Universal Electronics Inc (UEIC) 2008 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'll hold a Q&A session.

(Operator Instructions).

As a reminder, this conference is being recorded, November 6, 2008. I would now like to turn the conference over to Kirsten Chapman. Please go ahead, ma'am.

Thank you, Christian, and good afternoon, everyone. Thank you for joining us for the Universal Electronics 2008 third quarter 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 two hours after the conclusion of this call. To listen to the replay in the U.S. please dial 1-800-642-1687 and internationally, dial 1-706-645-9291. Enter access code 68335008.

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.

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 the future events and the 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 such as Delta, the Company's next-generation Nevo products and its XMP-2 technologies; the recently announced new contracts with new and existing customers and new market penetrations; the growth expected as a result of the digital-from-analog conversion; the expected continued growth in digital TVs, PVRs and overall growth in the Company's industry; the Company's ability to timely deliver its products to its customers as explained during this call; the Company's continued sales, operating income, net income and EPS growth; the Company's ability to attract and obtain new customers, particularly in Asia; and the strength of the Company's financial position; and the effects the company may experience due to the continued softness in its worldwide markets due to the current economic environment. Management wishes to caution you that these statements are just projections and actual results and events 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, 2007 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 and forward-looking statements.

On the call today are Paul Arling, Chairman and Chief Executive Officer, who will deliver an overview, and Bryan Hackworth, the Chief Financial Officer, who will summarize the financials, then Paul will return with a vision of 2008 and will open the call to questions.

It is now my pleasure to introduce to you Paul Arling, Chairman and Chief Executive Officer. Please go ahead, Paul.

Thank you, Kirsten and welcome everyone.

In this unpredictable and challenging economic environment, we continue to execute our strategy and reported record sales for the third quarter of 2008. While third quarter sales were slightly below our forecast, we did deliver year-over-year growth of 11% to $76.5 million.

We believe our experience successfully managing through all phases of the economic cycle is integral to helping us persevere through this unpredictable economic atmosphere. Our financial position continues to be very strong, our market position has never been stronger and the trends driving growth in our business are projected to continue.

Before I go over a review of our quarterly highlights, I will review what is happening near-term in our markets.

Our business category remains solid and revenue met our guidance. Our relationships with our subscription broadcasting customers are very strong and to date sales continue to be driven by the ongoing trends of the transition from analog to digital from standard definition to high definition and from non-DVR to DVR.

Our consumer category on the other hand was impacted severely. We saw a swift deterioration of the European markets, which is expected to last through the remainder of the year. The most affected in the third quarter was the UK.

In addition, the economic turmoil reduced consumer spending on consumer electronics which reduced foot traffic to our accessory products. In turn, our consumer category customers froze some September orders.

We expect the economic environment will continue to negatively impact our consumer category sales for the remainder of 2008 which is reflected in our current forecast.

Overall, we are monitoring the situation closely. Right now, all of our customers are on-track with our current projections and we continue to anticipate a record fourth quarter in company net sales.

Even during this challenging time, our employees remain focused on our long-term strategies. During the quarter, we made some more progress developing new technology, winning new customers and expanding relationships. We developed a new remote line named Excite which was introduced this fall at EFA.

Its features include guided out of-the-box, on-device software for quick set up, and web-based software for complete personalization; Color LCD screens and LCD touchscreen interfaces control of up to 18 devices; and compatibility with virtually any brand and advanced features like activity macros and learning.

In addition, in 2008, we developed the Delta, our universal 2-device remote designed to be pre-programmed to a digital to analog converter and programmed by the user to operate his or her television.

The Delta is uniquely positioned to benefit from the analog to digital transition and we have started shipping the delta to remote set top box manufacturers and a major MSO in the US.

It is estimated that over the next 5 years, the number of homes that receive digital signals will nearly double to 636 million households or half the world's TV homes. This indicates digital growth will accelerate especially outside North America and Western Europe. Over the next five years, it is estimated that nearly 300 million digital homes will be added.

It is also estimated that 26 million homes will be added in India alone over the next five years making it one of the fastest growing countries in our industry.

We are excited to announce we have begun supplying products to Reliance Communications, India's leading integrated telecommunications company.

We are providing Reliance with wireless devices for their big TV direct to home service roll out currently taking place in India. The service is being rolled out to over 6,500 towns and cities and will be made available to retail outlets across the country.

We think that Reliance provides an excellent example of the pace of growth possible in other regions of the world. Reliance launched its DTH service Big TV on August 19, 2008. Big TV acquired 500,000 subscribers within 60 days of launch. This is the fastest ramp up ever achieved by any DTH operator in the world.

