iRobot Corp (IRBT) 2014 Q3 法說會逐字稿

Good day, everyone, and welcome to the iRobot third-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'd like to note that statements made on today's call that are not based on historical information are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

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

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

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

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

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

Alison Dean, Chief Financial Officer, will review our financial results for the third quarter of 2014, and Colin and Alison will also provide our financial expectations for the fourth quarter and FY14 ending December 27, 2014.

Then we'll 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.

Last evening, we reported an outstanding third quarter.

Results exceeded our expectations as a number of orders in both Home and D&S, originally expected in Q4, were received and delivered in Q3.

Home Robot revenue grew 19% driving third-quarter total company revenue up 15% to $143 million.

Earnings per share were $0.48 and adjusted EBITDA was $30 million or 21% of revenue.

During the quarter, we completed the 2014 geographic distribution of our highly successful Roomba 800 series across the United States and overseas.

We delivered a number of defense and security orders and secured several new contracts, and we sold eight Ava 500 robots customers including AT&T, and additional robot trials are being conducted by other Fortune 500 companies to enable remote collaboration, customer service, and executive management.

Based on our visibility into the fourth quarter, we are maintaining our full-year revenue expectations and increasing our EPS and adjusted EBITDA expectations.

We continue to expect revenue to be $555 million to $565 million.

We now expect EPS of between $1.20 and $1.25 and adjusted EBITDA of $77 million to $80 million or roughly 14% of revenue.

Now, I'll take you through some of the details of the third quarter and our expectations for the rest of 2014.

Quarterly Home Robot revenue of 19% was driven by 31% year-over-year growth in US markets.

As domestic retailers place orders to restock following the strong sell through in Q2 and our club store customers transitioned to a next generation Roomba.

Sell through at our top five domestic retailers increased more than 30% over last year, and Roomba 800 sales across all regions comprised 36% of Q3 revenue.

We expect to see strong sales continue in the fourth quarter as the retailers replenish their stock for holidays and continue to meet customer demand.

Overseas, we launched a Roomba 800 in China, which was the last region schedule for 2014 distribution.

International Home Robot revenues grew 13% year over year in the third quarter as distributors sold through Roomba 800 product introduced in Q2.

EMEA grew approximately 7% in Q3 and APAC growth of 19% year over year was driven by strong demand in China.

In Q4, we also expect strong growth overseas as distributors replenish following sell through in Q3 and prepare for the holiday season.

Last quarter, we a commented on our commitments to better articulate the value proposition of Scooba and Braava, our wet floor care products.

While our 2014 marketing campaigns are set, our plans for 2015 will include advertising to promote wet floor care as well as training of in-store personnel to build awareness about the products.

There is a significant opportunity for this segment of the market and it is ours.

In 2015, we expect revenue for wet floor care to grow as a percentage of total Home Robot revenue along with continued strong growth in Roomba sales.

In the third quarter, two consumer product company executives from Keurig and Sony joined our Home Robot sales and marketing team.

They bring significant premium brand experience that will help maintain our market leading position as the category becomes more competitive and our business grows.

We recently kicked off our holiday advertising campaign featuring our Roomba 800 series robot to support our retail partners throughout the season.

The ads 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 brand will help drive awareness to the category and growth of the global robot vacuum cleaning market.

Our growing success has compelled others to enter the market.

In early September, Dyson announced its intention to launch a robot vacuum cleaner in the spring of 2015, and this is good news.

Our biggest challenge for continued strong growth is overcoming skepticism, and well-known competition entering the market will help legitimize the category further and grow the industry as a whole.

The world leader in traditional vacuum cleaners has declared that robot vacuum cleaners are the future of vacuum cleaning.

This is an important next step towards realizing our vision of traditional vacuums becoming a thing of the past.

We have known for years that Dyson was developing a robot vacuum cleaner, because they finally unveiled a prototype we now have the opportunity to evaluate.

We believe they have designed around our formidable IP as their robot vacuum doesn't appear to have our patented side brush, dirt detection, or debris extractors.

In an effort to incorporate their cyclone suction, they created a product that is simply too tall to fit under most couches and beds and runs for only 20 to 30 minutes before needing to recharge.

Based on press reports, it will sell between $1,000 and EUR1,000.

We think customers will find the Roomba 800 a much better value proposition, and we look forward to head-to head-competition.

