Arlo Technologies Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2025

Key Takeaways

  • Positive Sentiment: Arlo delivered an outstanding Q2 with total revenue of $129 M (+YoY and sequential), service revenue up 30% to $78 M, non-GAAP service margin at a record 85%, and non-GAAP EPS of $0.17 (up 70%).
  • Positive Sentiment: The company added 218 k paid subscriptions in Q2, reaching 5.1 M total, raised quarterly paid add guidance to 190–230 k, and reported ARR of $316 M (+34%), achieving a Rule of 40 score of 48.
  • Positive Sentiment: Launch of Arlo Secure 6 drove retail ARPU above $15 and subscriber LTV to $840, with further ARPU expansion expected as remaining annual subscribers migrate to the new structure.
  • Positive Sentiment: Arlo is executing its largest product roll-out ever—over 100 new SKUs with lower BOM costs (20–30% reduction)—and targets 20–30% camera unit growth in Q3 and Q4 despite tariff headwinds.
  • Positive Sentiment: A strategic partnership with ADT signed in June is set to materially boost subscriptions and services revenue starting in 2026.
AI Generated. May Contain Errors.
Earnings Conference Call
Arlo Technologies Q2 2025
00:00 / 00:00

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. I would now like to turn the conference over to Tom and Clark. Please go ahead, sir.

Speaker 1

Thank you, operator. Good afternoon, and welcome to Arlo Technologies' second quarter twenty twenty five financial results conference call. Joining us from the company are Mr. Matthew McCray, CEO and Mr. Kurt Binder, COO and CFO.

Speaker 1

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 2025, the long range plan targets, the rate and timing of paid subscriber growth, the transition to a services first business model, 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 ks and our most recently filed quarterly report on Form 10 Q earlier today.

Speaker 1

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. 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.

Speaker 2

Thank you, Tom and thank you everyone for joining us today on Arlo's second quarter twenty twenty five earnings call. Arlo's performance in the quarter was nothing short of outstanding. Total revenue came in at $129,000,000 up year over year and up over $10,000,000 sequentially. Service revenue hit $78,000,000 up 30% year over year and is now more than 60% of our total revenue, while non GAAP service gross margin increased to a record 85%. This performance propelled non GAAP earnings per share to $0.17 up 70% year over year and GAAP earnings per share to a profit of $03 a massive swing from a loss of $0.12 a year ago.

Speaker 2

The growth and profitability of subscriptions and services business continues to drive record results across the company. And you'll remember at the beginning of the year, we commented about our confidence that Arlo would be one of only a handful of SaaS companies achieving Rule of 40 performance in 2025. For those keeping score, our annual recurring revenue or ARR hit $316,000,000 which is up 34% and adjusted EBITDA rose to $18,000,000 up an incredible 82% and achieving an EBITDA margin of 14% for the quarter. That means our subscriptions and services business delivered a Rule of 40 score of 48 in the second quarter. Diving deeper into our retail and direct subscription business, camera unit sales were up 30% year over year.

Speaker 2

To date, we continue to experience strong customer demand across the channels and recently surpassed our forecast for the important Amazon Prime Day event. Arlo added 218,000 paid subscriptions to reach 5,100,000 at the end of Q2. And Verisure reported that their paid account catch up is complete and we expect that Verisure now has the ability to report these metrics within the quarter of deployment going forward. This visibility allows us to increase our estimated paid account range to 190,000 to 230,000 per quarter, reflecting the higher underlying performance and normal seasonality. And the launch of Arlo Secure six, our robust AI security service platform helped drive retail and direct subscriber monthly ARPU to over $15 in the quarter, growing our subscriber LTV to eight forty dollars This trend of ARPU expansion will continue through 2025 as the remaining pool of annual subscribers migrate to our new AI service plan structure.

