Q2 2021 iRobot Corp Earnings Call
Good day, ladies and gentlemen, and thank you for standing by welcome to the second quarter of 2021 Irobot.
Irobot Corporation earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press Star then 1 on your telephone keypad. If you require any further assistance. Please press Star then zero at this time I would like to turn the.
The conference over to your host a day Mr. Andrew Kramer. Thank you Sir please begin.
Thank you Howard 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.
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 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.
Related to our financial disclosures during this conference call, we will reference certain non-GAAP.
Today's call measures as defined by 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 our non-GAAP financial results I'll provide additional transparency into irobot is underlying.
GAAP operating performance and potential our definition of these non-GAAP financial measures and reconciliations of each of these non-GAAP financial measures to the most directly comparable GAAP measure are provided at the end of these prepared remarks and in the financial tables at the end of the second quarter 2021 financial results press release.
The line issued last evening, which is available on our website at www Dot Irobot Dot com.
Unless stated otherwise the second quarter 2021 financial metrics as well as financial metrics provided on in our outlook that we reference on today's call will be on a non-GAAP basis, only and all historical.
Comparisons are with the second quarter of 2020.
For today's call our agenda will be as follows Colin will briefly cover the company's quarterly financial results and then share his perspective on the primary issues shaping our revised outlook for 2021, Julie will review, our second quarter financial results and offer additional.
Insight into our expectations going forward Colin will conclude our commentary with some closing remarks after that 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.
We delivered solid second quarter results that were generally in line with the targets that we outlined for you.
We may as we navigated an increasingly challenging supply chain environment.
We generated second quarter revenue of $366 million, an increase of 31% over the prior year.
Our revenue growth was primarily driven by healthy demand from retailers in North America and from our retail.
In our distribution partners in EMEA.
We were pleased with this performance considering the COVID-19 related disruption to shipping activities in southern China left us unable to fill a $17 million in order at the end of the quarter.
We converted our top line performance into an operating income of $9 million and operating profit margin.
Margin of 2%.
And EPS of <unk> 27.
Our first half performance tells a very positive story, particularly as it relates to strong consumer demand for our product as well as increased customer engagement.
Roomba robots occupied 8 of the top 10, best selling RBC models in the United States.
And 6 of the top 10 in EMEA and 9 of the top 10 in Japan.
For the seventh straight year, we participated in Amazon's Prime day event once again Amazon cited roomba as 1 of its best selling items.
We generated solid 42% growth from the mid and premium tiers of our portfolio.
States, we believe demonstrates the appeal of our floor cleaning robots to provide their owners with personalized control over where when and how the robot cleans.
We also continued to expand our direct to consumer sales as reopening activities in the U S and rising online advertising costs moderated this growth.
Overall, we saw solid growth in the number of robots shipped and Asps in.
In our second quarter versus the same period last year.
We finished Q2 with over 1 <unk>.
And the point 6 million connected customers, an increase of 67% from the same period last year.
Customers are increasingly using our newest features like directed room cleaning the RSO increasingly using.
High powered recommendations to clean by objects and adopting.
Our new clean while I'm away capability using geolocation services on their smartphones.
Okay.
As we.
Move to the second quarter, our commercial teams retailers and distribution partners. We're increasingly bullish about the second half of the year, especially given our plans to introduce 2 new roomba robots and deliver another major upgrade to our genius home intelligence platform or.
Our new ecommerce and Martech systems will soon start moving into production, giving us the.
Ability to expand existing customer revenue effectively and efficiently.
After raising our top line outlook in early May we saw opportunity to exceed these targets.
Unfortunately, the reality of the current supply chain environment is forcing us to tell a different story for the second half of the year quite simply the supply side.
Side of our business is not currently able to keep pace with demand for our products.
Since our call in May we have seen further deterioration in our ability to source the requisite volume of semiconductor chips used to manufacture our floor cleaning robots.
We are not alone in feeling the pain of the semiconductor chip shortage as it impacts a.
A range of industries from automobiles to medical devices Tvs smartphones and many other consumer electronics.
Our robust rely on a wide range of integrated circuits from lower cost commodity like devices to very sophisticated powerful processors.
While there is tightness across the board we have recently.
<unk> fielding calls from multiple chip suppliers, who are now unlikely to fulfill their commitments to us either in volume timing are both these decommitments and push outs will constrain our ability to fulfill all of the orders we anticipated during the second half of the year.
