Q1 2022 Snap One Holdings Corp Earnings Call
Good afternoon, welcome to snap one holdings Corp's fiscal fourth quarter and full year 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session I would now like to turn the call over to staff, one senior Vice President of finance.
Eric Steel Sir please proceed.
Thank you operator, good afternoon, and welcome to snap ones fiscal fourth quarter and full year 2021 earnings Conference call. As a reminder, let's call it being recorded joining us today from snap one are John Hammond, our CEO and Mike <unk> our CFO .
Before we begin we would like to remind everyone that our prepared remarks contain forward 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 statements do not guarantee future performance and therefore undue reliance should not.
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 inherent 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 as of the date of this broadcast March 22022.
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 that snap on dot com.
In addition to the webcast. We have also posted a supplemental earnings presentation accompanying these results, which can also be found on our investor Relations website.
With that I will now turn the call over to our CEO , John Hey, John Thanks, Eric and welcome everyone and thanks for joining us this afternoon.
I'm going to start off.
Today with a review of our recent updates and highlights and then I'll turn the call over to Mike Cartwright, our CFO to discuss our financial results for the quarter and the year as well as provide a 2022 outlook.
And after that we will share some closing remarks before opening the call up for questions.
As a brief reminder, for everyone listening here at snap one we provide a smart living platform that empowers professional integrators to deliver joy connectivity and security to end consumers on a global scale as a leading distributor to these integrators, we work with a growing network above or.
16000 professionals.
That our do it for me integrators, who distribute our proprietary and third party products.
Using our e-commerce portal and our brick and mortar facilities.
We further support our integration partners with our proprietary software platforms and digital workflow solutions to allow them to successfully serve the residential and commercial customers across the project lifecycle.
The smart living opportunity is large and it's untapped, we believe that we're strategically positioned to power the smart living revolution through our entrenched and growing network of.
The integrators as demand for smart living solutions continues to rise, we anticipate an increasing number of consumers who rely on these professionals to get the job done in turn these local professional integrators need a scaled platform like snap one to successfully deliver on the.
The promise of smart living.
Here at snap, one we're positioning our integrators and our company to capitalize on the tremendous growth opportunity in front of US we aim to help our integrators and enhance their capacity to meet the durable demand for smart living solutions and to grow profitable businesses. We do this through investing in.
Two platforms, one our business platform to make life easier for small businesses we serve.
And two through a product platform that supports easier installations higher profits reliability and end consumer satisfaction.
From a business platform perspective, we are focusing on convenience and we're focusing on workflow solutions, which are critical for these partners the lack their own infrastructure.
From a convenience perspective, we're methodically rolling out new local branch openings to expand our nationwide physical footprint, while simultaneously investing to enhance the digital experience on our E. Commerce portal, we want to provide where integrators with the flexibility and convenience to engage with us in the way.
That best meets their needs.
We're also investing in workplace solutions, we're exploring new ways to support our integrators.
Business infrastructure and workflow tools to increase efficiency from a robust education and training curriculum to award winning support to new value added service offerings like parasol, we have our integrator snacks.
Regarding our product and software platforms, we continue to make big investments from a product standpoint, we're continuing to develop innovative new products with installation efficiency and integrator profitability top of mind.
The industry will see an amazing amount of new innovation coming from snap one over the next few years. We're also expanding our curated portfolio of third party products to provide integrators with the convenience of a one stop shop for their purchasing needs saving damn valuable time and money.
We're also making significant investments in our leading software platforms oversee and control force O S. Three to deliver new capabilities and integrated workflow efficiencies, making it easier than ever to configure install and support integrated systems and we also continued export new ways to deliver.
And monetize value added software services to integrators.
And in June or end users excuse me this integrated product portfolio will be key in transforming an industry that has relied on integrating disparate products together to one that implement integrated solutions that create seamless experiences.
We believe that no one is investing in the platforms that will drive the future success of this industry like snap one.
Let me take a few minutes and reflect on the past year 2021 was a banner year for snap one we became a $1 billion company generating.
Just over $1 billion in net sales an increase of 24% from the prior year on an as reported basis, our attractive business model delivered record profitability with adjusted EBITDA of $111 million, an increase of 17% from the prior year on an as reported basis.
Finally, we successfully executed across a range of strategic initiatives, while navigating a challenging supply chain backdrop to deliver for our integrator customers, who depend on us each day I'll highlight a couple of those achievements now first we rebranded the company as snap one to.
Our aspiration to be the one partner that professional integrators need for every job one company one business platform one product platform. We continue to execute on this one company vision with the recent launch of our all new partners reward program, which unifies the snap one partner.
Her experience under a single loyalty program as another proof point on our journey. The named Snap. One encompasses all we are today and our intent to continue leading the industry in the future.
Second we achieved a successful public listing in July more than a year's worth of hard work and preparation went into making this reality as possible and we're grateful for the efforts of our employees investors partners and other key stakeholders and supporting this key milestone entering the public markets as <unk>.
Abided, our company an expanded opportunity to invest in the success of our integrator partners and to grow our business.
Since our IPO, we have worked diligently to execute against our growth strategy established a track record of delivering strong financial performance build our presence within the investor community and fortify our team with the human capital to further our mission.
Our IPO has also enabled us to strategically deploy our balance sheet to ensure the best possible inventory availability throughout the year reinforcing the one partner that our professional integrators need to be successful.
In terms of our growth strategy in the future operationally our success in 2021.
<unk> strong execution against our proven growth playbook.
That we've laid out to drive sustainable long term growth our growth strategy is rooted as a reminder, in five key pillars, one increase our wallet share with existing integrators to expand our global integrator network three innovate with new products software and technology enabled workflow solutions.
