Control4 Announces Financial Results for Second Quarter 2016

Control4 Corporation (NASDAQ:CTRL), a leading global provider of smart-home solutions, today announced financial results for its second quarter ended June 30, 2016.

Revenue for the second quarter was $53.2 million, compared to revenue of $44.6 million for the second quarter of 2015, representing year-over-year growth of 19%. Total revenue for the first half of 2016 grew 25% year-over-year, from $76.7 million to $96.3 million, or 14% after excluding revenue from recently-acquired Pakedge Device & Software Inc.

Net income for the second quarter of 2016 was $0.5 million, or $0.02 per diluted share, compared to net income in the second quarter of 2015 of $2.0 million, or $0.08 per diluted share. Net income for the first half of 2016 was $7.2 million, or $0.30 per diluted share, compared to a net loss of $2.2 million, or $0.09 per diluted share, for the first half of 2015.

Non-GAAP net income for the second quarter of 2016 was $5.5 million, or $0.23 per diluted share, compared to non-GAAP net income in the second quarter of 2015 of $4.1 million, or $0.16 per diluted share. Non-GAAP net income for the first half of 2016 was $6.5 million, or $0.27 per diluted share, compared to non-GAAP net income of $3.0 million, or $0.12 per diluted share, in the first half of 2015. A reconciliation of GAAP to non-GAAP financial information is contained in the attached tables.

Unrestricted cash and net investments increased slightly to $48.8 million as of June 30, 2016, compared to $47.9 million as of March 31, 2016. The increase reflects the repurchase of $1.5 million of Control4 shares under the company’s previously announced stock repurchase program, debt pay-down of $0.2 million, and investment in product inventory to deliver anticipated growth in future periods.

“Our teams delivered strong results stemming from our continued focus and investments in product development, marketing, and sales,” said Martin Plaehn, chairman and chief executive officer of Control4. “Orders for our new EA Series Controllers continued to be strong and are confirming our thesis that the EA Series is a market expanding product-line for Control4 – notably the EA-1 for the single-room, entry level smart home solution. Additionally, our Pakedge networking products are being embraced by our expanding dealer channel, and we have successfully completed the bulk of the Pakedge acquisition integration. Combined, we are providing industry-leading home automation solutions side-by-side with robust, high-performance home networking solutions for today’s and tomorrow’s connected homes.”

Commenting on the company’s financial results for the second quarter, Mark Novakovich, chief financial officer of Control4, added: “We delivered both revenue and non-GAAP net income above our guidance range. Our year-over-year quarterly non-GAAP net income and EPS grew 33% and 44%, respectively, and for the first half of 2016, non-GAAP net income and EPS grew 119% and 125%, respectively, over the first half of 2015, reflecting the increasing leverage in our business model and our commitment to sustainable, profitable growth to enhance shareholder value.”

2016 Guidance

Control4 indicated that its guidance for the third quarter and the balance of the year includes 11 months of revenue and net income contribution from Pakedge. Because the Pakedge networking products are complementary to the company’s current business and are generally expected to be sold through the same or similar channels, all results of operations and forward-looking guidance will be based on the company’s consolidated, single-business segment.

Control4 expects revenue in Q3 2016 to be between $52.5 million and $54.5 million. In addition, Control4 expects non-GAAP net income for Q3 2016 to be between $4.7 million and $5.7 million, or between $0.19 and $0.23 per diluted share. Control4 does not provide guidance on GAAP net income because of the variable and unpredictable nature of certain items excluded from non-GAAP net income, such as acquisition-related expenses, stock-based compensation, litigation settlement expenses, and executive severance costs. For the full year 2016, the company is raising its annual guidance to $202 million to $206 million for revenue, and $17 million to $19 million for non-GAAP net income, or non-GAAP EPS of $0.70 to $0.78 per diluted share.

Conference Call

On August 4, 2016, Control4 Corporation (NASDAQ: CTRL) will host an investor conference call and will webcast the event beginning at 3:00 p.m. Mountain Time (5:00 p.m. Eastern Time). To access the conference call, dial 719-325-2376 or 888-505-4375 (toll free) and enter passcode 4272197.

The webcast and replay will be accessible on Control4’s investor relations website at http://investor.control4.com/. A replay of the conference call will be available within two hours of the conclusion of the conference through August 18, 2016. To access the replay, please dial 719-457-0820 or 888-203-1112 and enter passcode 4272197.

About Control4 Corporation:

Control4 [NASDAQ: CTRL] is a leading global provider of automation and networking systems for homes and businesses, offering personalized control of lighting, music, video, temperature, security, communications and similar functionalities into a unified home automation and networking solution that enhances the daily lives of its customers. Control4 unlocks the potential of connected devices, making networks more robust, entertainment systems easier to use, homes more comfortable and energy efficient, and families more secure. Today, every home and business needs automation horsepower and a high-performance network to manage the increasing number of connected devices. The Control4 platform interoperates with more than 9,700 third-party consumer electronics products, ensuring an ever-expanding ecosystem of devices will work together. Leveraging a distribution channel that includes over 3,800 custom integrators, retailers, and distributors authorized to sell the full-line of Control4 product in 91 countries with over 1,100 additional dealers and distributors that sell just our Pakedge-branded networking solutions. Control4 is delivering intelligent solutions for consumers, major consumer electronics companies, hotels, and businesses around the world.

