Universal Electronics Inc (UEIC) 2009 Q2 法說會逐字稿

Good afternoon. My name is Suzette, and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Electronics second quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator instructions.) Thank you.

Ms. Kirsten Chapman, you may begin your conference.

Thank you, Suzette, and good afternoon, everyone. Thank you for joining us for the Universal Electronics 2009 second 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 the replay in the US, please dial 1-800-642-1687, and internationally, 706-645-9291. Enter access code 16847245.

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 the future financial performance of the Company, including the benefits the Company expects as a result of the acquisition of Zilog assets and personnel and continued development and success of products and technologies, including new products and technologies; the continued growth expected as a result of the analog to digital conversion; the expected continued growth in digital TVs and DVRs; the Company's ability to successfully anticipate the needs and demands of the consumer with respect to new and innovative products and technologies; the continued relationships with the Company's existing customers; the Company's ability to attract and obtain new customers, particularly in Asia; and the strength of the Company's financial position; the continued improvement in its gross margins due to the successful implementation of supporting initiatives; 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 events or results may differ materially. For further detail on risk, management refers you to the press release mentioned on the onset of this call and [to] the documents the Company files from time to time with the SEC, including the Annual Report on Form 10-K for the period ended December 31, 2008, and the periodic reports the Company has 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, who will deliver an overview; and Bryan Hackworth, Chief Financial Officer, who will summarize the financials. Then, Paul will return to provide the vision for the remainder of 2009.

It is now my pleasure to introduce to you Paul Arling. Please go ahead, Paul.

Thank you, Kirsten, and welcome everyone. Sales for the second quarter were strong. The $78.3 million in revenue we recorded is a testament to our belief that during times of economic difficulties strong companies perform and emerge stronger. As I have discussed on previous calls, the trend toward more advanced wireless control technologies continues. Consumers are still transitioning from analog to digital, from non-DVR to DVR, and from standard definition to high definition. These trends drive demand for new services and devices.

Our strategy to build and expand relationships with our customers delivered second quarter growth, reflecting sales to new customers and strong sales to subscription broadcasters. One of our recently added customers is EchoStar. We have been shipping to EchoStar every quarter since late last year and look forward to building on this key relationship.

During 2009, the worldwide subscription broadcasting industry has been a great market for us despite one of the worst economic downturns in recent history. Over the past decade, we have worked hard to earn the business of the world's leading customers in this market and that process has continued. Providing high quality, technically superior products and service to these customers has been and will continue to be a priority within our company. I feel our recent performance in this area is better than ever and is reflected in our position as the world's leading supplier to this market.

We are also continuing to invest in new products and technologies. As I mentioned last quarter, we developed two new technologies that offer advanced features and easy setup; XMP-2 and QuickSet. XMP-2 is a two-way protocol that enables us to build low cost advanced remote controls. QuickSet is a software program for A/V devices that is used in conjunction with UEI-designed two-way remote controls to deliver simpler setup and advanced functionality to an ever more affordable array of control devices. This type of prudent investment in innovative technology has been at the heart of UEI's strategy throughout our history. We expect to be talking about customer implementation of these technologies in the coming months.

In February, we made a significant acquisition of universal remote control assets from Zilog. The integration of customers, technology, and employees has progressed as planned. Business is strong, and we feel this addition to our technology portfolio strengthened us strategically and will result in a positive financial impact, both short and long term.

Looking ahead, we remain focused on expanding relationships with existing customers, winning new customers domestically and internationally, expanding our presence into new regions, and developing new products and technologies that serve both our customers' and consumers' future needs.

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 second quarter of 2009 were $78.3 million, up 10.8%, compared to $70.7 million in the second quarter of 2008. Business Category revenue was $68.1 million, up 20% over the second quarter of 2008 revenue of $56.8 million. Our Consumer Category revenue was $10.2 million, lower than the second quarter 2008 revenue of $13.9 million.

