iRobot Corp (NASDAQ:IRBT) Q4 2019 Earnings Conference Call February 6, 2020
Company Participants
Andrew Kramer – VP, IR
Colin Angle – Co-Founder, Chairman & CEO
Alison Dean – EVP, CFO, Treasurer & Principal Accounting Officer
Analysts on Call
Jed Dorsheimer – Canaccord Genuity
Michael Latimore – Northland Capital Markets
Ben Rose – Battle Road Research
Asiya Merchant – Citigroup
Troy Jensen – Piper Sandler & Co.
John Babcock – Bank of America Merrill Lynch
Charles Anderson – Dougherty & Company
Mark Strouse – JPMorgan Chase & Co.
Michael Cikos – Needham & Company
Andrew Kramer
Thank you, Operator. Good morning, everybody. Joining me on today’s call are iRobot’s Chairman and CEO, Colin Angle, Executive Vice President and CFO, Alison Dean; and Julie Zeiler, Vice President of Finance, who was named to succeed Alison as CFO later this spring. Before I set the agenda for today, I’d 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 SEC. iRobot undertakes no obligation to update or revise these forward-looking statements, whether as a result of new information or circumstances.
During this call, we may also disclose non-GAAP financial measures as defined by SEC Regulation G, including adjusted EBITDA, non-GAAP gross profit, non-GAAP operating income, non-GAAP income tax expense, non-GAAP net income and non-GAAP net income per share are 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 fourth quarter and full year 2019 results press release we issued last evening, which is available on our website.
Related to our financial disclosures, we have continued to take steps to expand our financial reporting to provide additional transparency into iRobot’s underlying operating performance and potential. That process began a year ago when we started to provide non-GAAP financial metrics, and we have augmented those disclosures in today’s press release by providing the specific quarterly Section 301 tariff costs. In addition, we’ve expanded our outlook to include GAAP and non-GAAP metrics and reconciliations of these metrics for the full year 2020 and the first quarter of 2020 are available at the end of these prepared remarks. Given the impact of noncash items, like stock-based compensation and onetime exceptional items, such as litigation costs can have on our performance, Alison’s review of our 2020 outlook will focus primarily on our non GAAP outlook. Related to our non GAAP reporting, although, we are now providing the specific dollar value of Section 301 of tariff costs, we do not plan to adjust our non-GAAP gross and operating profit margins for this item.
To facilitate the transition in our reporting convention, the last 8 quarters of GAAP to non-GAAP reconciliations included in today’s press release can be downloaded as in itself filed directly from our IR website.
Finally, since we have exclusively relied on GAAP reporting convention throughout 2019, comments by both Colin and Alison about our fourth quarter and full year 2019 results will focus on our GAAP performance. In terms of the agenda for today’s call, Colin will briefly review the company’s performance and agreements for the fourth quarter and full fiscal year 2019, to review our top strategic priorities, discuss our outlook for 2020 and address the CFO transition announcement that we issued yesterday. Alison will detail our financial results for the fourth quarter and full year 2019 and share some further color on 2020. Colin will wrap up our prepared remarks with some final observations about 2020. Then we’ll open the call for questions.
At this point, I’ll turn the call over to Colin Angle.
Colin Angle
Good morning, and thank you for joining us. We closed 2019 on a positive note, with fourth quarter revenue, operating income and EPS that exceeded our October targets. Fourth quarter revenue of $427 million grew 11% due to a strong showing in the United States and a solid performance in EMEA. The combination of higher revenue and disciplined spending resulted in better-than-expected operating profit margin and EPS.
For the full year 2019, we reported revenue growth of 11% to over $1.2 billion, operating profit margin of 7% and EPS of $2.97. It’s worth noting that our operating profit margin would have been 3 percentage points higher and EPS would have benefited from $1.32 before taxes had we not paid nearly $38 million in Section 301 tariffs in 2019. During 2019, we executed well on all major elements of our strategy while navigating challenging market conditions in the U.S. and intense price competition in EMEA. As a result, we maintained our Roomba leadership took important steps to broaden our product portfolio and advanced our efforts to build out our smartphone ecosystem.
We were also pleased with our progress to grow our connected user base and diversify our supply chain. Although high tariffs in the U.S. and aggressive price competition are expected to persist. We are confident that by executing on our strategic priorities, we will emerge from 2020 well positioned to drive accelerated revenue growth, improved operating profit margin and generate stronger operating cash flow in 2021 and beyond.
Let’s take a closer look at our performance and accomplishments in 2019. In terms of geographic revenue performance, we grew our business in each major region. International revenue grew 15% in 2019 due to outstanding performance in Japan and solid execution in EMEA. In the U.S., revenue grew 8% driven in part by excellent Q4 growth of 15%. 2019 was a year of unprecedented innovation, highlighted by the introduction of the Roomba s9 and s9+ and the Braava jet m6. Sales of these new products, combining with the 2019 international launch of the Roomba i7 series drove our top line growth in 2019 and represented 17% of total 2019 revenue. We also introduced new differentiated digital features for these platforms that enable customers to tailor how, when and where our robots clean.
