Universal Electronics Inc (UEIC) 2008 Q4 法說會逐字稿

Good afternoon. At this time, I would like to welcome everyone to the Universal Electronics fourth quarter and year-end 2008 results conference call. (Operator Instructions). Thank you. Ms. Chapman you may begin your conference.

Thank you, Angelea, and good afternoon, everyone. Thank you for joining us for the Universal Electronics 2008, fourth quarter and year-end 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 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. To listen to the call in the U.S. please dial 1-800-642-1687 and internationally please dial 1-706-645-9291. Enter access code 83798059. Also any additional updated material nonpublic information that might be discussed during this call will be provided on the company's web site 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 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 just announced acquisition of Zilog assets and the continued development and success of products and technologies, including new products and technologies and the company's home connectivity line of products and software, relationships with new and existing customers including Maxim, Echostar, Reliance, and new market penetrations particularly in Asia, the growth expected as a result of the digital from analog conversion, the expected growth in digital TVs and DVRs, 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, the effects the company may experience due to the continued softness in its worldwide markets due to the current economic environment and the company's ability to finalize and realize benefits from the pending lease agreement.

Management wishes to caution you that these statements are just projections and actual results may differ materially. For further detail, management refers you to the press release mentioned at the onset of this call and the documents the company filed 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 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 statement.

On the call today are Paul Arling, Chief Executive Officer and Chairman - who will deliver an overview - and Bryan Hackworth, Chief Financial Officer, who will summarize the results - then Paul will return to provide a vision for 2009. Now it is my pleasure to turn the call over to Paul Arling, please go ahead sir.

Thank you Kirsten and welcome everybody. I'm excited to speak to you today about our ability to deliver record revenues in the fourth quarter and our acquisition announced this morning. First, as you saw from our press release this morning, by a three way asset deal with Zilog and Maxim Integrated Products, we acquired Zilog's universal remote control chip business including its intellectual property, customers, sales personnel, full library of infrared codes and engineering facility located in India. As part of the deal we hired Dr. Norman Sheridan, Zilog's executive vice president of technology and operation and chief technology officer. We're excited to welcome to UEI Dr. Sheridan and all the personnel related to Zilog's universal remote control business in the United States and Asia. In addition the deal involves an agreement to source chips from Maxim. For the first year we will be the exclusive sales agent of universal remote control chips for Maxim, selling the Zilog designs to their current list of customers. We expect a small increase in UEI sales during 2009 as a result of this deal and it will be mildly accretive this year. Beginning in the second year we will take over full sales and distribution rights to the current roster of Zilog customers and we anticipate this position will lead to more significant levels of revenue and earnings going forward. In summary, the acquisition expands both the breadth and depth of our customer base and subscription broadcasting and original equipment manufacturers. We are excited to begin working with some new customers and deepening relationships with existing customers through this transaction.

Turning to our performance - for the fourth quarter we grew sales approximately 19 percent over the same period last year to a record $78.7 million. And we recorded a record $287.1 million in sales for the full year. This is a significant accomplishment for the company especially considering the state of the global economy. Looking at our category breakdown, in our Business Category, while sales came in slightly under our forecast, we grew approximately 35 percent over the prior year quarter. Our Consumer Category performed better than anticipated with European retail demonstrating some improvement from the last quarter. During the quarter, we continued to expand existing customer relationships win new customers and regions we serve, as well as further penetrate new regions, even during these difficult times. A couple of examples include Echostar and Reliance. We are excited to have started working with Echostar, one of the world's largest digital media equipment companies and a leader in the subscription broadcasting market. We began shipping small volumes to Echostar during the third quarter with increasing shipment volume in the fourth quarter. We also began shipping small volumes to Reliance during the third quarter that grew in the fourth quarter.

We see customer wins like Reliance and others in this region as important to our long-term success as most experts believe this region will exhibit substantial growth over the next five to ten years. Overall we believe our broad product portfolio, our solid reputation and the health of our business give us further leverage to bring on new business and stay several steps ahead of our competitors. In fact, our product diversity from basic remotes to mainstream customized devices to high-end CEDIA solutions serves us well during times like these. We recognize the challenges implicit in the economic downturn and accordingly we have reduced head count in SG&A in certain appropriate areas. Nonetheless as always we are committed to long-term growth and shareholder value. As such, we build for our customers' future needs and continue to invest in R&D and product development so that we are able to launch future products that improve our customers' differentiation. We are proud of our accomplishments during 2008 and the business we have built over the long term. With that I'll turn the call over to Bryan Hackworth, our CFO, to lead us through the financial discussion. Bryan?

