iRobot Corp (IRBT) 2015 Q3 法說會逐字稿

Welcome to the third quarter 2015 earnings call.

My name is Hilda, and I will be your operator for today.

(Operator Instructions) Please note that this conference is being recorded.

I would now like to turn the call over to Ms. Elise Caffrey.

Ms. Caffrey, you may begin.

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 expense, 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 third quarter 2015 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 2015 as well as our outlook on the business for the remainder of 2015.

Alison Dean, Chief Financial Officer, will review our financial results for the third quarter of 2015, and Colin and Alison will also provide our financial expectations for the fourth quarter ending January 2, 2016 and fiscal 2015.

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.

Last evening we reported revenue in line with and earnings exceeding our expectations for the third quarter.

During Q3, we successfully launched our first connected Roomba, the 980, on our website and have subsequently begun shipping it into US retail and overseas markets.

We received and fulfilled multiple defense and security orders and announced two significant new IDIQ contracts, and we sold six Ava 500 robots and 13 RP-VITA robots.

Q3 revenue met our expectations, due to continued strong growth in the United States and China, partially offset by softness in Japan.

Third quarter earnings exceeded expectations, primarily because we decided to curtail the planned incremental Japan marketing investment, as the overall economic climate in the region was dampening its impact.

Although we expected continued strong growth in US and China, we are revising our full year revenue expectations to $610 million to $615 million, due to a slower than expected recovery in Japan and our continued caution in a few other international markets.

We are increasing our full year expectations for EPS and adjusted EBITDA, as we have reduced our spending plans for Q4 in order to offset the lower revenue.

We will also be recording a gain on investment of $0.06 per share, or $3 million in pre-tax income, from the sale of an investment we made several years ago, that was not previously contemplated in our expectations.

We now expect full year earnings per share of $1.35 to $1.40, and adjusted EBITDA of $89 million to $91 million.

These expectations continue to reflect our confidence that domestic home robot revenue will grow in the high teens for the full year; China, more than 70%; and that most European markets will also show significant growth.

While we are experiencing weakness in a few isolated international markets, we expect the macro effect to be temporary.

Global spending in robot vacuum cleaners continue to grow, and we are maintaining our leadership position in the market, despite several recent entrants in the category.

We remain optimistic about the industry and our growth prospects in the coming years.

Isolated challenges in Russia and Japan are the 2015 weak spots in an otherwise very healthy and growing global business.

Now I will take you through some other highlights of the third quarter and our outlook for the rest of 2015.

On September 16, we launched the Roomba 980, our first connected home robot with navigating and mapping capabilities.

The reaction we have received has been tremendous, exceeding our expectations.

The Roomba 980 is the first iRobot product to incorporate the VSLAM technology we acquired as part of the acquisition of Evolution Robotics.

The flagship Roomba is our first step into the Internet of Things, enabling new functionality today, such as remote app-control and systematic navigation, as well as paving the way for new products and new capabilities in the future.

We are also collecting insightful usage data from the product, which can inform future investment.

We look forward to discussing our strategy to take advantage of these advances in other forums in coming months.

The 980 was available exclusively on our website in mid-September, and it is now in select retail locations in the US and in Japan, and in early November it will be on the shelves in several European markets.

Our distribution plan for this product is consistent with our new product launch strategy, and we will roll it out globally over the next 12 months.

Strong third quarter sales in the US, fueled in part by the introduction of the Roomba 980 are expected to continue throughout the fourth quarter.

Domestic revenue growth of 23% in Q3 year-over-year demonstrates that we know how to profitably drive revenue through sales and marketing investment in the United States market.

Full year 2015 domestic growth is expected to be in the high teens over last year.

EMEA revenue was flat year-over-year in Q3 and based on our current outlook, is expected to grow in the low single digits for the full year.

We are continuing to see growth in most of the Western European markets, where we have been established for the past six years.

