Why Is IRobot (IRBT) Down 16.9% Since Last Earnings Report?

A month has gone by since the last earnings report for iRobot (IRBT). Shares have lost about 16.9% 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 Q4 Earnings Surpass Estimates, Q1 View Bleak

iRobot delivered better-than-expected results for the fourth quarter of 2019. Its earnings surpassed estimates by 66.67% while sales beat the same by 3%.

The company reported earnings of 70 cents per share in the quarter, outpacing the Zacks Consensus Estimate of 42 cents. Earnings, adjusted for one-time items, were 69 cents per share, representing a 40% drop from the year-ago figure of $1.15. The results were affected by weak margins.

For 2019, the company’s earnings were $2.97, above the Zacks Consensus Estimate of $2.68. Earnings, adjusted for one-time items, were $3.62 per share, decreasing 15.4% year over year.

Segmental Revenues

In the quarter under review, the company’s revenues of $426.8 million exceeded its projection of $413-$423 million. On a year-over-year basis, the quarterly top line improved 10.9%, benefiting from a healthy performance in the United States.

Also, the company’s revenues surpassed the Zacks Consensus Estimate of $414.3 million.

Total product units of 1,909 shipped in the quarter increased 13.5% year over year while average selling prices grew 4.3%. Notably, revenues from vacuum products grew 7.5% year over year to $388 million. Units shipped were 1,730 thousand, up from 1,520 thousand in the year-ago quarter. Further, revenues from mopping products soared 62.5% to $39 million. Units shipped were 179 thousand, up from 162 thousand in the fourth quarter of 2018.

On a geographical basis, the company sourced 57.9% of revenues from domestic operations, the rest came from the international arena. Domestic revenues totaled $247.2 million, suggesting a 14.8% increase from the year-ago quarter. International revenues grew 6.1% to $179.6 million. International operations benefited from a healthy sales generation in the EMEA region, partially offset by weakness in Japan.

For 2019, the company’s revenues of $1.21 billion increased 11.1% from the previous year. Also, full-year revenues surpassed the Zacks Consensus Estimate of $1.20 billion. Product demand, especially for Roomba i7, Roomba s9 and Braava jet m6, were solid in the year. Also, revenues from the sales of Braava products exceeded $100 million.

Margin Profile

In the quarter under review, iRobot’s adjusted costs of revenues surged 31.7% year over year to $254.6 million, representing 59.7% of revenues compared with 50.2% in the year-ago quarter. Adjusted gross profit in the quarter decreased 10% year over year to $172.2 million while adjusted gross margin shrank 950 basis points (bps) to 40.3%. The margin took a hit from adverse impacts of tariffs and pricing activities.

Research and development expenses were $37.3 million, down 0.4% year over year. This accounted for 8.7% of revenues compared with 9.7% in the year-ago quarter. Selling and marketing expenses slipped 0.1% to $94 million. As a percentage of revenues, it reflected 22% of the top line compared with 24.5% in the prior year. General and administrative expenses were $21.2 million, down 14.6% year over year. The figure mirrored 5% of the total revenue base compared with 6.5% in the year-earlier quarter.

Adjusted operating income in the quarter under review plunged 35.1% year over year to $27 million. Adjusted operating margin contracted 450 bps to 6.3% in the reported quarter. Tariff costs had a negative impact of $21.9 million on the quarter’s operating income.

Balance Sheet and Cash Flow

iRobot exited the fourth quarter with cash and cash equivalents of $239.4 million, soaring from $70.5 million recorded at the end of the last reported quarter. Total long-term liabilities were $66.2 million, down from $67 million sequentially.

In 2019, the company generated net cash of $130.5 million from its operating activities, reflecting growth of 82.1% from the previous year. Capital used for purchasing property and equipment totaled $35.3 million compared with $32.4 million in the preceding year.

Outlook

In the quarters ahead, iRobot anticipates gaining from solid consumer demand for robotic vacuum cleaning products. For 2020, the company predicts revenues to be $1.32-$1.35 billion, suggesting growth of 9-11% from the year-ago reported figure.

Adjusted gross profit in the year will likely be $510-$523 million while gross margin is expected to be 38-39% compared with 46% in 2019. The reduction in gross margin hints at the unfavorable impacts of pricing activities, promotional actions and tariff woes (related to Section 301 amounting to $47-$50 million for the full year).

Adjusted operating income is anticipated to be within $55-$75 million while margin is projected to be 4-6%. Adjusted earnings per share are predicted to be $1.70-$2.30. The company noted that tariff costs, pricing and promotional actions might hurt the operating income and earnings.

The company noted that roughly 40% of the projected revenues will be generated in the first half of 2020. Revenues in the first quarter are forecast to decline 8-12% year over year while that in the second, third and fourth quarters might grow in low- to mid- teens.

Lower revenues along with a depressed gross margin will likely induce an operating loss of $7-$14 million in the first quarter. Adjusted loss per share is assumed to be 15-40 cents. Tariff costs in the quarter are estimated at $6-$8 million.

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 -355% due to these changes.

VGM Scores

At this time, iRobot has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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. It's no surprise iRobot has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.