Forward-Looking Statements

This press release contains "forward-looking statements" within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to, statements regarding Control4's financial outlook, its future financial performance on both a GAAP and non-GAAP basis, future operating margins, growth prospects and the impact of its new EA Series of controllers. All statements other than statements of historical fact contained in this press release are forward-looking statements. These forward-looking statements are made as of the date they were first issued, and were based on the then-current expectations, estimates, forecasts, and projections, as well as the beliefs and assumptions of management. Forward-looking statements are subject to a number of risks and uncertainties, many of which involve factors or circumstances that are beyond Control4's control. Control4's actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including but not limited to, risks detailed in Control4's most recent Annual Report on Form 10-K and subsequent reports filed with the Securities and Exchange Commission, as well as other documents that may be filed by the company from time to time with the Securities and Exchange Commission. Past performance is not necessarily indicative of future results. The forward-looking statements included in this press release represent Control4's views as of the date of this press release. The company anticipates that subsequent events and developments may cause its views to change. Control4 has no intention and undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. These forward-looking statements should not be relied upon as representing Control4's views as of any date subsequent to the date of this press release.

Non-GAAP Financial Measures

Control4’s stated results include certain non-GAAP financial measures, including non-GAAP gross margin, non-GAAP gross margin percentage, non-GAAP income from operations, non-GAAP operating income percentage, non-GAAP net income, non-GAAP net income per diluted share, and non-GAAP net investments. Non-GAAP gross margin excludes non-cash expenses related to stock-based compensation, amortization of intangible assets, and acquisition-related costs. We further exclude expenses related to executive severance and litigation settlements from non-GAAP income from operations and non-GAAP net income.

Management believes that it is useful to exclude stock-based compensation expense because the amount of such expense in any specific period may not directly correlate to the underlying performance of the business operations.

The company has recently completed acquisitions that resulted in operating expenses that would not have otherwise been incurred. Management has provided supplementary non-GAAP financial measures, which exclude acquisition-related expense items resulting from acquisitions, to allow more accurate comparisons of the financial results to historical operations, forward-looking guidance and the financial results of less acquisitive peer companies. Management considers these types of costs and adjustments, to a great extent, to be unpredictable and dependent on a significant number of factors that are outside of the company’s control. Furthermore, the company does not consider these acquisition-related costs and adjustments to be related to the organic continuing operations of the acquired businesses and are generally not relevant to assessing or estimating the long-term performance of the acquired assets. In addition, the size, complexity and/or volume of past acquisitions, which often drives the magnitude of acquisition-related costs, may not be indicative of the size, complexity and/or volume of future acquisitions. By excluding acquisition-related costs and adjustments from the non-GAAP measures, management is better able to evaluate the ability to utilize its existing assets and estimate the long-term value that acquired assets will generate. The company believes that providing a supplemental non-GAAP measure which excludes these items allows management and investors to consider the ongoing operations of the business both with, and without, such expenses.

These acquisition-related costs are included in the following categories: (i) professional service fees, recorded in operating expenses, which include third-party costs related to the acquisition, and legal and other professional service fees associated with diligence, entity formation and corporate structuring, disputes and regulatory matters related to acquired entities, (ii) transition and integration costs, recorded in operating expenses, which include retention payments, transitional employee costs, earn-out payments treated as compensation expense, as well as the costs of integration-related services provided by third parties, and (iii) acquisition-related adjustments which include adjustments to acquisition-related items such as being required to record acquired inventory at its fair value, resulting in a step-up in the inventory value, and having to reverse part of our valuation allowance in order to offset the deferred tax liability that was recorded based on differences between the book and tax basis of assets acquired and liabilities assumed. The step-up in inventory is recorded through cost of goods sold when the inventory is sold, resulting in a negative impact to our gross margin. Although these expenses are not recurring with respect to past acquisitions, the company will generally incur these expenses in connection with any future acquisitions.

The company excludes the amortization of acquired intangible assets from non-GAAP measures. These amounts are inconsistent in amount and frequency and are significantly impacted by the timing and size of acquisitions. Providing a supplemental measure which excludes these charges allows management and investors to evaluate results “as-if” the acquired intangible assets had been developed internally rather than acquired. Although the company excludes amortization of acquired intangible assets from non-GAAP measures, management believes that it is important for investors to understand that such intangible assets contribute to revenue generation. Amortization of intangible assets that relate to past acquisitions will recur in future periods until such intangible assets have been fully amortized. Future acquisitions may result in the amortization of additional intangible assets.

Furthermore, we believe it is useful to exclude expenses related to executive severance and litigation settlements because of the variable and unpredictable nature of these expenses which are not indicative of past or future operating performance. We believe that past and future periods are more comparable if we exclude those expenses.

Management provides a non-GAAP measure representing the fair market value of the available-for-sale investments. We account for purchases and sales of investments on a trade-date basis. This is a non-GAAP measure representing the fair market value of our available-for-sale investments on a settlement date basis because from time to time, the investment trade date and the investment settlement date will cross a reporting period. We believe presentation of our investments on a settlement date basis is relevant to readers of our financial statements.

Management believes these adjustments provide useful comparative information to investors. Non-GAAP results are presented for supplemental informational purposes only for understanding the operating results. The non-GAAP results should not be considered a substitute for financial information presented in accordance with generally accepted accounting principles, and may be different from non-GAAP measures used by other companies. The non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in the industry, as other companies in the industry may calculate non-GAAP financial results differently, particularly related to non-recurring, unusual items. Management urges investors to review the reconciliation of non-GAAP financial measures to the comparable GAAP financial measures included below, and not to rely on any single financial measure to evaluate the business.

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