iRobot Corp (IRBT) 2018 Q1 法說會逐字稿

Good day, everyone, and welcome to the iRobot First Quarter 2018 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'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, income or expenses, gain on business acquisition, restructuring expenses, net intellectual property litigation expenses and noncash stock compensation expense.

A reconciliation of GAAP and non-GAAP metrics is provided in the financial table at the end of the first quarter 2018 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 first quarter of 2018; and Alison Dean, Chief Financial Officer, will review our financial results for the first quarter of 2018.

Colin and Alison will also provide our business and financial expectations for fiscal 2018. Then we'll open the call for questions.

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

Thank you. Good morning, and thank you all for joining us.

We're off to the strong start we expected in 2018. First quarter revenue grew 29% over Q1 of 2017, driven by growth across all major regions. Robust replenishment, following strong Q4 2017 holiday sell-through, and shipments to support Q2 holidays in the United States drove domestic revenue growth of 26% over last year. EMEA and Japan also saw significant year-over-year growth of 47% and 38%, respectively, in part driven by the revenue uplifts from the acquisitions, neither of which we had in Q1 of 2017.

On our February earnings call, the 2018 commitments we made were to drive revenue growth of 19% to 22% through deeper household penetration of Roomba globally, deliver double-digit revenue 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.

With 1 quarter under our belt, we are on track across the board. Revenue increased 29% in Q1 2018 over Q1 2017 with double-digit revenue growth in all major regions.

Gross margin for the first quarter this year was 53%, up from 52% for the first quarter of 2017.

Our acquisitions have enabled more consistent global control of our brand and execution of our marketing programs. And our investments in R&D continue as planned, and our new product introductions are on schedule for launch in the second half.

Given our Q1 results and outlook for the rest of the year, we are reaffirming our 2018 full year revenue and operating income expectations and increasing our full year expectations for earnings per share to reflect a $0.05 favorable impact from stock compensation windfall that we recorded in the first quarter.

We anticipate full year 2018 revenue of $1.05 billion to $1.08 billion, which is year-over-year growth of 19% to 22%, operating income of $86 million to $96 million and EPS of $2.15 to $2.40.

Now I'll take you through some of the highlights of Q1 2018 and our business expectations for the rest of the year.

First, I'd like to highlight our successful efforts in developing meaningful revenue diversification through our Braava family of floor mopping robots.

In talking to investors since our last call, I sensed some confusion about the performance of the category.

Our plan for growing Braava is built upon the success of our Roomba marketing efforts over the last few years. We see a tremendous opportunity to drive adoption of Braava products through campaigns targeted at our millions of Roomba customers. We have started to see the payoff in the U.S., the only region where we have done TV advertising and where we have made the majority of awareness investment, and to a lesser degree in Europe.

As we discussed on last quarter's call in Q4 2017, we launched our first ever Braava national television advertising in U.S. and the category revenue grew 65% in 2017 over full year 2016. In Q1 2018, the momentum generated by the campaign continued, driving U.S. revenue growth of nearly 35% over the first quarter last year. And we expect that our additional 2018 investments will generate full year domestic Braava revenue growth at a rate greater than the company's overall 2018 revenue growth rate.

We believe there is a meaningful global growth opportunity for the floor mopping category that is predicated on improving Braava products positioning and better articulating the value propositions.

Promotions of this category have been fragmented and uneven across the globe under our distributor model. However, where we have made advertising investments as we did last year in the U.S., demand has been very strong.

Therefore, additional advertising investment in Braava, under our direction, is critical.

Lack of awareness and articulation of the products' value propositions are the hurdles we must overcome to drive this growth.

One of the components of our 2018 incremental sales and marketing investment we discussed in February is executing Braava marketing programs for all major markets.

In the U.S., we have a strong digital marketing and social media campaign planned for Q2 to support Mother's Day; and in Q4, we will run a national TV campaign similar to the one we ran last year around the same time.

In addition, there's a TV campaign planned for Japan later this year.

We began our marketing campaigns for Roomba first in U.S. where we had 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 investing to support Braava promotion globally will help drive awareness and adoption of the category as it has for Roomba.

