All right, thanks everybody for joining this morning. Hope everybody's having a good day. Staying warm, it's freezing out there, so I'm Adam Tindle, and this is part of my connected devices coverage here at Raymond James. Very happy to have Matt McRae, CEO of Arlo Technologies, which has been an interesting story over the years, lots of transformation that's gone on, and we're gonna go just through a fireside chat today, keeping it informal. Obviously, if you have questions, please feel free to raise your hand. We'll probably start at a high level and get into some more specifics. With that, Matt, thanks for joining.
Thank you.
Maybe just starting with an introduction for those newer to the story, just touch on the background, the market opportunity, and key value proposition of Arlo.
Yeah, absolutely. There are a couple new faces in the, in the room, so I'm happy to do that. It just give you a little bit of the origin story of Arlo. If you're familiar, there's actually a company in the other room later today called NETGEAR. Arlo actually started as a product line inside of NETGEAR about 10 years ago, a little over 10 years ago. NETGEAR is a wireless routing company, if you're not familiar with them, selling at the time predominantly to consumers and a little bit of small business even back then. And they were looking at how do they drive a lot of utilization on the home network to get people to upgrade their wireless infrastructure at home.
And so they hit upon video. They looked at streaming devices and other things, and came up with a unique device at the time of a streaming camera that's utilizing cameras as a way to drive video on the network, which would drive an upgrade. I think at the time it was eight to 11 , maybe 10 years ago. And actually just struck a chord. The category didn't even exist. They built what was the first Arlo product, which was a wire-free camera. And when we say wire-free back then, it meant it was battery operated and obviously Wi-Fi. So you could place the camera anywhere. The setup took five minutes. You could place it on your house as a security device, or you could place it in a tree facing your house because there was no cabling required to actually do the installation.
That category basically is what we see now as the DIY security category, market segment. So back then, 100% of security installations were done by truck rolls from companies like ADT, Brink's. I think it was Honeywell at the time, now it's called Resideo. It's kind of traditional security of installation and, you know, buying the hardware. It gets put into a three or five-year contract. And here NETGEAR rolls out, basically a $100 camera, that you could set up yourself very easily and create a very simple visual representation of what's happening on a physical location. So 10 years ago, about eight years ago, we spun that division out as its own company. NETGEAR had investors that wanted to just invest in Arlo.
And they had other NETGEAR investors saying, "Look, Arlo's eaten up a bunch of capital, it's growing so quick." Patrick Lo, the CEO at the time of NETGEAR, decided to spin it out. Upon spin, we ended up realizing that we could transform the business quite a bit. So at spin, which was in 2018, Arlo was really a hardware product family, you know, had decent hardware gross margins at the time, no subscription service really to speak of. And now we've transformed it into what we call a services-first company. We found that consumers are willing to pay a subscription for security services. So if you look at today, we have over five million paid subscribers across the world. For our retail and direct paid subscribers, those are at 90+% service margin.
You've seen our annual recurring revenue from those paid accounts crest over $320 million on an annualized basis and continuing to grow quite a bit. So we've been on this journey of transforming what was a hardware product line inside of a networking company into a full-fledged SaaS-based consumer business. We find ourselves now with, like I said, raising ARPU, raising ARR, and 60% of our revenues now come from paid accounts.
Yep. It's been quite a story. Here more recently, throughout 2025, you guys have really focused on household formation and using.
Yep.
Products to help grow subscribers. Maybe just, you know, touch on that, what it's done to the financial model and maybe why it's justified.
Yeah. So digging a little deeper, again, if at spin, you know, hardware was making 20 points- 30 points margin and there was no subscription services. What we've been doing over the last, I guess, six or seven years has been turning down the dial on the hardware and turning it up on service, and really using the hardware as an acquisition piece to drive household formation, which then becomes potentially, through conversion, a subscriber or paid account for us. So that's a deliberate practice that we've been pushing. It's a little bit of razors and razor blades. And as we bring down that upfront cost for to get households in, then we put them through our conversion funnel out the back. So it, it's been extraordinarily successful. It's driven blended gross margin from - 20% to now +40% .
It's driven operating income from negative to now positive. We are GAAP EPS positive as well, so the actual transformation of the business once we really leaned into the subscription services has been a big transformation for the company.
When we think about the product gross margin and understand, obviously, in the greater picture, the financial model is just making sure everybody's awake out there. The financial model is turning to the positive. But just on the product piece, I think investors are trying to get a little bit of comfort on, you know, where that bottoms out in terms of, 'cause gross margins are negative.
Yes.
