Q3 2021 iRobot Corp Earnings Call

October 28, 2021

Okay.

Thank you for standing by and welcome to the third quarter of 2021, 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.

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Please be advised that today's conference is being recorded.

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I would now like to hand the conference over to your speaker today, Mr. Andrew Kramer, Vice President of Investor Relations. Thank you. Please go ahead Sir.

Thank you very much operator, good morning, everybody. Joining me on today's call are iRobot's chairman and CEO, Colin Angle, and executive Vice President and CFO Julie Zeiler.

Joining me on today's call are Irobot, chairman and CEO, Colin angle, and executive Vice President and CFO Julie Zeiler.

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 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 financial measures as to find 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 or that are non-GAAP financial results help provide additional transparency into iRobot underlying operating 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 measure are provided at the end of these prepared remarks.

And in the financial tables at the end of the third quarter 2021 financial results press release, we issued yesterday, which is available on our website at irobot.com.

So unless stated otherwise the third quarter 2021 financial metrics as well as financial metrics provided 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 third quarter of 2020.

For today's call our agenda will be as follows. Call will briefly cover the company's quarterly financial results, review important strategic milestones and outline our expectations for the remainder of 2021.

Briefly cover the company's quarterly financial results review important strategic milestones and outline our expectations for the remainder of 2021.

Julie will review, our third quarter results in detail and offer additional insight into our 2021 guidance.

John will conclude our commentary for 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 enjoyed a strong third quarter performance, while executing on our plans and navigating a stressed and fragile supply chain environment. Generated third quarter revenue of $441 million, an increase of 7% over the prior year and ahead of our plans entering the quarter.

We enjoyed a strong third quarter performance, while executing on our plans and navigating a stressed and fragile supply chain environment.

Generated third quarter revenue of $441 million, an increase of 7% over the prior year and ahead of our plans entering the quarter.

Our revenue performance benefited from the timing of orders that shifted from Q4 into Q3.

The combination of higher than anticipated revenue. Mostly better gross margins and prudent spending enabled us to deliver third-quarter operating profitability of $48 million and EPS of $1.67.

Mostly better gross margins and prudent spending enabled us to deliver third quarter operating profitability of $48 million and EPS of $1 67.

We've been pleased to see that demand for Roomba has remained healthy, revenue grew in each of our major geographies led by 15% expansion in EMEA, 5% in the US and 2% in Japan.

Roomba robots occupied eight of the top 10, selling best selling RBC models in the US. Six of the top 10 in EMEA and seven of the top 10 in Japan.

The excellent reception from retailers and consumers of our newest robots underpin solid 14% growth from the mid and premium tiers of our portfolio. Direct to consumer revenue grew 13%.

Direct to consumer revenue grew 13%.

We are seeing an existing customer, existing connected customer revenue trend very favorable. In absolute dollars and as a percentage of our total revenue.

Existing connected customer revenue trend very favorably.

In absolute dollars and as a percentage of our total revenue.

Overall gross robot Asp's grew 3% versus the same period last year, while units shipped were relatively unchanged. We finished Q3 with over $12.5 million connected customers, an increase of 60% from the same period last year.

For the past several months, we made important progress on executing our strategy to drive innovation and differentiate our products and build stronger relationships with our customers around the world and nurture value with them.

In September we introduced the latest upgrade to our genius home intelligence platform, along with the Roomba J seven plus our first robot designed with genius from the inception. I'll spend more time on this milestone in a minute.

In October we expanded our iRobot select subscription service to include the Roomba J seven-plus. Our robust selected now scaling quickly in the US. While its counterpart in Japan, the iRobot Smart plan is also enjoying strong growth, overall, we ended Q3 with nearly 50000 global subscribers with approximately 40% of these customers in the US. Since launching iRobot select a year ago.

Our robust selected now scaling quickly in the U S. While its counterpart in Japan. The Irobot Smart plan is also enjoying strong growth overall, we ended Q3 with nearly 50000 global subscribers with approximately 40% of these customers in the U S. Since launching irobot select a year ago.

We've accelerated the path the pace of adding new subscribers from dozens per week hundreds per week to over a thousand customers per week. Last week, we announced a new partnership with Bono to sell their hardwood in hard surface floor cleaning solutions, alongside our Brava jet M6 robot mop.

Last week, we announced a new partnership with Bono to sell their hardwood in hard surface floor cleaning solutions, alongside our Brava jet <unk> robot mop.

This relationship underscores our ongoing commitment to provide our customers with high value accessories and highlights the opportunity to further expand overall accessories sales, which are up 33% for the first nine months of the year.

We also continued to make good progress in moving our new CRM and related digital marketing tools and technology into production. With the implementation of new systems for our customer care teams, we're increasing call center productivity and effectiveness, which in turn is enabling us to optimize costs and raise overall customer satisfaction.

With the implementation of new systems for our customer care teams, we're increasing call center productivity and effectiveness, which in turn is enabling us to optimize costs and raise overall customer satisfaction.

Looking ahead, our long term success will be anchored around our ability to elevate our value proposition to consumers around the globe and further differentiate our robots in a competitive marketplace.

Success will be anchored around our ability to elevate our value proposition to consumers around the globe and further differentiate our robots in a competitive marketplace.

Accordingly, I would like to spend a moment outlining why the innovation within genius, three point out and the J seven pluses so critical. We see consumer robotics, following a similar path to personal computers and cell phone and which the software that powers these products ultimately becomes the primary driver of consumer buying behavior.

Why the innovation within genius, three point out and the J seven pluses so critical.

We see consumer robotics, following a similar path to personal computers and cell phone and.

Which the software that powers these products.

Ultimately becomes the primary driver of consumer buying behavior.