Dyson claims to have spent 16 years and $47 million on the vacuum.

We spend more than that on robot research and development every year building products developed with feedback from millions of customers to whom we've sold Roombas over the past 12 years.

We are confident in our marketing leading position and that we are making the right investments to sustain our category leadership well into the future.

Turning now to Defense and Security business, third-quarter results exceeded our expectations due to early delivery orders we expected to fill in Q4.

In addition, we finished Q3 with $25 million in backlog comprised primarily of upgrades for the US Department of Defense's fleet of PackBot robots and international orders.

We are confident in meeting our full-year expectations and are already building backlog for 2015.

During the quarter, we announced a $9.6 million contract to deliver iRobot 510 PackBot CBRN, that's chemical, biological, radiological, nuclear and explosives systems, and support to the Canadian Department of Defence.

This module being built to DND's specifications includes a CBRN suite that integrates five primary sensors to reliably detect, alert, and report on chemical warfare agents, toxic industrial chemicals, volatile gases, explosives, and radiation.

This new offering from iRobot is a great example of the versatility of our multi-mission robots.

A few weeks ago we announced the development of the uPoint Multi-Robot Control system, a universal control system for iRobot's line of D&S robots that will provide users with a powerful new touch screen-based interface and a radio communication system running on Android-based tablets.

The system simplifies robot operations including driving, manipulation and inspection, allowing users to focus more on the mission at hand.

Its features include: an intuitive touch screen technology that allows users to take on more complex tasks with reduced training.

A robust radio network that offers improved communication from smart networking, the ability to automatically switch away from congested frequencies, power management, and mesh networking to form a robust network in which robots, operators, and observers work seamlessly together.

And data sharing from the users controller to other team members or remote observers.

The product received very positive reviews when we demonstrated it at the Army's' AUSA exposition and will be available in Q2 of 2015.

We continue to make focused investments to expand the capabilities of our existing D&S platforms.

The uPoint MRC represents a major advance in the usability and performance of ground robots, and we expect it to provide another opportunity for our customers to upgrade their existing fleet of robots.

Moving on to our Remote Presence business, RP-VITA, our remote telemedicine robot continues to slowly gain traction in the market.

14 RP-VITA robots were installed during the quarter by InTouch Health, half of them in Mexico.

According to ITH, the market in Mexico is particularly attractive and that there is an opportunity to supply RP-VITAs in each of Mexico's 31 states.

Installations currently exist in three of those states and utilization rates at those locations are the highest of any ITH customer.

The RP-VITA operates within a hub and spoke hospital network where there are specialists in major hospitals in each of those states providing services through the robots at more than 20 remote hospital locations.

Consulting medical specialists cross multiple disciplines to provide quality diagnoses and care to patients in remote hospitals' critical care units.

Patients receive care they wouldn't otherwise have access to, improving overall patient outcome.

This model's being used by InTouch Health to illustrate the RP-VITA's value proposition to prospective customers.

I'm also very pleased to report we sold multiple Ava 500 Video Collaboration Robots to several customers, including AT&T, where the robots are being used by executive management to facilitate team collaboration and in a retail setting to deliver exceptional customer service experiences.

Additional robot trials are being conducted with a multinational law firm, manufacturing, pharmaceutical, and financial service companies to enable remote collaboration, customer service, and executive management And we look forward to future communication about them as customers.

iRobot continues to actively use this technology.

For the past year, we have been communicating with our West Coast office through Ava, and last quarter we installed a robot at one of our contract manufacturers' facility in China.

Having our engineers communicating directly with the line has saved us both time and money and provides a compelling use case for prospective customers.

We're currently in trials with several Fortune 500 manufacturing companies who are also using Ava to enable remote experts and supervisors to be on the production line and factory floor.

For the rest of 2014, we will continue to focus on building a base of reference accounts and we are well on our way to doing so through additional trials with a large multinational law firm, a pharmaceutical company, and a financial services firm.

In summary, Home Robot revenue grew 19% as orders expected in Q4 were filled in Q3.

Defense and Security revenue exceeded expectations due to order timing, and our visibility continues to improve with $25 million in backlog at the end of Q3.

And we've sold remote presence robots to multiple customers who are using our Ava 500 robots in a variety of different ways.

Interest remains high from a number of Fortune 500 companies who are currently in trial.

