Arlo Technologies Inc (ARLO) 2025 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. At that time, if you have a question, you will need to press the one on your push button phone. I will now turn the conference over to Tymon Clark. Please go ahead, sir.

Thank you, operator. Good afternoon and welcome to Arlo Technologies 3rd quarter 2025 financial results conference call. Joining us from the company are Mr. Matthew McCrae, CEO, and Mr. Kurt Binder, COO and CFO. If you have not received a copy of today's release, please visit Arlo's investor relations website at investor.arlo.com.

Before we begin the formal remarks, we advise you that today's conference call contains forward-looking statements. Forward-looking statements include statements regarding our potential future business, operating results, and financial conditions, including descriptions of our revenue, gross margins, operating margins, earnings per share, expenses, cash outlook, free cash flow, and free cash flow margin.

ARR, Rule of 40, and other KPIs, guidance for the 4th quarter of 2025, the long range plan targets, the rate and timing of paid subscriber growth, the commercial launch and momentum of new products and services, the timing and impact of tariffs, strategic objectives and initiatives, market expansion and future growth.

Partnerships with various market leaders and strategic collaborators, continued new product and service differentiation. And the impact of general macroeconomic conditions on our business operating results, and financial conditions.

Actual results or trends could differ materially from those contemplated by these forward-looking statements. For more information, please refer to the risk factors discussed in all those periodic filings with the SEC, including our annual report on Form 10k and our most recent quarterly report on Form 10Q filed earlier today.

Any forward-looking statements that we make on this call are based on assumptions as of today, and Arlo undertakes no obligation to update these statements as a result of new information or future events. In addition, several non-GAAP financial measures will be discussed on the call. A reconciliation of the GAAP to non-GAAP measures can be found in today's press release on our investor relations website.

At this time I would now like to turn the call over to Matt.

Thank you, Tamm, and thank you everyone for joining us today on Arlo's 3rd quarter 2025 earnings call.

Q3 was another record breaking quarter for Arlow across numerous performance and financial metrics. I will start by highlighting our outstanding fast business which continues to grow and propel Arlow to new heights. We added 281,000 paid accounts during the quarter, well above our target range of 190,000 to 230,000, and which drove our total paid accounts to 5.4 million. This performance was driven by net additions in our retail and direct channel coupled with stronger performance from our partner Veriser.

I'd like to take a moment to congratulate Verasure on their recent acquisition of ADT Mexico and their successful initial public offering last month. Their success is so well deserved, and we look forward to continuing to be a part of their growth and outstanding execution across their expanding footprint.

Arlo Secure 6, our latest AI-based security platform, is also driving our performance, with users finding substantial value in the features and capabilities.

In our retail and direct channel, average revenue per user was over $15 per month, and the lifetime value of each user grew to over $870 a new record for Arlo.

These metrics helped propel Arlo's annual recurring revenue to $323 million up 34% year over year, and another record for the company, while service gross margin expanded 770 basis points to more than 85%.

In addition to this impressive service performance, Arlo also executed the largest product launch in company history during the quarter, comprised of new platforms and products across our essential, pro, and ultra product tiers. These platforms not only bring a 20 to 35% reduction in bomb costs and new form factors such as Pant tilt zoom, they also contribute to a nearly 30% year over year unit sales growth in Q3.

These new products are receiving high ratings from both professional and user reviews which call out the ease of setup, high performance, and new capabilities across the lineup.

The execution of this product launch and transition was nearly flawless. Arlo launched over 100 skews simultaneously across channels on time, despite several shipping and weather disruptions, all while managing the X-ramp of inventory for a smooth transition. This is extraordinarily difficult to achieve, and a huge congratulations and thank you to the Arlo cross-functional teams on this exceptional outcome.

There are very few companies in the world that have successfully developed world-class capabilities in both the software service segment and the hardware device segment. This quarter is a great illustration that Arlo is one of those rare companies that can not only excel in both areas, but also bring these segments together to create compelling user experiences and drive real shareholder value.

And that could not be more obvious based on our full Q3 results and profitability. Adjusted EBITDA was up 50% year over year and reached $17 million. GAAP earnings per share was $0.07 in the quarter, a new record for Arlow, and year-to-date we reported a massive $0.35 improvement compared to the first nine months over last year. And looking at our services business in a rule of 40 context. Arlo achieved a result of 46, which underscores the elite performance against all peers in the fast space.

