iRobot Corp (IRBT) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to the iRobot Fourth Quarter and Full Year 2017 Financial Results Conference Call. This call is being recorded.

At this time, for opening remarks and introduction, I would now 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'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 many 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, gain on business acquisition, restructuring expenses, net intellectual property litigation expenses and noncash stock compensation expense.

A reconciliation of GAAP and non-GAAP metric is provided in the financial tables at the end of the fourth quarter and full year 2017 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 2017 as well as our outlook on the business for 2018. Alison Dean, Chief Financial Officer, will review our financial results for the fourth quarter and full year 2017. Colin and Alison will also provide financial expectations for fiscal 2018 and our 3-year financial targets for 2018 through 2020. 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. 2017, our first full year as a consumer-only focused business was a fantastic one for iRobot. Our highly successful strategic decision to focus on the consumer as our customer drove 2017 revenue growth that was 4x 2016 revenue growth. And we've only just begun.

We increased our expectations 3x during 2017 and our Q4 and full year 2017 revenue exceeded even those increased expectations. Record Q4 revenue was driven by very strong sales in The United States and in EMEA, as the overall category continued to grow at an accelerating rate. Higher revenue, coupled with continued improvement in gross margin, allowed us to increase investment in research and development and sales and marketing to capitalize on our momentum, while returning additional profit to shareholders and setting a strong foundation for 2018 and beyond.

During the year, we maintained unambiguous global product and brand leadership in the robotic vacuum cleaner category; we acquired 2 of our major distributors in Japan and Europe, giving us more direct control of 75% of our global revenue; we initiated marketing efforts to drive awareness of our mopping products; and we continued to extend connectivity across more of our products, allowing us to offer more robots with mapping capabilities and cloud connectivity at more accessible price points, growing our role in the emerging smart home.

These achievements resulted in full year 2017 revenue growth of 34%, operating income of $73 million or 8% of revenue and earnings per share of $1.77, including a $0.41 negative impact from the tax law change.

In 2018, we expect to drive revenue growth of 19% to 22% through deeper household penetration of Roomba globally, deliver double-digit growth in the U.S. and overseas, expand gross margin due to distributor acquisitions, drive greater global iRobot brand consistency and awareness, continue investment in innovation to extend our technology and product leadership in the category and deliver several new products in the second half of the year.

What are the factors supporting our confidence in our revenue growth rate? While, global household penetration of robot vacuum cleaners is still extremely low in the single digits, in the U.S., where penetration is highest, it is still at roughly 11%. That landscape provides us with a tremendous opportunity for sustained growth.

iRobot's relentless focus on building robots that deliver world-leading system performance for our customers, not just features listed on a box, combined with our strong technology and product pipelines, position us for continued category leadership.

Strong economic conditions worldwide are fueling overall global growth and positive consumer sentiment. We have demonstrated that in regions, where we have run marketing programs to educate prospective customers about Roomba, we have increased our market share. Our recent distributor acquisitions enabled us to extend our strategic marketing programs in Japan and many Western European countries.

The robot vacuum cleaning category grew at more than 25% in 2017, and we expect category growth to continue as we and competitors invest to drive awareness. We have seen retailers in The United States embracing and promoting the category through national advertising programs featuring robot vacuum cleaners, allocating increased shelf space and investing in high-visibility displays.

In addition to these growth drivers for Roomba, we see a tremendous opportunity to drive adoption of Braava products through campaigns targeted at our millions of Roomba customers.

In 2018, we expect to cross the $1 billion revenue threshold delivering $1.05 billion to $1.08 billion in revenue, which is year-over-year growth of 19% to 20%, operating income of $86 million to $96 million and EPS of $2.10 to $2.35. Continued investment in both sales and marketing and R&D is essential to meet 2018 expectations and successfully achieve our new 3-year financial targets.

Now I'll take you through some of the highlights of 2017 and our business expectations for 2018. Our initial view last February was that we would grow 2017 revenue 17% to 19%, excluding the impact of any acquisitions over the previous year. As the year progressed, our outlook for the U.S. and EMEA markets became more bullish despite increased competition, while addressing a rapidly shifting landscape in China. The final result was full year organic revenue growth that far exceeded our initial expectations along with the incremental revenue we achieved through the acquisitions.

Each year, we go through a very comprehensive, bottom-up analysis with input from retailers and distributors, while keeping in mind that any planned product introductions and transitions. As the category grows and retail dynamics change, we see new indicators develop that provide us with better visibility into potential consumer demand. The most significant indicator in the past 2 years was Amazon Prime Day in July, which has become an important metric for retailers planning their orders for the year-end holiday season in The United States.

We provide a range of financial expectations at the top and bottom lines intended to capture the opportunities and risks we see at different times of the year. Our view in February can change throughout the year as it did in 2017.

