CTRL
#Thank you, operator.
Good afternoon, everyone, and thank you for joining Control4's earning conference call for the first quarter of 2017.
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 Q1 2017 earnings release over the wire services, and we have posted it 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 14 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 providing revenue and non-GAAP net income and EPS guidance for the second quarter and full year of 2017.
We caution that such statements reflect our best judgment as of today, May 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 Q1 2017 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 discuss non-GAAP financial measures.
We do not provide full guidance on GAAP net income because of the variable and unpredictable nature of certain items excluded from non-GAAP net income, such as certain acquisition-related expenses, stock-based compensation, material litigation and settlement expenses, and executive severance costs.
Unless we specifically state otherwise, the non-revenue financial measures that we discuss today were not prepared in accordance with generally accepted accounting principles and that they exclude these types of expenses that 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 first quarter of 2017.
I am pleased to report very solid financial performance as Control4 continues to build a stronger and growing company, driven by robust operational execution combined with product and channel leadership in the home automation industry.
Here are the high-level business results for Q1.
Total revenue for the quarter was $50.2 million, which includes approximately $1 million from the 1 month of sales of Triad products, which we acquired on February 27, 2017.
Our Q1 revenue without Triad was a $49.2 million, representing year-over-year growth of 14.3%.
We continue to see adoption of our Pakedge networking products.
Since introducing these products to our channel in January of 2016, over 1,800 Control4 dealers have purchased Pakedge products for the first time, which compares to the 1,550 dealers we reported to you in February and the 1,250 dealers we reported in November, the 830 dealers we reported in August and 370 dealers we reported last May, confirming our channel expansion thesis for Pakedge products.
We successfully executed a similar strategy with our 4K video technology acquisition during 2015, and we intend to apply a similar business strategy to our very recent acquisition of Triad.
As I mentioned, on February 27, 2017, we acquired Triad Holdings, Inc.
, a leader in advanced audio technology with best-in-class customizable speaker solutions.
Triad manufactures a comprehensive range of high-quality, built-to-order premium audio speakers to meet the discerning demands of homeowners, whether for home theaters, family rooms, whole home or multi-room audio or outdoor environments.
The acquisition of Triad is a strategic addition to the Control4 entertainment portfolio, which includes our fully programmable EA Series controllers, with native high-resolution streaming music services, our family of multi-room audio matrix and amplifier products and our family of ultra-HD 4K video matrix switch with audio down mixing capabilities.
From day one of the acquisition, Triad and Control4 dealers have been able to place product orders and customize [each] request via a brand-new Triad online dealer portal as well as an updated Control4 online dealer portal.
Our solid Q1 revenue combined with non-GAAP gross margins of 51.8% and continued expense discipline enabled us to deliver non-GAAP net income for the quarter of $3 million or $0.12 per diluted share.
I am pleased with our non-GAAP profitability in what is our seasonally slowest quarter as it represents strong non-GAAP earnings growth compared to our first quarter of 2016.
And finally, our balance sheet remains strong with $55.3 million in cash and investments and no bank debt as of March 31, 2017.
Our accounts receivable and inventory levels are well managed, and during the first quarter, we generated $2.5 million in cash flow from operations.
As we have discussed on prior calls, Control4's mission is to be both the platform ecosystem and the market leader for premium automation and network solutions for the connected home market.
We continue to execute on key operational, business and product development programs that advance our mission and our business strategy.
I'd like to share with you several additional accomplishments since we last reported.
First, all of our connected home solutions contributed to our growth and continue to be recognized as industry leading brands.
Second, our platform and ecosystem continues to strengthen via improved dealer tools, the enhancement of Pakedge BakPak remote monitoring and management capabilities and even broader interoperability with third-party products.
Our Simple Device Discovery Protocol technology or SDDP is now licensed by more than 220 companies, which in turn are shipping more than 2,200 product models that are all SDDP enabled.
In addition, our extensive device driver library now supports interoperability with more than 10,600 third-party products.
We believe that no other whole home automation provider more broadly supports third-party products, as comprehensive in local expert installation and service network or has a larger active installed base at homes with an average of 40-plus connected devices per home as does Control4.
Third, our dealer channel support continues to scale, and our effectiveness in improving dealer sales is also rising.