Genius is critical to our ability to extend our technology leadership and ensure that Reuben Brava remained the top floor cleaning robots with customers worldwide. With the newest version of our genius platform, we've taken a major leap forward in how we apply AI machine learning and home understanding. Powered by genius, Roomba J seven plus it takes the time to understand your cleaning preferences, learn your cleaning rules, ask for and respond to feedback and remember how to react in the future.

With the newest version of our genius platform, we've taken a major leap forward in how we apply AI machine learning and home understanding Howard.

Powered by genius Roomba J seven plus it takes the time to understand Youre cleaning preferences learn your cleaning rules ask for and respond to feedback and remember how to react in the future.

It even recognize it avoids cords and pedway. We believe so strongly in our precision vision navigation technology to identify and avoid solid pet waste that we will replace any roomba J seven plus that failed to live up to our pet owners official promise.

We believe so strongly in our precision vision navigation technology to identify and avoid solid pet waste that we will replace any roomba J seven plus that failed to live up to our pet owners official promise.

It's exciting to see that the superior intelligence of our robots is starting to emerge as a key differentiator in the marketplace.

As we move forward, we plan to continue enhancing genius in ways that are aimed at enabling our customers to precisely direct where when and how our floor care robots clean while seamlessly integrating our products into their lifestyle.

Many of the newest features and functionality within Genius are unique in the marketplace, thereby enabling us to deliver very satisfying cleaning experience that we believe will increase the likelihood that our customers will remain loyal to iRobot over the long term.

And Genius is more than a robot intelligence system. It is a home intelligence platform. We explicitly refer to it that way because our vision for iRobot extends beyond robotic floor care.

We explicitly refer to it that way because our vision for irobot extends beyond robotic floor care.

Over time, we expect the Genius will support our ability to build out a larger ecosystem by entering new adjacent robotics and smart home category.

Before we discuss our outlook for 2021, and it's important to remember the wide range of challenges we've been navigating and the impacts they've collectively had on our anticipated financial performance.

More specifically, at the time of our Q2 call we called out the following development. Semiconductor chip shortage left us unable to fulfil a significant level of anticipated orders in the second half of 2021, and we adjusted our topline outlook accordingly.

Semiconductor chip shortage left us unable to fulfill a significant level of anticipated orders in the second half of 2021, and we adjusted our topline outlook accordingly.

In addition to scaling back our top line ambitions. We also began implementing a range of cost of surety actions to mitigate approximately $55 million and higher than expected costs associated with sourcing raw materials procuring integrated circuit complementary component tree necessary to produce our robots and shipping our products.

Also began implementing a range of cost of surety actions to mitigate approximately $55 million and higher than expected costs associated with sourcing raw materials procuring integrated circuit complementary component tree necessary to produce our robots and shipping our products.

Since our Q2 call at the end of July we have continued to manage through component availability challenges. We also are contending with longer shipping timeframes delays in shipping and other related logistical issues that further threaten our ability to expeditiously fulfil anticipated Q4 orders.

Also are contending with longer shipping timeframes delays in shipping and other related logistical issues that further threaten our ability to expeditiously fulfill anticipated Q4 orders.

Given these dynamics, we have refined our FY '21 revenue outlook range to be from 1.555 billion to $1.59 billion.

To be from 155 5 billion to $1 $5 9 billion.

Our FY '21 expectations for operating income and EPS have changed meaningfully since our Q2 call in late July, beginning in early August and continuing through September oceanic transported air freight costs have escalated beyond what we had contemplated in July for the second half of the year by approximately $13 million.

We're taking steps to limit the impact of these higher costs by further optimizing our second half channel activities thoughtfully adjusting our hiring plans and refining our working media and limiting other discretionary spending.

In addition to incrementally higher shipping costs, our updated 2021 outlook factors in recent developments on the tariff front up. Up until earlier this month, we are optimistic that we would be granted section 301 tariff relief at some point during the second half of this year.

Up until earlier. This month, we are optimistic that we would be granted section 301 tariff relief at some point during the second half of this year.

This view was based on bipartisan activity to restore the tariff exclusion process, including legislation that was passed by the US Senate in June to reinstate tariff exclusion and extend a retroactive refund for any tariffs paid this year.

While we were pleased that the US trade representative recently restarted at the targeted tariff exclusion process for section 301 duties. The current process is unlikely to be finalized and implemented before the end of this calendar year.

Additionally, while we believe we have a compelling case to hamper exclusion reinstated any exclusion granted under the current rule, making would only refund tariffs paid since October 12, 2021, rather than from the start of 2020.

We remain actively engaged with key stakeholders in Washington to advance our position. So the tariff exclusion no longer likely for the year, our full year outlook adds $42 million to $43 million back into our cost structure. As a result, we now expect 2021 operating income in the range of 36% to $55 million with EPS ranging from $1.15 to $1.74. At the tariff exclusion being granted for this year retroactive to January 1st our EPS performance would have been $1.24 to $1.27, higher and within expectations we set at the end of July.

So the tariff exclusion no longer likely for the year, our full year outlook adds $42 million to $43 million back into our cost structure.

As a result, we now expect 2021 operating income.

In the range of 36% to $55 million with EPS ranging from $1 15.

Two $1 74 at.

The tariff exclusion being granted for this year retroactive to January 1st our EPS performance would have been $1 24 to $1 27, higher and within expectations. We set at the end of July.

Although this development further depresses, our 2021 earnings performance, we believe that taking any additional material cost reduction activities will substantially impair our ability to execute on our strategy over the coming quarters and derail our ambition to drive long term value creation.

We move forward focused on successfully closing out 2021, while also advancing our plans for 2022 and beyond. We're very excited about the opportunities that lie ahead, and I will share some additional perspective on 2022 in just a few minutes.