Following the exceptional performance we delivered in the fourth quarter, we are more confident than ever that the outlook for robotic vacuum cleaner category growth remains strong. At the Consumer Electronics Show, CES, in January of this year, we met U.S. retailers and overseas distributors to review their perspective -- their respective iRobot performance and outlook. We've been doing this for years, and I have never heard such outright enthusiasm about robotic vacuum cleaners. They understand the category is expanding. During the holidays, the RVC segment was a major driver of store traffic at retailers.

While our continued investment in growing the category and brand through national TV campaigns clearly help drive awareness, major retailers including Target, Amazon, Best Buy and Walmart all featured iRobot in their national commercials and campaigns leading up to the holidays. Roomba is also currently being shown in Verizon's connected home TV ad for their Fios Internet service. In addition, new competition invested in TV advertising in the U.S. The end result, market data shows robotic vacuum cleaner 2017 growth in The United States for products that cost more than $200 up more than 40% compared with year-over-year category growth of 20% in 2016.

Growth of the category will enable us to continue to grow even as competitors enter the market. Based on the U.S. market momentum, we expect to drive U.S. revenue growth in the low 20s in 2018. We are often asked what differentiates our products from others because they all look alike. While it's true that competitors have copied our external demand -- design and their products look like Roomba on the outside, that is where the similarities end.

On the inside, our 900 series Roomba robots are sophisticated high-tech mobile mapping devices with more than 1 million lines of code, making them smarter by combining iRobot's proprietary iAdapt navigation with visual localization and Dirt Detect, it systematically and efficiently navigates an entire level of home, recharging as needed until the job is done.

They are simpler. The iRobot HOME App enables cleaning and scheduling conveniently, anytime, anywhere. And they are better cleaning. Roomba's AeroForce Cleaning System with dual self-cleaning debris extractors provide leading performance without the need to maintain the brushes.

We will continue to drive connectivity down through our product lines as well as continue our technology development of persistent mapping. In Q1 of 2017, we pushed out functionality to the users through our app that enables them to see a completed map of the cleaned area once the Roomba robot is finished cleaning.

Our maps not only improve the cleaning efficiency of the robot, but also help skeptics become believers by allowing them to see that Roomba is really vacuuming the area it supposed to. We've talked about the importance of persistent mapping that would allow the user to segment the mapping to specific rooms as well as enabling our robots to work together.

These are just a couple of the critical capabilities we are working to develop that we believe will improve cleaning efficiency and autonomy, and thus drive further adoption.

It is essential that we not cede our hard-won global market leadership to competitors who recognize this enormous opportunity. We will continue focusing on investment more deeply into the most important emerging technologies and integrate them into products that deliver the features and functionality that meet our customers’ needs as well as investing in patents to protect that technology.

Likewise, we must continue to invest in targeted marketing programs to drive awareness. Robotic vacuum cleaner household penetration in the U.S. is roughly 14 million households or 11%, and this is the most deeply penetrated market. Capitalizing on holiday momentum, where we were the clear category winter -- winner and building on it in 2018, will help us reach the next segment of immediately addressable 25 million U.S. households.

While U.S. revenue grew substantially in 2017, our overseas revenue grew at an impressive 28%, driven by 46% year-over-year growth in EMEA and 25% in Japan.

Our acquisition of Robopolis, our largest European distributor, at the beginning of the fourth quarter enabled us to implement our successful U.S. marketing programs in parts of Europe, going into the important holiday season and deliver results that exceeded our expectations. Going forward, our efforts in that region will focus on improving our brand awareness across Europe, and the adoption of robotic vacuum cleaners is growing. The RVC category itself grew roughly 22% in 2017, up from roughly 19% in 2016.

In 2018, we expect EMEA to grow 25% to 30% over that record 2017 growth. 3 quarters after acquiring our distributor in Japan, our largest market outside The United States, we have completed its integration and fully implemented channel inventory management practices consistent with those in The United States. We exited the year with historically low channel inventory levels and improved retailer relationships. We are optimistic about the -- further extending of our targeted marketing programs in this region and are driving consistent double-digit revenue growth.

And finally, China. China represented less than 5% of total company revenue in 2017 as competition, particularly at the low end of premium RVC segment, remained intense and we don't see that changing materially in the next few years. We're continuing to execute against our premium brand strategy, albeit at a scaled back level. With real-time market information available through our office in Shanghai, we continue to modify our go-to-market model, but at this point, we don't see China as a primary growth driver in the next 3 years.

In 2017, Braava family revenue grew 26% compared -- comprised roughly 9% of total company revenue. We continue to see a growth opportunity for the wet floor care market, as we improve its positioning and better articulate its value proposition. In Q4 2017, we launched our first ever Braava national television program in the U.S. following a very positive reaction to our limited television rollout in 2016. And Braava family revenue grew 65% in 2017 over full year 2016.

We have promoted this category unevenly across the globe. However, we have made strong advertising investments as we did in Q4 of 2017 in the U.S., and demand has been very strong. We began our television campaigns for Roomba first in the U.S., where we have been selling the product the longest and have the strongest brand recognition and market share. Since then we have selectively expanded them into overseas markets with positive results. We are confident that putting additional investments to support Braava promotion globally will help drive awareness and adoption of this category too.

