iRobot's (IRBT) CEO Colin Angle on Q2 2016 Results - Earnings Call Transcript

| About: iRobot Corporation (IRBT)

iRobot Corporation (NASDAQ:IRBT)

Q2 2016 Results Earnings Conference Call

July 27, 2016, 08:30 AM ET

Executives

Elise Caffrey - IR

Colin Angle - Chairman, CEO and Co-Founder

Alison Dean - EVP and CFO

Analysts

James Ricchiuti - Needham & Company

Josephine Millward - The Benchmark Company

Bobby Burleson - Canaccord

Troy Jensen - Piper Jaffray

Mark Strouse - JPMorgan

Adam Fleck - Morningstar

Ben Rose - Battle Road Research

Operator

Good day everyone and welcome to the iRobot Second-Quarter 2016 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 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, net merger, acquisition and divestiture 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 second quarter 2016 earnings press release which was issued last evening, and 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 of 2016, as well as our outlook on the business for 2016. Alison Dean, Chief Financial Officer, will review our financial results for the second quarter of 2016; and, Colin and Alison will also provide our financial expectations for the third quarter ending October 1, 2016 and fiscal 2016. 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. I am happy to report that we had a very strong second quarter with revenue at the high end of the range, and earnings that exceeded our expectations. More importantly we have good visibility into the rest of 2016 and are raising both revenue and earnings expectations for the full year.

During Q2, we delivered year-over-year consumer quarterly revenue growth in the United States of more than 25%, due to successful Mother’s Day and Father’s Day promotions, following record first quarter revenue.

We opened our new office in Shanghai and have begun executing our more direct ecommerce strategy. Japan sell through continued to improve due to the successful implementation of iRobot marketing programs in that region, and due to nominal expectations for revenue in the UK, we expect no 2016 impact from Brexit.

Based on our Q2 results and our outlook for the rest of 2016 fueled by strong momentum in the US, we are increasing our financial expectations. We now expect 2016 revenue of $640 to $645 million, net Income of $36 million to $40 million or roughly 6% of revenue, EPS of between $1.26 and $1.40 and Adjusted EBITDA of $85 to $90 million or roughly 13% to 14% of revenue. These expectations reflect our confidence that 2016 growth in the US of more than 20% will drive total consumer revenue growth of approximately 14% for the full year.

The success of the marketing programs we ran during Q2 for Mother’s Day and Father’s Day, resulted in US sell through that was up roughly 20% in the quarter versus last year. We anticipate this momentum to continue throughout 2016 as retailers begin to stock their shelves for the holiday season in late Q3, followed by significant promotional activities again in the fourth quarter.

As we discussed last quarter, our 2016 expectations include strategic incremental investments, critical to achieving our 3 year financial targets. The investments will impact earnings in 2016 versus last year as expected, as the position the company for accelerated growth and improved profitability in 2017 and 2018.

We are beginning to see the positive impact from our incremental sales & marketing investments in overseas markets, such as Japan, as we implement the programs that have been highly successful in driving demand generation in the United States.

Now I’ll take you through some of the details of the second quarter and our expectations for the rest of 2016. Total year-over-year consumer revenue growth of 8% in Q2 reflects demand for our high end Roomba 980, as well as for our 600 series Roomba and the Braava family of wet floor care robots.

Through the second quarter, Braava jet which we introduced in late Q1 was available only in the United States. In the third quarter we'll be on shelves in China and Japan, where we expect to leverage the necessity for daily mopping and the Asian consumer’s enthusiasm for automating this task.

We will also be launching Braava jet in Europe at the end of Q3 in time for the holiday season. Sales of Braava jet, in combination with increased sales of the larger format Braava, fuel our enthusiasm about developing our wet floor care business into a material, second revenue stream.

Revenue in EMEA was up 7% year-over-year in Q2 2016 as anticipated. We continue to expect EMEA’s quarterly revenue to grow through the rest of the year and result in full year growth of mid single digits over 2015.

For the third quarter in a row, revenue in Japan increased year-over-year, due in part to the implementation of a new marketing programs that proved to be highly successful in the US during 2015.

