Benchmark analyst Josephine Millward reiterates a Buy rating for iRobot Corporation, expecting new products and geographic expansion to drive growth in the future.

iRobot Corporation

iRobot will likely report an in-line quarter

iRobot Corporation (NASDAQ:IRBT) is scheduled to report its Q4 on Wednesday February 5. The call is scheduled on February 6 at 8:30 AM EST. We think iRobot will likely report an in-line quarter. Consensus estimates are $125 million in sales and $0.10 in EPS. Our model assumes $116 million for Home, up almost 40% y/y, and $8 million+ for Government, which is supported by the funded backlog of $13 million+. FY13 guidance reflects approximately 20% growth in Home robots with and $50 million for Government robots.

Guidance assumes 40%+ growth for Home Robots

iRobot Corporation (NASDAQ:IRBT)’s Q4 guidance assumes 40%+ growth for US Home sales and 20%+ growth for International Home sales. It appears aggressive with mixed holiday retail sales, but we think iRobot has good visibility: 1) iRobot Corporation (NASDAQ:IRBT) should have $8-10 million from Braava, which means it needs revenue growth less than 30% and lower unit shipment growth with a slightly higher ASP; 2) Guidance was based on orders in hand and iRobot Corporation (NASDAQ:IRBT) keeps its distributors’ inventory levels lean; 3) the new Roomba was sold exclusively on-line. According to the National Retail Federation, retail sales rose 3.8% in November and December vs. 3.5% last year. This is slightly below expectation of 3.9%. Non-store holiday retail sales, which included on-line sales, grew 9.3% y/y.

Expect low penetration, new products and geographic expansion to drive growth

We expect management to reiterate its FY14 guidance of mid-high teen revenue growth, and its three-year target of mid-to-high teen revenue CAGR, and EBITDA margin in the high teens. We note that consensus sales and EPS estimates of $555 million and $1.14 continue to reflect approximately 14% y/y top-line growth and modest operating margin expansion to approximately 9% (EBITDA margins in the low teens). Guidance assumes Home robots as the key growth driver in FY14, driven by low penetration of robotic vacuum cleaners around the world (13% of the $7 billion global market), and its vastly improved new generation of Roomba and Scooba combined with multi-media ad campaign. In addition, the company expects its continued expansion in China and roll-out of Braava around the world to drive growth. Europe was challenging last year, but indications from distributors at trade shows in the fall suggest that Europe could grow in 2014.

We reiterate our BUY on iRobot Corporation (NASDAQ:IRBT) based on potential upside in FY14 relative to guidance from Home Robots and Remote Presence. We believe iRobot Corporation (NASDAQ:IRBT) remains well-positioned for long-term growth from developing and dominating multiple commercial robotics markets. We remain excited about Remote Presence, in particular the Enterprise product leveraging Cisco Systems, Inc. (NASDAQ:CSCO)’s distribution channels.