iRobot Corp (IRBT) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to the iRobot second-quarter 2012 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 disclose 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, restructuring expenses, net intellectual property litigation expenses, and non-cash stock compensation.

A reconciliation of GAAP and non-GAAP metrics can be found in the financial tables at the end of the second-quarter 2012 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 2012 as well as our business outlook for the rest of 2012, and John Leahy, Chief Financial Officer, will review our financial results for the second quarter and provide our financial expectations for the full year 2012 and the third quarter ending September 29, 2012.

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.

I am pleased to report that the Company's second-quarter performance was very good given the challenging environment.

Total Q2 revenue of $111 million was at the high end of our expectations for the quarter, while adjusted EBITDA of $16 million and EPS of $0.26 for the quarter both far exceeded our expectations.

Our continuing investment to improve home robot product quality resulted in an adjustment to our product returns accrual, which positively impacted revenue and profit by approximately $3 million.

Yesterday we announced with InTouch Health the unveiling of the RP-VITA telemedicine robot.

The robot combines InTouch Health's state of the art telemedicine solutions with iRobot's autonomous navigation capabilities, mobility, interactive communication and situational awareness from the Ava program.

It is the first commercial robot based on our Ava technology and our most significant technological system since SUGV.

Our Home Robot business had an outstanding quarter and the outlook for that business is excellent.

Strong growth in both our international and US markets fueled a 50% year-over-year increase in Home Robot revenue.

We are successfully expanding our distribution of new products and increasing our market penetration.

In both the third and fourth quarters expanded product distribution and strong demand, both domestically and overseas, will drive year-over-year revenue growth of more than 20%.

US government funding and program delays, however, continue to negatively impact our expectations for the defense and security business unit.

We have received notification of contract delays for both FirstLook and two BCTM combat brigades which we expected to drive second-half revenue in that business unit.

Our steadily increasing home robot global reach is enabling us to substantially offset the impact of US government spending issues on our defense and security business.

Therefore, we are reaffirming our expectations for full-year 2012 revenue which we provided in February and affirmed in April, and are increasing our expectations for full-year 2012 EPS and adjusted EBITDA.

We anticipate full-year 2012 revenue of between $465 million and $485 million, EPS of between $0.90 and $1, and adjusted EBITDA between $59 million and $63 million.

For the third quarter we anticipate revenue of $125 million to $130 million, EPS between $0.30 and $0.36, and adjusted EBITDA of $17 million to $20 million.

Now I would like to take you through some of the details of the second quarter and our expectations for the rest of 2012.

In Home Robot expanded distribution of our Roomba 700 domestically and very strong demand overseas, particularly in Japan, continued to fuel revenue growth.

Asia Pacific grew more than 85% in the second quarter and totaled approximately 30% of Home Robot revenue in Q2.

Our business continues to thrive in Europe despite the negative news that has dominated the headlines.

Total EMEA revenue grew 42% in Q2 over last year and Western Europe, which comprised approximately 30% of Home Robot revenue, grew 40%.

Overall, international Home Robot revenue increased 56% year over year.

We have partnered with distributors who understand their markets and our products well, and we expect international Home Robot demand to contribute significantly to revenue for the remainder of 2012.

I am particularly excited to report that our plans to revitalize our US business are succeeding.

Domestic revenue grew nearly 40% over second quarter last year following an impressive 21% increase in Q1.

These results were driven by expanded distribution of the Roomba 700 into US retailers.

Our continued investment in marketing to reach our target customer, the modern professional, was increased in the second quarter to support the expanded distribution.

Proof that our efforts, and particularly the Q2 advertising campaign, have been effective is evidenced in higher Roomba and iRobot awareness scores as measured by independent sources, as well as significantly stronger sell-through as reported by our domestic retail partners.

During the six-week campaign the daily average of home robots sold to customers in the US increased approximately 50% from the daily average sold during the 15 weeks preceding the campaign.

Over the past year we have talked about the importance of investing in brand and marketing support to drive our growth plans, and we saw the positive impact of our investments in the first half and expect our programs to drive even greater awareness in the US market in 2012.

In addition to successful expansion of the Roomba 700, we continue to see demand for our Scooba 230 product which is being sold on our website and in select European markets.