You know, where, where does it bottom out, you know, and what is the trajectory of that product piece from here?
Yeah. So, like I said, we've been slowly turning the dial. Product, I think like three, four years ago was kind of like single digit gross margin. We've brought it down to kind of negative single digit, a little bit more with tariffs. So in the last quarter, it was a little bit higher, a little bit lower than that, in the tariff area. Service gross margin has gone from 40% to over 90%, in that same area. I think because this was a transition quarter, meaning we just launched 109 SKUs into retail, plus 'cause of the tariff impact, this is probably where you will likely see it actually recover a little bit from here. Where we measure ourselves is not on the product gross margin. We, there's a couple things that we measure ourselves from an operational perspective.
One is we wanna see unit growth quarter over quarter or year over year. So unit growth, last quarter was up 30% or 29%, year- over- year. And so that's households being formed that become subscribers. We also hold ourselves to blended gross margin. So if we are gonna bring product gross margin down, service gross margin better go up by more than that. So blended gross margin, continues to expand. And of course, we wanna see operating income expand, continuously as we go forward. We are about 13%, depending on which quarter you look at, from an operating margin percentage. And our goal is to hit 25% plus, as we look forward. So with that, we'll continue to expand as well. But that's really what we're targeting.
And if you look at what's driving the success of the business and what's driving the growth, it's hardware units, it's then service revenue, blended gross margin, which then rolls to the bottom line. One of the things I'll say just as part of that, that you'll see in the business is we've increased subscribers from basically, you know, 1 million, let's say a couple, you know, a couple years ago, accelerated through to 5 million plus. Our OpEx is not growing very quickly at all. In fact, the biggest piece of OpEx growth quarter over quarter is credit card fees on the subscription. So as our subscribers grow, the credit card fees get a little bigger every quarter. That is the biggest part of operating OpEx growth when you look at it kind of quarter over quarter.
What it says is we've got a tremendous amount of leverage in the business. As you see us go from five million paid accounts to 10 million, which is part of our plan, you're not gonna see OpEx grow at that same rate at all. If you look, OpEx is growing like this and you're seeing service gross margin go like that, that's opening up is what's actually dropping to the operating income line. And that'll continue, that leverage will continue going forward.
You alluded to the product refresh. I think it was biggest product refresh in company history that you just implemented.
Yes.
Let's talk about the response that you've received from the new hardware line. Maybe just recap the refresh and the response. And then I think there's, you know, some BOM cost reduction that.
Yep.
Came along that if you could touch on that and how that flows through the financial model.
Yeah. So, we just launched the largest product launch. It was 109 SKUs. We shipped 800,000 units in about six to eight weeks across all of our accounts. It was a refresh, if you're familiar with our product line. We have Essential, Pro, and Ultra. It was a refresh across all three lines. We expanded Essential into new categories like powered outdoor, P T Z, which is a growing form factor that people are interested in. All of the specs got upgraded as well. They're all dual band, plus Wi-Fi, better video, better audio. So it was a real big improvement, also an expansion of our product. Plus, to your point, COGS were down, roughly 20%-30% over the previous version of that same product line.
It was a cost down, a performance increase, and expansion of the entire product line. It is a lift for a company to actually build that many SKUs and ship them out to some of the biggest retailers in the world who have very strict must-arrive-by dates. I joked on our earnings call. It was the world did not make this easy for us. One of the container ships we were on caught fire in Korea. You can look this up on Google. There's some crazy photos of this. A container ship in Long Beach had eight or nine containers actually fall into the water. It wasn't our containers, but they actually freeze all the containers on that boat for a couple weeks as they do an investigation to figure out what happened.
There were two typhoons during the shipping period, and we still landed every single SKU and hit every MABD date, for all of our retailers and partners across the world. So I'd say that and just we're proud of the operational excellence, at Arlo as well. It's really easy to just look at the sales, the marketing, you know, our AI components in our subscription services and some of the innovation that we do. But I will tell you, I think Arlo is also excellent at just operationally delivering, what we need to each quarter.
I wanna get into near-term trends, but any questions on the high level for Arlo so far? Quiet ground.
It's cold.
Yeah, it's cold.
People warming up still.
Right. So on near-term trends and high-level demand, we're at a tech and consumer conference. Arlo's obviously a great cross-section for this investor group.
Yeah.
Maybe just speak to what you're seeing from consumer behavior. We're done with Black Friday, Cyber Monday, although I'm not sure how much those matter anymore nowadays.
Yeah.
and going into the holiday season as well, obviously just, you know, kind of what you're seeing from a consumer standpoint.