Now turning to our first quarter performance by region. We delivered 26% year-over-year revenue growth in the U.S., while international revenue increased 32%.

In the U.S., sales remained robust coming off a tremendous holiday season.

In EMEA, revenue grew 47% where we saw strong demand while also benefiting from the revenue uplift associated with sales in the EMEA countries where we now sell direct.

Japan revenue grew 38% in Q1 over 2017, also benefiting from the revenue uplifts from the acquisition. Note that in Q2, we anniversary the acquisition of SODC, so we will not see this rate of year-over-year quarterly revenue growth in the remaining quarters.

We still expect full year 2018 growth of 25% to 30% in EMEA and mid-teen growth in Japan. On our last call, I talked quite a bit about the increasingly competitive landscape driven by traditional consumer appliance companies trying to gain traction in the category. Since then, several premium European brands have launched products and others have announced but not yet launched.

The Chinese competitors that entered the U.S. market last year through online channels have not gotten traction in U.S. retail stores, but we anticipate that a few retailers will test some of the Chinese products in stores this year.

Some of these products have also shown up in select European markets.

We continue to believe that a multipronged approach to maintaining unambiguous brand and product leadership in robotic vacuum cleaners is the right one. It remains critical to make focused investments to drive this including: R&D to continue to deliver differentiated products that further strengthen our position; sales and marketing both in the U.S. and overseas to continue to drive awareness and articulate the difference between our products and others; and initiatives to validate the strength of our IP and widen our competitive moat while dispelling false claims by competitors.

In summary, we are off to an excellent start in 2018 and on track to meet the full year expectations we provided in February.

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

Thanks, Colin. Our first quarter revenue and operating income were in line with our expectations, and EPS was slightly ahead due to the stock compensation windfall that Colin mentioned.

Quarterly revenue of $217 million increased 29% from Q1 last year. Operating income for Q1 was $25 million compared with $22 million in Q1 '17. EPS was $0.71 for the quarter compared with $0.58 in Q1 '17.

Quarterly EPS included a $0.05 tax benefit relating to stock compensation accounting compared with a $0.06 benefit in Q1 of 2017.

Keep in mind that our Q1 2017 effective tax rate, before discrete items, was 31% prior to the new tax law change. While in Q1 2018, the rate before discrete items was 27%, in line with our expectations following the change.

The tax rate for Q1 2018 inclusive of discrete items was 21% compared with the Q1 2017 tax rate of 24% inclusive of discrete items.

Revenue growth of 29% for Q1 included domestic growth of 26%, EMEA growth of 47% and Japan growth of 38%, driven by stronger demand and ASP improvements, which for EMEA and Japan, were primarily driven by the ASP uplifts from the acquisition and the favorable impact of euro and yen exchange rates and our hedging contracts.

We continue to be very pleased with our 2 acquisitions and their performance to date.

Gross margin was 53% for the quarter compared with 52% in Q1 2017. The 150 basis point increase was due to higher average ASPs and COGS improvements, offset by the Robopolis intangible asset amortization.

Keep in mind that quarterly gross margin can fluctuate widely based on mix, seasonality and promotional activity among other things.

We do expect Q1 will be the highest gross margin quarter and we still expect gross margin for the year to be between 50% and 51%.

Q1 operating expenses were 42% of revenue, up from 39% in Q1 last year, primarily due to higher sales and marketing and G&A costs reflecting the roughly 150 employees we added to our 2 acquisitions, continued R&D spending in support of our roadmap and the 2018 product launches and legal expenses associated with our ITC litigation.

We ended Q1 with $184 million in cash, up from $166 million at year-end.

During the quarter, we established and announced a stock repurchase program authorizing the purchase of up to $50 million of our common stock.

The plan became effective on March 28, and we have repurchased approximately 260,000 shares through April 23 for roughly $17 million. We expect to end the year with a cash balance of approximately $150 million, assuming we complete the $50 million repurchase program during the year.

Q1 ending inventory was $112 million or 101 days, as expected, compared with $57 million or 64 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.

