iRobot Corp (IRBT) 2012 Q3 法說會逐字稿

Good day, everyone, and welcome to the iRobot third 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 called 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 compensation.

A reconciliation of GAAP and non-GAAP metrics can be found in the financial tables at the end of the third-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 third quarter of 2012, our business outlook for the rest of 2012 and the preliminary revenue expectations for 2013.

And John Leahy, Chief Financial Officer, will review our financial results for the third quarter and provide our financial expectations for the full year 2012 and the fourth quarter ended December 29, 2012.

Then we will 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.

Last night we reported total revenue of $126 million for the third quarter, driven by impressive growth in our Home Robot business.

Earnings per share of $0.54 and adjusted EBITDA of $29 million for the quarter both far exceeded our expectations.

Through the quarter, there were a number of adjustments, the positive net impact of which was $7.7 million in revenue, $0.10 in EPS, and $5.2 million in Adjusted EBITDA.

John will provide additional details.

Our Home Robot business unit had an outstanding quarter.

Total Home Robot revenue increased 33% year over year, fueled by strong growth in both international and domestic markets.

Our Defense & Security business had its best performance of the year, delivering revenue of $30 million.

US government funding and program delays, however, continue to negatively impact our near-term expectations for this business unit.

With Home Robots accounting for more than 80% of the Company's total revenue, iRobot's financial performance will be proven by growth in the consumer business and less impacted by the ups and downs in the Defense business.

During the third quarter we made a number of moves which we expect will extend our market-leading position.

We announced an acquisition in support of our Home Robot's business unit, hired key senior leaders across the organization, and began to implement significant strategic initiatives in our D&S business.

Each of these actions will have a financial impact on Q4 and full-year 2012 results as well as on 2013 results.

We have revised our full year 2012 expectations to reflect these actions and now anticipate full-year 2012 revenue between $434 million and $438 million, EPS between $0.44 and $0.50 and Adjusted EBITDA of $47 million to $49 million.

For the fourth quarter we anticipate revenue of $90 million to $102 million, loss per share between $0.39 and $0.33 and Adjusted EBITDA loss of $4 million to $2 million.

Both Q4 and full-year expectations include the impact of Evolution Robotics, which we acquired on October 1, 2012.

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

Expanded retail distribution of Roomba 700 domestically fueled total Home Robot revenue growth of 33% in the quarter.

In the third quarter, our domestic revenue was up 85% over 2011 and 39% if you exclude the positive impact of a returns adjustment.

Total EMEA revenue growth was 33% in Q3 and comprised almost 50% of Home Robot revenue in the quarter.

Overall, international Home Robot revenue increased 16% year over year.

In addition to successful expansion of the Roomba 700, we introduced our Roomba 600 robot into select worldwide markets.

Revenue from the Roomba 600 and 700 comprised more than 60% of Home Robot revenue in the third quarter.

Our Home Robot business will grow between 25% and 30% in 2012 and we expect continued growth in 2013.

On September 17, we announced the signing of a definitive agreement to acquire Evolution Robotics.

ER's Mint products will expand our automated floor care offerings while we expect its technology, deployed in future iRobot products, to deliver even greater customer value.

I am pleased to report that we closed the transaction on October 1 and we are working to quickly integrate the business.

Paolo Pirjanian, ER's former CEO and iRobot's new Chief Technology Officer, is on board and assisting in the process.

Our domestic sales team is in discussions with iRobot retailers regarding the addition of Mint products to their floor care line.

Our operations team is working with ER contract manufacturers and component suppliers to explore savings opportunities resulting from our combined purchasing power.

Expectations for the financial impact of the acquisition remain unchanged at this point for 2012 and 2013.

Underlying those expectations are the assumptions that full integration of the acquisition will be complete by the end of 2013 and that we will achieve higher revenue growth and improved margins in 2014.

In our Defense & Security business, shipments of the SUGV robots and software to upgrade the existing fleet of PackBot robots drove revenue of $30 million for the third quarter.

