Control4 Corp (CTRL) Q4 2018 Earnings Conference Call Transcript

Control4 Corp (CTRL)
Q4 2018 Earnings Conference Call
Feb. 4, 2018, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to the Earnings Conference Call of Control4 Corporation for the fourth quarter of 2018. My name is Kiki, and I will be your operator for today's call. Currently all participants are in listen only mode. Later, we will conduct a question and answer session. As a reminder, this conference is being recorded, and a replay will be available on the Investor Relations section of Control4's website for 14 days.

I would now like to turn the conference over to your host for today, Mr. Mark Novakovich. Please proceed.

Mark Novakovich -- Chief Financial Officer

Thank you, Operator. Good afternoon, everyone, and thank you for joining Control4's earnings call for the fourth quarter of 2018. My name is Mark Novakovich and I am the Chief Financial Officer for Control4. With me on the call today is Martin Plaehn, our Chairman and Chief Executive Officer.

Prior to this call, we distributed our Q4 and full year 2018 earnings release over the wire services, and we have posted it to our website at investor.control4.com, as well as furnished it to the SEC on Form 8-K.

Before we begin, I would like to remind you that during today's call, we will be making forward-looking statements regarding future events and financial performance, including providing revenue, and non-GAAP operating and net income, and EPS guidance for the fourth quarter and full year of 2019. We caution that such statements reflect our best judgment as of today, February 4th, based on factors that are currently known to us, and that actual future events and results could differ materially due to several factors, many of which are beyond our control. For a more detailed discussion of the risks and uncertainties affecting our future results, we refer you to our filings with the SEC. Control4 disclaims any obligation to update or revise these forward-looking statements to reflect future events or circumstances.

During the call, we will discuss non-GAAP financial measures. We do not provide full guidance on GAAP operating income and GAAP net income because of the variable and unpredictable nature of certain items included in such measures, such as certain acquisition-related expenses, stock-based compensation adjustments to the valuation allowance on deferred tax assets and certain litigation settlement expenses. Unless we specifically state otherwise, the non-revenue financial measures that we discuss today were not prepared in accordance with Generally Accepted Accounting Principles, in that they exclude these types of expenses that are detailed in the reconciliation of GAAP and non-GAAP results provided in today's press release and posted on the Investor Relations section of our website.

Now I will turn the call over to Martin.

Martin Plaehn -- Chairman and Chief Executive Officer

Thanks, Mark. Welcome, everyone, and thank you for joining us on the Control4 Earnings Call for the fourth quarter of 2018. On the call today, we will share with you the highlights of our quarter, a summary of our record financial and operational performance in 2018, and an update on recent business announcements in the areas of continued strategic focus, which we believe will help drive our leadership forward in the professionally installed connected home market. And finally, I will provide our perspective on the current state of our business and our outlook for 2019 and beyond.

Here are the high-level financial results for Q4. Revenue for the fourth quarter was a record $72.5 million. Our non-GAAP gross margins, 53.1%, were solidly within our long-term gross margin range of 52% to 54%, and our continued expense discipline enabled us to deliver non-GAAP net income for the quarter of $12 million, or $0.44 per diluted share.

We generated $13 million in cash flow from operations during the quarter and utilized $7.9 million to buy back approximately $337,000.00 Control4 shares during our November open trading window. And we closed the quarter and 2018 with $93.3 million of unrestricted cash in investments, a net increase of $2.1 million during the quarter, and we continue to be debt-free.

During 2018, operationally, we expanded and strengthened our foundation. We released new products, spanning the domains of intelligent networking, smart lighting, high-resolution multi-room audio, video intercom and communications, and 4 MP security cameras. We delivered five Contorl4 operating system releases with new and improved functionality to our dealers and end customers. And now, more than 137,000 sites of our 385,000 total registered installations are running Control4 software released in 2018.

We added our 58,600 new customer installations and an additional 71,000 Control4 operating system upgrades to prior installations throughout the world via our professional sales installation and service channel of more than a hundred independent dealers. We increased recurring 4Sight subscribers to over 70,000, up from approximately 55,000 subscribers at the end of 2017. We've launched our production builder program in conjunction with the introduction of our newest Controller product, the CI1, and we enter 2019 with 32 production builders and over 20 in-process applications, predominantly in North America, who are or will be standardizing on Control4 as their smart home automation system for the houses they will build in 2019 and 2020.

We also launched our certified showroom program starting in May, with 140 high-quality experiential showrooms, and expanded that number to 199 as of today. And we have more than 30 additional showroom applications in process for expected certification in the first half of 2019. We added and trained 563 new Control4 dealers during 2018, of which 331 and 232 were inside and outside of North America, respectively; 137 of which were added in Q4, 87 in North America, and 50 in other regions. We expanded our SDDP device ecosystem by 57 licenses during 2018, adding nine in Q4, and now have 327 companies licensing and embedding Control4 SDDP technology in more than 5,900 products.

