iRobot Corp (IRBT) 2011 Q2 法說會逐字稿

Good day, everyone, and welcome to the iRobot second 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'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 provision 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 noncash stock compensation expense.

A reconciliation of GAAP and non-GAAP metrics can be found in the financial tables at the end of Q2 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 second quarter of 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 second quarter and provide our outlook for financial expectations for the third quarter ending October 1, 2011.

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 second quarter results exceeded our expectations for both divisions and reflect a positive trend in domestic customer spending for our Home Robot products.

Revenue was $108 million for the quarter, up 11% from Q2 2010.

EPS of $0.29 was up $0.09 year over year, and adjusted EBITDA of $16 million, or 15% of revenue, grew 30% from Q2 last year.

Following strong performance by both divisions in the second quarter and our expectations for continuing profitable growth, we are increasing our full year 2011 expectations.

We expect full year 2011 revenue of between $460 million and $470 million, an increase of roughly 16% over 2010, EPS in the range of $1.04 and $1.10, and adjusted EBITDA of $62 million to $64 million, an improvement of almost 30% year over year.

Home Robot's revenue increase was driven by higher sales in our domestic business, both retail and web-based, as well as growth internationally, particularly in Asian markets.

Our Government & Industrial Division's revenue exceeded our expectations for the quarter, in part because we received some orders during the quarter which we had anticipated in Q3.

Overall G&I revenue was down slightly from last year due to delayed approval of the government's DOD budget.

On the home front, domestic revenues increased 30% in Q2 year over year, following a 12% year-over-year increase in Q1.

These back-to-back quarterly increases are a positive indication that the US consumer is beginning to spend again.

However, we remain cautious about expectations for the holiday season, given the uncertain economic environment.

In 2010 we executed a strategy focused on creating the right mix of products and channels in the domestic market which would enable us to improve our margins.

We are now positioned to take advantage of improving domestic consumer demand and will continue to generate profitable growth.

We've been a technology company since our founding 21 years ago, but as the market for our products matures, customer demand for increasingly sophisticated product features, enabled by more advanced technology, has grown significantly, which in turn makes our technology more valuable.

At this year's Analyst Day in May we talked about our mission -- to lead the world in providing remote presence and automated home maintenance solutions, supported by technical leadership in three areas -- autonomy, manipulation and platforms.

To extend our leadership position we've leveraged the mobile computing industry and gaming industry's advances and become much more focused on the key robotic-specific technologies -- autonomy, manipulation and platforms -- where we can be sustained world leaders.

That has been a very significant shift and positive move for the Company, improving our competitive positioning, long-term value creation and better meeting the needs of our customers.

In early May I was out at Google attending its developer conference, where I had the privilege of addressing 2,500 Android developers and informing them that as Android developers they were also robot developers.

Using our prototype Ava robot, we demonstrated our technology, showing how our platforms can support a tablet running Android.

Our Aware 2 software houses the autonomy, navigation and motor control and makes it possible to integrate third party-developed technology onto iRobot platforms.

In addition, we recently announced that we had signed a joint development and licensing agreement with InTouch Health to explore potential opportunities for healthcare applications on iRobot platforms such as the iRobot Ava mobile robotics platform.

InTouch Health and its founder, Yulun Wang, have been pioneers in both the use of robots in hospitals and various remote presence technologies.

The agreement includes extensive cross-licensing of the companies' patent portfolios, giving the collaboration a formidable patent position.

I expect that together we will revolutionize how people communicate and deliver information through remote presence.

Much of the technology we've developed since our founding has been funded through our work in the G&I Division.

Over the years we've talked about the synergies between the divisions, technology development being a critical one.

Ava is a perfect example of our using technology developed in our government division, combining it with technologies developed by others to create a much lower price point product.

Total R&D investment for the Company increased 45% from 2009 to 2011, while internal research and development has more than doubled.

Our strong financial performance has enabled us to provide great return for investors and at the same time has earned us the right to make the technological investments required to maintain leadership in the areas I've discussed.

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

In Home Robot, strong demand for our Roomba 500 robots in both domestic and international markets fueled Home Robot growth in Q2.

