Colin Angle - Chairman, CEO and Co-Founder Alison Dean - EVP and CFO Elise Caffrey - IR

James Ricchiuti - Needham & Company Bobby Burleson - Canaccord Genuity Mark Strouse - JPMorgan Adam Fleck - Morningstar Ben Rose - Battle Road Research

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, acquisition and divestiture expenses, restructuring expenses, net intellectual property litigation expenses and non-cash stock compensation expense.

A reconciliation of GAAP and non-GAAP metrics can be found in the financial tables at the end of the first quarter 2016 earnings press release issued last evening, and available on our Web site. 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 2016, as well as our outlook on the business for 2016.

Alison Dean, Chief Financial Officer, will review our financial results for the first quarter of 2016; and, Colin and Alison will also provide our financial expectations for the second quarter ending July 2, 2016 and fiscal 2016. 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. I’m very excited to report that we had an outstanding first quarter.

We delivered year-over-year Home Robot quarterly revenue growth in the United States of more than 50% following record sell-through during last year’s holiday season. The overwhelmingly positive response to the introduction of our newest product, Braava jet, resulted in the highest Day-1 unit sales in the Company’s history.

Shortly after the end of the quarter, we closed the previously announced sale of our Defense & Security business, ending a proud chapter in iRobot’s history and enabling our intense focus on our home business. And we executed an $85 million accelerated stock repurchase transaction, shortly after the end of the quarter, funded in part by the proceeds from the sale of Defense & Security, consistent with our balanced approach to capital allocation.

This latest transact -- with this latest transaction, we’ve returned almost $100 million of excess capital to shareholders during 2016, while investing to grow the business in order to create shareholder value. Based on our Q1 results and our outlook for the rest of 2016, our financial expectations are unchanged.

We continue to expect 2016 revenue of $630 million to $642 million, EPS of between $1.20 and $1.40, and adjusted EBITDA of $80 million to $90 million or roughly 13% to 14% of revenue. These expectations reflect our confidence that Home Robot revenue growth of 12% to 13% for the full-year will be driven by strong demand in the U.S.

and China. The success of the marketing programs we ran during Q4 2015 holiday season, resulting in year-over-year sell-through of more than 70% in the fourth quarter, caused U.S.

retailers to re-stock their shelves in Q1, ahead of our expectations. We anticipate this momentum to continue through 2016 as heavy promotional activities begin again in the second quarter for Mother’s Day and Father’s Day.

As we disclosed last quarter, our 2016 expectations include strategic incremental investments, critical to achieving our three-year financial target. The investments will impact earnings in 2016 versus last year, as expected, to position the Company for accelerated growth and improved profitability in 2017 and 2018.

The remaining expenses associated with the D&S divestiture and our proxy contest are additional one-time costs that will impact Q2, but our strong Q1 results enable us to reaffirm our earnings and adjusted EBITDA expectations for the full-year. Now I’ll take you through some of the details of the first quarter and our expectations for the rest of 2016.

Total year-over-year Home Robot revenue growth of 15% in Q1 reflects the sale of the Roomba 980, a new product, which we introduced in September of 2015. Demand continues to be strong for our top-of-the-line Roomba, as well as for our 800 and 600 series.

In the United States, Q1 sell-through at our top five U.S. retailers increased roughly 20% over last year.

While Roomba is driving overall revenue growth this year, we’re very excited by the customer reaction to our newest innovation, the Braava jet mopping robot. During the quarter, we delivered on our promise to introduce a new product, the second new product in less than a year.

We began selling the Braava jet on our Web site in mid-March and it’s been available in U.S. retail since the beginning of April.

Reviews in the press and on Amazon have been very positive highlighting its price, design and the fact that it is the perfect complementary product to Roomba. In the third quarter, we expect Braava jet to be on shelves in China and Japan, where we expect to leverage the necessity for daily mopping and the Asian consumer’s enthusiasm for automating this task.

Longer term, we expect the Braava jet with its disposable cleaning pads, to provide a future recurring revenue opportunity once we’ve built a reasonably sized installed base. With our new product, in combination with our larger format Braava, we’re very optimistic about developing our wet floor care business into a material, second revenue stream.

