Universal Electronics Inc (UEIC) 2007 Q1 法說會逐字稿

Welcome to the Universal Electronics' First Quarter 2007 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. (Operator Instructions). As a reminder, this conference is being recorded May 3, 2007. I would now like to turn the conference over to Miss Kirsten Chapman. Please go ahead, ma'am.

Thank you, Michael, and good afternoon, everyone. Thank you for joining us for the Universal Electronics' first quarter 2007 earnings conference call. By now, you should have received a copy of the press release. If you have not, please contact Lippert/Heilshorn and Associates at 415-433-3777, and we will forward a copy to you. This call is being broadcast live over the Internet. A web cast 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 5422366.

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 access that information by listening to the web cast replay of this call.

After 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 the products and technologies, including new products and technologies, and the company's home connectivity lines of products and softwares, the recently announced new contracts with new and existing customers and new market penetrations, the continued conversions 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 the subscription broadcasting and cable and satellite markets, the company's continued 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 further detail on risk, management refers you to the press release mentioned at the onset of this call, and the documents the company files from time to time with the SEC, including the annual report on Form 10-K for the year ended December 31, 2006. 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.

On the call today are Paul Arling, CEO and Chairman, and Bryan Hackworth, CFO. Now I will turn the call over to Paul Arling. Paul?

Thank you, Kirsten. Good afternoon and thank you all for joining the call today. We had a fantastic first quarter of 2007. Our core business has continued to thrive, driving our net sales to $66 million, up 22% as compared to the first quarter of 2006 reflecting broad based growth in all aspects of our business.

Business category revenue reached $50.2 million, up 18% compared to first quarter last year. As we have stated before, two main trends are key drivers of our business category sales growth. The first trend is the transition from analog to digital. In 2005, Congress established February 2009 as a date certain for the end of analog broadcasting which, according to CEA Digital America, gave millions of Consumers all the encouragement they needed to get off the fence and buy a new digital, big screen TV. And they are buying these TVs in great numbers which is driving demand for our universal wireless control products. According to CEA market overview, U.S. factory sales of digital TVs are another 35% this year.

As part of our strategy to capture the growing demand for wireless devices that go hand in hand with TV sales growth, we continue to pursue deeper relationships with the leaders in the industry.

In the first quarter of 2007, we announced our relationship with VIZIO to supply the universal report control solution for its newest line of VIZIO large format plasma televisions. We expect this relationship and the demand from VIZIO will continue to grow throughout the year. Additionally, in the past two years, we assigned some key consumer electronics customers that continue to flourish. Names such as Mitsubishi, Pioneer, Denon and Panasonic have used our technology in their new products.

The second trend driving business category growth is the high definition TV and DVR hardware upgrade cycle. Informa Telecoms and Media predicts rapid growth over the next five years with 850 million HDTV sets in the world's home -- in the world's homes by year end 2011, more than three times the 2006 figure. In addition, demand for the advanced set-top boxes supporting HDTV and DVR services is almost appearing to outstrip supply, and this phenomenon is global. Instat states worldwide digital cable set-top box shipments increased to 27.5 million in 2006, a huge spike in comparison to the 15.6 million units that shipped in 2005. Instat now expects digital cable set-top box shipments will again be strong in 2007 lead by sustained demand from cable and satellite operators, not just in North America, but across the world. And UEI, again, is serving the HDTV manufacturers, as well as, the subscription broadcasting leaders that are rolling out set-top boxes to power these new services.

Digital video recorder, or DRV, sales also continued to increase. CEA market overview states that more than 10 million households plan to purchase a DVR in the next year with 78% buying for the first time. Kagan states U.S. DVR households are estimated to grow to 47.6 million by the year 2010. Approximately 15% of U.S. households owned a DVR in 2006. By 2010, the number will be more than 50% according to Forrester Research.

