Universal Electronics Inc (UEIC) 2006 Q2 法說會逐字稿

Welcome to the Universal Electronics second quarter 2006 earnings conference call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to Ms. Mariah Shilton. Please go ahead, ma'am.

Thank you and good afternoon, everyone. Thank you for joining us for the Universal Electronics second quarter 2006 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 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 internationally the number is 706-645-9291. Enter access code 7904235.

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 and the company's home connectivity line of products and software, the recently announced new contracts with new and existing customers and new market penetration, and a continued convergence of the company's technology. And the continued sales and operating growth including in a 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 December 31st, 2005 and the quarterly report 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 management's projections or forward-looking statements.

Also during the call today, and this is very important, management will discuss certain non-GAAP or adjusted financial measures, for comparison purposes only, and they will be using adjusted numbers in their prepared remarks. The adjusted amounts of operating income, income before taxes, net income and net income per share reflect the impact of the new accounting for stock options on the 2006 results and the write-down of a balance due from a former European distributor on the 2005 results.

Management believes the adjusted amounts provide a more meaningful comparison measure of quarter-over-quarter and year-over-year financial performance. Please refer to the company's second quarter 2006 earnings press release and to the news releases page found in the investor section of the company's website for a reconciliation of adjusted financial measures to GAAP.

On the call today are Paul Arling, chief executive officer and chairman, Rob Lilleness, president and chief operating officer, and Bryan Hackworth, corporate controller.

And now I'd like to turn the call over to Paul. Paul?

Thank you, Mariah. Good afternoon, everyone, and thank you for joining the call today.

We had a strong second quarter, generating 52.4 million in revenue, up 18%, with growth primarily from our business category sales to our subscription broadcasting and OEM customers. This growth primarily reflects the success of our subscription broadcasting business, driven by the transition of analog to digital and hardware upgrade cycles such as high definition and DVR. We have built strong long-term relationships with the leaders in this market by shipping them the world's best remote control solutions.

Now we are also expanding our relationships with our customers by providing solutions which enhance their businesses. For instance, our call center services help our customers answer a variety of consumer requests quickly and economically. Our XMP solutions provide multimedia protocol for error-free text and gaming applications. And our new MyMedia software solution, introduced at the recent SCTE show, provide operators with a digital media solution deployed through the set-top box which can answer the consumers need for digital media access through their entertainment center and generate additional revenue for our customers.

We clearly have the broadest range of offerings of anyone in the industry. Testament to our successful strategy at UEI over the past three years, we have recorded compound annual sales growth of approximately 22% and compound annual earnings growth of approximately 26%.

Overall, in the past three years, we have achieved a number of goals. We have furthered our goal of earning the business of the leading companies in the industries we serve. More recent examples of this include Panasonic, Pioneer, Crestron and Nokia, to name just a few.

We have begun to penetrate new markets such as computing, telecom and automotive, as these are all extensions of the home entertainment network. And we have introduced or announced new products and new technologies that have brought new functionality to the connected home while remaining simple and affordable.

The opportunities in the area of access to, and control of, media and devices in the home are immense and growing. As new devices and content pour into the home, access and control become critically important, as does the need for simplicity. Parks Associates estimates 30 million U.S. households will have an entertainment network by 2010 and we expect to be assisting the consumer to navigate this ever more complex environment.

In the near term we have and will continue to successfully execute in the transition from analog to digital in the subscription broadcasting space, capitalizing on the rapid and sustained consumer adoption of such technologies as HDTV and DVR and are now preparing the products and technologies in the consumer space as digital products roll out. Strategy Analytics predicts consumers worldwide will buy nearly one billion wireless home devices over the next five years.

We have been building and are continuing to build industry-leading products and are introducing products over the next year that will redefine control within the home. These products and technologies will further our aim of bringing greater control of, and access to, entertainment in the home while remaining simple to set up and operate and of course affordable.

It's important to note that while -- even while UEI is investing in access and control solutions which promise to bring even greater success in years to come, we are on track to generate more annual profit than at any time in our company's 20-plus year history. I will spend a little more time on the call later discussing our longer-term strategy.

I'd like now to turn the call over to Bryan Hackworth, our corporate controller, who will give a review of the financials. Rob will then come on the call to provide more detail on our solid operating performance in the second quarter, recent activities and customer wins, and I will round out the call before opening it up to Q&A. Bryan?

Thanks, Paul.

