Control4 (Nasdaq:  CTRL), a leading provider of home-automation systems for professional installers, had another banner quarter in Q3, ended Sept. 30, 2017. Revenue was $64.7 million compared to $55.2 million for the Q3 2016, representing 17% growth year-over-year.

The company expects even higher revenue for Q4 of this year, between $66.3 million and $68.4 million. Its stock price has soared over the last 12 months from a low of $10.80 to a recent high of $34.10. Not bad considering CTRL was trading at sub-$6 less than two years ago.

What’s striking is that Control4 has done nothing particularly “remarkable” in a smart-home industry that is rife with hype, especially over the past few months.

Instead, the company continues to focus on fundamentals: improving hardware performance, enhancing the user experience, removing obstacles like monthly fees for recurring services, marketing to end users to generate leads for dealers, upping incentives for dealers, and offering ambitious new network training through its Pakedge group – in an era when cybersecurity hacks can threaten the smart-home business.

Pakedge, Triad Acquisitions Pay Off

Control4’s strategic acquisitions of Pakedge in 2016 and Triad Speakers in Q1 2017 are bearing fruit. Existing Control4 dealers are adding these lines in order to boost their overall purchases with the company, and because ordering is so simple through the Control4 portal.

“Much of our field sales focus in 2017 has been on educating our channel and facilitating the adoption of our new products including both the Triad and Pakedge brands,” said Control4 CEO Martin Plaehn during a Q3 earnings call on Nov. 2.

This year, 56% of Control4’s active dealers – 2,904 companies – purchased Pakedge products.

As for Triad, which used to sell its high-end, made-to-order speakers to an exclusive group of dealers, is now offering its wares to any Control4 dealer, boosting its customer base significantly.

So far this year, 32% of active Control4 dealers – 1,645 companies – purchased Triad speakers.

Triad revenue in Q3 was $3.8 million – a whopping 52% more than the same period in 2016 before the acquisition.

In the case of both Pakedge and Triad, Control4 introduced lower-priced systems to hit the broader market that Control4 dealers tend to serve – the $300 WR-1 wireless router from Pakedge, and the $700 Triad One streaming amplifier at $700.

The Triad One is considerably more expensive than Sonos, for example, but infinitely better in performance (high resolution audio), connectivity (digital and analog audio inputs, IR outputs, line-level subwoofer output) and of course integration with Control4.

While these products wouldn’t affect Q3 numbers, they are likely to generate more Pakedge and Triad business from Control4 dealers in the final quarter of the year.

Look for more acquisitions like these. As Control4 CFO Mark Novakovich said in the earnings call, “Our strong balance sheet and expected cash flows from operations 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.”

Cutting Uncommitted Dealers, Adding Eager Beavers

Plaehn mentioned in the call that many unproductive Control4 dealers would be dropped from the ranks, while hungry newcomers would be added to the roster.

“[W]e intend to more assertively review our 5,000-plus dealers with regard to their ability to successfully market, sell, install and support our solutions,” he said, warning investors now so “there will be no surprises with respect to possible decreases in total dealer counts due to our assessment that certain dealers no longer meet our technical competency and business performance requirements to continue.”

He said the cuts should be in the single digits as a percentage of all Control4 dealers.

While noting his confidence in the existing dealer base, he also explained that a “more significant channel planting, fertilizing and [missing from transcription] is appropriate to help our entire ecosystem be more effective, efficient and to drive continued growth.”

Plaehn noted “continued interest from potential new dealers,” perhaps referring to companies who have been denied dealerships in markets that are already saturated with Control4 providers.

Pruning some of the less-committed or high-maintenance dealers will make way for an enthusiastic freshman class culled from “both traditional audio-video dealers as well as dealers who historically have focused on IT, security, electrical or HVAC offerings,” Plaehn said.

He added that Control4 doesn’t plan to categorically fire the lowest-revenue dealers, but the company will look at “that bottom 8% to 10% and go talk to them … about their competencies, their readiness, their programs and their outlook, their business outlook.”

If the outlook is favorable, he said, “we're going to continue to support them.”

On the other hand, for dealers who don’t project a positive future with Control4, “then a different kind of conversation will happen.”

Paring the dealer base is nothing new in the home-tech industry or any other industry for that matter. Crestron just went through a significant round of dealer layoffs, and AMX famously did it many years ago. In virtually all cases, the uncomfortable initiatives pay off for the vendor.

Here’s an interesting exchange from the call, as transcribed by SeekingAlpha.com:

Steven Frankel, Dougherty & Co.

… I know there was this discussion around raising the bar for dealers and therefore maybe more aggressively trimming the dealer base. Your dealers tend to be small organizations that aren't very capital intensive. So to continue your growth rate, if you're going to shrink the base a little bit or maybe keep it flat, are you going to drive more wallet share or are you going to raise the size of the typical install to get that incremental revenue growth?

Martin Plaehn, CEO

So Steve, in simple terms, there are 2 axes to drive growth. One is the frequency of projects and the second is the magnitude of what's in those projects. So the magnitude of what's in those projects we call internally rack share. Other people call it wallet share.

But the other axis that most don't speak about is project frequency or project share, ranging from small projects all the way up to very large projects and how frequently does a given dealer or a set of average dealers or a cohort of dealers perform projects that have Control4 products in them. And part of our review is to really look at project frequency with our dealers. For example, a dealer who does 1 project a year but it adds $150,000 worth of Control4 product in it is interesting, but it sure would be better if he could do 3 projects a year and so we want to — I'm taking an extreme example. But we want to look at that.

So when we talk about evaluating a good portion of our dealer network, we're looking at the bottom end, when you stack rank them by contribution and you stack rank them by frequency of ordering with Control4. And then we're going to talk to them about what are their plans, what's their outlook. 

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