iRobot Corporation
Q4 2014 Earnings Call Transcript

Published: 5 Feb 2015

[Operator:]

Good day everyone and welcome to the iRobot Q4 and Full Year 2014 Earnings Financial Results Conference Call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Elise Caffrey of iRobot Investor Relations. Please go ahead.

[Elise Caffrey:]

Thank you and good morning. Before I introduce the iRobot management team, I would like to note that statements made on today’s call that are not based on historical information are forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties and involve a number of factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information on these risks and uncertainties can be found in our public filings with the Securities and Exchange Commission. iRobot undertakes no obligation to update or revise these forward-looking statements whether as a result of new information or circumstances. During this conference call, we will also disclose non-GAAP financial measures as defined by SEC Regulation G, including adjusted-EBITDA, which we define as earnings before interest, taxes, depreciation, amortization, merger and acquisition expenses, restructuring expenses, net intellectual property litigation expenses and non-cash stock compensation expense. A reconciliation of GAAP and non-GAAP metrics can be found in the financial tables at the end of the fourth quarter and full year 2014 earnings press release issued last evening, which is available on our website. On today’s call, iRobot Chairman and CEO, Colin Angle will provide a review of the company’s operations and achievements for the fourth quarter and full year 2014 as well as our outlook on the business for 2015. Alison Dean, Chief Financial Officer, will review our financial results for the fourth quarter and full year 2014 and Colin and Alison will also provide our financial expectations for the first quarter ending March 28th, 2015 and fiscal 2015. 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. 2014 was another great year for iRobot. Last evening we reported Q4 and full year results in line with our expectations. Home Robot revenue grew 19%, driving full year 2014 company revenue up 14% to $557 million. Earnings per share were $1.25; adjusted-EBITDA was 80 million or 14% of revenue. All three of our businesses met our expectations and made progress against their strategic plans, setting a sub-well for 2015. Our 2015 financial performance will continue to be driven by our Home Robot business. Home Robot revenue is expected to grow 10% to 12% in 2015 and comprise 90% of total company revenue. We anticipate defense and security will grow for the first time since 2011 and our Remote Presence business will focus on improving the scalability of our solution for holding revenue flat at 2014 level. For 2015 we expect revenue of $625 million to $635 million EPS of a $1.25 to $1.45 and adjusted-EBITDA of 85 million to 95 million. Additional 2015 will be an important year for iRobot as we begin to rollout and monetize investments we have been making in crucial robot technology. Now I will take you through some of the details of 2014 and our expectation for 2015. Our Home Robot business had another outstanding year. Revenue grew 19% for the full year over 2013, and comprised 91% to the company’s total revenue for the year. Our Defense and Security business delivered results consistent with our expectation exceeded the year with the solid backlog and is positioned for healthy growth in 2015. Our Remote Presence business continues to ramp sales in telemedicine robot to our partner InTouch Health for use in hospitals and Ava 500 Video Collaboration Robots to several Fortune 500 customers. Full year Home Robot revenues were driven by strong growth in both domestic and international markets, expanded distribution of the Roomba 800 worldwide, growth in China and launch of the higher ASP Roomba 600 robots in club stores were the primary drivers. Roomba 800 and 600 each comprised roughly 30% of total Home Robot revenues. Our continued investment in marketing programs to generate greater brand awareness helped drive full year domestic revenue growth of more than 20% over last year. Likewise our commitment to improving product quality and ease of use resulted in a reduction of product returns, accruals that positively impacted revenue and profit for the year. Higher quality robots and improved operational performance coupled with a premium ad campaign have proven to be a successful formula. We will continue to invest in these and other initiatives that expand our competitive moat and secure our market leading position. Our 2014 international Home Robot revenues grew 17% year-over-year driven by a return to growth in EMEA following the decline in 2013. Revenue at EMEA grew 18% over last year. In APAC we continue to see strong demand in China were revenue more than doubled in 2014 over 2013. Macros in Japan weighed heavily on customer spending in Q4 and resulted in a slight decline in Japanese revenue year-over-year. Overall APAC grew 13% in 2014. APAC and EMEA each comprised roughly 30% of 2014 Home Robot revenue. In 2015 the products expected to fuel growth are the Roomba 600 as club stores complete the transition to the next generation Roomba and the Roomba 800 in worldwide distribution for the full year. Our research shows that we're still in the early stage of adoption both domestically and internationally for robot vacuum cleaners. We believe that as awareness of the category continues to expand we can see an adoption rate similar to other disruptive households such as the microwave oven and dishwasher. It is our intent to focus our investments on growing the category and extending our customer base. Wet floor care continues to be an important part of our strategy and we're working to optimize the positioning and go-to-market strategy of Scooba and the Braava. In 2015 