Q1 2021 Snap One Holdings Corp Earnings Call
[music].
Good day and thank you for attending by welcome to the snap one fiscal second quarter 2021 earnings Conference call. At this time, all participants are in a listen only mode.
The biggest presentations there will be a question and answer session I would now let's turn the call over to your host.
Eric Steele, Vice President Investor Relations. Please go ahead.
Thank you.
Good afternoon, and welcome to snap one fiscal second quarter 2021 earnings conference call.
As a reminder, this call is being recorded.
Joining us today from step, one or John Hayman, CEO and Mike <unk> CFO.
Before we begin we would like to remind everyone that our prepared remarks contain forward looking.
Looking statements and management May make additional forward looking statements in response to your questions, including but not limited to statements of expectations future events or future financial performance. These.
These statements do not guarantee future performance and therefore undue reliance should not be placed upon them.
Although we believe.
These expectations are reasonable we undertake no obligation to revise any statements to reflect changes that occur after this call.
Actual events or results could differ materially.
These statements are based on current expectations of the company's management.
And involve risks and uncertainties.
Including those identified in the risk factors section of our registration statement on form S. One filed with the SEC.
All non-GAAP financial measures referenced in today's call are reconciled in our earnings press release to the most directly comparable GAAP measure.
This call also contains time sensitive information that is accurate only.
The date of this broadcast August 26.2021.
Finally, I would like to remind everyone that this conference call is being webcast and a recording will be made available for replay on our investor relations website at investors Dot snap one dot com.
I'll now turn the call over to our CEO John.
As of now John.
Thank you and thanks for all your leadership over the past.
Quarters yourself.
First of all welcome everyone. Thanks for spending time with US. This afternoon hope everybody's families are.
Healthy.
Recognizing that many of you might be.
John hit the snap one story I'm going to start today's discussion with a brief history and overview of our business then I'm going to review some recent updates and highlights and I will turn it over to Mike <unk>, our CFO to discuss financial results for the quarter and provide guidance for the remainder of 2020.
One I'll have some closing remarks after that and then we will open up the call for questions.
Let's get to it.
Snap one our mission is to bring together the best people.
Integrators and products to make lives more enjoyable connected and secure.
We began as snap.
In 2005, we were founded by two professional integrators, who saw an opportunity to transform how integrators into smart living industry, we serve.
These integrators work with consumers every.
Every week to design smart living experiences.
They.
Design they purchase they install and then support the products required to bring those experiences to life.
Process of evaluating products locating them purchasing them receiving them installing them and then supporting these products.
For any given.
Given project was very time consuming and expensive and our company set out to dramatically improve what wasn't an inefficient process.
From the beginning we understood the challenges that these integrator space and we sought to make their lives easier we invested in their success.
Yes, so that they can deliver on the promise of the smart home and business for the end customers, who depend on them, we disrupted the industry with things like an e-commerce ordering portal brands exclusively sold through these integrators and award winning.
Service and technical support.
With this value proposition, we grew rapidly by expanding our professional integrator base and our product portfolio.
As the smart living industry has evolved we continue to raise the bar.
First we diversify from our initial products like cables and racks amounts to more.
More technically complex and software driven products, such as networking surveillance smart power and these are all supported by our industry, leading remote management software platform oversea.
We've also complemented our revered e-commerce platform.
Brick and mortar locations to reach a new group of integrators deliver local services like product training technical consultations and last minute delivery and of course provide an omnichannel shopping convenience we've.
We've also opened our ecosystem to third party products and began reselling.
Curated set of non snap one brands with the goal of providing integrators with a one stop shop. If you will for all the products needed to complete a job.
Finally.
Most recently, we've entered the strategically important control and automation category with the 2019 acquisition.
<unk> of the industry, leading platform control platform control four two.
Together with control horse automation platform, we're able to deliver more reliable and fully integrated systems.
We've accomplished all of these advancements through significant internal advanced.
Significant.
<unk> internal investment and strategic M&A.
Over the past five years, we've successfully completed 10 acquisitions ranging from local distributors to leading technology companies like control for.
Yes.
To reflect our evolution, we recently rebranded the <unk>.
Company and we're very excited about that to snap one.
This represents our aspiration to be the one partner that professional integrators need for every job we removed the avi the audiovisual part of our name because our company and our industry have expanded well beyond.
Just entertainment solutions as solutions get more complex and get more intertwined we're dedicated to keeping things simple by providing exceptional product quality and selection premium service and support and an omnichannel shopping experience the named snap one encompasses.
<unk> is all we are today and our intent to continue to lead the industry in the future.
Here, it's not one our b to B to C business model is purpose built to drive value for all of our stakeholders.
We're very well positioned to provide lowered our loyal and growing.
