iRobot Corp (IRBT) 2013 Q2 法說會逐字稿

Good day, everyone, and welcome to the iRobot second quarter 2013 financial results conference call.

This call is being recorded.

At this time for opening remarks and introductions I would like to turn the call over to Elise Caffrey of iRobot Investor Relations.

Please go ahead.

Thank you, and good morning.

Before I introduce the iRobot management team, I would like to note that statements made on today's call that are not based on historical information are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

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

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

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

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

A reconciliation of GAAP and non-GAAP metrics can be found in the financial tables at the end of the second quarter 2013 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 2013 as well as our business outlook for the rest of 2013.

And Alison Dean, iRobot's Chief Financial Officer, will review our financial results for the second quarter and provide our financial expectations for the full year 2013 and the third quarter ending September 28, 2013.

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'm very excited to report that we had an excellent quarter following our outstanding Q1.

Our Home Robot business delivered strong results, both domestically and overseas, and the outlook continues to be excellent.

We announced our second remote presence market initiative, Enterprise TelePresence, in partnership with Cisco, and our Defense & security business performed as expected.

Based on our view of the rest of the year, our expectations for revenue and adjusted EBITDA remain unchanged, but we are increasing the low end of our EPS range due to a one-time tax benefit in Q2.

We expect to deliver fiscal 2013 revenue of $485 million to $495 million, EPS between $0.88 and $1.00, and adjusted EBITDA of $55 million to $61 million.

I will take you through some of the details of the second quarter and our expectations for the rest of 2013.

Total Q2 revenue of $130 million was consistent with our expectations, while adjusted EBITDA of $17 million and EPS of $0.28 slightly exceeded our expectations.

EPS for Q2 included a $0.07 tax benefit that we received in the quarter, as I just mentioned.

Domestic revenue growth of 26% coupled with international growth of 18% fueled a 20% year-over-year increase in Home Robot revenue in Q2.

Strong sell-through domestically, supported by our advertising campaign, helped to drive this Q2 growth.

The launch of Braava oversees and broadened availability of the Roomba 600 and 700 robots to retailers all combined to increase Home Robot revenue.

Over the past year we have talked about the importance of investing in brand and marketing to support our strategic growth plans.

We saw the positive impact from investments on domestic results in 2012 and continue to see this program driving greater awareness this year.

In fact, we are running the campaign to a limited degree in selected European markets to test its effectiveness there.

Overseas, demand in Japan continues to be very strong, and China's performance was consistent with expectations.

EMEA was up slightly from Q1 due to the launch of Braava and is roughly flat year-over-year.

In Q3 we expect the US launch of Braava, coupled with further growth from adoption of our core products, to drive domestic revenue, while overseas revenue will be driven by strong demand in Japan, continued Roomba sales into China, and expanded distribution of Braava in EMEA.

We continue to expect overall Home Robot revenue to grow 20% to 25% from last year, but based on the strength of the domestic Home Robot market year-to-date and our outlook for the remainder of the year, we now expect that part of the business to grow 25% to 30%, and the international business to grow 15% to 20% for the full year.

Turning now to our Defense & Security business.

Q2 results were consistent with our expectations, and consisted primarily of shipments of FirstLook robots.

During the quarter we announced $7.2 million in contracts from the Brazilian government to provide iRobot 510 PackBot robots, spares and associated equipment, and a four year $30 million IDIQ from the US Army for FasTac robots and spares, with an initial order of $3 million.

These contracts were included in our full year expectations, and we remain confident in achieving those results.

Switching now to our Remote Presence business unit, we had a very busy and exciting quarter.

As you know, we began shipping the RP-VITA to InTouch Health in Q1 of 2013.

We continue to ship robots in Q2 and have now delivered more than 40 units to InTouch, half of which have been installed and are in use.

These are very early days, but initial feedback has been positive, especially about the navigation capabilities and ease of use through the iPad.