Roomba has been the de facto RVC category leader since its introduction 18 years ago. Geographically, we held our U.S. segment share despite aggressive competition. In Japan, we gained meaningful share, thanks to solid go-to-market execution. And while our share in EMEA declined as expected, given growth at the low end of the category. We also made tangible progress to diversify beyond vacuuming, our family of Braava robot mops represent a second growth engine. The initial sell-in success of the Braava jet m6 helped drive total Braava revenue growth of 28% last year and surpassed our target for $100 million in annual revenue. We expect to continue driving solid Braava growth in 2020. We also conducted beta trials of our Terra t7 robot mower in both Germany and the U.S.
We took additional steps to position — build our position within the Smart Home by leveraging home understanding with our robots. We recently announced a partnership with IFTTT that is aimed at making it easier for users to benefit from the integration of our robots with other smart home connected devices. Examples of this will include enabling Roomba users to schedule vacuuming to begin once the home security system is activated or automatically turning off lights once Roomba’s mission is completed. Looking ahead, there is much more to come in this area.
Having sold over 9 million connected robots over the past 2 years, we’ve made meaningful progress to transform our user base into a true community. By the end of 2019, more than 4 million Roomba and Braava owners have opted into our digital communication, which represents nearly 200% growth over 2018. We converted this engagement into higher in-app and irobot.com sales last year and anticipate continued growth on this front in 2020.
Diversifying our manufacturing supply chain was another priority in 2019. In addition to balancing production across multiple contract manufacturers in China, we also commenced Roomba production in Malaysia in late 2019, ahead of schedule.
As 2019 unfolded, and U.S. category growth slowed more than originally anticipated. We proactively managed our cost structure to reduce spending, partially offsetting the impact of lower revenue and gross margin.
Moving into 2020, we expect competition will remain intense in our largest geographic markets, with no change to the current 25% tariff on list 3 goods that impacts Roomba as well as all other RVCs imported from China into the U.S. These factors will continue to weigh on our profitability and EPS in 2020. Nevertheless, we believe that executing on our plans for 2020 will set the stage for better performance in 2021 and beyond.
Our top priorities in 2020 include the following. First, we plan to continue taking the steps necessary to negate the impact of tariffs without compromising our category leadership. Entry-level Roomba robots made in Malaysia are now being shipped in the U.S., and we plan to begin producing a second Roomba product in Malaysia in the second half of 2020. All totaled, we anticipate Malaysian volume will represent up to 1/3 of our total U.S. units sold in 2020. We plan to accelerate and expand Malaysia production to cover most of our RVC portfolio by the end of 2021. We also seek a List 3 exemption, which would help defray the costs associated with ramping Malaysia and remain more cost-competitive during this transition. Given these activities, we believe we can generate tens of millions of dollars of improvements to our gross profit beginning in 2021. In the interim, we are focused on preventing tariffs and their impact on near-term profitability from impairing our ability to defend our category leadership, and we have continued to adjust our pricing and promotional activities accordingly.
Second, we are committed to continue advancing innovation, amplifying our differentiation and diversifying our product portfolio. With current RVC market penetration around 12% in the U.S. and well below that level of major international markets, we are investing to capitalize on the substantial growth runway that remains in front of Roomba. Ongoing investment in software-centric functionality that takes further advantage of our advanced AI and machine learning capabilities will enable Roomba and Braava to improve their performance and fit seamlessly into the lives of their owners. Our Smart Home plans are aimed at complementing these activities. Consistent with our comments last quarter, we plan to introduce one new Roomba model in 2020. In addition, we expect to make further progress commercializing Terra. During 2020, we plan to begin limited online sales of Terra, which is an important step toward a larger scale commercial launch in conjunction with the 2021 mowing season.
Third, having cultivated a vibrant, growing global user community, we are now focused on building a stronger direct-to-consumer sales pipeline and establishing new recurring revenue streams. Last year, we tested several new sales models including a limited but very successful subscription-like leasing trial in Japan that appealed to consumers more interested in our premium robots. We believe that offering greater flexibility to consumers for purchasing higher priced, higher margin robots and marketing directly to our user community will help us grow our core and premium RVC segment share, cross-sell complementary products and accessories into our installed base and further improve profitability.
Finally, we will remain diligent in managing our cost structure while continuing to fund the initiatives we believe will help us drive long-term value creation. While there will be minimal uplift to overall headcount this year, we will continue to focus on adding software engineering and data science talent into our R&D organization.
As we move forward, we believe that consumer demand for RVCs remains healthy. However, near-term challenges in the form of high tariffs and our expectations of moderate category growth in the U.S., along with aggressive price competition, are expected to impact our performance in 2020 and make it a year of transition for us.
