Universal Electronics Inc (UEIC) 2010 Q2 法說會逐字稿

Good afternoon. My name is Tasha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Electronics second quarter 2010 earnings conference call.

(Operator Instructions.)

Thank you. Ms Chapman, you may begin your conference.

Thank you, Tasha.

And good afternoon, everyone. Thank you for joining us for the Universal Electronics 2010 second 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 immediately.

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 (800) 642-1687, and internationally (706) 645-9291. Enter access code 89845448.

Also, any additional updated material nonpublic information that might be discussed during this call will be provided on the Company's website at www.uei.com shortly after the call, where it will be retained for at least one year. You may also access that information by listening to the webcast replay.

After reading a short Safe Harbor statement, I will turn the call over to Management.

During the course of this conference call, Management may make projections or other forward-looking statements regarding future events and the future financial performance of the Company, including the benefits the Company anticipates as a result of its continued development of new and innovative products and technologies that are accepted by and meet the needs of our customers and consumers; the Company's ability to successfully anticipate the needs and demands of the consumer with respect to new and more advanced 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 and in Central and South America; the strength of the Company's financial position; and the effects the Company may experience due to the current 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, 2009; 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 Chief Executive Officer and Chairman, Paul Arling, who will deliver an overview; and Chief Financial Officer, Bryan Hackworth, who will summarize the financials. And then Paul will return to provide the vision of 2010.

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

Thank you, Kirsten.

And welcome, everyone. In the second quarter of 2010, we reported solid revenue of $78.9 million. While year-over-year revenue was relatively flat, we improved gross margins to 34.8 percent, kept expenses relatively flat, while increasing our investment in R&D, thus producing stronger than expected earnings per share of $0.34. In total, operating income improved 38 percent since the start of the year.

Within the consumer electronics industry, UEI is positioned to address multiple markets with the solutions and technology stemming from our core wireless connection expertise. Our deep knowledge of infrared and radio frequency protocols, including Bluetooth, R4CE, and Wi-Fi technologies, enable us to provide the connection, control, and interaction solutions to a multitude of devices.

Our global database of codes enables us to control virtually every home entertainment device. We also have a strong track record of innovation. In the recent past, we have introduced several key solutions all aimed at simplifying the complex home entertainment experience.

Last year, we announced Onkyo was the first company to include our QuickSet application and XMP-2 technology in the universal remotes shipping with its A/V receivers. Since then, DIRECTV became the first television service provider to include QuickSet in its new suite of remote controls and HD set-top boxes. XMP-2 is a two-way protocol designed for interactive applications and services, and enables our QuickSet automated remote control setup solutions.

Another successful innovation introduced by UEI this year is our SmartControl product. SmartControl is our One For All retail remote control, which offers consumers an intuitive, modeless home theater system control experience at an affordable price. SmartControl includes UEI's SimpleSet, a simple, three-step universal device setup that does not require a manual or a computer, and can literally be set up in less than a minute. The SmartControl began shipping in Europe earlier this year, and began limited distribution in North America in the second quarter.

UEI has a global customer base including OEMs, subscription broadcasters, and retailers. We continue to focus on deepening and expanding our customer list, both by adding new customers as well as by expanding current customer relationships.

Key to building our customer base is growing into new markets, particularly those expected to show substantial growth in the coming years. Asia continues its growth within the worldwide pay-TV services marketplace, accounting for slightly more than 50 percent of all subscribers in 2010, according to the latest market study by In-Stat. In Asia earlier this year, we started shipping universal remote controls to Astro All Asia Networks, Malaysia's largest subscription broadcaster and the only HD service provider in the country.

We have also partnered with Airtel, Reliance, Foxtel, PCCW Hong Kong, Indovision, and Chungwa, among others. And we expect to continue strengthening our presence in fast-growing regions across the globe. We are also expanding into Central and South America as the market opportunities in these regions are growing.

According to SNL Kagan, the Latin American pay-TV market subscriber base has grown at a roughly 10 percent annual growth rate over the past two years. And according to market experts, this growth is expected to continue, with pay-TV services in Latin America adding over 22.5 million subscribers by 2014.

