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spk02: 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.
spk06: 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.
spk09: 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.
spk03: 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 third quarter of 2020 unless otherwise noted. We reported Q3 results that were generally better than we had expected at the start of the quarter. Total third quarter revenue grew 7% to $441 million. with the strong performance against our plans due largely to the timing of orders. Geographically, revenue grew 5% in the U.S. and 8% internationally, and EMEA and Japan increased 15% and 2% respectively. From a product mix perspective, Roomba robots and accessory revenue represented 90% of our Q3 revenue, with the remainder being Brava robot and accessory sales. We estimate that approximately 60% of total third 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 D2C revenue grew 13% to $40 million, or 9% of total revenue. Strong D2C growth in EMEA and Japan more than offset a modest decline in the U.S. We expect full-year D2C sales will represent 12% to 13% of total full-year revenue in 2021. Our gross margin of 37% in Q3 was better than expected by approximately 200 basis points, due primarily to favorable changes in promotional activity, timing of certain air freight costs that will now impact Q4, leverage on our fixed costs, and lower return rates. Compared with last year's third quarter, our gross margin declined by 11 percentage points. More than 60% of the decrease was due to tariff costs of $14 million and supply chain headwinds. The remainder was split between pricing and promotional activity, higher warranty expense, and unfavorable channel and product mix shifts. Third quarter 2021 operating costs of $115 million increased 8% and represented 26% of revenue. While we continued to fund key initiatives, we remained disciplined with our spending as we moderated working media, adjusted the timing of new hires and other personnel-related actions, and carefully managed discretionary spending. Our Q3 2021 operating income was $48 million, or 11% of revenue. Our third quarter tax rate was approximately 2%. which reflects changes in our full-year tax rate assumptions primarily associated with lower expected full-year operating income. Our net income per share was $1.67. We ended the third quarter with $248 million in cash and short-term investments, a decline of $168 million from the end of Q2. The sequential decrease primarily reflects the $100 million accelerated share repurchase program and cash outflows associated with changes in working capital, most notably accounts receivable and inventory. It's worth noting that our cash and short-term investments include a $30 million position in Matterport, which became a publicly traded company this summer. This event resulted in a $27 million gain on our Matterport investment and is reflected in other income in our third quarter gap income statement. Our Matterport shares were classified as a short-term investment, and they remain subject to a lockup provision until early next year. The value of those shares will be marked to market each month until the investment is sold. Third quarter DSOs were 50 days, a 10-day increase against the same period one year ago, but slightly less than the third quarter of 2019. The increase reflects shifts in the timing of orders toward the back half of the quarter and a mixed shift among our retail partners. Q3 ending inventory was $354 million or 116 days compared with $218 million or 93 days at the same time last year. As expected, inventory remained elevated in the third quarter, which primarily reflects higher in transit inventory as global supply chain issues extend shipping times across all primary modes of transportation. We expect inventory and DII will revert back to more normalized historical levels in the fourth quarter. With the quarterly review complete, let's move on to our fourth quarter and full year 2021 outlook. As Colin noted, we have been managing through a range of issues that have impacted our revenue and profitability expectations. In terms of our top line, we have refined our 2021 revenue outlook within the prior range due to the combination of component availability and shipping related issues. We now expect 2021 revenue in the range of $1.555 billion to $1.59 billion, which would result in annual growth of 9% to 11%. Our updated full-year revenue outlook implies fourth quarter revenue in the range of $445 to $480 million. As a reminder, our revenue Expectations contemplate yen and euro exchange rates roughly in line with current rates, plus or minus 5%. In terms of our gross profit margin, earlier on the call, Colin outlined the incremental transportation and tariff headwinds that will further pressure gross margin. For the full year, we now expect gross margin of approximately 36%. This updated view reflects anticipated 2021 tariff costs between 42 and $43 million. Had the tariff exclusion been granted this year and applied retroactively to January 1st, our full year 21 gross margin would have been approximately 39%. We expect a Q4 gross margin between 30 and 32%, which includes anticipated tariff costs of around 13 to $14 million. Approximately half of the decline in our anticipated Q4 21 gross margin versus the fourth quarter of 2020 will be driven by higher supply chain costs, followed by tariffs, changes in pricing between this year and last, and shifts in product and channel mix. In terms of our fourth quarter and full year operating costs, we expect a meaningful sequential increase in our