Oct 25, 2017
Executives
Elise Caffrey - Investor Relations Colin Angle - Chairman, CEO and Founder Alison Dean - Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer
Analysts
Bobby Burleson - Canaccord Genuity Jim Ricchiuti - Needham & Company Frank Faiella - Sidoti & Company Troy Jensen - Piper Jaffray Jon Fisher - Dougherty & Co Mark Strouse - JPMorgan Ben Rose - Battle Road Research
Operator
Good day everyone and welcome to the iRobot Third Quarter 2017 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’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 many 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 may 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, net merger acquisition and divestiture expenses, gain on business acquisition, 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 third quarter 2017 earnings press release which was issued last evening and 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 2017, and outlook on the business for the rest of 2017.
Alison Dean, Chief Financial Officer, will review the financial results for the third quarter 2017; and Colin and Alison will also provide our financial expectations for the full year ending December 30, 2017. 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. I am very excited to report that we delivered another outstanding quarter in which total revenue grew 22% over Q3 last year.
Continued strong demand in the United States, even with new competitive offerings in the market, as well as momentum in Europe and Japan drove the quarterly year-over-year growth. Based on our Q3 results and our outlook for the rest of 2017, we are increasing our full year 2017 growth expectations in the U.S.
and EMEA to 40% and 45% respectively and increasing our total financial expectations for the year. We now expect 2017 revenue of $870 to $880 million, which equates to year-over-year consumer revenue growth of 33% to 34%, operating income of $55 million to $65 million and EPS of between $1.65 and $2.
We successfully closed the acquisition of Robopolis, our largest European distributor at the beginning of the fourth quarter as expected and now control more than 75% of our global revenue. That is critical to our building a global brand in regions where awareness of iRobot and Roomba are lower than in the United States.
The timing of our acquisition is particularly important as it will allow us to implement our successful U.S. marketing programs and improve our brand awareness in several European countries as the adoption of robotic vacuum cleaners accelerates.
With two quarters of ownership under our belts, we are already beginning to see the positive impact of our efforts in Japan. Revenue increased 65% in the third quarter of 2017 over Q3 of last year and the region is on track to deliver 20% to 25% annual growth over 2016 as previously discussed.
Sell-through, driven by our focused marketing investments remains strong, and we expect to exit the year with retail channel inventory levels consistent with our targeted levels. During the quarter - third quarter, net revenue in China declined year-over-year as expected and previously discussed.
Decline was higher than expected though due to continued aggressive competitive pressure which resulted in the booking of additional promotional reserves to assist us in working through channel inventory. The China market data does show that during the first eight months of 2017, sales to customers of iRobot products grew approximately 20%.
This underlying demand keeps us very optimistic about our ability to grow revenue in the region once we work through the inventory in hand. Based on Q3 actuals and the distributor plans for Q4 in conjunction with inventory on hand, we now anticipate full year revenue to decline by 25% to 30% from last year.
For the full year, China revenue is expected to be less than 5% of total company revenue. Our strategy in China continues to be driving adoption of our premium robots.
In Q4, we began implementing the first consumer outreach marketing program since opening our Shanghai office. It is focused on driving awareness of the iRobot brand and the quality of our western product.
We expect to have measurable results coming out of Q4 that will help inform our strategy going forward. With the recent addition of the Roomba 900 and the Roomba 800 introduced just last year, we believe we can still achieve strong revenue growth at the high end – higher end of the premium segment.
Now I’d like to provide you with several other highlights of the third quarter. Last month, we announced a settlement with Micro-Star International, MSI relative to an action we took against several well-known appliance brands and Chinese manufacturers with the International Trade Commission in the United States.
The agreement represents an early win in our multi-level ongoing effort defend - to defend and protect our valuable intellectual property. MSI was a component supplier for certain respondents, but not directly named in iRobot’s action.
MSI agreed to exit the robotic cleaning industry worldwide and will compensate iRobot with a confidential monetary payment. The remaining terms of the settlement are confidential.
The ITC process remains on track with a trial date set for March 2018 and final decision in October of 2018. That is all the information we can provide at this time.
Demand from U.S. retailers for our robots increased during the last quarter.
