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#Thank you, operator, good afternoon, everyone, and thank you for joining Control4's earnings conference call for the second quarter of 2016.
My name is <UNK> <UNK> and I'm the Chief Financial Officer for Control4.
With me on the call today is <UNK> <UNK>, our Chairman and Chief Executive Officer.
Prior to this call, we distributed our Q2 2016 earnings release over the wire services and we have posted on our website, at investor.
Control4.com, as well as furnished it to the SEC on Form 8-K.
This call is also being webcast and a replay will be available on the Investor Relations section of our website for 30 days.
Before we begin I would like to remind you that, during today's call, we will be making forward-looking statements regarding future events and financial performance, including our financial outlook for the third quarter 2016 and our revenue and non-GAAP net income outlook for the full year of 2016.
We caution you that such statements reflect our best judgment as of today, August 4, based on factors that are currently known to us, and that actual future events or results could differ materially due to a number of factors, many of which are beyond our control.
For a more detailed discussion of the risks and uncertainties affecting our future results, we refer you to our filings with the SEC including the 8-K we filed earlier today, which contains our Q2 2016 earnings release.
Control4 disclaims any obligation to update or revise these forward-looking statements to reflect future events or circumstances.
During the call we will also discuss non-GAAP financial measures.
We do not provide guidance on GAAP net income because of the variable and unpredictable nature of certain items such as acquisition-related expenses, stock-based compensation, litigation settlement expenses, and executive severance costs.
Unless we specifically state otherwise the non-revenue financial measures that we will discuss today were not prepared in accordance with generally accepted accounting principles, and these differences are detailed in the reconciliation of GAAP and non-GAAP results provided in today's press release and posted on the Investor Relations section of our website.
Now I will turn the call over to <UNK>.
Thanks, <UNK>.
Welcome, everyone, and thank you for joining us on the Control4 earnings call for the second quarter of 2016.
I am pleased to report that Control4 experienced another strong quarter with revenue and earnings that exceeded our guidance.
Here are the high level financial results for Q2.
Revenue for the quarter was $53.2 million, $1.9 million above our guidance range, representing total year-over-year quarterly growth of 19%, and a sequential quarterly growth of 24% from the $43 million we delivered in Q1.
Revenue for the first half of 2016 was $96.3 million, up 25% from the first half of 2015.
Excluding the $9 million of Pakedge product revenue this year, our Control4 organic growth rate for the first half of 2016 was 14%.
During Q2 we saw continued strong demand for our new EA Series controllers with over 22,500 EA Series controllers ordered and delivered, a sequential increase of 15% from the 19,600 EA Series shipments in Q1.
Our acquisition of Pakedge is going well.
Pakedge networking products delivered $5.9 million in revenue in the quarter including orders from over 830 Control4 dealers that have purchased Pakedge products for the first time since the acquisition, up from 370 since we reported in May.
Our strong revenue and improved gross margins enabled us to deliver $5.5 million of non-GAAP net income for the quarter or $0.23 per diluted share, also above our guidance range.
On the heels of this record quarter, I would like to take a moment and thank and recognize our recently retired Senior Vice President of Sales, Jim Arnold.
Jim led our sales team for over nine years from a team of eight to now over 90 and was instrumental in architecting and driving Control4's channel growth.
Among his many contributions, Jim and his team helped establish Control4 as the go-to product line, brand and company for thousands of custom integrators worldwide.
During this recent quarter we [suppressed] $1 billion in total history to date revenue and we are eager to keep delivering great products and services to end customers through our expanding ecosystem and professional installation channel.
We also welcome Bryce Judd who joined us in June and now leads our worldwide sales organization.
Bryce comes to Control4 most recently from Nokia's motive division with over 20 years of both consumer and enterprise channel sales leadership experience with a strong emphasis and track record of growing technology solution businesses and their respective channel presence.
As we have noted in prior calls, Control4's mission is to be both the platform ecosystem end market leader in premium automation and network solutions for the connected home market.
Our strategy is threefold.
First, to provide premium high-quality and durable networking and automation solutions for homeowners and businesses focused in the areas of family room entertainment, multi-room media, intelligent lighting, comfort and convenience, and security and safety.
Second, to enable consumer choice and deliver automated lifestyle experiences by integrating with thousands of third-party products produced by hundreds of manufacturers.
And third, to deliver our solutions to families and businesses through an expanding global professional dealer network specifically intended to deliver the highest levels of consistent end customer satisfaction.
We have been directed operationally by these strategies to expand our solution presence, build a stronger ecosystem of partners, grow our worldwide channel and add new customers at an increasing rate, all of which are happening, advancing and being recognized by our industry.
