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iRobot Corporation (NASDAQ:IRBT)

Q4 2013 Earnings Call

February 6, 2014 8:30 AM ET

Executives

Elise Caffrey – IR

Colin Angle – Chairman, CEO and Co-Founder

Alison Dean – EVP and CFO

Analysts

Josephine Millward – The Benchmark Co. LLC

Jim Ricchiuti – Needham & Co. LLC

Adam Fleck – Morningstar

Paul Coster – JPMorgan

Tyler Hojo – Sidoti & Co. LLC

Brian Gesuale – Raymond James & Co.

Brian Ruttenbur – CRT Capital

Operator

Good day everyone and welcome to the iRobot Fourth Quarter And Full Year 2013 conference call. This call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Ms. Elise Caffrey of iRobot Investor Relations. Please go ahead.

Elise Caffrey

Thank you and good morning.

Before I introduce the iRobot management team, I would 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.

These forward-looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information on these risks and uncertainties can be found in our public filings with the SEC. iRobot undertakes no obligation to update or revise these forward-looking statements whether as a result of new information or circumstances.

During this conference call we will also disclose 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, restructuring expenses, net intellectual property litigation expenses and non-cash stock compensation. A reconciliation of GAAP and non-GAAP metrics can be found in the financial tables at the end of the fourth quarter and full year 2013 earnings press release issued last evening, which is available on our website.

On today’s call, iRobot Chairman and CEO, Colin Angle will provide a review of the company’s operations and achievements for the fourth quarter and full year 2013 as well as our outlook on the business for 2014. Alison Dean, Chief Financial Officer will review our financial results for the fourth quarter full year 2013 and Colin and Alison will also provide our financial expectations for the first quarter ending March 29, 2014 and fiscal 2014. 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. 2013 was a great year for iRobot. Last evening we reported Q4 and full year results in line with our expectations. Home Robot revenue grew 20%, driving full-year 2013 company revenue up 12% to $487 million despite the anticipated 30% decline in D&S revenue. Earnings per share were $0.94. Adjusted EBITDA was $62 million or 13% of revenue. All three of our businesses met our expectations and made significant progress against their strategic plans, setting us up well for 2014.

In 2014, our financial performance will continue to be driven by our Home Robot business. Home Robot revenue is expected to grow 17% to 20% in 2014 and comprise 90% of total company revenue. Our Defense and Security business is expected to perform at 2013 levels and our Remote Presence business will be shipping product into two markets.

For 2014 we expect revenue of $560 to $570 million; EPS of between $1 and $1.15 and adjusted EBITDA of $74 to $78 million or roughly 14% of revenue. These expectations are a strong next step in progressing towards our three year targets of mid-high teen revenue CAGR; high teen adjusted EBITDA margin and high single digit operating cash flow.

Now I’ll take you through some of the details of 2013 and our expectations for 2014. Our Home Robot business had a phenomenal year. Revenue grew 20% for the full year over 2012, and comprised 88% of the company’s total revenue for the year. Our Defense and Security business delivered results consistent with our expectations while continuing to reduce reliance on the Department of Defense and our Remote Presence business began shipping RP-VITA telemedicine robots for use in hospitals to our partner InTouch Health and we signed a marketing agreement with Cisco to sell our Ava 500 Video Collaboration robots.

Full year Home Robot revenues were driven by strong growth in both domestic and international markets. Expanded distribution of Roomba 700 and 600 series and the introduction of Braava overseas were the primary drivers. In the fourth quarter we launched our next generation Roomba, the 880, with revolutionary AeroForce technology that we think will change the way the world vacuums. The brushless design with counter-rotating debris extractors, coupled with significantly greater vacuum power, makes ours a truly differentiated and superior product. Sales of the product to date from our website have exceeded those of all other new products over the same timeframe.

At CES in January of this year we introduced our first major new large-format Scooba floor washing robot in nearly eight years. The Scooba 450 model addresses customer feedback we’ve received since we launched the product first in 2006. It delivers improved cleaning performance through its recycle cleaning process and significantly improved usability through technology and easy-to-clean design. We think there is a large addressable market, both domestically and overseas for the Scooba.

