Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)

Control4 Corp (NASDAQ:CTRL) made its public debut on Friday, August the 2nd. Shares of the provider of automation and control systems for the connected home, ended their first day with gains of 25.3% at $20.05 per share. Shares have gained more ground, currently exchanging hands around $21 per share.

The company is steadily growing and on track to break-even at the moment. Despite the nice opening day returns, the valuation looks reasonable for this established player in a growing niche market.

The Public Offering

Control4 Corporation is a provider of automation and solutions for connected homes. The company's solutions make entertainment systems and security systems easy to use, and homes more energy efficient by integrating lighting, temperature and communications. Crucial for the services is the company's software platform, also known as C4 OS.

Control4 sold 4.0 million shares for $16 apiece, thereby raising $64 million in gross proceeds. All proceeds will go to the company with no shares being offered by selling shareholders.

The public offering values the equity of the firm at $354 million. The offering took place above the preliminary $15-$17 offer range.

Some 18% of the total shares were offered in the public offering. At Tuesday's closing price of $21.06 per share, the firm is valued around $464 million.

The major banks that brought the company public were Bank of America/Merrill Lynch (NYSE:BAC), Raymond James, Canaccord Genuity, Cowen and Company, Needham & Company.

Valuation

Control4's home operating system makes life much easier for consumers. It solutions allow for adjustments for almost all devices at home. When leaving your home, the owner can switch off all lights, and lower the thermostat while enabling the security system. On average, consumers pay about $1,500 per appliance being provided by Control4.

The company was founded back in 2003. Since inception, Control4 has automated more than 120,000 homes. The system is sold across a wide range of dealers and is installed in some 81 countries.

For the year 2012, Control4 generated annual revenues of $109.5 million, up 17.2% on the year before. Net losses narrowed slightly towards $3.7 million, and were largely caused by a $2.9 million litigation settlement.

First quarter revenues were up by 17.4% to $26.6 million. Net losses roughly halved to $1.5 million in the meantime.

Control4 operates with $14.6 million in cash and equivalents and long term debt of $3.4 million. Factoring in the $64 million in gross proceeds from the public offering and the company will operate with a net cash position of around $70 million. As such, operating assets are valued around $400 million. This values the company at around 3.6 times last year's revenues.

Investment Thesis

As noted above, the offering of Control4 has been a success. Shares were offered at the midpoint of the preliminary offering range. On top of that came opening day returns of almost 25%, followed by gains in the sessions following.

Control4 offers understandable and really cool solutions. The company has well established operations which show solid revenue growth. The solid guidance for the second quarter is comforting as well. Control4 guides for second quarter revenues of $32 to $32.5 million on which it expects to generate $1.1-$1.8 million in operating income.

The prospects for the remainder of the year, and further into the future continue to be bright. Control4 should be able to generate annual revenues of around $125 million for 2013, and future growth prospects look good as more consumers have Wi-Fi networks and smart phones to control the in-home processes. The international market opportunity remains very large as the company still generates three quarters of its revenues in North America.

Some risk factors exist as well. Control4 relies heavily on third party dealers for its sales, while it has outsourced the production. Being able to adjust to changing technologies is key as well, as competition is fierce. Cable provider Comcast Corporation (NASDAQ:CMCSA) aims to expand its Xfinity offerings and could be a worthy competitor.

It is promising that no existing investors were selling shares in the public offering. Prominent shareholders include Thomas Weisel Venture partners, Signal Peak Ventures and Cisco Systems (NASDAQ:CSCO).

I am cautiously optimistic as Control4's valuation comes down to 3.2 times 2013s expected annual revenues, even after the solid returns. As revenue growth remains solid and operating leverage starts to kick in, earnings should accrue in the coming years, making it quite an interesting pick in an interesting sector with long term growth potential.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.