IRBT (2019 - Q1)

Good day everyone, and welcome to the iRobot First Quarter 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 Elise Caffrey of iRobot Investor Relations. Please go ahead. Elise Ca

Thank you, and good morning. Before I introduce the iRobot management team, I'd 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 provision of the Private Securities Litigation Reform Act of 1995. 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 filing 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. During this conference call, we may also disclose non-GAAP financial measures as defined by SEC Regulation G, including adjusted EBITDA, non-GAAP gross profit, non-GAAP operating income, non-GAAP income tax expense, non-GAAP net income and non-GAAP net income per share. 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 in the financial tables at the end of the first quarter 2019 earnings press release that we issued last evening which is available on our website. On today's call, iRobot Chairman and CEO, Colin Angle, will provide a review of the company's operations and achievements for the first quarter of 2019; and Alison Dean, Chief Financial Officer will review our financial results for the first quarter. Colin and Alison will also provide our business and financial expectations for fiscal 2019. Then we'll open the call for questions. At this point, I'll turn the call over to Colin Angle.

Good morning and thank you for joining us. We delivered strong Q1 results. First quarter revenue grew 9% over Q1, 2018 as expected. Q1 sell-through was good, sending us up for the higher year-over-year Q2, 2019 revenue growth rate we discussed last quarter. Given our Q1 results and our outlook for the rest of the year, we are reaffirming our 2019 full year revenue and operating income expectation that is increasing our full year expectations for earnings per share. We still expect full year 2019 revenue of $1.28 billion to $1.31 billion which is year-over-year growth of 17% to 20%. Operating income of $108 million to $118 million and now expect EPS of $3.15 to $3.40 driven by our $0.14 favorable discrete tax impact we recorded in Q1. Keep in mind that quarterly revenue growth by region as well as the quarterly timing of operating expenses incurred have varied widely through prior years and we expect fluctuations again this year. We managed the business on an annual basis and encourage investors to view us accordingly. Now, I’ll take you through some of the highlights of Q1, 2019 and our business expectations for the rest of the year. First, we successfully launched the Roomba i7/i7+ in EMEA, Japan and China. Customers love this product. The feedback we received from our millions of previous customers has directed our experience driven design approach which significantly differentiates us from would be competitors. A track record of superior performance, product quality and reliability drives a high level of customer engagement, supporting iRobot brand loyalty, and our ongoing segment leadership. By analyzing the information available to us with permission of our customers, we're able to see their level of engagement with our connected products. How often and for how long they're using the Roomba. How frequently missions are completed, whether they are using directed room cleaning available in our latest premium model and so on. We believe our successful execution against our strategy will fuel our growth over the next couple of years as the competition is either consolidating, or exits the segment. Now turning to our first quarter performance by region, we delivered 7% year-over-year revenue growth in the U.S. while international revenue increased 12%. In the United States retailers exited 2018 with more inventory than prior years, likely driven in part by desire to obtain inventory ahead of tariff increases originally scheduled for January 1st. As planned, we are -- we increased pricing on the i7/i7+ at the beginning of the year to partially offset the impact of tariffs. Despite the higher prices, Q1 demand was ahead of plan for this product. In EMEA, revenue grew 7% and retailers prepared for the Roomba i7/i7+ launch in that region. Japan revenue grew 26% in Q1 over 2018. That's a strong momentum experienced in Q4, 2018 continued into the first quarter. We still expect the full year double digit revenue growth domestically and overseas. On another note, I'm pleased to report that iRobot has been selected by Amazon as the principal smart home participant in re:MARS, it’s major new conference on AI and Robotics. We will be collaborating with Amazon to demonstrate a full scale sparkle featuring Alexa enabled iRobot devices. Additionally, I'll be delivering a keynote speech at the conference on AI and the smartphone. In summary, 2019 is off to a good start as we deliver against the commitments we introduced last quarter to roll out Roomba i7/i7+ and E5 overseas, drive further adoption of Braava, diversify our portfolio with the introduction of our revolutionary autonomous lawnmower Terra and create, long term, supply chain flexibility by beginning production outside of China in 2019. Also, we continue to invest in innovation, to extend our technology and product leadership and we will be introducing new products in Q2. With the launch of two new products in the second quarter along with the Terra launch later this year, we how -- we will have introduced five major new products in the past 12 months, very exciting. I will now turn the call to Alison to review our first quarter results in more detail.