As you recall, another part of our sales & marketing investment this year is earmarked for exporting our successful US demand generation program to overseas to expand worldwide consumer adoption of Roomba. We have begun implementing these programs in Japan and while it’s still early, we are very pleased with the results to date.

We are executing on the go-to-market transition in China, which we discussed on the last quarter’s call, to provide us with more direct control over our e-commerce channel. Sell-out in China was more than 50% - was an increase more than 50% in Q2 over last year, and more than 75% through the first half, which leaves us well positioned for significant second-half growth in China and to capture an even larger share of the rapidly growing Chinese market for robotic floor care.

We launched our new e-commerce operations at the beginning of Q3 and expect significant 11/11 and 12/12 online holidays to benefit from those enhanced operations. For the full year, we now expect APAC revenue growth of low double-digits driven by both Japan and China.

International consumer revenue was down slightly in the second quarter from last year, as expected, due to the go-to-market transition in China.

On another note, we recently announced a new relationship with Amazon Web Services that we believe will enable iRobot to address significant opportunities within our consumer business and the connected home.

AWS is a managed cloud service - solution that enables connected devices to interact easily and securely with cloud applications and other devices. The AWS Cloud will enable iRobot to scale the number of connected robots it supports globally and allow for increased capabilities in the smart home.

This is a huge step forward for us as we address strategically important cloud robotics technologies. With its broad, rich services and world-class infrastructure, the AWS Cloud will enable iRobot to more efficiently develop connected robot technologies and expand the value of robots within the smart home.

During the second quarter we made the decision to end our remaining remote presence marketing and business development initiatives. As we reported on our Q4, 2015 call, we had already reallocated R&D resources from a next generation remote presence platform, to consumer opportunities.

Going forward, 100% of the company’s resources will be focused on the consumer as our customer and I am very excited about the next chapter for iRobot.

We are poised for continued growth and success, maintaining our market-leading position requires technology leadership. We will continue to make disciplined R&D investments to ensure that we remain the leader in robotic floor vacuum cleaning and developing adjacent consumer product categories.

In summary, we continue to execute successfully against our plan, delivering excellent first half performance. Those first half results, coupled with continuing momentum in the United States enable us to increase our financial expectations for the full year.

In the second quarter, we continued to see the positive impact of our targeted marketing programs as US revenue grew 40% year-over-year in the first half over 2015. We better positioned ourselves in China to accelerate second half revenue growth and capitalize on that large and growing opportunity.

We fully exited the remote presence business allowing us to focus our efforts solely on the vast home robotics market. And we will continue to invest in key technologies to extend our market-leading position in consumer robotics.

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

Alison Dean

Thanks, Colin. We delivered second quarter revenue consistent with our expectations, and earnings per share and Adjusted EBITDA ahead of expectations due to the timing of certain operating expenses.

Consumer revenue of $148 million increased 8% over Q2 last year. Second quarter 2016 revenue includes approximately $1.2 million of favorable return reserve adjustments compared with $2.6 million in 2015.

As a reminder, total company revenue of $149 million for the second quarter 2015 included $12 million of D&S revenue compared with zero in Q2, '16, following the divestiture of that business at the end of Q1.

Net Income was $4.8 million in Q2 versus $7.3 million in 2015. EPS was $0.17 for the quarter compared with $0.24 for the same period last year, and Q2, 2016 Adjusted EBITDA was $16 million.

For the first half, revenue of $280 million compared with $267 million in 2015. Net income was $8.7 million compared with $12 million last year. EPS was $0.30 compared with $0.40 and adjusted EBITDA was $30 million compared with $31 million last year.

Keep in mind that 2016 first half results include defense & security revenue of $3 million versus $18 million in the first half of 2015, as well as divestiture costs that negatively impacted net income by $3 million, EPS by a $0.11 and adjusted EBITDA by $3.3 million.

As Colin discussed, domestic revenue grew more than 25% in Q2 over last year. This growth was driven primarily by strong demand for our high-end Roomba's, as well as the Roomba 600 series and the Braava family of wet floor care robots. International revenue was down slightly as expected and results varied from region to region.

