Universal Electronics Inc (UEIC) 2007 Q3 法說會逐字稿

Welcome to the Universal Electronics third 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, November 1st, 2007. I would now like to turn the conference over to Christiane Pelz. Please go ahead, ma'am.

Thank you and good afternoon, everyone. Thank you for joining us for the Universal Electronics third 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 webcast replay will be available at www.uei.com for one year. In addition, a telephone replay of this call will be made available for 48 hours beginning approximately two hours after the conclusion of this call. The U.S. number is 800-642-1687 and the international number is 706-645-9291. Enter access code 20309783. 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 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, HDTV and IPTV; 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 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.

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. Paul?

Thank you, Christiane, and welcome, everybody. I'm excited to report this past quarter was UEI's strongest third quarter in our history. Total sales were $69 million, up 15.7% overall, compared to the same period last year. Our year-to-date sales of $206.5 million represent a 24% growth over year-to-date last year.

It's important to note that over the past five years, the team here at UEI has delivered 20% plus compound annual growth and revenue and earnings growth has been in excess of that. In fact, our net income through three quarters this year exceeds our net income for the entire year in 2006.

Since 2002, our sales have more than doubled. Net income has more than tripled and, thus, our operating margin has improved dramatically over this five-year period. And we are confident we will continue our success.

The opportunities in the market today are compelling. We are leading growing markets, introducing new products and technologies to further separate us from competition in the emerging digital world and entering new geographic markets.

Within the U.S., the market for our products and technologies has been strong. Most experts expect the trends affecting our industry, the trends from analog to digital, the upgrade to DVRs and the transition to high definition will continue to be strong. Today, just over half of the U.S. is digital, leaving half of the U.S. still needing to transition. According to a study by LRG, DVRs are now in 20% of U.S. households, up from only 2% in 2003 and they are expected to reach 60 million households by 2011.

For high definition, our long-time customer, DIRECTV, has announced it will offer up to 100 HD channels to subscribers by the end of the year. This supports the trend of transition to high definition, which Data Monitor predicts will grow to reach 55 million households by 2010 and 76 million households by 2012, up from 15 million at the end of last year.

While these trends have been evident in the U.S. for some time now, and continue their growth trajectory, other regions of the world are just beginning this transition. We have consistently proven UEI's innovation and sales growth in the U.S. and Europe and we are now focused on doing it again in Asia. 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 the year 2012.

We have established our sales and program management infrastructure and we are in discussions with several leaders in Asia. We believe Asia, with its booming economy and large population, offers a significant opportunity for long term growth.

In the third quarter, we announced a new customer in Asia, PCCW, the largest and most comprehensive communications provider in Hong Kong. We are supplying PCCW subscribers with our remote control devices for new HD IPTV boxes. This is a big win for us and we expect that this will be the first of many relationships that we establish with the current and future leaders in subscription broadcasting in this region.

Historically, we have led the industry in innovation. In addition to growth associated with the product upgrade cycle, we continued to launch new products. In September, we unveiled three new members of the NEVO family. These products increased the features available to the custom install channel and achieve a new price point with groundbreaking functionality.

Our goal is and has always been to bring innovation to all consumers. Looking ahead, we intend to introduce products and technologies, which bring breakthrough ease of setup and ease of use to mainstream users. Keep your eyes open at future tradeshows, such as CES in January, and the NCTA Cable Tradeshow in the spring.

Now, I'd like Bryan Hackworth, our CFO, to lead us through the financial discussion. Bryan?

Thanks, Paul. As Paul noted, we had a terrific third quarter. The majority of our results met the midpoint or higher end of our guidance.

Net sales for the third quarter of 2007 were $69 million, 15.7% higher than last year's third quarter net sales of $59.6 million.

Business category sales were $55.9 million, or 81% of sales.

Consumer category sales reached $13.1 million, or 19% of sales.

Gross profit for the third quarter was $25.7 million, or 37.3% of sales, and greater than the third quarter of 2006 gross profit of 36.2% of sales.

