Universal Electronics Inc (UEIC) 2005 Q4 法說會逐字稿

Welcome to the Universal Electronics fourth quarter earnings conference call.

[OPERATOR INSTRUCTIONS]

Following management's prepared remarks, we'll hold a Q-&-A session.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded today, February 23, 2006.

I would now like to turn the conference over Ms. Moriah Shilton.

Thank you, maam. Please go ahead.

Thank you, [Fatina], and good afternoon, everyone.

Thank you for joining us for the Universal Electronics' fourth quarter and 2005 year-end earnings conference call.

By now, you should have 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 for one year. 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 international, the number is 706-645-9291, enter access code 4661176.

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, where it will be retained for at least one year 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 new products in the Company's home connectivity line of products and software, and 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 you -- to caution you that these statements are just projections, and actual events, or results, may differ materially. For further detail on risks, 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 contained 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'll 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 summary of our 2005 accomplishments and recent activities, including our attendance at CES, and then, provide a review of our financial results after which, Rob will provide an operating activity update. Then, I will conclude the prepared remarks and begin the question-and-answer session.

2005 was another successful year at UEI as we continued our evolution as the wireless control technology leader. The subscription broadcasting industry is expanding addressable market for UEI. In 2005, for the first time, shipments of advanced digital set-top boxes have exceeded shipments of basic set-top box units. Rapid consumer adoption of DVRs and high definition TVs is driving this part of our business, and is projected to continue into the foreseeable future. We believe are we are well positioned to capitalize on these trends.

Much like in subscription broadcasting, the consumer electronics industry is looking to give its consumers more control and bring universal remotes into the home. Our patented technology and database, coupled with your easy-to-use features, is leading to customer wins in this market, including new customers such as Denon, Mitsubitshi, Panasonic, and Pioneer.

We continue to build the leadership roll in digital media and are currently targeting three new markets in this space -- automobiles, cell phones, and home networking. At the recent International Consumer Electronics Show, or CES, we unveiled new products targeted at the overall digital media market and these growing markets in particular. These products and the research, development, production, and marketing and sales efforts behind them are all part of our ultimate goal to design and produce remote control technology that redefines what a remote control can and should, and can be.

Rob will provide more color on our work with this goal, and I'll review how it ties to our long-term strategy in my concluding remarks.

I'd like to now give a review of the financials for the fourth quarter and year-end 2005 results.

Before I begin, I'd like to review our pro forma financial definition. Pro forma net income excludes the 1.6 million write-down of the balance due from a former European distributor incurred in the second quarter of 2005, and subsequent tax consequences in the third and fourth quarter.

We did not adopt FAS123R in 2005, and therefore, we did not record any stock-based compensation charges during that year. However, beginning in 2006, pro forma net income will be adjusted for stock-based compensation charges. A table reconciling the difference between GAAP and pro forma net income is included in our results press release, which is available on our website.

Sales for the full year 2005, were up 15%, driven by increased demand from our subscription broadcasting and consumer electronics customers. Net sales for the fourth quarter of 2005, were 49.3 million, as compared to guidance of 50 to 53 million. As anticipated, net sales were lower than last year's fourth quarter revenue of 51.7 million.

Business category revenue was 32.8 million, representing 66% of the total revenue and compared to guidance of 31 to 34 million. Our consumer category revenue was 16.5 million, representing 34% of the total revenue and compared to guidance of 17 to 20 million. Lighter than anticipated sales in European retail and CEDIA impacted our consumer category in the fourth quarter. The fourth quarter 2004 mix was 61% business category revenue and 39% consumer category revenue.

Gross profit for the fourth quarter was 18.7 million, or 37.9% of sales, within our guidance of 38%, plus or minus one point, and lower than the fourth quarter 2004 gross profit of 39.1%. The 2005 fourth quarter margin reflects the sales shift towards the Company's highest volume customers, and the weaker Euro in the fourth quarter of 2005, compared to the fourth quarter of 2004.

