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Operator: Welcome to the iRobot First Quarter 2024 Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to Karian Wong, iRobot Senior Vice President and Principal Accounting Officer. Please go ahead.

Karian Wong: Thank you, operator, and good morning, everybody. Joining me on today’s call are Glen Weinstein; and Executive Vice President and CFO, Julie Zeiler. Before I set 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. A discussion of these risk factors is fully detailed under the deduction with factors now 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 margin, 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 iRobot’s underlying operating performance and potential. Our definition of these non-GAAP financial measures, and reconciliations of each of these financial measures to the most directly comparable GAAP measures are provided in the earnings press release issued last evening, which is available on our website at www.irobot.com. Also, unless stated otherwise, our first quarter 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 2023.

For today’s call, our agenda will be as follows. Glen will briefly cover the company’s quarterly results review important strategic milestones and outline our expectations for 2024. Julie will review our financial results in detail, offer additional insight into our Q2 and 2024 outlook. Glen will 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. First, I’d like to note that as announced in a separate press release last night, the Board has appointed Gary Cohen as iRobot’s new CEO effective immediately. Gary was previously the CEO of Qualitor Automotive and of Timex and held senior leadership positions at Gillette, Playtex and Energizer. In all, he has more than 25 years of executive leadership experience and a track record of successful turnarounds. During Gary’s tenure at Qualitor, the company nearly doubled revenue and profits. He will lead iRobot’s transformational strategy, overseeing all aspects of the company’s business, including innovation, product and commercial strategies, operational excellence, talent and working across the organization to build a sustainable competitive advantage and consumer-centric brand.

On behalf of the leadership team, I want to welcome Gary to our iRobot. I know he is looking forward to meeting with our investors as well as our employees and commercial partners as he comes up to speed. Turning to our quarterly results. We took aggressive action in Q1 to implement our restructuring plan to significantly improve our near-term operations. On today’s call, I’ll share with you the progress we have made with key elements of the plan and discuss what you can expect from iRobot moving forward. With the successes we achieved in the first quarter, and with a new CEO in place, we are all the more confident in our iRobot’s ability to build on our legacy of innovation. In the first quarter, we exceeded the goals we set out on our fourth quarter call and subsequent outlook release.

As we had expected, our Q1 performance was affected by overall consumer spending trends for domestic appliances and by aggressive competition across all regions. In total, we generated revenue of $150 million with a gross margin of 24.6% and reflecting significant improvements to our cost structure we reported an operating loss of $40 million with a net loss per share of $1.53. Later on the call, Julie will provide our Q1 financials in greater detail, along with our outlook for both the second quarter and full year 2024. Operationally, Q1 represented an important first step with respect to our restructuring plan. The plan is designed to stabilize the business in the current market environment without sacrificing longer-term growth initiatives.

We are committed to simplifying our cost structure, implementing a more sustainable business model and concentrating on our core value drivers. We are leveraging our brand and innovative products to extend or reclaim leadership positions in the mid and premium market segments as well as leveraging our new product launches that balance price point and cost to participate more fully in the entry market segment. In addition, we are focused on geographies that offer the greatest scale and profitability. In executing this plan, we are aligning our cost structure with near-term revenue expectations to enhance liquidity and drive bottom line improvements. In concert with our Chief Restructuring Officer, Jeff Engel, we are streamlining our operations, developing new products more efficiently and driving increased spending discipline and cash management.

As previously discussed, the plan is structured to one, achieve gross margin improvements through a focus on design to value and removal of unnecessary costs and more attractive terms with our manufacturing partners. Two, reduce R&D expense by relocating certain noncore engineering functions, including the greater use of third parties to provide those functions and pausing work unrelated to our core floor care business. Three, centralize our global marketing activities to be more efficient in our demand generation efforts and reduce nonworking marketing and agency fees; and four, streamline our legal entity and real estate footprint to fit our current business needs and near-term revenue expectations. The cornerstone of our gross margin improvement plan is the new relationship paradigm with our contract manufacturer.

