Elise Caffrey - IR Colin Angle - Chairman and CEO John Leahy - CFO

James Ricchiuti - Needham & Company Barbara Coffey - Brigantine Mark Strouse - JPMorgan Adam Fleck - Morningstar Josephine Millward - Benchmark Jim Ricchiuti - Needham & Company

Thank you and good morning. Before I introduce the iRobot management team, I'd like to note that statements made on today's call that are not based on historical information are forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties, and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information on these risks and uncertainties can be found in our public filings with the Securities and Exchange Commission.

iRobot undertakes no obligation to update or revise these forward-looking statements, whether as a result of new information or circumstances. During this conference call we will also disclose non-GAAP financial measures as defined by SEC Regulation G, including adjusted EBITDA, which we define as earnings before interest, taxes, depreciation, amortization, merger and acquisition expenses, restructuring expenses, net intellectual property litigation expenses, and non-cash stock compensation.

A reconciliation of GAAP and non-GAAP metrics can be found in the financial tables at the end of the first quarter 2012 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 first quarter of 2012, as well as our business outlook for the rest of 2012.

And John Leahy, Chief Financial Officer, will review our financial results for the first quarter and provide our financial expectations for the full year 2012 and the second quarter ending June 30, 2012. 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 kicked off the 2012 with a better than anticipated quarter.

The results and outlook for our Home Robot business are excellent, while the near-term visibility in our Defense and Security business continues to be limited. Total Q1 revenue of $98 million was at the high-end of our expectations for the quarter, while adjusted EBITDA of $6 million and EPS of $0.02 for the quarter, both exceeded our expectations.

Strong growth in both our international and U.S. markets fueled a 20% year-over-year increase in Home Robot revenue.

We are successfully expanding our distribution of new products and increasing our penetration in existing markets, while establishing a presence in new markets. Our steadily increasing Home Robot global reach is enabling us to weather continuing U.S.

budget issues impacting are Defense and Security business. Based on our view of the rest of the year, we are reaffirming our financial expectations shared this past February, to deliver full year 2012 revenue of $465 million to $485 million, EPS between $0.75 and $0.95 and adjusted EBITDA of $56 million to $63 million.

Our outlook by business unit has changed and due to significant growth in Home Robots, we now expect that business to comprise approximately 75% of total company revenue for the year. In the second quarter, we expect expanded product distribution and international demand to drive significant revenue growth in Home Robots.

We expect to receive U.S. government contracts for the purchase of FirstLook and SUGV robots that will generate higher second half revenue in our Defense and Security business, as we discussed earlier this year.

For the second quarter, we anticipate revenue of $102 million to $112 million, EPS between $0.05 and $0.13 and adjusted EBITDA of $7 million of $10 million. Now, I'd like to take you through some of the details of the first quarter and our expectations for the rest of 2012.

In Home Robots, a very strong demand overseas, particularly in Japan continue to feel revenue growth. In the first quarter, international Home Robot revenue increased 20% year-over-year and we expect overseas demand to contribute significantly to revenue for the remainder of 2012.

As said in the past that one in four vacuum cleaners sold in Spain is a robot. Based on current data that statistic is even more striking.

Quarterly data through February showed that one in three vacuum cleaners sold in Spain was a robot. Beyond Spain, we see the same fast developing adoption in such diverse markets of Italy, Taiwan, Denmark, Israel and Russia.

The robot vacuum cleaner category is going mainstream and growing far faster than the overall vacuum cleaning market. The good news is that not only is the adoption rate accelerating, but our Roomba remains the market leader.

Last year we began selling into Latin America and that region is on track to grow considerably this year of a small base. We've also begun selling limited product in China and expect material revenue contribution from that market next year 2013.

In our domestic business, Q1 results grew at impressive 21% over the same quarter last year, largely due increased sales to retail stores. Our U.S.

retailers are reporting stronger sell through and we expect strong double-digit full year growth over 2011. During the quarter, we expanded our distribution of Roomba 700 into retailers domestically and further throughout western European markets.

We also introduced the Scooba 230 into select European markets. Both products have been very well received in all region they together comprise approximately 40% of revenue in the quarter.

