Universal Electronics Inc (UEIC) 2005 Q1 法說會逐字稿

Good afternoon, and welcome to the Universal Electronics First Quarter 2005 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following managements prepared remarks, we'll hold a Q&A session. [OPERATOR INSTRUCTIONS] If anyone has difficulty hearing the conference, please press star 0 for operator assistance. As a reminder, this conference is being recorded today, Thursday, April 28th, 2005. I would now like to turn the conference over to Moriah Shilton. Please go ahead, ma'am.

Thank you, Christie, and good afternoon, everyone. Think you for joining us for the Universal Electronics first quarter 2005 earnings conference call. By now you should have received a copy of the press release. If you have not, please contact Lippert Heilshorn and 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.UEIC.com until April 28th, 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, and international, the number is 706-645-9219. Enter access code 5529733.

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.UEIC.com, shortly after the call. Where it will be retain 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 cause of this conversation call, management may 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 Nevo SL, the continued convergence of the Company's technology, and the continued sales and operating growth and strength in 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 and 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 S.E.C., including the annual report on form 10-K for the year December 31st, 2004. These documents contain taken and identify various factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

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

Good afternoon, and thank you for joining the call today. I will begin the call with a brief summary of the quarter, and then provide a review of the financials, after which Robb will give an operating activity update, and then I'll conclude the prepared remarks with our vision of 2005 and then begin a question and answer session.

For the first quarter of 2005, we reported revenue each 41.5 million, up 27% compared to the prior year quarter, driven by strong performance in our business category, primarily amongst subscription broadcasting customers. One of our long-term goals has been to diversify our customer base and product line to create balance and build power and diversity in the markets we serve. This quarter we continued that mission. On the product front, as many of you know, the first month of the quarter, UEI had booths at both the international Consumer Electronic Show, or CES, in Las Vegas, and the Integrated Systems Europe show in Amsterdam, where we unveiled Nevo SL to the public.

General consensus at the shows was 2005 would be the year for digital media. We concur, as we have received extremely positive feedback on the next generation of our Nevo line. We are also pleased to be on track with our Nevo SL official launch to the burgeoning [Cedia] and customer installer markets. Robb will update you on our progress in a moment.

Now I'll review the financials for the quarter. Net sales for the first quarter of 2005 were 41.5 million, up 27% compared to 32.6 million for the same quarter last year. The largest increases were in our business category.

Starting with the fourth quarter 2004, we began using two new revenue categories consumer and business. Products in the consumer category are end products, such as remote controls, audio visual accessories, and our forthcoming Nevo SL. The consumer category includes sales to consumers of a complete product through retail and custom installer channels. Our business category including software and hardware that is sold as parts of a solution, such as with a set top box or a plasma TV. The business category includes sales to a diverse array of subscription operators, consumer electronics manufacturers, and computing companies.

Consumer category revenue was 11.9 million, in line with guidance of 11 to 13 million. Consumer category revenue was 29% of the total. Business revenue was 29.6 million, in line with guidance of 27 to 30 million. Business category revenue was 71% of the total. The first quarter 2004 mix was 44% consumer category, and 56% business category revenue.

Gross profit for the first quarter was 15.7 million, or 37.9% of sales, slightly below our guidance of 38 to 40%, and lower than the first quarter 2004 gross profit of 38.8%. The difference is due to a number of variabilities. This quarter's product mix included a greater amount of sales to large subscription broadcasting customers, which carry a lower than average margin, and we incurred higher air shipments, which Robb will talk about later in the call.

Operating expenses were 14 million for the first quarter of 2005, in line with our guidance. Research and Development was 1.6 million, compared to 1.1 million last year, representing about a half a million dollar increase in additional investments. In addition, operating expenses related to Simple Devices were 816,000, as simple devices was acquired in October 2004 we did not have expenses related to it in the first quarter of 2004. The expense attributable to our successful completion of Section 404 compliance work for 2004 was 600,000, which was 400,000 greater than the first quarter of 2004. As this was our first audit, we believe it required more activity than will be necessary in the future. Therefore, we anticipate our costs associated to Section 404 will be lower for the rest of the year compared to last year.

Other income was 952,000, which included a positive foreign exchange impact of approximately 944,000 pretax, compared to a 498,000 pretax gain in the first quarter of 2004. Income before taxes was 2.9 million, up from 2.7 million last year. Net income was 1.9 million, or $0.13 per diluted share in line with guidance, compared to 1.8 million, or $0.13 per diluted air is the in the first quarter of 2004. The effective tax rate was approximately 35%, compared to 34% in the first quarter of 2004.

Turning to our balance sheet review. During the quarter, we repurchased approximately 106,000 shares for approximately $1.8 million. We ended the quarter with cash, cash equivalents and short term investments of 41.2 million. DSOs were 72 days at March 31, 2005, up from 68 days at March 31, 2004. Net inventory turns were 4.2 turns at March 31, 2005, up from 4.0 turns at March 31, 2004.

