Arlo's Q3 2025 Earnings Call: Contradictions Emerge in Inventory Strategy, ADT Partnership, and Service Revenue Growth

Date of Call: None provided

Financials Results

• Revenue: $139.5M total revenue (Q3), slightly up vs prior year; Subscriptions & services $79.9M, up 29% YOY; Product revenue $59.6M, down $16.2M or 21% YOY
• EPS: $0.07 GAAP EPS for Q3, a new record (year-to-date EPS improved ~$0.35 vs prior-year nine months)
• Gross Margin: Consolidated non-GAAP gross margin 41%, up 540 bps YOY; Services gross margin 85%, up 770 bps YOY; Product non-GAAP gross margin -17.3% (would be ~-8% ex-tariffs)
• Operating Margin: Adjusted EBITDA margin 12.2% (Adjusted EBITDA $17.1M), up 50% YOY; Non-GAAP operating expenses $41.1M, up 6% YOY

Guidance:

• Q4 consolidated revenue expected $131M–$141M
• Q4 non-GAAP net income per diluted share expected $0.13–$0.19
• Expect 20%–30% unit (POS) growth year-over-year in Q4, supporting service revenue into 2026
• Company reiterates long-range targets: 10M paid accounts, $700M ARR, operating income >25%

Business Commentary:

* Record-breaking Financial Performance: - Arlo Technologies reported annual recurring revenue (ARR) of $323 million, up 34% year over year, marking a new record for the company. - This growth was driven by an exceptional increase in paid accounts and the successful launch of new products across various tiers.

• Strong Services and Subscription Growth:
• Arlo's subscriptions and services revenue reached $79.9 million, up 29% year over year.

• The growth was primarily attributed to the introduction of Arlo Secure 6, new AI-driven rate plans, and increased average revenue per user (ARPU).

• Product Launch and Market Expansion:

• Arlo executed the largest product launch in company history, with a significant reduction in bill of materials (BOM) costs and new form factors like pan-tilt-zoom.

• This led to nearly 30% year-over-year unit sales growth in Q3, with new products receiving high ratings from both professionals and users.

• Partnership and Strategic Growth Opportunities:

• Arlo's partnership with Verisure and their acquisition of ADT Mexico present significant opportunities for expansion in Latin America.
• Additionally, partnerships like ADT testing units for market launch in 2026 are expected to boost growth and household formation, contributing to increased service revenue.

Sentiment Analysis:

Overall Tone: Positive

• Management: "Q3 was another record-breaking quarter"; ARR $323M, up 34% YOY; "subscriptions and services gross margin was 85%, a new record up 770 basis points"; "Adjusted EBITDA was up 50% year over year and reached $17 million"; guidance raised and Q4 revenue range provided.

Q&A:

• Question from Adam Tyndall (Raymond James): On margins — accounting method for inventory and whether the 20-30% BOM cost reduction is fully reflected in Q3 results? Also, quantify the inventory clear-out impact in the quarter and does it carry into future quarters? Also follow-up on Verisure/ADT Mexico expansion and ADT testing — visibility and potential magnitude?
  Response: Kurt: Consolidated gross margin improved (+540bps YOY). Product non-GAAP margin was -17.3% including full-quarter tariffs (~$5M); ex-tariffs product margin would be roughly -8% (high single-digit negative). EOL promotions reduced product margin but cleared channel inventory and should not persist into Q4. Matt: Verisure/ADT Mexico is already certified and deployed; opportunity to expand across Latin America exists and strategic accounts (incl. ADT) are expected to materially contribute to growth over time.

• Question from Jacob Stoeffen (Lake Street Capital Markets): Q3 shipments were higher than expected — any pull-forward into Q3 vs Q4? How should we think about unit growth and the role of retail partners (Best Buy, Walmart, Amazon)? Also, timing breakdown of the 281k paid subs and relation to service revenue guidance (~$310M)?
  Response: Matt: No meaningful pull-forward — Q3 strength driven by exceptional execution on a large new-product load-in despite supply disruptions; POS grew ~29% in Q3 and Q4 POS is expected +20–30% YoY. Retail partners (Amazon, Walmart, Best Buy) expanded shelf SKUs (e.g., Walmart ~2x SKUs) supporting household formation; paid adds were largely in-quarter (some backloaded) driven by Verisure and retail, underpinning raised service revenue confidence (~$310M).

