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Item 7. Management’s Discussion and Analysis

2026-02-27 compared with 2025-02-27 · 137 added, 102 removed, 161 unchanged (60% of the section changed)

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Since the launch of our first product in December 2014, we have shipped over 42.7 million smart security devices.

As of December 31, 2024, the Arlo platform had approximately 10.8 million cumulative registered accounts across more than 100 countries around the world coupled with 4.6 million cumulative paid subscribers and annual recurring revenue of $257.3 million.

As of December 31, 2025, the Arlo platform had approximately 12.1 million cumulative registered accounts across more than 100 countries around the world coupled with approximately 5.7 million cumulative paid accounts and annual recurring revenue of $330.5 million.

We conduct business across three geographic regions—(i) the Americas;

(ii) Europe, Middle-East and Africa (“EMEA”);

and (iii) Asia Pacific (“APAC”)—and we primarily generate revenue by selling devices through retail, wholesale distribution, wireless carrier channels, security solution providers, Arlo’s direct to consumer store and paid subscription services.

and (iii) Asia Pacific (“APAC”)—and we primarily generate revenue by selling paid subscription services, as well as devices through retail, wholesale distribution, wireless carrier channels, security solution providers, and Arlo’s direct to consumer store.

For the years ended December 31, 2025 and 2024, we generated total revenue of $529.3 million and $510.9 million, respectively.

Loss from operations was $34.9 million and $24.9 million for the years ended December 31, 2024 and 2023, respectively.

Income from operations was $6.1 million and our loss from operations was $34.9 million for the years ended December 31, 2025 and 2024, respectively.

Our goal is to continue to develop innovative, world-class smart security solutions to expand and further monetize our current and future user and paid account bases.

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Our key business metrics may be calculated in a manner different from the same key business metrics used by other companies.

We regularly review our processes for calculating these metrics, and from time to time we may discover a need to make adjustments to better reflect our business or to improve their accuracy.

We regularly review our processes for calculating these metrics, and from time to time we may discover a need to make adjustments to better reflect our business.

We believe that any such adjustments are immaterial unless otherwise stated.

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Cumulative Registered Accounts .

We believe that our ability to increase our user base is an indicator of our market penetration and growth of our business as we continue to expand and innovate our Arlo platform.

We define our registered accounts at the end of a particular period as the number of unique registered accounts on the Arlo platform as of the end of such period.

The number of registered accounts does not necessarily reflect the number of end-users on the Arlo platform as one registered account may be used by multiple end-users to monitor the devices attached to that household.

Registered accounts at the end of a particular period are defined as the number of unique registered accounts on the Arlo platform.

The number of registered accounts on the Arlo platform does not directly correspond to the number of users.

A single account may be shared by multiple users (which we consider as one account) and a single user may have multiple accounts (which we consider as multiple accounts).

Cumulative Paid Accounts .

Paid accounts are defined as any account worldwide where a subscription to a paid service is being collected (either by us or by our customers or channel partners, including Verisure).

Paid accounts at the end of a particular period are defined as any account worldwide where a subscription-based or otherwise recurring service fee was collected by Arlo (either directly from a user or from a partner).

Annual Recurring Revenue .

We believe ARR enables measurement of our business initiatives and serves as an indicator of our future growth.

ARR represents and is defined as the annualized paid service revenue we expect to recognize from subscription contracts, as calculated by taking the average paid service revenue multiplied by the number of subscription accounts at the end of the reporting period.

ARR represents and is defined as the annualized paid subscriptions and services revenue we expect to recognize from subscription contracts, as calculated by taking the average paid subscriptions and services revenue per paid account of the reporting period multiplied by the number of paid accounts at the end of the reporting period.

ARR is a performance metric and should be viewed independently of revenue and deferred revenue, and is not intended to be a substitute for, or combined with, any of these items.

Components of Results of Operations

Our gross revenue consists primarily of sales of devices and paid subscription service revenue.

We generally recognize revenue from product sales at the time the product is shipped and transfer of control from us to the customer occurs.

Our paid subscription services are billed in advance of the start of the monthly subscription and revenue is recognized ratably over subscription period.

Our revenue consists of gross revenue, less customer rebates and other channel sales incentives, allowances for estimated sales returns, price protection, and net changes in deferred revenue.