we expect strong Home Robot revenue growth in the mid-teens in the United States. While overseas growth will be tempered by macros and currency devaluations because we sell our product to distributors in dollars we're not directly impacted by currency fluctuations. During a period of prolonged currency devaluation as is currently being experienced in Europe and Japan there is pressure on pricing and the distributor's ability to invest in marketing which impacts revenue growth. In EMEA the macros will temper growth to 2015. Japan however is experiencing a perfect storm recessionary economy and significantly devalued currency. Japan is our largest market outside the United States and while we continue to hold our market share the negative impact on 2015 revenue will likely not be offset by growth in China. For the past couple of years we have talked about the opportunities for China to become iRobot's largest non-U.S customer. We saw significant growth in 2014 and expect it to continue in 2015 and beyond. To ensure that we capitalize long-term on this huge opportunity we will continue to balance growth with requisite controls in this market. While current macros are presenting a challenging backdrop for 2015 we're excited that on a global basis this business is growing significantly still. Since 2008 we have successfully built a global business in a nascent industry while weathering challenging economic times around the world. I am confident that we have the products in pipeline to continue this growth for the foreseeable future. Turning now to our Defense and Security business, full year results were in line with our overall expectations. Roughly 60% of the revenue was product lifecycle revenue, 33% was robot sales primarily PackBot and FirstLook robots, and the remaining 7% was from externally funded research and development. International revenue increased roughly 40% to the full year D&S revenue from approximately 30% in 2013. Our DoD revenue comprised 48% of the total 2014 revenues compared with 60% in 2013. We expect 20% to 30% D&S revenue growth in 2015 driven by international and continued traction from Department of Defense upgrade. However long-term visibility into DoD robotic investment does remain poor. Our $18 million backlog exiting 2014 was twice the size of last year's backlog. In 2015 we will continue to focus on the international markets as well as continuing to sell spares, service and support for the worldwide installed base of more than 5,000 iRobot unmanned ground vehicles. Moving on to our Remote Presence Business RP-VITA our remote telemedicine robot continues to gain market traction. Last year we discussed -- last quarter we discussed how InTouch Health is selling RP-VITA to [hub-and-spoke] hospital networks, where there are specialists in major hospital providing service through the robot at remote hospital location, providing consistently high quality care on a timely basis over a telehealth network will improve the quality of care while reducing overall cost. This model InTouch Health we’ll continue to use in 2015 to articulate RP-VITA value proposition to perspective customers. In 2014 we began shipping our second mobile telepresence robot Ava 500 in partnership with Cisco. Interest and excitement about this product continue to build. Ava was recently featured in Intel’s keynote at the Consumer Electronics Show and our relationship with Cisco continues to strengthen. Our primary focus for Ava in 2015 will be scalability as we actively work with customers to shorten sales cycle and simplify the implementation process. Over the past year working with our current customers and those still in trials we have learned a great deal about the challenges of creating a new market. Based on the multiple ways in which we’re using the product to facilitate robotic remote collaboration in our offices and our manufacturing floor and in the various uses of our customers. We are confident that we can both create and grow market for our mobile telepresence robot. Revenue for 2015 is expected to be relatively flat at $3 million, two-thirds of which we expect to come from the sales of our RP-VITA and the other third from Ava 500, getting the formula right with complex new robot technology and products is challenging but we believe we have the right technology partners and customer base to be successful. In 2014 we began talking more about our leadership in the development of robot with the capability to build maps and use them to precisely navigate around environment in which they operate. In 2015 we will begin to further monetize our navigation technologies through visual simultaneous localization and mapping or vSLAM with incorporation of the next generation navigation technology more broadly into our home products, [uPoint] capabilities on our defense robots and optimization of Ava’s mapping technology through scalability. Over the next year we expect this mapping capability coupled with internet connectivity to move us from a leader in the robot vacuum cleaner market to a technology company developing navigation connected devices for the home. It is our intent to continue investing in this critical technology and the economic opportunities it unlocks. In summary, 2014 was a very successful year. In 2015 Home Robot revenue will continue to grow in domestic markets at roughly 15% and comprise approximately 90% total company revenue. We will continue to invest in marketing programs and ongoing quality initiatives that drive profitable Home Robot growth. We will continue to pursue defense opportunities overseas while upgrading the DoD’s fleet of robots. We will focus on scalability of our Remote Presence business and we will continue to invest in key technologies that extend our market leading position in practical robots. I will now turn the call over to Alison to review our fourth quarter and full results in more detail.

