iRobot Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 6, 2024

Key Takeaways

  • Gross margin expanded by 590 basis points year-over-year to 32.4% in Q3, and management is on track for continued non-GAAP margin improvement.
  • Non-GAAP operating expenses fell 47% year-over-year to $47.7 million—driven by restructuring efforts and a $13.5 million favorable IP litigation settlement.
  • Full-year 2024 revenue guidance was lowered to $685 million–$710 million with an anticipated operating margin of negative 15% to negative 13% and net loss per share of $4.91 to $4.60.
  • The company launched new models like the Roomba Combo 2 Essential and Combo 10 Max with auto-wash dock, and plans the largest product refresh in its history for 2025 to drive revenue and margin accretion.
  • As part of the turnaround plan, iRobot has reduced its global workforce by approximately 50% since the start of 2024 to lower costs and improve operational efficiency.
AI Generated. May Contain Errors.
Earnings Conference Call
iRobot Q3 2024
00:00 / 00:00

There are 6 speakers on the call.

Operator

Hello, everyone, and welcome to this iRobot's Third Quarter 2024 Financial Results Conference Call. At this time, all participants have been placed in a listen only mode and a question and answer session will follow the company's prepared remarks. Please note that today's call is being recorded. And I would now like to turn the call over to David Kalusdian from the company's Investor Relations firm, Sharon Merrill Advisors. Please go ahead, sir.

Speaker 1

Thank you, Jim, and good morning, everyone. Joining me on today's call are Gary Cohen, iRobot's CEO and Julie Zeiler, Executive Vice President and CFO. At the outset, I would like to remind everyone that today's discussion will include forward looking statements regarding future events and future financial performance. These statements reflect the company's views as of today only and should not be considered as representing its views as of any subsequent date. These statements are subject to risks and uncertainties that could cause actual results to differ materially from expectations reflected in the forward looking statements.

Speaker 1

A discussion of these risk factors is fully detailed under the caption Risk Factors in the company's filings with the SEC. Related to the company's financial disclosures during this conference call, the speakers will reference certain non GAAP financial measures as defined by SEC Regulation G, including non GAAP gross margin, non GAAP operating expenses, non GAAP research and development, non GAAP sales and marketing, non GAAP operating income and loss and non GAAP net income and loss per share. Management believes that these non GAAP financial results provide additional transparency into Irobot's underlying operating performance and potential. 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 earnings presentation included in the Q3 2024 earnings conference call event details, which is available on the company's website at www.irobot.com. Also, unless stated otherwise, the Q3 financial metrics that will be discussed on today's conference call, including the financial metrics provided in the outlook, will be on a non GAAP basis only and all historical comparisons are with the Q3 of 2023.

Speaker 1

On today's call, Gary will briefly cover the company's quarterly results, review important strategic milestones and outline the company's expectations for the Q4. Julie will review Irobot's financial results and provide additional insights regarding the company's full year outlook. Gary will then provide closing remarks before we open the call for questions. With that, I'll turn the call over to Gary.

Speaker 2

Thank you, David, and good morning, everyone. Thank you for joining us today. It has now been 6 months since I took the helm at Irobot. During that time, I've had the opportunity to engage with consumers, employees, retailers, contract manufacturers and of course shareholders. As we begin this new chapter in Irobot's history, one thing is abundantly clear, we have a powerful brand that will serve as the foundation for the turnaround of this company.

Speaker 2

It should come as no surprise that in my conversations with stakeholders, it is the power of our iconic brand that comes up again and again. That brand power is at the heart of our turnaround strategy, Irobot Elevate. In executing Irobot Elevate, we are focused on providing our iconic brand with an improved platform to return to profitable growth. We are making operational and organizational changes and bringing new innovative products to market. While this work is ongoing, we are already realizing benefits and our improved financial performance.

Speaker 2

We recognize that turnarounds of this scale take time, but I am encouraged by our progress toward the goals that we set in February. In Q3, we expanded our gross margin by 5.90 basis points year over year and continued to improve our use of operating cash. We remain focused on driving efficient inventory balances and executing on our restructuring plan to right size operating expenses. For the 1st 3 quarters of the year, we have cut our operating losses in half as compared to the year before. However, our overall results did not meet the expectations we set in August as persistent market segment and competitive headwinds impacted our sell through performance.

