Oct 22, 2014
Executives
Elise Caffrey - Investor Relations Colin Angle - Chairman and CEO Alison Dean - CFO
Analysts
Jim Ricchiuti - Needham & Company Josephine Millward - Benchmark Company Tyler Hojo - Sidoti & Company Unidentified Analyst - Susquehanna Adam Fleck - Morningstar Mark Strauss - JP Morgan Ben Rose - Battle Road Research
Operator
Good day everyone and welcome to the iRobot Third Quarter 2014 Financial Results Conference Call. This call is being recorded.
At this time for opening remarks and introductions, I would like to turn the call over to Elise Caffrey of iRobot Investor Relations. Please go ahead.
Elise Caffrey
Thank you and good morning. Before I introduce the iRobot management team, I would like to note that statements made on today’s call that are not based on historical information are forward-looking statements made pursuant to the Safe Harbor 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 second quarter 2014 earnings press release issued last evening, which is available on our website. On today’s call, iRobot Chairman and CEO, Colin Angle will provide a review of the company’s operations and achievements for the third quarter of 2014 as well as our outlook on the business for 2014.
Alison Dean, Chief Financial Officer, will review our financial results for the third quarter of 2014 and Colin and Alison will also provide our financial expectations for the fourth quarter and fiscal 2014 ending December 27, 2014. Then we’ll open the call for questions.
At this point I’ll turn the call over to Colin Angle.
Colin Angle
Good morning and thank you for joining us. Last evening, we reported an outstanding third quarter.
Results exceeded our expectations as a number of orders, in both Home and D&S, originally expected in Q4 were received and delivered in Q3. Home Robot revenue grew 19%, driving third quarter total company revenue up 15% to $143 million.
Earnings per share were $0.48 and adjusted EBITDA was $30 million, or 21% of revenue. During the quarter we completed the 2014 geographic distribution of our highly successful Roomba 800 series across the United States and overseas.
We delivered a number of Defense and Security orders and secured several new contracts, and we sold 8 Ava 500 robots to customers including AT&T, and additional robot trials are being conducted by other Fortune 500 companies to enable remote collaboration, customer service, and executive management. Based on our visibility into the fourth quarter, we are maintaining our full-year revenue expectations and increasing our EPS and adjusted EBITDA expectations.
We continue to expect revenue to be $555 million to $565 million. We now expect EPS of between $1.20 and $1.25 and adjusted EBITDA of $77 million to $80 million or roughly 14% of revenue.
Now I’ll take you through some of the details of the third quarter and our expectations for the rest of 2014. Quarterly Home Robot revenue of 19% was driven by 31% year-over-year growth in U.S.
markets, as domestic retailers placed orders to restock following a strong sell through in Q2, and our club store customers transitioned to a next generation Roomba. Sell through at our top five domestic retailers increased more than 30% over last year and Roomba 800 sales across all regions comprised 36% of Q3 revenues.
We expect to see strong sales continue in the fourth quarter as the retailers replenish their stock for holidays and continued to meet customer demand. Overseas, we launched the Roomba 800 in China, which was the last region scheduled for 2014 distribution.
International Home Robot revenues grew 13% year-over-year in the third quarter as distributors sold through Roomba 800 product introduced in Q2. EMEA grew approximately 7% in Q3 and APAC growth of 19% year-over-year was driven by strong demand in China.
In Q4 we also expect strong growth overseas as distributors replenish following sell through in Q3 and prepare for the holiday season. Last quarter we commented on our commitment to better articulate the value proposition of Scooba and Braava, our wet floor care products.
While our 2014 marketing campaigns are set, our plans for 2015 will include advertising to promote wet floor care as well as training of in store personnel to build awareness about the products. There is a significant opportunity for this segment of the market, and it is ours.
In 2015, we expect revenue for wet floor care to grow as a percentage of total Home Robot revenue along with continued strong growth in Roomba sales. In the third quarter two consumer product company executives, from Keurig and Sony, joined our Home Robot sales and marketing team.
