iRobot Corporation

Thank you for standing by and welcome to the 3rd 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, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Andrew Kramer, Vice President of Investor Relations. Thank you. Please go ahead, sir.

Thank you very much, Operator. Good morning, everybody. Joining me on today's call are our robots chairman and CEO, Colin Angle, and Executive Vice President and CFO, Julie Zeiler. 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 it was 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 third quarter 2021 financial results press release we issued yesterday, which is available on our website at iRobot.com. Also, unless stated otherwise, the third 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 third quarter of 2020. For today's call, our agenda will be as follows. Colin will briefly cover the company's quarterly financial results, review important strategic milestones, and outline our expectations for the remainder of 2021. Julie will review our third quarter results in detail and offer additional insight into our 2021 guidance. Pauline 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 Angle.

Good morning, and thank you for joining us. We enjoyed a strong third quarter performance while executing on our plans and navigating a stressed and fragile supply chain environment. We generated third quarter revenue of $441 million, an increase of 7% over the prior year, and ahead of our plans entering the quarter. Our revenue performance benefited from the timing of orders that shifted from Q4 into Q3. A combination of higher than anticipated revenue, modestly better gross margins, and prudent spending enabled us to deliver third quarter operating profitability of $48 million and EPS of $1.67. We've been pleased to see that demand for Roomba has remained healthy. Revenue grew in each of our major geographies, led by 15% expansion in EMEA, 5% in the US, and 2% in Japan. Roomba robots occupied eight of the top 10 best-selling RBC models in the US, six of the top 10 in EMEA, and seven of the top 10 in Japan. The excellent reception from retailers and consumers of our newest robots underpinned solid 14% growth from the mid and premium tiers of our portfolio. Direct-to-consumer revenue grew 13%. We are seeing existing connected customer revenue trend very favorably, both in absolute dollars and as a percentage of our total revenue. Overall, growth robot ASPs grew 3% versus the same period last year, while units shipped were relatively unchanged. We finished Q3 with over 12.5 million connected customers, an increase of 60% from the same period last year. Over the past several months, we made important progress on executing our strategy to drive innovation and differentiate our products, build stronger relationships with our customers around the world, and nurture value with them. In September, we introduced the latest upgrade to our Genius Home Intelligence platform, along with the Roomba J7+, our first robot designed with genius from the inception. I'll spend more time on this milestone in a minute. In October, we expanded our iRobot Select subscription service to include the Roomba J7+. iRobot Select is now scaling quickly in the U.S., while its counterpart in Japan, the iRobot SmartPlan, is also enjoying strong growth. Overall, we ended Q3 with nearly 50,000 global subscribers. with approximately 40% of these customers in the U.S. Since launching iRobot Select a year ago, we've accelerated the pace of adding new subscribers from dozens per week to hundreds per week to over 1,000 customers per week. Last week, we announced a new partnership with Bona to sell their hardwood and hard surface floor cleaning solutions alongside our BravaJet M6 robot mop. This relationship underscores our ongoing commitment to provide our customers with high-value accessories, and highlights the opportunity to further expand overall accessory sales, which are up 33% for the first nine months of the year. We also continue to make good progress in moving our new CRM and related digital marketing tools and technology into production. With the implementation of new systems for our customer care teams, we are increasing call center productivity and effectiveness, which in turn is enabling us to optimize costs, and raise overall customer satisfaction. Looking ahead, our long-term success will be anchored around our ability to elevate our value proposition to consumers around the globe and further differentiate our robots in a competitive marketplace. Accordingly, I'd like to spend a moment outlining why the innovation within Genius 3.0 and the J7 Plus is so critical. We see consumer robotics following a similar path personal computers and cell phones, in which the software that powers these products ultimately becomes the primary driver of consumer buying behavior. Genius is critical to our ability to extend our technology leadership and ensure that Roomba and Brava remain the top floor cleaning robots with customers worldwide. With the newest version of our Genius platform, we've taken a major leap forward in how we apply AI machine learning and home understanding. Powered by genius, Roomba J7 Plus takes the time to understand your cleaning