The worsening situation in Russia over the past year has driven a precipitous revenue decline in a previously fast growing market for Roomba.

Revenue in APAC was down 20% in the third quarter due to lower year-over-year sales in Japan, but is expected to grow substantially in the fourth quarter, driven by China, and to a lesser extent, Japan.

In China, there are two major cyber holidays in Q4, plus distributor and retail purchasing in advance of Chinese New Year in early February, which we expect to drive fourth quarter growth of more than 100% over 2014.

While the outlook for China continues to be very strong, APAC is only expected to grow in the low single digits for the full year, due to the dampening effect of Japan's contraction.

Turning now to our defense and security business, third quarter results slightly exceeded our expectations due to early delivery of orders we expected to fill in Q4.

75% of D&S Q3 revenue was recognized for orders received and fulfilled within the quarter.

In addition, we finished the third quarter with $28 million in backlog, and since then it has increased to $36 million.

These orders are for SUGV, PackBot, and FirstLook systems and upgrades, as well as spares across all product lines.

The majority of these orders are scheduled for Q4 delivery, giving us improved visibility into the fourth quarter.

During the quarter, we announced two IDIQ contracts with a potential value of $96 million from the US Navy.

These contracts demonstrate the DoD's ongoing interest in keeping its fleet of iRobot unmanned ground vehicles equipped, with the latest in robot technologies.

Moving to our remote presence business, Cisco continues to develop its commitment to our partnership with a recent purchase of four Ava 500 robots and a purchase order for an additional seven.

Their plans are to deploy them in multiple locations to connect their executives around the globe.

We continue to make progress on building referenceable accounts, as well as development of a next generation platform.

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 that met our expectations, and earnings per share and adjusted EBITDA that exceeded our expectations.

Revenue of $144 million was flat from Q3 last year as expected, due to lower year-over-year defense and security revenue.

EPS was $0.42 for the quarter, compared with $0.48 in Q3 last year.

Q3 adjusted EBITDA was $26 million, or 18% of revenue, compared with $30 million, or 21% of revenue, last year.

Our profitability in the third quarter was better than expected, primarily due to our decision to curtail sales and marketing spending in Japan, as well as gross margin favorability driven by lower EMEA warranty expense and product mix in home robots.

Domestic home robot revenue grew 23% for the quarter, as retailers began stocking their shelves for the holidays, and we continue to expect high-teen revenue growth in domestic markets for the full year.

Q3 international revenue decreased 7% from last year, a little more than we expected, due to the weakness in Japan and Russia.

The overseas outlook has deteriorated since our last call, and we now expect total international growth in the low-single-digits over last year, despite strong growth rates in China and most European countries.

Defense and security revenue of $6 million in Q3 was down from $11 million last year, but slightly ahead of our quarterly expectations.

We received and fulfilled several orders earlier than anticipated, and currently have $36 million of backlog to support the significant ramp to $30 million in Q4.

We expect $55 million in revenue for the year, a 20% growth over 2014 and to exit the year well-positioned for 2016.

For the total company, gross margin of 49% for the third quarter 2015 was up 130 basis points from the same quarter last year, due to higher home robot gross margin, driven by favorable warranty and product mix.

In the fourth quarter, we expect gross margin to decline slightly due to customer mix and product mix.

Q3 operating expenses were 36% of revenue, compared with 32% in Q3 last year.

The increase year-on-year primarily reflects costs associated with the launch of the new Roomba 980.

The Q3 operating expense was lower than we originally planned though, as we reduced our scheduled incremental Japan marketing spend.

We ended the quarter with $212 million in cash and investments, compared with $187 million at the end of Q3 last year.

During the quarter, we purchased $20 million of our stock under our current repurchase plan, bringing our year-to-date total through the third quarter to $25 million.

The year-to-date total includes shares purchased in Q1 under our previous plan, as well as the shares purchased in Q3.

All purchased shares have been retired.