Our continued investment in marketing programs to generate greater brand awareness helped drive full year domestic revenue growth of more than 30% over last year. Likewise, our commitment to continuous improvement resulted in a reduction to our product returns accrual that positively impacted revenue and profit for the year. Higher quality robots and improved operational performance coupled with a premium ad campaign have proven to be a successful formula. We will continue to invest in these and other initiatives that expand our competitive moat and secure our market-leading position.

Our 2013 international Home Robot revenues grew 14% year-over-year. Revenue in Asia Pacific, driven by strong demand in Japan and China, increased more than 40%. As anticipated, EMEA declined approximately 5% driven by regional macros, slightly offsetting the strong APAC growth. As I mentioned last quarter, our European distributors are reporting improved demand in EMEA, and we expect the region to contribute to 2014 growth. For 2013, APAC and EMEA each comprised roughly 30% of Home Robot revenue.

We expect strong 2014 growth in each of our three markets, U.S., APAC and EMEA, to be driven by expanded distribution of Roomba 880, Braava and Scooba 450, deeper penetration of existing markets and further expansion in China. Growth in APAC will continue to be driven by Japan and China. In EMEA we are expecting increasing demand from long time western European distributors to fuel growth in that region.

The robot vacuum cleaner market grew roughly 30% from 2010 through 2012 and represents approximately 15% of vacuum cleaner sales. That revenue share is comparable to the level of other disruptive household appliances, such as the microwave oven and dishwasher, at the same stage of their lifecycles, 10 to 15 years following introduction. We believe that as awareness of the category continues to expand, we could see an adoption rate similar to those other appliances.

We are optimistic about our ability to capture an increasing slice of the global robotic floor care market and expect our Home Robot business to drive the company’s targeted mid to high teen growth through 2016. Our go-to-market strategies have served us well and will not change in 2014. As always we will balance continuing investments to support growth initiatives with generating increased profitability.

Now turning to our Defense and Security business, full year results were in line with our overall expectations. Roughly 50% of the revenue was product lifecycle revenue and 40% was robot sales, primarily PackBot and FirstLook robots. The remaining 10% was from externally funded research and development.

International revenue increased to roughly 30% of full year D&S revenue from approximately 10% in 2012, while the DoD comprised 60% of total 2013 revenues compared with 87% last year. Visibility into the DoD market remains poor. In 2014, we will continue to focus on the international and first responder markets as well as continuing to sell spares, service and support for the installed base of more than 5,000 iRobot unmanned ground vehicles.

In 2013, we began shipping our FDA approved Ava robot to InTouch Health. They in turn integrate their proprietary technology for telemedicine on the robots and shipped the RP-VITAs to hospitals across the United States and Mexico for use in remote diagnosis and treatment.

During the fourth quarter we sold roughly $1 million of product and we are very excited about our progress in this segment. We believe that as more and more hospitals, doctors and patients recognize the value of RP-VITA, its use will continue to expand.

During the year we announced a very exciting joint marketing agreement with Cisco to bring the enterprise-grade Ava 500 Video Collaboration Robot to market. We also signed an agreement with KBZ, a major Cisco distributor. Ava 500 is in beta with several global 2000 companies in various industries. All is going according to plan and we are anticipating a product launch in the first half of 2014. iRobot views indoor mapping as a long term strategic technology asset of the company. Our Ava platform is the first of many products through which we are monetizing this capability.

In summary, 2013 was a very successful year following a challenging transitional 2012. In 2014 Home Robot revenue will continue to grow in both domestic and overseas markets and comprise roughly 90% of total company revenue. We will continue to invest in marketing programs and ongoing quality initiatives that drive profitable Home Robot growth. We will expand our reach in health care telepresence and video collaboration markets. We will continue to track developments in Washington and elsewhere that impact our Defense and Security business and we will continue to invest in key technologies that extend our market-leading position in practical robots.

I will now turn the call over to Alison to review our fourth quarter and full year results in more detail.

Alison Dean

Thanks Colin. Our fourth quarter revenue, earnings per share and adjusted EBITDA were in-line with our expectations. Revenue of $126 million increased 25% from Q4 last year, driven by growth in Home Robot revenue. EPS was $0.11 for the quarter compared with a loss of $0.21 for the same period last year. Q4 EBITDA was $13 million compared with $1 million last year.

