iRobot Corporation

Good day, everyone, and welcome to the iRobot fourth quarter and four-year 2020 Financial Results Conference call. This call is being recorded. At this time, for open remarks and introductions, I would like to turn the call over to Andrew Kramer of iRobot Investor Relations. Please go ahead.

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 Zeiland. 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 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 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 defined by SEC Regulation G, including non-GAAP gross margin, non-GAAP operating expense, non-GAAP operating income, profit and profit margin, non GAAP effective tax rate and non GAAP net income per share. We believe that our non GAAP financial results help provide additional transparency into iRobot's 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 fourth quarter 2020 financial results press release we issued last evening, which is available on our website at iRobot.com. stated otherwise, the fourth quarter 2020 and full year 2020 financial metrics, as well as financial metrics provided in our outlook that will be discussed on today's conference call, will be on a non-GAAP basis only, and all historical comparisons are with the fourth quarter of 2019 and full year 2019, respectively. In terms of the agenda for today's call, Colin will briefly review the company's financial results, discuss major accomplishments and share his perspective on our outlook into 2021 and beyond. Julie will detail our results for the fourth quarter and full year and share additional insights about our expectations going forward. Colin will conclude our commentary with some closing remarks. After that, we'll open the call to questions. At this point, I'll turn the call over to 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 team and our broader supply chain underpinned an excellent revenue performance more specifically fourth quarter revenue of 545 million grew 28 year-over-year with significant growth in all major regions worldwide. Our top line expansion resulted in an operating income margin of 6% and EPS of 84 cents. For the full year, we reported revenue of $1.43 billion and operating profit margin of 10% and EPS of $4.14, all of which surpassed our original targets at the start of 2020. Just as important, we believe the steps we took during 2020 are putting iRobot on a very exciting path to drive substantial value creation over the coming years. With that in mind, I'd like to briefly review the notable progress we've made to execute on our strategy, which at a high level is focused on increasing the customer's engagement with our products, thereby creating a broader range of opportunities for our customers to transact directly with us. The first component of our strategy is focused on differentiating the cleaning experience, and we are proud of our 2020 accomplishments in this area. The pandemic forced us to make tough choices about where and how we would invest, and we prioritized investment in software across our AI home understanding and machine vision technologies to ensure that Roomba and Brava robots can be tightly integrated into the customer's lifestyle and deliver unprecedented levels of thoughtfulness, reliability, control, and support. These investments are already resulting in new features and capabilities that are delighting customers. In August, we introduced version 1.0 of our state-of-the-art robot AI platform, iRobot Genius Home Intelligence. Genius is extensible across our entire portfolio of Wi-Fi connected robots. unlocking a range of new features and functionality that give users greater control over where, when, and how our robots clean. We expanded our lineup of intelligent self-emptying robot vacuum cleaners in September of 2020 when we launched the Roomba i3 series in the US. We've been very pleased with customer demand for this product, which was introduced in EMEA last month. During the fourth quarter, we introduced the Roomba Combo, our first two-in-one floor cleaning robot that consolidates vacuuming and mopping functionality. The product is now available in certain markets in Europe, where this capability appeals to value-seeking customers looking for a convenient solution to help with their everyday floor care needs. As we move into 2021, our innovation engine shows no sign of slowing. We expect to introduce two new Roomba robots this year, along with a wide range of exciting new digital features through upgraded versions of our Genius platform. We also took steps to aggressively defend our IP as we recently filed a new patent infringement action against Shark Ninja. Our success in differentiating the cleaning experience has enabled us to expand our premium robot sales over the past several years. Revenue for premium robots grew by nearly 50% in 2020, and represented 60% of total robot sales. Well, our average gross selling price has continued to trend upward. Just as notable in a year when overall adoption of robotic vacuum cleaners accelerated, we maintained our global leadership position in the RBC category. For the full year, we finished with eight of the top 10 best-selling RBCs in the US, six of the top 10 in EMEA, and seven of the top 10 in Japan. The second element of our strategy is focused on building stronger, more enduring relationships with the customer who ended 2020 with nearly 10 million connected customers who have opted in to our digital communications, up more than 80% over 2019. Having a substantial portion of our connected customer base elect to receive in-app notifications, and email speaks volumes about the tangible value provided by our floor cleaning robots. The ever-expanding