Universal Electronics Inc (UEIC) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Universal Electronics fourth quarter and year-end 2002 results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question and answer session. At that time, if you have a question, you will need to press the number 1 on your touchtone telephone. As a reminder, this conference is being recorded, Wednesday, January 29th, 2003. I would now like to turn the conference over to Miss Kirsten Chapman at [inaudible].

Thank you, Molina. Good afternoon, thank you for joining us for the Universal Electronics fourth quarter and year end 2002*results conference call. By now, you should have received a copy of the press release. If you have not, please contact [inaudible] at 415-433-3777, and we will forward a copy to you. After reading a short Safe Harbor Statement, I will turn the call over to Paul Arling, Chairman and Chief Executive Officer of Universal Electronics.

During the course of this conference call, management may make projections or other forward-looking statements regarding future events and future financial performance of the company, including the benefits the company expects as a result of significant contracts with customers that have been recently announced, the development and success of products and technologies, the continued convergence of the company's technology and the continued strength of the company's financial position. We wish to caution you that these statements are just projections and that the actual events and results may differ materially.

For further detail on risks, we refer you to the press release I mentioned at the outset of this call and the documents that the company files from time to time with the security exchanges commission, including the company's annual report on form 10-K, filed for the year ended December 31st, 2001. These documents contain and identify various factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. We undertake no obligation to revise or update any such projections or statements to reflect the circumstances after the date on which such projections or statements are made or to reflect the occurrence of unanticipated events. Now I will turn the call over to Paul Arling, chairman and Chief Executive Officer of Universal Electronics.

Good afternoon everybody. After I deliver a few opening remarks, Mark Belzowski, our CFO will review the financial statements and guidance. Then Rob Lilleness, our President and COO, will discuss our product and customer activity. I will close with an industry review and our go-forward strategy. After which we will conduct a question and answer session.

To summarize, for the fourth quarter, UEI reported $29.9 million in sales and 15 cents in earnings per share, with sales and earnings coming in ahead of expectations. For the year, we posted revenues of $103.9 million and fully diluted earnings per share of 42 cents.

It was a tough year in terms of the economy, and most of the industries we serve. So we're proud of these solid results. Furthermore, our balance sheet is stronger than it has ever been. Our DSOs and inventory days on hand are both more than 10 days better than they were at year-end, 2001. Our cash balance ended 2002 at $40.6 million, which was $6.3 million higher than last year.

Throughout 2002, we have stated that in difficult times, strong companies get stronger. We committed to continued investment in innovative new product and technology offerings that would expand our lead over competition in the markets we serve. These investments have led to progress. Fourth quarter sales were boosted by a strong showing in our European retail business, which has been improving its marketing efforts, especially around the introduction of Chameleon. Nevo and Chameleon also contributed to sales in our OEM and private label businesses. In a few minutes, Rob will speak in greater detail about some of our recent successes. For me it's just further reinforcement that we are moving in right direction. Our advance technology products lead the industry and the market for these products is emerging.

Early in 2002, we set goals to enter the computing market and increase our commitment to being at the forefront of home control. We've succeeded in our goal so far, and we look forward to continuing progress in the future.

Our core universal remote business continues to perform well. At the same time, however, we are in an environment of reduced capital spending, resulting in some uncertainty in our target markets. During times like this, a company has to be smart and savvy to stay ahead of the needs of its customers, while offering a compelling value proposition. UEI proved its ability in this area repeatedly during 2002 as evidenced by our ever-expanding relationships with Comcast and Cox, announced earlier this year. In the fourth quarter we announced exciting news about Nevo being embedded in the next generation I Pac, the Intel reference designed for Microsoft's smart displays and then most recently, Nevo's inclusion in the Busonic air panel.

Looking back, we can safely say that we have met every milestone we anticipated in the development and marketing of our new products. And excitement about our products is even greater than we anticipated. So while the economic environment remains uncertain, at UEI, we remain focused on the future. Our goal has been to supply the technology that enables consumers to wirelessly connect, control and interact with an increasingly complex home environment. Each quarter we are showing measurable progress towards that goal. With that, I'll now turn the call over to Mark Belzowski, our Chief Financial Officer.