This past June, CE Pro magazine published its annual CE Pro 100 Brand Analysis which polls the largest domestic designers, installers of smart home systems including audio, video, lighting control, whole house controls, security systems and other electronic devices.
The CE Pro brand study determined and recognized Control4 for the second consecutive year as the brand leader for the whole house automation and control category and named our Pakedge brand for the fourth consecutive year as the leader for the advanced home networking category.
Control4 was further recognize this year by CE Pro as the top brand theater in three additional categories ---+ whole house audio and video, Access Control and HVAC and thermostats and was additionally named among the leading brands in categories of lighting control, remote control and communications.
It is in this context that our 2016 operating plan remains focused on several central business areas and I want to provide you a brief update on those today.
First, growth with expanding profitability.
We continue to execute in accordance with our operating plan, which contains our combined Control4 and Pakedge operating expenses to slightly above 2015 levels with the objective of delivering improved profitability and cash flow, along with stronger topline growth.
As <UNK> will explain in greater detail later in this call, our year-to-date financial results are better than we expected.
And we will be increasing our revenue and net income guidance for the full year.
Second, new products.
During the first half of 2016, we released two new versions of our Control4 OS that are now running in more than 70,000 connected home installations.
Additionally we introduced and began delivering our new entertainment and automation series controllers in Q1.
During Q2, of more than 24,500 total controllers ordered and shipped, over 22,500 were EA series controllers, up 15% from approximately 19,600 delivered in Q1.
And the total number of controllers shipped were up 17% over Q2 of 2015.
The continued traction of our EA Series provided validation that our thesis that the EA-1 and EA-5 are market expanding products for us ---+ notably the EA-1 for the introductory or single room automation segments.
During these first five months of EA-1 availability, we are observing continued adoption and mine share shift towards Control4 for one room AV automation and lower cost start or systems where more dealers are beginning to refer to the EA-1 as their everyday offering.
Our new EA-3 and EA-5 controllers are also being well received by dealers and end customers for traditional multi room and very large whole home automation installations, resulting in strong order rates and unit volumes that are well-balanced between these two models.
Third, Pakedge networking.
As we reported previously we acquired Pakedge Device & Software on January 29, 2016.
The response by Control4 dealers to the Pakedge acquisition continues to be very positive.
Since the acquisition in January over 830 Control4 dealers purchased Pakedge products for the first time.
Up from 370 we reported in May.
The approximately 1,100 Pakedge dealers that are not also Control4 automation dealers are becoming more comfortable with the combined Pakedge and Control4 organization.
In late July we unveiled a new online dealer portal for our 1,100 Pakedge-only dealers, enabling 24/7 online ordering and product support and information equivalent to the Control4 dealer portal, both of which are powered by the same SAP ERP system.
During the quarter we also completed the integration of the supply chain and fulfillment functions as well as consolidated all warehousing and delivery operations into our facilities in Salt Lake City, York, UK, and Melbourne ,Australia.
We are ready for expanded business.
Control4 is committed to enhancing the business and technical relationships with all Pakedge dealers and distributors, regardless of whether they are also marketing and selling Control4 automation solutions.
We believe that all connected homes can benefit from more substantial and intelligent networking capabilities.
Control4 aims to be the networking provider of choice for the connected home, and we intend to support our expanded global channel of 4,900 Control4 Pakedge active dealers in order to do so.
Networking has always been a key element of Control4 installations, and we are now seeing that as we embrace Pakedge capabilities we are able to deliver a much broader and more differentiated product line to our dealers and provide more reliable integrated experiences to our end customers.
We believe that by further integrating Pakedge technology with our entertainment and automation capabilities, and by ensuring that a single cloud-based reporting and management solution expanding both home networking and connected home devices, we can further strengthen our product and service offerings, improve the effectiveness and efficiency of our dealers, and increase end customer satisfaction.
Fourth, capital allocation.
Our balance sheet remains strong.
As of June 30, 2016, we had $48.8 million in cash and investment equivalents and over $25 million in additional capital that is accessible via our credit facility.
During the first half of the year we invested in product inventory to enable prompt delivery from our three fulfillment centers at higher expected volumes in the second half which are typically our seasonally strong periods.
With our solid cash balance, available credit line and continued expected improvements in cash flow from operations, we will continue to explore and evaluate strategic acquisition opportunities and, on a quarterly basis, determine if and when it is appropriate to use a portion of cash flow from operations to repurchase Control4 shares during open trading windows.
Wrapping up, although we are pleased with our continued progress and performance we are not content.
