Heading into its third-quarter earnings report, investors were hoping that iRobot (IRBT +0.00%) would announce strong sales growth and healthy profit margins.
The company exceeded those top- and bottom-line expectations even as it predicted a solid outing for its latest models in the critical holiday shopping season. Yet the stock slumped on a brutal day for the wider market as shareholders worried about the impact trade tensions could have on iRobot's profitability and the health of the broader industry.
CEO Colin Angle and his executive team addressed those concerns along with other key growth metrics in a conference call with analysts. Let's take a closer look.
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No issues with demand
We delivered third-quarter revenue growth of 29%, driven by a very successful launch of two new products in the United States. Sales of our game-changing Roomba i7+ were so robust that we were challenged to keep the product in stock. -- CEO Colin Angle
iRobot beat management's growth expectations in the quarter, and its 29% sales jump also trounced the 19% that investors were predicting. Sales were especially strong in the U.S., where the company rolled out its two new products, the premium Roomba i7+ vacuum and a value-targeted offering Roomba e5.
These releases helped domestic sales soar 45% compared to growth in the high teens across most of its other markets. Executives said other regions should benefit from similar sales boosts as iRobot introduces the new models in additional markets over the coming quarters.
Profits are holding up fine
We manage our global business on an annual basis, provide annual financial expectations, and encourage investors to view us accordingly. The gross margin of 51% in the third quarter was slightly ahead of our expectations driven by less than planned promotional activities. -- CFO Alison Dean
iRobot's gross profit margin rose, as it has in each the past few quarters. This success indicates that the company is having no major issues marketing its products in a competitive industry. Average selling prices for its robots, in fact, are up to $289 so far this year compared to $260 in the prior-year period.
Management was careful to note that this profitability figure is volatile and can swing depending on seasonal items like this quarter's unusual level of promotions. Next quarter, gross profit margin will decline, executives said, due to the negative impact of tariffs plus a normal uptick in promotions during the holiday season.
The future is bright
We are very excited about our Roomba competitive position with products across the board and across ranges of features, functionality, and prices; but we're not done yet. As exciting as these two new products are, you should expect the pace of new product introductions to continue into 2019. -- Angle
The newly launched Roomba devices should account for at least 25% of iRobot's sales this year, and the company aims to press its technological advantage into 2019, including through a big push into marketing its young lineup of Braava floor-mopping products. There are significant short-terms risks to profitability, which is the single factor that Wall Street chose to focus on in this report. Tariffs, after all, are scheduled to increase iRobot's costs in a big way starting next year.
The company will have to navigate that challenge by sacrificing growth by raising prices, or giving up profitability by accepting lower gross profit margins. More than likely, executives will try to balance those two unfavorable choices.
On the bright side, the cost spike will force iRobot to become leaner and more efficient as it hunts for ways to minimize the tariff impact on the business. Its long-term goals aren't threatened by the move, either, and in fact, the management team is more optimistic about that outlook today due to the recent advances in the smart home experience brought on by popular voice assistants. "I am very excited about our game-changing new products, our vision of the smart home and iRobot's role in it, and the pipeline of new products on the horizon," Angle said.