EMEA and Japan both delivered year-over-year growth. While China sell-through was up significantly again in the second quarter, revenue declined year-over-year as expected as we completed the transition to our new online distribution partner in that market.

We’ve lowered second half revenue expectations slightly due to the transition, but still expect APAC to deliver low double-digit growth for the year over 2015, driven by growth in both China and Japan.

We continue to expect mid single digit growth in EMEA as we roll-out distribution of the Roomba 980 and begin to sell Braava jet in overseas markets. Our revised expectations in APAC for 2016 are more than offset by increased expectations in the US which continues to benefit from our investments in sales & marketing programs.

Gross margin was 46.8% for the second quarter 2016, down slightly from the same quarter last year. This decline was driven by one-time remote presence shutdown costs of $1.7 million, $1.3 million of which negatively impacted gross margin, as well as lower Q2, '16 return reserve adjustments compared with last year.

Q2 operating expenses were 43% of revenue, up from 40% in Q2 last year, primarily due to higher sales & marketing spending to support the Braava jet launch and to drive Roomba adoption, one-time G&A costs of $1.5 million or $0.03 of EPS, associated with the proxy contest and $0.3 million of the remote presence shutdown costs.

We ended the quarter with $173 million in cash and investments. As we mentioned on last quarter’s call, in April, we funded our accelerated stock repurchase program of $85 million, coupled with the $12 million in share repurchases we executed in the first quarter, we have returned nearly 100 million of excess capital to shareholders to date in 2016, while still investing to grow the business in order to create shareholder value.

Total company DII of 54 days was consistent with our typical Q2 level. We anticipate higher inventory levels at the end of Q3 as we prepare to ship to US retailers for the holiday season.

Now I’d like to provide you with additional detail for our Q3 financial expectations. Keep in mind that these expectations and growth rates are based only on our consumer business. As a reminder, we provided a table in our Q1, '16 press release showing a pro-forma view of D&S by quarter and for the full year 2015 for an easier comp analysis.

We expect third quarter revenue of $155 to $160 million, an increase of 14% to 17% over Q3 last year, driven by sales in the US. Net income is expected to be $11 million to $13 million or roughly 7% to 8% of revenue. EPS is expected to be between $0.40 to $0.45, and adjusted EBITDA of between $25 and $28 million or 16% to 18% of revenue.

For the full year we continue to expect operating expenses to total 38% to 39% of revenues consistent with the expectations we provided on the February earnings call.

The full-year impact of the D&S divestiture on net income, EPS and EBITDA is expected to be negative $3 million, $0.10 and $2.7 million respectively. In addition, it is important to note that our full year revenue guidance includes only the $3 million D&S revenue we recognized in Q1.

I’ll now turn the call back to Colin.

Colin Angle

Thanks. We are off to an excellent start in 2016 as we focus our efforts on maintaining our position as the world’s leading consumer robotics technology company.

With our efforts solely focused on robots for the home, we are confident that we can accelerate the company’s growth in the near term by seizing the tremendous opportunities we see in driving further worldwide adoption of robotic vacuum cleaners.

Leveraging our robust portfolio of mapping and navigation software will enable us to further develop and grow significant adjacent consumer robot categories longer term.

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 our first question comes from Jim from Needham & Company.

James Ricchiuti

Thank you. Good morning.

Colin Angle

Morning.

James Ricchiuti

Colin, I wanted to go back to the comments you made about the Braava wet floor cleaning line. You talked about it targeting this to be material - contribute material revenue. And I wonder if you could perhaps talk a little bit about the timeline. Do you see it being material in 2017?

And I wonder how you define material, sometimes we define it is 10% or more of revenue. I wonder if you could just elaborate a little bit more on that.

Colin Angle

Sure. So the – you know, our rollout plan as described, we got started in the US. This product was – the Braava jet was conceived of as being ideal for the agent market place, where the smaller format fits and plays very, very well as an addition to the fact that particularly in China mopping is the dominant form of floor care. And so to sell robot vacuum you first I have to convince them to vacuum.

