Q1 2020 Earnings Call
Good day, everyone and welcome to the I Robot first quarter 2020 financial results Conference call. This call is being recorded.
At this time for opening remarks, an introduction I would like to turn the call over to Andrew Kramer Ivor about Investor Relations. Please go ahead.
Thank you operator, good morning, everybody.
Joining me on today's call, Hi, robot, Chairman and CEO Colin angle.
Okay, Vice President and CFO, Alison Dean and Julie's Island, Vice President Finance schools exceed Allison as CFO on May four.
Before set the agenda for today's call I would like to note that statements made on todays call that are 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 risks uncertainties and above many factors that could cause actual results could 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 information or circumstances.
Related to our financial disclosures as a reminder, we transitioned last quarter to focus our non-GAAP financial performance and outlook, which we believe it helps provide additional transparency into I robots underlying performance and potential accordingly. During this conference call. We will reference certain non-GAAP financial measures as defined by a C.C. regulation G.
Including non-GAAP gross profit non-GAAP operating income non-GAAP income tax expense or benefit non-GAAP net income and non-GAAP net income per share our definition of these non-GAAP financial measures and reconciliations of each of these non-GAAP financial measures to the most directly comparable GAAP measure are provided in the financial team.
Sales at the end of the first quarter 2020 financial.
Actual results press release, we issued last evening, which is available on our website and they're also provided at the end of these prepared remarks, which is also on our website.
In terms of the agenda for today's call called briefly review the company's first quarter results discuss current market conditions and outline our plans to navigator business through these unprecedented times.
Allison will detail our financial results for the first quarter and share additional insights into our plans going forward Colin will wrap up our prepared remarks, some final observation.
Then we'll open the call the questions at this point I'll turn the call over to Colin angle.
Good morning, and thank you for joining us.
Yes, two months since covered 19 began its global spreads have been marked by unprecedented change.
The measures taken by governments at all levels around the world to save lives from this pandemic are far reaching and have altered how we work communicate and socialize.
Hi, robot the health and safety, our global workforce is our top priority.
And we have continued to take action that will support this.
Pandemic injected significant operational challenges into our business and I've been on by the collective tenacity and commitment to her teams to move our company forward well proactively donating time resources in technology to support our healthcare workers on the trunk lines.
Although cleared challenges lie ahead, we received very important in positive news last week when our tariff exclusion was granted I will provide more information about this later on the call.
In terms of our Q1 performance we issued an announcement in late March provided additional details on the impact of cold at 19 on our business, including our view that we would fall short of our original Q1 revenue expectation that we had withdrawn full year guidance.
First quarter revenue of $193 million declined 19% from the prior year.
Our Q1 operating loss of 14.4 million was aided by better that expected gross margins combined with lower than anticipated spending.
We reported a net loss per share of 32 cents.
For some context into our Q1 topline performance.
The first two months at the year, our quarterly revenue was trending toward the low end of our original targets that range from $210 million to $220 million.
Although sell through started the year sluggish in the U.S. in Japan, we were pleased to see or us sell through accelerate in February.
However, the disruption of Coke is 19 affected her skills and supply chain activities in March.
The largest factor associated with the shortfall was our inability to completely fulfilled first quarter demand for ice happen plus and sometimes less products due to design driven engineering and supply chain challenges that were unexpectedly complicated by the impact could coded 19 funnel organisation.
Her contract manufacturers and some suppliers.
Our revenue was also affected by sub optimal Q1 manufacturing volumes in China as Rick contract manufacturers did not ramp back up fully until late March as well, some order reductions delays and cancellations for products by retailers.
Overall revenue declined 28% in the U.S., 11% in EMEA and 14% in Japan.
That's a pandemic courses large populations to remain in their homes cleaning products are increasingly top of mind with consumers.
Which is a potentially very favorable trend.
However, an uncertain economic environment is likely to weigh heavily on when where and whether consumers will buy a new rules are Bravo robot.
In addition retailers are facing major challenges as they strive to carefully manage inventory and prioritize demand for central products, while reducing operating hours limiting foot traffic and temporarily closing stores.
Although market conditions are expected to improve over the coming quarters, the timing velocity of an economic recovery remains uncertain, which further appears our visibility into order activity over the coming quarters.
The same time Cobot 19 has created pragmatic operational challenges that impact every part of our business and we are partially resources to address them.
Against this backdrop, we have reassessed, our 2020 plans and our adjusting them in ways. We believe will enable us to emerge from this downturn as a stronger company better positioned to fortify category leadership and deliver sustained profitable growth.
To do this we are focused on further differentiating our offerings building enduring relationships directly with our customers and nurturing the value of those relationships.
I'd like to expand a little bit on each of these areas, which formed a strategic pillars of moving our business forward.
The first strategic pillar involves differentiating roomba.
By providing consumers with an exceptional experience, which is a combination of cleaning performance in high value digital features enables roomba to better adapt to that support our customers lifestyles.