Net sales for the second quarter of 2006 were 52.4 million, at the high end of our guidance of 50 to 53 million, and 18% higher than last year's second quarter net sales of 44.3 million. Business category revenue was 40.4 million, within our guidance of 38 to 41 million. Our consumer category revenue was 12.0 million, also within our guidance of 11 to 13 million.

Gross profit for the second quarter was 19.6 million, or 37.4% of sales, above our guidance of 35.5% plus or minus 1 point, and above the second quarter of 2005 gross profit of 35.5%. The 2006 second quarter margin reflects favorable mix due to sales of higher margin products and cost containment measures, including lower freight and subcontract labor costs.

Research and development expense was 1.9 million compared to 1.6 million for the second quarter of 2005. Total operating expenses were 15.5 million for the second quarter of 2006, within our guidance of 15 to 15.5 million, and compared to 14.7 million for the second quarter of 2005.

The 2006 second quarter operating expenses included 665,000 of stock-based compensation charges, while the 2005 second quarter operating expenses did not include any such charges, but did include a 1.6 million write-down of a balance due from a former European distributor.

Other expense was 62,000 compared to other income of 1.4 million in the second quarter of 2005, which included a positive foreign exchange impact of approximately 1.3 million. The effective tax rate was approximately 39%, compared to our guidance of 33 to 35%. During the second quarter of 2006 federal and state tax audits were completed, which resulted in additional tax expense to prior year filings.

Adjusted operating income was 4.7 million compared to 2.6 million in the second quarter of 2005. Adjusted operating income in 2006 excludes expenses related to stock-based compensation in COGs, R&D and SG&A. Adjusted income before taxes was 4.7 million compared to 4.0 million in the second quarter of 2005. Adjusted net income was 2.9 million, or $0.20 per diluted share, compared to 2.8 million, or $0.20 per diluted share, in the second quarter of 2005.

For the first six months of 2006 net sales were 106.5 million, up 24% from 85.8 million for the same period of 2005. Adjusted net income was 5.5 million, or $0.39 per diluted share, compared to 4.6 million, or $0.33 per diluted share, for the same time period last year.

Turning to our balance sheet review. We ended the quarter with cash and cash equivalents of 58.8 million. DSOs were 73 days at June 20th, 2006, compared to 66 days at June 30th, 2005. Reflecting extended payment terms being granted to certain high volume customers and a high percentage of sales being made in the last month of the quarter in Q2 '06 versus Q2 '05.

Net inventory turns were 4.5 turns at June 30th, 2006 compared to 5.2 turns at June 30th, 2005. Reflecting higher inventory levels in Europe in anticipation of new product launches scheduled for the third and fourth quarters. We expect inventory turns to be at a more normalized range, between 5 and 6 turns, in the third quarter.

And now for our guidance. For the third quarter of 2006 we expect revenue to range between 55 and 58 million compared to 46.2 million in 2005. We expect business category sales to range from 39.5 to 42.5 million compared to 31.3 million in 2005 and consumer category sales to range from 14.5 to 16.5 million compared to 14.9 million in 2005.

For the quarter ending September 30th, 2006 we anticipate margins will be approximately 37% of sales plus or minus 1 point. The third quarter operating expense is expected to be between 16.5 and 17 million, including stock-based compensation charges of approximately 670,000. Last year's third quarter operating expense was 13.3 million and did not include stock-based compensation charges.

The tax rate is expected to be between 27 and 29%, which reflects higher than expected R&D credits relating to 2005. This range is provided under the assumption that the federal R&D tax credit statute, which expired at the end of 2005, is not reenacted in 2006.

GAAP EPS is expected to range from $0.21 to $0.25 per diluted share. This figure includes the effect of approximately 670,000 in stock-based compensation charges for the quarter and compares to $0.20 per diluted share in the third quarter of 2005. Adjusted EPS, which does not include the effect of stock-based compensation charges, is expected to range from $0.24 to $0.28 per diluted share.

For the full year 2006 we now expect total revenue to range between 220 and 226 million, which reflects growth of 21 to 25% over last year. Business category revenue is expected to range between 161 and 166 million and consumer category revenue is expected to range between 57 and 62 million. Operating expense is expected to range from 64 to 66 million. This figure includes stock-based compensation charges of approximately 2.8 million.

Our 2006 tax rate is expected to range from 32.5 to 34.5%. This range is provided under the assumption that the federal R&D tax credit statute, which expires at the end of 2005, is not reenacted in 2006. We expect GAAP EPS to be between $0.81 and $0.89 per diluted share. We expect adjusted EPS to be between $0.94 and $1.02 per diluted share, which will 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, president and chief operating officer, to discuss the operations of the company.

