Arlo Technologies, Inc. Aktie

Covering tech services here for Citi Research. Matt McRae here from Arlo Technologies. Great to have you here, Matt. Welcome to the conference.

This is a name that's a little bit new to me as well. So for investors, I think are new to the story, maybe let's dig into what you believe the market opportunity is today for Arlo and where does Arlo fit in the broader connected home ecosystem?

Yes. So Arlo -- for those that are very unfamiliar with the story, we are a spin about 8 years ago from a company called NETGEAR, who was in the home networking business. And they were looking to develop products that would utilize a lot of the wireless networks at home to try and trigger upgrades for people to buy the latest wireless router standard and hit upon video as a use case that would eat up a lot of bandwidth and drive people to a new router.

And decided that there was -- Roku had just started and there were some streaming set-top boxes and figured that wasn't the right area and hit upon the idea of DIY, do-it-yourself security and built the first Arlo camera nearly, I think it's over 11 years ago now, maybe 12 years ago. And it took off like a rocket. So the market since then has really been going through a transition from what we call DIFM or do-it-for-me, meaning installers coming and building home security systems in your home to DIY, which is do-it-yourself. So the technology that Arlo created in the market segment that we actually created was really around simplicity, powerful visual-based security and driven from the idea that you could take 2 or 3 cameras and install them in 20 minutes.

So that market that was 100% DIFM 10, 12 years ago is now about 16-plus sometimes as high as 70% DIY, and the rest of the market is now about 1/3 of the market. So that's the shift. Now the other thing I would tell you about the size of the market is independent studies and surveys show that about 20%, it's anywhere from 18% to 22% of broadband households in the United States now have a camera or some kind of visual-based security that they can access through the Internet. And we always -- I've been in the consumer space a long time with -- across multiple companies. And right around the 15% to 20% is when you move from early adopter, maybe tech-forward type customers and market segment into mass market.

And so we think we entered that transition about 1.5 years ago. And we're seeing that in many ways. One is we're seeing a new group of customers coming and buying the product. But we're also seeing the transition of -- for instance, we're seeing Walmart be a bigger part of the market than was historical over the last 3 years, and that's usually a signal that's going in mass market. So our view is the next 30 million households in the United States alone will probably come on and become connected with digital-based security in the next 3 to 5 years.

Services make up roughly 60% of the business right now. What are some of the important strategic decisions that enabled that transition? And I guess, how do you think about expanding that base going forward?

Yes, it's a great question. And again, it goes to the history of the company. So when we spun, we were really a hardware company at that time. So we were -- it's all about the hardware margin and just trying to sell as many widgets as you could in any quarter. But it was clear at that moment that home security is really a services business, right? You're providing an ongoing value proposition to that end user. And so after we spun, we set about basically transforming the company from a hardware first to a services first organization. And that was a change in the culture. It was a change in the road map. It was a change in finance and accounting practices and which metrics we're chasing, it changed everything in the company.

So I'd say the genesis of that transition happened probably right at our IPO, which was in the middle of 2018, took about 2.5, almost 3 years to actually really transform the company at its DNA into a services company. And if you look, we crossed over not only service revenue being a bigger portion of our revenue than hardware, but from a profitability perspective, probably about 2 years ago, and it's just been a rocket ride ever since. So you're going to see that continue. Certain metrics you look at, we're looking at our service revenue growth year-over-year, approaching -- we want to stay around 20%. So still be one of the fastest-growing companies in the space.

We've also seen gross margin, so blended gross margin across the company has gone from 30% to 40% to 50%. And we think we're on our way to 60% is where we want to target over the next couple of years. Operating margin as a company, too, was negative when we were a hardware company, broke through into positivity, and we hit almost 20% in the last quarter. So I would say we're in that 15% to 20% positive operating margin headed towards 25%-plus over the next few years.

Should we think of hardware, and we've seen this other companies that have transitioned into more of a service-based model. Is hardware more of like a customer acquisition tool?

Yes. So the way we look at it, it was a dial we turned slowly as we transition the company to services. But once we hit about 2 million -- 2 million to 3 million paid subscribers, I think it was around 2.5 million, the economics and the profitability of the company transformed to the point where we could really look at hardware as CAC. So as part of our customer acquisition cost, we measure ourselves on hardware unit sales because that brings new households into the funnel. We measure ourselves on blended gross margin. So even if the hardware goes negative margin, what we're always doing is looking at the blended gross margin expanding. So it's a good way to be disciplined around the overall profitability of the company growing.

And then we measure ourselves on things like LTV to CAC ratios to make sure that our CAC is still at a very healthy level against the value of the customers that we're actually bringing to the table from a shareholder value perspective. And just to give you a couple of numbers, our LTV is approaching $1,000. I think it was $976, $967 last quarter. And typically, our CAC is anywhere from $200 to $300. So our LTV to CAC ratio at the beginning of the year was about a 4x which is considered world-class, and we'd like to keep it between a 3 and a 5 and it moves up and down depending on promotions in that.

And $300, I'm sorry, $300 CAC.

Yes. $200 to $300 CAC on $1,000 LTV. So you can see every time we lean in and produce additional households, the shareholder return is actually very, very high.

And how do you think about pricing on the services? Is that -- do you have a tailwind there? Is there a sensitivity? Can you just walk through some of those?

Yes. So a couple of things. When we made our transition, one of the things that we tested early on was the pricing elasticity on hardware versus service. And what we quickly found out is that consumers are much more sensitive to the upfront cost of the hardware. So making that initial purchase. So how much value are they getting? How many cameras can they buy for a certain budget? How hard is it to install as well. So do they have to hire somebody to install or not is part of the cost equation. But once they're a subscriber, they're relatively insensitive to price because of the amount of value we're providing.

So our ARPU right now on average on our retail and direct is just over $15. A couple of years ago, that was closer to $11. So we've had ARPU increasing substantially over time. But most of our competitors in the broader security space are typically anywhere from $40 to $60 or even $70 a month. So we feel we're nowhere near the kind of the ceiling of where we can go. And our typical road map is, we will produce a lot of new functionality, new services, new features into our service tiers and then look to earn a price increase in that following year. So it's a little bit of a tick-tock type timing. So this year, you'll see us introduce a lot of new features in the coming weeks and something we call Arlo Secure 7, which will be a new version of our subscription services, setting us up for potential ARPU enhancement increases next year.

I definitely want to get into the platform in a bit here. But I guess before we get to that point, I want to position Arlo against maybe some very large brands out there that are very platform-centric, have lots of bells and whistles, DFIM (sic) [ DIFM, ] even DIY. How should we think about Arlo's wedge in the market here? What are some of the differentiating factors that Arlo has?

Yes. So if you look at the competitive landscape, it's really, I would say, in 2 major buckets and one of the buckets has a little sub bucket maybe. So if you look in the retail and direct space, you've heard of names like Ring or Nest, and then there's a lot of smaller competitors in that retail space. We're a solid #2 there. I would say Ring is #1, mostly because they own the channel. So they own Amazon, they spend a ton on marketing. But we're happy being in that #2 and having a more innovative service, a much more profitable business, and we think we're getting the best customers out of that retail space. So it's -- and we even see Google kind of pulling back and some of the other brands are starting to consolidate a bit in the retail channel.

And as the services business has become a larger component of the overall business and specifically our P&L, a lot of the entries that come into the market, whether they're overseas, Chinese, Taiwanese coming in and building just hardware and trying to sell that, it's very difficult to stay competitive because we can go negative easily on the hardware because all of our economics come on the service. If you don't have that service component, it's extremely hard to be competitive long term. So that's on the retail side. I would say it's really Ring and Arlo battling it out in the retail space, and we're seeing some consolidation that we think we can take advantage of over time.

Our work in this space has also shown that integration is a major, major factor here. I mean everybody has -- can't use multiple apps to manage their home. They want integrated control center, no other way of saying it. I do want to talk about the platform a little bit, but in particular, the Secure 7 release, which -- there's been a lot of investment ahead of that. Can you just walk us through kind of what that enables, what sits underneath the platform? It seems like it's such a strategic asset.

Yes, it really is. So we've -- especially as became very cash flow positive and started building up cash reserves, it's really moved to a more formal capital allocation plan as a company. And that includes stock buybacks. It includes a small acquisition we made, we may talk about it in a few minutes. But it also deals with our organic investment in the platform, especially over the last 3 to maybe 4 years. One of the things that's happening is the AI level layers in the service is getting more and more sophisticated. And we've always been at the forefront of developing those new technologies and rolling them out.

So to give you an idea, we rolled out probably what is one of the world's first consumer subscription AI services in the world. In 2018, we rolled out a subscription service around object detection and computer vision using AI capabilities. And I remember at the time, we called it AI and it actually freaked users out, so we changed the computer vision because AI wasn't even being talked about and people didn't really understand what it is, and it's kind of gone through, I guess, a bell curve where people are getting freaked out about it again.

Coming along.

Yes. That's how long we've been doing this, right? So we created the first object detection. Is it a person? Is it a package? All that almost 8 years ago and have been building on that. The overall road map of where we see AI going in the space is, one, is moving from detection. And now what we do is recognition. So I can see facial recognition, but we also do vehicle recognition. So is that my wife's car in the driveway? Is it an unknown car in the driveway? We started doing custom micro models and all these things in that area. Where it's moving next is interpretation or assessment.

So we're -- one of the things you'll see from Arlo Secure 7 is the beginning of what we call threat assessment. And that's not just trying to detect objects in a scene. It's actually looking at the overall event. So do I see a person? What are they holding? What are they wearing? What time of day is it? Are people home? Are people not home? Do I see a person at the front door and the back door at the same time? Are they approaching a window versus the door? So we take all of this information in and the AI interprets a threat level to that event and then can trigger certain responses based on that.

Most security systems, actually all security systems today are binary, right? They either do nothing or they call the call center, the police and set off the siren. And so it's either on or off and there's no in between. What threat assessment allows us to do is actually score things on a much more granular level. And so if it's nothing, maybe we don't even give you a notification. Maybe it's something interesting, we give you a normal notification. Maybe it's at night and something looks suspicious and we can give you an escalated notification that punches through any do not disturb. And then if it's really high on the threat level, we can actually dispatch first responders without even contacting you and then letting you know that it's already happening.

So it's a much more powerful area. Its interpretation and assessment of what's happening, not just, is there a package at the front door. So I think that's going to open the next maybe 2 to 3 years of innovation in that area. And then you brought up platform, kind of broader platform. The other thesis we're operating under, and you'll see a little bit of this in Arlo Secure 7, but a lot more in Arlo Secure 8, not to get ahead of ourselves. But the smart home and home security is really becoming smart home security. So we see those worlds combining. What's interesting is there's a lot of incremental benefit from the smart home capabilities. For instance, we could develop a lot of those devices and capabilities into our threat assessment. So maybe if somebody does approach your house late at night, it could turn on all the lights or flash the lights or do something to actually deter and it's actually using your smart home to actually become part of your security layer, right?

But what's interesting also is almost all of the economics, especially on a recurring revenue model from smart homes are coming from security. So people don't pay for a smart lock on a monthly basis. They don't subscribe to their smart light bulbs. What they do is they subscribe to security. And so the economic comes from the security element of the relationship and the control and the end user. But really, what's happening is it's going to become smart home security combined, and that you'll see start to ratchet up over the next couple of years as well.

The reasoning functionality, that's fascinating. You can think about all of the applications that you could tie to that and personalization involved in that as well. Wow. That's fascinating. And the revenue opportunity here, is it a significant up-step? Or do you think it's just -- it's going to be more of a market share play?

Yes. I think it's both in a way because, again, I think we'll be at the forefront. It will be great for the brand. It will drive people who are interested in the latest capabilities to come to Arlo for that from a marketing perspective. But also, I think you'll see it shift our ARPU higher as we mix people into higher-tiered services, have the opportunity to maybe increase price as that gets into the marketplace. And that will be paired with a new platform launch that we'll do next year from a hardware perspective as well. So a lot of that organic investment, you'll see some of it in Arlo Secure 7 in the next couple of weeks and a big part of it about probably next summer, Q3 of next year, and that's part of our capital allocation plan.

I was telling an investor at one of the meetings this morning that we -- it almost felt like we were getting to a plateau of capability in the space when you could pretty much detect any object and be able to recognize people and cars and everything. And I would say over the last 12 months to maybe 18 months, there was a punch through to this more interpretive intelligent reasoning capabilities that have risen to the level that I think we're going to see another 3 to 5 years of intense innovation and ability for us to extract additional value from customers that are getting something real, something beneficial from our subscription services.

And I guess we're also starting to hear more about like WiFi sensing as another potential technology, which is amazing, the potential that we can do with that. That's fascinating. I do want to dig into that capability, that computer vision layer -- the intelligence layer that Arlo has from your perspective, what's unique about it? What's unique about Arlo's AI strategy? And where do you believe the company has an advantage?

Yes. So first, we were one of the first to build most of these models and actually get them deployed. So we have a very deep team, a bunch of PhDs that work on this quite a bit. And we often get the question of why aren't you using off-the-shelf models or why are you developing this internally? And I would tell you our experience is that focused technology and specifically if we talk about AI, models that have been trained, built to solve very specific use cases perform dramatically better than a big generic model that you're trying to ask questions of specific things.

So I'll give you a couple of examples of that. So even when you do person detection or package detection, a big generic model, if you ask it, is this a package or not or is this a person or not, they're trained on pictures of people that they're pulling from stock photos and newspaper articles and all those kinds of things. When in reality, when you actually deploy a security system in the field, most cameras are mounted up in the top corner, and they're looking at people from a downward angle in most cases, right? And it turns out those generic models can only get to a certain accuracy level. We train all of our models on real security footage, stuff that's taken from real security environments, real deployments around the world. And so our models are dramatically more accurate. That's one example.

Another example is if you use these large models, they can be very expensive. They can be compute-intensive. When you build a model that's specifically trying to determine what's at the front door, is it a threat or not? Is it a package? Is it doing certain things and you can boil the model down, not only is it potentially more accurate because of your training, it's also faster, it's cheaper, right, and much easier to scale across the business. In fact, we can scale our model so well that we actually do something called micro models. So if we have one person type in, did I leave my trash cans on the curb? We can build a little micro model and actually put that in that user's account. Somebody else could type in, did I leave the back gate open? And it can put that model in that account. And those are specific user-specific models that aren't even pulled into our main model, and so they're private. And they're not shared from a training perspective or actual execution perspective.

So those are some of the benefits. So scale, speed, one of the things in security is latency matters, right, very much. So you want to be able to interpret a scene as it's unfolding within tenths of a second, not multiple seconds. So the smaller models actually perform better from a consumer perspective as well. So what we typically do is we will start with a bigger models, figure out what we're trying to hone in on from a great user experience, start building our own internal models side by side. And relatively quickly, our models perform better, are less expensive, are faster and can be deployed a lot quicker, relatively quickly, and that's typically what we go to market with.

In some of our other work on the security business, we do focus a little bit on how the use case for security is where false positives and miss detections are major super important kind of elements of the quality of the service. Where do you think Arlo needs to do better than its competitors for AI to become more of a true differentiator rather than just a feature?

Well, I think there's multiple vectors. So one, it has to be faster, better, all the things we already talked about, just from a raw performance perspective, and we're definitely there. From an accuracy perspective, it's 2 things. It's one is that training I talked about. So training on real-world data instead of just stock photos and kind of general training is really important. What's interesting, too, is when you tune for security, false negatives are actually much more important than they are in the normal world of just trying to determine is it a person? Is it something else for other purposes, right? Because if missing -- having a false negative, meaning there's actually something at your door and you totally missed it, it's a big event for the end user.

False positive, where maybe I thought there was a person, but it turned out it was a tree that looks like a person, is less important. So some of the tuning of the models and what you allow from a false negative or tuned for on false negative versus positive is very different than what most of the general models are tuned for as well. So that's important. And then just like we talked about before, I think it's extraordinarily important that Arlo stays at the forefront. We were the first with person detection, first with package detection, first with vehicle recognition still the only one, the only one in the world with micro models. We're going to be the first in the world with any kind of interpretive threat assessment. So we will stay at that forefront.

But again, part of that is because we're so focused on what we do. We have an entire team that wakes up every morning and tries to build the best security experience in the world. We're not waking up every morning and trying to build this massive generic model that is supposed to pass the bar exam, teach you to cook a recipe and maybe also figure out if there's intruder at your front door. So it's a very different business model, and it's proven, I think, extremely effective, and it's a big differentiator for Arlo.

It's a huge tech benefit purpose built. Absolutely. I do want to touch upon the acquisition of Aloe Care Health, expanding the company in the aging in place in the wellness monitoring kind of business. Why don't you give us an overview of that opportunity, what drove you acquire the company?

Yes. So it's part of our -- I mentioned our capital allocation plan around organic investment, which we just talked a lot about. We're doing stock buybacks. Historically, you should expect us to probably do more at the current stock price. And we made our first real acquisition earlier this year. And we've always told investors that if it's going to be in an adjacency or kind of a new market, it will be a relatively small acquisition. If it's in our core market, it could be bigger. This is an example of a small acquisition that moves us into the smart aging or the age in place market.

Small company, huge potential. So to give you a little bit of background, the market for age in place in the United States alone is around $26 billion, $27 billion right now, very antiquated technology. If you're familiar with Life Alert and some of these really old pieces of tech that haven't moved forward. No AI to be speak of in any way, terrible user experiences, if there is a user experience at all from an app perspective. But that market is going to grow from about $26 billion, $27 billion to nearly $300 billion in the next 5 to 10 years. So you're looking at a tenfold increase in that market. And that's driven from technology and other things, but also just demographic changes of the aging population.

1 in 5 to almost 1 in 4 Americans will be over 60 years old in about 5 to 10 years. So it's a huge movement, and there's a big push across all the industry, including the government, insurance and everything, to have people stay home longer. That means they need to be monitored to make sure that it's a safe place. And safety and security is what we do. So Aloe Care is a really interesting small acquisition, and we really purchased them for 2 reasons. One, they had the most interesting tech-forward innovation forward pipeline from a road map perspective, we had ever seen. So they have a very innovative hub. They can check monitoring conditions. It checks movement. It can do 2-way phone calls. They have an AI calling service that can check in and have a discussion with the user. It actually transcribes all that, can flag concerns to caregivers.

It's amazing technology, and that's just starting to roll out. And they're also moving towards fall prediction. So you'll see some solutions out there where somebody wears something and it detects a fall. That's good. What's much better is if you can actually predict the fall before it happens, right? And so you can do that through environmental measurement. You can do that through data analysis and radar. You can do that through the discussions and transcribing. Did they sleep well? Do they not? Are they dehydrated, all that, movement through the house, if there's a lot of movement at night, that can mean there's an infection or something.

And so actually being able to predict fall is considered the holy grail of being able to really help people at home. They're pretty far down building an AI model that can detect fall. So that's one. The other reason we are really excited about the company is they have a pipeline of potential partners and deals. We announced one recently, expect another couple of announcements in the next couple of quarters. But we believe that the revenue from this piece will grow dramatically in '27 and then continue from there.

