iRobot Corp (IRBT) 2014 Q2 法說會逐字稿

Good day everyone and welcome to the iRobot second quarter 2014 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 provision of the Private Securities Litigation Reform Act of 1995.

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

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

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

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

A reconciliation of GAAP and non-GAAP metrics can be found in the financial tables at the end of the second quarter, 2014 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 as well as our outlook on the business for 2014.

Alison Dean, Chief Financial Officer will review our financial results for the second quarter of 2014.

And Colin and Alison will also provide our financial expectations for the third quarter ending September 27, 2014 and FY14.

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 evening we reported a successful second quarter with results that met our expectations.

Home Robot revenue grew 15%, driving second quarter company revenue up 7% to $140 million.

Earnings per share were $0.28, adjusted EBITDA was $16 million or 11% of revenue.

During the quarter we expand the distribution of our latest Roomba 800 series robot across United States and into most of our overseas distributors to meet overwhelming demand.

We've successfully worked to secure a number of Defense and Security orders, which we will be delivering during the second half.

And we've shipped several of our AVA 500 telepresence robots and set up trial periods for prospective customers to assess the value of our robots in their locations.

Additionally, based on increased confidence in Home Robots, we are raising the low end of our full-year revenue expectations for our Home Robot business to $505 million, from $500 million.

Further, strong backlog in growth during the quarter in Defense and Security, coupled with several expected near-term orders, and the overall growth of a high probability pipeline has significantly improved visibility for the balance of 2014.

The increased visibility has clarified that certain order deliveries are being requested by the customers for early 2015, resulting in a decrease of the 2014 revenue expectation for Defense and Security by $5 million to $45 million.

For the company we now expect revenue of $555 million to $565 million driven by Home Robot growth of 18% to 20%, EPS between $1.10 and $1.20, and adjusted EBITDA of $74 million to $78 million, or roughly 14% of revenue.

Now I will take you through some of the details of the second quarter, and our expectations for the rest of 2014.

Our Home Robot business continues to deliver strong growth on an ever-increasing base.

Revenue growth in all three geographic regions contributed to year-over-year growth of 15% for the quarter.

Defense and Security business delivered results at the low end of our quarterly expectations, but secured several orders during the quarter and moved several other larger opportunities into the near-term pipeline, significantly improving visibility.

In our remote presence business begin shipping AVA 500 Video Collaboration robot to customers.

Quarterly Home Robot revenues were driven by 19% year-over-year growth in overseas markets, as we extended Roomba 800 distribution throughout most of the region.

Roomba 800 sales comprised 27% of Q2 revenue, which was ahead of our expectations.

In the United States we've seen a tremendous response from selected retailers, with whom we first began our distribution rollout, which fueled replenishment orders.

We expect to see this trend continue as the product reaches more stores, and we get closer to the holiday season.

Sell-through at our top five retailers increased 30% over last year.

Sales of Roomba 800 robots through the second quarter on our website, have exceeded those of all of our other new products over the same timeframe due to US retailer and international distributor demand, distribution is ahead of our original pipeline.

The product is now available at many domestic retail locations and is slowly being rolled out to retailers in European and Asian markets by our distributors.

The Scooba 450, our next generation floor-scrubbing robot, enjoyed early success on our website when we launched it in Q1.

While Scooba and Braava, the products comprising our wet floor care category, are growing year-over-year, they are growing at a slower rate than Roomba.

We have significantly invested in building awareness for Roomba over the past few years which has resulted in the growth.

We are still in the early days of better articulating the wet floor care value proposition and differentiating Scooba and Braava from Roomba in the retail environment, to fully realize the potential for this product category.

To support expanding distribution of these products, we will be shifting some investment focus to building awareness of the wet floor care category over the next 12 months.

International Home Robot revenues grew 19% year-over-year in the second quarter and we expect to see increased second half growth overseas as we receive replenishment orders for Roomba.

EMEA grew approximately 20% in Q2, fueled by the introduction of Roomba 800 in the region.

Revenue growth in APAC, of 18% year-over-year, was driven by strong demand in China.