International Home Robot revenues declined 8% year-over-year as expected. Revenue in EMEA was down 10% year-over-year as anticipated, due to distributor order timing.

We expect EMEA quarterly year-over-year revenue growth for the rest of the year to be robust and result in full-year growth in mid-single digits over 2015. We saw a small year-on-year increase in Japan in Q1 in part due to the implementation of new marketing programs that proved to be highly successful in the U.S.

during 2015. As you may recall, another part of our sales & marketing investment this year is earmarked for exporting our successful U.S.

demand generation programs overseas to expand worldwide consumer adoption of Roomba. We have begun implementing these programs in Japan and, while it’s still early, we’re pleased with the results to date.

We are executing on the go-to-market transition in China we discussed on last quarter’s call. As we said, in 2015, e-commerce was the growth driver, especially on the 11/11 and 12/12 holidays.

We believe that China will grow to be our second largest market based on estimates that the robot vacuum cleaner segment will grow to be more than $1 billion over the next five years. A critical piece of our 2016 incremental sales & marketing investment is focused on refining our go-to-market e-commerce strategy to further accelerate growth in this market.

Our distributor’s sell-out in China was more than double in Q1 over last year and Q2 is also expected to be more than double Q2 of 2015 sell-out. As we bring our new e-commerce partner online, we’re limiting new Q2 sell-in to our current partner, as planned, to keep regional inventory at an optimal level as we execute on this complex transition.

Exiting Q2 we expect to be well-positioned for significant second half growth and capturing an even larger share of the rapidly growing Chinese market for robotic floor care. For the full-year, we continue to expect APAC revenue growth of mid to high teens driven by China.

As we go forward, I’m very excited about the next chapter for iRobot. We’re poised for continued growth and success.

Our Home Robots business has grown at a 16% CAGR since 2012, setting the stage for accelerating consumer adoption and strengthening market share. Market leadership requires technology leadership and we’re making disciplined R&D investments to maintain our leadership in robotic vacuum cleaning in addition to developing and growing significant adjacent categories in Home Robots.

Our strategy for leading the Home Robot market is driving us to substantially increase software capabilities as we leverage our navigation IP for the connected home. Both the Roomba 980 and Braava jet are significantly more complex products, delivering enhanced performance enabled by software.

We have widened our competitive moat and will continue to pursue significant opportunities within the consumer robotics market through ongoing technology innovation. In summary, we’re off to a good start in 2016 and our plan is on track.

In the first quarter, we continued to see the positive impact of our targeted market -- marketing programs as Home Robot revenue grew 15% year-over-year following record Q4 revenue. We successfully launched our second new product in less than a year, the Braava jet, to rave reviews.

We closed the sale of our Defense & Security business allowing us to focus our efforts more intensely on the vast home robotics market to improve shareholder value, and we will continue to invest in key technologies to extend our market-leading position in consumer robotics. I’ll now turn the call over to Alison to review our first quarter results in more detail.

Thanks, Colin. We delivered first quarter revenue consistent with our expectations, with Home performing at the high-end and D&S performing at the low-end, and earnings per share and adjusted EBITDA ahead of expectations due to higher than expected Home Robot gross margin.

Revenue of $131 million increased 11% from Q1 last year driven by Home Robot growth in the U.S. EPS was $0.13 for the quarter compared with $0.16 for the same period last year.

Q1 adjusted EBITDA was $14 million versus $13 million last year. As Colin discussed, domestic Home Robot revenue grew more than 50% in Q1 over last year.

This growth was driven primarily by strong inventory replenishment by U.S. retailers.

Expanded distribution by Bed, Bath & Beyond and Best Buy, as well as a lower price point for our Roomba 650 model, also contributed to increased revenue. Net revenue from life-to-date returns adjustments was $1 million compared with $1.1 million last year.

International revenue declined roughly 8% as expected due to lower year-on-year sales in both EMEA and APAC. We continue to expect mid-to-high teen full-year growth in APAC and mid single-digit growth in EMEA as we continue to roll-out distribution of the Roomba 980 and begin to sell Braava jet to overseas distributors.