The other, there's a lot of synergies long term in the road map. The ability to sense things in the home and call first responders, it's very similar in a lot of ways. And I think some of the AI models will continue to kind of be able to benefit from each other. And we're finding a lot of homes where you want to check and make sure your parents are safe at home, also means you want to make sure they're secure at home. And so we believe a lot of these households will both use an agent place solution inside to monitor the safety of the person while they're home, but also the perimeter security. And so you'll probably see over the course of 2 years, us bundling subscriptions together that nobody in the market has done before.

That's fascinating. As a user and having elderly parents in that situation. That's fascinating. You recently discussed additional growth vectors beyond core consumer, including service provider insurance partnership opportunities in the SMB market. How should we think about the next phase of expansion? And where do you see the most compelling opportunity?

Yes. So post spin, one of the things we did is we worked really hard to diversify the revenue for Arlo as we were transitioning simultaneously to a services business. And so what that meant is when we spun, we were primarily and actually almost solely a business selling through retail partners, so the Walmarts, the Best Buys, Costcos of the world. We specifically built our platform to be partner aware in a lot of ways, and it's built for partnerships. So Verisure is a very large partner, if you're familiar with their story. They're similar to an ADT, they're in Europe. They just went public actually last year, had about 6 million-plus subscribers. We're their primary camera provider and run all their visual AI systems in the back. We just recently signed a deal with ADT and are doing the same for them in the DIY space. They just launched. We'll see them ramp through this year and probably ramp a lot more next year as they get into more channels.

We just announced Comcast as a partner as well. They have 31 million broadband subscribers. We're in the middle of integration with them and hope to launch with them in the middle of next year. That will provide additional growth in the second half of '27 and a full year impact in '28. We have a deal with Samsung and some others. When Kurt and I look at how we get from where we are to our long-range plan, which is 10 million-plus subscribers, $700 million in ARR, and I mentioned the 25% operating margin. We think about 60% of that incremental growth from where we are and how we're getting there is going to come from these strategic partners.

And we talked about how Arlo is, I think, the strong #2 and the more innovative #2 in the retail and direct business. In the partnership channel, we feel we're #1. We're winning predominantly almost all of the major partnerships over there. And I think it's because we're focused on the space. This isn't a side hustle for us like it is with some of the large companies. This is all we do. And we also have a very deep, deep focus on data privacy, data security. And like I said, we've built a platform specifically for partnerships. So we have robust APIs with documentation, source code. And so when somebody partners with us, they're seeing the most secure platform on the market, the most innovative feature sets and road map and a very robust set of APIs and documentation to get them up and running really quickly.

Fascinating IP, very interesting distribution, which I don't at least in my analysis of the space, I haven't seen before. I do want to talk about, though, some of the things in terms of trust and which is foundational to connected home products, and there's obviously a lot of chatter about this topic. How does Arlo think about privacy, data protection, responsible use of AI? Are there red lines? How should we think about Arlo branding itself with all these AI products?

Yes. It's core to everything we do, and it's core to the culture of the company. So we approach it, I would say, in a very unique fashion compared to all of our competitors in the space. We collect a lot of data and it's private. It's totally encrypted. But we believe, and this is even in our policies, it's not our data. it's your data as a user, right? And we're processing it and storing it on your behalf. So we never do anything else with that data than what you expected us to do for it. We don't sell it. We don't use it for advertising. We don't use it on an e-commerce site with some of the other companies out there.

We have very strict data security policies. We're the only company I'm aware that actually has a cybersecurity and data privacy Board committee with Board guidance and governance over this entire space. So it is a massive differentiator for us. And I think it's not only helping us in the consumer market, but it's one of -- like I mentioned, it's one of the main reasons why some of the largest companies in the world are willing to and comfortable partnering with Arlo over some of the other companies that are out there.

I can imagine touching health care in particular.

Actually, so it's funny you say that. So I just completed my training for HIPAA. That's me and Kurt's laughing. We know all the executives. So we decided as part of the Aloe Care acquisition that we might -- we're not yet, but we might be starting to collect information that would be borderline health related, right? And we had a couple of choices as a company, which is, okay, should we silo that data in a different repository in our cloud infrastructure and just treat it separately and try and kind of firewall it against other stuff? Or do we actually envelop it and we turn the entire company into a company that's even another level of privacy and data security and actually have the entire company become HIPAA compliant instead of just this one little section.

Pretty easy. We made the decision very quickly to say, you know what, it's another level of our commitment around privacy and data security. We're going to have the entire company become HIPAA compliant. So we're going through that process right now. And that's ahead of future road map items that might be able to integrate some of this data in some interesting ways.

That's quite a stamp, quite a stamp. So next year, when you're here and we're talking again, what is -- we think is going to be the hottest topic?

Yes. So let's see what's that, September, I would hope we're sitting here talking about some of the partners we already named launching and ramping. I would hope that we have another 2 to 3 partners that are of sizable scale and that we'd be able to characterize the growth that we're going to see in this Aloe Care acquisition and what the year-over-year is going to look like with some very large deals that are driving material revenue on that side.

I'm looking forward to it.

Yes.

Thanks again, Matt.

Thank you.

Great to have you.

Thank you. Ladies and gentlemen, thank you for standing by. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. At that time, if you have a question, you will need to press the star 1 on your push button phone. I would now like to turn the conference over to Tommen Clark.

Please go ahead. Before we begin the formal remarks, we advise you that today's conference call contains forward-looking statements. Other looking statements include statements regarding our potential future business, operating results and financial condition, including our description of revenue, gross margins, operating margins, earnings per share, expenses, cash outlook, free cash flow and free cash flow margin, ARR, and cash flow. KPIs, the guidance for the third quarter and full year 2026, the long-range plan targets, the rate and timing paid subscriber growth, the commercial launch and momentum of new products and services, timing and impact of tariffs, strategic objectives and initiatives, market expansion and future growth, partnerships with various market leaders and strategic collaborators, continued new product and service differentiation, and the impact of general macroeconomic conditions on our business, operating results, and financial condition. Actual results or trends could differ materially from those contemplated by these forward-looking statements. For more information, please refer to the risk factors discussed in Arlo's periodic filings with the SEC, including our quarterly report on Form 10-Q filed earlier today. Any forward-looking statements that we make on this call are based on assumptions as of today and ARLO undertakes no obligation to update these statements as a result of new information or future events. In addition, several non-GAAP financial measures will be discussed on this call.

Reconciliation of the gap to non-gap measures can be found in today's press release on our Investor Relations website. At this time, I would now like to turn the call over to Matt.

Thank you, Tom. And thank you, everyone, for joining us today on ARLO's second quarter 2026 earnings call. Marlo delivered outstanding results in Q2 with service revenue, total revenue, gross profit, and non-GAAP net income all setting new records for the company. We saw strength across the business and across all channels, which in addition to the team's great execution, generated the excellent outcome you see today. of sale units in our retail and direct channel were up 8%, which contributed to the nearly 300,000 paid account additions in the quarter. This brings our total paid accounts to 6.3 million, which is substantially ahead of the original trajectory to our long range target of 10 million. the quality of our paid account portfolio continues to increase when compared to the same period last year. Our average revenue per user is up, churn is down, and both monthly and annual subscription renewals came in higher than our forecast. These continuous improvements are due to several internal projects and programs that utilize deep user insights, which are focused on delivering the best user experience in the world. The result is Arlo's lifetime value of a paid account has risen to $967, which is about 15% compared to a year ago.

Total revenue grew to $156 million, up more than 20% year over year and setting a new record for the company. Service revenue of $93 million, also a new record, grew 19% year over year and comprised 60% of our total revenue in the quarter. This top line performance drove an incredible 70% year over year growth in adjusted EBITDA, which reached $31 million in Q2. And when combined with a partial tariff refund, propelled non-GAAP earnings to $0.28 per share, up 65% when compared to a year ago. As in past years, we use this mid-year checkpoint to assess the marking conditions and our performance over the first half as we finalize plans for the second half and begin the development of our annual operating plan for 2027. Our focus is to utilize Arlo's resources to deliver growth in both the short-term and long-term to drive the expansion of shareholder value. The capital allocation strategy that we rolled out nearly two years ago has served as an excellent framework to drive that growth in value.

Our investments across the pillars of organic, inorganic, and shareholder return are delivering the desired outcomes, and I would like to spend a moment to update our investors. Our organic or internal investments fall into three main buckets, operational excellence, sales and marketing, and platform innovation. Operationally, Arlo is deploying new tools and processes that, when coupled with our vast user data, are unlocking value and providing detailed insights that we are leveraging to improve the key metrics I mentioned earlier. We are still at an early phase and will continue to invest where we see the potential for high ROI or improvement in Arlo's key metrics. From a sales and marketing perspective, you will see us balance both short term and long term growth. As in past years, we intend to invest in our retail channels during the holiday selling period to drive incremental growth in subscribers now worth nearly $1,000 each in LTV. And you'll see us also invest in some market tests for both care and small business segments to collect data that will help feed our 2027 business plan and other future opportunities for growth.

It is exciting to see Arlo on the cusp of entering these large markets that can generate substantially higher ARPU and LTV. Finally, our internal innovation pipeline has never been stronger. Arlo will launch Secure 7 at the end of Q3 with several new features and capabilities that keep us at the forefront of smart security and open the door to additional service plan options at higher price points. And looking into 2027, Arlo will be launching a next generation product line, coupled with Arlo Secure 8, that together will represent the most innovative and impactful advancement to customer experience in home security since Arlo's initial launch of DIY security more than 10 years ago. Looking at the inorganic area of our capital allocation plan, Arlo generated a greater than 50% return from our origin AI investment. And the acquisition of Allocare has enabled Arlo to address the 30 plus billion dollar market for smart elder care and aging in place. Based on the early progress since the acquisition closed, we expect to have several additional partner announcements that will contribute to growth in 2027.

We remain bullish but selective on future inorganic investment opportunities and continue to look for either smaller adjacent assets or potentially larger options if they fit directly into our core market. From a return to shareholder perspective, Arlo has bought back nearly 6 million shares since the inception of our shared repurchase program and more than $20 million of shares in Q2 alone. The board and the management team continue to believe that Arlo's shares are substantially undervalued and you should expect to see additional share repurchases going forward. Taking this all together, Arlo had a record-breaking Q2, strong first half, and is executing a capital allocation plan that is contributing to short-term growth while positioning the company for additional growth in 2027 and beyond. I have never been more excited about Arlo's potential and believe that the next 18 to 24 months will begin a new phase of success for the company. And now I'll turn it over to Kurt for a more detailed review of our Q2 results and our outlook for the remainder of 2026.

Thank you, Matt. And thank you everyone for joining us today. First, I will provide a detailed review of the key operational and financial results of the business. Then I will share an overview of our expectations for the third quarter, followed by an updated outlook for full year. We continue to deliver outstanding top and bottom line growth driven by a quarter of record subscriptions and services revenue, coupled with record total revenue. Arlo continues to outperform expectations as a result of our subscriptions and services focus, which drives our expanding profitability metrics, including record levels of non-GAAP gross margins, adjusted EBITDA, and non-GAAP net income. And we are well positioned to continue these trends into the back half of 2026. During the period, we posted subscriptions and services revenue of $93 million, up 19% year-over-year, and once again accounting for 60% of total revenues.

Our subscriber base grew 23% year-over-year, as we generated 298,000 new paid accounts in the period. This double-digit subscriber growth was bolstered by our outstanding customer retention efforts, especially the results generated in our retail business. Our subscriber growth, coupled with a slight increase in ARPU, drove ARR to $365 million, up 16% year-over-year. Product revenue was $62.9 million, up 23% from $51.2 million in the same period last year. a trend driven by strong growth in international business, as well as strong device shipments into retail channels advance of Amazon's Prime Day, which began in late Q2 of this year. Both of these factors resulted in additional retail sales with POS or point of sale volume increasing 9% for the first half of 2026 in comparison to the same period last year. Our strategy to optimize our promotional campaigns around retail channels and product offerings that have higher subscription conversion rates helped enhance growth of our high-margin domestic retail subscription offerings. Total revenue for the period came in at $155.9 million, a record and up 21% from the prior year. driven by the strong double-digit year-over-year growth in both subscriptions and services revenue, as well as higher product revenue.

Generating total revenue at this level is a testament not only to the strength of our services revenue trajectory, but also to the diversification of our go-to-market strategy. From this point on, my discussion will focus on non-GAAP numbers. The reconciliation from GAAP to non-GAAP figures is detailed in our earnings release, which was distributed earlier today. In line with our guidance, non-GAAP subscriptions and services gross margin was 84.1%. which was slightly impacted by non-recurring engineering services revenue or NRE associated with the ramp of our strategic partners. We reported non-GAAP product gross margins of 1%, up significantly from the negative 13.8% in the prior year period, primarily related to the $8 million in tariff refunds were recorded during the period, as well as a higher mix of product sales coming from our strategic partners. On a pro forma basis, after adjusting for tariff refunds in the quarter, our product gross margins would have been a negative 11.6%, which still represents an improvement of 220 basis points year over year. With the improvement in both services and product gross margins, we again surpassed the 50% consolidated non-GAAP gross margin level, an increase of 480 basis points year-over-year.

Consolidated gross margins at this level represents a new record and underscores the continuing uplift in profitability we are experiencing. Total non-GAAP operating expenses for the second quarter were $48.6 million, up 16.5% from $41.7 million in the same period last year. The year-over-year increase is driven by investments in R&D, including headcounts that continue to drive our technology innovation ahead of our Arlo Secure 7 launch. Additionally, as mentioned earlier in the year, we are investing in delivering platform advancements for our strategic partners ahead of their launch of services. Lastly, we experienced an increase in fees associated with professional services to support our growth initiatives and deliver an enhanced customer experience. During the quarter, adjusted EBITDA was $30.6 million, up 70% year-over-year and representing an adjusted EBITDA margin of 20%. Even in an investment year, which requires additional spend to integrate large-scale strategic partners into our platform, We are still expanding our adjusted EBITDA and margins, a testament to the significant operational and financial progress Arlo has made in its transformation.

Profitability at this level translates into non-GAAP net income per dilutive share of $0.28, including a favorable $0.07 impact due to tariff refunds. On a pro forma basis, assuming the exclusion of tariff refunds, our non-GAAP net income per dilutive share would have been 21 cents ahead of both the midpoint of our guidance range and consensus EPS estimates in the quarter. Regarding our balance sheet and liquidity position, we ended the quarter with $141 million in available cash, cash equivalents, and short-term investments. This balance includes investments in various capital allocation initiatives, including $22 million as part of our stock repurchase program and $15 million as the cash paid in the period to acquire Allocare. For the six months ended June 28, 2026, we generated $33.9 million in free cash flow, or a free cash flow margin of 11%. Our Q2 accounts receivable balance was $63.6 million at quarter end, with DSOs at 37 days, down from 43 days last year as we continued to drive more subscribers to annual service offerings. Our Q2 inventory balance was $48.4 million, up from the $30.9 million level last year.

Inventory turns, excluding acquired inventory, were 5.5 times, a decline from 7.7 times last year, as we look to optimize our inventory levels in an effort to reduce our shipping costs and manage any potential future increase in memory costs. Now, turning to our outlook, we had an outstanding start to the year, driven by ongoing strength in our subscriptions and services business, which drove both our revenue and profitability. Looking forward, we expect the momentum in our subscriptions and services business to continue into the second half of 2026. And we expect total revenue in the third quarter to be in the range of $140 to $150 million. From a profitability perspective, we will leverage any Q3 tariff refund to further invest in the strategic areas that are fueling our growth. This includes strategic partners such as Comcast and ADT, second half promotional campaigns with our top channel partners. innovation across our technology platform, and market tests ahead of our 2027 annual operating plan. Despite these incremental investments, we expect our non-GAAP net income per dilutive share in the third quarter to be substantially ahead of consensus and in the range of 17 cents to 23 cents.

As a result of our strong first half and our outlook for the remainder of 2026, we are significantly increasing our outlook for total revenue in EPS for the full year. We are now expecting total revenue for the year to be in the range of $580 to $600 million, and non-GAAP net income per dilutive share to be in the range of $0.90 to $1.

Now I'll open it up for questions. At this time, I would like to remind you all that to ask a question, please press star one on your telephone keypad. To withdraw your question, press star one again. for just a moment to compile the Q&A roster. Your first question comes from the line of Jacob Steffen from Lake Street Capital Markets. Please go ahead.

Hey guys, appreciate you taking the questions. Congrats on a really nice quarter here. maybe just first kind of looking at, you know, the full year guide raise. I guess when you kind of think about ARR growth for the full year, I mean, where does that land and how comfortable are you.

with those targets. Yes, thanks for the question, Jacob. As you saw, we had some really strong growth on the service revenue side, just touching about almost 20%. And what I would say is if you look at the metrics we talked about on the call, so churn improving, conversion improving, ARPU actually raising up a little bit, that is driving that LTV almost to a thousand dollars. And that's usually a leading indicator or further growth when you're looking when you look out on ARR as you go through the year. I would couple that with Arlo Secure 7 launch. That's going to be happening sometime in September. And that is not only going to bring a lot of new functionality to the table, it's enabling us to bring a higher tier of service.

So you're going to see us actually add a subscription tier that's higher priced than the two that we have in the field today. And that obviously served to grow ARR as we exit the year. So typically you see some strengths and some growth in ARR as we get towards the end of the year because of our launch of our products. But I think the metric improvement is usually a leading indicator as well. So we are targeting towards that 20%, not only on service revenue, which we're basically at now,.

but also on ARR as we exit the year. OK, got it and you know, maybe just on secure 7 since you talked about it, you highlighted the Q3 launch. I guess, you know, what features are going to be incremental about Secure 7 that aren't already in Secure 6? And how do you think about kind of the market appetite for higher ARPU offerings at this point?.

Yes, so I don't want to get ahead of our launch in too much, but there are some functionality and some features that I think we've talked about in the past already. So I can touch on those and give you a little bit more color on why we're excited about it. So first we've talked about, and I think most importantly, we've talked about the idea of the next level of AI enhancement or AI capabilities in the consumer security space. And so if you look at what most AI is doing, it's usually object detection, or it's inferring from facial recognition or certain things you're detecting an object and notifying or taking action based on that. What we have been working on for more than a year now is actually going to that next level and actually assessing the entire event and what is the threat level given for that. And so that inferment or that assessment of what's actually happening is a whole nother level of of what AI can do and provides numerous improvements to both user experience and the speed of emergency response in those events that really require that while also filtering out a false alarm. So it's a functionality that I think is going to be a dramatic improvement to the customer experience, number one, but it's also something think that we can be leveraged with our strategic partners to have a much better outcome, both on the speed of the response, but also reducing false detection.

So I would say that is probably the most groundbreaking. and really the next wave of innovation that we think is going to come over the next three to five years in the, call it advanced AI security space. You're also going to see numerous customer enhancements that have been asked for or requested over the last year and a half. And that's something we typically do is we roll up all of the functionality and feature requests that we've seen the past year and roll those into user improvements, the app level or the service level. There are also some, we have a class of users that actually pay separately for something we call CVR, continuous video recording, and you're going to see a new tier of service, but also a lot of, HANSA that we think is going to unlock the benefits of a higher tier service as well. So there's a lot in there. That gives you a little bit of the bucket, but we'll obviously talk a lot more about it and have a lot more detail when it launches in September.

