iRobot Will See Future Revenue Boost From Brazil Contract And IBM Technology

Jun.10.13 | About: iRobot Corporation (IRBT)

On May 15th, iRobot (NASDAQ:IRBT) announced a new contract from the Brazilian government. The deal calls for $7.2 million for providing 510 Pack Bot robots, spares, and equipment through December of 2013. While $7 million doesn't seem like a big deal for a company that did over $400 million in sales in fiscal 2012, it certainly could be.

The United States has cut defensive spending, which means iRobot has had to diversify into other sectors, like healthcare and consumer products. Brazil is giving the defense segment a boost to sales in a deal that could bring future contracts. Hinting at the potential, Frank Wilson (Senior VP for iRobot defense and security unit) said this, "iRobot is excited to be providing the company's state-of-the-art robotic technologies to Brazil as the country prepares for several high profile international events, including the 2014 FIFA World Cup."

In 2014 (June 12-July12), Brazil will host the World Cup. The event, which happens every four years, will be taking place in Brazil for the first time since 1950 and on the South American continent for the first time since 1978. As one of the premiere world sporting events, Brazil will need extra security and could be calling on iRobot to provide more and more bomb detecting devices. The 2010 World Cup, held in South Africa, had the third highest World Cup attendance in the history of the event. Consider that this event is held at 12 different venues and consists of 32 teams. With the threat of terrorism looming at large sporting events, Brazil will invest heavily in bomb detecting technology.

The 2016 Summer Olympics will also take place in Brazil. From August 5th through August 21st, 306 events across 28 sports will take place on the South American country. Brazil will use 30 competition venues for the 28 sports. In 2012, the Summer Olympics hosted 10,820 athletes and millions of spectators. Brazil will once again be looking to spend millions of dollars on security technology.

Think of this initial $7.2 million deal from the Brazilian government as a test or a short term lease from iRobot. While shares of iRboot shot to new fifty two week highs from this contract, they should head higher as investors see the big picture. I fully expect Brazil to continue to add to this contract over the next three years and in higher amounts.

The other piece of news that could drive iRobot shares higher is new technology from IBM (NYSE:IBM). A news report shows IBM using the iRobot Create Platform to help with energy costs. IBM is using a modified version of the Roomba to plot temperatures and humidity patterns at its data centers. Essentially, IBM uses the Roomba like device to detect where too much cold air or hot air is blowing at data centers around the world. IBM can then use the results to make modifications to the building and save money on energy costs.

IBM has 11 production robots across four continents. The company expects to have more robots by the end of this year. The company is also using RFID tags to have the robotic device scan and track assets in the data centers. In India, a similar project using iRobot technology is being done by EMC.

This technology used by IBM represents another opportunity for iRobot. While it won't bring in billions of dollars in revenue, it highlights the valuable intellectual property and patents that iRobot owns. The company can license out the technology and also use it in different industries than consumer products and military.

In February and April, I highlighted iRobot's entry into healthcare with its RP VITA telemedicine device. Since that time, iRobot has disclosed that it shipped over two dozen of the devices. The company, through a partnership with In-Touch has eight fully operational RP VITAs up and running. At the JPMorgan Global Conference, iRobot shared more details of the partnership, but would not discuss pricing or margins on the device. iRobot sells the device to In-Touch, who then leases the device to hospitals for $5000 a month.

iRobot recognizes the sale to In-Touch as a direct sale. The partnership with In-Touch is very compelling considering the company's founder is one of the most recognized names in robotics. Dr. Yulun Wang founded In-Touch. Wang was also an early developer of the da Vinci Robot, used by Intuitive Surgical (IRSG). Wang founded Computer Motion, which merged with Intuitive and is now part of the large company.

At the same JPMorgan conference, iRobot shared several new opportunities. Among the areas where iRobot sees itself investing in are:

· Security

· Retail

· Video conferencing

· Lawn mowing

iRobot will announce before the end of the year which new market it will be focusing on as its new venture.

Shares of iRobot have shot up to new 52 week highs on the backs of strong first quarter sales and the Brazil military contract. In the first quarter, iRobot reported earnings per share of $0.29 vs. a consensus estimate of $0.18. For the full year, analyst had been projecting earnings per share of $0.94. Revenue was expected to climb 12.6% to $491.2 million for fiscal 2013. Those estimates now seem conservative with strong sales and new ventures.

The opportunity in Brazil, licensing, healthcare, and new ventures is too compelling to not give iRobot serious attention. Once seen as the company who created a Roomba, a robotic vacuum that seemed like a fad, iRobot is fast approaching a market capitalization of $1 billion. Consider putting iRobot in your portfolio and taking advantage of the infancy of this technology company.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in IRBT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.