iRobot Corp (IRBT) 2017 Q2 法說會逐字稿

Good day, everyone, and welcome to the iRobot Second Quarter 2017 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.

Thank you, and good morning.

Before I introduce the iRobot management team, I would like to note that statements made on today's call that are not based on historical information are forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements.

Additional information on these risks and uncertainties can be found in our public filings with the Securities and Exchange Commission.

iRobot undertakes no obligation to update or revise these forward-looking statements, whether as a result of new information or circumstances.

During this conference call, we may 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 noncash stock compensation expense.

A reconciliation of GAAP and non-GAAP metrics can be found in financial tables at the end of our second quarter 2017 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, our outlook on the business for 2017 and the acquisition of our European distributor.

Alison Dean, Chief Financial Officer, who will review our financial results for the second quarter 2017; and Colin and Alison will also provide our financial expectations for the full year ending December 30, 2017, including the financial impact of the acquisition.

Then we'll open the call for questions.

At this point, I will turn the call over to Colin Angle.

Good morning, and thank you for joining us.

I am very excited to report that we delivered another outstanding quarter in which revenue grew 23% over Q2 last year.

Based upon this and our latest view of the second half, I'm also excited that we are increasing our core business 2017 full year revenue and profit expectations.

And last, but not least, I'm very happy to report that we announced a signed definitive agreement to acquire our largest European distributor, Robopolis.

The transaction is expected to close at the beginning of Q4 this year.

This represents another element of our strategy to gain more direct control over our go-to-market execution in the International markets.

When completed, the acquisition will extend iRobot's oversea control of market activities, including consistent global messaging that will help drive greater adoption of robotic vacuum cleaners and affirm iRobot's segment leadership.

Before discussing the acquisition of Robopolis, let's look at our second quarter results.

In Q2, total year-over-year revenue grew 23%, driven by continued momentum in The United States, where revenue grew 46% over Q2 of 2016.

For the full year, 2017, we now expect revenues in the U.S. to increase roughly 30% compared with our April estimate of 18% to 20%.

Based on our Q2 results and our outlook for the rest of 2017, we are increasing our financial expectation.

We now expect 2017 revenue of $815 to $825 million, which equates to year-over-year consumer revenue growth of 24% to 26%.

Operating income of $67 to $75 million and EPS of between $1.80 and $2 before the impact of the European distributor acquisition.

These expectations reflect our confidence that strong momentum in the U.S. and EMEA will continue and 2017 revenue growth will accelerate over 2016 rates in the international markets we serve.

In the EMEA, where second quarter revenue was up 10% from Q2 2016, strong consumer demand for iRobot products, particularly Roomba 800 and 900, fueled increased year-over-year sell-through of more than 15% over the second quarter of 2016.

Throughout Europe in the second quarter, the Roomba 900 was the #1 selling SKU.

Our full year 2017 EMEA revenue growth outlook, before any expected positive revenue impact of our Robopolis acquisition, has improved from mid-teens to high teens over 2016.

In April, we expected year-over-year growth in EMEA to be the strongest in the first and third quarters.

Given the positive expected impact of the Robopolis acquisition, which Alison will discuss in more detail, we expect strong year-over-year EMEA revenue growth in the fourth quarter as well.

Revenue in China for the second quarter increased 38% compared with Q2 2016, due to the launch of the Roomba 900 in that market and the more favorable year-over-year comparison resulting from the dynamics of last year's distributor transition that we have previously discussed.

We featured our Roomba 800 on the 6/18 selling holiday, and it performed very well.

Second quarter 2017 revenue in Japan decreased 21% from Q2 2016, as we expected.

As Alison said on last quarter's call, inventory of retailers in Japan at the end of Q1 was higher than we had typically liked to see, while we're pleased with the sell-through activity generated from our incremental S&M -- sales and marketing investments, we would like retail channel inventories to be even lower.

Similar to the actions we took in the U.S. a number of years ago, we expect leaner inventory levels to provide us strong leverage with our Japanese retailers.

And as a result, we now expect full year 2017 revenue growth in Japan of 20% to 25%.

