Q3 2019 Earnings Call
Everyone and welcome to the I Robot third quarter financial results Conference call. This call is being recorded at this time for opening remarks, an introduction I would now like turn the call over to Andy Kremer I Robot Investor Relations. Please go ahead.
So I guess and good morning, everybody before I introduce the I wrote my management team I would like to know that the statements made on today's call. They're not based on historical information are forward looking statements made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995. These forward looking statements are subject to risk.
Certainties and involve many factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information on these risks and uncertainties can be found in our public filings with the Securities and Exchange Commission I robot undertakes no obligation to update or revise these forward looking statements whether as a result of new ones.
Permission or circumstances.
During this conference call you May also disclose non-GAAP financial measures as defined by FCC regulation G, including adjusted EBITDA non-GAAP gross profit non-GAAP operating income non-GAAP income tax expense non-GAAP net income and non-GAAP net income per share our definitions of these non-GAAP financial measures and record.
Celebrations of each of these non-GAAP financial measures to the most directly comparable GAAP measure are provided in the financial tables at the end of the third quarter 2019 earnings press release that we issued last evening, which is available on our website.
On today's call I robot Chairman and CEO conical will briefly review of the company's performance for the third quarter 20, Nike highlight major accomplishments and offer his perspective on the major drivers shaping our outlook for the full year.
Alison Dean Chief Financial Officer will detail, our financial results for the third quarter. Its 20, Nike and review our updated expectations for 29.
Colin will then wrap up our prepared remarks with his thoughts on our committed or your view into 2020.
After that we'll open the call for questions.
This point I'll turn the call over to holiday.
Good morning, and thank you for joining us.
Despite challenging market conditions for the United States, We reported a good quarter with both revenue and EPS, surpassing our plan.
Revenue of 289 million grew 9% due to strong international growth, there's a large Amazon ship, we previously expected to occur in the fourth quarter.
For topline growth was driven by 25% international growth, primarily due to a 27% increase in EMEA and a 40% gross in Japan.
More than offset a 7% decline in the U.S., but.
Well, we believe that are both overseas exemplifies the categories overall health and vitality U.S. category growth has remained subdued has the direct and indirect impacts from rising tariffs on Chinese imports weighed heavily on consumers retailers and suppliers.
From a bottom line perspective, the combination of higher revenue better than anticipated gross margins and disciplined spending resulted in a 15% operating margin and he P.S. or $1.24.
Given our results and accomplishments to date, our plans going forward and current market conditions, we have narrowed the range on a full year 2019 expectations, which will discuss later on the call.
We executed well across many fronts during the third quarter relate to briefly highlight those important accomplishments.
Our growth in EMEA demonstrates our ability to participate in the categories robust expansion despite aggressive price competition.
During the third quarter, we launched the rule the S 99 clubs as well as the Braava jet and six robot in EMEA further differentiating us in the premium segment.
Our accomplishments in this region also included progress with a beta trials over Taro robotic lawnmower in Germany, which will be I think shortly in conjunction with me and well demoing seasonal.
We expect to commence online sales in Germany next year.
I'll provide some additional color frontera in a few moments.
Asia Pacific region, we enjoyed low double digit revenue growth. Thanks in large part two outstanding performance in Japan.
Our topline growth in market share expansion in Japan reflects solid execution corporate go to market plans.
Sell through actively social activity remained very strong in the third quarter in advance of an increase in Japan's consumption tax earlier this month.
During the quarter, we successfully launched the Braava jet and six in Japan and plan to introduce the S 90, plus early 2020 .
With the launch of the Braava jet Mpsix consumers worldwide are now benefiting from it means a mainstream mopping robot that offers the powerful combination of coverage cleaning capabilities and spatial awareness.
Thanks, and perks to the M. six early traction in our expectation for a strong Q4, we anticipate that are braava category will surpass $100 million annual revenue and at least 20% year over year growth.
We believe the sales ramp up Pmsix is an important step forward it making braava the second pillar of our growth engine and in diversifying our business beyond backing.
Tariff represents a third emerging pillar for future growth.
In addition to the previously mentioned activities in Germany. We also commenced a smaller close closely controlled beta trials in the U.S. that will run until the end of October .
We're not putting the sales marketing and operational plans in place to support limited U.S. online sales return next year.
We are focusing development on further enhancing Terry software, thereby elevating overall performance, including mission completion rates and system installation.
We believe that our learnings over the coming quarters can related software enhancements will set the stage for large scale commercial launches in the spring of 21.
In addition to our third quarter international product launches our investments in digital features is delivering tangible value to consumers worldwide.
Our newest robots were designed to software centric product platforms, which enable us to incrementally improved performance and deliver completely new features and functionality through over the air updates. For example, we recently added new features like keep milestones, which allow orders that doesn't make areas that are robots are proof.
Okay, great emitted from country.
Smart charge and resume which enables group, it's a chart only enough to resume and complete its mission.
And we added imprint linked technology to our existing looming 900, sleep, which supports pairing with the EMS six to coordinate vacuuming thin mocking missions.
