iRobot's CEO Hosts 2013 Analyst Day (Transcript)

| About: iRobot Corporation (IRBT)

iRobot Corporation (NASDAQ:IRBT)

Analyst Day Call

May 09, 2013 10:00 AM ET


Elise Caffrey - IR

Colin Angle - chairman and CEO

Paolo Pirjanian - CTO

Alison Dean - CFO

Jeff Beck - COO

Youssef Saleh - VP and GM Remote Presence BU and Emerging Businesses

Christian Cerda - SVP and GM of Home Robots business unit

Alison Dean - EVP and CFO


Adam Fleck - Morningstar

Amy Kaser - Boston Trust

Paul Coster - JP Morgan

Elise Caffrey

Good morning. I’d like to welcome you all for the sixth iRobot Analyst Day. I am Elise Caffrey, iRobot, Invest Relations. We plan that we hope that you will find an interesting and informative event with presentations by our senior management team and Q&A session following each of our panel. We will then have a demonstration of RP-VITA, our human interface robot followed by lunch.

Before we begin, I’d like to cover a couple of housekeeping items. First, this event is being webcast, so if you could please turn off or silence your cellphones that would be great. If you did park in the garage downstairs and have a ticket, we will validate that for you.

Next, a reminder that this event, we will be making some forward statements that are subject to factors which could cause actual results to differ materially from those expressed in the statements. And investors are cautioned not to place undue reliance on such statements.

For our first panel of speakers, we have Colin Angle, chairman and CEO, Dr. Paolo Pirjanian, Chief Technology officer and Alison Dean, our Chief Financial Officer. Please hold your questions for them until after all three presenters have been up at the podium.

Most of you have met Colin, so I don’t think any introductions are needed for him, Paolo joined iRobot as Chief Technology Officer in October 2012 with the acquisition of Evolution Robotics, where he has served as CEO for the previous seven years and CTO prior to that. He has a proven track record of taking complex technology to consumer products. He holds a PhD in Robotics from Albert University and early in his career he was a lecturer in the computer science department at the University of Southern California and as a researcher at NASA’s Jet Propulsion Laboratory where he receive the Technical Leadership award.

Alison Dean jointed iRobot almost eight years ago prior to the company’s IPO. She has served on iRobot’s finance team in a variety of executive positions since 2005 including Senior Vice President, Corporate Finance and Principal Accounting Officer. Prior to joining iRobot for 10 years, Dean served at in a number of senior positions at 3Com Corporation. Alison holds a bachelor’s degree in business economics from Bryant University and an MBA from Boston University.

I will now turn the program over to Colin.

Colin Angle

Welcome to Boston. Happily the clouds are not so low, that you have no view. And I understand that my role today is to talk briefly and allow you all to dive deeper and expand your relationships with the rest of my amazing management team. So, in preparing my remarks, I decided that I was going to focus a little bit more forward than perhaps you are used to in your meetings with me when I am harping on the prior quarter. And I'll give you a little bit of a look forward about iRobot, about the robotics industry and our role within the robotics industry.

So, when you think about this amazing industry, for which, from two year old on up there is remarkable passion; one thing is inescapable especially from the perspective of the financial community. There is a ton of robots that have been created. There are very, very, very few robots that have ever crossed over and become economically relevant products. The challenge that our industry faces and have long faced is figuring out how to unlock the value in the passion and the ideas and turn them into the products that we all know we are going to have in the future.

Some of the keys to unlocking access to these robots, can you find them in the stores, awareness of the robots, did you know that you could have your floors (sweepered) by robot. And this is probably one of the biggest to this day; I already was talking about that believability. All that robot stuff that’s for someone else, it can't possibly be for me. I am not going to talk about these three things; I have talked about it a lot in the past. Perhaps, you can pepper my team with questions about these.

I am going to talk about capability because there is a big difference between a cool robot idea and a great product independent of its believability, access, awareness. Because it has to work, it has to be something other than just a cool demonstration or a cool paper.

And we are seeing a lot of increase in the capabilities in the tool box that we have to work with. And so it’s important that I acknowledge other trends that impact robot industry as we talk about the overall increase in capabilities and as larger emerging markets for robotics. And so I’ve highlighted slides here these are technologies that iRobot longs to use and would be appropriately chastised if we were seen to be developing new capabilities because how could we possibly compete with the larger drivers in these industries.

Voice and video over IP, 3D depths map generation for gaming and gestural interfaces, fact that you can play your Xbox by waving your hands in front it and doing this kind of stuff. That’s a huge industry moving very quickly, very exciting for us because we love to be able to gesture to our robots and have them understand what we mean.

Obviously, mobile computing, touch screen interfaces, voice interfaces, Siri, Wolfram Research, Nuance Companies that are pioneering natural language interfaces which is great news for us. And connectivity innovations like LTE, I was recently at Verizon and they were telling me that they believe their play for the internet of things wasn’t device to Wi-Fi to the web, it was every single device as an LTE chip that goes (to web). Well that’s fine as long they cost $0.25 each.

And they didn’t completely throw me out of the building. So these are technologies all of which are making it easier to make higher capability robots. So, what is the robot industry? What are the key technological pillars that the robot industry needs to be focused on? Colin is going to be up in a few minutes to do a little bit more of a deep dive on some these.

But wanted to let you know that the critical IP for a successful robot company involves these things; Navigation, it is no longer enough just to be able to move you must understand your environment. If you can navigate build maps interface with maps you can do, you can be more competitive in existing markets and you can also open up new markets.

Manipulation, so far most of the money in the mobile robot industry has been made by taking cleaning heads of various kinds and moving them around 2D surfaces, but the fact that robots are physical and mobile the next leap is physical mobile and can manipulate the environment. So, how do we do that at prices that people can afford? Major breakthrough of the robot industry with my former business partner Rod Brooks with his, we think Robotics, Baxter Robot brought manufacturing down from $100,000 to few $10,000 that’s going to be big when we bring it down to tens of dollars that will be huge.

Perception, you wanted to do higher value tasks you have to understand the environment, that’s not enough to just say I’m on the floor therefore I will the clean the floor. We want to understand more and of course the biggest market in mobile robotics today is the cleaning market. So how do we continue to raise the bar on doing an increasingly good job of cleaning many-many different types of surfaces; so these capabilities coupled with the ones that we’re inheriting or creating massive new opportunity in our industry? Again I promise to bit of a forward looking set of comments and that is what I’m hoping to convey.

These new capabilities before I get into the markets that I want to highlight I wanted to also talk about product development and helping you understand the market, which is becoming increasingly active, which is great. What I have done here is created a chart where in the vertical axis, I have value divided by cost, this is something that as you think about and try to understand the robot industry is a crucial ratio it might seem like motherhood, but believe me robot companies for very-very long time have created robots that provide a little bit of value at ridiculously high cost and when that ratio is out of whack what you’re looking at is demonstrations.

I think there are many examples of robots where some of this voice and video and teleconferencing technology have been put on top of basis; the value delivered relatively low relative to cost and so those products have not moved from demonstration of the product.

In the early days, iRobot was not the first company to create a Robot vacuum. In 1970, at the world's fair, there was probably the first robot vacuum. In the 80s, there was a robot called the Trilobite, which costs thousands of dollars and made no impact because the value cost equation was out of lag. We came tight under heels at an order of magnitude less cost with better functionality and we have to break through this threshold and create the industry that we are all enjoying and profiting from today with over 9 million robots full.

I think that we are also, we are going to finish today with a demonstration of remote presence of our RP-VITA robots, here is another industry which has been around for quite some time and has never broken through from demonstration to product. Similar reasons; the value of what it delivers just wasn't sufficiently compelling to get people to buy it.

And so that we had robots which were minutes of fun; with the RP-VITA robot in hospitals, for the first time, we are at a point where I believe robots are creating substantially more value than the cost of the systems that we are going to see in the economic future.

