iRobot Corp (IRBT) 2015 Q4 法說會逐字稿

Good day, everyone, and welcome to the iRobot fourth-quarter and full-year 2015 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 with iRobot Investor Relations.

Please go ahead.

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, included adjusted EBITDA, which we define as earnings before interest, taxes, depreciation, amortization, 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 fourth-quarter 2015 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 2015, as well as our outlook on the business for 2016.

Alison Dean, Chief Financial Officer, will review our financial results for the fourth quarter of full year 2015 and Colin and Alison will also provide our financial expectations for the first quarter ending April 2, 2016 and FY16.

Then we'll open the call for questions.

At this point I'll turn the call over to Colin Angle.

Good morning and thank you for joining us.

2015 was another great year for iRobot.

Last night we reported a record Q4 that resulted in full-year revenue and EPS that exceeded our expectations.

These results were driven by strategic investments we made throughout the year in domestic demand generation, China go to market improvements, technology supporting connectivity, navigation and mapping, advancement in product quality, exploring adjacent home robot market and supporting demand generation efforts of our overseas partners.

We also took steps to become more focused on the large home market and to fuel future growth.

We created better nuanced messaging of Roomba, driving sell through and further adoption.

Successfully launched our first connected robot Roomba using vSLAM navigation, to dynamically create and update a map.

We relocated R&D resources from the next generation Remote Presence platform to home opportunities.

We began to reinvigorate overseas home robot growth and we identified potential acquirers for our defense and security business.

As a result of these efforts, home robot revenue grew more than 30% in the fourth quarter, driven by sales in the United States and China which we're up 46% and more than 70% respectively over Q4 in 2014.

Likewise, our D&S business grew more than 25% in the quarter, driving full year revenue to $55 million and a return to pro forma fully allocated profitability for the first time in many years.

For the full-year 2015, Company revenue was up 11% to $617 million, earnings per share were $1.47, including a positive $0.05 impact of the investment tax credit, and adjusted EBITDA was $92 million or 15% of revenue.

We delivered this strong performance in the face of significant currency headwinds, the economic collapse of Russia, recession in Japan, our largest international market, and increasing competition.

During the year, we took the steps required to become more focused on our well-established and substantial market opportunity at home by identifying a buyer for our defense and security business.

On February 4, 2016, after a very thorough process we announced the anticipated sale of the business to Arlington Capital Partners for consideration of up to $45 million.

Upon completion, this divestiture not only creates an additional opportunity to return capital to shareholders, but also allows the remainder of the business to become razor-focus on the much larger opportunity the home market provides.

In 2016 our financial performance will be driven by our home robot business.

It is expected to grow 12% to 13% as we expand worldwide distribution of Roomba 980, tap further into the growing market in China, and build our wet floor care business.

To execute our 2016 plan and achieve our three-year financial target we need to continue to strategically invest in a number of areas to strengthen our marketing capabilities globally and accelerate worldwide consumer adoption of Roomba in order to maintain our market-leading position in robot vacuum cleaners.

We need to better position ourselves in China to capture an even larger share of the rapidly growing market for robot floor care.

We will develop our wet floor care business to generate a material secondary revenue stream; scale the infrastructure required to support connected products; explore, develop and grow adjacent non-floor care home robot products that can generate meaningful diversified revenue streams; and make continued operational improvements that can reduce product and operating costs.

For 2016 we expect revenue of $630 million to $642 million, EPS of $1.20 to $1.40, and adjusted EBITDA of $80 million to $90 million.

Expectations include the impact of one quarter of defense and security stub period and one-time investment divestiture cost, most of which will be recognized in Q1.

Growth is expected to be driven by the expanded worldwide consumer adoption of Roomba, supported by targeted marketing programs.

Wider geographic distribution of the Roomba 980, accelerated growth of wet floor care products, regional growth in particular in China and the United States, and a new product introduction in the first half of the year.

Now I will take you through some of the details of 2015 and our expectations for 2016.

Our home robot business had a solid year, despite the significant overseas macroeconomic headwinds.

