Universal Electronics Inc (UEIC) 2011 Q3 法說會逐字稿

Good afternoon. My name is Kelly and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Electronics' third quarter 2011 results conference call. All lines have been placed on mute to prevent any background noise. (Operator Instructions). Thank you.

I will now turn the conference over to Becky Herrick to begin.

Thank you, Kelly, and good afternoon, everyone. Thank you for joining us for the Universal Electronics' 2011 third quarter conference call.

By now you should have received a copy of the press release. If you have not, please contact LHA at 415-433-3777.

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 including those for LodgeNet and Roku, as well as our solutions for 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 ability of the Company to attract and retain new customer, the benefits the Company's expects via the growth of new markets, such as the over-the-top service, and in certain geographic areas including Latin America and Brazil, 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 periodic 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, which it believes do not reflect its true operating results. Adjusted pro forma results exclude the following expenses, 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. During the financial discussion on this call, all references to third quarter 2011 results will be adjusted pro forma results. The Company's operating results for the prior year do not include expenses related to its acquisitions. 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 third quarter 2011 revenue and adjusted pro forma EPS each grew more than 50% compared to the same period last year. These results came in as we predicted and represent record quarterly results for both sales and earnings. Even as the weakness in the global markets continues to affect our industry beyond our earlier expectations, we are more confident than ever in our future growth prospects as we continue to build market share, outperform our competition, and introduce new and innovative patented technologies.

While short-term visibility in the industry trends and customer forecast enabled us to provide accurate third quarter projections, longer-term visibility into such trends was limited. According to Display Search, forecasts for 2011 now shower lower than expected TV shipments across the world, particularly in North America, Western Europe, and Japan. We are now seeing lower projected unit volumes from our customers in Q4 as ongoing distressed consumer sentiment has translated into weaker retail reports and forecasts. As a result, we are adjusting our expectations for the remainder of the year to account for these trends that impact the parts of our business reliant on retail channels.

As in the past when the global markets and specifically our industry were weak, we are specifically leveraging our strong financial foundation to build our market share by adding new customers, increasing our share with current customers, and investing in new and innovative technologies, new markets, and emerging trends. A case in point, we recently announced that LodgeNet selected UEI to supply a new remote control for its hotel TV access platform. This new customer UEI Velocity Remote Control features a QWERTY keyboard and some of our patented technology, and will enable hotel guests to fully interface with LodgeNet's new interactive HD TV platform. The shift to more advanced viewing technologies such as On Demand video and personal DVRs is being rapidly adopted by the hotel industry. This trend illustrates the need for a more interactive and connective experience.

This partnership will pave the way for a complete integration of customized television, internet, and other interactive services. UEI Velocity Remote is already available at select hotels and will also be shipping along with LodgeNet's Vision Platform to more hotel rooms in the coming weeks. We see the potential for QWERTY type remote control solutions to be the next wave of interactivity in the home to address the growing trend for content search and social TV, and we are already actively working to launch three such platforms in 2012.

In addition to leveraging our expertise in control technology to expand customer relationships, we are working with customers who are at the forefront of technology to enter new, rapidly growing markets. One such customer is Roku. Roku is a leader in the emerging internet streaming market. We are supplying Roku with a remote that contains motion control. We worked closely with Roku to integrate pointing control technology and blue tooth connectivity into the design. This new product integrates the streaming of television shows, movies, live sports programming, Netflix, and even motion gaming for such as the ever-popular Angry Birds.

We are also working with another major customer in the game console space who engaged us to design a remote control solution for its next generation of Gateway gaming consoles. These Gateways advanced current gaming consoles in the set top boxes capable of playing movies and streaming over-the-top content. UEI is proud to be the top choice for the gaming industry to deliver the lean back control experience for content consumption versus the lean forward gaming experience that traditional game controls offer. We are excited about the innovations that we have recently introduced as well as those we will soon introduce.