Revenue from the Roomba 700 and Scooba 230 comprised more than 50% of Home Robot revenue in the second quarter.

Expanding our distribution of both products throughout the rest of 2012 will continue to drive increased revenue.

Since our last call we have announced new contracts totaling approximately $27 million for SUGV and PackBot robots, spares and software upgrades that we will deliver over the remainder of 2012.

We are currently performing work under the BCTM bridge development contract and expect to sign a direct contract with the government later this year.

In June, the FirstLook robot was a top performer in the Ultra Light Recon Robot competition at the Joint IED Defeat Organization's first challenge-based acquisitions event at the US Army Robotics Rodeo.

Among the participants were our three competitors in the operational assessment underway in Afghanistan, and not only did we win the competition but none of the other companies' robots finished in the top three.

The event's main objective was to use robotics to discover new methods that will enable creating better speed and flexibility to maneuver in a counter-IED environment.

The FirstLook robot's performance positions us very well for the upcoming contract competition in this weight class.

Unfortunately, the solicitation for this robot has been delayed until October of this year and it is currently unclear whether the government will place any significant orders for FirstLook robots prior to contract award.

In addition, orders we expected for approximately 76 SUGVs for BCTM Brigades 4 and 5 have been delayed.

We expect to receive them in the fourth quarter and fulfill them in the first half of 2013.

Given leaner military budgets, there is an intense focus on doing more with less.

Unmanned ground vehicles enable efficient achievement of mission objectives with fewer troops, and we are well positioned with our SUGV and FirstLook robots to enable the government to meet its objectives.

Limited visibility in our Defense & Security business presents near-term challenges, but we are working our way through them and hope to exit 2012 in a more positive position.

Finally, at the end of February we announced a management and structural realignment to the Company for our next stage of evolution which we discussed on last quarter's call.

After combining the divisional engineering operations and finance organizations into a shared service model to more effectively serve the business units we identified a number of redundancies and efficiencies and took action in early July.

I will now turn the call over to John to review our second-quarter results and our Q3 and full-year expectations in more detail.

Thank you, Colin.

Revenue for the second quarter was $111 million compared with last year's $108 million.

Earnings per share and EBITDA for the second quarter both exceeded our expectations.

Earnings per share for the quarter were $0.26 compared with $0.29 last year, and EBITDA for Q2 was $16 million, flat with last year.

In Q2 we adjusted our accrual rates for Home Robot product returns resulting in a positive benefit to revenue and earnings.

Our returns experiences gradually improved as the result of our sustained investment in product quality.

Revenue, EPS, and EBITDA would have been $108 million, $0.18, and $13 million, respectively, without this positive adjustment.

For the first half revenue was $209 million compared with $214 million in 2011.

EPS was $0.28 compared with $0.56 last year, and EBITDA was $22 million compared with $31 million last year.

Home Robot shipments grew 30%, while revenue of $96 million increased approximately 50% from a year ago.

International revenue increased 56% in the quarter to $65 million and comprised 67% of Home Robot revenue.

Total domestic revenues were up significantly, nearly 40% in Q2, following a 21% increase in Q1.

We now expect domestic revenues to grow more than 25% for the full year, our best domestic performance in several years.

Importantly, sell-through at our top five domestic retailers was up nearly 35% year over year, reflecting the impact of our advertising campaign in Q2 and expanded distribution of products launched last year.

Defense & Security revenue of $15 million decreased from a year ago due to both lower contract and product revenue.

Defense & Security product revenue was $12 million in the second quarter compared with $34 million last year.

Product lifecycle revenue was $5 million.

Backlog at the end of the quarter was $18 million.

However, as of today, the backlog totals approximately $28 million, the highest level since Q3 of 2011.

For the total company gross margin was 44% for the quarter compared with 39% last year.

This improvement was largely driven by Home Robots which had a gross margin of 52%.

As Colin mentioned earlier, improved product quality benefited our product return accruals.

Excluding this impact, Home Robot gross margins would have been 50% compared with 44% last year.

Product mix, lower warranty costs, and operating efficiency also contributed to the increase.

Gross margin in our Defense & Security business improved from last quarter despite lower revenue as a result of cost reduction initiatives.

