Universal Electronics Inc (UEIC) 2009 Q1 法說會逐字稿

Good afternoon. My name is Evelyn, and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Electronics first quarter 2009 results conference call. (Operator Instructions). Thank you. Ms. Chapman, you may begin your conference.

Thank you, Evelyn, and good afternoon, everyone. Thank you for joining us for the Universal Electronics 2009 first quarter 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. To listen to that replay in the U.S., please dial 800-642-1687 and internationally please dial 706-645-9291. Enter access code 955-91-927.

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 acquisition of Zilog assets and the continued development and success of products and technologies, including new products and technologies.

The growth expected as a result of the transition from analog to digital, the expected continued growth in digital TVs and DVRs, the Company's ability to successfully integrate the needs and demands of the consumer with the respect to new and innovative products and technologies, 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 the worldwide markets due to the global economic environment.

Management wishes to caution you that these statements are just projections and actual results may differ materially. For further detail on risks, 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 Form 10-K for the year ended December 31, 2008. 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, who will deliver an overview; and Bryan Hackworth, Chief Financial Officer, who will summarize the results. Then Paul will return to provide the vision for 2009. It is now my pleasure to introduce to you Paul Arling. Please go ahead, sir.

Thank you, Kirsten, and welcome, everyone.

During the first quarter, we once again made progress on our goal to bring our industry leading wireless access and control solutions to all consumers so they are able to wirelessly connect, control, and interact within their increasingly complex digital homes.

For the quarter, we reported strong sales, growing 16% year-over-year driven by strength in our business category. When it comes to television and home entertainment, consumer behaviors and spending trends have been evolving for decades. Even during tough economic times, the movement to more advanced technologies continues and it continues today. As the global consumer transitions from analog to digital, from non-DVR to DVR, and from standard definition to high definition, all of which drive demand for new services and devices.

According to IDC, worldwide DVR shipments were 31 million units in 2008 and are expected to reach more than 52 million units by 2012. High definition televisions are dropping in price and are becoming more accessible. There were 36 million homes with HDTV in 2008, and this is expected to grow to 200 million homes by 2012 according to In-stat.

Subscription broadcasters indicate consumers remain interested in new technologies and are continuing to innovate based on this demand. Our business category customers are still rolling out new set top boxes and a number have approached UEI to power their next generation of set top boxes. As our development is based on our customers' future needs, we continue to invest in product development so we are able to work with our customers to provide them the control technology that powers these new devices.

Our product portfolio is broad. We are prudently investing in a new generation of technologies and products. The gamut extends from basic remote controls that manage 2 to 12 devices to high-end solutions including radio frequency protocols such as WiFi, Zwave, Zigby and others. This diversity provides us with the flexibility to serve our customers' every need. In turn, we can serve all areas of the market.

For example, we are developing technology solutions that demonstrate our commitment to developing and introducing products that combine high functionality and ease of use at mass market price points for users as well as easier replacements for our customers. First, we developed XMP2, a two-way protocol which will enable us to build low cost remote control devices that combine advanced features with easy set up. In addition, we have designed software for set-top boxes called Quick Set. This software used in conjunction with UEI-designed two-way remote controls will bring a simpler set up and advanced functionality to an ever more affordable array of control devices. We will unveil more details on these technologies and customer activity in this area as time progresses.

It is important to note that UEI continues to invest in new innovation and will further its technological lead over competition in the coming months and years. We are always working on expanding our existing customer relationships and, of course, building new ones. One such important customer is EchoStar. We began working with EchoStar late last year and have increased our volume of shipments to them over the last six months. In addition to adding new customers, there also exists the opportunity to capture additional business from our current customers and we are focused on doing just that.

Also, regarding product innovation as announced in February, we made a significant acquisition of universal remote control assets from Zilog including intellectual property, customers, sales personnel, a full library of infrared codes, and an engineering facility located in India.