Thanks, Paul. Net sales for the fourth quarter of 2008 were a record $78.7 million, up 18.8 percent compared to $66.2 million in the fourth quarter 2007 but below our guidance. Business Category revenue was $65.1 million, up 35.5 percent over the fourth quarter, 2007 revenue of $48.1 million. But, below our guidance due primarily to certain orders in the Business Category both in the U.S. and international being delayed until 2009. Our Consumer Category revenue was $13.6 million within our guidance but lower than the fourth quarter, 2007 revenue of $18.2 million. Gross profit for the fourth quarter was $25.3 million or 32.2 of sales, within guidance and compared to 37.2 of sales a year ago. R&D expense was $1.9 million compared to $2.2 million in the fourth quarter of 2007. SG&A expenses were $15.6 million, which included approximately $300,000 in expenses related to M&A activity compared to $14.4 million in SG&A for the same period last year.

Total operating expenses were $17.5 million for the fourth quarter of 2008 lower than our guidance due to a concerted effort to offset the shortfall in net sales and compared to $16.6 million in the fourth quarter of 2007. The 2008 fourth quarter operating expenses included $733,000 employees stock based compensation expense compared to $703,000 in the fourth quarter of 2007. Interest income for the quarter was $368,000 compared to $905,000 in the fourth quarter of 2007 reflecting significantly lower interest rates. The effective tax rate was 33.2, slightly above our guidance of 30.5 to 32.5, due primarily to lower than expected federal R&D credits. Net income for the fourth quarter of 2008 was $5.8 million or $0.42 cents per diluted share, slightly lower than our guidance compared to $6.1 million or $0.40 per diluted share in the prior years quarter. Now for the 12 month period ended December 31, 2008 net sales were a record $287.1 million compared to $272.7 million in the same period of 2007, an increase of 5.

Gross profit was $96.2 million or 33.5 of sales, compared to $99.4 million or 36.4 of sales a year ago. Net income was $15.8 million or $1.09 per diluted share, compared to $20.2 million or $1.33 per diluted share in the prior year period.

Now turning to our cash flow and balance sheet review. During the 12 month period we generated $30.2 million in cash flow from operations. We repurchased approximately 200,000 shares in the fourth quarter, bringing our 12 month total to approximately 1.1 million shares. We are committed to leveraging our financial strength to generate value for shareholders. We have 310,000 shares remaining in our repurchase plan and intend to continue to repurchase shares as appropriate. We end the quarter with cash and cash equivalents of $75.2 million compared to $8.6 million at December 31st, 2007. DSOs were 68.4 days at December 31st, 2008, compared to 81.7 days at December 31st, 2007. Net inventory turns were 4.9 turns at December 31st, 2008, compared to the 4.8 turns at the same time last year.

Now for our guidance. This quarter's guidance incorporates a number of factors. First, we expect recently announced acquisition of Zilog's assets and our agreement with Maxim will be mildly accretive immediately in the first year. Overall, we recognize the difficult global economic environment. As a result, our sales estimates assume a continued sluggish retail market. We expect our Business Category sales to continue to be strong and grow in 2009 as a result of customer wins that took place in the second half of 2008 having a full year impact in 2009 and due to the recently announced acquisition. Regarding operating expenses, as Paul mentioned we recently analyzed our organization and processes which resulted in head count reduction. Outside of a long-term protracted economic downturn, we do not expect to implement any dramatic changes to current cost structure.

For the first quarter of 2009, compared to the first quarter of 2008, we expect revenue of between $63.5 million and $66.5 million, growth of between 4 percent and 9 percent. We anticipate gross margins for the first quarter of 2009 will be approximately 32 percent of sales plus or minus one point, compared to 35.5 percent of sales in the first quarter of 2008. The decrease in our gross margin percentage in the first quarter of 2009 compared to the first quarter of 2008 is due primarily to the strengthening of the U.S. dollar versus the British pound and the Euro, lower contribution from the Consumer Category which yields higher gross margin than Business Category and consumers trending toward the value oriented products that yield lower gross margins.. Although our gross margins are currently under pressure we expect gross margins to improve throughout 2009 as we have identified cost saving initiatives we expect to implement throughout 2009. In addition, we have pending licensing agreements we expect to close during the year.