Okay, got it. And maybe just last one for me. I mean, the last few quarters, we talked a lot about strategic partnerships. very notable ones ADT, Samsung and Comcast. I'm wondering if you could kind of give an update on some of those and obviously ADT Blue is launched, but how are things with Comcast Xfinity? Where are you in the testing phase with that? Any updates would be helpful. Thanks. Yes.

Thanks for the question. And it's, I didn't actually touch on that in the prepared remarks. And so I think it's a great thing to touch on. Everything is progressing extremely well. So, ADT has now launched. And as we said before launch, we expect them to kind of ramp through this time year, especially in the back half if you come into a holiday quarter and then lean in even more for a full year next year. And that's exactly what we're seeing. I can't share anything, but we're expecting some significant marketing spend and some from ADT for that blue offering they have in the market. So expect to see that to grow and then expand as we get into the first part of next year and have a full year of launch there.

So we're excited to see that and that's on track. Same thing with Comcast. So Comcast on a different timeline, but the integration and development with them is exactly on track. We spent some time with them actually in Philadelphia over the last couple of weeks. And I would say, if anything, there's actually probably more opportunity with this partnership across even more fronts of some of the services they want to deploy, deploy over time. So we're heads down. Everything's on track. And I would say, if anything, there's a desire to maybe, you know, try and get this launched closer to you on the Q2. but a lot of it will depend once we get test units into the field. And I'll save any more detail when we get closer to launch and Comcast.

I'll have a lot more to say about that probably in the first half of next year. Very helpful guys, nice quarter. Thank you very much.

Your next question comes from the line of Dylan Becker from William Blair. Please go ahead.

Hey, Matt, Curt, Tammen, appreciate it. And thanks for having us here. I guess I'm going to touch quickly. obviously all of the input mechanics on ARPU, uplifting reduced churn leading to higher LTV, but also obviously seeing pretty healthy product strength across the portfolio. I believe part of that was channel led. To what extent maybe is that starting to be some of those strategic partnerships ramping, but also how that drives conviction as you get kind of more devices installed within each of the individual homes to drive that uplift and conversion. So maybe better clarity through better homes as a part of that product motion. Thank you. Yes, I think you hit on all three.

Yes, sorry about that. You hit on all three of the components of that. So one is we saw strength in the partner channel. I would say it was pretty typical buying if we look at kind of the seasonality in the partner area, but it was definitely strong. Kurt mentioned in the prepared remarks that we saw some strength in our retail and direct channel as well. Some of that is the full in of Amazon Prime just by a few weeks. And so that shifts just a tiny bit in quarter. But I would say in general, we've been capturing share and we've seen strength in the retail channel as we're continuing to see strength in the partnership channel.

Both of those to your point, also are things that will have us look at higher ARR growth and service revenue growth going forward, because a lot of that's ending up in new households. The other topic you touched on is even when we sell these products into an existing household, you are correct in that when a household moves from one camera to two cameras or from two to three, the percentage of conversion or a cash on the service revenue side also goes up as well. So when we see unit volume actually increasing on a year-over-year basis. That is indicative of future service revenue and ARR growth.

Perfect. Thank you. Appreciate it, Matt. And then maybe for you or Kurt as well, too, I believe you guys called out some of the tariff savings maybe being utilized to reinvest more aggressively into the partnership motion. I guess can you just kind of give us some additional context into what that looks like? I know obviously some of these will ramp in the back half of the year and into 2027, but maybe what the incremental investment or the.

or spend can further unlock or accelerate in that motion. Thank you. Yes, yes, absolutely. Maybe just for clarity, we can kind of touch on exactly what we talked about on the call. So if you looked in Q2, we had about $8 million come in from a tariff-free fund, and that's roughly 7 cents of EPS as you drop it through to the bottom line. And as Kurt mentioned, we handedly and substantially so we beat the quarter even if you back that out. This quarter we're taking a different tact as the tariffs are coming in, partially because we can see it coming and it's a little bit more predictable. And it's roughly $6 million that's going to come in or call it what would have been 5 cents EPS. But when we look out at, that the investment of using this found gross profit coming into the company for investments, both short and long-term effect, the ROI is just so high.

I just hosted last week, the executive team at an offsite where we talked about the second half and looked at our annual operating plan, which is the kickoff really for us to have this, have this planning process start and there are several areas where we find it exciting to kind of push into one is our you know our typical sales and promotional into the into the Q3 and especially the Q4 time frame so you'll see us lean in a little bit there as we see household formation really converting into subscribers. And we think leaning in there will expand shareholder value. Two is partnerships, Kurt touched on this. So the strategic partnerships, investing in the engineering on both our platform in general, and accelerating some of the things for our list to curate some of the technology we talked about next year, but also the integration and maybe speeding up the integration of strategic partners is beneficial to unlocking additional growth in 2027. And then I mentioned, and I think Kurt mentioned as well, the test. So we're looking at doing, and these are relatively small, but spending a little bit of money investment in Q3 to test some price points and channels for both our care from our allocators care acquisition and in the small business. And so you see us do that a little bit Q3 and a little bit more in Q4.

And what we do is when we build our annual operating plans, we always like to have real data to base that off of. Um, and so this will not only look for. Additional revenue enhancement in the second half, uh, and maybe subscription revenue and subscribers, but really set us up to, to lock down a more cohesive plan based on real data for 2027, where we know at least in the care area, there's substantial, uh, uh, opportunities for growth. So when you step back and you say, well, why treat those two quarters differently? Again, we take our role as stewards of the capital of the company, of Arlo's capital, very, very seriously. And so when the tariff refund came in at the end of Q2, we looked at it and said, wow, there's opportunities to maybe spend and invest, but we don't have the time to actually do the rigor and the discipline of what would that ROI be and how fast would we see it for shareholders? So we decided to drop that down to the bottom line, like we talked about in the Q2 results. Q3, we have the time and we've had the time. And so we're going to use that smaller pair of rebate to fund very strategic areas of the business and explorations to drive, like I said, short-term growth and then what we call long-term growth, which really isn't that long-term, it's really in the next 18 months.

So that's the numbers, that's the color commentary and the reason why you're seeing us do two different things from Q2 to Q3.

Terrific. Thank you, Matt. Appreciate it. You're welcome. Your next question comes from the line of Ryan Visson from Craig Hallam. Please go ahead.

Hey, Matt. Hey, Kurt. Ryan on for Tony Stoss. Thanks for taking my questions. Just quickly, I want to touch on AlloCare, the home helpers deployment. It seems like that was the first commercial expansion since you closed the acquisition. I guess, can you talk a little bit about how maybe that channel works, what the reception's been like from some of the care providers, and kind of how you're thinking about AlloCare runway into the future?.

next year? Thanks. Yes, great question. And you know, we did this, the Allocare acquisition for two reasons. One is the technology they have today and the technology roadmap, but also the pipeline of potential customers that we saw right before we did the acquisition. And that provides onsite support for numerous stay at home, elderly care providers. people out in the field. And they use the AlloCare technology to monitor the health but also communicate with the people in the field and be able to escalate and notify if there's something that needs to be corrected or somebody needs to be checked in on. So it allows them to scale their business. What we're excited about in this is not only just doing business with somebody like Home Helpers, but actually rolling out some of the new technology that Allocare has been working on for the last years include AI calling and AI check-ins, which is absolutely fabulous.

We're hoping to demo this to the analysts at some point very soon, because it's pretty job dropping that you can provide AI call check-ins at a scale and provide all the feedback back into a dashboard for the caregivers, where all the feedback from that user is actually collated and you can start to predict issues in the future. So you start to build algorithms to predict falls or predict issues like dehydration of things, just from conversations that are having in the home. So two things, one, it's exciting that we're seeing the expansion of the Allocare business, even at this early stage, but two, seeing some of the most advanced technologies that Nobody Health has on the market be deployed through some of these partners. Now I mentioned on the call as well, I think HomeHulpers is an initial example of a partner that we've been able to announce very soon after the acquisition. You can expect several more, I would say, over the next maybe six to nine months be announced and not only add maybe a little bit of growth this year, but definitely set us up for some pretty substantial growth in the segment in 2027.

Perfect. Thank you, Matt. Congrats on the results, guys. Thank you.

Your next question comes from the line of Scott Searle from Roth Capital Partners. Please go ahead.

Hey, good afternoon. Thanks for taking the questions. Congrats on the quarter. Hey, Matt, we tended to talk about some of the strategic partnerships that you've established more recently, but we used to talk a little bit about some of the unpaid subscribers and potentially monetizing some of them as well. I think early on in some of the advertising trials, you were looking to use that to basically drive upsell opportunities. I'm wondering if you give us update in terms of monetization aspects on the unpaid subscriber base.

Yes, great question, Scott. So you're absolutely right. We've seen some very strong success in the advertising to non-pay subscribers of the services and subscriptions that we offer. look at advertising, we actually tested selling hardware, we tested selling services, and we tested third-party advertising. in that kind of free with ads, non-subscriber bucket. And the ROI was very clearly if you had, a user that actually signs up and the amount of users we were able to convert from actually, advertising and showing the benefits of our subscription services that our ROI was the highest by far. And so we've converted tens of thousands of subscribers from unpaid to paid just this year through advertising and being able to convert people over. And that's something you're going to see us continue to lean into and probably do more of. Where we get excited is actually starting to look at these households in more detail and maybe start to advertise allocare services in the future and some other opportunities to actually bring even more subscription conversion over time. The other one we have done historically off and on, and we're looking to do again, as we get into Q4 and the first half of next year is I mentioned earlier that we see subscription conversion jump when a single camera household moves to a two camera plus household.

And so there's ways to promote through advertising or promote to that non-subscriber that has a single camera, a second camera on signup, and we see pretty healthy conversion in those kinds of offers as well. And so you'll see us experiment with a little bit more of that, both at the end of this year, but going into the first half of next year before our security launches.

Very helpful. And maybe to follow up on AlloCare, it sounds like you're starting to develop some incremental channel partners in terms of starting to deploy those types of services. I'm wondering where, I guess, self-install models, right, the DIY model fits for you with AlloCare. Is that something we start to see more of in 2027, how you're thinking about that?.

that. Yes, Scott, you nailed it. That's one of our tests in Q4. So when we did the acquisition of Allocare, they were predominantly focused on certain types of providers and kind of in certain governmental areas. Once it was announced, we had an inbound set of calls, and I would say substantial calls, from, you know, retail channels. panel partners to additional state government agencies to federal government agencies to healthcare providers and others that are in the field like home helpers. And so the inbound interest was pretty high. I would add to that list even some of our current strategic partners showed significant interest in actually deploying Allocare as well. So what you see us doing is going through that opportunity stack and we're determining where we want to deploy some of the resources and that's some of the investment that we're talking about in Q3.

And to your point, one of the specific market tests we're going to do is deploy AlloCare back into the D2C DIY channel and get some numerics that we can then use to go build our.

the next 2027 annual operating plan. Got you, very helpful and and lastly just other adjacencies. I'm wondering how active those types of explorations and discussions are ongoing right now and how you kind of weigh that in terms of capital allocation and stock buybacks. And a quick question for Kurt. Just want to clarify. So the tariffs in the second quarter were contra. COGS, I guess, which produce the 1% gross margins. But going forward, we should be thinking about modeling at that negative 10% kind of gross margin range going forward on the product side.

Thanks.

Yes, I'll answer. Sure, sure, Scott. Sure. Yes, you're correct. As you pointed out for Q2, the amenity to the million dollar tariff refund was applied to our product gross margin. So you saw the 1% positive gross margin for products. We as we look out to the second half and frankly into the future, you would expect us to go back to the same strategy we've been deploying to date. And that is, is that using that product and sale and that product gross margin is really a cost of customer acquisition and our tool to drive household activation. our guess is that margins on the product side would be in that negative say mid to high single digits maybe even getting up to the teens and so as we get into the next couple quarters we'll kind of revert back to our approach and our strategy from the past while we're using this tariff refund to benefit.

some of the growth areas that Matt mentioned earlier. And then to your question, Scott, on adjacencies. You know, we, there are many opportunities and their adjacencies everywhere we turn and look. And I think, you know, part of that is we're seeing a lot of strength just in the security market, the core market, as you can see from the results and that strength was across channels. there are so many adjacencies that we can step into. And we wanna be very selective about it. And I think I used that word in the prepared remarks. We have now our Allocare, right? Which is, you know, opening up a TAM that is anywhere from $30 billion roughly today going towards $300 billion market, you know, TAM over the next eight to nine years.

So that is not only a large market, but a growing market. We want to make sure we're successful there. and can show the return on investment very quickly to our shareholders and the market in general, because we think there's huge pools of opportunity there, again, across all our channels. We are looking at other adjacencies, but I would say they're kind of second priority at this point until we have Allocare absolutely set. So I mentioned small business on the front end There is a test, we'll do some tests in the small business to see if we can maybe organically, you know, address some of that market as we come out with some of our new products next year. And that'll give us some intelligence ahead of time. So I would say yes, there's many adjacencies. We are interested in them. We know we have one that we wanna execute extraordinarily well and show our investors that our ally is there.

And that is on a path to actually add to our long range plan. Other than that, any other kind of inorganic investment would likely be more in our core market because we do believe we still see some consolidation in the space happening. And we think we are going to be one of the benefactors of that consolidation. And if that can add to growth and even speed it up further than what we're already seeing, we would consider that.

as well. Great. Thanks so much. Great quarter, guys.

Welcome Scott. Your next question comes from the line of James Fish from Piper Sandler. Please go ahead.

Hey, guys, thanks for taking my question. This is Ryan on for James. Any further color you guys can give us around the impact of Prime Day shift from Q3 to Q2 this quarter?.

Yes. So, as Matt mentioned earlier, this, and I think I talked about it on our pre-recorded remarks, this was the first year that Prime Day actually was pulled from Q3 into Q2, which means that ultimately our product revenue and the shipping associated with that particular event increased. pulled forward some of that product revenue into the quarter and we saw a bit of a lift. So when you look at the success we had this quarter regarding the growth in our product revenue, it was a combination of both international business as well as really from our retail partners, but in particular for the Prime Day event. As we look at the activity that came out of that, we thought that we performed pretty well. Obviously the Amazon platform and that marketplace is a big platform for us in terms of security and safety solutions. And so as we look at the results from that, We did pretty well relative to our forecast, and we're pleased with the way things worked out. So we'll look at seeing how that's going to impact us in the second half. As you can tell from our guidance for the third quarter, we're still expecting product revenue to be pretty healthy, irrespective of the fact that we had the ship end to prime.

coming Q2. Yes, and maybe I'll just add that shift it's not like the entire shift happens across all the product shipments. So even when Prime Day is typically in July, often there's some shipments that happen in Q2 to go fulfill that. So when it shifted from July to June, really only a couple weeks maybe of shipments that actually shift there it's not like the entire bulk of our amazon prime day shipments shift from q3 to q2 so that's why you see it you see a little bit of movement there but it's not as much as you would you would think if you know how you know how long it takes to actually ship everything in for the event anyways Very helpful. And then any way to think about the net ad pace for paid accounts and what you expect to get from new conversions for the rest of the year?.

Yes, so that's part of the forecast as we look into the second half. So our net paid accounts, as you've seen, is actually progressing very well and above the range that we've given as what we think a typical quarter would be. So we're definitely overachieving on that metric and seeing a lot of paid ad accounts above the range that we've stated in the past. And I think you're going to see that continue. The interesting part is, when we have sales in any given channel, how many of those are net new households that then go into the top of the funnel and how many households are maybe buying a third or fourth camera or they're an existing subscriber, right? And that gives you an idea of what's driving the net paid accounts. One of our data insights that we've done over the last, I would say two or three quarters is really understanding what types of offers and what types of skews drive new household formation versus second or third purchase for an existing household. And so what you're going to see as we get into the second half of the year is we're shifting promotional dollars and leaning in in the areas, the skews, the channels, the types offers that drive household formation, which then puts those households in the top of the funnel and tends to generate net ads at an even faster pace. we think we'll see conversion continue to pick up a little bit as we get through the holiday period.

And some of that is what you're seeing from our and utilization of data insights to drive a smarter deployment.

of capital into the promotional space. Very good and then finally final one for me. What kind of traction you guys seen with your more premium subscription offerings? How much of kind of your upside this quarter was more driven by that, those premium offerings as compared to the fall? a full new household kind of ads. Yes, so if you look at ARR increase pretty much from the beginning of the year, A lot of that is, or most of that is actually mixed shift. So we are seeing people mix into higher care plans. And some of that is how we promote it, how we price it, how we position it in the area. One of the things we've seen in the last quarter too is a higher growth rate in sales or a higher percentage of sales on some of our higher end products.

So call it Pro, Arlo Pro and Arlo Ultra actually did very well in the last quarter compared to previous quarters. And so that tends to shift users. Those are the types of users that tend to subscribe to a higher tier. plan, we think that movement or that next shift will continue, especially as we launch a higher tier plan as part of our list tier seven.

Great. Yes, thank you guys and congrats again on the quarter.

Thank you. Your next question comes from the line of Adam Tindall from Raymond James. Please go ahead.

Okay, I appreciate you squeezing me in. I wanted to start on the gross margin piece, Kurt. I think it was like a minus 11% gross margin for product on the core, taking out the tariff noise, understanding that you're positioning that as better year over year, but I'm wondering what drove that down sequentially. It seemed like we were making progress on that and improving all the way into Q1 and took a step back. I know you launched ADT Blue in the quarter. I'm wondering if maybe that's diluted to gross margin. And just to clarify going forward, I think you mentioned this earlier, but I didn't quite catch it.

Your expectations for product gross margin for the rest of the year, are we going to kind of remain in this sort of a range? And then I have a follow up for Matt on this.

Yes, hey Adam, how you doing? So, no, I wouldn't look at it that we took a step back. Actually, this is just part of the natural seasonal cadence of how we promote throughout the year and how that impacts our overall product revenue, promotional spend, and ultimately the product gross margin. So, as we pointed out, this was a little bit of an unusual quarter in the sense that that the Amazon Prime Day event was pulled into Q2. Leading into that particular event, it is critical for us to properly set up the right promotional campaigns and situate our products to meet meet the demand and where the customer is. So when you look at that 11% negative margin we highlighted on a pro forma basis, actually it was right in line with our expectation given what we had in working with the Amazon event. So we were pleased with the outcome there. Obviously the windfall or the benefit from that tariff was a bit unexpected.

We had filed for that back in the mid late part of April and we didn't realize when it would actually be processed and come in. So that came in like Matt mentioned towards the late part of Q2, which offset that margin, but we've been managing managing our product revenue and our margins around product pretty well, and we feel good about where we are relative to the seasonal promotional activity that we manage each quarter and on an annual basis. As we actually look out to the remainder of the year, I think you can expect us to be in that mid-2040 period the high teams of negative margin for the product. We think that's probably where we'll need to be in order to maintain the growth in our POS. We've been really pleased with the fact that in the first half of 2026, we were at a POS growth of about 9%. That's kind of where we lighten to target that 9 to 10% range. So I think we're managing the product and product sales pretty well relative to our expectations and the full year outcome.

