iRobot (IRBT) – Part 2 – Business Issues

The company had its initial public offering (IPO) on 11/8/2005 for 4.3 million shares (roughly 20% of the total shares outstanding) priced at $24 valuing the company at $480M. The stock closed at $26.70 at the close of the first day of trading. Revenue climbed from around $15M in 2002 to $142M in 2005 and at the time of the IPO the YOY revenue growth stood at 70% and gross margin at 29%. Profitability has been elusive for the company because of very low margins. Below is a summary of the company’s financials over the last 3 years:

Year	2007*	2006	2005
Revenue	240M	189M	142M
YOY Revenue Growth	27	33	49
Gross Margin	37	33.5	28.8
Net Profit Margin	1.25-2.0	1.9	1.8

* 2007 figures are projected.

Few factors that contributed to the anemic levels in the net margins over the last few years are:

• Increase in head-count.
• Litigation and other legal expenses.
• Product mix and customer relationship management related expenses.

Management should ensure expenses are controlled and that it lags the annual revenue growth rate replacing the current inverse scenario. iRobot’s product mix strategy also leaves a lot to be desired. Though Roomba is a success story, most other consumer products notably Looj and Verro cater to a much smaller market. For an infrequent chore, consumers show a preference for outsourcing the job or renting a tool as opposed to owning a robot. There are already plans in the offing for products that can rake leaves, shovel snow, mow lawns, and wash windows and it pays to research the potential market and the competitive environment.

iRobot’s strategy of configuring the PackBot product successfully for multiple purposes should be extended to its consumer suite of products too. By combining the functionality in various products iRobot can definitely bring a versatile product to the market. For example, a base consumer robot with configurable options enabling it to function as the Roomba, the Scooba, the Dirt Dog, and possibly for other uses would be well received by the market. The company could see margins improve and the customer could be spared the agony of amassing products. The company should consider this shift as early as the next generation of Roomba. This will position the company to realize the vision of these robots making the switch from an early adopter type product to being the helper for “chief household officers”.

The significance of iRobot’s fairly large patent portfolio came into play in the pre-IPO days in 2005 when it successfully swept Koolatron, a rival out of the US. Koolatron’s “smart” vacuum under the KoolVac brand was termed a complete knock-off of the Roomba. Recently, the company also successfully sued Robotic FX, a rival in the military space – Robotic FX had managed to pocket a large military contract by underbidding iRobot - ultimately military negated the order. The company needs to continue being aggressive on defending its intellectual property (IP), as building knock-offs is not complicated.

The 3rd quarter saw the company disappointing Wall Street as results came in well below expectations. The problem was the delay in manufacturing the 5-series Roomba robots as a result of switching the manufacturing partner from Jetta to Kin Yat both in China. The company has justified this as a diversification move. Management has to be diligent on avoiding such negative surprises as the effects can linger on for a while.

The defense side has its own challenges when competing in the global marketplace. Strong partnerships along with a diversified and flexible manufacturing base are what the company should aim for going forward.

Related Posts:

1. iRobot (IRBT) - Part 1 - Introduction.
2. iRobot (IRBT) - Part 2 - Business Issues.
3. iRobot (IRBT) - Part 3 - Outlook.