Four develop new software services and revenue models and bind finally fifth executing against strategic M&A I'll speak about each of these briefly one in terms of increasing our wallet share with existing integrators, which includes continuing to execute our omni channel strategy in 2000.
'twenty, one we continued to build out our physical footprint with the opening of eight new local branches in key domestic markets, bringing our year end footprint 31 local branches nationwide, our local branch expansion string.
Strengthens existing integrator relationships it adds incremental purchase occasions, and it expands our integrator network, we intend to continue building our geographic reach in 2022.
Two we're expanding our global integrator network with professionals focused on residential security and commercial applications around the globe in 2021, we experienced year over year growth in the number of transacting integrators across the home Tech security and commercial markets. Additionally.
We sharpened our focus on our international growth strategy, including our acquisition of starboard electronics. This past January and have resource continued investments to develop targeted international markets and our 2022 plant, adding new integrators into the snap one ecosystem will remain an important.
Growth driver for our business in 'twenty, two and beyond.
Great innovation with new products software and tech enabled workflow solutions in 2021, we made significant upgrades to both our first and third party product and service portfolios and the industry took notice.
Our leading products and services were recognized a record setting 36 times as the number one or two brands across 62 identified product subcategories in the 2021 CE Pro 100 brand analysis awards over the past year. We've also thoughtfully expanded our.
Third party products as well in 2021, we added several new third party vendors to our e-commerce portal, including rain pro control sound, United, including the denim and Moran brands and Roku.
In the fourth quarter, we extended our partnership with Josh AI for the strategic development of a first of its kind control bore certified driver for voice control of more private voice control alternative to big Tech overall, our product and service capabilities are now more robust than ever further.
<unk> is the partner and distributor of choice for our integrators, we remain committed to driving innovation through our continued investments in new product development and are looking forward to the many new product releases, we have coming to market.
Four we intend to develop new software services and revenue models in 2021, we announced a strategic investment in parasol and industry, leading provider of 24 by seven remote support solutions that improve integrator productivity and service levels. This services enabled by our.
Terry oversee remote management software platform.
This builds on our existing fore sight, offering which enables end consumers to remotely access and personalize their control for system. Today, we have over 100000 subscribers in our network paying us on a recurring basis and contributing about 1% to our consolidated company net sales.
Given control bore is in approximately 435000 active homes today and growing we believe we have a meaningful opportunity to increase subscription penetration within our installed base as smart living solutions become more software centric we are positioned snapped one <unk>.
Our integrators to lead the way with innovative offerings and revenue models, we continue to invest heavily in our two software platforms to deliver value to both integrators and end consumers stay tuned for further updates and on exciting announcements in the quarters ahead.
And finally fifth well.
We'll continue to execute strategic M&A in 2021, we continue to flex our strategic M&A muscles from a product perspective, we acquired access networks and enterprise great Enterprise grade networking solutions provider that offers networking products design configuration.
Monitoring and support services. The network is the digital backbone of smart living and this acquisition enhanced snap once networking solutions for residential and commercial applications. Additionally, we've continued to develop our local branch presence through a combination of organic openings and targeted M&A.
More recently, we announced the acquisition of Canadian distributor Staab Electronics in January This acquisition brings together two longtime business partners to provide more product choice.
Faster product fulfillment and superior support for professional integrators across Canada, we're excited to expand our local branch presence internationally with stops two locations, bringing our total branch count to 33 locations as of January we expect.
To continue to pursue.
Disciplined accretive acquisitions that enhance our products software and workflow solutions and expand into adjacent markets and geographies that allow us to best serve our integrator base as we look ahead to 'twenty two and beyond continued execution against these five growth pillars will remain foundational to our success.
Yes.
I'm going to touch on the outlook for 2022 before turning over to Mike who will provide more detailed guidance.
Demand for our products and services.
Remains very high and we enter 2022 with the wind at our backs. Despite the supply chain uncertainty we have strong conviction in both the short and long term growth outlook for our business due to continued healthy trends in smart Libyan adoption and durable residential and commercial uptake or integrators remain extremely.
<unk> busy and many are booked out months in advance in light of these factors, we're confident in our ability to continue to deliver strong growth and expect to deliver up to 1.17 billion in net sales and $120 million and adjusted EBITDA at the high end of our 2022 guidance range.
Mike will provide more detail and rationale on our guidance as we move into the first full fiscal year of being a public company. We are poised to build on the continued momentum for the foreseeable future with that I'll turn the call over to Mike <unk>, our CFO to discuss.
'twenty, one financial results and 'twenty twos outlook in greater detail Mike.
Thanks, Sean.
Turning now to our financial results for the fiscal fourth quarter and full year ended December 31 2021.
Net sales in the fiscal fourth quarter of 2021 increased 21% to $273 5 million up from $226 1 million in the comparable year ago period, we.
We had a 14th week in fiscal fourth quarter, 2021, which added approximately 18 million in net sales excluding that 14th week net sales increased approximately 13%.
For the full year ended December 31, 2021, net sales increased 24% to one point O O 8 billion up from $814 1 million in the comparable year ago period again, we had a 50 <unk> week in the fiscal year this year and excluding that week net sales would have increased approximately 22%.
The growth in net sales during the quarter and year was driven by strong overall demand across geographies markets and product categories with year over year increases in transact began integrators and spend per integrator.
Both was also driven by the benefit of recently acquired access networks and the cumulative ramp of eight new local branches opened since the end of the prior fiscal year, including one new local branch opened the most recent quarter, bringing total local branch count to 31 as of yearend.
Additionally, we benefited from two price increases enacted across our proprietary product portfolio in Q1 and Q3.
