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. [Operator Instruction] 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 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, free-cash flow margin, guidance for the second quarter of 2025, the long-range plan targets, the rate and timing of our 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, the effect of our brand awareness campaign on 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 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 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.

Thank you, Tahmin, and thank you everyone for joining us today on Arlo's first quarter 2025 earnings call. In Q1, Arlo added 298,000 subscribers in the quarter and ended Q1 with 4.9 million paid accounts, which is a 51% increase year-over-year. Average revenue per user or ARPU rose to a record $13.48, propelled by the continued success of Arlo Secure 5 and our new service plans. This resulted in subscriptions and services revenue of $69 million for the quarter and our annual recurring revenue grew to $276 million, both up over 20% year-over-year and new records for Arlo. This acceleration of Arlo's subscription and services business is the clear driver for our outstanding Q1 financial results. Our non-GAAP services gross margin of 83% is up 600 basis points from last year and contribute to our record free-cash flow of $28 million and earnings per share of $0.15, which is also a record for Arlo. And we expect this strength in our subscriptions and services business will continue in Q2 and throughout 2025. We expect strong growth in subscribers and additional ARPU expansion, as the benefits of our new Arlo Secure 5 plans penetrate our user base and read-through in our results. In fact, for the first five weeks of Q2, we have not seen any drop-off in demand across our channels and have already hit a key service milestone. Today, we announced we surpassed 5 million subscribers, which is ahead of our 2025 forecast and more than two years early compared to our original long-range plan. This is a significant milestone for the company and shows the incredible pace of growth for our subscriptions and services business, as we execute towards our new long-range plan of 10 million subscribers. And we don't believe the current tariff environment will slow-down this…

Thank you, Matt, and thank you, everyone, for joining us today. We delivered strong financial results during the quarter, continuing the significant operational momentum that we gained in 2024. I will start by sharing some financial details, then provide an overview of the business for the first quarter and finish by providing our outlook for the second quarter. Entering 2025 as truly a subscriptions and services first business, our installed base of subscribers continued its strong growth trajectory coming in at 4.9 million paid accounts, which was up 51% year-over-year. Our Q1 paid account increase still reflects some catch-up of the Verisure subscribers, while we were able to generate healthy new paid subscriber growth in the 170,000 to 190,000 range, a trend that we expect to continue in the future. The momentum behind our paid subscribers translated into another record quarter of subscriptions and services revenue, which came in at $68.8 million, a 21% increase over the same period last year. The strong services revenue performance was driven in-part by growth in the overall paid subscriber base, but was primarily related to higher levels of ARPU, which grew 7% sequentially and 15% year-over-year to $13.48. We are seeing ARPU accelerate as a result of the momentum from our new customers selecting our premium rate plans as well as the overall simplification of our plan structures. Our annual recurring revenue was $276 million, also up more than 20% over the same-period last year. The strength of our subscription and services revenue as well as our ARR generated strong top-line revenue performance and contributed to Arlo's record profitability, which I will discuss later. Total revenue for the first quarter of 2025 came in at $119 million, down slightly from the prior year period. Importantly, subscription and services revenue represented about 58% of…

[Operator Instruction] Our first question comes from the line of Jacob Stephan with Lake Street. Your line is now open.

Hey, guys. Appreciate you taking my questions. Congrats on the quarter. Maybe just to start, I'll kind of ask the tariff question in a different way. Are you thinking about any sort of inventory stocking kind of ahead of July 3rd, for which my perspective is that tariffs will be reinstated on Vietnam?

Well, we've been looking at our inventory levels for the past several months. If you look at actually how we ended-up the first quarter, I think we did a fantastic job of sort of leveling out our inventory on our balance sheet but actually pushing some of that inventory in the channel. And so now we're focused on making sure that between now and the first week of July, we capitalize on the available time we have to have sufficient inventory tariff-free or at least with a 10% tariff available for us to ship. There's a whole host of different things that are going into that right now. We're monitoring inventory levels almost weekly. We're in conversations with our suppliers on a -- every evening and we feel like we've got a good plan to attack it. As we've indicated in our remarks earlier, I mean, we feel great that as a subscription and services business, the majority of our revenue coming from services as well as the revenue that has been generated through product that has shipped to the EMEA are exempt from the tariffs. So, we're in a pretty good position all-in-all. So, but yeah, it's top-of-mind for us, Jacob. We're constantly looking and working with our supply partners and in-country trade experts to ensure we're optimizing the situation to our advantage.

Awesome. And maybe just to go a little bit deeper on what that means for kind of the second half in the product refresh. Do you expect that the products will be able to be shipped before kind of that July timeframe or -- obviously, I know that they're going to be a lower price to you, but does that give you enough time or will you -- you have to bear some of the tariffs on that?