<unk> network of over 16000 professionals do it for me integrators with leading products software platforms technology enabled workflow solutions that will help them successfully serve their customers and operate their businesses.
With our partnership our integrated can delight and consumer.
Consumers by selecting the right products performing complex and manually intensive installations supporting the system and bringing the entire experience together in a unified way.
Our integrator success is our success and by partnering with snap one hour integrators can folk.
Focus on their trade and leverage the tools and the infrastructure that we deliver to build thriving and profitable businesses.
Strong value proposition creates a reoccurring spending pattern with these integrators that strengthen our relationships and enhance our revenue visibility from the.
The integrator base, we were founded by integrators for integrators, and we carry that legacy with us being a leader in the industry as our integrators partner of choice.
So with that as a backdrop now let me get into where our businesses today.
Over the past few months we've made.
Considerable operational progress and completed several milestone achievements for our business highlighted by our public listing.
In July the IPO was a momentous occasion for our industry, our integrators and yes, our company I'd like to thank everybody for their tireless support and.
We are confident that the future is very bright for snap one.
Let me take a moment and recap a few of the highlights first we've expanded our omnichannel distribution presence into five new domestic markets, we opened or acquired brick and mortar locations in Charlotte Scottsdale.
Scale, Denver, Salt Lake and Atlanta. This brings our nationwide footprint to 27 locations as of quarter end all of these locations now make snap ones, leading products immediately available for local integrators, while extending our service offerings through deeper sales training.
Training and support engagement.
Second we were humbled.
To be recognized as the number one or the number two brand sometimes both.
36 times across 62 identified product categories in the 2021 CE.
Pro 100 brand analysis Awards the company earned approximately five times the number one <unk> two awards as the next most awarded competitor.
This follows our record performance in <unk> 2021 Quest for quality Awards, which were released in.
In March and recognize the best service providers to the industry. It's not one was recognized for 16 awards in the Quest for quality award approximately twice as many as the nearest competitor.
Together These awards demonstrate the company's leadership position in the market and competitive differentiation across.
Our product and service capabilities.
Third.
We've upgraded our control for OS three software to provide full support for oversea remote management to our control four controllers. This was a major enhancement envisioned at the time of our control for acquisition.
And it strengthens our commitment to make life simpler for integrators by offering them the ability to remotely manage and service clients control for connected devices.
Through the <unk> platform.
With increased system visibility integrators can more easily offer service contracts.
Two devices and reduced service costs.
And finally, we acquired access networks, the enterprise grade, leading network solutions provider offering networking products design configuration monitoring and support services. The network is.
Trouble digital backbone of smart living and this acquisition enhances snap ones networking solutions for residential and commercial applications.
We also announced a significant investment in parasol and industry, leading provider of 24 by seven remote support subscription.
The pretense that improve and a greater productivity and service levels.
Both actions provide further momentum for our long term strategy to support integrator customers.
Across the project lifecycle.
I'll touch on the financials before handing it over to Mike to discuss more.
Number one.
We delivered impressive results in <unk>.
Several key performance areas, namely a 34% increase in net sales to over $253 million and a 20% increase in non-GAAP adjusted EBITDA to approximately $29 million during the period.
The business experienced growth across product categories geographic regions markets et cetera, as we added new integrators increased spend per integrator and lap the demand trough from COVID-19 in the second quarter of 2020.
I'll talk quickly about demand sensors that we see and.
And then long term growth.
As we assess the current demand.
For smart living solutions, we see it as very robust or integrators are extremely busy and many are booked out months in advance.
19 accelerated what were already healthy smart living adoption trends.
Fueling durable residential and commercial uptake that is continuing throughout this year. The residential investment cycle is particularly strong in this quarter we saw.
An encouraging rebound in our commercial business is restaurants bars and retail.
Reopens and companies began to return to the office.
We continue to carefully monitor the resurgence of COVID-19, and any potential impact on the business, Mike will speak to the supply chain environment, that's affecting the entire industry, but our company and our integrators have proven resilient.
In the face of challenging macroeconomic backdrop, we remain confident in our ability to successfully navigate any future uncertainty related to COVID-19, and I must say, we salute our frontline employees.
Those in our local offices in our warehouses and our.
So we're going into homes and businesses every day.
Our ongoing dedication and sacrifice they are our industry's heroes.
Longer term our growth strategy.
Has been to continue to effect the same playbook, we've been doing.
For many years now there are five key pillars to that growth strategy. One continue to innovate with new products software and technology enabled workflow solutions for our integrators.
To continue to increase our wallet share with our existing integrators with existing products, which.
Which included includes continuing to execute our Omnichannel strategy three continue expanding our global integrator network with professionals focused on residential security and commercial applications.
