IRBT - NASDAQ

Thank you for standing by and welcome to the Third Quarter 2021, iRobot Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. To ask a question, [Operator Instructions]. Please be advised that today's conference is being recorded. If you require any further assistance, please [Operator's Instructions]. I would now like to hand the conference over to your speaker today, Mr. Andrew Kramer, Vice President of Investor Relations. Thank you. Please go ahead, Sir.

Thank you very much, Operator. Good morning, everybody. Joining me on today's call are iRobot's Chairman and CEO, Colin Angle, and Executive Vice President and CFO, Julie

Good morning. And thank you for joining us. We enjoyed a strong third quarter performance while executing on our plans and navigating a stressed and fragile supply chain environment. We generated third quarter revenue of $441 million, an increase of 7% over the prior year, and ahead of our plans entering the quarter. Our revenue performance benefited from the timing of orders as it shifted from Q4 into Q3. The combination of higher than anticipated revenue, modestly better gross margins, and prudent spending enabled us to deliver third quarter operating profitability of $48 million and EPS of a $1.67. We've been pleased to see that demand for Roomba has remained healthy. Revenue grew in each of our major geographies led by 15% expansion in EMEA, 5% in the U.S. and 2% in Japan. Roomba robots occupied 8 of the top 10 best-selling RVC models in the U.S., 6 of the Top 10 in EMEA, and 7 of the top 10 in Japan. The excellent reception from retailers and consumers of our newest robots underpin solid 14% growth from the mid and premium tiers of our portfolio. Direct-to-consumer revenue grew 13%. We're seeing existing connected customer revenue trend very favorably, both in absolute dollars and as a percentage of our total revenue. Overall gross robot ASPs grew 3% versus the same period last year. While units shipped were relatively unchanged. We finished Q3 with over 12.5 million connected customers, an increase of 60% from the same period last year. Over the past several months, we made important progress on executing our strategy to drive innovation and differentiate our products, build stronger relationships with our customers around the world, and nurture value with them. In September, we introduced the latest upgrade to our Genius Home Intelligence platform, along with the Roomba J7 Plus, our first robot designed with Genius from the inception. I'll spend more time on this milestone in a minute. In October, we expanded our iRobot select subscription service to include the Roomba J7 Plus. iRobot Flex is now scaling quickly in the U.S., while counterparts from Japan, the iRobot Smart Plan is also enjoying strong growth. Overall, we ended Q3 with nearly 50,000 global subscribers, with approximately 40% of these customers in the U.S. Since launching iRobot select a year ago, we have accelerated past the pace of adding new subscribers from dozens per week to hundreds per week to over a thousand customers per week. Last week, we announced a new partnership with Bona to sell their hardwood and hard surface floor cleaning solution alongside our Braava jet M6 robot mop. This relationship underscores our ongoing commitment to provide our customers with high value accessories and highlights the opportunity to further expand overall accessory sales which are up 33% for the first 9 months of the year. We also continued to make good progress in moving our new CRM and related digital marketing tools and technology into production. With the implementation of new systems for our customer care teams, we are increasing call-center productivity and effectiveness, which in turn is enabling us to optimize costs and raise overall customer satisfaction. Looking ahead, our long-term success will be anchored around our ability to elevate our value proposition to consumers around the globe, and further differentiate our robots in a competitive marketplace. Accordingly, I'd like to spend a moment outlining why the innovation within Genius 3.0 and the J7 plus is so critical. We see consumer robotics following a similar path to personal computers and cell phone, in which the software that powers these products ultimately becomes the primary driver of consumer buying behavior. This is critical to our ability to extend our technology leadership and ensure that Roomba and Braava remain the top four cleaning robots within -- with customers worldwide. With the newest version of our Genius platform, we've taken a major leap forward in how we apply AI machine learning and home understanding. Powered by Genius, Roomba J7 Plus takes the time to understand your cleaning preferences, learning your cleaning rules, ask for and respond to feedback, and remember how to react in the future. It even recognizes and avoid cords and pet waste. We believe so strongly in our precision vision navigation technology to identify and avoid solid pet