These new capabilities demonstrate the species the value of special awareness in our remarks, we believed that our robust understanding of their environment will enable them to play an increasingly important role in making this market smarter.
We're working closely with select Smart, who development partners, who plan to leverage certain datasets collected by air robots with the consumers approval.
Additionally, we are advancing activities that will enable our products work seamlessly with other smartphone device.
We believe that further progress in this area will increase or competitive differentiation.
Thereby further building consumer loyalty and driving sales in the process, we expect to shed more light on these efforts over the coming quarters.
I'd like to now turn my comments to the U.S. marketplace, what category growth has been muted by rising tariffs on Chinese influence.
Last year at this time tariffs were 10% on the list three goods, which include robot vacuum cleaners.
However, this tariff increase to 25% in may of 2019.
Although August through August U.S. category growth has moderated well below the 30 plus percent CAGR experienced over the past several years.
During this period, we gain share in the category.
To partially offset the higher costs associated with the 25% tariff rate, we raised prices and most of our RBC lineup in late July .
Most competitors, however opted to absorb the terrorists and keep crisis study.
Subsequently, we experienced greater demand at last 50 than we expected.
Which resulted in sub optimal sell through in August and September to drive consumer demand and defend our category leadership, we rolled back prices pre tariffs levels earlier this month.
Most of our skews.
Based on preliminary data. It appears that this tactic has helped improve sell through levels and we're optimistic that are marketing and promotional plans will facilitate further progress.
We understand the prioritization prioritizing growth.
Through lower prices, while incurring higher tariffs will increased pressure on gross margins and overall profitability in the fourth quarter.
And into 2020.
Accordingly, we are taking steps.
To get out from under these terrorists well operating as efficiently as possible as long as these severe tariffs persist.
First we are aggressively pursuing an exemption from list free tariffs that submitted or application for an exemption at the beginning of July .
We believe that are position has strong merits, but with over 30000 applications now awaiting review it could take several more quarters before we learn whether our request for an exemption will be granted.
Second we have made great progress with our efforts to diversify manufacturing outside China.
Products from a contract manufacturers and new line in Malaysia were successfully qualified during the third quarter than we are ahead of schedule to support volume production to begin 2020 .
Well, we are still finalizing 2020 volumes from Malaysia. Our current plan is to produce one entry level skew in this country and add additional skews as needed.
Finally, we continue to control operating costs by curbing discretionary spending and carefully managing the timing pacing of hiring.
These actions are expected to help us keep operating costs relatively flat in fourth quarter versus the same quarter, one year ago and will help limit expense growth in 2020.
Before I conclude my comments I'd like to offer my thoughts on our recent patent litigation.
As many of you know during the past decade, I robot has withstood many competitive forays into our category.
During this time, we've invested aggressively to why didn't or competitive moat by innovating and protecting our intellectual property with over 1000 the patents.
In 2017, we undertook substantial legal action against multiple competitors that ultimately resulted in a favorable ITC ruling and related settlements.
Last week, we took legal action to gaming preliminary injunction.
To order one of our competitors sharp ninja to hold all sales and distribution of its newest robot based on infringement of certain I robot patents related to features launched inter ice seven plus robot.
Our engineers have worked tirelessly over many years to perfect auto evacuation technology, along with our smart mapping capabilities, we will drop standby and watch any competitor tried to tilt the playing field in their favor by misappropriating, our intellectual property and we are taking these actions to protect our innovation.
Given that this litigation is ongoing.
We will refrain from commenting further and we would appreciate your understanding in this regard.
In summary, we expect to deliver revenue and operating income at the lower end of the revised 2019 financial targets that we set in July with EPS near the midpoint.
Category growth outside the U.S. remains very robust and the success of our new product launches in India, and Japan are helping us fortify our leadership position.
In the U.S. market conditions remain challenging, but we have taken decisive steps to defend our technology and the market leadership.
At the same time, we will continue to diligently manage our cost of funding initiatives that are crucial to long term success.
Hi, robot has pushed the boundaries of what is possible in consumer robotics by refusing to rest on this laurels and by setting in achieving ambitious goals.
We're excited for what we believe it in store over the coming years, and we're prior or typing accordingly to drive success in 2020 and beyond that.
I'll now turn the call over to El Centro review, our third quarter results in more detail.
So that I will return to offer some closing thoughts on our plans for 2020 Allison.
Thanks, Collyn I'd like to preface my comments by reminding investors that all comparisons for the third quarter and the first nine months at 29 team will be against the comparable period of 2018, unless otherwise noted.
Our third quarter results exceeded our plans for revenue operating income and EPS.
Quarterly revenue increased 9% to 289 million, thanks to strong 25% growth overseas fueled by 20, 827% increase in EMEA and 40% growth in Japan.
Which more than offset a 7% decline in the U.S.
In July we had expected third quarter revenue would be slightly down versus last year in part because we expect that a large shipment for Amazon to occur in the fourth quarter.
Amazon subsequently adjusted its plans once again and requested the shipment in the third quarter.
Our 47% gross margin for the third quarter was better than expected, but down 400 basis points year on year, due primarily to pricing and promotional activity and the impact of tariffs.
