Arlo Technologies, Inc.

percent year over year to deliver $78 million in subscriptions and services revenue. This growth was driven by new customers continuing to select our premium service tiers as well as the realization of the full financial benefit in this quarter of our structured rate plans. Strong ARPU growth and customer retention combined with our optimized LTV to CAC ratio are the backbone of our performance in Q2 and into the future. Our subscriber base maintained its strong growth trajectory as we exited the quarter at 5.1 million paid accounts, an increase of 29% year over year. In Q2, we generated 218,000 new paid additions, handily exceeding our prior range of paid subscriber additions. As Matt mentioned, with strong subscriber momentum and the verisur true up behind us, we have increased visibility to establish a new target of 190,000 to 230,000 paid subscriber additions per quarter. Improving ARPU trends and continued strength in paid additions drove our annual recurring revenue to $316 million, up more than 34% over the same period last year. The total revenue for the second quarter of 2025 came in at $129 million, up slightly from the prior year period. Remarkably, subscriptions and services revenue comprised 60% of total revenue, up from 47% in the same period last year. Our extraordinary transformation to a subscriptions and services organization underpins our success in generating best in class SAS KPIs and financial results that compare favorably with other highly regarded software and security companies. Product revenue for the period was $51.2 million, down in comparison to the prior year due principally to the decline in ASPs that has been prevalent across the entire industry. As previously discussed, we believe that prospective customers have a propensity to enter the Arlo ecosystem through a lower upfront cost of device acquisition, coupled with a competitive monthly recurring fee for ongoing services. This successful subscriber acquisition strategy has spurred our decision to further reduce our product costs in order to gain access to new households across the broader security market. Our experience is that each incremental paid account generates $840 of lifetime value with SAS level gross margins, thereby making the tradeoff more than worth it. The strategy is evident as we continue to deliver consistent point of sale device volume growth, a trend which is expected to continue through the remainder of the year. Our commitment to the strategy enhances our overall profitability, even in a period of rising costs, tariffs, and other external factors which are not within our control. The revenue contribution from our international operations declined as a proportion of our total revenue, primarily due to the increased level of subscriptions and services revenue, as well as seasonal stocking factors. Our international customers generated approximately $50 million in Q2, or 39% of our total revenue, down from $64 million, or 50% in the prior year period. In the EMEA region, Verisur continues to be a primary driver of our international revenue, a trend we expect to continue. From this point on, my discussion will focus on non-GAAP numbers. The reconciliation from GAAP to non-GAAP figures is detailed in our earnings release, which was distributed earlier today. Our non-GAAP subscriptions and services gross margin was 85%, a new record in up 850 basis points year over year. The favorable trend we are experiencing in services gross margin is attributable to expanding ARPUs driven by a larger mix of subscribers activating higher tiered service plans, coupled with a reduction in storage and other costs to serve our subscribers. Product margins declined when compared to the same period last year, related to industry-wide ASP declines, as well as the depth and frequency of promotional activities. It is notable that product margins were also impacted by the introduction of tariffs in the quarter. But as we have communicated, tariffs have no impact on subscriptions and services revenue and the related profitability. We were able to expand our consolidated non-GAAP gross margins to 46%, up nearly 800 basis points year over year, and including the impact of tariffs, which represented a gross margin headwind of approximately 100 basis points in the period. This positive outcome underscores our exceptional operational performance, as well as highlights the significant impact that our substantive shift to subscription and services is having on the profitability of our business. We also expect to benefit from the broad refresh of our device portfolio in the second half of the year. We will leverage promotional campaigns in Q3 to optimize the existing inventory levels and ensure a smooth transition to our new expansive device platform. This will enable us to drive household formation even in the face of declining ASPs, tariffs, as well as the general macroeconomic environment. Total non-GAAP operating expenses for the second quarter were $41.7 million, up .6% from $39.1 million in the same period last year. The -over-year increase is primarily driven by higher credit card fees associated with in-app subscription processing, with an additional impact from an increase in R&D. We capitalized $2 million of software development costs to prepare for the launch of our new portfolio of products and investments made to advance the final phase of the R-List Secure 6 platform rollout, which we expect later this year. For the second quarter, adjusted EBITDA was $18 million, an 82% increase -over-year and a great testament to the operating leverage generated from scaling our subscription and services business. Adjusted EBITDA was not only driven by our revenue growth, but also by our disciplined focus on cost containment. Our profitability continued to be remarkable, again generating record levels of non-GAAP net income of $19 million for the second quarter, equating to non-GAAP net income per dilutive share of 17 cents. Regarding our balance and liquidity position, we ended the quarter with $160.4 million in available cash, cash equivalents and short-term investments. This balance is up $16.4 million since June of 2024, even withstanding certain strategic investments and our share repurchase program. We generated record free cash flow of $34 million during the first six months of the year, representing a free margin of almost 14%. Our free cash flow margin increased 350 basis points, and our free cash flow in absolute dollars was up 33% over the same period last year. Our Q2 accounts receivable balance was $61 million at quarter end, with DSOs at 43 days, down from 44 days last year. Our Q2 inventory balance was $31 million, down from $45 million last year. Inventory turns were 7.7 times, up from 5.8 times last year, as we focus on reducing our existing inventory to optimal levels in preparation for one of our largest product launches in history. We expect that our portfolio refresh will result in a meaningful reduction in bomb costs, thereby creating an effective tool to mitigate both the regulatory and competitive environment. Now turning to our outlook. Even with the uncertain macroeconomic environment and the rollout of the global tariffs, our business continues to generate strong financial results and remains bolstered by the scale, predictability, and profitability of our subscriptions and services business. The composition of our services revenue insulates us from macroeconomic volatility and is driving the overall profitability of the business, as evidenced by the ongoing expansion of our consolidated gross margins. We expect the benefits from new strategic partnerships will begin to materialize in our financial results later in the year, with a much greater impact to our business in 2026. Our new devices, which include a reduction in bomb costs, will be launched in Q3, enhancing our competitiveness while offsetting some of the increased tariffs impact. To date, our supply chain team has done a phenomenal job optimizing our inventory levels, including inventory that sits in the channel with our retail partners. Our engineering, product, and operation teams have also flawlessly executed the portfolio refresh, enabling our new essential products to ship earlier than planned. As a result of these efforts, our gross shipments for new devices in the third quarter will be higher than we originally anticipated, driving our consolidated revenue outlook to the range of $133 to $143 million. Additionally, we expect non-GAAP net income per little share for Q3 to be in the range of $0.12 to $0.18. Looking at our full year 2025 outlook, based on the significant increase in paid additions and ARPU, we expect to generate subscriptions and services revenue above $310 million in 2025, growing at over 27%, with non-GAAP subscriptions and services gross margin at 85%. And finally, ARR of $335 million at year end, up over 30% when compared to the prior year period. And now I'll open it up for questions.