We have begun to make several market development investments in this region, and have recently partnered with Sky Mexico, the largest service provider in that country. These investments in new customer development and innovative technologies are at the heart of UEI's success story over the years. And we believe it is the consistent execution of this strategy that will continue the success story moving forward.

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 2010 were $78.9 million compared to $78.3 million in the second quarter of 2009. Business Category revenue was $67.3 million compared to the second quarter of 2009 revenue of $68.1 million.

As mentioned previously, beginning in 2010, a significant customer returned to a more traditional dual-source arrangement. We continued to supply 100 percent of the chipsets, but we share in the remote control volume. Despite this, by acquiring new customers both domestically and internationally, we almost entirely offset the financial effects of this dual-source arrangement.

Our Consumer Category revenue was $11.6 million, an increase of 14 percent over the second quarter 2009 revenue of $10.2 million, reflecting improvements in European retail. Gross profit for the second quarter was $27.4 million or 34.8 percent of sales compared to 32.6 percent in the second quarter of 2009. The improvement in our gross margin percentage year-over-year is due to the following; sales of higher margin products in both the Business and Consumer Categories, representing a higher percent of our total sales; and a decrease in environmental fees.

In the second quarter of 2010, we adjusted our accrual for an environmental fee assessment for the periods 2007 through 2009, as the actual assessment was approximately $450,000 less than our estimates.

Total operating expenses were $20.1 million compared to $19.8 million in the second quarter of 2009. Breaking down our operating expenses, R&D expense was $2.5 million compared to $2.1 million reported in the second quarter of 2009, reflecting our continuing investment in innovation and future products. SG&A expenses were $17.6 million compared to $17.8 million in the second quarter of 2009.

Operating income was $7.3 million in the second quarter of 2010 compared to $5.7 million in the second quarter of 2009. The effective tax rate was 34.7 percent in the second quarter of 2010 compared to 36.4 percent in the second quarter of 2009. Net income for the second quarter of 2010 was $4.8 million or $0.34 per diluted share compared to $3.8 million or $0.27 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, 2010, we generated $8.8 million in cash flow from operations, and we purchased approximately 297,000 shares for $6 million. We ended the quarter with cash and cash equivalents of $78.8 million compared to $79.4 million at March 31, 2010.

DSOs were 64 days at June 30, 2010, compared to 67 days at June 30, 2009. Net inventory turns were 4.7 turns at June 30, 2010, consistent with the 4.7 turns at June 30. 2009.

And now for our guidance. For the third quarter of 2010, we expect revenue between $79.5 million and $83.5 million compared to last year's revenue of $83.2 million. We anticipate gross margins for the third quarter of 2010 will be approximately 33 percent of sales plus or minus 1 point, compared to 31.3 percent of sales in the third quarter of 2009.

We expect operating expenses for the third quarter of 2010 to range from $19.3 million to $19.9 million compared to operating expenses of $19.4 million in the third quarter of 2009. GAAP EPS is expected to range from $0.32 to $0.36 per diluted share. This compares to $0.30 per diluted share in the third quarter of 2009.

For the full-year 2010, we now expect revenue between $315 million and $325 million compared to last year's revenue of $317.6 million. GAAP EPS is expected to range from $1.20 to $1.28 per diluted share or growth of 14 percent to 22 percent over the $1.05 per diluted share reported for the full-year 2009.

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

Thanks, Bryan.

UEI has continuously responded to the growing demand for home entertainment control solutions and technologies by providing the intelligent, simple, and affordable solutions that meet our customers' and consumers' future needs. We invest in regions that show promising market opportunities. And we will continue to invest in innovation to ensure we grow along with the many changing options and features in home entertainment devices and content.

Our success over the years has demonstrated our ability to do just that. Stay tuned.

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

(Operator Instructions.)

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

Thank you.

Paul, in the quarter, I think you called out Asia specifically, and you named a number of different carriers. Is it to the point where it's a meaningful percentage of revenues yet?

Not of the overall total of revenues. No.

Is it something where you think it might become a more meaningful -- or a meaningful piece in the near future?