We expect total company gross margin to be 41% to 42% for the full year.

Operating expenses increased to 35% of revenue in Q2 compared with 29% last year.

The increase was driven by a 50% increase in sales and marketing for the quarter, reflecting the multimedia advertising program we kicked off in April.

The second half of this campaign is scheduled for the fourth quarter to coincide with the holiday season.

Internal R&D grew 20% in Q2 as we accelerated development on Ava for the delivery of product to InTouch Health, which Colin discussed earlier.

For the full year we expect operating expenses to be approximately 33% to 34% of revenue.

At the end of Q2 we had cash, including investments, totaling $177 million compared with $123 million last year, and operating cash flow is breakeven on a year-to-date basis.

In Q3 we expect revenue of $125 million to $130 million, a slight increase over last year, driven by strong growth in Home Robot.

We expect EPS in the range of $0.30 to $0.36 and EBITDA of $17 million to $20 million.

Please keep in mind that in Q3 2011 we recorded a one-time tax benefit which impacted EPS positively by $0.12.

Our full-year revenue expectations of $465 million to $485 million remain unchanged.

However, we now expect Home Robot revenue to grow more than 30% to $365 million to $375 million, and comprise almost 80% of total company revenue.

We anticipate Defense & Security revenue in the range of $100 million to $110 million for the full year with sequential growth in both Q3 and Q4.

We have increased our full-year expectations for EPS to $0.90 to $1 and EBITDA to $59 million to $63 million for the full year.

Strong domestic sales growth, the expanded distribution of new products and further penetration into long-term international markets will drive the Home Robot business.

Orders for SUGV robots from the US military and block software upgrades of D&S robots will support that business in the second half.

Now I like to turn the call back to Colin.

Thank you.

Our results in the second quarter exceeded our expectations due to strong performance by our Home Robot business unit.

As we look at the rest of the year, we will extend our presence in existing markets and continue expansion in new geographic markets.

Beyond this year we see tremendous growth opportunities for our Home Robots and are very excited about prospects for Ava.

While the current military climate is disappointing, the longer-term drivers remain intact for our Defense & Security business and we are well positioned for those markets.

With that we will take your questions.

(Operator Instructions) Jim Ricchiuti, Needham & Company.

Thank you, good morning.

The first question I had, Colin, is you noted in your presentation that 50% of the Home Robot revenues is now coming from the 700 and the new Scooba 230.

Can you give us a sense as to where you might see that going by the end of Q4?

Because clearly there is a mix shift here that is helping your gross margins.

Right.

I think that the 700, we are seeing very strong performance and we are not fully rolled out with the 700 at this time.

So I think that is going to be an area of strength.

Whether it increases from its current mix, I wouldn't expect it to change dramatically from what we are seeing.

But certainly good reason to think we can maintain Roomba 700's sales throughout the balance of the year from a mix perspective as we roll them out more fully.

So the gross margins and the ASPs that we reported we think are sustainable through the remainder of the year.

Is the 700, I mean just in terms of geographies you notice -- you said Japan was particularly strong.

For example, is the 700 available widely now in Japan?

Yes.

In fact, Japan was the region where we most aggressively rolled it out.

It was a very good fit for that product, and so that was an early launch market for the 700.

Okay.

John, maybe you could help us understand if we think about that 600 basis point improvement that you saw in Home Robot gross margins excluding the accrual benefit, how much of that is coming from mix and how much of that is coming from the lower warranty rates and the operating efficiency?

Is there a way for us to get a sense for how that is breaking out?

Yes.

So excluding the benefit of the returns, gross margins were about 50%, so about a 600 basis point improvement year over year.

And it is split roughly by thirds.

About one-third of it benefited by lower warranty costs; about one-third benefited by the mix impact, and as you pointed out earlier that is really driven by the 700; and about one-third driven by lower cost of goods and transport costs.

Got it.

Thanks very much.

Josephine Millward, The Benchmark Company.

Good morning.

Congratulations, Colin.

Thank you.

Can you talk about visibility for the government business in fiscal year '13?

Do you see it stabilizing or growing in light of the approval of funding increase for the SUGV so far from the 3 out of 45 committees on the Hill?

We are not going to comment much about '13.

