iRobot Corp (IRBT) 2014 Q4 法說會逐字稿

Good day, everyone, and welcome to the iRobot Q4 and Full-Year 2014 Earnings 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.

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 expense.

A reconciliation of GAAP and non-GAAP metrics can be found in the financial tables at the end of the fourth quarter and full-year 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 fourth quarter and full year 2014, as well as our outlook on the business for 2015.

Alison Dean, Chief Financial Officer, will review our financial results for the fourth quarter and full year 2014.

And Colin and Alison will also provide our financial expectations for the first quarter ending March 28, 2015, and FY15.

Then we'll 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.

2014 was another great year for iRobot.

Last evening we reported Q4 and full-year results in line with our expectations.

Home Robot revenue grew 19%, driving full-year 2014 Company revenue up 14% to $557 million.

Earnings per share were $1.25.

Adjusted EBITDA was $80 million or 14% of revenue.

All three of our businesses met our expectations and made progress against their strategic plans, setting us up well for 2015.

Our 2015 financial performance will continue to be driven by our Home Robot business.

Home Robot revenue is expected to grow 10% to 12% in 2015 and comprised 90% of total Company revenue.

We anticipate Defense and Security will grow for the first time since 2011 and our Remote Presence business will focus on improving the scalability of our solution, while holding revenue flat at 2014 levels.

For 2015, we expect revenue of $625 million to $635 million.

EPS of $1.25 to $1.45.

And, adjusted EBITDA of $85 million to $95 million.

Additionally, 2015 will be an important year for iRobot, as we begin to roll out and monetize investments we have been making in crucial robot technology.

Now I'll take you through some of the details of 2014 and our expectations for 2015.

Our Home Robot business had another outstanding year.

Revenue grew 19% for the full year over 2013 and comprised 91% of the Company's total revenue for the year.

Our Defense and Security business delivered results consistent with our expectations, exited the year with a solid backlog, and is positioned for healthy growth in 2015.

Our Remote Presence business continued to ramp sales of telemedicine robots to our partner, InTouch Health, for use in hospitals, and Ava 500 Video Collaboration Robots to several Fortune 500 customers.

Full-year Home Robot revenues were driven by strong growth in both domestic and international markets.

Expanded distribution of the Roomba 800 worldwide, growth in China, and launch of the higher ASP Roomba 600 Robots in club stores are the primary drivers.

Roomba 800 and 600 each comprised roughly 30% of total Home Robot revenues.

Our continued investment in marketing programs to generate greater brand awareness helped drive full-year domestic revenue growth of more than 20% over last year.

Likewise, our commitment to improving product quality and ease of use resulted in a reduction of product returns, accrual that positively impacted revenue and profit for the year.

Higher quality robots and improved operational performance, coupled with a premium ad campaign, have proven to be a successful formula.

We will continue to invest in these and other initiatives, that expand our competitive moat and secure our market-leading position.

Our 2014 international Home Robot revenues grew 17%, year over year, driven by a return to growth in EMEA, following a decline in 2013.

Revenue in EMEA grew 18% over last year.

In APAC, we continued to see strong demand in China, where revenue more than doubled in 2014 over 2013.

Macros in Japan weighed heavily on customer spending in Q4 and resulted in a slight decline in Japanese revenue year over year.

Overall, APAC grew 13% in 2014.

APAC and EMEA each comprised roughly 30% of 2014 Home Robot revenue.

In 2015, the products expected to fuel growth are the Roomba 600, as club stores complete the transition to the next generation of Roomba, and the Roomba 800 in worldwide distribution for the full year.

Our research shows that we are still in the early stage of adoption, both domestically and internationally, for robot vacuum cleaners.

We believe that as awareness of the category continues to expand, we can see an adoption rate similar to other disruptive households, such as the microwave oven and dishwasher.

It is our intent to focus our investments on growing the category and extending our customer base.

Wet floor care continues to be an important part of our strategy, and we are working to optimize the positioning and go-to-market strategy of Scooba and Braava.

In 2015, we expect strong Home Robot revenue growth in the mid-teens in the United States, while overseas growth will be tempered by macros and currency devaluations.

Because we sell our products to distributors in dollars, we are not directly impacted by currency fluctuations.

During a period of prolonged currency devaluation, as is currently being experienced in Europe and Japan, there is pressure on pricing and the distributors' ability to invest in marketing, which impacts revenue growth.

In EMEA, the macros will temper growth in 2015.

Japan, however, is experiencing a perfect storm of recessionary economy and a significantly devalued currency.

Japan is our largest market outside the United States.

