Arlo Technologies, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-looking Statements This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words “believes,” “anticipates,” “plans,” “expects,” “intends,” “could,” “may,” “will,” and similar expressions are intended to identify forward-looking statements, including statements concerning our business and the expected performance characteristics, specifications, reliability, market acceptance, market growth, specific uses, user feedback, and market position of our products and technology. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in “Part II—Item 1A—Risk Factors” and “Liquidity and Capital Resources” below. All forward-looking statements in this document are based on information available to us as of the date hereof, such information may be limited or incomplete, and we assume no obligation to update any such forward-looking statements. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report. Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us,” the “Company,” and “Arlo” refer to Arlo Technologies, Inc. and our subsidiaries. Business and Executive Overview Arlo is transforming the ways in which people can protect everything that matters to them with advanced home, business, and personal security services that combine a globally scaled cloud platform, advanced monitoring and analytics capabilities, and award-winning app-controlled devices to create a personalized security ecosystem. Arlo’s deep expertise in cloud services, cutting-edge AI and computer vision analytics, wireless connectivity and intuitive user experience design delivers seamless, smart home security for Arlo users that is easy to setup and engage with every day. Our highly secure, cloud-based platform provides users with visibility, insight and a powerful means to help protect and connect in real-time with the people and things that matter most, from any location with a Wi-Fi or a cellular connection – all rooted in a commitment to safeguard privacy for our users and their personal data. Since the launch of our first product in December 2014, we have shipped over 44.1 million smart security devices. As of March 29, 2026, the Arlo platform had approximately 13.1 million cumulative registered accounts across more than 100 countries around the world coupled with approximately 6.0 million cumulative paid accounts and annual recurring revenue (“ARR”) of $356.9 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 paid subscription services, as well as devices through retail, wholesale distribution, strategic partners, security solution providers, and Arlo’s direct to consumer store. For the three months ended March 29, 2026 and March 30, 2025, we generated total revenue of $150.4 million and $119.1 million, respectively, and income (loss) from operations was $7.6 million and $(1.5) million, 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. We believe that the growth of our business is dependent on many factors, including our ability to innovate and launch successful new products on a timely basis and grow our installed base, to increase subscription-based recurring revenue, to invest in channel and other strategic partnerships and to continue our global expansion. We expect to increase our investment in research and development going forward as we continue to introduce new and innovative products and services to enhance the Arlo platform and compete for engineering talent. We 25 Table of Contents also expect our sales and marketing expenses to increase in the future as we invest in marketing to drive demand for our products and services. Key Business Metrics In addition to the measures presented in our consolidated financial statements, we use the following key metrics to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions. We believe these key business metrics provide useful information by offering the ability to make more meaningful period-to-period comparisons of our on-going operating results and a better understanding of how management plans and measures our underlying business. 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. We believe that any such adjustments are immaterial unless otherwise stated. As of March 29, 2026 % Change March 30, 2025 (In thousands, except percentage data) Cumulative registered accounts 13,052 19.4 % 10,930 Cumulative paid accounts 6,005 22.6 % 4,897 Annual recurring revenue (“ARR”) $ 356,921 29.2 % $ 276,357 Cumulative Registered Accounts . Registered accounts at the end of a particular period are defined as the number of unique registered accounts on our platforms. The number of registered accounts 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 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 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. Impact of Global Geopolitical, Economic and Business Conditions The U.S. government has implemented tariff measures affecting a broad range of imported materials, and these measures have been subject to change. 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. We continue to monitor and evaluate these developments and assess their potential impact on our business, financial condition, and results of operations. 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. 26 Table of Contents Results of Operations We operate as one operating and reportable segment. The following table sets forth, for the periods presented, the unaudited condensed consolidated statements of operations and comprehensive income (loss) data, which we derived from the accompanying unaudited condensed consolidated financial statements: Three Months Ended March 29, 2026 March 30, 2025 (In thousands, except percentage data) Revenue: Subscriptions and services $ 90,099 59.9 % $ 68,849 57.8 % Products 60,283 40.1 % 50,217 42.2 % Total revenue 150,382 100.0 % 119,066 100.0 % Cost of revenue: Subscriptions and services 14,682 9.8 % 12,265 10.3 % Products 63,032 41.9 % 54,074 45.4 % Total cost of revenue 77,714 51.7 % 66,339 55.7 % Gross profit 72,668 48.3 % 52,727 44.3 % Operating expenses: Research and development 22,814 15.2 % 16,165 13.6 % Sales and marketing 22,654 15.1 % 20,203 17.0 % General and administrative 18,207 12.0 % 17,785 14.9 % Other operating expense 1,435 1.0 % 25 — % Total operating expenses 65,110 43.3 % 54,178 45.5 % Income (loss) from operations 7,558 5.0 % (1,451) (1.2) % Other income, net: Gain on sale of long-term investment 6,423 4.4 % — — % Interest income, net 1,241 0.8 % 1,316 1.1 % Other income (expense), net 70 — % (198) (0.2) % Total other income, net 7,734 5.2 % 1,118 0.9 % Income (loss) before income taxes 15,292 10.2 % (333) (0.3) % Provision for income taxes 415 0.3 % 502 0.4 % Net income (loss) $ 14,877 9.9 % $ (835) (0.7) % Revenue 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. 