Q3 2020 iRobot Corp Earnings Call
Good day, everyone and welcome to the AI Robot third quarter 2020 financial results Conference call. This call is being recorded.
At this time for opening remarks, and introductions I would like to turn the call over to Andrew Kramer of I Robot Investor Relations. Please go ahead.
Thank you Joelle and good morning, everybody joining me on today's call are I, robot's, chairman and CEO, Colin angle and executive Vice President and CFO Julie silent.
Before I set the agenda for today's call I would like to note that statements made on today's 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 995. These.
These forward looking statements are subject to risks uncertainties and involve many factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information on these risks and uncertainties can be found in our public filings with the Securities and Exchange Commission.
I robot undertakes no obligation to update or revise these forward looking statements, whether as a result of new 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 margin non-GAAP operating expenses non-GAAP operating profit and profit margin non-GAAP effective tax rate and non-GAAP net income per share we believe that our financial.
Oh, I'm, sorry, our non-GAAP financial results help provide additional transparency into I robot's underlying performance and potential our definitions of these non-GAAP financial measures and reconciliations of each of these non-GAAP financial measures to the most directly comparable GAAP measures are provided in the financial tables at the end of the third quarter 22.
Many financial results press release, we issued last evening, which is available on our website at www Dot I robot Dot Com and is provided at the end of these prepared remarks.
Also unless stated otherwise the third quarter 2020 financial metrics discussed on todays call will be on a non-GAAP basis, only and all comparisons are with the third quarter of 2019.
Outlook for the full year 2020 has also provided on a non-GAAP basis with reconciliation is available in the tables of our Q3 press release and at the end of these prepared remarks.
In terms of the agenda for today.
Colin will briefly review the company's third quarter results discuss major accomplishments and share his perspective on our outlook Julie will detail our financial results for the third quarter ensure additional insights about our full year expectations, Colin will wrap up our prepared remarks with some observations on our plans for 2021.
Then we'll open the call for questions.
At this point I'll turn the call over to Colin angle.
Good morning, and thank you for joining us.
In the third quarter, we delivered exceptional financial performance and executed well across our global organization to achieve a number of important strategic milestones as we.
Result of the excellent progress we made this past quarter and growing confidence in the strength of expected fourth quarter orders from our retail partners are.
Our outlook has materially improved from our last update in late July.
Well there is still a lot of hard work ahead. It is important to acknowledge that our bright prospects would not be possible without the collective focus efforts and tenacity of my colleagues around the world.
In terms of our performance, we reported Q3 revenue of 413 million with 43% growth over Q3 2019.
That's far exceeded our plans entering the quarter.
The strength in the third quarter 2020 revenue reflected another quarter of substantially stronger than expected orders from retailers tied to favorable sell through trends anticipated demand for the upcoming holiday season, and incremental orders to support certain customer events as well as robust direct to.
Consumer sales growth.
The exceptional topline strength combined with extension of our tariff exclusion and prudent spending to enable us to deliver a Q3 operating profit of $93 million and EPS of $2.58.
In terms of our top line trends, we were thrilled that each major geographic region exceeded its quarterly target with the U.S. generating 75% revenue growth.
22% and Japan, 12%.
We've continued to see strong demand to support online, which includes pure play E commerce sites, our own website and whole map and the online.
Arms of our retail partners, we estimate that online related revenue grew by approximately 70% year over year and represented approximately 60% of total revenue.
Overall, the pandemic has impacted individuals and families in profound ways with home, becoming a primary hub for work education exercise entertainment and more.
The value of Rubin Braava continues to resonate with consumers worldwide, because these products fit seamlessly into their lifestyles, helping them keep their floors clean well freeing them to redirect their time and energy elsewhere.
These dynamics are helping drive higher interest in the category and ours is accelerating market penetration.
Along these lines, we recently participated in our six consecutive Prime day event.
Despite the challenging change in Prime day from its usual timing in early July was a solid event for us would remember being highlighted by Amazon as one of its top selling deals.
We made tangible progress against our strategic priorities in the third quarter and I'd like to highlight a few important developments.
As we discussed in recent quarters and important element of our strategy is to differentiate the cleaning experience and we update the Andy in this area with the introduction of our AI robot genius home intelligence platform, which gives users greater control of where when and how the robots clean.
Our genius platform Leverages, our substantial investments across AI home understanding and computer vision technology and supports a redesigned home app as a result, new features and functionality have been made available across our portfolio of connected floor cleaning robots.
We also introduced room by three plus which expands our lineup of intelligent self emptying robot vacuum cleaners, we believe that the eyeq three and three plus will play an important role and continuing to shift our product mix up into the mid and premium tiers port.
Quarterly revenue from premium robots, which are priced at $500 and up grew by 86% and represented over 60% of our Q3 revenue.
The second element in our strategy is to build a stronger enduring relationships with consumers worldwide. We are.
We ended the third quarter was 7.8 million connected customers, who have opted into our digital communication.
