Good day, and thank you for standing by. Welcome to iRobot's First Quarter 2022 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Andrew Kramer. Mr. Kramer, the floor is yours.

Andrew M. Kramer - Vice President of Investor Relations

Thank you, Chelsea. Good morning, everybody. Joining me on today's call are iRobot's Chairman and CEO, Colin Angle; and Executive Vice President and CFO, Julie Zeiler. Before I start the agenda for today's - set the agenda for today's call, I would like to note that statements made on today's call that are not based on historical information are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties and involve many factors that could cause actual results to differ materially from those expressed or implied by such statements.

Additional information on these risks and uncertainties can be found in our public filings with the Securities and Exchange Commission. iRobot undertakes no obligation to update or revise these forward-looking statements, whether as a result of new information or circumstances. Related to our financial disclosures during this conference call, we will reference certain non-GAAP financial measures as defined by SEC Regulation G, including non-GAAP gross margin, non-GAAP operating expense, non-GAAP operating income and loss, non-GAAP operating profit margin, non-GAAP effective tax rate and non-GAAP net income and loss per share. We believe that our non-GAAP financial results help provide additional transparency into iRobot's 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 measure are provided at the end of these prepared remarks and in the financial tables at the end of the first quarter 2022 financial results press release we issued last evening, which is available on our website at www.irobot.com.

Also, unless stated otherwise, our first quarter 2022 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 first quarter of 2021. In addition to posting the press release and today's prepared remarks on our website, we've also posted a document that summarizes our 2022 financial outlook including all relevant modeling assumptions for the second quarter, the first and second halves 2022 and the full fiscal year. For today's call, our agenda will be as follows: Colin will briefly cover the company's first quarter financial results, discuss market conditions and recent achievements and provide an update on our expectations for 2022. Julie will review our financial results in detail and offer additional insight into our 2022 guidance. Colin will conclude our commentary with some closing remarks about the important steps we're taking to elevate our responsiveness to customers and improve our profit profile. After that we'll open the call for questions. At this point I'll turn the call over to Colin Angle.

Colin M. Angle - Founder, Chairman & Chief Executive Officer

Good morning, and thank you for joining us. Yesterday, we reported a first quarter 2022 operating loss of $18.5 million and a net loss per share of $0.66 on revenue of $292 million. Our Q1 profitability and EPS exceeded our February targets, primarily due to our recent tariff exclusion and prudent cost management. Our top line performance benefited from solid 33% growth in the U.S. and 25% growth in Japan. This helped us largely offset a decline in EMEA as we lapped an exceptionally strong quarter in that region one year ago. We also made important strategic progress that we believe will contribute to our anticipated revenue and EPS growth in FY '22. However, our FY '22 growth prospects are complicated by ongoing disruptions to the consumer marketplace, particularly in EMEA, due primarily to a combination of heightened inflation and reduced customer confidence stemming from the Russia-Ukraine war. Although these emerging dynamics will limit our FY '22 top line growth ambitions, we have slightly increased the high end of our full year operating profit and EPS targets.

Before I cover our updated outlook in more detail, I'd like to review a number of Q1 accomplishments that we believe demonstrate that our INNOVATE, GET, KEEP, GROW strategy is succeeding. The first element of our strategy is to drive innovation across our product lines, differentiating them through thoughtful intelligence delivered on high-performance, beautifully designed hardware. In March, we released version 4.0 of our operating software platform, which offers a range of pragmatic and convenient new experiences that smart mapping to our midrange Roomba i3 series and increases the [Technical Issues] objects that our Roomba j7 robot can identify and avoid. Based on sell-through trends thus far into the year as well as our commercial plans going forward, we believe that our software differentiation will enable us to successfully fortify our RVC share in key markets around the world. The get component of the strategy is all about winning new customers.

During Q1, we increased the number of connected customers who have opted into our digital communications by 40% to 14.9 million over the same period a year ago. The key part of our strategy involves making sure that our customers love our products and remain part of our franchise over the long term. That continues to be the case. Customers are consistently using our floor care robots. First quarter 2022 utilization was just over 90%. Our customers are increasingly taking advantage of our new software capability since launching the Roomba j7 series last year. Over 95% of j7 owners are using the robot machine vision to detect and avoid an ever-expanding number of objects. We're also pleased that Roomba i3 owners are increasingly using the new smart mapping capability that we recently added. We expect adoption by i3 users to continue to grow as the new i3 EVO model was rolled out in EMEA before the end of Q3.

