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Executives

Elise Caffrey – IR

Colin Angle – Chairman and CEO

John Leahy – CFO

Analysts

Jim McIlree – Merriman

Alex Hamilton – Early Bird Capital

Josephine Millward – Benchmark Capital

Adam Fleck – Morningstar

Jim Ricchiuti – Needham & Company

Brian Ruttenbur – Morgan, Keegan

iRobot Corporation (IRBT) Q2 2011 Earnings Call July 27, 2011 8:30 AM ET

Operator

Good day everyone and welcome to the iRobot second-quarter 2011 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 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 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 or otherwise.

During this conference call, we will also discuss non-GAAP financial measures as defined by SEC Regulation G, including adjusted EBITDA, which we define as Earnings Before Interest, Taxes, Depreciation, Amortization, merger and acquisition expenses and non-cash stock compensation expense. A reconciliation of GAAP and non-GAAP metrics can be found in the financial tables at the end of Q2 2011 earnings press release issued last evening, which is available on our website.

On today’s call, iRobot Chairman & CEO Colin Angle will provide a review of the company’s operations and achievements for the second quarter 2011 as well as our outlook for the business for the rest of 2011; and John Leahy, Chief Financial Officer, will review our financial results for the second quarter and provide our outlook for financial expectations for the third quarter ending October 1, 2011. 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. Our second quarter results exceeded our expectations for both divisions and reflect a positive trend in domestic consumer spending for our home robot products. Revenue was $108 million for the quarter, up 11% from Q2 2010; EPS of $0.29 was up $0.09 year over year, and adjusted EBITDA of $16 million, or 15% of revenue, grew 30% from Q2 last year.

Following strong performance by both divisions in the second quarter and our expectations for continuing profitable growth, we are increasing our full year 2011 expectations. We expect full year 2011 revenue of between $460 million and $470 million, an increase of roughly 16% over 2010; EPS in the range of $1.04 to $1.10; and adjusted EBITDA of $62 million to $64 million, an improvement of almost 30% year over year.

Home robot’s revenue increase was driven by higher sales in our domestic business, both retail and web-based, as well as growth internationally, particularly in Asian markets. Our Government & Industrial division’s revenue exceeded our expectations for the quarter in part because we received some orders during the quarter which we had anticipated in Q3. Overall G&I revenue was down slightly from last year due to delayed approval of the government’s DoD budget.

On the home front, domestic revenues increased 30% in Q2 year over year following a 12% year-over-year increase in Q1. These back to back quarterly increases are a positive indication that the U.S. consumer is beginning to spend again. However, we remain cautious about expectations for the holiday season given the uncertain economic environment.

In 2010 we executed a strategy focused on creating the right mix of products and channels in the domestic market which would enable us to improve our margins. We are now positioned to take advantage of improving domestic consumer demand and will continue to generate profitable growth.

We have been a technology company since our founding 21 years ago, but as the markets for our products mature, customer demand for increasingly sophisticated product features enabled by more advanced technology has grown significantly, which in turn makes our technology more valuable.

At this year’s Analyst Day in May we talked about our mission, to lead the world in providing remote presence and automated home maintenance solutions supported by technical leadership in three areas; autonomy, manipulation and platforms. To extend our leadership position, we’ve leveraged the mobile computing industry and gaming industry’s advances and become much more focused on the key robot specific technologies – autonomy, manipulation, and platforms, where we can be sustained world leaders. That has been a very significant shift and positive move for the company, improving our competitive positioning, long term value creation and better meeting the needs of our customers.

In early May, I was out at Google, attending its developer conference, where I had the privilege of addressing 2,500 Android developers and informing them that as Android developers, they were now also robot developers. Using our prototype Ava robot, we demonstrated our technology showing how our platforms can support a tablet running Android. Our AWARE 2 software houses the autonomy, navigation, and motor control, and makes it possible to integrate third-party developed technology onto iRobot platforms.

