iRobot 2005 Annual Report Download - page 42

on a ""sell-through basis'' (when retail stores sold our Roomba robots to end users). In the first quarter of
2004, we began recognizing revenue from U.S. consumer product sales on a ""sell-in basis'' (when our robots
are shipped by us to the retail stores). As a result of this change in accounting treatment, in the first quarter of
2004 we recognized $5.7 million of product revenue from products shipped prior to 2004. This one-time
increase impacts period-to-period comparisons relating to 2004. Revenue from sales of our military robots is
recognized upon the later to occur of shipment or customer acceptance.
Revenue from consumer product sales is significantly seasonal, with a majority of our consumer product
revenue generated in the second half of the year (in advance of the holiday season). The timing of holiday
season shipments could materially affect our third or fourth quarter consumer product revenue in any fiscal
year. Revenue from our military robot sales and revenue from funded research and development contracts are
occasionally influenced by the September 30 fiscal year-end of the U.S. federal government, but are not
otherwise significantly seasonal. In addition, our revenue can be affected by the timing of the release of new
products and the award of new contracts.
Cost of Revenue
Cost of product revenue includes the cost of raw materials and labor that go into the development and
manufacture of our products as well as manufacturing overhead costs such as manufacturing engineering,
quality assurance, logistics and warranty costs. For the fiscal years ended December 31, 2005 and 2004, cost of
product revenue was 65.6% and 72.2% of total product revenue, respectively. Raw material costs, which are
our most significant cost items, generally have not fluctuated materially as a percentage of revenue since the
introduction of our robots in 2002. There can be no assurance, however, that our costs of raw materials will not
increase. Labor costs also comprise a significant portion of our cost of revenue. Compared to our PackBot
tactical military robots, labor costs for our home floor cleaning robots comprise a greater percentage of the
associated cost of revenue. We outsource the manufacture of our home floor cleaning robots to a contract
manufacturer in China. While labor costs in China traditionally have been favorable compared to labor costs
elsewhere in the world, including the United States, we believe that labor in China is becoming more scarce.
Consequently, the labor costs for our home floor cleaning robots could increase in the future.
Cost of contract revenue includes the direct labor costs of engineering resources committed to funded
research and development contracts, as well as third-party consulting, travel and associated direct material
costs. Additionally, we include overhead expenses such as indirect engineering labor, occupancy costs
associated with the project resources, engineering tools and supplies and program management expenses. For
the fiscal years ended December 31, 2005 and 2004, cost of contract revenue was 71.9% and 67.7% of total
contract revenue, respectively.
Gross Profit
Our gross profit as a percentage of revenue varies according to the mix of product and contract revenue,
the mix of products sold and the total sales volume. Currently, our consumer robots typically have a higher
gross profit as a percentage of revenue than our military robots due to lower-volume production of our military
robots. For the years ended December 31, 2005 and 2004, gross profit was 33.6% and 28.8% of total revenue,
respectively.
As a result of the change in accounting from a ""sell-through'' to ""sell-in'' basis, we recognized
$2.5 million of gross profit in the first quarter of 2004, which disproportionately increased our gross profit as a
percentage of revenues in that quarter and in 2004.
38