Thank you, Paul. I will review the fourth quarter 2002 results and provide guidance for the first quarter and full year 2003. Net sales for the fourth quarter of 2002 were $29.9 million, compared to $27.9 million for the same quarter last year. During the quarter technology revenue, which represented approximately 66% of total sales, increased 2% from last year's same quarter, due primarily to increased orders from cable operators and OEM customers in North America. The retail lines representing approximately 34% of total sales during the quarter, increased 19%, due primarily to increased sales in the major European countries. Net sales for the year ended December 31st, 2002, were $103.9 million, compared to $119 million for the 2001 year. Net income for the fourth quarter was $2 million or 15 cents per diluted share, compared to $3.6 million or 25 cents per diluted share for the fourth quarter of 2001. Net income for the year ended December 31st, 2002 was $5.9 million or 42 cents per diluted share, compared to $11.3 million or 78 cents per diluted share for the year ended December 31, 2001. Gross profit for the fourth quarter was $11.4 million. Gross margins came in at 38% for the fourth quarter, compared to 39.4% for the fourth quarter 2001. Gross margins were lower during the quarter due primarily to increased break costs and a slightly less favorable margin mix across our technology product lines.

Compared to fourth quarter 2001, SG&A for the quarter increased by $2 million to $8.9 million. However the fourth quarter of 2001 included the favorable effect of a significant reversal of certain performance based compensation accruals for which there were no such accruals or reversals in Q4 of 2002. The remaining increase was attributable to higher delivery and freight expenses due to one, increased air shipments and heavier surcharges on the use of air freight, both as a result of the west coast port shutdown, and two, the higher sales volume. And also the currency exchange effect on the payment of our European expenses and stronger local currency in Q4 2002 when compared to the prior year, 2001 fourth quarter.

Consistent with the third quarter 2002, the effective annual tax rate remained at 24%, compared to 2001's effective annual tax rate of 34%. However, I should note that the tax rate of 17% in the fourth quarter of 2001 was used to reach the revised annual tax rate of 34% for 2001.

As Paul mentioned, our balance sheet continues to strengthen. We generated $11.6 million cash during 2002. And during the fourth quarter of 2002, we repurchased 218,000 treasury shares at a total cost of $1.8 million, after which we ended the quarter with a cash balance of $40.6 million, $3.2 million higher than last quarter quarter's balance and $6.3 million greater than the balance at the end of 2002. Treasury share repurchases for the full year 2002 totaled 585,000 shares at a weighted average share price of approximately $9.00, and a total cost of $5.3 million. During the year, we improved our DSOs by 12 days, from 91 days at the end of 2001 to 79 days at the end of 2002. DSOs also decreased by four days from the end of the third quarter of 2002. This improvement was due primarily to stronger collections in our international receivables.

Now, regarding our guidance for 2003, continued uncertainty in the global economic environment makes it difficult to predict demand in our markets. However, even with this limited visibility, we believe that it is still more beneficial to our followers to provide guidance. For the quarter ending March 31st, 2003, we anticipate revenue will range between $24.5 and $26 million and EPS will range from 4 cents to 6 cents per diluted share. For the year ending 2003, we project revenue will range between $102 and $112 million. And EPS will range from 38 cents to 48 cents per diluted share. Now, I will turn the call over to Rob Lilleness, our president and Chief operating officer, to discuss the operations of the company.

Thank you, Mark. 2002 was a challenging year for UEI and we responded early by controlling costs and managing expenses. However at a time when our competitors were struggling with debt and other problems, we viewed 2002 as an opportunity to build a stronger company poised for future growth and profitability.

During the year the company made great strides towards this goal by strengthening our technology base, broadening our patent portfolio, launching new products, landing new customers and deepening existing customer relationships. Additionally, 2002 heralded the year when we expanded to serve the computing industry. To review the quarter, I will illustrate our progress in technology and patents, new products, and new customers.

Let's start with technology and patent. The additions to our device database of connectivity software is a leading indicator to the growth of device complexity in the home and of the value of UEI's intelligence inside home control devices. During the quarter we added over 9,000 new functions to the database which currently contains over 143,000 function codes, representing a 20% growth rate for the year. The additions to the database were mainly in the area of DVD and audio and video combinations.

