Universal Electronics Inc (UEIC) 2007 Q2 法說會逐字稿

Good afternoon, and welcome to the Universal Electronics second quarter 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 today, August 2nd, 2007. I would now like to turn the conference over to Ms. [Powell]. Please go ahead, madam.

Thank you, operator, and good afternoon, everyone. Thank you for joining us for the Universal Electronics second 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.

Today's 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 1-800-642-1687 and the international number is 706-645-9291. Enter access code 6144186. Also, any additional updated material, non-public information that might be discussed during this call will be provided on the Company's website at 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 technologies and the Company's home connectivity line of products and software; the recently announced new contracts with new and existing customers and new market penetrations, including Asia; 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 the subscription broadcasting and cable and satellite markets; the Company's continued sales operating income, net income and EPS growth; the ability to attract and obtain new customers, particularly in Asia; 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, 2006 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.

On the call today are Paul Arling, Chief Executive Officer and Chairman, and Bryan Hackworth, Chief Financial Officer. Now, I'll turn the call over to Paul Arling. Paul?

Thank you, [Kristiana]. Good afternoon, and thank you all for joining the call today. Our second quarter of 2007 was the best second quarter in our history. Sales reached $71.5 million, delivering growth of 36% as compared to the second quarter of 2006, and driving six-month sales to $137.5 million.

Our business continues to perform well as we capture the benefits from the many trends driving growth in our industry. These trends include the transition from analog to digital, the popularity and continued growth of high-definition TV, the associated hardware upgrade cycles that are a result of this fundamental change in home entertainment, and the long-term consumer shift to digital media. These trends are fueling orders from system operators and original equipment manufacturers worldwide, which we refer to as our business category.

Business category revenue reached $60.5 million, up 49% compared to the second quarter last year. We continue to pursue deeper relationships with the leaders in the industry. We recently announced a new agreement in Europe with Sky Italia, for whom we are providing remote control devices for a new Sky Italia retail product line. Also, we are in talks with several other leading companies around the world. The opportunities are huge, especially in the subscription broadcasting arena. Several of these companies are located in Asia and the penetration of communication technologies there continues to increase.

As we have said on previous calls, we are making a concerted effort to develop the required technologies and products to serve this important and growing region of the world. We have established a presence in these markets and we are forming offices in Singapore, India and Hong Kong. Our expectation is that this year we will establish the important relationships with industry-leading companies in this region of the world.

The growth prospects for the worldwide home entertainment market are compelling. According to In-Stat, the Chinese cable TV market is deploying digital cable set-top boxes at a record pace. Digital cable set-top box unit shipments in China rose from 2.2 million in 2005 to over 9 million in 2006. Also according to In-Stat, there were 2.7 million IPTV subscribers in Asia in 2006 and this number is expected to exceed 33 million by 2012.

By the end of 2006, there were around 15 million high-definition households in the U.S. By 2010, Datamonitor estimates that there will be close to 55 million high-definition households and it is expected to grow to around 76 million households by the end of 2012. We are capitalizing on these trends, both in the U.S. and internationally, and these trends are expected to continue for the foreseeable future.

Turning to our consumer category sales, we believe the success in the business category may have slightly dampened demand in the consumer category. We anticipated this trend and performed within the range we forecasted. Consumer category sales were $11 million, down 7.6% compared to 2006, primarily due to a decrease in European retail sales.

Looking forward in the consumer category -- and CEDIA in particular -- we are excited to be preparing for our fall launch of our next-generation Nevo product and we are continuing to develop next-generation products and technologies for these critical markets in future quarters. The new handheld will enhance RF effectiveness, provide easier new setup software, and make this groundbreaking technology more affordable. We are coming closer to fulfilling our vision of bringing our advanced technologies to the average mainstream consumer, who has always been our target core customer. We will provide more details on new products in the coming months.

We anticipate great success in our efforts for the second half of 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 second quarter of 2007 were $71.5 million, above our guidance of $67 million to $71 million and 36.5% higher than last year's second quarter net sales of $52.4 million. We believe business sales were greater than expected due to orders placed late in the quarter to meet the July 1st, 2007 OCAP deadline.

Business category revenue was $60.5 million, above our guidance of $55.5 to $58.5 million. Our consumer category revenue was $11 million, in line with our guidance of $10.5 to $13.5 million. Gross profit for the second quarter was $24.6 million, or 34.5% of sales, within our guidance of 35.5% plus or minus one point and down from the second quarter 2006 gross profit of 37.4%. Performance at the lower end of our guidance reflects our strategic decision to use air shipments to support significant customers with urgent needs late in the second quarter.