We remain optimistic about the vast opportunities in the China market and are well on our way towards transitioning to a fully-operational Shanghai office by the end of the second quarter. We are confident that with an iRobot presence in country and a new trading partner for e-commerce, we will be able to more effectively focus on further accelerating revenue growth and quickly build China into our second largest market.

Defense & Security revenue of $3 million in Q1 was lower than we anticipated. Scheduled Q1 deliveries were delayed until Q2 due to a customer’s inability to perform acceptance testing before our quarter-end.

The earn out of up to $15 million, associated with the sale of the D&S, is tied to total 2016 revenue of the business, whether generated pre or post divestiture. The EPS and EBITDA impact of D&S for the Q1 stub period, as well as divestiture costs were a negative $0.12 and $3.7 million respectively during Q1, as expected.

The close was effective April 4th, and therefore the final disclosure accounting will be completed in Q2. The full-year impact on EPS and EBITDA is expected to be negative $0.10 and $2.6 million respectively, more favorable than the Q1 impact due to the P&L benefit of transition services reimbursement and the gain we intend to book on the sale during Q2.

In addition, it is important to note that our full-year revenue guidance originally included a range for D&S of $2 million to $7 million. We will not record any D&S revenue other than the $3 million in Q1, but we’re also not changing our full-year revenue guidance, as we expect Home to perform better than originally planned.

For the total Company, gross margin was 47.4% for the first quarter 2016, up 1.9 points from the same quarter last year. This was higher than we anticipated, primarily due to region and product mix in Home Robots.

Domestic revenue was roughly 37% of Q1 2015 revenue compared with nearly 50% of Home Robot revenue in Q1 2016. In addition, our top-of-the-line Roomba 980 comprised 15% of Q1 2016 revenue and wasn’t available in Q1 of last year.

Q1 operating expenses were 43% of revenue, up from 39% in Q1 last year primarily due to higher selling & marketing spending to support the Braava jet launch and one-time G&A costs of $2.5 million or $0.06 of EPS, associated with the D&S sale and the proxy contest initiated by Red Mountain. We ended the quarter with $247 million in cash.

The accounts receivable balance at year-end 2015 was exceptionally high due to record revenue and shipments we made late in Q4. Strong collections during Q1 were partially offset by $12 million in share repurchases for a net $34 million increase in cash.

In April, we funded our accelerated stock repurchase program of $85 million, offset in part by the proceeds on the D&S sale, both of which will be reflected in our Q2 financials. With this latest stock repurchase, we’ve returned nearly $100 million of excess capital to shareholders to date in 2016, while investing to grow the business in order to create shareholder value.

Total company DII of 86 days was higher than normal this quarter as it included an unusually high level of D&S inventory due to D&S revenue slipping from Q1 to Q2 as a result of the acceptance timing previously discussed. DII for Home Robots was 70 days as we built Braava jet to support the product launch.

We expect Q2 ending inventory to return to our normal level of roughly 60 days. As we’ve consistently said, while we provide quarterly expectations, we manage our business from a full-year perspective.

Since 2006, more than 50% of our Home Robot revenue has been delivered in the second half. We are on track for the year which we continue to expect to be back-end loaded, as we communicated in February.

Throughout the rest of 2016, our quarterly year-over-year comparisons will be more challenging, due in part to the successful divestiture of the D&S business, as well as the incremental investments we’re making this year. Now I’d like to provide you with additional detail for our Q2 financial expectations.

Keep in mind that these expectations and growth rates are based only on our Home Robot business. We have provided a table in our press release to show a pro-forma view of D&S by quarter and for the full-year 2015 for an easier comp analysis.

We expect second quarter Home Robot revenue of $145 million to $150 million, an increase of 6% to 10% over Q2 last year driven by sales in the U.S. EPS is anticipated to be between $0.06 to $0.14, and adjusted EBITDA of between $9 million and $12 million, both down from Q2 last year as expected.