Got it. Okay. Maybe as a follow-up, Matt, understand you've got a sizable raise to the total revenue guidance. I think if we look at the composition of that, it's all product. And as Kurt just mentioned, it sounds like product gross margin is going to remain negative going forward. So, accelerating revenue at a loss-making rate. level and product, I'm wondering why that's the right strategy. And also, the services revenue being unchanged, why wouldn't that be higher if your expectations for product revenue are going up? Is there some disconnect in like attach rates or something like that that would drive that? Thanks.

Yes, good question. And I would say, I don't, there may be a disconnect, there may not be a disconnect. We chose not to update the guidance on the service revenue side because it's at that 20%. And I think there's opportunity, you know, to hit that and actually go higher. One of the things to think about is accelerating product revenue is usually a precursor to accelerating subscription revenue, right? those new devices go out into new households. Like I was saying before, it ends up in the beginning of the funnel, it flows through the funnel funnel and then ends up being subscription revenue and obviously much higher gross margin that's contributing to our growing kind of blended gross margin as a company. So a lot of that will then depend on does that conversion happen in Q4 or Q1 when we see that acceleration coming into Q4. So that's the investment. We have all the metrics that say that that is actually really good for service revenue.

But the first thing thing you'll see kind of flow through the P&L is increased product revenue, and then we'll see service revenue come after that. And that's what we've always seen in the past years. And that's something, to Kurt's point, we manage very carefully. We feel more confident about that as well because, as I mentioned, some of the key metrics are up. So LTV is up. So every customer we get is actually worth more to us and shareholders. Conversion is up. THE ACTUAL RENEWALS FROM BOTH MONTHLY AND ANNUAL IS UP. MONTHLY AND ANNUAL IS UP. CHURN IS DOWN.

CHURN IS DOWN. AND WE'RE SEEING A LOT OF And so we're seeing that the average customer or subscriber that's going through the funnel is actually worth more and adding more value to the company. So that's why you're going to see us maybe put a little more fuel on the fire to generate that future service revenue.

That's helpful. Thanks, Matt. You're welcome. Your final question comes from the line of Martin Yang from Oppenheimer. Please go ahead.

Thank you for taking my question. This is a follow-up regarding your earlier comment on consolidation. Where in the market do you see opportunities for consolidation?.

consolidation? So I'm not sure I heard the question totally, but the consolidation we see is happening really in the retail space for security. So we're starting to see retailers looking at reducing the number of brands that they may have on the shelf. bet double down on the brands that are actually delivering for them. And so when we've seen that happen in the past, we've tended to gain shelf share and actually gain share in the marketplace. So if if there are, you opportunities to do that, we'll invest in actually capturing that share. And I think you'll see us have a broader shelf set or a total shelf share in the second half than we did in the first half. Just as an example for that from an inorganic investment perspective, I'm not saying there is, but if there was a company that had households, but maybe not as successful as turning those into subscriptions, something we've proven we can do, maybe there's an opportunity to look at any kind of assets out there where there's households with cameras or households that could bring cameras into place and we could drive subscription revenue as an attach and start to consolidate those households in the security space a little bit quicker and drive drive revenue or subscription revenue from a security space. the security space even faster. So those are the two types of consolidation are happening.

One is the actual shelf share and what's happening across some of the channels. And that's true a little bit, even in the partnership channel. And then two, there may be may be in the future opportunities where there's people that have been or companies that have been in the space or adjacent to the space and haven't had the success that Arlo has had at transforming this into a subscription business and somewhere where we could acquire an asset and then add a lot of value very quickly on top.

Great. Thank you. Another question on subscription tiers. So, can you give us a bit more insight on how the different tiers of service are used our total subscriber base and how Arlo Secure 7 or next year's new hardware product,.

may change the composition of different tiers? Yes, so it's a really good question, and maybe the best answer is I can back up a little bit and then kind of walk you through where we are today, which gives you a little bit of direction where we go before we actually announce some of the new plan structure that we're going to have at the end of September. So if you go back, Arlo has typically had three tiers of service. And it used to be a very basic piece of service. And then there was one that had some AI and some protection features. And then we had a tier of service that had everything that we sell, including professional monitoring, battery backup, cellular backup, and the entire security experience. from a tiering perspective. So those are the three tiers. About a year, I guess it's a year and a half ago, we noticed that more and more of our customers were mixing up to the tier that had a lot of the AI functionality in it.

So we made a decision coming into the year following to actually get rid of the basic tier that didn't really have any AI capabilities, because we were watching most of the consumers mix up into the tier that had AI. So today, fast forward to where we are today, we have a tier of service that really has all of our AI functionality or most of it, and we have a tier of service We have a tier that then has all of that functionality, additional layers, plus professional monitoring, cellular backup and battery backup and everything. So those are the two tiers. Now we've reduced it to, but we know optimally from a customer offering perspective, three tiers is best, you know, good, better, best. And so what you see us do in September, and I've kind of hinted at some of the things that will be in that tier, we'll be introducing a tier above our current tier, our current highest tier. And you'll then see usually the spread of consumers across those tiers start to shift a little bit over time. We don't split exactly how many customers are on each tier.

Where you'll be able to see that is in the expansion of ARPU over time.

Thank you, Matt. You're welcome. At this time, there are no further questions. This concludes today's call. Thank you all for attending. You may now disconnect.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Ladies and gentlemen, thank you for standing by. [Operator Instructions] I would now like to turn the conference over to Tahmin Clarke. Please go ahead, sir.

Thank you, operator. Good afternoon, and welcome to Arlo Technologies First Quarter 2026 Financial Results Conference Call. Joining us from the company are Mr. Matthew McRae, CEO; and Mr. Kurt Binder, COO and CFO.

If you have not received a copy of today's release, please visit Arlo's Investor Relations website at investor.arlo.com. Before we begin the formal remarks, we advise you that today's conference call contains forward-looking statements.

Forward-looking statements include statements regarding our potential future business, operating results and financial condition, including description of our revenue, gross margins, operating margins, earnings per share, expenses, cash outlook, free cash flow and free cash flow margin, ARR, Rule of 40 and other KPIs, guidance for the first quarter of 2026, the long-range plan targets, the rate and timing of paid subscriber growth, the commercial launch and momentum of new products and services, the timing and impact of tariffs, strategic objectives and initiatives, market expansion and future growth, partnerships with various market leaders and strategic collaborators, continued new product and service differentiation and the impact of general macroeconomic conditions on our business, operating results and financial condition.

Actual results or trends could differ materially from those contemplated by these forward-looking statements. For more information, please refer to the risk factors discussed in Arlo's periodic filings with the SEC, including our annual report on Form 10-K and our quarterly report on Form 10-Q filed earlier today. Any forward-looking statements that we make on this call are based on assumptions as of today, and Arlo undertakes no obligations to update these statements as a result of new information or future events.

In addition, several non-GAAP financial measures will be discussed on this call. A reconciliation of the GAAP to non-GAAP financial measures can be found in today's press release on our Investor Relations website.

At this time, I would now like to turn the call over to Matt.

Thank you, Tahmin, and thank you, everyone, for joining us today on Arlo's First Quarter 2026 Earnings Call. During the exhaustive earnings process, the repetition of superlatives probably rings hollow, but I hope that you can see by any measure, Arlo truly had a spectacular quarter built on strong execution across our entire business and across all our key metrics. Both revenue and EPS were records, underscoring the strength of our results and came in well above the top end of our guidance range for the quarter.

In fact, total revenue was up 26% year-over-year and hit $150 million, while non-GAAP EPS came in at an incredible $0.28 per share, which was up 86% year-over-year. Diving into the details, Arlo added 318,000 paid accounts in the period, well above our target range of 190,000 to 230,000 and driven by net additions in our retail and direct channel, coupled with continued strength by our partner, Verisure. This performance catapulted us past 6 million paid accounts substantially earlier than expected.

Growth in paid accounts, coupled with ARPU increasing to $15.60 brought Arlo's annual recurring revenue up to $357 million, up an outstanding 29% year-over-year. This, in turn, propelled our consolidated non-GAAP gross margin by 460 basis points year-over-year to reach the 50% threshold. For those seeking score, our performance resulted in a Rule of 40 metric for our services business of 49, which puts us in a truly elite class of public companies with this level of profitable growth.

However, what really separates Arlo from the pure SaaS companies is the unbreakable link to our customers created by our hardware devices. This connection means we can't be disintermediated by a third-party solution as our customers have invested in devices that are linked to our cloud for services and support. Arlo is not only growing faster than most SaaS companies, but we also have the benefit of customer lock-in through our world-class hardware. This best of both world scenario that is in place irrespective of distribution channel is a unique differentiator.

Arlo's management team and Board still believe the value that we have created is not reflected in the market, which is why our Board authorized the recent $50 million stock buyback program. Our flagship partnership engagements are progressing well with both ADT and Samsung commercial launches likely occurring in the near-term. And our integration with Comcast is under active development and progressing as expected to have a material impact in 2027. As I mentioned on the last call, it is clear to me that Arlo has become the preferred partner in the Security segment, and I expect more strategic partnership announcements before the end of the year.

And finally, in addition to achieving the 6 million paid account milestone, Arlo also announced the acquisition of Aloe Care, a company focused on bringing truly innovative solutions to the age-in-place and home care market. This is a massive $23 billion market that will grow more than tenfold over the next decade to reach a TAM of nearly $300 billion by 2034. It is also a fragmented market, characterized by antiquated offerings and a lack of true innovation that desperately requires a better solution for families wanting better outcomes.

Aloe Care brings a broad spectrum of hardware, services and an exciting road map of AI-enabled features such as fall prediction instead of just fall detection. And while this is a small acquisition, it is a focused bet on a huge market with class-leading technology and a world-class team, but also a bet that will unlock new opportunities as we drive towards our long-range plan. We will share more information as we integrate Aloe Care, develop additional go-to-market opportunities and build out a plan for growth heading into 2027.

I would like to welcome the Aloe Care team to Arlo. Our vision and mission are completely aligned, and we are so excited to make a truly positive impact together.

And now I'll turn it over to Kurt for a more detailed review of our Q1 results and our financial outlook.

Thank you, Matt, and thank you, everyone, for joining us today. First, let me provide a detailed review of the key operational and financial results of the business, and then I will share an overview of our outlook for the second quarter.

Our strong momentum from last year continued into 2026 with the shift to services revenue continuing to drive our profitability metrics, including adjusted EBITDA and free cash flow. This shift has accelerated as a result of our outstanding operating leverage inherent within our proven business model.

In the first quarter, we were able to generate record subscriptions and services revenue of $90 million, up 31% year-over-year and accounting for 60% of total revenues. The growth was driven by strong expansion in our subscriber base, coupled with continued improvement in ARPU trends as well as the inclusion of nonrecurring revenue approximating $5 million received from a strategic partner.

Our subscriber base grew 23% year-over-year as we secured 318,000 new paid accounts in Q1. Our positive subscriber growth was supported by our outstanding customer retention efforts, especially focused on our retail business. Our ARPU in the quarter was $15.60, up 16% over the same period last year, driven by ongoing adoption of our AI-enabled service plan offerings. We continue to benefit from upgrades to higher service plans, coupled with new subscribers selecting our premium rate plans. The improvement in ARPU drove strong growth of our ARR to $357 million, up 29% year-over-year.

Total revenue for the period came in at $150.4 million, a record and up 26% from the prior year. This was driven primarily by growth in subscriptions and services revenue, coupled with increased product revenue resulting from the strong demand of our strategic partners. This level of total revenue growth is a testament to the strength of our services revenue trajectory as well as the diversification of our go-to-market strategy.

Product revenue was $60.3 million, up from $50.2 million compared to the same period last year. This is driven by strong growth in international business as well as our intentional decision to be less promotional on specific SKUs that have a lower service conversion rate. Leveraging this approach did not come at the expense of unit volume as we were still able to drive higher POS volume in our retail channels by almost 10%.

From this point on, my discussion will focus on non-GAAP numbers. The reconciliation from GAAP to non-GAAP figures is detailed in our earnings release, which was distributed earlier today. Our non-GAAP subscriptions and services gross margin was 85.4%, a new record and up 230 basis points year-over-year. Product margins also improved, up 340 basis points when compared to the same period last year, resulting from higher mix of purchases from strategic partners and a reduction in the overall bill of material costs for devices sold to our retail partners.

Notably, the team delivered this strong result against a headwind of a 430 basis point impact from tariffs, which were not in place when we reported last year. With the improvement in both services and product gross margins, we were able to surpass the 50% consolidated non-GAAP gross margin level, delivering a growth of 460 basis points year-over-year. Consolidated gross margins at this level represent a new record and underscore the continuing uplift in profitability we are experiencing.

Total non-GAAP operating expenses for the first quarter were $45.2 million, up 18% from $38.3 million in the same period last year. The year-over-year increase is driven by investments in R&D, including headcount as well as general operational expenses that result from the growth in our subscription business, such as higher credit card fees and increased professional services. During the quarter, adjusted EBITDA was $30.4 million, up a tremendous 85% year-over-year and represented adjusted EBITDA margin of 20%. Even in an investment year requiring integration of large-scale strategic partners onto our platform, we are still generating outstanding margins.

Profitability at this level translated into net income per diluted share of $0.28. Regarding our balance sheet and liquidity position, we ended the quarter with $167.5 million in available cash, cash equivalents and short-term investments. This balance is up $14.4 million compared to the same period last year, even considering the recent launch of various capital allocation initiatives. It is remarkable that our cash balance remains constant over the past 2 quarters, while we experienced outflows of $44 million in cash used for recent inorganic investments and our share repurchase program, offset by inflows of about $19 million from the return of capital on the sale of a strategic investment, all in Q1.

As you're aware, we made a $12.5 million investment in Origin Wireless last year, a strategic partner, which was recently acquired by ADT. During the period, we generated $25.4 million in free cash flow or a free cash flow margin of almost 17%. Our Q1 accounts receivable balance was $52 million at quarter end, with DSOs at 31 days, down from 34 days last year as we continue to drive more subscribers to annual service offerings. Our Q1 inventory balance was $44 million, up from $35 million last year. Inventory turns were approximately 6x, a modest decline from 6.3x last year as we look to optimize our inventory levels in an effort to reduce our shipping costs, especially air freight.

Now turning to our outlook. We expect the strong operational momentum in our business to continue into the second quarter as subscriptions and services revenue will continue to grow and product revenue should remain solid as a result of the demand coming from our strategic partners. Considering these factors, we are expecting total revenue in the second quarter to be in the range of $145 million to $155 million with the continued investment to integrate our strategic partners and support our recent inorganic investments such as Aloe Care. We expect our non-GAAP net income per diluted share in the second quarter to be in the range of $0.17 to $0.23.

Additionally, we remain confident that we will achieve the full year 2026 financial outlook, which we provided last quarter on subscriptions and services revenue as well as total revenue and EPS.

And now I'll open up the call for questions.

[Operator Instructions] And your first question comes from the line of Jacob Stephan with Lake Street Capital Markets.

Nice quarter. Maybe just first, I wanted to touch on the Aloe Health acquisition. You guys have talked about this in the past, age-in-place being a kind of strategic market you'd like to get into. But maybe what specifically about Aloe was attractive for you guys?

Yes. So it's really 2 layers. So at the beginning, we talked about in the prepared remarks around the size of the market. And like we mentioned, over the next 10 years, it's going to grow tenfold. And then when we look at Aloe Care in particular, first, it's the team. So I've known Evan, who's the CEO for probably 3 or 4 years and been talking on and off and getting educated around the market and what Aloe Care is doing. And we think that it's absolutely a phenomenal team that's dedicated to really providing innovative solutions in the market instead of just spinning out what's been done in the past.

And that's number two. So innovation. What you see with Aloe Care is not just the off-the-shelf hardware wrapped in some monitoring services. They're actually driving real transformation and innovation from -- I'll give you a couple of examples, using AI chat and calling to drive behavior and check-ins with seniors, instead of just focusing on fall detection, really starting to work on AI models that can do fall prediction. And this is where I think the market, especially this segment, is going to be transformed over the next 3 to 5 years. And that's why we decided now is the time, even though it's a small bet, it's a small bet on a huge market with a team that has shown that they can provide actual technology and innovation leadership.

And of course, Arlo then brings the scale and the ability to go drive the routes to market. So we are extremely excited. If I just give you like just a glimpse of some of the market stats, and you look out in the marketplace and 87% of adults that are over 65 want to stay in their homes, but 90% of the homes aren't safe for them to do so. They haven't been set up with the right technology or the services. So this market is going to continue to grow just from a demographic perspective. And it's from an ability to actually transform from a savings perspective on the cost 1 out of 3 nearly, it's like 30% of seniors fall on an annual basis, and the cost of that fall is $20,000.

So imagine not only being able to detect that and reduce the cost of some of these incidents but being able to predict it ahead of time. So this is really transformative. And just a falling section of the market is $80 billion a year. So it's -- going to your question, again, it's a huge market. It's a market that's going to grow dramatically. And this team and the technology that they brought to the table is really exciting to us. And we think coupling it with what we do well, scaling and using our back-end platform and providing those routes to market is going to come together nicely in 2027 as we go forward.

Got it. Very helpful. Maybe just next, I'll talk on the ADT partnership a little bit. Can you kind of give us a little bit more insight on the overall rollout there? I mean it feels like it's been 6 months since you first started testing. But curious what the update is there.

Yes. So they started testing earlier this year, as you mentioned. And I think in their earnings call, I'll tell you what they've communicated is that it's branded ADT Blue. They see it as a big area of focus for them for growth. And I would say, like I said in my prepared remarks, the launch is probably imminent. It's coming very, very soon. And they're doing -- I think they're doing the final preparations for to bring that into market.

We expect, as I've mentioned in the past, that to kind of scale through this year. So you may see them launch in a couple of channels and then add some channels as they progress and learn and start to roll out some marketing out through the year and then be able to have a first full year of deployment of it in 2027. So all the work is done. They're putting the final touches on it as they discussed on their earnings call, and we're excited to see it get into the marketplace.

Got it. And just last one for me. I saw you guys have bought back some stock this quarter. Just curious how you think about M&A versus buybacks versus maybe internal investment throughout the remainder of the year?

Yes. So I mean, you're basically referring to the 3 pillars of our capital allocation plan. And you can see that we've been doing some organic investment. I think that was evidenced by the large product launch that we had towards the end of last year. We're going to benefit from those products being refreshed last year through this entire year. You'll see some additional SKUs launched this year in some of the key areas, and we're setting up for a big product launch and kind of technology launch next year. Arlo Secure 7 will come out this year, we're already working on that and Arlo Secure 8 for next year. So that internal investment is ratcheting up a little bit. And now that Aloe Care is inside, that will soak up some internal investment as well as we prepare for 2027.

When I look at -- going to the core of your question, though, which I think is how do we balance buybacks with external acquisitions. Pretty simply, actually, we look at both on a valuation basis in a lot of ways. So what's the upside potential? Where do we think that technology is going? What's that worth over the long run? And when we buy our own stock, we very much look at that as an acquisition. We think, as we mentioned in the prepared remarks, that we're still undervalued compared to how we're performing. So you'll likely see us continue to buy stock as part of that $50 million stock buyback. It served us extraordinarily well.