Research and development expense was $2.1 million, compared to $1.8 million for the third quarter of 2006.

Total operating expenses were $19.5 million for the third quarter of 2007, compared to $17 million.

The 2007 third quarter operating expenses included $876,000 of compensation expense related to stock options, compared to $697,000.

Operating income was $6.3 million, compared to $4.6 million.

Other income was $892,000, compared to $407,000.

The effective tax rate was 31.4%.

Income before taxes was $7.2 million, compared to $5 million in the third quarter of 2006.

Net income was $4.9 million, or $0.32 per diluted share, compared to $3.5 million, or $0.25 per diluted share in the third quarter of 2006.

For the nine months ended September 30, 2007, net sales were $206.5 million, up 24.3% from $166.2 million for the same period of 2006.

Operating margin was 8.9% of sales, compared to 7.1% of sales last year.

Net income was $14.1 million, or $0.93 per diluted share, compared to $8.1 million, or $0.56 per diluted share the same time period last year.

Turning to our balance sheet review, during the quarter we generated $11.7 million in cash flow from operations. We used approximately $7 million to repurchase 250,000 shares for an average purchase price of approximately $28 per share. At September 30th, 2007, cash and cash equivalents were $84.5 million. DSOs were 79 days, compared to 68 days last year. And inventory turns were 5.3 turns, compared to 4.4 turns last year.

And now for our guidance. With our record nine month results we are on track for the strongest year in our history. We expect to end 2007 with record revenue and earnings. For the fourth quarter of 2007, we expect revenue to range between $70 and $75 million, compared to $69.7 million in 2006. We expect business category sales to range from $49 to $52 million, compared to $49.5 million in 2006, and consumer category sales to range from $20.5 to $23.5 million, compared to $20.2 million in 2006.

We anticipate margins for the fourth quarter of 2007 will be approximately 39% of sales, plus or minus one point. The fourth quarter operating expenses are expected to be between $19.9 and $20.5 million, including compensation expense related to stock options of approximately $700,000. Last year's fourth quarter operating expenses were $19.5 million, including compensation expense related to stock options of $625,000.

The tax rate is expected to be between 31.5 and 33.5%. GAAP EPS is expected to range from $0.38 to $0.42 per diluted share. This compares to $0.37 per diluted share in the fourth quarter of 2006.

For the full year of 2007, we expect total revenue to range between $276.5 and $281.5 million, which reflects growth of 17 to 19% over last year. Business category revenue is expected to range between $215.6 and $218.6 million. And consumer category revenue is expected to range between $60.3 and $63.3 million.

Operating expenses are expected to range from $76.2 to $76.8 million.

Our 2007 tax rate is expected to approximate 32.5%. We expect GAAP EPS to be between $1.31 and $1.35 per diluted share, compared to $0.94 per diluted share in 2006. We will announce our 2008 guidance next quarter.

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

Thanks, Bryan. We achieved another record quarter and, as Bryan indicated, we are on track for the best fourth quarter and, more importantly, the best year ever at UEI. We are continuing to pursue growth initiatives worldwide. The increasing transition from analog to digital and the continuing adoption of high definition TVs and DVRs continue to fuel our business. We are well-positioned to take advantage of strong growth in IPTV and satellite, which are very prevalent abroad. We are fueling international expansion and have established Asian offices staffed with UEI experts dedicated to this goal.

Additionally, we continue in our mission to provide everyone the ability to wirelessly connect, control and interact. As such, throughout the next year, we will be introducing new advanced features to the mass market audience via retail and subscription broadcasting customers.

We are looking forward to a great fourth quarter and 2008. Stay tuned.

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

(OPERATOR INSTRUCTIONS) One moment, please, for the first question. Your first question comes from the line of Scott Ciccarelli with RBC Capital Markets.

Hi, guys. How are you?

Hi, Scott.

Hi, Scott.

I was wondering if you guys might be able to go into kind of the impact of OCAP and what effect that might have had in the third quarter and what you're expecting that to be in the fourth quarter. Because it does look like you've shaved the fourth quarter expectations in the business category. I'm just wondering is thata function of some of the subscription broadcasting companies and the difficult comparison, the 50% growth from the year before, or is there something else going on there?