Domestic Home Robot revenue growth was 50% for Q4 and 31% for the year, further evidence that our advertising investments, product and channel strategies and quality initiatives are yielding positive results. Q4 domestic revenue was partially impacted by another favorable adjustment to the product return accrual of $3.6 million, it was $4.4M in total. We have seen favorable adjustments on and off over the last few years as we have seen our return rates declining.

International revenue grew 14% for the full year driven by APAC growing more than 40%, partially offset by a year-over-year decline in EMEA of 5%. I am happy to report that after our first full year post acquisition of Evolution Robotics, we achieved our revenue and gross margin targets for the year, as well as the planned EBITDA accretion in Q4. As we have now fully integrated this business into our Home Business Unit we will no longer report on it separately.

Defense and Security revenue of $16 million in Q4 was flat year-over-year. Roughly 70% of this quarterly revenue was from PLR and the balance was from robot sales.

For the total company, gross margin was 47% for the fourth quarter and 45% for the full year 2013. As a reminder the returns adjustments carry 100% gross margin. Q4 operating expenses were 43% of revenue, down from 53% in Q4 last year when we recorded acquisition costs associated with Evolution Robotics, ER and booked the majority of our D&S restructuring charges.

Full year 2013 operating expenses came in at 39%, roughly flat with last year. EBITDA for the quarter was $13 million compared with $1 million last year; with full year 2013 results of $62 million or almost 13%, compared with $52 million or 12% last year. EPS in Q4 was $0.11 and $0.94 for the full year.

Our full year annualized tax rate for 2013 was 15% and was impacted by the 2012 and 2013 investment tax credits, as well as a one-time tax benefit on Extra Territorial income from 2000 to 2006. The combination of these three items was approximately $0.18 favorable impact on 2013 EPS.

Q4 operating cash flow was $31 million resulting in full year 2013 OCF of $42 million, 9% of full year revenue. We ended the year with $187 million in cash, up from $139 million a year ago, and with $46 million in inventory or 63 days, compared with $37 million or 61 days last year.

Now I’d like to provide you with additional detail and some of the underlying assumptions for our Q1 and full year 2014 financial expectations. The outlook for our Home Robot business remains very strong with growth drivers identified for the next couple of years. For the Defense and Security business, our visibility is again limited in 2014. However we expect our continued focus on international, first responder markets and PLR to result in revenues comparable to 2013 levels. We expect Remote Presence revenue to increase in 2014 but to not contribute materially to growth.

We expect full year revenue of $560 to $570 million comprised of Home Robot revenue of $500 to $515 million and D&S revenue of roughly $50 million. We anticipate increased revenue from Remote Presence to contribute approximately $5 million. We anticipate our quarterly revenue pattern to differ from 2013 with roughly 55% coming in the second half of the year as we steadily roll out our new home robots.

We anticipate Home Robot revenue to grow 13% to 15% in Q1 2014 over last year while D&S revenue is expected to decline in the first quarter. As a result we expect total company Q1 revenue to increase roughly 5% to $110 to $113 million, and to increase sequentially quarter-to-quarter throughout the remainder of the year.

In Home Robots growth will be driven by further penetration of long time overseas markets, coupled with expansion in China and wider distribution of the Roomba 800, Scooba 450 and Braava. Overall we expect home robots to grow 17% to 20% in 2014.

We expect approximately 45% of D&S revenue to come from robot sales, 50% from PLR to support the installed base of robots, and the balance from contract revenue. Because it is expected to be nominal, contract revenue will be reported as part of total D&S revenue beginning with our Q1, 2014 earnings release.

We expect Q1 EPS of $0.13 to $0.17 and full year EPS of $1 to $1.15. Adjusted EBITDA in Q1 is expected to be $13 million to $15 million and for the full year is expected to be $74 to $78 million. Consistent with our commitment to improve profitability through OpEx leverage, we expect 2014 operating expenses to decrease to approximately 36% of revenue for the full year, down from 39% in 2013. We expect operating cash flow to continue to run in the high single digits as a percentage of revenue.

We are also assuming gross margin of roughly 45%; stock comp expense of roughly $15 million; depreciation and amortization expense of approximately $15 million; and diluted share count of approximately 30 million shares. We are estimating a tax rate of 32% to 35% for 2014. The lower end of this range would require a 2014 investment tax credit to be approved.

I’ll now turn the call back to Colin.

