Control4's (CTRL) CEO Martin Plaehn on Q4 2015 Results - Earnings Call Transcript

| About: Control4 Corporation (CTRL)

Control4 Corporation (NASDAQ:CTRL)

Q4 2015 Earnings Conference Call

February 4, 2016 05:00 PM ET

Executives

Martin Plaehn - Chairman and CEO

Mark Novakovich - CFO

Analysts

Robert Stone - Cowen & Co.

Steven Frankel - Dougherty & Company LLC

Saliq Khan - Imperial Capital

Gregory Weaver - Invicta Capital Management

Operator

Good day and welcome to the Control4 Fourth Quarter and Fiscal Year 2015 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Mark Novakovich. Please go ahead.

Mark Novakovich

Thank you, operator. Good afternoon, everyone and thank you for joining Control4’s earnings call for the fourth quarter of 2015. My name is Mark Novakovich and I’m the Chief Financial Officer for Control4. With me on call today is Martin Plaehn, our Chairman and Chief Executive Officer.

Prior to this call, we distributed our Q4 2015 earnings release over the wire services and we have posted it on our Web site at investor.control4.com, as well as furnished 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 Web site for 30 days.

Before we begin, I would like to remind you that during today’s call, we will be making forward-looking statements regarding future events and financial performance including our financial outlook for the first quarter of 2016 and our initial revenue and non-GAAP net income outlook for the full-year of 2016. We caution you that such statements reflect our best judgment as of today, February 4, based on factors that are currently known to us and that actual future events or results could differ materially due to a number of factors, many of which are beyond our control.

For a more detailed discussion of the risks and uncertainties affecting our future results, we refer you to our filings with the SEC including the 8-K we filed earlier today, which contains our Q4 2015 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, the non-revenue financial measures we will discuss today are not 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 Web site.

With that, I will turn the call over to Martin.

Martin Plaehn

Thanks, Mark. Welcome everyone and thank you for joining us on the Control4 earnings call for the fourth quarter of 2015. Here are the high level results for Q4 and the full-year 2015. Revenue for the quarter was just above the midpoint of our guidance at $42.9 million.

For the full-year 2015, revenue was $163.2 million, representing year-over-year growth of 10%. We recorded non-GAAP net income of $1.6 million for the quarter or $0.07 per diluted share. The midpoint of our guidance range. For the full-year, non-GAAP net income was $8.3 million or $0.33 per diluted share. And during the quarter, we generated $1.5 million in cash from operations and used $4.1 million from our balance sheet to repurchase Control4 shares per our Board approved share repurchase program.

As we’ve noted in prior calls, Control4’s mission is to be both the technology and premium product market leader in the home automation and connected home market. Our overall strategy is threefold: First, to provide premium high quality and durable connected home solutions for family room entertainment, multi-room media, intelligent lighting and security and safety.

Second, to enable and deliver automated experiences with a broad number of third-party products to support consumer choice via our connected home platform for the lifestyle benefit of our end customers; and third, to deliver our solutions to families and businesses through an expanding and global professional dealer network in order to deliver the highest levels of consistent and increasing end customer satisfaction.

We’ve made and we will continue to make both strategic investments and the step-by-step tactical moves necessary to profitably drive continued growth long-term. With that as context, we’ve four important updates since our last earnings call, focused on strengthening our business and increasing shareholder value.

First, we’ve begun executing on our 2016 operating plan, which among other things holds our operating expenses approximately at the 2015 levels with the objective of delivering improved profitability and cash flow in 2016.

Second, in October of 2015 we released a new version of our Control4 operating system version 2.8, which is now running in more than 40,000 installations. And last month we announced and commenced worldwide delivery of a new family of automation products and software, thereby expanding our solution offerings with rich entertainment in automation functionality at price points in an expanded range from as low as $500 up to $2000.

Third, we announced today that we acquired Pakedge Device & Software for $32.7 million. As you may now Pakedge is the leader in the advanced home networking infrastructure products and cloud network management capabilities for both wireless and wired network solutions.

And fourth, we increased our credit line facility with Silicon Valley Bank to $30 million, providing us with additional financial flexibility for organic investments, potential strategic acquisitions and further share buybacks.

On a related note, this week our Board authorized an extension to our share repurchase program from the original end date of May 13, 2016 to June 30, 2017.

