Universal Electronics Inc (UEIC) 2011 Q2 法說會逐字稿

Good afternoon. My name is Hope, and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Electronics' second 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). Thank you.

Ms. Becky Herrick, you may begin your conference.

Thank you, operator, and good afternoon, everyone. Thank you for joining us for the Universal Electronics' 2011 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 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 Roku, smartphones and tablets 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 benefits the Company's expects via the growth of new markets, such as the over-the-top service, the strength of the Company's financial position and its ability to manage its operating expense initiatives and debt reduction 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 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 and the period reports the Company has filed thereafter. 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 does 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 restructuring costs. The Company's operating results for the prior year do not include expenses related to its acquisition of CG. 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 the 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 second quarter 2011 revenue of $121.7 million represents very solid quarterly revenue. We also reported growth in adjusted pro forma EPS of 35% in the second quarter of 2011 compared to the same period last year. We are pleased with these results as they came in as we predicted and both sales and earnings are greater than any quarter in our history.

Our outlook for the remainder of the year, however, is weaker than we originally expected. In the past quarter, a distressed consumer sentiment has led to weakened retail reports and forecasts, which in turn has led our customers to decrease their projected unit volumes. As a result, we are reducing our expectation in the parts of our business reliant on retail channels.

For those who have followed us, you know we have successfully managed worldwide turbulent economic situations before and each time we have emerged as a stronger company. Today is no different. During these economically challenging times, we will as we have in the past maintain our course, add new customers, increase share with current customers, and leverage the strong financial foundation we have built to invest in new technology, new markets and emerging trends. We will work to drive incremental market share gain and the long-term remains promising.

While remote control technologies continue to evolve, consumer viewing habits are also advancing. Today consumers have more pay TV options than ever before. Great examples of this are over-the-top services and our Internet TV.

While cable or satellite are firmly entrenched as consumers' primary method for watching television, our diverse product and technology portfolio enable us to address multiple markets and the evolving trends in the pay TV industry. As new market forces emerge, our control technology expertise pairs well with the brilliant new products introduced by these innovative companies.

For example, we have recently begun working with Roku, a market leader in the emerging Internet streaming market. As you may know, Roku 2, the next generation of its streaming device was recently introduced. The new product integrate streaming of television shows, movies, live sports programming, Netflix, and even motion gaming including the ever-popular Angry Birds. We are excited to be working with Roku as it looks to enhance its control interface and we look forward to providing more detail on our relationship in the near future.

In addition, we look forward to embracing the emerging trends of home entertainment control. Recently we have begun working with large consumer electronics companies and computing companies on new products in the tablet space. Our continued investment in innovation ensures we are poised to embed our technology into a wide variety of new products in multiple industries. We expect to provide you with further details on this development in the near term, but suffice it to say that we are working to make both our existing products and new platform such as smartphones and tablets easier to configure and use than ever before.

Our ultimate goal is to create technologies and products that require no configuration at all and provide completely enjoyable, intuitive operation of the user's home theater. This is at the heart of what we do at UEI, creating easy to use innovative solutions to everyday obstacles faced by consumers and their home entertainment environment. Our focus on making the world's best control experiences is unmatched in the industry. Our growth from a small company to a global leader in our space powering one-third of the world's remote is testament to that. The list of industry leaders across the globe who use our control solutions continues to validate our leadership position. Despite the near term challenges, we are 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 will turn the call over to Bryan Hackworth, our CFO, to lead us through the financial discussion. Bryan?

Thanks Paul. Second quarter 2011 net sales were strong as we expected, reaching $121.7 million compared to $78.9 million for the second quarter of 2010. Business category net sales were $111.1 million compared to the second quarter of 2010 net sales of $67.3 million. Our consumer category net sales were $10.6 million compared to the second quarter 2010 net sales of $11.6 million.

Adjusted pro forma gross profit for the second quarter was $35.2 million or 28.9% of sales compared to a gross margin of 34.8% in the second quarter of 2010. Total adjusted pro forma operating expenses were $25.6 million compared to $20.1 million in the second quarter of 2010.

Breaking down our operating expenses on an adjusted pro forma basis, R&D expense was $3.2 million compared to $2.5 million reported in the second quarter of 2010. SG&A expenses were $22.4 million compared to $17.6 million in the second quarter of 2010.