We expanded our product fulfillment capacity in Melbourne, Australia to process and deliver ordered products to our dealers and distributors throughout Asia, as well as added a new fulfillment facility and team in Hebron, Kentucky to shorten delivery times to our dealers in the Central and Eastern regions of the United States and Canada. And we grew our leadership position in the professionally installed residential automation market through a combination of product innovation and continued focus on helping our channel be successful. Supporting this assertion, Control4 was named the top home automation provider in seven of the 2018 CE Pro Brand Analysis categories, including being named the top brand leader in whole house automation for the fourth consecutive year.

On the financial side during 2018, we strengthened our financial profile, generating $272.5 million of revenue, representing year-over-year growth of 11.6%; improving our blended non-GAAP gross margins to 53.5%, up from 52.3%; investing $9 million in incremental operating expenses across product development, marketing, and sales, while also expanding our non-GAAP operating income margins to 14.9%, up from 12.9% in 2017. We delivered $39.7 million in non-GAAP net income, or 14.6% of revenue, representing a 26% year-over-year increase over 2017. We generated approximately $35 million in cash flow from operations and increased our net cash and investments to $93.3 million, up from $86 million, while repurchasing 937,000 shares of Control4 from the open market during the year, for a total of $23.9 million. And Control4 remains debt-free.

Next, I would like to share with you a few strategic and corporate developments. First, as we start 2019, Control4 is now dealer direct in New Zealand, Ireland, and Switzerland, which should initially add 75, 25, and 20 Control4 authorized dealers in each country respectively this quarter. By directly supporting and managing businesses in these countries, Control4 authorized dealers and their end customers will receive improved business and technical support; direct access to Control4 online resources and e-commerce platform, with pricing in local currencies; direct product fulfillment to in-country dealers from Control4; along with more uniform international product pricing; and the full deployment of Control4 global programs and policies, including our certified showroom program, production housing program, volume incentive rebate program, classroom and online technical training, and onsite technical field specialist support.

Second, on February 1st, Control4 acquired Swiss-based company NEEO for a total consideration of $11 million in cash and the assumption of operating debt which will be paid off promptly. NEEO is the designer and creator of the NEEO universal handheld remote for entertainment and smart home automation. The NEEO team will be joining the Control4 product development organization with the mission to enrich and accelerate the delivery of next generation control device experiences for audio and video entertainment, and smart home automation. NEEO's existing end customers will continue to be supported with their current NEEO product, and we intend to provide a preferred upgrade benefit to them with the forthcoming combined Control4 plus NEEO product when it becomes commercially available.

All sales of existing NEEO products, most specifically their direct-to-consumer products, have been or will be promptly suspended, and we envision that all new products from the combined Control4 and NEEO team will only be available through authorized Control4 dealers. And the near-term expenses and future revenue implications of the NEEO acquisition are fully considered within Control4's Q1 2019 and full-year 2019 guidance that we will share with you today. The NEEO acquisition is a talent and technology investment, which should yield beautifully designed and deeply integrated products for Control4 customers and our dealer channel. We are excited about our expanded team and added capabilities, and we look forward to the new innovations our combined teams will create.

And lastly, at this week's integrated systems Expo in Amsterdam, we will be highlighting new products and capabilities of our expanding international lighting product family, including expanded KNX-enabled products with support for popular international keypads, and voice integration with Amazon Alexa.

Before we turn to Mark's comments on the financials, I wanted to share several simple thoughts on the business, the overall market, and our view of 2019. During the second half of 2018, our year-over-year revenue growth rate slowed. Our revenues resulted within but toward the low end of our guidance range. We believe these headwinds are attributable to a combination of factors, including general economic conditions, related pressures facing our dealers, and time impact relative to our product development cycles. Let me spend a few moments on each.

The general economic conditions include the slowing of new housing in MDU projects in many metropolitan areas; geopolitical polarization intentions in the UK and EU, and within and between the U.S. and China; and most recently, stock market volatility, all of which impact consumer confidence and homeowner decision-making regarding meaningful purchases involving design, installation, and customization. While we can't predict when these macro headwinds will subside, we do benefit from a broader secular trend of the irreversible adoption of technology within our homes. We at Control4 have demonstrated our ability over numerous years to continue to profitably grow through periods of uncertainty.

As for our dealers, CE Pro recently released its annual survey of electronics installers. The publication noted that in 2018, integrated revenues grew on average 8% in 2018, which is down from 11% of growth in 2017, and the average number of new installations per dealer fell from 48 in 2017 to 45 in 2018. The CE Pro survey also reported challenges noted by dealers, including a slowdown in new home construction and ongoing trade labor shortages facing the industry.

I would note that Control4 grew 11.6% in 2018, showing again that we can grow faster than the blended average of our channel. While we are not immune from the factors impacting our channels, we are taking proactive steps both to broaden our dealer channel and to empower our dealers to be more efficient and more productive. These steps include more proactively adding qualified new Control4 dealers in all of our 44 global territories, with an increased intensity in territories with soft revenue growth. Our candidate pool of dealer applications remains robust; however, not all interested parties will meet our objective business and technical criteria for Control4 dealer certification; strengthening dealer technical and business training, as well as continuing to expand our on behalf of marketing services for subscribing dealers, and adding more certified showrooms in strategic metropolitan areas in the U.S., UK, EU, China, and Australia and New Zealand; increasing our communications to dealers and potential customers, emphasizing the significant opportunities and benefits of Control4 solutions within existing homes to help facilitate a rebalancing of dealer focus toward retrofit installations, as new custom home construction becomes more selective in the coming year; and mobilizing the installation phases of Control4 solutions within newly constructed production houses in 2019 under our 2018 production builder program, as well as enlisting additional production builders in North America, UK, and Australia, where new production housing projects are expected in late 2019 and '20.

