Universal Electronics Inc (UEIC) 2004 Q2 法說會逐字稿

Welcome to the Universal Electronics second quarter 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 difficulty hearing the conference, please press star zero for operator assistance. As a reminder, this conference is being recorded. I would now like to turn the conference over to Kirsten Chapman. Please go ahead, Ma'am.

Thank you, Marvin. Good afternoon and thank you for joining us for the Universal Electronics second quarter 2004 results conference call. By now you should have received a copy of the press release. If you have not, please contact Lippert Heilshorn & 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 July 29, 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 U.S. number is 800-642-1687 and the International number is 706-645-9291. Enter access code 8628131.

Also, any additional or updated material nonpublic information that might be discussed during the call will be provided on the Company's web site at www.uei.com 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 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 the future financial performance of the Company including the benefit's the Company expects to receive as a result of contracts with customers that have recently been announced, the development and 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 files from time to time with the DEC including the annual report on Form 10K filed for the year ending December 31, 2003. 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. Management undertakes no obligation to revise or update any such projections and statements after the date on which such projections are made to reflect the occurrence of unanticipated events. Now I will turn the call over Paul Arling, the Chairman and CEO of Universal Electronics. Paul?

Good afternoon. To date, 2004 has been a very exciting year and we're glad you have tuned in to hear about our progress. With me today are Bernie Pitz, our CFO, and Rob Lilleness, our President and COO. After I open the call, Bernie will review the financial statements and guidance and Rob will provide an operating activity update. Then I will conclude the prepared remarks and begin a question and answer session.

This quarter we exhibited strong growth compared to second quarter 2003 driven by success in a number of our product lines, broader distribution channels and an expanded customer base. Net sales of $34m increased 23% compared to second quarter of 2003. Operating income of $2.4m increased 53%. A net income of $1.7m or 12 cents per share, increased 40%. Despite investing $1.9m in the repurchase of UEI shares, we closed the quarter with $57.2m in cash. We believe clear strategy and consistent execution are the keys to a well run company. Our long term growth strategy leverages our success leading the market for wireless control from stationary mediums like TVs and set top boxes, to providing multimedia controlled, consumers embracing the wireless digital lifestyle.

Our execution is evidenced by recent product and customer announcements. For instance, we're very excited to be launching our next generation of Nevo, our imbedded software, Nevo 2.0. As long stated, we leverage our existing technologies to develop new methods and technologies to simplify the increasing chaos in the broadband home. Nevo 2.0 extends UEI's leading position in control technology to include solutions for the rapidly growing number of broadband and WIFI enabled homes that are embracing digital technologies for the enjoyment of music, pictures and video.

We have also announced that Hewlett Packard selected Nevo 2.0 to power models in its iPAQ multimedia platform. We believe our continued strategic partnership with HP is strong product validation for the Nevo product platform. Later, Rob will provide more specific details on Nevo 2.0 and the exciting developments happening with our next generation Universal Home Control application. We are continuing to leverage our ever expanding technology portfolio to help consumers connect, control and interact in their homes. One example of our success in deepening existing relationships with out customers and capturing market share in the subscription broadcasting arena is our Direct TV announcement, Direct TV has already begun using our technology to standardize the control experience across all Direct TV set top boxes.

Our established leadership in simplifying the home provides great promise in the near term. Analysts estimate that cable video on demand households will nearly double over the next 2 years and PVR households will nearly quadruple over the next 4 years. In addition, our recent development of WIFI enabled Access 2 and Control Love digital media is very well timed. Broadband and wifi implementations are fueling a growth in digital media technologies that enable consumers to enjoy their entertainment anywhere within their home. This new opportunity is projected t double each year over the next several years. These trends portend an increased complexity in the living rooms of tomorrow and we continue to lead in building the technologies and products that simplify this evermore complex home environment. Now I'll turn the call over to Bernie Pitz, our CFO, who will review the financial statements in greater detail. Bernie?

Thank you, Paul. Net sales for the second quarter of 2004 were $34m, up 23% compared to $27.7m for the same quarter last year driven by strong performances in subscription broadcasting services and retail, especially in or European channels. For the second quarter 2004, technology represented approximately 69% of total sales or $23.4m. Retail revenue represented approximately 31% or $10.6m. This compares to a revenue mix in last year's second quarter of 73% technology and 27% retail.

Comparing this quarter to the same quarter last year, retail revenue rose 39% and technology revenue increased 16%. Retail growth was primarily due to after market sales related to subscription broadcasting services such as Sky, and sales in antennas and other audio/video accessories. Technology growth was primarily driven by sales to the U.S. subscription broadcasting services market. Gross profit for the first quarter was $12.9m or 37.9% of sales and on track with our estimates. Operating expenses were $10.5m for the second quarter of 2004, in line with our guidance of $10.4m and higher than the $9.3m in the same quarter last year. The $1.2m increase over last year was primarily related to bonuses, freight, Sarbanes-Oxley compliance, and appreciation of the Euro.

