Control4 Corporation (CTRL) CEO Martin Plaehn on Q2 2018 Results - Earnings Call Transcript

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About: Control4 Corporation (CTRL)
by: SA Transcripts

Control4 Corporation (NASDAQ:CTRL) Q2 2018 Results Earnings Conference Call August 2, 2018 5:00 AM ET

Executives

Mark Novakovich - Chief Financial Officer

Martin Plaehn - Chairman and Chief Executive Officer

Analysts

Rich Valera - Needham & Company

Adam Tindle - Raymond James

Craig Irwin - ROTH Capital Partners

Nehal Chokshi - Maxim Group

Thomas Forte - D.A. Davidson Companies

James Medvedeff - Cowen & Company

Operator

Good day and welcome to the Control4 second quarter fiscal year 2018 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mark Novakovich. Please go ahead, sir.

Mark Novakovich

Thank you operator. Good afternoon everyone and thank you for joining Control4's earnings conference call for the second quarter of 2018. My name is Mark Novakovich and I am the Chief Financial Officer for Control4. With me on the call today is Martin Plaehn, our Chairman and Chief Executive Officer. Prior to this call, we distributed our Q2 2018 earnings release over the wire services and we have it posted on our website at investor.control4.com, as well as furnished it to the SEC on Form 8-K.

Before we begin, I would like to remind you that during today's call, we will be making forward-looking statements regarding future events and financial performance, including providing revenue and non-GAAP net income and EPS guidance for the third quarter and full year 2018. We caution that such statements reflect our best judgment as of today, August 2, based on factors that are currently known to us and that actual future events and 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 Q2 2018 earnings release. Control4 disclaims any obligation to update or revise these forward-looking statements to reflect future events or circumstances.

During the call, we will discuss non-GAAP financial measures. We do not provide full guidance on GAAP net income because of the variable and unpredictable nature of certain items excluded from non-GAAP net income such as certain acquisition-related expenses, stock-based compensation and certain litigation settlement expenses. Unless we specifically state otherwise, the non-revenue financial measures that we discuss today were not prepared in accordance with Generally Accepted Accounting Principles, in that they exclude these types of expenses that are detailed in the reconciliation of GAAP and non-GAAP results provided in today's press release and posted on the Investor Relations section of our website.

Now I will turn the call over to Martin.

Martin Plaehn

Thanks Mark. Welcome everyone and thank you for joining us. Today, we will share with you the highlights of another strong quarter including an update on recent program and product announcements and areas of continued strategic focus, which we believe will help drive our leadership forward in a professionally installed connected home market.

Here are the high level business results for Q2. Revenue for the quarter was $69.2 million, representing year-over-year organic growth of 13%. Strong Q2 revenue combined with non-GAAP gross margins of 53.9% and continued expense discipline enabled us to deliver non-GAAP net income for the quarter of $11.4 million, or $0.42 per diluted share. We generated $11.6 million cash flow from operations during the quarter and we closed the quarter with $83.1 million in unrestricted cash and investments, a net increase of $6.5 million during the quarter and we remained debt-free.

Control4's mission is to be both the platform ecosystem and a solution leader for premium automation and networking solutions for the connected home market. Control4 has captured only a small percentage of our potential market, which includes households with an annual income over $150,000 and we view this as a tremendous opportunity as we increasingly offer a broader range of innovative products, which enhance our ability to enable more homes to become smart homes.

During the second quarter, we continued executing on key operational business and product development programs that advanced our mission and our business strategy. Here is an update of key developments since our last earnings conference call.

First, in early May, we announced the opening of 140 Control4 certified showrooms, owned and operated by independent authorized Control4 dealers in more than 40 cities around the world. The Control4 certified showroom program was designed to create accessible and compelling destinations for homeowners, architects and designers interested in experiencing and learning more about smart home solutions. Each Control4 certified showroom delivers a powerful new way of engaging prospective and existing customers through personalized and interactive Control4 automation experiences.

Certified showroom dealers are verified experts in wowing homeowners through interactive storytelling, visually stunning displays and hands-on demonstrations. These dealers have demonstrated a deep understanding of how to properly convey and deliver the real-life benefits of living in a truly automated, personalized Control4 smart home. Control4, in concert with most of our certified showroom dealers, sponsored C4Yourself Day on May 31 as a grand opening certified showroom program event for end-customers, designers and architects. Several thousand individuals attended C4Yourself Day in one of over 100 locations. We were pleased with this first event's attendance and the resulting new business opportunities as reported to us by our dealers.

