Q2 2020 iRobot Corp Earnings Call
Hello.
College being recorded at this time for opening remarks, and introduction I'd like to turn the call over to Andrew Kramer I've I've Robot Investor Relations. Please go ahead.
Thank you operator, and good morning, everybody joining me on todays call bright robot Chairman CEO and.
And executive Vice President and CFO Chili's.
For the agenda for today's call I wouldn't like to know that statements made on today's call that are not based on historical information.
Statements made pursuant to the Safe Harbor provisions of the private Securities Litigation Reform Act at 1995. These forward looking statements are subject to risks uncertainties and in both many factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information on these respect on these risks and uncertainties.
Can be found in our public filing with the Securities and Exchange Commission.
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. During this conference call, we will reference certain non-GAAP financial measures as defined by FCC regulation G, including non-GAAP gross profit non-GAAP operating expenses non-GAAP operating income non-GAAP income tax expense non-GAAP net income non-GAAP net income per share we believe.
But our non-GAAP financial results provide additional transparency I robots underlying operating performance and potential.
Definitions of these non-GAAP financial measures reconciliations 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 second quarter 2020 financial results press release, we issued yesterday, which is available on our website at www Dot com.
And is provided at the end of these prepared remarks also unless stated otherwise the second quarter 2020 financial metrics discussed on todays conference call will be on a non-GAAP basis.
Welcome comparisons are with the second quarter 2019.
In terms of the agenda for today's call I'll briefly review of the company's second quarter results discuss current market conditions and key highlights and share his perspective on her out.
We will detail our financial results, the second quarter and share additional insights about her plans going forward.
Oh, well wrap up our prepared remarks vital observations.
Open the call for questions at this point I'll turn the call over to call today.
Good morning, Thank you for joining us.
We entered the second quarter focused on navigating major challenges primarily associated with the coded 19 global pandemic.
We've been largely successful thus far things strong market the man and the commitment focus and resiliency of our global team.
As a result, we delivered stronger than expected Q2 results and continued advancing key elements of our strategy.
In terms of her performance, we reported Q2 revenue of $280 million between 8% higher.
Q2, 19, and well ahead of our target entering the quarter.
Our revenue exceeded our mid June update.
No I anticipated additional orders in the last two weeks for the quarter.
We posted a Q2 operating profit was $41 million benefited.
From higher revenue a notable improvements in our gross margin and disciplined expense management.
Translated into Q2 EPS of $1.86 cents.
In terms of our Q2 topline performance the break points. So we talk emerging in late March continued to strengthen.
Maintaining a clean home has taken on greater problems during depends having.
Revenue in each major geography exceeded our April expectations for the U.S. and Japan growing.
I mean, and 43%, respectively, which more than offset a 14% Clyde enemy.
Let's stay at home mandates limiting traditional in store retail activity or a bunch of the core.
We adjusted our go to market strategy and promotional campaigns to support ecommerce, which includes our website and app pure play online retailers like Amazon Dot com and the website separate traditional retail park.
Overall, we estimate that are E commerce related revenue grew by approximately 50% in Q2 and represented over 70% of total quarterly revenue.
Our direct to consumer business thrived in Q2 growing nearly 160% even as we are we just starting to implement initiatives aimed at enhancing the buying experience I wrote and on our.
And building stronger ties with our customers.
As we did tell on last quarter's call. The global pandemic has created operational challenges, which has impacted all parts of our business.
I'm showing demand signals and steps taken in China, and Malaysia to limit Combet 19 spreads continue to test the agility ever operations and manufacturing supply chain perks.
Well consumer spending has declined at a faster rate.
Since it has been resilient robot vacuum cleaners.
We sell sell throughs momentum don't globally over the past several months, which underpins. The notable improved in Q2 orders.
During the second quarter, we made important progress executing on key elements of our strategy and how we then aspects of our Q2 performance and help illustrate this.
Differentiating your for putting robots by providing consumers with an exceptional experience as a critical aspect covered strategy. The guys are development Roadmaps and supports our investments in AI, Oh, my understanding and computer vision technology in particular, our premium robots, namely the robot.
Seven and Epstein series Braava jet six.
My top notch cleaning efficacy with compelling digital features and leverage autonomy and thoughtful intelligence to better adapt to and support our customers lifestyles.
These products are resonating in the marketplace, which is reflected in a growing list of impressive awards and favorable reviews and strong consumer demand.
In Q2 revenue from premium robots priced at $500, you know grew by 43% and represented nearly 60% for total revenue.
The success of these products also underscores why was the models.
Occupy nine out of the 10 best selling Rpcs pop U.S.
Seven out of 10 in Europe, and 810 and Japan.
Looking forward, we expect to introduce new AI, driven cheap abilities and digital features enhanced performance and further elevate the cleaning experience.
These automation will give customers more control over where when and how our robots clean support do smart home with bases and offer a new insights into our robust performance and mission stats.
We're also looking forward to launch a new run about later this year.
The project has progressed on schedule, even with the substantial majority are our R&D teams.
Working from home.
We also accelerating investments aimed at building enduring relationships with the consumers worldwide.
Continue to made excellent progress on this front, we ended Q2, but they are approximately 6.9 million connected customers, who opt in to our digital communication.