However, our 2012 expectations for this business have declined further and at this point our outlook for 2013 is weaker.

In addition to better size the organization with our revenue, we have taken several actions.

First, our Maritime business, which operated in North Carolina as part of the D&S has both product and research components.

While we think there is a future for unmanned underwater vehicles, the product market has not materialized as quickly as we expected.

Therefore we closed the Raleigh-Durham office and moved the research activities to Bedford.

And secondly, we have taken actions to reduce costs across the entire D&S organization allowing us to efficiently serve our current customer base and invest in our core products and technologies.

We will record a $4 million to $5 million restructuring charge in the fourth quarter as a result of these actions.

In August, Frank Wilson joined iRobot as Senior Vice President and General Manager of Defense & Security to lead this business unit and help map its strategic direction.

To support this effort, he has reconstituted his management team.

Frank, who was previously vice president of business development and mission applications for Electronic Systems at BAE Systems, has extensive experience leading a business, driving business development, and transforming organizations in both favorable and declining defense budget environments.

We look forward to his contributions and leadership as iRobot develops new technologies to address the growing role robots have in special operations and infantry missions.

On the last earnings call, we discussed the new RP-VITA telemedicine robot which was built with InTouch Health on iRobot's Ava platform.

We recently hired Youssef Saleh as Vice President and General Manager to lead our Remote Presence Business Unit.

Youssef comes to us with a tremendous depth of experience in new product development with a focus on telepresence.

Formerly a VP at Polycom he started their high-end telepresence business and grew it into a major business unit.

Youssef combines entrepreneurial and product of element skills to recognize opportunities that build markets and grow revenue.

He has responsibility for supporting RP-VITA while exploring adjacent remote presence market opportunities.

During the third quarter, we made several strategic decisions to strengthen our business.

Our Home Robot business has had an outstanding year and we expect continued growth in that business as we further penetrate our markets, expand our footprint, build brand awareness and add ER's Mint products to our family.

Home Robot revenue will account for more than 80% of total iRobot revenue in 2012 and 2013.

Our near-term outlook for our Defense & Security business is weak.

Our unmanned ground robots have become part of the US military's doctrine; however, the current macroenvironment is limiting sales to the government.

We have scaled back D&S to allow it to succeed as a business unit and not negatively impact the overall Company's financial performance or our commitment to profitable growth.

And we will continue to invest in Remote Presence.

For the past three years, we have been exploring and investing in this market because of its significant potential and we are now poised to access those opportunities under Youssef's leadership.

I will now turn the call over to John to review our third-quarter results and our Q4 and full-year expectations in more detail.

Thank you, Colin.

Revenue for the third quarter was $126 million compared with last year's $120 million.

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

Earnings per share for the quarter were $0.54 compared with $0.50 last year, which included last year a $0.12 per share one-time tax benefit.

EBITDA for Q3 was $29 million, up from $20 million.

In Q3, we adjusted our accrual rates for Home Robot product returns, resulting in a benefit to revenue and earnings.

Our returns experience continues to improve as the result of our sustained investment in product quality.

We also booked reserves related to slow-moving D&S inventory.

Revenue, EPS and EBITDA would have been $1180 million, $0.44 and $24 million, respectively, without these adjustments.

Home Robot unit shipments grew 24% while revenue of $96 million increased approximately 33% from a year ago.

International revenue increased 16% in the quarter to $63 million and comprised 66% of Home Robot revenue.

Total domestic revenues were up significantly, nearly 85% in Q3, following a 40% increase in Q2.

Domestic revenue grew 39% excluding the returns adjustment.

Sellthrough at our top five domestic retailers was up 17% year over year, reflecting the impact of our advertising campaign in Q2 and expanded distribution of products launched last year.

Defense & Security revenue of $30 million decreased from a year ago due to both lower contract and product revenue.

D&S product revenue was $25 million in the third quarter, compared with $38 million last year.

Product lifecycle revenue was $50 million.

Backlog at the end of the quarter was $12 million.

For the total Company, gross margin was 43% for the quarter.

