Universal Electronics Inc (UEIC) 2004 Q1 法說會逐字稿

Welcome to the Universal Electronics First Quarter 2004 Results Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q&A session. To ask a question, please press star followed by one on your touchtone phone. If anyone has difficulties hearing the conference, please press star zero for operator assistance. As a remainder, this conference is being recorded Thursday April 29th, 2004. I would now like to turn the conference over to Kirsten Chapman. Please go ahead madam.

Thank you Felicia. Good afternoon, and thank you for joining us for the Universal Electronics First Quarter 2004 Results Conference Call. By now you should have received a copy of the press release. If you've not please contact the Lippert/ Heilshorn & Associates at 415-433-3777, and we'll 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 Friday, April 29th 2005. In addition, a telephone replay of this call will be made available for 48 hours beginning approximately 2 hours after the conclusion of this call. The US number is 800-642-1687, and the international number is 706-645-9291. The access code is 6634713. Also any additional or updated material, non-public information that might be discussed during this call will be provided on the company's website at www.uei.com shortly after the call, where it will be retained for at least twelve months. You may access that information by listening to the Web cast replay of this call. After reading a short Safe-Harbor statement, I'll 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 preparedness, financial performance of the company including the benefits the company expects as a result of contracts with customers that have recently been announced. The development and the success of products and technologies, the continued convergence of the company's technology, and the continued 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, management refers you to the press release mentioned at the onset of this call, and the documents the company filed from time to time with the SEC including the annual report on Form 10-K filed for the year December 31, 2003. This document contains and identifies various factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. Management undertakes no obligation to revise or update any such projections and statements after the day 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?

Good afternoon. With me today are Bernie Pitz, our Chief Financial Officer and Rob Lilleness, our President and Chief Operating Officer. After I open the call, Bernie will review the financial statements and guidance, and Rob will provide an operating activity update. Then I'll conclude the prepared remarks and begin a question and answer session.

We're pleased with our results for the first quarter. Net sales of $32.6m increased over 21% compared to the first quarter of 2003. Operating income of $2.1m increased 59%, and net income of $1.8m or $0.13 per share increased 89%. Early last year, we outlined three main objectives. Number one, we remain committed to prudent financial 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 to connect, control, and interact in their homes, and number three, use recent technologies to simplify the increasing chaos in the home. During 2003, we were successful in achieving these objectives, and in 2004, we're leveraging this work, and will make further progress. We expect to drive continued growth by expanding our customer base, and leveraging our technology and intellectual property to expand our product line, while managing our balance sheet prudently.

The first quarter results reflect growth throughout the company, and in particular, with our cable and retail units, including greater penetration in European and other international markets. This quarter, we announced wins with leading subscription broadcasters in France, Italy, and Australia. Looking at 2004 and beyond, market experts as well as some global trends indicate the economy and the markets we serve may be on an upward swing. We committed to you two years ago that in difficult times strong companies get stronger, and we have done just that. We will continue to position UEI to capitalize on any changes in the markets we serve. As you are aware, we target the subscription broadcasting, retail, consumer electronics, and computing industries. These markets are being driven by expanding entertainment technologies, home networking, and ultimately home automation needs. For example, in 2003, more than 15m households in the US have DVD players and each year the number of HDTV's sold is doubling. This creates opportunity for us to solve the increased complexity in today's living room. In addition, going forward, we believe the market growth rate will be even larger as consumers look for answers to managing digital media. Digital media collections are growing like never before. It is estimated that consumers are trading 5b music files and are taking more than 2b digital pictures per month. After this, the rapid adoption of DDR technology and an interesting consumer need emerges. How do I control my growing collection of digital media and those devices that I wish to enjoy them through?

Looking forward, home networks and particularly wireless home networks are driving new growth opportunities in the markets we serve. Today in the US alone, there are more than 6m households with wireless networks and this is expected to exceed 20m households in just three years from now. This growth in wireless networks coupled with a rapid adoption of digital media will bring a new wave of products, which will allow consumers to enjoy their entertainment anywhere within their home. UEI is positioned to capture opportunities in these markets because our ever-expanding technology portfolio helps consumers connect, control, and interact in their homes. We are uniquely positioned to build the bridge between the home devices of today and the networked home of tomorrow. Now, I'll turn the call over to Bernie Pitz, our CFO who will review the financial statements in greater detail. Bernie?

