iRobot Corporation

Good day, everyone, and welcome to the iRobot first quarter 2021 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.

Thank you, Tiffany. 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 margin, non-GAAP effective tax rate, 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 first quarter 2021 financial results press release we issued last evening, which is available on our website at www.iRobot.com. Also, unless otherwise stated, the first quarter 2021 financial metrics, as well as financial metrics provided in our outlook that we reference on today's conference call, will be on a non-GAAP basis only, and all historical comparisons are with the first quarter of 2020. In terms of the agenda for today's call, Colin will briefly review the company's quarterly financial results, discuss major strategic accomplishments and related progress, and share his perspective on our outlook into 2021. Julie will detail our first quarter financial results and offer insight into 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 Engel.

Good morning. Thank you for joining us and happy Star Wars Day. 2021 is off to a very good start. Our first quarter revenue of $303 million grew 58%. which we converted into operating income of 15 million and operating profit margin of 5% and EPS of 41 cents. We believe that our first quarter revenue growth demonstrates that our value proposition continues to resonate with consumers around the world. We generated strong top line growth in each major geographic region as we benefited from stronger than expected demand from our distribution partners in EMEA. and vibrant retail orders in North America, including certain orders that were previously anticipated in the second quarter. These dynamics were complemented by another quarter of triple-digit growth in our direct-to-consumer channel. Based on our strong Q1 performance and favorable consumer demand tailwinds, we see continued growth ahead, and we have raised our full-year revenue outlook. We also reaffirmed our 2021 profitability and EPS expectations as we have adjusted our spending plans to offset expected gross margin pressure from transitory supply chain challenges. As we move forward, we are optimistic about our potential to deliver upside to our updated 2021 targets. I'll discuss our outlook in more detail shortly. But first, I'd like to highlight our progress in executing each element of our strategy. As a reminder, our strategy remains focused on driving greater customer engagement in ways that lead to more customers transacting directly with us more often. The first element of our strategy is to differentiate the iRobot experience for our customers. This means continued investment in AI, home understanding, and machine vision technologies so that our floor cleaning robots can be tightly integrated into the customer's lifestyle and clean with unprecedented levels of thoughtfulness, reliability, control, and support. We are pleased with our current progress on these fronts. During the first quarter of 2021, we upgraded our iRobot Genius home intelligence platform, adding several compelling new features, including estimated clean time, which helps customers know when a cleaning job may be finished, and clean while I'm away, which uses a smartphone's location services to tell the robot to start cleaning once you leave the house. Unique functionality of our genius platform is helping drive sales of our mid-tier and premium robots. By pushing innovation across more of our product line and making certain price adjustments, we are reinvigorating the mid-tier of our portfolio and generated strong first quarter revenue growth from these robots. We believe that solid execution on this element of our strategy played an important role in enabling Roomba to occupy seven of the top 10 best-selling RVC models in the US, EMEA, and Japan in the first quarter. The second element of our strategy is to build stronger, more enduring consumer relationships. Our connected customer base grew by 74% over 2020's first quarter, to 10.7 million customers who have opted in to our digital communications. It has also been gratifying to see how the high-value features and functionality within the Genius platform are delighting our customers. As iRobot's customer community expands, we are enhancing all points of the