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iRobot Stock Jumps 6% on Q3 Earnings Beat and Raised Guidance

iRobot (NASDAQ: IRBT) reported strong third-quarter 2017 earnings after the market closed on Tuesday. The consumer robotics specialist, best known for its Roomba vacuum, posted revenue growth of 22%, while earnings per share grew 9%. Adjusted for one-time factors, EPS declined 26%. 

Revenue and earnings both beat Wall Street's expectations. Moreover, the company upped its revenue and earnings guidance for full-year 2017.

Shares of iRobot have jumped 5.8% in after-hours trading on Tuesday as of this writing, which we can attribute to the earnings beat and the brightened 2017 outlook. This bodes well for the stock's performance on Wednesday.

iRobot stock has gained a whopping 78% for the one-year period through the after-hours pop on Tuesday, versus the S&P 500's 22.5% return for the same period.

Image source: iRobot. 

iRobot's key quarterly numbers 

Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Revenue 

$205.4 million

$168.6 million

22%

Operating income

$23.9 million

$27.5 million

(13%)

Net income

$22.1 million $19.5 million 13%

GAAP EPS

$0.76

$0.70

9%

Adjusted EPS

$0.52

$0.70

(26%)

Data source: iRobot. GAAP = generally accepted accounting principles.

Net income and GAAP EPS include a tax benefit of $0.16 relating to a new 2017 stock compensation accounting standard and $0.08 from an adjustment to the original purchase price allocation for the acquisition of its Japanese distributor in the first quarter. The adjusted EPS comparison strips these benefits out.

Wall Street was looking for iRobot to post adjusted EPS of $0.47 on revenue of $204.52 million, so iRobot swept by the earnings expectation and also beat the revenue consensus.

Investors shouldn't fret about the decline in operating income, which flowed through to the bottom line. Importantly, it doesn't reflect a drop in gross margin, as this metric was 49.8%, up from 48.1% in the Q3 of 2016. Operating income was negatively impacted by increased spending on research and development, which equated to 14% of revenue, up from 11.7% in the year-ago quarter. R&D spending is a good thing for a company whose growth depends upon innovation. The Robopolis acquisition resulted in an incremental negative impact of $0.03 per share. The bulk of the remaining impact was due to a ramp in spending on sales and marketing.

iRobot's third-quarter business highlights

  • The average selling price (ASP) of a robot was $249, up from $229 in the third quarter of 2016. 
  • Revenue grew 34% in the U.S., 31% in EMEA (Europe, Middle East, and Africa), and 65% in Japan over the year-ago quarter. In the second quarter, U.S. revenue soared 46% year over year, helped by Amazon's Prime Day and the launches of the Roomba 890 and 690 Wi-Fi connected vacuums across its markets. So while the third-quarter revenue represents a deceleration of U.S. growth, there are good reasons for it. 
  • It completed the acquisition of its largest European distributor, Robopolis, which it expects will help drive increased adoption of robotic floor care products in the EMEA region. 
  • iRobot announced an agreement with Micro-Star International, which the company says is an early victory in its ongoing efforts to defend and protect its valuable intellectual property.

2017 guidance raised and much room for future growth

Given its robust third-quarter results and the continued strong momentum it's seeing in the U.S. and EMEA markets, iRobot now expects revenue to grow 40% and 45%, respectively, in these markets for the full year. Thus, it raised its revenue and earnings guidance as follows: 

Metric

Previous 2017 Guidance

Current 2017 Guidance

Projected Year-Over-Year Change

Revenue

$840 million to $860 million

$870 million to $880 million

 33% to 34% over 2016 consumer revenue*

Adjusted EPS

$1.35-$1.70

$1.65-$2.00

18% at midpoint

Data source: iRobot. *2016 revenue included $5 million from the now-discontinued defense and security robot business. 

While there is increasing competition in the robotic vacuum market, so far competitors haven't been able to make a notable dent in iRobot's rapid growth trajectory. The company has a big head start in the market and it has vast intellectual property. Even if new competitor SharkNinja and/or others are able to capture a decent chunk of the market, the total addressable market is massive and largely unpenetrated. Here's what CEO Colin Angle said on this topic in the press release:

U.S. household penetration of robotic vacuum cleaners is still less than 10%, so there is plenty of runway domestically and even more overseas. With the leading global segment share, at a time when adoption is accelerating, we are in an excellent position to capitalize on the momentum to drive future growth.

While the Roomba line accounts for the lion's share of iRobot's revenue -- 90% in the third quarter -- the company's Braava floor mopping line also has considerable potential. Moreover, investors can likely expect launches of robots to perform other tasks down the road. We know iRobot is working on developing a robotic lawn mower. 

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Beth McKenna has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends iRobot. The Motley Fool has a disclosure policy.