Exceptional domestic growth of 46% in Q4 and 25% for the full year over 2014, was driven by investments in ad media, national promotions, launch of the Roomba 980 and the addition of Target as a new channel in the fourth quarter.

Our Roomba marketing program was highly successful in the United States.

We saw significant return on investments.

Sell through for example at our top five retailers in Q4 was up more than 70% over Q4 2014, validating our marketing strategy.

We ran similar programs in Q2 over Mother's Day and Father's Day with equally positive results, but wanted to further evaluate them for Q4 before declaring victory.

We are highly confident that we have the right formula to export overseas to accelerate growth in those markets.

During 2016 we will focus our marketing efforts on the Japanese market, we have already kicked off several initiatives.

If we are successful, we should start seeing impact on demand generation by the end of the year.

In 2015, wet floor care revenue grew roughly 5%, but within that category Braava grew more than 30% over 2014.

This growth is due largely Braava's successful adoption in Japan and China where the product was first introduced in 2014.

The predominately hard floor surfaces in the region, coupled with the need for daily mopping particularly in China, make the product ideal for those households.

We continue to see growth opportunities for the wet floor care market worldwide as we improve its position and better articulate its value proposition.

In 2016 we will invest in optimizing the position and go to market strategy of this category by reaching out to existing Roomba customers; creating advertising to build awareness of the products; and functional differentiations from Roomba, educating the US retail in-store sales personnel about how to promote the category.

Growth in China was more than 70% year over year in 2015.

We first entered that market in 2012 and have continued to evolve our go to market strategy.

In 2015 e-commerce was the growth driver, especially on the 11/11/15 and 12/12/15 holidays.

We have said that we thought China could grow to be our second largest market and are confident that with 2016 investment to focus on further accelerating growth in the e-commerce channel, we can more quickly reach that goal.

We do plan to launch a new home robot product in the first half of the year, but I'm not going to provide any additional information on timing or product category at this time.

Regionally, we expect the United States and APAC to deliver mid-high teen growth, and EMEA to deliver mid single-digit growth in 2016.

Japan's strong fourth quarter followed three quarters of year-over-year declines during 2015.

We are cautiously optimistic that the positive trend will continue in 2016, resulting in mid single-digit growth for the year.

APAC as a region is expected to grow in the mid high-teens, up from 2% in 2015 driven by another year of strong growth in China.

In EMEA we were cautiously optimistic about a return to growth, with a mid-single digit revenue increase in 2016, from a flat year-over-year performance in 2015.

We expect Russia to grow off a much reduced base and Western Europe countries to post gains.

Turning now to our defense and security business, Q4 and full year results were in line with our expectations with revenue up 21% year-over-year in 2015.

D&S reported its first growth since 2011.

As we announced on February 4, 2016, we are divesting this business in a transaction expected to close in the next few months.

The business opportunity and the leadership team are strong, making it the right time for this transaction to occur.

While worldwide macros still present a challenging backdrop in the near term, we are excited that on a global basis the home business is growing significantly.

Looking out over a three year horizon, we anticipate home robot revenue growth to accelerate from 12% to 13% in 2016, to high-teen annual growth by 2018.

The business has developed from one in which we established the robot vacuum cleaner category, became the market leader with the first mover advantage and increased ASPs as we incorporated features and functionality through technology.

Going forward we will maintain Roomba's market leadership while positioning it as a key component into the connected home.

We must also build a secondary material revenue stream which we expect to do with our wet floor care products.

As we execute on these strategies in 2016 we will expect a small decline in adjusted EBITDA margin as we invest in these revenue growth initiatives, but expect a return to mid-teen adjusted EBITDA margins in 2017 and 2018.

In 2015 we began to further monetize our navigation technology through the introduction of Roomba 980 with visual simultaneous localization and mapping, or vSLAM.

2016 we are divesting our defense and security business and curtailing R&D investments in the next generation remote presence platform in order to solidify iRobot's position as a leader in diversified home robots, and to focus on key technologies with a focus on software that allow our robots to understand the homes in which they operate.

It is our intent to continue investing in these critical technologies and the economic opportunities that they unlock.

There's a lot to be excited about.

