"If we find a company we like, the level of the market will not really impact our decisions. We will decide company by company. We spend essentially no time thinking about macroeconomic factors. In other words, if someone handed us a prediction by the most revered intellectual on the planet, with figures for unemployment or interest rates, or whatever it might be for the next two years, we would not pay any attention to it. We simply try to focus on businesses that we think we understand and where we like the price and management." - Warren Buffett, 1992 Berkshire Hathaway annual meeting
Control4 is a leading provider of automation and control solutions for the connected home. In linking connected devices the company makes products that can control entertainment systems, climate control, and security. Control 4 provide consumers with the ability to integrate music, video, lighting, temperature, security, communications and other functionalities into a unified home automation solution. More than 75% of their consumers have integrated two or more of these functionalities with CTRL’s solution. The center of the solution is the advanced software platform, which is provided through CTRL products that interface with a wide variety of connected devices that are developed both by CTRL and by third parties.
What Are They Selling?
There is a Control4 product line, central to this all is the C4 OS (operating system). The C4 OS is embedded in many products. There is also a 4Sight subscription service which allows consumers to control and monitor homes remotely from smartphone, tablet or laptop.
The basic chain is that one would contact the dealer who would come out and design the system based on the individual’s wants. The “controller” is the brain of the smart home. This controller then links up to a variety of devices both made by Control4 and third party providers. So for example you might buy a thermostat or lighting from Control4, or perhaps you link up your Control4 to a TV you already have or perhaps a security system. Because installation is specialized, there is a switching cost that builds in as the relationship with the customer grows.
Who Are They Selling It To?
Of the 50,000-plus contractors the company currently deals with, no single customer represents more than 1% of consolidated revenue. The focus is on providing products where and when the customer needs them, technical support by phone or on site as required, and quick and efficient service at our locations. CTRL derives virtually all of its revenue from the sale of products that contain CTRL proprietary software, and a smaller portion from software licensing and annual service subscriptions.
Based on their data and estimates, through March 2013 CTRL has automated more than 120,000 homes representing cumulative sales of more than 275,000 of CTRL controller appliances which is the brain of the connected home. Sell product through dealer and distributor network. In other words they rely on third parties to sell, they have no direct sales pipeline.
What Is The Market Opportunity?
The proliferation of smartphones and tablets has brought home automation closer for consumers than ever before. According to ABI Research (https://www.abiresearch.com/pages/about-abi-research/) the mainstream segment of the home automation market was around $570 million in 2012 and estimated to grow to $2.5 billion by 2017. Again, CTRL TTM sales were $113.5 million. Sales outside of North America accounted for 25% of overall sales in 2012.
The bigger picture implications of something like what Control4 is working on is seen in the Internet of Things (Internet of Everything). http://newsroom.cisco.com/feature-content?articleId=1208342 Partnerships with companies like Sony and a significant investment by Cisco are noteworthy. Lend at least some credibility to the potential market opportunity. It’s also worth noting that this isn’t limited to personal housing, but also businesses as well. Control4 and Eragy worked on the automated system for a Subway franchisee Indiana helping it gain the state’s first LEED (Leadership in Energy and Environmental Design) commercial project certification.
Competition and Risks
Main competitor in the field is Savant. I called the project manager from a local dealer here called iHome Integration. His name is Justin Tsuchida and he had plenty of positive things to say about Control4; they sell a lot of their stuff and he likes it. Says they have come a long way through the years to develop a product that really works. I asked him about a dollar figure for something like a 3 story townhouse fully finished top to bottom with things like climate control, entertainment, lighting and security. Could be in the $15,000 neighborhood or more (ballpark). Control4’s model is not one based on recurring revenue, many others’ are. However while it’s a small part today, there is room for it to grow in the future as the installed based grows and value-adds become more compelling. Energy management is another big trend and CTRL just acquired a small company to focus more on energy management as an additional product.
This is a pretty fragmented industry right now. You have your players like Control4 and Savant for example that are more pure plays but you also see cable companies, telecom providers and even security companies offering some kind of stripped down version of this for security or entertainment or something else. The problem is that there are no real ways to expand that offering throughout the rest of the home. An attractive part of Control4 is that it is quite expandable (and affordable) which makes it an attractive proposition to the masses, particularly as the technology and possibilities are still very new for many.
From the S-1: "For certain of our products and components, we rely on a sole-source manufacturer or supplier. In 2012, two contract manufacturers, Sanmina and LiteOn, manufactured 82% of our inventory purchases."
What’s It Worth?
Control4 is currently in approximately 120,000 homes today. There are 125M to 130M households in the US, not to mention businesses. The Subway example is one that could represent another significant opportunity as there are approximately 980,000 restaurants in the US today. Email reply from Justin when I asked him about the potential opportunity for restaurants and other commercial entities:
"There is certainly a trend towards energy savings- and it's only a small step from there to monitoring and being more proactive about it. I see it coming soon! One of the lighting LED manufacturers we deal with is talking to chain restaurants about upgrading their fixtures and the ROI is less than two years."
Revenue has grown at about a 14% clip over the past four years with TTM at $114 million, but it’s still extremely early in the game. The company recently just reported its first earnings call as a public company.
It looks like there are a number of reasons why Control4 could continue to do well. For one, they are already seen as the more “budget-friendly” option that can cross more platforms. Here is a breakdown of the two with pros and cons: http://www.residentialsystemsinc.com/control4-vs-savant-for-todays-smart-home/ This is also very much in line with what Justin at iHome Integration had to say. Either way, it’s so early in the space that it’s probably unreasonable to feel like there is one winner from it all. Savant seems to have more exposure to Apple’s market, however we know that Android is just as relevant and having the ability to go with either platform has to be seen as attractive.
Other Links of Interest
Home automation to see $60 billion by 2017 according to this. Check at the 0:46 mark in this video. http://www.youtube.com/watch?v=_l8w_l972bE&feature=c4-overview-vl&list=PL51SGWabyJJukgAZGUby58LTLgRBPyoON
My name is Jason A. Moser and I'm lucky enough to have a job doing what I love to do: investing. But my family, golf, music, watercolors, reading, writing, current events...these are all things that matter to me. Consider yourself warned.