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iRobot Corp. (NASDAQ:IRBT)

Q1 2014 Results Earnings Conference Call

April 23, 2014 08:30 AM ET

Executives

Elise Caffrey - Investor Relations

Colin Angle - Chairman and CEO

Alison Dean - Chief Financial Officer

Analysts

Jim Ricchiuti - Needham & Company

Tyler Hojo - Sidoti & Company

Josephine Millward - Benchmark

Adam Fleck - Morningstar

Operator

Good day everyone and welcome to the iRobot First Quarter 2014 Earnings 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.

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 Securities and Exchange Commission. 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 first quarter 2014 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 first quarter of 2014 as well as our outlook on the business for 2014; Alison Dean, Chief Financial Officer will review our financial results for the first quarter of 2014; and Colin and Alison will also provide our financial expectations for the second quarter ending June 28, 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. Last evening we reported results exceeding our expectations. Home Robot revenue grew 17%, driving first quarter company revenue up 8% to $114 million despite the anticipated quarterly year-over-year decline in Defense and Security revenue. Earnings per share were $0.18. Adjusted EBITDA was $14 million or 12% of revenue. All three of our businesses met our expectations and made progress against 2014 goals.

Based on our Q1 results and our outlook for the rest of 2014, our full year financial expectations remain unchanged. We continue to expect revenue of $560 million to $570 million driven by Home Robot revenue growth of 17% to 20%, EPS of between $1 and $1.15 and adjusted EBITDA of $74 million to $78 million or roughly 14% of revenue. These expectations are a strong next step in progressing towards our three year targets.

Now I’ll take you through some of the details of the first quarter and our expectations for the rest of 2014. Our Home Robot business continues to deliver excellent growth on an ever increasing base. Revenue growth in all three geographic regions contributed to year-over-year growth of 17% for the quarter. Our Defense and Security business delivered results consistent with our expectations. And our Home Robot business announced the product launch of our new Ava 500 Video Collaboration robot.

Quarterly Home Robot revenues were driven by 31% year-over-year growth in the domestic market. Sell through at our top five retailers increased 28% over last year. In the fourth quarter of last year, we launched the revolutionary, Roomba 880 and sales of the product through the first quarter on our website has exceeded those of all our other new products over the same timeframe. The product is now available in limited domestic retailers and in selected European and Asian markets.

Likewise, the Scooba 450 robot, which we launched in early Q1 on our website, is enjoying success. It’s improved cleaning performance and significantly improved easy-to-clean design is resonating with customers. We expect both products to contribute to Home Robot growth throughout 2014.

International robot revenues grew 9% year-over-year in the first quarter and we expect to see increased growth overseas as the year progresses. And we expand distribution of Roomba 880 and Scooba 450, as well as record a full year of Braava revenue. The only anticipated growth attributable to geographic expansion in 2014 will be within China where we expect the number of doors to expand from roughly 420 doors in 2013 to 500 doors in 100 cities.

As anticipated, EMEA returned to growth this quarter fueled by the introduction of Roomba 880 into the region and strong sell through of Braava. EMEA grew approximately 9% and revenue in APAC was driven by strong demand in China.

Our continued investment in advertising and our brand will help drive increased awareness of the category and growth of the global robotic vacuum cleaner market; and we are optimistic about our ability to capture an increasingly larger slice of the revenue pie. As always, we will balance continuing investments to support growth initiatives with generating increased profitability.

Turning now to our Defense & Security business, first quarter results were inline with our overall expectations. Visibility in the DOD market remains poor. We have several international opportunities that we are expecting to close this year. Selling into that market is challenging given the longer sales cycle and it is difficult to predict the quarter in which we will close them.

We are continuing to sell spares, service and support for the installed base of more than 5,000 iRobot unmanned ground vehicles and have begun using distributors to help us access the fragmented first responder market.

In Q1, we launched the Ava 500 Video Collaboration robot in the United States, Canada and limited European markets through selected certified Cisco resellers. Our beta program, including Fortune 500 companies has been successfully completed and we have received our first orders. With the benefit of telepresence, Ava 500 helps globally dispersed teams work more closely together without the need for costly and time-consuming travel. We are very excited to add a second remote presence robot to our product offerings.