Thanks, Bryan.

Over the past two years UEI has worked hard to strengthen our lead in remotes and micro controller chips while developing new technology, products and services to better serve our customers. We have been successful in this pursuit and companies are adopting UEI technology in increasing numbers. In fact, we expect to ship over 50 million chips powered by UEI technology in 2006 alone. In Q2 sales were strong, up 18% year-over-year, with strength in sales to our cable and satellite providers as they continued to roll out DVR, high definition and digital set-top boxes.

Operationally, UEI is running strong as well. Expenses came in as planned and gross margins were at 37.4% due in part to product cost reductions and a lower mix of air versus ocean freight costs. Operations is one part of our success, but driving the growth of UEI sales has been our leading technology, products and services in the home control arena.

A good benchmark of the company's progress is our patents and our database of infrared codes, which fundamentally is the language of the living room. At the end of the quarter our database contained over 263,000 function codes, an increase of 22% over the same period last year. To give you a perspective on this number, we add a new function code to our database every three minutes we're open for business.

Patents are a good way to track our innovation. During the second quarter we were issued one patent, filed for three, bringing our total issued and pending patent count to 164. We believe this is the broadest patent portfolio in the home control space.

These activities drive both our business and consumer categories. In the business category we continue to experience robust sales as consumer demand for DVR and high definition grows around the world and as cable companies push to convert their analog subscribers to digital service to free up bandwidth on their systems.

We're also winning new customers. In the second quarter we added former Adelphia locations that had been acquired by Time Warner and Comcast. We also landed the Canadian Cable Systems Alliance, a group representing 85 broadcasting distributors throughout Canada with about one million subscribers. Around the globe we are also seeing strength coming from our customers, such as Sky, MultiChoice, Sky Italia, Foxtel and others, and from new customers such as Telefonica in Spain with their new IPTV offerings.

In consumer electronics we are seeing solid demand for our products and technologies as consumers upgrade to flat panel televisions. The hospitality industry is also upgrading to flat panel TVs and we are pleased to have LodgeNet as a new customer. We are supporting their new high-def platform, which will begin trials this month.

To continue our growth we are constantly working on new products and services to expand our reach within the industries we serve. During the quarter we previewed new and forthcoming products and services at two major cable shows. They include the Atlas DVR, a new learning DVR remote for cable companies, and the Polaris, a new remote designed as an easier to use remote for older cable and satellite customers. With Polaris we have a -- yet another offering for the industry and we've already sold it to 10 cable systems.

To prepare for the future, we previewed a new remote to support the forthcoming Open Cable Application Platform, or OCAP standard. OCAP defines a standard way of delivering services across the cable industry and is supported by almost every cable company in North America.

We also announced our relationship with Pace Micro to commercialize our MyMedia channel product, which turns a channel on a set-top box into an easy to use digital media server to access your home PC's pictures, video and music.

Finally, we unveiled our re-branded call center services called Active Support and formally launched our pre-installation services, which can reduce technician visits and truck rolls by an average of 20%. These new services -- with these new services we added Star Choice in Canada, [Brasnen] and multiple Comcast locations as new customers in the quarter. A key benefit of these new products, services and technologies is that it makes UEI a more visible partner for our subscription broadcasting customers, creating a greater barrier of entry for the competition.

Now let's turn to our consumer category. During the quarter, consumer came in with a solid 12 million in sales, within our guidance of 11 to 13 million. As we move into the high selling season, we are preparing to launch a number of new retail products in late Q3 and Q4.

The highlights include our third generation One-For-All Chameleon products, which will have brighter screens, sleek aluminum housing and of course the power of UEI technology. We will also have new accessories for the digital home that increase WiFi signals within home, send audio and video signals between devices and PCs, and a remote control that controls digital media on your PC.

Our third generation antennas will also launch with new designs and capabilities to tap the demand of Europe's rollout of digital broadcast television. We'll have new control solutions, including lighting, control modules and remotes to control them and a new product that can convert any infrared remote into a radio frequency remote, enabling consumers to put their components into a cabinet and out of sight, particularly important for new flat pane TV owners.

In addition to these products, we'll have a host of product upgrades and refreshes to our existing One-For-All line. We will formally launch these products on September 1st in Berlin at the [Internationale] [inaudible - highly accented language], which is the customer -- consumer electronics show in Europe.

