iRobot Corp (IRBT) 2013 Q3 法說會逐字稿

Good day, everyone, and welcome to the iRobot third-quarter 2013 earnings 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 table at the end of the third-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 third quarter of 2013, as well as our business outlook for the rest of 2013.

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

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.

I am pleased to report we delivered Q3 results in line with our expectations.

We saw strong growth in our Home Robot business, are excited to announce a major new Roomba robot for the fourth quarter.

Overseas strong demand in Asia continue, and we are seeing signs of recovery in Europe.

We shipped additional RP-VITA robots to InTouch Health, while our Remote Presence unit gained further traction in the video collaboration market.

And our defense and security business performed as expected.

Our businesses continued to perform in line with expectations we laid out in Q1.

Accordingly, we are narrowing our full-year 2013 expectation ranges to revenue of between $485 million and $490 million, EPS of $0.90 to $0.95, and adjusted EBITDA of $58 million to $61 million.

Based on our robust product pipeline and expectations over the next three years, we expect to achieve by 2016 mid to high teen revenue CAGR, high teen adjusted EBITDA margin, and high single-digit operating cash flow margin.

For 2014, our preliminary revenue expectations are for mid to high teen growth, consistent with these financial targets.

Now I'll take you through some of the details of the third quarter and our expectations for the rest of 2013.

Total Q3 revenue of $125 million and adjusted EBITDA of $17 million were consistent with our expectations while EPS of $0.26 slightly exceeded our expectations.

Domestic revenue growth of 8%, coupled with international growth of 19%, fueled a 16% year-over-year increase in Home Robot revenue in Q3.

Shipments of floor care robots increased to 27% while revenue grew at a lower 16% due to the positive impact of a large return rate adjustment in Q3 of last year.

The broadened availability of Braava overseas and strong demand in Japan for our premium Roomba 700 robot drove international home robot revenue growth.

Last quarter I mentioned we began running our advertising campaign, iRobot, do you?

To a limited degree in select European markets to test its effectiveness and we are starting to see positive results.

Overall revenue for EMEA was down slightly for the quarter compared with Q3 2012.

However during recent discussions I've had with numbers of distributors, they report improving demand in Germany, the UK, Spain, Israel, Russia, and we are optimistic about the region's turnaround and continued contribution to 2014 growth.

Braava was introduced in late Q2/early Q3 and we are seeing strong demand and sell-through.

It is currently being sold in 10 countries and we will continue to roll it out across most of EMEA in 2014, into China in December of this year.

Demand in Japan continues to be very strong.

Revenue in Q3 more than doubled from Q3 2012, and Japan is on track to grow more than 30% for the full year over last year.

China's growth was consistent with our expectations.

And for perspective, overall revenue contribution is expected to be under $10 million in 2013.

In Latin America, our initial shipment of product to Brazil was being sold through eCommerce and we are expecting placement in-store with a number of retailers over the next few quarters.

I am pleased to report that after a year -- a year after our acquisition of Evolution Robotics, integration is now complete.

We successfully relaunched the Mint robot as Braava in EMEA and the United States and we'll expand its distribution across those markets, as well as in APAC next year.

We have transitioned the supply chain management and manufacturing to iRobot and have achieved the 2013 exit margin improvement that we had planned ahead of schedule.

We are currently producing Braava robots at approximately 40% gross margin compared with a roughly 30% margin when we acquired Evolution.

In Q4, we will launch our next generation of Roomba.

In keeping with our tiered launch strategy, the new product will be sold exclusively at our website through year-end.

In Q1 of 2014, consistent with our other new product introductions, we will broaden distribution to a limited number of domestic retailers and international channels.

No additional details regarding this product will be available until its launch later this quarter.

Turning now to our defense and security business, Q3 results were in line with our expectations and consisted equally of robot units, primarily PackBot robots, and spares.

During the quarter, we fulfilled most of the $7.2 million in orders we received from the Brazilian government.

While the US government shutdown hampered our efforts in both the domestic and international markets, we continue to expect to deliver the full-year defense and security revenue of roughly $50 million.

In 2014, we will continue to focus on international and first responder markets as the primary sources of growth.