Home Robots had a gross margin of 51%, and 47% without the benefit of the returns adjustment.

Gross margin in our D&S business improved from last quarter due to higher revenue.

Operating expenses decreased to 25% of revenue in Q3 compared with 35% last quarter and 29% last year.

The sequential decline was due primarily to the timing of the advertising program we kicked off in April.

The first part of this campaign occurred in Q2 and the second part is scheduled for the fourth quarter to coincide with the holiday season.

At the end of Q3 we had cash, including investments totaling $190 million compared with $145 million last year and operating cash flow is $12 million on a year-to-date basis.

Our Q4 ending cash balance will reflect the $75 million cash outlay for Evolution Robotics.

As Colin mentioned, there have been a number of material adjustments this year.

In Q2, we adjusted our product returns accrual which had a $3 million positive impact on revenue and EBITDA and an $0.08 positive impact on EPS.

In Q3, we booked an additional product returns accrual adjustment which had an $8 million positive impact on revenue and EBITDA and an $0.18 positive impact on EPS.

We also booked D&S inventory reserves which had a negative impact of $2.5 million on EBITDA and $0.08 negative for EPS.

In Q4, we will be realizing for the first time the impact of the Evolution Robotics acquisition with a $4 million to $6 million positive impact on revenue; a $5 million to $6 million negative impact on EBITDA; and an $0.18 to $0.22 negative impact on EPS.

We will also be incurring a $0.09 to $0.11 negative EPS impact from restructuring our D&S business.

In 2013, we continue to expect the impact of the ER acquisition to be a $22 million to $24 million positive impact on revenue, a $2 million to $3 million negative impact on EBITDA and a $0.22 to $0.26 negative impact on EPS and to be accretive by Q4.

Inclusive of these items, we expect Q4 revenue of $98 million to $102 million; the loss per share in the range of $0.39 to $0.33; and EBITDA loss of negative $4 million to negative $2 million.

Our full-year revenue expectations are $434 million to $438 million with Home Robot revenue growing more than 25% to $355 million to $360 million.

We anticipate D&S revenue in the range of $75 million to $80 million for the full year.

Our full-year expectations for EPS are $0.44 to $0.50 and EBITDA $47 million to $49 million.

For 2013, our preliminary expectations are for revenue to increase 5% to 10% with $425 million to $435 million in our Home Robot business offset by a further decline in the D&S revenue to $45 million to $55 million.

Now I'll turn the call back to Colin.

Thank you.

Our results in the third 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 invest in the term of this growth opportunities for our Home Robots and our Ava platform while working to seamlessly integrate the Evolution Robotics acquisition.

The current military climate is disappointing.

However the longer-term drivers remain intact for our D&S business.

More than 80% of our annual revenue will be generated by Home Robot business and we expect continued growth in that unit.

We have scaled back the D&S business to ensure that it does not negatively impact our commitment to profitable growth and we will continue to invest in and pursue opportunities in our Remote Presence business unit.

With that, we will take your questions.

(Operator Instructions).

Jim Ricchiuti, Needham & Company.

Good morning.

I have two questions.

One on the Home Robot business in Q4 and the second just with respect to the preliminary guidance and the outlook for the D&S business.

First, on the Q4 guidance for Home Robot.

It looks like you trimmed your guidance a bit which I guess this is all that surprising given the current economic environment, but I'm wondering if you could just give a little more color on what you are seeing.

It appears that your business in Asia has slowed.

Is that true and what is going into the guidance you are giving for Q4 in that part of the business?

Sure.

As you know, Jim, the dividing line between Q3 and Q4 is often a little bit difficult to divine and I think what we saw in Q3, the unexpectedly strong performance in Home was driven by some retailer enthusiasm to get their hands on new products which pulled some of the orders that might more normally have happened in Q4 into Q3.

And then, we are also seeing some impact in Europe in particular by retailers taking a more conservative approach toward inventory, which will mean that a successful Q4 ends with a channel in Europe very, very clean based on what we are seeing in demand.

