iRobot Corp (IRBT) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to the iRobot first-quarter 2011 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 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 provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements.

Additional information on these risks and uncertainties can be found in our public filings with the Securities and Exchange Commission.

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

During this conference call we will also discuss non-GAAP financial measures as defined by SEC Regulation G, including adjusted EBITDA, which we define as earnings before interest, taxes, depreciation, amortization, merger and acquisition expenses, and non-cash stock compensation expense.

A reconciliation of GAAP and non-GAAP metrics can be found in the financial tables at the end of the Q1 2011 earnings press release issued last evening, which is available on our website.

On today's call iRobot Chairman and CEO Colin Angle will provide a review of the Company's operations and achievements for the first quarter 2011 as well as our outlook for the business for the rest of 2011.

And John Leahy, Chief Financial Officer, will review our financial results for the first quarter and provide our outlook for financial expectations for the second quarter ended July 2, 2011.

Then we will 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.

Before I get started with a discussion of our first-quarter operations and outlook, I would like to tell you how proud we are to have said sent our robots and people to Japan.

We shipped two PackBot and two Warrior robots to explore reactor buildings at Japan's crippled Fukushima Daiichi nuclear plant following the devastating tsunami.

Six iRobot employees flew to that country to train Japanese personnel to use the robots.

The robots equipped with hazmat detection sensors have been used to monitor radiation and oxygen levels to determine whether conditions are safe enough to allow human workers to go in to try to bring the nuclear crisis at the plant under control.

This kind of humanitarian effort is at the core of who we are at iRobot, making a difference in people's lives.

Turning now to our Q1 performance, we kicked off 2011 with another outstanding quarter.

Our financial results are especially impressive given the strength of Q1 last year.

Gross margin was 41% for the quarter, up 700 basis points from last year, driven by margin improvements in Home Robots.

International Home Robot revenue increased 37%, largely due to demand from existing customers in established markets.

Home Robot revenue in the US increased 12% in Q1 year-over-year and we received several important contracts in our G&I business that provide us with improved visibility for the rest of the year.

Total revenue in Q1 increased 12% to $106 million.

Adjusted EBITDA in Q1 increased to $15.1 million and adjusted EBITDA margin increased to approximately 15% of revenue.

EPS of $0.27 for the quarter increased by $0.03 and exceeded expectations.

Our exceptional results reflect the increasing diversification of the Company.

We are successfully meeting the challenges of international economic uncertainty, political unrest overseas, devastating natural disasters, and continuing unresolved US budget issues by delivering multiple products into multi-billion-dollar automated home maintenance and remote presence global markets.

Based on our view of the rest of the year, we are reaffirming the financial expectations we shared in February to deliver full-year 2011 revenue of $450 million to $465 million, EPS between $0.90 and $1, and adjusted EBITDA of $58 million to $62 million.

In the second quarter, we expect international demand to drive revenue growth in Home Robots.

The government contracts we recently announced for PackBot and SUGV robots should begin to generate revenue towards the end of the second quarter and will fuel second-half growth in this division, as we discussed earlier this year.

In Q2 adjusted EBITDA will be slightly lower sequentially, as anticipated and discussed on our Q4 call, due to lower revenue caused by the inherent lumpiness of our G&I business.

For the second quarter we anticipate revenue of $102 million to $106 million, EPS between $0.18 and $0.22, and adjusted EBITDA of $12 million to $14 million.

Now I would like to take you through some of the details of the first quarter and our expectations for the rest of 2011.

In the Home Robot division, strong demand overseas, particularly in long-term markets, continued to fuel Home Robot revenue growth.

International Home Robot revenue increased 37% year-over-year and we expect overseas demand to continue to be the driving force for Home Robot revenue growth for the remainder of 2011.

In our domestic business, Q1 results grew 12% over last year largely due to increased sales to retail stores.

Our US retailers are reporting stronger sell-through, in part reflecting pent up demand created by limited product availability at the end of last year as well as the impact of our marketing investments.

However, our outlook remains cautious in the US given the macroeconomic environment, but early indicators are certainly positive.

We began producing the Scooba 230, our new floor washing robot, in limited quantities and sold them to select customers directly through our website.

The response was overwhelming and we have now made the product fully available online.

We have just initiated a similar limited launch of the new Roomba 700 series.

We will expand distribution of both products throughout the rest of the year and to select US retail stores next year.