Accordingly, based primarily on the assumption of lower.
Unit volumes, we have reduced our 2021 revenue target to 155 billion to 162 billion, which still represents 8% to 13% growth over prior year.
This range is wider than usual, reflecting limited short term visibility into the availability of certain semiconductor.
True.
The impact of lower revenue on our anticipated profitability is compounded by having to increasingly source more semiconductor component tree in the aftermarket had a much higher price as well as grapple with rising raw material and transportation costs.
Against this backdrop, we are working diligently.
Comparable to carefully manage channel and product mix adjusted promotional activities qualify new alternate suppliers and optimize inventory levels more specifically with limited supply we were working collaboratively with our strategic retailers in countries, where our brand is strongest to support them, but we also take steps.
To optimize our second half promotional activities and direct to consumer sales.
Additionally, we are evaluating potential price increases.
Consumers are excited about the way, we continue to innovate and with that in mind, we intend to defend our leadership position in the premium segment, while also investing.
Gently getting activities to help us bring our next generation Roomba robots to market later this year.
We will also remain disciplined with our second half spending plans by recalibrating hiring hiring activities and other discretionary programs.
At the same time, we move forward.
We're committed to advancing our strategy by continuing to fund the initiatives. We believe are necessary to emerge from the short term turbulence as an even stronger category leader.
As we balanced cost austerity with investing in our future as a technology and category leader, we expect that our second half profitability will.
We will be aided by tariff relief between recently passed legislation in the U S Senate and bipartisan urging from representatives about the reinstatement of the tariff exclusion process. We now believe it is more likely than not that irobot will receive a tariff exemption and as a result, we've incorporated this likely development.
Into our updated 2021 outlook.
That said it is inherently difficult to forecast precisely when or even if the USTR would reinstate exclusions to the Chinese section 301 tariffs and establish a new process for importers to apply for exclusions since those activities are likely to be linked to the buyer.
<unk> and administrations ongoing reassessment of its overall policy towards China.
Based on our ongoing dialogue with policymakers and elected officials, we anticipate an exclusion if reinstated would cover all of 'twenty, 1 at a minimum and could extend through the end of 2022.
Julie will share more details.
On the specific financial impact of tariff relief in a moment.
Regardless of this potential positive development diversifying our manufacturing footprint into Malaysia remains strategically important and we are making good progress on this front. We are now producing nearly half of our U S bound product out of Malaysia and remain.
On track to have Malaysia manufacturing at scale by the end of the year.
Taking all these factors and new accounts, we've also revised our operating income and EPS expectations.
We now expect our 2021 operating income to range from 80 million to $110 million.
Our 5% to 7% of revenue with an EPS range of $2.25 to $3.15.
Which also factors in our recent plan to stock repurchase activities.
While the changes to our full year outlook are nonetheless disappointing. It is important again to emphasize that.
That we believe the supply chain constraints and cost headwinds are temporary.
Our operations teams are working diligently to preserve our supply chain resiliency.
As a high priority strategic customer to many of our longstanding chip suppliers, we continue to put longer term supply arrangements in place that not only support our revised near term volume.
Requirements, but also position us to be at the front of the line when our partners begin increasing their output, which we expect will happen during the first half of next year.
Just as important although qualifying new suppliers as time consuming we expect that these ongoing efforts will also help further increase our supply during this period.
Although.
Ability is limited right now we believe these activities will help lead to improved availability of components starting in the beginning of next year and steadily strengthen as we move into the second half of 2022.
While our performance in 2021 is now expected to fall short of our ambitious targets, we remain optimistic about our revenue and.
Other visits growth potential for next year.
Share some additional thoughts on how we see 2022 evolving in just a few minutes.
But at this point I'd like to turn over to Julie for her financial review.
Thank you Colin as Andy mentioned earlier, My review of our financial results and outlook will be done on a non-GAAP.
GAAP basis.
So unless stated otherwise each mention of gross margin operating expense operating income and operating profit margin effective tax rate and net income per share will mean, the corresponding non-GAAP metric.
All quarterly comparisons are against the second quarter of 2020, unless otherwise noted.
We reported a solid Q2 performance total second quarter revenue grew 31% to $366 million due primarily to strong retail and distributor orders in the U S and EMEA.
Moving related shutdown of the shipping ports in southern China in late June prevented us from fulfilling 17.
<unk> dollars in orders most of those orders have shipped and we expect to complete this activity over the next couple of weeks.