We ended Q3 with $59 million in inventory, or 73 days, as we built inventory to support the Roomba 980 launch and our overall fourth quarter ramp.

This compares to $54 million, or 65 days, last year and we expect inventories will return to more normal levels by the end of the year.

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

We anticipate fourth quarter revenue of $200 million to $205 million, down from our previous expectations, but still a record quarter, growing 26% to 29% over Q4 last year.

Due to our actions to reduce some non-revenue-generating spend, combined with a $3 million pre-tax or $0.06 per share gain on an investment we will record in October from the sale of a company, in which we invested several years ago, we are increasing Q4 EPS to $0.53 to $0.58, and adjusted EBITDA to between $32 million and $34 million.

For the full year, we expect revenue to be between $610 million and $615 million, EPS of $1.35 to $1.40, and adjusted EBITDA of $89 million to $91 million, 14% of revenue and a 12% increase year-on-year.

I will now turn the call back to Colin.

Thank you.

Home robot revenue continues to be strong in the United States and China, and many European countries.

While we are experiencing weakness in a few isolated international markets, we expect the macro impact to be temporary, and remain very optimistic about the industry and our growth prospects in coming years.

As we look to 2016, I am highly confident that our revenue growth will accelerate over our 2015 results.

We will be rolling out our new 980 robot globally, extending our successful US sales and marketing strategy to select oversea markets, and investing to better position and grow our home robot wet floor care products.

With that, we will take your questions.

Thank you.

(Operator Instructions).

Our first question comes from Bobby Burleson from Canaccord Genuity.

Please go ahead.

Yes, good morning.

Thanks for taking my question.

So I guess, D&S is showing some nice -- you have a nice backlog position going into Q4, and I am wondering; you talk about revenue accelerating in 2016.

Can you give us a little color on what your thoughts are on D&S in terms of maybe growth next year, any additional headwinds like we saw in 2014?

What are your thoughts there?

Sure.

My comments around looking forward to 2016, the mission was to provide some color.

But we are not, at this time, going to go into details by business unit.

I did mention the three main drivers for my confidence in accelerating growth next year.

They were around extending our US sales and marketing strategy relative to home, rolling out the 980 globally, and then putting more energy and investing to grow our home robot wet floor care products.

So those are the three growth drivers we are talking about at this time, but I am not going to provide additional color.

Okay.

All right?

And then -- yes, that's fine.

Thank you.

Just one more quick one, in terms of the macro environment, there are obviously some headwinds in Japan and Russia, and I am wondering: are there any other macro headwinds?

And then your confidence that these are temporary: How temporary are you thinking?

Are you looking at another couple of quarters, or -- what are your thoughts on the temporary nature of the headwinds?

Thanks.

Sure.

So Russia obviously is a special case and predicting the recovery of that market, I leave to those more qualified than myself.

But we do think that there is recovery in the future for Russia, although that will probably take more than a year.

The remaining macro headwinds, you can look at the foreign currency exchange and prognosticators as to when the recovery of the euro and the Japanese yen will be, or at least, stabilization that will foreshadow a recovery.

Also is giving time for iRobot to continue to roll through strategies for those regions, which will allow us to perform better under the current economic regime.

So -- and again, it's really, this year has been a tale of two cities, where a certain regions, the US and China in particular, have been doing fantastic.

There have been some very healthy countries in Western Europe that have been performing very well, and so that the overall landscape is anything but concerning.

It is more isolated to a few different regions, Japan and Russia being the worst two.

So I think that as we look at, we are a global company, we are in many regions, as we look forward to 2016, you don't need too much extraordinary progress in the global economy to get behind the fact that we think we can accelerate growth next year.

Great.

Thank you.

You bet.

We have a question from Jim Ricchiuti from Needham & Company.

Thanks.

Good morning.

Good morning.

Colin, just given the directional guidance that you are giving by region, I mean, it looks like -- you are suggesting that the international home robot business is still going to show pretty healthy growth in Q4, and I guess the pattern, I think in the last three years has been for the international robot business to be down sequentially.