Gross profit for the second quarter was $25.5 million, or 32.6% of sales, up from 30.1% in the first quarter and compared to 34.3% of sales a year ago. Sequential improvement in gross margins is due to cost savings initiatives identified at the beginning of the year coming into fruition in the second quarter of 2009.

Total operating expenses were $19.8 million, or 25.3% of revenue, for the second quarter of 2009, compared to $19.9 million, or 28.1% of revenue, in the second quarter of 2008. Second quarter 2009 operating expenses included R&D expense of $2.1 million, consistent with the $2.1 million reported in the second quarter of 2008. And SG&A expenses of $17.7 million compared to $17.8 million in the second quarter of 2008.

Interest income for the second quarter was $128,000, compared to $893,000 in the second quarter of 2008, reflecting significantly lower interest rates.

The effective tax rate was 36.4% in the second quarter of 2009, compared to 33.4% in the second quarter of 2008. The increase is due to a higher percentage of income earned in higher tax rate jurisdictions in the second quarter of 2009, compared to the second quarter of 2008.

Net income for the second quarter of 2009 was $3.8 million, or $0.27 per diluted share, compared to $3.5 million, or $0.24 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 June 30, 2009, we generated $6.2 million in cash flow from operations and repurchased approximately 111,000 shares for $2.2 million. We ended the quarter with cash, cash equivalents, and a term deposit of $70.6 million, compared to $66.3 million at March 31, 2009.

Both DSOs and inventory turns improved. DSOs were 67 days at June 30, 2009, compared to 74 days at June 30, 2008. Net inventory turns were 4.7 turns at June 30, 2009, compared to 4.4 turns at the same time last year.

And now, for our guidance. We use both micro data, such as internal sales and customer forecasts, as well as macro data, such as industry and general economic forecasts, when determining guidance. In the current economic environment, these data inputs have become increasingly unclear and at times contradictory in both the Business and Consumer categories. While we have met or exceeded expectations of both the first and second quarter of 2009, our visibility of future outcomes beyond one quarter has diminished considerably throughout the current year. As a result, we will not provide detailed guidance for the full year 2009; however, we believe we will continue to produce sales growth for the remainder of 2009 and we expect earnings for the year to be relatively flat compared to the prior year.

For the third quarter of 2009 compared to the third quarter of 2008, we expect revenue of between $79 million and $82 million, which represents growth of between 3% and 7%. We anticipate gross margins for the third quarter of 2009 will be approximately 32% of sales plus or minus 1 point, compared to 32.6% of sales in the third quarter of 2008. We expect operating expenses for the third quarter of 2009 to range from $19.3 million to $19.9 million, compared to 2008's third quarter operating expenses of $19 million.

GAAP EPS is expected to range from $0.26 to $0.30 per diluted share, which compares to $0.28 per diluted share in the third quarter of 2008.

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

Thank you, Bryan. We believe, and our results show, that we have performed strongly in one of the worst economic climates in decades. We believe that these difficult times only reinforce the importance of the things we have been doing for years; establishing strong relationships with the leading companies in the industries we serve and creating innovative yet cost effective products and technologies that make controlling your home entertainment network easy and fun. Our strategy has proven successful. Our industry-leading wireless access and control solutions continue to be the top choice for our partners who seek to provide consumers the ability to wirelessly connect, control, and interact within their increasingly complex digital homes. Stay tuned.

I'll now open up the call for question and answer. Operator?

(Operator instructions.) Our first question comes from Mr. Jonathan Goldberg.

Hi, guys. Thanks for taking my question.

Hey, Jon.

Just first, could you just help me parse your guidance a little bit? I understand there's not a lot of visibility into Q4, but you think earnings; you expect revenue up and earnings to be flat with last year?