Geographically revenue grew 40% in the U S, 29% growth in EMEA and 7% increase in Japan.
From a product mix perspective, roomba robots and accessories.
Million at 88% of our Q2 revenue mix with Bravo, making up the remainder.
We estimate that approximately 2 thirds of total second quarter revenue came from E Commerce, which comprises our own website and App dedicated E Commerce web site and the online arms of traditional brick and mortar retailers.
Our day to see revenue grew 36% to $45 million or 12% of total revenue.
Although we saw a very strong day to see growth in EMEA and Japan sales in the U S moderated due to the more limited traffic arising from higher advertising fees and reopening events that diverted consumer spending into other categories.
Given these dynamics along with our supply constraints, we now expect D to C sales to represent approximately 13% of total full year revenue in 2021.
Our gross margin of 38% in Q2 was slightly below plan as favorable changes in promotional activity were more than offset by higher warranty.
And timing shifts associated with the purchase of certain componentry.
Tariffs were the single biggest factor for the 12 point decline in gross margin from the second quarter of 2020.
As you May recall, we received our tariff exclusion in the second quarter of 2020, which not only eliminated any quarterly tariff expense.
But also resulted in a reversal of tariff costs of approximately $7 million from Q1 'twenty.
In this year's second quarter, we paid tariffs of approximately $12 million.
The net impact from tariffs from both periods was approximately $18 million, which represents nearly half of the decline.
The remainder of the decline was split relatively evenly between pricing and promotional activity supply chain headwinds higher warranty expense and unfavorable channel and product mix shifts.
I would also note that the company's second quarter 2020, GAAP gross profit reflected the reversal of the full $47 million in tariffs.
EFS that had been paid since they went into effect.
Second quarter 2021, operating costs of $131 million increased by 32% and represented 36% of revenue the.
The increase reflected higher working media to drive sales growth increased personnel related expenses primarily.
Head count and higher R&D spending.
Our Q2.2021 operating income was $9 million or 2% of revenue.
The impact of the delayed shipping of $17 million in orders to our operating income was approximately $7 million.
Our Q2.2021 effective tax rate.
Tied to approximately 12%, which reflects changes in our full year tax rate assumptions, primarily associated with lower expected full year operating income.
Our net income per share was 27.
We ended the second quarter with $416 million in cash and short term investments a decline of 85 million.
It was at the end of Q1 the.
The decrease primarily reflects share repurchases totaling $50 million and $27 million in operating cash outflows, mostly driven by changes in our inventory.
Second quarter Dsos were 19 days, a 23 day decrease against the same period, 1 year ago the.
From <unk> reflects the timing of orders that were more weighted to the first half of the quarter versus last year. When the pandemic resulted in most orders being shifted into the last half of that same quarter.
Q2, ending inventory was $277 million or 112 days compared with $133 million or <unk> 86.
A decrease at the same time last year the increase.
And inventory reflects the combination of our efforts to support our second half volume requirements as well as the impact of tariffs and the units that were stuck at 4 at the end of the quarter.
With the quarterly review complete let's move onto our 2021 outlook as Colin day.
Next day to semiconductor chip shortage will significantly reduce the number of robots, we had expected to ship in 2021.
We now expect 2021 revenue in the range of 155 billion to $1.$6.2 billion, which implies 57% to 59% of our anticipated revenue coming in the second half of the year.
Tailed know, 1% to 8% decline in our second half revenue versus <unk>.
<unk> last year.
While it is very challenging to forecast the timing of holiday orders between the third and fourth quarters. We currently expect low single digit revenue growth in the third quarter.
As a reminder, our revenue expectations contemplate yen and euro.
Exchange rates roughly in line with current rates plus or -5%.
In terms of our growth gross profit margin earlier on the call Colin shared our rationale for why we expect an exclusion from section 301 tariffs for 2020..1 we have factored this anticipated development into our updated outlook and removed 30.
5% to $37 million from our anticipated full year cost of goods sold.
Without the burden of tariffs, we expect our full year gross margin range of 39% to 40% if a tariff exclusion is not granted our full year 2021 gross margin will be 2 percentage points lower.
Assuming the.
Exclusion is granted in the fourth quarter, we anticipate our third quarter gross margin of approximately 35% that will reflect anticipated tariff cost of 11% to $13 million as well as many of the same factors that also affected our Q2 gross margin in a more prominent way.
