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Control4 Corporation (NASDAQ:CTRL)

Q2 2014 Results Earnings Conference Call

July 31, 2014 5:00 PM ET

Executives

Dan Strong - Chief Financial Officer

Martin Plaehn - Chairman and CEO

Analysts

Tal Liani - Bank of America

Scott Zeller - Needham & Co.

Steven Frankel - Dougherty & Co.

James Medvedeff - Cowen & Co.

Dan Toomey - Raymond James

Saliq Khan - Imperial Capital

Operator

Please standby, we are about to begin. Good day. And welcome to the Control4 Q2 2014 Financial Results Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Dan Strong. Please go ahead.

Dan Strong

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

Prior to this call, we distributed our Q2 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 third quarter and full year of 2014.

We caution you that such statements reflect our best judgment as of today, July 31st, based on factors that are currently known to us and 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 Q2 2014 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 were 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 will 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 second quarter of 2014. We are advancing operationally in many areas and we continue to execute within the emerging connected home market with a real wheel towards continues improvement and innovation.

First, let me provide several remarks on the financial results for the quarter. We reported revenues for the quarter of $36.7 million, a record for Control4. Our core business in the United States was up a healthy 17% year-over-year and our core international business was also up 17% year-over-year.

However, the revenue from Canada grew this quarter over last quarter. We experienced an unexpected Q2 year-over-year decline in Canada of 16% that reduced our Q2 core North America growth rate to 11% and our overall Q2 growth rate to 13%.

The issues in Canada were primarily due to the timing shifts of project sales through several large dealers. Turnover in our own sales team in Canada and general economic softness coming out of the harsh winter, which we believe impacted new residential housing completions, as a result, our Q2 revenues ended within our guidance range but in the lower half.

Second, regarding our gross margins, in Q2, we generated gross margins of 51.8%, an 80 basis point improvement over Q1 and a record level for Control4. Our steadily improving gross margins reflect the value of our solutions, our ability to preserve pricing and our continued supply chain optimization measures.

Third, I am pleased with the operating leverage that we are demonstrating this quarter. We managed non-GAAP operating expenses flat with the prior quarter, while allocating investment appropriately to support our growth initiatives. As a result, we delivered non-GAAP net income of $3.5 million and EPS of $0.13, both at the high end of our guidance range.

In summary, Q2 was solid quarter for Control4 and we are seeing increasing adoption of our solution products and software platform for the connected home.

Next, I would like to briefly share with you our perspective on recent announcements within our industry. It was one year ago when we completed our IPO. At that time, as well as for prior years, we were evangelizing and educating investor about the connected home and the home automation opportunity.

Today, just four quarters later, the Internet of Things, smart devices that connected home and home automation are top of mind for many technology investors. I am sure many of you have read about Apple’s announcement of their Home Kit project and NEFT Google’s announcement surrounding their work with NEFT program in intend to acquire Dropcam and they are just recently launch Wireless Mesh Network technology initiative based on Thread.

We at Control4 are following these activities along with others. They don’t frighten us nor they cause us deep products rather they encourage us and emphasis to scale and scope of the opportunities ahead for several reasons.

First, these announcements are not directly competitive with our products or solutions and they are not to be exclusion of Control4. For example, last year we announced with NEFT that we were the first authorized home automation provider to begin integrating with NEFT products. That integrating and testing work continues and its forthcoming with a future release of our OS.

We are also a significant application developer on Google’s Android platform, as well as on Apple iOS. We have access to Apple Home Kit in its current state and we believe as it becomes more material, Home Kit could provide us rapid interoperability between future consumer-oriented connected devices, iOS and the built-in home products and systems homeowners have in their homes today.

Second, though it’s early to declare exactly how things will change and play out long-term, our visibility into the market comes from our dealers, who are recording and envisioning minimal near and mid-term impact of these announcements to their Control4 business.

And third, we don’t view the connected home as a one or two winners take it all market. The opportunities are too large, too diverse, too early and with too many moving parts but just one approach to dominate.

We believe the connected home opportunities can and will support our continued growth for where we focus, and there will be other that emerge and approach things differently. They too should be able to grow in their own way.

I would now like to spend a few minutes updating you on recent operational developments at Control4. We are pleased to report continued step-by-step progress with our relationship with Toll Brothers.