While supply chain challenges represented a mid single digits headwind in the quarter and low single digits headwind for the year, we took proactive measures to mitigate that headwind and deliver for our integrators.
Contribution margin a non-GAAP measurement of operating performance increased 13% to $105 9 million or 38, 7% of net sales in the fiscal fourth quarter up from $94 1 million or 41, 6% of net sales in the comparable year ago period for the full year 2021 contribution margin increase.
20% to $408 1 million or 45% of net sales up from $339 3 million or 41, 7% of net sales in the comparable year ago period.
The increases in contribution margin were primarily due to net sales growth the decreases in contribution margin as a percentage of net sales were primarily due to mix as the growth in our third party product sales is outpacing the growth that we're seeing in our proprietary product sales the higher growth from third party product sales is due in part to the expansion of our local branch footprint.
Which skews towards more third party product and we see them already commerce platform.
As a reminder, third party product typically has a lower contribution margin as a percentage of net sales relative to proprietary products.
The strategic expansion of our local branch footprint and 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 into greater loyalty and capturing incremental contribution margin dollars.
Contribution margin as a percentage of net sales also declined relative to the prior year due to the increased componentry and logistics costs related to broader industry wide supply chain challenges, specifically, we leveraged the strategic use of airfreight to meet integrator demand across key product categories. These contribution margin rate pressures were partially offset by the pricing.
Actions enacted over the course of the year.
Selling general and administrative expenses in fiscal fourth quarter, 2021 increased 25% to $91 2 million or 33, 4% of net sales from $72 8 billion or 32, 2% of net sales in the comparable year ago period.
For the full year ended December 31, 2021, SGA expense increased 31% to $3 $50 3 million or 34, 7% of net sales up from $2 $67 2 million or 32, 8% of net sales in the comparable year ago period.
The increases in our SG&A expenses during the quarter and year were primarily due to our IPO. The recognition of equity based compensation expenses compensation cost creep to certain IP owners for the interest in lieu of their participation in the tax receivable agreement entered into in connection with the IPO.
The remaining increases in SG&A expenses were due to increases in our variable operating expenses, including outbound shipping credit card processing fees and warranty driven by the higher sales volume increased.
Increased costs associated becoming an operating as a public company.
Ongoing investments to support strategic growth initiatives, the required cost of access networks and finally, a return to normalized spending levels, while lapping cost reduction actions taken to mitigate the impacts of COVID-19 in 2020.
After adjusting for add backs, we realized modest operating expense leverage as a percentage of net sales for the year.
Over the long term, we continue to expect to realize operating expense leverage as the business scales and we realize the efficiencies of a unified operating platform.
Our net loss totaled $7 8 million in the fourth quarter compared to a net loss of $4 4 million in the comparable year ago period for the full year 2021, net loss totaled <unk> $36 5 million compared to a net loss of $25 2 million for the full year 2020 the.
The increase in net loss was primarily due to the increases in SG&A expenses as previously discussed.
Adjusted EBITDA, which is a non-GAAP measurement of operating performance increased 1% to $26 million or 9.5% of net sales in the fourth quarter 2020, compared to $25 6 million or 11, 3% of net sales in the comparable year ago period for.
For the full year ended December 31, 2021, adjusted EBITDA increased 17% to $110.8 million or 11% of net sales up from $94 5 million or 11, 6% of net sales in the full year 2020.
The adjusted EBITDA growth in the quarter and fiscal year was primarily attributable to the net sales increase in contribution margin growth offset by the increases in SG&A expenses the.
The decreases in adjusted EBITDA as a percentage of net sales in the quarter and fiscal year are primarily attributable to contribution margin as a percentage of net sales declining year over year offset by modest leverage on SG&A adjusted for in add backs as a percentage of net sales.
Adjusted net income another non-GAAP measurement of operating performance increased 63% to $13 9 million or five 1% of net sales from $8 5 million or three 8% of net sales in the comparable year ago period.
For the full year ended December 31, 2021, adjusted net income increased 89% to $53 $6 million or five 3% of net sales from $28 3 million or three 5% of net sales in the comparable year ago period.
These increases were primarily attributable to net sales and contribution margin growth offset by increases in SG&A expenses.
Free cash flow a non-GAAP measurement of operating performance was negative $40 4 million of the 12 months ended December 31, 2021 compared to $54 million of growth in the <unk>.
A year ago period, the decrease in free cash flow was primarily attributable to an increase in net cash used in operating activities and this increase in net cash used in operating activities was driven by the strategic use of our balance sheet to protect against supply chain uncertainty, resulting in use of networking capital, including increases in inventory and prepaid vendor deposits at.
The end of the fiscal fourth quarter and full year 2021 cash and cash equivalents were $40 6 million compared to $77 5 million as of December 25th 2020, our prior year end.
And I want to touch on our debt refinancing of note in December we completed a refinancing of our debt securing more favorable terms for a paydown plan and strengthening our balance sheet.
The new credit agreement provides for senior secured financing of $565 million in the aggregate consisting of $465 million in aggregate principal of senior secured loans maturing in seven years, and a $100 million senior secured revolving credit facility maturing in five years.
Now before I turn the call back over to John I'll take just a few minutes to provide a financial outlook for the remainder of the year.
As a reminder, snapple and provides annual guidance for net sales as well as adjusted EBITDA as we believe these metrics to be the key indicators for the overall performance of our business.
As we look at fiscal 2022 we continue to see strong demand for smart living solutions, we expect our net sales to range between 1.14 billion and 1.17 billion, an increase of 13% to 16% compared to the prior fiscal year on an as reported basis and an increase of 15% to 18%.