waste, that we will replace any Roomba J7 Plus that fail to live up to our pet owners official promise. It's exciting to see that the superior intelligence of our robots is starting to emerge as a key differentiator in the marketplace. As we move forward, we plan to continue enhancing Genius in ways that are aimed at enabling our customers to precisely direct where, when, and how our floor care robots clean, while seamlessly integrating our products into their lifestyles. Many of the newest features and functionality within Genius are unique in the marketplace, thereby enabling us to deliver a very satisfying cleaning experience that we believe will increase the likelihood that our customers will remain loyal to iRobot over the long term. And Genius is more than a robot intelligence system. It is a home intelligence platform. We explicitly refer to it that way because our vision for iRobot extends beyond robot floor care. Over time, we expect that Genius will support our ability to build out a larger ecosystem by entering new adjacent robotic and smartphone categories. Before we discuss our outlook for 2021, it is important to remember the wide range of challenges we've been navigating and the impact they collectively had on our anticipated financial performance. More specifically, at the time of our Q2 call, we called out the following developments. [Indiscernible] conduct a chip shortage left us unable to fulfill a significant level of anticipated orders in the second half of 2021 and we adjusted our top-line outlook accordingly. In addition to scaling back our top-line ambitions, we also began implementing a range of cost of surety actions to mitigate approximately $55 million in higher than expected costs, associated with sourcing raw materials, procuring integrated circuit, complementary componentry necessary to produce our robots, and shipping our products. Since our Q2 call at the end of July, we have continued to manage through component and availability challenges. We also are contending with longer shipping time-frames, delays in shipping, and other related logistical issues that further threaten our ability to expeditiously fulfill anticipated Q4 orders. Given these dynamics, we have refined our FY'21 revenue outlook range, to be from 1.555 billion to 1.59 billion. Our FY'21 expectations for operating income and EPS have changed meaningfully since our Q2 call in late July. Beginning in early August, and continuing to September, oceanic transport and airfreight costs have escalated beyond what we had contemplated in July for the second half of the year by approximately $13 million. We're taking steps to limit the impact of these higher costs by further optimizing our second-half channel activities, thoughtfully adjusting a hiring plan and refining our working media, and limiting other discretionary spending. In addition to incrementally higher shipping costs, our updated 2021, outlook factors in recent developments on the tariff front. Up until earlier this month, we were optimistic that we will be granted Section 301 tariff relief at some point during the second half of this year. The view is based on bipartisan activities to restore the tariff exclusion process including legislation that was passed by the U.S. Senate in June to reinstate tariff exclusions and extend a retroactive refund for any tariffs paid this year. But we were pleased that the U.S. Trade Representative recently restarted it. They targeted tariff exclusion process for Section 301 duties, the current processes, unlikely to be finalized and implemented before the end of this calendar year. Additionally, while we believe we have a compelling case to have our exclusion reinstated, any exclusion granted under the current rule making would only refund tariffs paid since October 12th, 2021, rather than from the start of 2020. We remain actively engaged with key stakeholders in Washington to advance our position. For the tariffs exclusion no longer likely for the year our full-year outlook adds $42 to $43 million back into our cost structure. As a result, we now expect 2021, operating income. in the range of 36-55 million, with EPS ranging from $1.15 to $1.74. As the tariff exclusion being granted for this year retroactive to January 1st, our EPS performance would've been $1.24 to $1.27 higher and within expectations we set at the end of July. Although this development further depresses our 2021, earnings performance, we believe that taking any additional material cost reduction activities would substantially impair our ability to execute on our strategy over the coming quarters and derail our ambition to drive long-term value creation. We move forward focused on successfully closing out 2021, while also advancing our plans for 2022, and beyond. We're very excited about the opportunities that lie ahead, and I will share some additional perspective on 2022 in just a few minutes. But at this point, I will turn the call over to Julie for her financial review.