A significant portion of our marketing expenditure is with customers and is deemed to be a reduction of revenue under authoritative guidance for revenue recognition.

Cost of Revenue

Cost of revenue consists of both product costs and service costs.

Product costs primarily consist of the cost of finished products from our third-party manufacturers and overhead costs, including personnel expense for operation staff, purchasing, product planning, inventory control, warehousing and distribution logistics, third-party software licensing fees, inbound freight, IT and facilities overhead, warranty costs associated with returned goods, write-downs for excess and obsolete inventory and excess components, and royalties to third parties.

Service costs consist of costs attributable to the provision and maintenance of our cloud-based platform, including personnel, storage, security and computing, IT and facilities overhead.

Our cost of revenue as a percentage of revenue can vary based upon a number of factors, including those that may affect our revenue set forth above and factors that may affect our cost of revenue, including, without limitation, product mix, sales channel mix, registered accounts’ acceptance of paid subscription service offerings, and changes in our cost of goods sold due to fluctuations in prices paid for components, net of vendor rebates, cloud platform costs, warranty and overhead costs, inbound freight and duty costs, and charges for excess or obsolete inventory.

We outsource our manufacturing, warehousing, and distribution logistics.

We also outsource certain components of the required infrastructure to support our cloud-based back-end IT infrastructure.

We believe this outsourcing strategy allows us to better manage our product and service costs and gross margin and allows us to adapt to changing market dynamics and supply chain constraints.

Research and Development

Research and development expense consists primarily of personnel-related expense, safety, security, regulatory services and testing, other research and development consulting fees, and allocated IT and facilities overhead.

Generally, we recognize research and development expenses as they are incurred.

We have invested in and expanded our research and development organization to enhance our ability to introduce innovative products and services.

We expect research and development expense to increase in absolute dollars as we develop new product and service offerings and compete for engineering talent.

We believe that innovation and technological leadership are critical to our future success, and we are committed to continuing a significant level of research and development to develop new technologies, products and services, including our hardware devices, cloud-based software, AI-based algorithms, and machine learning capabilities.

Sales and Marketing

Sales and marketing expense consists primarily of personnel expense for sales and marketing staff, technical support expense, advertising, trade shows, media and placement, corporate communications and other marketing expense, product marketing expense, allocated IT and facilities overhead, outbound freight costs, and credit card processing fees.

We expect our sales and marketing expense to increase in the future as we invest in marketing to drive demand for our products and services.

General and Administrative

General and administrative expense consists primarily of personnel-related expense for certain executives, finance and accounting, investor relations, human resources, legal, information technology, professional fees, allocated IT and facilities overhead, strategic initiative expense, and other general corporate expense.

We expect our general and administrative expense to fluctuate as a percentage of our revenue in future periods based on fluctuations in our revenue and the timing of such expense.

Others include restructuring charges, which consist of severance costs, office exit expense, and other exit expense associated with the abandonment of certain lease contracts and cancellation of contractual services arrangements with certain suppliers.

Others also include the write-off of deferred financing and separation related expenses, which consist primarily of costs of legal and professional services.

Impact of Global Geopolitical, Economic and Business Conditions

government implemented new tariff measures affecting a broad range of imported materials.

Certain countries have responded to the U.S.

tariffs by imposing or threatening retaliatory tariffs.

While we are actively monitoring the changes in global trade policy and the effects they may have on our business and broader macroeconomic environment, we have not experienced a material impact on our financial position to date and do not expect them to have a material detrimental impact on our business operations in the near term.

However, given the uncertainty surrounding global markets as a result of the fluid U.S.

tariff policy, we do not have clarity at this point over the potential medium to long term impacts our business may face.

The availability of certain goods could be affected if foreign suppliers choose to limit their exposure to U.S.

markets in response to unfavorable trade policies, which could negatively impact our suppliers ability to deliver materials or manufacture equipment for us and, therefore, delay or impede our product deliveries.

Furthermore, rising inflation, slower economic growth and increases in unemployment that may result from global trade disruptions could further deflate consumer demand and impact the demand for our products.