After adjusting fiscal 'twenty, one to remove the impact of the 50 <unk> week.
We believe the contributing factors to our 2022 sales net sales growth on a 52 week adjusted basis are as follows.
10% to 13% of that growth will come from organic growth, which includes volume historical pricing actions and local parental openings. Another 5% will come from the impact of recently completed M&A, including the access networks full year impact and Sobbed electronics, which as John mentioned, we closed in January .
On an as reported basis, the lapping of the 50 <unk> week in 2020 , one represents a 2% net sales growth headwind.
We expect adjusted EBITDA to range between 114, and $120 million, representing an increase of 3% to 8% compared to the prior fiscal year on an as reported basis.
Presenting 2021 on a 52 week adjusted basis and normalizing for a full year of public company costs. Our 2022, adjusted EBITA guidance would represent a year over year increase of 8% to 14%.
The implied.
Adjusted EBITDA margin range of 10% to 10.3% represents a 70 basis points of hundreds of basis points decline from our 2021 adjusted EBITDA margin rate.
The margin rate compression reflects both operating expense investments to drive long term growth as well as potential contribution margin rate pressures driven by supply chain inflation headwinds.
Among others. The following factors were considered when developing our adjusted EBITDA guidance.
Given our conviction around growth in the near and long term, we plan to fund investments in research and development software and go to market researches to continue to develop adjacent markets such as commercial security and international we believe these investments and any potential reinvestment from net sales outperformance in 2022.
<unk> well for long term sustainable growth.
As we look forward to 2023 and beyond we expect our pace of investments to normalize.
Second we expect to incur the full year impact of public company costs and the build out of our corporate infrastructure to support scalable growth as a public company.
And third given the dynamic and evolving situation regarding inflation and supply chain headwinds, we continue to see cost pressure in the excess of our historical pricing actions. Our philosophy has been to adjust pricing to maintain our long term margin rates to the extent, we continue to absorb sustained supply chain inflationary pressures will use pricing as a lever to <unk>.
Mitigate those costs.
As a reminder, we implemented a proprietary price increase in February of 2022 and any additional pricing actions. We may take in the future will be reflected as upside to our current guidance.
Overall, we remain highly confident in the financial health of our business as well as our ability to sustainably grow for the foreseeable future.
So that completes my summary, I'd now like to turn the call back over to John for additional comments John Thanks, Mike.
A few closing thoughts before we hit Q&A number one we're investing in our growth thesis integrators see far more demand than their existing capacity.
New channels are emerging and growing and exciting new product launches and models are in front of US number two our teams have been doing a great job managing through supply chain and logistics issues, which we believe will continue to persist throughout 2000.
22, our number one priority has been to deliver for our integration partners and keep projects moving our number two priority has been to protect our partners <unk>.
And our company's financial performance using price MSRP and other levers. These priorities will continue to guide us and in that order. We believe we will see moderation of the supply chain impacts in 2023.
And finally, we're quite bullish around our long term operating model the scale and the platforms. We are investing in will drive better solutions for the end customer more capacity for the integrator and growth for snap one in a way that increases operating margin overtime the supply chain for states.
In the short term, but our leadership and.
Our investments will assure it over the longer term and with that we'll open it up for Q&A.
Thank you at this time, we'll open the line for questions from the company's publishing analysts.
Company and request that each participant limit their comments to one question and one follow up.
I ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Our first question comes from Erik Woodring with Morgan Stanley You May proceed with your question.
Super. Thank you very much congrats guys on the quarter and the guide you know maybe John I'll throw in to you first and then Mike I'll follow up with you. So John maybe just help us understand.
You know you guys talked about investing in the platform just maybe if we can dig into that a little bit what are kind of a little more specifically what are some of the priorities that.
That youre investing as you think about 2022, and maybe I'd frame that from the context of you know you've talked about combining the loyalty programs that was an initiative that you had like that type of granularity just as we think about 2022, and then I have a follow up for you Mike.
Sure. Thanks, I would say if you back up.
We acquired control for.
A little over two and a half years ago. We've worked on doing a lot of integration of the sales channels and the technology all point to the integration of oversea with our control for product line.
This past year, which allowed us to also retire effectively older cloud management solutions that controlled warhead and so now what I would say is.
We're investing.
And three separate areas number one I would say.
The go to market and they're it's all around integrator acquisition.
It's.
It's security, it's commercial it's international and of course local is important to all of that so we're continuing to invest in our local platform.
We're also combining the technology platforms. The go to market platforms, the commerce sites of those <unk>.
<unk> and then <unk>.
I think where you would see the biggest increase in investment in the business is actually on the kind of R&D side of the business and now that we've integrated the.
Different platforms, we're now moving on to what I'll call true innovation so you're.
You.
More importantly, the industry and homeowners and business owners will see a significant amount of new product launches across many of our categories I would point to what we call. The more connected categories. This smart categories more than anything.
And so that's that's one area. The second area is the software platforms.
And what we're doing to position them for war as a service offerings and even more integration. So the installs are easier for the integrator.
And so that's the second area. That's the largest bucket is the R&D increase.
And then the third area is our own corporate infrastructure Shadow.
Bringing together these platforms, bringing together the ERP platforms getting our local businesses and our traditional e-commerce business to run on the same platforms. Those are the big areas. We're making I would also just site overall from a people standpoint, we're investing in our people.
I would say as we look this year and the.
We feel like we've had an amazing past couple of years.
We're investing in our talent and in terms of development, but we're also investing in them in terms of kind of benefits and wages.
And that's something that's across the board.
That was really helpful. John Thank you for for that detail I guess, maybe Mike I'll turn it over to you.