So it is the new product introductions driving the overperformance in Q3, and Q4 takes a bit of a hit as a result.

I don't think we are seeing anything worthy of reports as far as Asian demand for this product.

It has been strong all year, and the ups and downs in inventory are making Q4 play out as we have described.

But we don't see a trend in that arena.

Got it.

And then with respect to the 2013 guidance.

If we go back to the last call it sounded like the way you are characterizing the D&S business is that you felt that you might be entering 2013 with better visibility than you had a year ago.

So first what are the changes that you have seen?

And to what extent is this outlook for the D&S business?

Just conservative or is it just a realistic view of the business as you see it?

I think what we are seeing is a continued lack of visibility.

Definitely the DOD has not been giving us clear signals as to the time frame under which they are going to go and continually ramp up their acquisition for the SUGV product.

And certainly have pushed to the right the acquisition programs associated with first look.

And so it is very frustrating for us to try to plan and thus what we're giving you in our outlook for 2013, we think is the best estimate of expectations for 2013 given the data that we have today.

We feel like we are very well positioned and that there is a very, very strong intermediate and long-term demand for ground robots in the military.

Very strong messaging on that regard.

But on the flipside we are also seeing a lack of a strong demand signal for near-term purchases that have traditionally driven higher revenues.

So what you see is in our outlook for 2013 is our best guess, based on the information that we have in hand today.

It is a little bit of a tale of two cities.

Home Robot, with our technology leadership position, is great guns.

We are seeing tremendous growth in that rapidly maturing business; and the defense side, it is a little bit more of a wait and see.

And our commitment was to make sure that we did not overinvest and overspend on the Defense side.

And so that we have taken some action to allow us to appropriately continue to play in that market, appropriately continue to generate profit in that market as well as sensibly invest in our core products.

So it is a -- some of the part type of outlook for next year and as I mentioned Defense is going to play a smaller role in driving our financial results in 2013.

And John, just on that point about profitability would you be willing to give any color with respect to where operating margins might go given the revenue range that you are talking about for next year in light of the restructuring moves?

Jim, we are just not ready to do that.

And normally as you know, we would not even be projecting revenue at such an early point, but we did think it was important to try to level set, given what we are seeing in D&S.

But we are still point through our internal planning process and so we are just not ready to guide you on margins or the bottom line.

Fair enough.

Thanks a lot.

I will emphasize that our commitment to profitable growth as evidenced by our taking significant actions to rightsize the Defense business remains completely committed and so that there is not a change in our business model around profitability.

Far from it.

Okay, thanks, Colin.

That's helpful.

Josephine Millward, Pinch Park.

Good morning.

Colin, I know you have a lot of uncertainty with the government business with the elections, but are you just derisking there by setting expectations very low for government next year?

Because it seems to me that you should be able to do a lot better based on SUGV funding from the 2012 budget and what is being requested for 2013 on top of contact R&D and spares and parts.

Can you comment on that?

And do you still think the Army is committed to fielding the SUGV within the fourth structure or over long-term or in the coming year?

What I would say is that, yes, I believe the DOD is committed to fielding the SUGV.

The timeframe and rate at which the monies that were in the President's budget are allocated is the thing that we have mixed signals and so that we are, we think.

taking a realistic view of how those monies are going to flow in 2013.

Now the demand signal is there.

The elections certainly have slowed things down.

Sequestration has had a substantial impact on the ability to get commitments from the Pentagon.

And I think that there's also some questions around the -- how the SUGVs are going to be brought in and on what timeframe.

Whether it's the current approved configurations or whether they're -- would like to see some additional features incorporated into the robots.

So there's some real uncertainty and I think that what you see in our numbers is our best guess at this time.

I think that we are all disappointed by those numbers and feel like there is tremendous need in the military today for this type of equipment.

But Washington is a challenging place and there's many struggles that impact the visibility and the rate of these procurement programs.

Can you give us a rough breakdown of your expectations for the $45 million, $55 million in terms of SUGV?

You know, its robots and contract R&D?