Results of Operations

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(In thousands, except percentage data)

Subscriptions and services $ 316,356 59.8 % $ 242,998 47.6 %

Products 212,941 40.2 % 267,888 52.4 %

Services 242,998 47.6 % 201,238 41.0 %

Total revenue 529,297 100.0 % 510,886 100.0 %

Cost of revenue:

Subscriptions and services 52,336 9.9 % 54,613 10.7 %

Products 244,120 46.1 % 268,769 52.6 %

Services 54,613 10.7 % 52,950 10.8 %

Total cost of revenue 296,456 56.0 % 323,382 63.3 %

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General and administrative 66,097 12.5 % 72,134 14.1 %

Others 3,356 0.7 % 1,307 0.2 %

Other operating expense 2,181 0.4 % 3,356 0.7 %

Total operating expenses 226,770 42.8 % 222,396 43.5 %

Loss from operations (34,892) (6.8) % (24,903) (5.1) %

Interest income 5,584 1.1 % 3,935 0.8 %

Income (loss) from operations 6,071 1.2 % (34,892) (6.8) %

Other income, net:

Gain on early lease termination 4,144 0.8 % — — %

Interest income, net 5,452 1.0 % 5,584 1.1 %

Other income (expense), net — 0.0 % (104) (0.0) %

(104) (0.0) % 107 0.0 %

Loss before income taxes (29,412) (5.8) % (20,861) (4.3) %

Total other income, net 9,596 1.8 % 5,480 1.1 %

Income (loss) before income taxes 15,667 3.0 % (29,412) (5.8) %

Provision for income taxes 741 0.1 % 1,092 0.2 %

Net loss $ (30,504) (6.0) % $ (22,036) (4.5) %

Net income (loss) $ 14,926 2.8 % $ (30,504) (6.0) %

Our gross revenue consists primarily of paid subscriptions and services revenue and sales of devices.

Our paid subscription services are billed in advance of the start of the annual or monthly subscription and revenue is recognized ratably over the subscription period.

We generally recognize revenue from product sales at the time the product is shipped and transfer of control from us to the customer occurs.

Our revenue consists of gross revenue, less customer rebates and other channel sales incentives, allowances for estimated sales returns, price protection, and net changes in deferred revenue.

A significant portion of our marketing

expenditure is with customers and is deemed to be a reduction of revenue under authoritative guidance for revenue recognition.

We conduct business across three geographic regions—(i) the Americas;

and (iii) APAC—and generally base revenue by geographic region on the bill-to location of the customer for device sales and device location for service sales.

and (iii) APAC—and generally base revenue by geographic region on the bill-to location of the customer for device location for subscriptions and services sales and device sales.

Year Ended December 31,

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(In thousands, except percentage data)

Product Revenue $ 267,888 (7.6) % $ 289,938

Service Revenue 242,998 20.8 % 201,238

Subscriptions and services $ 316,356 30.2 % $ 242,998

Products 212,941 (20.5) % 267,888

Total revenue $ 529,297 3.6 % $ 510,886

Product revenue decreased by $22.1 million, or 7.6% for the year ended December 31, 2024 compared to the prior year, primarily driven by the decrease in product sales in two geographic regions Americas and APAC.

The decline in product sales is driven by a reduction in average selling prices (“ASPs”) of our products as we increased promotional activities to stimulate household acquisition and subscriber growth, and the increase in related sales incentives that are deemed to be reductions of revenue.

The decline was partially offset by the increase in product sales in EMEA due to stronger customer demand and the lower sales returns that are deemed to be reductions of revenue.

Service revenue increased in all regions by $41.8 million, or 20.8%, for the year ended December 31, 2024 compared to the prior year, primarily due to a 63.5% increase in cumulative paid accounts and the continued increase in average revenue per user (“ARPU”) of retail subscriptions.

Subscriptions and services revenue increased by $73.4 million, or 30.2%, for the year ended December 31, 2025 compared to the prior year, primarily due to a 23.7% increase in cumulative paid accounts and continued increase in average revenue per user (“ARPU”) on retail and direct paid subscription services.

Products revenue decreased by $54.9 million, or 20.5%, for the year ended December 31, 2025 compared to the prior year, primarily due to the timing of device shipments from our largest customer in the EMEA, and the reduction in average selling prices (“ASPs”) of our products in retail channels as we increased promotional activities to stimulate household acquisition and subscriber growth.

The decrease in products revenue was due to the higher sales incentives partially offset by the lower sales returns, which are both deemed to be reductions of revenue.