Speaker 2

In addition to the acceleration of our subscription business, Arlo will be executing the largest product release in company history with more than 100 new SKUs launching throughout our channels this fall. We will be updating products across our Essential, Pro and Ultra segments and introducing new form factors including pan tilt zoom designs and additional low cost powered options. Our new Canimer lineup has resulted in a larger assortment and more shelf space inside of our key channel partners. This significant product launch coupled with the aforementioned expansion of our LTV means we are planning an aggressive holiday season, very similar to 2023 where we brought down device ASPs and generated strong growth in our services business. For both Q3 and Q4, Arlo is targeting between 2030% camera unit growth year over year.

Speaker 2

And finally, I'm happy to announce that in June, we signed a strategic partnership with ADT, the largest security company in North America. We are working closely with them on key technology integrations and we will provide more information closer to market launch. ADT is a significant strategic account and will provide material upside to our subscriptions and services revenue starting in 2026. As I look ahead to Q3 and the balance of the year, Arlo could not be in a stronger position despite the volatility and external headwinds buffing the macroeconomic environment. Our incredible services performance coupled with a lower cost basis for our new product lineup is insulating us from the tariffs, which we view as a small increase in our customer acquisition cost.

Speaker 2

And with a world class LTV to CAC ratio and subscriber retention, we will remain focused on growing our subscription and services business, which is directly contributing to our excellent financial performance. Arlo just reported the best first half in our corporate history. We are guiding to a strong Q3. We are again reaffirming guidance for the full year. And we believe our 2025 service revenue estimate of $300,000,000 will be closer to $310,000,000 while our full year subscription and services gross margin will exceed our original estimate of 80% and land closer to 85.

Speaker 2

In June, Arlo celebrated the achievement of our original long range plan. We hit 5,000,000 paid subscribers, dollars 300,000,000 in ARR and over 10% operating income more than two years earlier than anticipated. That momentum is clearly continuing as evidenced by our results today and we believe we are well positioned to hit our new long range plan of 10,000,000 paid accounts, dollars 700,000,000 in ARR and over 25% in non GAAP operating margin early as well. And now I'll turn it over to Kurt for a more detailed review of our Q2 results and our outlook ahead.

Speaker 3

Thank you, Matt, and thank you everyone for joining us today. During the quarter, we again delivered outstanding financial results driven by our high growth SaaS business model that we described to you on our year end 2024 conference call. This quarter's results continued to show success in acquiring new subscriptions through our highly efficient retail channels and strategic partnerships and converting those households to paid accounts, leveraging the value proposition of our subscription services. Then we focused on increasing ARPU through the deployment of compelling service offerings, including personalized AI capabilities, which translates into expanding annual recurring revenue with high subscriptions and services gross margin. Customers continue to recognize the value of our service offerings as strong ARPU trends drove our stellar financial results during the period, most notably another quarter of record subscriptions and services revenue.

Speaker 3

Retail ARPU in the second quarter rose to $15 accelerating 12% sequentially and 26% year over year to deliver $78,000,000 in subscriptions and services revenue. This growth was driven by new customers continuing to select our premium service tiers as well as the realization of the full financial benefit in this quarter of our structured rate plans. Strong ARPU growth and customer retention combined with our optimized LTV to CAC ratio are the backbone of our performance in Q2 and into the future. Our subscriber base maintained its strong growth trajectory as we exited the quarter at 5,100,000 paid accounts, an increase of 29% year over year. In Q2, we generated 218,000 new paid additions, handily exceeding our prior range of paid subscriber additions.

Speaker 3

As Matt mentioned, with strong subscriber momentum and the Verisure true up behind us, we have increased visibility to establish a new target of 190,000 to 230,000 paid subscriber additions per quarter. Improving ARPU trends and continued strength in paid additions drove our annual recurring revenue to $316,000,000 up more than 34% over the same period last year. Total revenue for the 2025 came in at $129,000,000 up slightly from the prior year period. Remarkably, subscriptions and services revenue comprised 60% of total revenue, up from 47% in the same period last year. Our extraordinary transformation to a subscriptions and services organization underpins our success in generating best in class SaaS KPIs and financial results that compare favorably with other highly regarded software and security companies.

