Q4 2020 iRobot Corp Earnings Call
Okay.
Good day, everyone and welcome to the Irobot fourth quarter of employee of 'twenty and 'twenty financial results Conference call.
This call is being recorded at this type of opening remarks, and introductions I would like to turn the call over to Andrew Kramer of Irobot Investor Relations. Please go ahead.
Thank you Sarah and good morning, everybody.
Joining me on today's call are Irobot, chairman and CEO, Colin angle, and executive Vice President and CFO Julie's Island.
Before I set the agenda for today's call I would like to note that statements made on today's call and 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 1095.
These forward looking statements are subject to risks and 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.
Irobot undertakes no obligation to update or revise these forward looking statements, whether as a result of new information or circumstances relate.
The related to our financial disclosures. During this conference call, we will reference certain non-GAAP financial measures as defined by the SEC regulation G, including non-GAAP gross margin non-GAAP operating expense non-GAAP operating income profit and profit margin non-GAAP effective tax rate and non-GAAP net income per share we believe that.
And our non-GAAP financial result, helped provide additional transparency and the irobot and underlying operating performance and potential.
Our definitions of these non-GAAP financial measures and reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP measure are provided at the end of these prepared remarks, and and the financial tables at the end of the fourth quarter 'twenty and 'twenty financial results Press release, we issued last evening, which is available on our website and irobot.
Dot com.
Also unless stated otherwise the fourth quarter, 'twenty, and 'twenty and full year 2020 financial metrics as well as the financial metrics provided in our outlook that will be discussed on today's conference call will be on a non-GAAP basis, only and all of historical comparisons are with the fourth quarter of 2019 and full year 2019.
Respectively.
In terms of the agenda for today's call Colin will briefly review of the company's financial results discuss major accomplishments and share his perspective on our outlook into 'twenty and 'twenty, one and beyond Julie will detail on our results for the fourth quarter and full year and share additional insights about our expectations going forward Colin will conclude our commentary.
And some closing remarks after that we'll open the call the questions at this point I'll turn the call over to Colin angle.
Good morning, and thank you for joining us.
We closed out 'twenty and 'twenty I know the very strong note with revenue operating income and EPS that surpassed expectations. We shared at the end of October.
Strong demand combined with outstanding collaboration and execution, among our sales marketing and operations team.
And our broader supply chain underpinned and excellent revenue performance.
More specifically fourth quarter revenue of 545 million grew 28% year over year with significant growth in all major regions worldwide.
Our top line expansion resulted in an operating income margin of 6% and EPS of <unk> 84.
For the full year, we reported revenue of $1.43 billion and.
Operating profit margin of 10% and EPS of $4 and 14th.
All of which surpassed our original targets at the start of 'twenty and 'twenty.
Just as important we believe the steps we took during 'twenty and 'twenty are putting irobot and a very exciting path to drive substantial value creation over the coming years.
With that and mind I'd like to briefly review the notable progress we've made to execute on our strategy, which had a high level is focused on increasing the customers' engagement with our products, thereby creating a broader range of opportunities for our customers to transact directly with us.
The first component of our strategy is focused on differentiating the cleaning experience and we are proud of our 'twenty and 'twenty accomplishments in this area.
The pandemic forced us to make tough choices about where and how we would invest and we prioritize investment in software across our AI home understanding and machine vision technologies to ensure that roomba and Bravo robots can be tightly integrated into the customer's lifestyle and deliver unprecedented levels.
Of thoughtfulness reliability control and support the.
These investments are already resulting and new features and capabilities that are delighting customers.
In August we introduced version one point out of our state of the art robot AI platform Irobot genius home intelligence.
Janus is extensible across our entire portfolio of Wi Fi connected robots and.
Clocking a range of new features and functionality of that give users greater control over where when and how our robots clean.
We expanded our lineup of intelligence self emptying robot vacuum cleaners and September of 'twenty and 'twenty. When we launched the Roomba I three series and the U S.
We've been very pleased with customer demand for this product, which was introduced and EMEA last month.
During the fourth quarter, we introduced the Roomba combo, our first two and one for cleaning robot that consolidates vacuuming and mopping functionality. The product is now available in certain markets in Europe, where this capability of appeals to the value seeking customers looking for a convenient solution to help with her everyday floor care needs.
As we move into 'twenty 'twenty, one and our innovation engine shows no signs of slowing we expect to introduce two new roomba robots. This year, along with a wide range of exciting new digital features through upgraded versions of our genius platform.