Fourth develop new software services and revenue models.
Made.
We feel like substantial progress against each of these organic growth pillars in the quarter and with access networks and parasol, we made strong progress against our fifth pillar.
Which is to execute against strategic M&A.
As it relates to M&A, we view it as a core.
Competency of ours, and a strategic value driver for the business and for our integrators, we operate in a highly fragmented market, which lends itself to target rich.
Sure.
M&A landscape with our scale, our track record and now our access.
Aid capital, we've established ourselves as the acquirer of choice in the industry.
We expect as a result of that to continue to pursue disciplined.
Brito acquisitions that enhance our products software and workflow solutions and expand into adjacent markets that allow.
First of course serve our integrator base.
With that I am going to turn it over to Mike Carla Our CFO, who will go through our financial results for the quarter in greater detail and talk through our guidance. Thank you. Thanks.
Thanks, Sean.
Before I provide an overview of our financial performance I wanted to provide a brief summary.
Our recent capital markets activities.
John noted earlier in July we conducted an initial public offering of $13 million 850000 shares of our common stock at a price of $18 per share.
As part of this process the younger writers, partially exercised their over allotment option to purchase an additional $1 million two.
US to the 32500 shares at the same price.
This over allotment exercise resulted in snap one selling 1 million 170812 additional shares.
Selling stockholders selling 61688 shares.
In total gross proceeds to the company before deducting underwriter.
<unk> hundred underwriting discounts commissions and other operating expenses were approximately $270 million.
Of the approximately $248 million of net proceeds from the offering we have used about $260 million to repay a portion of the term loan under our credit agreement plus accrued interest and we expect to use the remainder of such net proceeds.
<unk> for general corporate purposes.
Now turning to our financial results for the fiscal second quarter.
As John mentioned net sales increased 34% to $253.3 million from $189.1 million in prior year period or.
Our growth during the quarter was driven by strong overall demand across the business.
<unk>.
Rytary in third party product portfolios grew over 29% with all product categories geographic regions and markets experiencing growth in the quarter. Additionally.
Additionally, in the prior year quarter, our net sales were affected by declines in demand due to the impact of COVID-19.
Net sales in the most recent quarter also benefited from the continued.
To wrap up local branches.
Turning of five additional branches between the end of the second quarter of 2020 at the end of the second quarter of 2021.
Net sales growth was partially offset by those supply chain challenges as John mentioned, resulting in stock outs late in the second quarter of 2021.
Our cost of sales exclusive of depreciation.
And amortization.
<unk>, 39% to $152.1 million or 61% of net sales up from $109.2 million or <unk> 57, 8% of net sales in the comparable year ago period.
The increase in cost of sales exclusive of depreciation and amortization was primarily attributable to net sales growth.
And further impacted by increase in cost from suppliers and higher inbound freight costs.
Contribution margin, which is a non-GAAP measure of operating performance increased 27% to $101.2 million, representing 39, 9% of net sales in the fiscal second quarter up from $79.9 million or <unk>.
$42.2 million in net sales and comparable year ago period.
The increase in contribution margin was due to the increase in net sales.
Decrease in contribution margin as a percentage of net sales was primarily due to accelerated growth of third party product relative to the growth of proprietary products in the fiscal second quarter the.
The increasing mix of third party.
The product was driven by expansion of product brand assortment to increase integrator stickiness catalyzed by the execution of our Omnichannel strategy of opening local branches.
Third party product typically has a higher cost of sales exclusive of depreciation and amortization as a percentage of net sales relative to proprietary products.
The strategic expansion of our curated third party product portfolio remains an important part of our value proposition.
We seek to provide our integrators with a one stop shop for their product needs, while enhancing integrator loyalty capturing incremental contribution margin dollars.
Our selling general and administrative expenses increased 30.
1% to $78.7 million or 31, 1% of net sales up from $60.1 million or 31, 8% of net sales in the comparable year ago period.
The increase in SG&A expenses was due to increases in variable operating expenses driven by higher sales volumes, while lapping of temporary cost reductions taken to.
To mitigate the impacts of COVID-19, 2020, and continued investments to support strategic growth initiatives and costs associated with becoming a public company.
Our net loss totaled $1.1 million in the period compared to a net loss of $3.2 million and comparable year ago period.
The decrease in net loss was primarily due.
Due to the increase in net sales by a greater amount than related expenses.
And the strong sales growth growth drove adjusted EBITDA, a non-GAAP measurement of operating performance up 20% to $29.3 million, representing 11, 6% of net sales.
Third to $24.4 million, representing 12, 9% of.
Net sales a year ago period.
Adjusted net income another non-GAAP measurement of operating performance increased 81% to $13.9 million or five 5% of net sales up from $7.7 million or four 1% of net sales in the year ago period.
