Feb 8, 2018
Executives
Elise Caffrey - IR Colin Angle - Chairman and CEO Alison Dean - CFO
Analysts
Frank Camma - Sidoti Asiya Merchant - Citigroup Jim Ricchiuti - Needham & Company Bobby Burleson - Canaccord Genuity Jon Fisher - Dougherty & Company Mark Strouse - JP Morgan Ben Rose - Battle Road Research
Operator
Good day everyone and welcome to the iRobot Fourth Quarter and Full Year 2017 Financial Results Conference Call. This call is being recorded.
At this time for opening remarks and introductions, I would now 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 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 is provided in the financial tables at the end of the fourth quarter and full year 2017 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 fourth quarter and full year 2017, as well as our outlook on the business for 2018.
Alison Dean, Chief Financial Officer, will review our financial results for the fourth quarter and full year 2017. Colin and Alison will also provide our business and financial expectations for fiscal 2018 and our three-year financial targets for 2018 through 2020.
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. 2017, our first full year as a consumer-only focused business, was a fantastic one for iRobot.
Our highly successful strategic decision to focus on the consumer-as-our-customer drove 2017 revenue growth that was four times 2016 revenue growth. And we’ve only just begun.
We increased our expectations three times during 2017 and our Q4 and full year 2017 revenue exceeded even those increased expectations. Record Q4 revenue was driven by very strong sales in the United States and in EMEA, as the overall category continued to grow at an accelerating rate.
Higher revenue coupled with continued improvement in gross margin, allowed us to increase investment in research and development, and sales and marketing to capitalize on our momentum, while returning additional profit to shareholders, and setting a strong foundation for 2018 and beyond. During the year, we maintained unambiguous global product and brand leadership in the robotic vacuum cleaner category; we acquired two of our major distributors in Japan and Europe, giving us more direct control of 75% of our global revenue; we initiated marketing efforts to drive awareness of our mopping products; and we continued to extend connectivity across more of our products, allowing us to offer more robots with mapping capabilities and cloud connectivity at more accessible price points, growing our role in the emerging smart home.
These achievements resulted in full year 2017 revenue growth of 34%, operating income of $73 million, or 8% of revenue, and earnings per share of $1.77 including a $0.41 negative impact from the tax law change. In 2018, we expect to drive revenue growth of 19% to 22% through deeper household penetration of Roomba globally; deliver double-digit growth in the U.S.
and overseas; expand gross margin due to distributor acquisitions; drive greater global iRobot brand consistency and awareness; continue investment in innovation to extend our technology and product leadership in the category; and deliver several new products in the second half of the year. What are the factors supporting our confidence in our revenue growth rate?
Global household penetration of robotic vacuum cleaners is still extremely low, in the single digits. In the U.S.
where penetration is the highest, it is still at roughly 11%. That landscape provides us with a tremendous opportunity for sustained growth.
iRobot’s relentless focus on building robots that deliver world-leading system performance for our customers, not just features listed on a box, combined with our strong technology and product pipelines, position us for continued category leadership. Strong economic conditions worldwide are fueling overall global growth and positive consumer sentiment.
We have demonstrated that in regions where we have run marketing programs to educate prospective customers about Roomba, we have increased our market share. Our recent distributor acquisitions enable us to extend our strategic marketing programs in Japan and many western European countries.
The robot vacuum cleaning category grew at more than 25% in 2017, and we expect category growth to continue as we and competitors invest to drive awareness. We have seen retailers in the United States embracing and promoting the category through national advertising programs featuring robot vacuum cleaners, allocating increased shelf space and investing in high-visibility displays.
In addition to these growth drivers for Roomba, we see a tremendous opportunity to drive adoption of Braava products through campaigns targeted at our millions of Roomba customers. In 2018, we expect to cross the $1 billion revenue threshold, delivering $1.05 billion to $1.08 billion in revenue, which is year-over-year growth of 19% to 22%, operating income of $86 million to $96 million, and EPS of $2.10 to $2.35.
Continued investment in both sales and marketing and R&D is essential to meet 2018 expectations and successfully achieve our new three-year financial targets. Now, I’ll take you through some of the highlights of 2017, and our business expectations for 2018.
Our initial view last February was that we would grow 2017 revenue 17% to 19%, excluding the impact of any acquisitions, over the previous year. As the year progressed, our outlook for the U.S.
and EMEA markets became more bullish, despite increased competition, while addressing a rapidly shifting landscape in China. The final result was full year organic revenue growth that far exceeded our initial expectations along with the incremental revenue we achieved through acquisitions.
Each year, we go through a very comprehensive, bottoms-up analysis with input from retailers and distributors, while keeping in mind any planned product introductions and transitions. As the category grows and retail dynamics change, we see new indicators develop that provide us with better visibility into potential consumer demand.
The most significant indicator in the past two years was Amazon Prime day in July, which has become an important metric for retailers planning their orders for the year-end holiday season in the United States. We provide a range of financial expectations at top and bottom lines intended to capture the opportunities and risks we see at different times of the year.
Our view in February can change throughout the year, as it did in 2017. Following the exceptional performance we delivered in the fourth quarter, we are more confident than ever that the outlook for robotic vacuum cleaner category growth remains strong.
