Universal Electronics Inc (UEIC) 2004 Q4 法說會逐字稿

Welcome to the Universal Electronics Fourth Quarter Year End 2004 Earnings Conference Call. (CALLER INSTRUCTIONS). I would now like to turn the conference over to Moriah Shilton. Please go ahead ma’am.

Thank you, and good afternoon everyone. Thank you for joining us for the Universal Electronics Fourth Quarter and Year-End 2004 Earnings 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 webcast replay will be available at www.UEI.com, until February 17, 2006. 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 U.S. number is (800) 642-1687. The international number is (706) 645-9291. Enter access code 3443774.

Also, any additional updated material, non-public information that might be discussed during this 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 also access that information by listening to the webcast 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 the development and success of products and technologies, including the recently announced http://www.UEI.com.NevoSL, the continued convergence 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. And 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 10K for the year December 31, 2003, and the quarterly reports on Form 10Q filed since that time. 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 Arling. Paul?

Thanks Moriah. Good afternoon 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 will conclude the prepared remarks and begin a question-and-answer session.

Now, turning to the financial results, the fourth quarter 2004 was a great end to another strong year at UEI. Revenue was above our guidance, with growth driven by strong performance in the OEM and European retail business lines. Overall, our fourth quarter delivered excellent results in growth. Net sales of $51.7m increased 46% compared to the fourth quarter of 2003. Operating income of $5.7m increased 74%. And net income of $3.7m or $0.26 per diluted share increased 51%.

Our full year results were also quite strong. Net sales were $158.4m, up 31% from 2003. And net income for the full year 2004 was $9.1m, or $0.65 per diluted share, an increase of 45% compared to 2003.

Looking at the long-term big picture, we decided to discuss our business, and provide guidance across two new categories. The new categories will be consumer and business. The consumer category includes sales to consumers through retail and customer installer channels. And the business category includes sales to cable operators and OEM customers. Bernie will provide greater detail during his presentation.

2004 was also a year of accomplishment in our advanced technology efforts. In the fourth quarter, we acquired simple devices. The capabilities acquired here, when combined with our Nevo technology, give us a solid foundation to drive the adoption of the UEI technology throughout all the nodes of the home network, including the PC, audio visual devices, to handheld controller, and, in time, even the automobile.

We have strengthened our ability to execute our connect at home strategy. That is, to make devices and content easy to discover, control, and enjoy anywhere within your home. During the year, we also continued our success with Nevo, shipping the first version with digital media control technology. And we recently unveiled NevoSL, which will bring UEI technology into the growing custom installer market.

All of these initiatives illustrate how UEI continues to broaden its home connectivity product line, to appeal to larger and larger audiences. Currently we have established leadership in our core technology. The growth we have experienced in the retail market and the worldwide OEM markets are further validation of the continually improving quality of our solutions, and the lead that our technologies have in today’s home.

Our recent agreement with Logitech further enhances our position as the leading technology provider for the connected home. And as discussed, we have leveraged our intellectual property to develop new means of wireless control with a focus on digital media. As a result, today we are ahead of the pack, with next generation digital media control devices, to serve the burgeoning digital media market.

Clearly we’ve had a great year. And I’d like to thank Bernie Pitz for his contribution. As announced this afternoon, Bernie will be leaving UEI on March 1. He is joining Sybron Dental Specialties, traded on the New York Stock Exchange, with a $1.5b market cap, as their Chief Financial Officer.

I would like to thank Bernie for his leadership and dedication. He has led programs to achieve Sarbanes-Oxley compliance, transformed our accounting and financial reporting processes, and built an exceptionally strong team. With his help and leadership, we have increased our financial flexibility. And we have acquired key technology, through both internal and external investments. Bernie has been a great asset, and made valuable contributions. We wish him the best at Sybron. I will turn the call to Bernie, who will review the financial statements in greater detail. Bernie?

Thank you Paul. I would also like to thank the UEI investors and all the employees at UEI for what has been a great work experience. During my tenure, UEI’s potential for becoming a leader in the digital home market became apparent. And I am proud to have assisted the Company in leveraging its existing platform into new target markets, in order to facilitate long-term profitable growth. I am confident UEI’s growth and recent success will continue.