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

Thanks, Colin.

We delivered third-quarter revenue, earnings per share, and adjusted EBITDA that exceeded our expectations.

Revenue of $143 million increased 15% from Q3 last year driven by growth in Home Robot revenue.

EPS was $0.48 for the quarter compared with $0.26 in Q3 last year.

Q3 adjusted EBITDA was $30 million or 21% of revenue compared with $17 million or 14% of revenue last year.

Our over-performance in the third quarter was due to fulfillment of orders in both Home and D&S during Q3 that we had originally expected to fill in Q4.

Domestic Home Robot revenue grew 31% for the quarter as retailers began stocking their shelves for the holidays.

Q3 domestic revenue included approximately $1.5 million in favorable return reserve adjustments.

Q3 international revenue grew 13% over last year driven by strong performance in China.

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 $11 million in Q3 was up slightly year over year and ahead of our expectation.

We received and fulfilled several contracts earlier than anticipated but still expect full-year revenue of $45 million.

For the total company, gross margin of 47% for the third quarter 2014 was up 400 basis points from the same quarter last year.

Home Robot product and customer mix were the main drivers.

We now expect full-year 2014 gross margin to be roughly 46% versus the 45% estimate we provided earlier this year.

Q3 operating expenses were 31% of revenue, down from 35% in Q3 last year.

Keep in mind that our Q4 sales and marketing expenses will increase substantially due to the new Roomba 800 ad campaign that Colin discussed, as well as other promotional programs planned to support our retailers during the holiday season.

OpEx for the full year will be roughly 37% versus our earlier expectation of 36% as we invest our improved gross margin to maintain revenue momentum.

We ended the quarter with $187 million in cash and investments compared with $157 million at the end of Q3 last year.

In April, we announced a stock buyback program structured to purchase stock as clearly undervalued prices.

Early in the fourth quarter, we purchased 56,000 shares of stock under our plan for roughly $1.7 million and retired them.

We ended Q3 with of $54 million in inventory, or 65 days as expected, compared with $49 million, or 64 days, last year.

We expect inventories to decline in Q4 and finish at our target of roughly 60 days.

Looking now to the fourth quarter, we are expecting strong growth from both Home and D&S.

Because we received orders ahead of our expectations in Q3, our Q4 ramp is not as steep as it appeared it would be in July.

We anticipate fourth quarter revenue of $158 million to $167 million, an increase of 25% to 33% over Q4 last year, EPS of $0.26 to $0.31, and adjusted EBITDA of between $17 million and $20 million.

For the full year, we continue to expect revenue to be between $555 million and $565 million.

We are increasing our EPS and adjusted EBITDA ranges and now expect full-year EPS of $1.20 to $1.25 and adjusted EBITDA of $77 million to $80 million or roughly 14% of revenue.

I will now turn the call back to Colin.

Thank you.

Home Robot revenue grew 19% in the third quarter and we expect that business to finish the year strong.

Accelerated order delivery in the third quarter, coupled with increased visibility, further solidifies our confidence in our defense business expectations.

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, we are happy to take your questions.

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions)

Jim, are you there?

Jim Ricchiuti from Needham & Company.

Please go ahead.

It looks like you're guiding to Home Robot growth in Q4 of, in broad terms, anywhere from 22% to 23% at the low end to in excess of 30% at the high end.

So assuming that's correct, I wonder if you could talk a little bit about the variables.

What gets you to the high end?

You're significantly increasing your -- it looks like you're ad spending for Q4.

How big a contributor could that be?

So Jim, the increase in spending on ads is something that is normal for this time of year so that it certainly -- our advertising in Q3 is relatively quiet, and this is the traditional time to ramp up.

We have the Roomba 880 and 870 robots, which are doing very well in the market.

And we expect that to continue in replenishment orders to drive significant parts of that year-over-year growth.

Both because of the superior performance of that robot will drive increased demand as well as the higher ASP.

So it is sort of a one a one-two compounding punch over last year.

We also have the Braava robots more fully distributed and the Scooba 450 robots fully distributed at this point.

Q4 is actually the first quarter where we have all of the new products that we announced at the beginning of the year and the end of last year fully rolled out throughout the marketplace.

Additionally, I mentioned in the call briefly, but let me put a little bit more spotlight on it.

