iRobot Corp (IRBT) 2015 Q2 法說會逐字稿

Good day, everyone, and welcome to the iRobot second-quarter 2015 financial results conference call.

This call is being recorded.

And 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 expense.

A reconciliation of GAAP and non-GAAP metrics and be found in the financial tables at the end of the second-quarter 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 2015 as well as our outlook on the business for 2015.

Alison Dean, Chief Financial Officer, will review our financial results for the second quarter 2015.

And Colin and Alison will also provide our financial expectations for the third quarter ending September 26, 2015 and fiscal 2015.

Then we will open the call for questions.

At this point I will turn the call over to Colin Angle.

Good morning and thank you for joining us.

Our second-quarter results exceeded our expectations.

Home Robot revenue was up slightly over last year while D&S revenue more than doubled.

Earnings per share were $0.24 and adjusted EBITDA was $18 million or 12% of revenue.

Based on our Q2 results and our outlook for the rest of 2015 we are reaffirming our full-year expectations.

We continue to expect 2015 revenue of $625 million to $635 million driven by Home Robot growth, EPS between $1.25 and $1.35 and adjusted EBITDA of $85 million to $90 million or roughly 14% of revenue.

These expectations continue to reflect our confidence that Home Robot revenue will grow 11% to 13% for the full year with growth across all three of our major regions.

We expect full-year domestic revenue growth in the high teens.

We expect EMEA revenue to grow mid- to high-single-digits where growth is being tempered by Russia, and APAC to grow low-single-digits as the year-on-year decline in Japan tempers the strong growth in China.

The incremental marketing investments we discussed on the last call in both the United States and overseas have successfully driven demand in these markets.

Promotions we ran for Mother's Day and Father's Day coupled with our new marketing campaign in the US helped drive a 24% increase in domestic revenue over Q2 of last year and strong sell-through at our retailers.

Supplemental demand generation spending in EMEA and APAC resulted in higher sell-through in Q2.

And we expect replenishment orders from our distributors in the second half.

Last year we hired two consumer product Company executives, our VP Marketing from Keurig and our VP sales in the Americas from Sony.

They brought significant premium brand experience that has helped us maintain our market leading position in home robots.

And we recently announced that Tim Saeger will be joining iRobot as Senior Vice President of Engineering.

He was formerly the VP and GM of the home entertainment business unit at Bose and was responsible for all aspects of product and technology development, and has led teams responsible for delivering dozens of breakthrough products to the market.

His expertise will not only help us to continue to build upon our world-class consumer technology Home Robot organization, but also the design and development of technology and products across the Company.

Now I will take you through some of the details of the second quarter and our expectations for the rest of 2015.

In the second quarter our Home Robot business was up 3% year-over-year, slightly more than expected, while our Defense & Security and Remote Presence businesses delivered results consistent with our expectations.

As a reminder, year-over-year quarterly comparisons can be difficult due to the timing of new product introductions and where we are in the distribution cycle of those products.

The year-over-year comparisons in the second quarter were easier in the United States and more difficult overseas due to the timing of the sell-through and sell-in of the Roomba 800 Robot respectively.

In the United States Q2 sell-through at our top five US retailers increased more than 25% over last year.

Revenue in this market was up 24% year-over-year driven by sales of Roomba 800.

International Home Robot revenue was down 7% from last year.

EMEA declined roughly 5% due to a substantial year-over-year decline in Russia.

And APAC was down 9% for the quarter.

Growth in China of more than 60% was not enough to offset the expected year-on-year decline in Japan.

Trends continue to improve slightly overseas and we expect full-year growth in all regions with significant year-over-year growth in the fourth quarter.

Roomba 600s and 800s are driving overall revenue growth; however, we are seeing Braava doing well, especially overseas where it comprises approximately 60% of worldwide Braava sales.

In addition, the long anticipated navigating Home Robot will be launched in the second half as promised.

I'm not going to say anything more about that product, launch timing or features, but we are very excited about it and sales of this new robot are included in our expectations.

