iRobot Corporation

Good day and thank you for standing by. Welcome to iRobot's first quarter 2022 financial results conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during that session, you will need to press star 1 on your keypad. Please be advised that today's conference is being recorded. If you require any assistance during today's call, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Andrew Kramer. Mr. Kramer, the floor is yours.

Thank you, Chelsea. Good morning, everybody. Joining me on today's call are iRobot's 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 as a result of new information or circumstances. Related to our financial disclosures during the 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 and loss, non-GAAP operating profit margin, non-GAAP effective tax rate, and non-GAAP net income and loss 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 table at the end of the first quarter 2022 financial results press release we issued last evening, which is available on our website at www.iRobot.com. Also, unless stated otherwise, our first quarter 2022 financial metrics, as well as the financial metrics provided in our outlook that will be discussed on today's conference call, will be on a non-GAAP basis only, and all historical comparisons are with the first quarter of 2021. In addition to posting the press release and today's prepared remarks on our website, we've also posted a document that summarizes our 2022 financial outlook, including all relevant modeling assumptions for the second quarter, the first and second halves of 2022, and the full fiscal year. For today's call, our agenda will be as follows. Colin will briefly cover the company's first quarter financial results, discuss market conditions and recent achievements, and provide an update on our expectations for 2022. Julie will review our financial results in detail and offer additional insight into our 2022 guidance. Colin will conclude our commentary with some closing remarks about the important steps we're taking to elevate our responsiveness to customers and improve our profit profile. 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. Yesterday, we reported a first quarter 2022 operating loss of 18.5 million and a net loss per share of 66 cents on revenue of 292 million. Our Q1 profitability and EPS exceeded our February targets, primarily due to our recent tariff exclusion and prudent cost management. Our top line performance benefited from solid 33% growth in the U.S. and 25% growth in Japan. This helped us largely offset a decline in EMEA as we lapped an exceptionally strong quarter in that region one year ago. We also made important strategic progress that we believe will contribute to our anticipated revenue and EPS growth in FY22. However, our FY22 growth prospects are complicated by ongoing disruptions to the consumer marketplace, particularly in EMEA, due primarily to a combination of heightened inflation, and reduced customer confidence stemming from the Russia-Ukraine war. Although these emerging dynamics will limit our FY22 top-line growth ambitions, we have slightly increased the high end of our full-year operating profit and EPS targets. Before I cover our updated outlook in more detail, I'd like to review a number of Q1 accomplishments that we believe demonstrate that our Innovate, Get, Keep, Grow strategy is succeeding. The first element of our strategy is to drive innovation across our product lines, differentiating them through thoughtful intelligence delivered on high-performance, beautifully designed hardware. In March, we released version 4.0 of our operating software platform, which offers a range of pragmatic and convenient new experiences, adds smart mapping to our mid-range Roomba i3 series, and increases the range of civic objects that a Roomba J7 robot can identify. and avoid. Based on sell-through trends thus far into the year, as well as our commercial plans going forward, we believe that our software differentiation will enable us to successfully fortify our RVC share in key markets around the world. The get component of the strategy is all about winning new customers. During Q1, we increased the number of connected customers who have opted into our digital communications by 40%. to 14.9 million over the same period a year ago. The key part of our strategy involves making sure that our customers love our products and remain part of our franchise over the long term. That continues to be the case. Customers are consistently using our floor care robots. First quarter 2022 utilization was just over 90%. Our customers are increasingly taking advantage of our new software capabilities. Since launching the Roomba J7 series last year, over 95% of J7 owners are using the robot's machine vision to detect and avoid an ever-expanding number of objects. We are also pleased that Roomba i3 owners are increasingly using the new smart mapping capability that we recently added. We expect adoption by i3 users to continue to grow as the new i3 Evo model is rolled out in EMEA before the end of Q3. The grow element of our strategy is focused on increasing lifetime customer value by having more customers transact more often directly with us over the course of their ownership. Direct-to-consumer revenue increased 17% in Q1 and represented 14% of total revenue. we are seeing our connected customers increasingly use our website and app to buy our products and accessories. Existing connected customers generated approximately 46% of D2C revenue versus 35% in the same period a year ago. This is a promising trend that supports our plans for substantial D2C growth over the next several years. In addition, we made meaningful progress in Q1 with our digital transformation initiatives, We launched a new version of our UK website and conducted several small-scale tests of our CRM systems and related tools. In