And while we continue to hold our market share, the negative impact on 2015 revenue will likely not be offset by a growth in China.

For the past couple years, we have talked about the opportunity for China to become iRobot's largest non-US customer.

We saw significant growth in 2014 and expect it to continue in 2015 and beyond.

To ensure that we capitalize long term on this huge opportunity, we will continue to balance growth with requisite controls in this market.

While current macros are presenting a challenging backdrop for 2015, we are excited that on a global basis, this business is growing significantly still.

Since 2008, we have successfully built a global business in a nascent industry, while weathering challenging economic times around the world.

I'm confident that we have the products and pipeline to continue this growth for the foreseeable future.

Turning now to our Defense and Security business.

Full-year results were in line with our overall expectations.

Roughly 60% of the revenue was product lifecycle revenue.

33% was robot sales, primarily PackBot and FirstLook robots.

The remaining 7% was from externally funded research and development.

Internationally, revenue increased roughly 40% of full-year D&S revenue from approximately 30% in 2013.

While DoD revenue comprised 48% of the total 2014 revenues, compared with 60% in 2013.

We expect 20% to 30% D&S revenue growth in 2015, driven by international and continued traction from Department of Defense upgrades.

However, longer-term visibility into DoD robotic investment does remain poor.

Our $18 million backlog exiting 2014 was twice the size of last year's backlog.

In 2015, we will continue to focus on the international markets.

As well as continuing to sell spares, service, and support for the worldwide installed base of more than 5000 iRobot unmanned ground vehicles.

Moving on to our Remote Presence business.

RP-VITA, our remote telemedicine robot, continues to gain market traction.

Last quarter, we discussed how InTouch Health is selling RP-VITA to hub and spoke hospital networks, with our specialists in a major hospital providing services for the robots at remote hospital locations.

Providing consistently high-quality care on a timely basis over a telehealth network will improve the quality of care, while reducing overall cost.

This is a model InTouch Health will continue to use in 2015 to articulate the RP-VITA value proposition to prospective customers.

In 2014, we began shipping our second mobile telepresence robot, Ava 500, in partnership with Cisco.

Interest and excitement about this product continues to build.

Ava was recently featured in Intel's keynote at the consumer electronics show, and our relationship with Cisco continues to strengthen.

Our primary focus for Ava in 2015 will be scalability, as we actively work with customers to shorten the sales cycle and simplify the implementation process.

Over the past year, working with our current customers and those still in trials, we have learned a great deal about the challenges of creating a new market.

Based on the multiple ways in which we're using the product to facilitate robotic remote collaboration in our offices and on manufacturing floors in the various uses of our customers, we are confident that we can both create and grow a market for our mobile telepresence robots.

Revenue for 2015 is expected to be relatively flat, at $3 million, two-thirds of which we expect to come from the sales of RP-VITA and the other one-third from Ava 500.

Getting the formula right with complex new robot technology and products is challenging.

But we believe we have the right technology, partners, and customer base to be successful.

In 2014, we began talking more about our leadership in the development of robots with the capability to build maps and use them to precisely navigate around the environments in which they operate.

In 2015, we will begin to further monetize our navigation technologies through visual simultaneous localization and mapping, or vSLAM, with the incorporation of the next-generation navigation technology more broadly into our home products; viewpoint capabilities on our defense robots; and optimization of Ava's mapping technology through scalability.

Over the next year, we expect this mapping capability, coupled with Internet connectivity, to move us from a leader in the robot vacuum cleaner market to a technology company developing navigation connected devices for the home.

It is our intent to continue investing in this critical technology and the economic opportunities it unlocks.

In summary, 2014 was a very successful year.

In 2015, Home Robot revenue will continue to grow in domestic markets, at roughly 15%, and comprise approximately 90% of total Company revenue.

We will continue to invest in marketing programs and ongoing quality initiatives that drive profitable Home Robot growth.

We will continue to pursue defense opportunities overseas, while upgrading the DoD's fleet of robots.

We will focus on scalability of our Remote Presence business.

And, we will continue to invest in key technologies that extend our market-leading position in practical robots.

I'll now turn the call over to Alison to review our fourth-quarter and full-year results in more detail.

Thanks, Colin.

Our fourth-quarter revenue, earnings per share, and adjusted EBITDA were in line with our expectations.

Revenue of $159 million increased 26% from Q4 last year, driven by growth in Home Robot revenue.

EPS was $0.31 for the quarter, which included a $0.04 positive impact from the 2014 investment tax credit compared with $0.11 for the same period last year.

