iRobot: Worry-Free Finances – Part 2

“Never invest in a business you cannot understand.”

Warren Buffett

The business is as simple as it can get. Sell vacuum cleaners. The more they sell more money they make. A basic understanding of where sales were made is essential, which can later help us understand growth aspects. Sales are made via three channels – 

  • Retailers like Amazon, Walmart, Target, etc., in countries like the US, Canada, Japan & Much of Europe.
  • Distributors in China and essentially the rest of the world.
  • Online stores. 

Due to holiday season sales are always higher in 2nd half of the year. As seen in the graphs, the R&D & Marketing expenses are pretty stable compared to revenue.

iRobot has very clean-looking financials. Revenue is steadily increasing over the years. The current operating income and net income jump are tailwinds of pandemic-driven sales. Total assets are increasing without any major contribution from Goodwill which is always a good sign. Total Liabilities are increasing but are aligned with asset growth. Debt is manageable and can be paid within one year, and is already decreasing. It was not a bad time to be in debt at low-interest record rates. Cash reserves are increasing due to operating cash. Cash from financing signifies that the company is investing more in itself for future growth.

Balance Sheet
Cash Flow
Gross and Operating Margins: Annually

The only murky part is the operating margin that is not that evident in the yearly graph but is noticeable with huge fluctuations when observed quarterly. Based on the latest twelve months, it came down to 4.3% from 10.6%.

Margings Quaterly

At the start of FY 2021, management cited margins pressures and targeted 7% and later decreased the target to 5% later in the year. Reasons listed for pressures on margins:

  1. Reinstatement of China tariffs. The company was exempted from 25% tariffs, which will cost them 41-43 million dollars.
  2. Setup cost of production in Malaysia. 
  3. Supply Chain issues, Semiconductor shortages, elevated raw material prices, transportation cost, etc.

Key points

  • The company is expecting to grow to a 30 million connected customer base by 2024.
  • It is rapidly moving away from a one-time transactional connection with the customer at POS terminal to a long-term relationship.
  • More revenue streams with relationship-driven personalized customer benefits. Upsell and cross-sell opportunities.
  • Continue focus on iRobot Genius. An A.I.-based platform for robots that keeps feeding information for models to understand the environment and adapt accordingly. Robot-as-a-service platform.
  • Diversification with Aeris (Air Purifier System)
  • Market leader in major markets.
  • Robust expansion of DTC (Direct to Consumer) channel. Target to grow to 25% of total revenue. Its important because it helps improving margins.
  • The company doesn’t have a very optimistic outlook for 2022. Supply chain issues, Rising transport costs, raw materials costs are believed to extend in 2022.
  • The company is solving challenges with Supply Diversification. 
    • Buying ahead predictability and extended forecast visibility.
    • Keeping a safe stock of Raw materials.
    • Dual sourcing for strategic components.
    • Building a better supply chain resiliency for future challenges.
    • Commitment to delivering YOY operational efficiencies.
  • The company expects semiconductor costs and tariffs to ease out in 2022, providing tailwinds.
  • The company targets a 12% operating income margin by 2024 and 16% CAGR growth for the next three years.