iRobot Corp (IRBT) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2018 iRobot Corp. Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Elise Caffrey, iRobot Investor Relations. Ma'am, 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 provision of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties and involve many factors that could cause the 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 may also disclose non-GAAP financial measures as defined by SEC Regulation G, including adjusted EBITDA, non-GAAP gross profit, non-GAAP income before income taxes, non-GAAP income tax expense, non-GAAP net income and non-GAAP net income per share.

Our definitions of these non-GAAP financial measures and reconciliations of each of these non-GAAP financial measures to the most directly comparable GAAP measure are provided in the financial tables at the end of the fourth quarter and full year 2018 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 2018 and Alison Dean, Chief Financial Officer, will review our financial results for the fourth quarter and full year 2018. Colin and Alison will also provide our business and financial expectation for fiscal 2019 as well as updated financial targets through 2020. 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. We had a phenomenal finish to 2018, exceeding both our fourth quarter and full year expectations for revenue growth and profitability after raising our expectations twice during the year.

Revenue grew 24%, crossing the $1 billion revenue threshold in an increasingly competitive market and we delivered an operating margin of nearly 10% after absorbing the impact of tariffs in Q4. Substantial demand for our game-changing Roomba i7 and i7+ robots drove strong holiday performance domestically.

Overseas, over-performance in Japan was driven by robust Q4 demand supported by our sales and marketing programs in that region.

In 2019, we will continue on a growth diversification journey, focusing on driving growth of non-Roomba products as well as supply chain and manufacturing diversification for longer-term production stability. Our financial performance is expected to be driven by our continued transformation to a global consumer robot company.

In 2019, we expect to drive revenue growth of 17% to 20% through deeper household penetration of Roomba globally, broader rollout of i7, i7+ and e5 robots, which were launched in the United States in 2018 and further adoption of Braava through marketing campaigns targeted at Roomba customers to drive Braava revenue of 10% of total company revenue. We expect to introduce a new category of robot, the Roomba -- sorry, the iRobot Terra, our revolutionary autonomous lawnmower, engage a contract manufacturer outside of China for partial production beginning in 2019, continue investment in innovation to extend our technology and product leadership and introduce additional new products midyear.

Before discussing 2019 financial expectations, I'd like to note that commentary has been written about our providing conservative expectations in February only to increase these expectations throughout the year. Given that 60% of our annual revenue is generated in the second half of the year, the competitive landscape continues to change, and we are operating in an unprecedented environment with the imposition of tariffs, for which there are no historical trends on which to base future growth. We are providing you with the best visibility we have today of our annual expectations.

That said, in 2019, we expect revenue of $1.28 billion to $1.31 billion, which is year-over-year growth of 17% to 20%.

Operating income of $108 million to $118 million and EPS of $3 to $3.25, excluding discrete items.

Now I'll take you some -- through some of the highlights of 2018 and our business expectations for 2019. In 2018, the U.S., EMEA and Japan grew 24%, 29% and 25%, respectively, year-over-year. These results advance our transformation to a global consumer robot company and make us less susceptible to macro impacts in any one country.

In the U.S., we successfully launched 2 new products during the third quarter, the Roomba e5, our core product, offering premium features at a lower price point; and our game-changing premium Roomba i7 and i7+ robots. Both contributed to the 24% year-over-year 2018 domestic revenue growth.

In the U.S. we continue to see new competitive products selling through Amazon marketplace, but not on shelves of retailers, where we still generate 60% of our domestic revenue. The overall category for RVCs priced at more than $200 grew 27% in 2018 over 2017 in the U.S. As we saw in 2017, competition ran an ad campaign throughout the fourth quarter, which we believed helped the category grow.

Our U.S. estimates for 2018 show a 3 point share loss overall, but we firmly believe that with low household penetration providing an opportunity for substantial category growth, we are well positioned to continue our growth trajectory in this market.

Overseas, we began to harvest the fruits of our targeted sales and marketing program investments in Europe and Japan as we completed our post-acquisition integration efforts in both regions.

International revenue growth of 23% was driven by growth of Roomba 900, our 2018 premium robot. And this strong demand bodes well for our 2019 global rollout for i7 and i7+.

In 2018, Braava family revenue grew 9% compared roughly to -- and comprised roughly 8% of total company revenue. We continue to see a growth opportunity for wet floor care, as we improve its positioning and better articulate its value proposition.

In Japan, where we ran a national television program in Q4, Braava revenue grew 25% in the fourth quarter year-over-year. Our goal in 2019 is to drive total Braava revenue to 10% of total company revenue, and we are confident that putting additional investment to support Braava promotions globally will help drive awareness and adoption in this category.

It is critical at this point, in the accelerating adoption of the category, we maintain unambiguous brand and product leadership in robot vacuum cleaners through continued focused investment in research and development as well as expanding our successful U.S. sales and marketing programs into overseas regions.

