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iRobot Attempts to Reanimate

In a Q&A with <i>TheStreet.com</i>, CEO Colin Angle talks about retooling his home robot unit and insider selling.

Robotics specialist iRobot (IRBT) - Get iRobot Corporation Report has a lot of drudge work ahead of it.

It is planning to revitalize its home robot unit, whose performance disappointed analysts in the fourth quarter, both through acquisitions and the launch of new products in fiscal 2007.

But the Burlington, Mass.-based company hasn't offered any details, which makes it difficult for analysts and investors to assess related risks.

The company definitely needs to bring back energy to its home robots unit. In the fourth quarter of 2006, revenue from robotic vacuum and mop products -- the Roomba and Scooba -- grew about 22% to $41.8 million, from $34 million the year before.

But sales of Roomba, which debuted in 2002, were disappointing.Shares of iRobot plunged 14% after

Monday's earnings report and closed Tuesday's regular session off $2.79 to $16.30.

iRobot also had to deal with hiccups during the year around the market rollout of the Scooba mop, which the company unveiled in 2005 to unenthusiastic consumers. iRobot had to retool the Scooba to bring down the price per unit and clear up inventory issues.

Scooba will be in fewer storefronts in first half of fiscal 2007, compared with the year before. But iRobot says it plans to increase retail distribution in the second half of this year.

In contrast, the company's government and industrial unit showed healthy growth and was up 54% to $19.25 million during the quarter.

In an interview with

TheStreet.com

, iRobot CEO Colin Angle talks about what the new product introductions mean for the company, and the insider selling that has troubled investors.

The Street.com:

The stock is down about 14%. What should investors at this point focus on?

Angle:

This is a long-term story. We have exciting news pointing to the second half of 2007 when we plan to have new products from the home robots division. And we have guided 28% to 30% growth in the second half of the year.

Sustainable Growth?

Based on the fourth-quarter results of the home robots unit, it seems that revenue jumps when you have new products but falls back after those products have been around for some time. Should we be worried about this lack of sustained high growth for the products despite their low penetration?

We don't see this situation as a burst of revenue forward and then falling back. We see the product introductions as iRobot adding legs to the stool. It's a new industry, and we think there's still a great amount of learning to be done.

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Colin Angle
CEO iRobot

We are certainly trying to bake some cautiousness into our model for second half of the year, but we are also trying to bring down cost of product development and accelerate the rate at which we bring products to the market.

The Roomba has about 2% penetration in the vacuum-cleaner market, but shipments grew just about 9% during the year. Roomba has seen single-digit volume increases. What's holding the home products back?

When you look at 2006, it is clear we have not yet reached the tipping point with Roomba. The challenge is that the skepticism surrounding robots continues, though customer satisfaction -- once someone buys a robot -- is at an all-time high. We view Roomba as headed in the right direction, although I would not suggest the magic point has been met.

As for the Scooba, we launched it in 2006. It was the first year for the product, and there was some learning we had to go through. I think we are on much more stable footing now. On the home revenue side, sales were up 20%. But sell-through was 40%. So we are seeing demand for these products continuing to grow very nicely.

The disparity between the two numbers, however, points to the inventory challenges we had to work through. We did have a battery recall for the Scooba, but it did not materially impact our earnings.

Military Money

In 2007, which division -- home robots or the government and industrial robots unit -- should investors be watching more closely?

There are some periods where home robots exceeds the government and industrial division, but growth rates can be lumpy and dependant on demand and new product introductions. It is true the G&I division grew much faster in the last quarter, but it would be foolish to write off the consumer side as being past its peak. This industry is still in its early early years.

On the military side, what will be the growth driver?

In 2007, clearly the

$16.6 million contract

with homeland security specialist ICx Technologies we won recently will add to the revenue. More importantly, the contract means there is recognition that PackBot (the robot designed for military use) is an excellent platform for many different applications. It is something that was not picked up on until then.

The contract also addresses the military police market rather than the explosive ordinance disposal market, which broadens our reach. It is done by taking a third-party sensor and integrating it onto our platform, and so is a very strategic and significant milestone for our company.

It shows PackBot as a platform for third-party developers, and we are looking at partnerships as a way to target markets like homeland security, and first responders rather than just U.S. military.

Though founders and senior management disclosed in July that they would enter trading plans as part of a "portfolio diversification" process, the continued selling of shares by insiders has led to a negative sentiment among investors. Are you looking to change that in any way?

We are very disappointed at how the program has been perceived. We are selling less than 10% of our holding over a year. We did it with a preplanned selling program to spread the sales. If you add up the absolute number of shares sold, it is a tiny fraction of our ownership.

We haven't yet announced any changes to the program. The founders still own 20% of the company, and we are in this for the long haul and are saddened by the opinion that we are somehow trying to get out.

That said, we will look at how the program has been perceived and how we can tweak it. But diversification is something we are committed to.