In addition to the progress we made in our database, we continue to add to our portfolio of intellectual property. 2002 was an extraordinary year in the unique technology UEI developed and patented. The total number of issued and pending patents now stands at 80, representing a 19% growth rate in our portfolio for the year. In fact, a full 40% of our patent portfolio has been filed in the last 18 months, a remarkable achievement.

During the year, we also settled two lawsuits against companies that were infringing on our intellectual property. These companies will now pay royalties to UEI.

During the fourth quarter, we filed three new patents. Two of the patents focused on our core mission to enhance the use of remote controls. These patents include novel methods for setting up a remote control and providing user feedback. At UEI, our patent portfolio is changing in that we not only are developing novel ways to enhance remote controls, we're also exploring how home control technology can control digital media in the home, and enhance the offering of the industries we serve. One of the areas we've been exploring addresses a growing problem in the subscription broadcast industry, piracy. It is estimated that piracy costs the satellite industry $900 million each year. To help address piracy, UEI has developed a novel method to add intelligence inside the remote control to combat this problem, and in the fourth quarter, we filed our first patent in this space.

We are also proud of the progress that we've made in 2002 on the product front. In the fourth quarter, we continue to reap the benefits from our fortified product line. We launched Chameleon to the market and Nevo was integrated into yet another form factor, the new Microsoft smart display. Chameleon’s launch followed the same successful use of public and media relation that we employed with the Nevo launch. We did this to build awareness for the product and drive sales for the Radio Shack Chameleon in the United States and the one for all Chameleon in Europe and international markets. The launch was a terrific success. Chameleon garnered great coverage from over 50 publications around the world,* including the Miami herald, the Seattle Post [inaudible] and MSNBC. Early reports from the holiday season indicate that the remote was a huge success. We anticipated a strong follow-on showing.

During the quarter we also announced a relationship with Intel who is integrating Nevo into their reference design for the new Microsoft smart displays and our expanded relationship with Hewlett Packard who has embedded Nevo in yet another of you their I Pacs, the 5400. Most recently we announced that Busonic will integrate Nevo into it’s air panel V110 and V150 smart displays,*the first commercially available smart display devices. This announcement demonstrates that the vision of Nevo to transform any display device into the platform for the connected home is no longer a vision. It is a reality.

Bringing our technology to the computing industry was a bold goal, but in a matter of just a year, our customer and partner roster now includes Microsoft, Intel, Busonic and Hewlett Packard. We're very pleased with our results and excited about this industry. The excitement for our technology and products such as Nevo and Chameleon could be seen at the recent consumer electronics show in Las Vegas. Our booth had an enormous amount of traffic and our technology was also shown in the Busonic booth.* We were also the only company invited to show our technology at an exclusive Microsoft sponsored event that was attended by an estimated 100 retail and OEM decision-makers.

Finally, we are very pleased to inform you that Nevo was also demonstrated by Bill Gates during his opening keynote at CBS. We welcome this recognition for UEI's work and look forward to continued success in 2003. Now, I would like to turn the call back over to Paul.

Thanks, Rob. We really are off to a good start in 2003. Looking back over 2002, we were successful on many fronts, especially in expanding our footprint in the computing market and all in the face of one of the toughest environments for consumer spending in years. I'm sure there were skeptics as to whether or not UEI could break into the software space with Nevo in any kind of meaningful way. I believe our new relationships in 2002 with HP, Intel and Microsoft and now starting off 2003 with Busonic have shown the strength of our new products and the promise they bring. Importantly, they have also demonstrated our tenacity to succeed in the face of challenge. So look for continued progress on that front, as new technology and products begin to gradually represent more and more of our revenue base.

While we continue to operate in an uncertain industry environment, our mission has not changed. Our objective is to broaden our presence in the industries we serve and to penetrate new ones, such as computing. In 2003, we will remain focused on our key initiatives. Number one, remain committed to prudent financial management, including a focus on cost reduction and effective cash management to enhance our ability to respond to competitive threats and opportunities. Number two, continue to use our ever-expanding technology portfolio to help consumers connect, control and interact in their homes, and number three, use these new technologies to simplify the increasing chaos in the home, thus helping our customers win in the battle for the living room. Thanks for joining us today. Operator will now take questions.

Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press the 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, if you have a question, press the 1 key on your touchtone telephone. One moment, please, for our first question. Our first question comes from Ian Corydon from B. Reilly and Company.

Could you talk about in your '03 guidance what you are assuming for retail versus technology sales?

Yes, right now it's -- we've given a wide range of guidance and it's hard to give you an exact percentage. We were about a little over 70% of technology in 2002, versus a little under 30% retail in '02. So, we'll probably -- you know, we do know for sure that at this point, it looks like the subscription broadcasting numbers will decrease somewhat. We're not sure how much, and if we should see growth in OEM and retail, so, given the wide range, we don't really want to pinpoint any exact number.

Okay. In retail, could you talk about kind of the things that are driving your increased retail sales?

Sure. We've made great progress at looking through our customer base in the various countries we serve. This last year, we really focused on the UK and establishing our self with certain key customers such as Dickson. We have made progress there. It's not only about customer relationships. We've also added new products such as Chameleon that has really put us and fortified the product leadership that we currently have, but really put us back in front of a lot of buyers to allow us to expand our footprint in our retail community.

All right. Are you prepared to talk about at this time what you expect the contribution to be from say Nevo or Chameleon next year?

Not in exact terms, Ian. Our expectations for both of those products is significant growth for this year, but I don't know that the business is large enough for us to pull it out specifically and give numbers for that, those specific product lines.

Okay. On the gross margin, I didn't catch what were the factors there. Was that a mix between technology and retail or within one of the categories?

That was a mix within the technology product line and also higher freight costs.

Okay. Finally, do you plan to continue to buy back stock in the quarter?

Yeah, we're going to consider continuing repurchase of shares. I believe we have about 600,000 authorized left under a board authorization. It continues to be something that we will consider.

All right. Thank you.

Our next question comes from Scot Ciccarelli from Gerard, Klauer, Mattison & Company.

Couple of questions. First a housekeeping item. Regarding the guidance, does that assume a more normalized tax rate?

That assumes about 34%.

34%? Okay. Did you want to share any or could you share any other details on kind of the mix? Obviously the subscription broadcasting business has been tough. It seems like you've gotten some early success with Nevo and Chameleon. Is it possible to provide any more flavor for kind of what the general anticipations are, even if you don't want to use the exact numbers?

Yeah, I can provide some -- maybe a little bit of color here, Scott. We'll obviously drive for growth on both sides of the business. I guess if we were to give you our best guess right now, subscription broadcasting will be a lot tougher than driving growth in retail segments or OEM segments. Or business lines within our business. So, our expectation is that -- is not that subscription broadcasting will be a growth market for us this year, although we'll drive for that. You know, I think it's more likely to come from retail or OEM relationships.

All right, let me rephrase it then. Where does subscription broadcasting end the year? In terms of mix?

Total? I think it's about 45%.

45%?

Yeah.

And the last question, I suspect is probably for Rob. You mentioned a new patent regarding piracy. Can you expand on that a little bit? What are you potentially offering to the subscription broadcasting companies that they haven't done before? Because it's obviously something they've been working on for a long time.

Right. Over all, if you look at what we're trying to do with our patent portfolio, we don't point to any one particular patent to really build what we deliver to customers. So you should consider the piracy patent as just one block in our fortress of technology. Another thing we're doing, in patents, because they are pending patents, you know, competitors can listen into this call, so we only give a broad detail of what the patent is targeted to do, but we don't give the details of how it does what it does. So the net of it is, we have focused on anti-piracy and looked at how a wireless controller can help that fight against pirates, overall. Beyond that, we don't want to give too much information on this call.

Okay. All right. Thanks, guys.

Our next question comes from Howard Penny from Sun Trust Robinson please proceed.

Thank you very much. In 2002, how much investment spending was there behind Nevo and was that in the SG&A line. How many new customers do you expect to sign up in 2003 for Nevo.