Now I'll take you through some of the details for the second quarter and our expectation for the rest of 2017.

In the U.S., we continue to see very strong growth momentum for both iRobot and robotic vacuum cleaning segment.

Our investments in sales and marketing programs to build awareness and articulate the value proposition of our Roomba products are generating substantial results.

On 7/11, Amazon Prime Day, and the biggest selling day in Amazon's history, we sold more than twice the volume sold on Prime Day in 2016, which was twice the volume sold in 2015.

The Roomba 652 ranked #1 in robotic vacuum cleaners, #1 in all floor care and #2 in all home and kitchen for Prime Day.

That is particularly significant when considered in the context of the increasing availability of cheaper, lower quality competitive products.

Our performance on Amazon Prime Day is an important gauge for the second-half expectations in the U.S. While we expect the competitive landscape to be similar to last year's, especially at the lower end of the market, we have high confidence in our increased expectations for full year U.S. revenue growth.

With respect to domestic competition, I reported on last quarter's call, that we had filed a legal action against several well-known appliance brands and Chinese manufacturers with the International Trade Commission, ITC, in the U.S. The ITC issued a decision to hear the case, which is the first step in affirming the validity of our clients.

Since then, discovery has been ongoing.

We have been informed that a trial date has been set for March 2018.

We would expect an initial decision to be handed down in June 2018 and finalized in October 2018.

That is all the information we can provide at this time.

As we promised on our last call, we introduced the Roomba 890 and 690 Wi-Fi connected vacuuming robots in the U.S., EMEA and China, extending the benefits of cloud-connected cleaning at lower price points.

These robots give customers a variety of connected Roomba vacuum options to choose from at price points that best meet their budget and cleaning needs.

More people can enjoy the benefits of smart home solutions, like our connected Roomba vacuuming robots.

In addition, U.S. customers are able to voice activate their Wi-Fi connected Roombas through Amazon Alexa and Google Home assistant devices.

I think it's important to remind you about a component of our product development and launch strategy.

Based on feedbacks from the tens of millions of Roomba customers, we have developed a prioritization of technology-enabled features and functionality that we plan to integrate in future generations.

As we have done in the past, we will introduce new capabilities at our most premium product, our best, at highest price points.

Then through a combination of product reengineering and scale efficiencies, we cascade some of those capabilities into lower-cost better or good product offerings at lower price points, while maintaining or improving gross margins.

A good example of this is the Roomba 980 to Roomba 960 transition, by removing the carpet boost feature for the 960, we are able to offer a lower-priced, similar margin version of our premium product for those customers for whom deeper (inaudible) carpets were not a priority.

While Roomba is driving overall revenue growth this year, we continue to be pleased with the performance of our wet floor care robots, Braava and Braava jet.

We are seeing continued adoption of the category and expect high-teen growth for the year versus 2016.

Now I'd like to provide you with additional information about our announcement to acquire Robopolis, our largest European distributor.

As we matured as a company, we have assessed our global markets to identify opportunities for potential forward integration or more direct control.

As with our Japanese distributor, we felt the timing was right to acquire our largest European distributor.

We had seen continued momentum and accelerated growth in Western Europe over the past couple of quarters, as we have previously discussed.

This has been driven by a number of factors, including the improving macro environment and positive consumer sentiment as well as the implementation of iRobot's successful U.S. marketing program in this region.

The acquisition provides iRobot with an opportunity to capitalize on the market momentum, driving accelerated adoption of robotic floor cleaners.

It will further expand the company's direct control of distribution in an environment of ever-increasing competition, while ensuring global brand consistency and better serving the needs of European customers.

Robopolis has been an exclusive distributor of iRobot products since 2006, and sells across 11 markets in Western Europe through operations in Germany, Spain, France, Belgium, Austria, the Netherlands and Portugal.

EMEA is a key strategic region for iRobot, comprising approximately 25% of our 2016 consumer revenue, and sales of our robots to Robopolis represented roughly half our EMEA revenues last year.