Nevertheless, we are focused on executing against our 2020 strategic priorities in ways that will fuel near-term revenue growth, preserve our profitability and fortify our leadership, setting us up to capitalize on a broad range of exciting longer-term
Opportunities. In terms of our 2020 expectations, as outlined in our press release, we anticipate 2020 revenue growth in the range of 9% to 11% with International anticipated to grow slightly faster than the U.S. As we said on our October call, we expect that the combination of our pricing and promotional activity, and, to lesser extent, incremental tariff costs will put further pressure on our gross margin. While we plan to partially offset the anticipated gross margin degradation by limiting overall expense growth, we expect that these dynamics will, as we previously discussed, translate into lower 2020 operating income and EPS, especially in the first half of the year.
While the challenges we face in 2020 are significant. I am confident that the team at iRobot is more than ready to rise to the occasion in order to make 2020 another successful year. To that end, as we move through 2020, we expect that some of the transitory issues impacting our performance will dissipate as we ramp production in Malaysia and continue to drive innovation and execution across the organization, while carefully managing spending levels.
We believe that our success in 2020 will enable us to exit the year with better prospects for accelerated revenue growth, improved profitability and robust cash flow from operations.
Finally, last night, we also issued a press release announcing a CFO transition with current VP of Finance Julie Zeiler becoming CFO in early May. Working as part of our senior leadership team, Alison has played an instrumental role in the company’s success as a senior finance leader throughout her 15 years at iRobot, including the past 7 as our CFO. During her tenure here, she has become a trusted partner, and I am very appreciative of her many contributions, including her commitment to support a seamless transition over the next few months. We respect her decision to take some
Much-deserved time off before pursuing new ambitions outside of iRobot. Alison will be leaving our finance organization in very capable hands. In her three years at iRobot overseeing our financial planning and analysis and treasury functions, Julie has worked closely with our senior leadership team, helping us further scale the business, and I am confident that she is the right finance leader to help us propel our company forward.
At this point, I will turn the call over to Alison and return after her remarks to offer some Additional closing thoughts.
Alison Dean
Thank you for the kind words Colin. Leaving iRobot will not be easy. The past 15 years at the company have been a wonderfully fulfilling experience in large part because of the Great people I’ve worked with. Julie and I have worked closely over the past 3 years, and I believe she has the requisite skills, experience, and business acumen to lead our finance organization and help guide iRobot into its next phase of growth. And while I am looking forward to spending extended quality time with my family before I figure out what may come next professionally, it is incredibly important to me that we complete a successful transition of responsibilities, and I am confident that will occur. With that said, I’d like to proceed with the business at hand and review our recent results.
As Andy mentioned earlier, my review of the fourth quarter and the full year 2019 financial results will be done on a GAAP basis since we used that convention during the past year and all comparisons will be against the comparable periods of 2018 unless otherwise noted.
Our fourth quarter results exceeded our October plans for revenue, operating income and EPS. Quarterly revenue increased 11% to $427 million due to a strong holiday season in the U.S., which grew 15%. International growth of 6% was driven by a 9% increase in EMEA while revenue in Japan declined slightly as expected. Also as we expected, gross margin for the fourth quarter drops 9 percentage points to 40%. The decline primarily reflected the impact of pricing changes and tariff costs of nearly $22 million, partially offset by ongoing progress to cost-optimize production.
Q4 operating expenses decreased by 2% to $153 million, representing 36% of revenue versus 41% last year. The decline in spending reflects ongoing fiscal discipline across the organization, as well as low incentive compensation expenses. Operating income for Q4 was $17 million and our operating margin was 4%. Other income of more than $8 million reflects a gain associated with the sale of one of our investments.
Our Q4 effective tax rate was 20.0%, including approximately $3 million of discrete benefits. Our Q4 tax rate before discrete items was 30.3% driven primarily by the establishment of a valuation allowance on certain tax credits. EPS was $0.70 for the quarter, which included less than $0.01 of a net discrete tax expense related to the impact of stock-based compensation shortfall. Last year’s Q4 EPS of $0.88 included a benefit of $0.04 related to stock compensation windfalls. From a full-year perspective, 2019 revenue grew 11% to just over $1.2 billion. Geographically, we generated 50% of our revenue in the U.S., which grew by 8%. Outside of the U.S., international revenue grew by 15% with Japan having an excellent year at 21% growth while EMEA increased by 15%.
2019 gross margin of 45% declined by 6 percentage points as expected. The decrease was split relatively evenly between pricing changes and tariffs of nearly $38 million. Operating expenses grew by just 2% to $457 million due primarily to lower short-term and long-term incentive compensation expenses as well as the steps we took to curb discretionary spending. Operating income in 2019 was $87 million and our operating
Margin was 7% versus 10% in 2018, as prudent cost management helped mitigate the impact of lower gross margins. Our full year 2019 effective tax rate was 13.7%, including $8.4 million of discrete benefits. The decline in our 2019 tax rate of 5 percentage points was primarily driven by the impact of discrete items. 2019 EPS was $2.97 for the year versus $3.07 in 2018. Both 2018 and 2019 EPS included a $0.23 discrete tax benefit related to the impact of stock-based compensation windfall.