Cost of Revenue

Cost of revenue consists of both subscriptions and services cost as well as products cost.

Subscriptions and services cost consists of costs attributable to the provision and maintenance of our cloud-based platform, including personnel expense, data storage, security and computing, IT and facilities overhead, and amortization of software development.

Products cost primarily consists of the cost of finished products from our third-party manufacturers and overhead costs, including personnel expense for operations staff, purchasing, product planning, inventory control, warehousing and distribution logistics, third-party software licensing fees, inbound freight, duty and tariff costs, IT and facilities overhead, warranty costs associated with returned goods, write-downs for excess and obsolete inventory and excess components, and royalties to third parties.

Our cost of revenue as a percentage of revenue can vary based upon a number of factors, including those that may affect our revenue set forth above and factors that may affect our cost of revenue, including, without limitation, product mix, sales channel mix, registered accounts’ acceptance of paid subscription service offerings, and changes in our cost of goods sold due to fluctuations in prices paid for components, net of vendor rebates, cloud platform costs, warranty and overhead costs, inbound freight, duty and tariff costs, and charges for excess or obsolete inventory.

We outsource our manufacturing, warehousing, and distribution logistics.

We also outsource certain components of the required infrastructure to support our cloud-based back-end IT infrastructure.

We believe this outsourcing strategy generally allows us to better manage our products cost and subscriptions and services cost and gross margin and allows us to adapt to changing market dynamics and supply chain constraints.

However, with respect to manufacturing that we have outsourced to ex-U.S.

manufacturers, our ability to manage product costs through this strategy has been, and may continue to be, negatively impacted by tariffs.

Year Ended December 31,

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Cost of revenue:

Subscriptions and services $ 52,336 (4.2) % $ 54,613

Products 244,120 (9.2) % 268,769

Services 54,613 3.1 % 52,950

Total cost of revenue $ 296,456 (8.3) % $ 323,382

Cost of product revenue decreased for the year ended December 31, 2024 compared to the prior year, primarily due to a decline in product shipments coupled with decreases in freight-in costs due to normalization of the supply chain and utilization of ocean freight, partially offset by increases in product warranty and inventory reserves.

Cost of service revenue increased for the year ended December 31, 2024 compared to the prior year, primarily due to service revenue growth as a result of the increase in cumulative paid accounts, partially offset by cost optimizations.

Subscriptions and services cost of revenue decreased by $2.3 million, or 4.2%, for the year ended December 31, 2025 compared to the prior year, primarily due to cost savings as we optimize our cloud platform to improve customer experience which assists in reduced data storage and cloud costs, despite the increase in paid accounts.

Products cost of revenue decreased by $24.6 million, or 9.2%, for the year ended December 31, 2025 compared to the prior year, primarily due to the decrease in product sales partially offset by an increase in freight cost mainly as a result of increased duties and tariffs, and to a lesser extent, the utilization of air freight.

Year Ended December 31,

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Gross profit:

Subscriptions and services $ 264,020 40.1 % $ 188,385

Products (31,179) ** (881)

Services 188,385 27.0 % 148,288

Total gross profit $ 232,841 24.2 % $ 187,504

Gross margin:

Subscriptions and services 83.5 % 77.5 %

Products (14.6) % (0.3) %

Services 77.5 % 73.7 %

Total gross margin 44.0 % 36.7 %

Product gross profit decreased for the year ended December 31, 2024 compared to the prior year, primarily driven by a reduction in the ASPs on our products as we increased promotional activities to stimulate household acquisition and subscriber growth coupled with an increase in inventory reserves.

Service gross profit increased for the year ended December 31, 2024 compared to the prior year, primarily due to service revenue growth in all regions as a result of increases in cumulative paid accounts, continued increase in ARPU of retail subscriptions, and cost optimizations.

**Percentage change not meaningful.

Subscriptions and services gross profit increased by $75.6 million for the year ended December 31, 2025 compared to the prior year, primarily due to subscriptions and services revenue growth as a result of increases in cumulative paid accounts, continued increase in ARPU on retail subscriptions, and cost optimizations.

Products gross profit decreased by $30.3 million for the year ended December 31, 2025 compared to the prior year, primarily driven by a reduction in the ASPs of our products as we increased promotional activities to stimulate household acquisition and subscriber growth, as well as an increase in freight cost mainly as a result of increased duties and tariffs, and to a lesser extent, the utilization of air freight.

