Universal Electronics Inc (UEIC) 2004 Q3 法說會逐字稿

Welcome to the Universal Electronics third quarter 2004 earnings conference call. At this time all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q and A session. To ask a question, please press "star" followed by "one" on your touch-tone phone. If anyone has difficulty hearing the conference, please press "star" "zero" for operator assistance. As a reminder, this conference is being recorded today, October 28, 2004. I would now like to turn the conference over to Kirsten Chapman. Please go ahead, ma'am.

Thank you, Diane and good afternoon. Thank you for joining us for the Universal Electronics third quarter 2004 results conference now. 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 webcast replay will be available at www.uei.com until October 28, 2005. In addition, a telephone replay of this call will be made available for 48 hours beginning approximately two hours after the conclusion of this call. The US number is 800-642-1687. And the international number is 706-645-9291. Enter access code 1531212. Also any additional 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 or it will be retained for at least 12 months. You may also access that information by listening to the webcast 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 financial performance of the Company, including the benefits the Company expects as a result of the recently announced acquisition of SimpleDevices Inc., the development and success of products and technologies, the continued conversions of the Company's technology and the continued sales and operating growth and strength of the Company's financial position. And management wishes to caution you that these statements are just projections, 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 SEC including the annual report on Form 10-K for the year 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 and statements are made to reflect the occurrence of unanticipated events.

On the call today are Paul Arling, Chief Executive Officer and Chairman, Rob Lilleness, President and Chief Operating Officer and Bernie Pitz, Chief Financial Officer. Now I'll turn the call over to Paul. Paul?

Good afternoon everyone and thank you for joining the call today. 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.

The third quarter 2004 was another strong quarter for UEI with revenue growth driven by solid performance in our core business. Net sales of 40 million increased 32% compared to the third quarter of 2003 driven by gains in many areas of our business, including OEM sales in Europe and the US and continued growth in our retail line of business.

Operating income of 3.3 million increased 38% and net income which included a non-cash charge of 358,000 pre-tax related to investments that were made in 1995 and 1996 in a private company was 1.9 million or 14 cents per diluted share. This was an increase of 16% compared to the prior year's quarter.

In addition to continued strong performance in our core business, we are also continuing to execute on our strategy to become the interface for the connected home. Our 18-year history of providing industry-leading connectivity software plus our broad portfolio of patented ease of use technologies gives us an edge. We help connect and control the myriad consumer electronic media devices already in the home. And we are building the bridge to IP connected devices, which provide access to and control of digital media across the home network.

In the third quarter we launched Nevo 2.0 the next generation of our embedded home control and automation software. Nevo 2.0 extends UEI's winning position in connectivity to include digital media control within home.

We also announced on our last conference call that we had begun Project Mozart, which will become a Nevo 2.0 powered interface for the connected home. We are very excited by the progress and prospects in this area, and Rob will update you further on this in a few minutes.

In addition, on October 4th, we announced that UEI had acquired SimpleDevices for approximately $12.5 million in cash. SimpleDevices multimedia connectivity software allows full digital media management and control across PCs, handhelds and importantly, within audio/visual devices. This software has an excellent track record with industry leading customers such as Phillips, Motorola and Rockford and chip development partners Equator, Cirrus Logic and Texas Instruments. This smart device category is emerging and we look to build upon these relationships and the software's potential in future product and customer announcements.

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 third quarter of 2004 were 40 million, up 32% compared to $30.3 million for the same quarter last year. The largest increases were in OEM subscription broadcasting and European retail. Rob will into more detail on the underlying drivers, shortly.

Depreciation of the euro as compared to the US dollar also positively impacted sales. The revenue mix for the quarter was approximately 69% technology revenue and 31% retail. This compares to a revenue mix in the same quarter last year of 64% technology and 36% retail. Technology revenue was $27.5 million up 43% compared to the third quarter of 2003. Retail revenue of 12.6 million was up 14% compared to prior year's quarter.

Gross profit for the quarter was $15.9 million or 39.8% of sales, up somewhat from our guidance range of 38 to 39%. Reasons for the increase included strengthening of the euro, and the delay in the shipment of products with lower than average gross margins. It was also slightly higher than third quarter 2003 gross profit of 39.1% due to number of variables, including strengthening of the euro as compared to the US dollar.

