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iRobot Corp (NASDAQ:IRBT)
Q2 2019 Earnings Call
Jul 24, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the iRobot Second Quarter Financial Results Conference Call. This call is being recorded. At this time for opening remarks and introduction, I would like to turn the call over to Elise Caffrey of iRobot Investor Relations. Please go ahead.

Elise P. Caffrey -- Investor Relations

Thank you, and good morning. As many of you know, today is my last earnings call at iRobot. My successor, Andy Kramer, joined the Company about a month ago and we've been working together to ensure a smooth transition. I greatly value the relationships, I felt with our analysts and investors over the years.

I'll now turn the call over to Andy.

Andrew Kramer -- Investor Relations

Thank you, Elise, and thanks, again for all your helps in starting at the Company.

Before I introduce the iRobot management team, I would like to note that statements made on today's call that are not based on historical information are forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties and involve many factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information on these risks and uncertainties can be found in our public filings with the Securities and Exchange Commission. iRobot undertakes no obligation to update or revise these forward-looking statements, whether as a result of new information or circumstance.

During this call, we may also disclose non-GAAP financial measures as defined by the SEC Regulation G, including adjusted EBITDA, non-GAAP gross profit, non-GAAP operating income, non-GAAP income tax expense, non-GAAP net income and non-GAAP net income share. Our 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 financial tables at the end of the second quarter 2019 earnings press release, we issued last evening, which is available on our website.

On today's call, iRobot Chairman and CEO, Colin Angle will provide a review of the Company's operations and achievements for the second quarter of 2019; and Alison Dean, Chief Financial Officer, will review our financial results for the second quarter. Colin and Alison will also provide our business and financial expectations for fiscal 2019. Then, we'll open the call to questions.

At this point, I'll turn the call over to Colin Angle.

Colin Angle -- Chairman, Chief Executive Officer and Founder

Good morning, and thank you for joining us. We had another strong quarter with revenue growing 15% over Q2, 2018. Our growth was led by Japan with more than 25% growth, followed by EMEA with 18% growth and 12% growth in the United States. Our Q2 operating income and EPS results were higher than anticipated, in large part due to our efforts to carefully manage spending. Year-to-date segment growth in EMEA and Japan was generally in line with our expectations.

The US segment did not accelerate in the second quarter, as we had expected, but we have maintained our segment share in this region and are not seeing any share erosion due to competition. We are, however, navigating the US market segment that is growing more slowly than we had originally anticipated, driven by the direct and indirect impacts of the ongoing US/China trade war and related tariffs. So although we achieved our Q2, US revenue target, we are lowering our second half expectations for this region. Nevertheless, we view tariffs as a short term impediment to more robust US segment expansion. We remain optimistic that the category will ultimately return to stronger growth over the medium and longer-term, and that iRobot will be well positioned to benefit whenever that occurs.

As a reminder, in February, our expectations for 2019 were based on 10% tariffs that we did not think would materially impact segment growth. In April, we reaffirmed those expectations. Today, following the implementation of increased tariffs to 25% on May 10th, and the resulting slower-than-expected segment growth in the US, which represents roughly half our revenue, we now expect full-year 2019 revenue of $1.2 billion to $1.25 billion or year-over-year growth of 10% to 14%. To mitigate the impact of lower-than-expected revenue and increasing gross margin pressure, we began to recalibrate spending in ways that we believe will help preserve near-term profitability, without compromising our ability to innovate, expand the business and create long-term value for all our stakeholders. We now anticipate offering income of $75 million to $100 million and EPS of $2.40 to $3.15 in 2019.

Now, I'll take you through some of the quarterly highlights and our business expectations for the rest of the year. In May, we successfully launched two revolutionary new cleaning robots in the US, the Roomba s9 and s9+, the most intelligent, powerful, deepest cleaning Roomba to-date, and the Braava jet m6 Robot Mop, which can tackle multiple rooms and large spaces with advanced navigation and mapping capabilities. Together, these two robots can use Imprint Link Technology to talk to each other, automatically vacuuming and then mopping without any effort from the user. We've talked for some time about robots working together in your home, leveraging or mapping and navigation technologies, as the next step toward realizing the dream of the smart home.

Following the launch, I was keynote speaker at re:MARS, Amazon's AI and robotics event, where we presented our vision for robotic automation in the home. The s9+ and m6, as well as our soon to be launched robot mower Terra, we are working conjunction with other smart home products in the Alexa and iRobot Smart Home. They're continuing to demonstrate how our digital product architecture is increasingly a differentiator. The proprietary software in a robot is the key to enabling spatial understanding that is fundamental for harnessing the full power of the smart home ecosystem. The re:MARS event raised our visibility as part of the smart home ecosystem and the support we're getting from partners like Amazon in making the smart home a reality is very gratifying. I will share some details about our Amazon Prime Day success in a moment.

But it's worth noting that Amazon sold millions of smart home devices that day and specifically cited Roomba, as one of the event's top selling deals in the smart home category. By the end of 2019, we expect to have sold over 9 million connected robots, and we've begun a developer program that enables third parties to leverage iRobot's home understanding, with the homeowners permission. This progress demonstrates that we are building a strong foundation for our growing role in the smart home.

Now, turning to second quarter performance by region. We delivered 12% year-over-year revenue growth in the US, while international revenue increased 18%. In the United States, we believe that we've maintained segment share year-to-date that is comparable to last year, even as the categories estimated growth did not increase at the rate we had expected. We believe that higher tariffs, compounded by a lack of competitive investment rather than market saturation, are creating a speed bump in the categories growth trajectory.