But at this point I'll turn the call over to Julie for her financial review tools. Thank you Colin. As Andy mentioned earlier, my review of our financial results and outlook will be done on a non-GAAP basis.

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 metrics all quarterly comparisons are against the third quarter of 2020, unless otherwise noted.

We reported Q3 results that were generally better than we had expected at the start at the quarter. Total third quarter revenue grew 7% to $441 million with the strong performance against our plans due largely to the timing of orders.

Total third quarter revenue grew 7% to $441 million with the strong performance against our plans due largely to the timing of orders.

Geographically revenue grew 5% in the US and 8% internationally and EMEA, and Japan increased 15, and 2% respectively. From a product mix perspective, Roomba robots and accessory revenue represented 90% of our Q3 revenue with the remainder being Brava robot in accessory sales.

From a product mix perspective, roomba robots and accessory revenue represented 90% of our Q3 revenue with the remainder being brava robot in accessory sales yes.

We estimate that approximately 60% of total third quarter revenue came from E-commerce, which comprises our own website and app dedicated e-commerce websites and the online arms of traditional brick and mortar retailer. Our DTC revenue grew 13% to $40 million or 9% of total revenue.

DTC revenue grew 13% to $40 million or 9% of total revenue.

Strong DTC growth in EMEA, and Japan more than offset a modest decline in the US. We expect full year DTC sales will represent 12% to 13% of total full year revenue in 2021.

We expect full year DTC sales will represent 12%, 13% of total full year revenue in 2020 one.

Our gross margin of 37% in Q3 was better than expected by approximately 200 basis points. Due primarily to favorable changes in promotional activity. A certain air freight cost that will now impact Q4. Leverage on our fixed cost and lower return rate. Compared with last year's third quarter, our gross margin declined by 11 percentage points.

Due primarily to favorable changes in promotional activity.

A certain air freight cost that will now impact Q4.

Leverage on our fixed cost and lower return rate.

Compared with last year's third quarter, our gross margin declined by 11 percentage points.

More than 60% of the decrease was due to tariff costs of $14 million in supply chain headwind.

The remainder was split between pricing and promotional activity, higher warranty expense and unfavorable channel and product mix checks.

Third quarter 2021, operating costs of $115 million increased 8% and represented 26% of revenue.

While we continued to fund key initiatives, we remained disciplined with our spending as we moderated working media. Adjusted the timing of new hires and other personnel related actions and carefully manage discretionary spending.

Adjusted the timing of new hires and other personnel related actions and carefully manage discretionary spending.

Our Q3 2021 operating income was $48 million or 11% of revenue. Our third quarter tax rate was approximately 2%, which reflects changes in our full year tax rate assumptions, primarily associated with lower expected full year operating income.

Our third quarter tax rate was approximately 2%, 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 $1.67. We ended the third quarter with $248 million in cash and short term investments, a decline of $168 million from the end of Q2. The sequential decrease primarily reflects the $100 million accelerated share repurchase program and cash outflows associated with changes in working capital, most notably accounts receivable and inventory. It's worth noting that our cash and short term investments include a $30 million position in matter part, which became a publicly traded company.

We ended the third quarter with $248 million in cash and short term investments a decline of $168 million from the end of Q2.

Sequential decrease primarily reflects the $100 million accelerated share repurchase program and cash outflows associated with changes in working capital, most notably accounts receivable and inventory, it's worth noting that our cash and short term investments include a $30 million position in matter part, which became a publicly traded company.

This summer this event resulted in a $27 million gain on a matter for the investment and is reflected in other income in our third quarter GAAP income statement. A matter of Port shares were classified as a short term investment and they remain subject to a lockup provision until early next year. The value of those shares will be marked to market each month until the investment itself.

A matter of Port shares were classified as a short term investment and they remain subject to a lockup provision until early next year.

The value of those shares will be marked to market each month until the investment itself.

Third quarter DSOS were 50 days, a 10 day increase against the same period, one year ago, but slightly less than the third quarter of 2019.

The increase reflects shifts in the timing of orders for in towards the back half of the quarter and a mix shift among our retail partners. Q3, ending inventory was $354 million or 116 days compared with $218 million or 93 days at the same time last year.

Q3, ending inventory was $354 million or 116 days compared with $218 million or <unk> 93 days at the same time last year.

As expected inventory remained elevated in the third quarter, which primarily reflects higher in transit inventory as global supply chain issues extend shipping times across all primary modes of transportation.

We expect inventory in DIY will revert back to more normalized historical levels in the fourth quarter. With a quarterly review complete let's move onto our fourth quarter and full year 2021 outlook. As Colin noted we have been managing through a range of issues that have impacted our revenue and profitability expectations.

With a quarterly review complete let's move onto our fourth quarter and full year 2021 outlook.

Collin noted we have been managing through a range of issues that have impacted our revenue and profitability expectations.

In terms of our topline we have refined our 2021 revenue outlook within the prior range due to the combination of component availability and shipping related issues. We now expect 2021 revenue in the range of 1.555 billion to $1.59 billion, which would result in annual growth of 9% to 11%.

Growth of 9% to 11%.

Our updated full year revenue outlook implies fourth quarter revenue in the range of $445 million to $480 million. As a reminder, our revenue expectations contemplate yen and euro exchange rates roughly in line with current rates plus or minus 5%.

In terms of our gross profit margin earlier on the call, Colin outlined incremental transportation and tariff headwinds that will further pressure gross margin. For the full year we now expect gross margin of approximately 36%. This updated view reflects anticipated 2021 tariff costs between 42 and $43 million.