Speaker 3

Product revenue for the period was $51,200,000 down in comparison to the prior year due principally to the decline in ASPs that has been prevalent across the entire industry. As previously discussed, we believe that prospective customers have a propensity to enter the Arlo ecosystem through a lower up upfront cost of device acquisition coupled with a competitive monthly recurring fee for ongoing services. This successful subscriber acquisition strategy has spurred our decision to further reduce our product cost in order to gain access to new households across the broader security market. Our experience is that each incremental paid account generates $840 of lifetime value with SaaS level gross margins, thereby making the trade off more than worth it. This strategy is evident as we continue to deliver consistent point of sale device volume growth, a trend which is expected to continue through the remainder of the year.

Speaker 3

Our commitment to this strategy enhances our overall profitability even in a period of rising costs, tariffs and other external factors which are not within our control. The revenue contribution from our international operations declined as a proportion of our total revenue, primarily due to the increased level of subscriptions and services revenue as well as seasonal stocking factors. Our international customers generated approximately $50,000,000 in Q2 or 39% of our total revenue, down from $64,000,000 or 50% in the prior year period. In the EMEA region, Verisure continues to be a primary driver of our international revenue, a trend we expect to continue. From this point on, my discussion will focus on non GAAP numbers.

Speaker 3

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%, a new record and up eight fifty basis points year over year. The favorable trend we are experiencing in services gross margin is attributable to expanding ARPUs driven by a larger mix of subscribers activating higher tiered service plans, coupled with a reduction in storage and other costs to serve our subscribers. Product margins declined when compared to the same period last year related to industry wide ASP declines as well as the depth and frequency of promotional activities. It is notable that product margins were also impacted by the introduction of tariffs in the quarter.

Speaker 3

But as we have communicated, tariffs have no impact on subscriptions and services revenue and the related profitability. We were able to expand our consolidated non GAAP gross margins to 46%, up nearly 800 basis points year over year and including the impact of tariffs, which represented a gross margin headwind of approximately 100 basis points in the period. This positive outcome underscores our exceptional operational performance as well as highlights the significant impact that our substantive shift to subscription and services is having on the profitability of our business. We also expect to benefit from the broad refresh of our device portfolio in the second half of the year. We will leverage promotional campaigns in Q3 to optimize the existing inventory levels and ensure a smooth transition to our new expansive device platform.

Speaker 3

This will enable us to drive household formation even in the face of declining ASPs, tariffs as well as the general macroeconomic environment. Total non GAAP operating expenses for the second quarter were $41,700,000 up 6.6% from $39,100,000 in the same period last year. The year over year increase is primarily driven by higher credit card fees associated with in app subscription processing with an additional impact from an increase in R and D. We capitalized $2,000,000 of software development costs to prepare for the launch of our new portfolio of products and investments made to advance the final phase of the Arlov Secure six platform rollout, which we expect later this year. For the second quarter, adjusted EBITDA was $18,000,000 an 82% increase year over year and a great testament to the operating leverage generated from scaling our subscription and services business.

Speaker 3

Adjusted EBITDA was not only driven by our revenue growth, but also by our disciplined focus on cost containment. Our profitability continued to be remarkable, again generating record levels of non GAAP net income of $19,000,000 for the second quarter, equating to non GAAP net income per diluted share of $0.17 Regarding our balance sheet and liquidity position, we ended the quarter with $160,400,000 in available cash, cash equivalents and short term investments. This balance is up $16,400,000 since June 2024, even withstanding certain strategic investments and our share repurchase program. We generated record free cash flow of $34,000,000 during the first six months of the year, representing a free cash flow margin of almost 14%. Our free cash flow margin increased three fifty basis points and our free cash flow in absolute dollars was up 33% over the same period last year.

Speaker 3

Our Q2 accounts receivable balance was $61,000,000 at quarter end with DSOs at forty three days, down from forty four days last year. Our Q2 inventory balance was $31,000,000 down from $45,000,000 last year. Inventory turns were 7.7 times, up from 5.8 times last year as we focus on reducing our existing inventory to optimal levels in preparation for one of our largest product launches in history. We expect that our portfolio refresh will result in a meaningful reduction in BOM cost, thereby creating an effective tool to mitigate both the regulatory and competitive environment. Now turning to our outlook.

