Arlo (ARLO) Q3 2025: Paid Accounts Jump 27% as Services Hit 57% of Revenue
Arlo’s Q3 marked a pivotal shift, with services now comprising the majority of revenue and paid accounts surging well above target. The company’s dual-engine model—SaaS and smart home hardware—delivered robust recurring revenue and margin expansion, even as hardware gross margin remained pressured by tariffs and promotions. Management’s focus on strategic partnerships and household expansion signals a durable path to long-range growth targets.
Summary
- Services-Led Model Surges: Recurring revenue now dominates, driving margin and LTV expansion.
- Hardware Margin Trade-Off: Tariffs and promotions weighed on product margin, but fueled subscriber funnel.
- Strategic Accounts in Focus: Partnerships and channel expansion underpin multi-year growth visibility.
Performance Analysis
Arlo’s Q3 results highlight a decisive shift toward a services-first business model, with subscriptions and services revenue representing 57% of total revenue, up from 45% a year ago. Total paid accounts reached 5.4 million, a 27% YoY increase, powered by both retail/direct channels and key partner Verisure. The company’s annual recurring revenue (ARR, subscription revenue run-rate) climbed to $323 million, up 34% YoY, underscoring the stickiness and growth of its SaaS base.
Product revenue declined 21% YoY, reflecting industry-wide average selling price (ASP, average sale per unit) pressure and deliberate promotional activity to clear end-of-life (EOL, discontinued) inventory ahead of a major product refresh. Despite negative product gross margin—driven by $5 million in tariffs and deep promotions—consolidated non-GAAP gross margin improved 540 basis points to 41%, thanks to the high-margin services business. Average revenue per user (ARPU) exceeded $15 per month, and lifetime value (LTV) per user hit a record $870, reflecting strong customer monetization.
- Service Margin Expansion: Services gross margin rose 770 basis points to 85%, driven by ARPU gains and lower storage costs.
- Hardware Margin Sacrifice: Product gross margin fell to negative 17.3% (negative 8% ex-tariffs), as Arlo prioritized subscriber acquisition over near-term device profit.
- Operating Leverage: Adjusted EBITDA rose 50% YoY, and free cash flow reached $49 million for the first nine months.
This quarter illustrates Arlo’s willingness to forgo hardware margin for durable SaaS economics, a trade-off that is yielding higher LTV and operating leverage as the subscriber base scales.
Executive Commentary
"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."
Matthew McRae, Chief Executive Officer
"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. These efforts are yielding strong results. 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."
Kurt Binder, Chief Operating Officer and Chief Financial Officer
Strategic Positioning
1. Services-First Model Drives Profitability
Arlo’s pivot to a services-first strategy is now fully evident in its financials, with recurring revenue streams delivering both margin expansion and predictability. Management is explicit that every organizational decision is now centered on maximizing ARR and LTV, even at the expense of hardware margin. This approach insulates Arlo from hardware cyclicality and positions the company for SaaS-like valuation multiples.
2. Hardware as Subscriber Acquisition Vehicle
Product launches and aggressive pricing are being used as a deliberate lever to expand the installed base and feed the subscription funnel. The Q3 launch featured over 100 SKUs with 20% to 35% lower bill of materials (BOM, manufacturing cost) and new form factors, which enabled nearly 30% YoY unit sales growth. Management views modestly negative product margin as an acceptable cost of customer acquisition, given the downstream SaaS economics.
3. Strategic Partnerships and Channel Expansion
Partnerships with Verisure, Allstate, and ADT are central to Arlo’s next phase of growth, with management projecting 60% of future incremental growth to come from such strategic accounts. Verisure’s acquisition of ADT Mexico opens new LatAm expansion, and ADT is testing Arlo units for a 2026 launch. Retail partnerships with Walmart and Amazon are also expanding, with shelf space nearly doubling at Walmart, supporting the mass market thesis.
