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Date
Thursday, August 7, 2025 at 5 p.m. ET
Call participants
Chief Executive Officer — Matthew McRae
Chief Operating Officer and Chief Financial Officer — Kurt Binder
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Takeaways
Total Revenue— $129 million in total revenue for Q2 2025.
Subscriptions and Services Revenue— $78 million (non-GAAP) in subscriptions and services revenue for Q2 2025, marking 30% year-over-year growth in service revenue and now exceeding 60% of total revenue.
Non-GAAP Service Gross Margin— Reached a record 85% non-GAAP subscriptions and services gross margin, up 850 basis points year over year (non-GAAP).
GAAP Earnings Per Share— GAAP earnings per share was a profit of 3¢, a reversal from a 12¢ GAAP loss in Q2 2024.
Non-GAAP Earnings Per Share— 17¢.
Adjusted EBITDA— Adjusted EBITDA was $18 million, up 82% year over year, with adjusted EBITDA margin of 14%.
Rule of 40 Score— Achieved a rule of 40 score of 48 for the subscriptions and services business.
Annual Recurring Revenue (ARR)— $316 million in annual recurring revenue (ARR), up 34% year over year.
Paid Subscriber Additions— 218,000 net new paid additions, lifting the total to 5.1 million paid subscriptions, an increase of 29% year over year.
Retail and Direct Subscriber Monthly ARPU— Exceeded $15 in retail ARPU, up 12% sequentially and 26% year over year.
Subscriber Lifetime Value (LTV)— $840 lifetime value per paid account.
Camera Unit Sales Growth— 30% year-over-year increase in service revenue.
Q3 and Q4 Camera Unit Growth Target— Guided to 20%-30% year-over-year camera unit growth for both Q3 and Q4 2025.
Product Revenue— Product revenue was $51.2 million due to industry-wide ASP declines.
International Revenue— $50 million in international revenue, or 39% of total revenue (non-GAAP), down from $64 million and 50% in the prior year.
Consolidated Non-GAAP Gross Margin— 46%, up nearly 800 basis points including a 100 basis point headwind from tariffs on a non-GAAP basis.
Non-GAAP Operating Expenses— $41.7 million (non-GAAP), up 6.6% (non-GAAP) due to higher credit card fees and R&D spending.
Capitalized Software Development Cost— $2 million related to new product launches and Arlo Secure Six rollout.
Non-GAAP Net Income— $19 million in non-GAAP net income; 17¢ non-GAAP net income per diluted share.
Available Cash, Equivalents, and Short-Term Investments— $160.4 million in available cash, cash equivalents, and short-term investments as of Q2 2025.
Record Free Cash Flow (First Six Months)— $34 million in free cash flow for the first six months of 2025, free cash flow margin of almost 14% for the first six months of 2025.
Accounts Receivable and DSOs— $61 million in receivables with days sales outstanding at 43, down from 44.
Inventory and Turns— Inventory at $31 million, down from $45 million last year. Inventory turns were 7.7 times, up from 5.8 times last year.
Tariff Impact on Gross Margin— Tariffs represented a 100 basis point headwind in non-GAAP gross margin and are expected to run 300-400 basis points per quarter against combined gross margin going forward.
Q3 Revenue Guidance— $133 million to $143 million projected consolidated revenue range for Q3 2025.
Q3 Non-GAAP Net Income Per Share Guidance— 12¢ to 18¢ non-GAAP projected range for Q3 2025.
Full-Year 2025 Service Revenue Outlook— Raised to above $310 million, with subscriptions and services revenue expected to grow over 27% in 2025.
Full-Year Service Gross Margin Guidance— Reaffirmed non-GAAP subscriptions and services gross margin at 85% for full-year 2025.
2025 Year-End ARR Target— $335 million in annual recurring revenue (ARR) at year-end 2025.
Largest Device Launch in History— More than 100 new SKUs launching across essential, pro, and ultra segments.
New Strategic Partnership— Signed with ADT, expected to materially enhance subscriptions and services revenue starting 2026.
Paid Account Addition Guidance— Increased quarterly range to 190,000-230,000 paid subscriber additions following completion of Verisure account catch-up.
Monthly Churn Rate— Company cited “closer to 1%” monthly churn, down from historical monthly churn of 1.1%-1.3%.
Summary
Arlo Technologies(NYSE:ARLO) reported a substantial shift in its revenue mix, with subscriptions and services comprising 60% of total revenue. Management increased full-year 2025 guidance for service revenue and ARR, citing accelerating subscriber growth, higher ARPU, and robust household formation driven by retail and channel activity. The company highlighted the rollout of over 100 new SKUs, with meaningful cost reductions of 20% to over 30%, as a strategic response to tariffs and as a lever for competitive pricing and expanded shelf space.
