Universal Electronics Inc (UEIC) 2009 Q3 法說會逐字稿

Good afternoon. My name is Demitrice and I will be your conference operator today. At this time I would like to welcome everyone to the UEI Third Quarter 2009 Earnings 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. Chapman, you may begin your conference.

Thank you, Demitrice. Good afternoon, everyone. Thank you for joining us for the Universal Electronics 2009 Third Quarter Conference Call. By now, you should have received a copy of the press release. If you have not, please contact Lippert/Heilshorn & 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 877-655-6895, and internationally, 706-758-0299. Enter access code 35717601.

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, 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 future events and the future financial performance of the Company including the continued growth expected as a result of the analog-to-digital conversion, the expected continued worldwide growth in digital TVs and DVRs, the Company's ability to successfully anticipate the needs and demands of the consumer with the respect to new and innovative products and technologies, the continued strong relationships with the Company's existing customers, the Company's ability to attract and obtain new customers, particularly in Asia, the strength of the Company's financial position, 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 or 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, 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 the management's projections or forward-looking statements.

On the call today, Paul Arling, Chief Executive Officer and Chairman, will deliver an overview and Bryan Hackworth, Chief Financial Officer, will summarize the financials. Then Paul will return to provide vision for the remainder of 2009.

It is now my pleasure to turn the call over to Paul Arling. Please go ahead, Paul.

Thank you, Kirsten, and welcome, everyone. Our third quarter sales of $83.2 million exceeded our expectations for the quarter and represents the highest quarterly revenue achieved in the Company's history. This is largely due to solid sales in our business category and improvement in our consumer category.

Our US business category customers are demonstrating persistent, strong ordering patterns. These ordering patterns are supported by many things, including the popularity and continued rollout of technology such as HDTV and DVR. The near-term continuation of these trends is supported by industry analysts who project an 11% increase in the number of HDTVs sold for the full year of 2009. This demonstrates the persistent demand for new technologies, even during the economic slowdown.

We are benefitting from the strong relationships we forged with the world's foremost subscription broadcasters. Consumers' television viewing habits and demand for new innovative ways to enhance their home entertainment experience have led to strong sales in this market and are expected to continue. These trends are also supported by industry analysts who predict that global shipments of set-top boxes will increase in 2009 to 136.7 million, a 4% increase over 2008, and HD and DVR-enabled systems expected to grow 28% during this year.

We are focused on winning new customers and increasing our market share with existing customers. Our success with this strategy is demonstrated by sales in our business category reaching $260 million for the trailing 12 months for the first time in the Company's history.

Trends indicate the retail market appears to be improving. Our customers are increasing their orders as consumer demand increases. For the third quarter of 2009, the consumer category demonstrated growth of approximately 7%. The industry forecasts also indicate improvement.

According to CEA, the average allocation of holiday gift spending for 2009 is projected to be up 4% from 2008, and the amount spent on consumer electronics is projected to increase 8% over the same period. While this may not portend a long-term recovery just yet, the strengthening of this market is a promising development for our consumer category.

UEI is uniquely positioned within the consumer electronics industry. Our technology and solutions reach broad markets. We remain successful and grow our business during this recession in large part due to our diversified business model. For example, as retail sales weakened, the strength in the subscription broadcasting market compensated.

UEI has weathered a number of recessionary cycles in the past, and it was during those periods that we focused our efforts on out-innovating our competitors, winning new customers and increasing our market share. As the economy recovered, we experienced unprecedented growth. Therefore, we look forward to a better 2010.

We continue to expand our existing customer relationships, to work to win new customers and to expand our geographic presence. We are also continuing to invest in new products and technologies. And our focus remains on offering our customers and consumers the technology and solutions that meet their future needs.

In September, we announced Onkyo will be the first company to include our Quickset application and XMP-2 technology in the universal remote shipping with its new audio/video receivers. Our Quickset application provides consumers with as simple as possible universal remote control setup by a guided on-screen instructions. And our XMP 2 technology, which is a revolutionary low-cost wireless two-way communication link between a remote and AV equipment.

Before I turn the call over to Bryan, I'd like to welcome Carl Vogel to our Board of Directors. Carl has over 25 years experience in the cable television, satellite, telecom and content sectors and is currently a member of the Board of Directors for DISH Network and Shaw Communications and was formerly the president, CEO and director of Charter Communications. We're excited to add Carl to our team and look forward to our partnership.

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 third quarter of 2009 were $83.2 million, up 8.7% compared to $76.5 million in the third quarter of 2008. Business category revenue was $67 million, up 9.2% from the third quarter 2008 revenue of $61.3 million. Our Consumer category revenue was $16.2 million, an increase of 6.6% over the third quarter of 2008 revenue of $15.2 million.

Gross profit for the third quarter was $26.1 million, or 31.3% of sales compared to 32.6% in the third quarter of 2008. Total operating expenses were $19.4 million, or 23.4% of revenue, for the third quarter of 2009 compared to $19 million, or 24.8% of revenue in the third quarter of 2008. (Technical difficulty) operating expenses R&D expense was $[3.3] million compared to $2 million recorded in the third quarter of 2008, reflecting our continued investments and innovation in future products.