So this is a – we're very excited about the potential, and so the back half of the year and the rollout of Braava jet into Asia will be important to us.

Relative to your questions about materiality, we certainly don’t – we don’t believe that Braava jet is going to be over 10% in '17. But we do think that over time it can become something that would meet your definition of materiality.

So we think it has a market opportunity that is maybe not the same size as Roomba, but is sort of more in the range of 50% Roomba globally which can ultimately drive some great growth. And it is also a product for which we have much less competitive pressure on it at this point. And so we think we've got a little bit of blue ocean running room with this robot.

James Ricchiuti

Okay. Thank you. And just maybe on that last note about just the competitive environment, how would you characterize the broader competitive environment that you are seeing across your geographies at the moment? Thank you.

Colin Angle

Sure. You know, there continue to be new and more entrants. But iRobot's market share is holding up very well, and so that we continue to raise the bar on performance. With the launching of the 980 and becoming a connected product, introducing our mapping technology, we've shown that we continue to be the technology leader.

We're going to have to continue to innovate and we're excited by that, because we have a deep pipeline of innovations to continue that leadership position. And we haven’t seen any single competitor truly become a global threat, depending on the region, sometimes we see a competitor who has some local advantages, gain some share, but outside of their favorite region that same competitor is sort of in the noise.

And so there is no one out there that you could point to and say, okay, you should really worry about that brand. We continue to upgrade and announce new models aggressively and we certainly intend to continue this leadership position.

James Ricchiuti

Is it a bit more competitive in APAC?

Colin Angle

You know, its – no, I mean, I think that it’s competitive in China, because we were not the first to market in China. And so that we came in, that was the only market where we didn’t create the market. So we're planning to catch up a little bit in China.

One of the reasons why we felt it was important to get a more direct control over our distribution strategy, so we can make sure the messaging was exactly what we wanted.

You know, I think Japan has traditionally had some other brands come in and certainly we have been seeing competition in Japan. But we've been able to maintain our market share quite nicely in Japan.

It went down a little bit last year and then recovered nicely, as the impact of sort of a new product offering and diminished as the customers had a better opportunity to judge the product by the merits of their product. So you know, I think that Europe has many competitive products and we hold up very, very well in Europe.

So I think that with competition since the second year of Roomba and so that we are organized and have a sustainable strategy for continuing to upgrade our features and I think that all of our competitors would say that we're a difficult organization to win against.

James Ricchiuti

Thanks very much.

Colin Angle

Yes.

Operator

The following question comes from Josephine Millward with The Benchmark Company.

Josephine Millward

Good morning.

Colin Angle

Good morning.

Josephine Millward

Great quarter. Colin, your guidance seems to imply slowing US growth to roughly 10% in the second half after a very strong first half. Are you being cautious there or is it timing of order shipment, can you expand on that?

Alison Dean

Josephine, its Alison. So we always give our best view based on the indications we're getting from our retailers and domestic partners in terms of when they're going to be placing their orders.

So we're overall really excited about the annualized growth that we're expecting there for the full year. We're very excited about the first half growth that we've seen and we think you know, the second half will be very powerful as well. But yes, the pure math would indicate a smaller growth rate in the second half than in the first.

Josephine Millward

Okay. And can you give us an update on China, why the more cautious outlook there? Because previously I think you were looking for mid to high teens in Asia, and now its low double-digits?

Colin Angle

Yes, there is a little bit in the call around that would suggest that our transition to this new distribution model involved a little bit more complication and more disruption than we originally had hoped. It is behind us, it’s going well. But - and sell-through remains very, very strong.

So you shouldn’t read anything into it, beyond we had to do a little more work on ensuring we have the right levels of inventory. So it is a sort of a temporal impact based on the transition.

Josephine Millward

Thank you. Can you talk more about the nature of the new relationship with Amazon Web Services and how you see them moving forward?

Colin Angle

Sure. The sales of 980 are very, very strong and we believe that connected robots are going to become an incredibly important part of our ongoing strategy. We talked a little bit about competition earlier. One of our tools in ensuring long-term leadership is connecting our robots, and all of the features and capabilities have been connected and the maps that the robots are building can deliver.