The Robopolis team has been instrumental in establishing iRobot as the leading consumer robotics brand in Western Europe, and we look forward to them formally joining iRobot.

Turning now to China, we had very strong year-over-year growth in Q2 2017.

Demand for our premium products, the Roomba 800 during last year's holiday season and the Roomba 900 following its launch in Q2, is strong and supports our premium product and market positioning.

Sell-through doubled on the 6/18 holiday this year over 6/18 in 2016.

We did see more aggressive moves by our competition at the low end of our target market during Q2.

As a result, we are adjusting our expectations regarding growth in full year 2017 China revenue.

We now expect nominal full year 2017 revenue growth following the decline in 2016.

In Japan, where integration efforts have been underway since early this year, we are progressing well against our short- and long-term integration goals.

We have hired additional finance and accounting staff to implement policies, procedures and reporting consistent with those in the U.S., and are on track to deliver very strong year-over-year revenue growth of 20% to 25%.

With our increased expectations for the total company full year 2017 revenue, we plan to reinvest some of the incremental profitability to ensure our continued product leadership in a rapidly growing competitive marketplace and capitalize on the strong U.S. and EMEA momentum, while still increasing profit expectations.

We will make additional investments in R&D to accelerate our product road map in anticipation of new product launches in 2018.

In addition, we will make incremental sales and marketing investments to further promote our Braava family of robots, building on the momentum we have seen over the past couple of quarters.

We are firmly committed on improving profitability, as we drive adoption and revenue growth, and are pursuing a disciplined strategy of balancing our incremental investments with increased profit.

In summary, it has been an exciting first half and we are very optimistic about the outlook for the rest of the year.

In the second quarter, we saw the positive impact of our targeted marketing programs, especially in the U.S. as revenue in that market grew 46% year-over-year, driving total Q2 consumer revenue growth of 24%.

We successfully launched Roomba 890 and Roomba 690 Wi-Fi connected vacuuming robots, extending the benefits of cloud-connected cleaning at lower price points while maintaining margins and we announced the planned acquisition of our largest European distributor, which we expect will enable us to capitalize on the current market momentum and drive robotic floor care adoption in EMEA.

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

Thanks, Colin.

As I begin my comments, I'll first discuss Q2 results and full year expectations before the Robopolis acquisition, and then I will explain the impact expected from the acquisition.

We delivered record second quarter revenue, slightly ahead of our expectations.

Revenue of $183 million increased 23% from Q2 last year, driven primarily by growth in the U.S. and China.

Operating income was $4.1 million in the second quarter compared with $5.9 million in Q2 last year, and EPS was $0.27 this quarter compared with $0.17 for the same period last year.

Q2 2017 included a $0.15 tax benefit relating to the new 2017 stock compensation accounting standard.

As a reminder, given the difficulty with projecting the size and direction of the stock compensation tax impact, we communicated in Q1 that our guidance reflected our tax rate expectations prior to discrete items for future periods.

For the first half, revenue was $352 million compared with $280 million in 2016; operating income was $25.7 million compared with $11.4 million last year; EPS was $0.85 compared with $0.30 last year.

Keep in mind that 2016 first half results include Defense & Security revenue of $3 million versus 0 in the first half of 2017.

Divestiture of the Defense & Security business negatively impacted first half 2016 operating income by $5.6 million and EPS by a negative $0.11.

Operating income and earnings per share were significantly higher in the quarter than our outlook in April, driven by several factors, the largest of which where the timing of Japan impacts and the significant favorability in the Q2 effective tax rate as just discussed.

Incremental revenue, delayed sales and marketing spend, favorable gross margin and another earn out on an investment were also factors.

With respect to the Japan accounting impact, the total 2017 effect of all Japan accounting requirements is in line with our previous expectations.

However, due to the types of the final accounting adjustments, the timing of the quarterly impact will be different.

We will have longer amortization periods on some of the intangible assets.

And as a result, there was a lower impact to Q2 results, but the impact to Q3 and Q4 will be higher.

To be clear, the impact of the year is expected to be same.

