iRobot Corp. (NASDAQ: IRBT) Q3 2020 earnings call dated Oct. 21, 2020

Corporate Participants:

Andrew Kramer — Investor Relations

Colin Angle — Founder, Chairman and Chief Executive Officer

Julie Zeiler — Executive Vice President and Chief Financial Officer

Analysts:

Charles Anderson — Colliers Securities — Analyst

James Ricchiuti — Needham & Company — Analyst

Ben Rose — Battle Road Research — Analyst

Asiya Merchant — Citigroup — Analyst

John Babcock — Bank of America — Analyst

Mark Strouse — JP Morgan — Analyst

Mike Latimore — Northland Capital Markets — Analyst

Jeff Feinberg — Feinberg Investment — Analyst

Presentation:

Operator

Good day everyone and welcome to the iRobot Third 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.

Andrew Kramer — Investor Relations

Thank you, Joelle and good morning everybody. Joining me on today’s call are iRobot’s Chairman and CEO, Colin Angle; and Executive Vice President and CFO, Julie Zeiler.

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 during this conference call, we will reference certain non-GAAP financial measures, as defined by SEC Regulation G, including non-GAAP gross margin, non-GAAP operating expense, non-GAAP operating profit and profit margin, non-GAAP effective tax rate and non-GAAP net income per share. We believe that our financial — I’m sorry, our non-GAAP financial results help provide additional transparency into iRobot’s underlying performance and potential. 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 third quarter 2020 financial results press release we issued last evening, which is available on our website at www.irobot.com, and is provided at the end of these prepared remarks. Also, unless stated otherwise, the third quarter 2020 financial metrics discussed on today’s call will be on a non-GAAP basis only, and all comparisons are with the third quarter of 2019. Our outlook for the full year 2020 is also provided on a non-GAAP basis, with reconciliations available in the tables of our Q3 press release, and at the end of these prepared remarks.

In terms of the agenda for today, Colin will briefly review the company’s third quarter results, discuss major accomplishments and share his perspective on our outlook. Julie will detail our financial results for the third quarter and share additional insights about our full year expectations. Colin will wrap up our prepared remarks with some observations on our plans for 2021. Then we’ll open the call for questions.

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

Colin Angle — Founder, Chairman and Chief Executive Officer

Good morning and thank you for joining us. In the third quarter, we delivered exceptional financial performance and executed well across our global organization to achieve a number of important strategic milestones. As a result of the excellent progress we made this past quarter and growing confidence in the strength of expected fourth quarter orders from our retail partners, our outlook has materially improved from our last update in late July. While there is still a lot of hard work ahead, it is important to acknowledge that our bright prospects would not be possible, without the collective focus, efforts and tenacity of my colleagues around the world.

In terms of our performance, we reported Q3 revenue of $413 million, with 43% growth over Q3 2019. That far exceeded our plans entering the quarter. The strength in the third quarter 2020 revenue reflected another quarter of substantially stronger than expected orders from retailers, tied to favorable sell through trends, anticipated demand for the upcoming holiday season, and incremental orders to support certain customer events. as well as robust direct-to-consumer sales growth. The exceptional topline strength, combined with the extension of our tariff exclusion and prudent spending, enable us to deliver a Q3 operating profit of $93 million, and EPS of $2.58.

In terms of our top line trends, we were thrilled that each major geographic region exceeded its quarterly target, with the U.S. generating 75% revenue growth, EMEA 22%, and Japan 12%. We’ve continued to see strong demand to support online, which includes pure play e-commerce sites, our own website and home app, and the online arms of our retail partners. We estimate that online related revenue grew by approximately 70% year-over-year, and represented approximately 60% of total revenue.

Overall, the pandemic has impacted individuals and families in profound ways, with the home becoming a primary hub for work, education, exercise, entertainment and more. The value of Roomba and Braava continues to resonate with consumers worldwide, because these products fit seamlessly into their lifestyles, helping them keep their floors clean, while freeing them to redirect their time and energy elsewhere. These dynamics are helping drive higher interest in the category and are accelerating market penetration.

Along these lines, we recently participated in our sixth consecutive Prime Day event. Despite the change in Prime Day from its usual timing in early July, it was a solid event for us, with Roomba being highlighted by Amazon as one of its top-selling deals.

We made tangible progress against our strategic priorities in the third quarter, and I’d like to highlight a few important developments. As we’ve discussed in recent quarters, an important element of our strategy is to differentiate the cleaning experience, and We upped the ante in this area with the introduction of our iRobot Genius Home Intelligence Platform, which gives users greater control of where, when and how their robots clean. Our Genius platform leverages our substantial investments across AI, home understanding and computer vision technology, and supports a redesigned Home App. As a result, new features and functionality have been made available across our portfolio of connected floor cleaning robots.

We also introduced the Roomba i3+, which expands our lineup of intelligent, self-emptying robot vacuum cleaners. We believe that the i3 and i3+ will play an important role, in continuing to shift our product mix up into the mid and premium tiers. Quarterly revenue from premium robots, which are priced at $500 and up, grew by 86% and represented over 60% of our Q3 revenue.