We expect operating expenses for the first quarter of 2009 to range from $20 million to $20.5 million including employee stock based compensation charges of approximately $840,000 as well as approximately 800,000 to $1 million deal expenses related to our recent acquisition. 2008 first quarter operating expenses were $19.1 million including approximately $1 million of employee stock based compensation charges. GAAP EPS is expected to range from a penny to $0.05 per diluted share this compared to $0.17 per diluted share in the first quarter of 2008.

For the full year 2009 compared to full year 2008 we expect total revenue to grow from zero to 5 percent over 2008 revenue of $287.1 million. We expect GAAP EPS to grow from zero to 8 percent from the $1.09 per diluted share recorded in 2008. I would now like to turn the call back to Paul.

Thanks Bryan. We are continuing to focus on building a great company. We are excited about our transaction with Zilog as it significantly increases our position in the universal remote control market and further solidifies our position as the technology leader within the industry. We will continue to prudently invest in the future.

As we have done during economic downturns in the past, we remain devoted to providing the innovative solutions and tools that serve the ever-changing trends in the industry, whether it's the switch from analog to digital, non-DVR to DVR or standard television to high definition, UEI will be there. In fact, during these particularly trying times, UEI will confidently pursue its goal of growth; adding new customers and investing in and introducing new technologies. We have stayed and will continue to stay true to our strategic vision to become the leader in wireless control technology. Stay tuned. I'll now open up the call for Q&A. Operator.

(Operator Instructions). Our first question is from the line of Scot Ciccarelli with RBC Capital Markets.

Wow, Scot Ciccarelli, how are you guys. First of all, Bryan, welcome back, I hope you're feeling better. A couple questions here. Can you guys highlight some of the key technologies and customers that you guys will be obtaining with the Zilog deal. And what did the deal cost?

I'll tell you what the deal cost; it cost approximately $9.5 million in cash.

In terms of the technologies that we will be acquiring, Zilog has long been a competitor in the infrared database side of the equation and the universal remote control market. They have held a number of customers across the years; they have done a very good job, particularly in certain regions, Asia in particular. They have an engineering center there where they perform software, firmware and capture services in India. They have done a fantastic job there.

They have relationships with major OEMs, major consumer electronic companies and subscription broadcasters mainly through some of the remote control factories in the industry. So we will be taking those over. Some of these are current customers of ours that we will build on the relationship with and others will be new customers. But we're very excited about adding their portfolio of technology to our own with this deal.

Is their, would you expect their financial structure to be similar to yours just in terms of when we're trying to figure out impact margins etc.

Well, somewhat. We have - again in the first year - we have the sales agency relationship with Maxim the second year we will take over full sales and distribution rights. So they reported, I think sometime last year, that this part of their business was doing approximately plus or minus $20 million in sales. During our first year we will do obviously less than that with the sales agency relationship, but longer term we will become a full sales and distribution agent for the Zilog business.

Okay. That's helpful. And then you guys mentioned some delays in the Business Category. Just given what's going on in the environment, how comfortable are you that they are indeed delays and not something more ominous.

I think the biggest reason or factor Scot is that we gave guidance of $81, $85 million; we came in a couple million short of low end of range. If we were off much more than that I would probably be concerned. But at the end of any quarter sometimes we get some push outs, sometimes we get pull ins, sometimes they offset. This time we happen to have a little more, a couple million dollars that slipped through but again if you look at it it's only a couple percent off our range of $81 to $85 million, so I don't think that's a sign of us missing in the future in the Business Category.

But it almost sounded like you were referencing some specific deal or deals. What I'm trying to figure out is, is that something that you are comfortable, you will recognize in the first quarter? Or is this just kind of typical course of business and given the environment there was just more that slipped than came in?

No, I'm confident we will recognize it in '09. So again it's only off by a couple percent, to me it's not a big deal. It's happened. Sometimes we get pull outs and sometimes we get pull in's, so I'm not worried about that.

Right, okay, thanks a lot guys.

Our next question is from the line of with Ian Corydon with B Riley and company.