Turing to our consumer category sales, we preformed within the range that we forecasted with revenues growing to 15.8 million or 38% in the first quarter of 2007 as compared to 2006. As anticipated, this growth was largely driven by the response to the products launched in the second half of 2006, particularly in the European retail space. In the (indiscernible) space, our Nevo line continues to find fans. And true to our roots, we plan to build upon that by introducing next generation versions of this industry leading product this summer. The new Nevo line will bring a new level of RF effectiveness to the industry, easier new set up software, as well as, expand the range of price points. We will provide more detail on these new products the coming months.

Everyday, UEI provides solutions to our customers, not only remote control solutions, but also digital media and home control which enhance their businesses. We anticipate great success in our efforts in 2007 on which I will provide more color after turning the call over to Bryan Hackworth, our Chief Financial Officer, for the financial review and guidance discussion. Bryan?

Thanks, Paul. Net sales for the first quarter of 2007 were $66 million, above our guidance of $61.5 million to $64.5 million, and 22% higher than last year's first quarter net sales of $54.2 million.

Business category revenue was $50.2 million, above our guidance of $46.5 million to $48.5 million. Our consumer category revenue was $15.8 million, in line with our guidance of $14.5 million to $16.5 million.

Gross profit for the first quarter was $24.3 million, or 36.9% of sales, within our guidance of 37%, plus or minus one point, and above the first quarter 2006 gross profit of 34.1%.

R&D expense increased by approximately $500,000 over prior year levels as we incurred the majority of the development cost for our next generation of Nevo products in the current quarter.

In the first quarter, we again expanded our patent portfolio. We added four new patents, bringing our total issued and pending patent count to 177. We also added to our database of home control nodes, one of the key enablers of our growth. This database now contains over 307,000 functions.

Total operating expenses were $18.2 million for the first quarter of 2007, at the high end of our guidance of $17.7 million to $18.2 million. The 2007 first quarter operating expenses include $554,000 of compensation expense related to stock options, compared to $770,000 in the first quarter of 2006.

Other income for this year's quarter was $682,000, compared to other income of $111,000 in the first quarter of 2006. This $571,000 increase was driven by additional interest income and favorable foreign exchange fluctuations. The effective tax rate was approximately 32.5%, above our compared to our guidance of 30% to 32% due to additional income in higher tax rate jurisdictions.

Net income for the first quarter of 2007 was $4.6 million, or $0.31 per diluted share, compared to $2.1 million, or $0.15 per diluted share in the prior year's quarter.

Turning to our balance sheet review. We ended the quarter with cash and cash equivalents of $78.2 million. DSOs were 69 days at March 31, 2007, compared to 68 days at March 31, 2006. Net Inventory turns were 6.4 turns at March 31, 2007, compared to 6.3 turns at March 31, 2006.

And now for our guidance. For the second quarter of 2007, we expect revenue to range between $67 million and $71 million, compared to $52.4 million in the second quarter of 2006. We expect business category sales to range from $55.5 million to $58.5 million, and consumer category sales to range from $10.5 million to $13.5 million.

We anticipate margins for the second quarter of 2007 will be approximately 35.5% of sales, plus or minus one point.

Second quarter operating expenses are expected to be between $18.2 million and $18.8 million, including compensation expense related to stock options of approximately $650,000. The tax rate is expected to be between 31.5% and 33.5%.

GAAP EPS is expected to range from $0.28 to $0.32 per diluted share. This compares to $0.17 per diluted share in the second quarter of 2006.

For the full year 2007, we now expect total revenue to range between $275 million and $285 million, which reflects growth of 17% to 21% over 2006 revenue of $235.8 million. Business category revenue is now expected to range between $210 million and $220 million, and consumer category revenue is expected to range between $60 million and $70 million.

Operating expenses are expected to range between $75 million and $78 million. Our 2007 tax rate is expected to range from 31.5% to 33.5%. We now expect GAAP EPS to be between $1.25 and $1.35 per diluted share. This compares to $0.94 per diluted share for 2006, or 33% to 34% growth.

I'd now like to turn the call back to Paul.

