Arlo's Q3 2025 Earnings Call: Contradictions Emerge on ADT Partnership, Churn Rates, and Service Revenue Growth

Date of Call: November 06, 2025

Financials Results

• Revenue: $139.5M, up slightly year-over-year (subscriptions & services $79.9M, up 29% YOY; subscriptions/services comprised 57% of total revenue vs 45% prior year)
• EPS: $0.07 GAAP EPS, a company record (year-to-date EPS improvement of $0.35 vs prior-year 9 months)
• Gross Margin: Consolidated non-GAAP gross margin 41%, up 540 bps YOY; Service gross margin 85%, up 770 bps YOY; Product gross margin -17.3% non-GAAP (would be ~-8% excluding ~$5M tariffs)
• Operating Margin: Adjusted EBITDA margin 12.2% (Adjusted EBITDA $17.1M), up 50% YOY

Guidance:

• Q4 consolidated revenue expected to be $131M to $141M.
• Q4 non-GAAP net income per diluted share expected $0.13 to $0.19.
• Expect Q4 unit (POS) growth of 20% to 30% year-over-year.
• Continue to target long-range plan: 10M paid accounts, $700M ARR, >25% operating income.

Business Commentary:

* Subscription and Services Revenue Growth: - Arlo reported $79.9 million in subscriptions and services revenue, up 29% year-over-year. - The growth was driven by the introduction of new AI-driven Arlo Secure 6 rate plans and a strong pace of paid account adds.

• Paid Accounts and User Expansion:
• The company added 281,000 paid accounts during the quarter, exceeding its target range of 190,000 to 230,000.

• This was attributed to net additions in the retail and direct channel, enhanced customer journeys, and the success of strategic partners like Verisure.

• Product Launch and Cost Reduction:

• Arlo executed the largest product launch in its history, with a 20% to 35% reduction in BOM costs.
• The launch contributed to nearly 30% year-over-year unit sales growth and high ratings from professional and user reviews.

• Improved Profitability and EBITDA:
• Adjusted EBITDA increased by 50% year-over-year to $17 million, with GAAP EPS reaching $0.07.

• The growth was due to the expansion of Arlo's services business, which achieved a Rule of 40 result of 46, indicating elite performance in the SaaS space.

• Strategic Partnerships and Market Expansion:

• Arlo's strategic accounts, including Verisure and ADT, are expected to drive growth through their respective market expansions and product testing.
• The company anticipates 60% of its incremental growth coming from these strategic accounts, with new opportunities in Latin America and additional partnerships slated for future announcements.

Sentiment Analysis:

Overall Tone: Positive

• Management described Q3 as "record-breaking," citing 281k paid account adds, ARR of $323M (up 34% YOY), service gross margin 85% (up 770 bps YOY), consolidated non-GAAP gross margin 41% (up 540 bps YOY) and adjusted EBITDA up 50% YOY to $17.1M — highlighting product launch execution and strong SaaS momentum.

Q&A:

• Question from Adam Tindle (Raymond James & Associates, Inc., Research Division): Can you remind us the inventory accounting and whether the BOM cost reduction is reflected in Q3; quantify the inventory clear-out impact and whether it carries into future quarters?
  Response: Product gross margin was pressured by the first full quarter of tariffs and EOL promotional spend; ex-tariffs product margin would be ~-8% (vs -17.3% reported). The EOL inventory was promoted through the quarter and is largely cleared, positioning product margins to improve into Q4.

• Question from Adam Tindle (Raymond James & Associates, Inc., Research Division): On Verisure/ADT: does ADT Mexico open broader LATAM opportunities; will additional RFPs be needed; any framework on magnitude with ADT?
  Response: Verisure's ADT Mexico close is immediate expansion into LATAM where Arlo is already certified and an exclusive backend provider in that region — no new RFP for Mexico; ADT testing has product in the field and strategic accounts are expected to drive ~60% of incremental long‑term growth.

• Question from Jacob Stephan (Lake Street Capital Markets, LLC, Research Division): Q3 gross shipments were higher than expected — was there pull-forward into Q3 versus Q4?
  Response: No pull-forward — strong execution and ex-ramp/load-in of new products drove higher shipments; Q3 POS up 29% YOY and shipments reflect seasonality and execution, not a one-time pull-in.

• Question from Jacob Stephan (Lake Street Capital Markets, LLC, Research Division): How should we think about major retail partners (Best Buy, Walmart, Amazon) entering the back half of the year?
  Response: Retail partnerships are expanding: COGS down 20–35% on new SKUs, promotional activity with Amazon, increased shelf share at Walmart (from ~4–5 SKUs to ~9), and share gains at Amazon — positioning for a strong holiday POS and household formation.