Yes, Scott. I think the answer to that is, some years as we looked back at the last five years, we've had years where Q2 has been the peak. We've had years where Q4 is the peak. The business category is not, doesn't follow as seasonal a pattern as the consumer category. It will turn out, as you pointed out, that this year Q2 was a phenomenal quarter. Last year, Q4 was a phenomenal quarter. So, next year, I suppose the Q2 will be a more difficult comp to the prior year and Q4 will be easier than it was going into the next year, if you get my point.

So, this business, if you look at it over the long term, though, if you look at the annual growth rate over the last five years, is averaged just over 20, in business, it's been over 25% and overall our revenue has grown over 20%. So, if you look out over more than one quarter, you start to see the trend.

Quarter-to-quarter, however, growth can be a single digit amount and we've had growth as high as 60% in a quarter in an element of our business.

So, a long-winded way of saying this year our peak quarter for business will be Q2. And next year, I couldn't tell you if it's going to be Q2, Q3 or Q4, maybe even Q1. But, if you add the four quarters together and you look at that over time, what you see is a consistent pattern of growth.

Paul, can you specifically address the impact of what OCAP has had on the business, number one. And, number two, the concern would be you're going to show fairly modest growth in the fourth quarter on the business category. What gives you confidence that that re-accelerates? Thanks.

Well, again, it's deployments. What OCAP did were, there were probably certain customers and certain regions of certain customers that ordered more product in front of the deadline and then reduced their ordering pattern after the deadline. But the important thing to remember is that over the long term, or over a sufficient number of quarters -- I don't even mean long term like five years, but I mean over three, four or five quarters -- those numbers have to level out, meaning it has to match deployments.

So, OCAP didn't really change anything about deployment. It just changed the flavor, the flavors of remotes that you would sell. We have a full product line of OCAP products that are OCAP-compliant. So, the real answer on how did OCAP affect us, it affected the ordering patterns of customers, but it doesn't change the path in the adoption of digital, moving from an analog to digital world, moving from a non-DVR sub to a DVR sub, or moving from a non-HD to an HD sub.

Over a number of quarters, if you look at it over two, three or four quarters, five quarters, the effect of OCAP is not really important. Now, this year, it did affect us again, because we had customers that ordered in front of the deadline.

Right.

So, they probably bought more product than they needed for deployments and then they will use that up, because as they deploy, the inventory level moves down and then they'll order to deployments.

So, as we get back to --

Their ordering of remotes has to equal their deployments.

Right. So, as we get back to the first quarter of '08, we should start to see kind of back to a more normalized deployment or selling rate.

Yes, I mean, we can't speak on the specific quarters for next year. We're putting together our plan in detail for next year. We'll have it done by the end of this year and, as is our custom, we'll disclose that in February.

But, yes, again, if you look at over the last five years, you'll see quarters where there were single-digit growth and then one or two quarters later, you'd see 50% growth. And again, if you connect the dots between them, you see this consistent pattern of overall 22% growth for the Company.

Right. Okay. And then the last question is, it doesn't seem like there is a whole lot of capital investment needed in this business. Where do you think operating margins could go? It seems like there is a lot of leverage in the model.

Yes, Scott, I think over time, if you look at 2006, we finished the year out about 7.9% operating margin. And 2007, if you were to look at our midpoints, we'll be probably be probably in the mid nines, about 9.5%. I think over the next couple of years we'll definitely get into double digits next year. I expect to see a significant operating margin growth in 2008. And I think, theoretically, we can get into the low teens and maybe even push up to 15% eventually. But, at that point, I think we are going to max out of our current cost structure.

Okay, great. Thanks a lot, guys.

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

Paul, I wonder, if you, did you have any revenue from that new Asian win in the quarter?

Yes, we have revenue, we have revenue now from the Asian win.

