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iRobot Corp. (NASDAQ:IRBT)

Q4 2011 Earnings Call

February 09, 2012 08:30 AM ET

Executives

Elise Caffrey – IR

Colin Angle – Chairman and CEO

John Leahy – CFO

Analysts

Jim Ricchiuti – Needham & Company

Paul Coster – JPMorgan

Adam Fleck – Morningstar

Barbara Coffey – Brigantine

Brian Ruttenbur – Morgan, Keegan

Presentation

Operator

Good day everyone and welcome to the iRobot Fourth Quarter and Full Year 2011 Earnings Financial Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Elise Caffrey of iRobot Investor Relations. Please go ahead.

Elise Caffrey

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

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 whether as a result of 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 expense. A reconciliation of GAAP and non-GAAP metrics can be found in the financial tables at the end of the Q4 and full-year 2011 earnings press release issued last evening, which is available on our website.

On today’s call, iRobot Chairman and CEO, Colin Angle, will provide a review of the company’s operations and achievements for the fourth quarter and full-year 2011, as well as our outlook on the business for 2012. And John Leahy, Chief Financial Officer, will review our financial results for the fourth quarter and full year 2011 and, Colin and John will also provide our outlook for the financial expectations for the first quarter ending March 31, 2012 and fiscal 2012. 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. 2011 was another outstanding year for iRobot. We delivered record setting results. We launched two new consumer robots, the Roomba 700 series and the Scooba 230 and a new military robot, FirstLook. We introduced our first human interface robot, Ava, and signed a joint development and licensing agreement with InTouch Health, to explore potential opportunities for healthcare applications on iRobot platforms. We further expanded that relationship through a financial investment in early 2012. And we met our three year financial targets a year ahead of expectations. Based on our confidence in continuing to expand margins through increased product software content and operating expense leverage, I am excited to increase the profit target in our new three year goals.

In 2011 our Home Robot division had another great year. We began to see the positive impact of our increased marketing investments in Home Robots, as domestic revenues increased 6% year-over-year. Throughout 2010 and 2011, we strategically exited certain lower margin products, channels and retailers making this growth even more significant. Our international Home Robot revenues grew nearly 30%, driven by the Far East market which was up more than 50% in 2011 year over year.

EMEA also showed strong growth, up more than 20% for the year. In 2012, we expected continued growth in both the US and overseas markets from expanded distribution of new products, improvement in the domestic economy and further expansion into Latin America and China.

Our government business grew nearly 10% in 2011 in a difficult and ever-changing environment that included a continuing resolution, program cancellations, a new secretary of defense, significant troop withdrawals and ongoing budget reductions. We responded quickly to meet the soldiers’ needs for a light weight reconnaissance robot with FirstLook, demonstrating the adaptability of our technology, relevance of our products and our close working relationship with the soldiers in the field.

In 2011, we made our first foray into the healthcare market with considerable IR&D investment and work done under a joint development and licensing agreement with InTouch Health. As many of you know, I have been passionate about finding a way to help solve the challenges of our aging thesis to serve these applications in hospitals and ultimately in the home are enormous. Since 2002, iRobot’s revenue has been generated primarily by the sale of Roomba, PackBot and SUGV robots. In 2011, we introduced our prototype Ava robot and demonstrated how our Aware software supports autonomy, navigation, and motor control, and provides interfaces with third party developed technology. Our Ava robot will change the way the world thinks about robots.

Turning now to our financial results, we delivered EPS and EBITDA far exceeding our fourth quarter and full year expectations, on revenue in line with our expectations. Full year 2011 revenue of $465 million grew 16% year-over-year, while earnings per share of $1.44 and EBITDA of 73 million increased approximately 50% over last year. Our exceptional results were driven by strong performance in our Home Robot business. We demonstrated our ability to improve profitability, while continuing to invest in research & development and marketing, critical to maintaining our industry-leading position.

Our continued focus on strengthening the balance sheet resulted in year-end cash and investments of $184 million, up more than 50% from $122 million a year ago. In 2011, we generated $56 million in operating cash flow as a result of significantly improved EBITDA. With these strong results, we achieved our three-year financial goals in 2011 a full year ahead of expectations and we are proud of this accomplishment.