And we know that we're performing very well compared to the market and compared to our peers. And so we think that's a great return on capital and a great way to give some money back. You'll see us look at acquisitions, especially if we see -- I'll go back to how we've described how we approach these acquisitions, either it's something like Aloe Care, where it's something that's tangential or it's a market segment that's on an adjacency, we'll take a smaller bet like we've done here in a big market to start to drive towards opening up additional opportunity and growth in the future or you could see us do something that's more core to what we're doing, maybe a larger bet because we do believe we're seeing continued market consolidation.

So the organic investment internally to what we're doing is going to continue to grow because we see so much market potential in front of us. We will do stock buybacks, especially as we see that we think the stock is undervalued in the marketplace, and we think that's a great return on capital. And we will place and have placed some bets in the acquisition market, and we'll keep an eye out over the next 12 to 18 months on additional opportunities.

Your next question comes from the line of Scott Searle with ROTH Capital.

Great job on the quarter. Maybe just to start, a couple of quick clarifications. Kurt, I think you said that there was a $5 million nonrecurring fee. I just want to clarify if that was the case and if that's in software and services. Also, European numbers were really big this quarter. Historically, in the past, sometimes we've had some big prebuys with Verisure and otherwise on the product front. I'm wondering if that was this case again. And maybe an idea of what you're seeing on the retail front, kind of the retail mix there. There are a lot of changing dynamics with what's going on with the FCC and exclusion list as well as maybe some of the bigger guys getting less shelf space. So I'm wondering if you could give us a quick update on that front.

Yes, Scott, thanks. I'll unpack that. So first off, I just want to say how pleased and excited we were about the overall trajectory of our business. Obviously, you pointed out the growth in our services business, which was remarkable this quarter and as was our product revenue growth, we had a really strong quarter from a product revenue growth, which fed through to our overall profitability. So extremely excited.

We did have a onetime item. We referenced it as a license fee from one of our strategic partners related to our technologies. As we've done in the past, and we've highlighted things like, for instance, our NRE type services, we'd like to make sure that you all are aware of some of the onetime nature items that may be in our revenue. That $5 million license fee is included in our services revenue. But the interesting thing is if you were to pull it out, actually, all of the growth metrics that we've highlighted, whether it's the growth in absolute dollars on our services revenue, our overall service gross margin percentage or our EBITDA growth or EBITDA percentage all would remain relatively in the same ZIP code. So no necessarily change to the overall trajectory of our business.

You highlighted Verisure. Verisure came in at -- it was a very strong quarter for Verisure. As we've talked to you in the past about some of their destocking and stocking trends, oftentimes in the third and fourth quarter, we'll experience a bit of a destocking trend with Verisure. But then in the follow-on quarters, they have to stock back up because of their demand. And that's what's happened this quarter. Q1 was a strong quarter from a Verisure standpoint. And it just highlights the overall strength in that relationship. And certainly, we want to work with them and make sure we're doing everything to optimize our supply chain and meet the demand that they have in the EMEA market.

So that was a positive trend. But overall, we're really pleased with the way the business is trending. We believe that the strategic partners and the impact there, coupled with the robust nature of our retail business is reading through, and it's really showing how we can perform very well in a market dynamic that may be a bit uncertain, but we're obviously executing extremely well. So thanks, Scott.

And since you already hit on ADT, Matt, maybe could you extrapolate a little bit on Samsung in terms of how that relationship is evolving and what kind of form it's going to take and how we should think about that monetization?

Yes. So Samsung provided a lot of public description of what the service was at CES, so I can talk about what the user experience will be. And it's really a safety services widget and application button that is going to go across their devices. We'll start on mobile phones and tablets, but you're likely to see it progress even across appliances and things where you can walk up, touch a button and have immediate access to emergency services.

And so they showed that at CES, they've done with it and got a great response. Again, I can't give you too much detail of when exactly it will roll out, except to say that, like I said before, it's imminent. So all the testing is done, and it's out in the field being tested now. And you're likely to see that roll out relatively soon, and there will be a small subscription component across that.

It's exciting for us for a couple of reasons. One is, it's the first partnership deal that we've done where what's being rolled out by a partner is purely service and software, right? There's not a hardware component coming from Arlo as a portion of this. So that's exciting. Two, from an Arlo perspective, it's exciting to see the progression of the SmartThings platform from Samsung continue to kind of broaden out. And we believe that some of these platforms are going to gain share and relevance in the market as we see standards like Matter continue to roll out across multiple channels. And Samsung is a very strong supporter of the Matter alliance and the standard being rolled out. And then you can see that if you look at some of their announcements recently.

And what we believe is that, that will open up additional opportunities for Arlo to partner with Samsung inside of SmartThings and potentially across other areas of the business. So we've done a lot of interop and make sure that the SmartThings experience with Arlo products is top tier, and we did some of that last year. What you'll see very, very soon is a first small subscription service being rolled out by Samsung, co-branded, by the way, so it will say Samsung powered by Arlo. So we're excited about that. But we think this area is going to be an area of growth, not only in the market segment, but also within Samsung, and we're excited to explore additional opportunities with them over time.

Got you. And lastly, if I could. A lot of exciting things going on, particularly as we start to ramp into '27, which it sounds like Comcast will be more commercial at that point in time, maybe age-in-place, it has some form of commercial services, but you've also got other strategic building in the pipeline. I'm wondering if you could flush that out a little bit, maybe give us an idea in terms of some of the comparative magnitude.

When I look at what you've done in the past couple of quarters with ADT and Comcast, that adds almost 40 million homes in terms of your addressable market to go after. So I don't know if there's some color in terms of the pipeline, how that's building, the magnitude of the customers to give us some idea about where we're going in '26 and '27.

Yes. That's a great question. And I think I mentioned on the previous call, we find ourselves as a company and as a team in the enviable position of seeing a great trajectory in 2026 but already building and seeing a great trajectory in 2027. And it's one of the first times I can really say that, that a lot of the things that we've announced and have built are going to provide performance, not only for this year but also next year.

And so you're touching on a bunch of those areas. I would broaden it a little bit and tell you that our product road map is very exciting going into 2027. Some of the things we're doing across multiple of our channels are exciting going into 2027. But to your point, we have 3 partnerships that we announced over the last 6 months, ADT, Samsung and Comcast. ADT and Samsung will launch relatively soon, ramp through the second half and have a full year impact next year. Comcast, that integration will go through most of this year and likely launch sometime in the first half of next year and start to impact 2027 as well.

From a magnitude perspective, I would say Samsung, we're not sure exactly what to expect out of this. It's exciting. You're looking at hundreds of millions of devices that this will roll out to over time. So there's a huge potential TAM there, both Comcast and ADT, you're correct. That's roughly 40 million households just here in the United States alone that we're going to be able to address through those. And I would say, especially if you look at Comcast, having about 31 million broadband households, we think that one has the opportunity from a service revenue impact over time to be as big as Verisure as far as materiality and impact to our performance over time.

The others, I think, can grow and be very material as well. It's a little bit more nebulous because they -- we're not sure what the adoption rate will be with Samsung and where that's going to lead to over time. But I'd say they have a very high potential as well. On top of that, what I would say, and I've kind of hinted this in the call is, you should expect us to announce maybe 1 or 2 small to medium-sized or medium to even kind of medium or large partners over the next 12 to 18 months as well. So there is a pipeline even beyond what we've already announced, and that will lead into probably more work being done in 2027 with revenue maybe be in the second half of '27, but leading into 2028.

So feeling really good about where we are in 2026, strong start with the quarter results we just put up, already feeling good about the trajectory going into '27. And there's a pipeline that will add some strength to '27 and even 2028. So feeling -- like I said, feeling really good about the performance and where we're headed. And if you add market consolidation just happening in general, we think we're in a really good position to just generally perform well and be rewarded for where we are in the market segment and the solutions that we have and can bring to the market.

[Operator Instructions] Your next question comes from the line of Anthony Stoss with Craig-Hallum Capital Group.

This is Rian on for Tony Stoss. I'm curious with just the amount of partnerships that you guys have announced in the past year or so and which will continue to expand, I guess. But how are you guys looking at the business customers like enterprise customers versus general consumer plans, maybe how you expect those to grow over the next year or 2 with the partnerships and without?

Yes. So if you're speaking about like small business and like other market segments, we did speak on the last call about starting to explore the small business market. What I would say today is we're still very consumer-focused across all our channels, and that includes partnerships. So when you look at our partnership with ADT, it's primarily targeting additional consumer households.

Same with Comcast. Comcast has 31 million broadband households. We're going after those consumer broadband households initially from a go-to-market perspective. But like I said, we've started to look at building out some -- a technology stack and start to look at solutions for the small business space. I think it's something we'll be able to put more formality to sometime in 2027. But that is another market segment where you look at a potential market size of tens of billions of dollars. It's very fragmented.

And I believe that you're not going to see true commercial enterprise solution providers come down market successfully. I think it's much more likely that a company like Arlo, who has a great technology stack, inexpensive hardware, very easy to set up and robust service set is likely to be more successful going upmarket into the very small business and eventually the medium-sized business.

So again, you'll see a little bit of us doing some tests and some things this year with the idea of maybe adding that to our portfolio in 2027. And going to your point, is I think the go-to-market in that area would likely be heavily reliant on working with several of these partners to actually address that market because the fragmentation in the small business market isn't just from a competitive set, it's also fragmented from a go-to-market set. You have tens of thousands of resellers and integrators. And a partner who already has some routes to market or is addressing that market already could be a good way to leverage the Arlo technology and start to address that market in a very efficient manner.

Got it. Super helpful. And then as my follow-up, I think you guys talked about it last quarter. Memory is a pretty small percentage of your guys' BOM cost, and you use kind of lower-level DRAM, maybe not as much of the constrained stuff in your products. I'm just wondering if there's been any change on that front or if there's any visibility that's kind of changed since last quarter on the memory side?

No, Rian. As you mentioned, and we talked about this last quarter, in terms of our overall BOM, memory is about 6% to 8% of the total BOM. So it's not a huge part of the BOM. The cost of memory absolutely has gone up. Based upon our records right now, first half, probably up 160%. Second half, there will be an increase -- continued increase in memory costs.

The great thing is we have a fantastic supply chain team that has deep relationships across the entire supply chain. They've been leveraging those relationships. Obviously, we are working with pretty sophisticated ODMs that do a lot of advanced purchasing. So right now, we feel very good about the supply we have for not just the first half, but for the entire year, feeling really confident about that. And we'll continue to work those relationships and negotiate price concessions throughout the year, and we'll manage that BOM cost down as best we can.

What I'd like to just say is it's like anything else, when we look at the price or cost increase, we kind of look at it in terms of the overall CAC or cost of customer acquisition. And we just see that this particular instance, albeit a bit unusual in terms of the overall market, from our standpoint, it's just -- it's a modest increase in overall CAC. And if we continue with our strategy and seeing the results that we've shown here this past quarter as well as over the last several quarters, I think we're on a good path forward. So no major disruption, and we're managing the whole situation really, really well.

Your next question comes from the line of Joseph Besecker with [ Besecker Asset Management. ]

Great quarter and keep going at it. And you had a brief comment on tariffs. How do you -- will you get -- do you anticipate getting tariff relief? How do you view tariffs? And then I have a follow-up to that.

Yes. Great. And great to meet you, Joe. So similar to the conversation I was just having with Rian on the overall cost of memory, we kind of look at the tariff cost of the tariff increase as also a portion of our overall CAC, and we've been able to manage that particularly well last year and into this year. It's pretty remarkable. When you look at our product gross margin on a non-GAAP basis for this quarter, it was actually at a negative 2.8%. But if you pull out tariffs, we were actually at 1.5% positive gross margin on our overall products.

So we think that's a good place to be because if we're managing it to that, what we said, low single-digit negative margin, that puts it in a real nice place for managing it as a CAC cost of customer acquisition, and we'll continue to do that. You are correct. We did actually place our claims shortly after the tariff relief portal was open. We're still in the process of evaluating whether or not we'll be eligible for claims. There's a lot of uncertainty around the processing and ultimately the timing of those. So just know that we are in the queue. We're managing the tariff relief process very carefully, and we'll provide more information as it becomes available to us over the next several months or quarters.

Thank you. And there are no further questions at this time. This concludes today's conference call. You may now disconnect.

Ladies and gentlemen, thank you for standing by. [Operator Instructions] I would now like to turn the conference over to Tahmin Clarke. Please go ahead, sir.

Thank you, operator. Good afternoon, and welcome to Arlo Technologies Fourth Quarter and Year-End 2025 Financial Results Conference Call. Joining us from the company are Mr. Matthew McRae, CEO; and Mr. Kurtis Binder, COO and CFO.

If you have not received a copy of today's release, please visit Arlo's Investor Relations website at investor.arlo.com. Before we begin the formal remarks, we advise you that today's conference call contains forward-looking statements.

Forward-looking statements include statements regarding our potential future business operating results and financial condition, including descriptions of our revenue, gross margins, operating margins, earnings per share, expenses, cash outlook, free cash flow and free cash flow margin ARR, Rule of 40 and other KPIs, guidance for the first quarter and full year of 2026, the long-range plan targets, the REIT and timing of paid subscriber growth the commercial launch and momentum of new products and services, the timing and impact of tariffs, strategic objectives and initiatives, market expansion and future growth partnerships with various market leaders and strategic collaborators, continued new product and service differentiation and the impact of general macroeconomic conditions on our business, operating results and financial condition, actual results or trends could differ materially from those contemplated by these forward-looking statements.

For more information, please refer to the risk factors discussed in Arlo's periodic filings with the SEC, including our annual report on Form 10-K filed earlier today.

Any forward-looking statements that we make on this call are based on assumptions of today and Arlo undertakes no obligation to update these statements as a result of new information or future events. In addition, several non-GAAP financial measures will be discussed on this call. A reconciliation of the GAAP to non-GAAP measures can be found in today's press release on an Investor Relations website.

At this time, I would now like to turn the call over to Matt.

Thank you, Tahmin, and thank you, everyone, for joining us today. In addition to providing an overview of our recent performance, we have designed this year-end call to provide a deeper dive into our broader strategy and the investments, which provide a path for continuing growth into the future. But first, let's jump straight into our results.

Arlo had an incredibly strong fourth quarter. Total revenue came in at $141 million, slightly above the high end of our guidance range and fueled by our product launches and impressive performance across our services business. In fact, service revenue hit $89 million representing 63% of total revenue and grew at an astounding 39% year-over-year. This momentum propelled our annual recurring revenue to $330 million, which is up 28% year-over-year. Fourth quarter EBITDA hit $23 million, up an incredible 138% year-over-year and resulted in a $0.22 of non-GAAP EPS, substantially above the high end of our guidance range. And looking at our SaaS performance in the quarter by utilizing the rule of 40, Arlo achieved a score of 45, putting us in an elite handful of companies executing at this level, underpinning the record-breaking quarter and continued expansion of our services business is a world-class team that is executing at the highest level. I would like to touch on a couple of examples.

Last year, we continued our strong pace of innovation and deployed Arlo Secure 6 across our user base, introducing a myriad of class-leading features, including an advanced multi-recognition engine AI-based scene descriptions, numerous new AI-based audio detections and the only personalized AI micro model capability in the world. We also made innumerable performance and interface improvements throughout the year to retain our leadership position in simple yet powerful user experiences.

And in the second half of 2025, Arlo executed the largest device launch in company history, comprising of more than 109 unique SKUs across our channel partners. We shipped more than 800,000 units in the first 60 days of production and achieved our planned supply ex ramp to ensure strong unit sales in the quarter with no excess inventory. This was an extraordinarily complex endeavor, and the team executed flawlessly. The reception of our new products and services has been outstanding. Our customer and professional reviews are the strongest Arlo has seen for a new product launch in our history with numerous models already receiving multiple editor's choice and best of awards. Our new lineup not only contributed to Q4 results, it serves as the foundation of our continuing growth in 2026.

The other example of exceptional execution is when you look across our fast performance metrics, our monthly consolidated churn dropped to 1% in the fourth quarter, or said another way, our monthly subscriber retention rate is 99%, which means a paying user stays with our service for more than 8 years on average. This achievement is the culmination of numerous small improvements across our platform, including performance enhancements, customer care improvements, billing system improvements and deeper insights at the user cohort level, driven by our vast data sets. And when you dig deeper into our retail and direct accounts, Arlo's SaaS unit economics are world-class. Average monthly revenue per user grew to $15.30 during Q4, aided by additional upward migration of customers to our AI-driven service plans and these subscriptions, which account for 89% of our annual recurring revenue, generated an outstanding 94% gross margin. These numbers, coupled with our low churn drove the lifetime value or LTV per subscriber up to $917 up 23% from a year ago and a new record for Arlo. Despite this being the promotional holiday quarter, our customer acquisition costs or CAC remained stable, while retail unit sales grew more than 20% year-over-year.

Taken together, this performance drove Arlo's LTV to CAC ratio up to 4.0. This is an optimal result for our services business as a score below 3 would indicate a less efficient user funnel and a score above 5 would indicate missing opportunities for additional growth. We constantly balance our unit growth product gross margin, household formation, conversion and other key metrics to ultimately expand our financial results, which are clear again this quarter. Arlo's corporate non-GAAP gross margin grew by more than 1,000 basis points year-over-year to a record 47.8%, and our non-GAAP EPS improved 120% to a record $0.22.

Looking back at the full year in review, the goals we set at the beginning of last year were ambitious, and Arlo delivered across the board. Arlo Secure 6 provided significant platform innovation by launching numerous AI enhancements that drove subscriptions and user engagement. Arlo executed the largest product launch in the company's history, which fueled our unit sales growth in the second half. Our expanded product lineup allowed us to nearly double our shelf share at Walmart and significantly increase our assortment across other retail and e-commerce channel partners. Arlo landed several new strategic partners, which creates incremental growth opportunities and further diversifies our revenue sources, a topic I will discuss later in more detail. We targeted a minimum of 20% growth or $300 million in service revenue and actually achieved an outstanding $316 million of service revenue in 2025.

And finally, we set out to be 1 of a handful of SaaS companies whose business was growing fast enough to be rule Arlo delivered a full year score of 42.5%, which places us amongst an extremely small selection of public companies to achieve such profitable growth.

2025 was a phenomenal year for Arlo, and I want to thank the team for the dedication and outstanding execution across every aspect of our business. And now I will turn it over to Kurt, who will provide more details on our operating results.

Thank you, Matt, and thank you, everyone, for joining us today.

2025 was another tremendous year for Arlo as we generated outstanding financial and operational results. Our subscription-driven strategy and services business remain paramount to our success. And as a result, we are now experiencing the benefits of stellar execution and a clear strategy. We continue to utilize our innovative products and competitive pricing to identify, target and monetize new households with our AI-enabled services. This approach, along with a disciplined focus on execution, enables us to consistently deliver record levels of subscription and services revenue, ARR, gross margin and free cash flow.