Speaker 2

At a macroeconomic level, this continues to be a challenging market environment for consumers, which may influence this upcoming holiday shopping season. As a result, we are resetting our guidance for the full year, which Julie will discuss shortly. While we expect it will take time to see stabilization in our revenue trend, we are on track to exceed our operating expense targets, while continuing to invest in areas that drive revenue and improve our foundation for profitable growth. To expand our new product pipeline, in July, we announced the creation of iRobot Labs, which will serve as our innovation center. IRobot Labs represents our global initiative to harness the strength of our domestic product and software engineering talent.

Speaker 2

At the same time, we are leveraging the specific strengths of select partners around the world. The team is focused on reducing our time to market, while advancing the technological leadership that iRobot is known for. We've reduced R and D and supply chain expenses by relocating certain non core engineering and supply chain functions, utilizing greater use of third parties and transitioning to a new product development paradigm with our partners and contract manufacturers. As part of our ongoing restructuring plan, yesterday we announced an additional round of workforce reductions, totaling approximately 105 employees. Since the start of 2024, we have now reduced our global workforce by approximately 50%.

Speaker 2

These moves while challenging have fundamentally changed the way we work with our partners to efficiently develop and build our robots. Our new operating model is able to deliver a significant increase in new product introductions with less than half the internal resources and approximately 1 third the cost. This transformation is central to improve our performance and generate long term shareholder value. To reignite growth, we continue to refresh our product line to deliver innovative technology that reduces the time families spend on cleaning. With the benefit of lower product costs and reduced development timelines, we expect to drive revenue growth at enhanced margins and improved profitability in 2025.

Speaker 2

Last month, we launched the Roomba Combo 2 Essential and the Roomba Vac2 Essential, which gives customers twice the cleaning power of their predecessor models and they bring self emptying capabilities for up to 60 days via an auto empty dock. In July, we launched the Roomba Combo 10 Max with auto wash dock, which is our best cleaning, most intelligent and independent robot vacuum and mop to date. It is also our first entry into the exciting and fast growing market segment of multifunctional docks. And this past April, we launched the Roomba Combo Essential, an affordable and easy to use 2 in 1 robot vacuum and mop that has a higher gross margin due to our new product manufacturing strategy. The Roomba Combo Essential is available in more than 14,000 stores worldwide and recently received the PCMag Editor's Choice designation.

Speaker 2

These products are significant additions to our portfolio and will be followed by a revitalized lineup for 2025. This includes the largest product refresh in the company's history with an unprecedented number of new product launches across our good, better and best price points, and they will be supported by an all new user app. These new offerings are all margin accretive compared to the products they are replacing and all include advanced features and performance and all new mapping and navigation technologies. Gross margin expansion is an important element of our Irobot Elevate strategy for unlocking value and fueling our growth drivers. We have an enviable robust IP portfolio and tremendous brand value.

Speaker 2

Together, they provide the solid foundation on which we are building our newest products. We are striving to reclaim our position as the global innovation leader in consumer robots for the home and beyond. As we adjust and revitalize our product lineup, we are not yet participating in a number of market segments in terms of product features and functions. Our Q3 results and Q4 outlook partly reflect that. But even in our current turnaround, Irobot continues to be the leader in several segments and we remain confident that as we aggressively introduce new robots with more features and enhanced capabilities, our share and sales volume will rebound.

Speaker 2

And consumers remain loyal to the Roomba brand. In fact, in a recent promotion with 1 of our major retailers, iRobot had 4 of the top 5 SKUs in the robot vacuum cleaner category. We still have work in front of us to become a more agile growth business, but our culture of innovation remains strong and I believe that we can achieve our growth and value creation goals. I see incredible opportunities for this company and we are optimistic about our prospects in 2025. This optimism is based on our expectations regarding the growth in the robotic floor care category as a whole as well as success from our own new product programs.

Speaker 2

In terms of category growth, we are encouraged by positive third party assessments of U. S. Market trends. We believe that we will start to see a return to growth in the U. S.