At the Consumer Electronics Show, CES, in January of this year, we met U.S. retailers and overseas distributors to review their respective iRobot performance and outlook.
We have been doing this for years and I have never heard such outright enthusiasm about robotic vacuum cleaners. They understand the category is expanding.
During the holidays, the RVC segment was a major driver of store traffic at retailers. While our continued investment in growing the category and brand through national TV campaigns clearly helped drive awareness, major retailers including, Target, Amazon, Best Buy, and Walmart all featured iRobot in their national commercials and campaigns leading up to the holidays.
Roomba is also currently being shown in Verizon’s connected home TV ad for their Fios internet service. In addition, new competition invested in TV advertising in the U.S.
The end result, market data shows robot vacuum cleaner 2017 growth in the United States, for products that cost more than $200 of more than 40% compared with year-over-year category growth of 20% in 2016. Growth of the category will enable us to continue to grow even as competitors enter the market.
Based on the U.S. market momentum, we expect to drive U.S.
revenue growth in the low 20s in 2018. We are often asked what differentiates our products from others because they all look alike.
While it’s true that competitors have copied our external design and their products look like Roomba on the outside, that is where the similarities end. On the inside, our 900 Series Roomba robots are sophisticated high-tech mobile mapping devices with more than 1 million lines of code, making them smarter by combining iRobot’s proprietary iAdapt navigation with Visual Localization and Dirt Detect it systematically and efficiently navigates an entire level of a home, recharging as needed until the job is done.
They are simpler. The iRobot HOME app enables cleaning and scheduling conveniently, anytime, anywhere.
And they have better cleaning. Roomba’s AeroForce cleaning system with dual self-cleaning debris extractors provides leading performance without the need to maintain the brushes.
We will continue to drive connectivity down through our product lines as well as continue our technology development of persistent mapping. In Q1 of 2017, we pushed out functionality to users, through our app that enables them to see a completed map of the cleaned area once the Roomba robot is finished cleaning.
Our maps not only improve the cleaning efficiency of the robot, but also help skeptics become believers by allowing them to see that Roomba really is vacuuming the area it’s supposed to. We’ve talked about the importance of persistent mapping that would allow the user to segment the map into specific rooms as well as enabling our robots to work together.
These are just a couple of the critical capabilities we are working to develop that we believe will improve cleaning efficiency and autonomy, and thus driving further adoption. It is essential that we not cede our hard-won global market leadership to competitors who recognize this enormous opportunity.
We will continue focusing on investments more deeply into the most important emerging technologies and integrate them into products that deliver the features and functionality that meet our customers’ needs, as well as investing in patents to protect that technology. Likewise, we must continue to invest in targeted marketing programs to drive awareness.
Robotic vacuum cleaner household penetration in the U.S. is roughly 14 million households or 11%, and this is the most deeply penetrated market.
Capitalizing on holiday momentum where we were a clear category winner, and building on it in 2018, will help us reach the next segment of immediately addressable 25 million U.S. households.
While U.S. revenue grew substantially in 2017, our overseas revenue grew at an impressive 28%, driven by 46% year-over-year growth in EMEA and 25% in Japan.
Our acquisition of Robopolis, our largest European distributor, at the beginning of the fourth quarter enabled us to implement our successful U.S. marketing programs in parts of Europe, going into the important holiday season, and deliver results that exceeded our expectations.
Going forward, our efforts in that region will focus on improving our brand awareness across Europe as the adoption of robot vacuum cleaners is growing. The RVC category itself grew roughly 22% in 2017, up from roughly 19% in 2016.
In 2018, we expect EMEA to grow 25% to 30% over record 2017 growth. Three quarters after acquiring our distributor in Japan, our largest market outside the United States, we have completed its integration and fully implemented channel inventory management practices consistent with those in the United States.
We exited the year with historically low channel inventory levels and improved retailer relationships. We are optimistic about further extending of our targeted marketing programs in this region and are driving consistent double-digit revenue growth.
And finally, China. China represented less than 5% of total Company revenue in 2017, as competition, particularly at the low end of the premium RVC segment remained intense, and we don’t see that changing materially in the next few years.
We continue to execute against our premium brand strategy, albeit at a scaled back level. With real-time market information available through our office in Shanghai, we continue to modify our go-to-market model, but at this point, don’t see China as a primary growth driver in the next three years.
In 2017, Braava family revenue grew 26%, comprised roughly 9% of total Company revenue. We continue to see a growth opportunity for the wet floor care market as we improve its positioning and better articulate its value proposition.
In Q4 2017, we launched our first ever Braava national television program in the U.S. following a very positive reaction to our limited television roll out in 2016, and Braava family revenue grew 65% in 2017 over full year 2016.
We have promoted this category unevenly across the globe, however, we have made advertising investments, as we did in Q4 of 2017 in the U.S., and demand has been very strong. We began our television campaigns for Roomba first in the U.S.
where we had been selling the product the longest and had the strongest brand recognition and market share. Since then, we have selectively expanded them into overseas markets with positive results.
We are confident that putting additional investment to support Braava promotions globally will help drive awareness and adoption of this category too. As I mentioned, we plan to launch several new products in the second half of 2018.