In the fourth quarter we will kick off an advertising campaign featuring our Roomba 800 series robot to support our retail partners throughout the holiday season.

The ads will focus on the product family’s revolutionary Aeroforce debris extractors, which to-date have been showcased only on our website.

Our continued investment in advertising and our brand will help drive increased awareness of the category and growth of the global robotic vacuum cleaner market.

Turning now to our Defense and Security business.

Second quarter results were at the low end of our expectations due to orders received late in the quarter that we will fulfill in Q3 and Q4.

Roughly half of the $20 million we have in backlog at the end of Q2, is comprised of international orders, reflecting our significant marketing efforts overseas.

The other half of the orders is from the DoD, all of which we expect to fulfill in 2014.

We are also expecting additional orders in Q3.

Our improved visibility in this business is the result of substantial order backlog, coupled with a significant percentage of high probability, near term pipeline opportunities.

With increased visibility and orders received later than expected, we now expect Defense and Security Robot revenue of $45 million, down from $50 million, as several orders call for partial delivery in 2015.

Moving on to our Remote Presence business, we reported in Q1 that we launched the AVA 500 video collaboration robot in the United States, Canada, and limited European markets through select certified Cisco resellers.

We received our first orders and began shipping to customers in Q2.

We have a strong pipeline of requests of Fortune 1000 companies that are interested in AVA 500, many of which have completed, and are currently engaged or scheduled for future trials.

As predicted, all prospective customers to date want to use the robot on a trial basis in their respective environments prior to purchasing the product.

Our focus for 2014 has been to build a base of reference accounts and we are well on our way to doing just that.

Our RP-VITA telemedicine robot continues to gain traction as doctors, hospitals and patients realize the value of remote diagnosis.

The feedback we are getting from doctors using our robot is that the user interface enabled by our navigation technology is proving to be highly valued in areas of telemedicine where frequent patient interaction is required, such as in Intensive Care Units.

As we are learning more about markets where iRobot can add value, the trend bodes well for RP-VITA.

In summary, Home Robot revenue grew 15%, is expected to continue to grow in both domestic and overseas markets, and is expected to drive full-year 2014 Home Robot growth of 18% to 20% and total company growth of 14% to 16%.

Our visibility into full year Defense and Security revenue has improved significantly based on a $21 million backlog and a substantial number of large high probability pipeline opportunities.

Customer interest remains high for our Remote Presence robots and we are seeing positive signs for this emerging market.

I will now turn the call over to Alison to review our second quarter results and expectation in more detail.

Thank you Colin.

We delivered second quarter revenue and Adjusted EBITDA in-line with our expectations, and earnings per share slightly ahead of expectations.

Revenue of $140 million increased 7% from Q2 last year driven by growth in Home Robot revenue.

Q2 2014 includes approximately $1.2 million of favorable return reserve adjustments, compared with $3.5 million in the second quarter of 2013.

EPS was $0.28 for the quarter, flat with Q2 last year.

Q2, and first half, 2014 EPS was ahead of our expectations primarily due to a $0.07 benefit resulting from the release of a valuation allowance relating to certain tax attributes associated with our acquisition of Evolution Robotics.

EPS in Q2, 2013 also included a $0.07 one-time tax benefit associated with the prior period sale of government robots to the US military, which were used outside of the US.

Additionally, EPS in the first half of 2013 included $0.09 benefit, associated with the full 2012 investment tax credit, and two quarters of 2013 credit.

Q2 adjusted EBITDA was $16 million compared with $17 million last year.

For the first half, revenue was $254 million compared with $237 million in 201, EPS was $0.46 compared with $0.57, and Adjusted EBITDA was $30 million compared with $32 million last year.

Q2 international revenue growth was 19% over last year, driven by strong performance in China, as well as growth in EMEA from expanded distribution of our new Roomba 880.

Domestic Home Robot revenue grew 7% for the quarter.

We continue to expect high teen revenue growth in both domestic and overseas markets for the full year, driven primarily by replenishment orders for Roomba.

Defense and Security revenue of $5 million in Q2 was down year-over-year as expected.

Roughly 75% of this quarterly revenue was from international sales.