CEO McRae said, “we are planning an aggressive holiday season,” and expects new SKUs to drive both unit growth and services momentum.
COO and CFO Binder confirmed that consolidated non-GAAP gross margins rose nearly 800 basis points year over year, even with tariffs representing a “gross margin headwind of approximately 100 basis points in the period” (non-GAAP).
Binder cited that tariffs are planned for mitigation through BOM cost reductions and operational discipline, with an anticipated “300 to 400 basis points per quarter against our combined gross margin” but a stated ability to offset these impacts.
Management indicated positive customer retention trends, with McRae noting operational initiatives that brought churn rates near 1%, and described ongoing efforts to further optimize subscriber conversions and ARPU expansion throughout the year.
A strategic partnership with ADT was announced as a unique and material long-term revenue driver, with additional strategic accounts under negotiation for further enhancement of the company’s services business.
Industry glossary
ARPU (Average Revenue Per User): The average monthly revenue generated per paid subscriber account for Arlo’s services segment.
ARR (Annual Recurring Revenue): The annually recurring revenue from active paid service subscriptions, excluding one-time product sales.
LTV (Lifetime Value): The projected total gross profit from a paid subscriber over the expected duration of their subscription.
COGS (Cost of Goods Sold): Direct production costs attributed to Arlo devices sold, critical for assessing gross margin.
BOM (Bill of Materials): The total component and assembly cost per device for Arlo’s hardware products.
SKU (Stock-Keeping Unit): A specific product identifier used for inventory and sales tracking across Arlo’s product assortment.
POS (Point-of-Sale): The point in the retail cycle where end customers purchase Arlo hardware, central to household formation metrics.
DSO (Days Sales Outstanding): The average number of days it takes Arlo to collect payment from customers after a sale is made.
Full Conference Call Transcript
Tahmin Clarke: Thank you, Operator. Afternoon, and welcome to Arlo Technologies’ second quarter 2025 financial results conference call. Joining us from the company are Mr. Matthew McRae, 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 condition, 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 2025, the long-range plan targets, the rate and timing of paid subscriber growth, the transition to a services-first business model, 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 condition.
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 Arlo’s periodic filings with the SEC, including our annual report on Form 10-K, and our most recently filed quarterly report on Form 10-Q 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 this 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 Matthew McRae.
Matthew McRae: Thank you, Tahmin, and thank you, everyone, for joining us today on Arlo’s second quarter 2025 earnings call. Arlo’s performance in the quarter was nothing short of outstanding. Total revenue came in at $129 million, up year over year and up over $10 million sequentially. Service revenue hit $78 million, up 30% year over year, and is now more than 60% of our total revenue, while non-GAAP service gross margin increased to a record 85%. This performance propelled non-GAAP earnings per share to 17¢, up 70% year over year, and GAAP earnings per share to a profit of 3¢, a massive swing from a loss of 12¢ a year ago.
The growth and profitability of our subscriptions services business continues to drive record results across the company. And you’ll remember at the beginning of the year, we commented about our confidence that Arlo would be one of only a handful of SaaS companies achieving rule of 40 performance in 2025. For those keeping score, our annual recurring revenue or ARR hit $316 million, which is up 34%, and adjusted EBITDA rose to $18 million, up an incredible 82% and achieving an EBITDA margin of 14% for the quarter. That means our subscriptions and services business delivered a rule of 40 score of 48 in the second quarter.
Diving deeper into our retail and direct subscription business, camera unit sales were up 30% year over year. To date, we continue to experience strong customer demand across the channels, and recently surpassed our forecast for the important Amazon Prime Day event. Arlo added 218,000 paid subscriptions to reach 5.1 million at the end of Q2. Verisure reported that their paid account catch-up is complete, and we expect that Verisure now has the ability to report these metrics within the quarter of deployment going forward. This visibility allows us to increase our estimated paid account range to 190,000 to 230,000 per quarter, reflecting the higher underlying performance and normal seasonality.
The launch of Arlo Secure Six, our robust AI security service platform, helped drive retail and direct subscriber monthly ARPU to over $15 in the quarter, growing our subscriber LTV to $840. This trend of ARPU expansion will continue through 2025 as the remaining pool of annual subscribers migrate to our new AI service plan structure. In addition to the acceleration of our subscription business, Arlo will be executing the largest product release in company history with more than 100 new SKUs launching throughout our channels this fall. We will be updating products across our essential, pro, and ultra segments and introducing new form factors, including pan-tilt-zoom designs, and additional low-cost powered options.