Operating expenses were $12.6 million for the third quarter of 2004 above our guidance of 11.8 to 12.1 million. Two items accounted for the majority of the increase. The first item was a non-cash charge related to certain development costs that had been capitalized by Europe subsidiary. These costs, at a remaining net book value of about $280,000. This adjustment adversely impacted operating expenses by about $416,000 and positively impacted cost of goods sold by about $136,000.

The second item related to higher than expected engineering costs, associated with product developments. Operating expenses in the third quarter of 2003 were $9.4 million. The $3.2 million increase is attributable to a number of factors including employee bonuses, Sarbanes-Oxley compliance efforts, the write-off of the capitalized development cost that I just described, the strengthening of the euro as compared to the US dollar and engineering costs associated with product development. Operating income for the third quarter was $3.3 million an increase of 38%, compared to 2.4 million during the third quarter of 2003.

Income before taxes was $3 million compared to 2.5 million last year, an increase of 19%. Other expense, including a non-cash charge of $358,000 related to investments that were made in 1995 and 1996 in private company. The remaining value of our investment in this company is minimal with a balance of $3000.

Net income was 1.9 million or 14 cents per diluted share compared to $1.7 million or 12 cents per diluted share in the third quarter of 2003. Effective tax rate was 35.9%, up from 34% in the third quarter of 2003. The increased rate included the impact of the expiration of the federal R&D income tax credit regulation in June. In October, this regulation was reinstated retroactively and under current accounting rules we will realize the benefit of the R&D tax credits for the third quarter in the fourth quarter. Therefore, this issue will not negatively impact our effective tax rate for the year.

Turning to our year-to-date performance for the first nine months of 2004, net sales were $106.7 million up 26% from $84.9 million for the same period of 2003. Net income for the nine months ended September 30th, 2004 was $5.4 million or 39 cents per diluted share, an increase of 42% compared to $3.8 million or 27 cents per diluted share over the same period last year.

During the quarter, we repurchased 11,000 shares for approximately $200,000 and year-to-date we have repurchased over 445,000 shares for approximately $5.9 million. We ended the quarter with cash, cash equivalence and short-term investments of $56 million. On October 1st we repurchased -- we purchased SimpleDevices for $12.5 million in cash. SimpleDevices products and technologies are related to option stage and we anticipate growth will result in the acquisition being accretive in 2005. We will not adjust current 2004 profitability guidance for the purchase, since we believe the business will breakeven during the fourth quarter.

We continue to improve accounts receivable performance and DSOs improved 68 days at September 30th, 2004, from 83 days at September 30th, 2003. Net inventory turns degraded to 3.7 turns at September 30th, 2004, from 3.9 turns at September 30th, 2003. This is largely due to the amount of inventory on hand related to the retail business, which is expected to have a higher third to fourth quarter growth rate in 2004 than it did in 2003.

Now, for our guidance. We expect fourth quarter revenue to range between 47 and $50 million, which equals growth of between 32 and 41% over the $35.5 million of revenue recorded in the fourth quarter of 2003. For the quarter ending December 31st, 2004, we anticipate margins will be approximately 40% of sales plus or minus 1 point. This is slightly higher than the 37.9% in the fourth quarter of 2003, due mainly to favorable mix and the appreciation of the euro. Operating expense is expected to be between $14 million and $14.5 million. The expected growth in operating expenses when compared to the fourth quarter of 2003 is primarily related to the acquisition of SimpleDevices employee bonuses, Sarbanes-Oxley compliance, increased headcount, recruiting fees, rate and the appreciation of the euro.

EPS is expected to range from 23 cents to 27 cents per diluted share, which would be a 41, 59% increase when compared to 17 cents per diluted share in the fourth quarter of 2003. Embedded in this guidance is a $240,000 free tax charge related to in-process technology as part of the allocation of the purchase price for SimpleDevices. This would translate into full year 2004 revenue ranging between 154 million and $157 million, which is 28% to 30% growth over 2003. EPS for the year is expected to range from 62 cents to 66 cents per diluted share compared to 45 cents per diluted share in 2003. Now I'll turn the call over to Rob Lilleness, our President and Chief Operating Officer to discuss the operation of the Company.

