Earnings Call
Arlo Technologies, Inc. (ARLO)
Earnings Call Transcript - ARLO Q1 2025
Operator, Operator
Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I would now like to turn the conference over to Tahmin Clarke. Please go ahead, sir.
Tahmin Clarke, Moderator
Thank you, operator. Good afternoon, and welcome to Arlo Technologies First Quarter 2025 Financial Results Conference Call. Joining us from the company are Mr. Matthew McRae, CEO; and Mr. Kurt Binder, COO and CFO. If you have not received a copy of today's release, please visit Arlo's Investor Relations website at investor.arlo.com. 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 descriptions of our revenue, gross margins, operating margins, earnings per share, expenses, cash outlook, free-cash flow, free-cash flow margin, guidance for the second quarter of 2025, the long-range plan targets, the rate and timing of our paid subscriber growth, the transition to a services-first business model, 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, the effect of our brand awareness campaign on 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 annual report on Form 10-K, and our most recent 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 and 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.
Matthew McRae, CEO
Thank you, Tahmin, and thank you everyone for joining us today on Arlo's first quarter 2025 earnings call. In Q1, Arlo added 298,000 subscribers in the quarter and ended Q1 with 4.9 million paid accounts, which is a 51% increase year-over-year. Average revenue per user or ARPU rose to a record $13.48, propelled by the continued success of Arlo Secure 5 and our new service plans. This resulted in subscriptions and services revenue of $69 million for the quarter and our annual recurring revenue grew to $276 million, both up over 20% year-over-year and new records for Arlo. This acceleration of Arlo's subscription and services business is the clear driver for our outstanding Q1 financial results. Our non-GAAP services gross margin of 83% is up 600 basis points from last year and contributes to our record free cash flow of $28 million and earnings per share of $0.15, which is also a record for Arlo. And we expect this strength in our subscriptions and services business will continue in Q2 and throughout 2025. We expect strong growth in subscribers and additional ARPU expansion, as the benefits of our new Arlo Secure 5 plans penetrate our user base and read-through in our results. In fact, for the first five weeks of Q2, we have not seen any drop-off in demand across our channels and have already hit a key service milestone. Today, we announced we surpassed 5 million subscribers, which is ahead of our 2025 forecast and more than two years early compared to our original long-range plan. This is a significant milestone for the company and shows the incredible pace of growth for our subscriptions and services business, as we execute towards our new long-range plan of 10 million subscribers. And we don't believe the current tariff environment will slow down this strong start to the year. First, it is important to remember that Arlo is a subscriptions and services company at its core. Less than 25% of our total revenue comes from hardware devices we import into the United States, so there would be minimal impact to our consolidated gross margins. Said another way, the majority of our revenue and nearly all of our profit is not directly impacted by the announced tariffs. Second, we assume Arlo will be operating under the 10% blanket tariff regime for the duration of Q2. And given Arlo's subscriptions and services strategy, I view it as a small increase in our customer acquisition cost that we will execute and optimize around to continue our growth of subscribers that generate a lifetime value of nearly $700. We don't have any plans to increase prices at this time and are beginning to see competitors struggle, which may provide incremental opportunities to capture share. And while the second half of the year remains uncertain, we have modeled the effective tariff rate at or near the current 10% rate. And based on this, we are confident in reaffirming our full year guidance. We still expect our 2025 results will make us a Rule of 40 company and Arlo will exit the year with more than $300 million in ARR. This places Arlo in a small, elite and shrinking class of public SaaS companies with this level of performance. These are unprecedented times, which could produce additional macroeconomic impacts, but my goal with the preceding commentary is to continue Arlo's tradition of transparent and open communication. Given our track record of success, disciplined execution and strategic agility, I believe the current conditions and volatility favor Arlo and may present the company with new opportunities for growth. As a reminder, Arlo is planning its largest product launch in company history for the 2025 holiday season with over 100 new SKUs launching into our channel. These new products will substantially extend our technology differentiation and achieve a 20% to 35% cost reduction, which puts us in a great position to not only mitigate any tariff impact but also win incremental opportunities to capture share in Q4 and 2026. On the last call, I gave a sneak peek of our plans for Arlo Secure 6, which includes exciting new Arlo intelligence features that substantially expand the capabilities and user experience of our subscription service. Given the success of our development program, some of these advanced features will be rolled out this month, including advanced AI and audio event descriptions, fire detection, events searching across our expanded 60 days of storage and new AI audio detections such as glass break, screaming, gunshots and barking dogs. In addition, Arlo will be rolling out Phase 1 of our advertising strategy this quarter, which will be focused on using our ad platform to promote Arlo service subscription tiers and device upgrades. Early testing has shown this as a powerful tool to extend the long-term value of our users and increase conversion to subscriptions. We believe these launches continue our momentum and set Arlo up for a successful second half of 2025. Arlo is executing extremely well and delivering strong growth across our key metrics, as we put the pieces in place for continued success throughout the year. And now, I'll turn it over to Kurt for a more detailed review of our Q1 results.