Well, yes. In the coming years, it -- the market projections show that there's a significant amount of growth in that region of the world. We don't break out beyond the Business Category. So we also have Europe, all of the Americas, the Middle East, and Asia-Pacific all rolled into the Business Category.

So we don't break that out by region. But that part of the world is projected to have a higher growth rate than probably anywhere else on Earth. So our expectation is that it will. And we have already lined up a number of what we believe to be leading companies in the countries that they serve, some of the innovators.

We believe the large subscription broadcasters in that region of tomorrow are probably in existence today with a low number of subscribers. And we feel building those relationships today leads to a great relationship over the next 5 to 10 to maybe 20 years, much as we have done with the subscription broadcasters here in the United States.

So we're pretty happy with our progress there to-date, but it is not anywhere near the size of the US market yet.

On the Consumer side of your business, you talked about SmartControl, you talked about SimpleSet remote. You said you shipped, I think, into Europe earlier this year, and some initial shipments into US.

Do you have any visibility into maybe sell-through in the European channel? And what are your expectations for the US channel for the remainder of the year?

Well, obviously, our expectations for the remainder of the year are embedded in the guidance we've given. The sell-through of the product in Europe has been very good. The retailers have embraced the product and have had good sell-through, so the product is doing well.

A couple -- two final questions.

One, Bryan, on the gross margin. You said the second reason for the better than expected gross margin other than product mix was a decrease in an environmental fee. How much was that, again?

It was about $450,000.

Okay. And then secondly, it looks like you've narrowed or changed your top end guidance in revenues for the year. What's been baked into that change?

Well, when we give -- provide guidance at the beginning of the year, we're about 11, 12 months out. And Q1 -- we had a solid Q1. We had an excellent Q2. And we're looking at Q3 to be good. For us to hit the top end of the original guidance we provided, Q3 and Q4 would have to be great.

And right now, we're looking at Q3 and Q4 being very good, but I can't say that it would be great. So I lowered the top end of the yearly guidance. But we're still within the range, and we're still looking at -- if you look at EPS, we're still looking at 14 percent to 22 percent growth, bottom line.

Thank you.

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

Hi, guys.

Hi.

I guess, my question is more broad. Where is the growth? I mean, it just seems like you haven't really grown. Last quarter, your guidance now is -- essentially, even at the high end, we'd be looking at 3 percent annual growth for the whole year off of what was a pretty depressed 2009.

I would have thought you'd have better progress this year. Because we know Asia is still too small, what's going on in the US? Is it demand is not there? Is it the unit side of revenue that's not growing, or is it the pricing?

Yes. The one -- this is Bryan. The one thing you have to take into consideration is what we reiterated on this call, is that from 2009 to 2010 we had a significant customer who went back to a dual-sourcing arrangement.

Right.

So when they did that, we said, I believe, a couple calls ago, that it was going to affect us in 2010 by about $25 million in sales. So the fact that we actually have done -- have kept a pace with the prior year tells us that we actually made up that $25 million in other areas. So we have actually grown, both domestically and internationally. So we've gained customers, again, both domestically and internationally, which have made up for the $25 million shortfall from the prior year.

So in terms of overall demand trends, are we seeing anything change with US consumes? Setting aside the customer-specific issues, are there -- are people still buying -- or upgrading to new services, to HD and whatnot, DVRs, at the same pace they were a year ago or two years ago? How is that overall US demand picture trending?

Yes, Jonathan. This is Paul. I think, generally, it's been okay. Again, the viewpoint we would have had six months ago was to incorporate what could be anything from fair outcomes to great outcomes. And at this point, we're seeing good. So good is good. It's not great.

I think the demand is fair to good. And is it what it was last year? I mean, there were periods last year, at the beginning of the year, where it was terrible. Subscription broadcasting wasn't so bad. The Consumer side was as bad as we've ever seen it. That picked up as the year went on. It has continued somewhat into this year.

I think, on the subscription broadcasting side, the order patterns are good. Not great, but good. So we feel that, at this point, the outcomes for the remainder of the year are, simply, good. And the guidance that Bryan provided pretty much encompasses that, that the orders are good, not great.

