iRobot’s Results Indicate Home Automation Becoming Mainstream Theme

iRobot, the leader in home robotics, reported impressive Mar-18  results, reiterated full-year revenue guidance, and modestly increased full-year EPS expectations. Heading into the quarter, we were optimistic demand was tracking ahead of expectations due to strong pricing trends throughout the quarter (see note here), but we were encouraged to hear Management’s commentary around continued strength despite investor fears of increased competition. iRobot reported Mar-18 quarter revenues of $217M, which is up 29% year/year and exceeded Street expectations by ~$3M. Demand in the quarter was driven by Roomba, with units and revenues increasing, 22% and 33% respectively. Following the strong quarter, we believe the transition to home automation is moving quickly, and see iRobot as a key player for years to come.

Home automation becoming mainstream theme. Largely due to increased consumer awareness, the domestic robot market has been one of the fastest growing robotic categories over the last several years and iRobot has taken full advantage. This marks the 5th quarter iRobot experienced 20%+ year/year revenue growth, and the company is on pace to see 20%+ growth for the second consecutive year. iRobot has invested a lot in sales and marketing initiatives, which has driven consumer awareness for the whole industry and benefited the company’s P&L materially. With only ~10% U.S. households and ~2 – 3% international homes owning a robotic vacuum cleaner, the domestic robot market and iRobot has more room to run.

iRobot’s premium robot niche tough to beat. Although a portion of rising ASPs was due to the company’s recent acquisition, we also believe it has to do with strong demand for iRobot’s higher-end Roomba products. The 900 Roomba series has been one of the company’s best selling products since being released, and the company has established itself as the clear leader in this category. While increased competition from traditional brands and new Chinese companies remains a risk and key topic, most of these companies are releasing lower-end products and have yet to threaten iRobot’s higher-end dominance. Given iRobot’s 20+ years of robotic expertise, and strong brand recognition we see it as challenging for these new brands to bring a superior high-end product to market. However, if a company does release a competitive high-end product, we view this market as growing fast enough where more than one company can flourish.

What to think of Amazon? Amazon was the latest to make some noise in the consumer robotic space when multiple reports had indicated the company is working on bringing a home robot to market. However, note this report was not confirmed by Amazon and many questions are still to be answered if they will be a direct competitor to iRobot. Until more information is released, we do not see it has a real threat today. However, assuming they want to release a vacuum or wet floor product, most will view this announcement as a negative. That said, iRobot finds it as a positive because it brings further validation and market awareness to the space. Also it should not be assumed Amazon will come in and dominate this market. Because, as multiple Fortune 500 companies have already found, making a fully functional robot is much harder than it seems.

Model Revisions. Given the company reiterated full-year revenue and operating income guidance, we have left our model mostly unchanged. See model here and here.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

iRobot Pricing Trends Suggest Demand for Roombas Has Not Slowed

iRobot is the leading manufacturer of robotic vacuums and wet floor products in the world. Based on a modest quarter/quarter improvement in pricing trends, we believe the company experienced another strong quarter of demand for Roomba and Braava products and likely sold more robots than expected in the Mar-18 quarter. In addition, we believe the domestic robot market is one of the fastest growing robotic segments, and given iRobot’s positioning and premium tech, we expect the company to sustain 20%+ revenue growth for the next several years. While increased competition has been a growing threat to iRobot’s market share in recent quarters, we believe these threats are overblown and that the company is in position to flourish for years to come. The company reports Mar-18 quarter results on Tuesday, April 24th after-markets-close.