4. Operational Excellence in Supply Chain and Launch Execution
Despite logistics headwinds—from shipping disruptions to typhoons—Arlo executed its largest product launch on time, managing inventory turns up to 6.4 times from 5.8 last year. The company’s ability to clear EOL inventory and ramp new products without channel disruption is a competitive strength, supporting both retail and B2B growth.
5. Insulation from Tariff and Promotional Volatility
While tariffs and ASP declines pressured hardware results, the growing share of high-margin, recurring service revenue provides a buffer against macro and industry shocks. Management expects this mix shift to continue, reducing exposure to external cost volatility over time.
Key Considerations
Arlo’s Q3 underscores the maturation of its dual-engine business model, with recurring revenue now the primary growth and margin driver. The company’s willingness to invest in subscriber acquisition at the expense of product margin, coupled with disciplined opex and expanding partnerships, creates a differentiated SaaS-plus-hardware platform.
Key Considerations:
- Margin Expansion Anchored in Services: High-margin SaaS revenue now dominates, offsetting hardware volatility and driving consolidated margin improvement.
- Unit Growth Fuels Future ARR: 29% YoY unit sales growth in Q3 and 20–30% expected in Q4 set up a strong base for 2026 service revenue.
- Strategic Accounts Will Be Growth Engine: Management expects 60% of incremental growth to come from partners like Verisure and ADT, with several new partnerships in late-stage discussions.
- Retail Channel Expansion Broadens TAM: Walmart shelf share nearly doubled, and Amazon share is growing, supporting the mass market adoption thesis.
- Hardware Margin Sacrifice Is Deliberate: Negative product margin is seen as a cost of customer acquisition, not a structural weakness, as LTV/CAC remains above 3x.
Risks
Arlo remains exposed to tariff volatility, promotional intensity, and the risk that hardware-driven subscriber acquisition may not sustain current growth rates if competitive intensity rises or consumer demand weakens. Execution risk exists around new strategic partnerships and international expansion, while any slowdown in partner ramp or retail sell-through could impact the growth trajectory of ARR and profitability.
Forward Outlook
For Q4, Arlo guided to:
- Consolidated revenue of $131 to $141 million
- Non-GAAP net income per diluted share of $0.13 to $0.19
For full-year 2025, management raised its service revenue outlook to $310 million, citing:
- Continued unit growth and strong household formation
- Momentum in both retail and strategic accounts feeding the subscription base
Management emphasized that the new product portfolio and competitive pricing position Arlo for accelerated paid account growth and service revenue momentum into 2026.
Takeaways
Arlo’s Q3 confirms the company’s transition to a services-first model, with recurring revenue and margin expansion now firmly in place.
- Services Now Drive Profitability: With over half of revenue from subscriptions and services, Arlo’s SaaS economics are reshaping margin and valuation potential.
- Hardware Is a Funnel, Not a Profit Center: Negative hardware margin is a calculated trade-off to drive subscriber growth and maximize LTV.
- Strategic Partnerships Are the Next Leg of Growth: Execution with Verisure, ADT, and retail giants will determine whether Arlo sustains its current growth trajectory toward 10 million paid accounts and $700 million in ARR.
Conclusion
Arlo’s Q3 demonstrates a business at an inflection point—recurring revenue now dominates, margin expansion is accelerating, and strategic partnerships are set to drive the next phase of growth. Investors should watch for continued paid account momentum, execution on new partnerships, and sustained SaaS margin leverage as the company heads into 2026.
Industry Read-Through
Arlo’s results provide a clear read-through for the broader smart home and IoT sector: The pivot to services-led models is critical for margin durability and valuation uplift, especially as hardware ASPs come under pressure. Companies that treat hardware as a subscriber acquisition tool, rather than a profit pool, will be better positioned to weather tariff and promotional volatility. Strategic partnerships—especially with insurers and security platforms—are emerging as key growth levers, and the ability to execute complex product launches across geographies is now a core competitive differentiator. These themes will likely define the winners in consumer IoT and connected home over the next several years.