iRobot Corp (IRBT) 2010 Q3 法說會逐字稿

Good day, everyone, and welcome to the iRobot third quarter 2010 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.

This conference call may contain express or implied forward-looking statements relating to the Company's financial results, operations and tax rate for fiscal 2010 and the fourth quarter ending January 1, 2011; seasonality; our long-term expectations regarding gross margin, operating expense margin, operating cash flow and adjusted EBITDA; our plans for expansion, new product development and shipment and new product distribution channels; backlog and demand for our government and industrial robots and related parts and services; orders for our SUGV robot; future levels of product life cycle revenue; timing in order fulfillment; demand for our home robots, including international demand; mix of product revenue; competitive position and market share; 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.

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

During this conference call, we will also disclose various non-GAAP financial measures as defined by SEC Regulation G, including net income, excluding the impact of a one-time tax benefit; earnings per share, excluding the impact of a one-time tax benefit; and adjusted EBITDA, which we define as earnings before interest, taxes, depreciation, amortization, merger and acquisition expenses, and noncash stock compensation expense.

Reconciliations between net income excluding the impact of a one-time tax benefit and net income, earnings per share excluding the impact of a one-time tax benefit in earnings per share and net income, the GAAP measure most directly comparable to adjusted EBITDA, and adjusted EBITDA are provided in the financial tables at the end of the Q3 2010 earnings press release issued last evening, which is available on our website, www.iRobot.com.

A live audio broadcast of this conference call is also available on the Investor Relations page of our website, and an archived version of the broadcast will be available on the same web page following the call.

In addition, a replay of this conference call will be available through November 4, 2010, and can be accessed by dialing 617-801-6888, access code 35724357.

On today's call iRobot Chairman and CEO Colin Angle will provide a review of our company's operations and achievements for the third quarter of 2010, as well as our outlook for the business for the rest of 2010, and John Leahy, Chief Financial Officer, will review our financial results for the third quarter of 2010 and provide our outlook for the financial expectations for the fourth quarter ending January 1, 2011 and fiscal 2010.

Then we'll open the call for questions.

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

Good morning, and thank you for joining us.

Our financial performance in the third quarter was exceptionally strong following our record first half results.

Revenue was up 20% from Q3 last year, and adjusted EBITDA for the quarter increased 37%, to $11 million, far exceeding our expectations.

EPS grew 80%, to $0.18, excluding the impact of a $2.3 million one-time tax benefit.

During the quarter, we increased our investments in the business, especially in the area of research and development, while also exceeding our financial expectations.

For the full year, we are raising 2010 revenue expectations once again, to $395 million to $400 million, representing growth of more than 30% over 2009.

We are increasing our expectations for EPS to a range of $0.80 to $0.82, more than six times our 2009 EPS, and adjusted EBITDA to $46 million to $48 million, more than double adjusted EBITDA last year.

Full year earnings per share, excluding the one-time tax benefit, are expected to be $0.72 to $0.74.

Profitable growth in the quarter was driven by both divisions.

Home Robot revenue increased as a result of continuing strong demand in European and Asian markets.

Increasing demand for our products continues to outpace concerns about a softening international economy.

During the quarter, we also had our first Latin America retail sales, in Chile.

Our Government and Industrial Robot Division's revenue growth in Q3 was driven by the sale of a significant number of small unmanned ground vehicles and PackBot spare parts.

Our continued focus on strengthening the balance sheet resulted in quarter-end cash and investments of $107 million, up 71% from $63 million a year ago.

A critical component of improving our cash position over the past year has been through driving adjusted EBITDA and operating cash flow.

Adjusted EBITDA was $11 million, or 12% of revenue, compared with $8 million in Q3 in 2009, and we generated $10 million of operating cash flow for the quarter.

We're having a terrific 2010 on the heels of a strong 2009, and our future looks very exciting.

We operate in global markets which are growing and represent multibillion dollar opportunities.

Our continuous commitment to investing in our technology has provided us with a strong, defensible intellectual property portfolio.

Ongoing investment in the iRobot brand, coupled with our IP position, gives us a sustainable competitive advantage that will allow us to continue to expand our share of these large and growing markets.

To support my optimism about our growth opportunities, we made some organizational changes during the quarter.

We promoted Retired Vice Admiral Joe Dyer to Chief Operating Officer.

Joe has served as President of our G&I Division since 2006.