terms of product diversification, we are advancing our efforts to integrate the AERIS air purification business, which contributed $3 million to our Q1 revenue. In addition to these accomplishments, we took steps across our operations that will help us enhance our responsiveness to customers, advance key commercial and R&D initiatives, and increase our profitability. I'll call to this in more detail later on this call. Consistent with our commentary in February, our 2022 outlook remains anchored by our expectation for substantially better second-half performance. Since our last call, however, market conditions have become more challenging, which has impacted our view into overall category growth and our second-half growth rate. Most notably, rising inflation threatens to curb consumer spending, while the Russia-Ukraine conflict has further eroded consumer confidence in Europe and elsewhere. Given these dynamics, we now anticipate that modest category growth in EMEA during the second half of this year will essentially offset an expected first half decline. Our updated outlook now assumes low double-digit category expansion in North America, complemented by strengthening RBC demand in Japan. As a result, we now anticipate FY22 revenue in the range of 1.64 billion to 1.74 billion, which equates to annual growth of 5 to 11%. Much of this revision is tied to EMEA, where we have lowered our full-year top-line targets considerably from prior plans that assumed at least low double-digit growth. Despite the moderation in anticipated U.S. category expansion, we still expect solid mid-teens revenue growth in this region for 2022, complemented by even faster expansion in Japan. We have revised our full-year 2022 revenue targets. While we still anticipate a meaningful acceleration in our second-half revenue, we now expect second-half revenue growth of 18% to 26% over last year's relatively soft second half, which had been impacted by component constraints. Along with a better second half gross margin, we also plan to carefully manage spending, which will translate into low double-digit operating profit margins in the second half of the year. That will enable us to convert a full-year operating profit margin of 3% to 4% into 2022 EPS that ranges from $1.50 to $2.10. In summary, although today's playing field is less than optimal, we are moving forward with confidence that our strategy is working. Our competitive position is strengthening, our connected customer base continues to grow, our customers are happy, and we are putting new systems to work to increase how much these customers spend directly with us this year and in years to come. As a result, we believe that our anticipated second half revenue trajectory and improved profitability will enable us to end the year with the momentum necessary to achieve our long-term financial target. That concludes my initial remarks, so I'll turn the call now 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 loss, operating profit margin, effective tax rate, and net income and loss per share will mean the corresponding non-GAAP metrics. All quarterly comparisons are against the first quarter of 2021 unless otherwise noted. iRobot's first quarter 2022 revenue of $292 million declined 4% and was slightly behind our February color due to unanticipated order delays and cancellations from certain EMEA retailers and distributors. From a product mix perspective, Roomba generated 89% of our Q1 revenue mix, with Brava and other products making up the remainder. We continue to see strength in our premium robots, which grew over 30% in the first quarter. Our gross margin of 34.5% exceeded the low 30% range target we outlined in February, due primarily to the reinstatement of our tariff exclusion, which saved us approximately $6 million. Our Q1 gross margin declined nearly six percentage points from the same period last year. The decrease was driven by several factors, which in order of magnitude comprised unfavorable increases in raw materials, transportation, and componentry, pricing reductions and higher promotional intensity, and product mix. These combined to more than offset the benefits from our tariff exclusion and lower warranty expense. In terms of the tariff exclusion, we were granted a temporary exclusion from Section 301 List 3 tariffs in late March by the USTR. This exclusion eliminates the 25% tariff on Roomba products imported from China beginning on October 12, 2021, and continuing until December 31, 2022. We expect to receive refunds totaling approximately $30 million, which are comprised of $6 million for Q1 tariffs paid, $12 million in tariffs paid on Roomba products imported after October 12 and sold in the fourth quarter of last year, and $12 million for on-hand inventory imported after October 12th. Similar to the refunds we received for our 2020 tariff exclusion, we expect that U.S. Customs will issue multiple refund payments over the next 12 months, although the timing of any and all payments is at the discretion of U.S. Customs. First quarter 2022 operating expenses of $119 million increased by 10%, due to primarily higher sales and marketing costs attributable to working marketing programs and increased personnel costs. We continued to carefully manage our spending in the first quarter. Operating costs for Q1 were 41% of revenue versus our prior target of the mid-40% range. Our Q1 operating loss was $19 million. Our first quarter effective tax rate was approximately 2%, and our net loss per share was 66 cents. We ended the first quarter with $113 million in cash and short-term investments, a decline of $121 million from year-end. The decrease primarily reflects the quarterly net loss and unfavorable changes in working capital. We have received a waiver from certain credit facility covenants that will increase our near-term fiscal flexibility. This is the first part of our