We also took steps to aggressively defend our IP as we recently find the filed a new patent infringement action against Shark Ninja.
Our success and differentiating the cleaning experience has enabled us to expand our premium robot sales over the past several years revenue per premium robots grew by nearly 50% in 'twenty and 'twenty and represented 60% of total robot sales well our average gross selling price.
<unk> has continued to trend upward.
Just as notable and a year when overall adoption of robotic vacuum cleaners. The accelerated we maintain our global leadership position and the RBC category for the full year. We finished with eight of the top 10, best selling rbcs and the U S. Six of the top 10, and EMEA and seven of the top 10 and Japan.
Okay.
The second element of our strategy is focused on building stronger and more enduring relationships with the customer we ended 2020 with nearly $10 million.
Connected customers, who have opted in to our digital communications.
More than 80% over 2019.
Having a substantial portion of our connected customer base elect to receive in App notifications and email speaks volumes about the tangible value provided by our floor cleaning robots.
The ever expanding range of digital features within our genius platform is helping to ensure the customers get great value from our products. For example, we're seeing consistently high levels of utilization by our connected customers each month and robust engagement around new capabilities like directed room cleaning and creating a favorite.
Cleaning routine.
The third strategic pillar is oriented around nurturing the lifetime value of our customer relationships by accelerating the replacement cycle promoting upsell and cross sale deals and adding new purchasing options that will ultimately lead to recurring revenue and higher margins, we believe that executing on.
The strategy will support greater revenue predictability and growth.
And improve our profitability.
Well it is still early days, we made considerable progress in this area over the past several quarters with.
And we've continued to invest and making our website the desired destination for current and prospective customers. For example, during the fourth quarter, we enjoyed strong sales of and exclusive and and exclusive Roomba Bravo bundle.
Added of financing option for our European customers successfully scaled to support the busiest online shopping days of the holiday season, and gained valuable experience and moving with agility and creativity to increase increased traffic and drive conversion.
As a result, our direct to consumer sales more than doubled in the fourth quarter and generated 11% of total 2020 revenue up from just 6% in 2019.
We view our direct to consumer channel is a powerful complement to our strong retail partners. We expect that this higher margin channel will grow to at least 15% of total revenue in 2021 and are optimistic the DTC revenue will exceed 20% of our total revenue by the end of 'twenty and 'twenty three.
Even as we continue to enjoy growth with our retail partners.
As we move forward, we believe that there are a number of attractive opportunities to increase existing customer revenue and amplify the benefits of growing our connected customer base.
During the fourth quarter, we began conducting tests of new services that span extended warranties robots of the service membership program and the premium care and maintenance offering the <unk>.
Thus far have been promising and we are optimistic they will begin commercializing the services over the course of 'twenty 'twenty one.
And we plan to test other offerings in 'twenty and 'twenty, one that can further increase existing customer revenue and contribute to building a high margin recurring revenue stream.
To effectively and efficiently grow existing customer revenue, we plan to accelerate investments debt further enhanced the buying experience on our digital properties and upgrade our digital marketing capabilities. We've selected our implementation of Parker and we'll continue to on board the marketing and it talent necessary.
And to maximize the power of these tools and platforms.
As we've discussed previously we believe that these investments are critical for driving traffic improving conversion rates and increasing transactional velocity. We also believe that these instruments and combination with our trusted position inside the consumer's home will enable us to further expand existing customer revenue opportunities.
While 2020 sell through of Rbc's accelerated well above prior year levels overall household penetration remains relatively low.
We believe that the fluid often frenetic pace of day to day life continues to elevate our value proposition and product differentiation.
As the benefits of robotic floor care become more widely appreciated and the home remains the central hub for everyday life. We plan to continue capitalizing on the many opportunities arising from the continued growth of our marketplace.
In terms of our 'twenty 'twenty, one outlook as outlined in the press release, we anticipate 'twenty and 'twenty when revenue growth ranging from 14% to 17%. We expect strong revenue growth to start the year, especially since we ended 2020 with retail inventory and.
And a very healthy position.
We believe that our success and continuing to drive solid top line expansion in 'twenty and 'twenty one.
We will also help us fund investments into key areas of our business and mitigate the impact of higher anticipated incremental costs on our 'twenty 'twenty one profitability.
More specifically, we expect that the reinstatement of tariffs will add approximately $41 million to $43 million and the incremental costs.
