Universal Electronics Inc (UEIC) 2005 Q2 法說會逐字稿

Welcome to the Universal Electronics second-quarter 2005 earnings conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. (Operator Instructions). As a reminder, this conference is being recorded today, August 2, 2005. I would now like to turn the conference over to Ms. Moriah Shilton. Please go ahead, ma'am.

Thank you Derek and good afternoon everyone. Thank you for joining us for the Universal Electronics second-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 & 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 August 2, 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 706-645-9291. Enter access code 783-6556.

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, development and success of products and technologies including the recently announced NecoSL; the recently announced new contracts with existing customers and new market penetration; the continued convergence of the Company's technology and the continued sales and operating growth, including in the subscription broadcasting and cable and satellite markets and the strength of the Company's financial position. 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 10-K for the year ended December 31, 2004 and the quarterly reports on Form 10-Q filed since that time. These documents contain and identify various factors that could cause actual results to differ materially from those constrained in our projections or forward-looking statements.

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

Thank you, Moriah. Good afternoon and thank you all for joining the call today. I will start with a brief overview of the quarter and then provide a review of the financials, after which Rob will provide an operating activity update, and then I will conclude the prepared remarks and begin the question-and-answer session.

The home has continually become more complex which has changed the landscape of the living room with the most recent trend being the transition from analog to digital. We continue to execute on our strategy to build our presence as a wireless control technology leader, enabling consumers to wirelessly connect, control and interact within an ever-increasingly complex home. This quarter, we accomplished a number of milestones.

Foremost, we achieved the highest sales for any second quarter in the Company's history with record 44.3 million in revenue which represents a 30% increase compared to the prior year quarter. Our strong subscription broadcasting sales in the second quarter were driven by our continued partnership with the leaders in subscription broadcasting and the increasing transition to HDTVs and DVRs.

In the consumer electronics market, we expanded our marketshare, announcing additional contracts with some of the biggest names in the industry. We also made progress in penetrating the fast-growing CD (indiscernible) custom installer market. We began shipping NevoSL in June and it was officially launched on July 25. Rob will update you on our progress in a moment.

Now I will turn -- I will review our financials for the quarter. As discussed in our previous SEC filings, we had a balance due from a former European distributor. This quarter, we determined it would be appropriate to record a onetime write-down of the balance. We also chose to report both GAAP and pro forma results as we believe pro forma reporting provides a more accurate measure of quarter-over-quarter and year-over-year financial performance as it excludes the effects of this unusual onetime write-down of the amount due from the former distributor. A table reconciling the difference between GAAP and pro forma net income is included in our second quarter results press release which is available on our web site.

Net sales for the second quarter of 2005 were 44.3 million compared to 34 million for the same quarter last year. Business category revenue was 32.5 million, slightly above the guidance of 29 to 32 million. The largest increases were with key subscription broadcasting customers.

Consumer category revenue was 11.8 million, below our guidance of 13 to 15 million as a result of slightly lower than expected retail sales and shipments of NevoSL beginning later in the quarter than expected. This quarter, business category revenue was 73% of the total the consumer category revenue was 27% compared to the second quarter of 2004 mix with 62% business category revenue and 38% consumer category. Gross profit for the second quarter was 15.7 million, up 22% on an absolute dollar basis compared to the prior year's quarter gross profit of 12.9 million. Second quarter 2005 gross profit was 35.5% which was below our guidance of 38 to 40% and lower than our second quarter 2004 gross profit of 37.9% primarily due to the quarter's sales mix.

Our higher margin category of consumer sales as mentioned was slightly lower than anticipated. More significantly, our business category, which posted stronger than expected sales, carries a lower gross margin. In addition, all of the demand above our prior expectations required air shipments. To address this issue, we have taken actions that give us confidence that with our expected business mix in the third quarter, gross margins should return to a normalized range of 37 to 39%. Rob will provide you with more detail about these activities later.