The success of our new Roomba 700 series on our website, the majority of which sold for $600 each, drove a 32% increase in our direct business.

Sales of both our new Roomba 700 and Scooba 230 robots exceeded our expectations.

To date, these new products have only been available on our website, but we will expand distribution later this year, when we begin selling the new Roomba in select retailers.

Total domestic sales grew 30% year over year, in part reflecting the impact of marketing investments we began making in Q4 of 2010, and continued through the first half of this year.

Consistent with the program we discussed last quarter to improve domestic profit margins through more strategic placement of product in select channels, we delivered a 500 basis point improvement in Home Robot gross margins, from 39% in Q2 last year to 44% in Q2 this year.

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

International Home Robot revenue increased 16% year over year.

Demand in Asian markets, particularly in Japan, where our partner has invested extensively in Roomba video demonstrations and retail displays, continued to drive second quarter growth.

Talks with our prospective Chinese distributor continue, and we are on track to enter that market in 2012.

Our outlook for Home Robots is very positive, and I am confident that we will continue to see strong growth as sales to our international customers grow, domestic customer spending improves and we expand the distribution footprint of our new products.

The Government & Industrial Division delivered 192 robots, an equal number of PackBot and SUGV units.

For the rest of the year we expect orders of SUGVs to exceed PackBot orders, which should result in a 60/40 split between SUGV and PackBot systems for the full year.

During the quarter we announced a $7.4 million order for SUGV 320s.

This was the first order for this type of robot outside of the Brigade Combat Team Modernization Program and the first use of these robots in theater.

Prior to the end of the US government's fiscal year of September 30, we expect to be awarded IDIQs for both PackBot and SUGV robots.

We also anticipate receiving delivery orders fulfilling -- requiring fulfillment by December 31, for which we've already begun building product.

The majority of these robots will be shipped in the fourth quarter.

As we discussed at Analyst Day, we have estimated the addressable market for SUGVs to be approximately 15,000 robots.

Orders for SUGVs will begin to outpace those for PackBots in 2011 and will continue to grow as the number of new PackBot orders remains steady or declines slightly over the next couple of years.

A key component and growth driver of our Government & Industrial business is product life cycle revenue, or PLR.

We have sold more than 3,500 PackBots, each requiring spare parts, support, maintenance and software upgrades over their 10-years lifespans, and we expect ongoing orders of PLR to support the fleet.

Inherent lumpiness in our G&I business has been exacerbated this year with the delayed passage of the 2011 budget.

We continue to have confidence in our ability to deliver strong second half results and meet our full year expectations, based on the most recent congressional markup of the President's proposed 2012 budget.

The President's budget request for $36 million for SUGVs has been increased by the House Defense Appropriations Committee to $60 million.

While it's not final, it is indicative of the value the decisionmaking constituents place on our robots.

In summary, both of our businesses are performing well in uncertain environments, and we expect them to continue doing so throughout 2011.

Because of our confidence in delivering more profitable results than discussed in February and April we are increasing our expectations for the full year.

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

Thank you, Colin.

Our performance in the second quarter and first half was outstanding, particularly given very challenging 2010 comps.

Revenue, earnings per share and EBITDA all exceeded expectations.

Revenue was $108 million and $214 million for the second quarter and first half, respectively, both all-time highs for these periods.

Growth in our domestic Home Robot business showed strength, due in part to our marketing investments and a very positive response to our new products.

Our Government & Industrial business, though down slightly for the quarter, also exceeded our expectations.

Earnings per share for the quarter were $0.29, up 45% from $0.20 in Q2 last year and up 27% for the first half from a year ago.

EBITDA was $16 million for Q2, and 15% of revenue.

EBITDA grew 30% in Q2 and 20% in the first half.

Our cash and investments totaled $123 million, up $24 million from Q2 last year.

In addition, we recently announced an increase in our revolving credit facility to $75 million, up from $40 million, providing further financial capacity for the Company.

In the Home Robot Division, shipments grew 12%, and revenue of $64 million increased 21% from a year ago.

International revenue increased 16% in the quarter year over year and comprised 65% of Home Robot revenue.