Yeah, we're seeing resilience, and I know like different companies are seeing slightly different versions of the consumer that are out there historically, and I think it's proving true this quarter as well. I think the category that we're in is less discretionary than a lot of other consumer categories. If you need security, you're gonna go out and buy security. There's a general tailwind of people just feeling less safe, so I think that separates us from some of the other categories you see in if you're looking at like the hardware portion of the consumer electronics business. Our churn in the last quarter was actually down, so we recorded the lowest churn in for at least the last three or four years at 1%, so we're seeing resilience. We're not seeing any negative trends on conversion or anything else.
And I think, you know, I think that'll continue. We've got an early look into our partners for Q1 and Q2, and some of the forward forecasting looks strong as well. So, I think, again, I think it depends on the category you're in, and it depends on, you know, which consumer you're actually seeing out there. There are some general trends we see in the market segment. So we've been talking for the last year and a half around this technology segment going mass market. So a typical evolution of a new technology, it's usually, you know, the Best Buys of the world that are the first partners in the physical retail at least channel to kind of get technology deployed. And that was true here. So when NETGEAR first deployed the Arlo camera, it was basically Best Buy and Costco, right?
You figure a household, high household GDP, early technology adopters. When things start to hit mass market, and that's usually around a 15%-20% penetration, you'll see that start to shift. And it's not that Best Buy doesn't continue to grow, but you'll see the Walmarts of the world start to become more important to that customer segment because the awareness has gotten to a certain level. And often through that technology, evolution, the pricing has also come down, through just, you know, continuing engineering work and consolidation of components and things like that. And that's what I, that's what I would say we are now. So we're seeing Walmart grow relatively quickly. They're also a strategic partner because we, you know, we're, we're not an Amazon. So we, we partner well as far as we're giving them the latest technology and, and letting them compete in the marketplace.
I think that mass market adoption is what we've just started to see over this calendar year. I think that'll continue as well. If you talk to like a Parks Associates or some of the companies that distribute certain research packages and stuff, roughly the next 30 million- 50 million households will come online into this product category over the next three to five years. So it's really still in its early stage, and that's the United States. When you look internationally, I think there's even more potential there.
Interesting. Maybe just touch on the competitive environment. You mentioned, you know, we've got Amazon, Google kind of the big guys. Also, you know, more of a direct, like a SimpliSafe, you know, would be another example. We'll get into partners here in a second, but just, you know, in terms of the direct competitors, just lay out the landscape and what you're seeing right now.
Yeah. I think there's two leaders in the marketplace. I think it's Amazon and us. And we have different characteristics. I you know, I'd put our technology up against theirs all day long. At partners like Walmart, obviously we have an unfair advantage. They obviously have an advantage on Amazon.com. In the partnership space, which we'll talk in a bit, I think we have an unfair advantage. I mean, 'cause we are a trusted place. This is all we do. It's our complete focus as a company. We have a very strict policy on data privacy and data security. Our whole platform has been built for partnership. So we have robust APIs and very well-documented interfaces. And so we are the company to partner with on the partnership side. In the retailer side, we compete with Amazon. Google less so.
They've kind of faded a bit. They have single digit market share, look to be maybe trying to transform this into a software play and kind of backing off the hardware. And then on the other side of the fence, there are smaller entities. So you'll see, you know, ODMs and certain manufacturers come in with a brand and they, they'll last for a certain length and then sometimes back off. This is a difficult category to be in if you don't have a scaled service strategy in business because we are using, we talked about margin, we are using some of the service margin to bring down hardware pricing to bring down that barrier of entry. If you don't have that and you have to compete with just raw hardware, you're gonna be losing money hand over fist.
Also in that space, we're seeing the federal government start to be more and more active around potentially banning several of those parties on national security and unfair competition concerns. This isn't new. I mean, they have already done that on the enterprise level security cameras and some of the security systems. And so they've been working their way down into the consumer space. If you look at some of the activities at the congressional level, I think it's more likely than not, maybe next year we'll see a couple brands be pulled off the shelf. So we're expecting some consolidation in the next maybe year or two. And we are geared up. Part of this new product line is also in line with this is geared up to kind of capture that share if it becomes unlocked.
Interesting. And you think next year possibly on that?
Yeah. I mean, I don't.
Sure. It's hard to forecast the U.S. government at any level, but you know, you can look at. There's letters from the China Select Committee. There was a letter just put out specifically against another camera brand by, I think it was 20 congressmen, actually demanding a ban, an investigation, a formal ban by the FTC. So it is, it is real action. What, where, when and where it comes down, I, I don't know, but I think, like I said, I think it's more likely than not something's gonna happen.