We are confident in our ability to expand our connected home solution set and ecosystem and thus our business.
We believe Control4 is well-positioned and expanding in the connected home and home automation landscape.
For the second half of 2016, and the start of 2017, we will continue to focus on five central aspects of our business operations.
First, continue to grow and optimize our professional dealer channel in the key regions where we have direct presence, including the United States, Canada, United Kingdom, Germany, Australia, China and India, as well as deepen our support for our 44 international distributors covering the rest of the world.
Second, strengthening our marketing service collaboration with our dealers to improve business and technical best practices as well as begin to provide select services at scales our dealers, such as managing their Control4 and Pakedge installations, communicating with existing customers regarding upgrades and expansion opportunities.
Third, facilitating relationships and business with new homebuilders, and D, thoughtfully generating and qualifying new customer interest and handing that off to confirm prospects to our dealers.
[Third], continue to facilitate and support our growing and industry-leading interoperability ecosystem, now with over 9,700 devices and 185 [STDP] licensees selling and delivering over 1,500 product models that are all Control4 STDP-enabled.
Fourth, we will continue to optimize our cross company internal systems for higher transaction volumes and fulfillment velocity as well as product and supply chain cost optimization in collaboration with our contract manufacturers.
And fifth, continue developing our connected home solution capabilities and providing them at value price points in order to expand our addressable market with homeowners at the entry-level, at the mid tier, and the luxury high-end, as well as enabling our professional installer channel to become more responsive, more effective and more efficient.
We believe these initiatives will collectively create additional shareholder value by strengthening Control4 as the premium and preferred choice for homeowners and their families, custom homebuilders, independent connected home integrators, and consumer electronics partners.
In closing I want to thank all of our employees, customers, dealers, distributors, suppliers, business partners and shareholders for their continued support and their many contributions to our continued progress.
We crossed the midpoint of 2016 with good momentum and we intend to keep racing forward smartly.
With that I'll turn the call over to <UNK>.
Thanks, <UNK>.
I'll start with a summary of our results for the second quarter and then provide guidance on the third quarter and full year before opening the call to your questions.
Total revenue for the second quarter was a record $53.2 million resulting in 19% year-over-year growth.
Our previous high water mark for revenue in the quarter was $44.6 million in the second quarter of 2015, as <UNK> mentioned, since the acquisition of Pakedge, over 830 Control4 dealers have purchased our networking products for the first time, helping generate $5.9 million of revenue from networking product sales during the second quarter.
Adjusting for revenue from this new source, our organic revenue growth was 6% and 14% for the three and six months ended June 30, 2016.
North America core revenue, which include sales in the US and Canada, grew 19% year-over-year, driven in large part by several new products including our EA Series controllers and our networking products.
Nearly all of our 25 North American sales regions contributed to that year-over-year growth.
International core revenue grew 12% year-over-year, reflecting modest economic rebound in many of our international countries with the exception of Latin America where we continue to see macroeconomic factors suppressing business.
In regions where we've recently transitioned from a two-tier distribution model to a direct to dealer model, we saw impressive quarterly year-over-year growth in India, Australia and Germany, up 16%, 54% and 61%, respectively, while China was sluggish this quarter and grew 13% year-over-year for the first six months of the year.
We continue to believe that the sales and marketing investments being made in those specific international markets will help drive additional revenue growth in the future.
Our non-core other revenue consisting primarily of hospitality business attributed $1.4 million to the quarter compared to $500,000 during Q2 2015.
During Q2 we added 84 dealers in North America and the total number of active dealers defined as dealers purchasing during the trailing 12-month period increased to 2,820, up from 2,794 at the end of the first quarter.
Internationally we added 143 new direct dealers during Q2, including 102 dealers in Australia.
The number of active international direct dealers increase from 840 at the end of Q1 to 972 at the end of Q2.
Our non-GAAP gross margin percentage for the quarter was 52.4%, up from 51% in the second quarter of last year, and up from 50.7% in Q1 of 2016.
The increase in gross margins were due to a variety of factors including manufacturing cost reductions and favorable product mix.
While we have historically seen some volatility in gross margin from quarter-to-quarter, we anticipate gross margins for the second half the year to be similar to the second quarter.
Our non-GAAP operating expenses in the second quarter of 2016 were $22.2 million compared to $18.6 million in the second quarter of 2015.
For the first six months of 2016, our non-GAAP operating expenses were 45% of revenue compared to 47% of revenue during the same period in 2015.
We expect to realize further operating leverage in the second half of the year as we grow revenue and recognize synergies from the Pakedge acquisition.