[Alison Dean:]

Thanks Colin. Our fourth quarter revenue earnings per share and adjusted-EBITDA were in line with our expectation. Revenue of a 159 million increased 26% from Q4 last year driven by growth in Home Robot revenue. EPS was $0.31 for the quarter which included a $0.04 positive impact from the 2014 investment tax credit compared with $0.11 for the same period last year. Q4 adjusted-EBITDA was 20 million compared with 13 million last year. Domestic Home Robot revenue growth was 21% for Q4 and 22% for the year, further evidence that our advertising investment, product engineering strategies and quality initiatives are yielding positive results. Q4 domestic revenue was partially impacted by a favorable adjustment to the product return accrual of $1 million, this compares with 4.5 million favorable adjustments in 2013. We have seen favorable adjustments on and off over the last few years as we have seen our return rates declining. International revenue grew 17% for the full year with EMEA growing 18% and APAC growing 13%. Defense and Security revenue of 24 million in Q4 was up 48% year-over-year as we expected. Roughly 65% of this quarterly revenue was from PLR, 10% was externally funded R&D and the balance was from robot sale. For the company gross margins was 48% for the fourth quarter and 46% for the full year 2014. The year-over-year improvement was due primarily to favorable product and customer mix in Home Robot. Q4 operating expenses were 40% of revenue down from 43% in Q4 last year. We said on our Q3 earnings call that Q4 sales and marketing expenses would increase substantially due to the Roomba 800 ad campaign as well as other promotional programs planned to support our retailers during the holiday season. For the full year sales and marketing was 15% of total revenue at a consistent level with our expectations and the prior two years. OpEx for the full year was 37% an improvement of 2 percentage points from last year. EBITDA for the quarter was $20 million compared with $13 million last year; with full year 2014 results of $80 million or 14%, compared with $62 million or 13% last year. EPS in Q4 was $0.31 and a $1.25 for the full year. Both were favorably impacted by $0.04 from the enactment of the 2014 investment tax credit in late December. Operating cash flow was $41 million resulting in full year 2014 OCF of $41 million, or 7% of full year revenue. We ended the year with $222 million in cash, up from $187 million a year ago. 2014 year-end inventory was $48 million or 53 days compared with $46 million or 63 days last year. The improvement in year-over-year DII was due to significantly higher Q4 Home robot revenue. Now I’d like to provide you with additional detail and some of the underlying assumptions for our Q1 and full year 2015 financial expectations. The outlook for our Home Robot business remains strong with growth drivers identified for the next couple of years. For the Defense & Security business, our visibility is again limited in 2015. However we expect our continued focus on international and DoD PLR to result in revenue growth of 20-30% over 2014. We expect Remote Presence revenue to remain relatively flat in 2015 as we fine tune the product and go-to-market strategy. We expect full year revenue of $625 million to $635 million comprised of Home Robot revenue of $565 million to $575 million and D&S revenue of $55 million to $60 million. We anticipate revenue from Remote Presence to contribute approximately $3 million. As in the past two years, revenue will be more heavily weighted in the second half when we expect to deliver more than 55% of the year’s revenue. While we provide quarterly expectations, we manage our business from a full-year prospective. Keep in mind that it is difficult to predict precise order timing between quarters and especially between Q3 and Q4. We anticipate total company Q1 2015 revenue to be flat to slightly up year-over-year to $114 million to $117 million, and then increase sequentially throughout 2015 as it did in 2014. Based on the current economic environment in Japan, we are expecting Q1 revenues from that market to decline in Q1 2015 from Q1 2014, which is negatively impacting total company Q1 growth. As Colin discussed, Home Robots growth will be driven by full year distribution of the Roomba 800, growth in China and replacement of the 500 series with Roomba 600 series in the club stores. Overall, we expect Home Robots to grow 11% to 13% in 2015, fueled by strong growth in the United States. We expect approximately half of D&S revenue to come from robot sales, and half from PLR to support the installed base of robots. We expect Q1 EPS of $0.08 to $0.10 and full-year EPS of a $1.25 to $1.45. Adjusted EBITDA in Q1 is expected to be $10 million to $11 million and for the full-year is expected to be $85 million to $95 million. Consistent with our commitment to improve profitability through OpEx leverage, we expect 2015 operating expenses to decrease to between 35% and 36% of revenue for the full year down from 37% in 2014. We expect operating cash flow to continue to run in the high single digits as a percentage of revenue. We're also assuming gross margin of 45% to 46%. Stock comp expense of roughly 15 million. Depreciation and amortization expense of approximately 15 million and our diluted share count approximately 31 million shares. We are estimating a tax rate of 34% for 2015. The high end of our EPS range assumes are [nominally -- non nominally] positive impact from an investment tax credit for 2015. I’ll now turn the call back to Colin.

