Universal Electronics Inc (UEIC) 2006 Q1 法說會逐字稿

Welcome to the Universal Electronics first quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded May 4th, 2006.

I would now like to turn the conference over to [Kerstin Chapman], please go ahead, ma'am.

Thank you, Melissa, and is good afternoon, everyone. Thank you for joining us for the Universal Electronics first quarter 2006 earnings conference call. By now you should have received a copy of the press release. If you have not, please contact Lippert/Heilshom & 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 U.S. number is 800-642-1687 and the international number is 706-645-9291. Enter access code 7904235. Also, any additional updated material nonpublic information that may--might be discussed during this call will be provided on the Company's website at www shortly after the call where it can be retained--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 a short--reading of the 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 the Company's connectivity line of products and software, the recently announced new contracts with new and existing customers, new market penetrations, the continued convergence of the Company's technology, the continued sale and operating growth in the subscription broadcasting 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 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 ended December 31, 2005. 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. I'll now turn the call over to Paul Arling. Paul?

Thank you [Kerstin]. Good afternoon and thank you all for joining the call today. UEI had a great first quarter in revenue with sales of 54.2 million driven by strong business category sales from our subscription broadcasting and OEM customers worldwide. The rapid consumer adoption of digital media technology such as HGTV and DVR continues to impact UEI positively. The number of DVR users will reach 130 million by 2010 up from 17 million users today according to strategy analytics.

UEI's was actually one of the first Companys to ever build a DVR remote for replay TV and Sony TIVO. Our ultimate goal is to design and produce remote control technology that redefines what a remote control should and can be. A recent example of our efforts towards this goal is the work we are doing with Monster cable to provide an advanced home control solution to be sold under the Monster label through the retail channel. This remote is the third Z-Wave-enabled product developed by UEI and we see this technology growing in importance as the home becomes ever more connected.

Another example of this is the evolution of smart phones, compounded annual growth rates for smart phones are expected to grow approximately 50% from 2005 to 2010, according to Gartner Dataquest. In April we announced the results of our first efforts in this industry, our Nokia agreement. Nokia is using our SimpleCenter software to enable consumers to easily transfer and stream digital media to and from their Nokia N80 phone. We are proud to have been selected by Nokia for this critical application in their new phone. We continue to develop technology and products that is redefine control within the home and Nokia joins a list of industry leading companies that have chosen UEI as their control technology provider.

Rob will provide more detail on recent activities and customer wins in a few moments and I'll review how they support our long term strategy in my concluding remarks. I'd like now give a review of the first quarter 2006 financials. Before I begin, I'd like to define our nonGAAP net income calculation. NonGAAP net income excludes stock-based compensation charges. A table reconciling the difference between GAAP and nonGAAP net income is included in our press--our results press release which is available on our website.

Net sales for the first quarter of 2006 were extremely strong coming in at 54.2 million above our guidance of 50 to 53 million. This year's first quarter net sales were 31% higher than last year's first quarter net sales of 41.5 million. Business category revenue was 42.7 million, which was greater than our guidance of 38 to 41 million. Our consumer category revenue was 11.5 million, which was within our guidance of 11 to 13 million. The first half of the year is seasonally the slowest part of the year for our consumer category.

First quarter 2006 revenue mix was 79% business category and 21% consumer category as compared to the first quarter 2005 revenue mix of 71% business category and 29% consumer category. Gross profit for the first quarter was 18.5 million or 34.1% of sales, within our guidance of of 35% plus or minus 1 point and lower than our first quarter 2005 gross profit of 37.9%. The 2006 first quarter margin reflects the sales shift toward the Company's highest volume customers and a weaker Euro in the first quarter of 2006 compared to the first quarter of 2005.

Operating expenses were 15.4 million for the first quarter of 2006 within our guidance of 14.9 to 15.4 million, and compared to 14 million for the first quarter of 2005. Research and development expense was 1.8 million, compared to 1.6 million for the first quarter of 2005. The 2006 first quarter operating expenses included 770,000 of stock-based compensation charges while the 2005 first quarter operating expense did not. Operating income was 3.1 million including the 770,000 of stock-based compensation charges compared to operating income of 1.7 million for the first quarter of 2005. Other income was 111,000 compared to other income of 1.2 million in the first quarter of 2005. Last year's first quarter included a 944,000 pretax gain due to foreign exchange.