Now, I’d like to take you through additional highlights of 2011 and discuss our outlook for 2012 and beyond. On the Home Robots front, revenues increased more than 20% for the full year, driven by strong growth overseas, particularly in Japan. At the end of the third quarter of 2011, we began shipping the Roomba 700 series to several international customers for limited distribution in overseas markets including Japan. The response has been overwhelmingly positive and we expect expanded worldwide distribution of the 700 series to be a growth driver in 2012.

We continued our initiative to improve profit margins domestically through strategic management of channel, customer, and product mix. In successfully executing that plan, we discontinued several low-margin products, and stopped selling through certain lower-margin channels and customers. Despite these actions, we generated domestic revenue growth of 6% for the year. Higher gross margins in the domestic market contributed significantly to an improvement in annual gross margin for the division of 500 basis points. The Roomba 700 was only available on iRobot’s website and through select specialty online retailers in 2011. We will expand its distribution in the US throughout 2012 and expect domestic growth in this year to exceed 2011’s rate.

As we closed 2011, domestic retailer and international distributor inventories were low, setting us up for a strong 2012. Other initiatives driving Home Robot growth in 2012 are expanded distribution of a Scooba 230 floor washing robot beyond our website and a material contribution from Latin America where we began to establish a presence last year. In 2013, we expect further expansion in China to be a growth driver.

Our outlook for Home Robots is very positive and I am confident that we’ll continue to see strong growth driven by our international customers, improvement in domestic consumer spending, and expansion of new product distribution.

Our Government & Industrial Robot division’s revenue grew nearly 10% in 2011, in the face of headwinds felt throughout the year. During the third quarter, we announced the partial termination of the BCTM contract by the US Army through Boeing. We are currently performing development work under a bridge contract and expect a new development contract in 2012 directly with the Army. Contract revenue for the year decreased in 2011 and we expect it will decline 25 to 35% in 2012.

Product revenue is also anticipated to be slightly down this year. There continues to be very strong demand for SUGV from the soldiers in the theater and support from military leadership. We shipped more than 400 units in 2011 and expect to ship a similar number in 2012, despite the drawdown of troops in the Middle East. This speaks to the ongoing demand by the Department of Defense for cost-effective products that enable improved mission capabilities while keeping warfighters out of harm’s way. Our robots are part of the future.

Although we began this year with the 2012 defense budget in place, and one that meets our funding expectations for the SUGV program, we have limited visibility on the rest of the G&I business for 2012. In a year dominated by election politics, when all DoD spending will be scrutinized, we expect G&I business performance to decline due to government contracting delays and budget uncertainty. We continue to believe that we are well positioned with a broad product base, and increased functionality enabled through technology to meet the evolving needs of global military and security forces, but at this point we are unsure as to how the year will play out. And this uncertainty is reflected in our 2012 financial expectations.

In 2012, we expect to deliver SUGVs to multiple BCTM brigades. We further expect the commencement of Increment 2 of this program in calendar 2012. This Increment will outline the Army’s SUGV requirement for the BCTM program.

We have shipped roughly 800 SUGVs since we began selling them in late 2009. Approximately 20% of the units have been delivered under the BCTM program and the balance has been sold to numerous DoD customers outside of the program. In 2012, we expect about 60% of the orders to come from non-BCTM customers further demonstrating demand for these robots throughout the military.

We anticipate receiving a contract in the first quarter to provide 105 FirstLook robots for operational assessment. The assessment will take place between March and June during which the robot specifications will be defined and after which a competitively bid contract will be awarded. We anticipate that two vendors will be awarded contracts totaling an estimated 4,000 robots and we are well-positioned to meet the customers’ top requirements including weight, ruggedness, run-time and price.

In addition to robots, we expect a 2012 PLR opportunity for a user assist package upgrade for PackBot robots that will enable automatic self-righting, retro-traversing, and course correction. This is the software upgrade we expected in 2011.

The inherent lumpiness of our G&I business was exacerbated in 2011 by competing budget priorities in Washington resulting from the state of the US economy. We expect a similar challenge in 2012 further complicated by the presidential election.