Turning now to our Defense & Security business, second-quarter revenue increased more than 100% over 2014 due to the delivery of robots and spares under the Canadian contract awarded in Q3 of last year.

We continue to build upon our solid pipeline of opportunities for both the DOD and international customers.

Our full-year expectations remain unchanged at this point, but the timing of orders and delivery remain somewhat uncertain.

In our remote presence business, we have talked about our 2015 focus on building a list of referenceable accounts and simplifying the installation process.

We have highlighted a number of sales and discussed that a number of companies were testing the Ava 500 in their environments.

Recently there was an article about Carbonite, a Boston-based tech firm using Ava 500 on a trial basis.

The robot which is autonomously navigating across Carbonite's 55,000 square foot headquarters in Boston is being used by them to connect the company's employees in Silicon Valley and Germany.

In summary, our second-quarter Home Robot revenue grew year-over-year driven by strong performance in the US and China markets.

And is expected to grow both domestic and in overseas markets for the full year in 2015.

We will continue to invest in marketing programs to drive growth opportunities and in key technologies that extend our market leading position in practical robotics.

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

Thanks, Colin.

We delivered second quarter revenue, earnings per share and adjusted EBITDA ahead of our expectations primarily due to timing.

Some Home Robot orders shipped earlier than anticipated and higher gross margins and lower operating expenses drove higher quarterly results.

Revenue of $149 million increased 6% from Q2 last year.

Q2 2015 revenue includes approximately $[2.6] million of favorable return reserve adjustments compared with $1.2 million in the second quarter of 2014.

EPS was $0.24 for the quarter, down from $0.28 in Q2 last year.

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

Q2 adjusted EBITDA was $18 million compared with $16 million last year.

For the first half revenue was $267 million compared with $254 million in 2014.

EPS was $0.44 compared with $0.46 and adjusted EBITDA was $31 million compared with $30 million last year.

Domestic Home Robot revenue was up 24% year-over-year in Q2.

International revenue declined in the quarter as products sold to distributors in the first quarter were sold through, supported in part by iRobot funded marketing programs.

We expect to see replenishment orders beginning in Q3 2015 and accelerate in the fourth quarter.

In APAC, China revenue grew more than 60% year over year, but that was not enough to offset the expected decline in Japan.

Defense & Security revenue of $12 million in Q2 more than doubled year over year.

Roughly 70% of this quarterly revenue was from robot sales, the majority of which were delivered under the Canadian contract.

For the total Company gross margin was 47.1% for the second quarter of 2015, up more than 250 basis points from the same quarter last year due to higher gross margins in both Home Robots and D&S.

The primary drivers for the increase in Home Robot margins were customer and product mix as well as favorable warranty expense in EMEA.

Improved year-over-year D&S margins resulted from higher quarterly revenue in that business.

For the full year we expect total Company gross margin to be roughly 46%.

Q2 operating expenses were 40% of revenue, up from 38% in Q2 last year, primarily reflecting our higher normal quarterly marketing spending and the additional overseas demand generation investments to support our distributors.

Operating expense was slightly lower than anticipated as some marketing activities and legal costs associated with patent filings were moved to Q3.

We have also accelerated some additional marketing expense into Q3 from Q4 to support our second half product launch and to support our growth in China.

These activities should result in OpEx of 38% to 39% of revenue and Q3, but we still expect full-year OpEx of roughly 37%.

We ended the quarter with $224 million in cash and DII of 53 days.

The lower DII reflects the 26% sequential growth in Q2 compared with Q1 this year.

Given our significant revenue ramp in Q4 I do expect DII to increase to higher than normal levels by the end of Q3 and return to more normal levels by year end.

Now I'd like to provide you with additional detail for our Q3 financial expectations.

As we have discussed in the past, it is very difficult to predict the revenue split between Q3 and Q4 each year due to the timing and shipment of Home Robot products for the holiday season and the inherent lumpiness of our D&S business.

2015 is no exception.

However, we are expecting a more dramatic split this year with an unusually heavy Q4 shipment schedule.

Given that, total Company revenue is expected to decline slightly in the third quarter sequentially and be flat year-over-year.