Strong pricing trends across entire portfolio. Over the last 3 years, we have tracked iRobot pricing across the company’s 4 largest US distributors (Best Buy, Amazon, Bed Bath & Beyond, and Target) on every Friday in the quarter. While pricing is not a perfect indicator of demand trends, price discounting has historically had a solid correlation with iRobot’s quarterly results. As displayed in the chart below, the company experienced on average higher pricing across all products we track (Roomba 980, Roomba 960, Roomba 614 Braava 380T and Braava Jet) in the Mar-18 quarter than they did in the Dec-17 quarter. We find this encouraging because we felt pricing last holiday season was strong, which translated into the company beating Dec-17 Street revenue expectations by ~$8M (or ~3%). We do want to highlight the company missed on EPS last quarter, which heavily weighed on the stock. While it is difficult to get a read on how pricing trends will directly impact the bottom line, we do know the company has historically beaten top and bottom line expectations over the last year. Given Management ability to manage expectations, we are optimistic about the upcoming quarter.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

3 Analyst Day Takeaways on Why iRobot Will Lead for Years to Come

Following iRobot’s Analyst Day, 3 themes stood out that confirm iRobot will remain one of the leading consumer robotic companies in the world for years to come. They include extremely low household penetration rates domestically and internationally, iRobot’s multi-million unit install base, and the company’s ability to scale the technology into many other consumer robotic categories.

We have barely scratched the surface. iRobot estimates only 10% of U.S. households own a robotic vacuum cleaner, and outside the U.S., penetration rates are estimated to be considerably lower (~2-3%). However, robotic vacuum sales have been growing at a 22% CAGR since 2012, and we anticipate 20%+ growth to continue in this category through 2020 as more households adopt this technology for the first time. We believe the biggest driver to growing adoption is increasing customer awareness through increased marketing spend. Despite Wall Street criticism around the company’s initiatives to increase marketing spend, we believe devoting extra resources to sales and marketing will drive incremental revenues and profit in the long term. As displayed in the chart below, iRobot believes the immediate addressable market is 2x their current install base, and looking out further, the company believes they have barely scratched the surface.

Source: iRobot 2018 Investor Day Presentation

Growing install base an undervalued robotics asset. The company highlighted their U.S. install base is over 13M units. We view this large and growing install base as a very underappreciated asset. As a Roomba is helping the consumer clean, it is also benefiting iRobot by gathering large data sets on how the robot interacts with the world. iRobot can then use the data to train their proprietary AI algorithms and improve their robots functionality. This is akin to a self-driving car testing on public roads. iRobot’s CEO, Colin Angle, said the biggest challenge any robot has to overcome is interrupting the world. By having access to millions of robots across the world, we believe the company will continue to build the highest performing robots on the market.

iRobot is much more than a vacuum company. iRobot’s mission is to drive robot adoption among the consumer. Today, that primarily consists of Roombas and Braavs, but we believe the company is capable of scaling this technology across many types of other domestic robot categories like lawn mowers, security systems, etc. Given the many years of robotics expertise, as well as the proprietary data iRobot has access too, we expect the company to begin to enter new robotic categories in the coming years. While iRobot’s Management team did not give too much information on the company’s new product launches in 2H18, they did hint that the company could soon be expanding outside of robotic vacuums and mops.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

iRobot’s Earnings Disappointment Doesn’t Change Long-Term Story

Heading into the Q4 print we were confident iRobot would report better-than-expected revenues and guide 2018 sales above street expectations (see note here), which they did, but we incorrectly judged the magnitude lower EPS could have on the stock. Shares of iRobot finished down 30% due to investors concerns with decelerating revenue growth and lower-than-expected profitability. That said, with the revenue outlook being inline with our expectations and the lower earnings forecast being largely attributed to increased marketing and R&D spend (and not price erosion), we remain believers in the long-term iRobot story. Following iRobot’s results our two key takeaways are 1) the domestic robot market is and will remain one of the fastest growing robotic markets over the next 3 years and 2) iRobot will continue to lead the wave of home robot adoption.

20% Growth Through 2020. In addition to providing 2018 guidance that implies 20% year/year revenue growth, iRobot expects this type of growth to continue through 2020. Although investors view 20% growth as a deceleration over prior years, we view this forecast as in-line to our estimates and higher than most longer-term consensus models. Given Management’s history of providing conservative guidance, we think there is room for these numbers to go higher as we make our way throughout the year. Demand will be driven by increased Roomba and Braava sales from both domestic and international homes.

iRobot Leading Domestic Robot Wave. The company announced they will be rolling out a slate of new products in 2H18, which is expected to account for 25% of total sales. While the company did not give much detail on these new products, we anticipate they will enhance both the Roomba and Braava product portfolios. The company continues to heavily invest in R&D, and we believe the company will soon expand their core presence outside of vacuums and wet-floor products.

