Q1 2025 Arlo Technologies Inc Earnings Call
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 at that time, if you have a question.
One on your push buttons Oh.
I would now like to turn the conference over to Thomas Clark. Please go ahead Sir.
Thomas Clark: Thank you operator.
Good afternoon, and welcome to Arlo technologies first quarter 2025 financial results Conference call.
Speaker Change: Joining us from the company are Mr. Matthew Mcrae CEO and.
Kurt: Mr. Kurt <unk>, our CEO and CFO.
Kurt: If you have not received a copy of todays release, please visit <unk> Investor Relations website at Investor <unk> Com.
Kurt: Before we begin the formal remarks, we advise you that todays conference call contains forward looking statements.
Kurt: Forward looking statements include statements regarding our potential future business.
Kurt: Operating results and financial condition, including descriptions of our revenue gross margins operating margins earnings per share expenses cash outflow and free cash flow free cash flow margin guidance for the second quarter of 2025, the long range plan targets the rate and timing.
Kurt: <unk> of our paid subscriber growth.
Kurt: Transition to our services first business model, the commercial launch of momentum with new products and services, the timing and impact of tariffs strategic objectives and initiatives market expansion and future growth.
Kurt: and conditions on our business, operating results and financial condition.
Kurt: Actual results for trends could differ materially from those contemplated by these four-looking statements.
Kurt: For more information, please refer to the risk factors discussed in Arlo's periodic problems with the SEC, including our annual report on Form 10K and our most recent quarterly report on Form 10Q files earlier today.
Speaker Change: 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.
Speaker Change: In addition, several non-GAAP financial measures will be discussed on this call. A reconciliation of the gap to non-GAAP measures can be found in today's press release on our Investor Relations website.
Matt: At this time, I would now like to turn the call over to Matt.
Matt: Thank you, Tahmin, and thank you everyone for joining us today on Arlo's first quarter 2025 earnings call.
Matt: In Q1, Arlo added 298,000 subscribers in the quarter and ended Q1 with 4.9 million pay accounts, which is a 51% increase year-over-year.
Matt: 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 plan.
Matt: 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.
Thank you.
Matt: This acceleration of Arlo's subscription and services business is the clear driver for our outstanding Q1 financial result.
Matt: Our non-GAAP services gross margin of 83% is up 600 basis points from last year and contributed to our record-free cash low of $28 million and earnings per share of 15 cents which is also a record for Arlo.
Matt: 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 RPU expansion as the benefits of our new Arlo secure 5 plans penetrate our user base and read through in our results.
Matt: In fact, for the first five weeks of Q2, we have not seen any drop-off and demand across our channels and have already hit a key service milestone.
Matt: 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.
Matt: 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 strong start to the year.
Matt: First, it is important to remember that Arlo is a subscriptions and services company at its core. Less than 25% of our total revenue comes from hardware devices we import into the United States, so there would be minimal impact to our consolidated gross margins.
Matt: Set another way, the majority of our revenue, and nearly all of our profit is not directly impacted by the announced tariffs.
Matt: Second, we assume Arlo will be operating under the 10% blanket tariff regime for the duration of Q2.
and given Arlo subscriptions and services strategy.
Matt: I view it as a small increase in our customer acquisition costs that we will execute and optimize around to continue our growth of subscribers that generate a lifetime value of nearly $700.
Matt: We don't have any plans to increase prices at this time and are beginning to see competitors struggle which may provide incremental opportunities to capture share.
Matt: And while the second half of the year remains uncertain, we have modeled the effective tariff rate at or near the current 10% rate. And based on this, we are confident in reaffirming our full year guidance.
Matt: We still expect our 2025 results will make us a rule of 40 company and Arlo will exit the year with more than 300 million in ARR.
Matt: This place is Arlo in a small, elite, and shrinking class of public-sac companies with this level of performance
Matt: These are unprecedented times which could produce additional macroeconomic impacts, but my goal with the preceding commentary is to continue Arlo's tradition of transparent and open communication.
Matt: Given our track record of success, disciplined execution, and strategic agility, I believe the current conditions and volatility favors Arlo and may present the company with new opportunities for growth.
Matt: As a reminder, Arlo is planning its largest product launch in company history for the 2025 holiday season, with over 100 new skis launching into our channel.