Thanks, Bryan. We kicked off 2007 with better than anticipated first quarter revenue and earnings. During the quarter, we continued to see the fruits of our efforts. We see strong demand continuing which we are supporting with innovation and customer service. In addition, we are implementing our successful model in new markets. The flat panel TV revolution is feeding content trends. We are seeing a longer term trend of more and more broadcasting content going hi-def and more and more people choosing their providers based on this content, all of which has been fed by flat panel TVs becoming more affordable and, thus, mainstream. These factors are blending to create a more complex home which is where our solution comes into play. Consumers need UEI to help them simplify an evermore chaotic home environment. Our innovation in products and technology continues as we plan to announce new product introductions throughout the remainder of the year.

We have nurtured the deep, long-term relationships we have with many customers. And we have expanded these, as well as, added to our customer base. We've had fantastic success in the U.S., but we are not done here yet. Additionally, we will continue to replicate our model across the globe. In Europe, we've fostered relationships with several of the top players and won key contracts. And, according to strategy analytics, by 2012, 44% of European homes will own HDTV receivers in the form of set-top boxes and integrated digital TVs. And 70% of European homes will own at least one HD capable TV, up from 8% in 2006.

In Asia, we see a huge opportunity, especially in the subscription broadcasting arena. And we must admit, in Asia, we have barely begun to scratch the surface. We believe we are well positioned to answer the growing demand to simplify the increasingly connected home. We are please to see our strategy being executed, enabling us to capitalize and capitalize well on current industry trends.

Stay tuned. I'd like to now open up the call to question and answer. Operator?

(Operator Instructions). Your first question comes from Scott Ciccarelli with RBC Capital Markets.

Hey, guys. How are you?

Hey, Scott.

Couple questions here for you. First of all, can you guys outline what the impact of currency was on the quarter? And what percentage of you business is international today?

The effect on foreign currency was very nominal for the quarter versus what gave for the guidance.

Okay, but what was the overall impact in terms of the year over year basis?

Year over year was about $500,000 for the bottom line, year over year.

And how much to the top line?

About a million. And the rest is operating expenses.

Got it. And is there anything else going on in the second quarter. I mean I know you guys have had several good quarters in a row here, so it is not like it is a complete outlier. But this quarter seems to be even more robust. I am just wondering if this is the inclusion of VIZIO or other new customers on a purely incremental basis, or if there is something else going on there.

No, Scott, it's pretty broad based. It's not any one particular customer or one particular product. We've just seen a pretty strong order pattern. And the forecast of 67 to 71 is in terms of sales. And the earnings guidance Bryan provided is where we realistically think things will be this quarter. It is not any one particular thing we can point at, and that's probably the good news. It's that there are many things. Many customers are having success with products. And rollouts have been probably slightly stronger than expected. And there seems to be a pretty good -- it's a pretty good environment today.

Okay, then the last question and I'll let someone else have the floor here is, just in terms of margins and pricing pressure, it looks like margins were up year over year. You had said in the press release it was partly a function of mix. But if I remember correctly, there was other things going on last year in terms of trying to airship stuff. Just what else is going on with the margin, number one? Number two, are you guys starting to get any kind of pushback on the pricing because of what is called volume discounts?

Yes. I think there is more pressure -- there will be more pressure not so much on industry pricing, but shipments. Because the demand patterns on a discreet basis, customer by customer, can vary pretty greatly. And when one customer demands more than they originally forecasted, occasionally we will have to airship things. So that is probably more the reason than industry pricing trends, having to airship -- emergency airship orders that weren't expected.

All right. So that's really just on transportation. That is not necessarily them coming back and saying, I need another 10% for this kind of volume.

No.

Okay.

There's always that possibility but -- and we've bared it --we've born the risk over the last decade. But, yes, the quarter to quarter changes usually are driven by changes in shipment from ocean to air.

Okay, Fantastic. Thanks a lot, Paul.

Your next question comes from John Bright with Avondale Partners.