In addition to enhancing the cleaning efficacy of our robots and encompass optimizing and cascading. These innovations across our platforms. We are elevating the cleaning experience through digital capabilities that enable users to customize how when and where our robot clean.
As we deliver on our product and digital Roadmaps of the coming quarters, we expect to bring new capabilities to the marketplace that will delight customers and build our position as.
As a trusted reliable cleaning partner.
The second pillar of our strategy involves building and enduring relationship with the consumer.
We ended 2019 within engaged user community of over 4 million owners.
Who opted into our digital communications through email and our App that grew 18%.
Quench lead to over 5 million users at the end of Q1.
As we move forward or ability to use the combination of our advanced navigation mapping innovative digital features home understanding smart home integrations is enabling us to deeply embedded roomba into that users like.
And as that happens it further solidifies our relationship with the customer.
And lastly, with increased loyalty comms increased opportunity.
Nurturing the lifetime value of our customers every year, we self millions of robots for both new and existing customers, which will enable us to continue to expand our base over 5 million.
We see exciting potential for us to make broader a broader range of products and services available to our user community.
Generate highly profitable recurring revenue streams in the process.
To help accelerate our progress in these areas. We have also made difficult.
But necessary decisions to implement a series of cost reduction actions that are intended to realign and reprioritize our resources.
To accomplish this we have adjusted the size and complexity of our workforce through targeted head count reductions of approximately 5%, where our workforce select furloughs and changes to our 2020 hiring plan.
Well also carrying back spending in other areas.
We expect these cost savings actions will reduce 2020 spending by approximately $30 million.
Alison will provide additional details on this in a few moments.
The actions taken around our workforce allows us to further shift R&D engineering talent from hardware to software, while enabling us to accelerate certain strategic initiatives, including goes focused on enabling a robust buying experience.
A deeper direct relationships with our customers.
In conjunction with these cost savings plans, we have suspended our go to market plans associated with our tariff robot Miller.
Although we believe there is a substantial long term opportunity to the robot long term market our decision to take our foot off the gas for tariff was largely based on the likelihood of significant delays toward 2020 commercial plans for Terra caused by Cobot 19, combined with the overall intensity of ongoing technology.
Investment.
That would be required of the coming quarters to continue advancing the product.
It is simply the wrong time to launch this.
All other product development and digital Roadmaps are funded and on track, including the planned to launch a new robot model later this year.
In addition to those actions, we're working diligently to drive gross margin improvement.
We achieved an important milestone on this front when our request for an exclusion from section three a one with three tariffs was granted last week.
Not only does this exclusion temporarily eliminate the 25% tariff. It was placed on group of going forward, but it also entitles us to a refund on all section three or one tariffs that weve paid on imports since they went into effect.
Even with the tariff exclusion in our favor we are actively advancing plans to drive greater efficiency and flexibility across our manufacturing supply chain by expanding our manufacturing in Malaysia.
No coated 19 has slowed our progress.
Yes.
We're excited about each element of our strategy to drive our business forward.
While we are due the asked about a strategic direction the uncertainty associated with coated 19, including its duration and macroeconomic impact has appeared or visibility into the timing and magnitude of orders as a result, we're not yet able to share updated full year financial targets.
Nevertheless, we would like to share our perspective on the dynamics that are currently shaping our business.
Given the substantial near term challenges facing our retail partners consumers, we anticipate sops second quarter revenue modestly below Q1 levels, which would represent the low 0.4 quarterly revenue in 2020.
This will drive the sizable second quarter loss from operations.
Nevertheless, we remain optimistic that trajectory of our revenue will show meaningful improvement in the second half of the year.
Our sales finance and operations teams have worked hard to understand how the potential resumption of economic activity in different parts of the world can positively impact demand levels.
Although near term revenue has been impacted there are some price points as evidenced in the following sell through trends.
Through week 16, our year to date sell through growth on a unit basis has remained positive in both the U.S. and EMEA.
We're particularly pleased with the ice seven Este night, and Mpsix unit growth in all major geographic regions of the past several weeks.
Our investment to deliver differentiated performance in our higher Ed Roomba and Braava models.
Our working as our product mix shifts up.
We see robust growth and I robot Dot com in recent weeks building on the strong revenue growth, we delivered on our website last year and complementing strong unit growth at pure play ecommerce platform.
And we fared modestly better than we expected intuit's retailers with extensive brick and mortar footprints in part because many of our largest retailers have kept their stores open.
And are also offering a strong digital buying experience.
And while all of the various scenarios. We've modeled currently anticipate the 2020 revenue will decline.
From 2019, the bright spot I just reviewed our combining to create a situation where we can move into the second half of the year with lower channel inventory.
And the highest demand for premium product offerings.
This helps underpin our potential for substantially stronger second half revenue versus the first half.
A better top line aided by our cost reduction activities and the extension of our tariff exclusion would help us returned to operating profitability and the second half year.
Given these dynamics, we believe we can exit this year well position to fortify our category leadership.
Build out or momentum to generate sustainable and profitable top line growth and drive long term value creation first stakeholders.
This point.