Total domestic revenues increased 30% year over year, an encouraging sign that US consumers are beginning to spend again.

Home Robot gross margins improved 500 basis points, primarily due to product and channel mix and cost savings in our supply chain.

In the G&I Division revenue was $44 million, compared with $45 million a year ago.

Product life cycle revenue was $7 million, or 20% of G&I product revenue.

We expect significant shipments of PLR in the second half, generating full-year PLR of 25% to 30% of G&I product revenue.

Product backlog at the end of the quarter was $15 million, compared with $12 million at the end of Q2 last year.

For the total company, gross margin for the quarter was 39.4%, compared with 34.7% last year, up almost 500 basis points.

The year-over-year increase was driven primarily by favorable mix in both divisions.

Operating expenses grew, as expected, to 29% of revenue this year, from 26% in Q2 last year.

This increase was due to higher investments in R&D and marketing initiatives we began in the second half of last year and built into our 2011 plans.

Now I'd like to provide you with additional detail for the financial expectations Colin discussed as well as color on how we see the rest of the year unfolding.

For the full year, we now expect Home Robot revenue to grow more than we had expected, at roughly 20%, to a range of $270 million to $275 million.

Our G&I revenue expectations are unchanged, at $190 million to $200 million, or roughly 15% growth, reflecting delays in the 2011 DOD budget.

We expect Q3 to be another strong quarter, with revenue up roughly 25% over last year.

We anticipate revenue in the range of $115 million to $120 million, EPS of $0.22 to $0.26 and EBITDA of between $14 million and $16 million.

Based on the expected timing of G&I contract awards, we are likely to ship significantly more robots in Q4 than Q3, thus skewing the division's second half revenue into the fourth quarter.

Home Robot revenue should be up slightly in Q4 over Q3 due to the holiday season, but not as significantly as it had been historically to the nonseasonal nature of our international business.

We expect full year gross margins of 39% to 40%, an improvement from our original expectations, as a result of favorable mix management and savings in product costs realized through supply chain management in Home Robots and through overhead expense leverage in G&I.

Our full year tax rate also looks like it will be closer to 34% than the 37% we initially expected.

And, as Colin indicated earlier, for the full year we are increasing our expectations for revenue, EPS and EBITDA.

Finally, as we shared during our Analyst Day in May, we benchmark ourselves against a group of companies which have attributes in common with iRobot.

While some of you may think of us with a defense or consumer electronics orientation, we are truly a technology company.

Our peer group consists of tech companies up to $1.5 billion in revenue with both a software and a hardware component who are market leaders in high-growth segments and in many cases creators of the segments in which we operate and who enjoy large addressable markets.

These peers have high margins or expanding margins and have created wide competitive moats.

A combination of these attributes drives attractive valuation multiples.

At iRobot, we are very focused on leveraging our attributes to continue to grow shareholder value.

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

Thanks, John.

Our results for the second quarter exceeded our expectations in both divisions.

Our domestic Home Robot business grew 30%, and, more importantly, indicated a positive trend with respect to US consumer spending.

Our international Home Robot business continues to perform well in long-term markets as we prepare to expand into new markets.

We successfully launched two new Home Robot products on our website, and we expect wider distribution later in the year to contribute to the division's growth.

We received several key orders from our government robots that validate the importance of our products to the warfighters and the willingness of the government to purchase them in the face of intense budget debate.

And we are confident that our G&I backlog, coupled with a strong pipeline of opportunities, will enable us to meet our increased expectations.

Based on our improved outlook for the year, we now expect revenue of $460 million to $470 million, EPS of $1.04 to $1.10 and adjusted EBITDA of $62 million to $64 million.

With that, we will take your questions.

Thank you.

(Operator instructions).

Your first question comes from the line of Jim McIlree, from Merriman.

Please proceed.

Yes, thank you, and good morning.

Good morning, Jim.

When you were talking about -- excuse me, when you were talking about the G&I outlook for the rest of this year you characterized it as Q4 loaded.

What amount of risk is there to the G&I revenues for the second half given all of the acrimony that's in Washington right now and the debate over the budget?

I think that we've tried to factor that in all year.