These new products will substantially extend our technology differentiation
Matt: and achieve a 20-35% cost reduction which puts us in a great position to not only mitigate any tariff impact, but also win incremental opportunities to capture share in Q4 and 2026.
Matt: On the last call, I gave a sneak peek of our plans for Arlo Secure 6, which includes exciting new Arlo intelligence features that substantially expand the capabilities and user experience of our subscription service.
given the success of our development program.
Matt: Some of these advanced features will be rolled out this month including advanced AI and audio event descriptions, fire detection, event searching across our expanded 60 days of storage and new AI audio detection such as glass break, screaming, gunshots, and barking dogs.
Matt: In addition, Arlo will be rolling out phase one of our advertising strategy this quarter, which will be focused on using our ad platform to promote Arlo's service subscription
Matt: Early testing has shown this as a powerful tool to extend the long-term value of our users and increase conversion to subscriptions. We believe these launches continue our momentum and set Arlo up for a successful second half of 2025.
Matt: Arlo is executing extremely well and delivering strong growth across our key metrics as we put the pieces in place for continuous success throughout the year. And now I'll turn it over to Kurt for a more detailed review of our Q1 result.
Kurt: Thank you, Matt, and thank you everyone for joining us today.
Speaker Change: We delivered strong financial results during the quarter, continuing the significant operational momentum that we gained in 2024.
Matt: 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.
Matt: 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-to-year [inaudible]
Matt: Our Q1 paid account increase still reflects some catch-up of the various first subscribers, but we were able to generate healthy, new paid subscriber growth in the 170,000 to 190,000 range. It trend that we expect to continue in the future.
Matt: 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.
Matt: 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 RPU which grew 7% sequentially and 15% year over year to $13.48.
Matt: We are seeing our crew accelerate as a result of the momentum from our new customers selecting our premium rate plan as well as the overall simplification of our plan structures.
Matt: Our annual recurring revenue was $276 million, also up more than 20% over the same period last year.
Matt: 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.
Matt: 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 total revenue, up from 46% in the same period last year.
Matt: The sizable shift in revenue composition from one-time device revenue to recurring services revenue reflects the momentum that we gained in our transition to a subscription and services driven business, and the results are clearly proving out the long-term sustainability of our operating model.
Matt: Product revenue for the period was $50.2 million, down in comparison to the prior year, and resulting princely from the decline in ASP that has been prevalent across the entire industry.
Matt: We continue to leverage our products to bring customers into the Arlo ecosystem through point of sale volume
Matt: with the success of this approach evidenced by the total number of shipments.
Matt: In Q1, we shipped a total of 1.1 million devices worldwide, which was in line with the shipment volume of the prior year period after withstanding a challenging economic environment.
Matt: The more customers that are brought in through our product funnel, the more we can convert into paid subscriptions, which generates significant lifetime value for the company while insulating us from the volatility created by external factors.
Matt: As are subscriptions and services business scales to become a larger component of our total
Matt: As a result, in the first quarter, our international customers generated approximately $51 million or 43% of our total revenue, down from $70 million or 56% of total revenue in the prior year quarter.
Matt: In the Amir region, Verishore continues to be the driver of our international revenue and remains an outstanding partner driving both product sales and supporting investments in innovation.
Matt: From this point on, my discussion will focus on non-GAAP numbers. The reconciliation from GAP to non-GAAP figures is detailed in our earnings release, which was distributed earlier today.
Matt: Our non-GAAP subscriptions and services gross margin was 83.1%, a new record and up over 600 basis points year-over-year.
Matt: Driven by an increasing portion of our subscriptions and services revenue generated from premium plans with higher RPU as well as a decrease in the cost of serving our subscribers.
Matt: Product gross margins remain slightly negative in the period, as we continued our promotional activity to ensure we remain competitive across all customer price segments, including at the sub-50 dollar market level.
Matt: Even with gross product margins at the current level, we were able to expand our total non-GAAP gross margins to 46% off a remarkable 800 basis points sequentially and 600 basis points year-over-year.
Matt: This result illustrates the impact of our subscription and service strategy on the profitability of our business.
Matt: Our planned device portfolio refresh in the second half of this year will further enhance our competitive position and allow us to continue using our products as a customer acquisition tool even in a declining ASP environment.
Matt: Total non-GAAP operating expenses for the first quarter were $38.3 million down from $40.3 million in the same period last year and demonstrating strong cost discipline.