In total, as we look at 2012, we feel very good about the strength of our home robot business. However, we expect a decline in top and bottom line in our government business this year due to limited visibility. In the first quarter of 2012, we anticipate revenue of 90 to $100 million, EPS a loss $0.08 to break-even and adjusted EBITDA of $2 to $5 million. For the full year, we expect revenue up to $465 to $485 million. We expect EPS to be $0.75 to $0.95 and adjusted EBITDA of $56 to $63 million.

In 2012 we will further widen our competitive moat by delivering products that make a difference, built on common platforms using highly integrated iRobot-developed technology. We create robot-enabled solutions to real world problems, not just demonstrations, and that is a real differentiator for us in the robot industry.

Additionally, our intellectual property is very strong and a key barrier to others considering entry into our markets. With more than 100 US patents and more than 150 additional pending US patent applications, we have a formidable market-leading position.

By leveraging our technology, with that developed by third-parties in areas such as voice over IP, user interface, voice control, and facial recognition, we will develop high quality robots for multi-billion dollar automated home maintenance and remote presence markets.

Based on the opportunities we see for our portfolio products and markets, we have re-assessed our goals for the next three years and I’m confident in our ability to achieve an increased EBITDA margin target. Our specific three-year goals are to deliver mid to high-teen revenue CAGR; high-teen EBITDA margins, and high single-digit operating cash flow margins. In order to achieve these goals, we will continue to make technology investments that ensure iRobot’s market leadership position in providing remote presence and automated home maintenance solutions.

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

John Leahy

Thank you Colin. Our performance in the fourth quarter was excellent once again with revenue reaching the highest quarterly level in our history. Earnings per share, EBITDA and cash flow all exceeded our expectations. Revenue of 131 million was up 15% for the quarter, driven by growth in both businesses. We have now had nine consecutive quarters of double digit revenue growth. Earnings per share for the quarter and full year were $0.38 and $1.44 compared to a $0.26 and $0.96 in Q4 and full year 2010, respectively. EPS included the impact of a $3.5 million tax benefit in 2011, and a $2.3 million tax benefit in 2010. Excluding the impact of these tax benefits, EPS for the year would have been a $1.32, compared with $0.88 in 2010. EBITDA for Q1 was $21 million, and our full year EBITDA of $73 million increased nearly 50% over 2010.

Operating cash flow of $56 million drove our cash position to $184 million up $62 million from the end of last year. Our return on invested capital or ROIC, is now in the high-teens. Our cash position in ROIC are the highest in the company’s history.

In the Home Robot division, revenue of $74 million increased 7% in Q4 from our record setting Q4 2010. International revenue increased 13% in the quarter year-over-year and comprised 67% of Home Robot revenue. Home Robot gross margins improved 340 basis points in the quarter and 500 basis points for the year, primarily due to product and channel mix.

In the G&I Division, Q4 revenue was $56 million compared with $45 million a year ago, up 27%. Product lifecycle revenue was $11 million or 23% of G&I product revenue. Full year PLR was 29% of G&I product revenue. This strong revenue performance was delivered despite the disruption of the BCTM research contracts.

For the total company, gross margin was 43% for the quarter and 41% for the year, up

300 and 500 basis points respectively. The year-over-year increases were driven primarily by favorable revenue mix in home robots and higher overhead absorption in G&I. Gross margins have been the key drivers of our improved profitability, increasing more than 1,000 basis points from two years ago.

Q4 operating expenses improved to 31% of revenue from 33% in Q4 last year. Full-year spending on marketing programs increased 16% while investments in R&D were up 47% for the full-year. And as we communicated on our call review in Q3 results, we also absorbed approximately $1 million in costs for the reduction and was implemented in early October.

Q4 operating cash flow was $37 million. For the full-year, operating cash flow was $56 million, or 12% of revenue. This was higher than we expected as we received roughly $10 million in accounts receivable payments in Q4 that we had anticipated in Q1 of 2012. Our Q1 and our full-year 2012 OCF will be impacted accordingly.

Now I’d like to provide you with additional detail and some of the underlying assumptions for our 2012 financial expectations. The outlook for our home robot business remains very strong with growth drivers identified for the next couple of years. For our government business, we don’t have the visibility to plan for growth for that division in 2012. U.S. budget pressures coupled with a presidential election increase our uncertainty for this year.