Prior to joining iRobot he served for 32 years in the US Navy in various capacities, including program manager for the F/A-18 program and as commander of the $23 billion NAVAIR organization.

In addition to operationally overseeing our Home Robot and G&I Divisions and Healthcare Business Unit, he will spend more time in Washington advancing our company's interests at a national and congressional level.

Joe's new role will also allow me to spend more time focusing on our long-term strategy, M&A, pursuing alliances and new avenues of growth.

Succeeding Joe as President of the G&I Division is "Knob" Moses.

Prior to his promotion he was Senior Vice President of the Division and had responsibility for managing the Division's operations since 2003.

To help ensure our continued position as a leader in developing robotic technology-based solutions, we are investing in our common software technology plan to drive product generation in the future.

To lead that initiative I've selected Tom Wagner and promoted him to the position of Senior Vice President and Chief Technology Officer from his previous position as Divisional Technology Officer for the Government and Industrial Division.

And, finally, we recently announced that Russ Campanello will join iRobot on November 1 as Senior Vice President of Human Resources.

Renowned for his expertise in the strategic role of human resources in business, Russ brings more than 25 years of industry experience and will be responsible for all human resources and organizational development activities at iRobot.

He joins the Company from Phase Forward following three years as Senior Vice President of HR and Administration, and prior to that at Keane, a $1 billion business process and information technology services firm with more than 10,000 employees worldwide, where he served as SVP HR and marketing.

By making these changes we are well positioned to continue to carefully manage our growth long into the future.

Now I'd like to take you through some of the other highlights of the third quarter.

In the Home Robot Division, strong demand in international markets, particularly in several European countries and Japan, continued to fuel Home Robot revenue growth.

These markets are providing -- proving to be particularly resilient in face of worldwide macro economic pressures.

Home Robot revenue overseas increased almost 60% year over year.

During the quarter, we began our planned penetration of Latin America with initial retail sales in Chile and expect to have signed distribution agreements in nine countries by year end.

To support that sales activity we recently opened an office in Miami.

In the US, we updated our research regarding our domestic target market as part of the refined sales strategy we discussed in previous calls.

We confirmed that the domestic market opportunity is significant, approximately 20 million households, and that our current sales channel are reaching that market.

Our target customers earn above-average incomes, want meticulously clean homes and believe that technology can address their floor-cleaning problems but need proof that the product will work.

Brand trust is also an important part of their purchase process.

This refined portfolio is consistent with that of our international customers.

A couple weeks ago we held a major press event in New York called Engineering Awesome to highlight our iAdapt navigation technology and Roomba's vastly improved power management system.

That event marks the first of several North American marketing activities that will extend into 2011.

Beginning in the fourth quarter we will kick off a targeted print, radio and online media advertising campaign in the US to coincide with holiday shopping.

Revenue in the domestic market declined slightly in the third quarter due to product availability, following substantial year-over-year growth in the second quarter.

We continue to improve domestic Home Robot profit margins through more strategic placement of product in selected channels.

In the third quarter, we generated gross margins of 39.7%, a 9.4 percentage point improvement over last year.

We are committed to our strategy of profitable growth, continuing to focus on higher end products and channels.

Our potential in Home Robots is tremendous, and we have only just begun to penetrate the markets we serve.

As we discussed at Analyst Day, the annual worldwide market for vacuum cleaners that cost more than $200 is $4 billion a year.

In 2010 we will capture approximately 5% of that market.

The robot vacuum cleaner segment of this market is the fastest growing segment, and our brand awareness and strong intellectual property position will enable us to continue growing our share in this market.

Our Government and Industrial Robot Division also delivered a very solid quarter, as we shipped 186 robots, more than half of which were SUGV 310s.

In addition, we recently received an order from the US Air Force for 30 SUGV 310s worth $4 million.

This represents an exciting expansion of our customer base and will provide the Air Force with the capability that our current customers have come to rely on in dealing with dangerous situations in war zones.

Earlier this month we announced a $14 million order for iRobot Aware 2 Robot Intelligence System software and spare parts, to upgrade the US Army's fleet of PackBot FasTac robots.

When we discussed this opportunity Analyst Day we had expressed -- had expected to upgrade between 500 and 1,000 of these robots in 2010.

However, the Army has since determined that the capabilities afforded the robot through this upgraded software and hardware are so compelling they will upgrade their entire inventory of 1,500 FasTac robots over the next several months.

