iRobot Corporation

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the second quarter 2021 iRobot Corporation earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star, then 1 on your telephone keypad. If you require any further assistance, please press star, then 0. At this time, I would like to turn the conference over to your host today, Mr. Andrew Kramer. Thank you. Sir, please begin.

Thank you, Howard, and good morning, everybody. Joining me on today's call are iRobot 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 definition 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 second quarter 2021 financial results press release we issued last evening, which is available on our website at www.iRobot.com. Also, unless stated otherwise, the second quarter 2021 financial metrics as well as financial metrics provided in our outlook that we reference on today's call will be on a non-GAAP basis only, and all historical comparisons are with the second quarter of 2020. For today's call, our agenda will be as follows. Colin will briefly cover the company's quarterly financial results and then share his perspective on the primary issues shaping our revised outlook for 2021. Julie will review our second quarter financial results and offer additional insight into our expectations going forward. Colin will conclude our commentary with some closing remarks. After that, we'll open the call for questions. At this point, I'll turn the call over to Colin Engel.

Good morning, and thank you for joining us. We delivered solid second quarter results that were generally in line with the targets that we outlined for you in early May, as we navigated an increasingly challenging supply chain environment. We generated second quarter revenue of $366 million, an increase of 31% over the prior year. Our revenue growth was primarily driven by healthy demand from retailers in North America and from our retail and distribution partners in EMEA. We were pleased with this performance, considering a COVID-related disruption to shipping activities in southern China left us unable to fill $17 million in order at the end of the quarter. We converted our top line performance into an operating income of $9 million, an operating profit margin of 2%, and EPS of 27 cents. Our first half performance tells a very positive story, particularly as it relates to strong consumer demand for our products, as well as increased customer engagement. Roomba robots occupied eight of the top 10 best-selling RBC models in the United States, six of the top 10 in EMEA, and nine of the top 10 in Japan. For the seventh straight year, we participated in Amazon's Prime Day event. Once again, Amazon cited Roomba as one of its best-selling items. We generated solid 42% growth from the mid and premium tiers of our portfolio, which we believe demonstrates the appeal of our floor-cleaning robots that provide their owners with personalized control over where, when, and how the robot cleans. We also continue to expand our direct-to-consumer sales as reopening activities in the US and rising online advertising costs moderated this growth. Overall, we saw solid growth in the number of robots shipped and ASPs in our second quarter versus the same period last year. We finished Q2 with over 11.6 million connected customers, an increase of 67% from the same period last year. Customers are increasingly using our newest features like directed room cleaning. They are also increasingly using our AI-powered recommendations to clean by objects and adopting our new clean while I'm away capability using geolocation services on their smartphones. As we move through the second quarter, our commercial teams, retailers, and distribution partners were increasingly bullish about the second half of the year. especially given our plans to introduce two new Roomba robots and deliver another major upgrade to our genius home intelligence platform. Our new e-commerce and Martech systems will soon start moving into production, giving us the capabilities to expand existing customer revenue effectively and efficiently. Even after raising our top-line outlook in early May, we saw opportunity to exceed these targets. Unfortunately, the reality of the current supply chain environment is forcing us to tell a different story for the second half of the year. Quite simply, the supply side of our business is not currently able to keep pace with demand for our products. Since our call in May, we have seen further deterioration in our ability to source the requisite volume of semiconductor chips used to manufacture our floor cleaning robots. We are not alone in feeling the pain of the semiconductor chip shortage as it impacts a range of industries, from automobiles to medical devices to TVs, smartphones, and many other consumer electronics. Our robots rely on a wide range of integrated circuits, from lower-cost commodity-like devices to very sophisticated powerful processors. While there is tightness across the board, we have recently fielded calls from multiple chip suppliers who are now unlikely to fulfill their commitments to us, either in volume, timing, or both. These decommitments and pushouts will constrain our ability to fulfill all of the orders we anticipated during the second half of the year. Accordingly, based primarily on the assumption of lower unit volumes, we have reduced our 2021 revenue target to $1.55 billion to $1.62 billion, which still represents 8% to 13% growth over a prior year. This range is wider than usual, reflecting limited short-term visibility into the availability of certain semiconductor componentry. The impact of lower revenue on our anticipated profitability is compounded by having to increasingly source more semiconductor componentry in the aftermarket at a much higher price, as well as grapple with rising raw material and transportation costs. Against this backdrop, we are working diligently to carefully manage channel and product mix, adjust promotional activities, qualify new alternate suppliers, and optimize inventory levels. More specifically, with limited supply, we were working collaboratively with our strategic retailers in countries where our brand is strongest to support them, but we also take steps to optimize our second half promotional activities and direct to consumer sales. Additionally, we are evaluating potential price increases. We know consumers are excited about the way we continue to innovate, And with that in mind, we intend to defend our leadership position in the premium segment while also investing in marketing activities to help us bring our next generation Roomba robots to market later this year. We will also remain disciplined with our second half spending plans by recalibrating hiring activities and other discretionary programs. At the same time, we move forward committed to advancing our strategy by continuing to fund the initiatives we believe are necessary to emerge from the short-term turbulence as an even stronger category leader. As we balance cost austerity with investing in our future as a technology and category leader, we expect that our second half profitability will be aided by tariff relief. Between recently passed legislation in the U.S. Senate and bipartisan urging from representatives about the reinstatement of the tariff exclusion process, we now believe that it is more likely than not that iRobot will receive a tariff exemption. And as a result, we've incorporated this likely development into our updated 2021 outlook. With that said, it is inherently difficult to forecast precisely when or even if the USTR would reinstate exclusions to the China Section 301 tariffs and establish a new process for importers to apply for exclusions, since those activities are likely to be linked to the Biden administration's ongoing reassessment of its overall policy towards China. Based on our ongoing dialogue with policy makers and elected officials, we anticipate that an exclusion if reinstated would cover all of 21 at a minimum and could extend through the end of 2022. Julie will share more details on the specific financial impact of tariff release in a moment. Regardless of this potential positive development, diversifying our manufacturing footprint into Malaysia remains strategically important and we are making good progress on this front. We are now producing nearly half of our US-bound product out of Malaysia and remain on track to have Malaysia manufacturing at scale by the end of the year. Taking all these factors into account, we have also revised our operating income and EPS expectations. We now expect our 2021 operating income range from $80 million to $110 million, or 5% to 7% of revenue, with an EPS range of $2.25 to $3.15, which also factors in our recent and planned stock repurchase activities. While the changes to our full-year outlook are nonetheless disappointing, it is important, again, to emphasize that we believe the supply chain constraints and cost headwinds are temporary. Our operations teams are working diligently to preserve our supply chain resiliency. As a high priority strategic customer to many of our long standing chip suppliers, we continue to put longer term supply arrangements in place that not only support a revised near term volume requirements, but also position us to be at the front of the line when our partners begin increasing their output, which we expect will happen during the first half of next year. Just as important, although qualifying new suppliers is time consuming, we expect that these ongoing efforts will also help further increase our supply during this period. Although visibility is limited right now, we believe these activities will help lead to improved availability of components starting in the beginning of next year and steadily strengthen as we move into the second half of 2022. While our performance in 2021 is now expected to fall short of our ambitious targets, we remain optimistic about our revenue and EPS growth potential for next year. I'll share some additional thoughts on how we see 2022 evolving in just a few minutes. But at this point, I'd like to turn over to Julie for her financial review.