In addition, we recently announced that we had signed a joint development and licensing agreement with InTouch Health to explore potential opportunities for healthcare applications on iRobot platforms such as the iRobot Ava mobile robotics platform. InTouch Health, and its founder Yulun Wang, have been pioneers in both the use of robots in hospitals and various remote presence technologies. The agreement includes extensive cross-licensing of the companies’ patent portfolios, giving the collaboration a formidable patent position. I expect that together we will revolutionize how people communicate and deliver information through remote presence.

Much of the technology we’ve developed since our founding has been funded through our work in the G&I division. Over the years we have talked about the synergies between the divisions, technology development being a critical one. Ava is the perfect example of our using technology developed in our government division, combining it with technology developed by others to create a much lower price point product. Total R&D investment for the company increased 45% from 2009 to 2011 while internal R&D has more than doubled.

Our strong financial performance has enabled us to provide great return for investors; and at the same time has earned us the right to make the technological investments required to maintain leadership in the areas I’ve discussed.

Now, I’d like to take you through some of the other highlights of the second quarter.

In Home Robots, strong demand for our Roomba 500 robots in both domestic and international markets fueled Home Robot growth in Q2. The success of our new Roomba 700 series on our website, the majority of which sold for $600 each, drove a 32% increase in our direct business. Sales of both our new Roomba 700 and Scooba 230 robots exceeded our expectations. To date, these new products have only been available on our website but we will expand distribution later this year when we begin selling the new Roomba in select retailers.

Total domestic sales grew 30% year over year, in part reflecting the impact of marketing investments we began making in Q4 of 2010 and continued through the first half of this year. Consistent with the program we discussed last quarter to improve domestic profit margins through more strategic placement of product in select channels, we delivered a 500 basis point improvement in Home Robot gross margins from 39% in Q2 last year to 44% in Q2 this year. We are committed to our strategy of profitable growth; continuing to focus on higher-end products and exploring new channels.

International Home Robot revenue increased 16% year over year. Demand in Asian markets, particularly in Japan where our partner has invested extensively in Roomba video demonstrations and retail displays, continued to drive second quarter growth. Talks with our prospective Chinese distributor continue and we are on track to enter that market in 2012.

Our outlook for home robots is very positive and I am confident that we’ll continue to see strong growth as sales to our international customers grow, domestic consumer spending improves, and we expand the distribution footprint of our new products.

The Government & Industrial division delivered 192 robots, an equal number of PackBot and SUGV units. For the rest of the year we expect orders of SUGVs to exceed PackBot orders which should result in a 60-40 split between SUGV and PackBot systems for the full year. During the quarter we announced a $7.4 million order for SUGV 320s. This was the first order for this type of robot outside of the Brigade Combat Team Modernization program and the first use of these robots in theater. Prior to the end of the U.S. government’s fiscal year on September 30th, we expect to be awarded IDIQs for both PackBot and SUGV robots. We also anticipate receiving delivery orders requiring fulfillment by December 31st for which we’ve already begun building product. The majority of these robots will be shipped in the fourth quarter.

As we discussed at Analyst Day, we have estimated the addressable market for SUGVs to be approximately 15,000 robots. Orders for SUGVs will begin to outpace those for PackBots in 2011 and will continue to grow as the number of new PackBot orders remains steady or declines slightly over the next couple of years. A key component and growth driver of our Government & Industrial business is product lifecycle revenue or PLR. We have sold more than 3,500 PackBots, each requiring spare parts, support, maintenance and software upgrades over their 10-year life spans and we expect ongoing orders of PLR to support the fleet.

The inherent lumpiness in our G&I business has been exacerbated this year with the delayed passage of the 2011 budget. We continue to have confidence in our ability to deliver strong second half results and meet our full-year expectations based on the most recent Congressional markup of the President’s proposed 2012 budget. The President’s budget request for $36 million for SUGVs has been increased by the House Defense Appropriations’ committee to $60 million. While it’s not final, it is indicative of the value that the decision-making constituents place on our robots.