plans to ultimately upsize and amend our $150 million unsecured revolving line of credit. First quarter DSOs of 33 days, an increase of 13 days from the same period one year ago, due primarily to customer mix and, to a lesser extent, the timing of orders within the quarter. Our inventory balance at the end of the first quarter was $331 million, or 158 days, versus $233 million, or 118 days, at the end of Q1 last year. In transit inventory continues to our inventory balance, representing an additional 13 days versus the same period last year. The increase also reflects healthy inventory that, due to shipping delays in the fourth quarter of 2021, missed key promotional windows last year. We plan to sell this inventory into our customers over the next three quarters, which will help us improve our inventory levels by year end. Consistent with our commentary last quarter, we still expect that inventory measured in dollars and days will stay elevated through Q3 before showing improvement to the low 70-day range at the end of 2022. With the quarterly review complete, I'd like to focus on our updated 2022 outlook. Given the potential for disruption in the European consumer marketplace, our revised FY22 revenue targets now range from $1.64 billion to $1.74 billion. We currently anticipate that approximately 65% of our 2022 revenue will be generated in the second half, which implies Q2 revenue in the range of $290 to $318 million. In contrast to an expected first half revenue decline between 9 and 13%, we anticipate 18 to 26% growth in the second half of 2022 over the same period last year. We believe our Q3 revenue growth rate will range from low double digits to the high teens over last year's Q3, and our Q4 growth rate well above that. As we look ahead, it is important to remember that our second half 2022 outlook will compare against a prior year period that was impacted by limited availability of components. Our ability to support this year's second half revenue targets are underpinned by existing inventory levels, and the steps we've taken to improve supply chain continuity and resiliency. In terms of product diversification, we remain on track to generate over $40 million in 2022 air purifier revenue, with more than 70% of that coming in the second half of the year. As a reminder, we manage our business on a full-year basis, since the timing of larger orders may shift between quarters, especially in the second half of any year. That's why we encourage investors to focus on our annual targets. Our revenue expectations contemplate yen and euro exchange rates roughly in line with quarter-end rates, plus or minus 5%. Our 2022 gross margin outlook is unchanged at 36% to 37%, despite the change to our full-year revenue targets. We anticipate that our second-half gross margin will improve from first-half levels into the 37% to 38% range, primarily as we begin to see the benefits of some of our productivity initiatives, lower shipping costs, and fixed cost leverage on higher sales. If our tariff exclusion had not been reinstated, we would have expected to pay more than $40 million in tariff costs this year. Our updated outlook reflects our plans to redirect approximately half of our tariff-related savings to increase our promotional intensity in support of both category growth and increased sell-through. The remainder of the savings will help us absorb the anticipated impact of lower revenue as well as our plans to work down on-hand inventory that was burdened by incrementally higher supply chain costs. As Colin outlined, we have taken and will continue to take a range of actions to optimize our cost of goods sold, which are expected to support a meaningful improvement in gross margin next year. We expect our Q2 gross margin to be lower than Q1 at between 31% and 33%, as increased promotional intensity associated with seasonal events will more than offset favorable channel mix shifts and improved leverage on fixed costs. We are targeting 2022 operating costs in the range of $538 to $574 million, or approximately 33% of revenue. We have adjusted our hiring plans and working marketing and accelerated other cost optimization programs to better align our cost structure with anticipated revenue. Given our top-line guidance and spending plans, we currently operating profit ranging from $45 to $61 million, with an operating margin between 3 and 4%. In terms of our second quarter spending, we anticipate Q2 operating costs of $143 to $144 million, or 45 to 50% of total revenue. This implies an operating loss between $39 million and $53 million. The combination of substantially stronger revenue, gross margin improvement, and prudent spending is expected to enable us to deliver second half operating income of $116 million to $119 million. In terms of other notable modeling assumptions for 2022, we anticipate other expense of around $2 million and an effective tax rate of approximately 2%. As a reminder, Relatively small dollar changes and pre-tax income, along with the jurisdictional mix of those profits, can cause meaningful changes in the effective tax rate. We anticipate a diluted share count of approximately 27 million shares. As a result, we now expect full-year EPS to range from $1.50 to $2.10. For Q2, we anticipate a net loss per share between $1.41 and $1.90. In summary, we've moderated our top-line growth expectations to reflect greater potential for macroeconomic trends and geopolitical events to temporarily disrupt RVC adoption, particularly in EMEA over the coming quarters. We've taken actions to preserve our profitability, which has enabled us to slightly increase the high end of our 22 EPS range. Most notably, we still anticipate a meaningful inflection in our top-line growth and profitability during the second half of this year. I will now turn the call back to Colin for some additional thoughts on our near-term process.