Yes, that's correct. I think for the year we're doing really well in sales, Jon. We've done really well in Q2. We grew approximately 11% in Q2 '09 over '08. The back half, I expect to continue to grow over the back half of last year. But right now the one thing that we are, I won't call it struggling, I think we're doing really well considering the environment with the gross margins. To come in at 32.6% in this environment is actually -- I'm very pleased. But the Consumer Category is -- it has been sluggish. We expected it to be sluggish and it has put downward pressure on our gross margins. So, if you look at our total sales, for instance, if we're off 0.5 a point on our gross margins, you're looking at $1.5 million or $0.07 to $0.08 a share. So it can put downward pressure. So, overall, for the rest of the year, I think we're going to look -- we're looking at relatively flat for the whole year.

But wouldn't that imply pretty strong Q4 improvement in earnings?

That's correct.

Okay. And then I was just wondering if you could talk a little bit about how things have progressed during the quarter. It sounds -- your press release reads a little bit like you've gotten -- it sounds like conditions have worsened a little bit, like visibility has decreased in the last three months. Am I reading too much into that? Why don't you tell me what -- can you give any color on --

Yes, I'll explain. We've changed our method of providing guidance for the full year. Right now it is difficult to forecast beyond one quarter. We have different -- we have multiple layers in -- when we do our forecast. We have customer forecasts. We have internal sales rep forecasts. We look at comments from the industry. We look at a real macro level in terms of what economists are saying, what they think consumer confidence will be, et cetera. And in the past, usually if I were to plot the data points, there's usually a consistency or a cluster. Over the last three to six months, I'll say -- I've been here almost five, a little over five years, and I've never seen it such where there are inconsistencies as there have been over the last three to six months among those data points. So it is murky, and because of that, when I look beyond one quarter, I'd rather give a directional point of view as opposed to a precise range. I think it's prudent.

Have things changed in the last three months? It seems like we were kind of that way in the March quarter too. Have things changed over the last three months, not in terms of internally, but I guess what I'm asking is, could you just talk about how trends have developed over the last three months?

Well, for us internally, they have changed. As I was saying, when we look at it for forecasts, we have multiple inputs. For us, personally, for UEI, I haven't seen this kind of inconsistency in the past.

What about externally? What are your customers telling you? Are there changes in your customers?

Generally, the Business Category has been true all year; [it] has been strong.

Okay.

[The] Consumer [Category] has been relatively weak. So those things have not changed.

That's not changed. So we still have pretty good Business Category trends? All your MSOs and DirecTV guys (inaudible -- multiple speakers).

Yes. [The] Business Category has been pretty good so far this year and we don't see any significant change.

Great. Thank you.

Our next question comes from Mr. John Bright with Avondale Partners.

Paul, it sounds --like in fact, it looks like you're just taking a conservative stance towards the consumer side in your seasonally strong fourth quarter, European-based retail sales there; I think everybody knows on the macro front, those have been pretty weak. Am I hitting that about right?

That's correct. Yes, the consumer side is difficult today versus any prior year over the last five, as Bryan stated. And the environment there continues to be challenging.

Sure, sure.

Yes.

What about -- let's, then, talk about a couple of other things. First, maybe 10% customers, if you wouldn't mind. And then maybe talk to all the banter that's going on in the marketplace now about I think the connected living room becoming more of a reality. I think set-top box shipments are really -- there's some really bullish comments out there on some of the changes that might happen in those. Maybe you can, first, tell us about the top ten customers and, second, tell us what you're seeing or hearing or what you can tell us about some of the changes and how close they might be in set-top boxes.

Yes, John, I'll answer the 10% customer. In Q2 '09, we have one 10% customer.

Okay. Thanks.

And regarding the second question, we are seeing, even in these difficult times, we are seeing a significant interest in the area you're speaking of, the connected box, having the set-top box within the home do much more than it has done in the past. And we're talking to, I would say, a majority of our customers on the subscription broadcasting side about next-generation products. I can't talk a lot about the details, but I think you're generally on track as far as the types of services and the type of user enhancements that they are looking at/investing in, investigating for test. Many of them are at different stages of development, but we're actively engaged in conversations with those major customers about those next-generation products.

