On Control4 (CTRL) Rise & Fall: The Trouble with Home Automation Analysts
Morgan Stanley analyst asks: “What is Apple Home Link?” as Control4 announces record IoT revenues and CTRL stock fluctuates wildly.
“One last question I have for you because I’m a little confused out there and there’s been some press on it and I haven’t seen any more,” the investor prefaced. “Could you just explain what Apple Home Link is? Does anybody know?”
Anyone that cares about Control4 – much less invests in it on an institutional level – should know what Apple HomeKit is and should be asking the question: “How will this DIY framework from the world’s most popular brand affect a little company that specializes in relatively pricey, proprietary home control systems?”
Control4 CEO Martin Plaehn acquitted himself nicely on the question-that-should-have-been, framing HomeKit as an unwieldy “early stage” program that requires device makers to implement Apple’s chipset and software and then pass certification to be inducted into the HomeKit club.
“Could you just explain what Apple Home Link is? Does anybody know?”
- Morgan Stanley analyst, during Control4 Q2 2015 earnings call.
“Just remember that Control4’s primary business is delivering automated solutions in the domains of … intelligent lighting, comfort systems, multi-room audio and video, and whether HomeKit exists or not is not going to impact our ability to deliver intelligent solutions to the market. … Apple is not going to be in the lighting business.”
Lighting and other Control4 subsystems comprise a huge chunk of the company’s revenues – about 65% of it, with home automation controllers (“hubs” in popular parlance) accounting for about 35%.
In Q2 2015, Control4 sold 20,908 controllers, compared to 17,516 sold in the second quarter of 2014, representing a year-over-year increase of 19%. Controller sales for Q2 2015 beat Q1 by 50%, offering some vindication to the company, which claimed the soft Q1 was due largely to back-orders for new products.
Overall, revenue for Q2 2015 was a record $44.6 million, a year-over-year increase of 22% and a vast improvement over the previous quarter by 39%.
Revenues came in more than $2 million higher than the consensus estimate of $42.36 million.
Control4 also beat analyst estimates on earnings per share.
Control4 recorded a non-GAAP net income of $4.1 million for the quarter or $0.16 per diluted share. Consensus estimate was $0.14.
Control4 sees Q3 2015 EPS of $0.10 to $0.16, versus the consensus of $0.16. Control4 estimates Q3 2015 revenue of $44-47 million, versus the consensus of $44.9 million.
Despite Control4’s strong performance in Q2 and slight improvement over analyst expectations, the market has been unkind.
Stock price began rising on July 30 in advance of the earnings report, ending the day at $9.11, up 12% for the day, and 22.4% over three days.
But the surge wouldn’t last. CTRL closed at $8.30 on July 31 and currently is trading at less than $8.
What the Institutional Investors are Missing
When Control4 went public in 2013, the stock was 10x oversubscribed. CEO Martin Plaehn did a good job of convincing investors about the long-term viability of the professional-installation channel for smart-home products and services.
As those investors tired of the stock, however, the newer group never got the memo about the growing market for custom-installed smart-home systems. They probably just wanted to play in the Internet of Things and they only had one option: CTRL (and later ALRM).
And then came the hoopla surrounding DIY systems and obscene valuations, like $3.2 billion for thermostat maker Nest, and $555 million for IP camera maker Dropcam.
Control4 would never be that kind of company.
Control4 also would never be the company that spends millions of dollars filling retail shelves with loss-leading home automation hubs that don’t sell (or support) themselves.
It isn’t. Just like it didn’t work for Revolv and so many others. Whole-house home automation is not an impulse buy. It must be sold, like it is today by ADT (Pulse), Comcast (Xfinity Home) and, yes, custom installers like those who sell Control4 and a dozen other systems like it.
Control4 does realize that its network of 3,400 authorized dealers cannot alone sell enough systems to double or triple revenues for the manufacturer. As such, the company is now testing various consumer-marketing campaigns that will formally launch in Q3 of this year.