The Control4 certified showroom program including its qualifying criteria and operating standards have been made available to all 4,500-plus authorized Control4 dealers. And those authorized Control4 dealers who embrace and meet the program's requirements will earn the Control4 certified showroom designation. Since our program announcement on May 8, we have added 12 certified showrooms to the initial 140 and we are now in process with several dozen additional dealer applications, many of which are expected to have their showrooms certified before year-end.

Second, we continue our efforts to expand our potential market beyond custom homes by driving adoption of our new CA-1 Automation Controller and solution packages among production homebuilders that include intelligent lighting, climate control, peace of mind security and safety capabilities in their home designs. During the recent quarter, several hundred additional Control4 dealers with existing builder relationships embraced the CA-1 as a solution platform for non-entertainment automation installations.

We also continued to see increases in the number of regional and multiregional production homebuilders admitting to include Control4 automation as standard within the houses they build in the communities scheduled for the latter portion of 2018 through 2020. We are both enthusiastic and optimistic about this business expansion initiative and the emerging market opportunity. We believe that supplementing our traditional and growing custom home focus business by empowering production homebuilders in partnership with our Control4 dealers provides both fantastic and durable end-customer smart home experiences as well as industry recognized and reliable differentiation for production homebuilders.

Third, we continued to deliver incremental functionality and improved performance to our Control4 Pakedge and Triad branded product lines. We recently released our new Control4 Intercom Anywhere capabilities and a new mobile intercom application for iOS and Android devices. Control4's Intercom Anywhere is an extension to our 4Sight cloud service providing homeowners with direct audio-video communication via their mobile phone to and from any Control4 interactive audio-video touch screen within the home, as well as from the home's front door or entry gate through Control4's audio-video door station.

Intercom Anywhere is a central part of our newly released Control4 OS version 2.10.3 and our enhanced 4Sight subscription cloud service. In addition to releasing OS 2.10.3 and Intercom Anywhere, we added high-resolution cameras to the Pakedge product line. These cameras are all SDDP-enabled, POE-ready, easy to install and configure and provide highly reliable day and night indoor and outdoor video monitoring. We released a new Triad 1-Zone Power Amp to supplement the Triad 8-Zone Amp am, the Triad 12 and 24-zone matrices and the Triad One Streaming Amp that we began shipping last September.

We released Pakedge cloud service improvements and new firmware for our Pakedge wireless access points to optimize initial setup and configuration and to improve performance in multi-WAP installations. And we also released and expanded support for Amazon Alexa for more natural voice control of audio and television experiences within Control4 installations with 4Sight and we made Alexa integration available to Control4 customers in Australia.

Fourth, we strengthened our connected home platform and partner ecosystem including our simple device discovery protocol technology or SDDP. SDDP is Control4 software that is freely licensed to third-party manufacturers and built into their products to make integration with Control4 automation seamless. We believe that our extensive interoperability is one of the competitive advantages we provide to dealers who sell Control4 automation. The greater the SDDP partnerships, the greater the number of solutions dealers can offer to home owners.

As of June 30, SDDP is licensed by 295 companies, up from 284 we reported in May, which in turn are shipping approximately 5,600 products that are all SDDP-enabled, up from 3,375 models that we reported in May. The significant jump in SDDP-enabled products is due to several large television manufacturers implementing and shipping hundreds of SDDP-enabled new television models worldwide. Specifically, Samsung began shipping over 1,500 new SDDP enabled television models. LG began shipping more than 360 new SDDP-enabled TV models. And longtime SDDP licensee Sony began shipping more than 190 new SDDP--enabled television models.

Fifth, in early June, our continued focus on the pro-installed connected home market was recognized through the CEPro Top 100 Annual Business Survey, where the leading connected home integrators named Control4 the top brand in seven solution categories and among the Top 2 brands in four additional solution categories. Control4 was named the number one brand by the CEPro Top 100 for the fourth consecutive year in the solution categories of whole-house automation, multiroom audio-video distribution, access control and HVAC control. And we were recognized as the number one brand for the sixth consecutive year via our Pakedge product line for home networking solutions and newly recognized this year as the number one brand for video distribution and switcher solutions.

Additionally, Control4 was recognized as the number two brand by the CEPro Top 100 in the large and established solution categories of lighting, audio amplification and communication intercoms, along with remote management services by our recent acquisition of Ihiji, to supplement our BakPak investment from Pakedge. We continue to make investments in both product and programs in these solution areas with the aim to continue growing those categories within the business and gain broader visibility and market share.

Before wrapping up, I would like to share with you today that Control4 has appointed Charlie Kindel as Control4's SVP, Products & Services, reporting to me. Charlie will lead our product management, product design and development, testing and QA and release management groups which are responsible for all of our products, services and software used by end-customers and by our dealers' technicians. Charlie comes to Control4 with deep technology and customer centric design and development experience developed over many years of creating and delivering many of the world top class products.