They bring significant premium brand experience that will help maintain our market-leading position as the category becomes more competitive and our business grows. We recently kicked off our holiday advertising campaign featuring our Roomba 800 series robot to support our retail partners throughout the season.
The ads will focus on the product family’s revolutionary AeroForce debris extractors, which to date have been showcased only on our website. Our continued investment in advertising and brand will help drive awareness of the category and growth of the global robot vacuum cleaning market.
Our growing success has compelled others to enter the market. In early September, Dyson announced its intention to launch a robot vacuum cleaner in the spring of 2015, and this is good news.
Our biggest challenge for continued strong growth is overcoming skepticism, and well-known competition entering the market will help legitimize the category further and grow the industry as a whole. The world leader in traditional vacuum cleaners has declared that robot vacuum cleaners are the future of vacuum cleaning.
This is an important next step towards realizing our vision of traditional vacuums becoming a thing of the past. We have known for years that Dyson was developing a robot vacuum cleaner because they finally unveiled a prototype, we now have the opportunity to evaluate.
We believe they have designed around our formidable IP as their robot vacuum doesn’t appear to have our patented side brush, dirt detection or debris extractors. In an effort to incorporate their cyclone suction, they created a product that is simply too tall to fit under most couches and beds and runs for only 20 to 30 minutes before needing to recharge.
Based on press reports, it will sell between $1,000 and €1,000. We think customers will find the Roomba 800 a much better value proposition and we look forward to the head to head competition.
Dyson claims to have spent 16 years and $47 million on the vacuum. We spent more than that on robot research and development every year, building products developed with feedback from millions of customers to whom we’ve sold Roombas over the past 12 years.
We are confident in our market-leading position and that we are making the right investments to sustain our category leadership well into the future. Turning now to Defense and Security business, third quarter results exceeded our expectations due to early delivery of orders we expected to fill in Q4.
In addition, we finished Q3 with $25 million in backlog comprised primarily of upgrades for the U.S. Department of Defense's fleet of PackBot robots and international orders.
We are confident in meeting our full year expectations and are already building backlog for 2015. During the quarter we announced a $9.6 million contract to deliver iRobot 510 PackBot CBRN that is chemical, biological, radiological, nuclear and explosives systems and support to the Canadian Department of Defense.
This module, being built to DND’s specifications, includes a CBRN suite that integrates five primary sensors to reliably detect, alert and report on chemical warfare agents, toxic industrial chemicals, volatile gases, explosives and radiation. This new offering from iRobot is a great example of the versatility of our multi-mission robots.
A few weeks ago we announced the development of the uPoint Multi-Robot Control system, a universal control system for iRobot's line of D&S robots, that will provide users with powerful new touch screen based interface and a radio communication system running on android based tablets. The system simplifies robot operations including driving, manipulation and inspection, allowing users to focus more on the mission at hand.
Its features include an intuitive touch screen technology that allows user to take on more complex tasks with reduced training. A robust radio network that offers improved communications and smart networking, the ability to automatically switch away from congested frequencies, power management, and mesh networking to form a robust network in which robots, operators, and observers work seamlessly together and data sharing from the user's controller to other team members or remote observers.
The product received very positive reviews when we demonstrated it at the Army’s AUSA Exposition and will be available in Q2 of 2015. We continued to make focused investments to expand the capabilities of our existing D&S platforms.
The uPoint MRC represents a major advance in the usability and performance of ground robots and we expect it to provide another opportunity for our customers to upgrade their existing fleet of robots. Moving on to our Remote Presence business, RP-VITA, our remote telemedicine robot, continues to slowly gain tractions in the market.
Fourteen RP-VITA robots were installed during the quarter by InTouch Health, half of them in Mexico. According to ITH, the market in Mexico is particularly attractive and there is an opportunity to supply RP-VITAs in each of Mexico’s 31 states.
Installations currently exist in 3 of those states and the utilization rates at those locations are the highest of any ITH customer. The RP-VITA operates within a hub and spoke hospital network, where there are specialists in major hospitals in each of those states providing services through the robots at more than 20 remote hospital locations.