Speaker 2

Next year. EMEA is already seeing such a return to growth. And in Japan, we expect growth will be driven by our new products and advertising push in a geographic region where we are still a market leader. Our new product program should begin supporting revenue growth in the second half of twenty twenty five. We plan to leverage that top line growth with a lower cost structure to drive improved bottom line performance and are on track for continued gross margin expansion and improved cash flow from operations.

Speaker 2

Now before we get into the financials, I'd like to discuss some upcoming changes to the executive leadership team, which we announced today in a separate press release. Julie Zeiler, our CFO and Russ Campanello, our CHRO have decided to retire effectively next month. Russ is leaving after more than 14 years with Irobot. He has been a dedicated leader, building the talent infrastructure that will be critical to helping us achieve our future growth. We thank him for his many contributions and wish him all the best.

Speaker 2

Russ will stay on in an advisory capacity until March 28. Julie joined Irobot in 2017 and has served as CFO since 2020. She has been instrumental in our aggressive efforts to position the company for profitability during what has been a very dynamic and challenging time. She will formally step down on December 2, but will also stay on in an advisory role through March 28. As announced, Jules Connelly is returning to Irobot as our Chief Human Resources Officer.

Speaker 2

She had a 7 year tenure with Irobot, most recently as Senior Director of Human Resources and brings deep experience designing and implementing effective HR processes with an emphasis on talent acquisition, employee engagement and retention. Taking over as CFO will be someone most of you know well, Karianne Wang, our Senior Vice President and Principal Accounting Officer. Karianne has more than 25 years of auditing and accounting experience and has been with Irobot for more than 7 years. She also has been leading our Investor Relations efforts for the past 2 years. I am pleased that this thoughtful and deliberate succession process resulted in having experienced executives in both positions with a solid understanding and historical perspective of Irobot.

Speaker 2

Jules and Karion are 2 executives that represent the next generation of leaders for Irobot and I look forward to working closely with them. Before I turn the call over to Julie, I know that I speak for everyone on the leadership team when I say thank you for all of your hard work and we wish you nothing but the best in your retirement.

Speaker 3

Thank you, Gary. It's been such a privilege to work alongside our leadership team and the talented professionals on our finance team. As I prepare to step down, I look forward to supporting Karian during this transition. I am confident in her capability to guide our finance organization forward, drawing on her deep understanding of our business and her thoughtful approach that will serve our team well in the years ahead. Turning to our Q3 results.

Speaker 3

As David noted, my review of our financial performance and outlook will be done on a non GAAP basis. Unless otherwise noted, each mention of gross margin, operating expense, operating income and loss, operating margin and net income and loss per share will mean the corresponding non GAAP metric. Our Q3 results reflect what continues to be a challenging consumer spend environment with intensified competition in our market segment. But as Gary mentioned, we are greatly encouraged that our results demonstrate the success of our restructuring efforts and our steady progress in driving significant margin improvement. 3rd quarter 2024 revenue totaled $193,400,000 compared with $186,200,000 in Q3 of 2023.

Speaker 3

The year over year increase was due to the timing of certain large orders. Geographically in the Q3, revenue increased 23% in the U. S, declined 20% in Japan and declined 11% in EMEA. Our Japan results reflect continued weakness in the yen against the dollar. Excluding the unfavorable foreign currency impact, Japan revenue decreased 15% over the prior year period.

Speaker 3

In terms of product mix, 2 in-one products represented 57% of total robot sales in Q3. Accessory revenue in the quarter declined 8% over the prior year and represented approximately 8% of total revenue. Revenue from mid tier robots with an MSRP between $300,000,000 $4.99 and premium robots with an MSRP of $500 or more represented 79% of total robot sales compared with 80% in the year ago period. Our 3rd quarter direct to consumer or D2C sales decreased slightly by 1% from the year ago period with flat sales in North America and a 9% increase in EMEA offset by an 8% decline in Japan. In the 3rd quarter, our D2C revenue represented 19% of total revenue as compared to 20% of total revenue a year ago.

