Prospectus Summary
PROSPECTUS SUMMARY This summary highlights certain information about us and this offering contained elsewhere in this prospectus, but it is not complete and does not contain all of the information you should consider before investing in our common stock. In addition to this summary, you should read this entire prospectus carefully, including the risks of investing in our common stock and the other information discussed in the section titled “Risk Factors,” and the financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. This summary contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements as a result of certain factors, including those set forth in the sections titled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.”We describe in this prospectus the businesses that will be contributed to us by NETGEAR as part of our separation from NETGEAR as if they were our businesses for all historical periods described. Please see the section titled “Certain Relationships and Related Party Transactions—Relationship with NETGEAR—Arrangements between NETGEAR and Our Company” for a description of this separation. Our historical financial results as part of NETGEAR contained in this prospectus may not reflect our financial results in the future as a stand-alone company or what our financial results would have been had we been a stand-alone company during the periods presented.
As used in this prospectus, the terms “Arlo,” the “Company,” “we,” “us” and “our” may, depending on the context, refer to Arlo Technologies, Inc., to the Arlo segment of NETGEAR, Inc. as described more particularly under “Certain Relationships and Related Party Transactions—Relationship with NETGEAR—Historical Relationship with NETGEAR” or to Arlo Technologies, Inc. and its consolidated subsidiaries after giving effect to the separation described under “Certain Relationships and Related Party Transactions—Relationship with NETGEAR—Arrangements between NETGEAR and Our Company.” As used in this prospectus, the term “NETGEAR” refers to NETGEAR, Inc.
Overview
Arlo combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that transform the way people experience the connected lifestyle. Our 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. To date, we have launched several categories of award-winning smart connected devices, including wire-free smart Wi-Fi and LTE-enabled cameras, advanced baby monitors and smart security lights. In addition, Arlo’s broad compatibility allows the platform to seamlessly integrate with third-party products and protocols. Since the launch of our first product in December 2014, we have shipped over 7.5 million smart connected devices, and, as of April 1, 2018, our smart platform had over 1.9 million registered users across more than 100 countries around the world. We plan to continue to introduce new smart connected devices to the Arlo platform in new categories, increase the number of registered users on our platform, keep them highly engaged through our mobile app and generate incremental recurring revenue by offering them paid subscription services.
Arlo exemplifies a new generation of smart internet-of-things (“IoT”) platforms by featuring smart devices that are always connected to the internet, software developed with artificial intelligence (“AI”) capabilities, including machine learning and computer vision, and a highly engaging mobile app through which users can manage and utilize their smart connected devices. We believe we are well-positioned to capture the large and fast-growing connected lifestyle market opportunity by leading the way into this new generation of connected lifestyle platforms.
Our total addressable market consists of individuals and business owners who use connected devices to enhance their lives. According to Gartner, consumer IoT endpoints hardware and services spending will reach $1.8 trillion by 2021.(1) Gartner estimates our addressable market for the global connected home alone, including elements of consumer IoT services spending and IoT endpoints hardware spending, will grow from $45 billion in 2017 to $146 billion in 2021, representing a compound annual growth rate (“CAGR”) of 34%.(2) Outside of the home, we have seen adoption of our cellular-enabled products in a variety of use cases, such as neighborhood watch, construction site monitoring, wildlife and outdoor trail surveillance and event monitoring. We are also seeing demand for our products and solutions from small businesses and local government agencies, and believe these segments represent additional growth areas for us. According to NPD Group, for the first quarter of 2018, we held 40% market share by point of sale dollars in the U.S. consumer network connected camera systems market.(3) A user’s introduction to our smart platform typically starts with the purchase of one or more of our cameras and lights. Consumers and business owners can easily set up these smart connected devices by downloading our mobile app and integrating these devices into their homes and businesses without the need for professional installation services. The Arlo app provides users with a highly engaging experience through real-time motion detection notifications and live stream functionality. To realize the platform’s full potential, users can subscribe to Arlo Smart, a paid subscription service that adds powerful AI capabilities to Arlo cameras that enhance the user experience by providing users with actionable intelligence and rich app notifications. These Arlo Smart services are available via three subscription-based tiers: Arlo Smart Premier, Arlo Smart Elite and Arlo Smart Add-On, each more fully described below under “—Our Products—Arlo Services.”