Thank you, Julie. As the RVC category creator and leader, we continue to be very enthusiastic about the global growth potential for both the category and iRobot. Household penetration is low. We design and deliver great products with a compelling and increasingly differentiated value proposition. We have a powerful brand. We enjoy great access to consumers worldwide through vibrant retailer and distributor relationships. And we are rapidly expanding our commercial capabilities to drive DTC revenue growth that will contribute to higher gross margins, increase profitability, as we expect more connected customers will transact directly with us. Across all areas of the company, we are mobilizing to navigate short-term turbulence and support the evolving needs of our retail partners and consumers around the world. To elevate our responsiveness, optimize inventory levels, and increase efficiency, we are consolidating our warehouse and distribution networks around the world. We've also made meaningful progress in our efforts to increase supply chain continuity and resiliency. While we are thrilled that the USTR has reinstated our Section 301 tariff exclusion through the end of the year, our plans to scale production in Malaysia are unchanged. As a result, we expect to enter 2023 without meaningful exposure to these tariffs. Additionally, we believe that our ongoing efforts to improve efficiency, carefully manage headcount, and control discretionary spending are critical for achieving this year's profitability targets and helping us further refine our cost structure over the longer term. And while we have adjusted overall spending plans for FY22, we are not sacrificing investment and those R&D projects that we believe will make the biggest impact on our business. We still plan to deliver additional major software upgrades and bring a new Roomba model to market this year. We are also taking important steps to support further product diversification. More specifically, we continue to realign our engineering resources and allocate more funding for internal development of new robotic products targeting adjacent categories. will be premature to offer additional insight into these activities right now. We look forward to sharing more in the future when we are closer to commercial launch. But truly detailed, our updated guidance for 2022 assumes a substantial acceleration in our second half financial performance. We expect that this momentum will enable us to exit this year well positioned to keep us on the path toward achieving the long-term financial targets we've outlined. and in the process, create substantial value for our shareholders, employees, and customers. That concludes our remarks. Operator, we are ready to take questions now.