Our continuing efforts to eliminate lower margin products, customers, and channels helped us achieve gross margin of more than 45% in the Home Robot division, more than 7 percentage points higher than Q1 of last year.

Sales of the Roomba 700 and Scooba 230 robots should further enhance the division's margins.

In 2010 we planned our entree into Latin America and our expansion in that region is on track.

Based on a successful blueprint we developed for entering and building markets in Europe, Japan, and Latin America, we have begun to execute our strategic plan for expansion into China next year.

The Tier 1 contract manufacturer that began producing for us in Q4 of 2010 is fully operational and we expect to meet our 2011 product demand.

Turning now to our G&I division, we continue to see demand for our tactical ground robots from war fighters in theater and the military leadership in Washington.

The US budget negotiations and operating under a continuing resolution have delayed contract awards this year, as we anticipated they would.

These delays will impact Q2 revenue as well as we have reflected that impact in our expectations.

Now that a DoD budget is in place we do expect orders to start flowing and we are on track to deliver G&I results consistent with the expectations we set last quarter.

We continue to expect 60% of G&I revenue to be generated in the second half.

International revenues, which increased 12% to a total of 21% of G&I product revenue, partially offset the impact from the DoD.

Recently we received several significant contracts, further indicating the underlying demand for both PackBot and SUGV robots.

NAVSEA awarded us a $230 million Indefinite Delivery/Indefinite Quantity contract for the delivery of up to 671 PackBot 510 robots over a 4-year period.

These robots are currently being used in Iraq and Afghanistan to identify and neutralize explosive devices, perform reconnaissance, and clear routes for warfighters on the move.

The $230 million contract ceiling reflects NAVSEA's estimate of the amount they will spend over that time period.

When we provided our financial expectations last quarter, we estimated that approximately 50% of G&I revenue derived from robot units would be the sale of PackBot systems.

This contract, which we had expected, provides the vehicle for the government's purchase of those units.

We anticipate receiving our first order under this contract in the second quarter.

Additionally, we received two orders totaling $7.6 million for SUGV 310s.

The robots will be used by the Marines and the combat engineers.

This is important for several reasons.

First, these SUGVs are being ordered outside of the Brigade Combat Team Modernization program and, secondly, they will go to two separate branches of the military, further supporting our position that there is demand for SUGV beyond the Army.

While SUGV 310s have been used in theater primarily by explosive ordinance disposal teams, as a result of ongoing positive user feedback and their success on the battlefield, they will now be used to perform an even wider variety of missions.

We completed delivery of 45 SUGV 320s under the first low-rate initial production order of the BCTM program in Q1.

As we said on last quarter's call, we expect to fill orders for two additional LRIP brigade sets of SUGV later this year.

During the quarter we also completed delivery of the Aware 2 software upgrade to 1500 PackBot FasTac robots in theater, which contributed to a 59% increase in product lifecycle revenue year-over-year.

We anticipate delivery of a second round of software upgrades, which will provide the robots with increased autonomous capabilities, to begin later this year.

On the new product front we unveiled prototypes of the iRobot 110 FirstLook earlier this month.

A small, lightweight, throwable robot, FirstLook provides immediate situational awareness, performs persistent observation, and investigates in confined spaces.

The robot weighs less than 5 pounds and is 10 inches long, making it ideal for building clearing, raids, and other close-in scenarios.

Given its small size, ruggedness, and state-of-the-art capabilities, the robot is ideal for a range of infantry missions and special operations.

With 4 built-in cameras and 2-way audio communication, FirstLook provides multidirectional situational awareness.

It also has a digital mesh networking capability allowing multiple robots to relay radio communications over even greater distances.

Over the next several months we will demonstrate FirstLook for military and law enforcement personnel, and we expect it to be available to delivery to customers in 2012.

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

We have delivered more than 4,000 unmanned ground vehicles over the past 2 years, primarily for the US military, principally for use by bomb disposal teams.

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

Expanding the fleet of robots provides not only current revenue, but a stream of recurring revenue through product lifecycle revenue such as these software block upgrades I described.

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

We are making significant progress toward our 3-year financial targets while making ongoing investments in building for our future and maintaining our market-leading position.

We will further widen our competitive moat by delivering robots that make a difference, built on common platforms, using highly integrated iRobot developed technology that incorporates artificial intelligence with advanced concepts in navigation, autonomy, sensing, and manipulation.

