iRobot Corp

NASDAQ:IRBT

Earnings Call Analysis

IRobot 2024 Revenue to Decline, Margins to Improve

IRobot's Q4 2023 earnings revealed a revenue decline of 14% to $308 million, with full-year revenue down 25% to $891 million. U.S. sales saw a notable 30% drop. The direct-to-consumer (D2C) channel, representing 21% of total revenue, is expected to grow by 5% in 2024. Gross margins fell by 5 percentage points to 19% in Q4, and the company reported a net loss per share of $1.82. The outlook for 2024 anticipates a modest revenue decline (3-7%) and a net loss per share of $3.73 to $3.30, with some recovery projected in gross margins to 32-34% and a pivot to an operating profit in the second half of the year.

Company's Resolution and Future after Termination with Amazon

iRobot, the renowned robotics company, embarked on its earnings call with a strong start, embodying confidence in its future despite the recent unexpected termination of its transaction with Amazon. The CEO reflected on a long tenure with the company and assured that a profound restructuring plan was in place to address their immediate challenges and propel long-term growth. The company foresees leveraging its brand and innovative product line to reclaim leadership in the semi-premium and premium segments while optimizing focus on profitable geographies and reducing its expenses across various functions.

Financial Performance and Restructuring Plans

The company reported sluggish revenue due to decreased consumer spending and fierce competition, recording a fourth-quarter revenue of $308 million and full-year revenue of $891 million. The gross margin stands at 19%, and significant losses were faced, with an operating loss of 22% and a net loss per share reaching $7.73 for the year. iRobot's answer to these challenges hinges on an aggressive operational restructuring plan with an aim to simplify their cost structure, reduce research and development (R&D) expenses by $25 million, cut sales and marketing expenses by $40 million, and achieve gross margin improvements estimated to uplift the margin to 32%-34% in the next fiscal year.

Concentration on Core Value Drivers and Profitable Channels

iRobot laid out the plan to zero in on its core value drivers, which include dominating the mid-to-high end market segments and honing in on channels and geographies that promise the most robust scale and profitability. They're tailoring their go-to-market strategy to spotlight the most profitable customers and sales channels, notably enhancing their direct-to-consumer (D2C) segment, while balancing spending to align with the current norm of revenue expectations.

Efforts Towards Profitability and Shareholder Value

The company's chief finance officer indicates a proactive approach to managing costs and improving cash flows, anticipating positive cash flow from operations in the second half of 2024 with capital expenditures expected to be a modest 1% of the projected revenue. The diligent cash management aligns with their strategy of operational restructuring, where they anticipate significant cash flow improvements compared to an outflow of $114.8 million in the prior year. They plan to introduce a shelf registration for a $100 million stock sale for additional capital flexibility.

Leadership Transitional Phase and Steady Path to Recovery

In a period of transformation, the company expresses its determination to improve gross margins significantly, enhance its joint development manufacturer model, and magnify its D2C presence. Emphasizing that these steps underpin their forward trajectory towards profitability, the leaders at iRobot also reinforce that they have initiated a search for a new CEO to lead the company into its next phase, thereby creating a value-driven foundation for stakeholders.

Earnings Call Transcript 2023-Q4

[Operator]

Welcome to the iRobot Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions].

I would now like to turn the call over to Karian Wong, Chief Accounting Officer. Please go ahead.

[Karian Wong, executive]

Thank you, Jamie, and good morning, everybody. Joining me on today's call are iRobot Interim CEO, Glen Weinstein; and Executive Vice President and CFO, Julie Zeiler.

Before I set the agenda for today's call, I would like to remind everyone that today's discussion will include forward-looking statements regarding future events and our future financial performance. These statements reflect our views as of today only and should not be considered as representing our views as of any subsequent date. These statements are subject to risks and uncertainties that could cause actual results to differ materially from expectations reflected in the forward-looking statements. A discussion of these risk factors is fully detailed under the caption with factors in our filings with the SEC.

Related to our financial disclosures during this conference call, we will reference certain non-GAAP financial measures as defined by SEC Regulation G, including non-GAAP gross margin, non-GAAP operating expense, non-GAAP operating loss and non-GAAP net loss per share. We believe that our non-GAAP financial results help provide additional transparency into iRobot's underlying operating performance and potential.