We had great results in 2015.

Q4 was a record quarter for us and was driven from the successful investments we made leading up to 2015, and during the year we responded well to the changing market environment.

We expect even higher revenue growth in 2016, driven by a strong performance again in US and China with Japan and EMEA turning the corner.

And as we exit the defense and security business, we are more focused.

Our confidence in the future is demonstrated by a decision to make significant capital allocation choices in 2016 that will drive future revenue diversification for our home business, and further revenue growth acceleration in 2017, 2018 and beyond.

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

Thanks, Colin.

Our fourth-quarter and full-year revenue and EPS results exceeded expectations due to better than anticipated domestic home robot performance.

Adjusted EBITDA was in line with our expectations.

Revenue of $206 million increased 29% from Q4 last year, driven by growth in home robot revenue.

EPS was $0.65 for the quarter compared with $0.31 in Q4 2014.

And investment tax credit positively impacted 2015 EPS by $0.05 and 2014 EPS by $0.04.

Q4 adjusted EBITDA was $35 million or 15% of revenue, compared with $20 million or 12% last year.

We also recorded a fourth-quarter gain on investment of $0.06 per share or $3 million in pretax income from the sale of an investment we made several years ago.

We noted this on last quarter's call and increased our expectations accordingly in October.

Domestic home robot revenue growth was 46% for Q4 and 25% for the year, reflecting the positive impact of our marketing program and successful launch of Roomba 980, our first connected product.

Q4 domestic revenue is partially impacted by a favorable adjustment to the product return accrual of $1.9 million.

This compares with a $1.1 million favorable adjustment in 2014.

International revenue grew 2% for the full year, with EMEA flat year over year and APAC up 2%.

Defense and security revenue of $31 million in Q4 was up 26% year over year as expected.

Roughly 65% of this quarterly revenue is from PLR and the balance from robot sales.

For the total company, gross margin was 46% for the fourth quarter and 47% for the full year 2015.

Q4 operating expenses were 35% of revenue, down from 40% in Q4 last year.

We said on our Q3 earnings call that we would curtail sales and marketing spending in Japan in Q4.

That contributed to lower overall sales and marketing expenses for the quarter as a percent of revenue.

For the full year, sales and marketing was 16% of total revenue compared with 15% in prior years, consistent with our expectations.

Keep in mind the higher full-year expense reflects the overseas investments we made earlier in the year to support our international distributors.

OpEx for the full year was 37%, unchanged from last year.

EBITDA for the quarter was $35 million compared with $20 million last year, with full 2015 results of $92 million or 15% compared with $80 million or 14% last year.

EPS in Q4 was $0.65 and $1.47 for the full year.

Full-year EPS was favorably impacted by $0.05 from the announcement of the 2015 investment tax credit in late December.

We ended the year with $213 million in cash, down from $220 million a year ago.

During the year we repurchased 1.26 million shares of our stock for $37 million under our buyback programs.

2015 year-end inventory was $62 million or 51 days, compared with $48 million or 53 days last year.

The improvement in year-over-year DII was due to significantly higher Q4 home robot revenue.

Now I'd like to provide you with additional detail on some of the underlying assumptions for our Q1 and full-year 2016 financial expectations.

The outlook for our home robot business remains strong with growth drivers identified for the next couple of years.

We expect full-year revenue of $630 million to $642 million, comprised primarily of home robot revenue.

These expectations assumes the divestiture closes in Q1 2016.

As in the past several years, revenue will be more heavily weighted in the second half of the year when we expect to deliver more than 50% of the year's revenue.

While we provide quarterly expectations, we manage our business from a full year perspective.

Keep in mind that it is difficult to predict precise order timing between quarters and especially between Q3 and Q4.

We anticipate total company Q1 2016 revenue to be up 6% to 14% year over year to $125 million to $135 million, including a quarter of D&S revenue.

After Q1 we expect home revenue to increase sequentially throughout 2016 as it did in 2015.

As Colin discussed, home robots growth will be driven by full-year distribution of the Roomba 980, growth in China and promotion of our wet floor care products.