We ended Q4 with $256 million in cash, an increase of $165 million since the end of Q3 and a year-over-year increase of $94 million. Consistent with our plans, Q4 ending inventory was $157 million, or 56 days, compared with $165 million, or 76 days at the end of 2018. It is worth noting that our U.S. inventory value at the end of December reflects the impact of tariffs at the 25% level versus inventory levels a year ago in which only a relatively small portion of the inventory balance were affected by the 10% tariff level.
Before I provide additional detail regarding our full year 2020 expectations, I’d like to reiterate Andy’s earlier comments that we will focus on our non-GAAP performance going forward, and we’ve taken steps to facilitate this transition in our reporting conventions. We currently expect full year 2020 revenue of $1.32 billion to $1.35 billion, which equates to year-over-year growth of approximately 9% to 11%. We are planning for a similar revenue cadence to prior years, in which the majority of our revenue will be generated in the second half with roughly a 40-60 split. We expect Q1 revenue will be down from the prior year, but anticipate showing low to mid-teen growth in each of the next 3 quarters. To reiterate Colin’s comments, we anticipate solid full year revenue expansion in all geographic regions, with International having potential for slightly faster growth than the U.S.
As a reminder, our revenue expectations contemplate yen and euro exchange rates roughly in line with current rates, plus or minus 5%. In terms of gross margin, we anticipate non-GAAP gross margin in the range of 38% to 39% versus 46% in 2019. The expected decline is largely driven by planned pricing and promotion activity, including recent price reductions on certain Roomba models that went into effect last month. A smaller factor is the incremental effect of Section 301 tariffs. In total, we expect our full year tariff expense to be in the range of $47 million to $50 million, which is a negative 4% headwind to our profitability.
Ongoing product cost reductions with our Chinese contracts manufacturers are expected to help us mitigate the higher costs resulting from our Malaysia manufacturing activities. For the full year, we now expect non-GAAP operating expenses to total approximately 34% to 35% of revenue. We will remain vigilant with discretionary spending and anticipate minimal headcount expansion, all of which will help us mitigate normalized incentive compensation and increased R&D investment to support the opportunities that Colin detailed. We now expect full year 2020 non-GAAP operating income of approximately $55 million to $75 million with a non-GAAP operating margin between 4% and 6%. We currently anticipate other income of approximately $3 million. In terms of our tax rate, we estimate that our non-GAAP effective tax rate will be in the range of 16% to 19%. This is an expected improvement from the 2019 non-GAAP tax rate of 19.4% due to the expected jurisdictional mix of profits, combined with the effect of lower anticipated pretax income. Based on these plans, we currently anticipate non-GAAP EPS to range from $1.70 to $2.30. We anticipate a diluted share count of just under 29 million shares.
For some additional color on the first quarter, as I mentioned, we currently expect a revenue decline ranging from 8% to 12%. This primarily reflects the timing of anticipated orders following 2019 holiday sell-through activity. Lower revenue, combined with the anticipated decline in gross margin is expected to result in a range of $7 to $14 million with a non-GAAP loss per share between negative $0.15 and negative $0.40. We anticipate that the vast majority of our non-GAAP operating income will be generated in the second half of the year.
In terms of other 2020 guideposts, we expect capital spending to be in the low $40 million range, with overall capital intensity of approximately 3% of full year revenue, which is generally in line with the prior 2 years. We anticipate relatively modest cash flow from operations in 2020 given our expected performance. We expect our inventory levels to grow over the next 3 quarters, like they did last year, peaking in Q3 before returning to normalized levels in Q4. Given the sell-through results in Q4, we have a few retailers in the U.S. and EMEA that are carrying higher entry-level inventory than we’d ideally like. With the recent price changes and planned promotions, we expect those inventories will decline substantially in Q1. It is worth noting that channel inventory levels for our premium products, we’re in good shape at the end of 2019.
In summary, we finished 2019 on a positive note. And while we faced some notable challenges in 2020, particularly during the first half of the year, we expect that executing on our plan will enable us to begin building momentum moving into the second half of the year.
Additionally, we are diligently working through the longer-range scenario planning that will allow us to articulate our long-term financial targets. With that said, I’ll now turn the call back to Colin for his summary.
Colin Angle
Thanks, Alison. As some of you may know, 2020 marks our 30th year in business. We’ve come a long way since those early years. Not only did we create an entirely new category, but we helped build it into a vibrant, multibillion-dollar global market in which we remain the category leader. And while it may be gratifying to take a nostalgic look back. We remain very much focused on the road ahead. The investments we are making this year are focused by mitigating our tariff exposure, extending our differentiation at lower price points, diversifying our product portfolio and evolving our go-to-market strategies to reduce barriers to purchasing our premium robots and capitalize on our expansive connected installed base. By executing on our plans and diligently managing costs, iRobot is laying the foundation for improved financial performance and continued category leadership over the long term. Thank you.
Andrew Kramer
That concludes our comments. Operator, we can now take questions. [Operator Instructions].
Question-and-Answer Session
Operator
[Operator Instructions]. And our first question comes from Jed Dorsheimer with Canaccord Genuity.
Jed Dorsheimer
I guess my first question is just around manufacturing and supply chain. I may have missed this. But I didn’t hear anything about the recent situation in China with the coronavirus and expectations around plants as well as possible mitigation strategies associated with that, and how we should be thinking about that in Q1 and possibly Q2 impact. And then I’ll have a follow-up too.