Our fifth consecutive invitation into and performance on Amazon Prime Day earlier this year helps validate our perspectives. Amazon included three SKUs for this year's Prime Day versus only one entry level SKU in prior years. For the US primary event, our Roomba 980, the most expensive SKU we've ever promoted on Prime Day sold out on the first day, which we believe demonstrates continued consumer interest and demand for a premium priced, Roomba robot. In total, the US event yielded a 90% increase in retail revenue, with a 50% increase in units versus last year's Prime Day.

Internationally, where it was our second consecutive invitation into Prime Day, retail revenue grew by 35%, with units increasing by nearly 45%. We are thrilled with these results. But it's still too early in the year to know how this performance may influence current retailers holiday buying expectations. Nevertheless, our success on Prime Day illustrates that underlying demand for RVCs remains vibrant, similar to how it was before tariffs.

In other news, we remain on track to begin our closely controlled US data program for Terra, our robot mower in Q3. The timing is expected to coincide with the limited launch program for Terra in Germany. Interest from potential beta participants and buyers has been overwhelming, and we are very excited to be launching this new category of robots for the home.

In EMEA, revenue grew 18% year-over-year in the second quarter, driven primarily by enthusiasm for the i7/i7+. The RVC segment is growing robustly in the region, which is attracting more competition. We are responding to a shift in landscape with more pricing and promotional programs. Looking ahead, the s9 and s9+ and m6 robots are launching in EMEA this quarter, which we believe will further increase our product differentiation.

And in Japan, we delivered another strong quarter, with revenue up versus Q2, 2018 by more than 25%, driven by the i7 and i7+ and the e5, all of which are performing better than expected. The m6 is launching in July,and the s9 and s9+ are scheduled for introduction early next year. iRobot continues to gain share in this market segment, and we believe that our upcoming launches can help us build on our momentum. Globally, we continue to expect full year double-digit revenue growth domestically and overseas. New products, which include i7 and i7+ in international markets are on track, with our target of 15% of total 2019 revenue.

A couple additional notes on tariffs. As some of you may seen, iRobot has formally applied for exclusion from the tariffs, and I have appeared in Washington several times to present our case. We believe that our position to gain an exemption from tariffs is compelling. However, given the nature of the process, it is unclear when a decision on our application will be forthcoming. We raised prices on select products earlier this week to partially offset the impact of higher tariffs.

Higher tariffs are also impacting order timing from certain retailers and Alison will provide some further detail on that front. We are making excellent progress with our 2019 manufacturing initiatives. We continue to diversify manufacturing in China across our various contract manufacturers, and we are also tracking well against our plans to move our initial line of robots to Malaysia, where we expect to be manufacturing products by the end of 2019.

In summary, although we are experiencing more impact from the worsening tariff situation than we originally anticipated in the US, 2019 is still shaping up to be a remarkable year. With our new product launches proceeding on track, we are driving significant innovation that is resetting the bar for competition and laying another piece of our smart home Foundation. Even as we operate in a higher tariff environment, we still expect to generate very healthy, double-digit top line growth for the full-year 2019, and fortify our substantial global segment leadership. Our progress and achievements over the coming quarters will pave the way for us to capitalize on the many exciting medium and longer term opportunities, the Company's products and our role in the evolving smart home.

With that, I will turn the call over to Alison to review our second quarter results in more detail.

Alison Dean -- Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer

Thank you, Colin. Our second quarter performance was strong. Quarterly revenue of $260 million, an increase of 15% from Q2 last year was driven by 18% growth overseas. Revenue was slightly below our quarterly expectations, due to relatively small shortfalls in EMEA and Canada.

Operating income for Q2 was $5 million, compared with $13 million last year. EPS was $0.25 for the quarter, which included a net discrete tax benefit of $1.6 million or $0.06, driven by the release of a tax reserve, along with additional stock compensation windfall. This compares with EPS of $0.37 last year, which included a net discrete tax charge of $2 million or $0.07. The charge last year was driven by an exit charge reserve in conjunction with the establishment of our UK principal company.

For the first half, revenue was $498 million, compared with $443 million in the first half of 2018. Operating income was $28 million, compared with $39 million last year, and EPS was $1.03 compared with $1.08 last year.

Our Q2, 2019 effective tax rate was a negative 6.3%, due to the $1.6 million of discrete benefits. Our Q2 tax rate before discrete items was 18%, and we still expect our full-year tax rate before discrete items to be between 19% and 21%.

Revenue growth of 15% for Q2 included domestic growth of 12%, EMEA growth of 18%, and Japan growth of more than 25%. We still anticipate roughly 60% of our annual revenue to be generated in the second half of the year. The reduction in our full-year revenue expectations is primarily driven by US RVC segment growth that has not accelerated at the weight -- rate we originally expected. As a result, we now anticipate that revenue growth in the US is likely to be in the low double-digit range versus the high teens we previously expected.

The initial launches of Roomba s9, s9+ and Braava jet m6 are going well and are consistent with our previous expectations. However, the slower than anticipated growth of the US segment overall is weighing on the Braava category, the 380t in particular, such that we now expect to fall short of the 10% of total Company revenue target for the Braava family in 2019. Nevertheless, we still expect significant year-over-year growth in the range of 20% to 25% for the Braava category globally, driven by the m6, which we believe can take our mopping category to the next level.

