iRobot's (IRBT) CEO Colin Angle on Q2 2014 Results - Earnings Call Transcript

Jul.23.14 | About: iRobot Corporation (IRBT)

iRobot Corporation (NASDAQ:IRBT)

Q2 2014 Results Earnings Conference Call

July 23, 2014, 08:30 AM ET

Executives

Elise Caffrey - Investor Relations

Colin Angle - Chairman and CEO

Alison Dean - CFO

Analysts

Jim Ricchiuti - Needham & Company

Josephine Millward - Benchmark Company

Tyler Hojo - Sidoti & Company

Adam Fleck - Morningstar

Paul Coster - JPMorgan

Operator

Good day everyone and welcome to the iRobot Second Quarter 2014 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 Provision 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 second 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 second quarter as well as our outlook on the business for 2014; Alison Dean, Chief Financial Officer will review our financial results for the second quarter of 2014; and Colin and Alison will also provide our financial expectation for the third quarter ending September 27, 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 a successful second quarter with results that met our expectations. Home Robot revenue grew 15%, driving second quarter company revenue up 7% to $140 million. Earnings per share were $0.28. Adjusted EBITDA was $16 million or 11% of revenue.

During the quarter, we expanded distribution of our latest Roomba 800 Series robot across the United States and into most of our overseas distributors to meet overwhelming demand. We successfully worked to secure a number of Defense and Security orders, which we'll be delivering during the second half and we shipped several of our Ava 500 telepresence robots instead of trial periods for perspective customers to assess the value of our robots and their locations.

Additionally based on increased confidence in Home Robots, we're raising the low end of our full year revenue expectations for our Home Robot business to $505 million from $500 million. Further strong backlog and growth during the quarter in Defense and Security, coupled with several expected near-term orders and the overall growth of the high probability pipeline has significantly improved visibility for the balance of 2014.

The increased visibility has clarified that certain order deliveries are being requested by the customers for early 2015, resulting in a decrease of the 2014 revenue expectation for Defense and Security by $5 million to $45 million.

For the company, we now expect revenue of $555 million to $565 million, driven by Home Robot growth of 18% to 20%, EPS between $1.10 and $1.20, and adjusted EBITDA of $74 million to $78 million or roughly 14% of revenue.

Now, I’ll take you through some of the details of the second quarter and our expectations for the rest of 2014. Our Home Robot business continues to deliver strong growth on an ever increasing base. Revenue growth in all three geographic regions contributed to year-over-year growth of 15% for the quarter.

Defense and Security business delivered results at the low end of our quarterly expectations, but secured several orders during the quarter and moved several other larger opportunities into the near term pipeline significantly improving visibility and our remote presence business began shipping Ava 500 Video Collaboration Robot to customers.

Quarterly Home Robot revenues were driven 19% year-over-year growth in overseas markets as we extended Roomba 800 distribution throughout most of the region. Roomba 800 sales comprised 27% of Q2 revenue, which was ahead of our expectations.

In the United States, we have seen a tremendous response from selected retailers, with whom we first began our distribution rollout, which fueled replenishment orders. We expect to see this trend continue as the product reaches more stores and we get closer to the holiday season.

Sell-through at our top five retailers increased 30% over last year. Sales of Roomba 800 robots through the second quarter on our website, have exceeded those of all of our other new products over the same timeframe, due to U.S. retailer and international distributor demand -- distribution is ahead of our original pipeline. The product is now available at many domestic retail locations and is slowly being rolled out to retailers in European and Asian markets by our distributors.

The Scooba 450, our next generation floor-scrubbing robot enjoyed early success on our website when we launched in Q1, while Scooba and Braava, the products comprising our wet floor care category are growing year-over-year. They are growing at a slower rate than Roomba. We have significantly invested in building awareness for Roomba over the past few years, which has resulted in the growth.

We are still in the early days of better articulating the wet floor care value proposition and differentiating Scooba and Braava from Roomba in the retail environment to fully realize the potential for this product category.

To support expanding distribution of these products, we will be shifting some investment focus to building awareness of the wet floor care category over the next 12 months. International Home Robot revenue grew 19% year-over-year in the second quarter and we expect to see increased second half growth overseas as we receive replenishment orders for Roomba.