Yes, sir. At this time, if you would like to ask a question, please press the star and one on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star and one to ask a question. And our first question will come from Mike Lattimore with Northland Capital Markets.

Yes, thank you. So I guess in terms of the outlook for the second half of the year, are you assuming that the kind of U.S. and Japanese markets remain relatively healthy, or are you trying to factor in a little bit of, you know, consumer sentiment deterioration there as well?

We see Japan as remaining very healthy. We've taken down our North America targets from the beginning of the year modestly, but still anticipate good performance in North America. So slightly below traditional growth rates, but still contributing to that overall growth in the industry.

Okay, got it. Then you're devoting half of the tariffs – exclusion to promotions. Does that reflect more competition, or is that more about just trying to deal with this consumer hesitancy?

It's a little of both. The year has had some good events and some more challenging events, and we definitely are looking at our basket of resources and working to ensure that we maintain our strong position in the markets. You know, and so some of it is motivating customers to get out of their chair and come and help continue to drive this category growth. And others is definitely to make sure that our lineup remains as competitive as it can be.

And I think it's important to remember that as we look at the potential for our category, We still look at overall penetration rates and believe there's a strong and long runway ahead of us for additional adoption. And the investment there is to ensure that we are able to continue to foster category growth.

Great. And just last on the comment about internal development of new robotic products. You can't really talk about that, but maybe what's the latest view on the lawnmower category?

You know, I think that, again, we are at the beginning of the robot industry. iRobot's ambitions certainly extend beyond robot vacuuming. We have talked about, yeah, specifically about lawn. We continue to think lawn is a very attractive adjacent market. And so I don't think anything has changed on that front. iRobot's continued development of new enabling technologies certainly position us well to attack multiple adjacent products.

Great. Thank you.

Yep.

All right. Thank you. Our next question will come from Jim Rusciutti with Needham & Company.

Just a couple of questions on the marketing spend promotional activity. I assume a lot of that is set for Q2. I'm wondering how it changed as you exited Q1. And just the related question to that is, as we think about the promotional activity over the balance of the year, is it going to be mainly concentrated in North America in terms of the change versus what you were thinking earlier in the year? You know, as you know, we're very data-driven.

And we try to look at the return on ad spend and optimize that globally. What you'll see is us moving dollars around geographically to ensure that we are spending money where it will work the best. And so that that definitely has evolved from the beginning of the year. as well as looking at which models, which channels, ways of spending our dollars is in constant evolution on a, frankly, on a day-to-day basis. So I think that the absolute dollars change with our expectation around revenue. But the way we spend those dollars is very fluid.

And a question on ARIS, obviously a small part of the business, but I'm just wondering how the rebranding effort is going. You know, how important is that to get to that full year contribution? And should we assume, you know, as part of the activity that you're going to be doing in terms of driving ARIS consumer demand that we might see some joint marketing with Roomba and the ARIS product?

Well, certainly one of the reasons why the air purification performance for the year has a larger second half to first half ratio than the Roomba is because completing the integration, completing the efforts we're doing to fully integrate the ARIS products into the iRobot line is underway. So the first part of your question is absolutely sound. And as far as joint marketing and so forth, that is a strategy which underlies our direct-to-consumer strategy. belief that as we bring customers into our franchise, as our software technology enables us to better understand our customers' needs, the unique challenges that their homes have and require, and better develop a partnership with our customers and their habits and how to operate synergistically with how they live their lives, we create opportunities to sell more things to those customers beyond just the first Roomba that they bought. And air purification is a powerful adjacency. So this idea that a Roomba can lead to a sale of an air purifier to an existing customer is core to our strategy. And, you know, we definitely look at lots of different ways that we can make that happen.

Thanks. I'll jump back on the queue. Okay. Thank you.

All right. Thank you. Our next question will come from Paul Chung with J.P. Morgan.

Hi. Thanks for taking my question. So just on the cancellations in Europe, are these orders being pushed out? And then how is your kind of visibility evolving in Europe? And I guess for other regions as well, you know, what's your order visibility into kind of second half today? And, you know, what's kind of driving your confidence for the guide? Are there some, you know, key customers you have firm orders for? And then, you know, again, you know, what regions are you seeing relative strength besides? kind of Japan and North America.