As I mentioned, we plan to launch several new products in the second half of 2018. As with all our new products, I will not provide any additional details about the products or timing of the launch other than to say, we expect 2018 revenue contribution of roughly 20% to 25% and further strengthening our RVC leadership.

This year, we kick off a new set of 3-year financial targets for 2018 through 2020, inclusive of the distributor acquisitions we made in 2017. These will replace those we set for 2016 through 2018, which did not include any acquisitions.

Over the 3-year period, we expect annual revenue growth of roughly 20%, gross margin in the range of 50% to 51% and operating margin growing to 10% by 2020.

This is critical at this point in the accelerating adoption of the category that we maintain unambiguous brand and product leadership in robot vacuum cleaners through the continued focus investment in R&D as well as expanding our successful U.S. sales and marketing programs into overseas regions. We must also continue to build on our original -- our initial success in wet floor care products and not let the competition get a foothold in this category.

There is a lot to be excited about. 2017 was a critical year for iRobot as the first full year focused solely on developing and delivering products for the home. We delivered outstanding financial results for the year, while successfully executing the acquisition of 2 major distributors in key markets and extending our control over 75% of our global revenue.

In 2018, we plan to capitalize on the incremental investments we made in 2017, with the introduction of new products in the second half of the year. We expect double-digit revenue growth in the U.S. and overseas as we're continuing to evolve and extend our proven sales and marketing initiatives in overseas markets. In The United States, we expect continued strong sales following our 40-plus percent growth in 2017.

I will 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, operating income and EPS exceeded expectations before the impact of tax reform due to better-than-anticipated performance in the U.S. and EMEA.

Record quarterly revenue of $327 million increased 54% from Q4 last year.

Operating income for Q4 was $23 million compared with $19 million for Q4 2016. EPS was $0.16 for the quarter compared with $0.49 in Q4 2016. Q4 2017 EPS included a negative $0.41 impact from the new tax reform, which included the remeasurement of our deferred tax assets and a provisional repatriation toll charge totaling roughly $12 million.

In addition, quarterly EPS included approximately $0.03 of 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 financial expectations at the time reflected our tax rate expectations prior to discrete items for future periods.

Our Q4 effective tax rate before discrete items was 34%. In 2018, we expect the tax law change to result in an effective tax rate before discrete items of between 25% and 27%.

Revenue growth of 54% for Q4 and 34% for the year reflects the positive impacts of our marketing programs, acquisition of Robopolis at the beginning of the fourth quarter and our successful positioning against competitors. International revenue grew 28% for the full year, with EMEA growing 46%, Japan up 25% and China down 27%.

We are very pleased with our 2 acquisitions and their performance to date. Incremental revenue was ahead of our expectations of $25 million to $35 million for Robopolis, and in line with the $10 million to $12 million expected contribution from SODC. Our full year 2017 organic growth rate was roughly 25%. Because both acquired companies have been fully consolidated into iRobot, 2018 expectations and results will be provided in total.

Gross margin was 47% for the fourth quarter compared with 50% in Q4 2016 and 49% for full year 2017. On our Q3 call, we said that we expected gross margin to be roughly 500 basis points lower in Q4 than Q3, primarily due to the impact of the Robopolis acquisition, and the Robopolis impact was in line with that. The quarter-on-quarter expected decline from Robopolis accounting adjustments was partially offset by favorability from higher revenue and COGS improvements, driven by product cost reductions and lower warranty expense across the global business.

Q4 operating expenses were 40% of revenue, down from 41% in Q4 last year due to higher revenue. For the full year, OpEx was 41% of revenue compared with 40% last year, consistent with the low end of our range. Sales and marketing was 18% of 2017 revenue, up from 17% last year and included approximately 150 new employees from our distributor acquisitions as well as the first-time national marketing campaigns for Braava and the China brand program.

Full year EPS was $1.77 compared with $1.48 in 2016. As a result of the Tax Reform Act, we took a discrete charge of $12 million for the remeasurement of our net deferred tax assets and a provisional repatriation toll charge in the fourth quarter, negatively impacting Q4 and full year EPS at $0.41. Full year 2017 EPS was also negatively impacted by approximately $0.30 from the year 1 SODC accounting adjustments, which will not impact 2018.

In addition, the negative effect in 2017 from the acquired inventory from Robopolis will also not carry into 2018. This will not translate into year-on-year gross margin improvement, however, due to an increased amortization of Robopolis intangibles in 2018.

We ended the year with $166 million in cash, down from $254 million a year ago, reflecting net cash payments of $149 million to acquire the distributors. We plan to rebuild our cash position to more than $200 million by the end of 2018.

