iRobot Corporation

Hello, everyone, and welcome to this iRobot third quarter 2024 financial results conference call. At this time, all participants have been placed in a listen-only mode, and a question-and-answer session will follow the company's prepared remarks. Please note that today's call is being recorded, and I would now like to turn the call over to David Kaluzdian from the company's investor relations firm, Sharon Merrill Advisors. Please go ahead, sir.

Thank you, Jim, and good morning, everyone. Joining me on today's call... are Gary Cohen, iRobot's CEO, and Julie Zeiler, Executive Vice President and CFO. At the outset, I would like to remind everyone that today's discussion will include forward-looking statements regarding future events and future financial performance. These statements reflect the company's views as of today only and should not be considered as representing its 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 the company's filings with the SEC. Related to the company's financial disclosures during this conference call, the speakers will reference certain non-GAAP financial measures as defined by SEC Regulation G, including non-GAAP gross margin, non-GAAP operating expenses, non-GAAP research and development, non-GAAP sales and marketing, non-GAAP operating income, and non-GAAP net income and loss per share. Management believes that these non-GAAP financial results provide additional transparency into iRobot's underlying operating performance and potential. 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 in the earnings presentation included in the Q3 2024 earnings conference call event details, which is available on the company's website at www.irobot.com. Also, unless stated otherwise, the third quarter financial metrics that will be discussed on today's conference call, including the financial metrics provided in the outlook, will be on a non-GAAP basis only, and all historical comparisons are with the third quarter of 2023. On today's call... Gary will briefly cover the company's quarterly results, review important strategic milestones, and outline the company's expectations for the fourth quarter. Julie will review iRobot's financial results and provide additional insights regarding the company's full-year outlook. Gary will then provide closing remarks before we open the call for questions. With that, I'll turn the call over to Gary.

