Feb 12, 2009
Executives
Colin Angle - Co-Founder and CEO John Leahy - CFO Elise Caffrey - Investor Relations
Analysts
Jim Ricchiuti - Needham & Company Barbara Coffey - Kaufman Brothers Jeff Evanson - Dougherty & Company Alex Hamilton - Jesup & Lamont Josephine Millward - Stanford Group
Operator
Good day, everyone, and welcome to the iRobot fourth quarter 2008 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 provision of the Private Securities Litigation Reform Act of 1995.
This conference call may contain expressed or implied forward-looking statements relating to the company’s financial results and operations demand for the company’s products and services and business conditions. These statements are neither promises nor guarantees, but are subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those contemplated in the forward-looking statements.
In particular, the risks and uncertainties include those contained in our public filings with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.
During this conference call, we will also discuss various non-GAAP financial measures as defined by SEC regulations G including adjusted EBITDA, which we define as earnings before interest, taxes, depreciation, amortization and non-cash stock compensation expense. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP financial measures and the non-GAAP financial measures are posted on the Investor Relations page of our website at www.irobot.com.
Please note that live audio broadcast of this conference call is also available on the Investor Relations page. An archived version of the broadcast will be available on the same web page shortly.
In addition, a replay of this conference call will be available through February, 19, 2009 and can be accessed by dialing 719-457-0820, access code 4192943. On today’s call, iRobot Chairman and CEO Colin Angle will provide a review of the company’s operations and achievements for the fourth quarter and full year 2008 and our expectations for 2009; and John Leahy, the Chief Financial Officer, will review our financial results for the fourth quarter and full year 2008.
Then we will open the call for questions. At this point, I will turn the call over to Colin Angle.
Colin Angle
Hello and thank you for joining us. Last evening, we reported 2008 revenues of $308 million, up 24% over 2007.
While our fourth quarter results fell short of expectation, we reacted quickly to deteriorating indicators and made tough decisions early in the quarter to strengthen our financial position. In short, we effected a reduction in force, imposed a freeze on discretionary capital expenditures and reduced inventory levels.
As a result of these actions, the company is financially strong and poised for profitable growth, when the economy recovers. In light of the current market environment, we intensified our focus on improving our liquidity through aggressive working capital management.
Our efforts are producing tangible results. In the fourth quarter, we reversed the trend which began more than a year ago by generating significant positive operating cash flow of more than $19 million.
We began 2009 with a strong cash position of $41 million and a more efficient operating model. In 2008, we worked to become a more global company.
Our results for the year demonstrated solid progress against that goal. iRobot’s international revenue more than doubled in 2008 compared with 2007.
For the year, it comprised almost a quarter of total revenue, compared with just 13% in 2007. Our successful expansion into overseas markets suggests worldwide demand for our products and provides important diversification to help offset the impact of the US recession.
In 2009, we expect increased demand from our international home robot customers to partially offset the recession driven decline we are experiencing in domestic retail sales. I would like to spend a few minutes reviewing the highlights of 2008, and then provide you with our expectations for 2009, as well as lay out the assumption that underlies our plan.
In 2008, we sold a record number of robots in both divisions. We delivered these results despite a US economy that deteriorated throughout the year.
In the Government and Industrial division, we shipped 951 robots during the year, more than double the number of units delivered in 2007, bringing total iRobot units sold to-date to more than 2,200. This larger installed base continues to help grow our recurring revenue from the sale of additional spare parts service and support.
G&I revenue for the year increased 28% over 2007 and was driven by the sale of PackBot FasTac robot under our $286 million xBot contract. As we have discussed for the past year, we expect the military to transition from FasTac to small unmanned ground vehicles for SUGVs at some point in 2009.
We expect revenue in the first half to continue coming from orders of FasTacs, such as the $13 million in orders we received in the past few weeks. Revenue in the second half will be fueled by new products, including the SUGV, Warrior, Negotiator and unmanned iRobots, such as Ranger and Seaglider; also product life cycle revenue and international sales.
