Valuing a Home Automation Co.: How Will Control4 IPO Fare?
Just as Control4 goes public on Nasdaq (CTRL) CE Pro's Julie Jacobson compares Control4's valuation to other home automation companies, explores Control4's growth strategy, and reflects on the company's prospects.
Is that a proper valuation for a manufacturer of home controls including thermostats, lighting control, whole-house audio/video, universal remote controls, touchscreens and other pieces of a home automation ecosystem? Market makers seem to think so.
When Control4 filed its first S1 on July 1, shareholders indicated a willingness to go public if they would be valued at no less than $225 million. Three weeks later, after dog-and-pony shows with investors, the company set its potential valuation at more than $400 million.
The company is offering 4 million shares – or about 18 percent of Control4 after the offering—at $16 per share, the midpoint of the price range that had been set at $15 to $17.
When CEO Will West, CTO Eric Smith and marketing executive Mark Morgan (no longer with the company) founded Control4 in 2004, CEO West boasted, “It ought to be a launch that really hasn’t been rivaled by anything.”
He was correct.
Valuing a Home Control Co.
Until recently, we had few barometers to judge the value of a home-control company since they’re mostly privately held.
But earlier this year, Nortek Inc. (Nasdaq: NTK), a group of home- and building-technology companies, acquired 2Gig Technologies, which is something of a Control4 competitor, sans audio/video, at the lower end.
Purchased under Nortek’s Linear security division, 2Gig was sold for about $135 million, or about 1x estimated revenue.
Control4 (CTRL) Financial Highlights
- There are an estimated 120,000 homes cumulative that have more than 275,000 Control4 devices in them.
- The company has installed solutions in 81 countries.
- Control4’s top 100 dealers represent 24 percent of the company’s total revenue in 2012.
- Control4 has 333 employees.
- Company revenues were $74.9 million in 2010, $93.4 million in 2011 and $109.5 million in 2012.
- Company losses for the past three years were $16.3 million (2010), $3.9 million (2011) and $3.7 million (2012).
- For the first quarter of 2013 through the end of March, the company reported $26.6 million in revenue with a loss of $1.5 million.
- In the Risk Factors section of the filing, Control4 reports, “For substantially all of our history, we have experienced net losses and negative cash flows from operations. As of March 31, 2013, we had an accumulated deficit of $107.1 million.”
Like Control4, 2Gig apparently has not been profitable since its founding in 2007. Nortek does not report the subsidiary’s net income, but an SEC filing indicates 2Gig had a net loss of about $900,000 in Q1 2012,
Control4 had revenues in 2012 of $109.5, with a net loss of $3.7 million, so its valuation is potentially about 3.6x revenues.
Use caution, however, when comparing the 2Gig deal to Control4’s IPO offering.
For starters, 2Gig was initially sold as a bundle with Vivint – a security and automation service provider that is heavily linked to 2Gig—for more than $2 billion to a fund managed by Blackstone (NYSE: BX).
Blackstone quickly divested 2Gig in a deal that included several exclusivity and collaboration clauses that could only work with longtime partner Linear as its buyer. In a more “open” market for 2Gig, the company certainly might have fetched more.
Besides that, 2Gig is pretty much a pure-play security and basic-automation solution, whereas Control4 incorporates audio, video and a full array of wired and wireless subsystems for whole-home integration.
What is more, Control4 makes a large number of products – including media streamers, lighting controls, thermostats, touchscreens, remote controls, and more – compared to 2Gig, which only makes a handful of security and automation components.
Finally, Control4 has a growing commercial-automation business; currently, 2Gig focuses solely on the residential market.
Before the 2Gig deal, we can look to the acquisition of Home Automation Inc. (HAI) by Leviton in 2012. Founded 27 years ago as a provider of integrated security and home automation systems, HAI was sold for an undisclosed amount last year. Rumor has it the purchase price was about on par with annual revenues of an estimated $10 to $15 million.
Then you have to go way back to 2005 to find more hints about the valuation of a home-control company.
At that time AMX, a home- and commercial-automation business founded in 1982, wasacquired by Duchossois for $315 million. AMX was then a public company (Duchossois is not), so we know it had net income of $4.4 million in the third quarter ended Sept. 30, 2004, on revenues of $27.2 million.
Then again, that was AMX’s best quarter in company history – as it should be on the eve of an acquisition. The prior year, it had net income of $1.7 million for the quarter.
Additional Highlights from S1
I asked a custom electronics industry veteran who has a heavy finance background to point out some details beyond the usual in Control4’s S1. The person notes:
- “Overall, Control4 has a strong balance sheet currently. They are not in financial stress. There is plenty of cash and working capital.”
- The new money from the IPO is going into the business for growth “versus paying out to existing shareholders, as often happens.”
- Most of the current shares of owners are not able to be sold for at least 180 days or longer, “which is good.”
- Margins are increasing steadily, which is a “big positive.” In Q2 of this year, margins are predicted to exceed 50 percent.
- Control4 has a net operating loss carry-forward of over $80 million, which could possibly be utilized against a similar amount of future earnings to reduce income taxes, “which is a nice asset to have.”
- International sales as percentage of total sales is growing—about 20 percent now – which is a positive.
- Sales costs as a percentage of sales took a large increase in Q1 of this year: “I’m not sure why—perhaps investing a lot more in marketing in new areas and sales deployment.”
Control4 Growth Plans are Reasonable
Control4 isn’t pinning its short- to mid-term success on anything too crazy like becoming the “OS of the Home” or enjoying mass-market penetration through energy utilities – two of the loftier goals pursued by Control4 in the past.
Instead, it plans to do more (and better) of the same. Per the S1:
- Enhance software platform and products
- Strengthen and expand the global dealer network
- Increase penetration of Control4 in the core North American market
- Continue to expand beyond residential markets into light commercial, multi-dwelling units and hospitality.
- Enhance the Control4 solution with services and apps (Control4’s 4Sight remote monitoring and management service is strong but holds much more potential than the current offering; its application marketplace so far has been underwhelming).
- Pursue technology licensing opportunities (Sony has embedded Control4 in some of its A/V receivers, but response has been lukewarm; the strategy seems sound, however)
- Pursue strategic acquisitions (Control4 makes money on home automation attachments, so each new Control4-made device in the ecosystem can add substantially to the overall business)
Julie Jacobson, recipient of the 2014 CEA TechHome Leadership Award, is co-founder of EH Publishing, producer of CE Pro, Electronic House, Commercial Integrator, Security Sales and other leading technology publications. She currently spends most of her time writing for CE Pro in the areas of home automation, security, networked A/V and the business of home systems integration. Julie majored in Economics at the University of Michigan, spent a year abroad at Cambridge University, earned an MBA from the University of Texas at Austin, and has never taken a journalism class in her life. She's a washed-up Ultimate Frisbee player currently residing in Carlsbad, Calif. Email Julie at [email protected]
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