iRobot Corp (IRBT) 2009 Q2 法說會逐字稿

Good day everyone and welcome to the iRobot Second Quarter 2009 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, ma'am.

Thank you and good morning. Before I introduce the iRobot management team, I would like to note that statements made on today's call that are not based on historical information are forward-looking statements made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. This conference call may contain expressed or implied forward-looking statements relating to the Company's financial results and operations demand for the Company's products and services 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.

During this conference call we will also disclose various non-GAAP financial measures as defined by SEC regulation G, including adjusted EBITDA, which we define as earnings before interest, taxes, depreciation, amortization and non-cash stock compensation expense. A reconciliation between net loss, the GAAP measure most directly comparable to adjusted EBITDA, is provided in the financial tables at the end of the Q2 2009 earnings press release issued last evening, available on our website, www.irobot.com.

A live audio broadcast of this conference call is available on the Investor Relations page of our website, and an archived version of the broadcast will be available on the same web page shortly.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 July 30, 2009 and can be accessed by dialing 719-457-0820, access code 2717744.

On today's call, iRobot Chairman and CEO Colin Angle will provide a review of the Company's operations and achievements for the second quarter of 2009 and our outlook for the business for the rest of the year. And John Leahy, Chief Financial Officer, will review our financial results for the second quarter of 2009. Then we'll open the call for questions.

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

Good morning and thank you for joining us. I am pleased to report that we delivered solid second quarter results in a very challenging environment.

Revenue of $61 million and a $0.10 loss per share were at the top end of our expectations for the quarter. Adjusted EBITDA of $100,000, nearly a $6 million improvement over last year, far exceeded expectations. More importantly it was the first time since the Company's IPO we generated positive EBITDA in the second quarter of the year. For the first half of the year we reported more than $10 million in EBITDA improvement. Our continued focus on achieving operating excellence and our efforts to tightly manage expenses helped us deliver on our commitment of improved profitability.

The most profound change at the Company over the course of the last year has been our focus on driving EBITDA and operating cash flow. Over the past year we have generated operating cash flow of almost $31 million and improved our cash position by nearly $21 million. At the end of the quarter our cash position was $51 million compared with $30 million a year ago.

We achieved these improvements while continuing to make investments to preserve our market leadership position. In particular, it is our commitment to the ongoing developments of AWARE, our robot intelligence software, which provides a competitive advantage and is an important part of our strategy.

Based on our performance through the first half we are narrowing the range of our full-year revenue expectations and reaffirming our expectations for earnings per share and adjusted EBITDA. For 2009 we expect revenue to be in the range of $295 million to $305 million, [sic - see press release] earnings per share between break-even and $0.04 and adjusted EBITDA to be between $14 million and $17 million.

Despite favorable first half results, continuing uncertainty about the second half retail demand and the potential impact on Defense spending caused by the Federal government's actions to fund the US economy makes us cautious.

Particularly in the third quarter we anticipate the domestic retail channel to order slowly until retailers can gauge the level of consumer holiday spending. We also expect revenue in the G&I business, which tends to be lumpy due to the nature of the government's contracting and ordering process, to make it lower in Q3 and higher in Q4 relative to 2008.

Now let's look at the results in detail.

In Home Robots revenue totaled $34 million for the quarter compared with $42 million last year.

Our international business continues to be the bright light against a dreary domestic consumer back drop. We generated nearly $20 million of international revenue, an increase of 9% from Q2 of last year which partially offset the year-over-year quarterly decline in domestic retail and direct revenue. Our international business continues to demonstrate the strength that we anticipated going into the year.

Many of our existing customers in key tier 1 countries are expanding with new retail partners because of the success they've had with the Roomba 500. We are beginning to see the impact of the expanding global recession, particularly in the UK, but demand elsewhere at this point seems to be outpacing the negative recessionary impact.

In the US we are seeing the greatest demand from secondary retailers such as Amazon and Home Shopping Network. Total domestic retail and direct sales were down year-over-year. At this point it is difficult to say whether the decline in consumer spending has hit bottom. Most US retailers are still taking a cautious approach to 2009 holiday inventory planning but we continue to expect growth in international to partially offset recession-driven weakness in our domestic retail and direct channels.