Non-GAAP research and development expenses during the second quarter of 2016 were $8 million or 15% of revenue compared to $7.6 million or 18% of revenue in Q1 of 2016 and compared to $7.4 million or 17% of revenue during the same period in 2015.
The Q2 year-over-year increase in absolute dollars is due to the acquisition of Pakedge.
Non-GAAP sales in marketing expenses in the second quarter of 2016 were $10 million or 19% of revenue compared to $9.4 million or 22% of revenue in Q1 of 2016 and compared to $7.4 million or 17% of revenue in Q2 of 2015.
The Q2 increase, relative to Q1 of 2016, includes incremental commission expense from sales overachievement, sales and marketing expense to grow sales and networking products, and incremental costs associated with developing a direct dealer presence in Australia.
Additionally, relative to the second quarter of 2015, we increased our general marketing expense to drive lead generation, grow our dealer and distributor networks, and deliver tools to the sales channel to support local marketing and sales lead generation.
Non-GAAP G&A expenses in Q2 were $4.2 million or 8% of revenue compared to $4 million or 9% of revenue in Q1 of 2016 and compared to $3.7 million or 8% of revenue in Q2 2015.
The Q2 year-over-year increase in absolute dollars is primarily due to increases in personnel costs and other administrative costs associated with running our business including transition costs associated with the Pakedge integration.
Our second quarter non-GAAP net income was $5.5 million or $0.23 per diluted share compared to non-GAAP net income of $4.1 million or $0.16 per diluted share in the second quarter of 2015, representing non-GAAP net income EPS growth of 34% and 44% respectively.
For the first have 2016, our non-GAAP net income and EPS grew 118% and 125%, respectively, over those of the first half of 2015.
As of June 30, 2016 we had $48.8 million in unrestricted cash, cash equivalents and net marketable securities, an increase of $900,000 from $47.9 million as of March 31, 2016.
The increase in cash and cash equivalents and net marketable securities included the following.
We generated $3 million of free cash flow defined as cash flows from operations, less capital expenditures during the second quarter, received proceeds of $600,000 from the exercise of stock options and we paid down $200,000 of our bank debt.
We repurchased 193,831 shares of our stock during the quarter for $1.5 million bringing the total number of shares repurchased under our $20 million board authorized share repurchase program to 1,582,126 with a cumulative price of $12.3 million, and in July subsequent to quarter end, we paid down our revolving credit line by $3.5 million, reducing our outstanding balance from $5 million to $1.5 million and increasing our available borrowing capacity on our $30 million revolving credit line to $28.5 million.
Before turning to our guidance, I wanted to provide a brief perspective on the possible impacts of the recent Brexit vote in the United Kingdom which has raised concerns of a potential slowdown in that portion of our business due to UK and Eurozone economic uncertainty and currency volatility.
As part of our diligence, in July we reached out to many of our dealers in the United Kingdom to assess their perspectives.
Responses varied and reflect the broader uncertainty that exists across many industries generally, but we did not observe any widespread panic among our dealers about their businesses as it relates to Control4 and Pakedge products.
The recent significant change in the British pound's value relative to the euro and the US dollar also raised questions.
Control4 prices and sells our products and incurs operating expenses in British pounds and the euro, and we incur exchange rate gains and losses for US dollar-denominated assets and liabilities, including intercompany and third-party accounts receivable and payable.
We enter into forward contracts to help offset our exposure to rapid movement and currency exchange rates.
The natural hedges resulting from conducting sales and operations in British pounds and euros as well as our forward contracts to limit balance sheet exposure lead us to believe that from a currency exchange perspective, there should be no material impact our net income generated by our subsidiary in the United Kingdom in the near term.
I will now turn to our forward-looking guidance which includes the expected contribution from Pakedge.
Given that Pakedge networking products are complementary to our current business and will generally be sold through the same or similar channels, all results of operations and forward-looking guidance will be based on our consolidated single business segment.
We expect our revenue in Q3 to be between $52.5 million and $54.5 million.
We expect our non-GAAP net income for Q3 to be between $4.7 million and $5.7 million, or between $0.19 and $0.23 per diluted share.
For full-year 2016, we are raising our annual guidance to $202 million to $206 million for revenue and $17 million to $19 million for non-GAAP net income or non-GAAP EPS of $0.70 to $0.78.
We will now open the call for your questions.
Good question.
Number one, we had a very, very extensive search process.
We were very fortunate to have the transition time that Jim provided us, and we had three very, very qualified top candidates, and Bryce was the finalist.
Bryce is a business leader, a field sales leader as well as a sales and business operation expert.