sales and marketing costs as we invest in working media to drive holiday season purchasing. Based on planned Q4 spending of the high $160 million range, we are targeting full year 2021 operating costs of approximately $523 million, or 33% to 34% of total revenue. Within our full year 2021 spend, we still anticipate that our sales and marketing costs will range between 18% and 19% of total revenue, with research and development expense targeted at around 10%. and general and administrative costs of approximately 5%. As a result, we expect a 2021 operating profit between 36 million and 55 million, which implies an operating profit margin between 2% and 3%. These expectations imply a Q4 operating loss in the range of $17 to $36 million. In terms of other major modeling assumptions for 2021, we expect other expense of around $2 million. We are now anticipating an effective tax rate between 5 and 7%, which primarily reflects lower operating income. As a result, we anticipate a full year EPS range from $1.15 to $1.74 with an anticipated diluted share count of approximately 28 million shares. At a tariff exclusion been granted in the fourth quarter retroactively to January 1st, we estimate that our 2021 EPS would have been between $1.24 and $1.27 higher on an after-tax basis using a higher tax rate of 17% on the assumption of higher operating income. We anticipate a fourth quarter net loss per share in the range of negative 63 cents to negative $1.24. We continue to expect 2021 capital spending in the low $50 million range. and we anticipate a strong quarter of cash generation in Q4, which will enable us to begin rebuilding our cash position. In summary, to echo some of Colin's earlier comments, 2021 presented us with a number of unexpected challenges. While we will fall short of achieving our targets this year, we would frame 2021 as another year of solid revenue growth, outstanding collaboration across the organization to limit the impact of rising costs and component supply constraints, and excellent execution to advance our strategy and position us for long-term prosperity. I'd like to turn the call back to Colin for some final thoughts.
spk09: Thank you, Julie. We're understandably very excited about our strategic direction and the potential we see to create substantially greater shareholder value. By advancing innovation to differentiate the iRobot experience, we expect continued success in expanding our connected customer base. We intend to delight those customers from the moment they purchase the product and begin using them. We believe that Happy Eye Robot customer will increasingly buy more products and services directly from us over the lifetime of their ownership. Our highest priority R&D, commercial, marketing, and operations initiatives are geared around supporting this simple overarching strategy. We are confident that continued execution will enable us to expand our business and create significant value over the long term. As we work to refine our planning for 2022, we currently expect that our actions to improve supply chain resiliency will help us move beyond our product supply constraints in the second half of next year. We expect a higher revenue growth rate in 2022 than in 2021. As we anticipate, improved supply will translate into a much stronger top-line performance in the second half of next year. We are pleased with the trajectory of existing connected customer revenue this year and look forward to moving into production with a range of new CRM capabilities over the next quarter or two. We believe that these new tools will play an important role in our efforts to further accelerate the growth of our existing customer revenue. We are bullish about the potential of our iRobot Select service and other similar subscription offerings outside of the United States. These offerings represent new ways for us to increase existing customer revenue while also appealing to price sensitive customers who might otherwise opt for a less expensive robot from the competition. As we continue adding thousands of new subscribers each quarter, we expect to exit 22 with a growing base of annualized recurring revenue. A major cost headwind next year will be higher transportation costs, which we expect will remain elevated to the first three quarters of next year. Tariffs remain a wild card. While we believe an exclusion is likely, it remains to be seen how quickly it can be granted. If tariffs remain in place next year, we expect that our 22 tariff costs will decline meaningfully from 2021 levels. Our initiative to achieve scale with our production in Malaysia by the end of the year remains on schedule, although there's more work for us to do as we finalize our product roadmaps and production plans for next year. We believe that 2022 will represent a major turning point in our efforts to transform iRobot into a more defensible, profitable enterprise with a compelling value proposition that resonates across a growing global base of loyal, connected customers. As we execute on our plans to expand our base and grow the lifetime value of each iRobot customer, we plan to remain disciplined with our spending. As a result, our assumptions for next year include an expectation that our second half revenue, operating profit, and EPS performance will be meaningfully better than the first half. We are excited about what's in store for our company and our shareholders. We look forward to offering a deeper dive into key areas of our business and reintroducing our long-term financial model when we hold our investor day on Thursday, December 9th, 2021. That concludes our comments. Operator, we will take questions now.