And then in terms of overall trends we see for -- I mean, typically, we see falling TV prices have encouraged consumers to upgrade, which has led to more box sales and more remote sales. Are we seeing the same -- is that correlation still there? Are we still seeing -- because TV prices continue to come down. Is the correlation still there with the upgrade? I mean, what kinds of things are you hearing from your customers on this front?

Well, we're -- I mean, as far as the TV prices, If you were to draw a graph and take the line and continue it on its path, it would have crossed zero at some point. So of course, pricing is going to have to level off at a point. The question is, is it leveled off at a point that it's still considered a relative value for consumers? And I think it's probably at that level, where it has been driven down to the point where it is affordable for the widest portion of the US population.

So I -- although that's always a matter of opinion -- I think these prices have gotten to the point where they're priced for mass penetration already. So do they need to continue to go down? I'm not so sure. Whether they will or not is difficult to predict. I could give you my prediction. And if you asked, you could get 100 different predictions on where that's going from here.

As far as where the market is today, I think that it is -- again, as I said earlier -- it's good. It's not great. I don't see huge demand pickup. I think there's still a lot of question about the economy and there's still a lot of people out there -- consumers -- that are wondering about the future. So I don't think the buying patterns have returned anywhere near to where they were three years ago. And I think that most companies will probably be saying that, at this point. They just haven't.

The subscription broadcasting world has done okay through the downturn, and continues to. But I'm not seeing that the economy is at a turnaround. We're, rather, seeing it that it's fair to good right now.

Got it.

That's pretty much what we're hearing. That it's good in most cases, fair in others. But we're not hearing anybody knocking the cover off the ball that consumers are ready to pull out their money like they were back in the good old days of 2006 and 2007. It's just not there.

Got it, got it. Thank you.

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

Thank you.

The mix that helped gross margin, was that materially driven by SmartControl and/or QuickSet?

Well, actually, I think that I would say the biggest driver of the gross margin improvement ties back to what I was speaking of earlier. In 2009, when we had a significant customer that purchased the majority -- nearly 100 percent of their remotes from us, when you purchase that many remotes, you get better pricing.

So the fact that we actually were able to replace that $25 million shortfall with new customers that are purchasing lower volumes each, the price per unit is higher than the aforementioned, so it ends up putting upward pressure on our gross margins.

Okay. And have you made any progress with QuickSet with any other MSOs? Or what's the outlook for uptake, do you think, the rest of this year and next year?

Yes. We think there will be additional implementers of this type of two-way technology. In fact, we're working with one that's unannounced. And we think that the concept will get embraced, simply because it's -- again, a great, affordable way to eliminate one of the pain points in these products and one of the pain points in the install for the subscription broadcaster.

So we think that it'll be more broadly deployed. It will take some time, because there are design instances and -- as we've talked about before, when a set-top box comes to its -- through its lifecycle and they're ready to do a new one, that's the best point at which to design things like this in.

So these things do take time. But we're confident that this type of technology -- not necessarily just QuickSet or XMP-2, but this type of technology supported by us is something that'll be implemented by more than just a few.

Okay. And that unannounced MSO you mentioned, is that -- is that a signed contract, or is that still in development? And is that a major domestic MSO?

[No]. It's already being implemented.

And it's a major domestic MSO?

Yes. I'd prefer not to describe who it is, but yes. There are other subscription broadcasters that are deploying two-way product supported by UEI.

Thank you.

Your next question comes from the line of Steven Frankel [of Brigantine Advisors].

-- Control product in the US. You mentioned you got some volume in Q2. Will that be fully ramped for the holidays?

Yes, yes. We just started --

And --

We just started shipping in Q2.

And what's the price point for SmartControl?

$50 or sub-$50, depending on the margins taken by the layers of distribution.

Okay. And what was the customer concentration in the quarter?

We had two significant customers [to which] we sold more than 10 percent of our sales.

Okay. And Paul, how do you think you're doing in the IPTV market? Is that any -- is that the same difficulty in winning new customers? Is there anything about it that makes it more or less difficult than what you've done in the traditional satellite and cable side?