Thank you. Good afternoon. Paul, you alluded to -- I think in your prepared remarks -- some success or some granular success in Europe and essentially Asia. Is the success that you're -- on the business side -- is the success you are experiencing domestically helping you there? And kind of, if you could share any color on those kinds of nuggets of future success.

Sure. I think, while I can't talk about any customer specific things, because they usually don't appreciate us announcing those ahead of them. But just longer term, here in North America, we've had a great success over the last 10 years in winning customer after customer, system after system, etc. And I think that, obviously, has given us credibility in the world of subscription broadcasting as many of the largest subscription broadcasters in the world are here in the United states. We've also over the last I would say 5 to 6 years because it really started here and then replicated the pattern in Europe. And we've had a lot of success there over the last five years. In Asia, as I said in the prepared remarks, we're just scratching the surface. So we think there is runway left here in both of those arenas and here in North America.

Who were some of the -- I apologize. I'm driving. That's the Hertz NeverLost giving me directions. I need to turn right. Who are some of the better customers in the quarter, top customers? And kind of, if you have any inclination of what the -- what the channel looks like, I'd be interested to hear that as well.

Well, I think that the largest customers, they'll be reported in the Q, but they're the same list. There's Comcast and Direct TV are the two largest.

Did you see anything with Verizon and AT&T?

Well, we are doing business with many people in the industry. Again, I don't have any specific customer announcements. And please remember, sometimes we sell to other who sell into other players in the marketplace. But we also sell to set-top box manufacturers that also supply some of those subscription broadcasters as well.

Okay. Then last one for you, on the consumer side of the equation. Your new product introductions in latter portion of last year, what do you think the runway is for those? You alluded to some new product introductions continuing throughout this year. Are we going to see it on that side of the house as well?

Well I talked about a little bit about the Nevo products that we are planning to introduce. I've said everything that I will on those. In the next few months, we will unveil more about those products. And that is on the consumer side of the ledger. And then, of course, the consumer business is more seasonal so we would expect the back half Q3 and Q4 to pick up in terms of volume. We had a very strong first quarter though as you saw the 38% growth in consumer, year over year.

Gentlemen, congratulations on a good quarter.

Your next question come from Murray Arenson with Ferris.

Thanks. Good afternoon, guys.

Hello, Murray.

Can you talk a little bit more -- you stressed in the business segment two key drivers, one flat panels and one set-tops. And I know you don't break it out. But I wonder if you'd just talk about the dynamics there. How that is changing. How quickly it is changing, that sort of thing.

Yeah, I think it's difficult to tease out all the various factors here. But in general, the -- at retail they're selling record numbers. We'll probably establish another record this year in terms of flat panel, high definition capable televisions. And there's a indirect effect -- there is a direct and an indirect effect. The direct effect is we're working with some of the players in the flat panel market. And so there's a connect rate there. But importantly, then when you get that hi-def panel, most people will go home and wish to have a hi-def signal. So they'll hook up a hi-def set-top box to power that new TV. And we have a connect rate there as well.

So there's multiple layers effects here. You also have a layered effect -- consumers go from analog to digital and occasionally it will happen in a couple of steps. They will go analog to digital. And then once they have digital, they'll go digital to hi-def. And sometimes they won't combine DVR with that, so there's yet another upgrade where they go from analog to digital, digital to hi-def, and then hi-def to DVR. So it's impossible to track how many of these overlap with each other. Just suffice it to say that there is a multi-layers upgrade here. It is probably rare that somebody goes from analog all the way direct to digital, hi-def DVR. So there may be multiple layers that have occurred over the last number of years and is projected to continue. With all the market statistics that we quoted, DVR is ramping quickly. Flat panel sales are up. Most of those flat panels today are sold hi-def capable. So people are going to seek signal to feed it through a set-top box or subscription broadcasting provider.

And again, it is not just here in the U.S., it's global.

What about the way you do business say on the OEM side versus on the cable side of the business? meaning is there -- are there any differences in terms of what percentage you are doing as chip sales or what percentage you're doing as turnkey or anything like that?

