Arlo Technologies, Inc. (ARLO) Earnings

Management highlights

### Overall Q2 Performance - Delivered record results across all key metrics: total revenue, service revenue, gross profit, and non-GAAP net income all hit new company highs. Total paid accounts reached 6.3 million, substantially ahead of the long-term 10 million target trajectory, with 298,000 net new paid accounts added in the quarter. - Core user metrics improved year-over-year: average revenue per user (ARPU) increased, churn decreased, monthly and annual subscription renewals exceeded forecast, and lifetime value (LTV) of a paid account rose 15% to $967. - Consolidated non-GAAP gross margin exceeded 50% (a new record), up 480 basis points year-over-year. Adjusted EBITDA grew 70% year-over-year to $30.6 million (20% margin), and non-GAAP diluted EPS hit $0.28, up 65% year-over-year. ### Capital Allocation Strategy Organic investments are focused on three high-return priorities: - Operational excellence: New data-driven tools and processes are being deployed to improve core user metrics, with investment continuing in high-RIO opportunities. - Sales and marketing: Balancing short-term holiday promotional investment in retail channels (to drive new subscriber growth, with each new subscriber now worth ~$1,000 LTV) and market testing for the new care and small business segments to inform the 2027 business plan. - Platform innovation: The Arlo Secure 7 new service platform will launch at the end of Q3 2026, bringing new capabilities that enable higher-priced service tiers. In 2027, Arlo will launch a next-generation hardware line paired with Arlo Secure 8, described as the most significant customer experience innovation in home security since Arlo's original DIY launch 10 years ago. Inorganic Growth Updates - The Origin AI investment generated a >50% return. - The AlloCare acquisition for the $30+ billion smart elder care market is progressing well, with multiple new partner announcements expected to contribute to 2027 growth. Arlo remains bullish but selective on future inorganic opportunities, prioritizing smaller adjacent assets or larger opportunities that align with the core smart security market. Shareholder Return - Arlo has repurchased nearly 6 million shares since the launch of its repurchase program, including more than $20 million in share repurchases in Q2 2026. Management and the board believe Arlo shares are substantially undervalued, and additional repurchases are expected going forward.

Guidance

- Third quarter 2026 total revenue is expected to be in the range of $140 million to $150 million. Non-GAAP diluted EPS is expected to be between $0.17 and $0.23, which is substantially ahead of consensus analyst estimates. - Full year 2026 guidance was significantly increased from prior levels: total revenue is now expected to be in the range of $580 million to $600 million, and non-GAAP diluted EPS is expected to be between $0.90 and $1.00. - Product gross margins for the second half of 2026 are expected to revert to a negative mid-teens to high teens percentage range, consistent with Arlo's strategy of using product sales as a customer acquisition tool to drive higher-margin subscription growth. - Management expects 20% full year 2026 ARR growth, aligned with current service revenue growth trends, supported by the upcoming Arlo Secure 7 launch and improving core user metrics.

Segment performance

Arlo operates two core business segments: Subscriptions & Services, and Product. For Q2 2026: 1. Subscriptions & Services: Revenue hit $93 million, growing 19% year-over-year, and contributed 60% of total company revenue. Non-GAAP gross margin for the segment was 84.1%, slightly impacted by non-recurring engineering revenue for strategic partner ramp-up. Annual Recurring Revenue (ARR) for the segment reached $365 million, up 16% year-over-year, driven by 23% year-over-year paid subscriber growth and a slight ARPU uplift. 2. Product: Revenue reached $62.9 million, growing 23% year-over-year. Reported non-GAAP gross margin was 1%, up significantly from -13.8% in the prior year period, primarily due to an $8 million tariff refund recorded in the quarter. Excluding the tariff refund, pro forma product gross margin was -11.6%, still a 220 basis point improvement year-over-year, driven by a higher mix of sales from strategic partners.