So, what are these new markets going to be? There is a little run through the history of the business of robots. Back when robots didn't move, manufacturing was the only industry which truly became exciting and viable at scale. If I can't move, well at least I can assume that the world around me is very predictable and so if I can move my arm here, grab and move it to there, I have done something of use in the automotive industry, embraced manufacturing industries and embraced these types of robots and built a multi-billion industry here.

Then we added mobility to the picture, we opened up a few new industries and these industries have been allowing iRobot to prosper. First I call Teleop presence, so this is person with joystick drives robot. Now, there are in places where that works, the place where it works are very-very challenging hazardous environment; diffusing bombs, going into caves. In those environments, the alternative is putting people's life at risks which is a lousy thing to do and so people are willing to pay premium for the robot and pay a premium from an operator training and pace of operation perspective to make that work.

So, somebody has to drive the robot up to the bomb, it takes time and use that joystick to go diffuse or render safe the bomb. However the robot has decided to do it. We’ve created a very nice business here but it is not the robot in every classroom; robot in every office building, future that some people have talked about. Then of course, floor care, this is the room of business by having a robot on your floor, understanding the environment of the floor we can effectively clean.

Now, as we add navigations to the picture, to our tool set, we create new important markets, teleporting remote presence. What’s that? It sounds like some kind of new term. Well, if the problem a business executive faces is how to attend meetings where there is no multimillion dollar; be it at your conferencing room and the flexibility of Skype and performance of Skype is not at professional levels what they to do?

Well you could say, I can take one of these tele presence robots and drive it to where I want to go. There are many, many, many operational problems that have kept these types of robots from serving markets that cannot afford the operational overhead. Ideally, you would go to your iPad or your computer and say I want to go there at this time and then poof I would be given a high quality remote presence experience.

Also robots lives in the building you want to visit; understands that building, get to where you want to go, we can start delivering that type of capability, expanding the user experience that can be delivered to the customer creating a new market. I believe this is going to happen, continuous home maintenance. Robot homes with larger floor plans, homes that where robots take care of it and have decreasing amount of interaction with those robots, navigation can play a huge role, it also means the robot can start to understand the home they live in, another significant value driver. An autonomous patrol, once the robot understands its environment it can do more things on its own, the person can be removed from the loop.

So (profit) define these using terms that will ultimately correlate to the products that create new business, but I think these categories, these three categories enabled by navigation are going to be the next big opportunities for the robot industry. And then as we add perception and manipulation, even more after that. Bottom line the robot industry is accelerating in the number of markets we can create real value for our customers.

iRobot intends to lead this industry for a very long time to come, if you look at the aggressiveness with which we are amassing a potent intellectual property portfolio, you can see an acceleration. 344 to 389 Colin, why is that exponential, it’s exponential because that's only the first four months of this year. We are very rapidly seeing our RT portfolio develop, if we dig in you can see domestically a 44-54% split between defense-oriented IP and home oriented IP, a growing, it’s a lever for some of these new markets that I was describing, internationally much more skewed toward home intellectual property.

So, I'm going to finish up with a couple of slides, it’s all good for me to be talking about the future, talking about these new markets but I need to do so in the context of reaffirmation of my commitment to growing this company profitably. So when we think about the term growth and the term profitability, my last two slides, here is my slide on growth, we continue to be just about, none of the way along the path to achieving the value that robots will create for the world.

Domestically, Q1 was up 44% over Q1 just a year ago, we are accelerating the rolling out of robots in North America, very exciting, it's our home turf, I will be not surprised if over the next few years North America eclipses our different regions in size, lots of room to go, the only thing that could make me a liar would be if China continues its growth, because China could very well be our second largest market, right now we're very, very tiny. We're starting to see materiality and we're very excited about the momentum being generated in China.

So, remote presence, we're putting a little bit of a focus on remote presence with the demonstrations and some of our comments today, this is a new emerging business, not material this year from a financial perspective but very material from the perspective of crossing key technological hurdles, FDA clearance and then just earlier this week we announced and invited the press into our first 7 or 8 hospitals which are using and taking advantage of the RP VITA technology.

When you look at our EBITDA trajectory over the last few years, 2011, we're really off for the races here, then we have to work through the very challenging and painful reduction in size of the GNI, our defense business, which clearly brought us down and challenged the company's will power. But you can see we're bouncing back strongly, I believe this performance in 2013 is not meant to represent an end state but more of an important next step reversing this trend and my commitment to you is to see this figure both on an absolute dollar percentage and on a percentage of revenue metric improve as we move the company forward.

So with that, notes and questions for me, I’d love to answer them but I’m going to hand it over to Paolo to talk a little bit more about the technology. Thank you.

Paolo Pirjanian

Good morning, I’m Paolo Pirjanian the CTO of the company by way of acquisition and glad to join iRobot. And we’d like to tell you a little bit about what I see my job as at iRobot. And I see my job as the most important job I have is really to deal the innovation that’s going to help unlock the potential value in robotics in the application areas that we believe are going to benefit from the innovation that comes.

What I mean by innovation is not playing around in the lab and having cool demos to show, it’s really taking very complex technologies and figuring out how to reduce them to practice very affordable cost. And today, I’ll give you examples of what we have already accomplished but there is a lot more work ahead of us.

So that’s really the first point is that what I get excited by is research and innovation that’s driven by clear requirements from market needs. Understanding how to close that gap and being committed to get that done.

In addition to that we would like to be able to build a platform such that every time we go to a new product category we don’t have to start from scratch. Collin already showed you some of the categories that we think are the key building blocks for robotics and that’s exactly what we are doing, we’re building modules that are optimized for navigation modules that are optimized for perception and we’re working on other modules that I’ll talk about.

So this will create a platform that has the building blocks that is common across many robots, many different types of robots. And finally by way of doing that, we are focusing on solving the real problems. If this problem was solved, we would really go out there and acquire it or license it not necessarily going and investing and trying to reinvent at will. But this is really building new technologies solving real problems that are adding new functionality to products to unlock new possibilities for profitable sustainable businesses. And that’s going to develop very sustainable, protectable IT which creates further barriers for us for the future.

So, briefly about the technology platform I’m talking about you can see there are some building blocks and each of this building blocks is being pursued either has been developed, is being refined or is build early in development. But if you look across the robots we have today and if you can imagine the robots of the future in the home let’s say we have manipulation and we were able to have robots that could go around and not only navigate around or clean the floor but actually physically move things around the environment and perform other tasks.

The first steps are, you need to be able to walk which we have it done, we know exactly how to do that, I would consider ourselves the Board leaders in ability to do that. And that you will see the results of that are already in RP-VITA and you will see more of that coming in the future.

The next thing you need to do is to be able to physically interact with the environment which is manipulation, that’s a missing link in robotics I would say and that’s why we’re committed and have resources and are working on developing technologies and solutions that are cost effective to get that done.

And then from there on you can go up the value chain and start developing more general purpose. So, consider these like the key building blocks for having robots that can go from point A to point B and be able to grab and object and then move it to the point C. Now imagine all the possible applications that can cause effect and especially if we do this in a cost effective way.

So, let me talk about the areas where I think we are world leaders at and areas where I think we should invest in the coming quarters. So, one of the area is obviously as robotic floor care represents, by large, the majority of our business, cleaning performances is very important and one of the key successes to Roomba is its ability to clean floors very effectively. And there is a lot of know-how and trade success in IP that has gone in being able to do that and refine that over the life of the product in the last 10 years.

So, we are very proud about that ability and obviously we’re going to continue building further, actually build is on top of that in terms of coverage, in addition to that also we’ll have the ability to clean your home.

