Universal Electronics Inc (UEIC) 2011 Q1 法說會逐字稿

Good afternoon. My name is Selema, and I will be your conference operator today. At this time I would like to welcome everyone to the Universal Electronics First Quarter 2011 Results 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 Becky Herrick. Please go ahead.

Thank you, operator, and good afternoon everyone. Thank you for joining us for the Universal Electronics 2011 First 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 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 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 Latin America; the failure to successfully integrate the operations of the recently acquired CG companies into our operations; the failure of the CG companies to perform in accordance with our expectations due to workforce and capacity constraints; 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; effects resulting from natural disasters particularly those recently occurring in Japan 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, 2010. 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. Also the Company references adjusted pro forma or non-GAAP metrics in this call. These adjusted pro forma metrics are provided because Management uses them in making financial operating and planning decisions and in evaluating the Company's performance.

The Company believes these measures will assist investors in assessing the Company's underlying performance for the periods being reported. UEI continues to incur certain expenses as a direct result of its recent acquisition of CG, which they believe do not reflect its true operating results. These expenses include amortization expense relating to intangible assets acquired, depreciation expense relating to the increase in fixed assets from costs to fair market value and other employee-related costs. The Company's operating results for the prior year do not include expenses related to its acquisition of CG and as such it is providing GAAP results in the prior year comparisons included in today's discussion. A full reconciliation of these adjusted pro forma measures versus GAAP is included in the Company's press release that was issued after the close of market today.

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. Our first quarter 2011 revenue and adjusted pro forma net income grew substantially over the same period last year, yet our profitability for the quarter fell short of our expectations. Our first quarter financials were impacted by less production capacity than we had planned, which was the result of a lower than expected retention level of employees in Asia following the Chinese New Year. This coupled with an unfavorable mix of product ordered by our customers impacted our adjusted pro forma margins and net income for the quarter.

As a result we have taken steps to monitor and maintain our workforce to be able to meet the increased demand placed on our production capacity needed to meet increased customer and internal expectations. In addition the natural disasters that hit Japan and their terrible aftermath affected our business late in the quarter and left near-term orders somewhat uncertain. While we are working through all of these issues, it is important to note that the global demand for our product remains strong and we still foresee great financial results for 2011 as Bryan will share with you in a few minutes.

UEI continues executing on our strategy to win new customers and deepen relationships with existing customers by introducing new products and technologies to fulfill the changing needs of consumers across the globe. Throughout our history UEI has successfully cut through the complexity of the ever-changing home entertainment experience to provide the kinds of technologies that make people's lives simpler. We have a strong track record of innovation that continues into 2011 as we introduce new solutions.

UEI QuickSet is a great example of this innovation as it offers both consumers and customers on on-screen remote programming function that enables an affordable, intuitive, step-by-step interface that simplifies the programming of their remote controls. Earlier this year we announced the expansion of our UEI QuickSet technology. 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 simply plugs an HDMI cable from their TV into a QuickSet enabled device and it automatically communicates with our QuickSet software to complete the set up process.

We are also working on the next generation of QuickSet that leverages new intelligent features being added to set top boxes and other devices, such as IP connectivity to extend the control experience to other smart devices in the home, such as Smartphones and tablets. Our next generation QuickSet when combined with UEI's XMP-2, is an innovation that will enable universal remote control functionality to run on 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 no set up at all. We will update you on the development and implementation of these technologies as the year progresses.

Over the last several years UEI has amassed an impressive customer list including the biggest names in consumer electronics, subscription broadcasting and retail across the globe. The key to building our customer base is growing into new markets particularly those expected to show substantial growth in the coming years. Our company now accounts for almost one third of all remotes sold on planet earth annually. This market leadership position increases our purchasing leverage, diversifies the markets we serve and broadens our product portfolio enabling us to serve as a customer's complete set of needs.

This scale also increases our ability to invest in industry-leading technologies as we continued to do this quarter. Despite any near-term challenges that we are working to overcome, we are even more confident in our future and excited about the progress we have made in technology development, customer relationships and the improved positioning of UEI.

With that I'll turn the call over to Bryan Hackworth, our CFO, to lead us through the financial discussion. Bryan?