Expanding our distribution of both products throughout the rest of 2012 will continue to drive increased revenue. In mid-April, we launched one of the largest domestic marketing campaigns in iRobot history.

This campaign will help build off a strong Q1 performance and multi-faceted media blitz based on the concept of iRobot includes an extensive integrated presence on television, online and print publications. We are reaching out to our target customer, the modern professional to a greater extent than ever before.

2000 television spots reaching more than 1.5 billion people will run on channel such as HD TV, DIY Network, Food Network and the Travel Channel. In addition, more than $200 million online banner impressions will run on sites including Wired, Epicurious and The New Yorker and print ads will appear in the number of targeted magazines.

We initiated the campaign in Q2 to capture the markets for spring cleaning, mothers day and the wedding season and we'll run it again in the fourth quarter around the holidays. The objective is to increase awareness of iRobot and position our Home Robots as mainstream solutions to practical problems.

Over the past year, we've talked about the importance of investing in brand and marketing to support our strategic growth plans. We saw the positive impacts of our investments in domestic results in 2011 and expect this program to drive even greater awareness in the U.S.

markets in 2012. In Q2 we anticipate higher year-over-year revenue in the U.S.

supported by our new campaign as well as significant growth in our international markets driven by sales of the Roomba 700 and Scooba 230. These positive developments have allowed us to increase our full year revenue expectations for Home Robots.

Turning now to our defense and security business, the Q1 results are consistent with our expectation of 70% of the units revenue will be generated in second half of the year. We are well positioned with a broad product base and increased functionality enabled through the technology to meet the evolving needs of global military and security forces.

The President requested $84 million to purchase more than 300 SUGVs in his proposed 2013 budget compared with just $25 million requested in the 2012 budget. The multiple approvals are required for its passage, this demonstrate the recognized value and support for our tactical ground robots by the military leadership in Washington.

Given leaner military budgets there is an intense focus on doing more with less. Unmanned ground vehicle enable efficient achievement of mission objectives with fewer trips.

We recently reported orders from more than 100 FirstLook robots and a Warrior robot both new products introduced this year. The Firstlook weighing five pound is our smallest robot.

The robots are undergoing operational assessment in theatre and we have received very positive feedback from the field about its capabilities. We are excited about the advantages of this game changing robots and will provide to our troops and expect additional orders for Firstlook in the second half of the year.

Pouring adjacent market opportunities for our defense and security robots has been an ongoing initiative at the company. Earlier this month, we announced the first significant order for a commercial use ground robot.

Progress at energy purchased at Warrior, our largest robot at 350 pounds and several PackBot robots for use at the Robinson Nuclear Plant near Hartsville, South Carolina. Following our success moving to brilliant transmitting information regarding radiation levels at Japan Fukushima Daiichi nuclear reactor last year, we had numerous enquiries about using our robots at other nuclear facilities.

Robots mitigate risk by keeping personnel out of radioactive environment and service cost effective way to perform operations. We are very excited about the potential in this market and continue to look at other industrial applications or military robot systems.

We continue to experience funding delays that will impact Q2 revenue and we have reflected that impact in our expectations. We expect orders and funding to start flowing but full year results will be lower than we anticipated last quarter for military robots.

We continue to believe that the prospects in our defense and security robots are significant as a life savings and operating efficiency attribute to the products and technology have been acknowledged by the soldiers and military leadership. Expanded use of the robots has driven increasing demand.

The wars in Iraq and Afghanistan clearly accelerated adoption of robots to appoint where unmanned systems have become part of the military doctorate and our products parts of the future army's standard equipment. As we said on our last earnings call, limited visibility in our Defense and Security business presents near-term challenges, but we are working our way through them and expect to exit 2012 in a very good position.

In addition to our established businesses, I'm excited about the progress we are making and the opportunities that we see for Ava, our human interface robot. Ava is a breakthrough mobile robotics platform, developed to help robot designers, application developers and market innovation specialist expedite the pursuit of practical affordable mobile robotic solutions.