Turning to call over to Allison and return after her remarks to offer some additional bookings thoughts Allison.
Thank you Tom as Andy mentioned earlier My review of our first quarter financial results will be done on a non-GAAP basis, and all comparisons will be against the first quarter of 2019, unless otherwise noted.
My comments about our outlook will also reference certain non-GAAP metrics, including gross margin operating expenses operating loss and profit and effective tax rate.
As Collin noted our first quarter financial performance was affected both directly and indirectly by the challenges associated with Cobot 19.
Quarterly revenue decreased 19% to 193 million.
Geographically revenue declined by 28% in the U.S., 11% in EMEA and 14% in Japan.
Well the represented approximately 88% of our mix with profit making up the remainder.
Within the room the mix, we've continued to generate most of our quarterly revenue from robots, where price points, our $500 or not.
Gross margin of 41% fared slightly better than anticipated primarily due to favorable product mix.
Tariff costs of 7 million had a 3% impact to our Q2 gross margin.
Gross margins declined 10.9 percentage points from last year, due primarily to lower pricing and higher promotional expenses and to a lesser extent higher tariff costs.
Q on operating expenses of 93 million increased by 4% and represented 48% of revenue.
As the covert 19th situation evolved during the final month corridor, we increased our bad debt reserve by over 4 million to reflect the financial challenges facing retailers.
However, the combination of better than anticipated gross margins.
Adjustments in short term incentive compensation.
Delayed implementation of certain marketing activities.
And shifts in the timing of certain R&D programs.
Helped soften the impact of lower than expected revenue and the booking of these reserves.
Our Q1 operating loss was 14.4 million, which was at the low end of our original target.
Our Q on 2020 effective tax rate was 37%, which was significantly higher than we expected due primarily to the expected reduction in full year profitability and the impact of our R&D tax credit.
Our net loss per share was 32 cents for the quarter.
Last year, our board authorized a 200 million stock repurchase program during the first quarter, we repurchased approximately 664000 shares of common stock at an average price of $37.65 per share for a total of approximately 25 million, we do not intend to repurchase.
Just more shares under the program in 2020.
We ended Q1 with 264 million in cash and investments an increase of approximately 8 million since the end of 2019.
We generated healthy cash flow from operations at 41 million, which more than offset the 25 million for share repurchases and capital spending of 7 million.
Q1, Dsos were very healthy 18 days.
Q1, ending inventory was 147 million or 118 days compared with 181 million or 144 days at the same time last year.
As we've articulated we are currently navigating a very fluid marketplace and assumptions about consumer confidence and the speed at which the global economy and various region regional economies recover continue to evolve.
Those assumptions continued to be informed by our ongoing dialogue with retailers worldwide.
We withdrew our expectations for 2020 in late March and we are not yet in a position to provide the same level of detailed quantitative guidance that we have historically provided as our visibility remains limited we would however, I'd like to share our insight into the coming quarters.
In terms of the second quarter, our revenue will be heavily influenced by the steps that are retailers continue to take to manage their businesses. During this endemic.
At present, we believe Q2 revenue will decline modestly from Q1, and presumably will be the quarterly low point upon which we will drive improvement in the second half of the year.
The tariff exclusion, we just received will help mitigate gross margin pressure, resulting from the combination of lower revenue.
Lower pricing increased promotional actions associated with mother's day.
Costs associated with finishing our design change on the clean based units for I, seven plus and as nine plus robots.
And tooling and other asset write down costs associated with Tara.
We currently expect Q2 operating loss that would reflect the combination of relatively soft anticipated revenue and operating costs that are expected to nominally increase over Q2 2019 levels.
In terms of other Q2 modeling assumptions, we anticipate negligible other income and just under 28 million shares outstanding.
Our tax rate for Q2, and the full year could fluctuate significantly in large part because even small shift in the jurisdictional mix of profits and anticipated pretax income levels can drive meaningful changes to our tax rate.
For the full year, we have limited visibility into second half demand Collin previously offer his insight on the second half of the year and I'd like to detail some of the factors that could contribute to that.
We are thrilled with our recent tariff exclusion, which was granted on a temporary basis consistent with all other tariff exclusions or lists one two and three.
Like all other list three exclusions, our exclusion will expire in early August.
Yes, the exclusion is extended.
We track all section 301 tariffs developments diligently and have observed that many of the companies who received exclusions from list one terrorists, we're able to successfully extend their exclusions for up to another year.
We assume that there will be a similar process for list three and if so we will seek an extension in due course.
In terms of our 2020 gross margin profile extending the tariff exclusion through all of 2020 will drive meaningful improvement over the coming quarters versus our prior plans.
We expect that our Q2 gross profit will benefit from 6.6 million for tariffs paid in Q1 2020, plus the elimination of tariffs for the quarter itself.
Our second quarter GAAP gross margins, however, full benefit will reflect the benefit of the full 47 million and tariffs paid since 2018 that we expect will be refunded.
In terms of our operating cost we have completed a set of cost reduction actions that include a reduction in force of approximately 5% furloughs and scaling back on our hiring plans.