We will sell additional RP-VITA units this year, but our Remote Presence business unit is not expected to generate meaningful revenue in 2013.

We are very excited about our progress in this segment and do expect the product to be a growth driver over the next couple years.

In June we announced a joint marketing agreement with Cisco to bring the enterprise grade Ava 500 video collaboration robot to market.

The robot blends iRobot's autonomous navigation with Cisco's TelePresence to enable people working offsite to participate in meetings and presentations where freedom of movement and location spontaneity are important.

We demonstrated the Ava 500 at the INFOCOM Conference and then at Cisco Live, attended by Cisco's customers and value added reseller network.

The reception at both events was extremely positive.

We will be initiating a beta program this year and are targeting limited availability through select Cisco partners in 2014.

In summary, the business performed as expected in the second quarter, and we are confident in our ability to deliver full year 2013 expectations.

Before turning the call over to Alison to review our second quarter results and Q3 expectations in more detail, I wanted to comment on a lawsuit we recently filed in Germany.

iRobot's patent portfolio now consists of more than 200 US patents and 195 non-US patents, of which roughly half are specific to our Home Robot business.

iRobot has made significant investments to protect its intellectual property and intends to defend its patent portfolio by the appropriate means available domestically and abroad.

We have demonstrated our willingness to rigorously defend it in the past, and we will continue to do so.

With that I will turn the call over to Alison.

Thanks, Colin.

Revenue in the second quarter was $130 million, compared with last year's revenue of $111 million.

Q2 for both years includes approximately $3 million of return reserve releases.

Adjusted EBITDA for Q2 was $17 million, compared with $16.2 million last year.

EBITDA came in slightly ahead of our expectations, driven primarily by favorability and gross margin.

Gross margin was favorably impacted by the release of the return reserves and favorable product mix.

Earnings per share for the quarter were $0.28 versus $0.26 last year.

EPS was ahead of our expectations, primarily due to a $0.07 one-time tax benefit associated with sales from 2000 and 2006 of government robots to the US military, which were used outside of the US.

For the first half revenue was $237 million, compared with $209 million in 2012.

EPS was $0.57, compared with $0.28.

And adjusted EBITDA was $32 million, compared with $22 million last year.

In Q2 Home Robot units grew 16%, while revenue of $116 million increased 20% from a year ago.

The mix of higher ASP Roomba 700 and 600 robots this year accounted for the majority of the difference in unit growth versus increased revenue.

Based upon current indications from our retailers and distributors, we anticipate our home revenue profile for the year to decrease slightly sequentially in Q3 and then increase in Q4 to Q2 levels.

Total domestic revenues were up 26% in Q2 year-on-year, following a 44% increase in Q1 due to expanded distribution of Roomba 600 and 700 and the inclusion of Mint.

Importantly, sell-through at our top five domestic customers was up 30% year-over-year, reflecting consumer demand and the impact of our marketing programs.

International revenue grew 18% in Q2 over last year and comprised approximately 66% of Home Robot revenue.

Defense & Security revenue of $12 million was consistent with our expectations but down from a year ago as expected.

Defense & Security product revenue was $11 million in the second quarter, $3 million of which was product life cycle revenue.

Q2 gross margin was 47.3% for the Company, compared with 47.4% last year, and OpEx was 41% of revenue, compared with 38% last year.

The increase in OpEx year-on-year was driven by the addition of Evolution Robotics for 2013 as well as the impact of a write-down of a maritime intangible asset.

At the end of Q2 cash, including investments, totaling $153 million, compared with $177 million last year, and operating cash flow was roughly $8 million, compared with a $4 million use of cash last year.

In Q3 we expect revenue of $124 million to $128 million, driven by strong growth in Home Robots.

We expect EPS in the range of $0.20 to $0.25 and adjusted EBITDA of $14 million to $17 million.

We are maintaining our full year revenue expectation of $485 million to $495 million.