The growth element of our strategy is focused on increasing lifetime customer value by having more customers transact, often directly with us over the course of their ownership. Direct-to-consumer revenue increased 17% in Q1 and represented 14% of total revenue. We are seeing our connected customers increasingly use our website and app to buy our products and accessories. Existing connected customers generated approximately 46% of D2C revenue versus 35% in the same period a year ago. This is a promising trend that supports our plans for substantial D2C growth over the next several years. In addition, we made meaningful progress in Q1 with our digital transformation initiatives. We launched a new version of our U.K. website and conducted several small-scale tests of our CRM systems and related tools. In terms of product diversification, we are advancing our efforts to integrate the Aeris air purification business, which contributed $3 million to our Q1 revenue. In addition to these accomplishments, we took steps across our operations that will help us enhance our responsiveness to customers advance key commercial and R&D initiatives and increase our profitability. I'll cover this in more detail later on this call.

Consistent with our commentary in February, our 2022 outlook remained anchored by our expectation for substantially better second half performance. Since our last call, however, market conditions have become more challenging, which has impacted our view into overall category growth and our second half growth rates, plus notably rising inflation threatens to curb consumer spending, while the Russia-Ukraine conflict has further eroded consumer confidence in Europe and elsewhere. Given these dynamics, we now anticipate that modest category growth in EMEA during the second half of this year will essentially offset an expected first half decline. Our updated outlook now assumes low double-digit category expansion in North America, complemented by strengthening RBC demand in Japan. As a result, we now anticipate FY '22 revenue in the range of $1.64 billion to $1.74 billion, which equates to annual growth of 5% to 11%. Much of this revision is tied to EMEA, where we have lowered our full year top line targets considerably from prior plans that assumed at least low double-digit growth.

Despite the moderation in anticipated U.S. category expansion, we still expect solid mid-teens revenue growth in this region for '22, complemented by even faster expansion in Japan. We have revised our full year 2022 revenue targets. While we still anticipate a meaningful acceleration in our second half revenue, we now expect second half revenue growth of 18% to 26% over last year's relatively soft second half, which had been impacted by component constraints. Along with a better second half gross margin, we also plan to carefully manage spending, which will translate into low double-digit operating profit margins in the second half of the year that will enable us to convert a full year operating profit margin of 3% to 4% into 2022 EPS that ranges from $1.50 to $2.10. In summary, although today's playing field is less than optimal, we are moving forward with confidence that our strategy is working.

Our competitive position is strengthening. Our connected customer base continues to grow. Our customers are happy, and we are putting new systems to work to increase how much these customers spend directly with us this year and in years to come. As a result, we believe that our anticipated second half revenue trajectory and improved profitability will enable us to end the year with the momentum necessary to achieve our long-term financial targets. That concludes my initial remarks. I'll turn the call now over to Julie.

Julie Zeiler - Executive Vice President & Chief Financial Officer

Thank you, Colin. As Andy 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, operating income and loss, operating profit margin, effective tax rate and net income and loss per share will mean the corresponding non-GAAP metrics, while quarterly comparisons are against the first quarter of 2021, unless otherwise noted. iRobot's first quarter 2022 revenue of $292 million declined 4% and was slightly behind our February color due to unanticipated order delays and cancellations from certain EMEA retailers and distributors. From a product mix perspective, Roomba generated 89% of our Q1 revenue mix, with Braava and other products making up the remainder. We continue to see strength in our premium robots, which grew over 30% in the first quarter.

Our gross margin of 34.5% exceeded the low 30% range target we outlined in February due primarily to the reinstatement of our tariff exclusion, which saved us approximately $6 million. Our Q1 gross margin declined nearly six percentage points from the same period last year. The decrease was driven by several factors, which in order of magnitude, comprised unfavorable increases in raw materials, transportation and componentry, pricing reductions and higher promotional intensity and product mix. These combined to more than offset the benefits from our tariff exclusion and lower warranty expense. In terms of the tariff exclusion, we were granted a temporary exclusion from Section 301 List three Tariffs in late March by the USTR. This exclusion eliminates the 25% tariff on Roomba products imported from China beginning on October 12, 2021, and continuing until December 31, 2022. We expect to receive refunds totaling approximately $30 million, which are comprised of $6 million for Q1 tariffs paid, $12 million in tariffs paid on Roomba products imported after October 12 and sold in the fourth quarter of last year and $12 million for on-hand inventory imported after October 12.

