Snap One Holdings Corp. (SNPO) on Q3 2021 Results - Earnings Call Transcript
Operator: Good afternoon. Welcome to Snap One Holdings Corp.'s Fiscal Third Quarter 2021 Earnings Conference Call. I would now like to turn the call over to Snap One's Vice President of Investor Relations, Eric Steele. Sir, please proceed.
Eric Steele: Great. Thank you. Good afternoon, and welcome to Snap One's fiscal third quarter 2021 earnings conference call. As a reminder, this call is being recorded. Joining us today from Snap One are John Heyman, CEO; and Mike Carlet, 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 4, 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.snapone.com. I will now turn the call over to our CEO, John Heyman. John?
John Heyman: 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 Carlet, and he'll discuss our financial results for the quarter. We'll then share some closing remarks and open it up for questions. Here at Snap One, 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 workforce solutions to allow them to successfully serve their residential and small business customers. Snap One 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 integrated 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 Snap One 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, end consumer demand for new experiences and 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, 8-K 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 mill 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 add 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, business is recovering following COVID disruption. We're building products and entering into third-party partnerships in the space to strengthen our relevance to commercial integrators and support their needs in commercial focused applications. To date, 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 workforce 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 OvrC 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 acquisition. 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. Snap One 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 and 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 omnichannel distribution presence and entered three new fast-growing domestic markets. We opened 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 Snap One's leading products immediately available for local integrators while extending our service offering through deeper sales, training and support engagement. We plan to 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 Control4 OS3 software this quarter with the rollout of OS 3.2.3. Last quarter, we noted that our recent integration of OvrC remote management software and OS3 allows integrators to remotely service clients control for connected devices through the OvrC platform. The OS 3.2.3 upgrade brings further enhancements for both integrator partners and end consumers, including increased connectivity and search speed with 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 Control4 contemporary lighting, OvrC 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 up for sale. 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 integrator 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 advanced notice of this increase, and we correspondingly 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 U.S. as COVID has subsided. As a reminder, today, we do around $100 million outside the U.S., 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 2-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 will turn it over to our CFO, Mike Carlet, to discuss our financial results for the quarter in greater detail. Mike?
Mike Carlet: 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 the 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 continued - benefited from the continued ramp-up of local branches with the opening of eight additional branches between the end of the third quarter of 2020 and the end of the third quarter of 2021. As John mentioned, this includes three new local branches opened in 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 the business experienced in the third quarter on a reported basis. And on a 2-year stack pro forma basis, as we said, net sales growth was above our long-term growth algorithm of low teens annual growth. Our cost of sales, exclusive of 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 of depreciation and amortization, was primarily attributable to higher sales volume. Our contribution margin, a 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 a percentage of net sales was primarily due to the net benefit from a price increase across our proprietary product portfolio in August, partially offset by increased supplier cost and inbound logistics costs in the period. Our selling, general and administrative expenses increased 57% to $105 million, representing 40.3% of net sales from $67 million, representing 29.6% of net sales in the comparable year ago period. The increase in SG&A 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 interest 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 and 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. The net 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 or 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 SG&A 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. And free cash flow, a non-GAAP measurement of operating performance, totaled negative $18.1 million in the nine months ended September 24, 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, or prior year-end. So before I turn the call back over to John, I'll take just a couple of 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 31 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 that they 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?
John Heyman: 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 Snap One 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.
Operator: Our first question is from the line of Erik Woodring from Morgan Stanley. Your line is now open.
Erik Woodring: 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.
John Heyman: Erik, this is John. I think, first of all, I think the - what we see is driving kind of our business is always kind of the number of integrators we have, which drives our capacity and the spend part. And then 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 enter these products, what kind of attach rates we get with that - 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, we as a proxy, Control4 is installed in about 100,000 homes a year. There's $1.5 million - 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 and that are under construction that we see getting installed with our products. So 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 a very strong 2022. So those are the metrics we generally look at.
Erik Woodring: 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 more - are having a more significant impact on our guys daily operations? And that's it for me, thanks.
John Heyman: Yes. I'm not sure we - I have a great breakout of that for you. What I can tell you is all of them have been an issue of component sourcing. Some of the plant shutdowns in China with the energy situation are now behind us. And then logistics, just 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 our - how that might evolve in the fourth quarter. But our supply chain team and logistics team, they've been amazing throughout this. And so - but I would say we're still watching componentry and logistics. And I think from our standpoint and 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.
Operator: Next question is from the line of Steve Volkmann from Jefferies. Your line is now open.
SteveVolkmann: Maybe just sticking with the supply chain question, John. I think you had given us some KPI there that you were able to sell 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?
Mike Carlet: It's Mike. How are you? Yes. So a couple of 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 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 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 has continued to date through Q4. And you could translate that into our ability to fulfill an order almost at the same rate. So 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 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 into Q4 at about the same rate. So again, as 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.
SteveVolkmann: And then just on the 5% price increase, I assume it's been enough time that you can kind of tell us 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?
Mike Carlet: It was enough to offset the cost increases we saw through that date. Obviously, we are 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 the whole market is 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 like and the industry has done and are holding just fine.
John Heyman: 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 that and we have continued to build even more trust with them in terms of how we've handled it.
Operator: We have our next question from the line of Chris Snyder from UBS. Your line is now open.
ChrisSnyder: 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?
Mike Carlet: 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, an extra week of fixed cost, you think about the 53rd week, that's a less profitable week. We've got actually the fixed cost 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 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 we don't - we would expect going forward as we look at the revenue changes that are out there, we would see corresponding 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.