So I am wondering, just in light of the macro concerns that you're expressing in Japan, what gives you the confidence that the international business is going to be up sequentially and year-over-year in Q4?

I mean, I think you have touched on a little bit of it, but it's still a different pattern than we have seen, than in previous years.

Sure.

Couple of things, year-over-year, internationally, we were starting to see some of the impact of the macroeconomic slowdown in Q4 of last year.

And so year-over-year, it's a little more economically apples-to-apples.

Additionally, we have the launch of the Roomba 980, which is a very healthy shot in the arm, that gives us additional confidence.

So those are the two main factors.

And again, the way we do business, many of the orders for our international markets have already been received and shipped, so that we have excellent visibility, particularly internationally in Q4.

Okay.

That's helpful.

Alison, just a quick question if I may, just the impact of the EMEA warranty expense on overall gross margins in the quarter.

We had a significant bottom line improvement, the majority of that in Q3 came from the OpEx, the remainder coming from the EMEA warranty expansion, primarily.

We had some other factors impacting gross margin, but in order of magnitude, it was the OpEx that contributed to the bottom line improvement, followed by the EMEA warranty.

Okay, okay.

Thanks a lot.

Congratulations on the quarter by the way.

Thank you.

We have a question from Josephine Millward from The Benchmark Company.

Thank you.

Good morning Colin, Alison.

Good morning.

Good morning.

Can you give us a sense of how much Japan is down year-to-date, given this is your largest market after the US?

And it sounds like you think we might see some kind of recovery sometime next year?

Yes.

Japan is down in high double digits year-to-date for us.

It has been down every quarter so far during the year.

We do expect Q4 to be up, but net-net for the year, it's definitely down in sort of low double digits for the year.

What about timing on recovery?

As Colin said earlier, that's very difficult for us to predict.

Certainly with adding the Roomba 980 into the mix, we hope that will be a stimulating factor in the region, but the overall recovery is very hard to predict at this time.

I think that -- Josephine, I mentioned that we will be rolling out these marketing strategies, which are working so well for us in North America, internationally.

Certainly, Japan is one of the areas where we think we can bring these new marketing programs next year, with the confidence of performance and tweaking that we are getting in the fourth quarter.

So there is a couple of different dimensions that sum up to the expression of confidence that we think we can do -- turn things around next year in Japan.

That's helpful.

Can you talk about Russia?

Can you give us a sense of the size of the market and I think we have all been surprised by how -- and give us a sense of how -- what kind of growth you are seeing in these key Western European markets?

Trying to figure out the impact that Russia is having on EMEA, going forward.

Sure.

I can give you some amount of color on that.

Although we don't break down sales generally by nation, let me give you a little color on Russia, because I think that it wasn't commonly understood that Russia was one of our fastest growing and top five regions in EMEA, and so having that region largely disappear from the revenue contribution list was significantly material for us, and so that -- again, I understand that that's only color, but having a top five nation basically hit a wall and disappear is very material, when you start averaging all the countries together.

So the net result is, Western Europe is quite healthy, with a significant drag coming from Russia.

Okay.

Last question, can you give us an update on remote presence and whether we can expect greater contribution from this segment in 2016?

Yes.

The comments in the call were meant to convey continuing acceleration and deepening of the partnership with Cisco, which is the key relationship, if there is to be near term acceleration.

So their continued investment in the technology, I think is very important.

So I think that the -- this is an emerging market, and as always, difficult to predict what the ramp might look like.

But certainly, we have a great partner with them, in charting these waters.

So that things are still moving well, and sort of putting one's pocketbook on the table and investing in the category, as these new purchase orders represent, suggests continued strength in that partnership.

And really that's what I was trying to convey.

Thank you.

We have a question from Alex Gauna from JMP Securities.

Thanks for taking my question.

Good morning everybody.

Good morning.