Thanks, Paul. Demand for our products was high in the first quarter of 2011. As Paul mentioned previously we experienced a temporal shortage of labor at our newly acquired factories in China, which limited production and shipments. Despite this and the recent events in Japan we still recorded net sales of $105.7 million, which was within our expected range. In comparison the net sales for the first quarter of 2010 were $71.4 million.

Business category net sales were $95.3 million compared to the first quarter of 2010 net sales of $60.2 million. Our consumer category net sales were $10.4 million compared to the first quarter 2010 net sales of $11.2 million. The product mix in the first quarter of 2011 trended more toward lower margin products than expected. Although we planned for a certain volume of lower margin products as the quarter progressed, certain key customers substituted lower margin products for higher margin products. This change in ordering pattern may have been influenced by the recent events in Japan or possibly by general economic conditions or both.

Also affecting our gross margin was the temporal shortage of labor which limited our production requiring us to utilize more expenses, third party manufacturers to meet demand. Adjusted pro forma gross profit for the first quarter was $27.9 million or 26.4% of sales compared to a gross margin of 30.9% in the first quarter of 2010. Total adjusted pro forma operating expenses were $24.4 million compared to $19.4 million in the first quarter of 2010. Breaking down our operating expenses on an adjusted pro forma basis R&D expense was $3.3 million compared to $2.8 million reported in the first quarter of 2010. SG&A expenses were $21.2 million compared to $16.6 million in the first quarter of 2010.

Adjusted pro forma operating income was $3.4 million in the first quarter of 2011 compared to $2.7 million in the first quarter of 2010. The adjusted pro forma effective tax rate was 22.1% in the first quarter of 2011 compared to 34.7% in the first quarter of 2010 due to a higher percentage of income being earned in lower tax rate jurisdictions, specifically China. Adjusted pro forma net income for the first quarter of 2011 was $2.6 million or $0.17 per diluted share compared to net income of $1.8 million or $0.13 per diluted share in the first quarter of 2010.

Now turning to our cash flow and balance sheet review, during the three-month period ended March 31, 2011, we generated $300,000 in cash flow from operations. We managed our vendors very tightly in the fourth quarter of 2010 which contributed to a $15.6 million cash outflow in the first quarter of 2011 related to accounts payable. We ended the quarter with cash and cash equivalents of $45.1 million compared to $54.2 million at December 31, 2010. Our debt balance was reduced from $35 million at December 31, 2010 to $27.8 million at March 31, 2011. DSOs were 66 days at March 31, 2011 compared to 71 days at March 31, 2010. Net inventory turns were 4.8 turns at March 31, 2011 compared to 4.7 turns at March 31, 2010.

We expect to repurchase shares in the second quarter under our current authorization plan which has 500,000 shares available for repurchase. This initiative reflects our confidence in UEI's long-term growth prospects and strategy. And now for our guidance, for the second quarter of 2011 we expect revenue between $117 million and $123 million compared to last year's revenue of $78.9 million. Adjusted pro forma EPS is expected to range from $0.42 to $0.52 per diluted share compared to earnings per diluted share of $0.34 recorded for the second quarter of 2010.

For the full year 2011 we expect revenue between $485 million and $510 million compared to last year's revenue of $331.8 million. Adjusted pro forma EPS is expected to range from $2.10 to $2.40 per diluted share compared to adjusted pro forma earnings per diluted share of $1.27 recorded for the full year 2010.

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

Thanks, Bryan. The global demand for our products remains strong and our forecast for the full year 2011 remains solid with improved profitability over 2010. Looking ahead our strategy remains unchanged. 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, as well as invest in regions that show promising market opportunities. It is our goal to supply the technologies and solutions that simplify and connect the increasingly complex and every-changing home entertainment environment. Stay tuned.

We'd like to now open up the call for Q&A. Operator?

(Operator Instructions). Your first question is from Ian Corydon of B. Riley and Company.

Thank you. Just to make sure I understand the capacity utilization issue, it sounds like you had a lack of labor but you were able to supplement that with outside manufacturing. Is that accurate?

That's correct, Ian. We had a labor constraint issue in China and what happens is in China there's the Chinese New Year which occurs every year obviously and in the past there's a certain retention level. This year actually hit us harder than expected, actually harder than in prior years where the retention level was lower this year than in prior years. So we ended up having to go to third party manufacturers to make some of the products. And as you know if you have to go to a third party manufacturer it's more expensive than doing it internally.