Q4 adjusted EBITDA was $20 million compared with $13 million last year.

Domestic home robot revenue growth was 21% for Q4 and 22% for the year.

Further evidence of that our advertising investments, product and channel strategies and quality initiatives are yielding positive results.

Q4 domestic revenue was partially impacted by a favorable adjustment to the product return accrual of $1 million.

This compares with $4.5 million favorable adjustment in 2013.

We have seen favorable adjustments on and off over the last few years as we have seen our return rates declining.

International revenue grew 17% for the full year, with EMEA growing 18% and APAC growing 13%.

Defense and Security revenue of $24 million in Q4 was up 48% year over year, as we expected.

Roughly 65% of this quarterly revenue was from PLR, 10% was externally-funded R&D, and the balance was from robot sales.

For the Company, gross margin was 48% for the fourth quarter and 46% for the full year 2014.

The year-over-year improvement was due primarily to favorable product and customer mix in home robots.

Q4 operating expenses were 40% of revenue, down from 43% in Q4 last year.

We said on our Q3 earnings call that Q4 sales and marketing expenses would increase substantially due to the Roomba 800 ad campaign, as well as other promotional programs planned to support our retailers during the holiday season.

For the full year, sales and marketing was 15% of total revenue at a consistent level with our expectations and the prior two years.

OpEx for the full year was 37%, an improvement of two percentage points from last year.

EBITDA for the quarter was $20 million compared with $13 million last year.

With full-year 2014 results of $80 million, or 14%, compared with $62 million, or 13%, last year.

EPS in Q4 was $0.31 and $1.25 for the full year.

Both were favorably impacted by $0.04, from the enactment of the 2014 investment tax credit in late December.

Operating cash flow was $41 million, resulting in full-year 2014 OCF of $41 million or 7% of full-year revenue.

We ended the year with $222 million in cash, up from $187 million a year ago.

2014 year-ended inventory was $48 million, or 53 days, compared with $46 million, or 63 days, last year.

The improvement in year-over-year DII was due to significantly higher Q4 Home Robot revenue.

Now I'd like to provide you with additional detail and some of the underlying assumptions for our Q1 and full-year 2015 financial expectations.

The outlook for our Home Robot business remains strong, with growth drivers identified for the next couple of years.

For the Defense and Security business, our visibility is again limited in 2015.

However, we expect our continued focus on international and DoD PLR to result in revenue growth of 20% to 30% over 2014.

We expect Remote Presence revenue to remain relatively flat in 2015, as we fine-tune the product and go-to-market strategy.

We expect full-year revenue of $625 million to $635 million, comprised of Home Robot revenue of $565 million to $575 million and D&S revenue of $55 million to $60 million.

We anticipate revenue from Remote Presence to contribute approximately $3 million.

As in the past two years, revenue will be more heavily weighted in the second half, when we expect to deliver more than 55% of the year's revenue.

While we provide quarterly expectations, we manage our business from a full-year perspective.

Keep in mind that it is difficult to predict precise order timing between quarters, and especially between Q3 and Q4.

We anticipate total Company Q1 2015 revenue to be flat to slightly up year over year, to $114 million to $117 million, and then increase sequentially throughout 2015, as it did in 2014.

Based on the current economic environment in Japan, we are expecting Q1 revenues from that market to decline in Q1 2015 from Q1 2014, which is negatively impacting total Company Q1 growth.

As Colin discussed, Home Robot growth will be driven by full-year distribution of the Roomba 80; growth in China; and replacement of the 500 series with the Roomba 600 series in the club stores.

Overall, we expect home robots to grow 11% to 13% in 2015, fueled by strong growth in the United States.

We expect approximately half of D&S revenue to come from robot sales and half from PLR to support the install base of robots.

We expect Q1 EPS of $0.08 to $0.10 and full-year EPS of $1.25 to $1.45.

Adjusted EBITDA in Q1 is expected to be $10 million to $11 million, and for the full year is expected to be $85 million to $95 million.

Consistent with our commitment to improve profitability through OpEx leverage, we expect 2015 operating expenses to decrease to between 35% and 36% of revenue for the full year, down from 37% in 2014.

We expect operating cash flow to continue to run in the high single digits as a percentage of revenue.

We are also assuming gross margin of 45% to 46%.

Stock comp expense of roughly $15 million.

Depreciation and amortization expense of approximately $15 million.

And a diluted share count of approximately 31 million shares.

We are estimating a tax rate of 34% for 2015.

The high end of our EPS range assumes a nominally positive impact from an investment tax credit for 2015.

I'll now turn the call back to Colin.