Thank you. At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. We'll pause here briefly just for a moment to compile the Q&A roster. Our first question comes from the line of Jacob Steffen from Lake Street. Your line is not open.

Hey, guys. Appreciate you taking the questions, and 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 help us understand what this partnership is actually about, is it more of a varisher-like agreement or is it similar to what ADT and NEST have tried to do a couple of years ago? Help us think through this a little bit.

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. 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 varisher or any other deal. 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. Stay tuned. It is a substantial deal. It's one of the two that I've been hinting at for the last couple earnings calls, and we got it done in June. We're really looking forward to it getting rolled out and executed in 2026.

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

Yeah, I can give you an idea around the launch. 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. It's on time. You heard Kurt talk about more of that shipping in Q3 than maybe our original plan, which is great because that gives us extra time to optimize shipping and airship and things like that. It's a very large product launch across multiple SKUs. Like I said, over 100 SKUs. It's not just lower costs. 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 States. It gives us dry powder to dig deeper on promotions and make sure we're growing the services business at the pace we think is appropriate and will be accretive to the overall shareholder value. In addition to that cost down, it's an expansion of the product line into several new categories. 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. That usually can lead to capture of market share as you're growing through the rest of the year through the holiday period. This will be our main lineup that we start the year for. 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 two years ago and said we're going to dig a little bit deeper and see what the impact is on services business. It was outrageously accretive to the business and somewhere where we learned a lot about how far we could drive the services business. 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 also reduced price. 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 in ARR at the end of the year. I'll leave a little more momentum going into Q1 as well.

Understood. Very helpful. Congrats again, guys.

Thank you very much.