We'll further pressure gross margin for the full year. We now expect gross margin of approximately 36%. This updated view reflects anticipated 2021 tariff costs between 42 and $43 million at.

The tariff exclusion has been granted this year and applied retroactively to January 1st our full year '21 gross margin would have been approximately 39%.

We expect our Q4 gross margin between 30, and 32%, which includes anticipated tariff cost of around $13 million to $14 million. Approximately half of the decline in our anticipated Q4, '21 gross margin versus the fourth quarter of 2020 will be driven by higher supply chain costs, followed by tariffs, changes in pricing between this year and last. And shifts in product and channel mix.

<unk> half of the decline in our anticipated Q4, 'twenty, one gross margin versus the fourth quarter of 2020 will be driven by higher supply chain costs, followed by tariffs changes in pricing between this year and last.

Shifts in product and channel mix.

In terms of our fourth quarter and full year operating cost. We expect a meaningful sequential increase in our sales and marketing costs as we invest in working media to drive holiday season purchasing. Based on planned Q4 spending of the high $160 million range, we are targeting full year 2021 operating costs of approximately 523 million or 33% to 34% of total revenue.

We expect a meaningful sequential increase in our sales and marketing costs as we invest in working media to drive holiday season purchasing.

Based on planned Q4 spending of the high.

$160 million range, we are targeting full year 2021 operating costs of approximately 523 million or <unk>, 33% to 34% of total revenue.

Within our full year 2021 spend we still anticipate that our sales and marketing costs will range between 18 and 19% of total revenue with research and development expense targeted at around 10% and general and administrative costs of approximately 5%.

As a result, we expect a 2021 operating profit between $36 million and $55 million, which implies an operating profit margin between two and 3%.

These expectations imply a Q4 operating loss in the range of $17 million to $36 million.

In terms of other major modeling assumptions for 2020, one we expect other expense of around $2 million.

We are now anticipating an effective tax rate between 5 and 7%, which primarily reflects lower operating income. As a result, we anticipate our full year EPS range from $1.15 to $1.74 with an anticipated diluted share count of approximately 28 million shares.

Tariff exclusion been granted in the fourth quarter retroactively to January 1st we estimate that our 2021 EPS would have been between 1 dollar and 24 cents and 1 dollar and 27 cents higher on an after tax basis, using a higher tax rate of 17% on the assumption of higher operating income.

One dollar and 24 cents and one dollar and 27% higher on an after tax basis, using a higher tax rate of 17% on the assumption of higher operating income.

We anticipate our fourth quarter net loss per share in the range of negative 63% to negative $1.24.

To negative $1.24.

We continue to expect 2021 capital spending in the low $50 million range, and we anticipate a strong quarter of cash generation in Q4, which will enable us to begin rebuilding our cash position.

In summary to Echo some of Colin's earlier comments 2021 presented us with a number of unexpected challenges, while we will fall short of achieving our targets this year, we would frame 2021 as another year of solid revenue growth, outstanding collaboration across the organization to limit the impact of rising costs and component supply constraint. And excellent execution to advance our strategy and position us for long term prosperity. I'd like to turn the call back to Colin for some final thoughts.

Standing collaboration across the organization to limit the impact of rising costs and component supply constraint.

Excellent execution to advance our strategy and position us for long term prosperity.

I'd like to turn the call back to Colin for some final thoughts.

Thank you Julie. We're understandably very excited about our strategic direction and the potential we see to create substantially greater shareholder value.

We're understandably very excited about our strategic direction and the potential we see to create substantially greater shareholder value.

By advancing innovation to differentiate the iRobot experience, we expect continued success in expanding our connected customer base.

We intend to delight those customers from the moment they purchased the product and begin using them. We believe that happy irobot customer will increasingly buy more products and services directly from us over the lifetime of their ownership.

Highest priority R&D commercial marketing and operations initiatives are geared around supporting this simple overarching strategy.

We are confident that continued execution will enable us to expand our business and create significant value over the long term.

As we work to refine our planning for 2022, we currently expect that our actions to improve supply chain resiliency will help us move beyond our product supply constraints in the second half of next year.

We expect a higher revenue growth rate in '22 than in 2021, because we anticipate improved supply will translate into much stronger top line performance in the second half of next year.

We are pleased with the trajectory of existing connected customer revenue this year and look forward to moving into production with a range of new CRM capabilities over the next quarter or two. We believe that these new tools will play an important role in our efforts to further accelerate the growth of our existing customer revenue.

Into production with a range of new CRM capabilities over the next quarter or two we believe that these new tools will play an important role in our efforts to further accelerate the growth of our existing customer revenue.

We are bullish about the potential of our iRobot select service and other similar subscription offerings outside of the United States.

These offerings represent new ways for us to increase existing customer revenue, while also appealing to price sensitive customers, who might otherwise up we're less expensive robot from the competition.

As we continue adding thousands of new subscribers each quarter, we expect to exit '22 with a growing base of annualized recurring revenue.

That's true as we continue adding thousands of new subscribers each quarter, we expect to exit 'twenty two.

With a growing base of annualized recurring revenue.

A major cost headwind next year will be higher transportation costs, which we expect will remain elevated through the first three quarters of next year. Tariffs remain a wildcard. We believe an exclusion is likely it remains to be seen how quickly it can be granted. These tariffs remain in place next year, we expect that our '22 tariff costs will decline meaningfully from 2021 levels, our initiative to achieve scale with our production in Malaysia by the end of the year remains on schedule, although there's more work for us to do as we finalize our product Roadmaps and production plans.

Tariffs remain a wildcard.

We believe an exclusion is likely it remains to be seen how.

Quickly it can be granted if tariffs remain in place next year, we expect that our 'twenty two tariff costs will decline meaningfully from 2021 levels, our initiative to achieve scale with our production in Malaysia by the end of the year remains on schedule, although there's more work for us to do as we finalize our product Roadmaps and production plans.