Okay. And were you able to fulfill those -- all the orders that you had so that you don't lose that or potentially lose that business going forward?

We were able to fill most of them but not all.

Okay. And then on the unfavorable product mix, the lower margin products, was that across consumer and business and domestic and international? Can you just give a sense for kind of how that --?

Yes. It was primarily in the business category and international. Actually it affected everything across the board because it's in the business category but because China is just our manufacturers for the US it really affects both internationally and domestically.

Okay. And last question just on the inventory, can you talk about just kind of the health of that inventory.

The inventory is fine. That's not -- there's no issue there.

Okay. Thank you.

Your next question is from Jonathan Goldberg of Deutsche Bank.

Hi. Thanks for taking my question. So first on the labor situation in China, I think it's a well-known topic among investors now is rising labor costs in China. Are you comfortable with your original earnings targets that you sort of spoke about when you acquired CG even in light of these new costs? Is there going to be a permanent change in cost structure going forward?

Well, yes. The labor rates in China have risen. I will tell you that it is not the majority of the cost of our product, number one. We don't now because we obviously can't perform exit interviews on the employees that weren't retained but it's probably a safe bet that there are alternative options for some employees in China now. But I will tell you that looking forward one of the things that we are looking at is -- and you probably understand this Jonathan because you spend quite a bit of time there, there's a great variety of regions within China and we have two plants there now. One of which is less affected by labor rate inflation than the other. But both have been affected by this retention issue.

We are looking at other methods of both recruiting and retaining. I also want to add to this that as the quarter progressed the team now over there is built back up. The team did a great job of responding to the lack of retention. You can't get back the weeks that you lost unfortunately. But, and when you bring in a new employee depending on the department they work in the training can last anywhere from one to four weeks, which is relatively unproductive time for those new employees. But the team in China has done a great job of retaining, getting us back to the level we need to be on labor and in fact are targeting record months for the company in terms of unit performance or units produced.

So I think we've obviously overcome the problem. I will say that it is an ongoing, obviously an ongoing issue that we're going to be looking at on a consistent basis. The Chinese New Year issue will happen every year and throws a wrench in things because as you know people leave and then a certain percentage come back. But we'll have I suppose a better expectation next year, a more accurate expectation next year. And we're looking at programs for again attraction and retention of employees.

Could you also then talk about the other side of the CG acquisition, it was supposed to get you access into some of the OEM customers. I guess those are probably disrupted now because of the earthquake but if you could just give us a sense of how that side of the acquisition is going. How's the sales cycle --

Sure. I think that's gone well. We spent obviously a fair amount of time on that and I think the customers -- there has been an effect of obviously domestic demand from a number of the customers that are headquartered in Japan. But obviously there's worldwide demand for AV products, Blu-ray players, DVD players, TVs, et cetera and the demand pattern there is strong. Part of the mix shift was caused by a lack of visibility late in the quarter and into this one. There's still some concern about that.

We don't see any -- we've worked through any small supply disruptions that we may have had. We're not concerned about the remote control side of things. But there's always the product it's paired with has to be manufactured as well. So we're still concerned about that. We don't have any reason to believe that there'll be any supply disruption but again you just don't know because we obviously don't manage the supply chain for our customers in terms of their product.

But the mix within the domestic market there probably will shift somewhat. We had some higher end product that we're less ordered and some lower end product that they were more ordered, which also contributed to that mix shift for the domestic market in Japan.

And that's a function of the earthquake or is that a function of competitors?

It's not competitors, it's probably -- it could be economic circumstances or it could be caused by the disasters that occurred there, the events in Japan. It's difficult to sort out which. What we do know is the orders did shift somewhat late in the quarter and into this one.

Okay. Thank you.

Your next question is from Jason Ursaner with CJS Securities.

When I think about the labor constraints and you mentioning the team is now kind of built back up, do you need to go out and find new business or as your own volume improves are you going to be able to move that capacity there and take advantage of it using intercompany work?

What we do is we want to fill the capacity or fill the factory to capacity. So it's a little bit of both. As the orders progress on the year and your sales volume increases, we're going to put some of that into the factory but we're also going to transition more units from third party manufacturers into our own factory. So it's a little bit a mix of both.

Okay. And in terms of seasonality with the lunar New Year, you're back-end loading your year a little bit, can you help us understand the seasonality now that you've had the CG business for a full quarter?