R&D expense was $2.3 million, an increase of $400,000, due primarily to the development of our next-generation Nevo products. In the second quarter, we again expanded our patent portfolio. We added four new patents, bringing our total issued and pending patent count to 181. We also added to our database of home control nodes, one of the key enablers of our growth. This database now contains over 312,000 functions.

Total operating expenses were $18.7 million for the second quarter of 2007, at the high end of our guidance of $18.2 to $18.8 million. The 2007 second quarter operating expenses included $671,000 of compensation expense related to stock options, compared to $665,000 in the second quarter of 2006. Net other income for the second quarter of 2007 was $759,000, compared to a loss of $61,000 in the second quarter of 2006. This $820,000 increase was driven by additional interest income in the absence of a foreign exchange loss, which was incurred in the prior year.

The effective tax rate was approximately 32.5%, within our guidance of 31.5% to 33.5%. Net income for the second quarter of 2007 was $4.5 million, compared to $2.4 million in the prior year's quarter. Earnings per diluted share was $0.30, compared to $0.17 in the prior year's quarter. For the six-month period, revenue was $137.5 million, compared to $106.5 million for the same period last year. Earnings per diluted share were $0.61, compared to $0.32 for the same period last year.

Turning to our balance sheet review. We ended the quarter with cash and cash equivalents of $76.4 million. During the quarter, we purchased 71,300 shares in the open market for approximately $2.4 million. DSOs were 75 days at June 30th, 2007, compared to 73 days at June 30th, 2006. Net inventory turns were 6.9 turns at June 30th, 2007, compared to 4.5 turns at June 30th, 2006.

And now for our guidance. For the third quarter of 2007, we expect revenue to range between $67.5 and $71.5 million, compared to $59.6 million in the third quarter of 2006. We expect business category sales to range from $54.5 to $57.5 million and consumer category sales to range from $12 to $15 million. We anticipate margins for the third quarter of 2007 will be approximately 37% of sales plus or minus one point.

Third quarter operating expenses are expected to be between $19 and $19.6 million, including compensation expense related to stock options of approximately $859,000. This expense includes an additional $150,000 charge related to the accelerating of vesting of options of certain former employees. The tax rate is expected to be between 31.5% and 33.5%. GAAP earnings per diluted share are expected to range from $0.29 to $0.33. This compares to $0.25 in the third quarter of 2006.

For the full year of 2007, we now expect total revenue to range between $279 and $287 million, which reflects growth of 18% to 22% over 2006 revenues of $236 million. Business category revenue is now expected to range between $218 and $228 million. And consumer category revenue is expected to range between $56 and $64 million. Operating expenses are expected to range between $76 and $78 million. Our 2007 tax rate is expected to range between 31.5% and 33.5%. We are narrowing our guidance for GAAP earnings per diluted share to be between $1.27 and $1.35. This compares to $0.94 for 2006, or a 35% to 44% growth.

I would now like to turn the call back to Paul.

Thanks, Bryan. Our second quarter this year was phenomenal. Combined with our first quarter sales results, we delivered a record first half. We expect to continue our success throughout the year. Overall, we believe our success is based on our ability to anticipate market transitions, which has enabled us to deliver the right products for today's market opportunities and prepares us to take advantage of new opportunities in the future.

The increase in the popularity of flat-panel TVs has created a paradigm shift. As flat screens and high-definition content become more available and affordable, consumers are adopting them at a rapid pace and demanding more high-def content from their subscription broadcasters to go along with their HDTVs. In addition, DVRs are becoming more mainstream, driven largely by the cable and satellite operators worldwide.

These factors are blending to create a more complex home, which is where our solution comes into play. Consumers value UEI's technology to help them simplify an evermore chaotic home environment. We are succeeding in bringing our solutions to customers around the world. We are expanding our reach abroad and executing on our plan to replicate our successful model worldwide. As the entire world is becoming increasingly digital, entertainment services are becoming far more interesting, and as a result, the living room is becoming more complex.

These new services and the devices that power them are dramatically increasing the importance of and demand for wireless control technology. We believe we are uniquely positioned to help consumers, average consumers around the world by providing solutions to simplify their device, digital media and home control needs. Stay tuned.

I'd like to now open the call up for a question-and-answer. Operator?

(Operator instructions) One moment, please, for the first question. Your first question will come from the line of John Bright at Avondale Partners.