We are relying on the expertise of these contract manufacturers to a greater extent than we have in the past, taking advantage of their mature supply chain, expertise in design for manufacturing and flexibility in component selection. This shift along with competitive bidding of design packages is key to our goal of unlocking improvement in full year 2024 gross margin, which we expect to see the benefit in the P&L, primarily in the second half of the year as higher-cost products are moved out of inventory. While we are working on a number of checks, we launched the Roomba Essential robots to consumers early in the second quarter. These are the first products to benefit from our new product development paradigm with our contract manufacturers and represent the balance of price points and costs that we are looking to maintain going forward.

They replace our very successful 600 series with an improved gross margin and enhanced customer experience. The changes we are making with our contract manufacturer allows us to reduce our R&D expenditures, particularly with respect to lower-value commodity engineering work. Within R&D, we expect to see a reduction of approximately $35 million year-over-year with an exit rate at the end of 2024, representing R&D expenditures at below 10% of revenue. Importantly, while we are increasing reliance on third-party partners, we are continuing to invest in higher-value robotics, computer vision, machine learning and complex mechanical design to improve the core functionality of our robots. For sales and marketing, we are focusing our resources on limited geographies and consolidating marketing efforts for greater efficiencies.

While this might put pressure on our revenue in the short term, it represents a more disciplined overall approach to demand generation. Specifically, while in Q1 revenue was down 6% year-over-year, sales and marketing saw a 30% improvement in cost as we continue to focus media expenditures on digital channels and customer conversion. This focus in Q1 and in part based on fast-selling end-of-life SKUs contributed to more than 25% of our revenue being from e-commerce, a rate that we do not anticipate sustaining over the next few quarters. Again, based on our focus on limited geographies, in April, iRobot began selling at Yamada, Japan’s largest electronics retailer. This is a significant expansion of points of sale and represents an opportunity to be in front of even a larger customer base.

At the end of Q2, we plan to transition certain markets to existing distributors to improve how we service customers in those regions. As a reminder, while we have some Mother’s Day-related marketing spend in Q2, for the full year, we expect to see a decrease in overall sales and marketing expenses of nearly $40 million, including a decrease in working marketing of approximately $20 million. Finally, we have taken steps to terminate various global lease commitments and increased subletting of excess space in our Massachusetts headquarters. In addition, we have streamlined operations and head count across G&A. As we mentioned last quarter, based on all of these actions, we anticipate a significant improvement in our 2024 cash outflow from operations compared with full year 2023.

We also anticipate generating modest positive cash flow from operations in both Q3 and Q4. While the operational and financial actions we are taking are essential to the near-term stability of the business, they are not being taken at the expense of our longer-term growth initiatives, which include innovation, and development efforts on iRobot key revenue generators. Our focus is on executing near-term plans and moving quickly and decisively to delight customers. In short, we have an iconic brand that people are passionate about, and we have great products. About 5 weeks ago, consumer reports released its 2024 guide to robotic vacuums. iRobot products held all 5 top positions and 7 of the top 8 rated robots with new models coming and our focused marketing driving sales at key retailers and online we believe we are well positioned to stabilize the business.

The first quarter represented an important step in iRobot’s journey, and we are proud of the way that it was able to deliver on the promises we outlined previously. The team looks forward to updating you on our continued progress. With that, I’ll turn the call to Julie.

Julie Zeiler: Thank you, Glen. 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, operating loss, operating margin and net loss per share will mean the corresponding non-GAAP metric. All quarterly comparisons are against the first quarter of 2023, unless otherwise noted. As Glen mentioned, our Q1 results exceeded our expectations across all metrics. iRobot’s first quarter 2024 revenue totaled $150 million, a decline of 6% versus prior year and slightly ahead of our expectations, driven by the timing of certain orders as well as solid DTC performance. Geographically, in the first quarter, EMEA declined 3%, the U.S. declined 4% and Japan declined 16%.

Our Japan results reflect a recent 34-year low in the yen against the dollar. Excluding the unfavorable foreign currency impact, Japan revenue decreased 6% over the prior year period. From a product mix perspective, 2-in-1 products represented 45% of total robot sales in Q1 2024. Accessory revenue in the first quarter grew 8% over the prior year and represented approximately 12% of total revenue. Revenue from mid-tier robot with an MSRP between $300 and $499 and premium robots with an MSRP of $500 or more represented 81% of total robot sales in the first quarter of 2024 as compared with 88% from the same period last year, reflecting the introduction of Roomba Combo Essential, providing the iRobot 2-in-1 cleaning experience at a lower price point.