Our definitions of these non-GAAP financial measures and reconciliations of each of these non-GAAP financial measures to the most directly comparable GAAP measures are provided in the financial tables at the end of the fourth quarter 2023 and full year 2023 financial results press release we issued last evening, which is available on our website at www.irobot.com.

Also, unless stated otherwise, our fourth quarter and full year 2023 financial metrics as well as the financial metrics provided in our outlook that will be discussed on today's conference call will be on a non-GAAP basis only and all historical comparisons are with the fourth quarter of 2022 and full year of 2022.

For today's call, our agenda will be as follows: Glen will briefly cover the company's quarterly and end financial results, review important strategic milestones and outline our expectations for 2024. Julie will review our financial results in detail and offer additional insight into our 2024 guidance. Then we'll conclude our commentary with some closing remarks about prospects over the longer term. After that, we'll open the call for questions. At this point, I'll turn the call over to Glen.

[Glen Weinstein, executive]

Good morning, and thank you for joining us. I'll start our call today by reiterating my confidence in iRobot, our mission and our ability to navigate our next chapter. I have been part of this organization for more than 2 decades. I know who we were, who we are and who we can become. At our foundation is a product that customers love and an incredible team of builders and innovators who are passionate about the robots we create, and because of this, our potential is great.

Our future is different than we had envisioned in August of 2022 or even at the start of this year, given the decision by iRobot and Amazon to terminate our transaction. The management team and Board are confident in our ability to build on our legacy of innovation as a stand-alone company and to navigate this period successfully.

As we shared on January 29, we are taking aggressive action to significantly improve our near-term operations. To that end, today, I'm going to outline the tenets of the restructuring plan we announced last month. I'll also provide additional information on how that work is progressing and what you can expect from us going forward. Julie will then cover financials for the quarter in greater detail as well as our outlook for 2024. Then we'll open the call for questions.

Before I jump into the restructuring plan, I'll touch on our financials at a high level. Our performance continues to be impacted by sluggish consumer spending as well as aggressive competition in all regions. We generated fourth quarter revenue of $308 million with a gross margin of 19%. We managed our cost carefully to report an operating loss of $45 million and a net loss per share of $1.82.

For the full year, revenue declined to $891 million with an operating loss of 22% and a net loss per share of $7.73. We have a plan to address our performance and these macro trends. The operational restructuring plan we announced last month is designed to stabilize the business in our current environment while also advancing our longer-term growth initiatives. The operational restructuring plan is centered around simplifying our cost structure, implementing a more sustainable business model and focusing on our core value drivers.

Those core value drivers are: first, leverage our brand and innovative products to extend or reclaim our leadership in the mid and premium segments; and second, focus on geographies that offer the greatest scale and profitability. Our immediate priorities in executing this plan are to more closely align our cost structure with near-term revenue expectations, improve liquidity and drive bottom line improvements.

Specifically, the plan is structured to first achieve gross margin improvements through a focus on design to value and removal of unnecessary costs and more attractive terms with our manufacturing partners. Second, reduced R&D expenses by relocating certain noncore engineering functions, including increasing reliance on third parties to provide those functions and pausing work unrelated to our core floor care business. Third, centralize our global marketing activities to be more efficient in demand generation, and provide a meaningful reduction in nonworking marketing and agency fees. And fourth, streamline our legal entity and real estate footprint to fit our current business needs and near-term revenue expectations.

The cornerstone of our gross margin improvement plans, which we have been working on for nearly a year, is a new relationship paradigm with our contract manufacturers, both existing and new. We are relying on the expertise of our contract manufacturers to a greater extent than we have in the past. Taking advantage of a matured supply chain and expertise in design for manufacturing and flexibility and components.

This shift, along with competitive bidding of our design packages, is a key component in unlocking an approximately 9.5 to 11.5 percentage point improvement in full year 2024 gross margin. We expect to see the benefit of these improvements in the P&L, primarily in the second half of the year as the higher cost products are moved out of the inventory, and we benefit from new products released during the year that have lower costs than the products that they will have replaced. We have more work to do, but we anticipate a gross margin of between 32% and 34% in fiscal '24.