Yes. With CG and I think we mentioned this on the last call, Q1 is the lightest quarter for CG and Q3 is its largest quarter. So if you look at us at UEI pre-acquisition of CG the back half, Q3 and Q4 were with the exception of 2007 which was an anomaly because of [OCAP], the back half of the year is bigger than the first half. So you couple that together, we're going to -- we expect a big second half. In Q1 we were just under $106 million, in Q2 we're looking at approximately $120 million and Q3 and Q4 we'll grow.

So, Bryan, if I stay with that a little bit and I think bigger picture, how do you think about what's going to drive overall demand for your products going forward if I lumped it maybe into big buckets of replacement demand in the domestic market from MSOs, replacement demand in the domestic market from consumer electronics, or expanding middle class in growth in cable adoption internationally versus secular growth in consumer electronics internationally?

I think domestically, we can still grow domestically. As we talked about in prior calls the US market and Western Europe is, I wouldn't say complete mature, but it's more mature than other areas such as Asia and Latin America. The TV growth projected worldwide is supposed to be significant over the next several years. So with the acquisition of CG we feel that we're very well positioned to take advantage of that growth that's going to happen in the sector. So I think overall I'd say the growth for UEI although some can come domestically, the majority of it will come internationally.

Okay. And then one last question on the debt, maybe I was too optimistic but maybe I had anticipated a little bit more progress in terms of paying off some of the debt. Was this because you're planning on the repurchase given some of the net cash there?

Yes. Part of it is and part of it also Jason is we have to transfer the cash from -- we have cash all throughout the world so I have to get it from certain jurisdictions and get it to a point where I can divvy it up from certain subsidiaries and that sort of thing. And it takes a little bit of time. So if you look at our cash position I think we've got a very strong balance sheet and we should be able to pay the debt off. If we start purchasing a significant amount of shares then that could affect the timing of the retirement of the debt. But keep in mind the debt has an interest rate of approximately 180 basis points. So it's very low.

Right. And can you avoid some of the tax implications by buying shares as opposed to I guess repatriating some of the cash?

Well I could only buy shares with cash from the US. I can't use cash abroad. IRS will consider that repatriation.

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

Your next question is from Corey Barrett with Pacific Crest Securities.

Thank you. This is Corey Barrett in for Andy Hargreaves. First could you just speak to the breakdown of impact from the earthquake in Japan between supply and demand?

The earthquake occurred late in the quarter, in terms of any supply disruption I think I said earlier there isn't any supply disruption on our end. There were a number of things we needed to look into because obviously parts or specialty parts can come from various suppliers that may or may not have been domiciled in Japan. So we worked through those issues. We don't really see any significant supply shortage. The bigger issue there is not so much our supply chain as it is as you understand our OEM business is where our remote gets paired with a product from one of our customers and while we haven't seen any yet the outlook on orders there is a little blurrier. Obviously right after early March it was very blurry because obviously the least concern of people was supply chain, particularly there.

So it takes time to work through what the longer-term forecast will be for products and then work through the bill and material to make sure on their end that they have all of the appropriate components to manufacture the products they have. So we have worked through that. We are continuing to work through it, both on our side and our customers' side in communication with our customers. We don't think it will have any significant impact but again it's something that needs to be worked through in the coming months, weeks and months.

Okay. And then the switching from higher margin to lower margin products, can you talk to sort of what you expect for whether these customers will switch back at some point or anything like that?

What we think will happen and is embedded in our guidance for the full year, I think some of the lower margin products, that substitution will continue throughout the year but again it's embedded within our guidance.

Okay and what sort of assumptions -- can you explain what sort of assumptions you've built in from a consumer demand perspective for your guidance? I saw that you had raised your revenue guidance range and I was hoping you could sort of talk to what provides you with the confidence that demand will improve or what has changed?

We get bottoms up. When we do our forecast we actually get it from ground zero. We go out and the sales folks are speaking with the customers and it's a very detailed process. So it's not just looking at macro trends. It's a very detailed process involving the customers. And as we talked about in Q1, despite having some issues with labor constraints as well as the issue in Japan we still came within our expected range of just under $106 million and that's with those issues. So you take those two issues out and we would have actually had higher sales. So the demand for our products has been strong, very strong. And it's really in multiple regions. And again the forecast we're getting from the customers and through the sales folks is very positive.