With this metric, which encompasses oh I robot product owners.
The interesting in App messaging or E Mail order book grew 13% from Q1.
We believe that tightly impact he will then probably into the lives of their own further increase.
Customer loyalty and make it more like the next fruit in my opening remarks.
[noise] virtually nurturing the lifetime value of our customers if another strategic priority.
This multiyear initiative is focused on optimizing our marketing campaigns, enhancing I really like a comment or home app and providing our customers greater flexibility in how they purchase our robots and accessories, including potential new subscription like service.
In coming quarters, we plan to launch new pilots that can help us cage consumer interest in potential new service offerings and inform our efforts to build recurring revenue streams and 2020 watts.
Improving our gross margin continues to represent an important element in our plan to deliver sustainable profitable growth. Our success at the end of April is receiving a temporary exclusion or the section 301 list, we tariffs that apply to rumo, but the step into right direction, the exclusion of related benefit contributor.
Our strong Q2 gross margin would have said exclusion will expire next month unless it is extended.
We expect to learn whether an extension will be great consumer although the recent public testimony of that you must have a leadership indicates that any extension printed at this point, but only apply until the end to 2020.
To reduce our China exposure to help combat 25% parents that we will return either next month or on January 1st 2021, we remain focused on manufacturing diversification.
As noted last quarter coated 19 has disrupted our manufacturing expansion in Malaysia.
Given these delays, we expect to incur higher than optimal production cost and Malaysia during 2021.
These costs are only moderately improved next year versus the cost manufacturing on 25% tariffs in China because of the time. It takes to qualify second contract manufactured add new lines and ramp volume the reinstatement of tariffs and higher 2021, Malaysia premium our routing absent material headwind tour.
Gross margin in 2021.
My here $38 billion.
Tariff costs, where is 3.3 percentage point headwind toward 2019 gross margin as terrorists increase to 25% midway through the year and nearly all of the volume came directly from shop.
Depending on the growth assumptions for U.S. revenue. This year at next our 2021 gross margin could face a similar contraction.
We believe that by the end to 2021, we will be manufacturing broadly and at scale in Malaysia, which will enable us to reduce our production cost country, thereby supporting and efficient geographically diversified supply chain decouple from U.S., China trade policy.
[noise] I'd be looking ahead, we moved into the second half a year with improved momentum sell through growth in units has strengthened in each of our major geographies due largely to healthy demand for our premium robots.
Yes, we've seen our year eight sell through growth rate more than doubled since our Q1 conference call robust online growth and the gradual reopening of the brick and mortar retail stores in various countries has accelerated AMEA sell through well into double digit territory, while Japan has returned to positive.
Okay.
Thanks to strong early campaign Eric.
At the same time inventory levels with retailers are relatively low.
As a result, we are incrementally more optimistic about her second half revenue prospects and we weren't mid June I mean, we shared our business update we now anticipate full year 2020 revenue to be relatively flat to slightly higher and 29 teens 1.214 billion.
We expect solid revenue growth during the second half from 2020, but that said there was significant uncertainty about second half demand as economic recovery around the world proceeds at different paces government stimulus program subside competition remains aggressive and retailers continue to carefully manage their inventory.
All of which limits our visibility into the timing and magnitude imports.
Just a notable the meaningful improvement in demand recently will test our ability to cost effectively sourced the raw materials and components as their supply chain remains challenged bike hope in 19.
From a profitability standpoint, while the scripts have orange reflects the benefit of our churn exclusion.
Operating profitability will be impacted exclusion is not extended to the second half would be here.
Nevertheless, we were focused on converting or second half topline results and prudent spending into solid operating profitability and EPS performance Julie will provide additional detail about her I want to testimony.
Clearly 2020 is shaping up to be a year of unprecedented challenge and resilience.
We are increasingly optimistic that we will exit this year well positioned to fortify our category leadership executing our strategy to drive profitable growth over the long term and reward shareholders for their comp.
At this point.
I will turn the call over to Julie effort Arts were turned to offered some additional closing thoughts Chile.
Thanks Collyn I.
As Andy mentioned earlier, my review of our second quarter financial results as well as my comments about our outlook will be done on a non-GAAP basis.
So unless stated otherwise each mentioned up gross margin operating expense.
Operating profit effective tax rate and net income per share will mean, the corresponding non gap that track all comparisons are against the second quarter of 2019, unless otherwise noted.
Our second quarter 2020 financial performance was driven by substantially better than expected revenue.
Total revenue grew 8% 280 million in large part due to strong 43% growth in our premium floor cleaning robots priced at $500 enough.
Geographically all regions outperformed their targets entering the quarter revenue grew 13% to make us with international revenue up 3%.
Outside of the U.S., 43% growth in Japan, and mild expansion in other markets were mostly offset by 14% decline in EMEA.
Well no represented 90% of our mixed we talk about making up the remainder.
Bravo revenue grew by 26% strong growth in the end six but partially offset by softer orders for other model.
Whenever the key drivers behind the strong growth in E. Commerce related revenue was robust expansion at Amazon, which represented 35% Q2 revenue.
Quarterly revenue from Amazon for 36%, Thanks to the lead up into Q2 events like mother's day father's day as well that's from orders to support their second half.