ChrisSnyder: And then for my follow-up, actually just wanted to talk on or ask about something that John mentioned in the prepared remarks. I think you said that you expect every company, at some point - sorry, every home in the U.S. at some point will be a smart home. But can you just maybe walk us through how the company thinks about the TAM, or total addressable market, whether it's household income or home price? Just because it feels like when we see an average integrator job in the $10,000-plus range, that could be a limiting factor to every home in the country. So just I'd be interested in hearing kind of your thoughts on that.
John Heyman: Thanks, Chris. I think just very quickly, I would say, 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 integrator, that discerning customer through commercial security and home technology integrators. So we - when we think about the average spend an integrator - one of those 70,000 integrators make 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.
Mike Carlet: John, let me just clarify. That 70,000 expand - that 70,000 integrators is our addressable market. There's a lot more integrators out there and actually have 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 who are actively marking to. We're actively trying to attract into the Snap One ecosystem to go after.
Operator: We have our next question from Ketan Mamtora from BMO Capital Markets. Your line is now open.
Ketan Mamtora: Maybe to start with, can you talk a little more about 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?
Mike Carlet: Sure. I'll touch on it briefly. How are you doing, Ketan? I would say that we're not, at this point, going to be 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 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.
Ketan Mamtora: Okay. Got it.
John Heyman: And just Ketan very quickly, and so is our international market, that's been outpacing the growth. And they - probably COVID had a longer tail there, but we've seen great recovery there.
Ketan Mamtora: Understood. That's helpful. And then just as my follow-up, as you kind of open branches, I'm curious kind of what you've learned 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?
John Heyman: 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 new branches. I think we're estimating kind of over next year right now that we can open around 6. We have a model that calls for - 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 need it 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 it on the website. And so those are the two things that we're seeing with virtually every local office that we've opened. I don't think - I think I'm accurate in saying, not a single one has disappointed us. And so that's generally driving, I would say, share shift from more conventional distributors in those locals.
Mike Carlet: I don't think it's changed at this point our view of - as for the long-term number. We're still - we evaluate markets as we go through. But I think our model of opening about six locations for the next three or four years is still what we're very strong underwriting. We'll probably try to open 10 next year, but we're going to underwrite six or so. And then as we reset sort of level, we'll evaluate other markets we might choose to go into.
John Heyman: Yes. I think our longer term model is called for 60, and we're at 30. And that 60 was - 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.
Operator: Next is Adam Tindle from Raymond James. Your line is now open.
Adam Tindle: 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? And any way to quantify how much backlog or bookings are still to get through at the dealer level?
John Heyman: Yes. I think basically, 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 and in terms of integrator optimism about - around the future. So the answer is that simple.
Adam Tindle: Yes. Yes, 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. Could you maybe double-click on that plan? I think about expansion in commercial and security as sort of your existing dealer base 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?
John Heyman: Sure. I think it's a good question. Let me back up. First of all, Snap One before we merged with Control4 a couple of years ago, had very little in terms of an international business. And today, it's about $100 million business for us. The market is outside the U.S., we estimate it to be over $100 billion based on the data we've seen. So there's a huge opportunity there. We at Snap One did not understand the international market because it came from the Control4 merger. And while we focused on the immediate integration of the two companies in late 2020 with plans to go OvrC 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 the same, 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 the 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 gotten limited investment has already grown to $100 million. So Control4 itself is, I forget the exact stat. I think it's actually installed in close to 100 different countries out there. And again, our products today are - have a great level of applicability. We did need to do some tweaking in areas such as power, but we're highly confident about the product relevance there. Security and - by the way, security and commercial, I do want to just comment on the other part of your question. There - 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 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.
Operator: Next question is from the line of Keith Hughes from Truist. Your line is now open.
Keith Hughes: Question is about pricing. I believe you mentioned you got 5% during the quarter, but the legal price increases implemented the intra quarter. As you go into the fourth, will there be more higher price you think you'll realize? Another question, too, can you give us an idea of how much acquisitions contributed to revenue growth in the quarter?
John Heyman: Mike, maybe you do the acquisition one. The price increase was roughly 5%. It was implemented August 1. 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 cost, but we should see flow-through of the 5% price increase in the fourth quarter.
Mike Carlet: As far as M&A goes, John, the only M&A activity that we've had is our acquisition of Access Networks. 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 assume that, that's - if you split that by 4, you can assume that's about the impact of what it would have been in the quarter - the full quarter results in there.
Operator: Next is Ryan Merkel from William Blair. Your line is now open.
Ryan Merkel: 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 margin to come down sequentially?
Mike Carlet: If you're comparing Q4 versus Q3, we do expect it to come down just a little bit as those supply chain pressures coming in and some mix issues come in. The mix in Q4 is a little bit different. We have Black Friday TV sales, which happened, 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 tens of bps lower in Q4 as it always is. But other than that, no other extraordinary activity moving the margins around one way or another.
Ryan Merkel: 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?
Mike Carlet: A couple of things. So the activity that our team is taking is we've talked about the three supply chain challenges. One is the componentry and other is manufacturing and the third is logistics. And all of them, as John talked about earlier, our headwinds that are out there. What we're really effectively managing is on the componentry piece, on the manufacturing piece, our supply chain team is working very closely with our contract manufacturers and JDM partners to make sure we have visibility and managing through those. And quite frankly, we probably did better in that area than we expected in Q3 as we went through. There's - we have no long-term issues or 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. We - it is tied 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 airfreight and other avenues to try to stay on top of it. Our overall inventory levels, 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 0. 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.
JohnHeyman: I think some of the more strategic things we're doing is getting down to like what are the components that go into 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 in more normal cycles we haven't had to worry about.
Operator: 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.
John Heyman: Thanks again, everyone, for joining us today. I really appreciate your time joining a busy earnings season. I just got a, again, applaud our team at Snap One, 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.
Operator: Thank you for joining us today for Snap One's fiscal third quarter 2021 earnings conference call. You may now disconnect.