This year we will be demonstrating the next generation of practical, innovative control technology, and will show how our products interact with new, emerging platforms. Our patented Quick Set technologies are great examples of this innovation as it brings us closer to our ultimate goal, which is to design remote controls that require no user configuration at all. We are introducing Quick Set 1.5, which can automatically program a user's remote by simply reading the brand and model information of the TV that is plugged in using the connected HDMI cable. The next generation of Quick Set Version 2.0 leverages the trend for connected set-top boxes and TVs to extend the control experience to other smart devices in the home such as smartphones and tablets by via Wi-Fi technology.

We have also successfully penetrated the tablet market by embedding our control technology inside many of today's tablets. Throughout the year, a number of tablet models offered by top consumer electronics and [continuing] companies were released that have universal AV control built into the device. While conditions of confidentiality keep us from disclosing the brands and products, sufficed to say that if the tablet has universal AV device control it is extremely likely that this advancement was made possible by our embedded technology.

Among the benefits of UEI's Quick Set 2.0 is the ability to provide universal remote control functionality on tablets without additional hardware. Furthermore because of the Quick Set application running in the target device, it is the first system ever that requires absolutely no setup at all. Details on these and other innovations will be shared with customers and you in the coming months and certainly at CES this January.

Our work continues to expand our share in the markets we serve, enabling us to be at the forefront of emerging trends in the home entertainment device industry such as smart TVs, over the top services, advanced entertainment game consoles, tablets, and smartphones. Our continued investment in innovation ensures we are poised to embed our technology into a wide variety of new products and industries. We are also expanding internationally in fast growing regions such as Latin America. In fact, by the end of this year a Latin America paid TV sector is expected to reach almost 41 million subscribers, representing strong growth over the past few years and this growth is projected to continue for the next five years.

We recently expanded our sales and production activities in Brazil in response to the recent traction gain in its paid TV industry and the compelling growth expectations for the region. Our ultimate goal is to create technologies and products that address tangible consumer and customer needs to provide a completely enjoyable and effortless home theater control experience anywhere in the world.

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

Thanks Paul. As a reminder, our third quarter 2011 results will reference adjusted pro forma metrics, while our prior year comparisons will represent GAAP results. Third quarter 2011 net sales came in as we expected, reaching $123.5 million compared to $79 million in the third quarter of 2010. Business category net sales were $111.3 million compared to the third quarter 2010 net sales of $66.2 million. Our consumer category net sales were $12.2 million compared to the third quarter 2010 net sales of $12.8 million.

Gross profit for the third quarter was $34.5 million or 27.9% of sales compared to a gross margin of 32.6% in the third quarter of 2010. Total operating expenses were $24 million compared to $19.2 million in the third quarter of 2010.

Breaking down our operating expenses, R&D expense was $2.9 million compared to $2.7 million reported in the third quarter of 2010. SG&A expenses were $21.1 million compared to $16.5 million in the third quarter of 2010. Operating income was $10.5 million in the third quarter of 2011 compared to $6.6 million in the third quarter of 2010. The effective tax rate was 21% in the third quarter of 2011 compared to 28.8% in the third quarter of 2010. Net income for the third quarter of 2011 was $8 million or $0.53 per diluted share compared to net income of $4.7 million or $0.34 per diluted share in the third quarter of 2010.

For the nine-month period ended September 30, 2011, net sales were $351 million compared to $229.3 million in the same period of 2010. The gross margin for the first nine months of 2011 was 27.8% compared to 32.8% in the same period a year ago. Total operating expenses were $74 million compared to $58.6 million in 2010. Net income for the nine month period was $17.7 million or $1.15 per diluted share compared with $11.3 million or $0.81 per diluted share in a prior-year period.

Now, turning to our cash flow and balance sheet review at September 30, 2011. We ended the quarter with cash and cash equivalents of $32 million compared to $37.9 million at June 30, 2011. Our debt balance was reduced to $18.4 million at September 30, 2011 from $20.6 million three months earlier. DSOs were 65 days at September 30, 2011 compared to 66 days a year prior. Net inventory turns were 4.2 turns at September 30, 2011 compared to 4.8 turns a year ago. During the third quarter, we repurchased approximately 300,000 shares for $6 million.

