Q4 2023 iRobot Corp Earnings Call
Participants
Karian Wong; Chief Accounting Officer; iRobot Corp
Glen Weinstein; Interim CEO; iRobot Corp
Julie Zeiler; Chief Financial Officer, Executive Vice President; iRobot Corp
Jim Ricchiuti; Analyst; Needham & Company
Asiya Merchant; Analyst; Citi Global Markets
Presentation
Operator
Welcome to the iRobot Fourth Quarter and Full Year 2023 earnings conference call. (Operator Instructions) I would now like to turn the call over to Karian Wong, Chief Accounting Officer. Please go ahead.
Karian Wong
Thank you, Jamie, and good morning, everybody. Joining on today's call I Robot Interim CEO, Glen Weinstein, and Executive Vice President and CFO, Julie Zeiler.
Before I start the agenda for today's call, I would like to remind everyone that today's discussion will include forward-looking statements regarding future events and our future financial performance. These statements reflect our views as of today only and should not be considered as representing our views as of any subsequent date.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from expectations reflected in the forward-looking statements. Discussions of these finance of these risk factors is fully detailed under the caption Risk Factors in our filings with the SEC related to our financial disclosure during this conference call, we will reference certain non-GAAP financial measures as defined by SEC Regulation G, including non-GAAP gross margins, non-GAAP operating expense, non-GAAP operating loss and non-GAAP net loss per share.
We believe that our non-GAAP financial results help provide additional transparency into our robust underlying operating performance and potential our definitions of these non-GAAP financial measures and reconciliations of each of these non-GAAP financial measures to the most directly comparable GAAP measures are provided in the financial tables at the end of the fourth quarter of 2023 and full year 2023 financial results press release we issued last evening, which is available on our website at www.irobot.com.
Also, unless stated otherwise, our full quarter and full year 2023 financial metrics, as well as the financial metrics provided in our outlook that will be discussed on today's conference call will be on a non-GAAP basis only and all historical comparisons are with the fourth quarter of 2022 and full year of 2022.
For today's call, our agenda will be as follows. Glenn will briefly cover the Company's quarterly and annual financial results, review important strategic milestones and outline our expectations for 2020 for Julie will review our financial results in detail and offer additional insight into our 2024 guidance plan. We'll conclude our commentary with some closing remarks about prospects over the longer term. After that, we'll open the call for questions.
At this point, I'll turn the call over to Glen.
Glen Weinstein
Good morning and thank you for joining us. I'll start our call today by reiterating my confidence in a robot, our mission and our ability to navigate our next chapter. I have been part of this organization for more than two decades. I know who we were who we are and who we can become at our foundation is a product that customers love and an incredible team of builders and innovators who are passionate about the robots we create. And because of this, our potential was great. Our future is different than we had envisioned in August of 2022 or even at the start of this year, given the decision by iRobot and Amazon to terminate our transaction, the management team and Board are confident in our ability to build on our legacy of innovation as a standalone company and to navigate this period successfully.
As we shared on January 29th, we are taking aggressive action to significantly improve our near term operations. To that end today, I'm going to outline the tenets of the restructuring plan we announced last month. I'll also provide additional information on how that work is progressing and what you can expect from us going forward. Julie will then cover financials for the quarter in greater detail as well as our outlook for 2024. Then we'll open the call for questions.
Before I jump into the restructuring plan, I'll touch on our financials at a high level. Our performance continues to be impacted by sluggish consumer spending as well as aggressive competition in all regions. We generated fourth quarter revenue of $308 million with a gross margin of 19%. We managed our cost carefully to report an operating loss of $45 million and a net loss per share of $1.82. For the full year revenue declined to $891 million with an operating loss of 22% and a net loss per share of $7.73. We have a plan to address our performance and these macro trends. The operational restructuring plan we announced last month is designed to stabilize the business in our current environment while also advancing our longer-term growth initiatives. The operational restructuring plan is centered around simplifying our cost structure, implementing a more sustainable business model and focusing on our core value drivers. Those core value drivers are first, leveraging our brand and innovative products to extend or reclaim our leadership in the mid and premium segments, and second, focus on geographies that offer the greatest scale and profitability.
Our immediate priorities in executing this plan are to more closely align our cost structure with near-term revenue expectations, improve liquidity and drive bottom line improvements. Specifically, the plan is structured to first achieve gross margin improvements through a focus on design-to-value and removal of unnecessary costs and more attractive terms with our manufacturing partners. Second, reduce R & D expenses by relocating certain non-core engineering functions including increasing reliance on third parties to provide those functions and pausing work unrelated to our core floor care business.
