Smart security company Arlo (NYSE: ARLO) reported Q2 CY2025 results exceeding the market’s revenue expectations, with sales up 1.5% year on year to $129.4 million. Guidance for next quarter’s revenue was optimistic at $138 million at the midpoint, 2.3% above analysts’ estimates. Its non-GAAP profit of $0.17 per share was 11.3% above analysts’ consensus estimates.

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StockStory’s Take

Arlo’s second quarter results drew a positive market reaction, supported by the company’s continued shift toward subscription and services revenue. Management emphasized accelerating subscriber growth and robust demand across retail and partner channels, with CEO Matthew McRae highlighting that “service revenue hit $78 million, up 30% year-over-year and is now more than 60% of our total revenue.” The quarter also benefited from higher average revenue per user, driven by customer adoption of premium service tiers and ongoing upgrades to the Arlo Secure platform. These factors, combined with operational improvements and effective inventory management, underpinned Arlo’s margin expansion and improved profitability.

Looking ahead, Arlo’s updated guidance is shaped by expectations of continued subscriber growth, the rollout of new devices, and strategic partnerships. Management believes the launch of over 100 new SKUs in the fall, combined with an expanded partnership with ADT, will set the stage for further service revenue and account growth. COO and CFO Kurtis Binder noted, “Our new devices, which include a reduction in BOM costs, will be launched in Q3, enhancing our competitiveness while offsetting some of the increased tariff impact.” Management also expects that the transition to updated service plans will drive higher average revenue per user into the next year.

Key Insights from Management’s Remarks

Management attributed the quarter’s performance to rapid expansion in subscriptions, higher ARPU, and operational discipline amid external headwinds. The transition to a services-first model and aggressive product strategy were central themes.

• Subscription growth accelerates: Arlo grew paid accounts to 5.1 million, up 29% year-over-year, as customers responded to new service tiers and ongoing partner momentum, particularly with Verisure. Management attributed subscriber gains primarily to stronger unit sales across direct, retail, and partner channels rather than solely improved conversion rates.

• ARPU expansion through premium tiers: The rollout of Arlo Secure 6 and migration of existing users to new AI-powered plans lifted average revenue per user (ARPU) to over $15, a 26% year-over-year increase. Management expects further ARPU expansion as annual subscribers renew at higher rates through the remainder of the year.

• Record services gross margin: Non-GAAP subscriptions and services gross margin rose to 85%, reflecting the benefits of premium service adoption and cost reductions in storage and delivery. This margin strength insulated overall profitability from external pressures such as tariffs and declining hardware average selling prices.

• Largest product launch in company history: Arlo is introducing over 100 new SKUs across its Essential, Pro, and Ultra lines. These launches, featuring both new form factors and lower-cost options, are designed to expand retail shelf presence and support aggressive holiday promotions that drive household growth and downstream services revenue.

• Strategic partnership with ADT: The signed agreement with ADT, North America's largest security company, is expected to deliver material upside to services revenue beginning in 2026. Management described it as structurally different from prior partnerships and emphasized its long-term significance for subscriber acquisition and integration.

Drivers of Future Performance

Management expects further growth driven by device launches, ongoing ARPU expansion, and new strategic partnerships, though tariffs and competitive pressures remain.

• Device refresh and promotional strategy: The fall launch of over 100 new device SKUs, with manufacturing cost reductions of 20–35%, is intended to support aggressive pricing and promotions. Management views this as a key lever to expand the subscriber base while mitigating the impact of tariffs on product margins.

• Partnership-driven revenue streams: The upcoming ADT integration, along with progress in converting active but unsubscribed users, is expected to enhance service revenue growth and provide additional visibility into future subscriber additions. Management sees these partnerships as central to achieving higher account targets and recurring revenue.

• Tariff management and operational resilience: Arlo is addressing tariff headwinds by leveraging lower bill-of-materials costs and supply chain strategies. Management believes these efforts largely offset regulatory cost increases, supporting combined gross margin expansion even amid industry-wide pricing pressures.

Catalysts in Upcoming Quarters

Looking ahead, our analysts will track (1) the pace of adoption and sell-through for Arlo’s new device portfolio, (2) the initial revenue impact and operational integration of the ADT partnership, and (3) trends in ARPU and subscriber retention as more customers shift to updated service plans. Execution on cost management and mitigation of tariff risks will also be key signposts.

Arlo Technologies currently trades at $17.20, up from $16.45 just before the earnings. Is the company at an inflection point that warrants a buy or sell? Find out in our full research report (it’s free).

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