You've previously talked about kind of the 13% long term growth algorithm.
M&A you know on a normalized basis 2022 is kind of like 12% to 15% organic growth and so just curious if there's if there's anything specific that youre seeing in 2022 that contribute to the slightly stronger growth outlook relative to how you think about maybe the long term and that's it for me.
Sure. Thanks, Paul I think there's two sort of offsetting factors in our 2020 guidance that are slightly different than our longer term algorithm. One is pricing probably has a more significant impact in 2022.
As you know we did a pricing change in August we did another one in February that's probably higher than we would expect to be the normalized run rate.
And that puts some logs from upside to our long term guidance.
So this year versus long term offsetting that as we think about the organic growth rate of business from a volume growth in the industry, which I think we typically call. It 6% to 8% is how we think about smart home and automation growing and that's both volume and price within that number but I think right now we're hedging that back a little bit just with the supply chain constraints that are out there that we're all seeing.
I think we're looking at organic growth being a little bit below that rate this year.
As we manage through supply chain challenges. So if you take that sort of pricing upside in just the base volume growth that we expect to see in the business being impacted by supply chain.
And those numbers that we talked about.
Okay. Thank you.
Thank you.
Our next question comes from Paul Chung with Jpmorgan You May proceed with your question.
Hi, Thanks for taking my questions and congrats.
Congrats on exceeding 1 billion in annual revenues.
So very nice execution this year so.
As we kind of look to the next incremental billion can you talk about the dynamics between.
Integrator count and spend per integrator.
How quickly do you kind of see a pickup in.
And new integrators as new locations opened and also kind of the mix of products impact on the spend as well you know what types of products are you seeing kind of relative strength.
Sure. This is John .
Think from our standpoint.
We have identified an integrator universe of roughly 70000 integrators domestically.
We do business today with over 16000 of those integrators and.
We continue to add thousands of integrators a year.
As we've said before by the way, it's our intent in the future to give counts on some of these the convergence of our different.
Operating systems between our local businesses control for and legacy snap.
We're getting to the point now that we can start identifying a single customer as an insurer, we're not double or triple counting a customer.
Very comfortable with the 16000 number.
And because we know we're adding thousands a year.
As long as we continue to run our playbook around integrator acquisition and product fit et cetera.
We believe we will continue.
<unk> increased the size of that universe.
Second in terms of average spend and if you thought about average share.
In the market, where we're kind of have the higher shares.
We are seeing in our greater spend.
50 to $60000 per integrator, so we generally would have.
Share of that integrators wallet, we would estimate of 10% to 15% depending on the size of the integrator.
And in our newer markets commercial and security, we have a lower share of their spend call it less than 5%.
And so.
What I would say is we are continuing to march towards adding.
Thousands of integrators of year end.
I will.
Sites, something kind of in the lower thousands of the integrators every single year.
And then continuing to increase our spend per integrator.
Across our universe and I think when you kind of deconstruct that then in our financial models. That's why we're comfortable with kind of low to mid teens organic growth is by increasing both of those so.
I personally think its going to tend more towards growth in the number of integrators.
If I were to.
If I was a betting person so call it 60% of our growth comes through adding integrators, the other 40% spend park.
And that hopefully matches up with the prior question, which is where we're investing in the business around the grow the market and around the product development.
Great. That's very helpful and then follow up.
And just the margin dynamics, you know I understand there's a margin uplift when you acquire kind of a third party products and move them to proprietary.
As we think about the staab acquisition and potential cost synergies and scale benefits there.
Do you see a margin uplift also immediately or does that kind of take time to flow through and then is the mix of M&A going to be expected to be kind of balanced between expanding your distribution in acquiring products. Thanks.
So thanks, Paul I think on.
On stock specifically.
Stop was already an existing partner of ours and they were already selling our products and so really what we've acquired was Bob has a footprint in Canada to continue.
To grow.
No.
Had a long term relationship with them.
Spans our market entry into Canada, we've already had a pretty good presence in Canada from selling out of our U S locations. So stop by itself actually if you think about it because we acquired a bunch of third party products, they're probably slightly negatively impacts our operating margin just given again the portfolio and they were already selling a bunch of our products, but long term again, we still think that.
Our mix of products will continue to be driven by our proprietary products. We're looking to have third party product be created and support that as we go forward.
And over the long term, we still think that the operating model expansion is going to be there for us.
Great. Thanks.
Thank you. Our next question comes from Chris Snyder with UBS. You May proceed with your question.
Thank you I wanted to kind of follow up on the conversation around margins old specifically gross margin, although I understand that.
Third party outgrowth as a natural kind of gross margin headwind, but it also feels like.
There is some other comment maybe price cost pressure going on with inflation and supply chain costs. So I guess, you're kind of taking that backdrop.
I was hoping for some more color on how the company thinks about pricing and how hard.
Posted on pricing.
It seems like the company is very good pricing power given the.
High percentage.
Our products are differentiated software platforms. It feels like integrators are doing phenomenally well.
So how do you think about that price cost and is the expectation that that price cost will be.
Be pressured in 'twenty, two relative to 'twenty one.
Okay.
In 'twenty two relative to 'twenty, one I just wanted to make sure I got it.
That grid, yeah, Yeah, I guess is the gross margin headwind all just less third party outgrowth or was that also an assumption that pricing is not fully offsetting the cost pressure we are saying.
Okay, I think first of all I would disaggregate for a second price versus cost.
And I think what we have.
Recognized over the past few years is that given the value our products provide we should price them accordingly to the end customer to maximize integrator profitability and reflect the value of the products.
And then we should price them in a manner to the integrator, that's fair for them and drives profitability for them.
And over time I want to make sure the company.