As with all our new products, I will not provide any additional details about the products or timing of their launch other than to say that we expect 2018 revenue contribution of roughly 20% to 25% and further strengthening of our RVC leadership. This year, we kick off a new set of three-year financial targets for 2018 through 2020 inclusive of the distributor acquisitions we made in 2017.
These will replace those we set for 2016 through 2018 which did not include any acquisitions. Over the three-year period we expect annual revenue growth of roughly 20%; gross margin in the range of 50% to 51%; and operating margin growing to 10% by 2020.
It is critical that at this point in the accelerating adoption of the category that we maintain unambiguous brand and product leadership in robot vacuum cleaners through continued focused investment in R&D as well as expanding our successful U.S. sales and marketing programs into overseas regions.
We must also continue to build on our original -- initial success in wet floor care products and not let the competition get a foothold in this category. There is a lot to be excited about.
2017 was a critical year for iRobot as the first full year focused solely on developing and delivering products for the home. We delivered outstanding financial results for the year while successfully executing the acquisition of two major distributors in key markets and extending our control over 75% of our global revenue.
In 2018, we plan to capitalize on the incremental investments we made in 2017 with the introduction of new products in the second half of the year. We expect double-digit revenue growth in the U.S.
and overseas as we continue to evolve and extend our proven sales and marketing initiatives in overseas markets. In the United States, we expect continued strong sales following our 40 plus percent growth in 2017.
I will now turn the call over to Alison to review our fourth quarter and full year results in more detail.
Alison Dean
Thanks, Colin. Our fourth quarter and full year revenue, operating income, and EPS exceeded expectations, before the impact of tax reform, due to better than anticipated performance in the U.S.
and EMEA. Record quarterly revenue of $327 million increased 54% from Q4 last year.
Operating income for Q4 was $23 million compared with $19 million for Q4 2016. EPS was $0.16 for the quarter compared with $0.49 in Q4 2016.
Q4 2017 EPS included a negative $0.41 impact from the new tax reform which included the remeasurement of our deferred tax assets and a provisional repatriation toll charge totaling roughly $12 million. In addition, quarterly EPS included approximately $0.03 of 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 Q4 effective tax rate before discrete items was 34%.
In 2018, we expect the tax law change to result in an effective tax rate before discrete items of between 25% and 27%. Revenue growth of 54% for Q4 and 34% for the year reflects the positive impacts of our marketing programs, acquisition of Robopolis at the beginning of the fourth quarter and our successful positioning against competitors.
International revenue grew 28% for the full year, with EMEA growing 46%, Japan up 25% and China down 27%. We are very pleased with our two acquisitions and their performance to date.
Incremental revenue was ahead of our expectations of $25 million to $35 million for Robopolis, and in line with $10 million to $12 million expected contribution from SODC. Our full year 2017 organic growth rate was roughly 25%.
Because both acquired companies have been fully consolidated into iRobot, 2018 expectations and results will be provided in total. Gross margin was 47% for the fourth quarter compared with 50% in Q4 2016, and 49% for full year 2017.
On our Q3 call, we said that we expected gross margin to be roughly 500 basis points lower in Q4 than Q3, primarily due to the impact of the Robopolis acquisition, and the Robopolis impact was in line with that. The quarter-on-quarter expected decline from Robopolis accounting adjustments was partially offset by favorability from higher revenue and COGS improvements, driven by product cost reductions, and lower warranty expense across the global business.
Q4 operating expenses were 40% of revenue, down from 41% in Q4 last year due to higher revenue. For the full year, OpEx was 41% of revenue compared with 40% last year, consistent with the low end of our range.
Sales and marketing was 18% of 2017 revenue, up from 17% last year and included approximately 150 new employees from our distributor acquisitions as well as the first-time national marketing campaign for Braava and the China brand program. Full year EPS was $1.77, compared with $1.48 in 2016.
As a result of the tax reform act, we took a discrete charge of $12 million for the remeasurement of our net deferred tax assets and a provisional repatriation toll charge in the fourth quarter, negatively impacting Q4 and full- ear EPS by $0.41. Full year 2017 EPS was also negatively impacted by approximately $0.30 from the year-one SODC accounting adjustments which will not impact 2018.
In addition, the negative effect in 2017 from the acquired inventory from Robopolis will also not carry into 2018. This will not translate into year-on-year gross margin improvement, however, due to increased amortization of Robopolis intangibles in 2018.
We ended the year with $166 million in cash, down from $254 million a year ago, reflecting net cash payments of $149 million to acquire the distributors. We plan to rebuild our cash position to more than $200 million by the end of 2018.
2017 year-end inventory was $107 million or 56 days compared with $50 million or 42 days last year, driven by the acquisitions and the need to hold inventory for direct-to-retail sales in Japan and more than 50% of EMEA. Due to this structural change in our business model, you should expect DII to be approximately 100 days plus or minus on average in 2018, with our typical quarterly fluctuations.
Now, I’d like to provide you with additional detail and some of the underlying assumptions for our full year 2018 financial expectations and our three-year targets. As we have previously discussed, we manage our business from a full year perspective.
Likewise, our 2018 financial expectations should be viewed on full year basis as quarterly year-over-year revenue growth rates will vary greatly by region due to a number of factors including the impact of acquisitions we made in 2017. For 2018, we expect full year revenue of $1.05 billion to $1.08 billion, which is year-over-year growth of 19% to 22%.
