Universal Electronics Inc (UEIC) 2003 Q4 法說會逐字稿

Welcome to the Universal Electronics fourth quarter and year-end results conference call. (Operator Instructions) I would now like to turn the conference over to Ms. Kirsten Chapman. Please go ahead, ma'am.

Thank you. Good afternoon and thank you for joining us for the Universal Electronics fourth quarter and year-end 2003 results conference call. Right now, you have received the copies of press release. If you have not, please contact Lippert Hielshorn (ph) & Associates, at 415-433-3777 and we will forward a copy to you. This call is being broadcast live over the Internet. A Web cast replay will be available at www.uei.com until January 29th, 2005 at noon, Eastern Time.

In addition, a telephone replay of this call will be made available for 48 hours beginning approximately two hours after the conclusion of this conference call. To listen to that replay, please dial 800-642-1687 or internationally dial 706-645-9291. The access code is 4777401. Also, any additional or updated material, non-public information that may be disclosed during this call will be provided on the company's Web site shortly after the call, where it will be retained for at least 12 months. You may access that information by listening to the Web cast replay of this call.

After reading a short safe harbor statement, I will turn the call over to management. 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 contracts with customers that have been recently announced, the development and success of products and technologies continue converging the company's technology and continue sales and operating income growth and strength of the company's financial position.

Management wishes to caution you that these statements are just projections and the actual events or results may differ materially. For further detail on risk, please refer to the press release I mentioned at the onset of this call. The documents and the documents the company files from time to time with the SEC, including the annual report on form 10K filed for the year December 31, 2002 and subsequently filed quarterly reports in the Form 10Q and periodic reports on forms 8-K. These documents contain and identify various factors that could cause actual results to differ materially from those contained in our projections of forward-looking statements. The company undertakes no obligation to advise or update any such projections and statements after that date on which such projections and statements are made to reflect the occurrence of unanticipated events.

Now I'll turn the call to Paul Arling, the Chairman and Chief Executive Officer of Universal Electronics. Paul?

Thank you for joining us today. On our call, I will open by reviewing our accomplishments. Then Bernie Pitz, our new Chief Financial Officer will review the financial results. Rob Lilleness will follow commenting on our operations and market share and I will close with our forward-looking strategy.

We were very pleased with our results for both the year and the quarter. Revenue for the quarter reached 36.1 million - over 20 % growth compared to the same period last year. Operating income increased approximately 33 % during the fourth quarter of 2003 to 3.3 million. Fourth quarter net earnings were 2.5 million or 17 cents per diluted share.

Revenue for the year totaled 121.1 million representing over 16 % growth compared to 2002. Operating income increased to 8.6 million and grew 23 % compared to last year. And the annual net income was 6.3 million or 45 cents per diluted share.

We achieved this growth by executing on our plan. At the beginning of the year, UEI established three objectives and we have successfully achieved them.

Number one, we stated we would maintain and further our balance sheet strength. During challenging times, good companies get stronger and we have done so as our balance sheet has continued to improve. We ended the year with cash and cash equivalents of 58.5 million, generating net cash of 17.9 million throughout the year.

Number two, we proposed leveraging one of our greatest competitive advantages, our expanding technology portfolio, to help customers connect control and interact with home technology. We have done so by expanding our reach with more product versions including the very successful Kameleon platform.

And number three, we set goals to use our technologies to simplify the increasing chaos in the home. That's helping our customers win in the battle for the living room.

Throughout the year, we continued to add to our client list and expand relationships within the markets we serve - the subscription broadcasting, retail, computing and consumer electronic industries. Examples include Comcast, Time Warner Systems, Scientific Atlanta, HP, Microsoft, B Sky B, Sky Italia, Circuit City, Fry's Electronics, Sharper Image and Wal-Mart as well as a number of European and Latin American subscription broadcasters.

Our 2003 accomplishments clearly demonstrate our execution. In addition, while implementing our plan, UEI has diversified our revenue streams. This is important as each target market is impacted by economic fluctuations differently. Therefore, we have bred flexibility into our business model. In 2003, the subscription broadcasting industry for us was more or less stable while the consumer electronics, computing and retail industries have shown more growth. We anticipate similar trends in 2004.

While this is very positive for our growth, at this point both our OEM and retail customers in these industries are distributing the bulk of their products through retail channels. Therefore, we anticipate our revenue in 2004 will be more seasonal and weighted toward the end of the year. Bernie Pitz, our new CFO will review this in greater detail later in the call.

