Universal Electronics Inc (UEIC) 2006 Q3 法說會逐字稿

Welcome to the Universal Electronics Third Quarter 2006 Earnings Conference Call.

At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q&A session. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded today, November 2, 2006.

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

Thank you [Mark] and good afternoon everyone. Thank you for joining us for the Universal Electronics Third 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 2 hours after the conclusion of this call. The U.S. number is 800-642-1687 and international the number is 706-645-9291. Enter access code 8625552.

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; the continued convergence of the Company's technology, and trends in upgrading digital media services, such as DVR and HDTV; the continued sales and operating growth including, in a subscription broadcasting and cable and satellite markets, the Company's sales, operating income, net income and EPS growth; 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 future 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 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 management's projections or forward-looking statements.

Also, during this call today, 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 third 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, and Bryan Hackworth, Chief Financial Officer.

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

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

We had a great third quarter, generating revenue of $59.64 million, driven by solid growth in our core subscription broadcasting business. Today's home is becoming ever more complex with more sophisticated entertainment devices, such as flat-panel TVs and a greater variety of entertainment services, such as HDTV and DVRs. Looking forward, we see sustained growth in these digital services. According to Parks Associates, the number of households with DVRs is expected to grow from 21.6 million in 2006 to 48.4 million in 2009 in the U.S. alone, a compound annual growth rate of more than 31%. And people will be using DVRs with more sophisticated TVs. Display Search predicts shipments of HD-capable TVs will have an almost 30% compound annual growth rate to the end of the decade.

We ourselves are offering greater services through new products. At the Custom Electronic Design and Installation Association, or CEDIA Expo in September, we announced the release of the NEVO Studio 2.0 software application as an update to the Company's software suite for NEVO SL and unveil the limited edition hi-gloss black version of the NEVO SL controller.

Also at CEDIA we announced a new product and a new relationship with Sirius Satellite Radio. Through our development relationship with Sirius, we will now be able to extend wireless capabilities to two-way communication, utilizing Z-Wave technology with the Sirius conductor. This customized solution will include integrated hardware, software, and patented control technologies and will be available at retail this month.

At the EFA trade show in Berlin in September, we launched the third generation of our Chameleon remote controls. A major new feature of this product is light control, a unique for remote controls offered through the retail channel. At the show, we also conducted a demonstration of our SimpleWare Home Reference design, which allows consumers to organize and play all their personal multi-media content using only a remote control.

Also at EFA, we unveiled new digital antennas for Europe's expanding digital broadcasting market and believe these new products will further strengthen the leading position of our One-for-All brand in the field of indoor antennas.

Recently in October, we announced the release of SimpleCenter 4.1, our software-based media management solution that enables users with a universal application to manage not only all their digital media, but also their latest mobile devices.

Looking forward, we have many new innovative products and technologies on tap for next year as well. We have been and will continue to be hard at work developing the next generation of products and technologies that revolutionize [inaudible] and ease of use in an ever more connected and complex home environment.

We are proud of what we have accomplished to date, and of course look forward to an even more successful future.

I would like now to turn the call over to Bryan Hackworth, our Chief Financial Officer. As many of you know, Bryan was family, our Corporate Controller who appointed CFO in late August. Bryan?

Thanks, Paul.

Net sales for the third quarter of 2006 were $59.6 million, above our guidance of $55 million to $58 million and 29% higher than last year's third quarter net sales of $46.2 million. Business category revenue was $46.1 million, above our guidance of $39.5 million to $42.5 million. Our consumer category revenue was $13.5 million, below our guidance of $14.5 million to $16.5 million.

Gross profit for the third quarter was $21.6 million, or 36.2% of sales, within our guidance of 37% plus or minus 1 point, and below the third quarter of 2005 gross profit of 36.8%. T

Research and development expense was $1.8 million, consistent with the third quarter of 2005. Total operating expenses were $17 million for the third quarter of 2006, within our guidance of $16.5 million to $17 million, and compared to $13.3 million for the third quarter of 2005.

The 2006 third quarter operating expenses included $691,000 of stock-based compensation charges, while the 2005 third quarter operating expenses did not include any such charges.

Other income was $407,000 compared to other income of $169,000 in the third quarter of 2005. The effective tax rate was approximately 29.8%, compared to our guidance of $27% to 29%.