Before I deliver the detailed analysis of the quarter, there are two very important elements to discuss. First, I’d like to provide an update on our Sarbanes-Oxley compliance efforts. We have completed our review of key internal controls, and have completed our testing of those controls, with the exception of the 10K process, which will be completed on March 16. With respect to those controls that we have tested, we have concluded that our controls are adequate, and we’re operating effectively at year-end with no material weaknesses.

Second, as Paul mentioned earlier, we have decided to discuss our business across two new categories. In the past, we provided revenue in two categories - retail and technology. Today we will provide revenue for the former categories of retail and technology, as well as new categories of consumer and business. We do have products in the consumer category (indiscernible) products, such as remote controls, audio visual accessories, and our forthcoming NevoSL.

In our business category, software and hardware is sold as part of a solution, such as a set top box. Our consumer category will now include all that was formerly included in our retail category - Europe retail, direct import, royalties from our One For All products sold in the United States. This category will also include our sales to custom installers, including our new Nevo SL. Private label, which was also part of the technologies line before, will now be in consumer.

The business category will now include the majority of what was formerly included in our technology category - subscription broadcasting, OEM product, OEM royalties, and call center revenues, less the private label, which is now part of the consumer category. The business category will also include central devices revenue. And now onto the details.

For the fourth quarter 2004, net sales were $51.7m, up 46%, compared to $35.5m for the same quarter last year. The largest increases were in OEM and Europe retail. The appreciation of the Euro as compared to the U.S. dollar also positively impacted sales. Using our traditionally reported revenue categories, revenue for the quarter was approximately 63% technology revenue, and 37% retail revenue.

This compares to a revenue mix in the same quarter last year of 58% technology and 42% retail. Technology revenue was $32.5m, up 58% compared to the fourth quarter of 2003. Retail revenue of $19.2m was up 28% compared to the prior year’s quarter. Using the new categories, consumer revenue was $20.1m, or 39% of the total. And business revenue was $31.6m, or 61% of the total. This compares to 45% consumer category, and 55% business category revenue mix for the fourth quarter of 2003, and represents 25% growth in consumer category revenue, and 62% growth in business category revenue.

Gross profit for the fourth quarter was $20.2m, or 39.1% of sales, in the range of our guidance, which was 40%, plus or minus one point. It was up from the fourth quarter 2003 gross profit rate of 37.9%, due to a number of variables, including the strengthening of the Euro as compared to the U.S. dollar.

Operating expenses were $14.5m for the fourth quarter of 2004, at the high end of our guidance of $14m to $14.5m. The reason operating expenses fell toward the high end of the range included Sarbanes-Oxley compliance costs, which were $1.2m for the quarter, and freight costs related to the higher sales volume.

Operating income for the fourth quarter was $5.7m, an increase of 74%, compared to the $3.3m during the fourth quarter of 2003. Income before taxes was $5.5m, compared to $3.7m last year, an increase of 47%. The effective tax rate was 32%, down from 34% in the fourth quarter of 2003. The two point decrease was primarily related to true-up of cash provisions for state and Federal R&D tax credits.

Net income was $3.7m or $0.26 per diluted share, compared to $2.5m or $0.17 per diluted share in the fourth quarter of 2003. Turning to the year 2004, net sales were $158.4m, up 31% from $120.5m for the year 2003. Using our traditionally reported revenue categories, revenue for the year was approximately 66% technology revenue and 34% retail revenue, which is the same as 2003.

Sales in our consumer category contributed 38% of revenue. And sales in our business category contributed 62%. Net income for the full year 2004 was $9.1m, or $0.65 per diluted share, an increase of 45%, compared to the $6.3m or $0.45 per diluted share for 2003.

In Q4 2004, we repurchased 495,000 shares, for approximately $6.7m. On October 1, we purchased Simple Devices for $12.5m in cash. We ended the year with cash, cash equivalents, and short-term investments of $42.5m. We continued to improve accounts receivable performance as DSOs improved to 67.5 days at December 31, 2004, down from 77.2 days at December 31, 2003.