Our club stores have gone from the 500 series to the 600 series, which brings a new capability and a more desirable product into those channels as well as offering an opportunity for some replenishment into those markets.

It's sort of a hitting on all cylinders expectation and it's very exciting to be able to talk about that happening.

Got it.

And maybe one follow-up just to switch gears for a second.

Just on the Ava products.

You talk a little bit more specifically about some of these reference accounts and building this base.

Do you see any of these potentially emerging in the next year as higher volume applications?

And I was also curious, you reference a retail application for this in terms of a customer service application.

I wonder if you could expand on that as well.

Sure.

Our ability to talk about our customers, obviously we'd love to be able to do it all at once but it is a partnership with our customers.

AT&T is using the robot now as a way of bringing expertise into the retail environment and so that some of their most knowledgeable experts can be sort of on demand put in front of customers without some kind of very challenging logistics operation of bringing those people together physically.

So they're very excited about the potential that the robot has to allow this type of interaction to take place.

And so that's being -- that is now rolled out and is being tested by AT&T, and they are quite enthusiastic about that.

But that's only one of a whole host of very exciting uses that are being trialed.

As far as expectations go, as far as the ramp -- the revenue ramp associated with this, I'm going to temper expectations that we are still worrying a tremendous amount about how best to roll out the robot.

And so that certainly next year will be an important year for Ava, but it is also -- we will expect to continue to learn significant information about how to scale and where to focus our marketing and sales efforts into 2015.

You should not expect a dramatic knee in the curve next year for Ava.

It's going to be something that our investors, our customers, and we continue in partnership to build out this most exciting and explosive of markets.

But we do need to get it right and we need to make sure that our customers are fully enthusiastic about the potential.

We love this area.

We are being cautious about how fast we move because we're positioned at the high end, sort of the premium end of this market place.

And if we can deliver that premium experience and truly get people off the plane and increase their ability to collaborate, we've got a great success on our hands.

But this is a fragile moment in time, and we're very guardedly optimistic about how things are going.

What I can promise is to talk much more than I did today about these reference accounts and how they are using the robot and hopefully in their own words what their plans are for expansion of the technology.

Okay.

Thanks a lot.

Josephine Millward from The Benchmark Company.

Good morning.

Good morning.

Colin, can you expand on what happened?

What led to the earlier than anticipated orders in shipments in Q3, especially in Home Robots, without drove most of the beat?

And did your retailers run out of (technical difficulty)?

It is the age-old problem of predicting when shipments are going to come in the Q3, Q4 break.

It is absolutely in the middle of replenishment season and inventory building season for the holidays.

And so that I think that having things pull forward is always a indication to us that our retailers are feeling very strong about the demand that they will see during the holiday season.

So we like it when this happens.

But we always shy away from predicting it because it is just a matter of when do the trucks hit the dock and when do the receipt orders hit our financial department.

And so there's just a tremendous number of moving pieces right at that end of September, beginning of October line and perhaps you could speculate that this is good news.

Safely you would say this is just of reassuring opportunity to help our investors see that we are ahead of the game as far as realizing what previously was a pretty aggressive Q4 ramp.

And now we de-risked that significantly and are happy to talk about having more behind us and less in front of us to make our year.

Since we're already in mid-October and would you say your visibility is fairly strong at this point?

I guess the question is, why haven't you -- why not take up guidance given this strong Q3?

I think it's simply because it was a shift.

I think that we have good models as far as what we believe are going to sell through for the year and we were able to move product and get those transactions completed in September rather than October.

So we had a very strong Q3 but please do not take that as raising expectations for Q4.

We've got very good visibility.

We have given increased profit guidance but feel like our revenue guidance is where it should be based on our full-year outlook.

Very helpful.

Thank you.

One last question, shifting gears to defense.

The $7.6 million order your announced for MTRS upgrade, is that included in your backlog?

Yes, it is.

Okay.

Thank you.

Tyler Hojo from Sidoti & Company.

Hello.

Good morning, everyone.

Just want to talk a little bit more about the ad campaign.

It looks like the budget there is bigger than it was, I guess, at the holiday season last year.

First of all, I'm just curious, is that indeed the case and maybe if so, maybe you can talk a little bit about I guess where some of those increment of dollars are being put to work.

So it is up slightly.

Not a dramatic change from prior years.