Our first quarter D2C sales grew 3% versus the prior year with 12% growth in North America and EMEA, partially offset by a 13% decline in Japan or a decline of 10%, excluding the impact of foreign currency. In the first quarter, our D2C revenue represented 26% of total revenue. Our gross margin of 24.6% in Q1 improved from 23.7% in Q1 2023. Our gross margin benefited from cost actions and the new product development paradigm with our contract manufacturing partners, partially offset by the annualization of promotional pricing actions taken in the second half of 2023. We reduced first quarter 2024 operating expenses by 23% to $77 million. The decrease primarily reflects the initial impact of our aggressive restructuring plans and is the result of disciplined spending during the quarter.

The key drivers of the decrease were people-related spending across all functions associated with the previously announced restructuring efforts, reduced marketing spend, a more disciplined overall approach to demand generation and a continued focus on efficiencies across the organization. Our operating loss of $40 million compares to an operating loss of $62 million in the year ago period. First quarter nonoperating expense was $3 million, reflecting interest expense associated with our term loan. This was partially offset by interest income on cash balances and to benefit from the change in the fair value of the term loan. Our Q1 tax expense was $0.5 million. Our first quarter net loss per share was $1.53. In the first quarter, the company reduced its workforce by approximately 330 employees, representing 30% of the company’s total as of December 30, 2023.

Our Q1 GAAP results include a $14 million charge related to our restructuring program, primarily for severance and related costs of $11 million as well as the costs associated with exiting certain nonrobotic floor care initiatives. We expect an additional restructuring charge of approximately $9 million across the remainder of the year. We ended the quarter with $118 million in cash and cash equivalents, a decline of $67 million from the end of Q4. Restricted cash totaled $42 million, with $40 million set aside for future repayment of the term loan and subject to limited rights for inventory purchases. In Q1, cash flow from operations was $1.4 million, which included the onetime net proceeds of $75 million from the Amazon termination fee. As discussed during our Q4 call, excluding the net proceeds, we expect negative cash flow from operations in both Q1 and Q2, and we expect to generate modest positive cash flow from operations in both Q3 and Q4.

First quarter DSO was 24 days, flat compared with Q4 of 2023 and up slightly from the same period a year ago due to the timing of certain orders within the quarter. Our quarter end inventory balance was $133 million or 108 days and reflected continued focus on carefully managing inventory balances with a reduction of $96 million or 63 days as compared with Q1 of 2023. As discussed on our Q4 2023 call to further enhance our liquidity and provide flexibility to our capital planning strategies, we filed a shelf S-3 registration statement on February 27 which included a $100 million at-the-market offering program for the sale of the company’s common stock. During the first quarter, we sold 0.6 million shares for total net proceeds of $5.6 million.

Careful management of our working capital efficiency will remain a focus in 2024 and I continue to be pleased with the progress we have made in managing our key working capital levers. We are updating our 2024 full year outlook that we outlined on our Q4 call, given the weakness of the yen as well as the timing of new product introductions and providing our outlook on Q2 2024. As discussed during our Q4 2023 call, we continue to expect a first half revenue decline of high teens to low 20% range. We also noted that within the first half of the year, we expect Q2 to be the weaker quarter of the 2 quarters in terms of growth versus prior year as we anticipate a shifting of orders from Q2 last year into Q3 this year. Based on our stronger-than-expected Q1 and continued weakness of the Japanese yen, we now anticipate revenue for Q2 in the range of $167 million to $172 million, and gross margin is expected to be in the range of 24% to 25%.

Operating loss is expected to be in the range of $43 million to $40 million, and net loss per share is expected in the range of $1.81 and $1.74 per share. For the full year 2024, given the continued weakness of the Japanese yen and timing of new product introductions, we now expect revenue in the range of $815 million to $860 million. We anticipate that more than 60% of our full year revenue will come in the second half of the year. Consistent with our comments during the Q4 call, we continue to anticipate the second half of the year revenue growth in the mid-single-digit percentage. 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, given that the timing of orders is challenging to forecast even under ideal conditions.