The consulting medical specialists across multiple disciplines to provide quality diagnoses and care to patients in remote hospitals’ critical care units. Patients received care they wouldn’t otherwise have access to, improving overall patient outcome.
This model is being used by InTouch Health to illustrate the RP-VITA's value proposition to prospective customers. I am also very pleased to report we sold multiple Ava 500 Video Collaboration Robots to several customers, including AT&T, where the robots are being used by executive management, to facilitate team collaboration and in a retail setting to deliver exceptional customer service experiences.
Additional robot trials are being conducted with a multinational law firm, manufacturing, pharmaceutical and financial service companies to enable remote collaboration, customer service, and executive management. And, we look forward to future communication about them as customers.
iRobot continues to actively use this technology. For the past year, we have been communicating with our west coast office through Ava and last quarter we installed a robot at one of our contract manufacturers’ facility in China.
Having our engineers communicating directly with the line has saved us both time and money and provides a compelling use case for prospective customers. We are currently in trials with several Fortune 500 manufacturing companies who are also using Ava to enable remote experts and supervisors to be “on the production line” and “factory floor”.
For the rest of 2014, we will continue to focus on building a base of reference accounts and we are well on our way to doing so through additional trials with a large multinational law firm, a pharmaceutical company, and a financial services firm. In summary Home Robot revenue grew 19%, as orders expected in Q4 were filled in Q3.
Defense and Security revenue exceeded expectations, due to order timing, and our visibility continued to improve with $25 million in backlog at the end of Q3. And we sold Remote Presence robots to multiple customers who are using our Ava 500 robots in a variety of different ways.
Interest remains high from a number of Fortune 500 companies who are currently in trials. I will now turn the call over to Alison to review our third quarter results and expectations in more detail.
Alison Dean
Thanks Colin. We delivered third quarter revenue, earnings per share and adjusted EBITDA that exceeded our expectations.
Revenue of $143 million increased 15% from Q3 last year driven by growth in Home Robot revenues. EPS was $0.48 for the quarter compared with $0.26 in Q3 last year.
And Q3 adjusted EBITDA was $30 million or 21% of revenue compared with $17 million or 14% of revenue last year. Our over-performance in the third quarter was due to fulfillment of orders in both Home and D&S during Q3 that we had originally expected to fill in Q4.
Domestic Home Robot revenue grew 31% for the quarter as retailers began stocking their shelves for the holidays. Q3 domestic revenue included approximately $1.5 million in favorable return reserve adjustments.
Q3 international revenue grew 13% over last year, driven by strong performance in China. We continue to expect high teen revenue growth in both domestic and overseas markets for the full year, driven primarily by replenishment orders for Roomba.
Defense and Security revenue of $11 million in Q3 was up slightly year-over-year and ahead of our expectations. We received and fulfilled several contracts earlier than anticipated but still expect full year revenue of $45 million.
For the total company, gross margin of 47% for the third quarter 2014, was up 400 basis points from the same quarter last year. Home Robot product and customer mix were the main drivers.
We now expect full year 2014 gross margin to be roughly 46% versus the 45% estimate we provided earlier this year. Q3 operating expenses were 31% of revenue, down from 35% in Q3 last year.
Keep in mind that our Q4 sales and marketing expenses will increase substantially due to the new Roomba 800 ad campaign that Colin discussed, as well as other promotional programs planned to support our retailers during the holiday season. OPEX for the full year will be roughly 37% versus our earlier expectation of 36% as we invest our improved gross margins to maintain revenue momentum.
We ended the quarter with $187 million in cash and investments compared with $157 million at the end of Q3 last year. In April we announced a stock buyback program structured to purchase stock at clearly undervalued prices.
Early in the fourth quarter, we purchased 56,000 shares of stock under our plan for roughly $1.7 million, and retired them. We ended Q3 with $54 million in inventory or 65 days as expected, compared with $49 million or 64 days last year.
We expect inventories to decline in Q4 and finish at our target of roughly 60 days. Looking now to the fourth quarter, we are expecting strong growth from both Home and D&S.