One area that we talk a lot about today is autonomous navigation. So, the ability to be able to navigate in a deterministic way and purposeful way from one point to the other; so diffusion based navigation in lawn mowing, floor care and even poo cleaning is an effective way to cover the floor. But that approach does not extend to being able to want to go to unknown location. You need to know where you are. You need to know how to get to where you want to go. Diffusion-based approach is beyond a deterministic way to accomplish that.

So it requires the ability to know where you are. GPS location really, indoors, which has challenged the robotics community for decades. The state of the art is what you see in RP-VITA today, which is a technology called SLAM, Simultaneous Localization And Mapping. The robot will autonomously build a map of the environment and uses that map, senses that map and can figure out exactly where it is on that map, and it can figure out how to get through it. So think of your in-car GPS navigation system. It knows where your car is. You give it a destination. It has a map. It will plan a path around those and figure out how to get there, shortest path or best path. That’s what SLAM does and RP-VITA represents the state of the art FDA-approved technology, which is a lot to say for the team effort that has gone into doing that.

Now, RP-VITA can afford a navigation technology that is state of the art that’s in the $10,000 range cost. The next thing that we have done is bringing a really bleeding edge technologies in navigation which allow you to do this at the consumer level with obviously different trade-offs.

It’s not going to be FDA approved, but it’s for the home use. So NorthStar which is in our Braava, formerly known as Mint, already is using a NorthStar solution which is known as the World’s lowest cost navigation solution and this exactly works the same way as a GPS where you have a beacon in the system that projects invisible stars on the ceiling that act as the GPS satellite and there is a sensor that looks at those triangulates and figures out exactly where you are so the robot knows exactly where it is all times and can use that information to build the map of your home and know where it is going for floor care, be able to cover the floor systematically and with completeness and for other applications of the future, you can imagine, you can be able to go from room to room or location to location.

The next generation technology that we are now reduced to practice is visual SLAM which is using a camera instead of expensive laser range finders and a camera, thanks to the cell phone industry has been cost reduced; can get the imagers for about a buck. The challenge in visual navigation is all the complex algorithms that go into figuring it out. This is what we do as humans, with that even conscious thinking. We walk around, we recognize things, we remember locations and landmarks, and we can use that to know how we are navigating in a city that we just walked into for instance, right?

And that’s what vSLAM does. But the impressive part of the vSLAM is that we have now reduced it to practice because the amount of competition and the algorithms are very complex. When we started it required cloud server form type computing to get this done. And today, we are able to do this here. We have a camera and a module, Arm7 type processing capability, so reduced to the order of dollars not that tens of thousands dollars. And this is a breakthrough that’s going to give us huge advantage for the future products.

And I just want to sort of give you a couple of maybe video demonstrations here. The demonstration in this one, you’ll say this is RP-VITA that uses their foot long SLAM system. Here you see it’s moving around exploring the environment and creating a map. The wide space is free space obstacles and unexplored space. It can plan path in this very effectively, in real-time and navigate autonomously. vSLAM camera-based system, the system automatically creates landmarks which are these dots here, are locations it recognizes and can be used to, for instance, do full coverage. And as I said the key breakthrough is that it can be done in very-very low cost, very compelling and will unlock value, and this is an example of what I mean by, I don’t like to play around in the lab. I really want to translate this into value that we can unlock for the business.

So for those that are not here we have some pictures because they couldn’t view the videos. In other areas that’s of huge value to robotics as Colin mentioned is the ability to perceive the environment, which is basically, say if you were blind and assuming you couldn’t rely on your other senses, which visually impaired people are trained to do. It’s going to be really hard to figure out what to do in the environment here, right? If I want to go find myself a cup of coffee or even find a person or even navigate around obstacles, it’s impossible. So perception allows you to see the environment, feel the awareness about your environment and then you can start acting up it. So it’s a key component.

And particularly our focus is on visual perception the sort of intuition is cameras are low cost and as there is a saying that says, a picture says more than a thousand words. There is a ton of information that is visual actually even in the human brain a very big part of our brain is dedicated, the visual cortex is dedicated to processing visual data because it is complex there is a lot going on in imagery. But what that means is that gives us an opportunity to be able to use the same sensing technology for many different tasks including what you saw with visual navigation knowing where you are and where you are going, recognizing obstacles so you can avoid running into them, recognizing cliffs so you do not fall down, recognizing people, gestures and you name it object that you want to retrieve. So it is a very rich sensor the challenge is again in these algorithms that figure out how to do this and this is again one of the areas where I see us as leaders in softer areas for recognizing objects.

So we have two technologies one of them is known as ViPR which stands for visual pattern recognition and the other one iSpot which I will show quick demos of. The first one ViPR, it recognizes objects, and this is again reduced to practice very low cost embedded implementations but even very large space applications, we have actually deployed this in cell phones for mobile marketing applications which is not what we are focusing on but in some areas that we may be interested in partnerships that can exploit this in other markets that are not interfering with our business. So this example you will see here is showing you some of those capabilities

(Audio-Video Presentation).

So this is giving the ability to see not to the same level as humans but at least a portion of what humans do and what is going to translate to real value and this is real world application one of the most challenging things with computer vision is that large things work really well in the lab because lighting is controlled, the environment is controlled, the background is controlled but as soon as you take it out of the lab in the real world where lighting you do not have control over objects and inclusions and so on, things fall apart. This algorithm works in the real world.

I mean if you notice for instance when it was recognizing the (garbage) it was not even looking at the entire (garbage) was not in the full view of the camera, you are seeing a portion of it and it was able to recognize. So, it’s an algorithm that works very similar to the human brain. Now, this algorithm; what this doesn’t do when we developed this, this was a Holy Grail for the computer vision community to be able to this. And, we did this; reduce it to practice both in terms of cost and scale and reliability. The next Holy Grail for the community and for computer vision scientists and companies like Google and Microsoft and Amazon is recognizing classes of objects and what that means is that this algorithm if I teach it that this is a chair it will only recognize that chair and copies of that chair if I show you that a chair that looks different, it will not recognize it, so it doesn’t understand that these two things are the same thing or in same category. So object class recognition is the next Holy Grail and this is where we are with that and we have this technology called iSpot and you can see it is recognizing that is a person. Now we are using mockups where you could point a camera to people and it will recognize it a horse and it is not that specific horse it is any horse it’s actually never seen those items before but it has seen objects in that category, it can also understand activity, recognize activity, moving, bending down and all these things so you can build up on top of this and you can imagine the value of this now being able to recognize in your home, that there is a chair over there, there is a table over there, there is a stove and oven and so on.

So very fundamentally important technology still needs work this area obviously this is the Holy Grail that everyone is working on and I think we are leaders in where we are with this in the robotics community in the broader domain mobile cell phones Google Amazon and Microsoft have armies of people working on this areas and still there we would be able to compete so this is not only important robotics but broader right this is giving the ability to perceive and sense.

So I talked about the areas where I feel we have leadership and we are going to continue investing in this areas and having those have predictable revenue and profit impact on our business and here are the areas where we need to pay attention to and we are so manipulation we talked about and Colin explained exactly why manipulation is so important I mean Roomba as our biggest revenue generator, is actually manipulating the environment but it’s using a very specialized manipulator which is the suction and brush, right? So, it can deal with one path, and we can think of lawn-moving which has a certain, very specifically manipulator and so it’s manipulating the environment which is the real value of robotics it’s about physical interaction with the environment.

As opposed to any our technology, moving bits and bytes around is interesting but moving atoms around is what makes robotics unique. That’s why manipulation is importation and it’s a missing link right now in the whole industry, right we are going to move the needle on that one and this is about again figuring out, it will require paradigm shape I believe, having motor than joints is probably not going to be the way to drive cost down and have safe and reliable technology that we can put in consumer’s hands, it’s potentially going to be shape memory alloy which is completely changing the paradigm but there is a lot work to be done there. We believe the Cloud; and fun activity is going to play a big role both in terms of the consumer experience but also in terms of accessing information that will enhance the intelligence of the robot that were performing task. So that’s something we are paying very close attention to and we hope that the user experience in parts of the study is going to be similar to what you would experience with your smart devices today.