Good morning.

Colin, you expressed a lot of optimism around what's happening for the 980.

Can you give us a little bit of color by what metrics you are saying it exceeded expectations, and maybe how it compares or contrasts versus some previous refreshes that you have had?

It's still early to get a read at retail.

Online sales over the first few weeks exceeded previous launches certainly on a dollar basis, and we view that as very telling.

Certainly this is our highest price point vacuuming robot we have ever launched, and so there was some risk that this would be a bridge too far.

And I think that the response we are seeing is encouraging on that front.

Certainly, the retail experience, as we see that, will be additional data points.

And the performance of the robot has been outstanding.

It is a huge amount of technology that we just put on the marketplace, so that the fact that we are getting very high ratings on Amazon suggests that the tremendous amount of work we went into, ensuring that connecting the app and the ease of use of the app and the navigation technology's ability to function in real world environments, is all proving out in a very positive fashion.

So there was certainly risk on multiple dimensions as iRobot -- we put out a robot with 100 times more software in it than any of our prior robots and connectivity and navigation.

None of these things are trivial to get right and we couldn't be happier with the customers' response and the market's response.

And so it gives you a little color, and we are very optimistic as this robot continues to broaden its distribution in the fourth quarter and into next year.

Okay, thank you.

Then I am wondering with regard to Japan.

While I would applaud your rapid response to that market in adjusting your investments in marketing there accordingly, how long can you afford to stay a little bit more muted there in how you are pushing your products?

And what are the metrics by which you might re-ramp?

And then lastly on that, do you think you're ceding any market share, as you temper your investments in that area?

So we are certainly not, by any means, walking away from the Japanese market.

The vacuuming market through the end of Q3 in Japan was down 18% year-over-year, and so that there's, there was an overall impact in Japan on the vacuuming industry, and certainly that impacted us.

And in this year, without our optimized marketing programs -- that again, we are developing very successfully and testing very successfully in the United States -- translated and brought to Japan, we just didn't see the expected return on the investment.

We certainly plan on getting -- going back, putting more energy next year against Japan.

In addition to the Roomba, we are also -- sort of the bright spot in Japan in 2015 was the adoption of the Braava and the hard floor, wet floor cleaning category, and as I mentioned in the call, we are going to be putting more energy against that, and Japan and China are markets that are already showing a significant appetite for that type of device as well.

So we have got, I think, very rich and robust plans to come back in force next year and turn this thing around, but as we looked at Q3/Q4 2015, we didn't have the confidence, and so that we did react to preserve some cash and put ourselves in a situation where we are able to raise the earnings guidance on this call.

Great.

Thank you.

You bet.

We have a question from Austin Bohlig from Piper Jaffray.

Hi.

Thank you for taking my question on behalf of Troy Jensen.

And this one is first for Colin.

Colin, first congrats on the launch of the 980.

It sounds like that's being perceived very well.

And in the past, you have talked about the VSLAM technology, using a camera versus sensors, and from a financial perspective, we thought the cameras are less expensive.

Is that true, and do you see as the 980 ramps, you could see some gross margin expansion?

I think that adding technology to the robot certainly adds costs and we have a very, very high bar, as far as the quality of the information we wanted out of this new navigation system.

And so that we -- the price of the 980 is increased, because of these new features and these new capabilities.

I think that, over time, is there an opportunity for the costs on this system to come down, absolutely.

Do we -- and we are also very excited that we are able to bring this technology to the marketplace at the attractive price that we accomplished with the 980, staying well below the $1,000 mark, without sacrificing capabilities.

And so, the 980 is just -- it's the biggest thing we have done since the launch of the original Roomba.

This is the capability which unlocks all manners of possibilities as we move forward, as well as making the 980 just a leap forward in performance in robot vacuuming.

There is so -- I could go wax about how excited I am about the 980 for quite a long time.