As we said on our first quarter call, we adopted the new accounting standard for 2017 related to the accounting for stock compensation.

Windfalls and shortfalls are now accounted for in the quarterly effective tax rate rather than running through additional paid-in capital as they had been previously.

The impact in either direction is highly dependent on the company's stock price.

We have seen favorable discrete benefits in both Q1 and Q2 from this new accounting guidance, but the amount in Q2 was significantly higher than it was in Q1, primarily as a result of the higher stock price during the quarter.

Our Q2 effective tax rate before discrete items was 35.7%.

As Colin discussed, consumer revenue grew 24% in Q2 over last year, as we continue to see tremendous momentum at U.S. retailers.

In the U.S., net revenue from life-to-date returns adjustments was $500,000 in Q2 of 2017 compared with $1.2 million last year.

We also booked approximately $2 million of incremental price protection reserves during the quarter for potential future actions.

In EMEA, we saw continued market momentum in the second quarter resulting in year-over-year revenue growth of 10%.

On last quarter's call, we said that we expected year-over-year growth in EMEA to be the strongest in the first and third quarters and full year EMEA revenue growth of mid-teens over 2016.

As the second quarter progressed, we saw momentum driving annual growth of high teens over 2016, with similar quarterly timing prior to the impact of the Robopolis acquisition.

Year-over-year, Q2 growth of roughly 38% in China compares with a 45% revenue decline in Q2 2016, as we worked down channel inventory ahead of our transition to a new distributor model at the end of Q2 '16.

As Colin has discussed, our full year 2017 revenue growth expectations have changed due to the quickly changing competitive environment at the low end of our product offering in China.

We are now planning for a nominal year-over-year growth in China this year compared with the decline in 2016.

In Q2, revenue declined roughly 20% in Japan from Q2 '16, as expected, as we began selling through the inventory acquired from the distributor in the acquisition and allowed retail channel inventory to decline.

During the quarter, we made significant progress on reducing the retailer inventory, and we expect further reductions in Q3 and Q4.

Year-over-year revenue growth in Japan is expected to resume in the third and fourth quarters, as we expected, resulting in full year revenue growth of 20% to 25% in 2017, in part, due to the higher price points we received having eliminated the Tier in the distribution model.

As Colin mentioned, the full year revenue has been reduced a bit as we look to target more aggressive retailer inventory levels.

We are pleased that our stronger performance in the U.S. and EMEA more than offset this impact and still allow us to increase our overall revenue guidance.

Gross margin was 49.1% for the second quarter of 2017, up 2.3 points from the same quarter last year.

The gross margin was higher than we anticipated in April, primarily due to the timing and P&L classification of the final accounting impacts for the Japanese distributor acquisition that I mentioned previously.

In total, Q2 was impacted by approximately $7 million of inventory profit adjustments and amortization of intangible assets.

Not related to the acquisition, we also saw better-than-expected gross margin, driven mostly by COGS savings and regional mix, slightly offset by the incremental price protection reserves mentioned earlier.

In Q3 and Q4, we expect gross margin percent to be roughly the same level as Q2 before any impact of the Robopolis acquisition.

Q2 operating expenses were 47% of revenue compared with 43% in Q2 last year, driven largely by the acquisition of the Japanese distributor at the beginning of the quarter and additional R&D spend.

This was better than anticipated due to higher revenue and the timing of some planned expenses that were postponed until the second half of the year.

OpEx is expected to decrease as a percent of revenue in Q3 and Q4 before the impact of the Robopolis acquisition.

For the full year, we continue to expect operating expenses to total roughly 42% of revenues, consistent with the expectations we have provided throughout the year, and again, prior to the Robopolis acquisition.

We ended the quarter with $260 million in cash, up from $173 million a year ago.

Inventory at quarter end was $83 million or 81 days compared with $47 million or 54 days last year.

This increase in inventory and DII was largely driven by our Japan acquisition in Q2 and the inventory we now hold in Japan to serve this region under our direct model.

Looking forward to Q3 and Q4, we expect DII to increase further in Q3, as we build inventory for the holiday season and then come down significantly in Q4 before any impact from Robopolis.