Thank you. Good afternoon. Congratulations on a good quarter, gentlemen. Paul, the quarter looks like you shipped some product on the business side late in the quarter, got some higher freight costs from that. There's been concern out there that the OCAP regulation caused some of the cable guys to maybe build up some inventory. Do you have a concern regarding that as in respect to your third quarter expectations?

Yes, well, we're not concerned about it. What you said is true, there were late quarter shipments. Some customers did want to get in a fair amount of product before the deadline, before the July deadline, but it was, in the grand scheme of things, relatively minor. Obviously, for the year we've guided the business guidance -- the business category guidance for the year has moved up slightly, so we had a little bit more in Q2 than we expected, but -- and for the year, we expect to have a little bit more than we had previously guided. So I guess the overall answer to that question is while there was temporal issues where people wanted product quicker, before the deadline, overall, for the year 2007 our guidance is slightly up.

If you see -- I've heard -- and candidly, I can't tell you this for sure, but I've heard that Comcast is -- there might be projections that they expect fewer digital customers in the second half of the year. If that's the case and if you believe that, what is kind of your thought? They're a big customer of yours. Is it the type thing where, as you've said before, anytime competition comes into play, product flies and that's where it's being made up? What's your thought on that?

Yes, well, I can't or won't speak specifically about Comcast, as they are one of our largest customers. They probably wouldn't appreciate me saying anything about their particular forecast. But I would say, in general, what's happening out there is that there is a competition for the subscriber. The companies that we serve, which is many of them in the U.S., in particular, are bringing out new services, and those services are interesting to consumers. As we've said many times, the price of HDTV is coming down. Consumers see that HD content in the store and wish to upgrade to it from either a former analog or a digital box. They upgrade to high-definition and/or DVR, and that's the main driver of the business today, that consumers are adopting digital. There's a transition from analog to digital, and then within digital, there's a transition from plain, old digital, I guess you'll call it, to high-definition and/or DVR. That's the real driver. Now, in terms of temporal issues with a customer, where they order a little bit more in June and a little bit less in July -- we had some of that, but in the grand scheme of things, as I said earlier, the business category for us we guided slightly up for the year, so that temporal impact is smoothed out.

Okay. And then another question, if I may, a follow up. Reading your comments in the press release, and then you mentioned it, your expansion or the activities you're pursuing, your opportunities in Asia -- can you elaborate on that a bit more? It looks like you're focusing in on premiere subscription broadcasters. Would it be safe to assume that this might be with existing customers that you're working with in Europe already? And would you talk about maybe a timeframe, any additional costs we might anticipate in '07, and what are we talking about in potential size of this?

Yes, that's a good question, John. The expenses that we expect to incur, there are already embedded in the guidance that we've given, so there shouldn't be -- we haven't budgeted or not budgeted for the expense. It's already in our expectation for this year. In terms of what we're doing there, as I said during the prepared comments, we are in front of customers as we speak. We've been there. This year, we've made it a major initiative of ours, and the expectation should be that we'll begin to announce -- the first step is to set up your presence there and begin the process of discovering the technologies that are necessary and design the products that are necessary. That is under way, and in some cases, largely finished. The next step is gaining the customers, getting the leaders in the industry to adopt your platform. It's not unlike the model we went through here in the U.S. 10 years ago. We had very little here in the U.S. We went out after the leaders in the industry, they adopted the platform system by system, and it was adopted across the U.S. We see a similar thing -- or expect to see a similar thing -- happening in Asia. The growth there, as I outlined from some outside data services, is projected to be phenomenal over the next, say, one to ten years, and we are establishing our presence there, and the expectation should be that near term, we will have announcements to make on progress we've made there on the sales front.

Terrific. Thank you.

Your next question will come from the line of Steven Frankel at Canaccord Adams.

Paul, following up on that last point, what kind of technologies are different in the Asian market that you need to master in order to serve these markets?

Well, they're not vastly different, but I would say that the character of the markets are a little different. Cable is bigger here in the U.S. because our subscription broadcasting industry here is older, more mature. In other parts of the world, satellite, direct-to-home and IPTV are becoming more popular, so the market changes -- the market differences in those cases are slight. But the real thing is to get in with the operator to determine what it is they really need, what types of services they're planning to put out, either currently or in their next-generation box, and then supporting that through the technology and the control point or the remote control that they're shipping. So that's the process we've undergone. It's not something we just started last week, we've been doing this for some time now. And again, our expectation is that we'll have some things to say about this in the next quarter or next number of quarters.

