iRobot 2011 Annual Report Download - page 77

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(in advance of the holiday season). As a result of the growth of our international consumer business, which is less
seasonal than our domestic consumer business, our consumer product revenue is currently spread more evenly
throughout the year.
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, 2011 and January 1, 2011, cost
of product revenue was 57.9% and 63.4% of total product revenue, respectively. The decrease in cost of product
revenue as a percentage of revenue was driven primarily by changes in product mix to higher margin home robot
products, improved leverage of our overhead expense against higher revenue, and lower return provisions and
warranty expense. Raw material costs, which are our most significant cost items, can fluctuate materially on a
periodic basis, although many components have been historically stable. Additionally, unit costs can vary
significantly depending on the mix of products sold. There can be no assurance that our costs of raw materials
will not increase. Labor costs also comprise a significant portion of our cost of revenue. We outsource the
manufacture of our home robots to contract manufacturers 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. In addition fluctuations in currency exchange rates could increase the cost of
labor. Consequently, the labor costs for our home 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, 2011 and January 1, 2011, cost of contract revenue was 67.9% and 66.9% of total contract
revenue, respectively.
Gross Margin
Our gross margin as a percentage of revenue varies according to the mix of product and contract revenue,
the mix of products sold, total sales volume, the level of defective product returns, and levels of other product
costs such as warranty, scrap, re-work and manufacturing overhead. For the years ended December 31, 2011 and
January 1, 2011, gross margin was 41.3% and 36.3% of total revenue, respectively. The increase in margin was
driven primarily by changes in product mix to higher margin home robot products, improved leverage of our
overhead expense against higher revenue, and lower return provisions and warranty expense.
Research and Development Expenses
Research and development expenses consist primarily of:
• salaries and related costs for our engineers;
• costs for high technology components used in product and prototype development; and
• costs of test equipment used during product development.
We have significantly expanded our research and development capabilities and expect to continue to expand
these capabilities in the future. We are committed to consistently maintaining the level of innovative design and
development of new products as we strive to enhance our ability to serve our existing consumer and military
markets as well as new markets for robots. We anticipate that research and development expenses will increase in
absolute dollars but remain relatively flat as a percentage of revenue in the foreseeable future.
For the fiscal years ended December 31, 2011 and January 1, 2011, research and development expense was
$36.5 million and $24.8 million, or 7.8% and 6.2% of total revenue, respectively.
In addition to our internal research and development activities discussed above, we incur research and
development expenses under funded development arrangements with both governments and other third parties.
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