Similar to the refunds we received for our 2020 tariff exclusion, we expect that U.S. Customs will issue multiple refund payments over the next 12 months, although the timing of any and all payments is at the discretion of U.S. Custom. First quarter 2022 operating expenses of $119 million increased by 10% due to primarily higher sales and marketing costs attributable to working marketing programs and increased personnel costs. We continue to carefully manage our spending in the first quarter. Operating costs for Q1 were 41% of revenue versus our prior target of the mid-40% range. Our Q1 operating loss was $19 million. Our first quarter effective tax rate was approximately 2%, and our net loss per share was $0.66. We ended the first quarter with $113 million in cash and short-term investments, a decline of $121 million from year-end. The decrease primarily reflects the quarterly net loss and unfavorable changes in working capital. We have received a waiver from certain credit facility covenants that will increase our near-term fiscal flexibility.

This is the first part of our plans to ultimately upsize and amend our $150 million unsecured revolving line of credit. First quarter DSOs of 33 days, an increase of 13 days from the same period one year ago due primarily to customer mix and to a lesser extent, the timing of orders within the quarter. Our inventory balance at the end of the first quarter was $331 million or 158 days versus $233 million or 118 days at the end of Q1 last year. In-transit inventory continues to skew our inventory balance, representing an additional 13 days versus the same period last year. The increase also reflects healthy inventory that due to shipping delays in the fourth quarter of 2021 missed key promotional windows last year. We plan to sell this inventory into our customers over the next three quarters, which will help us improve our inventory levels by year-end. Consistent with our commentary last quarter, we still expect that inventory measured in dollars and days will stay elevated through Q3 before showing improvement to the low 70-day range at the end of 2022. With the quarterly review complete, I'd like to focus on our updated 2022 outlook.

Given the potential for disruption in the European consumer marketplace, our revised FY '22 revenue targets now range from $1.64 billion to $1.74 billion. We currently anticipate that approximately 65% of our 2022 revenue will be generated in the second half, which implies Q2 revenue in the range of $290 million to $318 million. In contrast to an expected first half revenue decline between 9% and 13%, we anticipate 18% to 26% growth in the second half of 2022 over the same period last year. We believe our Q3 revenue growth rate will range from low double digits to the high teens over last year's Q3 and our Q4 growth rate well above that. As we look ahead, it is important to remember that our second half 2022 outlook will compare against the prior year period that was impacted by limited availability of components. Our ability to support this year's second half revenue targets are underpinned by existing inventory levels and the steps we've taken to improve supply chain continuity and resiliency. In terms of product diversification, we remain on track to generate over $40 million in 2022, air purifier revenue with more than 70% of that coming in the second half of the year.

As a reminder, we manage our business on a full year basis since the timing of larger orders may shift between quarters, especially in the second half of any year. That's why we encourage investors to focus on our annual targets. Our revenue expectations contemplate yen and euro exchange rates roughly in line with quarter end rates, plus or minus 5%. Our 2022 gross margin outlook is unchanged at 36% to 37% despite the change to our full year revenue targets. We anticipate that our second half gross margin will improve from first half levels into the 37% to 38% range, primarily as we begin to see the benefits of some of our productivity initiatives, lower shipping costs and fixed cost leverage on higher sales. If our tariff exclusion had not been reinstated, we would have expected to pay more than $40 million in tariff costs this year. Our updated outlook reflects our plans to redirect approximately half of our tariff-related savings to increase our promotional intensity in support of both category growth and increased sell-through. The remainder of the savings will help us absorb the anticipated impact of lower revenue as well as our plans to work down on-hand inventory that was burdened by incrementally higher supply chain costs.

As Colin outlined, we have taken and will continue to take a range of actions to optimize our cost of goods sold, which are expected to support a meaningful improvement in gross margin next year. We expect our Q2 gross margin to be lower than Q1 at between 31% and 33% as increased promotional intensity associated with seasonal events will more than offset favorable channel mix shifts and improved leverage on fixed costs. We are targeting 2022 operating costs in the range of $538 million to $574 million or approximately 33% of revenue. We have adjusted our hiring plans and working marketing and accelerated other cost optimization programs to better align our cost structure with anticipated revenue. Given our top line guidance and spending plans, [Technical Issues] creating profit ranging from $45 million to $61 million with an operating margin between 3% and 4%.

