iRobot 2005 Annual Report Download - page 49

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2005, we also reduced our consumer products return reserve accrual rate based on an analysis that indicated
that our actual customer return rates had decreased significantly and, accordingly, during the third quarter we
revised our returns reserve rate and reduced the returns reserve as of October 1, 2005. As a result of this
decrease, during the third quarter of 2005, we recognized an additional $2.7 million of consumer product
revenue related to robots shipped both during the third quarter of 2005 and during prior periods.
The increase in revenue from our government and industrial business in fiscal 2005 as compared to fiscal
2004 was due primarily to increased revenue from sales of our military robots, including the shipment of 152 of
our PackBot tactical military robots to the U.S. Navy, and a significant increase in contract revenues
generated under funded research and development contracts, including under the Future Combat Systems
program.
Our revenue in fiscal 2004 was positively impacted by our conversion in accounting for U.S. consumer
product sales from a ""sell-through'' basis (when retail stores sell our Roomba robots to their customers) to a
""sell-in'' basis (when our robots are shipped by us to the retail stores). As a result of this conversion, in 2004
we recognized $5.7 million of product revenue from products shipped by us prior to fiscal 2004.
Cost of Revenue
Our cost of revenue increased to $94.3 million in fiscal 2005, compared to $67.7 million in fiscal 2004.
The increase is primarily attributable to a 136.8% increase in the unit sales of our PackBot robots in fiscal 2005
as compared to fiscal 2004, and a $4.1 million increase in costs associated with the $5.0 million increase in
contract revenue. Unit sales in our consumer business increased by approximately 12.0% in fiscal 2005 as
compared to fiscal 2004. After giving effect to the impact of converting to ""sell-in'' accounting in the first
quarter of fiscal 2004 as described above, the increase was 2.3%. In addition to the changes in sales volume,
the unit costs of manufacturing our consumer robots increased by approximately 17.9% over the comparable
period in fiscal 2004 related primarily to an increase in costs associated with the production of the second
generation Roomba robots and a shift in the mix of the consumer robots that we sold. The unit costs of
manufacturing our PackBot robots decreased by approximately 12.6% over the comparable period in fiscal
2004 primarily as a result of manufacturing economies of scale.
Gross Profit
Gross profit increased 74.3% to $47.7 million in fiscal 2005, from $27.4 million in fiscal 2004. Gross profit
as a percentage of revenue increased to 33.6% in fiscal 2005 from 28.8% of revenue in fiscal 2004. The 4.8%
percentage point increase in gross profit as a percent of revenue in fiscal 2005 was primarily due to improved
gross profit of 6.0% on our consumer and government and industrial robots, including a gross profit increase
resulting from the reduction of our returns reserve. The favorable impact from improved product gross profit
was offset by approximately 0.7% as the result of lower gross profit realized on funded research and
development contracts and, to a lesser extent, a decrease in gross profit from royalty revenue for fiscal 2005.
Gross profit in fiscal 2004 included $2.5 million as a result of the change in accounting from a ""sell-through''
to ""sell-in'' basis.
Research and Development
Research and development expenses increased approximately 109.0% to $11.5 million (8.1% of revenue)
in fiscal 2005 from $5.5 million (5.8% of revenue) in fiscal 2004. The increase in research and development
expenses was primarily due to increased headcount in our internal research and development function to 72
employees at December 31, 2005 from 48 employees at December 31, 2004. For fiscal years 2005 and 2004 we
incurred the majority of our internal (non-funded) research and development expenses to support the
development of enhancements to our Roomba product line as well as our Scooba floor washing robot
development which began in early 2004. In fiscal 2006, we intend to accelerate our investment in research and
development to respond to and anticipate customer needs. Accordingly, we anticipate that research and
development expenses will continue to increase in absolute dollars for the foreseeable future.
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