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 operating profit margin, effective tax rate, Net Income per share, will mean the corresponding non-GAAP metric. All quarterly comparisons are against the third quarter of 2020, unless otherwise noted. We reported Q3 results that were generally better than we had expected at the start of the quarter. Total third quarter revenue grew 7% to 441 million, with the strong performance against our plans due largely to the timing of orders. Geographically, revenue grew 5% in the U.S. and 8% internationally, as EMEA and Japan increased 15% and 2% respectively from a product mix perspective, Roomba robots and accessory revenue represented 90% of our Q3 revenue, with the remainder being Braava robots and accessory sales. We estimate that approximately 60% of total third quarter revenue came from e-commerce, which comprises our own website and app, dedicated e-commerce websites, and the online arms of traditional brick and mortar retailers. Our D2C revenue grew 13% to $40 million or 9% of total revenue. Strong D2C growth in EMEA and Japan, more than offset a modest decline in the U.S.. We expect full-year D2C sales will represent 12% to 13% of total full year revenue in 2021, Our gross margin of 37% in Q3 was better than expected by approximately 200 basis points due primarily to favorable changes in promotional activity, timing of certain air freight costs that will now impact Q4, leverage on our fixed costs and lower return rates. Compared with last year's third quarter, our gross margin declined by 11 percentage points. More than 60% of the decrease was due to tariff costs of $14 million in supply chain headwinds. The remainder was split between pricing and promotional activity, higher warranty expense, and unfavorable channel and product mix shifts. Third quarter 2021, operating costs of $115 million increased 8% and represented 26% of revenue. While we continue to fund key initiatives, we remain disciplined with our spending as we moderated working media, adjusted the timing of new hires and other personnel-related actions, and carefully manage discretionary spending. Our Q3 2021, operating income was $48 million or 11% of revenue. Our third quarter tax rate was approximately 2%, which reflects changes in our full-year tax rate assumptions primarily associated with lower expected full-year operating income. Our net income per share was $1.67. We ended the third quarter with $248 million in cash and short-term investments, a decline of 168 million from the end of Q2. The sequential decrease primarily reflects the $100 million accelerated share repurchase program and cash outflows associated with changes in working capital, most notably accounts receivable and inventory. It's worth noting that our cash and short-term investments include a $30 million position in Matterport, which became a publicly traded Company this summer. This event resulted in a $27 million gain on our Matterport investment and is reflected in other income in our third quarter GAAP Income statement. Our Matterport shares were classified as a short-term investment and they remain subject to a lockup provision until early next year. The value of those shares will be marked-to-market each month, until the investment is sold. Third quarter DSOs were 50 days, a 10 day increase against the same period one year ago, but slightly less than the third quarter of 2019. The increase reflects shifts in the timing of orders, but toward the back half of the quarter and a mixed shift among our retail partners. Q3 ending inventory was $354 million, or 116 days, compared with $218 million, or 93 days, at the same time last year As expected, inventory remained elevated in the third quarter, which primarily reflects higher in transit inventory as global supply chain issues extend shipping times across all primary modes of transportation. We expect inventory and DII will revert back to more normalized historical levels in the fourth quarter. With the quarterly review complete, let's move on to our fourth quarter and full-year 2021 outlook. As Colin noted, we have been managing through a range of issues that have impacted our revenue and profitability expectations. In terms of our top-line, we have refined our 2021 revenue outlook within the prior range, due to the combination of component availability and shipping-related issues. We now expect 2021 revenue in the range of $1.555 billion to $1.59 billion dollars, which would result in annual growth of 9% to 11%. Our updated full-year revenue outlook implies fourth quarter revenue in the range of $445 million to $480 million. As a reminder, our revenue expectations contemplate Yen and Euro exchange rates roughly in line with current rates plus or minus 5%. In terms of our gross profit margin, earlier on the call, Colin outlined the incremental transportation and tariff headwinds that will further pressure gross margin. For the full year, we now expect gross margin of approximately 36%. This updated view reflects anticipated 2021 tariff costs between $42 and $43 million. As the tariff exclusion's been granted this year and applied retroactively to January first, our full-year '21 gross margin would have been approximately 39%. We expect a Q4 gross margin between 30 and 32%, which includes anticipated tariff costs of around 13 to $14 million. Approximately half of the decline in our anticipated Q4 '21 gross margin versus the fourth quarter of 2020, will be driven by a higher supply chain costs, followed by tariffs, changes in pricing between this year and last, and shifts in product and channel mix. In terms of our fourth quarter and full-year operating costs, we expect a meaningful sequential increase in our sales and marketing costs, as we invest in working media to drive holiday season purchasing. Based on planned Q4 spending of the high $160 million range, we are targeting full year 2021 operating costs of approximately 523 million or 33 to 34% of total revenue. Within our full-year 2021 spend, we still anticipate that our sales and marketing costs will range between 18% and 19% of total revenue, with research and development expense targeted at around 10%, and general and administrative cost of approximately 5%. As a result, we expect a 2021 operating profit between 36-55 million, which implies an operating profit margin between 2 and 3%. These expectations imply a Q4 operating loss in the range of $17 to $36 million. In terms of other major modeling assumptions for 2021, we expect other expense of around $2 million. We are now anticipating an effective tax rate between 5% and 7%, which primarily reflects lower operating income. As a result, we anticipate a full-year EPS range from $1.15 to $1.74, with an anticipated diluted share count of approximately 28 million shares. Had a tariff exclusion been branded in the fourth quarter retroactively to January first, we estimate that our 2021 EPS would have been between $1.24 and $1.27 higher, on an after-tax basis, using a higher tax rate of 17% on the assumption of higher operating income. We anticipate a fourth-quarter net loss per share in the range of negative $0.63 to negative $1.24. We continue to expect 2021 capital spending in the low $50 million range. And we anticipate a strong quarter of cash generation in Q4, which will enable us to begin rebuilding our cash position. In summary, to echo some of Colin's earlier comments, 2021 presented us with a number of unexpected challenges. While we will fall short of achieving our targets this year, we would frame 2021 as another year of solid revenue growth, outstanding collaboration across the organization, to limit the impact of rising costs and component supply constraints, and excellent execution to advance our strategy and position as for long-term prosperity. I'd like to turn the call back to Colin for some final thoughts.