Kurt Binder, COO and CFO
Thank you, Matt, and thank you, everyone, for joining us today. We delivered strong financial results during the quarter, continuing the significant operational momentum that we gained in 2024. I will start by sharing some financial details, then provide an overview of the business for the first quarter and finish by providing our outlook for the second quarter. Entering 2025 as truly a subscriptions and services-first business, our installed base of subscribers continued its strong growth trajectory coming in at 4.9 million paid accounts, which was up 51% year-over-year. Our Q1 paid account increase still reflects some catch-up of the Verisure subscribers, while we were able to generate healthy new paid subscriber growth in the 170,000 to 190,000 range, a trend that we expect to continue in the future. The momentum behind our paid subscribers translated into another record quarter of subscriptions and services revenue, which came in at $68.8 million, a 21% increase over the same period last year. The strong services revenue performance was driven in part by growth in the overall paid subscriber base, but was primarily related to higher levels of ARPU, which grew 7% sequentially and 15% year-over-year to $13.48. We are seeing ARPU accelerate as a result of the momentum from our new customers selecting our premium rate plans as well as the overall simplification of our plan structures. Our annual recurring revenue was $276 million, also up more than 20% over the same period last year. The strength of our subscription and services revenue as well as our ARR generated strong top-line revenue performance and contributed to Arlo's record profitability, which I will discuss later. Total revenue for the first quarter of 2025 came in at $119 million, down slightly from the prior year period. Importantly, subscription and services revenue represented about 58% of total revenue, up from 46% in the same period last year. The sizable shift in revenue composition from one-time device revenue to recurring services revenue reflects the momentum that we gained in our transition to a subscription and services-driven business and the results are clearly proving the long-term sustainability of our operating model. Product revenue for the period was $50.2 million, down in comparison to the prior year and resulting principally from the decline in ASP that has been prevalent across the entire industry. We continue to leverage our products to bring customers into the Arlo ecosystem through point-of-sale volume. With the success of this approach evidenced by the total number of shipments. In Q1, we shipped a total of 1.1 million devices worldwide, which was in line with the shipment volume of the prior year period after withstanding a challenging economic environment. The more customers that are brought in through our product funnel, the more we can convert into paid subscriptions, which generates significant lifetime value for the company while insulating us from the volatility created by external factors. As our subscriptions and services business scales to become a larger component of our total business, we are seeing the contribution of our international customers slightly decline. As a result, in the first quarter, our international customers generated approximately $51 million or 43% of our total revenue, down from $70 million or 56% of total revenue in the prior year quarter. In the EMEA region, Verisure continues to be the driver of our international revenue and remains an outstanding partner, driving both product sales and supporting investment in innovation. From this point on, my discussion will focus on non-GAAP numbers. The reconciliation from GAAP to non-GAAP figures is detailed in our earnings release, which was distributed earlier today. Our non-GAAP subscriptions and services gross margin was 83.1%, a new record and up over 600 basis points year-over-year. Driven by an increasing portion of our subscriptions and services revenue generated from premium plans with higher ARPU as well as a decrease in the cost of serving our subscribers. Product gross margins remained slightly negative in the period, as we continued our promotional activity to ensure we remain competitive across all customer price segments, including at the sub-$50 market level. The product margins did rebound from Q4 levels, as we were not as aggressive with the promotional activity that we use to support the holiday season. Even with gross product margins at the current levels, we were able to expand our total non-GAAP gross margins to 46%, up a remarkable 800 basis points sequentially and 600 basis points year-over-year. This result illustrates the impact of our subscription and services strategy on the profitability of our business. Our planned device portfolio refresh in the second half of this year will