Though new housing construction generally may be beginning its macro cyclical slowdown, newly constructed houses today are significantly more likely to include smart home solutions than houses constructed previously. We believe the opportunity for Control4 within those new houses that are built will continue to expand. Regarding product lifecycles, we continue to increase investments in developing our solution products in categories with expanding demand, including intelligent lighting, high fidelity audio and video, and access control and communications. We are also enhancing our platform products in the areas of wireless and wired networking and connected home automation to expand their capabilities, improve price performance, and to deliver new compelling user experiences.

The results of our ongoing product development will be made available as each of the respected multi-month field tests complete during the second, third, and fourth quarters of 2019; and we have an additional exciting wave of products and software aimed for the first half of 2020. Beyond our organic development efforts, we will continue to expand our device ecosystem in SDDP licensing to both mature and start-up companies; and to also continue pursuing opportunities to acquire businesses and teams with a unique product capability, strong technical and business expertise, and market presence that are synergistic to an amplifying of Control4's business presence and future.

We have now made seven acquisitions since we went public in 2013, and we believe we have a strong ability to drive successful selected acquisitions using our strong balance sheet and cash generating business. I and the Control4 team are confident in the strength of the broad opportunity of professionally specified and installed connected home solutions, and the strength of our product and business assets teams and partners, and our collective ability to globally execute in the context of our strategic outlook. Why? The connected home opportunity is durable. Homes aren't going away, and network connectivity will only increase, and largely independent of general macro cyclicality.

Useful and compelling products in the ecosystem. The Control4 platform and solution products are the most open and interoperable in the industry. We deeply interoperate and control over 13,000 third-party products and have over 320 corporate licensees of our SDDP technology, who are in turn shipping over 5,900 SDDP-enabled products.

Global dealer network. We have invested 15 years growing and curating our professional specification design and installation channel of nearly 6,000 independent dealers who have built their businesses around Control4. This powerful symbiotic ecosystem is extremely difficult to displace or to replicate.

Market leadership. We believe we are the leading provider in the professionally installed home automation market, and we believe our lead versus our competitors has widened in recent years. Brand leadership. We are the most recognized brand in the professional installed channel across a wide range of product categories ,and our brand is associated with quality, interoperability, and premium consumer experiences.

And financial strength. We have shown the ability to deliver sustainable, profitable growth, while in parallel, using our debt-free balance sheet to acquire accretive business building assets and teams, as well as selectively buy back our own stock to manage share count dilution. We believe our financial strength both propels us and stabilizes us during these near-term chaotic times, and we will continue to advance in investment programs and products to grow our business. We look forward to getting 2019 started efficiently and effectively.

With that, I'll turn it over to Mark.

Mark Novakovich -- Chief Financial Officer

Thanks, Martin. We will shortly open the call to your questions, but first, I'd like to share additional details about our recent financial performance and provide guidance for the first quarter and full-year 2019.

As Martin mentioned, total revenue for the fourth quarter of 2018 was $72.5 million, a year-over-year increase of 6%. Year-over-year, North America core revenue and international core revenue grew 5% and 19% respectively for the three months ended December 31, 2018.The category of other revenue, which consists primarily of hospitality business and in-store commercial audio/video switching products in Australia, contributed $0.6 million in the quarter, compared to $1.7 million in Q4 2017. We shipped 31,010 controllers during the quarter, representing a 3% increase over the same period in 2017; and for the full year, we shipped 114, 311 total controllers, an increase of 10% over the prior year.

Our non-GAAP gross margin percentage for the fourth quarter of 2018 was 53.1%, compared to 53.2% in Q3 2018, and 52.1% in Q4 2017. During the fourth quarter, we opened our second North America fulfillment facility, located in Hebron, Kentucky and have begun shifting delivery responsibilities for North America East and Central regions to that location. Although minor on a net basis, we did see some compression in gross margin percentage compared to the third quarter of 2018, resulting largely from the strengthening of the U.S. dollar in certain markets where we sell our products in local currency, increases in fulfillment center expenses as we open our Hebron facility, and absorbing the impact of additional tariffs that were levied on certain products shipped during the quarter.

As a reminder, and reinforcing our position on U.S. import tariffs, during 2018, the U.S. government announced new tariffs on certain goods imported from China. The first of these new tariffs on certain classes of imported goods went into effect on July 6, 2018. Additional tariffs on goods imported from China went into effect on August 23, 2018, and others are under consideration. We have performed a comprehensive analysis of our products and the respective HTS code classifications to assess which of our specific products are subject to these new tariffs.