Looking ahead to Q4, Arlo is exceptionally well positioned in a competitive market with our new product launch, and we expect to see 20 to 30% unit growth year over year which sets us up well for service revenue growth heading into 2026, and we continue to see great progress across our strategic accounts including Verisure driving growth via their IPO, Allstate deploying kits to home insurance customers, and ADT testing units in the field ahead of next year's market launch.

Expect more announcements in this area over the coming quarters. Given this performance, it is clear that Arlo is making excellent progress against our long range plan targets of 10 million paid accounts, $700 million in AR, and an operating income of over 25%.

Now I'll turn it over to Kurt for a more detailed review of our Q3 results and our outlook ahead.

Thank you, Matt, and thank you everyone for joining us today. During the quarter we again delivered outstanding financial results driven by our commitment to our services first strategy. Every decision that we make as an organization is centered around delivering an innovative and value-added smart home security experience that drives annual recurring revenue.

And these efforts are yielding strong results. As Matt mentioned, the LTV generated by our paid accounts is at an all-time high, and ensuring that we continue to fill the acquisition funnel and drive our subscriptions and services revenue is paramount to delivering best in class SA metrics and achieving our long-term financial goals. Now on to the results for the quarter.

Subscriptions and services revenue was $79.9 million up 29% year over year, driven by a significant increase in APpo and a great pace of paid account ads over that same period. This strong performance is largely due to the introduction of our new AI-driven Arlo Secure 6 rate plan offerings.

Additionally, our intense focus on enhancing customer journeys and delivering a differentiated value proposition drove new paid accounts to select our premium rate plans and existing customers to upgrade to higher rate plans. Paid accounts continued their strong growth trajectory as we generated 281,000 paid subscribers in Q3. We exited the quarter with a base of 5.4 million paid accounts, an increase of 27% year to year.

Improving our poo trends and the growth in our retail paid account base reflected our ability to guide customers to our higher value AI enhanced service levels and in turn drove our annual recurring revenue to $323 million up 34% over the same period last year. Total revenue for the third quarter came in at $139.5 million up slightly from the prior year period, with our subscriptions and services revenue comprising 57% of total revenue.

Up from 45% in the same period last year. This level of predictable and recurring service revenue is the key driver of our substantial improvement in profitability and our ability to deliver best in class SA metrics, including Aar growth.

Product revenue for the period was $59.6 million down $16.2 million or 21% when compared to the prior year, and as a result of the industry-wide decline in ASPs, as well as the frequency and depth of promotional campaigns, especially in Q3, as we promoted our end of life or EOL products to make way for the selling of our broader next generation product portfolio.

We continue to drive new household formation by optimally pricing our products to increase POS volume and utilize the devices as a subscriber acquisition vehicle.

The refresh of our product portfolio offers a considerable reduction in bond costs, enhancing our competitiveness across various price tiers, while also helping to offset some of the tariff impact.

And with the upcoming holiday season, we are leveraging this portfolio to help accelerate the growth trajectory of our subscriptions and services revenue. Given the outstanding subscriptions and services gross margin and expanding profitability with each new paid account. Our decision to sacrifice product gross margin for durable, highly profitable subscriptions and services revenue is an easy one.

We view a modest decline in product gross margin as part of our cost of customer acquisition.

And even after considering the incremental investment, we are still delivering a best in class LTV to CAC ratio in the range of 3 times. Our goal to drive solid POS volume and gain access to additional households in Q3 occurred as planned and we expect a similar outcome in the 4th quarter.

We believe the strategy insulates us from certain external market factors and drives shareholder value, and we will continue to lean into this approach during this Q4 holiday selling season.

In Q3, international customers generated $58 million or 42% of our total revenue.

Down from $66 million or 48% in the prior year period related to the increased level of subscription and services revenue from our US retail business and the successful launch of our new products.

Ver continues to be an important partner for us in Europe, and we thank them for their continued collaboration and expect them to remain a solid growth driver in the future.

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%, again, a new record and up 770 basis points year to year.

The significant growth in services gross margins is attributable to enhanced Pop coupled with a reduction in the cost to serve our customers, including lower storage and compute costs.

Product gross margins were negative, representing a modest decline when compared to the same period last year.

The decline in product gross margin is related to the full quarter impact of tariffs, approximating $5 million pled with industry-wide ASP declines and planned promotional spend on EOL products to optimize inventory levels ahead of our recent product launch.

Even withstanding these items, we reported consolidated non-GAAP gross margin of 41%, up 540 basis points year to year.

Our continued improvement in profitability in a period where the full impact of tariffs was experienced.