As in the past several years, we expect revenue will be more heavily weighted in the second half of the year when we expect to deliver roughly 60% of the year’s revenue. In addition to the traditional second-half seasonality of the business, 2018 will be positively impacted by the inclusion of incremental revenue from the European acquisition through the third quarter.
Our revenue expectations contemplate yen and euro exchange rates roughly in line with current rates, plus or minus 5%. We expect double digit year-over-year growth in each quarter and for revenue to increase sequentially throughout 2018 as it did in 2017.
The year-over-year growth rate is expected to be the highest in Q1 as U.S. retailers replenish inventory following a record Q4.
We will also benefit from revenue due to the inclusion of the two distributors in the first quarter. Profitability will be the lowest in Q2 as our sales and marketing expense increases over Q1 to support Q2 seasonal selling.
We expect our gross margin to be 50% to 51%, 1 to 2 percentage points up from 2017 which included the negative impact of acquisition-related intangible asset amortization and lower margin from acquired inventory, the latter of which is completely behind us coming into 2018. We sold through all the acquired inventory from both SODC and Robopolis, as expected, during 2017.
Beginning in 2018, we will recognize margin on products sold to retailers in Japan and the Robopolis countries on a basis consistent with our direct-to-retailer margins in the U.S. As previously disclosed, however, this positive impact on margins will be partially offset by the amortization of intangible assets associated with the Robo acquisition which will continue through 2019.
These charges are front-end loaded and will be higher in 2018 than 2019. We expect full year OpEx to increase 100 basis points to 42% of revenue as we proactively reinvest the incremental gross margin provided by the forward integration, primarily into higher sales and marketing spend.
Higher sales and marketing expense in 2018 includes full year of expense associated with our two acquisitions, as well as marketing expenses associated with our 2018 product launches. Additionally, we will make continued investments in the Roomba and Braava awareness campaigns to drive continued worldwide household adoption.
Our R&D investment is expected to remain at 13% of revenue, as we continue to invest in innovation to ensure Roomba maintains its market-leading position while we develop new product offerings for the future. We expect full year operating income of $86 million to $96 million and EPS of $2.10 to $2.35.
We are also assuming stock comp expense of roughly $24 million; depreciation and amortization expense of approximately $27 million; a diluted share count of approximately 30 million shares; and capital expenditures of approximately $30 million, driven largely by tooling for new products, facility expansions and the related leasehold improvements, and system implementations for our newly acquired entities. We are estimating a tax rate, before discrete items, of between 25% and 27% for 2018, reflecting the new tax law.
Building from our 2017 results, we are providing our three-year financial targets through 2020 as follows: 20% revenue CAGR; gross margin in the range of 50% to 51%; and, operating margin growing to 10% by 2020. Global revenue growth is expected to be driven primarily by further adoption and greater household penetration of Roomba, as well as adoption of our Braava family of mopping robots.
We believe at this critical point in the accelerating adoption of household robots, driving higher top line growth and maintaining dominant segment share is essential. I’ll now turn the call back to Colin.
Colin Angle
We have a tremendous opportunity to drive 20% revenue growth over the next three years due to single-digit global household penetration of robotic vacuum cleaner; our successful marketing programs that have driven consistent global segment share of more than 60%; the global RVC category grew more than 25% in 2017, and we expect category growth to continue as we and competitors invest to drive awareness; retailers in the U.S. embracing and promoting the category; and, our delivering world-leading performance products.
We expect global business to deliver strong financial performance in 2018 that will in turn fund critical investments in future technologies, and marketing, to further solidify our position as the unambiguous leader in robotic floor care and our increasing importance as a strategic player in the smart home to drive enhanced long-term shareholder value. With that we’ll take your questions.
Operator
[Operator Instructions] And our first question comes from Frank Camma with Sidoti. Your line is now open.
Frank Camma
Good morning, guys. Thanks for taking the question.
My first question has to do just to confirm here. You ended the year basically with no acquired -- I think you said this already, but just want to make sure, so, you ended with no acquired inventory from the distributors that you acquired last year.
Correct?
Alison Dean
That’s right.
Frank Camma
Okay, good. And so, -- and I totally understand the amortization issue, you went through that pretty well, and how that negatively affects your gross margin.
I guess, the question I have is, how much, even if you can’t say quantitatively, but just qualitatively, don't you pick up margin from what the distributor would have captured, I guess is where I'm going with this, just through the gross margin, from what they would have sold the product? That would have sort of kind of been my assumption.
Alison Dean
Yes. That’s right.
Frank Camma
Okay. But, it doesn't seem -- I guess, if you net out the amortization, it doesn't seem that you show -- I just wonder if you can -- it's probably too long you want [ph] to right now, but if you kind of take us through qualitatively why that wouldn't be, given the size of the acquisitions, which seem pretty sizable?
Like, why [multiple speakers] amortization?
Alison Dean
Yes. So, in 2018, we’re still facing about $15 million of amortization for the Robopolis intangible.
So, that’s certainly offsetting some of the natural margin expansion you’d expect from those acquisitions.
Frank Camma
Okay. So, $15 million.