About half of our projected revenue is the First Look product and the contracted R&D.

And the balance of the revenue is spread across small SUGV orders, small PackBot orders and upgrades.

So the key to that number being hit or perhaps exceeded is what happens with the First Look and the contract revenue.

Those are the two largest parts of the plan.

Got it.

Thanks.

Shifting gears to home robots.

Can you talk about your expectations for from Latin America and expansion to China next year?

Is that included in your outlook for 2013 and also your outlook for the telemedicine robots?

Thank you.

So I think that, yes, the answer is yes.

The expectation for Latin America and China are included in our current guidance.

I think that we are on track with our plans in China.

We talked about this year being not material and next year making material contributions.

In Latin America, the growth or the performance of Latin America in 2012 was one of the rare weak spots in our performance.

And we have made some changes in Latin America and believe that it will begin to perform to expectations next year.

So that we had some distribution issues in Latin America which have been addressed.

So Latin America underperformed.

China was on plan.

Both are included in our 2013 plan as material contributors and we are excited to see growth in those areas for a number -- when he years to come.

Colin, why are you projecting a growth deceleration in Home Robots?

You know, with the geographic expansion and the new products.

I'm just trying to understand whether this is iRobot being conservative or if there is something else going on that we should know about.

I think we are very excited about the growth we see next year in Home Robots.

I wouldn't view it as sending any type of message other than it's a vibrant and healthy market.

We have included what we think are prudent estimates as far as how quickly we can roll evolution into our product line.

Because of the complexities of taking a product which was focused on the US domestic market and making sure that we can meet the commitments and all other product issues of internationalizing that product base.

And we do have growth over 20% modeled, which is what I think is a very exciting figure to be laying out there.

I think that the -- there's a lot of growing room for many years to come and we are very comfortable and pleased with the 20% growth number at this time.

As John mentioned this is quite early for us to be commenting on 2013, but given the challenges that we are anticipating next year in Defense we wanted to get a number out there.

Certainly, when we give more formal guidance for 2013 in February we will have better numbers.

But this is what we think is prudent and appropriate given the information we have at this time.

By the way, I see the Roomba everywhere in Paris.

I think it's very popular here.

We are doing -- we continue just to define the economic malaise in Europe and we hope to continue.

So thank you for that feedback.

Thank you, Colin.

Adam Fleck, Morningstar.

Good morning.

I had a quick follow-up on the discussion about home robots.

ASPs showed much slower growth this quarter year-over-year than in some previous periods.

How do you think about pricing, the rollout of the 700 is nearly complete.

The rollout of the 600 is just beginning.

Albeit it sounds like replacing the 500, but you are also including the Mint next year.

So should we expect this metric to continue to see somewhat flat performance?

Well, what you're seeing right now, remember, is anniversarying of some of the higher price point products that we put into the market last year.

So that there's some natural slowdown in the ASP growth just because of the comparable.

We have seen the 700 series perform very well in the higher-end robots particularly strong, relative to expectations.

That has allowed our ASPs to increase.

You make a good point about the Evolution acquisition.

Those products tend to have lower price points.

So it is building out quality product offerings at opening price points which, we think, customers will find very affordable and bring new segments of the customer base into the iRobot franchise.

So I think that ASPs, we're not giving guidance at this point as to what we expect to see in 2013.

But you'll see some deceleration because of those very natural impacts of Evolution and anniversarying a high-end price point strategy that we launched last year.

Fair enough.

Thanks.

And then just shifting back to the whole Company.

It looks like R&D came down pretty sharply sequentially and as a percentage of sales.

Is this how you are thinking about R&D going forward on a quarterly run rate?

Maybe you can help us out with that a little bit.

Adam, what you're seeing in Q3 is that we are coming off of a peak level of R&D, relative to home the Remote Presence product, the Ava product.

And so that peaked in Q2 as we were working to finish some product delivery, relative to our relationship with InTouch Health.

And we think that internal R&D will continue to run at 7% to 8% of revenue as it has been over the last couple of years.