We now have our products and marketing materials in model homes or design studios in seven developed wins in key regions and we have increased the number of trained Toll Brothers authorized dealers to 28. In the coming quarters we intend to support this newly onboard dealers in the marketing and sales of Contro4 packages to new Toll Brothers homeowners in targeted markets.

In parallel, we continue to work regionally throughout the U.S. with our dealers and their local builders to enable hundreds of new housing projects and multi-dwelling communities with Control4 automated solutions for intelligent lighting, aware and efficient HVAC, interactive audio and video intercom, and sensor systems to improve safety and security.

On July 1st we announced the acquisition and the completed operational integration of the communication and sensor products of Card Access, Inc. We have been reselling Card Access products for several years and decided to acquire the products and underlying intellectual property, so that we can more directly manage their enhancement, manufacturing and the resulting solution experiences we deliver.

The Card Access product and their next-generation successors are intended to enhance our security and safety solutions, a fast growing area of interest by homeowners and our dealers.

These products already integrated well with other third-party products within the Control4 ecosystem and our used to easily and wirelessly monitor and control doors, gates, garages, windows and in-door temperature, moisture and humidity. They also enabled innovative automation capabilities based on room occupancy, motion of pressure detection and event triggers.

Since early 2012 we have been investing in our cloud infrastructure to provide end customers and dealers with configurable information access rights and permissions, to facilitate online ordering and business tracking for all our authorized dealers, to securely serve our end customers with remote access via our foresight service for anywhere in the world via their smartphone and tablets, to reliably provide network security and device driver patches and to provide 24x7 remote maintenance programmability and software upgrade capabilities to our dealers, as well as provide central Control4 system performance in health monitoring of more than 100,000 installed homes and businesses.

Based on this continued investment we recently released a new dealer’s customer dashboard based on our expanding cloud infrastructure and registered controller database. This new dashboard provides each Control4 dealer with a summary and detail views of their registered customers and their systems.

We believe this new dashboard will become an essential tool for daily and weekly used by our dealers because it provides current hardware and software system information, which our dealers need to provide prompt service and follow-on sales to their existing and new added Control4 customers.

This past quarter we also strengthen our sales presence with additional area sales managers in North America and we support the leadership of our international business between two very experienced and focus managing directors, one for the U.K, Eurozone countries, Eastern Europe, Middle East and Latin America and one for China, India, Australia, New Zealand and Southern Asia.

Additionally, in early July, we activated Euro-based commerce an online ordering for our Eurozone distributors and dealers. Previously, European business outside the U.K. was conducted only in U.S. dollars.

This past quarter and for the coming quarter we continue to support Sony’s television division with their integration and testing forthcoming certification of our Simple Device Discovery Protocol technology within Sony Bravia TVs.

We are pleased that the entire Sony Bravia TV line will be enable from the factory with Control4’s SDDP by year end. Sony’s TV division joins an expanding list of leading global consumer electronic brands supporting SDDP including Bose, Dish Network, Denon, Integra, (indiscernible), Onkyo, Pioneer, Panasonic, TiVo and Yamaha.

This quarter we also entered into new SDDP license agreement with companies including, Bang & Olufsen, Channel Vision, Fusion, Meridian and [Cidel] (ph). Our goals for SDDP are to continue improving the efficiency and decrease the complexity of connected device installation in home automation integration, whereby eventually most devices can be connected to a smart home as simply as consumers add a new smartphone or tablet to their home Wi-Fi network today.

SDDP licenses are now collectively shipping over 500 product models with embedded SDDP, a significant increase from the 300 models we reported during our Q1 earnings in April of this year.

And lastly, our next major software release Control4 OS 2.6 is now midway through external beta at hundreds of sites useful to dealers and distributors. Dealer feedback has been consistent. Our upcoming software delivers new levels of performance, functionality, usability, personalization and consistency for Control4 customers.

Our focus for 2.6 is to dramatically enhance the Control4 experience for both our end customers and our dealers. We are pleased that our newest and best software will be available in this Q3.

In closing, we made solid operational progress in Q2. Control4 remains well positioned as a leader in the exciting and growing connected home market. And we are executing against our strategic plan and making steady progress toward our target business model. As with any business, there have been and will continue to be speed bumps and potholes along the way.

We are learning from them and we continue to improve operationally while not losing our sharp focus on delivering the best-in-class home automation solutions that really improves consumer’s lives.