Gross margin was 45% for the second quarter, compared with 52% in Q2, 2018. The 600 basis point decrease from last year was due primarily to pricing and promotional activity, as well as the impact of the tariffs, we did not have last year. Due to our increased pricing and promotional activity in EMEA, that Colin discussed, coupled with the increased tariffs to 25% for the second half of the year, we now expect gross margins for the year to be approximately 45% to 46%. Due to the tariff increase, we now expect that the direct tariff cost for the full year will be in the range of $35 million to $40 million versus our previous estimate of $20 million to $25 million. The price increases that went into effect on July 22nd in the US are expected to only partially offset the incremental tariff costs.

Q2 operating expenses were 43% of revenue, down from 46% in Q2 last year, primarily due to the actions we began implementing to recalibrate our spending. We ended Q2 with $157 million in cash, down from $162 million at year end, as we built inventory to support our 2019 product launches as planned.

Q2 ending inventory was $192 million or 123 days compared with $115 million or 97 days last year. Recall that our US inventory value now includes the impact of tariffs and we expect that the May increase of tariffs to 25% will further increase US inventory value in the second half. Given our global roll out cadence for new products and our supply chain diversification strategy, we expect elevated inventory levels for the next quarter before declining at year end, as we discussed on the April conference call. We still expect that average DII for 2019 will be higher than the previous 100 day average.

Now, I'd like to provide you with additional detail and some of the underlying assumptions for our full year, 2019 financial expectations and some quarterly color. As Colin has discussed, we are experiencing a disruption of our US market that is resulting in slower growth for 2019 than we anticipated. The tariff situation remains fluid and while it's possible that we could see some positive impact from continuing trade talks or an iRobot exclusion, neither is assumed in our revised expectations.

For 2019, we now expect full-year revenue of $1.2 billion to $1.25 billion, which is year-over-year growth of 10% to 14%. Consistent with top line trends during the past several years, we expect revenue will be more heavily weighted in the second half of the year. Our revenue expectations contemplate yen and euro exchange rates roughly in line with current rates plus or minus 5%.

For the full-year, we now expect operating expenses to be roughly 38% of revenue, a 300 basis point improvement over 2018, as we scale back spending to mitigate the impact of lower revenue and gross margin. We now expect full-year operating income of $75 million to $100 million and EPS of $2.40 to $3.15.

As we have discussed on prior calls, we manage our business from a full-year perspective. Likewise, our annual financial expectations should be viewed on a full-year basis, as quarterly year-over-year revenue growth rates and overall results can vary greatly by region, due to a number of factors, including new product introductions and product transitions. The changing tariff environment is exacerbating this further, and our current financial expectations reflect our best estimate today of the impact of tariffs, as well as the costs of our manufacturing diversification plans.

From a quarterly perspective, the anticipated second half order activity from certain retailers, most notably Amazon, is shifting as part of their efforts to navigate potential tariff exposure. For example, last year, approximately two-thirds of Amazon's domestic second half revenue came in the third quarter, with a large percentage of those orders being directly shipped to and imported by Amazon from our contracts manufacturer.

This year, we expect 20% of second half revenue from Amazon's US operations to be generated in the third quarter, as the timing and sourcing of second half orders have been further complicated by tariff concerns. As a result of these shifts, we expect Q3 revenue to show a slight year-over-year decline since substantially more of Amazon's expected second half orders are now expected to ship in the fourth quarter of this year, we now expect Q4 year-over-year revenue growth to be even more substantial than in prior years.

Gross margin in Q3 is expected to be comparable to Q2, as we continue to roll out our new products and respond to competitive pressures overseas. We now expect Q4 to be our lowest gross margin quarter at approximately 44%, which could result in a full-year gross margin between 45% and 46%.

As it relates to our longer term 2020 targets, it is important to point out that those were last updated in a 10% tariff environment. Due to the recent tariff increase to 25% and our updated 2019 expectations, those targets are no longer current and will be updated in conjunction with reporting our full-year 2019 results early next year.

In summary, all regions delivered double-digit Q2 revenue growth and are expected to do so for the full-year as well. Our new product roll outs continue, as does our strategic initiative to diversify our supply chain, and we are pulling the levers within our control to deliver continued profitable growth. Outside of the uncertain US market, we continue to execute well against our 2019 plan.

I'll now turn the call back to Colin.

Colin Angle -- Chairman, Chief Executive Officer and Founder

Thank you. I am excited about the year ahead, as we address the current challenges in the US market. Our strategy to strengthen Roomba leadership, extend the portfolio beyond vacuuming, widen our competitive moat, diversify our supply chain and advance our smart home goals, continue to drive our planning and decision making process. As we navigate choppier market conditions, we believe that consistent execution of this strategy is the most effective way to drive sustainable growth, and build shareholder value. Although, the playing field is not as optimal today, as we would otherwise prefer, we remain confident in our strategic direction and believe 2019 will be another successful year for iRobot.

Finally, on behalf of Alison and all of us at iRobot, I'd like to publicly thank Elise for her hard work and many contributions to the Company over the past 13 years, and wish her well in her post iRobot endeavors.

With that said, we will now take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Frank Camma of Sidoti. Your line is now open.

Frank Camma -- Sidoti -- Analyst

Hey, good morning, guys. Thanks for taking the call.

Alison Dean -- Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer

Good morning, Frank.

Colin Angle -- Chairman, Chief Executive Officer and Founder

Good morning, Frank.