Thank you, Elise.

We expect our Home Robot business to deliver good growth in 2015 over an ever-increasing base; our stable Defense business will show healthy growth year over year; and our Remote Presence to be flat year over year.

With that, we will take your questions.

(Operator Instructions)

Brian Gesuale, Raymond James.

Yes, good morning, guys.

Good morning, Brian.

Wanted to delve into guidance a little bit here.

Can you, maybe, talk about the situation where revenue at the bottom end of the range is up roughly 10%?

But, earnings would be down $0.06, and maybe, what the levers are to get there?

Thank you.

So, first of all, the growth, the low end of our range, would be a 12% growth rate for the Company, that's 625.

That's based on our current view of all three businesses and the current market situation, as we described earlier.

The low end of our profit ranges are consistent with where we exited 2014.

And, we're giving ourself leeway in that guidance to deal with some of the challenges that we may be facing in the international markets.

Assistance we may need to provide our distributors to keep the growth engines running in those regions.

Okay.

Great.

Alison, I'm wondering if you could give us a little bit of insight on free cash flow targets for 2015?

And then, it also looked like accounts payable jumped up a little bit sequentially.

If you could just put some color around that?

Sure.

On the accounts payable front, it was a little bit higher than is typical.

And, that was really just due to timing of things in the quarter.

We have, as you know in Q4, substantial sales and marketing investments we make and some of those were in payables at the end of the quarter.

As well as Q4 being a very large production quarter for us.

We still had some payables left there.

But, lot of those have been normalized already as we've entered Q1.

And, from an operating cash flow perspective.

Again, we're expecting operating cash flows to remain in the high single digits as a percent of revenue.

Based on the income targets we have and our expectations for working capital.

Okay.

Terrific.

And then, could you, maybe, just talk a little bit about marketing plans for 2015.

It strikes me with the Q1 guide, that you're expecting, maybe, a little bit more of a congruent trajectory in marketing spend.

Can you, maybe, just, maybe, give us some thoughts on magnitude?

And then, how it shakes out through the year?

Our traditional profile for our demand generation spend remains consistent year over year.

Only modified by any additional support we may have to provide internationally.

That means heavying up in Q2 and Q4 from an actual spend perspective.

The foreign currency exchange internationally is meaning that our distributors' ability to go spend on marketing is diminished.

And, some additional support is being considered and factored into the guidance to allow us to continue to strongly drive sales in Europe and Japan.

Okay.

That's great, Colin.

One more and then I'll just out of the queue.

Colin, it seems like you're very excited about some of the new innovations that you guys plan on bringing to market.

You elaborated a little bit about that on the script.

Can you maybe talk about product cadence, new category plans?

Not per -- specific plans, of course, but, can you just, maybe, wrap that up a little tighter for us here?

Yes.

For how we should take about that?

Sure.

iRobot is very committed to investing and monetizing technology in navigation, cloud robotics, and manipulation.

Those are the three areas that our patent portfolio most strongly protects.

And, we believe that are the appropriate leadership areas for iRobot as the robot company.

Last year, at Analyst Day, we showed some of our navigation technologies.

This is the year where I'm signaling in the script, though certainly not giving any notion of timing, we will start to monetize some of the technology we demonstrated.

We also, last year, announced our uPoint control.

Which is a breakthrough touchscreen interface for our defense robots.

As well as a very sophisticated robot communications system that integrates with that touchscreen interface.

That will also start shipping in 2015 and should help drive some of the growth we alluded to in defense.

As well as extending our leadership in that category.

So, while last year, all we could do was point at some demonstrations.

This year is going to be the year where we begin to monetize those innovations in products that we sell.

Great.

Thanks so much.

You bet.

Jim Ricchuiti, Needham & Company.

Thank you.

Good morning.

Colin, I don't know if you want to comment further on this.

But again, with respect to vSLAM.

Should we assume that this newer technology finds it way, first, in your traditional floor cleaning products?

It's not clear whether you are talking potentially in 2015 about this technology in some other applications.

The -- I think that, while we're not discussing any product launch timing or cadence, I think what I can say is that you will see home robots with this technology in them at some point in 2015.

I think that, that's as far as I can go right now.

And again, we refer back to some of the demonstrations we showed last year.

Where it was mature research lab technology.

Now it's going to be -- being launched, embedded in our products.

Got it.

And then, Alison, could you talk a little bit more about Q1 as it relates to Japan?

I'm trying to get a sense, if we look back in previous years, 2014.

Is Q -- has Q1 been a particularly strong quarter as relates to the Japanese business?