I'll start, and Julie, you can add color if you like. I mean, the orders that we talked about in the call in EMEA, some were pushed, some were canceled. As we indicated, the single largest driver for the change in the guide is the weakness that we're seeing in the EMEA marketplace. broadly. And so we're definitely seeing the impact of the war in Ukraine creating a very time-correlated drop in consumer confidence, increase in inflation, and decrease in sort of sell-through rates that lead to retailers becoming more conservative and taking inventory positions with our product and becoming less aggressive so that these are signs that throughout our history when we see them we're able to understand what they lead to from a full year perspective and have attempted to model and adjust expectations appropriately you know we do have the nature of our relationships with with our retail partners, as well as with our distributors, includes conversations which extend beyond the immediate order, and so that we're definitely engaged in dialogue with our partners around what they expect and what they are seeing. And, you know, we have a current crop of orders as well, which gives us confidence in the guidance we've presented. So it's a rich collaboration which has frankly decades of history at this point leading us to trying to make the best indication of what we see happening through the balance of the year but to be honest there is still significant uncertainty as to how the rest of the year is going to unfold but our confidence is buoyed not just based on those conversations it's buoyed because We believe we have the best lineup that the company has ever had. We see very strong performance from a share perspective, showing that our products are holding up very well competitively. We think that the back half of the year also lapsed a much weaker back half of last year. And so the percentage of growth that we are contemplating in the the earlier call is relatively straightforward easier comps than certainly in the first half when a year ago we were enjoying tremendous momentum and strength so I think that all in all we have done our best to create a reasonable expectation balancing the goods and the unknowns and the challenges to deliver a expectation that we are confident in.

I'll just underscore a couple of things. As Colin said, we've taken into account a series of factors as we've reset and rebased our expectations for the full year that try to balance all of those things. It's our best view And it's in knowing that we will be investing again in supporting that ongoing category growth that gives us the picture that we're setting now for the full year.

Great.

And then just to follow up on, you know, longer term margins, if we think about tariffs going away, you know, freight coming down, component costs easing, what's more normalized gross margins maybe that starts to show in in 23 and, you know, where it progresses from there and, you know, can they recover back to the mid 40% range or have something kind of, you know, structurally changed? Maybe you have higher costs from your move in manufacturing. And then on the OPEX side, you know, you've seen continued cuts since analyst day guide, you know, where are you making the cuts there? And you mentioned commitments to R and D, but are there any trade-offs on growth on, on maybe some lowered OBDAX investments here. Thank you.

Yeah, sure. Why don't I start and then I'll let Colin jump in. But as we look forward with our expectations around second half expansion in gross margin over our first half, and then through 23 and 24, we believe we are making the progress That puts us on a path towards those LTFM targets that we established back in our investor day. You hit on some of them already that we expect over that multi-year period, we will see a normalizing and easing of some of the headwinds that we saw. We have an operations team that is just working in partnership with the rest of the organization to drive COGS productivity across the line. And then the third thing that I would point to are some of our CRM levers, which, as we continue to expand our direct-to-consumer reach and focus on the keep and grow parts of our strategy, should provide some expansion over time in our gross margin rates as we look forward to our LTFM?

Yeah, a little bit other than to reaffirm our commitment to the LTFM growth rates, gross margin rates, operating income rates that we shared in November. We'll be exiting this year in a slightly lower base, but those rates that we committed to We believe that all of the reasons that Julie just laid out give us confidence that that long-term financial model still holds. And I think that, again, looking at that deeply is the best answer to where we think things are going to go.

And then you asked another question around OPEX. It's true. We have made difficult choices associated with resetting our expectations for the year. Colin already mentioned one of the things that I think we do very well is we're extremely data-driven in how and where we put our investments and the cadence of those investments. We remain very committed to innovation at the center of what we do and The work that we're doing in R&D on innovation and the speed of innovation is front and center and how we think about our spending as it will continue to evolve as we go through the year.

But they aren't easy choices.

Okay, great. Thank you.

Sure.

Thank you. Our next question will come from Asiya Merchant with Citi Global Markets.