As we said last quarter, due to the structural change in our business model, we expect DII to be approximately 100 days plus or minus on average in 2018, with our typical quarterly fluctuations.

As part of our integration efforts, we are working to identify operating efficiencies to improve working capital and reduce DII over time.

Now I'd like to provide you with additional detail on some of the underlying assumptions for our full year 2018 financial expectations.

As we have previously discussed, we manage our business from a full year perspective. Likewise, our 2018 financial expectations should be viewed on a full year basis, as quarterly year-over-year revenue growth rates and overall results will vary greatly by region due to a number of factors, including the impact of acquisitions made in 2017.

For 2018, we continue to expect full year revenue of $1.05 billion to $1.08 billion, with roughly 60% of the year's revenue being delivered in the second half of the year. In addition to the traditional second-half seasonality of the business, 2018 will be positively impacted by the inclusion of revenue uplift from the European acquisition through the third quarter.

Our revenue expectations range contemplates yen and euro exchange rates roughly in line with current rates, plus or minus 5%.

We continue to expect double-digit year-over-year growth in each quarter and for revenue to increase sequentially throughout 2018 with the highest year-over-year growth rate in Q1 as we said last quarter.

The smallest sequential quarterly increase is expected between the first and second quarters and the largest sequential quarterly increase between Q3 and Q4.

Profitability will be the lowest in Q2, driven by our sales and marketing expense increase over Q1, as is typical, to support the Q2 selling season.

In addition, Q3 sales and marketing, as a percent of revenue, is expected to decline from Q2 but not as significantly as in prior years due to our second half planned product launches.

For the full year, we continue to expect operating expenses to total roughly 42% of revenue.

Our full year guidance still assumes reinvesting the incremental gross margin provided by our forward integration primarily into higher sales and marketing spend.

1/3 of the incremental spending is a full year of expense associated with our 2 acquisitions and the remaining 2/3 for marketing expenses associated with our 2018 product launches and continued investments in the Roomba and Braava awareness campaigns to drive continued worldwide household adoption.

We continue to expect full year operating income of $86 million to $96 million, and now expect EPS of $2.15 to $2.40, reflecting a $0.05 favorable impact from stock compensation windfalls that we recorded in the first quarter.

In summary, we are executing against our plan with no major new news.

I'll now turn the call back to Colin.

Thank you. We're off to a very strong start in 2018, and I am excited about the year ahead.

We expect our global business to deliver strong financial performance in 2018 that will fund our ability to reinforce our core product leadership in the RVC category, widen our competitive moat through technological differentiation protected by our intellectual property and extend our product portfolio.

We believe that consistent execution of the strategy is the most effective way to drive sustainable growth and shareholder value.

With that, we'll take your questions.

(Operator Instructions)

And our first question comes from Frank Camma from Sidoti.

I just had a quick question on -- I know there's been a lot of attention on Shark Robot, but seems like recently Samsung has been more aggressive on the higher end of the price range. So I was wondering your thoughts on that as maybe a threat to you guys.

Sure. I mean, I think that on the low-end, Shark is willing to spend some money and on the higher end, Samsung has consistently been trying to establish themselves in North America.

It's a very aggressive program in Q4. Obviously, that did not disrupt the market particularly significantly. They continue to work. I don't think Samsung is giving up on the category but definitely, we like our strategy.

Okay. And I just had one quick one, just on the EPS guidance, you mentioned the share repurchase. I was wondering how much of that, if any, is built into the EPS guidance for the year.

So our guidance assumes that we will complete the $50 million program within the year.

And our next question comes from Nick Johnson from Piper Jaffray.

So top of mind for a lot of us is the news release earlier this week regarding Amazon and they're making a home robot. I know you haven't had much time to digest this development, but I'd like to hear your initial thoughts on the press and how you see IRobot in a world that has home robots that do more than just clean.

Sure. I think that -- first, I want to point that Amazon has not made any official announcement relative to this product.