preferences, learn your cleaning rules, ask for and respond to feedback, and remember how to react in the future. It even recognizes and avoids cords and pet waste. We believe so strongly in our precision vision navigation technology to identify and avoid solid pet waste that we will replace any Roomba J7 Plus that fails to live up to our pet owner's official promise. It's exciting to see that the superior intelligence of our robots is starting to emerge as a key differentiator in the marketplace. As we move forward, we plan to continue enhancing genius in ways that are aimed at enabling our customers to precisely direct where, when, and how our floor care robots clean while seamlessly integrating our products into their lifestyles. Many of the newest features and functionality within Genius are unique in the marketplace, thereby enabling us to deliver a very satisfying cleaning experience that we believe will increase the likelihood that our customers will remain loyal to iRobot over the long term. And Genius is more than a robot intelligence system. It is a home intelligence platform. We explicitly refer to it that way because our vision for iRobot extends beyond robot floor care. Over time, we expect that Genius will support our ability to build out a larger ecosystem by entering new adjacent robotic and smart home categories. Before we discuss our outlook for 2021, it's important to remember the wide range of challenges we've been navigating and the impact they've collectively had on our anticipated financial performance. More specifically, at the time of our Q2 call, we called out the following developments. Semiconductor chip shortage left us unable to fulfill a significant level of anticipated orders in the second half of 2021, and we adjusted our top-line outlook accordingly. In addition to scaling back our top-line ambitions, we also began implementing a range of cost-security actions to mitigate approximately $55 million in higher-than-expected costs associated with sourcing raw materials, procuring integrated circuit componentry, componentry necessary to produce our robots and shipping our products. Since our Q2 call at the end of July, we have continued to manage through component and availability challenges. We also are contending with longer shipping timeframes, delays in shipping, and other related logistical issues that further threaten our ability to expeditiously fulfill anticipated Q4 orders. Given these dynamics, we have refined our FY21 revenue outlook range to be from $1.555 billion to $1.59 billion. Our FY21 expectations for operating income and EPS have changed meaningfully since our Q2 call in late July. Beginning in early August and continuing through September, oceanic transport and air freight costs have escalated beyond what we had contemplated in July for the second half of the year by approximately $13 million. We're taking steps to limit the impact of these higher costs by further optimizing our second half channel activities, thoughtfully adjusting our hiring plans, and refining our working media and limiting other discretionary spending. In addition to incrementally higher shipping costs, our updated 2021 outlook factors in recent developments on the tariff front. Up until earlier this month, we were optimistic that we would be granted Section 301 tariff relief at some point during the second half of this year. This view is based on bipartisan activities to restore the tariff exclusion process, including legislation that was passed by the U.S. Senate in June to reinstate tariff exclusions and extend a retroactive refund for any tariffs paid this year. While we were pleased that the U.S. Trade Representative recently restarted the targeted tariff exclusion process for Section 301 duties, the current process is unlikely to be finalized and implemented before the end of this calendar year. Additionally, While we believe we have a compelling case to have our exclusion reinstated, any exclusion granted under the current rulemaking would only refund tariffs paid since October 12, 2021, rather than from the start of 2021. We remain actively engaged with key stakeholders in Washington to advance our positions. With the tariff exclusion no longer likely for the year, our full year outlook adds $42 to $43 million back into our cost structure. As a result, we now expect 2021 operating income in the range of $36 to $55 million, with EPS ranging from $1.15 to $1.74. Had the tariff exclusion been granted for this year retroactive to January 1st, our EPS performance would have been $1.24 a dollar 27 higher and within expectations we set at the end of july although this development further depresses our 2021 earnings performance we believe that taking any additional material cost reduction activities would substantially impair our ability to execute on our strategy over the coming quarters and derail our ambition to drive long-term value creation we move forward focused on successfully closing out 2021 while also advancing our plans for 2022 and beyond. We're very excited about the opportunities that lie ahead, and I will share some additional perspective on 2022 in just a few minutes. But at this point, I'll turn the call over to Julie for her financial review.