In a July 22 conference call to discuss second-quarter 2020 financial results, Colin Angle, the CEO of iRobot (NASDAQ: IRBT), said, "Differentiating our floor-cleaning robots by providing consumers with an exceptional experience is a critical aspect of our strategy." Subsequent to this statement, the company launched iRobot Genius Home Intelligence to distinguish itself from the competition.
This wasn't a quiet software launch; iRobot is making a big deal about its new capabilities. It's part of a bigger trend in 2020: to establish a more direct relationship with customers. Doing so lays the foundation to establish recurring-revenue streams in 2021.
The new features
iRobot's two main products are the Roomba (a robot vacuum) and Braava (a robot mop). After digesting the company's press releases, I'd place its software improvements into three categories: autonomy, collaboration, and personalization.
In autonomy, the Roomba and Braava will be able to sense what's going on around them and learn. For example, Roomba can sense from other smart devices in the house whether its owner is home. It can take this cue and vacuum while the house is empty, which is less bothersome and noisy than when someone's trying to watch TV.
In collaboration, iRobot's management wants there to be two-way communication between device and owner. Yes, Roomba can be told to vacuum while the house is empty, but it can also now suggest when it "thinks" it should be cleaning. For example, Braava could suggest mopping more frequently during allergy season, removing allergens from the floor.
Finally, the software update really shines in personalization. An entire house can be segmented into different zones, and a personal schedule can be uploaded. With the push of a button or a voice command, Roomba can be told to clean the baby's room twice a day (but not during nap time, of course), or Braava can be sent to mop under the table after every meal.
Of course, this is what iRobot says the new software can do. To be a truly meaningful update, the company will have to actually deliver on functionality and ease of use, a challenge for any technology company when rolling out new software.
Why it matters
As Angle said, he sees iRobot's differentiation coming from providing an "exceptional experience." There are other robotic floor cleaners on the market, but this company is trying to offer a better service by upgrading its software to do more.
Standing out is important for consumer brands, but iRobot has more at stake. It's trying to establish more-direct customer relationships, and having more digital contact will help. In the fourth quarter of 2019, its direct-to-consumer (DTC) business was virtually nonexistent. It had $20 million in sales on the iRobot.com site, compared with total revenue of $427 million.
But DTC is picking up steam for iRobot. In Q2, DTC sales were 12% of the company's total and were up 160% year over year. Granted, it was an easier quarter to accomplish this feat since many physical-retail partners were closed due to the coronavirus. But still, it is growing.
So how does a software upgrade help iRobot establish direct customer relationships? Before the company had an app, someone could buy an iRobot product in a third-party store without ever interacting with the company. But with the app, iRobot can get customer data and send opt-in emails. The new software launch is more incentive to download the app or swap an old robot with a new one that has the new features.
The new iRobot app gets a customer's email. As of Q2, there were already 6.9 million people on iRobot's mailing list, up from just 4 million at the end of 2019.
Generating revenue by selling directly to consumers should improve iRobot's profitability since a retailer doesn't get a share. But the DTC model has another purpose: to generate recurring revenue. It's still unclear what this will look like; management just calls it "a broader range of products and services."
Establishing recurring-revenue streams is a big change for iRobot, and it will be the focus in 2021. Investors should expect management to fulfill its promise to launch recurring-revenue tests over the next few quarters. One thing the company might do is offer financing options. This could make higher-priced robots more accessible, boosting revenue growth.
But something else that could be on iRobot's docket is an ongoing subscription: a Robot-as-a-Service, if you will. Perhaps customers could have access to the latest iteration of cleaning devices for a flat monthly fee.
Whatever it winds up looking like, this is iRobot's focus right now. Investors should pay attention to the new software's consumer reception, the growing mailing list, DTC sales, and any recurring-revenue tests in the coming quarters.
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Jon Quast owns shares of iRobot. The Motley Fool owns shares of and recommends iRobot. The Motley Fool has a disclosure policy.
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