Colin Angle

Thank you. We expect our Home Robot to deliver robust results in 2014. Our stable defense business will be flat year-over-year and our Remote Presence business will contribute $5 million to revenue in 2014, with our Home Robot business comprising roughly 90% of the revenue we expect to deliver mid to high teen company growth consistent with our three year financial targets.

With that we will take your questions.

Question-and-Answer Session

Thank you. (Operator Instructions). Our first question comes from Josephine Millward from The Benchmark Co. Please go ahead, miss.

Josephine Millward – The Benchmark Co. LLC

Good morning.

Colin Angle

Good morning.

Josephine Millward – The Benchmark Co. LLC

Colin can you give us a sense of the Roomba 800 contribution during the quarter. You said that live sales have been better than – much better than other new product launches. And if you can just give us a sense of roughly how much it was during the quarter and can you talk about the rollout for the new Roomba and Scooba in terms of geography?

Colin Angle

Sure. So to remind you when we – our process for new product introduction is to first launch on our website and then bring in some specialty retail, the mission to make sure that, again we are coming at high end of the market and we have very good ties to every customer that purchases these robots. So we can be in touch with them and understand their reactions and then overtime we gradually expand distribution into Big Box retail and then toward the end of the product lifecycle move into larger discount chains. And so it is a very systematic rollout.

So with the 880 and with the Roomba 450 we are at a stage where they are available on our website, which means we are at the earliest stage of that funnel of distribution expansion but on the 880 we have seen an extremely strong response relative to other new product launches that follow that same trajectory and Scooba 450 as well though we didn’t call it out exclusively in the call. So as far as materiality in the fourth quarter, let me let Alison answer that.

Alison Dean

Yeah it wasn’t overall material to our Q4 total company revenue, Josephine we only expected it to do – the Roomba 880 to do a limited amount of contribution given the time that it was available on the website and on the other components of the revenue for the quarter.

Operator

Our next question comes from Jim Ricchiuti from Needham & Co.

Jim Ricchiuti – Needham & Co. LLC

Hi good morning. I wondered if you could give the same color that you – for the quarter that you gave for the year in terms of the revenue that you are seeing in regions and countries. Just to get a sense as to how that business progressed in Q4?

Alison Dean

So for the full year 2013, Home Robot revenue was roughly 30% U.S., EMEA and APAC. So they are all contributing roughly equal proportions to the total company or for the total Home performance for the year. We definitely had strong growth in North America and Asia Pacific both in the quarter and for the year and EMEA as we have said earlier was down about 5% year-over-year but is still representing about 30% of our total Home Robot profile.

Colin Angle

So no major changes from our exit ratios in 2014, but sort of as we signaled last year we saw North America catching up to Europe and Asia. It’s certainly – we called out China as an increasingly material growth driver and so the race is on between Asia and North America, but we definitely have seen again as we’ve mentioned in the call Europe starting to pick up again which is very good.

Operator

Our next question comes from Adam Fleck from Morningstar.

Adam Fleck – Morningstar

Hi. Good morning.

Colin Angle

Good morning Adam.

Adam Fleck – Morningstar

Really saw the revenue growth again as we are discussing but give a sense of maybe the channel inventory or the sell-through by region and is it more or less than what you consider normal for the end of the year?

Alison Dean

General inventories were in-line with what we expected. There really were no surprises there, we think we are entering 2014 in a very healthy position from a channel inventory perspective.

Colin Angle

Yeah but I want to point out that we are seeing a little bit more growth through the year. That is not a channel inventory issue, that is a function of our product introduction strategy which I described earlier. We have two major new products as well as continuing to see the Braava product rolled out more globally and so that we got a lot of cutting new products coming in. We’re very happy to be able to report strong growth even on the larger base. But the natural roll out implications of putting two major products out at the end of the year are being seen in the [quarterization] of our revenue growth.

D&S has always been lumpy and continues to be lumpy. Lumpiness on a smaller revenue base can exacerbate that and so the way it – the cards play out based on our expectations for 2014 is a little less in Q1 and a little more later in the year. So that just compounds things a little bit. But I think that we’re very pleased to be able to be talking about continued strong growth.

Operator

Our next question comes from Paul Coster from JPMorgan.

