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Control4 Corporation (NASDAQ:CTRL)

Q1 2014 Earnings Conference Call

May 1, 2014 5:00 PM ET

Executives

Dan Strong – CFO

Martin Plaehn – Chairman and CEO

Analysts

Tal Liani – Bank of America

Tavis McCourt -Raymond James

Tavis McCourt – Raymond James

Scott Zeller – Needham & Co

Rob Stone – Cowen & Co

Jon Dorsheimer – Canaccord

Jeff Kessler – Imperial Capital

Steven Frankel – Dougherty

Operator

Good day ladies and gentlemen. Thank you for standing by. Welcome to the Control4 First Quarter 2014 Financial Results Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. [Operator Instructions] This conference is being recorded today May 1, 2014.

I’d now like to turn the conference over to our host Dan Strong. Please go ahead sir.

Dan Strong

Thank you, operator, and good afternoon everyone, and thank you for joining Control4’s earnings conference call for the first quarter of 2014. My name is Dan Strong and I am the Chief Financial Officer for Control4, and with me on the call today is Martin Plaehn, our Chairman and Chief Executive Officer.

Prior to this call, we distributed our Q1 2014’s 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 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 outlook for the second quarter and full year 2014. We caution you that such statements reflect to our best judgment as of today, May 1st, 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 and our Q1 2014’s 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. Unless we specifically state otherwise, none of the non-revenue financial measures we will discuss today are prepared in accordance with generally accepted accounting principles. A reconciliation of the GAAP and non-GAAP results is provided in today’s press release and is posted on the Investor Relations section of our website.

With that, I’d like to turn the call over to Martin.

Martin Plaehn

Thanks Dan. Welcome everyone and thank you for joining us on the Control4 earnings call for the first quarter of 2014. I’m excited to report our Q1 progress. The first quarter for Control4 was very solid both operationally and financially. We were exceptional in delivering on our commitments, while prudently investing for growth. Here our new financial highlights for the first quarter and Dan will provide you with more details later.

We reported Q1 revenue of $31.9 million at the high end of our outlook of $30 million to $32 million. Our core revenues increased 21% year-over-year continuing the momentum we experienced in our business in the fourth quarter of 2013.

Our international business strengthened with core international year-over-year revenue growth of 31%. Our non-GAAP gross margin reached 51%, an increase of 160 basis points over Q4 2013. Lastly, we reported $708,000 of non-GAAP net income or $0.03 per share exceeding our outlook for breakeven earnings in our seasonally lowest revenue quarter.

Home automation is a great industry to be in the center right now. Our emerging industry is a subset of the broader mega trend referred to as the internet of things. From our central vantage point, we feel the interest in the development and the adoption of IRT related products and applications all accelerated.

Against this backdrop of increasing industry activity Conttrol4 is well positioned as a leading provider of the most comprehensive, interoperable, easy to use and scalably affordable home automation solution some small and simple installations to the very large and sophisticated.

At the center of our solution is our advanced software platform, which we provide to our products that interface with a wide variety of connected devices developed both by us and by 100s of third parties.

Our solution functions as the operating system of the home making connected devices work together to control automate and personalize the homes of our customers. By delivering insightfully simple personalized control solutions that enhance the lives of individuals and family, Control4 is the automation platform of choice for homeowners, hotel and businesses around the world.

We continue to execute on our strategy in making meaningful progress towards our business model goals. I remain confident that Control4 is uniquely positioned to drive home automation forward and build our business within the expanding opportunity.

I would like to spend a few minutes updating you on our progress on three important elements of our growth strategy. First developing and delivering compelling products and software with ever improving capabilities, quality, ease of use and reliability.

Second, increasing the breadth and efficiency of our sales channels both in North America and internationally. And third, forming and expanding strategic commercial relationships that strengthened market reach, improved sales effectiveness and increased installation velocity.

First with regard to product innovation, in February we announced the expansion of our home security solution through partnerships with leading manufacturers of home security cameras and network video recorders, including LILIN, Channel Vision, Planet, QNAP and SnapAV.

Our increased security camera and NVR capabilities available now through Control4 OS version 2.5.3 leverages the reach – recent integrations of our SDDP technology by these security monitoring manufacturers.

During Q1, we completed and in April we introduced new dealer services and tools for our intelligent lighting solution. These new services and tools are designed to assist our dealers in the marketing, specification, sales and installation of our wireless lighting products and panelized lighting system.

Since their introduction in Q2 of 2013, our next generation wireless lighting products and our new panelized lighting system are all in joined increasing in adoption. We believe our newly introduced dealer services and tools for lighting will increase the effectiveness and efficiency of our dealers and drive further adoption and acceleration.

Second regarding sales investments, consistent with our long term strategy we intend to drive growth in part by specifically increasing our sales presence and coverage in key regions. Since our last earnings call we have hired five new area sales managers in North America and that to increase the number of North American sales territories to 24.