So, on the manipulation, I have a brief video in terms of where we are with right now and although I would say that we are among the leaders the field overall is not that advance. We need to advance it significantly.

So, these are some demonstration of the arm edge manipulator that we have developed at iRobot to show the ability to be able to maneuver different types of objects. Now, the manipulators we are talking but that’s may, practically be deployed may look nothing like a human hands, right but this is allowing us to learn a lot about challenges and once we find a right fit with the business needs or user requirements it may be converted to look like something completely different.

So, in summary as I said, it’s really about fueling innovation but really focused on business goals and how do we take these challenging problems and not only solve them but solve them in a way that they can actually enable unlocking value in the big potential we see with robotics.

So thank you for your attention. I’ll pass it on to Alison.

Alison Dean

I was just sitting there and thinking, it’s probably a little unfortunate that I am following Paolo because they didn’t me give any props and I don’t have any videos but I’ll try to do my best. So, I am Alison Dean if you came in late and I don’t think I get a chance to meet you yet but I’ll do so later and today and I am going to talk about shareholder value. So I wanted to start with talking about some of our underlying tenants to our commitment to shareholder value. Starting with something Colin mentioned our commitment to growing EBITDA through profitable revenue growth. Now, that may seem obvious but we are really making a distinction here between from growing revenue at all cost. If we don’t see a path to profitability, we are not going to pursue something. Another area is we are going to respond quickly, two changes in the market place, we had to do that last year the when we saw the significant downturn in the defense business.

We will focus and prioritize on those things that are really going to support the strategy elements that Colin talked to us about earlier. And lastly, we are going to leverage the really strong operational capabilities that we've built up over the last couple of years to execute on the business. And then all of those things along with our continuing commitment to achieve the financial expectations we set, will hopefully build investor confidence.

So those are our tenants and we feel that last year we demonstrated these in a lot ways and I just want to hit on a few of those. So first, we reorganized our company and that’s not a small feat, we centralized our engineering and supply chain resources and that’s important for a few reasons. The first is, it really allows us to make prioritization decisions at a company level as opposed to a division level where we are making number four.

It also allows us to more quickly move resources from one priority to another. And lastly, we think this model just scaled more easily for future growth. Something else we did last year as we really had an enhanced trigger around where we are going to invest our dollars. So we have been working on an investment framework and I will show you a little bit of that later to help drive our decision making. It’s an analytical tool and basically what it helped us do, is look at those areas that we should probably disinvest in as well as areas that we probably should invest more in. So, as an example we right-sized D&S pretty significantly last year and we also shut down our Seaglider product business. But the model at the same time also showed us that there was probably an opportunity in extending our floor care product line to floor mopping and so we’ve acquired Evolution Robotics. And then we made many investments in the Remote Presence business, some of those were internal, we stood up the business unit, we funded a lot of R&D and we also made some investments in a strategic partner InTouch Health to really provide us with the healthcare market expertise and help us with our go-to-market model.

We also strengthened our management team. So we acquired Evolution Robotics, we’ve got a great product, we got some of the technologies that Paolo was talking about and we’ve got Paolo as great CTO for us. We’ve got Yusuf, Christian, and Frank who all joined us last year and they all have many years of experience and proven track records in the industries that they’re supporting for us.

And last but certainly not least, we had strong financial performance and a bit of resiliency. So looking at the numbers, Colin mentioned 2011 was a great year for us, we had very high revenue growth, we had significant margin expansion and we actually achieved our EBITDA margin target of mid-teens. So we were very happy with that. We did go down year-on-year but we delivered over 400 million of revenue, we had very strong performance in home which really was able to offset a big portion of the decline we saw in D&S.

Our EPS was impacted, we have the cost of the Evolution acquisition, we have the restructuring we took to right size D&S and weren’t investment tax credit last year, so those all impacted EPS. But we still delivered 50 million of EBITDA and a double-digit EBITDA margin, which we felt very good about. And probably most importantly as Colin mentioned as well we’re back on the growth track, so we’re expecting growth in revenue, EPS, and EBITDA for the year.

Looking a little more specifically at Q1, we had a great quarter; we had 8% revenue growth, home growth, a lot of that with strong performance in both North America and Japan. And D&S was down year-on-year as expected but they actually did a little bit better in Q1 than we thought. We had significant gross margin improvement year-on-year, we declined our OpEx to 35% despite the fact that Evolution was in our actual for our Q1 ’13 but not Q1 ’12.

And we delivered 15 million of EBITDA which was 150% EBITDA dollar growth year-over-year. So very good quarter and maybe more importantly although our full year D&S expectations haven’t changed for the year, the over performance we saw from homes in Q1 will hold for the year so we were able to increase our revenue EPS and EBITDA expectations, so someone asked that earlier you know it’s been a great start, it really has, we’re very happy with how things are performing in 2013.

Just quickly, the balance sheet is every healthy. I did want to spend just a few minutes talking a little more about cash flow, so we ended 2012 with a 139 million in cash but that was after making a $74 million investment in Evolution Robotics and a $6 million investment in InTouch Health, so we made some very key strategic decision to invest cash last year. And then we announced in Q1, a share repurchase program, so we’ve year marked another 25 million for that and we’ve also made some additional investments with InTouch.

So, we’ve made some strategic investments but we actually feel like we’re in very healthy position in cash price so that if there are other opportunities that come for acquisitions or investments we’re prepared to do those. I thought now would be a good time this is the investment framework I mentioned earlier, I just wanted to give you a flavor of what this is, so there is 4 main components, the upper left is market attractiveness. So that looks at how big are markets? How fast are they growing? The right hand side looks competitive strength what it is going to take to win in this marketplace and that’s one of the reasons that let us to looking for strategic partner in InTouch for the healthcare market, we knew we had something we didn’t have experience in the healthcare they’re providing it to us.

We’re really focusing a lot on strategic alignment, are these investments initiatives going to help make real the strategy that Colin talks about. And on the bottom right investment timing, how much do we need to invest today, tomorrow and when we’re going to get the return on the road. So we used this, we used it a lot last year and we intend to use it going forward to really be disciplined about how we’re going to invest or dollar.

So looking towards the future, our financial targets actually are unchanged. We expect revenue growth in the mid to high teens. We expect EBITDA margin in the high teens and we expect operating cash flow margins in the high single digits, so that hasn’t changed. What has changed is we are not putting timing on this right now and there is really two reasons for that. It is going to be very dependent on how quickly the defense market recovers and it's also going to be dependent on the rate of growth of remote presence. So, while we are not putting an actual time frame on it, we are committing to making year-over-year improvements as we reach these targets.

I thought it might also be helpful to talk about the things that are going to drive us to achieve those targets. So from revenue growth, home really is going to be the primary driver revenue for us. We have product expansion and market expansions opportunities. Remote presence is certainly going to contribute but its small now but will meaningful over the next couple of years.

From a gross margin perspective, part of just the D&A of the home business unit are constant product review so we are looking at the breadth of our products, the price point, customer trade terms, costs and with the sheer volume of products that we do there, we can make minor adjustments in any of those categories, we can increase our profits. So, that's an ongoing just part of the home business unit.

We also focused a lot on product quality and improving that; high quality products usually yield very happy customers which usually results in lower returns and lower warranty expense so that's all a very good thing for gross margin. And as I said at the beginning, we centralized our supply chain operations; we think there is a lot of leverage that can happen there. And we haven't yet fully integrated the Mint into our supply chain again yet either and how's that happen, that will yield improvement to gross margin.

And then finally on OpEx again with the creation of a shared service centers there is still some leverage, we can gain out of that and we haven't fully integrated ER; we didn't plan to at this point. We said by the end of this year, it would be fully integrated and when that happens we will have further leverage there. And then again the investment discipline that I have been talking about a lot this morning that' s really going to drive our OpEx to better levels going forward.

