Spruce Point – iRobot Corporation (IRBT) Deep Forensic Analysis

Updated on

Spruce Point Capital Management wants to alert our readers it has published a critical update to our research on iRobot (Nasdaq: IRBT) as a result of our deep forensic analysis into the Company’s recent distributor acquisitions in Japan and Europe.

Based on the primary statutory filings on Robopolis in France, and credit research obtained about Sales on Demand (SOD) in Japan, we cannot reconcile iRobot’s financial guidance. Recall, that iRobot has already revised guidance and sales commentary in Japan. We believe the guidance attributable to Robopolis appears even more troubling. Investors should carefully evaluate why iRobot has paid nearly 4x the price for Robopolis vs. SOD when each distributor sells identical iRobot products and achieve comparable margins. Furthermore, iRobot says that Japan is growing at 2x the rate of Europe.

Get Our Icahn eBook!

Get The Full Carl Icahn Series In PDF

Also read:

  • Baupost Letter Points To Concern Over Risk Parity, Systematic Strategies During Crisis
  • AI Hedge Fund Robots Beating Their Human Masters

Financial Details of iRobot’s Recent Distributor Deals Not Making Sense

New research into iRobot’s recent distributor acquisitions further calls into question the reliability and accuracy of the Company’s financial guidance. If iRobot cannot give further clarity, we believe its guidance should be suspended.

Distributor acquisitions need to be heavily scrutinized given the related-party nature of the transactions. In the case of iRobot, we believe investors should be extremely concerned that:

  • Its Japanese and European distributors act as exclusive agents for iRobot with nearly 100% of revenues from iRobot products
  • IRBT paid >4x the sales multiple and 3x the book value for Robopolis (Europe) than Sales on Demand (SOD/Japan)
    • Why should this be the case when Japan is supposedly growing much faster according to iRobot?
    • Both entities sell a comparable product set – iRobot products!
    • Our primary documents show nearly identical gross margins of 25% at SOD and approximately 20% at Robopolis
  • However, based on iRobot’s own SEC financial disclosures it suggests that Robopolis gross margins are 45%
    • These 45% margins are well above historical norms that are documented by Robopolis through French statutory filings
    • Are significantly higher than any electronic hardware product we’re aware of
    • Robopolis’ own financial figures advertised on its website also don’t reconcile with its French statutory filings
    • The 2017E sales implied from Robopolis from iRobot’s incremental margin contribution forecast doesn’t make sense
  • Further evidence of issues with the Japanese distributor acquisition emerge from our research
  • Recall, iRobot already revised the financial contribution of SOD and amended its transcript to correct Q4’16 sales growth
  • On the Q2 conference call iRobot admitted it hired additional finance and accounting staff in Japan
  • Based on our proprietary research, we estimate that 2017E sales in Japan are down 35%-40% vs prior years

Why Is iRobot Now Buying Distributors?

Investors need to ask themselves “why now” is iRobot acquiring its distributors and using material capital resources to fund this expensive endeavor when it could have done this at any point in the past:

  • $157m spent on acquiring two distributors (approximately 60% of its YTD average cash balance)
  • Alternative uses for the capital include:
    • More R&D to accelerate new product development where iRobot has traditionally failed (lawn mowers / telehealth)
    • Synergistic technology or product acquisitions
    • Initiating a regular or special dividend to eliminate excess cash
    • Buying back more stock if iRobot viewed it as undervalued

iRobot has said acquiring distributors gives it more ability to maintain and accelerate its market position by gaining control over its distribution network and to give a consistent approach over sales, marketing, branding and service

  • We had questioned in the past if iRobot had stuffed the channel by having its distributors acquire more product than it needed
  • This may explain why iRobot failed to meet sales and earnings forecasts for two years post our initial report criticisms in 2014

More likely explanations as to why iRobot is now acquiring its distributors are that:

  1. Its distributors have a better view of end market demand, and want to get out of the business before competition increases further and profits materially decrease
  2. Intense competition is already forcing margin compression, which is starting to creep into iRobot’s financial By acquiring its distributors, iRobot can soften some of the immediate margin impact by eliminating the middleman
  3. By acquiring its distributors’ inventory, iRobot can effectively re-sell product that it has already sold (effectively sell the same product twice)
  4. iRobot is using the acquisitions to cover-up prior issues / problems with its distributors (Japan/SOD), and now this might explain why iRobot is paying an unusually high multiple for Robopolis

A Close Look At IRBT’s Distributor Acquisitions Raises Interesting Questions…

Robopolis Reports Approx 20% Gross Margins

iRobot Corporation (IRBT)

Robopolis Revenue Discrepancy

Here’s more evidence of revenue discrepancies with Robopolis

Look carefully and you will see that the revenues it advertises on its website appears overstated by 44% Why has Robopolis website stopped reporting results post 2012?

iRobot Corporation (IRBT)

See the full PDF below.

Leave a Comment