Yes. So, here's what we know. We're under the 10% regime until July 8, actually. And then we expect, obviously, a lot of discussions to happen. We know -- as you know, we do a lot of lot of manufacturing in Vietnam and some in Indonesia. Vietnam was actually working with the White House Administration over the weekend -- over this past weekend. And so, I think what we're going to see is similar to what we actually saw announced with the UK this morning, I think the idea and the prevailing thought is that there's going to be deals done between now and the July timeframe. So, we really look at it in two different -- two different buckets. One is, we're assuming we're going to stay under this 10% regime until July 8. It could be less than that, but what we've shown is we're able to execute with these tariffs and look at it as a small increase in CAT with a focus on continuing to drive subscription. And like I said in the prepared remarks with LTV of $700. So being a services business insulates us from the tariffs that will happen on our hardware business. And again, like we mentioned, it's less than 25% of our business being affected. Then, I look at the second bucket, which is where your question is, which is what happens after July 8th. Again, we think it's more likely than not, there will be deals done with the areas that we do manufacturing. Those are underway. We don't know that. But if you couple that with the fact that our launch of these products, which most of them will not be produced before July 8th. So, most of the production for the holiday period will happen after July 8th.…

Okay, got it. That's very helpful. Maybe if I could just ask one more quick one on the ad platform. Obviously, it sounds like that's about to be launched here. But maybe you know, from my interpretation, it was going to be geared more towards advertisers and kind of larger brands. But it sounds like it's going to be more promoting upgrades in the subscriptions, upgrade to products. Can you just kind of walk me through that a little bit?

Yes. So, in our beta testing, and as you know, we talked about it last year when we said we go into beta testing in Q1. Obviously, we tested third-party ads, and we actually tested our own what we call house ads, so ads for good services and maybe discounts and hardware for Arlo. And we actually saw a really strong reaction, conversion and click-through on the Arlo ads. So, what we're doing in Phase 1 is we're going to roll-out and actually started on May 1. So, we've already rolled the ad platform out and we're going to specific cohorts and we're starting to pitch Arlo services. Phase 2 could be opened up to third-party, but I think the return on investment and what we saw in the beta testing as far as lift on conversion was strong enough that we think the right first step for this ad platform is actually to advertise our own services and hardware to the active users that we have across the world.

Okay. I appreciate it. Good luck going forward here guys.

Thank you.

Thank you for your questions. Our next question comes from the line of Logan Katzman with Raymond James. Your line is now open.

Hey guys, thanks for taking our question. This is Logan on for Adam. I just want to start on the international side. Europe was a little bit weaker, down 30% year-over-year. Just wanted to see if you guys could touch on a little bit more -- in a little bit more detail the drivers of that. And then I think you guys said that there was still some Verisure catch-up in your subs. Can you size that impact and then thoughts on when the Verisure catch-up should be done?

Yes, sure. Let me touch on the results from Verisure on the revenue. So, with Verisure, there's a couple of things that are in play. First-off is, we've seen over the five years or so of our relationship that they kind of have a destocking stocking timeline associated with their ordering and supply-chain. And if you go back in 20 -- the previous year, we were in more of a stocking coming into 2025. So, the inventory levels, I think were a bit higher in 2024, as we came into the first quarter of 2025. So that was the first thing. The second thing is that on Chinese New Year in this early 2025 was pulled forward. And so as a result of that, we were working with their supply-chain probably back in, I would say, September, October timeframe to make sure that we were able to order the product and deliver it towards the end of Q4, so that they had enough going into the first-quarter and didn't get jammed up on the accelerated timeline around Chinese New Year. And then the last thing is, there was a regulatory guidance that came out regarding USBC requirements in Europe. They required a switchover to make sure that consumer electronics companies were normalizing the connector points for all of the consumer electronics out there. And as a result of that particular changeover, we work with them to make sure that they had adequate inventory for purposes of their -- the retail business and that was done again in Q4, which did impact Q1 of this year. But I would say to you, the relationship is still very strong. The demand is very strong with them as it stands right now, and we're looking forward to having another good year with Verisure in 2025.

On the catch-up, just to answer the second part of your question on the catch-up, Kurt mentioned it in the prepared remarks, we had nearly 300,000 ads. If you back out the catch-up, we believe it was right in that 170 to 190 that we've been guiding the street. We think this is the last quarter of the catch-up. We don't often, no, we haven't seen anything pull-through in the first five weeks of the quarter. But what we're seeing so-far is batch processing that looks like it's the normal batch processing for ads that are going into their South region, which is the area that had the firmware issue that caused some of this stuff to have the catch-up. So, we did about 300,000. Normal would have been right between 170 and 190 right on plan and we think this is the last quarter that we'll see that catch-up effect.