Charlie spent more than 20 years at Microsoft and five years at Amazon where he started, lead and expanded Amazon's Alexa and Echo smart home group until this spring. Charlie's skills and experience with software platforms, open architectures, developer and partner ecosystems, mobile applications and scalable cloud services makes Charlie a fantastic fit to drive exciting innovation at Control4.

Charlie is hitting the ground running as he has already attended Control4's automation tech training class and he passed the exam, completed our hands-on and online Pakedge certified network administration course and has been co-designing and supervising a comprehensive installation out of home consisting of Pakedge networking, Control4 centralized lighting and video distribution, Control4 access control and intercom, Triad multiroom audio and home theater and a host of third-party products orchestrated and automated by Control4. We are thrilled to welcome Charlie to the Control4 team.

In closing, our business foundation continues to strengthen. We intend to continue leading in the professionally installed connected home market by concentrating on the key pillars of our business strategy, including one, grow and optimize our professional dealer network in the regions where we have direct presence including the United States, Canada, the United Kingdom, Germany, Australia and China as well as deepening our support for 51 international distributors covering the rest the world. Two, enhance our business service collaboration with our dealers, helping them acquire and fulfill more new business and serve their existing customers more effectively. Three, facilitate and support our large and growing device and partner ecosystem around the Control4 OS and remote management capabilities. And fourth, further develop or expand through acquisition our connected home solutions and platform services for homeowners across a spectrum of entry level, mid-tier and luxury high-end homes, as well as enable our professional installer channel to become more responsive, more effective and more efficient.

We believe a sustained focus on these initiatives will enable Control4 to deliver increased and long-term shareholder value by strengthening Control4 as a premium and preferred choice for homeowners and their families, custom and production home builders, independent connected home integrators and consumer electronic partners. We are pleased with first half of 2018 and we look forward to charging ahead.

With that, I will turn it over to Mark.

Mark Novakovich

Thanks Martin. We appreciate everyone's participation on today's earnings call and will shortly open the call to any questions you have at the end of our prepared remarks. First, I would like to share additional details about our recent strong financial performance and provide guidance for the second quarter and full year 2018.

As Martin mentioned, total revenue for the second quarter of 2018 was $69.2 million, a year-over-year increase of 13%. Year-over-year, North America core revenue and international core revenue grew 11% and 18% respectively for the three months ended June 30, 2018. We continue to see growth from net new dealer additions as well as existing dealers with same dealer growth driven by an increase in the number of projects that are being performed as well as increased project share which we believe is driven by growing consumer demand for smart home solutions coupled with our new product innovation and acquisition strategy.

The category of other revenue, which consists primarily of hospitality business and in-store commercial audio-video switching products in Australia, contributed $1.7 million in the quarter, compared to $1.2 million in Q2 2017. We shipped 28,871 controllers during the quarter, representing a 10% increase over the same period of 2017. Our EA-1 and CA-1 controllers are designed to broaden the addressable market for our solutions by providing single room and lower cost solutions, which typically involve more narrowly defined use cases with fewer connected devices.

In the first half of 2018, 26% of the Control4 automation projects our dealers installed were single room or starter systems consisting only of a controller or a controller paired with a handheld system remote. Our non-GAAP gross margin percentage for the second quarter of 2018 was 53.9% compared to 53.6% in Q1 2018 and 52.6% in Q2 of 2017. The year-over-year and sequential quarterly increases in non-GAAP gross margin percentage result primarily from a combination of favorable fluctuations in exchange rates in markets where we sell our products in the local currency, lower programmatic and discretionary price reductions and a steady increase in 4Sight subscriptions since we begin enabling customers through an either subscription online and directly with us which began in the second half of 2017.

As we have previously mentioned, we have began making incremental investments in our global fulfillment centers to accommodate continued growth and improve delivery times to our dealers. We anticipate expanding our North America fulfillment capabilities in late Q3 or early Q4 of this year. And our expansion of these investments in the coming months and quarters will moderate our gross margin improvements during the balance of 2018.

Recently, the U.S. government has announced new tariffs on goods imported from China. The first of these new tariffs on certain classes of imported goods went into effect on July 6, 2018 with additional tariffs on many additional classes of goods currently expected or under consideration. We have performed an initial analysis of our products and their respective HTS or harmonized tariff schedule classifications to assess which products are subject to the currently communicated new tariffs. We have also reviewed our current inventory levels and expected arrival dates of additional inventory during 2018.