Our full year 2017 financial expectations before the impact of the acquisition are for revenue of $815 million to $825 million, operating income of $67 million to $75 million and EPS of $1.80 to $2.

Revenue is expected to grow sequentially in the third and fourth quarters, and most significantly, in Q4.

Third quarter year-over-year growth is expected in all regions, except China, due to the difficult quarterly comparison.

As a reminder, we received an $11 million order in the third quarter of 2016 that we had expected to receive in Q4 last year.

Finally, I'd like to comment on the expected impact of the acquisition of Robopolis, which is detailed in our earnings release.

We have signed a definitive agreement to acquire the company for cash in the amount of $141 million, or approximately 0.9x the Robopolis 12-month trailing revenue ended June 2017, consistent with revenue multiples for comparable transactions and subject to customary purchase price and working capital adjustments.

We expect the acquisition to close at the beginning of Q4 2017 and to contribute incremental revenue of approximately $25 million to $35 million, all in the fourth quarter.

Our gross margin is expected to be negatively impacted by roughly 500 basis points in Q4 and 200 basis points for the full year '17, as a result of the acquisition.

We expect the acquisition to be between $0.30 to $0.45 dilutive in 2017, with the vast majority being incurred in the fourth quarter.

We have included a schedule in the earnings release showing the anticipated 2017 impact of the acquisition.

For 2018, we expect the transaction to generate incremental revenue and higher earnings per share.

I'll now turn the call back to Colin.

Thank you.

We are off to an excellent start in 2017 as we focus our efforts on extending our position as the world's leading global consumer robotics 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 floor care products.

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

With that, I will take your questions.

(Operator Instructions) And our first question comes from the line of Jim Ricchiuti with Needham & Company.

Just 2 questions.

One on the acquisition.

And then first question, just with respect to the growth you showed in the U.S. of 46%, I'm trying to reconcile the growth you showed in the U.S. as well as overall with relatively modest Roomba unit growth.

So I'm wondering, it sounds like you're seeing a pretty good mix shift toward higher end.

Should we anticipate over the balance of the year that with you guys may be refreshing the midrange that we'll see some pick up in the unit growth in that segment of the business?

Jim, we still see a pretty healthy mix across the high end and the low end in the U.S. with the introduction of some of the Wi-Fi capabilities at lower price points.

It's certainly our expectation that we could see some volume move that way.

But right now, it's still a pretty healthy mix between the 900 and 800 series and the 600 series.

Got it.

And then with respect to the acquisition, just a clarification for me.

So the balance of the revenues that you generate in EMEA, is that the bulk of that is web-based e-commerce?

No.

In Europe, we have a very healthy mix of retail bricks and mortar still as part of our business.

And other geographies not covered by Robopolis.

So as we said that it's only in about half of the countries we serve in Europe.

Okay.

That's helpful.

And Colin, I'm trying also to get a sense as to why now.

It sounds like you've been seeing pretty good performance from this distributor.

What should we anticipate?

Is this going to be an opportunity for you to drive more targeted marketing through certain of these countries with having direct control?

I think that as we have grown our capabilities to execute on predictable and successful sales and marketing operations in the U.S., we feel like there is a prize associated with more control of our channel partners and distributors overseas.

And so that -- we're seeing that happen in Japan.

And we're also optimistic that we'll be able to go and accelerate growth over what it would have been through more direct control in Robopolis.

It's an excellent team on the ground that we're acquiring.

And then this acquisition allows really a uniform strategy for branding and marketing.

And we are quite confident in our ability to benefit from that unified platform.

And our next question comes from the line of Mark Strouse with JPMorgan.

So I just wanted to start with the impact of the Robopolis acquisition.

I'm just trying to make sure I'm thinking about it right.

So when you say the 4Q revenue impact will be $25 million to $35 million.

Is that the total revenue that Robopolis will generate?

Or is that the incremental revenue that you get from eliminating the distributions here, essentially capturing their gross margin?

Yes.