No, no. I think it's the same. It's just a matter of design cycle and getting in when a customer is ready to make a change. Usually, that's when there's a juncture in the set-top box or there's new implementation of a new technology or a new box.

I will say that on the IPTV side here in the US, we are supplying that market. Today, it's currently chips, but not full remotes. So we do supply that market, but not remotes yet.

Okay. And if you look at the acquisition you made, have you -- how have you done in terms of customer wins in cross-selling versus the expectations you had when you bought that business?

I think we're right on plan with it. I think that it was a good deal for us, and that it gave us a number of things, both the database -- and consolidating our database with their database. Also, the workforce in India has been very, very valuable to us. And I think that, as time goes on, it'll be more difficult to know, because we've done a good job of merging the companies.

The databases are now being blended into one. We're designing on new silicon now. So it's difficult to separate anymore what was once Zilog and what is now UEI, because we're now one. We have merged the companies -- I think as I have said earlier, this was a deal where we knew that business quite well because, obviously, we were in it.

And what that led to is a -- the ability to more completely merge the entities. We have -- some of our lead engineers now here in the US and in Cypress in particular are from there. So we've interspersed some of their great talent with ours, brought in their database and merged it with ours.

So it's kind of a complete merger at this point. It's gone very smoothly. We haven't had any undue surprise. A few bumps, but nothing major. And it's gone pretty smoothly.

Okay, great. Thank you.

(Operator Instructions.)

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

All right. Thanks. All the good versus great commentary, is that specific to the US service provider or is that just broad commentary?

That was a broad commentary.

Can you get more specific? I mean, are there any segments of the business that are seeing more good and less great than others?

No. I think it's really across the board. I mean, when we did our guidance, we expected to be in that -- the $1.20 to $1.35 range, originally; and now we've brought it down to $1.20 to $1.28. Like I said previously, to hit the high end of that range, we would have to hit the high end of each quarter.

And we did really well in Q1. We did excellent in Q2. And in Q3 and Q4, we're still doing -- we're still expecting to perform well. So you look at the bottom line growth of 14 percent to 22 percent, I think that's an excellent year. So again, for us to hit the high end, I think we would have really had to hit the high end on Q3 and Q4. And right now, I see it a little lower than that.

Just staying on it really quick. Within the service provider market, is some of the maybe slower than outstanding outlook just because penetration of HD and DVR have gotten higher, or do you think you're seeing any impact at all from cutting the cord or downgrading or anything like that?

Well, it could be partially that. The other part is that it's always difficult to predict, even for us, sitting here right now. Promotion also enters into it. When subscription broadcasters do local promotions or, even more, national promotions, depending on who the operator is, that can also move volume; and with the absence of those, not move volume.

So you have to factor all these things in when you make your predictions about what's going to happen. And will the level of promotional activity and the effectiveness of that promotional activity be the same as it has been in the past? It's difficult for us to know exactly the answer to that question.

So again, when we sit down at the beginning of the year, we try to do it for the whole year. When we sit down here in early August, we do it for the remainder of the year. We probably get a clearer view now.

And what we see right now is that it's good, but not towards the high end of what we would have expected in February -- or what could have happened. In order to give you some guidance at that early stage in the year, we have to incorporate into it what can go really, really well, and what might not.

And at this point, the really, really good, we don't see. Now again, you don't know. Whenever you provide guidance -- we have a fairly clear view of Q3. The further out you go -- our most difficult prediction of the year, as you know, is February, when we provide that annual look. You literally have hundreds of factors that enter into it, so at this point, we think we've got a good handle on what we'll do the remainder of the year.

Good.

And then on Asia, can you just kind of square up the stat that more than half of -- or whatever it is -- more than half of the paying TV subs are over there, and you've got quite a few customers now, versus not having enough revenue for it to be meaningful?

Yes. Well, when we say meaningful, it's not as large as the US.

Yes.

If that's what meaningful means, it's got a ways to go. But it is a good piece of revenue. It's growing for us. But the market is very different than here. I think it'll take time to develop, just like here in the US. The subscribers come on, they usually start at a low ARPU, and then they build from there. Because subscription broadcasters worldwide start by signing a subscriber up, and then do sell-ups for things like HD or DVR or other services.