I want to thank our employees, dealers, distributors, partners and investors for their continued support and many contributions to our success. We intend to build on our progress together and we 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 unless I 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 the charges to the carrying value of preferred stock warrant liabilities.

Second, we refer to revenue attributable to sales through our dealers located in the Unites States and Canada as North American 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 lumpier business from hotels which we classify within other revenue.

Turning now to our results for the second quarter. Total revenue was $36.7 million representing a 13% year-over-year increase. Our second quarter non-GAAP net income was $3.5 million or $0.13 per diluted share compared to non-GAAP net income of $2.7 million or $0.13 per diluted share in the second quarter of last year.

For the first half of 2014, total revenue increased by 16% to $68.5 million. The first half non-GAAP net income was $4.2 million or $0.16 per diluted share compared to $2.0 million or $0.10 per diluted share in the first half of last year.

In the second quarter of 2014, North America core revenue was $27.7 million or 76% of total revenue. International core revenue was $8.2 million or 22% of total revenue. And other revenue accounted for the remaining 2%. Year-over-year our North America core revenue increased by 11% and our international core revenue increased by 17%.

For the first half of 2014, North America core revenue increased by 15% and international core revenue increased by 23% compared to the first half of last year. North America core revenue growth was impacted by a decline in Q2 year-over-year revenues from Canada for the reasons discussed by Martin at the beginning of this call. We have identified the issues contributing to the revenue decline in Canada and we are working to fix those issues.

Our international core revenue rate continues to be fueled by excellent performance in the U.K. and Latin America. However, sluggish performance in Central Europe and revenue declines in Australia and Russia brought our second quarter year-over-year international growth rate to 17%.

One of the metrics that we track closely and report publicly is our new dealer ads. I’m very pleased to report that in Q2 we added 94 dealers in North America and that the total number of active dealers increased from 2,506 at the end of the first quarter to 2,547 at the end of Q2.

In North America, 98% of our total dealers were active meaning those dealers who have purchased product on behalf of end customers in the previous 12 months. Internationally, we added 53 new direct dealers and our total active dealers increased from 612 at the end of last quarter to 640 at the end of Q2. And 87% of our total international direct dealers were active. These dealers as in both North America and internationally represent the largest number of dealers added in any quarters since the second quarter of 2012.

In the second quarter of 2014, we sold 17,516 controllers compared to 15,208 controllers in the second quarter of 2013 representing year-over-year increase of 15%.

Our non-GAAP gross margin in the second quarter of 2014 was 51.8% compared to 50.9% in the second quarter of 2013 and 51% in the first quarter of 2014. The increase in our gross margin percentage compared to last year is primarily due to component cost reductions, lower manufacturing overhead expenses as a percentage of revenue and favorable channel mix.

We are making steady progress executing against our long-term gross margin target of 52% to 54%. Although future gross margin can vary due to channel and product mix. We continue to invest in sales and marketing and as revenue scales, we expect to continue that investment. We expect we’ll able to generate leverage in 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 second quarter of 2014 were $15.5 million compared to $13.7 million in the second quarter of 2013. During the second quarter of 2014, as a percentage of revenue, sales and marketing expenses were 16.6%, a 50 basis point increase over 16.1% in Q2 of 2013.

This increase is a result of additional spending in sales resources and discretionary marketing expenses to drive growth and capitalize on our leadership position in our market. R&D expenses in Q2 of 2014 decreased 50 basis points from 17.6% of revenue compared to 18.1% of revenue in Q2 of 2013.

G&A expenses also decreased 40 basis points to 8.3% of revenue compared to 8.7% in Q2 of 2013. The combination of our growing revenue, improving gross margins and operating expense leverage resulted in our non-GAAP operating margin of 6.1% in the first half of 2014 compared to 3.8% in the first half of 2013. Our non-GAAP operating margin in the second quarter of 2014 was 9.5%

Our unrestricted cash, cash equivalents and net investments totaled $87.8 million at the end of the second quarter, representing an increase of $2.2 million from the balance at March 31, 2014 and an increase of $3.3 million from the balance at December 31, 2013.

In the second quarter, our working capital usage was $1.1 million comprised primarily of an increase in accounts receivable and a decrease in accounts payable offset by decline in inventory. Our inventory balance declined from $17.1 million at the end of Q1 to $16.0 million at the end of Q2.