I'm trying to get a sense of the seasonality of the business in Japan.

Yes, I mean, this year we're definitely dealing with some of the effects we saw in Q4 on the actual sell through.

And then, the resulting implications for reorders for Q1.

So, that's the primary driver of what's going on 2014 to 2015.

Q1, really, there's a lot of factors that go in to the seasonal timing in any country.

It can be impacted by product introductions.

That sort of thing.

Last year probably wasn't a particularly strong Q1 for Japan overall.

But certainly, this year it's definitely being impacted by the slowdown we saw in Q4.

And then, the resulting impact for replenishment orders for Q1.

Do the comparisons get tougher in Japan as we go through the year?

Q1's probably the toughest comparison as we see things right now.

Okay.

And if I could ask one final question.

Colin, just relating to Ava.

And, I guess the question is, how satisfied are you at this point that it's the right product for the commercial market outside of healthcare?

Or, do you feel that you're still refining the product?

And, that -- what ultimately may be the right product may be somewhat different than what you have right now?

I think that what we've learned is that we have the right basic product.

But, there are scalability issues that need to be worked through.

Meaning, that our installations were too labor-intensive in order to rapidly scale the trial.

As a new product, most of our customers are asking for trials first.

Which exacerbates that problem.

And so, we have solutions that are being worked and rolled out.

And, I think that the bottom line is that we are somewhat disappointed that we couldn't be further along.

On the other hand, virtually every single customer that we've got to trial last year, which was a significant number, is still actively excited about the product and we're working on moving forward with them.

So it's a sort of a good news/bad news issue.

Which is why I use scalability terminology.

We like our product.

Our customers are excited.

We don't have a scalable solution in market at this moment.

And we -- but, we believe we know how to solve that rapidly.

Okay.

Thank you.

That's helpful.

Yes.

Josephine Millward, Benchmark.

Good morning.

Good morning, Josephine.

Colin, in the past you've talked about the need to drive consumer awareness for the wet floor care products.

Can you talk about -- do you have a marketing plan?

And, do you see this category contributing to growth this year?

Because it doesn't seem like there's a whole lot of Braava and Scooba embedded in your guidance.

Sure, and that's a great question.

The wet floor care remains a significant growth driver for us.

The weight we gave it on the script is consistent with plans we that we have talked about, about refining our positioning and messaging for that category.

But, you are corrected in sensing that.

Another thing we mentioned on the call, that we're really becoming convinced that our penetration of Roomba is still quite low.

And, investing in driving further growth for the foreseeable in Roomba has actually increased in our investment share.

Over perhaps, what we were thinking at some point last year.

So, wet is still strong.

It's still great.

And, we are going to be refining its messaging.

But, in 2015 we've actually seen an opportunity to focus on further -- an increased investment in growing our Roomba market size as a primary driver of growth.

Okay.

Let's just gear to APAC.

Do you think APAC will grow this year?

Because, it sounds like China has been very strong.

What drove the strength?

Is it just geographic expansion?

And, what's your plan for China in 2015?

So, as a whole, we don't believe that China's growth will offset Japan's potential contraction.

Just because Japan has traditionally -- is, has traditionally been our largest customer outside of the United States.

But, we do see it as a very, very strong year of growth in China.

In 2014, as I mentioned in the script, we more than doubled our revenue.

That was driven both by increasing same-store sales.

But also, significant geographic expansion.

So, it was, sort of, a one-two punch on the growth there in China.

And, we expect another year of very strong growth there.

But, you do the math and we are predicting APAC to be slightly down.

Based on those two offsetting impacts.

Thank you.

Actually, I am being corrected.

That is, APAC is slightly up on the year.

We're expecting a, actually, a 10%.

So, China does increase on a summation basis.

Adam Fleck, Morningstar.

Hello.

Good morning.

Good morning.

I wanted to follow up on the discussion around home robot technology rollout.

And of course, the 600 and 800 full year.

As you look into 2015, how should we think about the balance of ASP growth versus volume growth in that segment?

Yes.

Volume growth is still going to be the driver in home, Adam, versus ASP growth.

There'll be a small amount of ASP impact.

But, it's a volume story.

Okay.

Great.

That is helpful.

And then, maybe just for the quarter.

Your revenue was, of course, up again nicely in home robots.

Can you help us understand the sell through?

Not just your revenue.

Yes, the sell through was definitely good.

In the US it was good.

As we mentioned, Japan was a little bit under our expectations.

Sell through in EMEA continued to be strong.

So, where we really saw the shortfall was in Japan.

The other regions reported very strong sell through.

