iRobot Corp (IRBT) 2020 Q1 法說會逐字稿

Good day, everyone, and welcome to the iRobot First Quarter 2020 Financial Results Conference Call. This call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Andrew Kramer of iRobot Investor

Relations. Please go ahead.

Thank you, operator, and good morning, everybody. Joining me on today's call are iRobot Chairman and CEO Colin Angle; Executive Vice President and CFO Alison Dean; and Julie Zeiler, Vice President Finance; who will succeed Alison as CFO on May 4.

Before I set the agenda for today's call, I would like to note that statements made on today's call that are not based on historical information are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties and involve many factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information on these risks and uncertainties can be found in our public filings with the Securities and Exchange Commission. iRobot undertakes no obligation to update or revise these forward-looking statements, whether as a result of new information or circumstances.

Related to our financial disclosures, as a reminder, we transitioned last quarter to focus on our non-GAAP financial performance and outlook, which we believe helps provide additional transparency into iRobot's underlying performance and potential. Accordingly, during this conference call, we will reference certain non-GAAP financial measures as defined by SEC Regulation G, including non-GAAP gross profit, non-GAAP operating income, non-GAAP income tax expense or benefit, non-GAAP net income and non-GAAP net income per share. Our definitions of these non-GAAP financial measures and reconciliations of each of these non-GAAP financial measures to the most directly comparable GAAP measure are provided in the financial tables at the end of the first quarter 2020 financial results press release we issued last evening, which is available on our website and there also provided at the end of these prepared remarks, which is also on our website.

In terms of the agenda for today's call, Colin will briefly review the company's first quarter results, discuss current market conditions and outline our plans to navigate our business through these unprecedented times. Alison will detail our financial results for the first quarter and share additional insights into our plans going forward. Colin will wrap up our prepared remarks with some final observations. Then we'll open the call to questions.

At this point, I'll turn the call over to Colin Angle.

Good morning, and thank you for joining us. The past 2 months since COVID-19 began its global spread have been marked by unprecedented change. The measures taken by governments at all levels around the world to save lives from this pandemic are far reaching and have altered how we work, communicate and socialize. For iRobot, the health and safety of our global workforce is our top priority and we have continued to take actions that will support this. The pandemic has injected significant operational challenges into our business, and I've been awed by the collective tenacity and commitment of our teams to move our company forward while proactively donating time, resources and technology to support our health care workers on the frontlines. Although clear challenges lie ahead, we received very important and positive news last week when our tariff exclusion was granted, and we'll provide more information about this later on the call.

In terms of our Q1 performance, we issued an announcement in late March that provided initial details on the impact of COVID-19 on our business, including our view that we would fall short of our original Q1 revenue expectations and that we had withdrawn full year guidance. First quarter revenue of $193 million, declined 19% from the prior year. Our Q1 operating loss of $14.4 million was aided by better-than-expected gross margins, combined with lower-than-anticipated spending. We reported a net loss per share of $0.32.

For some context into our Q1 top line performance, through the first 2 months of the year, our quarterly revenue was trending toward the low end of our original targets that ranged from $210 million to $220 million. Although sell-through started the year sluggishly in the U.S. and Japan, we were pleased to see our U.S. sell-through accelerate in February. However, the disruption from COVID-19 affected our sales and supply chain activities in March. The largest factor associated with the shortfall was our inability to completely fulfill first quarter demand for our i7+ and s9+ products due to design-driven engineering and supply chain challenges that were unexpectedly complicated by the impact of COVID-19 on our organization, our contract manufacturers and some

Suppliers. Our revenue was also affected by suboptimal Q1 manufacturing volumes in China as our contract manufacturers did not ramp back up to fully capacity until late March as well as some order reductions, delays and cancelations for our products by retailers. Overall, revenue declined 28% in the U.S., 11% in EMEA and 14% in Japan.

As the pandemic forces large populations to remain in their homes, cleaning products are increasingly top of mind with consumers, which is a potentially very favorable trend. However, an uncertain economic environment is likely to weigh heavily on when, where and whether consumers will buy a new Roomba or Braava robot. In addition, retailers are facing major challenges as they strive to carefully manage inventory and prioritize demand for essential products while reducing operating hours, limiting foot traffic and temporarily closing stores. Although market conditions are expected to improve over the coming quarters, the timing and velocity of an economic recovery remains uncertain, which further impairs our visibility into order activity over the coming quarters. At the same time, COVID-19 has created pragmatic operational challenges that impact every part of our business and we are marshalling resources to address them.

Against this backdrop, we have reassessed our 2020 plans and are adjusting them in ways that we believe will enable us to emerge from this downturn as a stronger company better positioned to fortify category leadership and deliver sustained, profitable growth. To do this, we are focused on further differentiating our offerings, building enduring relationships directly with our customers and nurturing the value of those relationships.

