iRobot Corp (IRBT) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the iRobot second quarter 2007 financial earnings 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. This conference call may contain express or implied forward-looking statements relating to the company's financial results, operations and business conditions. These statements are neither promises nor guarantees but are subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those contemplated in the forward-looking statements.

In particular, the risks and uncertainties include those contained in our public filings with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

Please note that a live audio broadcast of this conference call is available on the investor relations page of iRobot's website at www.iRobot.com. An archived version of the broadcast will be available on the same web page shortly. In addition, a replay of this conference call will be available through Thursday, August 2nd, and can be accessed by dialing 719-457-0820, access code 4256386.

On today's call iRobot CEO Colin Angle will provide a review of the company's operations and achievements during the second quarter of 2007. Helen Greiner, Chairman of the Board, will provide an update on our divisional growth strategy, and Geoff Clear, our Chief Financial Officer, will review our financial results for the second quarter of 2007. Then we'll open the call for questions.

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

Hello and thank you for joining us. Last evening we reported our 12th consecutive quarter of year-over-year revenue growth. Both our revenue and pretax loss for the first half of 2007 were better than guidance we provided for the period. The increased acceptance of our robots and our ability to effectively execute on our plans are principal drivers behind the company's success.

There are several key points that I'd like to emphasize on this call. First, our first half financial results, coupled with visibility in our government business, gives us increased confidence in the outlook for the balance of 2007. As a result, we are increasing the ranges previously provided for revenue and pretax income guidance for the year. Our new revenue guidance is $233 million to $243 million and our new guidance for pretax income is $3 million to $5 million.

Second, our home robot division is well positioned to deliver second half results in line with our expectations, driven by the launch of next generation Roombas, details of which will be announced in the third quarter.

And third, we are seeing U.S. and international military demand for our iRobot product line. This demand provides us with excellent visibility into our government and industrial robot business for the remainder of 2007.

In reviewing the results for the quarter, I will provide you with specifics that support my confidence in increasing-- achieving our increased 2007 targets and my expectation for continued momentum at both the top and bottom lines in the second half of 2007 and beyond.

Our record second quarter revenue was driven by substantial growth in our government and industrial division, which represents 63% of total revenue for the quarter. G&A revenue grew 67%, primarily as a result of delivering 152 iRobot PackBots, a quarterly record.

Let's look first at home robots. To remind you, our home robot business is highly seasonal and revenue is heavily weighted toward the second half of the year. Results for home robots were on plan and consistent with our new product introductions and product transition processes. With the addition of the next generation Roombas to our product portfolio, the retail picture warrants some explanation.

Throughout the second quarter, we worked with our retailers to manage their inventories in preparation for this transition. That said, despite the impact of product transition activities, year-over-year revenues grew 3% and Roomba sell through remained flat year-to-date.

These actions position us well to have a strong second half as we benefit from a next generation product, enthusiastic retail support and significant channel fill due to reduced store inventories. I'm not prepared to give you any details about price, features or timing, but I'm proud to say that after three years in the making, feedback from customers and experience born of selling more than 2.5 million home robots, this next generation robot is in production.

The two new non-floor-care products to which we have referred in the past will be announced at the end of the third quarter at the Digital Life Conference in New York on September 27th and will be available on our website in the fourth quarter. As we have previously said, we do not expect these products to contribute substantially to our 2007 revenue.

Direct sales combined-- comprised 44% of total home robot revenue for the second quarter and 35% for the first half of 2007. This compares with 17% and 15%, respectively, a year ago. The significant growth is due primarily to sales of Scooba 380, which was launched through an infomercial and available on our website.

The infomercial is valuable to iRobot because it can sell products, explain them more thoroughly and can serve as natural advertising. The Scooba infomercial is successfully delivering all three of these benefits. As a result, we will continue to air the infomercial, because it has driven increased direct sales and has resulted in additional orders for Scooba from retailers in the second half of the year.

Response to our iRobot Verro pool-cleaning robot has also been positive. This product is our first entrant into the outdoor market, further supporting our vision of developing the autonomous home inside and out. It is too-- it was launched in April, initially on iRobot.com.

We expanded distribution to the Home Shopping Network and Amazon.com. Both have experienced very strong results. We have multiple successful Home Shopping Network airings and Amazon has exceeded all pre-sale forecasts. Our success with these pool-cleaning robots validates the element of our multi-year growth strategy focused on leveraging our brand across products made by partners.

Now let's turn to government and industrial robots. The U.S. military continues to see the value of robots to remotely provide improved situational awareness that helps our troops operate more effectively. We recently announced delivery orders totaling $17.5 million from the U.S. military for 79 PackBots and spare parts.

This order was split between the U.S. Army Program Executive Office for Simulation, Training and Instrumentation, PEO STRI and the Naval Sea Fitness Command, NAVSEA. The PEO STRI order will also ship with iRobot's new game-style hand controllers for faster training and easier operation in the field. It's important to note that the new game-style hand controller takes advantage of hours of free training our young men and women have logged growing up with computer games to make them pre-trained PackBot operators, almost immediately.