Well, we will also absorb higher initial costs as we expand production in Malaysia.
Additionally, our sales and marketing spend will increase by an incremental 20 plus million dollars.
As we build out our direct to consumer infrastructure and bring on the additional head count needed to operate it.
As a result, we are targeting and operating profit margin of approximately 7% with EPS and the range of $3 to $3.25.
Looking ahead, we are increasingly optimistic about our longer term prospects, we believe that our 'twenty and 'twenty progress combined with executing on our plans in 'twenty and 'twenty, one will set the stage for substantially stronger performance in 'twenty and 'twenty. Two we expect that the progress we make in 'twenty and 'twenty one to execute.
On our plans will enable us to move into 'twenty 'twenty, two with a more defensible business that is well positioned to sustain mid to high teen top line growth.
At the same time, we believe that the gross margin headwinds of 'twenty 'twenty, one will turn into tailwind in 'twenty and 'twenty two as we achieve scale and Malaysia minimize our tariff exposure continue growing higher margin <unk> sales and increased fulfillment and supply chain efficiency.
As we calibrate our spending to drive further operating leverage we expect to drive 2022 operating profit margin above 20, and 20 levels, which would in turn yield a substantially stronger EPS performance.
At this point I'll turn the call over to Julie after her remarks, I'll return to offer some additional closing thoughts Julie.
Thank you Colin.
As Andy mentioned earlier, my review of our financial results and outlook will be done on a non-GAAP basis. So unless stated otherwise each mentioned on gross margin operating expense operating income and operating profit margin.
The tax rate and net income per share well me and the corresponding non-GAAP metrics.
All of quarterly comparisons are against the fourth quarter of 2019, and all full year comparisons are against 2019, unless otherwise noted we.
And we delivered a very strong quarterly performance and again exceeded our plan.
Total Q4 revenue grew 28% just $545 million due to the stronger than expected orders from retailers and outstanding growth and our direct to consumer sales.
Geographically revenue grew 28% and the U S with international revenue up 27% due primarily to 39% growth in Japan and of 26 per cent increase in EMEA.
And the product perspective, Roomba represented 89% of our Q4 revenue mix with Bravo and making up the remainder.
<unk> revenue grew by 56% due to robust growth and the EM debt wound up all of the bundles performed exceptionally well over the holidays.
Our gross margin of 43% and Q4 was essentially unchanged from the prior year.
Lack of tariff expense and two of lesser extent favorable channel mix was primarily offset by changes in pricing and promotion and higher warranty expense.
Fourth quarter, 'twenty, and 'twenty operating expenses of $189 million increased by 30% and represented 35 per cent of revenue.
The increase primarily reflects higher working media spending and DTC investment.
The higher personnel costs tied to head count and short term incentive compensation are.
Our Q4 operating income was $30 million or six per cent of revenue.
Our Q4, 'twenty and 'twenty effective tax rate was 19%, which was in line with our plans and our net income per share was 84 cents.
From a full year perspective, 'twenty and 'twenty revenue grew 18% to 143 billion geographically, we generated 52 per cent of our revenue and the U S.
Grew by 23 per cent outside of the U S. International revenue grew by 12% with Japan, having another stellar year of 20% growth, while EMEA increased by 8%.
'twenty and 'twenty gross margin of 44, 5% was slightly lower than the prior year and the impact of price reductions promotional activity and higher warranty expense.
And the offset by the benefit of our tariff exclusion leverage from higher revenue and favorable channel mix chess.
The year operating expenses of 488 million grew by 13% driven primarily by the same factors influence and the increase in the fourth quarter spending, namely increased personnel costs, working media and investment and keep programs and projects, including our D to C initiatives on.
Operating income of 'twenty, 'twenty, and 'twenty, and 'twenty was $150 million and our operating margin was 10%.
Our full year, 'twenty and 'twenty effective tax rate was 19% essentially unchanged from the prior year 'twenty and 'twenty EPS was $4.14 per.
First and $3.62 in 2019.
We ended 2020 with 484 million and cash and short term investments and increase of $126 million from the end of September the increase primarily reflects the good quarter of cash flow from operations.
The fourth quarter Dsos were 31 days unchanged against the same period, one year ago Q.
Q4, ending inventory was 182 million or 55 days compared with 157 million or 56 days at the same time last year.
Let's turn to our outlook for 'twenty and 'twenty one.