And I think, you gave an estimate of total D&A of $27 million for the year. But, that doesn't go up a lot year-over-year, right, for 2017 to 2018 because you ended -- I am sorry, it was -- or was it 25 for full year 2017, correct?
Alison Dean
I’ve lost the point of your question. Sorry.
Frank Camma
Well, I am trying to figure out the delta D&A year-over-year. Meaning, it didn't seem like there is a lot more amortization in 2018 than there was in 2017 from your estimates.
Because it says…
Alison Dean
The SODC amortization is behind us in 2017. So, the 2018 amortization is only from Robopolis, and it’s reflected in our gross margin.
There is a small amount in OpEx but it’s minimal.
Frank Camma
Okay, all right. I'll move on from that.
I guess, the other question is more of a strategy question, which is obviously, I think, I wasn't the only one that was a little bit surprised about the operating margin guidance, given -- I mean, it’s significant organic revenue growth here, and in all respect to the amortization issue, it seems like you should still, like expand upon that. And it seems like part of that clearly is the R&D spend.
And the strategy question goes to, I mean, you're already the dominant player in RVC and I know you want to stay the dominant player. But, where I guess -- where does it go to a point where the economic returns start to lapse?
And what I mean by that is, do consumers -- your product is much better than it was just a couple of years ago. At what point does it, I guess, in your mind Colin, this is the big picture question, does the payoff start to -- I think, you know where I'm going with this.
Colin Angle
Sure. And I think, first, I want to reiterate that iRobot is committed to its profitable growth strategy, showing improving top line and bottom line.
But, at this moment in time, with the market accelerating in its growth and competitive pressure coming into the market, we made a choice to double down on ensuring we had adequate dry powder to drive that topline growth. And so that while some of our analysts, investors may have been looking for more bottom line growth, hopefully, we excited and impressed our investor base with growth rates above expectation.
This is a moment in time where over the next three years, the true winners in the consumer robot industry are going to be determined for the next decade and the leadership position that we have, the growth opportunities in front of us are ones that we think are worthy of pursuit. We are not at a moment where industries are consolidating.
We’re at a moment where the market is accelerating. And it’s important to get out there that the world of consumer robotics is much larger than just vacuum.
I mentioned in the…
Frank Camma
Yes.
Colin Angle
Okay.
Frank Camma
I mean, I guess, where you’re going with that is the $130 million or wherever you, this would imply your spending is well beyond just robotic vacuum. So, that was really what I was trying to -- given that you did announce any other product categories or such.
But…
Colin Angle
We said we are coming out with several new products in 2018, but -- and I am happy to repeat that statement, but won’t be adding any more color to that statement today.
Operator
Thank you. And our next question comes from Asiya Merchant with Citigroup.
Your line is now open.
Asiya Merchant
Good morning everyone and thank you for taking the question. And congratulations on the outstanding results in the quarter.
Colin Angle
Thank you.
Asiya Merchant
I guess, my question was just kind of if you can walk us through the guidance. Obviously, you delivered stellar organic growth of 25% organically and your Robopolis acquisition seems to have gone past [ph] your prior expectations, just doing the math.
As we look out into the 2018, the guidance of kind of 19% to 22%, which includes a full I guess three-quarter benefit from a sizable acquisition that you just completed. It seems rather conservative.
Is that a fair way to characterize it? I know you guys typically guide conservatively and have a history of beating that on the top line?
So, if you can just walk us through that guidance a little bit more that would be helpful. And if you can help me understand if you just characterize it’s prudently conservative?
Colin Angle
Sure. I mean, I would start by saying this is the most aggressive revenue guidance the Company has ever given.
We’re very optimistic about where we can take this, and we think that is reflected in the guidance. When you go into a new year, there is a lot of uncertainty.
Sometimes it goes with us, sometimes it goes against. And so, that we truly believe that the guidance given is our best estimate as to what we think is going to happen, given what we know.
But, it’s early in the year and there is many months to go. And again, we crossed the $1 billion threshold.
And so that growing by constant percentages gets harder every year. But, I think I would definitely try to convey that we’re very bullish on growth that we felt we were leaning forward in giving this guidance and feel like the market is still at the beginnings of a growth run for robot vacuum cleaning alone, much less other products that can layer on in future.
Asiya Merchant
Fair enough. And then, the CapEx guidance seems hefty relative to your 2017 or I think even relative to your past at $30 million.
Can you just help us understand what's going there? I know you mentioned qualitatively in your prepared remarks.
But, if you can just help us understand -- and the impact that you will have probably to G&A going forward?
Alison Dean
Sure. So, it’s definitely an increase over what we’ve seen in the recent years.
The main driver of the increase is tooling, as I mentioned. We’ve also had some facility expansions in part related to our acquisitions and we’re doing some leasehold improvements for that as well.
So, it is a spike I would say in our capital expenditure. I wouldn’t expect rates in the outer years to remain at that level.
Colin Angle
I would back that up. In 2018, we are integrating a lot of the two distributors.
We certainly hope that G&A can be source of leverage on a go forward basis.
Operator
Thank you. And our next question comes from Jim Ricchiuti from Needham & Company.
Your line is now open.
Jim Ricchiuti
Hi. Good morning.
Congrats on the good quarter and a year; I’ll add my congrats to it. Question on the R&D spend.