Paul Coster – JPMorgan

Thanks for taking my question. So gross margin outlook for 2014 is 45% I believe it was about that level in 2013 but I included some more warranty reversals, what assumptions have gone into ‘14 please?

Alison Dean

Well as we said for a while now Paul we don’t – as we look at our three year targets we don’t think there is a lot of potential for substantial gross margin expansion in the next couple of years and that’s reflected in our 2014 expectations. We expect most of the leverage we’re going to get from an EBITDA perspective to be coming from OpEx. There are various factors that go in to gross margin, some of which are favorable, some of which are not and at this point we think a flat year-on-year projection is the best view.

Paul Coster – JPMorgan

Does that include any sort of assumptions around the reversals from warranties or not?

Alison Dean

Well as we’ve said in the past the last few years we’ve had the benefit of lower return rates which have had positive impact for revenue and gross margins. It’s very hard to predict exactly when we’re going to be able to take those adjustments on a go forward basis. When we provide guidance ranges we’re allowing for various factors to come into place such as order timing, these types of revenue adjustments et cetera. But it’s nothing that we can predict in a very specific time dimension.

Paul Coster – JPMorgan

Got it okay. Last question Colin you have this fantastic portfolio of intellectual property, any developments there in trying to monetize it?

Colin Angle

I tried to speak a little bit in the call where the strength of our navigating software technology is starting to get some play in driving revenue growth. So the Ava500 and RP-VITA robot are out there, strong IP around the navigation. As a company we’re starting to see that navigation technology successfully rolled out in products, as opposed to being demonstrated in research labs. And the expectation should be that we will see our navigating technology rolled out in more products and enable new business opportunities over time.

So the iRobot has tremendous IP and technology base that our platforms and our businesses getting to a point of maturity where we’re starting to be able to take advantage of that more strongly. And you should expect to see over the next few years our ability to monetize the technology improve. So you’re just getting a brief look at the tip of the Iceberg of what’s coming but it’s a very exciting place to be.

Paul Coster – JPMorgan

Thank you.

Operator

Our next question comes from Tyler Hojo from Sidoti & Co.

Tyler Hojo – Sidoti & Co. LLC

Yeah hi, good morning. Just wanted to hit on the remote presence guidance for a second. $5 million equates less than 1% of your overall sales guidance and just going back to your last call you told us less than 3% of sales is where we should think of remote presence. So just wondering if your outlook for this product line or for this product category has diminished over the last 90 days?

Colin Angle

No, it hasn’t. I think that what you are seeing is sort of start-up conservatism where we don’t have great visibility prior to launching this product, just what our ramp will look like. And so that – what we were trying to communicate is that we’re excited about it, that we are for the video collaboration robot, which probably has the largest potential for rapid growth but it’s still pre-launched, what does that ramp look like and I would rather give ourselves the time that is necessary to correctly build and roll this product out than over promise what is possible for this product line.

So we’re very excited about it. There have been no material changes in our outlook internally but I think that if we can achieve $5 million and have a significant percentage of that come from video collaboration robot we’ll be setting ourselves up extremely well, have that be a strong contributor in 2015 and ‘16 and beyond. This is a very exciting but also very decent new capability and new market.

Tyler Hojo – Sidoti & Co. LLC

Okay. Thanks for that. And may be just as a follow-on could you tell us what the RP-VITA shipments were in fourth quarter?

Colin Angle

That’s not something that we break out explicitly, so sorry.

Tyler Hojo – Sidoti & Co. LLC

Okay, that’s fine. May be just one other from me, as a follow-on I think it was Josephine’s question when are you anticipating rolling out the 880 to international markets, is that Q1 or Q2 event?

Alison Dean

Tyler it’s going to start probably in the later part of Q2, is when you would start seeing it in some select locations. But you shouldn’t really expect it to be fully rolled out until the tail end of 2014.

Tyler Hojo – Sidoti & Co. LLC

Perfect, that’s all I had.

Colin Angle

Okay.

Operator

Our next question comes from Brian Gesuale from Raymond James.

Brian Gesuale – Raymond James & Co.

Hey good morning guys. Most of my questions have been asked but wondering if you could talk a little bit about Braava and may be growth expectations kind of above the Home Robot growth rate in-line with kind of the company average or slightly below it in 2014?

