iRobot: All Gas, No Brakes

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Slow down, you move too fast.
You got to make the morning last.
Just kicking down the cobblestones.
Looking for fun and feelin' groovy.

I dedicate the above excerpt from Simon & Garfunkel's "59th Street Bridge Song" to Motley Fool Rule Breakers recommendation iRobot (Nasdaq: IRBT  ) -- because if anybody needs a strong dose of circa-1966 mellow, it's iRobot.

Seriously, guys. Every time I've tried to set fingers to keyboard recently and jot a few words about this Boeing (NYSE: BA  ) and SAIC (NYSE: SAI  ) partner's doings, out comes a new press release deserving attention of its own. Take last week, for example.

New York flashback
iRobot presented at the Kaufman Brothers Investor Conference in New York on Wednesday. There wasn't a lot of detail. No major revelations. Basically, CEO Colin Angle reassured us of what we've already heard: Despite a rough economy, iRobot's home-robots division is still racking up sales through its usual retail outlets, places like Sears Holdings' (Nasdaq: SHLD  ) Sears stores, Target (NYSE: TGT  ) , and Best Buy (NYSE: BBY  ) . International sales are booming, up five times from last year. And the company's more convinced than ever that it can improve margins by selling Roombas directly to consumers over the Internet.

Etc., etc.
Like I said -- we've heard that before. But the conference was noteworthy for a few statements that appeared toward the end, courtesy of new CFO John Leahy.

Back in February, you may recall, in iRobot's year-end 2007 conference call, management highlighted a few problems that needed fixing, but soft-peddled them. Soaring inventories were both "anticipated" and "required" to support the growth of the business. However, Leahy mentioned something about improving the supply chain to improve inventory management. And while profits weren't up to snuff, management promised to reduce operating costs and improve product quality to reduce the cost of returns.

Etc. won't cut it
No more. New numbers-boss Leahy seemed almost chagrined at the state of his financial statements. In particular, the reductions in cost and the quality improvements that were promised more than six months ago have yet to appear. Also, Leahy acknowledged a real need to "improve working capital management." Far from "required," management now views iRobot's inventory as a liability that needs to be worked down to get cash flowing through the business. (More on why in a moment.)

We also walk dogs
Which brings us to the two announcements released on the same day as the conference. Garnering the most headlines were iRobot's new Roomba Pet Series Robots, aimed at sucking up even more hair and dander. More than just a product extension and an "upsell" opportunity to current Roomba owners, these introductions (it seems to me) give iRobot an entree into pet retailers. While management said nothing specific, I expect to see Petco and PetSmart (Nasdaq: PETM  ) hawking Roombas in the very near future.

And as a matter of fact, we do do Buicks
The other product release could be even more significant. Last year, I had the pleasure of interviewing iRobot CEO Angle (read an excerpt here). Among the several subjects we covered was one sore point: A quote, attributed to Angle in a 2006 column in Forbes, according to which Angle quipped: "We don't do Buicks" -- shorthand for industrial robots, as opposed to the "sexier" fields of military robots and, um, vacuum cleaners.

Angle disclaimed the quip: "Now this one confuses me, as I don't remember saying it. While iRobot does not focus on manufacturing robots, such as robots that build cars, we are absolutely interested in industrial applications of our technology."

True to Angle's words (if not to those put into his mouth), iRobot announced last week the "iRobot Roomba 610 Professional Series Vacuum Cleaning Robot ... perfect for maintaining office spaces or large high traffic areas." So you can add a new customer category to iRobot's list: offices and storefronts. We'll definitely want to keep an eye on how well this one sells.

A few thoughts on "reach" and "grasp"
And now let's wrap up (Quick! Before iRobot puts out another press release), with Monday's news that iRobot is buying little-known Nekton Research for $10 million, and potentially $15 million. Investors seemed to like the news, bidding iRobot up on Monday. Me, I'm not so sure.

I certainly see why iRobot wants Nekton. It complements iRobot's key position in developing Seaglider Autonomous Underwater Vehicles (AUV) for the Navy. Nekton works on a "kamikaze" AUV for underwater mine detonation -- a logical fit with iRobot's landlubbing explosive ordnance disposal robot. That said, I fear iRobot's reach may exceed its grasp here.

Remember iRobot's troubles with cash flow, highlighted by the CFO? Well, unless iRobot gets these fixed right quick, the Nekton purchase could eat up a great deal of cash and equivalents that iRobot has on its balance sheet, raising the specter of a dilutive share issuance, or a need to go into debt to fund the Nekton purchase.

Slow down, iRobot, you move too fast,
You gotta make sure your cash will last ...

Read more about iRobot's military ventures in:

Fool contributor Rich Smith owns shares of iRobot and Boeing. Sears Holdings, SAIC, and Best Buy are Motley Fool Inside Value picks. iRobot is a Motley Fool Rule Breakers recommendation. PetSmart and Best Buy are Motley Fool Stock Advisor picks. The Fool owns shares of Best Buy.

Why do we tell you all of this? Because The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 10, 2008, at 4:38 PM, capitalgorilla wrote:

    well put Rich,

    My take: They hope to net more than 2H07 $19M to pay for Nuvitek. Else their cashflow may continue negative... sending balancesheet-cash in the red.

    Doesn't seem easy to achieve with the not-so-hot forecast for Q3/Q4 7% over 2H07,and lower Gross Margins.

    Despite the presentation I feel, hope, guess they totally understated 2H08 and will outperform 2H07 by a long shot and maybe look good

    Rgds, Steve Caps player capitalgorilla

  • Report this Comment On September 10, 2008, at 8:24 PM, TMFDitty wrote:

    Thanks, cg. Also, I see that a few of the supporting links I'd included in the article got stripped out. I'll post these on the RBS: iRobot board for y'all to review.


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