Further, by leveraging technology developed by third parties, we will develop high-quality robots for multibillion-dollar automated home maintenance and remote presence markets.

In summary, we had a strong first quarter and are on track to meet expectations for the rest of the year.

I will now turn the call over to John to review our first-quarter results and Q2 expectations in more detail.

Thank you, Colin.

Our performance in the first quarter was once again very strong with revenue growing 12% over last year's record first quarter, driven by our international Home Robot business.

Earnings per share and EBITDA both exceeded expectations.

Earnings per share for the quarter were $0.27, growing 13% over Q1 last year.

EBITDA for Q1 was $15.1 million compared with $13.7 million in Q1 last year.

Our continued focus on driving EBITDA continues to produce great results.

In our Home Robot division shipments grew 22%, while revenue of $68 million increased 29% from a year ago.

International revenue increased 37% in the quarter to $50 million and comprised 73% of Home Robot revenue.

Total domestic revenues were up 12% in Q1.

More importantly, sell-through at our top 5 US retailers was up more than 40% year-over-year, reflecting improved consumer sentiment and the impact of our marketing programs.

With our Tier 1 contract manufacturer in full production mode, we will be able to meet demand for 2011.

Home Robot gross margin improvement of more than 750 basis points for the quarter was due to an increase in international as a percent of total revenue, improved product costs, and mix.

G&I's revenue of $38 million decreased from a year ago due to the timing of product shipments.

Gross margins in the division improved nearly 300 basis points in Q1 over last year due to favorable mix.

G&I product revenue was $29 million in the first quarter, compared with $34 million last year.

Product lifecycle revenue was $13 million, up from $8 million in 2010.

For the total company, gross margin was 41% for the quarter, up 700 basis points from last year.

The improvement, which is consistent with our expectation for an increase in full-year gross margins of 200 basis points, was driven primarily by improved Home Robot mix and product costs.

Operating expenses increased as a percentage of revenue to 30% in Q1 from 24% last year, due to the higher spend in R&D and marketing we discussed on last quarter's call.

Inventory was $35 million at quarter end, compared with $30 million a year ago as we rebuilt our low year-end inventory stock.

At the end of Q1 we had cash, including investments, totaling $124 million compared with $85 million a year ago.

Operating cash flow was breakeven due to the inventory build.

Now I would like to provide you with additional detail and some of the underlying assumptions for the second-quarter financial expectations Colin discussed.

As we said last quarter, we are lapping a very strong first half of 2010 in which revenue grew 63% over 2009.

Therefore, year-over-year 2011 growth will be stronger in the second half than the first half.

In Q2 we expect revenue of $102 million to $106 million, a slight increase over Q2 of 2010 driven by growth in Home Robots.

G&I revenue will be lower, as we anticipated, due to delays in the contract awards Colin discussed.

We expect EPS in the range of $0.18 to $0.22 and EBITDA of $12 million to $14 million.

Improving domestic sales, the introduction of new products, further penetration into long-term international markets, and acceleration of selling into Latin America will drive the Home Robot business in the second half.

Orders under the IDIQ contracts received from the US military, sales to foreign countries, and block software upgrades of G&I robots in theater will drive our G&I business in the second half.

These factors provide us with the confidence to confirm the full-year financial expectations we shared in February.

Now I would like to turn the call back to Colin.

Our results in the first quarter were great and I am bullish about the balance of 2011 despite macro challenges.

As we look at the rest of the year, we will diligently balance our investment in technology and the iRobot brand to maintain our market-leading position with our commitment to delivering increasingly profitable growth.

This year we are launching new products and entering new geographic markets enabled by our investments.

Beyond this year we are exploring opportunities to leverage and integrate technology developed by others to accelerate our development of high-quality robots for the multibillion-dollar automated home maintenance and remote presence markets.

With that we will take your questions.

(Operator Instructions) Jim McIlree, Merriman.

Thank you, good morning.

Could you talk a little bit about the gross margins in the G&I division, why they were down versus Q4 of last year?

Jim, the gross margins in G&I you know they do bounce around a bit by quarter; largely revenue driven because we have overhead absorption that we need to deal with.

But in Q1 gross margins for G&I were up 300 basis points from Q1 a year ago.

That was largely due to mix, particularly the heavy or the strong performance in PLR as a result of the upgrades.