And then excluding the labor situation in China, can you discuss how you're operational synergies with CG are progressing relative to your original expectations?

It's gone well so far. With the situation put aside on labor in Q1 things have gone well so far. The customer relationships are good. The integration of their processes with our processes has gone well so far. There are still ways to go in terms of systems, processes and various methods of communication. But most of it has been very good so far. We had a disruption in Q1 based on this event, Chinese New Year and the planning of it, and unfortunately it was compounded by a number of things. Strong demand which was good news but then in a period where your capacity starts getting squeezed a little bit, it makes it a little bit more difficult. And then the mix shift.

So you combine all those things together in one quarter, it causes some difficulty. But the team is working on all of these issues, forward planning with the customers, solving the labor issue to determine exactly how we meet the demand we have, the strong demand that we have and there are literally teams of people on each of these issues working it. There were anyway but when these wrenches were thrown in they had to put it into overdrive. We at this table as well as the T&D executive team across the company. So we -- but the good news is the demand patterns are strong, the various business lines across the world, in Europe, here in the US, Latin America, the demand patterns in those regions all look good.

And lastly can you just speak to the progression of your subsidiary in Brazil and what you're seeing for demand trends there or your progression there?

The demand pattern there is strong. There's wide reporting on that down there. The growth in product down there, both TV products and subscription broadcasting is the -- both the near-term and the longer-term projections there are strong. The production is ramping now. We've got a subsidiary down there that is working as we speak to begin our internal shipments there. So everything is going okay.

Great. Well that's all the questions I have. Thank you very much.

Okay.

Your next question comes from John Bright of Avondale Partners.

Thank you. Good afternoon. Paul, on the quarter specifically what were the lower margin products that we're talking about in the product mix issue?

Well we won't identify particular products with particular customers. We don't -- obviously that's a policy not to do that. I will say that we do have a fairly wide product line with a number of our customers that we acquired in the CG acquisition, probably a much wider array of shapes and sizes and margins than we had in our subscription broadcasting business. As you know subscription broadcasting makes a very nice remote and the flavors of remotes they have are relatively close to each other. In the OEM business you have remotes that range from the very simple dedicated remote all the way up to a fairly complex RF remote with -- a very large remote with nice finishes and specific epoxy keys and a fairly high end product.

So you have a wider array of shapes and sizes, finishes and cost for those products. So you can imagine when you have that type of product array and a customer is starting to sell or promote or their demand pattern because of world events or economic cycles moves towards a mid to lower end product versus -- and fewer of the high end product for whatever reason, it can move the needle more. So, that's what the characterization of the OEM business. Looking forward though have baked in what we expect -- we don't expect as the earlier question, when we answered the earlier question, we don't expect things to magically shift back. We are doing a lot of designs for next generation product for these -- for subscription broadcasting customers and OEM customers, that are higher value/higher margin products. But they're not going to hit -- many of them are not going to hit in the next number of weeks. Those are months, numbers of months away.

So the mix expectations we have are similar to what we experienced in Q1.

On CG have you added any meaningful new customers or essentially lost any meaningful customers?

Haven't lost any. In terms of what we've gained they're a gain to UEI, but they're not gains of the joint companies, meaning they've had some of these customers. Some of them were overlap. In other words we served them -- some of which we served with a very small percentage of their share and CG had a higher share. But generally they're similar customers that we were calling on before. OEM was their main market which we were in as well. They had very little subscription broadcasting which was our real strength.

Are you finding cross selling opportunities?

We are. In fact there's designs that we've used or technology designs that we have used and pitched in both markets and we're seeing a lot of real interest in those. Some of the ones I mentioned on the call in fact, like QuickSet and we have some others. So I think there's an array of things we've been doing on the technology development side, some of which were presented prior to subscription broadcasting customers that there's a great deal of interest on the OEM side or the consumer electronics side. So that's been another benefit. But that's a long-term benefit, not short-term.

Got it. Last question. With your guidance somewhat banana shaped, generally speaking what assumptions are you making regarding the mix of revenues exiting the year?

What do you mean by the mix of revenues exiting the year? You mean in the back half?

Yes. So when you exit the year or forward the year in your year guidance when you leave this year business, consumer, what do we think in the back half that's going to look like?