During the quarter we built a $21 million backlog which gives us confidence in delivering full year revenue of $45 million.

For the total company, gross margin was 44% for the second quarter 2014, down 300 basis points from the same quarter last year.

Product mix and warranty reserves were the main drivers.

Q2 operating expenses were 38% of revenue, down from 41% in Q2 last year.

We continue to expect operating expenses to be lower in the second half as a percentage of revenue, and approximate 36% of revenues for the full year.

We ended the quarter with $183 million in cash and investments, compared with $153 million at the end of Q2 last year, and with $51 million in inventory or 60 days, compared with $42 million, or 58 days last year.

Now I’d like to provide you with additional detail for our Q3 and full year financial expectations.

The outlook for our Home Robot business remains strong and will drive Q3 results.

We anticipate Home Robot revenue to grow 12% 13% in Q3 2014 over last year, due to strong growth in domestic sales, as retailers fill their shelves for the holidays.

D&S revenue is expected to decline versus Q3 last year and then ramp substantially in Q4 as we fulfill orders in backlog, and those we expect to receive in the third quarter.

As a result of our Q3 to Q4 revenue ramp in both businesses, DII could temporarily rise into the mid-60s, before returning to more typical levels by the end of the year.

We anticipate third quarter revenue of $133 million to $136 million, an increase of 8% to 9% over Q3 last year, EPS of $0.32 to $0.35, and Adjusted EBITDA of between $21 million and $23 million.

For the full year, we expect revenue to be between $555 million and $565 million, reflecting an increase in the low-end of Home Robot revenue expectations, and a decrease in our expectations for D&S.

Home Robots is expected to deliver $505 million to $515 million up from the prior expectations of $500 million to $515 million.

Defense and Security revenue for the year is expected to be roughly $45 million, compared with $50 million, due to the timing of orders.

We expect increased full-year EPS of $1.10 to $1.20, and Adjusted EBITDA of $74 million to $78 million or roughly 14% of revenue.

I will now turn the call back to Colin.

Thank you.

Home Robot revenue grew 15% in the second quarter, and we expect that business to deliver full year 2014 top-line growth of 18% to 20% which will drive company growth at 14% to 16%.

With increased visibility in our defense business, we now expect it to be slightly down year-over-year before growing substantially in the fourth quarter.

And we are optimistic that remote presence will continue to gain traction in the video collaboration market, while further expanding into healthcare’s emerging telemedicine market.

With that, I'll take your questions.

Thank you, we will now begin the question and answer session.

(Operator Instructions)

Our first question comes from Jim Ricchiuti from Needham & Company, please go ahead.

Good morning.

Good morning Jim.

I have a question just regarding gross margin.

It looks like excluding the return -- the reserve adjustment, the home gross margin was down a couple of hundred basis points sequentially.

Just given that there was a higher mix of 880s in the quarter, and just given the strong international line, I wonder if you would comment on Home Robot gross margins?

Maybe the outlook for the second half of the year?

And then I also have a follow up on Braava.

Thank you.

Sure Jim.

We did see a decline in Home gross margins as a result of product mix, 880 was certainly a plus in there.

But in addition, we had growth in our wet-floor care category which carries a slightly lower margin.

We also took some incremental reserves to support warranty true-ups in the quarter.

So those definitely contributed to some year-on-year changes.

We do expect Home gross margins to increase slightly in the second half of the year, as the mix of the business shows a slightly different profile.

Okay, thank you Alison.

My impression with Braava was that it was in wider distribution in retail in the quarter, yet it sounds like it came in a little bit under expectations.

I wonder if you could talk a little bit about how you see the retail distribution for Braava and Scooba in the second half and maybe the kind of acceleration you would assume in the second half as you change and maybe refocus some of the awareness campaign for these products?

Sure, great question.

I think it is definitely true that in the second quarter the star was Roomba 800, and the Braava and Scooba, let me be clear, they both grew, but didn't grow as fast as we would've liked.

And I think what we're seeing is the vast majority of our awareness demand expenditures are focused on Roomba and 880 was the beneficiary of that.