We ended the year with $8.4 million in backlog, compared with $26.1 million at the end of 2007. However, we have good visibility into the first half of 2009, based on orders received recently and several we're expecting to receive in the next couple of month.
Beyond that, we have a solid plan to meet our 2009 goals with sales of new products, increased product life cycle revenue and international sales. Revenue in the Home Robot division increased 20% for the year compared with 2007.
This growth was primarily driven by the sales of Roomba 500 overseas. We shipped more than a million robots during the year, up 17% from a year ago, despite this difficult US economy.
Total gross margin for the year did not meet our expectations, primarily due to the lower divisional gross margin throughout the year. Home Robot's was impacted by retail customer bankruptcies in the first and fourth quarter, adjustments to return reserve, promotional incentives used to drive sales in a weakening environment and channel mix.
G&I gross margins were impacted by a change in product mix. To offset lower gross margins, we took aggressive action and reduced our operating expenses by more than four percentage points to 30.3% of revenue in 2008.
We're affirming our commitment to improving profitability. Pre-tax income of $1.1 million was more than double the $500,000 we reported in 2007, and our annual adjusted EBITDA margin increased to 4.3% from 3.0% in 2007.
Now, turning to 2009, this year will be challenging due to the current state of the economy and uncertainties around the timing of actions from the new administration in Washington. The key factors impacting potential upside or downside to our 2009 plan are the depth of the recession and the transition by the military from FasTac to SUGV.
We built a plan that assumes no overall growth, primarily due to the consumer sentiment, which is at historic low levels. We expect the US demand for home robots to decline year-over-year due to the recession, but it is expected to improve with the economy.
We anticipate this recession driven decrease to be offset in part by growth in international home robot sales. We also expect growth in our G&I division, assuming an uninterrupted transition to SUGV, although timing of orders could cause quarterly results to be lumpy.
Our revenue continues to be highly seasonal, with the majority of Home Robot's revenue generated in the month leading up to the year-end holiday season. As in prior years, we expect approximately 60% of our annual revenue will be generated in the second half of the year.
We also expect to report a net loss in each of the first two quarters consistent with previous years, before posting profitable quarters in the back half and a profitable full year. More than half of our expected incremental growth in international Home Robot revenue will be driven by the sales to existing partners.
Many of them continue to expand to new stores because of the success they have with the Roomba 500. Despite the economic environment, our international partners continue to report strong consumer demand and have sponsored additional advertising and promotions to support our products.
We are also expanding our reach through e-commerce by adding direct capabilities to more international markets. While the recession is broadening to impact countries worldwide, growth in our international business is being measured off a small base, and demand at this point seems to be outpacing the negative recessionary impact.
In 2009, we anticipate orders for PackBot FasTac will generate first half revenue. More than half of G&I revenues for the year will be generated in the third and fourth quarters from the sale of new products, international revenues, and product lifecycle revenue to support a larger installed base of robots.
As in 2008, our G&I division will incur disproportionally high R&D expenses in the first half of the year, particularly the second quarter, as we finalized product development in order to expect orders in the second half of the year. I will now turn the call over to John to review our 2008 financial results.
John Leahy
Thanks, Colin, and good morning, everyone. Fourth quarter revenue of $91 million was 8% below a very strong fourth quarter a year ago, due to the lower domestic sales of home robots.
Annual revenue increased 24% to $308 million, driven by growth of more than 20% in both divisions. Revenue from our acquisition of Nekton in September accounted for approximately $1.1 million in the quarter and $1.7 million for the full year.
For the fourth quarter, pretax profit was $10.2 million, compared with $12.1 million last year. Full year pretax profit was $1.1 million, compared with a $0.5 million a year ago.
EPS for the quarter was $0.21, compared with $0.81 in 2007, and full year EPS was $0.03, compared with $0.36 per share last year. The 2007 results include an $8.6 million tax benefit, due to the release of a federal deferred tax allowance.
That benefit accounted for roughly $0.34 of EPS in Q4 2007, while we had a $4.8 million tax expense, or about $0.19 of EPS, in Q4 2008. Our full year tax rate was 32.8%.