spk02: At this time, if you would like to ask a question, press star then the number one on your telephone keypad. Again, it's star one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Asiya Merchan from CD Group. Your line is open. Please ask your question.
spk10: Good morning. Thank you for the opportunity to ask a question. Clearly, you know, the challenges are unprecedented, and we've heard that from several of the companies that we track. If I may, you know, I'm just trying to parse through all these comments on revenue growth being higher in 22, which makes sense given you have a bunch of unfulfilled orders still If you could, you know, help guide investors and analysts, are we looking at a very back-end loaded, I mean, even more back-end loaded than is normal for 22? And then I have a question on margins as well. Clearly, tariffs get some mitigation from Malaysia into 22, but then you have these elevated transportation costs that you're highlighting. Is it reasonable to assume that margins will be up significantly in 22? 22? Will they be down relative to 21? I'm just trying to parse through the comments to see if tariffs can offset or the mitigation of tariffs from Malaysia can help to offset, you know, can be offset with some of the other costs or transportation costs that you're talking about. Thank you.
spk09: I'll jump on the revenue question. So we see in The first half of next year, there's a few things that are impacting, but the challenge of getting all of the chips that we need to build all of the robots that the market would absorb will still be something we're working through in the first half of the year. And it only takes one chip to stop us from building a robot in certain circumstances. And so that when we think about first half, second half, working through those supply chain parts availability challenges will cause the first half to be lower in revenue than it would be otherwise. And that will have the impact of creating an enhanced a larger back-end loading effect because we think that we'll have put those parts availability challenges largely behind us by the end of the first half.
spk03: And then, Asi, if I add on to that with thinking about gross margins, and I would start with as we talk through a number of these challenges that we're facing this year, we continue to believe that they will normalize over time. And so as we look forward, and we have limited visibility in how that will play out, and we're still working through our targets for 2022. But if you think about some of the factors that we've been talking about, Certainly, tariffs, whether or not an exclusion is granted, and the complementary move and scaling of our product in Malaysia will be a benefit as we think through going forward. If you think about the headwinds stabilizing and then normalizing, as we go through the year. And then, of course, the work that we will continue to do in optimizing our channel strategy. All of those things will come together in our targets for 22 and will be part of building out a long-term financial model, which we expect to share with additional color at our investor day on December 9th.
spk10: Okay, but if I may, I mean, I think the overarching question is, you know, will margins see improvements into 22? Just given all these things that you've put together, you know, I understand all the – there was an expectation that margins would – Yes, margins will be improved in 22.
spk09: The headwinds are moderating in 22. The energy in the changes we're making to our business model – are tailwinds to margins, and certainly we will see an improving environment to execute as next year rolls on. So absolutely yes.
spk10: Okay, great. Thank you for the clarification.
spk09: Yep, no worries.
spk02: Your next question comes from the line of Mr. John Bobcock from Bank of America. Your line is open. Please ask your question.
spk08: Hey, Gordon, and thanks for taking my questions. I guess just quickly to tag along on that last comment there, just when you mentioned that margins will be improved, is that relative to 3Q, 4Q margin levels or the full year 2021 levels?
spk03: I think you need to think about it in full year terms. Okay.
spk08: And that would be gross margins or that would be operating margins? Both. Okay, thank you. And then, you know, just kind of back, you know, with regards to the iRobot Select service, could you talk about the investments that you've made to build out this program and also what further investments will be needed as it scales up? You know, and then, you know, adding to that, you know, what competitive barriers exist that might make it challenging for your peers to build out a similar subscription service?
spk09: So the investments that we've had to roll out a subscription service, there's a lot of back-end, um, uh, investment to be able to service a customer, turn on, turn off the robots, handle payments, um, make sure that, um, uh, churn involuntary involuntary churn is, is, is managed. And the iRobot select service is definitely much more than just a rental program. There's, uh, services that are uniquely offered to, um, Robot as a service, iRobot select customers around getting accessories automatically sent to them, having dedicated resources if they have any questions with their robot. It's giving a real white glove experience, which has resulted in very high customer satisfaction with the service and very favorable churn rates that we've been able to see thus far. We think this is an amazing way to sell a product. And I think that resonates well with consumers who are frankly used to paying as they go for cleaning services in the home. So it's a very easy and familiar way of paying for this type of end benefit. Let's see. Is there more to your question? Did I cover your question? I'm happy to wax poetic about the awesomeness of the description.