In terms of our second quarter spending, we anticipate Q2 operating costs of $143 million to $144 million or 45% to 50% of total revenue. This implies an operating loss between $39 million and $53 million. The combination of substantially stronger revenue, gross margin improvement and prudent spending is expected to enable us to deliver second half operating income of $116 million to $119 million. In terms of other notable modeling assumptions for 2022, we anticipate other expense of around $2 million and an effective tax rate of approximately 2%. As a reminder, relatively small dollar changes in pretax income, along with the jurisdictional mix of those profits can cause meaningful changes in the effective tax rate. We anticipate a diluted share count of approximately 27 million shares. As a result, we now expect full year EPS to range from $1.50 to $2.10. For Q2, we anticipate a net loss per share between $1.41 and $1.90. In summary, we've moderated our top line growth expectations to reflect greater potential for macroeconomic trends and geopolitical events to temporarily disrupt RVC adoption, particularly in EMEA over the coming quarters.

We have taken actions to preserve our profitability, which has enabled us to slightly increase the high end of our 22 EPS range. Most notably, we still anticipate a meaningful inflection in our top line growth and profitability during the second half of this year. I will now turn the call back to Colin for some additional thoughts on our near-term process.

Colin M. Angle - Founder, Chairman & Chief Executive Officer

Thank you, Julie. As the RVC category creator and leader, we continue to be very enthusiastic about the global growth potential for both the category and iRobot. Household penetration is low. We design and deliver great products with a compelling and increasingly differentiated value proposition. With a powerful brand, we enjoy great access to consumers worldwide through a vibrant retailer and distributor relationships. And we are rapidly expanding our commercial capabilities to drive D2C revenue growth that will contribute to higher gross margins, increased profitability, as we expect more connected customers will transact directly with us. Across all areas of the company, we are mobilizing to navigate short-term turbulence and support the evolving needs of our retail partners and consumers around the world. To elevate our responsiveness, optimize inventory levels and increase efficiently - efficiency, we are consolidating our warehouse and distribution networks around the world.

We've also made meaningful progress in our efforts to increase supply chain continuity and resiliency. While we are thrilled that the USTR has reinstated our Section 301 Tariff Exclusion through the end of the year, our plans to scale production in Malaysia are unchanged. As a result, we expect to enter 2023 without meaningful exposure to these tariffs. Additionally, we believe that our ongoing efforts to improve efficiency, carefully manage headcount and control discretionary spending are critical for achieving this year's profitability targets and helping us further refine our cost structure over the longer term. And while we have adjusted overall spending plans for FY '22, we are not sacrificing investment in those R&D projects that we believe will make the biggest impact on our business. We still plan to deliver additional major software upgrades and bring a new Roomba model to market this year.

We are also taking important steps to support further product diversification. More specifically, we continue to realign our engineering resources and allocate more funding for internal development of new robotic products targeting adjacent categories. While it'd be premature to offer additional insight into these activities right now, we look forward to sharing more in the future when we are closer to commercial launch. As Julie detailed our updated guidance for 2022 assumes a substantial acceleration in our second half financial performance. We expect that this momentum will enable us to exit this year well-positioned to keep us on the path toward achieving the long-term financial targets we've outlined. And in the process, create substantial value for our shareholders, employees and customers. That concludes our remarks. Operator, we are ready to take questions now.

Question & Answers

Questions and Answers:

[

Operator

[Operator Instructions] And our first question will come from Mike Latimore with Northland Capital Markets.

Mike Latimore - Northland Capital Markets - Analyst

Thank you. So I guess in terms of the outlook for the second half of the year, are you assuming that the kind of U.S. and Japanese markets remain relatively healthy? Or are you trying to factor in a little bit of consumer sentiment deterioration there as well?

Colin M. Angle - Founder, Chairman & Chief Executive Officer

We see Japan as remaining very healthy. We've taken down our North America targets from the beginning of the year modestly, but still anticipate good performance in North America. So slightly below traditional growth rates, but still contributing to that overall growth in the industry.

Mike Latimore - Northland Capital Markets - Analyst

Okay. Got it. And then you're devoting half of the tariff exclusion to promotions, does that reflects in a more competition? Or is that more about just trying to deal with this consumer hesitancy?

Colin M. Angle - Founder, Chairman & Chief Executive Officer

It's a little of both. The year has had some good events and some more challenging events than we definitely are looking at our basket of resources and working to ensure that we maintain our strong position in the markets. And so some of it is motivating customers to get out of their chair and come in and help continue to drive this category growth and others is definitely to make sure that our lineup remains as competitive as it can be.