So, in summary 2012 was definitely a transformational year for many reasons. We are very excited about 2013 and being back on the growth track. And 2014 beyond, we have a defined path and we have a team that's committed, confident and all aligned about where we are going so we feel very-very confident. And with that, I think we will do our first panel, so if you have a question please raise your hand then we will come to you and; so that we can get this broadcast.

Question-and-Answer Session

Adam Fleck - Morningstar

Just wanted to ask Colin, you mentioned that the pattern portfolio internationally and domestic, how do see a more competitors in the home side internationally. Do you view those patterns as strong internationally as they are in the US?

Colin Angle

We do. We took action when we filed our domestic plans on Roomba to also file internationally and while the process is a different than timeline they are different. We didn’t explicitly protect Roomba with a global perspective and so that you have seen the International IP issuances are starting to accelerate and so now we have a few years ago; the optics of the competitive barriers in the yield from an IP perspective were radically lower than they are today and we feel very good that we will be able to take action as we seek this against any of the competitors that we choose. So, we at (inaudible) Corporation is strong.

Adam Fleck - Morningstar

Alison, you mentioned reviewing your supply chain obviously, integrating Evolution. As you have driven much more home robot volumes to your contract manufacturers maybe could speak to the contracts there and how those are structured in any changes that could come from such a higher amount of volume.

Alison Dean

We actually; we have multiple contract manufacturers for most of our products so we try to use that to create more leverage in our system; we are constantly reviewing how much volume we want to put through each contract manufacturer, what sort of benefits they are driving for our company. And we make adjustments as needed. We have some contract manufacturers that came with Evolution Robotics. We are moving more towards traditionalized robots contract manufacturers so you will see some change there. But it's really a constantly evolving set of reviews and investments depending which one we want to emphasize more at which time.

Colin Angle

If you look at current margin structure which captures the current manufacturing or the Braava Robot, the biggest lowest hanging fruit is the Braava manufacturing volumes which do not give Evolution much in the way of leverage coming on to our platform both of those manufacturers and moving to other more traditionalized robot manufacturers. We have massive opportunity around those products. So that's the probably step one, again as we continue to grow overall. We run a tight ship with our manufacturer it's not going to be massive opportunities for legacy products going to that same, that's pretty milked now, it's more on the Braava side and with new product introductions that may have different types of billed materials that create new opportunities.

Amy Kaser - Boston Trust

Alison, in the investment framework that you laid out for capital allocation, I'm curious and like your very thought process of the how does share repurchase fit into that and how do you think about the return on share repurchase versus investment in new product development.

Alison Dean

The share repurchase was probably a little bit of a different angle of investment for us, we were really doing it as more of a defensive move to take advantages if they were temporary deductions in the stock price as opposed to being sort of a pure investment strategy. But we did ask ourselves about other investments we could do with the money and with this one, one that we thought would have a good return if and when we were to use it. So it's probably a little bit of a different animal in the overall investment framework but we thought it was a prudent thing to do and thought the return would be there if and when we had to use it.

Unidentified Analyst

Colin, you talked about strength in North America and China, you didn't talk about the weakness in some of the other international markets, could you, well what to really attribute that to, is it just macro stuff, is it lapping product compares is it currency low.

Colin Angle

So that the only market in which I would say is weaker and that is not to be confused with down is Europe, you have a chance to talk to Jeff and Christian a little bit more on diving into the detail, but it’s primarily macro driven and there is some, certainly Europe is the most competitive market for us from a product standpoint, so there is some other folks doing some economically relevant things in that space. So, primarily driven, the market is growing. We have new product introductions with the Braava into Europe which will also help our growth strategy but the organic growth rate and it is positive growth rate in Roomba are lower than they traditionally have been in Europe, primary driver macros, secondarily competition.

Unidentified Analyst

And then also, along those lines, you've been successful advertising here. Is advertising an issue at all there and did it work that distributors did advertising there or do you do it?

Colin Angle

So the traditional model is for our distributors to bear the lion's share of the advertising cost. Based on our success in North America, we're looking at programs to augment international distributor advertising with corporate driven advertising. And so we'll be testing some of that this year as well.

Unidentified Analyst

Would you acquire any distributors as a result of this or no?

Colin Angle

No plans at this point.

Paul Coster - JP Morgan

You talked about artificial perception and cognition technologies and then you went on to say that you feel that you can compete with some heavy weight companies out there that have been in that technology for mobile computing, mobile phones. And I'm sure you are aware of Nantworks and the kind of stuff they're doing as well. Why do you feel the need to do that? A couple of years ago Colin talked about defining core competencies of the company and leveraging others R&D wherever possible, but also why compete with them, why not license their technology from them if it's really compelling? Thank you.

Paolo Pirjanian

The Nantworks teams have actually licensed the technology from us and I do consider ourselves as a leading company in that space. And we are interested in as long as it’s not a distraction from our core focus, we don't mind working with people like Patrick Soon-Shiong, and people at Nantworks, or similar people. And again, the idea is not to compete with those domains really. I think where we can refine our strengths is optimizing this within the constraints of robotics, and I see iRobot actually has been the largest platform in terms of business platform that is pursuing this.

Even though you have major big players that may or may not be investing in robotics and they may have much effects of our orders supplies are larger than ours. The level of investment in robotics is not comparable to iRobot. So within the domain that we care about, the one we want to own, I think that’s what we’re going to focus on. We don’t want to focus on Google for, Google projects and those kinds of things.

Paul Coster - JP Morgan

So the patented recognition technology would be focused on, kind of parameterizing that to make it relevant to robotics only, and anything that sort of much more abstracts and applicable to medicine or advertising whatever you are letting others pursue those points as they increase.

Paolo Pirjanian

Correct, we’ve only considered the orders pursuing it as long as it’s not a distraction to our company. But you’re actually right; we are focused on optimizing these for our domain, because optimization for other domains is significant work. We don’t want to do that.

Colin Angle

And I’ll just add some context. Well, iRobot is mostly know for the Roomba robots and the PackBot robots and the business case around acquisition of Evolution was primarily talked about as by taking the Mint, now Braava robot in North American markets and bringing it out globally. Moving on, more going on and today hopefully you recognize and perhaps we’re surprised by power technology presentation.

iRobot is going to working on Computer Vision since its inception. The Computer Vision Industry was born out of robotics. And Evolution was actually founded as a Computer Vision commercialization company. And so that when I put up the slide on IP embedded in that IP some of the most fundamental IP in the types of Computer Vision that Paolo and I talked about. We have earned the position as world leader in visual pattern recognition and object characterization as VIPeR and iSpot areas and the vSLAM navigation performance that comes out.

We’re now facing a world where those technologies have increasing value in our own industries, but also other industries beyond iRobot. So, we believe that based on our position, we can maintain leadership in the areas that we care about and as Paolo said we're open to licensing it into areas that are emerging that we don’t care about. But brining Paolo on, as part of the reorganization that, we talked about we are explicitly funding a go forward investments in vision based perceptions.

Unidentified Analyst

I wonder if you can give a little bit more color to your earlier question about competition in Europe. I think this is the first time that you talked about competition kind of coming up and I realize the secondary factor to the macro. But, maybe you can talk about what has the competition done to kind of close the gap relative to what Roomba offers? Now you obviously getting Braava there as well, but talk a little bit more about what had they done to close the gap and what do you not do to try the kind of re-extend that gap relative to competition in key markets?

Colin Angle

We are going to be speaking in more specificity about the Home Business unit. I’ll give you a lightweight answer and I would again invite the panel that is living this on a day-to-day to give more color to it. But we are seeing Chinese knockoff style entrance in China at the low end of the market. So, a small percentage of the dollars, larger percentage of the units coming in, obviously, in our opinions certainly violating intellectual property is going to be something that you all will be taking on as we go forward to decide what the strategy is.