consumer's journey with us from the moment they purchase a product from us and then unbox it to when they complete their first cleaning mission and at various points over the months and years that follow. The third strategic pillar is nurturing the lifetime value of the customer relationships to expand existing customer revenue. This involves accelerating the replacement cycle, upselling and cross-selling, helping customers properly maintain their robots, and offering complementary products and developing new services, including new purchasing options to drive recurring revenue and higher gross margins. Since the start of the year, we have accomplished several important milestones. In early April, we introduced our new iRobot H1 handheld vacuum as a complement to Roomba and Brava robots. Many of you have heard me say that the future of vacuuming is a Roomba and a cordless vacuum for areas that robots can't easily clean. Now, our customers can get both products directly from us. We also made tangible progress with new services that provide customers with greater purchase protection and flexibility. Consumers who purchase their robots directly from us can also add extended warranty, and we've been very pleased with the attachment rates thus far. In addition, customer feedback on our iRobot Select robot as a service membership program has been very positive as these pilots have progressed. Moving forward, we plan to optimize the value proposition for iRobust Select and prepare to further scale this program, as well as advanced testing of a premium care-as-a-service offering. Overall, our direct-to-consumer sales grew by 146% in the first quarter and generated 12% of Q1 revenue. Accessories represent another opportunity to drive existing customer revenue growth through our D2C channel. We generated very healthy Q1 growth in accessory sales, which includes filters, rollers, batteries, bags, mopping pads, and mopping solutions. We expect to build on this momentum over coming quarters as we further upgrade the buying experience in iRobot.com and our home app and implement world-class digital marketing systems, tools, and campaigns that will enable us to present our customers with the right offers for the right products at the right time. With a strong Q1 behind us, we move forward with solid category momentum, a compelling value proposition, a fast-growing and rapidly maturing D2C channel, excellent retailer relationships, and healthy channel inventory positions. Our year-to-date sell-through growth through Week 15 is not surprisingly substantially better than the same period a year ago, which was dramatically impacted by the early days of the pandemic. Nevertheless, we recognize that it is still early in the year. The pandemic continues to weigh on the macroeconomic landscape and limit our visibility. Additionally, our business is not immune to the semiconductor chip shortage that is disrupting a wide range of industries. To that end, certain component suppliers recently notified us of potential volume limitations. We have already made good progress in our efforts to mitigate these constraints, although additional work lies ahead on this front. Taking all of these dynamics into consideration, we have raised our full year revenue expectations to the range of 1.67 billion to 1.71 billion. From a profitability perspective, the semiconductor chip shortage is resulting in higher costs for these components. At the same time, we are now grappling with rising costs for raw materials, air freight, and transportation. While these transitory costs are likely to remain elevated for the next few quarters, we expect that over time they will revert to more normalized levels as market forces adjust. Nevertheless, to offset the near-term impact on our anticipated 2021 gross margin, we have recalibrated our spending for over the coming quarters. As a result, we are able to reaffirm our 2021 operating income margin and EPS targets. With two-thirds of the year still ahead of us, we are optimistic about our potential for further upside, especially if current demand trends remain healthy and we successfully expand access to the semiconductor componentry, which will enable us to increase production beyond what's embedded in our current expectations. That concludes my initial commentary. I will now turn the call over to Julie.