This implies an expected.
Free fourth quarter gross margin of around 44%, which would include a reversal of all tariffs paid from the prior 3 quarters.
In terms of our 2021 operating cost we expect full year operating costs in the range of $532 million to $535 million.
Tariffs or 33% to 34% of sales would that spend we anticipate that our sales and marketing will range between 18 and 19% of total revenue as we begin moving our new ecommerce and digital marketing systems and tools into production and we direct our working marketing towards supporting our new product launches and strong.
Strong sell through during the holiday season.
As a result, we expect an operating profit margin between 5 and 7% with anticipated operating income between 80 and $110 million.
As we adjust our spending plans, we expect third quarter operating costs to be 28 to 20.
9% of total revenue with sales and marketing costs moderating from Q2 levels. We expect Q3 operating income margin in the mid single digits.
In terms of other major modeling assumptions for 2021, we still expect other expense to be between 2 and $3 million.
We are now anticipating.
At a tax rate between 16 and 17% as a result, we anticipate our full year EPS range from $2.25 to $3.15.
With an anticipated diluted share count of approximately $28.5 million shares.
We estimate that the tariff exclusion will contribute approximately.
And effectively $1.05 to our 2021 EPS on an after tax basis.
We anticipate third quarter EPS in the range of 70 to 90.
We continue to expect our 2021 capital spending to be in the low $50 million range on the use of capital front.
As detailed in our earnings press release, we plan to execute an accelerated share repurchase agreement to repurchase an aggregate of $100 million of Irobot common stock subject to the terms of the ASR agreement.
We expect to fund the ASR from cash on hand.
We will share additional details via an 8-K when.
Proxy cards executed.
Our EPS outlook incorporates the effect of the upcoming ASR.
We still expect that inventory both in terms of absolute dollars in DIY will fluctuate meaningfully from quarter to quarter as we continue navigating a challenging and fluid supply chain environment.
In summary, despite.
The average results over the past 2 quarters, our full year outlook has eroded as the shortage in semiconductor chips will leave us unable to completely fulfill anticipated second half demand.
Despite this disappointing development it does not diminish the tangible progress we are making to advance our strategy and position our business for substantially better performance.
<unk> next year as those constraints ease our upcoming share repurchase activity further demonstrates our confidence in our ability to capitalize on the opportunities that lie ahead.
With that said I will turn the call back to Colin.
Thank you Julie.
On our most recent quarterly conference calls we've detailed our.
Solid build a more defensible profitable enterprise with a compelling value proposition that resonates across a growing global base of loyal connected customers.
By innovating to differentiate the Irobot experience, we will plan to continue winning more customers and keep them delighted at every turn to.
The point that they will buy more product and services directly from us over the lifetime of their ownership.
We are optimistic that executing on our claims will drive substantial value creation over the long term.
We've also shared our preliminary view that further.
Further progress on this path in 2021.
Would support continued top line expansion that we can convert into substantially improved operating profitability and EPS expansion in 2022.
Although the impact of constrained supply will make it more challenging to achieve our preliminary 2022 target of returning the business to our 2020 operating profit.
<unk> levels, we are confident that we can make considerable progress next year.
In terms of our 2022 top line assumptions, we anticipate more modest revenue growth in the first half of the year as we take proactive steps to increase our active or access to semiconductor comment componentry.
Amid fundamentally healthy.
<unk> signals from retailers and consumers assuming.
Suppliers steadily ramped up production as expected we will look forward to accelerating revenue during the second half of 2022 anchored by substantial restocking orders from retailers, who will carry very lean inventory.
Over the next.
Merger quarters. In addition to executing on our product Roadmaps and leveraging our unique home understanding. We're also excited about the potential of our Irobot select service, which we expect will begin to scale later this year as a growing recurring revenue stream.
We also look forward to seeing the impact.
Of our day to see infrastructure investments on growing existing customer revenue.
As we further personalized the online buying experience on our website and home apps and focus on delivering the right promotions to the right customers at the right time.
As we plan for next year, we anticipate that other.
Transitory costs that have spiked in 2021, namely raw materials, Oceana transport and air freight should eventually revert back to more normalized levels at some point in 2020 to these potential tailwind combined with expected tariff relief.
A laser manufacturing at scale and our.
We'll go first to optimize our production and fulfillment costs will leave us well positioned to drive gross margin improvement next year.