We must also continue to build on our initial success in wet floor care products and not let the competition get a foothold in this category.

In 2019, we plan to capitalize on incremental investments we made in 2017 and 2018 with the introduction of Terra and additional new products midyear.

Terra, our revolutionary robotic lawnmower, is unique because it learns its environment using iRobot's Imprint Smart Mapping technology. It will mow like a human, intelligently navigating the yard and cutting efficiently in systematic rows. Terra will remember what it has cut and where it still needs to mow. If the robot's batteries run low, it will return to its base to recharge and then resume mowing until the yard is complete.

Terra will offer customers a welcome alternative to existing robotic lawnmower technology by eliminating the need for costly and labor-intensive boundary wires.

Combining Imprint Smart Mapping technology and a newly developed wireless communication system, including stand-alone beacons, users will place the wireless beacons around the yard, drive the robot once around the perimeter and schedule Terra to mow. Users have total control of where the robot goes and where it doesn't go, so it will stay on the lawn and out of the flowers.

Because Terra will be connected, users will be able to use the iRobot HOME App to customize their robot, from adjusting the height of the grass to controlling precisely when the lawn is cut, day or night.

The robot is designed with rugged features to help it operate in inclement weather and navigate tough outdoor terrain. I'm very excited, as you can tell, that we're moving from talking about working on a robotic lawnmower to launching a new product in a new category that complements our growing ecosystem of robots for the home.

With the launch of the i7 in the third quarter, we unveiled the next phase of our smart home strategy. It is our goal for our robots to disappear into the background of your home, require little to no attention, consistently deliver routine services and always be ready for on-demand requests, all the while gathering and maintaining in partnership with the user in understanding of the home, enabling a new generation of home intelligence.

i7 runs every day, empties its own bin, and if you make a mess in the kitchen while cooking, just say Google or Alexa, tell Roomba to clean the kitchen, and the right thing will happen.

This is all enabled by iRobot's Imprint Smart Mapping technology, which brings actionable and valuable understanding of the consumer's home, including location and identity of rooms.

We're pleased to see our customers already actively engaging with their Smart Maps with a significant percentage of connected i7 users viewing, customizing and launching directed room cleaning missions.

We are planning to extend this functionality through collaborations with companies, including Google and Amazon, to deliver the most intuitive control of your iRobot robot possible and developing a growing array of new ways that our Imprint Smart Mapping can bring real intelligence to the smart home.

Beginning with the i7, all of the premium robots we launch are, and will be, platforms that will be continuously upgraded with the latest features and capabilities, allowing your iRobot robots to get smarter and do more every month.

Last year we introduced a new set of 3-year financial targets for 2018 through 2020 before tariffs were announced and imposed. We're providing updated targets that assume a 10% tariff for the balance of 2019 and 2020.

For 2020, we are targeting revenue growth of mid- to high-teens, a 3-year CAGR of roughly 19%, gross margin of approximately 48% and operating margins increasing to 10%.

Alison will speak to the specific impacts from tariffs on gross margins and our 2019 financial expectations. But I want to spend a minute addressing the supply chain and manufacturing diversification initiative we are taking in 2019.

While manufacturing solely in China has made economic sense for iRobot since we began to produce consumer robots in 2002, as a matter of good corporate hygiene, we've undertaken an annual review of alternative manufacturing sites.

The pressure brought to bear by rising labor costs, forced technology transfers and intellectual property theft, coupled with the imposition of tariffs and potential for them to increase has changed our view and accelerated our plan for supply chain and manufacturing diversification. This initiative is expected to negatively impact our gross margins in 2019 during the initial investment phase and in 2020, when we start production until we reach scale in the new facility as well as identifying lower-cost component suppliers outside of China. Overseas and expanded U.S. distribution of the new Roomba robots we launched in 2018 will be the primary revenue growth driver for 2019.

We expect revenue from Terra's limited availability to be nominal. However, we will be launching new products in 2019 beyond Terra. We expect revenue from the new products, including the i7 and i7+ overseas, to comprise approximately 15% of total 2019 revenue. We anticipate double-digit revenue growth in the U.S. and overseas, as we continue to evolve and extend our proven sales and marketing initiatives.

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

Thank you, Colin. Our fourth quarter and full year revenue, operating income and EPS exceeded expectations due to better-than-anticipated performance in the U.S. and Japan. Record quarterly revenue of $385 million increased 18% from Q4 last year. Operating income for Q4 was $30 million compared with $23 million for Q4 2017. EPS was $0.88 for the quarter, compared with $0.16 in Q4 2017.

Q4 2017 EPS included a negative $0.41 impact from the new tax reform, which included the remeasurement of our net deferred tax assets and a provisional repatriation toll charge totaling roughly $12 million.

In addition, Q4 2017 EPS included approximately $0.03 of tax benefit relating to stock compensation windfall compared with approximately $0.04 in Q4 2018.