EMEA grew approximately 20% in Q2, fueled by the introduction of Roomba 800 in the region. Revenue growth in APAC, of 18% year-over-year was driven by strong demand in China. In the fourth quarter we’ll kick off an advertising campaign featuring our Roomba 800 Series robot to support our retail partner throughout the holiday season.

The ads will focus on the product family’s revolutionary Aeroforce debris extractors which to-date have been showcased only on our website. 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.

Turning now to our Defense and Security business, second quarter results were at the low end of our expectations due to orders received late in the quarter that we will fulfill in Q3 and Q4. Roughly half of the $20 million we have in backlog at the end of Q2 is comprised of international orders reflecting our significant marketing efforts overseas.

The other half of the orders is from the DOD, all of which we expect to fulfill in 2014. We are also expecting additional orders in Q3. Our improved visibility in this business is a result of substantial order backlog coupled with the significant percentage of high probability near-term pipeline opportunities.

With increased visibility and order received later than expected we now expect Defense and Security robot revenue of $45 million down from $50 million as several orders call for partial delivery in 2015.

Moving on to our remote presence business, we reported in Q1 that we launched the Ava 500 Video Collaboration Robot in the United States, Canada and limited European markets through select certified Cisco resellers. We received our first orders and began shipping to customers in Q2.

We have a strong pipeline of requests of Fortune 1000 companies that are interested in Ava 500, many of which have completed and our currently engaged or scheduled for future trials.

As predicted all perspective customers to-date want to use the robot on a trial basis in their respective environments prior to purchasing the product. Our focus for 2014 has been to build a base of reference accounts and we are well on our way to doing just that.

Our RP-VITA Telemedicine Robot continues to gain traction as doctors; hospitals and patients realize the value of remote diagnosis. 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 areas of telemedicine where frequent patient interaction is required such as in intensive care units. As we are learning more about the markets where iRobot can add value, the trend bodes well for RP-VITA.

In summary, Home Robot revenue grew 15%, is expected to continue to grow in both domestic and overseas markets and is expected to drive full year 2014 Home Robot growth of 18% to 20% and total company growth of 14% to 16%.

Our visibility into full year Defense and Security revenue has improved significantly based on a $21 million backlog and a substantial number of large high probability pipeline opportunities. Customer interest remains high for our remote presence robots and we are seeing positive signs for this emerging market.

I’ll now turn the call over to Alison to review our second quarter results and expectation in more detail.

Alison Dean

Thank you, Colin. We delivered second quarter revenue and adjusted EBITDA in line with our expectations and earnings per share slightly ahead of expectations. Revenue of $140 million increased 7% from Q2 last year, driven by growth in Home Robot revenue.

Q2, 2014 includes approximately $1.2 million of favorable return reserve adjustments compared with $3.5 million in the second quarter of 2013. EPS was $0.28 for the quarter, flat with Q2 last year.

Q2 and first half 2014 EPS was ahead of our expectations primarily due to a $0.07 benefit resulting from the release of evaluation allowance relating to certain tax attributes associated with our acquisition of Evolution Robotics.

EPS in Q2, 2013 also included a $0.07 one-time tax benefit associated with the prior period sale of government robots to the U.S. Military, which were used outside of the U.S. Additionally, EPS in the first half of 2013 included a $0.09 benefit associated with the full 2012 investment tax credit and two quarters of 2013 credit.

Q2 adjusted EBITDA was $16 million compared with $17 million last year. For the first half, revenue was $254 million compared with $237 million in 2013. EPS was $0.46 compared with $0.57 and adjusted EBITDA was $30 million compared with $32 million last year.

Q2 international revenue growth was 19% over last year driven by strong performance in China as well as growth in EMEA from expanded distribution of our new Roomba 880. Domestic home revenue -- Home Robot revenue grew 7% for the quarter. We continue to expect high-teen revenue growth in both domestic and overseas markets for the full year driven primarily by replenishment orders for Roomba.

Defense and Security revenue of $5 million in Q2 was down year-over-year as expected. Roughly 75% of this quarterly revenue was from international sales. During the quarter we build a $21 million backlog which gives us confidence in delivering full year revenue of $45 million.

For the total company gross margins was 44% for the second quarter 2014, down 300 basis points from the same quarter last year. Product mix and warranty reserves were the main drivers.

Q2 operating expenses were 38% of revenue, down from 41% in Q2 last year. We continue to expect operating expenses to be lower in the second half as a percentage of revenue and approximate 36% of revenues for the full year.