The working capital usage was offset by non-GAAP net income of $3.5 million and cash generated from the exercise of stock options. Our rolling worldwide six month day sales outstanding as of June 30th stood at 38.9 days compared to 39.1 days for the same period of 2013.

I’ll now turn to our outlook for the third quarter and the full year 2014. For the third quarter of 2014, we expect revenue to be between $38 million and $40 million. And we expect non-GAAP net income to be between $3.0 million and $4.2 million or between $0.12 and $0.16 per diluted share. For the full year of 2014, we expect revenue to be between $148 million and $152 million.

Now I’d like to open the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take first Tal Liani with Bank of America.

Tal Liani - Bank of America

Hi guys. How quick would it take to fix the issues in Canada? That’s question number one and what’s required to do there. I apologize I missed the first three minutes of the call or few minutes of the call. So maybe you would have covered it. And second, how is the environment overall, the demand environment because you -- you noted issues in Canada but you also noted issues in some other places in international markets. And I’m wondering if it’s about the environment or it’s about something on your end that you can, fix, such as, increase the number of distributors or sign other types of agreement et cetera? Thanks.

Martin Plaehn

Hi Tal, this is Martin. Thank you for your questions. With regard to Canada, there were three things that contributed to the decline. One is the slower thought -- the slower business thought after pretty harsh winter where projects begin to be get -- be delayed in Q1. And we saw them continued to be delayed in Q2.

To our knowledge, we did not lose business to our competitor or an opportunity going away because they changed their heart or mind. But they were deferments and we are working with our dealers on the East Coast in Central Canada as well as west to calibrate when those projects will back to live and be ready to serve our dealers as they -- as each one triggers.

The second factor is we had a turnover in our area sales manager in Western Canada that became visible to us near the end of Q1. And then we immediately had to begin recruiting, interviewing and finding a strong candidate to join, we have solved that. The person joined in the middle of Q2. So they are coming up to speed, meeting all the regional dealers and beginning to put continuity back in place.

And the third area is just -- it's related to the winter or similar to the winter. It’s just the general economic climate in Canada. It’s not rebounding as strongly as in the U.S. I mean, the U.S. rebound is, it’s moving. It's not super buoyant but it is moving forward on a step-by-step basis in Canada in our experience and talking to dealers as well as the research we’re doing is not coming back as fast.

So we’re looking forward to getting revenue back on track, 16% drop is pretty significant especially for the size of what Canada contributes. And we want to get that back to flatten and then growing again. With regard to the other regions, we think that, that has a lot to do with us and our dealers and our distributors versus larger economic macro demand situations.

I think that we can do a lot better training our distributors in Russia and Australia and getting the fulfillment and alignment with demand. And we've done that in other regions and one by one, we make them work.

Dan Strong

And the one -- Tal, this is Dan. Just one thing to add to that in terms of the environment. We’ve talked in previous calls about China and the transition that we went through in China. And I think there is an example of our ability to influence those regions that were performing badly. We had a good quarter in China. In the second quarter, it was up year-over-year. It was up over last quarter.

We added 20 new dealers in Canada in the second quarter -- excuse me, not in Canada, in China. So I think that’s an example of regions of the world that are progressing and where we’ve identified issues and stepped up and fixed them.

Tal Liani - Bank of America

And how long -- you had a very strong quarter in terms of distributor additions, new distributors or dealers. How long did it take to translate it into growth, revenue growth, that’s number one. And second is why -- I don’t know how to ask the question, just not too directly but why are you -- you keep focus on this North American market, on the U.S. market in particular as you’re adding distributors. You’re doing everything that it takes on your end to make sure that there is growth because you’re adding distributors.

And we’ve been following you for few quarter. And since if we do in public and it always the same. You are working hard at dealers in the U.S. Why don’t we see the same effort outside of U.S.? Why are we getting situation like in Canada or elsewhere in international market where in retrospect you are saying you know what we should have invested more and finding dealers? What are the difficulties? What the uniqueness in these markets that you don’t have the same level of aggressiveness that you have in the U.S.?