In addition, we are reducing short term incentive compensation curtailing working media spend to better align it with lower revenue expectations and factoring in significantly reduced travel expenditures.
These actions are expected to generate approximately 30 million in savings over the next three quarters in 2020.
As a result, we anticipate that 2020 operating costs.
Well generally will be generally unchanged from 2019 levels with slightly lower sales and marketing costs offset by slightly higher general and administrative costs.
With that said certain costs are subject to change based on revenue and overall market conditions.
Just as important many of these measures are structural in nature, rather than onetime actions, which will help us move into 2021 better positions to deliver meaningful improvement to our operating profitability.
In conjunction with these actions I wrote that expects to record a restructuring charge of approximately 2 million in the second quarter, primarily for severance costs associated with the workforce reduction.
Restructuring charges are among the items excluded from our non-GAAP costs.
With 264 million in cash and investments at the end of Q1, no debt and access to a 150 million dollar credit facility. We believe we have the requisite financial strength to navigate through these challenging time.
Our cash position will be further fortified by the anticipated refund of approximately 57 million in tariffs expense of which 47 million is reflected in our prior period PNM else and 10 million is for products currently in inventory.
We expect to receive these proceeds within the next 12 months, which is subject to the timing of releases from U.S. customs and is likely to be distributed in multiple payments over the coming on.
In terms of anticipated cash flow activity, we historically experienced cash outflows during the second and third quarters and our cash burn will likely be exacerbated over the next two quarters, given our anticipated near term fundamentals and the need to build inventory in advance of the holiday season.
Well this is likely to Rick quire tapping into our revolving line of credit we expect that any borrowing will be short term in nature as order levels recovered during the second half of the year.
As we work closely with our retailers globally to understand and support their needs Dsos may increase above historical levels over the coming quarters.
At the same time, our operations teams are focused on aggressively managing our own inventory levels to ensure optimal flexibility to accommodate demand over the coming months.
Despite limited visibility our best view is that D. I will follow historical trends with a peak in Q3 before returning to more normalized levels.
In summary, 2020 has ushered in unprecedented challenges and I robot remains committed to taking the necessary actions that we believe will enable the company to navigate through the headwinds that will persist over the coming months. We are optimistic that we can deliver a stronger performance in the second half of this year and exit the year well fuzzy.
Mission to drive long term value creation for all stakeholders.
Ill now turn the call back to common for his summary.
Thanks Allison.
Before I offer my closing thoughts I'd be remiss, if I did point out that this is allison's final investor call that I robot.
Alex whose contributions to I robots success over the years.
I've been extensive.
Better focus and commitment to help move our business forward has never wavered, even has her tenure near to said.
Allison and our incoming CFO julie's either have worked closely over the past several months when short seamless transition.
Julie's outstanding work and leading our recent planning activities further reinforces our view that she will be a great successor to Allison as I robots next financial leader.
As I recall that moves forward. We are excited about our long term potential of our business. The investments, we're making to deliver a differentiated cleaning experience are intended to put further distance between our robots of the competition, especially in the core and premium segments with the market.
Over the coming quarters, you'll see this manifest in new digital capabilities continued progress with our smart and partnerships a redesign whole map another exciting advances that will enable our robots to build the more personal lives trusted partnership with shareholders.
At the same time, we're seeing the steps taken to protect public health from coded 19 are accelerating shifts.
In consumer buying that are well aligned with the other elements of our strategy.
To that we are moving aggressively to scale, our direct to consumer sales channel by enhancing our digital marketing capabilities.
Evolving our order management platform, driving greater efficiency, and our fulfillment processes and ensuring that our financial systems keep pace.
Those investments will also enable us to create new high margin recurring revenue streams as we provide customers with new options for purchasing our products and accessories, such as subscriptions and leasing programs.
Finally, we move forward, having made important progress over the past several quarters to expand our leadership team.
By adding talented executives and promoting new leaders into new roles.
I'd like to close by offering my sincere thanks to my colleagues around the world for their outstanding effort to sacrifice over the past several months.
I'm confident they will continue to rise to the challenges ahead.
That concludes our comments operator, we will now take question.
Okay.
Ladies and gentlemen to ask the question you'll need to press star one on your telephone to withdraw your question press the pound key and the interest of time, we ask that you. Please limit yourself to one question and one follow up please stand by what we can palms Q and a roster.
Our first question comes from RCM merchant with Citigroup. Your line is now.
Great. Thank you for the opportunity good morning, everyone.
Quick one for calling and one for Allison Julie.
If you can help us understand what are the sales through your direct consumer web site and you talked a little bit about the subscription programs leasing et cetera. If you can just for lights and.
Guidance I mean, how are you thinking about this how it impacts replacement cycle trick consumers.
Are you seeing any early indications of quicker replacement cycle or purchase of more consumable et cetera, I'm trying to frame my.
Thoughts around how this would lead to incremental growth over the next few years.
The domestic household robot category and then add the gross margin question for Allison.