We are delighted Bernie has joined us and we believe his experience in managing diverse strategic financial activities at major global corporations will be invaluable to us as we move UEI toward its growth objectives. Bernie comes to us from Corning Incorporated where he was Vice President of Finance for worldwide frequency control operations. Bernie also worked for 15 years with Motorola in a variety of financial and operating positions, most notably while living in Mainland China as Senior Division Controller for Greater China in their cellular business. Bernie?

Thank you Paul. Net sales for the fourth quarter of 2003 were 36.1 million, up 20.9 % compared to 29.9 million for the same quarter last year. The 6.2 million increase in sales from quarter - in the fourth quarter of 2002 to the fourth quarter of 2003 was primarily attributable to sales of new products and the appreciation of the Euro relative to the U.S. dollar.

For the fourth quarter of 2003, technology revenue representing approximately 57 % of total sales or 20.5 million and retail revenue represented approximately 43 % or 15.69. This compares to a revenue mix in last year's fourth quarter of 66 % technology and 34 % retail. This quarter retail revenue rose 52 % compared to the same quarter last year primarily due to increased Kameleon shipments in both the U.S. and European channels.

The fourth quarter technology revenue increased 4.7 % compared to fourth quarter 2002. Excluding call center revenue, which was minor this quarter but approximately 1 million in the fourth quarter of 2002. Technology revenue increased 9.8 % compared to the same quarter last year. This increase represents growth in subscription broadcasting and OEM. Gross profit in the fourth quarter was 13.5 million or 37.3 % of sales compared to gross profit of 38 % in the fourth quarter of 2002 in our forecast of approximately 38 % for the fourth quarter of 2003. The decrease was primarily due to Mosaic inventory write-downs of $425,000.

SG&A including research and development was 10.2 million for the fourth quarter of 2003 compared to 8.9 million in the same quarter last year. Fourth quarter 2003 expenses included severance and related expenses of $455,000, of which $340,000 was non-cash.

Other income and expense included foreign exchange gains of $190,000. Importantly, operating income increased 32.9 %t from 2.5 million during the fourth quarter of 2002 to 3.3 million this quarter. Effective annual tax rate during the quarter and throughout 2003 was 34 % compared to 2002, which had an effective tax rate of 24 % as it incorporated the remaining prior year research and development credits.

Fourth quarter net earnings were 2.5 million or 17 cents per diluted share this quarter versus 15 cents in the 2002 fourth quarter. Net sales for the 12 months ended December 31st 2003 were 121.1 million of 16.5 % from 103.9 million for the same period in 2002.

Operating income increased 22.8 % from 7 million for the full year of 2002 to 8.6 million for the full year of 2003. Net income for the 12 months ended December 31, 2003 with 6.3 million or 45 cents per diluted share, compared to 5.9 million or 42 cents per dilute share for the same period last year.

Our balance sheet continues to provide a very strong foundation for the company and its broad based growth. During the quarter, we generated net cash of $6.4 million and ended the quarter in cash and cash equivalents of 58.5 million. DSOs were at 79 days at the end of the fourth quarter of 2003. This is unchanged from the end of 2002. Net inventory returns improved from 3.8, at December 31, 2002 to 4.4 at December 31, 2003.

And now for our guidance - for the quarter ended March 31, 2004, we anticipate revenue will range between $26 and $29 million. Margins will be approximately 38 %. SG&A will be approximately 9.5 million and EPS will range from 6 cents to 8 cents per diluted share. The full year ending 2004, we project revenue will range between 130 million and 140 million. EPS will range from 48 cents to 58 cents per diluted share.

As Paul noted, we expect greater growth in income from customers in product lines that are typically distributed in the retail sector. We anticipate our income to reflect increased seasonality and to be more heavily weighted in the second half of the year. Now I'll turn the call over to Rob Lilleness, our President and Chief Operating Officer to discuss the operations of the company.

Thanks Bernie. 2003 was a year of growth for UEI with an increase in sales of over 16 % and a 23 % increase in operating income. This growth was attributable to a number of factors, but mainly to our new products in the marketplace.

Back in late 2001, we analyzed our product offering and decided to invest in new research, technology and products. As a result, new products were developed and introduced in 2002. 2003 sales reflect a full year of sales with our new products. Clearly, the investment was a success. 2003 was also a year of extended operating income and many factors played a role in this growth.