By remaining very disciplined with our spending we believe that we will convert our top line expansion into strong operating profit gains and significant EPS growth next year.
As we move forward.
<unk>, there's a lot of opportunity in front of US household penetration remains low.
We have an expansive and growing global connected customer base and their exciting new growth initiatives now underway.
Or in planning stages as a result, we believe that our exit trajectory for the second half of 2022 in combination.
We've continued strategic progress we will set the stage for sustaining solid annual top line expansion that can be converted into improving double digit operating profit margins substantial EPS growth and robust operating cash flow generation.
Our confidence in our strategic direction.
And our ability to achieve our ambitions over the next several years is underscored by our upcoming plans to execute a $100 million accelerated share repurchase agreement.
We share greater insight into our business later this year when we hope a.
A virtual Investor day event.
In addition to highlighting our vision and.
Strategy, our leadership team plans to share greater insight into many exciting initiatives that will underpin an updated set of long term financial targets stay tuned for more details on this event.
That concludes our comments operator, we.
We will take questions now.
Thank you ladies and gentlemen.
Tom If you have a question or comment at this please press Star then 1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue simply press the pound key.
Again, if you have a question or comment at this time. Please press Star then 1 on your telephone keypad.
Our first question or comment comes from the line.
Ben Rose from Battle Road Research your line is open.
Good morning.
First question for Colin I know that you [noise].
Excuse me reiterated your plans to introduce 2 new Roomba models.
Later on this year.
Can you talk about.
Do you plan to do that in light of the chip shortage that you mentioned is it a question of <unk>.
Simply price prioritizing the chips that are available or are there other factors at play that gives you this confidence.
It's really about prioritizing the chips for these exciting new product.
Hum.
There's a lot of share component tree across robot.
And making sure that we are able to execute aggressively on these new product launches.
It's something that we have taken on so that we have great confidence that the chip shortage.
Product not impact those plan.
Okay.
And.
With regard to.
The sales and marketing expenditures.
Q2, I understand that.
That is a very strong quarter in terms of seasonal promote.
Well were there any additional 1 time charge costs in there and how do you I know that Julie you provided some commentary on the expectation for sales and marketing, but could you maybe give a little bit more color on.
The extent to which those can.
Decline as a percentage.
<unk> of sales over the course of the.
The rest of the year.
Sure.
You know as we think and as we've gone through this year and then you know we've been talking about and the investments that we're making in our direct to consumer capability both in terms.
<unk> and then in that that talent to enable those system. What you what you've seen this year are those thoughtful investments.
That we have been doing and again in Q2, we made some of those investments what we've also been saying and continues to be true as we look forward.
A lot.
Those are foundational elements that are will not.
Scale as revenues scale.
And so as we as we head into the back half of the year are there are 2 things at work here..1 is the normal fluctuation in our working marketing ally.
Lined with promotional period and then the other is.
Those investments starting to.
Become fully in place and we're excited about the results that we see there.
Okay. Thanks very much.
Got it.
Sure.
Thank you. Our next question or comment comes from the line of C. A merchant from Citigroup. Your line is open.
Great. Thank you for the opportunity.
Quick question can you guys give us any commentary on sell through versus sell in into the quarter across your different from.
And then just you know given the dynamics with chip shortages in promo activity et cetera.
If you have any color on competitive dynamics.
You know what are you experiencing any share loss because of the unfulfilled orders.
When the iPhone fit orders largely.
Region domestic or worthy international it was it had more of a global.
Phenomenal.
And then lastly on inventory you know obviously you guys have the chip shortage situation, but the inventory spike was a pretty significant is that all components or you know planning.
Planning ahead of the new room does that you plan to introduce here in the second half. Thank you.
Okay.
Yeah.
The.
3 questions.
The first question.
Lee.
Was on share.
Sorry, sorry on sell through.
And inventory levels.
So we definitely have been seeing a.
Impact.
That is in Q2 that that will that is increasing as we go through the rest of the year.
A year.
Our demand from our retailers exceeds our ability to supply.
That will drive down.
The retailer inventory levels, there is some impact in Q2 and that impact to the.
Yes.
<unk> seen as growing significantly in Q3 and Q4, so as we exit the year.
The inventory levels with our retailers will be.
Unusually low relative to normal.
The second.
Question you asked was.
Do these chip shortages.
Impact on competition equally and what is the impact on share.
The.
Our competition.
Tens to use.
A greater per.
