Arlo Technologies, Inc. 2026 Q2 Earnings Call

Please go ahead. 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 our description of revenue, gross margins, operating margins, earnings per share, expenses, cash outlook, free cash flow and free cash flow margin, ARR and other KPIs, guidance for the third quarter and full year 2026, the long-range plan targets, the rate and timing of paying subscriber growth, 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, 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 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, 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.

Matt? Thank you, Tahmin, and thank you everyone for joining us today on Arlo's second quarter 2026 earnings call.

Arlo delivered outstanding results in Q2 with service revenue, total revenue, gross profit, and non-GAAP net income, all setting new records for the company. We saw strength across the business and across all channels, which in addition to the team's great execution, generated the excellent outcome you see today. Point-of-sale units in our retail and direct channel were up 8%, which contributed to the nearly 300,000 paid account additions in the quarter. This brings our total paid accounts to 6.3 million, which is substantially ahead of the original trajectory to our long-range target of 10 million. The quality of our paid accounts portfolio continues to increase when compared to the same period last year.

Our average revenue per user is up, churn is down, and both monthly and annual subscription renewals came in higher than our forecast. These continuous improvements are due to several internal projects and programs that utilize deep user insights, which are focused on delivering the best user experience in the world. The result is Arlo's lifetime value of a paid account has risen to $967, which is up 15% compared to a year ago. Total revenue grew to $156 million, up more than 20% year-over-year, and setting a new record for the company. Service revenue of $93 million, also a new record, grew 19% year-over-year and comprised 60% of our total revenue in the quarter.

This top-line performance drove an incredible 70% year-over-year growth in adjusted EBITDA, which reached $31 million in Q2, and when combined with a partial tariff refund, propelled non-GAAP earnings to $0.28 per share, up 65% when compared to a year ago. As in past years, we use this mid-year checkpoint to assess the market conditions and our performance over the first half as we finalize plans for the second half and begin the development of our annual operating plan for 2027. Our focus is to utilize Arlo's resources to deliver growth in both the short term and long term to drive the expansion of shareholder value. The capital allocation strategy that we rolled out nearly two years ago has served as an excellent framework to drive that growth and value.

Our investments across the pillars of organic, inorganic, and shareholder return are delivering the desired outcomes. I would like to spend a moment to update our investors. Our organic or internal investments fall into three main buckets: operational excellence, sales and marketing, and platform innovation. Operationally, Arlo is deploying new tools and processes that, when coupled with our vast user data, are unlocking value and providing detailed insights that we are leveraging to improve the key metrics I mentioned earlier. We are still at an early phase and will continue to invest where we see the potential for high ROI or improvement in Arlo's key metrics. From a sales and marketing perspective, you'll see us balance both short-term and long-term growth.

As in past years, we intend to invest in our retail channels during the holiday selling period to drive incremental growth in subscribers, now worth nearly $1,000 each in LTV. You'll see us also invest in some market tests for both care and small business segments to collect data that will help feed our 2027 business plan and other future opportunities for growth. It is exciting to see Arlo on the cusp of entering these large markets that can generate substantially higher ARPU and LTV. Finally, our internal innovation pipeline has never been stronger. Arlo will launch Secure 7 at the end of Q3 with several new features and capabilities that keep us at the forefront of smart security and open the door to additional service plan options at higher price points.

In looking into 2027, Arlo will be launching a next-generation product line coupled with Arlo Secure 8, that together will represent the most innovative and impactful advancement to customer experience in home security since Arlo's initial launch of DIY security more than 10 years ago. Looking at the inorganic area of our capital allocation plan, Arlo generated a greater than 50% return from our Origin AI investment, and the acquisition of Aloe Care has enabled Arlo to address the $30-plus billion market for smart elder care and aging in place. Based on the early progress since the acquisition closed, we expect to have several additional partner announcements that will contribute to growth in 2027. We remain bullish but selective on future inorganic investment opportunities and continue to look for either smaller adjacent assets or potentially larger options if they fit directly into our core market.

From a return to shareholder perspective, Arlo has bought back nearly six million shares since the inception of our share repurchase program and more than $20 million of shares in Q2 alone. The board and the management team continue to believe that Arlo's shares are substantially undervalued, and you should expect to see additional share repurchases going forward. Taking this all together, Arlo had a record-breaking Q2, strong first half, and is executing a capital allocation plan that is contributing to short-term growth while positioning the company for additional growth in 2027 and beyond. I have never been more excited about Arlo's potential and believe that the next 18 to 24 months will begin a new phase of success for the company. Now I'll turn it over to Kurt for a more detailed review of our Q2 results and our outlook for the remainder of 2026.

Thank you, Matt, and thank you, everyone, for joining us today. First, I will provide a detailed review of the key operational and financial results of the business. I will share an overview of our expectations for the third quarter, followed by an updated outlook for full year 2026. We continue to deliver outstanding top and bottom-line growth, driven by a quarter of record subscriptions and services revenue, coupled with record total revenue. Arlo continues to outperform expectations as a result of our subscriptions and services focus, which drives our expanding profitability metrics, including record levels of non-GAAP gross margins, adjusted EBITDA, and non-GAAP net income. We are well-positioned to continue these trends into the back half of 2026. During the period, we posted subscriptions and services revenue of $93 million, up 19% year-over-year, and once again accounting for 60% of total revenues.

Our subscriber base grew 23% year-over-year as we generated 298,000 new paid accounts in the period. This double-digit subscriber growth was bolstered by our outstanding customer retention efforts, especially the results generated in our retail business. Our subscriber growth, coupled with a slight increase in ARPU, drove ARR to $365 million, up 16% year-over-year. Product revenue was $62.9 million, up 23% from $51.2 million in the same period last year, a trend driven by strong growth in international business, as well as strong device shipments into retail channels in advance of Amazon's Prime Day, which began in late Q2 of this year. Both of these factors resulted in additional retail sales with POS or point-of-sale volume increasing 9% for the first half of 2026 in comparison to the same period last year.