Income before taxes was 3.2 million compared to 2.9 million in the first quarter of 2005. The effective tax rate was approximately 34.1% compared to our guidance of 34 to 36%. GAAP net income was 2.1 million or $0.15 per diluted share, compared to 1.9 million or $0.13 per diluted share in the first quarter of 2005. NonGAAP net income was 2.7 million or $0.19 per diluted share compared to our guidance of $0.15 to $0.19. As a reminder, nonGAAP net income in the first quarter excluded stock-based compensation charges.

Turning to our balance sheet review, we ended the quarter with cash and cash equivalents of 51.4 million, DSO's were 68 days at March 31, 2006, down from 70 days at March 31, 2005. Net inventory turns were 6.3 turns at March 31, 2006, up from 4.2 turns at March 31, 2005.

And now for our guidance. For the second quarter of 2006, we expect revenue to range between 50 and 53 million compared to 44.3 million in 2005. We expect business category sales to range from 38 to 41 million compared to 32.5 million in 2005, and consumer category sales to range from 11 to 13 million compared to 11.8 million in 2005. For the quarter ending June 30, 2006, we anticipate margins will be approximately 35.5% of sales plus or minus 1 point. Reflecting increased revenue contribution from the business category.

The second quarter operating expense is expected to be between 15 and 15.5 million including stock-based compensation charges of approximately 700,000. Last year's second quarter operating expense was 14.7 million and did not include stock-based compensation charges. The tax rate is expected to be between 33 and 35%. This range is provided under the assumption that the Federal R&D tax credit statutes, which expired at the end of 2005, are not reenacted in 2006.

GAAP EPS is expected to range from $0.13 to $0.17 per diluted share. This figure includes, of course, the effect of approximately 700,000 in stock-based compensation charges for the quarter. NonGAAP EPS, which does not include the effect of those charges, is expected to range from $0.16 to $0.20 per diluted share compared to second quarter 2005 pro forma EPS of $0.20 per diluted share. Pro forma EPS in the second quarter of 2005 excluded a one time write down of 1.6 million due from a former distributor. For the full year 2006, we are raising our total revenue guidance to between 218 and 228 million, which is a 20 to 26% growth over 2005.

Business category revenue is expected to range between 158 and 168 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 stock-based compensation charges of approximately 3 million. Tax rate is expected to be between 33 and 35%. Again, this range is provided under the assumption that the Federal R&D tax credit statutes, which is expire at the end of 2005, are not reenacted in 2006.

GAAP EPS for the year is expected to range from $0.80 to $0.88 per diluted share. We expect nonGAAP EPS to be between $0.94 and $1.02 per diluted share which would represent a 16 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. With sales growth of 31% and operating income growth of 86% over the last year's quarter, the first quarter of 2006 was a very solid quarter for UEI. We are experiencing strong demand from DIRECTV, Sky, Comcast, Time Warner and many other customers. And we continue to add new subscription broadcasting customers on a global basis including customer wins in North America and Europe. In Consumer Electronics, we are also adding customers so our roster. Through our partnership with Panasonic, we now have UEI technology in Yamaha, JVC, Toshiba, and Panasonic brand of product. We have also targeted and executed well in our drive to win non-Japanese flat panel television manufacturers. Our technology can be found in plasma and lcd televisions from Polaroid, Visio, Audiovox and many others.

Let's turn to our consumer category. While the first half of the year is seasonably the weakest half for the category, we believe our one for all brand name, premium products, and strong distribution in Europe will drive sequential growth in the second half of this year. We will be launching the broadest wave of new products that UEI has ever brought to market. We have new remotes from a new generation of Kameleons to a remote for digital media control.

We have new accessories including a new digital audio center to move digital music to wherever a consumer wishes, and we have new lighting control modes much like the ones we announced with Monster, that will enable consumers to control all their audio, visual products and their lights, delivering an unmatched home cinema experience. In total, we will launch 20 new products in Europe and international markets, and 9 new products in North America.

Overall, the pipeline in both our consumer and business categories is stronger than ever. We have over 50 new products that were launching in the back half of the year that build upon some already successful developments. Some examples of our recent new product and technology developments are, on April 17th, we announced our relationship with Nokia. Our newest version of SimpleCenter will provide a media management application on the pc and support the wireless transfer of digital media with Nokia's new N80 multimedia mobile phone.