Martin Plaehn

This is Martin. On the first question on how long does it take new dealers to come up to speed? It depends on two -- there are two types of new dealers, most of they are new dealers, the vast majority are existing businesses with good stature with their local community, that’s a requirement for us. Some already have experienced with home automation the connected home disciplines and some come from the security world or the pure AV world where they don’t. Where they have competency already in home automation within 90 days, they come up to very strong speed with us. We have our technical field manager organization that really helps with local tutelage and on-boarding so that their projects go very well. With the second class it usually takes about twice as long before they become confident and self-sufficient to close business, install business, to make sure that the initial installs are very strong.

With regard to the continuing theme of adding dealers outside the U.S., we did add 53 dealers outside the US, a big bulk of those were in China and India where we have deliberate programs in our direct presence to do so. In the U.K., we continue to add. In North America, we continue to add, but there are big pieces of the world that are covered by our distributors where we have 2 tier distribution, and we begun to take a more direct management role or co-management role with our distributors to be more aggressive in those regions to add delivery capability, so that our business can strength in those regions.

We are still in many regions around the world at very small numbers of dealers per geography. We probably have more dealers in Utah than we do in France and Germany combined and that has to change and it takes time.

Tal Liani - Bank of America

Got it. Thank you.

Operator

Our next question comes from Scott Zeller with Needham & Co.

Scott Zeller - Needham & Co.

Yes. Just adding to Tal’s question about international, could you give some more color around the changes in management in EMEA and also in Asia again if I heard correctly, because there have -- and Dan you had mentioned that you are up in China, but just it seems that there continues to be management turnover in both those regions. Could you offer us more color about that please?

Martin Plaehn

Yeah. This is Martin. First, there had not been management turnover with regard to the top level international management. We had one managing director who ran all of our business outside of North America and he has grown that business from $5 million to well above $20 million over the last few years, but the business is now getting to a scale where we felt that we had to split the responsibility and we hired a very experienced executive to run Asia world, the Asia sector China, India, Southern Asia and Australia, New Zealand. And we’re having our regional managing director now focus on U.K., Central Europe, Middle East and Latin America. This will give us much more sort of pounds per square inch, management focus on business and expanding our distribution and delivery footprint.

Scott Zeller - Needham & Co.

Okay. And then just to follow up on the acquisition that you mentioned about Card Access, could you just clarify whether or not there was any revenue that was attached to that acquisition and if it’s in your yearly forecast?

Dan Strong

Yeah, Scott, this is Dan. There isn’t incremental revenue associated with -- in the near term associated with that acquisition. We've been refilling Card Access products for a long time and so there won’t be top line increment. We do believe that there would be a little bit of margin enhancement, because we believe we will be able to manufacture the products at a little bit lower cost than instead of buying from Card Access and then reselling, we will be buying directly from our manufacturer.

So there will be a little bit of margin enhancement, but it won’t be material. The primary reason for the acquisition as Martin said in his opening remarks was to enhance the roadmap, to bring the control of the manufacture and distribution and development of those products in-house which we think is a key to our security and safety initiative in those product offerings.

Scott Zeller - Needham & Co.

And would you characterize the Toll Brothers partnership as something that's you being conservative with in your forecast for the year and it may provide positive results. Could you just give us more color on your expectations regarding Toll Brothers?

Martin Plaehn

This is Martin. The reason why we highlight Toll Brothers is much more about the trend that new construction is being built with the connected home and the fully automated home in mind. Toll Brothers is the national builder. They built about 5,000, maybe a little bit more homes per year across the right demographic. They did their homework. They compare different systems. They selected us. We are now engaging with them on community by community basis and we will be expanding that footprint as we go.

We are being conservative with regard to sell-through. It takes time. But our main reason for highlighting it is an example of how home automation is becoming mainstream to new 21st century homes. We are complimenting that work with national builders, with the regional builder program because many of our dealers have longstanding relationships with architects and custom homebuilders and we want to make sure that those homes have the best home automation platform and solutions that the market can provide and we believe we are well-positioned to do that.

Scott Zeller - Needham & Co.

Thank you.

Operator

The next question comes from Steven Frankel with Dougherty & Co.

Steven Frankel - Dougherty & Co.

Good afternoon. Starting with Canada, what kind of assumption did you build into the guidance for the back half of the year in your Canadian businesses? Is it still going to be down double-digits or should we assume that in your guidance it says that you can fix this problem in Q3?

Dan Strong

Steve, we factored our best estimate of what Canada would do in Q3 and Q4 in the guidance. There is an assumption of a turnaround of the decline and I am not going to be specific in terms of exactly what we forecasted, but we looked at all three regions in Canada and forecasted a recovery of the decline. And that’s our best forecast right now what will happen and that’s what’s going to build into our guidance.