The sequential increase of 12% and a 45% gain since the start of the year.
The introduction of our genius platform also helps advance this part of our strategy since genius gives owners unmatched levels of personalization and control over their cleaning robots weve all.
We've already seen the collaborative intelligence of genius drive greater in gauge Vince mish.
Mission completion rates have continued to increase I seven as Snine and M. Six owners are increasingly creating multiple favorite cleaning routines and utilization of new features like directed room clean is on the rise.
Nurturing the lifetime value of our customers is another strategic priority that we believe will support continued growth of our direct to consumer sales channel the development of new recurring revenue streams and improved profitability.
Our direct to consumer sales grew approximately a 155% to 35 million in the third quarter. As we are starting to see early returns on some of the initial investments that we've made to improve the buying experience on our digital properties. For example, we've recently added support for a broader range of pain.
Types optimize the design of the home page.
Elsewhere on I robot Dot com to increase conversion personalized various promotion programs and added a new roomba restore program that promotes the sale of refurbished roomba robots.
Earlier. This month, we began conducting smaller scale pilots of new services that we expect to refine and scale next year in 2021.
As we look ahead, our business has fared far better in 2020 than we could have possibly anticipated just six months ago.
We've seen our global year to date sell through growth rate accelerate further from Q2 levels, primarily as a result of exceptionally strong demand in the U.S.
Outside of the U.S. Europe year to date sell through growth has improved modestly from Q2 levels, while Japan turned slightly negative due largely to a tough comp against September of 2019, which benefited from very strong sell through in advance of an increase in that country's consumption tax.
Looking ahead, we remain confident that once again, we'll end the year as the undisputed global category leader, even as the competition intensifies and considerable uncertainty about consumer spending into the holiday season persist.
As we move into the final quarter of the year. Our operations teams are working closely with our contract manufacturers and broader supply chain to fulfill anticipated orders and close our euro on a very strong note.
On orders in hand, and those expected over coming weeks. We currently anticipate full year 2020 revenue in the range of.
1.365 to 1.375 billion that's in.
This implies fourth quarter revenue of $480 million to $490 million.
We expect 2020 EPS in the range of $3.43 to $3.53.
While we enjoyed a very strong EPS performance in the third quarter. We expect that are anticipated fourth quarter EPS will moderate as we implement a number of promotional activities and activate substantial working media plans, including the recently kicked off television advertising.
Julie will provide additional details about our outlook in just a moment.
In closing I am very proud of the way our teams have risen to the unprecedented challenges that we faced in 2020.
As a result, we are well positioned to deliver annual revenue gross margin operating profitability and EPS that we expect will exceed our original 2020 targets but.
The progress we've made over the past several quarters further validates our strategic direction and we are incredibly excited about the opportunities we see to move into the next phase of our growth and maturation.
At this point I'll turn the call over to Julie and after her remarks, I will return to offer some additional closing thoughts.
Okay.
Thanks Collyn.
As Andy mentioned earlier, my review of our third quarter financial results as well as my comments about our outlook will be done on a non-GAAP basis. So unless stated otherwise each mention of gross margin operating expenses operating profit effective tax rate and net income per share will mean, the corresponding non-GAAP metric all.
Comparisons are against the third quarter of 2019, unless otherwise noted.
For the second straight quarter, we outperformed our expectations total revenue grew 43% to $413 million due to substantially stronger than expected orders from retailers and direct to consumer sales GMV.
Geographically all regions exceeded their revenue plan since the start of the quarter.
Revenue grew 75% in the U.S. with international revenue up 21%.
Outside of the U.S. the growth was highlighted by 22% expansion in EMEA, while revenue in Japan increased 12%.
Roomba represented 89% of our mix with Braava, making up the remainder braava revenue grew by 38% due to the robust growth in the end six.
Our gross margin at 48% was well ahead of our plans primarily due to a combination of higher revenue.
Severable changes in foreign exchange rates, a favorable channel mix shift and the timing of other supply chain related activity gross.
Gross margin was essentially unchanged with the prior year, the leverage associated with higher revenue and the lack of tariff expense was primarily offset by changes in pricing and promotion.
Third quarter 2020, operating expenses of 106 million increased by 18% and represented 26% of revenue.
The increase primarily reflects higher short term incentive compensation based on our expectations for a substantially stronger full year performance and the intensity of certain sales and marketing programs to support revenue and build our direct to consumer sales channel.
Our Q3 operating income was $93 million or 23% of revenue.
Our Q3 2020 effective tax rate was 20%, which was slightly higher than our plan due to the discrete impact of 2020 tariff refunds.
Our net income per share was $2.58.
We ended the third quarter was 357.3 million in cash and short term investments a sequential increase of $115 million.
The increase primarily reflects strong fundamental performance. In addition to receiving approximately 35 million in tariff related refunds and approximately $52 million in Teladoc stocks at the company received in the third quarter when Teladoc acquired the Companys taken Intouch health it.
The gain associated with our Intouch investment is reflected in other income in our GAAP income statement.
