Arlo Technologies, Inc. Citi’s 2026 Global TMT Conference

Yeah. Arlo, for those that are very unfamiliar with the story, we are a spin about 8 years ago from a company called Netgear, who was in the home networking business, and they were looking to develop products that would utilize a lot of the wireless networks at home to try and trigger upgrades for people to buy the latest wireless router standard, and hit upon video as a use case that would eat up a lot of bandwidth and drive people to a new router. Decided that, Roku had just started, and there were some streaming set-top boxes and figured that wasn't the right area, and hit upon the idea of DIY, do-it-yourself security, and built the first Arlo camera nearly, I think it's over 11 years ago now, maybe 12 years ago. It took off like a rocket.

The market since then has really been going through a transition from what we call DIFM or do it for me, meaning installers coming and building home security systems in your home, to DIY, which is do it yourself. The technology that Arlo created and the market segment that we actually created was really around simplicity, powerful visual-based security, and driven from the idea that you could take 2 or 3 cameras, install them in 20 minutes. That market that was 100% DIFM 10, 12 years ago, is now about 60-plus, sometimes as high as 70% DIY, and the rest of the market is now about a third of the market.

Oof. That's the shift. The other thing I would tell you about the size of the market is independent studies and surveys show that about 20%, it's anywhere from 18% to 22%, of broadband households in the U.S. now have a camera or some kind of visual-based security that they can access through the internet.

I've been in the consumer space a long time across multiple companies, and right around the 15% to 20% is when you move from early adopter, maybe tech-forward type customers and market segment, into mass market. We think we entered that transition about a year and a half ago. We're seeing that in many ways. One is we're seeing a new group of customers coming and buying the product.

But we are also seeing the transition of, for instance, we are seeing Walmart be a bigger part of the market than was historical over the last three years, and that is usually a signal that it is going mass market. So our view is the next 30 million households, in the United States alone, will probably come on and become connected with visual-based security in the next three to five years.

Yeah, it is a great question, and again, it goes to the history of the company. So when we spun, we were really a hardware company at that time. It was all about the hardware margin and just trying to sell as many widgets as you could in any quarter. But it was clear at that moment that home security is really a services business, right? You are providing an ongoing value proposition to that end user. And so after we spun, we set about basically transforming the company from a hardware-first to a services-first organization, and that was a change in the culture, it was a change in the roadmap, it was change in finance and accounting practices and which metrics we are chasing. Changed everything in the company. So I would say the genesis of that transition happened probably right at our IPO, which was in the middle of 2018.

Took about two and a half, almost three years to actually really transform the company at its DNA into a services company. And if you look, we crossed over, not only service revenue being a bigger portion of our revenue than hardware, but from a profitability perspective, probably about two years ago, and it has just been a rocket ride ever since. So you are going to see that continue. Certain metrics you look at, we are looking at our service revenue growth year-over-year, approaching, we want to stay around 20%, so still be one of the fastest-growing companies in the space. We have also seen gross margin, so blended gross margin across the company, has gone from 30% to 40% to 50%, and we think we are on our way to 60%, is where we want to target over the next couple of years.

Operating margin as a company, too, was negative when we were a hardware company, broke through into positivity, and we hit almost 20% in the last quarter. I would say we're in that 15%-20% positive operating margin, headed towards 25%-plus, over the next few years.

Yeah. The way we look at it was a dial we turned slowly as we transitioned the company to services. But once we hit about 2 million, 2 million to 3 million paid subscribers, I think it was around 2.5 million, the economics and the profitability of the company transformed to the point where we could really look at hardware as CAC. As part of our customer acquisition cost, we measure ourselves on hardware unit sales because that brings new households into the funnel. We measure ourselves on blended gross margin. Even if the hardware goes negative margin, what we're always doing is looking at the blended gross margin expanding. It's a good way to be disciplined around the overall profitability of the company growing.

We measure ourselves on things like LTV to CAC ratios to make sure that our CAC is still at a very healthy level against the value of the customers that we're actually bringing to the table from a shareholder value perspective. Just give you a couple of numbers. Our LTV is approaching $1,000. I think it was $976, $967 last quarter. Typically our CAC is anywhere from $200 to $300. Our LTV to CAC ratio at the beginning of the year was about a 4x, which is considered world-class, and we'd like to keep it between a 3 and a 5. It moves up and down depending on promotions and in the- And $300, I'm sorry, $300 CAC?

The 200 to $300 CAC on a $1,000 LTV. You can see every time we lean in and produce additional households, the shareholder return is actually very, very high.