Clearly the third quarter and recent achievement demonstrate that we continue to solidify our position in our core business. Investing new technology and product development and expand our reach within our current customer base. I'll now review our progress during the quarter. In subscription broadcasting UEI reached an agreement with DIGITURK, the largest satellite television operator in turkey with over 700,000 subscribers.

UEI will be the exclusive provider of remote control for DIGITURK for new interactive set-top boxes, which started to ship in 8th August. In July we announced that we reached a broad agreement with DirecTV to supply remote controls and micro-controller chips for a new standardized remote control for which we'll receive solid orders during the quarter. In addition to DIGITURK and DirecTV we're also encouraged by the recent demand of international subscription broadcasting. It appears that European and international markets have started to get back on track with their digital rollouts and we have seen solid demand for our technology and product from Sky Italia in Italy, Foxtel in Australia and DirecTV Latin America. Northern American cable also has performed well during the quarter we added eight new systems to UEI including Cogeco the third largest MSO Canada. In retail we continue our push in marketing and media outreach to build strong relations with the trade and gain awareness for one for all brand as the leader in design and technology.

To give you an example of our success in Germany the UK and Spain, UEI products were covered in over 50 publications with a total circulation of 7.7 million readers and in America the variety of publications are equally impressive. The Los Angeles Times, Investor Business Daily, Home Theater magazines and many other publications covered UEI products totaling over 13 million readers and millions more on-line. Our one for all line of remote controls digital antenna and AV accessories have clearly benefited from our marketing and media outreach and from the hard work of our employees around the globe. The results retail sales were up 32% compared with the same three quarters in 2003. A particular note is our success of our strategy to bring new brands to UEI.

In the UK we combine the power of UEI's technology with the Sky brand to develop a line of accessories. The line was launched last year and now it accounts for over 30% of our retail sales in the UK. We hope to be able to create this success in other retail markets in the future. We've also been quite active in advanced technology. Just as UEI created a strong position in device control in the infrared enabled home we're pushing to create that same strength in the Wi-Fi enabled broadband home.

During the third quarter we launched Nevo 2.0 a huge step forward for UEI in terms of wireless controls. With the product users cannot only control infrared devices but also control digital contents such as photos, music and videos across the Wi-Fi network. Our software is now embedded in Hewlett Packard's new iPaq PDA. And as part of our relationship with HP, our digital media server is also automatically installed on a consumer's PC when they setup their PDA. This means UEI's digital media software will not only power millions of PDA's but also millions of PC's pushing UEI deeper into the it digital home space.

Even CNBC is recognizing the significance of our new software. On September 17th the network covered Nevo 2.0 on their morning call segment watched by millions of viewers. We're also working to extend the functionality of Nevo into our own products. On the last earnings call we talked briefly about Mozart our code name that a new product that uses the Nevo software in a form factor designed for the home. Since then we gave a sneak preview of the product at the CDA Customer Installer Show in September. During the show we unveiled the commercial name of the product Nevo SL and demonstrated the products capabilities. The response was overwhelming. We believe we are in line to ship what could be the must have handheld for the broadband hope.

We expect to launch it CES and in January 2005 and follow with Nevo SL shipments during the first quarter. We will give full details of the product during our next conference call and until then if with you like to take a sneak preview of the product, check out mynevo.com. We're also working to get our technology included with other leading companies in the development of the digital home market. This quarter we unveiled our partnership with In House, Europe's leading digital home consortium and with In House we join an elite group of companies including Honeywell, Sony, Deutsche Telekom and Volkswagen to develop digital home technology. For more information on In House there is a video clip on UEI.com in the news section. A particular note regarding our push into the digital home we are pleased to have announced our acquisition of SimpleDevices and welcome their employees to UEI. The acquisition fortifies UEI's control technology designed for the broadband and Wi-Fi enabled homes and gives UEI a foothold in Silicon Valley.

Founded in 2000, SimpleDevices provides technology that can be embedded into consumer electronic devices, personal computers, set-top boxes, automobiles and new digital Wi-Fi devices to enable these devices to interact within the home and also with external internet service like music sites. Importantly, Simple has also worked closely to post their technology to Texas Instruments, Equator and Cirrus Logic Chips. Therefore a consumer electronic and a manufacturer, for example, can quickly and easily integrate SimpleDevices functionality into their devices. While these options, of this technology is early, the Company is already delivered product to Phillips and Motorola for their offerings in the digital home space.