And then, if you combine that with external R&D, running in total about 10% to 14%.

Okay, great.

Thanks.

Paul Coster, JPMorgan.

Thank you.

Colin, as the R&D has been reined in, I assume that it's more tilted towards the sort of D now as it tilts towards the consumer products rather than the defense products for reasons of timing at least.

Is that true?

And does that kind of undermine in any way your long-term prospects which because there's some really creative stuff happening in that Defense segment previously.

First off, the 7% to 8% IR&D has been our target for IR&D for many years at this point.

So, I think that we did have a burst of IR&D spending earlier in the year as John said to help us get a couple of projects across the finish line.

But there is no change in iRobot's long-term commitment to IR&D with the absolute dollars increasing on year-over-year bases as revenue increases and as a percentage of revenue holding that steady.

The question about technology and our investment in technology.

It's more significant than ever.

The acquisition of Evolution Robotics has allowed us to put even more energy into visual navigation which is technology, which is going to allow our robots to use low-cost cameras to build maps and allow our robots to perform more sophisticated tasks based on that information about this environment.

And the cool things is that the investments we've made in low-cost processing and -- now, the code base allows this technology to be applied across product lines.

So while the absolute amount of dollars that is focused on research and development solely to benefit the D&S is probably down.

The amount of IR&D that is working on crosscutting technologies has been increased.

So the technology that was being developed for D&S, now, has applicability in our Remote Presence business unit and also is being used in the development of future Home Robot products.

The suit we are definitely a company that is able to better leverage our IR&D investments than we were just a year ago.

So it is actually a very exciting situation to be in where a whole company R&D benefits all of the products.

This is one of the ways that we will stay and extend our leadership position in the defense arena, despite the fact that the product sales have been disappointing and we anticipate continuing to be disappointing in the short term.

I would like to revisit Josephine's line of questioning as well, regarding the Home Robot business.

I mean, the way we look at it here is that you have got you have this fabulous organic growth rate year to date.

There's a quite marked slowdown entering the fourth-quarter and then it reaccelerates in 2013 to round about a 20% organic growth rate from 5% in the fourth quarter.

Can you just help us again understand this dip and why you have such confidence that the dip is temporary in nature?

Sure.

It's -- again, the retailers are -- with a very substantial amount of our sellthrough happening in the fourth quarter, the question is always when do the retailers order.

Is it in Q3 to stock in advance of sales?

Or is it in Q4 to more conservatively just-in-time order?

And because (technical difficulty) that we've put in the market place, this year we have seen more activity that falls on the Q3 line of the ledger rather than on the Q4 line of the ledger, which means that the -- we had growth rate for home above 30% in Q3 and excluding the Evolution impact, down in the high single digits in the fourth quarter.

But if you group those two quarters together, then we are up in that 20% plus growth rate that we are more accustomed to seeing.

So I don't believe it is in any way a deceleration.

And I provide additional color that in Europe we are seeing a little bit of a a barbelling effect where they ordered early, and then are holding off with a little bit of a wait and see attitude to look at sellthrough.

And thus, the early Q4 that we typically see are being pushed into, further and further, into the quarter.

And as I mentioned earlier, that is okay.

It means that we are likely to see inventory levels very -- at very nice low healthy levels exiting the year which makes for a nice Q1.

So every year has a little bit of a different dynamic.

I think 2011 saw more in Q4 and for various reasons in 2012, we are seeing the shift into Q3.

And, Paul, I would just add a little color in terms of the strength of the business.

In Q3 the domestic business excluding the impact of the returns adjustment grew about 39%.

In Q3, EMEA grew over 30%.

On a year-to-date basis, Japan is up over 50%.

So we continue to see considerable strength really around the globe now.

And as Colin pointed out, I think you're seeing some timing anomalies with what we have said and Q4.

But it should not change.

It certainly does not change our perspective in terms of the strength of the business now and going forward.

Thank you.

Patrick Wu, Battle Road Research.

Good morning.

Quick question on the D&S.

Can you possibly provide a breakdown in terms of the 76 units sold?

