Well, welcome everybody. It's Jim Fish with Piper Sandler once again. I've got Kurt Binder here of Arlo. Kurt, thanks for joining us.
Thanks, Jim. Thanks for having us.
Of course. So format today, I've got a bunch of questions to go through with Kurt, and I'll try to open it up at the end, if that's all right.
Absolutely.
But maybe Kurt, just to kick it off, $365 million ARR plus 6 million paid accounts. You guys have this goal of 10 million paid subscribers as well as $700 million of ARR. I guess, what are the primary velocity drivers to get you there, and how are you feeling about each of these drivers?
Yeah, great question. Thanks. Let me start by setting the stage. I guess it was back in 2024 to the early 2025, we set out for ourselves three key metrics. One was 10 million subs, the second one was $700 million in ARR, and the third one was a 25% EBITDA margin or greater. We have actually progressed pretty well on that relative to our five-year term, going out to 2030. If you look at what we did when we first set those up, we were really looking at our core business at that point in time with maybe one or two strategic partners, the biggest of which was Verisure. We just projected that out over five years and said, "Hey, if we keep doing what we are doing, we will hit these targets." Okay? A fairly conservative approach.
As you look at what we have done today, we have actually expanded on our core business. We have a new software app coming out here, actually in the next few weeks, called Arlo Secure 7, which will really ignite and push us further into our consumer-based subscribers. As well as give us a path to some SMB opportunities. Two, we have added a couple marquee names to our subscriber or our strategic partner list with Comcast and ADT, and to a lesser extent, Samsung, but we can talk about that a bit more in a few minutes. Then, most recently, we acquired a business called Aloe Care Health, which gets us into the elder or senior living space for in-home health type services.
Those key vectors, we think, provide growth that will allow us not to just achieve our objectives in 2030 around our long range plan, but actually accelerate that a bit, maybe a year or so. So we are pretty excited and the path is clearly defined and we are executing pretty well.
You guys, of course, have the direct business as well.
Right.
Direct and retail. Let's set the stage here a little bit more, too. How are you guys seeing consumer discretionary spending behavior on smart home technology at this point, and how are you thinking about that side of the equation beyond just the partnership contribution as you think about those goals?
Yeah. It's a great question, and obviously it's a timely question, and this is one of those ones where we think it has an impact on some of the volatility in our stock. That is that most people look at the Arlo brand and obviously have a direct tie to consumer spending, when in fact, over the last several years in our transformation at this stage, 60+% of our revenue is generated by subscription and services revenue. We have a backlog. That backlog is ARR. We ended Q2 with $365 million in ARR, which shows what we think we can do in the next 12 months. So there is a level of transparency and stability in the business, which we think ultimately, essentially mitigates some of that consumer element that you're referencing.
That being said, when we look at where we are today, we do believe that where the consumer sits, we have factored that into our near and long-term goals. We understand there's a lot of macroeconomic elements that are at play right now. But what we see in terms of the consumer spending is in line with our expectations. We have seen some ebbs and flows through the first half of this year, and if you look at our numbers through the second quarter, we've actually out-executed some of those ebbs and flows. We're pretty custom to understanding the consumer. It's part of our DNA relative to where we came from with Netgear and working with the big box retailers. We do a really good job, I think, of having insight and foresight into what's happening with the consumer and factoring those into our assumptions.
Right now, relative to our forecast, we feel really good about where we are.
Yeah. One of the things that we at Piper really like about your story here, though, are those partnerships.
Right.
Can you just walk us through how we should think about what you guys have seen so far, as well as what we should expect in terms of the ramps of some of these partners, ADT and now Comcast?
Yeah. This is by far the most exciting thing about working at Arlo right now. I would speak on behalf of the executive team. The progress and the traction we are getting with strategic partners is just extremely exciting for us. Let me walk you through sort of the top ones and I will work my way down. I will talk a little about our core business, what we are seeing there. I will talk about the key ones, starting with Comcast and ADT, and then I will discuss a little bit about some new logos that we are actually pursuing. First and foremost, around our core business, Secure 7, and ultimately next year's Arlo Secure 8. We come out with a software app upgrade every year.
What that does for us, I believe, is start to position us really well for moving from just consumer-based subscribers into SMB and more on the smaller side of SMB. You will see some new features coming out here in the next few weeks, like what we call ATR, which is called, for us, is automatic threat response or automatic threat assessment. It is a new technology that we are deploying here. You will see things around CVR plans, which are continuous video recording. These are things that we think resonate well with the consumer-oriented subscribers, but also play well within the SMB space. There are going to be some, I think, announcements and traction on the SMB front here in the next year and a half, too. When you break down our core strategic accounts we have announced. Obviously, Comcast is the biggest one, right?