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 first quarter of 2020 unless otherwise noted. As Colin noted, our Q1 performance represents a strong start to 2021. Total Q1 revenue grew 58% to 303 million and exceeded our original targets due primarily to stronger than expected orders from distributors in EMEA and U.S. retailers, including over 5 million in orders that were originally expected in the second quarter. Geographically, revenue grew 40% in the U.S. with international revenue up 70% due primarily to 74% growth in EMEA and a 53% increase in Japan. From a product mix perspective, Roomba robots and accessories represented 89% of our Q1 revenue mix, with Bravo making up the remainder. Since the start of the pandemic over a year ago, more consumers are buying our products online. We estimate that approximately 56% of total first quarter revenue came from e-commerce, which comprises our own website and app, dedicated e-commerce websites, and the online arms of traditional brick-and-mortar retailers. Our gross margin of 40.7% in Q1 was largely unchanged from the prior year's first quarter. Changes in pricing and promotion, higher air freight fees, and higher costs to procure certain components were essentially offset by leverage from higher sales, lower tariff costs, favorable channel mix, and the timing of one-time write-offs associated with pausing certain activities in the first quarter of 2020 that did not reoccur in the first quarter. Tariffs on RVCs imported into the U.S. from China were reinstated on January 1st, 2021. Taking advantage of the non-tariffed inventory that was in place at the end of 2020 helped us limit our first quarter tariff costs to just 3.4 million. Our gross and operating profit margin would have been 1.1 percentage points higher without tariffs. First quarter 2021 operating expenses of 109 million increased by 17% and represented 36% of revenue. The increase primarily reflects higher personnel cost expenses and increased working media spending to drive sales growth. Our Q1 2021 operating income was 15 million or 5% of revenue. Our Q1 2021 effective tax rate was 19.2%, which was in line with our plan. Our net income per share was 41 cents. We ended Q1 with $501 million in cash and short-term investments, an increase of $17 million from year-end. The increase primarily reflects the company's fundamental operating performance plus favorable changes in working capital. It should also be noted that the reduction in short-term investments since the end of 2020 primarily reflects the sale of our Teladoc stock early in the quarter once the restriction on selling those shares lapsed. First quarter DSOs were 20 days, a two day increase against the same period one year ago. Q1 ending inventory was 233 million or 118 days compared with 147 million or 118 days at the same time last year. With the quarterly review complete, let's move on to our 2021 outlook. As Colin outlined, we now expect 2021 revenue in the range of 1.67 to 1.71 billion. Our updated outlook assumes very strong sequential growth, which implies a split between the first and second halves of 2021 that approaches our historical 40-60 split. As a reminder, our revenue expectations contemplate yen and euro exchange rates roughly in line with the current rates, plus or minus 5%. Colin outlined several recent developments involving our supply chain that are resulting in higher than expected costs, including constrained availability of semiconductor componentry, rising raw material costs, and increased air freight and transportation fees. In addition, we expect slightly higher 2021 tariff costs in the range of $43 to $45 million. As a result, we now expect a full year 2021 gross margin of approximately 39%. We anticipate a Q2 gross margin that is in line with our full year target, which reflects the timing of promotional activities as well as incrementally higher supply chain costs. Many of the other factors shaping our 2021 gross margin are unchanged. Since the pandemic began, our operations organization has been outstanding in keeping key initiatives on course while moving with urgency and decisiveness to address unanticipated supply chain challenges. Our plan to substantially increase our production in Malaysia over the course of this year is progressing well, even with a tight labor market. We are also fortunate to have a strong balance sheet that will help us secure longer lead time and increasingly scarce componentry. In terms of our 2021 operating costs, we have adjusted our full year spending plans to offset the anticipated gross margin pressure. We are now targeting full year operating costs in the range of 535 to 555 million or approximately 32% of sales. As a result, we still expect operating profit margin of 7% with anticipated operating income between 110 and 120 million. While we expect relatively nominal increases in our Q2 R&D and G&A spending versus first quarter 2021 level, We plan to significantly ramp up our Q2 sales and marketing activity as we continue to invest in scaling our D2C operations and activate our working media programs to support major holiday and other seasonal events. Although we expect our Q2 operating profit margin will decline from the first quarter, we anticipate that the substantially higher second half revenue will support a meaningful improvement in our profitability in the second half of the year. In terms of other major modeling assumptions for 2021, we now expect other expense to be between 2 and 3 million. And we still anticipate an effective tax rate ranging from 18 to 19%. We still expect our full year EPS to range from $3 to $3.25 with an anticipated diluted share count of approximately 29 million shares. We continue to expect our 2021 capital spending to be in the low $50 million range. On the use of capital front, our previously authorized $200 million stock repurchase plan had 175 million available entering the second quarter. Earlier this month, we disclosed our intention to repurchase up to $50 million of our common stock under a 10b-5-1 plan that began on April 12th and is expected to end on or before September 5th. As a reminder, our 2021 expectations do not assume any repurchase activity. On the inventory front, we expect that inventory, both in terms of absolute dollars and DII, may fluctuate meaningfully from quarter to quarter over the remainder of the year as we navigate a challenging and fluid supply chain environment. In summary, Q1 was a good way to begin the year. We move forward focused on executing against our plans as we look to capitalize on the exciting opportunities we see and overcome the challenges that lie ahead. That concludes my commentary. I'll now turn the call back to Colin for some closing thoughts.