Thanks, Colin. First quarter revenue was in line with our expectations and operating income and EPS were ahead mostly due to the timing of operating expenses we initially expected in Q1 and the impact of a stock compensation windfall that was not previously forecasted. Quarterly revenue of $238 million increased 9% from Q1 last year as expected. Operating income for Q1 was $22 million compared with $25 million for Q1, 2018. EPS was $0.78 for the quarter compared with $0.71 in Q1, 2018. Q1, 2019 EPS included a net discrete tax benefit of $0.14 compared with a net discrete tax benefit of $0.05 in Q1, 2018. Our Q1, 2019 effective tax rate for discrete items was 21% versus our Q1, 2018 rate before discrete items of 27% in line with our expectations. Year-on-year improvements for our tax rate for discrete items was largely driven by the benefits of U.S. Tax -- the U.S. Tax Reform Act of 2017 which negatively impacted the Q1 2018 rate, and the benefits of our U.K. principal companies established in 2018. The effective tax rate for Q1, 2019 inclusive of discrete items was 4% compared with 21% for Q1, 2018. The biggest driver of the discrete benefits each year were the stock compensation windfalls of $0.20 in Q1, 2019 and $0.05 in Q1, 2018. Revenue growth of 9% for Q1 included domestic growth of 7%, EMEA growth of 7% and Japan growth of 26%. We still anticipate 60% of our annual revenue to be generated in the second half of the year, and we are on track to deliver the full year expectations we discussed in February. Gross margin was 50% for the first quarter compared with 53% in Q1, 2018. The 300 basis point decrease was due primarily to pricing and promotional activity particularly as we transition in the new products. We expect Q1 will be the highest gross margin quarter for 2019 and we still expect gross margin for the year to be approximately 48%. Q1 operating expenses were 41% of revenue, down from 42% in Q1 last year, primarily due to the timing of sales and marketing expenses we expected to encourage -- one that we now expect in Q2. We ended Q1 with $200 million in cash, up from $162 million at year end. We have been rebuilding our cash position following the 2017 acquisitions and the $50 million stock repurchase we completed during 2018. Q1 ending inventory was $181 million or 140 days compared with $112 million or 101 days last year as we prepared for the product transitions. In addition, recall our U.S. inventory value now includes the impact of tariffs. Given our global rollout cadence for the new products, and our supply chain diversification strategy, we are likely to continue to see inventory at an elevated level for the next quarter or two before declining again at year end. As a result, average DIY for 2019 will likely be higher than the previous 100 day average. I expect inventory days will normalize in 2020. Now I'd like to provide you with additional detail on some of the underlying assumptions for our full year 2019 financial expectations and some quarterly color. As Colin has discussed we manage our business from a full year perspective. Likewise, our 2019 financial expectations should be viewed on a full year basis as quarterly year-over-year revenue growth rates and overall results will vary greatly by region due to a number of factors including new product introductions, and product transitions. For 2019, we expect full year revenue of $1.28 billion to $1.31 billion which is year-over-year growth of 17% to 20%. As in the past several years, we expect revenue will be more heavily weighted in the second half of the year when we expect to deliver roughly 60% of the year's revenue. Our revenue expectations contemplate yen and euro exchange rates roughly in line with current rates plus or minus 5%. For the full year, we continue to expect operating expenses to total 40% of revenue a 100 basis point improvement over 2018 as we begin to leverage the investments we've made over the past couple of years. We continue to expect full year operating income of $108 million to $118 million and now expect EPS of $3.15 to $3.40 driven by the $0.14 net favorable impact from discrete tax items primarily the stock compensation windfall that we recorded in the first quarter. From a quarterly perspective, we continue to expect year-over-year revenue growth rates to be the highest in Q2 and Q4 due in part to the anticipated timing of new product introductions and distribution rollout. In Q2, we expect year-over-year revenue growth in the high teens. Gross margin is expected to be the lowest in Q2 and Q3 due to the introduction and rollout of new products in Q2 that margins that are lower than the cost optimized products they are replacing, as well as our supply chain diversification investment and the traditionally heavy promotional activities associated with Mother's Day and Father's Day. In addition, our sales and marketing expense is expected to increase more than usual in Q2 to support the three new major product introductions this year. All in, operating income for Q2 could be breakeven to slightly negative. However, we expect to deliver operating income in the second half of the year sufficient to meet our full year operating income expectations. As it relates to tariffs, on January 1st 2019, we increased prices on our premium i7 and i7+ robots sold in the U.S. to help offset the impact of the 10% tariff costs we are incurring on all Roomba imports into the U.S. At the 10% level, we anticipate 20 million to 25 million of tariffs costs to be incurred in 2019. As currently structured, the U.S. government has indefinitely postponed its increase in tariffs to 25% which was originally planned for March 1st 2019. If tariffs are increased at some point in 2019, we would likely increase our prices again to offset the incremental tariff costs incurred. Should the tariffs be lifted altogether, we would expect to lower prices to their pre tariff levels. Any change in tariffs would take time to implement as we and our retailers work through channel inventory, and we provide any contractual price change notifications to our partners. In summary, we are pleased with our Q1 results, which are in line with our full year expectations. I'll now turn the call back to Colin.