New market opportunities exist for Ava in multiple industries, including healthcare, retail and security. Finally, at the end of February, we announced a management and structural realignment of the company for our next stage of evolution.

Three business units were formed, focused on Home Robots, Defense and Security robots and emerging technologies. These business units report to Jeff Beck, formerly President of Home Robot and Chief Operating Officer.

Our government and industrial division has been renamed Defense and Security to reflect our focus on those markets. The three business units will advance iRobot's long-term growth strategies as a technology leader in remote presence in automated home maintenance solutions.

The use of iRobot platform to technologies outside of the home and military markets has grown significantly. And a new structure allows us to build market-facing business units around new opportunities and energize rapid product development.

Jeff has made significant and meaningful contributions to iRobot, driving possible growth strategies across the business, expanding new product distribution domestically and internationally and improving business processes. Joe Dyer, formerly Chief Operating Officer has been named Chief Strategy Officer, and he will lead strategic business development, mergers and acquisitions, research and advanced technology development.

In summary, first quarter results exceeded expectations and we are on track to meet our expectations for the rest of the year. I'll now turn the call over to John to review our first quarter results and Q2 expectations in more detail.

Thank you, Colin. Revenue in the first quarter was $98 million compared with last year's record $106 million.

Earnings per share and EBITDA, both exceeded expectations for the quarter. Earnings per share for the quarter were $0.02 compared with $0.27 and EBITDA for Q1 was $6.1 million compared with $15.2 million last year.

Home Robot shipments grew 12%, while revenue of $82 million increased 20% from a year ago. International revenue increased 20% in the quarter to $60 million and comprised approximately 75% of Home Robot revenue.

Total domestic revenues were up 21% in Q1, one of our best performances in several years and we expect this double-digit growth to continue throughout 2012. Importantly, sell-through at our top five domestic retailers was up about 15% year-over-year, reflecting improved consumer sentiment and the impact of our marketing programs and new product introduction.

Defense and Security revenue of $16 million decreased from a year ago, due to both lower contract and product revenue. Gross margins in the division decreased significantly as a result of lower fixed cost and absorption.

Defense and Security product revenue was $10 million in the first quarter, compared with $29 million last year. Product lifecycle revenue was $5 million or 48% of product revenue.

For the total company, gross margin was 35% for the quarter compared with 41% last year, due to the negative impact of the Defense and Security business. Home Robot gross margins continue to be strong at 45%.

We expect gross margin to improve throughout the year, resulting in full year 2012 gross margins of 40% to 41%. Operating expenses were limited to a 3% increase over last year.

As a percentage of revenue, OpEx was 34% in Q1 compared with 30% last year, primarily due to lower revenue. For the full year, we continue to expect operating expenses to be approximately 31% of revenue.

At the end of Q1 we had cash including investments totaling $182 million compared with $124 million last year and operating cash flow was $4 million. In Q2, we expect revenue of $102 million to $112 million, a slight increase over the last year, driven by very strong growth in Home Robots.

We expect EPS in the range of $0.05 to $0.13 and EBITDA of $7 million to $10 million. Our full year revenue expectation is of $465 million to $485 million remain unchanged.

However, we now expect Home Robot revenue to grow approximately 25% to $345 million to $355 million and comprise 75% of total company revenue. We anticipate defense and security revenue in the range of $120 million to $130 million for the full year with about 70% coming in the second half.

Strong domestic sales growth, the expanded distribution of new products and further penetration into long-term international markets will drive a home robot business orders for Firstlook and SUGV robots from the U.S. military.

Sales to foreign countries and block software upgrades of defense and security robots in theatre will support that business in second half. And now back to Colin.

Some results in the first quarter exceeded our expectations due to strong performance by our Home Robot business. As we look at the rest of the year, we will diligently balance our investment in technology in the iRobot brand with our commitment to deliver profitable growth.

This year we're further I;deepening our presence in existing markets and expanding in new geographic markets enabled by our investments. Beyond this year, we should see tremendous growth opportunities for our Home Robots while the military climate is disappointing, the longer term drivers remain intact for our defense and security business and we are well-positioned for those markets.

