iRobot 2007 Annual Report Download - page 74

Direct-to-consumer revenue generated through our iRobot on-line store accounted for 23.4% of our home robot
product revenue for the fiscal year ended December 29, 2007 compared to 16.0% in the fiscal year ended
December 30, 2006. In addition, 86.0% and 88.4% of military product revenue, and 72.4% and 76.2% of funded
research and development contract revenue, resulted from orders and contracts with the U.S. federal government in
the fiscal years ended December 29, 2007 and December 30, 2006, respectively.
For the fiscal years ended December 29, 2007 and December 30, 2006, sales to non-U.S. customers accounted
for 13.1% and 11.0% of total revenue, respectively.
Our revenue from product sales is generated through sales to our retail distribution channels, our distributor
network and to certain U.S. and foreign governments. In 2002, when our Roomba robot was first commercially
introduced and throughout 2003, we recognized revenue from our U.S. consumer product sales 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 29, 2007 and December 30, 2006, cost
of product revenue was 64.9% and 61.8% of total product revenue, respectively. 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. During
2007 in particular, the cost of some materials increased significantly, especially nickel (for batteries). The aggregate
cost of batteries for our home robots was especially impacted in 2007, as nickel prices more than doubled on a per
ton basis. 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. Compared to our PackBot tactical military robots, labor costs for our
home robots comprise a greater percentage of the associated 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. 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. Addi-
tionally, 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 29, 2007 and December 30, 2006, cost of contract revenue was 87.0% and 73.2% 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, total sales volume, and levels of other product costs such as warranty, scrap, re-work and
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