iRobot Corporation

Please stand by. Your program is about to begin. If you need any assistance during the conference today, please press star zero. Welcome to the iRobot Earth Quarter 2024 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. A question and answer session will follow the company's prepared remarks, and if you would like to ask a question at that time, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. For best sound quality, we do ask that you please pick up your handset. And lastly, should you require operator assistance, please press star zero. I would now like to turn the call over to Carrie Ann Wong, iRobot Senior Vice President and Principal Accounting Officer. Please go ahead.

Thank you, operator, and good morning, everybody. Joining me on today's call are Glenn Weinstein, and Executive Vice President and CFO Julie Seiler. 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 risk 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 Filings with the SEC. Related to our financial disclosure during this conference call, we will reference a certain non-GAAP financial measure as defined by SEC 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's underlying operating performance and potential. Our definition of these non-GAAP financial measures and reconciliations of each of these non-GAAP financial measures to the most directly comparable GAAP measures are provided in the earnings press release we issued last evening. which is available on our website at www.irobot.com. Also, unless stated otherwise, our first quarter 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 2023. For today's call, our agenda will be as follows. Glenn will briefly cover the company's quarterly results, review important strategic milestones, and outline our expectations for 2024. Julie will review our financial results in detail and offer additional insight into our Q2 and 2024 outlook. 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'd like to note that, as announced in a separate press release last night, the board has appointed Gary Cohen as iRobot's new CEO, effective immediately. Gary was previously the CEO of Qualitor Automotive and of Timex and held senior leadership positions at Gillette, Playtex, and Energizer. In all, he has more than 25 years of executive leadership experience and a track record of successful turnarounds. During Gary's tenure at Qualitor, the company nearly doubled revenue and profits. He will lead iRobot's transformational strategy, overseeing all aspects of the company's business, including innovation, product and commercial strategies, operational excellence, talent, and working across the organization to build a sustainable competitive advantage and consumer-centric brand. On behalf of the leadership team, I want to welcome Gary to iRobot. I know he is looking forward to meeting with our investors as well as our employees and commercial partners as he comes up to speed. Turning to our quarterly results, we took aggressive action in Q1 to implement our restructuring plan to significantly improve our near-term operations. On today's call, I'll share with you the progress we have made with key elements of the plan and discuss what you can expect from iRobot moving forward. With the successes we achieved in the first quarter, and with a new CEO in place, we are all the more confident in our robot's ability to build on our legacy of innovation. In the first quarter, we exceeded the goals we set out on our fourth quarter call and subsequent outlook release. As we had expected, our Q1 performance was affected by overall consumer spending trends for domestic appliances and by aggressive competition across all regions. In total, we generated revenue of $150 million with a gross margin of 24.6%. And reflecting significant improvements to our cost structure, we reported an operating loss of $40 million with a net loss per share of $1.53. Later on the call, Julie will provide our Q1 financials in greater detail, along with our outlook for both the second quarter and full year 2024. Operationally, Q1 represented an important first step with respect to our restructuring plan. The plan is designed to stabilize the business in the current market environment without sacrificing longer-term growth initiatives. We are committed to simplifying our cost structure, implementing a more sustainable business model, and concentrating on our core value drivers. We are leveraging our brand and innovative products to extend or reclaim leadership positions in the mid and premium market segments as well as leveraging our new product launches that balance price point and cost to participate more fully in the entry market segment. In addition, we are focused on geographies that offer the greatest scale and profitability. In executing this plan, we are aligning our cost structure with near-term revenue expectations to enhance liquidity and drive bottom line improvements. In concert with our Chief Restructuring Officer, Jeff Engel, we are streamlining our operations developing new products more efficiently, and driving increased spending discipline and cash management. As previously discussed, the plan is structured to, one, achieve gross margin improvements through a focus on design to value and removal of unnecessary costs, and more attractive terms with our manufacturing partners. Two, reduce R&D expense by relocating certain non-core engineering functions including the greater use of third parties to provide those functions, and pausing work unrelated to our core floor care business. Three, centralize our global marketing activities to be more efficient in our demand generation efforts and reduce non-working marketing and agency fees. And four, 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 plan is the new relationship paradigm with our contract manufacturers. We are relying on the expertise of these contract manufacturers to a greater extent than we have in the past, taking advantage of their mature supply chain, expertise in design for manufacturing, and flexibility in component selection. This shift, along with competitive bidding of design packages, is key to our goal of unlocking improvement in full-year 2024 gross margins. which we expect to see the benefit in the P&L primarily in the second half of the year as higher cost products are moved out of inventory. While we are working on a number of projects, we launched the Roomba Essential Robots to consumers early in the second quarter. These are the first products to benefit from our new product development paradigm with our contract manufacturers and represent the balance of price point and cost that we are looking to maintain going forward. They replace our very successful 600 series with an improved gross margin and enhanced customer experience. The changes we are making with our contract manufacturers allows us to reduce our R&D expenditures, particularly with respect to lower value commodity engineering work. Within R&D, we expect to see a reduction of approximately $35 million year over year with an exit rate at the end of 2024 representing R&D expenditures at below 10% of revenue. Importantly, while we are increasing reliance on third-party partners, we are continuing to invest in higher-value robotics, computer vision, machine learning, and complex mechanical design to improve the core functionality of our robots. For sales and marketing, we are focusing our resources on limited geographies and consolidating marketing efforts for greater efficiencies. While this might put pressure on our revenue in the short term, it represents a more disciplined overall approach to demand generation. Specifically, while in Q1 revenue was down 6% year over year, sales and marketing saw a 30% improvement in costs as we continue to focus media expenditures on digital channels and customer conversions. This focus in Q1, and in part based on fast-selling end-of-life SKUs, contributed to more than 25% of our revenue being from e-commerce, a rate that we do not anticipate sustaining over the next few quarters. Again, based on our focus on limited geographies, in April, iRobot began selling at Yamada, Japan's largest electronics retailer. This is a significant expansion of points of sale and represents an opportunity to be in front of even a larger customer base. At the end of Q2, we plan to transition certain markets to existing distributors to improve how we service customers in those regions. As a reminder, while we have some Mother's Day related marketing spend in Q2, for the full year we expect to see a decrease in overall sales and marketing expenses of nearly $40 million, including a decrease in working marketing of approximately $20 million. Finally, we have taken steps to terminate various global lease commitments and increase subletting of excess space in our Massachusetts headquarters. In addition, we have streamlined operations and headcount across G&A. As we mentioned last quarter, based on all of these actions, we anticipate a significant in our 2024 cash outflow from operations compared with full year 2023. We also anticipate generating modest positive cash flow from operations in both Q3 and Q4. While the operational and financial actions we are taking are essential to the near-term stability of the business, they are not being taken at the expense of our longer-term growth initiatives, which include innovation, and development efforts on iRobot's key revenue generators. Our focus is on executing near-term plans and moving quickly and decisively to delight customers. In short, we have an iconic brand that people are passionate about, and we have great products. About five weeks ago, Consumer Reports released its 2024 Guide to Robotic Vacuums. iRobot products held all five top positions and seven of the top eight rated robots. With new models coming and our focused marketing driving sales at key retailers and online, we believe we are well positioned to stabilize the business. The first quarter represented an important step in iRobot's journey, and we are proud of the way the team was able to deliver on the promises we outlined previously. The team looks forward to updating you on our continued progress. With that, I'll turn the call to Julie.