Matt: The year of your decline is primarily driven by a 3.6 million dollar reduction in research and development costs as we invested a bit more heavily in our Arlo Secure 5 last year.
Matt: We will ramp up additional investment related to Arlo's Secure 6 later this year, which will result in our operating expense level increasing slightly throughout the year.
As part of our evolution to a besting class sales company.
Matt: We are now reporting adjusted EBITDA, a financial figure which is consistently disclosed by consumer subscription businesses in our peer group.
Matt: During the quarter, our adjusted EBITDA was $16.4 million in the period, about 76% year-to-year.
Matt: Adjusted EBITDA was driven by the strong performance of the subscriptions and services business as well as our disabling focus on cost containment.
Matt: Further, we posted non-GAAP net income of $16.5 million. Another record that translates into non-GAAP net income per dilute share of 15 cents and thereby exceeding the consensus figure of 12 cents for the quarter.
Matt: Regarding our balance sheet and liquidity position, we ended the quarter with $153.1 million in available cash equivalence and short-term investment.
Matt: This balance is up $10 million since March of 2024 after considering the $12.5 million investment in Origin Wireless and the $15 million we invested in our share repurchase program.
Matt: The leverage in our operating model continues to be evident as we generated record free cash flow of $28 million during the quarter, representing a free cash flow margin of almost 24%.
Matt: Our free cash flow was up an astounding 45% over the same period last year driven by increased profitability and strong work in capital management.
Matt: Our Q1 accounts receivable balance was $46 million at quarter end, with DSOs at 34 days down from 41 days last year.
Matt: Our Q1 inventory balance was $35 million down from $45 million level last year.
Speaker Change: Thereby providing an effective tool to combat both the regulatory and competitive environment.
Matt: Now turning to our outlook.
Matt: Looking at our financial results Arlo continues to perform well despite operating in a volatile macroeconomic environment.
Matt: We have scaled our subscriptions and services business to a level that dictates the profitability of the entire business and we are well positioned to compete in a market defined by promotional activity and discounting.
Matt: We expect to deliver these strong operational results throughout 2025, especially as we expand our relationships with strategic partners and extend our technology and platform advantage later this year.
Matt: As everyone is experiencing there is uncertainty around the potential impact of tariffs.
Matt: Not only on our business, but in the global economy.
Matt: We are working closely with our suppliers customers and in country trade experts to examine the range of potential outcomes and have developed strategic plans to account for varying scenarios.
Matt: Our current assumptions include existing tariff rates remaining in place with the impact being felt in product gross margins for products shipped into the United States.
Matt: As previously discussed we do expect a 20% to 35% decline in our product costs as we rollout our new device portfolio in the second half of the year.
Matt: More importantly, driven by the resilience of our subscriptions and services business, we expect to achieve the full year financial outlook, we gave last quarter, both on subscriptions and services revenue and margins as well as total revenue and EPS.
Matt: Further our outlook for the second quarter assumes a continuation of current market conditions with asps across the industry continuing to decline.
Matt: We are expecting total revenue in the range of $119 million to $129 million and non-GAAP net income per diluted share in the range of 11.
Matt: 2017.
Matt: Now I will open it up for questions.
Matt: Okay.
Matt: At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Speaker Change: Our first question comes from the line of Jacob Steven with Lake Street.
Speaker Change: Your line is now open.
Speaker Change: Hey, guys I appreciate you taking my questions congrats on the quarter.
Speaker Change: Maybe just to start.
Speaker Change: Kind of as the tariff question in a different way are you thinking about any sort of inventory stocking kind of ahead of.
Speaker Change: July 3rd for which my perspective is that tariffs will be reinstated.
Speaker Change: In Vietnam.
Speaker Change: Well, we've been looking at our inventory levels for the past several months if you look at <unk>.
Speaker Change: Actually how we ended up the first quarter.
Speaker Change: I think we did a fantastic job of sort of leveling out our inventory on our balance sheet, but actually are 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 had to have sufficient inventory carefree or at least with the 10% tariff available for us to <unk>.
Speaker Change: <unk>, there's a whole host of different things that are going into that right. Now we are monitoring inventory levels almost weekly we're in conversations with our suppliers.
Speaker Change: Every evening and we feel like we've got a good plan to attack it as we've indicated in our <unk>.