Okay. And going back to the earlier discussion about the OCAP deadline, it sounds like you're confident that there's not a buildup of excess inventory of boxes in the channel that you've got, that there's room for sell through over the rest of the year?

Yes, well, I wouldn't say there was a buildup anywhere. I mean, people did -- again, as the deadline approached, they wished to have a little extra. Some did. I wouldn't say it's everywhere. It's like anything else in our history -- since we serve a fair amount of the market, some systems or some regions will build up more, and this really doesn't have anything to do with the OCAP, to be honest with you. Sometimes they'll order more, others will order less, and then the next period, the ones who didn't order last period order, and the ones who had a little bit of extra inventory don't order for a month. We did see late in the quarter a surge in orders. We think it was due to the OCAP deadline. But again, for the year, as we look out over the orders and expectations of orders, the forecast, we expect the business category to be -- our guidance for the business category actually went slightly up for the year.

And if we look out over the next couple of years, if this open cable initiative catches fire and consumers do begin to buy their own set-tops and use cable cards, what's your strategy for trying to take advantage of that on the consumer side?

Yes, well, we've developed relationships with both the operators and those who make the devices that power those services, the HD services, the DVR services, so it may change the channel slightly. It's not clear yet how much that will change, but we are working on the requisite relationships to make sure that either way it goes, it benefits us, just like we've done over the years with the operators.

Great. Thank you, Paul. That's all I have.

Your next question will come from the line of Scott Ciccarelli at RBC Capital Markets.

Hey, guys. How are you?

Hey, Scott.

Hey, Scott.

Did you guys give a sales figure for international?

No, we didn't.

Can you give us a ballpark?

No, we don't break that on the call.

Okay. And then Paul, you mentioned that you thought you had cannibalized your consumer sales with business sales. Can you just clarify that a little bit for us?

Yes, well, it's an estimate, Scott. There's no way to really prove this out, but there may be some of that -- if you look at it this way, as more and more people are putting boxes with new functionality, high-definition, DVR boxes in, if this month they get a new remote, the probability is less that they're go to retail to seek a replacement. We sell pretty good product -- we sell great product into this market, and when the consumer receives it, it lowers the probability that they'll seek a replacement. So we've long thought that there's a correlation there. It's not always proven out. Again, sometimes when we have a strong quarter in business, we also have a great quarter in consumer, but over the long term, there's probably some effect.

Was there anything else that happened on the consumer side during the quarter? Because, I guess, it came in at the low end of the range, but it seemed like it was easy comps, as we say in retail, so I guess I'm just wondering if there was another thing, whether it was maybe product transition or something else that my have inhibited it a little bit during the quarter?

Well, we did have a product transition, our mainstream product in Europe, which is a big portion of our consumer category. They did have a changeover in the mainstream.

Okay.

And often, as you know, when you have a changeover in product, sometimes customers will order a little bit less in expectation that in the coming months, you're going to ship something new. So there may have been some of that as well.

Okay. But you're looking for that to rebound a little bit here sequentially, and obviously, we're getting into the stronger time of year for the consumer side.

Yes, that's true.

Okay. All right, thanks a lot, guys.

Your next question will come from the line of Murray Arenson with Ferris, Baker Watts.

Thanks. Hi, guys. First, can you quantify what the impact was, either raw dollars or to the bottom line, of the airfreight costs?

I'll give it to you as a percentage. We do -- it's about 22% of our shipments were airfreight.

Okay. And so if 22% of the shipments were airfreight --?

It was $1.2 million. I'll give you the number.

Thank you. So how late does that happen in the quarter, where you get hit with that and decide that you have to go ahead and pull the trigger and do air freight? If that's 22%, that's a sizeable percentage.

Yes, well, there are a lot of variables there, Murray, but essentially this quarter what happened is it was later in the quarter. Again, on the business side, we surmise it had to do with the deadline, that people wanted their product a little earlier. Now, there are cases, to be honest with you -- not to make this too confusing, there are cases where we cover air freight; there are cases where we don't; then there are the third set of cases where, for customer service purposes, we cover air freight, we agree to pay the air freight as a customer service to long-term customers. So as Bryan said, this quarter we had about over $1 million -- a little over $1 million, $1.2 million in airfreight expense that we hadn't baked into the plan.

Okay.

Yes.

If I remember right, last year around this time, we were talking about a pretty substantial pipeline of new products. Can you talk about what that looks like this year versus last year and any impact that has on looking at comparables?

