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3 Key Things From iRobot's Q3 Earnings Call That You Should Know

By Beth McKenna - Updated Oct 30, 2017 at 5:25PM

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iRobot stock dropped 13.5% on Wednesday, so management’s comments during the earnings call take on even greater importance than usual.

iRobot (IRBT 1.80%) reported third-quarter earnings on Tuesday after the market closed. The maker of premium home-cleaning robots posted robust revenue growth of 22%, while earnings per share grew 9%, and EPS adjusted for one-time factors declined 26%. 

Revenue and earnings swept by Wall Street's expectations. Moreover, iRobot raised its top- and bottom-line outlook for 2017.

iRobot stock popped nearly 6% in after-hours trading on Tuesday, thanks to the earnings beat and raised guidance. The stock, however, changed course on Wednesday, closing down 13.5%. The culprit was Piper Jaffray analyst Troy Jensen reiterating his neutral rating on the stock, but lowering his price target from $92 to $69 per share, citing valuation concerns and increased competition for iRobot's Roomba in the robotic-vacuum category. (Shares closed at $65.11 after Wednesday's haircut.) 

Given the stock's whiplash-inducing post-earnings move, management's comments during the earnings call become even more important than usual. Here's what you should know. 

A Roomba vacuuming an area rug on a hardwood floor in a room with a blue armchair.

A Roomba vacuuming robot. Image source: iRobot.

1. iRobot's powerful market position

From CEO Colin Angle's remarks:

Demand from U.S. retailers for our robots increased during the last quarter. We continue to gain space, exposure, and momentum in the market driving higher full-year U.S. revenue expectations for the second time this year even with availability of new competitive products. We always expected a low-end U.S. market to emerge over time. This should be good for the RVC [robotic-vacuum category] because it will help drive awareness. Continuing to execute against our premium strategy will ensure ongoing growth for iRobot and robotic vacuum cleaners.

Keep in mind that in the U.S., the most highly penetrated market for robotic vacuum cleaners, household penetration is still less than 10%. Accordingly, there is plenty of runway domestically and even more overseas. With more than 60% global segment share, at a time when adoption is accelerating, we are in an excellent position to capitalize on the momentum to drive future growth.

iRobot's management has long-maintained that competition in the robotic-vacuum market is a good thing because it helps increase awareness of the product category. Until recently, competition has primarily come in the form of Chinese companies launching cheaper robotic vacuums, though British engineering company Dyson launched an extremely pricey robotic vac a few years ago. Last month, however, U.S.-based SharkNinja entered the market when it launched its Shark Ion Robot 750 at $350 -- a price point near the lower end of iRobot's price range for its Roomba line. 

The reason the market has jitters about new competitors -- iRobot stock dropped 19% in September due to a short-seller attack centered largely on SharkNinja's launch -- is because the Roomba line accounts for the bulk of the company's revenue. In the third quarter, the line accounted for 90% of its total revenue, with most of the remaining coming from the Braava family of floor mopping robots. Given the growth dynamics of the market, there's room for several companies to do well in this space, so investors shouldn't be overly concerned about SharkNinja at this point. 

2. iRobot now directly controls more than 75% of its global revenue

From Angle's remarks:

We successfully closed the acquisition of Robopolis, our largest European distributor, at the beginning of the fourth quarter as expected, and now control more than 75% of our global revenue. That is critical to our building a global brand in regions where awareness of iRobot and Roomba is lower than in the U.S. 

iRobot acquired two of its international distributors this year, as it believes increasing its direction distribution will help it in creating a consistent global brand and increasing awareness of both the robotic-vacuum category and its products.

The recently closed Robopolis acquisition expands iRobot's direct reach into Germany, Spain, France, Belgium, Austria, the Netherlands, and Portugal. Robopolis is expected to contribute about $25 million to $35 million to 2017 revenue. While the acquisition is expected to be dilutive to 2017 earnings, management anticipates it will begin to add to earnings next year. Earlier in the year, iRobot bought its exclusive Japanese distributor. Angle said on the call that the company is already beginning to see the positive impact of this move. In the third quarter, revenue soared 65% year over year in Japan.

3. 2017 growth projections by region

Angle shared the strong full-year growth projections for the U.S., EMEA (Europe, Middle East, and Africa), and Japan regions:  

In the U.S., which represents roughly 50% of our revenue, we expect to grow 40% this year; in EMEA, which represents roughly 25% of our revenue, we expect to grow 45% this year; and, in Japan, which represents roughly 15% of our revenue, we expect to grow 20-25% this year.

It's obvious from these powerful growth expectations that the robotic-vacuum market is taking off. iRobot is rocking it in the U.S. and the EMEA regions, and Japan's growth has gotten a tailwind from the company's acquisition of its exclusive distributor in the country.

CFO Alison Dean shared the not-so-good news on the China front:

Based upon Q3 results and expected Q4 sell-in, we now anticipate net revenue [in China] to decline 25-30% from 2016.

China is iRobot's problem child for several reasons, including that a fair number of lower-cost robotic vacuum companies operate in the country. The China market is a small portion of iRobot's business, so it's not negatively impacting the company's overall business much. Angle said on the call that for 2017, China revenue is expected to be less than 5% of total revenue. He noted that its strategy in China is continuing to drive adoption of its premium robots. In the fourth quarter, iRobot began implementing its first consumer outreach marketing program since opening its Shanghai office. 

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