Let's briefly review our consolidated results for 2025 when compared to the original guidance we provided at this time last year. At the beginning of the year, we shared our expectations to deliver consolidated revenue in the range of $510 million to $540 million with subscriptions and services revenue comprising 50% or more of total revenue or approximately $300 million. We ended 2025 with actual consolidated revenue of about $530 million and subscriptions and services revenue at $316 million or 60% of total revenue. Our top line revenue performance was strong. But what's truly remarkable is our ability to substantially exceed our goals for profitability in a year front with uncertainty due to macroeconomic, geopolitical and tariff challenges. We generated record levels of EBITDA, which resulted in an adjusted EBITDA margin of 14.1%. Additionally, our bottom line outperformance was even more impressive given the non-GAAP EPS outlook range of $0.56 to $0.66 as we provided when we embarked on the year. We delivered an impressive non-GAAP EPS of $0.70, surpassing the high end of our guidance even withstanding the impact of tariffs, an incredible outcome for our shareholders and a testament to the phenomenal execution by this team.

Our installed base of paid accounts continued its robust growth trajectory coming in at 5.7 million accounts for 2025, an increase of 24% for the year. Our paid account growth aligns with the 23% increase in retail POS or point-of-sale volume that we experienced with our new product launch in the second half of the year and the continued success with our strategic partners. Our performance at Walmart was solid, aided by an expansion in shelf space. We capitalized on the power of the Amazon platform, generating additional paid accounts through this digital channel. We expect to continue to drive paid account growth in 2026 as we launched several initiatives designed to enhance our conversion and subscription retention.

The strength of the Arlo value proposition is powered by annual recurring revenue as we ended the year with $330 million in ARR, up an outstanding 28% year-over-year. This was driven by strong subscription growth and continued expansion in ARPU. In 2025, our ARPU increased from approximately $12.60 to $15.30 and resulting from our service plan optimizations that occurred in early 2025, and customers selecting our higher-tiered AI-driven service offerings. We expect to deliver incremental ARPU benefits in 2026 through additional subscription plan optimizations and subscriber retention initiatives, thereby delivering durable and predictable revenue with the goal of surpassing our long-term ARR targets.

Our services transformation has been remarkable as we ended 2025 with over $316 million in subscriptions and services revenue, up 30% year-over-year. Subscription and services revenue for the full year now comprises 60% of total revenue, a significant milestone that is driving Arlo's expansion and profitability. Additionally, our Q4 subscriptions and services revenue was $89 million, an increase of about 40% when compared to the same period last year. Our non-GAAP subscription and services gross margin came in at 84% for the quarter, up 230 basis points when compared to the same period last year. As a point of emphasis, our retail paid accounts generated about 90% of 2025 subscription and services revenue with a gross margin of 94%, truly remarkable. Subscription and services gross margins were positively impacted by improvement in retail and direct ARPU coupled with a more favorable cost to serve as we continue to gain scale with our cloud storage partners. Approximately $4 million of Q4 subscriptions and services revenue was attributable to nonrecurring engineering services from a strategic partner. As we attract larger, higher-profile partners, we can expect additional revenue to be derived from this type of development work as we integrate our innovative platform and AI algorithms. While highly profitable, NRE has a slightly lower margin profile than our core subscriptions and services revenue.

In summary, all of the variables that drive our outstanding unit economics have improved, resulting in significant growth in our LTV to over $900.

Non-GAAP gross profit for the fourth quarter was $67.6 million, resulting in non-GAAP gross margin of 47.8%, up an outstanding 48% on an absolute dollar basis when compared to the same period last year. This trend was driven by the larger percentage of total revenue coming from subscriptions and services in Q4. Additionally, our product gross margins rebounded by almost 300 basis points in the period when compared to the third quarter levels, aiding the consolidated margin improvement. As we enhance our consolidated gross margins, this success confirms that leaning into product margin to generate additional paid accounts is the right strategy. It should be noted that this tremendous outcome would not be possible without the outstanding execution by the team to successfully navigate a challenging new product launch and related tariffs. We generated outstanding growth in adjusted EBITDA during 2025. For the year, adjusted EBITDA was $74.7 million, an increase of 85% year-over-year and represents an adjusted EBITDA margin of 14.1%. We exited the year with strong momentum in Q4, delivering adjusted EBITDA of $23.3 million, up an impressive 138% year-over-year for an adjusted EBITDA margin of 16.5%. The expansion in EBITDA margin resulted from our disciplined management of operating expenses. Total non-GAAP operating expenses for the full year of 2025 were $165.7 million. Non-GAAP operating expenses on an annual basis have increased over the past 5 years and a 6% CAGR from $123.2 million in 2021. During that same time frame, we have grown service revenue from $103.5 million to $316.4 million, representing a 25% CAGR over the same 5 years, a growth rate of 4x our OpEx spend. Our ability to manage our operating expenses while investing in R&D and sales initiatives to support the stellar growth in our subscriptions business underscores the operating leverage that is innate to this business model.

In Q4, we posted non-GAAP net income of $23.9 million or net income per diluted share of $0.22, significantly ahead of consensus estimates. This performance represented net income growth of more than 100% when compared to the same period last year. For 2025, we recorded non-GAAP net income of $77.3 million up more than $35 million or 83% when compared to the prior year period. Our non-GAAP net income translated to a net income per diluted share of $0.70 in 2025. And again, an outstanding improvement from a net income per diluted share of $0.40 in 2024. Strong adjusted EBITDA, coupled with exceptional working capital management, helped drive our 2025 free cash flow to $66.9 million, which is up 38% year-over-year with free cash flow margin of 12.6%. The continued free cash flow expansion fueled by exponential subscription and services revenue growth demonstrates how far Arlo has progressed over the past 5 years. We ended the quarter with $166 million in available cash, cash equivalents and short-term investments. Our cash was up $15 million year-over-year, underscoring the improvement in profitability, even withstanding our investment in Origin Wireless and the $45 million return of capital to our stockholders through our share repurchase plan. Given our expected ARR growth and expanding profitability, free cash flow generation will continue into 2026, and our cash position will improve over time, thereby enabling us to pursue a more aggressive capital allocation program in the near term. Our DSO levels for the quarter were 26 days in Q4 of 2025, and down significantly from the levels in prior quarters, highlighting a favorable working capital trend resulting from a subscription-based operating model. As our revenue shifts to monthly and annual subscriptions versus product sales, there will be a corresponding improvement in the timing of collections, while reducing the level of investment in working capital. Our DSOs may fluctuate from quarter-to-quarter but we are pleased with the improving status and collectibility of outstanding receivables. Inventory is at $41.2 million and down from $44 million in the third quarter. Our inventory turnover remained solid in Q4 at 5.9x, down from 6.4x in Q3. We a modest decline as we successfully managed our ending inventory as well as the inventory in channel. Arlo's inventory levels are now well positioned as we proceed into the first quarter of 2026, once again, highlighting the exceptional operating performance of the Arlo team.

Thank you, Kurt. Arlo's performance in 2025 was truly outstanding and a reflection of both the fundamental strength of our business and the excellent execution across the team. In parallel to delivering on our 2025 plan, Arlo has been hard at work building the foundation for continued growth in the coming years, and I would like to update you on a few of these initiatives.

Arlo has a multipronged strategy to drive growth across the business as we look to exceed our long-range plan. First is to continue our faster-than-market growth in the retail and direct channels. our recent product launch drove an expansion of Arlo's assortment across channels, and we continue to capture share in our key market segments. Arlo will also launch several new retailers over the next 12 months, allowing us to reach new customers and market segments. And as I mentioned before, 89% of our service revenue is generated from users that became subscribers by purchasing Arlo devices in this channel and incremental household formation will drive our services business.

Our software and services road map remains a key lever for growth, and Arlo has a robust pipeline of new features, AI-powered capabilities and additional subscription tiers, which will begin to roll out later this year. Arlo was set up for continued success across our SaaS metrics, including subscriber acquisition, ARPU expansion and retention. These services will layer on top of our massive product refresh from last year, new devices launching this year and a new hardware platform launching in 2027. Arlo will continue to focus on new strategic partnerships that fuel both additional growth and diversification. These partnerships can provide access to millions of users at scale with little or no customer acquisition cost and provide substantial incremental service revenue. Arlo is uniquely positioned to capture these partner opportunities due to our world-class technology stack, mature partner APIs and our unrelenting focus on data privacy, a topic that sharply differentiates us from the other players in the market today.

And finally, Arlo will take our first step to expand into new adjacencies, several multibillion-dollar markets exist that could leverage a substantial portion of our current platform. we have been cautious until it was clear, Arlo was well on our path to meet or exceed the long-range commitments we made to investors. But the time is now. I have never been more confident in our management team, our strategic plan, our platform and our ability to execute through the global volatility that seems to be the new norm. Arlo is ready to add new initiatives while managing the execution of our core plan. You will see Arlo planting the seeds for the small business market and the age in place market. All of this is enabled and built upon the world's most advanced resilient and innovative SaaS platform inherently designed for real-time smart safety and security. Arlo launched this platform with artificial intelligence integrated at the core in 2018 and has been driving AI-based consumer subscription services at scale for 8 years. In fact, we invented this market, and our longevity means that you'll see our seventh generation platform launch this year to keep us ahead of the competition. And as I mentioned earlier, this platform and our focused execution are helping us win numerous large-scale branded partnerships that will drive growth over the next 3 to 5 years. In addition to our previous announcement with ADT, there are 2 new strategic partnerships I'd like to touch on today.

At the Consumer Electronics Show in January, we announced our new partnership with Samsung. Arlo will be powering an emergency response service across Samsung devices in the United States. Samsung SmartThings will offer this new service to a substantial portion of the 425 million SmartThings users. It will be branded SmartThings safe premium powered by Arlo and represents our first partnership that is solely based on SaaS services without reliance on hardware component. We are extremely excited about this next stage of our partnership with Samsung and expect to see more information next quarter.

And finally, we are excited to announce a partnership with Comcast to provide connected home security solutions to millions of its Xfinity Internet households in the United States. More information about this offering will be provided by Comcast closer to the market launch. But I can say from our side, it is difficult to overstate the potential impact of this partnership, which could grow larger than our Verisure partnership over time.

All of these partnerships will contribute to our business in 2026, but truly ramp in 2027 and beyond. Let me back up a bit and review the capital allocation plan we rolled out in 2024. It has 3 main pillars. First, a focus on organic investment, Arlo's traditional pillar of differentiation. This should be evident in our huge product refresh, are secure 6 platform enhancements, strategic partner engagements and our share growth in core markets. It is the core tenet of our success to date, and I see no limit on the ROI as we drive this market forward with additional innovation in channels, launching over the next 2 to 3 years.

The second pillar is share repurchase or investing in ourselves. It is no secret, and I know many investors share the sentiment that Arlo is undervalued relative to our financial performance. Over the last year, we demonstrated our commitment to this area by repurchasing over 3.3 million shares, and you will see this commitment continue, as I'll talk about on the next slide.

And finally, the third pillar is our inorganic investment, which includes deep technology partnerships or acquisitions that could accelerate our path to Arlo's long-term targets. You can expect Arlo to be more active in this area over the next year as well.

Once again, if we look at software companies that are near a rule of 40 measure, we come up with 24 companies that at least hit a score of the revenue multiple for those companies is 5. If we then limit those companies to those with more than 20% revenue growth, it reduces the list to 8 companies, and they have a multiple of 6.4. Arlo service business has a growth rate of nearly 30%, and we achieved a full year 2025 score of 42.5%. However, the multiple on our service business is around we feel we are substantially undervalued compared to our performance. As such, our Board has approved an additional $50 million to repurchase Arlo shares, and this was 1 of the easiest decisions we've made inside of our capital allocation plan.

And now I will turn the call back over to Kurt, who will give our forward-looking guidance.

Thank you, Matt. Before I provide an outlook for 2026 I want to share some perspective that is foundational to our confidence in our outlook for the current year and beyond. Over the past few years, we told you that Arlo would transform into a durable recurring revenue subscriptions and services business, and we have accomplished that. We assured you that Arlo would be a market leader in innovation and technology with a scalable AI-driven platform and we have exceeded on that front.

Last year, we indicated that we would evolve into an enterprise-grade business supporting large global companies. And the recent signing of Comcast caps off a year where we have added ADT and Samsung to a robust portfolio of strategic partnerships. We believe the latest evolution will enable Arlo to diversify our revenue base and further enhance our operating model. With that said, we expect the first quarter consolidated revenue for 2026 to be in the range of $135 million to $145 million. We expect our first quarter GAAP net earnings per share to be between $0.01 and $0.07 and our non-GAAP net income per diluted share to be between $0.17 and $0.23 per share. We expect product margins in the period to rebound from the level that we reported in the fourth quarter of 2025.

For the full year 2026, we expect consolidated revenue to be in the range of $550 million to $580 million, with service revenue comprising greater than 65% of total revenue. We will implement initiatives to improve customer retention and drive higher conversion. And we will adjust our innovative service offerings to enable us to deliver ARPU growth and expanded ARR. These efforts will enable us to generate service revenue in the range of $375 million to $385 million in 2026. And finally, we expect our non-GAAP net income per diluted share to be between $0.75 and $0.85 per share.

As you're aware, there was a ruling by the Supreme court striking down the tariffs that were put in place by the administration last year. At this point, a great deal of uncertainty remains around the tariffs and our ability to recoup funds from tariffs that were previously paid. Given the lack of clarity, our outlook assumes that we will remain subject to the 20% tariff structure already in place prior to the ruling. And we will continue to monitor the situation closely and provide an update if necessary. Our innovative platform, coupled with our subscriptions driven strategy has delivered outstanding results over the past 5 years. Our paid subscribers have increased by more than 10x to $5.7 million. Our annual recurring revenue is up more than 7x to $330 million. And our highly profitable retail subscriber base continues to drive the expansion of our overall profitability resulting in adjusted EBITDA margin of 14%, which is up 30 percentage points. A customer-focused mindset and steadfast execution have enabled us to consistently deliver these outstanding SaaS results over the past 5 years. And we are well positioned to continue this trajectory over the next 5 years as we progress towards achieving our long-range plan targets.

Now let me turn the presentation over to Matt.

Thank you, Kurt. Given our rapid growth, stellar results and exciting new components of our business, I would like to quickly level set on where Arlo stands.

Arlo is a rapidly growing SaaS business that pioneered the DIY security market and created AI-powered services to create a compelling user experience. Arlo's singular focus on the smart home security market has allowed us to move quicker, innovate faster and maintain technology leadership in the market. Every day, every person at Arlo is solely dedicated to delivering on our safety and security pledge. Our mission is to connect and protect what people care about most. And that mission extends to our users and partners through our privacy pledge, which is transparent and clear. Your data will only be used to cultivate the best security experience for you. It's that pledge and singular focus, which has allowed some of the largest strategic players in the world like Samsung, Comcast and ADT to team up with Arlo to be their security partner of choice. And our continuous investment in our platform remains a substantial differentiator. While others have been pulling back on their investment in the segment, we have been pushing the boundaries further we leverage our class-leading devices to acquire users and lock in long-term relationships that can't be disintermediated like many other AI or subscription business. and our groundbreaking features and functionality that we deployed in Arlo Secure 6 will only be further enhanced by our rollout of Arlo Secure 7 later this year.

The home security market is large and growing quickly, now valued at $25 billion in the U.S. alone, and we estimate that the penetration of our market remains in their early innings at just over 20%. Our routes to this market have historically been retail channel partners, but we have diversified that into business-to-business strategic partners as well, ensuring access to hundreds of millions of households for future user acquisition. And now Arlo is making investments that will launch features and services across several areas, including the broader smart home segment, small business and the enormous agent place market, which increased the available TAM more than tenfold.

A quick glance at Arlo shows a SaaS company with over $330 million in recurring revenue, growing at 28%, service gross margins at 84% and a strong LTV to CAC ratio of 4 and a 2025 service business Rule of 40 score of 42.5%. These are the metrics of a world-class services company, and we feel like we are just getting started.

Looking ahead, the components of Arlo's future success are clear. We will continue the fast pace of platform innovation, which drives our service business. you will see continued growth in our core channels, which drives new household formation. We will launch and monetize our new impactful strategic partners. You will see us invest in new adjacent market segments. We are targeting more than 20% service revenue growth again in 2026, and we will invest in ourselves by repurchasing shares. Our investments and execution have set up Arlo not only for a strong growth in 2026, but also in 2027 and beyond as we and reinvest the rewards of our recent performance and strategic account wins over the coming years. I have never been more excited about the vast opportunities that lay in front of us, and we have the foundation and the team to go maximize success.

And now we will open the call for questions.

[Operator Instructions] Our first question comes from the line of Jacob Stephan with Lake Street Capital Markets.

Congrats on a great year and a really strong guide to start off '26 here. Maybe just first off, I wanted to touch on kind of the 2 strategic partnerships, more specifically Comcast and ADT. So when I look at Comcast, you've got 31 million subscribers that have Xfinity. Maybe help us think through kind of is this kind of like a Calix type partnership? And then maybe just kind of lay that over with a quick ADT update.

Yes. So maybe I'll go in order of the partnerships that we've announced or talked about either previously or today. So ADT is going very well. The technical integration was basically done by the end of last year. And so what being done now is planning for their go-to-market. And again, I don't want to kind of get ahead of their launch announcement, but the original target was sometime in the middle of this year. And so we're excited about seeing that come to market because I think it will be able to trigger a lot of growth for them, and it's an exciting partnership for us because of, obviously, their scale and their brand in the segment. Pleasing open Arlo up to a lot of households that we're not really addressing right now through our primary channels of retail and direct. So if I look at Samsung, Samsung is interesting, even though it was publicly announced at CES, I think people kind of missed the impact of that partnership. So what we announced is actually powering an emergency service across Samsung devices. It will start with their mobile phones and tablets, but you should expect that to kind of broaden across all Samsung devices starting in the United States. It's a very large population of users. And what's really interesting about that is, like I said on the call, it's the first time we've done a real deep partnership and integration with our hardware, right? I mean they have hardware. It's on their phones and tablets. But for us, the integration is we're really just powering a pure service and subscription service that Samsung will be providing out to their Smart things user. So that's really exciting. And like we said on the call, I think you'll see more information coming up next quarter.

Comcast, I can't say too much about. So it's announced, we'll be doing -- what I would suggest is the integration of a very large partnership like this takes usually between 9 and maybe 12 months. So that's -- there'll be a lot of work making sure that the technology is integrated and Comcast is ready to deploy. But I think you'll see that provide some revenue for us this year, but then really ramp going into '27 and beyond. But there'll be a lot more information when Comcast is ready to release more information about the partnership. But like I said on the call from our perspective, the scale of Comcast, how many Xfinity customers they have is really exciting for us. And I think the partnership for us could be as impactful, if not more impactful from a service revenue perspective than even Verisure, which is 1 of our largest and most successful partners.

Got it. Very helpful. Maybe just to kind of touch on some of these -- the new products, the new hardware products that you're kind of planning to launch over the 2026 as well. I mean, what end markets are attractive? You kind of look at your history and your spin-off from NETGEAR are routers on the table? Or what's -- I guess, what's exciting about the different hardware products?