Thank you. 2019 is off to a good start, and I'm very excited about the year ahead. We expect our global business to deliver strong financial performance in 2019, that will fund our ability to reinforce our core product leadership in the RVC category, expand and diversify our product portfolio, widen more competitive mode [ph] through technological differentiation protected by our IP portfolio, and broaden our manufacturing and supply chain outside of China. We believe that consistent execution of this strategy is the most effective way to drive sustainable growth, and shareholder value. With that, we'll take your questions.

[Operator Instructions] And our first question comes from Frank Camma with Sidoti & Company. Your line is now open.

Hey, good morning. This is Astar [Indiscernible] calling in for Frank Camma. So I see that average gross selling prices went up. Is that reflective of a higher mix of more premium products such as the i7 or is it more tariffs or would it rather be both?

Our ASPs were definitely impacted by the mix of i7/i7+ as we continued its global rollout into international locations in Q1.

Okay, cool. So I was wondering also if you guys can you commentary on Terra and how that soft launch has been performing so far?

So the soft launch has not yet begun, but it is on track for top in later in the second half. We're starting that launch in Germany. So that's where we will be initially selling the product and there is a beta program will happen late in the year here in the U.S. but we haven't given any details beyond suggesting if you want to participate, to sign up on the website as a interested party. So it's still -- still a little early.

Great. Thanks. That's it for now.

Thank you. And our next question comes from Jim Ricchiuti with Needham & Company . Your line is now open.

Thank you. Good morning. I was wondering if you could talk a little bit about when you started to see the inventory stockpiling at retail related to the tariffs in the U.S? Is that something that you began to notice as you went through the quarter?

Well certainly as we exited 2018, Jim we noticed that the retailers had higher inventory that was probably typical for that time of year. As we've progressed through Q1 we didn't see any real dramatic change to the inventory levels. The retailers were holding, so it's something that we started seeing you know as we were exiting Q4 and that we continue to see through Q1.

And at this point, Alison, how does it look. It looks like based on your -- the way you're characterizing the pickup in Q2, you feel that there's been a fairly good sell through that position due for a stronger growth in Q2?

Yes. Sell-through in Q1 was good. And with all the traditional promotional activities we have going on in Q2 we think that will provide some additional momentum in the market.

Are you assuming any any meaningful contribution from new products in Q2? You know putting aside the products that are out there?

The impact to Q2 will probably be pretty small given they're just being launched in the Q2 time frame and it will be more impactful in the second half of the year.

Okay. And one final question if I may. You’ve given I think some color around how we should be thinking about sales and marketing expense. Just wondering if there's anything we need to keep in mind with respect to general and administrative expense in the quarter. It was a little lower than expected in Q1?

