iRobot Prospects for 2008 Profits

The most important date for iRobot stock owners in the coming year will be the all-important 1st Quarter Earnings Conference Call, if the company announces full-year earnings and revenue guidance.

I'd like to get a little bit of a jump on things, assuming that the company can deliver on its revenue guidance for 2007 - $240-$250 Million. The company has listed profit guidance at $3-5 million, but that could be almost entirely wiped out by the $2.9 million legal costs in the Robotic FX case, depending on how much iRobot expected to spend on legal costs when they issued their guidance and also on the accounting for the legal costs. Some of the costs almost certainly went to pay Jameel Ahed for Robotic FX's residual assets, which could conceivably by amortized to lessen the impact on current year earnings. Plus there is the pre-tax/after-tax impact. Regardless, the 2007 profit number isn't particularly relevant, as long as it IS a profit. Wall Street doesn't like to see losses, period, and iRobot has been cutting it pretty thinly because of their emphasis on growth, R&D and advertising (all stuff I as a long-term shareholder am very happy with). Regardless, the 4th Quarter to 4th Quarter comparisons will look great because shipments were delayed from the 3rd Quarter to the 4th Quarter and because of significant Roomba 500 Series channel fill and channel expansion (even Best Buy is selling them.)
So that brings us to 2008. Let's go with conservative, given that iRobot has been conservative in all of its past full-year guidance. Take the $240 million low-estimate revenue number and add 19 percent (the low end of their initial growth expectations issued for their initial 2007 earnings estimate issued a year ago). That yields a 2008 revenue estimate of $285 million. The top of the revenue expectation range should exceed $300 million -- a very significant milestone that would be a big deal with traders.
How does iRobot get there? There are many factors that continue to go iRobot's way and could bolster 2008 growth:
* The military continues to emphasize and expand the use of robotics. The $286 million xBot contract expands iRobot's role from IED/bomb sniffing teams to regular infantry units, which are far more numerous. The initial order of 101 PackBots with FasTac kit is likely to be followed by hundreds more, and comes on top of the existing contracts for IED robots, which should continue. iRobot has already said it would be producing about 30 FasTac robots a month starting in March. If the contract does not scale, that should be a minimum of 300 robots for the year, or about $20 million in accretive sales. If it scales to 1,000 robots for the year, look out above! That would be about $70 million in accretive sales. Let's assume $20 million for now. Also note that the military has already signaled its intention to award a separate follow-on $200 million no-bid contract to iRobot for more IED Packbot sales and service, which is even more important from a profit perspective given that the xBot contract has lower margins. So enough with the meat and potatoes, iRobot also has some military gravy coming online to top things off: The first sales of its next-generation PackBot SUGV Early product will start shipping in volume by mid-2008, and the company will begin selling the 200-pound class iRobot Warrior product, which the company will offer for the first time with the potential for armed variants. Who knows, maybe they will even sell a few R-Gators? The company also has announced a new mapping kit for PackBots which could find a home in advanced recon teams. You send in the PackBot to map a building or an area so you can plan your assault. Seems like genius to me! And, I even forgot to mention iRobot's increasing foray into the vast homeland security/police market with Taser-equipped PackBots!

*The company's home robotics division has significant avenues for growth. The Roomba 500 Series will have its first full year in the channel, and its significantly improved feature set and performance and expected better reliability combined with a higher price point should result in significant improvements in revenue and profitability. The new Scooba 380 and Scooba 350 products also are doing better than I've expected. They will never be Roomba, but they are a significant next leg up and generate significant cross-selling opportunities, not to mention lots of free press. The Looj gutter cleaner also will have a full year of availability, and, if the company can get them into Home Depot, Sears and Lowe's next fall during leaf season, could generate significant sales ($5-$10 million?). The company will also sell a few thousand ConnectRs, etc., which will be accretive to revenue.
* The foreign market also is largely untapped by iRobot. They have ramped up their European distribution but should continue to explore global opportunities for significant Roomba growth in particular. There is no reason why foreign sales should not account for 40 percent of home robot sales versus under 20 percent today.
Finally, there is the big question: Will iRobot announce any significant new products in 2008? There are lots of possibilities, but iRobot has noted in the past that it can take two or three years of R&D to get a new robot out the door -- longer than iRobot has been a public company. So that's a big if. You know the list of chores iRobot has mentioned in the past that it could tackle -- lawn mowing (tops on my wish list, despite the competition), bathroom/shower/toilet cleaning (tops on my wife's wish list), laundry folding (probably too difficult for a while yet) and remote presence/elder care assistance robots (ConnectR and iRobot Cici). Colin Angle said last year that a robotic lawnmower is more feasible than laundry folding, although he wants laundry folding 'bot more. The company also has said it is looking into creating a light commercial version of its Roomba 500 product. I don't think however that you need any of these to see significant growth. Remember that iRobot's market penetration for Roomba alone is still just about 2 percent in the U.S. alone.
* Home robot profitability should expand significantly due to reduced warranty costs and higher prices from the Roomba 500 generation and the Scooba 300 generation and, significantly, from far lower nickel prices. The drop in nickel prices alone should mean a $5 million bonus to iRobot's bottom line in 2008! (That was the estimate iRobot's CFO gave of the hit from higher nickel prices in 2007). iRobot's profitability as a whole could top $10 million after taxes for the first time, chopping the P/E ratio from north of 100 to south of 50 with a vast, untapped market for robotics still to come.

Indeed, I think ever since the company botched the initial rollout and initial quality of the Scooba in early 2006, they have been performing exceptionally well. iRobot has mastered the art of coming out with new products at low cost to the company which generate lots of free, valuable buzz even if sales are not explosive (iRobot Create, Looj, ConnectR etc.) and have delivered a knockout, I believe, with their next generation Roomba 500 series and a solid hit with their next generation Scooba 300 Series product.

The one big caveat I hold out there is the broader economy and the downturn in the housing market spilling over into consumer appliances. I think this is the main drag on the stock right now, and if Roomba sales are weaker than expected this tepid holiday season, that could drag on the stock. A Roomba is not yet something that people consider a staple like a Gillette razor that they will buy in good times and bad. That being said, I remain bullish with the stock at $18, as iRobot appears to be firing on all engines.