Third quarter Dsos were 40 days versus 53, one year ago, which primarily reflects the timing of third quarter 2020 orders.
Three ending inventory was $218 million or 93 days compared with $248 million or 152 days at the same time last year. The decline in absolute inventory dollars, primarily reflects the impact of tariffs on the Q3 19 inventory levels while.
Hi benefited from our efforts to deliver against substantially higher than expected orders.
In terms of inventory at our retailers we ended the quarter in good shape.
Let's turn to our outlook for 2020 as Colin noted earlier, we now expect a much better 2020 performance with that said there is a lot of work outstanding to finish Q4. Overall, we are cautiously optimistic for a strong fourth quarter, although it remains to be seen how the pandemic and uncertain economic environment.
And the shifting of an event like Prime day from July to mid October will influence the holiday gift giving season.
Since late April our expectations for 2020 have steadily improved we now.
We now expect 2020 revenue in the range of 1.365 billion to $1.375 billion. This would represent growth over 2019 of 12% to 13%, which exceeds our topline growth expectations at the start of the year.
Our full year 2020 expectations implied Q4 revenue ranging from $480 million to $490 million or 12% to 15% higher than the fourth quarter of 2019.
Geographically, we expect double digit growth in the U.S., EMEA and Japan for the fourth quarter we.
We currently anticipate finishing 2020 with a gross margin of approximately 45%, which implies Q4 gross margin in the low 40% range as we support our retailers with promotional programs to drive sell through during the holiday season.
Looking closer into our operating costs. We currently anticipate a meaningful uplift in spending in the fourth quarter as we activate a range of advertising and marketing program incur higher short term incentive compensation and continue to advance strategic initiatives, primarily related to building stronger customer relationships and increasing.
Our software capability.
Based on planned Q4 spending in the range of $190 million to $194 million. We are targeting full year 2020 operating costs between 488 and $492 million.
Given our spending profile, we anticipate our 2020 operating profit margin to be approximately 9%.
Given the anticipated decline in Q4 gross margin, we expect a fourth quarter operating profit margin in the low single digit range.
In terms of other notable modeling assumptions for 2020, we expect an effective tax rate of approximately 19%.
We anticipate a diluted share count of approximately 28.6 million shares as.
As a result, we expect our full year EPS to range from $3.43.
The $3.53.
Q4, EPS between 12 cents and 22 cents.
As it relates to our cash position going forward, we are expecting Q4 to be a solid quarter of cash generation. It is worth noting that we received approximately 60% of the 60 million in tariff related refunds owed to us by the end of Q3.
We expect to receive the balance over the next three quarters as well.
As a reminder, the timing of these refunds is at the discretion of U.S. test them in.
In summary were very pleased with our third quarter performance and our visibility into the fourth quarter leaves us confident that we'll enjoy a strong finish to the year to be.
To be clear there is a lot to be excited about as we continue to successfully navigate the challenges primarily tied to the global pandemic that.
That concludes my commentary I will now turn the call back to calling for some additional color on the coming year.
Thank you Julie.
We are understandably proud of the performance and achievements, thus far into 2020 impart because we believe that our progress. This year will help set the stage for continued growth and such.
And success in 2021 and beyond.
With that said we still are.
Our advancing our planning process for next year and as a result, it would be premature to share specific guidance for 2021.
Nevertheless, I'd like to offer some preliminary thoughts on the opportunities and challenges that lie ahead for us next year.
Assuming our fourth quarter unfolds as expected we plan to exit this year with healthy sell through activity and relatively normal inventory levels at retailers we've.
We believe that this will create a foundation to sustained strong growth in 2021.
Consistent with this view, we believe our instruments to deliver highly differentiated cleaning experience we will.
We will further expand our investments sorry.
We will expand our direct to consumer sales channel and scale, New service offerings, which will increase our competitive moat and such.
And support long term value creation.
As the adoption of RBC is in general and Roomba more specifically continues into next year. We're also focused on a range of initiatives to address profitability headwinds that looming on the horizon on last quarter's call. We discussed the gross margin challenges, we see in 2021 due to the reinstatement of section three or one tariffs in the <unk>.
Investment to scale production in Malaysia during.
During the same call. We also noted that.
The tariffs represented a three point gross margin headwind in 2019.
At a high level nothing has changed on this front.
As we geographically diversify our manufacturing capabilities, we will continue to carefully manage our supply chain to expand our access to the key components and raw materials necessary to keep pace with demand.
Additionally, moving into 2021, we plan to further build out the infrastructure necessary to scale, the new service offerings and continue to grow direct to consumer sales while our.
While our 2020 profitability has benefited modestly from lower travel costs, we expect those gains will subside with a return to more traditional working environments at some point next year too.
To minimize these impacts we.
We plan to ramp production in Malaysia into the second half of 2021.
Expand our direct to consumer sales and carefully manage our spending just.
Just as important we believe that our progress on these fronts next year, we'll leave us well positioned to enjoy gross margin and operating profitability.