For Q3 and the balance of 2018, we intend to absorb and offset the impact of the currently communicated tariffs. We do not intend to change our product pricing in 2018 for existing product SKUs to our authorized dealers nor our product MSRPs for existing product SKUs in 2018 for end-consumers. Our improving gross margins, operating expense leverage and discipline and lower tax rates resulting from the 2018 Tax Act give us the ability to absorb the potential impact of these tariffs. Our review, estimates and forecasts are factored into our second half 2018 operating plan as well as in today's reported guidance for Q3 and the full year 2018. We will continue to monitor information and changes to import tariffs so that we can best plan and navigate future periods and explore all options available to us to reduce the impact of tariff changes.

After considering the impact of our plans for fulfillment center expansion in North America and potential new proposed tariffs on our cost of goods sold, we believe that our non-GAAP gross margin percentages for the year will be slightly higher than 2017 and remain in our stated long-term range of between 52% to 54%, provided that no additional import tariffs impacting our products are enacted. Our non-GAAP operating expenses in the second quarter of 2018 were $25.6 million or 37% of revenue compared to $24 million or 39% of revenue in the second quarter of 2017.

Non-GAAP research and development expenses during the second quarter of 2018 were $9.5 million or 14% of revenue compared to $9 million or 15% of revenue during Q2 of 2017. The Q2 year-over-year increase in absolute dollars is due primarily to increases in salaries and wages including incremental staffing. For 2018, we expect R&D to increase in absolute dollars compared to 2017 as we continue to invest in new product development to drive future revenue growth but to decrease modestly as a percentage of revenue.

Non-GAAP sales and marketing expenses in the second quarter of 2018 were $11.1 million or 16% of revenue, compared to $10.6 million or 17% of revenue in Q2 2017. The year-over-year increase in dollar terms was driven primarily by incremental sales and marketing expense associated with expanding our support for our growing channel including additional staffing to support marketing and sales services provided on behalf of our dealers. During the third quarter, we will be attending CEDIA which results in an increase in our sequential quarter-over-quarter marketing expenses of approximately $1.2 million. For 2018, we expect sales and marketing to increase in absolute dollars compared to 2017 as we work to grow our international sales channel but to decrease modestly as a percentage of revenue.

Non-GAAP G&A expenses in Q2 of 2018 were $5.1 million or 7% of revenue compared to $4.5 million or 7% of revenue in Q2 2017. In the second half of 2018, we anticipate an increase in global facilities expenses due to higher lease rates incurred upon renewal of certain corporate leases and incremental space to accommodate growth. In addition, we will incur additional public company expenses associated with the expiration of the five-year period under which we qualified as an emerging growth company under the Jobs Act. The resulting G&A expense in 2018 will increase in both absolute dollars and as a percentage of revenue.

On a GAAP basis, our second quarter net income was $6.6 million or $0.24 per diluted share compared to net income of $3.7 million or $0.15 per diluted share in the second quarter of 2017. Our second quarter non-GAAP net income was $11.4 million or $0.42 per diluted share compared to non-GAAP net income of $8.3 million or $0.31 per diluted share in the second quarter of 2017. We continue to maintain a strong balance sheet with cash flows from operations, which enable us to continue to pursue growth through acquisitions and other investments that leverage our sales channel and are strategically aligned with our core business vision.

As of June 30, 2018, we had $83.1 million in unrestricted cash, cash equivalents and net marketable securities, an increase of $6.5 million from the $76.6 million we reported as of March 31, 2018. Our cash balance reflects activities during the quarter including positive cash flows from operations of $11.6 million, $3.6 million used to repurchase 150,000 Control4 shares from the open market, $1 million paid towards taxes related to the net share settlement of restricted stock units in lieu of issuing 41,274 additional shares of Control4 stock and $1 million to purchase capital assets and facilities improvements. As of June 30, 2018, we do not have any bank debt and we have available borrowing capacity via our credit facility of $40 million.

The Tax Cuts and Jobs Act went into effect on January 1, 2018 which, among other things, reduces the corporate income tax rate to 21%, which we will benefit from in the future after we fully utilize our net operating loss and other cumulative tax credits. During the second quarter, we substantially completed our evaluation of the act and as anticipated it did not have a material impact on our results of operations.

Turning to our forward-looking guidance. We expect our revenue in the third quarter to be between $70.5 million and $72.5 million. We expect our non-GAAP net income for Q3 2018 to be between $9.5 million and $10.5 million, or based on an expected 27.6 million fully diluted weighted average shares outstanding to be between $0.34 and $0.38 per fully diluted share. For the full year of 2018, we expect revenue to be between $273 million and $276 million and our non-GAAP net income to be between $38 million and $40 million, or based on an expected average 27.6 million fully diluted weighted average shares outstanding during the year between $1.38 and $1.45 per fully diluted share.