And how does that play out for Arlo? So like TP-Link, I don't know what their market share looks like.
Yeah. And certain retailers, like if some of these brands do get blocked, I mean, you could see anywhere from 15%-20% of the unit volume need to go somewhere else.
Interesting.
So it's substantial.
Interesting. Okay. Fingers crossed for that. One of the other drivers that investors focus on, you know, in into next year's partnerships.
Yeah.
You mentioned that, right? Maybe just start at a high level, walking us through the expansion of your go-to-market into this partnership ecosystem. Then some of the more recent ones. We've got ADT here at the conference.
Yes.
We'll have to introduce you here. I'm sure you know them.
We know those guys. Yeah.
to say hi, but touch on some of the new partners.
Yeah. So when we spun, I mean, I gave you the origin story as us being part of NETGEAR. At the time of spin, you know, almost the entire revenue line was from retail customers, retail and direct. Actually, sorry, not even direct. It was retail, so there was no Arlo.com, there was no selling direct to consumers, there was no other partnerships, B2B or anything like that. Now it's about 50/50 ± . So we have, you know, 40+% coming from those same channels, those retail partners. We now have Arlo.com, which is actually a substantial channel for us. It's in the top five customer if you looked at it separately. And these B2B partnerships have become a big part of our success to date.
But also we're sharing that as part of our continued growth strategy, getting to our long-range plan. So if you look at the partners, the biggest one we signed today, and this was done just over five years ago, was Verisure in Europe. They just went public, raised about $3 billion, are gonna use some of those funds to obviously grow. We're moving into Mexico with them and probably other parts of the world. They've been a absolute fabulous partner, where we are enabling their backend services for cameras and actually shipping them and designing hardware for them, as they grow in Europe. If you're not familiar with Verisure, they're kind of the ADT of Europe, but bigger, growing very quickly.
And I think we're visionary in a way that they saw some of the trends very early around visual-based security being extremely important, not only for the experience consumers want, but the video verification policies that are coming from different governments that are driving cameras as a necessity of security installation. So Verisure was really the first. We've announced several partners since then. We most recently announced ADT here in the United States and we'll be launching probably sometime mid-next year. It's up to them to announce it. But a lot of the technical integration is done. What we've said publicly is that getting from our 5 million subscriber plus where we are now to the goal of 10 million, we think about 60% of that incremental growth will come from partners and 40% will come from the growth in the retail side.
We see a lot of demand on the partnership side. This typically happens when you see a technology go mass market, meaning when the awareness gets to a certain level. We're talking about a service that has high RPU, very high attach rates, very low churn. So if you're any kind of business out there that's looking to grow recurring revenue, especially in the consumer space, this is it. You know, people don't buy services for other components of the smart home, right? You don't pay for service for your thermostat. You don't pay for service to unlock your front door. People will pay for security. And so this is really driving the recurring revenue story of the overall smart home and smart home security segment. And so we're seeing a tremendous amount of inbound interest.
I have also said publicly that we have one or two more strategic accounts we'll likely be announcing in the next couple of quarters, that are underway and would be material for our future growth. So I think we're set up very well and again, I would say we have probably the best positioning in that part of the business, that B2B2C, because we're not a threat because of our policies, our privacy policy and our data security stuff, the way the platform has been set up and built for partners. Just giving you an idea, we've had partner integrations where they think it's gonna take 12 months and we're done in six because of the maturity of our platform.
We've had, you know, what we call development parties where we'll co-locate the teams and they'll start on a Thursday and by Monday they're actually streaming stuff into their own app already. So it is a real, I think, advantage for Arlo to take a lot of share in that B2B partnership space.
It's been a great story. Maybe, and kind of going off script here, talk about when you go into a partnership. I think the first introduction we had of you mentioned Verisure.
Right.
You know, that was sort of like a contractual guarantee of a certain amount of volume in that kind, you know, what do these look like going forward for a partnership strategy? Are they like contractually bound with certain volume or like maybe just give us a peek into what a partnership looks like?
Yeah. So most, maybe I can talk about the two market segments, they will sometimes have contractual terms and whether that's length or minimum guarantees. Verisure obviously had a very large minimum guarantee 'cause it was a very large commitment, and they were helping fund the development of everything as well, but if you look in our retail and direct channel, you know, we sell the hardware through partners, you know, so it could be a Best Buy, it could be a Walmart, Amazon, and the like. That user then comes to Arlo.com and subscribes to service, and we have a couple of service tiers that include all of our AI functionality and our computer storage and everything else, and we sell unlimited plans and those consumers may have, you know, anywhere from one to like 50 plus cameras.