This order is game-changing for both the Army and iRobot.

The new Aware 2 software will enable a completely modular reconfigurable robot with plug-and-play payloads and implementation of assistive autonomous operations.

The result of this upgrade will be a standardized fleet that can readily accept future upgrades as autonomous capabilities increase and new payloads are developed.

And for iRobot it is an important step in the implementation of our common software strategy.

Beyond supplying robots to the US government, we continue to expand our international footprint, adding new countries to our growing list of customers.

In the third quarter we delivered more than a dozen robots to our existing NATO customers in support of ongoing missions in Afghanistan.

In addition, we saw an increase in the foreign military sales channel, with new opportunities in Eastern Europe and the Middle East.

As with our Home Robot market, the opportunity for our government robots is significant.

We have delivered more than 3,500 unmanned ground vehicles, primarily to the US military, principally for use by bomb disposal teams.

We are just beginning to see the substantial infantry market opportunity for small unmanned ground vehicles materialize.

Over the next four to seven years we expect orders for these robots to be between $10,000 and $20,000 units, or $1 billion to $2 billion.

More importantly, we have a majority of the current market size for this size robot and have proven the defensibility of our intellectual property in this sector.

In addition to supplying robots, we expect to continue generating product life cycle revenue equal to approximately 25% of product revenue.

In summary, both of our businesses are performing well, and we expect each to grow more than 30% at the top line in 2010 while contributing a greater percentage to the bottom line.

Because of our increased visibility through Q3, we are increasing our expectations for 2010 for the third time this year.

For the full year we expect revenue to be between $395 million and $400 million, EPS to be between $0.80 and $0.82 and adjusted EBITDA to be between $46 million and $48 million.

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

Thank you, Colin.

Our performance in the third quarter was outstanding, especially given our very strong first half.

Earnings per share and EBITDA exceeded expectations, while revenue came in at the high end.

Revenue grew 20% year over year to $94 million in the third quarter, driven by continued robust growth in our international home robot business, which was up nearly 60% for the quarter.

Earnings per share for the quarter were $0.27, compared with $0.10 in Q3 2009.

Excluding the impact of a $2.3 million tax benefit due to the release of state deferred tax allowances, EPS for the quarter would have been $0.18, an 80% increase over 2009.

EBITDA was $11 million for Q3 compared with $8 million last year.

Operating cash flow of $10 million in the third quarter has driven our cash and investments position to $107 million, up $44 million from Q3 last year.

In the Home Robot Division, shipments grew 7%, to 308,000 units, and revenue of $55 million increased 23% from a year ago.

International revenue increased more than 50% in the quarter, to $35 million, and comprised 64% of Home Robot revenue.

Total domestic revenues decreased approximately 10% year over year, following a 20% increase in Q2.

The production capacity constraints we discussed on the call last quarter impacted domestic revenue as we allocated product across markets.

However, we expect Q4 domestic revenue to increase year over year as we enter the holiday season.

Home Robot gross margin improvement was due to an increase in international as a percent of total revenue and favorable product and channel mix.

G&I Division revenue of $40 million was up 15% from a year ago.

This growth was driven by higher unit shipments, primarily SUGV 310s, and higher product life cycle revenue, or PLR.

G&I product revenue was $30 million in the third quarter, compared with $25 million last year.

PLR was $9 million, or 30% of G&I product revenue, up from $5 million in 2009.

Product backlog at the end of the quarter was $34 million, compared with $12 million at the end of last quarter.

This backlog position does not include the recent $14 million order for Aware 2 upgrades or the $4 million order from the US Air Force for 30 SUGV 310s.

Including these two orders, we now have 100% visibility of G&I's full year revenue.

For the total company, gross margin for the quarter was 35%, compared with 31% last year.

The improvement was driven primarily by the improved Home Robot mix I mentioned earlier.

Operating expenses increased slightly as a percentage of revenue to 27% from 26% in Q3 last year, as we doubled our dollar investment in research and development.

Some of the sales and marketing expenditures we anticipated making in the third quarter were deferred to the fourth quarter, and others were postponed until next year.

Q3 operating cash flow was nearly $10 million, compared with $13 million last year.

Year to date, operating cash flow was $35 million, or 12% of revenue.

Inventory was $34 million at quarter end, up from $25 million a year ago, due to timing of shipments and higher revenues in both divisions.

