Snap One Holdings Corp.

Good afternoon. Welcome to Snap One Holdings Corp's fiscal fourth quarter and full year 2022 earnings conference call. At this time, all participants are in a 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 Senior Vice President of Finance, Eric Steele. Sir, please proceed.

Great. Thank you, Operator. Good afternoon and welcome to SNAP-1's fiscal fourth quarter and full year 2022 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 expectation, future events, or 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. 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 latest annual report on Form 10-K 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 time and date of this broadcast, March 14, 2023. 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. In addition to the webcast, we have posted a supplemental earnings presentation accompanying these results, which can also be found on our investor relations website. I will now turn the call over to our CEO, John Heyman. John.

Eric, thank you, and welcome, everyone, and thanks for joining us this afternoon. To begin today's discussion, I'll give some company background, followed by a review of our recent performance, and then I'll turn the call over to our CFO, Mike Carlett. Mike will discuss our financial results for the quarter and year in more depth, as well as provide our outlook for 2023. After that, I'll share some closing remarks before opening the call for questions. Let's get started. To begin, at SNAP One, we provide a smart living platform that empowers professional integrators to deliver joy, connectivity, and security to discerning residential and commercial customers on a global scale. As a leading distributor to these integrators, we work with our network of approximately 20,000 professional Do It For Me integrators to distribute our proprietary and third-party products through our e-commerce portal and growing local branch network. We further support our integrator partners with our proprietary software platforms and workflow solutions to allow them to successfully serve their customers across the project lifecycle. We are confident there is a tremendous and durable growth opportunity in front of us, and we are positioning our integrator partners to realize this growth with us. We believe homeowners will continue to upgrade their existing technology. We know the US is under housed by millions of homes that would be built in the future, and we are confident small business formation will continue to be the backbone of the economy. It is inarguable that homes and businesses will become smarter over the next decade, and many will require professional help to integrate and support the technology they need. This is the number one driver of our long-term growth, and no company is better positioned for this future than SnapOne. Our growth algorithm is simple. Continue to attract more integrator partners and capture more of their spend by building new products and driving adoption of our ecosystems. This formula will drive our growth over the next decade, and we will remain focused on executing this strategy while managing through the near-term uncertainty. Turning now to our recent performance, our team delivered solid fourth quarter results, and despite a challenging macro environment, we achieved strong growth in net sales and adjusted EBITDA for fiscal year 2022. I am proud of what the entire team has accomplished as we navigated the ongoing impacts of a dynamic operating environment while continuing to deliver for our integrator partners. For the fiscal year, we delivered $1,124 billion in net sales and generated $114 million in adjusted EBITDA, representing year-over-year growth of 11% and 3%, respectively. Our fiscal fourth quarter results exceeded the guidance we shared last time we spoke. While the industry continues to reduce inventory levels in the channel, we saw integrator partner activity remain steady through Q4 as they work against healthy backlogs in their own businesses. The channel inventory buildup helped sales in the first half of 2022, but it's been a continuing headwind for us since then as integrators deplete inventory. Mike will elaborate on this dynamic in his remarks. Looking back on 2022, a major focus for us was enhancing the smart living experience by improving both hardware and software offerings for our integrators and then consumers. At year end in early 2023, we successfully introduced exciting new products across our outdoor entertainment lineup, linear lighting, control, surveillance, and our networking product categories. We're particularly excited about Halo, our new family of Control 4 remotes, Arachnus wireless access points, which enable enhanced connection speeds with Wi-Fi 6 technology, vibrant linear lighting, which provides a fully immersive lighting experience, and Episode Radiance, which builds on our suite of outdoor entertainment products. Importantly, many of our new products will drive upgrade opportunities for our installed base of end customers. Our products and services garnered significant industry recognition in 2022, including 17 CE Pro Quest for Quality awards out of 22 identified subcategories, 40 top three brand rankings across 62 identified product subcategories in the 2022 CE Pro 100 Brand Analysis Awards, and two Mark of Excellence Awards at the Consumer Electronics Show in January of this year. I'd also like to highlight a few strategic accomplishments across our business this past year. We continue to invest in and bolster our software and service offerings. We released the Control 4 OS 3.3.0 update, introduced the Oversea Connect app, and completed the acquisition of Parasol, a powerful 24 by 7 remote support service based on Oversea. Two, our commercial and security growth markets remain important long-term opportunities for us, and we displayed continued progress in these areas in 2022. In commercial, we executed on product development, including the control for multi-display manager functionality that was voted an AV technology best of InfoComm 22 award winner. In security, we acquired