iRobot Corporation
Q4 2020 Earnings Call Transcript

Published: 11 Feb 2021

[Operator:]

Good day, everyone, and welcome to the iRobot Fourth Quarter and Full Year 2020 Financial Results Conference Call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Andrew Kramer of iRobot Investor Relations. Please go ahead.

[Andrew Kramer:]

Thank you, Sarah, and 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. Before I set the agenda for today’s call, I will 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 1995.

[Colin Angle:]

Good morning, and thank you for joining us. We closed out 2020 on a very strong note with revenue, operating income and EPS that surpassed expectations we shared at the end of October. Strong demand combined with outstanding collaboration and execution among our sales, marketing and operations teams, and our broader supply chain underpinned an excellent revenue performance.

[Julie Zeiler:]

Thank you, Colin. As Andy mentioned earlier, my review of our financial results and outlook will be done on a non-GAAP basis, so unless stated otherwise, each 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 fourth quarter of 2019 and all full-year comparisons are against 2019 unless otherwise noted. We delivered a very strong quarterly performance that again exceeded our plans. Total Q4 revenue grew 28% to $545 million due to the stronger-than-expected orders from retailers and outstanding growth in our direct-to-consumer sales. Geographically, revenue grew 28% in the U.S. with international revenue up 27%, due primarily to 39% growth in Japan and a 26% increase in EMEA. From a product perspective, Roomba represented 89% of our Q4 revenue mix with Braava making up the remainder. Braava revenue grew by 56% due to robust growth in the m6. Roomba-Braava bundles performed exceptionally well over the holidays. Our gross margin of 40.3% in Q4 was essentially unchanged with the prior year. The lack of tariff expense and to a lesser extent, favorable channel mix was primarily offset by changes in pricing and promotion, and higher warranty expense. Fourth-quarter 2020 operating expenses of $189 million increased by 30% and represented 35% of revenue. The increase primarily reflects higher working media spending and DTC investments, as well as higher personnel costs tied to headcount and short-term incentive compensation. Our Q4 operating income was $30 million, or 6% of revenue. Our Q4 2020 effective tax rate was 19%, which was in line with our plans. Our net income per share was $0.84.

[Colin Angle:]

Thank you, Julie. I’d like to close by extending my sincere thanks to my colleagues around the globe. The hard work, resilience and commitment of our team helped iRobot to deliver record results and exceed the ambitious targets we set for ourselves. It is an exciting time to be at iRobot. We created the RVC industry 18 years ago and have led it ever since. But we believe our best days are ahead of us. We have an expansive, growing installed base of nearly 10 million connected customers who want to engage with us. We’re optimistic that the trust that our customers have placed in our products will unlock more opportunity for us going forward, especially as they look directly to us to help them maintain their robots, replace their robots, add new robots and potentially purchase other new services and products from us that complement our current role in helping them keep homes clean. On today’s call, we’ve shared not only our outlook for 2021 but the opportunity to convert strong growth into higher profitability and faster EPS and free cash flow expansion in 2022. As our businesses grow and evolve, and as our relationship with the consumer deepens, we will remain committed to helping current and prospective analysts and investors better appreciate the opportunities we see, the strategies and initiatives that will help us capitalize on them and the metrics and KPIs that will best reflect our success and create value for our business. That concludes our comments. Operator, we will take questions now.

[Operator:]

Thank you. Our first question comes from the line of Mark Strouse with JPMorgan. Your line is now open.

[Mark Strouse:]

Yes, good morning. Thank you very much for taking our questions and congrats on the strong quarter here. I just wanted to dig into the commentary about 2022, maybe reading maybe too much in between the lines here, but kind of what you’re saying about the second half of 2021. I’m calculating kind of high single digits to maybe low-double digits revenue growth. Can you just give a bit more color into what gives you that expectation that the revenue can accelerate in 2022?

[Julie Zeiler:]

Sure, Mark. I’ll start that. As we think about 2021 and our guide for the full year and again, I would point everybody to the fact that we – we talk about full year growth targets because of how shifts in seasonality of our business can materially impact quarterly growth rates. So we are looking at 2021 as being a very good year of projected growth. And we look forward beyond that into 2022 with the momentum that we see in the market, recognizing that we are still very largely under-penetrated and believe that we have and look forward to continued strong growth in 2022.