Accounts receivable continue to be well managed, as evidenced by our DSO of 29 days, compared with 54 days a year ago.

At the end of Q3 we had cash including investments totaling $107 million, compared with $63 million a year ago.

Now I'd like to provide you with additional detail for the financial expectations Colin discussed.

Our revenue expectations for the full year have increased slightly from last quarter.

While we expect both divisions to grow roughly 30%, international demand for home robots allows us to increase our expectations for that division to a range of $223 million to $226 million.

Our revenue expectations for the G&I division remain at $172 million to $174 million for the year.

We expect Q4 revenues to be higher than Q3 and higher than our record-setting fourth quarter last year.

Home Robot revenue will be driven by a continued demand from our international customer base.

PLR, international orders for PackBots and shipments of SUGV 310s will drive G&I revenue for the fourth quarter.

As we discussed at Analyst Day, our three-year target for gross margin is 35% to 37%.

We've made significant progress towards that target over the past year and expect full year gross margin of approximately 35%.

Operating expenses will be higher in Q4 than last year due to marketing program commitments we've made to our international partners and expenditures planned to support and strengthen our brands domestically.

We've now added about 130 employees over the past year, largely in R&D and sales.

We expect Q4 to be another strong quarter, with revenue in the range of $108 million to $113 million, up almost 10% from our record quarter last year, EPS of $0.10 to $0.12 and EBITDA in the range of $8 million to $10 million.

Our estimated tax rate for Q4 is 39%, and 31.5% for the full year, reflecting the impact of the one-time benefit in Q3.

For the full year, we are once again increasing our expectations for revenue, EPS and EBITDA.

Finally, in 2011 we expect another year of good progress towards our long-term financial goals, with reasonable top-line growth and healthy growth in EBITDA and operating cash flow.

Given the less seasonal nature of international Home Robot revenue, the 2011 HRD quarterly revenue pattern is more likely to resemble 2010's than that of prior years.

G&I's revenue pattern is likely to be lumpier quarter to quarter next year but continue to show solid annual year-over-year growth.

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

Thank you, John.

I'm very excited to be talking to you today following great quarterly and year-to-date results, with the confidence to increase our full year 2010 expectations once again.

Just to reiterate those expectations, we anticipate revenue of $395 million to $400 million, EPS of $0.80 to $0.82 and adjusted EBITDA of $46 million to $48 million.

We continue to successfully navigate through the dynamic and challenging global marketplace in which we operate.

We're making significant progress toward our three-year financial targets.

We're making ongoing investments in building for our future and maintaining our market-leading position.

iRobot is a leader in robust global markets, with current annual sales of more than $4 billion.

The size of our markets will continue to grow, and we are focused on expanding our share of these markets.

We are confident that our strong brand and intellectual property will provide us with a sustainable competitive advantage.

With that, we'll take your questions.

Thank you.

(Operator instructions).

Your first question comes from the line of Jim Ricchiuti, representing Needham & Company.

Please proceed.

Hi.

Good morning.

Congratulations on the quarter.

Thanks, Jim.

Question I had is on the Home Robot business, I'm just trying to better understand the dynamics of what you're doing in terms of product allocations in the US versus international.

It seems like you deferred some sales and marketing expense, I am assuming out of the US market.

Was this a case where you just saw stronger demand internationally and took advantage of the better margins in that business?

The deferral of marketing spend was not just in the US.

We deferred some spend in both domestic and international channel.

Some of that was execution related and some of that was chasing some opportunities that we saw a little later in the year.

As far as the allocation goes, we made some assumptions as to where we were -- what product we were building that the models are not -- there's different SKUs that we sell internationally and domestically, and having made those decisions we're making -- allowing things to play out as our logistical capabilities allow.

And then from a capacity standpoint, it seems like you're increasing your guidance for the Home Robot business and you're, I think, assuming it sounds like a little better international business.

But do you have much flexibility in terms of capacity?

We don't.

I mean, you'll notice that our increase in revenue guidance is very modest, and that is primarily due to the product availability constraints.

Now, those are easing late in December as our new contract manufacturer comes online, so we don't anticipate that being an issue next year.

And last question and I'll jump back in the queue, just with respect to the US business, do you feel that there's been potentially any share loss in the US just given the capacity constraints you've faced this year?

I don't believe that there's any share loss.

We have the -- our retailers are very, very happy with us.

We're creating a -- despite the capacity constraints we're certainly giving them a very strong-selling product.

