This Time With Four Part Harmony And Feeling- Netgear Plans To IPO, Spin Off Arlo Camera Business

Maybe at Alice’s Restaurant you can get anything you want, but Arlo only makes security cameras. The buisness, which Netgear(NTGR) launched in 2014, had revenue last year of $378 million, compared to $1.03 billion for the rest of the company. This was double Arlo’s 2016 revenue, while the rest of the company is flat. Netgear management, wishing to take advantage of this high growth business announced plans to spin off Arlo as an independent publicly traded company.

Netgear first plans an IPO of no more than 20% of Arlo’s shares in the second half of 2018. The company envisions distributing the remaining Arlo stock to shareholders, tax-free, in the first half of 2019.  Netgear has chosen Matthew McRae, a recent hire, as CEO of Arlo.

Concurrent with the announcement of the planned separation of the Arlo business, NETGEAR also today announced that it expects Matthew McRae to serve as Arlo’s CEO upon the completion of the IPO. McRae joined NETGEAR approximately four months ago as SVP of Strategy. Prior to this he was at Vizio, where he was the Chief Technology Officer and Head of Marketing.

Netgear’s Q4 investor presentation contains a section on the transaction, outlining rationale.

Fortune is skeptical of Arlo’s prospects, comparing it to one time high flyers GoPro(GPRO) and Fitbit(FIT)

Arlo has sold close to 7 million of its white, pod-like cameras that can keep tabs on a sleeping baby, valuables stashed on the back porch, or an unoccupied vacation home. Of course, Netgear is pitching Arlo not just as the maker of easily commoditized hardware, but as a cloud software service provider, too. Arlo cameras include some free online backup of videos, but the company offers additional storage space and other features for additional fees. A $99 “premier” plan, for example, stores 30 days worth of recordings and supports up to 10 cameras.

Arlo’s revenue doubled last year to $378 million, while sales at the rest of Netgear actually slipped 10% to $1.03 billion. But how much of Arlo’s revenue was from cloud services? A paltry $20.9 million, or about 5%, and up from an only very-slightly-less paltry $19.8 million in 2016.

Netgear CEO Patrick Lo explained that the fast-growing Arlo unit needed to “aggressively acquire new users,” Wall Street speak for racking up big losses, while the rest of Netgear had to “deepen engagement” with an already large user base, a signal that customers would be squeezed with higher prices for more profits. One of his PowerPoint slides put it more bluntly: “Profit growth for NTGR; User growth for ARLO.”

That may make sense from a corporate strategy perspective. Netgear’s stock has done fine, but trailed the S&P 500 index for most of the past five years until a big rally the past few months, largely over excitement about how well Arlo cameras sold in the holiday shopping period. (One daft analyst even claimed Arlo was worth 10 times Netgear’s entire market value because its store of video data could be used for AI training projects.) But don’t forget that GoPro’s IPO pitch included how it was underlying a whole new video network or Fitbit’s focus during its IPO of its growing social network of fitness freaks. GoPro has since lost 77% of its value and Fitbit  74%.

Can Arlo make the leap? With competitors in the security camera space including Google’s(GOOGL) Nest and Amazon(AMZN), it will be challenging indeed to maintain growth or even to sustain market share.

Disclosure: The author holds shares of AMZN. The article contains Amazon affiliate links that compensate the author for purchases made.



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