iRobot 2005 Annual Report Download - page 51

increased revenue from sales of our military robots and, to a lesser extent to increased contract revenue. The
sales of our military robots in fiscal 2004 were driven by the continued strong demand for our PackBot robot,
attributable primarily to the level of hostilities in Afghanistan and Iraq and the need for soldiers to deal with a
large number of explosive devices.
Our revenue in fiscal 2004 was impacted by our conversion in accounting for U.S. consumer product sales
from a ""sell-through'' basis to a ""sell-in'' basis. As a result of this conversion, we recognized $5.7 million of
product revenue in the first quarter of fiscal 2004 from products shipped by us prior to fiscal 2004.
Cost of Revenue
Our cost of revenue increased to $67.7 million in fiscal 2004 compared to $37.3 million in fiscal 2003.
The increase is primarily attributable to a 69.4% increase in the unit sales of consumer robots, a 98.1%
increase in the unit sales of our PackBot robots, and a $2.2 million increase in costs associated with the
$4.7 million increase in contract revenue. In addition to the changes in sales volume, the unit costs of
manufacturing our consumer robots increased by approximately 6.9% over the comparable period in fiscal
2003 related primarily to an increase in costs associated with the production of the second generation Roomba
robots. In addition, the unit costs of manufacturing our PackBot robots decreased by approximately 12.4%
over the comparable period in fiscal 2003 as a result of manufacturing economies of scale.
Gross Profit
Gross profit increased 61.1% to $27.4 million in fiscal 2004, from $17.0 million in fiscal 2003. Gross profit
as a percentage of revenue decreased to 28.8% in fiscal 2004 from 31.3% of revenue in fiscal 2003. This
decrease in gross profit, as a percentage of revenue, was due primarily to the factors described above, as well as
a decrease in royalty revenue, and a reduction of the average sales price of our first-generation Roomba robot
in anticipation of the introduction of the second-generation robots in mid-2004.
Research and Development
Research and development expenses increased approximately 43.0% to $5.5 million (5.8% of revenue) in
fiscal 2004 from $3.8 million (7.1% of revenue) in fiscal 2003. In fiscal 2004 and fiscal 2003, we incurred the
majority of our internal (non-funded) research and development expenses to support the development of
enhancements to our Roomba product line resulting in the launch of the second-generation of our Roomba
floor vacuuming robots in fiscal 2004. In addition, at the beginning of fiscal 2004, we began product
development work on our Scooba floor washing robot. Research and development expenses for our
government and industrial business do not include the costs of research funded by various government and
industrial third-parties. The direct costs of these funded programs increased by $2.3 million from $6.1 million
in fiscal 2003 to $8.4 million in fiscal 2004.
Selling and Marketing
Selling and marketing expenses increased slightly to $14.1 million (14.8% of revenue) in fiscal 2004 from
$12.8 million (23.5% of revenue) in fiscal 2003. The spending in fiscal 2004 and fiscal 2003 reflects the
promotion of our Roomba robot which was available for its first full year in 2003, including a significant
investment in advertising for market penetration and product and brand awareness. Additionally, our sales and
marketing headcount increased during the fiscal year to 13 employees as compared to 10 in fiscal 2003.
General and Administrative
General and administrative expenses declined slightly to $7.3 million (7.7% of revenue) in fiscal 2004
from $7.8 million (14.3% of revenue) in fiscal 2003. This decrease was primarily attributed to the reduced
expenses for outside consultants.
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