I will spend a few minutes on the first three areas and Mark will expand on the fourth. First, improving operating profitability. 2015 was a significant investment year for Control4 in terms of both sales and marketing and in product development. Very little of our operating expense investments in 2015 were [as operative] [ph].

Our expansion efforts in Europe, India, and China are well on the path to contribute growing revenue in 2016. Our investments in multi currency e-commerce, in addition to U.S. dollars enables our dealers to transact project quoting and commerce in pound sterling in Great Britain, in the euro for all Eurozone countries, and this month in Canadian dollars for Canada.

In North America, our telemarketing team is driving consumer upgrades and increasing the rate of conversion of consumer leads in order to supplement our dealer sales and marketing activities. And our increased product development investment delivered new products during 2015 and also in Q1 2016 with additional product releases to follow this year.

During 2016, we expect to maintain operating expenses, excluding acquisitions, at approximately the 2015 levels. We would be rapidly integrating Pakedge into Control4 and we expect this acquisition to have a favorable impact on our revenue growth, gross margin, and profitability in 2016. More specifics on Pakedge in a moment.

Second, new product introductions. Last week, on January, 26th, we announced to begin the immediate delivery of our new entertainment and automation series controllers for small, medium, and large digital media entertainment and automation installations.

Concurrently we announced the availability of version 2.8.1 of our operating system for all existing and new installations. The entertainment and automation series or EA series is the successor generation to the HC series, or home controller series. And the most recent models of the HC series were the HC 250 and the HC 800, which we launched four years ago.

The new EA series provides a technical foundation and processing power to meet today’s and tomorrow’s demands and capabilities for connected homes and businesses around the world. The EA series family consist of three models, the EA1, the EA3, and EA5.

The EA1 is designed for single room audio video entertainment automation, such as the family room, a home theater, a study or a bedroom. The U.S MSRP for the EA1 is $500 when sold separately. And it’s available as a bundle with our handheld remote the SR-260 for $600 U.S MSRP, an extremely attractive price point for a new segment of consumers.

The EA1 is ideal for a starter system and it’s sufficiently versatile to be used in large installations as a secondary controller in single room applications. Additionally, the EA1’s rich functionality and affordable price point combined with the proven capabilities of composer express to ease installation, provides a solution substance to begin expanding our channel footprint with new dealers who are solely focused on single room audio video customers.

In comparison, the EA3 is designed for multi-room entertainment and small to mid size automation installations, such as an apartment or condominium, a small to medium sized home or a single floor in the large installation. The EA3 has a U.S. MSRP of $1,000.

And finally, the EA5 is designed for the large to very large multiroom entertainment and automation installations, such as a mid size to large size homes and very large estates and features the horse power to control and automate hundreds of connected devices. The EA5 has a U.S. MSRP of $2,000. We are recommending the EA series for all new installations, as well as expansions and upgrades within our installed base of more than 200,000 homes.

Already integrated with more than 40 connected devices on average, with many homes integrating hundreds of devices. Control4 is committed to a single broad based software platform for smart device orchestration in home automation functionality. The EA series was specifically designed to smoothly co-exist with installed HC series products and to run the same Control4 OS software with full functionality and interoperability at present with more than 9,300 third-party devices.

Third, strategic acquisitions. Today we announced the $32.7 million acquisition of Pakedge, an industry leader of comprehensive, high-performance networking solutions for the market in which we both operate. Pakedge’s portfolio includes the Connectplus platform with wired products, switches, and routers and wireless products, access points as well as power distribution products and cloud-based network management services.

Pakedge brings to Control4 for deep expertise in networking, innovative technologies and an industry-leading suite of newly refreshed products and rich software capability, as well as the integration of a growing list of third-party devices.

The Pakedge software running within their products and in their cloud service software enables dealers and homeowners to monitor, configure, and reset their home networks. The Pakedge founders, senior management team, and broader organization are joining Control4 and we’re all enthusiastic about our shared near-term objectives and long-term opportunity.

We believe the strategic value of combining Pakedge with Control4 is compelling. First, one integrated platform becomes one differentiated experience. The power of Control4 is in our ability to seamlessly orchestrate a comprehensive home automation experience, expanding entertainment, smart lighting, comfort and convenience and safety and security.