Alison Dean
Jed. So at this point, we haven’t been experiencing any impact due to the coronavirus as is typical for us in advance of Chinese New Year, we built some production ahead of the breaks that we expect to have. So our production in Q1 is generally low. Our factories are — some of them are up and running already. Others will be back up and running next week. And so at this point, we’ve seen no impact from it, but we’re obviously monitoring the situation very carefully.
Jed Dorsheimer
Got it. And then just regarding the pro forma and the decision to take out tariffs. I mean, I understand that you’re unhappy with the tariffs. But I haven’t seen a lot of other companies that have — that are excluding tariff impact, just because we don’t know whether or not they continue or will be removed. I’m just wondering if you could elaborate on the thought process in decision for that.
Alison Dean
So Jed, just let me clarify, we aren’t excluding it. We’re calling it out as an item. So people will understand the impact, but we also made the decision we wouldn’t exclude it from our financials.
Jed Dorsheimer
Okay.
Alison Dean
It’s not a non-GAAP adjustment for us.
Operator
And our next question comes from Mike Latimore with Northland Capital Markets.
Michael Latimore
Yes. In terms of the — moving the production of a second Roomba to Malaysia in the second half. I guess what kind of gross margin benefit might we see from there? And then secondly, in terms of new products revenue this year as a percent of revenue. Can you give us some general guidance on that relative to what you had in 2019?
Alison Dean
Yes. So in terms of moving product, remember, moving to Malaysia benefits us because it will offset the U.S. tariffs, but it is more expensive to produce those products in Malaysia. So when products get moved, there is a cost associated with that. Over time, we hope to lessen the premium that we will have on our Malaysia manufacturing, but we certainly have a premium on production happening in Malaysia in 2020. In terms of revenue coming from newly launched products. It will be smaller than it was last year. The new products we have in 2020 are really the rollout of the s9 in Japan. And then we talked about having one additional Roomba model in 2020.
Operator
And our next question comes from Ben Rose with Battle Road Research.
Ben Rose
Alison, wanted to wish you luck, and thank you very much for the transparency and clean financials over the years.
Alison Dean
Thanks, Ben.
Ben Rose
Just to ask the first question, Colin, you referenced perhaps additional sales directly through irobot.com. Can you remind us roughly what percentage of sales are coming straight from the company’s website? And is it, in fact, part of the strategy going forward to sell more products directly through the website.
Colin Angle
So we believe that our connected strategy has, well, taken a little bit of time to get to a point of materiality as resulted in a customer experience where our customers are highly motivated to connect their products, highly motivated to share their e-mail information with us and extremely motivated to even go beyond that and opt into receiving communications because of the benefits of doing so.
And being part of this community of building robots together. And so that what happened in ’19 was I think we broke through into an installed base opting in — of the beginning of materiality, and we should see on a go-forward basis that our ability to go and generate revenue in the direct-to-consumer fashion is going to become an increasingly important part of the iRobot story. And this is very good news. Sales on our website, sales for these D2C channels tend to be with more engaged customers who are interested in more premium differentiated features, higher-end products. And there’s also gross margin opportunities through this. So this is a very good thing that developed into a strategy over the last year as our installed base of opt-in customers has substantially grown.
Alison Dean
And just in terms of magnitude, to your other question, Ben. It did a little over $20 million in sales just in Q4 on our website in the U.S. Just to give you a rough order of magnitude.
Ben Rose
Okay. Great. And my follow up is the company’s burgeoning cash balance begs the question what you might be looking at sort of on a near-term basis. Are there any thoughts regarding share repurchase at this point?
Alison Dean
We are assessing that as we speak, Ben, just coming out of the year. As you know in the past, we’ve taken advantage of cash balances and low stock prices to occasionally have share repurchase programs. And so that’s — certainly, that’s something that’s under discussion. We also believe M&A is part of our future. And so having an expectation of utilizing some of that cash for M&A would also be part of our plans, but probably more to come on that as we get into more into 2020.
Operator
And our next question comes from Asiya Merchant with Citigroup.
Asiya Merchant
Good luck, Alison, and thank you again for all the financial guidance and transparency that you’ve provided over the years. My question is just around how we should think about the U.S. market, which is obviously 50% of your sales. If you can provide us some color on how you’re looking at things evolving as you’ve exited the quarter. You were talking — provided some color in the prepared remarks. And I’m just sort of want to delve a little bit into what you saw in terms of the lower price versus a more premium-priced market, and how you see that evolving to 2020? Are you expecting a mix shift happening here? What’s going on behind the scenes? And then I have a question on the gross margin guidance as well.