Julie Zeiler - Executive Vice President & Chief Financial Officer

And I think it's important to remember that as we look at the potential for our category, we still look at overall penetration rates and believe there is a strong and long runway ahead of us for additional adoption. And the investment there is to ensure that we are able to continue to foster category growth.

Mike Latimore - Northland Capital Markets - Analyst

Great. And just last on the comment about internal development of new robotic products. I know you can't really talk about that, but maybe what's the latest view on the lawn mower category?

Colin M. Angle - Founder, Chairman & Chief Executive Officer

I think that - again, we are at the beginning of the robot industry. iRobot's ambitions certainly extend beyond robot vacuuming. We have talked about, yes, specifically about lawn. We continue to think lawn is a very attractive adjacent market. And so I don't think anything has changed on that front. iRobot continued development of new enabling technologies, certainly position us well to attack multiple adjacent products.

Mike Latimore - Northland Capital Markets - Analyst

Thank you.

Operator

Thank you. Our next question will come from Jim Ricchiuti with Needham & Company.

Jim Ricchiuti - Needham & Company - Analyst

Just a couple of questions on the marketing spend, promotional activity. I assume a lot of that is set for Q2. I'm wondering how it changed as you exited Q1. And just a related question to that is, as we think about the promotional activity over the balance of the year, is it going to be mainly concentrated in North America in terms of the change versus what you were thinking earlier in the year?

Colin M. Angle - Founder, Chairman & Chief Executive Officer

As you know, we're very data-driven, and we try to look at the return on ad spend and optimize that globally. What you'll see is us moving dollars around geographically to ensure that we are spending money where it will work the best. And so that - that definitely has evolved from the beginning of the year. As well as looking at which models, which channels and ways of spending our dollars is in constant evolution on a - frankly, on a day-to-day basis. So I think that the absolute dollars change with our expectation around revenue, but the way we spend those dollars is very fluid.

Jim Ricchiuti - Needham & Company - Analyst

Just a question on Aeris. Obviously, a small part of the business, but I'm just wondering how the rebranding effort is going. How important is that to get to that full year contribution? And should we assume, as part of the activity that you're going to be doing in terms of driving consumer demand that we might see some joint marketing with Roomba and the Aeris product?

Colin M. Angle - Founder, Chairman & Chief Executive Officer

Well, certainly, the reason - one of the reasons why the air purification performance for the year has a larger second half to first half ratio than the Roomba is because - completing the integration, completing the efforts we're doing to fully integrate the Aeris product into the iRobot line is underway. So that - the first part of your question is absolutely sound. And as far as joint marketing and so forth, that is a strategy, which is - underlies our direct-to-consumer belief that as we bring customers into our franchise. As our software technology enables us to better understand our customers' needs, the unique challenges that their homes have and require and better develop a partnership with the - with our customers and their habits and how to operate synergistically with how they live their lives, we create opportunities to sell more things to those customers beyond just the first Roomba that they bought and air purification is a powerful adjacency. So this idea that a Roomba can lead to a sale of an air purifier to an existing customer is core to our strategy. And we definitely look at lots of different ways that we can make that happen.

Jim Ricchiuti - Needham & Company - Analyst

Thanks. Ill jump back in the queue.

Colin M. Angle - Founder, Chairman & Chief Executive Officer

Okay. Thank you.

Operator

Thank you. Our next question will come from Paul Chung with JPMorgan.

Paul Chung - JPMorgan - Analyst

Hi. Thanks for taking my question. So just on the cancellations in Europe, are these orders being pushed out? And then how is your kind of visibility evolving in Europe and I guess, for other regions as well? What's your order visibility into kind of second half today? And what's kind of driving your confidence for the guide? Are there some key customers you have firm orders for? And then, again, what regions are you seeing relative strength besides kind of Japan and North America?

Colin M. Angle - Founder, Chairman & Chief Executive Officer

Ill start, and Julie, you can add color if you like. I mean the orders that we talked about in the call in EMEA, some were pushed, some were canceled. As we indicated, the single largest driver for the change in the guide is the weakness that were seeing in the EMEA marketplace broadly. And so that were definitely seeing the impact of the war in Ukraine creating a very time correlated drop in consumer confidence, increase in inflation and decrease in sort of sell-through rates that lead to retailers becoming more conservative in taking inventory positions with our product and becoming less aggressive. And so that these are signs that throughout our history when we see them, were able to understand what they lead to from a full year perspective and have attempted to model and adjust expectations appropriately.