First we had to deal with the continuing resolutions and now we have the adventures going on in Washington.

We see real need, real drivers and contracts being put in place.

We do believe that the government will find a way through its current challenge, and we have good line of sight to the contracts required to meet guidance.

So it certainly is a chaotic situation in Washington.

We have seen challenges in the past where we've had administration changes and recognize that the right way through is to have a strong Washington presence, have people down there that can give us good advice, and stay on the side of predicting and guiding to results driven by real demand and need in the field as far as speculation.

So that has served us well in the past, and we think that we are well positioned for the back of this year.

Well, let me ask it a little bit differently, then.

It sounds as if you're looking for fiscal '12 budget dollars in order to fund this.

Is that correct?

And if you -- if we end up with a continuing resolution instead, does that mean that your customer has to scramble around in order to come up with the money?

There's -- that's not accurate.

There's -- we're expecting four contracts in Q3 to be awarded that we will make some deliveries against and then some additional deliveries, the bulk of the deliveries in Q4.

There's a five-year $60 million IDIQ contract from the Army for PackBot that we expect -- this would allow the Army to buy PackBot spare parts and supports FMS, foreign military sales; a two-year IDIQ for SUGV 310; and delivery order under our current MTRS IDIQ for over 100 PackBot 510s; and a SUGV 320 LRIP contract for 76 SUGV 320s.

Those are all current-year dollars, and we are -- will put us in a position where we start to build backlog for 2012 at the end of that.

So, we are actually anticipating some sort of repeat around continuing resolutions next year, which will mean that we live in a volatile state for a little bit longer, but -- as we start to build next year's model, but that's okay.

We're used to living in this uncertain world and trying to do our best to navigate through that and give our investors our best look with a conservative bent toward how things are going to play out.

That's very helpful.

Thank you.

I'll get back in line.

You bet.

Your next question comes from the line of Alex Hamilton, from EarlyBirdCapital.

Please proceed.

Alex, your line is open.

You may proceed with your question.

Hi.

Good morning, everyone.

Hi, Alex.

Good quarter.

The macros seem to be moving in your favor, and I've argued time and time again that this is an execution story.

So can we just talk about the trends that we've seen on the R&D and the G&A side, what we've seen and what we're going to see over the next few quarters?

Well, on the R&D side I wanted to highlight this year in this call a positive trend on our ability to increase our R&D spend while still delivering improved results on the bottom line.

That's important as we work to increase our pipeline of products so that we can be laying the groundwork for continued growth years into the future.

Also, as we globalize and continue to build our national brand our reliance on strictly word of mouth and PR to drive awareness of the Company has gotten to the point where we have -- are choosing to augment that by larger increases in paid advertising, and that has -- we started that in the middle of last year, and it's been paying dividends.

It certainly was one of the reasons why we saw such great growth in Europe, and the investments in North America, as you can see in Q1 and Q2, have also begun to show dividends.

So we think that's something that does pay and is an important part of our strategy.

I think that on a percent basis we're in the ballpark of where we want to be, so that you should -- you can -- we will continue to increase level of those spending, but in pace with increases in revenue.

I would not expect to see substantial increases on a percent basis on a go-forward method.

I think we're appropriately investing.

And, Alex, I would just add to Colin's comment, putting some numbers around it, R&D on a year-to-date basis this year is up more than 60% in dollars, and sales and marketing is up almost 30% this year.

So, those are substantial investments that we've been able to do while still over-delivering on the bottom line, and our guidance does reflect in the second half that we will continue to invest in R&D and sales and marketing at those sorts of levels, but, as Colin said, at a fairly consistent level of spend as a percentage of revenue.

Fantastic.

Thank you very much.

Sure.

Your next question comes from the line of Josephine Millward, from Benchmark Capital.

Please proceed.

Good morning.

Good morning.

Great quarter, Colin.

Thank you.

Colin, can you just repeat the government contracts you're expecting in Q3, because I think most of us didn't catch everything?

Okay, so just at a high level, there's -- I listed four, a five-year $60 million IDIQ from the Army for PackBots; a two-year IDIQ for SUGV 310, with a ceiling of 350 units; a delivery order under our $230 million MTRS program for over 100 PackBot 510s; and the -- a SUGV 320 LRIP for 76 SUGV 320s.