Speaker 3

Q3 gross margin was 32.4%, up from 26.5% in the Q3 of 2023. Overall, we remain on track with our gross margin improvement plan, which is driven by new products with a better cost profile as well as cost reductions on existing products. Looking at Q4, we expect a sequential decline in gross margin due to seasonal promotional activities, but anticipate strong year over year improvement. Operating expenses for Q3, 2024 totaled $47,700,000 compared with $90,100,000 in the year ago period, representing a 47% year over year reduction. As a percentage of sales, operating expenses decreased by 2,370 basis points from a year ago.

Speaker 3

Operating expenses in the 3rd quarter include a benefit of $13,500,000 or 700 basis points, specifically from a favorable IP litigation settlement. This is a one time benefit and underscores the overall strength of our IP portfolio. In addition to the benefit from the settlement, this operating expense decrease primarily reflects the progress in our aggressive and ongoing restructuring efforts along with disciplined spending in the quarter. The key drivers of the reduction were people related spending across all functions, reduced marketing spend and a continued focus on efficiencies across the company. Our Q3 GAAP results include a $1,900,000 charge related to our restructuring plan, primarily for severance and related costs.

Speaker 3

In the 1st 9 months of the year, we reduced operating expenses by $95,200,000 which includes the $13,500,000 IP litigation settlement and made significant progress in achieving the full year expense reduction goals for R and D, sales and marketing and headcount that we set out in February. Cost reductions are part of our ongoing strategy to right size the business and position it for sustainable growth. We continue to remain focused on reducing our operating and cash flow losses and achieving our targets for positive operating income and cash flow from operations. In the 1st three quarters, we exceeded our targets and reduced R and D expenses by $33,100,000 compared to a full year target reduction of approximately $25,000,000 In the same period, we reduced overall sales and marketing expenses by $38,200,000 including $19,000,000 in working marketing compared with a full year reduction of $40,000,000 which included a decrease in working marketing of approximately $20,000,000 As Gary noted, including our most recent workforce reduction, we have reduced our headcount by approximately 560 or approximately 50 percent versus year end 2023. Turning to operating income.

Speaker 3

For Q3, we reported operating income of $15,100,000 compared with an operating loss of $40,600,000 in the year ago period. For the 9 month period, we reported an operating loss of $73,100,000 compared with an operating loss of 153 point $4,000,000 Please note that these 2024 figures include the $13,500,000 benefit from the IP litigation settlement during the Q3. 3rd quarter non operating expense was 12 point $5,000,000 reflecting interest expense and the impact of fair value accounting associated with our term loan. This was partially offset by interest income on cash balances. Our Q3 tax expense was $1,500,000 and net income per share was $0.03 This compares with a Q3 net loss per share a year ago of $2.82 The $13,500,000 IP litigation settlement had a positive one time impact to earnings of $0.44 per share.

Speaker 3

We ended Q3 with 99 point $4,000,000 in cash and cash equivalents, a decline of $9,100,000 from the end of Q2. Restricted cash totaled $41,100,000 with $40,000,000 set aside for future repayment of the term loan and subject to limited rights for inventory purchases. Our 3rd quarter inventory levels reflect the seasonality of the business and preparations for the upcoming holiday season. At the close of the Q3, the company elected to draw down $40,000,000 of the restricted cash to purchase inventory. That cash was received in October and will be reflected in our 4th quarter results and under the terms of the loan agreement has a 5 month repayment period.

Speaker 3

In Q3, our cash used in operations was $10,200,000 compared with $21,700,000 in Q2 of this year $55,500,000 a year ago. 3rd quarter DSO was 48 days compared with 36 days in the year ago period due primarily to customer mix. Our quarter end inventory balance was $149,200,000 or 104 days, a reduction of $95,000,000 versus the prior year and reflects our continued focus on carefully managing inventory balances. As discussed on our Q1 call, we filed a shelf S-three registration settlement in February to enhance our liquidity and provide capital planning flexibility. The shelf offering includes an at the market or ATM offering program for the sale of the company's common stock.

Speaker 3

During the Q3, we sold 200,000 shares for total net proceeds of $1,400,000 As of the end of Q3, we had $79,600,000 remaining under the ATM program. In all, we have continued to make progress in managing our key working capital levers, while prioritizing careful management of our working capital efficiency. As Gary mentioned, we recognize that this is a challenging macroeconomic environment for consumers and that it's not likely to change before the end of the holiday shopping season, which will be shorter given the timing of Thanksgiving this year. With that in mind, we are providing our 4th quarter outlook and revising our full year outlook. For Q4, we expect revenue in the range of $175,000,000 to $200,000,000 and gross margin in the range of 24% to 27%, up from 18.9% in Q4 2023.