Operating expenses for the second quarter of 2005 were 14.7 million, including the 1.6 million write-down mentioned previously. Excluding this write-down, operating expenses were 13.1 million, below our guidance of 14 to 14.5 million. Research and development was 1.6 million compared to 1.1 million last year, representing a $500,000 investment in future product development. Other income was 1.4 million, which included a positive foreign exchange impact of approximately 1.3 million compared to a $7,000 loss in the second quarter of 2004. Most of this quarter's gain was related to a hedge we put in place during the quarter to protect the U.S. dollar value of our European business results for the remainder of the year. We put the hedge in place with an eye towards locking in the benefit that had accrued to UEI as a result of the dollar's decline during preceding quarters. The rise in the value of the hedge is due to how quickly the dollar strengthened after we put the hedge in place at the end of April. More information on this particular hedge will be available in the Form 10-Q that we will file shortly.

The effective tax rate was approximately 36% compared to 34% in the second quarter of 2004. For the second quarter 2005, GAAP net income was 1.5 million or $0.11 per diluted share and pro forma net income was 2.8 million or $0.20 per diluted share. For the second quarter 2004, GAAP and pro forma net income both were 1.7 million or $0.12 per diluted share. For the first six months of 2005, net sales were 85.8 million, up 29% from 66.6 million for the same period of 2004; GAAP net income was 3.4 million or $0.24 per share diluted share and pro forma net income for the six-month period of June 30, 2005 was 4.6 million or $0.33 per diluted share. For the six-month period ended June 30, 2004, GAAP and pro forma net income were both 3.5 million, or $0.25 per diluted share.

Turning to our balance sheet review, we ended the quarter with cash, cash equivalents and short-term investments of 38.5 million after we repurchased 250,000 shares for approximately $4.3 million. DSOs were 66 days at June 30, 2005, up from 64 days at June 30, 2004; net inventory turns were 5.2 turns at June 30, 2005, up from 3.8 turns at June 30, 2004.

And now for our guidance. For the third quarter of 2005, we expect revenue to range between 46 and 49 million which equates to growth of 15 to 22% over the 40 million of revenue recorded in the third quarter of 2004. We expect business category sales to range from 29 to 32 million and consumer category sales to range from 15 to 18 million. For the quarter ending September 30, 2005, we anticipate margins will be approximately 38% of sales plus or minus one point.

Operating expense is expected to be between 13.8 and 14.2 million. The tax rate is expected to be 37%. Both GAAP and pro forma EPS for the third quarter 2005 are expected to range from $0.18 to $0.22 per diluted share, which would be a 31 to 61% increase when compared to $0.14 per share diluted share in the third quarter of 2004. For the full year 2005, our total revenue is expected to range between 180 to 190 million, which is 14 to 20% growth over 2004. Business category revenue is expected to range between 121 and 126 million and consumer category revenue is expected to range between 59 and 64 million.

Operating expense is expected to be between 56 and 58 million, including the 1.6 million write-down. The tax rate is expected to be 37%. GAAP EPS for the year is expected to range from $0.69 to $0.76 per diluted share. We expect pro forma EPS to be between $0.78 and $0.85 per diluted share, which would represent a 21 to 32% increase compared to $0.65 per diluted share in 2004.

Now I went to the call over to Rob Lilleness, our President and Chief Operating Officer, to discuss the operations of the Company.

Thanks, Paul. UEI delivered a strong first half with almost 30% year-over-year sales growth. I will start my remarks with an update on our core technology and then we will provide a review of our business and consumer categories, finishing with our plans in the CDA custom installer market.

Looking first at technology, at the end of the second quarter, UEI's database contained over 216,000 function codes, an increase of 18% over the previous year. During the second quarter, we were issued two patents, filed for four, bringing our total issued and pending patent count to 145. We highly value our portfolio of technology and patents as it is one of the factors driving sales in both our business and consumer categories. This quarter, the largest driver in our business category was strong subscription broadcasting sales. With the advent of DVR and HD set-top boxes, this subscription broadcasting industry is clearly in an upgrade cycle. The good news is the rapid adoption of both DVR and HD boxes has resulted in strong sales for UEI. However, consumer demand for these new boxes has outpaced all expectations. As we noted to you during the last earnings call, we experienced dramatic changes in forecast from our cable and satellite customers from standard remotes to new DVR remotes. We acted quickly and early in the first quarter, we built additional tools and manufacturing capacity for these products.