I think that that certainly is good news and creates the beginning of a basis as we build our estimates for 2013.

We believe that we will exit the year with more visibility going to '13 than we had going into '12, so that is a low bar.

But certainly we view it as a positive and something that we can build on.

Thank you.

Switching gears to consumer, when do you expect the Roomba 700 to be fully rolled out in the US and around the world?

Our rollout plans, they have different stages.

When we first launch a product, it is in the specialty high-end retailers only; we are past that.

By the end of this year you will see the 700 fully rolled out into sort of the belly of our strategy which is the mass-market retailers.

Certainly you wouldn't see the 700 in the later-stage discounting channels at this point.

That would be something that would happen in upcoming years.

But we will be fully rolled out into our major mass-market channels by the end of the year.

Thank you very much.

Adam Fleck, Morningstar.

Good morning.

Thanks for taking my questions.

I had a couple questions about Europe really quickly.

US sellthrough was again really strong during the quarter.

Like I said, two questions.

How does that compare to what you have seen in Europe on the sellthrough?

And also, John, I appreciate the walk-through on the improved gross margins, but is there a substantial difference in profitability between your US sales and your international sales?

Let me take the second part of that, Adam.

In years past as you'll recall, there was quite a gross margin difference between international and domestic.

But with the good work that the home business unit has done in resetting our business in the US, the rationalization that was talked about of unprofitable SKUs and customers, the gross margins have improved significantly in the domestic business.

And so now, the margins are pretty close.

International is slightly higher, but domestic has improved so much that there is not a big gross margin mix impact now between domestic and international.

As far as the questions on sellthrough, in Europe and in the US we have a very uneven degree of reporting as far as what the accurate sellthrough numbers are.

Some retailers give us great data, some don't give us any data.

So as a surrogate, we track extremely carefully what the inventory levels at our retailers are.

And I would tell you that they are at a very comfortable two to three months of inventory at this point, both in the US and in Europe.

And so that would suggest that the sell-in -- sorry, at our distributors in Europe where we track their inventory levels.

And so that gives us confidence that sell-in is a valid surrogate for sellthrough.

We see no signs that inventory levels are doing anything unnatural.

We believe that the sell-in and the power of the growth we have seen in Q2 is completely representative of what is going out the doors of the stores.

Okay, great, thanks.

If I could just sneak one more in on just a quick housekeeping.

John, does the new EPS guidance include the one-time gain from this quarter?

In the accruals?

You mean the adjustment from the returns?

That's right.

Yes, it does.

It is all included.

Okay, great.

Thanks, guys.

Alex Hamilton, EarlyBirdCapital.

Good morning.

From the strategy side as you have gone throughout the course of the year and visibility in defense has gotten worse and visibility on consumer has gotten better, how has that changed in the boardroom sort of yours strategy towards those products, either existing or what you're sort of trying to develop going forward?

The reorganization of the Company that we performed the beginning of the year gave us the flexibility to shift resources so we could select investments for the Company that we felt were the most promising on a full company basis, rather than strictly on a divisional basis.

And this has had some very positive effects in where we see the Company placing its bets moving forward.

Clearly on the military side, we have great future in a number of our products like SUGV and FirstLook, and we continue to make substantial investments there.

We also on the home side have seen tremendous growth, and we are making sure that we are investing commensurate with the opportunities there.

As far as the more speculative work that is further out as far as generating revenues go, certainly it would be appropriate to imagine we are putting our money into programs like Ava, programs that we think are going to leave us in good stead to maintain our market-leading position on the home side and so forth.

Great, thank you.

Paul Coster, JPMorgan.

Good morning and thanks for taking my question.

Maybe perhaps start with the currency changes that are happening.

Obviously, the dollar is strengthening against the euro.

How is that risk passed on to your distributors in Europe and ultimately to the consumer?

Our arrangements with our distributors in Europe, we sell product to them in dollars and we have a band of exchange rates where the pricing is valid.

As the dollar strengthens if it were to stay outside of that band for a long period of time, it would negatively impact our distributors' ability to invest in marketing programs.

And we may wish to supplement those marketing programs with some additional resources, but we don't change our transfer pricing to our distributors based on currency.

And the guidance for the full year, does it assume that you step in on the marketing programs or not?