This assumes Home Robot revenue will grow approximately 22% to $435 million to $440 million and comprise roughly 90% of total Company revenue.

Our expectations for Defense & Security continue to be $45 million to $55 million for the year.

Last quarter we provided an estimated 2013 effective tax rate of 20% based on the impact of the 2012 and 2013 investment tax credit for R&D.

Due to the impact of the additional Q2 one-time tax credit, we now estimate a full year rate of approximately 12%.

For Q3 and Q4 we are estimating roughly 28%.

In summary, we performed as expected in Q2 and remain confident in our full year expectations.

Our Home business performance is strong, driven by sales growth in our domestic and Asian markets, and our Defense & Security business is executing very well against its plan for the year.

I will now turn the call back to Colin.

Thank you.

Our strong second quarter results, driven by our Home Robot business, give us confidence in achieving our full year expectations.

As we look at the rest of this year and beyond, we see tremendous growth opportunities for our home robots and expect that business to drive both top and bottom line growth for the Company.

Our success in home robots will enable us to invest in technology and the iRobot brand while delivering on our commitment to profitable growth.

We are very excited about the potential for our remote presence robots in both the healthcare and Enterprise TelePresence markets.

While the near term US military climate is somewhat disappointing, our Defense & Security business is solid at current levels and gaining traction in adjacent markets.

With that, we would love to take your questions.

Thank you.

(Operator Instructions).

Our first question comes from Jim Ricchiuti from Needham & Company.

Please go ahead.

Hi, Jim.

(inaudible) revenue in Q1.

What was it in Q2?

Did you guys mention that?

Hey, Jim, I think you -- I missed the first half of your question.

Could you please repeat it?

Sorry.

Hopefully you hear me a little better.

The ER related revenues in Q2, can you provide that?

They were about $3 million, Jim.

Okay.

And just the increase that you saw sequentially, can you talk a little bit about where that is coming from?

Is it mostly coming from overseas?

Because it sounds like you are now in the midst of a more -- a bigger rollout in the US for the product.

You are talking about Braava specifically?

Yes.

Yes, it was higher in Q2, and we are looking to expand it in the second half of the year with -- we launched in EMEA in Q2.

We just started there, and that will grow during the second half of the year, plus we are relaunching it under the Braava name in the US in Q3 as well.

And it's already beginning to hit the stores right now?

In EMEA, yes, but in the US that is not happening.

It is not on the shelves as Braava yet.

It is still there as Mint.

And just one follow-up question if I may, and I will jump back in the queue.

In the Remote Presence business, I know it is early days, but can you talk a little bit about how you see the margins for this business as the business begins to ramp up, both -- I guess initially in the healthcare area?

Can you give us any sense?

The -- steady state, the margins will help add to our Company margins.

In the early days, while we are investigating price points, while we are optimizing the installation of the products and are looking at where can we focus our cost reduction efforts, we will see below traditional iRobot margins.

But during that time the revenue from those sales will also be much less material.

So near-term the impact on the margins will be minimal, and by the time that revenue becomes material you should see a margin profile for that product that is additive.

Okay, thanks a lot.

You bet.

Thank you.

Our next question comes from Tyler Hojo from Sidoti.

Please go ahead.

Good morning.

Just a follow-up on the line of questioning on Evolution Robotics.

Did that meet your revenue plan -- I guess your internal revenue plan for the quarter?

And also just curious if you still think that is on track to do $22 million to $24 million for the full year and be accretive by the fourth quarter to earnings?

Yes on all fronts, Tyler.

Okay.

Well, that was an easy one.

And then I also have a question on the Defense & Security business.

When we look at the funded backlog there, I'm curious how much of that you anticipate to ship this calendar year, and I guess if you are kind of anticipating any incremental orders to hit that you need to execute on the full year revenue plan?

If you could provide some commentary there, that would be great.

We expect the majority of that backlog to ship this year, Tyler, and then if you just back into our expectations with that backlog, it would imply there are still some orders we expect to land before the year is out.