That's the incremental revenue iRobot will report after having acquired them.

So it is the delta of the increased price points for overseas.

Got it.

Okay.

And then how should we think about inventory levels with Robopolis?

And maybe your lessons that you've learned from SODC?

Like, what you are doing in advance of the acquisition clearing to make sure the inventory levels are where you want them to be?

We are doing our best to observe the retail inventory levels heading into the acquisition.

We feel like we have a good handle on what's currently there.

And obviously, we have a good handle on what we will be selling in over the next quarter.

But it remains an area that we have to be very vigilant on.

And we will be watching it quite closely as we head towards the close of the transaction at the beginning of Q4.

We do have some structural advantages in how some of the inventory was held in Japan made it more difficult to get our arms around levels.

There's a lot more visibility in EMEA.

And so that -- again, certainly, we learned from the Japanese acquisition that, that's something to look out for.

So we'll benefit from that.

But also structurally it's a more transparent organization.

Okay.

And then just one more quick one, if I can.

For SODC, the charges, the negative impacted gross margin in 2Q, was obviously less than we were expecting.

And so that's been rolling forward into 3Q and 4Q.

Can you talk about what the gross margin would be in the second half of the year without the impact of SODC?

I think people are just trying to get a sense of how gross margin should look heading into 2018.

I guess what I would tell you on that Mark is that throughout Q2, 3 and 4, we are going to record about $30 million of impacts due to the acquisition, most of which will be beyond us after we exit 2017, if that helps give you a little modeling color.

And what was that number in 2Q, if you don't mind?

That was -- I'm giving you a total for -- the $13 million was a total for the 3 quarters, 2, 3 and 4, and about $7 million of that was in Q2.

And our next question comes from the line of Troy Jensen with Piper Jaffray.

First of all, just wanted to say congrats on the inflection and the execution, very well done.

Thank you.

So a quick -- just another one on Robopolis here.

So if I'm doing my math right, it sounds like they did about $155 million in revenues last year, based on 8x or 9x sales?

So the figure that I gave you, Troy, was the trailing 12 months that ended June 2017.

Okay, perfect.

I guess what I'm trying to get to -- okay, I guess -- and then you said that -- I guess if I do the math -- I maybe off a little bit here, but it looks like about $80 million of their sales is iRobot-related products.

Because I guess I'm assuming they sell other products also outside of just the Roombas?

So I guess...

No, no.

Yes, it's predominantly iRobot product that they sell.

Okay.

It's well more north of half their sales would be iRobot products?

Yes.

Yes.

It's probably over 90%.

Yes.

99%.

They have a few other sales, which are not material to the transaction.

So -- or to their business.

Got you.

So they are nearly -- right.

Completely understood.

All right.

And then just quickly on China.

Can you just talk about the dynamics there?

I mean, to guide kind of flattish, given what's going on in the U.S. and Europe.

So if you just can talk about competitive dynamics in U.S.?

What's happening there transpiring in U.S. or Europe?

Sure.

I mean, it's early in the year.

What -- there is -- sales in China are dominated by the 6/18 sale day and then 11/11 and 12/12.

The 6/18 went very well for us.

But we have seen a lot of entrant or growth in the low end of that market.

And so that -- and we've also seen some macros in China slowing the overall growth of that market.

And so we're pleased with our performance on 6/18.

We think we have strong validation that our premium strategy is successful and continuing to be successful.

But we're bringing our numbers down a bit because of some of the competition in overall current macros in the country.

So kind of what's the risk of those agent companies coming into the U.S.?

Have you seen them trying to make an entrance yet?

Are they kind of just exclusively in that geography?

I mean, I think that we've seen some Chinese products coming into the U.S. and other markets.

So it's certainly at the low end as the category continues to explosively grow.

We are going to see a developing low-end opportunity for companies that want to engage in that strategy.

So I think that, that's a natural market dynamic.

Our premium strategy for the mid-to-high-end robot vacuums is something we're very, very confident in our position, confident in the R&D spendability to continue to create new things in the marketplace to extend our leadership.