Overall, we are proud of our accomplishments this year. We have made progress in our core technology business expanded our footprint in retail and built a solid foundation in digital media control. The future for UEI is bright our product pipeline is strong and we have a bold vision for the future. With that, I would like to turn the call back over to Paul for some closing remarks.

Thanks, Rob. Our long-standing goal has been to lead home activity to help people seamlessly connect control and interact with devices, content and services in the home. Successfully accomplishing this objective requires to us not only realize the home is changing rapidly but also understand how the home will most likely evolve. We have continued to improve our handheld devices and accessories using digital display technology to create the popular Kameleon platform and we have successfully introduced numerous other connectivity products through our retail channel. We have enhanced our Nevo platform to deliver complete audio-visual and digital media control within the home. We have also acquired technologies in our simple devices transaction that move us forward in the device, PC and automotive areas that broaden our solutions in the home connectivity market. As broadband and Wi-Fi become increasingly ubiquitous we believe our solution will create enormous value for our customers who are seeking additional methods to enhance and diversify their product lines.

We have successfully and profitably built a business that helps consumers short through the morass of technologies that are entering their home at a record pace. Our year-to-date sales growths of 26% in operating income growth of 48% are testimony to that. We are far from finished, as we believe there is vast potential for the technologies in our portfolio today and those we have begun to build. We also continue to expand our presence in our core markets of OEM, retail and subscription broadcasting building new products adding new customers and entering new regions. It is the combination of our solid position in our core business plus our focus on the future with our advanced technologies that will drive UEI's performance going forward. We believe we will build on our track record of solid operating results and generate excitement within the growing market of digital media. Thank you for listening and I would like to now open up the call to questions. Operator.

Ladies and gentlemen, if wish to register for a question for today's question and answer session, you will need to press "star" then 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 polling request you may do so by pressing the "star" then the number "two". If you're using a speakerphone, please pick up your handset before entering your request. One moment, please, for the first question.

Your first question comes from James Coe (ph) with Roth Capital Partners.

Hi, good quarter guys.

Thank you.

I was wondering if you could provide more color on some of the initiatives you're using to promote the iPaq relationship?

Sure, there is a number of things we do we have been supporting HP in terms of demonstrations and we have also targeted a few publications that like Pocket PC Magazine and others to ensure that Nevo is highlighted in some of the articles. A lot of our portion in term of PR will be around the Mozart product, which we have launched in 2005.

How about on the part of HP what are they doing to promote the product as well?

Yes if you read the reviews of HP, it is one of the core components that they push like Fortune Magazine highlighted iPaq multimedia, which Nevo 2.0 powers and if you look at the device itself, there are four major buttons on that device, where two of those major buttons were rewritten all the software that powers those buttons underneath.

Secondly, I was wondering if you could provide the term balance, cash balance, after the acquisition of simple device?

Well, the simple device was at $12.5 million cash purchase.

OK. So, directly half of the balance you that reported at the end of September?

Right.

And what is the direction you're leaning towards for upcoming acquisitions?

Well, we still -- the fact that we have done one would not preclude us from doing another one, but there is a number of different areas, we could do an acquisition in and whether they be in our core long-standing business or technology or geographic expansion or distribution channel expansion.

Thank you.

Your next question comes from Mike Coady with B. Riley Company.

Thanks. Good afternoon, gentlemen.

Mike.

Just a couple of questions on the expense line. First of all, the gross margin of 40% expected for the next quarter that looks like you're moving kind of a nice upward trend. Is that included any impact you would have from the late shipment of our margin products in the third quarter?

It does include that.

OK. So on sort of a I guess there is some offsetting backs with the Euro, I guess what do you expect a more normalized kind of run-rate to be, if you would factor out the delayed shipments and you also factored out back to the Euro?

Well, the Euro would probably have a little bit over a point impact for the fourth quarter. So that would probably bring it down to about 39%.

OK. And could you touch a little bit on what the delayed products were?