I'd like to expand a bit on each of these areas, which form the strategic pillars for moving our business forward.

The first strategic pillar involves differentiating Roomba by providing consumers with an exceptional experience, which, in the combination of cleaning performance and high-value digital features, enables Roomba to better adapt to and support our customers' lifestyles. In addition to enhancing the cleaning efficacy of our robots and then cost-optimizing and cascading those innovations across our platforms, we are elevating the cleaning experience through digital capabilities that enable users to customize how, when and where our robots clean. As we deliver on our product and digital roadmaps over the coming quarters, we expect to bring new capabilities to the marketplace that will delight consumers and build our position as a trusted, reliable cleaning partner.

The second pillar of our strategy involves building an enduring relationship with the consumer. We ended 2019 with an engaged user community of over 4 million owners who've opted-in to our digital communications through email and our app. That grew 18% sequentially to over 5 million users at the end of Q1. As we move forward, our ability to use the combination of our advanced navigation and mapping, innovative digital features, home understanding and smart home integrations is enabling us to deeply embed Roomba into the users' life. And as that happens, it further solidifies our relationship with the customer.

And lastly, with increased loyalty comes increased opportunity, nurturing the lifetime value of our customers. Every year, we sell millions of robots to both new and existing customers, which will enable us to continue expanding our base of over 5 million. We see exciting potential for us to make a broader range of products and services available to our user community and generate highly profitable, recurring revenue streams in the process.

To help accelerate our progress in these areas, we have also made difficult but necessary decisions to implement a series of cost-reduction actions that are intended to realign and reprioritize our resources. To accomplish this, we have adjusted the size and complexion of our workforce through targeted headcount reductions of approximately 5% of our workforce, select furloughs and changes to our 2020 hiring plans while also paring back spending in other areas. We expect that these cost savings actions will reduce 2020 spending by approximately $30 million. Alison will provide additional details on this in a few moments.

The actions taken around our workforce allow us to further shift R&D engineering talent from hardware to software while enabling us to accelerate certain strategic initiatives, including those focused on enabling a robust buying experience and deeper direct relationships with our customers. In conjunction with these cost savings plans, we have suspended our go-to-market plans associated with our Terra robot mower. Although we believe there is a substantial long-term opportunity in the robot lawn care market, our decision to take our foot off the gas for Terra was largely based on the likelihood of significant delays to our 2020 commercial plans for Terra caused by COVID-19 combined with the overall intensity of ongoing technology investment that would be required over the coming quarters to continue advancing the product. It is simply the wrong time to launch this. All other product development and digital roadmaps are funded and on track, including the plans to launch a new Roomba model later this year.

In addition to those actions, we are working diligently to drive gross margin improvement. We achieved an important milestone on this front when our request for an exclusion from Section 301 List 3 tariffs was granted last week. Not only does this exclusion temporarily eliminate the 25% tariff that was placed on Roomba going forward, but it also entitles us to a refund on all Section 301 tariffs that we've paid on Roomba imports since they went into effect. Even with tariff exclusion in our favor, we are actively advancing plans to drive greater efficiency and flexibility across our manufacturing supply chain by expanding our manufacturing in Malaysia, although

COVID-19 has slowed our progress.

We're excited about each element of our strategy to drive our business forward. And while we are enthusiastic about our strategic direction, the uncertainty associated with COVID-19, including its duration and macroeconomic impact, has impaired our visibility into the timing and magnitude of orders. As a result, we are not yet able to share updated full year financial targets. Nevertheless, we would like to share our perspective on the dynamics that are currently shaping our business.

Given the substantial near-term challenges facing our retail partners and consumers, we anticipate soft second quarter revenue modestly below Q1 levels, which would represent the low point for quarterly revenue in 2020. This would drive a sizeable second quarter loss from operations. Nevertheless, we remain optimistic that the trajectory of our revenue will show meaningful improvement in the second half of the year.

Our sales, finance and operations teams have worked hard to understand how the potential resumption of economic activity in different parts of the world can positively impact demand levels. Although near-term revenue has been impacted, there are some bright points as evidenced in the following sell-through trends. Through week 16, our year-to-date sell-through growth on a unit basis has remained positive in both the U.S. and EMEA. We are particularly pleased with the i7, s9 and m6 unit growth in all major geographic regions over the past several weeks. Our investments to deliver differentiated performance in our higher-end Roomba and Braava models are working as our product mix shifts up. We've seen robust growth on iRobot.com in recent weeks, building on the strong revenue growth we delivered on our website last year and complementing strong unit growth at pure-play e-commerce platforms. And we've fared modestly better than we anticipated with U.S. retailers with extensive brick-and-mortar footprints in part because many of our largest retailers have kept their stores open and are also offering a strong digital buying experience.