In late March, we announced a plan to collaborate with Niveus on the development of future releases of software that will enable Nevo SL to control their windows xp media center line of products. And this week, we also announced our FOXTEL branded accessories for the Australian retail market. FOXTEL is Australia's leading subscription television provider with over 1.2 million subs and is also partially owned by Newscorp. We are also excited about the relationship with [Zensis] new chip company that has received investment from both Cisco and Intel. [Zensis] has developed a low cost wireless networking technology that is well suited for home control applications. Our early identification of [Zensis] as a key technology partner for UEI has led to three new products.

Yesterday, we announced our relationship with Monster Cable. Monster is an outstanding new partner for UEI as they have broad distribution in the North American retail market. With Monster we are developing the first controller to integrate seven audio and visual device controls with lighting control. Another [Zensis] powered customer is our relationship with a major satellite provider to develop a system that allows consumers to wirelessly view and select satellite radio content on a remote display and enable music playback on a connected satellite receiver anywhere in the home.

Finally, our home control-- in home control we debuted our Helix universal remote control which seamlessly controls not only a vast array of audio and visual devices but also any [Zensis] enabled home control mode allowing consumers to dim the lights, close the curtains and start the movie all with one touch of a button.

We also demonstrated new digital solutions at our cable trade show, NTCA, in early April. They include Polaris, which is a product design to answer cables need for a simplified remote control for seniors that's easy to use, yet still powerful enough to give consumers access to advanced services such as video on demand and DVR.

The next is Atlas DVR, UEI's first ever learning-enabled universal remote control for the mass market subscription broadcast distribution. And finally, My Media Channel, which is being developed by SimpleDevices. My Media Channel streams the consumer's digital pictures, home videos and music to-- from their home pc to a channel on the set top box.

Before I return to call back to Paul, I want to provide an update on one of the key enablers of our growth, our data base of home control nodes. This data base continues to grow at a very rapid race--rate and contains--now contains over 253,000 functions. Another key competitive strength for UEI is our patent portfolio. In the first quarter of 2006, we added five new patents bringing the total issued and pending patent count to 161. I will now turn the call back over to Paul for some closing remarks.

Thanks, Rob. As stated earlier, rapid consumer adoption of digital technology such as high-definition televisions and content and digital video recorders, fuel demand today for our industry leading control solutions. New home and personal entertainment devices and digital media are proliferating in the market, quickly making control devices that also interact with content a major challenge for consumers who want to embrace the new digital life.

We're excited to be working with leading consumer electronics, broadcast, mobile and technology companies as we shape the next evolution of the digital life with innovative wireless technologies that expand the user experience. UEI has developed solutions that enable consumer seamless connectivity and control of their media, from traditional audio visual devices in their living rooms, to digital media content on personal computers in their home offices, to mobile media solutions on their hand-helds and in their cars. Our performance year-to-date has been strong and our outlook for the remainder of 2006 is equally strong.

But perhaps more importantly, we believe that the products and technologies that we have created and the customer relationships we have earned over the last 20 years speak to a bright future for UEI. Stay tuned. I'd like to now open it up to question and answer.

[OPERATOR INSTRUCTIONS] Your first question comes from Richard Todaro with Kennedy Capital.

Hi, guys. Great quarter. Stocks traded in the 19 in the after market just so you know.

Wow.

The--in looking at the Company's history, I've never seen that the second quarter is lower than the first quarter. But you guys are actually guiding down sequentially into the next quarter. What would make that happen? What would make it not be higher than this quarter?

Well, actually, to be, to clarify something, we last year-- last quarter we guided 50 to 53, we had 54, just over 54. At the last quarter conference call we did elude--or tell the group that there was a $1.6 million order that was to chip in Q4 that chipped in Q1. So that obviously we don't usually have that. So that impacted obviously the first quarter positively. The order log was strong. We still see 50 to 53 for Q2, though, same guidance we gave in Q1.

So if I took out that order, did you see it was 1.6?

Right.

And did you 54 what this quarter?

54.2.

So I'm just going to do the math real quick. 54.2 minus 1.6--

It's 52.6.

52.6 so--

That's at the high end of the range. Which we said 50 to 53.

But with 53 next quarter would still seem same sequentially low because every year you have at least 1 million to 2 million higher next quarter and your orders are. you said were strong?

Yes, we did, we did last year, Q1 to Q2 was strong. But again, traditionally the front half Qs1 and 2 are lighter, Qs 3 and 4 are stronger. This year it may happen that Q1 is slightly stronger than Q2. But the front half of the year is usually weaker and again, as we enter the back half with the retail season, it's stronger.