As we discussed last quarter, we are building an in-house capability to better manage the sales lead and hand off process of qualified consumer interest to our dealers. This investment in telemarketing supplements earlier steps we put in place to direct local awareness and leads for our dealers. This activity serves as the foundation for accelerated lead capture in management as we ramp up direct to consumer online advertising beginning later in this quarter.
At the same time, Control4 is working to push its systems with national home builders like Toll Brothers and most recently Ryland Homes.
We know from two decades of such “builder programs” that a national deal is not necessarily fruitful but it rarely hurts (see: The Reality of ‘National’ Home Builder Agreements). In the case of Control4, its products are in model homes in 69 communities and the “attach rate for new buyers is very good on a percentage basis,” Plaehn says, “but the numbers are still ... they contribute, they’re meaningful, but I don’t put them at the scale of financially material.”
Even so, CE Pro is seeing some progress among dealers targeting production builders with Control4 and competitive products. If nothing else, it’s a big win for the visibility of custom systems and the dealers who install and support them.
Investors should be asking not how Control4 compares to “Apple Home Link” but to competitors in the professional installation or custom-configuration category. There are scores of more relevant competitors from 2Gig and Interlogix, to Crestron and Savant, to Icontrol and Alarm.com.
To be sure, Control4 may suffer if it continues to ignore the consumer enthusiast market, and if it fails to deliver a cloud-based platform and business model that generates recurring revenue for itself and its dealers.
Control4 may suffer if it continues to ignore the consumer enthusiast market, and if it fails to deliver a cloud-based platform and business model that generates recurring revenue for itself and its dealers.
It will suffer, too, if independent dealers can’t scale their businesses. Instead of installing 50 or 100 systems per year, they need to be doing 1,000+ homes to really move Control4 forward. At the same time, Control4 needs to give dealers some products and platforms that are even cheaper and simpler than its current offerings.
Control4 is doing well vis-a-vis its competitors. If its competitors were public, we would see Control4 doing better than most. But it will never be an exciting stock unless dealers ramp up their volume and Control4 taps the truly mainstream market.
In closing, we can’t malign all institutional investors. Steven Frankel of Dougherty won the investor-question round of the Q2 2015 earnings call, with two solid inquiries.
First he asked about the progress of Toll Brothers and the prospects for Control4’s newest homebuilder partner Ryland (nice but not financially material at this time).
And then: “f I go back to the IPO, I think there was a thought process that said overtime your remote monitoring revenue would start to build up and maybe could be something material to your results. Kind of where are you today with that?”
That is the million-dollar question, and here is the disappointing answer:
Martin Plaehn - Chairman, President and CEO
We continue to offer our 4Sight service for those homes that have security, lighting control, heating and air conditioning, camera control, door locks, things like that. It’s not directly applicable to homes that are multi-room audio and television-based or [home] theater-based. We have a good attach rate. It’s hundreds of dollars a year per home. Our installed base is growing. We’re in about 180,000 or 190,000 homes worldwide as a total, and the attach rate is a double-digit percentage of that, but it’s still of small number.
Dan Strong - CFO
And Steve, just from a dollar standpoint so the revenue – the subscription based revenue that we generate from 4Sight—is increasing and increasing at a pretty rapid rate, but it’s still not material to our overall number.
One more thing: small investor James Godbout posted this reasonable earnings report on Control4 today.
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Julie Jacobson is founding editor of CE Pro, the leading media brand for the home-technology channel. She has covered the smart-home industry since 1994, long before there was much of an Internet, let alone an Internet of things. Currently she studies, speaks, writes and rabble-rouses in the areas of home automation, security, networked A/V, wellness-related technology, biophilic design, and the business of home technology. Julie majored in Economics at the University of Michigan, spent a year abroad at Cambridge University, and earned an MBA from the University of Texas at Austin. She is a recipient of the annual CTA TechHome Leadership Award, and a CEDIA Fellows honoree. A washed-up Ultimate Frisbee player, Julie currently resides in San Antonio, Texas and sometimes St. Paul, Minn. Follow on Twitter: @juliejacobson Email Julie at email@example.com
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