I'd like to take a minute to highlight the substantial improvements we have made to our home robot operations. An historic risk factor in our ability to operate efficiently and predict results, supply chain effectiveness is becoming a real strength. Specifically, we have reduced inventory to improve sales and production forecasting, implemented an oracle MRP system to better manage supply chain, developed dual sourcing for batteries and other key components, eliminated skews and consolidated third party logistic providers who optimize warehouse and distribution processes. All these initiatives have contributed to creating improved operating efficiency and, as a result, we are meeting the supply demands of our customers while maintaining much lower inventories.

Now let's turn to Government and Industrial Robots. In the Government and Industrial division we generated $27 million in Q2 revenue compared with $25 million a year ago. More than half of the 151 Government robots shipped during the quarter were PackBot FasTacs, as we anticipated. In addition, we delivered the first PackBot 510 EODs. These are enhanced versions of the PackBot that are faster, stronger and easier to use. We also delivered the first ten small unmanned ground vehicles, or SUGV 310s, under the mini-EOD contract. We expect to receive and fulfill additional orders for all three robot classes in the second half of this year.

On June 23rd the Defense Department issued a decision memorandum confirming the recommendations made earlier this year by Defense Secretary Robert Gates to replace the Future Combat Systems program with a number of smaller modernization efforts.

One of the new modernization programs includes a plan to quickly spin out the FCS capabilities that have already been developed to seven infantry brigades. Limited user testing will be conducted this summer on various individual systems including our small unmanned ground vehicle. A milestone [C] decision to move the systems into production is expected by the end of 2009.

The budget details surrounding the Army's procurement of SUGVs have still not been finalized and further complicating the equation is the overall economic situation and the government's competing funding priorities. However, while timing is uncertain we still expect SUGVs to be procured for all combat brigades over time beginning in the government's fiscal year of 2010, as we have discussed last quarter. We have not included any revenue from the sale of SUGVs under the Army's revised programs in our calendar 2009 expectations.

In addition to supplying robots to the US Government, we are gaining traction in the international markets. In the second quarter international revenue increased to $2 million, or 6% of G&I product revenue, compared with $400,000, or 2%, last year. We recently received a new order from the German Federal Defense Forces for 12 robots, the first order of 18 PackBot EOD robots in 2006, after conducting a competitive market search and an intensive year and one-half long test.

After receiving the first delivery the soldiers went through extensive user training and were impressed by PackBot's lightweight design and ease of use, speed and dexterity. And the successful training was one of the primary reasons they are executing a follow-on order for 22 robots in 2007 as well as the recent order which follows several year's worth of positive experience with our robots. Likewise, we recently received a new order from the UK Metropolitan Police for seven robots following the UK's successful experience with PackBots purchased in 2006. Our success in the [GF/DF] in the UK gives us increased confidence that our international strategy is on track.

On the research front we were selected by the Robotics Technology Consortium to work on three projects designed to enhance the capabilities of currently deployed and future unmanned ground vehicles. Funding for the three awards totaled $1.5 million and includes work on controller that will provide war fighters with a sense of touch in operating an unmanned ground vehicle, development of enhanced robot sniper detection capability and a development of a robot head with enhanced autonomy support for sensing and processing.

These examples of our continuing commitment to research and development efforts are important to growing our reputation as a leading innovator in the robotics space. Working with government, academic and industrial partners we're developing fundamental technologies and capabilities applicable across our robot family which will provide innovative robotic solutions to the war fighter.

Externally funded programs augmented by our IR&D efforts position us well to understand our customers' evolving needs and ultimately be selected for production programs.

In summary, we successfully executed against our plan in the first half and despite the fact that the rest of 2009 will be challenging due to macro forces, we are on track to meet the expectations we provided at the beginning of the year. We will continue to tightly manage the business, to drive adjusted EBITDA and operating cash flow while investing in our future.

I'll now turn the call over to John to review our second quarter financial results.

Thanks, Colin. Our financial results for the second quarter were at the top end of the range for revenue and earnings per share and far exceeded our EBITDA expectations.

While revenue declined 9% from the second quarter of last year as anticipated to $61 million, growth in our international Home Robot business continued to be strong, up 9% from a year ago.

Loss per share for the quarter was $0.10 compared with a loss of $0.18 per share in 2008. Adjusted EBITDA for Q2 was $100,000 compared with a loss of $5.8 million a year ago. For the first half of 2009, adjusted EBITDA loss improved $10 million from the first half of 2008. Our focus on driving EBITDA and our commitment to growing profitability have produced solid first half results.