home automation and security products provider, Clear Controls, and announced the upcoming launch of the new Luma X20 IP surveillance solution, which is now shipping. Three. We expanded our omnichannel presence by opening eight net new local branches in 22, including several in Q4, and acquiring two new branches in Canada through the acquisition of Staub. This brings the total number of North American branches to 41 as of year end. For further enhancing our omnichannel initiative, we have begun to convert our e-commerce customers to a single e-commerce portal which will drive efficiencies in our business, make our integration partners' lives easier, and allow us to drive marketing programs with higher efficacy. We believe that we made significant progress with our strategy in 22 and are increasingly well positioned for a long-term smart living evolution over the coming years. Our position in the industry remains quite strong, and we are confident that growth in smart living adoption The central role of the integrator in providing holistic solutions and our competitive differentiation will propel our long-term success. As to the economy and its impact on our business, as we discussed last quarter, we saw some softening around our residential end market, resulting in lower sales volumes relative to the first half of 22. We continue to see signs of end consumer cautiousness and elevated levels of channel inventory, which impacted our integrator partners' purchasing habits. Anecdotally, project delays and de-scoping are occurring as integrators seek to value engineer projects in response to a more price conscious end consumer. Last quarter, we described our integrator partners had accumulated additional inventory in response to supply shortages. And we expected an impact of about 40 to 60 million over the subsequent quarters as they rebalanced their own inventory positions. Since our last call, we have leveraged our oversee software to see when products purchased by the integrator are actually put into service. With the benefit of this added visibility, we now believe inventory in the channel peaked towards the end of Q2 of 22, but well above the high end of the range we previously communicated. Since then, we have seen strong signs of destocking across the channel and expect to reach a normalized state in the second half of 23. While the residential market remains a bit soft, our diversified business model allows us to serve integrator partners across a variety of end markets. These partners do remain busy and continue to prove their resiliency showcasing their ability to pivot projects and adapt to the current environment historically their capacity has been a governor on our growth particularly given the tight labor market with demand for their services exceeding supply so some contraction in end consumer demand can be absorbed by the channel given the ongoing capacity constraints meanwhile we continue to invest in the long-term growth of the business to extend our leadership position. However, given the uncertain macro backdrop, we have reviewed our long-term operating plan and prioritized investments in areas that we believe will position us for sustained long-term growth while curtailing spend in other places. Here are some actions we've taken. Number one, we're eliminating inefficiencies in the business from the COVID time period. As input costs, freight rates, and other supply chain factors normalize, we are driving an improvement in our contribution margin rate. Two, we expect more research and development efficiency by not having to redesign products in response to componentry availability challenges. Three, we completed a strategic repositioning of our sales force to increase integrator partner coverage and identified other areas of efficiency in the business. And four, we're being diligent with costs in our business, ranging from warehouse operation consolidation to reducing travel expenses. Collectively, these changes resulted in a modest workforce reduction of about 3% in our business in the first quarter of 2023. I'm going to now comment briefly on our outlook, and then I'll turn the call over to Mike. As we look to the rest of 2023, we expect the operating environment to remain challenging, particularly in the residential end market. In response, we have constructed an operating plan that reflects a heightened focus on delivering strong profitability and driving operating margin expansion. We are executing on controllable strategies consistent with our long-term growth algorithm that will enable us to outperform. These include, one, increasing our share of wallet with existing integrators through the adoption of our ecosystems and new products. Two, continuing to innovate, invest in, and launch exciting new smart living products. Three, open new local branches. Four, adding new integrator partners across our business, including in security and commercial markets where we continue to see outsized growth. And finally, enhancing our software platform capabilities and introducing new software and service-based solutions. Further, we intend to deliver this relative growth while driving scale in our operating model through improving our contribution margin rate as input and supply chain costs such as freight, logistics, commodities, and componentry costs continue to normalize. moderating our investment pace to drive efficiency and optimize productivity, and finally strengthening our balance sheet. We remain confident in our operating model, and still, while demand has stabilized at current levels, persistent macro uncertainty causes us to take a pragmatic approach to our near-term forecasts. We are therefore setting our net sales and adjusted EBITDA guidance for 23 accordingly, and Mike will discuss this in further detail. We believe our resilient integrator partners, our diversified business model, and consistently strong execution will continue to position us to prosper in a dynamic macro environment. Mike, with that, I'll turn the call over to you to discuss the fourth quarter and full year financial results and 23 outlook in greater detail.