Third, centralize our global marketing activities to be more efficient in demand generation and provide a meaningful reduction in non-working marketing and agency fees, and fourth, streamline our legal entity and real estate footprint to fit our current business needs and near term revenue expectations. Cornerstone of our gross margin improvement plans, which we have been working on for nearly a year is a new relationship paradigm with our contract manufacturers, both existing and new. We are relying on the expertise of our contract manufacturers to a greater extent than we have in the past, taking advantage of a matured supply chain and expertise in design for manufacturing and flexibility and components. This shift, along with competitive bidding of our design packages is a key component in unlocking an approximately nine and one-half to 11 and 1.5 percentage point improvement in full year 2020 for gross margin, we expect to see the benefit of these improvements in the P&L, primarily in the second half of the year as the higher-cost products are moved out of inventory and we benefit from new products released during the year that have lower costs than the products that they will have replace. We have more work to do, but we anticipate a gross margin of between 32% and 34% in fiscal 24, hand-in-hand with the shift to a greater reliance on contract manufacturers for certain work is the ability to decrease our R&D expenditures, particularly as it relates to lower value commodity engineering work. We plan to continue to invest in the higher value robotics computer vision, machine learning and complex mechanical design to improve the core functionality of our robots. We plan to take advantage of opportunities to source subcomponents and in some cases, nearly complete robust designs from third parties. In 2024, we expect to see a decrease in overall R&D expenses by approximately $25 million in sales and marketing. We had built an infrastructure to support revenue at the higher pandemic rates. And now we need to aggressively return to a more normalized level where we can operate the business profitably. We will focus resources on a more limited geographies and consolidate marketing efforts for greater efficiency.
In 2024, we expect to see a decrease in overall sales and marketing expenses of approximately $40 million including a decrease in working marketing of approximately $20 million. While this might put pressure on our revenue in the short term, we are returning to a more disciplined approach.
Turning to demand generation. In line with these initiatives, we will reduce our workforce by approximately 350 employees, which represents approximately 31% of our robots workforce. These reductions are expected to result in restructuring charges totaling between $12 million and $13 million, primarily for severance and related costs over the first two quarters of 2024. We are in the final planning stages for these difficult actions and expect to begin implementing these changes beginning in early March. As previously announced, we have engaged a Chief Restructuring Officer, Jeff Engle, to oversee these initiatives, and he is reporting directly to both the Board of Directors and me, Geoff is fully empowered to make not only these necessary changes, but to scour our cost structure and look for opportunities for savings and efficiency improvements, liquidity and careful cash management are our top financial priorities.
We anticipate a significant improvement in our 2024 cash flow from operations compared with full year 2023 and anticipate generating modest positive cash flow from operations in both the third and fourth quarter of 2024. We have always had an amazing team of builders who are eager to identify problems and create solutions. We recognize the importance of our people. They are vital to the success and growth of the Company and we appreciate their ongoing hard work and dedication. While the financial actions we are taking are essential to the near-term operations of the business, they are not being taken at the expense of advancing important work on growth initiatives.
As we shared last month, we have made the decision to focus our innovation and development efforts on our robust key revenue generators, pausing all work related to non-floor care innovation. Our focus is on executing the near term plans and moving quickly and decisively to continue to delight customers. We are laser focused on the initial impressions of our new customers. We know that the first experience of taking our products, home unboxing and performing the initial setup routines and creating the first masks and schedules are an important foundation for longer-term usage and customer satisfaction.
Additionally, we continue to enhance our go-to-market playbook, which focuses the business on our robust most profitable customers, geographies and channels, including our growing direct to consumer channel, while rebalancing our spending mix between price, promotion and demand generation to optimize returns, we believe it is important to meet our customers at the locations where they want to discover and purchase our product. We will retain an omnichannel presence presence in our large market while further leveraging existing and new distributor partners in smaller geographies.
Our direct-to-consumer channel continues to be an area of focused investment, ensuring it is the easiest place to buy and own a Roomba. We expect that this channel will grow approximately 5% in 2024 and represents approximately 20% of total revenue. We have an iconic brand that people love. Our marketing efforts will support key retailers in stores and online to deliver the premium experience that our customers expect and deserve. In the near term, we are taking the necessary actions to stabilize the business, improve liquidity and focus on bringing innovative products to our customers. We are confident in our ability to build on our legacy of innovation as a standalone company and to navigate this period successfully.
