iRobot Corporation (IRBT Quick QuoteIRBT - Free Report) reported better-than-expected results for the second quarter of 2019. Earnings in the quarter beat estimates by a significant margin while sales lagged the same by 2.9%.

The company’s adjusted earnings were 48 cents per share in the reported quarter, surpassing the Zacks Consensus Estimate of 3 cents. However, the quarterly results declined 37.7% from the year-ago quarter’s figure of 77 cents due to higher costs of revenues and operating expenses. However, tax benefits recorded in the quarter were a relief.

Solid Product Demand Drives Revenues

In the quarter under review, the company’s net sales were $260.2 million, increasing 15% from the year-ago quarter’s figure. The quarterly results benefitted from solid product demand, especially for Roomba products. Total product units shipped in the quarter increased 12.7% year over year while average selling prices grew 3.9%.

However, the company’s revenues lagged the Zacks Consensus Estimate of $267.9 million.

As noted, its revenues from vacuum products grew 16.2% year over year to $237 million. Units shipped were 935 thousand, up from 819 thousand in the year-ago quarter. Further, revenues from mopping products increased 4.5% to $23 million. Units shipped were 139 thousand, up from 134 thousand in the second quarter of 2018.

On a geographical basis, the company sourced roughly 47.8% of revenues from domestic operations; the rest came from the international arena. Domestic sales totaled $124.5 million, reflecting an increase of 11.6% year over year. International sales grew 18.2% to $135.7 million. International operations benefited from healthy demand for Roomba i7/i7+, especially in Japan and EMEA.

Margins Fall Y/Y

In the quarter under review, iRobot’s adjusted costs of revenues increased 34% year over year to approximately $138.5 million. It represented 53.2% of net revenues compared with 45.7% in the year-ago quarter. Adjusted gross profit in the quarter declined 1% year over year to $121.7 million while adjusted gross margin decreased 750 basis points (bps) to 46.8%.

Research and development expenses were $35.7 million, up 2.1% year over year. It represented 13.7% of net sales versus 15.4% in the year-ago quarter. Selling and marketing expenses of $56.4 million reflect a year-over-year increase of 22.9%. As a percentage of net sales, it represented 21.7% versus 20.3% in the year-ago quarter. General and administrative expenses were $20.6 million, down 12.3% year over year. It represented 7.9% of net sales versus 10.4% in the year-ago quarter.

Adjusted operating income in the quarter under review decreased 38.8% year over year to $15.7 million. Adjusted operating margin declined 530 bps to 6% in the reported quarter.

Balance Sheet and Cash Flow

Exiting the second quarter, iRobot had cash and cash equivalents of $132.8 million, down 23.3% from $173.1 million recorded at the end of the last reported quarter. Total long-term liabilities were $68.9 million, down from $71.7 million in the previous quarter.

In the first half of 2019, the company generated net cash of $21.3 million from operating activities, decreasing 19.1% from the year-ago period’s level. Capital used for purchasing property and equipment totaled $14.7 million versus $14.3 million in the year-ago period.

Outlook

In the quarters ahead, iRobot anticipates gaining from diversified product portfolio, innovation investments and growing global presence. Also, it believes that efforts to diversify manufacturing capabilities will be boon. It is worth noting here that the company successfully launched Braava jet m6 mops and Roomba s9 vacuums in the second quarter of 2019.

However, it is wary about the ongoing trade tiff between the United States and China. The company believes that its domestic business will suffer (more in the second half) from the application of 25% tariff bracket on various products.

For 2019, it revised down revenues projection to $1.2-$1.25 billion from the previously mentioned $1.28-$1.31 billion. The new projection suggests growth of 10-14% (versus the previously mentioned 17-20%) from the previous year’s reported figure.

Gross margin in the year will be 45-46%. Operating income is predicted to be $75-$100 million, down from $108-$118 million mentioned earlier. Earnings projection has been decreased from $3.15-$3.40 to $2.40-$3.15.

For the third quarter of 2019, the company predicts a slight decline from the year-ago quarter as tariff woes are predicted to adversely impact order activities of some major retailers (including Amazon). Gross margin will be comparable with the second quarter.

Revenues in the fourth quarter are predicted to be higher than the year-ago quarter. Also, the quarter’s gross margin will be roughly 44%, the lowest in all quarters of 2019.

iRobot Corporation Price, Consensus and EPS Surprise