Obviously, it’s meaningfully -- it's quite a bit higher year-over-year. And what I am wondering is if there is a meaningfully larger component of your planned R&D spend for 2018 tied directly to new products planned for this year versus prior years?
Colin Angle
So, we have a very structured strategy for capital allocation, particularly as it relates to R&D where we bucket the dollars going into our core market, meaning primarily Roomba and then new products that we’re developing to bring to market as well. And so, those ratios have not changed.
Certainly, the sophistication that is going into our Roomba product line to ensure it stays ahead of the competition has increased. Our R&D percentage as a Company remains unchanged from prior years and relative to our peer group, and we definitely want to make sure that we’re in line with R&D spend of peers.
We are definitely in middle of the path. And so that we don’t think we are out of line on that R&D.
And again, given this moment in time, in the rapidly growing consumer robot industry, we feel like the opportunities are there in front of us to be reducing [ph] to practice the critical technologies which are going to define differentiation over the next decade, as well as ensuring that our product pipeline is there to pursue, not just the Roomba product line but others as well. I think, we’ve taken important feedback that everyone would be quite happy if there were more legs on the stool for revenue driven -- driving, than just Roomba.
So, I think that we are operating within our structured allocation and operating at a percentage in line with our peer group and are very excited I think, more importantly are very excited by the opportunity that the investors were making are going to deliver to the Company from the perspective of maintaining our premium leadership in the Roomba category, as well as growing new categories.
Jim Ricchiuti
That’s helpful. Colin, it sounds like you are also suggesting that over the next couple of years, not put words in your mouth, but maybe you are anticipating some shakeout in terms of the overall competitive landscape, in the robotic vacuum cleaner market, is that fair to say?
Colin Angle
Yes. I think that we are in this hyper growth phase, the rapid growth phase, where typically shakeout occurs.
When it takes to be competitive at the mid to upper price points becomes harder and there typically is sort of two to three companies that come out controlling the dominant share. And so, it’s critical as we look at our strategy to ensure that we are one of the winners and that we maintain the leadership because again it’s -- we’re at the beginning of this -- of the consumer robot industry, not at the commoditization moment in time in consumer robots, right?
We have one great success in robot vacuum cleaning with a long line of high-potential opportunities waiting for their turn to get the type of investment and potential that Roomba has seen in the marketplace, and not just by any robot, but by competitors as well. And so, the three-year targets while maintaining this focus on profitable growth are absolutely skewed toward revenue growth over quite as an aggressive OI growth, although we did want to make sure that our OI percentage in our three-year targets was increasing over time.
Jim Ricchiuti
Okay. That’s helpful.
Can I ask one question, one other question on Braava? I am wondering how to think about Braava for this year.
On the one hand, the unit growth was somewhat modest last year. You showed good solid revenue growth.
But, how should we think about Braava? You seem like you are getting some good results from sales and marketing, but are you satisfied with the overall performance and what should we anticipate in 2018?
Colin Angle
Sure. I mean, this is a great question.
As we build new categories, because they are new to the world, they do require actual investment to drive awareness and adoption. And, well, Braava is not a new product of iRobot, although we -- the current lineup has the Braava jet in it, which is relatively new, what is new is actually putting material amounts of marketing dollars against.
And again, we’re very disciplined in how -- mathematical and how we approach investing when you start investing in a new product, the ROI is negative, then, it goes to a point where it’s OI dollars neutral, but OI percentage dilutive and then as we’ve done largely with Roomba, gotten to the point where we invest at a level where we are OI percentage accretive to the overall business. And we have to take Braava through that same disciplined investment growth curve.
And with some of our upside in 2017, we are able to go and put a real U.S. nationwide advertising against Braava.
And we’re very pleased with the response. So, that’s why I highlighted the 65% Braava growth in the United States.
And so that as we think about 2018, I think you’ll see iRobot putting a more systematic program against Braava instead of a more opportunistic program that we’ve at the end of the day implemented against Braava while we were driving the improved marketing programs against Roomba. And so that, a bit of a shift where we’re pointing some of our investment dollar against having a true portfolio strategy as opposed to driving Roomba growth at all cost.
So, there’s a bit of a change in focus. And I think you’ll see continued performance of Braava in the U.S.
And then to the extent that we put dollars against Braava outside the United States, you’ll see some acceleration there as well.
Operator
Thank you. And our next question comes from Bobby Burleson with Canaccord Genuity.
Your line is now open.
Bobby Burleson
So, I was just curious, Colin, if we think about Europe or EMEA, what the differences are in terms of the competitive landscape versus North America. I understand, you guys are working to promote more brand awareness in Europe.
But, is there anything different in terms of the players that you are going up against, the way the channel works, et cetera that we should be thinking about?
Colin Angle
Sure. EMEA has typically had many more competitive brands in it.
And this has been consistent for the last five, seven years. I think that the IP situation and it being iRobot home turf was created a lot of qualitative barriers for foreign companies to come in and try to compete against us.
And Europe became kind of the battle ground where other competitive products looking to go and test themselves against iRobot, was played out. There also was a area where because of our distribution strategy, sheer magnitude of the dollars invested against awareness were significantly less than in the United States.
So, the acquisition of Robopolis and our continued global focus on IP capture and generation certainly is part of our strategy to improve our competitiveness in EMEA. And we think it’s always been a great market for us.