With that, we'll take your questions.

The first question is on the defense business, of the units that you shift in the quarter, it sounds like it's clearly based on the average selling price, the bulk of these were Firstlook?

That is correct. Numerically, absolutely.

And Colin, I guess that's what I'm just trying to get a sense of as we look at the year in the second half, what's the profile of that business going to look like in terms of Firstlook, SUGV and other. And this maybe a question for John, where do you see gross margins going in this business?

For the year, I think that Firstlook is going to play a very significant role growing to be the largest single contributor. And I think that if you look at the product sales PackBot, SUGV and Firstlook are all roughly comparable contributors to the product sales and then you add in the POR on top of it to round out the year.

But I think that we've seen very, very nice strong growth in establishing Firstlook as another major revenue driver. And the PackBot and SUGV products are still contributing, PackBots is hanging on and SUGV is we've got the BCTM sales happening later in the year and I think that we still have not reached the levels of acquisitions around SUGV that we anticipate, so we'll be looking for that to happen in the 2013 and beyond.

And with respect to gross margins in this business, would you assume that they get back to the 30% type of level that you've seen in the past?

We think that in the second half gross will run in a traditional range of low to mid-30s, certainly margins were negative in the first quarter because of the low revenue. We think that improvement in Q2 not all the way back to where we traditionally are but in the second half as revenue ramps up, as it did in 2011 and 2010.

We think margins will come back.

One follow-up just switching gears on the consumer business, just given the changing profile of the business in terms of the heavier mix of consumer and the stepped up efforts in advertising and marketing that you're expecting, how should we think about SG&A, sales and marketing I should say, expands as a percent of revenues for the year. It sounds like that's clearly going to creep up.

It will, Jim, and particularly in Q2 our operating expenses will grow versus Q1 and that's obviously reflected in the guidance, we gave. The bulk of the spend around the marketing that Colin talked about in his remarks, the bulk of the spend will occur in Q2 and then again in Q4 around the holidays.

So you should look to see OpEx in sales and marketing grow from Q1 by somewhere around $5 million or $6 million. The other elements of OpEx will hold relatively steady.

And Jim just let me jump in. You do correctly say and point out that we are seeing a shift in the financial drivers of the business.

Currently, we view this as a massive de-risking of our year with the military side to see the Home business responding so powerfully and the mix shift. We're very happy about what is going on the Home and in mix as we look forward the idea that we will see strengthening military markets in the future as very nice upside to our growth plans.

As you're looking at the government side, I noticed that the ASPs came down a lot. And I assume that's because the FirstLook is a little less expensive.

But also, can you talk about how you expect the first call to be layered into the budget, because I don't know where it was, but I did see this at the allocations.

You're correct. In the first quarter we sold 100 FirstLook and that definitely drove down ASPs.

ASPs for FirstLook is in the $25,000 range rather than for PackBots and SUGVs closer to $100,000 per robot. So that is an ASP delta.

And whether you expect FirstLooks to show up in the budget?

Right now, the demand for FirstLooks are through urgent need request coming from theater, but you would not find them in a line item in the budget for 2012.

This is Mark Strouse on for Paul. You're now expecting a higher mix of Home Robots for the year.

I mean given the higher margin in that business, is it fair to say that you're more comfortable with the higher-end of your earnings guidance range or maybe what's the rationale for nudging that up a bit?

I think that we're very comfortable with the range as given. I think that until we have better visibility on what the military side of the business is going to perform and we see our backlogs growing to support our expectations for government.

You're not going to see us getting particularly aggressive about full year guidance. We think we have good numbers.

We think that they represent the correct balance of conservatism and optimism. But it is a frustrating lens we have to work through as we try to predict the buying behaviors.

Because on one hand we get very, very strong messages around the need and demand for these robots and at other hand it seems like the delays and slowness around contracting in actually procuring these robots offsets that demand pull. So we think that we have a good balance right now.

And we'll keep you guys posted as the year develops. Certainly, the tremendous performance on the Home Robot side is giving us a lot more comfort to weather this perfect storm of sequestration specter of continued resolution and election in politics, all coming together at the same time.