Okay. And where do you think your subscription broadcast customers are in the rollout of new boxes? You've been through a big changeover at DIRECTV. When's the next major refresh, as you look at your customer base?

Well, actually, I'd say that they're still in process, even DIRECTV. And while, as is our custom we won't talk about specific customers, if you just look across the industry, even here in the U.S., both cable and satellite, they're still in the process of upgrading consumers from a non-HD world to HD. The penetration rate is still, still relatively low. And with predictions of it moving to 60 million households over the next five years, they've got quite a ways to go.

And, as you know, when you go out to retail today, just about every TV being sold is a flat panel and most of those 16 by 9 TVs are HD-capable. If fact, almost all of them are now. Most of them are going to 10ADP. And when people get them home, they want to upgrade it to HD and then the call their subscription broadcaster, many of which are our customers. So, I think they've got a ways to go on that.

Then you have the added layer of DVR, which as I said in the call, many are predicting to be in the majority of households. And today, it's still around just under 20% is the prediction we've seen more recently. So, there's a ways to go on that.

And then, remember, at the very basic level, there's almost half the U.S. is still analog and will need to move to digital, whether it be HD or non-HD, over the next couple of years.

So, we think there's a lot of -- the upgrade cycle has many layers to it, which is good. It's not just one thing, it's many. And then you've got in other countries just the advent of service and subscriber growth. Here it's not as much about subscriber growth as it is about upgrade cycle. But there's good growth in just, in every market, in every market we're in today.

So, despite a material slowdown that we're going to see in Q4, you're comfortable that those drivers mean the company can kind of grow similar to the way it's grown the last couple of years if I look back over a year -- look forward over a full year?

Yes, well, we won't provide guidance for 2008, no matter how many of the people on the call ask.

All of us will.

We do expect that the underlying factors, the underlying trends in our industry, don't appear to be changing significantly or the HD doesn't appear to be slowing down. DVR is, again, still there's a lot of folks out there that need to upgrade. And then you have, again, other regions of the world where there is just plain subscriber growth. So, yes, we don't see any reason why going into next year we shouldn't see a nice growth in sales and, as Bryan pointed out, additional expansion in the operating margin.

Great. Thank you so much.

Your next question comes from the line of John Bright with Avondale Partners.

John Bright. Thank you. Good afternoon. Paul, just so we can be clear regarding the business sales guidance, what is it that you're seeing today that gives you your different outlook than you saw last time we spoke in August?

John, this is Bryan. Yes, I think when people look at the Q4, the fact that it took a little bit of downtick, I think we need to be careful when we analyze the business category growth trends on a quarterly basis. Because if you look at the last five years, the last five years business category growth on a quarterly basis has ranged anywhere from about negative 12% to over 60%. And if they take, for example, 2005, the business category grew only 4% in the fourth quarter, year-over-year. But, over 40% in Q1 2006, year-over-year. So, the growth can vary significantly from quarter-to-quarter.

And as Paul mentioned earlier, I think the best way to get an accurate picture is to look at net sales over a longer period of time. So, if you look at the last five years, we've grown net sales on a compounded annual growth rate by about 22%. And all the key drivers are recent growth, being the conversion from analog to digital in the U.S., as well as global adoption of HD and DVR, expected to continue for the next several years.

So, even though we won't provide detailed 2008 guidance until the next quarter, I will say I expect solid top line growth in 2008 and significant growth on the operating margin line.

Okay. So, and I'm not -- I don't want to beat a dead horse. And don't laugh, Paul. But, are we talking about a road bump when we get, where there was a lot of inventory built up that you didn't expect and didn't see, that's what it sounds like. Is that an accurate characterization?

Yes, I think for certain customers, they, again, they probably ordered more than deployments in earlier in the year. And now they will order less than deployments, which means there's an inventory build, and then a decline in inventory.

So, that's why in this business you need to look at it over -- if you look over a trailing four quarter period, you'll get a truer picture. Because, as Bryan said, the growth rate can vary anywhere from a low single digit, negative number, to a 60%. But, then when you look at trailing 12 months, you're going to see a consistent pattern of 20 to 22 -- I think it was 22% -- on a trailing four quarter basis.