Frank Camma -- Sidoti -- Analyst

I'd like to thank Elise too, lots of help over the years. First question is, just -- I am having a little hard time just in my head kind of rationalizing the impact of tariffs on demand. I mean, I totally get how they affect your cost structure. But can you just explain just how tariffs have impacted the category? It sounds like more of a demand issue. I mean, granted, you're still getting a lot of growth here in the US. But how did that impact consumers' view on the category itself, I guess.

Colin Angle -- Chairman, Chief Executive Officer and Founder

So there is an elasticity to demand associated with price. And the tariffs have caused iRobot and others in the category to increase their pricing and that has slowed down the rate of growth in the industry. So it's classic price elasticity of demand. And the success of Prime Day, I think is a very powerful compelling proof point to that, where we subsidized pricing to a larger degree than what we're doing in the regular market on Prime Day. So prices were less tariffs impacted. And we saw the success of Prime Day in 90% growth in dollars and 50% growth in units, which again, I think speaks volume to the fact that there is still a vibrant and growing demand for robot vacuuming. And if not for tariffs, North America would be much -- in a much more healthy place.

We also have seen -- go ahead.

Frank Camma -- Sidoti -- Analyst

No, I'll just add. I totally buy that. I've been talking about the discretionary spend here for a while. Do you think some of it's also perhaps that consumers are now, given this is now the fifth year of Prime Day, it was a pretty well publicized two day event that consumers are almost trained to realize that they're going to get products like your own at a much better deal if they just wait a month or two. Do you think that -- that could have pulled some of your granted, the sales were, I think, in the June number. But do you think that could have impacted some of your actual units that you would otherwise sold earlier in the year?

Colin Angle -- Chairman, Chief Executive Officer and Founder

So I think that the success of Prime Day and the growth of Prime Day is what resulted in having a growth rate on that day of 90% in dollars. So we're not saying that the -- without tariffs, the demand for Roomba in 2019 would have grown 90%. No, I think that we had given far more modest expectations at the beginning of the year for growth in the region. But I do believe that the success of being one of the top products on Prime Day suggests that there is still vibrant demand for robot vacuuming, as a category and that we're seeing is a price elasticity impact as well as we've seen some change in behavior of North American competitors, who went completely dark on demand generation spending in Q2, and we're expecting, and so it did not drive market growth like they did last year. And that's clearly attributable to the different tariff situation, as well.

Alison Dean -- Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer

Frank, I think it's also important to recognize that consumers are facing price increases on many products, not just RVCs. And it's our belief as well that -- that is also a factor.

Frank Camma -- Sidoti -- Analyst

Yes. No, I buy that. And Andy just to be clear, so that the Prime Day sales, even though it was in July that was accounted for in your Q2. I just want to make that abundantly clear. Is that correct?

Andrew Kramer -- Investor Relations

Yes.

Frank Camma -- Sidoti -- Analyst

Okay. Which is brings me to just sort of my next question on the cadence for your guidance. I mean, you explained it pretty well. But so that alone -- so Amazon alone, which I assume is was mostly a US issue, is enough to drag your Q3 year-over-year revenue number negative or breakeven. Am I correct on that? I'm just trying to sort of grapple with that a little bit?

Alison Dean -- Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer

Yes, it is. So Amazon is significant customer for us overall. And certainly the second half component of their purchases is very significant, and how that timing breaks down between Q3 and Q4 can be substantial. So it is enough to make that kind of a swing over what we previously would have expected, would be a growth quarter.

Colin Angle -- Chairman, Chief Executive Officer and Founder

I mean, there is a huge shift from two-thirds, one-third to 20/80s. That moves a tremendous number of dollars.

Frank Camma -- Sidoti -- Analyst

Sure. Okay. And last follow-up to that. Is Amazon for you, an international customer as well?

Alison Dean -- Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer

Yes, it is. It was only in the last few years that Amazon has become more important internationally. It was subsequent to our acquisition of the two distributors that became more of a focus for us overseas.

Frank Camma -- Sidoti -- Analyst

Okay, great. Thank you.

Colin Angle -- Chairman, Chief Executive Officer and Founder

Yeah. Thank you.

Operator

Thank you. And our next question comes from Jim Ricchiuti of Needham & Company. Your line is now open.

Mike Cikos -- Needham & Company -- Analyst

Hi, team. This is Mike Cikos on for Jim Ricchiuti. I'll apologize in advance for any background noise. But the first question following on from the last speaker, wanted to understand that sequential ramp we're seeing from Q3 to Q4, I think is the largest sequential growth you guys have seen on record. And I just wanted to get a better understanding that growth, if we're talking about Amazon, is that all from their movement within the supply chain? I guess, you've already had customer conversations that have been able to instill the confidence in that steep Q4 sequential ramp?

Alison Dean -- Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer

So the timing and the ramp Q3 to Q4 is driven by the conversations that we've had with our retailers and distributors regarding their expected timing of orders and the shipments that would follow. So that's our best view as we sit here today as the -- as to how the two quarters will play out.

Colin Angle -- Chairman, Chief Executive Officer and Founder

Yeah. I think that if it helps, without this extraordinary shift for our top customers like Amazon, Q3, Q4 would look quite similar to prior years and so that we're not seeing an extraordinary ramp in the retail behavior or our customer purchase behavior. Of course, this is a disruption driven by tariffs causing our retailers to be more back end focused in when they want product to arrive. So we're not expecting anything unusual beyond the guidance as far as customer demand goes. This is how our retailers are choosing to purchase in anticipation of the holidays.