Our RP-VITA telemedicine robot continues to gain traction as doctors; hospitals and patients realize the value of remote diagnosis. Much has been written recently about its advantages. In fact, telemedicine has been spurred in part by the Affordable Care Act, which is funneling more patients into a system plagued by physician shortages. The feedback we are getting from doctors using our robot is that the user interface enabled by our navigation technology is proving to be highly valued in more sophisticated areas of telemedicine.

With the launch of our remote presence robots, we’ve begun talking more about the importance of robot navigation and our leadership role in the space. After more than a decade of research, we are fielding robots with the capability of building maps and using them to precisely move about environments in which they operate. This capability is creating opportunities for robots to perform more valuable work, more efficiently.

Today, the enabling technology Simultaneous Localization and Mapping or SLAM is costly as it requires lasers and significant computation, though it works extremely well and safely as evidenced by RP-VITA’s FDA approval. Soon, a new generation of SLAM, visual SLAM, based on replacing lasers with low cost cameras will usher in a new generation of navigation robots. iRobot is a pioneer in vSLAM, holding exclusive access to critical technology, including many of the earlier filed patents in the technology, which positions us extremely well as the industry accelerates. It is our intent to continue to invest in this critical technology and the economic opportunities it unlocks.

In summary, we are off to a good start in 2014. Home Robot revenue grew 17% and will continue to grow in both domestic and overseas markets driving full year 2014 total company growth of 15% to 17%. We will continue to invest in marketing programs and ongoing quality initiatives that drive profitable Home Robot growth. We will expand our reach in the health care telemedicine and video collaboration markets. And we will continue to invest in key technologies that extend our market-leading position in practical robotics.

I will now turn the call over to Alison to review our first quarter results in more detail.

Alison Dean

Thanks Colin. We delivered first quarter revenue and earnings per share slightly ahead of expectations and EBITDA inline with our expectations. Revenue of $114 million increased 8% from Q1 last year, driven by growth in Home Robot revenue. EPS was $0.18 for the quarter compared with $0.29 for the same period last year. Q1 EBITDA was $14 million compared with $15 million last year. Recall that Q1 2013 earnings per share included an $0.08 benefit from investment tax credits, not repeated this year.

Domestic Home Robot revenue growth was 31% for Q1, reflecting strong online demand and expanded distribution of our new Roomba 880, as well as the introduction of Scooba 450. International revenue grew 9% for the quarter driven by strong performance in China and EMEA. The introduction of Roomba 880 in select European markets and the first quarter of Q1 contribution of Braava sales overseas drove the improved performance in EMEA. We expect the international growth rate to increase throughout the year as the Roomba 880 and Scooba 450 are more widely distributed.

Defense & Security revenue of $6 million in Q1 was down year-over-year. Roughly 60% of this revenue was from PLR and the balance was from robot sales. For the total company, gross margin was 45% for the first quarter, slightly higher than the same quarter last year due to revenue mix of the higher margin Roomba 880s.

Q1 operating expenses were 38% of revenue, up from 35% in Q1 last year. Increased R&D spending and higher marketing costs associated with the new product launches accounted for the increase. In Q2, you should expect to see higher marketing costs as the first phase of our 2014 advertising campaign kicks off. R&D will decline as a percent of revenue and we will continue to leverage our G&A costs. We still expect operating expenses of approximately 36% of revenues for the full year as we discussed last quarter.

We ended the quarter with $185 million in cash and DII of 61. Earlier this month, we announced a $50 million stock repurchase program to replace the $25 million program that expired at the end of March. We believe we can take opportunistic advantage of volatile market conditions to buy back our shares while maintaining flexibility to make strategic investments in our future.

Now I’d like to provide you with additional detail for our Q2 financial expectations. The outlook for our Home Robot business remains very strong and will drive Q2 results.

We expect second quarter revenue of $138 million to $145 million, an increase of 6% to 11% over Q2 last year, EPS of $0.15 to $0.25, and EBITDA of between $13 million and $17 million. Keep in mind that EPS for Q2 ‘13 included a $0.07 tax benefit that we received in that quarter. We anticipate Home Robot revenue to grow approximately 14% 16% in Q2 ‘14 over last year while D&S revenue is expected to decline versus Q2 last year.