Also in the retail environment, you know we are still optimizing, you see Roomba next to Scooba and Braava on the --at retail, and is it clear enough to the customers what these different products do?

And so that we may have --well we certainly over-performed on Roomba and still have some work to do as far as clarifying some of the message and differentiate in the marketplace on Scooba and Braava.

So everything grew, but I think the take-away which I talked about based on performance, is that we need to redistribute some of our awareness, and demand generation dollars toward the wet floor-care product line to see it achieve the growth rates we think it's capable of, as well as continue to refine our point-of-purchase displays.

Okay, thanks a lot.

Okay.

Thank you.

Our next question comes from Josephine Millward from The Benchmark Company, please go ahead.

Good morning.

Good morning.

Colin in the past you had talked about expecting revenue to grow sequentially throughout the year.

So why is Q3 weaker now?

It looks like maybe Defense is being pushed out to more Q4.

But has anything changed in Home?

I think absolutely on the Defense.

I think that the way the year was supposed to be in Defense, we had a bunch flatter profile.

But as we have long experienced, Defense is lumpy and we saw a number of contracts either get signed or imminently signed, but pushed into Q4 and a few pushed into Q4 slash Q15.

So that was the major factor.

And then predicting the sales on the boundary of Q3, Q4 is always another one of these arts not science.

And it looks like this year we are seeing a little bit more in Q4, so it will be a very strong year for us in Q4.

Though I will point out last year, we saw very significant growth in Q4.

So it tends to still be extremely strong quarter for us and we are seeing that our expectations are for a repeat of that.

Okay so your current guidance implies a very significant round about, almost 30% growth in Home Robot in Q4.

How much of visibility do you have into the holiday season at this point?

We do have the luxury of history and long-standing relations with our distributors.

And so that while I would say it is not fully committed, we have very good dialogue and have strong confidence.

Certainly we don't raise the low-end of our guidance expectations lightly.

So we have strong confidence that we have the supply train, we have retailer support and this is how it's going to fall-out this particular year.

Great, thank you very much that.

You bet.

Thank you.

Our next question comes from Tyler Hojo from Sidoti & Company, please go ahead.

Good morning, thanks for taking the questions.

Just firstly, I was hoping you could talk a little bit more about the international rollout of some of your new products.

I guess what I'm looking at here, is why wouldn't the growth be stronger in Home Robot in Q3 in context with basically introducing Roomba 800 specifically to new markets?

I think that we saw 27% of our revenue coming from Roomba 800 in Q2.

We mentioned in the call that we have accelerated some of the rollout plans.

I think when we talked in the last call it was going to be a little bit more of a gradual rollout.

But based on the demand for the product we accelerated some of those rollout plans.

So we definitely had the benefit in Q2 of accelerations.

That's one of the reasons why the numbers for 800 fell out the way they did.

We've got --so now we are in a situation where in Q3, there's going to be a lot of sell-through of inventory put in and replenishment orders from a timing perspective hitting in Q4 on the Roomba 800.

So it's a bit of the natural cycle of that.

Alison?

The Q3 is going to show in the low-teens growth in Home anyway even with the ramp into Q4.

Good healthy growth quarter just not as substantial as we saw in Q2 or are expecting in Q4.

Okay.

That's helpful.

On another front I was hoping that you could provide a little bit more detail in regards to Defense.

What I'm looking for, is when we look at the backlog that you have in Defense today, what is the expectation for percentage of that backlog to ship in 2014?

And what you need to book and ship through the rest of the year?

The 21 million we have in backlog is all expected to ship.

So that backlog plus performance to date is $31 million versus are $45 million plan.

Which leaves the $14 million of to go get.

Of that go-get, it's basically is all in-hand or all in our high probability pipeline.

That's why, at this point we feel not --you know we're not even talking about a range, we're talking about $45 million is the number, we know where it's going to come.

We are even seeing the beginning of building a pipeline into 2015, which is more significant -- a much better situation than we were coming into 2014.

So we did see this $5 million shift of revenue out, but confidence in 2014 is very strong, and then as I mentioned, we are starting to look at what 2015 will look like.