We believe that driving scaling business support and fine tuning our effectiveness will contribute to our growth.
During this most recent quarter, we provided a broader array of services to more dealers who opted into or on behalf of program to help them grow their businesses, including lead generation and qualification, coordinated outreach to existing Control4 customers on their behalf and increased sales interaction regarding Control4 Pakedge and now Triad products.
We also increased technical technician attendance and training class frequency across all of our training centers in Salt Lake City; Charlotte; Chicago; York, U.K.; Frankfurt, Germany; Melbourne, Australia; and Shanghai, China, all intended to meet the growing need for skilled talent of both existing dealers who are expanding their teams and new dealers who are onboarding each month.
And through a combination of staffing and internal process refinements, we increased the number of resolved dealer-technician support questions and cases while concurrently reducing technical support call wait times considerably, all with the focus on driving efficiency and effectiveness for our dealers as well as increasing our own responsiveness to dealers' end-to-end customers.
Fourth, we continue innovating and delivering new industry leading products.
When we reported to you in February, we shared with you our recent news regarding our new Control4 OS version 2.9.1.
And our new version of BakPak 4.1 remote management software as well as our updated RK-1 high-performance Pakedge network router, which now includes BakPak capabilities.
Today, I am pleased to report that dealer enthusiasm and adoption for our BakPak software and services for the connected home monitoring and management capabilities are strong and that shipments of our Pakedge networking products are increasing.
Additionally, as of April 30, homes and business installations running our newest Control4 OS version 2.9.1 now number above 45,000 installations, including more than 33,000 existing installations that have been upgraded to this newest software and more than 12,000 new customers installations enjoying Control4 products for the first time.
In the most recent weeks, we have announced and immediately began shipping a new product family, the Pakedge PowerPak series for electrical power management of connected home systems and devices.
With Pakedge PowerPak, Control4's extending our power management capabilities and making this new functionality available to all of our dealers in the United States, Canada, the U.K., Europe, Australia and New Zealand to enhance dealer efficiency and customer responsiveness.
Prior to the availability of PowerPak, dealers were either not adopting certain recommended best practices regarding power management or they were utilizing less capable third-party products.
Using our new PowerPak in combination with our BakPak cloud software, dealers can now power cycle individual devices, both remotely and automatically based on certain events to improve dealer productivity and homeowner satisfaction.
We believe our new PowerPak series is a superior alternative to other products, and we expect eager adoption over the coming quarters.
In closing, 2017 is off to a solid start, and we intend to grow and expand our leadership position in the professionally installed home automation market by focusing on the key pillars of our business strategy, including, first, continuing to grow and optimize our professional dealer channel presence in the key regions where we have direct presence, including the United States, Canada, the U.K., Germany, Australia, China and as well as deepening our support for our 57 international distributors that cover the rest of the word; second, enhancing our business service collaboration with our dealers to help them find and acquire new business as well as serve their existing customers more effectively.
We intend to more overtly and broadly convey both business and technical best practices to our dealers and to enhance specific types of services that Control4 can perform for our dealers at scale to supplement their important local work.
Third, continuing to facilitate and support our growing and industry leading device interoperability and partner ecosystem; and fourth, further developing or expanding through acquisition our connected home solutions and platform services to expand our business with homeowners at the entry level, mid-tier and luxury high end as well as enable our professional installer channel to become more responsive, more effective and more efficient.
We believe focusing on these initiatives will collectively continue to build revenue and earnings growth, further strengthening our position as a leader in home automation and creating shareholder value by strengthening Control4 as the premium and preferred choice for homeowners and their families, custom home builders, independent connected home integrators and consumer electronic partners.
We are pleased with our financial and operating performance in Q1, and we are excited about Q2 and the balance of 2017 ahead.
With that, I'll turn it over to <UNK>.
Thanks, <UNK>.
We appreciate everyone's participation on today's earnings call.
With our strong start to 2017, we have now exceeded consensus revenue and non-GAAP EPS for 5 consecutive quarters, and we are working hard to continue that trend.
Before opening the call to your questions, I'd like to share some additional details about our recent financial performance as well as provide guidance for the second quarter and full year 2017.
