77.3 | % | 76,535 | 73.0 | % | 255,666 | 74.6 | % | 184,467 | 75.0 | % | |||||||||||||||
Gross profit | 29,747 | 22.7 | % | 28,352 | 27.0 | % | 87,094 | 25.4 | % | 61,417 | 25.0 | % | |||||||||||||||
Operating expenses: | |||||||||||||||||||||||||||
Research and development | 16,100 | 12.3 | % | 8,289 | 7.9 | % | 41,929 | 12.2 | % | 24,886 | 10.1 | % | |||||||||||||||
Sales and marketing | 12,843 | 9.8 | % | 9,983 | 9.5 | % | 37,123 | 10.9 | % | 23,067 | 9.5 | % | |||||||||||||||
General and administrative | 8,357 | 6.4 | % | 4,337 | 4.1 | % | 19,553 | 5.7 | % | 10,426 | 4.2 | % | |||||||||||||||
Separation expense | 5,823 | 4.4 | % | — | — | % | 23,649 | 6.9 | % | — | — | % | |||||||||||||||
Total operating expenses | 43,123 | 32.9 | % | 22,609 | 21.5 | % | 122,254 | 35.7 | % | 58,379 | 23.8 | % | |||||||||||||||
Income (loss) from operations | (13,376 | ) | (10.2 | )% | 5,743 | 5.5 | % | (35,160 | ) | (10.3 | )% | 3,038 | 1.2 | % | |||||||||||||
Interest income | 503 | 0.4 | % | — | — | % | 503 | 0.2 | % | — | — | % | |||||||||||||||
Other income (expense), net | (129 | ) | (0.1 | )% | 716 | 0.7 | % | (923 | ) | (0.3 | )% | 1,649 | 0.7 | % | |||||||||||||
Income (loss) before income taxes | (13,002 | ) | (9.9 | )% | 6,459 | 6.2 | % | (35,580 | ) | (10.4 | )% | 4,687 | 1.9 | % | |||||||||||||
Provision for income taxes | 223 | 0.2 | % | 445 | 0.5 | % | 830 | 0.2 | % | 801 | 0.3 | % | |||||||||||||||
Net income (loss) | $ | (13,225 | ) | (10.1 | )% | $ | 6,014 | 5.7 | % | $ | (36,410 | ) | (10.6 | )% | $ | 3,886 | 1.6 | % |
Three Months Ended | Nine Months Ended | ||||||||||||||||||||
September 30, 2018 | % Change | October 1, 2017 | September 30, 2018 | % Change | October 1, 2017 | ||||||||||||||||
(In thousands, except percentage data) | |||||||||||||||||||||
Americas | $ | 112,849 | 36.9 | % | $ | 82,434 | $ | 274,253 | 40.4 | % | $ | 195,356 | |||||||||
Percentage of revenue | 86.0 | % | 78.6 | % | 80.0 | % | 79.5 | % | |||||||||||||
EMEA | $ | 11,760 | (32.5 | )% | $ | 17,433 | $ | 50,416 | 33.9 | % | $ | 37,662 | |||||||||
Percentage of revenue | 9.0 | % | 16.6 | % | 14.7 | % | 15.3 | % | |||||||||||||
APAC | $ | 6,565 | 30.8 | % | $ | 5,020 | $ | 18,091 | 40.6 | % | $ | 12,866 | |||||||||
Percentage of revenue | 5.0 | % | 4.8 | % | 5.3 | % | 5.2 | % | |||||||||||||
Total revenue | $ | 131,174 | 25.1 | % | $ | 104,887 | $ | 342,760 | 39.4 | % | $ | 245,884 |
Three Months Ended | Nine Months Ended | ||||||||||||||||||||
September 30, 2018 | % Change | October 1, 2017 | September 30, 2018 | % Change | October 1, 2017 | ||||||||||||||||
(In thousands, except percentage data) | |||||||||||||||||||||
Cost of revenue | $ | 101,427 | 32.5 | % | $ | 76,535 | $ | 255,666 | 38.6 | % | $ | 184,467 | |||||||||
Gross margin | 22.7 | % | 27.0 | % | 25.4 | % | 25.0 | % |
Three Months Ended | Nine Months Ended | ||||||||||||||||||||
September 30, 2018 | % Change | October 1, 2017 | September 30, 2018 | % Change | October 1, 2017 | ||||||||||||||||
(In thousands, except percentage data) | |||||||||||||||||||||
Research and development expense | $ | 16,100 | 94.2 | % | $ | 8,289 | $ | 41,929 | 68.5 | % | $ | 24,886 |
Three Months Ended | Nine Months Ended | ||||||||||||||||||||
September 30, 2018 | % Change | October 1, 2017 | September 30, 2018 | % Change | October 1, 2017 | ||||||||||||||||
(In thousands, except percentage data) | |||||||||||||||||||||
Sales and marketing expense | $ | 12,843 | 28.6 | % | $ | 9,983 | $ | 37,123 | 60.9 | % | $ | 23,067 |
Three Months Ended | Nine Months Ended | ||||||||||||||||||||
September 30, 2018 | % Change | October 1, 2017 | September 30, 2018 | % Change | October 1, 2017 | ||||||||||||||||
(In thousands, except percentage data) | |||||||||||||||||||||
General and administrative expense | $ | 8,357 | 92.7 | % | $ | 4,337 | $ | 19,553 | 87.5 | % | $ | 10,426 |
Three Months Ended | Nine Months Ended | ||||||||||||||||||
September 30, 2018 | % Change | October 1, 2017 | September 30, 2018 | % Change | October 1, 2017 | ||||||||||||||
(In thousands, except percentage data) | |||||||||||||||||||
Separation expense | $ | 5,823 | ** | $ | — | $ | 23,649 | ** | $ | — |
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2018 | % Change | October 1, 2017 | September 30, 2018 | % Change | October 1, 2017 | ||||||||||
(In thousands, except percentage data) | |||||||||||||||
Interest income | 503 | ** | — | 503 | ** | — | |||||||||
Other income (expense), net | (129 | ) | ** | 716 | (923 | ) | ** | 1,649 |
Three Months Ended | Nine Months Ended | ||||||||||||||||||||
September 30, 2018 | % Change | October 1, 2017 | September 30, 2018 | % Change | October 1, 2017 | ||||||||||||||||
(In thousands, except percentage data) | |||||||||||||||||||||
Provision for income taxes | $ | 223 | (49.9 | )% | $ | 445 | $ | 830 | 3.6 | % | $ | 801 | |||||||||
Effective tax rate | (1.7 | )% | 6.9 | % | (2.3 | )% | 17.1 | % |
Nine Months Ended | |||||||
September 30, 2018 | October 1, 2017 | ||||||
(In thousands) | |||||||
Net cash used in operating activities | $ | (46,309 | ) | $ | (5,072 | ) | |
Net cash used in investing activities | (50,628 | ) | (2,919 | ) | |||
Net cash provided by financing activities | 244,902 | 7,950 | |||||
Net cash increase (decrease) | $ | 147,965 | $ | (41 | ) |
Payments due by period | |||||||||||||||||||
Less Than | 1-3 | 3-5 | More Than | ||||||||||||||||
Total | 1 Year | Years | Years | 5 Years | |||||||||||||||
(In thousands) | |||||||||||||||||||
Operating leases | $ | 10,849 | $ | 2,196 | $ | 4,412 | $ | 3,816 | $ | 425 | |||||||||
Purchase obligations | 44,894 | 44,894 | — | — | — | ||||||||||||||
$ | 55,743 | $ | 47,090 | $ | 4,412 | $ | 3,816 | $ | 425 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Item 4. | Controls and Procedures |
Item 1. | Legal Proceedings |
Item 1A. | Risk Factors |
• | changes in the pricing policies of, or the introduction of new products by, us or our competitors; |
• | introductions of new technologies and changes in consumer preferences that result in either unanticipated or unexpectedly rapid product category shifts; |
• | slow or negative growth in the connected lifestyle, home electronics, and related technology markets; |
• | seasonal shifts in end-market demand for our products; |
• | delays in the introduction of new products by us or market acceptance of these products; |
• | unanticipated decreases or delays in purchases of our products by our significant retailers, distributors, and other channel partners; |
• | component supply constraints from our vendors; |
• | unanticipated increases in costs, including air freight, associated with shipping and delivery of our products; |
• | the inability to maintain stable operations by our suppliers and other parties with whom we have commercial relationships; |
• | discovery of security vulnerabilities in our products, services or systems, leading to negative publicity, decreased demand, or potential liability; |
• | foreign currency exchange rate fluctuations in the jurisdictions where we transact sales and expenditures in local currency; |
• | excess levels of inventory and low turns; |
• | changes in or consolidation of our sales channels and wholesale distributor relationships or failure to manage our sales channel inventory and warehousing requirements; |
• | delay or failure to fulfill orders for our products on a timely basis; |
• | delay or failure of our retailers, distributors, and other channel partners to purchase at their historic volumes or at the volumes that they or we forecast; |
• | changes in tax rates or adverse changes in tax laws that expose us to additional income tax liabilities; |
• | changes in U.S. and international tax policy, including changes that adversely affect customs, tax or duty rates (such as the tariffs on products imported from China recently enacted by the Trump administration), as well as income tax legislation and regulations that affect the countries where we conduct business; |
• | operational disruptions, such as transportation delays or failure of our order processing system, particularly if they occur at the end of a fiscal quarter; |
• | disruptions or delays related to our financial and enterprise resource planning systems; |
• | our inability to accurately forecast product demand, resulting in increased inventory exposure; |
• | allowance for doubtful accounts exposure with our existing retailers, distributors and other channel partners and new retailers, distributors and other channel partners, particularly as we expand into new international markets; |
• | geopolitical disruption, including sudden changes in immigration policies, leading to disruption in our workforce or delay or even stoppage of our operations in manufacturing, transportation, technical support, and research and development; |
• | terms of our contracts with channel partners or suppliers that cause us to incur additional expenses or assume additional liabilities; |
• | an increase in price protection claims, redemptions of marketing rebates, product warranty and stock rotation returns or allowance for doubtful accounts; |
• | litigation involving alleged patent infringement; |
• | epidemic or widespread product failure, or unanticipated safety issues, in one or more of our products; |
• | failure to effectively manage our third-party customer support partners, which may result in customer complaints and/or harm to the Arlo brand; |
• | our inability to monitor and ensure compliance with our code of ethics, our anti-corruption compliance program, and domestic and international anti-corruption laws and regulations, whether in relation to our employees or with our suppliers or retailers, distributors, or other channel partners; |
• | labor unrest at facilities managed by our third-party manufacturers; |
• | workplace or human rights violations in certain countries in which our third-party manufacturers or suppliers operate, which may affect the Arlo brand and negatively affect our products’ acceptance by consumers; |
• | unanticipated shifts or declines in profit by geographical region that would adversely impact our tax rate; |
• | failure to implement and maintain the appropriate internal controls over financial reporting, which may result in restatements of our financial statements; and |
• | any changes in accounting rules. |
• | loss of or delay in revenue and loss of market share; |
• | negative publicity and damage to our reputation and brand; |
• | a decline in the average selling price of our products and services; |
• | adverse reactions in our sales channels, such as reduced shelf space, reduced online product visibility, or loss of sales channels; and |
• | increased levels of product returns. |
• | our channel partner agreements generally do not require minimum purchases; |
• | our retailers, distributors, and other channel partners can stop purchasing and stop marketing our products at any time; and |
• | our channel partner agreements generally are not exclusive. |
• | actual or anticipated fluctuations in our results of operations or our competitors’ operating results; |
• | actual or anticipated changes in the growth rate of the connected lifestyle market, our growth rates or our competitors’ growth rates; |
• | conditions in the financial markets in general or changes in general economic conditions; |
• | changes in governmental regulation, including taxation and tariff policies; |
• | interest rate or currency exchange rate fluctuations; |
• | our ability to forecast or report accurate financial results; and |
• | changes in stock market analyst recommendations regarding our common stock, other comparable companies, or our industry generally. |
• | unexpected increases in manufacturing and repair costs; |
• | inability to control the quality and reliability of finished products; |
• | inability to control delivery schedules; |
• | potential liability for expenses incurred by third-party manufacturers in reliance on our forecasts that later prove to be inaccurate; |
• | potential lack of adequate capacity to manufacture all or a part of the products we require; and |
• | potential labor unrest affecting the ability of the third-party manufacturers to produce our products. |
• | exchange rate fluctuations; |
• | political and economic instability, international terrorism, and anti-American sentiment, particularly in emerging markets; |
• | potential for violations of anti-corruption laws and regulations, such as those related to bribery and fraud; |
• | preference for locally branded products, and laws and business practices favoring local competition; |
• | potential consequences of, and uncertainty related to, the “Brexit” process in the United Kingdom, which could lead to additional expense and complexity in doing business there; |
• | increased difficulty in managing inventory; |
• | delayed revenue recognition; |
• | less effective protection of intellectual property; |
• | stringent consumer protection and product compliance regulations, including but not limited to General Data Protection Regulation in the European Union, European competition law, the Restriction of Hazardous Substances directive, the Waste Electrical and Electronic Equipment directive and the European Ecodesign directive that are costly to comply with and may vary from country to country; |
• | difficulties and costs of staffing and managing foreign operations; |
• | business difficulties, including potential bankruptcy or liquidation, of any of our worldwide third-party logistics providers; and |
• | changes in local tax and customs duty laws or changes in the enforcement, application, or interpretation of such laws. |
• | changes in tax laws or the regulatory environment; |
• | changes in accounting and tax standards or practices; |
• | changes in the composition of operating income by tax jurisdiction; and |
• | our operating results before taxes. |
• | corporate opportunities; |
• | the impact that operating or capital decisions (including the incurrence of indebtedness) relating to our business may have on NETGEAR’s consolidated financial statements and/or current or future indebtedness (including related covenants); |
• | business combinations involving us; |
• | our dividend and stock repurchase policies; |
• | compensation and benefit programs and other human resources policy decisions; |
• | management stock ownership; |
• | the intercompany agreements and services between us and NETGEAR, including the agreements relating to our separation from NETGEAR; |
• | the payment of dividends on our common stock; and |
• | determinations with respect to our tax returns. |
• | tax, employee benefit, indemnification, and other matters arising from the Separation; |
• | the nature, quality, and pricing of services NETGEAR agrees to provide to us; and |
• | sales and other disposals by NETGEAR of all or a portion of its ownership interest in us. |
• | the failure of securities analysts to cover our common stock or changes in financial estimates by analysts; |
• | the inability to meet the financial estimates of securities analysts who follow our common stock or changes in earnings estimates by analysts; |
• | strategic actions by us or our competitors; |
• | announcements by us or our competitors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments; |
• | our quarterly or annual earnings, or those of other companies in our industry; |
• | actual or anticipated fluctuations in our operating results and those of our competitors; |
• | general economic and stock market conditions; |
• | the public reaction to our press releases, our other public announcements and our filings with the SEC; |
• | risks related to our business and our industry, including those discussed above; |
• | changes in conditions or trends in our industry, markets or customers; |
• | the trading volume of our common stock; |
• | future sales of our common stock or other securities; |
• | whether, when, and in what manner NETGEAR completes the Distribution; and |
• | investor perceptions of the investment opportunity associated with our common stock relative to other investment alternatives. |
• | a majority of our board of directors consists of independent directors; |
• | we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and |
• | we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. |
• | the inability of our stockholders to call a special meeting; |
• | the inability of our stockholders to act without a meeting of stockholders, from and after such time as NETGEAR beneficially owns shares of our common stock representing less than a majority of the voting rights of our common stock; |
• | rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings; |
• | the right of our board of directors to issue preferred stock without stockholder approval; |
• | the division of our board of directors into three classes of directors, with each class serving a staggered three-year term, and this classified board provision could have the effect of making the replacement of incumbent directors more time consuming and difficult; |
• | a provision that, from and after such time as NETGEAR beneficially owns shares of our common stock representing less than a majority of the voting rights of our common stock, stockholders may only remove directors with cause while the board of directors is classified; and |
• | the ability of our directors, and not stockholders, to fill vacancies on our board of directors. |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Item 3. | Defaults Upon Senior Securities |
Item 4. | Mine Safety Disclosures |
Item 5. | Other Information |
Item 6. | Exhibits |
Incorporated by Reference | ||||||||||
Exhibit Number | Exhibit Description | Form | Date | Number | Filed Herewith | |||||
8-K | 8/7/2018 | 3.1 | ||||||||
8-K | 8/7/2018 | 3.2 | ||||||||
S-1/A | 7/23/2018 | 4.1 | ||||||||
8-K | 8/7/2018 | 10.1 | ||||||||
8-K | 8/7/2018 | 10.2 | ||||||||
8-K | 8/7/2018 | 10.3 | ||||||||
8-K | 8/7/2018 | 10.4 | ||||||||
8-K | 8/7/2018 | 10.5 | ||||||||
8-K | 8/7/2018 | 10.6 | ||||||||
10.7 * | 8-K | 8/7/2018 | 10.7 | |||||||
10.8 * | 8-K | 8/7/2018 | 10.8 | |||||||
10.9 * | 8-K | 8/7/2018 | 10.9 | |||||||
10.10 * | 8-K | 8/7/2018 | 10.10 | |||||||
10.11 * | 8-K | 8/7/2018 | 10.11 | |||||||
10.12 * | 8-K | 8/7/2018 | 10.12 | |||||||
10.13 * | 8-K | 8/7/2018 | 10.13 | |||||||
10.14 * | 8-K | 8/7/2018 | 10.14 | |||||||
10.15 * | S-1/A | 7/23/2018 | 10.16 | |||||||
10.16 * | 10-Q | 8/27/2018 | 10.17 | |||||||
X | ||||||||||
X | ||||||||||
X | ||||||||||
X | ||||||||||
101.INS | XBRL Instance Document | X | ||||||||
101.SCH | XBRL Taxonomy Extension Schema Document | X | ||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||
* | Indicates management contract or compensatory plan or arrangement. | |||||||||
# | This certification is deemed to accompany this Quarterly Report on Form 10-Q and will not be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liabilities of that section. This certification will not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
ARLO TECHNOLOGIES, INC. |
Registrant |
/s/ MATTHEW MCRAE |
Matthew McRae |
Chief Executive Officer |
(Principal Executive Officer) |
/s/ CHRISTINE M. GORJANC |
Christine M. Gorjanc |
Chief Financial Officer |
(Principal Financial and Accounting Officer) |
1. | I have reviewed this Quarterly Report on Form 10-Q of Arlo Technologies, Inc. (the “Registrant”); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
4. | The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
c. | Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
5. | The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
/s/ MATTHEW MCRAE | |
Matthew McRae | |
Chief Executive Officer | |
Arlo Technologies, Inc. |
1. | I have reviewed this Quarterly Report on Form 10-Q of Arlo Technologies, Inc. (the “Registrant”); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
4. | The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
c. | Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
5. | The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
/s/ CHRISTINE M. GORJANC | |
Christine M. Gorjanc | |
Chief Financial Officer | |
Arlo Technologies, Inc. |
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
By: | /s/ MATTHEW MCRAE | |
Matthew McRae | ||
Chief Executive Officer | ||
Arlo Technologies, Inc. |
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
By: | /s/ CHRISTINE M. GORJANC | |
Christine M. Gorjanc | ||
Chief Financial Officer | ||
Arlo Technologies, Inc. |
Document And Entity Information - shares |
9 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Oct. 19, 2018 |
|
Document And Entity Information [Abstract] | ||
Entity Registrant Name | Arlo Technologies, Inc. | |
Entity Central Index Key | 0001736946 | |
Current Fiscal Year End Date | --12-31 | |
Entity Filer Category | Non-accelerated Filer | |
Document Type | 10-Q | |
Document Period End Date | Sep. 30, 2018 | |
Document Fiscal Year Focus | 2018 | |
Document Fiscal Period Focus | Q3 | |
Amendment Flag | false | |
Entity Common Stock, Shares Outstanding | 74,247,250 |
Unaudited Condensed Consolidated Balance Sheets (Parenthetical) |
Sep. 30, 2018
$ / shares
shares
|
---|---|
Statement of Financial Position [Abstract] | |
Preferred stock, par value (in dollars per share) | $ / shares | $ 0.001 |
Preferred stock, authorized (in shares) | 50,000,000 |
Preferred stock, issued (in shares) | 0 |
Preferred stock, outstanding (in shares) | 0 |
Common stock, par value (in dollars per share) | $ / shares | $ 0.001 |
Common stock, authorized (in shares) | 500,000,000 |
Common stock, issued (in shares) | 74,247,250 |
Common stock, outstanding (in shares) | 74,247,250 |