There are a number of orders that will fall in either Q2 or Q3 but the precise quarterly timing is uncertain. As a result, our revenue range is wider than typical. Likewise, profitability will vary depending on the product mix of the orders so we have provided a range that addresses the potential variety of outcomes. We are confident that we will receive these orders this year which is why we have not changed full-year expectations. For the full year, we continue to expect revenues to grow sequentially throughout the year, based on our Home Robot new product distribution plans as we discussed last quarter, with Q4 growing substantially over the fourth quarter of [2014].

I’ll now turn the call back to Colin.

Colin Angle

Thank you. We are off to a strong start in Home Robots and we expect that business to drive second quarter and full year 2014 top and bottom line growth. Our defense business, though stable, will be down year over year in the second quarter before starting to grow in the second half and we are optimistic that remote presence will continue to gain traction in the video collaboration market while further expanding into healthcare’s emerging telemedicine market.

With that we’ll take your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Jim Ricchiuti from Needham and Company. Please go ahead.

Jim Ricchiuti - Needham & Company

Hi, good morning.

Colin Angle

Good morning.

Jim Ricchiuti - Needham & Company

A question I had was just on the growth rate that you showed in the domestic market 31%, pretty strong and just considering the severe winter, I was just wondering was that a factor at all for you in retail and is this being primarily driven right now from the 600, 700 series?

Colin Angle

You know, I think that there is good data out there to show that the winter did negatively impact consumer sales. Now obviously we had a great quarter and so that the excitement over our new product launches and the growth in the category certainly slumped out any obvious chilling effect from the cold winter, but we are definitely seeing a significant risk in overall interest in the category and of course the launch of the 880 and the Scooba 450 on our website lead to very, very strong performance on our direct line because our launch strategy does start with direct only.

Jim Ricchiuti - Needham & Company

Okay. Can you say what your web based represented of your Home Robot business?

Alison Dean

I mean in general Jim it represents about 5%. It is a little bit higher with the introduction of a new product, the mix sort of and a little bit higher in this particular quarter.

Jim Ricchiuti - Needham & Company

Got it. And Alison tax rate for the year, and I will jump back in the queue?

Alison Dean

We haven’t changed our expectations there, we are still expecting anywhere from 33% to 35%.

Jim Ricchiuti - Needham & Company

Great. Thank you.

Operator

Thank you. Our next question comes from Tyler Hojo from Sidoti & Company. Please go ahead.

Tyler Hojo - Sidoti & Company

Yes, hi, good morning. Just a first question is just on, actually I am looking for a little bit more detail in regards to the plan for rolling out some of the new products namely to 880 and the Scooba?

Colin Angle

Okay. So the 880 is as I mentioned in the call is in limited distribution in the U.S. and certain Asian and European markets. Our expectation is that by Q3 of this year we should have a fully rolled out array of retailers globally at least as our plans indicate for this period of time with the 880. So we should be ramping the availability of the product through the end of Q1 and the similar story holds for Scooba 450.

Tyler Hojo - Sidoti & Company

Okay, got it. So Scooba should be out to all your international distributors by Q3 as well?

Colin Angle

Now the steady state distribution plan for Scooba 450 has knocked as many doors as with the Roomba, I would say product which is still emerging and we have got some more work to do to build the demand for it. And so that it will be everywhere we plan to be at this phase of the product’s maturity by the end of Q3. But certainly you won’t it in every store where Roomba is available although certainly that would be a longer-term goal.

Tyler Hojo - Sidoti & Company

Okay, thanks for that. And I just also wanted to talk about remote presence, it looks like those other sales volumes were down quite a bit sequentially and just down in general relatively to how you were tracking in 2013. Can you talk about if there was any sort of timing issues with RP-VITA shipments or maybe just more broadly what your expectation is for RP-VITA shipments in ‘14 should those be up year-on-year?

Alison Dean

Tyler we are definitely expecting a ramp in remote presence revenue quarter-on-quarter in ‘14. So that is narrowing the trend that we have at Home and D&S for the year. When you look back and compare the other category, 2013 to 2014, you have to be careful because in 2013 we had other revenues in that category, some of it came from Maritime business that we exited, some of it came from our research business that we’re not doing quite as much business with. So, it’s a little difficult to do apples-to-apples comparisons in the other category year-on-year.

Tyler Hojo - Sidoti & Company

Okay, got it. And then just lastly when we talk about the Defense business and the outlook there, I know you guys have talked about kind of using some new distributors to hopefully target some new customers in more fragmented markets. I guess I am wondering how important is it that these distributors gain traction to kind of making the revenue bogey set forth for the Defense business in 2014?