In addition, we continue to see upgrade and support requirements for the 5000 iRobot unmanned ground vehicles we've sold over the past 10 years.

Switching now to our Remote Presence business unit, we shipped an additional 15 RP-VITA units in Q3, bringing our total units shipped to date to approximately 60.

Based on positive feedback from early users in the US and Mexico, we are optimistic about the opportunity with InTouch Health.

I want to reiterate that while we are excited about our progress in this healthcare segment, it will not generate meaningful revenue in 2013.

Overall, this business unit continues to be in investment mode and we expect to continue as such in 2014.

As we look to 2015 and beyond, we expect significant opportunities in both the telemedicine and video collaboration markets.

In 2014, we expect revenue from Remote Presence to grow substantially and account for less than 3% of total Company revenue.

In Q2, we announced a joint marketing agreement with Cisco to bring the enterprise grade AVA 500 video collaboration robot to market, and we are in discussions to sign our first Cisco distributor.

The internal pilot we are currently running at iRobot is going extremely well.

AVA 500 is going into beta by year-end with early beta units coming this month.

Our beta customers include at least five Global 2000 companies from various industries.

If all goes according to plan, they are anticipating a product launch in the first half of 2014.

Before turning the call over to Alison, I wanted to provide an update to the patent protection initiatives we discussed last year.

In September, we obtained preliminary injunctions against the two Chinese companies.

The German court where we filed the suit granted the preliminary injunctions, confirming that their vacuum cleaners infringe all four asserted patents.

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

With that, I'll turn the call over to Alison.

Thank you, Colin.

Revenue in the third quarter was $125 million compared with last year's revenue of $126 million.

Adjusted EBITDA for Q3 was $17.2 million compared with $29.2 million last year.

Earnings per share for the quarter were $0.26 versus $0.54 last year.

As a reminder, Q3 2012 included adjustments which positively impacted revenue by $7.7 million, EPS by $0.10, and adjusted EBITDA by $5.2 million.

In Q3, Home Robot units grew 27% while revenue of $111 million increased 16% from a year ago.

The impact of the $7.7 million revenue adjustment in Q3 2012 accounted for the difference in unit growth versus increased revenue.

Total domestic revenues were up 8% in Q3 over last year, due to expanded distribution of Roomba 600 and 700 robots and the inclusion of Braava.

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

Based on current indications from our US retailers, we anticipate our domestic home revenue to increase more than 40% in Q4 year-over-year.

International Home Robot revenue grew 19% in Q3 over last year and comprised approximately 68% of Home Robot revenue.

We expect Q4 revenue overseas to grow roughly 20% year-over-year driven by Japan.

Defense and security revenue of $10 million was consistent with our expectations.

Product lifecycle revenue for the quarter was roughly half of the revenue.

Q3 gross margin was 43.4% for the Company compared with 46.3% last year.

The decrease in gross margin was due to lower D&S revenue, the positive impact of the adjustment in Home Robots last year, and the inclusion of lower margin Braava sales.

OpEx was 35% of revenue compared with 28% last year.

The increase in OpEx year-on-year was driven by the addition of Evolution Robotics for 2013, as well as higher selling and marketing expense, partially associated with preparing to launch the new Roomba product.

Our balance sheet continues to be very strong.

At the end of Q3, we had cash, including investments, totaling $157 million compared with $190 million last year prior to the outlay for Evolution Robotics.

Operating cash flow was roughly $3 million this quarter compared with $12 million last year.

Inventory increased to $49 million or 64 days of inventory at the end of Q3, largely to support Q4 consumer domestic revenue.

While most of our international consumer distributors take container shipments directly from our contract manufacturers, thereby not typically impacting inventory levels, domestic revenue for a given quarter is supported by inventory produced largely in the quarter before.

We ideally like to operate around 60 days of inventory, but this, as with other aspects of our business, can fluctuate a bit on a quarter-to-quarter basis.

In Q4, we expect revenue of $124 million to $129 million.

We expect EPS between $0.06 and $0.11 and adjusted EBITDA of $9 million to $12 million.

We are narrowing our full-year expectations and now anticipate $485 million to $490 million in revenue driven by 20% growth in Home Robots year-over-year, EPS of $0.90 to $0.95, and adjusted EBITDA between $58 million and $61 million.