Although visibility is less than optimal we move into 2021 with good momentum and the category and generally favorable channel inventory position at the same time, the global macroeconomic landscape remains uncertain due in large parts of the fluidity of the pandemic.
As Colin noted, we anticipate 'twenty 'twenty, one revenue and the range of $1 635 billion to $1 67, and $5 billion, which equates to a 14% to 17% growth over 'twenty and 'twenty and recent years approximately 60% of our revenue is generated and the second half of the year, although 67 per se.
And of 'twenty and 'twenty revenue came in the second half.
We expect our 'twenty 'twenty, one revenue mix between the first and second has to move a bit closer to historical norms.
And that said, we manage the business on a full year basis and encourage investors to focus on our annual target and the timing of orders is challenging to forecast even under ideal conditions and large orders that shift from one quarter to the next and cause material fluctuations and our quarterly growth rate.
As a reminder, our revenue expectations contemplate yen and Euro exchange rates roughly in line with current range plus or minus 5%.
We anticipate that our 2021 gross margin will decline to below 40 per cent range. As you know of 25 per cent tariff on Roomba is imported from China was reinstated at the start of 'twenty 'twenty, one and we anticipate that this will add between 41 and $43 million and incremental full year costs.
In addition to anticipated tariff expense, we expect that our 'twenty 'twenty. One gross margin will also be impacted to a lesser extent by higher initial costs associated with our Malaysia manufacturing, along with recent and anticipated pricing and promotional activity.
We believe those factors will be partially offset by favorable channel mix shifts and certain one time items in 'twenty and 'twenty that are not expected to recur in 'twenty and 'twenty one.
Our plan is to substantially increase our production and Malaysia over the course of this year.
Facilitate this we plan to qualify additional contract manufacturers and add new line by the end of 'twenty 'twenty, one we estimate that Malaysia manufacturing will have sufficient capacity.
And place to support the vast majority of our 'twenty and 'twenty, two and North America volume requirements.
This will provide three important benefits.
First of all substantially reduce our tariff expense in 'twenty and 'twenty two.
And it will enable us to bring our Malaysia cost structure much closer to parity with China.
And managing a geographically diverse manufacturing footprint and scale is simply prudent from a risk management perspective.
Our current gross margin assumptions also reflect current travel restrictions and chew and within Malaysia should those restrictions tightened further and they require us to shift more volume into China and incur additional tariff expense.
In addition to our Malaysia manufacturing initiatives, our operating teams continue to diligently grapple with a range of other supply chain challenges from.
I think freight and raw material costs and tighter availability of key components.
Our outlook takes these variables into account, although any substantial improvement or deterioration and the supply chain may require us to revisit these assumptions.
We are targeting 2021 operating cost and the range of 555 to 575 million or approximately 34 per cent of sales.
While we anticipate the G&A and R&D will trend a bit below historical levels as a percentage of revenue sales and marketing is currently expected to be around 19% of total revenue. This primarily reflects incremental spending of over 20 million and to support continued growth of our direct to consumer channel as well as higher working need.
The it investments.
Given our top line guidance and spending plan, we currently expect and operating profit margin of approximately 7%.
In terms of additional Q1 color and we expect a strong start to the year with Q1 revenue growth of 35 per cent or more.
And currently expect Q1 gross margin in line with our annual target with Q1 tariff costs and the ballpark of $3 million.
We expect operating costs to range from the high 30% to 40% of total sales driven largely by the accelerated sales and marketing and basketball.
As a result, we expect operating profitability to range from essentially break even at the low end up two of 3% operating profit at the high and as revenue grows over the course of the year, we expect our profitability will improve especially on the second half of the year.
In terms of other notable modeling assumptions for 'twenty and 'twenty, one we anticipate other expense between three and 4 million and and effective tax rate ranging from 18% to 19% due primarily to the jurisdictional mix of profits combined with the effect of lower anticipated worldwide pretax income.
And we anticipated the diluted share count of approximately 29 million shares as a result, we expect the full year EPS to range from $3 to $3.25.
In terms of other 'twenty 'twenty, one guide posts our business continues to be minimally capital intensive and overall, we expect the capital spending is expected to be and the low $50 million range or approximately 3% of anticipated 'twenty 'twenty, one revenue, which is generally consistent with historical trends the.
The increase over 'twenty and 'twenty levels reflects in part the shifting of certain investments and new tooling to increase production and Malaysia from last year into this year as well as spending to support new product introduction, we and.