Because we received orders ahead of our expectations in Q3, our Q4 ramp is not as steep as it appeared it would be in July. We anticipate fourth quarter revenue of $158 million to $167 million, an increase of 25% to 33% over Q4 last year, EPS of $0.26 to $0.31, and adjusted EBITDA of between $17 million and $20 million.
For the full year, we continue to expect revenue to be between $555 million and $565 million. We are increasing our EPS and adjusted EBITDA ranges and now expect full-year EPS of $1.20 to $1.25 and adjusted EBITDA of $77 million to $80 million or roughly 14% of revenue.
I’ll now turn the call back to Colin.
Colin Angle
Thank you. Home Robot revenue grew 19% in the third quarter and we expect that business to finish the year strong.
Accelerated order delivery in the third quarter, coupled with increased visibility, further solidifies our confidence in our defense business expectations. And we are optimistic that remote presence will continue to gain traction in the video collaboration market while further expanding into healthcare’s emerging telemedicine market.
With that we are happy to take your questions.
Operator
Thank you. We will now begin the question-and-answer session.
(Operator Instructions). We have a question from Jim Ricchiuti from Needham & Company.
Please go ahead.
Jim Ricchiuti - Needham & Company
It looks like you are guiding to home revenue -- Home Robot growth in Q4 in broad terms anywhere from 22% to 23% at the low-end to in excess of 30% at the high end. So assuming that's correct, I wonder if you could talk a little bit about the variables, what gets you to the high end, you are significantly increasing your -- it looks like your ad spending for Q4 is how big a contributor could that be?
Colin Angle
So Jim the increase in spending on ads is something that is normal for this time of the year. So that it certainly our advertising in Q3 is relatively quiet and this is the traditional time to ramp up.
We have the Roomba 880 and 870 robots which are doing very well in the market and we expect that to continue. And replenishment orders to drive significant parts of that year-over-year growth both because of the superior performance of that robot will drive increased demand as well as the higher ASPs.
So it is sort of a one too compounding punch over the last year. We also have the Braava robots more fully distributed and the Scooba 450 robots fully distributed at this point.
Q4 is actually the first quarter where we have all of the new products that we announced at the beginning of the year and the end of last year fully rolled out throughout the marketplace. Additionally I mentioned in the call briefly, let me put a little bit more spotlight on it, our club stores have gone from the 500 series to 600 series which brings a new capability in a more desirable product into those channels.
As well as offering an opportunity for some replenishment into those markets. So, it is sort of hitting on all cylinders expectations and it is very exciting to be able to talk about that happening.
Jim Ricchiuti - Needham & Company
Got it and maybe one follow-up just to switch gears for a second, just on the Ava products, you talk a little bit more specifically about some of these reference accounts and building this space. Do you see any of these potentially emerging in the next year as higher volume applications and I was also curious you referenced a retail application for this in terms of the customer service application.
I wonder if you could expand on that as well?
Colin Angle
Sure, the -- our ability to talk about our customers obviously we love to be able to do it all at once but it is a partnership with our customers. AT&T is using the robot now as a way of bringing expertise into the retail environments and so that some of their most knowledgeable experts can be on demand put in front of customers without some kind of very challenging logistics operations that brings those people together physically.
And so they are very excited about the potential that the robot has to allow this type of interaction to take place. And so that is being -- that is now rolled out and is being tested by AT&T and they are quite enthusiastic about that.
But that's only one of a whole host of very exciting uses that are being trialed. As far as expectations goes, as far as the ramp, the revenue ramp associated with this I am going to temper expectations that we are still learning a tremendous amount about how best to roll out the robot.
And so that certainly next year will be an important year for Ava but it is also -- we will expect to continue to learn significant information about how to scale and where to focus our marketing and sales efforts in 2015. So you should not expect a dramatic meet in the curve next year for Ava.
It is going to be something that our investors, our customers and we continue in partnership to build out this most exciting and explosive new markets. But we do need to get it right and we need to make sure that our customers are fully enthusiastic about the potential.
So we love this area, we are being cautious about how fast we move because we are positioned at the high ends or the premium end of this marketplace. And if we can deliver that premium experience and truly get people off the plane and increase their ability to collaborate, we have got a great success in our hands.