It’s not in the area we would go and try to compete head to head with. We are not the low cost provider of poor quality Vacuum Robot. So that is not something that we’re about. We believe that we are by far the world leader in cleaning efficacy. There is no robot out there that can pick up more dirt than we can, not even close. So that’s the best of the competing robots on a technology perspective and leave behind many, many times more dirt than our systems and we believe that that premium performance is what.

We believe that premium performance is what matters. We had a few anecdotal interesting events where there had been entrants in the market place of robots that had features that our robots don’t have. And our robots don’t have them because we decided not to put them on. The best example is Sharp in Japan. They launched a robot that had the voice recognition capability and video capability to send images back to your cell phone. They made a thing to do about, spend a lot of money. Their market shares spiked, I think it was up as in the high 20s, as a percent of market share according to the industry data. It has now fallen off the map because the customers realized that that doesn’t matter. You’re not buying your robot vacuum to talk to you, you’re buying your robot vacuum to give you bare foot clean floors. And so we saw a spike and then a precipitated fall off down to nearly rolls and levels of that product. So again these things happen. And iRobot’s commitment to our customers is that the best cleaning platform, the easiest to use cleaning platforms, the most rugged endurable robotic cleaning systems out there. We think it’s a winning strategy long term. And last year it was kind of interesting that people have tried to attack us in various novel ways. So I am going to let again if you’ve gotten, want more color, I have got some wonderfully knowledgeable folks that you don’t hear them often.

Alison Dean

Okay, at this point we will take a short 10 minute break and come back with Jeff Beck, Chief Operating Officer and our three business unit heads. Thank you.

We are to resume if people would please take their seats. We will get going with the second panel here.

Okay. So, on our second panel, we have Jeff Beck, our Chief Operating Officer and our three business units GMs. When Jeff last spoke at Analyst Day, he was the GM of our Home Robot division. Jeff joined iRobot in early 2009 and led that division and until his promotion to COO in 2012. Under his leadership, Home Robots revenue CAGR was almost 30%. And gross margins improved 17% point. Prior to joining iRobot, he served as Senior Vice President and General Manager of the Aerospace and Defense Division of AMETEK. He held senior management positions at Danaher and Emerson Electric Corporation. Jeff received a bachelor science degree in Mechanical Engineering from the New Jersey Institute of Technology and the MBA Boston University.

The other members on the panel are Christian Cerda, GM of Home Robots who joined us two months from Whirlpool Corporation where he held a number of roles across their global footprint, and was responsible for sales, marketing, brand communications, product development and operations. Prior to Whirlpool, Christian held senior roles at Boston Consulting Group and Procter & Gamble. He holds a BS in Computer Engineering from Universidad Simon Bolivar and MBA from North Western University.

Frank Wilson, GM of our D&S business unit joined iRobot in August of last year from BAE Systems. With 25 years of experience in the aerospace and defense industry, Frank most recently served as sector vice president of business development and mission applications for Electronic Systems at BAE. He holds the BS and MS degree in Mechanical Engineering from the University of New Hampshire and MBA also from Boston University.

And last but not least, Youssef Saleh, GM of our emerging Remote Presence business unit joined iRobot in July 2012. Formerly Vice President at Polycom, he brings tremendous depth of experience in new product development with the focus on TelePresence. Youssef also held senior positions at PictureTel, Hewlett Packard and Apollo Computers, and received a BS in Electrical Engineering from North Eastern University. With that, I will turn it over Jeff.

Jeff Beck

We’re a fairly competitive group at iRobot. I just noticed that our stock has been down like $0.40 since Colin and the others were up there. So our mission is to turn that around before we get off the stage. And I think some of you guys can help us with that if you want to send any messages. Okay, so I’m going to talk a little bit about the Chief Operating Officer side of the business.

First the quick look at the old chart. We kind of view it as our job to take a lot of the high level vision that Colin talked about, the technological advancements that Paolo and his team are bringing to light and operationalizing them. We have to find markets, we have to find engineering and supply chain capabilities to put those things into products, get them into markets and especially to follow the value is greater than the cost equation that Colin showed earlier.

That’s not easy feed because there are so many technologies out there that as we runaround our building all day we get eddy and excited about it. With the investment framework Alison talked about and some of the go to market strategies that this team has, we have to fill through it down and today most of our revenues still comes from a very small handful of products, although we’ve got this wide funnel of great stuff to look at and try to bring some products in the future.

This is how we’re structured to do it. We have shared services in operations and supply chain, led by single Senior Vice President. We have a shared services in engineering which you want to think of is one level closer to product than the group that Paolo leads. So this is the group that takes Paolo’s technologies, brings them down into drawings into hard tooling and put them into production. These two groups served these three business units. And so, over here he had defense and security business renamed. I think last time we had a session like this it was G&I, or government and industrial and now we are calling it Defense and Security.

Youssef who is running the Remote Presences business, we’ll see more about that when we do the robot demo. And Christian who is the newest member of our team is now leading the home business. The important thing about this structure is that it’s scalable. So as we think about new products and new technologies and new market that we want to go to, we don’t have to standup complete division because we have an expert supply chain and an expert engineering group that can cut across the different business units.

Okay, first I’ll talk about Home Robots a bit. Talk about the vision, strategy and a little bit there were some questions about competitive landscape. I'll be happy to get into that when we do the Q&A also. But we’re currently, by far the leader in these categories that we choose to play in. We like the slide, we may have shown it last time we’re here and maybe not, but it’s always the slide that we start our strategic planning with. We like to think of the Home, you know, the cut away view of home and all of the tasks and all of the activities that go into maintaining a home, we believe are ripe for being roboticized.

Today, we know how to clean floors, we know how to clean pools, we know how to clean gutters. But when you look at what goes on inside of a home is an awful lot of stuff that we don't do yet, that we think can be done with robotics. It could be related to lawn care, it could be cleaning your garage, it could be cleaning windows, it can be doing a whole bunch of different things and that's type of stuff that we are doing through our portfolio planning and technology development.

I put this slide in here; actually I wanted to show this one first. So this is what's happened with from robots over the last few years. Revenue growth has been very healthy, about 27% on year. But the part that we are also very proud is the gross margin expansion; there are plenty of companies that can grow revenue. It's hard to grow revenue and grow it on an increasing profit left after as well.

Because that means you are getting more efficient and you are probably raising prices and delivering more value. And the reason this slide is in here was just to show a little bit of the map that we followed. So back in 2009, we really had to re-formulate the business strategy and take it from one that was sort of an early stage company trying to get to get to critical massive revenue to one that was shifting more towards a profit focus.

And that was a big change because that meant we had to get the quality of the products up, their efficacy and their performance to a point where we could charge higher prices, and frankly have little bit more commercial leverage when we trade policy negotiations. Our operation had to improve a lot too. In 2011, we introduced the Roomba 700 series which really was a big inflection point for the business. It took the Roomba 500, and it incremented it, but it greatly improved the battery system, the cleaning systems and the user experience and it really took the product from something that was good; to something that is by far the leader today. And that’s a product that’s still as our main stream and later you will see some displays that's there on it.

Once we are sure we had the right product with the right quality and great operational performance, we then started some very serious marketing campaign, at least for the concise company that we are, in the United States. I am sure you have seen some of the iRobot use in commercials; everybody has seen that. There has been a tremendous response to that and Colin mentioned earlier, about a 44% growth in the markets where we are running that ad campaign.

That's not just television; that's the main part of it but it is an integrated digital media campaign as well on YouTube and through our website and there is some print ads that are happening. We also used some sponsorship with some of the local sports teams; all of that has come together and it’s created a more premium image for the company.