We also added two technical field managers to strengthen our field-based North American technical team. Internationally, we added a technically field manager in Central Europe and one more in China. And we are in the process of hiring a territory sales manager for Southern Europe.

I believe these recent skilled-based hirers along with others we planned to make in the coming quarters will enable us to continue improving the overall effectiveness of our distributors and dealer.

In Q1, we also continued recruiting in training dealers in both North America and internationally. In North America, we added 75 dealers and the total number of active dealers increased from 2465 in Q1 2013 to 2506 in Q1 2014.

In North America, 99% of our total dealers were active, meaning their purchase product on behalf of end customers in the previous 12 month. Internationally, we added 49 new direct dealers and our total active dealers increased from 578 in Q4 2013 to 612 in Q1 2014 were 90% of our total international direct dealers were active.

Third, regarding partnerships, we made solid progress in developing the operational infrastructure needed to begin serving multiple Toll Brothers housing development locations.

Working with Toll Brothers, we have completed the targeted marketing materials and product demonstration requirements in model home sales centers and design studios. In the first quarter, we worked with Toll Brothers to identify and train eight additional dealers to support development projects in five markets.

And we now have our products installed in model homes, sales centers and design studio in three of those five markets. We are now starting to work to enable an additional sixth market over the next several months.

The initial feedback from Toll Brothers regarding the reception by their customers to Control4 automation in their new home system very positive. And I’m encouraged about the potential of this relationship as it moves into revenue generating basis.

To supplement our national program with Toll Brothers in Q1 we rolled out a local builder program to several 100s of our dealers to work – our local builder program enables Control4 dealers to better capitalize on their own regional new housing recovery by formalizing the term between themselves and local builders regarding the availability and installation of Control4 solutions when incorporated as a standard offering in a builders housing project.

In Q1, we also saw increased adoption of our SDDP technology, which enables automatic device discovery and interoperability for homeowners and dealers. Our goals at SDDP are to continue to improve the efficiency and decrease the complexity of the installations, whereby eventually most new devices can be connected to an automation system as simply as consumers can add new personnel device to a Wi-Fi network today.

During Q1, we licensed SDDP to an additional 12 manufacturer bringing the total to approximately 70. SDDP licensees are now collectively shipping over 300 product models with embedded SDDP. A significant increase from the 180 models we reported during our Q4 earnings in February of this year.

Lastly, as in prior quarters, a dedicated time to have direct one-on-one conversations with dealers and distributors to better understand their views of their local business climate to help in trajectory of their businesses and their experiences with and their perceptions of Control4.

Thus far in 2014, I have had over 45 one-on-one conversations, all of which were [indiscernible] has been extremely helpful. It reinforces my confidence that we are doing the right things to drive our leadership in this growing industry. And as you would expect, I certainly received prescript feedback on areas were Control4 must continue to improve. Those areas on topic have already been shared internally, now being incorporated into our near and mid-term operational plan.

Though only a sample these perspectives from regional business owners stand nearly 40 states and regions across the United States, Canada and Europe certainly provide several takeaways in due discussion.

Our dealers are bullish about the growth in their home automation business for 2014 and likely 2015. Consumer confidence in mid-tier and high-end homeowners is improving. Home automation has greater consumer awareness today and 24 months ago. The new home construction market is improving and there are expectations for further improvement.

The retrofit and remodel opportunity is much larger and less technical, so projects are individually smaller. Our software and controllers are being very well received and continued innovation is expected.

Our new lighting solutions are well designed, well positioned, reliable and being specified in projects. We must continue to reduce installation and maintenance complexity for our dealers and for homeowners. There are great opportunities for automation solutions as price points above and below our current product offering.

And our improved focus, responsiveness and thoroughness is noticed by our channel, appreciated and a powerful differentiated. In closing, Q1 was a solid start to the new year. Control4 is positioned as a leader in a growing market fueled in part by the internet of things mega trend. We are executing against our strategic plans and making steady progress towards our target business model.

There will undoubtedly be speed bumps along way. We are learning from these experiences and continue to improve operationally, while not losing our sharp focus on delivering the best-in-class home automation solutions with improved consumers’ life.

I want to thank our employees, dealers, distributors and partners for their continued support and many contributions to our successes. We intend to build upon our progress together and I look forward to updating you on our next earnings call.

With that, I’ll turn the call over to Dan.

Dan Strong

Thanks Martin. Two brief reminders before I turn to our financial results. First and let’s say specifically note otherwise, I’ll be discussing all numbers except revenue on a non-GAAP basis, which excludes expenses related to stock-based compensation and other income associated with changes to the carrying value of preferred stock warrant liabilities.

Second, when we refer to revenue attributable to sales through dealers located in the Unites States and Canada as North America core revenue and revenue attributable to sales through dealers and distributors located throughout the rest of the world as international core revenue. Core revenue does not include the lumpier business from hotels which we classified as other revenue.