The second element in our strategy, is to build stronger, enduring relationships with consumers worldwide. We ended the third quarter with 7.8 million connected customers, who have opted into our digital communications, a sequential increase of 12% and a 45% gain since the start of the year. The introduction of our Genius platform also helps advance this part of our strategy, since Genius gives owners unmatched level of personalization and control over their cleaning robots. We have already seen the collaborative intelligence of Genius drive greater engagement. Mission completion rates continue to increase; i7, s9 and m6 owners are increasingly creating multiple favorite cleaning routines; and utilization of new features like directed room clean, is on the rise.

Nurturing the lifetime value of our customers is another strategic priority that we believe will support continued growth of our direct-to-consumer sales channel. The development of new recurring revenue streams and improved profitability. Our direct-to-consumer sales grew approximately 155% to $35 million in the third quarter, as we are starting to see early returns on some of the initial investments that we’ve made, to improve the buying experience on our digital properties.

For example, we’ve recently added support for a broader range of payment types, optimized the design of the homepage, and elsewhere on irobot.com to increase conversion, personalized various promotional programs and added a new Roomba Restore program, that promotes the sale of refurbished Roomba robots. Earlier this month, we began conducting smaller scale pilots of new services, that we expect to refine and scale next year in 2021.

As we look ahead, our business has fared far better in 2020, than we could have possibly anticipated just six months ago. We’ve seen our global year-to-date sell-through growth rate accelerate further from Q2 levels primarily as a result of exceptionally strong demand in the U.S. Outside of the U.S., Europe’s year-to-date sell-through growth rate has improved modestly from Q2 levels, while Japan turned slightly negative, due largely to a tough comp against September of 2019, which benefited from very strong sell-through in advance of an increase in that country’s consumption tax.

Looking ahead, we remain confident that once again we’ll end the year as the undisputed global category leader, even as the competition intensifies and considerable uncertainty about consumer spending into the holiday season persists.

As we move into the final quarter of the year, our operations teams are working closely with our contract manufacturers and broader supply chain to fulfill anticipated orders and close our year on a very strong note. Based on orders in hand and those expected over coming weeks, we currently anticipate full-year 2020 revenue in the range of $1.365 billion to $1.375 billion. This implies fourth quarter revenue of $480 million to $490 million. We expect 2020 EPS in the range of $3.43 to $3.53. While we enjoyed a very strong EPS performance in the third quarter, we expect that our anticipated fourth quarter EPS will moderate, as we implement a number of promotional activities and activate substantial working media plans, including the recently kicked off television advertising. Julie will provide additional details about our outlook in just a moment.

In closing, I am very proud of the way our teams have risen to the unprecedented challenges that we’ve faced in 2020. As a result, we are well positioned to deliver annual revenue, gross margin, operating profitability and EPS, that we expect will exceed our original 2020 targets. The progress we’ve made over the past several quarters, further validates our strategic direction and we are incredibly excited about the opportunities we see to move into the next phase of our growth and maturation.

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

Julie Zeiler — Executive Vice President and Chief Financial Officer

Thanks Colin. As Andy mentioned earlier, my review of our third quarter financial results, as well as my comments about our outlook, will be done on a non-GAAP basis. So unless stated otherwise, each mention of gross margin, operating expense, operating profit, effective tax rate and net income per share will mean the corresponding non-GAAP metric. All comparisons are against the third quarter of 2019, unless otherwise noted.

For the second straight quarter, we outperformed our expectations. Total revenue grew 43% to $413 million, due to substantially stronger-than-expected orders from retailers and direct-to-consumer sales. Geographically, all regions exceeded their revenue plans at the start of the quarter. Revenue grew 75% in the U.S., with international revenue up 21%. Outside of the U.S., the growth was highlighted by 22% expansion in EMEA, while revenue in Japan increased 12%. Roomba represented 89% of our mix, with Braava making up the remainder. Braava revenue grew by 38%, due to robust growth in the m6.

Our gross margin of 48% was well ahead of our plans, primarily due to a combination of the higher revenue, favorable changes in foreign exchange rates, a favorable channel mix shift, and the timing of other supply chain-related activities. Gross margin was essentially unchanged with the prior year. The leverage associated with higher revenue and the lack of tariff expense was primarily offset by changes in pricing and promotion.

Third quarter 2020 operating expenses of $106 million increased by 18% and represented 26% of revenue. The increase primarily reflects higher short-term incentive compensation based on our expectations for a substantially stronger full year performance, and the intensity of certain sales and marketing programs to support revenue and build our direct-to-consumer sales channel. Our Q3 operating income was $93 million or 23% of revenue. Our Q3 2020 effective tax rate was 20%, which was slightly higher than our plan, due to the discrete impact of the 2020 tariff refunds. Our net income per share was $2.58.

We ended the third quarter with $357.3 million in cash and short-term investments, a sequential increase of $115 million. The increase primarily reflects strong fundamental performance, in addition to receiving approximately $35 million in tariff-related refunds, and approximately $52 million in Teladoc stock, that the company received in the third quarter, when Teladoc acquired the company’s stake in InTouch Health. The gain associated with our InTouch investment, is reflected in other income in our GAAP income statement.

Third quarter DSOs were 40 days versus 53 one year ago, which primarily reflects the timing of third quarter 2020 orders. Q3 ending inventory was $218 million or 93 days compared with $248 million or 152 days at the same time last year. The decline in absolute inventory dollars, primarily reflects the impact of tariffs on the Q3 ’19 inventory levels, while DII benefited from our efforts to deliver against substantially higher-than-expected orders. In terms of inventory at our retailers, we ended the quarter in good shape.