Our fully integrated smart platform provides an intuitive and engaging user experience, which distinguishes our product offerings and contributes to our rapid growth. According to Sensor Tower, for the first quarter of 2018, the Arlo app had a user engagement rate, measured by daily active users (the number of users who launch the Arlo app at least once per day on average in a period) divided by monthly active users (the number of users who launch the Arlo app at least once per month on average in a period) of 37%. Sensor Tower’s data also shows that, during the same period, the Arlo app’s number of daily active users was in line with the median of the 500 most downloaded apps from the Apple App Store and that the Arlo app had a user engagement rate in the top 6% of these apps. While not one of these 500 apps, the Arlo app’s user engagement rate compares favorably to many of the most engaging social media and entertainment apps available. We believe our high user engagement rate is driven by the combination of individuals’ inherent desire to stay close to what they value most and the high-quality user experience that our platform provides. We have also cultivated an online Arlo Community, where users can share Arlo video content and give each other tips on using Arlo devices. In 2016 and 2017, the number of unique visitors to the Arlo Community website reached 1.0 million and 2.3 million, respectively.
We believe that the power of our platform increases as the number of users and devices on the platform grows. As our user base and community grow, more devices are connected to our platform, which enables us to analyze an increasing volume of data, and in turn facilitates more refined computer vision algorithms. We expect that these improving capabilities will enable us to offer more innovative and intelligent services and features to our users, who we believe will increasingly be willing to pay for subscription services to benefit from these
capabilities. We believe that, as awareness of our platform grows, more users will seek to purchase both our smart connected devices and our Arlo Smart services and join our rapidly growing user base.
We have built the Arlo platform on three key technology differentiators:
These differentiators, in combination with our scalable cloud infrastructure and AI-enabled features delivered in real-time through the Arlo app, have positioned Arlo to be the smart platform of choice for many consumers and businesses.
As an operating segment of NETGEAR, we have benefitted from its decades of technological expertise, deep and long-standing relationships with suppliers and channel partners and established business processes and leadership teams. While our history with NETGEAR has provided us with certain competitive advantages, we believe that the separation, this offering and the distribution will provide a number of additional benefits to our business. See the section titled “—NETGEAR Ownership and Our Separation from NETGEAR.”
We have experienced significant growth since the launch of our first product in December 2014, and according to NPD Group, Arlo is the leader in the U.S. consumer network connected camera systems market. Outside of the United States, we are also the leader in Australia and several major European markets. In 2016, Arlo grew revenue by 108% over the prior year to $184.6 million, and in 2017, Arlo further grew revenue by 101% over the prior year to $370.7 million. For additional information regarding Arlo’s financial performance, see the section titled “Selected Combined Financial Data.”
Key Trends Driving Our Market
The intersection of the following significant technology trends are driving mass adoption of a new generation of smart IoT connected lifestyle platforms:
segment, encompassing 64% of the market in 2021.(5) We believe the new generation of smart IoT platforms, like Arlo, will feature smart devices that are always connected to the cloud, AI-based services and mobile apps through which users can manage their connected devices, creating a highly engaging user experience.
Our Competitive Advantages — What Sets Us Apart
40% market share for the first quarter of 2018.(7) Outside of the United States, we are also the leader in Australia and several major European markets.
Our Growth Strategy
We primarily generate revenue by selling devices through retail, wholesale distribution and wireless carrier channels and paid subscription services through in-app purchases. We believe that we can continue to charge a premium price over competing products because of our superior product features, ease of use and bundled prepaid services, such as rolling seven-day cloud video storage. We further enhance the user experience by offering our subscription-based Arlo Smart services, which include features such as actionable intelligence, rich app notifications and extended data storage. Since the launch of the original Arlo Security Camera in December 2014, we have introduced six additional Arlo devices, and we plan to continue to launch new camera and non-camera products and services to the Arlo ecosystem and grow our number of registered users and subscribers.