27 Table of Contents We conduct business across three geographic regions—(i) the Americas; (ii) EMEA; 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. Three Months Ended March 29, 2026 % Change March 30, 2025 (In thousands, except percentage data) Americas $ 83,986 19.8 % $ 70,097 Percentage of revenue 55.9 % 58.9 % EMEA 60,665 41.4 % 42,895 Percentage of revenue 40.3 % 36.0 % APAC 5,731 (5.6) % 6,074 Percentage of revenue 3.8 % 5.1 % Total revenue $ 150,382 26.3 % $ 119,066 Revenue by classification is as follows: Three Months Ended March 29, 2026 % Change March 30, 2025 (In thousands, except percentage data) Revenue: Subscriptions and services $ 90,099 30.9 % $ 68,849 Products 60,283 20.0 % 50,217 Total revenue $ 150,382 26.3 % $ 119,066 Subscriptions and services revenue increased by $21.3 million or 30.9%, for the three months ended March 29, 2026 compared to the prior year period, primarily due to a 22.6% increase in cumulative paid accounts and continued increase in average revenue per user (“ARPU”) on retail and direct paid subscription services driven by higher volume of annual plan renewals. Products revenue increased by $10.1 million or 20.0%, for the three months ended March 29, 2026 compared to the prior year period, primarily due to the increase in product shipments to our largest customer in EMEA due to stronger customer demand coupled with lower sales incentives and sales returns on retail that are both deemed to be reductions of revenue. The increase was partially offset by a reduction in average selling prices (“ASPs”) of our products in retail channels as we continue promotional activities to stimulate household acquisition and subscriber growth. 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 28 Table of Contents 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. Three Months Ended March 29, 2026 % Change March 30, 2025 (In thousands, except percentage data) Cost of revenue: Subscriptions and services $ 14,682 19.7 % $ 12,265 Products 63,032 16.6 % 54,074 Total cost of revenue $ 77,714 17.1 % $ 66,339 Subscriptions and services cost of revenue increased by 19.7% for the three months ended March 29, 2026, compared to the prior year period, primarily due to subscriptions and services revenue growth, partially offset by cost savings as we optimize our cloud platform to improve customer experience which assists in reduced data storage and cloud compute costs. Products cost of revenue increased by 16.6% for the three months ended March 29, 2026, compared to the prior year period, primarily due to the increase in product shipments, partially offset by decreases in product warranty and inventory reserves, as well as the decrease in freight-in costs as a result of the utilization of ocean freight. Gross Profit Three Months Ended March 29, 2026 % Change March 30, 2025 (In thousands, except percentage data) Gross profit: Subscriptions and services $ 75,417 33.3 % $ 56,584 Products (2,749) ** (3,857) Total gross profit $ 72,668 37.8 % $ 52,727 Gross margin percentage: Subscriptions and services 83.7 % 82.2 % Products (4.6) % (7.7) % Total gross margin 48.3 % 44.3 % **Percentage change not meaningful. Subscriptions and services gross profit increased by $18.8 million for the three months ended March 29, 2026, compared to the prior year period, 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 improved by $1.1 million for the three months ended March 29, 2026, compared to the prior year period, primarily driven by lower product warranty and inventory reserves, as well as the decrease in freight-in costs due to the utilization of ocean freight. The improvement was partially offset by a reduction in the ASPs of our products in retail channel as we continue promotional activities to stimulate household acquisition and subscriber growth. 29 Table of Contents Operating Expenses 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, 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. 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. Three Months Ended March 29, 2026 % Change March 30, 2025 (In thousands, except percentage data) Research and development expense $ 22,814 41.1 % $ 16,165 Research and development expense increased by $6.6 million for the three months ended March 29, 2026, compared to the prior year period, primarily due to increases of $3.3 million in stock-based compensation as a result of the increase in our stock price; $2.5 million in payroll-related compensation as a result of headcount increases; and $0.5 million in outside professional services as we continued our investment in platform services. 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 subscriptions and services and devices. Three Months Ended March 29, 2026 % Change March 30, 2025 (In thousands, except percentage data) Sales and marketing expense $ 22,654 12.1 % $ 20,203 Sales and marketing expense increased by $2.5 million for the three months ended March 29, 2026, compared to the prior year period, primarily due to increases of $1.2 million in credit card and in-app processing fees as a result of the increase in paid accounts and focused efforts to improve our customer’s app experience; $0.9 million in marketing expenditures; and $0.2 million in professional services as we continued our investment in our customer experience improvement. 30 Table of Contents 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 initiatives 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. Three Months Ended March 29, 2026 % Change March 30, 2025 (In thousands, except percentage data) General and administrative expense $ 18,207 2.4 % $ 17,785 General and administrative expense increased by $0.4 million for the three months ended March 29, 2026, compared to the prior year period, primarily due to an increase of $2.0 million in legal professional services. The increase was partially offset by decreases of $0.8 million in payroll-related compensation as a result of headcount decreases and $0.6 million in IT and facilities overhead related to allocation associated with corporate infrastructure. Other operating expenses Other operating expenses primarily include acquisition-related expense and workforce reduction costs. Other Income, Net Three Months Ended March 29, 2026 % Change March 30, 2025 (In thousands, except percentage data) Gain on sale of long-term investment $ 6,423 ** $ — Interest income, net $ 1,241 (5.7) % $ 1,316 Other income (expense), net $ 70 ** $ (198) ** Percentage change not meaningful. During the three months ended March 29, 2026, we sold our strategic long-term investment. Upon completion of the sale, we received total cash proceeds of $18.9 million and recognized a realized gain of $6.4 million, representing the excess of proceeds received over the carrying value of the investment. Interest income, net slightly decreased for the three months ended March 29, 2026 compared to the prior year period, primarily due to the declines in interest rates. 