Turning now to our results for the first quarter. Total revenue was $31.9 million representing a 20% year-over-year increase. Our Q1 core revenue grew 21% year-over-year. Our first quarter non-GAAP income was $708,000 or $0.03 per diluted share compared to a non-GAAP loss of $658,000 on the first quarter of last year.

In the first quarter of 2014, North America core revenue was $24.2 million or 76% of the total revenue and international core revenue was $7.0 million or 22% of total revenue. Other revenue accounted for the remaining 2%. Year-over-year our North America core revenue increased by 18% and our international core revenue increased by 31%.

Our international core revenue growth rate was fueled by an excellent year, excuse me excellent quarter in the U.K. and Australia, New Zealand and solid performance in Latin America. In addition, our revenue from China and India this quarter showed positive year-over-year growth reversing the trends that we had seen in prior quarters.

We are making good progress in converting to a dealer direct model in those regions and we have more work to do. North America core revenue growth was healthy, but was impacted by relatively flat revenues from Canada. Revenue in Canada was impacted by severe weather condition, which contributed to delays of certain larger project installations. Excluding Canada, our North America core revenue would have grown by 21% year-over-year.

In the first quarter of 2014, we sold 16,224 controllers compared to 17,758 controllers sold in the first quarter of 2013. The relative reduction in the total number of controllers sold is due to our February 2013 announcement to increase controller pricing and to include MyHome software with these new controller effect that coming April.

That pricing and packaging announcement resulting in a significant number of controllers sold at the end of Q1 2013 in advance of the pricing and packaging change. Our total controller revenue was higher in the first quarter of 2014 compared to the first quarter of 2013 and our average sales price per controller sold increased by 21% in Q1 2014 compared to Q1 2013.

Our non-GAAP gross margin in the first quarter of 2014 was 51% compared to 49.1% in the first quarter of 2013 and 49.4% in the fourth quarter of 2013. The increase in our gross margin percentage compared to the fourth quarter of last year is primarily due to lower manufacturing overhead expenses as a percentage of revenue mainly inventory reserves and a favorable channel sales mix.

We are making steady progress executing our long – executing against our long-term gross margin target of 52% to 54%, although future gross margin may vary due to channel and product mix.

As Martin mentioned, we are investing in sales and marketing and as revenue scales we continue – we expect to continue that investment. We expect we were able to leverage G&A and R&D as we scale in line with our target operating model. Our total operating expenses excluding stock-based compensation in the first quarter of 2014 were $15.5 million compared $13.7 million in the first quarter of 2013.

As a percentage of revenue, total operating expenses declined from 51% in Q1 of 2013 to 49% in Q1 of 2014, compared to Q1 of 2013, R&D expenses increased by $467,000, but declined as a percentage of revenue from 22% to 20%. Sales and marketing expenses increased by $658,000 and declined just slightly from 20% of revenue to 19% of revenue.

The increase in sales and marketing spending is primarily in the areas of sales compensation and discretionary marketing expenses due to the investment in sales and service resources expenses discussed earlier in the call.

G&A expenses increased by $735,000 and also increased as a percentage of revenue from 9% to 10% due primarily to the cost associated with being a public company. The combination of our improving gross margins and our reduced operating expenses to revenue ratio illustrates the powerful operating leverage in our financial model.

Turning to the balance sheet. Our cash, cash equivalents and long-term, long and short-term investments totaled $85.6 million at the end of the first quarter representing an increase of $1.1 million compared to the balance at December 31, 2013.

In the first quarter, our working capital usage was $2.9 million comprised primarily of an increase in inventory from $15.3 million at December 31, to $17.1 million at March 31, 2014. The increase in inventory was primarily due to the procurement of wireless lighting products and amplifiers that will be sold through the balance of 2014.

Their working capital usage was offset by our non-GAAP net income and $3.2 million generated from the exercise of stock options. Our rolling worldwide six month DSO or day sales outstanding as of March 31, 2014 stood at 39.5 days compared to 41.1 days for the same period of 2013.

Now turning to our outlook for the second quarter and full year of 2014. For the second quarter of 2014,, we expect revenue to be between $36 million and $38 million. And we expect non-GAAP net income to be between $2 million and $3.4 million or between $0.08 and $.13 per diluted share. For the full year 2014, we expect revenue to increase between 16% and 20% over 2013.

With that, we’d now like to open the call for your question.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] And our first question is from the line of Tal Liani with Bank of America. Please go ahead.

Tal Liani – Bank of America

Hi guys, great quarter. I have three questions, the first question is very basic one it’s what is driving the growth, it’s a great quarter good guidance if you consider the three things you highlighted product, channels and partners were is the biggest contribution to the growth and to the surprise? The second question is to understand did our addition, you highlighted 75 new dealers in North America and 49 international, how is this number or these numbers compare to the previous quarters? Are these high numbers or low numbers, I just want to have it in kind of relationship to the previous additions.