And while all of the various scenarios we've modeled currently anticipate that 2020 revenue will decline from 2019, the bright spots I just reviewed are combining to create a situation where we can move into the second half of the year with low channel inventory and the highest demand for our premium product offerings. This helps underpin our potential for substantially stronger second half revenue versus the first half. A better top line, aided by our cost reduction activities and the extension of our tariff exclusion, would help us return to operating profitability in the second half of the year. Given these dynamics, we believe we can exit this year well positioned to fortify our category leadership, build on our momentum to generate sustainable and profitable top line growth and drive long-term value creation for our stakeholders.

At this point, I'll turn the call over to Alison and return after her remarks to offer some additional closing thoughts. Alison?

Thank you, Colin. As Andy mentioned earlier, my review of our first quarter financial results will be done on a non-GAAP basis and all comparisons will be against the first quarter of 2019, unless otherwise noted. My comments about our outlook will also reference certain non-GAAP metrics, including gross margin, operating expenses, operating loss and profit and effective tax rate.

As Colin noted, our first quarter financial performance was affected both directly and indirectly by the challenges associated with COVID-19. Quarterly revenue decreased 19% to $193 million. Geographically, revenue declined by 28% in the U.S., 11% in EMEA and 14% in Japan. Roomba represented approximately 88% of our mix with Braava making up the remainder. Within the Roomba mix, we've continued to generate most of our quarterly revenue from robots where price points are $500 and up.

Gross margin of 41% fared slightly better than anticipated primarily due to favorable product mix. Tariff costs of $7 million had a 3% impact to our Q2 gross margin. Gross margins declined 10.9 percentage points from last year due primarily to lower pricing and higher promotional expenses, and, to a lesser extent, higher tariff costs.

Q1 operating expenses of $93 million increased by 4% and represented 48% of revenue. As the COVID-19 situation evolved during the final month of the quarter, we increased our bad debt reserve by over $4 million to reflect the financial challenges facing retailers. However, the combination of better-than-anticipated gross margins adjustments in short-term incentive compensation, delayed implementation of certain marketing activities and shifts in the timing of certain R&D programs helped soften the impact of lower-than-expected revenue and the booking of these reserves. Our Q1 operating loss was $14.4 million, which was at the low end of our original targets.

Our Q1 2020 effective tax rate was 37%, which was significantly higher than we expected due primarily to the expected reduction in full year profitability and the impact of our R&D tax credit. Our net loss per share was $0.32 for the quarter.

Last year, our Board authorized a $200 million stock repurchase program. During the first quarter, we repurchased approximately 664,000 shares of common stock at an average price of $37.65 per share for a total of approximately $25 million. We do not intend to repurchase more shares under the program in 2020.

We ended Q1 with $264 million in cash and investments, an increase of approximately $8 million since the end of 2019. We generated healthy cash flow from operations of $41 million, which more than offset the $25 million for share repurchases and capital spending of $7 million. Q1 DSOs were very healthy at 18 days. Q1 ending inventory was $147 million or 118 days, compared with $181 million or 144 days at the same time last year.

As we've articulated, we are currently navigating a very fluid marketplace and assumptions about consumer confidence and the speed at which the global economy and various regional economies recover continue to evolve. Those assumptions continue to be informed by our ongoing dialogue with retailers worldwide. We withdrew our expectations for 2020 in late March, and we are not yet in a position to provide the same level of detailed, quantitative guidance that we have historically provided as our visibility remains limited. We would, however, like to share our insight into the coming quarters.

In terms of the second quarter, our revenue will be heavily influenced by the steps that our retailers continue to take to manage their businesses during this pandemic. At present, we believe Q2 revenue will decline modestly from Q1 and presumably will be the quarterly low point upon which we will drive improvement in the second half of the year.

The tariff exclusion we just received will help mitigate gross margin pressure, resulting from the combination of lower revenue, lower pricing and increased promotional actions associated with Mother's Day, costs associated with finishing our design change on the Clean Base units for our i7+ and s9+ robots and tooling and other asset write-down costs associated with Terra.

We currently expect a Q2 operating loss that would reflect the combination of relatively soft anticipated revenue and operating costs that are expected to nominally increase over Q2 2019 levels. In terms of other Q2 modeling assumptions, we anticipate negligible other income and just under 28 million shares outstanding. Our tax rate for Q2 and the full year could fluctuate significantly in large part because even small shifts in the jurisdictional mix of profits and anticipated pretax income levels can drive meaningful changes to our tax rate.

For the full year, we have limited visibility into second half demand. Colin previously offered his insight on the second half of the year, and I'd like to detail some of the factors that could contribute to that.