Our Q4 2018 effective tax rate before discrete items was 23%. In 2019, we expect an annual effective tax rate before discrete items of 19% to 21%, driven by the benefits of our new U.K. principal company as well as further impact of the U.S. tax reform act.

Revenue growth of 18% for Q4 and 24% for the year reflect the positive impact of our marketing programs in the U.S. and overseas and our successful positioning against competitors.

International revenue grew 23% for the full year, with EMEA growing 29% and Japan up 25%. We are very pleased with our 2 acquisitions and the growth we've delivered as a result of implementing our U.S. sales and marketing programs and optimizing e-commerce channels for those regions.

Gross margin was 48% for the fourth quarter compared with 47% in Q4 2017 and almost 51% for full year 2018, slightly higher than we expected.

Total P&L impact to gross margin from the tariffs was approximately $3 million versus the $5 million we estimated last quarter. Fourth quarter operating expenses were 41% of revenue, up from 40% in Q4 last year. This was lower than our expectations due to slower R&D hiring than planned.

For the full year, OpEx was 41% of revenue, also unchanged from 41% last year.

Sales and marketing expense was 19% of 2018 revenue, up from 18% last year and included a full year of approximately 150 new employees from our distributor acquisitions in 2017 as well as support for new 2018 product launches and a marketing campaign for Braava in Japan.

Full year EPS was $3.07, compared with $1.77 in 2017.

As a result of the tax reform act, we booked a discrete charge of $12 million for the remeasurement of our net deferred tax assets and a provisional repatriation toll charge in the fourth quarter of 2017, negatively impacting Q4 and full year 2017 EPS by $0.41.

Full year 2017 EPS was also negatively impacted by approximately $0.30 from the year 1 SODC accounting adjustments, which did not impact 2018.

We ended the year with $162 million in cash, consistent with the expectations we provided last quarter, down from $166 million a year ago. Recall that we completed a $50 million share repurchase program in 2018.

2018 year-end inventory was $165 million or 76 days compared with $107 million or 56 days last year and $161 million or 113 days at the end of Q3 2018. Inventory was slightly higher than planned due to the purchase of some additional robots for the U.S. market at the 10% tariff level, ahead of the anticipated tariff increase to 25% on January 1, 2019.

Now I'd like to provide you with additional detail and some of the underlying assumptions of our full year 2019 financial expectations and our updated 3-year targets.

As we have previously discussed, we manage our business from a full-year perspective. Likewise, our 2019 financial expectations should be viewed on a full year basis as quarterly year-over-year revenue growth rates will vary greatly by region due to a number of factors, including new product introductions.

For 2019, we expect full year revenue of $1.28 billion to $1.31 billion, which is year-over-year growth of 17% to 20%.

As in the past several years, we expect revenue will be more heavily weighted in the second half of the year, when we expect to deliver roughly 60% of the year's revenue.

Our revenue expectations contemplate yen and euro exchange rates roughly in line with the current rates, plus or minus 5%.

We expect year-over-year revenue growth rates to be highest in Q2 and Q4 due in part to the anticipated timing of new product introductions and distribution rollout.

Profitability will be lowest in Q1 and Q2 as our sales and marketing expense is expected to increase in those quarters to support new product introductions.

We expect our gross margin to be roughly 48%, down 3 percentage points from 2018, driven by many factors, including pricing and promotion assumptions, product mix, costs associated with our supply chain diversification strategy as well as the impact of a handful of favorable items in 2018 that aren't forecasted to repeat in 2019. Positively offsetting these factors is the lower amortization of the intangible assets associated with the Robo acquisition from $15 million in 2018 to $9 million in 2019.

The biggest driver of the year-over-year gross margin decline is from the mix of products as well as pricing and promotion expectations. As our product mix moves away from our cost-optimized Roomba 900 and 800 robots to our new robots, which do not yet have the scale and maturity, we will see a decline in our gross margin. Through manufacturing scale, operating efficiencies, engineering adjustments and component changes, we expect to improve the margins on these products over time. We have also planned additional pricing and promotional activity as we anticipate the competitive environment to remain strong, particularly at the low end.

As it relates to tariffs, on January 1, 2019, we increased prices on our premium i7 and i7+ robots sold in the U.S. to help offset the impact of the 10% we are incurring on all Roomba imports into the U.S. At the 10% level, we anticipate $20 million to $25 million of tariff costs to be incurred in 2019.

As currently structured, the U.S. Government plans to increase tariffs to 25% on March 1, 2019. If that happens, we would likely increase our prices again to offset the incremental tariff costs incurred. Should the tariffs be lifted altogether, we would expect to lower prices to their pretariff levels.

Any change in tariffs would take time to implement as we and our retailers work through channel inventory and we provide any contractual price change notifications to our partners.

Also as Colin mentioned, we plan to incur incremental costs in 2019 associated with the supply chain manufacturing diversification program both within China and outside China.

We expect these costs, which include tooling for new lines and the addition of sourcing expertise outside of China, among other things, to negatively impact gross margin in 2019 and 2020.