2017 year-end inventory was $107 million or 56 days compared with $50 million or 42 days last year, driven by the acquisition and the need to hold inventory for direct to retail sales in Japan and more than 50% of EMEA. Due to the structural change in our business model, you should expect DII to be approximately 100 days plus or minus on average in 2018 with our typical quarterly fluctuations.

Now I'd like to provide you with additional detail and some of the underlying assumptions for our full year 2018 financial expectations and our 3-year targets. As we have previously discussed, we manage our business from a full year perspective. Likewise, our 2018 financial expectation should be viewed on a full year basis as quarterly year-over-year revenue growth rates will vary greatly by region due to a number of factors, including the impact of acquisitions we made in 2017.

For 2018, we expect full year revenue of $1.05 billion to $1.08 billion, which is year-over-year growth of 19% to 22%. As in the past several years, we expect revenue will be more heavily weighted in the second half of the year when we expect to deliver roughly 60% of this year's revenue. In addition to the traditional second-half seasonality of the business, 2018 will be positively impacted by the inclusion of incremental revenue from the European acquisition through the third quarter. Our revenue expectations contemplate yen and euro exchange rates roughly in line with the current rates, plus or minus 5%.

We expect double-digit year-over-year growth in each quarter and for revenue to increase sequentially throughout 2018 as it did in 2017. The year-over-year growth rate is expected to be the highest in Q1 as U.S. retailers replenish inventory following a record Q4. We will also benefit from revenue due to the inclusion of the 2 distributors in the first quarter. Profitability will be the lowest in Q2 as our sales and marketing expense increases over Q1 to support Q2's seasonal selling.

We expect our gross margin to be 50% to 51%, 1 to 2 percentage points up from 2017, which included the negative impact of acquisition-related intangible asset amortization and lower margin from acquired inventory, the latter of which is completely behind us coming into 2018.

We sold through all the acquired inventory from both SODC and Robopolis as expected during 2017. Beginning in 2018, we will recognize margin on products sold to retailers in Japan and the Robopolis countries on a basis consistent with our direct to retailer margins in the U.S.

As previously discussed, however, this positive impact on margins will be partially offset by the amortization of intangible assets associated with the Robo acquisition, which will continue through 2019. These charges are front-end loaded and will be higher in 2018 than 2019.

We expect full year OpEx to increase 100 basis points to 42% of revenue, as we proactively reinvest the incremental gross margin provided by the forward integration, primarily into higher sales and marketing spend. Higher sales and marketing expense in 2018 includes full year of expense associated with our 2 acquisitions as well as marketing expenses associated with our 2018 product launches.

Additionally, we will make continued investments in the Roomba and Braava awareness campaigns to drive continued worldwide household adoption. Our R&D investment is expected to remain at 13% of revenue, as we continue to invest in innovation to ensure Roomba maintains its market-leading position, while we develop new product offerings for the future.

We expect full year operating income of $86 million to $96 million and EPS of $2.10 to $2.35.

We are also assuming stock comp expense of roughly $24 million, depreciation and amortization expense of approximately $27 million, a diluted share count of approximately 30 million shares and capital expenditures of approximately $30 million driven largely by tooling for new products, facility expansions and the related leasehold improvements and system implementations for our newly acquired entities.

We are estimating a tax rate before discrete items of between 25% and 27% for 2018 reflecting the new tax law.

Building from our 2017 results, we are providing our 3-year financial targets through 2020 as follows: 20% revenue CAGR, gross margin in the range of 50% to 51% and operating margin growing to 10% by 2020.

Global revenue is expected to be driven primarily by further adoption and greater household penetration of Roomba as well as adoption of our Braava family of mopping robots. We believe at this critical point in the accelerating adoption of household robots, driving higher top line growth and maintaining dominant segment share is essential.

I'll now turn the call back to Colin.

We have a tremendous opportunity to drive 20% revenue growth over the next 3 years due to single-digit global household penetration of robot vacuum cleaners, our successful marketing programs that have driven consistent global segment share of more than 60%, the global RVC category grew more than 25% in 2017 and we expect category growth to continue as we and competitors invest to drive awareness. Retailers in the U.S. embracing and promoting the category and are delivering world-leading performance products.

We expect global business to deliver a strong financial performance in 2018 that will in turn fund critical investments in future technology and marketing to further solidify our position as the unambiguous leader in robotic floor care and our increasing importance as a strategic player in the smart home to drive enhanced long-term shareholder value.

With that, we will take your questions.

(Operator Instructions) And our first question comes from Frank Camma with Sidoti.

First question has to do just to confirm here, you ended the year basically with no acquired -- I think you said this already, but just want to make sure. So you ended with no acquired inventory from the distributors that you acquired last year, correct?

That's right.

Okay. Good. And so -- and I totally understand the amortization issue, you went through that pretty well, and how that negatively affects your gross margin. I guess, the question I have is, how much -- even if you can't say quantitatively, but just qualitatively, don't you pick up margin from what the distributor would have captured? I guess is where I'm going with this, just through the gross margin from what they would have sold the product, that would have, sort of, kind of, been my assumption?