But we chose and spent probably an additional five years, perfecting this technology, rather than going to a laser-based navigating technology, for example, which we thought could have been a nice Band-Aid or a nice lower-tech entree into navigating, but wouldn't get us long term where we wanted to go.

So we held out.

Now we have got it in our marketplace.

The marketplace is reacting well, and this is big news.

All right, great.

Thank you.

That's very helpful.

And then just one last follow-up -- talking to people in the industry, it sounds like or we have heard that your guys's product has been able to even take a little bit of share due to performance, or better performance capabilities.

Do you guys see that?

Because in your prepared remarks, you saw or you said there was some new entrants that entered the market.

Who are you alluding to there also?

So there -- as the vacuuming market continues to grow, there are new entrants, but they have not impacted our share, and so that -- I think that that's the key message: that we have been able to successfully raise our performance bar swiftly enough that, we feel like we are increasing our performance lead over the competition, and the market share figures support that confidence and the performance of our products.

All right.

Thank you.

Good luck heading into the fourth quarter.

Thank you.

We have a question from Adam Fleck from Morningstar.

Hi.

Good morning.

Thanks for taking my questions.

Good morning Adam.

Question on China first, it obviously remains a very high growth market for you guys.

Well we have seen some macro pressure that's impacted many other consumer firms in the region.

I was just curious, if you could talk about how you are bucking that trend for the slowing economy that we are seeing there, and maybe what you are hearing from partners in the geography as well.

Sure.

I mean, there is no doubt that Japan's economy is having some impact, but it's quite similar --

China.

I am sorry, China's impact; the economy in China is having an impact on our growth rate.

But it's similar to a phenomenon that we saw in EMEA a few years ago, when that economy was weak, and yet we were seeing continued strong growth.

We are early enough in the adoption of Roomba in the market that the excitement of what this new product brings to consumer outweighs the negative impact from the macros.

So if China's economy was still white hot, we might see even enhanced performance.

But given our position in the market, given the newness of this category in the marketplace, we continue to see very strong performance and are bullish as to our expectations.

That's helpful.

Thank you.

And then sticking in the international markets, obviously, the growth in most of the Western European markets, I think is encouraging.

How much of that would you attribute to your prior support this year for your distributors' marketing efforts?

Have you seen an acceptable ROI in the investment there?

I think the short answer is yes.

There is uneven performance, depending on which country we are talking about, but as a whole, Western Europe has done very well.

And I think that the combination of the additional marketing support we put into the region, the swift reaction from our distributors in the region, have allowed us to weather the storm reasonably well.

So yes, we are pleased that the dollars we spent were in fact spent and are pleased with the impact that that spending had on the demand.

Great.

Thank you very much.

You bet.

We have a question from Holden Lewis from Oppenheimer.

Good morning.

Thank you.

Two things, first the weakness in Japan -- it has not been a strong market as you indicated for most of the year.

Does this represent kind of an incremental step-down in that market, that represents perhaps maybe a tough comp and negative numbers next year, or is it just that you didn't get the upside that you expected, and instead of getting the improvement, you basically got the same that you have been seeing all along?

There was orders that we are expecting to receive in September -- I'm sorry, in October that we didn't get.

I'm sorry, no it was September was the timing.

And so, we were expecting a bit of a bounce back towards the end of the year that didn't happen, and that was a significant part of taking down our revenue guidance, as we previously discussed.

I think that we saw a little bit more of the same playing out in Japan, and we didn't get the bump that we were hoping to.

That's also tied into our pulling back on the dollars invested, when we didn't have the confidence that the investing of dollars would materialize into those increased sales, that those lack of orders and the lack of investment sort of were tied to one another.

Got it.

Okay.

And then the second question is, as it relates to the Roomba 980, obviously, in APAC, where you have sort of rolled this out to retail I think already, Japan tends to historically spend a lot of money, or be willing to pay higher price points for their machines, whereas China, I think, does more on the lower end.

