Universal Electronics Inc (UEIC) 2010 Q4 法說會逐字稿

Good afternoon. My name is Selena, and I will be your conference operator today. At this time I would like to welcome everyone to the Universal Electronics fourth quarter and year end 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).

I will now turn today's conference call over to Ms. Becky Herrick. Please go ahead.

Thank you, operator, and good afternoon everyone.

Thank you for joining us for the Universal Electronics 2010 fourth quarter and year end 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 send you a copy. This call is being broadcast live over the Internet. A webcast replay will be available for one year at www.uei.com. Also any additional updated material non-public information that might be discussed during this call will be provided on the Company's website, 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 such as QuickSet and LowEIR that are accepted by and meet the needs of our customers and consumers; the Company's abilities 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 failure of the global TV market to continue growing and expanding in the manner we anticipated; the Company's ability to attract and obtain new customers, particularly in Asia and in Latin America; the failure to successfully integrate the operations of the recently acquired C.G. companies into our operations; the failure of the CG companies to perform in accordance with our expectations; the strength of the Company's financial position and its ability to manage its operating expense initiatives and debt redirection strategies as planned by management; 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 on the onset of this call and the documents contained -- the documents the Company filed from time to time with the SEC, including the annual report on Form 10-K for the year ended December 31, 2009, and a periodic report 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 closing remarks. It's now my pleasure to introduce Paul Arling. Please go ahead, Paul.

Thank you, Becky, and welcome, everyone.

In 2010 we continued to execute on our business strategy by penetrating new markets, adding new customers and deepening relationships with existing customers. Our success translated into annual revenue of $331.8 million. As you know, during the fourth quarter we made a significant acquisition in China based Enson Assets Limited, otherwise known as CG. CG is a leading designer, marketer and manufacturer of remote controls for original equipment manufacturers or OEMs. As a result of the acquisition we have gained several new customers, and more importantly we have significantly expanded the relationships with some of our existing customers, including industry leaders Sony and Panasonic.

The integration of CG's experienced management and sales teams as well as engineering groups has gone very smoothly, and in many instances better than anticipated. As the integration progresses, the line between the companies blurs, and we have retained the unique value of CG while supplementing their offering with UEI's world leading control technology. Thus far the team has done a brilliant job working together to create a great combined company, and we couldn't be happier with the results to date.

The CG acquisition strengthens UEI's leadership position in wireless control technology; significantly increases our market share in OEMs, particularly in TVs; and positions us to benefit from very promising international growth opportunities. While growth in regions such as North America and Western Europe have slowed, other regions continue to display strength. For example, China's TV market grew at approximately 34 percent last year, and in Latin America it grew more than 50 percent, demonstrating the importance of building an international presence. CG helps us continue our efforts in this area, as it has established its market presence in these regions to the relationships it has built with leading brands over the years.

At the International Consumer Electronics Show in Las Vegas UEI celebrated its 25th year of innovation in control technology. We offered a glimpse into the evolution of the remote control over the past 25 years and a look into the future with live demonstrations and interactive displays of products and control technology. During CES we announced the expansion of our UEI QuickSet technology. As you know, UEI QuickSet simplifies universal remote control setup and programming through an on-screen wizard and two-way communication link with the remote. The latest version of UEI QuickSet, version 1.5, utilizes data transmitted over HDMI to completely automate the process to connect with and program a remote control. The user doesn't need to know the model number or brand to setup their TV. Instead they can let the devices automatically communicate with our QuickSet software to complete the setup process.

We also have plans to introduce another innovation in the QuickSet application portfolio. UEI QuickSet 2.0 leverages off new intelligent features being added to set-top boxes, such as IP connectivity, to extend the control experience to other smart devices in the home, such as smartphones and tablets. QuickSet 2.0, when combined with UEI's XMP-2, is an innovation in that it will allow universal remote control functionality to run on current tablets with no additional hardware required. Furthermore, because of the QuickSet application running in the target device, it is the first system ever that requires absolutely no setup. UEI's QuickSet 2.0 is just the latest example of our approach to introducing the innovative technologies that lead to practical and simple solutions for consumers.

We also announced the availability of our Low Energy IR Engine, or LowEIR. With this unique combination of software and silicon, battery life may be extended by years without sacrificing performance. Because it requires less energy and potentially fewer batteries, this could reduce waste and tariffs, making it both an environmentally friendly option for consumers and a financially sound solution for device manufacturers and system operators.

