[Corrected 8/27/18, 10:45 am. See below.] United we stand, divided we fall. But sometimes, the opposite is true.
That’s the way things seem to be playing out for iRobot (NASDAQ: [[ticker:IRBT]]) and Endeavor Robotics, iRobot’s former defense and security business, which was carved out and sold to private equity firm Arlington Capital Partners two years ago for up to $45 million, including milestone payments.
Founded in 1990, iRobot was a pioneer in the robotics industry. In its early years, the Bedford, MA-based company was known for developing ground robots used by soldiers and first responders to do things like sniff out bombs and search for disaster survivors. But in recent years, defense budget cuts challenged that business, although U.S. military spending on ground robots is trending upward. Meanwhile, iRobot’s home-cleaning robots, most notably its Roomba vacuum cleaners, have been a hit, and a new wave of Internet-connected home devices could spell a big opportunity for the company.
In 2016, after several months of pressure from activist investor Red Mountain Capital Partners, iRobot decided to focus exclusively on its consumer robots, which made up 91 percent of its total revenue in 2014 and 2015. In addition to selling its defense and security business in 2016, iRobot also exited its “remote presence” business, through which it sold mobile teleconferencing robots to hospitals and businesses. That technology was spun out as a Cambridge, MA-based startup called Ava Robotics.
The decisions have paid off so far: iRobot’s stock price has ballooned to more than $100 per share, up from around $34 per share the day the company announced it would sell its defense and security business. The firm posted a nearly $51 million profit last year on $883.9 million in revenue, up from a $44.1 million profit and $616.8 million in revenue in 2015.
It was the right call for Endeavor, too, says president Tom Frost, a computer engineer who previously served as senior vice president and general manager of iRobot’s defense and security business.
“Any time you have two business units that are very different in their structure and very different in how they do business, you have competing priorities,” Frost says. “I think all parties realized that this was a good decision. The two business units … would thrive better separately than they would together.”
IRobot echoed those sentiments in an e-mailed statement attributed to CEO and co-founder Colin Angle. He says he’s proud of the defense robots’ track record keeping military personnel and public safety professionals safe, and he called the spinoff decision difficult but vital to both businesses.
“While the company was passionate about both [businesses], we couldn’t provide the necessary investments or equal level of focus across the board,” Angle wrote.
After the split, Frost says Endeavor’s team picked up right where they left off at iRobot, aiming to capitalize on the U.S. military’s growing spending on robots—part of a long-term plan to tap sophisticated machines for an expanding range of tasks. (More on this in a minute.) Frost says spinning out from iRobot has given Endeavor employees “a great deal of focus” and a feeling of excitement to try and grow the company on their own. As a smaller entity, Endeavor can react more quickly to the needs of its customers, Frost says. That’s helping it win contracts and expand the business.
Last October, Endeavor won a U.S. Army contract worth up to $158 million to deliver remotely operated robots that will help dispose of explosives and deal with situations involving chemical, biological, radiological, or nuclear hazards. Endeavor is also one of two finalists for a $429 million Army contract for lighter robots that can fit in backpacks; Waltham, MA-based QinetiQ North America is the other finalist. Meanwhile, Endeavor will deliver light robots—including ones that can literally be tossed into dangerous spaces—to the U.S. Marine Corps after winning several contracts worth $34 million last year and this year.
The U.S. Department of Defense is Endeavor’s largest customer, followed by foreign militaries, including the U.K. and Germany, a spokesman says. The company’s customers also include law enforcement agencies and groups that respond to natural disasters. [An earlier version of this paragraph misstated the order of Endeavor’s largest customers. We regret the error.]
Frost wouldn’t share the company’s financial results from the past two years, since it’s now privately held. But he points to other signs of growth: Endeavor recently added 10,000 square feet of space to its headquarters in Chelmsford, MA, and the company expects to increase its headcount from 120 employees to around 145 people by the end of the year, Frost says. Endeavor had around 80 employees when it formed two years ago.
The 2016 breakup with iRobot caused sadness among employees across the company, says Frost, who spent 18 years there.
“It was an emotional time,” Frost says. “We had shared a long history together—and some very important moments.”
Those included deploying robots to help soldiers in the Afghanistan and Iraq wars, and sending robots to help respond to the nuclear power plant disaster in Japan in 2011 and to New York after the 9/11 attacks a decade earlier. Frost recalls joining the iRobot team that, within a few hours of the World Trade Center towers collapsing, quickly gathered several robots, a generator, sleeping bags, and other gear to join the search and rescue effort at Ground Zero in Manhattan. The company’s robots were used to seek survivors in nearby buildings that remained standing but were damaged enough that they were deemed unsafe for humans to search, Frost says.
“That evening, I remember standing on the pile [of rubble], watching my sneakers melt because the pile was still hot,” Frost says. “It’s always impressed me how ready this team could be and how everything stopped at iRobot on that day to make sure we could get down there and respond to that event. And many of those teammates I had on that Tuesday are ones still” working at Endeavor.
Now, Endeavor is ramping up its business as the U.S. Department of Defense invests more in robots. The Pentagon plans to spend nearly $1 billion over the next several years on robots that will aid combat troops, Bloomberg reported in May. Defense spending on robotics and “unmanned ground vehicles” rose to $1.6 billion in fiscal year 2017, slightly higher than the previous year and more than double the six-year low of $681.8 million in 2014, according to a recent report from Govini, a data and analytics firm that tracks government spending. (See graph below.) Govini projects that DoD investments in ground robots will increase by a compound annual growth rate of 10.2 percent through fiscal year 2021.
The military is also becoming more deliberate with its robotics investments, Frost says. Instead of making “ad hoc purchases,” the Pentagon is increasingly buying robots through “programs of record that will stand on their own for 10 to 20 years,” he says.
“The battlefield of the future will be occupied by robots—automated trucks, robots in the sky, robots on the ground,” Frost says. “It’s absolutely the vision of where it’s going. And the budgets are growing.”
Does that mean robots will fight our wars for us, too? Drones equipped with deadly weapons are becoming more common, and some countries have already reportedly deployed various types of armed machines capable of attacking without human involvement.
Endeavor and military officials have discussed the concept of arming the company’s robots, but