That plays to our legacy and I'm talking 10 years ago moves towards pricing based on value versus pricing based on cost.
And one of the big reasons for that is because of the very high level of software content. That's in our products today that wasn't in our products a decade ago.
So I think we've got a a pricing competency in the business around that.
Second from that in 2022.
And really uniquely in 2022, we started to see cost increase the first the first.
Kind of drop on the supply chain was more around availability the second became.
Evidence was from a cost standpoint, and that's from two perspectives. One is componentry I don't think I have to spend much time talking about componentry in 2021, and what was happening from a cost standpoint, and then the other is logistics and there are many components around logistics.
Most recently, what we would all be aware of is the price of oil and kind of the inflationary pressures and so what we.
<unk> began to do is challenge ourselves to not just reflect our pricing from a value perspective, but also to understand kind of what was happening on the cost equation in our business and our partners business and so we updated pricing in August both at an MSR.
And at a.
Our price to the integrator level and so we saw.
About five months of benefit from that by the way. The date, we announced pricing we don't necessarily always see it because we give the market an advanced node a notion of the price increase said theres. Some buy ahead, but let's say we got four.
To five months worth of pricing in.
In 2021.
As we went through 2021.
Our mindset has been to make sure we have inventory for partners.
The price increase we did in August was about to ask what our normal price increase is.
As we started to see our costs continue to.
Expand and we solve that need to accumulate product for our integrators and effectively that becomes part of the cost of our infrastructure.
We decided we needed to do an additional increase of MSRP and of price and we announced that to the market in December .
And that went into effect on February 1st obviously, there was buying ahead in January for that.
But that price change has now been.
Bob fully implemented across our system.
We had expected in.
November and December timeframe that our supply chain issues.
Start to mitigate in the second half of this year.
I would say.
The inflationary pressures in the economy.
I would point, mostly towards kind of the most recent events in Ukraine.
Were things that.
Have caused us more recent concern and those things have rippled through the supply chain. They have also been other events, China Covid plant shutdowns et cetera, and so I would say we have gotten more conservative around our supply chain outlook for this year as it relates to both of them.
All ability and cost.
We.
Have reflected that in our guidance and mikes discussed that and you can see that in the fourth quarter results in terms of our margin that Mike spoke about you can see it in kind of our 2022 guidance.
Today, we sit here looking at price again, and it's a lever and it's a lever that we will use judiciously first we have to make sure our partners and MSRP are in good shape, then we will make sure that the issues we're seeing today.
That we're communicating today are not short term because we just did a price increase on February one and so we'll look at another one.
And the teams are looking at that it's very easy on specific products where the.
The componentry costs have increased significantly for instance, something that has a high copper content and so we might look at those in isolation and so I think what we're trying to communicate what we don't want to do here on a call with you guys is commit to a price.
Increase that doesn't make sense for our market in our industry and then have to live by that price increase that's not how we run the business. We're communicating to you guys.
Very strong demand out there we see the cost from Q4 and earlier this year around things that we're all aware of in the general environment.
And our message to you is that we will continue.
Look at price and use our pricing muscles and use.
Our pricing power judiciously.
Yes.
Appreciate all that color it's extremely extremely helpful.
And I guess kind of my follow up.
So I understand the level of investment going on to the business from 'twenty two to drive growth. It sounded like from some of the commentary that that pace of investment would fall off in 2023.
So is that so should we expect positive operating leverage returns to the business and in 2023 and then as they were.
A right way to think about incremental margins.
The business in more of a normal operating environment, which has obviously been hard to come by the last couple of years.
Yes, Chris It's Mike Boyle answer that is and I think we touched on this earlier on on Eric's question. If you think about our sort of baseline long term growth algorithm of low double digits. Within that then yes, you should expect us to see operating margin improvement.
We are looking at the investments we've made whether to bring our platforms together.
Investments in our product portfolio Smuggles data market investments, we're making and we would expect to see the scale of business provide leverage in our business.
If we're talking about is growing in low double digits. However, I think we aspire to grow at a higher rate than that and to grow at a higher rate than that is going to require some other investments and so the extent that we see opportunities to grow faster and actually deliver higher growth, we're not talking about five years from now.
See that opportunity then we very likely would be making investments that would continue to keep the operating margin where it is that maybe the pressure it slightly but that would all be on incremental dollars. So.
Theres incremental growth above our baseline there might be incremental investments, but at our baseline growth of low double digits clearly looking for operating margin improvement.
40, 50, 60 basis points each year for the next few years and something that we would expect to go live ruble.
Yeah, what I've seen.
That thinking.
Where I see the margin opportunity in the business is continuing first of all I think once the supply chain.
Outlook changes, which it will.
I think that we'll be able to get to some of the margin enhancing activities that historically.
We've been able to execute.
It's just today, we're focused more on availability than anything.
Two I think that there is G&A costs in the business that now that we've ramped up on the public company costs will start to significantly moderate and then three we are investing significant amounts in R&D right now.
And if you got behind kind of the rationale for that is in terms of growth.
We don't think that the.
The R&D the sales and marketing may have to increase with growth, but the R&D, we should start to see some leverage out of <unk>.
So that's that that's that's where kind of how we think about the business right now.
Okay. Appreciate all the color. Thank you guys.
Thank you. Our next question comes from Ken Tom mentor with BMO Capital markets. You May proceed with your question.
Good afternoon, and thanks for taking my question and congrats on a strong finish to the year.
Okay.
I'm just curious.
It sounds like you know sort of the demand and the backlog is pretty strong I'm. Just curious is this kind of.
From what you see more broad based or are you seeing.