So that's where we are.

And then, do you mind us walking us through the intra-quarter trends on the Home Robot side. It seems like some of macro issues in Europe kind of peaked again towards the end of the quarter.

Did that have any impact on your business, especially given the news in Spain or the France?

We've been relative unaffected or I guess more accurately we should say that the powerful adoption drivers in the robot vacuum market have outweighed the negative impacts from the macros in Europe and Spain, so that we have been enable to achieve for our last year and the first quarter of this year, very, very strong results, despite disappointing macros. I would love to see where it would be possible if the macros turn around as well.

But it is a mix and we haven't seen the slowdown, we would have seen it last year and certainly the macro environment in Europe was very challenging then as well. So we're weathering that with good opponent, and as I said earlier, Japan continues to be a very strong driver of our growth.

I wanted a follow-up on the European situation, the obviously the demand seems to still be there but I know Colin you previously discussed the importance of marketing investments from your distributors in the region. Can you talk a little bit about the level of support there, the economy is of course as bad as we discussed but the dollar is stronger and I know that's been a headwind in the past.

I think that the dollar is stronger but it is still within the range that we predicted it would be, that is built into our models with our distributors. The distributors I think have seen the dramatic impact of what investing in the marketing around the robots can yield as far as returns go.

And so that that works and we're seeing a continuation. We're seeing the continued investment in marketing from our distributors.

I think we've got good alignment between our target customer demographic in Europe and our distributor's ability to reach them so that's very good alignment. But it is business as usual.

We have a winning formula proved out last year and continued into this year and we had economic headwinds last year, we see them again this year, hopefully. We'll see it improve a little bit throughout the year but one can ever predict.

So our guidance is based around macro-challenges like we saw in '11, in '12 in Europe and levels of investment from our distributors are on par with what we saw last year and they have expressed willingness and determination to do that based on the efficacy of those program last year.

And then it's still early of course, but on the Home Robot side again, can you share with us the contribution from Latin America during the quarter?

Latin America contribution it is growing off with small base. We're seeing a multiple of sales from a year ago.

I think that there is a lot more room for improvement on the Latin America and if we're doing better right now in Mexico than we are in Brazil. But it's contributing.

Is the winning formula you have in Europe, do you find that that's working in Latin America as well.

I would say that I think we have the right formula, I wouldn't say that we've gotten too far out of first gear as far as driving the types of dollars out of Latin America but again this is process, we're committed to it. And we're seeing the needle move as far as revenue goes.

We think we have the right model.

Can you give us a breakdown of your product mix expectations for government robots this year? I think previously, you talked about roughly 400 SUGVs and maybe 2000 Firstlook, if you can help us in getting some more color on your thinking for updated guidance?

On a unit perspective, PackBots are going to around a 100 units, SUGVs in the rough order of magnitude to 150 units, Firstlook 1500 units, is what is contemplated by the guidance. So basically from a dollar perspective, 20% PackBots, 30% SUGV, 30% Firstlook, that gets us to the guidance figures that we gave.

If we're able to see some upsides from those figures, that's upsides to our guidance.

So can you also talk about some of the new opportunities in the government and security division? What's going on with undersea vehicle market and when you talk about security, are you referring to law enforcement and critical infrastructure protection, and what's your go-to-market strategy there?

The CNO has been outspoken in his desire to drive the unmanned underwater space. And what we've seen coming out of that is a lot more interest in underwater vehicle has not driven or translated into product procurement dollars.

But we have a number of research and product development programs: a program called (Rills), which is developing an unmanned swimmer interdiction system for harbor security; and a high speed countermeasure program that has seen its funding turn back on and proceeding toward product on the maritime space. Again, these things have a lot of inertia behind them.

But we do have some very exciting product development programs supported by government dollars proceeding. I think as a result and I would say that the intermediate term prospects for the underwater unmanned space to be improving, based on a growing recognition that this an area that we must be investing in as a nation.

Can you comment on law enforcement and critical infrastructure protection, is that an adjacent market that you're targeting? And whether you would see that contributing this year or next year?