Colin Angle

So, the revenue associated with those distributors is rough order of magnitude 10% of the total D&S target for the year, so material, but not huge. We are definitely pivoting the focus of our Defense business away from DoD toward international toward non-DoD U.S. customers and this is part of our plan. We see the demand in the DoD continuing to slide in 2014 and we are not predicting a dramatic recovery in ‘15 on our planning horizon so that in order to return that business unit to growth we need to look elsewhere for demand for the products.

Tyler Hojo - Sidoti & Company

Okay, got it. And the large orders that could be a swing factor for either Q2 or Q3; are these really tied to international orders for Defense or is it something else?

Colin Angle

Predominantly yes.

Tyler Hojo - Sidoti & Company

Got it.

Colin Angle

Predominantly these are -- it’s just a question of when do the sign off some of the contracts happened and our experience has shown that that can be variable and thus the reluctance to nail down and commit to the quarter that they are going to come in.

Tyler Hojo - Sidoti & Company

Perfect, I’ll hop back in the queue. I appreciate it.

Colin Angle

All right.

Operator

Thank you. Our next question comes from [Meghna Ladda] from [SHG]. Please go ahead.

Unidentified Analyst

Hi, good morning. Thanks for taking my questions. Colin, last quarter you talked about how you could monetize your navigation technology. Could I trouble you to give some more color regarding that comment that you made last quarter? And also, do you currently license any of your technology; if not, is there something that you would consider in the future?

Colin Angle

Sure. So, the RP-VITA and the Ava 500 Robots are our first navigating robots. And so, the economic importance of navigation is starting to be seen in the growth of that business area, but we also feel like navigation is something that can broadly impact the value proposition of our robots. And so, while we are not announcing more products at this point that have navigation, it is going to become increasingly important.

So, the idea of that robots have a good and robust understanding of where they are located inside their environment, opens up opportunities for more precise behavior and certainly better ease of use and reliability. So, it’s important thing we wanted to share with our investors, our leadership position in that space and there is lots more to come as the next few quarters unfold. So, I'm excited to be able to be talking about this in the context of products we've launched. That's a major milestone for iRobot.

Relative to our licensing of this technology, certainly we believe that at some point in our future it may become something we're interested in. But right now, we believe that it is a strategic advantage in the robot space at least and our plans are to hold that technology closely and incorporate it into our products. Certainly it won't rule out licensing opportunities outside of the robot space in the future and perhaps with our partner companies in the future. But it is not, should not be viewed as a revenue or profitability driver in the near-term.

Unidentified Analyst

Got it. With respect to Braava, can you give us any timeline on when this product will enter the Chinese market?

Alison Dean

It, we did it in Q4, Meghna.

Unidentified Analyst

Okay.

Alison Dean

Q4 of ‘13.

Unidentified Analyst

Okay. So, it's already there, all right. And then last question, Alison, we noticed that the other current assets on the balance sheet, it grew pretty meaningfully this quarter versus the last quarter; it was up about 50%. Can you -- what is exactly in this line item and why did it grow so significantly this quarter?

Alison Dean

Other current assets, give me one second. There wasn't anything of particular import in there. We have some changes in some prepaid expenses, prepaid income taxes were affecting that category, there was really nothing of unusual change in there.

Unidentified Analyst

Okay. As you said, if you look over the last few years, it was just -- so that it was quite a significant increase this quarter versus any other quarter, so was just wondering why such a big increase?

Alison Dean

Yes. And the biggest driver of it was prepaid income taxes, but there is really nothing unusual within that category within other current assets.

Unidentified Analyst

Got it. Thank you.

Alison Dean

Thank you.

Operator

Thank you. Our next question comes from Josephine Millward from Benchmark. Please go ahead.

Josephine Millward - Benchmark

Good morning.

Colin Angle

Good morning.

Josephine Millward - Benchmark

Colin, just to clarify, so your RP-VITA revenue was around $600,000 for the quarter, is that right?

Colin Angle

That is correct. There were some revenue recognition issues that did impact when material and product shift in first quarter would be booked, but that is a correct statement.

Josephine Millward - Benchmark

Okay. Can you talk about InTouch Health, their strategy of marketing the RP-VITA, because I believe they’re almost in 1000 hospitals around the world and they say they are selling one telemedicine robot a day; is there idea to replace the prior generation with the FDA approved RP-VITA. Can you talk what they are thinking, what they are doing?