Overall we expect home robot revenue to grow 12% to 13% in 2016, fueled by growth in the United States and China.

We expect Q1 EPS of negative $0.03 to positive $0.04 and full-year EPS of $1.20 to $1.40.

Adjusted EBITDA in Q1 is expected to be $8 million to $11 million and for the full year is expected to be $80 million to $90 million.

But Q1 and full year expectations include the impact of one quarter of a D&S stub period and divestiture costs, expected to be incurred primarily in Q1, in total approximately $0.10 to $0.11 of EPS loss for the quarter.

Note that for the full year 2015 and 2016 we have included a schedule in the earnings release showing comparable year-over-year data without D&S to help you model the impact of the divestiture.

When we provide Q1 2016 results in April we will also provide a comparable view of Q1 2015 results.

Given the investments outlined by Colin, we expect OpEx to increase to between 38% to 39% of revenue for the full year, before beginning to decline to lower levels in 2017 and 2018.

For 2016 we are also assuming gross margin of 47% to 48%, stock comp expense of roughly $16 million, depreciation and amortization expense of approximately $14 million and a diluted share count of approximately 28.2 million shares after the execution of the additional share repurchases.

We are estimating a tax rate of 30% for 2016 inclusive of an investment tax credit.

Building from our 2016 expectations we are establishing our financial targets through 2018.

Home robot revenue growth of 12% to 13% in 2016 is expected to accelerate annually to high teens by 2018.

Our EPS of $1.20 to $1.40 for 2016 is expected to grow more than 25% in 2017 and 2018, as we anniversary one-time costs associated with D&S and the divestiture.

Lever operating expense and continue to offset growth in share count through buybacks.

And 2016 adjusted EBITDA margins of 13% to 14% are expected to return to 14% to 15% levels in 2017 and 2018.

When we announced the planned divestiture of the D&S business, we also announced a $65 million increase to our current share repurchase initiative, partially funded from the expected proceeds, bringing the total 2016 program to more than $100 million.

We are evaluating several vehicles for this incremental share repurchase, including an accelerated share repurchase program.

We intend to initiate the incremental program in Q1 in conjunction with deal closing.

This initiative, coupled with our previous return of capital, effectively balances our interest to return cash to shareholders while maintaining sufficient cash to operate the business and make appropriate investments in acquisitions.

I'll now turn the call back to Colin.

Thank you.

We expect our home robot business to deliver strong financial performance in 2016 that will in turn fund critical investments in future technologies and marketing to solidify our position as the leader in diversified home robots, as well as to drive long-term shareholder value.

With that we will take your questions.

We will now begin the question-and-answer session

(Operator instructions)

Jim Ricchiuti from Needham & Company.

Jim, your line is open.

Just a couple of questions.

First of all, what you are seeing in Japan, it sounds like saw a little bit of growth in the quarter.

Can you qualify that?

I don't know if there's any way to look at it on a constant currency basis, just in terms of is this a modest recovery in this market?

I would view it as a modest recovery at this point, Jim, certainly Q4 was a good quarter in Japan.

We are still being sort of cautiously optimistic about this being the start of a return to growth for 2016, but we were definitely pleased with what we saw happen in that market in Q4.

And in EMEA what was the growth rate there, can you help us, any color ex currency how that's progressing?

Overall for us it was a flat region, year on year.

Again, based on what we saw coming out of the year in Q4, we are expecting to return to growth, albeit somewhat moderate, sort of in the mid-single digits for 2016.

Jim, you do have to unpack it a little bit with the dramatic decline in Russia.

Which, Western Europe was more healthy and certainly the dramatic currency devaluations which impacted the region at the beginning of the year also significantly reduced the effective growth rate in dollars.

So, all in it was flat.

We see stabilization and as I mentioned albeit off a dramatically lower base, a return to some modest growth in Russia.

So we feel like we took a lot of different hits in Europe as well as in Japan last year.

But now we have established a new baseline which we can grow from.

And operating expense, last year you talked about making some additional investments to support your international distributors.

How should we think of that activity in 2016, and also if you could just maybe give us a little bit of color in terms of how we should think about R&D?