And now for our guidance. For the fourth quarter of 2011, we expect revenue between $115 million and $121 million compared to last year's revenue of $102.5 million. EPS is expected to range from $0.33 to $0.43 per diluted share, compared to earnings per diluted share of $0.45 recorded for the fourth quarter of 2010.

For the full year of 2011, we expect revenue between $466 million and $472 million, compared to last year's revenue of $331.8 million. EPS is expected to range from $1.47 to $1.57 per diluted share compared to EPS of $1.27 recorded for the full year 2010.

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

Thank you, Brian. Our third quarter results reflect our continued growth even in these turbulent economic times. While we continue to be affected by the weakened global markets and consumer environment, we are weathering this storm better than our competition and will conclude the most successful year in our history. We are undeterred by the difficult economic environment because the long-term trend in our industry is quite compelling. The global trend is to continue shifting to advanced digital entertainment, HDTV, DVR, various forms of IP delivered entertainment to name a few are transforming the home entertainment space worldwide.

We have established ourselves over the years as the undisputed leader in home entertainment control technology, much of it patented, powering nearly one-third of all AV controllers on the planet. We will continue our investment in innovation to ensure we remain the leader in home entertainment controls. We will continue to gain share with existing customers and add new ones. We will also invest in regions that show promising market opportunities. We remain confident in our strategy and our ability to execute it. We are proud of the position we have attained and we are extremely excited about the advancements we are working on. Stay tuned.

We'll now open up the call for Q&A. Operator?

(Operator Instructions) Your first question comes from John Bright from Avondale Partners.

Thank you. Paul, you seem to have a lot going on when you talk bout the QWERTY remotes, the Roku, the game consoles, the tablets, over the top or IP side of the equation. Any way you can compare that versus, if you will, prior technology cycles?

Well, it's difficult to compare because the world constantly changes, but I would say that even in today's difficult environment, the interest in these types of things by both our customers, including the consumer electronics companies and the subscription broadcasting industry is probably greater than it has been in the 15 years that I've been here. So I would say the interest in these things is probably slightly higher than it's ever been and there are a lot of changes going on, not just here in North America or the United States, but in various regions of the world. And we feel like we're getting in front of a lot of it. The recent forecast for the next three months are difficult, but we still see a good long-term trend towards digital entertainment and some of the changes that are taking place on a global basis.

It doesn't seem like the world is getting more -- it's not getting more simplified. The complexity looks like it's increasing.

Well, I think the entertainment options are increasing, which the negative side effects of that can be slightly or greatly increased complexity that solutions like ours help simplify. So we bring order to that new chaos that is beginning to occur. But you have to always remember the positive is, again, the entertainment options for the consumer worldwide are increasing and getting better and better.

Let's talk about the subscription side of the business for a second. You and I have talked about this a number of times before. The cable subscription guys are losing some customers and the debate has been whether or not this is economy related or this is over the top related. I've contended that it's been over top, but I think I'm going to be wrong because a lot of the data comes out seems to say it is economy related. What are you seeing there on that discussion?

Well, I mean that's still -- that debate will range until we go through a long economic upturn. That will be the only time you truly see it. I think there's, personally, I think it's probably more economic related than anything else. But the truth is, look, the IP related entertainment is something that is not combined to outsiders. The subscription broadcasters of the world are also looking at new improved services that they can bring to consumers, some of which will be IP related. So I don't think people should confine themselves to thinking that it's one thing versus the other. Obviously, the subscription broadcasters that have been around for quite some time are aware that their business is to provide new forms of entertainment to consumers however that entertainment gets delivered.

One last question. When I think about the a lot going on or the opportunities you're talking about in the qwerty, Roku, the game console, tablet, et cetera, is this a case where you're getting that phone call or is it a case where you're going out and making that phone call?

Well, I think it varies by case by case, but in many instances we have long-term relationships with some of the players in the industry. And what's happened over time as we become a relied upon partner to bring with their new concept, which they articulate to us, we sometimes will help design the next generation controllers that can enhance the experience of the new services they're launching.