The increase in adjusted net income was primarily due to the reduced net loss.
Finally free cash flow a non-GAAP measurement of operating performance was negative $9 million in the six months ended June 25, 2021 compared to $33 million in the comparable year ago period, we invested to build inventories manage our supply chain. Our payable terms return to normalized levels. Following temporary extension received last year.
In anticipation of the Covid disruption.
At the end of the fiscal second quarter cash and cash equivalents was $35.9 million.
Compared to $77.5 million as of December 25, 2020, our prior year end.
Now before I turn the call back over to John I will take just a few minutes to provide our financial outlook for.
The remainder of the year.
Going forward the company plans to provide annual guidance for net sales as well as adjusted EBITDA as we believe these metrics to be key indicators for the overall performance of our business.
As we look at the remainder of the year, we continue to see strong demand for smart living technology.
Against that backdrop, we are working diligently.
Gently to combat the supply chain challenges that are impacting our business and the broader economy.
Our industry, leading inventory availability declined modestly during the second quarter and sporadic inventory stock outs of accelerated into Q3.
Our teams have been working tirelessly to take proactive measures to shore up our supply chain and our inventory positions.
These actions are included.
The best component sourcing supplier diversification and increasing our inbound airfreight to reduce transportation times.
Our diverse product portfolio and supplier base provides us some flexibility to navigate these challenges.
So while our year over year growth rate will fluctuate as we lap the disruptions experienced last year due to COVID-19, we expect our two year organic net sales.
Sprague's remained consistent with Q2 and our long term goal of low teens annual net sales growth obviously, excluding M&A.
Now, let's get the guidance.
As a reminder for 2021, our fiscal year ends on December 31, 2021, and includes a 50 <unk> week for.
We are setting our fiscal year net sales.
Guidance range between $985 million and $1 billion, which would represent an increase of 21% to 22, 8% compared to the prior fiscal year on an as reported basis.
We also expect adjusted EBITDA to range between $102 million and $109 million, representing an increase of 8% to 15 four.
<unk> percent compared to the prior fiscal year.
Overall, we remain highly confident in the overall financial health of our business as well as our ability to sustainably grow for the foreseeable future.
That completes my summary, John back to you.
Thanks, Mike.
In closing we will just say, we're quite pleased with our.
Fiscal second quarter results and we are really energized by the tremendous opportunity in front of us.
We believe our performance demonstrates number one to healthy ongoing demand for smart living solutions and number two the resilience and diversification of our operating model.
Both of these.
These things notwithstanding the global supply chain.
<unk>.
We believe we are in.
Early innings of global smart living adoption and over the long term, we plan to continue broadening our distribution capabilities and workflow solutions building compelling and innovative new products for the.
The end user while forging strong relationships with the integration community that serves them.
By empowering these professional integrators to provide seamless experiences and an increasingly complex and expanding ecosystem snap one is positioned to drive sustainable growth for years to come.
And with that operator, we will take questions.
Thank you at this time, we will open the last question.
How many request for each participants limit their comments to one question and one follow up.
Ladies and gentlemen, I'd like to ask a question. Please press Star then one when you touched on the telephone.
Again, if you would like to Apple.
Please press Star then one.
And our first question will.
Come from Erik Woodring with Morgan Stanley Your line is open.
Hey, good afternoon, everyone. Congrats guys on your first quarter out the gates here.
Maybe I'd love to touch on maybe some of the feedback that you've gotten from integrators. Following you.
Price hike in early August.
Whether you see yourself needing to raise prices again and then the second part of that would just be are you pricing increases fully offsetting fully offsetting the cost increases or any color that you could share there and then I have a follow up thanks.
Yes, Thanks, Eric good to hear your voice.
<unk>.
We announced effective August one.
Approximate 5% price increase given.
The cost increases we are seeing.
Both from our suppliers as well as.
Things in the logistical space.
And we.
Design.
And that too not just cover our costs, but to protect our margin.
We announced it well in advance 60 days because we it was important to us to give our integrators.
Heads up as it may affect the projects they had in flight.
And.
We there was plenty of other industry pricing activity that was going on so.
[noise] integrators appreciate it number one the fact that we gave them advance notice.
Number two the price increase probably wasn't as drastic as some others.
And I think.
I think we've also built trust within the integrator community. We can also increase MSRP to allow them to protect their margins downstream.
And given the.
<unk> that our industry targets, we don't see that really impacting demand.
And.
And anyway. So we're pleased with the changes and I are greater community is not shy I have not received a single comment on it.
Yeah.
No. That's very helpful. Thank you John I guess, maybe.
Follow up follow up was doing.
Do you really see.
Anything.
