Foolish Forecast: 2 Sides of iRobot

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As we learned last quarter, iRobot (Nasdaq: IRBT) expects to report "substantial" sales growth when it announces Q1 2008 earnings tomorrow -- and in all likelihood, a warning of even more substantial declines in Q2. How should investors interpret the expected conflicting news? Here are a few clues.

What analysts say:

• Buy, sell, or waffle? Eight analysts now follow iRobot, up one from last quarter. Buy ratings outnumber holds 5 to 3.
• Revenue. How substantial will the sales gains be? Wall Street predicts 39% growth to an even $55 million.
• Earnings. Unfortunately, the Street also thinks the company lost money -- $0.16 per share.

What management says:
Big news came in small packages at iRobot this quarter, with the company's award of a DARPA contract to develop LANdroids (no relation to the esteemed Mr. Calrissian of Star Wars) for the military. The tiny, deck-of-playing-cards-sized robots look like miniature versions of the SUGV that iRobot has already put together in conjunction with SAIC (NYSE: SAI) and Boeing (NYSE: BA), but they serve another function entirely. LANdroids will act as mobile walkie-talkie base stations, following soldiers around and maintaining communications with HQ in the field. If the contract's implemented in scale, my exceedingly dubious calculating skills put its eventual value in the tens of millions (check my math here).

In other news, CEO Colin Angle began a 10b5-1 trading plan to sell off nearly 10% of his stake in the company over the course of a year. Angle owns 7% of the shares outstanding, so with the trading plan, he intends to float about 0.7% of all shares outstanding. Doesn't sound like a lot, but I could certainly see this putting some downward pressure on the stock price.

What management does:
Not that iRobot needs the pressure. Gross margins were declining steadily (at least, up until last quarter, when they ticked back up).

Margins	9/06	12/06	3/07	6/07	9/07	12/07
Gross	36.3%	36.9%	36.1%	35.6%	32.7%	33.2%
Operating	1.4%	0.0%	(1.3%)	(2.7%)	(8.0%)	(0.1%)
Net	3.1%	1.9%	0.5%	(1.0%)	(6.4%)	3.6%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
So what's behind iRobot's expected surprise outperformance in Q1, and its equally expected underperformance in Q2? Two trends play into the news. On the plus side, the company's new line of Roombas and their relatives have been flying off the shelves at retail outlets such as Best Buy (NYSE: BBY), Target (NYSE: TGT), and Sears (NYSE: SHLD). Bolstering these civilian sales trends are military contracts for iRobot's line of SUGVs, PackBots, and the like. But in Q2, military sales are expected to hit a lull, coincidentally just as iRobot ramps up its research and development spending for the year.

Now throw in Angle's (pre-planned, automatic, out of his control,  yada, yada, yada) selling spree, and new competition from General Dynamics' (NYSE: GD) expanded interest in the military robots market, and I see tough times for iRobot shareholders in the quarters to come. For my part, I'm prepared to hold fast to my shares, but I expect iRobot to do its part, too, and come through on its promised improved gross margins, economies of scale, and contained operating costs. We'll find out tomorrow whether iRobot can deliver.

Catch up on all the latest iRobot news with:

• iRobot Picks Up the Phone
• Walking, Talking iRobot
• Foolish Forecast: iRobot's Still Dancing