Both orders were placed under our $328 million indefinite delivery, indefinite quantity IDIQ contracts for PackBot robots, spares, training and support. Under the terms of these agreements, the military could order up to the full value of the contract through 2012. At the end of Q2, more than 66% of the total $328 million was still available to the company under these contracts. We continue to see strong demand for our PackBot products as multiple military customers place orders at an accelerated pace.

The PEO STRI order included 14 PackBots with ICx Fido kits. This additional order is a great example of iRobot's outstanding capability to execute and deliver. Our first order for 101 units was received in January of this year. We built and delivered 13 pre-production units in Q1 followed by 88 production units in the second quarter.

The Army recently chose the PackBot with ICx Fido as one of the Army's greatest inventions of 2006. Our rapid response to our customers, coupled with positive feedback from the field has resulted in this additional order and we anticipate more to come.

Our G&I product backlog was $19 million at the end of Q2, a decrease of 37% from the end of Q1 as we have shipped products. I would like to remind you that the PackBot robot business tends to be lumpy due to the timing and nature of the government's contracting ordering process. Not reflected in these Q2 backlog data was the $17.5 million order for the 79 new PackBots I just discussed.

We have significant revenue visibility into the remainder of the year and currently have already captured 85% of the government and industrial division's annual revenue that is contemplated by our new full-year guidance. This captured revenue is in the form of shipped products, services rendered, executed contracts to be performed and product backlog expected to ship this year.

We reached an important milestone in the second quarter, delivering our 1,000th PackBot. Since iRobot introduced the PackBot into Afghanistan in 2002 to clear caves, U.S. ground forces have changed both tactics and doctrine. Robots have significantly reduced the risk to explosive ordinance personnel because now they have a tool that often allows them to remain a safe distance from imminent danger. Their mantra now is "Do it remotely." Similarly, infantry units have begun using robots to enter buildings first, giving them the ability to assess situations before putting their lives at risk.

On the international front, the sales force we built over the past year continues to deliver and has recently secured orders in multiple countries in Europe, Asia and the Middle East. We also captured our first international order through our new Boeing strategic partnership to provide PackBots to the Australian army. International revenue for the second quarter was 15% of total G&I revenue.

I'd like now to provide updates on a couple of other important programs. Excitement about the SUGV, our small unmanned ground vehicle, is growing and Boeing has recently ordered two demonstration units as the marketplace wants to see the SUGV in action.

This project has more than $4 million in funding as part of a strategic alliance with Boeing to accelerate development of a COTS version of the SUGV called SUGV Early. We have already successfully completed major milestones on schedule, including the system requirements review, systems functional review and the preliminary design review, during the second quarter.

The Warrior platform continues to mature and the external interest continues to grow. We have received positive feedback from the military engineering, chemical detection and combat medical communities, as well as the state and local first responders. This reinforces our belief that we have designed a multi-mission platform with tremendous potential.

Before I turn the call over to Helen, I'd like to comment on our financial guidance for 2007. We are executing against an aggressive plan to grow iRobot and create exciting new markets for robots. Between our anticipated channel sales from the new Roomba and outstanding visibility in our government and industrial business, I am highly confident in our expectations for the second half of the year.

Thus, we are raising our guidance ranges for revenue and pretax earnings for 2007. I remain committed to improved profitability. In the second half of the year, we will begin to see the returns on investments we made in 2006 that will drive us toward that improvement.

Now I'll turn the call over to Helen.

Thank you. We are very pleased with the results of the quarter as it demonstrates tangible evidence that our growth strategy is working. I wanted to take a minute and remind you about our growth strategy.

Our mission in home robots is to attack routine maintenance inside and outside the home, delivering on our promise to expand our product line beyond our core Roomba robot. Sandy Lawrence joined us in May, adding great leadership and market and branding strength to the home robot division.

I'd like to take a moment to discuss our vision for the business and our three-pronged approach to execution. First, we will pursue deeper penetration of markets for our existing Roomba and Scooba products and product extensions through both our retail and direct channels. As we stated at the beginning of the year, we intend to own the floor.

There will be a new generation of Roomba on the market in the fall and in it you will see evidence of our strategy of listening to our customers and incorporating their feedback into our product lines. We expect this to significantly increase our penetration of this market as we aim to change the way consumers think about floor cleaning.

Our products are currently in fewer than 2% of American households and there is tremendous opportunity for expansion in the U.S. alone. Sandy has had tremendous success in getting people to open their wallets and buy quality products and we anticipate her demonstrating this ability with this new model.

Second, we have a vision of the autonomous home where robots perform dull, dirty and dangerous tasks currently being performed by people to maintain their homes. In addition to the floor, there are many more places that need to be maintained, both on the inside and outside of the home. Think of sinks and showers, countertops, patios, pools, hot tubs, garages and lawns.