[Colin Angle:]

Thank you, Elise. We expect our Home Robot business to deliver good growth in 2015 over an ever increasing base; our Stable Defense business will show healthy growth year-over-year and our Remote Presence to be flat year-over-year. With that we’ll take your questions.

[Operator:]

Thank you. We will now begin the question and answer session [Operator Instructions]. And our first question is from Brian Gesuale from Raymond James.

[Brian Gesuale:]

I wanted to delve into guidance a little bit here. Can you maybe talk about the situation where revenue at the bottom end of the range is at roughly 10% but earnings would be down $0.06 and maybe what the levers are to get there? Thank you.

[Alison Dean:]

So first of all the growth, the low end of our range would be at 12% growth rate for the company that's 625, that's based on our current of all three businesses in the current market situation as we described earlier. The low-end of our profit ranges are consistent with where we exited ’14 and we are giving ourselves leeway in that guidance to deal with some of the challenges that we may be facing in the international markets, assistance we may need to provide our distributors to keep the growth engines running in those regions.

[Brian Gesuale:]

Okay, great. And Alison wondering if you could give us little bit of inside on free cash flow targets for 2015? And then it also looks like the accounts payable jumped up a little bit sequentially if you could just put some color around that?

[Alison Dean:]

Sure, on the accounts payable we have a little bit higher than as typical and that was really just due to timing of things in the quarter we have as you know in Q4 substantial sales and marketing investments we make in some of those were in payables at the end of the quarter as well as Q4 being a very large production quarter for us. We still had some payable left there, but a lot of those have been normalized already as we have entered Q1. And from an operating cash flow perspective, again we are expecting operating cash flows to remain in the high single-digits as a percent of revenue based on the income targets we have and our expectations for working capital.

[Brian Gesuale:]

Okay terrific. And then could you maybe just talk a little bit about marketing plans for 2015, it strikes me with the Q1 guide that you are expecting maybe a little bit more of a congruent trajectory in marketing spend. Can you maybe just -- maybe give us some thoughts on magnitude and then how it shapes out throughout the year?

[Colin Angle:]

Our traditional profile for our demand generation spend remains consistent year-over-year only modified by any additional support we may have to provide internationally. So that means, heading up in Q2 and Q4 from an actual spend perspective. The foreign currency exchange internationally is meaning that our distributors ability to go spend on marketing is diminished and some additional support is being considered and factored into the guidance to allow us to continue to strongly drive sales in Europe and Japan.

[Brian Gesuale:]

Okay, that’s great color. And one more and then I will just jump out of the queue. Colin it seems like you’re very excited about some of the new innovations that you guys planned on bringing to market. You elaborated a little bit on that on the script. Can you maybe talk about product cadence, new category plans, not specific plans of course but can you just maybe wrap that up little tighter for us here for how we should think about that?

[Colin Angle:]

Sure, iRobot is very, very committed to investing and monetizing technology in navigation, cloud robotics and manipulation those are the three areas that our patent portfolio most strongly protects and we believe that are the appropriate leadership areas for iRobot as the robot company. Last year at Analyst Day we showed some of our navigation technologies this is a year where I am signaling in the script those certainly not giving any notion of timing, we will start to monetize some of the technology we demonstrated. We also last year announced our uPoint control which is a breakthrough touch screen interface for our defense robots as well as a very sophisticated robot communication system that integrates with that touch screen interface. That will also start shipping in 2015 and should help drive some of the growth we alluded to in defense as well as extending our leadership in that category. So, well last year all we could do is point at some demonstrations, this is year is going to be the year where we begin to monetize those innovations in products that we sale.

[Operator:]

Next question is from Jim Ricchiuti from Needham & Company.

[Jim Ricchiuti:]

Colin I don’t know if you want to comment further on this, again with respect to vSLAM should we assume that this newer technology finds its way first in your traditional floor cleaning products. It’s not clear whether you are talking potentially in 2015 about this technology in some other applications.