Manufacturing outside China will be more expensive in the near term as lower labor rates are more than offset by higher logistics costs, given that the vast majority of our current component and material supply base is in China.

We feel diversifying our supply chain outside of China is a long-term strategic imperative. Whether or not tariffs remain, we will pursue this diversification regardless of tariffs.

We expect full year OpEx of 40% of revenue, a 100 basis point improvement from 2018 as we continue to leverage G&A and begin to see some leverage in R&D.

Higher sales and marketing expense in 2019 include marketing expenses associated with our multiple 2019 product launches. Additionally, we will make continued investments in the Roomba and Braava awareness campaigns to drive further worldwide household adoption.

We expect full year operating income of $108 million to $118 million and EPS of $3 to $3.25 before discrete items, which we can't estimate.

We are also assuming stock comp expense of roughly $32 million, depreciation and amortization expense of approximately $37 million, diluted share count of approximately 29 million shares and capital expenditures of approximately $40 million, driven largely by expansion of our manufacturing capacity and our manufacturing diversification program.

We are estimating a tax rate before discrete items of roughly 19% to 21% for 2019.

Building from our 2017 results, we are updating our 3-year financial targets through 2020 as follows to include the expected impact from tariffs. For 2020, we are targeting revenue growth of mid- to high teens, which will result in a 3-year revenue CAGR of roughly 19%, expecting gross margin of approximately 48% and operating margin increasing to 10%.

Global revenue growth is expected to be driven primarily by further adoption and greater household penetration of Roomba as well as adoption of our Braava family of mopping robots.

We believe at this critical point in the accelerating adoption of household robots, driving higher top line growth and maintaining dominant segment share is essential.

As a last housekeeping item, beginning with our 2018 results, we are introducing additional non-GAAP actual metrics that we think provide more clarity into our robots' true operating performance and potential. We have historically provided, actual, quarterly non-GAAP adjusted EBITDA in our financial statements along with a reconciliation of this metric to GAAP net income.

In a supplemental schedule to our Q4 and full year 2018 financial statements, we have provided full year 2018 non-GAAP gross profit, non-GAAP income before income taxes, non-GAAP income tax expense, non-GAAP net income and non-GAAP net income per share as well as reconciliations of each to the respective most directly comparable GAAP measure.

We have also provided definitions of each and why we think they provide more clarity for investors.

Beginning with our Q1 2019 results, we will provide this information on a quarterly basis.

I'll now turn the call back to Colin.

Thank you. 2019 will be an important step in our growth diversification journey. We see plenty of runway for continued Roomba household penetration. And you should expect continued performance enhancements, enabled both over the air and through new platforms.

But it is incumbent upon us at this stage to more aggressively develop revenue diversification. We have started to see a positive impact from our Braava awareness campaigns, and we expect our mopping robots to grow to 10% of total revenue in 2019.

In addition, we are launching our long anticipated robotic lawnmower, Terra, that we believe will revolutionize the way people mow their lawns. While it won't contribute revenue diversification in 2019, we believe that it can be a meaningful third leg on our revenue stool in the future. This introduction should also put to rest any doubts about iRobot's prowess as a technology company as we leverage our navigation and mapping expertise to solve a previously unsolved challenge.

While we are navigating uncharted waters with the current tariff uncertainty, we expect our global business to deliver strong financial performance in 2019 that will, in turn, fund critical investments in future technologies and marketing to further solidify our position as the unambiguous leader in the robotic floor care, definitively establish a diversified revenue stream, introduce a new robotic category and demonstrate our increasing importance as a strategic player in the smart home to drive enhanced long-term shareholder value.

With that, we will take your questions.

(Operator Instructions) And your first question comes from Frank Camma with Sidoti.

Colin, hey, how did you select -- I mean, obviously, I understand how you're going to launch in the United States with the lawnmower. But how did you pick Germany? Or was the...

So the -- there's more of an existing market for robotic lawnmowers, and so that it's a bit more of a known environment. The lawns in Germany tend to be smaller, more regular, and easier to mow. And so we thought it was a great first place to get our feet wet. We're also doing a beta program in the U.S. As with any new launch, we want a strategy which allows us to, without sacrificing customer experience, learn as much as quickly as possible. And so you add all of those factors together and Germany makes sense.

Sure, okay, I get it now. And how's the beta program, like you mentioned, is that mostly through your direct consumer? Can you just talk about the channels? How did you go about that, the go-to-market, specifically in the U.S.?

So the beta program in 2019 is going to be an invitation-only product program in North America. So if you want to participate, you sign up for our newsletter. We ask you some questions about your lawn and you agree to give us feedback on the product. And so again, we're trying to do as much learning as possible as we roll out to make sure that the intelligent systems we're building for the robot are working as intended as the numbers of lawns that we're mowing grow rapidly.