For 2019, we intend to absorb the impact of officially announced tariffs. We do not intend to change our product pricing in 2019 for existing product SKUs to our authorized dealers, nor our product MSRPs for existing product SKUs for end customers, in response to these current tariffs. Our prior improvements in gross margin have provided us the flexibility to absorb the blended impact of current tariffs, and our review estimates and forecasts are factored in to our 2019 operating plan, as well as in today's communicated guidance for Q1 and the full-year 2019. We'll continue to monitor information and changes to import tariffs, so that we can best plan and navigate future periods, and to explore all options available to us to reduce the impact of tariff changes.

Our non-GAAP operating expenses in the fourth quarter of 2018 were $25.9 million, or 35.7% of revenue, compared to $24.2 million, or 35.6% of revenue, in the fourth quarter of 2017. Non-GAAP research and development expenses during the fourth quarter of 2018 were $9.8 million, or 13.6% of revenue, compared to $9.3 million, or 13.7% of revenue, during Q4 of 2017. The Q4 year-over-year increase in absolute dollars is due primarily to increases in salaries and wages, including incremental staffing. For 2019, we expect non-GAAP R&D to increase in absolute dollars and as a percentage of revenue as compared to 2018, as we continue to invest in new product development, including the incremental R&D investment resulting from the NEEO acquisition we announced today, which are intended to enhance the development of future products.

Non-GAAP sales and marketing expenses in the fourth quarter of 2018 were $10.8 million. or 14.9% of revenue. compared to $10.4 million, or 15.3% of revenue, in Q4 2017. The year-over-year increase in dollar terms was primarily driven by incremental sales and marketing expenses associated with expanding our support for our growing channel, including additional staffing to support marketing and sales services provided on behalf of our dealers. For 2019, we expect non-GAAP sales and marketing to increase in absolute dollars compared to 2018 as we work to grow our sales channel, but to remain approximately flat as a percentage of revenue.

Non-GAAP general and administrative expenses in Q4 of 2018 were $5.2 million, or 7.2% of revenue, compared to $4.5 million, or 6.6% of revenue, in Q4 2017. The year-over-year increase in both absolute dollars and as a percentage of revenue is due primarily to higher global facilities expenses due to increased lease rates of certain corporate lease renewals, and incremental space to accommodate growth and higher professional fees associated with the expiration of the five-year period under which we qualified as an emerging growth company under the Jobs Act, and external diligence on potential acquisition targets and tariffs.

For 2019, we expect non-GAAP G&A expenses to increase in absolute dollars, but to decrease slightly as a percentage of revenue. I want to address the $23.4 million non-cash tax benefit reported during the fourth quarter, resulting from the release of the valuation allowance previously recorded against certain deferred tax assets. In each reporting period since recording the valuation allowance, we have considered all available positive and negative information, including past operating results, forecasted future market growth, forecasted earnings, future taxable income, and prudent tax planning strategies. Based on our consideration of these and other factors during the fourth quarter, we have released all of the valuation allowance against deferred tax assets in the U.S., the impact of which is a one-time incremental non-cash tax benefit to GAAP net income of $23.4 million, or $0.85 per diluted share, in the fourth quarter. Our balance sheet now reflects deferred tax assets resulting from net operating loss carry-forwards and other tax credits of approximately $23 million, which will offset against future U.S. federal income tax obligations. Until these tax assets are fully utilized, we will not be a payer of U.S. federal income taxes. As a result, we do not anticipate any significant change to our cash tax rate in 2019 compared to 2018.

For GAAP reporting on a percentage basis, we currently estimate our effective tax rate percentage to be in the high 20s for calendar 2019, and for non-GAAP reporting to be between 13% to 15%. On a GAAP basis, our fourth quarter net income was $30.5 million, or $1.11 per diluted share, compared to net income of $5.9 million, or $0.21 per diluted share, in the fourth quarter 2017. Our fourth quarter non-GAAP net income was $12 million, or $0.44 per diluted share, compared to non-GAAP net income of $10.9 million, or $0.40 per diluted share, in the fourth quarter of 2017. Our balance sheet remains strong, and as of December 31, 2018, we have $93.3 million in unrestricted cash, cash equivalents, and net marketable securities, an increase of $2.1 million from the $91.2 million we reported as of September 30, 2018.

Primary contributors to our cash flow during the quarter included cash flows from operations of $13 million, $7.9 million used to repurchase approximately 337,000 Control4 shares from the open market, and purchases of capital assets totaling $2.4 million. As of December 31st, we also have available borrowing capacity, our credit facility of $40 million, and Control4 has no debt.

I want to quickly summarize three items to consider when evaluating our 2019 guidance. First, our guidance for Q1 and the full-year 2019 reflects incremental cost of goods sold associated with absorbing the announced tariffs. as well as the expansion of product fulfillment capabilities in Hebron, Kentucky. Assuming no additional tariffs are enacted, we believe that we will remain within our long-term non-GAAP gross margin range of 52% to 54%, but toward the lower end of the range.

