ARLO Q1 Earnings Call: Services Growth Offsets Hardware Declines Amid Tariff Uncertainty

Yahoo

10-06-2025

Smart security company Arlo (NYSE:ARLO) reported Q1 CY2025 results topping the market's revenue expectations , but sales fell by 4.1% year on year to $119.1 million. Its non-GAAP profit of $0.15 per share was 28.2% above analysts' consensus estimates.
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Revenue: $119.1 million vs analyst estimates of $118.4 million (4.1% year-on-year decline, 0.6% beat)
Adjusted EPS: $0.15 vs analyst estimates of $0.12 (28.2% beat)
Adjusted EBITDA: $16.42 million vs analyst estimates of $12.33 million (13.8% margin, 33.1% beat)
Operating Margin: -1.2%, up from -8.5% in the same quarter last year
Market Capitalization: $1.79 billion
Arlo's first quarter results reflected a rapidly expanding subscriptions and services business, which management identified as the main factor driving performance. CEO Matthew McRae highlighted that paid subscriber accounts reached 4.9 million by quarter end, up 51% year over year, with annual recurring revenue surpassing $276 million. The company attributed this momentum to the continued adoption of premium Arlo Secure plans and the simplification of service offerings, which pushed average revenue per user to a record $13.48. COO and CFO Kurt Binder emphasized that this shift toward recurring services revenue underpinned overall profitability, even as hardware revenue declined and product gross margins remained negative.
Looking forward, Arlo's leadership expects the services-first approach to remain central to growth, with further ARPU expansion anticipated from the rollout of Arlo Secure 6 and new plan structures. McRae stated, 'We are planning our largest product launch in company history for the holiday season,' which is expected to deliver 20% to 35% cost reductions on new devices and mitigate tariff impacts. Management also outlined an early rollout of advanced AI features, including enhanced audio event detection and search capabilities, to strengthen the value proposition for customers. While tariff changes introduce some uncertainty, the company expects minimal impact on consolidated margins due to the predominance of services revenue.
Management attributed the quarter's results to accelerated subscriber growth, increased ARPU, and robust cost discipline, while addressing ongoing challenges in product margins and international markets.
Subscription and ARPU growth: Arlo's record services revenue stemmed from accelerated paid subscriber additions and a higher average revenue per user, driven largely by customer migration to premium Arlo Secure plans and recent plan simplification.
Product revenue under pressure: Hardware sales remained soft due to industry-wide declines in average selling prices (ASPs), which management described as a deliberate strategy to use devices as a customer acquisition tool rather than a profit center.
Negative product gross margins: Promotional pricing and aggressive discounting to remain competitive led to continued negative gross margins in the hardware segment, though combined gross margins improved as services revenue became a larger share of the mix.
International segment dynamics: The EMEA region, particularly the Verisure partnership, faced temporary headwinds from inventory destocking, supply chain timing around the Chinese New Year, and regulatory changes such as USB-C standardization, resulting in lower international revenue contributions.
Operational discipline and efficiency: Cost controls, especially in R&D spending, contributed to lower operating expenses and record free cash flow, supporting profitability despite the shift in business mix and competitive pressures.
Arlo's guidance is shaped by momentum in subscriptions, upcoming product launches, and ongoing efforts to manage tariff-related cost risks and industry pricing trends.
Holiday product refresh: The planned launch of over 100 new device SKUs later in the year is expected to achieve 20% to 35% reductions in cost of goods sold and help offset potential tariff increases, while supporting customer acquisition during peak retail periods.
Advanced AI feature rollout: Early deployment of Arlo Secure 6 features—including enhanced audio detection and expanded event search—aims to further increase ARPU and subscriber retention as customers shift to higher-value service tiers.
Tariff and supply chain risks: Management has modeled for a continuation of the current 10% tariff regime and is closely monitoring potential changes post-July. While most revenue and profit are insulated due to the services mix, hardware cost management and inventory positioning remain key uncertainties.
In the coming quarters, the StockStory team will watch (1) the pace of subscriber and ARPU growth as new AI features and Arlo Secure 6 roll out, (2) execution on the upcoming large-scale device refresh and its impact on customer acquisition and margins, and (3) the company's ability to navigate evolving tariff regimes and manage hardware costs. The realization of new strategic partnerships will also be a key marker for sustained growth.
Arlo Technologies currently trades at a forward P/E ratio of 27×. At this valuation, is it a buy or sell post earnings? Find out in our full research report (it's free).
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