We continue to hear a large amount of interest about set-top boxes that connect the PC, maybe the Internet as well. From a navigation standpoint, how is UEI going to play in that? Is it going to continue to be the code that connects the devices, sets up the devices, or, Paul, do you have anything that you might be working on that helps as far as the navigation is concerned as well?

Sure. And we've demonstrated some of these things for quite some time now at a variety of trade shows. We've made free floating cursor products. We've made text-entry products for quite a number of years. We have all of those within our product portfolio and a lot of those technologies within the portfolio. They haven't taken off just yet, but we are seeing a renewed interest in it. Free floating cursor navigation, some are looking at free space navigation, even text-entry. So these technologies are out there. We've mastered them. We've actually built products around them. So we're fully prepared as these customers come with requests to help us -- or help them, partner with them, on building next-generation control devices for those new functionalities in their box.

Going back to consumer. I've talked to a number of other companies and they've talked on their conference calls as well about really consumer demand being linear over the past, call it, three to four months, with no big, shall we say, inventory build in that period. And the retailer is keeping a really a bare bones inventory. Is that what you're seeing as well, Paul?

Generally, yes.

Okay, thank you.

Your next question comes from Steven Frankel with Brigantine Advisors.

Going back to the guidance question, another way I think to look at it, it implies some margin pressure in the back half. Is that a function of the Consumer [Category] weakness or is there something else going on that we should think about that's causing some margin pressure?

Overall, it's basically the Consumer [Category], the pressure on the consumer side. If you look in Q2, the Consumer [Category] made up about 13% of our total sales, where usually it's hovering around 20%. So it has put downward pressure on the gross margin line.

Okay. Could you give us an update on your cooperation with Audiovox?

Yes. I can't give too many details, but we are in the midst -- in fact they were here last week -- talking to them about not only the relationship regarding -- the chip relationship, which has been going on for some time, but also, as we announced, I think it was late last year, the mid- to high-end product. So you should be on the outlook for more detail on that as the coming months progress.

And will that mid- to high-end product line hit the stores for holiday '09?

We expect product introductions this year. Yes.

Okay. And on Zilog, what, if any, negative surprises have you discovered since you have taken the business over?

Nothing really major to speak of. I think it's gone very smoothly. As we announced, when we did the transaction, we did bring over some members of management. They've integrated very well with our company. They obviously know their operation very well and have come onboard, contributed greatly to the transition. And we haven't really had very many issues regarding the integration or of the technology, of the people, etc. So it's gone relatively smoothly.

And as you start to think strategically about next year and maybe even the year after, given the fact the consumer has been disappointing for several quarters in a row now, do you do anything differently?

Well, I suppose specifically we might. We look at projects every day internally, certainly every week, in terms of new products to work on or customer projects where we'll work alongside a customer. So probably more carefully look at those investments. But I think, generally, we're doing the same things today that have made us successful over the years. And that is, as I mentioned in the call, we build relationships with customers, whether it's in good times or bad, and when the environment recovers, even a little bit, you gain, because you've gained more share.

And during these difficult times you may be able to compete a little better because your competitor is weakened. And you keep doing the things you've been doing. Show them great technology, great product ideas. They adopt them. They, then, give you more of their line. If you start with one project, sometimes on the OEM side, you'll get three projects and you can win additional products. You prove yourself on the subscription broadcasting side and they award you more of their business. And then you bring them more new technologies and they partner with you on their next-generation set-top box. I mean, I think we're doing the same things today that we did three or four years ago. You might look at your investments a little bit more carefully, but pretty much execute the way that we have been.

All right, thank you.

Your next question comes from Ian Corydon with B. Riley & Co.