Let’s turn to our outlook for 2020. As Colin noted earlier, we now expect a much better 2020 performance. With that said, there is a lot of work outstanding to finish Q4. Overall, we are cautiously optimistic for a strong fourth quarter, although it remains to be seen how the pandemic, an uncertain economic environment and the shifting of an event like Prime Day from July to mid-October will influence the holiday gift-giving season.

Since late April, our expectations for 2020 have steadily improved. We now expect 2020 revenue in the range of $1.365 billion to $1.375 billion. This would represent growth over 2019 of 12% to 13%, which exceeds our top-line growth expectations at the start of the year. Our full year 2020 expectations imply Q4 revenue ranging from $480 million to $490 million, or 12% to 15% higher than the fourth quarter of 2019. Geographically, we expect double-digit growth in the U.S., EMEA and Japan for the fourth quarter.

We currently anticipate finishing 2020 with a gross margin of approximately 45%, which implies Q4 gross margin in the low 40% range, as we support our retailers with promotional programs to drive sell-through during the holiday season.

Looking closer into our operating costs, we currently anticipate a meaningful uplift in spending in the fourth quarter, as we activate a range of advertising and marketing programs, incur higher short-term incentive compensation and continue to advance strategic initiatives, primarily related to building stronger customer relationships and increasing our software capabilities.

Based on planned Q4 spending in the range of $190 million to $194 million, we are targeting full-year 2020 operating costs between $488 million and $492 million. Given our spending profile, we anticipate our 2020 operating profit margin to be approximately 9%. Given the anticipated decline in Q4 gross margin, we expect a fourth quarter operating profit margin in the low single-digit range.

In terms of other notable modeling assumptions for 2020, we expect an effective tax rate of approximately 19%. We anticipate a diluted share count of approximately 28.6 million shares. As a result, we expect our full-year EPS to range from $3.43 to $3.53 with Q4 EPS between $0.12 and $0.22. As it relates to our cash position going forward, we are expecting Q4 to be a solid quarter of cash generation. It is worth noting that we received approximately 60% of the $60 million in tariff-related refunds owed to us by the end of Q3. We expect to receive the balance over the next three quarters. As a reminder, the timing of these refunds is at the discretion of U.S. Customs.

In summary, we’re very pleased with our third quarter performance and our visibility into the fourth quarter leaves us confident that we’ll enjoy a strong finish to the year. To be clear, there is a lot to be excited about, as we continue to successfully navigate the challenges primarily tied to the global pandemic.

That concludes my commentary. I’ll now turn the call back to Colin for some additional color on the coming year.

Colin Angle — Founder, Chairman and Chief Executive Officer

Thank you Julie. We are understandably proud of the performance and achievements thus far into 2020, in part because we believe that our progress this year, will help set the stage for continued growth and success in 2021 and beyond. With that said, we are still advancing our planning processes for next year and as a result, it would be premature to share specific guidance for 2021.

Nevertheless, I’d like to offer some preliminary thoughts on the opportunities and challenges that lie ahead for us next year. Assuming our fourth quarter unfolds as expected, we plan to exit this year with healthy sell-through activity and relatively normal inventory levels at retailers. We believe that this will create a foundation to sustain strong growth in 2021. Consistent with this view, we believe our instruments to deliver a highly differentiated cleaning experience, will further expand our — investments, sorry — will expand our direct-to-consumer sales channel and scale new service offerings, which will increase our competitive moat and support long-term value creation.

As the adoption of RVCs in general and Roomba more specifically continues into next year, we are also focused on a range of initiatives, to address profitability headwinds that loom on the horizon. On last quarter’s call, we discussed the gross margin challenges we see in 2021, due to the reinstatement of Section 301 tariffs, and the investment to scale production in Malaysia. During that same call, we also noted that tariffs represented a three-point gross margin headwind in 2019. At a high level, nothing has changed on this front. As we geographically diversify our manufacturing capabilities, we will continue to carefully manage our supply chain, to expand our access to the key components and raw materials necessary to keep pace with demand.

Additionally, moving into 2021, we plan to further build out the infrastructure necessary to scale the new service offerings and continue to grow direct-to-consumer sales. While our 2020 profitability has benefited modestly from lower travel costs, we expect those gains will subside with a return to a more traditional working environment, at some point next year.

To minimize these impacts, we plan to ramp production in Malaysia into the second half of 2021, expand our direct-to-consumer sales and carefully manage our spending. Just as important, we believe that our progress on these fronts next year, will leave us well positioned to enjoy gross margin and operating profitability tailwinds in 2022 and beyond. Strategically, we move forward with a laser-focus on the consumer and on making sure that our customers never look to leave our franchise. A happy Roomba owner is an incredibly valuable asset, and that loyalty will create meaningful opportunities for us to expand the scope of our relationships with customers worldwide. To that end, we remain committed to product diversification.

A top priority for us over the next several years will be to build out our direct-to-consumer capabilities. We believe the progress on this front will increase the likelihood that we can successfully and efficiently enter new product categories. Based on this, our go-to-market plans to enter the robot mower market with Terra will remain on hold for the foreseeable future. To the extent we restart our efforts in this area, we will do so in stealth mode and will not be providing updates on a quarterly basis.