These recent UEI innovations add to our strong track record of creating innovative control technology that provide practical, simple and reliable solutions to consumers' needs across multiple markets. This continued success has enabled UEI to become the industry leader in controlling the home entertainment experience.

With that I will turn the call over to Bryan Hackworth, our CFO, to lead us throughout finance discussion. Bryan?

Thanks Paul.

Before I discuss the details of our results, please note that this quarter we will begin using adjusted pro forma, or non-GAAP metrics, to assist our investors in assessing UEI's current and future operations in the way we evaluate our operations.

We incurred certain expenses in the fourth quarter of 2010, some of which will continue to be incurred as a direct result of our recent acquisition of CG, which we believe do not reflect our true operating results. These expenses include amortization expense related to intangible assets acquired, depreciation expense related to the increase in fixed assets from cost to fair value, fair value adjustments to finished goods inventories, and other direct acquisition costs, including such items as professional services and other employee related expenses. Our operating results for the prior year do not include expenses related to our acquisition of CG. As such, we are providing GAAP in the prior year comparisons below. A full reconciliation of these adjusted pro forma measures versus GAAP is included in our press release that was issued after the close of the market today.

Now turning to our financial results. Net sales for the fourth quarter of 2010 were $102.5 million, compared to $84.9 million in the fourth quarter of 2009. Business category net sales were $89.1 million, compared to the fourth quarter of 2009 net sales of $66.4 million. Our consumer category net sales were $13.4 million, compared to the fourth quarter 2009 net sales of $18.5 million. Most of the sales decline was expected and imbedded in our fourth quarter guidance, as we had a particularly strong fourth quarter in 2009, driven primarily by product launches.

Adjusted pro forma gross profit for the fourth quarter was $30.4 million, or 29.7 percent of sales, compared to a gross margin of 33.7 percent in the fourth quarter of 2009. Product mix and a stronger US dollar versus the euro and British pound contributed to the decrease in our gross margin rate. In addition, as I indicated on our third quarter call, we expect the acquisition to decrease our consolidated gross margin percentage on a long-term basis by approximately two percentage points. However, our consolidated operating margin percentage is expected to increase by two percentage points.

Total adjusted pro forma operating expenses were $22.4 million compared to $20.5 million in the fourth quarter of 2009. Breaking down our operating expenses on adjusted pro forma basis, R&D expense was $2.8 million, compared to $2.3 million reported in the fourth quarter of 2009. SG&A expenses from $19.6 million, compared to $18.2 million in the fourth quarter of 2009.

Adjusted pro forma operating income of $8 million in the fourth quarter of 2010, compared to $8.1 million in the fourth quarter of 2009. The effective tax rate was 22 percent in the fourth quarter of 2010, compared to 27.9 percent in the fourth quarter of 2009. Adjusted pro forma net income for the fourth quarter of 2010 was $6.6 million, or $0.45 per diluted share, compared to net income of $5.8 million or $0.42 per diluted share in the prior year's quarter. For the year ended December 31, 2010, net sales were $331.8 million, with an adjusted pro forma gross margin of 32 percent, compared to $317.6 million in a gross margin of 32 percent in the same period a year ago.

Adjusted pro forma operating expenses were $81 million, compared to $79.7 million in 2009. Adjusted pro forma operating income for the year was $24.6 million, compared to $21.9 million in the prior year. Adjusted pro forma net income for the year was $17.9 million, or $1.27 per diluted share, compared to net income of $14.7 million, or $1.05 per diluted share in the prior year.

Now turning to our cash flow and balance sheet review. During the three month period ended December 31, 2010, we generated $24.9 million in cash flow from operations. We ended the quarter with cash and cash equivalents of $54.2 million, compared to $73 million at September 30, 2010.

And now for our guidance. As previously mentioned, we will be using adjusted pro forma or non-GAAP metrics to evaluate our performance in 2011, as we believe these adjusted pro forma metrics, while not in accordance with or an alternative to GAAP, provide useful information to management and our investors relating to our financial condition and results of operations, and are also used by management for budgetary planning purposes. The adjusted pro forma measures take into account the aforementioned expense adjustments.

