Home automation powerhouse Control4 (Nasdaq: CTRL) announced record revenues of $208.8 million for the year ended Dec. 31, 2016, beating Wall Street expectations on many fronts (details here).
The results were reported after the closing bell on Thursday, Feb. 9. The next day, shares of CTRL jumped 20% to $13.93. Monday they were up another 13% to $15.74.
Over the past two trading days, CTRL shares surged 36%. (Curently, CTRL is down)
You’d think Control4 would throw a party or something.
Oh wait, they did! As earnings were being announced in the U.S., Control4 was throwing a party in Amsterdam for more than 400 dealers during ISE 2017, the big trade show for home- and building-technology integrators.
Control4 had hosted similar affairs in the past, but skipped last year because, well, what is the ROI on a stupid party?
Apparently dealers rioted last year after the social snub. This year Control4 relented, giving their customers another blowout.
Who cares about a party in the context of record earnings and a stock-trading frenzy? I do, I do: The party was emblematic of Control4’s rabid devotion to its dealers.
Martin Plaehn, the CEO of Control4 since 2011, is a combo operations guy and customer-service maven. His mission is to make rock-solid products (delivered on time) and do whatever it takes to please the company’s 5,000 dealers and to make them successful.
That mission hasn’t budged for six years.
In the past few years, Control4 has solidified dealer loyalty (from what dealers tell me) by:
- Delivering solid products that generally work well at launch; they tend not to fail.
- Acquiring “safe” companies (Extra Vegetables, Leaf, Pakedge) whose products make sense for existing Control4 dealers.
- Providing an e-commerce platform that makes it simple for dealers to purchase products and track inventory.
- Minimizing or eliminating recurring fees for dealers and their customers (made Extra Vegetables software free; eliminated fees for Pakedge remote network service).
- Building a telemarketing group that feeds leads to dealers.
- Working with home builders like Toll Brothers to feed more business to dealers.
- Not straying into DIY territory.
In other words, Control4 is doing well by being boring.
I haven’t seen a single risky move since Plaehn took over: New products are generally par for the course, incrementally better than previous generations; acquisitions so far have all been safe bets (Extra Vegetables software development, Leaf matrix switches, Pakedge networking); and business models follow the mantra: If it ain’t broke, don’t fix it.
All of this makes dealers very happy.
Related: Top 2016 Mergers & Acquisitions in Home Automation, A/V, IoT, Security, Networking
Wall Street, on the other hand, generally doesn’t reward boring. Even at $15.74, Control4 is undervalued compared to, say, Logitech (Nasdaq: LOGI). And it’s a far cry from the $20 – $30 prices it hit in the first year after its 2013 IPO.
Even while Control4 continued to hold steady, growing incrementally over the past few years, Wall Street seemed to yawn, punishing the company for a bad quarter (Q1 2015) when new products failed to ship on time, but barely nudging the needle when Control4 recovered, growing steadily and profitably after that.
In the Q4 2016 earnings call last week, Plaehn noted, “We've strengthened and scaled our dealer sales and support services during 2016 which we believe will contribute to our growth in 2017 and beyond.”
Yawn.
But whatever Control4 is doing … it seems to be working, at least as far as dealers and investors are concerned.
Is there something else going on?
When I started writing this piece, it occurred to me that something else might be going on here. Is Control4 being acquired? That might better explain the stock movement.
Wall Street doesn’t usually reward a company so generously for relatively modest growth – modest for the tech sector, in any case.
Control4 revenues for 2016 bested 2015 by an admirable 28%. If you deduct revenues from the 2016 Pakedge acquisition, though, the growth rate would be 15% — still laudable, but nothing terribly exciting for impatient investors who are used to seeing astronomical growth in the DIY smart-home sector.
But the astronomical growth in DIY tech is accompanied by just as many flops.
On the other hand, Control4 is not likely to flop. The fundamentals beyond revenues are strong, and they have been for nearly two years.
After speaking to a few analysts and investors, I now believe that nothing crazy is in the works for the company. Investors simply are now believing in the business, and they’re comfortable with consistent (if modest) growth. One analyst tells me, Wall Street appreciates “consistent execution,” which Control4 has provided over the past seven quarters.
For 2017, Control4 provided revenue guidance of $228 to $232 million – or about 10% growth (at the midpoint) over 2016.
During the earnings call, Steven Frankel of Dougherty & Co. asked:
Why can't the business grow faster than 10%? Are you just being overly conservative or is there something gating the growth that dealers can generate and it's just the rate we should think about as the sustainable rate of business?
CFO Mark Novakovich replied first and foremost that it’s tough to predict revenues on a “book-and-ship” business where there’s little backlog in orders. Plus, there’s instability in foreign-exchange rates.
At the end of the day, though, “[W]e do have a strong channel, and we believe that our products, our business are growing at a faster rate than the CEDIA business in general and perhaps other manufacturers in this space,” Novakovich says.
That sentiment seems to resonate with investors and analysts. One tells me there’s not necessarily any indication that the markets are more favorable these days to custom-installed smart-home models vis-à-vis their DIY counterparts.
But, he adds, “If you believe in the professional installation model, then Control4 is the one.”
As Plaehn said in the earnings call, “We believe no other whole home automation provider more broadly supports third-party products, has a more comprehensive and local expert installation and service network or has a larger active install base of homes with an average of 40-plus connected devices per home, as does Control4.”
Coming up: Who will Control4 acquire next?
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