Arlo (ARLO) Q2 2025: Subscriptions Hit 60% of Revenue, Powering 800bp Margin Expansion

August 7, 2025 | By EarningsIQ Research

Arlo’s Q2 marked a decisive pivot, with subscriptions and services now delivering 60% of total revenue, up from 47% last year, and driving a nearly 800 basis point improvement in consolidated gross margin despite hardware headwinds. The company’s aggressive device pricing, record subscriber additions, and new strategic partnerships are fundamentally reshaping its business model, positioning Arlo for durable, high-margin growth. With major product refreshes and a landmark ADT partnership in the pipeline, Arlo’s transformation into a software-driven security platform is accelerating, but tariff and ASP pressure remain key watchpoints into 2026.

Summary

  • Services-Led Model Now Dominant: Subscriptions and services revenue now make up the majority of total revenue, insulating margins from hardware volatility.
  • Device Pricing Fuels Subscriber Growth: Lower device ASPs and expanded SKU launches are driving record household formation and recurring revenue.
  • Strategic Partnerships Set Up 2026: Initiatives like the ADT deal and new product lines are positioned to accelerate growth and margin expansion next year.

Performance Analysis

Arlo’s Q2 results underscore a profound shift from a hardware-centric model to a recurring, high-margin SaaS (Software-as-a-Service) engine. Subscriptions and services revenue surged to $78 million, now representing 60% of total revenue, compared to 47% a year ago. This structural change enabled consolidated non-GAAP gross margin to expand by nearly 800 basis points year over year, reaching 46% even as tariffs and declining device ASPs pressured product margins. Annual recurring revenue (ARR) climbed to $316 million, up 34% year over year, with paid accounts reaching 5.1 million, a 29% increase, and net subscriber additions exceeding guidance at 218,000 for the quarter.

Product revenue fell to $51.2 million, reflecting industry-wide ASP compression and promotional activity, but device unit growth remained robust due to Arlo’s strategy of lowering upfront costs to drive household penetration. International revenue as a share of total declined, with EMEA’s Verisur still a key contributor. Operating expenses were well contained, rising just 6.6% year over year, primarily due to higher credit card fees and R&D for the upcoming device refresh. Record free cash flow and improved inventory turns highlight operational discipline ahead of the largest product launch in company history.

  • Margin Expansion Driven by SaaS Mix: Subscriptions and services gross margin hit a record 85%, while product margins were pressured by tariffs and promotions.
  • Device Volume Offsets ASP Decline: Lower hardware ASPs are fueling more household formation and recurring revenue, with unit growth expected to accelerate through year-end.
  • Cash Generation and Inventory Management: Free cash flow margin rose to nearly 14%, and inventory turns improved to 7.7x, supporting the upcoming device portfolio transition.

Arlo’s performance validates its strategic pivot to recurring revenue and operational leverage, even as hardware headwinds persist.

Executive Commentary

"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."

Matthew McRae, President and Chief Executive Officer

"Improving ARPU trends and continued strength in paid additions drove our annual recurring revenue to $316 million, up more than 34% over the same period last year."

Kurt Bucholz, Chief Financial Officer

Strategic Positioning

1. Subscriptions and Services as Core Growth Engine

Arlo’s business model is now anchored by recurring SaaS revenue, with 60% of Q2 revenue from subscriptions and services. This shift de-risks the business from hardware cyclicality and enables SaaS-level gross margins. The company’s LTV to CAC (lifetime value to customer acquisition cost) optimization and premium tier adoption are driving ARPU (average revenue per user) higher, with the $15 retail ARPU now largely reflecting the new plan structure.

2. Aggressive Device Pricing and Portfolio Refresh

Lower hardware ASPs and the largest device launch in company history are central to Arlo’s strategy to drive household formation. By reducing BOM (bill of materials) costs by 20–35% and launching over 100 SKUs, Arlo is able to absorb tariff pressure, deepen retail partnerships, and expand shelf presence, particularly at key retailers like Walmart. This approach is expected to deliver 20–30% unit growth through the holidays, directly fueling future subscriber additions.