We continue to gain space, exposure, and momentum in the market driving higher full year U.S. revenue expectations for the second time this year, even with availability of new competitive products.
We always expected a low-end U.S. market to emerge over time.
This should be good for the Robot Vacuum Cleaning category, because it will help drive awareness. Continuing to execute against our premium strategy will ensure ongoing growth for iRobot and robot vacuum cleaners.
Keep in mind that in the United States, the most highly penetrated market for robot vacuum cleaners, household penetration is still less than 10%. Accordingly, there is plenty of runway domestically and even more overseas.
With more than 60% global segment share at a time when adoption is accelerating, we are in an excellent position to capitalize on the momentum to drive future growth. While Roomba is driving overall revenue growth this year, we continue to be pleased with our revenue diversification progress and the performance of our wet floor care robots, Braava and Braava jet.
We are seeing continued adoption of the category and expect full year revenue growth of 20% to 25% versus the high teens we communicated on our last call. The year-on-year growth is expected to be the highest in the United States more than 50%, where products have been available the longest and where the majority of our category marketing and advertising dollars have been spent thus far.
One of the critical elements of our success is listening to our customers and then continuing to improve our products using that input. There is a consistent theme running through their feedback; continue to improve cleaning efficacy and autonomy.
By focusing R&D investments to deliver these features and functionality, we have maintained the market-leading position of a category we created 15 years ago. By continuing to deliver these improvements while innovating our own technology, we have also continued to improve gross margins.
In summary, it has been an exciting year thus far and we are very optimistic about finishing the year strong. With the third quarter, we saw the positive impact of our targeted marketing programs with the U.S., EMEA and Japan driving year-over-year Q3 revenue growth of 22%.
We successfully completed the acquisition of our largest European distributor, which we expect will enable us to capitalize on the current market momentum and drive the robotic floor care adoption in EMEA and we announced an agreement with Micro-Star International representing an early win in our ongoing effort to defend and protect our valuable intellectual property. I will now turn the call over to Alison to review our third quarter financial results in more detail.
Alison Dean
Thanks, Colin. We delivered record third quarter revenue of $205 million, up 22% from Q3 last year, driven by growth in the U.S., EMEA and Japan.
Operating income was $23.9 million in the third quarter, compared with $27.5 million in Q3 last year and EPS was $0.76 this quarter, compared with $0.70 for the same period last year. Q3 2017 included a $0.16 tax benefit relating to the new 2017 stock compensation accounting standard.
As a reminder, given the difficulty with projecting the size and direction of the stock compensation tax impact, we communicated in Q1 that our financial expectations at the time reflected our tax rate expectations, prior to discrete items for future periods. Our Q3 effective tax rate before discrete items was 36%.
Q3 also included $0.08 from a non-taxable gain on the Japanese distributor acquisition. During the quarter, we finalized our purchase price accounting and made adjustments to the provisional amounts of the value of assets acquired at the end of Q2 2017.
The purchase accounting adjustments were made based on additional information relating to channel inventory at the time of acquisition and the potential for product returns and resulted in a gain on business acquisition, which is reported as non-operating income of $2.2 million or $0.08 of EPS. We view our Japanese distributor purchase accounting as final.
As Colin discussed, consumer revenue grew 22% in Q3 over last year, as we continued to see tremendous momentum in the U.S. where revenue increased 34% year-over-year.
U.S. net revenue was favorably impacted from a life-to-date returns adjustment of $1.4 million in Q3 2017, compared with $90,000 last year.
In EMEA, we saw continued market momentum in the third quarter resulting in year-over-year revenue growth of 31%. Our increased full year growth expectations of 45% with Robopolis is up from high teens without Robopolis and is based on Q3 results, the expected impact of Robopolis and our current sales expectations for the holiday season.
We have only just begun to rollout our targeted marketing programs, but are already seeing positive results in select markets in this region. In Q3, revenue increased 65% in Japan from Q3 last year as expected.
During the quarter, we made significant progress on reducing the retailer inventory and we anticipate exiting 2017 at targeted levels. Year-over-year revenue growth in Japan is on track to grow 20% to 25% in 2017 as Colin mentioned consistent with our prior expectations.
