Control4 (CTRL 17.39, -3.84, -18.09%), a provider of home automation systems – solutions
that allow consumers to control lighting, music, video, temperature, security
etc. using a smart home system -- is trading sharply lower today (-18%) after
reporting Q4 earnings and providing guidance.
See our InPlay comment on the topic for fuller details, but the Q4 results were actually pretty decent as non-GAAP EPS rose 13% year/year to $0.44, at the high end of prior guidance of $0.41-0.45. Revenue rose 6.5% year/year to $72.5 mln vs prior guidance of $72-74 mln. The problem was really the guidance for Q1: non-GAAP EPS of $0.08-0.11 and revenue of $61-63 mln. Both are below market expectations, with EPS coming in well below.
What is going on? On the call last night, CTRL cited familiar reasons for the slowdown: general economic conditions, including the slowing of new housing and multi-unit projects in many metro areas. There are also trade labor shortages facing the homebuilding industry. CTRL also cited trade tensions with China and tensions in the UK and EU. Recent stock market volatility has also set back consumer confidence.
We think this last factor is a big one. Those who saw their 401Ks shrink in 4Q18 may have turned to purchasing decisions like major home upgrades with less confidence and may have been influenced to put the brakes on home improvement projects.
Another interesting point is that CTRL is concerned about pending tariffs with China. The troubling thing is that it intends to absorb the full impact of tariffs. It does not intend to change its product pricing to authorized dealers nor its product MSRPs for existing product SKUs for end customers in response to these current tariffs. We think this shows a lack of confidence in pricing power, and this could eat into margins in 2019 if a trade deal is not announced.
On the positive side, although new housing construction generally may be beginning its macro cyclical slowdown, CTRL made the point last night that newly constructed houses today are significantly more likely to include smart home systems than houses constructed previously. CTRL believes that its opportunity within those newly built and upcoming houses will continue to expand.
The stock has been quite weak over the past few months, falling from $37 in September to around $17.50 currently. CTRL said that following a strong 1H18, the market got more challenging in 2H18, and 2019 is getting off to a slower start. From a broader perspective, Control4 has made the point in the past that it has captured only a small percentage of its potential market. Hopefully this slowdown will start to abate as we enter the spring/summer time period, when home construction tends to pick up the pace, but right now, the outlook remains pretty weak.
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