Adjusted operating income was $5.3 million compared to $3. million in the third quarter of 2005, up 43% year-over-year. Adjusted operating income in 2006 excludes expenses related to stock-based compensation in COGs, R&D and SG&A. Adjusted income before taxes was $5.7 million compared to $3.8 million in the third quarter of 2005. Adjusted net income was $4 million, or $0.28 per diluted share, compared to $2.9 million, or $0.21 per diluted share, in the third quarter of 2005.

For the first 9 months ended September 30, 2006 net sales were $156.2 million, up 26% from $132 million for the same period of 2005. Adjusted operating income was $13.9 million compared to $7.9 million in the same time period of 2005, reflecting growth of 76%. Adjusted net income was $9.5 million or $0.66 per diluted share compared to $7.5 million or $0.54 per diluted share during the same time period last year.

Turning to our balance sheet review, we ended the quarter with cash and cash equivalents of $57 million. DSOs were 67.7 days at September 30, 2006, compared to 71.8 days at September 30, 2005, reflecting strong collections from certain significant customers.

Net inventory turns were 4.4 turns at September 30, 2006 compared to 5.0 turns at September 30, 2005m reflecting higher inventory levels than expected. The higher inventory levels are necessary to meet the increased revenue forecast in Q4, which is forecasted to have the highest net sales in our Company's history. We have also increased our safety stock levels for some key customer accounts.

We expect inventory turns to be between 4.6 and 5.4 in the fourth quarter compared to 4.6 turns in the fourth quarter of last year.

And now for our guidance. For the fourth quarter of 2006, we expect revenue to range between $62.5 million and $66.5 million compared to $49.3 million in 2005. We expect business category sales to range from $44.5 million to $47.5 million compared to $32.8 million in 2005, and consumer category sales to range from $15.5 million to $20.5 million compared to $16.5 million in 2005.

We anticipate margins for the fourth quarter of 2006 will be approximately 37.5% of sales plus or minus 1 point. The fourth quarter operating expenses are expected to be between $17.5 million and $18.2 million, including stock-based compensation charges of approximately $619,000. Last year's fourth quarter operating expenses were $13.4 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 statute, which expired at the end of 2005, is not reenacted in 2006.

GAAP EPS is expected to range from $0.29 to $0.33 per diluted share. This figure includes the effect of approximately $0.03 in stock-based compensation charges for the quarter and compares to $0.25 per diluted share in the fourth quarter of 2005. Adjusted EPS, which does not include the effect of stock-based compensation charges, is expected to range from $0.32 to $0.36 per diluted share.

For the full year 2006, we now expect total revenue to range between $228.7 million and $232.7 million, which reflects growth of 26% to 28% over last year's revenue of $181.3 million.

Business category revenue is expected to range between $173.8 million and $176.8 million, and consumer category revenue is expected to range between $53.4 million and $57.4 million. Operating expenses are expected to range from $65.3 million to $66 million. This figure includes stock-based compensation charges of approximately $2.8 million.

Our 2006 tax rate is expected to range from 33.5% to 34.5%. 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. We expect GAAP EPS to be between $0.85 and $0.89 per diluted share. We expect adjusted EPS to be between $0.98 and $1.02 per diluted share, which would represent a 21% to 26% increase compared to $0.81 adjusted earnings per diluted share in 2005.

Before turning the call over to Paul, I will give you an update on our intellectual property portfolio. In the third quarter, we again expanded our patent portfolio. We added 4 new patents, bringing our full issued and pending patent count to 168. We also added to our database of home-control notes, one of the key enablers of our growth. The database now contains over 275,000 function codes.

Thanks Bryan.

As we've discussed, our business category sales this past quarter were extremely strong, fueled by increased demand for services, such as HDTV and the products that enable navigation of those services, universal remote controls, and set-top boxes. With UEI's patents and technology, consumer connect, control, and interact within the ever increasingly complex home environment. Consumers enjoy the simplicity our solutions bring, allowing them to easily navigate all of their devices and content, which leads to growth for us.

In fact, this quarter we expect to close UEI's strongest year ever in terms of both sales and earnings. Based on our projections, our trend in 4-year revenue growth is 22% per year, driven by underlying trends such as growth in advanced set-top boxes, HD, DVRs, satellite, IPTV, and the proliferation of digital media. But even more importantly, this growth has been driven by more innovation in products and technology than ever before, and the resulting customer relationships we have either earned or we continue to build.

Today's home is become more and more complex. Companies who can simplify the home for consumers win, and we have consistently been the leading Company who does just that.