And the last question, sorry for the long question list, spoke about very positive initial feedback et cetera. When does it translate into revenues, how long does it take to translate to revenues and what are the expectations is it just good to have, great to have or is it going to turn into something meaningful? What’s the magnitude of impact it could have on your numbers? Thanks.

Martin Plaehn

Hi, Tal. It’s Martin Plaehn, glad you could join us.

On the growth, if we look at the contributors new products that we released last year are lighting products certainly are contributing nicely and on an increasing percentage basis to our overall growth rate. Also our channel -our existing channel gaining more efficiency within our existing dealers. We had very strong contribution from the U.K., where we managed that channel directly. Partners are always important, third-party products that we interoperate with, help to drive the overall comprehensiveness of our solution, but those manifest themselves through our channel.

And I’ll skip to number three, our Toll Brothers relationship is very solid, its early days. We’re spending a lot of time together, making sure that we have the foundational instruments in recipes that we can scale across multiple properties in many states in the U.S., we’re starting out with five regions then we’ll have six more. We think that this will begin to contribute revenue in the back half of Q2 and then Q3 and Q4. I believe Toll Brothers, their analyst reports that are published they build between 4,200 and 5,000 homes a year. That is a very solid number for a premium national builder.

Our current analysis of the number of homes we do per quarter is approaching 10,000. So we think that getting a good solid percentage of new homes through the Toll Brothers relationship has it incrementally becomes rolled out to more and more building communities will make a good solid contribution. This is a growth strategy that’s brick-by-brick. I don’t think it’s going to choose our revenue in a dramatic way towards them, but there will be meaningful contributors and I’ll let Dan.

Dan Strong

Yes. I’ll answer the question, you asked, the same question you asked on dealers and then expand a little bit more on your first question. So in terms of dealers added, the first quarter of 2014 was the largest quarter of gross dealers added that we’ve had in the last weeks. So we added 67 dealers in Q3 of 2013. We added 70 in Q4 and we added 75 in Q1 of 2014.

And then internationally we added 36 in Q3, 44 in Q4 and 49 in Q1. So we’re seeing a nice acceleration on the number of dealers that we’re adding. We’re also seeing and as I think we mentioned in the prepared remarks we’re pleased with the number of active dealers, so we have a 99% of our dealers in North America were active in Q1 that’s also a metric that we follow closely.

And then just on your first question, the three drivers of our growth as Martin mentioned, it’s new dealers, same-store sales and new products and all three of those contributed to our growth in Q4, excuse me in Q1.

Tal Liani – Bank of America

Excellent. Thank you.

Operator

Thank you. And our next question is from the line of Tavis McCourt with Raymond James. Please go ahead.

Tavis McCourt -Raymond James

Hey, thanks for taking my question and nice quarter. International obviously you had a strong year-over-year growth and I wonder if you could provide an update on some of the strategic changes you had made in China specifically and we had the point now where you think international should be able to grow meaningfully on a year-over-year basis or might still see some more growth as the year progresses.

And then secondly on -just on the DSOs, you commented on rolling the six-month forecast. From a quarterly basis, the DSOs came down through last year that kind of seasonally what typically happen, that’s what you are expecting this year?

Dan Strong

Yes, let me take your first question, first, Tavis. In terms of international as we reported we’re really pleased with the growth rate overall on international. We had a really good quarter in U.K. and as I think everyone remembers our U.K. market we sell direct to dealers and then to the end consumer. And we’re really pleased with what -with revenue performance in U.K.

We also had a good quarter in Latin America and in the Asian market or in China and India, we were up in Q1 of 2014 versus Q1 of 2013, which reverses the trend that we reported on the last several quarters where we were actually down on a year-over-year basis. So we’re very encouraged by the progress that we’re making as we convert from a two-tier distribution model to a one-tier distribution model in China and India and we do expect our growth rate in international would be continue to be strong through the rest of the year.

And then with regard to DSO, we do see some seasonal trends in DSO, as we mentioned, it was down in the first quarter to 39.5 days versus 41 days in the first quarter of 2013, where we hover around between high 30s, low 40s in DSO. Which I think speaks really strongly to the relationship that we have with the channel, the fact that we sell to 2,500 dealers in U.S. and over 500 internationally. And we collect in an average of 39.5 days is really positive for us and again, speaks to the strength of the channel and the relationship that we have with those channel partner. So we expect that it will be around between high 30s and 40s through the rest of the year.

Tavis McCourt – Raymond James

Great. If I can ask a follow-up to Martin, when I look at one of the metrics on my model, I look at it is kind of productivity of the dealers or revenue per dealer, it looks like it was up 15% or so year-over-year. And I was wondering in terms of how you guys look at the health of the business or how you would prefer to get the revenue growth. Is that something you’re more focused on than overall dealer growth? Is that kind of where the leverage exist kind of getting these dealers to sell more product or do you expect to start accelerating the number of dealers over the course of the year?