Operating income increased substantially, 53% to $2.4m this quarter from $1.6m during the second quarter of 2003. The effective annual tax rate during the quarter was 34% which was the same as the second quarter of 2003. Second quarter net earnings were $1.7m or 12 cents per diluted share this quarter versus $1.2m or 9 cents per diluted share in the second quarter of 2003. For the first 6 months of 2004, net sales were $66.6m, up 22% from $54.6m for the same period of 2003. Net income for the 6 months ended June 30, 2004 was $3.5m or 25 cents per diluted share. This compares to $2.1m or 15 cents per diluted share for the same period last year.

During the quarter we repurchased 142,000 shares for approximately $1.9m and year to date we have repurchased over 435,000 shares for approximately $5.7m. We ended the quarter with cash and cash equivalents of $57.2m. DSOs improved to 64 days at June 30, 2004 from 81 days at June 30, 2003. However, we do expect DSOs to increase slightly in the second half of the year. Net inventory turns improved to $3.8 at June 30, 2004 from $3.3 at June 30, 2003.

And now for our guidance. We expect the third quarter revenue to range between $38m and $41m which equals growth of between 25 and 355 over Q3 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. We expect the third quarter margins to be 38% of sales, plus or minus one point. Operating expenses are expected to be between $11.8m and $12.1m. Earnings per share is expected to range from 12 cents to 15 cents per diluted share. The expected growth in SG&A, when compared to Q3 of 2003, is primarily related to employee bonuses, Sarbanes-Oxley compliance, increased headcount and recruiting fees, and appreciation of the Euro.

For the full year 2004 we project revenue will range between $148m and $157m which equals growth of between 23 and 30%. We expect EPS will range from 58 cents to 68 cents per diluted share. Now I'll turn the call over to Rob Lilleness, our President and COO, to discuss the operations of the Company.

Thanks, Bernie. Clearly, our results during the first half and our guidance for the year demonstrate that UEI is moving toward one of the strongest and most profitable years in recent memory. Are results are due to a number of factors including our investment in new technology and products, early cost engineering, and expanded distribution. Our new products started to pay strong dividends in 2003 with our first Kameleon and Nevo products. In 2004, the pipeline continues to deliver with the launch of over 15 new products.

Our product pipeline, combined with our solid sales, marketing and operational plans have delivered these strong results and have built the foundation for future growth. Regarding sales in product, we made significant strides in both our core and advanced technology businesses. In core technology, we announced our new relationship with Direct TV, one of the nation's largest TV service providers with more than 12m customers. Previously, UEI provided Direct TV with replacement remotes Moving forward, UEI will sell the micro controller chip imbedded to the vase majority of Direct TV remote controls and we've been selected as one of two companies to manufacture the complete remote control. Shipments of the products started this month.

In addition to Direct TV, we have also realized solid demand from other satellite companies including Sky Italia and Foxtel in Australia. I'm also pleased to announce that we have added satellite provider, O-Star in Australia, Taiwanese set top box maker ADB, and cable provider CNS in Taiwan to our customer roster. In North American cable, we also continue to make progress, especially with our new Atlas DVR compatible remotes. However, there are still a number of competitors in the market and as we continue to grow in share, we have seen some competition based solely on price. Nevertheless, we are confident in our ability to continue to take share in this market.

In our retail business, we continue to aggressively market our products in the press to create demand. In the U.S. alone, UEI technology has been covered in 28 publications and media outlets during the quarter including TV Guide, The New York Times, and GQ. To drive interest in the latest Kameleon 8 in 1, with remote finder from Radio Shack, we were successful in getting the unit placed in Time Magazine which reaches over 22m readers each week. Our Kameleon product also had its first movie debut, alongside Nicole Kidman in the Stepford Wives.

As we look toward the key selling season for retail in Q3 and Q4, we are preparing for the launch of our first complete line of one for all Kameleons in both the U.S. and Europe. This product line will feature vibrant new packaging and 7 new cutting edge designs including radio frequency capabilities for multi-room control. Supporting our growth in one for all branded retail has also been our line extensions to other products. During the second quarter, we launched a new universal LCD TV bracket which has been well received by the market with strong initial sales in this fast growing segment.

We also launched AV Selector boxes that enable a consumer to plug in all their devices into a central switch box for easy to buy selection. In addition, we continue to see solid demand for our redesigned antennas as free to air digital broadcasting rolls out in the German and British markets. Finally, our Sky branded retail line continues to enjoy solid sales in the U.K.