Thank you, Julie. We're at the midway point of a multi-year strategic plan to transform iRobot into a more defensible, more profitable business capable of sustaining solid growth with scaled channels and offerings to address the evolving needs of an expansive and expanding global customer base. Our recent accomplishments and progress from driving innovation in robotic floor care and introducing complementary cleaning products to offer extended warranties, advanced promising new high-value services, and selling more accessories all illustrate the importance of our investments to build out our e-commerce and digital marketing capabilities. They also highlight our potential to grow existing customer revenue, and further improve the profitability of our enterprise in the process. We expect more progress on these and other related fronts over the coming quarters. On our Q4 call in February, we shared our preliminary thoughts on what our business may look like in 2022. That view remains unchanged regardless of the short-term supply chain turbulence we've recently encountered. Over the past several quarters, we've made good progress in refining our long-term strategic plan As we finalize this activity, we have started our planning process for a virtual Investor Day event that we plan to hold later this year. We believe this will be an important opportunity for analysts and investors to fully appreciate why we are so enthusiastic about our prospects. We expect to finalize the timing for this event soon, and we'll share those details with you accordingly. That concludes our comments. Operator, we will take questions now.

Ladies and gentlemen, at this time, if you would like to ask a question, please press star then the number one on your telephone keypad. Again, that is star one. Your first question comes from the line of Asya Merchant with Citi Group.

Great. Thank you. Thank you, everyone. That was a very strong demand environment that you guys outlined, that you guys delivered and are outlining for the year. I had a few clarification questions. First, on the U.S. side, based on the results and the data that you provided, it seems like U.S., if I look at it, you know, not just last year because of the pandemic, but further out, kind of flattish relative to what it was in March 19. Are there any, like, inventory or channel dynamics here to consider here? And then as we look ahead into a more normalized environment in fiscal 21 as it relates to Prime Day and, you know, spring activities and promotional activities, how should we think about 2Q this year versus sort of last year when Prime Day, you know, was kind of shifted later into the year? If you can talk a little bit about that. the demand dynamics there. And then lastly, I know EMEA was very strong. I've heard some of my other companies also talk about the strength in EMEA. If you can talk to us about sell-in versus sell-through in EMEA in Japan, that would be helpful. Thank you.

Sure. Let me start. Relative to your inventory questions, what we said is that we're in a very good position, which would mean Superior from where we were a year ago when the pandemic was starting. Last year, we saw retailers drive their inventory to extremely low levels and then generally slowly built toward the back part of the year back to a more normalized position. We had a very strong Q4 last year, which allowed us to enter into Q1 of this year in a superior position than we did in 20, and we've been able to, based on the strength of the sell-through that we described, keep those inventory levels at healthy positions. So the question of is there any inventory fill or oversupply dynamics to consider for the balance of the year, I would say at this time we don't see that We don't see that we have an exposure either with any of our retailers from an inventory position. And I think that we also see with retail having weathered 2020, we don't see any unusual risks with channel viability. So I would say the answer to your first question is, Nothing out of the ordinary. We're very healthy in those dynamics. Relative to your comments around Prime Day, it is a choice of Amazon every year to either include or not include us in Prime Day, and we've been fortunate enough to have a strong history with Prime Day, but we have not announced what our situation is with Amazon and Prime Day at this point. It is, Julie, what do we know about timing on Prime Day? I think it would happen at a more normal time, but is the expectation. So that would mean were it happening, selling would happen in Q2. Of course, last year, we did have some selling for Prime Day in Q2 as well.

And then, Asya, as you know, I think that we always work hard to make sure that we find balance over time between sell-in and sell-through. As we mentioned in our prepared remarks, through week 15, we're seeing very solid global sell-through, particularly driven by the U.S. And overall, as we look forward to Q2, We expect strong sequential growth. We have to remember as we go through 2021, we're going to be comping an unusual 2020. And so as we look to make sure that we're continuing to build on the customer demand that we're seeing, a lot of that is going to normalize as we go through 2021. And 2022 will have a more

Typical comp.

Typical comp.

Okay. And if I may, one more on the accessories side. You know, how should we think about contribution from accessories into kind of, you know, what you're expecting here, you know, high teen 20% kind of growth? What should we kind of think about accessories more in 21 and as then you ramp up into the outer years?

I think at this point we'll just give some high-level color on that answer. But as our direct-to-consumer business grows, the opportunity to drive more accessory sales is almost outpacing the growth in D2C. And so it is a definite tailwind on revenue growth and financial performance. so that as we look forward, we see the increase in DDC definitely accelerating the contribution of accessories to our performance.

Great.

Thank you.

You bet.

Your next question comes from the line of John Babcock with Bank of America.

Good morning, and thanks for taking my questions. Starting out, you talked a little bit about component shortages as well as inflation in raw materials, freight, and transportation. On that point, I was wondering if you could talk about your relationship with the contract manufacturers and also provide some color on how your contracts with them are structured, just so we can get some sense on how this might roll through results.

So we've got long-term relationships with our contract manufacturers and definitely a strong partnership to work through these challenges. You know, I think that what made the current situation unusual was component suppliers decommitting components that we had expected and having to go into the open market and do spot buys, which we did effectively, although that was a driver of additional costs. So that the impact, the financial impact of that is included in the guidance that we have given. This gets better as we are able to go and secure longer-term commitments and take more, a slightly higher inventory position on some of the components that have been impacted and will lead to a normalization of cost as we roll the clock forward. It's why our expectations around the color for 2022 remain unchanged. And the guidance that we gave for 2021, we are confident in raising our revenue guidance and covering the incremental costs of raw materials and transportation within our previously given operating income guidance.