We are thrilled with our recent tariff exclusion, which was granted on a temporary basis, consistent with all other tariff exclusions for Lists 1, 2 and 3. Like all other List 3 exclusions, our exclusion will expire in early August unless the exclusion is extended. We track all Section 301 tariff developments diligently and have observed that many of the companies who received exclusions from List 1 tariffs were able to successfully extend their exclusions for up to another year. We assume that there will be a similar process for List 3, and if so, we'll seek an extension in due course.

In terms of our 2020 gross margin profile, extending the tariff exclusion through all of 2020 will drive meaningful improvement over the coming quarters versus our prior plans. We expect that our Q2 gross profit will benefit from $6.6 million for tariffs paid in Q1 2020 plus the elimination of tariffs for the quarter itself. Our second quarter GAAP gross margins, however, will reflect the benefit of the full $47 million in tariffs paid since 2018 that we expect will be refunded.

In terms of our operating costs, we have completed a set of cost reduction actions that include a reduction in force of approximately 5%, furloughs and scaling back on our hiring plans. In addition, we are reducing short-term incentive compensation, curtailing working media spend to better align it with lower revenue expectations and factoring in significantly reduced travel expenditures.

These actions are expected to generate approximately $30 million in net savings over the next three quarters of 2020. As a result, we anticipate that 2020 operating costs will generally -- will be generally unchanged from 2019 levels with slightly lower sales and marketing costs offset by slightly higher general and administrative cost. With that said, certain

Costs are subject to change based on revenue and overall market conditions. Just as important, many of these measures are structural in nature rather than one-time actions, which will help us move into 2021 better positioned to deliver meaningful improvement to our operating profitability. In conjunction with these actions, iRobot expects to record a restructuring charge of approximately $2 million in the second quarter primarily for severance costs associated with the workforce reduction. Restructuring charges are among the items excluded from our non-GAAP costs.

With $264 million in cash and investments at the end of Q1, no debt and access to a $150 million credit facility, we believe we have the requisite financial strength to navigate through these challenging times. Our cash position will be further fortified by the anticipated refund of approximately $57 million in tariff expense, of which $47 million is reflected in our prior period P&Ls and $10 million is for products currently in inventory. We expect to receive these proceeds within the next 12 months, which is subject to the timing of releases from U.S. Customs and is likely to be distributed in multiple payments over the coming months.

In terms of anticipated cash flow activity, we historically experience cash outflows during the second and third quarters, and our cash burn will likely be exacerbated over the next 2 quarters given our anticipated near-term fundamentals and the need to build inventory in advance of the holiday sales season. While this is likely to require tapping into our revolving line of credit, we expect that any borrowing will be short term in nature as order levels recover during the second half of the year.

As we work closely with our retailers globally to understand and support their needs, DSOs may increase above historical levels over the coming quarters. At the same time, our operations teams are focused on aggressively managing our own inventory levels to ensure optimal flexibility to accommodate demand over the coming months. Despite limited visibility, our best view is that DII will follow historical trends with a peak in Q3 before returning to more normalized levels.

In summary, 2020 has ushered in unprecedented challenges, and iRobot remains committed to taking the necessary actions that we believe will enable the company to navigate through the headwinds that will persist over the coming months. We are optimistic that we can deliver a stronger performance in the second half of this year and exit the year well positioned to drive long-term value creation for all stakeholders.

I'll now turn the call back to Colin for his summary.

Thanks, Alison. Before I offer my closing thoughts, I'd be remiss if I didn't point out that this is Alison's final investor call at iRobot. Alison's contributions to iRobot's success over the years have been extensive, and her focus and commitment to help move our business forward has never wavered, even as her tenure nears its end. Alison and our incoming CFO Julie Zeiler have worked closely over the past several months to ensure a seamless transition. Julie's outstanding work in leading our recent planning activities further reinforces our view that she will make a great successor to Alison as iRobot's next financial leader.

As iRobot moves forward, we are excited about our long-term potential of our business. The investments we are making to deliver a differentiated cleaning experience are intended to put further distance between our robots and the competition, especially in the core and premium segments of the market. Over the coming quarters, you'll see this manifest in new digital capabilities, continued progress with our smart home partnerships, a redesigned home app and other exciting advances that will enable our robots to build more personalized, trusted partnerships with their owners.

At the same time, we are seeing that the steps taken to protect public health from COVID-19 are accelerating shifts in consumer buying that are well aligned with the other elements of our strategy. To that end, we are moving aggressively to scale our direct-to-consumer sales channel by enhancing our digital marketing capabilities, evolving our order management platform, driving greater efficiency in our fulfillment processes and ensuring that our financial systems keep pace. Those investments will also enable us to create new higher-margin, recurring revenue streams as we provide customers with new options for purchasing our products and accessories such as subscriptions and leasing programs.