31 Table of Contents Provision for Income Taxes Three Months Ended March 29, 2026 % Change March 30, 2025 (In thousands, except percentage data) Provision for income taxes $ 415 (17.3) % $ 502 Effective tax rate 2.7 % (150.8) % Provision for income taxes decreased for the three months ended March 29, 2026, compared to the prior year period, primarily due to the elimination of the mandatory capitalization of research and development expenses, resulting in higher current deductions, lower taxable income and a reduced income tax provision. The higher effective tax rate for the three months ended March 29, 2026, compared to the U.S. federal income tax rate, is primarily driven by the shift from a relatively small pre-tax loss in the prior year period to a larger pre-tax profit in the current period. Although we have recently generated cumulative pre-tax income, we determined that we have not yet demonstrated a sustained level of profitability sufficient to support realization of the deferred tax assets. We also considered forecasted future taxable income; however, such projections are inherently uncertain and do not outweigh the available negative evidence. Based on the totality of evidence, we concluded that it is not more-likely-than-not that the deferred tax assets will be realized. Accordingly, a full valuation allowance has been maintained as of March 29, 2026. There is a reasonable possibility that within the next few 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. 32 Table of Contents Liquidity and Capital Resources As of March 29, 2026, our cash and cash equivalents and short-term investments totaled $167.5 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. We have a history of losses and may incur operating and net losses in the future. As of March 29, 2026, our accumulated deficit was $368.2 million. Historically, we have funded our principal business activities through cash flows generated from operations and available cash on hand. Material Cash Requirements We believe that our existing sources of liquidity will be sufficient to meet our anticipated cash requirements for at least the next 12 months and beyond. However, in the future we may require or desire additional funds to support our operating expenses and capital requirements. To the extent that current and anticipated future sources of liquidity are insufficient, we may seek to raise additional funds through public or private equity. 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 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. 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. 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 litigation reserves in other operating expense on the unaudited condensed consolidated statements of operations and comprehensive income (loss). Refer to Note 8. Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report for further information about our operating leases, purchase obligations, and legal contingencies. Stock repurchase program On February 3, 2026, our Board of Directors authorized a stock repurchase program of up to an aggregate of $50.0 million of shares, which commenced in March 2026 and is expected to continue through December 31, 2027 unless extended or shortened by the Board of Directors. During the three months ended March 29, 2026, we repurchased and subsequently retired 0.6 million shares of Arlo common stock for an aggregate repurchase of $8.0 million. As of March 29, 2026, $42.0 million remained available and authorized for future repurchases. 33 Table of Contents Cash Flow The following table presents our cash flows for the periods presented. Three Months Ended March 29, 2026 March 30, 2025 (In thousands) Net cash provided by operating activities $ 27,863 $ 30,919 Net cash used in investing activities (14,333) (14,352) Net cash used in financing activities (7,334) (14,590) Net cash increase $ 6,196 $ 1,977 Operating activities Net cash provided by operating activities decreased by $3.1 million for the three months ended March 29, 2026 compared to the prior year period, primarily due to unfavorable working capital movements of (i) higher accounts receivable balance primarily due to strong product sales; (ii) higher inventory purchases; and (iii) increases in deferred revenue due to the growth in our paid accounts and subscription rates; partially offset by the increase in accounts payable balances mainly due to timing of payments; partially offset by improved profitability. Investing activities Net cash used in investing activities was flat for the three months ended March 29, 2026 compared to the prior year period, primarily due to the payment for business combination offset by proceeds from the sale of our strategic investment and higher net proceeds from our available-for-sale securities investment. Financing activities Net cash used in financing activities decreased by $7.3 million for the three months ended March 29, 2026 compared to the prior year period, primarily due to lower stock repurchases offset by lower proceeds from employee stock plans. Critical Accounting Policies and Estimates For a complete description of what we believe to be the critical accounting policies and estimates used in the preparation of our unaudited condensed consolidated financial statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2025. There have been no material changes to our critical accounting policies and estimates during the three months ended March 29, 2026, other than as discussed in Note 2. Significant Accounting Policies and Recent Accounting Pronouncements, in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report. 34 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk During the three months ended March 29, 2026, there were no material changes to our market risk disclosures as set forth in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2025.