A relatively new component of our consumer revenue is CEDIA, the high-end custom installation market. During the quarter we launched [Nevo Studio 2.0] at CEDIA UK in England and we will launch it in North America at the CEDIA show this September.

NEVO studio is the customization software used by installers with NEVO SL. This release contains many cutting edge features. One of particular note is a patented feature that solves one of the biggest issues for installers, having to drive out to a customer's home for service and support.

With NEVO 2.0, instead of driving to a customer, and installer can remain in their office, fix the problem and over the Internet deliver that fix directly to the customer's NEVO SL. No driving, no traffic and faster customer support. So the installer can sever more customers with less cost. No other product on the market has this great new functionality.

Also during the quarter we announced our agreement with [Crestron] Electronics and began shipping them NEVO SLs. Crestron will brand the product under their name and the product will be used for Crestron systems.

Crestron is arguably the biggest company in the CDM market and we are very pleased to have them as a customer.

Overall, we experienced a great first half with sales of 106 million up 24% over last year. Our business category is very strong due to our leading technology, solid operations and market demand for digital set top boxes. And our consumer category is positioned for a solid back half with a strong pipeline of new products.

Wit that I will turn the call back over to Paul for some closing remarks. Paul?

Thanks Rob.

We are proud of our leadership role in wireless control technology and our work with our customers to provide services desired by consumers today and tomorrow.

High definition and DVR continue their aggressive roll out and naturally hardware cycles such as HDTV roll out benefit UEI.

To give some color on the roll out. Motorola shipped a record 2.4 million digital entertainment set top boxes in the second quarter, including approximately 680,000 digital video recorders.

Comcast reported a 10% year over year increase in the second quarter of its digital customers who are subscribing to its HD DVR products.

HD and DVR both stand at relatively low penetration rates and are projected to grow substantially over the next 5 years.

We are also working in the exciting area of digital media and are currently targeting 3 markets in this space, automobile, cell phones and home networking. We are well placed to provide our customers with the wireless control technology needed under all these scenarios.

How are we able to do this? It's based upon our experience from the last 20 plus years. Building up our database of home control codes and our intellectual property portfolio of novel ease of use solutions.

Continuing our tradition or innovation, or more specifically, creating software and hardware to expand what our technology can connect, control and interact with in the home.

Partnering with leaders in our served markets and focusing on building and maintaining a solid infrastructure.

Our success is illustrated by our ability to expand our customer list both within the traditional subscription broadcasting and consumer electronics industries and into different industries that are intersecting with the home entertainment network, such as computing, telecom and automotive.

Overall our efforts are supported by our profitable growing business. We have built a solid foundation that supports our r future growth while we anticipate only better things to come. Stay tuned.

I'd like to open it up now for Q&A.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Scott Ciccarelli with RBC Capital Market.

Hey guys how are you?

Hey Scott.

Couple questions actually. First, can you redescribe or give us a little more detail about number 1 the Crestron relationship and number 2, what you guys are doing specifically in terms of providing services. I was a little confused on Rob's comment on that.

Okay, so our relationship with Crestron in the CDM market, they are really the 800 pound gorilla. And what we're providing to them is the NEVO SL platform, which they will - they have a proprietary or closed system. So they will provide their software on top of the NEVO SL platform. They'll brand it as a Crestron product. And in fact you can go to Crestron.com today and see the product there today. And then they will sell that product, which is called a TPX4 or something like this, into their channel.

What this means for UEI is because the product Crestron systems are proprietary, they speak a proprietary language, in our CD offering we could never touch that important channel. Because we're selling to them, with their software, we can now not only sell to Crestron related customers but also to everyone else in the marketplace that is using a CD installer to build their home systems -

Isn't NEVO effectively competing against Crestron?

You know it is and it isn't. The Crestron installs are well above $50,000 installs and NEVO install is somewhere in between high end retail and high end CDR, so they're less than $50,000 installs. So really this is all about market expansion.

What was the second part of your question Scott?

Regarding the support you're providing to installers, I was a little confused on that. You had mentioned it sort of -

Oh sure. Great question. So we have call center services that we've always provided post install support. So if someone had a problem with their remote control or their set top box didn't work, customers like Comcast, who contract with us to take those calls. To expand those offerings to the cable industry, the one thing that we've done in addition to post installation support is pre installation support. And so what we're doing there is, for example if Comcast has a new install, we will do forward calls to make sure; 1) the customer will be there at the stated time and 2) understand what type of equipment a customer will have.