Unaudited Condensed Consolidated Statements of Operations - USD ($) shares in Thousands, $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2018 |
Oct. 01, 2017 |
Sep. 30, 2018 |
Oct. 01, 2017 |
|
Income Statement [Abstract] | ||||
Revenue | $ 131,174 | $ 104,887 | $ 342,760 | $ 245,884 |
Cost of revenue | 101,427 | 76,535 | 255,666 | 184,467 |
Gross profit | 29,747 | 28,352 | 87,094 | 61,417 |
Operating expenses: | ||||
Research and development | 16,100 | 8,289 | 41,929 | 24,886 |
Sales and marketing | 12,843 | 9,983 | 37,123 | 23,067 |
General and administrative | 8,357 | 4,337 | 19,553 | 10,426 |
Separation expense | 5,823 | 0 | 23,649 | 0 |
Total operating expenses | 43,123 | 22,609 | 122,254 | 58,379 |
Income (loss) from operations | (13,376) | 5,743 | (35,160) | 3,038 |
Interest income | 503 | 0 | 503 | 0 |
Other income (expense), net | (129) | 716 | (923) | 1,649 |
Income (loss) before income taxes | (13,002) | 6,459 | (35,580) | 4,687 |
Provision for income taxes | 223 | 445 | 830 | 801 |
Net income (loss) | $ (13,225) | $ 6,014 | $ (36,410) | $ 3,886 |
Net income (loss) per share: | ||||
Basic (in dollars per share) | $ (0.19) | $ 0.10 | $ (0.56) | $ 0.06 |
Diluted (in dollars per share) | $ (0.19) | $ 0.10 | $ (0.56) | $ 0.06 |
Weighted average shares used to compute net income (loss) per share: | ||||
Basic (in shares) | 69,600 | 62,500 | 64,867 | 62,500 |
Diluted (in shares) | 69,600 | 62,500 | 64,867 | 62,500 |
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2018 |
Oct. 01, 2017 |
Sep. 30, 2018 |
Oct. 01, 2017 |
|
Statement of Comprehensive Income [Abstract] | ||||
Net income (loss) | $ (13,225) | $ 6,014 | $ (36,410) | $ 3,886 |
Other comprehensive income, before tax: | ||||
Unrealized gain on derivative instruments | 20 | 0 | 20 | 0 |
Unrealized loss on available-for-sale securities | (4) | 0 | (4) | 0 |
Total other comprehensive income, before tax | 16 | 0 | 16 | 0 |
Tax provision related to derivative instruments | (3) | 0 | (3) | 0 |
Tax benefit related to available-for-sale securities | 1 | 0 | 1 | 0 |
Total other comprehensive income, net of tax | 14 | 0 | 14 | 0 |
Comprehensive income (loss) | $ (13,211) | $ 6,014 | $ (36,396) | $ 3,886 |
The Company and Basis of Presentation |
9 Months Ended |
---|---|
Sep. 30, 2018 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
The Company and Basis of Presentation | The Company and Basis of Presentation The Company Arlo Technologies, Inc. (“Arlo” or the “Company”) combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that transform the way people experience the connected lifestyle. Its cloud-based platform creates a seamless, end-to-end connected lifestyle solution that provides users visibility, insight and a powerful means to help protect and connect with the people and things that matter most to them. Arlo enables users to monitor their environments and engage in real-time with their families and businesses from any location with a Wi-Fi or a cellular network internet connection. The Company conducts business across three geographic regions - Americas; Europe, Middle-East and Africa (“EMEA”); and Asia Pacific (“APAC”) - and primarily generates revenue by selling devices through retail channels, wholesale distribution and wireless carrier channels and paid subscription services through in-app purchases. On February 6, 2018, NETGEAR Inc. (“NETGEAR”) announced that its board of directors had unanimously approved the pursuit of a separation of its Arlo business from NETGEAR (the “Separation”) to be effected through an initial public offering (the “IPO”) of newly issued shares of the common stock of Arlo, then a wholly owned subsidiary of NETGEAR. Following a series of restructuring steps prior to the completion of the IPO of Arlo common stock, the Arlo business was transferred from NETGEAR to Arlo (collectively, the “Contribution”). On August 2, 2018, NETGEAR and Arlo announced the pricing of the IPO of 10,215,000 shares of Arlo’s common stock at a price to the public of $16.00 per share. On August 3, 2018, Arlo’s shares began trading on the New York Stock Exchange under the ticker symbol “ARLO.” On August 7, 2018, the Company completed its IPO of 11,747,250 shares of common stock (including 1,532,250 shares of common stock pursuant to the underwriters’ option to purchase additional shares, which was exercised in full on August 3, 2018), at $16.00 per share, before underwriting discounts and commissions and estimated offering costs. Cash proceeds from the IPO offering were $173.4 million, net of the portion of the offering cost paid by Arlo, which portion was $1.4 million. The total offering cost was $4.6 million, of which $3.2 million was paid by NETGEAR. Prior to the completion of the IPO, the Company was a wholly owned subsidiary of NETGEAR and upon the closing of the IPO (including the issuance of additional shares of common stock pursuant to the underwriters’ option to purchase additional shares, which was exercised in full) on August 7, 2018, NETGEAR owned approximately 84.2% of the shares of Arlo’s outstanding common stock. NETGEAR has informed the Company that it presently intends to distribute its holdings of Arlo common stock prior to the end of its first quarter of 2019 to NETGEAR’s stockholders in a manner generally intended to qualify as tax-free to NETGEAR stockholders for U.S. federal income tax purposes (the “Distribution”). The Distribution is subject to market, tax and legal considerations, final approval by NETGEAR’s board of directors, and other customary requirements, and NETGEAR may abandon or change the structure of the Distribution if it determines, in its sole discretion, that the Distribution is not in the best interest of NETGEAR or its stockholders. In addition, in connection with the Separation and IPO: •On August 2, 2018, the Company amended and restated its Certificate of Incorporation to change the authorized capital stock to 500,000,000 shares of common stock and 50,000,000 shares of preferred stock, all with a par value of $0.001 per share. •On August 2, 2018, the Company issued 62,499,000 shares of its common stock to the Company’s sole stockholder of record, NETGEAR (after which NETGEAR held 62,500,000 shares of common stock of the Company, which represented all of the then issued and outstanding common stock of the Company). This issuance is reflected in the share and per share amounts for all periods. •On August 1, 2018, the Company reserved 9,000,000 shares of the Company’s common stock for issuance under the Company’s 2018 Equity Incentive Plan (the “2018 Plan”) and the Company’s 2018 Employee Stock Purchase Plan (the “2018 ESPP”). •The Company appointed executive officers and other key roles effective upon the completion of the IPO on August 7, 2018. Effective as of August 2, 2018, the Company also entered into executive confirmatory letters and change in control severance agreements with each of its key executives as well as granted its initial option grants to the Company’s key executives. For further details regarding executive compensation, please refer to the Prospectus (as defined below) in the section titled “Executive Compensation.” Basis of Presentation The unaudited condensed combined financial statements of Arlo that cover periods ending or as of dates prior to the completion of the IPO have been derived and carved out from the consolidated financial statements and accounting records of NETGEAR as if Arlo had operated on a stand-alone basis within the periods presented. In connection with the Separation and IPO, certain assets and liabilities presented have been transferred to Arlo at carry-over (historical cost) basis. Balances contributed by NETGEAR on or before the completion of the IPO were based on the master separation agreement between the Company and NETGEAR and related documents governing the Contribution. NETGEAR’s initial net assets contributed was approximately $80.9 million excluding the Account receivables of $111.1 million and Accounts payable of $25.5 million balances as of July 1, 2018. In addition, NETGEAR contributed approximately $70.0 million in cash in the period leading up to the separation. The net adjustment to the Company’s historical records was reflected as a net investment from parent. Following the completion of the IPO, the unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All periods presented have been accounted for in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and pursuant to the regulations of the U.S. Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated financial statements and accompanying notes should be read in conjunction with the audited combined financial statements and accompanying notes for the year ended December 31, 2017 included in the prospectus filed with the SEC on August 6, 2018 (the “Prospectus”) pursuant to Rule 424(b) under the Securities Act of 1933, as amended. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for fair statement of the unaudited condensed consolidated financial statements for interim periods. The Company has evaluated all subsequent events through the date the financial statements were issued. Cash Management Arlo was historically funded as part of NETGEAR’s treasury program. Cash and cash equivalents were primarily centrally managed through bank accounts legally owned by NETGEAR. Accordingly, prior to the completion of the IPO, Cash and cash equivalents held by NETGEAR at the corporate level were not attributable to Arlo for the periods presented. Only cash amounts legally owned by entities dedicated to the Arlo business are reflected in the unaudited condensed consolidated balance sheets. Following the completion of IPO, the Company has maintained a separate cash management and financing function for its operation. Transfers of cash, both to and from NETGEAR’s treasury program, are reflected as a component of Net parent investment in the unaudited condensed consolidated balance sheets and as a financing activity on the accompanying unaudited condensed consolidated statements of cash flows. Net Parent Investment As the functional departments that make up Arlo were not historically held by a single legal entity, total Net parent investment is shown in lieu of equity in the unaudited condensed consolidated financial statements. Balances between Arlo and NETGEAR that were not historically cash settled are included in Net parent investment as of the completion of the IPO on August 7, 2018. Balances between Arlo and NETGEAR that were historically cash settled are included in Prepaid expenses and other current assets and Accrued liabilities on the unaudited condensed consolidated balance sheets. Net parent investment represents NETGEAR’s interest in the recorded assets of Arlo and represents the cumulative investment by NETGEAR in Arlo through the dates presented, inclusive of operating results. Allocated Expenses The operating results of Arlo have historically been disclosed as a reportable segment within the consolidated financial statements of NETGEAR enabling identification of directly attributable transactional information, functional departments, and headcount. Through July 1, 2018, Revenue and Cost of revenue, with the exception of channel sales incentives, were derived from transactional information specific to Arlo products and services. Directly attributable operating expenses were derived from activities relating to Arlo functional departments and headcount. Arlo employees also historically participated in NETGEAR’s stock-based incentive plans, in the form of restricted stock units (“RSUs”), stock options, and purchase rights issued pursuant to NETGEAR’s employee stock purchase plan. Stock-based compensation expense has been either directly reported by or allocated to Arlo based on the awards and terms previously granted to NETGEAR’s employees. The unaudited condensed combined statements of operations of the Company as presented reflect the directly attributable transactional information specific to Arlo and certain additional allocated costs through July 1, 2018. The allocated costs for corporate functions included, but were not limited to, allocations of general corporate expenses from NETGEAR including expenses related to corporate services, such as executive management, information technology, legal, finance and accounting, human resources, tax, treasury, research and development, sales and marketing, shared facilities and other shared services. These costs were allocated based on revenue, headcount, or other measures the Company has determined as reasonable. Following July 1, 2018, the unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and accounts have been eliminated. Transactions between the Company and NETGEAR are included in these unaudited condensed consolidated financial statements for all periods presented. The amount of these allocations from NETGEAR reflected within operating expenses in the unaudited condensed consolidated statements of operations was $11.0 million for the three months ended October 1, 2017, which included $3.1 million for research and development, $3.6 million for sales and marketing, and $4.3 million for general and administrative expense. The amount of these allocations from NETGEAR was $30.6 million from January 1, 2018 to August 7, 2018, the date of the completion of the Company’s IPO, which included $9.4 million for research and development, $10.0 million for sales and marketing, and $11.2 million for general and administrative expense. Allocations amounted to $27.3 million for the nine months ended October 1, 2017, which included $8.1 million for research and development, $8.8 million for sales and marketing, and $10.4 million for general and administrative expense. The management of Arlo believes the assumptions underlying the unaudited condensed consolidated financial statements, including the assumptions regarding the allocated expenses, reasonably reflect the utilization of services provided, or the benefit received by Arlo through the completion of the IPO within the periods presented. Nevertheless, the unaudited condensed consolidated financial statements may not be indicative of Arlo’s future performance and do not necessarily reflect Arlo's results of operations, financial position, and cash flows had Arlo been a stand-alone company during the periods presented. Income Taxes During the periods presented in the unaudited condensed consolidated financial statements, the operations of Arlo are included in the consolidated U.S. federal, and certain state and local and foreign income tax returns filed by NETGEAR, where applicable. Income tax expense and other income tax related information contained in the unaudited condensed consolidated financial statements are presented on a separate return basis as if Arlo had filed its own tax returns. The income taxes of Arlo as presented in the unaudited condensed consolidated financial statements may not be indicative of the income tax liabilities that Arlo will incur in the future. Additionally, certain tax attributes such as net operating losses or credit carryforwards are presented on a separate return basis, and accordingly, may differ in the future. In jurisdictions where Arlo has been included in the tax returns filed by NETGEAR, any income tax receivables resulting from the related income tax provisions have been reflected in Net parent investment on the unaudited condensed consolidated balance sheets. Further, the unaudited condensed consolidated financial statements may not be indicative of Arlo’s liability for income taxes under the tax matters agreement entered into with NETGEAR in connection with the IPO, under which, for taxable periods (or portions thereof) beginning after July 2, 2018, Arlo is responsible for and has agreed to indemnify NETGEAR for (i) all income taxes imposed with respect to any consolidated, combined, or unitary tax return of NETGEAR or any of its subsidiaries that includes Arlo or any of its subsidiaries to the extent such taxes are attributable to Arlo or any of its subsidiaries, as determined under the tax matters agreement and (ii) all taxes imposed with respect to any of Arlo’s subsidiaries’ consolidated, combined, unitary, or separate tax returns. Fiscal periods The Company’s fiscal year begins on January 1 of the year stated and ends on December 31 of the same year. The Company reports its results on a fiscal quarter basis rather than on a calendar quarter basis. Under the fiscal quarter basis, each of the first three fiscal quarters ends on the Sunday closest to the calendar quarter end, with the fourth quarter ending on December 31. Use of estimates The preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Management bases its estimates on various assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from those estimates and operating results for the nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ended December 31, 2018 or any future period. |
Summary of Significant Accounting Policies |
9 Months Ended |
---|---|
Sep. 30, 2018 | |
Accounting Policies [Abstract] | |
Summary of Significant Accounting Policies | Summary of Significant Accounting Policies There have been no significant changes in the Company’s significant accounting policies from those disclosed in the Prospectus other than the following accounting policies discussed below. Cash and cash equivalents The Company considers all highly liquid investments with an original maturity or a remaining maturity at the time of purchase of three months or less to be cash equivalents. The Company deposits cash and cash equivalents with high credit quality financial institutions. Short-term investments Short-term investments are comprised of marketable securities that consist of government securities with an original maturity or a remaining maturity at the time of purchase of greater than three months and no more than 12 months. The marketable securities are held in the Company’s name with one high quality financial institution, which acts as the Company's custodian and investment manager. These marketable securities are classified as available-for-sale securities in accordance with the provisions of the authoritative guidance for investments and are carried at fair value with unrealized gains and losses reported as a separate component of stockholders' equity. Financial instruments The Company uses foreign currency forward contracts to manage the exposures to foreign exchange risk related to expected future cash flows on certain forecasted revenue, costs of revenue, operating expenses, and on certain existing assets and liabilities. Foreign currency forward contracts generally mature within eleven months of inception. Under its foreign currency risk management strategy, the Company utilizes derivative instruments to reduce the impact of currency exchange rate movements on the Company's operating results by offsetting gains and losses on the forward contracts with increases or decreases in foreign currency transactions. The company does not use derivative financial instruments for speculative purposes. The Company accounts for its derivative instruments as either assets or liabilities and records them at fair value. Derivatives that are not defined as hedges in the authoritative guidance for derivatives and hedging must be adjusted to fair value through earnings. For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in current earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. For derivatives designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in earnings. Fair value measurements The carrying amounts of the Company’s financial instruments, including cash equivalents, short-term investments, accounts receivable, and accounts payable approximate their fair values due to their short maturities. Foreign currency forward contracts are recorded at fair value based on observable market data. Refer to Note 6, Fair Value Measurements, in Notes to Unaudited Condensed Consolidated Financial Statements for disclosures regarding fair value measurements in accordance with the authoritative guidance for fair value measurements and disclosures. Stock-based compensation The Company’s employees have historically participated in NETGEAR’s stock-based compensation plans. Stock-based compensation expense has been allocated to the Company based on the awards and terms previously granted to the Company’s employees as well as an allocation of NETGEAR’s corporate and shared functional employee expenses. The Company measures stock-based compensation at the grant date based on the fair value of the award. The fair value of stock options and the shares offered under the employee stock purchase plan is estimated using the Black-Scholes option pricing model. Estimated compensation cost relating to RSUs is based on the closing fair market value of NETGEAR’s common stock on the date of grant. Equity awards granted by the Company under its own stock-based compensation plans on or after the completion of the IPO are comprised of performance-based stock options (the “PSOs”), stock options, offerings under the Company’s employee stock purchase plan (the “ESPP”), and restricted stock units (“RSUs”). The Company uses the fair value method of accounting for its equity awards granted to employees and measures the cost of employee services received in exchange for the stock-based awards. The fair value of stock options, PSOs, and ESPP offerings is estimated on the grant or offering date using the Black-Scholes option pricing model. The fair value of RSUs is measured on the grant date based on the closing fair market value of the Company’s common stock. The stock-based compensation cost is recognized