Thank you, Bob. Net sales for the first quarter of 2004 were $32.6m, up 21% compared to $26.9m for the same quarter last year. Revenue exceeded our expectation especially in the areas of subscription broadcasting services and retail. The $5.7m increase in sales from the first quarter 2003 and the first quarter 2004 reflects an increase in those same two areas, as well as the appreciation of the euro relative to the US dollar. For the first quarter 2004, technology represented approximately 64% of total sales, about $21m, and retail revenue represents approximately 36% or $11.6m. This compares to a revenue mix in last year's first quarter of 71% technology and 29% retail. As we've indicated on last few quarterly conference calls, we believe we will continue to have higher revenue contribution from the retail sector.

This quarter, retail revenue rose 48% compared to the same quarter last year primarily to sales of audio/video accessories and Sky-branded digital accessories, which were launched in third quarter 2003. The first quarter technology revenue increased 10% compared to first quarter 2003. This increase is primarily related to growth in subscription broadcasting. Gross profit for the first quarter was $12.7m or 38.8% of sales compared to gross profit of 37.7% in the first quarter 2003, and a forecast of approximately 38% for the first quarter of 2004. As compared to Q1 of 2003, Q1 2004 was positively impacted by the appreciation of the euro relative to the US dollar and negatively impacted by a number of issues, including warranty and inventory write-down.

SG&A, including research and development, was $10.6m for the first quarter of 2004 compared to $8.9m in the same quarter last year. The $1.7m increase in SG&A includes approximately $600,000, due to the appreciation of euro relative to the US dollar, approximately $200,000 of cost related to Sarbanes-Oxley compliance effort, and approximately $900,000 of severance and related costs, as well as bonus, bank cost, and business and occupation taxes. Importantly, operating income increased 59% to $2.1m this quarter from $1.3m during the first quarter of 2003. Other income expense including foreign exchange transaction gains are $498,000. Effected annual tax rate during the quarter was 34 %, which was the same as the first quarter of 2003. First quarter net earnings were $1.8m or $0.13 per diluted share this quarter versus $939,000 or $0.07 per diluted share in the first quarter of 2003. We ended the quarter with cash and cash equivalents at $56.9m. During the quarter we repurchased over 293,000 shares for approximately $3.7m.

DSOs improved to 68 days at March 31, 2004 from 88 days at March 31, 2003. Net inventory turns improved to 4.0 at March 31, 2004 from 3.6 at March 31, 2003. And now for our guidance. as we have indicated, we surpassed our expectations for Q1with year-over-year revenue growth of over 21% and we currently expect to surpass our previous guidance year. We expect the second quarter revenue to range between $32m and $34m, which equals growth of between 15% and 23% over Q2 of 2003. We expect some seasonality resulting from our retail business and therefore expect revenue in the second half of the year to exceed first half revenue. For the first quarter ending June 30, 2004, we anticipate margins will be approximately 38%. SG&A will be approximately $10.4m and EPS will range from $0.10 to $0.13 per diluted share. For the full year 2004, we project revenue will range between $136m and $145m, and EPS will range from $0.51 to $0.61 per diluted share. Now I will turn the call over to Rob Lilleness, our President and Chief Operating Officer, to discuss operations of the company.

Thanks Bernie. Clearly we are off to a good start in 2004. Our results are due in part to investments in new technology and product development over the past two years, which has enabled UEI to enter new markets, expand our reach in our current customer base, and increase sales and profitability. A major part of our new product success has been our increased emphasis on marketing and media relations. This has built awareness and demand for our technology, not only under the one for all brand, but also of many other brands as well. We have also seen the beneficial effects of our work to reduce cost through engineering redesign and procurement efforts, and from closely monitoring air versus ocean freight costs. Overall, we are executing well on our 2004 plans. As the home is changing, we are hard at work developing novel means to control the power of wireless networking, IP addressable consumer products, digital medium, and of course the traditional AV devices. As a result, our strength in intellectual property has expanded.

During the first quarter, we filed for five new patents and were issued two patents, bringing the total number of issued and pending patents to 106. We also added over 6,000 codes to our database, bringing the total number of codes to over 177,000. This represents an increase of almost 18% year-over-year. Additionally, we expanded our database to cover China, as we are starting to see demand for high end AV equipment in that country. Our portfolio patents and database, our connectivity software are key to the success of our products. We should also note that UEI's focus on marketing and media relations has been a critical component of this success. In North America alone Kameleon and Nevo have been in publications reaching over 87m readers, in addition to millions more on line. In fact last week, our newest Radio Sat Kameleon with a remote finder capability was featured in the technology section of the New York Times, which has 1.1m print readers and 9.9m online readers. Our marketing and media outreach have led to a substantial effect on driving our success in retail sales. In the Cable and Satellite industry, we have also performed well. There are a number of factors driving the demand in Cable and Satellite. First, the subscription broadcast industry seems back on track after a couple of years of consolidation. And second, exciting new DVR and high definition set top boxes are rolling out to homes across North America.