With that said the impact of these items on Q3 gross margin, that's partially offset by progress in our ongoing effort to reduce Cogs.
Operating income for Q3 was 43 million.
Q3, operating expenses decreased by 4% to 94 million, representing 33% of revenue versus 37% last year.
The decrease in spending in absolute dollars reflects ongoing fiscal discipline across each major functional area as well as lower short term in long term incentive compensation expenses.
The combination of higher revenue and lower operating costs more than offset the gross margin decline, enabling us to deliver a 50% operating income up from 14% in the same quarter one year ago.
Our Q3 2019 effective tax rate was 18.2%, including point 2 million of discrete benefits.
Our Q3 tax rate before discrete items was 18.6% driven by higher than expected R&D tax credits.
EPS was $1.24 for the quarter, which included just one penny of a net discrete tax benefit.
Related to the impact of stock based compensation windfall.
Last year's Q3, EPS of $1.12 included 13 cents related to stock compensation windfalls.
For the first nine months of 2019, our performance reflects revenue growth of 11% to 787 million, an operating income decline of 8% to 70 million and EPS growth of 3% to $2.27.
We ended Q3 was 91 million in cash down from 157 million at the end of Q2 and inline with our expectations as we built inventory for the heavy Q4 sales season.
Q3, ending inventory was 200 freedom 48 million or 149 days compared with 161 million or 113 days last year.
Recall that our U.S. inventory value at the end of September includes the impact of terrorists at the 25% level.
Consistent with our commentary on prior calls we believe that inventory levels have peaked in Q3 and will decline significantly at yearend.
I'd now like to provide you with additional detail on some of the underlying assumptions for our full year 2019, and fourth quarter financial expectations.
We currently expect full year revenue of $1.2 billion to $1.21 billion, which equates to year over year growth of approximately 10% to 11%.
This full year target implies fourth quarter revenue in the range of approximately $413 million to $423 million and year over year growth of up to 10%.
We expect high single digit growth in the fourth quarter in the U.S. and internationally.
Our revenue expectations contemplate yen in Euro exchange rate roughly in line with current rates plus or minus 5%.
As you know 2019 has been a year of unprecedented new product launches.
This was highlighted by the international introduction of the room I seven plus.
The domestic and EMEA introductions of the room, but Epstein plus.
The launch of Braava jet M., six and most major markets worldwide.
And initial commercial activities for Tara.
Overall revenue from these products is expected to exceed our 2019 target of having 15% of total 2019 revenue come from new products.
As Kolon noted, we expect the Braava family to deliver annual revenue growth in excess of 20%.
In terms of gross margin.
We expect increased Q4 pressure, primarily due to the combination of the recent price reductions.
Typical fourth quarter promotional activity and the impact of the tariff costs.
We anticipate full year gross margin of approximately 45%, which is at the low end of our prior range.
This implies Q4 gross margin of approximately 40%.
We still expect that the direct tariffs cost for the full year, we'll be in the range of 35 to 40 million, which covers current tariffs levels.
For the full year, we now expect operating expenses to totaled 39% of revenue with only 3% year over year expense growth as we have curved spending to mitigate the impact of the previously reduced revenue outlook and gross margin pressure.
We now expect full year operating income of approximately 75 to 80 million with an operating margin between six and 7%.
We currently anticipate some favorable benefits to both non operating income in Texas.
The acquisition of one of our investments closed earlier this month, which we expect will contribute other income of over 8 million.
In terms of taxes, we now expect our full year tax rate before discrete items to be approximately 19%, which is at the low end up the prior range of 19% to 21% driven by the higher R&D tax credit.
As a result, we expect our full year EPS to be between $2.60 to $2.80 with Q4 EPS in the range of 33 to 53 cents.
In summary, our performance in the third quarter exceeded our plans, reflecting positively on our execution around the globe.
As we work to finalize our annual operating plan for 2020, we do sell with the recognition that U.S. marcon conditions have changed profoundly during the last year.
We have taken and we'll continue to take the actions that we believe will enable us to protect and advance our technology and category leadership.
And ultimately emerge from this environment as a stronger company.
Outside of the U.S. the growth dynamics remain vibrant.
Although there is intense competition, we remain confident in our ability to capitalize on the opportunities we see to further expand our business overseas.
At the same time, we plan to carefully manage our cost structure without impacting our ability to advance innovation and engage and support our retailers and consumers worldwide.
I'll now turn the call back to college for his preliminary thoughts on 2020.
Thanks Allison.
As we move forward our team is focused on executing on a variety of strategic priorities in 2020.
These include keeping prices at pre tariff levels to drive us segment growth and protect our market share.
Delivering on a roadmap to delight the consumer across our product portfolio spending RV exceeds robotic mobs.
Hey, robotic lawn mowers.
Driving roomba sales globally by capitalizing on the efficiency of our working media spend for Roomba will tapping further into the strong brand loyalty, we built to further diversify beyond vacuum.
And leveraging our substantial is ongoing investment in software to further differentiate our robots and elevate the user experience.
There's also noted we have not yet finalized for 2020 operating plan.