There are other cases where we're brought in because of our leadership position. People research the industry and find out that we're one of the biggest and best players in the industry, and they look to us to help them design, again, next generation controllers for the services that they wish to provide.

So it's a little of both. Sometimes it's long-term relationships that they've come to rely on us for help in the design of those next generation boxes or next generation services. In other cases, it's the research they've done on the industry and they -- we call them and they call us. So it's a little of both.

Thank you.

Thank you. Your next question comes from Jason Ursaner with CJS Securities.

Paul, I just want to ask, if there is a shift to more embedded technology in mature markets, whether it's gradual or rapid, and that the remote is still the primary interface but that it's not implemented as it is today and you aren't selling physical plastic and only your tech and the embedded software, how does that change your revenue and margin over time? And is it sold through a different channel that would change the competitive landscape?

Well, I think there's yet to be one that doesn't require hardware. So if the question is, does it all get embedded in software, the answer to that is probably not near term. That would be, if ever, a very long-term development. So there's always a handheld, but what we're doing is extending the very concept of control entails both a physical interface in the user's hand as well as software on the other end in a target device, and the colors in a set-top box, or AV receiver, or other device.

So what we've done is extended our solution to include both the handheld hardware with embedded software as well as the embedded software in the devices themselves. And we think that that brings a much better experience for the consumer because the two ends are being designed together.

I guess I'm asking more if it's still a piece of hardware but yours is an embedded chip on someone else's hardware like a tablet.

Well, it could be if the tablet becomes an important player here. But again, most of the customers we talk to see the tablet as a supplement to rather than a replacement for the control device. Because as I mentioned during -- earlier in the call, there are lean back applications and lean forward. So people who use tablets in front of the television, which is done quite commonly, are typically in a lean forward mode while using the tablet. But when the tablet is set down on the table, people consume television in a lean back mode where they lean back in their chair and wish to have what we could call a no look operating method with their remote control.

And most of our customers agree with that viewpoint that there would be applications that can run on tablets, which we can help them power, to be a universal controller across the entire AV stack. But there will also be a handled that the consumer will want to use for the more familiar lean back mode of operation.

And what type of -- what magnitude revenue differences are between a handheld versus a supplementary item in terms of dollar content for UEI?

It all depends on the application, but as you might imagine on a lot of things it becomes a software application. The margins are probably much higher because there's not a lot of physical hardware involved. It's leveraging another form of physical hardware. So the margin percentages are typically a little higher on a software application versus [one-chip] hardware.

Got it. And I guess just generally looking at the CG acquisition, I understand it's not the $140 million and it's not the dollar of accretion. So since you haven't gotten that, can you elaborate a little bit on what the long-term strategic benefit you see going forward and why you'd be so excited for growth at this point?

I think our feeling on it is the same as it was before. We wouldn't judge it based on the last 11 months. We certainly think it was a great long-term play for us. We feel the same way we did when we announced it as we do now, that it was a great move for us. Times are difficult right now, particularly in the CE space, consumer electronics space, but that doesn't deter us from our long-term strategy and the (inaudible) particularly about CG. We think it's been executed very well, the internal team has done a good job of integration of that business, and we feel very good about the entire build as much that we built around that and what UEI was doing before that. It fits very nicely.

And the step down in guidance, is it primarily located in that CE space or have you also seen any weakness in the subscription side?

No, subscription has been okay. It's really more the CE space. Anything, as I said earlier, reliant on the consumer channel, the retail channel for distribution, which would be our consumer business, as we call it, as well as the portion of our business category that moves through the retail channel, the non-subscription broadcasting business. That's been more difficult than subscription broadcasting.

Subscription broadcasting has performed better across the line than the parts of our business reliant on the retail channel.

Okay, I appreciate it. Thanks, Paul.

Your next question comes from Steven Frankel from Dougherty and Company.

Good afternoon. I want to follow-up on the CG issue. Have you or can you do anything to pull more cost out of that organization given the way the world has changed over the 12 months, or are you just going to take this long-term view that the volumes are going to come back and so we'll bear the burden today for the payoff down the road?