Great. Thank you. That's super helpful. And then this is the second quarter that product gross margin was negative. And I understand the new devices are coming in at a lower cost to produce, but at least until those come in, do you expect a negative gross margin for product to hold? I understand you guys don't necessarily guide directly to it, but any high-level thoughts would be greatly appreciated. Thank you.

Yes. Thanks for that question. I guess what I wanted to do is start with highlighting what happened with our combined gross margins. If you look at our combined gross margins, they actually grew quite nicely quarter-over-quarter and year-over-year. If you look at quarter-over-quarter, we were up 800 basis-points on our combined gross margins and year-over-year, we were up 600 basis-points. Even taking into consideration that Q4 and this Q1, we were slightly negative on the product gross margin. So, I just emphasize that point because that is critical to understanding our strategy that we are comfortable using the device and the hardware as our cost of customer acquisition. And when we look at what's happening from whether it's a competitive dynamic or regulatory scenario, we still plan to use hardware as that customer acquisition tool. So, yes, we had negative gross margins in Q1, we'll evaluate the market conditions to determine how we want to play out Q2 and frankly, for the remainder of the year, but we're confident that we will show that our combined gross margins have the potential to continue to grow over-time. And we're pretty pleased by that because it shows kind of instantiates the overall effectiveness, our strategy that we're rolling out.

Understood. Thank you.

Thank you.

Thank you for your questions. Before our next question, we ask that all participants ask one question and one follow-up question. Our next question comes from the line of Scott Searle with ROTH Capital. Your line is now open.

Hey, good afternoon. Thanks for taking my questions. Nice job on the quarter. Hey, Kurt, just quickly to clarify your comments on product gross margins. It sounds like you get to 25% to 30% cost-down on the Series 6 platform as that starts to ramp-up. So, is the plan to continue to push with negative gross margins in the fourth quarter and into 2026 or to be determined on that front? And Matt, just to clarify in terms of some of your comments, the competitive landscape, and the impact on tariffs, what percentage of your competitors right now are really in that position of struggling with Chinese manufacturing? And what kind of share shifts are you seeing in the first several impacts -- first several weeks of impacts with that in-line?

Yes, maybe I'll go first and then Kurt can comment back on the product gross margin. Yeah, I would say pretty much every competitor you see in our segment is manufacturing in Asia. And the difference is -- I mean, if you put China aside, the differences then country-to-country are relatively small. So, I would say all of those companies that are not in China, they're in other areas of Asia doing manufacturing are in a similar boat. And I will tell you there are a couple, I won't name them, but there are a couple of brands that have relatively high-volume that are in China and obviously scrambling to get out because the tariff against China is actually so much higher than the others. I think the bigger impact is really is that competitor, do they have a robust and successful services business? To me, that's a bigger difference because even in your question around product gross margin, right, as Arlo, we're really a software and services business, right, subscription revenue business. And we use hardware as part of our cost of acquisition and acquisition of that customer, right? So, it insulates us so much from what's happening in tariffs because it's just a little bit more CAC, right? But we're still getting customers that are worth nearly $700 of long-term value. So, when I look at the market and the competitive set, what I can tell you is nearly 50% of the unit volume is likely to be hardware-only or hardware focused competitors and that's where we're seeing some of them start to falter. We're getting messages from our retail partners like, hey, do you guys have excess inventory? We're believing we're not going to get the inventory from some of our other -- other vendors that are…

Yes, Scott. And then in terms of the response on the product gross margin, let me just highlight that as we've mentioned in the past, our approach to the pricing on the product is more around driving POS, point-of-sale volume. And the whole concept there is we can continue to grow POS quarter-after-quarter means that we're filling our funnel with plenty of households, active households that we believe we can convert. And our conversion rates still are actually trending very favorably and that is a great thing. So, what we're doing is using that pricing on the product and the margins associated with it as that lever or that tool to ensure that the funnel is full and giving us that opportunity to convert households. The great thing is we're proving out to everyone that even in those scenarios, where product gross margins may go negative, it's okay because when you look at the growing margins on our services at 83% plus and you combine that with the product gross margins where they are right now, the combined gross margins are accelerating very nicely. And so, we're extremely pleased with the way things have actually rolled out here the last couple of quarters and we tend to be very aggressive on our promotional planning. And then in parallel with that, we're going to do everything possible, as Matt mentioned, to roll out this 20% to 35% cost reduction on the BOM to help us with these regulatory matters as well as to be competitive with our promotions.

Great. Thank you. And if I could just Matt, on the pricing on Secure 6, I'm not sure if we heard it, but should we assume premium pricing on that, or will it just be monetized in other ways like ads and otherwise as you would have been addressing? And any thoughts on other strategic partners within insurance or some of the other categories there? What's going on? How do we expect that to roll-out over the next couple of quarters? Thanks.