As <UNK> mentioned, total revenue for the fourth quarter was $50.2 million, a year-over-year increase of 16.7%.
This includes $1 million in revenue from the newly acquired Triad business for approximately 1 month of sales after the closing of the acquisition.
As we mentioned in the press release, on February 28, 2017, Triad generated approximately $9 million in revenue for all of 2016.
So we are already seeing some acceleration in sales as we introduce these products into our channel.
All of our product categories, including automation solutions and networking, as well as all of our geographic markets contributed to our growth.
North America core revenue and international core revenue grew 15.6% and 24.7% year-over-year for the 3 months ended March 31, 2017, respectively.
International growth is concentrated in areas where we have a direct presence, including the U.K., Germany, Australia and China.
The category of other revenue, which consists primarily of hospitality business and in-store commercial audio, video switching products in Australia, contributed $466,000 in the quarter compared to $639,000 in Q1 of 2016.
Revenue from the sale of controllers declined 12% in the first quarter of 2017 compared to the same period of 2016, and on a unit basis, we shipped 21,341 and 24,126 controllers during the first quarter of 2017 and 2016, respectively.
As you may remember, we launched our EA series of controllers in February of 2016, and units of EA controllers shipped increased year-over-year by 7% from 19,624 in Q1 2016 to 20,969 this Q1.
We estimate that in Q1 2016 approximately 2,000 EA Series controllers were sell-in for showrooms and demo systems associated with our newest controller generation.
Additionally, we ran controller-related channel promotions during both the first and fourth quarters of 2016, and we do not run any controller promotions in Q1 2017.
These combined actions created tougher unit volume and revenue comparisons for controllers between Q1 2016 and 2017.
Our non-GAAP gross margin percentage for the quarter was 51.8% compared to 50.7% in 2016.
To help you understand the impact of Triad on our gross margins, historically, Triad experienced gross margins in the range of 35% to 40%.
We anticipate that a revenue scale and leveraging our global supply chain expertise, we can improve gross margins on Triad products over the next 2 to 3 years to between 43% and 47%.
As a result, we anticipate that our blended gross margins for the year will be similar to 2016.
Before discussing operating expenses, I want to share a quick note about our stock-based compensation, which is included in GAAP net income.
Consistent with our prepared remarks last quarter, our stock-based compensation increased to $3.3 million in the first quarter.
The increase was driven by performance overachievement relative to our financial plan and the expensing of performance-based restricted stock units or RSUs under the compensation structure approved by our board that aligns senior management and executive compensation with company performance.
Our non-GAAP operating expenses in the first quarter of 2017 were $23.3 million compared to $21 million in the first quarter of 2016.
Non-GAAP operating expenses for Q1 2017 were 46% of revenue compared to 49% of revenue for Q1 2016.
Non-GAAP research and development expenses during the first quarter of 2017 were $8.7 million or 17% of revenue compared to $7.6 million or 18% of revenue during Q1 of 2016.
The Q1 year-over-year increase in absolute dollars is due primarily to increases in salaries and wages, including incremental headcount from the Pakedge and Triad acquisitions.
For the remainder of 2017, we expect R&D on a quarterly basis to increase in absolute dollars but to decrease as a percentage of revenue to between 15% and 16%, as we invest in new product development to drive growth in 2018 and beyond.
Non-GAAP sales and marketing expenses in the first quarter of 2017 were $10 million or 20% of revenue compared to $9.4 million or 22% of revenue in Q1 of 2016.
The modest year-over-year increase in dollar terms was driven primarily by incremental sales and marketing expense associated with the new Pakedge and Triad products as well as more general investments to expand and support our dealer network.
Non-GAAP G&A expenses in Q1 were $4.6 million or 9% of revenue compared to $4 million or 9% of revenue in Q1 of 2016.
The Q1 year-over-year increase in absolute dollars is primarily due to increased costs for facilities and professional fees.
Our first quarter non-GAAP net income was $3 million or $0.12 per diluted share compared to non-GAAP net income of $1 million or $0.04 per diluted share in the first quarter of 2016.
On a GAAP basis, our first quarter net income was $843,000 or $0.03 per diluted share compared to net income of $6.6 million or $0.28 per diluted share in the first quarter of 2016.