The lower than expected rate was largely due to R&D credits received in the fourth quarter. For 2009, you should assume an annual tax rate of 48%.
Adjustment EBITDA for the fourth quarter was $13.7 million, compared with $14.2 million a year ago. For the full year, adjustment EBITDA was $13.2 million, or 4.3% of revenue, compared to $7.4 million, or 3% of revenue last year.
For 2009, we expect stock compensation expense to be in the range of $8 million to $9 million. Looking now at Home Robots, unit shipments of 293,000 in Q4 generated $48 million in revenue, compared to 441,000 units and $74 million in revenue a year ago.
We did expect revenue for the division to be lower in 2008 than last year, as the Roomba 500 launch caused Q4 2007 results to be unusually high. For the full year, we shipped more than a million home robots, up 17%.
Our revenue of $174 million for the year grew 20%. International revenue doubled in the quarter, and was more than three times higher for the full year than in 2007.
In the G&I division, total revenue grew 69% to $43 million in the quarter and 28% to $134 million for the full year. This increase was driven by fulfillment of several large orders for the PackBot FasTac.
Contract revenue increased 48% in the quarter due to sub-refunding, a fourth quarter revenue from Nekton and funding for warrior development. G&I product revenue was $35 million in the fourth quarter, compared to $20 million a year ago, and grew 30% to $108 million for the year.
Product life cycle revenue was $9 million, or 25% of G&I product revenue, compared with 18% of product revenue in Q3. For the total company, gross margin for the fourth quarter was 36.1%, down slightly from 36.6% last year.
Home Robot gross margin decreased 2.8 percentage points, while G&I gross margin increased 1.4 percentage points. For the full year, total company gross margin was down 2.8 points to 30.4%, reflecting a 3.6 point decrease in Home Robots and a 1.8 point decline in G&I margin.
In Q4, Home Robot gross margin was negatively impacted by reserves for excess inventory and promotions we supported with select retailers to drive sales. Improvement in G&I margin was primarily the result of absorption of overhead, due to higher revenues.
Operating expenses declined $2 million year-over-year in Q4. For the full year, OpEx totaled 30.3% of revenue in 2008, down from 34.2% last year.
The overall reduction in operating expense demonstrates our ability to respond quickly in the face of changing economic conditions. We generated $19 million of positive operating cash flow for the quarter and $19 million for the full year, compared with negative operating cash flow of $2 million in Q4 last year, and negative $16 million for full year 2007.
The significant improvement this year is a result of our focus on inventory management and strong receivables collection. At the end of the fourth quarter, we had cash and investments totaling $41 million, compared with $27 million at the end of September.
Day sales outstanding were 38 days, down from 48 at the end of the third quarter and improved from 46 last year. At the end of the quarter, inventory was $35 million, down from $43 million at the end of the third quarter despite a weakening economy and the related declining sales.
As I discussed last quarter, this continued improvement was driven by a two-pronged approach of better managing production builds and a concerted effort to push slower moving skews through our sales channels. To summarize, in 2008, we managed well in a tough environment and put the company in a stronger financial position than a year ago.
As we face an equally challenging situation in 2009, we will continue to aggressively manage the key drivers of valuation, our EBITDA margins, working capital and cash flow. Now, I would like to turn the call back to Colin.
Colin Angle
Thanks. I would like to provide you with the details of our 2009 guidance.
For the full year 2009, we are expecting revenues to be in the range of $290 million to $310 million, with Home Robot revenue of $158 million to $168 million, and G&I revenue of $132 million to $142 million. Included in the 2009 revenue is approximately $6-8 million from the acquisition of Nekton for the full year.
This compares with about $2 million for the last four months in 2008, following the acquisition. In the first quarter, we anticipate revenue in the range of $50 to $55 million.
We expect revenue in Q2 to increase slightly over Q1 and begin to ramp in Q3, as retail holiday orders are placed. For the year, we anticipate earnings per share to be between breakeven and $0.04.