We expect third-quarter revenue of $143 million to $146 million, EPS of $0.20 to $0.24 and adjusted EBITDA of between $17 million and $19 million.

Home Robot revenue is expected to grow sequentially and year-over-year in Q3 and then substantially year-over-year in Q4, as it did last year.

The Q3 growth will be primarily driven by the US and China and to a lesser extent EMEA, while Japan is expected to decline year-over-year.

All regions are expected to deliver strong year-over-year growth in Q4 including Japan.

D&S is expected to be down sequentially and year-over-year in Q3 with a very strong growth in Q4, as we saw last year.

I will now to the call back to Colin.

Thank you.

We delivered a solid first half in 2015 and I am confident that we have the plan, the products and the team in place to deliver full-year results as expected.

As well as continuing to build the foundation for growth in the coming years.

With that we will take your questions.

(Operator Instructions).

Jim Ricchiuti, Needham & Company.

Two questions.

One, on the Home Robot business, Colin, should we anticipate any changes in your go-to-market strategy with new products?

And by that I mean in the past I guess you have had limited distribution initially through your website.

Are we going to see a similar strategy going forward for new product introductions in that part of the business?

That continues to be our strategy, so I would not -- so you should expect to continue to see that play out.

Depending on exact product timing and our plans, we may vary the amount of online exclusivity.

There is numbers of factors and windows that we like to hit, but the strategy of launch first online continues to be an important part of what we do.

Okay, thanks.

And then just a question on the Defense & Security business.

It looks like your guidance is implying a pretty healthy ramp in that business in the second half of the year.

And that is the question, Colin.

I mean, your backlog is down; what kind of pipeline visibility do you have to this next traunch of orders that you are anticipating?

The way the orders are playing out this year is that we have a number of relatively significant contracts that are in late stage negotiation.

And we have confidence as to the timing as to when they are going to come through.

But they are not at a point where we would put them as of this call into formal backlog.

And so we will have a couple big chunks to get to our -- a couple big orders to get to our bogie this year rather than a larger number of smaller orders or a singular large order.

So that is sort of how we got to where we are.

But we believe we have good visibility and that the question as far as remaining risk for the year really is only the timing of exactly when we get these contracts in and our ability to execute on them.

But we believe that our guidance reflects a good compromise between risk and aggressiveness.

Okay, thanks very much.

Josephine Millward, Benchmark Company.

Colin, can you expand more on the unusual seasonality?

Why the dramatic split between Q3 and Q4 this year?

And is it due to the timing of the new product launch?

And if you can also talk about visibility you have on the strong Q4 ramp for Home.

There is a couple different factors that go and add up.

One is certainly the new product launch does skew some buying behavior.

I think that we're also seeing sort of a macro trend in retail where some of their inventory -- willingness to hold inventory -- higher inventory levels has been reduced this year and so that that leads to more aggressive replenishment in the fourth quarter.

Which doesn't actually take much to push a significant amount of revenue from that end of September into early October, which causes some of these swings.

And I think that also the other factor is that the success of our Mother's Day promotions, which exceeded our expectation, will demand some additional replenishment ordering in the fourth quarter as well.

So we have a couple different factors which compound to create this shift.

That is helpful, thank you.

In your prepared comments you talked about the Braava doing well.

I think you said about 60% of the sales is coming from overseas.

If I recall, when you acquired this business it was primarily in the US, wasn't it?

That is correct.

And so that it is quite exciting and encouraging for us that we -- one of hypotheses we had when we acquired the product was that this type of cleaning, which mimics using mops and brooms, is quite common in Asian countries.

And so we thought that a robot that could perform cleaning in a way that was traditionally executed in Asian countries would be a successful product.

And that is what we are seeing; as we are able to get the product to APAC countries and build out distribution the response has been very, very strong.

And I think we are still frankly relatively early in our rollout of -- and marketing programs in support of Braava.

So I think that we have some real runway in front of us as we continue to expand that category.

Can you give us a sense of Braava contribution for the year?

Thank you.

No, we don't actually break down contribution at that level.

So, I'm sorry.

All right.

Adam Fleck, Morningstar.