The trends underlying this growth are only getting stronger, and we at UEI are continuing to innovate. We believe we will exit 2006 better positioned than ever to answer the growing demand to simplify the increasingly connected home. We remain ever more committed to delivering our innovative products and technologies into this growing market, thus continuing to generate impressive financial results. We have accomplished much over the past several years, and we are very excited about the future we are creating. Stay tuned.

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

[OPERATOR INSTRUCTIONS].

Steve Frankel, Canaccord Adam.

Good afternoon Paul; one accounting question and one strategic question. On the accounting side, what was the cash flow from operations in the quarter?

And then on the strategic side, the consumer sales have been a little disappointing the last couple of quarters. What would you attribute that to, and what are you doing to address that issue?

I'll let Bryan answer the cash flow question in a minute Steve, but I'll answer the strategic one first if you don't mind.

I think on the consumer side, in Q3 in particular, we probably, as you know Q3 is more back-end loaded because the retail selling season typically starts late in Q3 and into Q4; basically extends out until say the first 2 weeks of December where you get a pretty good picture for Q4. Q3 we had a big show in early September. We probably came into the quarter with more expectation of how quickly we would ship the products coming out of that show, number 1; we had an order push in the U.S., which we don't like to use it as an excuse, but nonetheless it occurred.

So there were a couple of things, nothing major but a couple of things that pushed us lower in Q3. Our expectation based on our, the input that we get and some of the market trends that we see in retail, which right now are mixed at best. We're not counting on a huge holiday season for retailers. If it is stronger than expected, then we should be towards the higher end of the range we gave; the new products that we came out with are more successful than we thought, and the retail season is great; otherwise, we have a low end of the range at $16.5 million for Q4, and we fully expect to be somewhere between that $16.5 million and $20.5 million range in the consumer businesses in Q4.

And you feel like you have the right product set going into next year so once we get through the holiday season, do you have everything you really need to address the market today ?

Yes we do, and again the products we introduced in Europe, in particular at EFA, we got a lot of strong reaction to, very positive, so we feel very good about the products we have there.

And we have a few things as I said earlier in the call on tap for next year that we haven't talked much about, but our product development team and engineering team is hard at work on those products for next year.

And Bryan you can answer that cash flow question.

The cash flow question for Q3, we were flat for cash flow from operations.

That was due to the inventory build?

Exactly; if you were to take net income and add back depreciation and amortization and stock-based compensation, and offset with inventory increase, it's basically flat.

Okay thank you; I'll let somebody else ask a question and maybe circle back.

Okay.

Murray Arrenson, Ferris Baker Watts.

Thanks good afternoon guys; I'm sorry first before I delve in, I missed your fourth quarter business category guidance.

It's going to be $44.5 to $47.5 million.

Okay great; can you talk a little bit about some of the leading indicators you're looking at on the consumer side of the business, what you're using to assess what you think is going to happen this holiday season maybe particularly with respect to HD and how meaningful that is during this holiday season?

Well again, for us Murray, HD affects not just consumer but also business because essentially what happens is consumers go out to retail, buy a flat-panel monitor, but often they'll buy a box, a set-top box through a different channel to power that HD monitor. So some of that business for us goes through the business category rather than consumer because we may not get a direct sale for retail but then get it through say a subscription broadcaster.

But on that, of course, the trend if continuing with flat panel TVs getting better and better, and less and less expensive. We don't really see that slowing down, at least very much.

I just think the general retail environment, and some of you guys would be more expert in this than us, but everything we read says that retailers are a little bit cautious about this retail selling season. So we don't want to get ahead of ourselves and presume it's going to be an extremely strong Christmas with, or holiday season, with our sales forecast and then be disappointed later when the foot traffic is lower than expected or so we try to embed all of that into our forecast for Q4, the range of outcomes.

If you were to ask us today, things are going okay, but again the real telltale sign in retail is going to be mid-November through mid-December because that's where the retailers do most of their reorders. So they stock and then if say high foot traffic and a lot of sales, they'll do a lot of re-orders during that period, so it's -- but again, we've embedded our expectation of range of outcomes in our guidance.

Okay; can we just get an update from you of how things are going on the media side of the business, and maybe how your strategy is evolving there?