Thank you, Julie. We are understandably very excited about our strategic direction and the potential we see to create essentially greater shareholder value. By advancing innovation to differentiate the iRobot experience, we expect continued success in expanding our connected customer base. We intend to delight those customers from the moment they purchase the product and begin using them. We believe that happy iRobot customer will increasingly buy more products and services directly from us over the lifetime of their ownership. Our highest priority, R&D, commercial marketing, and operations initiatives, are geared around supporting this simple overarching strategy. We're confident that continued execution will enable us to expand our business and create significant value over the long term. As we work to refine our planning for 2022, we currently expect that our actions to improve supply chain resiliency will help us move beyond our product supply constraints in the second half of next year. We expect a higher revenue growth rate in '22 than in 2021, as we anticipate improved supply will translate into a much stronger top-line performance in the second half of next year. We are pleased with a trajectory of existing connected customer revenues this year, and look forward to moving into production with a range of new CRM capabilities over the next quarter or two. We believe that these new tools will play an important role in our efforts to further accelerate the growth of our existing customer revenue. We are bullish about the potential of our iRobot Select service and other similar subscription offerings outside of the US. These offerings represent new ways for us to increase existing customer revenue, while also appealing to price-sensitive customers who might otherwise opt for a less expensive robot from the competition. As we continue addressing -- as we continue adding thousands of new subscribers each quarter, we expect to exit '22 with a growing base of annualized recurring revenue. A major cost headwind next year will be higher transportation costs, which we expect will remain elevated through the first three quarters of next year. Tariffs remain a wildcard. While we believe an exclusion is likely, it remains to be seen how quickly it can be granted. If tariffs remains in place next year, we expect that our '22 tariff costs will decline meaningfully from 2021 levels. Our initiative to achieve scale with our production in Malaysia by the end of the year remains on schedule, although there's more work for us to do as we finalize our product road maps and production plans for next year. We believe that 2022 will represent a major turning point in our efforts to transform iRobot into a more defensible, profitable enterprise with a compelling value proposition, that resonates across a growing global base of loyal connected customers. As we execute on our plans to expand our base and grow the lifetime value of each iRobot customer, we plan to remain disciplined with our expanding. As a result, our assumptions for next year include an expectation that our second half revenue, operating profit, and EPS performance will be meaningfully better than the first-half. We are excited about what's in store for our Company and our shareholders. We look forward to offering a deeper dive into key areas of our business and reintroducing our long-term financial model, when we hold our Investor Day on Thursday, December 9th,, 2021. That concludes our comments. Operator, we will take questions now.