And so having a partner that can scale globally with us and provide us the opportunity to put increasing amounts of intelligence in the cloud was critically important. And so the – so working with Amazon Web Service to affect that and build that capability jointly with us is critically important.

So I thought it worth mentioning because we are at the beginning stages of what's going to be a very interesting future of robotics with more and more technology being brought to bear on Home Robot based on cost effective ways of putting computation on data storage and the cloud.

Josephine Millward

Great. Thank you.

Colin Angle

You bet.

Operator

The following question comes from Bobby Burleson from Canaccord.

Bobby Burleson

Yes, good morning. Congratulations on the strong results.

Colin Angle

Thank you.

Bobby Burleson

So, just a couple of questions. Back to the competition topic, one of your competitors at the very high end is going global, I guess launching in Canada, but then soon to launch in the US.

And I'm wondering, in terms of any dynamics you might be seeing in your third quarter in terms of what your channel partners demand appetite is with that competitor, whether or not that's making channel fill a little bit more cautious or if you think that it's really just a non-issue on that subject. So just a little curiosity about how the high end might be impacted Q3 by that global launch.

Colin Angle

Sure. I assume you're talking about Dyson and…

Bobby Burleson

Yes.

Colin Angle

They launched about a year ago in Japan and Japan is globally their strong market from a percentage share and they have failed to achieve anything but low single digit market share performance in Japan.

And so that – I think that we're respectful of the company. We believe that they will - as they did in Japan put a reasonable effort behind awareness generation for their products, that’s something that that company does very well. And you know, the impact, there maybe on-launch a temporarily short disruption. But we believe there is no fundamental reason why their products should perform better than it did in Japan.

That the product is a Gen 1 product, it’s too tall to get under the furniture. It has challenges cleaning larger areas which was less of an issue in Japan, will be a more of a challenge for them as they come into North America.

So they will be one of our competitors. And I think that something that we did see in Japan was the – as other companies spend money to promote the category, there is opportunities for category growth acceleration as well.

So depending how aggressive – aggressively they promote, we could actually see a halo effect. But you know, we are holding some resources and reserve to make sure that we have dry powder to respond as need be on the sales and marketing front.

But – so we're taking them very seriously. But our confidence is very high that we remain the market leader and that we can continue to command the very significant market share position we enjoy today.

Bobby Burleson

Okay, great. Thanks. And then, just curious about the mix you know, Amazon Prime Day was massive for the 600 series…

Colin Angle

Yes…

Bobby Burleson

And I'm just curious whether or not, in terms of the upside, you mentioned the high end being strong, but how surprising, if at all, was that strength in the 6 series?

Colin Angle

We've been experiencing a little bit of barbelled sales performance for a while now, where our higher end robot centers 600 and robots account for the majority of our revenue. I think it’s not a phenomenon that is unique to iRobot and robot vacuuming, it’s a general trend in consumer.

The good news is the strong performance of the 980 where we were – we increased our price with that robot, relative to the 800 series when we launched last year and we've seen customers valuing the functional improvements that we – we're able to pack into that robot and have stepped up and being willing to pay the 899 for that price – for that robot.

So that’s – that was a little bit of a risk, and certainly its played out in our favor that we did deliver the required step up in performance to warrant the cost.

At the low end, it has been traditionally strong. It continues to be strong and the Prime Day performance, I think thrilled everyone. We had a special SKU that was sort of truly strip down from an accessory perspective version 600 and we – I think we sold 23,000 in under six hours.

So we will certainly continue to support those types of activities on a go forward basis. Its profitable and a very exciting new channel – or a new way of some of your products. I think its, and…

Bobby Burleson

Well, thanks a lot. Okay, great. Thanks and congratulations again.

Colin Angle

You bet. Thank you.

Operator

The following question comes from Troy Jensen from Piper Jaffray.

Troy Jensen

Congrats on the nice results.

Colin Angle

Thank you.

Troy Jensen

I've got two or two and a half questions for Alison. If I back out the $1.3 million shut down cost, your gross margins would've been 47.7% there. You grew 30 Bps sequentially.