Gauge.
Chinese local componentry, which has slightly different.
Bala ability dynamics.
But it only takes 1 comment 1 component too.
To stop you from building a robot.
And even our competitive R. R.
Percent competitors designs.
We require.
The component tree.
It will be hard to come by so it's difficult for us to.
Truly model.
What the extent to which they're going to be impacted beyond.
They will be impacted to some degree.
So theres, a little bit of a wait and see as it relates to <unk>.
Got a transitory impact in Q4 around share will be if there.
Impacted similar to we are we don't expect share to.
To change from where it is significantly if they have some additional availability they might pick up a bit of share until we can.
Reassert.
Uh huh.
Our in stock capabilities, so there's a little bit of a TBD.
And.
[noise] transitory impact to share numbers that we will have to work through in Q4, and then move into next year as things start to normalize.
And then your final question was around the.
The Irobot inventory, which we ended our with our own inventory at 200.
A $7 million at the end of Q2.
And we tried to lay out some of the factors year on year as we looked at that that increase.
How are our efforts to support our second half volume requirements.
That inventory is tariffs as compared to a year ago and.
7 also those units that we were those orders that we were unable to ship for the end of the quarter remained in our inventory.
As we look forward, we expect or our inventory will fluctuate as we go through the rest of this year as we navigate through these rather challenging.
King.
Environments.
Yes.
Okay. Thank you.
Yes.
Thank you. Our next question or comment comes from the line of John Babcock from Bank of America. Your line is open.
Hey, good morning, and thanks for taking my questions I guess the first 1.
I was just wondering if you could talk about the irobot select serve as to how that's progressing so far and also what you've learned from the first few months if that's what's been available.
Sure I'm happy to.
So we are in the.
Preliminary stage of rolling out that service.
I would say that we're very optimistic.
With both the.
<unk>.
[noise] net promoter of the customer favor ability of the service as we've rolled it out.
We've seen very favorable.
Low levels of churn and.
That has led us to gain the confidence required to begin re.
Scaling of Irobot select which we talked in the call about being increasingly visible.
Through the.
Balance of the year.
And exiting the year at all at a rate that we believe in 2022, it's going to be a material contributor that we will be able to talk about and starts to build our recurring revenue.
Backlog, so all things.
All systems Green.
Irobot select thus far and it's a definitely 1 of the exciting test that we began last year and now we're at a point of scaling.
Got it that's helpful.
And then next question just are there any signs.
It's been a semiconductor chip shortage is getting better at lately I mean, obviously it sounds like that's perhaps more challenging now than in <unk>, but I mean has that at least so far in 3 key areas shown any signs of west mean or does it seem like you know, we're still kind of on the on the downward slope here.
You know I think that it is certainly more.
Understood.
At this moment in time by both the suppliers themselves and the manufacturers who rely on the component tree. So we went from.
A situation of <unk>.
Not really understanding how bad it was going to be.
<unk>, Okay, we think we understand it now.
And Manny.
Suppliers are working to try to make sure that the components there.
I mean, they're able to produce are going efficiently to the manufacturers.
That.
They are choosing to support.
And so that's kind of a intermediate step well investments are being made to bring more production capacity online as the suppliers.
Recognize the bump.
Has been demand is not transitory and capital investments.
It increased.
Manufacturing capability are good business decisions for them. So I won't say, we're out of the woods, but we're at a period of.
Fewer surprises.
Bump and.
Concrete action to improve.
Okay.
And then you also talked about considering price increases you know honestly you considered this back in 2019 and didn't take price increases on some of your product back then do you believe the market.
It is sufficiently different now versus back then that the price increases might be better received.
And I think that price increases we mentioned it because it is 1 of the tools that we are considering I think we learned a lot from last time, we did it then and should we decide to.
Execute.
And take action with that tool it will be done in a way that.
Yeah.
Captures those learning so.
It might be more tactical and strategic or certainly being done in a way that we have more confidence in its success.
But it is only 1.
And tools, we have in our cadre to insure continues.
<unk> financial performance.
And I would iterate that the backdrop against.
Applying these different tools is our conviction that the supply chain and raw material costs.
Disruptions. We're currently facing are transitory.
Yeah.
Okay.
And then just last question before I turn it over I was just wondering if you might be able to provide some more detail on the different factors impacting gross margins are relative to the 2020 levels.
Ideally.