Thank you. Just to follow up on the Zilog question, in year one are you sort of getting a commission from Maxim, and then, how does that switch in year two and do you anticipate you'll be primarily selling chips or will that get converted to remote sales?

At the core of the deal is the fact that we will be a sales agent. We'll be responsible for all the customers from day one, from this day forward. But the financial arrangement we have with Maxim we're not disclosing the exact details of it. They will remain a vendor of ours. We have a longer term arrangement with them to buy chips from them. They are a current vendor of ours by the way, this is not new. Maxim is a current silicon vendor to us. So the deal includes us working together on this particular business for the next year and then after the first year we take on full sales and distribution rights to all of the, what was formally Zilog business.

And looking at fiscal '09 could you talk about what your growth expectations are for international versus domestic?

Actually we don't disclose international versus domestic. And actually this year as we have always said, the most difficult forecast we give during the year is the full year guidance when after Q4. Because the market has been so volatile and it's very unpredictable what we're doing is we're staying away from even giving guidance on the Business versus Consumer Category and we're giving guidance overall which we have provided because we think we will grow 0 to 5 percent on the top line and 0 to 8 percent on the bottom line.

Okay, and I didn't catch, did you buyback any stock in the fourth quarter

We did. We bought back about 200,000 shares in the fourth quarter.

Okay. and then last; in 2009 the interest income in the fourth quarter is that about reflective of what you think you will get on your cash in 2009 and then what are you looking at for a tax rate?

I think the interest rate is actually a little lower than they were in the Q4, so I would say it's not reflective. Actually right now we're actually staying away from giving guidance anything between the top line and bottom line, so I'm not going to provide a tax rate.

Okay, thank you.

Our next question is from the line of Tom Kucera with Avondale Partners.

Good afternoon, this is Tom Kucera for John Bright. Few questions, wanted to follow up on Zilog, first when did the acquisition close.

Yesterday.

Okay. And just to understand the customers a little better, so we're talking I guess customers that are going to fit, they're going to fit into the Consumer Category basically not so much subscription broadcast or Business [Category].

No, actually most of these customers will end up in the Business Category.

But maybe more the OEM side of [the] Business [Category]?

Yes.

Okay. And [if] you could provide anything more in terms of profitability, you said mildly accretive is it fair to say maybe 0 to $0.03, that kind of range?

I would rather stay away from giving exact numbers. I will say this though, in the long term we're not going to make an investment unless we believe the return will be greater than our cost to capital.

Okay. Also could you maybe give a headcount number and also say how much head count you're taking on from Zilog?

Yeah, at the end of 2008 we had about 430 employees and with the acquisition of Zilog it should add about 115 employees.

Okay, and also about how many of those in India?

The majority of them.

Okay. Just a few other questions here. One, I don't know if you can talk about some of the cost saving measures you're aiming for on gross margins.

They're across the board. Throughout the year some of the-- oil prices went up throughout the year, now they have come down. We will go back to our factories and our vendors and try and get some of that increase back. We're pretty confident that we will get it back and you should see that throughout the rest of 2009.

Okay. And also any comments on the Consumer Category, how that's trended within the U.S. and for example what kind of traction you have seen on Xsight remotes selling those through Audiovox.

Yeah, well we haven't begun our U.S. distribution of that product yet. The product has done well thus far in Q4, we distributed it in Europe and had some good success with it. But it was only in the fourth quarter, because the product shipped late in Q4. As far as the U.S. is concerned we haven't distributed that product here yet. There were announcements made around CES that we will be distributing it with Audiovox in the United States.

Okay.

That will come a little bit later this year.

All right. Last question, there was, Bryan, I guess there is an "other" income line, was that an FX gain?

That's correct. It relates to hedging.

Okay . All right. Thank you very

(Operator Instructions). Our next question comes from the line of Andy Hargreaves with Pacific Crest.

Just a follow up real quick, Bryan, wondering what your estimate of your cost to capital is.

I don't give that either.

Okay.

You're trying to figure a way to back into it.

I was trying to be opportunistic. Is the $9.5 million you guys paid comparable to I think it was $38 million that you had offered a year and a half ago or a little over a year ago. I mean are you getting the same assets?

No, it wouldn't be the exact same deal, but we were focused on the universal remote control market before and we are again. This is a three way deal between us, Maxim and Zilog, so it's probably not comparable to any deal we had proposed in the past.