We believe that 2022 will represent a major turning point in our efforts to transform iRobot into a more defensible profitable enterprise with a compelling proposition that resonates across a growing global base of loyal connective customers. As we execute on our plan to expand our base and grow the lifetime value of each iRobot customer, we plan to remain disciplined with our expending. As a result, our assumptions for next year include an expectation that our second half revenue, operating profit and EPS performance will be meaningfully better than the first half. We are excited about what's in store for our company and our shareholders. We look forward to offering a deeper dive into key areas of our business and reintroducing our long term financial model when we hold our investor day on Thursday, December 9, 2021. That concludes our comments. Operator, we will take questions now.

We believe that 2022 will represent a major turning point in our efforts to transform irobot into a more defensible profitable enterprise with a compelling.

At this time, if you would like to ask a question, press star then the number one on your telephone keypad. Again, it's star one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. The first question comes from Asiya Merchant from CB Group. Your line is open, please ask your question. Good morning, thank you for the opportunity to ask a question. Clearly, you know, the challenges are unprecedented and we hear that from several of the companies that we track. If I may you know I'm, just trying to parse through all of these comments on revenue growth being higher in '22 which makes sense given you have a bunch of unfulfilled orders still.

If you could help guide investors and analysts are we looking at a very backend loaded I mean, even more backend loaded than is normal for '22? And then I have a question on margins as well, clearly, tariffs get some mitigation from Malaysia into '22, but then you have these elevated transportation costs that you're highlighting. Is it reasonable to assume that margins will be up significantly in 2022 will they be down relative to '21? I'm just trying to parse through the comments to see if terrorists can offset.

And then I have a question on margins as well clearly tariffs get some mitigation from Malaysia into 'twenty two but then you have these elevated transportation costs that you're highlighting.

Is it reasonable to assume that margins will be up significantly in 'twenty.

22 will they be down relative to 'twenty, one I'm just trying to parse through the comments to see if terrorists can offset.

Or the mitigation of tariffs or Malaysia can help to offset you know, can be offset with some of the other costs that are transportation costs that you're talking about. Thank you.

Can be offset with some of the other costs that are transportation costs that you're talking about thank you.

Hello, jump on the on the revenue question so. We see in the first half of next year. There's a few things that are impacting. But the challenge in getting all of the chips that we need to build all of the robots that the market would absorb.

We see a in the first half of next year.

There's a few things that are impacting.

The <unk>.

And just getting all of the chips that we need to build all of the robots.

<unk>.

The market would absorb.

We'll still be something we're working through in the first half of the year. And you know it only takes one chip to stop us from building a robot in certain circumstances and so that when we think about first half second half. Working through those supply chain parts availability challenges will cause the first half to be lower in revenue than it would be otherwise and that will have the impact of creating a larger backend loading effect, because we think that will put those parts availability challenges largely behind us by the end of the first half.

And you know it only takes one chip to stop us from building a robot in certain circumstances and so that.

When we think about first half second half.

Working through those.

Ply chain pause.

Parts availability challenges will cause the first half to be.

Lower in revenue than it would be otherwise and that will have the impact of creating a in a larger.

Backend loading.

Effect, because we think that will.

Put.

Those parts availability challenges largely behind us by the end of the first half.

And then if I'm I'll see if I add on to that with thinking about gross margins and I would start with as we talk through a number of these challenges that we're facing this year.

We continue to believe that they will normalize over time. And so as we look forward. And we have limited visibility in how that will play out and we're still working through our targets for 2022, but if you think about some of the factors that we've been talking about, certainly tariffs there is whether or not an exclusion is granted.

And so as we look forward.

And we have limited visibility.

Visibility in how that will play out and we're still working through our targets for 2022, but if you think about some of the factors that we've been talking about certainly tariffs and whether or not an exclusion is granted.

And that complementary move and scaling of our product in Malaysia. Will it be a benefit as we think through the going forward?

Complementary move and scaling of our product in Malaysia.

Well it will be a benefit as we think through the going forward.

If you think about the headwinds stabilizing and then normalizing. As we go through the year and then of course the work that we will continue to do in optimizing our channel strategy. All of those things will come together in our targets for '22.

As we go through the year and then of course the work that we will continue to do in in optimizing our channel strategy. All of those things will will come together in our targets for 'twenty two.

And will be part of building out our long term financial model, which we expect to share with additional color at our analyst are at our Investor Day on December nine.

Okay, but he signed me I mean I think the overarching question is you know little margins fee improvements into '22. Just given all these things that you've put together you know I understand all that

Just given all these things that you've put together you know I understand all that.

There was an expectation that margins. Yes, margins will be improved in '22, the headwinds are moderating in '22.

Our moderating in 'twenty two.

The energy and the changes, we're making to our business model our tailwind to margins. And certainly we will see an improving environment to execute as next year rolls on so absolutely. Okay. Okay, great. Thank you for the clarification. No worries.

The and certainly we will see an improving environment to execute as next year rolls on so absolutely.

Okay. Okay, great. Thank you for the clarification.

No worries.

Your next question comes from the line of Mr. John Babcock from Bank of America. Your line is open. Please ask your question.

Hey, good morning, and thanks for taking my questions. I guess just quickly to tag along on that last comment there just when you mentioned that margins will be improved is that relative to 3Q, 4Q margin levels or the full year 2021 levels.

Last comment there just when you mentioned that margins will be improved is that relative to <unk>.

<unk> margin levels or the full year 2021 full year 2021 levels.

I think you need to think about it in full-year terms. And that'd be gross margins or that would be operating margins? Both. Okay. Thank you.