Ill wins.
In 2022 and beyond.
Strategically we move forward with a laser focus on the consumer and on making sure that our customers never look to leave our franchise.
Happy Roomba owner is an incredibly valuable asset that loyalty will create meaningful opportunities for us to expand the scope of our relationships with customers worldwide to that end, we remain committed to product diversification.
It's a top priority for us over the next several years will be to build out our direct to consumer capabilities. We believe that progress on this front will increase the likelihood that we can successfully and efficiently entered new product categories based on this our go to market plans to enter the robot lower market with terrible.
We'll remain on hold for the foreseeable future to the extent we restart these efforts in this area. We will do so in stealth mode and will not be providing updates on a quarterly basis.
In summary, we're very pleased with our reports.
The results to date, and we are optimistic about our prospects for the fourth quarter as we can.
As we continue to execute on our plans we remain enthusiastic that we can navigate the challenges that await us next year and reward our shareholders for their continued confidence.
That concludes our comments operator, we will take questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key please stand by while we compile acuity roster.
And our first question comes from Charlie Anderson from Colliers Security. Your line is now open.
Yes, thanks for taking my questions and congrats on a really strong quarter here. So I wanted to ask about the Q4 forecast they can.
14% supply growth at the midpoint thereabouts, So wonder if you could sort of speak to your expectations for sell through both.
Both for the category yourselves in Q4 relative to the guidance are there any things happening and they happened in the quarter that would sort of cause those to be any different to me as it relates to channel inventory or the effect of prime to et cetera, and then I've got a follow up.
Sure. So why don't I start yeah, as we look at the what we've seen in our sell through momentum today. It gives us growing confidence as we exit into the back of the year.
We will continue with those trends that being said I think it's important to note that we do have some uncertainty as we look through Q4 with the the economic environment.
And the fact that prime day in the holiday season have moved together, but with the orders that we have on hand, and what we expect in the few weeks coming weeks, we feel good about our expectations for the fourth quarter.
Okay, Great and then comment in your prepared remarks, you articulated a desire to expand direct to consumer I Wonder if you could maybe hit on some of the the actions you will take two to do that and then you also mentioned continued focus on product diversification. We're all aware of terror, So I imagine.
You are thinking about other products beyond Tara just here, we have to go first could other products jump ahead of terra potentially and that diversification efforts.
Yes.
Sure.
So with the law.
Launch of I robot genius, our robots are becoming increasing leap.
Really powerful partners to our consumers. So what that means is that the robots learn about the partners homes learn where the robots get stuck learn where the kitchen table in the kitchen counter and that coaches are and thus the amount of.
Opportunity to have a long term relationship where the owner of the robot benefits.
From the knowledge of the robot growth. Since this is the foundation of what we believe is a long term sticky relationship between I robot in our customer base and so.
And so that as we're building our economic mode. It.
We have a fundamental new dimension beyond.
Product excellence and brand now into tight partnership.
Which can drive this relationship.
And the way to transact with the customers. Once we have this relationship built is directly and so that it means that our marketing technology stack needed to be significantly overhauled and is sort of mid.
Process when that process will extend into 21 as as we improve our ability to translate behavior and how the robots are operating with ideal an optimal ways of interacting with those customers.
And as we grow that and we mentioned 155% growth in Q3 as an.
Illustration of just how successful we are building this new dimension of the company. Thus far we expect it to continue.
We're also building a way.
A way of transacting on selling things other than room, but to our customer base. So to your question of does roomba have to come next absolutely not but.
But it is our focus to create.
A world class capability.
To understand our customer and bring them offers that we believe they'll be excited to take up.
As a result of the investments that we're making.
Great. Thank you so much.
You bet.
Thank you and our next question comes from Jim Ricchiuti from Needham and company. Your line is now open.
Hi, good morning, congratulations on quarter.
I wanted to pick up on some of your.
On some of your your closing.
Commentary and I know, you're not going to be able to give specific guidance for 21, but you know what.
It's coming across is that.
Is going to be a year of increased investment and without getting into all the specifics that you highlighted.
Just wondering if there's any additional color as to how we should think about opex.
You know should we began to anticipate some of these investments that you're making.
The restart returns start coming through later in 21 or is it something we should think about into 22 debt.
That we really start seeing the benefits and you also talked about this is providing.
The foundation for what are you still anticipating that's going to be strong growth in 21, and I guess I'm also asking is there. Some some flexibility if in fact, we don't see that kind of demand environment that maybe you're anticipating entering the year to make adjustments.
So let me I'll start then Julie can add some color and I'll give you a.
I'll try to be as specific as I can the will be qualitative the.
The you know.
We're in a situation, where we're seeing strong acceleration in demand for our products and we believe.
And then compounded by strong growth in our direct.
Channels.
Which benefits both from the work from home environment and the investments we have in improving our direct capabilities as a business.
We believe that.
All of those positive move.
Momentum drivers will be present.