Alison Dean -- Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer

And just as a reminder, last year we faced the exact opposite phenomenon in Q3 and Q4. So our Q3 growth rate last year was much higher than it normally was because Amazon had decided to take a direct shipment from one of our contract manufacturers and do it in Q3. And we talked about that last year when it happened.

Mike Cikos -- Needham & Company -- Analyst

Okay. Thank you for that. That's helpful. And then the follow-up question I had. Could you guys, I guess, discuss further the gross -- the margin, gross margin erosion that we've seen? I understand the impact you guys are feeling from tariffs, but I also see the promotional pricing environment that you guys are in right now. And just wanted to get a better understanding of where we are in that environment. Do you guys feel like you can regain or recapture some of that lost margin down the road? Or is this promotional environment here to stay at this point? Thank you very much.

Alison Dean -- Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer

Well, for 2019 it's certainly here based on the guidance I provided. We expect fairly flat gross margins Q3 to Q2 and then a slight further decline in Q4, which is our typical heavy promotional period. So that environment we certainly expect will be here in 2019. The second half of the year also has us putting more promotional programs in place in Europe specifically as that competitive environment there stays quite strong.

Colin Angle -- Chairman, Chief Executive Officer and Founder

I would say that the other thing that is impacting gross margins is that a lot of our revenue is coming from recently launched products, and we have a history of when we launch a product initially, their gross margins typically lag the more mature products they're replacing and then, improve over time. So that we have a little bit of a stack up of a lot of new products desire to go and act a little more aggressively in Europe and tariffs combining to impact gross margins. I think that the tariffs and product maturity both improve over time and the competitive position also is something that -- is a little bit of a competition is not going to go away. So I think that we will have some more aggressive situations at lower price points in our product portfolio.

Alison Dean -- Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer

So with the launch of our new products, we do expect that we will be creating more distance between us and the competitors, as these products roll out on a global basis.

Operator

Thank you. And our next question comes from Troy Jensen at Piper Jaffray. Your line is now open.

Troy Jensen -- Piper Jaffray -- Analyst

Hi, there. Thanks for taking my question. Maybe a couple of quick ones here for Colin.

Colin Angle -- Chairman, Chief Executive Officer and Founder

Sure.

Troy Jensen -- Piper Jaffray -- Analyst

So Colin, I think with -- to me just start with the tariffs here, it really forced the price of some of your vacuums above a $1,000 right and I think that's been a threshold or a ceiling that you -- historically you may wanted to avoid. So I would just love to get your thought on just kind of growth in the industry in the sub $200 market? Are you still seeing that there with the -- obviously, there's been less price increases because of tariffs in here -- in the lower price category?

Colin Angle -- Chairman, Chief Executive Officer and Founder

So that -- I said that in s9 that we are doing very well, despite the fact that they've broken that $1,000 price barrier, which to me is not that it's great to have higher prices, but definitely the demand and the features of those products are being successful and I could only dream and imagine what we'd be doing if we could have those robots below a $1,000, but that's not the world we're living in right now.

Relative to the market below $200, to be clear, this is not a focus of iRobot. So our -- we're focused on the premium and occasionally do some promotions below $200, but in general, are operating above that price point. So we talked about share, it's all above $200. Below $200, there is very little opportunity to make the types of margins that we are interested in pursuing. That said, we do continue to see growth in the vacuuming industry below $200. In much of the world, the growth in that particular segment is higher than the growth in the more premium price points. It's a relatively new price category only over the couple -- past couple of years, as there have been an availability of product down there.

And so to some extent, it's catching up. Where that price point has been present longer, which would be in China, we're actually seeing a deceleration of the growth at these low price points, as the market is recognizing the value of the features available only on products at higher price point. So we're still at the below $200 priced segment of robot vacuuming is pretty dynamic right now, but it is a volume healthy place, but in margin, very unhealthy place.

Troy Jensen -- Piper Jaffray -- Analyst

Right. Okay. Thank you for the detail. And just correct me if I'm wrong, but I think you guys have not raised prices because of tariffs for the 690, the 960 and e5? And then just, would you -- do you intend to in the future I guess, would be my question?

Alison Dean -- Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer

So we originally only increased the price when it was 10% tariffs on the i7, i7+. This -- earlier this week, we did increase prices really across the board. We didn't further increase the i7, i7+ price, but we did increase prices across the remainder of the Roomba products.

Troy Jensen -- Piper Jaffray -- Analyst

You did. Okay. All right. Perfect. So and it was safe to assume just the s9 and s9+ and the m6 already had kind of higher tariffs baked in, right, even though there were never a first price, and then an increased price because of tariffs?

Colin Angle -- Chairman, Chief Executive Officer and Founder

No. We increased the price on the s9 and s9+ and m6 robot as a result of the 25% tariffs.

Troy Jensen -- Piper Jaffray -- Analyst

From where they would've been [Phonetic]. Okay, perfect. All right. Good luck in the second half, and thank you Elise for the help.

Operator

Thank you. And our next question comes from Mike Latimore with Northland Capital. Your line is now open.

Paul Penney -- Northland Capital -- Analyst

Good morning, guys. This is Paul on for Mike. I have two questions. Coming to the EMEA market, which competitors were most aggressive? And when did they do so is? Were they aggressive in June or starting May?

Alison Dean -- Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer

It's really been this year. So it's primarily been Chinese competition that have been particularly aggressive Roborock, Ecovacs companies like that.