Adjusted pro forma operating income was $9.6 million in the second quarter of 2011 compared to $7.3 million in the second quarter of 2010. The adjusted pro forma effective tax rate was 22.2% in the second quarter of 2011 compared to 34.7% in the second quarter of 2010 due to a higher percentage of income being earned in lower tax rate jurisdictions. Adjusted pro forma net income for the second quarter of 2011 was $7.1 million or $0.46 per diluted share compared to net income of $4.8 million or $0.34 per diluted share in the second quarter of 2010.

For the six months period ended June 30, 2011, net sales were $227.5 million compared to $150.3 million in the same period of 2010. The adjusted pro forma gross margin for the first six months of 2011 was 27.7% compared to 32.9% in the same period a year ago. Total adjusted pro forma operating expenses were $50 million compared to $39.5 million in 2010. Adjusted pro forma net income for the six months period was $9.7 million or $0.63 per diluted share compared with $6.6 million or $0.47 per diluted share in the prior-year period.

Now turning to our cash flow and balance sheet review at June 30, 2011. We ended the quarter with cash and cash equivalents of $37.9 million compared to $45.1 million at March 31, 2011. Our debt balance was reduced to $20.6 million at June 30, 2011 from $27.8 million three months earlier. We expect to be debt free by year-end.

DSOs were 65 days at June 30, 2011 compared to 64 days a year prior. Net inventory turns were 4.5 turns at June 30, 2011 compared to 4.7 turns a year ago. During the second quarter, we repurchased approximately 125,000 shares for $3.1 million.

And now for our guidance. For the third quarter of 2011, we expect revenue between $121 million and $127 million compared to last year's revenue with $79 million. Adjusted pro forma EPS is expected to range from $0.47 to $0.57 per diluted share, compared to earnings per diluted share of $0.34 recorded for the third quarter of 2010.

For the full year of 2011, we expect revenue between $470 million and $490 million, compared to last year's revenue of $331.8 million. Adjusted pro forma EPS is expected to range from $1.75 to $1.95 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, Brian. During the second quarter, we delivered growth and again demonstrated our position as the leading developer of solutions that enhance the home entertainment control experience. We remain positive about our future. As I have said before, it is during time such as these that strong companies get stronger.

Looking ahead, our strategy remains unchanged. We will continue to invest in innovation to ensure we capitalize on the many changing options and features in home entertainment devices and content, as well as invest in regions that show promising market opportunities. We are well positioned, gaining share, solidly financed, consistently profitable, and more excited than ever about the opportunities before us. Stay tuned.

I'll now open up the call for Q&A.

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

Good afternoon.

Good afternoon.

Hi, Jason.

Just looking at the outlook, you mentioned that the decrease in forecast is in the businesses related to the retail channels, so if I am thinking CG on the OEM side. Of the original sort of 140 incremental revenue, you've talked about, where do you think this ends up coming out for the year with the seasonal build in the second half relative to that original?

Yes, we don't give guidance Jason specifically by channel. But as Paul mentioned earlier, the lack of consumer spending was affecting really two channels; one is the retail business and the other is our OEM business which is primarily CG.

So, I guess maybe asking in other way, when do customers place orders for the seasonal build usually? Is it just -- you are basing I guess some of this on forecast or you're actually seeing declines?

Yes, we -- typically on forecast right. We have a number of ways that we look at the forward forecast; one is to look industry report, one is to look at the end customer, the retailer. But probably the most important one is to get the viewpoint of our customer on what they see based on those other two reports. And it is a forecast. Typically we have product that has as little a lead time three weeks. So there are cases where we are operating off of a forecast they are giving us. But based on their view and our view of what's going on in the world today and the consumer sentiment being relatively weak to where it was even three or four or five months ago, the forecast was dropped.

Okay. And if I am looking at the revenue range, I guess, from where it was last quarter, you are taking revenue down 3% or 4%, but you are taking earnings down 15% to 20%. So why would you be showing such negative operating leverage? Is it just the lower demand or you're also seeing a negative mix in the core business?

Yes, I think the revenue has come down a little more than that. I think as an [edge] Jason, we give guidance on top line and bottom line. We are not providing guidance on gross margins or on OpEx -- op expenses. The majority of the shortfall is due to sales though.