As we begin our 2014 planning, we expect mid to high teen revenue growth with home continuing to be the main driver.

We will discuss 2014 expectations in more detail during our February call.

I will now turn the call back to Colin.

Our third-quarter results, coupled with our outlook for all three business units, gives us the confidence to achieve our narrower full-year expectations.

We saw strong growth in our Home Robot business, and are very excited about a major new Roomba robot launch.

Based on our robust product pipeline and expectations over the next three years, we continue to expect to achieve, by 2016, mid teen revenue compounded annual growth, high teen adjusted EBITDA margin and high single-digit operating cash flow.

As we look at 2014, we expect strong growth in our Home Robot business will drive the Company's top and bottom line fueled by new products.

We believe D&S has hit the inflection point in 2013, and expect continued focus on international and first responder markets, along with the supporting of the existing fleet of unmanned ground vehicles will enable us to begin growing this business unit again.

And we remain very excited about the potential for our Remote Presence robots in both the healthcare and video collaboration market.

With that, we will take your questions.

(Operator Instructions).

Jim Ricchiuti, Needham & Company.

Thank you.

Good morning.

A couple of questions.

Just first, on the Home Robot business, the expectations that you are alluding to for 40% growth in the domestic business, which I guess is based on the discussions you've had with some of your larger US retailers.

Was that before the government shutdown?

I'm trying to get a sense as to how current that is, whether it captures any potential uncertainty that people may have regarding consumer spending in the early part of Q4.

Sure.

Again, you've been with us a while, and you know that the line between Q3 shipments and Q4 shipments is where most of the action happens.

But yes, the 40% growth is based on -- based largely on in-hand orders for product that is actively being shipped against PO.

This is the time of year when we are fulfilling orders, so that's a very good number.

It's something that we tend to have strong visibility around and that's why we have confidence.

Specifically did it happen prior or after the government shutdown, I would say that these orders are based on plans that are made before but continuously adjusted and monitored, so they represent the retailers' best current outlook as to the inventory levels they need.

Okay.

That's helpful.

Just regarding the D&S business, a pretty significant ramp that you are seeing in Q4.

And I'm just wondering, and maybe, Alison, you can address this, what this will do to your gross margins in the quarter.

I know there's going to be some mix issues, but just wanted to get a sense as to how we might think about gross margins.

Gross margins I think for the latter half of 2013 will be similar to what they were in the first half of the year.

We had a slight downtick in Q3, but that will return in Q4.

And for the year, I think we will average out to where we were at the beginning of the year.

Okay.

One final question and I'll jump back in the queue.

Just trying to understand some of the dynamics affecting your operating expense quarter-to-quarter, and particularly the sales and marketing and G&A lines.

It's down I guess fairly sharply sequentially.

How should we think about that for Q4?

Certainly, in sales and marketing, what we've tried to communicate is that although we have a steady campaign running throughout the year, we do sort of turn it up in Q2 and Q4.

So if you look Q2, Q3 and Q4, you will see a downtick, as expected, in sales and marketing in the third quarter and you should expect to see that ramp back up again in Q4.

In terms of G&A expense, if you remember, we took a write-off of some intangible assets in Q2 which hit our G&A line, so that spiked and then returned to normal levels in Q3.

I don't expect any large changes for Q4 from a G&A perspective.

Great, thanks a lot.

Josephine Millward, Benchmark Systems.

Good morning.

Can you tell us what was Braava's contribution for the quarter and if you're still expecting $20 million to $24 million for the year?

We are with about $9 million in Q3 and it places us on target to meet that $24 million goal.

Perfect.

Can you talk more about what drove the guidance revision?

It looks like government is on track.

Perhaps US and international Home Robot are slightly softer than anticipated.

Can you talk about that?

So just as we are coming into year-end and getting the latest cues from our retailers and distributors, we saw just a little bit of a reduction in EMEA and primarily Japan as they are looking at where they're going to end this year, and in preparation for the new product coming into play next year.

Overall, the growth in North America and Japan is still very substantial.