So, what that means is, quarter-to-quarter, variances can occur, but again, the -- as I said earlier, the amount of product ordered over a year usually will equal deployments. And the deployments are growing. The need is out there for both replacements and deployments. And you see a more consistent pattern when you look at it over time.

So, I guess it's a long-winded way of saying we want people to be careful if you see, as Bryan pointed out, a few years back, you see a low single digit growth rate or a negative growth rate in certain parts of our business, and then the next quarter or two quarters, you'll see a real nice growth. And when you average it out, it looks like it's about 20 to 25%.

So, then if I look forward to 2008, although you're not providing guidance, and I'm not asking you to, --but how important would you characterize your Asian expansion to your growth prospects in '08?

Yes, well, I think it will be an element next year, less so this year, more so next year and more than that in 2009. I mean, I think, again, this is not completely unlike where we were in the U.S. ten years ago, where we had very little -- we didn't have a lot of share. We lined up with the leaders in the market when they were maybe a little smaller than they are today. We build them great product with features no one else offers. We serve them well and you fast forward ten years and we're still serving them as they are a much bigger company.

So, we see -- that is our strategy there. We put in place the resources we need to give them great service, great sales, great customer service, great program management, and ultimately great logistics and delivery and customer service. And over time, as they grow from -- some of them are 1 million subs today and projected to be 8 million subs 5 years from now. As they grow, as you become a reliable supplier, you grow with them. That's the key to our success in the U.S. and we're looking to replicate that model there.

So, will we have growth next year? We will. Will it be as large as the U.S. next year? No. But, will it in time? There are many out there who believe that that region could be as big or bigger than the United States five to ten years from now.

So, we're not just investing there to lose money for a number of years. We expect it to be a small, profitable operation, but high growth over the next five to ten years.

John Bright. And you could characterize it by accelerating possibly through next year and then probably more meaningful, much -- more meaningful in 2009 time frame.

Right. 2009, 2010. Because, again, that region is projecting growth for quite some number of years.

Last one, Bryan, you mentioned the share buybacks. Could you go over that again and where that stands and what approval you have at the moment?

Sure. In Q3, we purchased 250,000 shares for approximately $7 million and it equated to about average price of $28. And we have, year-to-date, we purchased about $9.4 million and about 320,000 shares. And we have an approval to repurchase up to 2 million shares of our stock. And right now we've got plenty of room left. I think we have purchased about 400,000. So, we've got about 1.6 million left.

Thank you.

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

Thanks. Good afternoon, guys.

Good afternoon.

Another question on the, on the business side of things. Can you talk about maybe qualitatively cable versus satellite versus teleco and to what extent you're participating on the teleco side, because I know the cable guys have been talking about that more in recent quarters?

You mean IPTV or --?

Yes.

Well, the way, I guess the way I'd characterize it is, we provide a control point for all of those systems, so we're somewhat indifferent as to which way the video or service is delivered, whether it be through cable, satellite or IPTV. Now, I will say that internationally, as I said in the script on the call, that abroad, outside of the U.S., IPTV and satellite are much more prevalent. Cable is much less prevalent. Here in the U.S. it's -- the majority is cable.

But we're not, we work with all three. Here it just so happens that the majority of it is cable, so the majority of our business here in the U.S. is cable, but in Europe it would be satellite. And our technology works with any of the three. So, we're somewhat indifferent as to which one ends up being the majority share.

We are doing either remotes or chips for most of the leaders in the region. And, of course, there's always possibility for future customer growth that we'll announce over the next year.

As you're looking out at the outlook right now, because you are more so tied to cable, than the outlook is more reflective of what you're expecting from those cable guys, as opposed to the satellite guys. Is that accurate?

Yes, well, we also, obviously here in the U.S. we work with DIRECTV and so we have a presence in satellite. And, again, anyone who is in the subscription broadcasting business we see either as a customer or a potential customer. So, again, as time goes on, the expectation is that globally we will be working on new customers in cable, satellite and IPTV, or what we call subscription broadcasting.

