Snap One Holdings Corp.

Good afternoon. Welcome to SNAP One Holdings Corporation's fiscal fourth quarter and full year 2023 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, Haley Pierce. Haley, please proceed.

Thank you. Good afternoon and welcome to SNAP One's fiscal fourth quarter and full year 2023 earnings conference call. As a reminder, this call is being recorded. Joining us today from Snap One 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, 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 expectation of the company's management and involve inherent risks and uncertainties. including those identified in the risk factor 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 7, 2024. 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've 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?

Thank you, Haley, and welcome, everyone, and I appreciate you joining us this afternoon. To begin today's discussion, I'll give some company background, followed by a review of our performance for the quarter and the year, and then I'll turn the call over to Mike Carlett, our CFO. He will discuss our financial results in more depth and provide an outlook for 2024. After that, I'll share some closing remarks before we open the call for questions. Let's get started. As a reminder, at SNAP One, we develop and distribute smart living platforms that empower professional integrators to deliver joy, connectivity, and security to discerning residential and commercial customers worldwide. 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 local branches. We further support our integrator partners with our proprietary software platforms, service offerings, and workflow solutions to allow them to successfully serve their customers throughout the project lifecycle. We believe the smart living opportunity is large and it is durable, and that long-term secular tailwinds, including technology adoption, software enablement, housing construction, and small business formation, will continue to propel the industry and our company forward. Many end users will seek professional help to select, install, integrate, and support the technology solutions they require. Here at SNAP One, we aim to provide our integrator partners with the right tools to capitalize on this opportunity. While we have strong conviction in the United States housing market over the mid to long term, we are operating in a tough housing environment. Nonetheless, our strong fourth quarter and full year results highlight the resiliency of our business model and scrappiness of our integration partners. Our team delivered year-over-year profitability growth despite top-line headwinds, including global macroeconomic uncertainty, channel inventory destocking, and inflation. Our focus on extracting supply chain costs to increase contribution margin, as well as our operating expense discipline, enabled us to generate 2023 adjusted EBITDA of 117.2 million. Importantly, this reflects an expanded operating margin of 11%, a 90 basis point year over year improvement. We are positioning ourselves for a turnaround in housing and are ready to build on our profitability momentum as we drive further operating leverage with expanded scale. As we reflect on the operational highlights of 2023, there's no better recognition than the vote of confidence we receive from professional integrators. We were humbled by numerous industry awards, including, number one, 45 top five brand rankings across 62 product subcategories in the 2023 CE Pro 100 Brand Analysis Awards, representing approximately five times the number of recognition of the next closest competitor included within the analysis. 14 2023 CE Pro Quest for Quality Service Awards across the 22 categories included in CE Pro's survey of professional integrators. Number three, Best New Hardware for Residential Tech Today Innovation and Cedia Hall of Fame Awards at the 2023 Cedia Expo. And fourth and finally, two ISE 2024 Top New Technology Awards. We don't take these awards lightly. We recognize that to sustain and enhance our competitive position, we must continue to listen to our integration partners, develop innovative products, invest in our software platforms, and enhance end customer satisfaction with the smart living experience. In January of this year, we officially announced the launch of Control4 Connect and a Control4 Assist. As a reminder, Control 4 Assist is an optional service program for integrators to offer support to their customers, while Control 4 Connect will be a mandatory software subscription on all domestic installs starting in late April. Since acquiring Control 4 in August of 2019, a major focus for us has been on improving our software and support offerings for both our partners and the end customer. After years of extensive development, market testing, and integrator feedback. We have built a new software and support portfolio that we believe will transform this industry. Control4 Connect and Control4 Assist were designed to enhance the end customer experience, build recurring revenues, and incremental profitability for our partners and for SnapOne, and ultimately align the industry in a way that benefits and delights the end customer. and improve the system they acquire over time through valuable software updates and amazing service. These two services establish us and our integration partners as the clear leaders in an industry that must evolve to manage increasingly complex technology and more demanding customer expectations. So far, the overall post-launch reception has been positive. We are seeing customers come online now and we are excited for our partners and end customers to benefit from the value of these offerings in 