Speaker 3

Even with the uncertain macroeconomic environment and the rollout of the global tariffs, our business continues to generate strong financial results and remains bolstered by the scale, predictability and profitability of our subscriptions and services business. The composition of our services revenue insulates us from macroeconomic volatility and is driving the overall profitability of the business as evidenced by the ongoing expansion of our consolidated gross margins. We expect the benefits from new strategic partnerships will begin to materialize in our financial results later in the year with a much greater impact to our business in 2026. Our new devices, which include a reduction in BOM cost, will be launched in Q3 enhancing our competitiveness while offsetting some of the increased tariff impact. To date, our supply chain team has done a phenomenal job optimizing our inventory levels, including inventory that sits in the channel with our retail partners.

Speaker 3

Our engineering, product, and operation teams have also flawlessly executed the portfolio refresh, enabling our new essential products to ship earlier than planned. As a result of these efforts, our gross shipments for new devices in the third quarter will be higher than we originally anticipated, driving our consolidated revenue outlook to the range of $133,000,000 to $143,000,000 Additionally, we expect non GAAP net income per diluted share for Q3 to be in the range of $0.12 to $0.18 Looking at our full year 2025 outlook, based on the significant increase in paid additions and ARPU, we expect to generate subscriptions and services revenue above $310,000,000 in 2025, growing at over 27% with non GAAP subscriptions and services gross margin at 85%. And finally ARR of $335,000,000 at year end, up over 30% when compared to the prior year period. And now I'll open it up for questions.

Operator

Thank you. Our first question comes from the line of Jacob Steffen from Lake Street. Your line is now open.

Speaker 4

Hey guys, appreciate you taking the questions and congrats on a great quarter here and start to the year. Maybe first I'll ask on the ADT partnership. This is obviously big news, but maybe if you could kind of help us understand what this partnership is actually about. Is it more of a Verisure like agreement or is it similar to what ADT and Nest have tried to do in in a couple of years ago? Kinda help us think through this a little bit.

Speaker 2

Yeah. So so, obviously, ADT is a is a important name in the security space, and and I they've been doing very well if you've been following them. I think you're you're seeing them start to innovate more than their peers, which is really exciting. And so there's not a lot I can share at this time. It is a partnership that will involve devices and and service revenue.

Speaker 2

The overall structure of the deal is unique, though, so I I wouldn't compare it, to Verisure or any any other deal. And I think you'll see us able to announce more information around, the partnership, you know, either right close to the end of the year or maybe right at the beginning of the year after, you know, a major trade show or something like that. So stay tuned. It is a, you know, it is a substantial deal. It's one of the two that I've been hinting at for the last couple of earnings calls when we got it done in June.

Speaker 2

And we're really looking forward to it, you know, getting rolled out and executed in 2026.

Speaker 4

Okay. Got it.

Speaker 5

Next, just wanted to focus on

Speaker 4

the product launches. Maybe if you could help us think through the 1,000 new SKUs you plan to launch? And how does that relate to kind of the holiday season commentary where you expect 30% unit growth and overall more aggressive pricing? Can you help us think through kind of the margin pressures there and also what you're expecting for kind of the back half in revenue?

Speaker 2

Yes. So I give you an idea around the launch. So like we said, it is the largest device launch in in our company history. It's well over a 100 SKUs going into multiple channels simultaneously. The I will tell you, you know, from a status, and you probably inferred that from the call, things are going great.

Speaker 2

We're green across the board from a development, and a lot of those SKUs are already in manufacturing, and some of them are already arriving, here in The United States. So, it's it's on time. You heard Kirk kinda talk about more of that shipping in q three than maybe our original annual plan, which is great because that gives us extra time, to optimize shipping and airship and things like that. So it's a very large, product launch, across multiple SKUs, like I said, over a 100 SKUs. It's not just lower costs.

Speaker 2

So we do reduce the cost. If remember, the cost will be, you know, lower from anywhere from 20 to over 30% from a COGS reduction perspective. That gives us a lot of dry powder to react to the tariffs, which primarily hit, you know, product gross margin and the devices are imported in The United States. But gives us dry power to actually dig a little bit deeper on promotions and make sure that we're growing the services business at the pace that we think is appropriate and will be accretive to the overall shareholder value. But in addition to that cost down, it's actually an expansion of the product line into several new categories.