Risks & headwinds

- Forward-looking statements, including guidance, product launch timelines, and long-term growth targets, are subject to material risks that could cause actual results to differ materially, as detailed in Arlo's periodic SEC filings. Arlo does not undertake an obligation to update forward-looking statements after the call. - Product gross margins remain negative excluding one-time tariff refunds, and continued promotional investment to drive point-of-sale growth could pressure product segment profitability in the near term. - New product and new segment launches (including Arlo Secure 7, AlloCare elder care, and small business market entry) depend on successful market adoption, which is uncertain and may not meet growth expectations. - Integration of large strategic partnerships (such as Comcast and ADT) and potential future acquisitions carries execution risk that could delay launch timelines or reduce expected returns. - Inventory build to reduce shipping costs and mitigate potential future memory cost increases creates working capital risk if demand does not meet expectations.

Analyst Q&A

• Q: What is the outlook for full year 2026 ARR growth, what new features will Arlo Secure 7 add, and can you provide an update on key strategic partnerships with ADT, Samsung, and Comcast?

  A: Management expects full year ARR growth to hit 20%, aligned with current 19% service revenue growth, supported by improving churn, conversion, and ARPU metrics, and the upcoming Arlo Secure 7 launch. Arlo Secure 7 adds next-generation AI that assesses full event threat levels (beyond basic object detection), reducing false alarms and speeding up emergency response, plus all requested customer feature updates and major improvements to continuous video recording, enabling a new higher-priced subscription tier. ADT Blue is on track to ramp through the second half of 2026, with increased marketing expected in the holiday quarter. Comcast integration is progressing ahead of schedule, with a possible launch in Q1 2027 instead of Q2 2027, and the partnership offers more cross-service opportunity than initially expected.

• Q: How will Arlo use the expected Q3 2026 tariff refund, and what will these incremental investments unlock?

  A: Q2 2026's $8 million tariff refund (equal to $0.07 EPS) dropped to the bottom line because there was not enough time to rigorously evaluate high-ROI investment opportunities. The expected ~$6 million Q3 tariff refund (equal to ~$0.05 EPS) will be reinvested in three strategic areas: increased promotional investment for the holiday selling season to drive new household and subscriber growth, accelerated engineering integration for strategic partners and Arlo Secure 8 development, and small-scale market tests for AlloCare elder care and small business segment entry to gather real data for the 2027 annual operating plan. These investments are expected to drive both short-term growth and longer-term growth within the next 18 months.

• Q: Can you provide an update on the AlloCare acquisition, including early partner reception and DIY go-to-market plans?

  A: AlloCare was acquired for its proprietary technology and existing pipeline of care provider partners. Initial deployments with partners like Home Helpers (a provider of in-home elder care) are progressing well, and the company is already rolling out AlloCare's unique AI automated check-in technology that can predict potential health issues (such as falls or dehydration) from conversational data for caregivers. Arlo has received strong inbound interest from retail channels, government agencies, healthcare providers, and existing Arlo strategic partners. A DIY direct-to-consumer market test will be run in late 2026 to gather data for the 2027 business plan, and multiple new AlloCare partner announcements are expected over the next 6-9 months, with substantial growth contribution from the segment starting in 2027.

• Q: Why was the full year revenue guidance increase driven entirely by product revenue (which has negative gross margins) rather than service revenue, and why is this strategy appropriate?

  A: Accelerated product revenue comes from new devices sold into new households, which is the top of the funnel for future subscription revenue growth. The service revenue uplift from these new households typically flows through in subsequent quarters (most often Q1 of the next year) after conversion, rather than in the same quarter that product revenue is recorded. Management still expects service revenue to hit the prior 20% growth target, with upside potential if conversion performs better than expected. Core metrics (higher LTV, lower churn, improved conversion, higher renewals) confirm that acquiring new households via product sales continues to deliver strong long-term returns for shareholders.

• Q: Where does Arlo see consolidation opportunities in the smart security market, and how will it participate?

  A: Arlo sees two primary areas of consolidation. First, retail channels are reducing the number of smart security brands on shelves to focus on high-performing options, and Arlo expects to gain shelf share and overall market share from this trend. Second, there may be future inorganic opportunities to acquire companies that have existing household/customer bases in the security or adjacent spaces but have not succeeded at converting those customers to high-margin recurring subscriptions. Arlo has proven expertise in this conversion, so it would consider acquiring such assets to accelerate subscription growth, but it will remain selective, with AlloCare as the near-term priority.