Q3 revenue declined 68% in China year-over-year. A decline was expected as you recall that Q3 last year was up 140% over 2015 revenue as orders we expected to receive and ship in Q4 2016 were received and shipped in Q3 2016.
In addition, due to the continued competitive pressure in the lower-end, we recorded approximately $3 million in additional promotional reserves to support sell-through. Based upon Q3 results and expected Q4 sell-in, we now anticipate net revenue to decline 25% to 30% from 2016.
Gross margin was 49.8% for the third quarter of 2017, up 1.7 points from the same quarter last year. The gross margin improvement was primarily due to COGS savings and product and regional mix, partially offset by the Japan intangible asset amortization and the promotional reserves for China.
In Q4, we expect gross margin percent to be roughly 500 basis points lower than Q3, primarily due to the impact of the Robopolis acquisition as discussed last quarter. The Robopolis impact is due to the profit elimination on acquired inventory and the amortization of intangible assets, similar to the types of impacts we saw with our Japan distributor acquisition.
Full year gross margin is still expected to be about 48%. Q3 operating expenses were 38% of revenue, compared with 32% in Q3 last year driven largely by higher sales and marketing expenses, including the planned expenses of the Japanese distributor acquired at the end of Q2, the increased R&D investments we discussed last quarter and higher G&A costs including litigation costs, other legal fees, and other acquisition-related expenses associated with the Robopolis acquisition.
OpEx is expected to increase 3 to 4 percentage points in Q4 versus Q3, driven largely by our typical Q4 investment in sales and marketing to support the holiday season, the impact of the Robopolis acquisition and our continued investments in R&D. For the full year, we expect operating expenses to total roughly 41% to 42% of revenue.
We ended the quarter with $278 million in cash, up from $203 million a year ago. We expect lower levels of cash exiting the year to reflect the preliminary purchase price of $138 million for Robopolis.
Inventory at quarter end was $93 million or 82 days, compared with $61 million or 64 days last year. This expected increase in inventory and DII was largely driven by our building of inventory for the holiday season along with the inventory we now hold in Japan as part of our direct selling strategy.
We anticipate Q4 inventory to increase over Q3 as we add the expected Robopolis acquired inventory needed to support our direct to retail sales across 50% of EMEA, but DII should be down meaningfully. Our full year 2017 financial expectations are for revenue of $870 million to $880 million, operating income of $55 million to $65 million and EPS of between $1.65 to $2.
Revenue is expected to grow significantly in Q4 year-over-year. Fourth-quarter year-over-year growth is expected in all regions.
On our Q4 2017 call in February, we will provide 2018 full year expectations, as well as our three year financial targets for 2018 through 2020. I’ll now turn the call back to Colin.
Colin Angle
Thank you. 2017 has been an exciting year thus far.
We have been transitioning from a U.S. company that also sells products through distributors overseas, to a truly global company.
Our expectations for 2018 will not only reflect the positive financial impact from the distributor acquisitions we’ve made this year, but also the optimization of our go-to-market strategy resulting from our ownership of more than 75% of our global revenue. In the United States, which represents roughly 50% of our revenue, we expect to grow 40% this year.
In EMEA, which represents roughly 25% of our revenue, we expect to grow 45% this year. In Japan, which represents roughly 15% of our revenue, we expect to grow 20% to 25% this year.
By creating a consistent global brand and driving awareness of both the category and iRobot’s products beyond the U.S., we can capitalize on the tremendous opportunities we see in worldwide adoption of robotic floor care products. And by continuing to address customer-driven needs, we will capture our share of the growing robotic floor care category.
With that, we will take your questions.
Operator
[Operator Instructions] And our first question comes from the line of Bobby Burleson with Canaccord Genuity. Your line is open.
Bobby Burleson
Good morning.
Colin Angle
Good morning.
Bobby Burleson
A couple of quick ones here just – good morning. Colin, just curious in terms of, you guys mentioning increased competition at the low end in the U.S.
Can you kind of, just help us to sign your partition low-end from high end right now in terms of feature sets or as part of this, simply more aggressive pricing strategy?