The first part of the question, Howard, in terms of investment, we need to be careful here, because I wouldn't want anyone to assume that the numbers that we would give you there assume additions, because remember, what in -- in some cases what we've done is we've taken existing investment and redirected it, meaning current employees working on that project. There have been some selected hires. I think there may have been a few hundreds of thousands in terms of investment in the program. Probably not including the redirection of resources internally. If you understand what I'm saying. So I wouldn't want to give you a number of a few hundred and just assume that to be additive. Underneath the surface, there were employees redirected towards that program.

Do you expect your SG&A dollars to rise in 2003 from 2002? Dollars.

Well, we expect a range from $8.5 to $9 million a quarter at this point, but we are giving a pretty broad range, depending on on, you know, how we hit our targets.

And any expectations for new customers for Nevo in '03?

Sure, we're absolutely working to that end. I think an obvious area, what we want to address is the palm community. We have developed a palm operating system version, and it's currently in beta and we're talking to basically all of the major players. If you look at what we have done in the computing industry, we start at the top with Microsoft, et cetera, and we're working with all of the major players and there is some we still want to land, so we hope to, as the year goes on, inform you of new customers in that space.

Our next question comes from Michael Kim from Roth Capital Partners. Please proceed.

Good afternoon, gentlemen. A couple of questions. First with regards to your '03 guidance. Are you assuming flattish to down cap ex from the major MSOs and set top box shipments as well?

Yes, that's correct.

And can you talk to -- speak to the subscription broadcasting portion of your business and where you might see some opportunities to gain market share or look at incremental business, i.e., things like AT&T, Comcast and so forth?

We have expanded our footprint and our reach in the cable business overall this year. We've added at least 15 new systems to our overall customer roster. I think it speaks to our overall technology and what we have delivered to the end user, which is the ability to connect, control and interact to not only different devices that they have in their home, but also the different services, such as video on demand that's increasingly entering their homes through the cable set top box. So while the industry is going through some challenging times, including the merger of Comcast and AT&T, both of whom have been customers of ours, we continue to expand our foot print in that space.

And within the space itself, do you see an opportunity for at least in '03 to offer universal remote controls with higher level functionality, maybe higher ASPs and margins extension in '03?

Sure, that always exists as an opportunity, and also an opportunity for us is we don't have 100% of the cable industry. That's our goal. We have the best technology and we service the cable industry well. So certain customers that, -- such as Adelphia or cable vision, where we don't have a big footprint are also on our targeted list.

Thanks -- great, thank you very much.

Our next question comes from April Horace of Janco Partners. Please proceed.

Nice quarter. I'll add you guys to the pleasant surprise list. You now get to join Concurrent, Harmonic and SA. With respect to the '03 guidance, is that factoring any potential upside for picking up the former AT&T systems that you did not service?

No, it does not.

Do you have any 10% customers this quarter?

Yes, we do have one.

Are you going to disclose that?

You can tell them.

It's Comcast.

Thanks, that's what I needed to know.

Thanks, April.

Our next question comes from Jason Sam from the Seidler Companies.

Good afternoon, guys. Good job on the quarter. A couple quick questions. First, can you talk a little bit about what the auto patterns have looked like for the December quarter and what they look like current quarter?

Over all, Jason, obviously the order patterns picked up a little bit over what we had expected as we had given a range of 26 to 28.

In terms of are you seeing orders evenly distributed over the quarter or is it more, you know, backend loaded or front- front-end loaded?

Well, you know, I would say it was probably evenly between November and December, we saw some pick up.

We did find that some of the cable systems needed additional product at the end of the quarter.

Okay. So then for the MSOs, it's more back-end loaded?

No, I'm just saying that some additional sales did come in at the end of the quarter, but generally, it was pretty spread out.

Yeah, we received over overforecast orders as early as late November.

Okay.

Yeah, and also on -- again, on the retail side, we introduced Chameleon and even beyond Chameleon, and had a pretty good selling season through, again, mid-November through mid-December time frame and the introduction of Chameleon Chameleon, you know, led to additional sales, the product was very successful at retail.

Okay. Now, as far as margin is concerned, is Chameleon selling at similar margins to your other retail products? Or is it still below what it could be?

You know, we don't really disclose margins. We --

Not on individual products.