further enhance our competitive positioning and allow us to continue using our products as a customer acquisition tool even in a declining ASP environment. Total non-GAAP operating expenses for the first quarter were $38.3 million, down from $40.3 million in the same period last year, and demonstrating strong cost discipline. The year-over-year decline is primarily driven by a $3.6 million reduction in research and development costs, as we invested a bit more heavily in our Arlo Secure 5 last year. We will ramp up additional investment related to Arlo Secure 6 later this year, which will result in our operating expense level increasing slightly throughout the year. As part of our evolution to a best-in-class SaaS company, we are now reporting adjusted EBITDA, a financial figure that is consistently disclosed by consumer subscription businesses in our peer group. During the quarter, our adjusted EBITDA was $16.4 million in the period, was up 76% year-over-year. Adjusted EBITDA was driven by the strong performance of the subscriptions and services business as well as our disciplined focus on cost containment. Further, we posted non-GAAP net income of $16.5 million, another record that translates into non-GAAP net income per diluted share of $0.15 and thereby exceeding the consensus figure of $0.12 for the quarter. Regarding our balance sheet and liquidity position, we ended the quarter with $153.1 million in available cash, cash equivalents and short-term investments. This balance is up $10 million since March of 2024 after considering the $12.5 million investment in Origin Wireless and the $15 million we invested in our share repurchase program. The leverage in our operating model continues to be evident, as we generated record free cash flow of $28 million during the quarter, representing a free cash flow margin of almost 24%. Our free cash flow was up an astounding 45% over the same period last year, driven by increased profitability and strong working capital management. Our Q1 accounts receivable balance was $46 million at quarter-end with DSOs at 34 days, down from 41 days last year. Our Q1 inventory balance was $35 million, down from $45 million level last year. Inventory turns were 6.3 times, up from 5.7 times last year, as we focused on maximizing the use of our inventory on hand to minimize the potential impact of tariffs on our product gross margins. As Matt mentioned, we are refreshing our entire portfolio of devices in the second half of the year, which will result in a 20% to 35% reduction in BOM costs, thereby providing an effective tool to combat both the regulatory and competitive environment. Now turning to our outlook. Looking at our financial results, Arlo continues to perform well despite operating in a volatile macroeconomic environment. We have scaled our subscriptions and services business to a level that dictates the profitability of the entire business, and we are well positioned to compete in a market defined by promotional activity and discounting. We expect to deliver these strong operational results throughout 2025, especially as we expand our relationships with strategic partners and extend our technology and platform advantage later this year. As everyone is experiencing, there is uncertainty around the potential impact of tariffs, not only on our business, but in the global economy. We are working closely with our suppliers, customers and in-country trade experts to examine the range of potential outcomes and have developed strategic plans to account for varying scenarios. Our current assumptions include existing tariff rates remaining in place with the impact being felt in product gross margins for products shipped into the United States. As previously discussed, we do expect a 20% to 35% decline in our product costs, as we roll out our new device portfolio in the second half of the year. More importantly, driven by the resilience of our subscriptions and services business, we expect to achieve the full-year financial outlook we gave last quarter, both on subscriptions and services revenue and margins as well as total revenue and EPS. Further, our outlook for the second quarter assumes a continuation of current market conditions with ASPs across the industry continuing to decline. We are expecting total revenue in the range of $119 million to $129 million and non-GAAP net income per diluted share in the range of $0.11 to $0.17.
Operator, Operator
Our first question comes from the line of Jacob Stephan with Lake Street. Your line is now open.
Jacob Stephan, Analyst
Hey, guys. Appreciate you taking my questions. Congrats on the quarter. Maybe just to start, I'll kind of ask the tariff question in a different way. Are you thinking about any sort of inventory stocking kind of ahead of July 3rd, for which my perspective is that tariffs will be reinstated on Vietnam?