Other needed and as we currently assess our cost structure, we don't feel like we need to do anything. However, this is the most dynamic environment that we've operated in in some time and so we will do what it takes to protect.
Our opt.
Operating model did the same to protect our integrators model in terms of giving them the right kind of notice.
And being attentive to making sure the products remain affordable.
The end market.
Okay. That's really helpful. Thank you John and then the follow up is just you mentioned integrators are.
Book to months in advance.
Can you just share kind of what that normal kind of backlog or lead time would look like in a normalized environment is it weeks of it.
Kind of frame, what the current environment looks like compared to a quote unquote normalized environment and that's helpful. Thanks, and congrats I think yes, I think as.
As long as we've monitored this we've always assessed integrator backlog more in the way of and this is a generic statement because we serve so many types of integrators, but more in.
<unk>.
Then in months and.
Right now, it's just really hard.
To get in integrators attention. They are they are backed up.
And so.
That gives us good visibility.
Awesome. Thank you so much John.
Thank you.
Thank you. Our next question comes from Paul Chung of Jpmorgan. Your line is open.
Hi.
Hi, Thanks for taking my questions and congrats on the successful IPO. So a couple of questions just first off on.
The product mix of <unk>.
Third party products, which part of the portfolio did you kind of see strong relative demand and how should we expect that mix.
<unk>.
Logistics costs and pricing kind of impact the rest of the year just your gross margin outlook would be helpful and then.
What what could revenues have been if inventories had been in a better availability in <unk> in your view and have you seen that normalize for the most part.
<unk>.
Hey, Paul it's Mike Thanks for the question.
So to start just from a gross standpoint growth was strong across all categories, most notably our network and entertainment categories as people live work and play more AUM in those products as being probably the strongest growth there's growth across the entire portfolio.
Folio.
As we think about where.
Sales would have been if we didn't have the <unk>.
Inventory shortfall that we had.
We're seeing low single percentage points of impact on our topline revenue.
As we manage through the supply chain shortages, we're seeing.
It impacted.
Tens and a few hundred of our thousands of skus across the portfolio of products that we have and so.
And it moves around on any given week something comes in something else goes out azure going through the challenges that are out there and managing through it.
Okay, Great and then can you can.
Can you talk about the.
The overall dynamics of your M&A strategy, particularly around topline margin. So in the example of access networks can you quantify the topline uplift by leveraging your your channel. Once you brought it in house and also have the gross margin uplift.
Lift.
As you bring that product in house.
Yeah, So Paul access networks as part of our guidance going forward, we're not separately breaking out their individual performance, but it's already included in our guidance as we go forward.
They were already serving the same channel we serve so the vast majority of access networks of integrated rollout.
Snap one integrators, however by Green snap one we're now exposing that product portfolio to a much broader base of integrators and so we do expect to see.
Increases from a revenue standpoint, as we introduce that product.
With the 16000 integrators buying on snap platform have that availability.
Yeah, Great and then just to add just to add to that very quickly I think the synergy we see from the revenue side of bringing their product.
<unk> of customers versus there are hundreds of customers.
Let me see that into 'twenty two event and that's primarily because we've got to ensure.
We're already supply chain can react to that type of demand.
So it's not just a matter of buying them and putting their product on the shelf.
And then lastly will you be providing integrator count respective revenues.
International and RMR split that's it from me thanks.
That does.
I think international and domestic is split out in the queue.
Have those in front of me, but you can see them in there and we are looking at further revenue Disaggregation will go forward, but that's the only revenue disaggregation that we have today.
Thank you.
Our next question comes from Stephen Volkmann of Jeffries.
Your line is open.
Hey, good afternoon, guys. Thanks for taking the question maybe just a quick follow up on one of the earlier questions.
Relative to the price increase have you historically seen.
Like a pre buy or maybe things are just too tight for that to happen, but I'm just trying to think.
GAAP with cadence of third and fourth quarter relative to sort of the price cost. It feels like the fourth quarter will be fine maybe theres, a little headwind in the third quarter, just any color there.
Yes.
We had because we announce.
60 days.
In advance we can see.
And because we know what our normal patterns or we can see the last couple of weeks of July right before the price increase.
Small amount of buildup and that gets amortized very quickly in the first couple of weeks of August remember our integrators. The vast majority of them don't have warehouses to store product.
Product and so.
It is a dynamic but it's not material.
In the business.
Okay, Great and then maybe just a quick comment on cash flow. I think you said you were building a little extra inventory, which definitely makes sense I guess in this environment.
Do you then liquidate that as we get towards year end or is that something that we should just sort of straight line going forward.
Yes, we're definitely still alumina under inventoried, if we go back to last year when Covid first fit when we were looking out and trying to figure out where demand was going to be we definitely we're sensitive to our inventory.