Is this dynamic that you're seeing geographically, with a strong China and a weak Japan, does that have any implications to sort of the regional roll-out of the Roomba 980 and what you might expect out of it?

I mean, I think that your characterization of the spending habits in the markets are correct.

I think the -- although they're -- maybe I should qualify it -- are currently correct.

We are seeing that spending habits in China also include healthy growth in the premium segment, in the robot vacuuming market.

I don't know for how many years, your characterization will be correct, but you are directionally on target.

Japan has been a very strong market for our higher-end devices, and so that lower growth in Japan in 2016 and beyond would have some impact in 980 pickup.

But remember, these are just two countries out of our global distribution plan, and so that -- it all averages together, and certainly we are seeing very strong performance of premium products in many other markets.

But I think that, certainly, what you are saying is accurate.

Just to add, in terms of choosing which countries to roll the 980 out to, that is why after the US, Japan was the next market that we chose to put the 980 into, because of the propensity to purchase at the higher end of our spectrum, as you mentioned.

Right.

Okay.

And then just last thing is, you commented on non-revenue-generating spend, kind of pulling back on non-revenue-generating spend, but also pulling back on sort of Japan spending, which I would have thought was revenue-generating spend.

So I was just a bit confused, I guess by those messages.

Am I hearing two different things?

No.

The spend for Japan was not expected to have the return, from a revenue perspective, that we set for that type of investment, which is why we pulled it back.

It wasn't generating the revenue demand we wanted, and then we cut back on other non-revenue-generating spend in conjunction with it.

Again, in Japan specifically, got it.

In Japan.

Yes.

All right.

Thank you.

We have a question from Meghna Ladha from Susquehanna.

Hi.

Thanks for taking my questions.

How should we think about growth in the fourth quarter and into 2016, as it relates to pricing versus the number of units sold?

With the 980 coming into the mix at the price point that it's at, we do expect some lift from that, but we also have significant incremental volume coming out in the fourth quarter versus Q3.

So that will definitely be a driver.

As Colin mentioned, we are not going to get into detailed expectation-setting for 2016, we are going to see how things play out in the fourth quarter, in terms of mix of the different products of pricing versus units, and we will incorporate that into the guidance when we give it.

Okay.

And then, are you seeing a pickup in demand from your wet floor products, since you have committed to investing in building awareness of that product category?

The commitment that I made on the call is a 2016 commitment, and so that there is an anticipation that we will be able to drive deeper penetration, and then have that be one of our 2016 growth drivers.

I also mentioned that, in Asia, we are seeing a very good response, even prior to that increase in investment and awareness on our hard-floor robots.

So I think that we have got reason for optimism, and we are going to back it up with marketing dollars and thought leadership in that area next year.

Got it.

And then with respect to the launch of the 980, should we expect any cannibalization with either the 880 or the older series and is that all reflected in your current guidance?

It is reflected in the current guidance, whenever we add a new generation of robots, it certainly has some impact on our prior generations.

Probably the model under most pressure currently is the 700 model.

The 600 model continues, is relatively recent and represents a strong contributor to our revenue.

The 800 is still going strong at its price point, and so that every launch does reshuffle the deck slightly.

Got it.

And just a quick question on the tax rate, is there any update on fiscal 2015 tax rate?

There is not.

There has been no rumor of investment tax credits coming, so we have not assumed that in our guidance.

Got it.

Thank you very much.

We have a question from Ben Rose from Battle Road Research.

Good morning.

Good morning.

Excuse me, just a couple of questions, I guess on the 980 rollout.

You have alluded, Colin, to the ability with this robot to gather some customer usage data, presumably that could be fed back into R&D and so forth.

Could you talk a little bit about what kinds of usage patterns you're seeing, and any light that it might be shedding on customer use?

Sure.

We actually feed back to our customers the ability to monitor when the robot came out and how much area that it covered.

Those are things that we also can collect and understand.

So just plain usage data and run time data are two of the earliest things.