Second, while the acquisition of NEEO will help accelerate the development of new and exciting products, our guidance for 2019 does not assume any incremental revenue from these products, and does include approximately $3.5 million in incremental operating expenses associated primarily with the product development teams acquired in the transaction. Except for the incremental R&D associated with NEEO acquisition, our guidance assumes that our overall operating expenses as a percentage of revenue will be slightly lower year-over-year in 2019. In other words, we are striving to achieve operating margin expansion in 2019, excluding the impact of NEEO, while continuing to invest in R&D to support growth in 2019 and beyond.

Finally, while our cash tax rate is not expected to change significantly, because of the reversal of the valuation allowance on deferred tax assets, our non-GAAP effective tax rate percentage will increase from less than 10% to approximately 13% to 15% for calendar year 2019.

Turning now to our forward-looking guidance, we expect revenue in the first quarter of 2019, which is our seasonally low quarter each year, to be between $61 million and $63 million. Due to the IFC trade show marketing and sales expenses that occur in each Q1, we expect non-GAAP operating income for the first quarter of 2019 to be between $2.3 million and $3.3 million, and non-GAAP net income to be between $2.1 million and $3 million. Also, based on an expected $27.2 million weighted average shares outstanding, we expect non-GAAP earnings per diluted share to be between $0.08 and $0.11.

For the full-year 2019, we expect revenue to be between $295 million and $301 million, and our non-GAAP operating income to be between $37.3 million and $39.3 million, and non-GAAP net income to be between $32.5 million and $34.5 million. Also, based on an expected $27.6 million weighted average shares outstanding, we expect non-GAAP earnings per diluted share to be between $1.18 and $1.25.

Finally, and as a reminder, Control4 does not provide forward guidance on either GAAP operating income or GAAP net income, because certain non-GAAP adjustments are inherently difficult to forecast, whereas others relate to amortization or expensing of items tied to historical events. That said, our earnings release posted earlier today includes a detailed list of non-GAAP adjustments, and a reconciliation between GAAP operating income and non-GAAP operating income, and between GAAP net income and non-GAAP net income for Q4 2018, as well as our estimate of non-GAAP stock based compensation and the amortization of intangible assets reflected in our non-GAAP net income guidance for the first quarter of 2019.

We would now like to open the call for your questions.

Questions and Answers:

Operator

If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach out equipment. Again, press *1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions.

We'll have our first question from Adam Tindle with Raymond James.

Adam Tindle -- Raymond James -- Analyst

I'm gonna start on the 2019 revenue guidance. You've always talked how Q1's a good indicator of the stair step in revenue as the year progresses. Your Q1 2019 guidance is a little bit softer than previous years, so I'm hoping you can touch on maybe why the cadence to this year may be a little bit different, since it would suggest the remaining quarters would need to get a little better than seasonal for the growth implied in the full year. So, long way of saying, just talk about the approach to guidance/ Why not just take the full-year revenue down further, given what you're seeing in Q1?

Martin Plaehn -- Chairman and Chief Executive Officer

Hi, Adam. This is Martin. We looked at Q1, and we looked at the full-year, and we also look at our own internal plans and product and program assets. When we looked at the second half of 2018, we certainly saw a difference in the market performance and sentiment that in Q3 and then again in Q4 compared to all of 2017 and the first half of 2018. We also, and I think many businesses, experienced a very different November and December than what they did in 2017. And with the results that we delivered in Q4, and the way we looked at Q1, which is our seasonally low quarter, and the rise of uncertainty that surfaced throughout many economies and consumer product sentiments in November and December, we felt that Q1 should be more prudently forecasted, and we still strongly believe in our full-year opportunity. We have a strong product and program map that rolls out starting this week at ISC, but usually, we see a month to two-month to three-month delay between program introductions and revenue, and that will put us in Q2. And then we have more product and program in Q2, and then in the second half. So, we feel confident in our ability to navigate the near-term. And Q1 is right in front of us, and it's very clear that Q4 in November and December and part of January needs to be looked at clear-eyed, and we reflected that in our guidance.

Mark Novakovich -- Chief Financial Officer

Adam, this is Mark. I'd also add that one of the metrics that we've been watching closely is new dealer adds, and as we've reported, we felt good about the dealer adds in both Q3 and Q4. We're positive about what we're seeing so far in 2019. And as we reported today, we're going direct in a couple of new foreign markets, including New Zealand, Switzerland, and Ireland. And the combination of those new directed dealer markets, as well as the strong dealer adds we've seen over the last several trailing quarters, gives us an additional amount of optimism about 2019, including the second half of 2019.

Adam Tindle -- Raymond James -- Analyst

Okay, that's helpful, thanks. And I just wanted to ask maybe kind of a similar question on margins. If we look at your Q1 guidance, it looks like non-GAAP operating margin is down about half or more year-over-year, but then we look at the full year 2019 operating margin guidance implied, and it's down a lot more modestly than that. So, maybe just help us to understand what happens beyond Q1 to enable more leverage or better margin? What temporary items aid? Thank you.