Great. Thank you for the opportunity. I just, you know, on pricing relative to promotional intensity, I'm just trying to understand where you guys are thinking about that. And, you know, at the start of the year, you guys talked about ASPs benefiting you on a net basis or growth basis because you guys were shifting to these premium robots, which clearly is happening. But then at the same time, you're driving higher promotional intensity. So, just how you guys are thinking about units versus ASPs in your updated guidance, as well as you kind of roll forward to your long-term targets for fiscal 24, how you guys think about that mix shift and units versus ASPs benefiting you. And then I just have a follow-up on the inventory balance. I know you guys are talking about trending that down, but is there anything to keep in mind, you know, on how gross versus net impact of promotional impact, sorry, impact the inventory balances that you guys recorded. Thank you.

Sure. So as we look forward for the year, we do, as we think about units versus ASP, for the full year, we now anticipate low single-digit growth in our units, mid single-digit growth in ASP, and that ASP is a balance of a number of things, Asya. Certainly the mix of our products will continue to play a role there. As you said, we've been pushing up to the premium, but also the channel with which we sell those products. So as our direct-to-consumer business grows, we have benefit from pricing there as well. As it relates to inventory, we do expect inventory will remain elevated, as I said in our prepared remarks, both in dollars and in days through the first few quarters and then trend down by the end of the year into the 70s in terms of days of inventory. As we look at that inventory and as as we've said previously, that is healthy inventory that we expect that we will move through the normal course of events.

Great. Thank you.

And just, you know, as you guys have, I know you guys talked about the several levers that you have to raise margins, but just given the higher promotional intensity that you guys are talking about to drive category growth and, maintain or take share. Why should investors not think about these as kind of negatively affecting your gross margins or operating margin targets that you need out at the analyst event?

Thank you. I think that the LTSM contemplated a number of tailwinds as well as an evolving competitive dynamic in how we built it. And so that we see the fruits of our R&D investments giving us growing competitive strength. I think that we are managing competitive, sorry, maximize the OI dollars in 2022. That will shift a little bit toward meeting our gross margin rate targets as we move forward. So we do have a number of different levers, and we use these levers slightly differently depending on the challenges and the market situation we find ourselves in. Again, it's a nuanced answer, but right now as we look what our priorities are for the year, we want to ensure that we maintain share. We want to ensure that we deliver on our profitability commitments, and we are in line with the gross margin rates that we committed to for the year, and so we feel that's a good set point for where we are today, acknowledging that we intend to demonstrate gross margin rate acceleration in the back half, setting ourselves up for the LTFM that we put on the street.

Great. Thank you.

You bet.

Thank you. Again, to ask a question, that is star 1 on your telephone keypad. And our next question will come from John Babcock with Bank of America.

Good morning. Thanks for taking my questions. First, I want to understand a little bit. I think a couple of years ago, you started increasing investments on the software side while continuing to invest in hardware, just maybe not to the same extent. I want to understand, at least since then, have you found this has helped to enhance your competitive position in the marketplace? Have you found this has helped to excite consumers? Because I think consumers generally, obviously, they like the new features, but at the same time, they also like things that look new and innovative. So I want to get your sense overall in terms of how those investments in software are translating into growth in that competitive mode.

It's a great question, and I'm happy to address it. As we looked at the customer requirements and customer satisfaction, what they were looking for, that the current crop of robots failed to deliver on several years ago, very clearly the ability of the consumer to control where, when, and how the robot operated was huge priority as well as the robots ability to complete missions in an environment which wasn't necessarily pre cleaned ahead of the Roombas setting off on on its cleaning mission and so that pointed to a very challenging technical issue and but also played into iRobot's strengths in artificial intelligence and machine learning. We're beginning to be able to harvest the benefits of that recognition and subsequent investments in AI technology in our J7 plus robot, where the difference from a hardware perspective between the i7 and the J7 relatively modest the difference in the intelligence between those two models is tremendous and we are seeing the j7 robot leap to being the number one seller in many of our markets including North America we are seeing that robot receiving exceptionally strong Amazon ratings we're seeing the unique features the unique software features that we introduced on that class of robot being very highly utilized. And so that really we're seeing a validation of this strategy, a validation of the insights that we perceived and the fact that we are well on our way investing in the intelligence of our robots. gives us confidence that we have a sustainable, competitive advantage in the marketplace based on those R&D investments. We're able to continuously upgrade the software in our robots. As an example, the iPurchaser of an i3 robot received major new functionality last year with the directed room cleaning coming out. to benefit that user. And so we feel like we have a platform to accelerate the delivery of innovation to our customers and accelerate our ability to differentiate. Happy to do a follow-on question if you have one.