Sure.
So in 2019.
Our direct to consumer sales were sort of mid single digits.
And grew 45% year over year, so we're seeing good growth starting to get to material levels.
And.
Represented a very good starting point for this shifting focus.
We also saw in our.
Online sales, a particularly strong performance by customers who are interested in.
Leasing style purchasing.
We had a touch program last year, which also.
Maxed out against the a lot of volumes for a sort of a white glove leasing style program in Japan.
So we've got a number of different.
Indicators that says.
Buying robots.
With more flexible purchase terms is of interest to our customers extending that too.
Growing both those programs, but also looking at.
Actual service model recurring revenue model.
Opportunity is something that you're going to see us doing.
In $2020 and we'll certainly be quite open with the results of those activities.
By selling direct to consumer.
We both end up with us.
Comparable product sale a higher.
Revenue.
Figure and opportunities for improved gross margin. So as we scale. This direct to consumer business. We see this as a both a revenue driver, but also we gross margin driver.
And the.
The other very Jermaine.
Sort of rights to play statistic I'll give you is something I mentioned in the call.
This.
Cheating 4 million.
Connected engaged online customers last year and in one quarter or seeing that grow by 18%. So the.
The ice seven launch.
Back a couple of year to half ago.
Was truly a game changer for the company.
It provided our consumer with a compelling reason.
Who use the App to register with US and to continue a an engagement with the company and were exacerbating that by or enhancing that bye.
Our program to launch new features digitally to improve your rova simply by staying connected the last year that was a cheap out zone would enhance it was probably are our most.
Visible digital enhancement last year, but thats accelerating you you're going to see a lot more.
This year. So the company has made a.
A shift.
And it's go to market focus.
Not to say, we're leaving retail, but we think theres a real opportunity with building this direct business and as I mentioned, the the change in consumer buying habits only makes this shift in strategy more exciting.
Okay. That's helpful.
And then on gross margin.
Lets you provided a lot of color in terms of adding that retroactively. The tarik exclusion retroactively to Q2 are you guys anticipating using some of the gross margin benefited from tariffs exclusion to be more competitive in this space.
And the edges said you look at passed the one time retroactive benefit that you will get from the Tehrik exclusion and they continued benefits from that will you be using some of that you become more competitive going ahead.
Thank you.
I think we're going to wait to see Acea, how the year plays out obviously theres a lot still a lot of uncertainty in the second half of the year on getting the tariff exclusion on the refund.
His wonderful and we are going to carefully.
Assess how and if we might want to deploy that against.
Initiatives in the company versus having it improve the bottom line. So that's that's work ethic.
Our baseline planned for the year included.
Adjustments to our our pricing strategy to ensure that we'd be very competitive.
But with the change in mix from retail an online we're actually also looking at whether demand generation spend.
Should.
To what extent should it it's shift from retail driven programs online driven program. So we've got a lot of levers to pull and certainly the tariff exclusion adds to that.
War chest.
Great. Okay. Thank you very much.
Thank you. Our next question comes from Charlie Anderson with Dougherty and company. Your line is no.
Yes. Thank you for taking my questions I wanted to start with the the R&D changes and the cuts there called I Wonder if you could maybe just to expand a little bit.
What allows you to do that what is changing in terms of the hardware engineering that allows you to.
In fact would need less resources there.
And I'm also curious to.
Once we return to normalcy does that change the profile of Opex as a percent of revenue versus what we've seen historically.
[music].
Sure.
So the products that were offering and as we've been.
Learned.
What is going to be most differentiating going forward.
Resulted in some insights that really the overall experience this partnership with the consumer that I'm talking about.
Was it really extremely important area for us to focus how do we make our robots.
Smarter and better partners.
And delivering that differentiation.
Meant.
Further investments in our software.
And so that.
In keeping with that the hardware side of the business.
You know as that has continued to to grow.
We've moved to thinking about or robots more as platforms.
That are enhanced by the software then looking to rapidly churn.
Our physical products and.
Differentiate with.
A new bumper system or a new side for our system.
And.
Those changes in how we were going to our we're going to differentiate in the marketplace.
Necessitated that we look at our engineering mix and make some shifts I roll. It still has a very strong hardware engineering team.
We're very proud of that capability and certainly you will should expect to see continued new platforms coming out.
But from an overall engineering need theres so much opportunity.
On the software side to differentiate our products that we wanted to go in and increase that investment.
As part of versus our first pillar of the strategy I discuss.
And I'll just this is Julie I'll underscore some oncology comments by saying if you look at our overall net 30 million of operating expense reductions for the year, we really try to focus on those smart reductions that were going to improve our 2020 picture well also preserve.
Serving those investments that would set us up to execute really strongly against our longer term strategy.
Okay, Great and then for my follow up.
You did benefit from mix in gross margin in Q1 I'm curious.
As you looked at the rest of the year do you see a similar mix impacting gross margin positively or will there be a different mix the rest of the year versus what you experienced in Q1. Thanks.