In summary, we are very pleased with our results to date, and we are optimistic about our prospects for the fourth quarter. As we continue to execute on our plans, we remain enthusiastic that we can navigate the challenges that await us next year and reward our shareholders for their continued confidence.

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

Questions and Answers:

Colin Angle — Founder, Chairman and Chief Executive Officer

[Operator Instructions]. And our first question comes from Charlie Anderson from Colliers Securities. Your line is now open.

Charles Anderson — Colliers Securities — Analyst

Yeah, thanks for taking my questions, and congrats on a really strong quarter here. So I wanted to ask about the Q4 forecast, 14% top line growth at the midpoint thereabouts. So I wonder if you could sort of speak to your expectations for sell through, both for the category and yourselves in Q4, relative to the guidance? Are there any things happening. — anything happening in the quarter that sort of caused those to be any different, as it relates to channel inventory or the effect of Prime Day etc? And then I’ve got a follow-up?

Julie Zeiler — Executive Vice President and Chief Financial Officer

Sure. So why don’t I start. As we look at what we’ve seen in our sell-through momentum to date, it gives us growing confidence, as we exit into the back of the year, that we will continue with those trends. That being said, I think it’s important to note that, we do have some uncertainty as we look through Q4 with the economic environment, and the fact that Prime Day and the holiday season have moved together. But with the orders that we have on hand and what we expect in the few weeks — coming weeks, we feel good about our expectations for the fourth quarter.

Charles Anderson — Colliers Securities — Analyst

Okay, great. And then Colin in your prepared remarks, you articulated a desire to expand direct-to-consumer. I wonder if you could maybe hit on some of the actions that you will take to do that? And then you also mentioned continued focus on product diversification. We are all aware of Terra. So I imagine you’re thinking about other products beyond Terra. Does Terra have to go first, could other products jump ahead of Terra potentially in that diversification efforts? Thanks.

Colin Angle — Founder, Chairman and Chief Executive Officer

Sure. So with the launch of iRobot Genius, our robots are becoming increasingly powerful partners to our consumers. So what that means, is that the robots learn about the partners’ homes, learn where the robots get stuck. Learn where the kitchen table and the kitchen counter and the couches are. And thus the amount of opportunity to have a long-term relationship, where the owner of the robot benefits from the knowledge of the robot grows. And this is the foundation of, what we believe is a long-term sticky relationship between iRobot and our customer base. And so that as we’re building our economic mode, we have a fundamental new dimension beyond product excellence and brand, now into tight partnership, which can drive this relationship. And the way to transact with the customers, once we have this relationship built, is directly. And so that it means that, our marketing technology stack needed to be significantly overhauled, and is sort of mid-process, when that process will extend into ’21, as we improve our ability to translate behavior and how the robots are operating, with ideal and optimal ways of interacting with those customers.

And as we grow that, and we mentioned 155% growth in Q3 as an illustration of just how successful we are at building this new dimension of the company thus far, we expect it to continue. We’re also building a way of transacting and selling things other than Roomba to our customer base. So to your question of, does Roomba have to come next? Absolutely not. But it is our focus to create a world-class capability, to understand our customer and bring them offers that we believe they will be excited to take up, as a result of the investments that we’re making.

Charles Anderson — Colliers Securities — Analyst

Great, thank you so much.

Colin Angle — Founder, Chairman and Chief Executive Officer

You bet.

Operator

Thank you. And our next question comes from Jim Ricchiuti from Needham & Company. Your line is now open.

James Ricchiuti — Needham & Company — Analyst

Hi, good morning. Congratulations on the quarter.

Colin Angle — Founder, Chairman and Chief Executive Officer

Thank you.

James Ricchiuti — Needham & Company — Analyst

I wanted to pick up on some of your closing commentary. And I know you’re not going to be able to give specific guidance for ’21, but with what’s coming across is that, it’s going to be a year of increased investment and without getting into all the specifics that you highlighted. I’m just wondering if there is any additional color, as to how we should think about opex, should we begin to anticipate some of these investments that you’re making, the returns start coming through later in ’21, or is it something we should think about into ’22 that we really start seeing the benefits? And you also talked about, this is providing the foundation for what you are still anticipating, is going to be strong growth in ’21? And I guess I’m also asking, is there some flexibility, if in fact we don’t see that kind of demand environment that maybe you’re anticipating entering the year, to make adjustments?

Colin Angle — Founder, Chairman and Chief Executive Officer

So let me — I’ll start then Julie can add some color, and I’ll give you — I’ll try to be as specific as I can, but will be qualitative. We’re in a situation, where we’re seeing strong acceleration in demand for our products, and we believe — and then compounded by strong growth in our direct channels, which benefits both from the work-from-home environment and the investments we have in improving our direct capabilities as a business. We believe that all of those positive momentum drivers will be present in 2021, and thus we are qualitatively confident about the continuation of the strong momentum, the category, and iRobot in particular is enjoying.

The investments we’re making are very targeted, and we can be very specific about what we’re doing. We’re going back to a world, where we’re anticipating 25% tariffs on product manufactured in China. The COVID pandemic has delayed our original plans to get to Malaysia by the end of this year, and instead pushed our transition of manufacturing well into 2021. We believe that those investments have — are finite, and by the end of 2021, we will have the vast majority of product coming into North America manufactured efficiently in Malaysia, and so that, what starts out as a tailwind, ends the year as — sorry starts a year as a headwind, ends the year reversed as a tailwind moving forward. So because of the dynamics of product shipments, the vast majority of the products shipped in 2021, will be subject to the higher tariffs, so we’ll be able to talk to the state of maturation of our non-Chinese manufacturing capabilities through the year, but it’s going to be late in the year, and largely 2022, before those tariff costs that were — that are reimposed on January 1st are reduced in their impact, because of that transition.