I want to highlight that in both Q1 2017 and 2016 we recognized income tax benefits of $2.4 million or $0.10 per share and $9.8 million or $0.41 per share, respectively, resulting from purchase accounting for Pakedge and Triad that resulted in the recognition of deferred tax liabilities and corresponding reversal of a portion of the valuation reserve on our net deferred tax assets.
As of March 31, 2017, we had $55.3 million in unrestricted cash, cash equivalents and net marketable securities, a decrease of $6.6 million from the $61.9 million we reported as of December 31, 2016.
Our cash balance reflects outflows of $1.8 million we used to repurchase Control4 shares during the quarter, $2.1 million in taxes paid on the net settlement of equity awards, and $7.9 million in net cash were used to acquire Triad.
All of which was offset by free cash flow generation, which is defined as net cash provided by operations, plus purchases of property equipment of $1.5 million and $3.5 million received from the exercise of stock options.
As of March 31, 2017, we do not have any bank debt, and we have $30 million of available borrowing capacity under our credit facility.
Our strong balance sheet and expected cash flows from operations enable us to continue to pursue growth through acquisitions and other investments that leverage our sales channel and are strategically aligned with our core product vision.
Turning now to our forward-looking guidance.
Our guidance includes the expected revenue and non-GAAP net income contribution from the newly acquired Triad branded products.
These products are complementary to our business, and because they will generally be sold through the same or similar channels, all future results of operations and forward-looking guidance will be based on our consolidated single business segment.
Our current guidance anticipates approximately $10 million in Triad product revenue for the 10-month period from acquisition to end of year and approximately breakeven for Triad-related non-GAAP net income during the same period.
We expect our revenue in the second quarter to be between $59.5 million and $61.5 million, which includes approximately $2.5 million from Triad product sales.
We expect our non-GAAP net income for Q2 2017 to be between $5.6 million and $6.7 million or, based on an expected 26.2 million fully diluted weighted average shares outstanding, to be between $0.21 and $0.25 per fully diluted share.
For the full year, we expect revenue to be between $239.5 million and $243.5 million, and we expect non-GAAP net income to be between $24 million to $26 million or, based on an expected average 26.4 million fully diluted weighted average shares outstanding for the year, between $0.92 and $0.99 per fully diluted share.
Finally, as a reminder, Control4 does not provide forward guidance on GAAP net income because certain non-GAAP adjustments are inherently difficult to forecast, whereas others relate to the amortization or expensing of items tied to historical events.
That said, our earnings release posted earlier today includes a detailed list of non-GAAP adjustments and a reconciliation between GAAP net income and non-GAAP net income for Q1 2017 as well as our estimates of non-GAAP stock-based compensation and the amortization of intangible assets reflected in our non-GAAP net income guidance for the second quarter of 2017.
With that, we would now like to open the call for your questions.
Sure.
As part of the acquisition of Triad, there were some deferred tax liabilities that, when offset against the existing deferred tax assets, resulted in a reversal of the valuation allowance we had on those deferred tax assets, and that created a benefit.
And in 2016, the benefit ---+ and I apologize.
I'm scrambling to get the exact number here for you.
The benefit related to the Pakedge acquisition was $9.8 million, and the corresponding number for the Triad acquisition was $2.4 million.
We ---+ in 2016, because the revenue stream was a new source of revenue, we wanted to provide the specific numbers and break out that revenue source for you.
Now that it's become part of our core business and we are ---+ just like with other product categories, we don't plan to break that number out specifically anymore.
But it's continuing to grow nicely.
As we mentioned, we now have 1,800 dealers that were in the Control4 family that have started using those products.
And so it's certainly adding to our growth as a business.
This is <UNK>.
According to our calculations, we're seeing the revenue per controller or system revenue per controller very, very stable over the last 4 years.
It fluctuates a little bit, but it's very, very solid.
With regard to the EA Series, we're seeing good market broadening experiences with the EA-1, and the EA-3 and the EA-5 continue as our multi-room and whole home solutions, taking the place of the HC-250 and the HC-800 in prior years.
So we're pleased with the mix across all 3 SKUs and the expanding addressable market that the EA-1 provides at the entry level and the EA-5 at the luxury level.