We also continued to improve inventory performance, as inventory turns improved to 5.3 turns at December 31, 2004, up from 12.6 turns at December 31, 2003. And now for our guidance. Before I begin detailing our guidance, I would like to note we will be providing guidance ranges for total revenue, consumer category revenue, business category revenue, and as we look at our guidance scenarios, there are a number of scenarios that are being evaluated, that led us to this guidance range.

Although possible, it is improbable that the low end scenario for each category occurs, or the high end scenario for each category occurs. Take that into account when determining the total revenue range. Therefore, the total revenue range will be narrower than the sum of the revenue ranges for these individual categories.

For the first quarter of 2005, we expect revenue to range between $39m and $42m, which equals growth of 20% to 29% over the $32.6m of revenue recorded in the first quarter of 2004. Consumer category revenue is expected to range between $11m and $13m, and business category revenue is expected to range between $27m and $30m.

For the quarter ending March 31, 2005, we anticipate margins will be approximately 39% of sales, plus or minus one point. This is consistent with 38.8% in the first quarter of 2004. Operating expenses are expected to be between $13.5m and $14m. The expected growth in operating expenses when compared to the first quarter of 2004 is primarily related to the acquisition of Simple Devices, Sarbanes-Oxley compliance, increased head count and recruiting fees, freight, and depreciation and the Euro.

The tax rate is expected to be 36%, two points higher than Q1 of 2004, due to the greater percentage of profits earned in higher tax rate countries. EPS is expected to range from $0.12 to $0.15 per diluted share, which would be an increase of up to 13% when compared to $0.13 per diluted share in the first quarter of 2004.

For the full year 2005, total revenue is expected to range between $175m and $185m, which is 10-17% growth over 2004. Consumer category revenue is expected to range between $70m and $80m. And business category revenue is expected to range between $100m and $110m.

Operating expense is expected to be between $54m and $56m. The tax rate is expected to be 36%, up from 33.6% in 2004, due to a larger percentage of profits expected from high tax rate countries.

EPS for the year is expected to range from $0.75 to $0.85 per diluted share, which would be a 15% to 31% increase compared to $0.65 for diluted share in 2004. And 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. Clearly with sales up 31%, and earnings up 45%, 2004 was a great year for UEI. Our success was the result of the hard work by the 300 UEI employees around the world that helped UEI enhance our technology base, develop new products, and expand our market reach. Our results also reflect our close watch on operational costs, and our work to reduce product costs through engineering redesign and procurement efforts.

UEI has numerous strengths. But it’s our technology and intellectual property that give the company a strong competitive advantage in the markets we serve. Core to much of our work is our infrared database of codes that enables UEI to speak the language of virtually any device in homes around the world.

Our database grew by 19% this past year, and now contains over 204,000 codes, which is far beyond any known database. As a result, our database is clearly becoming the gold standard for control. In fact, we have almost tripled our annual shipments of UEI powered micro-controller ships, to over 40 million in the past three years.

Infrared, however, is just the start of our technology. We are hard at work on digital control technology and developing a broad portfolio of intellectual property. In Q4, we issued two patents, filed for six, and, with Simple Devices, acquired 17 issued and pending patents, bringing our total issued and pending patent count to 137.

Much like our database, our IP brings value to companies that license our technology. We are pleased that during the fourth quarter Logitech became a licensee, after settling the patent infringement lawsuit we had against them. We are also pleased to have signed universal remote control as a licensee, after settling in January of this year an infringement case we had against them as well.

Regarding sales, I will review our activity by the consumer and business categories. Let’s start with our consumer category. Our European and international retail business had a strong showing for the year, with double digit growth, which offset slight decreases in our private label and our direct import sales in the United States.

In Europe, our One For All line of remote controls, digital antennas, and audio visual accessories, have clearly benefitted from our marketing and media outreach, which garnered coverage in over 110 European media outlets during the fourth quarter.

While the U.K. grew tremendously during the year, we were, however, affected by slower than typical Christmas season in that market. Nevertheless, during the fourth quarter, we broadened our product line with second generation of Chameleons, and also expanded geographically with a broader presence, mainly in Italy.

