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spk04: Good afternoon. Welcome to Snap One Holdings Corp's Fiscal Third Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. I would now like to turn the call over to Snap One's Vice President of Investor Relations, Eric Steele. Sir, please proceed.
spk08: Great, thank you. Good afternoon and welcome to SNAP-1's Fiscal Third Quarter 2021 Earnings Conference Call. As a reminder, this call is being recorded. Joining us today from SNAP-1 are John Heyman, CEO, and Mike Carlett, 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, and future financial performance. 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, except to the extent required by law. 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-1 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, November 4th, 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.snap1.com. I will now turn the call over to our CEO, John Heyman. John?
spk06: Eric, thank you, and welcome, everybody, and thank you so much for joining us on what we know is a really busy afternoon. To begin today's discussion, I'll start with an overview of our business model, our market position, and long-term growth strategy. From there, I'll review our recent updates and highlights, and then I'll turn it over to Mike Carlett, and he'll discuss our financial results for the quarter and We'll then share some closing remarks and open it up for questions. Here at SnapOne, we've developed a smart living platform that empowers professional integrators to deliver joy, connectivity, and security to end consumers on a global scale. Through our e-commerce site and brick-and-mortar facilities, we distribute our proprietary as well as third-party products to a growing network of over 16,000 professional do-it-for-me integrators. We further support our integrator customers with our proprietary software platforms and our tech-enabled workflow solutions to allow them to successfully serve their residential and small business customers. SnapOne was founded by integrators for integrators, and we aspire to be the one partner that professional integrators need for every job. By partnering with us, integrators can increase their earnings while focusing on their trade and leveraging the products, tools, and infrastructure that we deliver to build thriving and profitable businesses. Integrators have embraced our value proposition, creating reoccurring spending patterns that strengthen our integrator relationships and enhance our revenue visibility from our integrator base. The smart living opportunity is large and it is untapped. We believe that we're strategically positioned to power the smart living revolution through our entrenched and growing integrator network. As demand for smart living solutions continues to rise, we anticipate an increasing number of end consumers will rely on professionals to get the job done. In turn, these local professional integrators need a scaled platform like only SNAP1 has to successfully deliver on the promise of the smart home and business. The long-term secular growth drivers of our industry are here to stay. We view those primary drivers as adoption and consumer demand for new experiences in residential and commercial development. First, adoption. According to Statista, only around 35% of the homes in the United States have a smart device. Over the next five years, that's anticipated to grow to almost 60%. Our perspective is that every home will be smart a decade from now, and those homes will have tens, if not hundreds, of connected devices. And homeowners will want an integrator to help them navigate and manage this complexity and realize this potential. Simply, adoption will drive more projects and more spend per project. Second, end consumer demand for new experiences. You, the end consumer, will continue to demand new experiences and upgrades to existing ones. 8K video, as broadcasting and that technology accelerates, will drive a significant upgrade cycle that starts with you. As pressure on the home and business network rises from at home, Use cases, you will demand Wi-Fi 6, and then you'll demand Wi-Fi 7. New use cases, such as aging in place, will drive you to want more from your integrator. And you will demand more of your software and services to access these innovations simply and without depending on multiple apps or disparate products. Third, the at-home phenomenon. is here to stay and the United States is under housed given the demand for housing over the long term and supply chain constraints have caused delays in construction that our integrators have shown an ability to muscle through in the short term. Further, while a significant amount of our sales is linked to upgrades and installations in existing homes, We will also benefit from the robust growth in residential and light commercial construction. On the commercial side, businesses recovering following COVID disruption. We're building products and entering into third-party partnerships in this space to strengthen our relevance to commercial integrators and support their needs in commercial-focused applications. Today, we've built an enterprise that serves hundreds of thousands of home and business owners through our integrators. We aspire to serve millions, and that requires refining our integrator workflow solutions, growing our integrator base outside the United States and in new channels, and investing in the software required to operate the smart home and smart business of the future. Of course, the more connected living spaces become, the more software like Oversea and OS3 will become mission critical. Besides participating in a fast-growing market, our sustainable long-term growth strategy is rooted in five key pillars. One, innovate with new products, software, and tech-enabled workflow solutions. Two, Increase our wallet share with existing integrators, which includes continuing to execute our omnichannel distribution strategy. Three, expanding our global integrator network with professionals focused on residential, security, and commercial applications. Four, developing new software services and revenue models. And five, executing around mergers and acquisitions. We continue to view M&A as a core competency of our company and a strategic value driver for the business and for our