And now for our guidance. For the second quarter of 2005, we expect revenue to range between 43 and 46 million, which equals growth of between 26 and 35% over the 34 million of revenue recorded in the second quarter of 2004. We expect business category sales to range from 29 million to 32 million, and consumer category sales to range from 13 to 15 million. For the quarter ending June 30, 2005, we anticipate margins will be approximately 39% of sales, plus or minus a point. Operating expenses expected to be between 14 and 14.5 million. The tax rate is expected to be 35%. EPS is expected to range from $0.14 to $0.17 per diluted share. Which would be a 17 to 42% increase when compared to $0.12 per diluted share in the second quarter of 2004.

For the full year 2005, our total revenue is expected to range between 180 million and 190 million, which is a 14% to 20% growth over 2004. Consumer category revenue is expected to range between 72 million and 82 million, and business category revenue is expected to range between 102 million and 112 million. Operating expense is expected to be between 56 million and 58 million. The tax rate is expected to be 35%. 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 per diluted share in 2004.

Now I'm turn the call over to Robb Lilleness our President and Chief Operating Officer to discuss the operations of the Company.

2005 promises to be an exciting year. For the quarter, I will give on update of our core technology, review our activity by business and consumer categories, and finish with our plans for the Cedia consumer installer market. Let's start with technology.

Our database continues to grow as new devices flood into homes around the world, further strengthening our competitive advantage in the markets we serve. At the end of the quarter the database contained over 210,000 function codes an increase of over 18% over the previous year. In addition, during the first quarter, we were issued two new patents, filed for four, bridging our total issued and pending patents account to 141. We believe this the the broadest portfolio the home control space. Not surprisingly, our licensing revenue has increased over the past three years. This portfolio of technology and patents also is critic until setting us apart from our competition and driving sales in both our business and consumer categories.

Our business category commercializes our technology and a number of ways. Full remotes, micro controller chips, and IP licenses. Some examples include our chip in hitachi plasma TVs, a remote control distributor with Comcast set-top box, and our software and Windows XP Media Center PCs. During the first quarter, the big driver of our business category of revenue was subscription broadcasting. Our early development of DVR product with TiVo and Replay TV has led us to success as new set top boxes rolled out in subscription broadcasting around the world. The industry is clearly in a new cycle of set-top boxes and the rapid adoption of both DVr and HDTV boxes has resulted in strong sales for UEI. However, at the end of last year and into the first quarter, we experienced dramatic changes in from our customers in terms of with product mix from standard digital to new boxes, which resulted in higher air shipments. Consequently our freight costs were higher than expected, and well above the historic lows we achieved in 2004. Moving forward, we have built additional capacity for these products, and we expect to return to a normal air ocean freight mix starting around June.

We are also making progress selling our product and tell into the consumer hecktonics industry. Even with today's complex devices entering the home, the remote that comes with a new plasma TV, for example, will most likely only control that particular device. We call these dedicated remotes. Much like we did in cable years ago, we are working hard to convert the consumer electronics industry from dedicated to universal remotes by adding our database of codes to their products. Over the past three years, we have developed solid relationships in Asia and progressed to win some small initial projects with well recognized companies. While we are far converting the industry to universal functionality, we are making progress, and you should look for some announcements during the coming year.

While we experienced strong demand in our business category offerings, our consumer category did not grow as fast as in past year's. In Europe, sales slowed slightly on a year-to-year basis. The UK retail market slowed considerably, however, during Christmas last year, and that has continued into the first quarter, which has affected our accessory sales. At the same time, however, we have experienced a slight uptick in sales in Germany and other countries, but this did not outweigh the slow down in the UK. As we forecasted in the United States, retail sales have been slower in both our direct product and private label businesses when compared to the previous period last year. On both fronts, we have plans in place to support sales for the remainer of the year, including new product introductions, increased promotional activity, and a PR campaign starting with Father's Day, and continuing through the back half of the year.

Our consumer category also includes the Cedia or consumer installing market place. As the home has become more and more complex, the Cedia market has grown from a cottage industry to a potent force in consumer electronics and retail. Here are a few data points on Cedia.

The industry enjoyed 17.2 billion in sales last year, including approximately 200 million of that in remote controls. Also, increasingly retailers are adding custom installation services from the likes of Best Buy to Tweeters, and there are over 30,000 Americans working in the custom installation market. To date, UEI has had very little presence in the Cedia market.