Networking has always been a key element of Control4 installations. But in the past our dealers have purchased these networking products from third-party suppliers. We believe that by embracing the Pakedge networking capabilities as an expanded core confidence within Control4, integrating them tightly with our entertainment and automation capabilities and ensuring that a single cloud-based reporting and management solution spans both home networking and connected home devices that we will be able to deliver much broader and more differentiated product lines to our dealers and more reliable experiences to our end customers.

Second, networks are the foundation of everything connected. Today’s consumers are increasingly becoming more connected at home, at work, in the car, and on the go. Eventually everything with power will become network aware. However, most home networks today are not fully ready for the expanded requirements of the truly connected home.

Seamless, scalable, reliable and secured networks are not just desired, they’re required. And Pakedge provides Control4 with this important foundation that we intend to provide through our entire dealer channel for use in any connected home business.

In 2015, Pakedge generated $18.5 million in revenue. At gross margins above 50% and net income slightly above $1 million. Like Control4 they conducted their business through a Broad channel of 1,700 independent dealers, of which only one-third are currently certified Control4 dealers. Because any of us with an attractive opportunity to grow Pakedge product sales through our much larger dealer network of 3,600 Control4 dealers, and to expand our combined business through a 1,100 additional dealers, uniquely brought to us via Pakedge.

Control4 intends to fully support the Pakedge product line for all Pakedge dealers, whether they’re a Control force certified or not. We intend to grow both the Pakedge product business and the Control4 product business through our combined dealer channel of over 4,700 total dealers.

We will encourage all appropriately qualified dealers to explore both product lines and we will be actively cross training and cross certifying dealers in accordance with our existing standards of technical proficiency and business practices.

Pakedge provides a significant boost to our development capabilities, our solution portfolio, and our business flexibility moving forward. For 2016, we expect Pakedge to be accretive to our growth rate and gross margin, while contributing positively to our net income for the year.

Wrapping up, I want to especially welcome all Pakedge stakeholders and employees, as well as thanks to all of our employees, customers, dealers, distributors, suppliers, business partners and shareholders for their continued support and many contributions to our continued progress. We’ve started 2016 with several exciting announcements and we intend to keep racing forward smartly.

With that, I’ll turn it over to Mark.

Mark Novakovich

Thank you, Martin. Two brief reminders before I turn to our financial results. First, unless I specifically note otherwise, I will be discussing all numbers except revenue on a non-GAAP basis, which excludes expenses related to stock compensation, acquisition related costs and certain other items that are detailed in the reconciliation of GAAP and non-GAAP results in our press release.

Second, we refer to revenue attributable to sales through dealers located in the United 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 revenue from our hospitality business, which is included in other revenue.

Turning now to our results for the fourth quarter of 2015. Total revenue for the quarter was $42.9 million, resulting in revenue for the full-year of $163.2 million and year-over-year growth of 10%. For the year, both North America core revenue and international core revenue grew a 11%.

Adjusting for our North America retail integrators which declined 11%, the balance of our North America core business grew 12%. While our total growth for 2016 was 10%, our quarterly revenue growth on a year-over-year basis was 1%, 22%, 11% and 4% in Q1, Q2, Q3, and Q4 respectively.

Our year-over-year revenue growth on a quarterly basis was not linear for a variety of reasons including the timing of new product releases, the use of marketing programs, to accelerate intra quarter sales of certain products or product families, the impact of foreign currency fluctuations and the impact of general, regional, economic conditions on consumer buying decisions and harsh weather that delayed or canceled building projects.

For the fourth quarter, the underlying mix of revenue growth rates by geography were as follows: North America core revenue grew 7% year-over-year. Although, within this growth we experienced a year-over-year decline in revenue from a large U.S. distribution partner and in Canada, otherwise most of our 23 U.S sales regions contributed double-digit year-over-year growth.

International core revenue grew 2%, reflecting economic weakness in many of our international markets. Our non-core other revenue consisting primarily of hospitality business declined 32% year-over-year with hospitality declining by $1.2 million, further impacting our overall revenue growth rate for the quarter.

CE Pro, the leading trade magazine for home technology installers, integrators recently published a survey indicating that typical custom electronics integration firms, reported revenue growth of 9% in 2015 compared to the 27% revenue growth that was reported in 2014. The 9% growth rate reported for 2015 is closely aligned with a 10% growth rate we generated during the year. So while Control4 addresses an extremely large and highly under penetrated market in general, our revenue growth rate is currently influenced by the capacity and practices of our dealer channel.