Martin Plaehn

We expect to do both. Within our dealer network let’s just say the United States with roughly 2,500 active dealers. We see dealers that are growing their business very, very aggressively and predictably. We see other groups of dealers that have much more valuable performance and they could be up strong and then down on either a monthly basis or quarterly basis and then sometimes on a year-over-year basis.

The blended rate is that we calculate is very similar to the one that you mentioned and when you look inside that, I look at dealers with volatility and I did look at dealers that have less revenue this year than last year, and go talk to them either directly or through our management team and regional management to understand if we -our company, our products or our programs had any impact on that volatility to the downside. And since we’ve been doing this for 2.5 years, we’ve dramatically improved the productivity of our dealers and lessen the volatility in a good number of dealers. We still have more to go.

So by removing that volatility and improving the down dealers, we can get tremendous growth and I also think that a fundamental statement of our business model. If we can go to a new dealer, a new recruiting dealer and show them proof that 100s or 1000s of other dealers can year-over-year, quarter-over-quarter grow their business reliably on Control4. We have a very good brand and a very good franchise that can continue to scale.

So it’s a combination of dealer efficiency and continuing to expand the channel. I’d mentioned in prior calls and certainly in one-on-one Investor meetings, we’re about 0.1% penetrated in our available demographics, home owners with household income, 150k and up. But to move from one in a 1,000 homes to 5 in a 1,000 homes is going to take a broader and more efficient channel.

And with product enhancements and channel enhancements and channel broadening we should be able to achieve that over the next few years.

Tavis McCourt – Raymond James

Okay, thanks Martin.

Operator

Thank you. And our next question is from the line of Scott Zeller with Needham & Company. Please go ahead.

Scott Zeller – Needham & Co

Thank you. I wanted to just jump on to Tavis’ question on international, can you talk specifically about what it is the change with Western Europe, we understand Asia and the changes that were going on there. But regarding Western Europe which I think had been a bit disappointing recently, what would change for the positive there?

Dan Strong

So the primary thing that we’ve done in Europe is – in Western Europe specifically is to add additional sales resources. So, we’ve added headcount both in terms of sales people and technical support people and we think that’s had a very positive impact. And its early to tell, exactly what the trends will be, we’re very comfortable and encouraged by what we’ve seen on the first quarter and we expect that, that our international growth rate will continue to be strong throughout the rest of the year.

Scott Zeller – Needham & Co

And how would you compare the coverage that you have on the ground on Western Europe with additional sales people and technical sales to the changes that describe for the U.S. where you were also adding regional folks and could you compare and maybe discuss how long it took for that effect to take place in Europe? And what we should think for the U.S?

Dan Strong

So, in terms of the addition, the additional resources its probably proportional relative to the size, the number of resources that we’ve added in Europe is similar relative to the size of the sales force and the technical force similar to what we added in North America. So, we’re not focusing specifically on Europe or on the international market relative to the expense or instead of North America, we’re doing both. So we’re adding sales resources and service resources in North America and in Europe.

Scott Zeller – Needham & Co

And how long did it take for that effect to be positive in Europe after adding those resources roughly it’s like [indiscernible]?

Dan Strong

Yes. It’s 6 to 12 months, the U.K. is a good example of the investment we made several years ago when we purchased one of our largest distributors in the U.K. and are now selling direct to dealers in the U.K.. And that model is working really, really well for us it was the biggest contributor to our and total international growth rate. And as we’ve added, with addition – also added additional resources in the U.K. market and it takes about 6 to 12 months for that to take effect.

Scott Zeller – Needham & Co

Thank you.

Operator

Thank you. And our next question is from the line of Rob Stone with Cowen & Company. Please go ahead.

Rob Stone – Cowen & Co

Hi, guys. Martin, the first question on the Toll Brothers relationship, you talked about in the collateral material and setting up in the first three year or five locations and then adding additional one. Do you see this broadening the number of dealers and available installers as you add new communities or is it more on the sales and is it that you need to add resources?

Martin Plaehn

What we’re doing with Toll Brothers is putting in place the model homes, the sales centers and putting to together the sales material actually training Toll Brothers employees and sales agents on the benefits and capabilities of home automation getting that all in place at multiple locations. And then getting that recipe and then stamping that out in additional six over the next coming months.

With regard to dealers, Toll Brothers has a set of suppliers, they build homes, they install electrical outlets, they install kitchen appliances, they install heating and air conditioning systems and garage doors and they have a set of suppliers that they certify and bond and they have to live up to Toll Brothers standard.

The same is true or home automation installers, there are Control4 dealers that will live up to the standards that Toll Brothers set forth and there are Toll Brothers providers that will be trained on Control4 so goes in both directions. And those have to be also put in place and just check off around each community that Toll Brothers and Control4 plan to deploy our solutions and offer them to consumers.