Tariff costs increased by $13.5 million for the year ended December 31, 2025 compared to the prior year, which accounted for the decline of 6.3% in products gross margin.

Operating Expenses

Research and Development

Generally, we recognize research and development expenses as they are incurred, exclusive of capitalized software development costs.

We have invested in and expanded our research and development organization to enhance our ability to introduce innovative products and services.

We expect research and development expense to increase in absolute dollars as we develop new product and service offerings and compete for engineering talent.

Year Ended December 31,

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Research and development expense $ 73,650 0.6 % $ 73,183

Research and development expense increased by $4.5 million for the year ended December 31, 2024 compared to the prior year, primarily due to an increase of $5.3 million in personnel-related expenses mainly from stock-based compensation and merit increases, partially offset by a decrease of $0.6 million in corporate IT and facilities overhead.

Research and development expense increased by $0.5 million for the year ended December 31, 2025 compared to the prior year, primarily due to increases of $6.9 million in personnel-related expenses from headcount increases as a result of our research and development investment and $2.2 million from stock-based compensation as a result of the increase in our stock price, partially offset by decreases of $5.2 million in professional services and $2.9 million in IT and facilities overhead as we strategically shifted to the investment in technologies that met the criteria for capitalization of software development costs.

Sales and Marketing

We expect our sales and marketing expense to increase in the future as we invest in marketing to drive demand for our subscriptions and services and device products.

Year Ended December 31,

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Sales and marketing expense $ 84,842 15.1 % $ 73,723

Sales and marketing expense increased by $7.6 million for the year ended December 31, 2024 compared to the prior year, primarily due to increases of $4.0 million in personnel-related expenses mainly from stock-based compensation and merit increases, $3.1 million in marketing expenditures, $1.5 million in credit card processing fees as a result of increases in paid subscriber accounts, and $0.9 million in professional services as a result of continued investment in improved customer experience, partially offset by a decrease of $1.6 million in freight-out expenses.

Sales and marketing expense increased by $11.1 million for the year ended December 31, 2025 compared to the prior year, primarily due to increases of $8.8 million in credit card and in-app processing fees as a result of increases in paid accounts and focused efforts to improve our customer’s app experience, $1.5 million in personnel-related expenses due to the headcount and merit increases, $1.3 million in stock-based compensation as a result of the increase in our stock price, and $0.8 million in marketing expenditures.

The increase was partially offset by decreases of $0.8 million in allocated IT and facilities overhead and $0.5 million in sales freight out expenses.

General and Administrative

We expect our general and administrative expense to fluctuate as a percentage of our revenue in future periods based on fluctuations in our revenue and the timing of such expense.

Year Ended December 31,

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General and administrative expense $ 66,097 (8.4) % $ 72,134

General and administrative expense increased by $15.8 million for the year ended December 31, 2024 compared to the prior year, primarily due to increases of $12.3 million in personnel-related expenses mainly from stock-based compensation as a result of the achievement of certain performance-based equity award targets, $2.0 million in legal and professional services, and $0.8 million in corporate IT and facilities overhead costs.

Interest Income and Other Income (Expense), Net

General and administrative expense decreased by $6.0 million for the year ended December 31, 2025 compared to the prior year, primarily due to decreases of $7.7 million in personnel-related expenses mainly from stock-based compensation as a result of the achievement of certain performance-based equity award targets in the prior year periods and $1.3 million in IT and facilities overhead related to allocation associated with corporate infrastructure;

partially offset by the increase of $2.6 million in legal and professional services.

Other operating expenses

Other operating expenses primarily include workforce reduction costs.

Other Income, Net

Year Ended December 31,

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(In thousands, except percentage data)

Gain on early lease termination

$ 4,144 ** $ —

Interest income, net $ 5,452 (2.4) % $ 5,584

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**Percentage change not meaningful.

Interest income, net increased for the year ended December 31, 2024, compared to the prior year, primarily due to the increase in our cash and cash equivalents and short-term investments as well as higher interest rates.

In July 2025, we entered into a termination agreement for our office lease located in San Jose, California.

We recorded the derecognition of right-of-use assets and lease liabilities and recognized a gain of $4.1 million upon the termination effective in the third quarter of 2025.