Matthew McRae, CEO
Well, we've been looking at our inventory levels for the past several months. If you look at actually how we ended up the first quarter, I think we did a fantastic job of sort of leveling out our inventory on our balance sheet but actually pushing some of that inventory in the channel. And so now we're focused on making sure that between now and the first week of July, we capitalize on the available time we have to have sufficient inventory tariff-free or at least with a 10% tariff available for us to ship. There's a whole host of different things that are going into that right now. We're monitoring inventory levels almost weekly. We're in conversations with our suppliers every evening and we feel like we've got a good plan to attack it. As we've indicated in our remarks earlier, I mean, we feel great that as a subscription and services business, the majority of our revenue coming from services as well as the revenue that has been generated through product that has shipped to the EMEA are exempt from the tariffs. So, we're in a pretty good position all-in-all. So, but yeah, it's top of mind for us, Jacob. We're constantly looking and working with our supply partners and in-country trade experts to ensure we're optimizing the situation to our advantage.
Jacob Stephan, Analyst
Awesome. Could you elaborate on what this means for the second half regarding the product refresh? Do you think the products will be shipped before the July timeframe? I understand they will be priced lower for you, but will that allow enough time, or will you need to absorb some of the tariffs?
Matthew McRae, CEO
Yes. Here’s what we know. We are under the 10% tariff regime until July 8, and we anticipate a lot of discussions taking place. As you're aware, we manufacture extensively in Vietnam and some in Indonesia. Vietnam was actually engaging with the White House Administration this past weekend. I believe what we will see is similar to the announcement made with the UK this morning; the general expectation is that deals will be reached between now and July. We consider this situation in two parts. First, we anticipate remaining under the 10% regime until July 8, though this could be shorter. Our execution amid these tariffs has shown to be effective, and we view this as a minor increase with a focus on boosting subscription revenue, seeing a lifetime value of $700. Being a services business helps shield us from the tariffs impacting our hardware segment, and as mentioned, less than 25% of our business will be affected. The second aspect relates to your question about what happens after July 8. We believe it is likely that deals will be finalized concerning our manufacturing partners. Although we cannot confirm this, coupled with our upcoming product launches—most of which will not be produced before July 8—we expect that most production for the holiday season will occur after that date. Since these products are projected to have a 20% to 35% cost reduction, it suggests that the average sales prices in the second half may not be as low as initially anticipated, but we will remain aggressive to achieve our goal of $300 million in annual recurring revenue or service revenue by the end of the year. We feel confident about our position. The product launch is well-timed for the holiday season and can withstand the impact of tariffs. If the tariff agreements are lower than the anticipated 10% plus the 20% to 35%, we can reduce average sales prices and be more competitive in the marketplace. This is our current perspective; there is the timeframe before and after July 8, and we believe we are well-prepared. You’ve seen our guidance for Q2, and we expect services to continue growing. We're identifying opportunities, especially as some competitors that are hardware-focused are having difficulties in product delivery. Post-July 8 is still uncertain, but we are projecting a similar tariff scenario as we have now, understanding that we will experience significant cost reductions, which should keep us competitive in the second half.
Jacob Stephan, Analyst
Okay, got it. That's very helpful. Maybe if I could just ask one more quick one on the ad platform. Obviously, it sounds like that's about to be launched here. But maybe you know, from my interpretation, it was going to be geared more towards advertisers and kind of larger brands. But it sounds like it's going to be more promoting upgrades in the subscriptions, upgrade to products. Can you just kind of walk me through that a little bit?
Matthew McRae, CEO
Yes. So, in our beta testing, and as you know, we talked about it last year when we said we go into beta testing in Q1. Obviously, we tested third-party ads, and we actually tested our own what we call house ads, so ads for good services and maybe discounts and hardware for Arlo. And we actually saw a really strong reaction, conversion and click-through on the Arlo ads. So, what we're doing in Phase 1 is we're going to roll out and actually started on May 1. So, we've already rolled the ad platform out and we're going to specific cohorts and we're starting to pitch Arlo services. Phase 2 could be opened up to third-party, but I think the return on investment and what we saw in the beta testing as far as lift on conversion was strong enough that we think the right first step for this ad platform is actually to advertise our own services and hardware to the active users that we have across the world.