Just the distribution will be fine actually for the quarter.

Well, for Q3, the bulk of our product sales would have been both SUGV and PackBot.

And then like always, we have some level of research, development research work.

With both PackBot -- we had sales across PackBot, small number of sales at First Look and then SUGV.

SUGV actually made up the bulk of the product sales in Q3.

Is it reasonable to assume that the SUGV and PackBot robot constitute 80% at least there?

Yes.

Yes, for sure, of the units.

First Look is still at the beginning of its product life cycle.

The majority of the robots that we sold to date are in operational tests.

The procurement contracts that we had hoped to see in 2012 are now pushed out into 2013.

And so, they are still there waiting for us, but part of the reason that we've had weakness against our estimates in 2012 has been the pushing to the right of the First Look.

You are absolutely correct that SUGV impact but represent the lion's share of our product sales.

How much inventory and backlog is attached to the Maritime business?

So we -- the Maritime product business has been shut down and so that our estimates for the remainder of this year and next year have zero sales associated with Maritime product.

And we have fully written down the inventory associated with that.

And that is included in the charges that we are taking in Q4.

So we are out of the product business and have taken -- fully taken all of the financial hits for that exit.

We believe that there is an exciting future for the Maritime business.

We are continuing to perform research funded research on the Maritime business and have a number of exciting contracts along that and have moved those activities to Bedford so that they can benefit from the infrastructure and employee base up here in Massachusetts as well.

So it is a way of efficiently continuing to pursue it in a cost-effective fashion.

Okay, so this shouldn't -- so the write-down should all happen in Q4 and not extend into 2013?

All included in the guidance that we have just given.

Okay.

And yes absolutely, all included in the Q4 guidance that we have just given.

So yes.

You are exactly correct.

Just one more if I may.

It seems like there was a 35% sequential growth to Accounts Receivable for the quarter.

What is this a function of and what is it -- in terms of product line where is it largely attributable to?

It is probably timing.

We had the bulk of our revenue come towards the end of the quarter particularly in the D&S business which is not unusual, but that is timing and that -- you'll see that DSO number improve as we report Q4.

Our collections and terms of current accounts are something like 97% or 98%.

So that is strictly timing.

All right.

Thank you.

That's all I have.

Brian Ruttenbur, CRT Capital.

The first question I have is a financial for 2013.

You have given revenue.

Can you give us some kind of trend in terms of gross margin by division?

Do you expect gross margins, which trend up or down from 2012 levels directionally?

Can you help us out?

As I said to Jim earlier, it's early to talk about operating margins.

I won't get very specific.

But clearly, in the home business where we've had terrific gross margin expansion over the last couple of years, we would not expect to back off of that trend.

So gross margins will be at least where they are today and hopefully continuing to improve.

D&S has been much more of a wildcard, as you know, this year with gross margins being impacted by the lumpiness of the revenue this year.

But as Colin mentioned, we've taken -- we are in the process of taking significant action in Q4 to take cost out of that business and we are doing that in part to try to improve a margin picture and the profitability of that business unit.

So I can't be real specific, but we are taking the actions to try to at least maintain the margins that we've had this year in D&S.

Okay, that is where it is a little confusing.

On D&S, your gross margins this year have been anywhere from a negative to a positive.

I assume they are going to be in a positive range, that is the way you have modeled it going forward with the restructuring.

Yes.

That is what I meant earlier with the margins have bounced around quarter by quarter based upon the revenue.

What I would expect as we go into the new year, we'll be back to more normalized margins for what we have seen in that business historically.

The gross margins are so tied to revenue that, with the volatility in revenue this year, we had difficulty maintaining traditional margins.

By changing our cost structure, we'll be able to put that back into the right domain based on the, we think, very achievable revenue figures that we have included in our outlook.

Okay and so the on the D&S you expect to be -- not to have big spikes in your revenue.

More of if we did the middle of your range roughly $50 million, that would be $13.5 million.

So let's call it $13 million a quarter or something like that.