[Colin Angle:]

I’ll add some color to that, Mark, some of the things that we talked about what was a test in 2020, things like robots-as-a-service, things like the other forms of existing customer revenue and warranty and initial efforts to scale D2C become scaling commercial commitments from the Company, but still relatively immaterial in 2021, growing more significant materiality as we move into 2022. And so you’ve got a number not just profitability tailwind but you have some revenue growth driving tailwinds that will be accelerating as well. And so that investments in 2021 leading to growth in 2022 is what we’re seeing. Certainly Q1 in 2020 was a weak quarter for us for a number of reasons, and so that the strong performance, we’re giving guidance on relative to Q1 2021 is against a – what I would say a pretty easy comp.

[Mark Strouse:]

Okay, that’s helpful. Thank you. And then just looking at the gross margins for 2021 guidance a bit better than what I was expecting, you’ve quantified the impact from tariffs, Julie. The delta is roughly 100 basis points, 125 basis points, something like that. Can you kind of dissect that – the remainder of the year-over-year decline from 2020? Is that for example ramp costs associated with Malaysia? Is it more promotions? Just anything you can do to kind of break that down a bit further would be very helpful. Thank you.

[Julie Zeiler:]

Yes, sure. And you’re right, tariffs are material part of our move of gross margin from 2020 to 2021. There are a number of other factors that play both positively and negatively to a lesser extent. So on the negative side, there is the scaling of Malaysia as we go through the year, as well as expected or anticipated pricing and promotional activity. Those things are offset to a certain extent by favorable channel mix shifts as well as non-recurring costs from 2020.

[Mark Strouse:]

Okay, very helpful. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Ben Rose with Battle Road Research. Your line is now open.

[Ben Rose:]

Yes, good morning everybody. A question first for Julie, you had alluded to, excuse me, some of the potential supply chain constraints that are out there. Could you maybe give us – could you perhaps elaborate a bit on what you’re seeing in terms of the health of your supply chain and your confidence in their ability to de-lever throughout the year?

[Julie Zeiler:]

Sure. So we are incredibly proud of our supply chain and the work that they’ve been able to do throughout 2020 to manage through a very changing situation. As we look forward, there are a number of factors, whether we’re talking about rising freight costs, I think, globally, there are things like a chip shortage, as well as cost of resins and other raw materials that we look to as things that we are managing carefully as we go through this year.

[Ben Rose:]

Okay. And a question for, Colin. If you could share with us your vision longer term for the Roomba specifically as you look out over the next couple of years. Do you think the primary focus will continue to be on home cleaning exclusively or perhaps could we see some additional functionalities built into the Roomba as we see it today.

[Colin Angle:]

Certainly, the Company’s ambition extends beyond Floorcare and the role that the Roomba plays today in the home, while limited to right now vacuuming and then mopping with the Braava is also serving as a platform for us to gain the type of home understanding necessary to increase the sophistication of what we’re able to do in the home. As we’ve talked before, growth in AI is important growth in the awareness of what is going on in the home. So that AI can have the context required to succeed is really at the cutting edge of technology. And so we are on a long journey to build the robots that we were promised growing up as kids. I think we’re at a very exciting place where we’re starting to be able to understand the context to extend what we’re capable of doing. And the iRobot Genius Home Intelligence really is a very ambitious long-term commitment to building a home AI capable of doing very sophisticated work in the home. So it’s a – we’re just still at the beginning of the industry. We’re still at the beginning of what the smart home will evolve into and iRobot is very excited about the role we will play in the home in both delivering physical work, but also delivering the context required to have a home that understands the type of things, you want to have happen enabling your home, not just your robot to be a strong partner as you address the challenges of the increasingly complex role the home is being asked to play.

[Ben Rose:]

Okay, thanks very much. It’s very helpful.

[Colin Angle:]

You’re welcome.

[Operator:]

Thank you. Our next question comes from the line of Asiya Merchant with Citigroup. Your line is now open.

[Asiya Merchant:]

Great, thank you very much and very, very strong results and congratulations to the team for weathering all the challenges that came with the supply chain. Colin, just on this last comment that you talked about, if you can just peel it back a little bit more and talk a little bit about unit versus ASPs. And maybe Colin and Julie together, how you think about that ramp and as you think about expanding to Roomba as a service, warranties that you talked about, is that something that would drive incremental higher ASPs as you think about from each sale of that unit of Roomba that you leased or you sell just so that we can help – you can help us around the modeling. And then you mentioned a bunch of one-time costs, Julie that are unlikely to occur and as you look into fiscal 2022 become a little bit of a tailwind. So if you can talk to us a little bit about that on what things is the $20 million that you already investing in 2021 for the D2C channel expansion unlikely to kind of repeat itself and that’s why you have that $20 million incremental in the OI. Thank you.