[Colin Angle:]

I think that well we’re not discussing any product launch timing or cadence. I think that -- what I can say is you will see Home Robots with this technology in them at some point in 2015. I think that that’s as far as I can go right now. And again we refer back to some of the demonstrations we showed last year where it was mature research lab technology, now it’s going to be launched embedded in our products.

[Jim Ricchiuti:]

Got it. Alison could you talk a little bit more of that Q1 as it relates to Japan, I’m trying to get a sense. If we look back in previous year's 2014, has Q1 been particularly strong quarter as it relates to the Japanese business; I am trying to get a sense of the seasonality of the business in Japan?

[Alison Dean:]

Yes, I mean this year we're definitely dealing with some of the effects we saw in Q4 on the actual sell-through and then the resulting implications for preorders for Q1, so that's the primary driver of what's going on '14 to '15. Q1 is really just -- there are a lot of factors that go into the seasonal timing in any country, it can be impacted new product introductions and that sort of thing. Last year probably wasn't a particularly strong Q1 for Japan overall but certainly this year is definitely being impacted by the slowdown we saw in Q4 and then the resulting impact for replenishment orders for Q1.

[Jim Ricchiuti:]

Do the comparisons get tougher in Japan as we go through the year?

[Alison Dean:]

Q1 is probably the toughest comparison as we see things right now.

[Jim Ricchiuti:]

Okay. And if I could ask one final question, Colin just relating to Ava, and I guess the question is how satisfied are you at this point that it's the right product for the commercial market outside of healthcare or do you feel that you are still refining the product and that what ultimately maybe the right product maybe somewhat different than what you have right now?

[Colin Angle:]

I think that what we've learned is that we have the right basic product, but there are scalability issues that need to be worked through meaning that our installations were too labor intensive in order to rapidly scale the trial. As a new product most of our customers are asking for trials first which exacerbates that problem. And so we have solutions that are being worked and rolled out I think that the bottom-line is we're somewhat disappointed that we couldn't be further along but on the other hand virtually every single customer that we got to trial last year which was a significant number is still actively excited about the products and we're working on moving forward with them. So it's sort of a good news / bad news issue which is why I use scalability terminology, we like our product, our customers are excited but we don't have a scalable solution in market at this moment and we -- but we believe we know how to solve that rapidly.

[Operator:]

Our next question is from Josephine Millward from Benchmark.

[Josephine Millward:]

Colin in the past you have talked about the need to drive consumer awareness for the wet floor care products. Can you talk about -- do you have a marketing plan and do you see this category contributing to growth this year because it doesn't seem like there is a whole of Braava and Scooba embedded in your guidance?

[Colin Angle:]

Sure, and it's a great question. The wet floor care remains a significant growth driver for us. The weight we gated on the script is consistent with plans that we have talked about, about refining our positioning and messaging for that category. But you are correct in sensing that -- another thing we mentioned down the call that we're really becoming convinced that our penetration of Roomba is still quite low and investing in driving further growth for the foreseeable in Roomba has actually increased in our investment share over perhaps what we were thinking at some point last year. So wet is still strong, it's still great and we're going to be refining it's messaging. But in 2015 we've actually seen an opportunity to focus on further and increased investment in growing our Roomba market size as a primary drive of growth.

[Josephine Millward:]

Okay. Let's just gauge your APAC. Do you think APAC will grow this year? Because it sounds like China came very strong, what drove the strength? Is it just geographic expansion and what's your plan for China in 2015?

[Colin Angle:]

So as a whole we don't believe that China's growth will offset Japan's potential contraction -- just because Japan has traditionally been our largest customer outside of the United States. But we do see it as a very, very strong year of growth in China. And 2014 as I mentioned in the script we more than doubled our revenue that was driven both by increasing same-store sales but also significant geographic expansion. So was sort of a one-two punch on the growth there in China and we expect another year of very strong growth there. But if you do the math and we are predicting APAC to be slightly down based on those two offsetting impacts.

[Josephine Millward:]

Thank you.

[Alison Dean:]

Actually I am being corrected -- APAC is slightly up on the year, we’re expecting 10%. So China does increase on a summation basis.

[Operator:]

Our next question is from Adam Fleck from Morningstar.

[Adam Fleck:]

I wanted a follow-up on the discussion around Home Robot technology role and of course the 600 and 800 full year. As you look into 2015 how should we think about the balance, ASP growth versus volume growth in that segment?

