iRobot Corporation

Welcome to the iRobot fourth quarter and full year 2023 earnings conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. Lastly, if you should require operator assistance, please press star zero. I would now like to turn the call over to Carrie Ann Wong, Chief Accounting Officer. Please go ahead.

Thank you, Jamie, and good morning, everybody. Joining me on today's call are iRobot Interim CEO Glenn Weinstein and Executive Vice President and CFO Julie Silas. Before I set the agenda for today's call, I would like to remind everyone that today's discussion will include forward-looking statements regarding future events and our future financial performance. These statements reflect our views as of today only and should not be considered as representing our views as of any subsequent date. These statements are subject to risks and uncertainties that could cause actual results to differ materially from expectations reflected in the forward-looking statements. A discussion of these risk factors is fully detailed under the caption risk factors in our filing with the FCC. Related to our financial disclosure during this conference call, we will reference certain non-GAAP financial measures as defined by FCC Regulation G, including non-GAAP gross margin, non-GAAP operating expense, non-GAAP operating loss, and non-GAAP net loss per share. We believe that our non-GAAP financial results help provide additional transparency into iRobot 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 measures are provided in the financial tables at the end of the fourth quarter 2023 and full year 2023 financial results press release we issued last evening. which is available on our website at www.iRobot.com. Also, unless stated otherwise, our fourth quarter and full year 2023 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 fourth quarter of 2022 and full year of 2022. For today's call, our agenda will be as follows. Glenn will briefly cover the company's quarterly and annual financial results, review important strategic milestones, and outline our expectations for 2024. Julie will review our financial results in detail and offer additional insights into our 2024 guidance. Glenn will conclude our commentary with some closing remarks about prospects over the longer term. After that, we'll open the call for questions. At this point, I'll turn the call over to Glenn.