Yes, that's right.

Okay. But it doesn't seem -- I guess, if you net out the amortization, it doesn't seem that to show -- I guess, one of you can -- it's probably too long to go into it right now, but if you can kind of take us through qualitatively why that wouldn't be given the size of the acquisitions, which seem pretty sizable? Like why that will count at the amortization?

Yes. So in '18, we're still facing about $15 million of amortization for the Robopolis intangible. So that certainly offsetting some of the natural margin expansion you'd expect from those acquisitions.

Okay. So $15 million. And I think you gave an estimate of total D&A of $27 million for the year. But that doesn't go up a lot year-over-year, right, for '17 to '18 because you ended -- am I -- I'm sorry, it was -- what was it -- $25 million for full year '17, correct?

I lost the point of your question, sorry. Could you repeat it?

Well, I'm trying to figure out the delta of D&A year-over-year, meaning, like it didn't seem like there is a lot more amortization in '18 than there was in '17 from your estimates. Because it says in the prepared...

Well, from -- the SODC amortization is behind us in 2017. So the 2018 amortization is only from Robopolis, and it's reflected in our gross margin. There is a small amount in OpEx, but it's minimal.

Okay. I'll move on from that. I guess, the other question is more of a strategy question, which is, obviously, I think I wasn't the only one that was a little bit surprised about the operating margin guidance given, I mean, its significant organic revenue growth here. And in all respect to the amortization issue, it seems like you should still like expand on that and it seems like part of that clearly is the R&D spend. And the strategy question goes to, I mean, you're already the dominant player in RVC, and I know you want to stay the dominant player, but where -- I guess, where does it go to a point where the economic returns starts to lap? So what I mean by that is, do consumers -- your product is much better than it was just a couple of years ago. At what point does it -- I guess, in your mind Colin, this is big picture question, does the payoff start to -- if -- I think you know where I'm going with this.

Sure. And I think that -- first, I want to reiterate that iRobot is committed to its profitable growth strategy showing improving top line and bottom line, but at this movement in time with the market accelerating in its growth and competitive pressure coming into the market, we made a choice to double down on ensuring we had adequate dry powder to drive that top line growth. And so that while some of our analyst investors may be looking for more bottom-line growth. Hopefully, we excited and impressed the -- our investor base with a growth rate above expectation. This is a moment in time where over the next 3 years, the true winners in the consumer robot industry are going to be determined for the next decade. And the leadership position that we have, the growth opportunities in front of us are ones that we think are worthy of pursuit. We're not at a moment where industries are consolidating. We're at a moment where the market is accelerating. And it's important to get out there that the world of consumer robotics is much larger than just vacuum. I mentioned in the...

Okay. That's fair point. You -- I mean, I guess, where you're going with that is the $130 million or wherever you would -- this would apply your spending is well beyond just robotic vacuums. That was really what I was trying to -- given that you didn't announce any other product categories, sorts but like that's a long...

We said we're coming out with several new products in 2018. But -- and I'm happy to repeat that statement, but won't be adding any more color to that statement today.

And our next question comes from Asiya Merchant with Citigroup.

I guess, my question was just kind of, if you can walk us through the guidance. Obviously, you delivered stellar organic growth of 25% organically. And your Robopolis acquisition seem to have blown past to your prior expectations, just doing the math. Now if we look out into the 2018, the guidance is kind of 19% to 22%, which includes a full -- I guess, 3-quarter benefits from a sizable acquisition that you've just completed. It seems rather conservative. Is that a fair way to characterize it? I know you guys typically guide conservatively. I know the history of beating that on the top line. So if you can just walk us through what's the -- through that guidance a little bit more, that would be helpful? And may be -- and if you can help me understand if it's just characterized as prudently conservative?

Sure. I mean, I would start by saying this is the most aggressive revenue guidance the company has ever given. We're very optimistic about where we can take this, and we think that is reflected in the guidance. When you go into a new year, there is a lot of uncertainty. Sometimes it goes with us, sometimes it goes against. And so we truly believe that the guidance given is our best estimate as to what we think is going to happen given what we know. But it's early in the year, and there is many months to go with. And again, we crossed the $1 billion threshold. And so that growing by constant percentages get harder every year. But I think I would definitely try to convey that we are very bullish on growth that we felt we were leaning forward in giving this guidance and feel like the market is still at the beginnings of a growth run for robot vacuum cleaning alone, much less other products that can layer on in the future.

Fair enough. And then the cash -- CapEx, sorry. The CapEx guidance seems quite hefty relative to your 2017 or I think even relative to your past at $30 million. Can you just help us understand what's going there? I mean, I know you mentioned qualitatively in your prepared remarks, but if you can just help us understand, and what's -- and the impact that you will have probably to D&A going forward?