In addition to the typical Q2 increase in sales & marketing expense to promote Mothers’ Day and Fathers’ Day sales, Q2 OpEx also includes our continued investment in China, the execution of some of our new marketing programs overseas, and one-time costs of approximately $3 million, or $0.07 of EPS, associated with the proxy contest and the final expenses associated with the sale of D&S. We expect OpEx to increase as a percent of revenue in Q2, before declining to the low 30’s in the second half of the year.

For the full-year, we continue to expect operating expenses to total 38% to 39% of revenues consistent with the expectations we provided on the February earnings call. I’ll now turn the call back to Colin.

We’re off to an excellent start in 2016 as we focus our efforts on maintaining our position as the world’s leading consumer robotics technology company. With our efforts solely focused on robots for the home, we’re confident that we can accelerate the Company’s growth in the near-term by seizing the tremendous opportunities we see in driving further worldwide adoption of robotic vacuum cleaners.

Leveraging our robust portfolio of mapping and navigation software will enable us to further develop and grow significant adjacent categories in Home Robots longer term. With that, we’ll take your questions.

Good morning.

Good morning.

My question relates to EMEA. Colin, I wonder if you can talk a little bit about that.

I mean, the trend here has been choppy for the last few quarters and it looks like you’re not assuming a whole lot of improvement in Q2 yet, still sounds like you’re expecting some positive developments in terms of growth picking up in the back half of the year. So, what gives you that confidence?

We will have to do with -- again, the exporting of the marketing programs that we initiated in North America in the Q4 of last year, as well as the stabilization of currency in Europe, and so that the economic environment is improving. Last year we were chasing a situation where currency devaluation put us in the hole and we had to go climb back out and so that we’re in a more -- much more stable environment and have our position, our products have the right position with the right prices such that we see the trends already starting to form that will lead us to meeting our expectations full-year.

What’s the timing of the stepped up marketing program? Is it underway now; is it something that’s going to pick up more towards the back half of the year?

As mentioned, it started in Japan already. Although it will increase through the year in Europe.

It's more of a Q2 through the end of the year program with the back half of the year being more significant than what we will see in Q2.

And then last question just again relating to EMEA. Is there any shift that you’re detecting in the competitive environment?

We are continuing to hold ground in EMEA, as well as the rest of the world. And so that there is a continued activity were we will see a competitor bring in a new product it might have a few weeks of higher sales in traditional be that competitor might have and then attempts to go and fall back down.

So we've seen that consistently in Japan, we see it in EMEA, in the U.S., we continue to gain share and so we’re over 80% market share in the United States. So, I think that our strategy of investing in product and technology and raising the bar at a rate faster than our competitors can keep up with is a successful strategy and is one of the fundamental tenants for why we’ve confidence in our growth through ’16, ’17, and ’18.

Okay. Thank you.

Yep.

Yes, good morning. Thanks for taking my questions.

Sure.

Colin, I was wondering just in terms of the Braava jet whether or not you guys have come up with some long-term, kind of the attach rate expectations with Roomba. It sounds like there is a natural attach rate kind of sale that can happen here.

And I’m also wondering, if you’re planning to market that relationship explicitly at any of the campaigns coming up?

Yes. It’s a little too early.

We obviously have our internal models of what the attach rate is, but they’ve yet to be proven out. It's still very early in the rollout of the Braava jet, but we do view these products as very complementary.

And so, I think that you should expect and we may talk about in the future how these will work together. In fact, in China last year, our most successful 11/11 promotion was a Braava and Roomba bundle, and that was proved to be a very good idea.

And so we will be doing more of that and perhaps looking at extending that beyond. Relative to our marketing campaign, one of the things that we’ve learned is one of the best ways of explaining the Braava jet is by showing it next to the Roomba.

So showing to avoid and a challenge we’ve had in the past of explaining what exactly is Braava or any of our wet cleaning products. It looks a lot like a Roomba and so that its shown to be very effective, that if we show Roomba what it can do and then show Braava by contrast, the viewer very, very quickly understands the difference and understand why their home cleaning arsenal should include both.

And so that type of joint marketing is actually on air in some test markets and you should expect that to continue.

Okay, great. Thanks for that.