Good morning, and thank you for joining us. I'll start our call today by reiterating my confidence in iRobot, our mission, and our ability to navigate our next chapter. I have been part of this organization for more than two decades. I know who we were, who we are, and who we can become. At our foundation is a product that customers love and an incredible team of builders and innovators who are passionate about the robots we create. And because of this, our potential is great. Our future is different than we had envisioned in August of 2022, or even at the start of this year, given the decision by iRobot and Amazon to terminate our transaction. The management team and board are confident in our ability to build on our legacy of innovation as a standalone company and to navigate this period successfully. As we shared on January 29th, we are taking aggressive action to significantly improve our near-term operations. To that end, today I'm going to outline the tenets of the restructuring plan we announced last month. I'll also provide additional information on how that work is progressing and what you can expect from us going forward. Julie will then cover financials for the quarter in greater detail, as well as our outlook for 2024. Then we'll open the call for questions. Before I jump into the restructuring plan, I'll touch on our financials at a high level. Our performance continues to be impacted by sluggish consumer spending as well as aggressive competition in all regions. We generated fourth quarter revenue of $308 million with a gross margin of 19%. We managed our costs carefully to report an operating loss of $45 million and a net loss per share of $1.82. For the full year, Revenue declined to $891 million with an operating loss of 22% and a net loss per share of $7.73. We have a plan to address our performance and these macro trends. The operational restructuring plan we announced last month is designed to stabilize the business in our current environment while also advancing our longer-term growth initiatives. The operational restructuring plan is centered around simplifying our cost structure, implementing a more sustainable business model, and focusing on our core value drivers. Those core value drivers are, first, leverage our brand and innovative products to extend or reclaim our leadership in the mid and premium segments. And second, focus on geographies that offer the greatest scale and profitability. Our immediate priorities in executing this plan are to more closely align our cost structure with near-term revenue expectations, improve liquidity, and drive bottom line improvements. Specifically, the plan is structured to first, achieve gross margin improvements through a focus on design to value and removal of unnecessary costs, and more attractive terms with our manufacturing partners. Second, Reduce R&D expenses by relocating certain non-core engineering functions, including increasing reliance on third parties to provide those functions, and pausing work unrelated to our core floor care business. Third, centralize our global marketing activities to be more efficient in demand generation and provide a meaningful reduction in non-working marketing and agency fees. And fourth, streamline our legal entity and real estate footprint to fit our current business needs and near-term revenue expectations. The cornerstone of our gross margin improvement plans, which we have been working on for nearly a year, is a new relationship paradigm with our contract manufacturers, both existing and new. We are relying on the expertise of our contract manufacturers to a greater extent than we have in the past, taking advantage of a matured supply chain and expertise in design for manufacturing and flexibility in components. This shift, along with competitive bidding of our design packages, is a key component in unlocking an approximately nine and one half to 11 and one half percentage point improvement in full year 2024 gross margin. We expect to see the benefit of these improvements in the P&L primarily in the second half of the year as the higher cost products are moved out of inventory and we benefit from new products released during the year that have lower costs than the products that they will have replaced. We have more work to do, but we anticipate a gross margin of between 32 and 34% in fiscal 24. Hand in hand with the shift to a greater reliance on contract manufacturers for certain work is the ability to decrease our R&D expenditures, particularly as it relates to lower value commodity engineering work. We plan to continue to invest in the higher value robotics, computer vision, machine learning, and complex mechanical design to improve the core functionality of our robots. We plan to take advantage of opportunities to source sub-components and, in some cases, nearly complete robot designs from third parties. In 2024, we expect to see a decrease in overall R&D expenses by approximately $25 million. In sales and marketing, we had built an infrastructure to support revenue at the higher pandemic rates, and now we need to aggressively return to a more normalized level where we can operate the business profitably. We will focus resources on a more limited geographies and consolidate marketing efforts for greater efficiency. In 2024, we expect to see a decrease in overall sales and marketing expenses of approximately $40 million, including a decrease in working marketing of approximately $20 million. While this might put pressure on our revenue in the short term, we are returning to a more disciplined approach to demand generation. In line with these initiatives, we will reduce our workforce by approximately 350 employees, which represents approximately 31% of iRobot's workforce. These reductions are expected to result in restructuring charges totaling between $12 and $13 million, primarily for severance and related costs, over the first two quarters of 2024. We are in the final planning stages for these difficult actions and expect to begin implementing these changes beginning in early March. As previously announced, we have engaged a Chief Restructuring Officer, Jeff Angle, to oversee these initiatives, and he is reporting directly to both the Board of Directors and me. Jeff is fully empowered to make not only these necessary changes, but to scour our cost structure and look for opportunities for savings and efficiency improvements. Liquidity and careful cash management are our top financial priorities. We anticipate a significant improvement in our 2024 cash flow from operations compared with full year 2023 and anticipate generating modest positive cash flow from operations in both the third and fourth quarter of 2024. We have always had an amazing team of builders who are eager to identify problems and create solutions. We recognize the importance of our people. They are vital to the success and growth of the company, and we appreciate their ongoing hard work and dedication. While the financial actions we are taking are essential to the near-term operations of the business, They are not being taken at the expense of advancing important work on growth initiatives. As we shared last month, we have made the decision to focus our innovation and development efforts on iRobot's key revenue generators, pausing all work related to non-floor care innovation. Our focus is on executing the near-term plans and moving quickly and decisively to continue to delight customers. we are laser-focused on the initial impressions of our new customers. We know that the first experience of taking our products home, unboxing, and performing the initial setup routines and creating the first maps and schedules are an important foundation for longer-term usage and customer satisfaction. Additionally, we continue to enhance our go-to-market playbook, which focuses the business on iRobot's most profitable customers, geographies, and channels, including our growing direct-to-consumer channel, while rebalancing our spending mix between price promotion and demand generation to optimize returns. We believe it is important to meet our customers at the locations where they want to discover and purchase our products. We will retain an omnichannel presence in our large markets while further leveraging existing and new distributor partners in smaller geographies. Our direct-to-consumer channel continues to be an area of focused investment, ensuring it is the easiest place to buy and own a Roomba. We expect that this channel will grow approximately 5% in 2024 and represent approximately 20% of total revenue. We have an iconic brand that people love, Our marketing efforts will support key retailers in stores and online to deliver the premium experience that our customers expect and deserve. In the near term, we are taking the necessary actions to stabilize the business, improve liquidity, and focus on bringing innovative products to our customers. We are confident in our ability to build on our legacy of innovation as a standalone company and to navigate this period successfully. Now I'll hand it over to Julie to discuss financials.