range of digital features within our Genius platform is helping to ensure that customers get great value from our products. For example, we are seeing consistently high levels of utilization by our connected customers each month and robust engagement around new capabilities like directed room cleaning and creating a favorite cleaning routine. The third strategic pillar is oriented around nurturing the lifetime value of our customer relationships by accelerating the replacement cycle, promoting upsell and cross-sale deals, and adding new purchasing options that will ultimately lead to recurring revenue and higher margins. We believe that executing on this strategy will support greater revenue predictability and growth and improve our profitability. While it is still early days, we made considerable progress in this area over the past several quarters. We've continued to invest in making our website a desired destination for current and prospective customers. For example, during the fourth quarter, we enjoyed strong sales of an exclusive Roomba Brava bundle, added a financing option for our European customers, successfully scaled to support the busiest online shopping days of the holiday season, and gain valuable experience in moving with agility and creativity to increase traffic and drive conversion. As a result, our direct to consumer sales more than doubled in the fourth quarter and generated 11% of total 2020 revenue up from just 6% in 2019. We view our direct to consumer channel as a powerful compliment to our strong retail partners. We expect that this higher margin channel will grow to at least 15% of total revenue in 2021 and are optimistic that D2C revenue will exceed 20% of our total revenue by the end of 2023, even as we continue to enjoy growth with our retail partners. As we move forward, we believe that there are a number of attractive opportunities to increase existing customer revenue and amplify the benefits of growing our connected customer base. During the fourth quarter, we began conducting tests of new services that span extended warranties, robots as a service membership program, and a premium care and maintenance offering. The results thus far have been promising and we are optimistic that we'll begin commercializing these services over the course of 2021. We plan to test other offerings in 2021 that can further increase existing customer revenue and contribute to building a high margin recurring revenue stream. To effectively and efficiently grow existing customer revenue, we plan to accelerate investments that further enhance the buying experience on our digital properties and upgrade our digital marketing capabilities. We've selected our implementation partner and will continue to onboard the marketing and IT talent necessary to maximize the power of these tools and platforms. As we've discussed previously, we believe that these investments are critical for driving traffic, improving conversion rates, and increasing transactional velocity. We also believe that these instruments, in combination with our trusted position inside the consumer's home, will enable us to further expand existing customer revenue opportunities. While 2020 sell-through of RVCs accelerated well above prior year levels, Overall household penetration remains relatively low. We believe that the fluid often frenetic pace of day-to-day life continues to elevate our value proposition and product differentiation. As the benefits of robotic floor care become more widely appreciated and the home remains a central hub for everyday life, we plan to continue capitalizing on the many opportunities arising from the continued growth of our marketplace. In terms of our 2021 outlook, as outlined in the press release, we anticipate 2021 revenue growth ranging from 14% to 17%. We expect strong revenue growth to start the year, especially since we ended 2020 with retail inventory in a very healthy position. We believe that our success in continuing to drive solid top line expansion in 2021 will also help us fund investments into key areas of our business, and mitigate the impact of higher anticipated incremental costs on our 2021 profitability. More specifically, we expect that the reinstatement of tariffs will add approximately $41 to $43 million in incremental costs, while we will also absorb higher initial costs as we expand production in Malaysia. Additionally, our sales and marketing spend will increase by an incremental $20-plus million as we build out our direct to consumer infrastructure and bring on the additional headcount needed to operate it. As a result, we are targeting an operating profit margin of approximately 7% with EPS in the range of $3 to $3.25. Looking ahead, we are increasingly optimistic about our longer term prospects. We believe that our 2020 progress combined with executing on our plans in 2021 will set the stage for substantially stronger performance in 2022. We expect that the progress we make in 2021 to execute on our plans will enable us to move into 2022 with a more defensible business that is well positioned to sustain mid- to high-teen top-line growth. At the same time, we believe that the gross margin headwinds of 2021 will turn into tailwinds in 2022 as we achieve scale in Malaysia, minimize our tariff exposure, continue growing higher margin D2C sales, and increase fulfillment and supply chain efficiency. As we calibrate our spending to drive further operating leverage, we expect to drive 2022 operating profit margin above 2020 levels, which would in turn yield a substantially stronger EPS performance. At this point, I'll turn the call over to Julie. After her remarks, I will return to offer some additional closing thoughts. Julie.