Therefore, for 2012, we expect full year revenue of $465 to $485 million comprised of Home Robot revenue of $320 to $325 million and G&I revenue of $145 to $165 million. We expect Q1 revenue to be down year-over-year, but to increase in each of the subsequent quarters resulting in nearly 60% of 2012 revenue in the second half. In Home Robots, growth will be driven by further penetration of long-time overseas markets, coupled with expansion into new geographies and wider distribution of new products. Expanded retail distribution of the Roomba 700 series and Scooba 230 in the U.S. market will drive domestic growth.

We expect roughly half of G&I product unit revenue to come from SUGV sales, 25% to come from PackBot and the balance to come from FirstLook and Warrior sales.

Contract revenue is expected to be between $25 million and $30 million and product lifecycle revenue is expected to total approximately 25% of product revenue. SUGVs and PLR will drive our revenue in 2012. We anticipate more than 70% of G&I revenue to come in the second half of the year.

We once again expect positive EBITDA in each quarter this year, increasing sequentially throughout the year. Investments in R&D for Ava and other product development, as well as increased marketing spend to promote expanded distribution of new home robot products will continue throughout the year.

Operating expense will be approximately 31% of revenue for the full year. Operating cash flow will be $30 million to $35 million, largely driven by net income gains. We are also assuming stock comp expense of roughly $11 million. Depreciation and amortization expense of approximately $11 million and diluted share count of $28.5 million shares.

We are estimating a tax rate of 35% for 2012, which is much higher than 2011 when we benefited from several one-time tax events. Also, we have not assumed in our rate the investment tax credit for R&D, which has not yet been approved by Congress for 2012. The impact of the one-time benefits and the lack of the tax credit is worth about $0.20 in EPS year-over-year.

Finally, as Colin mentioned we are raising our three-year profit target from mid-teens to high-teens EBITDA. We expect this to be driven by both gross margin gains and expense leverage. We expect gross margins of mid 40s and operating expense in the low 30s as a percent of revenue.

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

Colin Angle

Thank you, John. In addition to delivering record setting results this year and meeting our three-year financial goals a full year ahead of our target, we delivered new products, and entered new geographical markets that will fuel our growth for years to come. Over the next year, three years we are committing to achieve, mid to high-teen revenue CAGR; high-teen EBITDA margins, and high single-digit operating cash flow margins

There is a gap in our 2012 expectations and these goals. While our home robot division will deliver robust 2012 results throughout the year, our lack of near-term visibility in our government business negatively impacts our first half and full-year expectations.

However, we expect continued demand from the warfighters and support from military leadership for our products to drive higher revenue in the second half and position us well for future growth. And we will continue to invest to earn the future performance.

We have tremendous emerging opportunities to pursue. The robot world is changing quickly. Two years ago, I said the tablet computers were going to change the way we interact with robots by providing intuitive touch screen interfaces, voice and video over IP, and powerful development tools.

Last year, the video game industry provided another change agent, the Kinect Xbox sensor giving us a gestural interface and an ideal indoor object sensor. And this year, led by Siri, the true power of the Cloud is becoming apparent. Algorithms that require vast memory and processing power to work are delivered as nearly free service to any connected device. Things like facial recognition and speaker independent natural language recognition are now possible.

The power of these new technologies, coupled with our maturing software technology to build, can use maps of a robot’s environment, create opportunities to build value-creating robots, like the world has never seen before, in both our current markets and new ones. There has never been a better time to be positioned as we are.

Today iRobot is truly a global technology company with a portfolio of products meeting the needs of customers worldwide and our exceptional results reflect the increasing diversification of the company. We are successfully meeting the challenges of an international economic uncertainty, and continuing unresolved U.S. budget issues by delivering multiple products into multi-billion dollar automated home maintenance and remote presence global markets.

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). And the first question is from Jim Ricchiuti from Needham & Company. Please go ahead.

Jim Ricchiuti – Needham & Company

I’ve got two questions, John may be the first one for you based on just giving the guidance you are giving for operating expenses being about 31% of revenues that would seem to imply that gross margin are going to be lower than we have been accustomed to seeing in 2012. Do you anticipate lower gross margins in both parts of the business but the G&I and the Home Robot business and I wonder if you could just give a little color on how we should think about gross margins this year.