And the fact that we are doing that, at this point of the year, is very encouraging.

Got it.

Is it fair to say that de-confidence surrounding the fact that Defense is bottomed-out is stronger today than it was say, a quarter go?

Oh absolutely.

Absolutely.

We have sidelined to our number and we are building 2015 backlog.

So we are significantly ahead of where we were a year ago.

We think 2014, there's not a go-get, there is a, let our current activities play out, and we will be in good shape.

Okay great.

And lastly from me, just looking for a little bit more detail on remote presence.

I guess what I'm wondering is, how long do these trials last?

I guess if you could maybe talk a little bit about what you think the sales cycle is?

And when you think some of these trials will start materializing into firm orders in hand?

This is a new technology and we don't have reference accounts that are formally signed up yet.

And so the normal course of development of this type of business is, first when these types of products are launched, there is skepticism in the marketplace.

There is not third-party validated use-cases where the productivity improvements from these robots are well documented.

You know it's the early fight.

Against that, we say -- well gosh, we have a very impressive pipeline of interested parties, we have a number of robots that are in trial.

I think that, you know, ideally you would wish that you could launch a new product without the need for trial.

That isn't the case, but as we get these reference accounts through trial, the numbers of companies that are interested in purchasing without trial, or the duration of the trial are significantly reduced.

So I'm giving you a complicated answer to what is in fact a complicated question, because the trial experience that we have today could be four to eight weeks.

Do we believe that trial period is going to be significantly reduced, and in some cases eliminated as we move forward?

Absolutely.

So we are at the start-up stage, and I think that we will definitely let you share our experiences and let you share with the growth of this exciting new market as it evolves.

But in Q2 of 2014, the phase of development of remote presence is acquiring reference accounts through trial.

And we hope that we will soon be able to turn the corner on that one.

Got it.

That's all I had, thanks a lot.

You bet.

Thank you.

Our next question comes from Adam Fleck from Morningstar, please go ahead.

Thanks and good morning.

Good morning.

I had a question on your headcount, it has been steadily increasing here each quarter of the past year.

If you could just talk about what the primary role you have been hiring for.

And if you are still looking to continue to increase those staffing levels?

Sure.

The primary role is engineering, with a -- in particular, we have a focus on software engineering as the software content in our products and product pipeline continues to grow.

So we are committed to -- you know, a long-term exciting pipeline of products and technology.

And given our profitable growth commitment to our investors, we are able to grow our top-line 15% to 16% over last year, which gives us some additional resources to put into IR&D.

Also some of the hires that you have noticed are associated with building out the remote presence business unit as well.

And that is a mixture of sales and marketing heads, as well as engineering heads.

Okay that is helpful.

And then Alison, I had a question on operating cash flow.

I think originally you guys had talked about your long-term goals, and this year being a high single-digit percent of revenue.

But we're running a negative rate, it looks like, because of some increased payouts from accrual compensation.

But are we still looking this year at a high single-digit percent of revenue for operating cash?

Yes, our view for the year hasn't changed.

Again with the skewing of our business over the year as you said, we are in a use position in the first half of the year, but we fully expect to make that up by the second half of the year, and then achieve that high single-digit percent of revenue.

Okay great.

That's it for me, thank you.

Okay.

Thank you.

Our next question comes from Paul Coster from JPMorgan, please go ahead.

Thank you, Colin back to remote presence for a moment.

Can you talk a little bit about what the profit, sort of what the margin impacts of this initiative is at the moment?

I imagine a slightly unhelpful for the time being.

And then sort of what your go, no-go decision might be next year on whether to pursue this segment?

Sure.

Absolutely right we are in investment mode relative to remote presence at the current time.

So it is negatively impacted our gross margins and EPS.

The focus and business model that we have taken on, is to acquire these reference accounts, and focus our IR&D around customer satisfaction in optimizing our installation process so that we can have the customers having the experience that we want.

And then believe that in future years we can reverse that and take remote presence out of investment mode, and start having it contribute to the Company as a whole.

We have a portfolio approach to IR&D investment where we have things like the Roomba 800 series where we have very strong confidence that the innovations would be rapidly accepted by our customers.