In 2021, and thus we are qualitatively confident about the continuation of this.
Continuation of the strong momentum the category and I robot in particular is enjoying.
The.
Investments, we're making are very targeted and we can be very specific about what we're doing.
We're going back to world, we're anticipating a 25% terrorists on product manufactured in China. The Covidien pandemic has delayed our original plans to get to Malaysia.
By the end of this year.
And instead pushed our transition of manufacturing well into 2021 week.
We believe that those investments have are finite and by the end of 2021, we will have the vast majority of product coming into North American manufactured efficiently in Malaysia, and so that what starts out as a tailwind ends the year.
As I'm sorry, it starts a year as a headwind ends the year River.
Reversed as a tailwind moving forward so big.
Because of the dynamics of product shipments.
The vast majority of the products shipped in 2021 will be subject to the higher tariffs.
So we'll be able to talk to the.
The.
Mature, Matt the state of maturation of our non.
Non Chinese manufacturing capabilities through the year.
But it's going to be late in the year and largely 2022 before.
Those tariff costs that were that our reimpose on January 1st.
Are reduced in their impact because of that transition so it's pretty straightforward.
Hasn't changed since our last quarter call, we continue to make progress moving to Malaysia, and the physics of the tariff.
Tariff policies.
Are what they are and we're just trying to be very clear in communicating how that's going to play out.
The other area of incremental investment.
Is this building out of the direct capabilities to support the strategy I was just describing.
It is characterized by some initial investments in these new tools and outside capabilities that we needed to bring in to get these tools implemented and again it has a a unknowable and to the investments.
Leaving us with a internal capability that can execute at a world class level too.
Continue the momentum we're already seeing on direct and so that again, there is a tailwind that turns into sort of a headwind that turns into a tailwind as 2021 progress is the same.
The services or less about expense and then and more about getting them scaled they have to wait to scale for the some of these.
Some of these direct investments to play out.
But again, we feel like we'll be exiting 2021 with.
Another important and sticky revenue stream growing within the business.
So to your question about if things don't go exactly as we planned do we have some levers to pull of course, we do and I think that you've been with us for a long time and know that we do adapt to changing environments up or down as appropriate but.
But we believe that given the strong them on my momentum we're seeing right now that's the strategy that we're articulating today is the right one to move I robot to a position where a larger percentage of our revenue comes from repeat customers.
Or in recurring fashion and that were able to.
Try.
Transact with an increasing number of them directly. So this is a great.
Great strategic shift for us that we've been investing towards and it's working.
I think the only thing that I'd add kolon is the other area of investment for US, which is really building our software capability and so if you we've been talking about this during the year. If you look at what we've been able to bring to market a this quarter, both with the Eyeq three plus as well.
I'll ask the genius platform.
It shows that I think the.
Early the early looking that were seeing the those highly differentiated software features are resonating with our customers and as we look forward. We believe we have a multiyear roadmap of equally rich and high value features and functionality that we'll be bringing to them.
Market with our floor cleaning products.
I'll just finish by kind of underscoring what Colin said around.
Our view of these investments as an organization I think we have a culture of putting a lot of rigor into our investments and making sure that aren't any significant investment drives an attractive return over a multiyear horizon. So there are certainly a number of areas that we believe are important.
Two advancing our strategy and we are we will continue and are carefully looking at all of those as we move forward.
Got it that's helpful and one final quick question Julie I'm wondering if you can tell us what Amazon represented for you in the quarter.
Sure Revpor Amazon represented roughly 27%.
Of our business. Thank you.
Thank you.
Thank you.
Our next question comes from Ben Rose with Battle Road. Your line is now open.
Yes, good good morning, Colin.
Conan Julie and congratulations on a very strong quarter [noise].
Thank you know just taking a look at.
One of the developed.
Developments in the quarter was the introduction of VR Geocoding robot and.
Like a very intriguing product.
Should we.
Should we be thinking of this as kind of a one off or perhaps an initial foray into.
The home learning Slash educational segment of the home robot market.
So that that robot.
Route is a a robot that was developed and it.
Included in our product portfolio supported by robots commitment to stem education, we think it's an amazing product available online.
I think it will benefit from the growth in direct to consumer E. Commerce that we described we don't view it as a material revenue driver at this point, so I wouldn't put it into your growth driver calculus.
I hope that.
It is incredibly successful from an impact perspective, particularly in an environment today, where remote learning is so challenging and good tools to help students.
Students stay.
Advancing.
Fingers crossed in their educational journey, so it's a strategic a robot more on our company's commitment to impact rather than revenue growth at this point.
Okay, and if I may I'm, calling just again to clarify some of your comments.
Around product diversification and the company's growth strategy.
[music].
I'm Surmising from what you said that you are obviously.
You're obviously looking at some additional categories that terror may not in fact be the next kind of major.
[noise] diversification thrush that we see but can we surmise that it is a question of when rather than if Tara will be launched.
You know we didn't we haven't given any comments on timing for Tara.