So it’s pretty straightforward. Hasn’t changed since our last quarter call. We continue to make progress moving to Malaysia, and the physics of the tariff policies are what they are, and we’re just trying to be very clear in communicating how that’s going to play out.

The other area of incremental investment is on this building out of the direct capabilities to support the strategy I was just describing. It is characterized by some initial investments in these new tools and outside capabilities that we needed to bring in, to get these tools implemented. And again, it has a unknowable end to the investments, leaving us with an internal capability, that can execute at a world class level, to continue the momentum we’re already seeing on direct. And so that, again there is a tailwind that turns into — sorry a headwind that turns into a tailwind, as 2021 progresses. The services are less about expense and then more about getting them scaled. They have to wait to scale for the — some of these direct investments to play out. But again we feel like we’ll be exiting 2021 with another important and sticky revenue stream growing within the business.

So to your question about, if things don’t go exactly as we plan, do we have some levers to pull? Of course we do. And I think that you’ve been with us for a long time, and know that we do adapt to changing environments up or down as appropriate. But we believe that given the strong momentum we’re seeing right now, that the strategy that we’re articulating today is the right one, to move iRobot to a position, where a larger percentage of our revenue comes from repeat customers, or in recurring fashion, and that we’re able to transact with an increasing number of them directly. So this is a great strategic shift for us that we’ve been investing towards, and it’s working.

Julie Zeiler — Executive Vice President and Chief Financial Officer

I think the only thing that I’d add Colin, is the other area of investment for us, which is really building our software capability. And so if you — we’ve been talking about this during the year, if you look at what we’ve been able to bring to market this quarter, both with the i3+ as well as the Genius platform, it shows that I think the — in the early looking that we’re seeing, those highly differentiated software features are resonating with our customers, and as we look forward, we believe we have a multiyear roadmap of equally rich and high value features and functionality that we’ll be bringing to market with our floor cleaning products. I’ll just finish by kind of underscoring what Colin said around our view of these investments as an organization. I think we have a culture of putting a lot of rigor into our investments, and making sure that, any significant investment drives an attractive return over a multi-year horizon. So there certainly a number of areas that we believe are important to advancing our strategy and we are — we will continue and are carefully looking at all of those as we move forward.

James Ricchiuti — Needham & Company — Analyst

Got it. That’s helpful. And one final quick question, Julie. I’m wondering if you can tell us what Amazon represented for you in the quarter?

Julie Zeiler — Executive Vice President and Chief Financial Officer

Sure. Amazon represented roughly 27% of our business in the quarter.

James Ricchiuti — Needham & Company — Analyst

Thank you.

Operator

Thank you. Our next question comes from Ben Rose with Battle Road. Your line is now open.

Ben Rose — Battle Road Research — Analyst

Yes, good morning, Colin Julie and congratulations on a very strong quarter.

Colin Angle — Founder, Chairman and Chief Executive Officer

Thank you.

Ben Rose — Battle Road Research — Analyst

Just taking a look at one of the developments in the quarter, was the introduction of the rt0 Coding Robot and looks like a very intriguing product. Should we be thinking of as kind of a one-off or perhaps an initial foray into the home learning/educational segment of the home robot market?

Colin Angle — Founder, Chairman and Chief Executive Officer

So that robot, Root, is a robot that was developed and included in our product portfolio, as part of iRobot’s commitment to STEM education. We think it’s an amazing product available online. I think it will benefit from the growth in direct-to-consumer commerce that we described. We don’t view it as a material revenue driver at this point. So I wouldn’t put it into your growth driver calculus. We hope that it is incredibly successful from an impact perspective, particularly, in an environment today, where remote learning is so challenging and good tools to help students stay advancing, fingers crossed, in their educational journey. So it’s a strategic robot more on our company’s commitment to impact, rather than revenue growth at this point.

Ben Rose — Battle Road Research — Analyst

Okay. And if I may, Colin, just again to clarify some of your comments around product diversification and the company’s growth strategy. I am surmising from what you said that, you’re obviously looking at some additional categories that Terra may not in fact be the next kind of major diversification thrust that we see. But can we surmise that it is a question of when, rather than if, Terra will be launched?

Colin Angle — Founder, Chairman and Chief Executive Officer

We haven’t given any comments on timing for Terra, and I don’t want to create speculation. We certainly continue to believe that lawnmowing using our robotic technology is an attractive future market. So people would benefit from robot lawnmowers.

Ben Rose — Battle Road Research — Analyst

Okay, great. And sorry, just one additional comment, in terms of the diversification efforts. Can you speak broadly or maybe just in a broad fashion, what other kinds of opportunities you may be taking a look at? Or would that be betraying too much, future strategy?