Yes. So what you've seen us do is at the end of last year, we did basically a pretty comprehensive refresh, right, 109 SKUs across our channels. And that really set the foundation for not only having a successful holiday period, which we demonstrated. But the foundation for a bulk of sales that we'll be doing in 2026. So we think we're situated extraordinarily well for 2026. And you'll see some updates to some of those products and a couple of new form factors this year, really adding to the assortment of cameras and working say not too much working on some product segments that are seeing some specific growth, very similar to what we did in 2 in a refresh that we did last year. So that will continue to grow, and we've been able to grow assortment and market share with those launches this year. When we look into 2027, we talked about launching a new hardware platform. And that is going to be a combination of a couple of things. One is it will be a refresh of a technology-first or innovation-led type platform, new user experiences, starting from scratch a little bit thinking about home security in the world where the experiences can be AI native or built from -- with AI from the very beginning. So think of a clean sheet of paper and starting over in the space, starting at the high end, and coming out in 2027, but also broadening into the broader market of smart home control, right? And it doesn't mean we'll be building those devices in every respect, but the idea of being able to make the smart home and the various devices that are in a smart home participate in home security in the smart home ecosystem. So you'll see that.

The other thing we're starting to work on is making a more deliberate push into small business. That is an extremely large market, very fragmented and the next-generation platform will be geared towards that market segment as well. And you could see us make some service announcements later this year is starting to test that market getting ready for maybe a bigger deployment in 2027.

And then there's some other areas that are very interesting to us. So as we look to adjacent markets that where 90% of what would be deployed is technologies or platforms we already have you'll see us maybe make some moves in the second half of this year into other markets like agent place or some of these other areas, and that could involve new hardware as well. So like I was speaking about earlier on the prepared remarks, I feel that the time is now for Arlo to start to accelerate growth and our investment in some of these adjacent markets and which will fuel faster growth than we're sitting here today. So we spent a lot of time recently thinking about not only 2026 growth but really '27 and '28 and making sure that we are investing correctly to drive that growth. And I think we've done a really good job, and you'll see more of that be rolled out with more detail probably over the next 12 to 18 months.

Okay. And if I could just sneak 1 more in. The service revenue in the quarter, $89 million, that was well above what we were expecting. Maybe you could kind of help us think through, is this the kind of second phase of the planned simplification you did earlier this year? Or maybe just any kind of color you can provide as to why that was such a strong sequential number?

Jacob, it's Kurt. So yes, so $89 million for Q4 was a great quarter for us. Obviously, we continue to build on the previous 2 or 3 quarters, with the service plan optimization that we kicked off and also on the ARPU expansion that we experienced. So the core business grew nicely as a result of adding new subs especially coming out of the retail and direct channel and then the ARPU expansion. We did have about $4 million of NRE in Q4 hit. This was associated with a strategic partner that we've been working with for the better part of a year. They came in and actually increased our service revenue did have a slight impact on our overall services margin. But all in all, it was a nice windfall for us in the fourth quarter. So I think, as I mentioned in the prerecorded remarks, you're going to see a little bit more of this as we go into 2026. And given the caliber of the strategic accounts that we're working with now, we're being asked to do a lot of integration work with our platform. And as a result of that, we're monetizing service revenue through those relationships a bit earlier than sort of what we've done in the past. So 2026, you'll continue to see growth in our core subscription business, and then we'll add on in these cases where we're working hard to deliver on the promises to these large strategic accounts.

Our next question comes from the line of Scott Searle with ROTH Capital.

Great job on the fourth quarter and really exciting in terms of the strategic opportunities and new adjacencies that you guys are moving into. Maybe in terms of starting, the outlook for subscription and services growth this year, around 20%. I'm wondering if you could give us an idea of of strategic contribution into that number? How much are you guys factoring in? It seems like we might start to get some in the second half, but it's going to be fairly limited on that. And which sets up a nice growth trajectory into '27. But also as part of that, I'm wondering if you could talk about the opportunity pipeline as well. Are there additional opportunities that you guys have percolating there. Also would like to couple that, Matt, with the privacy concerns have really reached, I'll call it, a little bit more of a fever pitch now and how that's factoring into how you guys are positioned on that front. And then where adjacencies kind of fit into the numbers this year? Is there any -- is there any contribution that you guys are assuming at all at this point? And then I had another follow-up.

Yes. So maybe I'll start with the privacy matter. So as you know, over the last, I would say, I guess, 6 weeks or so, 4 to 6 weeks, privacy and the idea of data security and data ownership has really become a topic in the public mine. But also, I would tell you, in strategic partners and the industry as a whole. We are very proud of the pledge and the stance that we've always taken at Arlo, which is it's not our data. It's your data. It's a customer. We're servicing it on your behalf. If you choose to share it to somebody, that's fine, but we are not taking that data and using it in unexpected ways or sharing it with third parties without your permission or anything else. And I will tell you, I think that's helped in the consumer market. And we're hearing that from the channel, and we're hearing that from our customers directly. But like I said, I think it's having a big impact with potential strategic partners. So when we talk to some of the accounts and some of the partnerships -- partners that we've mentioned on the call and some of the ones that may be coming, this is increasingly a topic of discussion and something that they're using to make their decision on where to put their investment from a relationship perspective. So I think it's why Arlo is winning in most cases, when it comes to driving strategic partnerships and having that be part of our growth going forward as part of our long-range plan.

When you talk -- you asked about what's the revenue contribution when we look at the 20% or more service revenue. A big portion of that is still just the core business growing. We're capturing share at retail. We're driving more households. We have current strategic partners that are helping drive that as well. You will see some contribution on the service revenue line, as Kurt was saying. A chunk of that will be NRE and some of the nonrecurring fees that we're working with. And that's 1 of the reasons you're seeing the normal ratio of ARR to service revenue changed just a little bit because we don't treat NRE as recurring. We treat it as service revenue only. And so you'll see that change just a little bit, like you saw in Q4. So there will be a contribution in service revenue as we execute the engineering and the integration with some of these partners. But I would tell you, I think then when you look at ARR or the service recurring component of a lot of those relationships, you're right, we'll see a little bit of that in the second half. But I think what you'll see in more materiality will be in 2027 as those launch and ramp and have time to actually saturate into the marketplace.

As far as adjacencies, we haven't really included any of that in the plan. We really are looking at maybe doing tests, some investments in that area. So again, I think it's more of a setup for 2027 growth when you look at ARR and service revenue. But you'll see some of that come in by the second half. And there's more information we'll share probably either before or at the next call.

Great. It's very comprehensive. And if I could, from an investor standpoint, the concerns I've been getting a risk from a feedback standpoint has been around privacy, which you've addressed, but also AI in terms of marginalizing the recurring revenue stream and the opportunity and what Arlo provides as basic services. I wonder if you could quickly address that again. I know you had some comments in your opening remarks, but I'm wondering if you could dive deeper. And then as well, concerns about memory, not just in terms of pricing but also availability, particularly as we get into the second half of this year, how that impacts you and how you guys are thinking about it?

Yes, I'll answer the AI component and then I'll let Kurt talk about the supply chain from an operations perspective. I think the AI market and the potential for disintermediation that we're seeing in the broader software market, really just doesn't apply to us. And I think it's 1 of the key differentiators that Arlo has over most of the market when you look at it like an AI SaaS-based market, if you're looking at the broader category. And a lot of that is due to our relationships with our customers derive from a hardware component that they purchase and vest and that draws a linkage to then our cloud services. So there's no way to actually disintermediate and actually drive different AI services to those cameras. They are locked to our back end. It's part of our security mechanism, and we are the only 1 that provides those services. So there's an inability to actually be disintermediated that doesn't exist in many markets, and that's driven from our dual relationship with the end user. It's a hardware relationship that starts right when they purchase the devices and get them installed, that then converts into an ongoing long-term service relationship that makes us very unique in that the user is actually investing in the relationship as much as we are. So it's something that I think is missed by a lot of investors when we get swept up in some of the concerns around AI. It's actually an advantage that I think differentiates us from a lot of what's happening in the marketplace.

Yes, Scott. And we, as you know, have been leaders in supply chain management for probably the better part of 15 years. The team that we have at Arlo had began at NETGEAR and has done a phenomenal job of building incredible relationships across the entire supply chain. And those relationships obviously bear significant benefits when you have a situation that's like unfolding today with memory. Memory costs have gone up, absolutely. Across our actual product ecosystem, it represents probably somewhere between 4% and 6% of the BOM cost and so it's not, I would say, overly significant to us. We look at it as just another element of that cost of customer acquisition because we use that particular product to gain access to a household and convert them into a service or paid household. What I would say to you is, is that we use the lower end of the DRAM spectrum type capacity, most of the stuff that's being highly coveted right now is sort of the high bandwidth memory, which is consuming a lot of capacity at plants. We have multiple suppliers that we can tap into. And at this point in time, in all of our discussions with our suppliers, we feel like the supply is available to us and any increase or incremental cost has already been factored into our medium- to long-term plan. So we're feeling pretty good about the situation. Obviously, we're monitoring it closely. And of course, as new information comes available, we'll make sure that we share it with you guys.

Our next question comes from the line of Logan Katzman with Raymond James.

This is Logan on for Adam. Kurt, maybe for you. We -- I think you mentioned product gross margins through 2026, we're expected to rebound off of the 4Q level here. I just wanted to get your thoughts on maybe gross margins in 2026 and more specifically, product gross margins and your thoughts on the cadence there.

Yes. Logan, yes, let me just clarify a couple of things. So when we came out of Q3, our product gross margin was in, I think, around the negative 17% range. And we had heard from various investors that, that was a bit concerning because it had bounced up a little bit relative to what we were presenting in the first half of this year. And then what you saw in Q4 is it actually came back about 300 basis points. We reported negative margins of about 14.4% for product in Q4. We were pleased with that. We've obviously been very focused on ensuring that we keep our product costs in check. As we communicated in Q3 into Q4, when we launched the third generation of products that Matt mentioned earlier, we brought down the BOM cost anywhere between 25% and 30%. One of the challenges we had in the third quarter of last -- of 2025 was we also had the added cost of welling a lot of the existing legacy products. So that impacted our product margins. What I communicated about 2026 was that in Q1, we do expect the product gross margin to continue to bounce back a bit. Currently, right now, the first half of 2026 looks pretty strong from a device standpoint. And we're feeling really good about the way we're managing our product margins given the 25% to 30% BOM cost down that we communicated earlier, and our ability to manage the promotional sort of the depth and the frequency of promotions at this point. So all we're saying is, is that we're watching it very closely. We know that it factors into the overall combined gross margin. We hold ourselves accountable to growth in that combined gross margin. And frankly, when you look at the 2025 combined gross margin and the growth that, that occurred over 2024, we were extremely pleased with that. We also believe that going into 2026, we'll continue to see that growth. And so we'll keep you posted. But right now, we're feeling really good about the way we're managing our overall combined gross margins, given that our services margins are still trending in that 84% to 85% range, and our actual product margins are manageable where they are right now and using that particular element as our cost of customer acquisition .

Great. That's super helpful. I appreciate it. And then I guess as my follow-up, I just wanted to get your guys' thoughts on what you guys are currently seeing in your international markets and the opportunity you guys see there in I know 1 of your largest partners just went public, and it's pain maybe doing some expansion. So just curious you guys have thoughts in 2026 around the international?

Yes, it's a great question. So you're correct. So obviously, our European partner, Verisure went public in October. They've raised a bunch of capital, obviously, using that capital for growth. So when we look out at least over the first half of this year, where we have already forecast, we're expecting some strength and continued growth from that region. So I think that we're starting off really strong there. And they are moving into Mexico and potentially some other areas that they've talked about publicly. And so there was likely some growth there. We are also actually spending more time looking at some of our other regions that we spent less time focused on as we've been driving just core growth in the business. And so you will likely see a little bit more growth in areas like Canada, Australia and New Zealand and some of those some areas that we're going to start pushing a little bit investment in as we think they're ripe for some additional share gain. So international expansion, I would say, is something that we are working on and expecting some strong results as we go into 2026.

Our next question comes from the line of Anthony Stoss with Craig-Hallum.

It's Rian on for Tony. you know, Matt, for you. You mentioned last quarter shelf share nearly doubled on basis with Walmart. And we've seen or more chatter against home security cameras coming out of China in the U.S. I'm curious your thoughts around any further potential share gains or if you're hearing anything from your retail partners regarding that?

Yes, it's a really good question, and there is a lot of different, I would say, vectors of activity that we're seeing there. So one, like I said and like you mentioned, is we are able to capture additional share in several areas. One was, obviously, Walmart, like I talked about as far as our product launch. That product launch also drove additional assortment at other retailers and obviously, e-commerce. We'll be launching additional products to use as I talked about earlier, that will help us capture some additional share and assortment across the retailers. So I'd say that's one.

Two, we are looking at expanding into some additional retailers over the next 6 to 9 months as well. And so there's some discussions going on there. So I think there's incrementality just from that perspective of us being able to capture some incremental shelves across our key markets. I would say also that some of the key retailers and some of our channel partners are realizing that having a very large assortment, meaning many different brands isn't really a path to success. And so they're looking at actually consolidating down to maybe a smaller number of brands on the shelf as we look at this year and probably going into 2027. And that's something, obviously, will be 1 of the brands that get to remain on the shelf and actually capture a little bit more share, at least mind share or shelf share from a relative perspective. So I think you'll see that trend continue. And then there's various areas that you touched on the import of cameras from specifically China, as an example, and a couple of brands that are being investigated at the federal level and in some cases, some state level. That is continuing. And I think the activity there has accelerated. We're seeing actual formal actions being taken at the congressional level at some of the Department of Homeland Security and other areas of the federal government. And there's likely to be some action sometime this year that could block the import of 1 or 2 brands that could open up as much as maybe somewhere between 10% and maybe 20% of unit volume in the United States to be captured. So what we're doing is we're following that. it's from at least an informational perspective and actually working with some of the federal agencies and congressmen that are actually pushing some of these activities. At the same time, we are making sure that our products, especially the products we just launched are priced correctly positioned correctly and are in the right channels to be able to attack that share if it becomes available. So I think it's more likely than not something happens this year and Arlo's ready to capture additional share above and beyond the share capture that we're working on with just organic activities across the channels.

Got it. Super helpful. And then just I could just piggyback on kind of the retail partner stuff on a more broad level. So volumes were strong in 2025. I'm curious, it's early in the year, but do you have any thoughts on '26 unit volumes or just overall consumer demand? Anything that you're hearing on that front?

Yes. I would say third-party data is just coming out. And I think what you'll see when that third-party data comes out is they're expecting the overall market to be flat to maybe up 5% to 10%. And so kind of a typical year-over-year, we endeavor to grow faster than that as always because we'll be capturing share. What I would tell you is, so far, year-to-date, we're seeing a stronger results. And I would say, from a consumer demand perspective than what maybe the third-party data suggests. So I would say the year is off to a good start from at least a consumer confidence perspective. It is a little bit week by week as we're having snow storms and other quick shutdowns and things that are happening. So there's a little bit of volatility. But overall, I think the year is off to a very good start, and it supports our annual operating plan and the forecast that we're putting together. So I think it's going to be a normal year-over-year growth from a third-party data perspective, and then we're going to outperform that going forward.

Right. Great. And congrats on the results, guys.

Thank you.

Our next question comes from the line of Hamed Khorsand with BWS Financial.

So first question I have was any reason why the cash balance didn't grow so much as your profitability did this quarter compared to Q3?

Yes. So we ended the year at $166 million and we generated on the year close to $68 million of free cash flow. What you don't see in the numbers is that during the year, there was 2 pretty sizable areas of investment we made for our capital allocation plan. First thing is, in the beginning of the year, we made an investment in a company called Origin Wireless. That was about $12.8 million. It's really the first investment that we've made in a technology or IP play, and that's worked out pretty well for us.

The other thing is that we actually invested $45.5 million in the share repurchase program. So we returned capital to our shareholders of $45.5 million. So when you look at just the cash balance and the overall year-over-year growth, given the free cash flow that was generated, you have to take into consideration those factors to get to really what the overall business is generating. When we look forward into 2026, we expect free cash flow to continue to grow. We do believe that we can grow free cash flow upwards of $80 million. And so we'll look at that in relation to the capital allocation program that Matt talked in depth about as part of his prerecorded remarks.

Okay. Maybe I missed it back, I was referring to the difference between Q3 and Q4. It was only less than $1 million. Was there any share buybacks in Q4?

Yes.

Okay. That's what I missed. And then as far as the investment into your partnerships with Comcast and Samsung, does that require any CapEx spend for you this year?

There will be a level of investment we'll need to make. Actually, that is a thing we've factored into our 2026 guidance that we will be putting some of our OpEx away to invest in things like R&D and sales and marketing. So we already started that planning. And given that those projects in the development phase have already kicked off, that will be factored into -- that is factored into our guidance.

Thank you for your questions. There are no further questions registered. That will conclude today's call. You may now disconnect your lines.

Ladies and gentlemen, thank you for standing by. [Operator Instructions] I would now like to turn the conference over to Tahmin Clarke. Please go ahead, sir.

Thank you, operator. Good afternoon, and welcome to Arlo Technologies Third Quarter 2025 Financial Results Conference Call. Joining us from the company are Mr. Matthew McRae, CEO; and Mr. Kurt Binder, COO and CFO.

If you have not received a copy of today's release, please visit Arlo's Investor Relations website at investor.arlo.com.

Before we begin the formal remarks, we advise you that today's conference call contains forward-looking statements. Forward-looking statements include statements regarding our potential future business, operating results and financial condition, including descriptions of our revenue, gross margins, operating margins, earnings per share, expenses, cash outlook, free cash flow and free cash flow margin.

ARR, Rule of 40 and other KPIs, guidance for the fourth quarter of 2025, the long-range plan targets, the rate and timing of paid subscriber growth, the commercial launch and momentum of new products and services, the timing and impact of tariffs, strategic objectives and initiatives, market expansion and future growth, partnerships with various market leaders and strategic collaborators, continued new product and service differentiation and the impact of general macroeconomic conditions on our business, operating results and financial conditions.

Actual results or trends could differ materially from those contemplated by these forward-looking statements. For more information, please refer to the risk factors discussed in Arlo's periodic filings with the SEC, including our annual report on Form 10-K and our most recent quarterly report on Form 10-Q filed earlier today.

Any forward-looking statements that we make on this call are based on assumptions as of today, and Arlo undertakes no obligation to update these statements as a result of new information or future events.

In addition, several non-GAAP financial measures will be discussed on the call. A reconciliation of the GAAP to non-GAAP measures can be found in today's press release on our Investor Relations website.

At this time, I would now like to turn the call over to Matt.

Thank you, Tahmin, and thank you, everyone, for joining us today on Arlo's Third Quarter 2025 Earnings Call.

Q3 was another record-breaking quarter for Arlo across numerous performance and financial metrics. I'll start by highlighting our outstanding SaaS business, which continues to grow and propel Arlo to new heights.

We added 281,000 paid accounts during the quarter, well above our target range of 190,000 to 230,000 and which drove our total paid accounts to 5.4 million. This performance was driven by net additions in our retail and direct channel, coupled with stronger performance from our partner, Verisure. I'd like to take a moment to congratulate Verisure on their recent acquisition of ADT Mexico and their successful initial public offering last month. Their success is so well deserved, and we look forward to continuing to be a part of their growth and outstanding execution across their expanding footprint.

Arlo Secure 6, our latest AI-based security platform, is also driving our performance with users finding substantial value in the features and capabilities. In our retail and direct channel, average revenue per user was over $15 per month, and the lifetime value of each user grew to over $870, a new record for Arlo. These metrics helped propel Arlo's annual recurring revenue to $323 million, up 34% year-over-year and another record for the company, while service gross margin expanded 770 basis points to more than 85%.