So strength in residential versus kind of what's going on in commercial and in security any perspective, and I recognize that you are not providing numbers at this point on individual end markets, but just a broad brush on kind of how the backlogs are looking within the categories.
Yeah the growth in the business is <unk>.
System wide I would say commercial is outpacing the company's growth rate.
But.
We we feel like.
The business is strong everywhere.
And so I think that's a combination I think at the first it's a matter of integrator capacity number one like our integrators are busy if they have a lull in their business, it's very easy for them to find work, whether it's an upgrade or remodel their existing customers are going out in <unk>.
Finding light commercial work. So that's number one number two housing.
<unk> to stay strong for our integrators and.
So we we.
We feel good about that notwithstanding kind of some of the <unk>.
<unk> that people have around the housing market, we feel like that's going to be.
Quite solid for us and so we've seen that strong everywhere if anything I think it's probably more geographic where people are moving to and where business is better than it is.
From an industry perspective.
Got it that's helpful and then.
Just turning to the branch.
Opening strategy as you look at 2022.
Is that sort of the strategy to keep.
Keep opening more branches five eight and get to that sort of the target of 60 over the next few years.
Yes, John that's certainly what we see I think right now our guidance would say that we expect to open six to eight branches within the way we put it there will always look at opportunities to accelerate that.
Theres constraints on our people and everything else to get it done, but if we could open a few more than that that'd be great would be some upside probably later in the year would be too much outside Michelle will provide some upside so as we go forward and accelerate some growth, but in our baseline guidance continuing to grow that footprint.
Six to eight as sort of a number in our guidance right now and maybe the opportunity to do a few more than that.
Got it that's very helpful. I'll turn it over good luck in 2022 and beyond.
Thank you very much.
Thank you. Our next question comes from Adam Tindle with Raymond James You May proceed with your question.
Okay. Thanks, Good afternoon I just wanted to ask a question on software and subscription definitely appreciate the disclosures that you gave I think if I back into it there's about 100000 homes with about 10 Bucks a month and <unk> and just a two parter John .
First on penetration.
You said you have about 435000 total homes, so how to penetrate that remaining 300, plus and secondly on <unk>.
<unk>, where do you see that subscription number moving over time from that $10 or so a month and the levers to accomplish that.
Yes.
Alright.
Hi.
This is an area I'm, obviously very passionate about.
Given my background.
I think that.
First of all.
It strikes me that this is an industry where.
There.
No.
No one's mandated software to.
To the end customer yet the end customer is very dependent on software to run their homes. So.
Within that context, when theres been a product that's elective, which his foresight was an elective product that control for sold.
And I think as you go think about the <unk>.
Your calculations are generally very close in terms of that $10 per month.
So that's number one.
Number two the Rps for parasol.
Which.
Is a.
And kind of an MSP. If you will it allows us to enable the integrator to provide.
The service, our discerning customer expects the <unk> around that is closer to depending on the service offering 39% to $59 per month.
And then there is.
Set of kind of products that we're working on in the background around some of the software investments that we think can be more valuable to the.
The end customer.
And I'll just.
Speak about like what we're investing in and are I don't want to get too detailed on this call, but in our surveillance and the capabilities of surveillance systems in the future.
Are going to enable a higher end, what I'll call security offering than traditional security offerings. So we're really excited about those types of things and other things we're investing in the business.
So I think from our perspective, if we take it back like in terms of as I think about increasing the penetration. The first place I look to is the new installs. We do every year those each and every one of those should have some software content. That's good for the end customer.
Because it aligns them with the integrator and it aligns them with us So we're working hard on that model.
And we are seeing incredibly strong net promoter scores with the thousands of customers that use the parasol offering and we think that's an important piece of it.
Parasol offering.
Depending on the end price.
As in our <unk> of.
456 times, what foresight is alone and then the we have all of their service offerings. So.
<unk>.
The way I look at this model.
Adam is there are companies out there providing services to the home to a much less discerning customer base than we are.
That are north of $50 per site per month, and as I think about first of all the new customers, who buy our products in the future.
We are building products that have a value to those customers that they will be willing to pay for on a per per month basis.
The integrators are already.
Bursty for products like that to sell into their customer base and so that is where we have been working on foresight or other software offerings or other hardware offerings and parasol to get the industry to that point and as probably I.
Probably shouldn't say anything else around it but from a visionary standpoint from a visionary standpoint.
It's very easy based on our existing growth trajectory for people to imagine a milling in homes and small businesses on our platforms at some point.
Over the medium term future.
We already have.
A population that is spending somewhere between 122.
Seven or $800 a month on service and software.
And now it's time for us as an industry to to bake that model basically for the end consumer customer and for the integrator and that will align this smart living industry in a way it's never been aligned between.
The homeowner or small business owner, the integrator, who serves them and us and so that's what we're working to is that 1 million plus installs with.
A very rich model that exists today in terms of hardware and installation services and enhanced by a recurring software and service model.
That's the vision.
And I think that's a win for investors to makes a ton of sense to me I.
I guess, maybe just as a quick follow up here more near term obviously, congrats on a strong close to the year, we've got the benefit of almost being done in Q1 at this point.
Could you maybe just speak to demand sitting here in late March there has been a lot of macro events, obviously over the past couple of months, how has demand changed as the key.
Warner has progressed and Mike any comments on the shape of the year I appreciate the full year guidance that shape of the year from a revenue and EBITDA perspective, perhaps relative to last year first half second half however, you'd you'd put it in terms of shaping our models. Thank you.
Mike do you talk to the second point I'll talk to the first.
Integrators are busy we get it anecdotally we get it through.
Surveys.
We're not seeing.
Any concerns.