I don't want to.
Create speculation.
We certainly continue to believe that lawn mowing using our robotic technology is a attractive.
Future market so.
It is it people would benefit from robot lawn mowers.
Okay, Great and sorry, just one one additional comment in terms of the diversification efforts.
Can you speak broadly or maybe just in a broad fashion, what other kinds of opportunities you may be.
Taking a look at or would that be betraying too much.
Interest registry.
I can speak broadly I robot is focused on improving the the home experience, helping people maintain their home.
Operated efficiently securely and and a focus on.
Focus on how does technology help homes become healthier places to raise your family.
That's sort of the Aereo that we view as core to the company.
Well, we think we built a brand around delivering.
To our consumers technology rendered accessible reliable and delivering a remarkably on the expectations that people have for for robots and so I think that there's a lot of opportunity for us to expand our brand and.
Take advantage of this growing this rapidly growing.
7.8 million connected customers as of today that have opted in to a direct relationship with the company. So.
These investments that we're making and will continue into 2021 is really setting up a.
Very exciting and efficient new channel into the marketplace, where three.
Through the excellence and stickiness of the Roomba experience we.
We create.
Rabid law.
Long term I robot fans.
And then can bring to them efficiently directly.
New products and service offerings that they would enjoy and benefit from.
Okay. Thanks very much.
You bet.
Thank you. Our next question comes from Asian merchant with Citigroup. Your line is now open.
Hi, Good morning, everyone and thank you for the opportunity for the question and congratulations that was that very amazing Sellthrough and already see top line growth that you guys reported.
I think your question sure.
Sure I have a couple of questions you know how we should think about calling just kind of you know your growth rate assumptions just long term again, not looking just specifically for 21 22, but you know it's one point, we talked about growth.
The growth rate that we're could hover in the 20 percentish kind of range and it looks like you know you guys with 13% growth potentially this year and looking out should we expect kind of convergence to those kinds of growth rates you're in the next couple of years.
As connected consumers and all this work from home stay at home improvement cleanliness et cetera, do you know.
You know comes to the forefront on People's mind, and then have a question on margin for Julie.
You know the dip that you expecting for Q is this something that we should expect.
Sort of on a year on year basis fourth quarter will always be such a sharp dip into four key issue is there something about this year that you know kind of you kind of take a step back and remind us whether this is something thats happening just for this year and then in 21 gets you guys talk about terrorists being a three percentage point headwind.
I believe that.
Because it's a full cost full year EPS 21, the margin headwinds in 21 that we should model should be higher and I do understand to be reversed as you progress through the year, but he said the starting point they should be a little bit higher relative to what they were in 2019, because it's a full year versus a half year.
Thank you.
Sure I feel why don't I start and then Colin can jump in and just to be clear we haven't offered any.
Guidance for either 21, or 22 and long term yet.
So as you think about your model is what I would draw you back to is.
As we look at both the role that RBC play within the overall vacuum cleaner market and the growth we've seen there as well as the headroom that we continue to believe we have in our target addressable market. We are still in the low double digit penetration range.
We look forward and believe that there's room to grow as in all of our regions how that growth of all that we'll we'll be talking about as we finalize our plans for 21 and beyond.
Oh and discipline and as you know I I think its.
We're still early.
And the robot industry.
Roomba has a lot of room to grow and we're describing a.
The strategic shift through developing this direct to consumer business.
Business, which should give us a very powerful new growth driver.
As 21.
Comes to a close and sets us into 22, so I think that at this.
I think that at this point I agree with Julie we really can't talk more than qualitatively around the stacking up of.
Drivers of growth looking forward and I think that we're trying to make that very very clear without giving you numbers.
Okay, let's see it could I just ask a clarifying question. When you asked a question about margin were you speaking about gross margin or operating margin.
Oh gosh margins.
Gross margin Okay. So as you know as you look at our business and we've talked a lot our we have seasonality in our business with.
Heavier promotional periods in Q3, X., sorry in Q2, and Q4 and as you look backwards you typically see that.
They they.
The.
As we go from our Q3 gross margin into our Q4 gross margin.
What we're projecting is a what I would call during a normal level of MDF and our promotion and pricing activity.
Associated with ensuring that we continue to reach and convert our customers. During this important gift giving season.
Great and then just to clarify on the terrorists I know you refer to what they were in 2019 from an impact your margins at about three percentage points.
At at the start of 21.
You know if parents continue we should assume that the impact would be higher than what it was in 2019, because it's a full year I just want to clarify that.
You know just.
It's not quite apples to apples with 2019 as you say, it's been 29 team there was the increase in tariffs, but we do have some operations in Malaysia, and we will continue to scale them in 21 so.
You know as you say it might it will certainly started off more impactful than it ends.
Although some of the inventory being sold in Q1 will have been.
Brought into the country without margins, sorry without tariff impact in.
In 20, and so that it's it's difficult to get too precise and so we're trying to keep it at a high level, but there are puts and takes.