The other thing to add is that in fourth quarter we shipped a significant number of the software upgrades which favorably impact gross margins and we are finishing and closing that out in Q1.

So it's a combined effect.

But certainly the G&I margins do track revenue fairly carefully because of the overhead absorption effect that John mentioned.

Was the software upgrade revenue in Q1 greater or less than the software revenue in Q4 of last year?

It was a little down and thus the effect that I described.

Okay.

And then lastly, I think that you mentioned in your script some additional orders related to autonomous control expected later in the year.

Can you size that either in precise dollars or kind of bigger or smaller than the Aware 2 upgrade?

I cannot at this time, but it certainly is a significant opportunity for us.

We see our business evolving in a way where we do systematically provide upgrades for our installed base.

This is a growing over time opportunity, but in any -- we do not have the order in house.

We expect it as a Q4 event and we will provide more details as we have them.

Great.

Thank you.

Josephine Millward, Benchmark.

Good morning.

Colin, the order you are expecting from the NAVSEA IDIQ, do you expect requirements above what is planned in the defense budget for the MTRS program?

I believe it's around $36 million from the 2011 budget.

Or is this just part of -- are you expecting an order in line with what is planned in the budget?

At this time, I think we expect what is in-line but I would tell you that there are -- there is a lot of noise as far as what is required to meet the demand in-theater.

So it is a little bit of a moving target.

I was going to ask you about that, because I thought the Army was getting very close to their acquisition target on MTRS.

I was a little surprised by the ceiling value and the duration on this new contracting vehicle.

Is that what is going on there, they are thinking about maybe taking up their requirements?

I really can't comment on that, Josephine.

But certainly the aggressiveness and size of the contract indicates a very strong appetite for the robots, the upgrades, the additional capabilities that we are developing and the continuing and growing pull from the field for the utilization of the robots.

Every time we talk to soldiers in the field it is a very validating and exciting experience.

That is good to know.

On that note, on the SUGV was one of your SUGV orders under a new IDIQ?

And if so, can you tell us the ceiling on that contract and whether the Army can buy both SUGV 310s and 320s on that contract?

Josephine, we received an IDIQ for I think $7.6 million and an order right along with that.

So we will be fulfilling that over the next quarter or so.

Got it.

Now previously I think you talked about seeing demand for SUGV 320s outside of BCTM.

In light of uncertainty related to the Afghan drawdown this summer, are you still anticipating the same level of requirements for SUGV 320s outside of BCTM?

As you have mentioned, we have been wrestling with a lot of uncertainties surrounding the budget.

The demand is there.

We have had a number of different opportunities which raise -- go up and down in their seriousness, but we do have a rich and diverse backlog, including opportunities for SUGV outside of BCTM.

So that the way that we look at our year, it's a portfolio of risk-adjusted opportunities and we think we like our guidance where it is at this point.

Certainly, as we get more clarity that will give us -- we will pass our feelings along.

But short answer, yes, we believe that there are opportunities for the SUGV 320 outside of BCTM.

That is great.

Let me shift gears a little bit.

There is a lot of excitement around your new Scooba.

Can you talk about what is assumed in your guidance for this new Scooba introduction?

Sure.

We are assuming a very small amount of revenue in 2011 associated with it, so that if we can continue the momentum that we see with this current launch that will be good.

But remember that our marketing programs and our distribution strategies for the Scooba 320 is largely web-based in 2011 and we are very slowly ramping up production because this is a very complicated device to create.

So we don't want to get ahead of our skis on that.

We like where it is today.

We are enthusiastic about the demand; that seems to be there.

And so it is really a limitation of ramping up production and carefully rolling this product out in a sensible way to retailers.

So this is a good news story.

I think you probably picked up on this call I have mentioned several times new products having some impact in 2011, growing in 2012.

So I love our long-term growth story.

I feel like our product backlog of new introductions is growing very strongly and we have the opportunity to systematically bring these products out in ways that allow us to ensure the right pricing, the right quality levels, and do this in a phased and rational way.

So it's all good news.

Thank you, Colin, and congratulations on a great quarter.

Thank you.

Jim Ricchiuti, Needham & Co.

Thank you.

Just with respect to your 2011 guidance, I think in the past you had talked about increases of approximately 30% in both consumer and G&I.

Just given the delays on the G&I side has that changed at all?