Thank you, David, and good morning, everyone. Thank you for joining us today. It has now been six months since I took the helm at iRobot. During that time, I've had the opportunity to engage with consumers, employees, retailers, contract manufacturers, and of course, shareholders. As we begin this new chapter in iRobot's history, one thing is abundantly clear. We have a powerful brand that will serve as the foundation for the turnaround of this company. It should come as no surprise that in my conversations with stakeholders, It is the power of our iconic brand that comes up again and again. That brand power is at the heart of our turnaround strategy, iRobot Elevate. In executing iRobot Elevate, we are focused on providing our iconic brand with an improved platform to return to profitable growth. We are making operational and organizational changes and bringing new innovative products to market. While this work is ongoing, we are already realizing benefits in our improved financial performance. We recognize that turnarounds of this scale take time, but I am encouraged by our progress toward the goals that we set in February. In Q3, we expanded our gross margin by 590 basis points year over year and continued to improve our use of operating cash. We remain focused on driving efficient inventory balances and executing on our restructuring plan to right-size operating expenses. For the first three quarters of the year, we have cut our operating losses in half as compared to the year before. However, our overall results did not meet the expectations we set in August, as persistent market segment and competitive headwinds impacted our sell-through performance. At a macroeconomic level, This continues to be a challenging market environment for consumers, which may influence this upcoming holiday shopping season. As a result, we are resetting our guidance for the full year, which Julie will discuss shortly. While we expect it will take time to see stabilization in our revenue trend, we are on track to exceed our operating expense targets while continuing to invest in areas that drive revenue and improve our foundation for profitable growth. To expand our new product pipeline, in July, we announced the creation of iRobot Labs, which will serve as our innovation center. iRobot Labs represents our global initiative to harness the strength of our domestic product and software engineering talent. At the same time, we are leveraging the specific strengths of select partners around the world. The team is focused on reducing our time to market while advancing the technological leadership that iRobot is known for. We've reduced R&D and supply chain expenses by relocating certain non-core engineering and supply chain functions, utilizing greater use of third parties, and transitioning to a new product development paradigm with our partners and contract manufacturers. As part of our ongoing restructuring plan, yesterday we announced an additional round of workforce reductions, totaling approximately 105 employees. Since the start of 2024, we have now reduced our global workforce by approximately 50%. These moves, while challenging, have fundamentally changed the way we work with our partners to efficiently develop and build our robots. Our new operating model is able to deliver a significant increase in new product introductions with less than half the internal resources and approximately one-third the cost. This transformation is central to improve our performance and generate long-term shareholder value. To reignite growth, we continue to refresh our product line to deliver innovative technology that reduces the time families spend on cleaning. With the benefit of lower product costs and reduced development timelines, we expect to drive revenue growth at enhanced margins and improved profitability in 2025. Last month, we launched the Roomba Combo 2 Essential, and the Roomba Back 2 Essential, which give customers twice the cleaning power of their predecessor models, and they bring self-emptying capabilities for up to 60 days via an auto-empty dock. In July, we launched the Roomba Combo 10 Max with AutoWash Dock, which is our best cleaning, most intelligent, and independent robot vacuum and mop to date. It is also our first entry into the exciting and fast-growing market segment of multifunctional docks. And this past April, we launched the Roomba Combo Essential, an affordable and easy-to-use two-in-one robot vacuum and mop that has a higher gross margin due to our new product manufacturing strategy. The Roomba Combo Essential is available in more than 14,000 stores worldwide and recently received the PCMag Editor's Choice designation. These products are significant additions to our portfolio and will be followed by a revitalized lineup for 2025. This includes the largest product refresh in the company's history, with an unprecedented number of new product launches across our good, better, and best price points. And they will be supported by an all-new user app. These new offerings are all margin accretive compared to the products they are replacing, and all include advanced features and performance, and all new mapping and navigation technologies. Growth margin expansion is an important element of our iRobot Elevate strategy for unlocking value and fueling our growth drivers. We have an enviable, robust IP portfolio and tremendous brand value. Together, they provide the solid foundation on which we are building our newest products. We are striving to reclaim our position as the global innovation leader in consumer robots for the home and beyond. As we adjust and revitalize our product lineup, we are not yet participating in a number of market segments in terms of product features and functions. Our Q3 results and Q4 outlook partly reflect that. But even in our current turnaround, iRobot continues to be the leader in several segments, and we remain confident that as we aggressively introduce new robots with more features and enhanced capabilities, our share and sales volume will rebound. And consumers remain loyal to the Roomba brand. In fact, in a recent promotion with one of our major retailers, iRobot had four of the top five SKUs in the robot vacuum cleaner category. We still have work in front of us to become a more agile growth business, but our culture of innovation remains strong, and I believe that we can achieve our growth and value creation goals. I see incredible opportunities for this company, and we are optimistic about our prospects in 2025. This optimism is based on our expectations regarding the growth in the robotic floor care category as a whole, as well as success from our own new product programs. In terms of category growth, we are encouraged by positive third-party assessments of U.S. market trends. We believe that we will start to see a return to growth in the U.S. next year. EMEA is already seeing such a return to growth, and in Japan, we expect growth will be driven by our new products and advertising push and a geographic region where we are still a market leader. Our new product program should begin supporting revenue growth in the second half of 2025. We plan to leverage that top line growth with a lower cost structure to drive improved bottom line performance and are on track for continued gross margin expansion and improved cash flow from operations. Now, before we get into the financials, I'd like to discuss some upcoming changes to the executive leadership team which we announced today in a separate press release. Julie Zeiler, our CFO, and Russ Campanello, our CHRO, have decided to retire effectively next month. Russ is leaving after more than 14 years with iRobot. He has been a dedicated leader, building the talent infrastructure that will be critical to helping us achieve our future growth. We thank him for his many contributions and wish him all the best. Russ will stay on in an advisory capacity until March 28th. Julie joined iRobot in 2017 and has served as CFO since 2020. She has been instrumental in our aggressive efforts to position the company for profitability during what has been a very dynamic and challenging time. She will formally step down on December 2nd, but will also stay on in an advisory role through March 28th. As announced, Jules Connolly is returning to iRobot as our Chief Human Resources Officer. She had a seven-year tenure with iRobot, most recently as Senior Director of Human Resources, and brings deep experience designing and implementing effective HR processes with an emphasis on talent acquisition, employee engagement, and retention. Taking over as CFO will be someone most of you know well, Carrie Ann Wong, our Senior Vice President and Principal Accounting Officer. Karian has more than 25 years of auditing and accounting experience and has been with iRobot for more than seven years. She also has been leading our investor relations efforts for the past two years. I am pleased that this thoughtful and deliberate succession process resulted in having experienced executives in both positions with a solid understanding and historical perspective of iRobot. Jules and Karian are two executives that represent the next generation of leaders for iRobot. and I look forward to working closely with them. Before I turn the call over to Julie, I know that I speak for everyone on the leadership team when I say thank you for all of your hard work, and we wish you nothing but the best in your retirement.