It's the result of some speculative journalism and based on looking at hiring and so forth. So we don't really know much about what ground truth is. I think that it's important to -- as this category does develop and companies do look to see how robots can create new value to recognize that this is, from my perspective, opportunity and goodness.

iRobot has 28 years of experience building robots, we have over 1,000 patents. And I can say with great confidence what is good for consumer robots is good for iRobot. So if Amazon were building a new category of consumer robots, that would be opportunity for iRobot.

Okay. And just a quick one if you have this in front of you, I know you usually give out Amazon as a top 10% customer. Do you have what they represented this quarter?

They were definitely one of our top 5 U.S. customers, but we usually give that statistic more on a full year basis, because they can vary quarter-by-quarter. But they're definitely one of our top 5 customers.

Okay. You mentioned in your press release that the Chinese -- you see Chinese competitors essentially entering U.S. market and retail stores this year. Can you name which ones specifically that you're seeing enter the market? I know I've got a few that I have been following, but I'd like to hear your thoughts.

It's we'll have to wait and see a little bit. We don't fully know where they're going to get actual shelf spaces, that changes frequently.

We know that they were quite active on the Amazon marketplace in Q4. But we are speculating that we will see them on the retail shelves, but I don't have anything definitive on that front.

Okay. And then last one from me here is, as you're getting ready for your new product launches in the second half of the year, should we be looking to see any discounting on current models as you maybe rollout or kind of discount the current models to bring in the new ones in order to replace them?

Our promotional activities remain pretty consistent year-on-year and during the year, so there's nothing specifically in conjunction with the new product launches that we've got planned at this point.

Most of our promotions happen around this time of year and then around the holiday season as a typical practice.

And our next question comes from Asiya Merchant from Citigroup.

Just if you could walk us through some of the cadence that you see on ASP increases during the quarter, how we should think about that. If I recall correctly, I think you mentioned last time that the uplift you were seeing in ASPs were part of the acquisitions. And how should we think of them as you go through the year, if there's any mix shift there that we should account for. And also, I don't know if you can give any color on sell-through across the various regions, EMEA, Japan, U.S. That would be helpful as well.

So there's definitely in 2018 and in Q1 specifically, our ASPs did benefit from the revenue uplift of the acquisitions. Going forward, at least from a Japan perspective, we're going to be anniversarying the acquisition, so that will be not as impactful from a Japan perspective as we go through the year but there still could be an element for Europe in Q2 and Q3. Exactly how ASPs will average out over the remaining 3 quarters as you rightly point out, there's just a lot of variables that go into that. So there is no specific trend I can point to right now other than giving you those 2 sort of color elements as it's related to Q1 and then the impact that Europe will continue to have likely in Q2 and Q3.

From a sell-through perspective, we normally report our top 5 U.S. retailer sell-through and we had a rate of 29% in Q1.

Okay, great. And then obviously, you guys had a good strong beat in the first quarter, both on the top line. I understand there's -- or acquisition impacting there but the guidance -- so as you mentioned that, I mean, what are the puts and takes, not just on the top line, but hopefully as you look at your margin performance that was very strong this quarter?

Just to clarify again, Asiya, we didn't actually give guidance for Q1, so our results were in line with our expectations. As we mentioned in the script, we're holding our revenue guidance for the year, we've given color on how we think that will roll out through the quarters. We also mentioned that we do believe that Q1 was our peak gross margin percent quarter and that we're reaffirming our 50% to 51% for the year. And again, there could be quarterly fluctuations on exactly how that's delivered through the year. So we view Q1 as a very strong start and very much in line with how we expected this year to begin.

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

Alison, I'm wondering, have you changed your expectations at all for the growth in the business for the full year in the U.S.? You gave some color around your expectations for EMEA and Japan. Just sounds like you're off to a stronger start in the U.S., and I'm just wondering, any change in expectations?

No, the regional performance U.S. is as we thought at the beginning of the year, we thought the overall growth would be in the low 20s and that continues to be our view. And the rates I gave for EMEA and Japan are consistent with what we expected when we spoke to you in February.

