Why iRobot Corporation Lowered Guidance Despite Strong Q1 Earnings

By Markets Fool.com

iRobot Corporation may have just announced another impressive quarter, but the market sure isn't acting impressed. After falling more than 3% in Tuesdays regular session, iRobot stock dropped another 3.5% in after-hours trading after the company offered better-than-expected first-quarter results, but followed by decreasing the high end of its full-year earnings guidance.

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Quarterly revenue rose a modest 3.3% year over year to $118 million, which translated to a 9.4% decrease in net income to $4.8 million, or $0.16 per share. For reference, in February iRobot told investors to expect first-quarter revenue of only $114 million to $117 million, with earnings per share of $0.08 to $0.10. And analysts, on average, were only anticipating revenue and earnings of $116 million and $0.10 per share, respectively.

A surprising leader?
Perhaps most interesting is that a primary driver behind iRobot's results was 17% growth from from its formerly struggling Defense & Security business, 70% of which came from support and orders of spare parts for existing robots. Remember, last quarter iRobot said D&S exited 2014 with a strong backlog, and was poised to grow revenue on a year-over-year basis for the first time since 2011.

Meanwhile, Home Robot revenue -- which is still expected to comprise around 90% of iRobot's total sales this year -- rose a modest 3% over last year. To be fair, though, this was exactly what iRobot expected would happen this quarter, as macroeconomic headwinds held back the segment in the important EMEA and Japanese markets. And Japan, for its part, is iRobot's largest market outside the United States.

Even so, international home robot sales still managed to grow 5% in Q1, driven by strong sales of iRobot's latest Roomba 800 models in both EMEA and China. According to iRobot CEO Colin Angle, China enjoys a particularly strong market that's not suffering from the same macro headwinds.

In addition, with regard to its budding telepresence business, iRobot recently installed multiple Ava 500 robots at Fidelity Investments' FCAT center in Boston for applications including collaboration and tours of the facility. Even so, management reiterated its prior stance of focusing primarily on scalability for the Ava platform this year. They did elaborate, however, that they're actively working with customers to both shorten the sales cycle of these relatively expensive robots, while at the same time simplifying the implementation process. For now, though -- and while it can't hurt to have big name like Fidelity on board -- it seems safe to assume iRobot's previous estimation of $3 million in full-year revenue from telepresence remains intact.

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You get what you pay for
Speaking of which, that brings us to the subject of the market's ire: guidance.

iRobot reiterated its previous guidance for 2015 revenue of $625 million to $635 million and decreased the top end of its expected 2015 earnings range by $0.10 per share, resulting in a new range of $1.25 to $1.35. Analysts were modeling 2015 earnings of $1.34 per share on sales of $629.3 million.

On one hand, this is encouraging in that iRobot still expects Home Robot revenue to grow 11% to 13% for the full year. That includes growth in the U.S. in the mid-teens, and continued single-digit increases overseas.

On the other hand, Angle said the downward revision to earnings is due primarily to incremental marketing investments. Specifically, iRobot is planning to spend more than it previously anticipated to both continue to strengthen brand awareness in the U.S. and China and bolster support for international partners as macro headwinds persist. For perspective, iRobot isn't directly affected by currency fluctuations but is rather indirectly hurt when distributors face pricing pressure in markets with prolonged currency devaluation (and so can't spend as much on marketing) as is currently the case in Europe and Japan.

"We need to ensure traditional levels of demand generation spending continue," Angle explained, "so they are well positioned for growth when markets improve."

That's fair enough, especially as competition for iRobot's core Home Robot segment continues to increase. For example, iRobot has previously recognized that Dyson has the deep pockets necessary to heavily promote the impending launch of its own robotic vacuum in Japan.

While it may not be ideal, that's why I think iRobot is wise to supplement international distributors' crimped marketing budgets to ensure that the iRobot brand remains viable in overseas consumers' eyes. If that means eschewing short-term thinking by temporarily crimping the high end of iRobot's expected earnings this year, then so be it.

The article Why iRobot Corporation Lowered Guidance Despite Strong Q1 Earnings originally appeared on Fool.com.

Steve Symington owns shares of iRobot. The Motley Fool recommends iRobot. The Motley Fool owns shares of iRobot. Try any of our Foolish newsletter services free for 30 days. 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.