In order to outpace the growth rate of our dealer channel, we’re focusing on three broad strategies. First, adding more dealers. In Q4 we added 90 dealers in North America and the total number of active dealers increased to 2,748, up from 2,703 at the end of the third quarter. In North America, 99% of our total dealers were active, meaning they purchased product on behalf of end customers during the previous 12 months.

Internationally, we added 44 new direct dealers during Q4. The number of total active direct dealers increased from 796 at the end of Q3 to 816 at the end of Q4, and 91% of our total international direct dealers were active. In several international regions, we’re shifting to a direct to dealer model were distribution has been less effective.

Second, making our dealers more productive. We continue to invest in lead generation and cultivation activities, which resulted in an increase in the number of qualified leads that are passed along to our dealer network, as well as an increase in the conversion rate of leads to Control4 smart home projects.

We recently partnered with GreenSky to offer end user financing through our U.S dealer network. We believe providing financing options will aid in shortening the sales cycle for smart home projects by offering payment options that better aligned with customer financing preferences.

We also continued to work with our dealers to drive system upgrades to their Control4 customers that they currently have. The release of the EA series should provide additional opportunities to our dealers through our upgrade program which began in 2015 and will continue for 2016.

Third, increasing our wallet share, drew both organic and inorganic steps including the acquisition of Pakedge, we were offering a broader array of solutions to consumers through our dealers, increasing our addressable market opportunity. Our experience suggests that our dealers prefer to saw solutions from Control4, because of our status as a trusted partner, our e-commerce based ordering and delivery system and the fact that Control4 solutions work better together. We plan to continue expanding our product line to address broader connected home applications, leveraging our established channels.

Turning now to some of our key metrics. In the fourth quarter of 2015, we sold 16,964 controllers worldwide compared to 22,737 controllers sold in the fourth quarter of 2015. This decrease was expected and reflects the expected transition to our new controller family and tough comparisons for Q4, 2014 which included a one-time shipment of 3,300 controllers into a large hospitality project.

Very early EA series controller sales indicates, strong and rapid adoption. In one week since we announced availability and pricing of the EA series on January 26, we’ve sold and shift to 841 unique direct dealers, 4,010 EA series controllers of which 790 controllers are already installed and registered with our cloud services.

Our non-GAAP gross margin percentage in the fourth quarter of 2015 was 51.7% compared to 51.2% in the fourth quarter of last year and 51% in Q3 of this year. As we expected our gross margin percentage improved for the fourth quarter compared to prior quarters of 2015, as well as over Q4 2014.

For the fourth quarter of 2015, R&D expenses were $7.3 million or 17% of revenue compared to $6.3 million or 15% of revenue in Q4 of last year. Our increase in R&D contributed meaningfully to the delivery of new products and software in 2015, as well as the new EA series products we recently announced and began shipping on January 26. Additionally, we expect to deliver more new products in the first half of 2016, which are largely due to R&D investments made in 2015.

Sales and marketing expenses in the fourth quarter of 2015 were $8.4 million or 20% of revenue compared to $6 million or 15% of revenue in Q4 of 2014. The increased sales and marketing investment reflects our direct-to-consumer digital advertising program and the strengthening of our field presence in North America, the U.K., Germany, Central Absolute dollars of $1.5 million in sales and marketing reflects higher salaries and wages Europe, China and India.

G&A expenses in Q4 of 2015 were $3.8 million or 9% of revenue compared to $3.1 million or 7% of revenue in Q4 of 2014. The increase in absolute dollars of $0.7 million consists primarily of professional fees and facilities related expenses.

Our fourth quarter non-GAAP net income was $1.6 million or $0.07 per diluted share compared to $5.4 million or $0.21 per diluted share in the fourth quarter of 2014. Our GAAP net loss for the quarter was $0.7 million or a loss of $0.03 per diluted share. During the fourth quarter of 2015, we repurchased $596,819 shares of our stock bringing in a total number of shares repurchased in 2015 to 1,154,480 for a cumulative price of $9 million.

Our free cash flow was $0.6 million during the fourth quarter and a resulting cash and investments balanced at the end of December, prior to the Pakedge acquisition was $81 million compared to $84.4 million at the end of the third quarter.