Those are the four new contracts, plus our current, that we expect to allow us to drive through the back half of the year.

These will be primarily awarded in Q3, with the bulk of the shipments in Q4, and we will also --

That's very helpful, thank you.

Okay, great.

And do you expect G&I revenue to be higher in Q3 versus Q2, or should we -- how should we think about the split between Q3 and Q4?

Josephine, as I said I think in my remarks, we do expect that G&I revenue will be more skewed to Q4.

Yes.

And so the way to think about it is G&I revenue in Q3 somewhere between probably $48 million and $50 million in revenue.

Okay.

And Q4 more in the vicinity of $60 million.

So about $10 million, maybe $12 million more revenue in Q4 than in Q3, but, as Colin said, even though that is skewed, we have a very good line of sight to the orders to support that revenue forecast.

That's great.

And on the '12 budget, Colin, you said the $36 million requested for the SUGV was marked up by the House to $60 million.

Can you comment on the Senate authorization?

I think they actually reduced the $36 million down to $24 million with no increase, and if you can talk about how confident you are that all the BCTM unmanned ground vehicle funding will go to the SUGV.

Another question is if the military starts buying SUGVs as a program of record, do you still anticipate sales funded by requirements on theater next year?

The House -- we've been -- it is still in debate.

We do feel very good about it because of the strong demand pull from theater.

So we expect the information we gave about the House to carry the day.

Okay.

And so I think that is the main driver.

There's a lot of discussion going on as to how BCTM will further evolve, and I'm not -- on this call I'm not going to speculate exactly how that's all going to play out, but certainly we know and have been told that the SUGV is wanted, impactful and is part of the go-forward plans with the US Army, and we feel very confident about its future there.

Just one follow-up question on Home Robots, your international sales appear to be slowing.

Can you talk about what's going on in Europe and how you see the revenue split between US and international in the second half?

Slowing would not be the adjective I would describe.

They're up 16% after growing well over 30%, 40% last year, so they continue to rocket along at very, very exciting levels.

It's -- I think that -- so it's not even flat.

It continues to be strongly up.

We have new programs going on and expanding distribution in Germany, and -- for example.

So it's a very healthy area, and, yes, it's [chilling] to hear the word slowing and Europe and home in the same sentence, because it's --

I'm sorry, I meant the growth rate appeared to be decelerating.

Well, I think that's a normal phenomenon.

I think that it'd be difficult to predict what will happen next quarter, other than that there is still a lot of strength there, and we see opportunities for continued long-term growth there.

So, certainly the European economy is something that has a lot of volatility to it, with anxiety over the debt crisis in Europe.

We're still benefiting from the fact that the demand for our product in a rapidly growing area is outpacing any chilling effect the economy has in it, and we expect that to continue.

What I would -- certainly I look forward to the day where we don't have to talk about volatility in the economy and we can see additive effects as to one exceeding the other, the impact of the other as we have to navigate through right now.

But, Europe is very strong.

Japan, which had -- we had some earlier concerns about, has proven to be a strong growth area for us, and international is a continued bright spot on the consumer, and it's definitely gratifying to see North America start to come back so strongly as well.

Thank you.

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

Please proceed.

Hi, everyone.

Good morning.

Good morning, Alex.

I have a quick question.

Looking at the inventory situation it was pretty good in the quarter, but we saw days sales outstanding continuing to tick up here, and you guys paid off a large amount of payables, it looks like, in the quarter.

Can you talk a little bit about your expectations maybe for net working capital over the remainder of the year and where you see that metric longer term?

Yes, Adam.

The -- your observations are correct.

AR ticked up a bit, and payables went the wrong way.

I would say our view is that is essentially timing in Q2.

The AR is higher than it's been running because our shipments, particularly in G&I, were skewed heavily towards the end of the quarter.

And so the revenues were recognized, the receivable was posted.

And already I can tell you we're, what, three or four weeks now into the new quarter, the receivable balance has come back down to what you would typically be seeing.