[Operator Instructions] Your first question comes from the line of Asiya Merchant from Citigroup. Your line is open. Please ask your question.

Good morning. Thank you for the opportunity to ask a question. Clearly, the challenges are unprecedented and we've heard that from several of the companies that we track. If I may -- I'm just trying to parse through all these comments on revenue growth being higher in '22 which makes sense given you have a bunch of unfulfilled orders to fill. If you could help guide investors and analysts, are we looking at a very back-end loaded, I mean even more back-end loaded than is normal for '22, and then I have a question on margins as well, clearly tariffs get some mitigation from Malaysia into '22, but then you have these elevated transportation cost that you're highlighting. Is it reasonable to assume that margins will be up significantly in 2022, will they be down relative to '21. I'm just trying to parse through the comments to see if [Indiscernible] can offset -- or the mitigation of [Indiscernible] in Malaysia can help to offset -- can be offset return the transportation costs that you're talking about. Thank you.

Well, I'll jump on the revenue question. We see in the first half of next year, there's a few things that are impacting, but the challenge of getting all of the chips that we need to build all of the robots that the market would absorb, will still be something we're working through in the first half of the year. And it only takes one chip to stop us from building a robot in certain circumstances. And so that -- when we think about first-half, second-half, working through those supply chain parts availability challenges will cause the first half to be lower in revenue than it would be otherwise. And that will have the impact of creating a larger back-end loading effect because we think that we'll have put those parts availability challenges largely behind us by the end of the first half.

And then if -- I'll see if I add on to that with thinking about gross margins. And I would start with, as we talk through a number of these challenges that we're facing this year, we continue to believe that they will normalize over time. And so as we look forward, and we have limited visibility in how that will play out, and we're still working through our targets for 2022. But if you think about some of the factors that we've been talking about, certainly tariffs, whether or not an exclusion is granted and the complementary move and scaling of our products in Malaysia will be a benefit as we think through the going forward. If you think about the headwinds stabilizing, and then normalizing, as we go through the year and then, of course, the work that we will continue to do in optimizing our channel strategy. All of those things will come together in our targets for '22, and will be part of building out a long-term financial model, which we expect to share with additional color at our analyst -- at our Investor Day on December 9th.

Okay. But if I may, I mean, I think the overarching question is, will margin see improvement into '22, just given all these things that you've put together. I understand they'll be -- there was an expectation that margins would -- in slack from --

Margins will be improved in '22. The headwinds are moderating in '22, the energy in the changes we're making to our business model are tailwinds to margins. And the -- and certainly, we will see an improving environment execute as next year rolls on. So absolutely, yes.

Okay. Great. Thank you for the clarification.

Yup, no worries.

Your next question comes from the line of Mr. John Babcock from Bank of America. Your line is open, please ask your question.

Hey, good morning and thanks for taking my questions. Just quickly to tag along on that last comment there, just when you mentioned that margins will be improved, is that relative to 3Q, 4Q margin levels are the full-year 2020 levels?

I think you need to think about it in full-year term.

Okay. That'd be gross margins or that'll be operating margins?

Both.

Okay. Thank you, and then just back with regards to the iRobot select service, could you talk about the investments that you've made to build out this program. And also what further investments will be needed as this scales up? Then adding to that, what competitive barriers exist that might make it challenging for your appears to build out a similar subscription service?

So the investments that we've had to roll out the subscription service is a lot of [Indiscernible] investment to be able to service a customer. Turn on, turn off the robots, handle payments, makes sure that churn -- involuntary involuntary churn is managed, and the iRobot select service is definitely much more than just a rental program. There's services that are uniquely offered to iRobot select customers around getting accessories automatically sent to them. Having dedicated resource if they have any questions with their robot. It's giving a real white glove experience, which has resulted in very high customer satisfaction with the service, and very favorable turn rates that we've been able to see that far. So we think this is an amazing way to sell a product and I think that resonates well with consumers who are frankly used to paying as they go for cleaning services in a home. So it's a very easy and familiar way of paying for this type of end benefit. The more to your question that I couldn't cover your question. I'm happy to act poetic about the [Indiscernible] descriptions.