Now I'll hand it over to Julie to discuss financials.
Julie Zeiler
Thank you, Glenn. As Karian mentioned earlier, my review of our financial results and outlook will be done on a non-GAAP basis. So unless stated otherwise, each mention of gross margin, operating expense, nonoperating expense, operating loss, other expense and net loss per share will be in the corresponding non GAAP metrics. All quarterly comparisons are against the fourth quarter of 2022 and all full year comparisons are against 2022, unless otherwise noted, I robots Fourth Quarter 2023 revenue declined 14% to $308 million. Our performance was disappointing across all regions driven by demand gap and higher promotional and pricing support. Many retailers in Amea and North America continue to carefully manage their inventory as part of their ongoing efforts to rebalance inventory levels amid relatively sluggish consumer spending on a range of categories, including robotic floor care products. The overall market conditions continued to be challenging, and we continue to see increased competition in Amea, Japan and the U.S. throughout 2023.
Geographically, in the fourth quarter, Amea declined 5%. Japan declined 19% and the US decreased 20% from a product mix perspective, two-in-one products represented 43% of our Q4 revenue mix with robotic vacuums and to a lesser extent, robotic mops making up the remainder. Accessory revenue in the fourth quarter grew 18% over the prior year and represented approximately 7% of total revenue. Our fourth quarter DTC sales declined 9% versus prior year with flat growth in North America, offset by declines in Amea and Japan. In the fourth quarter, our DTC revenue represented 21% of total revenue.
Our gross margin of 19% in Q4 declined five percentage points from the prior year. The year-over-year decrease primarily reflected six percentage points associated with higher pricing and promotion, two percentage points associated with suboptimal absorption of fixed operational costs and two percentage points associated with higher losses related to purchase commitments with our contract manufacturers and higher excess and obsolete inventory write-down.
These factors were partially offset by a 4 percentage point benefit of lower product cost of sales and transportation costs. We reduced our fourth quarter 2023 operating expenses by 30% to $104 million, representing 34% of revenue. The decrease primarily reflected disciplined spending during the quarter across the board, with the biggest drivers being reduced working marketing spending as a result of lower revenue people-related costs associated with previously announced restructuring efforts and other discretionary spend. Our Q4 operating loss was $45 million. Fourth quarter nonoperating expense was $5 million, reflecting interest expense associated with our term loan, which was partially offset by interest income on cash balances.
Our fourth quarter net loss per share was $1.82. From a full year perspective, 2023 revenue declined 25% to $891 million. Geographically, we generated 48% of our revenue in the U.S., where revenue declined by 30%. International revenue declined by 19%, with Amea decreasing by 11% and Japan declining by 21%. 2023 gross margin of 22.5% declined seven percentage points from 2022. The full year decline was impacted five percentage points associated with pricing and promotion and four percentage points related to fixed costs across a lower revenue base.
This was partially offset by improvements in product cost, transportation rates and channel mix. Full year operating expenses of $399 million declined by 23% due to the combination of lower working marketing based on lower revenue, a reduction in personnel expenses associated with headcount and other discretionary spending. Our 2023 operating loss of $199 million was 22% of revenue. We recorded 2023 non-operating expense of $13 million and a net loss per share of $7.73. We ended 2023 with $185 million in cash and short-term investments, a decline of $5 million from the end of Q 3.
The timing of certain working capital levers impacted the quarterly usage and generation of cash from operating activities during 2023. In Q4 23, cash flow from operations was negative $1.2 million in Q4 2022. Cash flow from operations of $122.6 million benefited from the decrease in inventory from our elevated inventory level at the end of Q3 2022, we had another strong quarter of working capital efficiency. Fourth quarter DSO was 24 days. Our year-end inventory balance was $152 million or 56 days for the fourth quarter. In 2022. The year-end inventory was $285 million or 96 days for the fourth quarter. I am pleased with the progress we have made in managing our key working capital levers throughout 2023, careful management of working capital efficiency will continue to be a focus in 2024.
With that said, let's take a deeper look at our 2024 outlook. We anticipate 2024 revenue will decline modestly in the range of 3% to 7% to $825 million to $865 million. We anticipate that over 60% of our full year revenue will come in the second half of the year with an expected first half revenue decline of high 10s to low 20% range within the first half of the year. We expect Q2 to be the weaker of the two quarters in terms of growth versus prior year as we anticipate a shifting of orders into Q3 for the second half of the year, we anticipate revenue growth in the mid single digit percentage. Overall, our 2024 revenue outlook assumes a modest decline in unit volume for robots and stable robot ASP.