integrators. SnapOne operates in a target-rich environment, and with our scale, track record, access to capital, we believe that we have established ourselves as the acquirer of choice in our industry. We expect to continue to pursue disciplined, accretive acquisitions that enhance our products, software, and workflow solutions and help us expand into the adjacent markets we've discussed and geographies, enabling us to best serve our integrator base. Now, I'll turn to some quick updates. Notwithstanding the supply chain constraints many industries have seen this year, we outperformed our expectations in terms of net sales and profitability in Q3, and we look forward to a strong Q4 in 2022 as well. Mike will cover the financials, but let me talk through a few recent highlights. First, Building on the momentum from the second quarter, we continue to expand our omni-channel distribution presence and enter three new fast-growing domestic markets. We open local branches in Hollywood, Florida, Austin, Texas, and Nashville, Tennessee. This brings our nationwide footprint to 30 locations as of quarter end. All of these locations now make SnapOne's leading products immediately available for local integrators while extending our service offering through deeper sales, training, and support engagement. We plan to continue expanding our omnichannel capabilities both domestically and internationally going forward. Second, we have recently shared several exciting product announcements with the industry. Most notably, we made another major upgrade to our Control 4 OS 3 software this quarter with the rollout of OS 3.2.3. Last quarter, we noted that our recent integration of Oversee remote management software and OS 3 allows integrators to remotely service clients' Control 4 connected devices through the Oversee platform. The OS 3.2.3 upgrade brings further enhancements for both integrator partners and end consumers, including increased connectivity and search speed for integrator efficiency and improved control and personalization of their systems for end consumers. This upgrade also brings new Composer Pro features designed to make installations faster and more efficient and adds fundamental platform enhancements for commercial deployments, including a beta release that provides native support for multi-display rooms and video walls. We're encouraged by early integrator feedback and energized by the opportunity in front of us in the growing commercial market. We're also excited about recent product releases, including control for contemporary lighting, oversee workflow enhancements, new cameras and NVRs, mounts and cables. Our product catalog is more robust than ever and we remain committed to driving innovation through our continued investments in new product development. Third, we continue to strategically expand our third-party product portfolio, to provide integrators with a one-stop shop experience. In the last year, we've greatly expanded on our Wear Pros by Audio strategy. We've added the distribution of KEF, Klipsch, Parasound, and Yamaha products. This quarter, we're proud to announce the addition of Sound United brands, Denon and Marantz, to our portfolio, plus the increased investment in our proprietary brands, specifically Episode. Together with our proprietary and third-party brands, we built and we curated a leading lineup of audio solutions to meet the needs of our integrators and end customers. Let me talk quickly about the current environment and then I'll turn it over to Mike. As we assess the current environment, many of our leading market indicators and broader demand sensors have remained strong. Our integrators are extremely busy and many are booked out months in advance. COVID accelerated already healthy smart living adoption trends, fueling durable residential and commercial uptake that is continuing into the fourth quarter. COVID has also produced many industry challenges, including product availability. Our team's commitment to operational efficiency, along with strategic inventory management, have enabled us to successfully navigate these challenges and to serve strong integrated demand for our solutions. Order volume has remained strong, and we continue to add new integrators and increase spend per integrator on a year-over-year basis, both key tenets of our overall growth strategy. As noted previously, we enacted an approximate 5% price increase on our proprietary products beginning in August, which was also partially responsible for the sales lift and contribution margin strength we saw during the quarter. Importantly, we provided our integrators with advance notice of this increase, and we correspondently raised MSRP to protect our integrators' profit, and the reception has been largely positive, which leads us to believe that, as and if needed, our end markets can bear increases as cost inputs rise. In addition to the domestic home technology market, We continue to develop three other channels, security, commercial, and international, to drive long-term growth. During the quarter, we developed a strategic plan to expand our presence outside the US as COVID has subsided. As a reminder, today we do around $100 million outside the US, and we believe these markets present a significant opportunity for us in the future. Our international, commercial, and security businesses are continuing to grow. In fact, each grew at a faster rate than our domestic home technology market in the third quarter. We believe integrators in these adjacent channels are key to serving the accelerating demand for smart living solutions. Put together, these positive operational developments enabled us to deliver a record quarter. Financial highlights include a 15% increase in net sales to over $260 million and a 2% increase in non-GAAP adjusted EBITDA to approximately $32.1 million during the period. Despite moderate headwinds resulting from supply chain shortages during the period, we continue to grow our business, even relative to a strong COVID-accelerated outperformance in Q3 last year. When zooming out a bit further, our two-year organic net sales CAGR remained in the mid-teens in the quarter and sustained long-term sales growth remains the focus. With that, I'll turn it over to our CFO, Mike Corlett, to discuss our financial results for the quarter in greater detail. Mike?