With our future looking investment in new products, we built our Atlas remote, with strong DVR capabilities prior to the roll out of DVR boxes. Today, we have a great product to serve this market. To give you some numbers, Scientific Atlanta has shipped 1.7m DVR and HD boxes, and Motorola has shipped over 1.1m of these new boxes. This quarter we had sales at the Atlas TVR remotes to new operators and locations including Time Warner, Brenson, , Wide open west, GCI, Shah and many others. We also continue to progress in introducing our products and technologies on a global level. During the first quarter we announced that Australia's Fox hound Sky Italia and Francis TPS have become UEI customers. These broadcasters serve a subscriber base of over 4m homes. As home is changing in our advanced technology business is built to these changing needs in the network term. Digital music services like i-tunes and Rhapsody are part of the reason that consumers are downloading estimated 5b music files every month.

Internet and radio Websites are streaming digital music into homes and on to PCs. And digital cameras are pumping those PCs full of billions of digital photos. New media devices are also taking hold. DVR boxes are built with Ethernet jacks in the back, for digital media is play and sharing. There are now Hi-Fi TVs, DVD players and ever Boom boxes enabling consumers to drag and drop digital files to this new breed of device. Yes with all these devices and services there is one common thing all together, they need to be controlled. And at UEI we are fast at work building the control technology for the broadband home. By next generation of Nevo consequently we will not only control traditional AV devices but also digital media. This quarter we completed our data of the next generation of Nevo, which includes a suit of technology to sport media control in the network home. The beta version had been well received and we are on track to launch the product mid year. In summary we continue to be busy successfully executing our plan to gain greater reach into each facet of our business and each market we serve. We continue to invest in the next generation of wireless control, and as the year-end folds, we anticipate we will be even busier with product introduction customer acquisition and market expansion. I will now turn the call back over to Paul.

Thanks Rob. Today we have reviewed the quarter's accomplishment, which demonstrate election on every level. We have outlined our plans for the remainder of 2004. We continue to uphold the concept that effort in good business practices will yield our desired results. In addition market indicators are good and keep going stronger. We believe growth and digital media and broadband will drive long-term growth in each and every one of our markets. Subscription broadcasting, retail consumer electronics and computing. Therefore we will continue to invest to create solutions for the next generation as well as to expand our current platforms. We have the technology and experience to capture these opportunities. We believe that our focus and execution on the objective of enabling end users to connect control and interact with increasingly complex home, we are the best ever revenue stream and lead to long-term growth for our company. We encourage you to stay tuned. we would like to open up now for questions.

Ladies and Gentleman if you wish to register any question for today's question and answer session you will need to press star then the number one on your telephone. you will hear a pop to acknowledge your request. If the question have been answered and you wish to withdraw your polling request. you may do so by pressing the star, then the number two. If you are using a speakerphone, please pickup your handset before entering your request. One moment please for the first question. Our first question is from Ian Corydon with B. Riley & Co.

Thank you. Could you guys talk about what portion of the upside at the top line was driven by better subscription broadcasting and by better than expected retail revenues?

After imperative guidance?

Well I don't believe that you gave specific guidance for retail versus subscription broadcast, so I am trying to figure out how much better subscription broadcast came in versus and how much better retail came in.

Sure, would you like or get that compared to Q1 of 2003 then?

Sure.

Okay, description broadcasting and OEM together were little more then 11% growth after Q1 2003. And total retail was approximately 48% growth of Q1 2003.

Right. I'm just wondering what your guidance, what kind of growth in each of those two areas is your guidance assumed?

Yes the guidance again for the year for 2004 retail would be about 40% of our business a little bit less than that and we don't really break it down any further than that in our guidance.

All right. In subscription broadcasting, could you talk about where was the strength? Was it in Europe, was it in domestic -- was it domestically or, how does that shape out?

Actually it was to cross the board. I mean we saw with the new customers that we landed in Australia, France and Italy that really helped. The Sky business in the UK is doing well, as is our expanded footprint in the customers that we're serving in North America. And in North America we are not only penetrating deeper with The-Atlas DVR remote but we're bringing new operators especially in the Time Warner arena.

Okay and the 38.8% gross margin, is there some reason while that was unusually strong or is that a chance that margins of that magnitude could continue to the rest of the year?

Yes, as apparently as compared to guidance we had two things that drove it up a bit and that was on the Mosaic sales we discussed in Q4, that we drove down to the net realizable value. We received purchase orders for those but they wont be sold until Q2, so that had a small impact and there was a number of minor mix issues in there that caused it to be slightly above guidance. And the guidance for Q2 is about 38%.

Okay. All right, thanks a lot.