In summary, both of our businesses are performing well in uncertain environments and we expect them to continue doing so throughout 2011. Because of our confidence in delivering more profitable results than discussed in February and April, we are increasing our expectations for the full year.

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

John Leahy

Thanks Colin. Our performance in the second quarter and first half was outstanding, particularly given very challenging 2010 comps. Revenue, earnings per share and EBITDA all exceeded expectations. Revenue was $108 million and $214 million for the second quarter and first half respectively, both all-time highs for these periods. Growth in our domestic Home Robot business showed strength due in part to our marketing investments and a very positive response to our new products. Our Government & Industrial business, though down slightly for the quarter, also exceeded our expectations.

Earnings per share for the quarter were $0.29, up 45% from $0.20 in Q2 last year, and up 27% for the first half from a year ago. EBITDA was $16 million for Q2, and 15% of revenue. EBITDA grew 30% in Q2 and 20% in the first half.

Our cash and investments totaled $123 million, up $24 million from Q2 last year. In addition, we recently announced an increase in our revolving credit facility to $75 million, up from $40 million, providing further financial capacity for the company.

In the Home Robot division, shipments grew 12% and revenue of $64 million increased 21% from a year ago. International revenue increased 16% in the quarter year over year and comprised 65% of Home Robot revenue. Total domestic revenues increased 30% year over year, an encouraging sign that U.S. consumers are beginning to spend again. Home Robot gross margins improved 500 basis points, primarily due to product and channel mix and cost savings in our supply chain.

In the G&I Division, revenue was $44 million compared with $45 million a year ago.

Product lifecycle revenue was $7 million or 20% of G&I product revenue. We expect significant shipments of PLR in the second half, generating full year PLR of 25% to 30% of G&I product revenue.

Product backlog at the end of the quarter was $15 million, compared with $12 million at the end of Q2 last year.

For the total company, gross margin for the quarter was 39.4% compared with 34.7% last year, up almost 500 basis points. The year over year increase was driven primarily by favorable mix in both divisions.

Operating expenses grew, as expected, to 29% of revenue this year from 26% in Q2 last year. This increase was due to higher investments in R&D and marketing initiatives we began in the second half of last year, and built into our 2011 plans.

Now I’d like to provide you with additional detail for the financial expectations Colin discussed, as well as color on how we see the rest of the year unfolding.

For the full year, we now expect Home Robot revenue to grow more than we expected, at roughly 20%, to a range of $270 million to $275 million. Our G&I revenue expectations are unchanged, at $190 million to $200 million, or roughly 15% growth, reflecting delays in the 2011 DoD budget.

We expect Q3 to be another strong quarter, with revenue up roughly 25% over last year. We anticipate revenue in the range of $115 million to $120 million; EPS of $0.22 to $0.26; and EBITDA of between $14 million and $16 million.

Based on the expected timing of G&I contract awards, we are likely to ship significantly more robots in Q4 than Q3, thus skewing the division’s second half revenue into the fourth quarter. Home Robot revenue should be up slightly in Q4 over Q3 due to the holiday season, but not as significantly as it had been historically, due to the non-seasonal nature of our international business.

We expect full year gross margins of 39% to 40%, an improvement from our original expectations as a result of favorable mix management and savings in product costs realized through supply chain management in home robots, and through overhead expense leverage in G&I. Our full year tax rate also looks like it will be closer to 34% than the 37% we initially expected.

As Colin indicated earlier, for the full year, we are increasing our expectations for revenue, EPS and Adjusted EBITDA.

Finally, as we shared during our Analyst Day in May, we benchmark ourselves against a group of companies which have attributes in common with iRobot. While some of you may think of us with a defense or consumer electronics orientation, we are truly a technology company. Our peer group consists of tech companies up to $1.5 billion in revenue with both a software and a hardware component, who are market leaders in high growth segments, and in many cases, creators of the segments in which we operate, and who enjoy large addressable markets. These peers have high margins or expanding margins and have created wide competitive moats. The combination of these attributes drives attractive valuation multiples.