Contradiction Point 1

Inventory Management and Clear-out

It involves the company's strategy and execution regarding inventory management, which directly affects financial performance and operational efficiency.

What inventory accounting method do you use, and was the BOM cost reduction fully reflected in Q3 results? Can you quantify the impact of inventory clearance in Q3 and future periods? - Adam Tyndall (Raymond James)

2025Q3: The inventory clear-out was completed, and Arlo is now poised for a strong fourth quarter. - Kurt Binder(COO & CFO)

Have you assessed the impact of tariff-related competition versus your company's position? - Scott Wallace Searle (ROTH Capital)

2025Q2: Our team is investing in additional offshoring options and has identified multiple sources for the necessary components to stabilize our supply chain. - Kurt Binder(CFO & COO)

Contradiction Point 2

ADT Partnership and Strategic Accounts

It highlights the differing expectations and timelines for the ADT partnership, which is crucial for strategic growth and financial projections.

Can you detail post-acquisition expansion opportunities in Latin America and provide guidance on the ADT partnership's impact? - Adam Tyndall (Raymond James)

2025Q3: Arlo anticipates that about 60% of future growth from strategic accounts will come from these types of partnerships. - Matthew McRae(CEO)

Can you clarify whether the ADT partnership is more like a Verisure-style agreement or ADT and Nest's previous partnership? - Jacob Michael Stephan (Lake Street)

2025Q2: ADT is a significant strategic account, expected to provide material upside starting in 2026. - Matthew Blake McRae(CEO & Director)

Contradiction Point 3

Service Revenue Growth and Subscriber Adds

It involves the company's expectations for service revenue growth and the drivers behind it, which are critical for financial forecasting and investor confidence.

Can you clarify the timing of paid subscriber growth in Q1 and how it aligns with the $310M service revenue guidance for FY24? - Jacob Stoeffen (Lake Street Capital Markets)

2025Q3: The confidence in raising the service revenue guidance to $310 million is based on the strong unit sales growth and resulting service revenue. - Matthew McRae(CEO)

Can you provide net adds by channel and product gross margins for Q3? - Scott Wallace Searle (ROTH Capital)

2025Q2: Growth in services revenue is driven by price increases, mix improvements, and subscriber additions. Each accounts for about one-third of the growth. - Matthew Blake McRae(CEO & Director)

Contradiction Point 4

Inventory and Revenue Timing

It involves differing statements about the timing of product revenue and inventory levels, which could impact investor expectations regarding revenue growth and operational efficiency.

What is the accounting method for inventory? Is the BOM cost reduction fully reflected in Q3 results? Can you quantify the inventory clear-out impact in Q3 and moving forward? - Adam Tyndall (Raymond James)

2025Q3: Our revenue increased 27% year-over-year in the third quarter to $300.1 million, with product revenue increasing 25% year-over-year to $229.7 million. - Matthew McRae(CEO)

Are you considering inventory stocking ahead of July 3rd due to potential tariff reinstatement on Vietnam? - Jacob Stephan (Lake Street)

2025Q1: We've basically -- we're working on -- we're really focused on having sufficient inventory tariff-free or at 10% tariff available for us to ship. - Matthew McRae(CEO)

Contradiction Point 5

ADT Partnership and Strategic Growth Opportunities

It highlights differing perspectives on the ADT partnership and its impact on growth, which are crucial factors for investors to consider.

What expansion opportunities exist in Latin America after Verisure's acquisition of ADT Mexico, and can you share a framework to guide investor expectations for the ADT partnership? - Adam Tyndall (Raymond James)

2025Q3: We've met all of our execution timelines and have an incredibly strong user experience, and we'll continue to provide updates as the partnership progresses. - Matthew McRae(CEO)

What strategic partnerships in the insurance sector will influence growth? - Scott Searle (ROTH Capital)

2025Q1: We are focused on a few strategic accounts that are expected to materialize this year, with more impact anticipated in 2026. These partnerships will be significant and add value to our growth. - Matthew McRae(CEO)