SG&A expenses were $17.2 million compared to $17 million in the third quarter of 2008. Operating income of $6.6 million in the third quarter of 2009 compared to $5.9 million in the third quarter of 2008. Interest income for the third quarter of 2009 was $110,000 compared to $859,000 in the third quarter of 2008, reflecting significantly low interest rates.

Effective tax rate was 37.7% in third quarter of 2009 compared to 37% in the third quarter of 2008. The increase is due to lower than expected federal research and development tax credits.

Net income for the third quarter of 2009 was $4.2 million, or $0.30 per diluted share, compared to $4 million, or $0.28 per diluted share in the prior year's quarter.

For the nine-month period end of September 30, 2009, net sales were $232.6 million compared to $208.4 million in 2008, representing growth of 11.6%. Gross profit was $73 million, or 31.4% of sales, compared to $70.9 million, or 34% of sales a year ago.

Operating income was $13.9 million compared to $13 million in 2008. Interest income was $376,000 compared to $2.6 million in 2008. Net income for the nine-month period was $8.8 million, or $0.63 per diluted share, compared to $10 million, or $0.68 per diluted share, in the prior-year period.

Now turning to our cash flow and balance sheet review. During the three-month period ended September 30, 2009, we generated $11.3 million in cash flow from operations, and we purchased approximately 72,000 shares for $1.4 million. We ended the quarter with cash and cash equivalents and term deposits of $79.2 million compared to $70.6 million on June 30, 2009.

Both DSOs and net inventory turns improved. DSOs were 61 days at September 30, 2009 compared to 71 days at September 30, 2008. Net inventory turns were 5.2 turns at September 30, 2009 compared to 5.1 turns at the same time last year.

Now for our guidance. For the fourth quarter 2009 compared to the fourth quarter of 2008, we expect revenue between $81 million and $84 million, which represents growth of between 3% and 7% over last year's revenue of $78.7 million. It is important to note we reported an additional $7 million in revenue in the fourth quarter of 2008 compared to the fourth quarter of 2009 due to sales of the Delta remote control, which was ruled out to address the analog-to-digital conversion deadline.

We anticipate gross margins for the fourth quarter of 2009 will be approximately 33.5% of sales, plus or minus one point, compared to 32.2% of sales in the fourth quarter of 2008. We expect operating expenses in the fourth quarter of 2009 to range from $19 million to $19.6 million compared to 2008 fourth quarter operating expenses of $17.5 million. GAAP EPS is expected to range from $0.38 to $0.42 per diluted share. This compares to $0.42 per diluted share in the fourth quarter of 2008.

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

Thank you, Bryan. 2009 has been a year with challenges for all companies. And our team has managed quite well, delivering solid results despite the negative environment. Looking to 2010, we look forward to a more robust year. We have remained true to our long-term strategy, differentiating ourselves from others in our industry through continued improvement and innovation. Our expectation is to continue to win new customers and deepen our relationships with existing customers with this strategy.

We will kick off the year participating in the International Consumer Electronics Show, commonly called CES, January 7 through January 10 in Las Vegas. We will be demonstrating some of our newly-introduced products and solutions, such as Quickset and XMP-2. We intend to introduce other new and exciting future technologies as well, and we look forward to seeing many of you there.

We intend to stay the course and continue to pursue the long-term success and growth of our business as we invest in and introduce new technologies and add new customers. We are staying true to our strategic vision to become the leader in wireless control technology. As always, stay tuned.

I'll now open the call to Q&A.

(Operator Instructions). Your first question comes from the line of John Bright.

Thank you. Bryan, the gross margin in the quarter 31.3% and in the higher gross margin in the fourth quarter. It looks like the product mix was favorable in the third quarter. And I would assume that it typically is in the fourth quarter as well. What's the delta?

Yes. It's a couple things. In Q3, John, this year we all know it was tough consumer year. And we've had higher returns this year than in the past. And when you get returns, a certain percentage of those returns you end up having to scrap, we felt the year has kind of accumulated. And in Q3 we ended up having to take a little bit of a hit on scrap. It's about $300,000 or $400,000 incremental to us. That's probably about close to 0.5 percentage point in Q3 that won't occur in Q4.

And then the uptake in Q4, as you know, when we get into Christmas season, we end up naturally having more European retail sales, which carry higher gross margins than the business category.

Would the scrap be coming from the business remotes or from consumer remotes in Europe?

From the consumers.

Yes. What's been the sales relationship like domestically for consumer remotes?

It's been good, actually.

Yes?

Yes, yes.

All right. And then, Paul, on the revenue side in the fourth quarter, are you being conservative on the -- from a consumer standpoint in that you just want to see how the things play out because sequentially it looks -- I think it's almost flat, right, as far as revenues are concerned?

Well, I wouldn't characterize it as necessarily conservative. We obviously try to be realistic about what we can do in the fourth quarter. So I wouldn't deem it conservative. The range that we've given is obviously the range of possible outcomes we see.