Paul Penney -- Northland Capital -- Analyst

Okay. Thank you. And my second question is like, you recently raised your prices, are you assuming other players to do it as well?

Colin Angle -- Chairman, Chief Executive Officer and Founder

We expect other players in the marketplace in North America will also raise their prices. The other players either operate on very, very thin margins or also are structures, where premium margins -- premium healthy margins are critical to their business model. So in neither case could the company absorb a 25% increase in COGS without impacting their price in marketplace. So this will be across the board.

Paul Penney -- Northland Capital -- Analyst

Thank you. That's all I have.

Colin Angle -- Chairman, Chief Executive Officer and Founder

Okay.

Operator

Thank you. And our next question comes from Jed [Phonetic] Dorsheimer of Canaccord Genuity. Your line is now open.

Jonathan Dorsheimer -- Canaccord Genuity -- Analyst

Hi, thanks, and thanks for taking my questions. And two -- and but first, I also want to throw my hat into the ring in terms of thanking Elise. It's been quite helpful over the years from pre-IPO to now. I guess first question, maybe I could just rephrase and tell me whether or not I'm looking at this and thinking about it correctly. It looks as if you're having a bit of a mix shift to I guess some of the mid-range or higher volume products by virtue of the success with Amazon Prime. It would seem that and the greatest margin is kind of on the high-end direct sales. So is that what is contributing mostly to the contraction of the profitability for full year guide, is that mix shift from high end to sort of the higher volume mid range?

Alison Dean -- Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer

No, there really hasn't been a significant change in our mix expectations through the first half of the year and baked into our guidance, we're seeing kind of reductions in the US across all three categories from where we were originally expecting volumes to be for the US. We actually have a pretty healthy mix in Q2, which is very similar to Q1. We had about 45% of our revenue coming from the 900 series and up in the range. We had about 30% in our entry level and the remaining 20% was in our sort of e5 price category. So and that's been pretty consistent so far this year.

Colin Angle -- Chairman, Chief Executive Officer and Founder

Jed given our premium strategy, we are very focused on continuing to drive demand at the 900 series and above level. But we are seeing because of the new product introduction product margin phenomenon, which we do believe will improve over time, some reduction in profitability on a unit basis from those premium SKUs. So that is again the trifecta hitting our gross margin in Q2, 2019 is the promotional investment in EMEA, the new product launches and the tariffs. But I think, I'm actually quite happy with the current mix.

Jonathan Dorsheimer -- Canaccord Genuity -- Analyst

Got it. That's helpful. Thank you. Second question. Colin, this one is probably directed for you. It's sort of a higher level strategy. As you look at Terra, it has a lot of the same attributes as Roomba to be successful for is kind of what I'm getting at. You've got a high priced substitute product that you're replacing, it's a chore that most people don't enjoy doing, whereas with the Braava, you have a very different set of dynamics. So and my question is, more of a resource allocation and sort of redeployment, if you will at what point -- what metrics are you looking at and what point do you kind of put the eggs in the Terra basket instead of the Braava basket?

Colin Angle -- Chairman, Chief Executive Officer and Founder

So as iRobot is scaled, our ability to go launch and grow new products improves. So for many years, the web category has failed to be the second coming of Roomba, partially because we didn't have systematic navigation, and frankly, mopping is more sensitive and benefits more from being able to say, that's the kitchen, just mop the kitchen. So there are some technical hurdles that the m6 over occurs. But there's also simply the -- when we look at the dollars available to go build the markets and get markets to the point, where we have very, very positive ROI and dollars spent takes time and investment. And I think that Braava has suffered not getting that full level of investment, while we're continuing to build the Roomba franchise globally.

In 2019, we believe, we have the product and we believe we have the marketing resources to drive m6. And my -- the favorite quote so far post m6 launch is, it's selling like a Roomba, which makes me very happy. The -- as Terra gets to a point, where it is in market and we've gotten through these betas and these initial launches, I think you will expect us to move our willingness to invest in market growth from Braava to Terra, and our hope is that the m6 and the Braava mopping segment will have reached this escape velocity and can continue to profitably grow, without the need for investments like marketing. So it's a very planful sequential launch strategy, where we want to drive a product to profitability and then move to the next product that we're investing and bringing up the demand curve.

Jonathan Dorsheimer -- Canaccord Genuity -- Analyst

Got it. That's helpful. Thanks. I'll jump back in the queue.

Colin Angle -- Chairman, Chief Executive Officer and Founder

Okay.

Operator

Thank you. And our next question comes from Charlie Anderson of Dougherty & Company. Your line is now open.

Charles Anderson -- Dougherty & Company -- Analyst

Yeah. Thanks for taking my questions and best of luck in everything, Elise. I wanted to just kind of start with a multi-part question, the tariff situation. So Colin, first, could you maybe walk us through the dynamics of the petition for exclusion? It looks like companies that have applied for that have a decent batting average. When are you expecting to hear back on that? And then secondarily, has there been any conversations with the retailers, in terms of -- they -- them participating in any release here? Obviously, they want to move a lot of product too as well? And then, I've got a follow-up. Thanks.

Colin Angle -- Chairman, Chief Executive Officer and Founder

Sure. So that imports from China were divided into three -- sorry, four groups. Group one, the first group to have tariffs imposed, had an exclusion -- has an exclusion process and is granting exclusions. So and you're correct that it's a reasonably good batting average. List two has an exclusion process and there are many applicants and that's currently been in process. No list two approvals as of yet. So that when I talked about being unsure as to when we're going to -- even if we are successful, get judgment, this is not a fast process. And list two, closed its window for application for exclusion in December. So seven months we haven't gotten any list two approvals yet. But I think we expect to see them and hopefully the batting average will continue.