But this is a fragile moment in time and we are very guardedly optimistic about how things are going. And what I can promise is to talk much more than I did today about these reference accounts and how they are using the robot and hopefully in their own words what their plans are for expansion of the technology.
Jim Ricchiuti - Needham & Company
Okay, thanks a lot.
Operator
The next question comes from Josephine Millward from Benchmark Company.
Josephine Millward - Benchmark Company
Good morning.
Colin Angle
Good morning.
Josephine Millward - Benchmark Company
Colin can you expand on what happened, what led to the earlier than anticipated orders and shipments in Q3 especially in Home Robots and so drove most of the beats and did your retailers run out of (Technical Difficulty)?
Colin Angle
You know it is the age old problem of predicting when shipments are going to come in the Q3-Q4 break because it is absolutely in the middle of replenishment season and inventory building season for the holidays. And so that I think that having things pulled forward is always an indication to us that our retailers are feeling very strong about the demand that they will see during the holiday season.
So we like it when this happens. But we always shy away from predicting it because it is just a matter of when does the -- when do the trucks hit the dock and when do the receipt orders hit our financial departments.
And so there is just a tremendous number of moving pieces right at that end of September beginning of October line and perhaps you could speculate that this is good news. Safely you would say this is just a reassuring opportunity to help our investors see that we are ahead of the game as far as realizing what previously was a pretty aggressive Q4 ramp and now we de-risked that significantly and are happy to talk about having more behind us and less in front of us to make it here.
Josephine Millward - Benchmark Company
Since we are already in mid-October and would you say your visibility is fairly strong at this point. I guess the question is why having you -- why not take up guidance given the strong Q3?
Colin Angle
You know I think it is simply because it was a shift. I think that we have good models as far as what we believe are going to sell through for the year.
And we are able to move products and get those transactions completed in September rather than in October. So we had a very strong Q3.
But please do not take that as raising expectations for Q4. Where we have got very good visibility, we have given increased profit guidance, but feel like our revenue guidance is where it should be based on our full year outlook.
Josephine Millward - Benchmark Company
Very helpful, thank you. One last question, shifting gear to defense, the 7.6 million order you announced for MPRS upgrade is that included in your backlog?
Colin Angle
Yes, it is.
Josephine Millward - Benchmark Company
Okay, thank you.
Operator
Our next question comes from Tyler Hojo from Sidoti & Company. Please go ahead.
Tyler Hojo - Sidoti & Company
Yeah, hi, good morning everyone. Just I wanted to talk a little bit more about the ad campaign.
It looks like the budget there is bigger than it was I guess at the holiday season last year. First of all I am just curious, is that indeed the case and maybe if so maybe you can talk a little bit about I guess where some of those incremental dollars are being put to work?
Colin Angle
So it is up slightly even though not a dramatic change from prior years. I think that one of things that we are doing is more online and non-broadcast video.
So that we are doing, we have a broader selection of medias that we are going after and so that there is emerging opportunities which we think are very cost competitive and quite interesting that we will be testing this year. And so that what you are seeing is a continued strong commitment to broadcast but also probably some incremental dollars in some of these newer alternate channels we are advertising.
So it is a -- we didn’t want to pull back on what we knew works and so adopted a strategy of putting some incremental dollars against some of these other opportunities and we will be monitoring very carefully what the impact of those ads are being doing various split testing and what have you. So it is a strategy that has got a lot of opportunities for learning in it and we are confident.
I think it strikes a good balance between proven and emerging.
Tyler Hojo - Sidoti & Company
Okay, thanks for that Colin. And maybe just another question as it relates to kind of the new competitive dynamic that I guess is emerging in Home Robot.
You mentioned in your prepared remarks that, obviously you guys have spent a lot more on R&D than your competitor and I guess what I am wondering is when we think about your kind of your EBITDA margin targets over the next couple of years then how some of this maybe changes your outlook. Are you going to need to spend a little bit more on either advertising or on R&D to kind of maintain that competitive dynamic and does it change your kind of outlook for profitability?