So that’s where we’re putting our effort and we have a large network very well covered across the U.S. We’ll continue to add dealers, if Toll Brothers brings to us a very qualified supplier that they trust and they can learn our system, we welcome them into the family, it’s a great way to add dealers, it’s just one source of adding dealers.

Rob Stone – Cowen & Co

Great. Another for you Martin, have you seen any changes in the last three months with respect to the competitive landscape either, significant new product announcements or changes in the go-to-market strategy by your existing competitors or new ones cropping up?

Martin Plaehn

Not dramatic changes, I think that we all realize that economic conditions are improving the awareness of home automation and the connected home and the connected consumer is much more forefront in consumers mind and solutions that we’re providing and our competitors are providing are being asked for more frequently. And therefore the game is living and we’re all competitive it makes each of us a better provider. So I don’t see dramatic changes except for just an increase in the reality of the business.

Rob Stone – Cowen & Co

Okay. Housekeeping question two for Dan, can you just comment on what’s in the cash that you shifted from short-term to long-term investment?

Dan Strong

It’s just an investment. We’ve implemented a program in Q1 to invest our cash in very safe and secure – securities that we’re working with our cash managers on. And so it’s just an effort to get a little bit better return on the available cash. But it’s all very short liquidity, very safe investments and again just hoping to earn a few more basis points on the available cash.

Rob Stone – Cowen & Co

Okay. And then with respect to the inventory build, you mentioned certain things for lighting products and so forth was – was that related to may be an opportunity to get a better price on some components by bringing in larger quantity at one-time or is that just based on seeing an upswing in planned purchases through the channel?

Dan Strong

It wasn’t necessarily priced rather was more, as you guys know our business is relatively seasonal and Q1 is our low quarter, we have a – if you look at what we reported in Q1 versus our guidance in Q2, we have a big increase in revenue from Q1 to Q2. And so it was more making sure that we have the amount of inventory that we need to meet Q2 demand. The last thing we want to do is miss top-line growth opportunities for available inventory. So, we build up the inventory a little bit, I mentioned that the products that we build up specifically and we expect those to sell through in the coming months.

Rob Stone – Cowen & Co

Okay. And Martin the final question for you, I’d this should have followed on what I asked you before, but you mentioned the size of the market, new home activity increasing with the much larger market for retrofit, can you say roughly how the business breaks down recently between existing homes and new homes?

Martin Plaehn

We still believe that we’re in the 70-30 range, 70% retro existing homes and 30% new construction. I believe that may shift a little bit, but as we continue to grow the durable non-cyclical opportunity is, existing homes within existing communities, existing homeowners and families. And we strongly encourage our dealers to blend above when their interest move to new construction rather than a very dramatic student body left towards new construction.

Most of our dealers have been through cyclical changes and I think they are much wiser going into this one than they were coming – going into the one that ended in 2008 so dramatically.

Rob Stone – Cowen & Co

Great. Thank you very much.

Operator

Thank you. And our next question is from the line of Jon Dorsheimer with Canaccord. Please go ahead.

Jon Dorsheimer – Canaccord

Hi thanks guys for taking my question. I guess first within the lighting products and strength that you are seeing is there any products in particular that you can attribute to the greater strength for example, the trends towards solid stay lighting or you seeing more zero to 10 dimmers in terms of your dealers stocking up or is it pretty much strength across the board or any additional details that would be helpful?

Martin Plaehn

Hi. Jon, this is Martin. Our lighting products are being very well received by both homeowners and dealers, the 1000, we have two lighting families one is the wireless lighting that find its way into existing homes more prevalently than new homes. Then our panelized solution, which is the whole new high-end solution for new construction.

We have several 100 homes now installed with our panelized lighting, we’re getting fantastic reviews from dealers and homeowners. We think that will continue bringing dealers on that have panelized lighting expertise and know-how is a little bit sophisticated than our wireless retrofit enabled products. So the panelized lighting is contributing nicely.

In our wireless family, I would say that our adaptive phase dimmer is a real center piece of our product line, because it can work with both, prior generations of lighting loads as well as new loads that are dimmable. And, this transformation from incandescent lighting to LED lighting is happening before our eyes and our products both our wireless and panelized lighting are future proved in that way and really doing well.

Jon Dorsheimer – Canaccord

Just on the panelized, does that change the, previously that’s or the focus has been on residential with limited amount of commercial installs. As you move to the panelized and have a more sophisticated system does that change that thought process up it all? And then does that also change, the criteria of how you’re looking at signing up new dealers, I’m kind of wondering if that expands the dealer tame if you will, is that the product category is changed a little bit?

Martin Plaehn

Well, certainly, if we were to aggressively pursue commercial lighting opportunities and even aggressively pursued light commercial, lighting opportunities that there is a channel that is more center towards that were ours is highly centered towards residential and some due light commercial work. Our focus right now is really nailing the use cases and the delivery of compelling products to residential applications. We think there is a big opportunity for that.