Anticipating that our cash flow from operations in 'twenty and 'twenty, one will remain healthy even as it declines from 'twenty and 'twenty levels, given our expected fundamental performance.
We moved forward with good fiscal flexibility as it relates to use of capital. Our previously authorized 200 million stock repurchase plan remains largely intact and last year's buybacks were limited to repurchasing $25 million of our stock and the first quarter. We will continue to evaluate the merits of deploying cash to repay.
The stock, particularly as it relates to neutralizing the dilutive effect of our equity programs.
With that said, our 'twenty and 'twenty, one expectation and not assume any repurchase activity.
On the inventory front, we expect that inventory both in terms of absolute dollars and D. II will increase and the first quarter and remained elevated thereafter until they returned to normalized levels at the end of the year.
While our profitability and EPS are expected to take a step back in 'twenty and 'twenty. One we believe that we are taking the necessary actions to sustain our top line growth rate in 'twenty and 'twenty two.
Just as important we believe that the tail winds arising from our Malaysia manufacturing higher margin direct sales growth and other initiatives to increase efficiency and productivity will enable us to deliver a meaningful improvement and our 'twenty and 'twenty two operating income with an operating profit margin above 20, and 20 levels all of which fall under.
<unk> strong EPS expansion in 'twenty and 'twenty two.
In summary of our fourth quarter results were a very satisfying way to end the year well, we know 'twenty 'twenty one will bring its fair share of challenges. We are incredibly excited about our prospects to continue expanding our business and drive long term value creation and the process that concludes my commentary I'll now turn the call back to Carl.
And on for some additional color on the coming year.
Thank you Julie.
I'd like to close by extending my sincere thanks to my colleagues around the globe.
The hard work resilience and commitment of our team helped irobot to deliver record results and exceed the ambitious targets we set for ourselves.
It is an exciting time to be at Irobot we.
We created the RBC industry 18 years ago and have let it of person, but we believe our best days are ahead of us.
We have and expansive growing installed base of nearly 10 million connected customers, who want to engage with us.
And we're optimistic that the trust that our customers have placed in our products will unlock more opportunity for us going forward, especially as they look directly to us to help them maintain the robots replace the robots add new robot and potentially purchase other new services and products from us.
The complement our current role and helping them keep their homes clean.
On today's call, we've shared not only of outlook for 'twenty and 'twenty, one, but the opportunity to convert strong growth into higher profitability and faster EPS and free cash flow expansion in 2022.
As our businesses grow.
10 of them evolve.
And as our relationship with the consumer deepens and.
We will remain committed to helping current and prospective analysts and investors better appreciate the opportunities we see.
The strategies and initiatives that will help us capitalize on them and.
And the metrics and Kpis that will best reflect our success and create value for our business.
That concludes our comments.
Operator, we will take questions now.
Thank you.
And I ask a question you would need the press Star then one on your telephone to withdraw your question. Please press the pound key again that the Star then one if you would like to ask a question.
Our first question will come from the line of Mark Strouse with JP Morgan. Your line is now open.
Yeah. Good morning, Thank you very much for taking our questions and congrats on the strong quarter here.
I just wanted to dig into the the commentary about 2022.
It may.
And maybe reading maybe too much in between the lines here, but kind of what you're saying about the second half of 2021.
I'm calculating kind of high single digits to maybe low double digits revenue growth can.
Can you just give a bit more color on to what gives you that that expectation that the revenue can accelerate in 2022.
Sure Mark I'll start that.
On the you know as we think about 'twenty 'twenty, one and our guide for the full year and again I I would.
And everybody to the fact that we we we talk about full year growth targets because of the Hum.
Shifts in the seasonality of our business can materially impact quarterly growth rate.
So we are looking at 'twenty 'twenty, one as being a a very good year of projected growth.
And we look forward beyond that into 'twenty and 'twenty two with the momentum that we see and the market recognizing that we are still very largely underpenetrated and.
I believe that we have and look forward to continued strong growth in 'twenty and 'twenty two.
I'll add some color to that mark the.
Some of the things that we talked about what was the test in 2020.
Things like robot because of service things like the other.
The other forums of the existing customer revenue and warranty and.
And the initial efforts to scale D to C become scaling commercial commitments from the company, but still relatively immaterial and 21 growing to more significant materiality as we move into 'twenty, two and so you've got Oh.
Number not just profitability tailwind, but you have some revenue.
Growth driving tailwind that will be accelerating as well.
And and so that.