Jacob Stephan, Analyst
Okay. I appreciate it. Good luck going forward here guys.
Matthew McRae, CEO
Thank you.
Operator, Operator
Thank you for your questions. Our next question comes from the line of Logan Katzman with Raymond James. Your line is now open.
Logan Katzman, Analyst
Thank you for taking our question. This is Logan representing Adam. I want to focus on the international aspect. Europe experienced a decline of 30% year-over-year. Could you provide more details on the factors contributing to this? Additionally, I believe you mentioned that there is still some Verisure catch-up in your subscriber numbers. Could you quantify that impact and share your expectations on when the Verisure catch-up will be completed?
Kurt Binder, COO and CFO
Yes, sure. Let me touch on the results from Verisure on the revenue. So, with Verisure, there's a couple of things that are in play. First off, we’ve seen over five years of our relationship that they have a destocking stocking timeline associated with their ordering and supply chain. And if you go back in the previous year, we were in more of a stocking coming into 2025. So, the inventory levels, I think were a bit higher in 2024, as we came into the first quarter of 2025. So that was the first thing. The second thing is that on Chinese New Year in early 2025, it was pulled forward. And so as a result of that, we were working with their supply chain probably back in, I would say, September, October timeframe to make sure that we were able to order the product and deliver it towards the end of Q4 so that they had enough going into the first quarter and didn't get jammed up on the accelerated timeline around Chinese New Year. And then the last thing is, there was a regulatory guidance that came out regarding USBC requirements in Europe. A switchover was required to make sure that consumer electronics companies were normalizing the connector points for all of the consumer electronics out there. As a result of that particular changeover, we worked with them to make sure that they had adequate inventory for purposes of their retail business and that was done again in Q4, which did impact Q1 of this year. But I would say to you, the relationship is still very strong. The demand is very strong with them as it stands right now, and we're looking forward to having another good year with Verisure in 2025.
Matthew McRae, CEO
On the catch-up, just to answer the second part of your question on the catch-up, Kurt mentioned it in the prepared remarks, we had nearly 300,000 ads. If you back out the catch-up, we believe it was right in that 170 to 190 that we've been guiding the street. We think this is the last quarter of the catch-up. We haven't seen anything pull-through in the first five weeks of the quarter. But what we're seeing so far is batch processing that looks like it's the normal batch processing for ads that are going into their South region, which is the area that had the firmware issue that caused some of this stuff to have the catch-up. So, we did about 300,000. Normal would have been right between 170 and 190 right on plan and we think this is the last quarter that we'll see that catch-up effect.
Logan Katzman, Analyst
Great. Thank you. That's super helpful. And then this is the second quarter that product gross margin was negative. And I understand the new devices are coming in at a lower cost to produce, but at least until those come in, do you expect a negative gross margin for product to hold? I understand you guys don't necessarily guide directly to it, but any high-level thoughts would be greatly appreciated. Thank you.
Kurt Binder, COO and CFO
Yes. Thanks for that question. I guess what I wanted to do is start with highlighting what happened with our combined gross margins. If you look at our combined gross margins, they actually grew quite nicely quarter-over-quarter and year-over-year. If you look at quarter-over-quarter, we were up 800 basis points on our combined gross margins and year-over-year, we were up 600 basis points. Even taking into consideration that Q4 and this Q1, we were slightly negative on the product gross margin. So, I just emphasize that point because that is critical to understanding our strategy that we are comfortable using the device and the hardware as our cost of customer acquisition. When we look at what's happening from whether it's a competitive dynamic or regulatory scenario, we still plan to use hardware as that customer acquisition tool. So, yes, we had negative gross margins in Q1, we'll evaluate the market conditions to determine how we want to play out Q2 and frankly, for the remainder of the year, but we're confident that we will show that our combined gross margins have the potential to continue to grow over time. And we're pretty pleased by that because it shows kind of instantiates the overall effectiveness of our strategy that we're rolling out.
Logan Katzman, Analyst
Understood. Thank you.
Kurt Binder, COO and CFO
Thank you.
Operator, Operator
Thank you for your questions. Before our next question, we ask that all participants ask one question and one follow-up question. Our next question comes from the line of Scott Searle with ROTH Capital. Your line is now open.