Okay. Then on the high margin licensing agreements you're expecting to close, is that just database licensing or is it something else?

It could be both database or and/or patent.

Okay. Wondering - two questions - you can say quantitative or qualitative, but within your guidance how much are you accounting or how much are you assuming for the MSO digital to analog converter boxes?

I'm not going to give you a specific number on that either Andy. We're including everything in the Business Category obviously

Yeah

As I mentioned one of the drivers in the growth of the back half of 2009 was the fact that we had pretty big wins in the back half of 2008, which we will now gain full impact in 2009.

Okay. Also just you can talk qualitatively about this one, but in the guidance how much growth are you expecting within the existing customer base versus acquisition of new customers. I know when you guys originally gave guidance last year you were assuming some customer wins, are you assuming new customer wins this year or are you pretty much assuming you're going to run with customers that you have.

We're always looking for new customer wins. But like I said already, the wins in the latter half of last year we're going to get the full year impact in '09, that's a big driver on it.

Okay. Then last, just wondering on your payables why it jumped in the quarter and is that something that's sustainable?

The payables, partly if you look at inventory levels, inventory went up $12 million year over year, payables went up I think it was $15 [million]. So they're partially offset. But we did I think we did do a pretty good job with vendor management throughout the year.

Okay, thank you.

Our next question is from the line of Neal Goldman with Goldman Capital management.

First on that inventory question, is it higher than you would like it and what, how much can you take out of that in the course of this year?

I wouldn't to say it's higher than expected. Our inventory terms are pretty much flat with the prior year. I think it was 4.9 turns at the end of this year and 4.8 at the end of last year, so it's hovering around 5, which is pretty typical for us

What was actual share count at year-end?

It was 13.9 million diluted.

Okay. How much did stock based comp cost us in terms of per share for '08?

I think for the year it was about $2.8 million give or take.

Is that $0.20 or that's pretax?

That's pretax; I'd have to calculate it.

So it's about $0.10?

I think the actual number is about $3.8, $3.8 million in stock based comp for 2008. Or it's about 900,000 a quarter, $3.6 million.

That's after tax or pretax.

Pretax.

So it would be about $2.6 [million], right? After tax?

Probably. Approximately.

So it's about $0.18 a share, correct? On 14 million shares?

Sounds about right.

Okay. What was the overall effect of currency this past year, given the decline in the pound, and what kind of assumptions are you making for the new year?

For Q4, let me look here, it was about $2 million on the top line. And then as far as what we expect in the current year, I don't know. I can't predict that.

Okay, but you're projecting that in your year-end earnings estimates, right?

Yeah. So what we do is we do a budget we assume the current rate.

Okay. In terms of the Zilog deal, what were you buying more on the first deal than you are now? Because you were basically looking for the remote part of the business, right?

Yeah, we're still, we were still able to acquire most of, actually everything that we really wanted. The one thing that we were looking at on the first go around was the entire remote control business including the management of the fabs and the chip design. In this deal we are not, we're not doing that, we're taking over the - what I guess I would call the front stage, the software firmware design, the design of the database, so the software design that is embedded on the chip, which UEI currently does - and the customer relationships, which UEI currently does as well.

So what we have done is I think structured a deal which gives us exactly what was strategically important to us. Also gave Maxim what was strategically important to them, because they're obviously a business engaged in the design of this type of part and whole variety of other parts and the management of the fab, which they're fantastic at. I think this deal was structured very well strategically to match with each company's best points, ours being the customer relationships and that layer of value add on the chip; patents, firmware, software and database of codes, which we have been doing here for years. I think in the end what we ended up with was exactly what best fit us strategically.

So it was a significantly better deal, forget the actual numbers, but in terms of a) what you wanted to buy, and also the price you paid, right?

Yeah, we feel we cut a very good deal here for us and for everyone really. It was the exact business we wanted to get at we believe to be a very good price.

Okay. Very good guys. Thank you.

(Operator Instructions). There are no further questions at this time. I would now like to turn the call back over to Mr. Paul Arling.

Thanks, everybody, for joining us today. We wholeheartedly believe and have proven before that during challenging times strong companies get stronger. We're focused on earning new business, positioning our company for long-term growth and providing long-term value to both our customers and our shareholders. We look forward to talking to you all soon, thanks very much for tuning in and we will talk to you next time.

This concludes today's conference call. You may now disconnect.