As a reminder, and we say this every year, we manage our business on a full year basis and encourage investors to focus on our annual targets since the timing of orders is challenging to forecast even under ideal conditions, large orders that shift from one quarter to the next can cause material fluctuations in our quarterly growth rate. Additionally, our revenue expectations contemplate yen and euro exchange rates roughly in line with current rates plus or minus 5%. We anticipate that our 2024 gross margin will improve significantly to between 32% and 34%.
As Glenn mentioned, we expect that the combination are of our cost of goods sold productivity initiatives and a reduction in onetime costs related to actions taken in 2023 to reduce our elevated inventory level from fiscal 2022 will fuel this margin expansion. We anticipate that the Q1 24 gross margin will show slight improvement from Q1 last year, but we expect sequential improvement every quarter from 2023 with stronger gross margin expansion in the second half as more significant cost savings improvements move through the P & L, and we compare against annualize pricing adjustments. We are targeting 2024 operating costs in the range of 322 to $340 million or approximately 39% of revenue.
The anticipated decrease from 2023 primarily reflects previously announced efforts to move more closely align our cost structure with near-term revenue expectations and drive toward profitability. Given our top line guidance and spending plans, we currently expect to make considerable progress as we execute our restructuring efforts in the first half of the year, we anticipate a full year operating margin of approximately negative 5% to negative 7%. We have an operating loss in the first half and an operating profit in the second half of 2024.
In terms of other notable modeling assumptions in 2024, we anticipate other expense of around $45 million, including approximately $15 million in net cash interest expense and $29 million in estimated fair value adjustments associated with our term loan and full year tax expense of approximately $3 million, driven by our foreign jurisdictions, we anticipate a diluted share count of approximately $28.3 million shares. As a result, we expect our full year net loss per share to range from $3.73 to $3.34.
In terms of other 2024 financial guideposts, our business remains minimally capital intensive. Overall, we expect 2024 capital spending to be approximately $5 million or roughly 1% of anticipated 2024 revenue. As Glenn mentioned, liquidity and careful cash management is our top financial priority. With the operational restructuring plan we announced last month. We anticipate a significant improvement in our cash flow from operations compared with the reported cash outflow from operations of $114.8 million for full year 2023. Excluding the net proceeds from the $94 million break-up fee from Amazon, we expect cash flow from operations in Q1 and Q2, and we expect to generate and we expect to generate positive cash flow from operations in both Q3 and Q4 to provide further flexibility to our capital planning strategies, we intend to file a shelf S-3 registration statement, which would include a $100 million at-the-market offering program for the sale of the Company's common stock along with our 10-K this week, the timing of any sales and the number of shares of common stock sold, if any, under the ATM program will depend on a variety of factors to be determined by the company with the net proceeds from the ATM program expected to be used for working capital purposes.
In summary, we are managing through a very challenging period and making important strategic progress that we believe will help us further expand our business, reduce operating expenses and drive bottom line improvement.
That concludes my commentary. I'll now turn the call back over to Glenn for some additional comments on the coming year.
Glen Weinstein
Thank you, Julie. As we've outlined, we have a plan in place to simplify our cost structure implement a more sustainable business model and focus on our core value drivers of leveraging our brand and innovative products to regain and extend our leadership across segments and geographies, coupled with the restructuring actions we announced, we believe our second half 2024 performance will serve as a springboard for our driving our future. We are committed to significant gross margin improvements we expect our gross margin will further benefit from our transformation to a more complete joint development manufacturer model, ongoing DTC expansion and relentless effort to achieve greater scale and efficiency across our operations. These dynamics underpin our expectation for material improvement in our bottom line performance and put us on a path toward profitability.
Finally, as we noted in late January, the Board has initiated a search for a permanent CEO., supported by a leading executive search firm. The Board is already reviewing candidates. In the meantime, we are committed to stabilizing the business and returning to profitability. We expect that our success in 2024 will create a foundation that will deliver value for our shareholders, our employees and our customers.
That concludes our remarks. Operator, we're ready to take your questions.
Question and Answer Session
Operator
(Operator Instructions) Jim Ricchiuti, Needham & Company.
