Smart security company Arlo (NYSE: ARLO) announced better-than-expected revenue in Q3 CY2025, with sales up 1.4% year on year to $139.5 million. The company expects next quarter’s revenue to be around $136 million, close to analysts’ estimates. Its non-GAAP profit of $0.16 per share was 8% above analysts’ consensus estimates.

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“Arlo again delivered another outstanding quarter fueled by our services business. Our ARR accelerated to $323 million, up about 34% year over year, driving non-GAAP subscriptions and services gross margin to over 85%, a record level and a spectacular increase of 770 basis points year over year,” said Matthew McRae, Chief Executive Officer of Arlo Technologies.

Company Overview

Originally spun off from networking equipment maker Netgear in 2018, Arlo Technologies (NYSE: ARLO) provides cloud-based smart security devices and subscription services that help consumers and businesses monitor and protect their homes, properties, and loved ones.

Revenue Growth

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.

With $509.6 million in revenue over the past 12 months, Arlo Technologies is a small player in the business services space, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and numerous distribution channels. On the bright side, it can grow faster because it has more room to expand.

As you can see below, Arlo Technologies grew its sales at a decent 6.9% compounded annual growth rate over the last five years. This shows its offerings generated slightly more demand than the average business services company, a helpful starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within business services, a half-decade historical view may miss recent innovations or disruptive industry trends. Arlo Technologies’s recent performance shows its demand has slowed as its annualized revenue growth of 3.6% over the last two years was below its five-year trend.

This quarter, Arlo Technologies reported modest year-on-year revenue growth of 1.4% but beat Wall Street’s estimates by 0.6%. Company management is currently guiding for a 11.9% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 8.3% over the next 12 months, an improvement versus the last two years. This projection is admirable and suggests its newer products and services will spur better top-line performance.

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Operating Margin

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Although Arlo Technologies broke even this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 7.3% over the last five years. Unprofitable business services companies require extra attention because they could get caught swimming naked when the tide goes out.

On the plus side, Arlo Technologies’s operating margin rose by 13.5 percentage points over the last five years, as its sales growth gave it operating leverage. Still, it will take much more for the company to reach long-term profitability.

In Q3, Arlo Technologies’s breakeven margin was up 4.1 percentage points year on year. This increase was a welcome development and shows it was more efficient.

Earnings Per Share

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Arlo Technologies’s full-year EPS flipped from negative to positive over the last five years. This is a good sign and shows it’s at an inflection point.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

Arlo Technologies’s EPS grew at an astounding 120% compounded annual growth rate over the last two years, higher than its 3.6% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Arlo Technologies’s earnings quality to better understand the drivers of its performance. Arlo Technologies’s operating margin has expanded over the last two years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q3, Arlo Technologies reported adjusted EPS of $0.16, up from $0.11 in the same quarter last year. This print beat analysts’ estimates by 8%. Over the next 12 months, Wall Street expects Arlo Technologies’s full-year EPS of $0.58 to grow 25.6%.

Key Takeaways from Arlo Technologies’s Q3 Results

We were impressed by how significantly Arlo Technologies's EPS guidance for next quarter blew past analysts’ expectations. We were also glad its revenue, EPS, and EBITDA outperformed Wall Street’s estimates. Overall, we think this was a decent quarter with some key metrics above expectations. Investors were likely hoping for more, and shares traded down 2% to $16.59 immediately following the results.

So should you invest in Arlo Technologies right now? When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free for active Edge members.