We ended the quarter with a $183 million in cash and investments compared with $153 million at the end of Q2 last year and with $51 million in inventory or 60 days compared with $42 million or 58 days last year.

Now, I’d like to provide you with additional detail for our Q3 and full year financial expectation. The outlook for our Home Robot business remains strong and will drive Q3 results. We anticipate Home Robot revenue to grow 12% to 13% in Q3, 2014 over last year due to strong growth in domestic sales as retailers fill their shelves for the holidays.

D&S revenue is expected to decline versus Q3 last year and then ramp substantially in Q4 as we fulfill orders and backlog and those we expect to receive in the third quarter. As a result of our Q3 to Q4 revenue ramp in both businesses DII could temporarily rise into the mid 60s before returning to more typical levels by the end of the year.

We anticipate third quarter revenue of $133 million to $136 million, an increase of 8% to 9% over Q3 last year, EPS of $0.32 to $0.35 and adjusted EBITDA of between $21 million and $23 million.

For the full year, we expect revenue to be between $555 million and $565 million reflecting an increase in the low end of our Home Robot revenue expectations and a decrease in our expectations for D&S.

Home Robot is expected to deliver $505 million to $515 million, up from the prior expectations of $500 million to $515 million. Defense and Security revenue for the year is expected to be roughly $45 million compared with $50 million due to the timing of orders.

We expect increased full year EPS of $1.10 to $1.20 and adjusted EBITDA of $74 million to $78 million or roughly 14% of revenue.

I’ll now turn the call back to Colin.

Colin Angle

Thank you. Home Robot revenue grew 15% in the second quarter and we expect that business to deliver full year 2014 top line growth of 18% to 20%, which will drive Company growth at 14% to 16%.

With increased visibility in our defense business, we now expected to be slightly down year-over-year before growing substantially in the fourth quarter, 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

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

Jim Ricchiuti - Needham & Company

Good morning.

Colin Angle

Good morning, Jim.

Ricchiuti - Needham & Company

I have a question just regarding gross margin. It looks like excluding the return reserve adjustment here the home gross margin was down a couple of hundred basis points sequentially. Just given that the -- there is a higher mix of 880s in the quarter and just given the strong international, I wonder if could comment on Home Robot gross margins and maybe the outlook for the second half of the year? And then I also have the follow-up on Braava. Thank you.

Colin Angle

Dean.

Alison Dean

Sure, Jim. So, we did see a decline in home gross margins as a result of product mix. 880 was certainly a plus in there, but in addition we had growth in our wet floor care category, which carries a slightly lower margin.

And we also took some incremental reserves to support warranty true ups in the quarter. So those definitely contributed to some year-on-year changes. We do expect home gross margins to increase slightly in the second half of the year as the mix of the business shows a slightly different profile.

Jim Ricchiuti -Needham & Company

Okay. Thanks, Alison. And just my impression with Braava was that it was in wider distribution in retail in the quarter, yet sales again came in a little bit under expectation.

I wonder if you could talk a little bit about how you see the retail distribution for Braava and Scooba in the second half, and maybe the kind of acceleration you would assume in the second half as you change and maybe refocus some of the awareness campaign for these products.

Colin Angle

Sure, great question. I think it is definitely true that in the second quarter the star was Roomba 800 and the Braava and Scooba -- let me be clear, they both grew, but didn’t grow as fast as we would have liked. And I think that what we’re seeing is the vast majority of our awareness demand expenditures are focused on Roomba and 880 was the beneficiary of that.

Also in the retail environment, we’re still optimizing. You see Roomba next to Scooba and Braava on the -- at retail. And is it clear enough to the customers what these different products do. And so that we may have -- but we certainly over-performed on Roomba and still have some work to do as far as clarifying some of the message and differentiation in the marketplace on Scooba and Braava.

So, everything grew but I think the takeaway which I talked about based on performance is that we need to redistribute some of our awareness and demand generation dollars towards the wet floor care product line to see it achieve the growth rates we think it’s capable of as well as continue to refine a point of purchase displays.

Jim Ricchiuti - Needham & Company

Okay. Thanks a lot.

Colin Angle

Okay.

Operator

Thank you. And our next question comes from Josephine Millward from Benchmark Company. Please go ahead.