Oh, great. And then just moving onto the wet care, because obviously, I know you're ramping up there as far as going after converting customers. Can you just talk about what you found to be the most effective outreach there, whether it's just ongoing typical media advertisement? Or is it really -- I know you have sort of a robust database of existing customers for the Roomba. So what's really been the more effective use of your time?

Well, we've shown that the types of advertising channels that reach Roomba customers also work well for the Braava customer. So that in the U.S. we've done that twice in -- I mentioned in the call that we ran a promotional campaign in Japan, which was very effective. And so there is a strong overlap between the Roomba customer and the Braava customer. That suggests that targeted marketing to Roomba customers for Braava also will be successful.

So we're trying a lot of different things. But the key insight is, if you own a Roomba, you're far more likely to be excited about owning a Braava as well, which is good news for us.

Got it. My last question is just, if the tariffs were for some reason to end today, how long would it take to -- I know, obviously, you bought ahead to take advantage of the -- in case it went to 25%, but how long would it take you to work through the inventory that you bought ahead on or normalize, I guess, is the way to question -- ask the question.

That really will depend, Frank, in terms of what time of the quarter or the year they're changed. How much inventory we have on hand at the time. How much the -- our retailers are carrying. We do have some contractual notification periods, they vary in terms of their length for some of our retailers if we're going to change pricing. So it's really going to depend on when that happens.

I guess, theoretically though, if you knew it was go -- on the other hand, if you knew it was definitely going to 25%, you could do the same thing, right? You could take advantage of that ahead of that increase, theoretically, right? Or does it take a while to do that?

It would take a while. It would be our intent to, say, where to increase to likely move prices up, but it would take a while before those prices would be present in the market. We would work through the inventory that we already have before we would push those higher prices through onto the consumer base.

Your next question comes from Jim Ricchiuti with Needham & Company.

First off, just with respect to some of the changes you're making on supply chain, can you talk a little bit about -- first off, where you're going to be looking at manufacturing the Roomba outside of China? And I've got a follow up just as it relates to the impact that it could have on gross margins.

Sure. We did a thorough analysis. At this point, we are committed to Malaysia as our next area to develop. We think the combination of manufacturing maturity and infrastructure, while not equivalent to China, is the furthest along and would be a logical extension of our supply chain.

Got it. And Alison, you alluded to the cost associated with this having some negative impact on margins in 2019. I'm wondering if you could give us a little bit more color on that as it relates to your overall guidance for 2019 gross margins.

Sure. So the costs we'll incur in 2019 are mostly related to capital investments to set up lines, the tooling for the lines as well as start to hire some sourcing expertise that can help us try to figure outsourcing opportunities outside of China.

We will incur additional costs once units are coming off the line of Malaysia, because although we will likely benefit from lower labor costs, those lower labor costs will be offset by higher logistics costs, freight, for example, to get the componentry out of China and into Malaysia. So there'll -- it'll be an uptick in terms of the standard cost of the products that we do produce in Malaysia when those eventually start getting sold through. In terms of the impact to '19, the manufacturing diversification is probably 1/3 or less of the shift we're seeing in gross margin year-on-year.

Okay, that's helpful. And then final question for me, and I'll jump back in the queue. I may have missed it in your prepared remarks, but did you give the growth metrics for EMEA and Japan, those 2 regions for the quarter? I know -- I think I have it for the year.

Yes, so EMEA grew 14% in the fourth quarter. Japan grew 28% for the fourth quarter.

Your next question comes Troy Jensen with Piper Jaffray.

Quick question for Alison. So you mentioned the $20 million to $25 million impact in 2019 for the tariffs. Does that factor in the price increases for the i7 and i7+? And will that offset some of that?

So the $20 million to $25 million is the expected check we will write to pay for the tariffs. With the price increases that we made on the i7 and i7+, we're hoping that those price increases mostly offset that incremental $20 million to $25 million of tariff costs that we'll incur.

All right, perfect. If we do go to 25% tax rate, do you think -- excuse me, 25% tariff, do you think you'd be pushing price increases onto the lower products also? I think this is a change in your messaging, you guys had talked about pushing all kind of tariff increases to consumers, but it seems like it's just more on the less price sensitive high-ends currently?

That was our strategy at this point, right? We believe there'll be less elasticity at the more premium end of the market. If the tariffs go to 25%, we will update our analysis and determine whether we think the strategy of increasing prices only at the high end continues to make sense or a different strategy would need to be executed.

Great, understood. And then just a follow up on Jim's question just about gross margins. I think you'd mentioned in your prepared remarks that some favorable items benefited gross margins in 2018 that won't repeat in 2019. Could you kind of quantify maybe how much benefit you got from these one-time items?

It was a handful of smaller items in, and of, themselves were very meaningful. We had some favorable year-on-year return rate favorability, we had some warranty favorability, we had some smaller FX favorability, so it was really a handful of small items, none of which we would normally forecast for future years.