For Q1, we expect a loss per share between $0.18 and $0.12. We expect adjusted EBITDA to be between $14 and $17 million for the full year.
That’s an increase of $1 million to $4 million over 2008, and an adjusted EBITDA loss for Q1 to be between a loss of $6 million and $4 million. We expect to report an adjusted EBITDA loss in each of the first two quarters.
Before taking your questions, I would like to wrap up with a few comments about how we are thinking about the next couple of years. 2008 demonstrated to us that there was strong demand for our robot.
Given the uncertainty about the timing of an economic recovery, we are not expecting 2009 to be a growth year for us, but instead we will continue our focus on operating efficiency and building for the future. Beyond 2009, our model is one of balanced top and bottom line growth.
We expect to return to a state of double-digit revenue growth once the economy improves, the administration transition is complete and we have our major G&I product transition behind us. In Home Robot, there is tremendous opportunity for growth through further penetration of existing markets in the US and overseas with our current product line.
Expansion beyond our current international market, coupled with increased e-commerce access will provide additional avenues for growth. For several years, we have told investors that capturing the Infantry market was key to our longer term growth in G&I.
In 2003, we were awarded the development contract for the future combat system small unmanned ground vehicle. We expect to begin delivering SUGVs to the army in the fall of this year and to continue for years to come.
,
With that, we'll open the call to your questions.
Jim Ricchiuti - Needham & Company
Thank you, and good morning. Just a question on backlog.
So your current backlog … If we take into account the orders that you announced in January, is this somewhere around 20 million or 21 million?
John Leahy
Yes, that's correct.
Jim Ricchiuti - Needham & Company
And I wonder if you would comment a little bit on the order visibility you alluded to. Can you give us a sense in terms of the orders you're anticipating, will just be for existing PackBot, and how do you see the bookings that you are getting to ramp over the next one to two quarters?
Colin Angle
Well, typically, at this point in the year, we don't have visibility yet for the full year in the form of booked orders or work completed. That grows typically in our next call substantially, and we're in a very similar position as we sit here today than we have been in 2008 and 2007.
So that we are very comfortable as to what we have in hand. So there is, really, despite the transition and so forth in the administration, we are in a very similar position.
So we feel good about that. So, well our backlog at year end was lower than a year before; that was only because of our year end beginning your timing of contracts, which we have since received.
Jim Ricchiuti - Needham & Company
And again, just with respect to what you potentially see on the horizon, and will the near-term, will these be PackBot?
Colin Angle
In the first half of the year, they are primarily going to be the PackBot FasTac robot.
Jim Ricchiuti - Needham & Company
Okay.
Colin Angle
That’s going to drive revenue in the first half ,and we are going to see a transition in the back half away from the FasTac version of the PackBot to some of our new products such as the SUGV, the Warrior, the Negotiator and some of our Underwater Vehicles. So we'll see a diversification of products – of revenue drivers in G&I.
Jim Ricchiuti - Needham & Company
And just a question for John, if I may, just on operating expenses and, in particular, R&D. You alluded to that, something like that's going to be a little higher in the June quarter.
Will that be the high water mark for R&D for the year, the June quarter? I wonder how you had characterized operating expense in general for the year?
If there is any color you can give on that? Thank you.
John Leahy
Yeah. I think in terms of OpEx, we would expect to continue to leverage our operating expenses as a percentage of revenue, as we have for the last couple of years.
In addition, we are managing our OpEx very aggressively. Colin mentioned that we did a small reduction influx this year.
And so, we are managing OpEx in absolute dollar terms very aggressively as well, in our effort to improve our overall EBITDA margins. In terms of externally funded R&D, the high point probably will be in Q2, as we are finishing up work on projects or products for the second half.
Jim Ricchiuti - Needham & Company
Okay. John, what was the headcount at the end of the year?
John Leahy
I think we have got that here in front of us, somewhere.
Colin Angle
479.
John Leahy
Thank you.
Jim Ricchiuti - Needham & Company
Okay, thanks a lot.
Operator
We will go next to Barbara Coffey of Kaufman Brothers.