Gotcha. And might you be able to talk about some of the raw materials where you're seeing the most inflation?

You know, just resins are up, you know, 50% in some situations. It is a, there's definitely a disruption to supply chain that is temporal, that will take some time to work through, but we do expect it to normalize back to traditional levels at this point. So, you know, that's one significant example.

That's great. And then also, you know, going back to kind of the last set of questions, I was just wondering if you might be able to talk about some of the key trends that are driving that strong growth in the MS

I think that robot vacuuming continues to grow as the method of floor care for the future. This is something that we've seen happening and continues. It's Roomba and Hanvac is increasingly how people think about cleaning their floors. And so we still have relatively low household penetration. There's still strong opportunity for continued growth. And we are at a phase of consumer adoption where, you know, the majority of consumers are now realizing that this is not a fad. This is the new normal. And I think that realization was accelerated last year through the spending more time at home and the work from home changes in consumer behavior. So, you know, I think that this is a vibrant industry at an exciting time in its growth.

Okay. And then I just want to, you know, squeeze in two other quick ones here. You know, first, there have been some proposals in the U.S. about changes in the corporate tax rate as well as the global minimum tax. And I was wondering if you might be able to just quickly talk about how that might impact iRobot. And then also, I think on the last call, you mentioned expecting 2022 earnings to be above 2020 levels and just wanted to see if that is still the case.

Yep. So I'll take that one, John. Obviously, some of the what's being written now about potential changes in the corporate tax rate are things that we are watching closely. I have nothing new to add to that. And as, you know, as that evolves, we'll continue to look at that and its implications. When we look forward into 2022, the color that we've provided is that, you know, Underpinned by our expected continued healthy market growth and the fact that iRobot will benefit appropriately from that continued growth, we expect that we'll see a number of things start to turn in our favor. Gross margin headwinds turning into tailwinds. Continued calibration of our spending and driving operating leverage. And so that we expect our OI to be above 2020 levels and substantially stronger EPS performance. Those things all, which we talked about during our Q4 call, are all things that we continue to feel confident in today.

Thanks for that.

Your next question comes from the line of Mike Lattimore with Northland Capital Markets.

Great, yeah, thanks a lot. Really strong growth recorder there. In terms of the supply shortage, did that influence your revenue guidance much, or is it more just on the margin side?

It certainly influenced both, and we alluded to there being some additional juice that may be in our financial performance, assuming we can unlock it through continued strong demand and continued ability to grow our supply. In a constrained or an unfavorable supply situation, companies are less able to meet growth demand because of lead time, componentry lead time, which have been substantially growing over the past few months. Assuming that we can find the supply, we believe the demand is there and the growth in revenue guidance work signaling today represents the best view we have at this moment in time where we're admitting that there is some uncertainty around availability of incremental product that hampers our ability to lean even further forward. So this is where we think we are today. But, again, the demand is there. We're very excited with our position and how customers are responding to our product. And, you know, it's also early in the year for us to be touching our guidance at all. So I think that there's a strong message in the fact that iRobot just increased revenue guidance in the Q1 call, which is not something we have done frequently in our history.

Great, great. Makes sense. And then on EMEA, was the strength there largely related to launching the I3 in the region or this combo product or channel activity? I mean, a little more color there would be great.

It was largely demand up and down our product lines. The I3 definitely was a contributor to it. But, you know, I think that Europe is in just a very healthy market from a demand perspective and is catching up with North America and Japan. which sort of where robots caught on a little bit earlier. Okay.

Okay. And then just last time that I think it's 10.7 million consumers that have opted in, you know, what, what percent of those are actually buying something, you know, not, not, not a room or a private, but like an accessory or warranty, that sort of thing.

It's a great question and something we look forward to giving more color on in the future. We're sort of – as we are rolling out our direct program, we wanted to start releasing new statistics to our analyst and investor community, the first being what is the size of the connected pool. We'll be talking about existing customer revenue and some other key metrics in the future as we continue to implement the tools required to accurately measure and communicate those. But great questions. Stay tuned.

Okay. Thank you.

Your next question comes from the line of Ben Rose with Battle Road Research.