As announced in August, we have begun shipping wireless devices to Onkyo for a range of its product line up. In addition to the initial development agreement, we have continued to work with Onkyo to develop new remote controls in more of its devices.

We also began shipments to Audiovox during the third quarter as planned.

There are promising trends in the marketplace that bode well for our business. Projections indicate DVRs are currently found in over 27% of US households, a figure that has doubled in the past two years. With a continued push from cable, DBS, and Telco TV providers, it will likely double again over the next four years.

We continue to execute on our goals of growing and deepening customer relationships, winning new customers and introducing new products. In particular, we are focused on expanding our OEM business and our reach into Asia.

Most importantly, we are not sitting still. We have excelled during lean times before and we intend to do the same now. Even though near term economic circumstances have caused our results to fall short of what we expected, we still anticipate a record quarter for UEI in both sales and EPS in the fourth quarter.

But even more important than that, is that we remain extremely optimistic about the position we have built as the leader in wireless control of home entertainment and regardless of the economic environment, we will continue to build on that strength.

We will do this because the powerful trends affecting the home entertainment market across all regions of the world continue and the resulting long-term growth prospects remain extremely attractive. With that, I'll turn the call over to Bryan Hackworth, our CFO to lead us through the financial discussions.

Bryan?

Thanks, Paul. Net sales for the third quarter of 2008 were $76.5 million, up 11% compared to $69 million in the third quarter of 2007 but below our guidance primarily due to the shortfall in European retail sales.

Business category revenue was $61.3 million, within our guidance of $61 million to $64 million and up 10% over the third quarter 2007 revenue of $55.9 million. Our consumer category revenue was $15.2 million, below our guidance of $16.5 million to $19.5 million but growing 17% over the third quarter 2007 revenue of $13.1 million.

Gross profit for the third quarter was $24.9 million or 32.6% of sales compared to guidance of 35% plus or minus one point and compared to 37.3% of sales a year ago.

Our gross profit percentage was negatively impacted by the shortfall in our higher margin European retail sales accounting for a lower than expected percentage of our total sales. In addition, in these difficult economic time, customers gravitated towards more value oriented products which yield lower gross margins.

R&D expense was $2 million consistent with R&D spend in the third quarter of 2007 of $2.1 million. Total operating expenses were $19 million for the third quarter of 2008, below our guidance of $19.9 million to $20.5 million and compared to $19.5 million in the third quarter of 2007.

The decrease reflects general cost controls as well as reduction in management incentive compensations. The 2008 third quarter operating expenses included $792,000 of employee stock based compensation expense, compared to $876,000 in the third quarter of 2007.

Interest income for the quarter was $859,000 compared to $879,000 in the third quarter of 2007. The effective tax rate was 37%, above our guidance of 33% to 35% due primarily to the shortfall of European retail sales which are recorded in a lower tax rate jurisdiction.

Net income for the third quarter of 2008 was $4 million or $0.28 per diluted share lower than our guidance of $0.39 to $0.45 per diluted share and lower compared to $4.9 million or $0.32 per diluted share in the prior year's quarter.

For the nine-month period ended September 30, 2008, net sales were $208.4 million compared to $206.5 million in the same period of 2007. Gross profit for the nine-month period was $70.9 million or 34% of sales compared to $74.7 million or 36.2% of sales a year ago reflecting the third quarter's impact.

Net income for the nine-month period was $10 million or $0.68 per diluted share compared to $14.1 million or $0.93 per diluted share in the prior year period.

Now, turning to our balance sheet and cash flow review.

During the nine-month period, we generated $18.1 million in cash flow from operations. We repurchased approximately 160,000 shares for $4.1 million in the third quarter bringing our nine-month total to approximately 914,000 shares or $21.6 million.

Including this repurchase, we ended the quarter with cash and cash equivalents of $75.9 million compared to $86.6 million at December 31, 2007. DSOs were 73 days at September 30, 2008 compared to 79 days at September 30, 2007.

Net inventory turns were 5.1 turns at September 30, 2008 compared to 5.3 turns at the same time last year.

And now for our guidance.

For the fourth quarter 2008, we expect revenue to range between $81 million and $85 million compared to $66.2 million in the fourth quarter of 2007. We expect business category sales to range from $67 million to $70 million compared to $48.1 million in the fourth quarter of 2007 and consumer category sales to range from $13 million to $16 million compared to $18.2 million in the fourth quarter of last year.