In keeping with this strategy, we introduced Verro, our pool-cleaning robot, but, as you can see, there are many more opportunities outside the home, as well as inside. In addition to your primary home is your home away from home like college dorm rooms and vacation homes and robots can help maintain these, as well.

And third, we see an opportunity to take our current products or slightly ruggedize the platforms that we already have and apply them to light commercial applications. Again, this is an area in which Sandy has extensive experience.

For example, we have received feedback from customers saying that they use their Roombas to clean small offices and believe we could apply our cleaning robots to some light commercial applications. There are other light commercial applications that we are evaluating that would require a one to two year development effort.

That does not mean that we are ready to tackle the industrial cleaning or other industrial markets, but we do think that light commercial applications present a market opportunity beyond the home.

Switching to our government and industrial division, I'd like to talk about our expansion to new markets. To date, sales have been predominantly PackBot EODs to the important but relatively limited specialized explosive ordinance disposal market. But we are targeting many other markets with the existing PackBot platform, such as combat engineers, the military police, Marines and the military chem-bio teams, who are often in very similar hazardous situations.

Today I will elaborate on just one of these opportunities, our entry into the first responder market, which has received quite a lot-- bit of media attention recently. These are SWAT teams, bomb squads and hazmat professionals.

At the International Association of Bomb Technicians and Investigators conference next week, we will be introducing a new product, the iRobot PackBot 510 with first responder kit, leveraging our battle-proven PackBot robot together with a payload it specifically tailored to provide a safer, more cost-effective solution for today's most dangerous civilian defense operations.

The first responder community has shown strong interest in seeing this new robot capability. Because of its modular and digital design, this robot is able to adapt to a wide variety of scenarios, including the investigation and disposal of makeshift IEDs, conventional explosives and a range of hazardous materials.

Importantly, we priced this robot to sell for less than $90K, so it fits the needs and the budget of the first responder community. A sales team is now in place targeting law enforcement customers.

This strategy is showing results. We have already delivered PackBots to a few police departments, including the LA Sheriff's Department and St. Paul Police. These law enforcement PackBots have already been used in hostage barricades and bomb threats.

For example, in LA recently, a PackBot was called in to investigate a suspicious device placed in a trash can. PackBot drove in and found nothing suspicious, allowing the subway operations to continue uninterrupted. Previously, the police would have had to close down the subway and evacuate the premises.

We also recently announced a strategic alliance with TASER International to provide a new capability to law enforcement and military. As an initial step, we developed a proof of concept robot by integrating a TASER electronic control device on to our PackBot platform.

Using a PackBot equipped with an integrated TASER, police officers will be able to remotely engage, neutralize and control dangerous suspects. The robotic deployment allows the officer to remain at a safe distance, although the officer is still always in control of the firing mechanism.

TASER is a well-established vendor in the law enforcement area and has sold to more than 8,500 police departments. We intend to work with TASER to leverage their deep contacts and sales network in the law enforcement community in order to better serve this important segment.

We unveiled the proof of concept model with TASER at the annual TASER Tactical Conference on July 9th and 10th. The response was very positive and we believe this product will support our growth into new markets such as SWAT and law enforcement teams, as well as correctional institutions and private security companies.

The law enforcement market is fragmented and will take a while to develop, but we now have the people in place, the products and we are starting to build relationships to target this market effectively over the next few years.

We have already delivered more than 1,000 PackBots. Because of its modular and digital design, this robot is able to adapt to a wide variety of scenarios. We see tremendous potential in adjacent markets and law enforcement is just one example.

In summary, we continue to see tremendous growth opportunities in both the home robots and government businesses. I will now turn the call over to Geoff for a review of our financial results.

Thank you, Helen, and good morning, everyone. Our financial performance for the quarter exceeded our expectations at both the top and bottom lines. I'll begin with some highlights.

Revenues grew 36% over the second quarter last year to $47 million and, for the first half of the year, revenues increased 19% to $86.5 million. This compares with our first half guidance of 9% to 14% in revenue growth year-over-year.

Gross margin for the second quarter was 32.4% of sales, down from 34.9-- 34.1% from the comparable quarter of 2006. And for the first half of the year, gross margin came in at 30.5% of sales, compared with 32.9% last year and our first half guidance this year of 31%.

Gross margins continued to be negatively impacted by the increased nickel prices that we discussed on the last call. The largest component of our cost of goods sold for home robots is batteries and nickel is the most significant element of our battery.

We estimate that the financial effect of the increased prices could be $5 million in reduced margin during the second half of this year and in our full-year earnings. However, we have accounted for this impact and other favorable impacts in our 2007 guidance.

Over the past couple of years, we have made significant progress in improving our gross margins. In 2006, gross margin reached nearly 37%, consistent with the high end of the guidance range we originally provided for this year back in February.

In order to achieve our long-term target of 40% to 42% gross margin, we need to do several things. Among them are improving our material component monitoring and purchasing processes to effectively anticipate and handle aberrations like the nickel situation and we also need to consistently develop high-quality products that result in increased customer satisfaction rates and, therefore, reduced return rates, over time.