Okay.

And would those be international type orders or --

It would be a mix.

We have a very solid pipeline leading that is not classified as formal backlog, and that is a diverse pipeline with both domestic and international orders in it.

So, again, we don't have 100% of the year in backlog, we have most of it.

We feel very good about hitting that range, $45 million to $55 million this year, and later in the year we would anticipate starting to build backlog for next year.

So that is very solid and well in hand.

Okay, great.

And last question for me.

I'm kind of curious why you didn't increase the top end of your guidance range to reflect the tax gain.

Is the offset there increased litigation expense expectations?

The tax increase was anticipated this year.

The timing of the tax benefit was not fully known.

So we had modeled it in the back half of the year, and it came in -- surprise, surprise -- ahead of schedule, which rarely happens, and thus the surprise this quarter, and thus the lack of increasing the revenue guidance.

And just to clarify, EPS is strictly -- the tax thing is strictly an EPS impact.

So we did increase the lower end of our EPS range, as we had had downside protection there in case this tax benefit didn't come in in the year, but from a revenue perspective no impact of that tax incentive on revenue.

Yes, of course.

Okay, great, that's all I had.

Thanks so much.

You bet.

Our next question is from Adam Fleck from Morningstar.

Please go ahead.

Hi, good morning, thanks for taking my question.

Colin, you had noted that you shipped 40 of the RP-VITAs to InTouch but only half are being used in hospitals.

Are the remainder testing units or are those planned for eventual deployment?

Those are all planned for deployment.

So it is just a -- we ship our part to InTouch, they integrate the torso onto the robot and then install in hospitals.

So it is just a process.

There will always be a lag between our shipping to InTouch and them actually making it to the hospital.

Trying to give a little bit of clarity during the early days of launching as to what exactly is going on.

Sorry if I confused.

No, that is helpful.

Thanks.

And then we talked a little about the profitability in that TelePresence business.

I just want to clarify, are you talking gross profitability, or maybe you can help us understand the incremental R&D SG&A needs?

Any color there would be helpful.

I was talking about product margin in my comments earlier.

The -- certainly as our business grows we increase on a dollar amount our IR&D to support a broadening line of products and new business opportunities.

So that you certainly would -- we certainly do now allocate a portion of our IR&D funding to Remote Presence and our launching of both the healthcare remote presence unit and the Enterprise TelePresence unit this year as outcomes of prior investments in IR&D.

We are an innovative company.

We intend to continue investing, and we are very excited that as our technology matures and as the receptivity for the types of products we create continue to increase, the opportunities for new product creation launches seem to be growing excitingly with us.

We have to balance the investment in IR&D, of course, with our commitment to profitable growth, and we are very pleased where we are right now with that balance.

Okay, great.

And then just one more from me quickly here.

Colin, you mentioned the limited trial of the advertising campaign in Europe.

I just wanted to clarify.

Is this going to be all on your P&L, or is this partially funded by the distributors?

And then would you be targeting a US-like success for such a campaign, or do you think that is a best case scenario?

Our advertising in -- outside of the US is a cost borne by both iRobot and the distributors.

Traditionally the distributors shoulder the lion's share of the marketing dollars that are spent, and we expect that to continue.

We are very closely aligned and partnered with our distributors, and based on the amazing and excellent success we are seeing with our advertising campaign in the US, we are trying a program out in the EU where we are bringing our marketing material there and trying it on air.

In general, what do we expect?

Well, certainly the -- we are a global company.

We are seeing substantial growth in the US, substantial growth in Asia, and very limited growth right now in Europe based on macro forces.

Certainly I think that, again, you have to look at things as a basket of markets, and in Europe flat to slightly up feels like winning right now.

Fair enough.

All right.

Thanks.

Appreciate it.

Thank you.

Our next question comes from Josephine Millward from Benchmark.

Please go ahead.

Good morning.

Good morning.

Colin, can you talk about seasonality in the second half?