We anticipate margins for the fourth quarter of 2008 will be approximately 32.5% of sales plus or minus one point. Fourth quarter operating expenses are expected to be between $18 million and $18.6 million including an employee stock based compensation expense of $733,000.

The tax rate is expected to between 30.5% and 32.5%. GAAP EPS is expected to range from $0.44 to $0.50 per diluted share. This compares to $0.40 per diluted share in the fourth quarter of 2007. For the full year 2008 guidance, we now expect total revenue to range between $289.4 million and $293.4 million which reflects growth of 6% to 8% over 2007 revenues of $272.7 million.

Business category revenue is expected to increase 9% to 10% and consumer category revenue is expected to be flat to a decrease of 5%. Operating expenses are expected to be between $75.9 million and $76.5 million.

The tax rate is expected to range from 33% to 35% of pre-tax income resulting in GAAP EPS of between $1.11 and $1.17 per diluted share, a decrease of 12% to 17% from $1.33 per diluted share recorded in 2007.

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

Thanks, Bryan. While the economic situation is certainly impacting everyone, the fundamentals of our business remain rock solid and the trends driving demand still exist. For over 20 years, UEI has been the leader in wireless devices and remotes.

We have managed and managed well through various economic environments. Today, we are continuing to demonstrate that strength.

We continue to build partnerships and execute growth strategies to further increase UEI's leading position in the markets. We are committed to increasing our strength in the subscription broadcasting markets as well as with consumer electronics companies in every region of the world.

And as previously discussed, we intend to broaden our penetration of the vibrant and growing Asian markets. We are also gearing up to again demonstrate our technology leadership at the Consumer Electronics Show or CES taking place in January of 2009.

Again, regardless of the platform or technology -- cable, satellite, analog, digital, AV receivers, DVR, Set top boxes or digital TV, UEI provides the devices and customized entertainment solutions for our growing base of global customers.

The technologies and products that we are developing today and will present to the market in the near future and the resulting customer activity have us as optimistic as ever about our long-term growth prospects.

Stay tuned. I'll now open the call for Q&A. Operator?

(Operator Instructions).

One moment please for the first question.

Our first question comes from the line of John Bright with Avondale Partners.

Thank you, good afternoon, Paul and Bryan.

Hi, John.

Paul, on the consumer side, what's competition look like on that side? And from a pricing standpoint and maybe an update on the Audiovox relationship?

Sure. On the European side, our competition obviously is still there but our market share has remained constant or in some countries, it is actually up. So our share position remains strong just a situation there, as I said, during the comments that during the quarter, for most of the year, we were actually performing very well.

And then in about the September timeframe, and into October, the retailers are essentially preparing for what some are predicting to be the worst year in a couple of decades so their ordering pattern has changed significantly towards the end of the quarter.

But our share position in that environment remains very strong so there is no competitive issue, it is more of a market or consumer behavior issue there in terms of purchasing.

As far as Audiovox is concerned, everything is going exactly as planned, we began shipments this quarter and we are working on some things that you might expect to see towards CES which is of course, the biggest consumer electronics show in the US for the year.

So stay tuned for things to be done there as well.

And specifically, the pricing in the consumer market in Europe, are you seeing the need obviously with the low demand to increase rebates, et cetera?

Not so much, I think it is more that the behavior has been to shift to lower -- more value oriented products as Bryan said.

Shifting then to the subscription side, maybe talk about the Asian market and what you see for opportunities there.

Yes. We announced obviously on this call, a pretty major one, Reliance in India who as I said, rolled out 500,000 new subscribers in basically a two-month period which is an unprecedented level of roll out.

The projections for that region of the world are astounding over the next five years between the end of this year and the end of 2013. So we're already hard at work developing those relationships for that 5-year trend and generating some business in the near term with those customers.

We just think that while the growth here will continue and the number of digital homes added here will continue to grow, the upgrade trends here will continue to grow, the non-HD to HD and non-DVR to DVR.

The simple roll-out of digital homes in other areas of the world, the growth is going to be pretty substantial over the next five years and a lot of it will be centered in that region. So again, look for more from us on that as time progresses.

And as far as the digital transition is concerned, what are you seeing associated with that and what's your thought process on how long that may last into '09?

Well, some of the customers we're selling to are saying that it will last into '09 and into '10, so we'll have to see on that. We are not making any projections yet on our '09 but we are hearing from customers that they believe the, particularly here in the US, that the DTA or Digital to Analog converter or the conversion from Analog to Digital will take place throughout 2009.