Our gross margin of 50%, which well ahead of our plan due to a combination of higher revenue.
From a product and channel mix shifts.
Lower than planned write down charges associated with Terra component and the timing of other supply chain related activity.
Gross margin was three percentage points higher than Q2, 19, primarily reflecting the benefit of nearly $7 million.
But first quarter care cob, and no tariff costs in the second quarter versus chair.
$5 million in the prior year second quarter.
Our Q2 GAAP gross margins are selected the refund of 47 million in tariff costs that have impacted our PNM since the tariff went into effect in September 2018.
Q2 operating expenses at $99 million decreased by 7% and represented 35% of revenue.
During Q2, we completed actions to realign and Reprioritize resources across the organization, which helped us lower operating costs, while also enabling us to redirect spending into areas critical to long term et cetera.
Thank you there our second quarter, R&D, and Gionee cost, a relatively flat well sales and marketing expenses declined by $7 million due primarily to shift in timing certain campaign promotion.
Given the state of our accounts receivable, we did not make any meaningful adjustments to our bad debt reserve during the second where.
Our Q2 operating income was $41 million or 14% of revenue.
Our Q2 2020 effect effective tax rate was nearly 24%, which was lower than expected primarily due to changes in pretax okay and the tax related impact of the care grief.
Our net income per share was one dollar.
We ended Q2 with $242 million in cash.
Decline of $21 million from Q1 level.
Decline, primarily reflects changes in working capital and our capital spending activity.
Dsos were 42 days versus 32, one year ago, which primarily reflects the timing of orders and shipments during the latter half a quarter.
Q2, ending inventory was $133 million or 86 games compared with $192 million for 127 days at the same time last year.
A decline in inventory reflects the combination of the removal of tariff related costs and stronger than expected demand throughout the quarter.
In terms of inventory our retailers that call I noted we ended the quarter in good shape overall, having made solid progress to reduce excess entry level and that's why.
As call I noted earlier, our view much more 2020 performance has continued to improve.
With that said, we remain cautious about our near term how it's for a number of factors that are beyond our control and difficult to forecast, including the sustainability of recent sell through trends.
Perspective, consumer spending activity competitor action and whether we receive an extension to our tariff exclusion.
As a result, we aren't yet able to offer explicit financial targets like we have done previously.
However, we'd like to share as much color, it's possible to help manage expectations around our 2020 outlook.
Starting with revenue a little over a month ago, we issued our business update and reiterated argued that we expected an annual revenue decline.
We now believe that our 2020 revenue will range from relatively unchanged.
Actually low digit several low single digit growth over 2019 revenue of 1.21 for failure.
Further context, our first half revenue was down 5%.
Our current all your expectation by second half revenue growth in the mid single digit range on a percentage change basis.
Geographically, we expect solid growth in the U.S., Japan with a modest second half improvement in EMEA.
We currently anticipate a stronger third quarter revenue growth rate and fourth quarter.
With that said forecasting the revenue mix between third and fourth quarters is challenging in any given year and it just inherently more difficult.
Now given current market conditions.
In terms of gross margin expectations as Todd said, we don't know whether an extension to our tariff exclusion will be granted.
Well, we are hopeful the vast majority of section 301 extension request and denied that star.
Whereas our first half gross margin was 46% we expect second half gross margin on both a GAAP and non-GAAP basis to be in 39% to 40% range that is slightly above our original full year 2020 target and assumes the reinstatement of the 25% here next month.
This would imply a full year gross margin in the low 40%.
We expect our third quarter gross margins to be better than our second half average as we benefit from inventory not subject to section 301 care and execute various Q4 holiday promotions consistent with historical practice.
[noise] looking closer into our operating costs. We currently anticipate a modest increase in 2020 operating expenses due to certain costs that have shifted the first half a year and we invest in working media to drive top line growth.
With that said certain costs are subject to change based on revenue when overall market conditions.
We anticipate Q3 operating expenses will be moderately higher compared to Q2 level.
By an uplift in Q4, consistent with historical trends as we invest in advertising and marketing campaigns for that summer holiday.
We are targeting 2020 income from operations to be in the mid single digits as a percentage of revenue.
We anticipate a higher third quarter operating profit margins fourk or.
Ultimately our full year operating income performance will reflect our second half unfolds from a revenue and tariff perspective.
As we execute on a wide range of supply chain better market R&D other programs and projects to successfully close that 2020.
It was efforts will provide the clarity required to set our targets the 2021 idea.
In terms of other notable modeling assumptions are 2020 are true profit.
Profile, but the U.S. and abroad will help produce an effective tax rate in the high team, which is actually in line with our plans at the start up here.
We anticipate a diluted share count more than 28 million shares.
It relates to our cash position doing well, what I would like to note that we recently started to receive cash payments associated with our care response on the U.S. government.
Anticipate receiving that $57 million and tariffs related refunds. So it's one over the next 12 months.
Over 40% about expected within the next two quarters.
I should note that the timing of these refunds that discretion have you Uh huh.
We plan to continue working closely with our retailers lead to understand what their needs. Accordingly, dsos made a elevated above historical levels over the coming quarters.