Okay. As you -- just last question for me. I understand the value proposition for an MSO with the remote acting as a revenue growth driver. Can you talk a little bit about the value proposition on the OEM side I guess, besides just branding?

In terms of using a --

In terms of using a higher-end remote versus the lower-end remote that would be lower margin?

Well, they use both. Towards the higher end of the product line, they'll want a product that is well featured that can operate the other devices in the room, particularly those with their own brand, with nicer product you'd want a remote that was multifunctional that could operate the set-top box and the DVD player that is likely connected to it.

Okay. Thanks for taking my questions.

Sure.

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

Hi, guys.

Hi, Jon.

Hey, Jon.

So, my question is more along similar lines. If you look at the CG acquisition, is everything there going according to plan?

Yes, by and large it is. Yes, the -- it's going on very well so far. I think the central issue is the market itself. The forward forecast that we had for the consumer market didn't presume a glowing recovery of the economy, but certainly we didn't expect to see what we are seeing now in the news over the last couple of months about the markets. And again, we are reading the tea leaves but based on conversations with our own customers, the market itself, the industry reports, economic reports, and we are not really seeing a lot of positive statements about how the consumer markets are moving right now. So, as we look into the back half of the year, we are not seeing as great a forecast as we might have originally --

Is it --

But operationally and strategically, we feel we are better positioned than ever. Everything has gone largely to plan as far as the acquisition is concerned and as far as our own activities in the OEM market are concerned. We feel we are executing in all the right ways, but the consumer market is just a lot weaker than we had originally expected and I think a lot weaker than a lot most people have expected it to be.

So, the short point--

(multiple speakers) weak.

So, the short point you are citing in your guidance, is that coming more from the traditional side of the business or from the CG side?

Well, no, it's not -- it's any of our businesses, both that the traditional UEI OEM, which sold ultimately to the retail channel, CG what was formerly known as CG or UEI now, which also sold to the -- ultimately to the retail channel, and our own consumer business, which sells to the retail channel. Right now the subscription broadcasting market worldwide is doing okay, but the issue right now is the consumer market for consumer electronics goods, it's just not as strong as everyone expected it to be.

Are you seeing any geographical trends?

Well unfortunately the consumer centric economies of the world Japan, North America, Western Europe where most of the product across the globe is sold for the last two decades. Unfortunately, all of those areas were both similar and different reasons, of course, Japan had the earlier in the year issues, but the rest of it is shared problem of economy. These consumer centric economies almost are universally weak right now. That is not where everybody expect them to be. The recovery is the weakest from a recession since World War II, I mean everybody I am sure on this call has read the newspaper, I don't need to drag them through it. It's just, we are in extremely weak recovery right now.

And you are seeing that sort of roughly evenly spread across your geographies?

That's correct.

Okay.

Yes all the economies are weak, but we are seeing growth in other areas of the world, it's just not enough right now to offset what is the weakness in almost every consumer centric economy on earth, Western Europe, North America, Japan, etcetera.

Okay. Thank you.

Yes.

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

I think most of my questions have been answered. Paul could you just talk about what you are seeing out of your domestic MSO customer here in the US. If you have any luck up selling them to some of your newer technologies and then for emerging market MSOs, what kind of luck are you having penetrating those?

Yes I think, as I alluded to earlier that the -- that subscription broadcasting cable satellite IPTV markets worldwide are doing okay right now. And I think as far as the upsell goes the -- and I think I have said this on prior calls that those market players are spending as much time R&D and focus on advanced services, advanced features in their new boxes, as I have ever seen in my time here at UEI over the last 15 years.

So, I think that market is doing okay. It's really weakness on the consumer side. I should probably also add that even in this difficult time we actually -- while there is no good share reporting services in our industry, based on what we were seeing in bids with customers and different movements, our share is actually in every area either holding or moving up. So, we feel pretty good about that. The subscription broadcasting market is going okay. It's really anything that has to do with the consumer, typically the retail channel, anything that ends up there either we sell directly to it or ends up there this weak right now.

Got it. Thank you.

Yes.

(Operator Instructions). Your next question comes from the line of Andy Hargreaves with Pacific Crest.