Speaker 2

And that's important because not only do we, you know, get a few new SKUs that end up online, but in physical shelf, you'll see us actually capture a diff additional shelf share in some of the most critical partners like Walmart. And that usually can lead to capture of market share, as you're, you know, growing through through, the rest of the year through the holiday period, and then this will be our main line up, you know, that we start the year for. So it is, it is substantial. You'll see, you know, us getting more aggressive on ASPs, very much like we did in 2023. If you remember, we came in at the same earnings call two years ago and said we're gonna dig a little bit deeper and see what the impact is on our services business.

Speaker 2

It was, you know, outrageously accretive to the business, and it's somewhere where we learned a lot about how far we could drive the services business. And so you're gonna see us do that again and actually look at the tariff impact as a small increase in CAC and us using some of that dry powder also reduced price. And again, that's driving what you mentioned, which is roughly 20% to 30% camera unit growth year over year for both q three and q four, which will then, you know, accelerate, service revenue towards the year, which is why we raised our estimate for service revenue and ARR at the end of the year, and it'll leave, you know, a little momentum going into q one as well.

Speaker 4

Understood. Very helpful. Congrats again, guys.

Speaker 2

Yes. Thank you very much.

Operator

Thank you. The next question comes from the line of Scott Searle of Roth Capital. Your line is now open.

Speaker 6

Hey, good afternoon. Congrats on the quarter. Thanks for taking my questions. Matt, maybe just quickly in terms of net adds this quarter, can you give us a little bit idea what channels those are coming through direct versus some of the different retailers? I know we've got international, but kind of domestically where you're seeing that pull through.

Speaker 6

And I just want to get some clarification in terms of the product gross margins as we go into the third quarter, Kurt, and how we should be thinking about it. You've got tariffs that are some headwinds, but you got the cost down coming in pretty hard and you guys are going to be aggressive on that front. So how should we be thinking about that and modeling that as we go into the second half of this year? And then I had a follow-up.

Speaker 2

Okay. Yeah. Scott, I'll take the the first part. As far as the the growth we're seeing in in net ads, it it was pretty much across the board. So I so I can't tell you that a very specific channel did a lot better than others.

Speaker 2

I think we executed extraordinarily well at Amazon, and that that we're actually capturing some share there. But even, you know, Best Buy and Walmart, contributed as well, in addition to, obviously, Verisure and our other partners. So I would tell you that, and I mentioned this on the call a little bit, we are seeing general strength in the consumer, across our different channel partners and and seeing still healthy conversion in paid subscribers. So I wouldn't say there was a specific call out. We're seeing just general strength and and consumers remain remaining very strong for us all the way through, like I mentioned, Prime Day where we were above forecast.

Speaker 2

But that's really, you know, that's really landing in this quarter.

Speaker 3

Yes, Adam. As it relates to the, the gross margin, obviously, we were extremely pleased with the results and our gross margins, this quarter. As we mentioned, we grew our combined gross margin over 800 basis points, and we did that on the back of really our service gross margins, which tapped out about 85%. You noted the the product gross margin. Yeah.

Speaker 3

That actually came in, what we would say, in mid teens. We were comfortable with that, especially considering that it drove the high POS volume that Matt mentioned earlier, and we expect that to continue in in the second half. There'll be two things we're focused on. First and foremost, we're gonna continue to focus on driving our services gross margin to that 85% or higher level. We'll continue to focus also on our combined gross margin to show that that is growing year over year and continues to in the second half.

Speaker 3

We'll do that by managing basically the, ASPs for our devices and keeping that, at a level where we're pushing the envelope on the POS, but doing it responsibly so we can continue to sell gross margin expansion. Now there is one other dynamic that's in play, and I'm probably you're probably alluding to that, and that is we do have the the tariff impact. We anticipate right now that the tariffs will probably run about 300 to 400 basis points per quarter, against our combined gross margin. We're pleased to say that we feel like we have a path to cover all or substantially all of those through the reduced BOM and other techniques. We feel like we're in a good spot, and that was part of the reason why we confirmed our services gross margin of 85% for the full year.