Okay. Can you give us a sense -- I'm sorry, go ahead.

No, no. Go ahead.

Can you give us a sense, going back to the opportunity in Asia, of what the pipeline looks like, meaning should we be looking for additional announcements like you had with PCCW over the near terms or not necessarily? What? How?

Yes, you should.

Okay. And, are we talking about a deal, a handful of deals? I'm just trying to put some parameters around it.

More than one.

Okay.

I suppose that would be a handful.

Okay.

Yes. So, yes, but -- and, Murray, we're at different stages with different customers. Sometimes we're in producing models. There's a lot of steps to the process. And then the last step, or usually one of the last steps, is discussing with them the disclosure of such relationships. So, and sometimes that can take longer than developing the product itself.

Got you.

We're working on, we're at various stages of development on relationships in the region and, again, if you fast forward a year, the expectation should be that there would be more announcements of customer win there. And again, don't overlook customer wins in the other regions, either. We also are working -- we're not putting all of our resource on winning customers just in that region. We're working on winning customers globally.

Okay. Last question, taking a look at -- well, I guess it's two questions. I'm sorry. Taking a look at the consumer side of the equation, I just kind of wanted to know what you've baked in there as far as your outlook for the economy and consumer electronics sales overall? How have you approached that in providing the guidance range for the fourth quarter?

Well, our sales guidance for Q4 is based on a, more as a bottoms up forecast. So, we go into each country -- because obviously a lot of our consumer business is abroad -- and get input from customers on that. So, I guess you could say it's the aggregation of our expectation for each of those countries and each of those customers.

Now, I suppose if the Christmas season is much weaker than they expected, then we would expect the number to be at the lower end of the range. And if the season, if the reorders at end of November and into December are extremely strong because of the traffic, then we'll see a number at the higher end of the range.

Okay. All right. And this is the last question, just talk, if you could talk about the flat panel side of the business. How meaningful you expect that to be for you this quarter and the fourth quarter holiday season and how that's growing?

Well, we think it's important. I think the bigger element, though, on the flat panel is, again, the secondary effect, which is once you get a high-def capable TV, you're going to want to feed it a high-def source. And that market we are working with most of the leaders in this region, in the U.S. So, that if we have a two-thirds share, that would mean that, let's say at 70%, that would mean 7 out of 10 of those flat panels sold are probably going to end up with our chip or our remote coupled with it.

Got it. All right. Thank you.

Your next question comes from the line of Matt Kather with Hambrecht.

Hi, guys.

Hi, Matt.

When we look at the business category, I'm very okay with the explanations you've given about quarter-over-quarter and sometimes Q2 has been the peak in the past. But, this is a pretty meaningful reduction in the revenue range. So, I'm just wondering if there's anything else other than the inventory dynamic that you mentioned that you can share as to what has led to that versus even what you were expecting last quarter?

Yes, Matt, this is Bryan. No, I don't really see anything else other than the inventory. I mean, like we stated before, the -- on a quarter-to-quarter basis it fluctuates, the growth fluctuates significantly sometimes. So, I'm not too concerned about Q4 being down and then it being a reflection of 2008. I'm very positive about 2008. I think that, as we stated before, all the drivers that have influenced our growth over the next, over the last three years we expect to continue. So for 2008, I'm actually very positive about the top line growth and even more so about the bottom line growth.

And from the inventory perspective, you feel you have adequate safety stock now? I know for the last couple of quarters it was drawing down more. So, given the, your outlook for business that you're giving now for Q4, should we assume that the inventory levels that you have now have gotten that safety stock back up to a more reasonable level?

Yes, it is. And you see it actually reflected in the margin in Q3. The reason we came out, one of the reasons we came out at 37.3% for Q3 is the fact that we did build up our safety stock and we had extremely low airfreight. So, we have accomplished that.

Now, I can't guarantee that we won't have any airfreight in the future, because it's just, I can't guarantee that. But I will say that we have taken steps to mitigate the likelihood of that happening.