No nothing in particular to point out. That’s an area that we’ve been trying to get a lot of leverage on in the company over the last couple of years. I think we were able to do that in Q1 and for the full year I expect that we’ll have additional leverage that we can see in G&A, but nothing of any particular note that we’re expecting that would be unusual for the rest of the year.

Great. Thanks very much.

Thank you. And our next question comes from Mike Latimore with Northland Capital Markets. Your line is now open.

Thanks a lot. The new products that you’re launching, are they going to be manufactured in China or over a variety of regions?

Those products will be manufactured in China. We are moving some of our production outside of China and starting with some of our more easy to build products, so they’ll be a – but to your point or your question, yes, China is where we are doing our most advanced work right now.

And I believe last year you gave some color on percent of revenue from new products or an expectation around that. Any color on that for this year or the second half?

It’s the same as what we’ve communicated back in February. So we’re expecting about 15% of our revenue to come from new products.

Got it. And then as it relates to the i7, you talked about the ability to do over the year updates, there are new features, more then services over time. Any color on any of that activity to say this year?

You will certainly see material new features being rolled out this year that could be more specific, but your i7 has already received several over the year updates mostly around reliability enhancements, but this year you will also see some material feature improvements.

Okay. Thank you.

Thank you. And our next question comes from Troy Jensen with Piper Jaffray. Your line is now open.

Yes. Hi. Good morning. Couple of quick questions. Maybe, Colin first for you, I just love to hear your thoughts on conviction of the Braava products, still be in about 10% of revenue this year. Is it so, any expectations?

Yes. We still believe that Braava represent an important growth area for us. And so you’ll definitely see a robot putting some energy against that category, and investing in its development. So this is an important second leg on the stool as we believe in the intermediate term that Terra will be an important third leg.

Okay. Understood and couple of quickly for Alison. Can we just go over the comment about breakeven for operating income in Q2? I assume that's just all of just one huge step up in the sales and marketing. And if so how does that line kind of progress through the reaming of the year then?

Yes. It’s a combination of two things, Troy. So, definitely as I said, we expect gross margin to go down in Q2 and Q3 from where it was in Q1, all supporting the previous commentary that we expect the full year gross margin of 48. So part of the decline Q1 to Q2 was certainly be driven by gross margin. And then secondarily, we will have – we also have higher sales and marketing in Q2. It will be even higher than that what just normal for Q2 in order to support the new product launches that we have both in Q2 and later in the years. So, it will be unusually high quarter for sales and marketing spend in Q2. As you think about it going forward for the rest of the year, we will have our sort of normal dip down in Q3 and then our ramp-up in sales and marketing again in Q4 as we support the overall holiday season.

All right. Perfect. Good luck.

Thank you.

Thank you. And our next question comes from Charlie Anderson with Dougherty & Company. Your line is now open.

Yes. Thanks for taking my questions. I just had a question on the DSOs, they are little bit lower than normal in the quarter or any color behind why that was the case? And then on the shift in the sales and marketing from Q1 to Q2, was that due to any shift in the launch scheduled versus when you walked into – is there any additional color there why that was? And then I have a follow-up?

Yes. On the DSO, really it was just great work by our collections team here that followed up on all that area we had coming out of the end of year and we’re able to do just a great job of getting those dollars collected, so nothing really unusual to point out there. In terms of the sales and marketing move from Q1, it’s nothing really a typical. We come at the beginning of the year with our expectations of when we’ll execute various things and as we see things evolve, we make updated decisions about when to actually execute against those dollars. So, pretty normal activity as we just react to what we’re seeing and adjust our spending plans accordingly.

Great. And then, Colin, in the prepared remarks you did comment about consolidation or exits by competitors, I think, I don’t know, you make that comment before I wonder sort of what was behind that? Or you’ve seen anything on that front to lead you to that comment, just any additional color there? Thanks.