Got it. Colin, just a question about the competition question from China. Have you seen any traction from some of these players in Europe? Because it sounds like they may be -- they may possibly have started to hit some retail stores in Europe. I'm just wondering if you -- what the initial color that you might be able to provide from that.

Sure. I think that the market, as it develops, what we saw towards the end of last year was the beginning of the establishment of a low end of the marketplace, and Chinese players were certainly active in that low end. In the U.S., predominantly that was through the Amazon marketplace and we think that could extend a little bit into retail in North America.

In Europe, there are some low-end products in market, and that's driving incremental category growth in Europe.

Obviously, the dominant price point in China and to a much lesser degree, in Japan. But the market is accelerating its growth and that growth isn't all at the high end.

There is this new dimension to consumer robotics in the vacuuming segment that is emerging, accelerating the overall robot vacuum cleaning category growth.

Do you see any difference in the U.S. consumer market and the European consumer market relative to price points, in terms of where the consumers might be more inclined to lean?

Not really. I think that the -- from a higher level altitude, we're seeing the -- for a long time, we've talked about the size of -- iRobot's view on the size of the market and that was predicated on price points starting around the $300 range. As this lower end of the marketplace develops, the size of the robot vacuum cleaning opportunity grows, and we're bringing new types of customers into robot vacuuming.

And thus, we're getting a compounding of the growth of the business. Because not only is sort of the $300 and up robot vacuum cleaning market growing, we're adding new customers to the size of consumer robotics. So I think that at a high level, we're seeing robots being accessible to new people.

Okay, last question and I'll jump back in the queue, just Braava. Your strong growth in the U.S. following the strong year last year as a result of the advertising campaign, so it seems like that's validating the strategy. Are you -- have you done some initial testing of this strategy in Europe or elsewhere, probably Japan, where you're seeing some support to that as well?

We're very systematic. We have -- as you can tell from the -- well, the prior call and this call, we put the spotlight on Braava. We scaled Roomba to the point where we have the resources to start working with the Braava category in ways that we have not been able to do so previously. And our playbook is pretty consistent, we do small scale tests. Based on the results of those tests, we scale up our investment and we lead with North America. So we are -- I will say that we're learning more about the rest of the world carefully, while we scale up and continue to test larger opportunities in North America.

So it's a playbook. We're working it out, most of the investment is in North America. You can see, we did talk about a bit of a new spend in Japan in support of Braava as well.

So we've got a playbook, it worked, we like it.

Jim, the only other thing I would add to the question is that in Europe, we had some marketing investment, not really TV advertising, and we've seen some good traction in EMEA as well. And in the second half of the year, as Colin mentioned, we will be doing some additional TV and other marketing in Japan that'll sort of be the next area of focus of Braava investment.

And our next question comes from Bobby Burleson from Canaccord.

So I guess, Alison, if you don't mind helping us with kind of a normalized growth rate for international, your kind of normalized for the acquisitions, if you have that in front of you.

Yes, unfortunately, Bobby, it's not possible to calculate that. With Japan, we've been running that business for 4 quarters now. So to try to strip out what we would have done if we've not bought the distributor there is just extremely complicated as it is with Europe.

So clearly, there was an impact on our growth rates, partially driven by that revenue uplift from the acquisitions and that should lessen it as we go through the year. But it really is impossible to kind of break that out, given this related party acquisition.

That makes sense. And then I guess in terms of the competition, I'm just wondering how Roomba at the different price points is positioned versus the competition feature-wise.

So what are the competitors lacking right now in terms of features and performance as a consumer evaluates choosing between a Roomba and one of these either Chinese brands or even the Samsung?

These other robots are relatively new on the market and so, they try to go and copy some of our features as best they can. I think that in Q4, we had tremendous success against the competition.

Our robots are designed with a system and many features working together to deliver superior performance. And so that there are some things I can point at like we're the only robot in the market with Dirt Detect, so we actually know if we're done cleaning an area before we move on, which none of the competitors have. We have debris extractors instead of brushes to make the overall ownership experience much better because you don't have to clean those brushes. We have 2 brushes instead of 1 that do a superior job. And so we are quite successful, the head-to-head sort of bottom of the funnel decision process relative to the competition in Q4.