Speaker 3

Operating loss is expected to be in the range of $31,000,000 to $22,000,000 and net loss per share is expected to be in the range of 1 $0.50 to 1 point $2.0 per share. Our outlook reflects seasonal increases in promotional and marketing expenses, particularly as we plan for the anticipated 2025 rollout of new products. For full year 2024, we are lowering our guidance as a result of persistent headwinds in the consumer market and ongoing competitive challenges. We now expect revenue to be in the range of 6 $85,000,000 to $710,000,000 and gross margin in the range of 25% to 26%. We are targeting full year operating expenses in the range of $274,000,000 to 2.70 $6,000,000 or approximately 39% to 40 percent of revenue.

Speaker 3

The anticipated decrease from full year 2023 primarily reflects previously announced efforts to align our cost structure more closely with near term revenue expectations, along with the additional workforce reduction this quarter. We anticipate full year operating margin of approximately negative 15% to negative 13%. From a cash perspective, we continue to make incremental progress in improving our cash used in operations. Excluding the Amazon termination fee received in Q1 2024, we are expecting a significant improvement in cash flow in the second half of twenty twenty four relative to the first half of the year. In terms of other notable modeling assumptions for 2024, we anticipate other expense of around $38,000,000 including approximately $14,000,000 in net interest expense and $24,000,000 in estimated fair value adjustment associated with our term loan and full year tax expense of approximately $3,000,000 driven by our foreign jurisdiction.

Speaker 3

We anticipate a share count of approximately 29,600,000 shares exclusive of any additional issuances under our ATM. As a result, we expect a full year net loss per share in the range of $4.91 to $4.60 Our business remains minimally capital intensive and we now expect full year capital spending to be less than $1,000,000 As a reminder, we manage our business on a full year basis and continue to encourage investors to focus on our annual targets given that the timing of orders is challenging to forecast even under ideal condition. Large orders that shift from 1 quarter to the next can cause material fluctuations in our quarterly growth rates and cash flow performance. Additionally, our revenue expectations for the remainder of the year contemplate a euro exchange rate of 1.10 and a Japanese yen exchange rate of 1.50 to 1.55. Looking further ahead, while we are continuing to be cautious about the macroeconomic environment, we are expecting to return to year over year organic top line growth for full year 2025 as we introduce new and revitalized products.

Speaker 3

We believe the second half of twenty twenty five will be stronger than the first half of the year as our product lineup ramps up. Our Q1 results will reflect a transitional period for our product line. It's important to note that as we continue to execute on our restructuring activities, we expect to be in a strong position to leverage a significantly improved margin structure along with anticipated revenue increases in 2025. Additionally, please note that we will be participating in the Raymond James TMT and Consumer Conference on December 9 in New York as well as the Needham Growth Conference in January. Conference details will be announced by press release and posted to our Investor Relations website and we hope to see you at one or both events.

Speaker 3

With that, I will turn the call back over to Gary.

Speaker 2

Thank you, Julie. Before opening the call up for questions, I want to thank our dedicated and talented employees who are working harder than ever to support our ambitious objectives during this period of turnaround and change management. I'm proud to be leading this team. Their dedication and pride in the Irobot brand are evident in everything that they do. In closing, we are mindful of the market and operational challenges ahead and believe our actions will elevate Irobot's overall performance and ultimately generate long term growth and shareholder value.

Speaker 2

We will now open the call to questions. Operator, please go ahead. Thank

Operator

you. We'll hear first from Mike Latimore at Northland Capital Markets. Please go ahead.

Speaker 4

Hi, Craig. Thanks. Yes, good morning. Hey, Mike. Yes, Julie, nice working with you and best of luck in here, whatever new venture you pursue.

Speaker 3

Appreciate that. Thank you.

