Control4 to Expand Best Buy Relationship Through Magnolia Stores

Cisco’s contribution to Control4 business “hasn’t met the expectations” of either company, said Control4 CEO Martin Plaehn on the company’s Q2 earnings call Thursday, its first after going public Aug. 2. Both companies are objectively looking at the relationship “in partnership,” Plaehn said, and guidance for Q3 and the 2013 year doesn’t include “any material contribution from that revenue stream.” Control4’s IPO filing contained the first known disclosure that Cisco’s stake in Control4 was as high as 10.8 percent (CED July 5 p3). Control4 has provided “formal notice to Cisco that we want to re-frame the agreement and we're both working to find a better way to address the market opportunity,” which he called “very real and durable."

The two companies announced a strategic agreement in February 2011 to deliver network-enabled automation platforms for connected smart communities and home energy deployments worldwide. According to a Cisco backgrounder, the collaboration would integrate Control4 technology into Cisco’s Service Delivery Platform through Cisco-branded Control4 products.

In India, Control4 sees a “large and durable” market opportunity from multi-dwelling housing but the effort will take time, Plaehn said on the Q2 earnings call. Control4 is establishing a direct presence in Bangalore, where it will continue to work closely with Cisco to evaluate the companies’ collaboration with the “shared intent” to address the opportunity more effectively, he said.

Control4’s international business -- notably in China, India and Brazil -- “hasn’t met expectations” in revenue growth, Plaehn said. In response, Control4 is transitioning distribution from a two-tiered distributor/dealer model to a single-tier direct-to-dealer model. The shift began in February and has produced “temporary revenue friction” as distributors are being partially or fully disintermediated, he said. In Brazil, Control4’s controller pricing change earlier this year combined with the country’s 100 percent import tax on electronics hurt growth in the quarter, Plaehn said. A large part of Control4’s business in Brazil is related to “price-sensitive” apartment and condominium developments, he said, and the company is working on new programs to address that segment.

In North America, Control4 “has more work to do” in the custom channel, Plaehn said. It’s working with Best Buy to expand the retail relationship from the 32 standalone Magnolia Design Center stores to the roughly 280 Magnolia Home Theater sections in Best Buy stores, he said. Control4 will focus on the “high-potential subset” of MHT in-store locations and put in place “improved product training and consumer marketing programs,” Plaehn said.

On Control4’s relationship with Sony for that company’s premium ES AV receiver line and how it may lead to a stronger push into lower income demographics, Plaehn called the Sony partnership “solid.” The two companies will be working together to determine “what to do next,” he said. The product line sells currently through the Control4 dealer channel as a way to ease consumers into home automation at a relatively low incremental cost of a $300 license activation fee, Plaehn said. Current activations from Sony receivers don’t amount to a “material unit count” or contribute material revenue, he said. “When it becomes so, we'll begin to break it out,” he said.

In Q2, Control4 revenue was $32.5 million, an 18 percent bump from Q2 2012 and a 22 percent increase sequentially, Chief Financial Officer Dan Strong said. Net income for the period was $973,000 compared with $513,000 in Q2 2012, he said. In Q2, North America core revenue was $24.9 million, up 17 percent from the year-ago quarter, Strong said. International core revenue of $7 million grew from $5.3 million in Q2 2012, up 32 percent, he said. While international revenue grew overall, growth lagged in China, India and Brazil.

Strong attributed the North America increase to solid demand for home control solutions and increased customer awareness about the benefits of home automation, evidenced both by the increased dealer count and by average revenue per dealer, he said. As of June 30, Control4 had 2,416 active dealers in North America, up from 2,350 at the end of calendar 2012, he said. The number of international dealers grew to 536, from 501 active dealers at the end of 2012, Strong said. Adding dealers in North America and internationally will be a focus in the second half and next year, he said.

Control4 sold 18,208 controllers in Q2, down from the 18,463 in the year-ago quarter due to the introduction of more powerful HC 800 and HC 250 controllers that replaced three older models, Strong said. Many integrators used the older controllers in first-half 2012, which required at least two controllers per installation, while new installations this year required only one, he said, but revenue and margin per controller were higher in Q2, including software bundled with the controller.

Control4 launched its 4Sight Anywhere Access remote monitoring and control service in the spring and, while it’s early into the service, Plaehn said attach rate is at roughly 20 percent of installations. He said total installations include small AV-only jobs that “don’t drive the use case of changing the channel” from “the other side of the world.” In multi-discipline automation installations that include lighting, climate and security control, the 4Sight subscription -- which costs consumers $100 per year -- becomes “a very compelling offering,” he said. The company will begin to drive the remote service through dealers in coming quarters, he said.

Plaehn sees an opportunity to expand basic AV control systems to add lighting, security and climate, Plaehn said, and the company hopes to ride the current marketing wave of service providers entering the market. Comcast, AT&T and ADT are among those promoting home automation via broad-based advertising and “they're showing remote access,” he said. That can benefit Control4’s “very powerful, very secure, very reliable solution” that can control all lights, shades, and locks in a home, he said. Plaehn said he believes remote access will be something that excites customers and make them “possibly move to larger systems."

Financial analyst Canaccord Genuity issued a buy rating for Control4 Thursday, calling it the “biggest supplier of automation and control systems to the connected home market” with a market capitalization of $598 million. Canaccord estimated the annual domestic and international market for high-end home automation systems at $2.5 billion. Analyst Jonathan Dorsheimer positioned Control4 as an opportunity to play the favorable trend in housing stocks for investors who missed the median 70 percent appreciation in housing-related stocks since January 2012.