Resideo Technologies, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Resideo Technologies, Inc. is a global manufacturer and distributor of technology-driven products and solutions that help homeowners and businesses stay connected and in control of their environments. Their portfolio includes smart home comfort, security, and energy solutions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Resideo Technologies, Inc. (REZI) operates in two segments: Products & Solutions and ADI Global Distribution.

  • Products & Solutions: This segment designs and manufactures solutions that provide smart-home comfort, security and safety, water and air solutions, and other connected home and building applications. They primarily sell to professional installers and service providers.
  • ADI Global Distribution: This segment is a wholesale distributor of low-voltage security products, including access control, fire detection, intrusion, and video surveillance. It focuses on distributing these products to small and medium-sized integrators.

Market Trends: The demand for connected home solutions and security systems has been steadily increasing over the past few years. This trend is fueled by growing awareness among consumers about the benefits of home automation and security, and the growing popularity of remote monitoring and control services. This industry also benefits from increasing energy costs, because of the fact that the energy saving devices and solutions are gaining popularity.

Revenue Distribution

REZI generates revenue through two main channels, their Products & Solutions segment and ADI Global Distribution segment. The majority of their revenue is generated by the ADI Global Distribution segment Exhibit 19.1 on page 31 and 32 shows revenues split between the segments for last 3 fiscal years.

Margins: Resideo’s gross margin for 2022 was 27.2%, a drop from 27.7% in 2021; this is due to lower sales volume and increased supply chain costs. Operating expenses for 2022 were higher at 21.1% due to an increase in distribution costs and restructuring expenses. Net income for 2022 was $263 million dollars, but that includes a $65 million one-time tax benefit; without it it would have been roughly $198 million. In 2023 Q3, revenue decreased to $1.53 billion (compared to $1.55 billion from the same period in 2022) Gross profit decreased to $486 million from $511 million in the prior year period, and Operating income dropped to $112 million from $184 million. This means that company’s profitability dropped YoY due to negative macro changes.

Competitive Landscape

REZI operates in competitive industries. The home solutions market is quite competitive, with numerous players ranging from large diversified companies to niche specialists. The ADI Global Distribution market is also competitive with other large scale distributors. In order to compete effectively, companies will seek a differentiator, such as price, innovation, or quality. However, as we will see in the “moat” section, REZI is unable to maintain an edge in any one of those fields.

What Makes REZI Different? Resideo Technologies, Inc. has a global distribution network and a strong established brand. However, it doesn’t have unique capabilities, but rather acts as a middleman. The company faces pressure to provide competitive and differentiated products while also operating an extensive global distribution network. They emphasize partnerships with professional installers and other third party channels.

Moat Assessment

I would give REZI a 2 out of 5 rating for its moat. Here’s a more detailed justification on why I have given this rating:

  • Brand Recognition: Resideo has strong brand presence in their segment, and people are able to identify their products. However, brand loyalty is low in this industry and thus it provides a little to no competitive advantage to REZI.
  • Distribution Network: ADI Global Distribution segment has an expansive distribution network. However, this isn’t difficult to replicate and therefore doesn’t give a strong competitive advantage.
  • Scale: Neither Products & Solutions nor ADI Global Distribution segments has economies of scale that would give them significant competitive advantage over competitors.
  • Switching costs: The company provides certain solutions that incorporate automation for their customers, but those are not difficult to switch, and does not contribute to creating a moat.
  • Intangible Assets REZI does have certain patents and certifications that protect a product or service, but that does not offer substantial advantages over its competitors.
  • Network Effect: REZI does not have a powerful network effect.

Thus, even though REZI does have some minor advantages, most of them are relatively weak, and could easily be replicated by competitors. There isn’t any single or group of characteristics that would form a moat for the company.