Speaker 3

And we feel really comfortable indicating that we have an ability to grow our combined gross margins year over year.

Speaker 6

Great. Very helpful. And Kurt, if if I could just follow-up on the front, maybe competitively, have you guys done the assessment then in terms of the impact of the competition from a tariff standpoint versus where you stand? And Matt, just a lot going on, very exciting stuff, ADT certainly at the top of the list. But in terms of other strategic and other adjacencies, I I wonder if you could give us some thoughts and priorities.

Speaker 6

I think insurance has kind of factored into there that as well in terms of Allstate. But there's also the monetizing unpaid accounts and other adjacencies I think there's been some announcements around things like elder care. So I'm kinda wondering how all that fits in over the next couple of quarters and and how you prioritize things. Thanks.

Speaker 2

Yeah. No. It's a it's a good question. So I would tell you that there's progress on on nearly all fronts. You know, if if you remember at the beginning of the year, we said that, we were seeing a lot of momentum around strategic accounts.

Speaker 2

They do take a while, you know, to sign and and get announced, but we are seeing an interest level that's higher than we've ever seen before, from a partnership perspective. You know, I balance that with focus. So, you know, ADP is obviously gonna be a very large focus for us and making sure we're executing that as as a very good partner through the rest of this year so that we have, success with them next year. There's a couple more, that we are spending some time on right now that are very close, that will you know, I can't tell you what they are today, but they're, exciting opportunities for us in the strategic accounts area. And then we have been executing, additional opportunities to drive additional, service, service acquisition.

Speaker 2

You mentioned one, you know, going after our, active but unsubscribed base. And I will tell you, we we are seeing success, using our ad platform. You know, we're we are we do have ads rolled out to non subscribers and actually converting those over to paid accounts. Relatively small. I think it's couple thousand people we've already done, just in the last thirty days or so.

Speaker 2

But that's an area of focus as well because as we migrate people from, obviously, unpaid active to paid subscriber, that's actually a good list on, gross margin and overall service revenue. So I would tell you, you know, we're gonna we're gonna stay focused on maybe the two or three that are the most active through the rest of this year, but are just starting to do our 2026 annual operating plan. We're just kicking that off in the next couple weeks. And I I would tell you the plate is absolutely full, and it'll be up to us to actually distill that down to the things that we think can be material in '26 going into '27. As far as competition, I'll just jump in and answer that as well.

Speaker 2

So from a competition perspective on the tariff, I would tell you, I think we are at either a similar playing field or in an advantage against the competition in the marketplace. So as you know, we source a lot of our product from Vietnam. Over the last twelve to eighteen months, a lot of our competitors have moved to Vietnam or moved some of their product at least, to Vietnam as well. So that would be, you know, an area where we would have maybe similar tariffs. And then there are many competitors that are still remain in China and other areas that will actually, right now, at least, have a higher tariff.

Speaker 2

So it's still evolving as you know. Some of the tariffs have been announced and they they're locked in as of today. Some are still in a temporary suspended execution of an older tariff until deals are done. So at this point, I don't think we're at any disadvantage, absolutely. We are typically either in line with some of our competition or actually in a better position.

Speaker 2

And I would tell you most of our competition don't they do not have the same service revenue and service gross margin to pull from. So if you were a pure hardware provider and you just had a 20% or 25% tariff hit, obviously, that's a really big impact to your business. For us, like we mentioned on the call, it's a small increase in CAC. And so our propensity is to, stay aggressive through the holiday period and focus on unit growth, and absorb the tariff in various ways that Kurt was talking about, to make sure that we're growing service revenue at the rate that you're seeing today.

Speaker 6

Great. Thanks so much. Very exciting times. I'll get back in the queue.

Operator

Thank you. Our next question comes from the line of Adam Tindle of Raymond James. Your line is now open.