EMEA would be flat to down for the year, so no big changes in the trends we are seeing there, just a little bit of year-end versus next-year planning by our partners.

Just one follow-up question.

Can you give us some initial thoughts on the assumptions -- growth assumptions you have for 2014?

Not at this time.

We will be giving more detail on that in 2014.

I mean on the February call.

All right, thank you.

Adam Fleck, Morningstar.

Thanks.

Good morning everyone.

Colin, a year or so ago, you talked about a potential deceleration of ASPs because you're anniversarying new products, you had the Braava inclusion and really that's exactly what we've seen.

I'm just curious.

Going into next year, and I know you're not commenting on topline guidance, but are you thinking about ASPs reramping back up here as you lap a full-year of Braava and you have this new product, or should we expect sort of continued flatting?

Relevant to 2014, I did make a comment that we expect it to be a growth year in line with our mid to high teen revenue growth expectation.

So we did -- we are feeling very good about next year.

With respect to your question about ASPs, certainly Braava will be rolled out.

Well, it is not completely rolled out at this time.

And so we should see sales momentum for Braava to continue to trend above the growth rates of Roomba for next year, because it's coming off a smaller base.

That will have a negative impact on ASPs perhaps somewhat offset -- we alluded to a new robot coming in.

Based on the marketing strategy we've talked about in the past, that might have an upward impact on ASPs.

So, I think it really depends on the details of the relative pickup and success of those two products next year.

So, I think they'll largely offset and we're not going to see strong motion up or down next year as we look at it today.

Okay, that's very helpful.

Thank you.

And then just with the marketing campaigns on the Home Robot side showing pretty strong topline returns -- again, I know it's still early, but do you think there's an opportunity for similar marketing activity right off the start on the AVA product?

And if that's the case, who would handle the marketing costs in that relationship?

Would that be Cisco?

Would that be you?

Just curious on your thoughts there.

Sure.

It's a different market.

It's a B2B market versus a consumer market.

And one of the exciting attributes of our go-to-market strategy for AVA is the leveraging of the Cisco distribution network, their VARs and distributors.

And so the impact of that strategy is going to be seen at the margin side, but not so much on the advertising, sales and marketing -- sorry, the advertising side of the equation.

And so you won't see significant increases relative to those costs as we ramp up AVA.

Okay, great.

That's helpful.

Thank you very much.

Tyler Hojo, Sidoti & Company.

Hi, good morning everyone.

Just to follow up on I think Josephine's question, it looks like if domestic Home Robot is going to be up 40%, international is going to be down substantially on a sequential basis.

I was just hoping that maybe you could just clarify a little bit as to why that is.

The way that the different countries, distributors in those countries order throughout the year, we encourage people to really look at the overall annual performance and not quarter-on-quarter.

We do expect it to be down a bit sequentially, but still very healthy overall for the year.

It really depends on the ordering patterns and the timing of the various distributors.

So really nothing to read into there.

We typically have quarter-on-quarter fluctuations just depending on the buying patterns of the particular distributors.

I'll add a little bit of color on Japan.

Up 100% this quarter.

They ran some very, very successful promotions in the quarter to drive that type of business.

And after you do that type of promotion that has such extraordinary results, you typically model a slight recovery period as demand that was satisfied comes back and builds again.

So, again, it's really important to look at these things on the full-year basis.

Up 30% predicted on the year for Japan, a very, very exciting, very healthy market for us.

And I think that coming off a 100% growth quarter, having them come in with more modest expectations for fourth quarter is very understandable.

Okay.

And when would the new Roomba model go on sale in Japan?

That would be a Q4 event.

All right, great.

I'm sorry, I misspoke.

A 2014 event.

I have got my fours in my brain.

Okay, it will be a first-half 2014 event or --?

We are not talking more about timing about it, but yes.

(multiple speakers) I'm getting lots of nodding heads around the table.

We will say yes.

Okay, wonderful.

And then just moving over to the defense side of the business, I'm just curious if the funded backlog that you have currently -- I think it's $13 million -- does that all ship in Q4?

And just kind of maybe as a follow-on to that, I'm just kind of wondering what kind of backlog level you're going to need exiting this year in order to be comfortable with call it flattish revenues in 2014.