In the Home Robot division shipments of 192,000 units generated $34 million in revenue compared to 237,000 units and $42 million in revenue a year ago. International revenue increased 9% in the quarter year-over-year and comprised more than 50% of Home Robot revenue.

Domestic revenue, including direct, continues to be soft. In the G&I division, total revenue increased 7% to $27 million in the quarter. Revenue was driven by fulfillment of orders for the PackBot FasTac 510s and SUGVs. Contract revenue increased 34% in the quarter due to funding for maritime research and a number of PackBot sensor programs.

G&I product revenue was $19 million in the second quarter, essentially flat versus last year. Product lifecycle revenue was $5 million, or 25% of G&I product revenue, compared with 11% of product revenue in Q2 last year.

For the total Company, gross margin for the second quarter was 26.8%, up from 24.5% last year. The gross margin increase was largely driven by improved cost of goods and favorable mix in home robots.

Operating expenses improved $5.3 million year-over-year in Q2. Expenses totaled 33% of revenue, down from 38% last year. The overall reduction in OpEx was largely driven by a reduction in selling and marketing.

Our tax rate for Q2 was 29.5% versus 52.6% in Q1. The rate was positively impacted by a change in the deductibility of our 2009 incentive plan expenses. Second quarter loss per share was negatively impacted by $0.03 by the lower rate. For Q3 and Q4 we are forecasting a 36% tax rate.

Operating cash flow was a use of funds of approximately $2.5 million compared with break-even in Q2 of last year. G&I shipments late in the quarter resulted in higher accounts receivable at quarter end. This was off-set in part by continued improvements in inventory levels and higher accounts payable.

Over the past year we have generated operating cash flow of nearly $31 million as a result of our focus on working capital. Days sales outstanding were 52 days, up from 42 at the end of the first quarter and 36 last year, primarily due to the late quarter G&I sales.

Inventory improved further to $29 million, down from $31 million at the end of the first quarter and down almost $15 million from $43 million a year ago. At the end of the second quarter we had cash and investments totaling $51 million compared with $41 million at the end of December. Over the past year we have improved our cash position by $21 million.

We expect our cash balance to decline in the third quarter as we build inventory for the holiday season before growing again in Q4. We expect to generate $11 million to $14 million in operating cash flow for the year and finish the year with $45 million to $48 million in cash.

To summarize, we met expectations in a difficult environment and continue to strengthen the Company's financial position. The remainder of the year promises to be challenging but we will continue to aggressively manage the key drivers of valuation - EBITDA, working capital and operating cash flow - while continuing to invest in our future.

Now I'd like to turn the call back over to Colin.

Thank you. We had a very good second quarter and despite the uncertainty impacting our expectations for both businesses in the second half of the year we are on track to meet the expectations that we set at the beginning of the year.

In summary, we ended the second quarter with nearly $51 million in cash, reported a $6 million improvement in adjusted EBITDA year-over-year and a $10 million first-half improvement over last year, growth in our international Home Robot businesses had partially offset the recession-driven decline in domestic sales, the medium and long-term outlook for G&I business is excellent despite near-term uncertainty about funding flow and order timing and we will continue to manage the business aggressively to deliver strong operating performance while investing in technology and new product development.

Before we take your questions I'd like to provide you with our financial expectations for the third quarter. Predicting the exact timing of holiday orders in our Home Robot business between third and fourth quarter is extremely difficult. We expect domestic retailers to be cautious about ordering early this year and to wait as long as possible. In addition, the lumpiness in our G&I business will negatively impact the quarter. Therefore, we anticipate Q3 revenue and profit to be significantly lower than 2008 and Q4 to show an improvement over 2008.

We are expecting Q3 revenues to be in the range of $75 million to $80 million. For Q3 we expect earnings per share between break-even and $0.03. We expect adjusted EBITDA for Q3 to be between $3 million and $5 million. We are narrowing the range of our full-year revenue expectation and reaffirming our expectations for earnings per share and adjusted EBITDA.

For 2009 we anticipate revenue to be in the range of $295 million and $305 million [sic - see press release] and earnings per share between break-even and $0.04, and adjusted EBITDA to be between $14 million and $17 million.

With that we'll open the call to your questions.

Thank you. (Operator Instructions) Our first question today comes from Jim Ricchiuti of Needham and Company.