We really think that he brings to us the skills needed to scale our business from our $200 million run rate to a much larger scale, I think our opportunity worldwide supports that bigger business.
And that will not only take larger transaction volume but also more sophisticated programs and infrastructure on how we manage and lead and motivate our channel, as well as our own teams and our processes and systems.
These are all areas that Bryce has done quite well and effectively in growing businesses.
Several of his assignments were involved with businesses of several hundred million dollars larger than our existing business, so we are confident that he has the experience and bandwidth to help us grow.
For the full year up through June 30 was $9 million.
And $5.9 million in Q2.
Sure.
Naturally we were two companies, with two channels, and two channel management organizations.
At the time of the merger, there were about 600 dealers that intersected the 1,700 that Pakedge had and the 3,700 or 3,800 that Control4 had.
The first things that we did was align our two geographic sales territories so that they were co-resident with each other.
So that we could manage areas of a total combined revenue of Control4 plus Pakedge, even though the channels were independent inside those regions.
The second thing we did was we have aligned the sales organizations and our geographic distribution, we have six area sales directors, and inside those are over 40 sales professionals that run each region.
And those now have Control4 management channel focus as well as Pakedge-only dealer focus.
We also ---+ the Pakedge team brought with them a large network of manufacturing reps, we are still engaged with them and we are working with them to continue to manage the Pakedge-only channel to keep revenue continuity and services going.
As I mentioned in my prepared remarks, behind that, backstage we've now consolidated all of the SAP order entry and ERP systems.
So from a system standpoint we are one company.
With a Control4 pricelist, a Pakedge pricelist, Control4 dealers can self all for product and Pakedge products, Pakedge dealers can only sell Pakedge products.
We maintained a lot of the dealer incentive programs to maximize continuity for our dealers, and then we will keep those going and make smooth transitions and tuning as we see appropriate in the future periods.
We did not say that, but it is true.
Our primary focus at first is to get adoption of Pakedge networking in the larger of the two channels, which is the Control4 channel.
The Control4 channel has about 3,800 dealers, the Pakedge only channel now has about 1,100.
And at the time of the acquisition, there was a 600-dealer overlap between their 1,700 and our 3,800.
Since that time, the 830 dealers on the Control4 side have adopted Pakedge and bought Pakedge products, so that brings us to 1430 dealers in the Control4 ecosystem that are adopting Pakedge.
So that's a significant acceleration of Pakedge-enabled channel sales.
We are not disclosing the actual mix between them, we can remind everybody that the HC-Series had two models.
HC-250 and HC-800.
The 250 was priced at $750 retail and the HC-800 was priced at $1,500.
EA series has three lines, EA-1 priced at $500, EA-3 priced at $1,000, and EA-5 at $,2000.
But we have seen is a large percentage of the 800s flow towards the EA-5, small amount flows towards the EA-3, and HC-250 splits between the EA-3 and EA-1, and the EA-1 has provided a market expansion opportunity at the below $,1000 installed price point for single room or entry system opportunities.
And we are getting good feedback from that.
We are also seeing EA-5s go into very large installations and that's also the market expansion for us.
Great question, as we mentioned in our prepared remarks we think that the rest of the year in terms of gross margin percentage that will be similar to what we achieved in Q2.
So for the balance of the year and improvement over Q1.
As we've mentioned in the last couple of presentations, Canada has been an area of focus for us.
One of the changes that we made in Canada was to transition from US dollar pricing of our products to Canadian dollar pricing, and we believe that's going to help us in the long term.
In the first quarter of this year, we saw some continued downward pressure in terms of year-over-year sales.
That's rebounded a bit in Q2.
We were flat, up a little bit in terms of year-over-year sales, and so it appears that we are seeing our sales volumes move in the direction we want them to.
It's still tough growth for us there, but we think the actions we have taken will help us as we go into the balance of the year and obviously into future quarters.
I think right now, we are going to stay focused on our core markets and core geographies, which are the residential space, both existing homes and new construction.
We do have a good interest within our channel in light commercial and boutique retail, and then we have a very small, a very targeted expert set of integrators that serve hotels.
I think that strategic focus, combined with our expansion in the direct regions, Germany, Australia, China, India, Canada, UK and the United States, is sufficient frontage for us to grow our business without biting off a new vertical.
This is <UNK>.
Thank you very much for joining us today.
We are excited about how we started the first half of this year and the momentum and foundation that we've built.
We are looking forward to the second half and building that foundation broader and stronger so that we can support a growing business in 2017 also.
We look forward to reporting to you at the end of Q3, and thank you very much for joining us today.