And when we look at the features that the competitors are bringing to the market, we see a fair amount of whiz-bang that are perhaps exciting to niche techies, but not to the core of the consumer who is looking for a clean floor and not a gadget.

So iRobot continues with its strategy, trying to ensure that we understand how value is truly created to the consumer who cares about cleaning their floor, ensuring that our technological innovation is in service to the consumer. And there's so many features inside a Roomba that are just not on the box but deliver the type of performance which creates a loyal customer base.

And so there's things that we like to point out but at the end of the day, iRobot is committed to a simple, superior performance for a customer and a system that is an iRobot product, delivers a remarkable experience that is reflected in our star ratings, it's reflected in our net promoter scores and reflected in our continued leadership despite having a cluttered market of competition.

So we love our strategy. We think that this closeness of technology and service to the customer is something that has consistently served us well and we remain committed to it.

Okay, great. And then just last quick one, if I may. On Braava, curious what your -- any metrics you're looking at in terms of household penetration and goals there in terms of where you'd like your mix of revenue to go? And if the gross margins continue to be kind of on par with the overall business?

Yes, Bobby, our goal really is to drive the Braava category to the 10% of revenue mark for the company. The category is in such an infancy, that talking about households penetration is just premature at this point. And to your last comment, yes, the margins on the Braava category are consistent with the goals we have on Roomba and additive to the overall gross margins of the company.

And our next question comes from Mike Latimore from Northland Capital.

On the Braava sales, what -- do you have a sense of what percent of Braava units are sold to a Roomba customer?

We don't have a specific amount, but we believe the overlap is very, very high.

A lot of our marketing is targeted to Roomba owners who are already comfortable with our brand, product quality and the experience of robotic cleaning.

And then on the Braava international growth, do you see that sort of picking up in the second quarter? Or would that be more of a second-half dynamic?

Braava will be a contributor, we think, throughout the year just based on our general business seasonality and the strength of our revenue base in the second half of the year.

We think Braava will follow the trend of that as well.

Okay. And just last on the IP litigation expense. I know that will move around, I guess, any sort of baseline number to think about there on IP litigation expense for the quarter?

Well, certainly based on the fact that we had our hearing in Q1, we had a good bulk of our expense in Q1 that will be probably be ongoing costs as well later in the year.

But we definitely saw a big piece of expense of that litigation in Q1.

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

Just wanted to explore the gross margin commentary a little bit further to the extent you can provide further details. Clearly, a very strong gross margin quarter of 53%, well above your 2018 guidance of 50% to 51%, and you've reiterated that 50% to 51% guidance. Two quarters now of average unit price of above $300 and you talked about some manufacturing efficiencies that you continue to get on the production side.

So I'm just trying to figure out what is going to change from Q3's gross margin performance that we should be forecasting or expecting gross margins to fall so precipitously from Q1 levels?

I mean, is the average unit price above $300 not sustainable? Is the product mix biased towards the higher end SKUs? Is that not sustainable or manufacturing efficiency is not sustainable? Just trying to get my hands around why gross margin should fall so much for the rest of the year.

Well, all of those things will definitely be a factor and the exact timing of those over the quarters is very difficult to predict.

Q1, as I mentioned, we did benefit from both Japan and a large percentage of Europe from having the revenue uplift. And for Japan, that level of uplift goes away as we anniversary the acquisition later in the year.

So all of those factors that you're mentioning Jon, cost improvements, potential changes in ASPs, promotional activities, seasonality, the actual timing of purchases from our distributors and our retailers, all of that will play into the exact gross margins that we report for the quarter.

We're very confident that we will land with a full year gross margin that will be in that original range that we guided of 50% to 51%.

But there's just numerous variables that we're dealing with, all of which could impact being either at the lower end of that range or the higher end of that range.

Currency will be another thing that could have an impact there.