John Leahy

Well actually I think Jim overall that gross margins should hold reasonably well probably will be around 40% with some gross margin improvement in in HRD as we’ve seen over the last couple of years and probably some pullback in gross margins and G&I because of the lower revenue and therefore the lower overhead absorption.

The 31% that I read in the script for OpEx, that’s our target with the revenue, drop off in G&I could end up being a little higher than that. But we’re targeting to get back to 31% and holding our gross margins reasonably well.

Jim Ricchiuti – Needham & Company

Okay. That’s helpful and Colin, just with respect to the three year target, clearly the growth rate for 2012 that you’re suggesting flat to up to 4% which suggest that you’re going to need to see a fairly significant acceleration in 2013 and 2014, so the question is to what extent will the initiative that you have underway in the healthcare market begin contributing in 2013, how should we think about what you are doing in that market.

Colin Angle

It's a good question. A little color on your answer certainly what we are trying to communicate home robots is healthy and continues to grow at rates that already that would meet that three year growth targets and we believe that will continue and try to list a number of the growth drivers that will affect us not just in 2012 but 2013. Growth this current year is impacted by the slowdown and pushing to the right of government contracts, as that situation starts to clear as we look forward I think that that has chilling effect on our growth rate will moderate.

With respect to our healthcare initiatives in 2012 we are not suggesting that we are going to see materiality in that initiative but in ‘13 and ‘14 certainly that we come a real contributor to the growth and I should say not just in healthcare when we talk about Ava we have several different market initiatives where we think Ava can contribute a few commercial opportunities that we’ll be speaking more about as they develop this year but taking as a basket we think a ‘13 and ‘14 will see some positive impact and that will be one of the key mechanisms for reaching the growth targets described.

Operator

Thank you. And the next question is from Paul Coster from JPMorgan. Please go ahead.

Paul Coster – JPMorgan

So focusing on the G&I business for a second. Unfortunately, looking beyond 2012, which I know will be a difficult for you to answer, but at the moment I think we’ll agree it’s feels like just a budget sort of cycle issue. However, this debate around the reset and whether the U.S. DoD budget should or insight more towards of strategic kind of protection of how are through air force and maybe and so. Do you think the BCTM program is still holding up strong in the concepts of that debate and 2013 will be the year in which you start seeing the rebound in that business?

Colin Angle

You know the BCTM contracts or the BCTM program have been scale back dramatically with iRobot SUGV program being the sort of sole surviving initiative out of that. And surviving with good reason January 3rd, as (inaudible) said that as we reduce overall defense budget we will protect and in some cases increase our investments in special forces and new technologies like ISR and Unmanned Systems we believe that while we are going to see overall challenges as the money starts to flow the commitment to unmanned platforms both ground underwater and aerial unmanned ground platforms will see a robust and a rich future.

So, this realignment does allow these systems to play very central and growing role. So I think that the future is very strong for us, but there is some realignment going on that we need to work through.

Paul Coster – JPMorgan

A two very quick follow ups, first is what’s the average selling price for the FirstLook product and the other is obviously you’ve accumulated lot of cash which is great, can you just remind us what the intended use of that cash is please. Thank you.

Colin Angle

Okay. For FirstLook we have not set the official price for the volume purchase but you should model somewhere between $10,000 and $20,000 depending on how they ultimately want to procure it and what accessories and features that go into a unit purchase.

John Leahy

In terms of the cash Paul, we’ve obviously had great success in building our cash position in the last couple of years and I think we’ve been saying now for probably 18 months or so we think acquisitions will be a core part of our strategy. We obviously haven’t pulled the trigger on anything but we’ve been very actively searching for attractive acquisition opportunities. So, we continue to think for a company, a growth company like us and the prospects that we have that M&A and investments back into the business is the best use of the cash and we do get the questions about stock repurchases obviously but at this point we don’t believe that’s the best use of our cash resource.

Operator

Thank you and then the next question is from Adam Fleck from Morningstar. Please go ahead.

Adam Fleck – Morningstar

I wanted to follow up on the cash question you obviously have a lot of cash, but lot of the growth come from international markets. Is it possible that you can share with us what percentage of your cash is held overseas versus here in the U.S?