What that does is that improves the yield of that actual truck roll and service call and makes sure the customer is there, they know going in that they have basically the remote ready, up and running, ready to go.

So what we've fundamentally done is re-branded the call center and called it active support and we will provide not only post - post installation service but pre installation services and we've landed a number - we've been sort of quietly testing that service and we unveiled it at SCTE and we've landed a number of Comcast locations and a couple locations in Canada with this new pre installation business,

And this is purely related to the remote, yes?

Yes. And call center.

Okay.

The call center service.

Got it. And then the last 2 questions and then I'll pass this off is gross margins have bounced around quite a bit. How much visibility do you have into kind of the gross margin guidance you've given us?

Well we're guiding at 37 plus or minus 1% for Q3 and we don't give guidance beyond that. I mean in Q2 -

No, but I guess my question is - there's a lot of things that have impacted it, whether it was the freight both up and down so how comfortable are you or how comfortable can we get, in terms of investors of kind of looking at the run rate of the business and say this should be 37, should be 38, should be moving up should be moving down?

Well, we feel comfortable that we'll hit between 37 plus or minus in Q2 '06. There's a lot of variables that - or Q3 I'm sorry. There's a lot of variables that play - come into effect for the gross margins. There's - as you said a freight, there is product mix, you get into Q3 and Q4 you start selling more into the retail channels. So we feel comfortable with 37 plus or minus 1% --

Let me rephrase. Should we expect it to bounce around a lot from the 37 range going beyond that? I'm not asking for a specific quarterly guidance but just in terms of how to think about the business.

Yes, again Scott, I think it's difficult for us to project into next year. I think we've provided enough guidance on the call in terms of sales and operating expenses for one to get a pretty good idea of what we would expect the range to be in margins for the remainder of the year, certainly for the quarter. Again we've said 37, plus or minus 1.

I think beyond that, to go into next year, its difficult for us to say. I think what's happened is we've had margins in the mid 30s, and, as we've said all along, the business category when it is a higher percentage of mix will push the margins down.

What we think is we've en-richened the mix a bit there. We've done some cost containment measures there, that we think are sustainable. And on the consumer side, as we lift the mix towards consumer, the margins will begin to go up. So that's why you see 37.4 in Q2 and then 37 plus or minus in Q3.

But again as we move forward - as we get into next year if there were an issue with airfreight or demand, we don't really want to provide multiple quarters out guidance. There's too many variables out there that we can't at this point predict.

Okay. I got it. I guess the last question is, any update on simple devices or the automotive business and did that actually cost you any money during the quarter?

Well, it did. Of course we're developing products that are for multiple years out and as I alluded to on the call, we're - we have those investments even within out growing profitable business. So they are embedded in there.

I think what's happening with simple though is its more integrated today. We've got a lot of things that are going on today, my media is a - something that was originated out of our northern California location. We're working on some TV business that probably better originated out of our northern California location.

So simple devices as we become a home control company, they're an important element in the offering of UEI. So across the company we've been integrating the employees and having them work on projects across the company rather than viewing simple devices as its own entity.

Okay. Thanks a lot guys.

Yes.

Your next question comes from the line of Murray Arrenson with Ferris Baker Watts.

Thanks, good afternoon guys.

Hey Murray.

Hey Murray.

First couple - you went through a lot of information, I want to make sure I got it all. What was you EPS guidance for next - for '07?

We did give any.

We didn't give any guidance for '07.

I'm sorry - well you - oh, I'm sorry for the full year I meant to say.

For the full year was - we expect a GAAP EPS to be between $0.81 and $0.89 per diluted share. We expect adjusted EPS to be between $0.94 and $1.02 per diluted share.

Okay. And foreign exchange impact you talked about. What was the deal there?

That was actually versus Q2. If you look at other incomes, Q2 '05 versus Q2 '06, in Q2 '05 we had a significant gain.

Got you.

[inaudible - microphone inaccessible] gain of about 1.4 million and this year we did not.

Okay. So that - there was no meaningful impact on 4X this time around.

No, no there was not.

Okay. You talked about the record quarter for Motorola set top boxes, Comcast had some good numbers. They're talking about some pretty good CapEx numbers heading into the second half of the year especially after this Adelphia transaction. I know its kind of a dotted line or a crooked line between those sorts of numbers and your numbers. But can you talk about the impact on those things in the back half of the year?

Sure. I mean we expect - again we've provided the guidance of 160 - 160 to 166 million in sales. Again, we're comfortable with that range. I'm sorry - 161 to 166. We're comfortable with that range and again, that's implicit of what we've done in the front half.