Okay.

Great.

And then, just one last housekeeping item from me.

Following up on a prior question on the balance sheet.

Yes.

Shifting to receivables.

Day sales outstanding finished the year quite a bit higher.

Highest in several years.

Is there a geographic mix at play here?

Is there anything else you'd point to?

Yes.

It was just really the timing within the quarter.

As you know we had a very significant Q4.

And, a lot of the timing within Q4 was back and loaded within the quarter.

Since the quarter -- our quarter ended on December 27th.

And in the week following and the week following that, that A/R balance declined dramatically, as those receipts came in.

So, it's really just a timing event at year end.

Okay.

Great.

That's helpful.

Thank you.

You're welcome.

Tyler Hojo, Sidoti & Company

Yes, hello.

Good morning.

So, just the first question is just on positive return accruals.

And, I guess the question is, what does guidance for 2015 anticipate in, kind of, further momentum on a positive return accruals?

And, I guess, in context of that, I'm just trying to think through how, kind of, the rollout of the 600 and the US through the -- your big box stores is going to, kind of, play into that

So, just on the returns.

We don't explicitly plan for the return reserve adjustments.

In order to take an adjustment, we have to see a significant and continued decline in our rate.

So, it's very hard to predict when that'll happen.

However, we do give the range on our revenue.

Because many different items can come into play, one of those can always be returns.

But, we don't make an explicit assumption when we give guidance, either for a quarter or a year, that there will be returns adjustments, because we just don't know until we see the actual return rates coming in.

But, we do continue to invest in product quality.

It is our hope that we would continue to see benefit with declining return rates.

And ultimately, being able to make some changes to those return reserves.

But, nothing explicitly planned.

In terms of the 600 series rollout.

There really is no direct connection between 600 series and return rates.

It's as we've continued to evolve the technology over time, the newer products have had better quality than the older ones.

So, as we move away from 500 to 600, that's definitely -- should be a positive for us.

But, in terms of, again, how that would translate into changes in return rates, we just don't know until we see the return rates actually materialize.

Thank you for that, Alison.

And, I guess switching gears here.

Just in terms of the, kind of, decline in volumes expected in Japan for 2015.

I get the macro conversation.

I'm also wondering if, kind of, that expectation also factors in.

Maybe some added pressure from the Dyson product being rolled out.

I think in the springtime of this year.

Thus far, we are certainly holding our share in a market, which like several other, mor, many other consumer markets in Japan has declined.

The exact timing of Dyson is a subject of speculation.

Certainly, Dyson is a strong brand in Japan and their product should do well merely because of their brand.

We have tried to factor an environment of somewhat increased competition in Japan in our expectations as we have given guidance.

But, it is very difficult to model any precise anticipation of impact.

Our brand in Japan is extremely strong and we are a well-regarded brand.

We think we can continue to lead that market even with Dyson's appearance, especially because of the performance of our product.

But we've tried to anticipate some impact.

Panasonic has also launched.

As I mentioned previously, the remote the vacuum cleaning category is still in its early stage.

And, we certainly can play very well as a leader in this growing category as robotic vacuuming mainstream.

Okay.

Thanks for that, Colin.

And, I guess, just lastly.

You've had out the -- for some time, you've had out, kind of, sales and EBITDA margin targets through 2016.

I mean, it doesn't sound like there's a change there.

But I just, kind of, wanted to confirm that.

Are you still, kind of, expecting mid- to high-teen kegger in sales through 2016?

And, high-teen adjusted EBITDA margins?

Yes.

The -- certainly this guidance we've given for 2015 doesn't advance us as strongly towards those targets as we would like.

Primarily because of the difficult-to-precisely-quantify impact of the foreign currency exchange.

We certainly -- we do believe that our investment strategy and operating strategy for the business is consistent with those long-term financial targets.

Were we to go, and later in the year have better visibility as to what the timing and duration of this impact on foreign currency exchange was, we could say more at that point.

But, right now we see no reason to go and change those targets.

Got it.

Thanks a lot.

That is all I had.

You bet.

Bobby Burleson, Canaccord.

Hello.

This is Prabh calling in for Bobby.

Thanks for taking the question.

Just piggybacking on the previous question on the competitive landscape.

I just want to try and understand.

In North America, is there -- who else are you seeing?

And, do you see new entrants coming into the home robot space?

In North America it is -- there is not as much activity as from a competitive landscape.

We certainly believe in coming years some of the competitive products that we have seen in Japan and North America may enter.

But, at this point in time, we are the -- by far dominant player.

The -- and, there's a few other brands which are quite small in comparison.