Okay. It's outside of Asia, which has been discussed already, are there other, are there some OEM opportunities maybe that you're looking at in '08 and '09 that may be coming up to bid where a competitor is in there, thinking specifically about any comments you can make around the Sling Media, which you're in, versus the Echo Star and maybe Advanced Generation boxes there. Or, you announced I think SKY Italia a quarter ago on the retail level. But, like their OEM business, just is there a couple of opportunities I'm just throwing out there. But are there other things that you can identify where you may have a chance to displace an OEM competitor as we start to look out into '08 and '09?

There absolutely are. I don't necessarily want to tip our hat on any of those, because we never know if our competitors are out there on this call. But, if they are, hello, competitors. But, yes, we don't necessarily want anyone to know what we're up to there. But, I guess you should look at it as, if you were to list the major companies in the world that are engaged in consumer electronics or subscription broadcasting, we are talking to many, if not all, of them. And, again, if we were to reel back the clock ten years, the same thing was true and slowly but surely, one after another they adopted our platform and have been very happy with it. So, we always believe that over the next 12 months, we're going to have a couple, if not more, wins of those customers that we don't currently have. So, we are working on all of those that we don't have, including some of the ones you mentioned.

Okay. Great.

I also wanted, I did want to say, Matt, when you said earlier, a significant drop off. I mean, one of the things we said earlier this year and I think it was in Q2, was that our earnings this year would be between $1.25 and $1.35 and Bryan has just updated that to $1.31 to $1.35. So, I think we, we're pretty happy about what we were able to achieve this year, up from $0.94 last year to the high end of the range we gave earlier this year. We've just narrowed it to the top end of that range we gave. So, I think we've been pretty consistent on that front.

Yes, I think you have. You've done a terrific job. I'm just, I was trying to get in on, too, what the quarter-over-quarter revisions and then the drivers for that. And I appreciate your answers to that. The last question I have is when we do start to think about growth rates and you mention what your historical compounded was, and Asia being very much a new driver for you. Is it fair for us, when we start thinking about 2008 and 2009 growth rates, that given the relatively low penetration in your existing customer base, that Asia should be accretive to your overall growth rate? Is it fair to think about it that way?

Well, it is, except Asia, again, we'll start, we'll start small. And then the growth on, if you were to look at the growth on that number, it will look very large. But, in blending it in with our nearly $280 million in sales through the first few quarters is going to be rather small.

Okay. But, in '09 any beyond?

[Inaudible] it becomes a bigger part of our business and its growth rate exceeds our typical growth rate, then it will definitely positively impact the growth rate of the company.

Okay. Thank you, Paul. Thanks, Bryan.

Thanks, Matt.

Your next question comes from the line of Andy Hargreaves with Pacific Crest.

Hi, Paul. I think you alluded to it a little bit earlier, but can you talk about any progress in Europe or any new happenings there?

Yes, well, we don't have anything to report. We didn't report any on this call. But again, any CE company or subscription broadcaster that isn't currently a customer, we're talking to. So, again, people should, as I always say on the call, stay tuned. Because in the coming weeks, the coming months and over the next year, our expectation is that we we'll have more announcements of customers, both large and small.

On, back to Asia again, how long do you guys, or how long are the sales cycles there? And then overall, I guess, both Asia and Europe, have you seen any change in competition or any new competitors entering the market?

Good questions. The -- I'll answer the second one first. In terms of the competitive set, it's typically the same. It's a global business. There's a number of players in it. And it doesn't really change much by region.

In terms of the sales cycle, it does vary by customer. Some customers -- well, I will say there are some customers we've been calling on for a while and the sales cycle might be years. In other cases, it's as little as a month or six weeks. So, it varies by customer. It typically varies by the type of product they want to buy. If it's a simple, a controller, three or four device controller, the sales cycle is usually shorter. If they wish to incorporate new technologies, RF or other, sometimes the sales cycle can be longer. So, again, varies by customer. Can be a month, six weeks. Some cases it can be more than a year.