Accordingly, or not yet prepared to share a specific expectations.
Nevertheless, we'd like to share some of the performance parameters that are guiding our planning, which we expect to further refined over the coming months.
We see sufficient demand to support revenue growth in excess of 10% 2020.
As we expect to benefit from recent pricing adjustments promotional programs and broader marketing activities.
In particular, we expect room that Bravo will continue to be our primary growth and into next year.
And we plan to launch at least one new Roomba platform next year.
Although we do not anticipate material revenue from Taro next year. It will be important here in tears maturation, which is critical for ensuring a strong commercial ramp in 2021.
Gross margins will obviously be challenged fixed here to the combination of current tariffs and aggressive pricing in certain markets.
Regarding tariffs, we believe that the current 25% tariff rate on ruble represents a short term phenomenon that has temporarily stunted top line growth and eroded profitability.
We remain optimistic about opinion exemption at some point in 2020, even as negotiations to end the trade for continue.
The tariff environment continues to be very fluid and as a result copolymer review does not include the impact of possible. This three or list for tariff increases nor does it reflect the potential benefits of an exemption.
Looking ahead, we plan to continue to limit or China exposure by moving production to Malaysia.
While ramping production in Malaysia will help us mitigate some gross margin pressure. We currently expect 2020 gross margins to drop below 40% on the cap thesis.
We continue to assess our operating cost structure as we strive to strike a balance between limiting expense growth without handicapping or ability to fund short and long term growth initiatives, while we plan to throttle spending in certain areas. We remain committed to funding the programs people in partnerships that we believe.
Are critical to long term value creation.
As a result, we anticipate relatively minimal operating expense leverage which will only slightly offset expected year over year gross margin decline on a 2020 operating profit margin.
That concludes our comments.
We're now ready for questions.
Thank you as a reminder to ask the question do you want me to press Star one on your telephone, which all your question first Apache Please standby, while the compiled a county roster.
Our first question comes from job that cost of Bank of America Merrill Lynch. Your line is that open.
Good morning, Thanks for taking my questions starting out with what you're seeing out of China are there any thoughts to producing more your products outside of the country and then on top I was wondering what you believe the impact of the 25% tariffs will be on an annualized basis.
Isn't that you provided already kind of tariff adjustment for this year.
So the.
We have a multi layer plan for getting out from under tariffs certainly pursuing the exemption is the.
The.
Fastest and most profitable.
Path, but certainly are poised to not solely rest upon that.
We'll have.
One line operating at scale for entry level products.
Which will provide some relief in 2020.
And.
Continuing our efforts to.
Find ways to move.
Higher complexity products outside of China, depending on what we're seeing relative to the.
The tariffs situation.
In in China, and frankly, just the the physics of.
Moving these more complicated products. So certainly Malaysia is playing a growing part of our strategy.
And it we're not.
Holding our breath and waiting for tariffs to two end or to be exempted, though that is the most favorable outcome for my robots perspective.
And John the impact to 2019 that we currently expect from terror still in the range of $35 million to $40 million.
Okay I, just I guess that second part my question I was also probably revolving around how you're thinking about that for next year.
Oh, you know as we finalize the work on our 2020 flamel communicate that clearly up 25% tariffs hold.
The impact next year will be more significant than this $35 million to $40 million range that we're seeing in 19, which add 10% at the beginning of the air 25% for only part of the year.
Okay and.
And then just the next kind of question or two here or do you have a sense for how fast the robot vacuum category grew in the U.S. Simeon hey, packed during the quarter.
I'm also Allison from a volume standpoint are you comfortable with where inventory step.
Sure on the inventory front, we did build inventory in the in the third quarter in anticipation of the holiday selling season.
And with our forecast, we expect our inventory levels to go back to normal levels by the ended the year likely even be less than we had.
Coming out of last year.
The segment growth in the U.S.. Our data is a few weeks in arrears, but through August the U.S. segment grew probably in the high single digits.
Again, which is slower than what we had anticipated coming into the year.
And that was for Threeq you.
That was a year to date through August .
Thats Rogers Gotcha.
And then just the last question before I turn over you know I was wondering if you had kind of talked about obviously.
The robot southern capabilities that your current ones have such as navigational improvements offered by the southern enough nine.
Wondering what our customers looking forward that would drive the next incremental changes for the room been braava from here.
So we believe there's significant opportunity to.
Improved brief the the function of the robots would be.
Launch of auto Eva.
The numbers of days that the robot can operate without getting stuck and the direct ability of the robot.
Have emerged as being very highly valued by our consumers and so the the idea that.
And this grows into.
The next steps on the smart home.
Consumers are looking not for a complexity.
But for reliable trusted simplicity in that role technology plays in their home.
So the idea that you can come home every day.
To a freshly vacuumed Holden.
And have tremendous capability of.
Ensuring the robot cleans exactly what you wanted to clean.
Our emerging Lee appreciate if things are also very difficult to do well, which plays nicely into I robots core competency.
That I mentioned, a little bit about connecting more broadly into the smart home.
So that.
The work that we have done and or approach to delivering that type of experienced to the consumer can extend.