Investments in 'twenty and 'twenty, one leading to.
Growth in 'twenty two is what we're seeing.
Certainly Q1.
And.
'twenty 'twenty was a weak quarter for us for a number of reasons and so that.
The.
The strong performance, we're giving a guide.
The guidance on.
Relative to Q1, 'twenty and 'twenty one is against the a.
What I would say, it's a pretty easy comp.
Mhm.
Okay. That's helpful. Thank you.
And then just looking at the the gross margins for 2021 guidance a bit better than what I was expecting.
You've quantified the the impact from from tariffs Julie.
The the Delta is roughly 100 125 basis points something like that Covid can you kind of dissect that the the remainder of the year over year decline from 2020.
Is that.
For example, the ramp costs associated with Malaysia is it more promotions and it just any.
The thing you can do the kind of break that down a bit further it would be very helpful. Thank you.
Yeah, sure and you're and you're right tariffs are a material part of our move of gross margin from 'twenty to 'twenty. One there are a number of other factors that that play both positively and negatively to a lesser extent so debt.
On the on the negative side, there's the scaling of Malaysia and.
And as we go through the year as well as expected.
The expected or anticipated pricing and promotional activity and those things are offset to a certain extent by favorable channel mix shift as well as nonrecurring costs from 'twenty and 'twenty.
Okay very helpful. Thank you.
Thank you. Our next question comes from the line of Ben Rose Battle Road Research. Your line is now open.
Yes, good good morning, everybody. The question first for Julie.
You had alluded to.
It gives me some of the.
<unk> supply chain constraints that are out there could you maybe give us could you perhaps elaborate a bit on what youre seeing in terms of the health of your supply chain.
And your confidence and their ability to the liver throughout the year.
Sure.
So we're incredibly proud of our supply chain and the work that they've been able to do throughout 'twenty and 'twenty Chad managed through a very.
The changing situation and we look forward there are a number of factors and.
On whether we're talking about a rising freight cost.
I think globally, there are things like that of chip shortage as well as cost of resins and other raw materials that we look to and things that we are managing carefully as we go through this year.
Okay.
And the question for Colin.
If you could share with us your vision longer term for the.
For the Roomba spin.
Specifically as you look out over the next couple of years.
Do you think the primary focus will continue to be on home cleaning exclusively or perhaps could we see some additional functionalities and.
And built into the Roomba as we see it today.
You know certainly the company's ambition expand extends beyond the floor care and the role that the roomba plays today and the home.
While limited to right now vacuuming, and then mopping with with the Bravo is on.
Also serving as a platform for us to gain the type of home understanding necessary to increase the sophistication of what we're able to do and the home.
You know as we've talked before.
And the AI is important growth in the awareness of.
Of what is going on and the homes. So that AI can have the context required to succeed is really at the cutting edge of technology and so.
You know we are on a.
A long journey to build the robots that we were promised growing up as kids are I think we're at a very exciting place where were starting to be able to understand the context to extend what we're capable of doing and the irobot genius home intelligence.
And really is a.
Very ambitious long term commitment to building a home AI capable of doing very sophisticated work and the home. So it's a.
We're just still at the beginning of.
The industry, we're still at the beginning of what the smart home will evolve into and Irobot is very excited about the role we will play and the home and both delivering physical work.
But also delivering the context required to have a home that understand.
The types of things you want to have happen.
And enable and your your home not just your robot to be of strong partner as you address the challenges of the.
The increasingly complex role of the home is being asked the play.
Okay. Thanks, very much and that's very helpful.
Youre welcome.
Thank you.
Our next question comes from the line of and I'll see of merchant with Citigroup. Your line is now open.
Great. Thank you very much and a very very strong results and congratulations and the team for weathering you know all of the challenge and.
That came with the supply chain.
Colin just on this last time and that you talked about you know.
If you can just peel it back a little bit more and talk a little bit about units of course, the F B and maybe Colin and Julie together, how you think about that ramp and as you think about expanding two of rooms out of the survey a day.
Nick Warranties that you talked about is that something that would dry.
Incremental higher Asp's.
As you think about from each sale of that unit.
Up remember that you'd be sort of you sell just so that we can help and it can help us around the modeling and.
And then you mentioned a bunch of one time costs to lead that are unlikely to occur and as you look into fiscal 'twenty to become a little bit of a tailwind. So if you can talk to with the little bit about that on on what things isn't the 20 million debt, you're already investing and 21 for the D to C channel expansion and unlike me to kind of the.