And the challenge of making a robot that sells and stays sold is a very daunting challenge, and the retailers appreciate the success of the product and all of the work that's gone into making sure that the customers are delighted with our product.

We are up 2% year over year in the US, so certainly it's not like the retailers are seeing a negative vector in sales.

It's far from it.

The demand is very, very high.

Okay.

Thanks very much.

Your next question comes from the line of Paul Coster, representing JPMorgan.

Please proceed.

Yes, thank you.

Good morning.

John, in your final comment there you said that the G&I business next year is likely to be lumpier quarter to quarter.

Can you just provide us a little bit of color as to why the buying pattern is changing next year?

Paul, I think it's really just more uncertainty in terms of timing.

We've seen some of that this year, probably more behind the scenes than what's been visible to you and those externally, but there just continues to be a lot of uncertainty around the timing of when orders will come in.

And so we are anticipating that the quarter-to-quarter order flow may just not be as smooth as we would like.

Can I go down one level of detail there and understand the reason why there's less visibility?

Is it because of uncertainty in terms of budget processes in the US DOD, or is it something else that's going on?

Paul, it's Colin.

The G&I sales, if you recall, have always been lumpy.

We thought for a while there was a pattern where the second quarter would be the weakest.

This year the second quarter was amongst the strongest.

The driving reason for this is that the acquisition of robots is based on when various contracts are signed, and every year we have a good idea which contracts are in the works, but we see a variance of three to six months from the promise date in both directions as to when those actually get signed and we can start shipping product.

So this is a characteristic that we have developed processes around to deal with and have had a very predictable, on a full-year basis, record of anticipating what's going to happen, but quarter to quarter it's always been difficult to predict, and next year is no exception.

That's the reason for that lumpiness comment.

It won't look the same -- the only thing we can be certain about is that it won't look the same as it did this year.

That having been said, you're also pointing to massive growth potential for the -- in the US infantry context, and clearly that means that at some point the visibility will improve.

So we're in a transitional period, it sounds like.

When do you think that infantry demand that's so massive will start to ramp up, and what will be the -- how will investors know, get a handle on the scale and the visibility?

Well, the -- we have delivered the first four robots under the LRIP and we'll be delivering the next 39 robots by the end of the year.

That's the first stage in a large program of record acquisition of robots.

So certainly when we start talking about long-term contracts with higher ceilings for higher levels of robots, that will be a good sign that a long, easily predictable flow of these SUGV robots in the military has begun, although it may not happen solely like that.

What we're seeing is outside of the Brigade Combat Team Modernization Program we're seeing increased demand for SUGV 310s and 320s.

So the Pentagon is definitely looking at multiple different mechanisms for acquiring our robots, and you have our commitment to give as much clarity as we have to you in helping set expectations.

But you are correct in that I can't tell you exactly how it's going to play out today.

The South America Home Robot initiative, will it be in place in time for the holiday season?

The robot -- we have had very good sales in Chile so far.

The distribution agreement goal was to have them in place by the end of this year, and we'll certainly do that.

We've previously stated we don't anticipate material sales this year, but we do expect those sales to be material next year.

Okay, last question.

John, in your prepared remarks you also talked about reasonable growth next year, which raises all kinds of questions as to the definition of reasonable, but is it a kind of 20% growth story still here, 30%?

Perhaps you can elaborate.

Well, as you would know, Paul, we don't want to be giving specific 2011 guidance at this point.

But what we're trying to indicate is that we think we're well on track with those three-year goals that we had set out and that 2011 should be in line with those goals.

So those goals were that we would deliver mid to high teens revenue growth year in and year out.

We would achieve mid teens EBITDA margins within a few years and then consistently generate operating cash flow.

So our messaging is that we think -- 2010 has obviously been a terrific year at very high revenue and profit growth, and what we are indicating is that we think for the next couple of years we think we're on track to continue to progress towards our long-term targets.

Thank you very much.

All right.

Your next question comes from the line of Adam Fleck, representing Morningstar.

Please proceed.

Hi.

Good morning.

Good morning.

Question about, John, you talked about R&D obviously is up quite a bit here in the quarter.

On your internal research expenses, is that pretty much split evenly between the Home Robot side and the Government, or does it lean one way or the other?

Adam, we have more headcount on the Government side.

So it would be more skewed towards the G&I Division.