Looking deeper into the major components of our balance sheet, during the fourth quarter our inventory balance at the end of the year was $19.9 million compared to $18.1 million at the end of the third quarter. We grew our inventory during the fourth quarter in anticipation of our January 2016 launch of our EA series controllers and a new 10-inch model of our tabletop touch screens.

Our rolling 12 months inventory returns were 4.8 at the end of Q4 compared to 4.8 at the end of Q3 and 4.9 at the end of Q4 2014. Our accounts receivable balance decreased from $22.3 million at September 30, 2015 to $21.3 million at the end of Q4. Our rolling worldwide day sales outstanding or DSO was 41.2 days at the end of Q3 compared to 43.6 days at the end of Q4.

Our accounts receivable collections and the payment history of our customers is very strong as evidenced by our history today AR write-offs a percentage of 0.3%. During 2015 our actual write-offs were approximately 0.1% of revenue for the year. We value our relationships with our dealers and recognize that we are a key partner of theirs and generally extend credit to dealers both domestically and internationally when our credit review guidelines are met.

Our accounts payable balance grew from $17 million at the end of Q3 to $17.6 million at the end of Q4, primarily as a result of the build-up of new product inventory in anticipation of January sales and delivery. Our credit standing with our vendors and manufacturing partners is and has always has been excellent. We have not had nor do we expect to have any significant changes in our payment terms with our vendors or manufacturing partners.

In January of 2016, we amended our credit agreement with Silicon Valley Bank providing for an addition of $30 million in credit which we anticipate using the fund strategic acquisitions. We used $5 million of this credit line to fund the $32.7 million acquisition of Pakedge leaving an addition of $25 million of capacity for organic investments, strategic actions or share buybacks. The credit line has a two year term and customary covenants.

Our net cash and investments position after funding the Pakedge transaction, as of January 31, 2016 was approximately $53 million. Our Board of Directors has authorized an extension to our share repurchase program for up to $20 million of Control4 common stock during open trading windows from its original end date of May 30, 2016 to June 30, 2017 with cumulative share repurchases since May 2015 of approximately $9 million, we have a $11 million remaining in authorized repurchase capacity.

In parallel we believe strategic acquisitions that are accretive to revenue growth and net income are important, and we’ll continue to evaluate such opportunities. Our 2016, capital allocation decisions will be governed by our desire to maintain flexibility to fund these type of strategic decisions.

Turning now to our forward looking guidance, we want to remind everyone that the first quarter of every year is our seasonal low revenue quarter, and our first quarter includes some frontloaded marketing cost including our participation in the large ISE Trade Show in Amsterdam next week. Our guidance also includes the expected contributions from Pakedge beginning on February 1. As these new networking products are complimentary to our current business and will generally be sold through the same or similar channels all future results of operations and forward looking guidance will be based on our consolidated single business segment.

Before turning to our guidance for Q1 and the year, let me turn your attention to three ways in which the Pakedge integration will impact our financial outlook. First, Q1 is the seasonally low quarter for Pakedge revenue similar to Control4. Second, we anticipate incurring some incremental operating costs during the expected three to five month business integration period, and third the elimination of overlapping operating expenses between the two companies in terms of sales, operations and administrative personal should result in improved operating margins beginning in Q3 when compared to the historic results for Pakedge.

We expect our Q1 revenue to be between $38.5 million and $41.5 million, which includes two month’s of contribution from Pakedge. We expect our non-GAAP net income for the quarter to be between a net loss of $0.9 million and net income of $0.9 million or between a net loss of $0.04 per share and net income of $0.04 per share.

For the full year 2016, we expect revenues to be between $198 million and $202 million including 11 months of contribution from Pakedge. We are committed to expanding profitability in 2016, and we expect our non-GAAP net income for the full year to be between $16 million and $18 million with earnings per share of between $0.67 and $0.76.

We would now like to open the call for your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We’ll take our question from Rob Stone with Cowen & Company. Please go ahead.

Robert Stone

Hi, guys. You are certainly busy.

Martin Plaehn

Yes. Thank you very much.

Robert Stone

My first question is for you, Martin. I wonder if you could just give us some examples of the kinds of installations where it sounds like Pakedge is a specialized type of networking provider as opposed to many big household names we’ve heard of. So what drives the overlap from that to traditional Control4, and what did they do that’s special in the home automation context?