ratably over the period during which an employee is required to provide service in exchange for the awards, usually the vesting period, which is generally four years for stock options, four years for RSUs and six months for the ESPP. For PSOs, stock-based compensation expense of individual performance milestone is recognized over the expected performance achievement period when the achievement becomes probable. Refer to Note 12, Employee Benefit Plans, for a further discussion on stock-based compensation. Comprehensive income (loss) Comprehensive income consists of net income (loss) and other gains and losses affecting stockholders’ equity that the Company excluded from net income (loss), including gains and losses related to fair value of short-term investments and the effective portion of cash flow hedges that were outstanding as of the end of the year. Recent accounting pronouncements Emerging Growth Company Status As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, unless the Company otherwise irrevocably elects not to avail itself of this exemption. The Company did not make such an irrevocable election and chose to use this extended transition period under the JOBS Act. Thus, the effective dates discussed below reflect the delayed adoption dates applicable to private companies. Accounting Pronouncements Recently Adopted ASU 2014-09 In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606) (“ASC 606”). The revenue recognition requirements in Accounting Standards Codification Topic 605 (“ASC 605”), Revenue Recognition, is superseded by ASC 606. ASC 606 requires the recognition of revenue when control of promised goods or services is transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance should be applied either retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with the cumulative effect of initially applying this guidance recognized at the date of initial application (modified retrospective method). The guidance is required to be adopted in the first fiscal quarter of 2019 and early adoption is permitted. On January 1, 2018, the Company adopted ASC 606 and applied this guidance to those contracts which were not completed at the date of adoption using the modified retrospective method. Refer to Note 3, Revenue Recognition for further details. ASU 2016-16 In October 2016, the FASB issued ASU 2016-16, “Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory” (Topic 740), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. This removes the exception to postpone recognition until the asset has been sold to an outside party. ASU 2016-16 is required to be adopted in the first fiscal quarter of 2019 with early adoption permitted. The Company elected to adopt the new standard on January 1, 2018 (when it became effective for public companies that are not emerging growth companies). There was no impact on the Company’s unaudited condensed consolidated financial position, results of operations, or cash flows as a result of the adoption. ASU 2017-12 In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities” (Topic 815), which expands and refines hedge accounting for both non-financial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The guidance also makes certain targeted improvements to simplify the application of hedge accounting guidance, ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness and ease the reporting on hedge ineffectiveness. ASU 2017-12 is effective for the Company in the first fiscal quarter of 2019 and early adoption is permitted. During the three months ended September 30, 2018, the Company established a hedge program to hedge foreign currency exchange rate risks. The Company early adopted the new guidance effectively July 2, 2018, the beginning of its third fiscal quarter of 2018. The adoption did not have material impact on the Company’s unaudited condensed consolidated financial position, results of operations, or cash flows. Accounting Pronouncements Not Yet Effective ASU 2016-02 In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842), which requires lessees to recognize on the balance sheets a right-of-use (“ROU”) asset, representing its right to use the underlying asset for the lease term, and a corresponding lease liability for all leases with terms greater than 12 months. The liability will be equal to the net present value of minimum lease payments while the ROU asset will be based on the liability, subject to adjustment, such as for initial direct costs. In addition, ASU 2016-02 expands the disclosure requirements for lessees to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. Upon adoption, the Company will be required to record a lease asset and lease liability related to its operating leases. The new standard requires a modified retrospective transition through a cumulative-effect adjustment as of the beginning of the earliest period presented in the financial statements, although the FASB recently approved an option for transition relief to not restate or make required disclosures under the new standard in comparative periods in the period of adoption. ASU 2016-02 is effective for the Company in the first fiscal quarter of 2020 (or the first fiscal quarter of 2019 should the Company cease to be classified as an EGC), with early adoption permitted. The Company will adopt the new standard effective January 1, 2019 and elect to utilize the FASB’s recently approved option for transition relief and recognize a cumulative-effect adjustment to the opening balance of retained earnings as of January 1, 2019. The Company will not restate or make disclosures under the new standard for the comparative periods prior to the period of adoption. The Company’s assessment of the impact of the adoption of ASU 2016-02, based on its lease portfolio as of September 30, 2018, indicates that it will recognize ROU assets in the range of $11 million to $14 million and lease liabilities in the range of $12 million to $15 million as of January 1, 2019, exclusive of the build-to-suit lease arrangement under its San Jose corporate headquarters. The difference between these amounts, net of deferred tax impact, will be recorded as an adjustment to Retained earnings at the beginning of the first quarter of year of adoption. The Company is currently evaluating the impact of ASU 2016-02 on its build-to-suit lease arrangement under its San Jose corporate headquarters. The adoption of the new standard will not have material impacts on the unaudited condensed consolidated statements of operations and statements of cash flows. The ultimate impact of adopting ASU 2016-02 will depend on the Company’s lease portfolio as of the adoption date. The Company expects to complete the adoption process, including adding policies, procedures and controls, implementing lease accounting software, and evaluating necessary disclosures to comply with the standards requirements, prior to the first fiscal quarter of 2019. ASU 2016-13 In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments” (Topic 326), which replaces the incurred-loss impairment methodology and requires immediate recognition of estimated credit losses expected to occur for most financial assets, including trade receivables. ASU 2016-13 is effective for the Company beginning in the first fiscal quarter of 2021 (or the first fiscal quarter of 2020 should the Company cease to be classified as an EGC), with early adoption permitted. The Company continues to assess the potential impact of the new guidance, but does not expect it to have a material impact on its financial position, results of operations, or cash flows. ASU 2018-15 In August 2018, the FASB issued ASU 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”, which align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). ASU 2018-15 is effective for the Company beginning in the first fiscal quarter of 2022 (or the first fiscal quarter of 2021 should the Company cease to be classified as an EGC), with early adoption permitted. The Company is currently evaluating the impact of the adoption on its consolidated financial statements. With the exception of the new standards discussed above, there have been no other new accounting pronouncements that have significance, or potential significance, to the Company’s financial position, results of operations, or cash flows. |
Revenue Recognition |
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Revenue Recognition | Revenue Recognition Adoption of ASC 606 On January 1, 2018, the Company adopted ASC 606 and applied this guidance to those contracts which were not completed at the date of adoption using the modified retrospective method. The Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of Net parent investment. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods (ASC 605). The adoption had an impact of ($3.1) million to the opening balance of Net parent investment. The adoption did not have a material impact to the nature and timing of the Company's revenues and cash flows. Refer to the tables below for the impacts of adopting ASC 606 on the Company’s balance sheet as of September 30, 2018 and statement of operations for the three and nine months ended September 30, 2018. The majority of sales revenue continues to be recognized when control of the product transfers to a customer upon shipment or delivery. The primary impact of adopting ASC 606 relates to the establishment of liability estimates for channel rebates and discounts upon revenue recognition on the basis of customary business practice. Under ASC 606, the Company is required to account for rebates and discounts ahead of commitment date if customary business practice creates an implied expectation that such activities will occur in the future. The Company utilizes channel rebates and discounts to stimulate end user demand. Consequently, this change in guidance results in an adjustment to the statement of financial position to accelerate the recording of liabilities for yet to be committed channel marketing rebates and discounts upon adoption. Further, under ASC 606, deferred revenue balances are to be booked at an amount that reflects only the amounts expected to be received for future obligations. As such, an adjustment was made to allocate variable consideration to deferred revenue. Additionally, the balance sheet presentation of certain reserve balances previously shown net within Accounts receivable are now presented as refund liabilities within Accrued liabilities and deferrals for undelivered shipments with destination shipping terms are now removed from receivables and deferred revenue. The following table summarizes the impacts of adopting ASC 606 on the Company’s unaudited condensed consolidated balance sheet for the fiscal year beginning January 1, 2018 as an adjustment to the opening balances:
The following table summarizes the impacts of adopting ASC 606 on the Company’s unaudited condensed consolidated balance sheet as of September 30, 2018:
The following table summarizes the impacts of adopting ASC 606 on the Company’s unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2018:
Revenue Recognition Accounting Policy under ASC 606 Revenue Recognition Revenue from contracts with customers is recognized when control of the promised goods or services is transferred to the customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The majority of revenue comes from sales of hardware products to customers (retailers, distributors, and service providers). Revenue is recognized at a point in time when control of the goods is transferred to the customer, generally occurring upon shipment or delivery, dependent upon the terms of the underlying contract. The amount recognized reflects the consideration the Company expects to be entitled to in exchange for the transferred goods. The Company sells subscription paid services to its end user customers where it provides customers access to its cloud services. Revenue for subscription sales is generally recognized on a ratable basis over the contract term, beginning on the date that the service is made available to the customers at the time of registration. The subscription contracts are generally 30 days or 12 months in length, billed in advance. All such service or support sales are typically recognized using an output measure of progress by looking at the time elapsed, as the contracts generally provide the customer equal benefit throughout the contract period. In addition to selling paid subscriptions, the Company also sells services bundled with hardware products and accounts for these sales in line with the multiple performance obligations guidance. Revenue from all sales types is recognized at transaction price, which is the amount the Company expects to be entitled to in exchange for transferring goods or providing services. Transaction price is calculated as selling price net of variable consideration which may include estimates for future returns, sales incentives, and price protection related to current period product revenue. The Company’s standard obligation to its direct customers generally provides for a full refund in the event that such product is not merchantable or is found to be damaged or defective. In determining estimates for future returns, management analyzes historical data, channel inventory levels, current economic trends, and changes in customer demand for the Company’s products. Sales incentives and price protection are determined based on a combination of the actual amounts committed and through estimating future expenditure based upon historical customary business practice. Typically variable consideration does not need to be constrained as estimates are based on predictive historical data or future commitments that are planned and controlled by the Company. However, the Company continues to assess variable consideration estimates such that it is probable that a significant reversal of revenue will not occur. Contracts with Multiple Performance Obligations Some of the Company’s contracts with customers contain multiple promised goods or services. Such contracts include hardware products with bundled services, various subscription services, and support. For these contracts, the Company accounts for the promises separately as individual performance obligations if they are distinct. Performance obligations are determined to be considered distinct if they are both capable of being distinct and distinct within the context of the contract. In determining whether performance obligations meet the criteria for being distinct, the Company considers a number of factors, such as the degree of interrelation and interdependence between obligations, and whether or not the good or service significantly modifies or transforms another good or service in the contract. The embedded software in most of the hardware products is not considered distinct and therefore the combined hardware and incidental software are treated as one performance obligation and recognized at the point in time when control of product transfers to the customer. Basic service that is included with certain hardware products is considered distinct and therefore the hardware and service are treated as separate performance obligations. After identifying the separate performance obligations, the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices are generally determined based on the prices charged to customers or using an adjusted market assessment. For the Company, standalone selling price of the hardware is directly observable from add-on camera and base station sales. Standalone selling price of the service is estimated using an adjusted market approach. Revenue is then recognized for each distinct performance obligation as control is transferred to the customer. For the Company, the revenue attributable to hardware is recognized at shipping or delivery at the time control of the product transfers to the customer. The transaction price allocated to the service is recognized over the estimated useful life of the hardware, beginning when the customer is expected to activate their account. Useful life of the hardware is determined by industry norms, frequency of new model releases, and user history. Warranties Sales of hardware products regularly include warranties to end customers that cover bug fixes, minor updates such that the product continues to function according to published specifications in a dynamic environment, and phone support. These standard warranties are assurance type warranties and do not offer any services in addition to the assurance that the product will continue working as specified for one or more years. Therefore, warranties are not considered separate performance obligations in the arrangement. Instead, the expected cost of warranties is accrued as an expense in accordance with authoritative guidance. Shipping and Handling Shipping and handling fees billed to customers are included in Revenue. Shipping and handling costs associated with inbound freight are included in Cost of revenue. In cases where the Company gives a freight allowance to the customer for their own inbound freight costs, such costs are appropriately recorded as a reduction in Revenue. Shipping and handling costs associated with outbound freight are included in Sales and marketing expenses. The Company has elected to account for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products. Shipping and handling costs associated with outbound freight totaled $0.5 million and $0.8 million for the three months ended September 30, 2018 and October 1, 2017, respectively, and $2.3 million and $1.9 million for the nine months ended September 30, 2018 and October 1, 2017, respectively. Transaction Price Allocated to the Remaining Performance Obligations Remaining performance obligations represent the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period. Unsatisfied and partially unsatisfied performance obligations consist of contract liabilities, in-transit orders with destination terms, and non-cancellable backlog. Non-cancellable backlog includes goods and services for which customer purchase orders have been accepted and that are scheduled or in the process of being scheduled for shipment. The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2018:
Majority of the performance obligation over one year pertains to revenue deferral from prepaid services. Contract Costs Applying the practical expedient, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that otherwise would have been recognized is one year or less. These costs are included in sales and marketing and general and administrative expenses. If the incremental costs of obtaining a contract, which consist of sales commissions, relate to a service recognized over a period longer than one year, costs are deferred and amortized in line with the related services over the period of benefit. Deferred commissions are classified as non-current based on the original amortization period of over one year. As of September 30, 2018, deferred commissions were not significant. Contract Balances The Company records accounts receivable when it has an unconditional right to consideration. Contract liabilities are recorded when cash payments are received or due in advance of performance. Contract liabilities consist of advance payments and deferred revenue, where the Company has unsatisfied performance obligations. Contract liabilities are classified as Deferred revenue on the unaudited condensed consolidated balance sheets. Payment terms vary by customer. The time between invoicing and when payment is due is not significant. For certain products or services and customer types, payment is required before the products or services are delivered to the customer. The following table reflects the changes in contract balances for the nine months ended September 30, 2018:
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For the nine months ended September 30, 2018, contract liabilities increased primarily as a result of increased sales of products containing multiple performance obligations, where cash payments are received or due in advance of satisfying the service related performance obligation. For the nine months ended September 30, 2018, $35.6 million of revenue was deferred due to unsatisfied performance obligations, primarily relating to over time service revenue, and $27.4 million of revenue was recognized for the satisfaction of performance obligations over time. $19.9 million of this recognized revenue was included in the contract liability balance at the beginning of the period. There were no significant changes in estimates during the period that would affect the contract balances. Disaggregation of Revenue The Company conducts business across three geographic regions: Americas, EMEA, and APAC. Sales and usage-based taxes are excluded from revenue. Refer to Note 13, Segment and Geographic Information, for revenue by geography. |
Business Acquisition |
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Business Combinations [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||
Business Acquisition | Business Acquisition Placemeter, Inc. On November 30, 2016, the Company acquired Placemeter, a computer vision analytics company, for total purchase consideration of $9.6 million. The Company believes that Placemeter’s engineering talent added substantial value to the Arlo smart security team, and that Placemeter’s proprietary computer vision algorithms helped to build leading video analytics solutions for the Arlo platform. The Company paid $8.8 million of the aggregate purchase price in the fourth fiscal quarter of 2016 and paid the remaining $0.8 million in the first fiscal quarter of 2017. The acquisition qualified as a business combination and was accounted for using the acquisition method of accounting. The allocation of the purchase price was as follows (in thousands):