Underscores the significant insular benefits that the shift to our services enterprise provides us. Total non-GAAP operating expenses for the third quarter were $41.1 million up 6% from $38.7 million in the same period last year.

The year to year increase is primarily driven by app store fees and an increase in personnel to support R&D investment as we launch our new innovative product offerings and Arlow Secure 6 this year. Our leveraged go to market approach has enabled us to maintain our operating expenses at roughly $40 million per quarter or less since 2022 while growing ARR at a 37% keger during that period, which is truly remarkable.

For the third quarter, adjusted EBITDA was $17.1 million or an adjusted EBITDA margin of 12.2%. The growth in adjusted EBITDA represents a 50% increase year over year and a powerful testament to the operating leverage created by scaling our subscriptions and services business. Further, we generated non-GAAP net income of $18.1 million for the third quarter and $53.3 million for the nine month period ended September 30th, which was up an impressive 68% when compared to the same period last year.

Regarding our balance sheet and liquidity position, we ended the quarter with $165.5 million in cash equivalents, and short-term investments.

This balance is up about $19 million since September of 2024, even withstanding certain strategic investments and our ongoing share repurchase program. We generated record free cash flow of $49 million during the first nine months of the year, representing a free cash flow margin of almost 13%.

Our Q3 accounts receivable balance was $76.7 million at quarter end with DSOs at 50 days, up from 45 days in the same period last year. Our Q3 inventory balance was $44.4 million down from the $52 million level in September of last year and a testament to the amazing job that our supply chain team has done with optimizing inventory levels ahead of our portfolio refresh. Inventory returns were 6.4 times, up from 5.8 times last year as we sold in inventory for one of our largest product launches in history.

Now turning to our Outlook. Even with the full impact of tariffs during the period, our business generated outstanding financial results driven by the resilience of our subscriptions and services business. The recent launch of our innovative product portfolio gives us dry powder to remain competitive given the solid reduction in bond cost.

We will leverage our new products and competitive ASPs to drive strong POS volume and accelerate paid subscription growth.

As a result, we expect our Q4 consolidated revenue outlook to be in the range of 131 to $141 million.

Additionally, we expect non-GAAP net income per diluted share for Q4 to be in the range of $0.13 to $0.19.

And now I'll open it up for questions.

(Operator Instructions)

The first question comes from Adam Tyndall with Raymond James. You may proceed.

Okay, thanks. Good afternoon.

I just wanted to start maybe on margins, obviously acknowledging that gross and operating margin overall is quite healthy here, but when we look at the components, you had your largest launch with a 20 to 30% bomb cost reduction that Talked about, but product gross margin is still pressured. I understand there's a number of moving parts driving that. Maybe the question would be if you could just remind us the accounting method for inventory and wondering if that bomb cost reduction is maybe not fully reflected in the Q3 results that we're seeing. And secondly, there's an inventory clear out, that you mentioned. I wonder if you could, Kurt, just, help us quantify that. Is that something that was, what did it do to impact in the quarter and does it carry into future quarters from here? Thanks.

Yeah, thanks Adam. Let me just start by saying, as we've discussed in the past, we're very, we are very much focused on our consolidated gross margins, and we were extremely pleased by the fact that if you look at the 3rd quarter consolidated gross margins relative to last year we were up about 540 basis points. If you look at that margin on a year-to-date basis, we're up about 640 basis points. So as we've mentioned before, we hold ourselves accountable to continue to grow, consolidated gross margin, and we'll continue to do that here in the, upcoming future as it relates to the, product gross margin you're referencing, Adam, we were on a non-GAAP basis at about 17.3%. What's embedded within that number is a number of things. So first and foremost, obviously we had the, first full quarter of tariffs. If you actually look at it closely and you strip out tariffs, that margin actually would decline to about a 8%, so small or I would say a pretty significant shift from the 17% and in that range of say high single-digits. Additionally, we did have a fair amount of EOL, investment that was necessary to make sure that all of the inventory in the channel was at the right levels which would enable us to load in the right amount of inventory on the next generation platform of products that we just rolled out. So there was a fair amount of upfront spending to encourage promotional activity to move that inventory through. That inventory has now been moved through and we feel really good about where we stand right now as we go into the 4th quarter. So I have to say that we're extremely pleased with the fact that if you look across all of our operating metrics, especially our profitability targets, whether it's adjusted EITA, non-GAAP operating income, gross margins, they are all moving up into the right, and we're extremely pleased with the overall performance of the team in this area.