Our net loss for the second quarter was $4.8 million compared with a $1.8 million loss in the second quarter of last year. Net loss for the first half of the year was $10.3 million compared with our first half 2007 guidance for pretax net loss of $11 million to $12 million and a net loss of $4.7 million last year. We are especially pleased that, exclusive of a cumulative adjustment for stock compensation expense, about which I'll speak more in a few minutes, our first half results were more than $1 million favorable to our pretax loss guidance.

Now let's go through our second quarter financial results, starting with our revenue performance. We analyze our revenue in three categories -- home robots, government and industrial contract research and development, and government and industrial robots.

I'll start with home robots. Revenues grew 3% to $17.2 million from $16.7 million last year. The combined unit volumes for our home robots decreased from 107,000 units in the second quarter last year to 99,000 units in the second quarter this year. This was primarily due to retailers preparing for the product line transition that Colin talked about earlier in the call.

Our investment in our direct sales channel continues to yield excellent results. That channel more than doubled in sales over the first half last year and for the first half this year, direct sales comprised more than a third of home robot's revenue.

Let's turn now to the government and industrial division. In this division, contract research and development projects are a significant source of revenue and they provide us with an independent source of growth, as these programs allow us to drive technology into both the home and military markets.

In the second quarter, contract development revenue was up 14% over the same quarter last year. Our work on the Future Combat Systems project continues to be a major funding source for contract revenues.

Our third revenue component is G&I product revenues. These revenues are primarily for the sale of our PackBot line of military robots. In the second quarter, G&I product revenue climbed to $24.2 million, an 88% increase over the $12.9 million in revenues last year.

We sold a record 152 PackBots during the quarter and for the first six months of the year we sold 249 units. That's an increase of 60% over the first six months last year.

Over the past 12 months, sales of spares, support, service and training amounted to 18% of G&I product revenue. During the second quarter, PLR, product life cycles revenue, was 8% of revenues, a lower percentage than our historical trend, primarily due to the record high level of PackBot product shipped during the quarter.

Of the recent new order for $17.5 million that Colin mentioned earlier, more than $7 million or 40% was for spare parts, service, support and training, a more representative picture of what we anticipate in the future. This quarterly fluctuation in spares volume, due to the timing of the receipt of government purchases is consistent with our product lifecycle revenue model.

Now I'd like to turn to operating expenses. For the second quarter, total operating expenses increased by 44% to $20.9 million from the second quarter last year.

Let's look at OpEx in more detail, beginning with research and development. For the quarter, internal research and development was $4.2 million or 8.9% of revenues, compared with $3.8 million or approximately 11% of revenues a year ago.

For the first half of 2007, internal R&D totaled 9.6% of sales. Given the seasonality of our revenues, this 9.6% for the first half is actually consistent with our full-year guidance of 7% of revenues for R&D.

Likewise, sales and marketing spending for the second quarter of $10.9 million or 23% of revenues is on plan. This compares with $5.7 million or 16.4% of revenues in the year-ago quarter. The increase in sales and marketing spending, as compared to last year, is the result of two factors -- marketing and fulfillment costs for direct sales due to the significant growth in that channel, and second, the commencement of our infomercial program for Scooba at the beginning of the second quarter.

For the first half, sales and marketing expenses totaled $19 million or 22% of revenues, compared with $14.5 million or 20% last year. These expenses, as planned, will increase in the second half of the year, especially in the fourth quarter, as we invest to support the holiday buying season. The 22% of sales figure for the first half is impacted by the seasonal trend in revenues and we expect the full-year sales and marketing investment to be approximately 19% of revenues, as previously indicated.

G&A expense was $5.8 million or 12.2% of sales in the second quarter of 2007 compared with $5 million or 14.5% of sales in the year-ago quarter. The year-over-year percentage decrease was due primarily to the effect of scalability from increased revenue growth.

We are focused on tightly managing controllable operating expense and we affirm our commitment to improving profit margins, partially through leverage of our operating expenses. We expect the full-year G&A expense will be approximately 9% of revenues.

Our operating loss increased to $5.7 million in the second quarter from $2.7 million a year ago. This year's results include stock compensation charges of $1.5 million for the second quarter, compared with $360,000 last year and $2.2 million for the first half of 2007 compared with $1 million last year.

During a recent review of our stock compensation expense accounting methodology, we determined that stock options granted during the period when we filed-- between when we filed our IPO registration statement to become a public company and when we completed our initial public offering should have been subject to FAS-123R accounting. In order to true-up our stock compensation expenses, we recorded a cumulative adjustment of $528,000 during the second quarter. In addition, there will be approximately a $100,000 increase in our quarterly stock compensation expenses over the next few quarters as a result of this recalculation. Keep in mind that these are non-cash expenses.

We recorded net interest income of $887,000, thus our pretax loss was $4.8 million in the second quarter, compared with a pretax loss of $1.8 million in the second quarter last year.