3. Strategic Partnerships and New Verticals

The ADT partnership, set to roll out in 2026, is a landmark deal involving both devices and service revenue. Arlo is also pursuing other strategic accounts and exploring adjacent markets, such as insurance and elder care, to further monetize its active but unsubscribed user base. Early results from advertising to non-subscribers are promising, providing incremental lifts to gross margin and service revenue.

4. Operational Leverage and Cost Discipline

Operating expenses remain tightly managed, with incremental increases tied to R&D and payment processing fees. Inventory management and channel optimization are enabling a smooth transition to new products, while free cash flow generation and liquidity remain strong even after share repurchases and strategic investments.

Key Considerations

Arlo’s Q2 results reflect a business in transition, with its SaaS model now delivering both growth and margin expansion. The company’s ability to manage hardware price pressure, execute large-scale product launches, and capitalize on new partnerships will define its trajectory into 2026.

Key Considerations:

  • Services Revenue Resilience: High-margin subscriptions now buffer the business from hardware and macroeconomic volatility.
  • Tariff Mitigation Strategy: Reduced BOM costs and pricing flexibility offset tariff headwinds, but ongoing trade policy shifts remain a risk.
  • Execution on Device Launch: Flawless execution on the 100+ SKU refresh is critical for capturing holiday demand and future subscriber growth.
  • Partnership Leverage: The ADT deal and other strategic accounts could materially expand Arlo’s addressable market and recurring revenue base in 2026.
  • Churn and Retention Improvements: Operational “Tiger teams” are driving churn below 1%, with small improvements yielding significant service revenue gains.

Risks

Tariff and ASP volatility continue to pressure product margins, and Arlo’s strategy depends on sustaining device unit growth to feed the subscription funnel. Execution risk around the massive device launch and the ADT partnership rollout could impact momentum, while competitive responses or further macroeconomic softness may strain pricing power and channel sell-through. Investors should monitor churn, ARPU progression, and the pace of strategic account monetization for signs of sustained SaaS leverage.

Forward Outlook

For Q3, Arlo guided to:

  • Consolidated revenue of $133 to $143 million
  • Non-GAAP net income per share of $0.12 to $0.18

For full-year 2025, management raised guidance:

  • Subscriptions and services revenue above $310 million, up over 27% year over year
  • Non-GAAP subscriptions and services gross margin of 85%
  • ARR of $335 million at year end, up over 30% year over year

Management highlighted several factors that will impact results:

  • Benefits from new strategic partnerships expected to materialize in 2026
  • Device portfolio refresh and lower BOM costs to offset tariffs and support margin expansion

Takeaways

Arlo’s Q2 cements its transformation into a SaaS-first security platform, with recurring revenue and high-margin services now at the core. The company’s ability to manage device pricing, execute on product launches, and capitalize on strategic partnerships will be the critical levers for sustained growth and profitability into 2026.

  • Recurring Revenue Now Dominates: The pivot to services is driving margin expansion and reducing exposure to hardware volatility, with ARR and ARPU both on strong upward trajectories.
  • Execution on Scale and Partnerships: Flawless delivery on the device refresh and strategic deals like ADT are set to unlock new growth vectors and deepen competitive moat.
  • Investor Watchpoints: Monitor ARPU progression, churn, and hardware sell-through as leading indicators of future SaaS leverage and cash generation.

Conclusion

Arlo’s Q2 results validate its SaaS transformation, with subscriptions and services now driving both growth and margin. Execution on upcoming product launches and partnerships will determine whether this momentum is sustained, but the foundation for recurring, high-margin revenue is now firmly in place.

Industry Read-Through

Arlo’s shift to a services-dominated revenue mix and SaaS-level margins signals a broader transition for consumer IoT and security hardware companies. As tariffs and ASP declines pressure traditional hardware economics, companies with recurring revenue models and strong subscriber funnels are positioned to outperform. The ability to leverage device sales for high-margin service attachment will become increasingly critical, while partnerships with legacy security providers point to industry consolidation and ecosystem expansion. Investors should expect further divergence between hardware-centric and SaaS-enabled players across the connected home and security landscape.

ARLO Technology Security SaaS Recurring revenue IoT Tariffs