We have consistently worked to cut our microchip and factory production costs and, by closely managing our supply chain, we were able to achieve the lowest air shipment in the last - in the past five years. As we look forward, we will continue focusing on cost reductions and operational efficiencies.

However, we are most excited about the future of technology in the home and the opportunity it affords UEI to bring new products to the market. The home is rapidly changing and becoming more complex than ever before. Analog TV is going digital and high definition. VCRs are morphing into digital video and DVD recorders. Broadband is pouring digital media into the home, enabling people to skip the trip to blockbuster and download a movie.

In addition to movies, other services you had to leave the house to do can now be done at home. Last year, an estimated 25 billion digital pictures were taken and billions of songs were downloaded. And no one had to go to the store to develop the pictures or buy a CD. However for the consumer, all of these new products and services need one thing - an easy way to control them.

Today, if a consumer wants to play a song that was downloaded to his PC on his stereo system, he might as well call a network administrator. In the future, with UEI technology, you'll be able to select music that was automatically populated on your handheld and simply press play, thanks to our advanced technology group that is busy developing controlled technology for the broadband home.

This change in home technology, however, is not only due just to broadband. New devices such as home theatre, high depth TVs, digital video recorders are driving demand for our core technology as people have a growing awareness of the need for a universal way to control these devices. And our connectivity software database continues to lead the market.

During the fourth quarter, we added over 10,000 function codes to the database, bringing the whole number of function codes to over 171,000 at December 31, 2003. This represents an annual increase of almost 20 %. Our push into serving consumer electronics has also driven demand for our local Chinese database, and we are adding many Chinese brands to our library to serve this market.

Regarding our IT portfolio, during the fourth quarter we issued 5 new patents and filed for 6 more, bringing the total number of issued and impending to 101 patents. We believe this is the broadest patent portfolio in home control.

One patent of particular note covers our automated software development tool that enables UEI to build the operating software for a remote control in a matter of days, instead of weeks. It's basically a broad set of software modules that can be married together with our database and compiled to produce the firmware for a microchip. Approximately 20 % of our projects were built using this software in 2003. This new, patented software reduces development time and provides us with a competitive advantage when serving our customer.

Technology and patents are a key area strength for UEI. However, our marketing and PR capabilities are also critical success factors for sales as they drive product awareness for our OEM and retail customers. Prior to the holiday season, we targeted the gift-guide editions of major publications around the world. And during the fourth quarter, we got our coverage in over 40 publications. Most notable was the coverage in Parade magazine in Sunday newspapers. With over 20 million readers, Parade's gift guide published a picture of the One for All Kameleon and called the product, "a gadget you can't live without."

Our new products, technology and marketing have helped us boost sales across all industries we serve. In the subscription broadcasting industry, we continue to expand. During the fourth quarter, we added systems at Time Warner, Comcast and others. We also added systems in Latin America, with shipments to Direct TV in Latin America, in Brazil, Argentina, Columbia, Venezuela and Central America, as well as in Mexico, where we already have distribution to Mega Cable (ph) and Cable Vision Monterrey (ph).

In Europe, we added Sky Italia, the leading subscription TV provider in Italy. UEI began shipping Sky Italia a two-device universal remote in the fourth quarter. We also landed TPS, France's leading satellite TV provider with more than 1.2 million subscribers with our new Omni remote. And in Germany, we will also provide Omni to Premier Fernseher, the country's leading TV subscription provider with 2,.7 million customers.

Finally, with the introductions of HGTV, video-on-demand and digital video recorders and cable, we expect subscription broadcasting to remain solid in the coming year.

Switching to retail, we saw the channel embrace Kameleon as consumers all over the world clamored to get the product. Our Sky product line has been very well received, as have our One for All branded antennas designed for the burgeoning market in digital terrestrial, or free to air (ph) television. In addition, we have expanded our One for All brand to serve the do-it-yourself channel with companies like Homebase in the U.K., and other markets.

In the computing industry, we are busy developing the next generation of Nevo, which is designed to set the standard of control for the broadband home. We expect to ship the beta during the first quarter of this year and launch the product around the mid-year.

In summary, we continue to be committed to products, customers, and the diversification of our revenue stream. The home is truly the new frontier and Universal Electronics has the technology, patents and products to enable consumers to wirelessly connect, control and interact with an increasingly complex home environment. I'll now turn the call back over to Paul.