spk08: Yeah, no worries. I mean, I guess, you know, maybe you partly answered it, but I guess, you know, part of the question was also just around kind of the competitive, you know, barriers.
spk09: Oh, yeah, competitive barriers. Yeah. So iRobot's competitive strategy really centers around this, growing differentiation in the intelligence of our robots, their ability to avoid getting stuck, their ability to offer users control over where and when the robots operate. iRobot is unique in the marketplace with its ability to clean around an object in a room. It's unique in the marketplace with the ability to allow a user to schedule when a particular room could be cleaned, much less a particular object in the room. And we've rolled out things where you can even have that schedule be automatically activated by simply leaving the house. And so this idea that the robot works around your schedule and with the new precision vision navigation, be able to recognize objects on the floors that if they're there permanently, the robot can automatically add a, we call it a keep out zone so that the robot doesn't go back there. Or if it's something you just forgot to clean up, it can actually tell you to go clean it up and then you can send it back to finish the cleaning job. So this growing knowledge about your habits, about your home and with every mission, having the robot be able to do a better personalized job creates a stickiness with that customer. Because if you ever left iRobot, all of that knowledge around your habits and the challenging areas of your home to clean and how to go about doing it would be lost. And so that we have this personalized, intelligence-based differentiation strategy, which dovetails very well with a subscription-style approach sale process. And at the same time with a subscription, we're lowering the barrier to invest in a robot that has this type of intelligence and capability. So it's an integrated strategy, varying intelligence with subscription to give a dramatically larger lifetime value on a customer by customer basis than a single anonymous purchase of a robot at a retail outlet.
spk08: Okay, thanks for that color. And then, you know, I guess like next question I had, last quarter you mentioned that you were evaluating potential price increases. Are there any updates on your thinking around that, you know, particularly in light of the rising cost environment and your expected margin levels?
spk09: Yeah, I mean, it continues to be dynamic. We definitely have adjusted how promotional we will be. We've adjusted how much we're investing in demand generation. The changes in discounting and promotion results in a material increase in ASPs. And then very, very tactically, we made some price adjustments. So we haven't done anything wholesale at this moment in time, but we definitely effectively increase ASPs through our commercial strategy.
spk08: Gotcha. That's helpful. And then the last question before I turn it over. You know, can you just talk about, you know, your work with the manufacturing partners, you know, what opportunities might exist there to, you know, reduce your production costs? You know, I mean, at least in kind of looking at, you know, where, you know, some of your peers might be, I mean, it seems they might have, you know, more favorable terms. And so just want to kind of get a sense for, you know, how you're kind of working with that, you know, relationship and what opportunities, you know, are out there.
spk09: We take this very, very seriously and have established aggressive year-over-year targets for COGS efficiencies on existing products. We're very confident that if you look at like-for-like bills of materials, that our robots are not more expensive to build. Our robots do include componentry that our competition chooses not to invest in, and that may include silicon parts with different commitments to security or reliability. We put a lot of investment into sensing on the robot to ensure that the robot less frequently get stuck and can do a better job cleaning. So this is not a every robot is created equal. It's a situation where we make targeted investments in customer experience as we select what goes into one of our products. But to your question about manufacturing costs, We have very explicit opportunities every year for substantial improvements in COGS on our existing products.
spk08: Okay, great. Thanks for the help.
spk02: Yep. Your next question comes from the line of Ben Rose from Battle Road Research. Your line is open. Please ask your question.
spk04: Yes, good morning. To dive a little deeper into the status of manufacturing in Malaysia, looking out to the first quarter of this next year, I guess the first question would be, could you speak to roughly what percentage of U.S.-bound Roombas do you anticipate will be produced in Malaysia?
spk09: Sure. As I mentioned in the call, we are on track to achieve the level of manufacturing in Malaysia that we had targeted at the beginning of the year. That will be, in 2022, about 80% of the product that is destined for North America. We're constantly looking at our product plans and How much of older product are we going to bring into market versus new product? And so that number fluctuates a bit. But at this point, we're 80% there.
spk04: Okay, great. And, you know, excuse me, in terms of looking at the manufacturing costs, notwithstanding all the variables around manufacturing, supply chain componentry and transportation that you outlined in the call. Is it your anticipation that perhaps by mid-year the manufacturing costs for Roombas in Malaysia will be somewhat similar to what you've had in China?