Okay, understood. And then my last question and I'll see the floor. For Braava to become 10% of sales, it implies about 50% growth this year. And in 2018 it only grew 9% with some increased investments. So I would just like to hear about just the conviction, was it going to be more geographic expansion, new products there? I know you did mention some marketing, but just the conviction you can grow that 50% this year?

Sure. I mean, we're a learning organization and like we did with Roomba, every period we were testing and measuring what types of sales and marketing messaging works. What are the right channels to get to our customers? And so that when you bring together all of our plans for 2019, our models lead us to believe that this is a reasonable thing and an achievable thing based on our learning. So definitely, a more to come as to how that's going. We can talk about that through the year, but here at the beginning of the year we do believe we have a plan that leads to that growth figure.

Your next question comes from Mike Latimore with Northland Capital Market.

This is Paul on for Mike Latimore. Do you hear me?

Yes.

Yes, I have two questions. Like, would EPS guidance change materially if 25% tariff holds starting March 1?

I'm sorry, can you repeat the question?

Would EPS guidance for FY '19 change materially if 25% tariff starts kicking in from March 1?

We would reassess at the time. As I said to one of the previous questions, our intent would be to increase prices more in order to offset the incremental tariff costs as we work through that analysis. If we thought that the current ranges that we split on our guidance needed to be updated, we would do so.

It would certainly increase risk on the year, and we would assess whether that risk translated into any need to change expectations based on what we saw happening in the market. We can offset the impact, but that will certainly -- any price action could have an impact on the demand signal for our products. So it definitely is a -- would be an event that requires a lot of scrutiny.

Okay. And my next question is, you talked about 3% share loss in this fiscal '18, is that in terms of units or revenue dollars?

That's in terms of retail dollars spent.

Your next question comes from Jed Dorsheimer with Canaccord.

A couple of questions, I guess just first, I'd like to try and better understand how you're thinking about elasticity per channel, particularly as it relates to tariffs? I mean, clearly, in the high-end of the business, you have more autonomy in terms of the ability to raise prices. But as you start to think about the 60% of business that's sold through the traditional channels, how you're thinking about the consequences and costs of raising prices to offset tariffs?

Sure. We're certainly dealing in a land where we have models and uncertainty and are trying to make judgments based on the best available information. It's even too early at this point in time on February 7 to talk about what the impact has been at this point in the year, because these price increases that we made are only very recent. I think that the -- our strategy is based on a premise, which I think is a solid premise that there is much more price elasticity at the lower end of our price points based on the fact that value shoppers are more influenced by price. And at the premium level, price is less elastic because the shoppers are more focused on the features the products possess.

And so as we skewed our response to these tariffs along the lines of that philosophy, the -- we have seen sustained and continued strong growth in the category. We believe based on the market penetration figures, even in North America, we are still in the earlier days of adoption. And so saturation is not an impact and that we should anticipate continued strong category growth at this time.

So those were some of the factors that led into the guidance that we gave today. Certainly, the impact of price actions increases the pressure on the overall industry growth rate. And that's the mechanism of actions that we've studied most aggressively. And at 10%, we're comfortable with the guidance that we gave.

Got it, thanks. That's helpful. I have two more. The first of the two is, just with respect to the i7, i7+, in terms of the capturing of data and using that to enhance the intelligence within your products, could you speak or elaborate on how you're thinking as a monetization of that data?

Sure. The primary near-term monetization strategy for the mapping, the Imprint Smart Mapping, is in improved differentiation and improved experience of our customers. And we've already seen tremendous uptick in the use of its directed room cleaning. That'd be, go clean my kitchen function. In fact, more people are doing that than are scheduling the robot, which is a long-standing cornerstone. So that's very encouraging that this is -- we have implemented this feature and that, that feature is significantly valued by our customers. So it's differentiating in the marketplace and should continue to drive our category leadership.

The idea that there are opportunities to do -- create additional value through partnerships and other types of relationships continue to be developed and we're not including those revenue streams at this time in our LTFM. And we talked a little bit about the collaboration that we had with Google. We're exploring some ways that, that value could be monetized. But it's still honestly a little bit early to make any quantitative assessment as to how and when this -- these revenue streams might develop and what their magnitude would be.

So in the near term, it's all about product differentiation. Longer term, I would reiterate, we have significant but not quantified opportunities through the use of data while respecting the privacy and our commitments with our customers.

Great. And last question from me, then I'll jump in the queue. With respect to Terra, I'm sure you're probably or -- you've thought through the channel implications. This is a whole new channel for you, different metrics, different marketing, spending. Are you looking to beyond Europe? Are you looking to -- how are you thinking about leveraging existing channel versus -- or is this more -- going to be more of a direct product in terms of that mix in comparison to what we've seen out of Roomba?