Your next question comes from Rommel Dionisio with Roth Capital. Go ahead sir.

Good afternoon. In your prepared comments I think you talked about warranty and inventory writedowns as being issued. Does that impact your gross margin and I was wondering if you could just, perhaps quantify the inventory writedowns and tell us what that has to do with?

Yes. The total of warranty and inventory write downs were above run rate, were about 400K. And really resulted from a number of minor warranty issues that visibly were above run rate as well as some inventory items that we had looked at in Q4 and put together action plans to sell, and some of those action plans came to fruition and some of them we determined had a low probability of success at this time and so we took the appropriate action flattened down.

Anything left that you might see sort of tentatively on the second quarter, or do you think you're pretty much some of the inventory writedowns?

Well, as due to our nature of our business with product life cycles from time to time we'll take writedowns, but as what we know of right now, no. But we have a number of skews and on an ongoing basis, inventory writedowns will be a part of our business, but now relating to this over inventory, I don't foresee any additional writedowns at this time.

Fair enough. Nice quarter.

Thank you.

Once again ladies and gentlemen as reminder to register for a question, please press star then the number one on your telephone. Your next question comes from Byam Stevens with HG Wellington. Go ahead sir.

Well done . This morning's Times as in article about the use of wireless in education as a teaching aid because of a firm apparent quarter, our education that is providing equipment to this business. Are they by any chance a licensee of yours or do you consider this another possible market?

They are not of licensee, but our technology applied to a number of control situations, we're largely focused in the home. But I'm not familiar with that article, but I'll certainly check it out.

Very good.

Your next question is from Ryan Hardy with Wells Capital . Go ahead sir.

Hey guys. Great quarter. Just a quick question here regarding guidance, you also had a great first quarter beating your guidance that you gave last quarter by, if it calculate its right $0.05 to $0.07, but yet you're only raising full year guidance by $0.03, is there anything or are you just giving yourself some room to make that number, or am I just not adding this right?

Now the Q1 results included some foreign exchange gain and we forecast those at zero going forward.

Okay, so basically the $0.03 regarding to guidance for the full year was from the first quarter foreign currency gains?

I don't know that I would characterize in that way, and what's about 2.5 tons in Q1.

Okay.

There is still a lot of unknowns going forward in the year; for example, with respect to the sales range - those gross margins on some of the incremental sales could come in as various degrees. So, both the gross margin percentage in SG&A are -- we can't nail down that as well low right now.

Okay, great thanks.

You have a follow-up question from Ian Corydon with B. Riley & Company. Go ahead sir.

You guys have a sense for what percentage of your products that go out to the subscription broadcasting that are being deployed with high definition or PDR set-tops?

We would estimate they are to be pretty traditional as maybe 70% to 80% where we are today; somewhere around that. Probably in PDR where we are doing quite well, maybe a little higher. There is not a whole lot of differentiation between our traditional remotes in HD, but there is with the applets TV or with commercial skipping and these type of things. There is definitely differentiation and we believe we are ahead of the curve there.

Okay, do you get a sense of the PDR and HD is a meaningful driver of the growth rate now or is it just --?

Yes, the subscription broadcasting industry seems to be back on track of delivering digital cable and digital satellite to subscribers as opposed to going through some of the mergers and consolidations that they had been going through. So they want to be back on track, and two they have these exciting new boxes both in DVR and HD that consumers want, and NTTA estimates that almost every one of the top one 100 cable market is now covered by HD and so this new service are being offered by the customers and it's starting to drive interest and also the cable companies are marketing these DVR and HD boxes to compete with satellite companies.

Okay great. You guys mentioned in the press release early your private label shipments, could you just give a little more color on what that was? How are that contributed to the quarter?

Yes, we had very strong ordering from private label in, and probably in some cases some earlier-than-expected orders. So it drove business in the first quarter.

Where those orders earlier-than-expected because the product sold in previous shipments sold through quicker or?

Yeah, quicker than we had expected and maybe even quicker than they had expected. So they needed refill orders sooner than we had originally forecasted.

Okay. Could you talk about the opportunity with Adelphia looking like it might be sold. I believe you had pretty small market share within Adelphia?

That's correct. Unto the extent, obviously with our share there, being at two-thirds to 75% not having high share to Adelphia. It would probably go to some one who is one of our customers.

And when we also -- it sounds like every one is talking that Time Warner will be the acquirer. We have strong relations there as well.

All right, thank you.

Once again ladies and gentlemen, as a reminder, to register for a question, please press star then the number one on your telephone. There are no further questions at this time. Please proceed with your presentation or any closing remarks.

Okay. Thank you for joining us today. We look forward to see you guys soon and also having you on the call next quarter. Thanks for participating.

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