Martin Plaehn -- Chairman and Chief Executive Officer

Well, one of the operational expenses that we've been talking about is the opening of our facility in Hebron, Kentucky. We started shipping product out of that location in Q4, and we'll expand the regions that that facility is serving in Q1, and it'll be fully operationalized. And then, we'll also have all of the costs associated with running that facility for the full Q1 period. We'll see some leverage out of those expenditures in the second half of the year as we're able to increase volume of revenue and then be more efficient in our Salt Lake City facility. So, we're able to see some benefit in second quarter, third quarter, and fourth quarter from those efficiencies.

And then, the other issue obviously is tariffs. And our current guidance assumes the 10% tariffs through the first part of Q1. We're assuming that the 10% tariffs increase to 25% as currently enacted, and continue at 25% through the balance of the year. So, the tariffs do put pressure on gross margins when comparing 2019 to 2018.

Adam Tindle -- Raymond James -- Analyst

That's helpful. Thanks, Mark.

Operator

Our next question will come from Rich Valera with Needham & Company.

Rich Valera -- Needham & Company -- Analyst

Thank you. I would just like to follow up on that last answer you gave there, Mark. Can you say how much impact you expect from that increase from 10% to 25% on the tariffs, like how many, roughly, basis points of gross margin you think that will be for you guys?

Mark Novakovich -- Chief Financial Officer

Yeah. For the full year, it's 60 or 70 basis points.

Rich Valera -- Needham & Company -- Analyst

And if, in fact, the tariffs did not go up, would you see 60 to 70 basis points better? Or is it just that's if you didn't have any tariffs at all?

Mark Novakovich -- Chief Financial Officer

I don't have a split between the impact of 10% and 25%, but let's just say 40% of that expense would continue as a rough estimate.

Rich Valera -- Needham & Company -- Analyst

Got it. And just on the tax rate, you mentioned that your old non-GAAP tax rate was less than 10%, but if I look at my model, it was closer to actually 1% in 2018. S, I just want to make sure we're talking apples-to-apples, that it was really kind of -- you're looking, I guess, 13% to 15% this year, and that compares to basically 1% in 2018. Is that correct?

Mark Novakovich -- Chief Financial Officer

Yeah. At the beginning of 2018 when we provided our original guidance, I think we suggested that our effective non-GAAP rate would be closer to 8%, but because of different tax credits that materialized during the year, you're correct that for the full year, it was certainly less than 5%, and probably toward the lower side of that.

Rich Valera -- Needham & Company -- Analyst

Got it. And then for you, Martin, so last quarter, you called out some basically underperforming territories, and you largely chalked it up to your kind of own execution issues. And clearly, you're striking a different tone this quarter. Sounds like kind of acknowledging that there is some pretty significant macro headwinds here. So, I guess the question is, you did say you were taking a bunch of steps last quarter, and I think -- some of which you elaborated on tonight, to remediate the underperformance of those dealers. So, how have you -- and it's probably sort of two conflicting dynamics. One is maybe you're seeing improvement from what you're doing, but you're seeing worsening macro. But can you sort of say how the remediation steps you took helped or didn't help with your performance of those territories?

Martin Plaehn -- Chairman and Chief Executive Officer

We started those remediation steps that I outlined in the last earnings call and reiterated this time in Q3 and in Q4. I mean, we'll continue to do those throughout 2019 month by month. I do believe that the steps that we started in Q3 and those that we continued did help stem further, let's say, internal diffusion of things that we can control. The difference between the remarks that we're making today and the remarks that we made in early November/late October is that November and December was dramatically different than most companies, including our industry expected. And it is not prudent for us to just say that that was a two-month anomaly, and that that wouldn't have impact into 2019.

And so, those are much more external factors that heightened in their visibility. There are things that we can do that I mentioned in my prepared remarks today, such as start really focusing on communication with our dealers to have them put more emphasis behind existing homes and existing houses for retrofit installations, so that they can buttress their new construction business. We think that that cyclicality can't be ignored. But we have influence over how we can communicate with our channel, and we have a very broad channel. And some of those dealers will be readily adaptive. Some of them will continue on with their pipeline of new construction. And when that pipeline starts spinning, they'll start making the migration changes in their strategy.

So, I do believe that we have strong influence on our ability to navigate. We certainly have propellant to keep our business moving forward, which makes it easier to steer. And we're communicating with our channel what we see and what we can do with them for our clients' best interest. We think the demand for intelligent homes and connected consumer experiences is gonna continue to expand. That expansion isn't necessarily linear, or smooth, or without perturbations, but we're going after it, and I think we have a good clear view into the future.

Rich Valera -- Needham & Company -- Analyst

Okay. That's helpful color. Thank you, Martin.

Operator

Once again, please press *1 to ask a question. We ask that you limit yourself to one question and one follow-up, please.

And our next question will be from Scott McConnell with D.A. Davidson.

Scott McConnell -- D.A. Davidson -- Analyst

Great, thanks. So, you guys noted last quarter the revenue mix had shifted materially in the past from the historical 50/50 mix of new and existing homes. Can you provide any details or comments on how that mix is currently? And you've kind of alluded to it, on how your focus or strategy is shifting, given the new housing environment. Any more details on that?