So, I mean, their roll outs if they become more aggressive, I suppose we'd be at the high end. And less aggressive probably towards the low end. That's our best estimate at this point, building it up on a bottom's up basis as to where we'll be for the rest of the year.

Okay. Can you talk on the consumer side? It seems like its always worth digging a little deeper geographically to see what markets were particularly strong or particularly weak and heading into the holiday season what you're view is there and how you've kind of handicapped the holiday season spending.

Sure, as you know our retail is largely outside North America and largely in Europe. Our strongest markets, we really started out in the UK. And have grown from there. So the UK is our strongest market. But across continental Europe we also do well. We do well in Germany, Scandinavia, Spain. And one area of particular growth for us is Italy, where we have a new office in Milan and we look to taking the relationships that we have in other parts of Europe like with the metro group for example and extending those relationships into the Italian retail chain.

So we look forward to a good back half. But what's especially interesting in the retail is the number of new products that we will come out with. Especially right around EFA because that really drives that business is new exciting products. Whether it be our refreshes chameleons, our third generation chameleons, our third generation antennas, where some of the interesting products that we're coming out with more digital or connected home type applications.

Okay, because I mean you seem to be - if I'm doing this correctly you seem to be implying some pretty strong year over year growth by the time you get to fourth quarter. And that's generally based on the new products and just kind of a flattish scenario on consumer spending.

Right.

And I think Murray, we - the EFA is the first week of September. FEDIA is the second week or mid-September. And again we expect to, after that period, at those shows have a lot of new product on the market for Q4.

Okay. Last question. Operating expenses, I think you said you were pointing to 16.5 to 17 million next quarter.

That's correct.

Which is up a million from this quarter and up a couple million or more from year ago. Can you talk about what's going on there and how that's [inaudible - microphone inaccessible] -

Yes sure, its due primarily to an increase in spending associated with the new product launches that Paul and Rob alluded to which include multiple expenses of product development, promotional cost, additional head count. As etc.

In addition in 2006 we forecasted a executive management bonus, which will hit in Q3, Q4 the expense. Where in 2005 we did not pay out an executive management bonus at all.

Are you going to quantify that for us?

Not at this time. Actually it wouldn't get really quantified until year-end.

Okay.

We hit our targets, it will be paid. So we will accrue it as we clearly see the end of the year.

Okay and so as you head into first quarter and second quarter of next year, then do expenses, which direction do they go from there?

We don't give guidance beyond this year.

Well, I'm just trying to figure out if that's like a third and fourth quarter hit and then you get into first quarter and it drops off again, or if once you bundle everything in with the additional spending, the OpEx continues to kind of move flat to up?

Yes, some of the launch cost will go away Vern - Murray.

Okay.

So yes. Some of these expenses will go up for advertising, promotional costs, launch costs for late Q3 into Q4. Not all the expense will go away but some of it will.

Okay. Okay great. Thank you.

Your next question comes from the line of Steven Frankel with Canaccord Adam.

Paul could you start with an update on the monster relationship and when we might see those products roll out to the marketplace.

Yes. Those are in development today and will be out probably later this year into next year. Still yet unspecified.

Awesome. Okay and on the DSOs, you talked about some extended credit terms. Is this a new way of doing business or [inaudible - microphone inaccessible] on promotion - how should we think about the DSO level going forward?

I would say its long term. It's not a promotion. It was actually - we had some high volume customers that we granted extended payment terms at, because of it it will affect our DSO slightly, which it did. I wouldn't consider it promotional.

And could we sense from the monster deal and maybe the Crestron deal that the US focus for retail high end and mid levels is going to be through partners and what about the low end retail. Are you still going to use third parties or are you thinking about other ways to really attack that market in the US?

Yes, we're still looking at ways to go after the mainstream retail market in the US. The products we've run out today though are some of the most advanced products on the market. Usually things start there and then it moves down from there.

But remember, our products do show up in mainstream realty -- retail today through the One-For-All brand. We also have a relationship with Radio Shack.

And is that one for all relationship something that's a rolling renewal or is there and end date with that relationship?

No. No the contract is perpetual.

Great. Thank you.

Your next question comes from the line of Richard Todaro with Kennedy Capital.

Hi guys.

Hi.

Nice quarter. Couple questions here, a list of them. Are you guys seeing any raw material pressure today that could alleviate maybe if costs come down next year or anything on that side?