Pete itself and that's why you have that 20 million incremental and the.
Oh, hi, thank you.
Sure so on.
And maybe I'll start with your question and then I'll, let Colin jump in on units versus ASP P. I.
Thank the we are excited about the early on.
The results that we're seeing and some of our services pilot I think it's important to also remember that well we are looking optimistically.
Optimistically to commercializing those during 'twenty 'twenty, one and it will take a while before those become a material part.
Of our number of.
As I think about.
Looking forward I'm, a S P and unit.
We've certainly seen during 'twenty 'twenty and.
Nice increase in and what I would call net price with shifts in up towards our premium and of our category as well as from Inc.
Chips and in our channel.
We also have seen nice unit growth and as I look forward into 'twenty, one and beyond I think the we will expect that the.
And that will continue to see good unit growth again pointing to.
On the relatively low penetration that our products have globally.
And a small amount of continued pricing strength again related to mix.
The mix.
And I think that the.
The only thing I would add on.
Two of which is less about financial model and get more about.
The momentum and the success of our strategy around differentiation as the the shift that we talked about and the call to the premium.
It's really a shift.
Embracing the increased and.
<unk> of the robot as well as some of the auto Evac technologies, we introduced and so that.
You know I like to see it call it is almost and anti commoditization.
And that we're seeing where the differentiating features that we're bringing on to the market place are being embraced by our customers and driving them to spend up to get these exciting and important features.
So again I think it's all illustrative of a very healthy market, where there are continued opportunities to differentiate with new technology and new features.
Which is great news for us because that's where we're investing the.
And I'll stop there.
And then as the kind of late two you were asking a question around the 20 million of what we've highlighted adds incremental.
On D to C investment during 'twenty 'twenty, one and that's across a range of areas. Both in terms of building capability and that talent required to run that capability to really focus on making the buying experience on our website and app and easy.
One of.
And making sure that we've got the marketing insight to understand what customers need and how to build that that relationship and.
Theres a portion of of that which is one time. There is another portion which will continue as we go forward. However, we would expect that and we won't get leverage on that as our business scale.
And we would expect that to grow more slowly.
Okay. So as I look into 'twenty. Two you guys are you know assuming the ramp margins back up from 21 level of the Opex run rate as the percentage of revenue well the job.
And quite meaningfully.
To get to 10 per cent and higher Opex op margin is that the right way and that and that's what I was trying to kind of feel a little bit like where are we seeing the benefits from it that R&D because he kind of.
And talking about trending that down as the percentage of revenue at true, our G&A as well and so that incremental marketing and selling and opex initiatives that youre doing and 21 shouldn't really be scaling back and 'twenty, two and that's what I'm trying to get to Opex at the run rate of revenue okay.
Right and and so as we've talked it.
We're thinking about and we tried to provide color on the on the entire P&L. We look at our gross margin and believe some of the headwinds that we're facing today in 'twenty and 'twenty turn into a tailwind as we I'm sorry, as we're facing today and 2021 turn into a tailwind as we move into 'twenty and 'twenty two.
That coupled with calibrating, our spending and getting operating leverage should allow us to have operating margin in 'twenty and 'twenty two above 2020 level.
More specifically I think we're continuing to diligently work through those longer range plan and hope to provide more.
Be able to articulate longer term financial targets more specifically in coming months.
Okay, great. Thank you.
Thank you.
As a reminder to ask the question you would need the press Star then one on your telephone.
Our next question will come from the line of John Babcock with Bank of America. Your line is now open.
Good morning, and thanks for taking my questions just quickly tagging along on some of these modeling questions and I was wondering if you could just talk about what youre assuming per unit selling growth versus unit sell through growth and the 'twenty 'twenty one guidance.
Okay.
And.
John as you know, we work to balance sell in and sell through and it's never a perfect science and based on the needs of our retail partners.
But we are a we are looking for continued good unit growth that would equate to good sell in as well as sell through of momentum.
Okay, Thanks, and then and <unk>.
And you know you talked a little bit about the robot is the service program could you share more about how the testing and it's gone so far with that and what's working well with the challenges are still of lot to the workout worked out.
Yeah. This is a constant optimization challenge for US I think that we've had very encouraging results and have already been able to optimize the experience, but there's more work to do you definitely as I said.
We will see this move from a test to a commercial.
Program this year and will begin to scale up so something youre going to hear more about as I mentioned earlier.