We expect the bulk of that $13 million of backlog to ship in Q4.

And backlog in this day and age, as you know, when we entered 2013, we didn't have a high percentage of backlog coverage for our plan.

I don't really expect that to change going into 2014 unless something dramatic changes in the next couple of months, which I'm not expecting.

So, I think we will enter with probably a similar level that we did last year.

Okay, great.

Our days of visibility early in the year I think are in the past.

Yes, got it.

Okay.

And then just lastly on free cash flow, it looks like, historically speaking at least, Q4 is always a pretty strong quarter for you all.

But I mean do you think you're still on track?

I think you had a $20 million to $25 million operating cash flow bogey out there for 2013.

Yes, yes.

We feel like we are still on track for that, and our goal of ending up in the high single digits as a percent of revenue is still a good number for us.

Okay, wonderful.

That's all I had.

Thanks a lot.

Paul Coster, JPMorgan.

Thanks.

Good morning.

Thanks for taking my question.

So you talk of growth through 2014.

Can you talk to us a little bit about the underlying assumptions there in terms of the sort of mix of revenues between D&S and Home Robots, and whether or not there are sort of major new product categories in that timeframe?

Sure.

I'll tell you what we are saying right now.

Certainly, growth next year is going to be predominantly driven by home.

We have announced just moments ago that we are coming out with a major new Roomba product, but that's all the new product announcements that we've made to date.

Obviously, we continuously work on things, but at this point in time, that's what we are seeing.

We believe that D&S will be an up year next year, so we think we've reversed the momentum of the last few years where we have seen decreases in defense, the defense business.

And on the Remote Presence business, it will still be an investment year but the revenue we think is going to be under 3% of total revenue, but will start adding to the growth rate of the business.

As we look out over three years though, does that change?

We are very comfortable putting a date of 2016 and saying that in 2016 we will have achieved a compounded annual growth rate of mid to high teens.

Would that be a new product category by then, and would the revenue mix shift have shifted dramatically between D&S and Home Robots, or would there be a third category by then?

The Remote Presence business we expect to be very material by then and will be one of the key elements driving that growth rate in addition to continued strong growth in home and a recovery on the defense side.

Excellent.

Thank you very much.

Brian Ruttenbur.

Yes, thank you very much.

A couple of questions.

The drivers of growth going forward in 2014, you talked about mid teen revenue growth.

Is that going to be -- it's obviously on the home robotics side.

But can you talk about if it's going to be more domestic or international first of all?

We haven't provided color.

Certainly, as we look at the market saturation portfolio of the globe relative to robot vacuuming, we are still, we believe, early days.

We think that there are strong growth opportunities around the globe for robot vacuuming.

Macros will play.

We are seeing signs of recovery in Europe, but certainly -- so we think that Europe will be a contributor to growth of the business next year.

We see continued strength in Asia and North America, and so we believe that those areas will probably outperform EMEA, though to a lesser degree, a lesser differential than we saw in 2013.

So we think we will be firing on all cylinders in home as we go into the next year.

It should be noted that if you look at drivers of growth even in 2014, we will see some revenue contribution from the Remote Presence business unit and we are predicting growth, though not at Home Robot growth rates, in the defense and security business, again which will nicely buoy our growth rates because the declines in the last two years had masked much of the very impressive growth that home has been serving up, and so that will be a big change year-over-year.

Okay.

And then just I've got a couple little housekeeping -- plans for cash and then RP-VITA sales in the quarter?

I didn't catch that.

Okay.

I'll hit RP-VITA sales.

RP-VITA in the quarter, we did say that we are continuing -- we did have additional shipments.

We talked about our sales to date being 60 and 15 units being shipped, but -- and so that's how we are doing there, which is in line with expectations on an early-stage rollout.

So we are very pleased with that.

From a cash perspective, our plans really haven't changed.

They are basically to replenish our cash to the pre-Evolution level and in terms of what we will use it for to look at additional M&A opportunities as we go forward and just operations of the business.

Great, thank you very much.

That concludes our third-quarter earnings call.

We appreciate your support, and we look forward to talking to you again in February to discuss our Q4 and full-year results.

That concludes the call.

Participants may now disconnect.