Colin Angle
Sure. We can give a little bit more color. I think that as we look at the market for RBCs in North America, definitely seeing some activity down at the low end, below $200. But we’re also very pleased with the performance of our i7 and above robots in 2019 and believe that some of the programs I referenced in the prepared remarks around driving people up to features that we have launched that give more control in how, when and where the robots clean is a successful strategy in ’19 and something we intend to build on in 2020. And so that the — I think that the mainstreaming of robot vacuum cleaners as the right way to vacuum your floors has taken hold. Interestingly, ’19 was a year where — I’ve been watching the Roomba journey for, I guess, 17, 18 years now. And ’19 marked the moment when our customer base split from being skeptical that Roomba worked to impatient what they wanted Roomba to do more. And that’s actually really good news for us and supports our focus on differentiated features and a strategy to drive the market up into our core and premium capabilities. So there’s a lot going on. ’19 had a lot of color and definitely a lot of noise with tariffs and prices moving around a bit in the marketplace. But from a higher level — low saw more growth than high. But we maintained great performance in the high even with some testing out some new price points for the s9 and s9+.
Alison Dean
Asiya, just to add on that, in terms of our 2019 revenue mix, the high end, which we call 900 and above, that represented almost 50% of our revenue on a global basis. And we had almost 30% at our entry level. And then about 20% was in our mid-range.
Asiya Merchant
Okay. That’s great. And then just on the gross margin guidance. I know you provided a lot of color already on the tariff cost. But given that the fourth quarter, I think in your — in the excel that was sent out was a $20 million impact on tariffs. If I just roll that through — what am I doing wrong in my math here. If I just roll that through for 2019, the impact would be significantly greater than what you guys have indicated the 2020 tariff impact. Is that the offset that you’re expecting from the Malaysian production? Or is there something else going on there?
Alison Dean
So as we look at the expected — are you talking about the gross margin ’19 to ’20, just to clarify, in total?
Asiya Merchant
Yes. So the fourth quarter was when you saw — I think, in your excel, you’ve pointed out that, that was about a $22 million impact to margins in the fourth quarter. If I roll that — because that’s when you got hit with the 25% tariff in entirety. If I roll that through 2020, I would expect the gross margin impact to be much greater than what you guys have listed in your prepared remarks. I’m just trying to understand what the offset is here between the $20 million annualized — or $22 million annualized versus the guidance that you’re giving for about $47 million to $50 million impact on tariffs.
Alison Dean
Sure. So we’re expecting a 6- to 7-percentage point decline in gross margin from ’19 into ’20. The biggest driver of that are actually pricing related decisions, some we’ve made that are already in market and others that we expect to make in the year. So about 60% of the decline is being driven by pricing-related actions. About 15% of the decline is coming from a combination of incremental tariff costs that we will need to pay as well as the cost of producing product in Malaysia. So those 2 things combined are probably another 15% of the decline and then the remaining is a sort of a mix of puts and takes. But the biggest impact on our year-over-year gross margin change is the pricing actions that we’ve taken and plan to take during the year.
Asiya Merchant
And if the pricing actions that you’re taking then going to impact this mix shift that you guys have talked about as you exited or for the full year 2019, are you going to see a lot more mix towards the lower end or — in the U.S., and that’s why your growth rate in the U.S. are below kind of what you expect to see for International?
Alison Dean
We’re expecting relatively the same type of mix that I just relayed to you that we saw in 2019. We don’t expect a big difference.
Colin Angle
Yes. I think strategically, you’re going to see iRobot focusing more on differentiated products so that as we drive our consumer base and customer base up into the core price points, they — we need to maintain competitiveness down at the low end. And so that some of the pricing actions are focused on actually driving a mix shift change which will favor iRobot positioning in the intermediate term. So the idea that we’re at 50% core and above — from a sales perspective, as Alison indicated, we’d love to get that percentage up over time.
Operator
And our next question comes from Troy Jensen with Piper Jaffrey.
Troy Jensen
First off, congrats on the nice fourth quarter results. And Alison, good luck, enjoyed working with you. Maybe a quick question for you, Alison. Can you just talk about the cadence of revenues here? If you guys are going to be down sequentially or down year-over-year in Q1. But still do 40% of the business in the first half, it implies a really big second quarter. So I just love to know your visibility or kind of conviction on that number?
Alison Dean
Sure. So you’re right, we do expect sequentially Q2 to be up over Q1. And as we said earlier, all the remaining three quarters, we do expect will be sort of low to mid-teen growth rates year-over-year, but you should expect a quarter-on-quarter, absolute dollar value increase in revenue as we go with the first step of that being Q1 going into Q2.
Troy Jensen
And it’s like 50%, though, to be correct, right? 50% sequential in Q2 to hit this 40% target?
Alison Dean
Probably more or less.
Troy Jensen
Okay.
Colin Angle
And keep in mind, Troy, that there are some events in Q2 related to Mother’s Day. You’ve got a holiday happening at early July.
Troy Jensen
So okay. All right. Perfect. And just a follow-up question on the price cuts from last month. I’m curious, especially at the high end, do you guys think these near 20-ish percent cuts are permanent? Or is that going to be dynamic as the year progresses?