At the same time that our product got a lot better. So it was kind of synchronized there. Going forward, we need to continue to expand it into adjacent markets. So the floor care market is still large, there is still an awful lot of room to grow. But when I go back to that picture of home, what makes us really lick our chops is thinking about all the different applications we can address in that home. There is a lot more to do there than just floor care.

Talking about the size of the markets so this is strictly the vacuum cleaner market; products sold above $200. So we are not counting the $49 dust busters and things of that nature. And if anybody asks me, do we still have room to grow or we saturated, I just pull this chart out. The United States is about a $2 billion market. We have about 10% of that; robotics in total only has 12%. So, plenty of room there to grow, you can see the story is about the same period. Europe is a little bit more advanced and has developed 18% of the total market has gone to robotics but there are still lost in space.

And we have certain countries within Europe; Spain is always my favorite example, where I think now, Christian I actually forgot the data is that about 25% now. Okay, so 26% of all the vacuums sold in Spain are now robots. So, we have existence cases of countries that have advanced well beyond what we see in this market shares. And even in Asia, which includes Japan of course and China; only 16% of the market has gone robotic.

I don’t know exactly how far this can run but I know that when we do customer surveys or potential customer surveys and we say things like have you considered a robot vacuum cleaner; the answer north of 30% comes back with a very strong yes but we haven't been able to convert those 30% of people who've considered it, they actually buy the robot vacuum cleaner so we still have to get them over that belief ability curve and that's still a hurdle for us.

Okay, we drill now and now look at our market share of the robotic segments. You can see in all major markets, we continue to lead, and lead pretty dramatically, even in Europe, where that question came up earlier today. We are competing with Samsung, LG, Hoover, Philips and Dirt Devil and we still lead the market by a long shot.

We got three times the market share of the beginners like Samsung and we compete on many vectors; one of them is product performance, product quality, but you also have merchandising, you have branding and company positioning overall. We believe pretty strongly that the fact that we are a robotics company as opposed to the consumer electronics company or appliance company and that we have been in this business for so long, helps that consumer get over the hurdle of should I buy that Samsung brand or should I buy a real robot from a company called iRobot. I think there's a lot of value in that.

Asia is a crowded place in terms of competition. But again we've got sort of at least times the market share of the nearest competitor. These are big names, Sharp, Samsung, LG, Toshiba; yet we're still way ahead of them. Paulo did mention China as being a growth market for us. I won't reveal the exact numbers, but I can tell you in the month of April we sold more robots in China in one month, than we sold in the entire year of 2012. That's the level of growth that we're seeing now that we have proper channel and proper traction through all of the products certification. Coming off of a very small base for sure but it’s definitely on the right trajectory.

When we think about, back to that picture of the home and all of the different things we potentially could automate through robotics, we roughly think there's about a $14 billion addressable market and that’s between floor care which is vacuuming and wet floor care and then that outdoor space which we have barely touched. Yes, we have pool cleaners and we have gutter cleaners, but when you think about what you do to maintain your home those are, depending on if you even have a pool, those are two pretty small pieces of what you get.

Okay, I'll talk a little bit about the products; Roomba of course is the flagship, that's the majority of our revenue today. Couple of new things that came in 2013; we rebranded Mint, and we're calling it Braava. The product is essentially unchanged from the product that came with the acquisition, but from a marketing perspective it made sense to paint it fresh and paint it new.

We put it in different packaging so it fits nicely with our product line up and you can see that in the display in the back. We also wanted to create a little bit of a space at least from a naming perspective between some of Evolution Robotics early forays in to the European market and coming in through the iRobot channel. So customers aren't all that sophisticated when it comes to things like that, and it will look new to them.

I also heard this morning that Braava appeared for the first time on shelves today in Italy in (inaudible) was it, so we are now, our channel which is big and powerful in Europe had adopted that product and it's in iRobot packaging and it's going through our mainstream channel. And Italy was the first country distributor who jumped in the front of the line and said give us our product as soon as you can. As soon as their orders came in we started to receive sizable orders from the other distributors. They're in the queue and they'll get their product starting here in Q2.

We also are putting a new pool cleaner in to the market. There are some updates and improvements to the user experience especially, I don’t know if any of you have ever used our old pool cleaners but I have a built in pool at home. What’s really nice about this one is you can empty it from the top. Maybe you guys used our pool cleaners, in order to clean it out you have to flip the thing over and it was really quite difficult to work with.

All right, here’s the Roomba series product line up. You can see now we cover nicely from $349 at PricePoint all the way up to $599. We continue to see the majority of the demand for our product, up here, at the higher end, which continues to tell me that people like robots and they want them to succeed in their home. The types of consumers that we’re targeting are not buying based on price, majority of our volume is up here with the 700. This is our Scooba and Braava product line ups so we have the small format Scooba 230 and the larger format Scooba 390 and then two versions of Braava that are in the market at 199 and 299. Another thing we love about Brava is it lets us get people into our franchise at a $199.

Prior to that, we weren't able to do that. This is Mirra and Looj, Mirra sells for about $1300 and Looj for about $300. So some takeaways for the home business; we got a really clear strategy, it's largely unchanged from what we've done for the last couple of years. You know, it's build a great product, get the price where it should be, and keep a premium brand and great customer service. We've got a market that every time we study, it looks bigger and bigger in terms of its addressability, especially as we think about the outdoor side of it. Our technologies that Paulo talked about earlier, that's just feeding the funnel on what we can do in terms of expanding portfolio and we’ll continue to drive profitable growth from the home business.

Defense and security; anyone ever had the pleasure of running a business that does this. It's not a lot of fun to go from 187 down to 50 in the space of 12 or 18 months. One could say that it was major surgery that we had to do, but that's the reality, we had to deal with it. I’ve worked with some companies where we had to do that either through acquisition integration or other markets that have fallen apart on us. Had some experience in the semiconductor industry at one point and that's extremely volatile. But we managed it.

So, what are we doing today we're looking at a business of around $50 million where it used to be 180, but we’ve got a whole different mix, we got a whole different team, Frank is new; he’s got a new strategy to think about where we can use those robots. International is becoming a larger segment for us. You can see here in 2012 it was about 14% sales, this year it will be about 32%. So as the DoD is contracting as part of our business we’re finding pretty right territory in some of the international spaces and also in some of the non U.S. DoD businesses like state and local first responders and also some work that we’re doing in the nuclear industry, put robots into places where human shouldn’t go.

We’re spending a bunch of time still on business development, the DoD is not going away. They will need robots, I don’t know if they’re going to need them three years from now or six years now. But while they’re getting their act together again, we still put a reasonable amount of effort and trying to shape their understanding of robotics, what robotics can do for them in the future and of course trying to influence the requirements that they put out ultimately for bid.

So, we have not by any stretch of imagination walked away from that. We’re just focusing more on business development than we are on tactical engineering work right now. Cost controls, of course when you do that a lot of cost has to come out. Unfortunately that’s mostly people in our kind of business. And so it’s just a line on a slide here but believe me we did a lot of work to get the right number of people in that business while simultaneously reinvesting the parts of the business that are growing.

There was some corporate realignment that happened as well. So, all of those things came together and today we stand with a $50 million business. We know that it’s right sized, we’ve got a new team in place and then looking at markets that are different from what really brought iRobot total G&I business from where it was to 187 and so we’re going to follow a different track going forward.

Okay, Remote Presence. So this one we’re going to get a demo on shortly. This is the Ava Robots platform. What it is basically, breakthrough mobile platform, can move around safely indoors, avoid obstacles, not break things, it can carry different types of the applications or payloads up above the head, has a very simply use of interface. The whole ideas that you didn’t have to be an expert in robotics to use it. You could point and click and tell it to go someplace and not worry about how it’s going to go get there, it will get there without doing any damage along the way.