Yes, no is that -- I mean, I guess maybe you probably answered it, but I guess part of the question was also just around the competitive barrier.

Yes, competitive barriers.

Yes.

So iRobot's competitive strategy really centers around this growing differentiation in the intelligence of our robots. Their ability to avoid getting stuck, their ability to offer users control over where and when the robots operate. iRobot is unique in the marketplace with its ability to clean around an object in a room. It's unique in the marketplace with the ability to allow a user to schedule when a particular room could be cleaned, much less than particular object in the room. And we've rolled out things where you can even have that schedule be automatically activated by simply leaving the house. So this idea that the robot works around your schedule, and with the new precision vision navigation, be able to recognize objects on the floors that, if they're there permanently, the robot can automatically add a -- we call it a keep out zone so that the robot doesn't go back there. Or if it's something you just forgot to clean up, it can actually tell you to go clean it up and then you can send it back to finish the cleaning job. This growing knowledge about your habits, about your home and with every mission, having the robot be able to do a better personalized job, creates a stickiness with our customers. Because if you ever left iRobot, all of that knowledge around your habits and your -- the challenging areas of your home to clean and how to go about doing it would be lost. And so that we have this personalized intelligence base differentiation strategy, which doesn’t [Indiscernible] very well with a subscription style sale process. And at the same time, with the subscription, we're lowering the barrier to invest in a robot that has this type of intelligence and capability. It's an integrated strategy bearing intelligence with subscription to give a dramatically larger lifetime value on a customer by customer basis, than a single anonymous purchase of a robot at a retail outlet.

Okay. Thanks for that Colin. And then -- I guess like the next question I had, last quarter, you mentioned that you were evaluating potential price increases. Are there any updates on your thinking around that, particularly in light of the rising cost environment and your expected margin levels?

It continues to be dynamic. We definitely have adjusted how promotional we will be. We've adjusted how much we're investing in demand generation. The changes in discounting and promotion results in a material increase in ASP. s. And then very, very tactically, we made some price adjustments. So we haven't done anything wholesale at this moment in time. But we definitely affectively increased ASPs through our commercial strategy.

Got you. That's helpful. Then the last question before I turn it over. Can you just talk about your work with the manufacturing partners? What opportunities might exist there to reduce your production costs? I mean, at least in kind of looking at where some of your peers might be? I mean, it seem that they might have more favorable terms and so just want to kind of get a sense for how you're kind of working with that relationship and what opportunities are out there?

We take this very, very seriously and have established aggressive year-over-year targets for COGS efficiencies on existing products. We're very confident that if you look at like-for-like bills materials, that our robots are not more expensive to build. Our robots do include componentry that our competition chooses not to invest in, and that may include silicon parts with different commitments to security or reliability. We put a lot of investment into sensing on the robot to ensure that the robot less frequently gets stuck and can do a better job cleaning. So it's -- this is not a, every robot is created equal. It's a situation where we make targeted investments in customer experience, as we select what goes into one of our products. But to your question about manufacturing costs, we have very explicit opportunities every year for substantial improvements in COGS on our existing products.

Okay, great. Thanks for the help.

Yeah.

Your next question comes from the line of Ben Rose from Battle Road Research. Your line is open, please ask your question.

Yes, good morning. To dive a little deeper into the status of manufacturing in Malaysia. Looking out to the first quarter of this next year, can you -- I guess the first question would be, could you speak to roughly what percentage of U.S. bound Roombas do you anticipate will be produced in Malaysia?

As I mentioned in the call, we are on track to achieve the level of manufacturing in Malaysia that we had targeted at the beginning of the year. That will be in 2022, about 80% of the product that is destined for North America. We're constantly looking at our product plans and how much of older products are we going to bring into market versus new product? And so that number fluctuate a bit. But at this point, we're 80% there.

Okay. Great. And in terms of looking at the manufacturing costs, notwithstanding all the variables around supply chain componentry and transportation that you outlined in the call. Is it your anticipation that perhaps by mid-year the manufacturing costs for Roombas in Malaysia will be somewhat similar to what you've had in China?