Martin Plaehn

So, several things. The roots of Pakedge are in optimizing wired and wireless networks for multiple types of traffic especially those types of traffic that involved audio and video, whether that is streaming audio music locally within the house or from a streaming service, whether that’s streaming video within the home or from a video network service, and even including surveillance cameras for both residential applications and business applications. Layering on top of that type of traffic, they have technology that automatically prioritizes quality of service and responsiveness for low latency applications such as Voice over IP, Telephony and within home intercom audio and video communication. And so, with that foundation that’s their heritage they have very deep firmware that interoperates across the various components of routers, switches and access points and power distribution management. They tie that to their cloud service which provides remote management by the local dealers and home owners. And it deeply integrates with Control4 via our open API so that not only can the Pakedge technology see the entire traditional network within the home, but they can also see what is connected to the home automation system whether that’s IP driven or ZigBee or other forms of communication.

Robert Stone

Great. So, how fast -- you mentioned the 2015 revenue is about $18.5 million. How fast was Pakedge growing recently?

Martin Plaehn

Similar to Control4, Pakedge’s revenues in 2015 were $18.5 million which was slight growth over their 2014 numbers. They spent an enormous amount of their attention on technology and product refresh which they began shipping in the fourth quarter of 2015. Their business started to pickup in the fourth quarter, and January looked good. And we’re excited to expand their channel with our channel and get the synergies of creativity, customer synergy and new products.

Robert Stone

Great. Just two quick housekeeping ones for Mark, if I can squeeze those in. What are your assumption within the full year guide for tax rate and weighted average shares?

Mark Novakovich

So, our tax rate will be sub 10% this year with a bigger distribution of our income domestically and we’ll take advantage of the net operating losses that we’ve accumulated. So I think if you think of that in terms of 5% to 10% that should be in the range that we’re modeling as well. And the second question, could you repeat that one?

Robert Stone

You’re buying back stock. I know you can't necessarily predict what you’ll do, which depends on market conditions. But behind the non-GAAP EPS guidance that you gave, can you say what you were assuming for weighted average shares for the year?

Mark Novakovich

Yes, so our current actual number of shares is about 23.4 million which since you pointed out we’ve been buying back shares, so that’s down from prior levels. On a fully diluted basis it will be just short of 24 million; 23.9 million is what we’re modeling in our guidance numbers.

Robert Stone

Thanks very much.

Operator

We’ll take our next question from Steven Frankel with Dougherty. Please go ahead.

Steven Frankel

Good afternoon. Let me parse the guidance a little bit. So you talked somewhat about Pakedge’s growth rate. But should we think about the core business kind of growing at the same rate in ’16 that it did in ’15 or do you think some of your marketing initiatives are going to lead to an acceleration in your growth rate in ’16?

Mark Novakovich

We’re modeling a slight improvement in our core business growth rate. We’re optimistic about the year, but prior to declaring victory we want to see Q4 come in at the numbers we’ve guided to.

Steven Frankel

Okay. And then maybe help me a little bit on this notion that OpEx is going to be flat for the core business. What kind of incremental OpEx are we talking about for Pakedge?

Mark Novakovich

So their OpEx is similar to ours in terms of percentage of revenue on an annual basis. In the first part of the year as we have overlapping operating expenses and prior to achieving synergies, we’re expecting to have a breakeven contribution on a net income perspective. But in the later part of the year, we expect with those synergies and as we start to see revenue growth that their operating income will be above the 10% type level that we saw for Control4 in 2014.

Steven Frankel

Okay. One more housekeeping question and then a higher level question. What was the Canadian core number in the quarter?

Mark Novakovich

The Canadian core revenue? Ask as a question and I’ll -- we’ll look for that. They typically are about 10% of our total revenue. So for the quarter it was probably around $4 million.

Steven Frankel

And then, Martin, you and I’ve spoken in the past about the dealer channel not always being great at converting leads to deals. You seem more optimistic about that now. What's changed or what will be different in 2016 that will help your lead generation get translated into transactions?

Martin Plaehn

Well, I think that having a couple of things, number one, we were at the tail end of our product lifecycle for the HC series. The new EA series spans a broader range of customer use cases. The EA1 and the $600 price point is fantastic for going after one room home-theater, home family rooms which is a larger market, but yet smaller transactions. So we think, and the dealer feedback that we’re getting even within the last week and the half is absolutely tremendous with regard to them getting that opportunity.