Steven Frankel - Dougherty & Co.

Okay. And in China, could you tell us what kind of growth you saw year-over-year in the quarter?

Dan Strong

Not specifically, but I can tell you that it was up over the second quarter of last year and it was up over the first quarter of this year.

Steven Frankel - Dougherty & Co.

Okay. Thank you. That’s all for now.

Operator

Your next question will come from James Medvedeff with Cowen & Co.

James Medvedeff - Cowen & Co.

Good afternoon, and thanks for taking my question. I wanted to talk about the homebuilding program a little bit also. So the Toll Brothers, you are now up to 7 from I believe it was 5 communities at the end of the last quarter. How would you characterize the take rates in the -- as these communities, as you become there more longer how does the take rate maybe changed, does it increase the longer that you there? To the first community that you went into the design centers, are those more productive now than the ones that you are just entering or just how does that work?

Martin Plaehn

Well, it’s still early days and we are training the sales people within the design centers and those people that monitor the modern homes to communicate with prospective homeowners what the capabilities are and what the options are and what the future benefit trade-offs of package A versus package B versus package C. The interest level is strong. We are still building out the sales capability with Toll Brothers and the support framework with the dealers. We now have 28 dealers that can serve the demand at 7 communities. So we are watching it carefully. We don’t see it going backwards or becoming more difficult and certainly once teams get proficient and how to sell and close, they will grow from there.

James Medvedeff - Cowen & Co.

The earlier communities or the earlier startups are performing better as they mature, is that…

Martin Plaehn

They certainly have a head start.

James Medvedeff - Cowen & Co.

And just to refresh my memory, are those exclusive relationships or can other home automation companies come into those communities?

Martin Plaehn

There is no contractual exclusivity, but there is a pragmatic logistical exclusivity. There is only so much human bandwidth that builder’s sales team can understand and home automation is still in the early stages of this burgeoning opportunity. So right now Toll Brothers has said we are going to focus on Control4 and we said we are going to concentrate on Toll Brothers and we will take it step-by-step community by community.

Dan Strong

I think the other important to think about when you think about Toll Brothers is the number of dealers that we mentioned in the opening remarks. We now have 28 dealers that have been trained and are authorized and approved by both Toll Brothers and Control4 and that training those dealers and getting the dealer channel invigorated is the beginning phases of starting to generate that revenue.

James Medvedeff - Cowen & Co.

At what point in the construction of the house, does the automation system go in and at what point in that process, do you get paid?

Martin Plaehn

So depending on how much automation is placed in new home, when if you are looking at panelized lighting a lot of the wiring goes in and wiring in cabinets go in very early in the project, but typically the balance of the automation system, the brains, the actual devices, whether they are keypads or actually lighting, dimming, fixtures or inwall touchscreens and electronic door locks and the controller and the information distribution that goes in right after -- right before or after final finish paint and finishings.

And we get paid at the time the dealer buys the equipment to install that phase. So when they put in the cabinets for panelized lighting we get paid. When they put in the modules we get it paid and when they put in the final finishing and user interface devices and controllers, we get paid.

James Medvedeff - Cowen & Co.

Okay. And then finally on this homebuilding issue, on the last conference call you talked about several 100 local builders that you’re starting to work with, that you probably already had worked with but you are stepping up that program. Could you just give us an update on, A, on how that’s going, and, B, since retrofit is by far the bigger part of the business, whether those builders are also sort of remodeling contractors, how much sort of synergistic you start working with them for new home construction and you pull through some retrofit business as well?

Martin Plaehn

I think on the latter question, I think that I would be speculating on the correlation between custom home building and remodeling. I’m sure some due but I don’t have a hard statistic on that.

With regard to our regional builder program, that is going very well for us, in many regions. Its going well for us in the areas where they’re doing moderate-sized MDU multi-dwelling unit, multi-dwelling communities.

Small single home communities in the mid level luxury all the way up to high-end luxury homes. We have programs with local dealers where if the local dealer standardizes on Control4 and puts basic capability or sometime -- midlevel capability into our home, on every home, we support those builders and those dealers very rigorously and some operate as an option.