We are integrating this new business efficiently. Our new sales agency relationship is going well. The volume of shipments since the acquisition has met our expectations, and the integration of our two libraries in India is proceeding as planned. We remain confident this transaction will be a successful one for UEI. With that I will turn the call over to Bryan Hackworth, our CFO, to lead us through the financial discussions.

Bryan?

Thanks, Paul. Net sales for the first quarter of 2009 were $71.1 million, up 16% compared to $61.2 million in the first quarter of 2008. Business category revenue was $60.9 million, up 26% over the first quarter of 2008 revenue of $48.3 million.

Our consumer category revenue is $10.2 million, lower than the first quarter 2008 revenue of $12.9 million. Gross profit for the first quarter of $21.4 million or 30.1% of sales, below guidance and compared to 35.5% of sales a year ago. The shortfall versus our forecast of 31% to 33% is due to sales mix between our higher gross margin consumer category and our lower gross margin business category.

Sales on our business category are very strong as certain significant customers order more product than expected. Although we expected sales in our consumer category to be sluggish in 2009, sales in this category came in at the lower end of our expectations.

Total operating expenses were $19.9 million for the first quarter of 2009 compared to $19.1 million for the first quarter of 2008. First quarter 2009 operating expenses included R&D expense of $2.1 million compared to $2.2 million in the first quarter of 2008. And SG&A expenses were $17.8 million, which included approximately $1.1 million in deal-related expenses compared to $16.9 million in SG&A expense for the first quarter of 2008.

Interest income for the quarter was $139,000 compared to $897,000 in the first quarter of 2008 reflecting significantly lower interest rates and a lower average cash balance.

The effective tax rate was 39.1% due to fixed interest expense on tax contingencies representing the higher percentage of pretax income coupled with a higher percentage of income earned in higher tax rate jurisdictions.

Net income for the first quarter of 2009 was $796,000 or $0.06 per diluted share, above our guidance of $0.01 to $0.05 and compared to $2.5 million or $0.17 per diluted share in the prior year's quarter.

Now, turning to our cash flow and balance sheet review. During the three-month period ended March 31 2009, we generated $3.4 million in cash flow operations; we repurchased approximately 105,000 shares for $1.6 million; and we acquired Zilog's universal remote control software technology and related assets for $9.5 million or $10.6 million including deal-related expenses. We end the quarter with cash, cash equivalents and term deposits of $66.3 million compared to $75.2 million at December 31, 2008.

Both DSOs and inventory turns improved. DSOs were 69 days at March 31, 2009 compared to 79 days at March 31, 2008. Net inventory turns were 4.7 turns at March 31, 2009 compared to 3.7 turns at the same time last year.

And now, for our guidance.

In the second quarter of 2009 compared with the second quarter of 2008, we expect revenue of between $74.5 million and $77.5 million, growth of between 5% and 10%. We anticipate gross margins for the second quarter of 2009 will be approximately 32.5% of sales plus or minus 1 point compared to 34.3% of sales in the second quarter of 2008. We expect operating expenses for the second quarter of 2009 to range from $19.3 million to $19.9 million compared to 2008 second quarter operating expenses of $19.9 million.

GAAP EPS is expected to range from $0.22 to $0.26 per diluted share. This compares to $0.24 per diluted share in the second quarter of 2008. For the full year 2009 compared to full year 2008, we now expect total revenue to grow from 3% to 8% over 2008 revenue of $287.1 million. We expect GAAP EPS to grow from 0% to 8% from the $1.09 per dilute share recorded in 2008.

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

Thanks, Bryan.

As we have said before, we are continuing to focus on building a great Company. 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 is the switch from analog to digital, non-DVR to DVR, or standard definition to high definition, UEI will be there. In fact, during these particularly trying times, UEI will confidently pursue its goal of growth. We have stayed and will continue to stay true to our strategic vision to become the leader in wireless control technology.

Continuing this mission, we remain focused on expanding relationships with existing customers, winning new customers domestically and internationally, expanding our presence in the new regions and developing new products and technologies that serve both our customers and consumers' future needs. Stay tuned.

I'd like to now open the call up for a Q&A. Evelyn?