List three is now taking exclusion requests, as of the beginning of July, and so we're -- and we have submitted. We believe we have a very good case. But again, I think it could easily be reasonably into 2020 before we see progress. We know that the USTR is hiring more people to work these issues, so that there is some reason to believe that list two could it -- could be less indicative of the time it would take, but that would be putting an optimistic hat on. And it's worth noting that if we are excluded, it will be retroactive. And so all of the money spent or expended on the tariffs that we've talked about would be refunded back to a iRobot, which would be certainly a nice outcome. But that's the sense of the timing.

Charles Anderson -- Dougherty & Company -- Analyst

Okay. And then on the retailers?

Colin Angle -- Chairman, Chief Executive Officer and Founder

So the retailers are getting hard hit and so that on all sides with price increases and challenges and so that it is a common request, and I think the retailers try to do what they can, but that is not translating into them suddenly deciding that they're going to move and give back significant numbers of margin points because they're facing the resultant of slowdown in volumes, as a result of higher prices. So it's sort of a -- has not been a well, that has been material for us.

Charles Anderson -- Dougherty & Company -- Analyst

Got it. And then for my follow-up, you obviously know there's very low gross margins in Q4. You have talked about Malaysia coming online backup, for next year, you also have products that are going to be a little bit more mature. I guess I'm curious how we should think about the margin trajectory from here. When you do cut over to Malaysia, can we get back to some of the gross margins we had before? Is there incremental cost to Malaysia, we need to be thinking about that, we didn't have in China just kind of margin trajectory from here how we should think about that? Thanks.

Alison Dean -- Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer

So I'm not going to make any comments about margins beyond 2019 and what I've already said for this year. But I will remind you that we did communicate earlier that at least initially product coming off the line in Malaysia on a like-for-like basis will actually be more expensive than the same product produced in China, at least initially. The labor rates -- the line labor rates are a little bit less expensive, but the management labor rates are a little bit more. And more importantly, a lot of our -- most of our component supply is in China and we will have additional costs to get those components to Malaysia for production. So at least starting off, it's going to be more expensive.

Charles Anderson -- Dougherty & Company -- Analyst

Got it and [Speech Overlap].

Colin Angle -- Chairman, Chief Executive Officer and Founder

I think more expensive meaning, still better than 25% tariffs, just to be clear. But rough order of magnitude on par with the 10% tariffs is sort of neutral-ish depending on volumes and so forth, to sort of bound that a little bit.

Charles Anderson -- Dougherty & Company -- Analyst

Okay, perfect. That's helpful. Thank you.

Operator

Thank you. And our next question comes from Ben Rose with Battle Road Research. Your line is now open.

Ben Rose -- Battle Road Research -- Analyst

Yes. Good morning. Wanted to echo my thanks to Elise as well and wish Andrew luck in his new role. Question for Colin. Looking at the second half of the year with the newer products i7/i7+ just hitting international markets and not having the constraint of the tariffs, could we see a higher product mix in favor of the newer products because, you won't have to price them as high as you do in the US?

Colin Angle -- Chairman, Chief Executive Officer and Founder

Our models for international sales are unchanged relative to the beginning of the year. I think that we're excited to be launching these new products. We're counting on them to deliver on the growth targets that we have communicated. And so, that I think that outside of North America, things are good. Things are stable. They're behaving like we had wanted them to. If you're asking about the risk of gray marketing from Europe back to North America or something like that, I don't think we believe that -- that is going to be material.

Ben Rose -- Battle Road Research -- Analyst

Okay, thanks. And question for Alison. Could you maybe cite some areas that the Company is scaling back in from a cost standpoint in order to -- at least from an operational standpoint mitigate the impact of the tariffs?

Alison Dean -- Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer

Sure. It's really across the board. We're focused mostly on discretionary type spending that we don't think will sacrifice our longer-term strategic plan, but it's really across all of the different functional groups that we're looking for those reductions.

Ben Rose -- Battle Road Research -- Analyst

Okay. Thank you very much.

Operator

Thank you. And our next question comes from Asiya Merchant of Citigroup. Your line is now open.

Asiya Merchant -- Citigroup -- Analyst

Yeah, hi. I just had a couple of quick questions. One just on the revenue cadence that you've talked about. I just wanted to understand that I know a lot of questions have already been asked. But I would have assumed that given price increases are happening not just for iRobot, but across other products, consumer products as well, they would have called in [Phonetic] some of that demand into the third quarter ahead of anticipated price increases that are likely to impact the second half that would have -- and just given the strength that you saw in Prime Day, I would have thought Amazon would have tried to replenish some of that inventory into the third quarter and before sort of price increases really take foot. So that was my first question.

And then just on gross margins and the trajectory of gross margins, the guide for the tariffs that are impacting, it seems like that's only partially for this year? So if we kind of then extrapolate that to the remainder of and going forward, is it fair to assume that the full impact of that would be felt most likely in 2020, offset by some price increases of course. But is it fair to assume that from here on the margin unlikely to go up, but more likely to see some downside pressure as we get into 2020? Thank you.