Colin Angle — Founder, Chairman and Chief Executive Officer

I mean — I can speak broadly. iRobot is focused on improving the home experience, helping people maintain their home, operate it efficiently, securely and focus on how does technology help homes become healthier places to raise your family. That’s sort of the area that we view as core to the company. I think we’ve built a brand around delivering to our consumers, technology rendered accessible, reliable and delivering remarkably on the expectations that people have for robots. And so, I think that there is a lot of opportunity for us, to expand our brand, and take advantage of this growing — this rapidly growing 7.8 million connected customers as of today, that have opted into a direct relationship with the company.

So these investments that we’re making, and will continue into 2021, is really setting up a very exciting and efficient new channel into the marketplace, where through the excellence and stickiness of the Roomba experience, we create rabid, long term iRobot fans, and then can bring to them efficiently, directly, new products and service offerings, that they would enjoy and benefit from.

Ben Rose — Battle Road Research — Analyst

Okay, thanks very much.

Colin Angle — Founder, Chairman and Chief Executive Officer

You bet.

Operator

Thank you. Our next question comes from Asiya Merchant with Citigroup. Your line is now open.

Asiya Merchant — Citigroup — Analyst

Good morning everyone and thank you for the opportunity for the question. And congratulations, that was a very amazing sell through and — or at least sales, top line growth that you guys reported.

Colin Angle — Founder, Chairman and Chief Executive Officer

Thank you.

Asiya Merchant — Citigroup — Analyst

I have a couple of questions — sure, I have a couple of questions, how we should think about, Colin, just kind of your growth rate assumptions. Just long-term again, not looking to specifically for ’21, ’22, but at one point we talked about growth rates that could hover in the 20%-ish kind of range and it looks like you guys with 13% growth potentially this year, and looking out. Could we expect kind of convergence to those kinds of growth rates here in the next couple of years, as connected consumers and all this work from home, stay at home, improving cleanliness etc, comes to the forefront on people’s minds?

And then I have a question on margin for Julie; the dip that you expect in 4Q, is this something that we should expect sort of on a year-on-year basis, fourth quarter will always be such a sharp dip into 4Q. Is there something about this year that kind of — you kind of take a step back and remind us of whether this is something that’s happening just for this year? And then in ’21, you guys talk about tariffs being a 3 percentage point headwind, but I believe because it’s a full year of ’21, the margin headwinds in ’21 that we should model, should be higher, and I do understand that they reversed as you progress through the year, but at least at the starting point, they should be a little bit higher, relative to what they were in 2019, because it’s a full year versus a half-year. Thank you.

Julie Zeiler — Executive Vice President and Chief Financial Officer

Sure Asiya. Why don’t I start, and then Colin can jump in! Just to be clear, we haven’t offered any guidance for either ’21 or ’22 in long-term yet. So as you think about your models, what I would draw you back to is, as we look at both the role that RVCs play within the overall vacuum cleaner market, and the growth we’ve seen there, as well as the headroom that we continue to believe we have in our target addressable market. We are still in the low double-digit penetration range. We look forward, and believe that there is room to grow in all of our regions. How that growth evolves, that we’ll be talking about, as we finalize our plans for ’21 and beyond. Colin, did you want to add anything?

Colin Angle — Founder, Chairman and Chief Executive Officer

I think it’s — we’re still early in the robot industry. Roomba has a lot of room to grow, and we’re describing a strategic shift through developing this direct-to-consumer business, which should give us a very powerful new growth driver, as ’21 comes to a close and sets us into ’22. So I think that at this point, I agree with Julie, we really can’t talk more qualitatively around the stacking up of drivers of growth looking forward. And I think that we’re trying to make that very-very clear, without giving you numbers.

Julie Zeiler — Executive Vice President and Chief Financial Officer

And then Asiya, could I just ask a clarifying question, when you asked a question about margin, were you speaking about gross margin or operating margin?

Asiya Merchant — Citigroup — Analyst

Oh, gross margins.

Julie Zeiler — Executive Vice President and Chief Financial Officer

Gross margin. Okay. So as you look at our business and we’ve talked a lot, we have a seasonality in our business with heavier promotional periods in Q2 and Q4, and as you look backwards, you typically see that. As we go from our Q3 gross margin into our Q4 gross margin, what we’re projecting is a — what I would call, a normal level of MDF and our promotion and pricing activity, associated with ensuring that we continue to reach and convert our customers during this important giftgiving season.

Asiya Merchant — Citigroup — Analyst

Great. And then just to clarify on the tariffs, I know you had referred to what they were in 2019 from an impact to your margins, about 3 percentage points. At the start of ’21, if tariffs continue, we should assume that the impact would be higher than what it was in 2019, because it’s a full year. I just want to clarify that?

Colin Angle — Founder, Chairman and Chief Executive Officer

It’s not quite apples-to-apples with 2019, as you say. In 2019, there was an increase in tariffs. But we do have some operations in Malaysia, and we will continue to scale them in ’21. So as you say, it might — it will certainly start-off more impactful than it ends. Although some of the inventory being sold in Q1, will have been brought into the country without margins — sorry, without tariff impact in ’20 and so that it’s difficult to get too precise, and so we’re trying to keep it at a high level. But there puts and takes.

Asiya Merchant — Citigroup — Analyst

Okay. All right. Got it. Thank you.

Operator

Thank you. Our next question comes from John Babcock with Bank of America. Your line is now open.

John Babcock — Bank of America — Analyst

Good morning. And thanks for taking my questions. Just quickly, I noticed that as recently as this morning, there was a notice on your website suggesting potential delays in shipping products. And so I was wondering if you could talk about your supply chain and how you’ve managed through this period of elevated demand? And then also, what adjustments might you have to make, as we enter the holiday season?