However, this is all about to change with the launch of Nevo SL. This revolutionary product is designed to be the handheld for the broadband home, delivering complete audio, visual, and digital media control, and it can be completely customized for an individual's home. The market for advanced broadband enabled controllers is enormous, and it's an enormous new opportunity for UEI. It will take time, but we are well on our way. Nevo SL will launch in the second quarter, and we have built a global distribution net work of 14 leading Cedia distributors to ensure the successful introduction of the product.

We are off to a strong start in 2005, and we look forward to an exciting year ahead. I will now turn the call back over to Paul.

Thanks, Robb. As predicted, the face of home control continues to change. Consequently, UEI continues to evolve, as well.

For example, first we developed Nevo software as an embedded application for infrared control and and then digital media control. Now we have the Nevo SL, providing the easy and seamless ability to control devices and content in the increasingly connected home. Also with the acquisition of our Simple Devices capabilities, now can imbed digital media capability into consumer electronic devices and into automobiles to make them smarter. In addition, we continue to add to the largest electronics code database, as well as secure more patents.

Looking ahead, we see markets with challenges and markets with opportunities. Over the past 18 years, we have experienced both. We will continue to forge ahead in our core markets of subscription broadcasting, OEM, and retail. It's important to remember that whether it's a new HDTV cable box, a DVR, a media center PC, or a surround sound system, each new device or node enters the home with another device and increases connectivity complexity. UEI solved this problem and gives consumer the power to wirelessly connect, control, and interact in an increasingly connected home.

Thanks very much. We're ready for question and answer now.

[OPERATOR INSTRUCTIONS] Your first question is from Scot Ciccarelli of RBC Capital Markets.

Hey, guys, how are you?

Hey, Scott.

Couple of questions. First, do you guys happen to have year-ago figures for the consumer and business segments as you now look at it?

We do.

Want to share it?

Of course, yes. We did last year, in consumer, in Q1, we did about 14.5 million, and in business, we did 18.1. Say 14.5 and 18.1.

These are 1Q figures, Paul?

Yes, Q1.

Do you have it for Q2 and full year just so we know what we're looking at.

Yeah, I have Q2, but not full year. Q2 is 12.8 and 21.2.

Thanks, that's helpful. And I guess the second question is, I know that the consumer business tends to be back-end loaded anyway, but it looks like just as a percentage of the full year revenues, you guys are looking at consumer is going to become a much more meaningful part in the second half year. Is a lot of that dependent upon Nevo, or there are other things going on there that might be influencing that?

Well, Nevo is one product that we're coming out with, obviously, that's a very important product, but we're also coming out with hybrid Chameleon, a Chameleon with radio frequency, and then of course it's the traditional seasonality that you pointed out.

So on the new product front, it will mostly be Nevo and then the hybrid Chameleon?

Yeah, a number of Chameleons.

Any way we should be thinking about Nevo, it's going to be -- you're actually selling the product, so it's not a licensing deal, but any kind of deal for what kind of contribution that could potentially have this year?

It will be in the millions, but the low -- the low millions. I think one thing that really speaks to that is there is a technology section of the Wall Street Journal this Monday, and they spoke of all of the various industries that are coming in. A lot of them have computer or enterprise class offerings, and Nevo is really the first product that actually controls not only traditional devices, but also digital media, as well. So in the short-term, it's going to, you know, in the millions, but longer term, this could be a very exciting opportunity for us.

Okay. And then the last question, and then I'll turn it over to the floor, any change in tone from your, you know, subscription broadcasting customers? I mean, you said there was a change in mix, but I mean, has there been a change if pace of installations or just now they want more advanced features, so it costs you more in air freight, and that's all there is to it?

Yeah, it's more towards the latter part of your statement. We really had forecasted, in working with them, forecasted more traditional remotes for the traditional -- I shouldn't say traditional, but the more digital media, digital boxes, digital cable boxes, and a rapid adoption of DVR and HD has really altered that mix, and that's what resulted in the air shipments.

So no change in pace one way or the others, just a mix change

There there's make little bit of an uptick in the change of pace, but it's really the change in mix.

Great, thanks a lot, guys.

Your next question is from Michael Coady of B. Riley.

Thanks, good afternoon.

Hi, Michael.

With the gross margin, you mentioned the -- you talked about this extra capacity you're putting on line for the fourth quarter, and you think that it will be sort of freight costs will be normalized by June, so do you think there's still going to be some impact to the dream important the first two thirds of the quarter? Is there a chance that that might more toward the negative point relative to the --

No, I mean clearly more emphasis is -- we try to keep to that a minimum, but that's all built into our guidance that Paul gave.

Okay. Thanks. And then -- I mean, I guess it sounds redundant to and a question, you've already given gross margin guidance, but what about the extra promotions on the retail side? Are there any offsetting factors where that might cause some margin pressures where you have some pick up someplace else?

No, actually we're pretty savvy when it comes to the market promotions. We share that across the board with our distributors and our retailers as well.