So that was an end-of-quarter phenom.

And the payables number, again, is just a timing element at the end of the quarter, as well.

I would expect in the back of the year payables to get back to a more reasonable level and not be a use of cash.

So, we're still predicting to generate significant operating cash flow for the year, somewhere in the $30 million to $35 million range.

So, I think you're observing on two of the line items some anomaly for a quarter end.

Okay, great.

That's good news.

And then also you talked a little bit your increased revolver.

You're obviously still sitting on a pretty good chunk of cash.

I remember we talked a few quarters ago about the fact that you'd hired a boutique banker to help search for potential M&A deals.

Can we maybe go back to that point, and could you talk a little bit about the pipeline you're seeing there?

Is it a price issue, or is the pipeline pretty robust, in your mind?

So, we did have the opportunity to raise the size of our revolver, which went very smoothly with the support of B of A and extended the term for two more years, so we feel good about that.

We did work with on retainer a boutique through most of 2010 and sifted through, as you can imagine, dozens and dozens of potential targets across G&I, Home as well as industrial.

And the challenge for us is not so much a pricing that we would not feel comfortable with, but the challenge has been more around business model and the maturity of the product set as we see in companies.

As you would expect, so many robotic companies are small and quite often a year or two away from having product.

So there are quite a few that we have analyzed, and obviously we haven't pulled the trigger.

But we continue to think that M&A is an important part of our strategy.

That is in part why we took the opportunity to increase the revolver and have dry powder with that and our cash balance for when the right opportunity presents itself.

Great.

That's all I have.

Thanks, guys.

You're welcome.

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

Please proceed.

Good morning.

I joined the call late, so you may have gone over this.

If you did, no worries, I'll take it up with you offline.

But I was just wondering, on the international business, did you give any detail in terms of how much Europe was up or Asia was up and to what extent you've been able to see some inroads in Latin America yet?

The -- so, I would say that Latin America has been slow.

We've been working through some trade issues as far as import/exports that delayed the progress that we had expected to see.

We expect those issues to be behind us, and 2012 will be the first full year where we see real benefit from our operations in South America.

So, that's a delay triggered off some complexity of doing business down there that took longer to resolve than we had expected.

Europe has been good.

Highlights in Europe, probably Germany has been leading the pack as they've gone from a more boutique sales model to putting our product in mainstream retail, and Japan is the surprise bright spot on the year, a lot of anxiety as to what the impact of the earthquake might have been, but it seems like that has had, at least for iRobot, less of an immediate issue, and we have seen very, very strong performance in Japan as our distributor has invested in sales and marketing strongly and has seen their -- the customer base in Japan respond effectively to that.

So a mixed bag.

Okay.

And, Colin, again, if you went over this, no worries, but did you give any indication as to the kind of retail channel expansion we might see for the new Roomba 700 and Scooba, the new Scooba device?

The -- we did not.

What we said was that currently they're both available on our website, and we expected in the back half of the year limited retail expansion.

We have a very careful program where we go from our web-based sales to more high-end specialty retail where we can make sure that the story behind the product is well told, and then in 2012 you would see expanding into more full-blown mass market retail channels.

So, the economic potential for the product is not going to be maximized in 2011, which means that it'll be -- there'll be an opportunity to fuel continued growth from that new product introduction in 2012 and beyond.

And by limited, at least, does that suggest just US, whatever retail --

It's more of a limited by type of retailer, but we do -- we're a global company, and to the extent possible we execute on our strategy on a global basis, so that select retailers globally will be getting it in the back half of the year, expanding into more mass market retail next year.

Got it.

Thank you.

You bet.

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

Please proceed.

Yes.

Thank you very much.

A couple of questions I think I'm asking from a little bit different angle, but on the US growth on the Home Robots, can you talk about geographic growth or by distributor?

Were there some new distributors added?

Because that's such a big jump year over year I'm just trying to understand that.

I think that's what a lot of the questions have been getting at is how did you achieve such a strong growth.

And was it something new that happened in terms of a geographic expansion or a distribution expansion or something else?