So that’s where we’re putting our R&D that where we’re putting our training. We do have dealers that installer products in light commercial projects that’s because, they are very capable and they can take the knowledge that we provide and transform that beyond. I would like to see us get stronger on the residential lighting side before we open up more competitive frontage.

Jon Dorsheimer – Canaccord

Okay. And just within the – maybe digging into the dealers a little bit more 2465 growing to this 2506, curious of that 2500 dealers that you now have in Q1, is there a certain percentage that you would say or doing, the 80-20 roll, 20% are doing 80% of the business or that we could look at the -the best of breed in there. Any additional break down or color might be helpful?

Martin Plaehn

Well, we don’t – we don’t really publish the statistics on, dealer performance on a – category or histogram basis. I can’t tell you that, there are dealers that are growing and their average growth is very, very impressive across all those dealers and that is, measured in over a 1000 dealers growing. We have dealers that have volatility I mentioned that in prior remarks and we’re trying to understand why that volatility is – is it that they do one project every other month or they do two projects every other month. Is there sales cycle that’s their national rhythm or why do they have volatility, and if we can get those dealers that have much more regular growth much like the other half that is really regularly growing. We could add significant stability and growth to our overall growth.

Jon Dorsheimer – Canaccord

Great. And then last question, as you’re doing more work with Toll Brothers and some of the builders, I’m curious if your conversations, if you’ve had conversations with any of the banks from a lending perspective and how lenders are starting to treat home automation, is this something that’s being that is being included and capitalized in mortgages et cetera? Just curious is this, is your desire to sort of come down into broaden the tame to open up the demographics if that might be the way and which we have seen in other markets such as solar?

Martin Plaehn

The answer to that is, yes. Though we haven’t had, supersensitive conversations directly with banks we have learned through our relationships with dealers and with builders that banks have pretty strict criteria about what types of enhancements to the home they will allow to be amortized on the mortgage. It mostly comes down to, if its fixed and integrated with the house it has a high likelihood of being a candidate to be included. If its portable or removable it most likely does not. So things that get amounted on racks next to your heater and air conditioner things that get built into walls, like light switches and dedicated touch panels have the tendency to be candidates were including in the new mortgage, generally. I don’t want to speak for a specific bank for sure. A remote control or a portable touch panel not likely.

Jon Dorsheimer – Canaccord

Great. Thank you.

Operator

Thank you. And our next question is from the line of Jeff Kessler with Imperial Capital. Please go ahead.

Jeff Kessler – Imperial Capital

Thank you. You’ve mentioned at the beginning of your presentation that you had introduced and we read about it, introduced your first suite of security, security products. And you do have – the four side service out there, of all of the perhaps all of the suite of products and that you have security is the one thing that probably – that probably order, that probably goes better with a recurring revenue model whether its not used everyday its and perhaps on sometimes but, always on in some ways, but not really used until it has to be used. I’m just wondering have you thought about ways in dealing with your dealer base that you can begin to get with the recurring enabler as four sides your security product into some type of recurring revenue model that would be accepted by your dealer business.

Dan Strong

Hi, Jeff. Jeff, the answer is, yes. We have thought about it. We do think that the security arm of our business or the security portion of our business is an area that we could generate recurring revenue streams from. We’re not ready to announce anything at this point. As you mentioned, we have the four side service where we do have a small portion of our revenue today that is recurring. And we think that there is certainly opportunity within our security business to enhance that recurring revenue piece of our business. We’re not ready to make any predictions about how much it will be and when it will be, but we do absolutely think that’s an opportunity and we’ve thought a lot about it and it’s in our – it’s in our plan, okay.

Jeff Kessler – Imperial Capital

Thank you. And second question is over the last year and perhaps maybe the last year and a half and we’re seeing a real acceleration in these point solution DIY types of products that have gone through either VCs private equity or down to crowd funding and they are coming out almost daily, it’s hard to keep up with them. And that the question is, when you take a look at what is out there for you, are there folks coming to you or are you taking a look at what is out there that might be part of a Control4 solution that you could use? It may go both ways, but the answer is, what is out there in the DIY world that, that looks interesting that you could add functionality to a Control4 system at this point in time? And how do you look, how do you choose that which ones you’re going to go introduce yourself to?

Martin Plaehn

Hi. This is Martin

Jeff Kessler – Imperial Capital

Hi, Martin.

Martin Plaehn

Well, we certainly see the increased in point solutions or connected devices, I had said numerous times that this is a trend that is not going to slow down. Every device with the battery or power cord will have some kind of network connection forced on application be as maintenance or be just sensor data or actual end-user utility and value.

We do see the start, kick starter projects, we do see all sorts of products that can go into the home from cameras, to motion sensors, to thermostats, to door locks, to garage door openers and we applaud that. We have an open architecture with the platform that can coordinate all that innovation by 100s of companies. Some of them do come to us early, many of them most of the start ups are highly concerned with getting their own product right and getting it to a channel and getting revenue flowing before they worry about interoperability with a home automation system.