Barbara Coffey - Kaufman Brothers
Yes. To some degree, I am a little surprised at the international strength in the home market, as Europe is continuing to see some of the recessionary environment that we are.
Can you add a little bit more color as to what you saw and what you think are the drivers for the continued strength?
Colin Angle
Sure. Basically what we are seeing is substantial growth in a very large market, as we have a sales organization and distributor network which is increasingly mature and able to do the sorts of things that have been shown to drive sales.
So the extraordinary demand and growth is due to our small initial base, and the fact that the actions we took in 2007 to improve the way we sold our product internationally really paid off and kicked-in in 2008, and should continue to kick-in in 2009. So there is absolutely a negative pressure from the growing global recession on our sales, but, as I said, it offset some selling a very exciting product into a hungry environment.
Barbara Coffey - Kaufman Brothers
Where any particular countries stronger than others?
Colin Angle
Of course. We saw particular success and growth in Japan and in Europe.
Barbara Coffey - Kaufman Brothers
Thank you.
Operator
We will go next to Jeff Evanson of Dougherty & Company.
Jeff Evanson - Dougherty & Company
Good morning. Can you hear me okay?
Colin Angle
Absolutely.
Jeff Evanson - Dougherty & Company
Great. Thanks.
Well, let's see. First of all, I was wondering if you could give us any kind of an update on where the RFP process is with respect to Oceanglider and your positioning there?
Colin Angle
The LBS contract, what we know is that – or I should say, what we believe, is that we are one of three finalists, and we have been actively engaged in responding to questions, and they put out a schedule, which suggests a announcement could happen at any time. So, over the next few weeks, we could be in a position of receiving word of the expectations.
We have been expecting work for quite sometime. So, there is a potential that could get pushed to the right.
But the last schedule that we saw suggested notification relatively soon.
Jeff Evanson - Dougherty & Company
Okay. Well, good share in for you there.
Colin Angle
Appreciate that.
Jeff Evanson - Dougherty & Company
Next question on the PLR being up so strongly. Can you give us a little color on what specifically drove that?
Colin Angle
Well, I think that it's – the most important driver is our install base. We sold in – every robot we sell carries with it a stream of product service support and spare revenue.
So with having sold an additional 951 robots into the feeder in 2008, we nearly doubled the potential base for driving the PLR revenue. So this is an exciting part of our business model.
Now, we also have on the market today upgrades – block upgrades to allow some of our older PackBot models to be improved to the PackBot 510. So that's an addition to our product offering.
And we are certainly seeing some very real interest from our military customers who own our older robots for that as well. So this is a classic recurring revenue dimension to our G&I story.
Jeff Evanson - Dougherty & Company
I guess the revenue, if I calculate this way, PLR did not grow as much as the installed base. Is my math right there?
Colin Angle
That's true. But its going to be lumpy, because the way the military works is, they sometimes buy a big chunk of spare parts and then work that down before buying new spare parts.
And you should expect utilization to be a factor in deciding what our sustained PLR rate is going to be.
Jeff Evanson - Dougherty & Company
Sure. And if we see a reduced operational tempo, we can see reduced per unit PLR.
Colin Angle
Offset by things like the block upgrades from the PackBot 500 to 510. So again, it's a multi-variable problem there.
But the one thing you can say is, the more robots we have in the field, the better the opportunity for PLR.
Jeff Evanson - Dougherty & Company
Did you have any payload upgrades in the quarter of consequence?
Colin Angle
No, we did not.
Jeff Evanson - Dougherty & Company
Okay. And my question, if I look at the roll forward of your funded backlog, it appears as though what got added to that on a year-over-year basis is down year-over-year.
What are you seeing with respect to contracting tempo?
Colin Angle
I think that the G&I side of the business is always lumpy, so that is difficult to do through an apples to apples comparison. We are seeing a lot of contracting activity.
We are seeing -- as we mentioned on the international front an increase in tempo. We had a lot of things started in 2008 that we are seeing come to fruition in 2009.
So that’s a very good sign. And then, as the administration sort of settles in, we have lots of ongoing discussions.