Here, it started even simpler than that. So it's got a ways to go. But as I've said many times, this is a region of the world where the population is changing. There's a developing middle class. We think that the subscription broadcasting market's there, certainly in subscribers, and one day in dollars. And this may be many years from now. But it can be as large or larger than the United States.

And we have begun our progress there over the last couple years. We've won a number of major subscribers, who we believe many of which will be the leaders of tomorrow in the subscription broadcasting world in that region. And that's how we started here, signing up the smaller cable companies, many years ago, that became very large cable and satellite companies of today.

So we think it's important to get in there. We've made limited investment, and we think we're pretty prudent about how we do it. We start with a sales and application engineering team, and then build from there. And that's what we've done. We've done it in other areas of the world successfully, and we're doing it there now successfully. And we're now starting to make some initial investments in Central and South America, as well.

And at this point, are you seeing pretty similar gross profits for per unit in those markets?

Similar. Sometimes lower, sometimes higher. It depends on which type of product they wish to buy. I mean, the better-featured for a higher ARPU customer would be a better-featured product, might carry a little bit higher price point, potentially a higher margin. Sometimes on a simpler product, it's a little bit lower margin. It all depends on what the market dictates.

Okay. And then last, just on the gross margin guidance for Q3. It's a little lower than Q2, just -- even after backing out that -- the environmental fee assessment thing. Can you just comment on the rationale for that?

Yes. I don't think it's much lower. I think we said 33 percent plus or minus a point, so we'd get up to 34 percent, what we're providing. So yes. There are so many factors that play into gross margin, Andy, that if you're talking about 0.2 of a point, I mean, that could -- anything can sway that. So we usually round. So 33 percent plus or minus, I think, is where we're coming at.

Okay. Thanks.

Your next question comes from the line of Jason Ursaner with CJS Securities.

Afternoon, everyone. Just to try and follow up on some of the points you just spoke on. The dual-source arrangement. It was my understanding that was more first half-weighted?

It was more first half-weighted. And then it waned -- if you're talking about 2009. It waned towards the end of 2009 a bit. But it was still -- it was first half-weighted. But again, we still had a significant amount in the back half, as well,

Right. But so you're characterizing the revenue performance as consistent. But the underlying trend, it actually seems more like a transition period, where you've done a very good job of replacing the lost revenue with some of these other growth initiatives; So can you comment at all why those wouldn't be accelerating growth in the back half as this problem goes away?

Well, it probably won't go away this year. Q3 was affected by the dual-source. We had it through Qs 1, 2, and 3. Maybe come on more full force in Q4. But we are -- like you said, we are making up that delta. So the consistent comment is having more to do with consistent with expectation, because we laid out expectation at the beginning of the quarter, and we were consistent in our execution against that expectation.

Okay. And then the air freight issue that you spoke about last quarter. You said that it was expected until mid-May. Did it actually go until then, or did it end earlier with the factory extension?

No. I believe it went to about May, give or take a couple weeks.

So in terms of the gross margin, I understand you kind of quantified some of these higher products and the environmental issue. But with less air freight for half a quarter, I'm, I guess, a little confused as to why it would decrease sequentially.

Yes. Again, when we do the gross margin rates, I mean, it's -- there are many factors that play into it. FX plays into it. You've got mix between Business/Consumer. You've got mix within the categories. There are literally -- I could rattle off many items that roll into it.

Right now, if you look at Q3 of last year, we were at 31.3 percent, our gross margins. This year, we're looking at 33 percent plus or minus one point. So I think it's a solid gross margin. And we've actually done a good job in actually bumping it up. But to sit there and try and explain 0.2, 0.3 of a point, that could change on a whim.

Right. Typically, though, the new products, would they have higher gross margin? When you're implementing some of these two-way technologies and some of the other new things?

Yes. Not speaking about any specific product. Often, a Consumer product, particularly a new one that is differentiated, will carry a slightly higher margin than the average. Sure.

Okay. And the SG&A was up $1 million sequentially. Was there any one-time in that, or is that kind of a better run rate?