Martin Plaehn -- Chairman and Chief Executive Officer

I recall that what we discussed in the last call was that our current blend of business and our channel's business on average was 50% new construction and 50% retrofit. We did also point out that in early years of the Control4 history, the business in the very early years, 2005, 2006, the business was 70% new construction, 30% retrofit. And then during the downturn, between late 2008 through 2012, we saw that shift completely to the other way, where it was about 30% new construction and 70% retro, and that we today were at about 50/50. We still believe the business today and what we've just finished is about 50-50. Our dealers have project pipelines. Much of their business is new custom homes, which have a different dynamic than production housing. And we do expect with the cyclical downturn in new construction that our business should shift small percentages. And if there is a dramatic slowdown economically, then our dealers will have shift faster.

Scott McConnell -- D.A. Davidson -- Analyst

Okay. And then, international growth kind of remained a bright spot this quarter. Can you update us on your strategy internationally? And then, any comments about the macro environment in some of your key international markets?

Martin Plaehn -- Chairman and Chief Executive Officer

Our business is global. We're much more mature in North America. We have the most mature international talent in the UK. And then, we have newly expanded presence in Australia, China, and Germany, all of which are quite large economies for connected homeowners and consumers. We think that there are macro economic conditions in many of those regions that affect premium consumer investment and purchasing decisions. Certainly, Brexit in the UK and the interplay between the UK and the EU impacts many, many businesses. The owners of those businesses, the senior managers and executives of those businesses, our homeowners, they make large capital purchase decisions during their lives, and I'm sure that some of that chaos or uncertainty is impacting the subset of decisions in the European market.

In Australia, we 're seeing good growth because we're on a small base, but we are seeing real estate and housing looking a little bit more tepid. And then, China is a vast opportunity for us. We have a very powerful team there. It's small but growing. But their economy is slowing. It's still moving much faster than ours. So, there is some adjustment there. We're a small player in all these economies relative to the economies themselves. So, we should be able to navigate and adjust, and it just depends on how long does it take us and our channel and those programs to make the necessary adjustments to keep growing.

Mark Novakovich -- Chief Financial Officer

To maybe to put some numbers to what Martin just said, in the regions where we have a direct presence for 2018, we saw growth of 20%. So, as you pointed out, a nice robust growth rate in those regions. And then, in the regions where we go through a second tier of new distributors, we saw growth of about 9%. So, we do think there is real value to the dealers when we can deploy the full Control4 engine to help them be successful.

Operator

And our next question is from Craig Irwin with Roth Capital Partners.

Mark Novakovich -- Chief Financial Officer

Craig?

Operator

Please check your mute function. We're unable to hear you.

Craig Irwin -- Roth Capital Partners -- Analyst

Sorry. Good evening. Sorry. Thanks for taking my questions. So, the first question I wanted to ask is about your guidance. Clearly, you're looking for a reacceleration from something like low single-digit growth back toward high single-digit growth by the end of the year. Can you maybe talk through the relative contributions in there of the new geographies and dealer adds, some of the new products that you're targeting for introduction, and then some of the discrete initiatives that you've put in place over the course of the last 18 months, particularly the production homebuilders initiative and certified showrooms? How would you break down the relative contribution to reacceleration that you're forecasting?

Mark Novakovich -- Chief Financial Officer

Yeah, I think you did a good job of summarizing the strategies or the initiatives that we're counting on to drive year-over-year growth in our business. We've talked about the new dealer adds. We've talked about products which expand rack share, and we're expanding some international geographies. I think if you had to break it up, new dealer adds, new business is probably a third of our growth; rack share, probably a third; and then the other factors are a third.

Craig Irwin -- Roth Capital Partners -- Analyst

Okay, excellent. And then, if we could talk about the certified showroom initiative a little bit more specifically. This quarter ,you added 37 new showrooms; you talked about 30 that are in process. Can you maybe update us on whether or not you're seeing capture rates double as you would hope when you put this program in place? And do you have a target for the number of showrooms you want to have exiting 2019?

Martin Plaehn -- Chairman and Chief Executive Officer

So, good questions. We have started to measure the performance of the current cohort of certified showroom dealers. Their performance on a blended average is substantially better than the general population. We have metrics, internal, and confirmation from certified showrooms that our joint efforts, their efforts and ours, have driven good business and incremental business to what they had prior to their showrooms. And we are focusing on processing the 30 applications. There's certainly an incoming stream of additional. We've communicated to all of our dealers the criteria for certified showrooms, that we don't have an upper bound for certified showrooms. We would like as many of our dealers that can meet those requirements to reach out for them and attain them.

From an operational standpoint, we want to make sure that our on-behalf-of services and the demand creation portions that we do at scale, that we really get good at that for the existing suite of certified showroom dealers. So, there is some governance that's going on from an operational standpoint. And right now, if we can get to in the mid-lower 200s by July 4th, I feel really good, provided all the other metrics on sell-through and performance relative to the broader population continue to improve.