[Julie Zeiler:]

Sure. So Asiya maybe I’ll start with your question and then I’ll let Colin jump in on units versus ASPs. I think that we are excited about the early results that we’re seeing in some of our services pilots. I think it’s important to also remember that while we are looking optimistically to commercializing those during 2021, it will take a while before those become a material part of our number. As I think about – looking forward ASP and unit, we’ve certainly seen during 2020, a nice increase in, what I would call net price with shift in up towards our premium end of our category, as well as ex-shifts in our channel. We also have seen nice unit growth. And as I look forward into 2021 and beyond, I think the – we will expect that we – that we’ll continue to see good unit growth again pointing to the relatively low penetration that our products have globally. And a small amount of continued pricing strength again related to mix.

[Colin Angle:]

And I think – the only thing I would add, Asiya, which is less about financial model get more about momentum in the success of our strategy around differentiation is the shift that we talked about in the call to the premium is really a shift embracing the increased intelligence of the robot as well as some of the auto evac technologies we introduced. And so that I like to see it call it as almost an anti-commoditization that we're seeing where the differentiating features we're bringing onto the market place are being embraced by our customers and driving them to spend up to get these exciting and important features. So again, I think it's all illustrative of a very healthy market where there our continued opportunities to differentiate with new technology and new features, which is great news for us, because that's where we're investing the – I'll stop there.

[Asiya Merchant:]

Okay.

[Julie Zeiler:]

And then as it relates to, you were asking a question around the $20 million of what we've highlighted as incremental DTC investment during 2021. That's across a range of areas both in terms of building capability and the talent required to run that capability to really focus on making the buying experience on our website and app an easy one. Making sure that we've got the marketing insights to understand what customers need and how to build that, that relationship. And there's a portion of that, which is one-time. There is another portion, which will continue as we go forward. However, we would expect that if we will get leverage on that as our business scale, we would expect that to grow more slowly.

[Asiya Merchant:]

Okay. So as I look into 2022, you guys are dealing we ramp these margins back up from 2021 level. The OpEx run rate as a percentage of revenue will drop quite meaningfully to get to 10% and higher op margin. Is that the right way? And that's what I was trying to kind of peel a little bit like where are we seeing those benefits from is it R&D, because you guys are kind of talking about trending that down as a percentage of revenue at out G&A as well. And so that incremental marketing and selling and OpEx initiatives that you're doing in 2021 should really be scaling back in 2022 and that's what I'm trying to get to, OpEx as a run rate of revenue. Okay.

[Julie Zeiler:]

Right. And so as we've talked, it's – we're thinking about and we tried to provide color on the entire P&L, we look at our gross margin and believe some of the headwinds that we're facing today in 2020 turn into tailwind, as we – I'm sorry, as we're facing today in 2021, turn into tailwinds, as we move into 2022, that coupled with calibrating our spending and getting operating leverage should allow us to have operating margin in 2022 above 2020 levels. More specifically, I think we're continuing to diligently work through those longer range plans, and hope to provide more be able to articulate longer-term financial targets more specifically in coming months.

[Asiya Merchant:]

Okay, great. Thank you.

[Operator:]

Thank you. Our next question comes from the line of John Babcock with Bank of America. Your line is now open.

[John Babcock:]

Good morning. Thanks for taking my questions. Just quickly tagging along on some of these modeling questions, I was wondering if you could just talk about what you're assuming for unit sell-in growth versus unit sell-through growth in the 2021 guide.

[Julie Zeiler:]

So John, as you know, we work to balance sell-in and sell-through. It's never a perfect science based on the needs of our retail partners. But we are looking for continued good unit growth that would equate to good sell-in as well as sell-through momentum.

[John Babcock:]

Okay, thanks. And then next question, you talked a little bit about the robot as a service program. Could you share more about how the testing has gone so far with that and what's working well with the challenges are still left to be worked out?

[Colin Angle:]

No, this is a constant optimization challenge for us. I think that we've had very encouraging results and have already been able to optimize the experience, but there's more work to do. You're definitely, as I said, we'll see this move from a test to a commercial program this year and we'll begin to scale up. So something you're going to hear more about. As I mentioned earlier, I think that the materiality of the robots as a service program will be minimal in 2021, but certainly increasing throughout the year. And also remember we'll have to account for that with a significant deferred revenue portion of the income, which will also create a little bit of a lag on the showing up in our revenue and profitability numbers. But again, something we'll be more than happy and to talk about as a year unfolds.