Josephine Millward - Benchmark Company

Good morning.

Colin Angle

Good morning.

Josephine Millward - Benchmark

Colin in the past you had talked about expecting revenue to grow sequentially throughout the year. So why is Q3 weaker now? It looks like maybe defense has been pushed out to more Q4, but has there any -- has anything changed in home?

Colin Angle

I think that absolutely on the defense, I think that the way the year was supposed to be in defense, we had a much flatter profile, but as we have long experienced, defense is lumpy and we saw a number of contracts either get signed or imminently signed, but pushed into Q4 and a few pushed into Q4/Q15. So that was the major factor.

And then predicting the sales on the boundary of Q3, Q4 is always another one of these arts not science. And it looks like this year we’re seeing a little bit more in Q4 and so that it will be a very strong year for us in Q4, but I’ll point out last year we saw very, very significant growth in Q4 until it tends to still be extremely strong quarter for us and we’re seeing that our expectations for repeat of that.

Josephine Millward - Benchmark

Okay. So your current guidance implies a very significant ramp about almost 30% in home -- 30% growth in Home Robot in Q4. How much visibility do you have into the holiday season at this point?

Colin Angle

We do have a luxury of history and longstanding relations with our distributors and so that, while I would say, it’s not fully committed we have very good dialogue and have strong confidence. Certainly, we don’t raise the low end of our guidance expectations lightly. So we have strong confidence that we have the supply chain, we have retailer support and this is how it’s going to fall out this particular year.

Josephine Millward - Benchmark

Great. Thank you very much for that.

Colin Angle

You bet.

Operator

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

Tyler Hojo - Sidoti & Company

Yeah. Good morning. Thanks for taking the questions. Just firstly I was hoping you could talk a little bit more about the international rollout of some of your new products. And I guess what I am looking at here is why wouldn’t the growth be stronger in Home Robot in Q3 in context with basically introducing Roomba 800 specifically to new markets?

Colin Angle

Well, I mean, I think that the -- we saw 27% of our revenue coming from Roomba 800 in Q2. We mentioned in the call that we’ve accelerated some of the rollout plans. I think when we talked in our last call it was going to be little bit more of a gradual rollout. But based on demand for the product we accelerated some of those rollout plans. So, we definitely had the benefit in Q2 of acceleration and that’s why the numbers for 800 fell out the way they did.

We’ve got -- and so now we’re in the situation where in Q3 there is going to be lot of sell-through of inventory put in and replenishment orders from a timing perspective hitting in Q4 on the Roomba 800. So it’s a bit of a natural cycle of that. Alison.

Alison Dean

Q3, it is going to show in low-teens growth in home anyway even with the ramp into Q4.

Tyler Hojo - Sidoti & Company

Okay. Got it.

Alison Dean

But healthy growth quarter, just not a substantial as we saw in Q2 or are expecting in Q4.

Tyler Hojo - Sidoti & Company

Okay. That’s helpful. And on another front, I was hoping that you could provide a little bit more detail in regards to defense. What I’m looking for is just when we look at the backlog that you have in defense today what is the expectation for percentage of that backlog to ship in 2014 and what do you need to book and shift through the rest of the year?

Colin Angle

The $21 million we have in backlog is all expected to ship. So that backlog plus performance to-date is $31 million versus our $45 million plan, which means the $14 million of the go get. And of that go get it’s basically all in hand or all in our high probability pipeline. And that’s why at this point we feel -- we’re not even talking about the range. We’re talking about $45 million is the number we know where it’s going to come. And we are even seeing the beginning of building a pipeline into 2015 which is more significant -- a much better situation than we were coming into 2014.

So, we did see this $5 million shift of revenue out, but confidence in 2014 is very, very strong and then as I mentioned we’re starting to look at what 2015 will look like and in fact that we’re doing that at this point of the year is very encouraging.

Tyler Hojo - Sidoti & Company

Got it. Is it fair to say that the confidence surrounding the fact that defense is bottoming out is stronger today than it was say a quarter ago.

Colin Angle

Absolutely, absolutely, we’ve got -- we have side line to our number and we’re building 2015 backlog.

Tyler Hojo - Sidoti & Company

Got it.

Colin Angle

So we’re ahead of where -- we’re significantly ahead of where we were a year ago. And we know to -- and we think 2014 is -- there’s a not a go get. There is a -- let our current activities play out and we’ll be in good shape.

