Executive Summary / Key Takeaways

• Arlo Technologies has successfully transformed into a services-first SaaS company, with subscription revenue now comprising the majority of total revenue and driving significant profitability expansion.
• The company's core investment thesis is centered on leveraging hardware sales as a customer acquisition tool to fuel growth in its high-margin, recurring subscription business, underpinned by differentiated AI-powered technology.
• Recent performance highlights include record subscription revenue ($68.8M in Q1 2025, up 21.4% YoY), record non-GAAP services gross margin (83.1% in Q1 2025), and strong free cash flow generation ($28M in Q1 2025).
• Paid subscriber growth is accelerating, surpassing 5 million accounts ahead of schedule, and Average Revenue Per User (ARPU) is expanding due to new service plans and feature adoption, driving Annual Recurring Revenue (ARR) towards the $300M mark.
• Despite macroeconomic headwinds and competitive pricing pressure on hardware, Arlo's strategic agility, planned product cost reductions (20-35% BOM reduction in H2 2025), and expanding strategic partnerships position it for continued growth and profitability improvement, reaffirming strong 2025 guidance.

The Evolution of Arlo: From Hardware Pioneer to SaaS Powerhouse

Arlo Technologies emerged over a decade ago, pioneering the wire-free security camera category in December 2014. While initially known for its innovative hardware, the company embarked on a deliberate and strategic transformation, recognizing the immense value in recurring service revenue. This shift began in earnest with the introduction of AI subscriptions in 2018 and has culminated in Arlo becoming a services-first business powered by a globally scaled cloud platform. Today, Arlo offers a comprehensive ecosystem of home, business, and personal security services, integrating award-winning devices with advanced monitoring and analytics.

The smart home security market is large and growing, but penetration of smart security services still lags behind device adoption, presenting a significant untapped opportunity. Arlo's strategy is built around capturing this opportunity by leveraging its hardware as a critical, albeit lower-margin, customer acquisition tool. The goal is to bring customers into the Arlo ecosystem through device sales and then convert them into high-margin, long-term subscribers to its cloud-based services. This model is designed to drive predictable, sustainable revenue and profitability, insulating the company from the volatility often associated with pure hardware businesses.

This strategic pivot has positioned Arlo distinctly within a competitive landscape populated by tech giants like Google Nest (GOOGL) and Ring (AMZN), as well as more budget-focused players like Wyze and professional monitoring providers like SimpliSafe and Alarm.com (ALRM). While competitors like Nest and Ring benefit from vast ecosystems and distribution networks, Arlo differentiates itself through a focused approach to security, user experience, and privacy. Its standalone nature allows for greater customization and potentially faster innovation cycles in its core domain. Against hardware-only competitors, Arlo's services-first model provides a crucial advantage, particularly in navigating market pressures like tariffs and declining hardware Average Selling Prices (ASPs), as the majority of its revenue and nearly all of its profit are derived from high-margin services, viewing hardware margins primarily as a customer acquisition cost.

The Technological Engine: Arlo Intelligence and Platform Innovation

At the heart of Arlo's services-first strategy lies its proprietary technology platform, particularly Arlo Intelligence – a real-time, high-performance AI engine purpose-built for smart security. This is a key differentiator, enabling capabilities that go beyond basic motion detection. Arlo Intelligence processes video, audio, and environmental data to provide specific, actionable alerts and trigger system responses.

The platform's capabilities include:

• Advanced Detection: Identifying objects such as persons, animals, vehicles, and packages. Recent updates include fire detection for earlier alerts.
• Robust Recognition: Identifying specific known persons or vehicles, allowing for tailored alerts and actions.
• Custom Detection: A groundbreaking feature enabling users to create private AI models to detect nearly any type of event, significantly expanding service utility.
• Enhanced Audio Analysis: Listening for and identifying specific sounds like glass breaking, screaming, gunshots, and barking dogs (rolling out in Arlo Secure 6).
• Event Descriptions & Search: Providing detailed descriptions of events (including visual and audio elements) that are fully searchable within the app.
• Threat Assessment: Analyzing events and providing a threat score based on parametric classifications to prioritize responses (in beta for Arlo Secure 6).