Well similar to what I explained earlier in that when you look at CG the Q3 for CG is their largest quarter. If you look at UEI pre-acquisition of CG the back half is typically larger than the front half. So for us we came in at $106 million approximately in Q1. We're looking at approximately $120 in Q2 and then with Q3 being the biggest for CG and for UEI pre-CG back half growing, you're looking at decent amount of sales growth in Q3 and Q4.

So the consumer, Bryan, the consumer side will have a greater weighting in Q3 and then the business side in Q4?

Well consumer is always Q4. The largest quarter for our consumer business is in Q4 because of retail. It's a retail channel and obviously you have the holidays.

Got it. Thank you.

I think, John, too, just to be clear on this, the CG is UEI and UEI is CG. So we view this as -- there's an OEM business here that they contributed greatly to. We've combined it with UEI's OEM business. The seasonality of our business is as follows. Retail or consumer is late in the year so it starts off low. Q1 is weaker. Q2 builds. Q3 and Q4 in consumer businesses are strong. That's obvious because there's a number of companies out there that you could comp to on the retail side. OEM is similar but a slight lead meaning the OEM because if you think about this, the OEM sale we do goes into a product that then gets distributed mainly through the retail channel.

So it has a similar seasonality to retail with a slight lead, which is why the company formerly known as CG has its peak seasonality in Q3 because it slightly leads the retail selling cycle. The subscription broadcasting business here is a flatter curve. It doesn't have as pronounced a seasonality across the year. Typically we'll build a little bit in the summer, in Q2 and Q3 but doesn't have the typical seasonality.

Now for retail distributed product in subscription broadcasting it will have a back-end load for things like satellite. It will sometimes be a little bit more seasonal because there's a holiday promotion around those products. So we've got a pretty vast mix of seasonalities within our business but suffice it to say that Q1 is the lightest. Q2 obviously provided our guidance is heavier and then when you blend all of those businesses together Q3 and Q4 are both much stronger than Q1 and Q2.

Thank you, gentlemen.

Your next question comes from the line of Lance James with RBC Global Asset Management.

Paul and Bryan, two questions. One is the employment in your China operations now, is that where you want it to be or do you still have some more hiring to do?

It's where we want it to be right now. Again, they are producing record amounts right now so the team in China has done a great job of rehiring, training and getting up to speed.

Great. Secondly you've maintained your full year guidance even though the first quarter was somewhat of a disappointment, so I guess my question is as you look forward what can we hang our hat on that may be better in the next three quarters to make up for the shortfall in the first quarter? Is it top line revenue growth? Is it mix? Is it margins? What do you think will be the make-up for the shortfall in the first quarter to enable you to attain that $2.10 to $2.40 range for the full year?

It's the strong demand, Lance. We've had very strong demand for our products which is the main highlight for us in terms of on a positive in Q1. Despite having the issues with the labor constraint and the issue, the event that happened in Japan we still managed to come within the expected range. As I mentioned previously if not for those two events, the revenue would have been higher. So we've had very strong demand for our products and we see that will continue throughout the year. We see it continue throughout the year. And that's why we raised our revenue guidance from originally it was $475 million to $500 million and we raised it to $485 million to $510 million.

Thanks very much.

Thank you.

(Operator Instructions). The next question will come from George Prince of RBC Global Asset Management.

Hey, guys. How are you?

Hey, George.

So that brilliant guy who just asked the last question was pretty much what I was going to ask about how you get from this quarter to the end of the year and even bumping the guidance. Can you talk maybe a little deeper into it? If you kind of hit the revenues for this quarter anyway, but you didn't get the EPS can you raise price a little bit to get there in the future? How are margins going to get better? At the end of the day my question is purely profitability.

In terms of the margins, in Q1 because we have the labor constraints, George, we weren't able to run at full capacity at the factories and as a result you end up incurring unfavorable manufacturing variances for one, which we don't expect to happen in Q2 through Q4. The other factor is once you get the labor issue resolved, which we've done, we're able to transition more units into the factory which will improve our gross margin.

And you're really very confident of that?

Yes.

All right. We'll we're rooting for you. Thank you.

There are no further questions at this time. I'll now turn the conference call back to Mr. Paul Arling.

Okay. Thank you, everybody for joining us today. We'll look forward to speaking to you across the quarter and of course updating you as time goes on. And of course having you join us on our next quarterly conference call for Q2. Good bye.

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