We welcome them, we’re not discriminatory, the more devices that we can conduct with the benefit of homeowners, the more choices, the homeowners have. We don’t have the illusion that we’re going to create every product that connects to our home automation system in fact most of the products that are connected in home are built by us. And we continue to grow and we’ll prosper from the innovation of others.

Jeff Kessler – Imperial Capital

Okay. Thank you very much.

Operator

Thank you. And our next question is from the line of Steven Frankel with Dougherty. Please go ahead.

Steven Frankel – Dougherty

Hi, good afternoon. And I’ll start with the quick question, how many dealers do you have now signed up in China?

Dan Strong

Steve, I don’t have the exact number, I can get back to you on that, I don’t have the exact total number of dealers in China. We’ll look for that as you ask the next question, and either get back to you or answer when we find it.

Steven Frankel – Dougherty

And was there any material impact on gross margin from third party products in the quarter?

Dan Strong

The third party products certainly help our gross margin percentage. So it was contributor to the gross margin, in terms of trends the percentage of revenue in the first quarter represented by third party products was relatively the same. So, it didn’t have an impact on the change, but it is a positive factor in our gross margin.

Steven Frankel – Dougherty

Okay. And you mentioned that you had good results in Latin America, was that an impact of putting more people on the ground and helping your dealers?

Dan Strong

We did add a technical resource in Latin America in the first quarter, I don’t think that was had a significant impact on the revenue in Latin America in the first quarter, because it’s too early in fact discuss question earlier in the call and takes a while for that to have an impact. We just – it was just a good quarter for us in Latin America due to a lot of factors, but that specifically the addition of the resource.

Steven Frankel – Dougherty

Okay. And any commentary on resolving the Best Buy situations, specifically the store within the store issues you were having?

Dan Strong

So we’re working on that, we generate through Best Buy there is two types of stores that we generate revenue from, one is the MDC stores or Magnolia Design Centers those are standalone stores that were doing very well in, Best Buy has been adding some additional stores which is good for us, because they are good revenue generators for us.

The MHT stores are store within store we’ve had success in certain stores in certain regions and have not been successful in others. But we are focusing on some specific stores and specific regions. What we’re doing well in those MHT stores and we intend to focus on those and not as much on the others.

Steven Frankel – Dougherty

Okay. Thank you.

Martin Plaehn

This is Martin, again. I have some information with regard to, in China we added about a dozen brand new dealers and in India another area we added just under 10.

Steven Frankel – Dougherty

Thank you.

Dan Strong

There is a total of 36 dealers in China.

Operator

Thank you. And our next question is from the line of Scott Zeller with Needham & Company. Please go ahead.

Scott Zeller – Needham & Co

Hi, thanks for letting me ask a follow-up. I just wanted to double check on your comments Dan, about guidance for the year, you mentioned 2Q guidance, but I believe you repeated or reiterated guidance for calendar 2014 16% to 20% growth?

Dan Strong

We said this for the full year, we expect between 16% and 20% growth. And that’s consistent with what we’ve said in the past.

Scott Zeller – Needham & Co

Okay. And the other thing I wanted to ask about was the light commercial opportunity that you’ve mentioned in the past, were your, thinking with some of your residential oriented dealers may go into lighter commercial work, any thoughts on that?

Martin Plaehn

Well, we know it happens, and we know that are dealers view it as very solid business. A lot of that business is it will affect from our residential business, many of our end customers are influential business people either senior managers or managers and directors of businesses or owners of them whether they are professional business, professional office-based businesses, doctors, lawyers, dentist, tax consultant. And then we also have small business owners, restaurants, sports bars and we see the crossover the between a dealer serving a residential client and then having that experience moved to their office or their place of work. That is a large driver of the light commercial business that we get today. We also have dealers who focus 40% or 50% or 60% of their business on light commercial and go the other way.

What we don’t have is a consorted, program dramatic – product management, marketing management, channel management focus strictly on light commercial of our commercial. So that may come later, I think that there is sufficient opportunity for us to grow a very strong buyers towards the residential market and when we surely get back recipe right and scaling at like a snowball going downhill. We’ll start looking at other opportunities.

Scott Zeller – Needham & Co

Okay. Thank you.

Operator

Thank you. And I am showing no further questions. I would like to turn the call back over to Mr. Plaehn, for any closing remarks.

Martin Plaehn

Thank you very much. Thanks for joining us on our first quarter call for 2014. We thank you for your support and attention to Control4. And we look forward to updating you next quarter. Thank you very much.

Operator

Thank you. Ladies and gentlemen, this concludes our conference call for today. If you would like to listen to a replay of today’s conference, please dial 1800-406-7325 or 3035903030 and enter access code 4680001. We’d like to thank you for your participation. And you may now disconnect.

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