4/24/2013
By David Urani

Started by MIT roboticists in 1990, iRobot got the ball rolling when it won a DARPA contract in 1998 for a tactical bot (which was deployed in the trade center on 9-11). They launched Roomba in 2002 and have been a pioneer and market leader ever since in home robots. They serve three markets: Consumer, Military, and Emerging (consisting of a remote presence bot recently approved for hospitals). In 2012, 80% of sales were in Home, and 20% in defense; it will be 90% Home in 2013. The company has limited competition and a solid brand name. 8% of all new vacuums in the US/Canada are iRobot (13% in EMEA, 8% in Asia).

In 2012 their Defense segment was affected by spending issues and that weighed on the stock. Defense was down 68% in 2012. We still don’t expect much from Defense, in fact management sees it declining by approximately another 11% this year. Nevertheless, in a way the segment has hit rock bottom; it comprises just 11% of sales now. The Defense segment will reduce its exposure to the US Department of Defense to 16% from 40% this year. But the real story is not the decline in Defense, but the fantastic results in Home robots. Likewise if Defense can manage to win some additional business back (possibly from non-US governments) it could be welcome surprise on the side; in fact Defense outperformed management’s expectations in 1Q.

Side note: IRBT’s Packbot was used by the police to inspect the Boston bombers’ vehicle for explosives:

Home revenues were up 14% in 2012 driven by Mint hard floor cleaning robots and continued uptake of Roomba. Units sold were up 7%, with mix of higher-priced units adding the additional growth. The real kicker though is US Home robot sales were up 44%! International was only up modestly as Europe struggles.  And while conditions in Europe remain tough, it could see some acceleration there in Q2 due to the introduction of the European version of Mint.  Look for Home robots to continue to be strong in Q2, with the company having rolled out a big ad campaign during the quarter domestically.

As far as the Emerging segment goes, it’s uncertain how well the remote presence robot sales will be in the long term, but the RP-VITA telepresence hospital bot began shipping in Q1 although it’s not expected to generate any material addition to the top line this year.

It seems clear that people are loving their home cleanup bots, which represent the vast majority of sales. Sure, Defense has been a drag but there’s only so much worse it can get, and at this point it’s a relatively modest piece of the pie. Looking ahead, there’s good promise from continued uptake of hard surface/mopping robots, a big new marketing push to drive product awareness, and expansion internationally.

For its Q1, the company beat by $0.3 on the bottom line while reporting an 8.6% overall increase in revenue with sales of $106 million versus the $104 million consensus. Gross margin rose to 43.8% from 38.4% (up 120 bps in Home). Management issued revenue guidance of $480-495 million (up from $436 million last year), while Q2 earnings are expected to be $0.15-0.20 versus the $0.11 consensus. The stock was up more than 15% following Q1 earnings.

David Urani
Wall Street Strategies