Usually it's between two and over time it's usually three, like 3.1, 3.2, cameras, and then we provide the services directly to that end user. Through a partner, the hardware's similar. So, you know, we sell the hardware to that partner, and that partner marks it up or gives it away as part of their package. Doesn't matter. Sometimes we do custom hardware for Verisure. We've done custom development as well. And then on the subscription side, most of the deals that we're doing now have basically wholesale pricing for the AI services and platform stuff that we do. So we look at what they wanna deploy, and then we'll mark that up appropriately, and it's usually a cost per camera. So what's interesting is if you look at, and then they take all the costs of the business.
So if you look at LTV to CAC, which is one of the important ratios that we run our business on, on the retail side, it's over three. And our LTV is $870 now for a subscriber. And CAC is like 240-ish, right around 240 or so. On the partnership side, RPU and the LTV is a little bit lower 'cause the RPU's lower, but the CAC is zero, right? We have zero cost of doing that. The partner takes on sales, marketing support, and in many cases, even the overhead for us, actually servicing that business. So, two different business models, very complimentary. You know, we've gotten questions about, well, you know, why not just service everybody through the retail component? Well, first, there's a great diversification of risk and revenue across the lines. They have different seasonality too, which is great.
So it's made our quarters very predictable. We get long-term forecasts from our partners as well. Sometimes at nine to 12 months out, we get to see what the demand looks like. But I would also tell you this market's growing very fast. There's probably 300 million-plus households to go capture over the next decade around the world. And we think we'll capture a bunch through our retail partners and they're amazing partners. But to address that many customers, we want multiple routes to market. And Verisure is a great example of having a tremendous amount of success of that in a region like Europe.
Just thinking about going forward and we'll wrap here in a second, but services growth and sustainability of services growth is a key thing for investors, right? And it's been very impressive. That's the piece of the business that, you know, we're obviously accruing a lot of value in. I think you're pushing, you know, close to high 20s growth in services this year and 2025. Some of that was price increases and other factors. But as investors think kind of going forward into 2026 and beyond, how do you think about sort of the sustainability and right level of services growth?
Yeah. So if you look out on our long-range plan, the other component of the long-range plan is hitting $700 million in ARR. And we closed at $323 million last quarter. So we're just about half the way there. Just like on paid accounts, we're just over halfway on paid account number. That growth from $323 million in ARR to $700 million only supposes another one price increase along the way. And I'll tell you, there's probably opportunity to do a lot more than that. Give you another data point. If you look at the traditional security space that consumers are used to paying for home security, that is usually around $50-$70 a month. And our average ARPU right now is $15.20.
So I would tell you there's a tremendous amount of future pricing power, especially given our services are more compelling, more feature rich. Some of the AI components that are coming are really exciting. So we're targeting, if you take that and just roll that out, we're targeting anywhere from 15%-25% growth, between now and then. If you just look at the long-range plan, and I think we can beat that actually, there's a ton of levers to pull each year. So sometimes it might be a just an absolute price move, which we did a couple of years ago. Earlier this year, we made a structure change. One of the things we saw at the end of last year is we used to have three tiers of pricing. The first was basic.
The second one had all of our AI functionality and the third includes professional monitoring and everything. When we rolled out those plans, we started seeing a mix shift into the middle plan. Everybody was basically the consumers were telling us they want the AI features. And so instead of making a price move this year, we just killed the basic plan 'cause we saw consumers mixing anyways. We also have the ability to roll new plans. Now that we only have two, it is likely you'll see a third plan be announced at some point. There are a tremendous number of levers that we've utilized over just a normal price increase, which the last one we did, I think was probably. You could argue it was last year in 2024, but it was really probably 2023 is when we did a price increase.
We are using all those levers. We watch consumer behavior quite a bit, but we know the ceiling of where we're gonna take pricing is, you know, far away from where we are now, especially when you look at consumer behavior and what they typically are willing to spend for home security.
You also have partnership announcements on the horizon.
We have partnership announcements.
Drive services.
Absolutely.
2026.
Yes. And I'll tell you, there's adjacencies we're starting to look at as well. I mean, we talk about this a little bit in our investor deck. Things like small business or aging in place have complete upside from where we are today. Those are both $10-plus billion-dollar markets we're not participating in yet.
Exciting times ahead. We'll leave it there. Thanks, Matt.
Thank you.