Arlo Technologies, Inc. Q2 FY2025 earnings call

• Arlo's Q2 performance was outstanding with total revenue growth, service revenue increasing over 30% Y/Y and accounting for over 60% of total revenue.
• Non-GAAP service gross margin hit a record 85%, non-GAAP EPS up 70% Y/Y, and GAAP EPS turned to profit. ARR was $316 million, up 34%, and adjusted EBITDA up 82%.
• Added 218,000 paid subscriptions, reaching 5.1 million; Verisure's paid account catch-up is complete, with expected paid subscriber additions of 190,000-230,000 per quarter.
• Launched Arlo Secure 6, with retail and direct subscriber monthly ARPU over $15 and subscriber LTV at $840.
• Largest product launch in company history with over 100 new SKUs launching fall 2025, updating Essential, Pro, Ultra segments and introducing new form factors.
• Targeting 20%-30% camera unit growth Y/Y for Q3 and Q4. Secured strategic partnership with ADT, to provide material upside to subscriptions and services revenue from 2026.

Total revenue for Arlo Technologies' Second Quarter 2025 was $129 million, up year-over-year and sequentially. Service revenue hit $78 million, up 30% year-over-year and accounting for over 60% of total revenue. Non-GAAP service gross margin reached a record 85%. Non-GAAP earnings per share were $0.17, up 70% year-over-year, and GAAP earnings per share turned to a profit of $0.03 from a loss of $0.12 a year ago. Annual recurring revenue (ARR) was $316 million, up 34%, and adjusted EBITDA rose to $18 million, up 82% with an EBITDA margin of 14%. Retail and direct subscription business saw ARR unit sales up 30% year-over-year, and 218,000 paid subscriptions were added, reaching 5.1 million. Product revenue was $51.2 million, down year-over-year due to industry-wide ASP declines. International operations revenue contribution was 39% in Q2, down from 50% in the prior year period.

• Q3 revenue guidance is in the range of $133 million to $143 million.
• Full-year 2025 services revenue is expected above $310 million, growing over 27% with non-GAAP subscriptions and services gross margin at 85%.
• ARR at year-end is expected to be $335 million, up over 30% Y/Y. Reaffirmed full-year guidance with service revenue closer to $310 million vs original $300 million and gross margin closer to 85% vs original 80%.

• Macro-economic conditions can impact the business. Tariffs pose a headwind to product gross margin but are viewed as a small increase in customer acquisition cost. Competition, including tariff impacts on other competitors, can affect market position.

Q: Congrats on a great quarter here and start to the year. Maybe first, I'll ask on the ADT partnership. This is obviously big news, but maybe if you could kind of help us understand what this partnership is actually about? Is it more of a Verisure-like agreement? Or is it similar to what ADT and Nest have tried to do in a couple of years ago? Kind of help us think through this a little bit.

A: Yes. So obviously, ADT is an important name in the security space, and they've been doing very well if you've been following them. I think you're seeing them start to innovate more than their peers, which is really exciting. And so there's not a lot I can share at this time. It is a partnership that will involve devices and service revenue. The overall structure of the deal is unique, though. So I wouldn't compare it to Verisure or any other deal. And I think you'll see us able to announce more information around the partnership either right close to the end of the year or maybe right at the beginning of the year after a major trade show or something like that. So stay tuned. It is a substantial deal. It's one of the 2 that I've been hinting at for the last couple of earnings calls, and we got it done in June. And we're really looking forward to it getting rolled out and executed in 2026.

Q: Next, I just want to focus on the product launches. Maybe if you could help us think through the 1,000 new SKUs you plan to launch? And how does that relate to kind of the holiday season commentary where you expect 30% unit growth and overall more aggressive pricing? Can you help us think through kind of the margin pressures there and also what you're expecting for kind of the back half in revenue?