It's a little early to tell we have two high volume events, which typically drive some of our lower end products than you know the black Friday promotions and our Prime day promotions tend to be lower ASP is but definitely were.
Encouraged by the uptick in mix, we've seen for the first half a year, so a little bit early to tell but but.
Given the strategy, our I articulated given the fact that we.
Tend to do better where we can tell a more complete product story with online sales.
That helps drive improved mix, we think these are encouraging trends.
Okay, great. Thank you so much.
Thank you. Our next question comes from Mark Strouse with JP Morgan. Your line is now open.
Hi, good morning, Thanks for taking my questions.
Colin I just wanted to see if the tariff relief changes any of your plans to transition manufacturing to Malaysia, I think on the on the last call. You you mentioned I think it was something about the most of your RBC production.
I would be out of militia by the end of next year is that still the case.
So our commitment to geographic diversification remains unchanged, we believe that it is a strategic imperative to be manufacturing.
Significant portions of our of our robust outside of China.
We faced some pragmatic challenges because of coded 19, where you know first.
China was shut down and then as it opened up Malaysia shut down and.
And so that the physics of.
Moving manufacturing.
Has been.
A delayed as I mentioned in the script, but our intention is unchanged. So I would say the percentage of robots.
Manufactured in Malaysia by the end of next year will be reduced from our original plans, but our plans remain.
A committed.
View of what we want to evolve towards.
Okay. Thanks, and then for my follow up.
Can you just give a bit more color on to the rationale Q.
On a shell Tara.
Im just looking I mean that your with your balance sheet, including the a the tariff refunds you should be somewhere over $300 million a net cash.
I understand there's some investments this year, but it can you talk about the decision to yeah.
No. It continued to invest this year with.
Yeah, a launch during the spring season of 2021.
And that kind of a quick follow up to that I mean, you know how temporary is this is the suspension should we expect sales and 2021 or 2022 any color there would be helpful.
Sure. So first let me say with a difficult decision.
We believe that.
The market Proterra is very real exciting.
And I start off by where I sort of left off my comments. It was just the wrong.
The wrong time.
This was a four I robot a moment of being very careful with our resources being very careful with our cash.
And making sure we were investing in some of the.
Strategic pillars, I described which will matter most sooner so.
So the differentiation.
Ics of of Roomba through the consumer experience be ensuring that we have the right foundation and investments.
To take advantage of this meteoric increase and engage.
Engage consumers that's just helps everything in fact that will reduce the.
The go to market costs, when we do launch Tara and the future.
It just was a prioritization.
And against the backdrop of co vision and.
There was a lot of uncertainty as to how that was going to go as well as significant continuing costs that.
We're going to.
Make pursuing the.
Current plan for Tara.
Just the wrong thing for us to do.
We're not commenting today at all about.
When you might see terra in the future.
Theres too many unknowns to deal with and I don't want to set any expectations.
This point in time.
Okay fair enough. Thank you call.
Yep.
Thank you. Our next question comes from Ben Rose with Battle Road Research. Your line is now open.
Good morning, everyone Im glad to hear everyone to say fit I robot.
Just a couple of questions firstly.
The timing of the potential terrorists extension could you walk through us.
Walk through some of the mechanics around that so in other words should we assume.
That as of August 20th that the extension will continue or are there are some milestones that need to occur prior to that time for you to know that.
So we're a little in the dark and there is no stated process. So the comments. We made were based on what has happened for the extension process poor prior limits. So again I want to be very clear the way that that word was prior to.
The.
Expiration.
Their original exemption.
They were they were aware that they were going to be extended and.
In many cases, there was not even anything to apply for.
So the if.
List three is handled at a similar fashion.
We hope to know prior to the beginning of August as to whether that extension should happen.
Again, but but we're a little in the dark and we're waiting for clarity.
How this is precisely going complete b to play out.
Okay and you.
Calling from kind of a product planning standpoint in kind of looking out over the next.
Six to 12 months, you know, there's definitely been a proliferation of roomba models.
Hi end of the product line.
I don't think was your long term in tend to have.
Consumer robots, particularly roomba priced over a thousand dollars at retail obviously, there's been some.
There's been some developments that will help bring the prices down but could you talk a little bit about your plans for the high end of the product line and specifically, whether you plan to prune any models than kind of consolidate around just a few of them.
Thank you.
Sure. It it has traditionally been are.
Strategy to launch new technology at the high end and propagated.
Down in price point.
As well as as we.
Our able to improve our AR.
Cogs and manufacturing efficiency too.
Make our old high end robots, a bit more affordable overtime.
If you were to say, okay I robot.
What do you have it traditionally done you would see those trends.
The focus that I described today on the call around the importance of.
Differentiating through digital feature through software.
Also.
Points at opportunity.
To create.
New differentiation.
Throughout our product line based on software enhancements.
And so that again, the you asked specifically about the high end of both.
The market I robot remains very committed to selling the best cleaning robots in the world and you should continue expect us to continue to support having.
These premium robots in the marketplace and as I gave some color too.
The strongest performance.