I think somewhat similar is the fare. There will be a slight premium, but it's going to be in the single-digits.

Just a single digit difference?

Correct. So there will be a single-digit premium for Malaysia, which is something that we think we can manage quite nicely.

Okay, great. And then if I may, a final question. Colin, in your remarks in terms of the differentiation of iRobot's product line vis -a - vis the competition, given the anticipated advertising in Q4. Do you think some of your messaging might be around highlighting some of the differences and perhaps some of the shortcomings of the competitors relative to their inability to navigate around some of the objects in the home or not really fulfilling the promise of what a consumer robot should accomplish?

You will definitely see iRobot starting to speak more explicitly about the differentiation based on the superior intelligence of our robots. We've been investing for a number of years in making sure that our robots are by far the smartest in the marketplace. And with the launch of the J7 Plus, with its front-facing imaging technology, we're really able to demonstrate that increasingly, obviously, and talk about the customer benefit in an incredibly clear way. So that's going to be a growing part of the iRobot story. And the growth and the power Genius, I should note, is not just for the J7 Plus. All of our robots that are connected benefit in varying degrees from our technology. I mentioned earlier that our robots have the capability, for example, of cleaning while you're away. That's a benefit that even our entry level connected robots can benefit for [Indiscernible] So I tease that there is a moment in time when we stopped buying our PCs based on the hardware and started buying it based on what operating system that personal computer ran. I think that we're getting towards the point in the robot industry, where the intelligence is such a differentiating and important factor, that we can -- that customers will say, while what's software does that robot run and how is that being incredibly important part of the decision making process.

Okay. That was very helpful insight. Thank you.

Yeah.

Your next question comes from the line of Mike Latimore from [Indiscernible] Your line is open, please ask your question.

Hi, this is [Indiscernible] on behalf of Mike Latimore. Could you give some color on how the inventory levels are with your channel partners, are the inventory levels at an all-time low, or does your channel partners have enough inventories with them? So any color on the inventory levels, that could be helpful.

Sure. As we stand in Q3, we believe that retail inventory levels declined sequentially from Q2. Overall, we think that as we look forward to the rest of the year, we will end the year with relatively lean inventory at our retail partner.

Alright, and are you getting to the revenue or performance, I see timing of the orders have benefited a lot of revenue has moved from Q4 to Q3. Could you give some color on what caused that?

One of the reasons why we give full-year guidance is the perpetual challenge of hauling the line between Q3, Q4, when we have a tremendous amount of inventory in the ports exiting factories being unloaded and because it's a period of high demand, and simply the availability of ships or depending on how revenue is recognized, waiting to see which retailers accept and pick up inventory when, just creates a lot of challenge so that we have a -- it's not unusual for there to be some adjustment between that Q3, Q4. There's really nothing particularly interesting or material about a shift from Q3 to Q4. It's just our ability to call with precision how much is going to hit where. And this time we thought a little bit more would get into Q3 and got pushed, which is -- sorry, got pulled forward. So probably the only time this year where we were overly pessimistic about the timing of shipping.

Your next question comes from the line of Derek Soderberg from Colliers Securities. Your line's open. Please ask your question.

Good morning, everyone. Thanks for taking my questions, I'm really looking forward to hearing the updated long-term model at the coming Investor Day. Colin, I wanted to start with you. Just want to get your thoughts on the industry growth rate for robot vacuums. How sustainable is some of this pandemic-driven demand as you look into 2022 and beyond? And then as it relates to you guys first in the industry, I imagine your competitors are having some similar challenges. But just curious if you think you guys are growing faster than the industry as a whole, either maintaining or growing market share across all price points or maybe just the high-end price points. In the past, you've been pretty aggressive and prioritized growth in market share a bit. Has that strategy changed at all in this tougher environment?