I mean, it would be nice if you could provide some color on how much. It is you know from raw materials, how much of the lower guidance is from raw materials transportation tariffs and price mix, recognizing you might not want to get too specific any cash.
Sure you can provide that would be useful.
Yeah.
Sure and I will be speaking on both in 2020.
And in 'twenty, 'twenty, 1 and I am a tear in assumption of a tariff free comparison.
And so if you're looking in 'twenty 'twenty, we were at approximately 45% gross margin.
And our outlook for 2021 assuming a terrorist exemption.
It is 39% to 40%.
Certainly there are headwinds and you've named a number of them are significant in terms of.
Increasing costs for Ocean transportation.
Our sourcing materials on the open market.
Increased.
<unk> costs as well as increased air freight to make sure that we can get our products to our customers when they need them.
That's a significant factor as along with a year on year pricing and promotional reductions which.
We've been talking about.
That then are partially offset by the good work that our supply chain teams continue to do to take product cost out of our product.
And and so it's the net of all of that that.
It gives you the the walk.
Between last year and this year.
Okay, that's great. Thanks, I'll pass it over.
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then 1 on your telephone keypad.
Our next question or comment comes from the line of Derek Soderberg from Colliers Securities. Your line is open.
Hi, everyone. Thanks for taking my question just.
Just wanted to get a bit more color on your view around tariffs Colin I guess I'm wondering what's changed in the buying interest administration on trade policy. My understanding is that the U S trade representative Catherine tie us more or less enforcing existing trade.
I see.
Has the office under Biden picked up the pace of exemptions I guess since January or is this the first time they are considering them.
Wanted to get a bit more color on what you're hearing and what's informing your view ex.
So what's informing your view is the fact that the Senate passed a.
Let just passed legislation.
That called for the.
Reinstatement.
Exemptions for companies that had previously received exemptions for all of 'twenty, 2 and all of 'twenty 1.
Paul that bill is being taken.
<unk> taken up by the house.
And there is strong support.
For exemption language in the house as well, we just can't guarantee when that legislation is going to be taken up.
And.
The U S T R as is <unk>.
Also up too.
Act unilaterally independent of this legislation.
And so that in general there is broad based support.
Though the timing is uncertain.
We're kind of in a little bit of a wait and see but we felt like.
It was it behooves us to include.
An assumption of an exemption based on our analysis that it was more likely than.
So.
And that.
Would convey the most accurate.
View on our financial performance.
Got it and then is the exemption is that part of a larger bill with other stuff.
Off that could potentially muddy the waters in terms of bipartisan support or is that more of a standalone bill.
Yes.
So it it would be part of a larger.
Legislative package, which would contain other things that's correct.
Okay got it thanks.
You bet.
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then 1 on your telephone keypad.
Yeah.
Yeah.
We have a follow up question from Mr. John Babcock from Bank of America.
Your line is open.
Hey, guys just figured I'd jump in since there aren't any other questions. I guess, just first of all what drove the higher warranty expense you know in the quarter.
So our our warranty expense is a.
Is.
I look at the trend it amounts that were paying as we see those those those costs come back that some of that.
Issues that we've been talking about in terms of.
Higher costs and logistics costs are.
Things that would impact our warranty expense so it's a number of factors.
Just to give you a little bit of a feeling for pain. There are some situations, where we were previously could affect a repair with a.
By sending a part and because.
The supply chain challenges, we actually have to send a robot.
So it's it's a.
It's a multifactorial factor issue, but again, something we feel good about driving back to more historical levels.
Gotcha, and then just relative to you know back when you reported.
1 key learnings has inflation had inflation situation changed there positively or negatively for raw materials and transportation.
Raw materials have.
Grown dramatically.
In in costs, particularly resins.
And we.
We expect those.
Raw material prices to maintain elevated.
For the balance of the year and we expect them to normalize at some point next year, but definitely that's that's a headwind.
Okay, I tried transportation no big changes there I guess.
Yes, and transportation as well, they're very similar.
It's not it's all that big.
Yeah go ahead.
That's why I'm, sorry, Dominion robbed yeah, net and then I guess just my last question I mean, it sounds like you know demand from retailers is going to exceed you know your about your ability to supply.
In the back half of the year.
Are you able to charge more you know to help.
Offset that so in other words, you know while not raising the price of the robots.
Perhaps increase that spread with a retailer's you know to help.
No deal with deal that you know demand you know I don't know, if that's an option or not but just.