Colin Angle

I think that you should think about Braava as outperforming the base line growth rate of Home because of the territory expansion that it will enjoy in 2014. So it’s a good product it fits a niche, it delivered on the expectations we had for it in 2013 and we see some opportunities for continued expansion of it on a global basis as our distributors get a better sense of where it fits in alongside Roomba, how to market it alongside Roomba, in retail and drive sale. So it should outperform.

Brian Gesuale – Raymond James & Co.

And Colin may be just a follow up to that, do you still or may be the better question, is does this mix or geographic mix two-third internationals one-third domestic is it going to track similarly to Roomba or fundamentally is it just a different geographic mix for you guys?

Colin Angle

Let me ask you to clarify your question are you talking of Braava in specific?

Brian Gesuale – Raymond James & Co.

Yeah, Braava specifically yes.

Colin Angle

I don’t necessarily believe it must follow Roomba. I think that the question in Asia does the customers clean using this sweeping type of methodology as frequently as vacuuming. We get actually fairly passionate opinions on both sides of the ledger. So I think we have to do a little bit of a wait and see how it ends up. We know it’s strong in North America, we’ve had strong positive response in EMEA and it’s still early, we have the least amount of distribution for Braava in Asia. So that will be a great question in Q3 and I can give you a much better answer then.

Brian Gesuale – Raymond James & Co.

Okay, terrific. Thanks very much.

Colin Angle

You bet.

Operator

Our next question comes from [Magna Laude from SIG].

Unidentified Analyst

Hi, thanks for taking my questions. Colin, you remain bullish on China. Can you just highlight again what are some of the growth drivers you see in that region and what gives you confidence that it will be a big market someday for iRobot.

Colin Angle

So the Robot vacuuming industry in China is actually experiencing good growth. It is the only region in the world where iRobot was not first to market and that is exciting because it means we don’t have to go and build the market all ourselves. We saw significant growth in 2013 where we have entered and started taking substantial market share from the players that were in China prior to our rolling out and expansion of our product line in China and we see every indication of that continuing to be the case.

So we’re still enjoying high growth percentages because of a relatively small base but there is a general appreciation for robot vacuuming in china already and we’re able to leverage that.

Unidentified Analyst

Got it. Thank you. And can you give us a little bit more color to the European market, it was down 5% this year. Can you give us more color on improving market conditions that you are seeing going into 2014?

Colin Angle

I think that this has a lot to do with macros and that robot vacuuming in Europe is a at a scale where macros do come into play which two or three years the growth of the category created some invulnerability to market conditions. Last year we saw that flip and now we are impacted.

So with the improving European economy our distributors are reporting increasing demand and we saw that, that demand improving towards the end of 2013 which gave us the confidence to talk about and incorporate in the guidance we gave today that Europe will be a growth market.

Additionally, we have new product introductions and the expansion of Braava into the European market which again allows us the confidence to talk about significant growth opportunities in Europe. So improving economy, new product introductions really are the two major drivers for that confidence.

Unidentified Analyst

Thank you so much.

Operator

Our next question comes from Brian Ruttenbur from CRT Capital.

Brian Ruttenbur – CRT Capital

Thank you very much. Total revenue you stated in the first quarter was $110 million to $113 million and then you gave guidance for the total year of $560 million to $570 million and you stated 55% of your revenue was going to be the second half of the year. This guidance and I just want to make sure I am checked okay here is implying around $150 million in revenue in the second quarter, is that correct?

Alison Dean

Yes, that’s the way the numbers play out.

Brian Ruttenbur – CRT Capital

So what’s driving the sequential 30% growth, is that all on the home robotic sales?

Colin Angle

It’s a mixture of lumpiness on the defense. So that weak Q1 more strength in the remaining quarters and the natural impact of rolling out new products according to our product launch lifecycle throughout the year. And so those two drivers added to one another give this growth throughout the year dimension which we didn’t see last year because the lumpiness of the D&S business played out differently and we did not have the material new product launches that we are enjoying this year. So those are the two drivers.

Brian Ruttenbur – CRT Capital

Okay and then on operating expenses, just trying to understand the breakdown a little bit on R&D I expect to be up, what as a dollar amount $10 million plus is that the right ballpark and SG&A should also, excuse me sales and marketing should also be up in that range?