At iRobot, we are very focused on leveraging our attributes to continue to grow shareholder value.

Now I would like to turn the call back to Colin.

Colin Angle

Thanks, John. Our results for the second quarter exceeded our expectations in both divisions. Our domestic home robot business grew 30% and more importantly indicated a positive trend with respect to U.S. consumer spending. Our international home robot business continues to perform well in long-term markets as we prepare to expand into new markets. We successfully launched two new home robot products on our website and we expect wider distribution later in the year to contribute to the division’s growth.

We received several key orders for our government robots that validate the importance of our products to the warfighters and the willingness of the government to purchase them in the face of intense budget debate. We are confident that our G&I backlog coupled with a strong pipeline of opportunities will enable us to meet our increased expectations.

Based on our improved outlook for the year, we now expect revenue of $460 million to $470 million; EPS of $1.04 to $1.10; and adjusted EBITDA of $62 million to $64 million.

With that we’ll take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Jim McIlree from Merriman. Please proceed.

Jim McIlree – Merriman

Yes, thank you, and good morning.

Colin Angle

Good morning, Jim.

Jim McIlree – Merriman

When you were talking about, excuse me, when you were talking about the G&I outlook for the rest of this year, you characterized as Q4 loaded. What amount of risk is there to the G&I revenues for the second half given all of the acrimony that’s in Washington right now and the debate over the budget?

Colin Angle

I think that we’ve tried to factor that in all year. First, we have to deal with the continuing resolutions and now we have the adventures going on in Washington. We see real need, real drivers and contracts being put in place. We do believe that the government will find a way through this current challenge, and we have good line of sight to the contracts required to meet guidance. So it certainly is a chaotic situation in Washington. We have team challenges in the past where we’ve had administration changes and recognize that the right way through is to having strong washing presence have people down there that can give us good advice and stay on the side of predicting and guiding to results driven by real demand and need in the field as far as speculations. So that has served us well in the past and we think that we are well positioned for the back of this year.

Jim McIlree – Merriman

Well, let me ask it a little bit differently then, it sounds as if you are looking for fiscal ‘12 budget dollars in order to fund this, is that correct and if you – if we end up with the continuing resolution instead does that mean that your customer has to scramble around in order to come up with the money?

Colin Angle

There is, that’s not accurate. There is – we are expecting four contracts in Q3 to be awarded that we will make some deliveries again and then some additional deliveries to both the deliveries in Q4. There is a five year, $60 million IDIQ contract for – from the Army for PackBot that we expect. This would allow the Army to buy PackBot, spare parts and supports for FMS Foreign Military Sales. Two year IDIQ for SUGV 310 and delivery order under our current MTRS, IDIQ for over a 100 PackBot 510s and a SUGV 320 LRIP contract for 76 SUGV 320s.

Those are all current year dollars, and we are – we will be put as in a position where we start to build backlog for 2012 at the end of that. So we’re actually anticipating some sort of repeats around continuing resolutions next year, which will mean that we live in a volatile state for a little bit longer. But as we start to build next year’s models, but that’s okay, we’re used to living in the some certain world and trying to do our best to navigate through that and give our investors our best look with a conservative bend toward how things are going to play out.

Jim McIlree – Merriman

That’s very helpful, thank you. I’ll get back in line.

Colin Angle

You bet.

Operator

Your next question comes from the line of Alex Hamilton from Early Bird Capital. Please proceed. Alex, your line is open, you may proceed with your question.

Alex Hamilton – Early Bird Capital

Hi, good morning, everyone.

Colin Angle

Hi, Alex.

Alex Hamilton – Early Bird Capital

Yes, third quarter, the macro seem to be moving in your favor and I’ve heard you time and time come again that this is an execution store. So can we just talk about the trends that we’ve seen on the R&D and the G&A side? What we have seen and what we’re going to see over the next few quarters?