Hand in hand with the shift to a greater reliance on contract manufacturers for certain work is the ability to decrease our R&D expenditures, particularly as it relates to lower-value commodity engineering work. We plan to continue to invest in the higher-value robotics, computer vision, machine learning and complex mechanical design to improve the core functionality of our robots. We plan to take advantage of opportunities to source subcomponents and, in some cases, nearly complete robot designs from third parties.

In 2024, we expect to see a decrease in overall R&D expenses by approximately $25 million.

In sales and marketing, we had built an infrastructure to support revenue at the higher pandemic rates. And now we need to aggressively return to a more normalized level where we can operate the business profitably. We will focus resources on a more limited geographies and consolidate marketing efforts for greater efficiencies. In 2024, we expect to see a decrease in overall sales and marketing expenses of approximately $40 million including a decrease in working marketing of approximately $20 million.

While this might put pressure on our revenue in the short term, we are returning to a more disciplined approach to demand generation. In line with these initiatives, we will reduce our workforce by approximately 350 employees, which represents approximately 31% of our robust workforce. These reductions are expected to result in restructuring charges totaling between $12 million and $13 million, primarily for severance and related costs over the first 2 quarters of 2024. We are in the final planning stages for these difficult actions and expect to begin implementing these changes beginning in early March.

As previously announced, we have engaged a Chief Restructuring Officer, Jeff Engel, to oversee these initiatives, and he is reporting directly to both the Board of Directors and me. Jeff is fully empowered to make not only these necessary changes but to scour our cost structure and look for opportunities for savings and efficiency improvements.

Liquidity and careful cash management are our top financial priorities. We anticipate a significant improvement in our 2024 cash flow from operations compared with full year 2023 and anticipate generating modest positive cash flow from operations in both the third and fourth quarter of 2024. We have always had an amazing team of builders who are eager to identify problems and create solutions. We recognize the importance of our people. They are vital to the success and growth of the company, and we appreciate their ongoing hard work and dedication. While the financial actions we are taking are essential to the near-term operations of the business. They are not being taken at the expense of advancing important work on growth initiatives.

As we shared last month, we have made the decision to focus our innovation and development efforts on iRobot's key revenue generators, pausing all work related to non-floor care innovation. Our focus is on executing the near-term plans and moving quickly and decisively to continue to delight customers.

We are laser-focused on the initial impressions of our new customers. We know that the first experience of taking our products home, unboxing and performing the initial setup routines and creating the first maps and schedules are an important foundation for longer-term usage and customer satisfaction. Additionally, we continue to enhance our go-to-market playbook, which focuses the business on iRobot's most profitable customers, geographies and channels, including our growing direct-to-consumer channel while rebalancing our spending mix between price promotion and demand generation to optimize returns.

We believe it is important to meet our customers at the locations where they want to discover and purchase our products. We will retain an omnichannel presence in our large markets while further leveraging existing and new distributor partners in smaller geographies. Our direct-to-consumer channel continues to be an area of focused investment, ensuring it is the easiest place to buy and own Roomba. We expect that this channel will grow approximately 5% in 2024 and represent approximately 20% of total revenue.

We have an iconic brand that people love. Our marketing efforts will support key retailers in stores and online to deliver the premium experience that our customers expect and deserve. In the near term, we are taking the necessary actions to stabilize the business, improve liquidity and focus on bringing innovative products to our customers. We are confident in our ability to build on our legacy of innovation as a stand-alone company and to navigate this period successfully. Now I'll hand it over to Julie to discuss financials.

[Julie Zeiler, executive]

Thank you, Glen. As Karian mentioned earlier, my review of our financial results and outlook will begun on a non-GAAP basis. So unless stated otherwise, each mentioned of gross margin, operating expense, non-operating expense, operating loss, other expense and net loss per share will mean the corresponding non-GAAP metric. All quarterly comparisons are against the fourth quarter of 2022, and all full year comparisons are against 2022, unless otherwise noted.

IRobot's fourth quarter 2023 revenue declined 14% to $308 million. Our performance was disappointing across all regions, driven by demand gap and higher promotional and pricing support. Many retailers in EMEA and North America continue to carefully manage their inventory as part of their ongoing efforts to rebalance inventory levels amid relatively sluggish consumer spending on a range of categories, including robotic floor care products. The overall market conditions continue to be challenging, and we continue to see increased competition in EMEA, Japan and the U.S. throughout 2023.