To an overall smart home experience.
So its a.
It's a very exciting time and I feel like.
Over the next two years, we're going to see the smart home.
Start to deliver on the promise for which it has disappointed to some degree over the last five years.
Thanks, Paul.
Yep.
Next question.
Thank you and then next question comes from Genworth County of Needham and company. Your line is now open.
Hi, good morning, trying to reconcile some of the comments you made of doubt.
The the resistance that you've seen from from consumers in the U.S. to a higher prices to the fact that you think you gained share in that category. So what I'm wondering is if there's been a mix shift within the room, but business. If you noticed any kind of a shift during the quarter before you took some of the.
Pricing actions.
Okay.
Sure they.
So the wesco we.
Brought up the fact that.
Competitive competitors in North America.
Hi.
Materially scaled back on demand generation activities.
So that.
At the heart of it.
Hi robot Gainshare.
In North America, as we continued to build and spend against market growth and continued to deliver innovation into the marketplace.
Against that we saw.
The.
Tariffs driven higher prices.
Contributing to a slowdown in the growth and of course.
So relative to the we're still anticipating.
2019 to be high single digit.
Growth in North America, but certainly it.
It was a temporary.
So in Q4, I'm, we're already seeing a more active investment from competition and we.
You know as we mentioned.
Are we.
We have made some pricing actions and our own demand generation activities are just starting to kick off now and so but we feel good about Q4.
But certainly north America's has been challenging this year.
Jim can I, just add two comments to that one I just want to make one clarification I want to Collins comments the segment U.S. segment in the second half of the year, we actually are expecting to.
Grow in the sort of.
Low teen rate for the second half of the year versus the high single digit we saw in the first half a year or at least through August .
And as it relates to our revenue mix. The mix. We saw in Q3 was very consistent with what we saw in Q2, which is consistent with our full your expectations and just to remind you a little bit about what that mix looks like.
We had in Q2, we reported about 45% of our revenue mix being the 900 series and above that actually increased slightly in Q3.
Q2, we reported we had about 30% of our revenue come from the entry level 600 series.
That actually dropped a little bit in Q3 to 25% and then we had about 20% of our revenue come from the mid tier and that.
In Q2, Q3 was pretty consistent and we're expecting about the same thing for the full year.
Thank you that's helpful and just one final question for me I'm, just wondering just in light of some of the concerns people have about.
Slowing macro side I'm wondering what you're hearing from some what's the tone from some of your larger U.S. retailers and whether that you whether you've seen any indication of potential slowing in EMEA, where youve clearly performed very well year to date.
So I think that.
You know the marketing conditions in EMEA.
Remain solid I think that Theres anxiety.
Risk factors from Brexit I, just returned from a trip there.
So anxiety is is elevated.
But they're not seeing the same.
Macro impact on consumer spending that we're.
Certainly is present in China.
And.
That we have seen.
And in what I would call tariff impacted industries here in the U.S. the.
So.
It's a.
A bit skittish, but but holding.
[noise].
Thank you.
Thank you know and ladies and gentlemen, I'm interested time, we ask that you. Please limit yourself to one question and one follow up any additional questions. Please reenter the queue and our next question comes from I see a merchant of Citigroup. Your line is now open.
Hi, Thank you gentlemen, thank you everyone I have a quick question on Chesapeake U.S. growth as well can you maybe talk a little bit about.
Your expectations and maybe some of the underlying assumptions you know Alison mentioned gross back into second half in the low teens.
Married that against the macro and what we're seeing what what makes you confident that grow to resumed back.
You know next year.
See in the mid teens I'm back to where it's been broadly for that category and sort of where you had initially laid out some expectation before the terrorists et cetera. So what gives you confidence we're not undergoing some sort of categories. The t. gear, but did that underlying health is very strong and then as a follow up.
You know international has been very strong I think in the prepared remarks, you mentioned about growth slowing a little bit into fourth quarter.
I don't know that's just comp if you can again talk about the growth in the international as well and the underlying assumption that makes you feel revenue growth will accelerate.
In 2020, thank you.
Sure.
Good question so the.
So we've studied the market and addressable.
Size in North America extensively.
And we believe that.
Certainly the addressable market is well above 30% for the type of robot vacuum cleaners, the portfolio that I robot.
Creates.
That number is elevated if you include.
Entry level model that lower price points that I robot offers.
The.
This year.
When we previously rolled back pricing.
Pre tariff levels for Prime day.
With Amazon.
We saw extraordinary growth, so overnight, 90% growth year over year on Prime day, which again we.
We're buoyed and.
Well, it's still early.
We have rolled back our prices to pre tariffs levels and have seen.
The demand.
Respond to those changes in pricing in a favorable fashion. So the trend is is good.
So that I think we.
Triangulate those data points.
Coupled with the fact that even.
During times with the where the organic.
Levels were were.
Constrain for example over mother's day, the marketing spend that we invested tracked.
Very very closely to the models that we had created so suggesting that our ROI models on marketing investments.
Still held.
Despite the.
Impact of macro economics and then.
Price elasticity, so things are broken and if we were seeing a saturation demand.