Finally and as a reminder, Control4 does not provide forward guidance on GAAP net income because certain non-GAAP adjustments are inherently difficult to forecast, whereas others relate to the amortization or expensing of items tied to historical events. That said, our earnings release posted earlier today includes a detailed list of non-GAAP adjustments and a reconciliation between GAAP net income and non-GAAP net income for Q2 2018, as well as our estimates of non-GAAP stock-based compensation and the amortization of intangible assets reflected in our non-GAAP net income guidance for the third quarter of 2018.

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

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question is from Rich Valera with Needham & Company.

Rich Valera

Thank you. Good afternoon. Congratulations, gentlemen. Martin, I was wondering if you can give us any color on the certified dealer program? What have seen so far for me, maybe in terms of lead-gen? Any color there? And then you mentioned you had, I think, a bunch of deals in the pipeline going through the process. can you give us any sense of maybe where you would expect to finish this year in terms of dealers that have gone through that certification process?

Martin Plaehn

So the showroom program is in its early days. The feedback from dealers and influencers, architects and designers and prospective customers thus far is positive. At our launch event, we had 3,000-plus visitors visit at least one of the 100-plus showrooms on the afternoon and evening of May 31. Many of our dealers reported that they received very, very solid interest and commitments for follow-on meetings to actually pursue quotations and business.

We are performing online digital advertising in the core cities where our showrooms are and directing those leads towards showrooms via telemarketing follow-up on those leads and helping make appointments. That is going reasonably well. Again, it's early days and we have designed those processes and new processes always need refinement and we are learning and improving. But the ground is very fertile and the feedback is very solid.

With regard to additional certified showrooms coming online since we launched the program, we had others in process that have not completed their certification by the time we opened the program to the public on May 8. They have completed about 12 more and then we have several dozen that are in the process that we expect to finish between now and the end of September and a few dozen more before the end of the year. So it's a nondeterministic process, but I would be pleased that we are north of 180 by year-end.

And then we have a good number of early-stage named interest leads for inbound registration of dealers who have said, I would really like to walk through the requirements, understand them better to make a decision on whether they want to embark on the process to become a certified showroom. So we feel very good about it. We are to drive traffic and new business to the existing ones. We are going to carefully add a few dozen more through the end of the year, make sure our processes scale and then continue to add more showrooms in 2019.

Rich Valera

That's great. Thank you for that color. And then Mark, I wanted to ask you some questions about gross margin. First on the [indiscernible] front, can you size what you are expecting to absorb as you absorb the cost of some of these tariffs on some of your products? [indiscernible] kind of 25 bips? 50 bips? If you can give any color there and then have you started look into potentially sourcing some of these products from those that are not being tariffed, i.e. non-China sources? If you can give any color on that?

Mark Novakovich

Yes. That's a good question and obviously, we have spent a lot of time evaluating both the known elements of tariffs as well as trying to anticipate the direction that it is going. We haven't published a specific number as to the impact in part because the ground is still shifting a bit and we have to narrow that down before we are willing to provide a range or specific number. But what we are comfortable with is our long-term guidance of 52% to 54%. And in fact in our prepared remarks we mentioned that in the second half of the year, we still think that when the year closes out, we still think we will be above our non-GAAP gross margin percentages for 2017. So we will continue to have overall some leverage or improvement in gross margins.

Rich Valera

And what about the sourcing, potential sourcing of any of those products? Have you seen any options?

Mark Novakovich

We are evaluating quite a few different options or scenarios from sourcing to other different strategies. And it still a little bit too early and in terms of sourcing, particularly, there is costs associated with making some of those changes and it is probably too early to make long-term commitments until we know more about the duration of some of these tariffs and the specific product classes that they are going to definitively impact.

Rich Valera

That makes sense. And one more if I could. Just could you guys give an update on 4Sight? I know you had made some changes there to try to increase the renewal rates. Just any sense of how that's been trending, if you could. Thanks.

Martin Plaehn

Yes, this is Martin. A year ago, we began enabling our customers to renew their 4Ssight subscription and existing Control4 customers to subscribe for the first time on their own. We provide a bounty back to our dealers even though the customers are doing that self-service. We have not reported 4Ssight subscriber numbers externally. We don't believe it's of a sufficient scale to start that baseline. We do see very good improvement in renewal rates and initial sign-up rates when talking directly electronically to end-customers for this service to be able to get status of your home when you are not at home, be able to interact with your home through voice through the cloud and our new Intercom Anywhere capability which is audio-video communication, to and from the home via mobile devices and our in-home voice communication devices. We see those as drivers of 4Ssight. Once we get to a sufficient scale, we will then begin to talk about it more publicly.