Our telemarketing sort of concierge cultivation of leads is making improvements though we’re only at a small scale, and we’ll be shifting within our P&L, we’ll be shifting more attention towards that without growing our P&L. I think that new products and new software and new capability always drive our channel, and we’re coming out with new products right at the beginning of the year and I think that will enhance our visibility within our channel which will help them generate local business in addition to what the demand that we create and cultivate.

Mark Novakovich

And Steve, just follow-up on the Canada question, I said $4 million previously. It’s just below that at $3.5 million in the fourth quarter.

Steven Frankel

And do you -- have you seen any signs of stabilization in Canada or you expect that to continue to be tough in ’16?

Martin Plaehn

This is, Martin. We believe that it will be tough in ’16. We have the added benefit of providing Canadian dollar pricing and Canadian dollar commerce to our dealers in Canada that’s brand new for this year, and that should help. But the economy in Central and Eastern Canada is still rough and we’re being cautious.

Steven Frankel

Okay. And is there anything you can do to fix the issues with your significant retail partner in the U.S. or it just is what it is, and you work harder on the rest of the business to make up for it?

Martin Plaehn

The latter.

Steven Frankel

Okay. Thank you.

Operator

[Operator Instructions] And we will go to Rob Stone with Cowen & Company. Please go ahead.

Robert Stone

Hi, Mark. I just had a follow-up. I wanted to make sure I’m understanding your commentary about expenses correctly, because you talked about keeping expenses flat year-over-year, but then there’s incremental expenses for Pakedge integration. And then you said, expenses for Pakedge are sort of similar to Control4’s model, but more overlapping expenses in the first half of the year. So, do I understand that all correctly in the sense that relative to revenue expenses on the new guide are going to be within the same kind of model, but in absolute dollars there, they’re going up in relation to the addition for Pakedge, is that right?

Mark Novakovich

Correct. Our historical Control4 business will see operating expenses contained within the envelop of expenses that we saw in 2015. Obviously the Pakedge expenses will be incremental. We have a large engineering team that will contribute to our R&D efforts particularly in the networking space there. There’ll be some synergies in sales and in administration and we’ll see those synergies start to take effect in the later half of the year. And we expect that their contribution -- their net income contribution will be incremental to, to what we otherwise would have generated.

Robert Stone

Okay. And I guess, in general your non-GAAP numbers exclude sort of onetime items and transaction related costs. So, are there -- in Q1 are there some onetime items related to this transaction and do you expect any other Pakedge related onetime items for the balance of the year?

Mark Novakovich

You’re correct that we’ve excluded the onetime charges associated with professional fees, diligence related expenses that were onetime type items. We’ve excluded those from the non-GAAP guidance that we’ve given. We don’t anticipate any significant charges associated with -- that with non-GAAP associated with the transaction in Q2 -- Q1 and Q2.

Robert Stone

Great. Thanks.

Operator

We’ll go next to Saliq Khan with Imperial Capital. Please go ahead.

Saliq Khan

Thank you. Hi, Mark. Hi, Martin.

Martin Plaehn

Hi.

Mark Novakovich

Hi, Saliq.

Saliq Khan

Hi, guys. Regarding the acquisition of Pakedge, what are some ways that your team can bring about more efficiencies, reduce the overall cost to actually help increase the operating profile of that company?

Martin Plaehn

Well, this is Martin. Number one, they’re a small company relative to us. They’re roughly 12%, 13% of our size. That means that, the assets that we have with regard to supporting and marketing to our channel are big boosters to their business without having them build that out. We have a small -- we have a small administrative staff and finance staff that will be consolidated. And there were other operating synergies that are relatively small on the combined scale. The big opportunity for us is to provide very premium high function, high durable networks into every single Control4 project and have our dealers also provide powerful networking tune for the connected home whether they use Control4 or not as an automation system. So this is a broad platform for that sits underneath our larger expanding business, as well as provides an avenue to expand our horizon to even applications that don’t include traditional automation.

Saliq Khan

Would the -- the second question I had for you is that, would the new partnership that you have right now with GreenSky to provide new consumer financing options. What percent of potential customers do you believe are likely to take advantage of this? And do you anticipate a meaningful increase in sales because of this?