I had a question on China.

Obviously it's been a nice growth story for you guys as expected.

I was hoping you could comment a little more broadly on the competitive dynamic you are seeing though in that country particularly around pricing and share that you are seeing.

Sure, I can give you a little bit of color there.

China is an interesting market for us as it is the only market that we didn't create ourselves.

When we entered there was an existing robot vacuum cleaning business that was present.

We have quite rapidly taken over the premium -- leadership in the premium price point category, which is our business model.

There is a significant lower price robot vacuum cleaning segment which we do not compete in nor do we plan on competing in, that is in existence to a larger degree than it exists in other nations.

So that is an interesting, unique feature of the China market.

But we are very pleased by the growth we are seeing and we are succeeding with our strategy of taking over that higher end premium position.

Thank you.

And then a similar question staying in the APAC region.

I think you mentioned back in February that you didn't see any share losses in Japan, it was mostly the macro factors weighing on the results.

Is that fact still the case?

Are you, and your declines, is that roughly mirroring what you are seeing in the overall robotic vacuum market there?

I think that the challenges that we are experiencing in Japan are not due to loss of share.

Our data supports maintaining that.

There is macro factors, there is an impact of a rise in sort of the other half of what the future duo of home floor care in Japan and that is the handheld -- high-powered handheld vacuum is creating at least a temporal disturbance in the marketplace as people are transitioning to this future of having a cleaning robot and a hand vac as the entirety of their home vacuuming arsenal.

So that those hand vacs are doing very well and I think that is taking a little bit of the overall spend share in Japan as well.

Okay, thank you so much.

Bobby Burleson, Canaccord Genuity.

So just sticking with Japan for a second.

It sounds like part of that very strong emphasis on the Q4 is coming from a rebound that you are expecting in that geography.

Can you give us some kind of qualitative data points or point us to what the signs are that are giving you confidence that that demand generation spend is working and is going to result in a snapback in Q4?

I think that we expect a much better performance in Japan in Q4.

But some of that is due to the improving performance of the robot.

Some of it is actually due to an easier comp.

The economic downturn in Japan started to impact sales in Q4 of last year.

And so that we're actually not predicting huge turnaround in Japan; we are predicting a steady and slow improvement that we saw start in Q3 and will continue into Q4.

Q3 was comping against a Japan that was still in a very strong position and so we get the benefit.

So our confidence in full-year growth in Japan is not due to some Herculean turnaround in the country, more just a -- the physics of (technical difficulty) their last year looked like and a continuation of some gradual return to growth in that country.

Great.

And then just on the remote presence investment you guys have been making.

Is -- where are you, if we had to describe it, in terms of innings, in terms of the investment spending you are making on that platform?

Is the bulk of the development done?

The bulk of the heavy lifting on the spending front done, you're just in harvest mode?

Even though harvest mode, I don't think so far, has resulted in anything dramatic.

I am just wondering whether or not there are ways you can take more cost out of that business or if it is primarily sunk cost at this point?

I think that it is a great question.

As far as the heavy lifting on the technology and product development side, you should be expecting that investment coming down as an absolute number.

We are getting into the -- I think I don't really -- I attribute the term harvest mode as sort of a -- more of an end-of-life comment around a product.

I would say that the revenue ramp mode is -- it would be a better term.

We had, when we first launched that Ava 500, as I described before, we had a number of issues around installation, which slowed things down.

It is a new to the world technology, and so it was less well known and required a lot of trialing.

And the year 2015 was around -- well, continues to be around building these reference accounts.

And it is always somewhat frustrating when, as we go through this process, you need to have everything completed before the customer says okay, now I will be a public reference from you.

And so, we are still at this point where we have to be a little opportunistic about when we can talk about new customers.

So there is more to come on that front, but definitely we are over the hump of investment and on to a strategy of building out the market, getting these reference accounts and scaling.

Great, thank you.

Troy Jensen, Piper Jaffray.

Congrats on the nice quarter.

Thank you, Troy.

You are welcome.

Just a follow-up to Jim's earlier question.