At the same time, we continue to prioritize inventory flexibility to ensure we can mobilize quickly to accommodate shifts in demand over the coming month.
We anticipate a peak in DIY in Q3 or four potential return to more normalized level.
In summary, we've seen our business built that he momentum over the past three month as a result, we move forward with improved confidence that our second half 2020 revenue will grow meaningfully over first half level.
We plan to stay focused on converting our second half revenue expansion and prudent spending into solid operating profitability at each guest performer.
With that said, we remain cautious given the relatively fragile eight of the global macroeconomic environment.
We remain committed to managing the business and ways to times to enable us to emerge from these difficult market conditions at the stronger company.
His point I'll now turn the call back to college, Chris No.
Thank you Julie.
That's a robot moves forward, we remain excited about the long term potential of our business.
We are seeing that our strategy to differentiate the cleaning experience is helping support the continued shift in our product mix toward our premium products as we accelerate investments so leverage our growing base of more than 6 million connect customers.
As we look to finished 2020 with a strong second half performance.
We are advancing our planning process seems for 2021 and beyond.
Finally, I think as timely to close my commentary by noting that I room ups access for the past 30 years has fueled by hiring the best and the brightest dinner industry talented individuals who brings a unique set of skills experiences and passion to our company along with diverse perspective.
Police and backgrounds.
We're continuing to support and develop diversity within or global workforce. These firms extend well beyond the CEO action for diversity and inclusion pledge and I signed last month.
Reflected in our hiring practices training programs and continued efforts to extend our stent, they educational resources curriculum and reprogramming robots to students in underserved communities.
Strengthening diversity and inclusion within our global workforce will remain important to us as we work together to invent the future.
Seamlessly fits the unique personal and diverse needs of our global consumer base.
Last month, we updated our website with a new corporate social responsibility section. The details are efforts to advance racial ethnic and gender diversity and inclusion along with a range of relevant.
Timely information about or people products production and philanthropy.
That concludes our comments.
Operator, we will take questions.
[noise]. Thank you.
Ladies and gentlemen to ask the question you would need to press star one of your telephone to withdraw your question press the pound key.
We exit you please limit yourself to one question and one follow up.
Please standby, while the key when a roster.
Yes.
Our first question comes from Mike Latimore with Northland Capital markets. Your line is open.
Great. Thanks, very much yeah, I'm just on the I guess on the tariffs topic.
You know I get feel here August six whether you got a further exemption I guess is the thought that there's really no opportunity to get an exemption in 2021 at this point or is it just too early to tell.
Oh there was.
Sorry, Lighthizer testified in front of Congress, where he made quite explicit.
Mentions that would be granted would expire at the end of the year. So that is the.
The public testimony that.
It would be most current.
And the explicit guidance that we give been given so we're continuing to push with all energy to.
Drive the diversification of our manufacturing base, which unfortunately been one of the.
Impacts the code at Nike, we haven't been able to remediated overcome because there's travel bans.
In place.
Finding people into Malaysia, which which has created the delay, but we do see the ability to oh.
Uh huh.
Get that work.
Back on track and we do believe that by the end 2021 will be in a situation, where we are effectively geographically diversified and U.S. trying to trade policy.
Does not.
Substantially impact our business anymore. So.
We're working.
Got it okay, great and then obviously that online sales have been great duty.
To the type of products that are sold online skew more towards the high end than average or is the mix online because it's sort of similar to you know the normal retail outlet.
You know well it's interesting the.
Conventional wisdom says that E commerce tends to skew down.
In premium we have seen a very material.
Shifting up in.
The failed that we're seeing.
I robot to calm has always skewed favorably towards the premium but in general when you look at online as a whole.
You know there's you can go online and you can look for value products. So.
The evidence that we've seen in Q2 had been a very clear shift up in mix, which sort of bucks. These traditional online trends and so we're very pleased with that.
And definitely I've seen a real appreciation.
For the capabilities of we're delivering our premium product so that I think as the true shift because it didnt even goes against some.
Traditional wisdom on on what online can deliver.
So we're very excited about that.
Thanks, Great great quarter.
Thank you.
Our next question comes from John Babcock <unk> with Bank of America Merrill Lynch. Your line is open.
Good morning, and thanks for taking my questions I guess was quickly on the premium products you and your mix. This quarter you know what drove that in your mind I mean, it was it did the promotions that were that occurred during the quarter happened to contribute to that and then also you know what are your expectations on how that mix might contribute to the second half.
[music].
So too.
We've seen our customers shifting their expectations of products.
You know since 2018 from.
I'm speaking sort of at the highest level from a a skepticism is its vacuuming robot thing real too.
And in patients.
Our robots can do more and the idea that they don't want the robots to be.
More I kind of if they want to have better control over the experience what the robot clean where they go and how they operate and how they can direct the robot to do what they want and.
Our premium robots with the directed room cleaning features augmented by the dockings be auto E back functionality.
I think is really resonated strongly with our with our customers.
And given the importance of keeping one's home clean and having the robots work around the lives of people at home.
I think it's a I think these are just extremely valuable features that we have rolled out or premium products, then drove driven demand.
So you know at the end of the day.
The intelligence of the robot is starting to play.