Sure. So Terra is going to leverage many of the current channels that we use as well as require us to open some additional. So it's kind of in between, certainly direct will continue to be important. DIY centers where we sell Roomba could also be very important. But then there are some channels that we're certainly exploring that -- where we do not currently sell Roomba. I think that what you'll see is leveraging current channels earlier and then expanding distribution avenues as the market for Terra grows. We believe this to be a Roomba-sized opportunity and would certainly justify fully building out an effective supply chain to support Terra fully.

Your next question comes from Charlie Anderson with Dougherty & Company.

I want to start with a -- a two-part question on the supply chain diversification. Are you guys fully leaving China or are you guys staying in China to produce anything? Is it all going to Malaysia? And then I wonder, Alison, if you could touch on the CapEx impact, maybe on the -- I don't know if you have the CapEx forecast for this year and next year to sort of total cost of that program? And then I've got a follow-up.

Sure. So our move to Malaysia is, I'd say, a first step. At this point, we don't have a plan to fully leave China. Even if we did, that would take many, many, many years to accomplish. I think you should view Malaysia as a first step towards diversification outside China. But for the foreseeable future, we will still have significant volumes being produced in China.

In terms of CapEx, we did indicate about a $40 million CapEx plan for next year. I'd say a quarter of that is probably related to supply chain diversification investments.

Got it. And then on Terra, I think Colin I've heard you quoted before talking about maybe the mower market being as large for you as the Roomba market. I wonder what are some of the underlying assumptions to get you there if that's the case. And then I'm also curious on the margin profile of that product, is that accretive to gross margin? And then in terms of operating margin, too, I'm kind of curious what the long-term outlook for Terra would be?

Okay, so something that I can talk about the -- there exists a market for robotic lawn mowing even with these experience-hampering limitations of having to bury a wire of around EUR 200 million today. About $6 billion is spent every year on lawnmowers. In the U.S., $14 billion on top of that is spent on lawn services. So the -- when I talk about a Roomba scale opportunity, these are numbers where if we have the type of success that we had with Roomba, you could very easily see this category being comparable in scale over time with the vacuum cleaning market. People spend a lot of money on hardware, they spend a lot of money hiring people to do this work, and we believe a superior robot lawn mowing experience can compete very favorably with traditional solutions. So I think that's the color behind the assertions that this is not a little cousin to Roomba, but this could be a legitimate, very significant growth at, or over, time.

And then on the margins?

On the margins, we certainly believe that there's an opportunity for this to be a product in line with iRobot margins. So there's nothing about this, which would fundamentally put us in a disadvantaged position.

Your next question comes from Asiya Merchant with Citigroup.

Just a couple of very quick questions. On -- given the growth that you're guys are baking in for Braava, pretty significant, conversely that would imply the vacuuming unit are kind of decelerating quite a bit. If you can just talk about that? And then for Alison on margin, you provided some clarity on the manufacturing diversification. And of course, the tailwinds there are amortization rolls off a little bit here from your acquisitions in the prior year. But then looking a little bit further out into 2020, would you not get any more benefit from the diversification and the heavy CapEx that you're putting in, in 2019 to support your diversification? If you can just walk us through why margins should not go up in 2020, given amortization rolls off further and all the investments in 2019?

Sure. Go ahead.

So on your first question, certainly, we're expecting Braava in the -- the plan we have for 2019 to grow faster than Roomba. But remember, it's at only 8% of our revenue growing to 10%. And so that the materiality of that higher-than-planned growth rate does not significantly slow down what's happening in the Roomba side. So I would not go, and I think when you work out the math, it's a very minor impact on Roomba. And predicting 17% to 20% growth as a company assumes very strong, continued growth of Roomba in all markets.

So that, again, when you work through your model, I think you'll see that we're -- we remain bullish on Roomba.

On your second point, Asiya. The -- you're right, the robo amortization will go away completely in 2020, so that will be a $9 million pickup. However, as I mentioned earlier, as we are able to move more and more volume out of China to Malaysia, which we think strategically is the right thing to do, in the near term that is going to cost us to more. The standard cost per unit on a like-for-like product manufactured in Malaysia versus China is going to be higher. And they'll take probably quite a few years in order to get some of the costs advantages that we've achieved. We've produced Roomba in China since 2002. So we will be early days in Malaysia. We go into Malaysia knowing it'll cost us more. How soon, how many years after that we will be able to start seeing efficiency and leverage, I can't answer that today. We've got to get a little more traction under our feet in terms of actually getting products off the line and seeing what that's all about.

Okay, great, and thanks for the extra color. And just again very quickly, if I may, on the ASP assumptions. I know in the past you guys have talked a little bit about -- provide some color on this. How should we think about in your revenue assumption, the underlying unit versus ASPs? Or should we assume relatively -- ASPs continue to tick up here, as you roll out Terra? As you roll out tariff increases on your premium robot? Maybe the Braava gets updated as well with higher ASPs? I mean, how should we think about ASPs versus units?