Alison Dean

Definitely from an R&D perspective we target investments in the low double digits and that’s consistent with our expectations for ‘14. Both IR&D and sales and marketing on an absolute basis will grow year on year based on the guidance we’ve given. We’re over time trying to get leverage out of G&A and maybe a little less so from sales and marketing as you think through our three year targets, but on a year-to-year basis going into ‘14 R&D, sales and marketing will grow in absolute dollars. R&D will probably stay in the low double digits as a percent of revenue.

Brian Ruttenbur – CRT Capital

Great, thank you very much.

Operator

Our next question is a follow up from Josephine L. Millward from The Benchmark Company.

Josephine Millward – The Benchmark Co. LLC

Hi, Colin I have a follow-up on China. Do you have a sense of your Roomba market penetration in China and if you can give us revenue contribution from the Chinese market last year and finally talk about how big do you think the Chinese market could get?

Alison Dean

Josephine in terms of 2013 that was less than $10 million coming from China. We do, again as Colin mentioned earlier, expect that, that number will grow into 2014. We’re not giving specific guidance on China as an element but given our limited distribution so far in that region we do continue to see it as being a significant growth driver for us.

Colin Angle

And if you ask what could it be Josephine, again we’re early days in China. We see a long and very positive growth runway ahead of us. There is plenty of comparable premium consumer electronic goods stories which show very, very substantial success where China has become one of the top global markets for those premium consumer products. So again that gives me more confidence that we are in fact early days and we do have a very positive runway for many years in front of us and should anticipate China growing into one of our major marketplaces.

Josephine Millward – The Benchmark Co. LLC

Right. I believe you are only in a few select cities currently. Do you plan to double that or triple that in the coming year?

Colin Angle

We haven’t given information in that detail regarding our plans but certainly, yes it is true we are only in select markets and yes it is our plan to grow those markets, though we’ll do it in a controlled fashion such that we can maintain good controls on the ground, ensure that the experience that is delivered to our customer base in China is consistent.

It’s very easy to grow too rapidly and watch price erosion and other things that would be negative to our overall global strategy occur in China. So we have to be careful about it. We have a great partner on the ground, to help manage that and caution of growing too quickly we’ll certainly put a governor on just how rapidly revenue grows but we should see it strongly grow for many years to come.

Josephine Millward – The Benchmark Co. LLC

Very helpful. Thank you. Congratulations on a great year.

Colin Angle

Thank you.

Operator

Our next question comes from Jim Ricchiuti from Needham and Company.

Jim Ricchiuti – Needham & Co. LLC

Thank you. Last year I think at this time you talked about increasing your advertising spend, marketing spend in support of the brand. Your OpEx is coming down as a percent of revenue this year it sounds like. What can you say about your plans to spend on advertising and can you give any color in terms of how we might see that rollout quarterly?

Alison Dean

Hi, Jim. We are definitely going to continue with the advertising campaign that we launched a couple of years ago. That’s definitely part of our plans for next year and you should expect to see the fluctuations on a quarterly basis that we exhibited the last two years as well and by that I mean higher proportion of the spend in Q2 and Q4 than Q1 and Q3.

We did some trials of some of the portions of the campaign in Europe in the latter part of 2013. We’re still accessing those results to see if we want to do something differently or more broadly with extending that campaign outside of the U.S. but we haven’t reached that conclusion yet.

Jim Ricchiuti – Needham & Co. LLC

Okay, thank you.

Operator

Our next question comes from Adam Fleck from Morningstar.

Adam Fleck – Morningstar

Hi, yes thanks. If I remember correctly Alison your $25 million repurchase authorization expires at this end of this quarter. I believe it’s gone unused and I know it’s meant to be more of an opportunistic type of program but maybe could you update us just on your thinking there especially given the very large amount of cash in your balance sheet?

Alison Dean

Yes, the facts you state are correct. It does expire at the end of Q1 and we have not repurchased any shares under that program and it was more of an opportunistic program when we put it into place. We will discuss internally whether we want to launch another share repurchase program for either opportunistic reasons or for potential share dilution objective but we haven’t reached that conclusion yet and we will be taking that up at the end of the quarter when the current plan expires.

Adam Fleck – Morningstar

Okay, great. Thank you. That’s helpful.

Colin Angle

Okay, that concludes our fourth quarter and full year 2013 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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