I think that if you think about our cyclic nature of the business, Q1 is advantaged over other quarters, because we get very strong replenishment orders following Q4 without the need for promotional activities that drive down gross margins in Q2 and Q4 and to a lesser extent, Q3. So there's a lot going on, but if you look back historically, Q1 is advantaged by just the cyclicality of our business.

Okay. So just on kind of the promotional activity comment, Colin, that you mentioned there, is there some sort of rebating or discounting that isn't run through the sales and marketing expense line, that's run through the COGS line from just a retail sales standpoint that we should be aware of then?

Yes, there's definitely promotional activities that come as revenue deductions and others that are classified as sales and marketing expense.

So we actually have funding for those activities that happen in both those places on the P&L.

Okay, okay. And then just one last question on gross margins. I know you don't guide quarterly, but would there be any reason to expect any 1 quarter, Q2 through Q4, to have a gross margin below 50%? Or should every quarter be at least above 50% as we go through the rest of the year?

Yes, there's nothing I can specifically point to today on a quarterly basis, just to highlight 1 quarter over the other. As the business plays out, we'll see exactly what the impacts are to the different quarters, but there's nothing specific I can point to, to any given quarter at this point.

Okay. And then one last question for me. Since you've been more deeply involved in your Japan market now for roughly a year, and are there any updates from marketplace dynamic, consumer engagement, competitive reaction or dynamic to iRobot being more directly involved in Japan?

Anything to the positive or negative that has occurred over the last year that you can highlight or go into greater detail on?

I think that since we took ownership of our distributor in Japan, we've been able to more precisely execute on our marketing programs, which has had a positive impact from the perspective of segment share. We've improved our relationships with distributors through a very careful inventory management program, which we talked about last year, where we brought down channel inventories and with our retailers and so, that's been positive.

And so, it's been a good experience. There has not been any indication that U.S. ownership of this distributor is in any way, negative. And we have seen many positives based on consistent execution of our programs.

And our next question comes from Mark Strouse from JPMorgan.

Colin, can you just talk about for the European retailers that you mentioned that have adopted some of the Chinese products in store, have those retailers expanded their overall shelf space for the category? Or has that entrance kind of come at the expense of the some of the incumbents including iRobot? And then it sounds like the commentary around the U.S. retailers was more speculative than anything, but to the extent that you had actual conversations, can I ask that same question?

Sure. In Europe, if you went into a store, you would see a diverse set of robot vacuum cleaners, has been the norm for a number of years where your typical retailer might have 10 or more SKUs.

And so at this point in time, some of those SKUs can be Chinese brands. I think that the growth in the category, I can't give you any specifics as to whether the linear feet has expanded for robot vacuuming but with the growth of the category, I would not be surprised if that were the case, but I am speculating. But it is not like it used to be, it used to be just Roomba, now it's Roomba and someone else. It's always been a diversified array. We just happen to dominate or be very, very successful in maintaining our market share based on product differentiation.

So iRobot is certainly not losing space at retail as a result of these introductions.

I think that in North America, we're the land of speculation, so I won't comment but I will say that many of our retailers are very excited about growing the category within their stores. So we think that they are seeing that robot vacuum cleaning is the major area of growth in the vacuuming category like we talked about at the Analyst Day where we've seen declines in uprights and canisters and tremendous growth in robot vacuuming. So again, the retailer is sending us very positive messages, and we should not -- we certainly do not anticipate losing any shelf space.

Okay, that's helpful. And then Alison, can you provide a little bit more color on Braava by region, as far as the percentage of sales from your 4 major regions or your 3 major regions?

We don't typically break that out, Mark. Again, as I said, we've seen the highest traction certainly in the U.S., and then followed by EMEA.

In Japan, it's been a nice percent of their overall business. So it really is -- it's been contributing across all but have I to highlight U.S. and EMEA as being the strongest regions to date.

Okay. Maybe a different way to asking it. So I'm just looking back to the second half of '16 when you had some pretty big sell-in to China. Are we kind of at the point where we're past some pretty tough comps in that region?

Well, unfortunately in China, Braava has been impacted in China with our overall China business. So until we see greater overall revenue growth in China, I don't think we will see specifically Braava growth in China either.