Geographically, in the fourth quarter, EMEA declined 5%, Japan declined 19% and the U.S. decreased 20%. From a product mix perspective, 2-in-1 products represented 43% of our Q4 revenue mix with robotic vacuums and, to a lesser extent, robotic mops making up the remainder. Accessory revenue in the fourth quarter grew 18% over the prior year and represented approximately 7% of total revenue.

Our fourth quarter D2C sales declined 9% versus prior year, with flat growth in North America, offset by declines in EMEA and Japan. In the fourth quarter, our D2C revenue represented 21% of total revenue. Our gross margin of 19% in Q4 declined 5 percentage points from the prior year. The year-over-year decrease primarily reflected 6 percentage points associated with higher pricing and promotion, 2 percentage points associated with suboptimal absorption of fixed operational costs, and 2 percentage points associated with higher losses, related to purchase commitments with our contract manufacturers and higher excess and obsolete inventory write-down. These factors were partially offset by a 4 percentage points benefit of lower product cost of sales and transportation costs.

We reduced our fourth quarter 2023 operating expenses by 30% to $104 million, representing 34% of revenue. The decrease primarily reflected disciplined spending during the quarter across the board, with the biggest drivers being reduced working marketing spending as a result of lower revenue, people-related costs associated with previously announced restructuring efforts and other discretionary spend.

Our Q4 operating loss was $45 million. Fourth quarter nonoperating expense was $5 million, reflecting interest expense associated with our term loan. This was partially offset by interest income on cash balances. Our fourth quarter net loss per share was $1.82.

From a full year perspective, 2023 revenue declined 25% to $891 million. Geographically, we generated 48% of our revenue in the U.S., where revenue declined by 30%. International revenue declined by 19%, with EMEA decreasing by 11% and Japan declining by 21%. 2023 gross margin of 22.5% declined 7 percentage points from 2022.

The full year decline was impacted 5 percentage points associated with pricing and promotions and 4 percentage points related to fixed costs across a lower revenue base. This was partially offset by improvements in product costs, transportation rates and channel mix.

Full year operating expenses of $399 million declined by 23% due to the combination of lower working marketing based on lower revenue, a reduction in personnel expenses associated with head count and other discretionary spending. Our 2023 operating loss of $199 million was 22% of revenue.

We reported 2023 nonoperating expense of $13 million and a net loss per share of $7.73. We ended 2023 with $185 million in cash and short-term investments, a decline of $5 million from the end of Q3. The timing of certain working capital levers impacted the quarterly usage and generation of cash from operating activities during 2023.

In Q4, '23 cash flow from operations was negative $1.2 million. In Q4 2022, cash flow from operations of $122.6 million benefited from the decrease in inventory from our elevated inventory level at the end of Q3 2022. We had another strong quarter of working capital efficiency. Fourth quarter DSO was 24 days. Our year-end inventory balance was $152 million or 56 days for the fourth quarter. In 2022, the year-end inventory was $285 million or 96 days for the fourth quarter.

I am pleased with the progress we have made in managing our key working capital levers throughout 2023. Careful management of working capital efficiency will continue to be a focus in 2024. With that said, let's take a deeper look at our 2024 outlook.

We anticipate 2024 revenue will decline modestly in the range of 3% to 7% to $825 million to $865 million. We anticipate that over 60% of our full year revenue will come in the second half of the year with an expected first half revenue decline of high teens to low 20s percent range. Within the first half of the year, we expect Q2 to be the weaker of the 2 quarters in terms of growth versus prior year as we anticipate a shifting of orders into Q3. For the second half of the year, we anticipate revenue growth in the mid-single-digit percentage. Overall, our 2024 revenue outlook assumes a modest decline in unit volumes for robots and stable robot ASPs.

As a reminder, and we say this every year, we manage our business on a full year basis and encourage investors to focus on our annual targets since the timing of orders is challenging to forecast even under ideal conditions. Large orders that shift from one quarter to the next can cause material fluctuations in our quarterly growth rates.

