"What price glory?"

In his recent Q&A session with Wall Street analysts, iRobot (NASDAQ:IRBT) CEO Colin Angle mentioned that one price the company pays for receiving substantial orders from the military is that it must grant "price breaks for high-volume orders" from its No. 1 customer. And at first glance, yesterday's press release appears to show that promise in action.

iRobot announced a pair of contracts with the U.S. Army on Thursday. The first award, for $6.3 million, is part of a $64 million indefinite delivery, indefinite quantity (IDIQ) contract to supply PackBots. From the press release, it appears that iRobot will have completed $52 million of the planned work, and management predicts it will deliver on the remaining $12 million before October (i.e., in the third quarter).

The xBot cometh
But it's the other contract that I want to talk about today -- the second installment on iRobot's 3,000-unit, $286 million, IDIQ contract to provide "xBots" to the U.S. Army. (xBot, by the way, does not refer to a new kind of robot. Rather, it is a generic name for the PackBot 510 with FasTac kit.) With 101 xBots already trundling around the Mideast, de-boom-izing things that go boom, the military is now ready to hit the start button on another batch of 200. iRobot's take on this installment: $16 million.

Military math
Fifth-grade math will suffice to tell you that this contract pegs the price of each xBot at just $80,000. And yet, according to iRobot, it has already delivered 101 xBots and booked $11 million in revenue thereon -- meaning those xBots fetched nearly $109,000 each. Talk about a "price break"!

But here's the good news. The entire xBot deal is worth $286 million. Subtract out the $27 million already booked, and divide the result by the 2,699 xBots still to be delivered, and we're back up to an average price of nearly $96,000 per unit going forward.

Foolish takeaway
For reasons unexplained, iRobot's second batch of 200 robots sells for a significant discount to the first batch. These robots are due for delivery by Oct. 31, which is one month into iRobot's fiscal fourth quarter. All other things being equal -- or, in other words, ignoring the effect of other military sales such as the iRobot-Boeing (NYSE:BA)-SAIC (NYSE:SAI) SUGV -- we should probably be prepared to see gross margins in iRobot's military business drop in the fiscal third and fourth quarters.

Farther out, though, future xBot deliveries promise to fetch higher prices (again, for reasons unexplained), and accordingly, better margins.

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