The $3.7 million of goodwill recorded on the acquisition of Placemeter is not deductible for U.S. federal or U.S. state income tax purposes. The goodwill recognized is primarily attributable to expected synergies resulting from the acquisition. In connection with the acquisition, the Company recorded $0.3 million of deferred tax liabilities net of deferred tax assets. The deferred tax liabilities were recorded for the book basis of intangible assets for which the Company has no tax basis. The deferred tax liabilities are reduced by the tax benefit of the net operating losses as of the date of the acquisition after consideration of limitations on their use under U.S. Internal Revenue Code section 382. The Company designated $5.5 million of the acquired intangibles as software technology and a further $0.2 million of the acquired intangibles as a video library database. The valuations were derived using the replacement cost method, with consideration given to the estimated time, investment and resources required to recreate the acquired intangibles. A discount rate of 15.0% was used in the valuation of each intangible. The acquired intangibles are being amortized over an estimated useful life of four years. The Company designated $0.3 million of the acquired intangibles as non-compete agreements. The value was calculated based on the present value of the future estimated cash flows derived from projections of future operations attributable to the non-compete agreements and discounted at 20.0%. The acquired agreements are being amortized over an estimated useful life of three years. |
Balance Sheet Components |
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Balance Sheet Related Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance Sheet Components | Balance Sheet Components Available-for-sale short-term investments
The Company’s short-term investments are classified as available-for-sale and consist of government securities with an original maturity or remaining maturity at the time of purchase of greater than three months and no more than twelve months. Accordingly, none of the available-for-sale securities have unrealized losses greater than twelve months. As of December 31, 2017, the Company had no short-term investments. Accounts receivable, net
_________________________ * Upon adoption of ASC 606, allowances for sales returns and price protection were reclassified to current liabilities as these reserve balances are considered refund liabilities. Refer to Note 3. Revenue Recognition, for additional information on the adoption impact. Property and equipment, net The unaudited condensed consolidated balance sheets include the property and equipment specifically identifiable to Arlo’s business. The components of property and equipment are as follows:
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Depreciation and amortization expense pertaining to property and equipment was $1.1 million and $2.3 million for the three and nine months ended September 30, 2018 and $0.5 million and $1.3 million for the three and nine months ended October 1, 2017, respectively. During the fiscal 2018, prior to the completion of the IPO, allocated depreciation expense from NETGEAR was $1.2 million. Allocated depreciation expense from NETGEAR was $0.5 million and $1.4 million for the three and nine months ended October 1, 2017, respectively. The unaudited condensed consolidated statements of operations include both the depreciation expense directly identifiable as Arlo’s and allocated depreciation expense from NETGEAR for the periods presented prior to the completion of the IPO. Refer to Note 1, The Company and Basis of Presentation, for detailed disclosures regarding the methodology used for corporate expense allocation. Intangibles, net
As of September 30, 2018, the remaining weighted-average estimated useful life of intangibles was two years. Amortization of intangibles was $0.4 million and $1.2 million for the three and nine months ended September 30, 2018 and $0.4 million and $1.6 million for the three and nine months ended October 1, 2017. As of September 30, 2018, estimated amortization expense related to finite-lived intangibles for the remaining years was as follows (in thousands):
Goodwill In the year ended December 31, 2016, the Company acquired Placemeter. Refer to Note 4, Business Acquisition, for detailed disclosures. There was no change in the carrying amount of goodwill during the nine months ended September 30, 2018 and the goodwill as of December 31, 2017 and September 30, 2018 was as follows (in thousands):
Other non-current assets
Accrued liabilities
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Fair Value Measurements |
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Fair Value Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Measurements | Fair Value Measurements The Company determines the fair values of its financial instruments based on a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. The fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value: Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). The following tables summarize assets and liabilities measured at fair value on a recurring basis as of September 30, 2018:
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The Company’s investments in cash equivalents and available-for-sale securities are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. The Company enters into foreign currency forward contracts with only those counterparties that have long-term credit ratings of A-/A3 or higher. The Company’s foreign currency forward contracts are classified within Level 2 of the fair value hierarchy as they are valued using pricing models that take into account the contract terms as well as currency rates and counterparty credit rates. The Company verifies the reasonableness of these pricing models using observable market data for related inputs into such models. Additionally, the Company includes an adjustment for non-performance risk in the recognized measure of fair value of derivative instruments. As of September 30, 2018, the adjustment for non-performance risk did not have a material impact on the fair value of the Company’s foreign currency forward contracts. The carrying value of non-financial assets and liabilities measured at fair value in the financial statements on a recurring basis, including accounts receivable and accounts payable, approximate fair value due to their short maturities. As of September 30, 2018, the Company has no Level 3 fair value assets or liabilities. |
Derivative Financial Instruments |
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Derivative Instruments and Hedging Activities Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative Financial Instruments | Derivative Financial Instruments The Company’s subsidiaries have had, and will continue to have material future cash flows, including revenue and expenses, which are denominated in currencies other than the Company’s functional currency. The Company and all its subsidiaries designate the U.S. dollar as the functional currency. Changes in exchange rates between the Company’s functional currency and other currencies in which the Company transacts business will cause fluctuations in cash flow expectations and cash flow realized or settled. In the three months ended September 30, 2018, the Company entered into foreign currency forward contracts in Australian dollars, British pounds, Euros, and Canadian dollar to manage the exposures to foreign exchange risk related to expected future cash flows on certain forecasted revenue, costs of revenue, operating expenses and existing assets and liabilities. The Company does not enter into derivatives transactions for trading or speculative purposes. The Company’s foreign currency forward contracts do not contain any credit-risk-related contingent features. The Company is exposed to credit losses in the event of nonperformance by the counter-parties of its forward contracts. The Company enters into derivative contracts with high-quality financial institutions and limits the amount of credit exposure to any one counter-party. In addition, the derivative contracts typically mature in less than six months and the Company continuously evaluates the credit standing of its counter-party financial institutions. The counter-parties to these arrangements are large highly rated financial institutions and the Company does not consider non-performance a material risk. The Company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including, but not limited to, materiality, accounting considerations or the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign exchange rates. The Company’s accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments in accordance with the authoritative guidance for derivatives and hedging. The Company records all derivatives on the balance sheets at fair value. Cash flow hedge gains and losses are recorded in other comprehensive income (loss) (“OCI”) until the hedged item is recognized in earnings. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in Other income (expense), net in the unaudited condensed consolidated statements of operations. The fair values of the Company’s derivative instruments and the line items on the unaudited condensed consolidated balance sheets to which they were recorded as of September 30, 2018 are summarized as follows:
Refer to Note 6, Fair Value Measurements, for detailed disclosures regarding fair value measurements in accordance with the authoritative guidance for fair value measurements and disclosures. Offsetting Derivative Assets and Liabilities The Company has entered into master netting arrangements which allow net settlements under certain conditions. Although netting is permitted, it is currently the Company's policy and practice to record all derivative assets and liabilities on a gross basis in the unaudited condensed consolidated balance sheets. The following tables set forth the offsetting of derivative assets and liabilities as of September 30, 2018:
Cash flow hedges To help manage the exposure of operating margins to fluctuations in foreign currency exchange rates, the Company hedges a portion of its anticipated foreign currency revenue, costs of revenue and certain operating expenses. These hedges are designated at the inception of the hedge relationship as cash flow hedges. Effectiveness is tested at least quarterly both prospectively and retrospectively using regression analysis to ensure that the hedge relationship has been effective and is likely to remain effective in the future. The Company typically hedges portions of its anticipated foreign currency exposure less than six months. For the three months ended September 30, 2018, the Company entered into eight forward contracts with an average size of $3.3 million USD equivalent related to its cash flow hedging program. The effects of the Company's cash flow hedges on the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2018 are summarized as follows:
The Company expects to reclassify to earnings all of the amounts recorded in OCI associated with its cash flow hedges over the next twelve months. OCI associated with cash flow hedges of foreign currency revenue is recognized as a component of revenue in the same period the related revenue is recognized. OCI associated with cash flow hedges of foreign currency costs of revenue and operating expenses are recognized as a component of cost of revenue and operating expenses in the same period and in the same statements of operations line item as the related costs of revenue and operating expenses are recognized. For information on the unrealized gains or losses on derivatives reclassified out of accumulated other comprehensive income into the unaudited condensed consolidated statements of operations, refer to Note 8, Accumulated Other Comprehensive Income (Loss). Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur within the designated hedge period or if not recognized within 60 days following the end of the hedge period. Deferred gains and losses in OCI with such derivative instruments are reclassified immediately into earnings through Other income (expense), net. Any subsequent changes in fair value of such derivative instruments also are reflected in current earnings unless they are re-designated as hedges of other transactions. The Company did not recognize any material net gains or losses related to the loss of hedge designation as there were no discontinued cash flow hedges during the three and nine months ended September 30, 2018. Non-designated hedges The Company enters into non-designated hedges under the authoritative guidance for derivatives and hedging to manage the exposure of non-functional currency monetary assets and liabilities held on its financial statements to fluctuations in foreign currency exchange rates, as well as to reduce volatility in other income and expense. The non-designated hedges are generally expected to offset the changes in value of its net non-functional currency asset and liability position resulting from foreign exchange rate fluctuations. Foreign currency denominated accounts receivable and payable are hedged with non-designated hedges when the related anticipated foreign revenue and expenses are recognized in the Company’s financial statements. The Company also hedges certain non-functional currency monetary assets and liabilities that may not be incorporated into the cash flow hedge program. The Company adjusts its non-designated hedges monthly and entered into one non-designated derivative during the three months ended September 30, 2018. The size of its non-designated hedge is $3.6 million USD equivalent and the hedge range from one to three months in duration. The effects of the Company’s non-designated hedge included in Other income (expense), net in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2018 are as follows:
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Accumulated Other Comprehensive Income (Loss) (Notes) |
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Accumulated Other Comprehensive Income (Loss) | Accumulated Other Comprehensive Income (Loss) The following table sets forth the changes in accumulated other comprehensive income (loss) (“AOCI”) by component for the nine months ended September 30, 2018:
The following tables provide details about significant amounts reclassified out of each component of AOCI for the three and nine months ended September 30, 2018:
_________________________ * There is no tax impact on all hedging gains and losses from derivative contracts due a full valuation allowance. |
Net Income (Loss) Per Share |
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Earnings Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Income (Loss) Per Share | Net Income (Loss) Per Share Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. The weighted average number of shares outstanding for the basic and diluted net income (loss) per share for the periods prior to the completion of the IPO is based on the number of shares of Arlo common stock outstanding on August 2, 2018, the effective date of the registration statement relating to the IPO (the “IPO Registration Statement”). On that date, the Company issued 62,499,000 shares of common stock to the Company’s sole stockholder of record, NETGEAR (after which NETGEAR held 62,500,000 shares of common stock, which represented all of the then issued and outstanding common stock). Potentially dilutive common shares, such as common shares issuable upon exercise of stock options, vesting of restricted stock awards, and issuances of shares under the Company’s 2018 ESPP are typically reflected in the computation of diluted net income (loss) per share by application of the treasury stock method. For certain periods presented, due to the net losses reported, these potentially dilutive securities were excluded from the computation of diluted net loss per share, since their effect would be anti-dilutive. Net income (loss) per share for the three and nine months ended September 30, 2018 and October 1, 2017 were as follows:
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Income Taxes |
9 Months Ended |
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Sep. 30, 2018 | |
Income Tax Disclosure [Abstract] | |
Income Taxes | Income Taxes The income tax provision for the three and nine months ended September 30, 2018, was $0.2 million, or an effective tax rate of (1.7)%, and $0.8 million, or an effective tax rate of (2.3)%, respectively. The income tax provision for the three and nine months ended October 1, 2017, was $0.4 million, or an effective tax rate of 6.9%, and $0.8 million, or an effective tax rate of 17.1%, respectively. During the three and nine months ended September 30, 2018, the Company sustained higher book losses than the same periods in the prior year. The Company has a full valuation allowance on its U.S. federal and state deferred tax attributes. As a result, consistent with the prior year, the Company is unable to record a tax benefit on these losses because of uncertainty of future profitability. The decrease in tax expense for the three months ended September 30, 2018 compared to the three months ended October 1, 2017, resulted primarily from the Company reporting profits in the U.S. for the three months ended October 1, 2017, subjecting the Company to the U.S. federal alternative minimum tax in 2017, offset somewhat by higher earnings in foreign jurisdictions in 2018 than in 2017. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. The Tax Act reduced the U.S. statutory rate from 35% to 21% effective as of January 1, 2018. In addition, certain new complex tax rules related to the taxation of foreign earnings (Global Intangible Low-Taxed Income, Foreign Derived Intangible Income and Base Erosion and Anti-abuse Tax) became effective as of January 1, 2018. The Company does not anticipate an increase in tax expense from the Tax Act during the current period due to current year losses and loss carryforwards, previously subject to a valuation allowance, that can offset this income. In addition to the corporate tax rate decrease, the changes resulting from Tax Act include, but are not limited to, the transition of U.S. international taxation from a worldwide tax system to a territorial system and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings. The Company has calculated an estimate of the impact of the Tax Act in its year-end income tax provision in accordance with its understanding of the Tax Act and available guidance. On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, the Company has determined that its computation of the transition tax on the mandatory deemed repatriation of foreign earnings was a reasonable provisional estimate at December 31, 2017. As further guidance is issued by Treasury, the Company may refine its computations to ensure earnings as required by the calculations are properly determined. Based on information available, the Company also reflected a provisional estimate of $2.9 million related to the transitional tax that was fully offset with tax attributes and therefore did not result in an income tax expense. The amounts reported as of December 31, 2017 are provisional based on the uncertainty discussed above. As the Company completes its analysis and prepares necessary data, and interprets any additional guidance, the Company will adjust its calculations and provisional amounts that the Company has recorded in its tax provision. Any such adjustments may materially impact the Company’s provision for income taxes in its financial statements. Additionally, as a result of the Tax Act, the Company has not completed its evaluation of its indefinite reinvestment assertion with regard to foreign earnings under ASC 740-30. As a result, deferred tax liabilities are provisional and may be increased or decreased during the period allowed under SAB 118. Any subsequent adjustment to any of these amounts will be recorded to tax expense or offset by available tax attributes during the measurement period provided under SAB 118. Further, no estimate can currently be made and no provisional amounts were recorded in the financial statements for the impact of the Global Intangible Low-Taxed Income (“GILTI”) provision of the Tax Act. The GILTI provision imposes taxes on foreign earnings in excess of a deemed return on tangible assets. This tax is effective for the Company after the end of the current fiscal year. However, the Company is evaluating whether deferred taxes should be recorded in relation to the GILTI provisions or if the tax should be recorded in the period in which it occurs. The Company may choose either method as an accounting policy election. The Company has not yet decided on the accounting policy related to GILTI and will only do so after completion of an analysis. If the Company decides to adopt an accounting policy to treat GILTI as a deferred adjustment the amounts will be recorded through deferred tax expense. |
Commitments and Contingencies |