No. Actually, for the full-year, I expect it to be very similar to last year's total combined operating expenses. But if you're looking at Q3, one of the items we had that typically isn't an issue here at UEI is we actually had bad debt expense of about -- I believe it was about $550,000, which, again, is very uncommon for us. So we did have it in Q3 -- or Q2.

And that would be in SG&A?

That's within SG&A.

Okay. Thanks a lot. That's all I have.

Your next question comes from the line of Neal Goldman with Goldman Capital Management.

Thanks. Stock-based comp in the quarter and your estimate for the year, and then what was it last year?

Year-to-date for the six months is about $2.5 million. So we expect probably around $5 million for the full-year, or $1.25 million for the quarter.

So are you saying it's just like $3 million AP in terms of what it would be in earnings?

Prior to tax.

Yes. That's about right.

So it's over -- it's $0.21 in stock-based comp?

Yes. That sounds about right.

Okay. What was it a year ago?

It was -- I have to look this up. It was about --

It was lower.

It was a little lower. It was probably about $3.5 million to $4 million.

Okay. So from a true cash basis, we're earning at $1.40 to $1.48, $1.50 type of number; right? We're sitting with $5.60-plus in cash per share; right? No debt. And we're earning virtually -- I mean, you earned $17,000 in interest income last quarter, given the rates.

Why wouldn't -- I mean, you've done a nice job in buying back. But why wouldn't we be very aggressive in a buyback, with your stock selling at -- if it's $11.00 actually in cash, and it's $1.40 pro forma for the stock-based comp, we're selling at a ridiculous multiple relative to the historic growth rates and the potential here.

We very well might, Neal. That's, obviously, under constant consideration by us. So it is something that's being considered.

I mean, I assume you've done pretty much what you can in terms of the acquisitions in the remote area with the last one. So the majority of the business is you and Sony and Philips; right?

Well, I wouldn't --

Are there strategic other areas that would fit into this -- into your outlook in terms of acquisition possibilities?

Yes. There are other potential projects we could have in that arena, too. So that has to be weighed in against the use of cash for stock buyback or other uses. But we do weigh them all in against each other.

Okay.

Every use that we can for that cash balance.

Right.

Because we have to find, obviously, the most efficient way to return it to shareholders, whether we invest it in operating capital -- which, by the way here, if you look at that over the last ten years, on a trailing basis, we've been a pretty good shepherd of capital on the operating side.

The one challenge is that the earnings on the financial capital we hold, or that cash balance, is quite low. And it's gotten lower. And frankly, it's always been an issue, because our returns, even if they're at 3 percent or 4 percent, our returns on capital, if you use say a measurement like EBITDA less tax or NOPAT type of measurement versus the operating capital we employ, we're in the neighborhood of 20 percent return on capital.

So we're good users of the operating capital. And we're getting terrible returns on the financial capital. So we have to find a way to transition from the 0.7 percent or 1 percent or 2 percent, whatever the prevailing interest rate is in any given period -- find a way to boost that return. And the best way to do it would be to give it to the team that is earning 20 percent on their capital.

We just have to find the appropriate way, though.

Okay. Very good. Nice job. Thank you.

-- investment or M&A. Those are the things we look at.

Okay. Thank you.

(Operator Instructions.)

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

Sorry. I meant to take myself out of the queue. Asked and answered. Thanks.

(Operator Instructions.)

There are no questions at this time. I would like to turn the call back to management for closing remarks.

Okay. I want to thank everybody for joining us today. Just to let everybody know, this fall, between now and our next call, we'll be attending several upcoming trade shows. So if you're traveling internationally, you may find us at IFA, which is held in Berlin, the IFA trade fair, in September, early September. Right after that is the 2010 IBC Exhibition in Amsterdam, a major show there. And in October, we'll be at CEATEC in Japan and SCTE Cable-Tec Expo in New Orleans here in the United States.

So if anybody is available to be at those and wishes to meet up, let us know. Otherwise, thanks for being on the call today, and goodbye.

Thank you. This concludes today's conference call. You may now disconnect your line.