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Why Is iRobot (IRBT) Down 9.5% Since Last Earnings Report?

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A month has gone by since the last earnings report for iRobot (IRBT - Free Report) . Shares have lost about 9.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is iRobot due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

iRobot Surpasses Q3 Earnings Estimate, Ups 2020 View

iRobot reported better-than-expected results for third-quarter 2020, with earnings and sales surpassing estimates by 183.5% and 31.6%, respectively. Also, both bottom and top-line results improved from the year-ago quarter.

The company reported earnings of $2.58 per share in the quarter, whereas the Zacks Consensus Estimate was pegged at 91 cents. Notably, the bottom line reflected an increase of 72% from $1.50 recorded in the third quarter of 2019. Healthy sales growth and improved margins aided the year-over-year rise in earnings.

Revenue Details

The company generated revenues of $413.1 million in the quarter, surpassing the Zacks Consensus Estimate of $314 million. On a year-over-year basis, the quarterly revenues increased 42.8%, driven by healthy demand from retailers (on the upcoming holiday season, favorable sell-through trends and customer events) and growth in direct sales to consumers.

Revenues derived from premium robots — products having $500 of more as list price — expanded 86% in the quarter.

Notably, the demand for the company’s Roomba and Braava products was solid in the quarter. Also, response to the Genius Home Intelligence platform, and Roomba i3 and i3+ (launched in the third quarter) were remarkable.

Total product units of 1,538 thousand shipped in the quarter reflected a year-over-year increase of 36%, while average selling prices grew by 2.3%. For vacuum products, revenues of $369 million reflected growth of 43.6% from the year-ago quarter. Units shipped were 1,354 thousand, up 38.9% from the year-ago quarter. Further, revenues from mopping products increased 37.5% to $44 million. Units shipped were 184 thousand, up from 156 thousand recorded in the third quarter of 2019.

On a geographical basis, the company sourced 49.9% of revenues from domestic operations, the rest came from the international arena. Domestic revenues totaled $206.3 million, reflecting a 74.9% increase from the year-ago quarter. International revenues grew 20.6% to $206.9 million. International operations gained from a 12% increase in revenues in Japan and a 22% rise in EMEA sales.

Margin Profile

In the quarter under review, iRobot’s non-GAAP costs of revenues increased 43.3% year over year to $213.7 million, representing 51.7% of revenues compared with 51.5% in the year-ago quarter. Non-GAAP gross profit in the quarter grew 42.1% year over year to $199.4 million, while adjusted gross margin decreased 20 basis points (bps) to 48.3%.

Research and development expenses were $38.6 million, up 15.6% year over year. This accounted for 9.4% of revenues compared with 11.5% in the year-ago quarter. Selling and marketing expenses increased 19.5% to $50.5 million. As a percentage of revenues, it reflected 12.2% in the quarter compared with 14.6% in the prior-year quarter. General and administrative expenses were $28.5 million, up 55.1% year over year. The figure mirrored 6.9% of the total revenue base compared with 6.4% in the year-earlier quarter.

In the quarter, the company recorded adjusted operating earnings of $93.1 million, reflecting an increase of 86% from the year-ago quarter. Adjusted operating margin was 22.5%, higher than 17.3% in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting third-quarter 2020, iRobot had cash and cash equivalents of $297.2 million, increasing 28.8% from $230.7 million recorded at the end of the last reported quarter. Total long-term liabilities were $69.9 million, up 6.1% sequentially from $65.9 million.

In the first three quarters of 2020, the company generated net cash of $96.8 million from its operating activities. However, it used net cash of $31.6 million for its operating activities in the first three quarters of 2019. Capital used for purchasing property and equipment totaled $25 million in the first nine months of 2020, down 7.6% year over year.

During the first nine months of 2020, the company repurchased 0.7 million shares for $25 million consideration. Notably, no shares were repurchased in the second and third quarters of this year.

Outlook

iRobot anticipates benefiting from effective measures taken to deal with the pandemic-related woes, improving sell-through trend, exclusion of Roomba products from tariffs imposed under section 301 through Dec 31, 2020, and other growth opportunities in the quarters ahead.

It anticipates revenues of $1.365-$1.375 billion for 2020, suggesting year-over-year growth of 12-13%. The expected growth rate is higher than 9-11% mentioned in February 2020.

Non-GAAP gross profit is expected to be $613-$621 million (versus $510-$523 million stated earlier) and non-GAAP operating income is expected to be $125-$130 million (versus the previously mentioned $55-$75 million).

Non-GAAP earnings per share are likely to be $3.43-$3.53 per share, higher than $1.70-$2.30 mentioned in February 2020.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -125.11% due to these changes.

VGM Scores

At this time, iRobot has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, iRobot has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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