Okay.

And that'd be gross margins or that would be operating margins.

Both.

Okay. Thank you.

And just kind of back you know with regards to the Irobot select service could you talk about the investments that you've made to build out. This program and also what further investments will be needed as it scales up and then adding to that you know what competitive barriers exist that might make it challenging for your peers to build out a similar subscription service.

So the investments that we've had two to roll out a subscription service. There's a lot of backend investment to be able to service the customer, turn on, turn off the robots. Handle payments. Make sure that churn involuntary and voluntary churn is managed and the Irobot select service is definitely much more than just a rental program. There's services that are uniquely offered to a robot as a tourist iRobot select customers around getting accessories automatically sent to them, having a dedicated resource if they have any questions with a robot is it giving a real white glove experienced which has resulted in a very high customer satisfaction.

There's a lot of backend.

Investment to be able to.

Service the customer turn on turn off the robots.

Handle payments make sure that churn involuntary and voluntary churn is it is managed and the Irobot select service is definitely much more than just a rental program. There's a services that are uniquely offered to.

a robot as a tourist iRobot select customers

around getting accessories automatically sent to them, having a dedicated resource if they have any questions with a robot is it giving a real white glove

experienced which has resulted in a very high customer satisfaction.

This action with the service center and very favorable churn rates that we've been able to see thus far. So we think this is an amazing way to sell a product and I think that resonates well with consumers or frankly used to paying as they go for cleaning services in the home. So it's a very easy and familiar way of paying for this type of and benefit.

Oh for cleaning services in the home. So it's a it's a very easy and familiar way of paying for for this.

This type of and benefit.

The.

[laughter] C.

There are more to your question. But I couldn't give cover your question I'm happy to wax poetic about the awesomeness subscriptions.

But I couldn't give cover your question I'm happy to wax poetic about the awesomeness subscriptions, yes.

Yeah. No I mean, I guess, maybe you partly answered it but I guess you know part of that question was also just around kind of a competitive barrier.

Oh, yeah competitive barriers. So iRobots competitive strategy really centers around this growing differentiation in the intelligence of our robot their ability to avoid getting stuck their ability to offer users control over where and when the robots operate Irobot is unique in the marketplace with its ability to clean around an object in a room, it's unique in the marketplace with the ability to allow a user to schedule.

They.

So I robots competitive strategy.

Really centers around this growing differentiation in the intelligence of our robot their ability to avoid getting stuck their ability to offer users control over where and when.

The robots operate Irobot is unique in the marketplace with its ability to clean around an object in a room, it's unique in the marketplace with the ability to allow a user to schedule.

When a particular room could be clean much less a particular object in the room and we've rolled out things, where you can even have that schedule be automatically activated by simply leaving the house and so this idea that the robot works around your schedule. And with the new precision vision navigation and be able to recognize objects in the floors that if they're there permanently.

Works around your schedule.

And with the new.

Precision vision navigation and be able to recognize objects in the floors that if they're there permanently.

The robot can automatically add a we call it a keep out zones. So that the robot doesn't go back there or if it's something you just forgot to clean up it can actually tell you to go clean it up and then you can send it back to finish the cleaning job.

No.

This growing knowledge about your habits. About your home and with every mission, having the robot be able to do a better-personalized job creates stickiness with that customer because if you ever left iRobot all of that knowledge around your habits, and you're the challenging areas as your home to clean and how to go about doing it would be lost and so that we have this personalized intelligence-based differentiation strategy, which dovetails very well with a subscription-style sale process. And at the same time with a subscription we're lowering the barrier to invest in a robot that has this type of intelligence and capabilities. So it's an integrated strategy. Marrying intelligence with subscription to give a dramatically larger lifetime value on a customer by customer basis than a single anonymous purchase of a robot out a retail outlet.

<unk> knowledge about your habits.

About your home and with every mission, having the robot be able to do a better personalized job creates stickiness with that customer because if you ever.

left iRobot all of that knowledge around your habits, and you're the challenging areas as your home to clean and how to go about doing it would be lost and so that we have this

Personalized intelligence based differentiation strategy, which.

Dovetails very well with a subscription style. Sale process and at the same time with a subscription we're lowering the barrier to invest in a robot that has this type of intelligence and capabilities. So it's an integrated strategy. Marrying intelligence with subscription to give a

Sale process and at the same time with a subscription we're lowering the barrier to invest in a robot that has this type of intelligence and capabilities. So it's an integrated strategy.

Marrying intelligence with subscription to give a.

Dramatically larger lifetime value on a customer by customer basis than a.

Single anonymous purchase of a robot out a retail outlet.

Okay. Thanks for that color and then I guess my next question I had last quarter. You mentioned that you were evaluating a potential price increases are there any updates on your thinking around that particularly in light of the rising cost environment and your expected margin levels.

Yeah, I mean. It continues to be dynamic we definitely have adjusted how promotional we will be we've adjusted how much we're investing in demand generation.

It continues to be dynamic we definitely have adjusted.

How promotional we will be we've adjusted how much we're.

We're investing in demand generation.

The changes in discounting and promotion results in a material increase in ASPS. And then very very tactically, we made some price adjustments. So we haven't done anything wholesale at this moment in time, but we definitely effectively increased ASPS through our commercial strategy.

<unk> Asps.

Through our.

Commercial strategy.

Got you, that's helpful. And then the last question before I turn it over. Can you just talk about you know your work with the manufacturing partners you know what opportunities might exist there to reduce your production costs?

Can you just talk about you know your work with the manufacturing partners you know what opportunities might exist there too.

Reduced your production costs.

I mean at least in kind of looking at where some of your peers might be I mean, it seems they might have more favorable terms and so just wanted to kind of get a sense for how you're kind of working with that relationship and what opportunities are out there.