Jim, last year in 2015, we definitely did invest some OpEx to help our overseas distributors, EMEA during the year.

Japan primarily at the beginning of the year.

As we said, we weren't having the return we expected at the end of the year so we curtailed that investment.

We do expect to continue to invest to assist our overseas distributors in 2016.

We're going to do it a little differently in that we are going to leverage some of the components of the marketing campaigns that we ran so successfully in the US.

And tailor those to the international markets overseas.

We definitely plan to continue to support the distributors next year, but in a slightly different fashion than we have done it in 2015.

From a R&D perspective as a percent of revenue we think will we maintain fairly constant investment in R&D as a percent of revenue going into 2016, but all of that R&D focus will now be on the home business products and technologies.

Are you assuming any meaningful revenue from the new product in your guidance?

We are.

It's less than 5% of our revenue, but we are expecting to be actively selling the product.

Thank you.

You bet.

Josephine Millward, The Benchmark Company.

Good morning Colin, good morning Alison, congratulations on a great Q4.

Thank you.

Colin, can you share with us your growth strategy in China, how do you plan to better position iRobot in light of the broad economic slowdown and what's your growth assumption in China?

Sure.

We think that long-term China is a tremendous market that could in the relatively short-term become our largest market outside of the United States, and in the slightly longer term could surpass the United States as our largest single market.

With that in mind, we are making real investments in establishing an iRobot on the ground operation in China.

That's one of the investment items that are driving our 2016 P&L.

We expect that entity to focus primarily on eCommerce.

That is the most rapidly growing path to market in China, and as we said, we think it's going to be one of the two largest growth drivers alongside of North America in 2016 performance, as well as contributing strongly to the -- our long-term financial model of high-teen revenue growth in 2017 and 2018.

This is a key investment area for us.

We will start to enjoy the benefits of the investments in 2016, but won't fully enjoy the scale and the growth engine that China we believe can be until 2017 and 2018.

It's true that as you point out, the macros in China are not as strong as they were a year ago.

But as we've seen in other emerging markets for robotic floor care, we believe that we are currently at a level where the overall macros have less of an impact on overall growth than they would in a more mature market like Europe and Japan.

So certainly those macros will slow us down somewhat, but we still think there's dramatic growth opportunities in front of us.

Can you given us a sense of revenue contribution from China last year, was there roughly $30 million, 40 million?

We don't specifically quantify that, Josephine.

It was definitely a significant grower at more than 70% over the prior year and it's becoming a much more substantial driver of performance in APAC overall.

Can you compare the size of China relative to Japan, just to give us a sense of how big China is roughly?

Japan is still the dominant country by far within the APAC region, but China is closing the gap for sure.

Thank you.

Troy Jensen.

Congrats on the nice fourth quarter.

Thank you very much.

It was an achievement and demonstrated that this growth strategy that we're articulating and the investments that we're making and undertaking 2016 have great potential, so appreciate that.

Colin, quickly for you and maybe Alison can jump in on this, can you discuss the number of headcount reductions or the amount of operating expense reductions related to the sale of the defense and security business?

And to that point, can you tell us what the Company's return on invested capital has been prior to selling it and what it should be going forward?

Troy, in terms of headcount, you should be thinking probably approximately 100 people leaving iRobot related to the divestiture.

And in our additional schedule that we added to the press release, we quantified the impact of the D&S divestiture on many fronts, revenue gross margin and OpEx for you.

For example, in 2015 for that schedule we were showing about $20 million of OpEx associated with the D&S business as a rule of thumb.

From a return on invested capital perspective, for the last several years we have made basically 1 point improvement in our ROIC, exiting this year at about 11%.

Two other questions for me.

Are you also doing a strategic assessment on the remote telepresence business?

We did during the year and as I mentioned in the script we found that the needs and opportunity related with the home surpassed the remote presence assessment of opportunity.

And so we wholesale moved our engineering resources dedicated to the remote presence into the investments required to ensure a smooth and industry-leading growth in the connected dimension of our home business.

Into which we're making significant investments as well as in the new product pipeline for homes.