I think that it's important to note that revenue in the back half is driven by far more diverse set of product than we’ve ever had in the past. If 2008 was really a PackBot story, 2009 represents the transition from the PackBot story to the PackBot, SUGV, Negotiator, Warrior, Seaglider, Ranger story.
So you are seeing a tremendous diversification and change in the fundamental drivers of our business. It's very exciting for us to finally be able to cross that hurdle.
Jeff Evanson - Dougherty & Company
I apologize, I had one more question here. With respect to your comments about your outlook to 2010, Colin, where are you putting an improvement in the economy in your thinking?
Colin Angle
You know, I try not to assume any particular moment in recovery. We modeled this year without a recovery from a recession built in.
We also modeled as a recession staying from no worse than it currently is. If the recession deepens substantially, that could be problematic.
If we see a back-half recovery, as some people are suggesting we might, then we could see some upside, but it's very difficult to predict the economy, especially with customer sentiment so low right now.
Jeff Evanson - Dougherty & Company
So maybe you are thinking possibly in the early stages of 2010.
John Leahy
As I said, the guidance that we gave for 2009 does not hinge on an assumed recovery, and I don’t think I have said too much about 2010.
Jeff Evanson - Dougherty & Company
Okay. All right, thank you very much, and good job on the balance sheet improvements.
John Leahy
I appreciate that.
Operator
We will go to Alex Hamilton of Jesup & Lamont
Alex Hamilton - Jesup & Lamont
Hi. Good morning.
Colin Angle
Good morning.
Alex Hamilton - Jesup & Lamont
The question that I have for you, if you could provide a little bit of color, you did a pretty good job on that, just trying to figure this out a little more. You said G&I revenue for the year is expected to be in the range of a $132 to $142 million.
You also said that the back half of that is contingent on a transition to SUGV. Can you quantify what the numbers are in terms of the transition?
I’m just trying to figure out how much of this is transition based.
Colin Angle
I’m not going to be able to comment too strongly on that. We have, the way we are modeling here, is that we have a basket of different opportunities and we handicap that basket.
We believe that SUGV is one of the big rocks in that basket, but we have other very exciting big rocks that also could exceed and provide opportunities. So, I’m not going to try to break it out for you.
If it doesn’t happen, we could still make the year if some other good things come along. So, that’s premature, and we certainly will be giving you more information as the year goes by and things get a bit more certain.
Alex Hamilton - Jesup & Lamont
Okay. And then international is clearly doing well on the commercial side.
Based on your comments I'm assuming we're expecting a flattish kind of state of the economy, if you will. That being said, are there any further expansion plans on the international side, or is it more just playing decent in holding on to the status, holding on to where you are more importantly?
Colin Angle
Internationally, on the home side, its growth area. So, we are predicting domestic because of the recession, for a full year to be down year-over-year offset by increases in international sales.
So there, what we're seeing, to answer the question, where is the growth international coming from? About half of the growth, half of the incremental sales, is coming from our current array of distributors increasing their sale.
And the other half is from expansion into some new markets, as well as expansion of e-commerce platform to cover more countries in Europe.
Alex Hamilton - Jesup & Lamont
Okay. Thank you very much.
Colin Angle
Yeah.
Operator
We go to Josephine Millward of Stanford Group.
Josephine Millward - Stanford Group
Good morning.
Colin Angle
Good morning.
Josephine Millward - Stanford Group
Colin, you mentioned that you’re expecting additional G&I orders in the next few months. Are you referring to PackBot FasTac orders?
Could you just give us a little more color on that?
Colin Angle
Sure. The additional orders we see certainly include FasTac orders, but also orders for some of our other products.
So, we have seen two orders on the FasTac come in recently, and we think that there are opportunities for more FasTac to come in 2009, as well as other variants the PackBot 510. And as I mentioned previously, in the back half of the year, orders from our expanding diversity of products.
Josephine Millward - Stanford Group
Can you talk about what demand is like for EOD robots in this environment, the knowledge we filled a lot of EOD robots and we are drawing down in Iraq, if you expect that to remain relatively robust going forward?