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Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commitments and Contingencies | Commitments and Contingencies Operating Leases The Company entered into several office lease agreements under non-cancelable operating leases with various expiration dates through December 2028. The terms of certain of the Company’s facility leases provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period, and has accrued for rent expense incurred but not paid. Financing Leases The Company entered into a 10.5-year lease for its corporate headquarters located in San Jose, California. During the three month ended of September 30, 2018, the Company commenced construction of tenant improvements that are expected to be complete by January 2019. Annual base rent is expected to be $2.9 million and will increase throughout the lease term. Lease payments are expected to commence once the building is complete but no later than January 1, 2019. According to ASC 840, Leases, the Company is deemed to be the owner, for accounting purposes, during the construction phase of the building (mainly for construction of tenant improvements) under build-to-suit lease arrangement because of the Company’s involvement with the construction, the exposure to any potential cost overruns or other commitments including indemnification under the arrangements. Consequently, the fair value of the building, which was $21.9 million, was included in Property and equipment, net, and recorded based on fair value of the building and actual construction costs incurred through September 30, 2018. A corresponding liability, under the finance method, of $20.6 million was included in Non-current financing lease obligation and $0.9 million was included in current liabilities on the Company’s unaudited condensed consolidated financial statements as of September 30, 2018. Purchase Obligations The Company has entered into various inventory-related purchase agreements with suppliers. Generally, under these agreements, 50% of orders are cancelable by giving notice 46 to 60 days prior to the expected shipment date and 25% of orders are cancelable by giving notice 31 to 45 days prior to the expected shipment date. Orders are non-cancelable within 30 days prior to the expected shipment date. As of September 30, 2018, the Company had approximately $44.9 million in non-cancelable purchase commitments with suppliers, respectively. The Company establishes a loss liability for all products it does not expect to sell for which it has committed purchases from suppliers. Such losses have not been material to date. From time to time the Company’s suppliers procure unique complex components on the Company’s behalf. If these components do not meet specified technical criteria or are defective, the Company should not be obligated to purchase the materials. Warranty Obligations Changes in the Company’s warranty liability, which is included in Accrued liabilities in the unaudited condensed consolidated balance sheets, were as follows:
* Upon adoption of ASC 606 on January 1, 2018, warranty reserve balances totaling $28.7 million were reclassified to sales returns as these liabilities are payable to the Company’s customers and settled in cash or by credit on account. Under ASC 606, these amounts are to be accounted for as sales with right of return. Legal Proceedings The Company is and, from time to time, may become, involved in legal proceedings or be subject to claims arising in the ordinary course of its business. The Company is not presently a party to any legal proceedings that in the opinion of its management, if determined adversely to the Company, would individually or taken together have a material adverse effect on the Company’s business, results of operations, financial condition or cash flows. Indemnification of Directors and Officers The Company, as permitted under Delaware law and in accordance with its bylaws, has agreed to indemnify its officers and directors for certain events or occurrences, subject to certain conditions, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that will enable it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the fair value of each indemnification agreement will be minimal. The Company had no liabilities recorded for these agreements as of September 30, 2018. Indemnifications Prior to the completion of the IPO, the Company historically participated in NETGEAR’s sales agreements. In its sales agreements, NETGEAR typically agrees to indemnify its direct customers, distributors and resellers (the “Indemnified Parties”) for any expenses or liability resulting from claimed infringements by NETGEAR’s products of patents, trademarks or copyrights of third parties that are asserted against the Indemnified Parties, subject to customary carve-outs. The terms of these indemnification agreements are generally perpetual after execution of the agreement. The maximum amount of potential future indemnification is generally unlimited. From time to time, the Company receives requests for indemnity and may choose to assume the defense of such litigation asserted against the Indemnified Parties. The Company had no liabilities recorded for these agreements as of September 30, 2018. In connection with the Separation, and after July 1, 2018, certain sales agreements were transferred to the Company, and the Company has replaced certain shared contracts, which include similar indemnification terms. In addition, pursuant to the master separation agreement and certain other agreements entered into with NETGEAR in connection with the Separation and the IPO, NETGEAR has agreed to indemnify the Company for certain liabilities. The master separation agreement provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of its business with the Company and financial responsibility for the obligations and liabilities of NETGEAR’s business with NETGEAR. Under the intellectual property rights cross-license agreement entered into between the Company and NETGEAR, each party, in its capacity as a licensee, indemnifies the other party, in its capacity as a licensor, and its directors, officers, agents, successors and subsidiaries against any losses suffered by such indemnified party as a result of the indemnifying party’s practice of the intellectual property licensed to such indemnifying party under the intellectual property rights cross-license agreement. Also, under the tax matters agreement entered into between the Company and NETGEAR, each party is liable for, and indemnifies the other party and its subsidiaries from and against any liability for, taxes that are allocated to the indemnifying party under the tax matters agreement. In addition, the Company has agreed in the tax matters agreement that each party will generally be responsible for any taxes and related amounts imposed on it or NETGEAR as a result of the failure of the Distribution, together with certain related transactions, to qualify as a transaction that is generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) and certain other relevant provisions of the Code, to the extent that the failure to so qualify is attributable to actions, events or transactions relating to such party’s respective stock, assets or business, or a breach of the relevant representations or covenants made by that party in the tax matters agreement. The transition services agreement generally provides that the applicable service recipient indemnifies the applicable service provider for liabilities that such service provider incurs arising from the provision of services other than liabilities arising from such service provider’s gross negligence, bad faith or willful misconduct or material breach of the transition services agreement, and that the applicable service provider indemnifies the applicable service recipient for liabilities that such service recipient incurs arising from such service provider’s gross negligence, bad faith or willful misconduct or material breach of the transition services agreement. Pursuant to the registration rights agreement, the Company has agreed to indemnify NETGEAR and its subsidiaries that hold registrable securities (and their directors, officers, agents and, if applicable, each other person who controls such holder under Section 15 of the Securities Act) registering shares pursuant to the registration rights agreement against certain losses, expenses and liabilities under the Securities Act, common law or otherwise. NETGEAR and its subsidiaries that hold registrable securities similarly indemnify the Company but such indemnification will be limited to an amount equal to the net proceeds received by such holder under the sale of registrable securities giving rise to the indemnification obligation. Refer to Note 1, The Company and Basis of Presentation, for details relating to the Company’s IPO and related transactions. Employment Agreements NETGEAR has signed various employment agreements with the Company’s key executives pursuant to which, if their employment is terminated without cause, such employees are entitled to receive their base salary (and commission or bonus, as applicable) for up to 26 weeks. Such employees will also continue to have equity awards vest for up to a one-year period following such termination without cause. If a termination without cause or resignation for good reason occurs within one year of a change in control, certain key employees are entitled to up to two years acceleration of any unvested portion of his or her equity awards. The Company had no liabilities recorded for these agreements as of September 30, 2018. In connection with the completion of the IPO, the Company entered into executive confirmatory employment offer letters and change in control and severance agreements with each of the Company’s key executives, which superseded and replaced any employment arrangements that such executives had previously entered into with NETGEAR. Refer to Note 1, The Company and Basis of Presentation, for details relating to the Company’s IPO and related transactions. Environmental Regulation The Company is required to comply and is currently in compliance with the European Union (“EU”) and other Directives on the Restrictions of the use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”), Waste Electrical and Electronic Equipment (“WEEE”) requirements, Energy Using Product (“EuP”) requirements, the REACH Regulation, Packaging Directive and the Battery Directive. The Company is subject to various federal, state, local, and foreign environmental laws and regulations, including those governing the use, discharge, and disposal of hazardous substances in the ordinary course of its manufacturing process. The Company believes that its current manufacturing and other operations comply in all material respects with applicable environmental laws and regulations; however, it is possible that future environmental legislation may be enacted or current environmental legislation may be interpreted to create an environmental liability with respect to its facilities, operations, or products. |
Employee Benefit Plans |
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Employee Benefits and Share-based Compensation, Noncash [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Employee Benefit Plans | Employee Benefit Plans On August 1, 2018, the Company reserved a total sum of (1) 7,500,000 shares of its common stock for issuance and (2) the number of shares of its common stock that may be issuable upon exercise or vesting of awards relating to NETGEAR common stock that may be converted into awards relating to the Company’s common stock upon the completion of the Distribution for issuance under the Company’s 2018 Plan and 1,500,000 shares of its common stock for issuance under the 2018 ESPP, as applicable. The Company’s employees have historically participated in NETGEAR’s various stock-based plans, which are described below and represent the portion of NETGEAR’s stock-based plans in which Arlo employees participated as of September 30, 2018. The Company’s unaudited condensed consolidated statements of income reflect compensation expense for these stock-based plans associated with the portion of NETGEAR’s plans in which Arlo employees participated. ARLO 2018 Equity Incentive Plan The 2018 Plan provides for the granting of stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance units and performance shares to eligible directors, employees and consultants. Award vesting periods for this plan are generally four years. Options may be granted for periods of up to 10 years or such shorter term as may be provided in the agreement and at prices no less than 100% of the fair market value of Arlo’s common stock on the date of grant. Options granted under the 2018 Plan generally vest over four years, the first tranche at the end of 12 months and the remaining shares underlying the option vesting monthly over the remaining three years. The Company calculates the fair value of stock option using the Black-Scholes option pricing model. The period over which RSUs granted under the 2018 Plan may fully vest is generally no less than three years. RSUs do not have the voting rights of Arlo’s common stock, and the shares underlying the RSUs are not considered issued and outstanding prior to settlement of the RSUs. The fair value of RSUs represents the closing stock price of the Company’s common stock on the grant date. ARLO IPO Options On August 2, 2018, in connection with the completion of the IPO, to create incentives for continued long-term success and to closely align executive pay with the Company’s stockholders’ interests in the achievement of significant milestones, the Company granted to its Named Executive Officers (“NEOs”) options to purchase 2,781,249 shares of Arlo common stock (“IPO Options”). The Company calculates the fair value of options using the Black-Scholes option pricing model. Each of the IPO Options will have a ten-year contractual term and an exercise price equal to the fair value of a share of Arlo common stock on the date of grant and will vest as follows: •The Tranche 1 Service Option will vest in equal monthly installments during the 24-month period that begins on the two-year anniversary of the option grant date; •The Tranche 2 Performance Option will vest on the later of (i) the date (prior to the four-year anniversary of the grant date) of satisfaction of a cumulative registered users milestone and (ii) if the milestone has been satisfied prior to the applicable date, then (a) with respect to 25% of the Tranche 2 Performance Option, on the first anniversary of the option grant date, (b) with respect to 25% of the Tranche 2 Performance Option, on the second anniversary of the option grant date, and (c) with respect to the remaining 50% of the Tranche 2 Performance Option, in equal monthly installments on the first day of each month beginning on September 1, 2020; •The Tranche 3 Performance Option will vest on the later of (i) the date (prior to the four-year anniversary of the grant date) of satisfaction of a paid recurring revenue milestone and (ii) if the milestone has been satisfied prior to the applicable date, then (a) with respect to 25% of the Tranche 3 Performance Option, on the first anniversary of the option grant date, (b) with respect to 25% of the Tranche 3 Performance Option, on the second anniversary of the option grant date, and (c) with respect to the remaining 50% of the Tranche 3 Performance Option, in equal monthly installments on the first day of each month beginning on September 1, 2020; •The Tranche 4 Performance Option will vest on the one-year anniversary of the grant date based on the extent to which the revenue and non-GAAP gross profit milestones for the second half of fiscal 2018 are achieved; and •The Tranche 5 Performance Option will vest on the one-year anniversary of the grant date based on the extent to which the revenue and non-GAAP gross profit milestones for the second half of fiscal 2019 are achieved. ARLO Employee Stock Purchase Plan Under the 2018 ESPP, eligible employees may contribute up to 10% of compensation, subject to certain income limits, to purchase shares of Arlo’s common stock. The terms of the plan include a look-back feature that enables employees to purchase stock semi-annually at a price equal to 85% of the lesser of the fair market value at the beginning of the offering period or the purchase date. The duration of each offering period is generally six months. The Company calculates the fair value of a share purchase option under the 2018 ESPP using the Black-Scholes option pricing model. As of September 30, 2018, no shares had been purchased under the 2018 ESPP by Arlo employees, as the program is temporarily suspended until the completion of the Distribution. NETGEAR 2016 Equity Incentive Plan The 2016 Equity Incentive Plan (the “2016 Plan”) was adopted by NETGEAR in April 2016. The 2016 Plan provides for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and performance units to eligible directors, employees and consultants. Award vesting periods for this plan are generally four years. Nonstatutory stock options (“NSO”) granted under the 2016 Plan may be granted to employees, directors and consultants. Options may be granted for periods of up to 10 years and at prices no less than the estimated fair value of NETGEAR’s common stock on the date of grant. Options granted under the 2016 Plan generally vest over four years, the first tranche at the end of 12 months and the remaining shares underlying the option vesting monthly over the remaining three years. The period over which RSUs granted under the 2016 Plan may fully vest is generally no less than three years. RSUs do not have the voting rights of NETGEAR’s common stock, and the shares underlying the RSUs are not considered issued and outstanding prior to settlement of the RSUs. NETGEAR 2006 Long-Term Incentive Plan The 2006 Long-Term Incentive Plan (the “2006 Plan”) was adopted by NETGEAR in April 2006 and provided for the granting of stock options, stock appreciation rights, restricted stock, performance awards and other stock awards, to eligible directors, employees and consultants. The 2006 Plan expired in 2016 by its terms. Outstanding awards under the 2006 Plan remain subject to the terms and conditions of the 2006 Plan. NETGEAR 2003 Stock Plan The 2003 Stock Plan (the “2003 Plan”) was adopted by NETGEAR in April 2003 and provided for the granting of stock options to employees and consultants. The 2003 Plan expired in 2013 and outstanding awards under this plan remain subject to the terms and conditions of the 2003 Plan. NETGEAR Employee Stock Purchase Plan Under NETGEAR’s ESPP, eligible employees may contribute up to 10% of compensation, subject to certain income limits, to purchase shares of Arlo’s common stock. The terms of the plan include a look-back feature that enables employees to purchase stock semi-annually at a price equal to 85% of the lesser of the fair market value at the beginning of the offering period or the purchase date. The duration of each offering period is generally six months. ARLO Option Activity Arlo’s stock option activity during the three months ended of September 30, 2018 was as follows:
(1) Including Arlo IPO Options of 2.8 million shares granted to the Company’s NEOs with performance-based vesting criteria (in addition to service-based vesting criteria for any of such IPO Options that are deemed to have been earned) during the three months ended of September 30, 2018. As of September 30, 2018, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria had been satisfied. Therefore, this line item includes all such performance-based IPO Options granted during the three months ended September 30, 2018, reported at the maximum possible number of shares that may ultimately be issuable if all applicable performance-based criteria are achieved at their maximum levels and all applicable service-based criteria are fully satisfied. NETGEAR Option Activity NETGEAR’s stock option activity for employees specifically identifiable to Arlo during the nine months ended September 30, 2018 was as follows:
(1) Transferred options are attributable to employees that transferred from other NETGEAR’s divisions. ARLO RSU Activity Arlo’s RSU activity during the three months ended of September 30, 2018 was as follows:
NETGEAR RSU Activity NETGEAR’s RSU activity for employees specifically identifiable to Arlo during the nine months ended September 30, 2018 was as follows:
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Valuation and Expense Information The Company measures stock-based compensation at the grant date based on the estimated fair value of the award. Estimated compensation cost relating to RSUs is based on the closing fair market value of common stock on the date of grant. The fair value of options granted and the purchase rights granted under the ESPP is estimated on the date of grant using a Black-Scholes option pricing model that uses the assumptions noted in the following table. Because the Company’s common stock did not have a long history of being publicly traded at grant date, the estimated term of Arlo’s options granted was determined by a combination of using a simplified method, which is an average of the contractual term and vesting period of the stock options and using management best estimate of the expected term. The risk-free interest rate of options granted was based on the implied yield currently available on U.S. Treasury securities, with a remaining term commensurate with the estimated expected term. The estimated volatility assumption was calculated based on a compensation peer group analysis of stock price volatility on the grant date. The following table sets forth the weighted average assumptions used to estimate the fair value of Arlo’s stock options granted using Black-Scholes option pricing model during the three months ended September 30, 2018.