In addition to this impressive service performance, Arlo also executed the largest product launch in company history during the quarter, comprised of new platforms and products across our Essential, Pro and Ultra product tiers. These platforms not only bring a 20% to 35% reduction in BOM costs and new form factors such as pan, tilt, zoom, they also contributed to a nearly 30% year-over-year unit sales growth in Q3. These new products are receiving high ratings from both professional and user reviews, which call out the ease of setup, high performance and new capabilities across the lineup.

The execution of this product launch and transition was nearly flawless. Arlo launched over 100 SKUs simultaneously across channels on time despite several shipping and weather disruptions, all while managing the [ ex-ramp ] of inventory for a smooth transition. This is extraordinarily difficult to achieve, and a huge congratulations and thank you to the Arlo cross-functional teams on this exceptional outcome. There are very few companies in the world that have successfully developed world-class capabilities in both the Software Service segment and the hardware device segment. This quarter is a great illustration that Arlo is one of those rare companies that can not only excel in both areas, but also bring these segments together to create compelling user experiences and drive real shareholder value. And that could not be more obvious based on our full Q3 results and profitability.

Adjusted EBITDA was up 50% year-over-year and reached $17 million. GAAP earnings per share was $0.07 in the quarter, a new record for Arlo. And year-to-date, we reported a massive $0.35 improvement compared to the first 9 months over last year. And looking at our services business in a Rule of 40 context, Arlo achieved a result of 46, which underscores the elite performance against all peers in the SaaS space.

Looking ahead to Q4, Arlo is exceptionally well positioned in a competitive market with our new product launch, and we expect to see 20% to 30% unit growth year-over-year, which sets us up well for service revenue growth heading into 2026. And we continue to see great progress across our strategic accounts, including Verisure driving growth via their IPO, Allstate deploying kits to home insurance customers and ADT testing units in the field ahead of next year's market launch.

Expect more announcements in this area over the coming quarters.

Given this performance, it is clear that Arlo is making excellent progress against our long-range plan targets of 10 million paid accounts, $700 million in ARR and an operating income of over 25%.

Now I'll turn it over to Kurt for a more detailed review of our Q3 results and our outlook ahead.

Thank you, Matt, and thank you, everyone, for joining us today. During the quarter, we again delivered outstanding financial results driven by our commitment to our services-first strategy. Every decision that we make as an organization is centered around delivering an innovative and value-added smart home security experience that drives annual recurring revenue, and these efforts are yielding strong results.

As Matt mentioned, the LTV generated by our paid accounts is at an all-time high and ensuring that we continue to fill the acquisition funnel and drive our subscriptions and services revenue is paramount to delivering best-in-class SaaS metrics and achieving our long-term financial goals.

Now on to the results for the quarter. Subscriptions and services revenue was $79.9 million, up 29% year-over-year, driven by a significant increase in ARPU and a great pace of paid account adds over that same period. This strong performance is largely due to the introduction of our new AI-driven Arlo Secure 6 rate plan offerings.

Additionally, our intense focus on enhancing customer journeys and delivering a differentiated value proposition drove new paid accounts to select our premium rate plans and existing customers to upgrade to higher rate plans.

Paid accounts continued their strong growth trajectory as we generated 281,000 paid subscribers in Q3.

We exited the quarter with a base of 5.4 million paid accounts, an increase of 27% year-over-year.

Improving ARPU trends and the growth in our retail paid account base reflects our ability to guide customers to our higher-value AI-enhanced service levels and in turn, drove our annual recurring revenue to $323 million, up 34% over the same period last year.

Total revenue for the third quarter came in at $139.5 million, up slightly from the prior year period, with our subscriptions and services revenue comprising 57% of total revenue, up from 45% in the same period last year. This level of predictable and recurring service revenue is the key driver of our substantial improvement in profitability and our ability to deliver best-in-class SaaS metrics, including ARR growth.

Product revenue for the period was $59.6 million, down $16.2 million or 21% when compared to the prior year and as a result of the industry-wide decline in ASPs as well as the frequency and depth of promotional campaigns, especially in Q3 as we promoted our end-of-life or EOL products to make way for the sell-in of our broader next-generation product portfolio.

We continue to drive new household formation by optimally pricing our products to increase POS volume and utilize the devices as a subscriber acquisition vehicle.

The refresh of our product portfolio offers a considerable reduction in BOM costs, enhancing our competitiveness across various price tiers while also helping to offset some of the tariff impact.

And with the upcoming holiday season, we are leveraging this portfolio to help accelerate the growth trajectory of our subscriptions and services revenue.

Given the outstanding subscriptions and services gross margin and expanding profitability with each new paid account, our decision to sacrifice product gross margin for durable, highly profitable subscriptions and services revenue is an easy one.

We view a modest decline in product gross margin as part of our cost of customer acquisition. And even after considering the incremental investment, we are still delivering a best-in-class LTV to CAC ratio in the range of 3x.

Our goal to drive solid POS volume and gain access to additional households in Q3 occurred as planned, and we expect a similar outcome in the fourth quarter. We believe the strategy insulates us from certain external market factors and drive shareholder value, and we will continue to lean into this approach during this Q4 holiday selling season.

In Q3, international customers generated $58 million or 42% of our total revenue, down from $66 million or 48% in the prior year period related to the increased level of subscription and services revenue from our U.S. retail business and the successful launch of our new products.

Verisure continues to be an important partner for us in Europe, and we thank them for their continued collaboration and expect them to remain a solid growth driver in the future. From this point on, my discussion will focus on non-GAAP numbers. The reconciliation from GAAP to non-GAAP figures is detailed in our earnings release, which was distributed earlier today. Our non-GAAP subscriptions and services gross margin was 85%, again, a new record and up 770 bps year-over-year.

The significant growth in services gross margins is attributable to enhanced ARPU, coupled with a reduction in the cost to serve our customers, including lower storage and compute costs.

Product gross margins were negative, representing a modest decline when compared to the same period last year. The decline in product gross margin is related to the full quarter impact of tariffs approximating $5 million, coupled with industry-wide ASP declines and planned promotional spend on EOL products to optimize inventory levels ahead of our recent product launch.

Even withstanding these items, we reported consolidated non-GAAP gross margin of 41%, up 540 bps year-over-year. Our continued improvement in profitability in a period where the full impact of tariffs was experienced underscores the significant ancillary benefits that the shift to our services enterprise provides us.

Total non-GAAP operating expenses for the third quarter were $41.1 million, up 6% from $38.7 million in the same period last year. The year-over-year increase is primarily driven by app store fees and an increase in personnel to support R&D investment as we launch our new innovative product offerings and Arlo Secure 6 this year.

Our leveraged go-to-market approach has enabled us to maintain our operating expenses at roughly $40 million per quarter or less since 2022, while growing ARR at a 37% CAGR during that period, which is truly remarkable.

For the third quarter, adjusted EBITDA was $17.1 million or an adjusted EBITDA margin of 12.2%. The growth in adjusted EBITDA represents a 50% increase year-over-year and a powerful testament to the operating leverage created by scaling our subscriptions and services business.

Further, we generated non-GAAP net income of $18.1 million for the third quarter and $53.3 million for the 9-month period ended September 30, which was up an impressive 68% when compared to the same period last year.

Regarding our balance sheet and liquidity position, we ended the quarter with $165.5 million in cash, cash equivalents and short-term investments. This balance is up about $19 million since September of 2024, even withstanding certain strategic investments and our ongoing share repurchase program.

We generated record free cash flow of $49 million during the first 9 months of the year, representing a free cash flow margin of almost 13%.

Our Q3 accounts receivable balance was $76.7 million at quarter end, with DSOs at 50 days, up from 45 days in the same period last year.

Our Q3 inventory balance was $44.4 million, down from the $52 million level in September of last year and a testament to the amazing job that our supply chain team has done with optimizing inventory levels ahead of our portfolio refresh. Inventory turns were 6.4x, up from 5.8x last year as we sold in inventory for one of our largest product launches in history.

Now turning to our outlook. Even with the full impact of tariffs during the period, our business generated outstanding financial results driven by the resilience of our subscriptions and services business.

The recent launch of our innovative product portfolio gives us dry powder to remain competitive given the solid reduction in BOM cost. We will leverage our new products and competitive ASPs to drive strong POS volume and accelerate paid subscription growth. As a result, we expect our Q4 consolidated revenue outlook to be in the range of $131 million to $141 million.

Additionally, we expect non-GAAP net income per diluted share for Q4 to be in the range of $0.13 to $0.19.

And now I'll open it up for questions.

[Operator Instructions] The first question comes from Adam Tindle with Raymond James.

I just wanted to start maybe on margins, obviously, acknowledging that gross and operating margin overall is quite healthy here. But when we look at the components, you had your largest launch with a 20% to 30% BOM cost reduction that you talked about, but product gross margin is still pressured. I understand there's a number of moving parts driving that. Maybe the question would be, if you could just remind us the accounting method for inventory and wondering if that BOM cost reduction is maybe not fully reflected in the Q3 results that we're seeing. And secondly, there's an inventory clear out that you mentioned. I wonder if you could, Kurt, just help us quantify that. Is that something that was -- what did it do to impact in the quarter? And does it carry into future quarters from here?

Yes. Adam, let me just start by saying, as we've discussed in the past, we are very much focused on our consolidated gross margins, and we were extremely pleased by the fact that if you look at the third quarter consolidated gross margins relative to last year, we were up about 540 bps. If you look at that margin on a year-to-date basis, we're up about 640 bps.

So as we've mentioned before, we hold ourselves accountable to continue to grow consolidated gross margin, and we'll continue to do that here in the upcoming future. As it relates to the product gross margin you're referencing, Adam, we were at -- on a non-GAAP basis at about 17% -- negative 17.3%.

What's embedded within that number is a number of things. So first and foremost, obviously, we had the first full quarter of tariffs. If you actually look at it closely and you strip out tariffs, that margin actually would decline to about a negative 8%. So small -- or I would say, a pretty significant shift from the 17% and in that range of, say, high single digits.

Additionally, we did have a fair amount of EOL investment that was necessary to make sure that all of the inventory in the channel was at the right levels, which would enable us to load in the right amount of inventory on the next-generation platform of products that we just rolled out. So there was a fair amount of upfront spending to encourage promotional activity to move that inventory through. That inventory has now been moved through, and we feel really good about where we stand right now as we go into the fourth quarter.

So I have to say that we're extremely pleased with the fact that if you look across all of our operating metrics, especially our profitability targets, whether it's adjusted EBITDA, non-GAAP operating income, gross margins, they are all moving up and to the right, and we're extremely pleased with the overall performance of the team in this area. That's helpful.

Yes. And it provides obviously a platform for future growth in margin when some of these temporary items rebound as well. So it makes sense. Maybe a follow-up, Matt. There's a number of growth drivers in the future as well for the business. I know you addressed some of the partnership in particular in your prepared remarks. So I want to ask a question on 2 of those. First is on Verisure. You mentioned the ADT Mexico piece of this. I wonder if that's maybe a broader opportunity for Arlo to expand more in Latin America in general.

Would that need to be sort of a separate RFP process for you to win? Or do you have sort of visibility into that as an opportunity? How big could that be?

And then secondly, on ADT itself, you mentioned they're testing units ahead of the market launch. Just wonder -- I understand you're probably going to be a little bit limited on what you can say here, but any framework that you can get as you get closer to this in setting investor expectations on the magnitude of that partnership?

Yes. Great question. And when you talk about growth drivers, Adam, you're 100% right when we're focused on a couple of areas. One is, as Kurt was just mentioning, the growth in our normal channels like retail channels, and that's going really well. We mentioned on the call that units were up year-over-year by nearly 30% from a POS perspective, and we expect somewhere between 20% and 30% growth there.

One of the other areas is exactly what you're talking about, what we call strategic accounts or our more B2B plays. There's a couple, and you mentioned some of them. So the ADT Mexico acquisition by Verisure, I believe, actually closed yesterday. in European time. And we've been actually working with them, as you probably could guess, behind the scenes for months, if not actually quarters, preparing and actually certifying all of our products for Mexico. So there's no incremental business to win. As you know, we are, at this time, the exclusive provider of some of the back-end service for them.

We do a lot of camera development for them, both on Arlo product for those certain regions, but also some custom products that we've developed for them. So our expectation is that ADT Mexico acquisition by Verisure is kind of the first area they're focused on with potentially a more bigger expansion across Latin America. So it is a new region, I think, for the partnership to expand into over time and drive a lot of growth for both companies.

So we're excited -- really excited about that. Then you look at EDT, I can't say a lot about EDT beyond what I said on the call, except that from an Arlo execution perspective in conjunction with that partner that we hit all the timelines we needed to hit, and there's actually product in the field. And from a user experience perspective, it's stellar.

So we're really excited about talking more about that in the future, and we'll leave that to the date that, that actually goes live.

And then I mentioned on the call that this is an area that we're excited about, and you should expect some more information over time. There are several other partnerships that we're in discussion with. And I expect between now and probably the end of Q1 or maybe going slightly into Q2, we'll have a couple of more sizable name brand accounts in the partnership space that we'll be talking about that could have a material impact on us going forward.

So if you -- if I pull back and talk about how we get to our long-range targets that we talked about on the call, the 10 million subscribers, the $700 million in ARR and increasing that operating income over 25%. Kurt and I on previous calls, have said we think about 60% of that incremental growth over where we are today is going to come from strategic accounts. And I would tell you, based on recent activities and some of the things we can talk about and some of the things that are coming soon, I absolutely believe that's the case that we'll see 60% of that incremental growth come from strategic. And that's saying a lot because we think the traditional channels, retail and direct are growing really nicely, and we think there's a lot of growth there.

So hopefully, that gives you a little bit more color on those specific accounts and where we think this part of our business is headed over the next couple of quarters.

[Operator Instructions] The following comes from Jacob Stephan with Lake Street Capital Markets.

Nice quarter. Just wanted to ask, you guys made some comments last call, gross shipments in Q3 will be higher than you had originally expected. And you also kind of mentioned 20% to 30% unit growth as we look at the second half of the year here in Q4 specifically. But maybe you could help us kind of think through -- we saw higher negative margin in the products segment, but products actually -- product revenue was actually higher than we kind of had anticipated. And I understand that tariffs are part of the impact there. But maybe help us kind of contrast that with where you expect -- because it seems like you guys are a little bit above plan in Q3. And maybe I'm wondering if there's any kind of pull forward into Q3 versus what's going to be in Q4?

Yes. There's no pull-in. I mean it was a very strong quarter. And to kind of break that down a little bit, the growth ship number is obviously strong because of the ex-ramp and the load-in of all of our new products. We always have a little conservativeness built in when we do the forecast for the quarter because there's a lot of things you can just run into from a supply chain logistics perspective.

And I kind of mentioned on the call, we had a -- there was a container ship that caught fire in Korea. There was containers dropping in the ocean in Long Beach, none of ours, by the way. There were 2 typhoons. I mean, so there's always some things going on. And again, the team here executed exceptionally well around all of that, and we landed all the product where we needed to on time.

And so I would say is that little bit of buffer we leave in for supply chain issues maybe during the quarter, we didn't need. And so you saw a pretty strong quarter on gross ship.

The 20% to 30% or the inside the quarter, the 29% growth on year-over-year units, that's actually our forecast and results on POS. So how many units actually sold through the channel. And we like to talk about the growth that we're seeing there, 29% in Q3 and the 20% to 30% we're anticipating in Q4 because, as you know, shipments out really then become household formation, which then becomes service revenue, which is what's obviously driving the outstanding performance of the company and the expansion of profitability over time. So that's -- the gross ship number, Q3 is always strong because of seasonality. I think it was exceptionally strong because of the execution of the team and the load-in of so many new products. But the 29% in Q3 and the 20% to 30%, that's actually commentary on POS, which actually leads to future service revenue.

Yes. Understood. I know you guys run a tight ship on the logistics team. But maybe kind of help me think through some of the more important partners then as we enter kind of the back half of the year here. Obviously, you guys have bigger shelf share at Best Buy. You're kind of growing into a longer-term partner -- a bigger partnership with Walmart. Help me think through some of these strategic kind of retail partners?

Yes, absolutely. I mean I think just commenting on Q4 in general, we know it was going to be a very competitive quarter. We're seeing great demand in the channel. So that's a good sign as we roll forward on Q4, but we knew it was going to be a competitive quarter, and you can see us preparing the entire company to actually be really successful inside of a competitive environment. So the product launch with 20% to 35% COGS declines as an example of that. A lot of the promotional activity we've got lined up with our biggest partners. Some of those are obviously Amazon, which is a big part of the market. We're actually gaining some share there week by week, and so we're happy about that.

You mentioned Walmart. I mean, Walmart is part of our thesis around this product segment going more mass market. And we're seeing a wider population actually enter the space as the awareness over the product category and people feeling less safe in general is starting to drive. And we've been proven right over the last couple of holiday seasons. So we're expecting a strong holiday season with Walmart as well. And that's the channel as we've launched in our new product line, we've gone from 4 SKUs or 5 SKUs to closer to 9 SKUs at Walmart, so almost a doubling of shelf share there. And that's partially what's driving some of the unit velocity year-over-year from a quarter basis and why we feel like we're going to be exceptionally positioned with this product line going throughout 2026.

So from a partnership perspective or where we think some of the growth is coming, it's across the board. I think we'll see strength in our strategic accounts. And then a lot of our big retail partners were set up, I think, very well for what will be a competitive quarter, but something we completely anticipated with our product launch and our promotional activity. And for us, as you know, it's really about driving that household formation to see that service revenue grow through the end of the year and actually tip over into a strong service quarter in Q1.

Got it. And maybe just kind of continuing on the service revenue growth question and comments. When we look at paid sub adds of 281,000, maybe you could kind of help us piece out the timing of those subs in the quarter, obviously, keeping in mind your $310 million service revenue guidance for the full year.

Yes. I think it was pretty much through the quarter. There are some that kind of came a little bit later as we promoted the older product through the channel that Kurt was talking about, some of the EOL product towards the end of the quarter as the new product came in. So it might be a little bit more backloaded than you would expect over maybe a traditional just very linear trajectory through the quarter. But that 281,000 was really driven by 2 things.

One, Verisure performed very well, and I think that was part and parcel of their IPO and going to market there and just really leaning into sales and executing extraordinarily well in Europe. But we're seeing strength in our retail and direct channel. as well, which is great. And so you see a more balanced revenue line when Kurt was talking about the split between Europe and the United States. So you're seeing some strength across our traditional channels.

Another indicator of that is what I was saying before around seeing nearly 30% unit growth in the quarter. Now if you remember, when we guided the year on service revenue, we guided close to $300 million in service revenue.

And on our last call, already seeing what was happening in Q3, we took that up to closer to $310 million. And so that's the confidence we're seeing. We are already seeing some of that sell-through happen in Q3 on the previous call and why we were willing to kind of bring up that guidance to demonstrate how strong not only the lift and the growth in the market of unit sales going through to the end user, but that it is resulting in higher than originally expected service revenue, which obviously leads to greater profitability.

Thank you. This concludes today's conference call. You may now disconnect.