Thank you. The next question comes from the line of Scott Searle of Roth Capital. Your line is not open.

Good afternoon. Congrats on the quarter. Thanks for taking my questions. Matt, maybe just quickly in terms of Net Eds this quarter, can you give us a little bit 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. I just want to get some clarification in terms of the product gross margins as we go into the third quarter and how we should be thinking about it. You've got tariffs that are some headwinds, but you've got the cost down coming in pretty hard and you guys are going to be aggressive on that front. How should we be thinking about that and modeling that as we go into the second half of this year? Then I had a follow-up.

Okay. Yeah. Scott, I'll take the first part. As far as the growth we're seeing in Net Eds, it was pretty much across the board. 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 Beth Bion Walmart contributed as well in addition to obviously Berisha and our other partners. I would tell you that, 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 state drivers. I wouldn't say there was a specific call out. We're seeing just general strength and the consumer is remaining very strong for us all the way through, like I mentioned, Prime Bay where we were above okay, but that's really landing in this quarter.

Yes, and as it relates to the gross margin, 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 two 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 so 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 substantiate all of those through the reduced BOM and other techniques. 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.

Great, very helpful. And Kurt, if I could just follow up on that, maybe competitively, have you guys done the assessment then in terms of the impact of the competition from a tariff standpoint versus where you stand? And Matt, just a lot going on, very exciting stuff, ADT certainly at the top of the list, but in terms of other strategic and other adjacencies, I wonder if you could give us some thoughts and priorities. I think insurance has kind of factored into that as well in terms of all state, but there's also the monetizing unpaid accounts and other adjacencies that you guys have talked about. I think there's been some announcements around things like elder care, so I'm kind of wondering how all that fits in over the next couple of quarters and how you prioritize things. Thanks.

Yeah, it's a good question. So I would tell you that there's progress on nearly all fronts. If you remember, at the beginning of the year, we said that we were seeing a lot of momentum around strategic accounts. They do take a while to sign and get announced, but we're seeing an interest level that's higher than we've ever seen from a partnership perspective. I balance that with focus. ADT is obviously going to be a very large focus for us in making sure we're executing that as a very good partner through the rest of this year so that we have success with them next year. There's a couple more that we are spending some time on right now that are very close. I can't tell you what they are today, but they're exciting opportunities for us in the strategic accounts area. And then we have been executing additional opportunities to drive additional service acquisition. You mentioned one, going after our active but unsubscribed base. And I will tell you, we are seeing success using our ad platform. We do have ads rolled out to non-subscribers and actually converting those over to paid accounts. Relatively small, I think it's a couple thousand people we've already done in the last 30 days or so. That's an area of focus as well because as we migrate people from obviously unpaid active to paid subscriber, that's actually a good list on gross margin and overall service revenue. I would tell you, we're going to stay focused on maybe the two or three that are the most active through the rest of this year, but are just starting to do our 2026 annual operating plan. We're just kicking that off in the next couple of weeks. I would tell you, the plate is absolutely full and it'll be up to us to actually distill that down to the things that we think can be material in 26 going into 27. As far as competition, I'll just jump in and answer that as well. So from a competition perspective on the tariff, I would tell you, I think we are at either a similar playing field or at an advantage against the competition in the marketplace. So as you know, we source a lot of our product from Vietnam. Over the last 12 to 18 months, a lot of our competitors have moved to Vietnam or moved some of their product at least to Vietnam as well. So that would be an area where we would have maybe similar tariffs. And then there are many competitors that still remain in China and other areas that will actually right now at least have a higher tariff. So it's still evolving. As you know, some of the tariffs have been announced and they're locked in as of today. Some are still in a temporary suspended execution of an older tariff until deals are done. So at this point, I don't think we're at any disadvantage. Absolutely. We are typically either in line with some of our competition or actually in a better position. And I would tell you, most of our competition, they do not have the same service revenue and service gross margin to pull from. So if you were a pure hardware provider and you just had a 20% or 25% tariff hit, obviously that's a really big impact to your business. For us, like we mentioned on the call, it's a small increase in CAC. And so our propensity is to stay aggressive through the holiday period and focus on unit growth and absorb the tariffs in various ways that Kurt was talking about to make sure that we're growing service revenue at the rate that you're seeing today.