Colin Angle -- Chairman, Chief Executive Officer and Founder

So relative to the buying cadence and thus the revenue cadence of our retailers, the prices have already gone up. So that there is no anticipation of additional price increases and inventory they would be taking in would carry with it that 25% tariff. And so that what you're seeing, is retailers holding out some hope or at least acknowledging that in the current environment, the only certainty is what exists today. So that what we're seeing, for example, with Amazon is where tariffs to go away, they would, if they had already brought in product, they would be holding product at a higher cost basis than they would be if they had deferred that decision and took that inventory in post tariffs.

So that says, as a retailer, you are advantaged to hold inventory levels lower than -- and balance that risk against supply chain risks, which drive companies to want to have inventories of exciting hot product in hand to avoid the risk of not having access to those products. And so that's the calculus. But the -- there is no benefit to a retailer at this point of loading up in Q3, ahead of the price increases because they've already happened.

Asiya Merchant -- Citigroup -- Analyst

Okay. And then on gross margin, please?

Alison Dean -- Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer

Yeah. On your second point Asiya, as I said before, I'm not really going to make any comments beyond 2019 from a gross margin perspective. You're right that 25% tariffs are impacting half of our year and our price changes has been structured to hopefully offset part of that incremental tariff costs. But will we have to do an entire full year 2020 plan once we understand better what that environment is going to be like before we can make any comments about anything relative to 2020?

Asiya Merchant -- Citigroup -- Analyst

Okay. Thank you. And then just one more, if I may, on the market share. Some of the surveys that I've done as well clearly point to the strength that iRobot and the brand that you guys have. But is there any data that you have, whether it's sell through data, etc. that suggest that market share was pretty much flat in the region for iRobot?

Alison Dean -- Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer

Yeah. What we said earlier on the call is that in US, we've held our share based on the data we're seeing. The competition doesn't seem to have taken anything in the first half of the year. So we look at that as a good sign, particularly in light of the segment itself growing more slowly than we had anticipated.

Asiya Merchant -- Citigroup -- Analyst

Okay. Thank you.

Operator

Thank you. And our next question comes from Mark Strouse of JPMorgan. Your line is now open.

Mark Strouse -- JPMorgan -- Analyst

Hey, good morning. Thanks for taking our questions. So you guys have applied for exclusion from the tariffs. And Colin, you talked about a compelling case for -- your belief that it's a compelling case for why that will be granted. Can you just give a high level overview of why you think it is a compelling case?

Colin Angle -- Chairman, Chief Executive Officer and Founder

Sure. The -- I think it is appreciated in Washington that the consumer robot industry is a strategically interesting industry to the United States, and so that they do believe that they would like consumer industry to prosper. iRobot is the only non-China source of robot and so that there is not -- so we are a company of particular interest in leading this emerging opportunity. And it's recognized that we're at a moment in time when winners and losers are determined. So that this is a rapidly growing industry, where growth is particularly important relative to competition.

And so that under those circumstances, iRobot, which has over half of its revenue in the US and are -- well our competition has most of its revenue in China, which is not impacted by tariffs, the imposition of tariffs disproportionately slows us down relative to our competition. And so that fact pattern leads to a compelling case of exclusion. So if you want to help iRobot, don't slow us down in our primary market relative to our competition. I mean that's -- I think that's the gist of it.

Mark Strouse -- JPMorgan -- Analyst

Got it. Okay. That's helpful. Thank you. And then just in Malaysia, can you talk about the output from that facility and maybe not by SKUs, but maybe just on a -- breaking it down from a high level or mid-level or entry level, what's going to be coming out of that factory? And can you kind of talk about the scale of that relative to what the demand for those products might be in the US?

Alison Dean -- Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer

So Mark, our current plan for 2019 is it's one of our entry level SKUs that it will be -- is targeted to be produced in Malaysia by the end of the year. So it's very limited volumes this year as we look to just stand that line up and all the associated processes. As we see how that goes, we will determine how much volume we try to put through that line in 2020. So that will be part of our guidance we give for 2020 early next year.

Mark Strouse -- JPMorgan -- Analyst

Okay. That makes sense. And then just a real quick, if I can. Terra, where will that be manufactured?

Colin Angle -- Chairman, Chief Executive Officer and Founder

That is manufactured in China, and is -- we do not have any plans to move it out of China.

Mark Strouse -- JPMorgan -- Analyst

Okay, great. Thank you very much.

Colin Angle -- Chairman, Chief Executive Officer and Founder

You bet.

Operator

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Andy Kramer for any closing remarks.

Andrew Kramer -- Investor Relations

Thank you. That concludes our second quarter 2019 earnings call. Look forward to speaking with and seeing many of you over the coming months. We certainly appreciate your support. And we'll plan to talk to you again with our -- in October to discuss our Q3 results.

Operator

[Operator Closing Remarks]

Duration: 65 minutes

Call participants:

Elise P. Caffrey -- Investor Relations

Andrew Kramer -- Investor Relations

Colin Angle -- Chairman, Chief Executive Officer and Founder

Alison Dean -- Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer

Frank Camma -- Sidoti -- Analyst

Mike Cikos -- Needham & Company -- Analyst

Troy Jensen -- Piper Jaffray -- Analyst

Paul Penney -- Northland Capital -- Analyst

Jonathan Dorsheimer -- Canaccord Genuity -- Analyst

Charles Anderson -- Dougherty & Company -- Analyst

Ben Rose -- Battle Road Research -- Analyst

Asiya Merchant -- Citigroup -- Analyst

Mark Strouse -- JPMorgan -- Analyst

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