And then, just wondering also on the Braava jet with the disposable cleaning pads, are there any third-party suppliers there or do you’ve that all integrated where you’re the only supplier and what are the margins look like on that consumables business once Braava jet fully ramped?

So the interface between the pad and the robot is a patented shape which gives us some ability to protect against third-party copycats. So that it is our intention that the consumables business will be led and controlled by iRobot.

So we’ve thought that went through and the pad also have some unique features which allows the robot to determine what type of pad it is, because there's three different types of pads, one for drive, one for damp, and one for wet cleaning. And so there is a bit of technology that provides some additional color.

It’s a consumable business and we do believe that as we continue to scale that consumable business would be additive to our margin structure, but we don't give out any detailed information on a product by product basis, but it should be good.

Thanks.

Yep.

Good morning. Thanks for taking our questions.

Sure. Hi, Mark

Hi. So just a question on FX, I mean you kind of talked about that as one of the reasons for growth in EMEA in the second half, but I’m just kind of wondering what -- just because there's been some movements in FX since you guys first reported or first issued your earlier 2016 outlook.

Just wondering what guidance assumes as far as FX on the top and the bottom end of the range? And then, just more generally, if there is kind of a rule of thumb that we can kind of think about as far as, for example the yen depreciates by X percent that implies a Y percent change in revenue, that kind of thing.

Is there any rules of thumb for your major currencies?

No, there aren’t really rules of thumb, Mark. Just going back to your comments about EMEA, and Colin’s earlier statements, we were impacted pretty significantly last year by the macroeconomics.

To date this year, we haven’t been and we’ve started to recover from the impact we’ve had last year. So, our expectations are based on sort of our current view of the macroeconomic situation and current FX rate.

And there just isn’t a standard methodology you can use to track changes in either the yen or the euro to how it might impact us. But we think in both Japan and EMEA we’re coming into a year where we shouldn't be impacted to the extend we were in 2015 and that's one of the reasons we've got the targeted growth rates for those regions in our expectations.

And Mark both iRobot and our distributors engage in currency hedging to mitigate any small changes. Last year the changes in FX were so dramatic that it broke the hedging protections and caused a real impact.

So we cannot absorb modest FX fluctuations without having it impact materially our business and that's the assumptions and the reality of 2016 thus far.

Got you. Okay.

That's helpful. Thank you.

And then, I just wanted to make sure I’m thinking about this right as far as the one-time costs in 1Q and 2Q. So I think you said total impact from the divestiture was about $0.12, but I think it was $0.06 of that was in OpEx and you kind of lump that together with the proxy contest.

And then for 2Q you’ve said $0.07 in OpEx with the proxy contest. And the final divestiture cost, is that $0.07 the total impact in Q2 or will there be additional costs somewhere else?

The $0.07 ….

Trying to make sure I’m getting a pro-forma outlook here.

Yes, $0.07 is the total we expect in Q2 from both the proxy contest and the remaining divestiture costs that we have. Just to clarify the comments about one-time versus the impact of D&S in Q1, the $0.12, the $0.12 is the impact of both the stub period, which was a loss period for us because of the minimal revenue we had from D&S, yet we had a full quarter of D&S expenses before the divestiture in conjunction with the one-time divestiture costs that we incurred.

That’s the combination that creates the $0.12.

Got you. Got you.

Okay. And then, last one for me just on the buyback, so pretty good chunk in early April.

How much is remaining under the current authorization and how should we think about that going forward?

From a cash perspective, the cash is fully executed in April, the $85 million has left. We’ve received a partial amount of those shares.

That’s the way the mechanics of the ASR works in Q2. Remaining shares that will be purchased under that ASR will come to us outside of Q2.

But the authorization for that program is complete. If you combine that with what we executed prior to the ASR, that’s a total of almost $97 million that we’ve returned year-to-date.

Right. Okay.

Thank you very much.

Welcome.

Hi, good morning. Thanks for taking my questions.

Sure. Good morning.

So I want to follow-up on, on the Braava jet, helpful commentary on profitability around the consumables business, but Colin, I remember you’ve talked previously that the prior Braava model was a similar margin structure to the rest of the Home Robot division. Should we assume that the Braava jet would also track that?