Speaker Change: In our remarks earlier, I mean, we feel great that.
Speaker Change: 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 is shipped to EMEA.
Speaker Change: Exempt from the tariffs so we're in a pretty good position.
Jacob: So, but yes, it's top of mind for us Jacob we're constantly looking and working with our supply partners in country trade experts to ensure we're optimizing the situation.
Speaker Change: And vantage.
Speaker Change: Awesome and maybe just to go a little bit deeper.
Speaker Change: What that means for kind of the second half.
Speaker Change: And the product refresh.
Speaker Change: <unk>.
Speaker Change: I expect that the products will be.
Speaker Change: To be shipped before kind of July timeframe or.
Speaker Change: Obviously, I know that they're going to be lower.
Speaker Change: Price to you but.
Speaker Change: Does that give you enough time or will you have to bear some of the tariffs on that.
Speaker Change: Yes, so here's what we know.
Speaker Change: We're under the 10% regime until July 8th actually.
And then we expect.
Speaker Change: Obviously, a lot of discussions to happen we know as you know we do a lot of.
Speaker Change: A lot of manufacturing in Vietnam and Indonesia.
Speaker Change: Vietnam was actually working with the White House administration over the weekend over this past weekend.
Speaker Change: And so I think what we're going to see.
Speaker Change: And similar to what we actually saw announced with the U K. This morning, I think the idea and the prevailing thought is that theres 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 the 10% regime until July as it could be less than that but what we've shown is we're able to execute with these tariff.
Speaker Change: Yes.
Speaker Change: And look at it as a small increase in cap 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.
Speaker Change: The tariffs that will happen on our hardware business and again like we mentioned 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 eight again, we think it's more likely than not there will be deals done.
Speaker Change: The areas that we do manufacturing those are underway, we don't know that.
Speaker Change: 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 eight gig.
Speaker Change: Given that those have a 20% to 35% Cogs reduction.
Speaker Change: What it means is maybe some of the Asps you would see in the second half might not be as low as we were planning, but still pretty aggressive to drive the $300 million of <unk>.
Speaker Change: Our service revenue that we want to hit before the end of the year. So I think we're in a really good spot. The launch of this product is perfectly timed for the holiday and it can absorb the tariff and or if tariffs deals come in lower than that 10% plus 2% to 35% will be able to actually drop ESPN be more competitive in the March.
Speaker Change: <unk>.
Speaker Change: So that's how we're looking at.
Speaker Change: <unk> today, there's a July 8th in before and we think we're really well positioned you saw our guidance on Q2, and we think service.
Speaker Change: Continue to accelerate in fact, we're starting to see some opportunities as I mentioned in the channel at some of our competitors, who may be hardware only or more hardware focused are struggling.
Speaker Change: To bring product in.
Speaker Change: And then there is the post July 8th where it's early but we're modeling a very similar tariff regime of what were doing today, knowing that we've got bid cost declines coming.
Speaker Change: We're going to be very competitive in the second half.
Speaker Change: Okay got it that's very helpful. Maybe if I could just ask one more quick one on the AD platform.
Speaker Change: Platform, obviously, it sounds like that's about to be launched here, but maybe.
Speaker Change: My interpretation of it was it was going to be geared more towards advertisers.
Speaker Change: Kind of larger brands, but it sounds like it's.
Speaker Change: It's going to be more promoting.
Speaker Change: Upgrades in subscriptions upgraded products.
Speaker Change: Can you just kind of walk me through that a little bit.
Speaker Change: Yes, yes.
Speaker Change: So in our beta testing and as you know we've talked about it last year. When we said we'd go into beta testing in Q1.
Speaker Change: Obviously, we tested third party ads and we actually tested our own what we call house ads, So ads for voice services.
Speaker Change: Maybe discounts on hardware for Arlo.
Speaker Change: We actually saw a really strong reaction that conversion and click through on the Arlo ads.
Speaker Change: And what we're doing in phase one is we're going to roll out and actually started on may one so we've already rolled the AD platform out.
Speaker Change: And we're going to specific cohorts and we're starting to pitch Arlo services.
Speaker Change: <unk> phase II 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.
Speaker Change: Strong enough that we think the right first step for this AD platform is actually to advertise our own our own services and hardware to the to the active users that we have across the world.
Speaker Change: Okay I appreciate it.