Sure. So it's definitely an increase of what we've seen in the recent years. The main driver of the increase is for tooling, as I mentioned. We've also had some facility expansions in part related to our acquisitions. And we're doing some leasehold improvements for that as well. So it is a spike, I would say, in our capital expenditure. I wouldn't expect rates in the outer years to remain at that level.

And so I would back that up -- in 2018, we are integrating a lot of -- the 2 distributors. We certainly hope the G&A can be a source of leverage on a go-forward basis.

And our next question comes from Jim Ricchiuti from Needham & Company.

Colin, question on the R&D spend. Obviously, it's meaningfully -- it's quite a bit higher year-over-year. And what I'm wondering is, if there is a meaningfully larger component of your planned R&D spend for '18 tied directly to new products planned for this year versus prior years?

So we have a very structured strategy for capital allocation, particularly as it relates to R&D where we bucket the dollars going into our core market, meaning primarily Roomba and our new products that we're developing to bring to market as well. And so those ratios have not changed. Certainly, the sophistication that is going into our Roomba product line to ensure it stays ahead of the competition has increased. Our R&D percentage as a company remains unchanged from prior years and relative to our peer group. And we definitely want to make sure that we're in line with R&D spend of peers. We're definitely in middle of the pack. And so that we don't think we're out of line on that R&D. And again, given this moment in time in the rapidly growing consumer robot industry, we feel like the opportunities are there in front of us to be reducing to practice the critical technologies, which are going to define differentiation over the next decade as well as ensuring that our product pipeline is there to pursue not just the Roomba product line, but others as well. I think we've taken aboard feedback that everyone would be quite happy if there were more legs on the stool for revenue driven -- driving than just Roomba. So I think that we are operating within our structured allocation and operating at a percentage in line with our peer group and are very excited, I think more importantly are very excited by the opportunity that the investors were making -- are going to deliver to the company from the perspective of maintaining our premium leadership in the Roomba category as well as growing new categories.

Okay. That's helpful. Colin, it sounds like you're also suggesting that over the next couple of years, not to put words in your mouth, but maybe you're anticipating some shakeout in terms of the overall competitive landscape in the robotic vacuum cleaner market. Is that fair to say?

Yes. I mean, I think that we are in this hyper growth phase or the rapid growth phase, where typically shakeout occurs. The -- what it takes to be competitive at the mid-to-upper price points becomes harder and they're typically sort of 2 to 3 companies that come out controlling the dominant share. And so that it's critical as we look at our strategy to ensure that we are one of the winners and that we maintain the leadership, because again it's -- we're at the beginning of this -- of the consumer robot industry, not at the commoditization moment in time in consumer robots, right? We have one great success in robot vacuum cleaning with a long line of high potential opportunities waiting for their turn to get the type of investment and potential that Roomba has seen in the marketplace. It's not just by iRobot, but by competitors as well. And so the 3-year targets, while maintaining this focus on profitable growth are absolutely skewed toward revenue growth over quite as aggressive OI growth. Although we did want to make sure that our OI percentage in our 3-year target was increasing over time.

Okay. That's helpful. Can I ask one question -- one other question on Braava. I'm wondering how to think about Braava for this year. On the one hand, the unit growth was somewhat modest last year. You showed good solid revenue growth, but how should we think about Braava? You seem like you're getting some good results from sales and marketing, but are you satisfied with the overall performance? And what should we anticipate in 2018?

Sure. I mean -- this is a great question. As we build new categories, they -- because they are new to the world, they do require actual investment to drive awareness and adoption. And well, Brahma is not a new product for iRobot, although we -- the current lineup has the Braava jet in it, which is relatively new. What is new is actually putting material amounts of marketing dollars again. And again, we're very disciplined in how -- and mathematical and how we approach investing. When you start investing in a new product, the ROI is negative then it goes to a point where it's OI dollars neutral, but OI percentage dilutive. And then as we've done largely with Roomba gotten it to the point where we invest at a level where we are OI percentage accretive to the overall business. And we have to take Braava through that same disciplined investment growth curve. And with some of our upside in 2017, we are able to go and put a real U.S. nationwide advertising program against Braava. And we're very pleased with the response. So that's why I highlighted the 65% Braava growth in The United States. And so that -- as we think about 2018, I think you will see iRobot putting a more systematic program against Braava instead of a more opportunistic program that we, at the end of the day, implemented against Braava, while we were driving the improved marketing programs against Roomba. And so that a bit of a shift where we're putting some of our investment dollars against having a true portfolio of strategy as opposed to driving Roomba's growth at all cost. So there is a bit of a change in focus. And I think you will see continued performance of Braava in the U.S. and then to the extent that we put dollars against Braava outside The United States, you'll see some acceleration there as well.

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

So I was just curious, Colin, if we think about Europe or EMEA, what the differences are in terms of the competitive landscape versus North America? I understand you guys are working to promote more brand awareness in Europe. But is there anything different in terms of the players that are -- that you are going up against, the way the channel works, et cetera that we should be thinking about?