John Leahy

Adam the vast majority of our cash is in the U.S., our business you may recall in Europe with HRD is largely dollar denominated and it’s not captive in Europe. We have small amounts in China for the work we do with CMs but the bulk is in the U.S.

Adam Fleck – Morningstar

And then I wanted to ask, you've had a full-year now working with Jable (ph). Any key takeaways or thoughts on the partnership?

John Leahy

The partnership with Jable (ph) is very strong. I went and visited the factory last year. They were making significant investments which I was impressed by clearly investing in a long-term relationship. We’ve been very, very happy with the quality of the product coming from their manufacturer and we that we are in early days or what is going to be a very long and mutually successful partnership. It’s all good.

Operator

Thank you. The next question is from Barbara Coffey from Brigantine. Please go ahead.

Barbara Coffey – Brigantine

A couple quick questions on how we should work at the replacement parts market as well as sort of the software upgrade piece. You’d mentioned that you are in the process of doing some of the software upgrade. Can you speak to how that’s different than the Aware 2 product and also as where winding down on some of the worse, can you speak to how we should be looking at the replacement part cycle?

Colin Angle

Sure. The upgrade that we are planning for this year, builds on top of the prior upgrade that we rolled out 18 months ago. So basically 18 months ago we moved to our Aware software on our military robots and that is, if you think about a computer operating system, you put in once you have the OS in place, adding apps becomes much more feasible and you can write more powerful apps.

And so that this user assist package that I referenced in the call is a bundle of apps that run on top of the Aware software giving the robots the ability to drive back along the path that they took if for whatever reason radio communications are lost allowing the robot to reestablish those comms. That helps eliminate a risk that a solider might have having to go down and retrieve that robot and putting himself perhaps in the line of fire.

So that there is a number of these different apps bundled together that run on top of the robot and so we have about 1,800 robots in the theatre today running the Aware, that would be sort of an upper bound on the number of upgrades but we haven’t worked out the detail of exactly how many of these robots will get this user assist package. It will be an exciting part of the government and industrial product lifecycle revenue story for the year and we think that the soldiers will be very excited with the functionality as well. That’s what’s driving demand from the field.

Barbara Coffey – Brigantine

And on replacement parts, if we're hopefully not lined them up, quite so often.

Colin Angle

I think the product lifecycle revenue story still holds. We're modeling sort of mid-20s as a percent of product revenue for product lifecycle for the year which is on par as what we have seen in the past. I think that as we continue to ship robots and these robots continue to be used it does drive a need for these replacement parts.

I think that we’re going to see despite troops coming back from overseas a continued active role for the robots on a daily basis and we don’t anticipate the product life cycle revenue dropping significantly this year. We will also have a larger installed base as we continue to ship robots to drive continued utilization of those spare parts.

Operator

Thank you and the next question is from Brian Ruttenbur for Morgan, Keegan. Please go ahead.

Brian Ruttenbur – Morgan, Keegan

Hey, thank you very much. I’ve got a couple of questions. On G&I, on the guidance, it's down roughly 20% year-over-year. You mentioned new potential awards during the conference call and I just want to make sure you talked about 4000 robots, the 2012 upgrade. What's in the guidance? And this may have been asked already, I didn’t catch it but can you just clarify if any of that's in the guidance?

John Leahy

The figure that I spoke to in the call are in the guidance. We are assuming that we're going to see the equipping of a few BCTM combat teams. We’re going to see the capture not up 100% but some reasonable percentage of the FirstLook robots. We’re going to see PackBot sales continue albeit at a lower level. We have a relationship in place which require a continuing flow of those larger robots. We see that declining year-over-year. And a continuation of sales of SUGVs outside of the Brigade Combat Team Program. And additionally Seaglider and some Warrior sales, Warrior up nicely from last year and a material contributor to overall budget in 2012.

Brian Ruttenbur – Morgan, Keegan

I guess I'm try to figure out if everything slips out, how much could G&I revenue be down than, since you have these new things in there this kind of nebula, trying to figure out how much of the new stuff is in there? Is it $20 million, $100 million? I'm just trying to figure out if all that stuff slips out, could G&I revenue be down 40%? That's what I'm trying to grab onto.