2026, this year, is what we call an integration year. We have been working extremely hard with the backend technology team at Comcast to make sure we have all the API connections locked and loaded, and we are actually getting paid for that as part of NRE. That is baked into our forecast and part of our services revenue. We are extremely excited about the progress we are making there. What we see is that probably in mid Q2, early summer, we will launch effectively with Comcast, and that means that we will attack new potential subscribes, but also potentially penetrate their 30-some million households that they currently have in the U.S. So 2027 will be the launch year, summertime. We think that by the time we get to 2028, we will be fully deployed. What does that mean?
Well, basically what we are hearing is that they would expect us to at least be penetrated into those 30-plus million households at about a 5%-10% rate. You guys can do the math, but what that does is put Comcast basically on a path within 18-24 months to be as or bigger than Verisure is as of today, after eight years of working with Verisure. Comcast has real big momentum and progress right now, and we are super excited about that. ADT is a little bit slower. We launched ADT effectively in the May timeframe. They put, I think, a moderate investment in that in terms of getting into two main retail accounts. It was ADT, or what we call direct-to-consumer, and then they are also actually getting into some of the retailers. In particular, Walmart is the one that they are adding, as well as Amazon.
What we have seen with them is that they are in a bit of a learning phase. 2026 is really them getting accustomed to DIY in retail channels. Then we see 2027 is when they start to take off and actually have planned some other momentum and investment into marketing that will happen in the early part of 2027. ADT is progressing well, but slower than we think Comcast ultimately will. We think it will be a good, strong account, but it will not be nearly the scale that Comcast is at. Samsung, a bit different. Matt likes to say it is anybody's guess. Basically what we are is a built-in app experience within their SmartThings ecosystem. They are still working to figure out how they are going to monetize that.
That is something that Samsung sees as a challenge for them, is creating a services business out of SmartThings, and we are featured in that area. What you could expect that to materialize as is basically us being positioned as the backend supporting all of their emergency response through their appliances. Think of it as sort of the big red button on your stove or oven or refrigerator that if you are having a choking or a fire, you can hit. Automatically, it deploys through our system and gets first responders to get there as soon as possible, and we handle all of that backend. Those are the three primary strategic accounts we have talked about and the path to kind of ramping them.
I will say that behind the scenes, we're working on probably three to five major logos that we think will materialize in the next couple quarters, I would say probably three quarters. They're from the Aloe Care acquisition as we start to work with Medicare, Medicaid, and government-funded institutions, as well as our core business. More on the horizon, but we've got to get a little bit further down the path of our pipeline before we can actually announce those. Lots happening in multiple fronts, all of which I think will further catalyze and expand on our growth.
I mean, you could announce them here. It's okay. I'm kidding.
Yes.
We have the direct side as well as the partnership side. Maybe help us break down the unit economics, the customer acquisition costs, and the churn profiles of each of the businesses.
Yeah, great question. This is probably the biggest question we get when we're meeting with investors is, "So what does this all mean?" Let me start by saying this. When you look at our, I'll break it down into our retail channel partners and our strategic account partners, our B2B2C partners. Basically, to start, the net result is expected to be about the same. What I mean by that, just to kind of cut to the chase, is we have a target on a long-range plan of 25% operating margin or EBITDA margin. Regardless of how we go to market, retail or B2B2C, we expect to be hitting that overall profitability target, okay? Let me back up and sort of explain the two channels a bit.
On the retail channel, this is probably the one that you see most in our information that we share with you publicly through our investment decks, and that is higher ARPU, higher gross margin. ARPU in that $15-$16 range, gross margin in that 92%-96% range, driven because we have to carry the customer acquisition costs. You say, "Okay, what's customer acquisition cost?" Basically, we look at the device and pushing the device through the marketplace or our retail partners and the cost that we incur in that effort as CAC. If you're familiar with the consumer business, the way it really works is it's great, and you get to put your devices on the shelves of Best Buy or Amazon or Costco, whatever. But you basically pay for them to sell through promotional activity that you fund.
We're okay doing that, and you'll see in a lot of cases on that side of the equation, our margins are negative around the devices because when we actually sell it through to a household, activate that household, and get that subscriber, we're getting 90-some-plus percent on the actual services. So retail channel, higher ARPU, higher gross margin because there's a CAC element associated with it. Net margin targeting, again, 25%, thereabout. When you flip over to the B2B2C, or our strategic accounts, what we do is we wholesale price basically the ARPU, so we're giving them a discounted price associated with the service. That allows them to go out and market it themselves and ultimately price it how they see fit based upon the subscriber cohort or the geographic region or whatever you want to call it.
