iRobot 2008 Annual Report Download - page 86

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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. We recognize revenue from the sales of home robots under the
terms of agreements with customers upon transfer of title to the customer, net of estimated returns, provided that
collection is determined to be probable and no significant obligations remain.
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 27, 2008 and December 29, 2007, cost
of product revenue was 67.7% and 64.9% 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 27, 2008 and December 29, 2007, cost of contract revenue was 90.4% and 87.0% 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 27, 2008 and December 29,
2007, gross margin was 30.4% and 33.2% of total revenue, respectively.
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. An example of this is the engineering design center we opened in India late in 2005.
A substantial portion of our research and development is performed in the United States, although we maintain an
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