However, we knew that shipping product via air was necessary to support our customers and to continue to build our market share. Based on forecast, we plan to return to a normal air/ocean freight mix starting around May, but additional orders extended our higher than normal air shipments into late June. Consequently, our freight costs in the first and second quarters were higher than our historical low achieved in 2004. Nevertheless, with increased manufacturing capacity, we're on-track to achieve lower air shipments during the second half of 2005.

The deployment of new boxes has also enabled UEI to engage with our cable and satellite customers regarding our call center services. As a result, we added a Comcast region to our customer roster during the first quarter of 2005 and in the second quarter, we added a Time Warner operator. In both cases, our call center is helping with new box deployments and service.

As mentioned during previous calls, we have been targeting the consumer electronics industry for future growth. We're pleased to inform you that we have demonstrated success in the second quarter as we signed agreements with Panasonic and Pioneer. Our announcement with Panasonic represents significant progress in penetrating the consumer electronics market. We've established a partnership with Panasonic not only to provide our database, patents and microcontrollers to them for their internal projects, but also to bring UEI's technology to other Panasonic trading partners in the consumer electronics industry. This relationship represents the opportunity to reach new customers and sell millions of UEI chips.

We're also pleased to have Pioneer as a customer. Pioneer will be using our market microcontrollers chips to enable Pioneer plasma TVs to interoperate with other devices, like DVD players and set-top boxes in the home entertainment center making it easy for consumers to control all of their devices from a Pioneer remote.

Our strong performance in our business category, however, was offset by lower sales in our consumer category. Traditionally, the second quarter is the weakest quarter for consumer-related products. This year, sales slowed slightly on a year-to-year basis. We have also seen some evidence and an overall slowdown in the UK retail market and also experienced slower than expected sales in Spain due to a lack of promotional activities by our largest customer there. However, we are already starting to see the Spanish market regain traction as they are working closely and we're working closely with our customers in the UK to continue to improve sales through a variety of methods, including promotions and media outreach related to the high consumer season. We expect to see overall improvement in the second half of 2005 as the third and fourth quarters are seasonally stronger quarters.

In addition, the successful launch of NevoSL will add to the consumer category's strength in the back half. NevoSL represents UEI's entry into a new market for the Company, the CDA (ph) custom installer market. This multibillion dollar market was estimated by Parks and Associates as having 200 million in control device sales in 2004 and they foresee this growing. To reach this new market, we have built a global network of distributors in 16 countries worldwide, including Avid (ph), the leading CDA distributor in the United States.

We started shipping product during the second quarter and see strong demand for NevoSL in the future. While we face competition from entrenched players, we strongly believe we have built a better mousetrap. With NevoSL, consumers can finally unify all audio, video, home control and digital media products in one graphical user interface. NevoSL is powered by UEI's world-leading infrared database, 16 issued and pending patents and Wi-Fi control capabilities. Thus, it is designed to not only deliver unmatched home theater and device controls, but also control the growing digital media collections in today's networked home.

This is the key as the addressable market for this class of customizable device is growing. There are 25 million wireless homes in the United States and 33 million broadband Internet homes in the U.S. alone. The market reaction has been strong. At a recent CDA tradeshow in the UK, NevoSL was seen as the newest, most cutting-edge product and booth traffic was particularly strong. At another CDA tradeshow in Australia, Nevo won best product of the show. We have also just finished a media tour supporting a NevoSL product launch and look forward to additional press stemming from these activities.

I mentioned in our last call we're off to a strong start in 2005. We now have reported a strong first half and anticipate continued growth for a second half in years to come. I will now turn the call back over to Paul for some closing comments.

Thanks, Rob. Almost 20 years ago, UEI was founded on the idea that audio-video wireless controlled data could be aggregated into a universal remote. Over the years, we have studied the wireless control markets and invested to capitalize on what we saw were future trends. As such, we've not only evolved in product and scope, we have led the market in control technology.

First, we began developing our infrared wireless handheld devices that control audiovisual equipment. Recognizing the power of simplicity in a complex home, we created a digital ink-like (ph) interface which powers our popular Kameleon. We lead the remote sector, and this quarter, we sold our one-millionth Kameleon. More importantly, we signed expanded agreements with consumer electronics leaders to produce their new, more sophisticated product lines. We believe this demonstrates great confidence in our technology and appreciation for our product quality and customer service.