The guidance that we give does not -- we view it as an all-in set of guidance, and we think that there is hundreds of different puts and takes that go into making that.

Certainly we have probability weighted the notion that we might need to put a little bit of money, and that would push our guidance into a slightly more conservative place.

But we have other factors that we believe that offset, and that is how we were able to get comfortable.

But there is some risk that we may see a prolonged disparity between currencies.

Generally, you see a sequential dip in the first quarter in your defense segment, your D&S segment revenues.

But it sounds like this year it might be a little less pronounced, owing to the shift of the BCTM business out into the beginning of next year.

Do you concur?

Defense has always been lumpy.

Certainly starting off 2013 with BCTM 4 to 5 would be a great way to start next year and would bolster first-half sales.

But I would push back at any deep systemic pattern to the ordering in the government, other than the fact that Q4 tends to be good because we have benefited from year-end dollars that are obligated in September.

So that would be the only systematic seasonality to the defense business.

But certainly you are correct, it should help next year first half.

Okay, got it.

My last question, Colin, is it's very exciting with the introduction of the healthcare robot.

Can you talk a little bit about your assessment of the addressable market, whether you have got any customers already, what the near-term demand is, how you are going to develop that channel, all that good stuff?

Okay.

We are very excited about this.

This is a major product launch, and we do think it will contribute to our revenue next year and in some way to our back-half revenue this year.

What we have is an unveiling of the robot later this week.

The exact date when we start taking orders is not yet set, though it will be in the back half of this year.

And from an addressable market perspective, we think this is a very substantial trend that with hospitals needing to look at ways to control costs and to provide expertise of care across large geographic areas.

So we think this is an important market, as well as being a very important first step for Ava technology in general.

We think that healthcare is one of a number of important markets that will be served by this technology.

So it is the first step in creating the next major business unit for iRobot, and I look forward to being able to talk more about it as we start incorporating our expectations for performance into our revenue guidance with more fidelity.

All right, thank you.

Brian Ruttenbur, CRT Capital.

Thank you, great quarter.

Congratulations.

You had incredible growth in Europe and Asia on the Home Robot side.

Can you talk about maybe your long-term projections in these markets and maybe talk about what is driving this growth.

Is it existing distributors, is it new distributors?

I may have missed it.

Can you talk about the number of new distributors that you have added in Asia and Europe in the quarter and if that is driving it or if it is the existing distributors?

Thank you.

It is primarily being driven by existing distributors.

The major new area for growth in Asia is China, and we have been saying all of this year that that is something that is going to be material next year, not this year.

So 2013, we are excited about starting to tell the China story with more detail.

But what is driving growth in Europe and Asia this year is the rollout of the 700 and the rollout of Scooba 230 through primarily existing distributors.

And those distributors are increasing their number of doors, so that same number of distributors and increase in doors but primarily better sellthrough, same-store sales, elevated price points; and then with the distributors with some amount of new doors as the kicker on top of that.

But it is the story we have been telling for a while toward the end of 2012 about growth drivers for '13, and it is gratifying to see that playing out despite all of the negative economic news that we have been getting out of Europe.

Great, thank you very much.

Jim Ricchiuti, Needham & Company.

This is a follow-up to Paul's earlier question about Ava.

This is more of a housekeeping nature.

Where will you be including the revenues for the telemedicine robot; in which bucket?

Well, to date, Jim, the costs we have been capturing within the Home business unit.

But likely with the reorganization that we announced, we talked earlier about an merging BU.

So as the revenue gets to be material and the cost of goods obviously, we will break it out at some point.

But to date, the costs have been in the Home business unit and largely just showing up in our R&D spend.

Got it.

Is it fair to assume that you will take the platform into some markets outside of healthcare in 2013?

Is that something we could anticipate in the early part of the year, or is that more in the second half?

At this point what we have announced is bringing the platform in partnership with InTouch Health into the telemedicine space.

I will certainly be excited to let you know when we are ready to take our next step, but I make no timing promises at this time.

Okay, thanks very much.

Congratulations on the quarter, by the way.

Thank you so much.

Well, that concludes our second-quarter earnings call.

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

That concludes the call.

Participants may now disconnect.