spk00: Thanks, John. So now turning to our financial results for the fiscal third quarter, which ended on September 24, 2021. Our net sales increased 15% to $260.7 million from $226.3 million in the comparable year-ago period. Our growth during the quarter was driven by continued demand strength with solid execution against supply chain headwinds. Those supply chain headwinds we estimate to have represented a negative 5% to 7% impact on net sales in Q3. Both our proprietary and third-party product portfolios grew over 13%, with all major product categories, geographic regions, and markets experiencing growth in the quarter. This quarter also represented our first full quarter with results included for access networks following our acquisition in June. Additionally, we benefited from a price increase enacted across our proprietary product portfolio beginning in August. And finally, our net sales in the most recent quarter continue benefited from the continued ramp up of local branches with the opening of 8 additional branches between the end of the 3rd quarter of 2020 and the end of the 3rd quarter of 2021. as John mentioned this includes 3 new local branches open to the most recent quarter and it brings our total local branch count to 30. Despite the supply chain headwinds we faced, we're pleased with the growth of business experience in the third quarter on a reported basis. And on a two-year stacked pro-form basis, as we said, net sales growth was above our long-term growth algorithm of low-teens annual growth. Our cost of sales, exclusive to depreciation and amortization, increased 14% to $151.3 million, representing 58% of net sales. from $133.1 million, which is 58.8% of net sales in the comparable year-ago period. The increase in cost of sales, exclusive to depreciation and amortization, was primarily attributable to higher sales volume. Our contribution margin and non-GAAP measurement of operating performance increased 18% to $109.5 million, representing 42% of net sales in the fiscal third quarter, up from $93.1 million, representing 41.2% of net sales in the comparable year-ago period. The increase in contribution margin as percentage of net sales was primarily due to the net benefit from our price increase across our proprietary product portfolio in August, partially offset by increased supplier costs and inbound logistics costs in the period. Our selling general administrative expenses increased 57 percent to $105 million, representing 40.3 percent of net sales, from $67 million, representing 29.6 percent of net sales in the comparable year-ago period. The increase in SGA expenses was primarily due to our IPO and the associated recognition of $14.4 million in equity-based compensation expense. and $10.6 million in compensation costs paid to certain pre-IPO owners for their interests in lieu of their participation in the tax receivable agreement entered into in connection with the IPO. The remaining increase in SG&A expenses was due to increases in variable operating expenses, including outbound shipping, credit card processing fees and warranty driven by higher sales volume, increased costs associated with becoming an operating as a public company, ongoing investments to support our strategic growth initiatives, and a return to normalized spending levels while lapping cost reduction actions taken to mitigate the impacts of COVID-19 in 2020. Our net loss totaled $21.5 million compared to net income of $1.4 million in the comparable year-ago period. And that loss was primarily due to the year-over-year increases to selling general and administrative expenses related to the equity-based compensation and compensation expense for payouts in lieu of TRA participation that we just mentioned. Adjusted EBITDA, a non-GAAP measurement of operating performance, increased 2% to $32.1 million, representing 12.3% of net sales, compared to $31.4 million, or 13.9% of net sales in the comparable period. The increase in adjusted EBITDA was a result of net sales and contribution margin growth, offset by year-over-year increases in SGA expenses, as previously referenced, adjusted for all those IPO-related items. Adjusted net income, a non-GAAP measurement of operating performance, increased 13% to $16.7 million, representing 6.4% of net sales from $14.8 million, or 6.5% of net sales in the comparable year-ago period. The increase in adjusted net income was primarily due to net sales and contribution margin growth offset by those increases in SG&A expenses. In free cash flow, a non-GAAP measurement of operating performance, totaled negative $18.1 million in the nine months ended September 24th, 2021, compared to $35.5 million in the comparable year-ago period. The decrease in free cash flow was primarily attributable to an increase in net cash used in operating activities, driven by increases in inventory, as well as prepaid vendor deposits we've made to protect against supply chain uncertainty, and the return of our payable terms to normalized levels following temporary extension we received last year in anticipation of COVID disruption. At the end of the fiscal third quarter, cash and cash equivalents were $60.6 million compared