Sure. The EMEA has typically had many more competitive brands in it. And this has been consistent for the last 5, 7 years. I think that the IT situation and it being iRobot's home turf was -- created a lot of qualitative barriers for foreign companies to come in and try to compete against us. And Europe became kind of the battlegrounds, where other competitive products looking to go and test themselves against iRobot was played out. There also was a area where because of our distribution strategy, the sheer magnitude of the dollars invest against awareness were significantly less than in The United States. So the acquisition of Robopolis and our continued global focus on IT capture and generation certainly is part of our strategy to improve our competitiveness in EMEA. And we think it's always been a great market for us. And these actions that we took last year with Robo and the actions that from an IT strategy initiated many years ago, but there is a long-lead time on that. It's leading to increasing numbers of patents being issued in Europe is all meant to shore up our European strategy. So as it rests today, we have strong market leadership continued in Europe. It is a few points lower than the North America to be sure, but we still have clear leadership there. And I think that we'll expect it will continue to be a region where competitive robots come in earlier than they come into North America. So this battleground region characterization, I think, will certainly continue. And iRobot is taking actions to ensure that our competitive set in Europe continues to strengthen, so that we can continue to lead, if that's clear at all, but they are different.

Great. And then just looking at the U.S., wondering whether or not you're seeing given that inflection in demand, any changes in the ASP dynamics, any pricing pressure, anything that's shifting here in 2018 versus what you saw in 2016, 2017?

Sure. I think that there is absolutely an increased competitive pressure. And we work to try to protect ourselves against us and given us -- giving ourselves some optionality as to how do we address competitive pressure that is embedded in the guidance that we've given. We see the low end of the robot vacuum cleaning segment growing, where there are an increasing number of entrants down sort of below the 299 price points that we have traditionally played at. And iRobot certainly intends to continue to aggressively compete throughout the market. So the dynamics are changing. We are seeing the market accelerate because of competitive investment in advertising the market as well as a mainstreaming of robot vacuum cleaning in general. And as I mentioned in the call, even investments from the retailers to prompt the category. So I think that again in the guidance that we gave, we allowed ourselves some amount of ability to respond to competitive threats. And we think we are well equipped to win in 2018 as should be taken away from the confidence in our revenue growth rates.

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

Just to kind of follow on from that, the last line of questioning and conversation there, the average price point of $305, that's a very impressive average price point. I was just curious if that's some sort of quarterly record for average price? Or if you've had quarters where that has been historically higher?

I think that -- I don't have a -- it's likely a quarterly record. I think that we've been working very hard to trade customers up. And the more confidence our customers have in the legitimacy of robot vacuum cleaning, the more they are willing to go invest in the types of features that really deliver on the convenience that is the promise of robots. And so we had a -- we do great at our opening price points, but certainly that figure is driven by customer willingness to trade up and play at our premium price point. So it's a great news story.

Yes. And you had great success with that this year. I mean, one of the drivers of growth this year has definitely been the mix up to your higher price point products and selling more in that category. Just wondering when you look at the market, I think the mix has been running kind of 60% of your sales have been the 800 and the 900 SKUs and 40% in the lower SKUs. Just wondering when you look out next year and may be into 2019, do you think you can hold that 60-40 mix? Or do you think there is risk of giving some of that trade-up mix benefit that you've seen this year back?

I don't think that -- I mean, the real market pressure isn't giving it back. It's -- we as aggressively as we can take our premium features and roll them down to ensure that our entry-level price points continue to be competitive and to ensure that we can hold off these lower tech entrants into the marketplace. And the -- and so that -- I think that the mix -- we'll have to start to see how the year rolls out. It's -- we modeled it similar. Although if there was going to be a deviation from prior year, it might actually be a shift up toward premium as the category continues to mature and the -- an iRobot's strongest differentiation will always be at the premium level. The -- and this shift up in ASPs, it ties back to the R&D investment that we make in ensuring that our premium models are just giving this superior experience to our customers. And so I think that for us we are actually looking at a little bit inverted from the question that you asked.

Okay. Good. And then just 2 more questions on FX. Alison, since you broke out some commentary on FX, and you have made the Japanese distributor acquisition and the European distributor acquisition. Should we expect more FX volatility in the numbers when we look forward now at the iRobot? And kind of how do you view FX volatility impacting revenue and cash flow statement on a go-forward basis?

Certainly, so I think our revenue guidance contemplates roughly the current rates and give or take a 5% change in those. So I think we're pretty much covered there. We do also have natural hedge in our business as you think about bottom line impact. And we have hedging programs also targeted at minimizing the earnings volatilities from the currency. So I think we're well covered in our guidance ranges.

Okay. And then final question is on organic growth. The organic growth figures that you provided in the prepared comments 46% in EMEA, 25% in Japan. Is that inclusive of the distributor acquisitions or is -- or are those organic growth rates? And if there are not organic growth rates, can you allude -- enumerate what the organic growth performance was in those markets in 2017?