Are you assuming perhaps the consumer business could be up a little stronger, G&I up a little less this year?

Jim, just to clarify, for 2010 both businesses grew over 30% top line.

Our guidance for 2011 was for HRD to grow mid to high teens.

I apologize, that is right.

And G&I to grow low to mid teens, and we still feel that is appropriate.

Certainly we have come out of the gate stronger in HRD than we have in G&I, but as you heard in Colin's remarks, we feel good about the back half for G&I as well.

So I would stick with that direction for now.

Good, thanks for clearing that up, clarifying that for me.

Colin, maybe you could elaborate just on what your plans are to expand the distribution for the new Scooba 230 and Roomba 700?

It sounds like you are not going to be going heavily into the retail channel until next year.

And so what should we expect in terms of the distribution strategy for the product later this year when presumably you will have a little bit more production?

From the highest level -- when we create a new product what we have learned from the past is that we benefit by being conservative in the rollout so that the first channels that you will see our product in are sort of more boutique, higher-priced but very high-touch retailers like specialty, like our website where we have the ability to understand who we are selling to and can maximize the information coming back from our customers.

And so that is sort of the first phase of a product's launch.

Then from there we go into more mass-market retail and then, over time, we will go into sort of the more value-based retail to maximize distribution.

But this is a long-term strategy and by the time we are into the discount channels or the lower value-based channels you should expect us to be coming out with a new higher-end model up at the top of the market.

So this distribution model is what is playing out.

So that right now our newest product, the Scooba 230, is available on our website only and as the year rolls out you will see us carefully broaden that distribution.

So retail, I think that with the Roomba 700 by the end of the year you will see limited retail, international and perhaps some US if we can negotiate and find the right partners to bring it into retail.

Certainly broad web-based sales going on and then growing our retail presence in 2012.

That is our current plan, and I think that gives us maximum confidence that we can get all -- capture all of the feedback from our customers and carefully control the growth of the distribution.

Does that answer your question?

That is helpful.

Just with respect to the domestic business, HRD in Q2, I guess you had a stronger Q2 last year, albeit it was off -- it was a recovery quarter.

But you still seem somewhat cautious about the domestic business and I am just curious, just given the sell-through that you are seeing.

Well, remember that what we are doing domestically is repositioning the product in the marketplace where we are -- in our top retailers we are up 40%, that is huge.

We have pulled out of some lower-priced channels which were creating revenue but not particularly helping our bottom line and actively hurting our margins.

So that as we have strengthened as a business we have been able to do a better job of capturing the uniqueness embodied in our products.

These are extremely differentiated products in the marketplace.

This is something that is revolutionizing an industry and we believe that as the market leader it is a -- we are at the point where it's not a great strategy to be selling at extremely low margins.

Our ambitions for the gross margins in the Roomba business are above even where we are today.

So what you are seeing happen in North America is successfully repositioning our product, huge improvements in gross margin without -- last year without seeing reductions in revenue.

And here going into Q1 2011 you are seeing a 12% increase overall in North America and, with our retailers that we are focused on, a 40% increase.

So this is a success story.

I think that as far as setting expectations go, we are seeing North America respond to the marketing investments we made.

We are seeing tangible -- just look at our results -- impact and improvement in gross margin, and we see a lot of running room to grow North America into a -- well, back into a dominant position from a home robot sales perspective.

I assume Q2 last year you still had a fairly sizable or higher, somewhat meaningful percentage of business coming from these low-margin retail channels.

That is correct.

It is a stark change and it was executed sort of in the back half of last year, continues to this day.

Jim, I would just add as a reminder that we had an incredibly strong first half in HRD last year.

The overall revenue for HRD in Q2 last year was up 55% versus prior.

So we are -- both in Q1 and Q2 we are lapping some pretty big numbers.

Okay, thank you.

You bet.

Paul Coster, JPMorgan.

Thank you, good morning.

I think it's now 5 quarters in a row that you have seen an increase in the average selling price of your G&I robots.

Can you talk to us a little bit about what the drivers for the ASP increase are?

Perhaps in terms of the attach rate for payloads or the actual platforms.

And also how you believe that will evolve moving forward, particularly in the context of the SUGV, the BCTM program?

The main driver of -- for the increase in ASPs over the last few quarters has been SUGV.

Now the DoD has opted to take a relatively patient approach to acquiring SUGVs, meaning that they have been lower volume.