With the launch of the new products here, what is the margin difference between online sales versus sales through distribution?

The -- go ahead.

Troy, they tend to be a little bit higher when they are just on our website.

As the product moves more fully into retail and distribution it levels out a little bit more.

But there is a small bump associated with when products are shipping on our website only.

What is the timeline between when you start to push it through the channel?

That really depends on the specific product introduction.

As Colin said, we have had a general strategy of approximately a quarter, but that can vary product by product.

All right, understood.

And then also, Amazon Prime Day just recently here, there was an article that came out that said you guys -- or Amazon sold 14,000 Roombas on that day.

Just wondering if you could confirm or deny that comment?

We did have a product that sold on Amazon Prime Day; it was one of our lower end Roomba versions.

But we did participate in that day and we sold a lot of units on that specific day.

I don't have the exact number at my fingertips right now.

All right, perfect.

Then the last question and I will cede the floor.

Just on the defense visibility here, I'm curious if you can just let us know which defense contract is driving that and then is the Canadian contract finished?

So the -- we don't talk about exact contracts, but it is a small-single-digit number of contracts that make up the majority of our backlog.

So that it is -- the Canadian contract continues to -- has largely been delivered, at least the phase 1 has, of that contract has wrapped up.

And so, these would be new contracts.

Understood.

Good luck in the second half.

Holden Lewis, Oppenheimer.

Wanted to ask about another cost element.

You look at the Japanese yen, the euro -- those values seem to have stabilized here for a while.

Obviously don't know what the future holds.

But can you just give some sense of where we stand in terms of topping up the marketing of the resellers overseas?

How long you would expect that program to continue?

Just how we should be thinking about the costs around that going forward?

Holden, our plans continue to be the same where we had expenditures planned for multiple quarters within the year.

We are assessing the situation as we go through the year and will decide how much to continue to deploy against those plans as we progress through the year.

Certainly the currency stabilizations we see as a positive.

But in terms of when and how that translates into sell-through changes and then sell-in changes for us, we are still seeing that through.

So we spent some of those investments in the first half of the year, we have others planned for the second half and we will continue to monitor the situation and decide how deploy those funds as we see those situations evolve.

Okay.

And longer-term as we think about next year, we do anticipate a ramp down and return to lower levels of support, which will help us drive our OpEx back toward our target levels.

But for this year I think the plan is the plan.

Are you able to give any sense of kind of what impact that incremental spend is having so we can get a sense of what that might mean to 2016 if all things stay equal?

No, at this point we are not going to comment on 2016.

When we announced these investments coming into our plan for this year it had about a 2 percentage point impact on our OpEx for the year, at least in terms of how we expected this all to play out.

But I won't really comment at this point about what impact it might have on 2016.

Okay, but this year it is still sort of thinking about 200 basis points impact on OpEx?

Yes, for the full year that is what we have included in our expectations.

Okay, thank you.

And then just a question on average selling prices.

I mean I guess especially where the Defense & Security is concerned, you had a nice step up and gross margin in that business, you also had a big step up in the ASP.

I assume those are related.

Can you comment on -- given the visibility of new orders coming on, kind of what the ASP would do and what that might imply for the gross margin in that unit?

A couple of things are impacting that.

So certainly as revenue scales in that business unit you would see an improvement to gross margin just from the coverage of fixed costs in that business.

The ASP on a quarter-to-quarter basis can vary dramatically dependent upon the mix.

In Q2 there was a lot of PackBot sales associated with this Canadian contract which is what drove that ASP up.

And depending on the mix, particularly the mix between say PackBot and FirstLook's as we see the year unfold could modify that ASP on a quarter-by-quarter basis.

But certainly as you see significant revenue quarters you should have a general expectation of better gross margin performance in that business unit.

And then as we see the mix play out primarily between PackBot and FirstLook that could have an impact on ASPs.

And in any given quarter the mix of spare service and support, or PLR, can also have an impact on gross margin.

Okay, and lastly and I will jump back in.

You don't have the same I think volatility between -- or the same sort of direct relationship between gross margin and volumes on the Home Robot side.