Okay. And then in the U.S., the HD service has trailed TV sales for quite a while now and it's pretty significantly below what HDTV sales have been. Do you think that the DIRECTV marketing campaign -- and I'm sure that will force other service providers to try to market more around their HD offering. Do you think that will help HD service penetration kind of catch up with where HDTV sales are?

Yes, absolutely. I think, if you think about this, when HD first came out it was only a few channels. So, the compelling reason to upgrade probably wasn't there. But when it gets to a point where every channel that you watch or even more than every channel that you'll watch, when somebody gets to 70 to 100 channels, it gets to a point where people say, now it's worthy of the upgrade, because now every channel I watch will be available in HD.

Okay. Thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of John Langston with Hodges Capital.

Hi, guys. Thanks for taking my question. I guess, couple of questions I have here. Could you maybe speak to the possibility of Echo Star being taken out by AT&T and how that may affect your business if that were to happen? I know that you don't necessarily work with Echo Star right now, but how -- would that open up an opportunity for you?

Yeah, I couldn't give you my opinion on the likelihood of that transaction, but I think what we have found is over time ownership changes usually will open up an opportunity for business. So, that may present an opportunity. We'll have to see how that unfolds. I think the first step we'd have to get to is, is that actually going to happen.

Right. Right.

And we'd sort it out after that.

Does Echo Star manufacture their own remotes right now?

No, they outsource them.

They do?

Yes.

Can you tell me who, can you tell us who that is?

No, I wouldn't be -- it's not us, though.

Okay. Okay. Can you give us the breakdown of your domestic versus international revenues and the same for the consumer and business revenues?

Yes, I'll answer the second one first. Business sales comprised about 81% of the total sales for Q3 and consumer was 19%. And then approximately 40% of our sales come from Europe and 60% in the U.S.

So, none of that was Asia or just it wasn't big enough to --

Yes, Asia was small, yes.

Excuse me?

Asia is very small. We ship -- when I say 40% in Europe, it has to be taxable income I'm referring to. So, sometimes we'll ship to companies such as Panasonic or Mitsubishi, so they are technically Asian sales, but they're recorded either in the U.S. or Europe.

Okay. Could you give me the international breakdown for business sales?

I don't have that off hand. You can see it in the Q, which we'll file next week.

Okay, and lastly, could you just give us a little bit more color on the TCCW [sic] and their position in the Asian market and so forth? Thanks for taking my questions.

Oh, yes. Sure. PCCW is the leading company in Hong Kong and a new relationship for us. It is the biggest there, but, again, still relative to Comcast relatively small. But, an important win for us. I think the first one is always important and we have a handful of others that we're talking to. And, again, as I said earlier, at various stages of development on. So, again, over the next year, maybe over the next weeks and months, we hope to be talking more about the progress we're making in that region.

Your next question comes from the line of John Bright with Avondale Partners.

Thanks. One follow-up, Paul. If I was to think about the way you're looking at '08 today versus how you were looking at '07 at the same time, and '06, would you characterize it as more optimistic, less optimistic, equal?

Well, we haven't said anything about '08 yet, so I guess I would say it's equal.

Okay. Any 10% customers and who were they in the quarter?

Yes, we had two 10% customers, DIRECTV and Comcast.

And are you via a third party shipping to FiOS and U-Verse?

We have.

Thank you.

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

Okay. Thanks, everybody. In summary, the Q3 was a record quarter. We have a strong cash position, as well as a solid market position and we are poised for future growth.

Last quarter, in addition to reporting a record quarter, we were busy meeting with prospective and current investors at several conferences, including those put on by Canaccord Adams, Credit Suisse and RBC. We were also mentioned in BUSINESS WEEK, for those of you who saw that. And we were once again named by Forbes as one of the 200 best small companies in America, something that all of us at UEI are very proud of.

In closing, we're forging ahead with new products and targeting new markets and we look forward to giving you updates on that in the coming weeks, months and over the next year. We believe 2007 will be another great year and we look forward to 2008. And I look forward to speaking with all of you very soon.

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