Speaker Change: Good luck going forward for you guys.
Speaker Change: Thank you.
Speaker Change: Thank you for your question.
Speaker Change: Our next question comes from the line of learning curve with Raymond James.
Speaker Change: Your line is now open.
Speaker Change: Hey, guys. Thanks for taking on a question. This is Logan on for Adam.
Speaker Change: I just want to start on the international side Europe was a little bit weaker is down 30% year over year.
Speaker Change: Let me know.
Speaker Change: If you guys could touch on a little bit more and a little more detail the drivers of that.
Speaker Change: And then I think you guys said that there was still some bearish or catch up.
Speaker Change: And year subs.
Speaker Change: Can you size that impact and then thoughts on windows, there sure catch up.
Speaker Change: Don.
Speaker Change: Yes, sure let me touch on the.
Speaker Change: The results there on the revenue so.
Speaker Change: With very sure.
Speaker Change: A couple of things that are in play on a first off as we've seen over the five years or so of our relationship that they kind of have a.
Speaker Change: Destocking stocking.
Speaker Change: <unk> associated with their the 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.
Speaker Change: <unk> were a bit higher in 2024 as we came into the first quarter of 2025. So that was the first thing second thing is is that Chinese new year in 'twenty. 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.
Speaker Change: Order the product.
Speaker Change: Deliberate 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.
Speaker Change: Guidance that came out regarding USB C requirements in Europe.
Speaker Change: Required a switchover to make sure that.
Speaker Change: Consumer electronics companies, where a 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 they had adequate inventory for purposes of there.
Speaker Change: 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 with various short in 2025.
Speaker Change: Thank you.
Speaker Change: 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 have nearly 300000 ads. If you back out the catch up we believe it was right in that $1 70 to 190 that we've been guiding the street. We think this is the last quarter of the catch up we don't often though we haven't seen anything pull through in the first five weeks of the quarter.
Speaker Change: But what we're seeing so far is batch processing that looks like it's the normal batch processing.
Speaker Change: For ads that are going into their south region, which is the area that had the firmware issue that caused some of the stuff too to have half the catch up. So we did about 300000 normal would have been right between 170 <unk> hundred 90, right on plan and we think this is the last quarter that we'll see that catch up effect.
Speaker Change: Great. Thank you that's super helpful.
Speaker Change: And then the second.
Speaker Change: Second quarter that product gross margin was it wasn't negative.
Speaker Change: And I understand that the new devices are coming in.
Speaker Change: A lower cost to produce.
Speaker Change: But at least until both Tom and you expect negative gross margin for.
Speaker Change: So product to hold I understand you guys don't necessarily go directly to Q1, but any high level thoughts on that.
Speaker Change: We greatly appreciate it thank you.
Speaker Change: Yeah. 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.
Speaker Change: Quarter over quarter and year over year, if you look at quarter over quarter, we were up 800 basis points on a combined gross margin and year over year, we were up 600 basis points, even taking into consideration that Q4. In this Q1, we were slightly negative on the product gross margin. So I just emphasize that.
Speaker Change: Point, because that is critical to understanding our strategy and we are comparable 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.
Speaker Change: Customer acquisition tool so yeah.
Speaker Change: Yes, we had negative gross margin in Q1 will evaluate the market conditions to determine how we want to play out in 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 <unk> the overall.
Speaker Change: Our effectiveness our strategy that we're rolling out.
Speaker Change: Understood. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you for your questions.
Speaker Change: Before our next question, we ask that all participants ask one question and one follow up question.
Scott Searle: Our next question comes from the line of Scott Searle with Roth capital.
Scott Searle: Your line is now open hey, good day.
Good afternoon, Thanks for taking my questions nice job on the quarter, Hey, Kirk just quickly to clarify your comments on product gross margins.
Scott Searle: It sounds like you get the 25% to 30% cost down on the.
Scott Searle: Series six platform as that starts to ramp up.
Scott Searle: 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 on the competitive landscape.
Scott Searle: 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 or are you seeing in the first several impacts.
Scott Searle: First several weeks of impacts with that in line.
Scott Searle: Yes, maybe I'll go I'll go first and then Curt can comment back on the product gross margin.
Speaker Change: Yes, I would say pretty much every competitor you see.
Speaker Change: Our segment is manufacturing in Asia, and the differences I mean, if you put China aside the differences than country to country are relatively small so I would say.