We’re pleased with how we’re working with our dealers and the local architects and builders. And we continue to support it with corporate level programs through our local dealers, as well as with regional, technical, and sale support.

James Medvedeff - Cowen & Co.

Okay. And finally on the Canada situation, we’re probably through the third quarter now. The new sales manager, he’s been on board for almost a full quarter. What’s the evidence of any one of those three things turning, those are the economic issue, the weather issue and then turnover of the sales manager? Are you beginning to see any kind of uptick in any of those three factors?

Dan Strong

So, I think the best way to answer that is that the July revenue that we’ve seen so far in Canada is inline with the forecast that we prepared for that region that ties to our guidance. So it’s performing the way that we estimated that it would when we prepared the guidance for Q3 in the year.

James Medvedeff - Cowen & Co.

Okay. Thanks again.

Operator

From Raymond James, we’ll take Tavis McCourt.

Dan Toomey - Raymond James

Thank you. This is Dan Toomey on for Tavis McCourt. My first question, you noted that it was your largest dealer at quarter in about two years. Can you just talk a little bit about the dealers you lose each quarter? It looks like you lose roughly half of what you add. What are the metrics you look at to cut dealers or what you base that on? And what are your thoughts on that?

Martin Plaehn

Well, let me first clarify that the definition of active dealer is the list of dealers that have purchased from us in the trailing 12 months. And there are subset of dealers that remain certified dealers that don't necessarily order in every single month or in every single quarter. But that doesn't mean they went away. It means that for that dealer, they chose not to order in the last 12 month as that 12 month goes by.

Maybe they only focus on four or five homes per year and they’re finishing the ones that they did start 12 month ago. So it is not the case that we added 93 and the active dealer count went up by 45 that the other 45 are terminated. A subset of them still maybe certified.

We do terminate dealers for poor performance or a mutual agreement that they're not going to come back and that is a small number. It’s certainly less than 10% and we constantly are gardening our dealer base for quality of deployment, quality of sales and commitment to help us grow and move from one in the 1000 homes to five in a 1000 homes.

Dan Toomey - Raymond James

Okay. Thank you. That’s helpful. My next question is we have spoken to some dealers and a few have noted more light commercial work or videoconferencing work and taking that from some competing automation providers. Is that at a trend that you see growing as well? I guess, I’ll just have let you into that before I follow-up?

Martin Plaehn

Well, we have seen that opportunity for many years and we think it can be a bigger opportunity. We do help our dealers that are focused on commercial. Many of our dealers do commercial but most of them do it as a secondary line of business where some of them solely focus on it. And we really want to get the residential in multi-dwelling unit business, really optimized product line channel strategy, marketing, fulfillment and we are going to continue to serve those dealers that focus on commercial.

But we’re doing that in a more prudent way because we have the priority to focus on residential opportunities. At this point in time, we have to pick one in front of the other but when we do engage in with the dealer to support them, we do a first-class job with that dealer and that dealer does a first-class job. It’s just that we’re not putting the 100% of the company behind that at this time.

Dan Toomey - Raymond James

Do you have a sense of your overall revenues, what commercial makes up at this point?

Martin Plaehn

It fluctuates between the mid teens and low 20s…

Dan Toomey - Raymond James

Okay.

Martin Plaehn

…in percentage and it’s very osmotic with our residential business because of who our residential homeowners are. They own businesses, whether they are doctors, dentists, lawyers, own restaurants, own specialty businesses and they have an experience in their home and they want it conveyed in their business.

Dan Toomey - Raymond James

I agree, I get the same feedback. Thank you.

Operator

(Operator Instructions) We’ll now move to Saliq Khan with Imperial Capital.

Saliq Khan - Imperial Capital

Hi. Thank you. Just a couple of real quick questions for you, and first of all I’m speaking on behalf of Jeff Kessler. You guys participated on very highly competitive market which lot of the company, including some of the larger technology companies, broadband and security service providers and even the other management service providers as well are actively parsing the home automation industry, the home automation market.

What is it that you as management team along with some of the integrators as well and the dealers, what is the message and the mantra that they're telling people to go with you guys versus what you see it survive. That might be not -- it will be little bit cost -- a bit more expensive than you as well?

Martin Plaehn

This is Martin. There is -- probably there are two in your question. There are sort of two camps of competition. One camp is those service providers that have a subscription-based business whether they’re providing telethon, broadband or security services. And then the other side is our traditional co-home automation alternatives like Crestron or Savant or AMX.

