Museum shop

Will the trade war continue to weigh on iRobot’s revenue?

While the ongoing trade war between the United States and China has been difficult for many companies, i robot (NASDAQ:IRBT) was arguably among the hardest hit technology stocks. After hitting all-time highs earlier this year, the stock has since lost more than half its value after two successive quarters of below-par earnings reports.

Investors will be on the lookout for any good news when the company releases financial results for its recently completed third quarter after market close on Tuesday, October 22. Let’s take a look at the effect of pricing and take a look at iRobot’s previous quarterly results to see if they provide any insight into what investors can expect when the company reports earnings this time around.

Image source: iRobot.

How Tariffs Affect iRobot’s Results

In September last year, the Trump administration imposed a 10% tariff on a slew of Chinese-made products. Since the majority of iRobot’s products are made there, the company took a hit, but management initially thought the levies wouldn’t have a “significant impact on segment growth.”

However, as the trade war escalated, this levy was increased to 25%. In his Q2 conference call, iRobot CEO Colin Angle addressed the issue, saying that the U.S. market is “growing more slowly than we originally anticipated, due to the direct and indirect impacts of the ongoing US trade war.” United States and China and related tariffs,” and as a result, the company was lowering its expectations for the second half.

It wasn’t just a posture. In testimony before U.S. trade officials in June, Angle said the trade war and resulting tariffs had “created significant trade uncertainty for iRobot,” which has weighed on both research spending and development and on hiring.

iRobot now expects direct tariff costs for the year in the $35-40 million range, up from its previous estimate of $20-25 million. The company has raised prices for its products in the United States, but the move should only partially offset price increases earlier this year.

To put those numbers into perspective, iRobot’s net profit for the year 2018 was just under $88 million, so tariffs could potentially eat up nearly half of the company’s profits for that year. year.

Slowdown in results and lower forecasts

In the second trimester, iRobot reported revenue of $260 million, up 15% year-over-year, the second consecutive quarter of growth below expectations. Operating profit fell more than 60% to $5.3 million, producing earnings per share (EPS) of $0.25, compared to $0.37 in the year-ago quarter.

The company cut full-year revenue growth to a range of 10% to 14%, down from its previous guidance of between 17% and 20%. The bottom line will be hit even harder. iRobot now expects EPS for the year to be between $2.40 and $3.15, down more than 15% from its previously published guidance. By comparison, the company produced EPS of $3.18 in 2018.

What the future might hold

iRobot management does not provide quarterly guidance, but consensus analyst estimates call for third-quarter revenue of $260 million, down about 2% from the year-ago quarter previous year, with EPS of around $0.52, a decline of almost 54%. %.

As President Trump recently announced progress toward a trade deal, China immediately hit back, saying more work needed to be done.

iRobot is not sitting idly by, waiting for politicians to strike a deal. The company said it is working to diversify its supply chain and will move manufacturing of some of its less complicated components out of China. There are plans to move at least one line of robots to Malaysia, with the first product expected to roll off the assembly line in that country by the end of the year.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.