We've really dramatically reduced the level of investment and the remote presence endeavors at this point are really looking more on a business development side at partnerships.

But from an engineering and material cash investment or capital investment perspective it is no longer significant.

And the last question, I know you don't want to talk about what the new product is, but can you tell us when was the last time you refreshed Braava and Scooba and how often do you refresh those products?

When we made the acquisition of Evolution Robotics, over the year following we went and refreshed that Braava line.

And certainly we're excited by its performance as I mentioned earlier, particularly in Asia.

I think that for Roomba, we're on a -- we'll have annual refreshes that are minor, and in every two or three years have a major refresh is sort of our historical cadence.

On the wet floor care, we think that the biggest near-term opportunity is actually helping to position that product adjacent to Roomba because we think there's still significant opportunities and a lot of confusion at retail as to what are these products and why are they different.

If you go into many retail stores, you will see Braava sort of next to the robot vacuum cleaners, and some cases even labeled as a robot vacuum cleaner.

So we think that there are tremendous opportunities to get our go to market strategy correct for wet floor care products and so that you should expect to see a lot of attention played to this second leg on the home revenue stool.

Thank you and good luck in 2016.

Thank you very much.

Bobby Burleson, your line is open.

Thanks for taking my question.

I just wanted to follow-up on the remote presence.

You talked about reallocating R&D resources to home and I'm wondering whether or not there's any incremental accretive to earnings savings that you're getting there and if all of that headcount is being reallocated, or some of it's actually being reduced?

It is not being reduced.

It is keeping within the, our [IR&D] budget for 2016 which on a percentage basis is flat to 2015.

As I tried to convey in the script, the company is, we're going for it.

We believe that the growth opportunities in home are immense and accelerating, and crucial to achieving those growth rates is both product leadership within the Roomba category and the establishment of the second leg on the stool.

And within Roomba, that means connectivity.

We are certainly putting a lot of incremental investment in the connectivity dimension of Roomba.

In order to -- if you look at the competitive landscape, the real players are connected.

And given our market share, we are scaling the connected robot business at a very, very fast rate.

So that we're pushing at sort of the [bleeding] edge of a lot of different back-office technologies for connected product, and are also making investments to ensure that the information that the robots are collecting is being done in a way that we can leverage in the future for the performance of the robot.

And also as part of an important element of the connected home.

These are major investments.

We think that they are fundamental to our long-term growth strategy.

And I think that the technologies that were developed for the remote presence and the skill set that was represented by the engineers in the remote presence business unit were exactly the skill sets and talents that we needed to effect what I just described.

And also alluded to in the call.

Looking at non-floor care product opportunities which will be a little further away in our product road map, and certainly some of the technology that we worked at higher price points in the commercial world can be redeployed and pointed at the home as well.

So we took the opportunity to maintain that skill base very opportunistically, while staying within our IR&D budget.

Great.

And just a follow on, now that you're more laser focused on home robots with the D&S divestiture and the shift in R&D resources away from next gen remote presence, are there other areas besides headcount where you get some OpEx optimization or R&D optimization, simply because you've got basically one platform now or one broader platform now that you're focusing the spending on?

Yes.

I think that as the clock rolls forward, you will see IR&D continue to grow but it will not grow as a percentage of revenue and so there will be some leverage there.

We think that there are opportunities on product cost to leverage some additional scale and certainly as our robots become more significantly value enabled by software, incremental features can also allow us to drive some improved margin on that front.

So those are two areas that we certainly do see leverage coming from in the future.

So, sales and marketing as we go forward will continue to be a significant part of our expenditure, but the other expenses as a percent of revenue, we think we can drive down.

Interesting.

You guys talked about 12% to 13% home robot growth this year and I'm wondering if Japan is a main, continuing caution around what you are seeing in Japan, even though you had a good quarter there.

Is that the main reason for not guiding a mid-teens for home robot this year?

We've got -- Japan certainly has risk associated with it and we think that EMEA has some risk associated with it as well.

And so that North America and China great, but I think there's a little bit of wait and see as far as how strong EMEA and Japan will be.

Okay.

Thank you.

You bet.

Mark Strouse.