Is that just how you are going to -- how you are going about manufacturing in those two different businesses, why you get that leverage difference?

That business is just on such a completely different scale right now than the D&S business and there is many, many more factors that go into the actual gross margin profile in that business.

It is very difficult to compare it to the same factors that are driving Defense.

Okay.

But you just contract manufacturers for Home Robots, do the same for D&S?

We do.

All of our contract manufacturing is outsourced.

Great, thank you.

Meghna Ladha, Susquehanna.

(Multiple speakers) Middle East/Africa revenue declined 5%.

How much of this was related to the weakness in Russia?

And were there any other markets that contributed to the weakness?

So the -- primarily the weakness -- primarily the decline is attributable to Russia.

I think we feel like EMEA is increasingly healthy and has a bright future.

But the 45% devaluation of the ruble and the challenges of the Russian economy has had a dramatic impact in their ability to continue to move product.

And that has -- very unfortunate.

Russia was a strong, emerging high-growth contributor and has sort of hit a wall currently.

And so, we hope that things will turn around in the future, but we have very limited expectations in the near-term that this is going to be a viable market for us.

It sounds like this region will still be weak in the second half as well?

That would be a -- well, Russia will be -- continue to be weak in the second half and that will continue to have a chilling effect on the overall EMEA region.

However, we are predicting that the region on a full-year basis will be up.

And so that would imply somewhat neutral to down in Q3 and strong growth in Q4.

Got it.

And then with respect to Ava 500, what steps have you taken to improve the scalability, shorten the sales cycle and simplify the implementation of this product?

This is -- continuous improvement of our software and specifically as it relates to mapping and network.

So the -- one of our early challenges was the wide variety of different networks at the enterprise level that we needed to connect into and what was required -- the concept of a standard enterprise network is certainly not a particularly useful or true statement.

So that the flexibility of our networking software has radically improved.

And also, we found our users want to do a lot of the installation themselves or have flexibility in making changes to that.

And so that demanded a re-architecting of how we install.

Got it.

And then a quick question on OpEx.

So that came in slightly lower at 40% was to the guidance of low 40% range.

Is that all a result of lower investment spend or is it that additional investments were [deployed] into 3Q?

It is mostly driven by timing.

We did reassess the plans and what we were planning to spend in Q2 and moved some of that spend to later in the year.

Our overall OpEx for the year, as I said, we still expect to be in the same range of 37%.

So it was really more of a timing change than anything else.

Thank you.

Ben Rose, Battle Road Research.

Just I guess a couple of questions regarding Western Europe in particular.

Could you talk a little bit about the performance there in terms of some of the more established markets that you have been selling to such as Spain, and I guess UK and Germany?

Well, as -- at the beginning of the year we were hit hard by foreign currency exchange issues and saw -- that had a material impact on our sell-through.

And also had an impact on our distributor's ability to market.

We responded aggressively with programs to improve the margins, inherent margins of our products, did some pricing adjustments to allow distributors to regain some margin and made investments outside of our distributors in demand generation to get back onto the right track.

And we are very happy to see that those efforts have borne fruit and I think we have stabilized Western Europe and put it back onto a growth trajectory.

So again, if you caveat the sort of bridge abutment that Russia (technical difficulty) Western Europe is in a healthier -- a much healthier state right now.

And sufficiently so that despite the drag that Russia will put on the EMEA region, we think we will see growth in EMEA on a full-year basis.

And so, the vector is strongly in the right position -- direction.

And I think earlier in the call I talked about fourth quarter is when we start anniversarying region performance impacted by macros and foreign currency exchange.

And so, again, that will help our fourth quarter be strongly up.

Okay, thanks.

And another question -- I realize this particular product, the lawn mowing robot, is further out in terms of the outlook.

But just curious to know from your perspective if there has been any incremental news in terms of the FCC review or your own expectation for that product?

We really haven't heard anything from the FCC yet, nor did we expect to hear at this time.

We think that we will hear in the next few months.

We believe that our submission was very complete and we believe that the FCC is diligently working against the understanding and valuation of our request.