[John Babcock:]

Okay. Thanks. And then also on the two new products for launch, I was wondering how you might have us think about that next generation of products and how these will fit in with the rest of your portfolio?

[Colin Angle:]

I think that we're really focused on the intelligence of the robot. We're focused on how we can extend that, that partnership between the customer and the robot to make sure that the iRobot customer feels in control of what the robot is doing and feel like they have an enlightened and trusted partnership between the company the robot and themselves. And so that as we continue to rollout our products, that will be sort of an overall guiding principle in what we are trying to accomplish. Without that trust, without that control, we will undershoot the potential of the industry we are leading.

[John Babcock:]

Okay. And then just last question before I turn it over, could you just provide us a sense of the timeline for the patent infringement action iRobot is pursuing at U.S. International Trade Commission. And then also any color you can provide on how this supplement the prior litigation would be helpful.

[Colin Angle:]

So the recent action and I can only say a very limited set of things is through the ITC, which is a very aggressive and fast moving from the legal perspective organization. We expect to be at trial by the end of this year.

[John Babcock:]

Okay. Thanks, Colin.

[Colin Angle:]

Yes.

[Operator:]

Thank you. Our next question comes from the line of with Derek Soderberg with Colliers. Your line is now open.

[Derek Soderberg:]

Yes. Good morning, everyone, and thanks for taking my questions. I wanted to start with direct sales. Can you elaborate on some of the reasoning behind the success there? What's driving the growth and your confidence longer-term? And I guess in a longer-term, I'm curious how much of that 20% direct sales goal in 2023 can be services' contribution and what sort of gross margin for services are you targeting?

[Colin Angle:]

Sure. We can answer some of that. I think that the Roomba is a considered purchase. The Roomba customer tends to do research on what model, why should I believe this robot works, adjusted, there's a very real curiosity, which all drive customers to be willing to go to a website to learn about the product. Back in 2018 and 2019, iRobot’s ability to really capture that interest and translate that into a transaction was relatively pedestrian or uninspired. It wasn't where we were focusing our go-to-market energies. I think we were good, but we were certainly far from world-class as we rollout tools to better capture expressions of interest to better nurture, the customers along a sales journey, the more effective we will be with direct-to-consumer. The other thing is the skyrocketing engagement of our customers as the features that our customers are asking for and using are these online connected features, this growth of 80% in the – since the end of 2019 in our connected customer to well over 10 million connected customers opting in for to our communications is really a profound growth in interest and a profound growth in our ability to go transact with a customer base. And so all of these things give confidence, and I think that one of the things that is maybe a subtle point in the script that we gave today was, I think I used the word we identified our implementation partner for many of the improvements in our direct-to-consumer, which suggests we're not done. We are making major investments in 2021 to improve the tool set and our capabilities and our talent around this, which should pay continued dividends in our effectiveness online. So I think the 2020 showed tremendous progress, but what we're working on and continuing to implement in 2021 should continue that strong momentum forward.

[Julie Zeiler:]

And just the last thing I would add is we really view this direct-to-consumer channel as a powerful complement to our very strong retail partners. So we look to the – this growth as being a way once you find your way to iRobot, and you're part of our family, we want to nurture that relationship with you and make sure that when you're ready to buy your next product that you're going to transact directly with us.

[Colin Angle:]

Yes, absolutely.

[Derek Soderberg:]

Got it, yes. It's helpful to think about it like that. And as my follow-up, I'm wondering what level of direct sales can be supported by some of the investments you're making will be adequate to support that 2023 goal of 20% directs sales.

[Colin Angle:]

We are implementing best-in-class tools, which can scale well beyond even our 2023 goals. So that we're definitely making a real bet that this is going to be a long-term important dimension of our business, so that that is not a concern, that we're somehow undershooting what we're investing in.

[Derek Soderberg:]

Got it. Thank you.

[Operator:]

Thank you. There are no further questions. I would now like to turn the call back to Andrew Kramer for closing comments.

[Andrew Kramer:]

Thank you so much. That concludes our fourth quarter 2020 financial results call. We appreciate your support and we look forward to talking with you all over the coming weeks and months. Thanks, again.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.