Colin Angle

Well, on the R&D side, I wanted to highlight this here in this call positive trend on our ability to increase our IR&D spend, well still delivering improved results on the bottom line. That’s important as we work to increase our pipeline of products, so that we can be laying the ground work for continued growth years into the future.

Also as we globalize and continue to build our national brand, our reliance on strictly word of mouth and PR to drive awareness of the company got to a point where we’ve – have – are choosing to augment that by larger increases in our paid advertising and that has – we started that in the middle of last year and its being paying dividend, certainly was one of the reasons why we saw such great growth in Europe and the investments in North America. As you can see in Q1 and Q2, we have also begun to show dividend, so we think that something that does pay and is important part of our strategy. I think that on a percent basis, we’re in the ballpark of where we want to be, so that you should – you can – we will continue to increase level over those spending but in phase with increases in revenue. I would not expect to see substantial increases on a percent basis on a go forward method, I think we’re appropriately investing.

John Leahy

And Alex, I would just add to Colin’s comment, bring some numbers around R&D on a year-to-date basis this year is up more than 60% in dollars and sales and marketing is up almost 30% this year. So those are substantial investments we’ve been able to do while still over delivering on the bottom line and our guidance does reflect in the second half that we will continue, we invest in R&D and sales and marketing and those sorts of levels. But as Colin said at a fairly consistent level of spend as a percentage of revenue.

Alex Hamilton – Early Bird Capital

Fantastic. Thank you very much.

John Leahy

You’re welcome.

Operator

Your next question comes from the line of Josephine Millward from Benchmark Capital. Please proceed.

Josephine Millward – Benchmark Capital

Good morning.

Colin Angle

Good morning.

Josephine Millward – Benchmark Capital

Great quarter, Colin.

Colin Angle

Thank you.

Josephine Millward – Benchmark Capital

Colin, can you just repeat the government contracts you are expecting in Q3, because I think both of us didn’t attach everything?

Colin Angle

Okay. So just at a high level there – I listed for a five-year $60 million IDIQ from the Army for PackBot, a two-year IDIQ for SUGV 310, with a ceiling of 350 units, a delivery order under our $230 million MTRS program for over 100 PackBot 510s, and the SUGV 320 LRIP for 76 SUGV 320s. Those are the four new contracts plus our current that we expect to allow us to drive through the back half of the year. These will be primarily awarded in Q3 with a bulk of the shipments in Q4.

Josephine Millward – Benchmark Capital

That’s very helpful. Thank you.

Colin Angle

Okay.

Josephine Millward – Benchmark Capital

And do you expect G&I revenue to be higher in Q3 versus Q2 or should we – how should we think about this split between Q3 and Q4?

John Leahy

Josephine, as I said I think in my remarks, we do expect that G&I revenue will be more skewed to Q4 and so the way to think about it is, G&I revenue in Q3 somewhere between probably $48 million and $50 million in revenue.

Josephine Millward – Benchmark Capital

Okay.

John Leahy

In Q4 more or like in the vicinity of $60 million. So about $10 million maybe $12 million more revenue in Q4 than in Q3. But as Colin said, even though that is skewed, we have a very good line of sight to the orders to support that revenue forecast.

Josephine Millward – Benchmark Capital

That’s great. And on the ‘12 budget, Colin, you said that $36 million requested for the (inaudible) was marked up by the house to $60 million. Can you comment on the Senate authorization? I think they actually reduced the $36 million down to $24 million with no increase. And if you can talk about how confident you are that all the BCT on that ground vehicles funding will go to this SUGV? And my another question is, if the military starts by itself, which as a program of record, do you see as anticipate sales funded by requirements on CEDAR next year?

John Leahy

The house – we’ve been – it is still in debate. We do feel very good about it, because of the strong demand poll from CEDAR. So we expect the information we gave about the house to carry the day.

Josephine Millward – Benchmark Capital

Okay.

John Leahy

And, so I think that is the main driver. There is a lot of discussion going on as to how BCTM will further evolve and I’m not, on this call, not going to speculate exactly how that’s all going to play out. But certainly we know and have been told that the SUGV is wanted, impactful and is part of the go-forward plans with the U.S. Army and we feel very confident about its future there.

