The Numbers Behind iRobot's Improving Results

Global consumer robot manufacturer iRobot (NASDAQ: IRBT) has managed to hang onto share price gains in 2018 despite an increasingly volatile stock market. The company's stock is up roughly 4% on the year, and its staying power can be traced to solid financial results, as well as a market-sensitive pricing strategy.

In this segment from Industry Focus: Consumer Goods, host Vincent Shen and contributor Asit Sharma discuss the numbers investors should be following.

A full transcript follows the video.

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This video was recorded on Dec. 18, 2018.

Vincent Shen: Right now, there's absolutely no doubt that sales of these cleaning robots like the Roomba, like the Brava and other models, is driving the business at this moment. As you mentioned there, for a long time now, management has talked about the incredible assets that iRobot is amassing by mapping all of the homes that its products are in, that they're helping to clean and tidy up. They refer to this spatial awareness as something that could serve as a really important tool, a hub for various smart home integrations that have yet to debut to consumers, stuff of the future. I really feel like we're entering Jetsons territory here. We'll talk more about that in a bit.

For their third quarter, iRobot had really strong results, showing a lot of momentum throughout 2018. What jumped out to you?

Asit Sharma: Revenue growth of 29%. This is a on the heels of two new product introductions -- the i7, which is a more upscale model of the Roomba, and the e5, which is a more mid-price model. For three months ended September 29th, 2018, sales were $264 million. Gross margin of 32%. That's pretty strong. Research and development expenses increased, as did selling and marketing expenses, but the company was able to increase its gross margin by almost 3% to 14%.

What I like about iRobot, which we're starting to see as the quarters go on, is the business model has proved itself out. It's getting more of a direct result from the research and development expenses that it's investing. It's helping the top line, very healthy growth.

This recent quarter shows to me, also, management's acumen at figuring out what features will hit consumers with product rollouts. This sounds simple. You have a great product, you spend a lot on research and development, it's time to upgrade your line. But longtime listeners will know, our favorite whipping horse, GoPro, has struggled, as an example of a company that's struggled with new product introduction. What is the feature that will bring customers in? For this mid-price model, in the most recent quarter, the company introduced self-cleaning, that's usually found in the higher models. That had a huge uptake among pet owners who want that debris cleaned. If your analysis is correct, you understand how you can price your next generation of products and swap features. And that really impressed me. As well as with the higher-end model, the company now has price points that range in a stepladder fashion, from $300 for entry level up to $600, and for the i7+, $900 to $950. There's something for everyone in the offering, and that's showing up in these financial numbers.

Also, I'd quickly like to talk about the balance sheet. That really stands out to me, as well, how strong it is. Vince and I just got through taping an episode, which hopefully most of you have already listened to. We're pre-recording this episode. We just talked about a company which has quite a bit of new debt on its books, Carvana. You can find that episode on our podcast list. iRobot has been around for a while now, and it has no long-term debt on its books. It has a current ratio of about 2.5X. That means current assets, current resources which aren't long-term in nature, are about 2.5X the current liabilities, like accounts payable and other types of one-year expenses that the company's obligated for. Inventory is up 50% since the beginning of the year. That's a function of this sales path, we're seeing that 30% growth that I talked about quarter over quarter. It's also a function of the new product launch.

That's a healthy increase in inventory. It's like the three little bears. Based on sales, this feels just about right. You don't want too much inventory going into your channels, because that can be inefficient. But, you don't want too little when there's demand on the products you've introduced. I like this relationship between the 30% top line growth and 50% in inventory.

All in all, I had not looked at iRobot's financials in a while, very impressed with what I see. It feels like a very solid company with a product that, as Vince mentioned, is seeing a lot of demand in the marketplace. What are your thoughts, Vince?

Shen: I'll go back to this most recent quarter with that 29% year over year growth. That's accelerating from the second quarter, which had a 24% pace. Bottom line net income was up 44%. These are numbers that all exceeded analyst expectations across the board. Units sold came in at 1.1 million units during the quarter. Again, up big from the prior year. Something that management has stressed is that revenue growth for the company will largely be driven by units rather than average selling prices. One, that supports the broader trend of greater smart home device adoption. Even then, as you mentioned, that step change in terms of the pricing for their products, $300-600 to as much as $900. Clearly, customers feel that the features that the company's introducing are compelling, because average selling prices are increasing. They went from $260 to $289 year over year in this period. Gross margins expanding, I think you said 3%.

I think for the time being, this should be enough to hold off some of the critics, some of the bears who have argued that iRobot will struggle to compete with a growing number of low-cost competitors. The features, for example, for the premium i7 and i7+ that it released are just incredible, looking at how it can really become a seamless part of your home.

Asit Sharma has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends iRobot. The Motley Fool has a disclosure policy.