Two quick questions on my end.
The first one is can you speak on Triad's gross and operating margins.
And if you find this to be a high-volume business, how much have we found with Pakedge.
I'll address the strategic fit part, and then <UNK> can address some of the financial pieces.
We see the Triad product offering really being very complementary and supplementary to our solutions in one-room entertainment automation with bringing high-performance audio experiences to the television and to the family room, along with our EA-1 and EA-3 controllers and other products.
We see the Triad product line really accentuating our home theater solutions, where we're providing automation capability for all of the complex equipment and interactions between that equipment in formal home theaters and then also for multi-room audio, which is a big proportion of our entertainment business, being able to provide the endpoints, the actual speakers for multi-room audio in addition to streaming sources, audio switching and audio amplification.
We can provide very high-end endpoints throughout the home and extending into outdoor spaces.
So we feel the strategic fit is really good for what our dealers provide every week and every month, and we expect to replicate our channel expansion and last year's strategies with that product line in complement with our other products.
And I'll turn it over to <UNK> on the financial questions.
Yes.
And then, <UNK>, thanks for your question.
With regards to gross margin, we mentioned in our prepared remarks that the Triad historically has had gross margin percentages in the 35% to 40% range.
With the promotions that we've run to introduce the products to our dealer base, those ---+ the gross margins that we saw in the first month were towards the lower end of that range.
As we mentioned, we think that, over time, we can leverage our global supply chain efforts.
We can drive some efficiencies and see gross margins from this product line over the coming years in the 43% to 47% range.
But as we noted, it will have some impact on our consolidated gross margins, and we're expecting that we'll be consistent with last year in terms of our non-GAAP gross margins on a blended, consolidated basis for the business.
Got it.
And guys, with Pakedge or some of the other software bids that you've done previously, now with the recent acquisition as well, it looks like these ---+ you're spending ---+ the customer spending on a per-home basis has dramatically increased as well.
And I'm not talking about just acquiring new customers and the spending they're doing.
But it looks like you guys are able to go back to your previous customers and do a lot more cross selling.
Could you give us a estimate of what the average spend per home was maybe a year or 2 years ago versus what it is that you're seeing right now.
Well, I have not done that analysis as of this phone call exactly, so I don't want to communicate a fact that we compute in our heads.
We do see more revenue per project because our solution suite is broader now.
We also see that we're attracting more customers, new customer installations on a weekly and monthly basis.
We think that, that is corresponding to the efficiency of our dealer channel and the growth of the opportunity in general.
We're seeing very good stability in our price competitiveness and revenue per project and revenue per dealer.
Got it.
And then just one last question on my end, which is I believe you guys are active right now in over 70 different Toll Brother properties or communities.
Could you give us an update on that as well.
We continue to work with Toll Brothers.
There's about 300 communities where we are provided as an option.
We're active in scores of communities.
We feel very good about our relationship with Toll Brothers.
We intend to continue to sharpen that and make it more effective for each and every community in which Toll Brothers elects to make Control4 much more visible.
We don't break that out anymore, but it's moving forward.
We're well respected in their world.
We respect them highly in our world, and we think we can build a better business for both companies.
We anticipate that, that'll be in 2 to 3 years out when we get into that 43% to 47% margin range.
It would be a driving scale of the business, it will be one of the factors that enables us to do that, transitioning some of the relationships from Triad to Control4 on the manufacturing side, and then just streamlining operations, in general, will help us do that.
But it's a many quarter effort to make that full transition.
This is <UNK>.
I think that there are various components that are linear.
I think, as we scale the business, the fixed cost that gets amortized over a larger amount of revenue helps our gross margins.
As we move through product cycles and we refresh how we design and manufacture product lines, that will be much more discontinuous based on when we introduce new products with new methods of manufacturing and how they're designed.
So it'll be a blend of linear scale and product cycle efficiency.
We ---+ in our prepared remarks, we stated that we expect about $10 million for the 10 months of 2017.
We're not disclosing that.
Thank you all for joining us at the beginning here of 2017.
I'm proud of the team's performance to start the year.
We're excited about what we see near term, midterm and long term in front of us, and we're focused on going after it.
So onward together.
Talk to you next time.
Thank you.