Earlier, I think that the materiality of the.
The robots is the service program will be minimal in 'twenty, one, but certainly increasing throughout the year and.
Also remember we will have to account for that with the significant deferred revenue portion of of the of the income which will also create a little bit of of lag on the.
Oh on the showing up in our revenue and profitability numbers, but hum against something will be more than happy and to.
To talk about as the year unfolds.
Got it thanks.
And then also on the two new products are launched and I was wondering you know.
How you might have us think about that next generation of products and how do you. How this will fit and what the rest of your portfolio.
And I think that.
We're really focused on the intelligence of the robot.
And we're focused on how we can extend that that partnership between the customer and the robot to make sure that the irobot customer feels in control of what the robot is doing and feel like they have.
And enlightened and trusted partnership.
The company of the robot on themselves and so that as we continue to rollout of our products.
And that will be sort of the overall guiding principle and what we are trying to accomplish without that trust without that control of.
Well we.
We will undershoot the potential of.
Of the industry, we are leading.
Okay and then just last question before I turn it over could you just provide a sense of the timeline for the patent infringement action Irobot is pursuing that to the U S. International Trade Commission and then also any color you can provide on how the supplement the prior of litigation would be helpful.
So the the recent action.
And I can only say of very limited set of things is through the ITC.
Which is a very aggressive and fast moving from the legal perspective.
The organization, we expect to be at trial by the end of this year.
Yeah.
Yeah.
Okay. Thanks Colin.
Yep.
Okay.
Thank you.
Our next question comes from the line of Derek Soderberg with Colliers. Your line is now open.
Yep.
Everyone and thanks for taking my questions I wanted to start with direct sales can you elaborate on some of the reasoning behind the success, there and what's driving the growth and your confidence longer term and I guess, you know longer term I'm curious how much of that 20% direct sales goal and <unk>.
The 23 can be services contribution and what sort of gross margin for services are you targeting.
Sure we can answer some of that.
I think that.
The Roomba is a considered purchase the run.
And the customer tends to do research on what model why should I believe this robot works.
And just the you know, there's a very real curiosity, which all drive.
The customers to be to be willing to go to a website to learn about the product.
Back at 18, and 2019 Irobot the ability to really capture of that interest and translate that.
Into a transaction.
Was.
Relatively pedestrian or uninspired it wasn't where we were focusing our go to market energies.
And I think we were good but we were certainly far from world class as we.
Rollout tools to better capture of expressions of interest to better nurture all of the customers along a sales journey. The more effective we will be with direct to consumer of the other thing.
Is the skyrocketing engagement of our customers as the features that our customers are asking for and using all of these online connected feature of this growth of.
And 80% in the since the end of 2019 and our connected.
Customer to well over 10 million connected customers opting in for two of our communications.
It's really a profound growth and interest in our profound growth and our ability to go transact with the customer base and so all of these things give confidence and I think that one of the things that is.
Maybe a subtle point in the script that we gave today was on.
And I used the words, we identified our implementation partner for many of the improvements and our direct to consumer which suggest we're not done.
We are making major investments and 21 to improve the tool set and our capabilities and our talent and.
Around this.
And should pay continued dividends and our effectiveness on line. So I think the 'twenty and 'twenty showed tremendous progress.
But what we're working on and and continuing to implement and 'twenty. One should continue that strong momentum forward.
And just the last thing I would add is we really view this day.
The consumer channel as a powerful complement to our very strong retail partners.
So we look to the this growth as being a way one you find your way to Irobot and you're part of our family, we want and nurture that relationship with you and make sure that when you're ready to buy your next products that youre going to transact directly with us.
Absolutely.
Got it yeah. That's it's helpful to think about it like that and as my follow up I'm wondering what level of direct sales can be supported by some of the investments you're making.
It will be adequate to support that.
One of 23 goal of 20 per cent directs out sales.
We are implementing best in class tools, which and can scale well beyond even our 2023 goals so that.
And we're definitely making.
A real bad debt. This is going to be a long term important dimension of our business.
And so that that is not a concern that we're somehow undershooting what were.
Investing.
Okay.
Got it thank you.
Thank you.
And there are no further questions I would now like to turn the call back to Andrew Kramer for closing comments.
Thank you so much that concludes our fourth quarter 2020 financial results call. We appreciate your support and we look forward to talking with you all over the coming weeks and months. Thanks again.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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And.
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Okay.
Yeah.
Yeah.
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