Finally, we move forward having made important progress over the past several quarters to expand our leadership team by adding talented executives and promoting leaders into new roles. I'd like to close by offering my sincere thanks to my colleagues around the world for their outstanding efforts and sacrifices over the past several months. I am confident they will continue to rise to the challenges ahead.

That concludes our comments. Operator, we will now take questions.

(Operator Instructions) Our first question comes from Asiya Merchant with Citigroup.

Quick one for Colin and one for Alison or Julie. Colin, if you can help us understand what are the sales through your direct-to-consumer website? And you talked a little bit about the subscription programs, leasing, et cetera. If you can just provide some guidance. I mean how are you thinking about this, how it will impact replacement cycle for consumers? Are you seeing any early indications of quicker replacement cycles or purchase of more consumables, et cetera? I'm trying to frame my thoughts around how this would lead to incremental growth over the next few years for the domestic household robot category? And then I have a gross margin question for Alison.

Sure. So in 2019, our direct-to-consumer sales were sort of mid-single digits and grew 45% year-over-year. So we were seeing good growth starting to get to material levels and represented a very good starting point for this shift in focus. We also saw in our online sales, a particularly strong performance by customers who are interested in leasing-style purchasing. We had a test program last year, which also maxed out against the allotted volumes for a sort of a white glove leasing style program in Japan. So we've got a number of different indicators that says buying robots with more flexible purchase terms is of interest to our customers, extending that to growing both those programs, but also looking at actual service model, recurring revenue model opportunity is something that you're going to see us doing in 2020, and we'll certainly be quite open with the results of those activities.

By selling direct-to-consumer, we both end up with a comparable product sales, a higher revenue figure and opportunities for improved gross margin. So as we scale this direct-to-consumer business, we see this as a, both a revenue driver but also a gross margin driver. And the other very germane sort of right-to-play statistic I'll give you is something I mentioned in the call, this achieving 4 million connected engaged online customers last year and in 1 quarter, seeing that grow by 18%. So the i7 launch, back a couple -- 1.5 years ago was truly a game changer for the company. It provided our consumer with a compelling reason to use the app to register with us and to continue an engagement with the company, and we're exacerbating that by or enhancing that by our program to launch new features digitally to improve your Roomba simply by staying connected. So last year, that was a keep-out zone enhancement was probably our most visible digital enhancement last year, but that's accelerating. You're going to see a lot more this year. So the company has made a shift in its go-to-market focus, not to say we're leaving retail, but we think there's a real opportunity with building this direct business. And as I mentioned, the change in consumer buying habits only makes this shift in strategy more exciting.

Okay. That's helpful. And then on gross margins, Alison provided a lot of color in terms of adding that retroactively -- the tariff exclusion retroactively to Q2. Are you guys anticipating using some of the gross margin benefit from tariff exclusion to be more competitive in this space? And the edges as you look at past the onetime retroactive benefit that you will get from the tariff exclusion and the continued benefit from that. Will you be using some of that to become more competitive going ahead?

I think we're going to wait to see, Asiya, how the year plays out. Obviously, there's a lot -- still a lot of uncertainty in the second half of the year, getting the tariff exclusion and the refund is wonderful. And we are going to carefully assess how and if we might want to deploy that against initiatives in the company versus having it improve the bottom line. So that's work yet to come.

Yes. Our baseline plan for the year included adjustments to our pricing strategy to ensure that we'd be very competitive. But with the change in mix from retail and online, we're actually also looking at whether demand generation spend should -- to what extent should it shift from retail-driven programs to online-driven programs. So we've got a lot of levers to pull. And certainly, the tariff exclusion adds to that more shifts.

Our next question comes from Charlie Anderson with Dougherty & Company.

I wanted to start with the R&D changes and the cuts there. Colin, I wonder if you could maybe just expand a little bit upon what allows you to do that. What is changing in terms of the hardware engineering that allows you to effectively need less resources there? And I'm also curious too, once we return to normalcy, does that change the profile of OpEx as a percent of revenue versus what we've seen historically? And then I've got a follow-up.

Sure. So the products that we're offering and as we learned what is going to be most differentiating going forward resulted in some insights that really the overall experience, this partnership with the consumer that I'm talking about was a really extremely important area for us to focus. How do we make our robots, smarter and better partners? And delivering that differentiation meant further investments in our software. And so that in keeping with that, the hardware side of the business, as that has continued to grow, we've moved to thinking about our robots more as platforms that are enhanced by the software than looking to rapidly churn our physical products and differentiate with a new bumper system or a new side brush system. And those changes in how we were going to -- how are we going to differentiate in the marketplace, necessitated that we look at our engineering mix and make some shifts. iRobot still has a very strong hardware engineering team. We're very proud of that capability. And certainly, you will -- should expect to see continued new platforms coming out. But from an overall engineering need, there's so much opportunity on the software side to differentiate our products that we wanted to go and increase that investment as part of that first pillar of the strategy I discussed.