Of our product line in the first half.
Against plan was our premium high seven nine M. six robots so.
So we think that Thats working.
And.
As we move forward.
Expectation would be at what rates are we able to bring some of these differentiated features down.
Okay. Thanks inventory question or do Okay. No no no I think that's very helpful. Thank you I don't want to take up too much too much time, but that's a.
Definitely helpful overview I appreciate it.
Between software and Moore's law of good things happen.
You can differentiate.
Right it sounds good.
Okay.
Thank you. Our next question comes from Mike Cecos with Needham and company. Your line is now open.
Hey, guys. Thanks for taking the questions.
Just wanted to get some more information if we could.
Understandably, these stores or or trying to tackle the different operating hours reduce foot traffic et cetera, but.
As you see it today, how would you describe it from the current inventory in the channel.
And also just interested in how how those retailer conversations have been trending in recent weeks.
I like the the inventory in the channel is good as you know we came in a little bit heavier into Q1 than we had wanted and we made good progress against sell through in that inventory.
So right now we're feeling pretty good overall about the channel inventory levels heading into the second half of the year, we really don't have a lot of insight relative to how the retailer environment will change in the coming quarters, we we presume that at some point in the second half of the year some of the store.
I will start opening but we we won't know that till it's happening we are fortunate that several of our key retailers remain open physically and Ah we are benefiting as well from there.
Mine sales as well so we continue to stay in close contact with them. So we can adjust our plans. Accordingly, we think we're set up well if and when they in their their doors again.
Broadly.
That's helpful. And then if I'm just trying to frame, obviously with the the covert pandemic hitting certain regions earlier.
Some of some regions soared to open up.
Earlier than others.
Have you seen any any change in demand as these restrictions have been lifted in other regions and I'm just trying to gauge again.
How how that might translate this as the.
Restrictions easing in other geographies as well.
It's definitely different region by region.
So I can give you the color that we have because we definitely haven't seen much in the way of reopening.
Our business and in China.
Which.
As reopened the most I guess.
Yes, it was good but not particularly material to our overall performance.
I think Japan has.
Remained the most open of our regions.
From a retail perspective, although it certainly.
Is fairly brick and mortar oriented.
And so.
Even with that color as a team impact.
EMEA is is the hardest hit it started the year with our biggest growth.
Targets.
But.
In general sort of taken as Europe, which is completely unfair but taken as Europe. It is the most.
Brick and mortar.
Oriented E Commerce is still.
Mm.
Limited and some of the largest online retailers.
Because of the.
Extreme growth in demand.
Were oftentimes unable to.
Meet that demand and started restricting shipments to the essential products, only which slowed down.
What otherwise would have been strong offsetting growth and so that that's that's the market where.
We'll see the probably with the hardest hit and won't recover until truly people can get back to the stores at a reasonable fashion.
North America.
It was our strongest online with the strongest online most developed networks for fulfillment.
And.
It's been on a sell through but basis holding its own.
And performing reasonably well.
So I think that the.
Recovery.
Well.
I think b.
Gradual because the trough was not as deep as it was in EMEA.
That is helpful.
It is terrific. Thanks for the color as to what goes.
Thank you.
And keep as a reminder, ladies and gentlemen that start doesn't want to ask a question.
Our next question comes from Sean that <unk> with Bank of America. Your line is now open.
Hey, good morning.
Yes, I just wanted to start out on Malaysia.
Just were called here in the past the cost there were about 10% to 15% higher in Malaysia and.
Correct me, if I'm wrong, but I guess I was wondering what you might be ought to do to get those costs down over time and also how much much you'd be able to reduce those costs.
So that you remember correctly that the current Malaysia premium is is.
In those types the ranges at all but it all depends on volume.
And how much volume, we can move to Malaysia at what rate.
You know at that lower volumes, you could even see higher premiums being paid in Malaysia. It's just the economics of scale and when you start from zero waste.
Factor.
You know it is a negotiation and how much can you move so that.
Moving to Malaysia.
Is in fact, the commitment to moving a material amount of units to Malaysia overall sit as Jeff.
Not particularly economic and we are committed to moving to Malaysia.
So the.
Could you get into single digit premiums absolutely.
Could you get the parity probably not just because of the physics.
And the need for Malaysia to too.
Grow its ability to manufacturing more of the roomba.
You know because as current things stand even as manufacturing cost for at parity. We have to go move our we have some additional transportation cost moving moving materials around to support manufacturing.
So nothing magical just a lot of hard work and it's immediately tied to.
Are you going big or you're going to be ability, if you're going to be adult on kinda don't bother because we're going to be paying a huge premium.
Okay, Thanks, and just to clarify on that the single digit premium would that be a high single digit low single digits.
It really we don't we don't know it's going to depend on on the exact business terms with the exact partner at this point.
If I did it simple.
Okay. Thanks, and then just just next question.
You talked about seen positive sell through on a unit basis, and the U.S. and EMEA. How is the cadence of that growth evolved over the last few weeks and then also if you can just kind of remind me I guess I'm, a little forgetful here, but just what that sell through refers to.
