Expectations were subdued going into iRobot's (NASDAQ:IRBT) third-quarter financial report, weighed down by the continuing trade war between the U.S. and China and the emergence of cut-rate competition. The technology company was able to brush off those factors and turn in solid results, boosted by strong international sales and a large shipment of its products to Amazon.com, which was previously scheduled for the fourth quarter.

Despite its better-than-expected performance, however, iRobot shares were pummeled after the company lowered its guidance for the all-important holiday quarter, citing tariffs. Shares fell nearly 20% in after-hours trading Tuesday evening following the report.

A woman sitting on the floor with a dog, with a robotic vacuum in the foreground.

Image source: iRobot.

When better isn't good enough

Revenue of $289.4 million grew 9% year over year, easily surpassing analysts' consensus estimates, which called for revenue of about $260 million, a decline of about 2%. The results were mixed by region. The U.S. market, which is iRobot's largest and typically accounts for nearly half of all sales, saw revenue decline to $117.9 million, down 7% year over year. International markets fared much better, generating revenue of $171.5 million, up 25%, driven by 27% growth in Europe, the Middle East, and Africa (EMEA), and by 40% growth in Japan. 

The company also delivered profits that outpaced expectations. Earnings per share of $1.24 soared past analysts' consensus estimates of $0.52. 

iRobot CFO Alison Dean said the company now anticipates the full-year impact from tariffs to be in a range of $35 million to $40 million, assuming they remain at current levels.

The company has been making progress toward its manufacturing diversification initiatives, which would help negate the impact of tariffs in the future. iRobot's manufacturing facility in Malaysia will be completed ahead of schedule and will be ready to begin production in early 2020.

It's the tariffs...

If you have any doubt that tariffs resulting from the trade war played a part in iRobot's results, it's worth pointing out that the subject came up more than 25 times on the company's conference call. iRobot CEO Colin Angle spent a good chunk of the discussion laying out how the levies on goods manufactured in China were impacting the company's results in the U.S. 

The tariff imposed on robotic vacuum cleaners last year was 10%, but that was increased to 25% in May. iRobot raised prices on most of its models in late July to partially offset the tariffs but later discovered that many of its competitors had opted to absorb the additional costs, rather than pass them on to consumers. In Early October, management rolled back prices to pre-tariff levels, a strategy that appears to be increasing demand but will negatively affect the bottom line.

...that led to the lower guidance

Three months ago, iRobot updated its guidance, saying it expected full-year revenue in a range of $1.2 billion and $1.25 billion, which would represent year-over-year growth of between 10% and 14%, and earnings per share in a range of $2.40 and $3.15 for 2019, or $2.77 at the midpoint of its guidance.

However, absorbing the cost of the tariffs and increased competition for the upcoming quarter caused the company to lower its guidance. Management is now expecting revenue in a range of $1.2 billion and $1.21 billion, or growth of between 10% and 11%. Profits will also be squeezed and iRobot is now guiding for full-year earnings per share of between $2.60 and $2.80, or $2.70 at the midpoint.

It's worth noting that this is the second successive quarter of lowered guidance. The company had originally forecast revenue of growth of between 17% and 20%. Profits expectations have also fallen.

More tough times ahead

iRobot has taken a sensible approach to a difficult situation, but there's simply no getting around the pain the tariffs are causing. Until the trade war ends or the company can manufacture products for its U.S. market at scale outside China, there will probably be more hard times in store for iRobot investors.