Operating expenses were 13.4 million for the fourth quarter of 2005, compared to our guidance of 13.4 million to 13.9 million, and compared to 14.5 million for the fourth quarter of 2004. Research-and-development expense was 1.6 million, compared to 1.8 million for the fourth quarter of 2004. The fourth quarter of last year includes the write-off of 240,000 of in-process R-&-D at SimpleDevices, which was due to the acquisition.

Other income was 227,000 compared to a $285,000 pre-tax loss in the fourth quarter of 2004. Income before taxes was 5.6 million, compared to 5.5 million in the fourth quarter of 2004. GAAP net income was 3.5 million, or $0.25 per diluted share, compared to 3.7 million, or $0.26 per diluted share, in the fourth quarter of 2004. The effective tax rate was approximately 37%, compared to our guidance of 34%. The tax rate was higher than guidance because we earned less income in lower tax rate jurisdictions.

Pro forma net income was 3.7 million, or $0.27 per diluted share, compared to our guidance of $0.28 to $0.32. As a reminder, fourth quarter pro forma net income excludes the tax effects of the one-time write-down of the amount due from the former distributor taken in the second quarter of 2005.

For the full-year 2005, net sales were 181.3 million, up 15% from 158.4 million for the year 2004, and compared to guidance of 182 to 185 million. GAAP net income for the full-year 2005 was 9.7 million, or $0.69 per diluted share, compared to GAAP net income of 9.1 million, or $0.65 per diluted share, for the full-year, 2004.

Pro forma net income was 11.3 million and $0.81 per diluted share, compared to guidance of $0.81 to $0.85 per diluted share.

Turning to our balance sheet review, we ended the year with cash and cash equivalents of 43.6 million. DSOs were 75.8 days at December 31, 2005, up from 67.5 days at December 31, 2004. Net inventory turns were 4.6 turns at December 31, 2005, down from 5.3 turns at December 31, 2004.

And now, for our guidance -- for the first quarter of 2006, we expect revenue to range between 50 and 53 million, compared to 41.5 million in 2005. We expect business category sales to range from 38 to 41 million, compared to 29.6 million in 2005, and consumer category sales to range from 11 to 13 million, compared to 11.9 million in 2005.

For the quarter ending March 31, 2006, we anticipate margins will be approximately 35% of sales, plus or minus one point, we thought the increased revenue contribution from the business category. Operating expense is expected to be between 14.9 and 15.4 million, including stock-based compensation of approximately 800,000. Last year, operating expense was 14 million and did not include stock-based compensation charges.

The tax rate is expected to be between 34% and 36%. This range is provided under the assumption that the federal R&D tax credit statutes, which expired at the end of 2005, are not re-enacted in 2006.

GAAP EPS is expected to range from $0.11 to $0.15 per diluted share. This figure includes the effect of approximately $800,000 in stock-based compensation expenses. Pro forma EPS, which does not include the effect of stock-based compensation, is expected to range from $0.15 to $0.19 per diluted share, which is a 15% to 46% growth compared to the first quarter 2005 EPS of $0.13 per diluted share for GAAP and pro forma.

For the full year 2006, our total revenue is expected to range between 210 and 220 million, which is a 16% to 21% growth over 2005. Business category revenue is expected to range between 150 and 160 million, and consumer category revenue is expected to range between 55 and 65 million.

Operating expense is expected to be between 62 and 66 million. This figure includes an estimated stock-based compensation expense of $3 million.

The tax rate is expected to be between 34% and 36%. This range, again, is provided under the assumption that the federal R&D tax credit statutes, which expire in 2005, are not re-enacted in 2006.

GAAP EPS is expected to range from $0.78 to $0.88 per diluted share. We expect pro forma EPS to be between $0.92 and $1.02 per diluted share, which would represent a 14% to 26% increase compared to $0.81 pro forma per diluted share in 2005.

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

Thanks, Paul.

2005 was a year of continued growth for UEI. A number of factors are driving this growth. Fundamentally, there is a shift in technology occuring in the homes around the world, which is increasing demand for UEI products and opening vast new opportunities for the Company. This dynamic shift is the movement from analog technology to digital, and with this shift comes an array of new products and services, such as digital video recorders, digital music services and devices, home networking, and high definition television.