The paramilitary markets are markets that we have always sort of supported on a inbound call side. We are outbound marketing to these organizations has been relatively limited as it's a very distributed marketplace.

With the growing maturity of our FirstLook product, we think that there are opportunities to go back with a product, which is at a price point in capability that is a nice alignment in those areas. And you'll be hearing us talk more about our success and selling FirstLooks into those markets.

Although, at this moment in time, we are 100% focused on supporting the urgent needs for FirstLook in 2012. So that opportunity is more of a '13 and beyond opportunity, because basically our all of our engineering investments around FirstLook is maturing this product rapidly enough in order to meet the DoD customer needs.

But we think that has a lot of legs outside of DoD on a go-forward basis. So as critical infrastructure, you heard us talk about our first sale of the Warrior platform to Progress Energy.

We think that is a nice adjacent marketplace. And we do have energy, but against the selling of additional units into other customer similar to Progress Energy.

And again, we'll keep you inform as that develops.

Colin, in the past you've talked about the international markets and you've given us an idea of which countries represent the highest portion of your revenues. Has that changed much?

Is Japan still one of the big three as it for largest market right now?

Yes. Japan is one of the big three, is our largest single nation outside of the United States, and growing very, very strongly.

The distributors are doing a great job, continues to invest very strongly in the iRobot brand and awareness programs and a bright spot, although on the Home side we have many bright spots.

And the other markets, has there been any change? You've talked about France being one of the large ones or clearly Spain it sounds like?

Spain is in the top five. Italy and France are strong, Switzerland is strong.

The Europe continues across the board to be a vary good market for the Robots. And hopefully you took away from the call that our domestic market is been turned around, both in margin and growth rates.

And we're very excited that 2012 is going to be the year of North America rejoining the growth parade for Robot vacuum cleaners and we're investing in it. And we are excited to make that a part of our Home Robot story this year.

I assume your competitors are seeing the same kinds of activity at least the pickup in the U.S. market and the strength overseas.

Has there been much of a change in the competitive landscape, particularly as you allude to Robot vacuum cleaners becoming more mainstream products now?

I think that what I would say is that the growth in the marketplace has allowed the legitimate competitors to start to have some economic success. And so that LG, Samsung and then the two U.S.

companies' evolution and (inaudible). I think that they are sharing in the growth of the Robot vacuuming category, which is expected, again there marketing efforts helps breakthrough the skepticism barriers that held us back for so long and so they add their marketing dollars to the growth of this category.

We view this as a good thing. It's one of the reasons why we are seeing the main streaming of Robot vacuuming.

It's now more relatively accepted as the better way of cleaning your floor. So that's a good thing.

And it also means that we can sections of stores beginning to devote themselves to robots. We saw I think the first time ever best buys has a got robot section at 75% iRobot, which is nice.

But we have a better store presence now than we've ever had in past, driven by the main streaming of this category.

What do you think your market share is right now?

It really depends on the country. But we're clearly the leader in these categories.

And last question from me, just with respect to the 700 the Scooba 230, it looks it's around 45% at the Home Robot business what percentage of your overall distribution channel do these products now address.

I am not sure I have understand your question.

Well, I mean you have these products now gotten full distribution in the channel or are you still moving, I mean to the 230, it looks like you're still moving into the international markets. When would you expect to have these products fully available?

Okay, I understand the question. First of yes, in facts our new products are driving about 40% of our Home Robot revenue this year, which we think is a great new and healthy statistic.

The products are absolutely not fully rolled out. We are very methodical in how we bring our new products to market.

We would rather move deliberately from specialty retail into the sort of big box specialty into main stream and then finally into our discount retail channels. And so that even by the end of this year we will not see these new products fully rolled out through our product introduction strategy because it's a multi-year strategy but we will see mass market distribution of these new products in probably all of our markets except Latin America by the end of year, so not in every channel and every market but in every market by the end of the year.

And these products, you would assume continue to command higher gross margins and that should continue.

Absolutely.

Thank you very much. So that concludes our first quarter earnings call.

We appreciate your support and look forward to talking with you again in July to discuss our Q2 results.