(Operator Instructions). Your first question comes from the line of Scot Ciccarelli with RBC Capital.

Hello?

Hey, Scott.

Hi, guys.

First of all, can you just describe what the term deposit activity was, Bryan?

The term deposit is actually a 6-month CD [revolving], and what happens is from the accounting role, whenever you have a deposit that when the original maturity is greater than three months, you have to classify it as a short-term investment versus a cash equivalent. I could pull the money out tomorrow.

Okay, thanks. What were the sales generated from the Zilog acquisition you closed kind of mid-first quarter? What was the sales contribution from that?

Actually, we're not going to disclose that, Scot; but we did say that was for the year we expect the deal to be mildly accretive.

Okay, but it is fair to assume it helped those business categories sell to some degree, correct?

It was actually rather minimal to be honest with you.

Okay. Any other impact from Zilog on the balance sheet that we should note?

Nothing significant, what we have is you're going to have a breakdown of the purchase price so if we have intangibles on the books now as well as additional good will.

Okay, I did see that. Finally, can we just talk about the gross margin for a second? I mean obviously sales were better and there is a mix issue but we have seen margins a little bit later than what I think you guys would have expected, probably a few quarters in a row now, and just wondering is there something else going on on the gross margin line and what it is that you guys are kind of talking about or referring to in terms of helping boost the margins in the back half of the year. Thanks.

Yes, sure. We talked a little bit about this last quarter and if you're comparing over the last three quarters, one of the items that has really affected us or adversely affected us is the currency -- the FX rate.

The dollar versus the euro as well as the dollar versus the British pound has strengthened significantly so that has put downward pressure on our gross margins. We talked a little bit about this last quarter and talked about the mix that I previously stated but last quarter, we talked about cost savings initiatives and these are in place. We are working hard in Q1 to put them in place to take effect in the Q2 as well as the back half of the year.

So I expect the gross margins to have an upper pressure because of these cost savings initiatives and you see that reflected in our guidance in Q2 or guiding 32.5 plus or minus 1.

Yes. I know that was the expectation, previous course, I'm just trying to figure out what else is different there? And when you say cost savings, is that better sourcing or is there something else that is impacting the margin?

Yes, I don't want to get in too much detail in terms of the cost savings initiative for business reasons, but we've got a lot of discussions with our ops teams and we have a lot of initiatives in place so I expect to see the gross margin improvement in Q2, in early Q2 and then more so in the back half.

Okay, and then I'll hand the floor to somebody else; but finally just kind of housekeeping item, tax rate, should we start to see kind of the 33% to 34% tax rate going forward or would you expect a higher tax rate going forward like you experienced this quarter?

No. No. This quarter was an anomaly to a certain extent because our pretax income is low enough where when you have fixed interest expense, it just makes up a higher percentage as a total.

Got it.

I'm not going to give you the exact number, but we're forecasting, if you look at last year, it shouldn't be significantly different than last year.

Okay, all right. Thanks, guys.

Your next question comes from the line of Ian Corydon with B. Riley & Company.

Hello? Ian?

Sorry, I was on mute there. Regarding Zilog, just wondering if you could update so far on the integration if you had any positive or negative surprises and if you are seeing any other opportunities open up there from what you originally were expecting.

Yes. Well, the integration has gone very well as I stated earlier. Of course, when we purchased the assets, we of course purchased the assets that we wish to integrate and so we had a lot of pre-planning that went on, we added the employees that we needed, and again, everything has gone pretty much as we expected it would. The sales levels are what we expected them to be. The integration of the library has gone very well. The integration of the US employees, not as many of them as in India, but that has gone well. So by and large, everything is moving as we expected it to. We haven't had a lot of either real positive or real negative surprises.

Where are you at today with the Audiovox relationship?

That is going very well. We designed over the ICs from their product line, and we are working on products as we announced late last year at the mid to high end. So again, that is going according to plan. Retail obviously has its seasonal impact and our expectations are that that relationship will be very fruitful for us this year and going forward.