Speaker 7

Okay, thanks. Good afternoon. I wanted to start the $15 retail ARPU was obviously an impressive and surprising number to the upside. On that, maybe one for Matt or Kurt, if you want to weigh in. With the price increases in the services plans, I just want to confirm, is that now on that $15 retail ARPU in Q2 entirely reflected, in the current run rate, or is there anything incremental from here?

Speaker 7

And then secondly, as we kind of think about sort of framing, this year from a services revenue growth standpoint, You know, based on this updated guidance, you're gonna be growing, you know, close to 30% year over year. Of that, I mean, is there a way for us to just kind of think about how much contribution for that 30% was related to price increases just so we don't get ahead of ourselves as we think about 2026 where where that may not repeat?

Speaker 2

Yeah. Hey, Adam. It's good to talk to you. I'll I'll tackle the first. So, as you remember, we, announced the new plan structures in January for new subscribers and then migrated our existing customer base through the course of February.

Speaker 2

So when you look at q one, you know, I would say roughly on average, you know, it was just over 50% of quarter was impacted by the Arlo Secure six plan structure, rollout. Q two is the first quarter where we had a full quarter's impact, and that's why you see the ARPU jump, all the way up to 15. Now you asked me, are we gonna continue to see it arrive? You will. It'll be slower.

Speaker 2

So the rest of, the year, we'll see ARPU increase, as well, and that'll be mostly people who are on annual plans coming up for their plan renewal onto the new pricing structure. So we had a a good increase in q one, a full impact in q two. You'll see a bit more, rise up in q three and q four and probably actually a little bit q one too as we see some of the annual plans in q one actually kick over in, 2026. So, a larger jump this quarter, but you'll see that kinda generally rise at a slower rate through the next three quarters.

Speaker 3

Yeah. And then in terms of impact, so we look at impact really through three lenses. Obviously, you highlighted price. We also look at the overall mix and then, of course, sub ads. And as we highlighted in the, earlier commentary, we not only have, executed extremely well on the price equation, but most recently, we uplifted our overall quarterly estimates on the number of sub ads growing that to a 190,000 to a range of 230,000.

Speaker 3

Now, if I had to look at the split, it's probably one third, one third, one third across all of those areas. I would say that our team, in particular, our subscription and and and customer journey team has been executing extremely well and identifying ways to really tweak and improve all the key metrics, whether it's subscriber retention, whether it's the conversion rate, you name it, to ensure that we're hitting on all cylinders and growing all three of those key areas. So as we look forward into the future, really, our key objective is to continue to grow our services revenue plus 20% out into the future, and that's what we're all motivated and incentivized to do here as part of the management team.

Speaker 7

Yep. Makes sense. I think investors will appreciate that. Just as a follow-up, kind of mechanical on the product side, I just want to understand two different dynamics that are going to happen here over the coming quarters. On one hand, with your existing inventory, you are working to effectively take down channel inventory, which makes a ton of sense before a huge launch.

Speaker 7

We wanna have sort of a clean channel. I wonder, you know, that and kind of thinking about the financial implications and the potential headwind from that, if you could help us sort of frame that piece. And then the second part is the tailwind then from the launch. Obviously, a massive launch that you have, you know, the impact to sell in on, from a product standpoint, you know, kind of those two different dynamics. If you could sort of help us frame the financial implications and timing of each, that'd be helpful.

Speaker 3

Yeah. So I I would say that, obviously, the the third quarter is a big quarter for us. As we mentioned, it's gonna be important quarter because we have or we are highly incentivized to to ship in, and our gross ship will be higher than we had originally anticipated. That means, ultimately, we believe that the product revenue, will be a bit higher in q three as we load in in preparation It really starts towards the '3 and continues into the fourth quarter.

Speaker 3

Why it's tricky is you have a combination of things that are in play here. First and foremost, as you mentioned, we have a subset of SKUs that we have to EOL. End of life is what that means. And so we have been working on bringing that down. That has been partially reflected in our current product gross margins and will be, reflected somewhat in q three product gross margins.