And last question for you, then Paul, when you look at your business, from a variable cost standpoint, where do you see variable cost as potential savings opportunities in an uncertain demand market?

Well, most of our cost base, most of our SG&A and R&D base is fixed, there are variable expenses in there -- freight and there are a few variables, but most of it is fixed. In Q3, our expenses were a little lower than expected as Bryan highlighted. One of them was management incentive compensation was curtailed.

But going forward, we believe it is important for us to continue our efforts in both sales and product development because the customers that we're bringing in today are the same ones that are going to grow substantially over the next number of years.

We have been through this before in the downturn of, as I remember it well, in '01/'02 timeframe after the dot com burst, the economy went down and there was negative impact but we fought to win new customers and develop new products and certainly, went on a great growth trend after that and I think I would attribute it to some of the actions we took even during the downturn.

So, we are going to remain positive about our markets, we think that these trends are continuing, the analog to digital transition, the upgrade to high definition and DVR may slow down a bit but they're not going to stop. It will continue over the next number of years and we're going to go out with new products and new technologies to fight for every customer on earth that is implementing those and we feel we can do very well.

Everyone asked the question, and I know you're probably not prepared to talk about '09, but would it be correct to make any kind of analogies or discuss what your experience was during that last downturn versus discount downturn as we look forward to '09?

Yeah, it is hard for us to say, John, it is not that I know and I won't tell anyone today, it is more the last downturn, we don't know the length of this or the effect of it, but what we do know is so far, it has affected the consumer side more than business.

The business category, we feel -- selling to OEMs and subscription broadcasters that as I've said before, bread, water and TV are staples of people's lives and I think that those services are slightly more immune, at least they have been so far, our business category has been okay, the consumer category is more affected.

The upgrade purchases at retail are probably more affected in a down cycle than our staples like cable and satellite and IPTV subscription services.

You've had a record year in '08. Would you feel comfortable -- pretty confident in thinking that your revenues are going to be up year-over-year in '09?

We're not ready to make that prediction yet. I guess all I would point to is the fact that our Q4, even though less than we expected, will be a record in both sales and earnings.

Got it.

Bryan, a couple of clean ups for you then. Other expense? What was taking place there and then headcount if you don't mind?

It is hedging, we hedged in Q3 as we always do, we hedge the balance sheet so there's a little bit of expense in that respect.

And headcount?

Headcount was about 400.

All right. Thanks, guys.

(Operator Instructions).

Our next question is from the line of Andy Hargreaves with Pacific Crest Securities.

I wonder if your primary competitors or just how you think they can fare in the economic downturn and maybe even more specifically, can they operate without credit, how does your balance sheet play versus the competition in sales right now?

In terms of whom? Sorry? With the customer base?

On the service provider and CE OEM side.

You mean in terms of AR terms or?

No, I mean as you're in sales conversations, does the credit crunch favor you over a competitor, meaning do your competitors have to access credit to provide units where you can do it based on working capital.

I can't speak to their financials although some of them clearly aren't as strong as we are and we have been around for a long time, we are specialists in this industry, we supplied actually some of these customers, we have supplied through multiple economic cycles. We have customer relationships that last more than a decade so I think they are pretty comfortable with us in good times and in bad and our financial position is obviously public so they know that our company is strongly financed and it may favor us -- it probably has favored us over time as they look at us, the technology we bring and the financial strength that we have.

We are not going anywhere so they feel very comfortable about that. Smaller competitors will have more of a problem.

Do you think that the economy is going to impact the pace of actual new service roll outs in emerging markets?

Well, it might. But it is hard for us make those predictions about next year right now, we are going through the process, that process as we speak over the course of the next month, we are putting our plans together for next year. So it is hard for us to make any prediction about that yet. But again, the things like the analog to digital transition are occurring and they're not just occurring here, a lot of the new roll outs in other countries are obviously digital -- either satellite or IPTV rollout, they don't appear yet to be as affected.

Again, I do think that television here in the US certainly and also in other parts of the world is becoming more than a luxury, more akin to a necessity.

Okay. And then can you just give us the revenue from 10% customers in the quarter?

It is the same two customers that we have had in the past, Andy, that are bringing [2%].

Okay. Thanks.

(Operator Instructions).

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

Okay. Thanks everybody for joining us today, we were pleased to report the record quarterly revenues which demonstrate our company's strength, its focus and its strong foundation.

We have a plan to continue the success of the business regardless of the economic environment and we look forward to seeing all of you soon certainly at CES. If any of you want to see us there, we will be there showing new products and technology.

So please make arrangements to see us there. Thank you 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 line.