You expect that to be flattish from quarter to quarter for 2013 or do you expect fourth quarter is going to be a big spike.

It is going to be back end-weighted.

Do you have any idea how that is going to look?

We are not ready to talk about the quarters for next year and, unfortunately, just the way we do our accounting in that business unit, the gross margin does fluctuate with revenue because of the absorption of overhead.

And so next year, if we do have lumpy quarters, you will see volatility in the gross margin.

But for the full year, we are working towards to get those margins back to what we find historically.

Thank you.

The next question I have on the other division is about your distributors.

Is there a certain level of inventory that your distributors by agreement have to keep?

No.

In fact, we actively keep our distributors at an inventory level that tends to be below what they would ideally like.

We have learned lessons over the last 20 years that suggests that allowing inventory levels to rise at the distributor just causes many, many different challenges.

So we aggressively manage our distributor inventories.

We are very, very conservative and how much rope we give them and make them come to us with their marketing programs.

And we will work to make sure that they have adequate inventory to support their marketing program.

But again, we would rather resupply them frequently than risk them owning too much product and being tempted to take any price action that would hurt the overall global franchise.

This is a very, very healthy, very exciting global franchise that we are actively managing very, very tightly to ensure control over the investment in our products, the price points in our products and there's no need for anyone to have a glut at this time if there's great demand globally.

Great.

That you very much.

Josephine Millward.

I see a lot of other robotic vacuum cleaners here in Europe from Hoover and Samsung.

Are you seeing more competition in Home Robots and is that putting pressure on your ASP?

We certainly are seeing remarkable growth in the overall robot vacuuming industry.

I think that this is an industry which has gone mainstream, represents the, I think, the second largest growth driver in the small domestic appliance industry.

And so it is something that customers are flocking to as they make decisions around how they are going to clean their floors.

Our growth speaks for itself and there are other entrants into the marketplace in some markets.

So that Samsung and LG, for example, do have competitive products out there.

We believe strongly about our competitive position relative to those markets.

But they are certainly are getting some traction from the perspective of sales.

So as I mentioned a number of times, our growth rates are very attractive.

So -- (multiple speakers).

Their products tend to be priced quite high and so that this is not putting downward pressure on us.

We believe we have both better value pricing -- I'm sorry, better performance and a good value in our pricing.

Our target is not to chase them down.

We have the performance lead.

We have a premium positioning strategy in the marketplace.

And it is our intent to continue that trend and, certainly, our acquisition of Evolution Robotics just adds to our very exciting IP portfolio around navigation technologies and gives us technology for next generations of Home Robots to come.

Got it.

Can you give us an update on the Scooba rollout?

Have you completed the new Scooba US and international rollout?

And how the ramp is going because I think that is exciting.

I would say it is not fully complete at this point.

We are again taking it relatively carefully.

We are very excited by the product, but it is not fully rolled out in Europe.

It is not rolled out in Japan to, in any way to a full extent.

So there's a lot more to come on Scooba.

Okay.

Do you think Scooba has the potential to become the size of the market to rival the Roomba?

Our expectations are that when both product lines are mature, Roomba will be larger than Scooba.

I think, in our model, the Scooba market will be more than 50%.

Whether it is 50% or 80% or 95% of Roomba, that is something that time will have to tell.

But we believe that it is a market of great significance.

And our testing shows that the desire to buy associated with Scooba rivals and even exceeds the desire to buy for the vacuum cleaners.

Because scrubbing your floors is a much more hated task than vacuuming your floors because of the dirt and grime involved.

So as our products become increasingly easy to use and convenient, we see ourselves capturing more and more of the customer's attention and allowing that new business area to grow.

And right now the Scooba is about 10% to 15% of your Home Robot sales, right?

That's correct.

Great.

Thank you.

That is helpful.

Okay.

That concludes our third-quarter earnings call.

We appreciate your support and look forward to talking to you again in February to discuss our Q4 and full year 2012 results as well as a complete discussion of our expectations for 2013.

That concludes the call.

Participants may now disconnect.