Thanks Rob. You can see we achieved a lot and we are proud of our accomplishments. Our performance is certainly based on a combination of efforts including product platform development, customer base expansion and prudent operational management.

As Bernie and Rob have indicated, we are continuing to build upon each of these areas. Our technology truly creates a competitive advantage, which enables us to be flexible and to pursue new revenue streams and add new customers. Yet probably the biggest trend we see over the next few years is the increase in digital media entering the home through multiple platforms, and the very obvious need to simplify the environment.

Market research shows that consumers are transacting an estimated 5 billion digital music files per month. They are also taking more than 2 billion digital photos per month. This explosion of digitized entertainment media leads to an obvious consumer trend, that is, to untrap those digital files from the PC. IDC predicts that multimedia networks, defined as home PC networks, that also include consumer electronics devices such as DVD players and set top boxes, will grow more than 80 % per year over the next 5 years.

We are aware that many different companies are evaluating ways to grab a piece of the network digital media pie. However, we have unique advantages that serve our core product line, as well as address this emerging market.

First and foremost, UEI has 17 years' experience in wireless control. We know what we are doing and we have proven to our customers time and again, we can get the job done. We are uniquely positioned to build a bridge between the home devices of today to the networked home devices of the future. We have over 100 issued and pending patents related to wireless access and control in the home and we have leveraged our expertise to build software that powers the connected home.

In closing, we are pleased with our performance in our core markets during difficult times and have built a great technology portfolio and product platforms to firmly maintain our leadership position in these markets going forward. We have also begun to build a solid foundation to succeed within the networked home of the future.

Stay tuned. Operator, we are ready to begin the Q&A.

(Operator Instructions) Your first question comes from Ian Corydon with B. Riley & Company.

In Q4, what were revenues in constant currencies?

The - in constant currencies compared to Q4 of the prior year?

Sure.

It was about 2.2 million higher.

OK. And for fiscal '04, what do you expect the breakdown between tech and retail to be? The sales breakdown.

Can you hold on one second? About 52 million of that would be retail.

OK. And regarding the TPS and Sky Italia deals, is it the first time you've had revenues to those two companies?

Yes.

OK. And what's the nature of those deals? Are you, you know, a preferred supplier or you want several suppliers?

There are several suppliers but we are a leading supplier.

OK. On the Mosaic write-down, if I remember right, I think that was a touch screen product. Who were the customers of that product and how did inventory, kind of, get ahead of you there?

That's being sold through the retail channel and the - during the fourth quarter, it was determined that the market price for that product had fallen, so we did a net realizable value calculation on it and took it down so that we could move it very quickly at the new, lower price.

Yes. It's really reached the end of the product life cycle.

OK. And on the high-definition and the PVR set tops that, you know, seem to be increasing pretty substantially here. Are your sales - are your sales of remotes that go with those products - are those generally to the MSOs right now or to the set-top box manufacturers? And you know, what model remotes are those? How does that all ...

Sure. Great question. Generally, it goes to the MSO.

All right. Thanks a lot.

Thank you.

Your next question comes from April Horace with Janco Partners.

Hi, this is Mike Service (ph) for April Horace. Just a couple of questions, here. Regarding your '04 guidance, what percentage of the revenue do you anticipate from new products?

I'm sorry, Mike. Was that Mike?

Yes.

Hi. Mike, we don't have that defined because again, when we were quoting new product sales for this year, we were using product platforms. So, we've moved away from really calling that new product 'sales', because what you're seeing from us - what you saw from us during the year '03 and into '04 is sales of derivative products from those platforms.

For instance, Kameleon started the year with one version and we have developed or are under development of new versions of those product platforms.

So, is there some way that you can define, say, these newer platforms? What percentage of sales will be derived from those?

Well, what you're also going to see potentially - and I don't want to leak too much about products we haven't announced yet, but you're going to see hybrids between product platforms. So, the lines between these products are going to blur, potentially, even further.

OK. That's fair enough. The next question regarding your agreement with Sky Italia, how many subs does that involve?

Sky has 2.4 million subs in Italy.

2.4. OK. Thank you very much.

Your next question comes from Michael Kim with Roth Capital Partners.

Hi, this is James Koch (ph) calling on behalf of Michael Kim. Good afternoon, gentlemen.

Hi, James.

When you talk about customer extension, I was wondering if you could give us a little bit more detail about some of the domestic e-retailers gained during the quarter as well as some loss?