Josephine Millward – Benchmark Capital

Just one follow-up question on Home Robots. Your international sales appear to be slowing. Can you talk about what’s going on in Europe and how you see the revenue split between U.S. and international in the second half?

Colin Angle

Slowing would not be the adjective I would describe, they’re up 16% after growing well over 30%, 40% last year. So there – they continue to rock it along at very, very exciting levels. It’s – I think that, so this is not even flat, it continues to be strongly up. We have new programs going on and expanding distribution in Germany and for example. So it’s a very healthy area and yes, it is its challenging to hear the word slowing in Europe and home in the same sense because it is –

Josephine Millward – Benchmark Capital

I’m sorry, I meant the growth rate appear to be decelerating.

Colin Angle

Well, I think that’s a normal phenomenon. I think that it will be difficult to predict what will happen next quarter. Other than that, there is still a lot of strength there and we see opportunities for continued long-term growth there. So, certainly the European economy is something that has a lot of volatility to it with anxiety over the debt crisis in Europe. We’re still benefiting from the fact that the demand for our product in rapidly growing area is outpacing and showing affect the economy has in it and we expect that to continue.

What I would – certainly I look forward to the day where we don’t have to talk about volatility in the economy and we can see additive effects as to one fixed – one exceeding the other the impact of the other as we have to navigate through right now, but Europe is very strong, Japan which had – we had some earlier concerns about has proven to be a strong growth area for us. And international is a continued bright spot on the consumer and it’s definitely gratifying to see North America start to come back so strongly as well.

Josephine Millward – Benchmark Capital

Thank you.

Operator

Your next question comes from the line of Adam Fleck from Morningstar. Please proceed.

Adam Fleck – Morningstar

Hi, everyone. Good morning.

Colin Angle

Good morning, Adam.

Adam Fleck – Morningstar

Quick question. Looking at the inventory situation, it was pretty good in the quarter but we saw days sales outstanding continue to tick up here and you guys paid off a large amount of payables looks like in the quarter. Can you talk a little bit about your expectations may be for networking capital over the remainder of the year and where you see that metric longer-term?

Colin Angle

Yes, Adam, the – your observations are correct. AR ticked up a bit and payables went the wrong way. I would say, our view is that is essentially timing in Q2. The AR is higher than it’s been running, because our shipments particularly in G&I were secured heavily towards at the end of the quarter. And so the revenues were recognized, the receivables was posted. And already I can tell you where what three or four weeks now into the new quarter, the receivable balance has come back down to what you would typically be seeing. So that wasn’t end of quarter for norm, and the payables number again is just a – is just a timing element at the end of the quarter as well. I would expect in the back half of the year payables to get back to a more reasonable level and not be a use of cash. So we’re still predicting – predicting to generate significant operating cash flow for the year somewhere in the $30 million to $35 million range. So I think you’re observing on two of the line items somewhat phenomenally for a quarter end.

Adam Fleck – Morningstar

Okay, great. That’s good news. And then also you could talk a little bit about your increased revolver – you’re obviously still sitting on a pretty good chunk of cash. I remember we talked a few quarters ago about the fact that you hired a boutique banker to help search for potential M&A deals. Can we maybe go back to that point and could you talk a little bit about the pipeline you’re seeing there? Is it a price issue or is the pipeline pretty robust in your mind?

Colin Angle

So we did have the opportunity to raise our size of our revolver, which went very smoothly with the support of DOA and extended the term for two more years, so we feel good about that. We did work with on retainer of boutique through most of 2010 and shifted through as you can imagine dozens and dozens of potential targets across G&I home, as well as industrial.

And the challenge for us is not so much pricing that we would not feel comfortable with, but the challenge has been more around business model in the majority of the product set as we see in companies as you’d expect so many robotic companies are small and quite often a year or two away from having product. So there are quite a few that we have analyzed and obviously we haven’t pulled the trigger, but we continue to think that M&A is an important part of our strategy. That is in part why we pay opportunity to increase on the revolver and have dry powder with that and our cash balance for win the right opportunity presents itself.