Large orders that shift from 1 quarter to the next cause material fluctuations in our quarterly growth rates and cash flow performance. Additionally, our revenue expectations for the remainder of the year contemplate a euro exchange rate of 1.10 and Japanese yen exchange rate of 145 to 150 using estimates based on Reuters FX pull. The expected Japanese yen forecast also will impact our 2024 gross margin outlook. We continue to anticipate that our 2024 gross margin will improve significantly but we are now expecting an average gross margin of 31% to 33% with an anticipated Q4 2024 exit gross margin rate above 34%. As Glen mentioned, we expect that the combination of our COGS 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 the Q2 24 gross margin will show modest improvement from Q2 last year, and we expect sequential improvement every quarter from 2023 and with stronger gross margin expansion in the second half of the year as more significant cost savings improvements moved through the P&L, and we compare against annualized pricing adjustments. We are pleased with our progress on resizing our cost structure and are now targeting 2024 operating expenses in the range of $308 million to $326 million or approximately 38% of revenue. The anticipated decrease from 2023 primarily reflects previously announced efforts to align our cost structure more closely 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%, with an operating loss in the first half and an operating profit in the second half of 2024. In terms of other notable modeling assumptions for 2024, we now anticipate other expense of around $30 million, including approximately $15 million in net cash interest expense and $14 million in estimated fair value adjustment associated with our term loan. We also expect full year tax expense of approximately $3 million, driven by our foreign jurisdictions. We anticipate a diluted share count of approximately 28.8 million shares, exclusive of any additional issuances under our ATM. As a result, we expect our full year net loss per share to range from $3.13 to $2.71.

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 approximately 1% of anticipated 2024 revenue. That concludes my commentary. I’ll now turn the call back over to Glen for some additional comments.

Glen Weinstein: Thank you, Julie. We are pleased with the progress on our operational restructuring plan thus far, and we expect that our efforts in 2024 will provide a solid foundation for delivering long-term value for our shareholders, our employees and our customers. That concludes our remarks. Operator, we’re ready to take questions.

Operator: [Operator Instructions] And our first question comes from Asiya Merchant with Citigroup.

Asiya Merchant: If you could just kind of elaborate on the competitive dynamics you’re seeing here in the marketplace. And if you think as you kind of ramp operations back up on how you think about your retailers, e-tailers? Are you seeing stocking activity kind of resume on both ends? And I believe when you were going through the acquisition, there was a retailer that had kind pushed out orders. Has that retailer sort of come back to you guys? Or should we be expecting momentum here in the back half?

Julie Zeiler: Sure, Asiya. So you asked a number of questions. I think First of all, and consistent with our discussion in Q4, we continue to see a very aggressive and competitive environment, and we see an overall market on consumer durable goods to be relatively sluggish. That said, I think as we look at our performance for Q1, and as Glen noted, in part as a result of some fast-selling end-of-life SKUs, we see the market overall performing roughly as we expected with some variation across regions. And we continue to work across all of our retail partners on reengaging and we’re pleased with progress that we’re making. We have no further comments to make on that thus far. Glen, do you want to add anything?

Glen Weinstein: No, I think that generally covers it. Look, the market dynamics in the various jurisdictions are slightly different, but this is a highly competitive market in all — in EMEA and the U.S. and also in Japan. We’re seeing a lot of innovation from third parties, and it’s really driving us to meet and beat what we’re seeing enter the market as in certain jurisdictions the increasing adoption and the price points at which these products sell.

Asiya Merchant: Okay. And then just a follow-up, like on cash flow. I understand the — how you guys are thinking about cash flow here in the back half as well. Should we be anticipating any warranty for cash infusion? Or do you think given the expectations for the back half of this year, the cash is sufficient to meet your working capital needs and OpEx needs?

Julie Zeiler: Sure. So discussed in our filings, we went through quite a rigorous process in establishing our term loan. And as I have said and we’ve discussed, liquidity and careful cash management will remain a significant focus for our team as we work through our turnaround efforts this year. We will continue to look at opportunities to drive for that modest return to profitability and modest positive cash flow in both Q3 and Q4.

Operator: [Operator Instructions]. And with no further questions, this will conclude the Q&A portion of today’s call. I will now turn the call back over to Karian Wong for closing remarks.

Karian Wong: Thank you, everyone, for joining us today. We look forward to updating you on our progress on our Q2 conference call. Have a great day.

Operator: And this will conclude today’s conference. Thank you for your participation, and you may now disconnect. Goodbye.