They have not yet kicked into the economically beneficial quantities that they would have to reach to get better pricing, so that they have been more expensive based on their acquisition strategy which has driven ASPs.

As unit quantities increase in SUGVs the base platform costs will not continue to rise.

Now moving counter to that is the notion that as these robots combine more and more autonomous and sophisticated capabilities born out of the software work we are doing, born out of the partnering work that we do with third-party payload development as well as our own payload development, you will see systems being delivered which could very well carry with them higher ASPs.

But now we are starting to look out into the future and it is hard to get more concrete than what I have just said.

But short-term increases in ASPs has been -- first switch over to SUGVs and switch over to SUGVs at relatively low volume orders.

Longer term you have got economies of scale pushing down; you have got more sophisticated, high-value payloads being integrated into solution purchases, which would raise ASPs.

Not sure which way the winning force will be at this time.

Okay, got it.

So we shouldn't extrapolate from this trend indefinitely and, of course, you have also got the one thing that will kick in and create a different kind of price point for your products?

Now, of course, as revenues continue to increase on a division-wide basis we have already mentioned today that our overhead spending, as a percentage, is tightly coupled to revenue.

So that as revenue continues to increase we will see and there are opportunities for continued improvement based on scale and more complete absorption of our overhead structure.

So we have built the organization to be able to operate at substantially larger revenues without adding commensurate new costs into the business.

So, again, there is opportunities there as well.

Okay.

I am curious about the Aware 2 upgrade cycle.

You announced that you had this big opportunity only a year ago and then executed, and already we are on to a second upgrade cycle.

Is it touching every single robot out in the field or pretty much every robot out in the field?

And is this what we should expect moving forward that you are aiming at creating a new release once a year and that you will try and drive that into the entire installed base?

I would tell you that this is a merit-based strategy, meaning that we need to compellingly demonstrate the benefit of these upgrades.

It is not built into a contract.

And this upgrade that we are talking about this year is not guaranteed, by any stretch of the imagination, to touch every robot upgraded to Aware 2.

That said, it is our ambition to systematically upgrade as much of the installed base as we can, and we believe that an annual basis for a new upgrade pack or software upgrade does make sense.

We are already working on the 2012 upgrade which at the last analyst day we previewed.

It's the Aware head navigation system.

We believe that there are opportunities in 2012 to start helping our soldiers in the field with the capabilities that that system can deliver.

That is a major one.

If we got started in 2012 that certainly would push into 2013 before all was said and done.

But you are correct that we see this as a recurring opportunity to increase platform performance to our customers.

But it is not correct to say that this is all baked at this moment in time and that we have any lock or guarantee that all 1,500 robots upgraded to Aware 2 would get an upgrade at the end of the year.

So I can -- certainly that is the strategy.

For my last question, and actually it's probably for John and that is, John, can you remind us what exposure you have in terms of margins and even EBITDA and EPS from foreign currency fluctuations?

And how does the deteriorating dollar exchange rate benefit or hurt you?

Paul, the direct exposure is very minimal, particularly in 2011, for two reasons.

One is you might recall that the bulk of the HRD international business is dollar-denominated.

When the euro softened dramatically last year, we actually had to provide some incremental marketing support for our distributors to help continue to grow the business.

That obviously is not an issue this year.

Then secondly, with the appreciation of the renminbi that is not a factor this year because our pricing for -- with the CMs and the major components are all locked in.

In 2012, between currency rise or strengthening out of China and inflation, there will be challenges for us and I would assume most companies that produce consumer electronics in China.

So there will be challenges down the road that we will have to face.

But for 2011 we see little to no currency exposure, either out of Europe from a retail standpoint or out of China from a supply standpoint.

Great.

Thank you very much.

You are welcome.

Brian Ruttenbur, Morgan Keegan.

Thank you very much.

Cash from operations, first of all, in the first quarter was around the $100,000 mark.

What do you anticipate happening for the year in terms of cash from operations and was it just timing that was weak in the first quarter?

Brian, the OCF in Q1 was pretty much as we expected because we knew going into the year that we needed to build inventory.

And actually built inventory in both divisions.

In HRD because we had run inventory stocks down so low, but also in G&I we built inventory in anticipation of orders.

These orders, that contract that Colin was referring to.

For the year our thinking really has not changed.