Our new camera lineup has resulted in a larger assortment and more shelf space inside of our key channel partners. This significant product launch coupled with the aforementioned expansion of our LTV means we are planning an aggressive holiday season. Very similar to 2023 where we brought down device ASPs and generated strong growth in our services business. For both Q3 and Q4, Arlo is targeting between 20-30% camera unit growth year over year. Finally, I’m happy to announce that in June, we signed a strategic partnership with ADT, the largest security company in North America. We are working closely with them on key technology integrations and we will provide more information closer to market launch.
ADT is a significant strategic account and will provide material upside to our subscriptions and services revenue starting in 2026. As I look ahead to Q3 and the balance of the year, Arlo could not be in a stronger position despite the volatility and external headwinds buffeting the macroeconomic environment. Our incredible services performance coupled with a lower cost basis for our new product lineup is insulating us from the tariffs, which we view as a small increase in our customer acquisition cost. With a world-class LTV to CAC ratio and subscriber retention, we will remain focused on growing our subscription and services business, which is directly contributing to our excellent financial performance.
Arlo just reported the best first half in our corporate history. We are guiding to a strong Q3. We are again reaffirming guidance for the full year. We believe our 2025 service revenue estimate of $300 million will be closer to $310 million, while our full-year subscription and service gross margin will exceed our original estimate of 80% and land closer to 85%. In June, Arlo celebrated the achievement of our original long-range plan. We hit 5 million paid subscribers, $300 million in ARR, and over 10% operating income, more than two years earlier than anticipated.
That momentum is clearly continuing as evidenced by our results today, and we believe we are well-positioned to hit our new long-range plan of 10 million paid accounts, $700 million in ARR, and over 25% in non-GAAP operating margin early as well. I will now turn it over to Kurt for a more detailed review of our Q2 results and our outlook ahead.
Kurt Binder: Thank you, Matthew, and thank you everyone for joining us today. During the quarter, we again delivered outstanding financial results driven by our high-growth SaaS business model, that we described to you on our year-end 2024 conference call. This quarter’s results continued to show success in acquiring new subscriptions through our highly efficient retail channels and strategic partnerships, and converting those households to paid accounts leveraging the value proposition of our subscription services. Then we focus on increasing ARPU through the deployment of compelling service offerings including personalized AI capabilities, which translates into expanding annual recurring revenue with high subscriptions and services gross margin.
Customers continue to recognize the value of our service offerings as strong ARPU trends drove our stellar financial results during the period. Most notably, another quarter of record subscriptions and services revenue. Retail ARPU in the second quarter rose to $15, accelerating 12% sequentially and 26% 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 Matthew mentioned, with strong subscriber momentum and the Verisure 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. Total revenue for 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 SaaS 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 ASP 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 cost 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 SaaS-level gross margins, thereby making the trade-off more than worth it. This 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 this 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, Verisure 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 and 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 6.6% from $39.1 million in the same period last year. The year-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 cost to prepare for the launch of our new portfolio of products, and investments made to advance the final phase of the Arlo Secure Six platform rollout which we expect later this year.
For the second quarter, adjusted EBITDA was $18 million, an 82% increase year 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 diluted share of 17¢. Regarding our balance sheet 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 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 cash flow 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 BOM cost, 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, 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 BOM cost, will be launched in Q3, enhancing our competitiveness while offsetting some of the increased tariff 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 diluted share for Q3 to be in the range of $0.12 to 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. We will now open for questions.
Operator: 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. Our first question comes from the line of Jacob Stephan from Lake Street. Your line is now open.
Jacob Stephan: 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 could you maybe help us understand what this partnership’s actually about? Is it more of a Verisure-like agreement? Or is it similar to what ADT and NEST have tried to do a couple of years ago? Kinda help us think through this a little bit.
Matthew McRae: Yeah. 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. 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. 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 two that I’ve been hinting at for the last couple of earnings calls when we got it done in June. We’re really looking forward to it getting rolled out and executed in 2026.
Jacob Stephan: Got it. Next, just wanna focus on the product launches. Maybe if you could help us think through the thousand new SKUs you plan to launch. 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?
Matthew McRae: Yeah. So I can give you an idea around the launch. Like we said, it’s the largest device launch in our company history. It’s well over 100 SKUs going into multiple channels simultaneously. From a status, and you probably inferred 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. Some of them are already arriving here in the United States. So it’s on time. You heard Kurt 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 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 United States. But it gives us dry power to actually dig a little bit deeper on promotions and make sure that we’re growing services business at the pace that we think is appropriate and will be accretive to the overall shareholder value.