Additionally, our revenue expectations contemplate yen and euro exchange rates roughly in line with current rates, plus or minus 5%. We anticipate that our 2024 gross margin will improve significantly to between 32% and 34%. As Glen mentioned, we expect that the combination of our cost of goods sold productivity initiatives and a reduction in onetime costs related to actions taken in 2023 to reduce our elevated inventory level from fiscal 2022 will fuel this margin expansion.

We anticipate that the Q1 '24 gross margin will show slight improvement from Q1 last year but we expect sequential improvement every quarter from 2023 with stronger gross margin expansion in the second half, as more significant cost savings improvements moved through the P&L, and we compare against annualized pricing adjustments.

We are targeting 2024 operating costs in the range of $322 million to $340 million or approximately 39% of revenue. The anticipated decrease from 2023 primarily reflects previously announced efforts to more closely align our cost structure with near-term revenue expectations and drive toward profitability. Given our top line guidance and spending plans, we currently expect to make considerable progress as we execute our restructuring efforts in the first half of the year.

We anticipate a full year operating margin of approximately negative 5% to negative 7%, with an operating loss in the first half and an operating profit in the second half of 2024. In terms of other notable modeling assumptions in 2024, we anticipate other expense of around $45 million, including approximately $15 million in net cash interest expense and $29 million in estimated fair value adjustments associated with our term loan and full year tax expense of approximately $3 million driven by our foreign jurisdiction.

We anticipate a diluted share count of approximately 28.3 million shares. As a result, we expect our full year net loss per share to range from $3.73 to $3.30. In terms of other 2024 financial guideposts, our business remains minimally capital-intensive. Overall, we expect 2024 capital spending to be approximately $5 million or roughly 1% of anticipated 2024 revenue. As Glen mentioned, liquidity and careful cash management is our top financial priority.

With the operational restructuring plan we announced last month, we anticipate a significant improvement in our cash flow from operations compared with the reported cash outflow from operations of $114.8 million for full year 2023. Excluding the net proceeds from the $94 million breakup fee from Amazon, we expect cash flow from operations in Q1 and Q2, and we expect to generate positive cash flow from operations in both Q3 and Q4.

To provide further flexibility to our capital planning strategies, we intend to file a shelf S-3 registration statement, which would include a $100 million at-the-market offering program for the sale of the company's common stock, along with our 10-K this week. The timing of any sales and the number of shares of common stock sold, if any, under the ATM program, will depend on a variety of factors to be determined by the company, with the net proceeds from the ATM program expected to be used for working capital purposes.

In summary, we are managing through a very challenging period and making important strategic progress that we believe will help us further expand our business, reduce operating expenses and drive bottom line improvement. That concludes my commentary. I'll now turn the call back over to Glen for some additional comments on the coming year.

[Glen Weinstein, executive]

Thank you, Julie. As we've outlined, we have a plan in place to simplify our cost structure, implement a more sustainable business model and focus on our core value drivers of leveraging our brand and innovative products to regain and extend our leadership across segments and geographies. Coupled with the restructuring actions we announced, we believe our second half 2024 performance will serve as a springboard for our driving our future.

We are committed to significant gross margin improvement. We expect our gross margin will further benefit from our transformation to a more complete joint development manufacturer model, ongoing D2C expansion, and a relentless effort to achieve greater scale and efficiency across our operations. These dynamics underpin our expectation for material improvement in our bottom line performance and put us on a path toward profitability.

Finally, as we noted in late January, the Board has initiated a search for a permanent CEO, supported by a leading executive search firm. The Board is already reviewing candidates. In the meantime, we are committed to stabilizing the business and returning to profitability. We expect that our success in 2024 will create a foundation that will deliver value for our shareholders, our employees and our customers. That concludes our remarks. Operator, we're ready to take questions.

[Operator]

[Operator Instructions] Our first question will come from Jim Ricchiuti with Needham & Company.

[James Ricchiuti, analyst]

I just wanted to go through the bridge to the gross margin improvement that you're anticipating -- sorry for the background noise. Looking out to the full year, how much of that is coming from the initiatives you've had with the existing and it sounds like some new contract manufacturers? And maybe what is baked into those assumptions also with respect to price and market share?