We do have the nature of our relationships with our retail partners as well as with our distributors includes conversations which extend beyond the immediate order and so that were definitely engaged in dialogue with our partners around what they expect and what they are seeing. And we have the current crop of orders as well, which gives us confidence in the guidance we presented. So its a rich collaboration, which has, frankly, decades of history at this point, leading us to trying to make the best indication of what we see happening through the balance of the year. But to be honest, there is still significant uncertainty as to how the rest of the year is going to unfold. But our confidence is buoyed not just based on those conversations.

Its buoyed because we believe we have the best lineup that the company has ever had. We see very strong performance from a share perspective, showing that our products are holding up very well competitively. We think that the back half of the year also laps a much weaker back half of last year. And so the percentage of growth that we are contemplating in the earlier call is relatively straightforward easier comps than certainly the first half when a year ago, we were enjoying tremendous momentum and strength. So I think that all in all, we have done our best to create a reasonable expectation, balancing the goods and the unknowns and the challenges to deliver an expectation that we are confident in.

Julie Zeiler - Executive Vice President & Chief Financial Officer

Yes. Ill just underscore a couple of things. As Colin said, weve taken into account a series of factors as weve reset and rebased our expectations for the full year. Try to balance all of those things. Its our best view. And its in knowing that we will be investing again in supporting that ongoing category growth that gives us the picture that we were setting now for the full year.

Paul Chung - JPMorgan - Analyst

Great. And then just a follow-up on longer-term margins. If we think about tariffs going away, freight coming down, component cost easing, whats more normalized gross margins, maybe that starts to show in 23 and where it progresses from there? And can they recover back to the mid-40% range? Or has something kind of structurally changed, maybe you have higher costs from your move in manufacturing. And then on the OpEx side, youve seen continued cuts since Analyst Day guide. Where are you making the cuts there? And you mentioned commitments to R&D, but are there any trade-offs on growth on maybe some lowered OpEx investments here? Thank you.

Julie Zeiler - Executive Vice President & Chief Financial Officer

Yes, sure. Why dont I start, and then Ill let Colin jump in. But as we look forward with our expectations around second half expansion in gross margin over our first half. And then through 23 and 24, we believe we are making the progress that puts us on a path towards those LTFM targets that we established back in our Investor Day. You hit on some of them already that we expect over that multiyear period, we will see a normalizing and easing of some of the headwinds that we saw. We have an operations team that is just working in partnership with the rest of the organization to drive COGS productivity across the line. And then the third thing that I would point to are some of our CRM levers, which as we continue to expand our direct-to-consumer reach and focus on the keep and grow parts of our strategy should provide some expansion over time in our gross margin rate from a - as we look forward to our LTFM.

Colin M. Angle - Founder, Chairman & Chief Executive Officer

Yes. A little then, other than to reaffirm our commitment to the LTFM growth rates, gross margin rates, operating income rate that we shared in November. Well be exiting this year on a slightly lower base, but those rates that we committed to. We believe that all of the reasons that Julie just laid out give us confidence that, that long-term financial model still holds. And I think that, again, looking at that deeply is the best answer to where we think things are going to go.

Julie Zeiler - Executive Vice President & Chief Financial Officer

And then you asked another question around OpEx. Its true. We have made difficult choices associated with resetting our expectations for the year. Colin already mentioned, one of the things that I think we do very well is were extremely data-driven in how and where we put our investments and the cadence of those investments. We remain very committed to innovation at the center of what we do and the work that were doing in R&D on innovation is - and the speed of innovation is front and center and how we think about our spending as it will continue to evolve as we go through the year. But they arent easy choices.

Paul Chung - JPMorgan - Analyst

Okay. Great. Thank you.

Colin M. Angle - Founder, Chairman & Chief Executive Officer

Youre welcome.

Operator

Thank you. Our next question will come from Asiya Merchant with Citi Global Markets.