Colin Angle
We try not to move the prices around too frequently, we’re trying to do is establish the differentiated products that we think anchor this direct-to-consumer strategy, anchor the core of our differentiation strategy, and we’ve been investing in reducing the COGS pricing on those products to make the higher-end robots, a larger revenue driver for the company. Again, it’s all part of the strategy. And as we’ve talked in the past, when we first launch a product, there are a lot of unknown in the manufacturing and opportunities to go take COGS out. We’ve been aggressively working with COGS on not just our low end robots, but on our higher-end robots to facilitate these types of moves in a sustainable fashion.
Troy Jensen
Right. Understood. All right. Well, congrats again on Q4 and good luck in 2020.
Colin Angle
Thank you.
Operator
And our next question comes from John Babcock with Bank of America Merrill Lynch.
John Babcock
I guess the first thing I wanted to just touch on here is just really 1Q. And you talked a little bit about how there was a little bit of excess inventory at retailers, which I guess would seem to imply that demand in the fourth quarter was a little bit weaker than certainly that kind of 15% growth, I guess, you saw in the U.S. And so overall, I guess, I want a, first of all, get a little bit more color on what exactly happened there from the inventory side? And then also if you could talk about growth in kind of RVC channel and what it might take to reinvigorate that growth?
Alison Dean
Sure. So as I mentioned, sell-through in Q4 on particularly our entry-level SKUs were — was lower than we had anticipated, which had us coming into 2020, again, with a little bit higher channel inventory on certain SKUs than we’d like. The premium product sell-through was very strong in Q4. And we expect that, again, with the pricing that we put into effect about a week ago as well as some promotions we plan to run in Q1 — that coming out of Q1, that will be much less of an issue.
John Babcock
Okay. Are you guys seeing any change, though, with regards to your customers and they’re purchasing habits around robot vacuums. I just want to get a sense for whether or not there’s sort of still that enthusiasm and interest out there and — because obviously, we’re like we’ve seen much stronger growth rates in the past. And so I kind of want to reconcile that with where you are today?
Colin Angle
So I think that, again, there’s a little tale of two cities. At the higher price points, we did very well, and we ended pretty clean in the channel. And that’s the area where we see the opportunity for margin expansion and more differentiation. And so that we talked about today, a few different initiatives in going to market that can help drive growth in those higher price points. And that’s really the core of our strategy. At the lower price points, we did see continued growth in the marketplace.
That’s where the knock offs and some of the low-end products are coming in as impacting the market somewhat. The — at a top level, we held share in our segment of 200 above. So we wish we could have had a little bit more sell-through and ended up a little cleaner at the lower price points. And so that’s what’s driving some of our first quarter and some of the gross margin. Topics we’ve talked about is cleaning out the low end, and so we can move forward with appropriate inventory levels, not just at the high end, but also at the low end of the marketplace.
So that’s what’s behind those machinations in the market. But the — we’re at 12% penetration. As we’ve said in the past and have revalidated. We believe that the opportunity in the U.S. is 30% or higher for robot vacuuming so that we’re definitely stating a situation where the demand continues to be there. And I think that as we look at 2018, 2019. In 2018, we actually saw some of the go-to-market innovations that we brought about — in fact, they’re being more successful. 2019 had a less of those innovations in it, which I think, on top of
Tariffs and everything else did bring down some of the industry growth. We think that our subscription programs that we’ve talked to — talked about a bit, and the direct-to-consumer model as well as getting out from under tariffs. Those are all things that are going to contribute to recovery growth rates in ’21, but the underlying demand for this new category continues.
Operator
And our next question comes from Charlie Anderson with Dougherty & Company.
Charles Anderson
My congrats to Alison. So I wanted to talk about the top line guidance for 2020. Obviously, it looks like you’re going to have an ASP headwind with some of the price cuts. I wonder if you could speak to what some of the unit assumptions are in terms of growth there. I think you had 10% growth in units in ’19. So how should we think about 20 relative to ’19? And then I’m curious if there’s any contribution from Terra in the full year guide. And obviously, would take a lot of Terra to help and — 100 basis points, 200 basis points of growth. I wonder if there’s anything embedded there. And then I’ve got a follow-up.
Alison Dean
Sure, so we are expecting ASPs to probably be flat to slightly down next year based on, as you said, the price changes that we’ve put in place. So the growth really is driven underlying by unit volume increases.
Charles Anderson
And then on Terra?
Alison Dean
Oh, sorry. On Terra, Terra Will not be a significant contributor to 2020. Again, as Colin mentioned in his opening comments, we expect to do some limited online sales of the product. But relative to our overall plan of $1.3 billion, it won’t be material.
Charles Anderson
Great. And then for my follow up, obviously, getting the exemption from the tariffs would be a huge event for you guys. I think there’s something like 30,000 applications out there. I wonder just procedurally, Colin, if you can talk about what happens next? Is there any level of interaction or are you literally just waiting. Any additional color on how that will all play out over the course of the year?
Colin Angle
Sure. I think that when we first started talking about these List 3 exemptions in the 30,000 that were applied for the — we set expectations that this is going to be a long procedural process to work through and try to set expectations around mid-year. We expect to know something — comes up or comes down. There has been substantial progress working through the list with over 10,000 applications rejected and much fewer approved at this point. So depending on how you want to look at that, that’s either good news and that we’re still in the running or concerned that List 3 is going to have a different dynamic to it than List 2.