So I think this is a natural process that's going to happen as the category grows.

And our next question comes from the line of Ben Rose with Battle Road Research.

Just a clarification in the script regarding the performance on Amazon Prime Day.

Could you clarify whether that was a doubling in unit volume or dollar volume?

No, the doubling in unit volume.

Okay.

And also, just to clarify on Europe for the one-half of Europe that is not covered by Robopolis, is that served primarily through other distributors?

Yes.

Exclusively through other distributors.

And then the online is something that iRobot manages.

Okay.

And then with regard to the $35 million incremental impact from the Robopolis acquisition in the fourth quarter, is -- the way to think about that is, assuming kind of a similar sales trajectory that you are experiencing now in Europe that you would essentially be generating an incremental $35 million each quarter going into 2018?

So Ben, the way to think about that is, as we said in the call, we've been seeing increased momentum happening in Europe, despite before the acquisition.

So we had increased our expectations from mid-teens growth to high-teen growth for the region.

And then all of the sales that we will conduct in Q4, assuming this close is at the beginning of Q4, will generate incremental revenue.

And we have a range of impact of $25 million to $35 million from that incremental revenue.

Okay.

And sorry, if I may, just one final question.

Regarding the legal action against some of these potentially infringing products, are you having any direct discussions with those companies?

Or is everything at this point essentially being handled through the ITC?

It is being handled through the ITC.

And our next question comes from the line of Bobby Burleson with Canaccord Genuity.

This is Jon DeCourcey on for Bobby.

Just 2 questions for you.

First up, the $4 million in unbilled receivables on the balance sheet, can you kind of explain what these are related to for the quarter?

Yes.

This is something unique to Japan.

As we've taken over this business, there is a -- it had, in the past, a practice of shipping some products and billing them afterwards.

And so that balance is completely related to that previous practice that Japan has had.

Okay.

And then a second question is related to the acquisition.

Approximately what was the dollar amount for Robopolis in the second quarter?

And then what is baked into the third quarter guidance, given that it wont close until the fourth quarter, likely?

So you need to think about Robopolis as part of our overall European guidance prior to close.

So again, as I said earlier, our expectations is that our EMEA business, of which Robopolis represents roughly 50%, we expect the EMEA business to grow in the high teens for full year '17.

And then we expect an incremental $25 million to $35 million of revenue when the transaction closes at the beginning of Q2.

Just as I talked to you through the quarterly guidance as well, Q4 will be -- Q3 and Q4 will be very strong quarters within the full year of EMEA.

Q1 was a very strong quarter.

Q2 had 10% growth.

And then we expect strong growth in Q3 and Q4, and Q4 in particular, because of the acquisition.

Okay.

And then actually one final question is just related to China on the lower end competitions.

Are there any competitors in particular that standout relative to the group that you are particularly worried about or that are gaining specific share?

The top 2 competitors at the lower end are a company called Xiaomi and a company called ECOVACS.

They represent the bulk of the growth and revenue down at the low end.

And our next question comes from the line of Jon Fisher with Dougherty & Company.

On the EMEA, the other half of the revenues, how many distributors is that other half spread out over?

It's probably a handful, 5, 6, maybe.

Okay.

And then on the sales and marketing spend, I guess, how much was moved from Q2 to the second half?

And I guess, why was -- did that occur?

We're talking maybe a couple of million dollars.

And then, we reassessed our plans for execution as the year unfolds and take different opportunities that might be coming towards us.

So we just really go with the signals we are getting from the business and determine when and where to best deploy those sales and marketing dollars.

Okay.

And the earn out benefit that you mentioned, was that along a similar $1 million to $2 million benefit?

Are you talking about the earn out from the investment?

Yes.

So that's in nonoperating income, and that was a little over $1 million.

Okay.

And then just on the performance in non-EMEA International market, the significant step down in China growth expectations from 30% to flattish and even Japan at the beginning of the year, inclusive of the acquisition, was originally targeted at 30%.

And this is kind of the second time this year that there is kind of been a step down in numbers in Japan overall since the distributor.