Colin Angle
I think where we stand today our product pipeline is stronger than it has ever been. We are incredibly excited about our plans for next year, the year after, and the year after that.
And so -- and that has all been developed with the sort of our current concept around spending sort of in place. There are opportunities that we see in front of us especially with emerging opportunities around connected devices that may present significant additional growth opportunities to the company and that might be a future conversation as to what the investments required and return expected from those types of investments might be.
But I think that the fact that we have more competition is not in itself going to drive any change in our investment strategy. We are very happy with that.
I think that investing in our future as a percentage of revenue will remain fairly constant. Of course that's increasing dollars every year.
The fact that the market continues to grow in a very exciting rate that other competitors are entering the market, you know, as I mentioned in sort of the next stage of evolution for the marketplace. We are doing very well at if you study new product adoption.
We are doing quite well in the early majority now with nearly 20% of the dollar spent on vacuums now going into the robot vacuuming category. But there is a long way to go and we need to more deeply penetrate the rest of the customer base which is still skeptical that robot vacuum cleaners really work and can really work with them.
And so big name entrants in the market do more good than take share. There is no doubt that our competitors will over time grab some share but we are quite confident it will be at a much lower rate than the overall market growth and that's why I say with confidence that this Dyson entry is a good thing for robot vacuuming, particularly a good thing for iRobot.
Tyler Hojo - Sidoti & Company
Okay, thanks for that Colin. And maybe just one last question for Alison.
Just as you wait the cash flow, Q4 historically is a really strong cash flow quarter for you all. I get the discussions surrounding inventories, is there anything else that is going to be a driver just from a working capital standpoint in Q4?
Alison Dean
No, I don’t expect so Tyler. We are still anticipating having an operating cash flow on an annual basis in the high single digits as a percent of revenue that does require us to have a strong operating cash flow in Q4.
But we don’t expect anything unusual to happen there.
Tyler Hojo - Sidoti & Company
Great, thanks a lot.
Alison Dean
Welcome.
Operator
Our next question comes from Meg Nallata (ph) from Susquehanna. Please go ahead.
Unidentified Analyst
Good morning, thanks for taking my questions and congratulations on a good quarter.
Colin Angle
Thank you.
Unidentified Analyst
Given the magnitude of the Q3 beat versus your expectations, Colin can you help us understand your assumptions when you provide forward guidance?
Colin Angle
Sure, the beat has two elements to it. There is the revenue side and then there is the profitability side.
On the revenue side I want to reiterate that we believe that it is a shift from Q4 into Q3 because as a company with 90% of our revenue coming from a consumer business and because the end of September beginning of October is such a hugely active time of shipping, it is just frankly difficult to predict what hits when. And so from a revenue perspective full year guidance unchanged, shift some of the revenue which was admittedly a steep of revenue ramp in Q4 into Q3, and feel good about the fact that it is easier to have confidence in our Q4 revenue numbers because of this shift.
On the earnings, we actually have been operating in a more efficient way. We saw the mix shift into the 800 series would carry some additional margin opportunity in just general operations of the company.
As we looked at the year it did result in increased confidence that we are going to be more profitable than originally anticipated which gave us the opportunity to communicate and deliver to our investors additional EBITDA. So two different stories, one is shift and one a true good news story regarding the cost of operating the business.
Unidentified Analyst
Got it and also the $0.15 EPS upside that we saw this quarter but the guidance was raised by about $0.08 when you take the midpoint of the guidance, was that because of incremental operating expenses that you planned to incur this year?
Alison Dean
Yeah, we are investing part of the gross margin capability for the year in increased OPEX which is why you are not seeing more of an expansion at the EPS level.
Unidentified Analyst
Got it, thank you.
Colin Angle
You bet.
Operator
The next question comes from Adam Fleck from Morningstar.
Adam Fleck - Morningstar
Hi, good morning. Thanks for taking my questions.
Colin Angle
You bet Adam.
Adam Fleck - Morningstar
I just wanted to talk a little bit about the European growth situation, we saw that slow this quarter versus the first half. Of course that was fuelled by the Roomba roll out the last couple of quarters but looking out the remainder of the year and then into 2015, is there a concern that the macro environment here could again negatively impact sales?