Good morning. Question for Colin with regard to the Roomba combo. I was curious to know if you could give some additional color in terms of its performance in the quarter and, in general, your thoughts about combination robots at this point.

The Roomba Combo is an entry-level robot that combines mopping and vacuuming capabilities and is available in very, very limited markets where we think that tactically it makes sense. iRobot is very committed to the fact that the premium and the best way to clean your floor is to separate vacuuming and mopping functionality. Just the physics of both the cleaning process and getting the pad up to the edges and into the corners where the most dirt is substantially from a two-robot solution. And as evidenced by strong Brava performance, our customers are agreeing with our strategy. So it's a tactical play. There are some markets where, particularly at the lower price points, we find ourselves competing against products that have that two-in-one where people are are willing to accept a lower level of clean, willing to accept more involvement in deciding before every mission whether you're going to mop or vacuum and what parts of your home are you going to do this. Again, it's a little anathema from our vision of how robots should care for your home. but it is a useful tactical play.

Okay. And just to follow up, I'm intrigued by the progress in the Genius Home platform and wanted to know, I guess, strategically, whether you have thoughts about perhaps opening that up to other companies' products to participate in the benefits of the platform.

So we already integrate with other companies' products. And so you're starting to see that happen already. I think that it's very exciting. The growth and the utilization of things like Clean While I'm Away, particularly with work from home, just finding a good time to clean is a real challenge for many of our customers. And so the idea of the cell phone has left the building, time to go clean. is a compelling proposition and we've integrated with other devices in the home. So we're very open to it. We think that as we move forward, you're going to see iRobot driving more thoughtfully and automatically configured opportunities for the home to do more in service of the customer. And the examples that we have rolled out and are beginning to see adopted are emblematic of that direction. So this is, I guess that's a long way of saying yes.

Okay. Okay, thanks very much. That's helpful. You bet.

Your next question comes from the line of Jim Ricciuti with Needham.

Hi, this is Tyler Bailey. I'm filling in for Jim. Thanks for taking my question, and congrats on the strong demand this quarter. Just wondering, you kind of mentioned various headwinds on supply chain, transportation, freight, and obviously the component shortages. Just wondering if you might be able to opine and kind of parse out the impact of each on margins.

Yeah, so Tyler, this is Julie. I'll try to answer your question. And we've, as we've looked at a number of these things, we're giving our best aggregated view of what we think those incremental costs look like. And certainly, you know, any one individually, perhaps, you know, you'd have a way through, but when you start to look at them all together, It's a headwind for us as we look to the rest of the year. You named the big one. So as I look at as a percent of our total, the increased raw material costs are significant, as are roughly the same, the increased transportation, which we would expect over time to normalize. Then I'd point to the scarcity of some of the componentry and our need to do spot buys out in the market. And then finally, the fourth piece would be air freight. Those four things make up the lion's share of the impact.

That's helpful. I appreciate that. And just, I guess, to follow up, you obviously mentioned you know, recalibrating some of your expenditures to adjust for some of those costs. Just wondering, are we going to see, I guess, the typical ramp up in quarter two, or should we, you know, I guess more I'm thinking of later half Q3, Q4 for those adjustments in spending?

Yep. So one of the things that we talked about in our prepared remarks was we do, well, if you look at our spending chart, Q1 to Q2, we would expect fairly nominal growth across both R&D and G&A. Sales and marketing does have substantial sequential growth planned, as it normally does associated with our promotional environment, the holidays that happen in the second quarter.

Okay, thank you. And then just one last question, you know, interested to hear a little bit more about, you know, the launch of the handheld. Curious, obviously, it's an extension, you know, towards sort of your existing customer base and sort of filling a need there. But you see, you know, from a, I guess, strategic standpoint, eating into any of the market share in the current, I guess, handheld vacuum market?

So launching the handheld was strategic for a few reasons. The first, it was the first example of using a new capability with our direct-to-consumer engine, so that selling an additional product directly to our customers, and so that we were testing out the plumbing. It's something that we've talked about doing as a way of enhancing our existing customer revenue. It's also something that is a very logical adjacency given that the future floor care is a Roomba and a hand vac. It's a very high-quality premium hand vac, certainly not the flagship of iRobot artificial intelligence technology, but it's a strong performer for what it does. And I think that you should expect that over time, the learnings from launching this hand vac will pave the path for other types of product offerings and developing direct as an additional channel for new product introductions. We think that the product we're offering is very competitive and that we definitely hope that it can grow and be a legitimate performer in the hand vac market against its competitors. competitors. And so, you know, it's certainly not an anecdotal product that we just threw out there. We think it's strong and we can build on that category as a logical adjacency. That helps.