Colin Angle

So, as a pioneer in telemedicine, InTouch Health is addressing the number of different needs in the hospitals. And not all of their current endpoints or the actual telemedicine units that are in hospitals are currently robots. And depending on what the hospital wants to do, you can accomplish some with a more traditional push card and others with the more sophisticated RP-VITA robot. And as the telemedicine industry matures, hospitals are trying to look at telemedicine not just as a single solution for a single diagnosis challenge which would lead to the less sophisticated solutions but instead looking at a remote presence solution which would allow the robot to perform many different diagnosis and treatment functions within a hospital.

And so that what they are seeing is hospitals that are -- there is an increasing trend where hospitals are looking at this more sophisticated utilization of remote presence. And in those areas, RP-VITA is the overwhelming choice, and so that we are not the only devices, endpoint devices that in touch sales but we are certainly trending in a very exciting and positive direction.

So we are going to grow within touch and with the emergence of the telemedicine industry and we are here in slightly early but that gives us great opportunity from an ISP perspective, from a brand development perspective, and to develop a product. And so that we expect as we’ve spoken previously about a ramp in 2014 and acceleration of that ramp in 2015 and beyond.

Josephine Millward - Benchmark

Great. Can you talk about, can you comment on the launch of Ava 500? I know you have been looking forward this for a long time. Has it been in line with your expectations or exceeded your expectations? I know you’ve already received some initial orders?

Colin Angle

Right. So, that while we’re not releasing the names of those orders, we’re very excited about them. They’re very high quality customers. So, that we have completed our beta program; we have converted some of our beta customers into sales; and we are -- we have a very strong pipeline of customers following that. So, it’s great to finally be able to ship these robots, it’s great that these robots are not in so short supply that we have to fight for that you see here at iRobot. And I would say that I am pleased with our progress thus far. I think that our expectations for the year are appropriate. The sales cycle for a business-to-business selling of equipment like this does take a number of months. And so that it’s not going to be a turn to switch growth rate, but a steady build which is what we have included in our 2014 experience.

But based on launching RP-VITA last year, our beta trials have been relatively smooth, the product is appearing to be functioning very well with our customers, and so that it’s been a smooth launch thus far.

Josephine Millward - Benchmark

Thank you.

Colin Angle

You bet.

Operator

Thank you. Our next question comes from Adam Fleck from Morningstar. Please go ahead.

Adam Fleck - Morningstar

Hi, good morning. Thanks for taking my questions. Over the past few quarters, you’ve discussed some marketing trials in Europe. It’s nice to see growth returned to the region. But have you reached to conclusion on the effectiveness of those programs in particular?

Colin Angle

Well, they seem to work, so it is nice to see return to growth. I think that the economic environment in Europe is much better than it was a year ago. And by investing in these marketing programs, it also gives us stability to control the messaging more directly than we have done in the past, where a lot of the awareness generation was with our distributors. And so that ought to be very helpful with the brand. And so that the exercise thus far, I would put in the win column.

Adam Fleck - Morningstar

So then going out through the rest of the year as you increase your marketing spend, would you expect an increasing amount of dollars spent in Europe compared to say last year then?

Colin Angle

I think that is correct, it’s not going to be a night and day change, but the success of the program does give us confidence that we -- putting marketing energy into Europe makes sense.

Adam Fleck - Morningstar

Okay, great. And then just one more from me, pricing in Home Robots was up very strongly, I assume due to the effects of the 880 and 450, but I’m curious what’s included in your full year assumptions given that you are expecting higher growth, particularly in Braava?

Alison Dean

Overall, we expect that the ASPs will increase slightly on average throughout the year. We’ve thought the benefit of adding 880 and 450, as you mentioned Adam, but then we also will see a higher mix of Brava which has a lower price points. So that tempers some of the growth that we’d otherwise see in the category due to Roomba.

Adam Fleck - Morningstar

Okay, great. That’s helpful. Thanks.

Colin Angle

You bet. So thank you. This concludes our first quarter 2014 earnings call. We appreciate your support and look forward to talking with you again in July to discuss our Q2 results. Thank you very much.

Operator

Thank you. Ladies and gentlemen, this concludes the iRobot’s first quarter 2014 earnings call. Participants may now disconnect.

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