Bigger and bigger in differentiation.
Okay, and so for that kind of extrapolate into the second half basically that there should be some benefit to next from the printed products.
You know I think that the predictability of the world right. Now is is challenging so I think that we are hopeful that this mix shift based on the fundamental appreciation that would be advanced features a will continue.
So as they say, we're increasingly confident that the back half through the year.
Is going to show.
Growth over prior year, and leading us to be.
Be able to on this call start to lean forward as to what we think the full year is going to look like showing.
A recovery from the first half we were down over prior year in total to being flat to slightly up for the full year. So.
The trends are good and certainly the mix shift.
It is a important driver of guided proof.
That's helpful. And then next on Malaysia, I mean, how are you thinking about the ramp up the volumes. There and then also you said the production cost will be moderately lower than the cost manufacturing with 25% tariffs in China and so I was wondering if you might go to add some color on what you mean by moderately.
You know the.
I'll give a little color than Julie will jump in.
Getting the type of.
Pricing that we've enjoyed in China.
May never be fully possible Asia, but we certainly can get closer as volumes ramp.
We were able to move our lower in products over to Malaysia with one line toward the end of last year, that's ramped up and will represent sort of 20% to 25% of volume headed to North America. This year.
We think that and 2021 the challenges getting our premium robots.
Venue in manufacture app the volumes that we need to get the premium premiums.
Down to a level that is a.
Consistent or at least the same ballpark with China manufacturing costs, and so that's going to take the better part of 21 to get to Julie and I guess the other thing I would say is obviously that is slower than where we originally began our strategy we.
Our constraint as Colin noted in our ability to get.
Our engineers in and out of those key manufacturing partners. It really work that line transfer and so as a result that heading through 21, and we haven't finished our planning yet but through 21, we do you expect to see that there will be a higher than we had anticipated costs.
Premium associated with that ball.
Okay. So that's why there's really no way to kind of quantify what you meant by moderately down at this point.
Unfortunately, it really depends on the ramp rate and right now were crossing our fingers that.
In August the travel policies in Malaysia will change if we can actually people into Malaysia. This is a temporary speed bump problem.
Hi, this is not a one month beep on problem because of the complexity of building. These.
These factories and scaling up production so.
It is a temporary challenge that we will overcome and we're doing everything we can too.
Be ready to jump as soon as the doors open.
But there's so many things beyond our control divvied up you can get it done faster it's going to be.
Less impactful and and credit for were held out of the country. It really.
I have to get do most of the work is starting in Q4.
You know it it's going to take us a while to get to that at scale manufacturing volume and thus be less than satisfying answer to your question, but it's it's really the.
There's a lot of weighted c., but to be clear. This is a temporary speed bump and when you do have plans.
Partnerships and.
Implementation activities underway, which which will get us out from under this by the end of next year.
All right that's written into class last question, which hopefully a quick before I turn it over I was just wondering if you can.
Provide some clarity on how much insight you havent demand for the third quarter and then also what color can you provide on Amazon Prime day. Realizing two there are limitations there, but just wanted to see what you might go to say.
Okay.
Yes, so I'll jump and then I'll, let Colin add on I think what what gives that improved confidence in a then the color that we provided to the back half a year, it's really anchored back to the sell through trends that we're seeing so we've seen meaningful improvement.
In our sell through trend does call an iterative across all of our region and we believe that coupled with coupled with relatively low inventories should result in revenue that we think a meaningfully better in the second half of the year.
As it relates to Amazon Prime day.
You know ER.
I think we do you need to defer to kind of the public statements and news reports around the timing of the Amazon Prime day.
We always have to remind investors that this is an invitation only event and while we im very proud of our inclusion in prior year Prime day events and supporting its expansion to international market.
Amazon for headed suppliers from confirming participation in prime day prior to the commencement of the events.
Like I fully understand thanks again.
[noise] action [noise].
Our next question comes from Jim Ricchiuti with Needham and company. Your line is open.
Hi, Thank you a good good morning.
Hi, Joe maybe a question I'm wondering if you might be able to just quantified the impact on gross margins of the terror related fair related charges in the quarter and also perhaps that but yeah. The impact of the timing of the malaise, Malaysia supply chain and pivot.
He said you alluded to.
There are way to quantify that.
Sure. So if I'm talking about in Q2 versus last year.
We had.
Roughly let's call it about a point impact from care unrelated related expenses.
Well there as.
Well I would also I mean, clearly there's been a more of a disruption in Malaysia and I'm just wondering what the impact of that was if you could size that.
On the quarter result.
I don't know how to.
To that Chan, let me think about that and maybe we can talk about it further okay.
I can also discuss it offline.
Yeah Okay.
That's fine.
A question is just wondering who pursue a little bit more on the.
Direct to consumer business Collyn I mean, you you know, it's it's if she you're saying a better mix, presumably those higher margins in that portion of the business and I'm wondering.
More broadly where we might see the this part of the business going as a percent of revenues, which I guess was what nearly 12% in the quarter.
Mhm.
This is they are a major strategic focus for the company we started.
Talking about it we started taking action to.
Harvest and grow the numbers over our customers, which we could reach out to directly if you recall.
At the end of last year.