For the first quarter of 2011 we expect revenue between $105 million and $111 million, compared to last year's revenue of $71.4 million. We anticipate adjusted pro forma gross margins for the first quarter of 2011 will be approximately 28.5 percent of sales, plus or minus one point, compared to 30.9 percent of sales in the first quarter of 2010. We expect adjusted pro forma operating expenses for the first quarter of 2011 to range from $24.5 million to $25.3 million, compared to $19.4 million in the first quarter of 2010. Adjusted pro forma EPS is expected to range from $0.26 to $0.32 per diluted share, compared to $0.13 per diluted share in the first quarter of 2010.

For the full year of 2011 we expect revenue between $475 million and $500 million, compared to last year's revenue of $331.8 million. Adjusted pro forma EPS is expected to range from $2.15 to $2.35 per diluted share, compared to adjusted pro forma earnings per diluted share of $1.27 recorded for the full year 2010. We expect by the end of 2011 we will have retired the debt balance, which will further strengthen our balance sheet.

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

Thanks, Bryan.

UEI has built its business on understanding, applying and delivering technology solutions to meet the control needs of consumers. In 2010 we again demonstrated our position as a leading developer of solutions that enhance the home entertainment control experience. We also delivered growth in a continuing difficult economic environment. We now ship or are technology is embedded in approximately one-third of all remotes sold annually on this planet.

In 2011 we intend to continue building our leadership position, leveraging our world class wireless control technology to drive growth in both the markets we currently serve as well as new markets worldwide. Stay tuned.

I would like to now open the call up for Q&A. Selena?

(Operator Instructions). Your first question comes from the line of Jason Ursaner with CJS Securities.

Good afternoon, everyone.

Hey, Jason.

First just looking at the Q1 guidance. On the operating expense side, what's driving sequential increase, excluding the one-time deal fees and amortization?

Q1?

If I look Q1 to Q4.

Oh, Q1 to Q4. Well, you got a full quarter of CG. In the fourth quarter of 2010, CG was involved in -- we had them for two months out of the quarter, where they're going to be three months in Q1.

Okay. And if I want to think about a split between SG&A and R&D, how much R&D is CG adding?

On an annual basis I would say that they're going to add about $2.5 million. Approximately.

Okay. And then just since this may be the last time you can kind of talk about the core domestic business, last quarter, Paul, you mentioned headwinds from consumer demand in TVs and growth in cable. Can you provide any updated details on maybe what you're seeing in the market, and where you think it could be going?

Yes. Well, it's always difficult to know quarter to quarter, but I think that it's still not -- as I have been here quite a long time, it's nowhere near where it was three or four years ago. I mean, the environment then was very robust and great. Now it may have gotten a little bit better, but it's still both here in the US and in Western Europe it's still tough. But we have done very well. Our customer relationships are as strong as they've ever been. Our market share is as high as its been, and we feel very good about the things we're doing.

I will also point out that on the subscription broadcasting side in particular, but also on the AV side or the OEM market for consumer electronics I don't know that I have ever seen a period where there's been as much time, attention and investment by our customers in bringing next-generation technologies to consumers. So I think that's a good sign for us going forward and a good sign probably for the markets going forward. Whether the economy over the next couple years will cooperate is difficult for us to know, but it looks like the investments are there to improve the products for consumers.

Thanks. Those are some good details. In terms of the CG financials you provided in the 8-K in January, it kind of painted two different pictures for growth. And you mentioned China growing 34 percent in the TV market, and if I look at CG's results in their fiscal 2009 to 2010 and what it's done in 2011, maybe you can just talk a little bit about what you think normalized long-term growth characteristics are for this business.

Well, we'll probably be addressing that as the year progresses. As you know, we don't provide -- haven't historically provided forward guidance anywhere beyond the current quarter, and of course in our February call -- now -- the guidance for this year. So we're not willing at this point to provide any detailed guidance or long-term growth rates for future years.

Okay. And then just -- you had mentioned in there that there was some manufacturing capacity available at CG. Do you have plans to shift more of the assembly, I guess, inter-company sales to CG and try and capture more of that gross margin on what was essentially previously a pass-through cost?

Yes, absolutely. That's the goal, is to take as much as we can from our third-party manufacturers and actually shift it into our own factory, which is CG.

Do you have any type of quantification on how much of the revenue could be impacted by that?

No. We're not going to provide that, Jason.

Okay. Thanks. I'll jump back in the queue. Thanks, guys.