Speaker 3

So that's the first dynamic that's in play. The second dynamic that's in play is we are balancing out, the impacts of the tariff and also our ability to manage shipping through air freight and sea freight. And so we're doing everything possible to manage that profitability such that we optimize that and ensure we don't gap out. And then the third thing that's at play is we we know that our new product SKUs all have really a benefit of 20% to 35% on the COGS level. So the sooner that we ship those in and get them to retailers, the better we can use that favorable costing to offset some of these other costs in place.

Speaker 3

So that's the dynamic that we're executing against in the third quarter. But I have to reiterate, we've been extremely impressed with our product engineering ops team and the way they've executed flawlessly to date, and we expect to have a really strong third quarter as evidenced by our guidance.

Speaker 7

Very helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Hamed Khorsand of BWS Financial. Your line is now open.

Speaker 8

Hi. So the first question is, is the sub ads a function of selling more units or is it the conversion rate? And the sub ads mean that you raised the guidance range now?

Speaker 2

Yeah. It's it's I would say more, to do with more units across multiple channels. So both partner, and in particular recently as we've gotten more aggressive and talk about the the camera unit growth on our retail and direct. So I I would say it's much more attributable to that, and that's us executing well, being a little bit more aggressive on promotions, and, you know, driving that business because it's so accretive on the service revenue level. There is a little bit here and there on conversion.

Speaker 2

Some of it is, you know, better in retention as well, but I would put most of it just to us capturing some share in the retail direct and some strong performance with our partners.

Speaker 8

Okay. And then you've been talking a lot about Q3 new product shipments happening in the channel. Does that imply that we could see service subscriber numbers actually increase quite a bit in q four?

Speaker 2

Yeah. The holiday period is usually a little more smoothed out. And what I mean by that is some of the product we will grow ship in q three. POS is typically in q four. And in the q four, we often see that some of that POS is actually bought, installed, and then goes through their thirty day trial and then may subscribe in q four.

Speaker 2

Some of that is actually bought stuck under a tree, isn't open for three, four weeks. Then there's a thirty tragic day trial, and maybe they they actually become a potential subscriber in q one. So it's a little bit more, you know, gross ship in q three becomes POS in q four, and then there's kind of a split of where those subscribers will land depending on what it was bought for and when it was opened and when it was installed and how they got through the free trial. But I think in general, obviously, more POS, more units shipped is more household formation will drive additional service revenue. And it's one of the reasons why we took our service revenue from roughly 300 up to three ten, is we think there will be a little bit of additional services hitting in Q4 than originally planned.

Speaker 8

Okay, great. Thank you.

Speaker 2

You're welcome.

Operator

Thank you. Our next question comes from the line of Ryan Boussan of Craig Hallum. Your line is now open.

Speaker 5

Hey, Kurt. It's Ryan on for Tony Stoss. Just one quick one for me. It looks like from the slides you guys posted and that the churn was about 1% monthly churn. I think historic historically, you talked about, you know, 1.1 to 1.3%.

Speaker 5

I mean, I I understand that it fluctuates a bit, but should we be thinking about churn closer to 1% moving forward?

Speaker 2

Yeah. I I would tell you that I think we're holding a range of 1.1 to 1.3, but, you know, Kurt just alluded that there is a lot of work being done on retention, save journeys, and things in the company that are it is having some impact. And so I think you're seeing some of that, impact at at 1%. I think we're still comfortable with the 1.1 to 1.3 just because of overall seasonality, and, and we're seeing units, kinda grow quite quick. But you are you are getting a hint of some operational improvements that the company is doing and individual team members are doing here, that we're seeing some benefit through.

Speaker 2

And I think the stars aligned a little bit and got us closer to 1% on the quarter. As you know, you know, things like conversion and the retention rate or or churn, say it another way, small changes can have a big impact on on the business and the service revenue profitability going forward. So there are a series of tiger teams inside the company looking at tenth of a percent changes over time and several of those kind of hit all at the same time in Q2. Great. Thanks, guys.

Speaker 2

Congrats on the results. Thank you very much. Thank

Speaker 3

you.

Operator

There seem to be no questions at this time. So this will conclude today's conference call. You may now disconnect your line.

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