to $77.5 million as of December 25, 2020, our prior year end. So before I turn the call back over to John, I'll take just a couple minutes to provide our financial outlook for the remainder of the year. As a reminder, at this time, we 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 upcoming fourth quarter, we continue to see strong demand for smart living technology. Our teams work to take proactive measures to shore up our supply chain and inventory position continue, and we are confident in our ability to execute throughout the remainder of the year. From a cash flow perspective, we'd also like to note that our capital expenditure outlook has seen a timing shift with regards to our Salt Lake City office relocation, with capital expenditures pushing out several quarters from Q4 2021 as originally anticipated. Now, moving to our guidance, as a reminder, for 2021, our fiscal year ends on December 31st and includes a 53rd week. As we said, while we managed well through the supply chain pressures in Q3, those pressures remain, and we anticipate them to continue to impact our fourth quarter. Our strong quarterly performance in Q3 increases our confidence in the full-year outlook, and as of today's call, we are revising our net sales guidance to range between $990 million and $1 billion, which would represent an increase of 21.6% to 22.8% compared to the prior fiscal year on an as-reported basis. We are also revising up our adjusted EBITDA estimate to a range between $106 million and $110 million, representing an increase of 12.2% to 16.5% compared to the prior fiscal year. 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'll turn the call back over to John now for additional comments. John?
spk06: Thanks, Mike. Look, we're very pleased with the quarter. We're really energized by the tremendous opportunity in front of us, both in the short term and the long term. The industry is robust. Demand is high. The team is executing across all fronts. and the secular trends we've talked about makes what we are doing here at SNAP1 even more relevant in the future. We have experienced incredibly healthy growth across geographies, markets, and product categories. Our integrators have proven resilient in the face of challenging macroeconomic backdrops thus far, and we remain confident in our ability to successfully navigate any future uncertainties. With that, we'll open it up for Q&A.
spk04: Thank you. At this time, we'll open the line for questions from the company's publishing analysts. The company requests that each participant limit their comments to one question and one follow-up. If you would like to ask a question, please press star 1. Our first question is from the line of Eric Woodring from Morgan Stanley. Your line is now open.
spk09: Hey, good afternoon, guys. Congrats on the quarter. Just a quick one from me on the demand outlook. Can you just talk about some of the KPIs that you see on your end that give you confidence in the demand outlook, not just in 4Q, but into 2022? And then I have a follow-up. Thanks.
spk06: Hey, Eric, this is John. I think, you know, first of all, I think the, you know, what we see as driving kind of our business is always kind of, you know, the number of integrators we have, which drives our capacity, and the spend per. And then, you know, there are a number of things that... drive both those factors. So we continue to see more and more integrators coming to our company. In part, that's fueled by our opening of brick and mortar facilities. We have plans to continue to open brick and mortar facilities. And so we know when we do that, that brings in new partners into our company to install our products. I'd say the second thing is we look at our own new product development and what we're bringing to market together with products that we know that the industry reveres that aren't our products, like Denon and Marantz, which I think are really important. So we know what our history is when we introduce products, what kind of attach rates we get with our integrators. And then... Three, as we talk to them about backlog, as we see kind of what's going on from a building perspective, et cetera, you know, we, you know, as a proxy, Control 4 is installed in about 100,000 homes a year. You know, there's 1.5 million homes being built in the U.S. Even if housing is a little lighter because of their own supply chain issues, there's plenty of homes being built that are under construction that we see getting installed with our products. We see those factors, and then we also see kind of the investments we're making in channels that are newer for us, whether it's security or commercial or international. So I think all of those things give us confidence in, you know, a very strong 2022. So those are the metrics we generally look at.
spk09: Okay, thanks. And then maybe just to clarify on the supply chain side, maybe can you just clarify what of the headwind you'd attribute to component shortages versus potential manufacturing disruptions and then logistics delays? Just curious which of those three factors are having a more significant impact on your guys' daily operations. And that's it for me. Thanks.