As Bryan did point out, though, in his comments, the last year as you had the emerging, as you remember, the emerging transition from analog-to-digital, we had (technical difficulty) for the benefit of some additional sales over what we'll have this year from that transition. I think, Bryan, you outlined it at about $7 million additional to last year, so.

So is the --?

It's obviously embedded in our guidance, of the guidance Bryan provided is what we expect to get this year despite all of those effects.

Right, right. Okay. And then looking forward to 2010, does Zilog revenues come online probably in the February, March timeframe? I assume that you're fully aware of what the revenues are looking like and they're trending as you anticipate.

Yes. The transition of the customers of the former Zilog company have transitioned very well into UEI. We're obviously watching that very closely. And it's gone very well.

And everything's -- so I think in calendar '08, there was $20 million in revenues. There's no reason to think that that number has deteriorated, possibly increased since then. Is that fair?

Well, yes. We're not making any comment about the 2010 revenues from that. But I will say that, again, the unit relationships that we have customer-by-customer with the customers that used to buy from Zilog, each of those transitions has gone very well.

Thank you.

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

Hi, gentlemen. This is [Keith] stepping in for Ian. Can you hear me well?

Sure.

All right, great. Just a final touch upon the Zilog business, you mentioned that you're not going to make any comments with respect to revenues. I just want to get a sense of the impact to gross margins and operating margins once it does kick in.

Yes. We don't like to give specifics on the gross margins for a customer. But in 2010, we're going to open a sales [residency] fee to a more traditional sale we're selling to the end-customer. So then it probably should reflect typical gross margins.

Okay. And do you have the opportunity to turn some of those chip sales into remote sales?

Yes.

All right, good. Maybe a follow-up question. Could you maybe review the opportunity for UEIC with the international subscription broadcasting, perhaps talk about the face of the rollout and how you would expect it to play out over the next few years and perhaps the margins around the international business compared to domestic?

Yes. I mean, some general comments about the international business long-term, meaning over many years, it's projected that the number of digital households outside the US will far surpass the number inside the US, whereas that's not necessarily true today. The Asia Pacific region in particular is one that over the next 10 years is projected to grow substantially.

So it's gone well so far. I think they're at the early stage of just developing the leaders in that region. The margin characteristics for the market at the beginning are usually lower as some of the operators begin with what we call dedicated devices, which are lower-margin, single-purpose devices. And as the market matures, they move toward universal devices, which is more our specialty. That happened here in the US, by the way. If you look over the last two decades, that's what the transition that occurred here. And we're beginning to see that abroad as well.

You also see many more operators, which you saw here in the US, again, 20 to 30 years ago. And that's beginning to change. There are emerging leaders, which we are targeting and winning as customers. So I think in many ways the markets are fundamentally similar, yet very different. And that's why we set up our sales offices in those regions to closely track it. But we feel it's a strong long-term play for us.

The Pay TV households, they already outnumber those in the US. The digital transition, though, is not as high as in the US. And we think that's inevitable as well. So there's a lot of growth potential there, not necessarily in the next six months per se, but over the next six years. And we think it's important too, just like we did here.

If you go back 10, 12 years, back when I started at UEI, our share was very low. We won the customers. As they grew and became bigger, we became successful. And that's how our business category sales have reached over $260 million. In some ways, it's what we started to do 10 years ago, that began to cause that. So I think it's important for us to target those customers in that region. And that's what we're doing.

Great. Thank you for the other comments, and good luck next quarter, guys.

Okay. Thanks.

(Operator Instructions). Your next question comes from the line of Austin Paul, RBC Capital Markets.

Hey, guys. I'm sitting in for Scot Ciccarelli today.

Okay.

The first question is a follow-up on something we talked about last quarter, specifically the reduced visibility. Do you guys feel like you have any improved visibility between then and now?

Yes, because we only have one quarter left, we're only guiding for Q4. So the visibility -- we've always had decent visibility at one quarter out, which we're in right now. We'll let you know what the visibility will be like on our next conference call when we give the Q4 results. And we're looking forward to giving Q1 guidance potentially for the full year.

Okay, great. Then my second question relates to the upcoming holiday season. Could you provide some I guess additional details on what you expect this holiday season?

Well, yes. I mean, we expect this year to be okay. I can't really quantify it with what that means. It'll be -- the environment seems to be a little better than last year. But that's not saying much because last year's environment was about as bad as it's been in at least in the last decade if not longer.

So the environment has improved. I think the consumer environment, there's been a level set on the inventories at the retail level it would appear. And so, therefore, orders are matching consumer demand now. Consumer demand seems to have gotten a little better, certainly not at 2006, 2007 levels, but better. And the ordering patterns have reflected that.

On the business side, things are going pretty much as they have, not a real seasonality to that business. So it doesn't really heavily rely on the holidays anyway.

Okay, great. Thanks a lot.

(Operator Instructions). There are no further questions at this time.

Okay. Well, I want to thank everybody for participating today. And we'll be certainly as I said on the call at CES this January. So, for anybody who is there, please stop by our booth and see some of the things we're working on. And we look forward to speaking with you early next year to report our Q4. Thank you.

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