Last question is on the mix of products you are seeing in the business segment. Is there any change there or is that mix pretty much steady quarter to quarter?

Within the business category, I don't see a significant amount of mix change within that category now.

Thank you.

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

Hi, guys.

Hey, Andy.

I was just a tad late getting on so I apologize if you guys said this already but can you talk about the impact of the DTA converter box roll out. Both the federally mandated boxes, did that have any impact, but I think more importantly, probably the cable boxes.

Well, to be honest with you, the effect of the whole DTA legislation is difficult for us to separate out because obviously on the subscription broadcasting side, it drives demand but it is difficult to tell whether the new box that was rolled out was due to DTA or not to DTA so it is difficult to assess that. We would suspect that there has been a positive result from it. I will say late last year we had a fair amount of demand particularly in the back half of the year in Q4 in particular related to DTA because the original deadline was February so there was a surge of orders late last year.

But the effect remains. Consumers are going to have to transition over if they are currently watching either on a primary television or probably more importantly on a secondary television using an analog signal, they will cease to get that signal come the deadline which is very quickly coming upon us. So I think there is probably a pick up currently resulting from the transition. People may be instead of going out and get a converter box at retail are ordering a digital box or one of the DTA converters from a subscription broadcaster. So certainly another positive trend for our business.

And within the business segment, can you talk at all about your consumer electronics customers? Are you continuing to see at least flat or do you see growth there or has there been any kind of pull back?

I haven't seen a great deal of pull back. I would say though that most of the strength in our business category probably come from the subscription broadcasting side of our business.

And then just last on the expense guidance for next quarter, is there continued integration expensed in there? It is a little bit higher than I would have thought it would have been given the one time cost that you had in Q1?

Not a lot of the integration costs for Q2, although we are actually down versus Q2 of last year.

Okay, thanks.

Your next question comes from the line of Jonathan Goldberg with Deutsche Bank.

Hi, guys.

Hey, Jonathan.

I was wondering if you could just talk a little bit about -- if you could sort of characterize growth in the quarter. It seems there's a fair amount of upside. How much of that was from things that are new to the Company in the last 12 months? (Inaudible) international Zilog dish, to sort of -- you don't get specific obviously but just in general.

You want to know the breakout? I mean I'm not going to get too specific but like we said --

No, I'm not looking for the breakout. I'm sort of trying to get a sense for how much of the upside do you think is coming from things that are new and how much is just the existing business doing better than expected.

Yes, Jonathan, I think it is a little bit of both. I mean we have some customers that were existing customers last year whose orders have been strong, have been at least as good as last year, in some cases, better. And those were existing customers.

We have also added customers to our roster of customers that obviously, if they weren't buying last year and are this year, then that was an addition too but we are getting some of both. Both increased business from some of the existing customers and a few new customers on the list so consumer, however it was weak, as we expected, and as Bryan said, was toward the bottom end of our expectations but that was expected. The consumer market as you well know is tough right now so that part we expected the business category was a little bit stronger. The orders from existing customers and a little bit of help from the new customers drove our sales up 16%.

Then what is the tax rate for the year?

I'm not giving anything too specific; but again, as I already told Scot, if you were to use last year's rates, I don't expect it to be significantly different.

Okay, and then if you could just talk a little bit about how things are progressing internationally, I'll get back in the queue.

Yes, well, internationally, it is -- things are going like they are here. Again, we have some customers who have done very well. On the consumer side, it has been weak and a big part of our consumer business is international. But again, that is -- we are reviewing things that you guys already well know -- consumer markets today are tough and so that one has been a little tougher than most but on the business category side of things, things are going very well.

Thank you.

(Operator Instructions). Your next question comes from the line of Tom Kucera with Avondale Partners.

Good afternoon, Paul and Bryan. Tom Kucera for John Bright. Just a couple of quick questions here.

First, on the DTA boxes, I know that this is already hit -- but I guess any sense of really the cable operator behavior there and I know they talked about not really pushing enforcing that until sort of the FCC transition is finished. I wonder if that might be something that picks up later in the year.