Our goal is to continue to develop innovative, world-class connected lifestyle solutions to expand and further monetize our current and future user and subscriber bases.
The key elements of our growth strategy to achieve this goal are:
Our Solutions
We offer our solutions through the Arlo platform. The backbone of the Arlo platform is our scalable and intelligent cloud computing engine, which continuously processes the data collected from Arlo devices and, in turn, provides actionable intelligence in the form of real-time notifications to our users through the Arlo app. We designed our platform to meet a wide range of user needs with its depth of features, AI-enabled services and support for our growing number of smart connected devices. In addition, the Arlo platform is built with broad compatibility and integrates with leading third-party IoT products and protocols, allowing our users to customize and personalize their own connected lifestyle experience.
Benefits of Our Solutions
Our products and solutions offer a unique set of capabilities that address a growing market opportunity, which has resulted in rapid user adoption and has enabled Arlo to become the current leader in the U.S. consumer network connected camera systems market. Our products and solutions offer the following benefits:
Our Products
Smart Connected Devices
The Arlo App
The Arlo app, available for iOS and Android devices, is designed to provide our users with an easy-to-use, flexible, mobile-first experience that connects our users to the people and things that matter most to them.
Arlo Services
Our prepaid service, included with the sale of our cameras, provides users with rolling seven-day cloud video storage, the ability to connect up to five cameras and 90 days of customer support.
Launched in 2018, Arlo Smart is a paid subscription service that adds powerful AI capabilities to our cameras that enhance the user experience. Through real-time computer vision algorithms, Arlo Smart provides users a more personalized experience, deeper insights into detected activity and streamlined access to take responsive actions in urgent situations, such as contacting local emergency services. Some of Arlo Smart’s key features include person detection, e911 emergency call service, cloud activity zones and rich app notifications.
NETGEAR Ownership and Our Separation from NETGEAR
Currently, and at all times prior to the completion of this offering, we are and will be an operating segment of NETGEAR. Upon the completion of this offering, we expect that NETGEAR will own % of our outstanding common stock (or % if the underwriters exercise their option to purchase additional shares in full).
Prior to the completion of this offering, we will enter into agreements with NETGEAR that will govern the separation of our business from NETGEAR and various interim arrangements. These agreements will be in effect as of the completion of this offering. They will provide for, among other things, the transfer from NETGEAR to us of assets and the assumption by us of liabilities comprising our business through a separation agreement between us and NETGEAR (the “master separation agreement”). For more information regarding the assets and liabilities to be transferred to us, see our unaudited pro forma condensed combined financial statements and the related notes included elsewhere in this prospectus.
We also expect to enter into certain other agreements that will provide a framework for our relationship with NETGEAR after the separation, including:
In this prospectus, references to the “contribution” refer to NETGEAR’s transfer to us (in connection with certain reorganization transactions) of the assets and liabilities related to our business, and the term “separation” refers to the separation of our business from NETGEAR’s other businesses (including the contribution), along with the effectiveness of various agreements between us and NETGEAR.
See the section titled “Certain Relationships and Related Party Transactions—Relationship with NETGEAR” for a more detailed discussion of these agreements. All of the agreements relating to our separation from NETGEAR will be made in the context of a parent-subsidiary relationship and will be entered into in the overall context of our separation from NETGEAR. The terms of these agreements may be more or less favorable to us than if they had been negotiated with unaffiliated third parties. See the section titled “Risk Factors—Risks Related to Our Separation from NETGEAR.”