Well, there is probably a slight difference. Most of the subscription broadcasters -- and I say most, not all -- but most do turnkey. Where as a OEM is probably a little bit more heavily chip than it is in subscription broadcasting. But they are very similar that's why they're in the business category of sales. They --we're involved in the design cycle with them. We design a product or a chip to power a product. And then it is put into production. So they're similar in that regard. But I would say that our percentage mix on chips is heavier in OEM than it is in subscription broadcasting.

How do you view your penetration into the flat panel side of the business at this point in terms of how many of the major providers that you are selling into at this point?

Yeah, we actually haven't calqued our share, Murray, but it's low. It's no where near our subscription broadcasting share in North America. It's a low -- it might be double digits.

And how do you see that changing? Do you sign up more OEMs? Do you dig deeper into the existing OEMs?

Both. Typically the way OEM relationships work is you get a project and then when another project comes up, you get that project. And you have to build it over time. It's not typical for them to redesign an entire line of products. In fact, that's almost never done. So you get the product incrementally. As products come off of their lifecycle and new ones come on, you can win more business. So you have to -- once you gain a relationship, you have to perform, build quality product, deliver on time, and then you'll win the next project. And these relationships can take years to develop. But we think that's very positive -- very positive trend for us long-term.

Okay. Then lastly, I apologize if I missed this. But Bryan, did you give the stock-based comp numbers for the quarter.

I did. It was 550 for the quarter.

Okay, thanks very much.

Your next question comes from Matt Kather with W.R. Hambrecht.

Hi, Paul and Bryan.

Hey.

Hello.

Just looking at your gross margin guidance for June -- definitely ticking down sequentially. I wondered if you could share some of the factors that are going into that lower margin guidance that you are giving for June.

Sure. It's basically mixed between business lines. In Q2 the consumer category which yields a higher gross margin than the business category is going to represent about 17% of the total. Where in Q1, it was closer to 25. That's the main reason we're still optimistic about -- consumer we had a 38% growth over Q1 over Q1. And we're sticking to our original forecast of 60 million to 70 million which we gave in our last call.

Okay, so it's fair to -- we would not be wrong in assuming that that should pick up as long as your new consumer products, and particularly the VIZIO that you just talked about, would gain a better mix in the back half of the year as per your -- like you said, you're still keeping your consumer guidance.

That's correct.

Okay. Interested in an update on how, from your perspective, what you think the satellite set-top box market dynamics are going to be for Q2 and how that is going to effect you. We've heard from a number of the chip-set vendors that there seems to be a mixed shift due to the open access standards towards simpler boxes in the quarter, less higher end boxes just going into this change over. What are you seeing, and how is it affecting your business?

Well actually we probably -- we don't want to comment on their mix. That would -- we certainly don't want to get ourselves into trouble with any of our customers. But to be honest with you, if the mix of the boxes shift, typically what we do is we'll sell a unit, because they are universal, that will power both. So we're typically a little less concerned about exactly which flavor of box they sell. Because often we'll have skus that overlap their skus. In other words, we'll have one that will power many. So we're not as concerned on the tracking of which box in their mix. If they have two products, one is 60, one is 40 and we have one unit that powers both, we don't care if it flip-flops.

Okay, great. Just one housekeeping, Bryan, what is the D&A and the CapEx in the quarter if you can give us that?

It is about a million dollars each, [basically] offset.

Million each. Okay. Great, thank you.

(Operator Instructions). Your next question comes from John Langston with First Dallas Securities.

Hi, guys. Good quarter.

Thank you.

I guess I got most of my questions answered about gross margin, I think. But you were talking a little bit about your North American subscription broadcasting market share. And I wasn't -- what is that number?

We actually didn't give it. and it is only an estimate. We had estimated it to be about 65%, maybe 70%. There is no precise tracking of the industry market share for remote controls. So we don't have any outside source to be able to quote on that. We estimate it is two-thirds.

Okay. And that includes -- that's satellite and table set-top boxes?