Hey just wanted to ask about the Logitech litigation and whether or not that's just kind of a onetime thing, they didn't want to sign a license or whether this reflects a stringent strategy at all about monetizing your IP?

Yes, and I can't talk too much about the Logitech lawsuit. All I can say is that Logitech continue to sell products with technology that covers over 17 of our patents, but without payment despite a previous licensing agreement expiring in June of 2010. That's really all I could say.

And, I think Andy, just to echo your question, the concerning strategy beyond Logitech just talking generally it's not a changing strategy. UEI has always defended its IP and most times what happens is customers work with us either on a license or the sale of the product utilizing our IP. This just happens to be an exception of that and it's not really a changing strategy, it's just a situation where it got to this point.

Okay. And that was kind of the question. You guys don't foresee yourselves being in the litigation business in other words.

No, we don't. Well, unless we have to.

Yes. Okay. Are there any cost associated with that that are factored into the back half guidance, I mean, do that change the OpEx expectations?

Yes, it did.

Can you give us any kind of quantification of that?

No, we don't plug out into that, but there will a litigation cost that we factored into SG&A.

Okay. And then just in terms of the weakness, is it primarily, I think may be some of the other questions were kind of alluding to this. But is it essentially lower units or is there a combination of lower units and a mix down?

It's mostly lower units.

Okay.

Yes.

Okay, thank you.

Sure.

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

Thank you. Good afternoon Paul, Bryan. Paul, let me slice the apple little bit different. Remind us generally speaking what the margin profile looks like for CG what it looks like for your typical consumer business maybe best, middle, lowest and than your historic subscription business?

In terms of the margin variance or?

In terms of the gross margin, the three different types of products, so we can think about the variance -- the difference between your guided revenue and your guide of earnings.

Yes, I don't know that we will have any significant margin variance. The real issue right now, as I answered in the earlier question is unit volumes. It's not related to the margin. It's related to the fact that there is just fewer units being demanded in the market place which--

You don't have different margins on the different products?

Oh sure, yes. We always have though, I mean that's not new, we've had margins that are well below over company average and we have margins well above our company average.

Right, so what I was --

We don't really see the mixed effect. The mix effect of the transaction was already blended in and I think we've said earlier that it cause a couple point of margin less gross margin in our business.

Okay. So then on the domestic subscription business what -- if we're seeing such consumer weakness out there, are you assuming that as well in your forecast for the domestic subscription business?

Well, our forecast there is typically driven again by the customer. As I explained earlier, we do look at various pieces of data the overall economy. The retail market for subscription broadcasting, it's typical done customer by customer. And we sit down with each customer multiple points within those customers to talk about promotions on the various activity in the field that's going on as far as installations is concerned. So, we think we get a pretty good handle on that. It's always subject to change of course our risks in those forecast, but typically that one is driven more off of discussions with the operator themselves -- for the back half and -- go ahead.

And you may haircut what they come back to you, just for conservativism, is that fair?

Well, it depends on -- if it fits in line with the general environment, you wouldn't question it as much.

Okay.

If it suffice the environment you might and you might ask some additional questions of that customer and again the various contacts we have within that customer to determine whether or not we feel that forecast is accurate.

Okay. So let's then talk about a more positive comments you made in your prepared text about the large CE companies working with you for the tablet space. Can you give us a flavor of what we might think about for the use of remotes within -- combined with tablets?

Sure, yes. I think Neilson just released the study that showed that 70% of tablet users are using those tablets in front of their television and nearly a third of the hours that consumers are spending with those tablets are actually in front of their television. So, we viewed this obviously and the people who are making the tablet see this and realize that a great app for these products would be a control app that would allow them to get either immediate rich interface on the tablet, which many of our customers have been working on and talking to us about helping add that additional control. But we were looking beyond that to see whether or not there is any ability for us to make the whole experience even better and easier as far as set up and everyday use. So, we've got a lot of plans there. I don't want to talk too much about products, but in future tradeshows and hopefully in future announcements, you will see some things that we're doing there already.

Thank you.

Yes.

(Operator Instructions). Your next question comes from the line of Corey Barrett with Pacific Crest Securities.

Hi. I actually had -- Andy stepped on and he asked the question on the Logitech litigation. I was hoping you could just provide a little more color on your commentary on the satellite and IPTV and MSO spending, sort of maintaining the spend on innovation?