Thanks.

Good morning.

Thanks for taking our questions.

Good morning.

Just thinking about the three-year targets and the revenue acceleration in 2017 and 2018, can you kind of break that down into how much of that is expected from new products versus better positioning, better marketing, versus potentially easing macro headwinds in the out years?

The short answer is all of the above.

What we did in Q4 in North America is what gives us confidence to embark on what I think is a pretty bold growth strategy for the Company.

We know and have developed a demand generation engine that we proved out in 2015.

The investments that we make in 2016, a significant portion of those is effectively exporting the ability to execute on that program in other countries.

So that has to do with our relationships with our distributors.

It has to do with people on the ground in China, as I described.

It has to do with developing and putting the creative on air.

That is a -- something that we will be doing in 2016.

Diversification of revenue is another element of our long-term growth acceleration plans and so that is going to be most visibly manifested in 2016 with what we're doing in the wet category.

As I mentioned, we think this is a nascent market, particularly in Asia where hard floor care is the default standard.

So that even driving vacuuming growth is asking, particularly in China, customers to embrace a different methodology of cleaning their floors.

They are much more used to mopping and so that Braava as a robot mop is a smaller leap than in some cases buying an upright push vacuum cleaner.

So we think that the investments we are making in driving sales and our organizational's sophistication in Asia will benefit wet floor care.

We've also talked about we've got a new product coming, and in the past have talked about other new products that are coming down the pipeline.

So certainly parts of driving revenue growth in 2017, 2018 and beyond will happen from adding product categories to our home lineup.

Again, that is accelerated by this focusing of the business on the home that we have successfully executed in the last three, four months.

And, of course, macroeconomic headwinds it would be -- in 2015, it seemed like we weren't catching any breaks with the currency devaluation and the collapse of Russia.

Certainly as the world economy stabilizes, even somewhat, we think we can enjoy some benefit from that.

That's really helpful.

Thanks, Colin.

And just thinking about the product road map over time, do you think there is potential for further increases in ASP or where the 980 is, do you think that is where new Roomba ASPs would be?

And then they would just be more feature rich?

And then vice versa on the Braava on the lower end, do you think there's a need or potentially, I guess, offset the margin impact with the volumes if you brought the Braava ASPs down?

To your first question, what I can say is there is not an example of a competitive product in the robot vacuum cleaning space having much success over $1000.

So it may be that, that is the practical ceiling for ASPs and what we're going to see is a functional improvements in the $300, $400 to $1000 range in the category.

And so that I don't expect a lot of growth driven simply by the increase in ASPs of Roomba.

As it relates to Braava, again, the ASPs as a metric for iRobot is going to become less relevant because we're expecting growth in the wet floor care category which cares with it lower ASPs, higher volumes but similar margin structures.

Got it.

Okay.

That was actually my next question so I'm all set.

Thank you very much.

You bet.

Adam Fleck.

Thanks for taking my question.

Hey, Adam.

I had a few follow-up questions on the D&S divestiture.

First of all, I appreciate the commentary in the press release on the margin and revenue impact from the business, but is there any specific cash flow items we should be aware of, any inventory impact or capital spending needs that go along with that business?

Capital, D&S wasn't an overly capital intensive business, the primary capital spend for D&S was tooling related to new products which we had not done a lot of in the last few years.

Inventory, I don't expect the go forward business DII situation to change much.

It might go up a little bit upon the divestiture of D&S.

Certainly the overall value of the inventory we're carrying will go down.

We will be able to give a lot more color on that at the end of Q1 when the deal is actually closed.

Okay.

Thanks.

And then when you look at the intellectual property in that business, are there any key patents in the sale that go along with D&S, particularly any that are used on the home side from a navigation perspective or anything like that?

The IP, we were able to affect in a relatively clean fashion.

The IP that went with the deal was IP that was exclusively used on the D&S side.

There are some patents that D&S used and the home business used which stayed with iRobot and there was a license given -- a use license given to defense.

And to ensure that we didn't make any mistakes we gave ourselves at iRobot a license to the IP that went with D&S as well.