Well you know - definitely if you look at commodity prices, they've gone up quite a bit and we work very closely with our partners and vendors to ensure that we're getting the best prices across the board. And with our volume. As we mentioned we're doing 50 million, over 50 million ships this year. We're ensuring that we're using that volume to give us the best prices. So really in a macro sense those pressures are always there but the companies manage then quite well.

Okay, we are hearing some chatter on the Street about a number of your patents being challenged. Is there a key pattern that you are in the middle of being challenged or is this just rumors that your word would affect the business in any way shape or form?

No, we are a confident of our patent portfolio. And I think one of the testaments to our competence is the licensees that utilize our technology, such as Microsoft, Philips, Logitech in the space.

Okay. Do you guys give any indication of bookings for the next quarters, so your confidence level in your guidance is -- how much lead time to the cable companies give you to know or how do we get comfortable with the visibility? Everything looks okay, but how do we know?

Well, frankly the backlog is anywhere from one day to two months, two to three months, so we don't actually publish a backlog because it doesn't always provide a good indication of what sales for the quarter will be. We do have a backlog and in some of the segments it's obviously longer than others, as we do expect customers to order six to eight weeks ahead of time. They don't always do that though, and we do prepare for that to fulfill orders quicker than that on the retail side though or make the stock business. So we can receive orders very, very late in a period and those orders out of inventory.

So just -- can you guys help us walk through your comfort level with the guidance for the year and maybe what -- if something did go wrong what would happen? And then any positives that could happen to make it even better than you thought.

Sure. You know, I think walking through it again, we go through the business, business line by business line. In some cases product by product, in other parts of the Company customer by customer, talking to the sales folks, then talking to the sales management, Brian and Mike Cook, another guy who works here, they go through this in a lot of detail. Rob and I review it.

There's a very detailed process that goes into it, so we're comfortable with the ranges that we've given for Q3 and the year. In terms of what can make them go right or wrong, there's again any number of variables there; the Christmas selling season in the US or in Europe. If it's a complete disaster, that would be a negative because there would be less foot traffic in the stores.

However, we've got a lot of new products coming out because those new products have a lot of order flow and then more reorders than we expect, that would be a very positive impact on these new products. We think the level of new products we are putting out is going to lead to a very positive effect.

In subscription broadcasting, the rollouts of HD DVR, as long as the operators are continuing to roll those services out we benefit because we are providing the control technology within those products and as we've said on the call, services now to help their businesses. So, if that environment remains robust, as it has been, then we are very confident with the forecast that we put out.

Given that we are only six months till the end of this year and the strong turns trend you're seeing this year, is there anything that -- it looks like the analysts are only predicting about 13% topline next year? Is there any trend or any change that's going on in the business that you see would actually slowed the growth into next year or do you -- I thought you were launching like 50 new products in the back half of the year? And while I want the analysts to be conservative I just want to understand if there's anything obvious that the trend is tougher next year because of something.

Yes. Well, there's nothing obvious. And again, our official stance on that we won't provide any outlook into next year that the analysts have obviously done their job in looking into next year and you'd probably be best to talk to them. We at this point don't have -- the vision we have we are not willing yet to put a range on numbers for next year.

Okay. I just want to understand one more time on the -- if businesses are good, are strong, why would there be a need to give any extended payment terms at all? What advantage does that -- what am I missing?

Yes, look, there's also late quarter shipment that affected the DSO. If we have a higher percentage of shipments in say the last month of the quarter, it will adversely affect the DSO.

But specifically on extended payment terms, was there a significant amount of the business that you're dealing now or ...

We have a couple of customers that contribute over 10% of our sales, so I would say it's relatively significant.

And they came to you and said sorry, you are going to have to give us extended payment terms or was this part of -- I'm just curious if you're pulling forward quarter sales ahead into this quarter?

No, we are not doing that.

Or something like that.

Unfortunately, some of these customers are very large and they do have leverage, and they are good payers. They pay well, we don't have any sort of bad debt issues with them, and because they have great credit ratings we extended their terms.

Okay. And the two last questions and then I'm done, the use of cash, we're building up cash great, you guys are doing a great job. You could talk about maybe possible acquisitions, but you know, I just didn't know if there's anything there?

Yes. Well, we can't comment at this point on any specific use, but it is a normal -- a frequent conversation here, both with management in the Board. So we continue to discuss uses, and again, as the balance has come up now, approaching 60 million, I think we need to address the issue of do we use it for M&A because, you know, we look for deals there, do we use it for stock repurchase, do we use it to invest in the business, or we do to clear a dividend?