Risks to Moat and Business Resilience

Several factors could harm REZI’s moat and resilience. Here are some of them:

  • Intensified competition: In both the products and distribution segments, there is considerable competition, this can lead to lower margins and reduce REZI’s ability to sustain revenues.
  • Rapid technological changes: The rapid change in technology might make the current solutions obsolete. The company needs to continuously innovate and invest into new technologies and product development.
  • Supply chain disruptions: Global supply chains remain vulnerable to disruptions like labor disputes and geopolitical events. These disruptions affect REZI’s ability to manufacture and distribute its products and therefore affect its overall earnings.
  • Economic downturns: Economic downturns might lead to lower demand and consumption, which might affect REZI’s profitability.
  • Changing consumer preferences: Consumer preference and needs may change quickly and if REZI fails to notice and respond, then the company might have problems.
  • Integration risks: The integration of the acquired businesses is a key risk, since REZI must retain customers, increase revenues, and cut costs of the combined operations. The most notable recent acquisition is Snap One which has made it harder to analyze REZI’s results because of adjustments in the company’s finances.

Despite these risks, REZI has several strengths: an established brand, strong distribution network, and a diversified portfolio. These strengths make the company somewhat resilient to adverse market conditions, though with high uncertainty in terms of market share or profitability. Overall, I would give REZI a somewhat weak moat and somewhat low business resilience given its position in competitive industries and external risks.

Financials

I’m analyzing the company’s financials mostly using 2023 Q3 documents.

  • Revenue: Resideo’s revenue for Q3 2023 came to $1.53 billion dollars, down from $1.55 billion in 2022. REZI’s management acknowledged in the report that there is weak overall demand for their products, as the market is getting saturated, even though the company is performing well. Sales were down in both the Products & Solutions segment and ADI Global Distribution segment.
  • Profitability: Gross profit for Q3 2023 was $486 million dollars, lower than $511 million from the same period last year. The company attributes this to supply chain costs. In 2023 Q3, Operating income dropped from $184 million dollars in 2022 to $112 million. The company is having trouble with cost cutting, and that affects its profitability.
  • Return on Invested Capital (ROIC): ROIC is a key metric for REZI as it measures how well the company is using its capital to generate returns. The company does not usually state the number for individual fiscal quarters, but for the whole of 2022 it was 8.2% which indicates that the company isn’t having great returns and its ability to create value is quite low.
  • Free Cash Flow (FCF): For 2022, FCF was negative $62 million, whereas for 2021 it was $260 million, this means that the company didn’t have the ability to generate additional cash flow. In 2023 Q3, FCF came to negative $118 million.
  • Debt: Total Debt outstanding for REZI is $2.85 billion dollars, for the period ended Sep 30, 2023. Long-term debt, including current portion of long-term debt, is at $1.67 billion.
  • Share Repurchase Program: In August of 2022, REZI’s board authorized up to $300 million dollars of share repurchases. As of September 30, 2023, they’ve repurchased $159.5 million.

Looking at it from the viewpoint of financial health, the company is having trouble with profitability and free cash flow. Moreover, their high debt levels are concerning. They are trying to turn it around, but it will still be difficult due to the macro environment.

Understandability

I would give REZI a 3 out of 5 rating for understandability. While the company’s overall goal of providing connected home solutions is simple enough, REZI operates in complex markets with multiple segments, different distribution channels, and numerous geographic locations. Analyzing financials is tough because of the company’s multiple acquisitions.

Balance Sheet Health

I would give REZI a 4 out of 5 rating for balance sheet health. Although their debt is substantial and might pose risks in the future, their short term liabilities are well covered by current assets, and their cash on hand is sufficient to operate the company for several fiscal quarters.

Recent Problems and Controversies

REZI is struggling with high debt and low profitability, mainly due to market environment and the issues within the industry. Inflation, high interest rates, supply chain problems, competition from new players, and low profit margins are all problems that the company is facing at the moment. However, management is working to restructure the firm and implement a strategic plan to turn the company around.

In response, they’ve taken the following actions:

  • Strategic plan that focuses on profitable segments
  • Cost-cutting initiatives to improve margins
  • Streamlining operations to reduce expenses
  • Integration of acquired companies
  • New product launches to generate higher demand

The management team is expressing optimism about the company’s future and believes it will perform well if their strategic plan is executed properly. They are also making promises that they will focus on margins, revenue growth and pay down their debt. However, it remains to be seen if their plan will truly work out, or if the market forces will be too powerful to overcome.