And keep in mind that an important part of our model for R&D is government-funded R&D, as well, which obviously is predominantly flowing into the Government Division, as well.

So, overall our revenue -- our R&D as a percentage of revenue, including funded, runs 13% to 14% for the total company, but we have been investing over the last couple of quarters more money, more -- and headcount into R&D, and therefore that comment of R&D dollar spending for the total company going up from Q2 to Q3.

Great.

And then, also, we've seen nickel costs throughout the year here creep up.

Are your suppliers still hedged on the year?

And then as you bring Jabil online on the Home Robot side, do you anticipate that they'll be hedged on nickel costs as well?

Adam, we have two or three battery suppliers now, which is an improvement from where we were a couple of years ago.

And we have locked in -- we had for 2010 our pricing for batteries locked in before the beginning of the year.

And with our major supplier of batteries we've now already locked in pricing for 2011, which will greatly minimize any risk from price swings in nickel.

So we feel pretty good about the pricing that we've already secured for 2011.

Great.

That's it for me.

Thanks.

You're welcome.

The next question comes from the line of Jim McIlree, representing Merriman.

Please proceed.

Thank you.

Good morning.

Good morning.

Can you talk about the Aware 2 shipment schedules?

Do you think that that entire $14 million order will be completed this year, or does it bleed into next?

It'll be completed over the next two quarters, so Q4 and Q1 of 2011.

Okay.

And is it reasonable to think that it's kind of evenly split, or does it -- is it predominantly in one of the quarters?

I mean, more or less, yes.

I'm sorry?

More or less.

I mean, I think that there's a -- it's probably a little back-end loaded.

Okay.

Great.

And then, for 2011 in terms of the composition of the unit shipments of the G&I Division, is that going to be almost all SUGVs or is there still some residual PackBots in there?

The PackBot product line continues to be vibrant, but we're not going to give a detailed breakdown at this time of what we anticipate.

But PackBot is strong internationally.

We expect that to continue.

Okay.

Great.

The operating expense deferrals in Q3, how much -- it seems like you have a lot of flexibility to make those or not make those this quarter and the next, and I'm trying to understand what goes into your thinking to defer them or not defer them?

Jim, you're right.

We do have flexibility.

And the uptick in spending we're anticipating for Q3, as Colin mentioned earlier in the marketing area, some of that did not come to fruition, in part just to challenges in executing those programs, but also because we chose to rein it back a bit, largely because of the production constraints that we've talked about the last couple of quarters.

But we do anticipate in Q4 to be upping our marketing spending both domestically and overseas.

And, as you suggested, we do have a fair amount of flexibility in terms of whether we choose to do that or not.

But our expectations are that we will, because we do feel the -- we feel the impact of supporting the brand in a heavier way than we have over the last couple of year will be beneficial in both the near term and the long term.

Is it fair to say that part of the reason for the deferrals was also based on a stronger European and Japanese demand than you had expected?

I think it's more operational.

The demand, strong demand internationally caused a lot of excitement and work on those sides, which led to the deferring of some of these marketing programs.

But we feel very committed to those programs and feel that they'll put us in good stead as we finish the quarter and go into the next year.

Also, just to point out that strength on our direct side, as that grows, that also adds to our below-the-line sales and marketing costs, because that's where we accrue some of those expenses.

Right.

Okay.

And, finally, can you just comment briefly on Ranger, where that is in its development and introduction?

Sure.

Ranger is a new product development program so that we are at the -- sort of actively building and designing this product.

We've had some prototype units that have been in operational test, but it is not yet a product, so that you should expect to hear more about -- more information about when we would sell that to customers beyond the research community next year.

So that's sort of a stay tuned, in development program.

Great.

Thank you, and very impressive results.

Thank you very much.

Your next question comes from the line of Brian Ruttenbur, representing Morgan Keegan.

Please proceed.

Yes, thank you very much.

Great quarter.

The questions I have, some of them have been touched on a little bit, but can you talk a little bit about going forward the sales and marketing?

The fourth quarter it's going to ramp up, obviously, and can you talk about how you expect that to then drop off then in the first quarter and then go back up in the fourth quarter?

You talked a little bit about seasonality of some of your operating expenses.

I know you're not prepared to talk as much about revenue, but maybe we can talk a little bit about expenses by quarter.

Sure.

From a sales and marketing perspective, on the home side you have a couple different competing drivers.

Domestically, we tend to get the biggest return generating demand around the Mother's Day timeframe and the holiday season.