spk09: I think somewhat similar is the fare. There will be a slight premium, but it's going to be in the single digits.
spk04: A single-digit difference?
spk09: Correct. So there will be a single-digit premium for Malaysia, which is something that we think we can manage quite nicely.
spk04: Okay, great. And then if I may, a final question, Colin, in your remarks in terms of the differentiation of iRobot's product line vis-à-vis the competition, given the anticipated advertising in Q4, Do you think some of your messaging might be around highlighting some of the differences and perhaps some of the shortcomings of the competitors relative to their inability to navigate around some of the objects in the home or not really fulfilling the promise of what a consumer robot should accomplish?
spk09: You know, you'll definitely see iRobot starting to speak more explicitly about the differentiation based on the superior intelligence of our robots. We've been investing for a number of years in making sure that our robots are by far the smartest in the marketplace, and with the launch of the J7+, with its front-facing imaging technology, we're really able to demonstrate that increasingly obviously and talk about the customer benefits in an incredibly clear way. So that's going to be a growing part of the iRobot story. And the growth in the power of genius, I should note, is not just for the J7+. all of our robots that are connected benefit in varying degrees from our technology. I mentioned earlier that our robots have the capability, for example, of cleaning while you're away. That's a benefit that even our entry-level connected robots can benefit for. So I kind of tease that there's a moment in time when we stopped buying our PCs based on the hardware and started buying it based on what operating system that personal computer ran. I think that we're getting toward the point in the robot industry where the intelligence is such a differentiating and important factor that customers will say, well, what software does that robot run, and have that be an incredibly important part of the decision-making process.
spk04: Okay, thanks. That's a very helpful insight. Thank you.
spk02: Yep. Your next question comes from the line of Mike Lattimore from Northland. Your line is open. Please ask your question.
spk01: Hi, this is Aditya on behalf of Mike Lattimore. Could you give some color on how the inventory levels are with your channel partners or the inventory levels at an all-time low or does your channel partners have enough inventories with them? So any color on the inventory levels that could be helpful.
spk03: Sure. You know, as we stand in Q3, we believe that retail inventory levels declined sequentially from Q2. Overall, we think that as we look forward through the rest of the year, we will end the year with relatively lean inventory at our retail partners.
spk01: All right, and regarding the revenue performance, I see the timing of the orders have benefited. A lot of revenue have moved from Q4 to Q3. Could you give some color on what caused that?
spk09: You know, one of the reasons why we give full-year guidance is the perpetual challenge of hauling the line between Q3, Q4 when we have a tremendous amount of inventory in the ports, exiting factories, being unloaded and, you know, because it's a period of high demand and simply the availability of ships or depending on how revenue is recognized, waiting to see which retailers accept and pick up inventory when, just creates a lot of challenge so that we have a, it's not unusual for there to be some adjustments between that Q3, Q4. There's really nothing particularly interesting or material about a shift from Q3 to Q4. It's just our ability to call with precision how much is going to hit where. And this time we thought a little bit more would get into Q3 and got pushed, which is I'm sorry, it got pulled forward. So probably the only time this year where we were overly pessimistic about the timing of shipping.
spk02: Your next question comes from the line of Derek Soderberg from Collier Securities. Your line is open. Please ask your question.
spk07: Good morning, everyone. Thanks for taking my questions. I'm really looking forward to hearing the updated long term model at the coming investor day. Colin, I wanted to start with you. I just want to get your thoughts on the industry growth rate for robot vacuums. You know, how sustainable is some of this pandemic driven demand as you sort of look into 2022 and beyond? You know, and then as it relates to you guys versus the industry, I imagine your competitors are having some similar challenges. But just curious if you think you guys are growing faster than the industry as a whole, you know, either maintaining or growing market share across, you know, all price points or maybe just the high end price points. And sort of in the past, you've been pretty aggressive and prioritize growth and market share a bit. You know, has that strategy changed at all in this tougher environment?