How you're kind of working with that relationship and what opportunities are.

We are out there.

We take this very very seriously. And have established aggressive year over year targets for Cogs efficiencies on existing products.

And have established.

Aggressive year over year targets for Cogs efficiencies on existing products.

We're very confident that if you look at like for like bills of materials that. Our robots are not more expensive to build a robust do include componentry that our competition chooses not to invest in and that may include silicon parts with different commitments to the security or reliability.

Our robots are not more expensive to build a robust do include componentry.

Our our competition choose.

Chooses not to invest in and that May.

Include silicon parts with different commitments.

Commitments to.

The security or reliability.

We put a lot of investment into <unk> sensing on the robot to ensure that the robot less frequently get stuck.

And can do a better job cleaning. So it's you know this is not a every robot is created equal.

It's a situation where we make targeted investments in customer experience as we select what goes into one of our products.

But.

To your question about manufacturing costs.

We have very explicit opportunities every year for substantial improvements in Cogs on our existing products.

Okay, great. Thanks for the help.

Yep.

Your next question comes from the line of band Rose from Battle Road Research. Your line is open. Please ask your question.

Yes, good good morning.

<unk>.

To dive a little deeper.

Into the status of manufacturing in Malaysia.

Looking out to the first quarter of this next year can you speak I guess first question would be could you speak to you know roughly what percentage of U S. Bound Roomba is do you anticipate will be will be produced in Malaysia.

Yeah.

Sure they are in.

As I mentioned in the call we are on track to.

Achieve the level of manufacturing in Malaysia that we had targeted at the beginning of the year.

That will be in 2020 to about 80% of the product that is destined for North America.

We're constantly.

Looking at our product plans and and how.

How much of older product are we going to bring into market versus new product and so that number fluctuate a bit but I'm at this point, we're 80% there.

Okay great.

And you know excuse me in terms of looking at the manufacturing costs notwithstanding all the variables around.

Supply chain component tree and transportation that you outlined in the call.

Is it your anticipation that perhaps by mid year the manufacturing costs.

For Roomba is in Malaysia will be somewhat similar to what you've had in China.

I think the somewhat similar as it is the fair there'll be a slight premium, but it's going to be.

The single digits.

So it's a single digit difference.

Correct, so there'll be a kangol digit premium for Malaysia, which.

It's something that we think we can manage quite nicely.

Okay, Great and then if I may a final question Colin and in your remarks in terms of the.

Differentiation of Irobot product line vis vis the competition.

Given the.

Anticipated advertising in Q4 do you think some of your messaging might be around high highlighting some of the differences and perhaps some of the shortcomings of the competitors.

Relative to their inability to navigate around some of the objects in the home or you know.

Not not really fulfilling the promise fulfilling the promise of.

What a consumer robot should accomplish.

You'll you'll definitely see irobot.

Starting to speak more explicitly.

The differentiation based on the superior intelligence of our robot.

The AR, we've been investing for a number of years and making sure that our robots are by far the smartest in the marketplace and with the launch of the G. Seven plus with its front front facing imaging technology.

We're really able to demonstrate that increasingly.

Creasings, obviously, an end and talk about the customer benefit than a.

Incredibly clear way they.

So that's going to be a growing part of the Irobot story and and the growth in the power of genius I should note is not just for the J seven plus all of our robots that are connected benefit.

In varying degrees from our technology I mentioned earlier that our robots are the capability for example of cleaning while you're away.

That's a benefit that even our.

Entry level connected robot.

Can benefit or so I kind of teased that you know there was a moment in time, when we stopped buying or P fees based on the hardware and started buying it based on what operating system.

Personal computer ran I think that we're getting towards a point in the robot industry, where the intelligence is such a differentiating and important factor that we can that customers will say well.

What software does that robot run and have that being an incredibly important part of the decision making process.

Okay. Thanks, that's very helpful insight. Thank you.

Yep.

Your next question comes from the line of Mike Latimore from Northland. Your line is open. Please ask your question.

Hi, This is other deal on behalf of Mike Latimore.

Could you give some color on how the inventory levels out with your channel partners are the inventory levels at an all time low or does your channel partners have enough inventories for them. So any color on the inventory levels that could be helpful.

Sure you know as we stand in Q3, we believe that retail inventory levels declined.

Declined.

Sequentially from Q2.

Overall, we think that as we look forward through the rest of the year, we will end the year with relatively lean our inventory at our retail partners.

Okay.

Alright, and regarding your revenue performance I see the timing of the orders have benefited a lot of revenue have moved from Q4 to Q3.

Could you give some color on what caused that.

You know, it's one of the reasons why we give full year guidance.

Is the perpetual challenge.

Calling the line between Q3 Q4, when we have a tremendous amount of.

Inventory in.

In the ports exiting factories.

Being unloaded and either because it's a period of high demand.

Simply the availability.

Oh ships or depending on how revenue is recognized.

I'm waiting.

To see which retailers, except and pick up inventory when just creates a lot of challenge so that we have a.

It's not unusual for there to be some adjustments.

Between that Q3 Q4, there's really.

Nothing, particularly interesting or or material about a shift from Q3 to Q4.

It's just our ability to call the.

Uh huh.

With precision how much is going to hit wear and a at this time we thought.

Got a little bit more wood.

I would get into Q3 and got pushed which is.

That's sorry, it got pulled forward.

So.

Probably the only time this year, where we were overly.

Overly pessimistic about the timing of shipping.

Your next question comes from the line up Derek Soderberg from call. Your Securities. Your line is open. Please ask your question.