Colin Angle
We are seeing some – in a maturing market, you are going to have products that are lower gross margins, lower profit, and obviously lower function start to big emerge at the bottom of the price points and by that, I mean, anything from sort of 150 bucks to the $350 range, maybe and that would be sort of roughly bounding that lower end. And given the remarkable growth we are seeing in the category, this is inevitable occurrence.
Above that, we still see the tremendous growth that we’ve enjoyed thus far having a bright future. Won’t give exact numbers yet, because it’s not February.
But, that’s the area where we think the opportunity to generate the most gross margin dollars, the area where intellectual property and innovation are more strongly rewarded. And this is just a natural evolution.
It’s not particularly material at this point in time, because to-date, there really hasn’t been much, at least in the United States, at the low end, but we expect it to develop over the next few years. We don’t view it as cannibalistic of our growth.
We actually see it as supportive of the overall category maturation and when we talk about the – our analysis of our market opportunity, a lot of this low-end product goes against areas and parts of the market that we were not targeting and thus does in fact in a non-cannibalistic way grow the marketplace. Is that helpful?
Bobby Burleson
That’s very helpful. And then, just taking a stab at 2018, I know you guys aren’t operating efficient items until February, but you had given color on organic growth expectations a few quarters back and I am wondering given what’s happened in China, and this emerging competitive network or rapidly evolving competitive landscape, whether or not the acceleration in organic growth is still something that you think is on the table for 2018?
Colin Angle
I mean, I think that what’s happening in China just to be clear, the good new story in China is the premium segment continues to grow and we continue to see, I guess, sell-through moving in a positive fashion. But I think that we did have an adjustment in strategy and some inventory we needed to move and work through which resulted in the performance that we saw today.
So, I think that the China story is, it’s not going to be the second coming of North America. But it is a contributor to our overall growth story.
I think that you need to look at what’s happening in North America and believe that the segment growth in North America is something that we will see globalize and so that we definitely view our – that we are not seeing signs of a deceleration in the adoption of robot vacuum cleaners and this – going back to the first part of my answer to your first question, we believe the emergence of a low end could accelerate the growth of the overall category on top of what we see at the premium side.
Bobby Burleson
Okay, great. Thank you.
Colin Angle
Okay.
Operator
Thank you. And our next question comes from the line of Jim Ricchiuti with Needham & Company.
Your line is open.
Jim Ricchiuti
Hi, good morning. Just a clarification on the revenue guidance for the year.
It looks like you – previously you had given some expectations for the Robopolis revenues and that doesn’t appear to change. So, the increase that you are giving us today is, it seems like that’s mainly from the U.S.
market. Is that fair to say?
Alison Dean
We definitely had an increase in our expectations in the U.S. market, but our overall expectations for EMEA have gone up a bit since last quarter, as well, Jim.
But you are right. The guidance relative to the incremental impact of Robopolis, specifically didn’t change.
Jim Ricchiuti
Got it, okay. And, with respect to the earnings guidance, the implied earnings for Q4, there is a wide range.
I mean, it looks like it’s and you look forward to $0.39. So, I am trying to get a sense, if you could help us maybe think about what the major variables could be here?
I mean, you’ve given some guidance for how we should think about gross margins. What are the other, really the moving parts?
Is it tax rate? Is it going to be sales and marketing expense?
Alison Dean
Well, also think about the Robopolis bottom-line impact that we guided to as well, but there is a pretty significant range there. We have just entered the first quarter of having that under our belts.
We’ve got to do the initial purchase accounting and so, there is a pretty significant range that we’ve provided just in terms of the incremental impact of Robopolis in and of itself. And then as usual, we give a range across all our expectations to accounts for many different factors, but it could occur in Q4.
Q4 is a very sizable quarter for us. It will be a record quarter in size and so there is a lot of variability that could come in there and we’ve tried to give you a range that reflects the variability that could happen.
Jim Ricchiuti
Okay. Now that’s helpful.
And one last question from me is, just with respect to Braava, it sounds like you’ve got some real good momentum for Braava in the U.S. The fact that units were down, Braava revenues were down year-over-year, is that it will tie to just maybe a weaker performance than maybe you have been expecting in parts of Asia?
I mean, I always thought this product in particular would be a strong product in Asia, particularly in China. Is that turning out to be less of the case?