spk06: Yeah, I'm not sure I have a great breakout of that for you. What I can tell you is all of them have been an issue, component sourcing. Some of the plant shutdowns in China with the energy situation are now behind us. And then logistics, just, you know, unloading containers at the port is probably – we have a lot of product on ships right now. And so at the end of the third quarter, we were successful being able to clear some of those orders and outperformed because of that. And we're still cautious about how that might evolve in the fourth quarter. But our supply chain team and logistics team, they've been amazing throughout this. But I would say we're still watching componentry and logistics. And I think from our perspective, standpoint in talking with our supply chain partners. We see that kind of continuing through the first half of next year, but we also are confident we'll continue to manage through it, and during that time, it will be less of an issue, not more of an issue.
spk09: Great. Thank you so much.
spk04: Next question is from the line of Steve Walkman from Jefferies. Your line is now open.
spk11: Hey, good afternoon, guys. Maybe just sticking with the supply chain question, John, I think you had given us some KPI there that you were able to fill like 95% of orders on schedule or something like that. Forgive me if I'm remembering that slightly wrong, but can you just update us there on where that stands?
spk00: Hey, it's Mike. How are you? Yeah, so a couple things. One, what you're referencing is our inventory availability metric, which we measure what percentage of our SKUs are available at any point in time. And so, you know, typically we're running up north of 98%, 99% on that metric, and it's dropped down into the low to mid-90s. It moves around, you know, week by week, depending upon, as we talked about, as John was mentioning, what container gets cleared at any given day out of the ports. And that's continued through Q3. It's continued today through Q4. And you can translate that into our ability to fulfill an order almost at the same rate. So if we're at 95% from an availability standpoint, that means we're able to fill about 95% of the orders. It's not an exact one-for-one match, but it's pretty darn close. And so we've seen that continue. I would say that the... The supply chain pressures in Q3 were probably actually a little bit less than we anticipated, given all the hard work for our supply chain team. But we've also seen them continue to keep forward about the same rate. So, again, as we said, we think the top line got impacted by about 5% to 7% in Q3. And our best guess, that's about the same impact we'll feel in Q4.
spk11: Great. That's helpful. Thanks. And then just on the 5% price increase, I assume that's been enough time that you can kind of tell if it's sticking. I can't imagine why it wouldn't be in this environment. But is that enough to offset the cost increases that you're seeing and kind of hold everything neutral as we think about 2022?
spk00: It was enough to offset the cost increases we saw through that date. Obviously, we were closely managing and looking at our cost base to continue to monitor that. We'll always be looking at that as we go forward. We're constantly evaluating the market environment, our price position, our cost position. But the 5% that we put into place then was adequate at the time, and we'll continue to look at what's out there in the future. And it has held. I think, you know, the whole market's out there. Obviously, the pressure that everyone's feeling in our industry is – in a lot of industries, by the way, is there. And so the price increases we put into place are very consistent with what I think the industry has done and are holding just fine.
spk06: I'll just very quickly on that. By the way, the entire industry has raised prices. So we're not alone, number one. Number two, many have done so multiple times and in larger percentages than we have. And I would say the other thing is we are very focused on our integrators' business when we do that, meaning we give them lots of notice so that they can give their customers notice and not surprise them negatively. We generally will honor quotes that have already been made out there and protect the integrators. So I think while we've been doing this, I think, frankly, integrators expect it, and we have continued to build even more trust with them in terms of how we've handled it.
spk03: Great. I appreciate it. I'll pass it on. Thanks.
spk04: We have our next question from the line of Chris Snyder from UBS. Your line is now open.
spk10: Thank you. So my first question is on the implied Q4 guidance, which at least by my math calls for revenue in Q4, largely in line with Q3, but a pretty big step down in EBITDA. Can you just provide some color on what is driving the implied sequential margin decline?
spk00: Sure. So if you think about the operating margin on adjusted EBITDA between Q4 and Q3, one, there's an extra week. So the holiday week that's out there is an extra week of fixed costs. If you think about the 53rd week, that's a less profitable week. We've got an extra week of fixed costs in there. And you can imagine there's not a lot of work being done between that week. So that drives some. If we think about it, Year on year, we've got, obviously, access networks come on board, and we have the costs associated with them. We have our public company costs that are out there that are also taking a bite out of our profitability in the quarter. So, you know, we would expect going forward, as we look at the revenue changes that are out there, we would see corresponding, you know, adjusted EBITDA changes, but on a quarter-to-quarter basis, particularly with the IPO costs and the public company costs that we're seeing, we're going to see some fluctuations in the short term.