Jim Ricchiuti
Good morning, or just wanted to go through the bridge to the gross margin improvement that you're anticipating? Sorry, for the background noise.
I'm looking out to the full year. How much of that is coming from the initiatives you've had with the existing and sounds like some new contract manufacturers and maybe what is it what is baked into those assumptions also with respect to share price and market share?
Julie Zeiler
Sure, Jim. Why don't I take that. So as Glenn laid out in quite a bit of detail, we have programs well underway to drive us solid improvements as we go through 2024 and our gross margin. As noted, we expect to show some slight improvement in Q1 over the same period of prior year, but sequential improvement every quarter as we go through 2024. And those initiatives are generally driven in a few buckets. The first one is product mix, which is the largest individual piece as we launch new products that come with a lower cost base and bring those into the market. We expect that we will see improvements in gross margin and we commented in our prepared remarks around fixed costs. There are some expenses that we had in 2023 that we don't expect to continue to have in 24 as well as some of our restructuring efforts around the organization in total. And then finally, there are some things like ongoing cost improvements on existing products as well as taking advantage as compared to prior year of improved transportation rates. That finally will drive the last big piece of. So it does cost improvements.
Jim Ricchiuti
And that's helpful, Julie. And maybe my follow-up question. As we think about the recovery that you're anticipating in revenues in the back half of the year. I wonder if you could comment about the conversations you're having or maybe having with some traditional brick and mortar retailers just in the aftermath of the merger agreement being terminated?
Julie Zeiler
Sure. Why don't I start and then I'll let Glenn jump in as well. If you think about the timing and the growth expectations in our quarters. As I mentioned in my remarks, we'd like to point people to our full year target and what we see sometimes, and we expect to see that again this year is there can be movement in the timing of certain large orders associated with significant promotional events. And as those move between, as an example, Q2 and Q3, it can drive on gross fluctuation.
Glen Weinstein
I think the other piece as we look at our revenue outlook for the year is we expect to continue to optimize certain channels, particularly internationally, and that underpins as well, our outlook in the second half, John, Jim or I know that we have after we announced the transaction with Amazon in the summer of 2022, we had some retailers exit business with us both domestically and internationally. And because they viewed Amazon as a particular competitor with the announcement of the termination, we have begun conversations with those retailers and to reenter and their stores. And we hope that that is something that we'll be able to announce as the year goes on.
Jim Ricchiuti
Thanks very much.
Operator
Asiya Merchant, Citi.
Asiya Merchant
Great. Thank you for taking my question. Julie, if you could just again walk us through why the first half is weak. I guess the second half trends that you're seeing in margins and obviously other cost initiatives. But can you walk us through why you think the first half should be so much weaker than last year? And my understanding was as well as I'm going back to my notes that there was orders that had shifted into subprime again into the back half of the year. So maybe you can just walk us through what you're seeing in the first half that leads to so much pressure still in the first half? And then my other question was just on the OpEx initiatives. That you've identified. Should we assume that this is still like an obviously going through some analysis here? Should we expect more to come? Or is this sort of how you think the full year was going to play out with the majority of the expenses being taken out, let's say, in the first quarter and definitely by the first half. Thank you.
Julie Zeiler
Sure. Thank you, Asiya. So as I think about the seasonality of our revenue in 2024, and you pointed to a couple of things every year we see there, there can be shifts of certain large orders, and we expect some of that will happen first half versus second half of this year and which plays into our expectations around growth rates.
I think the second piece of it, as I mentioned is Glen touched on some conversations with certain customers. I think also they are, as we've talked in our prepared remarks about our optimizing our channels. And as we work through that, we expect to see an improvement in our performance in a particularly internationally in the back half of the year.
Glen Weinstein
On the OpEx, so first of all, what we have explained is our year-over-year improvements, and we think our exit rate, it would be better.
And then just looking at the year over year about there's always more efficiencies to look for specifically on your question. I think the majority of the restructuring will be done in Q1, some in Q2, but the vast majority happening in the first half of the year.
Asiya Merchant
Okay. Thank you.
Operator
And that is all the time we have left for questions today. I would now like to turn the floor over to Karian Wong for closing remarks.
Karian Wong
Thank you so much. This concludes our conference call today, and we appreciate your support and looking forward to talking with you over the coming weeks and months. Thank you.
Operator
Thank you. This concludes today's iRobot fourth-quarter and full-year 2023 earnings conference call. Please disconnect your line at this time, and have a wonderful day.