The estimated expected term of NETGEAR’s options granted is derived from historical data on employee exercise and post-vesting employment termination behavior. The risk-free interest rate of options granted and the purchase rights granted under the NETGEAR’s ESPP is based on the implied yield currently available on U.S. Treasury securities, with a remaining term commensurate with the estimated expected term. Expected volatility of NETGEAR’s options granted and the purchase rights granted under the NETGEAR’s ESPP is based on historical volatility over the most recent period commensurate with the estimated expected term. The following table sets forth the weighted average assumptions used to estimate the fair value of NETGEAR’s options granted and purchase rights granted under the NETGEAR’s ESPP to employees specifically identifiable to Arlo during the three and nine months ended September 30, 2018 and October 1, 2017.
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The weighted-average fair value of NETGEAR’s RSUs granted to employees specifically identifiable to Arlo for the nine months ended September 30, 2018 and October 1, 2017 was 67.22 and $53.23, respectively. The weighted-average estimated fair value of NETGEAR’s options granted to employees specifically identifiable to Arlo for the nine months ended September 30, 2018 and October 1, 2017 was $20.63 and $12.25 per option share, respectively. The weighted-average fair value of Arlo’s RSUs and stock options granted for the three months ended September 30, 2018 was $18.51 and $7.02, respectively. The following tables set forth stock-based compensation expense for employees specifically identifiable to Arlo and allocated charges deemed attributable to Arlo operations resulting from NETGEAR’s and Arlo’s RSUs and stock options, and the purchase rights under the NETGEAR’s ESPP included in the Company’s unaudited condensed consolidated statements of operations during the periods indicated:
The Company recognizes these compensation generally costs on a straight-line basis over the requisite service period of the award. As of September 30, 2018, $2.0 million of unrecognized compensation cost related to NETGEAR’s stock options for employees specifically identifiable to Arlo was expected to be recognized over a weighted-average period of 2.7 years. $26.7 million of unrecognized compensation cost related to unvested NETGEAR’s RSUs for employees specifically identifiable to Arlo was expected to be recognized over a weighted-average period of 2.9 years. As of September 30, 2018, $19.2 million of unrecognized compensation cost related to Arlo’s stock options and PSOs was expected to be recognized over a weighted-average period of 3.6 years. $0.9 million of unrecognized compensation cost related to unvested Arlo’s RSUs was expected to be recognized over a weighted-average period of 1.7 years. Cash received from NETGEAR stock option exercises and ESPP purchases by employees specifically identifiable to Arlo was $0.4 million through the completion of the IPO. Cash received from NETGEAR stock option exercises and ESPP purchases by employees specifically identifiable to Arlo was $0.1 million and $1.0 million for the three and nine months ended October 1, 2017, respectively. Cash paid to administer the RSU withholdings relating to employees specifically identifiable to Arlo was $0.8 million through the completion of the IPO. There was no cash paid to administer the RSU withholdings relating to employees specifically identifiable to Arlo for the three months ended October 1, 2017. Cash paid to administer the RSU withholdings relating to employees specifically identifiable to Arlo for the nine months ended October 1, 2017 was $0.4 million. |
Segment and Geographic Information |
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Segment and Geographic Information | Segment and Geographic Information Segment Information The Company operates as one operating and reportable segment. The Company has identified its CEO as the Chief Operating Decision Maker (“CODM”). The CODM reviews financial information presented on a combined basis for purposes of allocating resources and evaluating financial performance. Geographic Information The Company conducts business across three geographic regions: Americas, EMEA and APAC. Revenue consists of gross product shipments and service revenue, less allowances for estimated sales returns, price protection, end-user customer rebates and other channel sales incentives deemed to be a reduction of revenue per the authoritative guidance for revenue recognition, and net changes in deferred revenue. For reporting purposes, revenue by geography is generally based upon the ship-to location of the customer for device sales and device location for service sales. The following table shows revenue by geography for the periods indicated:
The Company’s Property and equipment, net are located in the following geographic locations:
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Related Party Transactions (Notes) |
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Related Party Transactions | Related Party Transactions Related Party Transactions Related party transactions and activities are conducted on terms equivalent to those that would prevail in an arm’s-length transaction where conditions of competitive, free-market dealing may exist. Related party transactions between Arlo and NETGEAR completed prior to consummation of the IPO were settled in cash. The related party receivables are reflected in Prepaid expenses and other current assets, and the related party payables are reflected in Accrued liabilities on the unaudited condensed combined balance sheets. The related party receivables balance was $0.1 million as of December 31, 2017 and there was no related party payable as of December 31, 2017. On August 2, 2018, in connection with the IPO, the Company entered into a master separation agreement, a transition services agreement, an intellectual property rights cross-license agreement, a tax matters agreement, an employee matters agreement, and a registration rights agreement, in each case with NETGEAR, which effect the Separation, provide a framework for the Company’s relationship with NETGEAR after the Separation and provide for the allocation between the Company and NETGEAR of NETGEAR’s assets, employees, liabilities and obligations (including its investments, property and employee benefits assets and liabilities) attributable to periods prior to, at and after the Separation. See below for detailed descriptions of those agreements. Pursuant to the agreements between NETGEAR and the Company, NETGEAR transferred substantially all of the assets and liabilities and operations of Arlo business to the Company. As a result, Receivables from NETGEAR was $27.6 million and Payables to NETGEAR was $15.2 million as of September 30, 2018. Additionally, the Company received a contribution of cash of approximately $70.0 million from NETGEAR. Allocation of Corporate Expenses Prior to the completion of the IPO, NETGEAR provided certain corporate services to the Company, such as executive management, information technology, legal, finance and accounting, human resources, tax, treasury, research and development, sales and marketing, shared facilities and other shared services, as well as stock-based compensation expense attributable to Arlo’s employees and an allocation of stock-based compensation expense attributable to NETGEAR’s employees. These costs were allocated based on revenue, headcount, or other measures the Company has determined as reasonable through July 1, 2018. Following July 1, 2018, the Company assumed responsibility for the costs of these functions. The amount of these allocations from NETGEAR reflected within operating expenses in the unaudited condensed consolidated statements of operations was $11.0 million for the three months ended October 1, 2017, which included $3.1 million for research and development, $3.6 million for sales and marketing, and $4.3 million for general and administrative expense. The amount of these allocations from NETGEAR was $30.6 million from the January 1, 2018 to the date of the completion of the Company’s IPO, which included $9.4 million for research and development, $10.0 million for sales and marketing, and $11.2 million for general and administrative expense. Corporate expense allocations amounted to $27.3 million for the nine months ended October 1, 2017, which included $8.1 million for research and development, $8.8 million for sales and marketing, and $10.4 million for general and administrative expense. Related Party Arrangements Prior to the completion of the IPO, the Company entered into agreements with NETGEAR that govern Arlo’s separation from NETGEAR and various interim arrangements. These agreements have been in effect since the completion of the IPO and the Separation, and provide for, among other things, the transfer from NETGEAR to Arlo of assets and the assumption by Arlo of liabilities comprising the business through a master separation agreement between the Company and NETGEAR (the “master separation agreement”). The Company also entered into certain other agreements that provide a framework for the relationship with NETGEAR after the Separation, including:
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Summary of Significant Accounting Policies (Policies) |
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Accounting Policies [Abstract] | |
Cash and cash equivalents | Cash and cash equivalents The Company considers all highly liquid investments with an original maturity or a remaining maturity at the time of purchase of three months or less to be cash equivalents. The Company deposits cash and cash equivalents with high credit quality financial institutions. |
Short-term investments | Short-term investments Short-term investments are comprised of marketable securities that consist of government securities with an original maturity or a remaining maturity at the time of purchase of greater than three months and no more than 12 months. The marketable securities are held in the Company’s name with one high quality financial institution, which acts as the Company's custodian and investment manager. These marketable securities are classified as available-for-sale securities in accordance with the provisions of the authoritative guidance for investments and are carried at fair value with unrealized gains and losses reported as a separate component of stockholders' equity. |
Financial instruments | Financial instruments The Company uses foreign currency forward contracts to manage the exposures to foreign exchange risk related to expected future cash flows on certain forecasted revenue, costs of revenue, operating expenses, and on certain existing assets and liabilities. Foreign currency forward contracts generally mature within eleven months of inception. Under its foreign currency risk management strategy, the Company utilizes derivative instruments to reduce the impact of currency exchange rate movements on the Company's operating results by offsetting gains and losses on the forward contracts with increases or decreases in foreign currency transactions. The company does not use derivative financial instruments for speculative purposes. The Company accounts for its derivative instruments as either assets or liabilities and records them at fair value. Derivatives that are not defined as hedges in the authoritative guidance for derivatives and hedging must be adjusted to fair value through earnings. For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in current earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. For derivatives designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in earnings. |
Fair value measurement | Fair value measurements The carrying amounts of the Company’s financial instruments, including cash equivalents, short-term investments, accounts receivable, and accounts payable approximate their fair values due to their short maturities. Foreign currency forward contracts are recorded at fair value based on observable market data. |
Stock-based compensation | Stock-based compensation The Company’s employees have historically participated in NETGEAR’s stock-based compensation plans. Stock-based compensation expense has been allocated to the Company based on the awards and terms previously granted to the Company’s employees as well as an allocation of NETGEAR’s corporate and shared functional employee expenses. The Company measures stock-based compensation at the grant date based on the fair value of the award. The fair value of stock options and the shares offered under the employee stock purchase plan is estimated using the Black-Scholes option pricing model. Estimated compensation cost relating to RSUs is based on the closing fair market value of NETGEAR’s common stock on the date of grant. Equity awards granted by the Company under its own stock-based compensation plans on or after the completion of the IPO are comprised of performance-based stock options (the “PSOs”), stock options, offerings under the Company’s employee stock purchase plan (the “ESPP”), and restricted stock units (“RSUs”). The Company uses the fair value method of accounting for its equity awards granted to employees and measures the cost of employee services received in exchange for the stock-based awards. The fair value of stock options, PSOs, and ESPP offerings is estimated on the grant or offering date using the Black-Scholes option pricing model. The fair value of RSUs is measured on the grant date based on the closing fair market value of the Company’s common stock. The stock-based compensation cost is recognized ratably over the period during which an employee is required to provide service in exchange for the awards, usually the vesting period, which is generally four years for stock options, four years for RSUs and six months for the ESPP. For PSOs, stock-based compensation expense of individual performance milestone is recognized over the expected performance achievement period when the achievement becomes probable. |
Comprehensive income (loss) | Comprehensive income (loss) Comprehensive income consists of net income (loss) and other gains and losses affecting stockholders’ equity that the Company excluded from net income (loss), including gains and losses related to fair value of short-term investments and the effective portion of cash flow hedges that were outstanding as of the end of the year. |
Recent accounting pronouncements | Recent accounting pronouncements Emerging Growth Company Status As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, unless the Company otherwise irrevocably elects not to avail itself of this exemption. The Company did not make such an irrevocable election and chose to use this extended transition period under the JOBS Act. Thus, the effective dates discussed below reflect the delayed adoption dates applicable to private companies. Accounting Pronouncements Recently Adopted ASU 2014-09 In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606) (“ASC 606”). The revenue recognition requirements in Accounting Standards Codification Topic 605 (“ASC 605”), Revenue Recognition, is superseded by ASC 606. ASC 606 requires the recognition of revenue when control of promised goods or services is transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance should be applied either retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with the cumulative effect of initially applying this guidance recognized at the date of initial application (modified retrospective method). The guidance is required to be adopted in the first fiscal quarter of 2019 and early adoption is permitted. On January 1, 2018, the Company adopted ASC 606 and applied this guidance to those contracts which were not completed at the date of adoption using the modified retrospective method. Refer to Note 3, Revenue Recognition for further details. ASU 2016-16 In October 2016, the FASB issued ASU 2016-16, “Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory” (Topic 740), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. This removes the exception to postpone recognition until the asset has been sold to an outside party. ASU 2016-16 is required to be adopted in the first fiscal quarter of 2019 with early adoption permitted. The Company elected to adopt the new standard on January 1, 2018 (when it became effective for public companies that are not emerging growth companies). There was no impact on the Company’s unaudited condensed consolidated financial position, results of operations, or cash flows as a result of the adoption. ASU 2017-12 In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities” (Topic 815), which expands and refines hedge accounting for both non-financial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The guidance also makes certain targeted improvements to simplify the application of hedge accounting guidance, ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness and ease the reporting on hedge ineffectiveness. ASU 2017-12 is effective for the Company in the first fiscal quarter of 2019 and early adoption is permitted. During the three months ended September 30, 2018, the Company established a hedge program to hedge foreign currency exchange rate risks. The Company early adopted the new guidance effectively July 2, 2018, the beginning of its third fiscal quarter of 2018. The adoption did not have material impact on the Company’s unaudited condensed consolidated financial position, results of operations, or cash flows. Accounting Pronouncements Not Yet Effective ASU 2016-02 In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842), which requires lessees to recognize on the balance sheets a right-of-use (“ROU”) asset, representing its right to use the underlying asset for the lease term, and a corresponding lease liability for all leases with terms greater than 12 months. The liability will be equal to the net present value of minimum lease payments while the ROU asset will be based on the liability, subject to adjustment, such as for initial direct costs. In addition, ASU 2016-02 expands the disclosure requirements for lessees to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. Upon adoption, the Company will be required to record a lease asset and lease liability related to its operating leases. The new standard requires a modified retrospective transition through a cumulative-effect adjustment as of the beginning of the earliest period presented in the financial statements, although the FASB recently approved an option for transition relief to not restate or make required disclosures under the new standard in comparative periods in the period of adoption. ASU 2016-02 is effective for the Company in the first fiscal quarter of 2020 (or the first fiscal quarter of 2019 should the Company cease to be classified as an EGC), with early adoption permitted. The Company will adopt the new standard effective January 1, 2019 and elect to utilize the FASB’s recently approved option for transition relief and recognize a cumulative-effect adjustment to the opening balance of retained earnings as of January 1, 2019. The Company will not restate or make disclosures under the new standard for the comparative periods prior to the period of adoption. The Company’s assessment of the impact of the adoption of ASU 2016-02, based on its lease portfolio as of September 30, 2018, indicates that it will recognize ROU assets in the range of $11 million to $14 million and lease liabilities in the range of $12 million to $15 million as of January 1, 2019, exclusive of the build-to-suit lease arrangement under its San Jose corporate headquarters. The difference between these amounts, net of deferred tax impact, will be recorded as an adjustment to Retained earnings at the beginning of the first quarter of year of adoption. The Company is currently evaluating the impact of ASU 2016-02 on its build-to-suit lease arrangement under its San Jose corporate headquarters. The adoption of the new standard will not have material impacts on the unaudited condensed consolidated statements of operations and statements of cash flows. The ultimate impact of adopting ASU 2016-02 will depend on the Company’s lease portfolio as of the adoption date. The Company expects to complete the adoption process, including adding policies, procedures and controls, implementing lease accounting software, and evaluating necessary disclosures to comply with the standards requirements, prior to the first fiscal quarter of 2019. ASU 2016-13 In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments” (Topic 326), which replaces the incurred-loss impairment methodology and requires immediate recognition of estimated credit losses expected to occur for most financial assets, including trade receivables. ASU 2016-13 is effective for the Company beginning in the first fiscal quarter of 2021 (or the first fiscal quarter of 2020 should the Company cease to be classified as an EGC), with early adoption permitted. The Company continues to assess the potential impact of the new guidance, but does not expect it to have a material impact on its financial position, results of operations, or cash flows. ASU 2018-15 In August 2018, the FASB issued ASU 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”, which align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). ASU 2018-15 is effective for the Company beginning in the first fiscal quarter of 2022 (or the first fiscal quarter of 2021 should the Company cease to be classified as an EGC), with early adoption permitted. The Company is currently evaluating the impact of the adoption on its consolidated financial statements. With the exception of the new standards discussed above, there have been no other new accounting pronouncements that have significance, or potential significance, to the Company’s financial position, results of operations, or cash flows. |