John Leahy

Okay. You’re asking a very different question. If everything slips out than everything slips out. We believe that…

Brian Ruttenbur – Morgan, Keegan

Okay. These additional wins that we're talking about, the additional 4,000 robots, the 2012 upgrades; what are the biggest ones, maybe let me state the question differently? What are the biggest three? That’s a better question? Sorry.

John Leahy

I think that the FirstLook contract is a significant contract. And we're shipping robots in the theatre and we gave some timing expectations around when we think we'll get word on that particular contract. So if you hear us talking about that’s slipping out, we're anticipating that in Q2 if it slipped forward or we didn’t win it that would have a material impact in the first half of the year but we do feel like we are well positioned for that one.

The BCTM contract, that would be a second one where we're modeling, equipping several Brigade Combat teams but not the four teams that we thought towards the end of last year where you might be seeing. So that number is reduced already in our guidance and is a back half program. If the equipping of all BCTM brigades moved into ’13 that would have a material impact but we believe that we’ve pretty conservatively modeled that in our guidance.

And then the last would be the fact that we see and continue to see a strong desire for SUGVs outside of the BCTM contract. That is more of a basket of smaller contracts and so that’s not less of a singular that could slip. It's more about what is our capture rate and predictability around capture of those opportunities for us.

And so that’s less of a, one event could materially harm us. I think that if you think about what we have done in the past, we try to come out with guidance that we're quite confident in. We have, because of the timing of uncertainty shifted revenue for the back half of the year and tried to be as conservative as we could base on uncertainty as I attempted to describe.

So we do have very good confidence in the numbers we’re presenting today and certainly as you look at the military landscape it’s good to be the guys selling unmanned ground systems, much better than some of the other aspects of the military marketplace that we might be talking to and that the overall sort of best estimate for 2012 is that the military is down 20%.

As you correctly point out, the military side and the guidance that we’re giving is down in that regime. And so if you’re looking for a measure of conservatism and measure of confidence, you can say, okay, well, if it’s 20% down, it’s total and we are the unmanned guys. I don’t think we’re leaning too far forward in presenting you with that as a place to start the year from.

Brian Ruttenbur – Morgan, Keegan

And then just as a follow-up there, on the FirstLook and the BCTM, I’m just trying to understand is that half of your business combined those two programs in the government side, the G&I business. Is that 20% a piece. Can you give me some kind of parameters of how much of your revenues of G&I in 2012 are tied to those two contracts?

John Leahy

Those two contracts together represent less than 20% to 25% of our full-year revenue though there is a lot there. This is not a year that hinges on any single contract. It is a basket of different opportunities that we're pursuing. So unfortunately for us I'd much rather have a diversified set of opportunities to pursue but there is no one singular event that you can say okay, they got it or they didn’t get it and they are either going to make it or probably off plan based on a singular event.

Brian Ruttenbur – Morgan, Keegan

Just one other question on a different line, you're off the hot seat to a certain extent. What do you need to meet your financial goals long-term overall in terms of G&I and in terms of the other side of your business, the commercial side in order to hit your long-term revenue growth targets.

Colin Angle

Good question and obviously looking in the future is challenging but we see the home side of the business as very strong and in many ways quite close to meeting those long-term targets from where we stand. They have a tremendous backlog of products, geographic opportunity for expansion in front of us and so that area I think is extremely well positioned and so the differential between its growth rate and the government's growth rate this year will actually cause it to be a more substantial contributor to our overall picture.

So to some extent 2012 playing out as we have just described it sets up meeting our longer term financial targets as described very, very well. That’s off and running. The thing that is going to need to happen in order for us to hit those targets in the three year timeframe that I described is the stabilization of the government slide of the business and returning that on to a growth trajectory as well as the successful development of what we call the third leg on the stool and that is the commercial opportunities and I include the healthcare in the commercial bucket for navigating robots based on the Ava technology that we have demonstrated.

So we have a very strong plan with multiple formulas if you will for achieving the three year guidance that we put out there which is how we like to do it. That's how we get confidence and its anchored in continued strong growth in home.

Colin Angle

So that’s concludes our fourth quarter and full year 2011 earnings call. We appreciate your support we and look forward to talking with you again in April to discuss our Q1 results.

Operator

That concludes the call. Participants may now disconnect.

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