Just curious to think, do you expect gross margins can continue to kind of creep higher with revenue growth in the second half of the year?

Alison Dean

The mix always plays an important role in determining what the gross margin is, you're right, we would have year-over-year growth in gross margin and Q2 had it not been for the remote presence shut down cost.

The mix conversation we were just having with Bobby in terms of the mix of you know, 600 versus 980, the new Braava jet product as well, as that plays through, that can have a significant impact.

So you know, we're not expanded - not expecting significant gross margin expansion in the second half or significant expansion year-on-year as we've talked about previously. But as the different mix takes place in any give quarter we could see these instances where gross margin is expanded.

Troy Jensen

Okay. That’s fair. And then on the share count, Alison, it was down a lot because of the buyback, and the 27.8 million is obviously an average beginning quarter, ending quarter. Could you let us know what the share count was at the end of the quarter?

And then previously, I know you had an anti-dilutive buyback program. Can you keep the share count flat? Curious if that is still in place or did the recent buyback kind of supersede that?

Alison Dean

Yes, we did have an anti-dilutive program initiated at the beginning of the year, we repurchased about 12 million under that. When we implemented the ASR we actually ceased the anti-dilutive program.

But we augmented and included in the ASR a value - an incremental value associated with what we would have won through with the other programs. So we tried to reach the same end save of share repurchases. So we've adjusted the total of the ASR to accommodate the remainder of the anti-dilutive program as well.

Troy Jensen

Okay. So what was the ag – what was the ending quarter share count?

Alison Dean

So shares outstanding were about 28 million at the end of…

Troy Jensen

27.8, that was the average for the quarter and you had 29.5 last quarter, so…

Alison Dean

We're required to do the appropriate weighting of the shares throughout the quarter. So I am not exactly sure what you're asking there.

Troy Jensen

I guess, I want to figure out what do you think share count is going to be in September?

Alison Dean

We will have – it will have the reduct [ph] in the shares that we saw from the initial return in Q2. We'll have a bigger impact on the weighted shares we report in Q3, coupled with the fact that we have some final shares to be delivered which we expect to be delivered in Q3 to end that program.

So they will definitely be lower, I can't give you an exact number here on the phone, but it will be lower than it was in Q2.

Troy Jensen

Okay. Thank you.

Operator

The next question comes from Mark Strouse from JPMorgan.

Mark Strouse

Good morning. Thanks for taking our questions. Most of them have actually been answered already. But I just want to go back to the ASPs this quarter. The quarter-over-quarter dip was a bit larger than what we have seen in recent memory.

I just really wanted to see what drove that and how we should think about that in the back half of the year.

Alison Dean

Mark, that was really driven by two things, one of which was the success of the 600 series that we've been talking and then also the introduction of Braava jet, which as you know that are much lower price points that we've had in the past.

Mark Strouse

Okay. Fair enough. And then a quick follow-up to Troy's question on the gross margin. So are there any other one-time costs or anything like that associated with remote presence perhaps in early 3Q that will lay on margins?

And how should we think about, not necessarily in the back half of this year but over time, you know, corporate margins have always been 2 or 3 points below the home robot margins.

But as the business evolves into more and more of just a home robot business, should we expect that to, say kind of creep up over time kind of closer to the high 40s, low 50s range?

Alison Dean

So on your first question, we don’t expect any gross margin impact in Q3 from remote presence. We feel the adjustments and reserves we took in Q2 will be the final impact of that business.

In terms of your longer term question, we have said continuously that we don’t expect significant moves in gross margin over time. We are certainly striving for that as we implement different initiatives to improve gross margins but there are constant pressures in terms of pricing, increased Chinese labor rates et cetera that tends to counter balance a lot of the initiatives we do.

So from a modeling perspective, we don’t recommend modeling significant gross margin expansion as the business goes forward.

Mark Strouse

Got it. Okay. Thanks, Alison.

Alison Dean

You're welcome.

Operator

Our next question comes from Adam Fleck from Morningstar.