However, we also think competing with that inherent two-peak seasonality is a desire to create a bit of a drumbeat of awareness for the product, because as Roomba continues to become more mainstream, we are finding the product less as a gift and more as a, "My vacuum cleaner broke, I think maybe I'll try out the Roomba," or maybe I just am tired of vacuuming the floor every day, let's have a robot do it.

So it's appliances in the -- vacuum cleaners in particular are not inherently seasonal, and so that we want to be in the mind space of our customers year round, so that you'll see an increase in sort of the drumbeat with some spiking around those two areas domestically.

Internationally, the product is much less seasonal and thus a consistent, through-the-year awareness program would be the ideal.

Okay.

So, help out me out with, then, numbers a little bit more concrete.

We're going to see $14 million to $15 million in sales and marketing in the fourth quarter?

Is that a right number?

We don't want to get into that level of detail.

But what I would suggest to you, Brian, is that we do expect uplift in Q4 in sales and marketing, in part due to the cost of the direct business but also investments in the brand.

And we expect that as we go into next year that we will support the brands in a stronger way through sales and marketing efforts than we have in the last couple of years.

The last couple of years, obviously, we really tightened down OpEx because of the uncertainty with regard to macros.

Now we're seeing very good performance of the business, and we're letting out the leash somewhat.

And we in 2011, just like I mentioned earlier, we'll have the ability let that leash out or draw it back in based upon how the business is doing.

But we expect and hope that we'll be able to continue to invest more in sales and marketing, as we have in the second half of this year, than we did in '08 and in '09.

Okay.

Can you talk about targets for R&D as a percentage in sales and marketing, then?

Your target in three years is to have 6% R&D and 11% sales and marketing?

Can you give us some kind of --

Sure.

Our internal research and development target has long been between the range of 6% and 9% of top line.

We have tended to be much closer to the 6% figure than the 9% figure.

I think that given our revenue growth, despite our increased commitment to research and development, that we would continue to be closer to that lower percentage figure than the higher percentage figure.

But, again, let me remind you that we are highly successful at bringing in the -- that government-sponsored research and development dollar to more than double the IR&D spend, giving us mid teen type of overall investment as a company in research and development.

Okay.

And then sales and marketing, can you give me that same -- in G&A give me that same kind of number?

No, we're not going to break that out, but I can tell you that our three-year target for OpEx is 25% to 27% of revenue.

Great.

Thank you very much.

I appreciate your help.

Sure.

Your next question comes as a follow-up from the line of Jim Ricchiuti, representing Needham & Company.

Please proceed.

With respect to new products in the consumer business, you've been relatively quiet, I guess for obvious reasons given the macro economy.

But can you talk a little bit about 2011 in terms of new products in that area of the business?

Well, at the Analyst Day Jeff Beck made the statement that before the next Analyst Day you'd see a new product from Home.

I think that we certainly stand by that comment.

Okay.

And, Colin, is it -- sounds like you're going to be spending a little bit more time in some of the newer market areas.

Your cash position is increasing quite a bit.

I wonder if you would talk a little bit about your strategy with respect to acquisitions, and what types of areas you might be considering, to the extent you're willing to talk a little bit about that.

Well, certainly, our business performance, our cash performance gives us a more significant ability to execute on an M&A, so that's exciting for us.

We -- as we think about M&A we look at adjacent -- adjacencies to our current business.

We look at technologies that have a unique benefit for a robot industry, and we look for products that could take advantage of our existing sales channels.

What you wouldn't see us do is make a move in an industry where most of the sales and economic opportunity lay outside of our industry, like buying a battery manufacturer would be a -- something we'd be less interested in, because the economic opportunity for batteries, while it does overlap with robots, predominantly lies outside of the world of robots.

Okay.

And last question from me, I wonder if there's anything new to report or anything that you'd be willing to talk about with respect to the home health initiative that you have going on.

Not at this time.

When we announced it we tried to set expectations that yes, we are involved.

But this is a new business development opportunity and it's something that is going to take some time to decide where the most attractive areas are for launch, and then in our industry developing product is a multiyear endeavor.

So we'll keep you updated, but I have nothing to report right now.

Okay.

Thank you.

Okay.

Well, that concludes our third quarter earnings call.

We greatly appreciate your support and look forward to talking with you again in February to discuss Q4 results and our financial expectations for 2011.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect.

Good day.