Okay, all right got it thank you.
Thank you. Our next question comes from John Babcock with Bank of America. Your line is now open.
Good morning, and thanks for taking my questions just quickly I noticed that as recently as this morning. There was I noticed on your website, suggesting potential delays in shipping products and so I was wondering if you could talk about your supply chain and how you've been through this period of elevated demand and then also what adjustments might you have to make as we enter the holiday season.
Ah so as we have and and as Weve talked the last couple of quarters as we've moved through this and.
Credibly challenge.
Challenging period with a global pandemic, we've had to make adjustments to.
To our supply chain to ensure we could keep up with with demand. This it goes from the beginning of our chain all the way through to the end.
Yeah, I think that there given all the.
Given all of the growth there is occasionally a situation or a website, where shipping is delayed and that's maybe what you're seeing but we believe.
We believe that we have the systems in place that to make those types of disruptions very short.
Okay. So no real major supply chains in terms of getting your products from China or manufacturing the product overall.
Hi.
It is an adventure every day, but we feel like we are winning.
Okay.
Then just some to get some clarity on the last set of questions. I was just wondering if the promotional activities in the fourth quarter of this year are going to be any different than in past holiday seasons and I'm also just generally you know if you could provide a little bit more color on how you're currently thinking about whether or not there will be pull forward because of Amazon Prime day.
So our promotional strategy varies from year to year. This year definitely we are accelerating age.
Accelerating a shift of spend demand Gen spend online.
And focused on driving the.
Awareness and demand, where our consumers are and so that the.
The spend definitely shifts we're all.
We're also.
As the category becomes more well understood.
Making sure that what.
What makes I robot special is highlighted.
A bit more than we've done in the past as opposed to Hey, Jay.
Hey, Gee Whiz did you know that a robot could back him a floor for you and you don't have to push a vacuum cleaner and so as the.
As the.
Competitive landscape and customer acceptance of robot vacuuming evolve so does our marketing strategy.
I think that one thing that I'd point out is over the last year, we've seen a huge shift it.
And customer expectations of robots from a point just a year ago.
Just a year ago when like.
The 17 years prior and people were.
People were skeptical that robots could actually doing effective job vacuuming.
It's almost like someone push the switch now people are impatient that.
That they their robots don't do more and are starting to rely increasingly on robots as their primary floor care solution.
This is part of the excitement we have around I robot genius because what.
What customers are asking for is more control over what where and how the robot Queens and that's what we're delivering to them with our AI improvements on the robot.
That's helpful. Thank you and then last question before I turn it over just on capital allocation, obviously, you've seen your cash balance grow with you know the strong growth in the robots and overall just a good operations here I was wondering if you can talk about how you plan to use that cash whether it's via M&A or whether there are other value return opportunities and also just what you see as.
Our preferred level of cash to maintain on the balance sheet.
Sure I'll I'll take that.
We've been very clear I think that our capital allocation strategy goes across a three fronts.
The first one and I think one that is highly important in this volatile period is to ensure we have sufficient liquidity to fund our existing operation.
And during periods like the global pandemic, there was an it heightened focus on that.
The second area of our capital allocation and consistent with our past practices is making smart acquisition and we continue to believe that that will be something that we want to look at doing and if you look historically, both in terms of technology as well as.
That going direct in a number of markets. We've made some smart moves there that.
Third portion of our capital strategy, then becomes on a when it makes sense.
Returning some value back to our shareholders. We did that at the beginning of this year with roughly $25 million of share repurchases I still.
I still don't we said during Q1 that we would not be doing any more of those this year and I still believe that's the case, but as we proceed forward and and finalize our plans for 21 and beyond well be taking another look at that.
Any rebalancing needed in our capital allocation.
Great Crystal.
Thank you. Our next question comes from Mark Strouse with JP Morgan. Your line is now open.
Yeah. Good morning, Thank you very much for taking our questions I'm, just kind of a follow up to let's see as earlier question.
I understand you're not giving a long term targets for for gross margins yet, but if you go back a couple of years ago. You were you were regularly printing and gross margins in the low Fiftys and I think you had at the time, given a 2020 targets for.
Gross margin of around 50, 51% again, not looking for specifics, but is it unreasonable to think that over the next couple of years, but you could eventually get back there or something fundamentally changed with your competition or pricing or a component costs and things like that.
So mark maybe I can.
Try to give you some color on that.
Color on this death.
Definitely you've been with US a long time and you've seen the market of ball from a time when we were alone in the marketplace to a time when competition.
Started to come in and put pressure on pricing a little bit and that coincided with I robot really.
Really leaning forward on our bill of materials to ensure that we're putting more.
More technology into the robot for processing power to come out with the the first robot that could build a map and first systematic system and then the with genius the first robots that.
Could.
Remember the map and grow the understanding of the environment.
We spent a lot of time today, and and I'm happy to add more.
More color color to it that we're entering into play into a place where I feel like there our gross margin and profitability tailwinds that should help.