Rich Valera

Fair enough. Thank you.

Operator

And our next question is from Adam Tindle with Raymond James.

Adam Tindle

Okay. Thanks and good afternoon. Martin, I just wanted to start on revenue per dealer. I think it's still positive, but declined a little bit in the second quarter and I am sure there are reasons for that. But the competitive environment is as aggressive as ever on the low end of the connected home market. Can you just maybe talk about the trends in the quarters and how you think about maintaining ASPs within the customer base?

Martin Plaehn

I actually have not done the math, a quick math but the other metrics within our business revenue per controller, number of projects, that all seems to be very stable. Dealer sentiment is positive. They are very busy with all ranges of projects. We would like to see more adoption of certain classes of products for the first time as more and more dealers using our networking, more dealers using our audio speaker line, they are expanding and that certainly helps drive the numbers. So that's what we are really focused on is dealer adds, product adoption and project rates of new installations per week.

Mark Novakovich

And then I would add in, dealer engagement in terms of the dealer activity meaning purchasing Control4 products during a certain period of time is consistent. And that metric is relatively high and continuing in a range that we are happy with.

Adam Tindle

Okay. And just as a follow up, I think you alluded to this in the prepared remarks. Apple announced that it would open some of the products up with SDDP. Some investors think of them as a longer-term. Can you maybe just talk about the symbolism in that, especially on the back of Samsung and LG last quarter and what it means for Control4?

Martin Plaehn

Well, what Apple announced was that they were going to enable APIs for third parties, including Control4, to control Apple TVs, their Apple TV product of over IP. We are certainly working with Apple on that. That's an unreleased product. Our policy is not to talk about products aren't released. Apple has a different policy and they made those announcements and when the Apple TV next-generation ships with those APIs, we hope to be able to claim commercial support for that.

With regard to the broad industry, we provide connected infrastructure for the connected home, intelligent lighting, intelligent multiroom audio and video, things that get really built-in in a very durable way into connected homes. I think that that's distinctly different than the pursuits of many of the consumer product companies or the consumer electronics companies.

Adam Tindle

Okay. Thank you.

Operator

[Operator Instructions]. Our next question is from Craig Irwin with ROTH Capital Partners.

Craig Irwin

Good evening and thanks for taking my questions. So Martin, there has been a lot of interest recently in audio and the adoption of audio in smart homes and your Triad acquisition is looking pretty interesting in comparison to some of the other products in the market. As we looked at the pro forma disclosures, you acquired the assets, it was fairly obvious that we were seeing some acceleration of growth well above the corporate average. Can you maybe comment about how that growth has continued? And I think originally you had said that the profitability of the assets was below the corporate but you expected that to be remediated fairly quickly. Is this something that we can assume is at or near possibly above the corporate average in profit contribution?

Martin Plaehn

So the Triad speaker line is certainly a very high value brand, high-performance audio delivery for interim speakers, home theater speakers as well as for built-in architectural speakers. When we purchased Triad, they had a relatively small dealer distribution footprint. We have rapidly expanded that in North America, Canada, the U.K., Australia, China and that's certainly contributing to the revenue growth. That attachment of audio is just a natural attachment to the types of projects our dealers are doing every single week, which include multiroom audio and now the high-performance speaker component is becoming more and more Control4 product line via our Triad brand versus installing third-party product in which that revenue contribution would bypass Control4.

Mark Novakovich

And I would add, one of the value propositions that Control4 brought was the ability to invest a little bit more aggressively in new product innovation. I think you have seen that with the types of speaker products that have come to market at a faster pace than prior management was able to do. So that's helped accelerate the growth rate as well.

Craig Irwin

Great. Thank you. So my second question is about your incremental operating margins. in the second quarter, north of 43%, the past several quarters they have been as low as the mid-20s to high-30s. Can you comment maybe about the character of the revenue strength, whether this is specific to any product group or geography that you are seeing this incremental profitability? And is this may be driven a little bit by some of the investments that you have made in your fulfillment capabilities nationally and I should say globally?

Mark Novakovich

In terms of improving gross margins, it's driven primarily by three items. There is a little bit of favorable impact from the movement of the U.S. dollar relative to the local currencies in Australia, the U.K. and Canada where we price our sales in those local currencies. But more importantly, Martin mentioned that we are seeing an increase in 4sight subscriptions and that's having a positive impact on gross margins because of the high margin nature of those subscriptions and that's something that we think is durable as we continue to expand subscription rates for 4Ssight. And then the last piece is just how we have managed programmatic discounting, whether it's volume instead of rebates or types of promotions that we are running to drive adoption of our products. So that's had probably the biggest impact on gross margins. And then we are seeing across the board growth contributions from the majority of the product categories that we sell.