So those are consolidated growth rates. So they do include the impact of the acquisitions.

The growth rates were about mid-teens organically in the acquired regions.

And our next question comes from Mark Strouse, JPMorgan.

So I just want to talk about the OpEx strategy over this -- the next 3 years and just kind of call out this shake period with competition. The last couple of years, you've been able to deliver revenue above your initial expectations, if that happens again, let's say, in 2018, how should we think about OpEx? Would you allow that to stay constant as a percentage of sales, so the dollar amount increases up? Or could that stay flat, you potentially see some leverage? And then, vice versa, if revenue fall short of your expectations, would that be a reason to potentially ramp up sales and marketing and R&D even further?

Sure. I think as you look at OpEx, we believe that in out years there are some opportunities to leverage some G&A and potentially some other fixed costs in the OpEx domain, and then choosing as to whether or not there are prudent investments in sales and marketing to drive the growth, not just at Roomba, but other product categories over the next 3 years is going to be some important calculus that we look at. So I think you're going to see some shifting around as to how the OpEx is made up, where you definitely will see leverage in some lines and consistent with this shake out period focused on profitable growth with revenue growth being the critical primary focus, although we definitely intend to keep OI ramping in the right direction. It's going to be -- the (inaudible) will be made in evolving fashion over the next few years. Is that helpful?

Yes, that has, Colin. And then how should we think about the marketing by region in 2018? Should we think about that kind of as a similar to the split of revenue? Or is there one particular region that's going to get the lion's share here?

We haven't really commented on that in the script thus far. I think that as we look in North America, Europe and Japan, which are the areas where there could be some variability, it's going to be based on competitive response. We certainly intend to maintain leadership in North America. It's where we spend the most money and have the largest share and large revenue. But we also think in Japan and Europe, where our marketing spend is less optimized, you could see investment dollars on a per robot sold basis trending slightly higher in those regions versus in the more optimized region of North America. So we, again, are very analytical on how we approach these things and are constantly running tests and building models around how do we optimize the spend to be OI percentage accretive. And there are actually more opportunities for incremental accretive dollars in Japan and Europe likely than in North America. So this test, measure and scale mechanism that we apply in a very disciplined fashion will continue.

Okay. And then just lastly, if I can, I didn't hear anything about the pending ITC litigation. But if I remember right that you are expecting a decision sometime in 2018. The Black & Decker settlement that was announced, if I remember right, it was for a "certain period of time" that they will be restricted from the market. Can you just talk about the rationale for that versus going for something more longer-term or even permanent? And how we should think about the remainder of the suit with the other competitors?

Sure. So the ruling -- first off, I pre-apologize, there's very little I can say. What I can say is that a decision will be forthcoming in 2018 in the back half of the year. There's a hearing upcoming in March, which is on the books. Now you can say we're very satisfied with the resolution thus far. So I can't go into more detail. It's all very confidential, but iRobot is very satisfied with the outcomes thus far.

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

Question for Colin. If you just -- just taking a snapshot of 2017, could you come in perhaps on the percentage of sales coming from Internet-connected robots? And in the spirit of your moving higher-end features down to entry-level products, could you perhaps give some commentary around what your expectation would be for 2020 in terms of the percentage of robots that you sell that are Internet connected?

Okay. I can give you some color on that. We made some specific new product launches in 2017 with the Roomba 960, the Roomba 690, where we substantially brought down the cost. Customers would have to pay to get mapping and to get connected. As a result, we've accelerated the growth of the installed base of connected robots and exited the year with over 2 million connected robots sold in. And that's -- we're very pleased with the -- that growth. Currently, about -- around a little above 35% of all our robots sold in 2017 were connected. And I think you should anticipate iRobot continuing to drive that figure up as it is part of our long-term strategy, and it is how we believe we're going to deliver some of the additional functionality that we think customers are going to rapidly grow its demand in their vacuuming robots. So it was a -- that was a huge increase from the year prior and not sure we can go and recreate that same percentage increase. But definitely, our lineup in 2018 continues to trend, started in '17 regarding our focus on connecting robots.

Okay. And then just one final question from me. Again, in terms of the 3-year outlook, you quantified the potential contribution of new products to 2018 at 20% to 25%. Should we be thinking about kind of a like percentage contribution from new products over the course of this 3 years? Or is 2018 kind of a very big new product to your -- in the context of things?

We're not -- I'm not comfortable today speculating on exactly how the next 3 years are going to roll out from a contribution perspective. It is definitely our strategy to systematically upgrade and launch new products. I think that -- certainly, that 20% to 25% of revenue in 2018 coming from new products, and that's a great number. But I'm not going to speculate beyond stating that this isn't our year of new product launches and then expect a drought. We have a cadence that we work to maintain.

Okay. Well, thank you, everyone. That concludes our fourth quarter and full year 2017 earnings call. We appreciate your support and look forward to talking with you, again, in April to discuss our Q1 results.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone, have a wonderful day.