2024 and beyond. Over the course of 2023, we outlined two key strategic initiatives. First, driving higher platform and product adoption by our partners and in turn delivering far better end consumer experiences. And second, expanding our operating margins through several key programs, which have already yielded positive results. From a platform adoption perspective, our continued innovation in our products, solutions, and service models enhances our relationships with our partners, delivers a better end customer experience, and drives market share gains for Step 1. With this in mind, we launched a large number of innovative new products throughout the year, across many of our categories with new launches planned for 2024. Complementing our product portfolio, we continue to optimize our go-to-market strategy to drive ecosystem adoption, and we are pleased with all that we've accomplished this year as part of this initiative, including leveraging our best-in-class loyalty platform to drive product category and ecosystem adoption and strengthen our relationships with partners. We're also converging our SNAP 1 and control 4 portals in the United States, further enhancing our omnichannel initiative and finally bringing together a unified experience for our partners. And finally, we're expanding our strategic omnichannel presence by opening four net new local branches in 2023, including two in the fourth quarter. This brings the total number of North American branches to 45 as of year end, and continuing with this momentum, we have another branch slated to open in the coming weeks. We intend to continue opening more locations in 2024 to serve our partners and their communities, though we plan to briefly pause additional openings during the first half of this year as we wrap up our efforts to migrate our branches to a single operating system. While we continue to try to drive growth in our business, Our second strategic initiative is achieving operating margin expansion. Through COVID and the recent supply chain challenges, we prioritized keeping our partners in business. This created near-term inefficiencies for SNAP1. The supply chain is now largely normalized, and our team has successfully extracted those cost inefficiencies, driving sustained contribution margin expansion this year. We're also driving scale within our operating model. Integration activity related to previously completed acquisitions, as well as investments within our technology infrastructure, have continued to yield results. These investments will support our operating leverage and growth expectations going forward and are evident in this year's results. Let me now comment briefly on our outlook, and then I'll turn the call over to Mike. While we hold a high-level conviction around our growth algorithm, We also think it's prudent to maintain a pragmatic view of the current operating environment. Several of the factors that have applied modest pressure on our demand over the last few quarters all remain in the short term. However, as we projected last quarter, we now believe that the industry is arriving at its new normal level of inventory that we estimate. Additionally, while spending has declined a bit, our integration partners continue to report relatively healthy backlogs and remain optimistic about the future. They are highly adaptable and have a proven ability to pivot to a variety of projects to remain successful in changing market conditions. These can include upgrading their install base with new products or pursuing commercial projects. We have a unique ability to support this flexibility with our diversified business model and product portfolio, which allows us to serve integration partners across a wide variety of price points and in markets. While we're seeing some softness from more budget-conscious end customers for entry-level projects, we believe that high-end residential housing remains resilient and our commercial pipeline is growing. We expect some demand headwinds to continue into 2024, but we're confident that we're winning share and will emerge as an even stronger company as the operating environment bounces back. As we look to the rest of 2024, we expect the operating environment to remain uncertain, but we plan to achieve growth nonetheless. Accordingly, we have constructed a strategy to not only drive expansion in 2024, but to position SNAP1 to transform the industry and win market share in the years to come. To achieve this, we're executing on several strategies, including We're expanding our share of wallet with existing integrators through the further adoption of our ecosystems and product categories, the introduction of innovative new products, and the expansion of our local branch footprint. We're elevating the end consumer experience by offering cutting edge support services such as Control 4 Connect and Control 4 Assist that will align the industry in a way that benefits the end consumer and ultimately increases the demand for our products. We're growing beyond our core business, especially in commercial markets, as we work to drive outsized growth by introducing new products and solutions in the near term. We're driving operational efficiency and scale by expanding our profitability, continuing to optimize our inventory position, and investing in our infrastructure. And finally, we're bolstering our own foundation by maintaining a strong employee engagement with the best team in the industry and making it easy for our integrators to buy from us week after week through whatever channel they prefer. With that, I'll turn the call over to Mike Corlett, our CFO, to discuss the fourth quarter and full year results in 2024 outlook in greater detail. Mike?