So I think the growth that you will see in Braava in 2018 will be U.S., EMEA and Japan.

Okay. And then, I'm not very hopeful for getting an answer to this, but Amazon over the last 2 years, the Prime Day has become more material to annual revenue. Any comment as far as this year, directionally speaking, what the impact might be as far as similar to last year or greater or less than?

I can't comment specifically about Prime Day. What one clarification I think I would make, Mark, is that the actual units sold on Prime Day in the past few years, in and of themselves, haven't been usually significant. It's really been the reaction of other retailers and then Amazon after Prime Day as they've seen the success of the Prime Day event, that has resulted in increased expectations going forward.

But the units that were sold on Prime Day as a percentage of our total units, in and of themselves, haven't been particularly meaningful.

It's just been a trigger for higher expectations for the second half and then growth coming in the second half off of it.

The category has been seeing tremendous growth and Prime Day has been something that we can point to, to help retailers take advantage of this surge of momentum around a new way of maintaining your home, and it's a great bona fide.

And our next question comes from Bill Baker from GARP Research.

Yes, on the Braava line, are you seeing or envisioning any mix change in that this year? And given your success last year, where that -- are there the things that you've learned from the product where you can tweak it before issuing completely new versions of it? Do you see this as an opportunity to upsell people who bought Braava jet to get something better? How do you see this evolving in terms of the product itself this year and afterwards?

Sure. I think that as we create new categories, learning from our customers is sort of core to part of our development process. So we do it with Roomba and that led to the fact that for example, customers felt that maintaining the brushes and having to clean them after every few uses was a big negative and broke the promise of autonomous cleaning.

Similarly, we've been working on optimizing our wet cleaning and mopping experience for some time, moving from robots that needed to be maintained and cleaned to the pad-based systems that were rolled out with the Braava jet.

So these new categories are continually being reworked, lessons learned from our customers put into our product and technology roadmaps.

And as we move forward, iRobot is committed to continuously improving products. Yes, the question about do we believe in mix will change in 2018, our product offerings have not changed and so that this mix between large format cleaning and more kitchen bathroom-oriented cleaning we think is relatively stable as we will be putting -- rolling out additional marketing and messaging, if possible, where we could meet and reach new customers and that could have an impact on the mix.

But again, we haven't modeled into the year, great changes between the kitchen bathroom focused Braava jet and the open floor plan focused of Braava 380 model.

So there's no structural shift in mix that we're anticipating in '18.

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

A quick modeling question for Alison. Would we expect a similar level of amortization of intangible assets in COGS as you reported in Q1 throughout the rest of the year?

Yes, the amortization that's going through COGS is now related to the Robo acquisition and that will be a steady amount each quarter in 2018.

Okay. And then for Colin, with regard to the ITC action, I know there was an initial hearing last month.

And I think that last update we had was that your expectation would be that there would be some type of preliminary ruling in June.

My question is, is that still the case in terms of the timing, #1? But #2, is it conceivable that any of the named parties might choose to settle with iRobot over the next couple of months before that?

So the -- to part 1 of the question, yes, late June is anticipated time for a preliminary ruling.

And as to your second part of the question, that would be speculation and I'm not going to speculate.

And we do have a follow-up from Jon Fisher from Dougherty & Company.

Just a follow-up on the Amazon Prime Day questioning from a couple of questions ago.

I know that you historically have done a specific branded Roomba product for Amazon Prime Day specifically.

I'm just wondering now with the increased attention and focus now on Braava and developing more of a targeted marketing campaign around Braava, is there anything planned for Amazon Prime Day for Braava, either introducing Braava into Amazon Prime Day or creating a specific Braava SKU to be highlighted on Amazon Prime Day?

Or anything that we should be aware of or be on the lookout for on the Braava line there?

Sure. Well, thank you for the question, but it is really something that we cannot comment on at all. Our plans are very closely held around Prime Day, so I'm not going to be able to comment.

Okay. That concludes our first quarter 2018 earnings call. We appreciate your support and look forward to talking with you again in July to discuss our Q2 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.