We’re definitely in the rapid growth phase of the development of the Roomba category and so that a year ago, two years ago we saw a proliferation of new entrance into the marketplace and now we’re starting to see that proliferation actually reverse somewhat and a few leaders emerging in the category which again is typical of this hyper growth of phase of the product adoption cycle. And so, definitely – we haven’t seen brutal mortality, but we have seen material shrinkages in the performance of smaller players sort of outside of the top three or four manufacturers. And so that, my expectation is this will continue and it will be increasingly difficult to play in this space if you don't have the financial performance to invest in the new features and increasing performance that is table stakes. So, definitely some interesting market dynamics going on and a bit of a reversal from what we’re seeing a couple of years ago.

Great. Thanks so much.

You bet.

Thank you. And our next question comes from Ben Rose with Battle Road Research. Your line is now open.

Yes. Good morning. Few questions if I may. With regard to i7 and e5 shipments overseas, were those products for sale for the entire quarter? Or were they made available at some point in the first quarter?

It’s a little different depending on which products, so the e5 was available for most of Q1, because that was launched internationally in Q4 of last year. The i7 was rolled out later mid to late Q1 and so was not available for full sale in Q1.

Okay. And on the product mix this quarter I know in past quarters you’ve had a bit of a barbell effect in terms of the 600 series and some of the newer models. Was that the case this quarter with the higher -- with the other end of the barbell being the newer models?

Yes. This quarter we saw a little bit greater than 50% of our revenue coming from the 900 series and above with the remainder coming below that. So, really good traction to date with the higher price skews.

Okay. And also Alison on this front with regard to distribution, was there much of a difference overall in terms of the mix in the U.S. between stores versus Internet sales?

Nothing really worth reporting on. No, no unusual changes in trend there.

Okay. And with regard to your comments on gross margin, I assume that that takes into account the – takes into account the $20 million to $25 million of tariff related costs that you expect to incur this year?

Yes. We contemplated $20 million to $25 million when we gave the 48% gross margin guidance for the year.

Okay. And then finally for you or for Colin, is there any update on the timing for the implementation of the new manufacturing location?

No. I mean, we hope to have the Malaysia line running at the end of this year and have our first products coming off the line. We don't – it shouldn’t be meaningful in terms of how many units are being produced in 2019 and when will actually sell those in market will be somewhat dependent on when we – when they start coming off the line.

Okay, great. Thank you.

You’re welcome.

Thank you. And our next question comes from Asiya Merchant with Citigroup. Your line is now open.

Hey, thank you. Have a couple of quick questions. One, Alison and Colin, 40% of the revenue expected in the first half and then you obviously guiding to 60% ramp in the -- of the revenue contribution in the second half. It seems that assume a very strong fourth quarter particularly given that one of your strongest quarters. If you can help us understand kind of what the unit ASP assumptions are around that guidance? I think it could be one of your seasonally, like, very strong quarter outside of the acquisitions impact that you had in the prior four quarters. So just trying to understand what the underlying assumptions are against a very, very strong, better than seasonal – significantly better than seasonal 4Q?

Yes. So, I mean, the 60% coming the second half for us is not unusual and a high Q4 also is not unusual for us. It is definitely driven by unit growth assumptions more so than ASP growth assumptions, but that’s not just for Q4 but for the year in total?

Right. But should we assume that with given that for the first quarter, second quarter will be high teens, first quarter was up 9% year-on-year. If I just do the math and kind of get to 17% to 20% growth that would imply just a very, very strong – very strong 4Q. So just trying to understand is that kind of baked in with new products, all of new products. Just if you can help us get to that math would be great?

Sure. We expect our new products will contribute to that overall volumes in even the non-new products will be contribute to that all of the products that we will have available, will be available in Q4, so its really the impact of all of the product offerings that we’ll have at that time.

Okay. And should we assume a greater contribution than coming from your mopping line, the Braava line which will be like Colin pointed out the area of focus. Should we assume more unit growth in that segment coming in the fourth quarter and the third quarter?

Yes. You should assume that the shift between the mopping category contribution in the first half and the second half will probably be exaggerated.

Okay. All right. That’s helpful. And then on the gross margin line, you guys are guiding to 48% and you had a 300 bps year-on-year impact this year. As you progress throughout the year given that you’re coming out with new products, there is always be the diversification manufacturing strategy that you’re working on. What gives you confidence that the 300 bps impact is the most that you will see? And how does it trend during the year?