Interest income, net decreased for the year ended December 31, 2025, compared to the prior year period, primarily due to the declines in interest rates.

Provision for Income Taxes

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federal income tax rate due to a lower effective tax rate on foreign earnings and valuation allowance on our net U.S.

deferred tax assets and certain foreign tax attributes as it is more likely than not that some or all of our deferred tax assets will not be realized.

deferred tax assets and certain foreign tax attributes.

Based on a review of all available evidence as of December 31, 2025, we concluded that it was more likely than not that a valuation allowance was required against our U.S.

deferred tax assets and, as a result, we are maintaining the full valuation allowance.

However, as we continue to generate income, we are approaching the point at which the accumulated rolling 36-month pre-tax income turns positive—a key piece of objectively verifiable evidence supporting the realizability of deferred tax assets.

There is a reasonable possibility that within the next several quarters, sufficient positive evidence will become available to reach a conclusion that all or a significant portion of the valuation allowance against our U.S.

net deferred tax assets would no longer be required.

The provision for income taxes decreased for the year ended December 31, 2025, compared to the year ended December 31, 2024, primarily due to a U.S.

tax loss position, which resulted in no U.S.

federal income tax, and lower international income taxes driven by the utilization of research and development tax credits in Ireland.

These decreases were partially offset by higher state income taxes resulting from certain states’ nonconformity with the immediate research and development expensing provisions under Section 174A of the Internal Revenue Code.

On July 4, 2025, the OBBBA, a significant tax reform package, was enacted.

Among other provisions, the legislation permits the immediate expensing of certain domestic U.S.

research and development expenses, and includes changes to the U.S.

taxation of profits derived from foreign operations.

Based on our evaluation of enacted provisions and current facts and circumstances, management currently expects that, for the current tax year, we will expense eligible domestic U.S.

research and development costs as permitted under the OBBBA, which is expected to result in a U.S.

federal tax loss for the tax year.

Management expects the enactment of the OBBBA to reduce our current year U.S.

federal and state cash tax obligations, primarily as a result of the immediate expensing of eligible domestic U.S.

research and development costs.

The effects of the enacted legislation reflected in the consolidated financial statements are based on management’s current interpretation of the law.

The ultimate tax effects may differ as additional analysis is completed and tax positions are finalized.

We have determined that the undistributed earnings of certain foreign subsidiaries are indefinitely reinvested.

Accordingly, no deferred tax liabilities have been recorded related to outside basis differences for these subsidiaries.

The amount of unrecognized deferred tax liability is not practicably determinable.

Liquidity and Capital Resources

As of December 31, 2024, our cash and cash equivalents and short-term investments totaled $151.5 million.

Additionally, on November 14, 2024, we entered into the Credit Agreement, which provides for a three-year revolving credit facility of up to $45.0 million that matures on November 14, 2027.

As of December 31, 2024, we had unused borrowing capacity of $45.0 million based on the terms and conditions of the Credit Agreement.

As of December 31, 2025, our cash and cash equivalents and short-term investments totaled $166.4 million and our unused borrowing capacity was $45.0 million based on the terms and conditions of the Credit Agreement.

The proceeds of the borrowings under this credit facility may be used for working capital and general corporate purposes.

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We have no commitments to obtain such additional financing and cannot provide assurance that additional financing will be available at all or, if available, that such financing would be obtainable on terms favorable to us and would not be dilutive.

Our future liquidity and cash requirements may vary from those currently planned and will depend on numerous factors, including the introduction of new products, the growth in our service revenue, the ability to increase our gross margin dollars, as well as cost optimization initiatives and controls over our operating expenditures.

Our future liquidity and cash requirements may vary from those currently planned and will depend on numerous factors, including the introduction of new products, the growth in our subscriptions and services revenue, the ability to increase our gross margin dollars, as well as cost optimization initiatives and controls over our operating expenditures.

As we grow our installed base and related cost structure, there will be a need for additional working capital, hence, we may increase our product and subscription rates in the future.

Leases and Contractual Commitments

Our operating lease obligations mostly include offices, equipment, data centers, and distribution centers.

Operating leases and contractual commitments

Our operating lease obligations mostly include offices, equipment, and distribution centers.

Our contractual commitments are primarily inventory-related purchase obligations with suppliers.

Contingencies

We are involved in disputes, litigation, and other legal actions.