Okay. Looking at R&D, how much of the R&D, or how much of the cost in the first quarter in general related to Simple Devices?

Well, they're not included in the R&D line, so the R&D moving from 1.13 to 1.6, none of that is Simple Devices.

Okay.

They're in SG&A.

Okay. On Comcast's call they mentioned the potential to go all digital at some point. First of all, they talked a lot about the increase in the DVR and HD boxes driving their results, and also the potential to go all digital with kind of a low-end set-top box, which they refer to maybe as a converter or low-end set-top. Is that something that would be an equal or you know great opportunity for you if they do in fact go all digital and will out low-end set-top boxes, or would that be kind of a dumber mode, or something you view as big opportunity?

Well, no, again I would presume that even if they went with a more traditional digital box, it still results in controllers being shipped.

Is that something that you're excited about? You're talking about going from 40% digital penetration, now they're talking about 50 to 55%, to essentially 100%. It seems to be that would be a fantastic opportunity over the next several years

Absolutely.

Okay. Thanks a lot, guys.

[OPERATOR INSTRUCTIONS] Your next question is from Murray Arenson of Ferris, Baker Watts.

Thanks. Good afternoon, guys

Hi, Murray.

Kind of a follow-up to one of the previous questions. Can you or would you quantify for us what the impact was either in terms of margin or dollars, the increased air shipments for this past quarter?

Well, it affected two things, Murray, actually. There were -- don't have the exact numbers, but there were hundreds of thousands on the inbound side, so it affected margin. It also was in SG&A on outbound.

Okay.

So there were two separate impacts. One is inbound air shipment. The other is outbound.

Okay. Can you talk a little bit about the Cedia market and how you expect that grow? Is that something that we'll see grow on kind of a unit basis, or does that happen with larger contracts with and of the builders, or how should we be looking for that?

There's a number of aspects of the Cedia market. What we are focused on is the custom installation. Not necessary lit the whole home experience where they're putting in Cat5 wiring when you buy a brand new home. This is really looking at those installation services that are offered at Tweeters and a Best Buy and Magnolia Hi Fi, all the way down to the guy that sells high end audio in those better neighborhoods around America and frankly around the world. And there's about, you know, 30,000 people working in that industry. $200 million was spent last year in remote controls in that space, and it's estimated that it will be around $250 million for Cedia remote control sales this year.

Okay. And if I can reference the Comcast call, too, maybe you can help me put this in the context of their guidance. Because a couple thing I heard on their call were their expectations now for the high-end boxes are 1.5 to 2X what they were previously, and then in addition they said with this migration to more of the high-end boxes, they're saying more replacements of the old boxes. So I'm wondering in you can, like I said, but that in context within your guidance, your expectations as you see it right now?

Well, it's definitely in our guidance for the year, but what -- what was somewhat surprising to us was that -- how fast the shift was from a traditional digital set-top box to a DVR or an HD, or an HD DVR box, and that's -- the results were higher air shipments, and we hope to get that basically on track around June.

Looking beyond the numbers, we think this is a very positive -- very positive development.

Gotcha. And a couple of housekeeping things before I hop off, please. Do you have a CapEx number and a depreciation number for the quarter?

Yeah, depreciation was just under $900,000, and CapEx, I think, was above a million. No, it was about 950.

Okay. Excellent. Thanks a lot.

[OPERATOR INSTRUCTIONS] Your next question is a follow-up from Scot Ciccarelli of RBC Capital Markets.

Hey, guys, just a follow-up on the Simple Devices. Is there any -- you know, any notable revenue coming from Simple Devices, or is the expenses associated with that appear a drag at this point?

Well, sure, they have -- they have revenue currently, but, you know, we view it more in Q1, particularly, as an investment. We expect revenue for the rest of the year. The think to really look at on Simple Devices is our progress towards customer wins. You know, we've said before, you've heard us mention a few times now, automobile. The automotive market. In that area, when we attain a design win, what's going to happen is we're not going to recognize anything by NRE revenue on that this year, because those contracts would be for future model years, beginning in late '06 into '07 and '08. So, you know, our view on this is long-term, particularly for that market, we're now looking to make design wins in that area, and again, that should be the thing that should be on the top of investors' minds as we move through the year, looking for those types of announcements from Simple, or from UEI Simple.

Sure. Ask and is there anything to relate on that front at this time, Paul?

Well, no, other that an we are item engaged in discussions with a number of automotive companies, including Tier 1s, and again more on that as the year progresses.

Okay. Great. Thanks.

[OPERATOR INSTRUCTIONS] There are no further questions at this time. I will now turn the call back over to management for any closing remarks.

Okay. I want to thank everybody for participating today, and we'll probably be speaking to you over the course of the quarter, and of course on our next quarter's conference call in July. Thanks very much.

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