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iRobot Sweeps Away Competitive Threats

iRobot Sweeps Away Competitive Threats

Special thanks to Austin Bohlig for his work on this note. 

iRobot (IRBT) continued to show their leadership in the home robotic space, reporting Sep-17 results essentially inline with analyst expectations and more importantly raised Dec-17 revenue guidance by 5%. Despite elevated worries about increased competition heading into the quarter, iRobot continues to exceed expectations and experience 20% plus revenue growth over the past 3 quarters. Sep-17 results shows the perceived threat from competition is overblown, and indicates iRobot is defending their leading home robotics position. Although we just launched coverage on iRobot last week (note here), we have become incrementally more upbeat on the company’s future and leadership role within home robotics space following these stellar results.

Sep-17 Qtr Highlights. Total revenues grew 22% y/y in the Sep-17 quarter, and they raised full year guidance from $840 –860 to $870 – 880, which implies 32% y/y growth at the midpoint. iRobot sold 905k home robot units in the quarter, of which 86% were Roomba vacuums and 14% were Braava wet floor products. Both categories experienced strong y/y growth in many regions across the globe, but continued success in the U.S. and EMEA continues to drive upside. Robust demand in both these regions will continue into 2018, and iRobot is increasing full year 2017 growth expectations in U.S. and EMEA, to 40% and 45% respectively.

An Early Thought On 2018 Guidance. It’s worth noting when the company reports Dec-17 results in the month of Feb-18 we would expect slightly conservative guidance for 2018 given managements history of setting a beatable bar.

The Big Picture, Plenty of Room To Grow.  The most penetrated robotics vacuum market in the world is the U.S., but less than 10% of U.S households own a robotic vacuum. With plenty of room to run both domestically and internationally, the future is bright for iRobot. The driving catalyst to increase robot adoption is increasing consumer awareness, and as consumers become more comfortable with robotic vacuums, this will cause increase demand for other domestic robot categories (mops and lawnmowers). Over the next 10 years we anticipate the entire domestic robot category to see double-digit unit growth annually, and by 2025 believe 26.5M domestic robots will be sold, which will equate to a $5.7B market opportunity. See our domestic macro model here. While iRobot is well positioned in the vacuum and wet floor markets, the company’s industry leading robotics expertise will unlock many opportunities in other domestic markets.

No Hint At Lawnmower…Yet. We mentioned last week that iRobot will hint to their entrance into the lawn mower category on the Sep-17 or Dec-17 earnings. They did not mention the lawn mower on this call, and more broadly would not comment on new products. While iRobot did not provide any color on when they will release a lawnmower, we continue to believe it is likely they will introduce a robot lawnmower in 2018. Most importantly this a “when”not an “if”, they will introduce a robotic lawnmower. We’re modeling for the lawn mower will launch in Mar-18 (and account for 5% of revenue in the Jun-18 quarter) and account for 8% of 2020 revenue. The Street is not modeling the lawn mower.

Model Revisions. We raised our near term estimates to reflect the company’s updated guidance, and now expect the company to sell 3.2M vacuums and 503k wet floor products in 2017. Looking longer term, we continue to believe both the Roomba vacuum and Braava wet floor product line can experience 20%+ unit and revenue growth through 2020, and believe it is very likely the company will introduce a lawnmower over the next 12 months. The robotic lawnmower could add $60M in incremental revenue over the first 12 months, but grow to a $200M business by 2022. See model here.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

iRobot, Robotics
3 min. read Show less
AMS AG Results Positive for iPhone X Mix

AMS AG Results Positive for iPhone X Mix

Following positive Sept-17 results from an Apple supplier, AMS AG, we continue to believe the mix of iPhone X remains favorable and will drive overall iPhone ASPs 15% higher (Street up 8%) in FY18.

Who is AMS. AMS is a European semiconductor company, which supplies optical components to Apple that enables 3D sensing on the iPhone X. 3D sensing is a premium feature going into the iPhone X, which will allow facial recognition and other augmented reality applications.

What AMS Said. AMS reported q/q revenue growth of 45% in the Sept-17 quarter, but more impressively, guided Dec-17 revenues to be up 68 – 83% q/q (mid point up 75%), which was meaningfully stronger than analyst expectations. The company implied the better than expected guidance was due to their 3D sensing optical business which is in the iPhone X. The start of high volume shipments began middle of the third quarter, but given the better than expected Dec-17 guidance we believe demand will continue to increase.

What Does This Mean For The Apple Model? Directionally its positive for the mix of iPhone’s that will be in the form of the iPhone X. Since the AMS component is new, we can not build a growth rate off of the Dec-17 guidance to better triangulate iPhone X demand. That said, upside to AMS Street estimates do suggest Apple has a more favorable outlook to iPhone X demand than analysts have been projecting.

iPhone ASP Barrier A Fallacy. As we highlighted in a Apple preview note this morning, we believe these data points further indicate strong demand for iPhone X, which will lead to better than expected ASP acceleration in 2018. At first take the $1000 starting price iPhone feels like a deal breaker. We think that’s a fallacy, and consumers will take a step function jump in what they’re willing to spend on an iPhone. The average ASP (unweighted) for the iPhone X is $1074, compared to $809 for the iPhone 7, a 33% increase, and the average iPhone 8 ASP of $824, 2% above the iPhone 7.  It’s been well documented an increasing number of iPhone buyers are moving to monthly installments, whether through the iPhone upgrade program, or similar programs from most global carriers.  In total we estimate about 75% of new global iPhones are purchased via installment programs. Last year using the iPhone Upgrade Program, the iPhone 7 plus 128GB was $40.75 per month, compared to the iPhone X 64GB at $49.91 per month. This translates to a $9.16 monthly increase, and an ASP increase from $849 (iPhone 7 Plus 128GB) to $999 (iPhone X 64GB), up 17%. We think 22% of iPhone buyers will view the $9 monthly increase as an acceptable monthly increase to get the latest iPhone.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Apple, Augmented Reality
2 min. read Show less
AAPL: iPhone ASP Barrier a Fallacy; Raising Estimates