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

Thanks. I wonder if you could just talk a little bit about QuickSet 1.5 and 2.0. When does 2.0 roll out? Obviously you need IP connectivity in set-top boxes to use that technology. Where do we stand in terms of the technology that's already rolled out in set-top boxes to allow you to -- or allow subscription broadcast providers to actually provide this technology?

Okay. Yes. I can answer that, Ian. The -- separating them. 1.5 doesn't necessarily -- although it would be enhanced by IP connectivity, QuickSet 1.5 can run without an IP connected box. Because what it is essentially doing is utilizing the HDMI signal, or EDID as it's known, to identify devices and help automate the setup so the consumer doesn't have to go through any confusing steps. The devices essentially communicate with each other and with our QuickSet software to help aid the setup process. So no IP connectivity is necessary there.

That one -- I don't have -- we don't have any dates scheduled. As we often do, we give you a glimpse into the future of our technologies and then of course we are presenting this to -- as we did at CES -- to many customers. There is a good deal of interest in this for obvious reasons, because setup is something that consumers would love to see automated, and the operators in fact would like to see it automated as well for speed of install. So there's a great deal of interest in that.

The QuickSet 2.0 does utilize an IP connected box. In terms of implementation of that there are IP connected boxes already out on the market that this could be implemented in, but by utilizing QuickSet 2.0 along with our XMP-2 or 2A infrared protocol, essentially you can turn things like a tablet -- the ones currently on the market -- into a universal remote that controls the box and the television, with -- and utilize, along with QuickSet, the Quickset application, that it would require no additional setup, because the user has already set it up for the original remote. So you could download the app and control your box and your TV with no setup, which we think -- and our customers that we previewed it with at CES think it's a great application.

So it's early days on these things. Again, it's a glimpse into the future. We are talking to a lot of customers. They are investing a lot in these areas, and we'll be updating on this at later -- on later conference calls.

Okay. And is there an international -- or emerging market subscription broadcast opportunity for these technologies, or is that much further out?

Well, in a lot of cases it probably won't start there, although there are -- there is interest in these topics, so they may move to that immediately. But we have, obviously, solutions all along the spectrum, starting from a dedicated remote, to going to a two or three device universal remote, to a two-way remote that can handle up to as many devices as they wish to operate. So we obviously present everything along the spectrum, and I think the opportunity for these types of applications, though -- QuickSet 1.5 and 2.0 -- are probably more in the US and Western Europe.

Okay. And maybe a last question on some of the OEMs that you haven't typically done a lot of business with, but Enson has. Any kind of early read on what kind of opportunities there are there now that the two companies are combined?

Yes. I think the -- generally the market knows both of us and knows the distinct value or the unique value proposition for each company. We are retaining that. The great value of CG is being retained, as I said in the prepared remarks. They provide fast flexible production, high quality output. They have done it for us for six years, so we know that equation very well. Great supplier. So the message to the customers is that you're going to get all of the great value that CG has provided you across the years, plus integration of a great technology road map that they can employ through their product line as time goes on. So I think it's generally viewed as a good combination of the great talents of what UEI has been known for and what CG has been known for across the years.

All right. Thank you.

Your next question comes from the line Steven Frankel with Dougherty & Company.

Good afternoon. Could you (inaudible) that your new view pro forma new includes (inaudible)?

Steve, you're breaking up when you asked the question.

Let me try one more time. Is your view of pro forma include stock based comp?

No, it doesn't. We don't add back stock-based comp.

Okay, great. And what's the right share count for Q1?

I'd use about 15.5 million15.5 million.

Your next question comes in the line of John Bright with Avondale Partners.

Thank you. Paul, what have you learned two months -- I guess it's what four months now since you've completed the acquisition of CG -- that you didn't know beforehand?

Well, we -- again, we -- not a whole lot, given that we had a lot of experience with the team there. So we haven't learned any more than we already knew, which was quite a bit, about them. We haven't had any significant surprises. Frankly, as I said in the prior remarks, the integration, the combination of the two companies has gone relatively smoothly so far. It's only been two months, but everything's gone pretty much as planned. The team is excited to be part of UEI we're excited to have them onboard. We spent a fair amount of time with them and with the customers. Everything seems to be rolling along pretty well. So we haven't seen anything that has been surprising.

You mentioned in your prepared -- in the text part of the release you significantly expanded relationships with some of your existing customers. Talk about what you have done and the products you have expanded and how you have expanded those relationships.