Speaker Change: All of those companies that are not in China or in other areas.
Speaker Change: <unk>.
Speaker Change: During manufacturing.
Speaker Change: In a similar boat and then I will tell you there are a couple I won't name them, but there are a couple of them.
Speaker Change: Brands that are that have relatively high volume that are in China, and obviously scrambling to get out because of the tariff China. It's actually so much higher than the others I think the bigger impact is really is that competitor.
Speaker Change: Do they have a robust and successful services business to me that's the bigger difference because even in your question around product gross margin right.
Speaker Change: As our LOE, we're really a software and services business subscription revenue business and we use hardware as part of our cost of acquisition an 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.
Speaker Change: When I look at the market.
Speaker Change: In our 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 thats where were seeing some of them start to falter, we're getting messages from our retail partners I, Hey, do you guys have X in inventory, we're believing we're not going to get the inventory from some of our other.
Speaker Change: <unk>.
Speaker Change: Other vendors that are on the shelf and in fact, we've seen some that have come in early as an example, so I think we're seeing the beginning of if you are a hardware company only.
Speaker Change: Harriss you immediately they go straight to the profitability of the company that hit you completely on gross margin, which was your total gross margin as well and it's really difficult to bring in product and to be able to justify that in any way and still have and profitability of the company as a software services company.
Speaker Change: It's a small impact on our business and we think it's manageable, where we're managing it through our strategy and obviously our services first we are working very closely with our supply chain partners to push some of the costs and there were optimizing in other ways and for US again, the way I see it is there may be we don't know, but there may be a small increase in.
Speaker Change: CAC or customer acquisition costs, but.
Speaker Change: But I believe there is as much opportunity for us to stick the foot on the gas still capture share going forward and actually exit the year on everything that we guided at the beginning of the year from now you asked about our share I can tell you that through Q1 and through the first five weeks of Q2, we have captured share nearly every.
Speaker Change: Week over week over week in all of our key accounts.
Speaker Change: And so I think some of that was coming out with <unk>.
Speaker Change: And some of our pricing in Q1, which you can see with relatively aggressive and then as we get into the tariff regime. I think we're better situated than most of our competitors and our expectation is we'll continue to capture share.
Speaker Change: Yes got it and then in terms of the response on the product gross margin, let me just highlight that.
Speaker Change: 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 as we can continue to grow quarter. After quarter. It means that we are fulfilling our funnel with plenty of households active households that we.
Speaker Change: Believe we can convert in our conversion rates still.
Speaker Change: We're 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.
Speaker Change: Everyone that even in those scenarios where product gross margins may go negative.
Speaker Change: It's okay, because when you look at the growing margin on our services at 83% plus and you combine that with the product gross margins, where they are right now.
Speaker Change: <unk> gross margins are accelerating very nicely and so we're extremely pleased with the way things have actually rolled out here in the last couple of quarters, and we tend to be very aggressive on promotional planning.
Speaker Change: And then in parallel with that we're going to do everything possible as Matt mentioned to rollout this 20% to 35% cost reduction on the bomb to help us with these regulatory matters as well as to be.
Speaker Change: <unk> with our promotions.
Speaker Change: Okay. Thank you and if I could just not on the pricing unsecured six I'm not sure. If we heard it but should we assume premium pricing on that or will just be monetized in other ways like edge and otherwise that you had been addressing and any thoughts on other strategic partners within insurance or some of the other categories or what's going on how do we expect that to rollout over the next couple of quarters. Thanks.
Speaker Change: Yeah. Yeah. Good question. So you know we made the changes with Arlo secure five.
Speaker Change: We launched the platform in late Q3 early Q4, and we start seeing <unk> increase.
Speaker Change: Mix up to premium plans than our second step was to change the structure of our plans. We did that in January and most of that fed through in February. So there is a partial impact on.
Speaker Change: On the Q1 results, we'll see a bigger impact as we go forward on the business, but that also is growing <unk>.
Speaker Change: And mixing people up the plans the changes we made in January were planned because we knew <unk> was coming so the plans that you see today in 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 <unk>.
Speaker Change: Our plans are we secure six plans, we just made that plan adjustment a quarter before rolling out now normally our literature six would rollout in Q3 timeframe, that's our normal timeframe kind of annualized timeframe for rolling out <unk>.