It had grown substantially to around 4 million.
We ended Q1 that number and reached 5 million.
Through both continued.
Efforts around our connected products also making sure that we had access to and were counting.
Robots that weren't connected but whose customers have opted into app and E Mail communications with us.
We were able to grow from that 5 million to 6.9 million in this quarter. So we're seeing extremely rapid aggregation and growth in the numbers of customers for which we can uniquely identify uniquely reached out to them.
That we can access access through directly and not a very very exciting trend and what does it put stop or is it be subject color, but did you say today, that's important that would probably be top on my list.
The co that 19 impact on our business as we talked about.
Earlier provided a tremendous acceleration in customer engagement on on them.
Online channels, including the 160% growth, we saw last quarter in our direct business and so that I would say all of that growth happen.
Even prior to rolling out of many of our systems improvements that we had been investing in so we're sitting in a very interesting place.
We are probably the the growth in our online business has been.
Accelerated.
Because of coated the investments, we're making in better reaching out to our customers is in the process of getting ruled out through the balance of this year and into next year, It's a continuous improvement operation and we're getting valid.
Asian that.
Our customers are responding well to.
Experience will improvements in the products, which actually reinforce the.
The benefit.
And our.
In the digital performance the rather than the intelligence of the robot so that'd be the idea that as the robot understand your home better it can be more direct double.
As demonstrated by our success in.
Clean by room technology.
Reinforces this idea that buying Aruba, and having an ongoing relationship with the company.
His valuable.
So there's a lot going on and the.
Hopefully trying to do a decent job of explaining it isn't just a few second that all self reinforce around.
Growing confidence in our.
Direct strategy.
Where could it be well you know we hit 12%.
This quarter.
We hope, we can maintain momentum and and.
Continue to see that ROE retail will continue to be a very important part of our strategy.
But I think that we're just in the early days of what.
Our direct to consumer business will look like.
Yeah, and I would underscore how you ended that Collin, where we believe as we think forward retail it's very important.
Ongoing part of all the way that we reach our customers and our direct to consumer efforts are complementary to that very strong strategy.
Got it that's helpful. Just one final question I notice and maybe it was my imagination, but.
But it seemed like there was there were more promotions bundling braava with roomba.
And I'm just wondering how effective that has been.
Because the Braava units were down but it seems like that's more a reflection of but the decline in the lower end product.
Yeah, I think what you see it, particularly with our more premium products, we see strong and growing interest from our consumer base in the in print link technology, which allows the roomba and that braava, particularly the and stick to work.
Together, so we view that had a very interesting and red important way that we're looking at that the way our products resonate with our consumers and Andy the way that the Braava works.
The m. six with the navigation ability really drives more utilization about that robot as well. So you know the mix shifts that we were C.
Broadly definitely included a shift toward the end six.
From the lower end models.
As well so I think what you're saying is in factor.
Got it thank you congrats on a quarter.
Thank you. Thank you.
Our next question comes from Ben Rose with Battle Road Research. Your line is open.
Yes, good good morning.
One of two.
Drill down a little bit a in terms of what's happening in Japan and Europe. It looks like there was very strong performance in Japan.
Could you speak Collyn Edward Julie to some of the factors driving that performance and.
After that we'd like to get your thoughts on whats happening happening in Europe is your competence stemming from the fact that there were more stores opening now in the back half a year.
Yep.
So happy to happy to jump in on this one so let's talk with Japan first yeah. So Japan has traditionally been our strongest.
Market from the perspective, a premium products and so that the rollout of the EPS nine.
Complementing that prior rollout of the eyes.
Well is gonna be bigger in Japan faster than any of our other markets that we definitely saw that we definitely saw that and benefited from that frozen growth as.
One.
To the.
Pandemic.
Driven growth in interest in RBC, but definitely the tailwind.
Added to interest in Japan as well.
And retail.
In Japan was less impact.
Then in other parts of of the World and so that it's David I will say more open.
Then it elsewhere.
And then finally the government.
Had a points program a stimulus.
Program to help the economy.
Move and we definitely benefited from that so that a stimulus program with less travel and other discretionary venue for spending created opportunities to.
Right growth. So there were a bunch of head of Tailwinds.
In Japan.
Offset the clear headwind.
Oh reduce store traffic a retail so.
With that into the postural will you get plus 43%.
Performance in Q2.
AMEA by contrast was the region that had the most.
Nipigon and I speak in the broadest of generality because there's many.
There's a lot of texture country by country by.
Hi level EMEA is the most.
Brick and mortar dependent region.
And was.
Most heavily impacted by stay at home.
Orders.
And so that the.
The kobin headwinds.
Driven by I can't get to the product.
Where I've used the buying the product.
We're most severe and then layer on top of that the maturity of the online services in Europe, again speaking broadly where at least mature.
So that there were situations in Q2, where online.
Etailers.
We're preventing us from advertising.
Offering.
Very much delayed.
Fulfillment scheduled where were essential products will be prioritized over back getting robots.
So that there wasn't the search capability and online that was ready to go meet the increased demand as we saw and benefited from me in for example in North America. So I was Europe has started to reopen retail we've done.
Currently some of those headwinds a decrease in some of the Tailwinds we spoke of earlier.