And that’s what we’re really good at. But what markets have, I mean the fact that you can make something move around, okay that’s great. So, we put a lot of thinking into how do we take that technology and turn it into a business. And the first one what I think everyone has heard about many times is our partnership with InTouch Health. So this is a real business, real application, hundreds of these robots at least are being demanded as we speak for being used in hospitals. It’s transitioned from demo into a real product. That’s real value there that’s being delivered.

The other things we’re going to look at over time here are enterprise Telepresence, physical security, perhaps retail assistance for revolving sales clerks and ultimately some sort of elder care as well.

The important message to take away from this part of the presentation is we don’t pretend to be experts to what happens sort of up above the waist. We are really good the robotics piece which is making a mobile platform and all the electromechanical interfaces to an application.

The application is going to come from other companies, InTouch Health, either just purely representative, Honeywell, Cisco, those types of companies. So, sort of end of factor for the robot that the world interface is with and that does useful work or data communication that something we’re going to partner with other companies on.

Why? Because again, we’re good at this stuff, this is not our domain. It also lets us leverage of course a platform across multiple verticals. It means, we don’t have to standup wildly expensive go-to-market piece and after market and service and support that goes along. Specially in the security or healthcare business and it lets us build more robot faster or letting others put their gear on top they can take ownership of it and then push it into the market. Did I stay on time?

Alison Dean

So, we’ll do a Q&A session with this panel and then we’ll end the formal part of the program after that and we’ll go to demo. So, if you have any questions please raise your hands.

Unidentified Analyst

On the defense business, how confident are you that its bottomed and what type of visibility do you have when it picks, going up?

Jeff Beck

We’re pretty confident that it’s bottomed. Visibility is not, I don’t have visibility yet to the inflection point heading back up. But there is a level of activity, a level of request for quotes and things like that which makes us very confident about the numbers that we’ve talked about so far. And we haven’t yet begun planning for next year. So, that’s all I can say about that.

Unknown Analyst

I am sure you can’t get into all of the economics of the Ava and the InTouch opportunity. But I want to know if you could just help us kind of understand that opportunity in terms of roughly kind of the cost per unit, the cost of outfit the hospital, what the payback timeframe is, what are the key elements of the payback or ROI for the hospitals; can you give us a feel for how that works out and why it makes sense. Clearly it’s still in trial mode, but trying to better understand the business opportunity there?

Jeff Beck

Youssef, you want to answer that one?

Youssef Saleh

I think you said if you want to, I think there is public information on the pricing for the RP-VITA which is, and the go to market there is InTouch Health; and I think pricing is $4000 to $6000 per month to the hospital. And that’s not just RP-VITA itself, InTouch Health provides kind of a network and services in addition to that. So our involvement in that we sell InTouch Health to base; we refer to it as Ava the base.

And from value to hospitals, it is early stage right now as I think we also publically mentioned that, the last quarter there were about couple of dozens of these units are actually deployed in hospitals. And this is early evaluation and they’re actually already deployed in several hospitals and also there was a recent announcement about seven or eight hospitals that are using RP-VITA today.

The current application that is really time sensitive, light depth type of application’ which is the hospitals has deployed it today in targeting more TeleStroke, as well as intensive care unit grounds kind of application. The economics behind is really, it’s probably bigger story, but to summarize it, there is very few specialists to address some of these critical application and being able to provide these services to real hospitals or smaller hospitals with fewer specialists and while these hospitals already investing in building that capability and be able to provide these services outside of just their hospitals, it’s a value floor, but this is what they call the hubs.

Unidentified Analyst

Could you help explain on their products, the platform itself, what you think the kind of curve will look like in driving down the cost of platform over time and what you will need to achieve to drive much lower costs in producing the platform, so it can serve many more applications?

Youssef Saleh

I will touch on that just in two areas. One obviously volume, so currently with the current level of production and early deployment of RP-VITA with Ava platform, obviously volume will be able to drive cost and drive to margins that we usually expect of the established businesses. The other is some of the stuff that Paolo mentioned, talking about some of the technologies that are working on to bringing costs down. You know it’s going to be over time. But these are the two drivers that will be the driving cost of the solution.

Unidentified Analyst

Then I had a couple of questions for Christian. Can you first, since from a geographic standpoint, think drivers going forward, new drivers are China and Latin America; could you first help us understand what your reaches in China in terms of how many more dollars you are in versus last year, and what the upside is in terms of brick and mortar type of opportunities, and where you are in that potential.

And then also you come from a company that has a very big business in Latin America. Can you give us any insight and why you think challenges and opportunities are in Latin America and what you think you can accomplish in Latin America with iRobot?

Christian Cerda

First of all on China, Jeff was saying I think we are in early stages for a market as large as the Chinese market. I think that our point of sales where the products are represented across the one hundred points of sales a few months ago. And I think we have a plant of reaching at two hundred or close to two hundred by year end.

If you think about the full Chinese geography, this is a very small percentage of all the POS available. So I think we are making good in growth, right? We feel good about the deployment of the strategy and our current momentum and as Jeff said we are, I think we are in very early stages. Regarding Latin America, I think that when you look at the continent there are basically two markets that are significantly larger than the others the first one being Brazil the second one being Mexico. At iRobot, we are currently pursuing both two of them. And again making inroads in the two and the first indication of product demands looks good and I think similarly to where we have making inroads in other geographies. So far visibility is that we should be obtaining growth as we have it now.

Unidentified Analyst

Yes hi, of the market opportunity for Home I think it will like 14 billion. What area is the biggest that you are not in right now?

Unidentified Company Representative

And you are probably looking at a second answer but I will give you the first answer. The biggest area that we are not yet in is still floor care market. If we look at our percentage of penetration and the size of that market, I think that is probably the largest area that we are not yet in.

Just showing that Roomba in itself has a lot of lags in term of future growth, and I think then if you look at other current markets anything that is addressing the outdoors is a large market that we are not in and also there are other electronic areas or appliance products within the Home where we are not yet in. An example of that is mopping that I think before iRobot or Evolution Robotics we could say that it was not an appliance market or very niche in appliance markets so you can consider the industries that already exist and probably potential opportunities that robot has filled the (inaudible).

Unidentified Analyst

Yes hi of the 58% of sales that come from the DoD within the government business; just kind of curious how much of that is service related. That will give us maybe a better sense of how kind it is sustainable $50 million run rate is? Thanks.

Unidentified Company Representative

When you say service related I am going to presume what you mean is selling our engineering or other services to the government. And we call that external research and development typically. And that is a very, it is less than 10% of what we do today. What you are seeing going on also in our businesses, we are shifting from; last year we sold very little new product, and mostly sold a lot of spares and repair parts which you might equate to the service industry business more, durable goods, consumable goods or parts we have been replacing, as well as a pretty good size of service in terms of labor research and development.

This year what you are seeing our product sales are way up due to some new strategies that we have executed. And the service side or the spare part side and the research and development are going down come as with the whole sequestration and the way that market is going. So we took our hit there and we are doing a good strategy to execute to get more robot sales going and we have really increased our robot sales year over year.

Elise Caffrey

I think we have time for one more question.

Unidentified Company Representative

Okay seeing no more questions we are going to call a end to the formal parts of this program. So thank you very much for coming but do not go away. We have some exciting demonstrations to go next. But I would like to thank the panel for the commentary. For Jeff for the presentation we will see the effect of the market challenge that Jeff’s laid out in a second but anyway thank you for coming to Boston on a (grey) day thank you everyone who is attending this and seeing this over the web. And I would like to ask Youssef to come up and describe what demonstration we are about to see next.

Youssef Saleh

We are going have two parts of the demonstration the first part you will see an RPV that here which some of you saw earlier in the back. There is also Marcia, who is going to play kind of the remote doctor or the remote person that is driving or controlling the behavior of the robot in here. There is a third element that you are not going to see which is really a cloud services that allows the connect so we are on a public network. So we are just using the museum Wi-Fi connection through the…

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