We have also worked to expand our distribution region retail. In Germany, we closed broad distribution contracts with both Kaughland and Karstadt. Kaughland is the second largest hyper market chain in the region and Karstadt is one of the top five retailers in German with over 190 departments stores. We are also expanding to service the do-it-yourself market in the U.K., adding both Home Base, with 270 stores, and B&Q with 320 stores.

Turning to our advanced technology business, we announced Nevo 2.0 and our relationship with HP this past Tuesday. This product is a giant step forward for UEI as a technology provider. The product cannot only control infrared devices as in Nevo 1.0, but it also can control digital content such as photos, music, videos across a home network. With Nevo 2.0 we now have a control technology for the expanding market of wireless home networks and digital media. For a preview of the product, go to uei.com. We're also hard at work on a new product that utilized Nevo 2.0 technology but in a form factor designed for the home. This product is code named Mozart and we expect to ship Mozart in the first quarter of 2005. We will give more details on this product as we get closer to launch.

Just as we built the universal control technology for the infrared home, with Nevo 2.0 we are out to build the control technology for the broadband home, a market that will potentially be larger than our core remote control market today. In summary, during the quarter we worked hard to achieve some big wins and we are proud of our accomplishments launching Nevo 2.0 and securing HP. We will continue to invest in the next generation of wireless control to capture new market share created by the increasingly complex home environment. I will now turn the call back over to Paul.

Thanks Rob. This quarter we leveraged our technology to further enhance our product lines, broaden our distribution and expand our customer base. As a result, we grew our revenue, operating income and net income. Our dedication to good practices continues to yield desired results and add the opportunities as well as the challenges of helping to create the connected home emerge. We are not sitting still. We are devoted to simplifying the home and as the home environment changes, we are providing new solutions. As I indicated earlier, market statistics indicate the pace of change in the home seems to be quickening. For example, the digital TV market will nearly double over the nest two years. Cable video on demand subscribers will also nearly double over the next two years. PDR technology will penetrate most 4 times the number of households it is in now over the next 3 years. Broadband and WIFI also continue their growth driving the creation of the connected home.

Broadband is predicted to reach 50m households in the U.S. alone by the year 2006 and WIFI will reach 20m households. Sales of home media devices or connected devices that enable consumers to enjoy collections of digital media throughout their home, will grow from an $800m market this year to a $13.6b market 4 years from now. With all of these areas growing, people will need easy to use wireless controls to enhance their entertainment experience. We are uniquely positioned to capitalize on these trends. We are ahead of the game with a suite of technologies that control devices and digital media within the home. We will continue to broaden our scope so that more homes will enjoy better, simpler controls and establish UEI as the interface for the connected home. Thank you for joining us today. We'd now like to open up the call to questions. Operator?

Ladies and gentlemen, if you wish to register for a 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 prompt to acknowledge your request. If your question has been answered and you wish to withdraw your request, you may do so by pressing star then the number two. If you are using a speakerphone, please pick up the handset before entering your request. Again, we ask that if you have pressed star one to ask a question before this time, please press it once again to be sure you enter into the queue. One moment please for the first question. Your first question comes from Scot Ciccarelli with RBC Capital Markets. Please go ahead with your question.

Hi guys, how are you? A couple of questions. First, two housekeeping items. First, what should we be looking for for tax rate going forward? The second one is related to currency - - what was the impact in the quarter and what should we be thinking about going forward?

Yeah, Scot, I don't see any reason why the tax rate would change so we're currently forecasting it to remain at 34%. Secondly, for the quarter as compared to Q2 of 2003, the foreign exchange rate change, particularly resulting from the Euro, impacted sales by about $800k favorably, margins by about $700k favorably and SG&A by about $200k unfavorable.

Okay, so about $500 net?

That's correct.

Got it. And then two questions just kind of more about the business. In terms of looking at the second half and the way you guys see things shaping up, should we look for similar types of mix between your let's call it your core and advanced technologies or will we see differences there, more retail versus retail? However you want to break it out.

For the second half of the year, I would expect retail to be approximately the same percent of sales that it was for the second half of last year.

As it was last year?

Correct.

Got it. And then I guess probably a question for Rob since this seems to be your specialty here. The Nevo 2.0 - - can you explain, can you kind of give us an example of exactly what this device can do?

Sure. People are, in increasing numbers, taking digital photography. For example, they store their photos on the PC. Well they're trapped on their PC and you can see it on a small screen, What UEI technology does is it installs a suite of software on the PC that automatically publishes those digital photos to your handheld, your iPAQ handheld. And you can basically drag and drop that digital photo from your PC on to your television set in the living room, for example. You can also stream MP3 files that are on your PC directly to the handheld, download it to the handheld and then plug in some headphones and use it much like an I-Pod. Those are the types of capabilities that the product offers. Does that make sense?

Your next question comes from Ian Corydon with B. Riley & Co. Please go ahead with your question, Ian.