And then we've had a great launch.
Last 12 months and have been chasing inventory and with supply chain challenges that are out there we've been investing in inventory and we've got a little bit more to go there. So it won't be liquidated, but it shouldn't grow significantly outside of our normal revenue growth. So as we said we expect inventory to grow.
Roughly in line with our inventory growth on a go forward basis.
Got it thanks, so much.
Thank you. Thank you.
Thank you. Our next question comes from Chris <unk> of UBS. Your line is open.
Thank you guys.
So.
By my math.
<unk> into the <unk>.
Back half assumes.
Very little if any increase in activity relative to Q2 once we account for the 5% price increase the extra week in Q4, and the access network acquisition.
So I guess my question is does guidance assume supply chain disruption picks up.
Into the back half you guys talked about inventory is running a little bit low.
<unk> integrator activity capped at the levels. We saw in Q2, just because this is a labor intensive industry in there.
Hiring across the economy.
Definitely the former Chris as we're looking out there.
We.
We see the supply chain challenges they did accelerate into the end of Q2, and we're still seeing those today.
So we've taken a approach that we want to be conservative as we think about.
The logistical and supply chain challenges that are out there and so because of that while we're still seeing great demand sensors out there we've moderated our expectations about.
About our ability to be primarily in Q3, we do think it will moderate back going into Q4 watching it closely but we want to make sure we're going into this with eyes wide open. It's it's still a little bit murky out there and you know as we look out there and when exactly it's going to get back to normal times.
We're just being conservative our guidance as we as we look out the rest of the year and manage.
That supply chain challenge.
I appreciate that and then I think you guys called out maybe a low single digit percentage point impact to revenues in Q2, so it sounds like the embedded impact into Q3.
Is above that and then I will.
Also.
Can we get some color on the increase.
Increased costs incurred as it relates to the supply chain impact is obviously isn't impacting revenue, but you guys called out advanced component sourcing new suppliers more air freight.
All of which is it sounds.
It drives opex higher any color there on either what was experienced in Q2 or.
Kind of what's baked into the into the rest of the year. Thank you.
Yeah. Thanks, Chris So definitely it's going to have a bigger impact on Q3 than Q2 of Q2 was low single digits Q3s mid single digits from our standpoint.
And really the second half of the year is our expectation on that supply chain pressure and again, we expect it to moderate.
Before.
Get closer to normal by the end of the year, but it's something we're watching closely as.
As far as the cost pressure, we're seeing it's really in three areas. One is on commodity pricing. We've all seen that that's moderating a little bit where we're seeing those inputs as an issue labor is the other one so at our factories and we're definitely getting.
Conversations.
Patients from our proprietary product contract manufacturers in JDM partners on the prices that the cost pressure they are feeling and looking to pass that along.
Then we all know what's going on with logistics in the <unk>.
Freight rates that are out there the ocean transportation airfreight are all tight right now and so we're seeing that that should moderate going into next year.
Or is the expectation and so the 5% that we pass through really is meant to overcome all of that and maintain our margin rates as John said.
Thank you.
Thank you. Our next question comes thank you Ken.
That's all I have at BMO capital markets. Your line is open.
Good afternoon. Thank you for taking my question.
First one maybe John or Mike can you talk a little bit about your M&A pipeline and what areas are most interesting deal.
Yes, sure I think.
We.
Have been since since we.
We got the IPO done and don't forget we did access.
Earlier this year.
I think we've been working now on kind of refreshing.
The pipeline I think there is.
Two areas that.
A primary interest to us.
One is continuing to.
Things that expand our reach and our distribution capabilities and I would point, specifically to security and commercial as part of those and.
Secondarily, I would point to kind of the international market, but thats distant from security and commercial and then the other piece of our.
Product opportunities that could have played in those markets security and commercial specifically, but also opportunities for us to continue to consolidate our existing position in the residential technology market.
Translate what are <unk> margins into <unk> margins and.
Make our reach available to those product companies, who don't necessarily have it. So that those are the two primary areas for us and then if we as we continue to expand our distribution capability inside the U S. If we can pick up small distribution companies that already have.
A culture similar to ours in terms of serving the integrator and have.
Have presence in a locale that were not in I think we'd be very interested in making them part of our family.
Got it that's very helpful. And then my follow up would be around.
Your brands.
<unk> strategy can you just remind me kind of how you guys are targeting.
Kind of the number of branches that you will open as we head into 2022, not asking for specific numbers, but just sort of getting a sense of how you guys think about the opportunity there.
Yes, so right.
Now in terms of our 2007, we expect to open another three or four for the remainder of this year.