Yes, Tom, and it is possible that it will pick up, we -- you don't really know until the deadline hits. I mean we have an expectation that they're -- we have seen quite a bit of orders, again, going back into last year for these products into late last year, meaning Q4. So it is difficult to know exactly what will happen. This type of transition hasn't occurred before. My suspicion is that there will be some people who frankly aren't ready at transition time and there will be some installations done post changeover. So -- but the effect of it is difficult to gauge at this point. We have obviously put into our guidance what we expect to happen for the remainder of the year.

And also on the operator side, any change really you think in their behavior in terms of inventory of remotes, any kind of response to the recession you might be seeing?

Well, no more than usual. Over the years, operators go through periods where they order more when they are doing more installations. Occasionally, certain regions will get ahead of themselves. I mean I'm not really seeing a great deal of change in behavior there, other than that, what you see over the last decade. So I don't know that it is any different during the recession than it was during the boom period.

Okay, and then on the consumer side, I don't know if you can say anything about -- I think a lot of people have been seeing obviously retailers clamping down on inventory and I don't know if you can comment, obviously, it is a smaller part of your business now, but comment on a sell through versus sell in on that side of the business?

Yes, well, I think it is probably as other companies have reported, they are probably drawing back inventory a little bit because they often are measured on their inventory turns as well. But the truth in that is that sell through, once one rebalances their inventory, you should be supplying a sell through. So if it is an inventory rebalancing, it is temporal in nature.

And the last point I wanted to hit was the sort of new technologies and I think QuickSet I think was a brand I heard for at least one of the technologies, I think the 2-way communicators and any sense at this point in the economics there? Is that -- is it more something to strengthen or deepen those customer relationships or is it something where you think you might be able to get a bit more margin or a bit higher of a price point.

Well, the real purpose of it is to bring out a mass market affordable technology that was heretofore only available to a higher level customer so it brings great value and the value proposition is there for both the consumer of the subscription broadcaster because they will see they are getting a much better product from that operator and the subscription broadcaster can also see some benefit in that replacements become quite simple.

I mean if you think this one through an XMP2 powered remote or a 2-way remote, when coupled with QuickSet, the set up code is stored centrally or within the box; somebody loses or breaks a remote, the set up would be quite simple because that data, instead of residing in a handheld that was lost, is now resident either at the head end or within the corporation or within the box itself so there are some benefits -- long term benefits, even cost benefits to operators for this.

So we see this as an important technology that brings a lot of features to consumers but also brings some benefit to customers which is why we have been previewing it and showing it to a lot of major players and there is a good level of interest in this type of technology.

Very good, and good job on the quarter.

Thank you.

Thanks.

(Operator Instructions). We have a follow up from Andy Hargreaves with Pacific Crest.

Do you have an expectation for a CapEx for the year?

Yes, it should be around $5 million to $6 million.

Okay, and then can you give us percent of revs for any customers over 10%?

We will disclose that in the 10Q on Monday. We had two customers that exceeded the 10% level.

Okay. And then kind of a follow up I guess to the converter box question and not talking about the federally mandated transition date but just service providers efforts to shut off analog to conserve bandwidth. Is that having or do you see it having a material impact for the year?

Well, in as much as it has been, yes, because it has been going on for quite some time. I mean I think this transition from analog to digital to your point is not just about the digital to analog converters or the federal mandate, the operators have been rolling off of analog into digital for some time now and I think that trend continues. I think it is a longer term trend that has been occurring and continues to occur.

Okay, thank you.

(Operator Instructions). And there are no further questions at this time. Mr. Arling, are there any closing remarks?

Sure. Thanks, everybody, for joining us today. We are going to continue to supply with consumer's need to simplify their increasingly digital yet chaotic home environment. We serve very dynamic and growing markets and are continuing to grow our customer base in the consumer electronics subscription broadcast and retail markets. In addition, our financial position remains strong and we are focused on long term growth prospects in the industries we serve. We look forward to talking to all of you soon. Thanks very much.

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