What is your overall confidence level in being able to grow the business outside of normal western mature markets?

Because kind of right now this year is playing out as predominantly a U.S.-driven and EMEA picking up tighter performance.

And just kind of wondering what the ability of the business is to be able to grow outside of these more mature economies as penetration rates increase in these economies?

Sure.

First, just on to your last point, talking about -- using the word mature and robots in the same sentence doesn't make a lot of sense to do.

We're still at the early stages as far as market penetration goes in both the United States and the rest of the world.

And so that the growth that we're seeing is not going to decrease based on market saturation anytime soon.

We've done a lot of work showing that we have tremendous headway.

As you think about sort of non-U.

S., non-European markets, you do need to think market-by-market.

In Japan, our sell-through is very strong.

And so that when we acquired SODC, there were some inventory issues and strategic issues that needed to be addressed, and we're working through them.

And we feel like the growth prospects in Japan are consistent with what we're seeing in Europe.

And we have great confidence that we'll see a nice return to growth supporting our overall long-term financial model in Japan shortly.

So that's very, very good.

In China, I think that we're buoyed by our performance on the 6/18 major selling day.

Certainly, there is some, as I said earlier, some macro concerns that are going to temper the overall growth of the category.

And then a little bit of realigning as far as who are the major players in what segment in the category in China, with the lower price points being at least temporarily impacted by some very aggressive moves by Xiaomi and ECOVACS, as mentioned before.

But the premium segment is definitely alive and well in China.

And over time, we feel like we could see growth in line with market growth in the segments that we're strongest in, in China.

So I think that there is a little more froth that we're working through in China and Japan, 2 very different markets.

And I think we've got the right people in place.

And we're taking very disciplined approach to building the foundation that's required for long-term growth in those markets.

And just 2 quick questions, one on China and one on Europe.

On your China comment, when you look at your segmentation in that market, is that segment the upper end of the market?

So the China GDP is growing 6.5% to 7.5%.

Is that segment of the market growing in line or faster than overall China GDP growth?

The overall growth in the robot vacuuming cleaning market, as I said, has slowed down slightly.

And again, period-by-period, you see different shifts.

In the most recent period, we've seen activity down at the low end, growth at the low end, more strong than at the high end.

But we've -- that data excludes the 3 major selling days in China.

So it's very premature to make any strong conclusion on that front.

Okay.

And then the last question.

On Robopolis, when you acquired your Japanese distributor, you put in your own management team and leadership team.

Will you be leaving the Robopolis management team in place?

Or are you going to execute personnel changes there also?

The Robo team that exists today will be coming to iRobot, and the key leaders for each of those regions will remain with us.

And our next question comes from the line of Frank Camma with Sidoti.

This is Frank (inaudible) on for Frank Camma.

I had a couple of things.

First, on the Japan distributor, can you break up the Q2 EPS impact versus what it will be the rest of the year?

I will just reiterate what I said earlier, Frank.

So we had about $7 million of impact in Q2 due to the various accounting items that we needed to book.

And we expect in total for Q2, 3 and 4 for that amount to be about $13 million.

Okay.

And then on Amazon Prime, you guys called out the 652, obviously, it did tremendously well.

But I don't see that in the website.

Is that something that you expect a lot of sales going forward?

Or is that more of a discontinued?

And then additionally, I know you have a lot of incremental overall from Amazon Prime, but do you see any of that strength as may be pull-forward into the quarter from the back half of the year?

So the 652 is a unique SKU that we developed for prime day, and it's part of the special offer that we create for that event.

So you wouldn't see it.

Okay.

Great.

And then I just had one last thing.

The Braava jet, can you break out may be how it did versus expectations both in U.S. and internationally?

What I can tell you is that, what we did in Q2 for the category of Braava and Braava jet was per our expectations.

I don't have specific international numbers in front of me here today.

But year-to-date, that's been performing as we had anticipated.

Okay.

That concludes our second quarter 2017 earnings call.

We appreciate your support and look forward to talking with you again in October to discuss our Q3 results.

That concludes the call.

Participants may now disconnect.