[Alison Dean:]

Volume growth is still going to be the driver in Home item versus ASP growth will be a small amount of ASP impact, but it’s a volume story.

[Adam Fleck:]

Okay, great that’s helpful. And then maybe just for the quarter, revenue was of course up again nicely in Home Robot, can you help us understand the sell through, not just your revenue?

[Alison Dean:]

Sell through was definitely good. In the U.S. it was good. As we mentioned Japan was the little bit under our expectation. Sell through in EMEA continues to be strong. So where we really saw the shortfall was in Japan, the other regions reported very strong sell through.

[Adam Fleck:]

Okay, great. And then just one last housekeeping item from me, following up on a prior question on the balance sheet, shifting to receivables, day sales outstanding finished the year quite a bit higher, highest in several years. Is there a geographic mix that plays here? Is there anything else you point to?

[Alison Dean:]

It was just related to the timing within the quarter, as you know we had a very significant Q4 and a lot of the timing within Q4 was backend loaded within the quarter. Since the quarter -- our quarter ended on December 27, and in the week following and the week following that AR balance decline dramatically as those [proceeds] came in. So is really just a timing event at year-end.

[Operator:]

Next question is from Tyler Hojo, Sidoti & Company.

[Tyler Hojo:]

So just first question is just on positive return accruals and I guess the question is what does guidance for 2015 anticipate in further momentum on the positive return accruals. And I guess context of that, I am just trying to think through how the rollout of the 600 in the U.S. through your big box stores is going to play into that?

[Alison Dean:]

So just on the returns, we don’t exclusively plan for the return reserved adjustments in order to take an adjustment we have to see a significant and continued decline in our rate. So it’s very hard to predict when that will happen. However we do give the range on our revenue and because many different items can come into play and one of those can always be returned. So we make an explicit assumption when we get guidance either for a quarter or a year that there will be returns adjustments because we just don’t know until we see the actual return rate coming in. But we do continue to invest in product quality and it is our hope that we would continue to see benefit with declining return rates and ultimately being able to make some changes those return reserves, but nothing exclusively planned. In terms of the 600 series rollout, there really is no direct connection between 600 series and return rate. As we have continued to evolve the technology overtime the newer products have had better quarter than the older ones. So as we move away from 500 to 600 that definitely should be a positive for us but in terms of again how that would translate into changes in return rate we just don’t know until we see the return rate actually materialized.

[Tyler Hojo:]

Okay, thanks for that Alison. And I guess switching gears here, just in terms of the decline in volume expected in Japan for 2015. I get the macro conversation but I am also wondering if that expectation also factored in maybe some added pressure from the Dyson product being rolled out, I think in the spring time of this year?

[Colin Angle:]

Thus far we are certainly holding our share in a market which like several other or many other consumer markets in Japan has declined. The exact timing of Dyson is subject to speculation. Certainly Dyson is a strong brand in Japan and their products should do well merely because of their brand. And we have tried to factor in an environment of somewhat increased competition in Japan in our expectations as we have given guidance but it is very difficult to model any precise anticipation of impact. Our brand in Japan is extremely strong and we are a well-regarded brand and we think we can continue to lead that market even with Dyson’s appearance especially because of the performance of our product. But we've tried to anticipate some impact -- Panasonic has also launched as I mentioned previously the remote vacuum cleaning category which is still in its early stage and we certainly can play very well as a leader in this growing category as robotic vacuuming mainstreams.

[Tyler Hojo:]

And I guess just lastly you had out the -- for some you have had out kind of sales and EBITDA margin targets through 2016, I mean it doesn't sound like there is a change there but I just wanted to kind of confirm that, are you still kind of expecting mid to high teen trigger in sales through '16 and high teen adjusted EBITDA margin?

[Colin Angle:]

Yes, certainly this guidance we have given for 2015 doesn't advance us as strongly towards those targets as we would like primarily because of the difficult to precisely quantify impact of the foreign currency exchange. But we do believe that our investment strategy and operating strategy for the business is consistent with those long-term financial targets, were we to go in and later in the year have better visibility as to what the timing and duration of this impact on foreign currency exchange was, we could say more at that point. But right now we see no reason to go and change those targets.

[Operator:]

Our next question is from Bobby Burleson from Canaccord.

[Prabh Gowrisankaran:]

Hi this is Prabh calling for Bobby, thanks for taking the question. Just piggy banking on the previous question on the comparative landscape, I just want to try and understand in North America is there -- who else are you seeing and do you see new entrants coming into the home robot space?