Link to model here.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Expect iRobot to Have Cleaned Up During Holiday Season

iRobot is the leading manufacturer of robotic vacuums and wet floor products in the world. Based on holiday pricing trends we believe the company sold more robots than expected in the Dec-17 quarter. In addition, we believe the domestic robot market is one of the fastest growing robotic segments, and given iRobot’s positioning and premium tech, we expect the company to sustain 20%+ revenue growth in 2018. While increased competition has been a growing threat to iRobot’s market share in recent quarters we believe these threats are overblown and believe the company is in position to outperform current expectations over the next year.

Strong Pricing Trends Across Entire Portfolio. Over the last 3 years, we have tracked iRobot pricing across the company’s 4 larger US distributors (Best Buy, Amazon, Bed Bath & Beyond and Target) on every Friday in the quarter. While pricing is not a perfect indicator to demand trends, price discounting has historically had a solid correlation to iRobot’s quarterly results. As displayed in the chart below, the company experienced on average higher pricing across all products we track (Roomba 980, Roomba 960, Braava 380T and Braava Jet) in the Dec-17 quarter than they did in the Dec-16 quarter. We find this encouraging because we felt pricing last holiday season was strong, which translated into the company beating Dec-16 Street revenue expectations by ~$6M (or 3%), and EPS by $0.08 (or 20%). Given these strong pricing data points, coupled with Management’s history of providing conservative guidance we expect the company to once again exceed Dec-17 Street estimates.

While pricing remained similar Y/Y at Best Buy, Bed Bath & Beyond, and Target in Dec-17 quarter, we would like to highlight prices on Amazon increased over regular retail price regularly throughout the quarter. Given Amazon’s pricing strategy is based more on supply and demand trends, we believe above regular retail pricing late in the Dec-17 quarter is the strongest sign of demand.

Expect Solid 2018 Guidance, but Likely Conservative Although we expect iRobot to beat Dec-17 Street estimates, the key number investors will focus on is how the company guides for 2018. Despite concerns about increased competition, the domestic robot market is inflecting, and given the most penetrated robotics vacuum market in the world (the U.S.) is less than 10%, we believe there is plenty of room to run both domestically and internationally. The Street is currently expecting iRobot to guide 2018 revenues to ~$1.0B, which implies ~16% Y/Y growth. iRobot has experienced 3 consecutive quarters of 20%+ growth and is on pace to grow over 30% in CY17. In addition, we anticipate the robotic vacuum market to grow 26% Y/Y in 2018. (Link to domestic macro model here.) Given the current market dynamics and iRobot’s market positioning, we believe Street numbers are conservative. However, given Management’s history of consistently beating expectations, we wouldn’t be surprised if the company guides in-line to modestly above consensus, but expect multiple beat and raise quarters throughout the year.

Robot Lawnmower Positive 2018 Catalyst. While iRobot continues to not provide any color on when they will release a lawnmower, we continue to believe it is likely they will introduce a robot lawnmower in 2018. However, most importantly this a “when” not an “if”, they will introduce a robotic lawnmower. We’re modeling for the lawn mower to launch in Mar-18 (and account for 5% of revenue in the Jun-18 quarter) and account for 8% of 2020 revenue. The Street is not modeling the lawn mower.

Model Adjustments. Given the expectation for better than expected demand in the Dec-17 quarter, we are raising our revenue estimates to the high-end of the company’s 2017 guidance ($870 – 880M vs cons $875M). We are leaving our 2018 estimates largely unchanged, but would like to note our current estimates of $1.1B are above consensus ($1.0B) due to our model factoring in ~$60M in lawnmower revenue. Assuming the lawnmower gets pushed out till 2019, we still believe iRobot can grow ~23% Y/Y. Link to model here.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.