And our range of openings I would say that we aspire to open about a year and we feel highly confident we will be five or six and so it all becomes a matter of capacity and timing and finding the right location all of those.
Salaries being fixed income locations I think is is how do we think about it.
And we will always push for the higher number in and modeled.
<unk> modeled a lower number.
Got it good luck in the back half of the year.
Thank you.
Operator any more questions.
Okay.
Hello are you there.
Okay. So most of our operator for anybody on hold we're trying to figure out how to.
Figure out some questions that she doesn't come back so to step backwards.
Okay.
It looks like the next.
Person, Here's Adam Tindle from Raymond James Adam you're able to ask your question.
Adam you probably muted compress some are one.
I think that will undo.
I wouldn't promise.
Okay.
Okay. We were just informed only the operator can control the muting.
<unk>.
Standby, we'll see if we can get her back.
Hey, everyone.
This is John.
And inevitably on our first conference call something has gone wrong with lost our operator and only she can on mute. The line. So those of you have questions, we'll take them after the meeting.
I want to just say thanks for joining us today.
It's a really exciting Easter visit this is Andrew I'm, taking over for Valerie are we should we go to Q&A now.
Sure if we got more questions lets go.
Yes, we do Okay. Our next question comes from the line of.
Ryan Merkel with William Blair.
Hey, Hey, guys I'm still here, Hey, Ryan Youre right claw back on.
No problem.
Very unfortunate on your first call as you said, but.
So.
My first question is on gross margin how should we think about the second half.
The price increase out there say gross margin lift sequentially.
Second quarter into the second half.
So Ron we've set the price increase to offset the cost pressure refuelling and obviously some of that costs came through a little bit earlier in the year and some of it's coming from now and so what you guys are the ones that we will see a slight lift early in Q3, but other than that I wouldn't be modeling any significant changes.
From the margin rates going forward.
Got it okay.
And then for my second question, just maybe an update on traction in the commercial and security markets. If you want.
Yes.
Well they both are.
Have grown.
Nicely I think we've seen.
And our accelerating growth.
As we kind of measure those channels security was up.
A bit below our overall growth rate at.
At 26% commercial was up over 50% five zero so that shows the bounce back we're starting to see.
Our commercial market as as we all know nobody was going into commercial spaces.
In the second quarter of.
2020 so.
We are launching products.
We are continuing to drive the same growth strategies.
We are in residential and we're really pleased with what we're saying.
Great sounds good I'll pass it on best of luck. Thank.
Thank you Jerry.
Thank you.
Question comes from the line of Keaton Ventura with BMO capital markets.
I'll take the second.
Ill facility, if I get.
Yeah.
Yeah.
So.
Maybe just a just and I'll talk a little bit about in August the snap and control for.
The ERP platform consolidation that Europe.
Planning and kind of you know what is the target there.
Yeah.
Sure. So you know.
We executed the merger of the companies just about almost exactly two years ago.
Control Force E Commerce platform. The staff, one ecommerce platform store out there separately or integrators are transacting separately, we're in the process of converting them theres two subset versus converting a whole loyalty programs.
Grams across all of our platforms and crude goes ecommerce platforms in our omnichannel local stores and we expect to have that done by the end of the year and then from there we'll be merging the actual e-commerce platform between staff wanted control for and sometime early to middle of next year. When we expect to have those collapsed into one so integrators, we only transacting on one platform.
Instead of two.
Got it and then if you think about kind of.
Capex.
For the for 2021 and.
So what is the right framework to think about in 2022.
Okay.
Other than the relocation of our Draper headquarters.
That lease expired.
We're moving our.
Salt Lake City headquarters.
The ratio of Capex to revenue should remain very consistent in 2022 with where it's been in 2021 historically.
A little bit over 1% as Arctic.
Oh Capex rate would you expect that to change significantly.
Got it that's very helpful. I'll turn it over good luck. Thank.
Thank you. Thank you.
Thank you your.
Your next question comes from the line of Adam Tindle with Raymond James.
Okay I've had plenty of time to think about this guidance.
Typical.
Hey, Thanks for taking the question and congrats on the results and IPO.
So John I did want to touch on you've obviously got a very healthy core residential environment that you're in right now, but as I think about the back half of this year, you've got catalysts on top of it with sea for OS for commercial I think our plan to.
Sure.
You gave us the commercial growth rate, though maybe you can take a step back and touch on the overall commercial opportunity maybe touch on the progress on that Oss reliefs and any early indications from dealers on interest levels.
Sure Adam I think you know.
We.
We became.
To come out trusted in this market because we started to see commercial integrators.
Coming to us just for the superiority of the product without really any.
Devoted effort to go out and market to these integrators and.
Now the businesses.
Came around pretty significantly so it's become much more strategic about it and I think.