We remain extremely engaged, garnering support for the exemption. We have found that our efforts moving to Malaysia are consistent with what the administration is hoping for. And so that, that is a big positive as well as rail support for desiring the United States to continue to lead in the consumer robot industry and a recognition that the tariffs are working counter to that. So we’ve got a strong support fairly broadly in Washington. So we think our case continues to be a strong case. What we can’t do right now is really predict on the timing of getting an answer. We’re literally checking the boards every morning to see what happened. But we’re not sitting around waiting. We believe that this is in the nation’s best interest and have gotten a lot of encouragement to continue to build our case. And so that you should expect us to continue to do that until we get word one way or the other. But we remain optimistic, just uncertain on timing.
Operator
Our next question comes from Mark Strouse with JPMorgan.
Mark Strouse
Alison, I’d like to offer our best wishes as well. Most of our questions have been answered. But Colin, I just wanted to touch on patent litigation in your guidance. It looks like you’re — you’ve picked up the amount of expense that you’re expecting this year. I imagine you’re fairly limited in what you can say about that process. But I guess the question is do you think it’s realistic to have a resolution or a ruling in place before the 2020 holiday season?
Colin Angle
So we’ve had our Markman hearing scheduled in August. So that’s a reasonable pace. The Markman hearing is not the trial. It’s where the claims on our patents are discussed and judgment is rendered on their construction. It is unlikely that there will be resolution in time for the holiday season in 2020, but we continue to be very committed to aggressively defending our IP, and we are very — feel very good about this case.
Operator
And our next question comes from Jim Ricchiuti with Needham.
Michael Cikos
This is Mike Cikos here for Jim Ricchiuti. I want to echo my sentiment as well, best of luck to you, Alison, and thanks again for all the help. First question, we would like to wrap our arms around. If we’re thinking about Malaysia, more philosophically here. But if the tariffs went away with China tomorrow, would you guys still be expanding into Malaysia? Is it a matter of diversification of the manufacturing footprint at this point? Or would you guys be willing to go back into China, obviously, under the assumption that you have to negotiate with your contract manufacturers moving things around.
Colin Angle
We are absolutely committed to manufacturing in Malaysia as part of our strategy to have a geographically diverse manufacturing footprint. As we scale our operations in Malaysia. We believe that the premium that we’re currently paying in Malaysia can be materially reduced and that we would view a long-term commitment to Malaysia as something that might have a small premium, but would be an important part of risk mitigation given the uncertain — uncertainty of the geopolitical situation. And so that we are long-term committed to Malaysia.
Michael Cikos
And then just second question for a follow up. On the OpEx, looking out to 2020, I was hoping you could give us some more color regarding the moving pieces. Just trying to wrap my arms around, I guess, the R&D or sales and marketing efforts for new product, Terra, the new Roomba. Just want to see how those OpEx line items move throughout the year.
Alison Dean
Well, we continue to pursue the roadmap that we’ve discussed externally. So R&D investments continue to go into Roomba, some of the differentiation and digital features that Colin was talking about at the beginning of the call. Obviously, investments in Terra continue as we work to get to a point of commercialization. Our sales and marketing, we expect to get some leverage out of that this year. However, we are investing and changing the mix of where some of our sales and marketing investments are going. Some of the programs that Colin alluded to earlier will be getting more funding this year. And those are probably the key changes that you might see in our OpEx.
Michael Cikos
I’m sorry, just to put a finer point on that. So the sales and marketing, we’re expecting some leverage as far as the changes in mix that you’re talking about, does that come back to the digital communications and those engaged customers we were discussing earlier? And then for the R&D. I know that this is — I guess in Q4 of this year, the GAAP R&D actually declined year-on-year. Can we expect R&D budget to decline again in 2020 or is this actually going to grow?
Alison Dean
R&D will probably be flat as a percent of revenues in ’20 versus ’19.
Michael Cikos
And the mix of sales and marketing?
Colin Angle
The mix on sales and marketing, we’re trying to make sure that we are optimizing our spend around the best ROI we can on Roomba. And you may see us starting to take advantage of our relationship with our consumers to allow us to more efficiently drive demand for things like Braava and Terra. So definitely, there’s a shift. We always optimize spend globally. And I think that we, as a percentage, or a per robots sold, spend a little less internationally than domestically. So there are some more opportunities, internationally, you may see us pursue. But from a mix perspective, definitely relative to 2019, you’ll see an increased direct spend on Roomba and more activity through D2C on other products. It’s one of the ways we will get more efficiency. Yes, okay.
Operator
Ladies and gentlemen, this concludes our Q&A portion of today’s call. I would now like to turn the call to Andrew Kramer for closing remarks.
Andrew Kramer
Thank you, operator. That concludes our call for today. We appreciate everybody’s support. We look forward to talking with everybody later again this spring to discuss our Q1 financial performance, and we hope to see our investors out on the road over the course of the coming months. Thank you.