ARLO Q3 Deep Dive: SaaS Expansion and Product Refresh Shape Mixed Market Reaction

Smart security company Arlo (NYSE:ARLO) announced better-than-expected revenue in Q3 CY2025, with sales up 1.4% year on year to $139.5 million. The company expects next quarter’s revenue to be around $136 million, close to analysts’ estimates. Its non-GAAP profit of $0.16 per share was 8% above analysts’ consensus estimates.

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StockStory’s Take

Arlo’s third quarter results were met with a negative market reaction, despite the company delivering revenue and non-GAAP earnings that modestly exceeded analyst expectations. Management attributed performance to strong growth in paid SaaS accounts, the commercial launch of its Arlo Secure 6 platform, and a significant new product rollout that drove nearly 30% year-over-year unit sales growth. CEO Matthew McRae pointed to the company’s “record-breaking quarter for paid accounts and annual recurring revenue,” with a notable shift toward higher-margin service revenue. However, management acknowledged that product gross margins remained under pressure due to tariffs and promotional activity required to clear prior-generation inventory.

Looking forward, management expects continued unit growth and service account expansion to drive results, supported by a refreshed product lineup and expanding partnerships. McRae highlighted that Arlo is “exceptionally well positioned in a competitive market,” noting ongoing progress with key partners such as Verisure and ADT, and targeting further strategic account wins in the coming quarters. COO and CFO Kurt Binder added that the company plans to “lean into competitive pricing and promotional activity” during the holiday season to accelerate household formation and paid subscriber growth. Management believes that this strategy, along with recent reductions in bill of materials (BOM) costs, will help offset tariff headwinds and support profitability.

Key Insights from Management’s Remarks

Management credited the quarter’s results to rapid growth in paid subscriptions, a major product launch, and effective channel execution, while noting continued gross margin pressure in the hardware segment.

• Paid account growth: Arlo added 281,000 new paid accounts in the quarter, surpassing expectations and bringing its total to 5.4 million. This was driven by both retail/direct channel strength and strong partner performance from Verisure, which benefited from its recent expansion into Mexico. Management emphasized that higher average revenue per user (ARPU) and lifetime value metrics reached new highs, signaling improved customer monetization.
• Arlo Secure 6 adoption: The introduction of the AI-powered Arlo Secure 6 service plan contributed to a 29% year-over-year increase in subscriptions and services revenue. Management noted that new and existing users are increasingly opting for premium rate plans, supporting recurring revenue growth and driving annual recurring revenue (ARR) to $323 million, up 34% from the prior year.
• Major product portfolio refresh: The quarter included Arlo’s largest-ever simultaneous product launch across its Essential, Pro, and Ultra lines. These new offerings featured 20%–35% reductions in BOM costs and new features such as pan, tilt, and zoom. Management highlighted successful execution in launching over 100 SKUs across channels despite supply chain and weather-related disruptions.
• Product gross margin trade-offs: While consolidated gross margins improved due to the services mix, product segment margins remained negative, impacted by tariffs and promotional spending to clear end-of-life inventory. Management described this as a deliberate strategy to drive household formation and accelerate the shift to recurring revenue.
• Retail channel and geographic mix: International revenue declined as a proportion of total sales, reflecting stronger U.S. retail channel performance and the impact of the new product lineup. Management stated that growing shelf space at major retailers, especially Walmart, contributed to higher unit velocity and broader market reach.

Drivers of Future Performance

Management expects service revenue and paid account growth to remain central, underpinned by new product momentum and expanding strategic partnerships.

• Holiday season promotions: Management plans targeted promotional activity and competitive pricing during the upcoming holiday period to drive increased device sales and accelerate the funnel of new paid subscribers. This approach is expected to support both household formation and future service revenue, even if it weighs on product margins in the near term.
• Partnership and channel expansion: Strategic accounts—especially partnerships with Verisure and ADT—are anticipated to be the primary drivers of incremental growth. Management indicated that approximately 60% of future subscriber and ARR growth will depend on these channels, with new partnerships in Latin America and expanded shelf space at mass retailers like Walmart seen as key growth levers.
• Tariff and cost management: Tariff-related cost pressures remain a headwind for hardware profitability. However, management expects that reductions in BOM costs from the refreshed product line, along with an increasing mix of high-margin service revenue, will help offset these impacts and support consolidated margin expansion.

Catalysts in Upcoming Quarters

Our analysts will be closely tracking (1) the pace of paid account additions and ARPU growth following the holiday season, (2) tangible progress on strategic partnerships, particularly further announcements related to Verisure and ADT, and (3) the impact of promotional activity and BOM cost reductions on consolidated margins. We will also monitor whether Arlo can sustain momentum in retail channel expansion and successfully navigate ongoing tariff pressures.

Arlo Technologies currently trades at $14.49, down from $16.92 just before the earnings. At this price, is it a buy or sell? See for yourself in our full research report (it’s free for active Edge members).

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