So that certainly iRobot comes out of the transaction no worse from an IP perspective, and yet we were able to give the newco, the divested entity, the access to the IP it needs to succeed.

That's great to hear.

Thanks.

And then finally I know we talked last week of the $45 million consideration, about $15 million or so was an incentive driven payment based on the revenue performance this year.

Can you share with us targets from a revenue perspective and your confidence that the business can hit those?

Well the earn out will start coming into effect at revenue over $60 million.

As you know, we did $55 million in that business this year.

The earn out is complete.

The full $15 million gets earned at a revenue number just under $70 million.

So that's the range of revenue that needs to be achieved for return on that earn out payment.

Okay.

Great.

Thank you.

Marc Estigarribia.

Your line is open.

Thank you.

Thanks for the opportunity and congratulations on the quarter.

Thank you.

Just want to take a step back and look at some of the themes out there, Colin, with regards to IoT, the smart home, getting into the privacy and security.

Just want to get your update on where we in that and with regards to how iRobot is tackling the privacy and security issues and questions which are not a problem for earlier adapters, but is it holding back the functionality offerings for the home robot?

So the overarching philosophy that we have relative to privacy on our home robots is lets be cautious.

The 980 robot as it's currently architected, all of the information collected stays resident on the robot.

It is our expectation to slowly allow some information to flow up to the cloud, but it will be done with the permission of the owner, because that owner actually wants to enjoy the benefit of that information going up in the cloud.

So if you want to see, for example, a picture of what the Roomba did, you would enable the robot to go and send that information up.

So we're working to be cautious.

We have -- our partners in the back office associated with the connectivity of the robot are best in class and we think that the value of the information collected by the robot in 2016 is 100% focused on making the Roomba clean and operate more effectively.

And we will slowly move into a domain where we're able to think about and expand the value and potential consumer base for the value of that connectivity.

Thank you.

And with regards to functionality, is there new upgrades and functionalities for the home robot?

In your opinion, maybe we can just take a step back in terms of what you're thinking at the outlook of the market, but should we expect voice activated technology, on the same line of Alexa or Siri with the Roomba?

Or are there other [detail or] color on the connectivity functionalities that we could expect this year by iRobot?

The interface to the robot is something that is an active area of development and we try a lot of things.

I think that we've made a -- I believe that the cell phone is not the remote control, but it is something that is a great way to configure preferences for your connected home device.

So an example of that is using the mobile app to schedule your Roomba, should lead to a far larger percentage of Roomba customers actually scheduling their Roomba, which leads to better customer satisfaction and a more complete delivery on the promise of robot vacuuming.

The question of is there a voice interface gets at what is the right way of controlling the smart home.

And so that very quickly now we're talking about the future of the smart home and what is iRobot's role in it.

A lot of that has yet to be public if we talked about it and played out.

But I would say that the core value that iRobot brings to a smart home has to do with the creation of maps.

The idea that in order for objects within the home that are connected to kind of do the right thing, they need to know where they are.

And having a mapping mobile robot able to go and discover and capture that information ultimately is going to be something that iRobot has IP, market presence and scale to deliver.

And those are all significant barriers that I think we uniquely possess.

As we talk about what is iRobot's home, or role in the connected home of the future, it's going to build off that very defensible, very exciting positioning.

Thank you.

Just a little more color if you can please on the one-time impacts of the divestiture cost, and maybe just a little more color on what the divestiture costs are please?

So we've sized the actual divestiture cost to be $0.05 and those are primarily related to fees associated with bankers, lawyers, accountants, et cetera.

Great.

And how should we look at the investment tax credit?

Could we get a little bit more color there going forward?

Was just a one time in the fourth quarter?

How should we model that going forward for 2016?

Thank you.

Our guidance assumes the investment tax credit will continue, which was announced with its confirmation for 2015.

So it was a permanent tax credit, so it's now permanently part of our guidance.

Thank you very much.

You're welcome.

Okay.

I think that we've exhausted our questions so that concludes our fourth-quarter and full-year 2015 earnings call.

We appreciate your support.

And look forward to talking with you again in April to discuss our Q1 results.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.