In addition to that cost down, it’s actually an expansion of the product line into several new categories. That’s important because not only do we get 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 line 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 years ago and said we’re gonna dig a little bit deeper and see what the impact is on our services business. It was outrageously accretive to the business, and it’s somewhere where we learned a lot about how far we could drive the services business. You’re gonna see us do that again. Actually look at the tariff impact as a small increase in CAC us using some of that dry powder to also reduce 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 and ARR at the end of the year. I’ll leave a little momentum going into Q1 as well.
Jacob Stephan: Understood. Very helpful. Congrats again, guys.
Matthew McRae: Yeah. Thank you very much.
Operator: Thank you. The next question comes from the line of Scott Searle of Roth Capital. Your line is now open.
Scott Searle: Hey, good afternoon. Congrats on the quarter. Thanks for taking my questions. Hey, Matt, maybe just quickly, in terms of net adds 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 you know, kind of domestically, where you’re seeing that pull through? I just wanna 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’ve got the cost down coming in pretty hard, and you guys are gonna be aggressive on that front.
How should we be thinking about that and modeling that as we go into the second half this year? Then I had a follow-up.
Matthew McRae: Okay. Yeah. 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. I can’t tell you that a very specific channel did a lot better than others. I think we executed extraordinarily well at Amazon. 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. 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 drivers. 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.
Kurt Binder: Yes, Scott. As it relates to the gross margin, obviously, we were extremely pleased with the results and 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. Yeah. 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. We expect that to continue in the second half. There’ll be two things we’re focused on.
First and foremost, we’re gonna 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 is growing year over year and continues to in the second half. We’ll do that by managing basically the ASPs for our devices. Keeping that at a level where we’re pushing the envelope on the POS but doing it responsibly so we can continue to sell gross margin expansion. Now there is one other dynamic that’s in play, and I’m you’re probably alluding to that. 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. To 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. We feel really comfortable indicating that we have an ability to grow our combined gross margins year over year.
Scott Searle: Great. Very helpful. Kurt, if I could just follow-up on the front, 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? Matt, just a lot going on, very exciting stuff. ADT certainly at the top of the list. But, you know, in terms of other strategics and other adjacencies, I wonder if you could give us some thoughts and priorities. I think insurance is kinda factored into there as well in terms of Allstate. 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 kinda wondering how all that fits in over the next couple of quarters and how you prioritize things. Thanks.
Matthew McRae: Yeah. It’s a good question. 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 are seeing an interest level that’s higher than we’ve ever seen before from a partnership perspective. I balance that with focus. ADT is obviously gonna 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 that will, I can’t tell you what they are today, but they’re exciting opportunities for us in the strategic accounts area. We have been executing additional opportunities to drive additional service acquisition. You mentioned one, going after our active but unsubscribed base. I will tell you, we are seeing success using our ad platform. We do have ads rolled out to nonsubscribers, actually converting those over to paid accounts. Relatively small.
I think it’s a couple thousand people we’ve already done just in the last thirty days or so, but 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 lift on gross margin and overall service revenue. I would tell you, we’re gonna 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 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. From a competition perspective, on the tariff, I would tell you, I think we are at either a similar playing field or an advantage against the competition in the marketplace. As you know, we source a lot of our product from Vietnam. Over the last twelve to eighteen months, a lot of our competitors have moved to Vietnam or moved some of their product, at least to Vietnam as well.
That would be an area where we would have maybe similar tariffs. Then there are many competitors that still remain in China and other areas that will actually, right now, at least, have a higher tariff. 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. 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.
I would tell you most of our competition don’t have the same service revenue and service gross margin to pull from. 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, we mentioned on the call, it’s a small increase in CAC. Our propensity is to stay aggressive through the holiday period and focus on unit growth and absorb the tariff 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.
Scott Searle: Great. Thanks so much. Very exciting times. I’ll get back in the queue.
Kurt Binder: Thank you.
Operator: Our next question comes from the line of Adam Tindle of Raymond James. Your line is now open.
Adam Tindle: Okay. Thanks. Good afternoon. I wanted to start with the $15 retail ARPU, which was obviously an impressive and surprising number to the upside. On that, maybe one for Matt or Kurt, if you wanna weigh in. With the price increases in the services plans, I just wanna 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? Secondly, as we kinda think about framing this year from a services revenue growth standpoint, based on this updated guidance, you’re gonna be growing close to 30% year over year.
Of that, is there a way for us to just kinda think about how much contribution for that 30% related to price increases just so we don’t get ahead of ourselves as we think about 2026 where that may not repeat?