And I'll just -- this is Julie. I'll underscore some of Colin's comments by saying if you look at our overall net $30 million of operating expense reductions for the year, we really tried to focus on those smart reductions that we're going to improve our 2020 picture, while also preserving those investments that would set us up to execute really strongly against our longer-term strategy.

Okay. Great. And then for my follow-up, you did benefit from mix in gross margin in Q1. I'm curious, as you look at the rest of the year, do you see a similar mix impacting gross margin positively? Or will there be a different mix the rest of the year versus what you experienced in Q1?

It's a little early to tell. We have 2 high-volume events, which typically drive some of our lower-end products, the Black Friday promotions and our prime day promotions tend to be lower ASPs. But definitely, we're encouraged by the uptick in mix we've seen through the first half of the year. So a little bit early to tell, but given the strategy I articulated, given the fact that we tend to do better where we can tell a more complete product story with online sales that helps drive improved mix, we think these are encouraging trends.

Our next question comes from Mark Strouse with JPMorgan.

Colin, I just wanted to see if the tariff relief changes any of your plans to transition manufacturing to Malaysia. I think on the last call, you mentioned, I think it was something about, most of your RVC production would be out of Malaysia by the end of next year. Is that still the case?

So our commitment to geographic diversification remains unchanged. We believe that it is a strategic imperative to be manufacturing significant portions of our robots outside of China. We faced some pragmatic challenges because of COVID-19, where, first, China was shut down and then as it opened up, Malaysia shutdown. And so that the physics of moving manufacturing has been delayed, as I mentioned in the script, but our intention is unchanged. So I would say the percentage of robots manufactured in Malaysia by the end of next year will be reduced from our original plans, but our plans remain a committed view of what we want to evolve towards.

Okay. And then for my follow-up, can you just give a bit more color on the rationale to kind of shelf Terra? I'm just looking -- I mean at your -- with your balance sheet, including the tariff refund, you should be somewhere over $300 million in net cash. I understand there's some investments this year. But can you talk about the decision to not -- continue to invest this year with a launch during the spring season of 2021? And then kind of a quick follow-up to that. I mean how temporary is the suspension? Should we expect sales in 2021 or 2022? Any color there would be helpful.

Sure. So first, let me say, it was a difficult decision. We believe that the market for tariffs is very real and exciting. And I start off by where I sort of left off in the comments, it was just the wrong time. This was a -- for iRobot, a moment of being very careful with our resources, being very careful with our cash and making sure we were investing in some of the strategic pillars I described, which will matter most sooner. So the differentiation of Roomba through the consumer experience, the -- ensuring that we have the right foundation and investments to take advantage of this knee-jerk increase and engage consumer numbers, that just helps everything. In fact, that will reduce the go-to-market costs when we do launch Terra in the future. It just was a prioritization and against the backdrop of COVID. And there was a lot of uncertainty as to how that was going to go as well as significant continuing costs that we're going to make pursuing the current plan for Terra, just the wrong thing for us to do. We're not commenting today at all about when you might see Terra in the future. There's too many unknowns to deal with, and I don't want to set any expectations at this point in time.

Our next question comes from Ben Rose with Battle Road Research.

Glad to hear everyone is safe at iRobot. Just a couple of questions. Firstly, on the timing of the potential tariff extension, could you walk through us -- walk through some of the mechanics around that? So in other words, should we assume that as of August 20 that the extension will continue? Or are there some milestones that need to occur prior to that time for you to know that?

So we're a little in the dark, and there's no stated process. So the comments we made were based on what has happened for the extension process for prior list. So again, I want to be very clear. And the way that, that worked was prior to the expiration of their original exemption, they were aware that they were going to be extended. And in many cases, there was not even anything to apply for. So the -- if List 3 is handled in a similar fashion, we hope to know prior to the beginning of August as to whether that extension should happen. Again -- but we're a little in the dark, and we're waiting for clarity on how this is precisely going to play out.

Okay. And Colin, from kind of a product planning standpoint and kind of looking out over the next 6 to 12 months. There's definitely been a proliferation of Roomba models at the high end of the product line. I don't think it was your long-term intent to have consumer robots, particularly Roomba priced over $1,000 at retail. Obviously, there's been some developments that will help bring the prices down. But could you talk a little bit about your plans for the high end of the product line? And specifically, whether you plan to prune any models and kind of consolidate around just a few of them?