And so it's something obviously that we watch given all the news over the past three to four weeks.
But we feel like we still got <unk>.
Solid tailwind again, I'll remind you about the integrator theyre, great even when the key even when someone's see slowness in the business.
And statistically when we surveyed the integrators theyre not seeing that but when they do there's plenty of other business to go after and their market because demand has been outstripping supply for the past few years in this industry Mike sure. So Adam.
While we won't give quarterly guidance, but just a couple of high level bullet points, we should think about seasonality of the business. So first of all the recent years are not overly instructive on this given M&A Covid 50, <unk> week, all that noise around it. So we would say is if you start at a baseline that every quarter is created equal 25% revenue per quarter, probably take a few points out of Q1.
One and spread them pretty evenly through Q3, and Q4 and a growth perspective in.
Q1 was definitely less but the rest will be pretty even on an EBITDA perspective.
Contribution margin and adjusted EBITDA margins are typically highest in Q2 and Q3 Q4 gets impacted by some black Friday TV sales and some other noise around seasonality of a couple of our product lines. Some of the outdoor living things have.
Higher performance in the summer and then Q1, probably has the highest opex percentage as a percentage of net sales just given.
The way things flow so.
Q1, probably will have.
A little bit lower revenue and a little bit more pressure on the bottom line Q2, three and four much more equal as it comes back with Q2, and Q3 being a little bit more positive on the bottom line.
Very helpful. Thanks, and congrats again.
Yes. Thank you.
Thank you and as a reminder to ask a question you will need to press star one on your telephone. Our next question comes from Ryan Merkel with William Blair. You May proceed with your question.
Hey, guys two questions for me first off John could you talk about how that business has performed during past periods of rising interest rates anything for us to be watching out for and then secondly, what's baked into guidance for the supply chain pressures I assume that's both a revenue and a margin impact.
Yeah.
<unk>.
We are not seeing anything on the interest rate.
Front.
I would say.
Again.
Words, such isn't worse that we're so this industry is.
So lowly penetrated relative to its potential and so I think generally there's been a lot of bullish information around housing I saw a report today around forecast being lighter specifically around first time buyers.
But I think.
All of the statistics that we see that the country is under house.
And so we were not seen any pressures in terms of.
Interest rates.
I don't feel like we're seeing pressure from our integrators, saying people have lower budgets now we're not seeing any of that.
And so.
It's all anecdotally relate to you just because I'm actually selling the house right now.
Realtors, who will talk about how people may have reduced their price problem.
200000, or 300000 or 400000, because their mortgage payments going up but they're still buying a house they still need to buy a house and.
Builders are still building.
And.
So we were.
We obviously ask ourselves this question quite a bit Ryan, but we're not seeing any issues around it.
Hey, Rob just on your question about guidance, what's baked in so yeah, we picked 2% to 3% of topline headwinds. We mentioned earlier, we will see the organic growth rate and our long term model, probably a little bit higher than we're making this year as we think about the supply chain headwinds as of right now we would say that.
We think that what we've done from a pricing action should basically on a go forward basis cover the costs, we've incurred but we know it's a volatile environment. We will continue to look at it to the extent we continue to see cost pressure as John said earlier, we think both ourselves and our integrated partners have pricing power, we would adjust our pricing the integrators MSRP to their customer.
Cover that if needed, but that's not in the guidance today, we think the way we position guidance today.
Is appropriate for what we've seen to date, but.
As you know and we all nodes.
Every day is a new story as we think about what's going on out there.
Got it best of luck in 'twenty two.
Thanks Ryan.
Thank you. Our next question comes from Brian <unk> with Imperial Capital You May proceed with your question.
Great. Thank you just real quick to clarify so the current guide has no additional price increases and half the growth is coming from already in place price increases is that a correct summary.
No additional price increases in the guidance today, we would say the guidance about 5% is already implemented price activity, whether that was last August activity or what we just did in February .
Great and then in terms of demand.
Interest rates said this was playing off the last question, but interest rates have obviously gone up and they expect it to continue to go up, especially for 30 year fixed and all that.
And what you're saying in summary, as Youre seeing nothing from the integrators are the end users pushback.
Now is that correct that demand still remains at record levels.
That is correct.
Perfect I just wanted to get that.
Ill remind everybody of a couple of things as long as you're asking the question. One is we're not the only company out there increasing price. This is something that's in the industry.
I would say virtually uniformly.
In fact, even.
Even competition, that's been reluctant to increase price. We've now seen increased price. So that's number one and when I say increased price significantly.
And two is I just need to remind everybody because of this interest rate question.
I'd say one we serve at the end of the day, a pretty discerning customer.
Number two our integrators do not have the capacity to serve the demand thats been coming at them.
Their ability to pivot.
To business when they need to like pivot to small businesses et cetera that are coming back to work now has shown itself to be exceptional.
In.
Any cycle, we've been in as a company or that control for within our businesses grew and so seven OE and a nine eight grew in the earlier part of the second decade, and Thats continued to growth to other types of cycles and I attribute that to the flexibility.
And the ability to pivot of our integrators.
Thank you.
Thank you at this time this concludes our question and answer session.
I'll, let to turn the call back over to Mr. Hagan for closing remarks.
Alright, thanks, everyone again for joining us today, it's truly exciting time to be at snap one.
I, especially want to thank our dedicated employees for their ongoing contributions our network of the integrators, who continue to do great work, creating exceptional experiences out there and I'd like to finally, thank our investors for their continued support and we'll talk to you in may thanks.
Thank you for joining us today for snap ones fiscal fourth quarter and full year 2021 earnings Conference call you may now disconnect.
Okay.
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Yes.
Okay.
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Uh huh.
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