Additionally, our line of digital antennas also continued to see demand, as Europe has started to convert to digital television programming. And in the UK and Ireland, our private label Sky branded business also grew substantially.

As we look toward 2005, we have a strong product line up in our consumer category, including our traditional products, and the forthcoming NevoSL, which will ship in the second quarter. NevoSL is designed to serve the consumer installer or CEDIA market, as it’s commonly called.

Why CEDIA? Because as the home has become increasingly complex, people are asking for help getting everything to work. In fact, in a recent survey of over 1,000 Americans, 87% reported they would seek the help of a professional to install equipment in their home. That’s where NevoSL and the custom installer enter the picture.

NevoSL is designed to deliver complete audio, visual and digital media control, and customize it specifically for an individual home. The customization power of NevoSL lies in Nevo’s Studio, which is an application that runs on the PC. With easy to use drag and drop functionality, an installer can deliver a completely customized controller within an hour or so, compared to the competition, that can take more than 10 hours to complete.

In addition, NevoSL is powered by our software, database, and patents, ensuring NevoSL will control everything in the home with ease. In January, at the CES Show in Las Vegas, and at the Integrated Systems Europe show in Amsterdam, we unveiled NevoSL to the public. And the reaction has been extremely positive.

At CES, Nevo won the prestigious Best of Innovations Award from over 800 new product entries submitted for the award. Additionally, NevoSL was covered by Business Week, PC World, CBSNews.com, the BBC News, and many others.

The CEDIA market offers a whole new growth opportunity for UEI. Parks & Associates, a leading consumer electronics consultancy, estimates the market at $7.2b in 2004 sales, with over 30,000 custom installers working in the United States alone. More importantly, they estimate the CEDIA market spent approximately $200m on remote control products in 2004, which is expected to grow to $250m in 2005.

However, with any new market, we face entrenched players. Nevertheless, based on the feedback from installers and end users, NevoSL has some strong selling points, including Nevo Studio’s ease of use, built in WiFi for media management and network control, a sleek, consumer friendly design, and a compelling value, with an estimated street price of $799.

We are in the process of building our distribution network, and have signed the leading distributors in France, Spain, Australia, South Africa, Switzerland, Norway, Benelux and Germany. Additionally, we expect to have distribution partners signed in the United States, Canada, the UK, Italy, and Austria over the next couple of months.

Moving on to our business category, in subscription broadcasting, we are also encouraged by the recent demand for UEI product and technology. It appeared that North American and international markets are on track with their digital roll out. And we have seen solid demand for our line-up, to support new DVR and HD set top boxes entering the market, in addition to traditional digital boxes.

Motorola just announced their broadband communication segment enjoyed their best quarter in three years. And Scientific Atlanta announced a 72% increase in year over year sales, in their DVR business. Also, around the world Sky and DirecTV have been rolling out new boxes.

While our success in subscription broadcasting has increased our overall sales, it has resulted in increased air shipments during the quarter. We are working to build our production capacity to lower our air shipments, but do not foresee the impact of these efforts until the second quarter of this year.

Finally, we are also making progress selling our products and technology into the consumer electronics industry. And you should look for some announcements in the coming quarter. Additionally, we are encouraged by recent announcements coming from the telecom industry, as they look to deliver digital entertainment, using their pipes into homes. And we are actively working on these accounts. Overall, operationally we had a very successful year, and are looking forward to a strong 2005. With that, I would like to turn the call back over to Paul for some closing remarks.

Thanks Rob. Rob just provided detailed examples of our 2004 successes, expanding our customer base, and deepening our existing relationships within our core business, and in our newer advanced technology markets. In 2005, we expect to continue building this momentum.

We have built a great business serving our core customers in the cable, satellite, OEM and retail industries, through the phenomenal effort or the worldwide UEI team, we have continued to innovate and lead in our core product lines. And we have begun to build a solid foundation for the future, by leveraging our IT and software expertise, to create products that will allow consumers to enjoy their digital pictures, music and videos on any TV or audio device in their home. And, of course, control the device through which they’re enjoying the media.