Also if you call our customer service line with an issue on the robot, the robot will be able to give us some information as to its own state.

And so, those are all very, very helpful in order to improve customer confidence and customer experience.

We have an app, we have a platform, and we have an exciting roadmap of new features that will make the robot easier to use and more effective that we will be rolling out in time.

So this is just step one of many.

The key things we wanted to get right out of the box was to ensure that customers were having a very easy time connecting the product to the net.

The fact that the experience with the app was highly favorable and not intimidating.

One of our trademarks is the ease of use of our robots, and we wanted to ensure that, as we went into the connected product space, that we weren't and also ran -- or that the connectivity was not just a gadgety gimmick, but that we could provide easy-to-use true functionality to our customers, and we feel like we were off to a great start on that.

But this is the first few steps in a marathon of features and capabilities that being connected to the cloud and having the app and navigating technology will deliver to our users.

And so we are very excited about not tripping off the starting line, and in fact, really delivering tangible, usable benefit to our customers, and obviously can't talk about what's coming next, but certainly, there is a lot in the pipeline.

Okay.

It kind of relates to my second question, which is, in terms of growth drivers for 2016, the two of the three seem pretty self-explanatory, the rollout of the 980 globally and the focus on the wet floor category.

But the first part, the first growth driver that you mentioned in terms of home strategy, I was hoping you could elaborate a little bit on that, how much of that is related to the existing product line or perhaps a second step into IoT?

So we have three growth drivers, 980, wet floor care, which are self-explanatory, and then this idea of extending our sales and marketing strategy overseas.

This relates back primarily to Roomba, and we have been -- as Roomba has gone mainstream, we get more and more data about our customers.

We learn more about how to talk to our customers.

And we found that there is some positioning and there are some customers that we have been -- that our current messaging has done a less effective job at reaching, and in the fourth quarter, our ads and our ad purchasing strategy has been modified, and is showing very exciting results.

It's one of the reasons why North America growth has been so stellar this year.

And so taking that strategy and rolling it out internationally is the reason for that second bullet in my list of three drivers for next year, and we have -- are confident that it's going to have some material impact.

Okay.

Thanks.

And just finally, with regard to other countries in Europe, really the only on you mentioned was Russia, specifically.

Could you talk a little bit perhaps in terms of color on Spain, which is historically what I understood to be one of your largest European markets, and then any other markets within Western Europe?

Thanks.

Unfortunately, I will disappoint you on that one.

We try not to break it out.

Russia was such a special case, we just had to.

But quarter-by-quarter, there is variations by country, and I'd drive you guys insane if I asked you to keep track of each region.

So we try to talk in our major EMEA, APAC, and North America level of granularity.

But I had to mention Russia.

Okay.

Thanks.

Appreciate it.

You bet.

We have a question from Holden Lewis from Oppenheimer.

Great.

Thank you very much.

I am trying to get a sense, on the wet care side, of how impactful that could be?

And I guess I am just trying to kind of scale the size of the opportunity for 2016.

And if I remember correctly, I think that home robots are 90% of the overall mix, and of that, weren't the home, the vacuums about 90%?

That would suggest that the remaining vacuums are maybe 9% of the revenue mix.

Does that sound about right, and kind of the right number to think about growing off of?

Yes.

Roomba has definitely contributed 90%, 90% plus of the home robot revenue.

The bulk of the remainder is driven by our wet floor care products, which we said have run anywhere from probably 8% to 10% of home revenue to date.

8% to 10% of home revenue.

Okay.

So if you can double revenue on that from investing in that sort of thing, then that's a meaningful driver to growth.

Correct.

Okay.

Thank you.

Okay.

That concludes our third quarter 2015 earnings call.

We very much appreciate your support and look forward to talking with you again in February of 2016, to discuss our Q4 results, and to give our outlook for 2016.

Thank you.

Ladies and gentlemen, this concludes today's conference.

We thank you for participating.

You may now disconnect.