I think that one of the things that we're doing is more online and non-broadcast video.

So that we're doing -- we have a broader selection of media that we're going after and so that there is emerging opportunities which we think are very cost competitive and quite interesting that we'll be testing this year.

And so that what you are seeing is a continued strong commitment to broadcast, but also probably some incremental dollars in some of these newer alternative channels for advertising.

So we didn't want to pull back on what we knew works, and so adopted this strategy of putting some incremental dollars against some of these other opportunities.

And we'll be monitoring very carefully what the impact of those ads are by doing various split testing and what have you.

So it's a strategy that is got a lot of opportunities for learning in it and we're confident.

I think it strikes a good balance between proven and emerging.

Okay.

Thanks for that, Colin.

Maybe just another question as it relates to kind of the new competitive dynamic that I guess is emerging in Home Robot.

You mentioned in your prepared remarks that obviously you guys have spent a lot more on R&D than your competitor.

And I guess what I'm wondering is when we think about your -- kind of your EBITDA margin targets over the next couple of years and how some of this maybe changes your outlook.

Are you going to need to spend little bit more on other advertising or on R&D to kind of maintain that competitive dynamic?

And does it change your kind of outlook for profitability?

I think that where we stand today, our product pipeline is stronger than it has ever been.

We're incredibly excited about our plans for next year, the year after, and the year after that.

And that has all been developed with the sort of our current concept around spending sort of in place.

There are opportunities that we see in front of us, especially with emerging opportunities around connected devices that may present significant additional growth opportunity to the Company.

And that might be a future conversation as to what the investment required in return expected from those types of investments might be.

But I think that the fact that we have more competition is not in itself going to drive any change in our investment strategy.

We're very happy with that.

I think that investing in our future as a percentage of revenue will remain fairly constant.

Of course that's increasing dollars every year.

The fact that the market continues to grow in a very exciting rate that other competitors are entering the market, as I mentioned, it's sort of the next stage of evolution for the marketplace.

We're doing very well if you study new product adoption, we're doing quite well in the early majority now with nearly 20% of the dollars spent on vacuums now going into the robot vacuuming category.

But there's a long way to go, and we need to more deeply penetrate the rest of the customer base, which is still skeptical that robot vacuum cleaners really work and can really work for them.

And so a big-name entrants in the market do more good than take share.

There's no doubt that our competitors will over time grab some share, but we are quite confident it will be at a much lower rate than the overall market growth.

And that's why I say with confidence that this Dyson entry is a good thing for robot vacuuming, particularly a good thing for iRobot.

Okay.

Thanks for that, Colin.

And maybe just one last question for Alison just as it relates to cash flow.

Q4 historically is a really strong cash flow quarter for you all.

I get that the discussion surrounding inventory.

Is there anything else that's going to be a driver just from a working capital standpoint in Q4?

No I don't expect so, Tyler.

We're still anticipating having an operating cash flow on an annual basis in the high-single digits as a percent of revenue that does require us to have a strong operating cash flow in Q4.

But we don't expect anything unusual to happen there.

Great.

Thanks a lot.

You're welcome.

Meghna Ladha from Susquehanna.

Good morning.

Thanks for taking my questions, and congratulations on a good quarter.

Thank you.

Given the magnitude of the Q3 beat versus your expectations, Colin, can you help us understand your exemptions when you provide forward guidance?

Sure.

The beat has two elements to it.

There's the revenue side and then there's the profitability side.

On the revenue side, I want to reiterate that we believe that it is a shift from Q4 into Q3 because as a company with 90% of our revenue coming from a consumer business and because the end of September, beginning of October is such a huge reactive time of shipping, it's just frankly difficult to predict what hits when.

So from a revenue perspective, full-year guidance unchanged, shift some of the revenue which was admittedly a steep revenue ramp in Q4 into Q3.

And feel good about the fact that it's easier to have confidence in our Q4 revenue numbers because of this shift.

On the earnings, we actually have been operating in a more efficient way.

We saw the mix shift into the 800 series with carrying some additional margin opportunity, and just general operations of the company.

As we looked at the year, did result in increased confidence that we were going to be more profitable than originally anticipated which gave us the opportunity to communicate and deliver to our investors additional EBITDA.

So two different stories.

One is shift and one a true good news story regarding the cost of operating the business.