Our tax rate in the quarter was negligible, but for planning purposes we recommend using an effective tax rate for the year of 30%.

After-tax loss for the quarter was $4.8 million or $0.20 per share, compared with a second quarter 2006 net loss of $1.8 million or $0.08 per share.

Turning to a few balance sheet highlights, we continued to maintain a strong balance sheet with no debt outstanding. Cash and short-term investments at June 30th were $70 million, unchanged from the end of the first quarter.

During the second quarter, we signed a three-year agreement for a $35 million unsecured revolving line of credit and a one-year agreement for a $15 million secured equipment financing facility. The new credit facilities replace a $20 million secured revolving credit agreement that was entered into in May 2005. The new credit facilities will significantly increase our access to financial resources for working capital and to provide flexibility for us to execute our growth and acquisition strategy.

Net accounts receivable were $17.7 million, up from $16.2 million in the first quarter and consistent with our quarterly revenue. Days sales outstanding were 37 days, down from 41 at the end of the first quarter. You should expect the days sales outstanding trend for the remainder of the year to increase as our retailers begin stocking for the holiday season. Inventory was $22 million and inventory turns were approximately 8.

Before we take your questions, I'd like to discuss our financial guidance. We are increasing our financial guidance for the full year 2007. The current trends in our business give us confidence that our revenues are likely to grow in the second half of the year at a rate of 26% to 35% over the second half of 2006. Thus, our new 2007 full-year revenue guidance is $233 to $243 million, a year-over-year growth of 23% to 29%.

Due to improvements in our inventory and logistics management processes implemented last year, which enable us to deliver product to our home robot customers on a much more efficient basis, and also, to a lesser extent, due to the timing of home robot product introductions, we expect revenues to be back-end loaded in the fourth quarter of this year and significantly higher than in the third quarter, the same quarterly trend we saw last year but to a greater degree this year.

As discussed earlier, higher nickel prices will likely negatively impact gross profits in the second half, resulting in a lower guidance range of gross profit percentage for the full year of 35% to 36%.

We are also raising our full-year pretax earnings guidance to a range of $3 million to $5 million. While we expect that the third quarter will be significantly profitable, we anticipate that we will still track to a year-to-date pretax loss through the end of the third quarter. The fourth quarter will show a significantly larger pretax profit, resulting in the full-year guidance of $3 million to $5 million, $1 million higher than our previous guidance.

In summary, we exceeded our guidance in the first half of the year. We have 85% visibility in our government and industrial business. We will be announcing the next generation Roomba products during the third quarter and we have increased financial guidance for the full year.

With that, Cynthia, we will open the call to the audience's questions.

Thank you. (OPERATOR INSTRUCTIONS) Paul Coster, JPMorgan.

Good morning, everyone. Can you hear me?

You bet.

Great, thank you. Let me start off with what to me is the most important thing, which is at the analysts day event your military-- the G&I team talked of a tenfold increase in the size of your addressable market in the next, I think, three to four years. They also talked of an expanding portfolio beyond the PackBot and SUGV into the Warrior and also the R-Gator, et cetera.

First, with the addressable market in mind, when are we going to see what sounds like absolutely phenomenal growth? Is it '08, '09? Perhaps you can talk us through that and then address the opportunities in the contiguous product families.

We see the largest military-- we see the largest military opportunity to be tactical robots for infantry. Future Combat Systems, when they did the analysis through the Training and Doctrine Command came up with a military need of 3,600 units, so that's the type of order that could be expected for a block one purchase. In addition to that, there's a need for this type of robot in the current forces of 4,000 to 7,000 small robots.

Beyond that, there's international and law enforcement markets for the same type of robots. So that's where those higher numbers that we spoke about are coming from.

The SUGV Early, which I described, is currently on track, going into LRIP in mid-'08 and will be available for sales, again, in 2008 so that the need that Helen described will start be delivering against next year and we should see that ramp from '08 into '09 and beyond.

And the Warrior and R-Gator, where do we stand with these two products?

When you look at the Warrior, it's a larger robot. It's a 250-pound robot with a larger payload capacity and we expect the need to be about 500 to 1,000 units over the next three to five years. It's also got a higher price tag. It will have a higher price tag, so it does present a significant market opportunity.

And we'll have prototypes ready for sale mid-2008 and are running toward an LRIP, that's low rate initial production, by the end of the year. So, again, we will see sales next year, growing in '09 and beyond.

And on the R-Gator we have sold three -- to NASA, to (inaudible) and [Target], which is TACOM, the tank command, and they're currently being evaluated by these customers, which is the purpose of an LRIP and we continue to develop the technology and continue to see buyer interest in it, but, again, it's, right now, in some customers hands starting to be evaluated.

So it sounds like '08, mid-'08, is when we'll start to see the acceleration associated with these new products and what seems to be a systemic adoption of this technology rather than the sort of tactical. Is that a fair statement?