You appear to be understandably cautious with respect to the domestic holiday season coming up. I wonder, how do you see the international business, Colin? You don't have as much experience with the Home Robot business overseas as it relates to the holiday season. Can you give us some sense what you're seeing, what you're assuming for that business now that it's a bigger part of your consumer revenue?

Well, we have -- we've been in the international market for some time. Certainly they have taken off over the past 18 months and that's exciting for us. But what we've modeled in our plan for the year is a continuation of the solid and strong performance we saw in the first half of the year. But we haven't assumed a tremendous improvement over the rates of sales that we're currently enjoying so we're trying to be cautious about that, too, because the recession in Europe is on the up-swing, not the down-swing, as far as we can tell and we want to make sure that we protect ourselves.

And is business down in the UK, Colin, in the quarter?

No. It's been up. We talked about UK being impacted but the -- throughout the rest of Europe the demand for this product entering the marketplace and the job our distributors have been doing driving sales have outpaced the negative impact of recession. So we continue to be up.

Thanks.

Barbara Coffey, Kaufman Brothers.

Yes. As you take a look at Europe and sort of the Home Robots are there certain patterns of buying behavior if you are doing it differently here than in the US? Is it because they don't have the same kind of big box stores in the same way? Could you speak a little bit about how the sales process might be different overseas?

We actually have adopted a strategy where we use local distributors to help form our distribution strategy country by country. And that's important because, as you point out, each country has different ways of buying this type of product.

For example, in Germany we're getting a lot of traction and sales through very small boutique stores. It's one of the only countries left on the planet where that is an effective way of moving volumes of product where you sort of have mom and pop electronics stores.

In Italy it's a model that more closely resembles the North American process where we're in larger big box stores and our distributor is making larger investments on TV advertising and awareness programs to drive foot traffic into those stores.

France is a little bit more in the middle but we rely on and partner with our retailers to show what we're doing, show what other distributors are doing and allow them to tailor a program to best meet the appropriate strategies that work in their country. And it's really been a winning strategy for us.

Thank you.

Paul Coster, JPMorgan Chase & Company.

Colin, a few questions on the G&I side of business. First of all, can you talk to us a little bit about what's happening in Afghanistan? We're seeing reports of increased use of roadside bombs again and I'm assuming this has some benefit to you in some way. If it does, what's the funding vehicle for it? What program would you see those orders coming through?

Certainly an increase in conflict is not a good thing but Afghanistan is an area where our vehicles have a real advantage being smaller and more easily carried about than some of the other potential competitors. We think that, and we've shown, these robots to be incredibly effective at addressing roadside bomb threats.

So the utilization of robots in Afghanistan is significantly up and the provider of robots to the soldiers in the field, groups like the RSJPO, are being able to put more robots to work and that ultimately leads to additional sales and support contracts coming into iRobot. So utilization is absolutely up and as we see any impact and creation of new orders certainly we'll pass those along.

I guess I'm trying to understand what programs would it come through? Would it be -- and what models are we talking about here? Is it FasTacs or EODs --?

Well, the roadside bombs typically are the EOD robots. They are procured under the MTRS program. The FasTacs are a model that's been put into service to give a response capability for EOD like situations through the regular infantry and we've -- and so that would be a different end user but also a potential vehicle with which our robots could find their way in greater quantity into Afghanistan. So the FasTac contract and the MTRS contracts are things that would -- vehicles that would be used to place orders to more robustly equip our soldiers.

Now the FCS program has been disbanded. Maybe that's a good thing for you because it seems like smaller and lighter programs will move faster. That said, to what extent should we be concerned about the actual procurement organization now that that's being disbanded? Was there one in the first place? Is there one now and is that sort of gauging factor for you?

Well, as I tried to describe it, it is a bit -- there is more uncertainty exactly around the timing. I think you're exactly right that the disbanding of the FCS program and the formation of smaller, more agile programs to commercialize technology such as the SUGV ultimately benefit us as do the expansion of scope where these technologies are instead going to all of the combat brigades over time. So this is all good news.

We've managed in 2009 with all this transition taking place to establish a consistent and predictable set of orders to help drive our business this year. And we see the clouds of uncertainty clearing in 2010, and the end of this year, as we start to get more -- a better look at how the procurements are actually going to play out.

I talked a little bit in the call about a specific program to equip seven combat brigades which we'll get some clarity on by the end of this year. But we're confident that 2010 is going to be a good year for SUGV.

