Shares of iRobot Corporation (NASDAQ:IRBT) are down around 3% since it reported second-quarter results two weeks ago, but that doesn't mean those results were bad. On one hand, while iRobot handily beat analysts' expectations on both the top and bottom lines, CEO Colin Angle explained that "this was primarily due to timing" of orders and delivery for the company's robots. On the other hand, he also noted that this "alleviates some pressure on the second-half ramp" that iRobot told investors to anticipate earlier this year.
If anything, this goes to show the usual headline numbers often don't suffice in helping investors fully understand what drives businesses like iRobot. But lucky for us, iRobot management spends some time each quarter to add color on their performance in a conference call with analysts. Here are five of the most important points iRobot co-founder and CEO Colin Angle discussed in the company's most recent call:
1. Those extra ads are doing their job
The incremental marketing investments we discussed on the last call, in both the United States and overseas, have successfully driven demand in these markets. Promotions we ran for Mother's Day and Father's Day coupled with our new marketing campaign in the U.S. helped drive 24% increase in domestic revenue over Q2 of last year, and strong sell through at our retailers. Supplemental demand generation spending in EMEA and APAC resulted in higher sell through in Q2, and we expect replenishment orders from our distributors in the second half.
During iRobot's first-quarter report in April, the company disappointed investors by reducing its full-year earnings outlook due to the need to make greater-than-expected investments in marketing. Specifically, thanks to persistent macro headwinds and currency fluctuations, iRobot wanted to ensure it could not only continue to strengthen its brand in the U.S., but also support international distributors in markets like Japan, where prolonged currency devaluation meant less money could be spent by those retailers on advertising.
Investors should be encouraged. While sales in Japan still declined as expected, these incremental marketing investments have at least lessened the negative impact it might have otherwise had.
2. Second-half revenue will be lumpier than usual
As we have discussed in the past, it is very difficult to predict the revenue split between Q3 and Q4 each year due to the timing and shipment of Home Robot products for the holiday season and the inherent lumpiness of our D&S business. 2015 is no exception. However, we are experiencing a more dramatic split this year with an unusually heavy Q4 shipment schedule.
In other words, iRobot is still a relatively small company collecting the majority of its revenue from its core Roomba product line. As such, revenue tends to be lumpy ahead of the all-important holiday season, and especially so given years-long uncertainty revolving around iRobot's Defense & Security segment.
This year, though, the fourth-quarter's strength should be even more pronounced. When asked for elaboration during the call, Angle stated that those aforementioned macro headwinds have led to retailers being less willing to hold higher levels of inventory than in the past, which, in turn, has led to "more aggressive replenishment" in anticipation of the holidays.
3. Braava is a hit overseas
Roomba 600s and Roomba 800s are driving overall revenue growth; however, we are seeing Braava doing well, especially overseas where it comprises approximately 60% of worldwide Braava sales.
For perspective, iRobot acquired Evolution Robots in late 2012. Then, in 2013, it re-introduced ER's "Mint" floor sweeping and mopping robots as "Braava" in both Europe and the U.S. At the time, however, nearly all of Braava's sales were still in the U.S., so investors should be happy that international consumers have taken such a strong liking to the Braava product line.
In particular, Angle noted during the Q&A portion of the call that customers in the Asia-Pacific region have shown a "very, very strong response," despite the fact that iRobot is still relatively early in its rollout of marketing programs in support of Braava. Investors should watch closely, then, to see whether iRobot can maintain Braava's momentum overseas in the coming quarters.
4. Something new and exciting is on the way
In addition, the long-anticipated navigating home robot will be launched in the second half as promised. I'm not going to say anything more about the product, launch timing or features but we are very excited about it, and sales of this new robot are included in our expectations.
This isn't entirely new -- though it is slightly more specific than before. In February's call, for example, Angle teased shareholders by promising that "2015 will be an important year for iRobot as we begin to roll out and monetize investments we have been making in crucial robotic technology." More specifically, he described "incorporation of next-generation mapping navigation technology more broadly into our home products."
Angle also noted that tech could include Internet connectivity to store and manage hi-fidelity maps, as well as use low-cost cameras for visual navigation as a massive improvement over their products' current reliance on physical bumpers, infrared, and acoustic sensors.
In the end, I suspect the mystery product will belong to iRobot's flagship Roomba line. But if anything, it's good to know at least one device with this navigation technology -- which boasts broad applicability to other connected navigating devices -- is still on track for commercial launch this year.
5. Defense & Security is making a comeback
We do see some positive trends in the [D&S robot] marketplace. I think that most importantly there are a few programs of record for small robots that we're quite interested in, which are hundreds of millions of dollars in scale. And whether or not they become material [...] out beyond 12 months, we could see them driving some significant growth [...] as we are working to position ourselves to competitively respond and win those contracts.
Angle explained later on that iRobot expects to receive and respond to these requests for proposals in 2016, and material dollars from these programs "could flow in 2017."
But remember, as recently as 2011, iRobot's mostly government-centric Defense & Security business comprised more than 40% of total revenue. When Defense budgets became inherently unpredictable in 2012, D&S segment revenue plunged nearly 60% the following year. As a result, iRobot restructured its business to revolve around the more predictable Home Robot segment, which last quarter represented 92% of total sales.
However, that's even after Defense & Security revenue more than doubled year over year in Q2, to $11.8 million, largely thanks to deliveries under iRobot's multi-year contract for robots and spares with the Canadian Department of National Defence. And only a few days ago, iRobot announced a new $9.8 million order from the U.S. Marine Corps Systems Comand for 75 SUGV systems, with deliveries expected to be complete by this time next year.
But over the longer term, if iRobot can secure a prime spot in the massively larger programs of record Angle describes above, it would undoubtedly be a huge catalyst for investors in this promising small-cap company.