Adam Fleck – Morningstar

Great. That’s all I have. Thanks guys.

Colin Angle

You are welcome.

Operator

Your next question comes from the line of Jim Ricchiuti from Needham & Company. Please proceed

Jim Ricchiuti – Needham & Company

Hi, good morning. I joined the call late, so you may have gone over this, if you did, no worries I’ll take it up with the offline. But I was just wondering on the international business, did you gave any detail in terms of how much Europe was up or Asia was up, and to what extent you’ve been able to see some inroads in Latin America yet?

Colin Angle

Yeah. So I would say that Latin America has been slow. We have been working through some trade issues as far as import-exports that delayed the progress that we would had expected to see. We expect those issues to be behind us and 2012 will be the first full year where we see real benefit from our operations in South America. So that’s the delay, triggered off some complexity of doing business down there, that took longer to resolve than we had expected.

Europe has been good. Highlights in Europe, probably German has been leading the pack as they have gone from more boutique sales model to putting our product in main stream retail. And Japan is the surprise bright spot on the year, lot of anxiety is to what the impact of the earthquake might have been, but it seems like that has had at least for iRobot less of an immediate issue. And we have seen very, very strong performance in Japan as our distributor has invested in sales and marketing strongly and it seem there – their customer base in Japan respond effectively to that, so a mix bag.

Jim Ricchiuti – Needham & Company

Okay. And Tom, again if you went over this no worries, but did you give any indication as to the kind of retail channel expansion we might see for the new Roomba 700 and Scooba, the new Scooba device?

Colin Angle

We don’t know, what we said was that currently they’re both available on our website and we expect it in the back half of the year limited retail expansion. We have a very careful program where we go from our web-based sales to more high end specialty retailer where we can make sure that the story behind the product is well told. And then in 2012, you would see expanding into more full blown NAS market retail channels. So the economic potential for the product is not going to be maximized in 2011, which means that it will be – there will be an opportunity to fuel continued growth from that new product introduction in 2012 and beyond.

Jim Ricchiuti – Needham & Company

And by limited in at least is that suggest just the U.S. whatever retail?

Colin Angle

It’s more of a limited buy type of retailer. But we do. We are a global company, and to the extent possible, we execute on our strategy on a global basis, so that select retailers globally will be getting it in the back half of the year, expanding into more mass-market retail next year.

Jim Ricchiuti – Needham & Company

Got it. Thank you.

Colin Angle

You bet.

Operator

Your next question comes from the line of Brian Ruttenbur from Morgan, Keegan. Please proceed.

Brian Ruttenbur – Morgan, Keegan

Yes. Thank you very much. A couple of questions. I think I’m asking from a little bit different angle, but on the U.S. growth on the Home Robots, can you talk about geographic growth or by distributor, were there some new distributors added because that’s such a big jump year-over-year? I’m just trying to understand. I think that’s what a lot of the questions are being getting at, is how did you achieve such a strong growth, and was it something new that happened in terms of a geographic expansion or distribution expansion or something else?

Colin Angle

Yeah, this is actually a very exciting store because its same-store sales where we have actually reduced the number of stores. We’ve reduced our low-end SKUs and seen strong uptick in demand for our higher price point product at the – at that reduced store account footprint. We’ve started a program last year where we work to improve our margins in the U.S. by cutting out some of discount retailers and some of our much less profitable, low-end SKUs and managed a whole domestic flat, despite the reduction in doors and product.

And in 2011, we further reduced some of the doors in product for sale and then increased our marketing spend, and that has proven to be a winning combination. So this is – there is no new stores, it’s actually the opposite. The new higher-end product, but we also retired our – some of our lower cost model. So that’s been very exciting for us and hats off to our HRD team for pulling off such an exciting coup and we’re going to keep with this. We think this is the right strategy for us.

