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How iRobot Corporation is Investing for the Future

By Steve Symington – Jan 26, 2015 at 5:15PM

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iRobot dedicates a surprising amount of money on research and development. Here's how it decides where to spend.

Since iRobot (IRBT 1.20%) launched its first Roomba in 2002, the company has sold more than 10 million home robots worldwide. Perhaps unsurprisingly, home robot sales now represent about 90% of iRobot's total revenue, with the vast majority coming from its Roomba line.

Don't be alarmed
While that might seem risky on the surface, it's not a terrible thing considering that robotic vacuum adoption is still growing quickly.

Speaking at the 17th Annual Needham Growth Conference earlier this month, iRobot CFO Alison Dean pointed out overall robotic vacuum sales have grown by at least 20% for each of the past several years, but still represent less than 20% of the $7 billion global market for vacuums costing $200 or more. That is up from a 15% share almost exactly one year ago. 

What's more, that growth should have legs for the foreseeable future. During iRobot's earnings conference call almost exactly a year ago, CEO Colin Angle noted robotic vacuum revenue share was comparable to that of other disruptive appliances such as the microwave oven and dishwasher at the same stage in their life cycles, roughly 10 to 15 years following introduction.

But iRobot is not resting on its laurels. Dean said one of the most common questions the company receives is how it determines where to invest for the future.

How much?
First, she revealed iRobot typically spends roughly 12% of its annual revenue on research and development.

While iRobot is not slated to announce fourth-quarter 2014 results until Feb. 5, its guidance calls for 2014 revenue in the range of $555 million to $565 million. If we consider Dean's 12% figure in relation to the midpoint of that range, it means iRobot currently spends over $67 million per year on R&D.

Thanks to healthy growth in the robotic vacuum market, iRobot's revenue is also expected to increase by 15% this year. If that happens, iRobot's 2015 R&D allocation should be about $77 million.

Where's that money going?
So we know how much iRobot dedicates to R&D. But how does it decide where to use those funds?

First, Dean said, iRobot dedicates anywhere from 20% to 25% "strictly to advancements in key technologies like navigation, manipulation and, more so going forward, how [...] we leverage the cloud." 

These are items that will allow iRobot to expand the scope of its machines to function more autonomously. And while I can't blame iRobot for being tight-lipped about specifically what is in store, we've already seen some of iRobot's early "advancement" efforts over the past year in the form of versatile manipulating hands and video navigation using low-cost cameras. In the past, Angle has also expressed the need to develop robots that will do activities like vacuum stairs, open doors, and fetch items for their owners.

Thanks to a presentation at CES 2015 a few weeks ago, we also know iRobot has already incorporated its patent protected video navigation tech into its burgeoning AVA 500 telepresence platform with the help of Intel's depth-aware RealSense cameras.

Dean said the remaining 75% to 80% of iRobot's R&D allocation is focused on "actual product development."

When we look at the product development, we want to make sure we have a really good mix between keeping the core strong -- the core being the products that are driving revenue and profitability today and in the near future -- as well as making sure we are continuing to invest in emerging products and future products that'll drive our revenue and profitability three, five, ten years down the road.

In addition to the Ava 500, perhaps the most notable recent result of this category came in the form of iRobot's radically redesigned Roomba 800 vacuums. Specifically, the Roomba 800 took a massive leap forward just over a year ago by moving to a new brush-less design. This removes virtually all maintenance, increases the machine's vacuum power by fivefold, and removes up to 50% more debris. Add in a dramatically improved battery and a 60% larger bin, and it's no surprise iRobot has since confirmed the Roomba 800 series not only outsold every other new product on its website in the quarter following its release, but continued that momentum to comprise 36% of third-quarter revenue.

What's more, iRobot launched the Roomba 800 in China last quarter, so the company unsurprisingly expects to report sustained strong sales in its quarterly release next week. Analysts, on average, are looking for fourth-quarter revenue to climb an impressive 29.7% to $163.9 million. If iRobot lives up to those expectations, its engineers will have that much more R&D money to ensure the company's long-term success.

Steve Symington owns shares of iRobot. And though he's had a Roomba for almost three years, his cats won't go near the thing. The Motley Fool recommends Intel and iRobot. The Motley Fool owns shares of Intel. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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