Certainly we would have seen.
Deviations from our our.
ROI models for us for spending and over mother's day, we would have seen how much more challenging result out of Prime day, and we would giving we would be giving you a very different outlook for performance in the queue in Q4.
So I robot is a very quants based company from.
Demand generation and revenue prediction.
I think that what we Didnt know.
Going into the year was what was the.
What was going to the impact of.
Going from 10% to 25% tariffs.
We didnt have great models and price elasticity and so that we are certainly caught a little bit by surprise.
Based on that.
That event.
Typically when the market leader goes up in price the.
The competitive followers also go up in price.
When that Didnt happen.
You know.
Pretty straightforward, we knew what we needed to do to prior to protect our leadership.
So.
So hopefully that gives you.
Somewhat of a window into our thinking.
Why we believe.
But there is latent demand that a return to.
Far more strong category growth.
In North America can be achieved.
As well as looking overseas in.
At our performance and the categories performance in.
EMEA and in Japan.
You mentioned, a little bit Isle US Q4 international growth rate.
In Japan.
Go ahead, so yes, I in terms of the two for growth rate for international.
A lot of what you see in EMEA was the launching of the S. 90, M. six in Q3, so there really what's sort of a timing shift versus Q3 in Q4 in that region and a lot of what you see going on in Japan. In Q4 was they had a lot of.
Campaigns happening in the third quarter to get ahead of the increase in the consumption tax. So there really just start sort of unique timing elements. It. This year of Q3 versus Q4, the overall growth rates for both those regions for the full year remained very strong.
Thank you know and our next question comes from Jed Dorsheimer of Canaccord Genuity. Your line is open [noise].
Hi, Thanks, just to I guess, so first one call and I've always respected your clump based approach. So maybe if you could.
Help me a little bit better understand.
The cost per customer accurate.
The customer acquisition costs by our calculations it seems as if braava compared to room, but it's about 50% higher and so when I normalize the growth the two categories.
Seem to be growing about the same so I'm just wondering if I.
When you think about sort of getting to that more mature phase on the braava category.
The you'd be able to throttle that throttle that back to more normalized roomba type.
Rates and then I have a follow up question.
Sure so.
Certainly braava is earlier.
And the cost of customer acquisition is higher for Roomba, Ralph I, sorry, if I refer Bravo relative to roomba.
There was in the first half of the year Unpacking, what happened with Brew brothers has some merit.
Our.
Our.
More popular model in the first half the year the 380.
Had some distribution.
Challenges as the store traffic and foot traffic in bed Bath and beyond decline and.
That product.
Is exclusively brick and mortar available in bed bath and beyond and so well consumers looking for roomba could easily fine.
Other retail outlets that was not the case for the three t. and so that created some artificial.
Slowdown in that model the first half the year so.
Keep in mind that as you look at the growth rate overall for Braava because it.
Comparable to prior years is not entirely fair calm pmsix is going very well and you will see investments in demand generation.
Activities in Q4 two.
Drive that base.
And I think that as we look to 2020.
I think that what you should expect is.
A a shift in strategy for investing in Bravo coupled with.
More brand awareness and Bravo to to make them.
Real.
Progress.
To bring down the cost of consumer acquisition. So your model should.
Should anticipate.
Material gains in 2020, I can't quantify them, because I'm not exactly sure what model you're using.
But is it.
We should be much more dollar efficient in 2021 than we have been thus far in 19 relative to braava.
Got it that's really helpful. I guess, just as a segue for my follow up question is.
So far you have kind of looked at the two categories is almost mutually exclusive but the fact that the robots can talk to each other some of your competitors are offering dual function.
Robots currently in the marketplace. Just wondering do you think the you know that.
Is that a missed opportunity.
How should we think about.
Your competitive.
Positioning relative to some of these dual purpose robot some on the market right now yes.
Well I think I guess back at I. robots commitment to the premium category and the best consumer experience.
If you combine these two functions into one robot youre necessitating that's the consumer be involved with the robot every time the robot is turned on.
We need to fill up the tank if your robot as this too and feature on it it can't vacuum carpets and.
The vision for where I robot is going is this idea that you come almost everyday to a freshly clean home.
And mopping.
You are actually able to run your EMS six multiple times because of the size of the tank.
And begin to have a similar experience.
So there's a bit of a philosophical.
What is the right way to do this that's important.
Also when you look at the design and where we put the Pat on the robot its specialize around getting into the corners.
Of the though of the room and.
The the pad that is placed by the competitors on the back of the robot incapable of getting closer than a couple inches from the edge of the wall and let's be honest, that's where most of the visible dirt is.
And so.
It's like building a vacuum cleaner to told to get under Kickboards, you're delivering a consumer experience, where you run the robot and then you have to go out and get your mop anyways to finish the job.
So.
It's a bit of a gimmick.
There is some.
Consumer appeal to an idea of those two in one rubber. Unfortunately, the experienced doesn't live up to it bonds. So we're looking at what can be done.
On that on that front without sacrificing our commitment to the premium experience.
Got it thank you.
Thank you and I work.