Yes. That'd probably be correct for both of those markets subscription broadcasting.

Okay. And when do you all anticipate filing your Q.

The ninth or tenth.

Okay. Okay, great. Thanks, guys.

Sure.

Your next question comes from Michael Burtz with the Kennedy Capital.

Good afternoon, guys, nice job.

Thanks.

Thanks.

Listen, so one question here. Obviously you guys raised the outlook for the year. And Q2 looks pretty good. I want to think about, particularly from the subscription broadcast side, in terms of any sense that you have gotten for visibility into the back half of the year. Clearly, like I said, you're outlook is going up, so you would think that is going pretty well. But do you have anything from them in terms of forecast or how they would project that for you that would give us just some outlook for that?

Yeah. Frankly what we do is we gain forecast from customers. But we often have to, if they are that far out, we have to adjust them. This is why we would never provide detailed guidance for Q4 at this point, or even really Q3. Because they are always subject to change. We have an overall outlook for the year which Bryan has imbedded in his guidance for the year. But again, we'll update as the year progresses.

Okay, fair enough, Paul. I guess what I'm getting at is directionally still, the outlook is going pretty well. I mean often times Q3 is sometimes a down set-top box quarter. But clearly directionally the indications from MSO in particular are still pretty good.

Yes. That is correct.

Okay, fair enough. And then the other thing -- and this is sort of a longer-term question. But as you look at the overseas opportunity which I would tend to agree is very good. Particularly in Asia, as you think about the opportunities you have to penetrate into the subscription in particular there. Can you kind of characterize if you guys have come up with anything to kind of frame the opportunity there? Maybe in terms of the kind of opportunity size in measuring it by, let's say, a COGS size type MSO. I mean how many of those kind of guys do you see out there in those different countries that are available for you guys to go get?

Yeah, well the answer to that is we started here, not just because we were here, but this is the -- this was the most developed subscription broadcasting market in the world, followed closely by Europe. But long term projections, and not by Wall Street standards which is the three quarters, but 10 years. From a 5 to 10 year perspective, that region of the world is growing. Wealth is increasing. And they already have an infrastructure in place. It's already developed. It's probably not as well developed as it is here. Per capita, it certainly is not. But every prediction, every projection of the economies there and the lifestyle changes that will occur over the next number of years, we're confident that that region will become, potentially, as large or larger than the Americas.

So we're making some limited investments today. In Asia, that's an early stage for us. Europe, we have invested in over the years and are doing a fantastic job there. The team in Europe has done a great job over the last five years of growing that business. And then our position here in the United States is solid. As I mentioned earlier, two thirds, approximately two thirds market share in subscription broadcasting. Much less than that in OEM which is an another area that we're developing.

Okay. I guess in terms of timing, I mean, I'm not going to try to pin you down on this, Paul, but it you were to think about the timeframe for that market to develop, particularly again in Asia -- I mean Europe, obviously, much farther along. Do you think it s a 10 year type thing as you have seen say the European march along for five or six years and now being at that point, is it kind of along the same sort of ten year frame to get it to that level? Or do you think it could happen faster if, again, like say standard of living improves much faster?

Yeah. It could improve much faster. But our goal is to make some progress this year in developing relationships with some of the leaders there, because that is how you get started. Line up with a few of the players, gain credibility with the other players, build great product, deliver on time. As people change jobs from one company to the next, they remember the great vendors they had at the last company. I mean a lot of factors go into this, but we think we need to enter the market with a limited investment, gain a few partners, and then build from there. Which is exactly what we did in the United States and in Europe.

Terrific. Thanks, guys.

(Operator Instructions). There are no further questions at this time. Gentlemen, please proceed with your presentation or any closing remarks.

Okay, thank you again for joining us on the call today to discuss our record quarter, our record first quarter in both sales and earnings. We're moving ahead with new products and targeting new markets and obviously are projecting a great year for you UEI. We look forward to talking with you guys throughout the quarter and, of course, importantly on the Q2 conference call. Thanks very much.

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