Yeah, that's great. Appreciate it. Thanks, Colin. Thanks, Julie.

Yep. You're welcome. And again, ladies and gentlemen, if you would like to ask a question, please press star, then the number one on your telephone keypad. Again, that is star one. We do have a follow-up question from the line of Asya Merchant with Citigroup.

Great. Thank you again. You know, given the component shortages that are not just specific to iRobot but across the industry. Some of the companies have talked about a more benign pricing environment, less promo pricing, and just given your strong balance sheets and ability to get components, et cetera, perhaps better than some of your peers. Can you talk a little bit about what you're seeing on a market share? Should we expect at the retail level to see iRobot gain share because of these dynamics? And how should we think about the limited promotional pricing on your gross margin guide for this year?

So I think it's difficult to predict the behavior of our competitors. In all markets, our major competitors are China-based manufacturers, and they have and are using slightly different chips than we have. And then in 2019, when tariffs came in, we observed our competitors were content to continue some of their promotional pricing and leave their prices where they were and operate under a different margin structure. So we built our year assuming that our competitors would remain aggressive and we would go and react as we have traditionally done, leading to the optimistic look that we have communicated today. So I think that we're planning for a competition to find ways of weathering this storm and we don't view it today as a strategic advantage in the marketplace. Time will tell, but I think that's the safe way of viewing it.

And I guess the other thing to underscore is, you know, we continue to believe that we have a very compelling value proposition as we look at our products and their ability to fit seamlessly into the lifestyle of our consumers. And so we will continue to focus our energy and effort on improving improving that overall user experience and ensuring in our promotional activities that we're explaining that effectively out to our customer base. We think that's the way to win long-term. Okay.

Thank you.

You're welcome.

And we do have a follow-up question from the line of John Babcock with Bank of America.

Hi, thanks for taking my follow-ons here. Just quickly, I was wondering if you might just be able to remind us how you're thinking about new product launches for this year. Obviously, you have the handheld vacuum, but I thought you also were talking about, you know, launching some other products. So if you can maybe help provide some, you know, rough color, recognizing you can't be too specific, you know, just around kind of where that innovation might occur.

Sure. So we have... Communicated that there are two new robots to come this year, and we haven't specified any details about what those products are. I would tell you anecdotally, I'm very excited to see what's coming, but I will have to leave it at that. But I guess I can say they're on track and unaffected by the supply chain challenges that we've talked about. So we've been able to mitigate the impact on these product launches. So it's all as per plan.

Okay. And then next question, you know, I was just wondering if you might be able to talk about what you're hearing from traditional retailers, you know, about the reopening here and how they're kind of thinking about it. And then also, how you are thinking about how consumers might adjust spending as we get more people vaccinated and hopefully at some point beyond the pandemic?

Well, definitely we saw a huge shift to online and e-commerce in 2020 and continuing through the first quarter of 2021. We talked about 56% of our revenue coming from e-commerce channels That's significantly up from something closer to 40% in 2019 when we had a 60-40 split. I think that we could see retail brick and mortar come back a bit, but certainly we would not expect a retreat to 2019 levels, more of a single-digit move over time as people get back to retail. We're pretty agnostic as to whether we're selling online or retail with the exception that we're very, very excited about the continued strong growth in our direct to consumer dimension of our business, which we're investing substantially in and enjoying improved gross margin and access to consumers. via that channel.

Okay. And then just my last question for the day, and I suspect it may not be much here, but I was just wondering if there are any updates on the litigation with Shark.

Not at this time.

Gotcha. All right. Well, thanks again.

All right.

At this time, there are currently no further questions in queue. I will now turn the call back over to Mr. Kramer for any closing remarks.

Thank you very much, Tiffany. Thanks, everybody, for joining us. We look forward to speaking with our shareholders and analysts over the coming days and weeks and seeing you at various conferences that we'll be participating in over in May and in June. So look forward to future engagements. And if you do have questions, feel free to ring Investor Relations. Thank you so much.

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.