Revenue Recognition | Revenue Recognition Revenue from contracts with customers is recognized when control of the promised goods or services is transferred to the customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The majority of revenue comes from sales of hardware products to customers (retailers, distributors, and service providers). Revenue is recognized at a point in time when control of the goods is transferred to the customer, generally occurring upon shipment or delivery, dependent upon the terms of the underlying contract. The amount recognized reflects the consideration the Company expects to be entitled to in exchange for the transferred goods. The Company sells subscription paid services to its end user customers where it provides customers access to its cloud services. Revenue for subscription sales is generally recognized on a ratable basis over the contract term, beginning on the date that the service is made available to the customers at the time of registration. The subscription contracts are generally 30 days or 12 months in length, billed in advance. All such service or support sales are typically recognized using an output measure of progress by looking at the time elapsed, as the contracts generally provide the customer equal benefit throughout the contract period. In addition to selling paid subscriptions, the Company also sells services bundled with hardware products and accounts for these sales in line with the multiple performance obligations guidance. Revenue from all sales types is recognized at transaction price, which is the amount the Company expects to be entitled to in exchange for transferring goods or providing services. Transaction price is calculated as selling price net of variable consideration which may include estimates for future returns, sales incentives, and price protection related to current period product revenue. The Company’s standard obligation to its direct customers generally provides for a full refund in the event that such product is not merchantable or is found to be damaged or defective. In determining estimates for future returns, management analyzes historical data, channel inventory levels, current economic trends, and changes in customer demand for the Company’s products. Sales incentives and price protection are determined based on a combination of the actual amounts committed and through estimating future expenditure based upon historical customary business practice. Typically variable consideration does not need to be constrained as estimates are based on predictive historical data or future commitments that are planned and controlled by the Company. However, the Company continues to assess variable consideration estimates such that it is probable that a significant reversal of revenue will not occur. Contracts with Multiple Performance Obligations Some of the Company’s contracts with customers contain multiple promised goods or services. Such contracts include hardware products with bundled services, various subscription services, and support. For these contracts, the Company accounts for the promises separately as individual performance obligations if they are distinct. Performance obligations are determined to be considered distinct if they are both capable of being distinct and distinct within the context of the contract. In determining whether performance obligations meet the criteria for being distinct, the Company considers a number of factors, such as the degree of interrelation and interdependence between obligations, and whether or not the good or service significantly modifies or transforms another good or service in the contract. The embedded software in most of the hardware products is not considered distinct and therefore the combined hardware and incidental software are treated as one performance obligation and recognized at the point in time when control of product transfers to the customer. Basic service that is included with certain hardware products is considered distinct and therefore the hardware and service are treated as separate performance obligations. After identifying the separate performance obligations, the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices are generally determined based on the prices charged to customers or using an adjusted market assessment. For the Company, standalone selling price of the hardware is directly observable from add-on camera and base station sales. Standalone selling price of the service is estimated using an adjusted market approach. Revenue is then recognized for each distinct performance obligation as control is transferred to the customer. For the Company, the revenue attributable to hardware is recognized at shipping or delivery at the time control of the product transfers to the customer. The transaction price allocated to the service is recognized over the estimated useful life of the hardware, beginning when the customer is expected to activate their account. Useful life of the hardware is determined by industry norms, frequency of new model releases, and user history. Warranties Sales of hardware products regularly include warranties to end customers that cover bug fixes, minor updates such that the product continues to function according to published specifications in a dynamic environment, and phone support. These standard warranties are assurance type warranties and do not offer any services in addition to the assurance that the product will continue working as specified for one or more years. Therefore, warranties are not considered separate performance obligations in the arrangement. Instead, the expected cost of warranties is accrued as an expense in accordance with authoritative guidance. Shipping and Handling Shipping and handling fees billed to customers are included in Revenue. Shipping and handling costs associated with inbound freight are included in Cost of revenue. In cases where the Company gives a freight allowance to the customer for their own inbound freight costs, such costs are appropriately recorded as a reduction in Revenue. Shipping and handling costs associated with outbound freight are included in Sales and marketing expenses. The Company has elected to account for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products. Shipping and handling costs associated with outbound freight totaled $0.5 million and $0.8 million for the three months ended September 30, 2018 and October 1, 2017, respectively, and $2.3 million and $1.9 million for the nine months ended September 30, 2018 and October 1, 2017, respectively. Transaction Price Allocated to the Remaining Performance Obligations Remaining performance obligations represent the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period. Unsatisfied and partially unsatisfied performance obligations consist of contract liabilities, in-transit orders with destination terms, and non-cancellable backlog. Non-cancellable backlog includes goods and services for which customer purchase orders have been accepted and that are scheduled or in the process of being scheduled for shipment. |
Fair Value of Financial Instruments | The Company determines the fair values of its financial instruments based on a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. The fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value: Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). |
Revenue Recognition (Tables) |
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Revenue from Contract with Customer [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Impacts of Adopting ASC 606 | The following table summarizes the impacts of adopting ASC 606 on the Company’s unaudited condensed consolidated balance sheet for the fiscal year beginning January 1, 2018 as an adjustment to the opening balances:
The following table summarizes the impacts of adopting ASC 606 on the Company’s unaudited condensed consolidated balance sheet as of September 30, 2018:
The following table summarizes the impacts of adopting ASC 606 on the Company’s unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2018:
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Schedule of Remaining Performance Obligations | The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2018:
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Schedule of Changes in Contract Balances | The following table reflects the changes in contract balances for the nine months ended September 30, 2018:
_________________________
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Business Acquisition (Tables) |
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Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||
Business Combinations [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Allocation of Purchase Price | The allocation of the purchase price was as follows (in thousands):
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Balance Sheet Components (Tables) |
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Balance Sheet Related Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale short-term investments | Available-for-sale short-term investments
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Schedule of Accounts Receivable, Net | Accounts receivable, net
_________________________ * Upon adoption of ASC 606, allowances for sales returns and price protection were reclassified to current liabilities as these reserve balances are considered refund liabilities. Refer to Note 3. Revenue Recognition, for additional information on the adoption impact. |
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Schedule of Property and Equipment, Net | Property and equipment, net The unaudited condensed consolidated balance sheets include the property and equipment specifically identifiable to Arlo’s business. The components of property and equipment are as follows:
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Schedule of Intangibles, Net | Intangibles, net
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Schedule of Estimated Amortization Expense Related to Intangibles | As of September 30, 2018, estimated amortization expense related to finite-lived intangibles for the remaining years was as follows (in thousands):
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Schedule of Goodwill | There was no change in the carrying amount of goodwill during the nine months ended September 30, 2018 and the goodwill as of December 31, 2017 and September 30, 2018 was as follows (in thousands):
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Schedule of Other Non-Current Assets | Other non-current assets
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Schedule of Other Accrued Liabilities | Accrued liabilities
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Fair Value Measurements (Tables) |
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Fair Value Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value, Assets and Liabilities Measured on Recurring Basis | The following tables summarize assets and liabilities measured at fair value on a recurring basis as of September 30, 2018:
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Derivative Financial Instruments (Tables) |
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Derivative Instruments and Hedging Activities Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Fair Values of the Company's Derivative Instruments and the Line Items on the Consolidated Balance Sheets | The fair values of the Company’s derivative instruments and the line items on the unaudited condensed consolidated balance sheets to which they were recorded as of September 30, 2018 are summarized as follows:
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Schedule of Offsetting of Derivative Assets | The following tables set forth the offsetting of derivative assets and liabilities as of September 30, 2018:
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Schedule of Offsetting of Derivative Liabilities |
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Schedule of Effects and Locations of Gains or Losses Recognized in Income | The effects of the Company's cash flow hedges on the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2018 are summarized as follows:
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Schedule of Derivatives not Designated as Hedging Instruments | The effects of the Company’s non-designated hedge included in Other income (expense), net in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2018 are as follows:
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Accumulated Other Comprehensive Income (Loss) (Tables) |
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Equity [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Accumulated Other Comprehensive Income | The following table sets forth the changes in accumulated other comprehensive income (loss) (“AOCI”) by component for the nine months ended September 30, 2018:
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Schedule of Reclassification out of Accumulated Other Comprehensive Income (Loss) | The following tables provide details about significant amounts reclassified out of each component of AOCI for the three and nine months ended September 30, 2018:
_________________________ * There is no tax impact on all hedging gains and losses from derivative contracts due a full valuation allowance. |
Net Income (Loss) Per Share (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Net Income Per Share | Net income (loss) per share for the three and nine months ended September 30, 2018 and October 1, 2017 were as follows:
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Commitments and Contingencies (Tables) |
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Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Changes in Warranty Obligation | Warranty Obligations Changes in the Company’s warranty liability, which is included in Accrued liabilities in the unaudited condensed consolidated balance sheets, were as follows:
* Upon adoption of ASC 606 on January 1, 2018, warranty reserve balances totaling $28.7 million were reclassified to sales returns as these liabilities are payable to the Company’s customers and settled in cash or by credit on account. Under ASC 606, these amounts are to be accounted for as sales with right of return. |
Employee Benefit Plans (Tables) |
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Employee Benefits and Share-based Compensation, Noncash [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Stock Option Activity | Arlo’s stock option activity during the three months ended of September 30, 2018 was as follows:
(1) Including Arlo IPO Options of 2.8 million shares granted to the Company’s NEOs with performance-based vesting criteria (in addition to service-based vesting criteria for any of such IPO Options that are deemed to have been earned) during the three months ended of September 30, 2018. As of September 30, 2018, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria had been satisfied. Therefore, this line item includes all such performance-based IPO Options granted during the three months ended September 30, 2018, reported at the maximum possible number of shares that may ultimately be issuable if all applicable performance-based criteria are achieved at their maximum levels and all applicable service-based criteria are fully satisfied. NETGEAR’s stock option activity for employees specifically identifiable to Arlo during the nine months ended September 30, 2018 was as follows:
(1) Transferred options are attributable to employees that transferred from other NETGEAR’s divisions. |
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Schedule of RSU Activity | NETGEAR’s RSU activity for employees specifically identifiable to Arlo during the nine months ended September 30, 2018 was as follows:
_________________________
Arlo’s RSU activity during the three months ended of September 30, 2018 was as follows:
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Schedule of Weighted Average Assumptions | The following table sets forth the weighted average assumptions used to estimate the fair value of NETGEAR’s options granted and purchase rights granted under the NETGEAR’s ESPP to employees specifically identifiable to Arlo during the three and nine months ended September 30, 2018 and October 1, 2017.
_________________________
The following table sets forth the weighted average assumptions used to estimate the fair value of Arlo’s stock options granted using Black-Scholes option pricing model during the three months ended September 30, 2018.