And our next question comes from Mark Strouse JP Morgan Your line is now Ben.
Yeah, Hi, good morning, Thanks for taking my questions I was hoping to start with a if you could provide an update on the seasonality with Amazon I think historically, you've said that.
Back half is more a two thirds or.
In Threeq, you and then one shirt, one third and fourth year, but.
[laughter] last call you were talking about there being a bit different so I know things have changed since then so just open for an update there if you can.
Yeah, Mark So where where we are at now what you're right was different than when we spoke in July .
We expect a similar pattern this year and 29 team that we saw in 2018, a and what that was was we had about 70% of the business Don enough through the third quarter.
And we're sitting at a similar spot now, but again that is that with a change from when we talk to you in July .
Okay. Thanks, Allison and then lastly, your guidance for Fourq, you and then just kind of the initial peek into 2020.
Can you just kinda talk about what you've baked in as far as this this litigation with Sharks in.
It's just assume status quo or if you're you're assuming any kind of a any onto the favorable outcome there.
We can't predict any outcome, we've just got to look at status quo.
Okay, great. Thank you very much.
Thanks, Yeah, and then next question comes from Troy Jensen at Piper Jaffray. Your line is now open.
Hi, Dan Thanks for sneaking in and thanks for the transparency you this quarter.
Maybe just a quick follow up with Alison you said a year to date through August that the U.S. markets up single digits can you just talked Q3 over Q3, I think we may have seen as.
Through the meaningful deceleration in August and September So just curious with the quarter over quarter. Some quick I.
I don't have the third quarter, specifically broken out, but yes. After our price increase we didn't see the segment growth I'm sorry on price increases that went into effect on July 22nd we did see I'm a little bit of a deceleration.
During the third quarter, but.
Year to date a number.
For the full nine months or eight months was the 8%.
But that is 1% enabled us to reduce those prices back share.
Okay, and then I'm, calling me I've answered this but you know that definitely has been closing some stores have just compounded the U.S. weakness or is this just really on the brother product line or is this kind of announcement.
You know it on the Roombas side.
It has had a a modest too.
Small when I got the small impact we were able to.
To see the bed Bath customer.
Go to other retailers, which saw.
Bose planned growth rates.
As sales in bed.
Were impacted so rumo was largely unaffected I mean, you can never say not affected but.
It was this singular skew the the Threeeighty T. Bravo, which was exclusive to bed bath and beyond in brick and mortar where we saw some real deceleration of the sales that product as people just didnt have.
Without going online an alternate channel for buying that product so that one hurt a little bit.
A little bit more.
Right understood I can look in Q4.
Thank you needs.
Thank you and then next question comes from Frank Camma of Sidoti Your line open.
Good morning, guys.
Hey, I'm wondering.
Do you think consumers now come become a little bit train to wait for the you know the Black Friday Mondays sale for your type of product Bill.
The electronics category and then how does that affect your Q4, because that's selling already occurred or.
Or do you do get benefit from a intermodal.
So we certainly get benefit Oh, let's say your first question. There are people trained for these special buying days like Black Friday in the U.S., an 11 11 in China, Yeah, Yeah, I think that.
Every year is it is there is a class of consumer from the value seeking consumer who wait for these particular, Dave and how we put a huge amounts of our time and energy into ensuring that we have a great deal.
To deliver on the expectation on those days than that we have the circulars and found the the the placement to to harvest that it's traditionally been a real strengths for I robot.
You know in China.
They'll spend the better part of a year preparing the offer for that singular day. So.
I definitely think that consumers are being trained.
As far as.
How do we take advantage of that is baked into it certainly baked into the guidance that we're giving today.
And why we believe we'll see.
Strong pickup in demand for the category as well as I robot results.
And again, we this is something we do really well at a point that Amazon Prime day, where we were plus 90% right year over year. We can we can move a lot of product on on these.
Specialties and kind of some other sites I love the self supporting some of that sell in supporting those events happens in Q3, and some of that happens in Calgary, where it's just very okay retailer specific Amazon being a good example, yes that makes sense.
Of course, just sort of calm and maybe clarification. So I mean, you gave atomic commentary on the.
Gross margin even for next year.
You know from my perspective, you shouldn't put out a lot of the negatives here, which is fair I mean, you want to give all that.
The only Allstate you seem to give was Malaysia, but you know from other companies so I hear things like.
The devaluation of the currency, helping them and also the economic environment in China, just allowing them to.
Negotiate better with the factories there even in your case, you're shifting production. So you would think in some sense as you would have some leverage over these factories eight do not have that because of the uniqueness of your category I. Just wondering if you couldn't comment there because obviously, it's a sizable drop in your gross margin.
So one thing to point out we you know we're somewhere in the midst of negotiation with our contract manufacturers on pricing for next year. So that is not settle that's a big open for us as well as to how the volumes will be split across our factories and as a reminder, we lock in with our contract manufacturers forward.
The year going into the year on our pricing so as changes in currencies happen you shouldn't necessarily expect to see changes in our structure with our contract manufacturers. So that other beat open item as Colin mentioned were really just at the beginning part of our annual planning cycle.