This is actually a very exciting story, because it's same-store sales where we have actually reduced the number of stores, we reduced our low-end SKUs and seeing strong uptick in demand for our higher price point product at the -- at that reduced store count footprint.

We started a program last year where we work to improve our margins in the US by cutting out some of the discount retailers and some of our much less profitable low-end SKUs and managed to hold domestic flat despite that reduction in doors and product, and in 2011 we further reduced some of the doors and product for sale and then increased our marketing spend, and that has proven to be a winning combination.

So this is -- there's no new stores.

It's actually the opposite, the new, higher end product, but we also retired our -- some of our lower cost models.

So, that's been very exciting for us, and hats off to our HRD team for pulling off such an exciting coup.

And we're going to keep with this.

We think this is the right strategy for us.

Okay, so by reducing the low end and getting rid of that and only going to the high end, your same-store sales in terms of units aren't up 30%, maybe up 15%.

What are the number of units that are actually up?

I understand same-store sales in North America is up --

I'm not going to be able to break that down to you, but it is true to say that our ASPs are up and our units are not up the full 30%.

They're up by something either low 20s or high teens, probably low 20s.

We're not -- but the ASP is a key factor.

ASPs are up 10%.

ASPs up 10%.

Okay, that helps.

Okay, and then in terms of one of the things you said at the Analyst Day is Spain is your -- you're the number one vacuum cleaner there.

Can you talk about what percent growth you're experiencing in Spain?

I'm trying to understand, once you dominate a market, then what kind of growth do you have?

Again, we don't typically give country-by-country growth rate, but I can say Spain is up year over year more than 20%.

Okay.

And then the next question just switches over to G&I.

Percent of your funding in the second half of the year that's coming out of the core versus supplemental -- it sounds like it's all coming out of the core, or is it all -- is it a mix?

Can you help me out with that?

I'm not going to be able to break that down to you in detail, but it is a mix.

Okay.

Now, traditionally you've had the majority out of supplemental.

Are you -- do you see still that being the case going forward, beyond just the second half of the year, but a year out, two years out?

Certainly we are -- the programs that we're pursuing, increasingly we look for core funding, because the supplementals are decreasing.

So we will see a shift of the makeup.

The -- I think that our shipment of product into the 10th Mountain, which was the first SUGV sale outside of the Brigade Combat Team Modernization, was a big milestone for us, because that was really demand pull, getting the SUGV into theater, and is representative of an area where we hope to build a lot of future business.

Okay, last question, I promise.

Japan, you said that that's where a lot of your growth was this quarter, I believe.

Are you now number one, number two?

What kind of market share are you, and what -- I missed the percentage increase that you had in Japan.

Didn't give the percent increase.

I said it was the biggest surprise, because we had actually reduced expectations earlier in the year and now they are substantially up year over year, again, more than 20%.

The -- and so that is -- sorry, you asked the second part of that story?

Market share.

Market share, oh, we dominate.

We're number one in Japan by wide margins.

Okay.

And what has driven that?

Is that a similar thing where you've reduced the low end and only --?

That strategy, our distributor there's strategy is always to be -- has always been to be at the very, very high end.

So, they're a premium price product with substantial service attached to each sale, which is the winning strategy for us in Japan.

And that has -- and then what they have done is strongly reinvested in sales and marketing to drive brand awareness, which is extremely high in Japan for the Roomba and led to the growth that we're seeing.

Okay, so there's been a sales and marketing blitz, is this the correct way to phrase it, from your distributor there in Japan that drove the quarter's business?

Is that -- because there was such a big increase in the quarter I didn't -- is that a correct way to phrase it or not?

Well, blitz would suggest it's short term.

Okay.

And they have probably been our distributor who has most consistently invested and increased -- doubled down on the investment, and so that not blitz -- probably just continuing to raise the volume or the -- of the messaging going out around the product and have been doing it long enough that they have enjoyed continued strong growth, and certainly this year the biggest investment to date, and best results to date.

Perfect.

Thank you very much.

Okay.

So, thank you very much.

That concludes our second quarter earnings call.

We appreciate your support and look forward to talking to you again in October to discuss Q3 results.

That concludes the call.

Participants, you may now disconnect.

Have a wonderful day.