Good morning, everyone. Thanks for taking my questions and really looking forward to hearing the updated long term model at the coming Investor Day Collyn I wanted to start with you I just wanted to get your thoughts on the industry growth rate for robot vacuums.

How sustainable is some of this pandemic driven demand as you sort of look into 2022 and beyond you know and then as it relates to you guys versus the industry I imagine your competitors are having some similar challenges.

Just curious if you think you guys are growing faster than the industry as a whole you know either maintaining or.

We're growing market share across all price points or maybe just the high end are.

Price points and sort of in the past you've been pretty aggressive and prioritize growth and market share a bit you know has that strategy changed.

At all in this tougher environment.

Sure.

I will start with.

Just reiterating that the robot vacuum cleaning market is underpenetrated household penetrations are quite low.

You know from the Ah.

13 ish percent of households in the U S, which would be the most dense.

Or most fully penetrated arena to EMEA and Japan.

Where those numbers are significantly lower so the opportunity remains.

Extremely large we think that.

The opportunities into the twenties and thirties.

As before we see any saturation effects.

In the marketplace I.

Irobot commands a very large share in all of these markets.

So when you talk about do you think we can grow share versus.

What do we think we'll we'll do to maintain share.

You know, it's a difficult question.

I would say that at.

At the we've always focused first on.

Winning and ensuring we maintain true.

<unk> at the premium side, we make the smartest robots in the world.

Delivered in beautiful high performance hardware, our customers value that and that's a winning strategy.

<unk> in the mid price points with the launch of the <unk> three robot, we've really made a statement that we continue to be there.

Very aggressive in the mid tier with our investments and then as we get into the lower priced tiers.

Where.

Competition has focused it is reasonable to imagine some continued L.

Albeit slow loss of share down it down at the bottom so that our approach to defending our market share.

Is not linear across all price points.

But I would point out that our irobot select strategy, which.

We talked about earlier in the call is an exciting way for us to be more competitive.

The lower price point with our higher end products such that we can deliver robots with these.

All implementations of superior intelligence and really get across the stack people.

The experience that.

Honestly they came to robot vacuuming expecting that this robot could be set loosen their AUM and a complete every mission and give the customer the control over where and when they want the robot to act.

Got it got it I appreciate the detail and then I just wanted to clarify one thing on the tariff exclusion none of that is baked into any sort of guidance or commentary on 2022.

And then more specifically is the thought that you know once we exit this calendar year, it's a pretty highly unlikely that you know you're going to get an exemption for the period before October 12th.

And sort of if this new version of legislation is passed would that likely exempt you guys from tariffs for the full calendar year 2022.

So let me try to answer.

As much of that question as I can.

They.

The current.

Registry language around the exemption process.

He is currently open for comments.

So that means that it is not final as to what the.

The exclusion process or what an exclusion will mean that has not been.

<unk> finalized.

The proposed language.

But if it stays as.

Currently written.

Would grant.

Companies with received an exclusion.

Relief only back to October 12 of this year.

And so the tariffs paid prior to October 12.

Would be lost or would not be refunded.

The exclusion.

Uh huh.

Language is currently silent.

And how long an exclusion.

Would be for if it was granted so I can't comment meaningfully on that so you know we had a specific language in the Senate Bill, which said all sorts of things we like earlier in the year, but that language was not reflected in the most recent language presented.

By the U S T R.

So we're.

We're kind of in a holding pattern, we think the our case for being excluded remains very strong and we're optimistic but hum.

No.

But I think that's all I can comment on that at this point.

Yep Yep, that's fair thanks, guys.

You bet.

Your last question comes from the line of Keith Ranga from Needham. Your line is open. Please ask your question.

Hi, Good morning, everyone. Thanks for taking the question. This is Chris Ranga filling in for Jim.

From the direct consumer front, 12, or 13% of sales for.

Anticipate that trending and what is driving growth there.

So the Irobot continues to.

Rollout.

More.

Competent and effective tools for targeting we continue to invest in.

In growing our direct.

Relationships with our customers and are increasingly.

We're able to go back and re target customers, who previously bought robots and of course targeting someone who already owns a robot to get an upgrade or a second robot or accessories has.

Difficultly favorable economics than going and finding and bringing a new customer into the franchise. So this is an area that we've been investing in this is an area that we think will be a gross margin and gross profit tailwind as we scale. It and is one of the very.

Exciting dimensions of our new and new and growing strategy, where we're able to deliver a product with this intelligence we've talked about before create a long term relationship based on the fact, the robot learning their home.

At the right time to go back to them for upgrade.

And a be able to transact with them very very efficiently because of the relationship we have with them and improve our profitability and lifetime value per customer. So this is a something that we're very excited to see continued to grow and you should expect it.

To remain a focus of Irobot investment and strategy on a go forward basis.

Yeah.

Great. Thank you very much for that that detail and sorry, just one more for me on promotional activity in Q4 do you expect that to be in line with our prior normal years or or any departure. There. Thank you very much.

We're trying to size our investment.

In keeping with the amount of product that we need to move and so that using our investment dollars are very strategically.

That said there is a you know we have a very significant ambitions for.

Driving the amount of demand for our robots are we you will still certainly see plenty of Irobot ads on television and on your social and digital platforms.

Thank you very much.

You bet.

That concludes our question and answer session I will hand back the call over to Mr. Andrew Kramer.

Great well. Thank you all very much for joining today I know today is a very busy one for our investors and we appreciate your attention to our to our results. Obviously appreciate your support and look forward to speaking with you over the coming weeks and months and you should see additional detail regarding registration.

For the Investor day over the next couple of weeks. Thanks, so much.

This concludes today's conference call. Thank you for participating you may now disconnect.

Goodbye.

[music].

Q3 2021 iRobot Corp Earnings Call

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