That's consistent with our understanding and consistent with when our products are going to begin to be available, at least with the Warrior and the SUGV Early.

Okay. I noticed that the ASPs or the average selling price for both the home robots and the military robots were higher, sequentially at least, using a very sort of simplistic calculation. What's going on there? We applaud that, of course, but can it be sustained?

Paul, the-- I'll start on the G&I side. You are correct. The ASP is up on the G&I side. It's primarily driven, Paul, by the Fido product. The ASP in total is up about 30% and most of that increase has to do with the sale of the Fido products. Those products sell for more than $160,000 per unit and, as we have, I think, previously discussed at one point or another, PackBots sell in the $110,000 to $120,000 range.

Paul, I think that as you see our payload strategy continue to evolve, you're going to-- these increases in prices will be sustainable. The PackBot is a platform and through addition of the ICx Fido payload kit, we're able to deliver increased functionality and, thus, higher prices. And so that's a trend that is not an aberration but should continue on that product line.

Now the SUGV Early and some of these infantry robots are going to be counter to that trend and we're going to-- Helen spoke about a PackBot for first responders at a lower price point and while we continue-- we will strive to continue margins, we'll have sort of offsetting factors at work.

I think you also asked about the home robot side, Paul, so let me answer that piece as well. On the home robot side, our ASP was up about 3% before you consider accessories and that was impacted by both the Scooba product, which is-- I think we've discussed in the past is a-- is a higher average selling price, and also by the impact of the robot Verro pool product, which is a considerably higher-priced product.

Okay. My last question is, obviously, the-- you could have had a blowout in this first half if the nickel prices had behaved appropriately. What is it that you are going to do to sort of manage this particular risk and is there any chance in the next 18 months or so of nickel prices stabilizing or falling? I'm beginning to doubt that.

Paul, let me start with just a little bit of background and then I'm going to ask Colin to step in and talk about the different plans we have to deal with it.

But for those who may not be familiar, nickel is a major component of our batteries. Nickel prices started to increase just a little over a year ago. We were aware of the increasing, but we did not anticipate that the pricing would escalate as rapidly as it has. It has been as high as-- actually over $50,000 a ton, which was more than a doubling compared to what it was-- almost a tripling.

So with that as a background, then I'll turn to Colin and ask him to address how we're dealing with that.

Right. We use many different commodities in the creation of our robots and I would-- I would tell you, if you follow nickel, what happened there was truly extraordinary. That said, on a go-forward basis, we will be trying to identify trends earlier and work with our vendors to lock in prices on a long-term basis.

But to give you-- put the nickel problem in perspective, there was actually a change in regulations on the commodity trading market to address what happened with nickel and so it was unusual and you're exactly correct, we wish it wouldn't have happened, because certainly our gross margins were negatively impacted.

Okay, thank you.

You bet.

Gus Richard, First Albany Capital.

Yes. Thanks for taking my questions. Geoff, could you quickly go over your international sales again and then talk a little bit about how that-- how that market is developing, how do you see that growing as a percentage of revenue over the next couple of years on the G&I business?

Again, I'll-- I think I'll share this one with Colin. I'll give you the specific numbers and then either Colin or Helen can comment.

On the home robot side this quarter, we saw our highest proportion of international sales. We were about 20% international this quarter, so that's continuing to be a strong market for Roombas and, in fact, we've just introduced a Scooba product in one particular country.

On the G&I side, international was about 15% of sales, which is, again, a high proportion for G&I.

So on a total company basis, international was roughly 17%.

We've talked previously about our investment in an international sales force and what you're seeing is the beginnings of the results of that sales force hitting their stride. It's also worth noting that our partnership with Boeing extends beyond the SUGV Early and allows us to leverage their sales force and our sale of PackBot robots to the Australian army is our first demonstrable win based on that relationship.

Okay and then in terms of the opportunity in law enforcement, you've started to ship some PackBot 510s to a couple of law enforcement. Is TASER going to help you with that-- that channel for other products or how is that commercial relationship going to work?

I just want to clarify. The PackBots we have shipped to law enforcement are not PackBot 510s.

Oh, okay.

That's the one we're announcing with the first responder kit next week at the IABTI show. We-- one of the strategic reasons behind having a strategic alliance with TASER is they have really wonderful relationships with many law enforcement. They've sold to over 8,500 police departments already and we also think that the capability we give with this added payload on the-- on the PackBot is a significant one for the law enforcement community.

Into-- are you expecting the first responder law enforcement to be a material contribution to your G&I product revenue in '08?

It will take a while to develop the market. It is a fragmented market. It-- unlike the military where they aggregate purchases so sometimes we've announced orders of some magnitude, 79, 101, et cetera, you can't really expect that from the law enforcement community. But there are-- it's a great opportunity because there's over 450 local bomb squads and 100% of them are required to have robots by 2009. Two-thirds of them do already have robots, but we're targeting those without robots yet but also looking at small robots that complement the bomb squad's existing large platforms.