These technological capabilities translate into tangible benefits for users: reduced false alarms, faster and more relevant notifications, enhanced situational awareness, and greater control over their security environment. For Arlo, this differentiation is critical to attracting and retaining high-value subscribers, supporting ARPU expansion, and strengthening its competitive moat against rivals whose AI capabilities may be less specialized or performant in a security context. While direct, quantifiable performance comparisons across all competitor AI platforms are not detailed here, Arlo's emphasis on its purpose-built engine and continuous feature rollouts like those in Arlo Secure 5 and 6 underscore its commitment to leading on the technology front.

Arlo's investment in R&D extends beyond AI. The company is undertaking its largest product launch in history for the Holiday 2025 season, refreshing nearly its entire camera lineup and expanding into new segments. A key goal of this refresh is a significant 20-35% reduction in Bill of Materials (BOM) costs, which is strategically vital for maintaining competitive pricing power in the hardware market while mitigating external cost pressures like tariffs. Looking further ahead, development has begun on a next-generation DIY security concept targeting a 2026/2027 launch, aiming to revolutionize the market with a clean-sheet design approach. These initiatives demonstrate a commitment to continuous innovation, crucial for sustaining long-term growth and competitive relevance.

Performance Reflecting the Strategic Shift

Arlo's financial performance over recent periods clearly illustrates the impact of its services-first strategy. In the first quarter of 2025, total revenue was $119.1 million, a slight decrease from $124.2 million in the prior year period, primarily due to a reduction in product sales. However, this masks the underlying strength of the services business.

Subscriptions and services revenue reached a record $68.8 million in Q1 2025, representing robust 21.4% year-over-year growth. This segment now constitutes 57.8% of total revenue, a significant increase from 45.7% in Q1 2024 and exceeding the key SaaS milestone of over 50% contribution achieved in Q4 2024. This growth was fueled by a 51.4% year-over-year increase in cumulative paid accounts, reaching 4.9 million by the end of Q1 2025 and surpassing the 5 million mark shortly after. Annual Recurring Revenue (ARR) stood at $276.4 million at the end of Q1 2025, also up over 20% year-over-year and on track to exceed $300 million.

Profitability reflects this mix shift. The non-GAAP services gross margin reached a record 83.1% in Q1 2025, up from 76% in the prior year period and consistently above the 80% target. This high-margin revenue stream is driving significant operating leverage. While product gross margins remained slightly negative in Q1 2025 due to aggressive promotional activity and higher inventory valuation adjustments, the strength of services led to a substantial expansion in total non-GAAP gross margin to 46%, up 600 basis points year-over-year.

Operating expenses were managed effectively. Total operating expenses decreased year-over-year in Q1 2025, primarily due to lower R&D and G&A costs, partially offset by increased sales and marketing spend related to growing paid subscribers and marketing initiatives. This cost discipline, combined with gross margin expansion, resulted in a significant improvement in operating loss ($1.5 million in Q1 2025 vs. $10.6 million in Q1 2024) and contributed to record non-GAAP net income of $16.5 million, or $0.15 per diluted share.

Arlo's focus on profitability and working capital management is also evident in its cash flow generation. Net cash provided by operating activities increased significantly to $30.9 million in Q1 2025, up from $19.8 million in the prior year period, driven by improved profitability and favorable working capital movements, particularly the increase in deferred revenue from subscription growth and strong accounts receivable collections. This translated into record free cash flow of $28 million in the quarter.

As of March 30, 2025, Arlo held $153.1 million in cash, cash equivalents, and short-term investments. The company also has access to a $45 million revolving credit facility, which was unused. Despite a history of losses and an accumulated deficit of $398.8 million, management believes existing liquidity is sufficient for at least the next 12 months and beyond, supported by ongoing free cash flow generation. The company is actively executing on its $50 million stock repurchase program, having bought back $15.2 million in Q1 2025, signaling confidence in its valuation.

Strategic Initiatives and Partnership Expansion

Beyond core product and service innovation, Arlo is actively pursuing strategic partnerships to expand its reach and diversify its revenue streams. The long-standing relationship with Verisure, Arlo's largest customer in EMEA, remains strong and was renewed for another five years through November 2029, providing a stable base of product sales and supporting innovation investment.