Some time ago we articulated a strategy of building technologies and products that helped consumers to connect, control, and interact within an evermore complex home. Today, with our next generation products, we are well positioned to capitalize on the home connectivity market, as it begins to take flight.

In closing, we are proud of our accomplishments in 2004. And we look forward to greater accomplishments to come. The core of our business, control device technologies and accessories, is as strong as it has ever been. Looking to the connected home market, the investments we have made over time are proving very effective. We believe our success in both of these areas mean only better things to come for UEI in 2005. Stay tuned.

Thanks for listening. We’ll now open up the call to questions.

(CALLER INSTRUCTIONS). Our first question comes from Murray Arenson of Ferris, Baker, Watts.

Thanks. Good afternoon. A couple of questions first, and breaking down the finances and the expenses a little bit. Can you tell us what the expenses were associated, specifically with Sarbanes-Oxley this quarter, and Simple Devices, and what those are going to look like over the coming quarters?

Yeah. Sarbanes-Oxley was over $1m, about $1.2m for the quarter. Those costs will continue on in Q1, as we wrap up our year-end compliance efforts. And then from that point forward, we expect them to be significantly lower as we maintain compliance with Sarbanes-Oxley. So Q1, we’ll still have a fairly significant number. It’s embedded in the guidance.

And Simple Devices, we don’t break that out separately. So it’s -- we expect it to be near break-even for Q1, and slightly accretive for the year.

And those operating expense levels for Simple Devices, is there anything additional to be squeezed out of that? Or do those run as they’re at going forward?

No. We really didn’t acquire it to remove any costs from the organization. So we expect them to be fairly stable.

What about a contribution from currency translation this quarter?

Yeah. Our gross margin, if currency had remained flat from Q4 of 2003, would have been about 37% versus 39.1%.

Got you. And then if I could ask a couple questions on driving the top line. What about DirecTV? Can you give us order of magnitude as far as contribution this quarter, and going forward, how big a deal that is? And also, the impact that DirecTV has on kind of average ASPs and margins?

Yeah. We don’t actually break it out for customer. But DirecTV has definitely been a strong customer, as we’ve started to ship this past year. And then into this year, they continue to have quite a strong showing.

And do you know, as they move forward with their DVR push this year, can you kind of give us a flavor of what you have built in there expectation wise? And I am also curious, specifically, as they get into the kind of home media option that they’re talking about, if that is additional device opportunities for you guys.

Well, we are the intelligence inside the remote controls for all of DirecTV’s remote controllers. And we are also working with DirecTV and other partners to ship radio frequency technology, so you can put your DirecTV box maybe in a cabinet or these things. And we’re starting to ship that this quarter as well. So we’re working with them on a number of levels. And we’re close to them as one of our larger customers.

Great. Thanks a lot. And good luck to you Bernie.

Thank you very much.

Our next question is from James Ko of Roth Capital Partners.

Good quarter guys. Can you explain the reason why R&D expense has declined sequentially? And should we look forward to similar amounts?

No. The R&D expense we would expect to grow slightly going forward. And that was just mainly due to some adjustments in prior quarters. But we’ve been continuing to add on to the R&D staff as time goes on. So we had several hires within the quarter.

How about the results within the quarter? How – ? What are some of the reasons in regards to how it declined sequentially?

The R&D expense?

Yeah.

Again, it’s -- the payroll expense for R&D just hasn’t declined. It really relates to prior quarter’s adjustments that took a spike up.

Okay. Secondly, can you provide a progress in regards to the Orion product? And have you secured any contracts as of today?

Yes. We’re actively in the marketplace, working with a number of consumer electronics vendors, even in the CEDIA market space with our new Orion product. And so far we’re doing quite well with it. And the sales cycle is anywhere between three to six months. So we hope to update you on our progress.

Thank you. And good quarter.

(CALLER INSTRUCTIONS). It appears that there are no further questions at this time. Please proceed with your presentation or any closing remarks.

Okay. I want to thank everybody for participating in the call today. And we look forward to speaking to you throughout the quarter and, of course, on the next conference call, to give you a further update. Thanks very much.