Colin Angle
I think what we're seeing is a recognition, based out of experience in the field, that the EOD mission needs to expand beyond just the EOD units. And so there is interest from the army, from the marines, and engineers in having more equipment, so there is an expansion of interest in this sort of capability.
There was a recent competition on the many EOD robots, which has not yet been awarded, but that will provide an acquisition vehicle for a number of additional robots into the military. And so that is an area where the EOD team themselves will probably see a decrease in units purchased in 2009, but, on the whole, this category of robot sold should remain vibrant and strong.
Josephine Millward - Stanford Group
And are you expecting as many EOD opportunities to be awarded in the near future?
Colin Angle
It is our expectation that that will be the case.
Josephine Millward - Stanford Group
Okay. Colin, I’m hearing great things about the SUGV from the military, but it’s unclear to me, when they are going to move forward with a production decision.
Can you give us more color, where you might see an initial low rate production order?
Colin Angle
What we said is, that we expect to see production and acquisition of the SUGV in the back half of the year, but we haven’t given any more specificity as to when exactly that’s going to happen. But sure, right, the feedback that we’ve gotten and continue to get on the SUGV is extremely positive.
Josephine Millward - Stanford Group
Right, thanks. Can you tell us what direct sales, the portion of direct sales were for home robots last year and sell through number in the US?
John Leahy
Josephine Millward - Stanford Group
What do you expect it to be for 2009?
John Leahy
We are not guiding on that.
Josephine Millward - Stanford Group
You are not, okay. Do you have a sell through number for US retailers?
Colin Angle
We haven’t specifically, I can give you a qualitative answer. In the back half of the year, we saw a significant decrease in sell through based on the deteriorating economy.
We were well locked through Q3, and then we saw performance consistent with other consumer electronic firms start to fall off significantly. We cut back on our inventory and were able to in the year, inventories substantially down from beginning of Q3, which we are pretty happy about, because in this type of economy, one of the dangers the company can follow in to losing track of their inventory and seeing that balloon, as orders and demand sell through fall down.
So we believe that we are taking adequate reserves at year-end to cover any excess and obsolete inventory and we are working -- what we are hearing from our retailers is that we are in decent shape.
Josephine Millward - Stanford Group
When do you plan to launch the Negotiator, or can you talk about any product introductions planned for this year?
Colin Angle
The negotiator is a launch product.
Josephine Millward - Stanford Group
I am sorry, did I say the Negotiator? I meant the Connector.
Sorry.
Colin Angle
Oh, okay. Sorry, on the Home Robot side, the Connector was in beta test and what we determined was that, as a result of the beta test, we had a little bit more work to do, and so we have not announced a formal launch date for that product.
We have a firm commitment to our customers that we are not going to launch the product prematurely and that’s as a result of the beta, they said okay. We are going to hold back on this and we will be speaking to you again, as soon as we have more concrete information.
Josephine Millward - Stanford Group
Okay. Thanks for the update.
Colin Angle
Okay. We have time for one more question.
Operator
We will take a follow-up from Jim Ricchiuti of Needham & Company.
Jim Ricchiuti - Needham & Company
Thank you. I was just wondering if you can perhaps quantify the impact on Q4 Home Robot margins from the reserves and promotions.
Any flavor you can give us on that, John?
John Leahy
Jim, the reserves that we took for inventory on the Home side were about $1.5 million. And the incremental promotions, which were in-store coupons and things like that, where we work with our retailers, were about $1.07 million.
So 3 to 3.05, between those two. And then the last thing I would mention, as I think you know, Circuit City was also a customer of ours; we took reserves for about 450 K on Circuit City, which also would have impacted our gross margin.
Jim Ricchiuti - Needham & Company
Okay. Thank you.
Colin Angle
Yes. All right.
Operator
At this time, I'll turn the conference back to Mr. Colin Angle.
Please go ahead, Sir.
Colin Angle
Operator
And that concludes today's conference call. We thank you for your participation.
You may disconnect at this time.