Scott Searle, Analyst
Hey, good afternoon. Thanks for taking my questions. Nice job on the quarter. Hey, Kurt, just quickly to clarify your comments on product gross margins. It sounds like you get to 25% to 30% cost-down on the Series 6 platform as that starts to ramp up. So, is the plan to continue to push with negative gross margins in the fourth quarter and into 2026 or to be determined on that front? And Matt, just to clarify in terms of some of your comments, the competitive landscape, and the impact on tariffs, what percentage of your competitors right now are really in that position of struggling with Chinese manufacturing? And what kind of share shifts are you seeing in the first several weeks of impacts with that in-line?
Matthew McRae, CEO
Yes, I'll go first and then Kurt can provide insights on the product gross margin. Most competitors in our segment manufacture in Asia, and aside from China, the differences between countries are minimal. Companies manufacturing outside of China in Asia share similar challenges. There are a few brands with significant volume in China that are trying to move away due to higher tariffs compared to other regions. The more significant impact comes from whether a competitor has a strong and successful services business. For Arlo, we primarily operate as a software and services company, focusing on subscription revenue, which means we use hardware mainly for customer acquisition. This strategy protects us from tariff impacts since it slightly increases our customer acquisition costs while still allowing us to acquire customers worth nearly $700 in long-term value. In the competitive landscape, about 50% of unit volumes are from hardware-only or hardware-focused competitors, and we are seeing some of them struggle. Our retail partners are asking if we have excess inventory because they anticipate not receiving enough from other vendors. We've even received some early purchase orders as an indication. Hardware companies feel the immediate effects of tariffs, affecting their profitability and gross margins. It's challenging for them to justify product costs while maintaining any profitability. In contrast, as a software and services company, the impact on us is minimal and manageable through our strategy. We are closely working with our supply chain partners to mitigate some costs and optimize our processes. We might see a slight increase in customer acquisition costs, but we also have opportunities to expand our market share as we progress. From Q1 and the first few weeks of Q2, we've consistently gained share across all our key accounts. Some of this was aided by the launch of Arlo Secure 5 and aggressive pricing in Q1. As we navigate the tariff situation, we believe we are in a stronger position than many competitors and expect to continue capturing market share.
Kurt Binder, COO and CFO
Yes, Scott. And then in terms of the response on the product gross margin, let me just highlight that as we've mentioned in the past, our approach to the pricing on the product is more around driving POS, point-of-sale volume. And the whole concept there is we can continue to grow POS quarter after quarter means that we're filling our funnel with plenty of households, active households that we believe we can convert. Our conversion rates still are actually trending very favorably and that is a great thing. What we're doing is using that pricing on the product and the margins associated with it as that lever or that tool to ensure that the funnel is full and giving us that opportunity to convert households. The great thing is we're proving out to everyone that even in those scenarios where product gross margins may go negative, it's okay because when you look at the growing margins on our services at 83% plus and you combine that with the product gross margins where they are right now, the combined gross margins are accelerating very nicely. So, we're extremely pleased with the way things have actually rolled out here the last couple of quarters and we tend to be very aggressive on our promotional planning. In parallel with that, we're going to do everything possible, as Matt mentioned, to roll out this 20% to 35% cost reduction on the BOM to help us with these regulatory matters as well as to be competitive with our promotions.
Scott Searle, Analyst
Great. Thank you. And if I could just Matt, on the pricing on Secure 6, I'm not sure if we heard it, but should we assume premium pricing on that, or will it just be monetized in other ways like ads and otherwise as you would have been addressing? And any thoughts on other strategic partners within insurance or some of the other categories there? What's going on? How do we expect that to roll out over the next couple of quarters? Thanks.