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Schedule of Total Stock-Based Compensation Expense Resulting from Stock Options, Restricted Stock Awards, and the Employee Stock Purchase Plan | The following tables set forth stock-based compensation expense for employees specifically identifiable to Arlo and allocated charges deemed attributable to Arlo operations resulting from NETGEAR’s and Arlo’s RSUs and stock options, and the purchase rights under the NETGEAR’s ESPP included in the Company’s unaudited condensed consolidated statements of operations during the periods indicated:
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Segment and Geographic Information (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Net Revenue by Geography | The following table shows revenue by geography for the periods indicated:
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Schedule of Long-Lived Asset By Geographic Areas | The Company’s Property and equipment, net are located in the following geographic locations:
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Summary of Significant Accounting Policies (Details) - Accounting Standards Update 2016-02 - Scenario, Forecast $ in Millions |
Jan. 01, 2019
USD ($)
|
---|---|
Minimum | |
New Accounting Pronouncements or Change in Accounting Principle [Line Items] | |
Operating lease, right-of-use asset | $ 11 |
Operating lease, liability | 12 |
Maximum | |
New Accounting Pronouncements or Change in Accounting Principle [Line Items] | |
Operating lease, right-of-use asset | 14 |
Operating lease, liability | $ 15 |
Revenue Recognition (Income Statement Impact) (Details) - USD ($) $ in Thousands |
2 Months Ended | 3 Months Ended | 7 Months Ended | 9 Months Ended | 12 Months Ended | ||
---|---|---|---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2018 |
Oct. 01, 2017 |
Aug. 02, 2018 |
Sep. 30, 2018 |
Oct. 01, 2017 |
Dec. 31, 2017 |
|
Revenue, Initial Application Period Cumulative Effect Transition [Line Items] | |||||||
Revenue | $ 131,174 | $ 104,887 | $ 342,760 | $ 245,884 | |||
Cost of revenue | 101,427 | 76,535 | 255,666 | 184,467 | |||
Gross profit | 29,747 | 28,352 | 87,094 | 61,417 | |||
Provision for income taxes | 223 | 445 | 830 | 801 | |||
Net income (loss) | $ (6,776) | (13,225) | $ 6,014 | $ (29,634) | (36,410) | $ 3,886 | $ 6,549 |
Adjustments | Accounting Standards Update 2014-09 | |||||||
Revenue, Initial Application Period Cumulative Effect Transition [Line Items] | |||||||
Revenue | 3,195 | 5,654 | |||||
Cost of revenue | 172 | 202 | |||||
Gross profit | 3,023 | 5,452 | |||||
Provision for income taxes | 29 | 65 | |||||
Net income (loss) | 2,994 | 5,387 | |||||
Balance without adoption of ASC 606 | |||||||
Revenue, Initial Application Period Cumulative Effect Transition [Line Items] | |||||||
Revenue | 134,369 | 348,414 | |||||
Cost of revenue | 101,599 | 255,868 | |||||
Gross profit | 32,770 | 92,546 | |||||
Provision for income taxes | 252 | 895 | |||||
Net income (loss) | $ (10,231) | $ (31,023) |
Revenue Recognition (Schedule of Changes in Contract Balances and Impacts of Entries to Adopt ASC 606) (Details) $ in Thousands |
9 Months Ended |
---|---|
Sep. 30, 2018
USD ($)
| |
Accounts receivable, net | |
Beginning balance | $ 158,507 |
$ change | $ (41,388) |
% change | (26.10%) |
Ending balance | $ 117,119 |
Contract liabilities - current | |
Beginning balance | 24,746 |
$ change | $ 1,768 |
% change | 7.10% |
Ending balance | $ 26,514 |
Contract liabilities - non-current | |
Beginning balance | 13,091 |
$ change | $ 6,301 |
% change | 48.10% |
Ending balance | $ 19,392 |
Business Acquisition (Schedule of Allocation of Purchase Price) (Details) - USD ($) $ in Thousands |
Sep. 30, 2018 |
Dec. 31, 2017 |
Nov. 30, 2016 |
---|---|---|---|
Business Acquisition [Line Items] | |||
Goodwill | $ 15,638 | $ 15,638 | |
Placemeter | |||
Business Acquisition [Line Items] | |||
Cash and cash equivalents | $ 8 | ||
Accounts receivable | 11 | ||
Prepaid expenses and other current assets | 130 | ||
Property and equipment | 83 | ||
Intangibles | 6,000 | ||
Goodwill | 3,742 | ||
Accounts payable | (40) | ||
Accrued liabilities | (74) | ||
Deferred tax liabilities | (308) | ||
Total purchase price | $ 9,552 |
Balance Sheet Components (Schedule of Available-for-Sale Short-Term Investments) (Details) - USD ($) |
9 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Dec. 31, 2017 |
|
Debt Securities, Available-For-Sale [Line Items] | ||
Cost | $ 39,777,000 | |
Unrealized Gains | 0 | |
Unrealized Losses | (4,000) | |
Estimated Fair Value | 39,773,000 | |
Short-term investments | 39,773,000 | $ 0 |
U.S. treasuries | ||
Debt Securities, Available-For-Sale [Line Items] | ||
Cost | 39,777,000 | |
Unrealized Gains | 0 | |
Unrealized Losses | (4,000) | |
Estimated Fair Value | $ 39,773,000 |
Balance Sheet Components (Schedule of Accounts Receivable and Related Allowances) (Details) - USD ($) $ in Thousands |
Sep. 30, 2018 |
Jan. 01, 2018 |
Dec. 31, 2017 |
---|---|---|---|
Accounts, Notes, Loans and Financing Receivable [Line Items] | |||
Gross accounts receivable | $ 117,119 | $ 164,157 | |
Total allowances | 0 | (6,477) | |
Total accounts receivable, net | 117,119 | $ 158,507 | 157,680 |
Allowance for doubtful accounts | |||
Accounts, Notes, Loans and Financing Receivable [Line Items] | |||
Total allowances | 0 | (207) | |
Allowance for sales returns | |||
Accounts, Notes, Loans and Financing Receivable [Line Items] | |||
Total allowances | 0 | (5,868) | |
Allowance for price protection | |||
Accounts, Notes, Loans and Financing Receivable [Line Items] | |||
Total allowances | $ 0 | $ (402) |
Balance Sheet Components (Schedule of Property and Equipment, Net) (Details) - USD ($) $ in Thousands |
Sep. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Total property and equipment, gross | $ 49,114 | $ 7,270 |
Accumulated depreciation and amortization | (9,504) | (3,387) |
Total property and equipment, net | 39,610 | 3,883 |
Machinery and equipment | ||
Total property and equipment, gross | 9,879 | 6,067 |
Computer equipment | ||
Total property and equipment, gross | 4,245 | 50 |
Software | ||
Total property and equipment, gross | 9,499 | 180 |
Leasehold improvements | ||
Total property and equipment, gross | 2,590 | 530 |
Furniture and fixtures | ||
Total property and equipment, gross | 1,043 | 443 |
Construction in progress | ||
Total property and equipment, gross | $ 21,858 | $ 0 |
Balance Sheet Components (Property and Equipment, Other Information) (Details) - USD ($) $ in Millions |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2018 |
Oct. 01, 2017 |
Sep. 30, 2018 |
Oct. 01, 2017 |
|
Balance Sheet Related Disclosures [Abstract] | ||||
Depreciation expense | $ 1.1 | $ 0.5 | $ 2.3 | $ 1.3 |
Depreciation expense allocated from NETGEAR | $ 0.5 | $ 1.2 | $ 1.4 |
Balance Sheet Components (Schedule of Intangibles, Net) (Details) - USD ($) $ in Thousands |
Sep. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Intangible Assets [Line Items] | ||
Gross | $ 12,000 | $ 12,000 |
Accumulated Amortization | (8,796) | (7,652) |
Net | 3,204 | 4,348 |
Technology | ||
Intangible Assets [Line Items] | ||
Gross | 9,800 | 9,800 |
Accumulated Amortization | (6,821) | (5,790) |
Net | 2,979 | 4,010 |
Trademarks and trade names | ||
Intangible Assets [Line Items] | ||
Gross | 1,400 | 1,400 |
Accumulated Amortization | (1,400) | (1,400) |
Net | 0 | 0 |
Other | ||
Intangible Assets [Line Items] | ||
Gross | 800 | 800 |
Accumulated Amortization | (575) | (462) |
Net | $ 225 | $ 338 |
Balance Sheet Components (Intangibles, Other Information) (Details) - USD ($) $ in Millions |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2018 |
Oct. 01, 2017 |
Sep. 30, 2018 |
Oct. 01, 2017 |
|
Goodwill and Intangible Assets Disclosure [Abstract] | ||||
Amortization of intangibles | $ 0.4 | $ 0.4 | $ 1.2 | $ 1.6 |
Acquired intangible assets, estimated useful life | 2 years |
Balance Sheet Components (Schedule of Estimated Amortization Expense Related to Intangibles) (Details) - USD ($) $ in Thousands |
Sep. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Balance Sheet Related Disclosures [Abstract] | ||
2018 (remaining three months) | $ 381 | |
2019 | 1,517 | |
2020 | 1,306 | |
Net | $ 3,204 | $ 4,348 |
Balance Sheet Components Balance Sheet Components (Schedule of Goodwill) (Details) (Details) - USD ($) |
9 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Dec. 31, 2017 |
|
Goodwill and Intangible Assets Disclosure [Abstract] | ||
Increase (decrease) in goodwill | $ 0 | |
Goodwill | $ 15,638,000 | $ 15,638,000 |
Balance Sheet Components (Schedule of Other Non-Current Assets) (Details) - USD ($) $ in Thousands |
Sep. 30, 2018 |
Jan. 01, 2018 |
Dec. 31, 2017 |
---|---|---|---|
Balance Sheet Related Disclosures [Abstract] | |||
Non-current deferred income taxes | $ 438 | $ 865 | |
Deposits | 6,000 | 0 | |
Other | 3,760 | 1,328 | |
Total other non-current assets | $ 10,198 | $ 2,437 | $ 2,193 |
Balance Sheet Components (Schedule of Other Accrued Liabilities) (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||||
---|---|---|---|---|---|---|
Sep. 30, 2018 |
Oct. 01, 2017 |
Sep. 30, 2018 |
Oct. 01, 2017 |
Jan. 01, 2018 |
Dec. 31, 2017 |
|
Balance Sheet Related Disclosures [Abstract] | ||||||
Sales and marketing | $ 36,142 | $ 36,142 | $ 31,613 | |||
Sales returns | 33,304 | 33,304 | 0 | |||
Warranty obligation | 3,618 | 3,618 | 31,756 | |||
Accrued employee compensation | 7,969 | 7,969 | 3,184 | |||
Freight | 2,023 | 2,023 | 3,862 | |||
Current financing lease obligation | 917 | 917 | 0 | |||
Other | 20,546 | 20,546 | 5,682 | |||
Total accrued liabilities | 104,519 | 104,519 | $ 89,467 | 76,097 | ||
Reclassified to sales returns upon adoption of ASC 606 | 0 | $ 0 | 28,713 | $ 0 | ||
Non-current financing lease obligation | $ 20,639 | $ 20,639 | $ 0 |
Derivative Financial Instruments (Narrative) (Details) - Foreign currency contracts $ in Millions |
3 Months Ended | 9 Months Ended |
---|---|---|
Sep. 30, 2018
USD ($)
derivative_instrument
|
Sep. 30, 2018
USD ($)
derivative_instrument
|
|
Derivative [Line Items] | ||
Term of derivative contracts | 6 months | |
Derivatives Not Designated as Hedging Instruments | ||
Derivative [Line Items] | ||
Number of derivatives entered into | derivative_instrument | 1 | 1 |
Average size of derivative contracts | $ | $ 3.6 | $ 3.6 |
Cash Flow Hedges | ||
Derivative [Line Items] | ||
Number of derivatives entered into | derivative_instrument | 8 | 8 |
Average size of derivative contracts | $ | $ 3.3 | $ 3.3 |
Minimum | Derivatives Not Designated as Hedging Instruments | ||
Derivative [Line Items] | ||
Term of derivative contracts | 1 month | |
Maximum | Derivatives Not Designated as Hedging Instruments | ||
Derivative [Line Items] | ||
Term of derivative contracts | 3 months |
Derivative Financial Instruments (Schedule of Offsetting of Derivative Assets) (Details) $ in Thousands |
Sep. 30, 2018
USD ($)
|
---|---|
Offsetting of Derivative Assets [Line Items] | |
Gross Amounts of Recognized Assets | $ 272 |
HSBC | |
Offsetting of Derivative Assets [Line Items] | |
Gross Amounts of Recognized Assets | 272 |
Gross Amounts Offset in the Unaudited Condensed Consolidated Balance Sheets | 0 |
Net Amounts Of Liabilities Presented in the Unaudited Condensed Consolidated Balance Sheets | 272 |
Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets: Financial Instruments | (59) |
Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets: Cash Collateral Pledged | 0 |
Net Amount | $ 213 |
Derivative Financial Instruments (Schedule of Offsetting of Derivative Liabilities) (Details) - HSBC $ in Thousands |
Sep. 30, 2018
USD ($)
|
---|---|
Offsetting of Derivative Liabilities [Line Items] | |
Gross Amounts of Recognized Liabilities | $ 59 |
Gross Amounts Offset in the Unaudited Condensed Consolidated Balance Sheets | 0 |
Net Amounts Of Liabilities Presented in the Unaudited Condensed Consolidated Balance Sheets | 59 |
Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets: Financial Instruments | (59) |
Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets: Cash Collateral Pledged | 0 |
Net Amount | $ 0 |
Derivative Financial Instruments (Schedule of Effects and Locations of Gains or Losses Recognized in Income) (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2018 |
Oct. 01, 2017 |
Sep. 30, 2018 |
Oct. 01, 2017 |
|
Derivative Instruments, Gain (Loss) [Line Items] | ||||
Revenue | $ 131,174 | $ 104,887 | $ 342,760 | $ 245,884 |
Cost of revenue | 101,427 | 76,535 | 255,666 | 184,467 |
Research and development | 16,100 | 8,289 | 41,929 | 24,886 |
Sales and marketing | 12,843 | 9,983 | 37,123 | 23,067 |
General and administrative | $ 8,357 | $ 4,337 | $ 19,553 | $ 10,426 |
Derivative Financial Instruments (Schedule of Derivatives not Designated as Hedging Instruments) (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2018 |
Oct. 01, 2017 |
Sep. 30, 2018 |
Oct. 01, 2017 |
|
Other income (expense), net | Foreign currency contracts | Derivatives Not Designated as Hedging Instruments | ||||
Derivative Instruments, Gain (Loss) [Line Items] | ||||
Gains (losses) on cash flow hedge | $ (57) | $ 0 | $ (57) | $ 0 |
Income Taxes (Narrative) (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | 12 Months Ended | ||
---|---|---|---|---|---|
Sep. 30, 2018 |
Oct. 01, 2017 |
Sep. 30, 2018 |
Oct. 01, 2017 |
Dec. 31, 2017 |
|
Income Tax Disclosure [Abstract] | |||||
Provision for income taxes | $ 223 | $ 445 | $ 830 | $ 801 | |
Effective tax rate | (1.70%) | 6.90% | (2.30%) | 17.10% | |
Provisional estimate for transition tax | $ 2,900 |
Commitments and Contingencies (Schedule of Changes in Warranty Obligation) (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2018 |
Oct. 01, 2017 |
Sep. 30, 2018 |
Oct. 01, 2017 |
|
Movement in Standard Product Warranty Accrual [Roll Forward] | ||||
Balance at the beginning of the period | $ 3,487 | $ 18,000 | $ 31,756 | $ 15,949 |
Reclassified to sales returns upon adoption of ASC 606 | 0 | 0 | (28,713) | 0 |
Provision for warranty obligation made during the period | 344 | 16,476 | 1,166 | 36,660 |
Settlements made during the period | (213) | (8,985) | (591) | (27,118) |
Balance at the end of the period | $ 3,618 | $ 25,491 | $ 3,618 | $ 25,491 |
Employee Benefit Plans (Schedule of Valuation and Expense Information) (Details) |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2018 |
Oct. 01, 2017 |
Sep. 30, 2018 |
Oct. 01, 2017 |
|
Arlo | Stock Options | ||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||||
Expected life (in years) | 6 years 3 months | |||
Risk-free interest rate | 2.86% | |||
Expected volatility | 40.00% | |||
Dividend yield | 0.00% | |||
NETGEAR | Stock Options | ||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||||
Expected life (in years) | 4 years 5 months | 4 years 5 months | 4 years 5 months | |
Risk-free interest rate | 2.79% | 2.32% | 1.65% | |
Expected volatility | 33.50% | 30.90% | 31.60% | |
Dividend yield | 0.00% | 0.00% | 0.00% | 0.00% |
NETGEAR | ESPP | ||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||||
Expected life (in years) | 6 months | 6 months | 6 months | |
Risk-free interest rate | 1.12% | 1.81% | 0.93% | |
Expected volatility | 31.30% | 37.10% | 29.70% | |
Dividend yield | 0.00% | 0.00% | 0.00% | 0.00% |
Segment and Geographic Information (Narrative) (Details) |
9 Months Ended |
---|---|
Sep. 30, 2018
region
segment
| |
Segment Reporting [Abstract] | |
Number of reportable segments | segment | 1 |
Number of operating segments | 1 |
Number of geographic regions in which the Company conducts business | region | 3 |
Segment Information (Schedule of Net Revenue by Geographic Areas) (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2018 |
Oct. 01, 2017 |
Sep. 30, 2018 |
Oct. 01, 2017 |
|
Segment Reporting Information [Line Items] | ||||
Revenue | $ 131,174 | $ 104,887 | $ 342,760 | $ 245,884 |
United States (U.S.) | ||||
Segment Reporting Information [Line Items] | ||||
Revenue | 108,236 | 77,370 | 263,798 | 185,347 |
Americas (excluding U.S.) | ||||
Segment Reporting Information [Line Items] | ||||
Revenue | 4,613 | 5,064 | 10,455 | 10,009 |
EMEA | ||||
Segment Reporting Information [Line Items] | ||||
Revenue | 11,760 | 17,433 | 50,416 | 37,662 |
Asia Pacific | ||||
Segment Reporting Information [Line Items] | ||||
Revenue | $ 6,565 | $ 5,020 | $ 18,091 | $ 12,866 |
Segment Information (Schedule of Long-Lived Asset by Geographic Areas) (Details) - USD ($) $ in Thousands |
Sep. 30, 2018 |
Dec. 31, 2017 |
---|---|---|
Long-Lived Assets [Line Items] | ||
Total property and equipment, net | $ 39,610 | $ 3,883 |
United States (U.S.) | ||
Long-Lived Assets [Line Items] | ||
Total property and equipment, net | 36,583 | 2,053 |
Americas (excluding U.S.) | ||
Long-Lived Assets [Line Items] | ||
Total property and equipment, net | 212 | 61 |
EMEA | ||
Long-Lived Assets [Line Items] | ||
Total property and equipment, net | 273 | 1 |
China | ||
Long-Lived Assets [Line Items] | ||
Total property and equipment, net | 2,157 | 1,702 |
APAC (excluding China) | ||
Long-Lived Assets [Line Items] | ||
Total property and equipment, net | $ 385 | $ 66 |
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