Description

Summary

Snap One is the leading specialty distributor and manufacturer of products for the smart home industry. Interest in smart living continues to increase, as consumers desire high-end entertainment, audio, security, lighting, and networking systems for their homes that work together seamlessly. Homeowners that want the best available smart home experience are willing to pay for professional assistance to create a fully integrated system and monitor/upgrade it over time. Snap One is an essential partner to more than 16,000 of these professional integrators and is known for its great products, broad selection, service, and high quality Control4/OvrC software platforms. We expect that the do-it-for-me smart home market will continue to grow, and that Snap One will deepen its wallet share and expand its integrator count over time. Snap One trades at an attractive valuation of 10.5x 2023 TEV/EBITDA and 12.5x 2023 P/E, a significant discount to intrinsic value as well as a meaningful discount to peers. Given the company’s excellent competitive position, strong management team, and likely low double digit revenue and mid-teens EBITDA annual growth, we expect that an investment in the stock will provide 25%+ compound annual returns over a 5 year time horizon.

Company History

• 2003: Eric Smith, Will West, and Mark Morgan found Control4, with the vision of providing a unified smart home system to automate and control connected devices including lighting, audio, video, climate control, intercom, and security

• 2004: Control4 debuts at the CEDIA Expo home technology trade show

• 2005: Jay Faison, who had run his own custom integration business for almost a decade, founds SnapAV in Charlotte, NC as a supplier of AV accessories; Control4 releases its first commercially-available products

• 2010: General Atlantic acquires a majority interest in SnapAV

• 2013: Control4 goes public

• 2014: SnapAV launches its OvrC remote management software platform

• 2017: Hellman & Friedman acquires SnapAV

• 2018: SnapAV launches its local store distribution strategy, acquiring Allnet and Volutone

• 2019: SnapAV and Control4 announce their merger; Control4 introduces its Smart Home OS3

• 2021: Combined company re-brands as Snap One and IPO’s

Business Overview

Consumers in 2022 have seen digital transformations in many areas of life. Technology has changed the way people live and work in so many ways, bringing greater convenience, connectivity, and peace of mind. While consumers’ homes have grown more and more tech-enabled over time, there is still much ground to cover to upgrade lighting, entertainment, temperature, security, and many other systems to the latest and greatest. This powerful secular trend has led Frost & Sullivan to estimate a 9% forward CAGR for total spend in the global residential and commercial technology market.

There has been significant innovation in the smart home industry over the last decade. Google, Amazon, Sonos, and many others have introduced new, affordable products that have driven consumer interest in the space. However, there are drawbacks to these systems – they only cover basic applications, leave the consumer with many apps on their phones that don’t work together, and are not fully built into the home. In order to move up to the next level of quality and complexity for a smart home, consumers typically work with a professional integrator or dealer. These small local businesses work directly with consumers to turn their smart home visions into a reality, helping them build high-end systems. These projects can occur while a new home is being built, or as part of a renovation project.

Snap One has been built organically and through acquisition to be the partner of choice for these integrators. Snap provides immense value to the integrators that it works with, serving as a one-stop shop for the integrators’ product needs. Snap sources and manufactures the broadest array of smart home products in the industry – speakers, networking, cables, mounts, racks, electronics, control systems, lighting, and many other categories. Integrators are able to receive these products with excellent speed and convenience via Snap’s omnichannel network; Snap has the leading e-commerce platform in the industry, and also has a growing network of local distribution branches to fulfill same-day needs. From there, Snap’s software ecosystem is at the center of the smart home experience and integrators’ operations. Snap’s Control4 platform is the leading control system powering smart homes in North America, and its OvrC software enables integrators to remotely manage and configure devices in the field.  