All and that's a that's a big element that we stopped the locked down.
I think that the.
Rule of thumb for products, both roomba like complexity.
Malaysia, you, we will be paying some premium.
To manufacturing in Malaysia, as a result, and we've tried to.
Incorporate some allowance for that in the guidance that we gave.
But certainly we have a.
But very serious.
Planned backup plan backup backup plan as to how are we going to.
Ensure that the terrorists were that are currently slowing us down in North America can be overcome.
Okay fair enough. Thank you.
Yep.
Thank you and our next question comes from Ben Rose Battle Road Research line is open.
Yes, good good morning Collyn.
And Allison I kind of a related question on the contract manufacturing side do you do you negotiate.
Directly with your supply chain partners in those factories in China and.
Is there additional room per your comments earlier, Alison to reduce Cogs independent of whatever the contract manufacturing.
Cost would be.
Yeah, we negotiate directly with the contract manufacturers on the on the pricing for the year. There are you know a small amount of components, which we may range pricing on ourselves outside of the contract manufacturers. The bulk of our cost comes through the negotiations we do on the on the product pricing directly with the CMDS.
I mean, certainly are continuously committed to Cogs improvements.
Particularly as it relates to products that have just launched.
I'm getting them out.
Well often make decisions as.
We are overtime, but based on the the product performance in market and our experience.
We can see opportunities to get some things.
Got into the production.
So that's quite typical for I robot to launch at one Cogs and and actually quite significantly improved cards over time.
Okay entry all up.
Im sorry.
Hi, just going to come at the.
Mentioned, a little bit about our platform strategy, where.
We actually are designing robots, we take that.
Ken.
Have a useful life time that is reasonably significant because we were able to go make material improvements to their performance through software upgrades and I see a change from what we've done in the past as a way of bringing features to market more quickly and extending the life.
Time of the hardware, which gives us even rewards us even further for costa.
Okay, and just one one additional question with regard to moving additional skews to Malaysia overtime, I think there's kind of a common misconception out there that it's just requires kinda flick.
Looking a switch and moving things over but maybe call Im just speak to some of the puts and takes to what somebody issues would be with regard to moving products of greater complexity to that to that region.
So the in order for it to account.
I'll dive into the details just briefly so bear with me in order for to be count to be manufactured in Malaysia enough of the the product needs to be manufactured in Malaysia to qualify refer whats called substantial transformation.
So that for a lower priced products.
You get there basically by injection molding.
The the robots, but.
As you get into the more sophisticated robots that requires electronics being manufactured in Malaysia, and potentially batteries being manufactured laser that's a much longer.
Road to Ho.
Malaysia is coming up quickly as you might imagine as a the in its sophistication but.
It certainly lags.
Substantially behind China from an infrastructure perspective to do a these more advanced.
Types of products and so to get for example.
Hi, southern over to Malaysia, we need to not just.
Transferred capabilities and in plastics molding, but also batteries and fine pitch surface Mount and so forth. So its a.
It's an investment but certainly.
The current situation.
Is not.
A situation I robot intends to allow.
Continue.
Day longer than it needs to and so the idea of okay. We're.
Giving guidance for 2020.
With the assumption that were under 25% tariffs on roomba for the full year.
We've described a few different strategies for getting out from under those terrorists shifting manufacturing more fully to Malaysia being one of those.
And I'm looking to find a way to do it.
Okay. Thanks, that's very helpful.
You bet.
Thanks, Yeah, and then next question comes from don't make or a far for research. Your line is now open.
Yes, hi, thanks.
Just a.
I know you're continuing to test the Tara and notched expected sales next year, but.
Just wondering given the kind of long history.
From.
The competition in Europe .
With this kind of product.
Are you seeing from your Tas demonstrably different.
Features or.
Capabilities in terms of.
No, particularly with the long term trial and different things like inclined to narrow passages from things like that.
Yes, I mean I'd be the Terra is substantially differentiated from anything else on the market today.
And you know I would say that.
The status of the product is if you have a simple lawn you love this product.
And the.
No actually got into some detail on the call around.
Looking at more complicated.
Terrains and mission completion rates in more challenging to raise the sort of being the oh, the things are working on and and them.
You know we have an ambitious strategy.
Which again.
Product differentiation based on system complexity favors I robot.
We think we have a very disruptive product here with Terra nothing else like it from an navigation perspective is out there.
And.
You know the.
We describe the market for Terra is being roomba size to in fact in Germany. The market today for lawn Boeing is bigger than the significantly bigger than the market for robot vacuum cleaners and so this is a big one we got to make sure we do it right.
We will be selling robots next year, though as you say not materially in preparation for for the real a ramp at 21.
Great. Thank you calling.
Yes.
Thank you know and ladies and gentlemen. This does conclude our question answer session I will now I'll turn the call back to any Kramer.
Great. Thank you very much operator that does conclude our third quarter results conference call. We appreciate everybody support forged talking with everyone again in early 2020 to discuss our Q4 in full year 2019 financial results. Thank you all.
Ladies and gentlemen, this place today's conference call. Thank you for participating you may now the tie back.
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