Great. Thanks so much. Very exciting times. I'll get back in the queue.

Thank you. Our next question comes from the line of Adam Tindale of Raymond James. Your line is not open.

Okay. Thanks. Good afternoon. 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 the 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, 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?

Yeah. Adam, it's good to talk to you. I'll tackle the first. 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, 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 plan 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 three quarters.

Yeah, and then in terms of impact, so we look at impact really through three lenses. Obviously, you highlighted price. We also look at the overall mix and then of course sub-ads 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-ads, growing that to 190,000 to a range of 230,000. Right now, if I had to look at the split, it's probably one-third, one-third, one-third 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 all cylinders and growing all three of those key areas. So as we look forward and to the future, really our key objective is to continue 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.

Yep, makes sense. I think investors will appreciate that. This is a follow-up kind of mechanical on the product side. I just want to understand two different dynamics that are going to happen here over the coming quarters. On one with your existing inventory, you are working to effectively take down channel inventory, which makes a ton of sense before a huge launch. We want to have sort of a clean channel. I wonder that and kind of thinking about the financial implications and the potential headwind from that, if you could help us sort of frame that piece. And then the second part is the tailwind then from the launch, obviously a massive launch that you have, the impact to sell in from a product standpoint. Kind of those two different dynamics you could sort of help us frame the financial implications and timing of each that would be helpful.

Yeah, so I would say that obviously the third quarter is a big quarter for us. As we mentioned, it's going to be an important quarter because we are highly incentivized to ship in and our gross ship will be higher than we had originally anticipated. That means ultimately we believe that product revenue will be a bit higher in Q3 as we load in in preparation for all the promotional activities. It really starts towards the end of Q3 and continues into the fourth quarter. Why it's tricky is you have a combination of things that are in play here. First and foremost, as you mentioned, we have a subset of SKUs that we have to EOL, end of life is what that means. And so we have been working on bringing that down. That has been partially reflected in our current product gross margins and will be reflected somewhat in Q3 product gross margins. So that's the first dynamic that's in play. The second dynamic that's in play is we are balancing out the impacts of the tariff and also our ability to manage ship in through air freight and sea freight. And so we're doing everything possible to manage that probability such that we optimize that and ensure we don't gap out. And then the third thing that's in play is we know that our new product SKUs all have really a benefit of 20 to 35% on the COGS level. So the sooner that we ship those in and get them to retailers, the better we can use that favorable costing to offset some of these other costs in play. So that's the dynamic that we're executing against in the third quarter. But I have to reiterate, we've been extremely impressed with our product engineering ops team the way they've executed flawlessly to date. And we expect to have a really strong third quarter as evidenced by our guidance.

Very helpful. Thank you.

Thank you. Our next question comes from the line of Haman Corzonde of BWS Financial. Your line is not open.

Hi. So the first question is, is the sub ads a function of selling more units? Or is it the conversion rate? Sub ads mean that you're raised guidance range now?

Yeah, 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 talk about the camera unit growth on our retail and direct. So I would say it's much more attributable to that. And that's us executing well, being a little bit more aggressive on promotions, and, you know, driving that business because so creative on the service revenue level. There is a little bit here and there on conversion. Some of it is, you know, better in retention as well. But I would put most of it just to us capturing some share in the retail and direct and some strong performance with our partners.

Okay, 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, the subscriber numbers actually increase quite a bit in Q4?

Yeah, the holiday period is usually a little more smoothed out. And what I mean by that is some of the product we will gross 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 three, four 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 open 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 is we think there will be a little bit of additional services hitting in Q4 than originally planned.

Okay, great. Thank you. You're welcome.

Thank you. Our next question comes from the line of Ryan Besson of Craig Hallam. Your line is now open.

Hey, it's Ryan on for Tony Stoss. Just one quick one for me. It looks like the slides you guys posted and that the churn was about 1% monthly churn. I think historically you 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?

Yeah, 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 I 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 operational improvements that the company is doing and 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 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 profitability going forward. So there are a series of Tiger teams inside the company looking at tenth of a percent changes over time and several of those kind of hit all at the same time in Q2.

Great. Thanks, guys. Congrats on the results. Thank you very much.

Thank you. There seem to be no questions at this time. So this will conclude today's conference call. You may now disconnect your line.