We evaluate whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies.

Legal contingencies

We are, and from time to time, we may become involved in disputes, litigation, and other legal actions in the ordinary course of business.

At each reporting period, we evaluate whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies.

Significant judgment is required to determine both the probability and the estimated amount of loss.

In such cases, we accrue for the amount or, if a range, we accrue the low end of the range, only if there is not a better estimate than any other amount within the range, as a component of legal expense within litigation reserves, net.

In such cases, we accrue for the amount or, if a range, we accrue the low end of the range, only if there is not a better estimate than any other amount within the range, as litigation reserves in other operating expense on the consolidated statements of operations and comprehensive income (loss).

Refer to Note 7, Commitments and Contingencies in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for further information about our operating leases, purchase obligations, and legal contingencies.

Stock repurchase program

Our Board of Directors has authorized a stock repurchase program of up to an aggregate of $50.0 million of shares, which commenced in September 2024 and is expected to continue through December 31, 2026 unless extended or shortened by the Board of Directors.

In the fourth quarter of fiscal 2024, we repurchased and subsequently retired 378,745 shares of our common stock for an aggregate purchase price of $4.4 million.

As of December 31, 2024, $45.6 million remained available and authorized for future repurchases.

Our Board of Directors authorized a stock repurchase program of up to an aggregate of $50.0 million of shares, which commenced in September 2024 and was fully implemented and completed as of December 31, 2025.

During the fiscal year 2025, we repurchased and subsequently retired 3.3 million shares of Arlo common stock for an aggregate repurchase amount of $45.5 million.

Repurchases under this program were made through open market purchases in a manner deemed in the best interests of our company and stockholders, considering the economic cost and prevailing market conditions, including the relative trading prices and volumes of our common stock.

The following table presents our cash flows for the periods presented.

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Net cash provided by operating activities $ 78,722 $ 51,306

$ 51,306 $ 38,302

Net cash provided by (used in) investing activities 27,754 10,840

10,840 (50,686)

Net cash used in financing activities (42,068) (40,767)

Net cash increase (decrease)

$ 21,379 $ (27,526)

Net cash increase $ 64,408 $ 21,379

Operating activities

Net cash provided by operating activities increased by $13.0 million for the year ended December 31, 2024 compared to the prior year period, primarily due to improved profitability coupled with favorable working capital movements as the results of (i) higher accounts receivable collections due to the growth of our sales;

(ii) higher accounts payable balances mainly due to timing of the payments;

and (iii) increase in deferred revenue due to the growth in our service subscription paid accounts and subscription rates expansion, partially offset by increased inventory purchases.

Net cash provided by operating activities increased by $27.4 million for the year ended December 31, 2025 compared to the prior year period, primarily due to improved profitability, partially offset by unfavorable working capital movements as a result of the decrease in accounts payable balances mainly due to timing of payments;

offset by (i) lower accounts receivable balance primarily due to strong collections coupled with lower product sales to our retail customers in the fourth quarter of 2025;

and (ii) increases in deferred revenue due to the growth in our paid accounts and subscription rates.

Investing activities

Net cash provided by (used in) investing activities increased by $61.5 million for the year ended December 31, 2024 compared to the prior year period, primarily due to higher proceeds from maturities of short-term investments.

Net cash provided by investing activities increased by $16.9 million for the year ended December 31, 2025 compared to the prior year period, primarily due to less available-for-sale securities purchases attributable to changes in our investment strategy to maintain higher liquidity, partially offset by our strategic long-term investment in a privately-held company, as well as the capitalized software development costs.

Financing activities

Net cash used in financing activities increased by $25.6 million for the year ended December 31, 2024 compared to the prior year period, primarily due to an increase in withholding tax from RSU releases and the repurchases of common stock.

Net cash used in financing activities increased by $1.3 million for the year ended December 31, 2025 compared to the prior year period, primarily due to the higher stock repurchases and lower proceeds related to employee benefit plans, partially offset by the decrease in withholding tax from RSU and PSU releases as a result of the sell-to-cover method being applied to all Arlo employees for their tax withholding effective on January 1, 2025.

Critical Accounting Estimates

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We also discuss our critical accounting estimates with the Audit Committee of our Board of Directors.

Note 2, Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K describes the significant accounting policies and the effect in our consolidated financial statements.