And these actions that we took last year with robot and the actions that from an IP strategy initiated many years ago, but there is a long lead time on that, leading to increasing numbers, patents being issued in Europe is all meant to shore up our European strategy. So, as yesterday, [ph] we have strong market leadership continued in Europe.
It is a few points lower than the North America to be sure but we still have clear leadership there. And I think that we’ll expect it will continue to be a region where competitive robots come in earlier than they come into North America.
So, this battleground region characterization I think will certainly continue. And iRobot is taking actions to ensure that our competitive set in Europe continues to strengthen so that we can continue to live it, if that’s cleared all, but they are different.
Bobby Burleson
Okay, great. Thanks.
And then, just at the U.S., wondering whether or not you’re seeing, given this inflection in demand, any changes in the ASP dynamics, any pricing pressure, anything that’s shifting here in 2018 versus what you saw in 2016 and 2017? Thanks.
Colin Angle
Sure. I think that there is absolutely increased competitive pressure and we’ve worked to try to protect ourselves against this and giving ourselves some optionality as to how do we address competitive pressure that is embedded in the guidance that we’ve given.
We see the low end of the robot vacuum cleaning segment growing where there are increasing number of entrants down sort of below the 299 price points that we have traditionally played at. And iRobot certainly intends to continue to aggressively compete throughout the market.
So, the dynamics are changing. We are seeing the market accelerate because of competitive investment and advertising the market as well as a mainstreaming of robot vacuum cleaning in general, and as I mentioned in the call, even investments from the retailers to promote the category.
So, I think that again in the guidance we gave, we allowed ourselves some amount of ability to respond to competitive threats. And we think we are well-equipped to win in 2018 as should be taken away from the confidence in our revenue growth rates.
Operator
Thank you. And our next question comes from Jon Fisher with Dougherty & Company.
Your line is now open.
Jon Fisher
Thank you. Good morning, everyone.
Very successful Q4. Just to kind of follow on from the last one of questioning and conversation there.
The average price point is $305; that’s a very impressive average price point. I was just curious if that’s some sort of quarterly record for average price or if you had quarters where that has been historically higher?
Colin Angle
I don’t have a -- it’s likely a quarterly record. I think that we’ve been working very hard to trade customers up.
And the more confidence our customers have in the legitimacy of robot vacuum cleaning, the more they are willing to go invest in the types of features that really deliver on the convenience that is the promise of robots. And so, we had a -- we do great at our opening price points, but certainly that figure is driven by customer willingness to trade up and play at our premium price point.
So, it’s a great new story.
Jon Fisher
Yes. And you have great success with that this year.
One of the drivers of growth this year has definitely been the mix up to your higher price point products and selling more in that category. Just wondering, when you look at the market, I think this -- the mix has been running kind of 60% of your sales have been the 800, the 900 SKUs and 40% in the lower SKUs.
Just wondering, when you look out next year and maybe into 2019, do you think you can hold that 60-40 max or do you think there is risk of giving some of that mix -- trade up mix benefit that you’ve seen this year, back?
Colin Angle
I don’t think that -- I mean, the real market pressure isn’t giving it back, it’s we as aggressively as we can, take our premium features and roll them down to ensure that our entry level price points continue to be competitive and to ensure that we can hold off these lower tech entrants into the marketplace. And the so that I think the mix -- we'll have to sort of see how the year rolls out.
We’ve modeled it similar. Although if there was going to be a deviation from prior year, it might actually be a shift up toward premium, if the category continues to mature and the -- and iRobot’s strongest differentiation will always be at the premium level.
And this shifts up in ASPs; it ties back to the R&D investments that we make, ensuring that our premium models are just giving this superior experience to our customers. And so, I think that for us, -- we are actually looking at a little bit inverted from the question that you asked.
Jon Fisher
Okay, good. And then, just two more questions.
On FX, Alison, since you broke out some commentary on FX, and you have made the Japanese distributor acquisition and the European distributor acquisition. Should we expect more FX volatility in the numbers when we look forward now at iRobot?
And kind of how do you view FX volatility impacting revenue and cash flow statement, on a go forward basis?
Colin Angle
I think our revenue guidance contemplates roughly the current rates, and give or take a 5% change in those. So, I think, we’re pretty much covered there.
We do also have natural hedge in our business, as you think about bottom line impact. And we have hedging programs also targeted minimizing the earnings volatility from the currency.
So, I think we are well covered in our guidance ranges.
Jon Fisher
Okay. And then, the final question is on organic growth.
The organic growth figures that you provided in the prepared comments, 46% in EMEA, 25% in Japan, is that inclusive of the distributor acquisitions or are those organic growth rates? And if they are not organic growth rates, can you innumerate what the organic growth performance was in those markets in 2017?
Colin Angle
So, those are consolidated growth rates. So, they do include the impact of the acquisitions.
Alison Dean
The growth rates were about mid teens organically in the acquired regions.
Operator
Thank you. And our next question comes from Mark Strouse with JP Morgan.
Your line is now open.
Mark Strouse
So, I just want to talk about the OpEx strategy over the next three years and kind of call out this shakeout period and the competition. The couple of years, you’ve been able to deliver revenue above your initial expectations [technical difficulty] happens say in 2018, how should we think about OpEx?