Asiya Merchant - Citi Global Markets - Analyst

Great. Thank you for the opportunity. I just - on pricing relative to promotional intensity, Im just trying to understand where you guys are thinking about that. And at the start of the year, you guys talked about ASP benefiting you on a net basis or growth basis because you guys were shifting to the premium robots, which clearly is happening. But then at the same time, youre driving higher promotional intensity. So just how you guys are thinking about units versus ASPs in your updated guidance as well as you kind of roll forward to your long-term targets towards fiscal 24, how you guys think about that mix shift and units versus ASPs benefiting you? And then I just have a follow-up on the inventory balance. I know you guys are talking about trending that down. But is there anything to keep in mind on how growth versus net effect of promotional effect impact - sorry, impact the inventory balances that you guys reported? Thank you.

Julie Zeiler - Executive Vice President & Chief Financial Officer

Sure. So as we look forward for the year, we do - as we think about units versus ASP for the full year, we now anticipate low single-digit growth in our units, mid-single-digit growth in ASP. And that ASP is a balance of a number of things, Asiya. Certainly, the mix of our products will continue to play a role there. As you said, weve been pushing up to the premium but also the channel with which we sell those products. So as our direct-to-consumer business grows, our - we had benefit from pricing there as well. As it relates to inventory, we do expect inventory will remain elevated, as I said in our prepared remarks. Both in dollars and in days through the first two quarters and then trend down by the end of the year into the 70s in terms of days of inventory. As we look at that inventory and as weve said previously, that is healthy inventory that we expect that we will move through the normal course of events.

Asiya Merchant - Citi Global Markets - Analyst

Great. And just as you guys have - I know you guys talked about the several levers that you have to raise margin. But just given the higher promotional intensity that you guys are talking about to drive category growth and maintain or take share, why should investors not think about these as kind of negatively affecting your gross margins or operating margin targets that you laid out at the Analyst Event? Thank you.

Colin M. Angle - Founder, Chairman & Chief Executive Officer

I think that the LTFM contemplated a number of tailwinds as well as an evolving competitive dynamic in how we built it. And so that we see the fruits of our R&D investments, giving us growing competitive strength. I think that we are managing competitive - sorry, promotional intensity and price as two levers to ensure we maximize the OI dollars in 22 that will shift a little bit toward meeting our gross margin rate targets as we move forward. So its - we do have a number of different levers and we use these levers slightly differently depending on the challenges and the market situation we find ourselves in. So again, its a nuanced answer. But right now, as we look at what our priorities are for the year, we want to ensure that we maintain share. We want to ensure that we deliver on our profitability commitments and we are in line with the gross margin rates that we committed to for the year. And so we feel thats a good set point for where we are today, acknowledging that we intend to demonstrate gross margin rate acceleration in the back half, setting ourselves up for the LTFM that we put on the street.

Asiya Merchant - Citi Global Markets - Analyst

Great. Thank you.

Colin M. Angle - Founder, Chairman & Chief Executive Officer

You bet.

Operator

Thank you. [Operator Instructions] And our next question will come from John Babcock with Bank of America.

John Babcock - Bank of America - Analyst

Hey. Good morning and thanks for taking the questions. I guess, actually, just first I want to understand a little bit is I think like a couple of years ago, you started increasing investments on the software side, while continuing to invest in hardware just maybe not to the same extent. So I want to understand, at least since then, have you found this has helped to enhance your competitive position in the marketplace? Have you found this has helped to excite consumers because I think like consumers generally - obviously, they like the new features, but at the same time, they also like things that were new and innovative. So I want to get your sense overall in terms of like how those investments in software are translating into growth in that competitive mop?

Colin M. Angle - Founder, Chairman & Chief Executive Officer

Its a great question, and Im happy to address it. As we looked at the customer requirements and customer satisfaction, what they were looking for that the current crop of robots failed to deliver on several years ago, very clearly, the ability of the consumer to control where, when and how the robot operated was a huge priority as well as the robots ability to complete missions in an environment which wasnt necessarily pre-cleaned ahead of the Roombas setting off on its cleaning mission. And so that pointed to a very challenging technical issue, but also played into iRobot strength in artificial intelligence and machine learning. Were beginning to be able to harvest the benefits of that recognition and subsequent investments in AI technology in our j7 Plus robots, where the difference from a hardware perspective between the i7 and the j7 is relatively modest.

The difference in the intelligence between those two models is tremendous, and we are seeing the j7 robot leap to being the number seller in many of our markets, including North America. We are seeing that robot receiving exceptionally strong Amazon ratings. Were seeing the unique features and unique software features that we introduced on those robots - on that class of robot being very highly utilized. And so thats really were seeing a validation of this strategy, a validation of the insights that we perceived.