Alison Dean
When you are looking at that year-over-year decline, Braava as a category units and dollars versus Q3 last year, you need to keep in mind that Q3 last year is when we introduced Braava jet to Asia. So, Q3 last year had the initial sell-in to support those products, particularly Braava jet in that region.
So it’s just one of those quarterly year-on-year comps that’s just taken us in and of itself isn’t telling the whole story. The expectations for the category in general are on track and again, we were pleased to be little bit increase those full year expectations across the full year.
Jim Ricchiuti
Okay. So, potentially we can see that begin to turn the other way as you had the comparisons get more normalized in Q4 in Asia?
Alison Dean
Right.
Jim Ricchiuti
Okay. Thanks very much.
Congratulations on the quarter.
Colin Angle
Thank you.
Operator
Thank you. And our next question comes from the line of Frank Camma with Sidoti & Company.
Your line is open.
Frank Faiella
Hey guys. This is Frank Faiella on for Frank Camma.
I had a question on the revenue guidance. With the Amazon Prime Day, was there any impact on third quarter?
Alison Dean
No, that was really – no that mostly sell-in we would had in the second quarter.
Frank Faiella
Okay, okay, thanks. And then, you just touched on it, but, just on the – in China, can you kind of quantify a range of how much the Braava jet decline had to do with the decline in China in general?
Alison Dean
In terms of year-over-year, Braava jet was part of the decline that we’ve seen in China for sure, but that decline was across both Roomba and Braava year-on-year.
Frank Faiella
Okay. That’s helpful.
That’s all I have. Thank you.
Colin Angle
Okay.
Operator
Thank you. And our next question comes from the line of Troy Jensen with Piper Jaffray.
Your line is open.
Troy Jensen
Yes, good morning and congrats on the net results here.
Colin Angle
Thank you.
Troy Jensen
Hey, so, just a quick question on ASPs that are down a little bit sequentially. I mean, is that just a function of mix within Braava and Roomba?
Or is there a mix shift happening also within Roomba?
Alison Dean
Bear with me one second there, Troy.
Troy Jensen
It was up year-over-year, Allison, that you stay on number 26 bucks or sequentially here?
Alison Dean
Yes, definitely, mix in terms of the different products and regions can have an impact on sequential ASPs.
Troy Jensen
So, with China being weaker, I would assume kind of the lower products, lower price products and there will be a mix shift positive?
Alison Dean
Can you repeat the first part of that? I didn’t hear.
Troy Jensen
China, what’s going on – go ahead and say.
Alison Dean
I just didn’t hear the first part of your second question.
Troy Jensen
I was saying that, with China being down so much I would assume China’s kind of the low end rate – lower ASP products, so, for you that mix shift would be positive ASPs, but that will be – maybe there is multiple dynamics going on here?
Alison Dean
There are definitely multiple dynamics impacting those quarter-to-quarter sequentials.
Troy Jensen
Okay. All right.
That’s very helpful rule of thumb. And then, Allison, just can you help us on what you think your tax rate is going to be for 2016 or excuse me, 2018?
Alison Dean
At this rate, the effective tax rate we are seeing for the year of 2017 is 34% and I wouldn’t expect to see major changes to that in 2018.
Troy Jensen
Great. Perfect.
Thank you. Keep up the good work.
Colin Angle
Thank you.
Operator
Thank you. And our next question comes from the line of Jon Fisher with Dougherty.
Your line is open.
Jon Fisher
Thank you. Just to follow on that question, I guess, I’d like to push a little bit further on the price change.
When you look at trends in the first half of this year or kind of unit growth had been in a decelerating mode and then here in Q3, we see a huge pick up in units to 28.5% growth, especially when you are comping a big sell-in last year’s Q3, that’s kind of surprising me all of a sudden a change in unit growth and then at the same time, we see a 10% decline in sequential price. So, just, I guess, I’d like a little more detail on what exactly was going on from Q2, Q3 or from first half to Q3 that all of a sudden dynamically changed or unit growth lamped up significantly and average price declined 10%.
I consider that meaningful, I don’t consider that slighter incremental.