Craig Irwin

Great. Thanks again and the congratulations on the strong quarter.

Operator

Our next question is from the Nehal Chokshi with Maxim Group.

Nehal Chokshi

Thanks and I would view the hiring of Charlie Kindel as a huge testament to the durability of Control4's business. I think this is a huge win. Can you describe the evolution of relationship with Charlie? And did he start only when he resigned from Amazon in April or before then?

Martin Plaehn

So Control4 and Amazon have a multifaceted business and technology relationship. The center of that is around the Alexa product line where the Control4 team interacted with the Alexa team. That's how we got to know Charlie and his team members. In late April or early May, I think it was, Charlie put his hand up and said he was going to be leaving Amazon and as he tilt that offramp of that superhighway, the Control4 team was at the base that offramp and said we have got an on-ramp on to something that's exciting and different, a different slant on the connected home, a durable one, a different place in the food chain and that's when the conversations got far more material. And Charlie is here this week. He started this week and we are really excited about his background, his passion for the space, his knowledge of software, hardware, customer experiences and partners in channels. So were excited. It's a big job. He deserves it.

Mark Novakovich

And as you can imagine, we weren't the only company waiting at the bottom of that offramp trying to get him to join our company. And so we are pretty happy that he chose Control4. And I think you highlighted something that we agree with that we have a compelling business and he is going to be able to help us continue to grow and take the company where we think it can go.

Nehal Chokshi

I guess it didn't hurt either in terms of the competition for Charlie that in his personal blog that he stated he was going to call CEDIA integrator to help make his smart home really smart.

Martin Plaehn

Well, what we do is sophisticated and requires mastery and is expected to be beautiful and work and that takes experience and focus and repetition and most homeowners don't get to do it many, many, many times in order to gain that mastery. So we believe that delivering compelling connected home products and experiences through professional channel for a large portion of the connected home market is a very viable and durable path. And that's the one we are on, that's the one we are focused on.

Nehal Chokshi

Is Charlie going to be moving to Utah or will he be working remotely?

Martin Plaehn

His base is here in Salt Lake City. His home is in Washington. Currently has temporary housing and he will work that out but we expect him here every Monday through Friday.

Nehal Chokshi

Okay. Great.

Martin Plaehn

One of our other facilities or with industry partners in the field and maybe a day or two on vacation.

Nehal Chokshi

All right. And then a question for Marc. Can you give us any indications as far as where organic growth rate for the quarter? And then presumably I think you are basically guiding to a step-down into the year-over-year growth rate for the back half of the year. Is there anything more than conservatism that's embedded in that?

Mark Novakovich

No. Our organic growth rate for the quarter was just under 13%, I think 12.8% and as we look at the second half of the year, we are anticipating sequential quarterly growth going from, sorry, my mind just went bank. Going from $69.2 million up to $72.5 million. And a little bit of conservatism. Obviously each quarter, for us, becomes a record quarter and we have confidence in our ability to grow those numbers. But as a book and ship business, I think it's prudent to be cautious in how we approach the quarter from a revenue perspective.

Nehal Chokshi

Okay. Great. Thank you very much.

Operator

Our next question is from Saliq Khan with Imperial Capital. Saliq Khan, your line is open. And our next question is from Thomas Forte with D.A. Davidson Companies.

Thomas Forte

Hi. I am looking for any further update on performance of the CA-1 controllers since their launch in February? And also what it says about the opportunity in production houses going forward?

Martin Plaehn

So we made a few mentions of that in our prepared remarks. We launched that product in the first quarter. We had good early adoption. That product is focused on non-entertainment installations, that's lighting, heating and cooling, access control, door locks, windows shades and security and specifically targeted at a new segment that we want to go after which is production builders. So in the second quarter, we got continued attachment to additional dealers ordering the CA-1 for the first time. We made progress on singing additional production builders who will commit to put Control4 in each of the homes that they build. So directionally, much like the certified showroom program, these are new programs that existed for single digit months. All the feedback that we are getting from the constituents through the value chain is positive. There are areas that we certainly are going to improve and there are areas that we are going to replicate or double down on. But we currently feel good about it. We are not quantifying it publicly.

Thomas Forte

Okay. Great. And then the second question is, without getting into any specifics, what areas you looking at broadly for M&A going forward?

Mark Novakovich

Broadly, it's products that plug into our platform, products that our dealers know how to sell because they are relevant to the connected home and businesses that deepen our presence in the markets which we already play.

Thomas Forte

Great. Thanks.

Operator

Our next question is from James Medvedeff with Cowen & Company.