So, it is not where the more competitive environments are playing out.

That would be Asia and Europe.

Okay.

Another question I had was just on the gross margin trends.

So, it sounds like ASP will be flattish.

The units will grow.

Are you seeing any benefits from your class optimization stuff?

Do expect margins to pick up in 2015?

Well, as we said, our assumption is that gross margins for the Company will be up 45% to 46%.

We expect a very small amount of ASP growth in home in 2015.

As we talked about on previous calls, we pursue many different opportunities for cost reductions.

Quite often those have been offset or challenged with competing factor such as Chinese labor rates.

So at this point, we think it's prudent to not plan on significant amounts of gross margin expansion.

Even though we're actively pursuing opportunities to improve them.

Okay.

Thanks for taking my question.

Thank you.

Alex Gauna, JMP Securities.

Thank you and good morning and congratulations on a strong 2014 overall.

Thank you.

Was wondering if you could help with, maybe, the slope of demand you're expecting for 2015.

Because off of the Japan-driven headwinds in Q1, it looks by my math, that you're going to have some unseasonably strong sequentiality necessary to get to your full-year guidance.

So, I'm wondering what your visibility is into those?

And, expectations about how that plays out throughout the year?

Thank you.

Yes, so Alex, at this point we're seeing a 2015 that actually looks very much like 2014 in terms of the ramp over the year.

The different countries will have different growth rates in different quarters.

But overall, both -- defense has -- is back and loaded.

Home, we see being back and loaded.

And, the visibility is probably similar to has -- as it has been in previous years.

But, as we've mentioned a few times, how deep and how long we see this -- the impact of the currencies in EMEA and Japan could certainly affect things.

And, we see that very strongly now.

And, how that'll play out for the rest of the year is a little unclear at this point.

Okay.

And then, I'm wondering in the fourth quarter.

I'm wondering at what point, you realizes you were starting to have a headwind?

In fact, from Japan in particular, and the effects overall of exchange rate.

And, was that something that gradually progressed?

Or, was it as the quarter wrapped?

And then, looking at Japan specifically.

I know you've mentioned some of the increased competition there.

Is it your indication that you've lost a little bit of share to some of your competitors who are not as disadvantaged by the yen/dollar exchange rate?

The -- we have not lost share.

The robot vac -- what's happening in the -- in Japan in a little more detail, is that the robot vacuum cleaning category has suffered slightly.

As the stick vac category in Japan has grown rapidly.

So, the big loser is upright vacuums.

Which we certainly knew and know are on their way out.

And, the future of vacuuming is the robot for doing all of your floors.

And, the stick back for spot cleaning, cleaning couches, and stairs, and so forth.

That is the modern future of vacuuming.

The stick back, has particularly in Japan, burst on the scene strongly.

And, it has attracted real share customer, which we think is a transient situation.

And, that the robot vacuum cleaning market will rebound, as the one-two punch of those two modern methods, cooperative methods of cleaning, take hold.

But, the -- from a share perspective, iRobot is fine and is very strong in Japan.

It's the category that is temporarily depressed, as the stick back phenomenon plays through, that is impacting.

And then, of course, the entire category as a whole and consumer spending is down.

Because of the challenges of foreign currency exchange and macros in the country.

That's helpful.

Thank you.

One more quick one.

I know you mentioned you expect ASPs to be a modest tailwind in 2015.

Did you see that mix shift up in Q4 again as?

Were ASPs up quarter on quarter?

Thanks.

Yes they were up slightly quarter to quarter.

All right.

Thanks.

Good luck.

Thank you.

Troy Jensen, Piper Jaffray.

Hello.

Thanks for taking my question.

Just, I guess, maybe for Alison.

If you look at 2014, you guys did 19% growth in the home.

Coming into the year, what were your expectations?

I'm just kind of curious to know if this 15% is a conservative number for your home growth in this year?

Well, as we do every year, we give you our best view based on everything we are seeing.

So, the guidance we're putting out for Home is what we're hearing from our distributors and our partners, about what they expect in the region.

I believe when began last year, we planned, sort of, mid- to high-teen growth for home and that's very much what we delivered.

All right.

Perfect.

And then, Alison, another one for you.

Curious to know if there's any warranty accruals or product return reserves that were released into earnings for Q4?

We had $1 million of return reserves favorability on the top and bottom line.

Perfect.

And then last question and I'll cede the floor.

When you guys do introduce Roomba with the vSLAM technology, can you talk about what ASPs will do?

And, what gross margins would look like for those products?