Matthew McRae: Yeah. Hey, 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. Then migrated our existing customer base through the course of February. 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 Six 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 fifteen. It’ll be slower. Now you asked me, are we gonna continue to see it arise?
The rest of the year, we’ll see ARPU increase as well, and that’ll be mostly people who are on annual plans coming up for their plan renewal onto the new pricing structure. 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. A larger jump this quarter, but you’ll see that kinda generally rise at a slower rate the next three quarters.
Kurt Binder: Yes. In terms of impact, we look at impact really through three lenses. Obviously, you highlighted price. Also look at the overall mix. Then, of course, sub ads. 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 to a range of 190,000 to 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.
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. As we look forward and to the future, really, our key objective is to continue to grow our services revenue plus 20% out into the future. That’s what we’re all motivated and incentivized to do here as part of the management team.
Adam Tindle: Makes sense. I think investors will appreciate that. Just as a follow-up, kind of mechanical on the product side, I just wanna understand two different dynamics that are gonna happen here over the coming quarters. On one hand, with your existing inventory, you are working to effectively take down channel inventory, which makes a ton of sense before a huge launch. We wanna have sort of a clean channel. I wonder, you know, that and kind of thinking about the financial implications, the potential headwind from that, if you could help us sort of frame that piece. Then the second part is the tailwind then from the launch.
Obviously, a massive launch that you have, you know, the impact to sell in on from a product standpoint, you know, kind of those two different dynamics you could sort of help us frame the financial implications and timing of each, that’d be helpful.
Kurt Binder: Yeah. So I would say that obviously, the third quarter is a big quarter for us. As we mentioned, it’s gonna be an important quarter because we have or 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 the product revenue will be a bit higher in Q3 as we load in preparation for all the promotional activity. 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. 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 margin. 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 shipping through air freight and sea. We’re doing everything possible to manage that profitability such that we optimize that and ensure we don’t gap out. The third thing that’s at play is we know that our new product SKUs all have really a benefit of 20 to 35% on the COGS level.
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 place. 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 and the way they’ve executed flawlessly to date, and we expect to have a really strong third quarter as evidenced by our guidance.
Adam Tindle: Very helpful. Thank you.
Operator: Thank you. Our next question comes from the line of Hamed Khorsand of BWS Financial. Your line is now open.
Hamed Khorsand: Hi. So the first question is, is the sub ads a function of selling more units or is it the conversion rate? Sub adds mean that you raised guidance range now.
Kurt Binder: 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. I would say it’s much more attributable to and that’s us executing well, being a little bit more aggressive on promotions. Driving that business because it’s so accretive on the service revenue level. There is a little bit here and there on conversion. Some of it is better in retention as well, but I would put most of it just to us capturing some share the retail direct and some strong performance with our partners.
Hamed Khorsand: Okay. 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?
Matthew McRae: Yeah. The holiday period is usually a little more smoothed out. What I mean by that is some of the product we will gross ship in Q3. POS is typically in Q4. In Q4, we often see that some of that POS is actually bought, installed, and then goes through their thirty-day trial. 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 thirty-day trial, and maybe they actually become a potential subscriber in Q1.
It’s a little bit more, you know, 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. It’s one of the reasons why we took our service revenue from, you know, roughly 300 up to $310 million is we think there will be a little bit of additional services hitting in Q4 than originally planned.
Hamed Khorsand: Okay. Great. Thank you.
Matthew McRae: You’re welcome.
Kurt Binder: Thank you.
Operator: Our next question comes from the line of Rian Bisson of Craig Hallum. Your line is now open.
Rian Bisson: Hey, Matt. Hey, Kurt. It’s Rian on for Tony Stoss. Just one quick one for me. It looks like from the slides you guys posted in that the churn was about 1% monthly churn. I think historically, you had talked about, you know, 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?
Matthew McRae: Yeah. I would tell you that I think we’re holding a range of 1.1 to 1.3, but, you know, Kurt just alluded that there is a lot of work being done on retention, save journeys, and things in the company that are having some impact. 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 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. We’re seeing some benefit through.
I think the stars aligned a little bit and got us closer to 1% on the quarter. As you know, things like conversion and the retention rate or churn, say another way, small changes can have a big impact on the business and the service revenue profitability going forward. There are a series of tiger teams inside the company looking at tenth of a percent changes over time, and several of those kinda hit all at the same time in Q2.
Rian Bisson: Great. Thanks, guys. Congrats on the results.
Matthew McRae: Thank you very much.
Kurt Binder: Thank you.
Operator: There seem to be no questions at this time, so this will conclude today’s conference call. You may now disconnect your line.
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