Matthew McRae, CEO
Yes, that's a great question. We implemented changes with Arlo Secure 5, launching the platform in late Q3 and early Q4, which led to an increase in ARPU and a shift towards premium plans. Our next move was to restructure our plans, which we did in January, and most of those changes were reflected in February, resulting in a partial impact on our Q1 results. We expect a larger impact as we progress with the business. This restructuring is also driving ARPU growth and transitioning more users to the new plans. The adjustments made in January were strategic, anticipating the upcoming Arlo Secure 6. Today’s plans and pricing simplify our offerings to just two options, both of which are the premium tiers we previously offered, now rebranded as our Arlo Secure 6 plans. Typically, Arlo Secure 6 would launch around Q3, but due to the success of our testing and development, particularly with event scene descriptions and advanced AI features enhancing user experience, we decided to roll them out earlier. These will start to become available in May, and we’re excited to share this development, allowing users to experience Arlo Secure 6 ahead of schedule, with additional features coming later this year. The plans we established in January were designed with Arlo Secure 6 in mind, positioning us well for the future. What was the second part of your question?
Scott Searle, Analyst
Oh, just an update on insurance and strategic partners in that area? What's going on? How do we expect that to roll-out over the next couple of quarters? Thanks.
Matthew McRae, CEO
Partnerships are moving along well. As I mentioned on the last call, we are particularly focused on one or two key accounts. One of them just missed the deadline, which we will discuss soon, and I anticipate another one emerging in the second half of the year. I believe these partnerships will be significant, and we are excited about them, having worked on them for over six months. We expect them to materialize this year and have an impact, particularly in the second half, as well as a substantial effect as we approach 2026.
Scott Searle, Analyst
Thanks so much.
Operator, Operator
Thank you for your questions. Our next question comes from the line of Hamed Khorsand with BWS Financial. Your line is now open.
Hamed Khorsand, Analyst
Hi. So, I just wanted to understand, given the dynamics of what's happening on your ARPU line, is that the increase coming because you're selling - you raised prices or is that coming because of a natural increase from the retail channel?
Matthew McRae, CEO
Yes. If we look at ARPU, there are a couple of important points. When we launched Arlo Secure 5 in late Q3 or early Q4 last year, we noticed a shift towards more premium plans, which increased ARPU from around $11 to over $12. The changes we made in January, where we eliminated our basic plan and focused on plus and premium plans, have also contributed to the rise in ARPU. This improvement can be attributed to the features introduced with Arlo Secure 5, and we aim to maintain this momentum with Arlo Secure 6. Additionally, based on the data collected after the launch of Arlo Secure 5, we have restructured and simplified our plans, further elevating ARPU. As for the latest figures, Arlo Secure 5 helped us increase ARPU from about $11 to over $12, and now we are above $13 and possibly moving towards $14. As I mentioned in the last call, the ARPU for new subscribers is approximately $17. This gives us confidence that ARPU will keep rising throughout the year as we implement Arlo Secure 6 and the new plan structure leading into 2025 and 2026. So, starting from $11 to $12 last year, we're currently at about $13.50, and we anticipate further growth, which will enhance both service revenue and profitability.
Hamed Khorsand, Analyst
Great. Thank you.
Matthew McRae, CEO
You're welcome.
Operator, Operator
Thank you. I believe I've lost. There we go. Our next question comes from the line of Rian Bisson with Craig-Hallum Capital Group. Your line is now open.
Rian Bisson, Analyst
Hey guys, it's Ryan on for Tony Stoss. Most of my questions have been asked already, but I just wanted to get an update, see what you guys are seeing. It's good that ARPU is going up, service revenues are going up. What are you seeing in terms of churn and conversion rates? Any changes there maybe even positively?
Matthew McRae, CEO
Yes, we are seeing improvements or consistent performance across all metrics. Changes in our service plans, whether structural or price increases, have generally resulted in positive outcomes. We did experience a slight increase in churn, similar to what we observed a year ago when we adjusted single plan pricing, and two years ago with a larger plan price hike. However, that churn has now returned to normal levels and continues to improve. The changes in plans have behaved as we anticipated. We have established a churn steering committee and action group, and believe we can enhance these figures even further going forward. Churn has returned to the baseline and continues to improve. Conversion rates are strong across all cohorts, service revenue is increasing, ARPU is rising, and we have also seen an expansion in profitability from a service gross margin perspective. Overall, every metric of our services business is performing well, and we expect continued improvement throughout the year.
Rian Bisson, Analyst
All right. Great. Thanks guys and congrats on the results.
Matthew McRae, CEO
Thank you.
Operator, Operator
Thank you for your question. That concludes today's conference call. You may now disconnect your line.