Julie Zeiler — Executive Vice President and Chief Financial Officer

So as we have — and as we’ve talked the last couple of quarters, as we’ve moved through this incredibly challenging period, with a global pandemic. We’ve had to make adjustments to our supply chain, to ensure we could keep up with demand. This goes from the beginning of our chain, all the way through to the end.

Colin Angle — Founder, Chairman and Chief Executive Officer

Yeah, I think that there — given all of the growth, there is occasionally situation in our website, where shipping is delayed and that’s maybe what you’re seeing. But we believe that we have the systems in place that — to make those types of disruptions very short.

John Babcock — Bank of America — Analyst

Okay. So no real major supply chains in terms of getting your product from China or manufacturing a product overall?

Colin Angle — Founder, Chairman and Chief Executive Officer

It is an adventure every day. But we feel like we are winning.

John Babcock — Bank of America — Analyst

Okay. And then just wanted to get some clarity on the last set of question, I was just wondering if the promotional activities in the fourth quarter of this year are going to be any different than in past holiday seasons? And also just generally, if you could provide a little bit more color on, how you’re currently thinking about whether or not there will be pull-forward, because of Amazon Prime Day?

Colin Angle — Founder, Chairman and Chief Executive Officer

So our promotional strategy varies from year-to-year. This year definitely, we are accelerating a shift of spend — demand gen spend online and focus on driving the awareness and demand where our consumers are, and so the spend definitely shifts. We’re also — as the category becomes more well understood, making sure that, what makes iRobot special, is highlighted a bit more than we’ve done in the past, as opposed to Hey gee whiz, did you know that a robot could vacuum a floor for you and you don’t have to push vacuum cleaner? And so as the competitive landscape and customer acceptance of robot vacuuming evolves, so does our marketing strategy. I think that one thing that I would point out is, over the last year, we’ve seen a huge shift in customer expectations of robots, from a point — just a year ago when like the 17 years prior, people were skeptical that robots could actually do an effective job vacuuming, is almost like someone pushing a switch.

Now people are impatient, that the robots don’t do more, and are starting to rely increasingly on robots as their primary floor care solution. And this is part of the excitement we have around iRobot Genius, because what customers are asking for, is more control over, what, where and how the robot cleans, and that’s what we’re delivering to them with our AI improvements on the robots.

John Babcock — Bank of America — Analyst

That’s helpful. Thank you. And then last question before I turn it over. Just on capital allocation; obviously you’ve seen your cash balance grow, with the strong growth in the robots and overall just, good operations here. I was wondering if you can talk about how you plan to use that cash, whether it’s via M&A or whether there are other value return opportunities? And also just, what you see as a preferred level of cash to maintain on the balance sheet?

Julie Zeiler — Executive Vice President and Chief Financial Officer

Sure, I’ll take that. We’ve been very clear. I think that our capital allocation strategy goes across three fronts. The first, and I think one that is highly important in this volatile period, is to ensure we have sufficient liquidity to fund our existing operation. During periods like the global pandemic, there was a heightened focus on that. The second area of our capital allocation, and consistent with our past practices, is making smart acquisitions and we continue to believe that that will be something that we will want to look at doing, and if you look historically, both in terms of technology, as well as going direct in a number of markets, we’ve made some smart moves there.

The third portion of our capital strategy then becomes on, when it makes sense, returning some value back to our shareholders, we did that at the beginning of this year with roughly $25 million of share repurchases. I still don’t — we said during Q1, that we would not be doing any more of those this year, and I still believe that’s the case. But as we proceed forward and finalize our plans for ’21 and beyond, we’ll be taking another look at any rebalancing needed in our capital allocations.

John Babcock — Bank of America — Analyst

Great. Appreciate all the help.

Operator

Thank you. Our next question comes from Mark Strouse with JPMorgan. Your line is now open.

Mark Strouse — JP Morgan — Analyst

Yeah, good morning. Thank you very much for taking our questions. Kind of a follow-up to Asiya’s earlier question. Understand you’re not giving long-term targets for gross margins yet, but if you go back a couple of years ago, you were regularly printing gross margins in the low 50s and I think you had at the time, given a 2020 target for a gross margin of around 50%, 51%. Again not looking for specifics, but is it unreasonable to think that over the next couple of years, that you could eventually get back there? Or has something fundamentally changed with competition or pricing or component costs, anything like that?

Colin Angle — Founder, Chairman and Chief Executive Officer

So Mark, maybe I can try to give you some color on this. Definitely, you’ve been with us a long time, and you’ve seen the market evolve, from a time when we were alone in the marketplace, to a time when competition started to come in and put pressure on pricing a little bit, and that coincided with iRobot, really leaning forward on our bill of materials to ensure that we are putting more technology into the robots, more processing power to come out with the first robot that could build a map, and first systematic system and then the — with Genie as the first robot that could remember the map and grow the understanding of the environment.