[Colin Angle:]

In North America it is -- there is not as much activity from a competitive landscape. We certainly believe in coming years some of the competitive products that we have seen in Japan and North America may enter but at this point in time we're by far dominant player and there are a few other brands which are quite small in comparison. So it is not where the more competitive environments are playing out that, would be Asia and Europe.

[Prabh Gowrisankaran:]

Okay. And other question I had was just on the gross margin trend. So it sounds like ASPs will be flattish the units will grow -- are you seeing any benefits from your cost optimization stuff, do you expect margins to pick up in '15?

[Alison Dean:]

So as we said our assumption as the gross margins for the company will be 45% to 46%. We expect a very small amount of ASP growth in Home in 2015. As we talked about on previous calls we pursue many different opportunities for cost reductions quite often those have been offset or challenged with competing factors such as Chinese labor rates. So at this point we think it's prudent to not plan on significant amounts of gross margin expansions even though we're actively pursuing opportunities to improve them.

[Operator:]

Next question is from Alex Gauna from JMP Securities.

[Alex Gauna:]

I was wondering you could help with maybe the slope of demand you are expecting for 2015 because off of the Japan driven headwinds in Q1 it looks by math that you are going to have some unseasonably strong sequential necessary to get to your full year guidance. So I am wondering what your visibility is into those and expectations about how that plays out throughout the year? Thank you.

[Alison Dean:]

Yes, so Alex at this point we're seeing a 2015 that actually looks very much like 2014 in terms of the ramp over the year. The different countries will have different growth rates in different quarters but overall those -- Defense is backend loaded, Home we see being backend loaded and the visibility is probably similar to as it has been previous years but as we've mentioned a few times the -- how deep and how long we see this if the impact of the currencies in EMEA and Japan could certainly effect things and we see that very strongly now and how that will play out for the rest of the year is a little unclear at this point.

[Alex Gauna:]

Okay. And then I am wondering in the fourth quarter, I am wondering at what point you realized you were starting to have a headwind effect from Japan in particular and the effects overall of exchange rate and was that something that gradually progressed or was it as the quarter wrapped? And then looking at Japan specifically I know you have mentioned some of the increased competition there. Is it your indication that you lost a little bit of share to some of your competitors who were not as disadvantaged by the Yen-Dollar exchange rate.

[Colin Angle:]

We have not lost share. The robot back what’s happening in Japan in little bit more detail is that the robot vacuum cleaning category has suffered slightly as the stick vac category in Japan has grown rapidly. So the big looser is upright vacuums which we certainly knew and know are on their way out. And the future of vacuuming is the robot for doing all of your floors and stick vac for sport cleaning, clean couches and stairs and so forth. That is the modern future of vacuuming. The stick vac has particularly in Japan burst on the scene strongly and has attracted real share customer mind share, which we think is a transient situation and that the robot vacuum cleaning market will rebound as the one-two punch of those to modern methods -- cooperative methods of cleaning take hold. But from a share perspective iRobot is fine and is very strong in Japan. It’s the category that is temporarily depressed as the stick vac phenomenon plays through that is impacting and then of course the entire category as a whole and consumer spending is down because of the challenges of foreign currency exchange and macros in the country.

[Alex Gauna:]

That’s helpful, thank you. One more quick one, I know you mentioned you expect ASPs to be in modest tailwind in 2015. Did you see that mix shift up in Q4 again as well where ASPs are up quarter-to-quarter.

[Alison Dean:]

Yes they were up slightly quarter-to-quarter.

[Operator:]

Our next question is from Troy Jensen from Piper Jaffray.

[Troy Jensen:]

Thanks for taking my question. Just I guess for Alison, if you look at 2014 you guys did 19% growth in Home. Coming into the year what were your expectations, I am just curious if this 15% is a conservative number for your Home growth in the industry.

[Alison Dean:]

As we do every year, we give you our best view based on everything we are seeing. So, the guidance we are putting out for Home is what we are hearing from our distributors and our partners about what they expect in the region. I believe that when we began last year we planned mid to high teen growth for Home and that’s pretty much what we delivered.

[Troy Jensen:]

Okay, perfect. And then Alison another one for you, curious to know if there is any warranty accruals or product return reserves that where released into earnings for Q4?

[Alison Dean:]

We had a $1 million of return reserve favorability on the top-line and bottom-line.