So, first off, we have not confirmed that we are launching a Roomba with vSLAM technology.

Only that a home robot product using that technology is something that one should expect, as we monetize our technology in 2015.

The vSLAM technology is more expensive than the current navigation technology that we have commercialized in our products thus far.

Though, not tremendously so, a product using that technology, therefore, you would expect, if you had a comparable launch, a comparable product, otherwise, you would see some uptick in the price through the addition of that technology.

And understandably, and one would expect to see a significant impact.

More than offsetting that increase in price in the performance and value in the eyes of the customers for that new capability.

Okay.

Perfect.

Thank you and good luck in 2015.

Thank you.

Meghna Ladha, Susquehanna.

Hi.

Good morning.

Thanks for taking my question.

Regarding the remote presence business, Colin.

In your prepared remarks, you talked about how you're gaining market traction in the market.

But yet, guidance for 2015 is flat year over year.

Can you help us understand why we won't see an acceleration this year?

Is it because of the scalability issue that you discussed earlier in Ava?

Or, is it something else?

No, it's completely due to the scalability issue.

And, we wanted to go and set expectations appropriately.

And, depending on the timing and how those additional capabilities roll out, we felt that holding it flat was prudent and appropriate.

But, read nothing more into it than what I have said.

That our initial solution has made for happy customers, but very painful implementations.

Okay.

So that we need to work through those issues.

All right.

And, the next one is for Alison.

Alison, the free cash flow you ended the year at around $28 million.

That is below the average of $35 million to $40 million that you generated in the past few years.

Is it because of higher investments this year?

And, what is your expectation for CapEx going as we enter 2015?

Yes, so we don't have significantly higher CapEx expectations.

As you know, were not a very capital intensive company as it is.

Our capital is tooling and leasehold improvements.

Demo assets and that type of thing.

So, I don't expect a more significant CapEx investment next year.

We focus very much on operating cash flow as opposed to the free cash flow.

And, it's been pretty consistently in the high teens for the last few years.

So, we don't really see that changing going forward.

And, don't see any real dynamics within it changing dramatically.

Okay.

Thank you very much.

Ben Rose, Battle Road Research.

Good morning.

Good morning.

Again, congratulations on finishing up a great year.

I realize the focus of the call is on the coming year.

But, I'm sure it's gratifying.

With regard to the consumer guidance for this year.

The range that you've stated, 565 to 575.

Just wanted to be clear that, that is just based on your current product portfolio?

And, that the -- hitting the high end of that guidance would be just performance in general, as opposed to the introduction of anything new?

That range contemplates organic growth and performance of our businesses.

It does not anticipates any acquisition.

Certainly, if we were to launch any new product, that would be contemplated in that guidance.

Not telegraphing that we're about to.

But certainly, the way we give guidance, it tries to take into account all of the regularly planned activities for the year that we are anticipating.

Okay.

So, that's to say that it could include some new product introductions.

Correct.

Okay.

The other thing -- the second question I have, Colin.

Is that we've already seen some of the high-end features of the 800 series incorporated into the 700 series.

Given the remarks that you made about the 600.

Could we see some of those features incorporated into the 600 series by year end?

It is our normal course of business to migrate the high-end features into the lower-end models over time.

So that, certainly there will be a time when the debris extractors are fully rolled out through our portfolio.

Because they offer such a significant benefit over the brushes.

However, we're not -- I won't commit to any particular feature and timing going into the 600 series.

That would -- you'd have to wait to understand when our new product rollouts were going to happen and what was included.

But, from the highest level, every -- we launch the new technology at the high end.

We work on reducing the cost of that technology.

And, to the extent it is possible, aggressively roll that through.

So that, our customers can have our -- the best experience.

Of course, we are continuously bringing out new technologies into our higher-end products.

It's -- we try to obsolete ourselves as aggressively as we can as part of our strategy of leading the market

Okay.

Thank you.

And then, just a final question for Alison.

DNS, 70 -- I calculated 76% of DNS in 2014 came in the last couple of quarters of the year.

Are we expecting a similar sort of percentage back end loading for 2015?

Or, could the DNS contribution overall be somewhat more linear?

We are definitely still expecting a backend loaded year for DNS.

I don't know if it will have quite as dramatic an impact in Q4 as it did this year.

But, it's definitely a backend-loaded year based on the current visibility we have.

Okay.

Thank you very much.

You're welcome.

Okay.

That concludes our fourth quarter and full year 2014 earnings call.

We appreciate your support and look forward to talking with you again in April to discuss our Q1 results.

And, that concludes the call.

Participants, you may now disconnect.