spk09: Sure. So we'll start with just reiterating that the robot vacuum cleaning market is underpenetrated. Household penetrations are quite low from the 13-ish percent of households in the U.S., which would be the most dense or most fully penetrated arena to EMEA and Japan, where those numbers are significantly lower. So the opportunity remains extremely large. We think that the opportunities is into the 20s and 30s as before we see any saturation effects in the marketplace. iRobot commands a very large share in all of these markets. So when you talk about do you think we can grow share versus what do we think we'll do to maintain share? You know, it's a difficult question. I would say that we've always focused first on winning and ensuring we maintain true leadership at the premium side. We make the smartest robots in the world delivered in beautiful, high-performance hardware. Our customers value that, and that's a winning strategy consistently. In the mid-price points with the launch of the i3 robot, We've really made a statement that we continue to be very aggressive in the mid-tier with our investments. And then as we get into the lower price tiers where competition has focused, it is reasonable to imagine some continued, albeit slow, loss of share down at the bottom so that our approach to defending our market share is not linear across all price points. But I would point out that our iRobot Select strategy, which we talked about earlier in the call, is an exciting way for us to be more competitive at the lower price points with our higher-end products, such that we can deliver robots with these full implementations of superior intelligence and really get across the stack people the experience that, honestly, they came to robot vacuuming expecting that this robot could be set loose in their home and complete every mission and give the customer the control over where and when they want the robot to act.
spk07: Got it. Got it. I appreciate the detail. And then I just wanted to clarify one thing on the tariff exclusion. None of that is baked into any sort of guidance or commentary on 2022. And then more specifically is the thought that, you know, once we exit this calendar year, it's pretty highly unlikely that, you know, you're going to get an exemption for the period before October 12th. And sort of if this new version of legislation is passed, would that likely exempt you guys from tariffs for the full calendar year 2022?
spk09: So let me try to answer as much of that question as I can. The current registry language around the exemption process is currently open for comment. So that means that it is not final as to what the exclusion process or what an exclusion will mean. That has not been finalized. The proposed language, if it stays as currently written, would grant companies which received an exclusion relief only back to October 12th of this year. And so that tariffs paid prior to October 12th would be lost or would not be refunded. The exclusion language is currently silent on how long an exclusion would be for if it was granted. So I can't comment meaningfully on that. So, you know, we had a specific language in the Senate bill which said all sorts of things we liked earlier in the year, but that language was not reflected in the most recent language presented by the USTR. So we're kind of in a holding pattern. We think our case for being excluded remains very strong and we're optimistic, but we're And, you know, I think that's all I can comment on at this point.
spk07: Yep, yep, that's fair. Thanks, guys.
spk09: You bet.
spk02: Your last question comes from the line of Chris Granger from Needham. Your line is open. Please ask your question.
spk05: Hi, good morning, everyone. Thanks for taking the question. This is Chris Granger, founder for GEMM. From the direct consumer front, 12% to 13% of sales for... ...anticipate that trending and what is driving growth there.
spk09: So the iRobot continues to roll out more competent and effective tools for targeting. We continue to invest in growing our direct relationships with our customers. And increasingly, we're able to go back and retarget customers who previously bought robots. And of course, targeting someone who already owns a robot to get an upgrade or a second robot or accessories has significantly favorable economics than going and finding and bringing a new customer into the franchise. So this is an area that we've been investing in. This is an area that we think will be a gross margin and gross profit tailwind as we scale it and is one of the very exciting dimensions of our new and growing strategy where we're able to deliver a product with this intelligence we talked about before, create a long-term relationship based on the fact the robot's learning their home at the right time go back to them for upgrades and be able to transact with them very, very efficiently because of the relationship we have with them and improve our profitability and lifetime value per customer. So this is something that we're very excited to see continue to grow, and you should expect it to remain a focus of iRobot investment and strategy on a go-forward basis.
spk05: Great. Thank you very much for that detail. And sorry, just one more for me. On promotional activity in Q4, do you expect that to be in line with prior normal years or any departure there? Thank you very much.
spk09: We're trying to size our investment in keeping with the amount of product that we need to move and so that using our investment dollars very strategically is That said, we have very significant ambitions for driving the amount of demand for robots. You will still certainly see plenty of iRobot ads on television and on your social and digital platforms.
spk05: Thank you very much.
spk02: You bet. That concludes our question and answer session. I will hand back the call over to Mr. Andrew Kramer.
spk06: Great. Well, thank you all very much for joining today. I know today is a very busy one for investors, and we appreciate your attention to our results. Obviously, appreciate your support. Look forward to speaking with you over the coming weeks and months, and you should see additional detail regarding registration for the Investor Day over the next couple of weeks. Thanks so much.
spk02: This concludes today's conference call. Thank you for participating. You may now disconnect.
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