But they handle that pricing because they know their consumer better than we do. The margins are a bit different, much lower, but still very healthy. But we don't have that customer acquisition cost because they handle all of the sell into the household, they handle the support functions, all that stuff is on them. So net-net, you're back to, again, a targeted EBITDA that is similar to the retail channel. So that's how it all works. I think what you'll see is it'll roll through in our service revenue continuing to grow nicely. The margins will be consistent as you see now, and our EBITDA performance will actually expand over time.
How do you balance the investments that you're making between, especially as you think about overlapping geographies or whatnot, in terms of where you guys overlap with your partners between that retail side versus what they're trying to do with their customers?
Yeah. Well, first I'd say that we do look at a lot of data. You'll see right now we are in an investment mode, particularly around getting into these large-scale partners. Over the last several quarters, we've talked a lot about investing in R&D and sales and marketing to make sure that we were positioned with our platform to really capitalize on a Comcast or an ADT. That has shown through our numbers, and it is showing in the level of effort that we're deploying with our engineering and sales and marketing teams. As we look at the data and we look at the demographics that are out there, we are careful to ensure that we're not in any way cannibalizing ourselves.
Most people say, "Well, gosh, you're getting into ADT, and ADT is just going to try to steal your subscribers." We don't see it that way, actually. When we look at the demographics, surprisingly, you'll see that most consumer subscribers that buy Arlo tend to be anywhere from the age demographic of 35 to 45, generally are new or existing homeowners. I can give you all of the salary and demographics and all that stuff. A bit different than what you see with ADT. ADT is a much older demographic. Typical age for ADT user is somewhere between 55 and 65, probably targeting what we hear is 62 years of age. Not as technologically advanced. The demographics don't necessarily overlap as much as you might think. But that being said, we are very aware of, say, positioning ADT in our retail channels along with Arlo.
What we're ultimately trying to do is just find the most aggressive path to as many subs as possible. What we see is a scenario playing out. I'm sure you probably hear the question oftentimes, how do you compete against an Amazon? Well, this is actually how you compete against Amazon. Amazon and the Blink and Ring brand certainly have an advantage on the Amazon platform. Obviously, they have unlimited funds for marketing spend. What they don't do well is play with strategic accounts.
Frankly, Comcast, ADT, Verisure, you ask any of these guys whether they want to give up their subscriber and associated data to an Amazon and Google, you will receive an emphatic, "Absolutely not, would never even consider it." If you ask us, well, how do we get to 10 million subs, or frankly, 10 million subs to 40 million subs, it's basically angling the business where we have a healthy retail consumer-based business, generates nice, healthy ARPU and profitability, helps us understand where that consumer is at all times, and to take that data and insight and apply it to the strategic accounts and blow it out to the strategic accounts with counts that get you to massive scale, like 30-some million households. That's the mindset and how we are pursuing it.
Ultimately, I think what you'll see is over time, it'll be a nice kind of symbiotic relationship, but you won't see much cannibalization.
Yeah. So maybe touching upon that competition angle, because it's the one I get probably the most.
Yeah.
What sort of product functionality, especially around this wonderful thing called AI, makes Arlo differentiated versus Ring, Google Nest, and some of your other peers?
Yeah. It's a fantastic question, and honestly, the whole AI initiative here, I think is helping us answer this a bit better. That is, purpose-built solutions or models for a particular space or industry are better than general models or general strategic approach. By that I mean when you look at Arlo, we were founded within Netgear as a security solution DIY provider back in 2016, 2017. Sole purpose to provide safety and security, peace of mind through a DIY solution that was Wi-Fi enabled, that could ultimately be a very useful solution in the home, period. We've never wavered from that. That is our sole purpose.
When we build our hardware, which we think is world-class because of our legacy with Netgear and how we use Wi-Fi enabled services, when we build our apps and we perfect the experience with the consumer, all of that is done with that mindset, very purpose-built. That is not the case with Google. It's not the case with Amazon. Frankly, it's not the case with pretty much all of the big players that are out there. We see that playing also out in the AI world. AI, when we work with our teams internally and consumer facing, they struggle because these large language models that are general in nature don't have a specific purpose. When you build what we call micro models within the home and for a purpose around DIY solutions, they're much better.
Over time, I think what you'll see is, we will continue to differentiate from those large brands by virtue of our purpose-built solutions, and ultimately the consumer will get it. That's also on the foundation of consumer privacy and data protection. The fact of the matter is, we believe that the data is not ours, it's yours as a consumer, as a household, and we're only a holder of that data to support you in safety and security in your homes. That is not the case with Amazon. It's not the case with any of those brands out there. So we think that's becoming a bigger and bigger differentiator, is particularly relevant with strategic accounts.
Yep. You can tell my neighbor that. Exactly. He lived it firsthand.
Right.