There's also over 2,500 SWAT teams in the country and less than 10% have robots today. SWAT teams are moving in this direction really quickly and we actually quote more systems to this market segment.

And then there's also local hazmat teams. There's over 400 of those.

In the longer term and not talking 2008, as our understanding of the customer needs increases and our systems develop to accommodate this particular market even further, there is potential for robots in squad cars as first responders. That's the first officer to the scene to go into the multitude of dangerous situations.

So there is a significant long-term market opportunity, but I wouldn't see it in 2008 to be an extremely significant contributor to the revenues. It has taken us a while to establish ourselves in the military, so you can look to that as our primary market in '08.

Got it. All right, thank you.

Jim Ricchiuti, Needham & Company.

Thank you. Good morning. Thanks for clarifying some of the operating expense items. So it sounds like sequentially on the G&A line, Geoff, we'll see a sequential decline in that in the current quarter?

I'm assuming when you say a sequential decline, Jim, you mean as a percentage of sales. If that's what you mean, you are correct. It'll remain relatively constant or maybe even slightly up on an absolute dollar basis.

Okay. And on the sales and marketing, it seems like you've got a lot going on in the second half of the year and yet it looks like you're still targeting 19% of revenues. And I wonder if-- can you shed any light on how you see some of the sales and marketing expense for the two new consumer products? Is that-- are those expenses that we will see toward the early part of '08 or would we begin to see some of that in Q4?

So the-- the impact of those sales and marketing costs will largely be in 2008. We're doing an-- announcing these products at the Digital Life Show, as I mentioned, and they're being sold online. We have no plans to do a major national advertising program around these particular products. We think we can achieve our plan goals without that in '07. In '08 you may see our national advertising campaigns incorporate these new products to some degree.

And, Colin, I wonder if you would just talk a little bit about the plans for a campaign around the new Roomba product?

Certainly that will be the major focus of our national advertising in the back half of the year. We maintain our sales and marketing percentage as a percentage, but certainly both our revenues and our spend go up in the back half.

But you'll see national TV. You'll see infomercials. You'll see investment in co-ops and circulars and all of the usual types of media forums that we've been-- we've used in the past to drive sales. But R-3 is the-- the new generation Roomba is the-- will be the focus.

Okay. And just shifting quickly to the G&I business, it looked like of the PackBot total that you shipped in the quarter, a pretty high concentration of the Fido ICx, it looks like maybe about 60%. And I'm just wondering how you would characterize that portion of the business in the second half of the year? Should we continue to assume a pretty high concentration of that particular robot and payload?

The-- the PackBot with the ICx Fido payload kit was delivered on an accelerated basis to meet an urgent need in theater. So that we got our first major block of product out as quickly as we could to support our soldiers.

We should see a reduced demand through the back half of the year and we'll see upticks in the 510 and MTRS units. So, no, that level of deployment will decrease.

Okay, thank you.

We also expect the G&I business to continue to be lumpy like we get significant orders and deliver against them.

Okay. Thank you very much.

You bet.

Brian Gesuale, Raymond James.

Yes, good morning, everyone. A couple of questions I want to bounce around in the consumer segment. Geoff, did you give a PLR number with home robots? And maybe if you could talk a little bit about Verro in terms of the size of the product? And I'll start there.

Okay. I didn't give a PLR number, but I would tell you that it was higher as a percentage of sales than it's been in the past. It's normally been about 10% of sales in the past. It was about 15% in the-- in the second quarter.

Okay, great.

And as far as the Verro product goes, we had modest expectations for that product and we have met and exceeded those expectations. So we view that as a-- as a real validation and success of taking a product developed outside of iRobot, adding our brand and bringing it to market through our channels. And so that we'd like to do more of that in the future if opportunities present themselves.

Okay, great. And then one last thing in the-- on the home robot side of things. How concerned should I be that the channel sales are significantly down? I know that there were some one-time events with Scooba last year filling into the channel. But the-- the absolute home run success in the direct sales, to date, has really overshadowed some of the consumer-- or some of the channel sales partners. How do you really re-accelerate that and is this new product on the Roomba side going to be enough to do that?

Well, just to be very clear, we are doing a major SKU transition and the way our home robot business exists today, we are still largely driven by our Roomba product. So when you do a transition in your major product line, it's going to impact sell-through, because you have to work down the inventory in the channel and then bring in the new SKUs and try to orphan as few of the older SKUs as possible. So that what you've seen in the channel is explained by this transition that we've announced today.

Do you have any-- any-- maybe any color to add maybe in terms of what your channel partners have from an inventory, maybe a year ago versus today to get us real comfortable with that-- that Q4 ramp, which I imagine will be largely dependent on your-- on, really, the success of your channel partners buying product from you?

Well, I'm not-- not going to give you any specific numbers on that, only to say that if you look in the marketplace, we're in the middle of this Roomba SKU transition. We have not had to reduce our mass pricing at this time on the robots, which means that we've been effectively continuing to move product and have-- are successfully working with our retailers so that inventories are substantially down and we're going to be shipping in these new SKUs to our retailers as part of a channel fill program quite similar to the one when we initially loaded up our retailers when we first launched Scooba.