Our certainly there in Europe, as well and we're seeing a recovery not mark.
Okay, Great sorry, just a quick follow up on that Colin is the direct to consumer strategy.
In Europe as applicable as it is in the U.S. So in other words.
Enabling the consumer to purchase your products directly from you over the Internet.
Is that.
Do you think the appetite is a strong there as it is in the United States.
Absolutely.
I would say that were up a little bit less.
Less mature in Europe, but rapidly closing the gap a with North America, and we believe that our direct strategy is they absolutely a global triage.
Okay.
Okay. Thanks very much.
You bet.
Our next question comes from Mark Strouse JP Morgan Your line is open.
Yeah. Good morning, Thanks, very much for taking my questions.
I wanted to start there was a given some media reports about a.
A partnership with Eco Vacs, there was announced a few months ago. Just curious if you can opine a bit on that what you're what you're providing to that a partnership what you're getting in the in return.
And how how important is it I guess is it more kind of a just a did putting feelers out there kind of partnership or it could it be potentially something.
That leads to something more strategic as far as a.
Products or geographic expansion anything like them.
So it's more the former I mean, we didnt make a press release about it because it.
Certainly having conversations with other companies in the industry, it's something that.
Makes a lot of sense to do.
The terms of the.
[noise] deal that we formed with them.
Had two dimensions, one talks about the ability of I robot to look at certain products.
That you go back to is working on that and.
For possible use outside of China and.
In a reciprocal fashion looked at some of our technology that he kovacs was interested in potentially in using within shot so that.
It is it it is a agreement that.
Isn't an exploratory phase.
Phase and then I think that's how it plays out is still very significant question as to whether it will be material, but definitely there are a it's a small industry and there's only a few players and the fact that we're able to communicate and talk about ways that we might.
Work is something that were opened.
Okay that makes sense. Thanks, Colin then Julie.
I want to come back to some earlier questions about gross margins I know, it's really not fair tend to be asking about 2021, but just the language that that you're talking about as far as you mentioned the contraction in 2019.
And then you talk about depending on some variables there could be a similar contraction and 2021, yeah. How are we to interpret that a minute and should we think about that compared to second half 2020 levels are done off of 2020 full year levels.
Any further color would be very helpful. Thank you.
Sure and.
I think that there's.
We want it to make sure that we discussed that how we were currently looking at the landscape.
This is not intended to be a discussion on 2021 target we.
Have more to do in our overall plans for next year. However, as we look at the uncertainty in where we sit today in a timing and duration a tariff extension.
And the impact.
As we've been speaking for the last two quarters, a slow down in our.
Our ability to shift our product to Malaysia, we wanted to make sure that we began that discussion.
I would just say the way it's intended to be interpreted is.
If you win all things being equal.
Meaning that if 2021 was exactly like 2020, there wouldn't be a tariff headwind.
We wanted to be very clear.
To all the analyst.
Shouldn't be included.
Because I think that we had hoped.
To minimize the impact of any 2021 terabyte exposure through more rapid.
Developments over Malaysia strategy.
At the very material slowdown in ramping up of of Malaysia.
Because of.
So that has precipitated.
The need to communicate.
That.
The terror Slash, Malaysia premium is going to be a gross margin headwind. So that if you had a model and you Didnt include this it's important that you do.
Certainly there are many other thing we've talked about today, which over time are focused on improving our gross margin landscape.
That's helpful.
Thank you. Our next question comes from Charlie Anderson with Colliers Securities. Your line is open.
Yeah. Thanks for taking my questions and congrats on a great quarter I had a two parter on backup revenue.
First it sounds like the channels still fairly lean some sort of curious is the assumption that you will match sell through and so in.
Or is there a chance that.
Those will be different any degree of that I also wonder.
Are there I didn't hear anything in the script about new product I wonder if there's any new product assumptions and back out for that to go up.
Sure. So we there will be a new roomba in the back half.
So.
We haven't announced that I'm not going to say what it is today.
But exciting new a new robot coming up.
As it relates inventory levels.
The Oh, we do think that retailers are going to be fairly conservative continue to be fairly conservative inventory.
So that.
And so that comes to pass you'll see sell through in cell and roughly tracking each other.
It again, it's it's unlikely that there's going to be a sudden surge in retailer comp is leading to higher inventory levels in the back half, we just don't see that happening right now but.
Again.
Retail euphoria could create additional demand, we're just not expecting.
Okay, great and not a question on the subs potential for subscription service as it sounds like the rest of the year or there will be trials going on and then 21 is when some of this takes shape I.
I Wonder if you could speak to any trials you're doing currently if you'd give any insight and I wonder if you have any sort of role models in terms of what this may look like you just any additional color on the subscription opportunities. Thanks.
Sure.
Again, not a lot to add other than what we've said before where did.
He 19, we had a.
Subscription no big things that we.
Very successful one was.
Probably a little bit like leasing program and.
Mark.
Uh huh.
Our.
I have a website.
She wants.
Hello.
So that's one of the ongoing.
Yeah.
I think that what I can say.
Yeah.
No that quite yet.
As part of this call.
You see.
Oh.
Hey, Robert Province.
Financing.
Uh huh.