AAPL: iPhone ASP Barrier a Fallacy; Raising Estimates

Apple reports September results on November 2nd. The focus of the call will be Apple’s commentary about iPhone X preorders which start on Oct 27th (launch is Nov 3rd), and what that will mean for iPhone mix and ASP. The mix and ASP will be the biggest driver of AAPL shares in the next year, which we expect to be favorable to the story. We’re raising our estimates based on higher iPhone ASPs ($740) with our updated model (here).

Raising Estimates. For FY18, we’re raising our iPhone ASP to $740 vs. Street at $696 (up 15% y/y), revenue to $273 billion vs. Street at $265 billion, and EPS to $11.25 vs. Street at $11.05.  We’re moving 7m iPhones from Dec-17 (now at 77.5m vs. Street at 82m) to Mar-18 (now at 64.5m vs. Street at 61m) to account for production constraints of the iPhone X. For FY18 we’re expecting 238m iPhones, up 9% y/y vs. Street at 242m. We dive deeper into the potential upside around iPhone X in FY18 below.

iPhone ASP Barrier A Fallacy. At first take the $1000 starting price iPhone feels like a deal breaker. We think that’s a fallacy, and consumers will take a step function jump in what they’re willing to spend on an iPhone. The average ASP (unweighted) for the iPhone X is $1074, compared to $809 for the iPhone 7, a 33% increase, and the average iPhone 8 ASP of $824, 2% above the iPhone 7.  It’s been well documented an increasing number of iPhone buyers are moving to monthly installments, whether through the iPhone upgrade program, or similar programs from most global carriers.  In total we estimate about 75% of new global iPhones are purchased via installment programs. Last year using the iPhone Upgrade Program, the iPhone 7 plus 128GB was $40.75 per month, compared to the iPhone X 64GB at $49.91 per month. This translates to a $9.16 monthly increase, and an ASP increase from $849 (iPhone 7 Plus 128GB) to $999 (iPhone X 64GB), up 17%. We think 22% of iPhone buyers will view the $9 monthly increase as an acceptable monthly increase to get the latest iPhone.

Now Modeling for 15% ASP Increase in FY18, versus Street at 8%. We’re raising our iPhone ASP to $740 vs. Street at $696 (up 15% y/y) due to a shift to higher ASP iPhones including the iPhone 8 and iPhone X. The release of the iPhone 8 was underwhelming compared to past iPhone launches, but this is not bad news for Apple. This year’s iPhone cycle will have its units and revenues split between the iPhone 8 and the iPhone X. We anticipate ~25% of iPhone SKUs purchased in FY18 will be an iPhone X (with about ~30% iPhone 8). Historically about half of the iPhones purchased in a given year are the most recently released model. This bodes well for iPhone revenue growth as this cycle’s ASP is materially higher than previous cycles. We have a weighted-ASP of $740 for this cycle of phones (all iPhone models for sale), indicating the higher-end phones’ robust demand is pulling up ASPs. Importantly, a look at the bill-of-materials (BOM) for these phones indicates that the gross margin on the 8/X cycle will be comparable to previous models’ at around 65%. While this means margins have not improved, it does mean that there will be more gross profit dollars for this year’s phones (65% of $1000 is more than 65% of $500). See below for our breakdown of the cycle’s mix and ASPs.

Other Ways To Get A Read On iPhone Demand. Google trends suggests a 10% decline in interest; the index went from 79 to 71 for ‘iPhone’ searches Y/Y. While this is a negative data point, we are putting more weight onto our iPhone Intent to Buy survey we have conducted twice over the past six months. The results of our survey indicate 25% of people in the US intend to upgrade to iPhone 8 or iPhone X, compared to last year’s results of 15% intending to upgrade to the iPhone 7. Our model also predicts ~18% of new iPhone sales will be the SE, which may appear high, but the SE is actually a capable phone (it was released 18 months after the iPhone 6) that will appeal to price-sensitive iPhone buyers given its average price of $399. The SE is not a threat to the iPhone X as the price points and tech interest levels of the respective buyers are vastly different.

The Upgrade Wave. The reason why our survey is suggesting 25% of the iPhone base in the U.S will upgrade this year (that’s about 12% of the U.S. population) may be attributed to the base of iPhone owners whose phone will be 3 years or older. This number will surpass 300 million this year. This 300 million pool exceeds Street estimates calling for 242 million new iPhone units to be sold in the twelve months. Owners of older phones will be more inclined to upgrade in a given cycle. In addition, this year’s models offer a favorable ASP mix, both of which are positive data points for Apple. Owners of newer models will still be inclined to upgrade due to the draw of more advanced technology and new features, so it is not hard to believe that the Street’s estimates are conservative. For our part, we are modeling 238 million units to be sold, and would not be surprised to find this estimate conservative once the sales data starts coming in.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Apple
4 min. read Show less