No, we really don't talk about gross margin by-product lines, but there is a number of different ways to look at our gross margins by skews because any individual product might have a gross margin more or less than another one, but also in the type of solution being offered, whether its a complete remote control, our solution on a chip or just the software sale. And obviously, the software sale would've the highest gross margin and be completed on a solution and the remote control would have the lowest gross margin percentage, so as the mix between those three solutions change from month-to-month it can impact our margin.

Got you. OK. Thanks. And then looking at the R&D, it looks like obviously, it jumped up quite a bit in the quarter and there was the one time item, in there. Even if you backed that out though, it is still nice move up. Could you talk about our again on account of a run-rate basis and then as a follow up, to that where you expect extra expenses in the launch of the Nevo SL?

Yes, the R&D is up a little bit primarily, because of the charge, I talked about. That was $415,000 in there. We are also continuing to invest in engineering resources into new products. And I'm sorry what was the last question you had?

Where you might see additional expenses you talked about marketing for DSL also if there are any additional engineering expenses included that might kind of ramp-up a little bit and that is why you have another jump up in outbacks in the fourth quarter. Just sort of how those expenses play out?

Yes. The -- we wouldn't expect R&D expenses percent of sales to dramatically change, but we are continuing to invest in advanced technology such as Nevo.

OK. All right. That's it for now. Thanks.

Thanks.

Once again, ladies and gentlemen, as a reminder to register for a question, please press "star" then the number "one" on your telephone. A follow-up question comes from Mike Coady with B. Riley Company.

Thanks. Just to follow up on DSL and that launch to in January, but obviously it is somewhat available on the website and then probably some people have seen it. Do you have any expression of interest rather and any sense for kind of what the impact of that is going to be?

Yes, we have had the response at the CES trade show, which is the custom installer show, was incredibly positive. We believe our Nevo 2.0 software and our work with Wi-Fi is exactly the right direction. That is what the customer feedback is. To really start developing the market for a handheld for the broadband home so, positive feedback formally launch the product at CES, which is a show we attend each year and we'll start shipments in the first quarter of 2005.

OK. And do you anticipate this being just a stand-alone unit or do you see any bundling opportunities?

It is designed as a stand-alone unit for custom and CD Installers.

OK. And the last question was I know that this is going to be something that was sort of a - a high-end item. Do you think that, if the interest is high enough that you might consider trying to bring the price down in order to have a more magic acceptance or general acceptance-- overtime?

I think of our eighteen history, UEI has definitely a tradition of delivering innovative technology at price points that are the market is willing to pay for and then overtime, cost engineering that product and bringing it more to the mass market.

Sure.

You should probably expect that over the next, two to five years we'll continue to bring our price points down on something like Nevo SL or frankly any other product that we ship at the market.

OK. Great. Thanks again.

Your next question comes from Ryan Curdy with Wells Capital Management.

Good afternoon. I apologize but Bernie can you again go over the charge that is in R&D? I must have missed that. 416,000?

Yes, correct. It is about the net cash net non-cash charge was 280,000, pre-tax, which was a combination of a charge on operating expenses of about 416,000 and a credit to cost of goods sold of about $136,000.

OK.

The charge operating expenses comprise net book value of the assets at the beginning of this year and the credit related depreciation taken since then.

OK. And what was cash flow from operations in the quarter?

It was just slightly negative about 300K negative due to increased receivables related to sales growth. DSO's, however, improved from last year.

And what about CapEx? I'm sure it was --

CapEx was just under $1 million and mostly related to tooling in new products and also some computer equipment.

Great. Thanks.

You're welcome.

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 Mike Coady with B. Riley Company.

Thanks. Bernie, just one follow up on the numbers, the DNA in the quarter, for the nine months either one.

I'm sorry?

Depreciation and amortization you look for the quarter, nine months, however you have it most conveniently.

Yes, depreciation was about -- depreciation and amortization was about 1,000,004 for Q3.

Super, thanks.

You're welcome.

To register for a question please press "star" then number "one" on your telephone. There are no questions at this time. Please proceed with your presentation or any closing remarks.

OK. Everyone thank you for joining us today. Please visit our website at www.uei.com to see more about Nevo and our upcoming investor conferences and since our next conference call is in late January, we look forward to seeing some of you at CES this year. Thanks very much.

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