Before we.
To get serious about it we had to ensure that we had the product capability in all the areas because I think what's made what's made us really.
As inside the resi industry has been the combination of the workflow solutions that residential integrators value, but also as we talked about what the brand analysis, we feel like we've got the best products and the best software platforms in the industry.
We don't have.
Meat products and platforms, yet in the commercial industry and so what our teams have been doing is.
He is investing in those and so in some areas those are.
Has been easier to do and we work with are.
Partners in Asia.
The best and have been able to do things around you know how many ports for instance, networking switch has.
And we've been able to.
Two.
Revamp, but add features and functionality to oversee that are required for commercial integrator short managing across.
Many different locations for a single customer.
And what we've been lacking there is what we would call the center plate products around control for.
That environment and the first release of that product is going to be in September and we're really excited about it.
We're getting good feedback on it it's in beta now and <unk>.
That will be a journey.
As we.
Our control system and our residential environment.
Very similar almost regardless of what home you put it in <unk>.
Control system in our commercial.
And wherein because theres, so many different types of commercial environments.
Varies and so we will continue to enhance that system with features and functionality and continue to round out some of our other product lines. So we feel like we are.
At the beginning but it's a business.
<unk> today is.
Significant tens of millions of dollars for us and we're really optimistic and getting good reception on the products from both commercial integrators, but also our residential integrators, who.
May have been really busy with residential implementations over the past year.
True.
That generally have.
Seen commercial applications be as much as 30% of their business and.
We are.
Sure that as the commercial business continues to return there'll be there along with commercial integrators to serve that.
Sorry for the long winded answer.
No.
Traditions very helpful and obviously controls complex, but chance to be a pretty big differentiator. So definitely wishing you best of luck with that initiative just as a follow up maybe for Mike.
On seasonality.
Covering control four years ago, we were kind of count on sort of a steady revenue build.
Throughout the year with Q4, typically being the largest by revenue and I'm wondering how to think about this year for snap you what could be different because traditionally you'd have maybe Q3 looking sort of like Q2 revenue dollars with the balance in Q4 and being a little bit higher than what could be potentially is that the right way to think about.
Build what could be different this year.
Yeah. Good question I am sorry, I think generally when we look at seasonality in our business. Our sales are generally highest in Q2, that's what our outdoor solutions outdoor audio video surveillance access points come into season fewer stock up on those products, sometimes where ASP on those jobs are are starting to ramp.
Our sales continue to be strong in Q3.
Then into Q4 due to consumers desire.
Project as part of Thanksgiving Christmas holidays.
We do tend to sell a bunch of Tvs that are at our local omnichannel stores and there is always the typical TB Black Friday holiday type of sales pick up there.
<unk>.
<unk> talked about in Q1, we will see very very modest decreases in sales on an average per day basis from from what you see there, but the seasonality across our portfolio should be significantly less than what you used to experience with control for.
Understood very helpful. Thank you guys.
Joe.
And your next question comes from the line of Keith Hughes with Truest.
Thank you.
On commercial talked about several times in this call could you just talk about what kind of commercial jobs.
<unk>.
It's a job in our revenue, but doing that you think you could serve now and.
And in the future as you ramp this up and what will be areas you could serve.
Well I think right now good question right now what we are.
Focused on is what I'll call smaller applications that we would fit into what we call the design and build.
Category.
What we're not doing is large office towers, where specifier and architects have been hired in Rfps are being put out to various product companies <unk> integrators. Those are not the projects, we're typically going after.
<unk>.
Our restaurants in sports bars.
The local lawyers office or Accountants office, where they.
They need network and they need us surveillance system to look at the property conference rooms that will have sound bars, and speakers and microphones and so forth and that's what we're focused on right now.
And Thats, a very big market.
Okay.
Okay. Thank you.
Thank you. Thank you.
Thank you.
I would now like to turn the call over to management for any closing remarks.
Okay. I started this earlier when we lost the upper face.
I'll try it again first.
Thanks again for joining us. This afternoon. It is a really exciting time for the company.
Just wanted to take a moment and thank the three groups of people are number one our dedicated employees who have been.
Working.
So hard to generate.
Volatile stirring really trying times.
In the country number two our network of 16000 integrators in the 100000, plus people who work for them who have been going into homes throughout this COVID-19 crisis.
And making those homes more connected.
<unk> safer and more enjoyable and I want to thank the investors you guys, who are who are taking time with us today, but who also have supported us in our IPO.
And we will work hard to continue to.
Deliver results for all of you so with that I'll turn it.
The Brazil, the operator, and we will speak with you guys. After the third quarter.
Thank you for joining us today for snap ones fiscal second quarter 2021 earnings Conference call you may now disconnect.