Tyler Hojo - Sidoti & Company

Okay. Great. And just lastly from me. Just looking for a little bit more detail on remote presence, I guess what I’m wondering is -- I mean, how long did these trails last. I guess if you can maybe talk little bit about what you think the sale cycle is and when you think maybe some of these trials will start materializing into kind of firm orders in hand?

Colin Angle

This is a new technology and we don’t have reference accounts that are firmly signed up yet. And so that the normal course of development of this type of business is first when these types of products are launched there is skepticism in the marketplace, there is not third party validated use cases where the productivity improvements from these robots are well documented.

It’s the early fight. Against that we say well gosh we have a very impressive pipeline of interested parties. We have a number of robots that are in trial. I think that ideally you would wish that you could launch a new product without a need for trial. That isn’t the case. But as we get these reference accounts through trial, the numbers of companies that are interested in purchasing without trial or the duration of trial are significantly reduced.

So I’m giving you a complicated answer to what is in fact the complicated question, because the trail experience that we have today it could be four to eight weeks. Do we believe that trial period is going to be significantly reduced and in some cases eliminated as we move forward, absolutely?

So, we’re at the startup stage and I think that we are definitely -- what you share our experiences and you share with the growth of this exciting new market as it evolves. But in Q2 of 2014 the phase of development of remote presence is acquiring reference accounts through trial and we hope that we will soon be able to turn the corner on that one.

Tyler Hojo - Sidoti & Company

Got it. That’s all I had. Thanks a lot.

Colin Angle

You bet.

Operator

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

Adam Fleck - Morningstar

Thanks and good morning.

Colin Angle

Good morning.

Adam Fleck - Morningstar

I had a question on your headcount has been suddenly increasing here each quarter over the past year. Can you just talk about what the primary role you been hiring for and if you’re still looking to continually increase those staffing levels?

Colin Angle

Sure. The primary role is engineering and with this in particular we have a focus on software engineering as the software content in our products and product pipeline continues to grow. So, we are committed to a long-term exciting pipeline of product and technology. And given our profitable growth commitment to our investors, we’re able to grow our topline 15% to 16% over last year, which gives us some additional resources to put into IR&D.

Also some of the hires that you’ve noticed are associated with building out the remote presence business unit as well, and that’s a mixture of sales and marketing heads as well as engineering heads.

Adam Fleck - Morningstar

Okay. That’s helpful. And then Alison, I had on question on operating cash flow. I think originally you guys had talked about your long-term goals and this year being high single-digit percent of revenue. But we’re running at a negative rate, it looks like because of some increased payouts from accrual compensation. But are we still looking this year at a high single-digit percent of revenue for operating cash?

Alison Dean

Yeah. Our view for the year hasn’t changed, again with the skewing of our business over the year, as you said, we are in a use position in the first half of the year, but we fully expect to make that up by the second half of the year and then achieve that high single-digit percent of revenue.

Adam Fleck - Morningstar

Okay, great. That’s it from me. Thanks.

Colin Angle

Okay.

Operator

Thank you. And our next question comes from Paul Coster from JPMorgan. Please go ahead.

Paul Coster - JPMorgan

Yes. Thanks. Colin just back to remote presence for a moment, can you talk a little about the -- what the profit -- what the margin impact of this initiative is at the moment, I mentioned it’s slightly unhelpful for the time being? And then, what your go-no go decision might be next year on whether to pursue this segment?

Colin Angle

Sure. Absolutely, right, we’re in investment mode relative to remote presence at the current time. So it is negatively impacted our gross margins in EPS. The focus that and business model that we have taken on is to acquire these reference accounts and focus our IR&D around customer satisfaction and optimizing our installation process, so that we can have the customers having the experience that we want and then believe that in future years we can reverse that and take remote presence out of investment mode and start having a contribute to the company as a whole.

We have a portfolio approach to IR&D investment where we have things like the Roomba 800 Series where we had very, very strong confidence that the innovations would be rapidly accepted by our customers and then we have a certain percentage of our IR&D which is more speculative that we believe.

We have success. It will help drive longer term growth substantially. And the Ava project is absolutely on that more speculative side of the business. Although we’re shipping product and we have enthusiastic customers and so that we’re very hopeful that that investment will be a positive experience.