Yes, I think that we’re being aggressive with the price. And so that at launch the margin structure might be slightly different, but we’ve a good plan in place that should make the core Braava jet itself be consistent with our margin structure of other products.

Got it. Thank you.

And then, maybe a question for Alison, looking back at the past few quarters of share repurchases, I think you’ve been disciplined in buying back the shares when they look cheap and of course holding off after price appreciation and now the stock has come up a little bit, you wrapped up a pretty sizeable buyback. Does that bring maybe M&A a bit closer to the forefront?

Can you share your pipeline look there?

You know we’re constantly looking into the market for acquisition opportunities. I wouldn’t necessarily read anything into the nature of our share repurchase programs recently and how that might relate to acquisitions, but as we’ve said pretty openly we’re always looking for partners or other companies that can help us implement our strategic vision.

So we founded an organic opportunity to do that, we would take advantage of it.

Okay, great. Thank you so much guys.

You bet.

Good morning.

Good morning.

Good morning. Question, Colin regarding the positioning of the new Braava jet.

The Braava 380t has been a very successful product for iRobot. Can you talk a little bit about how the positioning or the pricing might change for that model in light of the recent product introduction?

Sure. So that the Braava theories we have -- the 380t, which is the legacy product and then the Braava jet.

The primary difference between the two is that the 380t model is designed for larger areas. And so that hard floor, living rooms, dining room, open floorplan homes, would be cleaned using that device.

And that the Braava jet would be used in kitchens and bathrooms. The Braava jet has some newer technology in it with the way that it cleans and the reusable -- I’m sorry, the disposable pads which contain the cleaning fluid embedded in them and so that its newer technology, but both products are highly effective and we’re seeing as we promote the Braava jet, we’re seeing a lift on the 380t v as well, and so that the marketing program and the way that we’re explaining the difference between Braava and Roomba is in fact working.

But the short answer 380t for large areas, Braava jet for small areas like kitchen and bath.

Okay, great. And then also in -- as it pertains to the far east, I think one of the things that you’ve discussed in the past is this idea that, hardwood floors and other floors that are non-carpeted are fairly prevalent over there.

And I know you don't disclose sales by geographic region, but can you speak to how the Braava is performing in general versus the Roomba in the far east?

What I can say is that the success last year with Braava in Asia gives us great confidence and that was one of the reasons why we continue to develop and launch the Braava jet. So it would not surprise me if the Braava jet was demonstrated the highest growth rate over the next two years in Asia, because the cleaning methodology used in Asia is predominantly mopping.

And in Asia, in China, in particular, in order to make a Roomba sale first you’ve to get the customer to be excited about vacuuming and then robot vacuuming whereas robotic mopping is just a one step from mopping to robot mopping. And so we think the sales process is going to be in many ways simpler than the -- that robot vacuum cleaning sales process, which is very exciting because the expectation for the size of the robot vacuuming market are -- as I said over a $1 billion in the next five years in China alone we could see a mopping opportunity, perhaps a comparable size and as we work to diversify our revenue stream away from solely Roomba, we see mopping in Asia as to as, A, the key market and the key product for effectively doing that.

Okay, great. And if I may, just one final question.

The Company's patents and so on that you're working on in the lawn mowing area are in the public domain and you’ve discussed a little bit about some of your efforts there. Is it right to think about that as being the next category with respect to Home Robots that iRobot will be entering or will it be more likely that you will be doing something else first from a new category perspective?

You know I think that the right thing to say is that we're extremely interested in lawn mowing. It is been out in the public domain because of the patent filings.

We believe that the approaches on the market today will effectively mowing your lawn a fall short of the usability required in order for that market to truly scale, and so that we're making sure that we’ve a solution that would lead to a great customer experience relative to the timing of the lawnmower versus other product introduction. It’s not our typical strategy to comment on what's coming next, but we’re happy to continue to acknowledge that lawn mowing we think is a very significant opportunity for us in the future.

Okay. Thanks very much.

You bet.

Thank you. So that concludes our first quarter 2016 earnings call.

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