Yes, I think --

And what you are seeing there?

Yes, as I said, I think they are spending as much or more time than they ever have on those next generation boxes, next generation software, and next generation services. So, we are -- obviously, we have many long-term relationships in that market. What we are often asked because of that long-term trusted relationship to participate in some of the -- sometimes even the early design of those things to provide some input or guidance as far as the control technology is concerned. And I think there is a lot of interesting opportunities there. We've already introduced some of them. But I think that in the coming months and years, you will see a lot of activity from the subscription broadcasters both here and elsewhere in the world.

Great, thanks. And you had commented that you are seeing pockets of strength geographically or you -- could you expand on what you are seeing there? I know it not maybe meaningful yet to the model, but --

Yes. Well, the biggest one that would be most closest to home would be in Latin America, Brazil there is a lot of growth there has been over the last couple years. We have formed an operating unit there and we see good things from that both this year, but more importantly next year the year and the multiple years beyond that because this is a growing region in the world. The growth in both TV sales and subscription broadcasting is relatively phenomenal and we just think it's -- the one area of the Americas that is probably going to be the highest growth over the next five years.

Perfect. That's all I have. Thank you.

Yes.

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

Thanks for taking the follow-ups here.

Sure.

If I look at inventory, jumped almost 20% from the first quarter?

Yes.

So, if I look back historically, it is normally a build season in Q2, but not quite to this magnitude. So I am wondering if you could speak to that a little bit?

Sure, the -- Jason, we expect that the back half of the year to be bigger than it is. So what we did was, we ended up -- you have to pre build and Q3 is your largest quarter especially with our recent acquisition, in order to build as many units in-house as we like to, we had to sort of pre building in Q2. So the inventory levels went up by about $10 million from the last quarter, but we should see them fall down to a more normal rate in Q3 and Q4.

And is there any risk of obsolete inventory in there or this is the stuff that's still going to be --

No. The inventory we build up the $10 million is really high running products for large customers, so there is -- for that inventory there is no risk. And on each quarter we always evaluate the inventory and look at the cash flow statement, we consistently write-down inventory so it's not a risk.

Yes, Jason. I am glad to you ask this because I think it's important thing with the acquisition in last November that -- to note that this is -- it will be a normal operating procedure, the capacity of our company that peaks production quarter would be Q3. So, when you have a relatively seasonal business you do have to pre build, because you don't want to build capacity for your peak quarter because in the other three quarters you would have excess capacity. So, what you have to do in this business because the peak production quarter would be Q3 and the peak sales quarter would be Q3 or Q4, you would pre build in front of the quarter and what we do is pre-build the high volume items with extremely low obsolescence risk.

Okay. And then Bryan, can you just remind us what's left on the buyback authorization?

Yes, we have about 400,000 shares available for buyback remaining.

Okay. And then were there any, I guess lingering cost from the assembly facilities that you took on that you have some issues within the first quarter or was that at all taking care of it in the first quarter?

Yes, that was primarily taking care of in Q1.

Okay. And then I guess just coming back to the guidance range, if I am looking at the amount of revenue you took off from where we were in Q1 and I sort of back into what the operating profit would be, it looks like you are sort of implying a 45% to 50% incremental operating profit. So, I am wondering how much of this is the litigation cost that are built in? But on the other side of that, if consumers get out and spend then revenue does come in better than the forecast, should we be expecting that type of operating leverage, I guess on the positive side?

Yes, we are not breaking out between sales and EPS, Jason. I will say this though. As you know, as you start to sell more and you get -- you start to get leverage, you get -- we get significant operating leverage on each dollar that we sell. So the EPS is going to fall at a greater rate than the sales number. And then as we mentioned earlier we do have litigation costs that I can't -- we are not going to talk about gross margins or operating expenses or other income so it's -- I can't -- and that's really all I could tell you.

Okay. Well I appreciate the commentary. Thanks a lot.

(Operator Instructions). There are no further questions at this time. I would now like to turn the call back over to Paul for any closing remarks.

Okay. Thank you everybody for joining us today. We will probably be seeing you as we are -- we will be out on the road this quarter. But -- and we look forward to speaking to you on the next quarterly call. Good bye.

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