NETGEAR has informed us that, at some time in the future, but no earlier than the expiration or earlier termination of the 145-day lock-up period applicable to NETGEAR described under the section titled “Underwriting,” it intends to effect a distribution of its remaining ownership interest in us to its stockholders in a transaction that is generally expected to be tax-free for U.S. federal income tax purposes (the “distribution”). Under current tax law, NETGEAR must retain beneficial ownership of at least 80% of our combined voting power and 80% of each class of nonvoting capital stock, if any is outstanding, until immediately prior to such distribution in order to so qualify. To preserve the tax-free treatment of the separation and distribution, the master separation agreement will include certain covenants and restrictions to ensure that, until immediately prior to the distribution, NETGEAR will retain beneficial ownership of at least 80% of our combined voting power and 80% of each class of nonvoting capital stock, if any is outstanding. NETGEAR has no obligation to effect the distribution, and it may retain its ownership interest in us indefinitely or dispose of all or a portion of its ownership interest in us in a sale or other transaction. Any such distribution or other disposition by NETGEAR of its remaining interest in us (each, an “other disposition”) would be subject to market, tax and legal considerations, final approval by the NETGEAR board of directors and other customary requirements.
Under current law, the distribution could be rendered taxable to NETGEAR and its shareholders as a result of certain post-distribution acquisitions of our shares or assets. For example, the distribution may result in taxable gain to NETGEAR under Section 355(e) of the Internal Revenue Code of 1986, as amended (the “Code”), if the distribution were later deemed to be part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, shares representing a 50% or greater interest (by vote or value) in us. To preserve the tax-free treatment of the separation and distribution, we intend to agree in the tax matters agreement that we and our subsidiaries will be subject to certain restrictions during the two-year period following the distribution that are intended to prevent the distribution, together with certain related transactions, from failing 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) of the Code. Specifically, during such period, except in specific circumstances or unless NETGEAR waives our obligation to comply with such restrictions, we expect that we and our subsidiaries will generally be prohibited from: (i) ceasing to conduct certain businesses, (ii) entering into certain transactions or series of transactions pursuant to which all or a portion of our common stock would be acquired or all or a portion of certain of our and our subsidiaries’ assets would be acquired, (iii) liquidating, merging or consolidating with any other person, (iv) issuing equity securities beyond certain thresholds, (v) repurchasing our stock other than in certain open-market transactions or (vi) taking or failing to take any other action that would cause the distribution, together with certain related transactions, to fail to qualify as a transaction that is generally tax-free for U.S. federal income tax purposes under Section 355 and 368(a)(1)(D) of the Code. These restrictions may limit our ability to pursue certain equity issuances, strategic transactions or other transactions that may maximize the value of our business. See the section titled “Certain Relationships and Related Party Transactions—Tax Matters Agreement.”
NETGEAR has no obligation to pursue or consummate any further disposition of its ownership interest in us by any specified date or at all.
We believe, and NETGEAR has advised us that it believes, that the separation, this offering and the distribution will provide a number of benefits to our business and to NETGEAR’s business. These intended benefits include improving the strategic and operational flexibility of both companies, increasing the focus of the management teams on their respective business operations and allowing each company to adopt the capital structure, investment policy and dividend policy best suited to its financial profile and business needs, and providing each company with its own equity currency to facilitate acquisitions and to better incentivize management. In addition, as we will be a stand-alone company, potential investors will be able to invest directly in our business.
Risks Affecting Our Business
There are a number of risks that you should understand before making an investment decision regarding this offering. You should carefully consider the risks described in the section titled “Risk Factors” before making a decision to invest in our common stock. If any of these risks actually occur, our business, financial condition and results of operations would likely be negatively affected. In such case, the trading price of our common stock would likely decline, and you may lose part or all of your investment. These risks include, but are not limited to:
Company Information
We were incorporated in Delaware in January 2018 in connection with our planned separation from NETGEAR. Our principal executive offices are at 350 East Plumeria Drive, San Jose, California 95134, and our telephone number is (408) 907-8000. Our website is www.arlo.com. The information and other content contained in, or accessible through, our website are not part of, and is not incorporated into, this prospectus, and investors should not rely on any such information in deciding whether to invest in our common stock.
JOBS Act
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual revenue of at least $1.07 billion or (c) in which we become a large accelerated filer, which means that we have been public for at least 12 months, have filed at least one annual report and the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last day of our then most recently completed second fiscal quarter, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. In addition, the JOBS Act provides that an emerging growth company can delay adopting new or revised accounting standards until such time as those standards apply to private companies. While we have not made such an irrevocable election, we have not delayed the adoption of any applicable accounting standards.