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Why Is iRobot (IRBT) Down 8.1% Since Last Earnings Report?

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It has been about a month since the last earnings report for iRobot (IRBT - Free Report) . Shares have lost about 8.1% 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 drivers.

iRobot Beats Q3 Earnings Estimates, Lowers View

iRobot kept its earnings beat streak alive in the third quarter of 2019. Its earnings surpassed estimates by a whopping 128.78% while sales beat the same by 11.71%.

The company reported earnings of $1.24 per share in the quarter, surpassing the Zacks Consensus Estimate of 54 cents. Earnings, adjusted for one-time items, were $1.50 per share, representing growth of 11.9% from the year-ago figure of $1.34. The results benefitted from healthy demand for products and rise in other income, partially offset by weak margins.
 
Revenues Rise on Solid Demand

In the quarter under review, the company’s net sales were $289.4 million, improving 9.4% from the year-ago quarter figure. Results benefitted from huge shipment to a U.S. retailer and solid international business. Also, the company’s revenues surpassed the Zacks Consensus Estimate of $259.1 million.

Total product units shipped in the quarter increased 4% year over year while average selling prices grew 10.5%. As noted, its revenues from vacuum products grew 6.2% year over year to $257 million. Units shipped were 975 thousand, up from 942 thousand in the year-ago quarter. Further, revenues from mopping products rose 39.1% to $32 million. Units shipped were 156 thousand, up from 145 thousand in the third quarter of 2018.

On a geographical basis, the company sourced roughly 40.8% of revenues from domestic operations, the rest came from the international arena. Domestic sales totaled $117.9 million, suggesting a 7.3% decline from the year-ago quarter. International sales grew 24.9% to $171.5 million. International operations benefited from healthy product demand in Japan and EMEA.

Margins Fall Y/Y

In the quarter under review, iRobot’s adjusted costs of revenues rose 19.9% year over year to approximately $149.1 million. It represented 51.5% of net revenues compared with 47% in the year-ago quarter. Adjusted gross profit in the quarter increased 0.1% year over year to $140.3 million while adjusted gross margin declined 450 basis points (bps) to 48.5%. The margin suffered from tariffs as well as promotional and pricing activities.

Research and development expenses were $33.4 million, down 5.4% year over year. It represented 11.5% of net sales versus 13.4% in the year-ago quarter. Selling and marketing expenses of $42.3 million reflected a year-over-year increase of 8.3%. As a percentage of net sales, it represented 14.6% versus 14.8% in the year-ago quarter. General and administrative expenses were $18.4 million, down 21.2% year over year. It represented 6.4% of net sales versus 8.8% in the year-ago quarter.

Adjusted operating income in the quarter under review rose 2.4% year over year to $50.1 million. Adjusted operating margin declined 120 bps to 17.3% in the reported quarter.

Balance Sheet and Cash Flow

Exiting the third quarter, iRobot had cash and cash equivalents of $70.5 million, down roughly 46.9% from $132.8 million recorded at the end of the last reported quarter. Total long-term liabilities were $67 million, down from $68.9 million in the previous quarter.

In the first three quarters of 2019, the company used net cash of $31.6 million for operating activities against net cash of $40.3 million generated in the year-ago comparable period. Capital used for purchasing property and equipment totaled $27.1 million versus $25.3 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 mop and Roomba s9 vacuum in Europe while launched Roomba s9 vacuum in Japan in the third quarter of 2019.

However, iRobot is wary about the ongoing trade tiff between the United States and China, and the possible impact of higher tariff rates on robotic products on its results.

For 2019, the company revised down revenue projection to $1.2-$1.21 billion from previously mentioned $1.2-$1.25 billion. The new projection suggests growth of 10-11% (versus the previously mentioned 10-14%) from the previous year’s reported figure.

Gross margin in the year will likely be 45%, at the low-end of previously mentioned 45-46%. Operating income is predicted to be $75-$80 million, down from $75-$100 million mentioned earlier. Earnings projection has been declined from $2.40-$3.15 to $2.60-$2.80.

For the fourth quarter of 2019, the company predicts revenues of $413-$423 million, suggesting year-over-year growth of 10%. Sales in the United States and international arena are expected to grow in high-single digits.

Also, gross margin for the fourth quarter will likely be roughly 40%. The company believes that margin will suffer from tariff costs, promotional activities and reduced prices of products. Earnings will likely be 33-53 cents per share.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -59.29% due to these changes.

VGM Scores

Currently, iRobot has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. 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. It's no surprise iRobot has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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