We’ve called numerous integrator/dealer partners that work with Snap One, and the feedback we got was some of the most positive we’ve ever heard doing channel checks. Some of the key integrator views of Snap One were:

• Snap One is known for treating its partners well and providing excellent customer service. It is very easy to deal with them if something goes awry in a project

• Integrators trust the quality of Snap’s products (Episode speakers, racks, etc.) more than the typical consumer electronics supplier

• Product selection is very strong. Snap’s selection is broader than any of its competitors

• Ordering from Snap One is very easy, whether via eCommerce or at a local site. The experience is hassle-free, and provisions for returns and rush orders work well

• In an environment of high technician labor costs, overnight shipping of products to solve customer problems quickly is very important

• Snap’s pricing is seen as attractive and competitive with other options

• Snap’s loyalty programs provide valuable volume discounts to integrators

• Over time, most integrators expect to consolidate more of their business with Snap, increasing the company’s wallet share 

• Snap’s OvrC remote management software is very valuable to dealers – they use it regularly to monitor the health of customer systems and reboot from afar, saving technicians time and effort

• Control4 is dominant over other control systems like Savant (expensive, doesn’t work well with third party products) and Crestron (complicated, more suited to the commercial market than home)

• When technicians get familiar with a particular OS like Control4, they prefer to spend more time installing just that

• Snap’s sales and customer support teams are seen as very high quality

Snap One offers quick and easy delivery of a broad range of reliable, attractively priced products that integrators need on a timely, regular basis, and that combined with its OvrC and Control4 software systems allow integrators to save both time and labor costs. OrvC in particular is a very high value system to integrators as they can diagnose technical problems remotely (i.e. without a truck-roll). This strong value proposition to integrators will enable Snap to continue to increase wallet share in the industry, and also to expand their services to increasingly cover integrators in adjacent end markets (commercial, security). Combined with the underlying growth of the industry as more and more consumers opt for complex, integrated smart homes, that makes for a very attractive growth algorithm for Snap One for many years to come.

Snap One has numerous competitive advantages that should enable them to continue to win in the market over time. First, the smart home market is incredibly fragmented both on the product/manufacturer side as well as on the integrator and consumer side. Snap One works with over 50 contract manufacturers, 80 joint development suppliers, and many other providers of third party products. On the consumer side, Snap works with over 16,000 integrators that interface with hundreds of thousands of consumers. It is difficult to put both sides of the equation together, and Snap One is able to command strong pricing power by sitting in the middle of the fragmentation. Additionally, Snap has created significant lock-in with other constituents in the industry. The OvrC remote management software is a key platform used by thousands of integrators to run their businesses, and the installed base of homes with Control4 as the main operating system is quite meaningful as well. Finally, while Snap One does not have strong brand awareness with consumers, it is very well known for reliability and quality with professional integrators, who drive the vast majority of purchase decisions in the projects they work on.

One of the potential risks we identified while researching the space was the increasing popularity of DIY products, particularly from Amazon’s Ring and Google’s Nest. Amazon and Google have been innovators and fierce competitors in many markets, and we would never take competition from them lightly. However, our discussions with integrators and industry experts gave us a lot of comfort that the do-it-for-me, higher end channel is quite distinct from the opportunity Ring/Nest are targeting, and has a very healthy outlook of its own. Some of the major factors supporting this view are:

• Many customers begin their interest in the smart home category with DIY products. Eventually, they realize they have too many apps on their phone, and none of them work together

• Not as seamless as a Control4 system where everything works together

• High-end customers just want a simple system that works well, and are willing to pay a premium for it

• Average customer does not generally care about the brand of the speakers, light fixtures, etc. – they trust the integrator to decide

• Many customers are not sophisticated enough to self-install, particularly as smart home systems get more and more complex

• Customer care/support systems for Ring and Nest are not strong enough for more than the simplest problems

• Snap does sell third-party products like Sonos to its integrators, who typically know best how to fit those products into a broader smart home system

• People hate cutting holes in their walls, and that will never change

• Many integrators distrust the security of DIY systems; additionally, Ring and Nest do not “plug and play” well with the vast ecosystems of other third-party products

Management

John Heyman (age 59) has been CEO of Snap One since 2015. Prior to his time with Snap One, John was CEO of Radiant Systems from 2002-2011. John was instrumental in leading Radiant through its early growth phase and public offering. At the time of its sale to NCR for $1.2bn, the company was the leading provider of technology solutions to the retail and hospitality industries. John grew the business by entering new verticals, growing the base of integrator partners, launching new products and acquiring complementary companies. Over the period of time John was CEO of Radiant, sales grew from $125mm to nearly $400mm, and the total shareholder return for an investment in Radiant’s stock was 188%, or 12% annualized (vs. the S&P 500 at a 31%, or 3% annualized return over the same period). 

John began his career at Arthur Andersen and, before joining Radiant, worked with several companies in the private equity industry. He is a graduate of the Harvard Business School and the University of Georgia.