Thank you. Just looking at the increase in guidance, obviously some of that is coming from this incremental Direct TV business. I'm just trying to get a sense if you feel better about your business just kind of excluding that incremental Direct TV business than you did last quarter? Did that have an impact on the guidance also?

The Direct TV certainly impacted our confidence in the second half of the year as well as other smaller contracts that have been signed since that time in the general economy as well. Also, we've gotten a little bit more confidence in some of the dates for the new product introduction. So all those shape up to a more confident second half.

Okay, and are you still seeing kind of strengthening across the board from your subscription broadcasting customers?

Yes.

All right. That's all I have. 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. Your next question comes from Jason Sam with Seidler Corporation. Please go ahead with your question.

Hi, guys. Hey, Bernie I missed your technology and retail breakout. Can you give that to me real quick?

Sure. Technology sales for the quarter - - hole on one second, Jason. Total technology was $23.4m and total retail were $10.6. Abut 31% retail.

Great. Now, Rob, you mentioned that with the existing competition you're seeing some aggressive price movements by some of your competitors. Are you guys, you know, matching them on the price, losing any sales?

No, it's a good question. What's happening is that as we've taken additional market share I think there's been some increasing desperation on the side of smaller players. And what the large subscription broadcasting groups come to us for is that universal technology, that leading database. And the patented technology that we put into our products that make their services easier to use as opposed to just buying a simple, dumb, dedicated remote. And that's what's the differentiator and that's why we continue to take market share.

And do you have any idea what your current market share is now?

It's hard to estimate, so maybe in the North American cable business we're somewhere around 70% to 80%, but again, it's difficult to estimate.

Okay. With the Direct TV business - - now you have traditionally provided them with a turnkey product. The new controller relationship that you have with them there, the micro controllers, is that going to be incremental to the turnkey products or is it sort of - - how's that going to play? How much of an incremental effect is it going to have on your total relationship with Direct TV?

Well, we will continue to provide replacement remotes as we do today. But as Direct TV moves to a Direct TV branded remote, and a Direct TV design, and away from using individual OEM designs, they are now standardizing their remote control. And also the technology inside the remote control to offer a common interface and common user experience across all the set top boxes they will purchase. In that change in their business, we are now the default standard as a technology inside the remotes and we are one of two manufacturers of the complete remote which will also be used a replacement remotes moving forward.

Okay, so then you would have 100% of the business regardless of whether or not you sell them a remote? Or you are one of the manufacturers of the complete remote or another manufacturer does it, right?

There will be two manufacturers. But in terms of the microchip controller provided, we will be the standard for their digital systems.

Okay, great. Also, can you comment a little bit on what the current channel inventory looks like for the subscription broadcasting market?

We don't really have too much visibility of what the channel inventory looks like for your products.

As far as your order pattern is concerned, are you receiving - - are your order rates pretty consistent across the quarter or is it more front-end loaded, back-end loaded? Any color on that?

Yeah, as we look at our order patterns over the last 3 months, that's one of the reasons that we've taken the guidance up for the second half of the year. Obviously the orders are looking quite good.

Great. Thank you.

Your next question comes from Brian Stevens with HG Wellington. Please go ahead with your question.

Good job, guys. Clarity on this price pressure - - did I understand it to be only in retail abroad or is it across the board?

Well, in all the markets we serve obviously as a tech company, people expect greater technology at a lesser price. Nevertheless, I mentioned in the subscription broadcasting industry, as we have seen some price competition based solely on price. But again, our technology stands on its own merits and people are more interested in delivering a complete interface with technology that turns on their TV and their other devices around that subscription broadcast service.

And also, as we've talked in the past about license fees and things versus selling the chips with the technology inside, as you move into these new markets, does the same thing apply or - - ?

Well in the advanced technology business, it is largely a software component, so the ability to control digital media is a suite of technology and some of that is pure software that resides on the PC. In the case of the HP product, they also want infrared control, so we do have a chip in the iPAQ as well. But it becomes more and more of a software business.

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. You have a follow up question from Scot Ciccarelli. Please go ahead with your question.

I actually got disconnected back there for a part of it. I apologize for that. Another question on the Nevo 2.0 - - should we possible expect to see the technology on different types of form factors or will it stay on a remote type centric device?

Well it's architected to transform any display device into an interface for the home. And we also on the call today announced our project code named Mozart which will take Nevo 2.0 technology onto a form factor that is designed for the home. And we'll give more details on that as we progress toward the launch date which will be in the first quarter of 2005.

Okay, I must have missed that. Okay, thank you very much.

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.

Paul Arling. Okay, everybody, thanks for participating today. In the next quarter, we will be presenting at three investor conferences and you can find more information on our newly launched website at www.uei.com. Again, thanks for your participation today.

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