Got it, and also the $0.15 EPS upside that we saw this quarter that the guidance was raised by about $0.08 when you take the midpoint of the guidance.

Was that because of the incremental operating expenses that you plan to incur this year?

Yes, we are investing part of the gross margin capability for the year in increased OpEx which is why you are not seeing more of an expansion at the EPS level.

Got it.

Thank you.

You bet.

Adam Fleck from Morningstar.

Hello.

Good morning.

Thanks for taking my questions.

You bet, Adam.

Just wanted to talk a little bit about the European growth situation.

We saw that slow this quarter versus the first half.

Of course, that was fueled by the Roomba rollout the last couple quarters, but looking at the remainder of the year and then into 2015, is there concern that the macro environment here could again negatively impact sales?

I think the macros is in Europe are impacting growth rates.

You see a significant differential between North America and Europe at this time.

I think that I was just over in Europe and you hear a lot of news regarding weaker customer sentiment.

I think that beginning of the year we bucked the trend because of our new products and as those -- as the newness of those products fade slightly, it creates -- well I guess the masking effect of new product introduction is reduced.

And so that I think as we look into Q4 and into 2015, you'll see EMEA underperforming, at least North America, from a growth rate perspective solely due to macros.

If we see a turnaround in macros, I think that you could see a nice recovery.

We do believe that Europe will continue to be a good growing region for us, but I don't think it will keep pace with North America next year.

Okay.

That's helpful.

Thank you.

And then the RP-VITA opportunity in Mexico that you outlined, is the price in margin there similar to what you see in your US sales?

It's identical.

We sell our product -- we OEM our base to InTouch Health and they are responsible for negotiating with customer and if any discounts or whatever their pricing strategy is, we are insulated from it.

Got it.

Thank you.

You bet.

Paul Coster from JPMorgan.

Good morning.

This is Mark Strouse on for Paul.

Thanks for taking my questions.

I think most of our questions have been asked but if I could just ask two quick modeling questions.

The first on gross margin.

I understand your comments around mix but was there any impact during the quarter from warranty reversals?

And then second, can you just remind us what tax rate you are expecting or it's included in your full-year guidance?

Thanks.

Hello, Mark.

The Q3 results weren't impacted by warranty but as I mentioned, we did have about $1.5 million of favorable return reserve adjustments in the quarter.

And for the year, we are roughly planning on about a 30% overall tax rate.

Okay.

Fair enough.

Thank you.

You're welcome.

Ben Rose from Battle Road Research.

Good morning.

Colin, I think you said in your prepared remarks that the Company had taken a look at some of the Dyson intellectual property.

And my first question is, are you prepared to say at this point categorically that they are not in violation based on what you've seen?

We are not in physical possession of their product and so I certainly couldn't say that.

The point of my remarks is looking at what has been announced, it seems clear that Dyson has avoided our intellectual property by not including in their product some key features which we believe are essential for premium operation of a robot vacuum cleaner.

So that the strength of our intellectual property is having a very significant impact on the design decisions of quality players in the vacuuming marketplace.

But no, I can't say that there is nothing there because we don't have it in our hands.

Okay.

Fair enough.

And then with regard -- there was one aspect of their announcement that was interesting in terms of the Wi-Fi enablement of their product.

Do you have plans currently with regard to the Roomba to make that Wi-Fi enabled?

We've said publicly that clearly that's on our roadmap, but it is always our intent to make sure that we put technology into our products for a reason, not just adding cool for cool's sake.

I think that on the 800 series, it was commonly assumed that we would Wi-Fi enable it but instead we had been focused on trying to create a cleaning system which did not require maintenance and would allow superior pickup at even increased efficiencies.

Because in our testing, that's what our customers needed to see in order to get over that skepticism barrier and to enjoy a maintenance-free product.

We're pretty focused on ensuring that customer need comes first.

Will it be connected?

Yes, absolutely.

But our current product line, we chose to put the dollars we're asking our customers to pay against things that were higher on their priority list for desire and need for customer satisfaction.

It's on the way, but we took another path with the 800.

Okay.

Great.

Thanks very much.

You bet.

That concludes our third-quarter 2014 earnings call.

We appreciate your support and look forward to talking with you again in February of 2015 to discuss our Q4 results and importantly, our outlook for 2015.

Thank you very much.

That concludes the call.

Participants may now disconnect.