And the fact that we are well on our way, investing in the intelligence of our robots gives us confidence that we have a sustainable competitive advantage in the marketplace based on those R&D investments, were able to continuously upgrade the software and our robots. As an example, the i-purchaser of an i3 robot received major new functionality last year with the directed room cleaning coming out to benefit that user. And so we feel like we have a platform to accelerate the delivery of innovation to our customers and accelerate our ability to differentiate. Happy to do a follow-on question if you have one.

John Babcock - Bank of America - Analyst

No. I mean thats great. Ill follow up certainly in due time on that. But I mean, I guess like the next question on supply chain. I was wondering if you might be able to talk about how that compares with last quarter, what sort of disruptions youre seeing there, and particularly with some of the news around shutdowns in China. I dont know if theres any update you might be able to provide on that, but thats really what I wanted to focus on now.

Colin M. Angle - Founder, Chairman & Chief Executive Officer

Okay. Sure. I guess starting a year ago, iRobot and most every consumer tech company has faced the challenge of supply chain issues, shipping issues, chip shortages and so forth. And we jumped on that aggressively to start securing longer-term partnerships with our key suppliers, longer-term partnerships with our shippers and develop the ability to second source many of our components to give us a better ability to take advantage of what supply there is out there. And so here we are a year later having substantially shifted our emphasis from a pure efficiency perspective to a perspective on supply chain that balances supply chain resiliency with efficiency. And so that right now, we do have the inventory that we need. We believe that we have sight line and the commitments required to produce the inventory reflected in the guidance that we gave today. We definitely still see growing raw material costs.

We see some easing of shipping costs. But certainly, it is not headed back to where it was 18 months ago in a foreseeable time frame. There continue to be sporadic shutdowns in factories and component shortages. But thats kind of day-to-day living for us at this point given that its a year in and our supply chain organization has been up to the task given the year that weve been through and the partnerships we have reinforced to manage through those challenges. So not out of the woods, but the headwinds the supply chain were for us last year are definitely substantially eased in 2022. We will have the products that we need. Shipping costs are more manageable. And with all of the work that weve done in dual sourcing, we believe we have access to the components that we need to build the products.

John Babcock - Bank of America - Analyst

Right. Thats great. And the next question, I just want to follow up on one of the questions earlier on inventories. If you can talk about your plan to ultimately reduce those inventory levels? And then also how you can do that without having any meaningful impact on pricing? It seems like inventories built up are, I guess, heavier than they have been at least that I can recall. So I just wanted to get your color on that.

Colin M. Angle - Founder, Chairman & Chief Executive Officer

I think that Julie made the important point, all of the inventory we have is healthy inventory that we have factored into the plans to sell this year. So that it gives us more confidence from an inventory availability perspective that were well-positioned to meet our revenue targets for the year. I think that it - as we have aligned production with demand. Weve been able to make some adjustments to change the ramp from up to down through the balance of the year, and were taking a sensible approach to working that revenue down over time, which limits the pressure to go take actions that might negatively impact profitability. As I commented on a few minutes ago, we are looking at a go-to-market strategy for 2022 that prioritize profitability dollars over gross margin rate and so that we are willing to do some activities, which would protect share, drive units rather than maximizing gross margin rate. And we think that it is prudent to do that, and we can execute on that plan while still showing the growth in gross margin rate that we committed to at the beginning of the year, setting ourselves up for the LTFM next year. So again, a lot of moving parts, but I would say that no unnatural acts required relative to driving down inventory. But with a willingness to go focus on driving profitability dollars that you probably wont see next year.

John Babcock - Bank of America - Analyst

Okay. Great. Thanks. Thatall all the questions I had.

Colin M. Angle - Founder, Chairman & Chief Executive Officer

Sure.

Julie Zeiler - Executive Vice President & Chief Financial Officer

Great. Thank you.

Operator

All right. And there are no further questions in the queue at this time. So I would like to turn the floor back over to Mr. Kramer for any additional or closing remarks.

Andrew M. Kramer - Vice President of Investor Relations

Thank you. That concludes todays call. We definitely appreciate everybodys support. We know its a very busy day for folks, so we appreciate you listening. We look forward to talking with shareholders and prospective shareholders and analysts over the coming weeks and months. Thank you once again.

Operator

[Operators Closing Remarks]

]

AI Assistant

IROBOT CORP

Q1 2022

Earnings Transcript

Find Answers

Ask about any part of the document to get insights, explanations, or key details.