Okay. Just another question, Paul, when you were in our office we talked about the use of cash and acquisitions and different things that you could use it for. The cash is going to build pretty decently this year, what are your guys' thoughts on that?

We continue to look at uses of it. We talk about it as a Management team and a Board. And we-- we're looking at a variety of things including M&A activity. We, of course, have not discounted things such as stock repurchase and even up to and including dividends. But right now we're looking at a number of things that we think we may be able to do on the M&A side, no way of knowing for certain when or what they will be just yet. So there's no real update on that. But we continue to look at projects there as well as internal investment. And options.

And just kind of handicap the guidance for the year at 218 to 228, I mean, what could cause that? You've had a decent trend, but could it be another 10 million higher or is that just way out of the ballpark on what you guys could actually do? Could you actually do 248 if certain sequence of events came through or what could go wrong to make you do the 218?

Well, honestly, I mean as it's early May, we're only about a third of the way through the year. We do try to provide clarity to the investor as to what we--what our forecast is for the remainder of the year. There's obviously a lot of variables in that. The best range we've come up with is the 218 to 228. Right now. Is there a possibility to do better? Sure. Is there a possibility to do worse? Yes. But right now, we believe that 218 to 228 is sort of the likely range of outcomes. We as is our custom, update people on that. So three months from now when we have a conference call, we'll update on that.

The things that could cause positives are again continued or stronger order strength on the business category sales. We're introducing a lot of new products. Which could push it to the higher end of consumer as well. In which case there's very strong performance. But again the -- converse is true, if orders slow down on that side, on the business side, and consumer isn't as strong, if the Christmas season globally is not as strong, that's how you end up towards the lower end of that range. I think it again being a third of the way through the year, it's difficult to precisely project. But we try to give a range of outcomes to provide some clarity to you guys, the investors.

And then the last question, just on the expense side this year, is there anything going on of the manufacturing, the operations, the shipping, that could make expenses higher or lower this year based on those numbers?

We closely watch that with oil being relatively high, then we've traditionally seen. We keep a close watch on our cost of plastics, our cost of shipping both air and ocean. And has tried to utilize as much as possible ocean freight to save money overall.

Okay. Thanks, great job, guys.

Your next question comes from Scot Ciccarelli with RBC Capital Markets.

Hi, guys, how are you?

Hi, Scot.

Hi, Scot.

I apologize if this was already answered 'cause I got cut off here in the middle of the call. But it sounds like some of your newer products are pretty differentiated. But it's not clear when they'd introduce or when they will be introduced where are we in kind of the rollout process, can you help us kind of understand what is going on with some of those new products, and what the expected impact could be to ASPs and margins?

Sure. Where do you want to start? Because we have over 50 rolling out. I think a few of the ones that we've announced, like the Nokia relationship that we have with them, that will start to roll out in Europe this month in the UK, I think it's available next week. And then sometime in summer it will start to roll out in the United States. So we're very excited about our relationship with Nokia and as with all these products, whether already launched or launching in the back half, they are built into our guidance.

Other products like some of the relationships like with Monster, that will roll out in the August timeframe and Monster has a great distribution strength so we're encouraged there. What other products would you like to know about?

Well, you mentioned the one with, the satellite radio, for example.

Yes. That will come out later in the back half. It's designed for the home and it will be a branded product at retail. So all these products, we have them paced and built into our financial forecast. And now it's just a matter of executing, getting them engineered, distributed and out the door.

Is the margin structure any different now that we're starting to get into the world of controlling content and controlling media instead of just controlling widgets?

It can be, but again Scot, we have a wide variety of products so it can vary widely as well.

Okay.

And we don't break out the specific margins on specific products.

No, I understand.

But again it's in the range of our guidance, in terms of--

Okay. And regarding the expense line, is there anything that, did you incur any extra expenses during the quarter that you might not have expected or was anything-- more specifically was anything deferred that you have to kind of take care of later in the year, just in terms of timing?

No. No, it was -- nothing deferred. We have invested some in product development this year versus last year. So yes, there was nothing deferred.

Okay.

Yes.

And is there an expected near term use of the cash -- it's been awhile since you buys bought some stock if I recall properly -- or are we just kind of sitting our [inaudible] trying to figure out best to utilize it?