Yes. Yeah, good question. So, you know we made the changes with Arlo Secure 5, where we launched the platform in late Q3, early Q4, and we started seeing ARPU increase, we saw a mix-up to premium plans. Then our second step was to change the structure of our plans. Now we did that in January and most of that fed through in February, so there's a partial impact on the Q1 results. We'll see a bigger impact as we go forward on the business. But that also is growing ARPU and mixing people up to the plans. The changes we made in January were planned because we knew Arlo Secure 6 was coming. So, the plans that you see today and the pricing you see today, where we've really reduced the plans to just two options and they were the two most premium options that we had prior is really our Arlo Secure plan -- Arlo Secure 6 plans. We just made that plan adjustment a quarter before rolling out. Now normally, Arlo Secure 6 would roll out in Q3 timeframe. That's our normal timeframe kind of annualized timeframe for rolling out Arlo Secure 6. The testing and the development has gone so well. And I will tell you the event, scene descriptions and some of the more advanced AI capabilities are so strong from a user experience perspective, we decided to actually roll them out early. And so those are starting to roll-out throughout May and we're excited kind of tell that story and let users actually experience Arlo Secure 6 early and then you'll see additional features actually roll-out later in the year. But the plans that we had set in January, we're in anticipation of Arlo Secure 6. I think we're in a really good spot there. And then what was the second part of the question?

Oh, just an update on insurance and strategic partners in that area?

Partnerships, yes. Yes, sorry, strategic accounts. Yes, so they're progressing well. As you know, I said on the last call that I think there is probably one or two that we're really focused on. I think one just missed the finish line and there's something we'll talk about relatively soon. And then I expect to have another one maybe in the second half. So -- and I believe these will be sizable, good partnerships that we're very excited about and ones that we've been in work for six months plus. Those will come to fruition this year and have some impact, I believe, this year in the second half and then a material impact, as we look at 2026.

Thanks so much.

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

Hi. So, I just wanted to understand, given the dynamics of what's happening on your ARPU line, is that the increase coming because you're selling -- you raised prices or is that coming because of a natural increase from the retail channel?

Yes. So, if you're looking at ARPU, we're kind of -- I think there's a couple of facts. So one, when we launched Arlo Secure 5 in late Q3, early Q4 of last year, we saw a mix to the more premium plans and that started to bring ARPU from roughly $11 and change over $12 and changed. And then the planned changes we made in January, where we got rid of our basic plan and really just have plus and premium additionally is driving up ARPU as well. So, I think some of it is the feature sets, the rollout of Arlo Secure 5 and we're looking to build-on that momentum with Arlo Secure 6. And some of that is through all the data we collected post Arlo Secure 5, we've rearchitected the plans and simplified the plans and that's also driving ARPU up. Now to give you the latest numbers, I said Arlo Secure 5 took us from roughly $11 to $12 and changed as we exited out. We are now above $13, right, and actually, I think, headed towards $14. And I mentioned on the last call, when we look at and just take a snapshot of new subscribers coming in fresh, the ARPU is closer to $17. So that's what gives us the confidence that ARPU will continue to expand through the year as we continue to roll-out Arlo Secure 6 and the new plan structure through 2025 going into 2026. So, kind of $11 to $12 last year. We're roughly at $13.50 around right now, and we think that will continue to expand going forward driving not only service revenue, but profitability.

Great. Thank you.

You're welcome.

Thank you. I believe I've lost. There we go. [Operator Instruction] Our next question comes from the line of Rian Bisson with Craig-Hallum Capital Group. Your line is now open.

Hey guys, it's Ryan on for Tony Stoss. Most of my questions have been asked already, but I just wanted to get an update, see what you guys are seeing. It's good that ARPU is going up, service revenues are going up. What are you seeing in terms of churn and conversion rates? Any changes there maybe even positively?

Yes, great question. So, we're seeing basically improvements or in-line performance across all metrics. When we make changes in our service plans, now whether that's a structure change or a price increase, right. And our structure change was effectively a price increase and that's what you're seeing pull-through. Often, we'll see a spike in churn. And we did see a little spike in churn very similar to what we saw a year-ago when we changed single plan pricing and two years ago when we did a larger plan price increase. What I can tell you now is that that has actually returned to the norm and is continuing to improve. So, if the behavior we've seen through the plan changes is exactly as predicted. In fact, we have a churn steering committee and action group here, and we think we can actually improve it even more as we go-forward. But churn is exactly where we wanted to return right back to baseline is continuing to improve. Conversion looks great across all the different cohorts. Service revenue is going up, ARPU is going up and you saw us also expand profitability on the service -- from a service gross margin perspective. So, I would tell you every metric of our services business has a green light behind it and we think it will continue to improve through the year.

All right. Great. Thanks guys and congrats on the results.

Thank you.

Thank you for your question. That concludes today's conference call. You may now disconnect your line.