Okay. Thought I would try. How about, you know, unit -- how many units did you ship for 2002 in general for your products?

25 million.

About 25 million.

That includes all remotes, all chips, all licensed units.

Okay. And headcount for the last quarter?

Headcount is about 340, but a good chunk of that is from the call center where we've been expanding our business, about 35 additional over the year.

Okay.

We should also say at the corporate level in manning our SG&A, we did reduce headcount by 7 people here in Cypress.

And again, we'll continue to look at possible cost reductions as we move through our plan.

Okay. Now at headquarters mainly Admin. you are eliminating?

Excuse me?

At headquarters, the 7 reduction, is that Admin.?

No, it ranges across a number of different departments.

Okay. And what's your CAPEX for 2003 or budgeted?

It's about $2.2 million.

Great, thank you.

Our next question comes from Brett Miller from AG Edwards. Please proceed.

Good afternoon, everybody.

Hi, bred Brett.

I wanted to drill down -- I don't know if you answered this earlier in the call, but OEM versus retail, or technology versus retail, did you break that out?

For the quarter?

Uh-huh.

Yeah, 66% technology and 34% retail.

Okay, sorry to be redundant there. If we can, can you move to your Q1 guidance, what's your expectationin that range for retail? You guys still have a few weeks under your belt, does it still look pretty good for retail?

Retail will come down with the seasonality.

Sure, but Q1 typically has pretty decent peripheral sales as well. I was curious with Chameleon and some of the other products out if that's still holding true.

Yeah, it looks like its on track with typical seasonality, but we have new product to deliver.

Right.

So that should increase slightly.

Is there an expectation for gross margins, either out for the year or for the quarter?

About -- based on the mix, 2003, about 39% plus or minus.

Hold steady, okay. What I

What I really wanted to know, when you do your deals with the Intel smart display and on the reference design and with Microsoft, how are these working in structure? Is it the same as like with Microsoft before on the XP media center where you guys got a lump sum or are these ongoing revenue streams?

Okay. Well, the Intel reference design is more of a partnership than a customer relationship. We're designed into the reference design, and then what Intel does with the reference design, they take this to the OEM community, the Hewlett Packard, the Acers, the Dells of the world and say would you like to by off-the-shelf come pone net tree. It's an introduction into the OEM community from a standards base. That's Intel.

Microsoft is the current agreement, while not giving too many details, is a licensing agency agreement that is not based on royalties, but based on more of a time frame.

So there is a potential revenue ongoing per unit on the Intel reference design deal versus the Microsoft XP media center

Intel, an example of how that would work, they would take us to -- Intel would go to Dell and say here is a smart display you can by off the shelf. Wrap it in your package and your logo and put it into your customers' hands. We would ride on the tails of Intel's reference design. It's a great way to be formally blessed by an industry powerhouse and get embedded into their design.

The way the industry is moving, as you well know, is off the shelf design that is wrapped in plastic.

Largely the computer manufacturing industry is looking at how they can reduce their overall engineering costs and this is an excellent way to do that.

I'm just making sure you all are getting a per unit revenue versus a lump -- one lump --

Nevo is based on a royalty revenue stream to us per unit.

And two more real quick ones, remind us again what the bonus reversal was in Q4 of '01 if you could.

As we went through the year, we expected to hit certain targets targets, so we accrued performance based bonuses.

What was the dollar amount?

It was well over a million dollars.

Okay. That's right.

Do we have to talk about it anymore?

Let's hope we don't have to mention in '03 at all, but can you guys give a little color, I know we talked about the cable industry being weak. Can we talk about what's moving within the cable industry? You know, who is kind of doing what and where.

Are there any bright spots out there?

Time Warner has been strong in Florida and Cox was strong out in the west coast for a while with some rollouts. Is there anything you guys are seeing that is signs of potential life there?

Sure, in some cases we're seeing systems that are rolling out. It's not as universal as it once was.

That's a bad word choice, but it's not as ubiquitous or as everywhere as it was once, but we're seeing some areas where there is investment being made and even Comcast now the largest MSO has announced that they are going to do significant plan upgrades and obviously that leads to rollout.

So there are some bright spots, sure.