Well, I think the answer is somewhere in between, Steve. There's probably more that we can do on the cost side, but we have to be ever mindful that the developments we need to build our share, to grow ourselves -- over the last 15 years, we've gone from 3% share to approaching one-third of the market. We want to make sure that we're making good long-term decisions about our cost base and commit only to those costs we need for that growth and no more. So I think we've done pretty fruitful over the years, but we're not going to get shortsighted about the long-term while trying to support a better short-term. Actually, I can admit to you I did this about ten years ago and lived to regret it for about two years because we ended up having to reinvest money when growth ensued and we're not going to make that mistake again.

So there probably is some more room for us to work on cost, but we, again, are going to be mindful of the developments that we need to do for our customers. Because as I told John earlier, we have good relationships with a lot of these customers. They're looking at next generation platforms and we want to be the partner to develop it. And we're going to have the appropriate level of resources to do that for every customer, every meaningful customer we have.

Okay, and are you comfortable that you have your arms around the labor situation so that you don't have to go through a repeat of the problems you had early on?

Well, we do. Again, we're coming up to that time of year or planning for that and we think we do, but again, with the [fluid] situation we're both through in Q1. But we're pretty confident that there's -- we have a lot of experience in the Company having worked through this and we also have our experience last year to draw from. So I think we'll be better prepared this year than last.

And on the subscription side, has your visibility in the customers, inventories, and order patterns gotten better or worse over the last couple of quarters?

I think it's about the same. I don't really foresee, and Bryan, I'll let you comment on that. I don't see any issue there.

No, actually as Paul mentioned earlier, the subscription broadcast market, that channel has actually been fairly predictable this year. That's the one that has actually come in as we expected. Actually, a little better.

That's all I have. Thank you.

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

Just looking into Q4 and beyond, it sounds like your expectations are too, that CE is going to continue to be where the weakness is, and if so, will remain stable? Is that fair?

I wouldn't want to go beyond next quarter. I mean we've only provided guidance for the next three months. I feel like over time we've had fairly good visibility out for the current quarter. So that's where we provide the guidance for. As far as what we see beyond that, of course we'll update everybody at the end of Q4 as to our go-forward. The only thing I'll say on that is as of today, and these predictions are subject to change, Display Search who's a leading projector of, or forecaster of future demand, they're currently saying that they believe 2012 sees a 9% flat panel TV unit growth. Now, again, that's subject to change and we'll have to update you as time goes on and as those predictions change. But as of today, they provided a forecast about three or four weeks ago that they feel flat panel growth globally would be 9% next year.

Are you anticipating any impact from those Thailand floods, and specifically the potential for (inaudible) Fox units this coming quarter to be negatively affected?

Haven't seen that yet, Andy. I think our supply chain doesn't really involve any product movement through that area. So we haven't seen any affect.

Then just last, within the MSO market, the service provider market, can you give us any color about adoption of some of the newer products and how that's helping growth or what that's meaning to gross margins?

Well, every product we've been involved with that's been introduced this year, we pointed out a couple of them on this call and on prior calls, have done well. They've done exactly as we would have forecasted them too. So as both I and Bryan said earlier that the launches we've done on the subscripting side have all been successful. They've all met our expectations.

Then just finally on the gross margins, the last three quarters have been a little bit volatile, but basically kind of in the 27ish percent range on average. Does that seem like a reasonable number to expect on a go-forward basis?

Yes, we only go out one quarter, but I'd say for Q4 what you just stated is a reasonable estimate.

Okay. Thanks.

Thank you. This concludes the Q&A portion. I will now turn the call back over to Mr. Paul Arling for any closing remarks.

Okay, I just want to thank you for participating in the call today and as I said in the prepared remarks earlier, I hope that you'll all have time to attend Las Vegas, the CES Show in Las Vegas in January. We've got a lot of things that we're working on. There will probably be some things that will be quite interesting to you if you have the time to get to Vegas in January. So look forward to seeing you and thank you for being on the call today.

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