And still, the market continues to grow. Motorola recently reported it shipped more than 600,000 high-definition DVR set-top boxes during the second quarter. Scientific-Atlanta recently announced DVR shipments increased 40% with 300,000 of those shipments being high-definition DVRs. All of this good news is supported by favorable expectations as CEA Market Research expects the total number of DVR shipments to grow over 300% from 2004 to 2008.

This translates into an expanding addressable market for UEI. In 2002, we turned to the computing arena and created the Nevo software suite. The embedded software has evolved and now delivers complete audiovisual high-definition home in digital media control to home and mobile users. We have leveraged this patented technology to create NevoSL to capture the growing custom installer CDA market. We officially launched NevoSL on July 25.

Last year, we expanded over technology by acquiring SimpleDevices whose software and firmware solutions enable consumer electronic products, including the automobile, to wirelessly connect and interact with home networks and interactive services to deliver digital entertainment and information. As broadband and Wi-Fi become increasingly ubiquitous, we believe our various solutions will create synergies for our customers who are seeking additional methods to enhance and diversify their product lines. When companies ask if their new device will interoperate with others in the home, UEI is already there to provide the answer. We have built a great business serving our core customers in the subscription broadcasting, OEM and retail markets. Now we are serving the computing and CDA markets as well. We are devoted to simplifying the home and as the home environment changes, we are providing new solutions.

In summary, this bodes well for our company and we have a solid pipeline, the right technology, the customer service and the reputation to deliver to consumers the solutions to wirelessly connect, control and interact within the ever-increasingly complex home. I would like to now open up the call for questions. Operator?

(Operator Instructions) Scott Ciccarelli, RBC Capital Markets.

Hi, guys, how are you? A couple of questions. I just wanted to make sure that I understand the numbers you guys were talking about. So in the SG&A, there was 1.6 million that you did not originally anticipate when you provided your guidance. Is that correct?

Correct.

So how is it that your operating expenses wound up so much lower than what your original expectation was? It that a matter of foreign exchange, or is there something else going on there?

Well, there were a number of elements. We had slightly lower incentive compensation accrue. There were some reductions in some departments; not personnel, but just reductions in expenditures. There was some FX benefit, because obviously, our expenses in Europe are denominated in Euros. And as the dollar strengthened, the value of those went down. So all of those contributed some to our expense -- our expenses being less than expectations.

And when did you originally expect the NevoSL to come out? Because it sounded like you kind of inferred that it was later than your originally expected.

Maybe a month, a month later than we expected.

The last question is -- SimpleDevices. I know (indiscernible) would call it an R&D project. Is that still costing you meaningful dollars at this point? Is it a meaningful drag, or is it not really costing you that much at this point?

No, it does. It's an investment we're making. The expenses there we'll have obviously fully disclosed in the Q. But its revenues are certainly less than the current expenses.

Okay. That's all I have. Thanks a lot, guys.

Murray Arenson; Ferris, Baker, Watts.

First, a question on guidance. For the year, it looks like you're keeping the topline expectation pretty much in check, but you're moving around product mix with a higher expectation on the business side than the consumer side and a pretty significant shift. I wonder if you just kind of talk through what you're seeing there and what drives the magnitude and that shift?

At this point, Murray, I guess we have a clearer view into the back half of the year. We feel that on the business side of things, we have signed up a number of customers. We have strength with the current customers we have, some of which have been with us for many years, some of which are relatively new to us. So the business sector, we see continuing a fairly strongly pace for the remainder of the year.

Consumer will perform much better in the back half seasonally, so that's what led us to the expectation ranges you have. So you're correct. The total has not changed but we have slightly more bullish expectations on business, slightly less bullish expectations on consumer as part of the mix going into the back half.

Can you comment on the consumer side? Is it too early to say whether, since the NevoSL launch, everything seems to be going on track? Are you tempering expectations on that front in particular or not necessarily?

Not really, no. Initial demand has been strong on the product and it's early to tell yet, but we are still -- we still have very positive expectations from it in the back half of the year.