Would you allow that you stay constant as a percentage of sales, so the dollar amount increases up or could that stay flat and you potentially see some leverage? And then, vice versa, if revenue fall short of your expectations, would that be a reason to potentially ramp up sales and marketing, and R&D, even further?
Colin Angle
Sure. I think if we look at OpEx, we believe that in out years, there are some opportunities to leverage some G&A and potentially some other fixed costs in the OpEx domain and then, choosing as to whether or not they are prudent investments in sales and marketing to drive the growth, not just at Roomba, but other product categories over the next few years is going to be some important calculus that we look at.
So, I think, you’re going to see some shifting around as to how the OpEx is made up where you definitely will see leverage in some lines. And consistent with this shakeout period focused on profitable growth with revenue growth being the critical primary focus that we definitely tend to keep OI ramping in the right direction.
It’s going to be -- this also [ph] will be made in evolving fashion over the next few years. Is that helpful?
Mark Strouse
Yes, that is, Colin. Thank you.
And then, how should we think about the marketing by region in 2018? Should we think about that kind of as a similar to the split of revenue or is there one particular region that’s going to get the lion share here?
Colin Angle
We haven’t really commented on that in the scripts thus far. I think that as we look in North America, Europe and Japan which are the areas where there could be some variability, it’s going to be based on competitive response.
We certainly intend to maintain leadership in North America, it’s where we spend the most money and have the largest share and large revenue. But, we also think, in Japan and Europe where our marketing spend is less optimized, you could see investment dollars on a per robot sold basis, trending certainly higher in those regions versus in the more optimized region of North America.
So, we again are very analytic in how we approach these things and are constantly running tests and building models around how do we optimize the spend to be OI-percentage-accretive. And there are actually more opportunities for incremental accretive dollars in Japan and Europe, likely than in North America.
So, this test measure and scale mechanism that we apply in very-disciplined fashion, will continue.
Mark Strouse
Okay, thanks so much. And just lastly, if I can.
I didn’t hear anything about the pending ITC litigation. But, I if I remember right, you are expecting decision sometime in 2018.
The Black & Decker settlement that was announced, if I remember it was for a “certain period of time” that they will be restricted from the market. Can you just talk about the rationale for that versus going for something longer term, or even permanent?
And how we should think about the remainder of the suits, with the other competitors? Thanks.
Colin Angle
Sure. So, the ruling -- first off, I pre-apologize, there is very little I can say.
What I can say is that a decision will be forthcoming in 2018 in the back half of the year. The hearing is upcoming in March, which is on the books.
I can say, we’re very satisfied with the resolutions thus far. So, I can’t go into more detail.
It’s all very confidential. But, iRobot is very satisfied with the outcomes thus far.
Mark Strouse
Okay, fair enough. Thank you, Colin.
Colin Angle
Sorry for being mysterious.
Mark Strouse
Understood.
Colin Angle
Okay.
Operator
Thank you. And our next question comes from Ben Rose with Battle Road Research.
Your line is now open.
Ben Rose
Good morning. Question for Colin.
If you just take -- taking a snapshot of 2017, could you comment perhaps on the percentage of sales coming from internet connected robots? And in the spirit of your moving higher end features down to entry level products, could you perhaps give some commentary around what your expectation would be for 2020, in terms of the percentage of robots that you sell that are internet connected?
Colin Angle
Okay. I can give you some color on that.
We made some specific new product launches in 2017 with Roomba 960, the Roomba 690, where we substantially brought down the costs customer would have to pay to get mapping and to get connected. As a result, we’ve accelerated the growth of the installed base of connected robots and exited the year with over 2 million connected robots sold in.
And we are very pleased with that growth. Currently, about around a little above 35% of all our robots sold in 2017 were connected.
And I think you should anticipate iRobot continuing to drive that figure up, as it is part of our long-term strategy than it is how we believe will going to deliver some of the additional functionalities that we think customers are going to rapidly grow demand in their vacuuming robots. So that was a huge increase from the year prior.
And I’m not sure we can go and recreate that same percentage increase. But definitely, our line-up in 2018 continues the trend started in 2017 regarding our focus on connecting robots.
Ben Rose
Okay. And then, just one final question for me, again, in terms of the three year outlook.
You quantified the potential contribution of new products to 2018 at 20% to 25%. Should we be thinking about kind of a like percentage contribution from new products over the course of these three years or is 2018 kind of a very big new product year in the context of things?
Colin Angle
I’m not comfortable today speculating on exactly how the next three years are going to roll out from a contribution perspective. It is definitely our strategy to systematically upgrade and launch new products.
I think that’s -- certainly that 20% to 25% of revenue in 2018 coming from new products; that’s a great number. But, I’m not going to speculate beyond stating that this isn’t our year of new product launches and then expected drought.
We have a cadence that we work to maintain.
Ben Rose
Okay, great. Thanks very much.
Colin Angle
Okay. Well, thank you everyone.
That concludes our fourth quarter and full year 2017 earnings call. We appreciate your support and look forward to talking with you again in April to discuss our Q1 results.
Operator
Ladies and gentleman, thank you for participating in today’s conference. This does conclude today’s program and you may all disconnect.
Everyone, have a wonderful day.