So it is one of these things that I know nothing to believe that this initiative is on any track other than the healthy normal course of evaluation track that we expected.

So we remain optimistic and we know that the FCC is very capable in looking at the facts surrounding our request and we hope that we will end up with a positive outcome.

Okay.

And then one final question, if I may, just on the D&S business.

Exclusive of your expectation for perhaps this quarter and even the fourth quarter, looking at the potential for US DOD spending beyond spare parts and maintenance and sell [on] just looking out over a 12- to 18-month type of horizon.

Are you seeing any bounce back or incremental interest on the part of DOD for your D&S robots?

We do see some positive trends in the marketplace.

I think that most importantly there are a few programs of record for small robots that we're quite interested in which are hundreds of millions of dollars in scale.

And whether or not they become material in 12 months, well they wouldn't, but out beyond 12 months we could see them driving some significant growth if we are able to, as we are working to, position ourselves to competitively respond and win those contracts.

So that is the biggest news that, if you are willing to go and be a bit patient, we see a bright future.

In the interim we do see just a general lightening of the mood, a general uptick in interest in robotic systems that makes us feel like the path to get to that future inflection point has some brightness to it.

Okay.

So, suffice it to say that rumors of the death of your Defense & Security business have been greatly exaggerated?

I don't think there was ever a death.

The question was it did need to shrink, it did need to get right sized so that it was a burden on the Company commensurate with the opportunity.

So we took that quite seriously and made it so that the carrying of the Defense business could be handled appropriately and basically give us the patience required to go wait for the next uptick.

We have continued to put sufficient investments into the business such that the technology and the capabilities of our products continue to lead the market.

And I think that we have perhaps been able to take advantage of the downturn to solidify our leadership position.

Okay, thanks very much.

Jim Ricchiuti, Needham & Company.

I was wondering, as more of your traditional US retail customers emphasize omni-channel strategies, I am wondering if you have been able to notice any change in their buying patterns and their approach to this category.

And just in general, is this impacting your go-to-market strategy within this channel?

That's a great question.

I think it is a little early that -- I think that we have shifted some of our media spend away from what traditionally has been a very broadcast media heavy focus to our current strategy, which is far more balanced between broadcast and digital.

And I would expect as we roll the clock forward we might see the balance of power completely shift to a -- the minority of spending on broadcast and the majority on online.

So I think perhaps that is the most dramatic impact we have seen thus far.

I think that we are -- for a number of years have been having to optimize our strategy which sort of assumes aggressive online dimensions to most of our retailers.

And where you see that most is there is -- everyone knows everyone's prices the instant a change is made and we need to react and respond quickly to those types of situations.

So that is certainly a dimension that is not new, but probably becoming just standard practice at this point.

But the shift in marketing spend is definitely underway.

Colin, do you have insight into your major US retail customers?

Is more of the product going through these omni-channels as opposed to the traditional brick-and-mortar?

There is a modest shift -- I mean I think Amazon is doing great and they continue to grow.

The success of the online arms of the other retailers I would say is mixed.

Okay, thanks a lot.

Congrats on the quarter, by the way.

Thank you.

Josephine Millward, Benchmark Company.

I was going to ask you about your thoughts actually on the timing and size of the two upcoming US DOD programs.

So I believe on the common robotic system the Army has an acquisition objective of over 5,000 units.

Yes.

When do you think we can see an RFP?

This is next year's stuff.

So we are anticipating responding -- receiving and responding to the RFPs next year.

We are not anticipating material dollars flowing next year.

We do believe that material dollars could flow in 2017.

But you know how these things go.

The stuff can get pushed right, but the current best thinking would have that type of time frame affiliated with it.

It sounds like this program is a redo of the [SUGV].

How does it differ from the MTR -- next generation MTRS?

There is a significant emphasis on even lighter weight vehicles and a significant emphasis on integration between different types of autonomous systems, both land and air.

And so that the -- the system of systems concept that was at the core of FCS and was a solid idea is reborn, but on a more manageable micro scale as they speak to operational integration between multiple assets.

Thank you.

Okay, that concludes our second-quarter 2015 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, you may now disconnect.