James Medvedeff

Hi. Good evening. Thanks for taking my questions. I want to go just a little bit more into the certified showroom program. Do have target levels for sort of incremental sales per dealer that you think might come out of those showrooms or out of that program?

Martin Plaehn

Of course, we do.

James Medvedeff

Are you able to share those with us?

Martin Plaehn

No.

James Medvedeff

No. Okay. And when it comes to building one of those or furnishing one of those, what is the expected cost or sort of the average cost to a dealer to actually build one of these things?

Martin Plaehn

Well, it can vary greatly. The initial set of dealers that we recruited and were interested in the program had retail space already. It wasn't an incremental investment to them. Many of those were refreshes to the look and carpeting and products. We provided products to those showrooms at a discounted rate through our standard program. They can vary from tens of thousands of dollars to high tens of thousands of dollars of investment. The nature of the business that we are in is with single digit incremental projects will justify these showrooms on a dealer-by-dealer basis.

James Medvedeff

Okay. Thanks. And then I had a couple of questions about expenses. So R&D, starting with R&D, it seems to be trended down from the first quarter and it's not tracking higher versus last year or I guess barely. How should we think about that going forward? And to what extent are you or how is it that you are able to keep those expenses so low and keep introducing the new products?

Mark Novakovich

So the two primary components to our R&D spend are headcount which is, by far, the largest and we have certainly added more headcount this year. At the same time, it's a very competitive environment and so to the extent that people leave, it creates gaps that become increasingly more difficult to fill. So some timing related decreases relating to headcount. And then the other piece is, when we develop new hardware products, whether it's regulatory or beta or other hardware related costs, those costs and the period we incur them can impact the trend. And so that sometimes is somewhat cyclical. Q2 was relatively low. It's some of the cost that we expected to see hit in Q2 on the hardware front will carry over into the back half of the year and that's reflected in our guidance overall. So hardware, it's not atypical for it to vary a bit from quarter-to-quarter given those chunks of expense that come from hardware development.

James Medvedeff

Thanks. And then on G&A or first of all on S&M, you said about $1.2 million incremental for CEDIA this year and then I assume it ticks down in Q4 as it has in prior years?

Mark Novakovich

Correct.

James Medvedeff

And then G&A appears to be at this new run rate of about $5.1 million on the things you mentioned, the public company costs and the lease rates. So is this the new run rate? Does it stay at this level? Or does it begin to drift up from there?

Mark Novakovich

There is still a bit of variability and some cost that aren't fully baked yet into our run rate, but not materially. It may shift $100,000 or $200,000 a quarter, depending on, for example, when is the auditor out doing work on stocks related to controls testing or when does new space come online from a lease. But the current run rate isn't that far off from what it would be assuming we don't add headcount and don't factor in your normal annual increases.

James Medvedeff

Okay. Great. Thanks for taking my questions.

Operator

Due to the interest in time, our last question is from Saliq Khan with Imperial Capital.

Unidentified Analyst

Hi. This is [indiscernible], on for Saliq Khan. What has been reception of the early introduction of the lower price points CA-1 home automation controller?

Martin Plaehn

That controller, as I remarked in answer to prior question, was designed for non-entertainment applications of home automation including lighting, heating control, security and access control, lock, door locks and window shades. It is also designed specifically for the production builder opportunity for which we have put forth that the builder program.

Sales in Q2 exceeded sales in Q1. Dealers purchasing in Q2 exceeded dealers purchasing in Q1. Builders signed up for our builder program exceeded the number that we had in Q1. So all of those are improving and we are pleased with that direction and we are going to continue to build it. It's also notable that the introduction of the CA-1 did not materially dilute our revenue per controller. They have been very, very stable.

Unidentified Analyst

Thank you. And can you give us an update on the relationship with the Toll Brothers? And can we expect your channel strategy to change as the smart home industry evolves?

Martin Plaehn

Number one, our channel strategy is to work with local professionals, certified installers for Control4 products. We are resolute in that. We are unequivocal about it and we are unconflicted about it. With regard to Toll Brothers, we continue to work with Toll Brothers on a community-by-community basis. We are one of a couple partners they have in smart home related products and services and we look forward to continuing to deliver smart home experiences to their new homeowners as they purchase and build new homes.

Unidentified Analyst

Thank you very much.

Operator

I would like to turn the conference back over to management for any closing remarks.

Martin Plaehn

Thank you very much for joining us today. Thank you for following Control4 for the second quarter and the first half of 2018. We are excited about where we are and what we have from an asset standpoint, human, technology and financial. We look forward to our expanding opportunities and serving them in an excellent way and we will see you when we report Q3 in a couple months. Thank you.

Operator

This concludes today's call. Thank you for participation. You may now disconnect.