So we expect that we will generate operating cash flow somewhere between $35 million and $40 million and have an ending cash position of somewhere in the $140 million to $145 million range.

Perfect.

That was the easy question, too easy for you.

The next questions have to get harder then as we move to double jeopardy.

Gross margins, is 41% now the norm?

Brian, so that -- this question is not much more difficult than the first one, but well prepared.

We had a very good first quarter in terms of gross margin, probably exceeded our expectations somewhat.

For the full year, we still think that our gross margins will be in the range of 35% to 37% and so that would be up about 200 basis points over prior year.

Okay.

So do you anticipate then the second half of the year gross margins will be weaker than the first half of the year because of the mix of business?

Yes, that is what our guidance would imply.

And it's due to the mix, right?

More government business versus commercial, is that how it works?

That would be the biggest driver.

So our revenue in G&I was down year-over-year and we will pretty much see that sort of performance or close to flat, perhaps, in Q2.

And so in the back half G&I, as a percentage of the overall mix, will be quite a bit higher than what you are seeing the first half.

Okay.

And then just moving on to operating expenses, should we be looking at first quarter as the norm now in terms of R&D at these levels and G&A at these levels?

Was there anything one-time in nature in any of those?

Again, for OpEx we would still stick with our full-year guidance, which is OpEx of 25% to 27% as a percentage of revenue.

So that would imply slightly lower OpEx as a percentage of revenue in the second half, in part because of the fact that revenue in the second half will be higher.

But really the important part of the story there is, as you saw in the second half of last year, our investment in R&D and sales and marketing we have increased significantly.

So in Q1 the combination of spend in R&D and sales and marketing was up almost 60% year-over-year.

Obviously that ties into the new product development that Colin talked about, but also the rebound in HRD North America performance that we saw in Q1.

In part due to that marketing support that we are giving that business, which really until the second half of last year had not seen a lot of marketing support for a couple of years.

Okay.

On the commercial business, what are the number of distributors that you have now and what do you expect by year-end?

Domestically we don't use a distributor model, so we direct sell into our retail channel.

So if you are asking about the --.

No, I was asking international because that is where all your growth is.

Right.

So that in our major markets we have a stable set of distributors so that is unchanged.

We are actively adding distributors in Latin America, and we have our principal distributors signed up for the major markets like Brazil and Mexico and Argentina and Peru.

So they are signed up and are scaling up operations.

So that is as per our plan.

We are in process, adding our Chinese distributor from mainland China.

We are negotiating that relationship today.

If you think about the timing of getting into the Latin American market that would be appropriate as far as setting expectations for what will happen there.

And that is a -- we view China as a huge potential new market.

Although it will be immaterial in 2011, it will be modestly material next year and could grow.

We have great optimism as far as where it can go from there.

So those are the major new areas where we are adding distributors.

But in Europe and Japan and Korea, Australia and our other locations, we feel like we have superior performing distributors.

We are very comfortable growing with them and are not adding or supplementing them in those regions.

So are we talking about you are at 500 distributors or how many distributors are you --?

About 40.

About 40 distributors, and you expect that to grow by 10 or 15 by year-end as you move into those new markets?

No, because we -- typically a distributor handles one country.

Okay.

But you wouldn't have two or three in China, you would have one?

We would have one in China and that distributor would have to build out, obviously, a very sophisticated network to handle full distribution in China.

But that is our winning strategy where we combine our local presence, that we will have iRobot personnel based in Hong Kong supporting a local distributor which brings to us the knowledge of how to operate in the country and invest in appropriate marketing programs.

And it just seems to work.

Great.

Thanks so much.

As the numbers show.

Sure.

Brian Gesuale, Raymond James.

Good morning, guys.

Nice job on the quarter.

Just a couple of questions.

Maybe first off, Colin, can you give us an update on the healthcare segment for you guys?

It has been almost 18 months since you made a splash with some hirings and just wanted to get an update on where that business was going.

Well, as I tried to set expectations back when we did it, this is a program which is going to go in stealth mode for a while before we make any large announcements.

One thing that you have seen is the AVA concept prototype that we started showing off at the Consumer Electronics Show at the beginning of the year.

So that is a platform that is designed to allow very sophisticated interactions with people.

Obviously, one of the applications there is healthcare, although it is a multipurpose platform.

So I would say that that robot project, which is operating under and out of the Home Robot division, is our first peek, if you will, as far as what we are up to.