That's helpful, yeah, and it provides obviously a platform for future growth and margin when some of these temporary items rebound as well, so it makes sense.

Maybe a follow-up, Matt. There's a number of growth drivers in the future as well for the business. I know you stressed some of the partnership in particular in your prepared remarks, so I want to ask a question on two of those. First is on Vera sure. You mentioned the ADT Mexico piece of this. I wonder if that's, maybe a broader opportunity for Arlo to expand more in Latin America in general. Would that, need to be sort of a separate, RFP process, for you to win, or do you have sort of visibility into that as an opportunity? How big could that be? And then secondly, on ADT itself, you mentioned. They're testing units ahead of the market launch.

Just wonder, understand, they're probably going to be a little bit limited on what you can say here, but any framework that you can get as you get closer to this in setting up investor expectations on the magnitude of that partnership. Thanks.

Yeah, great question, and you know when you talk about growth drivers, Adam, you're 100% right when we're focused on a couple of areas. One is, as Kurt was just mentioning, the growth in our normal channels like retail channels and that's going really well, we mentioned on the call that units were up year over year by nearly 30% from a POS perspective and we expect somewhere between 20% and 30% growth there. One of the other areas is exactly what you're talking about, what we call strategic accounts or or our more B2B plays. There's a couple, and you mentioned some of them. So the ADT Mexico acquisition by Verisae, I believe, actually closed yesterday, in European time, and we've been actually working with them, as you probably could guess, behind the scenes for months, if not actually quarters, preparing and actually certifying all of our products, for Mexico. So there's no incremental business to win, as we are, at this time the exclusive provider of some of the back end service for them. We do a lot of camera development for them both on. Our low product for those certain regions but also some custom products that we've developed for them. So our expectation is that ADT Mexico acquisition by Vera sure is kind of the first area they are focused on with potentially a more, bigger expansion across Latin America. So it is a new region, I think for the partnership to expand into over time and drive, a lot of growth for both companies. So we're excited, really excited about that. Then you look at, EDT. I can't say a lot about EDT beyond what I said on the call, except that, from an Arlo execution perspective, in conjunction, with that partner that we hit all the timelines we needed to hit, and there's actually product in the field, and from a user experience perspective it's stellar, so we're really excited about talking more about that in the future and we'll, leave that to the date that that actually goes live. And then you know I mentioned on the call that this is an area that we're excited about and you should expect some more information over time. There are, several other partnerships that we're in discussion with, and I expect, between now and probably the end of Q1, or maybe going slightly into Q2, we'll have a couple of more sizable name brand accounts, in the partnership space that we'll be talking about, that could have a material impact on us going forward. So if you, if I pull back and.

Talk about how we get to our long range targets that we talked about on the call, the 10 million subscribers, the inR700 million and the increasing that operating income over 25%.

Kurt and I on previous calls have said we think about 60% of that that incremental growth over the over where we are today, is going to come from strategic accounts and I would tell you based on recent. Activities and some of the things we can talk about and some of the things that are coming soon, I absolutely believe that is the case that we will see, 60% of that incremental growth come from strategic and that is saying a lot because we think the traditional channels, retail and direct are growing really nicely and we think there is a lot of growth there. So hopefully that gives you a little bit more colour on those specific accounts and where we think this part of our business is headed over the next couple of quarters.

Very helpful. Looking forward to hearing more.

Thanks, Adam.

Thank you. As a quick reminder, if you'd like to ask a question, please press star one on your telephone keypad. The following comes from Jacob Stefan with Lake Street Capital Markets. You may proceed.

Yeah, hey guys, nice quarter. Just wanted to ask, you guys made some comments last call, gross shipments in Q3 will be higher than you had originally expected, and you also kind of mentioned 20 to 30% unit growth as we look at the second half of the year here in Q4 specifically, but, maybe you could help us kind of think through. We saw higher negative margin in the product segment, but a product revenue is actually higher than we kind of had anticipated, and I understand that tariffs are part of the impact there, but, maybe help us kind of contrast that with, where you expect it because it seems like you guys are a little bit above plan in Q3 and maybe I'm wondering if there's any kind of pull forward into Q3 versus, what's going to be in Q4.