So for 2019, unit growth will still be the most significant driver of revenue. We do think we will see an uptick in ASP in 2019, largely driven by i7 and i7+ mix. Remember, we didn't have that product internationally in 2018, so that should help. But certainly unit increases are going to be a bigger driver. And just to clarify, again, Terra is not really going -- although we're really excited to get it to market, it is not going to be a significant player in our '19 financials, in fact on any (inaudible)

Your next question comes from Mark Strouse with JPMorgan.

Just wanted to start with a kind of a two-part question on the updated 3-year targets. So first, the revenue CAGR target is down just a tad. I kind of assume that's just a function of the tariffs and the change in pricing, which -- correct me if I'm wrong there. And then on the operating margins, you're still targeting about 10% in 2020. And that's despite a slightly lower gross margin. So just kind of curious, if the lower OpEx is due to something that you've seen change in the industry that requires less investment or if that's just simply an effort to kind of manage towards a level of profitability?

So I think -- we had put out this challenge for the company to go grow OI to 10% over that period. And sounds like, given the growing maturity of the business, given our progress at improving efficiencies that despite seeing a little bit of a step back on margins that we described in the call, we thought we still could hold that commitment to the OI through leveraging the company a little more aggressively than maybe we thought we could have a few years ago. So I think it's a positive story in the maturation of iRobot, and we're very happy to be able to reiterate that target, despite the cost of diversification and the impact of tariffs.

Okay, that's helpful. And then just going back to the revenue CAGR question. Am I right in assuming that's just simply tariffs?

That's the biggest driver in that change, which is -- we view as pretty minimal.

All right. And then just another question on Terra, if I can. Colin, you mentioned some of the ruggedized features of this product. How should we think about the life expectancy of that? I mean, obviously, early, but as you design this product, what is your targeted life?

Sure. I mean, with Roomba, what we've sort of targeted is, 3-year life, compelling reason to upgrade after 2 years, and if you're willing to go replace the batteries and so forth and take care of it, positive experience is beyond that 3-year target.

I think that we brought similar philosophies to Terra. It's still early to fully be able to say whether or not we can do better than that. But certainly, this is viewed as a durable product, which is meant to robustly delight customers for multiple seasons.

Your next question comes from Ben Rose with Battle Road Research.

Just a quick question regarding the initial mix that you're seeing between the i7 and the i7+. Alison, I don't know if you can make any comments on it, whether it's sort of in line with your expectations or whether one is in greater demand than the other?

Yes, the i7, i7+ adoption is a very strong, and in particular as we saw sort of coming out of the gate, people are leverage -- going more towards the i7+ than the i7. Probably greater than 50% of the sales are going to i7+.

Okay. And then maybe just a quick question for Colin in terms of how the i7, i7+ are interacting with the Google Home and Alexa products. Is there really any material difference at this point? Should -- would a customer be indifferent to using kind of one smart home system versus the other?

So the current functionality, we had great support from both companies and being able to launch with the extensions to the interface, enabling what we call directed room cleaning. So that's going beyond just clean the house to clean the kitchen. So at this point, that functionality exists with both smart home ecosystems. There's a lot more to do and a lot of that more to do does require deeper collaboration with these companies. And beyond that, I'm not going to hint at what these new features are, but only to say that it could very well be that the 2 companies work at different rates to add functionality to the experience and -- but at this point, we -- both have been great partners.

Okay, great. And so -- just one final question for Alison, and it does relate to kind of the current environment around tariffs and the anticipated environment. Are you accelerating the production and sort of intake into the U.S. of the i7 and -- excuse me, the i7 and i7+ in anticipation, potentially, of an increase, if that make sense?

Yes. I wouldn't say ramped. We're trying to do any sort of acceleration, our production capacity, particularly as we're getting i7 and i7+ to region as well as working on the new products that Colin mentioned that is all sort of lined up against the guidance we've given. I don't think there's any real opportunity for acceleration of inventory into the U.S.

Your next question is a follow-up from Jim Ricchiuti with Needham & Company.

You made a quick comment about R&D hiring and that was one of the reasons why your OpEx was a little bit lower. I'm just curious what -- is this a case of timing? Or is it just becoming more challenging to get the type of people you're looking for? And does that persist, do you think, in 2019?

It is certainly a case of timing because of the challenges of attracting all of the talent that we would love to hire. I -- we've been certainly building into our 2019 plan, new programs that we believe will help address the hiring challenges that we saw in 2018 and get us back to a place where talent does not slow us down.

iRobot hires some of the best experts in artificial intelligence, machine learning, digital object recognition, mapping and navigation that exists on the planet. And so we certainly compete with other top tech companies for this top talent. And I think that in '18, the growth in our strategic direction and the technology content of our robots left us a little bit short against our hiring plans, causing us to go and make some additional investments in how we source talent for '19.

Okay. That concludes our fourth quarter and full year 2018 earnings call. We appreciate your support, and look forward to talking with you again in April to discuss our Q1 results.

That concludes the call. Participants may now disconnect.