No, I mean, that's great. I'll, you know, follow up certainly in due time on that. But, I mean, you know, I guess like the next question, you know, on supply chain, I was wondering if you might be able to talk about how that compares with last quarter, you know, what sort of disruptions you're seeing there, and particularly with some of the news around shutdowns in China. I don't know if there's any update you might be able to provide on that, but that's really, you know, what I wanted to focus on now.

Okay, sure. You know, I guess starting a year ago, iRobot and most every consumer tech company has faced the challenge of supply chain issues, shipping issues, chip shortages, and so forth. And we jumped on that aggressively to start securing longer-term partnerships with our key suppliers, longer-term partnerships with our shippers, develop the ability to second source many of our components to give us a better ability to take advantage of what supply there is out there and so here we are a year later having substantially shifted our emphasis from a pure efficiency perspective to a perspective on supply chain that balances supply chain resiliency with efficiency and so that right now we do have the inventory that we need we believe that we have sight line and the commitments required to produce the inventory reflected in the guidance that we gave today We definitely still see growing raw material costs. We see some easing of shipping costs, but certainly it is not headed back to where it was 18 months ago in a foreseeable timeframe. There continue to be sporadic shutdowns in factories and component shortages, but that's kind of... day-to-day living for us at this point, given that it's a year in and our supply chain organization has been up to the task, given the year that we've been through and the partnerships we have reinforced to manage through those challenges. So not out of the woods, but the headwinds that supply chain were for us last year are definitely substantially eased In 2022, we will have the product that we need. Shipping costs are more manageable. And with all of the work that we've done in dual sourcing, we believe we've access to the components that we need to build the product.

That's great. And the next question, I just wanted to follow up on one of the questions earlier on inventories. If you can talk about your plan to ultimately reduce those inventory levels and then also how you can do that without having any meaningful impact on pricing. I mean, it seems like inventories built up are, you know, I guess heavier than they have been at least, you know, that I can recall. So I just wanted to get your color on that.

I think Julie made the important point. All of the inventory you have is healthy inventory that we have factored into the plans to sell this year so that it gives us more confidence from an inventory availability perspective that we're well positioned to meet our revenue targets for the year. I think that as we have align production with demand. We've been able to make some adjustments to change the ramp from up to down through the balance of the year, and we're taking a sensible approach to working that revenue down over time, which limits the pressure to go take actions that might negatively impact profitability. As a commented on a few minutes ago, we are looking at a go-to-market strategy for 2022 that prioritize profitability dollars over gross margin rate, and so that we are willing to do some activities which would protect share drive units rather than maximizing gross margin rate and we think that it is prudent to do that and we can execute on that plan while still showing the growth in gross margin rate that we committed to at the beginning of the year setting ourselves up for the LTFM next year so again a lot of moving parts but I would say that no one natural acts required relative to driving down inventory, but with a willingness to go focus on driving profitability dollars that you probably won't see next year.

Okay, great. Thanks. That's all the questions I had.

Sure. Great.

Thank you. All right. And there are no further questions in the queue at this time, so I would like to turn the floor back over to Mr. Kramer for any additional or closing remarks.

Thank you. That concludes today's call. Definitely appreciate everybody's support. We know it's a very busy day for folks, so we appreciate you listening. We look forward to talking with shareholders and prospective shareholders and analysts over the coming weeks and months. Thank you once again.

Thank you, ladies and gentlemen. This concludes today's teleconference, and we appreciate your participation. You may disconnect at any time.