Speaker Change: The testing and the development.
Speaker Change: Has gone so well and I will tell you the event seem 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 rollout throughout may.
Speaker Change: And we're excited to kind of tell that story and let users actually experienced <unk> secure six early and then Youll see additional features actually rollout.
Speaker Change: Later in the year, but the plans that we had set in January we're in anticipation of <unk> six so I think we're in a really good spot there and then what was the second part of the question.
Speaker Change: Just an update on insurance and strategic partners in that area partnerships, yes, yes, sorry strategic accounts, yes, so they are progressing well.
Speaker Change: No.
Speaker Change: <unk> said on the last call that I think there is probably one or two that we're really focused on I think one just minutes that missed the finish line and there is something we will talk about relatively soon.
Speaker Change: And then I expect to have another one maybe in the second half.
Speaker Change: I believe these will be <unk>.
Speaker Change: Sizeable good partnerships that we're very excited about.
Speaker Change: And ones that we have 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.
Speaker Change: Great. Thanks, so much.
Speaker Change: Thank you for your questions.
Speaker Change: Our next question comes from the line of <unk> <unk> with B Ws financial.
Speaker Change: Your line is now open.
Speaker Change: Hi, So I just wanted to understand it.
Speaker Change: Given the dynamics of what's happening on your <unk> line is that the.
Speaker Change: The increase coming because you are selling.
Speaker Change: Raise prices or is that coming because of a natural increase from the retail channel.
Speaker Change: Yes, so if you're looking at <unk>.
Speaker Change: We're kind of Theres I think theres a couple of effects. So one when we launched arlo secure five.
Speaker Change: In late Q3 early Q4 of last year, we saw mix to the more premium plans and that started to bring our approved from roughly 11.
Speaker Change: And change over 12 and change and then the.
Speaker Change: 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 <unk> as well. So I think some of it is the feature sets the rollout of <unk> five and we're looking to build on that momentum with <unk> six and some of that is through all the data and we.
Speaker Change: Collected post <unk> five we've re architected the plans and simplified the plan and Thats also driving <unk> now to give you the latest numbers.
Speaker Change: Said are the 65 took us from roughly $11 to 12 and change as we exited out.
Speaker Change: We are now above 13, right and actually I think headed towards $14 and I've mentioned on the last call. When we look at and just take a snapshot of new subscribers coming in fresh.
Speaker Change: <unk> who's closer to 17, so that's what gives us the confidence that <unk> will continue to expand through the year as we continue to rollout <unk> secure.
Speaker Change: Six and a new plan structure through <unk>.
Speaker Change: 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.
Speaker Change: Great. Thank you.
Speaker Change: Youre welcome.
Speaker Change: Yeah.
Speaker Change: Okay, well hopefully that Paul.
Speaker Change: Again, if you would like to ask a question. Please press Star then one on your telephone keypad.
Speaker Change: Yeah.
Speaker Change: Our next question comes from the line of Ryan <unk> with Craig Hallum Capital Group.
Speaker Change: Your line is now open.
Speaker Change: Hey, guys, it's Ryan on for Tony Stoss.
Speaker Change: Most of my questions have been asked already but I just wanted to get an update.
Speaker Change: You guys are seeing now.
Speaker Change: Arco is going up service programs are growing up what are you seeing in terms of churn and conversion rates any changes there maybe even positively.
Speaker Change: Yeah, Great question, So we're seeing.
Speaker Change: Basically improvements or in line.
Speaker Change: Performance across all metrics when we make changes.
Speaker Change: Our service plans now whether that's a structure change or a price increase right in our structure change was effectively a price increase and thats, what youre seeing pull through often we will see a spike in churn.
Speaker Change: And we did see a little spike in churn very similar to what we saw a year ago. When we change single plan pricing and two years ago. When we did a larger plan price increase what I can tell you now is that that is actually return to the norm and is continuing to improve so.
Speaker Change: 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 it recurrent right back to baseline is continuing to improve conversion looks great across all the <unk>.
Speaker Change: Cohorts service revenues going up <unk> 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.
Speaker Change: Alright, great. Thanks, guys and congrats on the results.
Speaker Change: Thank you.
Speaker Change: Thank you for your question.
Speaker Change: That concludes today's conference call you May now disconnect your line.
Speaker Change: Yeah.
Speaker Change: [music].