Do you think Q4 will be stronger than Q3?

And are you anticipating a significant ramp in OpEx in Q4, because your guidance is implying a softer Q4?

The -- our OpEx spikes in Q2 and Q4 are based on the heavier spend on advertising.

So there is seasonality to our OpEx.

As we talked about in the call, expect our revenue in Q3 to be down slightly and then up nicely in Q4.

So there will be a little bit of anticipated pattern.

A lot of it does hinge on when product ships to retailer, especially in the North American market where there is very pronounced Q4 seasonality, and sometimes the retailers accept shipments in Q3 and sometimes in Q4.

We are expecting to be a little bit Q4 loaded on the revenue profile this year.

And switching gear to defense, I didn't catch the funded backlog.

Can you give me that number?

It is $19 million.

And can you talk about whether you see the Navy's advanced EOD robotic systems program as an opportunity for iRobot in the coming years?

And if not, can you help us understand your vision or strategy for G&I going forward.

It is my understanding that this might be one of the only funded military robotics programs going forward, in light of the uncertainty related to the SUGV.

Right.

So the complicated story, the advanced EOD is the current standing program of record, with the SUGV program in hiatus at this point.

There is an ongoing review of what the requirements for small robots are, and there may be a relaunch of a new program trying to address a more unified requirement.

That said, specifically relative to [EODRS], our mission is to bid on it, but we would not be looking at bidding to be the lead system integrator, because that contractually prohibits you from delivering hardware and software.

It's a little interesting how they have structured it.

So we will be involved, but we are not going to be bidding to be the integrator.

So -- I see.

So this could become -- could be the driver for your defense business next year, because it is supposed to be awarded sometime at the end of this year.

Is that correct?

We are not counting on it as being our growth driver.

I mean, if it does play out favorably, that would be an accelerator from our perspective.

We see FirstLook as being a very promising product line.

And we see international sales, paramilitary sales; we see support of our installed base; and then nonprogram driven sales of PackBot and as -- and Warrior as also drivers for next year.

So we are not dependent on EODRS in order to make the statements we are making about how we think D&S is going to evolve.

If it did play out in our favor, that would be great news.

That is very good to know.

Thanks, Colin.

You bet.

Thank you.

Our next question comes from Paul Coster from JPMorgan.

Please go ahead.

This is Mark Strouse on for Paul.

Thanks for taking our questions.

Sure.

Hi, Mark.

Hey, Colin.

So just following up on the earlier question about EMEA, so we're flat year-over-year.

Stripping out the $3 million from ER, the core Roomba business is down a bit.

Can you just talk about the linearity of the quarter?

If there is any signs of improvement throughout the quarter thus far into 3Q, or if there's any pockets of strength that you guys are seeing over there?

I think the fact that we are able to report flat results, slightly up year-to-date in EMEA, given the economy, is actually a very strong statement showing the strength of the market.

In general consumer products in Europe are significantly down.

So we view continued strength in our products.

We are excited about Braava expanding in distribution in Europe, giving us a growth driver, and again we are trying some new things from a marketing perspective to continue to increase awareness.

So as I mentioned before, we look at -- we are definitely a global company, almost perfectly balanced -- a third, a third, a third -- right now in -- between Asia, Europe and North America, and diversity is providing us the opportunity to grow strongly despite European weakness.

All right.

Okay, thanks.

And then just a quick modeling question if I can.

The return reserve release in the quarter, was that included in guidance?

And just how should we think about that in the back half of the year, if there is anything in guidance for the rest of the year that we should be on the lookout for?

Mark, when we provided the additional range for our revenue for the full year, we definitely take into consideration things like return reserves that could impact us.

Usually the exact quantity and the timing of those is hard to predict, but one of the reasons we have the ranges that we do is to accommodate things like that.

Fair enough.

When you look --

Okay -- sorry, go ahead.