So one of the things you and I have talked about too is, I'll say customer lock-in a little bit, where you obviously have a large consumer base. How do we think about the mix in terms of monthly versus annual and what you're doing, if anything, to sort of make that mix shift towards more annual, what incentives, why not incentivize more towards the annual to lock in customers longer?
Yeah. It's an interesting dichotomy there because I'll speak from a CFO and operator standpoint. Certainly, I prefer the annual plan because number one, upfront cashflow, and number two, improved subscriber retention, obviously. However, there is an element of discounting that goes on with that, right? You should see it if you go to our website. We have a pricing associated with the annual plans. We have a pricing which is associated with the monthlies. And, with the annual plans, there is a discount. It can range anywhere from, I would say, maybe 10% to 16%. And we do a lot of promotional kind of cohort analysis to determine when we should target annual plans versus monthly plans. Currently, mix is probably. Well, new subscribers coming in is like a 75/25 split, where 25% of all the new subscribers are annuals, 75% are month to month.
When you mix it with our entire aggregate of all of our subscribers, it slants a little bit lower, obviously, on the annual plans because we hadn't been doing annual plans for the longest time. But I would say to you is, annual plans will continue to be key to our overall strategy. It'll be a promotional element that we'll work with. We'll use data to help us determine when we turn that switch on and off. But I wouldn't necessarily see a situation where we do nothing but annual plans in the retail base of subs. I think there'll be a mix, and that mix will probably end up in that, say, 30% annual, 70% monthly.
Got it. One of the other levers you have for growth here is addition upsell. I guess, how is that addition upsell going? What are you doing to help drive the higher tiered plans?
Yeah, that all comes down to basically innovation and building innovation into each of the plan tiers. If you look at our current plan tiers, we really have two plans. There is a Plus plan and a Premier plan. The Plus is currently priced in that, like, $19.99 on a month-to-month basis. The Premier is at, like, $29.99. You talk to Matt, and he is very clear with this, is that he believes there is opportunity for a third plan on the higher end. We actually did just recently announce quietly to kind of test to see if the market would gravitate to it, but in the Premium plan, we actually announced the CVR element, and it is actually being charged at $49.99. A little bit to our surprise, we saw that 3%-5% of our existing cohort of subscribers actually just naturally gravitated to it because they wanted that service.
We think that CVR, continuous video recording, is ideal, as I mentioned earlier, for SMB. It is also, I think, important for high volume users of our services. To your point, Jim, what we do is every year, we are looking at how we can drive more and more innovation within those plans. Once we have it all there, it is about promoting and working through the subscription planning cycle to ensure that it is made relevant with the consumer, and then we look to elevate.
Got it. You guys bought Aloe Care Health n ot too long ago. How should we think about how that's gone so far and the contribution that you expect over the next year or two?
Yeah, good. Well, right now that we bought Aloe Care Health, I guess it was about in early April, and it's going well. It's a small business. Right now, relatively nascent contributor to our overall services revenue, 10 people. The integration's going really well. What we were super excited about was really two things. One, the IP that they have around fall prediction and some of the AI algorithms we're working with them on. That's super critical in senior living type services because ultimately, falls contribute to one of the highest healthcare cost factors in the U.S. And if we can help curb that in some way and reduce that investment, we will be adding value not just to the elder that's requiring the care, but also to players like Medicaid, Medicare, and senior living homes. We think that the technology is very relevant.
We also think that their pipeline is strong. They have a number of inroads to some government-funded agencies that ultimately are requiring the rollout of certain devices and services into homes. And we do know that this is a market that's expanding to $300 billion here in the next five to 10 years, so we need to be relevant in that space, and we think Aloe Care Health is a good way to get there. So it's been going well.
Got it. We actually only have about a minute left, and I did want to ask one last question here. What do you think is most misunderstood as part of Arlo here?
Well, first off, I will say that making these transformation from sort of hardware centric to services is not easy. I think if you look over the course of, say, 10 to 15 years, most companies haven't done it well. So it's hard to get credit. So there's, I think, a bit of a show-me mentality within the investor base and a lot of people from the outside looking in, and we have to do a good job of better telling the story so people understand the progress we've made to date. We feel from a strategic standpoint, we've made that pivot. But in terms of our messaging and ultimately our investor base, we still got some work to do.
I think it's just a little bit of a show-me type attitude. I think what will be the catalyst for the re-rating or the complete pivot is ramping up these strategic accounts. I think once you have a really healthy consumer-based subscription business and you have a B2B2C strategic account that's robust, not just Verisure, but robust with multiple logos, ultimately the proof is there and you'll see it in our ARR, you'll see it in our services revenue growth, and it'll be hard to deny. So we think 2027 will be a big year for us and we're excited and we think it'll be a good year.
Awesome. I think it's an exciting story. Anyways, thanks for joining us, Kurt and for the color.
Thanks.
Thanks, everybody.