Revenue recognition

Revenue from all sales types is recognized at transaction price, which is the amount we expect to be entitled to in exchange for transferring goods or providing services.

Transaction price is calculated as selling price net of variable consideration which may include estimates for sales returns and sales incentives related to current period product revenue.

For product revenue, transaction price is calculated as selling price net of variable consideration which may include estimates for sales returns and sales incentives related to current period product revenue.

Sales returns are estimated by analyzing certain factors, including historical sales and returns data, channel inventory levels, current economic trends, and changes in customer demand for our products.

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Our standard warranty obligation to our retailers and wholesale distributors allows for returns of damaged and defective products only.

At the time we recognize revenue, we record an estimate of sales returns to reduce revenue in the amount of the expected credit or refund to be provided to our customers as a contra revenue.

Our estimated allowances for product warranties can vary from actual results, and we may have to record additional contra revenue, which could materially impact our financial position and results of operations.

At the time we recognize revenue, we record an estimate of sales returns to reduce revenue in the amount of the expected credit or refund to be provided to our customers as a contra revenue, which can vary from actual results.

As of December 31, 2025 and 2024, accrued sales returns amounted to $9.3 million and $11.7 million, respectively.

Sales incentives that are mutually agreed with customers are recognized as contra revenue while marketing expenses paid to the third parties are recognized as a marketing expense.

Sales incentives that are mutually agreed with retail customers are recognized as contra revenue while marketing expenses paid to the third parties are recognized as a marketing expense.

We accrue estimated contra revenue or marketing expense for these sales incentives either when the related revenue is recognized or prior to customer commitment if customary business practice creates an implied expectation of future activities.

As of December 31, 2025 and 2024, accrued sales incentives amounted to $32.0 million and $31.9 million, respectively.

Valuation of Long-Lived Assets

Goodwill and long-lived assets impairment

We assess goodwill for impairment annually at the reporting unit level on the first day of the fourth fiscal quarter each year or whenever events or changes in circumstances indicate the carrying value may not be fully recoverable.

Examples of such events or changes in circumstances include a significant decline in the expected future cash flows, a sustained, significant decline in our stock price and market capitalization, a significant adverse change in the business climate and slower growth rates.

In the annual assessment, g oodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of the reporting unit is less than its carrying amount.

The qualitative assessment considers macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and events affecting our stock price.

If the reporting unit does not pass the qualitative assessment, we estimate the fair value using a discounted cash flow method and compare the fair value with the carrying amount of our reporting unit, including goodwill.

If the fair value is greater than the carrying amount of our reporting unit, no impairment is recorded.

If the fair value of a reporting unit is less than its carrying value, a goodwill impairment charge is recorded for the difference.

During the years ended December 31, 2025 and 2024, no goodwill impairment has been identified.

Long-lived assets, including property and equipment and operating lease right-of-use assets, are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable.

Recoverability of these assets is measured by a comparison of the carrying amounts to the assets and related cash flows that they are expected to generate from the use and eventual disposition.

If such review indicates that the carrying amount of property and equipment and operating lease assets is not recoverable, the carrying amount of such assets is reduced to the fair value.

If such review indicates that the carrying amount of property and equipment and operating lease assets is not recoverable, and the assets’ fair value is less than the carrying amount, an impairment charge is recognized.

During the years ended December 31, 2025 and 2024, no impairment of long-lived assets has been identified.

Valuation of Goodwill

We perform an annual assessment of goodwill at the reporting unit level o n the first day of the fourth quarter of each year and whenever events or changes in circumstances indicate the carrying value may not be recoverable .

We operate as one operating and reportable segment.

In the annual assessment, a qualitative assessment is performed in consideration of macroeconomic conditions, industry and market conditions, cost factors, overall company financial performance, and c hanges in our stock price.

We believed that it was more-likely-than-not that the fair value of the reporting unit is greater than the respective carrying value and therefore performing the next step of impairment test for the reporting unit was unnecessary.

If there are events occurred or circumstances changed (i.e.

a decline in our stock price based on market conditions and deterioration of our business) that would more likely than not reduce our fair value below the carrying amount, we may have to record a charge to our earnings for the associated goodwill impairment of up to $11.0 million.

No goodwill impairment was recognized in the years ended December 31, 2024 and 2023.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis