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Executives

Colin Angle - Chairman & Chief Executive Officer

John Leahy - Chief Financial Officer

Elise Caffrey - Investor Relations

Analysts

Jim Ricchiuti - Needham & Co.

iRobot Corporation (IRBT) Q4 2009 Earnings Call February 18, 2010 8:30 AM ET

Operator

Good day, everyone and welcome to the iRobot fourth quarter and full year 2009 financial results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Elise Caffrey of iRobot Investor Relations; please go ahead.

Elise Caffrey

Thank you, and good morning. Before I introduce the iRobot management team, I’d like to note that statements made on today’s call that are not based on historical information are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

This conference call may contain express or implied forward-looking statements relating to the company’s financial results, operations and tax rate for fiscal 2009, the first quarter ending April 3, 2010 and the second quarter ending July 2, 2010, our financial position at the end of fiscal 2009, demand for the company’s products and services, the timing of funding and contact awards under the FCS Program now refer to as the Brigade Combat Team Modernization program, our plans for expansion and new product development, backlog and demand for our Government and Industrial Robots, mix of product revenue and business conditions.

These statements are neither promises nor guarantees, but are subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those contemplated in the forward-looking statements.

In particular, the risks and uncertainties include those contained in our public filings with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. iRobot undertakes no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or circumstances, or otherwise.

During this conference call, we will also disclose various non-GAAP financial measures as defined by SEC Regulation G, including adjusted EBITDA, which we define as earnings before interest, taxes, depreciation, amortization, merger and acquisition expenses and non-cash stock compensation expense.

A reconciliation between net income, the GAAP measure most directly comparable to adjusted EBITDA, and adjusted EBITDA is provided in the financial tables at the end of the Q4, 2009 earnings press release issued last evening, which is available on our website www.irobot.com.

A live audio broadcast of this conference call is available on the Investor Relations page of our website and an archived version of the broadcast will be available on the same page, shortly. In addition, a replay of this conference call will be available through February 25, 2010 and can be accessed by dialing 617-801-6888, access code 316-785-47.

On today’s call, iRobot’s Chairman and CEO, Colin Angle will provide a review of the company’s operations and achievements for the fourth quarter and full year 2009, as well as our financial expectations and outlook for the business for 2010; and John Leahy, Chief Financial Officer, who will review our financial results for the fourth quarter and full year of 2009 and provide additional detail on our 2010 financial expectations. Then we’ll open the call for questions.

At this point, I’ll turn the call over to Colin Angle.

Colin Angle

Good morning, and thank you for joining us. I’m pleased to report that we delivered record quarterly revenue of more than $100 million and full year revenue of nearly $300 million. Earnings per share and adjusted EBITDA significantly exceeded expectations for the fourth quarter and the full year.

Lifetime sales of our home robots surpassed 5 million units and as we recently announced deliveries of PackBot robots have exceeded 3,000, both are significant milestones for the company and validation that demand continues to be strong for our products. Our continued focus on strengthening the balance sheet resulted in year-end cash and investments position of $77 million, up significantly from $41 million a year ago.

A critical component of improving our financial position over the past has been driving adjusted EBITDA in operating cash flow. Adjusted EBITDA was $21 million, up 61% from 2008 and we generated $41 million of operating cash flow in 2009, compared with $19 million in 2008.

2009 marked an important step to achieving our three year strategic goals, maintaining our industry leading position of delivering robotic technology-based solutions that leverage common platforms and common software, and a financial goal that underpin our strategic plan, which are mid-to-high teen revenue [CAGR], mid-teen adjusted EBITDA margins and high single digit operating cash flow margins.

We recently added Paul Sagan, Chief Executive Officer of Akamai Technologies to our Board of Directors. Paul brings extensive technology, consumer and global business expertise to iRobot at a critical time in our developed given our projected global growth, and we are very pleased to have him join our team.

We began 2010 with $42 million in backlog in our G&I business, the highest level in our company’s history. This positions us well to deliver another year of solid financial performance, with increased top and bottom line growth while continuing to invest in the future of our business, as we keep making progress on delivering against our strategic plan.

In home robots, strong demand for our Roomba 500 robots in international markets continued to fuel home robot growth overseas. International home robot revenue was up 35% from the prior year and represented more than half of 2009 home robot revenue. We expect to see significant overseas growth in 2010 within existing markets.

In addition, we are exploring opportunities for market expansion into Latin and South America as well as Eastern European countries, but we have assumed minimal contribution from these new markets in our 2010 financial expectations.

In the United States, our strong Q4 sell-through results coupled with closely managed production had driven replenishment orders ahead of expectations. As a result, we anticipate first quarter of 2010 U.S. revenues will be higher than 2009, Q1 U.S. revenues. Executing against our plan of tightly controlling inventory while fulfilling customer commitments was critical, given the uncertainties that we faced this past holiday season.

2009 was a year of revitalization for our home robots’ business. We hired a new division president with a strong general management background in operations and he had successfully build a team of experience, product development, finance, and operations’ professional, refined the home robots strategy and implemented discipline processes to support continued profitable growth. With all signs pointing to some level of economic recovery in the U.S. in 2010, we are well positioned with our core products to capitalize and improving conditions.

There was a significant opportunities for additional penetration of Roomba in existing markets. In North America alone, market for [Inaudible] is costing more than $200, was approximately $1 billion in 2009 and we generated revenues from sales of Roomba of approximately 10% of that amount.

Functional differentiations affected through continuous platform upgrades and increased software content will enable us to position Roomba products as good, better and best, which will also help drive higher margins. Likewise, overseas the markets are relative untapped, both Europe and Asia provide significant opportunities for expansion.

In Europe, we estimate our position as 11% of the $600 million annual addressable market and in Japan and Korea 12% of the $125 million annual market. I am very excited about the opportunity for home robots. We have a the team in place to take us forward, tremendous opportunity for expansion with existing products in our current markets and a well defined plan to add new distribution channels internationally.

As we look to a development and introduction of new products for the home, we will focus on those that not only meet the needs of our customers, but also leverage our investments in order to continually improve our margins. Given our position and the recovering economy, I’m cautiously optimistic about our year-over-year expectation for growth in all segments of our home robot business.

In our Government and Industrial Division, we also delivered a record quarter, driven by shipment of PackBots, FasTac Robots, ordered under contracts from the robotics joint program office. Quarterly contract revenue was up 36% year-over-year, and fueled by the government’s acceleration of funding under Feature Combat Systems development contract for SUGV, the Small Unmanned Ground Vehicle.

We expect funding under this program to continue to grow in 2010 to support transition to a production program. 2009 we began to deliver SUGV 310’s a variant of the robot that will be a key growth driver of the next couple of years as it is rollout to the infantry. In February, we received a $17 million order for the iRobot Boeing develop robots, bring the total units order to-date to $229, of the customers request we did not issue of press release, nor can we discuss the details of this contract.

I’d like to take a minute to review the status of this program and our expectations for the different SUG variants in 2010. As we discuss last quarter, the FCS program is now referred to by the Army as the Brigade Combat Team Modernization or BCTM program.

In December, the Increment 1 inventory Brigade Combat Team capabilities completed a Defense Department Milestone C review, under which the maturity, requirement, testing and evaluation, and production plans for Increment 1 capabilities including the SUGV were reviewed and approved.

We submitted an LRIP, its Low Rate Initial Production proposal to support the first increment of an additional 124 SUGV and expect to be on contract for this effort in the second quarter of 2010. We are currently development and delivering three SUGV variants to marketplace.

The SUGV 310 of which we have delivered approximately 50 units last year in 2009. The SUGV 320 for which we’re expecting the LRIP contract just described above and a commercial office self version of SUGV 320 for which we are pursuing contract to supply to infantry current forces.

Build on the same 20-pound chassis, each variant has the distinct functionality addressing the needs of different customers from EOD, special Ops and engineering teams to the infantry current forces. From the time we began developing the SUGV several years ago, we expect that all of the current forces to want them, once the SUGVs were fielded to the SES Brigade Soldiers.

When Defense Secretary Gates terminated the program formally known as Future Combat Systems, restructured its successor referred to as the BCTM, he accelerated the development of the SUGV 320 and expanded its deployment to all of the Army Combat Brigades. His action was a strong word of confidence in the SUGV and provided increase support for our SUGV market estimates.

The army has estimated that its SUGV requirement exceeds 8,000 robots and has documented this need in a draft capability production document. When this requirement is added to the projected demand from marines and other services, the international market and the domestic supermarket we estimate an overall market demand of between 10,000 and 20,000 SUGV robots.

The un-supplying robots to U.S. government, we will continue to make in-roads in international markets. International is 69% to 11% of G&I product revenue compared with 6% last year. In 2009, we closed our first major foreign military sale to Iraq and sold robots in five new countries bringing our international presence to 19 countries. We are well positioned with the team and product offerings to build upon and accelerate international growth in 2010.

In summary, both of our businesses performed well in a difficult environment, while we continued to invest in and build upon our competitive advantages. As a leader, in developing robotic technology-based solutions, we passed two significant milestones, 5 million home robot sold and 3,000 government robots delivered, but we much continue to make investments in critical technology that widen our competitive note.

We have a robust expanding and defensible intellectual property portfolio. Our proprietary AWARE to robot intelligence system, which has been dynamically involved from continuing investments over the past 10 years is an essential element of our business growth strategies. Increasing software in IP content on our robot platforms will enable us to provide increased functionality to customers in both divisions, while generating sustainable higher margins.

In G&I, our customers are demanding increased mission anatomy that will allow robots to perform the more dangerous tasks, which will be enabled by our advanced software. In home robots, we see software playing a bigger role in products and we believe there is a great opportunity for more software-enabled products in the healthcare sector.

During the fourth quarter of 2009, we announced the formation of our healthcare business units. We hired a Season Technology Executive to explore ways, which our platforms and software can be leveraged to develop solutions that meet the needs of our aging population.

We will continue invest in areas where we see opportunities to create high value products, with high software and IP content that leverage our platforms in order to improve competitive positioning and drive increased product margins overtime. In 2010, we anticipate delivering strong revenue and profitability growth in an economy that still is recovering over continue making robust and long term investments in building our future and maintaining our market leading position.

Now, I’d like to provide you with our 2010 financial expectations, for full year we expected revenue to be between $345 million and $360 million, roughly 20% growth over 2009. We expect to see growth in both of our divisions with home robot revenue being driven by growth in both international and U.S. markets, and G&I revenue primarily from the sale of SUGVs and PackBots.

For the full year 2010, we expect EPS to be between $0.20 and $0.25 and adjusted EBITDA to be between $24 million and $28 million. In the first quarter of 2010, we anticipate revenue of $82 million to $87 million, EPS of $0.01 to $0.04 and adjusted EBITDA of $4 million to $6 million.

We’ll now turn the call over to John to review our fourth quarter and full year financial results in more detail.

John Leahy

Thank you, Colin. Our performance in the fourth quarter was very strong with revenue reaching the highest quarterly level in our history. Earnings per share, adjusted EBITDA and cash flow all exceeded expectations. Revenue of $102 million was up 12% for the quarter year-over-year. Growth in our international home robot business continued to be robust, up 29% for the quarter.

Likewise our government business was up 11% for the quarter and had a $42 million backlog coming into 2010. Earnings per share for the quarter in full year was $0.20 and $0.13 compared with $0.21 and $0.03 per share in Q4 and full year 2008 respectively. EBITDA for Q4 was $13 million, and for the full year EBITDA grew to $21 million, up 61% over 2008.

Operating cash flow of nearly $41 million in 2009 has driven our cash position to $77 million, up $36 million from the end of last year. The cash balance includes $5 million in liquid investments. Our focus on driving EBITDA and cash flow has clearly produced strong results.

In the home robot division, shipments of 324,000 units generated $55 million in revenue during Q4, compared to 293,000 units and $48 million in revenue a year ago. International revenue increased 29% in the quarter year-over-year and comprised approximately 55% of home robot revenue. For the full year, international was 54% of home robot revenue compared with 38% in 2008.

Improvements in home robot gross margin were largely due to this increase in international as a percent of total revenue. In the G&I division, total revenue was $47 million in the quarter, compared with $43 million a year ago. This increase was due to higher product shipments, primarily PackBot, FasTacs and higher contract revenue generated under the FCS development program.

Contract revenue comprised 23% of G&I revenue for the quarter and 27% for the year, compared with 19% and 20% respectively last year. Contract work is a critical component of our R&D effort, but gross margins tend to lower then on product revenue. As a result increased contract revenue adversely impacted G&I margins for both the quarter and the year.

G&I product revenue was $36 million in the fourth quarter compared with $35 million last year. A key component in growth driver of our government business is product Lifecycle Revenue or PLR, our rapidly growing installed based of robots requires spare parts, support, maintenance and training. In the fourth quarter PLR was $9 million or 26% of G&I product revenue and for the year it totaled $24 million or 25%, compared with 19% of product revenue in 2008.

In addition, providing software, enabled solutions to upgrades to robots in a field is an emerging opportunity. We expect PLR to average 25% to 30% of G&I product revenue annually, although it can vary significantly quarter-to-quarter.

As Colin mentioned earlier, product backlog at the end of the quarter was $42 million, compared with $8 million at the end of 2008. This gives us the opportunity to deliver a strong Q1 and skew our earnings less heavily towards the back half of the year. For the total company, gross margin for the year was 31%, about even with last year.

Operating expenses increased $3.3 million year-over-year in Q4 and totaled 25% of revenue, unchanged from 2008. The increase in operating expenses resulted from incentive compensation expense accrued in 2009 that was not accrued in 2008. For the full year, operating expenses improved $7.5 million or to 29% of revenue compared with 30% of revenue in 2008.

The decrease in OpEx for the year was driven by tight spending controls across the company. 2009 operating cash flow was nearly $41 million compared with $19 million in 2008. This significant improvement resulted from continued focus on managing working capital, and in particular improvements in inventory levels.

Inventory was $32 million at the end of the year, down from $35 million a year ago. Accounts receivable were also well managed as evidenced by our DSO of 33 days at year-end. Operating cash flow in 2010 and beyond will be much more dependent on improved EBITDA than for the working capital gains. At the end of the year, we had cash including investments totaling $77 million compared with $41 million a year ago.

Now, I’d like to provide you with some of the underlying assumptions for the financial expectations, which Colin discussed as well as color on how we see the year unfolding.

For the full year, we expect home robot revenue $180 million to $190 million. In G&I revenue of $165 million to $175 million, we expect roughly equal revenue contributions from SUGV and PackBot with almost three quarters of the SUGV revenue to come from the sale of the 310 Robot.

Within G&I, contract revenue is expected to be between $30 million and $35 million and product lifecycle revenue is expected to total 20% to 25% of product revenue. We expect revenue growth for both divisions in each quarter with an especially strong Q1, which creates less dependency on second half home robot holiday sales.

In Q1, continued shipments in PackBot, FasTacs along with fulfillment of several international orders will drive G&I revenue. Second quarter revenue will decline sequentially to a range of $75 million to $78 million due to the expected timing of government orders.

We anticipate positive EBITDA in each of the quarters this year. In Q2, EBITDA will decrease sequentially to between $0.5 million to $2 million due to the lower revenue. Full year gross margin will be relatively unchanged and will fluctuate quarterly consistent with revenue and dependent on product and channel mix. We will continue to manage operating expenses carefully while investing in the company’s future, as a percentage of revenue OpEx will be consistent with 2009 levels.

Now, just a few additional data points, we are assuming stock comp expense between $9 million and $10 million for the year. Depreciation and amortization expense of approximately $8 million, a tax rate of 40%, diluted share count of 26.5 million shares, and operating cash flow for 2010 of roughly $20 million.

Now, I’d like to turn the call back to Colin.

Colin Angle

Thank you. In 2009, we faced a challenging year due to the state of the economy and uncertainties around the timing of actions from the new administration in Washington. We said it wasn’t going to be a revenue growth year for us and it wasn’t, but one in which we would focus on operating efficiency and building for our future and we did. We delivered substantial growth in EBITDA and operating cash flow with a net effect of dramatically increasing the strength of our business.

In particular, during the year we delivered against our financial commitments, increasing by EBITDA by 61% and quadrupling EPS while significantly improving our balance sheet. We strike in our senior leadership team and enhanced our Board with an experience and highly respected technology industry executive. We invested in and implemented critical operating process improvements resulting in lower and better manage inventory levels.

We expanded our international reach of our home robot division, which grew 35% and began delivering the SUGV robot for which we believe there’s a 10,000 to 20,000 unit addressable market over the next four to seven years. We demonstrated that there’s global demand for our products in both divisions, and exited the year a strong company.

We are very excited to be at this point in our longer term technology development process and you will here us talking more about our IP assets, as our customers demand more functionality in our platforms and we can meet their needs through higher software content in our products, should be noted that doing also enables us to deliver sustainable increase profit margins.

So with that, we’ll take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jim Ricchiuti - Needham & Co.

Jim Ricchiuti - Needham & Co.

Congratulations on the Quarter. Question on the home robot business, it looks like the U.S. home robot business you saw only a modest decline, just try to get a senses maybe you could provide some flavor direct versus your traditional retail channels? Then as a follow-up to that, if you could talk a little bit about the competitive landscape in the home robot business and how you see pricing going forward? Thank you.

Colin Angle

The direct business, if you look at the total robot sold in U.S. ‘08 versus ‘09 the direct business went from about 28% in ‘08 to 33% in 2009, so that there is an increase in direct over the last period of time.

We’ve also seen more recently a significant up-tick especially in Q4 in our higher price more sophisticated products. So we view that as a positive that people are stepping up. So we think that it’s a healthy business and moving in a good direction.

Every year we do get the next raft of potential competitors coming into the marketplace and 2009 was no exception we had new entrants from Samsung upgrading their model, another entrant from LG upgrading their model and a few start-ups launching product.

They are not currently material as far as revenue goes, Samsung and LG are not yet for sale in North America, so we view this as validation that there is a long term sustainable market for these robots given the other company sustained interest, but we’re very happy with our positioning of our product relative to these new entrance, even though they are not yet in our markets.

Jim Ricchiuti - Needham & Co.

In then, just pricing in the home robot business in 2010?

Colin Angle

Yes, you asked about, I should comment that all of the competitive entrants are priced significantly higher than our current pricing, so that’s a worthy of note. As I said our higher price robots domestically have been doing very well. So we expect there to be opportunities for some increased ASPs.

Operator

This concludes the Q-and-A portion for today’s call. I’ll now turn the call over to Mr. Angle for closing remarks.

Colin Angle

Thank you. That concludes our fourth quarter and full year 2009 earnings call. We appreciate your support and look forward to talking with you again in April to discuss our Q1 results.

Operator

That concludes the call. Participants may now disconnect.

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