Alison Dean
One thing I would say is, we encourage you again to look over the full year and not get overly focused on one change from quarter-to-quarter, because we’ve got lots of fluctuations in there. Certainly, the mix, the product mix can impact the ASP in any given quarter and the 600 CREs mix overall in Q3 was higher than it was in Q2.
That doesn’t necessarily indicate what will happen going forward, that will be very dependent on the – how mix evolves over time and encourage you to continue to look at more of an annualized basis of ASPs.
Jon Fisher
And then from a sell-in standpoint, was your China, EMEA, U.S. sell-in, did that occur in Q3?
Or did any or all of those will those fall in, in October in Q4 for the holiday season sell-in?
Colin Angle
The quarter boundary certainly happens right in the middle of sell-in and so it really varies from year-to-year as to how it’s actually going to fall out. We definitely had a lot of sell-in happening in Q3 to support the holiday season.
But as Allison said, Q4 is looking a very strong, like a record quarter. And so, it’s not an either or, it’s more of a rolling of the dice how the percentage breaks down, whether it’s 40-60 or 60-40 or 55-25.
It’s a – but we can’t say we had a great quarter in Q3 and we are anticipating a great quarter in Q4 both of which are driven by sell-in supporting the holiday season.
Jon Fisher
Okay. And then, just one final question.
Just on Japan, you acquired the distributor, you gave guidance in February, that guidance was lowered in April, guidance was lowered again in July, expenses were less in the Q2 than expected and that was going to be pushed out to Q3, Q4 and Allison, you report Q3, and all of a sudden there is a gain that you are taking on the distributor acquisition. I guess, I am surprised that, I mean, it’s your distributor that relationship has been there for over a decade.
It’s a business that you should know fairly well. They distribute your product.
I am surprised that the – every two to three months, the numbers on the distributor acquisitions have changed and like I said now, we’ve gone from being a drag to all of a sudden there is a gain in Q3. So, why is there so much – has there been so much volatility in the numbers around this Japanese distributor acquisition?
Alison Dean
So, since our last call, the operational performance is expected to be exactly the same. The revenue growth is still 20% to 25%.
The gain on the acquisition was a typical adjustment within the measurement period allowed by the accounting regulations to relook at the fair value of the assets and I am very pleased with the fact that this is an even better deal than we had anticipated before based on the gain we are now able to record. I am very pleased with how the Japan operation is performing.
When you take a business that’s operating as a private company and bring it under the public umbrella, there is some transitional things that we had to deal within the first quarter. But I think we are beyond those now and I am very pleased that this acquisition was made.
I think the economics are very sound and the business is performing well.
Jon Fisher
Okay. Thank you.
Operator
Thank you. And our next question comes from the line of Mark Strouse with JPMorgan.
Your line is open.
Mark Strouse
Hey, good morning. Thanks for taking our questions.
I was hoping you could just talk about the mix of products kind of by generation within Roomba. So, understand the comments around competition primarily increasing at the low end.
But, just kind of how should investors think about your mix of business for your low end 600 product, which is kind of at the high end of that range that you provided for the low price competitors versus the 800 and 900 series, which have less competition and not necessarily for any given quarter, but over the last year or whatever trends you want to guess?
Alison Dean
Year-to-date, we’ve got the 600 series globally representing about 35% of overall revenue with the 900 series and the 800 series being about equally about 30%. So the 600 series is slightly ahead of the individual 800 and 900, but there is not a huge difference year-to-date.
Colin Angle
And I think that…
Mark Strouse
Okay.
Colin Angle
At a high level, we expect that to continue. We believe that our brand strength and our customer promise is going to be – create a compelling reason for iRobot to maintain its success with our entry-level price points which in a more mature marketplace would be in the mid range.
Although there is, we have done something where we’ve offered special SKUs to get people into their franchise from time-to-time. But that mid-range entry point is something that you should imagine us continuing.
But with the higher price point premium products, the things that will in total be the larger percentage of our revenue. So, we are quite happy with this premium strategy and we think it is resilient and even benefits from this low-end emergence.
Mark Strouse
All right. Okay, that’s helpful.
Thank you. And then, Allison, now with the Robopolis deal is closed, I was hoping to give a bit more information about the gross margins for that business, the gross margins that Robopolis used to have which now you will capture that incremental.