A: Yes. So I can give you an idea around the launch. So like we said, it is the largest device launch in our company history. It's well over 100 SKUs going into multiple channels simultaneously. I will tell you, from a status, and you probably inferred that from the call, things are going great. We're green across the board from a development, and a lot of those SKUs are already in manufacturing, and some of them are already arriving here in the United States. So it's on time. You heard Kurt kind of talk about more of that shipping in Q3 than maybe our original annual plan, which is great because that gives us extra time to optimize shipping and air ship and things like that. So it's a very large product launch across multiple SKUs, like I said, over 100 SKUs. It's not just lower costs. So we do reduce the cost. If you remember, the cost will be lower from anywhere from 20% to over 30% from a COGS reduction perspective. That gives us a lot of dry powder to react to the tariffs, which primarily hit product gross margin, and the devices are imported in the United States. It gives us dry powder to actually dig a little bit deeper on promotions and make sure that we're growing the services business at the pace that we think is appropriate and will be accretive to the overall shareholder value. But in addition to that cost down, it's actually an expansion of the product line into several new categories. And that's important because not only do we get a few new SKUs that end up online, but in physical shelf, you'll see us actually capture additional shelf share in some of the most critical partners like Walmart. And that usually can lead to capture of market share as you're growing through the rest of the year through the holiday period. And then this will be our main lineup that we start the year for. So it is substantial. You'll see us getting more aggressive on ASPs, very much like we did in 2023. If you remember, we came in at the same earnings call 2 years ago and said we're going to dig a little bit deeper and see what the impact is on our services business. It was outrageously accretive to the business, and it was somewhere where we learned a lot about how far we can drive the services business. And so you're going to see us do that again and actually look at the tariff impact as a small increase in CAC, and us using some of that dry powder to also reduce price. And again, that's driving what you mentioned, which is roughly 20% to 30% camera unit growth year-over-year for both Q3 and Q4, which will then accelerate service revenue towards the year, which is why we raised our estimate for service revenue and ARR at the end of the year and will lead a little momentum going into Q1 as well.

Q: Congrats on the quarter. Matt, maybe just quickly, in terms of net adds quarter. Can you give us a little bit of idea what channels those are coming through, direct versus some of the different retailers? I know we've got international, but kind of domestically, where you're seeing that pull-through. And I just want to get some clarification in terms of the product gross margins as we go into the third quarter, Kurt, and how we should be thinking about it. You've got tariffs that are some headwinds, but you got cost down coming in pretty hard, and you guys are going to be aggressive on that front. So how should we be thinking about that and modeling that as we go into the second half of this year? And then I had a follow-up.

A: Okay. Yes. Scott, I'll take the first part. As far as the growth we're seeing in net adds, it was pretty much across the board. So I can't tell you that a very specific channel did a lot better than others. I think we executed extraordinarily well at Amazon and that we're actually capturing some share there. But even Best Buy and Walmart contributed as well, in addition to obviously, Verisure and our other partners. So I would tell you, and I mentioned this on the call a little bit, we are seeing general strength in the consumer across our different channel partners and seeing still healthy conversion in subscribers. So I wouldn't say there was a specific callout. We're seeing just general strength and consumers remaining very strong for us all the way through, like I mentioned, Prime Day, where we were above forecast. But that's really landing in this quarter.

Q: ... (follow-up from Scott) A: Yes, as it relates to the gross margins, obviously, we were extremely pleased with the results in our gross margins this quarter. As we mentioned, we grew our combined gross margin over 800 basis points, and we did that on the back of really our service gross margins, which tapped out about 85%. You noted the product gross margin, that actually came in what we would say in mid-teens. We were comfortable with that, especially considering that it drove the high POS volume that Matt mentioned earlier. And we expect that to continue in the second half. There'll be 2 things we're focused on. First and foremost, we're going to continue to focus on driving our services gross margin to that 85% or higher level. We'll continue to focus also on our combined gross margin to show that that is growing year-over-year and continues to in the second half. We'll do that by managing basically the ASPs for our devices and keeping that at a level where we're pushing the envelope on the POS, but doing it responsibly so we can continue to show gross margin expansion. Now there is one other dynamic that's in play, and you're probably alluding to that, and that is we do have the tariff impact. We anticipate right now that the tariffs will probably run about 300 to 400 basis points per quarter against our combined gross margin. We're pleased to say that we feel like we have a path to cover all or substantially all of those through the reduced BOM and other techniques. So we feel like we're in a good spot. And that was part of the reason why we confirmed our services gross margin of 85% for the full year, and we feel really comfortable indicating that we have an ability to grow our combined gross margins year-over-year.

Q: I wanted to start the $15 retail ARPU was obviously an impressive and surprising number to the upside. On that, maybe one for Matt or Kurt, if you want to weigh in. With the price increases in services plans, I just want to confirm, is that now on that $15 retail ARPU in Q2 entirely reflected in the current run rate? Or is there anything incremental from here? And then secondly, as we kind of think about sort of framing this year from a services revenue growth standpoint, based on this updated guidance, you're going to be growing close to 30% year-over-year. Of that, I mean, is there a way for us to just kind of think about how much contribution for that 30% was related to price increases, just so we don't get ahead of ourselves as we think about 2026 where that may not repeat?