Yes. So, as we said earlier, Q2 and Q3 will be the lowest gross margin quarters for the year. This is based on our current view of what we’ll do. We will be bringing to market and our views of what the competition will have as we progress through the year we’ll have to see how are these dynamics in the market change, but at this point that 48% average for the year is the best view that we have.

Okay. So should we expect a very strong ramp up again 4Q on your margin? Is that what we should expect as you ramp through 2Q and 3Q which tend to be lower margins for you?

To get to the 48% we’d have to a little bit of pickup in Q4, but nothing crazy.

Okay. All right. And then lastly, the Terra launch, I understand the beta happening in the U.S. later and in the – and in Germany in the earlier part of the second half, is that – is it possible that you would be missing like prime spring season or summer seasons typically when people use most of their lawn mowers. Is that anything to consider? Or is that just the function product rollout and market acceptance?

So, the strategic goals for the rollout in 2019 is to get in market in a controlled fashion with customers that we can stay in close communication with, so that learnings and tuning of the robot can happen in preparation for scaling up of the distribution of the robot in subsequent years. And so that we’ve said that, Terra is not material to 2019, and -- but we’ll be launching it earlier in the year so that our customers can take advantage and use the robot. So, again, this is completely new category for us and we’re launching new technologies surrounding the navigation of technology that the cutting edge and how it works. And so we believe that Terra can be a Roomba sized business opportunity and so we’re trying to sensibly enter into the marketplace and really make sure that we have good understanding of this performance and the performance of the software on the robot. So, this is a methodical ramp up in distribution. So, whether it is true that most lawn mowers get sold actually during the spring. And so that once we get to scale will be our best Terra selling season. But the demand for this product is such that we can easily meet our volume sales goals in 2019. Frankly, we can do it if we launched it in December, although people wouldn’t be able to use it much unless we’re going to sell. But again, we’re not so concern as to the primary selling season for Terra in 2019.

Okay, great. Thank you. Good luck.

You bet.

Thank you. And our next question comes from Mark Strouse with JPMorgan. Your line is now open.

Yes. Good morning. Thanks for taking our questions. Kind of a follow-up to Asiya’s question. Alison, when you talk about the new products and the gross margins you say that they’ll initially have lower margins than – I think you said the cost optimized products they are replacing. Is the view that they will eventually get to the gross margin profile of those order products? And if so can you kind of talk about the timing of that? Is that something that can occur in 4Q of this year or is that more of a 2020 story?

Yes. It is our goal that we will have the ability to improve the margins on the new products over time. Certainly, we don't expect that in 2019 particularly with a lot of our other efforts to diversify the supply chain. It would be sometime beyond that.

Okay. Thank you. And then, we’re about three months or so away from prime day, might be kind of asking how the sausage is made here? But just kind of curious how you guys go about your forecasting that given you had a few years of success with that sale. How you think about that in your guidance? Is that something that you just kind of look at last year and apply some kind of growth rate to or do you kind complete rollout [ph] and anything that you give would be upside?

Yes. As you know, we can’t specifically comment on prime day, but our – the width of our revenue range we think would accommodate whether that happens or not.

Okay. Fair enough. Thank you.

You’re welcome.

Thank you. And our next question will be from Steve Colbert with Canaccord Genuity. Your line is now open.

Hey guys, thanks for taking the call. Most of my questions have been answered, but maybe if I can just circle back. The decision you’re maintaining for your operating income guidance based on stronger second half. And I know you touched on this a little two questions ago. But could you maybe provide some color on the progression, I mean, I’m assuming it’s pretty heavily weighted to Q4, but just curious how we should be looking at that from a modeling perspective?

Yes. So Q4 at this point we do expect to be the highest revenue and the highest operating income quarter for the year for sure.

Okay. That’s it from me. Thank you.

Okay. Thank you much for your questions. That’s concludes our first quarter 2019 earnings call. We appreciate your support and look forward to talking with you again in July to discuss our Q2 results.

That concludes the call. Participants may now disconnect.