Sure. It has traditionally been our strategy to launch new technology at the high end and propagate it down in price point as well as -- as we are able to improve our COGS and manufacturing efficiency to make our old, high-end robots a bit more affordable over time. That's -- if you were to say, okay, iRobot, what you've traditionally done, you would see those trends. The focus that I described today on the call around the importance of differentiating through digital features through software also points at opportunity to create new differentiation throughout our product line based on software enhancements. And so that -- again, I think you asked specifically about the high end of the market, iRobot remains very committed to selling the best cleaning robots in the world, and you should expect us to continue to support having these premium robots in the marketplace. And as I gave some color to, the strongest performance of our product line in the first half against plan was our premium i7, s9 and m6 robots. So we think that that's working. And as we move forward, the expectation would be at what rate are we able to bring some of these differentiated features down? My answer satisfied you?

Okay. No, no, no. I think that's very helpful. I don't want to take up too much time, but that's definitely a helpful overview. I appreciate it.

Between software and Moore's Law, good things happen. You can differentiate it.

Our next question comes from Mike Cikos with Needham & Company.

Just wanted to get some more information, if we could. Understandably, these stores are trying to tackle the different operating hours and reduced foot traffic, et cetera. But as you see it today, how would you describe the current inventory in the channel? And also just interested in how those retailer conversations have been trending in recent weeks?

Mike, the inventory in the channel is good. As you know, we came in a little bit heavier into Q1 than we had wanted, and we made good progress against sell-through in that inventory. So right now, we're feeling pretty good overall about the channel inventory levels heading into the second half of the year. We really don't have a lot of insight relative to how the retailer environment will change in the coming quarters. We presume that at some point in the second half of the year, some of the stores will start opening, but we won't know that until it's happening. We are fortunate that several of our key retailers remain open physically, and we are benefiting as well from their online sales as well. So we continue to stay in close contact with them, so we can adjust our plans accordingly. We think we're set up well if and when they open their doors again more broadly.

That's helpful. And if I'm just trying to frame, obviously, with the COVID pandemic hitting certain regions earlier and some regions starting to open up earlier than others. Have you seen any change in demand as these restrictions have been lifted in other regions? And I'm just trying to gauge again, how that might translate as the restrictions ease in other geographies as well?

It's definitely different region by region. And so I can give you the color that we have because we definitely haven't seen much in the way of reopening our business in China, which has reopened the most, I guess. It was good but not particularly material to our overall performance. I think Japan has remained the most open of our regions from a retail perspective, although it certainly is fairly brick-and-mortar oriented and so even with that color has seen impact.

EMEA is the hardest hit. It started the year with our biggest growth targets. But in general, sort of taken as Europe, which is completely unfair, but taken as Europe, it is the most brick-and-mortar oriented. E-commerce is still limited and some of the largest online retailers because of the extreme growth in demand, we're oftentimes unable to meet that demand and started restricting shipments to essential products only, which slow down what otherwise would have been strong offsetting growth. And so that's the market where we'll see the -- probably with the hardest hit and won't recover until truly people can get back to the stores in a reasonable fashion.

North America, was our strongest online, with the strongest online, most developed networks for fulfillment. And it's been on a sell-through basis, holding its own and performing reasonably well. So I think that the recovery will gradual because the trough was not as deep as it was in EMEA. If that is helpful?

It is terrific.

(Operator Instructions) Our next question comes from John Babcock with Bank of America.

I guess I just want to start out on Malaysia. I just recalled hearing in the past, the costs there were about 10% to 15% higher in Malaysia. Correct me if I'm wrong, but I guess I was wondering what you might be able to do to get those costs down over time? And also, how much might you be able to reduce those costs?

So that you remember correctly that the current Malaysia premium is in those types of ranges. It all -- but it all depends on volume, and how much volume we can move to Malaysia at what rate? At lower volumes, you could even see higher premiums being paid in Malaysia. It's just the economics of scale. And when you start from 0 with a manufacturer, it is a negotiation and how much can you move? And so that moving to Malaysia is, in fact, a commitment to moving a material amount of units to Malaysia. Overall, it is just not particularly economic. And we are committed to moving to Malaysia.

So the -- could you get into single-digit premiums? Absolutely. Could you get to parity, probably not just because of the physics and the need for Malaysia to grow its ability to manufacturing more of the Roomba because as the current things stand, even if manufacturing costs were at parity, we have to go move -- we have some additional transportation costs moving materials around to support manufacturing.

So nothing magical, just a lot of hard work, and it's immediately tied to are you going big? Or are you going to be a dilatant? You're going to be a dilatant, kind of don't bother because you're going to be paying a huge premium.

Okay. And just to clarify on that. The single-digit premium, would that be a high single digit, low single digit?

It really -- we don't know. It's going to depend on the DAC business terms with the exact partner at this point.