Most important to note for UEI investors is all of these new devices and services, no matter how different they may be, all have one thing in common, they need to be controlled, simply and easily, and that's where UEI steps in. Our technology and product offerings are stronger than ever. Our database of infrared code continues to grow at a rapid rate, over 20% per year. Our database now contains over 245,000 function codes. To put in this in perspective, we add a new function code to our library every four minutes the doors are open at our Cypress headquarters. As a result, we have a key competitive advantage in the market, and our database is becoming a standard across multiple industries.

Our innovative research-and-development work in control technology is also helping to build another key competitive strength -- our patent portfolio. In 2005, we added 19 new patents, bringing the total issued and pending patent count to 156 patents, [inaudible] include Logitech, Philips, Panasonic, Microsoft, just to name a few.

In 2005, our technology and product offerings, combined with our strong sales and operational execution, have resulted in a 29% growth in our business category, and as Paul mentioned in the guidance, this trend continues into 2006.

The demand is most salient in our cable and satellite customers. The subscription broadcasting industry is in the midst of a set-top box upgrade cycle as DVRs and HD boxes roll into homes around the world. Consequently, we have experienced strong demand from DIRECTV, Sky, Comcast, Time Warner, and many other customers. In addition, we continue to add new subscription broadcasting customers on a global basis, including customer wins in Canada, Latin America, Africa, the United States, and Europe. We anticipate we will continue to capitalize on these set-top box roll-outs in North America and the European upgrade cycles taking place today, and we are also starting to explore market opportunities in Asia.

This shift to digital technology is also creating demand in the consumer electronics industry Three years ago, we targeted consumer electronics as an area of growth for the Company. Though we knew the investment would be long and difficult, it is now paying dividends for the Company.

The consumer -- in the consumer electronics' space, we recently announced our relationship with Mitsubitshi Digital Electronics America. We are now building full universal remote controls for their line of flat-panel digital televisions. This is yet another customer win for UEI in consumer electronics, in addition to Denon, Panasonic, Pioneer, Polaroid, and a number of other brands of other flat-panel TV manufacturers. We are very excited about the progress in the industry as the global advanced TV market is expected to grow from 13.2 million units in 2004, to over 100 million units in 2009, according to Display Research. This represents an annual compound growth rate of 50%.

Let's turn to our consumer category.

As we mentioned during the last call, we expected our sales in consumers to be relatively flat due, in part, to the extraordinary growth in retail sales, new product introduction, and the strength of the Euro in 2004. Last quarter, we forecasted sales of 17 to 21 million -- or 20 million -- and we came in about 3% below our range. This was largely due to push-outs of holiday promotions in Spain and Germany, and slightly slower than expected sales in the UK, CEDIA, and our private -- US private-label business.

While we had expected stronger results in consumer, we remain bullish regarding the category for a number of reasons. We have a strong brand name, premium products, and a strong distribution in the marketplace. In retail, we have a number of new products planned for the back half of this year with new digital-ready technologies, and we are strengthening our geographical reach, particularly in Italy, Australia, and Asia.

In CEDIA, we're building a strong foundation for the future growth, much like our push three years ago into consumer electronics, and we have the right product and road map to succeed in the industry as evidenced by channeling consumer feedback and awards such as CE Pro's High Impact Product of the Year and Electronic's House Product of the Year award.

Looking forward, as consumer technology moves from analog to digital, UEI is building our product, patent, and technology war chest for the future. At CES, we unveiled a number of project that we are in the process of commercializing under the theme "Control Solutions for the Digital Life." If you visited the show, you got a preview of the future of UEI's technology at work controlling digital media in cars, cell phones, satellite radio, internet services, and, of course, remote controls. As we move from analog to digital, the future is bright for UEI, and we're looking forward to a record 2006.

I will now turn the call back to Paul for some closing remarks.

Paul?

Thanks, Rob.