I will say that internally, we've said that it's too early to pass judgment on the certified showroom program, because we went out and selected current dealers. Current dealers who self-selected themselves is -- by that nature alone, you create a population that is dramatically different than the broad base of 5,900 dealers. So, by the end of 2019, we'll have a lot more data on actual consumer transactions, consumer satisfaction, and total revenue, where we can make good comparisons versus selection-based comparisons.

Operator

And in the interest of time, we will move to the next question from Jack Vander Aarde with Maxim Group.

Jack Vander Aarde -- Maxim Group -- Analyst

Shipments look pretty strong; they're up 3% year-over-year; they're flat Q-over-Q. But how did those control unit shipments perform relative to your expectations heading into the quarter?

Mark Novakovich -- Chief Financial Officer

I think the growth was disproportionate to our overall revenue growth. One of the reasons why revenue grows for us is because of increases in rack share from, whether that's new product that we introduce internally through our organic R&D efforts, or through acquisitions. And so, it's not unexpected to see, particularly in any given quarter, for controllers to grow at a slower rate than our overall revenue. But we're certainly pleased with what we saw in 2018. With 114,000-plus controllers being shipped, and that being a 10% increase over the prior year, that was a good outcome for us.

Jack Vander Aarde -- Maxim Group -- Analyst

Okay. And then, I think you guys said 4Sight subscriptions, they increased to over 70,000 from 55,000. What do you think was driving this increase in 4Sight subscriptions?

Martin Plaehn -- Chairman and Chief Executive Officer

So, this is the first time we've communicated numeric statistics on 4Sight. We would expect to do the same again at the end of 2019. In mid-2017, we began a program which enabled end customers to electronically resubscribe to 4Sight, sort of self-service renewal. And in those cases, we would provide a bounty back to the dealer of record of 20%. When the dealer does the renewal, the dealers get a 40 percentage point bounty on the subscription cost. The subscription cost for 4Sight is $100. And during the time from mid-2017 through the end of 2018, this new method of doing renewals and new subscription signups has really accelerated signups and reduced churn out. When we started in middle of 2017, we had 42,000 subscribers. That moved quickly to 55,000, and then that moved from 55,000, and now we're nicely over 71,000.

Operator

And we will take our last question from Saliq Khan with Imperial Capital.

Saliq Khan -- Imperial Capital -- Analyst

Hey, guys. Two quick questions for you. First one being -- is, Martin, the dealers are at the crossroads of the consumer technology business, so what strategies are your dealers using right now to sell into your channel some of the smart home technologies that you guys carry? And do you envision that they can improve those methods so they can better sell into the retrofit market?

Martin Plaehn -- Chairman and Chief Executive Officer

Our dealers are really good at integrating diverse technologies and delivering experiences tuned for the customers' expectation. A lot of their business is brought to them through referrals of prior business or adjacent business. And they certainly can learn and improve more traditional local marketing and selling techniques. I mean, I'm talking broad-based. We have hundreds, if not thousands, of dealers who are fairly awesome at sales and marketing, as well as technology integration and experience design and delivery. However, I would assert that we all can get better, Control4 included. We're doing lots of things with regard to training dealers on how to show connected home experiences so that customers really can demystify what the connected home is all about and differentiate between the different offerings pertinent to their own lives. And I think that's a big strategy for us. We're doing that with our certified showrooms. We're making that information available to all of our dealers more broadly and electronically. And I think that that can help, both for retrofit and for new custom homes.

Saliq Khan -- Imperial Capital -- Analyst

Gotcha. And then, Martin, can you talk about the importance of your partnership with the home dealers that you have in regards to your long-term strategy? One of the things that I continue to find is I'm seeing an increasing number of the homebuilders establish relationships with the Amazons and the Googles of the world.

Martin Plaehn -- Chairman and Chief Executive Officer

Well, we'll have to see how well those relationships turn out. Those big companies have enormous marketing and communication assets that are very alluring to many kinds of companies, including builders. But when it comes to installing and delivering very robust solutions for a home that is either already sold or that is to be sold, that takes a far more sophisticated and present -- I mean, local present -- servicer arm and company fully dedicated for it. We're building our practice of going after production houses. We have about a year of experience with it. The ones that are working are working very well. And we're gonna take it step by step.

Operator

That concludes our question and answer session. I'd like to turn the conference back over to management for additional or closing remarks.

Martin Plaehn -- Chairman and Chief Executive Officer

Thank you for joining us on our first call in 2019. We look forward to continuing our adventure, and we'll be reporting back to you in late April or early May. Thank you very much.

Operator

This concludes today's conference. Thank you for your participation.

Duration: 59 minutes

Call participants:

Mark Novakovich -- Chief Financial Officer

Martin Plaehn -- Chairman and Chief Executive Officer

Adam Tindle -- Raymond James -- Analyst

Rich Valera -- Needham & Company -- Analyst

Scott McConnell -- D.A. Davidson -- Analyst

Craig Irwin -- Roth Capital Partners -- Analyst

Jack Vander Aarde -- Maxim Group -- Analyst

Saliq Khan -- Imperial Capital -- Analyst

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