Speaker 4

Great. And then on the quarter, so the gross margin was very strong, nice improvement there. I guess since you're in that kind of low 30% range and that's before some of these new products out, is it fair to assume that gross margin should be in the 30s 25

Speaker 3

So Mike, we're very pleased with the steady progress that we're making through 2024 on our gross margins, and we expect that we will be launching new products that will continue to benefit from that stronger margin profile. That said, while we offered some color on 2025, we aren't providing explicit guidance on 2025 until we're a little further along in our process and likely associated with the announcement of our Q4 results.

Speaker 4

Got it. Fair enough. And then you did give some color on growth expectations for 2025. I just wanted to clarify, did you say you expect growth to return in the second half of twenty twenty five or you expect the year to have growth overall or can you just clarify the growth expectations you outlined?

Speaker 3

Sure. So what we said in terms of 2025 is that, although we are cautious about the macroeconomic environment, we expect to return to year over year top line growth for the full year of 2025. And we believe the second half of twenty twenty five will be stronger than the first half as our product lineup ramps up.

Speaker 4

Got it, got it, got it. Very good. And I guess just last one. You talked about maybe market forecast suggesting an improved market in 2025. Can you just provide a little bit more detail on kind of what drives that improvement from a broader standpoint?

Speaker 2

Yes. I mean a couple of data points. Primarily as you see in EMEA with the launch of premium multifunctional docs, they're seeing aggressive double digit category growth. And that's supported by many new products. And we're not yet participating and we plan to be in full effort next year.

Speaker 2

So we're starting to see the emergence of those product lines in the U. S. As well. And again, we plan to participate. And so we're seeing that trade up also give us category growth.

Speaker 2

And then secondly, EMEA is seeing growth. They didn't really have a huge pull forward in the pandemic time period. And if you actually look at the U. S. In our particular segment, we had twice the index of like 21 volume versus 20 versus even the home floor category.

Speaker 2

So it's taken us a while to get that category and units back. And now we're seeing sequential declines in negative trends, which is giving us optimism that both the new products as well as that trend will give us growth next year. And that's based on our own projections, but also third parties that we subscribe to.

Speaker 4

Okay. All right. Thanks a lot and best of luck.

Operator

We'll hear next from the line of Jim Ricchiuti at Needham and Company.

Speaker 5

This is Chris Genga on for Jim. Thank you for taking the questions. Recognize you're not guiding to 2025, but just curious if you could elaborate on the extent to which you expect the Essentials line to grow the share of mix and how you're thinking about the impact on gross margins as Essentials becomes a larger part of the portfolio?

Speaker 2

Sure. As we've seen, part of the gross margin improvements is due to our remix of some of these products. And our entire lineup next year will be margin accretive to the products that they're going to replace. The Essentials line is just one of those components. And we expect to actually have newer products, even enhancements of that variation that's in the marketplaces now, as I mentioned, within improved features and functions.

Speaker 2

So that will just be one of many products that starts to get into the mix next year as we see gross margin improvement.

Speaker 5

Great. How would you characterize conversations that you're having with customers that might have stepped back or curtailed purchases during the Amazon process? Are you making headway there? And just curious if you could update us on anything

Speaker 1

there?

Speaker 2

Yes, sure. Discussions are ongoing and we actually have very positive relationships with all of those partners. Our main goal is to get back into retail everywhere. Actually, we do have some form of distribution and relationship with every retailer who left us. We have upcoming line reviews that will determine the full breadth of our ability to secure permanent and expanded retail distribution.

Speaker 2

And we're really at the we're trying to tie into those retailer set dates and many of them set for the holiday season. So more to come in next year as we have these discussions. But so far everything about our new product line has been very positive. And as I said, we have positive relations with all the retailers who left us.

Speaker 5

Great. Thank you very much.

Speaker 3

Thanks, Chris. Thank you, Chris.

Operator

And we have no further questions from our audience. I'd like to turn it back to Mr. Gary Cohen for any additional or closing remarks.

Speaker 2

Thank you again for joining us today. This concludes the conference call. Carrie and I look forward to seeing many of you at upcoming investor conferences that we will be attending in the future. So thank you and have a great day.

Operator

Ladies and gentlemen, this does conclude today's teleconference and we thank you all for your participation. You may now disconnect your lines.

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