We believe John’s experience with Radiant is a perfect fit for the growth playbook Snap One is executing, and that the broader management team behind John is also top notch.

Mike Carlet (age 53) has been CFO of Snap One since 2014. Prior to joining Snap One, Mike served as COO and CFO of the automotive division of Sears. Before Sears, Mike spent over 15 years with Driven Brands, the parent company of Meineke Car Care Centers, Maaco, and other automotive franchise brands. He began his career in public accounting with Ernst & Young, and also has worked for a number of companies in the transportation and logistics space. He received his undergraduate degree in accounting from The Catholic University of America and his MBA from Wake Forest.

Financials/Valuation

Snap One certainly benefited from the COVID-induced re-allocation of consumer interest and spend toward the home in the past few years. Organic sales growth was a healthy 19% in 2021, driven by increases in the number of integrators transacting, new local branch openings, and overall volume/pricing gains. The demand environment remains very positive lapping this strong year. In March, the company provided its outlook for fiscal 2022, forecasting 10% to 13% y/y organic growth. This healthy outlook mirrors that of the integrators, who are seeing project backlogs of six months or more for their own businesses.

The current global supply chain challenges are likely to remain a modest headwind to profit for the upcoming year. Snap One works with a broad network of overseas contract manufacturers, and logistics and product availability have been challenging in this environment. These factors have influenced the company’s outlook for EBITDA in 2022, with inflation in freight and product costs pressuring the bottom line. We certainly do not want to minimize the impacts of these challenges.  However, we would note that Snap One’s EBITDA guidance for 2022 does not factor in the impact of any new pricing actions. The company has shown that it can pass along rising input costs through price increases, and any price increases the company pushes through in this year would flow through as upside to the 2022 results. Looking beyond 2022, if the global supply chain situation improves over the coming years, Snap One would be a beneficiary.

Snap One’s excellent competitive position in a growing end market gives us a lot of confidence in the forward trajectory for the business. We expect that over a 5-year time horizon, Snap should be able to grow revenue and EBITDA at double-digit CAGRs. Combined with de-leveraging and capital allocation, we would expect that the company could grow EPS in excess of 20% annualized over our forecast period. 10.5x 2023 EBITDA and 12.5x 2023 P/E is a very attractive price to pay for a company of this quality and growth outlook, especially compared to specialty distributor comps like POOL, SITE, and WSO which trade at high-teens multiples on TEV/EBITDA and mid-20’s multiples on P/E.

Risks

• Execution risk. Snap One is a remarkable company relative to its size, with many capabilities operating at the same time. The company is best in class in a broad array of areas – electronics/product sourcing and manufacturing, ecommerce, store-based local distribution, and software development. The mixture of these factors creates a strong moat. We acknowledge that it is difficult to do all of this at once, but have more confidence in Snap to do so than in any of the competitors.

• Economic cyclicality. The typical integrator smart home installation is a very large ticket item, and is tied to the residential construction and remodeling markets. While the current demand backdrop is strong, with long dealer backlogs, Snap One would likely be hurt somewhat in a more difficult macroeconomic environment.

• Technological innovation. There is significant R&D and product innovation in the smart home industry. This level of development is an opportunity for Snap One, as better smart home products and systems will continue to stimulate more demand for the category. However, it will be important for Snap to keep up with the latest and greatest.

• Supply chain. Snap One’s profitability is currently being dragged down somewhat by difficulties in the global supply chain. While we expect that the company should be able to protect its profitability through pricing actions, and that the situation will normalize over a 3-5 year time horizon, continued tight conditions could harm the company.

• Consumer behavior exiting COVID-19. There are meaningful unknowns around exactly how consumers will respond to increasingly open social conditions in 2022. While we are optimistic based on our read of the current demand environment, there is still uncertainty.

• Financial leverage. Snap One’s Net Debt/EBITDA currently stands at 3.7x. We consider this leverage level to be quite appropriate and manageable, but note that it could become more challenging in a severe economic downturn.

Conclusion

In sum, Snap One is a high quality, well-managed, and well-positioned business. We believe that the current price is very attractive, that the forward growth outlook remains strong, and that an investment in Snap One is an attractive risk-reward looking forward over a 5 year period.

Catalyst

- Continued execution

- Supply chain improvements

- Progress on key managment initiatives (software, security/commercial markets)