Colin Angle
I think the macros in Europe are impacting growth rates. We see a significant differential between North America and Europe at this time.
I think that -- I was just over in Europe and you hear a lot of news regarding weaker customer sentiment. I think at the beginning of the year we bucked the trend because of our new products.
And as those, as the newness of those products fade slightly, it creates well I guess the masking effect of new product introduction is reduced. So that -- I think that as we look into Q4 and into 2015 you will see EMEA underperforming at least in North America from a growth rate perspective solely due to macros.
If we see a turnaround in macros I think that you could see a nice recovery. We do believe that Europe will continue to be a good growing region for us but I don’t think it will keep pace with North America next year.
Adam Fleck - Morningstar
Okay, that's helpful. Thank you.
And then the RP-VITA opportunity in Mexico that you outlined, is the price in margin there similar to what you see in your U.S. sales?
Colin Angle
It is identical. We sell our product, we OEM our base to InTouch Health and they are responsible for negotiating with the customer and if any discounts or whatever their pricing strategy is we are insulated from it.
Adam Fleck - Morningstar
Got it, thank you.
Colin Angle
You bet.
Operator
Our next question comes from Paul Coster from JP Morgan.
Mark Strauss - JP Morgan
Good morning, this is Mark Strauss on for Paul. Thanks for taking the questions.
I think most of our questions have been asked but if I could just ask two quick modeling questions. So first on gross margin, I understand your comments around mix, was there any impact during the quarter from warranty rehearsals and then second, can you just remind us what tax rate you are expecting that is included in your full year guidance, thanks?
Alison Dean
Hi Mark. The Q3 results weren’t impacted by warranty but as I mentioned we did have about a $1.5 million of favorable return reserve adjustments in the quarter.
And for the year we are roughly planning on about 30% overall tax rate.
Mark Strauss - JP Morgan
Okay, fair enough, thank you.
Alison Dean
Welcome.
Operator
The next question comes from Ben Rose from Battle Road Research.
Ben Rose - Battle Road Research
Good morning. Colin I think you said in your prepared remarks that you had -- the company had taken a look at some of the Dyson intellectual property and my first question is are you prepared to say at this point categorically that they are not in violation based on what you have seen?
Colin Angle
We are not in physical possession of their product and that is why I certainly couldn’t say that. The point of my remarks is looking at what has been announced, it seems clear that Dyson has avoided our intellectual property by not including in their product some key features which we believe are essential for premium operation of a robot vacuum cleaner.
So that the strength of our intellectual property is having a very significant impact on the design decisions of quality players in the vacuuming marketplace. But no I can't say that there is nothing there because we don’t have it in our hands.
Ben Rose - Battle Road Research
Okay, fair enough. And then with regards, there was one aspect of their announcement that was interesting in terms of the Wi-Fi enablement of their product, do you have plans currently with regard to the Roomba to make that Wi-Fi enabled?
Colin Angle
We have said publicly that clearly that is on our roadmap but the -- it is always our intent to make sure that we put technology onto our products for a reason, not just adding cool for cool sake. And so that -- I think that on the 800 series it was commonly assumed that we would Wi-Fi enable it but instead we had been focused on trying to create a cleaning system which did not require maintenance and would allow superior pickup at very, at even increased efficiency.
Because in our testing that is what our customers needed to see in order to get over that skepticism barrier and to enjoy maintenance free product. So, we are pretty focused on ensuring that customer need comes first.
Will it be connected, yes absolutely. And -- but our current product line we chose to put the dollars we are asking our customers to pay against things that were higher on their priority list for desire and need for customer satisfaction.
So, it is on the way but we took another path with the 800.
Ben Rose - Battle Road Research
Okay, great. Thanks very much.
Colin Angle
You bet. That concludes our third quarter 2014 earnings call.
We appreciate your support and look forward to talking with you again in February of 2015 to discuss our Q4 results and importantly our outlook for 2015. Thank you very much.
Operator
That concludes the call. Participants you may now disconnect.