Yeah, I, there's no poll in. I mean it was a very strong quarter, and to kind of break that down a little bit, the gross shift number is obviously, strong because of the X ramp and the loading of all of our new product. We always have a little conservativeness built in when we do the forecast for the quarter because there's a lot of things you can just run into from a supply chain logistics perspective and And I kind of mentioned on the call we had a, there was a container ship that caught fire in Korea. There was, containers dropping in the ocean in Long Beach, and none of ours, by the way. There were two typhoons. I mean, so there's always some things going on. And again, the team here executed exceptionally well around all of that and we landed all the all the product where we needed to on time and so I would say is that little bit of that little bit of buffer we leave in for supply chain, issues maybe during the quarter, we didn't need and so you saw a pretty strong quarter on gross ship, the 20 to 30% or the inside the quarter, the 29% growth on a year over year units, that's actually our, forecast and results on POS.

So how many units actually sold through the channel and we like to, talk about the growth that we're seeing there, the 29% in Q3 and the 20 to 30% we're anticipating in Q4 because as shipments out really then become household formation which then becomes service revenue, which is what's obviously driving, the outstanding performance in the company and the expansion of profitability over time. So that's, the gross ship number Q3 is always strong because of seasonality. I think it was exceptionally strong because of the execution of the team and the loading of so many new products, but the 29% in Q3 and the 20 to 30%, that's actually commentary on POS which actually leads to future service revenue.

Yeah, understood, I know you guys run a tight ship on the, logistics team, but, maybe kind of help me think through some of the more important partners then as we enter the kind of the back half of the year here, obviously you guys have bigger shelf share at Best Buy, you're kind of growing into a longer-term partner, a bigger partnership with Walmart, help me think through some of these strategic kind of retail partners.

Yeah, absolutely. I mean, I think, just commenting on Q4 in general, we know it's going to be a very competitive quarter. We're seeing great demand in the channel, so, that's a good sign as we roll forward on Q4, but we knew it was going to be a competitive quarter and you can see us preparing the entire company. To actually be really successful inside of a competitive environment, so the product launch, with 20 to 35% COGS declines is an example of that. A lot of the promotional activity we've got lined up with our biggest partners, some of those are obviously Amazon, which is a big part of the market. We're actually gaining some share there, week by week, and so we're happy about that. You mentioned Walmart. I mean, Walmart is part of our thesis around this product segment going more mass market and we're seeing a wider population actually enter the space as the awareness over the product category, and people feeling less safe in general, is starting to drive, and we've been proven right over the last couple holiday seasons, so we're expecting, a strong holiday season with Walmart as well, and that's the channel as we've launched in our new product line, we've gone from 4 or 5 skews to closer to 9 SKUs at Walmart, so almost a doubling of shelf share there, and that's partially what's driving. Some of the unit velocity, year over year from a quarter basis, and why we feel like we are going to be exceptionally positioned with this product line going throughout 2026. So from a partnership perspective or where we think some of the growth is coming, it is across the board. I think we'll see strength in our strategic accounts and then a lot of our big retail partners were set up I think very well for what will be a competitive quarter, but something we completely anticipated with our product launch and our promotional activity and for us as it's really about driving that household formation to see that service revenue grow through the end of the year and actually, tip over into a strong service quarter in Q1.

Got it and maybe just kind of continuing on the service revenue, growth question and comments, when we look at paid sub ads of $281,000 maybe you could kind of help us piece out the timing of those subs in the quarter, obviously keeping in mind your $310 million dollar, service revenue guidance for the full year.

Yeah, I think it was pretty much through the quarter. There are some that kind of came a little bit later as, we promoted the older product through the channel that Kurt was talking about some of the EOL product towards the end of the quarter as the new product came in. So it might be a little bit more backloaded than you would expect over maybe a traditional just very linear trajectory through the quarter. But at 281,000 was really driven by two things. One, Varnisher performed very well and I think that was part and parcel of their IPO and, going to market there and just really leaning into sales and executing extraordinarily well in Europe. But we're seeing strength in our retail and direct channel. Well, which is great. So you see a more balanced revenue line when Kurt was talking about the split between Europe and the United States, you are seeing some strength across our traditional channels. Another indicator of that is what I was saying before around seeing nearly 30% unit growth in the quarter. Now if you remember when we guided the year on service revenue, we guided close to $300 million in service revenue and on our last call, already seeing what was happening in Q3, we took that up closer to 310. And so that's the confidence we're seeing. We are already seeing some of that sell through happen in Q3 on the on the previous call and why we're willing to kind of bring up that guidance to demonstrate how strong not only the the lift and the growth in the market of unit sales going through to the end user, but that it is resulting in in higher than originally expected service, revenue which obviously leads to greater profitability.

Got it, very helpful comments, I appreciate it.

Great work.

Thank you.

Thank you.

This concludes today's conference call. You may now disconnect.