Adam Fleck

Hi, good morning. Thanks for taking my questions.

Colin Angle

Sure. Hi, Adam.

Adam Fleck

I had a follow-up question on the Braava jet commentary. Colin, you obviously noted that the product is a natural fit for the Asian market. But ahead of the European launch this year, could you maybe compare and contrast that opportunity with that geography versus what you've seen in Asia so far?

Colin Angle

So the – house size in Europe is smaller than in the United States, Hard Floors are common and Braava is a –it does a decent job and it’s a decent contributor in Europe. And so we think that Braava has a good play in Europe.

I think that this is realistically a made for Asia product with the Braava jet with the form factor, but we think that like we're doing a good job and seeing the category, the Braava category benefiting and Braava jet benefiting in North America we think we can have a nice business in Europe as well. That’s a very qualitative answer. I think the fit in Europe is better than North America, not as bulls eye as Asia.

Adam Fleck

Okay. That's really helpful. Thank you. And then maybe following up on margins as well, digging a little bit deeper into the P&L. You've discussed in the past that you are looking to leverage some of the expenses, product costs, obviously R&D, but that selling and marketing expenses will remain a pretty significant expenditure.

But just curious how you think about this on a longer-term basis. I mean, clearly, the marketing dollars are showing a really nice return on the revenue side, but are we about right at a percentage of sales here or is this a leverageable expense as well?

Colin Angle

I think that the investment in sales and marketing, we look very carefully as to what our return is. On the Roomba, we're seeing investment the ROI positive, as we build new markets, there is some investments that we allocate against building new categories and we have to get over the hump before that starts to be ROI positive at significant spending levels. And so that would be iRobot investing and building a second leg on the stool.

And so that – it’s not a simple question, and as Roomba continues to grow and accelerate to create some opportunities to build that second leg, which I think is an important part of revenue protection and risk mitigation on the company's revenue stream.

So we'll continue to view it as a – an important part of our go forward strategy. We certainly are going to continue to invest strongly in Roomba as it is ROI positive and that we roll it out internationally we view it as one of the tools we have to achieve the very exciting revenue growth targets we put out there for our next year and the year after.

Adam Fleck

Great. Thanks very much.

Colin Angle

You bet.

Operator

Our following question comes from Ben Rose from Battle Road Research.

Ben Rose

Good morning.

Colin Angle

Morning, Ben.

Ben Rose

How are you?

Colin Angle

Good.

Ben Rose

I would imagine much better after the publication…

Colin Angle

Yes, we are getting it done this quarter, so we're excited.

Ben Rose

Okay, good. A question for you regarding what we see as an emerging category, and that is for the first time sort of a trickle of remote presence robots in the home, and that is kind of roaming robots hooked up with either cameras or sensors, beginning to create what appears to be an emerging category.

Can you comment on what you're seeing in the market with regard to that, and any observation on what might be missing from some of these products or iRobot's intentions to maybe address the market?

Colin Angle

There is – that’s a fun question, I mean, there is a lot going on in the home and trying to build out the next great revenue and growth driver in the home and what is that product, its something that many companies are thinking about. We believe the next material product in the home is wet floor care and that’s why we're investing significantly in building out the Braava category which we think is the right strategy for doing that.

Longer term the static home monitoring - market in the home, so these are webcams has shown some pretty interesting growth perspective and making that static camera mobile you know, we view as being an interesting new feature that could help that remote monitoring business increase.

So certainly when we – the technology that we developed under our remote presence initiatives has positioned us well for that market. We do need to make - be very balanced in our investments and ensure that as a company iRobot doesn’t launch too many things.

We just had a conversation about sales and marketing and our bet as our next major product development initiative is around this wet floor care and we're investing our sales and marketing dollars against that and watching that grow.

But certainly we think that remote monitoring there is a play there and I don’t think any mobile camera solution has gotten a lot of traction yet. But I wouldn’t be surprised if we see that as a emerging sub-segment of the home monitoring, smart home industry. And so we certainly are keeping our eye on that.

Ben Rose

Okay. Thanks very much.

Colin Angle

So that concludes our second quarter 2016 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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