Arlo Technologies Inc. - ARLO
What's with the early look?
Thought I’d share my thought process on something that’s puzzling me this morning…
ARLO is scheduled to release earnings after the bell today, which will be followed by a conference call with analysts. They announced the schedule last month.
SAN JOSE, Calif., April 14, 2025--(BUSINESS WIRE)--Arlo Technologies, Inc. (NYSE: ARLO), a leading smart home security platform company, today announced that it will hold a conference call with investors and analysts on Thursday, May 8, 2025 at 5:00 p.m. ET (2:00 p.m. PT) to discuss the Company’s first quarter 2025 results. The news release announcing the first quarter 2025 results will be disseminated on May 8, 2025 after the market closes.
An early look?
So what’s with a pair of announcements this morning that could easily have been folded into this afternoon’s earnings release?
The one regarding their new “Smart 6 Home Security Service” has been expected for several quarters, with the company teasing and analysts asking about it on every call. That’s nice, but nothing really market moving, and most companies would release something like that either in conjunction with their earnings release if they wished to talk about it with analysts or just schedule it for a different time.
The second one, announcing that they had surpassed 5M total paid subscribers and $275M in ARR, is potentially market moving, so why the early release?
The timeline?
What’s missing from the announcement, of course, is the timeline. I suspect that each of those numbers, both total paid subscribers along with the $275M ARR, are recent achievements rather than Q1-ending numbers. Why? Because they easily could have added something to the effect of “as of March 31st” but chose not to do so. Also if those were quarter-ending numbers I would think that they would have been disclosed later today rather than early (since there’s no real reason to dribble that out), but we’ll have to wait until later today to find out if that thought is correct.
Are those meaningful numbers?
For some context, the company ended Q4 2024 with 4.599M cumulative paid accounts and $257.332M in ARR (annually recurring revenue).
Let’s take the cumulative paid accounts first.
If the company just now surpassed 5M total paid subscribers, that means that they would have added about 401K since December 31st. If those accounts were added at least somewhat linearly and spread out evenly over the last 127 or so days, that means that they added around 3,157 accounts per day and should therefore announce around 284K new “paid” accounts at the end of Q1 later today.
By contrast, they added 364K “paid” accounts during Q4 and 422K “paid” accounts during Q1 2024, so while a bit lower than the last couple of comparable numbers, nothing too out of the ordinary.
Now, the company does something stupid that I have pointed out repeatedly over the last year or so.
Their “paid” accounts basically fall into 2 different buckets.
The first bucket is the subscribers that they sign up directly off of their web site.
The second bucket are the subscribers that their European reseller Verisure signs up on their behalf and receives some sort of economics from the relationship.
So while the company tells us that their average “paid” subscriber is paying something over $11 a month for their service, when you add in the Verisure subs and divide the numbers they provide it turns out to be around $3. Why they don’t separate out these numbers is beyond me, but they throw them both together into the same “paid” bucket.
And to make matters worse, though Verisure was supposedly passing along the correct economics of their agreement to ARLO, they were drastically underreporting the number of subscribers, so the last 5-6 quarters have had a “catch-up” element to the numbers, so we really just don’t know what the real number of new paid subscribers is, and the company doesn’t seem too concerned about finding it.
How about ARR?
If you believe the company and the underreported Verisure numbers have nothing to do with actual dollars, then ARR should be more aligned to real new subscribers rather than double counting some paying subscribers that have already been in the system.
This number, unfortunately, has been all over the board, and I have pointed out my frustrations repeatedly.
There will be some quarters when ARR will only rise 4% on the back of a 23% rise in “paid” accounts (Q2 2024), and then there are those quarters when ARR rises 7% on a 9% increase in “paid” accounts (Q4 2024).
Which will it be this time?
At the end of Q4, ARR was $257.322M, an increase of $15.76M from Q3.
Going back a year, in Q1 2024 the sequential increase was $16.89M.
The $275M ARR number is about $18M higher than at the end of Q4, which is good, but that’s only if it was a quarter-ending number, which once again I am thinking is not the case.
If the ARR behaves linearly and similarly to what I am expecting out of the cumulative paid subscriber number, then the ARR addition to the quarter should be somewhere around $12.75M.
What do I think happens?
First, I have no idea of whether or not either of those numbers proves to be correct, and to make matters worse, I have no idea what “the street” is expecting, since I don’t have access to any of the analyst reports or models.
As I have noted, since adopting this “catch-up” dynamic from Verisure, their numbers tend to be all over the place, so I wouldn’t be surprised if they dramatically over-or-under-perform on either of those numbers.
Looking at the timing of this release, however, I would have to take the under and think the numbers they report will be below my estimates. Why? Because both of those numbers (paid subs and ARR) could have easily been announced during this afternoon’s earnings call with analysts and pointed out as updated “color” to how the quarter was progressing so far. Analysts always ask, so it would be easy to slip that in there.
But they chose not to do that, and rather jumped the gun by a few hours and put those numbers out first.
Again, why?
If they announce some truly punk paid sub additions or ARR later this afternoon, do they really think a few hours is going to make that much of a difference in how investors are interpreting them? And do they think investors can’t take into account the trend since the quarter ended?
Or is there perhaps a surprise somewhere else and they’re trying to get investors to focus elsewhere? Product revenues (the actual video cameras) were down hugely in the December quarter on what turned out to be a price war that resulted in gross margins tumbling to -13% (who out there thinks the tariffs will make any made-in-China product go higher?). Gross margins on product sales had already been steadily in decline, but have now turned into an actual loss-leader for them. Lose money on the cameras and hopefully make it up on the 7-plus years of subscriber revenues (the attrition rate is also something they do not disclose).
Barring something drastic, I had not really planned on commenting on their numbers this quarter, but perhaps there may be a reason to do so.