iRobot (IRBT +0.00%) is ready for the next phase of its growth strategy. The leading robotic cleaning device giant withstood rising manufacturing costs and a surge of price-based competition to close out a solid fiscal 2018, highlighted by surprisingly strong sales gains and rising profitability.
The company still lost market share as the robotic vacuum industry moved deeper into the mainstream. And its supply chain and manufacturing base is a bit too exposed to just one market -- China. Finally, iRobot believes it's critical that the company protect its design, marketing, and branding lead with respect to floor care while extending it into new areas like lawn mowing over the next few years -- even at the expense of reduced short-term profitability.
CEO Colin Angle and his team talked about those challenges in a recent conference call with investors, and below are some highlights from that discussion.
Check out all our earnings call transcripts.
Image source: Getty Images.
Closing out a good year
We had a phenomenal finish to 2018, exceeding both our fourth-quarter and full-year expectations for revenue growth and profitability after raising our expectations twice during the year. Revenue grew 24%, crossing the $1 billion revenue threshold in an increasingly competitive market and we delivered an operating margin of nearly 10% after absorbing the impacts of tariffs. -- Angle
iRobot exceeded most investors' expectations for a year that was supposed to be marked by slowing growth and plunging profitability. Sales gains were robust at 24% for the full 2018 and 18% for the ultra-competitive holiday quarter, thanks mainly to the design and branding lead enjoyed by the Roomba vacuum franchise. Gross profit margins actually rose along with average selling prices even though competition was fierce, especially at the value end of the industry.
Executives estimate that the core U.S. industry grew at a 27% rate, and that iRobot shed about 3 percentage points of its dominant position at around 60% of sales. They still see plenty of room for healthy sales growth here as the niche moves into the mainstream.
Looking beyond China
While manufacturing solely in China has made economic sense for iRobot since we began to produce consumer robots in 2002, as a matter of good corporate hygiene, we have undertaken an annual review of alternative manufacturing sites. -- Angle
Tariffs took a smaller bite than expected out of earnings this past quarter, but management is still determined to diversify the manufacturing and supply base beyond China over the next few years. Besides the unpredictable tariff spikes, that market also suffers from other weaknesses, including rising labor costs and weak intellectual property protections.
The move will hurt profitability in 2019 and 2020, CFO Alison Dean explained. Other headwinds include the tilt toward newer, lower-volume products, and continued price-based competition. Overall, gross profit margin should decline to about 48% of sales from 51% in 2018.
Staying on the offense
We believe at this critical point in the accelerating adoption of household robots, driving higher top-line growth and maintaining dominant segment share is essential. -- Angle
iRobot plans to stay on the offensive for the foreseeable future in a bid to protect as much of its market share as possible as the global industry matures. That posture likely means increased research & development expenses, aggressive spending on marketing and advertising, and competitive pricing to fend off competitors. All of these choices will pressure profits today in hopes of maintaining a premium industry spot in the future.
The new lawnmowing robot won't be material to 2019 revenue, executives said. But iRobot does plan for the category to eventually grow into an important division. In the meantime, management is predicting that the Braava line of mopping devices will soon pass 10% of the broader business. Its latest Roomba products, set to launch mid-year, should account for about 15% of overall sales in 2019 even as the company rolls out the i7 and e5 robots to markets outside of the United States.
Those releases are critical, since the key factor that will most determine iRobot's long-term trajectory is how well it can maintain its innovation lead in the industry over the next few years.