Okay. Lastly, is there any royalty amount that you can discuss to be paid from these litigation wins?

There is a couple of settlements that we did do. We're restricted in terms of what we can say about them.

Okay. Well, thank you very much. Good quarter.

Thanks.

Our next question comes from Liam Stevens (ph) from HG Wellington.

Fair amount of this is just just -- has just been covered, but it seems to me in the past, royalty income has been running on the order of $5 million a year. Is that accurate?

It's a little less than that.

Can you give us any guidance on the net result of what we've just -- of what we just were talking about with various customers and the royalties presumably where in the past you've encouraged potential licensers to by product, it would seem that in the computer business, that would not be so likely. Can you talk about that a little bit?

Sure. Yeah, I think that you are right right. The selling proposition begins with the technology. It actually always has.

Now, how we wrap that technology or how we package it varies by industry.

You are correct. In the technology industry or in the computing industry, more than likely it will include less physical product than we're used to in the consumer electronics or retail or cable market. So that is correct.

Although that's not to say that there won't be some level of sales of hardware coupled with software, as an aid to the customer. Again where we can provide value. But you're correct. As we move in that direction direction -- as we move in that direction it will be less physical product and more intellectual property/software element to the sale.

With regard to the nonhardware section, will there be any costs allocated to the software that you are licensing? Or is that --

No, not -- we don't expect any significant costs.

That's bottom line stuff.

Correct.

Can you give us any guidance as to where you think this -- the royalty source of revenue might be going in '03?

We could, but let me give you an example why this is difficult to talk about. There are cases where we may be selling software, but the customer asks us to deliver it in the form of a chip.

So, again, on that sale, I would call that a software sale, but technically, it would be considered a chip sale. So it wouldn't fall on to what would be called a licensing income line, because there is actual physical product sold.

This is why we typically shy away from talking about those categories, because they can mislead. Because the real sale on say a Nevo product would be, again, the IP and the software itself, but it may include physical product as part of the relationship.

Gotcha.

Thank you.

Ladies and gentlemen, if you have a question, please press the 1 key on your touchtone telephone. Our next question comes from David Drury from Blackbird Research. Please proceed.

. Can I get a fourth quarter OCF number and I might have missed it, but fourth quarter CAPEX number as well?

Operating cash flow for '02-4 '02-4.

It was about $3m.

And CAPEX?

About 800.

. Okay. And jut one more. Any room for improvement still on the DSOs or is that pretty much leveled out?

I think we still -- will keep on applying a lot of attention to our international receivables and drive that DSO further down. And so I think there is about maybe five days that we can improve at least currently for our targets.

. Great. Thanks.

We have a follow-up question from Jason Sam.

Just a quick question, for 2002 for full year, what did you say your OEM revenues were? About 20% or so?

No, we didn't break that out. We just gave the 66% technology which includes the OEM.

You did talk about subscription broadcasting, might as well just talk about the other one.

No, I think at this point, I don't really want to give that level of detail because cable and OEM also includes customers like Motorola and so on.

Thanks.

Our next question comes from Ryan Kurdy from Vedson Associates.

Hey, guys, just a quick question. With regard to Chameleon, were there any problems with distribution at RadioShack?

Well, no, not on our end. We delivered everything to them you know, there might have been some cases where stores stocked out, but that would have been the case of store got a number of units and they quickly -- an article appeared in the syndicated column and 8 people showed up in the store looking for the product and they stocked out.

I know it was a tough item to get a handle on up here in the northwest.

Yeah.

And there have been follow-up orders; is that right?

Yes, there have.

Is there any talk or consideration about looking for additional distribution on product here in the U.S.?

Absolutely. Yeah, we're looking at ways to bring the Chameleon market -- the Chameleon technology to other markets or other distribution.

We've already announced that Kenwood will be adopting the Chameleon technology for their line of systems.

Okay, thanks.

I'm showing no further questions at this time. Please proceed with any further remarks.

Okay, I want to thank everyone for participating today today. We'll talk to you at the end of next quarter.

Ladies and gentlemen, thank you for your participation in today's conference call.

This does conclude the program and you may now all disconnect. Everyone, have a great day.