I'd like to ask you about DirecTV as well. I know that's a relatively new customer for you and it looks like they're putting a pretty aggressive push on some of these advanced boxes for this particular quarter. I wondered what the impact there is for you, if some of that has been seen already, if we should look to see that, if that will make a difference in the next quarter or two, and if there is a margin impact from that as well?

I can't actually comment on any particular customer. They might be rather upset with that. We will say that we have become -- obviously DirectTV is important to us. They've become a more significant customer over the last 12 months. And as they become more aggressive in there plans, we stand ready to support them.

Last question -- can you update us on where you are in terms of your CFO search?

We're getting much closer. I hope by this time next quarter, we will be joined by another person on the call.

Okay, thanks a lot.

Patrick Lavin (ph), Lavin, Blake (ph) & Company.

Paul, can you take us through the logic and the status of the foreign exchange hedge? Obviously, the timing was brilliant, but I gather that this was a shorting of the dollar in effect or a going long -- or a shorting of the euro rather. Is this a continuing hedge, or is this a onetime event? What is it?

No. What we did was we sat down and determined what the -- what our exposure was on the P&L for the remainder of the year, given movements in the dollar versus the euro and other currencies. And then what we did was, rather than speculate, what we tried to do is provide as good an offset as we could based on our forecast for the currency fluctuations effect on the P&L. Hopefully I said that well. So we attempted to create a true hedge.

So in essence, what the hedge does, it provides a gain when the dollar strengthens offsetting any negative influence on our P&L with regard to the strengthening of the dollar. Yet it still allows us to participate in the upside should the dollar weaken further. So in essence, it's a true hedge. We put that in place; it is in place until the end of this year.

Okay. So then, if the dollar were to weaken henceforth, would this result in a loss?

No. What it will do is we have a participating forward, so we would share in the upside should the dollar weaken. However remember, if the dollar weakens, our operating performance will improve because many of our sales are denominated in dollars -- I'm sorry -- in euros in Europe. So if the dollar weakened, those sales would be greater in dollars.

So this is a win-win under any circumstance?

Well, I suppose you could look at it that way. What we did was, again, we tried to offset -- as the dollar strengthens, we put in place a hedge that would help us because there would be negative influences on our P&L. What we gave up was some upside from the point at which we entered into the hedge, figuring that if there were upside, that would mean the dollar -- if the dollar continued to weaken, our business results would get even better.

Okay. And then in terms of the increase in SG&A excluding the $1.6 million write-down, is that the operating loss of SimpleDevices?

No. Actually, we've performed favorable to expectations on SG&A, if you remove the 1.6 million write-down. So we were at 13.1 million in, SG&A which was favorable to our expectations.

Right, but it is a sizable increase from the year before?

Yes. Part of that is investment in R&D internal, part of that would be SimpleDevices as well.

And your expectations on the SimpleDevices -- before I say that, presumably a large part of the increase in research and development was SimpleDevices as well?

No. That wouldn't be classified into that R&D bucket.

It would be classified all in the SG&A account?

Correct.

And your expectation as to SimpleDevices reaching a nondilutive status would be when?

Well, potentially this year into next year. The real point of SimpleDevices is to build these products for the future. We are working on the relationships as we speak across various industries. And again, stay tuned on that. We're looking over time to build a suite of products which will help consumers to share and sync digital media across devices up to and including even their automobiles. That is a long leadtime item that we expect to have movement on within the next year.

Okay, so we're looking at a near-term and continuing stream of product innovation here?

Correct.

Okay, which will mitigate the losses being experienced presently?

Correct. Longer-term, that is correct.

Thank you.

(Operator Instructions). We have no further questions at this time. Please proceed with your presentation or any closing remarks.

Okay, thanks to everybody for joining us today. Before I sign off, I'd like to remind everyone, we will be attending the Adams Harkness Summer Seminar in Boston tomorrow, August 3, and the B. Riley & Co. annual investor conference in New York City on August 11. Thanks everybody for joining us today, we will talk to you next quarter.

That conclude today's Universal Electronics second quarter 2005 earnings call. You may now disconnect.