spk10: Okay. No, thanks for that, Tyler. I appreciate it. And then for my follow-up, I actually just wanted to talk on or ask about something that, you know, John mentioned in the prepared remarks. You know, I think you said that you expect every company at some point, or sorry, every home in the U.S. at some point will be a smart home. But, you know, can you just maybe walk us through, you know, how the company thinks about the TAM or total addressable market, whether it's you know, household income or home price, you know, just because it feels like when we see, you know, an average integrator job in the 10,000-plus range, you know, that could be a limiting factor to, you know, every home in the country. So just, you know, be interested in hearing kind of your thoughts on that.
spk06: Thanks, Chris. I think just very quickly I would say, you know, that's a 10-year view that every home will have. tens if not hundreds of devices. So I do want to caveat my remarks there. I would say the second thing I want to be clear around is we're architecting our products to be more affordable for some part of the market. I think I've spoken before about our investments in software to make that happen. There are, in our minds, there's about 70,000 integrators inside the United States. And so that is kind of the first thing we look at because we are serving the discerning the discerning customer through commercial security and home technology integrators. So when we think about the average spend an integrator, one of those 70,000 integrators, makes on products that we sell, That's about $600,000 per integrator. That results in about a $43 billion total addressable market. So let me just run through those numbers one more time. Again, 70,000 integrators in the United States, of which we're doing business now with over 16,000 of them. They're spending about $600,000 a year each on products like we sell. And when you multiply those numbers, it's a $43 billion TAM.
spk00: John, let me just clarify. That 70,000 integrators is our addressable market. There's a lot more integrators out there. And actually, that's our addressable market today. And so there's other folks that are servicing smart home technology that we'll continue to look to. But that's just how we define it today. Those are people we're actively marketing to, we're actively trying to attract into the SnapOne ecosystem to go after.
spk10: Appreciate all that, caller. Yeah, yeah, no, appreciate all that. Thank you.
spk04: We have our next question from Keetan Mamtara from BMO Capital Markets. Your line is now open.
spk02: Good afternoon, John, Mike. Thanks for taking my question. Maybe to start with, can you talk a little more about, you know, kind of the growth that you all saw in residential, but as well as in your two kind of other focus areas, commercial and security?
spk00: Sure, I'll touch on it briefly. How are you doing, Keith? I would say that, you know, we're not at this point going to be at the disclosing our separate market segments and growth rates. What I can say is that If we look at the quarter, both security and commercial grew at a rate that was faster than the home residential market. And so we have a lot of confidence in our continued growth there. Maybe sometime in our future lives we'll get into some different types of reporting, but what we can say today is we're very pleased with the growth rates in all of our markets, and commercial and security are growing at a rate faster than the residential market.
spk06: Okay. And just very quickly. And so is our international market that that's been outpacing the growth and, you know, they probably COVID had a longer tail there, but we've seen great recovery there.
spk02: Understood. That's helpful. And then just as my follow up, um, you know, as you've, you know, kind of open, uh, branches, I'm curious, kind of, you know, what you've learned, uh, you know, as you've kind of gone and opened these branches, And has that changed your view at all in terms of the pace with which you want to grow these branches?
spk06: I think right now we're kind of, we've opened, by the time we're done this year, we'll have opened at least 10 branches. new branches. I think we're estimating kind of over next year right now that we can open around six. We have a model that calls for, you know, that shows a ramp when we enter a geography. We have generally been seeing our models as conservative, and we typically have outpaced that growth. So there's two things that happen when we go into the market. Number one, we're finding a set of integrators who don't buy traditionally through e-commerce and want to buy through local distribution because of relationships, access to product, et cetera, they needed that day. And so we've seen a new type of integrator coming into those brick-and-mortar facilities. The second thing we're finding is that even our existing integrators who buy through e-commerce buy more frequently. because they need products that day or first thing the next morning, or they need third-party products that we carry at the branch but might not have on the website. And so those are the two things that we're seeing with virtually every local office that we've opened. I think I'm accurate in saying not a single one has disappointed us. And so, you know, that's generally driving, I would say, share shift. from more conventional distributors in those locales.