A: Yes. Adam, it's good to talk to you. I'll tackle the first. So as you remember, we announced the new plan structures in January for new subscribers and then migrated our existing customer base through the course of February. So when you look at Q1, I would say roughly on average, it was just over 50% of the quarter was impacted by the Arlo Secure 6 plan structure rollout. Q2 is the first quarter where we had a full quarter's impact, and that's why you see the ARPU jump all the way up to $15. Now you asked, are we going to continue to see a rise? You will -- it will be slower. So the rest of the year, we'll see ARPU increase as well, and that will be mostly people who are on annual plans coming up for their planned renewal onto the new pricing structure. So we had a good increase in Q1, a full impact in Q2. You'll see a bit more rise up in Q3 and Q4 and probably actually a little bit Q1, too, as we see some of the annual plans in Q1 actually kick over in 2026. So a larger jump this quarter, but you'll see that kind of generally rise at a slower rate through the next 3 quarters.

Q: ... (follow-up from Adam) A: Yes. And then in terms of impact, so we look at impact really through 3 lenses. Obviously, you highlighted price. We also look at the overall mix and then, of course, sub adds. And as we highlighted in the earlier commentary, we not only have executed extremely well on the price equation, but most recently, we uplifted our overall quarterly estimates on the number of sub adds, growing that to 190,000 to a range of 230,000. Right now, if I had to look at the split, it's probably 1/3, 1/3, 1/3 across all of those areas. I would say that our team, in particular, our subscription and customer journey team has been executing extremely well and identifying ways to really tweak and improve all the key metrics, whether it's subscriber retention, whether it's the conversion rate, you name it, to ensure that we're hitting on all cylinders and growing all 3 of those key areas. So as we look forward to the future, really, our key objective is to continue to grow our services revenue plus 20% out into the future. And that's what we're all motivated and incentivized to do here as part of the management team.

Q: So the first question is, is the sub adds a function of selling more units? Or is it the conversion rate? The sub adds mean that you raised guidance range now?

A: Yes. It's, I would say, more to do with more units across multiple channels, so both partner and in particular, recently, as we've gotten more aggressive and we talked about the camera unit growth on our retail and direct. So我 would say it's much more attributable to that. And that's us executing well, being a little bit more aggressive on promotions and driving that business because it's so accretive on the service revenue level. There is a little bit here and there on conversion, and some of it is better in retention as well, but I would put most of it just to us capturing some share in the retail direct and some strong performance with our partners.

Q: And then you've been talking a lot about Q3 new product shipments happening in the channel. Does that imply that we could see service -- subscriber numbers actually increase quite a bit in Q4?

A: Yes. The holiday period is usually a little more smooth out. And what I mean by that is some of the product we will grow ship in Q3. POS is typically in Q4. And in the Q4, we often see that some of that POS is actually bought, installed, and then goes through their 30-day trial, and then may subscribe in Q4. Some of that is actually bought stuck under a tree, isn't open for 3, 4 weeks. Then there's a 30-day trial, and maybe they actually become a potential subscriber in Q1. So it's a little bit more gross ship in Q3 becomes POS in Q4. And then there's kind of a split of where those subscribers will land depending on what it was bought for, and when it was opened, and when it was installed, and how they got through the free trial. But I think in general, obviously, more POS, more units shipped, is more household formation will drive additional service revenue. And it's one of the reasons why we took our service revenue from roughly 300 up to $310 million, is we think there will be a little bit of additional services hitting in Q4 than originally planned.

Q: Kurt, it's Ryan on for Tony Stoss. Just one quick one for me. It looks like from the slides you guys posted that the churn was about 1% monthly churn. And I think historically, you had talked about 1.1% to 1.3%. I mean I understand that it fluctuates a bit, but should we be thinking about churn closer to 1% moving forward?

A: Yes. I would tell you that I think we're holding our range of 1.1% to 1.3%, but Kurt just alluded that there is a lot of work being done on retention, save journeys, and things in the company that are -- it is having some impact. And so我 think you're seeing some of that impact at 1%. I think we're still comfortable with the 1.1% to 1.3% just because of overall seasonality, and we're seeing units kind of grow quite quick. But you are getting a hint of some of the operational improvements that the company is doing and the individual team members are doing here that we're seeing some benefit through. And I think the stars aligned a little bit and got us closer to 1% on the quarter. As you know, things like conversion and retention rate or churn, say it another way, small changes can have a big impact on the business and the service revenue and profitability going forward. So there are a series of tiger teams inside the company, looking at entcent changes over time, and several of those kind of hit all at the same time in Q2.