Part of that Moore's law gives us access to cheaper processing power and so that the need to lean quite as far forward is improved the fact that.
At this point in time customers are excited by how well the robots clean and are looking for the robots to be smarter, which means that innovation and differentiation in the <unk>.
In the category.
It's something that could be best delivered with improved software that helps the direct to consumer health services health and so that.
You know I'm not going to give you a magic number but I think that.
Gross margins ebb and flow with the current run.
Current reality of.
Of the marketplace and from a alone in the market too early competitive challenges to differentiation based on software and the direct business model I feel like we're headed into a at Ics.
An exciting next chapter of I robot.
Okay that makes sense. Thank you call. It and then just one quick follow up if I can how.
How committed how locked in are you to Malaysia.
If you know something happens that with a change in the tariff structure from the election or or something else.
I robot is committed to Malaysia.
We are we are we believe that geographic diversification.
It's critical for a number of different reasons and.
And Malaysia makes a ton of sense were invested in making that our second geographic geography of of manufacturing.
Full stop period.
Got it understood. Okay. Thank you very much.
You bet.
Thank you. Our next question comes from Mike Latimore with Northland Capital markets. Your line is now open.
Yes, Thank you a great great quarter there.
Just on the on the sell through sell through rates a little bit can you. I think you said they were improving or accelerating can you just quantify that a little bit maybe third quarter third quarter versus second quarter, and then does that kind of roughly 14% of revenue growth in the fourth quarter is that roughly in line.
With what you're expecting sell through to be.
Oh sure so well as as we said.
As we said, we're seeing a nice improvements in our sell through and as we're talking about it it's through week 40.
So versus our Q2, we're seeing.
Credibly exceptionally strong growth in the U.S.
Modest improvements over Q2 and EMEA.
And then Japan, which is slightly negative in Q3 year to date basis, and but we believe that that's largely due to their comping in the third quarter at a very high 2019 because of the pending.
Pending and increase in consumption tax.
The does.
Just from a a physics perspective, Q3, 10, because we account on sell in.
Q3 tends to be an inventory build quarter.
In Q4 will be in inventory rundown, leaving us in Q1 in a a good inventory position. So the physics of it would be that fell in.
Fell in outpaces sell through in Q3 and sell through outpaces sell it in Q4 EPS.
Okay great.
And then on the.
Some of the enhanced.
Teachers that you've highlighted like.
You know the directed room cleaning.
Service can you talk a little bit about just kind of the usage rates. There you know what percent of the.
Users are actually using that function, how often are they are kind of growth and someone doesn't enhance features.
You know I would say that the.
The idea that you.
You ask room, but to clean a specific area of your home.
Has continued to grow and is now a very commonly used feature I'm not going to give you a percentage, but it's it's not a something that just the nish a robot owners use if you bought it I seven EPS nine or M. Six robot.
Chances are you built a map and chances are you're using this functionality and the genius goes from clean my kitchen to even more precision clean around my kitchen table.
And it's still early.
On on that front, but definitely we're seeing strong uptake on that additional functionality.
The the use of the robot to also find good times to clean so that Oh, one of our biggest challenges right now is that the roomba.
The roomba starts and Theres people home and they turn it off and so that's there's a very real.
A very rapidly growing focus on when our good times to clean in the home.
And we've got a lot of features in the I robot genius or software to help us.
Help address those questions as well and so it's.
It's a it's all goodness and again as I said, we tried to say on the call. We're seeing increased engagement, which is what we hope to see based on the rollout of this.
This new AI capability and that's supportive of this strategic.
Goal of.
Getting more of our direct opt in customers very actively engaged with our robots.
Okay all right. Thank you.
You bet.
Thank you as a reminder to ask a question you won't need to press star one on your telephone.
Our next question comes from Jeff Feinberg with Feinberg investments. Your line is now open.
Thank you very much good morning. Thank you for all the flavor just want to make sure that I'm understanding the opportunity correctly when you're talking about.
The direct to consumer the resourcing as well as a variety of investments. If we're looking at this on a multiyear basis is taking 2022 versus whatever we do this year I'm, assuming with the comments that you made about the hurdle it returns and the investments that we could look for a nice compound growth.
In the bottom line over a couple of your.
Time planning horizon with the benefit of these investments.
Yes, the direct to consumer is designed to.
Decrease customer churn.
And create compounding growth.
Because we'll be selling more.
Product to our existing customer base, then we would without these investments.
And so that it should accelerate our organic growth.
And just to be clear how that plays through.
We again, we have not offered any explicit guidance on 21, and 22 and beyond and we'll be doing that in the future Yep.
But you are correct on the mechanics.
Thank you. This concludes my answer.
<unk> session I would now like to turn the call back over to Andrew Kramer for closing remarks.
Thank you Joelle concludes the third quarter 2020 financial results call. Appreciate Everybodys support we look forward to talking with you over the coming weeks and months. Thanks again.
That concludes the call participants may now disconnect.
Good bye.
[music].