spk00: I don't think it's changed at this point our view as to the long-term number. We're still, you know, we evaluate markets as we go through, but I think our model of opening, you know, about six locations for the next three or four years is still what we're very strong underwriting. We'll probably try to open ten next year, but we're going to you know, we're going to underwrite six or so, and then, you know, as we reach that sort of level, we'll evaluate other markets we might choose to go into.
spk06: Yeah, I think our longer-term models call for 60, and we're at 30. And that 60 was, you know, to the extent we continue to fill out our security and commercial product lines, there is a strong case to be made because the buying power in each market expands to open more than 60 facilities.
spk02: Got it. That's very helpful, Kalar. I'll turn it over. Good luck. Thank you.
spk04: Next is Adam Tindall from Raymond James. Your line is now open.
spk05: Okay, thanks. Good afternoon. I think we've tackled supply, so I wanted to ask a question on demand, John. Last call, you talked about a robust environment, how dealers were booked months out. Maybe if you could give us an update on this. Has backlog been stable, up or down since this? in any way to quantify how much backlog or bookings are still to get through at the dealer level?
spk06: Yeah, I think, you know, basically, you know, we depend on two things. One, surveys of our dealer base, but also reports from the sizable buying groups in the industry. And there is... no indication of demand slowing in terms of bookings, in terms of new business, in terms of integrator optimism around the future. So the answer is that simple.
spk05: Yep, yep, that makes sense. I wanted to ask also, John, on the strategic plan to expand outside the U.S. You talked about $100 million today, but significant opportunity in the future today. Could you maybe double-click on that plan? I think about expansion commercial and security as sort of your existing dealer-based expansion, but in this international strategic plan, I would imagine that that's probably more about new dealer acquisition. So I'd just be curious how you'd approach that from a recruitment perspective and what SNAP brings versus existing lines that dealers use internationally. Thank you.
spk06: Sure. I think it's a good question. Let me back up. First of all, SNAP 1, before we merged with Control 4 a couple of years ago, had very little in terms of an international business. And today, it's about a $100 million business for us. The market is, you know, outside the U.S., We estimate it to be over $100 billion, based on the data we've seen. So, you know, there's a huge opportunity there. We at SNAP-1 did not understand the international market because it came from the Control-4 merger. And while we focused on the immediate integration of the two companies in late 2020 with plans to go overseas with our product line, that was all interrupted by COVID in early 2020 and 2021. And so we were unable to travel. Business had shut down in many parts globally, much more so than it did in the United States. And we've been able to spend actually quite a bit of time studying the market over the past three or four months. And so we've built a plan that calls for us to expand on kind of the strength of the $100 million business and specifically target more investment directly in key international markets where we know our product has an immediate fit and continue to build out our go-to-market model, which is basically similarly to what we've done in the United States. That will call for a direct presence in some markets. it will call for an indirect presence in many others where we don't think it's worth us standing up to go to market because of the size of that market, nor do we think it's worth it to tweak our products from a product development standpoint in certain areas because of the size of the market. Notwithstanding that, we think there's a near-term growth opportunity internationally when I say near term, over the next three to five years, hundreds of millions of dollars based on a business today that's got limited investment and has already grown to $100 million. So Control 4 itself is, I forget the exact stat, I think it's actually installed in close to 100 different countries out there. And, you know, again, our products today, have a great level of applicability. We do need to do some tweaking in areas such as power, but we're highly confident about the product relevance there. By the way, security and commercial... I do want to just comment on the other part of your question. While we do business largely with almost 75% to 80% of what we'll call the home technology integrators inside the United States, we have a much lower penetration of the integrators in the security and commercial market. So in that market, we're doing business more with 5,000 or so of integrators of 53,000 integrators. So a lot of our strategies inside commercial and security are similar to the international strategy and focus on integrator acquisition through either our commerce site or our brick and mortar facilities.
spk04: Next question is from the line of Keith Hughes from Truist. Your line is now open.
spk07: Thank you. Questions about pricing. I believe you mentioned you got 5% during the quarter, but I believe the price increase was implemented intra-quarter. As you go into the fourth, will there be more, a higher price you think you'll realize? The other question, too, can you give us an idea of how much acquisitions contributed to revenue growth in the quarter?