Typically any significant return -- we look at -- returns are typically in the second quarter, although that is not a rule, it is just when we have good data traditionally.

And I think it is a -- it is very exciting for us that the investments that we have made over the past few years are consistently delivering improvements in returns that we can take to the bank.

So it is actually a wonderful story, and we are very excited to be able to announce that and take that to the bottom line this quarter.

Right.

You're making good products.

Okay.

That is it for us.

Thank you very much.

You bet.

Thank you.

Our next question from Brian Ruttenbur with CRT Capital.

Please go ahead.

Thank you very much for taking my questions.

On G&A, on a quarterly basis should we look for it to be relatively flat, and then bonuses being in the fourth quarter around the $15 million mark, and then spiking a little bit in the fourth quarter?

Well, we in Q2, I mentioned earlier, we had the write-off of an intangible asset, which hit our G&A line, which caused a little bit of a spike there for Q2.

But other than that anomaly we really don't expect large changes in our G&A on a quarter to quarter basis.

So it should be more like $12.5 million going forward?

In that general range.

Again, the anomaly in Q2 was the write-off of the intangible asset.

Okay, thank you very much.

The other questions I have, can you tell me the number of distributors or a goal that you have in Asia right now?

I'm just trying to understand how much you have ramped so far in terms of distribution channel in Asia.

So the distributor list is -- typically we have one distributor per region, so that number of distributors is not so much an indicator of growth.

If we were to go into a new market, we would look to distributors -- to add a distributor to that region.

More typically you look at how many doors are we in, same store sales growth, and in Asia certainly we have operations in China, in Japan, in Korea, in Taiwan.

And so that you shouldn't be expecting significant increases on that, because we do not currently have -- we are not currently incubating new regions in Asia.

We are focused on building out China and continuing to develop the markets we are in.

Okay.

And then the last question I have is on your core growth ex Evolution -- growth year-over-year.

Can you help me out?

I calculate around 17% internal growth ex Evolution.

Is that the right ballpark?

That is the right ballpark.

Okay.

Thank you very much.

You bet.

Thank you.

Our next question comes from Jim Ricchiuti from Needham & Company.

Please go ahead.

Hey, Jim, we can't hear you again.

I'm sorry.

Hopefully you can hear me better now.

Would you expect to have a large-scale distribution of Braava in the US and EMEA by Q4?

Yes.

Colin, can you talk a little bit about the potential launch or expansion of Braava in Asia?

It is something that we are looking at.

It is not -- your expectations for rollout in Asia should be more focused on late Q4 and -- or more appropriately into 2014.

So it is something that, again, is better to do right than quickly, and so that trying to make sure that we have our positioning in a way that the customers are most receptive is what we are testing now.

And would you give an update on how the consumer business is progressing in Latin America?

It is still slow.

Again, we had a couple of restarts there, and what I would say is expectations is that it remains nonmaterial through the balance of the year.

Okay.

And one final question, again relating to the Home business.

I wonder if you could talk about the -- how the revenues or how sales of the non-Roomba, non-Braava product -- how are the other products doing in the portfolio?

They are definitely contributing.

After Roomba you have got Scooba, which we continue to -- we have recently launched the new model and continue to improve the existing models and have not yet thrown a large marketing campaign against it, so we view that as a future growth area.

So foreshadowing 2014, we may put more marketing energy against Scooba.

So that is an underutilized asset in our portfolio.

Looj is a more minor part, but we think that, based on consumer reviews coming back from some real enthusiasts associated with Looj that, again, that is an opportunity for growth in 2014 as well, if we can create the distribution relations to get that on the shelves.

So definitely nothing compared to the levels of revenue driven by Roomba, but some pretty interesting things we have in our portfolio as the Company continues to grow and continues to improve its profitability with Braava -- rolls out -- we have got again a lot to work with to drive future growth.

Okay, thanks very much.

You bet.

That concludes our second quarter earnings call.

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

Thank you.

That concludes the call.

Participants may now disconnect.