But we.
[noise] launch.
Well, it's targeted highlighted Q4 last year.
The increase commented about it.
Oh.
Hi.
Right.
So I.
I think.
Publicly visible magnetation.
Oh.
Robots as a service offerings.
Well.
Great. Thank you so much.
Yeah.
Our next question comes from Asian merchant with Citigroup. Your line is open.
Hi, Thank you for taking my questions and congratulations on a great quarter, a couple of questions one.
Total category the robotic vacuum category do you believe you gain share maintain share.
I think some of them sell through data from POS systems would suggest that perhaps you lost share just wanted to clarify that.
Yeah. Thank you.
And I when I was.
Right now.
Okay.
Third party today still.
Hi, fairly early so [laughter], probably the first month.
Yeah.
[laughter] [laughter] market I think wed.
Okay.
Looking at that in aggregate.
Globally.
It's hard to tell it looks like you.
Or roughly.
Link.
But I think.
[music].
It's very small percentage of our.
So I think we need to wait.
Yeah.
Okay. That's fair and then if I can clarify on gross margins and you know maybe I'm just need to do better get better on math on days, but you already QQ and Oh, sorry, first half margin you know much better than expected, what one time nature with that because even factoring in the.
It's kind of terrorists that should see a full quarter impact in the fourth quarter seems like your margin degradation degradation and the second half is.
Much heavier than what one would expect with the 25% terrorists going into maybe you can walk us through that.
Through that match that would be helpful. And then and then just as a final follow up Oh are related to that question. You know if they wage margin benefits and this quarter frightened of accorded quarter from beat direct to consumer or premium mix.
Should we get back those trends continue and that's again why you know my question about that margin degradation in the back half. Thank you.
Sure.
So.
Okay.
[laughter] called her that riding on the back half of T.
Yes.
Oh, you can think about.
Yeah.
[laughter] point drop.
Coming in towards shoot.
Well.
Being eight.
Our.
Okay I care.
At 25%.
That's roughly that drop.
Right.
But when you see.
So if anything that happens.
First half second yeah, so [laughter].
Yes.
You have more I'm sorry.
Good morning promotion.
And that's that's what you can see.
Along.
Okay. Thank you and then put the direct you to a consumer trends as well as they shift you premium make if that's something we anticipate continuing into back half this year or do you think there was something at brick and mortars sort of reopened in big U.S., you know as well as in EMEA.
People start to go more into that and that would drive some of your criminal activities.
For retailers.
Oh, yes.
Right.
Okay.
But represents.
<unk> sales.
We are assuming.
Production that.
As a percentage of revenue.
Ladies and some of the.
Right.
And drive.
All right.
But it.
You know 160% road.
It was very.
No one exciting trend.
Yeah, I think that.
I will.
At retail.
Yes.
I see a little bit.
Well.
From the Q2.
Thanks.
But oh.
Yes.
Back up to that.
Right.
Oh, we're.
Effort.
Our online experience.
Oh.
Speech, where we've seen Q2.
So there's a little better.
Uncertainty as to what the retreat.
From.
Hi.
Prefer.
Oh.
Yeah.
Well, it's getting products.
Are they do.
And the.
As a real growth driver.
Oh.
Well I.
We will.
Yeah.
Before Oh, we get slightly lower online.
See you get Q2.
2021 2020.
Fair enough and calling at kind of look at the you know I know, it's it's you're not planning for 2012 guiding for 2021 at this point, but yet the secular trends that you see in the domestic robotic space you know like offset with some of this call that 19 impact it seems that accelerated to ship.
Two you know.
Automated cleaning et cetera, given lack of cleaning services et cetera.
Balance there are you still seeing you know the market growing.
As you look into 2021 22 with that mid teens, Victor high teens kind of rate that one with expecting after normalizing for fiscal 20.
Yeah, I think that I'm going to avoid talking about percentages of wrote the categories certainly.
[noise] very vibrant today.
And our penetration rates are still extremely low.
We're seeing I think that I robot as the premium developer.
Of products has shown that.
Innovation isn't done we're not a commoditization stage because.
We're seeing such a strong.
Consumer response to smarter robots, which gives us confidence that we have real runway in front of us to continue to successfully differentiate.
Based on consumer a a premium consumer experience I think that.
Penetration is still low opportunity for premium to meaningfully differentiate from entry.
Revitalized to some degree.
And I robots role of being the leader in the premium area has been enhance because we're seeing a shift from.
The lower margin entry level.
Products to higher end products.
It was something that as this industry mature.
Was inevitable happen in the fact that we're doing it well.
Maintaining the type of margin a differentiation is exciting to me personally so.
You know that this is the robot vacuuming industry.
Is.
Mainstream at this point and I robots role is becoming increasingly clear.
And the opportunities at the top increasingly clear.
[noise]. Thank you. This includes the question answer session I would now let's turn the call back over to Andrew Kramer for closing remarks.
Thank you thanks, everybody for joining us that concludes our second quarter 2020 financial results call. Appreciate everybody supported we look forward to talk with you over the coming weeks and months and we'll plan another conference call to discuss our Q3 financial performance later this fall. Thanks again.
That concludes the call participants may now disconnect.
[music].