Paul Coster – JPMorgan

To what extends are the trails for the Ava products taking place versus this very low price and not very functional competing products?

Colin Angle

We are taking a high end strategy. Our goal is to give people a very viable alternative to traveling to a remote location and so it’s really a no compromises approach where the robot, the self navigation of the robot allows traversal of dead spots in buildings which always exist. I mean, it’s really focused on being a complete solution viable alternative to travel as oppose to a -- I won’t say gimmicky but more of a Skype quality, quick way of doing some more dynamic face-to-face meetings.

And so it’s a different positioning in the marketplace. The remote presence marketplace is segmented into low end and high end already and we certainly are playing in this high end category. We think we’re price competitive in the high end category and we think that our experience is very, very compelling based on what our customers are telling us and looking at utilization rates of the robot in the reference of the trail accounts that we currently have. So that’s our strategy and I think we’re very excited and remained confident in our strategy.

Paul Coster – JPMorgan

Okay, my last Colin is relating to the pack book. There are several hundred well it’s probably a couple of thousand of them still out in the field presumably still living active lives. At what point do you think on the current circumstances that’s without a massive board type scenario, do you think those pack books start to need to be replaced. And do you have some sense of what the replacement cycle might be given the current configuration of the defense spending?

Colin Angle

You’re absolutely correct. There are thousands of these robots in service today. And the idea that there is a revenue stream associated with replacement, training, upgrades, that is part of the business model. And I would say that, it is ongoing part of the way that we’re going to meet our $45 million target this year is through some upgrade contracts with DOD. And we believe that those contracts will also play heavily in 2015.

So, if we categorize this as-- this recurring revenue and in 2014 just give you a statistic, 60% of our revenue is related to servicing and upgrading the existing fleet. And so, while we build out our international and non-DOD business we’ve been able to continue to see good revenue and profit from servicing the installed base.

Paul Coster - JPMorgan

Great. Thank you very much.

Colin Angle

You bet.

Operator

Thank you. And our next question comes from Jim Ricchiuti from Needham & Company. Please go ahead.

Jim Ricchiuti - Needham & Company

Thanks. I just had another question regarding the remote presence. It sounds like you’re correctly characterizing Ava 500 as speculative and investment oriented as in terms of the business right now. I wonder how would you characterize the medical portion of that business, what kind of acceptance are you seeing and particularly as you think about that business, the medical portion in 2015?

Colin Angle

Sure. So what we’ve learned thus far is that there is a number of different applications where the RP-VITA robot is used. And in applications where remote presence and robot sort of started which is diagnosing stroke. That’s an application where the robots are used maybe 10 times a month.

And -- so that has been good, but the real area of growth for RP-VITA is in treatment and involvement in the ICU treatment of situations where specialists are needed more frequently than that rate. And so when we start – that started in the stroke areas where RP-VITA is really shining and where our win rate is astronomically high is in ICU-related applications.

And this is the real growth area for telemedicine in general. But is smaller today than the stroke business, which was the first area where remote diagnosis really has gain favor. So, I’m not sure whether that color helps, but I think that the direction where telemedicine is going happens to align very well with the capabilities of our robot. So that’s exciting news as the clock ticks forward.

Jim Ricchiuti - Needham & Company

But it sounds like on the ICU application, it’s also a case where you need to build up reference experience, reference accounts?

Colin Angle

That’s coming. This is one of these Uber trends in medicine in general. There is more and more that is talked about. There is more dollars being spent on telemedicine. So it is a trend. We do have numbers of reference accounts so that as opposed to Ava 500 we’re really searching to get our first ones. We do have reference accounts in the ICU and so it’s a growth area for RP-VITA and our partner InTouch Health.

But it is growing rapidly off of smaller base than the stroke application, which is more mature and more developed. So put that all in total, we’re in over 50 hospitals. We have certainly gone through the birthing pains of RP-VITA that we’ve experienced last year getting the customer experience right and now we’re honing on the right target and right sales message for that to watch that business area move forward.

Jim Ricchiuti - Needham & Company

Great. That’s helpful. Thanks a lot.

Colin Angle

Sure. Okay. That concludes our second quarter 2014 earnings call. We appreciate your support and look forward to talking with you again in October to discuss our Q3 results.

Operator

That concludes the call. Participants may now disconnect.

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