Martin Plaehn

That is a good question. Obviously we believe it should help in certain areas. We plan -- we’ve rolled it out to our dealers. We’ve started to see dealer’s signup with GreenSky. The adoption rate is at the very, very early stages. And I would say sub 1000 dealers out of our large dealers, so there’s a lot of green field there. With the launch of the EA series, especially the EA1 at the $600 price point plus installation and possibly plus third party products, the GreenSky financing option maybe a powerful tool in conjunction with that program for single room AV. This is a marketing affiliate program with GreenSky. We’re investing our time and access to our channel. It’s really the benefit for consumers that GreenSky can provide.

Saliq Khan

Now deals that you had mentioned Martin was, the EA series now, we realize that Q1 is seasonally the lowest revenue quarter, however the inventory build up that you saw was somewhere around 40% increase year-over-year. You noted this was largely due to the anticipation of sales of the new EA series. Does your revenue guidance for 2016 account for the increase?

Mark Novakovich

Saliq, I’ll just remind you, that build up on a year-over-year basis is in large part due to the acquisition of Leaf which happened in January of 2015. So we currently have about $2 million plus of revenue from Leaf that wasn’t on the books at the end of 2014. The other elements of the revenue build up -- the inventory build up as you point out are the EA series which was proportionate to the launch that we’ve had so far. And in addition normal built up of an inventory to support the growth of our business. So, nothing there that would require creative planning on our behalf as we go into 2016.

Saliq Khan

Got it. And guys one last question on my end and I’ll hop back in the queue. I’m not sure if you noted this earlier, but the administrative counts were up almost 20% year-over-year. What caused this change?

Mark Novakovich

There’s two elements that in terms of absolute dollars, one was the cost associated with acquiring Leaf, and early in the year there were some one time charges. So if you’re looking at a GAAP number that would include that. In addition we had higher non-cash stock compensation with related expenses; otherwise there was nothing that wasn’t tied to your normal growth of the business.

Saliq Khan

Got it. Thank you, guys.

Operator

Thank you. We’ll go next to Gregory Weaver with Invicta Capital. Please go ahead.

Gregory Weaver

Hi. Couple of questions on Pakedge; how much of that, their business is commercial versus residential roughly?

Mark Novakovich

Right now it’s a fairly small percentage of their business, less than 10%.

Gregory Weaver

Is commercial?

Mark Novakovich

Correct.

Gregory Weaver

Okay. And in terms of the company itself, was it being [indiscernible] at all?

Martin Plaehn

Not to our knowledge.

Gregory Weaver

Okay. And in terms, did their products do HD video, distribute HD video?

Martin Plaehn

As IP -- over IP, yes, as streaming video.

Gregory Weaver

So how does I guess, Leaf fit into this post acquisition?

Martin Plaehn

Leaf is HDBaseT distribution, and also moving towards IP. So there is a convergence place of both of these technologies for video distribution in the home.

Gregory Weaver

Okay. So they’re complementary?

Martin Plaehn

They will converge over time. Technologically they will converge over time. Everybody is looking at, how do you deliver video over IP? And right now, HD or premium content with DRM for the security requires a special chipset and special processing and that’s what in the Leaf product line today.

Gregory Weaver

Okay. And what other -- what were the other non-overlapping Control4 dealers using to handle their networking generally?

Martin Plaehn

There’s a lot of choices for dealers throughout -- there’s people that use Ruckus, there are people that use Ubiquiti, there are people that use Airport Extreme from Apple, there are people that use Luxul. There’s a broad swath, what we do know is that underneath most significant Control4 projects, medium to large is new network infrastructure as the foundation. We also know that our dealers still spend a lot of time with networking and we know that also via our tech support the frequency of network related calls that we get during installation and the frequency of network support issues that we receive. So this is a very central topic of our dealers, of our business, and putting it as a foundation and a core confidence within Control4 we believe will be a long-term asset and help us grow our business.

Mark Novakovich

And Pakedge sits nicely among its competitors, particularly in the professional install CEDIA channel, they’re a category leader.

Gregory Weaver

Okay, great. I appreciate the color, and sound’s good. Thank you.

Mark Novakovich

Thanks.

Operator

At this time I’d like to turn the conference back over to management for any additional or concluding comments.

Martin Plaehn

Thank you very much for joining us on the Q4, 2015 call, and the first call of 2016. We’re excited about our new products that they’re in the field, that the reception is being strongly felt by our dealers and end customers, and we’re looking forward to a stronger 2016. Thank you.

Operator

Ladies and gentlemen, this does conclude today's call. Thank you for your participation.

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