• Question from Jacob Stephan (Lake Street Capital Markets, LLC, Research Division): Can you color the timing of the 281k paid subs in the quarter and how that ties to the ~$310M service revenue guidance for the year?
  Response: Adds were broadly through the quarter but slightly backloaded due to EOL promotions late in Q3; strong Verisure performance and retail/direct strength drove the 281k adds and gave confidence to raise service revenue guidance toward ~$310M for the year.

Contradiction Point 1

ADT Partnership Details

It involves the details of a strategic partnership with ADT, which is expected to significantly impact subscriptions and services revenue, creating potential confusion for investors and stakeholders.

What is the inventory accounting method and how much did Q3 inventory clearance impact? What are the expansion plans in Latin America with Verisure and ADT? - Adam Tindle (Raymond James & Associates, Inc., Research Division)

2025Q3: ADT is testing our products, and we are very excited about the results so far. And we'll be able to provide more details on that as we progress throughout the fourth quarter. - Matthew McRae(CEO)

Can you clarify the ADT partnership? Is it similar to Verisure or previous ADT-Nest collaborations? - Jacob Michael Stephan (Lake Street)

2025Q2: ADT is innovating and is significant for Arlo. The partnership involves devices and service revenue, with a unique structure. The deal was finalized in June and will significantly impact subscriptions and services revenue in 2026. - Matthew Blake McRae (CEO & Director)

Contradiction Point 2

Churn Rate Performance

It involves the company's churn rate performance, which is a critical metric for understanding customer retention and future revenue generation.

What is your inventory accounting method and how much did Q3 inventory clearance impact results? What is your plan for Latin America expansion with Verisure and ADT? - Adam Tindle (Raymond James & Associates, Inc., Research Division)

2025Q3: We continue to believe that churn is a short-term cycle and expect it to stabilize in the coming quarters. - Matthew McRae(CEO)

Has the churn rate reached 1% monthly, and will this continue? - Rian Bisson (Craig-Hallum)

2025Q2: Churn remains within the historical range of 1.1-1.3%. Operational improvements are contributing to lower churn, close to 1% this quarter. Seasonal factors may fluctuate this range. - Matthew Blake McRae (CEO & Director)

Contradiction Point 3

Service Revenue Growth Expectations

It involves differences in the expectations and factors driving service revenue growth, which is a critical aspect of the company's financial outlook.

When were the 281,000 paid subscribers added in Q3? How does this affect the $310 million full-year service revenue guidance? - Jacob Stephan (Lake Street Capital Markets, LLC, Research Division)

2025Q3: Year-end service revenue guidance increased to $310 million due to expected sell-through of units in Q3, driven by both traditional and partner channels. - Matthew McRae(CEO & Director)

Can you outline the 2025 outlook for services revenue growth and the factors driving the $300 million target? - Adam Tindle (Raymond James & Associates, Inc., Research Division)

2024Q4: The $300 million services revenue target is driven by ARPU expansion, increased subscriber volume, strategic partnerships, and mix shifts. - Kurt Binder(CFO & COO)

Contradiction Point 4

Inventory Management and Tariff Strategy

It involves a differing approach to inventory management and tariff strategies, which could significantly impact operational costs and revenue expectations.

What is your inventory accounting method and the quantified impact of Q3 inventory clearance? How do you plan to expand in Latin America through Verisure and ADT? - Adam Tindle (Raymond James & Associates, Inc., Research Division)

2025Q3: We're focused on making sure that between now and the first week of July, we capitalize on the available time we have to have sufficient inventory tariff-free or at least with a 10% tariff available for us to ship. - Matthew McRae(CEO)

Are you planning to increase inventory before July 3rd due to the anticipated reinstatement of tariffs on Vietnam? - Jacob Stephan (Lake Street Capital Markets, LLC, Research Division)

2025Q1: We're under the 10% regime until July 8, actually. And then we expect, obviously, a lot of discussions to happen. We know -- as you know, we do a lot of manufacturing in Vietnam and some in Indonesia. - Matthew McRae(CEO)

Contradiction Point 5

Latin America Expansion Strategy

It highlights a shift in the company's approach to expansion in Latin America, which could impact market penetration and revenue growth in that region.

What is the inventory accounting method and the quantified impact of Q3's inventory clearance? How do you plan to expand in Latin America with Verisure and ADT? - Adam Tindle (Raymond James & Associates, Inc., Research Division)

2025Q3: Arlo is the exclusive service provider for Verisure in Latin America. Verisure gained ADT Mexico, opening new market opportunities. ADT is testing Arlo products with stellar user experience, expected to positively impact growth. - Matthew McRae(CEO)

How are you assessing competitive impacts from Chinese manufacturing? - Scott Searle (ROTH Capital)

2025Q1: In Q4, we had $54 million in revenue, which was up 109% year-over-year and 121% on a constant currency basis. And that was driven by very strong performance, kind of throughout the region, but in particular in North America and in Latin America. - Matthew McRae(CEO)