And then we have a certain percentage of our IR&D which is more speculative that we believe that if we have success it will help drive longer-term growth substantially and the AVA project is absolutely on that more speculative side of the business, although we are shipping product and we have enthusiastic customers.

So we're very hopeful that investment will be a positive experience.

To what extent are the trials for the AVA product taking place versus these very low price and not very functional competing products.

We are taking a high-end strategy.

Our goal is to give people a very viable alternative to traveling to a remote location.

So it is really a no compromises approach, where the robot, the self navigation of the robot allows traversal of dead spots in buildings, which always exist.

I mean it's really focused on being a complete solution, viable alternative to travel as opposed to a, I won't say gimmicky, but more of a Skype quality, quick way of doing some more dynamic face-to-face meetings.

So it is a different positioning in the marketplace.

The remote presence marketplace is segmented into low-end and high-end already.

We certainly are playing in this high-end category.

We think were priced competitive in the high-end category.

And we think that our experience is very compelling based on what our customers are telling us.

And looking at utilization rates of the robots in the reference -- or the trial accounts that we currently have.

So that is our strategy, and I think we are very excited and remain confident in our strategy.

Okay.

My last question Colin is relating to the PackBot.

It's probably a couple thousand of them still out in the field, presumably still leading active lives.

At what point do think under current circumstances, that's without a sort of massive ground [war] type scenario do you think those PackBots start to need to be replaced?

And do have some sense of what the replacement cycle might be, given the current sort of configuration of Defense spending?

(Technical difficulty) -- some upgrade contracts with DoD and we believe that those contracts will also play heavily in 2015.

So if we categorize this as this recurring revenue and in 2014 -- just to give you a statistic, 60% of our revenue is related to servicing and upgrading the existing fleet.

So while we built out our international and non-DoD business we have been able to continue to see good revenue and profit from servicing the install base.

Great, thank you very much.

You bet.

Thank you.

Our next question comes from Jim Ricchiuti from Needham & Company, please go ahead.

I just had another question regarding the remote presence.

Sounds like you are correctly characterizing AVA 500 as speculative in investment oriented as in terms of the business right now.

I wonder, Colin, how would you characterize the medical portion of that business?

What kind of acceptance are you seeing?

Particularly as you think about that business, the medical portion in 2015?

Sure.

So what we have learned thus far, is that there are a number of different applications where the RP-VITA robot is used.

In applications where remote presence and robots sort of started, which is diagnosing stroke, that's an application where the robots are used maybe ten times a month.

So that has been good, but the real area of growth for RP-VITA that is in treatment and involvement in the ICU treatment of situations where specialists are needed more frequently then that rate.

So when we got started in stroke, the areas where RP-VITA is really shining and where our win-rate is astronomically high, is in ICU related applications.

And this is sort of the real growth area for telemedicine in general.

But it is smaller today than the stroke business, which was sort of the first area where remote diagnosis really has gained favor.

So I'm not sure whether that color helps.

But I think that the direction where telemedicine is going, happens to align very well with the capabilities of our robot.

So that is exciting news as the clock ticks forward.

But it sounds like on the ICU application it's also a case where you need to build-up reference experience, reference accounts.

That's coming.

You know, this is a sort of one of these uber-trends in medicine in general, there is more and more that is talked about, there's more dollars being spent on telemedicine.

So it is a trend.

You know, we do have numbers of reference accounts, so that, as opposed to AVA 500, we're really searching to get our first ones, we do have reference accounts in the ICU.

So it is a growth area for RP-VITA and our partner, InTouch Health.

But it is growing rapidly off of a smaller base than the stroke application, which is more mature and more developed.

So put that all in total, we are in over 50 hospitals.

We have certainly gone through the birthing pains of RP-VITA that we experienced last year getting the customer experience right.

And now we are honing in on the right target and right sales message for that to watch that business area move forward.

Great, that's helpful.

Thanks a lot.

Sure.

Okay that concludes our second-quarter 2014 earnings call.

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

That concludes the call, participants may now disconnect.