Supply Shortages to Ease by Year-End, Says Snap One on Debut Earnings Call
Strength in the custom electronics channel drove a 34% sales increase to $253 million in Q2 at Snap One, which rebranded from SnapAV in June, said management Thursday on the company’s first earnings call. The company completed an initial public offering in July that generated $270 million. Cost of sales grew 39% to $152.1 million year on year due to net sales growth and higher costs from suppliers and inbound freight costs, said the company. Net loss for the quarter ended June 25 was $1.1 million vs. a net loss of $3.2 million in the comparable year-ago period.
Supply chain challenges accelerated at the end of Q2, said Chief Financial Officer Mike Carlet. “We’re still seeing those today,” he said, saying the company is being conservative and “moderated our expectations about our ability to meet [supply chain challenges].”
Integration of third-party products, including Sound United brands Denon, Marantz and Definitive Technology (see 2108250037) will result in a higher cost of sales vs. Snap's proprietary product, said Carlet. The expansion of the portfolio to include third-party products is an important part of the company’s strategy to be a “one-stop shop” for dealer needs, to build loyalty and capture incremental margin dollars, he said.
Snap will provide annual guidance as a key metric of business, said Carlet. For the remainder of 2021, Snap sees continued demand for “smart living technology” and is “working diligently to combat the supply chain challenges that are impacting our business.” Inventory availability declined “modestly” in Q2 and “sporadic inventory stock-outs have accelerated into Q3,” he said. Operations staff have worked to mitigate shortages through advanced component sourcing, supplier diversification and an increase in inbound air freight to reduce transportation tie-ups, he said.
The company expects the two-year year-on-year growth rate to be consistent with Q2, with a long-term goal of a low-teens percentage annual sales growth. Quarterly year-over-year growth rates will fluctuate as the company laps disruptions experienced last year due to COVID-19 disruptions, Carlet said. The impact of shortages was low single digits in Q2, projected at mid-single digits this quarter and expected to be “closer to normal” by year-end. “It’s something we’re watching closely.”
Areas of the supply chain experiencing pressure are commodity pricing and labor, where Snap is having “conversations” with proprietary product contract manufacturers and joint design partners on the price pressure they’re feeling and “looking to pass that along,” Carlet said. Rates for ocean transport and air freight are “all tight right now” but should moderate going into next year, he said.
Snap instituted a 5% price increase on Aug. 1 to cover increases in supplier cost and logistics, said CEO John Heyman. The 5% increase “is meant to overcome all that and maintain margin rates,” said Carlet. The company announced the increase 60 days in advance to give integrators a heads-up for projects they were working on. “There was plenty of other industry pricing activity that was going on,” Heyman said, saying integrators appreciated the advance notice and that the increase “wasn’t as drastic as some others.”
Heyman doesn't expect price hikes to have an impact on sales in the custom channel. “This is the most dynamic operating environment in some time,” he said. The company also raised manufacturer's suggested retail prices to allow for integrators to raise their prices downstream, Heyman said.
The financial benefit of Snap’s May purchase of Access Networks is expected to be realized in 2022. That's a result of supply chain constraints as the company ramps to make products available to Snap’s dealer network of 16,000 vs. Access Networks’ dealer base of “hundreds,” said Heyman. “We’ve got to ensure that the supply chain can react to that type of demand, so it’s not just a matter of buying them and putting their product on the shelf.”
Among Snap’s long-term initiatives are product innovation; software and workflow solutions for integrators; increased wallet share with existing integrators, products and an omnichannel strategy; expansion of its global integrator network for residential, security and commercial applications; development of software services and revenue models; and mergers and acquisitions, said Heyman.
The company sees M&A as a “core competency” and value driver. “We operate in a highly fragmented market,” that lends itself to M&A, Heyman said: “With our scale, our track record, and now our access to capital, we’ve established ourselves as the acquirer of choice in the industry.” Snap expects to continue to pursue “disciplined, accretive acquisitions that enhance our products, software and workflow solutions and expand into adjacent markets” to serve the integrator base.
Snap, which bought Control4 in 2019, upgraded the OS 3.2.2 software in June to provide full support for OvrC remote management to Control4 controllers. It gives integrators the ability to remotely manage and service clients’ Control4 connected devices through the OvrC platform. The increased system visibility is designed to make it easier for integrators to offer service contracts, troubleshoot devices and reduce service calls.
In preparation for going public, Snap removed the “AV” part of its name “because our company and our industry have expanded well beyond just entertainment solutions,” Heyman said. As residential technology solutions get more complex and intertwined, Snap aims to “keep things simple through product quality and selection, service and support, and an omnichannel shopping experience.
Carlet said the current distribution center count is 27, with plans to open another three or four this year. The company aspires to open 10 per year and models for five or six due to capacity, timing and finding the right location, he said. This year, it opened in five new domestic markets, opening or acquiring brick-and-mortar locations in Charlotte, Scottsdale, Arizona; Denver; Salt Lake City; and Atlanta. The centers make products “immediately available” for local integrators, while providing sales, training and support, he said.
Snap’s commercial business is picking up as bars, restaurants and retail are opening after slowdowns in 2020 due to COVID-19, said Heyman. It’s focused on smaller applications in what Heyman calls the “design and build category” vs. large office towers.
For FY 2021, ending Dec. 31, Snap expects revenue of $985 million-$1 billion, which would be a 21% rise over 2020. Shares hit a record high in the company's short history as a public company Friday morning, reaching $21.64 before closing 1.6% higher than Thursday's closing price at $20.94.