Okay, I'll take a person and then.
Well you Astrotech of Western we'll make sure Allison because expect will answer the first off its North America and Japan.
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I believe for thing I mean, the true.
Oh, yes, sorry.
America, then EMEA saw positive.
Unit sell through so sorry, I misspoke.
[laughter].
The trends we saw over the quarter was generally sluggish in January.
Then we started to see a turnarounds in February sell through picked up and not only did we end the quarter with positives sell through this is unit sell through so sale of units from our retailers to consumers.
Not only with that positive at quarter end as we said in the script. It continued to be positive through our last reported week, which was weak 16.
Okay.
And weak 16, I assume you know goes through kind of April.
And I guess I was wondering so has that unit growth picked up or slowed or.
What you can see now.
So our reporting is a few weeks delayed says three weeks 16 is the last report that we've got.
Okay, Yes, I think all the again the trends is positive.
So there was it is a.
If there is looking good color, but it is also.
A little anecdotal on trend because we're going week to week. So so things are sell through is happening were.
Moving toward a higher.
Sell through season with mother's day.
So again I'd caution against taking.
Too much instantaneous.
Vector detailed from any one week, leading up to a higher volume, but it's definitely encouraging to us that there seems to be strong.
Enduring demand for the products that were seeing sourcing strength.
Thank you. Our next question comes from Mike Latimore with Northland Capital markets. Your line is now open.
Great. Thanks.
So I guess, just taking that comment as well as the comment you made that.
You weren't able to meet full demand in the first quarter because of I guess production capacity. If you were able to meet full demand in the first quarter would revenues have actually grown year over year.
That's really hard to quantify specifically Mike.
Yes, we definitely would have seen more revenue than we were able to deliver for the quarter, but it's it's hard to say exactly what has been.
Okay and then.
In terms of the second half perspective I.
I mean are you thinking maybe sort of normal seasonal patterns awesome.
Slower second quarter base or.
There are more pronounced seasonal patterns, how our general general everything about the seat that second after.
Yes, so and you're specifically asking about revenue.
Yes.
Yes, so I think.
As we look to the second half there are number of reasons why we're optimistic.
Collins already spoken a rounds the recovery as we expect that we'll see a gradual reopening of stores.
Ultimately an improvement in.
In consumer spending I think we also.
Anticipate that we won't see continued to grow 10 E. Commerce, then you, killing as people continue to shift their fine to online.
So what I would say is that the timing of that in the magnitude of that recovery remains really difficult to forecast. So where are we seeing today, we don't have.
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Visibility to what the specifics back half of the year, it's going to look like which is why we have not provided updated target.
Think they economists are still arguing whether this is going to be a you are an l. or the recovery out of the recession and.
I think that well the cleaning category.
Is the category, which seems to have kept.
Consumer attention and strength.
A lot so much of it depends on.
What the shape of the recovery from the session recession. It looks like to truly answer. Your question is it going to be a bounce back to growth over prior year or they're going to be.
Traditional seasonal improvement over Q2.
I think that Weve Thats why were hesitant reestablishing full year guidance at this time.
Thank you. Our next question comes from Troy Jensen with Piper Sandler Your line is now open.
Yeah. Thanks for sneaking in I'm glad to hear everyone's doing well, maybe just a couple of quick questions here for Alison.
Oh, So I guess I'm curious to know how you're going to report non-GAAP earnings.
Next quarter with the tariff release.
I guess those kinds of crazy Didnt back it out.
In the recorded March quarter.
But just your thoughts on how the reporting is going to be going forward.
Yes. So maybe this is truly I'll jump in and try to answer that so if you think about the tariff relief I'm going to split it into two pieces.
The terrorists.
Expense that we've seen in RPM now in nine in 20 that will be a refund in also in 20, we will be looking at inside of our non-GAAP results. The refund for prior period tariff expenses will be only shown in our GAAP results.
Okay. So non-GAAP gross margins will be significantly higher than Julie great I.
If I make the adjustment this quarter was at about 350 Bips in gross margin difference.
Yes, that's right.
I think though and what we tried to caution in as we discussed our expectations for the second quarter in.
The benefit of that tariff exemption in the second quarter will help to mitigate some other pressures that we're seeing.
Sure, Okay, Alright, perfect and then maybe Mike just my last one would be.
A clarification did you see a key to Opex did you see it would be up slightly from prior year Q2, just any color on that would be helpful. Thank you.
Yes, we expect.
Q2 opex to be.
Nominally increase versus Q2 last.
Okay perfect. Thanks, Good luck.
Thank you ladies and gentlemen, this concludes our question and answer session for today's call I'd now like to turn the call back over to Andrew Kramer for any closing remarks.
Thank you very much thanks, everyone for joining us. This morning, we look forward to engaging with you whether it's over the phone or virtually in different conferences and other formats and we'll look to.
Get back in touch with you when we report our second quarter results later this summer. Thank you.
That concludes the call participants may now disconnect.
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