Thanks. Just a couple points of clarification. Regarding the guidance, the guidance is for sales growth in the back half of 2009 and earnings flat. Does that earnings [being] flat apply to the back half or to the full year?

No. The earnings being relatively flat is for the full year.

Okay. And then on some of the kind of inconsistencies you're seeing I guess in forecasting or ordering from customers, is that exclusive or fairly exclusive to the Consumer [Category] side or are you seeing some of that in the Business [Category] side?

It's a little bit of both. I'd say it's more on the Consumer [Category] side.

Okay. And the last one is on Zilog. Is there -- I assume there's no change to the expectation that those revenues really don't kick in in a real meaningful way until 2010?

That's correct. Everything is really going [according] to plan, not only from an integration standpoint, but also from a financial standpoint.

Okay, thank you.

(Operator instructions.) Our next question comes from Ivan Holman with RBC Capital Markets.

Hello. I'm sitting in for Scot today. At the risk of sounding a bit redundant, could you just kind of talk about the guidance in terms of what really has changed relative to maybe November, last fall, when the world was really falling apart that really caused you to suspend the full year guidance? Just a little bit more color on that would be appreciated. I know that you've mentioned things have become a little bit more inconsistent, but was there any particular driver that really, really kind of forced you to not pin down the guidance for the year?

Yes. First of all, we didn't suspend the guidance for the full year. What we did was we scaled it back a bit where, rather than give a precise range, it was more directional in nature. So what I'm saying is the back half of the year in regards to revenue, I expect to grow year-over-year on the back half, just as we have in the first -- the front half. And then for earnings for the full year, we expect to be relatively flat. So we didn't suspend guidance, we just scaled it back a bit.

From a guidance point of view, a lot of people don't like to hear this, but when you give -- when you come out with guidance, say, in February for the full year, it's really an educated guess. So it's -- you don't have all the data points. Unless you have a backlog of 11 to 12 months, which we don't have, it's a difficult forecast. As you progress throughout the year, especially getting to this point, although it's still not perfectly clear beyond one quarter, I usually -- in the past five years, I get a pretty good feel for where we're going to wind up. And this year, it's a difficult economic environment, not just from a recession point of view, but also from a forecasting point of view. And I'm sure there's a causal relationship between the two, but it's difficult. It's difficult to put all the data points together and say beyond a quarter exactly where we're going to be. So what we decided to do was take more of a top-level perspective beyond one quarter and give it [a] more directional base versus a range.

Okay, fair. And I guess kind of quick follow-up question. I'd like to focus on margins very quickly. Just could you pin down or give a little more granularity on what provided the boost to margins relative to the first quarter?

Yes. I can give you a little bit. In the past, over the last couple years, we all know that oil prices bumped up a bit, right? They went to $150 to $160 a barrel at one point and we received pricing pressure from our CMs. We all know that oil prices aren't $150 a barrel anymore, so we actually went back and recovered some of those costs. And I have to give credit to the operations team. They did an excellent job, both in Europe and in the US, where in Q1 we said we're going to go after these costs. And we said it's going to start taking effect in Q2 and go through the reminder of the year. And I think you can see that reflected in the gross margin of 32.6% for Q2. Which, again, in this environment, I know it's a little down from the prior year, but given the FX rates, the dollar is stronger this year versus the prior year, putting all this into perspective, I think we're doing really well.

Okay, great. So would it be fair to characterize it as despite a negative kind of shift in mix with regards to the consumer segment, the energy costs were really the offset for the margins?

That would be accurate.

Okay, thank you very much. I appreciate the time.

Thank you. (Operator instructions.) There are no further questions at this time. Do you have any closing remarks?

Yes, I do. Thanks, everybody, for joining us today. Over the next couple of months we'll be on the road meeting with investors and attending some upcoming conferences. We look forward to seeing some of you soon and catching up with everyone in November for our third quarter earnings call. Thanks very much.

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

Notations of '[Category]' added by company following the call.