Do you expect any new storefronts as part of that filling later this year?

Adding storefronts -- I mean, there will be some new doors, but when you're working on your model, that is not the major driver of growth for 2007.

Okay, terrific. And then I just had one last housekeeping question here. Geoff, I just wanted to make sure I understood correctly. Q3 will be profitable on a stand-alone basis, but not profitable enough to make the full nine months profitable. Is that--?

That is a correct statement, Brian. You got it.

Okay. Thanks so much, guys.

You bet.

Jed Dorsheimer, Canaccord Adams.

Hi, thanks. Just two questions. One, I was curious with the nickel prices increasing as much as they have, what is the delta now between nickel metal hydride and a lithium ion battery for your consumer products?

You'd have to spend about a 30% premium in order to transition to lithium ion technologies. And so it isn't that bad yet and if you watch the market, nickel prices have come down and so that while we might consider a lithium ion battery as a special high-capacity accessory to our home robot, we wouldn't start packaging them in with our base robot sales.

Great. That's helpful. Thanks.

And then, second question, during the IPO process the-- if memory serves me, you had qualified one supplier for your PackBots, I think in Ohio. And I just wanted to double check. With the significant growth that you're seeing in the Packs, the military side of the business, what does capacity look like with that particular supplier? And have you qualified or are in the process of qualifying any additional suppliers, specifically for the G&I business? Thanks.

Well, we-- the supplier on the PackBot has grown with us and we've been able to have sufficient look-ahead to ensure that that supplier can meet both current capacity, anticipated future capacity and a substantial surge capacity. That said, as we certainly believe and have talked about the increasing demand for our robots, we continue to evaluate whether or not there are other options and I think that we're going to be able to remain ahead of this one comfortably.

Great. That's all for me. Thank you.

Mark Gross, California State University.

Thank you very much. Geoff, as of today, what would be your guess as to how many years away your long-term model is? And would the sort of acquisitions that iRobot is considering, would they be more likely to shorten that amount of time or lengthen it?

I'll choose not to speculate, although I will acknowledge that when we first put this model together at the time of the IPO, I stated at that point that it was five years plus. As far as acquisitions go, the comment that I would make there, is that while we obviously look to generate a return on investment from acquisitions, the timing of acquisitions and how quickly they are accretive to an operation is difficult to predict. So I won't go-- I won't speculate beyond that, Mark.

I would say that today marks a bit of an inflection point for the company, as far as our commitment to focusing on profitability. In 2006 we spoke and executed on a plan which highlighted the-- a highlighted an investment in IR&D above maximizing our bottom line. And, as I said, we're going to start to see in the back half of this year and on a go-forward basis, harvesting those investments and we feel like we're well positioned to go after and maintain our leadership position in this emerging marketplace.

So we are committed to improving our bottom line and we are going to become-- begin our march increasing our pretax income.

Just to quantify Colin's comment about the back half of this year, Mark, if you look at our guidance, I think you'll see that the pretax operating margin is somewhere in the neighborhood of 10% for the back half of this year. So that starts to give you a feel for the impact that leverage has when our revenue rises.

I understand that, but if I look back, say, from 2004 to 2007, it's actually costing more per dollar of incremental revenues in terms of operating expenses than it used to. In other words, operating expenses as a percent of revenues has gone up from 2004 to 2007.

So what gives you the confidence that you have sufficient operating leverage to--?

Well, certainly during that time, in addition to investing more heavily in IR&D, we also built the infrastructure required to scale this company. And we are not a company satisfied with the status quo. We want to continue our growth for the foreseeable future. That's a very complicated prospect, given that we are a physical product manufacturing operation and we felt we needed to lay in processes, which we have spent the last few years doing and are excited about where we are.

So we're quite confident that our position today allows us, on a go-forward basis, to start realizing efficiencies as our revenue scales.

A couple more points on that, Mark. On the G&A side, general and administrative side, I mentioned that the guidance-- the new guidance for the year is 9% of sales. That was previously 10%. So you're starting to see some scalability there.

The second point I would make is that in the sales and marketing area, our momentum towards increasing our proportion of direct sales does drive that number higher. It will also drive the gross margin number higher in the next several years, as well.

So our original model back five years-- back a year and a half ago for margin was 40%. Now we're seeing 40% to 42% because of that direct impact on the business.

All right. That's helpful. Thanks

One other question for Colin and Helen. Would you rule out the possibility of splitting off or spinning off your military business from your consumer business?

Yes, we would. In other words, it's not a strategy that, unless it truly is in the best interests of our shareholders, we would not view that as a beneficial outcome. We are the robot company and we believe that the synergies between our divisions is a substantial competitive advantage.

So thank you and that concludes our second quarter earnings call. We appreciate your continued support and look forward to talking with you again following our third quarter.