[Julie Zeiler, executive]

Sure, Jim, why don't I take that? So as Glen laid out in quite a bit of detail, we have programs well underway to drive solid improvements as we go through 2024 in our gross margin. As noted, we expect to show slight improvement in Q1 over the same period of prior year but sequential improvement every quarter as we go through 2024.

Those initiatives are generally driven in a few buckets. The first one is product mix, which is the largest individual piece. As we launch new products that come with a lower cost base, and bring those into the market, we expect that we will see improvement in gross margin.

We commented in our prepared remarks around fixed costs, there are some expenses that we had in 2023 that we don't expect to continue to have in '24 as well as some of our restructuring efforts around the organization in total. And then finally, there are things like ongoing cost improvements on existing products as well as taking advantage as compared to prior year of improved transportation rates that finally will drive the last big piece of those cost improvements.

[James Ricchiuti, analyst]

That's helpful, Julie. And maybe my follow-up question, as we think about the recovery that you're anticipating in revenues in the back half of the year, I wonder if you would comment about the conversations you're having or maybe having with some traditional brick-and-mortar retailers? Just in the aftermath of the merger agreement being terminated?

[Julie Zeiler, executive]

Sure. Why don't I start and then I'll let Glen jump in as well. If you think about the timing and the growth expectations in our quarters, as I mentioned in my remarks, we'd like to point people to our full year targets. What we see sometimes and we expect to see that again this year as there can be movement in the timing of certain large orders associated with significant promotional events. And as those move between, as an example, Q2 and Q3, it can drive growth fluctuation.

I think the other piece, as we look at our revenue outlook for the year, is we expect to continue to optimize certain channels, particularly internationally, and that underpins as well our outlook in the second half.

[Glen Weinstein, executive]

Yes. And Jim, I'll add. I know that we have -- after we announced the transaction with Amazon in the summer of 2022, we had some retailers exit business with us, both domestically and internationally because they viewed Amazon as a particular competitor. With the announcement of the termination, we have begun conversations with those retailers to reenter their stores. And we hope that, that is something that we'll be able to announce as the year goes on.

[Operator]

We'll go now to Asiya Merchant with Citi.

[Asiya Merchant, analyst]

Julie, if you can just again walk us through why the first half is weak. I guess, the second half trend that you're seeing in margin and obviously, all the cost initiatives. But can you walk us through why you think the first half should be so much weaker than the last year? And my understanding was as well, if I'm going back to my notes that there was orders that had shifted into the prime again into the back half of the year.

So maybe you can just walk us through what you're seeing in the first half that leads to so much pressure still in the first half. And then my other question was just on the OpEx initiatives that you've identified. Should we assume that this is still like obviously going through some analysis here? Should we expect more to come? Or is this sort of how you think the full year is going to play out with the majority of the expenses being taken out, let's say, in the first quarter or definitely by the first half?

[Julie Zeiler, executive]

Sure. Thank you, Asiya. So as I think about the seasonality of our revenue in 2024, and you pointed to a couple of things. Every year, we see there can be shifts of certain large orders. And we expect some of that will happen first half versus second half of this year which plays into our expectations around growth rates.

I think the second piece of it, as I mentioned, is Glen touched on some conversations with certain customers. I think also the -- we've talked in our prepared remarks about -- optimizing our channels. And as we work through that, we expect to see an improvement in performance, in particularly internationally in the back half of the year.

[Glen Weinstein, executive]

On the OpEx. So first of all, what we have explained is our year-over-year improvements. And we think our exit rates will be better than just looking at the year-over-year amount. There's always more efficiencies to look for. Specifically on your question, I think the majority of the restructuring will be done in Q1 some in Q2 with the vast majority happening in the first half of the year.

[Operator]

That is all the time we have left for questions today. I would now like to turn the floor over to Karian Wong for closing remarks.

[Karian Wong, executive]

Thank you so much. This concludes our conference call today, and we appreciate your support and looking forward to talking with you over the coming weeks and months. Thank you.

[Operator]

Thank you. This concludes today's iRobot Fourth Quarter and Full Year 2023 Earnings Conference Call. Please disconnect your lines at this time, and have a wonderful day. Goodbye.