Well, I think -- I mean, what happened there is that we had some customers that might have been somewhat small for us but somewhat larger for CG, because they had a long-standing relationship with those customers. So as a result, when you combine the two companies together, it's a significant expansion of what UEI had pre-acquisition.

Now, the breadth of product line is everything, as I said earlier, from a dedicated remote all the way up to multiple device, higher end product with our app technology that CG has in the and UEI has built for these customers across the years. So we spread the breadth of control devices across the entire market now, where we may not have before, and CG has filled in a lot of that part of the product line. So we've had a full line [of] suppliers to all of these OEMs as well as to the subscription product casters world wide now.

Last question. In the 2011 guidance, it looks back-end loaded. If I break your business into the three main segments of discussion; subscription broadcasting, consumer, and OEM/AV; characterize how you're thinking about the three businesses, and how they may look as we go through the year. Typically we saw the consumer was fourth quarter loaded and subscription broadcasting had its seasonality. How should we anticipate the OEM/AV business to play out throughout the year?

Well, if you're talking about -- you know our business in terms of pre-acquisition of CG. If you -- with the addition of CG, their largest quarter in sales is Q3. Q1 is their smallest quarter, and Q2 and Q4 are relatively similar.

Okay.

Yes, John, as far as the characterizing it as back-end loaded our earnings path in the year 2010 was about 10 percent of our earnings were earned inQ1. In Q1 of 2011, if you take the guidance range we gave for both Q1 and the year, you have more than 10 percent of the earnings being in Q1. So I wouldn't characterize 2011 as being back-end loaded. In fact, it's slightly less back-end loaded than 2010.

Do you see the consumer business having more seasonality than we have seen, I guess, what, probably the past two years? It's been fairly stable if I recall correctly, the past couple of years, and we haven't seen the big bumps that we may have seen three years or so ago in the fourth quarter.

Yes. That may be true. And remember, the OEM market -- one of the reasons that our Q3 is a higher quarter for the company formerly known as CG is because there's a slight lead on the OEM business, because the channel that the OEMs typically use is retail. So with the retail business being somewhat seasonal, skewed towards the end of Q3 and into Q4, the OEM market would be into Q3. Because there is a slight lead on that business as that product makes its way through the system.

Thank you.

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

Hey, thanks. Just following up on one of the previous questions on manufacturing capacity and bringing stuff in-house. Is there then an increase in the gross margin built into your guidance as we go through the year?

Yes. It is. We obviously save on the gross margin when we're producing it ourselves, so that will help expand the gross margin, which is included in our guidance.

Okay. So that 2 percent longer-term impact would be something that we would strive to get to longer term? Not in the first couple quarters here?

Well, when I say longer-term, I'm talking about -- the main purpose of that comment was -- I'm giving you 2 percent as a guideline, but it doesn't mean it's going to be actually 2 percent every single quarter. I mean it could be a 1 percent, 1.5 percent, and I think you have been covering us long enough to realize that there's so many things that affect our gross margins that the two percentage points, I'd say over the next year, is a pretty good estimate.

Okay.

(Inaudible -- multiple speakers) model after.

Okay. Can you give us -- is there any change in your tax rate expectations with CG?

Yes. It's going to come down. The tax rates in both Hong Kong and in mainland China are lower than that in the US, so that if you were to look at Q4's rate, it's probably going to be a little bit higher than that, but it's a decent indicator of what our tax rate will be.

Okay. And then there look to be a significant increase in CapEx in Q4. Can -- is that related to anything in particular? Can you provide any expectations for the CapEx going forward.

Yes. I think for 2011 I think probably between $14 million, $15 million CapEx on a consolidated basis is probably a decent estimate.

Okay. And then lastly, are you comfortable with the cash balance right now, and is the intention to use most of free cash flow to pay down the debt?

Our priority to pay down the debt.

Okay.

That's what we're going to use it for.

Okay. Thank you.

(Operator Instructions). There are no further questions at this time. I will now turn today's conference call back over to Mr. Paul Arling for closing remarks.

Okay. Thank you everybody for being on the call today. We look toward to speaking with you across the quarter, and of course look forward to getting on our conference call in a few months to talk about our Q1 results. So thank you everybody, and goodbye.

For thank you. This will conclude today's conference call. You may now disconnect your lines.