More recently, Arlo has announced significant partnerships that open new avenues for growth:

• Allstate (ALL): Phase 2 of this partnership involves marketing and selling Arlo security solutions to Allstate's home insurance customers, marking an entry into the InsureTech segment. This collaboration leverages the natural synergy between home security and insurance, potentially reaching new households beyond traditional retail channels.
• Origin AI: This strategic partnership grants Arlo exclusive worldwide rights to Origin's AI Verified Human Presence detection technology, which uses existing Wi-Fi signals to detect human presence. Integrating this into Arlo Intelligence enhances the platform's capabilities (e.g., motion detection without hardware, reduced false alarms) and creates opportunities to license this technology as a service to other partners.
• Samsung SmartThings (SSNLF): An expanded partnership aims to enhance the integration of Arlo cameras within the Samsung SmartThings ecosystem, improving performance, two-way audio, event previews, and AI-powered notifications for SmartThings users.

These partnerships are strategically important for Arlo's long-range plan, which targets 10 million paid accounts and $700 million in ARR. Management expects a significant portion of this growth to come from future strategic engagements over the next 2-3 years, viewing the partnership space as less competitive than traditional retail and valuing partners who prioritize security, privacy, and innovation.

Arlo's capital allocation strategy reflects these priorities, focusing primarily on organic investment in technology (Arlo Secure 6, next-gen platform) and customer experience. Evaluation of inorganic opportunities (acquisitions for new tech/channels or market consolidation) is ongoing, with potential action in the next 12-18 months. The stock repurchase program is a third pillar, used opportunistically to return capital.

Outlook, Guidance, and Key Risks

Arlo's strong Q1 2025 performance and strategic momentum provide confidence in its forward outlook. For the second quarter of 2025, the company expects total revenue between $119 million and $129 million and non-GAAP net income per diluted share between $0.11 and $0.17. This guidance assumes a continuation of current market conditions, including declining industry ASPs, and factors in operating under a 10% blanket tariff regime for imported hardware.

For the full year 2025, Arlo reaffirmed its guidance, projecting consolidated revenue between $510 million and $540 million. Crucially, service revenue is expected to comprise greater than 50% of total revenue and reach at or above $300 million, representing over 20% year-over-year growth. Non-GAAP service gross margin is expected to remain above 80% throughout the year. The company anticipates non-GAAP net income per diluted share between $0.56 and $0.66, implying over 50% growth at the midpoint.

Management highlights that this outlook positions Arlo as a Rule of 40 company (sum of revenue growth and operating margin) and expects to exit 2025 with over $300 million in ARR. They believe this places Arlo in an elite group of public SaaS companies and underscores the market's undervaluation of the stock, noting it trades at a significantly lower multiple of service revenue compared to high-growth SaaS peers. Furthermore, Arlo has already surpassed its original 2027 targets for paid accounts (5 million) and ARR ($300 million) well ahead of schedule, suggesting potential to substantially beat its new long-range targets (10 million paid accounts, $700 million ARR).

Despite this optimistic outlook, risks remain. The international trade environment and potential tariffs, particularly on goods manufactured in Asia, could increase costs and disrupt supply chains, potentially impacting product deliveries and reputation. While Arlo believes the impact on consolidated margins is minimal due to its services focus, prolonged trade tensions or macroeconomic downturns could negatively affect consumer demand and exacerbate competitive pressures. Competition remains intense, with ongoing pressure on hardware pricing. However, Arlo's planned 20-35% BOM cost reduction in its H2 2025 product refresh is strategically designed to mitigate these cost pressures and maintain competitive positioning. The company's ability to continue driving paid account growth and ARPU expansion in a challenging consumer environment is key to realizing its guidance and long-range targets.

Conclusion

Arlo Technologies has successfully executed a fundamental transformation, evolving from a hardware-centric company into a high-margin, services-first SaaS provider. This strategic shift is yielding tangible results, demonstrated by accelerating subscription revenue growth, expanding gross margins, robust free cash flow generation, and rapid paid subscriber additions that are outpacing long-range targets.

The company's investment thesis is compelling: leverage hardware sales as a cost-effective customer acquisition channel to fuel a sticky, profitable subscription business powered by differentiated AI technology. Despite macroeconomic headwinds and competitive pricing in the hardware market, Arlo's strategic agility, ongoing innovation in its platform and product portfolio (including significant planned cost reductions), and expanding strategic partnerships position it for continued growth and profitability improvement. The reaffirmed 2025 guidance underscores management's confidence in the resilience of their model and their ability to execute against ambitious targets, suggesting that the market may not yet fully appreciate the value created by Arlo's successful SaaS transformation.