Brian Ruttenbur – Morgan, Keegan

Okay. So by reducing the low-end and getting rid of that and only going to the high-end, your same-store sales in terms of units aren’t up 30% maybe up 15%. What is the number of units that are actually up? I understand same-store sales in the North America is up –

Colin Angle

I’m not able to break that down to you, but it is true to say that our ASPs are up and our units are not up the full 30%. They are up by something, either low 20s or high teens, probably low 20s. We’re not. But the ASPs is a key factor. ASPs are up 10%.

Brian Ruttenbur – Morgan, Keegan

ASPs up 10%. Okay. That helps. Okay. And then, in terms of one of the things you said at the Analyst Day, is Spain is your – you are the number one backing planner there. Can you talk about what percent growth you are experiencing in Spain? I’m trying to understand. Once you dominate a market then, what kind of growth do you have?

Colin Angle

Again, we don’t typically give country-by-country growth rate, but I can say Spain is up year-over-year more than 20%.

Brian Ruttenbur – Morgan, Keegan

Okay. And then, the next question just switches over to G&I percent of your funding in the second half of the year that’s coming out the core versus supplemental. It’s sounds like it’s all coming out of the core or it is all – is it a mix. Can you help me out with that?

Colin Angle

Not going to be able to break that down to you in detail, but it is a mix.

Brian Ruttenbur – Morgan, Keegan

Okay. Now traditionally, you’ve had the majority out of supplemental or – do you see still that being the case going forward, beyond just second half of the year, but a year out – two years out?

Colin Angle

Certainly we’re – the programs that we are pursuing increasingly, we look for core funding because the supplementals are decreasing, so we will see a shift of the make-up. I think that our shipment of product into the 10th Mountain which was the first SUGV sale outside of the Brigade Combat Team Modernization was a big milestone for us because that was really demand pull getting the SUGV into theater and is representative of an area where we hope to build a lot of future business.

Brian Ruttenbur – Morgan, Keegan

Okay. Last question, I promise, Japan, you said that that’s where a lot of your growth was this quarter. I believe, are you now number one, number two, what kind of market share are you and what – I missed the percentage increase that you had in Japan?

John Leahy

I didn’t give the percent increase, I thought it was the biggest surprise, because we had actually reduced the expectations earlier in the year and now they’re substantially up year-over-year. Again more than 20% the – and so it’s – that is – sorry you had the second part of that story markets, so we dominate, we’re number one in Japan by wide margins.

Brian Ruttenbur – Morgan, Keegan

Okay. And what has driven that, is that the similar thing where you reduced the low end and only –

John Leahy

That strategy our distributor strategy is always to be – as always then to be at a very, very high end. And so there are premium price product with substantial service attached to reach sale, which is the winning strategy for us in Japan. And that has – and then what they have done is strongly reinvested in sales and marketing to drive brand awareness, which is extremely high in Japan for the Roomba and led to the growth that we’re seeing.

Brian Ruttenbur – Morgan, Keegan

Okay. So, if there has been a sales and marketing blitz, is this correct way to phrase it from your distributor there in Japan that drove the quarter’s business, is that big because it was such a big increase in the quarter, I didn’t – is that a correct way to phrase it or not?

Colin Angle

Well, it’s, blitz would suggest a short-term.

Brian Ruttenbur – Morgan, Keegan

Okay.

Colin Angle

And they have probably been our distributor who has most consistently invested and increased double down on the investment and so that it not blitzes probably just continuing to raise the volume or the top – of the messaging going out around the product and have been doing it long enough that they have enjoyed, continued strong growth and certainly this year – biggest investment to date and just result of today.

Brian Ruttenbur – Morgan, Keegan

Perfect, thank you very much.

Colin Angle

Okay.

Colin Angle

So, thank you very much. That concludes our second quarter earnings call. We appreciate your support and look forward to talking to you again in October to discuss Q3 results.

Operator

That concludes the call. Participants, you may now disconnect. Have a wonderful day.

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