spk06: Mike, maybe you do the acquisition one. The price increase was roughly 5%. It was implemented August 1st, so we got two months of it. I will say there were certain quotes we also honor in the market to protect our integrators' profits. We don't have another one planned for this year. We don't feel like we need another one based on our costs, but we should see full flow-through of the 5% price increase in the fourth quarter.
spk00: As far as M&A goes, John, you know, the only M&A activity that we've had is our acquisition of Access Networks. You know, we don't disclose specifically what they did in the quarter, but Access, when we bought it, was in a mid-30s revenue on an LTM basis. So you can, you know, assume that that's, if you split that by four, you can assume that's about the impact of what it would have been in the quarter, with a full quarter of results in there. Okay, thank you.
spk04: Next is Ryan Merkel from William Blair. Your line is now open.
spk01: Hey, thanks. I wanted to follow up on the implied 4Q guide again. Just in terms of gross margin, should we assume sort of stable, or is there something going on where gross margins have come down significantly?
spk00: If you're comparing Q4 versus Q3, we do expect it to come down just a little bit. As those supply chain pressures come in and some mix issues come in, the mix in Q4 is a little bit different. You have Black Friday TV sales, which happen, and we benefit from that, but that's at a much lower part. And so our mix profile does change a little bit in Q4 versus the rest of the year. So margin will be higher.
spk01: you know tens of bits lower in q4 as it always is but other than that you know no no other um extraordinary activity moving the margins around one way or another got it that's helpful and then you mentioned strategic inventory management help drive sales can you unpack that a little bit and also just comment on your inventory levels are you carrying more inventory than you want to sort of protect or are you still short
spk00: A couple things. So the activity that our team is taking is we talked about the three supply chain challenges. One is the componentry, another is manufacturing, and the third is logistics. And all of them, as John talked about earlier, are headwinds that are out there. What we're really effectively managing is on the componentry piece, on the manufacturing piece, our supply chain team working very closely with our contract manufacturers and JDM partners to make sure we have visibility in managing through those. And quite frankly, we probably did better in that area than we expected in Q3 as we went through. We have no long-term issues. We're having issues where on a week there might be a component we don't get, and so we have to constantly stay on top of that. Logistics, obviously, is a challenging environment. It ties into the second part of your question with inventory. There's a lot more inventory on the water than we would typically have with things either hung up or trying to get ahead of some of the curve on inventory. That is one that I think our performance in Q3 was around our expectations. We're using air freight and other avenues to try to stay on top of it. Our overall inventory levels, you know, listen, I'm the CFO. I'm never going to be happy with the amount of inventory we have. I'm always telling folks we have not enough of the right things and too much of the wrong things. But I think overall our supply chain team is really on top of that. We have long lead times on our products, so we do have to manage it. We do have a lot of inventory on the water. We have increased the number of stores. So every time we open a store, we get a little bit more inventory at our local stores. So all that plays into it. I think our overall inventory right now is about where it should be, but I wish we had a little bit more of the inventory that we really want, a little bit less of some of the other stuff. By the way, our inventory obsolescence is typically almost zero. We have very, very low inventory write-offs in our business. as we go through it. So we're optimistic. We think the supply chain, again, will continue to be a bit of a challenge more on the logistics aspects than anything else with some intermittent componentry issues that we'll have to continue to work around.
spk06: I think some of the more strategic things we're doing is getting down to, like, what are the components that go into the different products, identifying those, making commitments to those component suppliers, things we haven't had to do before. But our balance sheet is a strength of ours, especially against smaller competitors in the market. And so we've done a double-click there and gotten commitments that, you know, in more normal cycles we haven't had to worry about.
spk01: Very helpful, guys. Thanks. Thank you, Ryan. Thanks, Ryan.
spk04: At this time, this concludes our question and answer session. I'd now like to turn the call back over to Mr. Heyman for his closing remarks.
spk06: Thanks again, everyone, for joining us today. Really appreciate your time during a busy earnings season. I just got to, again, applaud our team at SNAP1, the amazing work they're doing. is inspiring to me. It's delivering for our integrators so they can deliver amazing results to consumers around the world. So thanks a lot for your time today and really look forward to speaking to you at the end of Q4.
spk04: Thank you for joining us today for Snap One's fiscal third quarter 2021 earnings conference call. You may now disconnect.
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