With us on that front.
Yeah.
We did mention price is 1 of the levers that we're looking at as we try to.
Optimize the back half of the year.
Okay.
There may be some situations where that could work.
But we have now.
We are predicting.
<unk> very you know.
8% to 13% growth that there's still a tremendous amount of our robots to move and.
You know, it's a complex year.
But yeah that's.
1 of the reasons why we wanted to mention price as being on the table that's something.
We would consider.
Okay.
It sounds like that basically the price would be driven by the end market price that the consumer is paying instead of a change in the price that the retailers you know my time.
Certainly something we are considering and we will try to thoughtfully use.
US along with other.
Lever.
Levers to ensure that we're extracting as much profit out of the robots that we sell.
Okay really appreciate it thanks again for all the detail.
You bet.
Thank you. Our next question of contract comes from the line of Jim Ricchiuti from Needham Your line is open.
Hey, everyone. This is Tyler Bailey filling in for Jim today.
Why.
Hey.
Hey, yeah. Thanks.
So again for taking the questions.
1 question I guess just looking at.
Historically did you see sort of I guess relatively similar bump from.
As in you know task orders.
So prime day.
A difficult question to a precisely answer because last year Prime day.
It happened much later in the year.
And.
Your previously when Prime day was similarly time, whereas 2 years ago.
And the market has.
And our the size of our Prime day has grown substantially from there so.
I would say that we had a very successful prime day and were called.
Prime day as 1 of the top performers on Prime day.
But there is no normal.
Or at least normal is changing every year.
So.
I'm not sure how to give you a good answer there.
No I appreciate that insight.
So and then another question from me I, just wondering how I guess, maybe just provide some additional color on your your Irobot as a service model I know you talked about that last quarter, a little bit just wondering if you can provide any additional color or customer feedback it seem like it's been going well I'm just wanted to get an update there.
Sure.
You know what we can say today is that the tests that we have run.
Have been very successful at.
And we are going to be significantly scaling our select program in the back half of this year and believe it to be in.
Important part of next year. So we're.
We're not quantifying.
The numbers, yet something that again as it grows we will be.
Providing more color there, but it's all systems go and we are we are actively scaling.
The numbers of customers that we're targeting with.
With our select program.
Customer satisfaction is good churn is low and well within our target range is this is a good thing.
I appreciate that thanks.
That's all from me Thanks for taking the question I guess.
You bet.
Thank you. Our next question or comment comes from the line of Ben Rose from Battle Road Research. Your line is open.
I just wanted to ask 1 follow up question for Colin a number of the competitors over the last number of months have been introducing.
<unk> vacuum robots with.
Some new capabilities, including.
Remote monitoring and curious to get your thoughts on.
Just at a high level, whether you think features like that or.
Sort of something of a Swiss army knife approach.
Net for weather.
They make sense to incorporate into a vacuum robot.
You know, it's a great question with a long answer because it all has to do with whether or not.
The features that are being added.
Can be effectively used.
Or are they by the customer whether the customer would value that feature and.
Or whether it's just more unusable complexity.
People that put.
Security cameras on robust before with.
But no success.
Is it a bad idea.
I think we can say it was.
A bad idea executed as it was executed when it was tried before.
So I think people are wondering.
What.
Is what can they do.
Do how can they go and further differentiate their robots.
And.
Our competitors.
Life suggest add stuff.
Our strategy is really around how do we make the experience of owning the robot.
1 where you.
Is like you're more in control and you're able to get the robot.
To do what you wanted to do when you wanted to do it.
And have it operate the way you wanted to do it intuitively and effectively so you feel like.
The robot is your partner.
In cleaning your home.
I would tell you blindly, adding stuff to the robot.
It's going to have a negative impact in people's interest in the robots.
So you'd really have to do it.
Hopefully as part of a larger strategy.
That would bring customers along with.
Feel like in order to succeed.
So.
Again, not a simple answer, but there's a lot of bad ways of just adding stuff to your product.
Yeah.
Okay. That's helpful. Thank you.
Okay.
Thank you I'm sure.
With no questions in the queue at this time I'd like to turn the conference back over to management for any closing remarks.
Thank you Howard that concludes our second quarter 2021 financial results conference call. We appreciate everybody's support and participation today, we certainly look forward to talking with you over the coming weeks and months. Thank you again.
<unk>.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the phone call. You may now disconnect everyone have a wonderful day.
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