UEI is a strong profitable business, and we continue to invest in our future. One of our over-arching goals is building the ultimate remote control technology. In doing so, we will redefine what the term "universal remote control" means.

We are focused on designing and building products and technologies that operate a consumer's entire remote controllable device universe, that will do so with little or no effort to set-up and use on a daily basis. We are enabling consumers to remotely control their digitized entertainment media, be it music, pictures, or video, and share the media with a range of devices such as the TV, stereo receiver, and even cell phones and the automobile.

In 2006, we are off to a strong start, and we plan to develop and introduce products and technologies, which will make control of the consumers' home electronic arena richer, simpler, and affordable. In addition, we will continue to use this expertise to build better relationships with our subscription broadcasting, OEM, retail, and CEDIA customers. We believe that the demand for our advanced, yet simple and affordable, control technology is strong and growing, and as a result, we believe 2006 will be another great for UEI and our shareholders. Stay tuned.

We are now ready for question-and-answer.

[OPERATOR INSTRUCTIONS]

Your first question comes from Murray Arenson with Farris.

Thanks.

Good afternoon, guys.

Murray.

Taking a look at guidance you have given for this coming quarter and for the year, it looks like, on the business side, you're doing a step function up, and you look for that to maintain itself through the year. One, is that a fair characterization; and two, what's behind this?

Well, we see a strong backlog of orders there, I would say that it -- the consumer business is seasonal, so what we see is that the Q4 number was higher, Q1 goes down. We do expect that number to come up, obviously, in Q3, and 4 of 2006, particularly, based on, again, plans we have for new product rollout.

But on the business side, in particular, was what I was referring to. You did -- what, 32-ish million this time, and you're looking for 38 to 41 in the first quarter and 160 for the year, so that tells me 38 to 40 each quarter, right?

That -- that's correct.

So should I be-- I'm trying to get to the source of that. I mean are we talking about some of your premier historical subscription video customers and throw DIRECTV into that mix, or do we take a look at Mitsubitshi and Panasonic business?

Murray, this is Rob.

The strength is really in the cable and satellite. We're obviously doing well as we start to build up in consumer electronics, but the demand for DVR and HD boxes are clearly pulling a lot of remotes out of UEI.

One thing we should note, though, in the fourth quarter, we actually had about 1.6 million in orders from a subscription broadcast customer that we actually got pushed into the first quarter. That's why you probably see a slightly stronger first quarter than perhaps you would have normally seen had we not -- had we shipped that 1.6 million in the fourth quarter.

Okay.

That's helpful.

But overall, there is real strength in the subscription broadcast market.

You see that continuing through the year because I know, often times, when you are dealing with set-top boxes and the like, those can be pretty lumpy, but you feel reasonably confident that those are sustainable numbers through the year?

We send a great deal of time with your biggest customers, and we feel very confident of their continued demand in the marketplace.

Okay.

Can you -- would you -- I know a quarter back or two, you broke out a NevoSL contribution. I wonder what that looked like, and what that was relative to your expectations?

Yes, last quarter, we shipped NevoSL for the first time, so we wanted to give -- share some of the excitement that we have with the product, but, as you know, we don't break out individual products, but overall, the CDM marketplace is a long-term investment for UEI. We're building that channel now because it's a new channel for us, and we have 17 distributors around the world. We have a world-class product in terms of the overall functionality and the future capabilities in terms of digital networking and home networking, and so we think we're on the cusp of a very promising market in the future.

At this stage of the game for you guys, how much is that tied to housing starts and things like that?

It's -- housing clearly has been a -- buoyant in the industry. The good thing about the CDM market is it tends to serve the higher income individual, and the good thing about UEI, overall, is we have a very global business, and so, we're not really tied to any one industry, like housing -- if housing slows down or these things, because we're not tied to any one geography necessarily. I have never seen a correlation of the two.