Yes, well, we have a lot of new products that we have planned for the coming -- I'll say the coming quarters, out through -- because we do product plans out for the next year, so we have products planned out through Q2 of next year. So there's a lot on the docket. I will say that in retail last year, we had a record amount of product introduced at EFA, so we probably won't have as many there, but we have quite a bit planned in both product and technology for the next year. And again, as we go on through the quarters, there will be more on that either through press releases between conference calls, and we'll talk about it on conference calls.

Okay. And lastly, if I could follow up a little bit on your discussion of Asia. Is there anything we should be factoring in? I mean, are the costs associated with setting up these offices significant, and how would you view kind of the lead time necessary to set up and do business ahead of the point where you can actually start to take shipments and recognize some revenue?

Yes, well, I think as I alluded to earlier, our expectation is that we'll have those relationships and -- the relationships and shipments near term. But the sales and the expense -- our expectation of both expense and sales are embedded in the guidance we've provided.

Okay, fair enough. All right, thank you.

(Operator instructions) Your next question will come from the line of Matt Kather at WR Hambrecht.

Hi, good afternoon.

Hi, Matt.

Hi, Matt.

Hey. How are you?

Good.

Couple questions. One, just your visibility into the fourth quarter. How would you characterize your visibility versus stuff that's in backlog versus maybe additional turns business or whatever you might want to call it for Q4?

Well, for Q4, we don't have great visibility two quarters out. We always have better visibility in the subsequent quarter, so when you go out to Q4, it's a little bit more of an art than it is a science, but our sales personnel -- they communicate well with the customers, so we get what we believe is a pretty accurate forecast. But again, there's a bit of art to it; it's more art than science.

Okay. Again, back to Asia, a couple of good questions. So just on the expense side, if it's in your guidance for this year, how would you characterize sort of your build out of -- not the product and the shipment, but your infrastructure and your presence there? Do you think you'll have a significant expense in 2008 continuing to build this out, or do you think that most of it -- that your presence in Singapore, India and Hong Kong was built out this year?

Well, I think what we do is we set a foundation, so that's what we're setting up this year. The growth in the expense will probably be based on activity, so if there's -- as we've always done here, as there's more activity, you build out more of the infrastructure. So I think we're setting a good base this year, establishing a presence, establishing the ability to penetrate the accounts, understand, again, the needs of those accounts, have all the requisite people there. We're not talking about hundreds; we're talking about a few people, a few good people, and we've always done it this way. We start that way -- we establish relationships, we serve those relationships. As margin starts coming in, we invest more. Depending on the growth prospects, as we get more projects, we'll invest more money. And again, the objective always in our business is to lever, so put the expense in, gain the gross margin, and then lever the expense; have your gross margin dollars growth exceed your expense growth. So that'll be the objective there, as well.

Okay. How would you characterize the competitive landscape in Asia, specifically outside of Japan, as you approach these vendors for design wins or whatever you want to call it into their next generation of services and set-top boxes? Is it as fragmented as it was in the U.S. when you started, or does FMK already have a presence there, or is it local vendors? How would you characterize the competition versus getting some of these wins?

Yes, I think it's like everywhere today -- worldwide, competition is tough. But we have built up a record of credibility in these markets. We serve some of the world's largest operators. We've brought great technology to them and great service to them for a number of years, so I think that's built us in this market -- I guess if I take the -- dial the clock back, 10 years ago, we didn't necessarily have that to sell them; we had great technology, great product, but maybe not a good history. Now we have not just the great technology and great product, we also have a good history of serving people in other regions of the world. And make no mistake about it, the operators out there -- they're global citizens. They know what's going on in the other regions of the world, and I think that gives us a good leg up. But the competition is there just like they're here in the U.S. and just like they're in Europe. It's competitive everywhere, it's not vastly different in any region.

Okay. Thanks, guys.

Sure.

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

Okay, everybody, thank you again for joining us on the call today to discuss our record quarter. This quarter, we'll be visiting with investors at conferences and we hope to see you there. In August, we'll present at the Pacific Crest conference in Vail on August 6th, and the Canaccord Adams conference in Boston on August 7th. In September, we'll be at the Credit Suisse conference in Boston being held on September 11th and 12th, and the RBC conference in Naples, Florida being held September 18th through 20th. In closing, we're forging ahead with new products and targeting new markets. We believe 2,000 -- obviously, we believe 2,000 will be a great year, and we look forward to speaking with you all soon.

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