And again, nothing is off the table. We have not declared that any one of those things is off the table. They'll all be considered, and what we're really looking at is how do we return the cash to the shareholders in the most economical fashion or the highest return fashion, and that's really the goal and we continue to work on that.

Clearly as you can continue to invest in the business the margins in the turns that you have we would encourage that, if not a small dividend is great. The final questions, last suggestion, if the company isn't changing its option expense plan or its option plan, and this is going to be a go for what expense? And why not just report the numbers as GAAP numbers and then next year the comparisons you don't have to go GAAP, non-GAAP this year, we take the head and we grow off of that number?

Yes, we may do that. In '06, because the first year of implementation, we want to compare apples to apples, '06 versus '05. Now next year we may do that because, like you said, it will be an apples to apples comparison.

Okay. Okay, great job guys. Thanks.

[OPERATOR INSTRUCTIONS]

Your next question comes from the line of Patrick Flavin, from Flavin Blake & Co.

Paul, there's been a lot of press of late about a group of the, I believe, exclusively Japanese TV set makers putting together a commercial Internet TV product for next year. Could you elaborate on anything you know about that, one, and two, explain to us how your strategy would play into that?

Yes, sure. We talk to many of the OEMs and of course to the extent they haven't talked about, more importantly, if they haven't introduced their product, We certainly, if we have any details on that, couldn't disclose it only because secrecy in our business, particularly on that customer relationship, from a customer relationship standpoint, is critically important.

So I can't comment on anything about any specific product, but I would say that you know one of the strategies we've employed over the last number of years is to develop closer relationships with the leaders, particularly in leaders in the flat-panel area. So we have relationships with some, not all, and we continue to work on those relationships because that obviously over the next number of years is a growth area and we are working with them on incorporating our technology or our products into their solutions. That's about all I can say on that though.

Okay, but any Internet TV wouldn't open up new horizons?

It may, it may, yes.

Okay.

To the extent it's with one of our partners, that would lead to even more of this, again, digital transformation. It would be on top of HD DVR and then IPTV or Internet TV.

Okay, and then to specific questions, you mention that the tax rate was inflated during the quarter for taxes paid on an audit for past events. Could you give us that number? How much was that? In other words, ex that, what was your tax rate?

Well, the tax expense was about 104,000 [inaudible] principal plus interest, so it came out to about 140, $150,000.

Okay, so we just stripped that out of ...

Yes, it would have been -- if you would exclude that, you would have been comparable to last quarter.

Okay. And then finally on the R&D spend, can you give us -- because it continues to go out and obviously with simple devices in some of the other stuff you're doing, that's money presumably well spent. But can you give us a sort of a look forward as to what you see R&D spending maxing out at as a percentage of revenues?

Well, looking for what I can really give you a maximum because again that would be looking into next year, but we have increased the spend here slightly and we think it's important for, again, future periods, future quarters, even future years for us to continue the investment. And they may be software and hardware that we are building for these markets, some of which are now starting to see the Mymedia product is a result of R&D spending over the last number of periods.

Now, that's being introduced and so we think that R&D spending is important. Now whether it will grow as a percentage of sales, with the sales growth we've had it hasn't because we spend -- we feel we spend wisely, and don't necessarily want to just rely on if we grow our sales 30% we should just grow our expenses 30%. We spend to projects, rather than just to a budget.

Okay, but you're at 4% of sales now and you seem to be gravitating around that level. Is that a normalized level or are we looking at a migration to 5%?

Well again, to the extent we have customers that are interested in future applications we may increase it a little, because if we -- again, on a project level basis, if we look at a project where we are going to work with a customer on an NRE project over a year, year and a half, that will yield revenues at the end of that period in excess of that expense, then we would invest in that may drive up our R&D spending for that period. But again, it's viewed on a project by project basis.

Okay, thank you Paul.

Sure.

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

Okay, thanks everybody for joining us today. We see great opportunities ahead of us for us to build on our role as the world leader in wireless control technology and we look forward to sharing our future successes with you.

In addition, it's important to know we will be presenting at two conferences next week. We will be in Boston at the Canaccord Adams Conference on the ninth and we will be in New York at the B. Riley conference on the 10th. We look forward to seeing and speaking with you at those, if you can make it there.

In addition to that, as I mentioned, if you guys can work it into your schedule I would advise you to go to EFA in Berlin, if you can make it there in September and/or [Cedia] later that month. Thanks everybody, we'll talk to you next time.

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

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