IRobot (Nasdaq: IRBT) company designs and markets robots for a variety of markets (manufacturing is outsourced). The company markets cleaning robots to consumers, but also has a variety of products aimed at the police, military and undersea research markets as well. The retail business is conducted through national retailers and the company's online store. It markets to government, the military and institutions through those institutions' purchasing processes. Among the more well-known of iRobot's products are its bomb-disposal robots, the Roomba vacuuming robot and its Seaglider unmanned underwater robot. iRobot has a wide range of strengths. The firm has a unique market position. There are few competitors in the household robot niche. Although iRobot's products are still limited in terms of functionality, they are ahead of the competitive curve, giving iRobot some first mover advantages in this nascent industry. iRobot faces more competition with respect to military and research robots but has thus far developed some strong products that have driven sales growth.

The four unique customer bases give iRobot strong income diversification for a relatively young, research-intensive company. The firm has been around since 1990, but has only had products on the market since 2002. That they have now developed four unique customer bases and product lines is indicative of the strength of their robotics platform and the innovation of their research and design teams. iRobot began with a robot platform dubbed Genghis and from there has been able to adapt their basic technologies to meet a wide range of market needs.

When iRobot went public in 2005, the added infusion of capital (approximately $70 million) spurred strong growth. Since that time, the company's revenues have grown steadily and rapidly. 2005 saw top line growth of 49.3%. In the next three years, revenue growth was 33.1%, 31.8%, and 23.5%. The firm now has sales in excess of $300 million and posted strong gains last year despite the economic downturn. This steady revenue growth indicates that the company has strong product offerings that are well-received in the marketplace. This growth also gives iRobot a basis from which to further expand into new products or markets.

Despite being a research-intensive company that took 15 years to go public, iRobot has no long-term debt. This gives the company significant financial freedom to take on debt in order to expand. The freedom from debt obligations also allows iRobot to plow back its earnings into the company, to fuel growth using equity. Furthermore, it insulates the company to some degree from the impacts of volatile cash flows. iRobot's revenue streams are growing steadily, but the company's cost structure and industry are not mature. If iRobot had high debt, it would be less able to weather volatility. Given the nature of their industry and their current stage of life, having no debt is a significant source of financial strength for iRobot.

The lack of debt has also contributed to good liquidity at iRobot. Since 2005, the firm had a strong cash position, much of which it still maintains. The company's cash position has resulted in a current ratio that sits at 3.13, which is comparable to its high point right after the company went public. The quick ratio sits at a very healthy 1.99, having peaked at 2.68. The low levels of current liabilities, combined with the lack of long-term debt, indicate substantial balance sheet strength.

A final strength that the company has is prestige. While the Roomba may not be a prestige product, many of iRobot's products do work that gains the company significant prestige. Their robots not only diffuse bombs and mines, but explore the deep ocean and the surface of Mars. The prestige of working on such exclusive and high profile projects can be leveraged to help market the household robot lines.

Despite its many strengths, iRobot also has many weaknesses. At present, the company is only marginally profitable. The company significantly expanded its selling/general/administrative expenses in 2006 and since then has been unable to turn a significant profit. iRobot earned an operating income of $400,000 in 2006 and in 2008 earned an operating income of $200,000. The company posted an operating loss of $2,650,000 in 2007. The net income statistic is higher than operating income for each of these three years, attributable to "other" items in 2006 and 2008 and a tax rebate in 2007. Despite holding research and development investments steady, and having strong earnings growth, the company has been unable to generate a significant operating profit for the past three years.

iRobot has poor margins for a high-tech firm. They have a margin that is solid compared with the industry...

Most such companies are able to obtain margins that do more than merely recover their operating costs. This indicates a weakness with respect to marketing, in particularly obtaining a good price for their products.
As a result of some uncontained costs, iRobot has experience wildly fluctuating profits over the past five years. The company saw a dramatic increase in profits for the first few years after going public. However, it is clear from the fluctuations over the past couple of years ($9.06 million profit in 2007 but just $760,000 in 2008) that the firm's profit streams are as yet unreliable. This makes planning, particularly with respect to growth operations, more difficult.

At present, the company is offering low returns to investors. Being that they are a young company with tremendous long-run potential, this is not a problem unto itself. The main issue is that they have been thus far unable to translate strong top line gains into profits. If they were spending their money on research & development investment, this would be reasonable, but iRobot's R&D expense has remained flat for the past three years. What this means is that not only are they not paying anything to their shareholders now, but they are not spending the money in such a way that will result in a payoff in the future. This could make it difficult to go back to the equity markets for additional financing in the future.

For a company with the strength in an emerging technology that iRobot has, there are many opportunities. One is to take their existing product line global. They have already taken steps towards this. They have established offices in the UK, France, India, China and Hong Kong to build out their international presence. They can move overseas not only with their consumer products, but also with some of their military products as well. The company has operating strength in government sales, which has allowed them to close deals with over half a dozen international governments, but there is significant room for growth in developed markets.

There is tremendous opportunity for growth in the household markets. The company currently has three main household products -- the Roomba (vacuum), Scooba (floor-washing) and Looj (gutter cleaning). There is substantial room for new product innovation, based on existing technology platforms. Myriad household functions have not yet been addressed by the marketplace. Perhaps the biggest opportunity, with the development of the next level of artificial intelligence (an ongoing project at iRobot) is household robots with intelligence and the ability to handle a multitude of tasks independently.

A significant opportunity exists in the military contracting sphere. At present, the main product used by the U.S. armed forces is the PackBot, which is capable of clearing minefields and doing reconnaissance. However, the Army has plans to develop what are essentially robot soldiers (Weiner, 2005). Government projects for the value of robot contracts range into the billions in the coming years (Ibid). As iRobot is a leader in the industry and has established relationships with all military branches, they have the opportunity to gain a substantial share of this business.

There are a number of threats, however, that represent significant risk to iRobot. The robot industry is highly competitive, so competition is a major threat. Many appliance makers are moving into robotics and will compete with iRobot. Unmanned vehicles like the PackBot receive competition from a variety of firms both large (Northrop-Grumman) and small. Most major military contractors (Lockheed Martin, Boeing, General Dynamics) are competition for iRobot.

Competition in the robot industry is driven by technological innovation. Shifts in technology represent a major threat to iRobot. A major technological leap could render the company's robotics platforms obsolete, effectively eliminating it from all relevant markets. Related to technology is the threat of loss of intellectual property. Industrial espionage and other sources of IP leaks are not unheard of, particularly in the military contracting industry. As a result, iRobot must protect its IP rights vigorously, or lose the competitive advantage it has built in technological innovation.

Government funding decisions are another threat. Given that the military is the largest potential customer for iRobot, military spending is a key macroeconomic variable for their business. The new budget, for example, has effectively scrapped a number of projects-in-development. Should this happen to one of iRobot's projects, the…