Yes I mean I think, again we look at we're looking at projects relatively consistently. But again, you have to find the right one, the right strategic fit at the right price. And as we look at M&A type things, lining all of those up can be difficult. So we obviously won't execute one that we don't think is right from every perspective. And over time, we may in fact consider other uses of the cash.

Okay. All right. Great. Thanks a lot, guys.

Hello? Hello? Great. Hello?

Operator, we're ready to queue for the next question.

Mr. Arenson, your line is open, you may begin.

Thanks. Hi, guys.

Hi, Murray.

Wanted to say congratulation by the way, it's a very nice quarter. I wanted to see how granular we might be able to get on the business side. If there was anything in particular, I mean we--you obviously knew about that $1.6 million heading in when you provided the guidance, was there anything in particular that showed strength? I'm looking maybe the customer side with cable versus satellite versus OEM. Did either of those come in more strong than expected?

It's a really interesting question. But--and we've drilled down into different geographies into cable, satellite, et cetera. And really across the board the demand has just been quite strong. And it's just been strong demand as people roll out HD and DVR boxes or they buy a new plasma and then get a new digital box in to their home and that's where a lot of the demand has been coming from. And then of course you mentioned the 1.6 million that was pushed from Q4 into Q1.

Okay. And so then also looking at those kind of individual drivers you talked about, HD DVRs, and maybe some of the multi-room. All those, I mean there wasn't--you couldn't point at this and say well, this was an important quarter for HD in particular or anything like that?

Actually, because our products are universal, Murray, it's actually sometimes difficult for us to know exactly why it's being purchased. Because when the box gets deployed, our product can work all of them. A lot of our products can, anyway. So I think it's difficult for us to tease out of that whether it was more HD or more DVR or more HD-DVR. We just know that these general trends are affecting the order patterns of our customers. And as DVR is projected to roll out strongly over the next number of years and HD continues to be a strong growing area, people get these flat panels home and want to hook up high-definition source to them or a decoder to them. Because if they hook it up to their old standard definition box it just doesn't look like it did in the store

Right.

So pretty strong demand there for upgrade in the box, on the box side of things.

A couple questions on the retail side of things. In past quarters we've been talking about strength of individual markets, there were issues in the UK, and then some promotions and some other European -- could you just give us a flavor of what you're seeing right now and how things perform?

Sure. The UK is our largest market in terms of retail market. And we actually are pleased to report that we're back on the growth path there. We saw sequentially that it actually grew year-over-year.

But in other markets, I mean, if you look at what's going on in Europe, Germany and France have anemic economies and they continue to struggle, which has pulled of our retail growth down. And finally in other markets, such as Mexico and Australia, we've traded out our current distributors, brought in new ones, and Australia has shown some really solid promise as they roll out new products from us and also handle such things as the new FOXTEL remotes in Australia. So it's mixed geographically. The most important thing is that the UK seems like it's back on track and then we're going into a strong back half with a number of product offerings that are reinvigorating the retail category.

I believe if I remember right you're keeping the consumer level guidance for the year on the revenue side at the same level.

It's flat to up, depending on how we're doing.

But it's the same guidance we provided last quarter.

And what about trends that you're seeing in the [CEDIA] market?

Still strong demand in that place. It's growing, it's a growing market overall. And with our Nivo SL we are in the process of getting more and more installers trained. And we're, we've opened two new regions. We've opened United Emirates based in Dubai and we've also opened Israel for new dealerships, and then we are in discussions for the Japanese market as well.

Excellent. Last question, any update on the CFO front?

We're interviewing candidates. We are having some second interviews and again, hope to update you on that by the next conference call.

Excellent. Okay. Thanks very much.

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

Thanks, good afternoon Paul, hi Rob. Very nice job in the quarter. You--Rob you said you don't really want to break things out very much, but just trying to get some sort of a sense of the OEM versus your traditional business and specifically kind of the revenues that you're generating from the recent agreements of Panasonic and Pioneer and then all of the others you mentioned Yamaha, JVC, Toshiba et cetera, I would assume that would start from a small base and then grow as you get into more models. Any sense of how that business is doing?

Correct. We don't like to break things out on individual levels. I think the key thing to look at the split between business and consumer category and this quarter was 79% business so the mix is clearly in more of our cable and satellite providers. But in there is a small but growing footprint in the consumer electronics industry. As we've announced our sweeping partnership with Panasonic as they standardize on our chips, it's enabled us to through Panasonic as it's owned by [inaudible] which is a trading company, reach customers like Toshiba and the other customers we announced.