Yes, I mean it's going well; we were at CEDIA, again we announced a new NEVO 2.0, new NEVO SL controller, and I don't have a lot more to say on product there mainly because we are hard at work on a couple of things for the CEDIA channel that we haven't unveiled yet. But at upcoming trade shows, you should look for press releases, and if you're able to attend the shows because we'll be unveiling some things as we go into next year.

Okay, and lastly if you could give u an update on the cell phone in the automotive initiatives.

Yes automotive initiative is underway; the development path, we're on track. As I've said before that's long term because most of those relationships you gather the relationships today but enjoy the benefits a few years out.

As far as the cell phone goes, we have a relationship with Nokia, and as we've announced they'll be using our PC software as a multi-media solution for future phones, particularly in the N-series. And again, we're very optimistic or very positive about what we think can develop in that over the next 2 years.

Okay great; congratulations on a nice quarter.

Thank you.

Patrick Flavin, Flavin, Blake & Co.

Nice job Paul.

Thanks Patrick.

Can you talk a little bit about the increase in SG&A expenses as a percentage of your business model, what --there's a $5 million increase for the 9-month over 9-month.

Well I can address a couple things there Patrick right off the top. We have stepped up our investment in product development and engineering. Those are a couple things we've done. There's of course been the 123R stock-based compensation that is, we did not have in prior years that we do have this year. Bryan can probably comment on the exact number there, but it's not a small amount; it's a few million dollars attributed to that.

About $2 million.

Yes, about $2 million attributed to 123R, which is just that change that we didn't book last year but did this.

We also quite frankly last year accrued zero management bonuses; this year we have begun an accrual of management bonus. If we hit our figures, there will be, or at least the Comp Committee will be recommended to pay management bonuses this year whereas they did not last year.

Okay, and can you also re-address for us, you've done this before, but you're now up to $4 a share in cash and the beauty of your business is that you generate cash as you grow. Can you go through the dissertation again as to the options on use of that cash, and did you buy in any shares during the quarter?

I think we did buy shares; we bought about $380,000 worth. So we did enact share repurchase this quarter, Patrick and essentially what we were looking -- and again, management looks at this as well as the Board -- we're looking at a variety of options including strategic investment, M&A activity; we're looking at internal investment, meaning investing in our own product line, some of which we've done over the past couple of years. We look at repurchasing of shares, which is something we've done, and we also again consider dividends. We view those as the 4 areas that we could potentially use to essentially reward our shareholders or maximize return for our shareholders.

So we analyze each of them; there are obviously some uncertainties to some of them, and we weigh them on a regular basis to determine what is the most efficient method or the highest return method to return that capital to the owners of UEI.

Okay; I [commend] to you the share repurchase. if you don't have any other options, the share repurchase vehicle simply because it allows you to participate more directly, or us to participate more directly in the growth of the Company.

Right, well and over the years we've repurchased a few million shares of stock from time to time.

Okay thank you; keep up the good work.

Steve Frankel.

I wondered if you might give u an update on the Comcast relationship specifically the notion of providing some customer support in addition to providing hardware.

Sure, we have a more turnkey service probably than anyone in the industry, and we do help customers like Comcast with customer support, not just for the remote control, but for what I guess I would deem the installation services, so this provides them with again, a greater breadth service from UEI. We don't just provide the wireless control technology but also help them on their customer installs. And that's been, that' s small part of our business, but it has grown this year with our subscription broadcasting customers, including Comcast.

Okay thank you.

Kevin [Lieu], B. Riley.

Hi congratulations guys.

Okay thanks.

I only just had one question; it looks like the split in terms of revenues between consumer and business was similar to the prior quarter. I was just wondering what was going on in the gross margin line. It looks like margins were down overall.

Let me see; I think the margins were in the range of guidance we gave. They were slightly below the mid-point. And that was mainly because again the consumer business was slightly lighter than we expected and the business category were greater than expected, and as we have said before, the business category margins were slightly lower than consumer, so when the mix shifts a little bit, based on our expectation for the quarter, in this case I think our guidance was 37 plus or minus and we were pretty, we were within that range but at the lower end.

Thank you.

[OPERTOR INSTRUCTIONS].

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

Okay; I want to thank everybody for participating today. As discussed the fourth quarter promises to be an exciting one for us, finishing out he most successful year in our Company's history. In January, in early January, we'll be at the 2007 International Consumer Electronics Show, and as we know it CES, one of our largest industry trade shows of the year, and we look forward to seeing some of you there if you can make it. Otherwise we'll talk to you on the next conference call.

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