Well, domestic in the U.S., we actually announced a number of them last quarter. One being Wal-Mart and also The Sharper Image and we continue to expand our footprint in those retailers. That's probably the best example of what we're doing in the retail space.

How about during the fourth quarter?

Fourth quarter is really largely the expansion within those chains. And also getting the demand and awareness up through our marketing activities and PR. But, then we didn't announce any new retail change during the fourth quarter.

Second question is during the fourth quarter, did you have any 10 % customers?

Yes.

Is that Comcast again?

Yes Comcast.

Were there any additional 10 % customers?

No there were not.

How about revenue breakdown in terms of product line. Were - are you able to talk about the breakdown between Atlas versus (inaudible).

No we typically don't disclose that type of information.

However would it be fair to say that Kameleon is generating the most revenue?

Certainly the most growth, no doubt.

Out of the three, correct?

Correct.

OK.

Operator, are there any further questions?

(Operator Instructions) Your next question comes from Bion Stephen with HG Wellington.

Hi Paul, gentlemen. Familiar question. With all these new areas of product, what effect is that having on your royalty versus chip revenue?

Well Bion, again that's a hard one to answer - I mean we have cases where we're selling pure license technology. We have cases where customers are buying licensed technology paired with silicon.

And again, I would characterize that as licensed sales, but of course there's a chip that goes along with it. And of course on the product side, you know, as we talked about before there's many cases where customers walk in the door wanting to license one or two of our patents, and they leave, buying an entire product.

So I - you know we could strongly make the argument that, you know, most of our sales are related to licensed technology. It's just the method by which we wrap that technology.

So we don't really provide a strict breakdown because in some ways it could be misleading. Quarter-to-quarter licensing dropped but chip would go up. Namely because we would have a customer that wished to have their technology packaged with silicon.

I guess what I'm really driving at is, can you give an idea of what percentage of your revenue, or amount of your revenue, has no product related to it, no production product related to it?

Yes, well we don't give the percentage but it is rather low.

Thank you.

Next question is a follow-up question from Ian Corydon with the B. Riley & Company.

Thanks.

Hi, Ian.

Hi guys. Regarding the Latin American satellite provider's deals you talked about is that something that's new?

It's relatively new. We've been working in Latin America for a couple of years but what we've really been following is the development of digital cable in Latin America. And it's starting to roll out. I think you've seen some announcements from Motorola.

And now you'll se some more announcements from us, in terms of obviously Direct TV and their presence there, but also Cable Vision (ph) and Mega Cable (ph) in Mexico, as they start to roll out digital just like in the U.S. We offer a more rich environment for the consumer, so we go along with it.

OK and then on the deals in Italy, France, and Germany, what are the - kind of, the penetration rates for satellite there and what's the pace of growth?

Well satellite - Europeans actually have quite a bit to chose from depending on which geography you're in. Satellite is clearly very successful in the U.K. with Sky Digital having more than 7 million subs in the country. Sky Italia has 2.4 million subs. Premier Fernseher in Germany has about 2.7 million subs. That's really the satellite market.

On the cable market, you can look to NTL and Telewest in the U.K. They are about a million subs each or Kabel Deutschland, which is in Germany with 900,000.

But what is increasingly interesting is the movement to terrestrial digital TV or free to air (ph) television, which requires you to buy a set top box and an antenna to receive the signal. In the U.K., that is being rolled out and we have a line of antennas that we actually launched this year at (INAUDIBLE) in Berlin, to capture that market.

So, whether it's digital satellite, digital cable or free to air (ph) digital television, UEI is playing a role there.

All right. And then I guess, do you have any kind of update on how sales went with B Sky B over the holidays - I think it was your first quarter?

Yes. They went quite well. We - during the fourth quarter just before we actually were able to get our product into the channel, so that when the consumers went to the stores, they could buy Sky products and we are very please with having the Sky brand on board in retail, but also having Sky as a customer in Europe and now with Sky Italia in Italy.

All right. Thanks a lot, guys.

(Operator Instructions) There are no further questions at this time. Please proceed with your presentation or any closing remarks.

OK. Thanks everybody for joining us today. Just as a reminder, we will be at the Roth conference in February as well as presenting at the B. Riley conference in March. So, we hope to see you there or on our other investor relation travels during the quarter. Thanks very much.

Ladies and gentlemen, that concludes your conference for today's call. We thank you for your participation and ask that you please disconnect your line.