[Troy Jensen:]

Okay, perfect. And then last question on [indiscernible] floor. When you guys do introduce Roomba with a vSLAM technology. Can you talk about what ASPs will do and what gross margins would look like for those products?

[Colin Angle:]

So first of we have not confirmed that we are launching a Roomba with vSLAM technology, only that a Home Robot product using that technology is something that one should expect as we monetize our technology in 2015. The vSLAM technology is more expensive than the current navigation technology that we have commercialized in our products, thus far though not tremendously so a product using that technology therefore you would expect if you had a comparable launch -- a comparable product otherwise you would see some uptake in the price through the addition of that technology, and -- understandably and one would expect to see a significant impact more than offsetting that increase in price in the performance and value in the eyes of the customers for that new capability.

[Operator:]

Our next question is from Meghna Ladha from Susquehanna.

[Meghna Ladha:]

Hi, good morning thanks for taking my question. Regarding the Remote Presence business Colin in your prepared remarks you talked about how you are gaining traction in the market, but yet guidance for 2015 is flat year-over-year. Can you help us understand why we won’t see an acceleration this year. Is it because of the scalability issue that you discussed earlier in Ava? Or is this something else that?

[Colin Angle:]

It’s completely due to the scalability issue. And we wanted to go and set expectations appropriately and depending on the timing and how those additional capabilities roll out we felt that holding it flat was prudent and appropriate. But read nothing more into it than what I have said that our initial solution has made for happier customers but very painful implementations, so we need to work through those issue.

[Meghna Ladha:]

All right and the next one is for Alison. Alison the free cash flow you ended the year at around 28 million that is below the average of 35 million to 40 million that you generated in the past few years, is it because of higher investment this year. And what are the expectation for CapEx going as we enter '15?

[Alison Dean:]

Yes, so we don't have significantly higher CapEx expectations as you know we're not very capital intensive company as it is. Our capital is tolling and we pulled improvements, general assets that type of thing. So I don't expect more significant CapEx investment next year. We focus very much on operating cash flow as opposed to the free cash flow and it's been pretty consistently in the high teens for the last few years, so we don't really see that changing going forward and don't see any real dynamics within it changing dramatically.

[Operator:]

Our next question is from Ben Rose from Battle Road Research.

[Ben Rose:]

Again Colin congratulations on finishing up a great year and really just focus of the call is on the coming year, but I am sure it's gratifying. With regard to the consumer guidance for this year the range that you have stated 565 to 575 just wanted to be clear that that is just based on your current product portfolio and not the hitting the high end of that guidance would be just performance in general I suppose to the introduction of anything new?

[Colin Angle:]

That range contemplates organic growth and performance of our businesses, it does not anticipate any acquisition certainly if we were to launch any new product that would be contemplated in that guidance -- not telegraphing that we're about to but certainly the way give guidance it tries to take into account all of the regularly playing activities for the year that we're anticipating.

[Ben Rose:]

Okay. So that's to say that it include some new product introductions?

[Colin Angle:]

Correct.

[Ben Rose:]

Okay. The other thing -- second question I have Colin is that we've already some of the high end features of the 800 series incorporated into the 700 series given the remarks that you made about the 600, could we see some of those features incorporated into the 600 series by year-end?

[Colin Angle:]

It is our normal course of business to migrate the high end features into the lower end models over time so that certainly there will be a time when the debris extractors are fully rolled through our portfolio because they offer such a significant benefit over the brushes. However we're not -- I won't commit to any particular feature and timing going into the 600 series that -- you would have to understand when our new product roll outs what’s going to happen and what was included. But from the highest level -- we launched the new technology at the high end, we work on reducing the cost of that technology and to the extent it's possibly to aggressively roll that through so that our customers can have our -- the best experience. And of course we're continuously bringing out new technologies into higher end products, so we try to obsolete ourselves as aggressively as we can as part of our strategy of leading the market.

[Ben Rose:]

And then just final question for Alison, D&S -- I calculated 76% of D&S in 2014 came in the last couple of quarters of the year. Are we expecting a similar sort of percentage back end loading for 2015 to the D&S contribution overall be somewhat more linear?

[Alison Dean:]

We're definitely still expecting a back end loaded year for D&S, I don't if it will have quite as dramatic an impact in Q4 as it did this year but it's definitely a back end loaded year based on the current visibility we have.

[Colin Angle:]

Okay. That concludes our fourth quarter and full year 2014 earnings call. We appreciate your support and look forward to talking with you again in April to discuss our Q1 result.

[Operator:]

And that concludes the call. Participants you may now disconnect.