Okay. And then just next question. You talked about seeing positive sell-through on a unit basis in the U.S. and EMEA. How has the cadence of that growth evolved over the last few weeks? And then also if you can just kind of remind me, I guess a little forgetful here, but just what that sell-through refers to?

Okay. I'll take the first and then -- well, you ask a technical question, we'll make sure Alison give the technical answer. The -- first off, it's North America and Japan. It's I believe or -- hang on let me make sure. Sorry, it's Americas and EMEA saw positive unit sell-through. So sorry, I misspoke.

The trend we saw over the quarter was generally sluggish in January. Then we started to see a turnaround in February, sell-through picked up. And not only did we end the quarter with positive sell-through, this is unit sell-through, so sales of units from our retailers to consumers. Not only was that positive at quarter end, as we said in the script, it continued to be positive through our last reported week, which was week 16.

Okay. And week 16, I assume, goes through kind of April. And I guess I was wondering, so has that unit growth picked up or slowed? Or what you've kind of seen there?

So our reporting is a few weeks delayed. So through week 16 is the last report that we've got.

And I think the trend is positive. So there was -- it is a -- if you're looking at color, but it is also a little anecdotal on trend because we're going week to week. So things are -- sell-through is happening. We're moving toward a higher sell-through season with Mother's Day. And so again, I caution against taking too much instantaneous vector detail from any 1 week leading up to a higher volume, but it's definitely encouraging to us that there seems to be a strong enduring demand for the products that we're seeing or seeing strength.

Our next question comes from Mike Latimore with Northland Capital Markets.

So I guess just taking that comment as well as the comment you made that you weren't able to meet full demand in the first quarter because of, I guess, production capacity. I guess if you were able to meet full demand in the first quarter, would revenues have actually like grown year-over-year?

That's really hard to quantify specifically, Mike. We definitely would have seen more revenue than we were able to deliver for the quarter, but it's hard to say exactly what it would have been.

Okay. Got it. And then in terms of the second half perspective, I mean are you thinking maybe sort of normal seasonal patterns off of this lower second quarter base or more pronounced seasonal patterns? How are generally are you thinking about the second half?

Yes. So -- and you're specifically asking about revenue?

Yes.

Yes. So I think it -- as we look to the second half, there are a number of reasons why we're optimistic. Colin's already spoken around the recovery as we expect that we'll see a gradual reopening of stores and ultimately, an improvement in consumer spending. I think we also anticipate that we will see continued growth in e-commerce and e-tailing as people continue to shift their buying to online. But what I would say is that the timing of that and the magnitude of that recovery remains really difficult to forecast. And so where we sit today, we don't have visibility to what the specific back half of the year is going to look like, which is why we have not provided updated targets.

I think the economies are still arguing weather this is going to be an U or an L or a V recovery out of the recession. And I think that, well, the cleaning category is a category which seems to have kept consumer attention and strength. A lot so much of it depends on what the shape of the recovery from recession looks like. To truly answer your question, is it going to be bounce back to growth over prior year? Or is it going to be traditional seasonal improvement over Q2. I think that we -- that's why we're hesitant reestablishing full year guidance at this time.

Our next question comes from Troy Jensen with Piper Sandler.

Glad to hear everyone's doing well. Maybe just a couple of quick questions here for Alison. Alison, I guess I'm curious to know how you're going to report non-GAAP earnings next quarter with the tariff release. I guess I was kind of surprised you didn't back it out in the reported March quarter. But just your thoughts on how the reporting is going to be going forward?

Yes. So maybe -- this is Julie. I'll jump in and try to answer that. So if you think about the tariff relief, I'm going to split it into 2 pieces. The tariff expense that we've seen in our P&L in '20 that will be a refund. And also in '20, we will be looking at inside of our non-GAAP results. The refund for prior period tariff expenses will be only shown in our GAAP results.

Okay. So non-GAAP gross margins will be significantly higher than, Julie, right? I mean if I make the adjustment this quarter, was it about 350 bps in gross margin difference?

Yes, that's right. I think though and what we tried to caution and as we discussed our expectations for the second quarter is the benefit of the tariff exemption in the second quarter will help to mitigate some other pressures that we're seeing.

Sure. Okay. Very perfect. And then maybe my -- just my last one would be a clarification. Did you say Q2 OpEx, did you say it would be up slightly from prior year Q2? Just any color on that would be helpful.

Yes, we expect Q2 OpEx to be nominally increase versus Q2 last year.

Ladies and gentlemen, this concludes our question-and-answer session for today's call. I would now like to turn the call back over to Andrew Kramer for any closing remarks.

Thank you very much. Thanks, everyone, for joining us this morning. We look forward to engaging with you, whether it's also over the phone or virtually in different conferences and other formats. And we'll look to get back in touch with you when we report our second quarter results later this summer. Thank you.

That concludes the call. Participants may now disconnect.