We spent a lot of time today and I’m happy to add more color to it, that we’re entering in a play, into a place where I feel like that our gross margin and profitability tailwinds, that should help part of that, Moore’s law gives us access to cheaper processing power, and so that the need to lean quite as far forward is improved. The fact that, at this point in time, customers are excited by how well the robots clean, and are looking for the robots to be smarter, which means that innovation and differentiation in the category is something that can be best delivered, with improved software, that helps. The direct-to-consumer helps. Services help. And so that, I’m not going to give you a magic number, but I think that gross margins ebb and flow with the current reality of the marketplace, and from alone in the market to early competitive challenges to differentiation based on software and the direct business model, I feel like we’re headed into an exciting next chapter of iRobot.

Mark Strouse — JP Morgan — Analyst

Okay. That makes sense. Thank you, Colin. And then just one quick follow-up if I can, how committed, how locked in are you to Malaysia? If something happens with the change in the tariff structure from the election or something else?

Colin Angle — Founder, Chairman and Chief Executive Officer

IRobot is committed to Malaysia. We believe that geographic diversification is critical for a number of different reasons, and Malaysia makes a ton of sense. We’re invested in making that our second geography of manufacturing. Full stop, period.

Mark Strouse — JP Morgan — Analyst

Got it. Understood. Okay, thank you very much.

Colin Angle — Founder, Chairman and Chief Executive Officer

You bet.

Operator

Thank you. Our next question comes from Mike Latimore with Northland Capital Markets. Your line is now open.

Mike Latimore — Northland Capital Markets — Analyst

Yeah. Thank you. Great quarter there. Just on the sell-through rates a little bit, can you — I think you said they were improving or accelerating, can you just quantify that a little bit and maybe third quarter — you saw on the third quarter versus second quarter? And then does the — kind of roughly 14% revenue growth in the fourth quarter, is that roughly in line with what you’re expecting sell-through to be?

Julie Zeiler — Executive Vice President and Chief Financial Officer

Sure. So, as we said, we’re seeing nice improvements in our sell-through and as we’re talking about it, it’s through week 40. So versus our Q2, we’re seeing incredibly — exceptionally strong growth in the U.S., modest improvements over Q2 in EMEA, and then Japan, which is slightly negative on Q3 year-to-date basis. But we believe that that’s largely due to their comping in the third quarter, a very high 2019, because of the pending increase in consumption tax.

Colin Angle — Founder, Chairman and Chief Executive Officer

Just from a physics perspective, Q3 — because we account on sell-in, Q3 tends to be an inventory build quarter and Q4 will be an inventory rundown, leading us in Q1 in a good inventory position. So the physics of it would be that sell-in outpaces sell-through in Q3, and sell-through outpaces sell-in in Q4.

Mike Latimore — Northland Capital Markets — Analyst

Got it. Okay, great. And then, on the — some of the enhanced features that you highlighted like, the directed room cleaning service. Can you talk a little bit about just kind of the usage rates there? What percent of the users are actually using that function? How often are they — or kind of growth in some of those enhanced features?

Colin Angle — Founder, Chairman and Chief Executive Officer

I would say that the idea that you ask Roomba to clean a specific area of your home, has continued to grow, and is now a very commonly used feature. I’m not going to give you a percentage, but it’s not something that just the niche robot owners use. If you bought an i7, s9 or m6 robot, chances are you’ve built the map and chances are you’re using this functionality. And the Genius goes from Clean My Kitchen to even more precision, clean around my kitchen table, and it’s still early on that front, but definitely we’re seeing strong uptake on that additional functionality. The use of the robot to also find good times to clean, so that — one of our biggest challenges right now is, that the Roomba starts, and there’s people home and they turn it off, and so that there’s a very rapidly growing focus on when are good times to clean in the home, and we’ve got a lot of features in the iRobot Genius software, to help address those questions as well.

And so, it’s all goodness and again, we tried to say on the call, we’re seeing increased engagement, which is what we hope to see based on the rollout of this new AI capability, and that’s supportive of this strategic goal of getting more of our direct opt-in customers very actively engaged with our robots.

Operator

[Operator Instructions] Our next question comes from Jeff Feinberg with Feinberg Investment. Your line is now open.

Jeff Feinberg — Feinberg Investment — Analyst

Thank you very much. Good morning. Thank you for all the flavor. Just want to make sure that I’m understanding the opportunity correctly when you’re talking about the direct-to-consumer, the resourcing as well as variety of investments. If I’m looking at this on a multiyear basis, this is taking 2022 versus whatever we do this year. I’m assuming with the comments that you made about the hurdle of returns and the investments that we could look for a nice compound growth in the bottom line over a couple of year time planning horizon with the benefit of these investments?

Colin Angle — Founder, Chairman and Chief Executive Officer

Yes. The direct-to-consumer is designed to decrease customer churn and create compounding growth because we’ll be selling more product to our existing customer base than we would without these investments. And so that it should accelerate our organic growth.

Julie Zeiler — Executive Vice President and Chief Financial Officer

And just to be clear how that plays through, again, we have not offered any explicit guidance on ’21 and ’22 and beyond, and we’ll be doing that in the future.

Colin Angle — Founder, Chairman and Chief Executive Officer

Yes. But you’re correct on the mechanics.

Operator

Thank you. This concludes our answer-and-question session. I would now like to turn the call back over to Andrew Kramer for closing remarks.

Andrew Kramer — Investor Relations

Thank you, Joelle. This concludes the third quarter 2020 financial results call. I appreciate everybody’s support. We look forward to talking with you over the coming weeks and months. Thanks again.

Operator

[Operator Closing Remarks].