With regard to the service provider offerings, our positioning and how we teach our dealers and how our dealers interact with homeowners is that our sole purpose Control4 and our dealers is to deliver the best in breed, most flexible, long-term durable home automation experience for each family within the community that dealer serves.

We believe that that is very high value and what consumers expect and how they want to live with their automation system. That is not the primary goal of the other companies. Their primary goal is ARPU and stickiness of their service, which are under a set of assorts that are different.

The broadband providers have their issues. The security providers have their issues. The telephone companies have their issues and they are offering product lines that are utilitarian, that function but are not designed for personalization and broad interoperability with the products consumers have in their homes and the best-in-class products that they want to buy.

On the other side, you have how does Control4 compete and position against our traditional competitors. We are a premium value-based solution for intelligent lighting, family room, audio-video automation in multi-room audio and video and safety, security interoperability solutions. We position it that way through our dealers and we think we just have a much stronger offering at a much better price point.

And it enables our dealers to deliver that solutions faster with Control4 than other providers. And so on one hand we serve the end customer with a better and open and more choice, while not compromising on the experience. And we provide to the dealer network, a platform and set of tools by which they can do more jobs and have more satisfied customers in the unit of time and thus make more money.

Saliq Khan - Imperial Capital

And also that you guys, so much have a complete line of home automation product to suppose to some of the companies or either the standalone companies or ones that only trying to solve one or two issues but you commend you guys for that. I guess as you guys have become more of a true company in the public markets, how is the install based really changing?

Let me redefine that as essentially I’m saying as are you facing more of the single homes, excuse me, single room installation being done or is there a much larger home that are being done now. And how does that differentiate between the various income levels because you guys previously mentioned that you are also targeting the individuals that are making less than the $0.25 million or less than the $150,000.

So how is that really changing when it comes to targeting them or they are the ones that are really test driving your products and services, like going after a single room installation, whereas individual that may have a bit more wealth? They are already familiar with your products or either one of your competitors. They truly do like your products. They go more after the entire home?

Martin Plaehn

We certainly are seeing an increasing volume of smaller projects where customers, homeowners are starting with their family room or maybe their family room and their kitchen. And then six months to eight months later they add more additional room of audio, additional rooms of video distribution or additional lighting. We are seeing it increase in our -- increasing acceleration in our wireless and panelized lighting solutions for whole home intelligent lighting and new construction lighting. We’re very pleased with that.

So we’re seeing solid increase in more smaller homes, which I think is a good trend. And I think the awareness of the connected home and the internet of things and smart devices is all helping that. And our investment that we made several years ago to bring out a next-generation intelligent lighting solution, both wireless and panelized is really starting to pay off. We’re excited about that.

Saliq Khan - Imperial Capital

Okay. And lastly Martin, you guys are pretty methodic with regards to your partnerships and your marketing strategies as well, particularly Toll Brothers. As you’re looking out and whatever you can comment on as well first of all. As you looking out over the next two to four quarters, what types of partnerships are you guys looking for to help you move the needle?

Martin Plaehn

Well, I think that the home automation is a pretty broad agenda. And we really -- one of the big priorities is distribution and basically geographic presence. Looking at partnerships that help us drive back. And then we look at partnerships on the supply side where we can increase the level of integration and interoperability between our solutions and third-party products that consumers want to buy. Our SDDP initiative is exactly that. Sony Bravia TVs is an example of that. Bose audio system is an example of that. And we’re going to continue to drive that.

Saliq Khan - Imperial Capital

Great. Thank you.

Operator

And at this time, we have no further questions. I’d like to turn the call back over to Martin Plaehn for any additional or closing remarks.

Martin Plaehn

Thank you very much for joining us today. We look forward to moving into the second half of 2014. We’re continuing our initiatives to build our channels in the key regions. We have exciting software that we’re going to be bringing to market, that we've been working on for well over a year that will be released this quarter. And we’ll be bringing that to all of our dealers and as well as all of our installed customers, end customers. And we look forward to speaking with you at our next earnings call to give you our progress and results. Thank you very much.

Operator

Once again, ladies and gentlemen, that does conclude today’s conference. Thank you for your participation.

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Source: Control4's (CTRL) CEO Martin Plaehn on Q2 2014 Results - Earnings Call Transcript
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