My last question, then, is the unit volumes in the military segment are a bit lower than we expected but the revenues were higher. Are the ASPs creep -- the average selling price for the devices creeping up because of the mix-shift or is it the product life cycle business that's making that change happen?

Paul, for the quarter it was probably more driven by contract revenue being up so PLRs [wouldn't] and that has been growing over time. But in Q2 overall revenue for G&I was impacted by contract revenue being up quite a bit year-over-year.

Well, it's important to - as we have really focused on operating efficiency - we also continue to be very successful at bringing in this contract revenue to fund the research and development activities to work on our new product programs and our new technology programs so we were very, very happy with that result.

And maybe I'm misstating it but the EOD product that's now starting to ship, does that have a higher than average ASP or not?

The mini-EOD robot which I think you are referring to has a lower ASP than the PackBot 500 Series EOD and PackBot 510 EOD product. And the FasTac is also -- has some EOD capability and is priced lower.

Okay, got it.

You wouldn't be seeing higher ASPs.

No. Okay, got it. Thank you.

Josephine Millward, [Stanford] Financial Group.

Colin, you talked about you were looking for orders in all of -- the FasTac, PackBot 510 and also the SUGV. You expect to receive orders in the second half. Could you give us a little more color on the magnitude and timing of these orders?

I'm afraid I can't, Josephine. As you know, these things are very lumpy and we'll receive requests and then it will be uncertain as to the exact timing and amounts of these. But we have indications that there is strong interest in all of these three classes of robots which gives us sufficient confidence to say that we expect them in. But I can't give you more detail.

Are you actually bidding on -- are you currently bidding on solicitations or are we at that stage yet?

We are constantly receiving inquiries driven from needs out of the Pentagon and probably in the last week have done a number of bids and responses but the number that we have to do before we have one turn into an actual order is certainly not a 1-to-1 ratio. But there's a lot of activity and that's encouraging for us.

Great. And, Colin, you talked about the spin-outs, these seven infantry brigades, combat teams. Do you expect when you get your low-rate initial production orders, do you expect to receive an order to supply seven brigades? Because so far I think the Defense budget mark-up has only provided funding for one brigade next year.

Well, things are certainly in flux and information on exactly how many brigades seems to change so that I'm uncomfortable giving you a strong answer on that one.

Okay. That's fair. The budget is not done!

Yes. If I could predict the future that would be a wonderful thing.

Right. Can you talk a little bit about your international outlook for G&I? Are you seeing any interest from the Iraqi Army or Afghanistan? Any foreign military sales opportunities?

Foreign military sales opportunities are absolutely one of the things that we think will drive our international business. The Iraqi Government is actively looking at our robots and we think that there is great opportunity there. And so, yes, that's a strong area of future business for us.

Great. Thank you very much.

This will be the last question.

And our final question is a follow-up from Jim Ricchiuti at Needham & Company.

I was just wondering if you can say based on your internal plan for the G&I business how far are you along the way in terms of comfort level based on your backlog at this point?

Jim, at this point we have about 65% visibility between what has already been shipped or provided and what's on contract to hit the full year forecast that we have for G&I.

And your costs continue to be well under control. And I'm just wondering with respect to the tightening of the revenue guidance, are you taking any additional measures on the cost side or you expect possibly a little better gross margins than you were initially anticipating in the second half?

Jim, we'll continue to manage in the second half in a way consistent with the first half and that's really -- across both divisions we've managed the business very tightly because, as you know, for different reasons but both divisions the visibility for the year has been really hard to -- the visibility has not been great for both divisions. So we have managed costs, particularly sales and marketing, very carefully.

In the back half we do expect that gross margins will improve as they typically do because of the seasonality of the home business. So I think in the back half you can expect to see gross margins somewhat in line with the gross margins from last year. And then we will continue to leverage our operating expenses as a percentage of revenue at a better rate, again, consistent with the way we've done it in Q1.

So we feel confident about the guidance that Colin outlined because we feel that we now have processes in place to manage the business aggressively and will continue to do that in the second half.

Thanks very much.

Thank you. That concludes our Second Quarter Earnings Call. We appreciate your support and look forward to talking with you again following our third quarter.

And that does conclude today's conference, ladies and gentlemen. We appreciate everyone's participation today. You may now disconnect. Have a wonderful day.