And in addition to that, we're going directly to the Taiwan, Chinese and Hong Kong manufacturers to win other brands of fast growing markets such as the lcd and plasma television markets. So it's a small base now, but it's a growing base and it's a profitable base for us.

Okay. That helps, thanks. And kind of unrelated question as we move to all digital and away from analog. What's the opportunity or what do you see happening kind of the low-end remotes as cable MSOs just roll out kind of a strip down box to upgrade consumers to digital?

As they move people from analog to digital?

Right. As we go the 2009 deadline.

Yes, it's a great opportunity for us. The interesting thing is there are cheaper boxes that are being rolled out. You can buy a set-top box for perhaps right around the $100 mark. It's great for us because as they roll that out, the large cable companies of the world, they still want to have their branded remote with their services such as video on demand, pay per view, sitting in the hands of the consumer.

So all those old analog boxes that take up a huge amount of bandwidth in terms of delivering digital data down to the consumer, as they move to digital boxes, you get much more bandwidth to free up for phone, for Internet service and for video service. So all those trends from analog to digital really plays well for us in the long term. And there's still a lot of analog boxes out there, surprisingly.

Right. Okay. And then just one last thing. As you look at the small but growing base of revenues from let's call it Panasonic at all within the business, as that increases a percentage of the business mix, do you anticipate that being enough to reverse the trend of a declining gross margin in the business and is then obviously in the overall revenue or overall business?

Yes. I think on that one, Michael, we obviously don't want to speak about margins on a particular consumer group, customer group. But the truth is, with some of the new products we've brought out which was a question that we've asked and we alluded to earlier, the new products will often carry a average to better than average margin. And as the mix moves more towards those on the consumer side, in particular, the margin improves. But larger customers obviously command a lower than average margin for us. So as the mix shifts towards those larger volume customers, it pulls the margins down.

The real question is, one year, two years from now, will we see more volume of those consumer products or those higher margin products? We're certainly pushing for that. But certainly if the large customers want to continue to buy even more product, the margins may remain flat. But in the--across the growing sales base that wouldn't be such a bad thing.

Another aspect of things is, with our Z-Wave technology and home networking, the dollar margin may go up in certain cases as more advanced remote controls with the two-way communication require more capabilities and it's a higher ASP on that. And so you might see as well, higher dollar margins.

Okay. Thanks, keep up the good work.

Your next question comes from Patrick Flavin with Flavin, Blake & Company.

Hi, Paul, hi, Rob.

Hi, Patrick.

Can we with the dollar starting to fade again, Paul, can we go through just the impact on the Company of that? And I'm thinking in two regards. That is, sourcing products from abroad, in terms of cost, and secondarily revenue generation obviously primarily out of Europe.

Yes.

Is a weak dollar good or bad for the Company?

Well, a weak dollar typically would be good for us as we operate in Europe, as the Euro appreciates relative to the dollar. All our financials are converted back into dollars for reporting, so a weakening dollar actually is good for our results. Many of our cost of goods are denominated in dollars globally. So it actually helps sales and margin, a weakening dollar can help both sales and margin.

Okay. So therefore, the trend in effect now in particularly if it continues is beneficial, vis-a-vis your forecast.

Yes. Well, we do have some hedging contracts in place which, what you'd see is there would be some impact favorable impact on the operating margin line. But if the dollar continued to weaken, you may see some expense on the other income line as we have, we have hedging contracts in place that protected the downside. So, again, you'll see that interchange between other income and the operating income line. As the dollar weakens, operating income becomes stronger. But hedging contracts can go to the negative.

We don't foresee any vast changes here, though. In the past, you have seen them here. We had unhedged positions on the balance sheets. Q1 last year. And quite frankly that unhedged position led to a $900,000 plus gain. The problem with a 900,000 plus gain on your balance sheet is that if the currency goes the other direction it could result in a $900,000 loss. We as a result of that, have hedged those positions.

Understood. The hedge would be located in other income?

Yes. Well, the gain and loss from the hedge position would be in other income, that's correct.

Okay. Thank you.

Yes.

[OPERATOR INSTRUCTIONS] There are no further questions at this time. Please proceed with your presentation or any closing remarks.

Okay, great. It was great talking to everybody and we look forward to potentially seeing some of you over the course of the quarter. And we'll obviously look forward to having you on the call approximately three months from now. Thank you.

Ladies and gentlemen, that concludes your conference call for today.