So unfortunately you are going to have to be satisfied with that for now.

So less filling on the answer, but I will take it.

John, maybe a second question for you.

A few years ago you came over and EBITDA margins were in the low single digits, a little bit lumpy.

You have done a terrific job on executing at the business here.

We are sitting at mid-teen levels, which if -- I believe that was the bogey at the time.

Is it time to redraw those given the gross margin strength, the installed base of government robots out there driving higher-margin PLR sales?

How should we look at this?

It's a fair question.

The good news is when we laid out those goals those were our goals that we were looking to attain by 2012.

Obviously we are on a good pace and we are starting to get into that range.

This summer we will be going into our traditional strategy discussions and sorting through where we think the next set of goals are.

So right now it would be premature for me to comment on where we would look to reach eventually.

But the good news is we are ahead of pace on the goals we laid out.

And I think Colin and I have both been very clear that when we set that goal of midteens that that was not the endgame, that was part of the journey.

Great, thanks.

And then just one final question.

Did you -- I might have missed it.

Did you give the split of PackBot versus SUGV revenue in the quarter, and how is that tracking to the 60/40 split you have talked about?

In Q1 it was, in terms of revenue, about roughly split 50/50, which would be consistent with what we thought for the full year.

Okay, terrific.

Thanks a lot, guys.

Adam Fleck, Morningstar.

Good morning.

Real quick wanted to circle back to the conversation about China.

As you have looked to enter that market obviously longer term, in your early analysis can you talk a little bit about maybe some of the competitive forces there, especially in regards to IP or patent issues?

Well, the key for operating in China is to have a strong partner who is sophisticated enough to address those types of questions.

There are many precedents of high-tech consumer companies succeeding in China, and we look to those as our model which we will follow.

For example, Bose has a very successful operation in China that is an IP-rich company.

They have found a way through careful partnering and through having a strong presence on the ground, and so that -- we think that it is not a simple task, but certainly far from an insurmountable task.

We believe that the distributor partner we are currently negotiating with is very sophisticated in that regard.

So you have to have a combination of enforcement, of speed, of appropriate pricing and marketing in order to make it all work.

So there is no one silver bullet how to do it, but certainly you go in with eyes wide open and choose good people to work with.

Sure.

Thanks, that is helpful.

John, real quick, just going back to the inventory situation.

Obviously rebuilding in the first quarter, as you talked about, but do you have a target level of, say, days in inventory on an annual basis that you hope to achieve over the long run?

I can tell you, Adam, in the near term what we are looking at.

DII has bounced around a little bit over the last year but obviously it has come down dramatically from where we were 2 or 3 years ago.

And so in Q1 we did about 55 days in DII.

Over the last year it ranged between 40 and the high 50s.

I think the low 50s is about the right point.

We definitely ran extremely tight in HRD in the second half of last year, so we needed to rebuild.

This slight uptick in Q1 was also as a result of G&I building a bit ahead of demand knowing that we have got these contracts or possible contracts in the second half.

So 55 is probably a little high, but I think it's -- the right number is probably in the low 50s.

Great, thanks for that.

You are welcome.

Jim Ricchiuti, Needham & Co.

I was just wondering where does Japan rank in terms of your largest international markets.

It might be helpful if you could just give us the top 3 or 4 international countries.

And then if you did see any impact late in the month of March in Japan and what you might anticipate in Q2.

Well, Japan is one of our top distributors, certainly in the top 3.

The other top distributors; France is one of them.

Actually Spain and Italy and Germany are also extremely strong for us.

But relative to anxiety about the impact of the disaster in Japan on sales, it has been interesting.

The retail community in Japan is predicting a 15% negative impact based on the disaster there.

From our perspective, much less than 10% of our retail locations where we sell Roomba were impacted and the -- we have seen very little impact in demand.

In fact, perhaps based on the substantial amount of publicity that iRobot has gotten in Japan, we have seen some strengthening of demand in Japan.

So we have conservatively booked and incorporated into our guidance that we have given today an assumption of some softness in Japan.

Obviously, there is a lot more to play out in the year, but right now we are guardedly optimistic but felt it prudent to take those numbers down somewhat.

Great, thank you.

So that concludes our first-quarter earnings call.

We appreciate your support and look forward to talking with you again in July to discuss our Q2 results.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.