Sure. I will start with reiterating that the robot vacuum cleaning market is underpenetrated. Household penetrations are quite low. From the 13 - ish percent of households in the US, which would be the most dense, or most fully penetrated, arena to EMEA and Japan, where those numbers are significantly lower. So the opportunity remains extremely large. We think that the opportunities is into the 20s and 30s, before we see any saturation effects in the marketplace. iRobot commands a very large share in all of these markets. So when you talk about, do you think we can grow share versus what do we think we'll do to maintain share? It's a difficult question. I would say that, we've always focused first on winning and ensuring we maintain true leadership at the premium side, we make the smartest robots in the world, delivered in beautiful, high-performance hardware. Our customers value that and that's a winning strategy consistently in the mid-price points with the launch of the i3 robot. We've really made a statement that we continue to be very aggressive in the mid-tier with our investments. And then as we get into the lower price tiers, where competition has focused, it is reasonable to imagine some continued, albeit slow loss of share down at the bottom so that our approach to defending our market share is not linear across all price points. But I would point out that our iRobot select strategy, which we talked about earlier in the call, is an exciting way for us to be more competitive at the lower price points with our higher-end products, such that we can deliver robots with these full implementations of superior intelligence, and really get across the fact people -- the experience that, honestly they came to robot vacuuming expecting, that this robot could be set loose in their home, and complete every mission, and give the customers control over where and when they want the robot to act.

Got it. Got it. I appreciate the detail. And then I just wanted to clarify one thing on the tariff exclusion. None of that is baked into any sort of guidance or commentary on 2022. And then more specifically is the thought that once we exit this calendar year, it's pretty highly unlikely that you're going to get an exemption for the period before October 12. And if this new version of legislation is passed, would that likely exempt you guys from tariffs for the full calendar year 2022?

Let me try to answer as much of that question as I can. The current registry language around the exemption process is currently open for comments. That means that it is not final as to what the exclusion process, or what an exclusion will mean, that has not been finalized. The proposed language, if it stays as currently written, would grant companies which received an exclusion relief only back to October 12th of this year. And so that tariffs paid prior to October 12, would be lost or would not be refunded. The exclusion language is currently silence on how long an exclusion would be for if it was granted. So I can't comment meaningfully on that. So we had a specific language in the senate bill would said [Indiscernible] the things we liked earlier in the year. But that language was not reflected in the most recent language presented by the USTR. So we're in a holding pattern We think the -- our case for being excluded remains very strong and we're optimistic, but I think, that's all I can comment on at this point.

Yeah, that's fair. Thanks, guys.

You bet.

Your last question comes from the line of Chris Ranga from Needham. Your line is open, please ask your question.

Hi. Good morning, everyone. Thanks for taking the question. This is Chris Ranga filling in for Jim. On the direct-consumer front, 12% to 13% of sales for [Indiscernible] anticipate that trending and what is driving growth there?

So the iRobot continues to roll out more competent and effective tools for targeting. We continue to invest in growing our direct relationships with our customers and increasingly, we're able to go back and retarget customers who previously bought robots. And of course, targeting someone who already owns a robot to get an upgrade or a second robot or accessories has significantly favorable economics than going and finding and bringing a new customer into the franchise. So this is an area that we've been investing in. This is an area that we think will be a gross margin and gross profit tailwind, as we scale it. And is one of the very exciting dimensions of our new and growing strategy where we're able to deliver a product with this intelligence. We've talked about before, create a long-term relationship based on the fact the robots learning their home. At the right time, go back to them for upgrades and be able to transact with them very, very efficiently because of the relationship we have with them and improve our profitability and lifetime value per customer. So this is something that we're very excited to see continue to grow. And you should expect it to remain a focus of iRobot investment and strategy in a go-forward basis.

Great. Thank you very much for that detail. And sorry, just one more for me. On promotional activity in Q4, do you expect that to be in line with prior normal years or any departure there? Thank you very much.

We're trying to size our investment in keeping with the amounts of product that we need to move, and so that using our investment dollars very strategically. That said there is -- we have very significant ambitions for driving the amount of demand for robots, that you will still certainly see plenty of iRobot ads on television and on your social and digital platforms.

Thank you very much.

You got it.

That concludes our Q&A session. I will hand back the call over to Mr. Andrew Kramer.

Great. Well, thank you all very much for joining today. I know today is a very busy one for investors with -- and we appreciate your attention to our results. Obviously, appreciate your support. Look forward to speaking with you over the coming weeks and months, and you should see additional detail regarding registration for the Investor Day over the next couple of weeks. Thanks so much.