I think, both based on the disclosures that you guys have previously laid out there. I think a lot of people were kind of backing into somewhere around 40% or so.
Just wanted to see if there is anything that you can say, it sits in the right ballpark or any help there would be great.
Alison Dean
So, I am not going to comment on previous Robopolis gross margins. What we have provided you is the expectations of how our gross margins, iRobot’s gross margins will be impacted by adding Robopolis into the business in 2017.
And again, that will be a decline in 2017 to our gross margins. It will be dilutive to our gross margins, because of the amortization of the intangibles and the profit elimination that we have to do based on the acquired inventory.
Going into 2018, all I’ll say about gross margins from a Robopolis perspective, the addition of that to our business is that the profit elimination should be behind us in 2017. But the amortization of the intangibles will carry on through 2018 and will continue to have an impact iRobot’s gross margins until we get through that amortization and the amortization period is expected to be nine quarters.
So we expect that to go into 2019. And we’ll give you further guidance on gross margins for 2018 in February.
Mark Strouse
Got it, okay. And then, just one quick follow-up.
Colin, I don’t want to – for February, but just going back to, I believe it was Bobby’s question earlier about acceleration in 2018, I think, I missed your answer to it. Is that still kind of the target for 2018 for organic acceleration?
Colin Angle
We’ve got our LTFM model out there. We are going to update it in 2018 on the February call.
So, you are going to have to wait to get some real detail on us. But certainly, the comments that I made about the addressable market still being underpenetrated, less than 10% in the U.S.
far less than that internationally creates a landscape where growth is definitely in front of us.
Mark Strouse
Okay, that’s it for us. Thank you so much.
Colin Angle
Okay.
Operator
Thank you. And our last question comes from the line of Ben Rose with Battle Road Research.
Your line is open.
Ben Rose
Good morning. Allison, just to follow-up on the last part of that gross margin question.
Is it possible to separate the impact of the profit elimination versus the amortization in the fourth quarter?
Alison Dean
Yes, the profit elimination is the much larger component. We talked about a Q3 to Q4 500 basis point reduction.
The majority of that reduction is Robopolis and out of that I’d say about a 100 basis points is the intangible asset, the amortization in the quarter.
Ben Rose
Okay. And, I guess, it’s been a couple of years now since the introduction of the 900 series and that’s kind of marking your sort of the basis of the premium strategy as I understand it over the last couple of years and kind of migrating some of those capabilities to other Roomba models.
Is there anything you can share with us, just kind of regarding the flow of new products that might, one might anticipate over the course of 2018 and I guess, specifically, just thoughts on perhaps how the premium strategy for the Roomba might unfold.
Colin Angle
Great question. You are not going to like my answer.
But certainly, we are very excited about our roadmap. We think we have – are investing very wisely in a long-term strategy which will allow us to maintain our premium position.
We are very excited about the traction we are getting in the Braava category and we think that we are in the very early days as it looks – as we look out the smart home, as we look out the role the consumer robots are going to play in the home. And how the systems or the technology are going to work together which are going to make this industry more about the complete solution than it is about a single point solution.
So, there is a lot of exciting things to come and – but unfortunately, at this moment in time, we got to wait to get more details. But we certainly look forward to talking to you in the future about our plans and our launches.
Ben Rose
Okay, great. And then, perhaps just one additional question here regarding the ITC lawsuit or just intellectual property infringements by competitors as you assess the ongoing introduction of some of the new products, particularly perhaps in the last few months, is there any chance that other manufacturers could be added to that ITC lawsuit?
Or be pursued separately based on alleged – based on your assessment of their intellectual property?
Colin Angle
So, a couple things I’ll say. First, iRobot will aggressively defend its intellectual property.
From a mechanics perspective, you would not see us adding defendants to this current action. That’s not how it works.
Anything that we would do would have to be incremental or a new action.
Ben Rose
Okay. That’s helpful.
Okay, that’s it for me. Thank you.
Colin Angle
All right. Well, that concludes our third quarter 2017 earnings call.
We appreciate your support and look forward to talking with you again in February of 2018 to discuss our Q4 results.
Operator
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect.
Everyone have a great day.