I think it's more directly tied, Murray, as we said, to things like the rapid adoption of DVR and HD. The growth in that catagory -- consumers get those new televisions home -- LCD or plasma -- and in the store, it's displayed with HD. If you don't have an HD box at home, you are more than likely going to go out and get one as soon as you bring that television home. The operators -- the subscription broadcasting companies are enjoying the upgrade, and it's continued to projected for some years as people move to the mandate of by 2009, having their broadcasts in HD. Consumers, as the price points come down on these flat panels, will buy them more and more, and seek out high definition and probably DVR functionality in those new boxes.

Last question -- I was a little surprised by some of the commentary of the overseas consumer market. I know the UK, in particular, had been a drag in previous quarters. You said it was slightly disappointing this quarter, and I thought it actually bounced back reasonably well in the fourth quarter, so I wondered if you could provide a little more color on where the soft spots were?

You are absolutely right.

The UK -- we have addressed that issue on a number of calls -- that it has been particularly weak, which is a fairly big market for us, and it -- it was only slightly down, actually -- we had expected it to be down more, but it was only slightly down. But the good news is, we have seen a pick up in January, so we're seeing some positive results here -- there.

The big issue, which really affects your consumer sales, were push-out of promotions that we had expected to have during the Christmas season in Germany and Spain, and we believe that those were perhaps pushed to promote flat-panel televisions and other things that pull our devices forward, and so, we -- we expect that that had something to do with it, and we're actually pleased with -- we're seeing some promotions getting put now into this quarter and seeing a little bit of pick-up in the marketplace.

Thanks a lot.

[OPERATOR INSTRUCTIONS]

Your next question comes from Michael Coady with B. Riley.

Thanks.

Good afternoon.

Hi, Michael.

Hi.

Would you just talk a little bit about the times of the -- you mentioned auto cell phones and home networking, I think we have covered home networking. You're introducing some more products there, some kind of strip-down Nevos, perhaps. Could you talk about the timing of the initiatives in the auto and cell phones -- when you might have something more tangible to announce?

Sure. In terms of timing, auto is something you may see announcements on, but we don't see any appreciable volume from that this year because, again, the design cycle in the automotive industry is long -- the sales cycle is long.

So, signing contracts today leads to license revenue, in some cases, a couple of years from now, as they are designing platforms for future years now. The trick there is to get designed in now for those future years. So, on that, you may see announcements, but not appreciable revenue, other than small NRE.

In terms of the -- the cell phone market, again, we're talking to major players there. We haven't announced anything just yet, but again, as I say at the end of the prepared comments, stay tuned, because that's something that we're working on with players in the industry, and hope to have announcements on that in the near future.

And the cell phone, obviously, there's not a long design-in cycle there. That would be relatively immediate?

Much shorter. Yes.

Okay.

Did you talk about, in your guidance for business revenues for 2006, just in the general sense -- excuse me -- expectations for the flat-panel OEMs that you're working with Mitsubitshi and Panasonic and Pioneer, et cetera?

Well, we don't break them out separately, but we -- we, of course-- but as we've signed up some of those that are relatively new relationships, that will also contribute to our growth this year over last year.

Okay.

Given that the volume there is lower, you probably don't provide the same discounts, and maybe more -- maybe a higher end remote in some cases. How about the gross margin differential between your typical subscription broadcasting customers and these new OEMs?

Well, of course, as they may be on the call, we don't actually make very much profit on any of them.

Right. Right. Give them away I'm sure.

But -- but I will say, obviously, larger customers do demand, probably better than market pricing on their -- on their products, so yes, the larger the customer, typically, the lower the pricing, or -- I shouldn't say lower the pricing -- the sharper the margin.

Okay.

And, I could probably back into this number from the guidance provided, but do you have a gross margin expectation for the full year '06?

We don't usually provide at that at the beginning of the year. We didn't last year, and aren't this year.

Okay.

Let's see--.

We'll get a better view on that as the year progresses, Michael.

Alright. That's it for now.

Thank you very much.

There are no further questions at this time.

Please proceed with your presentation or any closing remarks.

Okay.

Thank you for joining us today, everybody.

I look forward to reporting on our progress as the year progresses Also, I want to say we'll be presenting at the B. Riley conference on March 16, and we look forward to seeing some, or many, of you there.

That's it.

Thank you.