Universal Electronics Inc (UEIC) 2012 Q4 法說會逐字稿

Good afternoon. My name is Stephanie, and I will be your conference operator today. At this time I would like to welcome everyone to the Universal Electronics fourth quarter and year-end 2012 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. (Operator Instructions).

Thank you. I would now like to turn the call over to Becky Herrick. Please go ahead.

Thank you, operator, and thank you for joining us for the Universal Electronics 2012 fourth quarter and year-end conference call. By now you should have received a copy of the press released. 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 nonpublic information that might be discussed 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 anticipated by the Company due to the continued innovation of products and technologies such as solutions that address mode confusion, eliminate remote control set up, and transform start devices such as smartphones and tablets, and gaming consoles into universal remote controls; theCompany's ability to gain market share by adding new customers and retaining current customers; the Company's app technology being embedded in smart devices and game consoles as anticipated by management; the demand of smart device and game consoles to grow as anticipated by management;the continued global general economic conditions and the benefits the Company expects via the growth of new markets and certain geographic areas, including Latin America, the Asia Pacific region and Eastern Europe.

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, 2011, and the periodic reports the Company has filed since then. These documents contain and identify various factors that could cause actual results to differ from those contained in management's projects or forward-looking statements.

Also, the Company references adjusted pro forma or non-GAAP metrics in this call. The adjusted pro forma metrics are provided because management uses them in financial, operating and planning decisions and in evaluating the Company's performance. The Company believes these measures will assist investors in accessing the Company's underling performance for the periods being reported.

UEI continues to incur certain expense as a direct result of it's acquisitions, which it believes do not reflect it's true operating results. Adjusted pro forma results exclude the following expenses;amortization expense relating to intangible assets required,depreciation expense relating to the increase in fixed assets from cost to fair market value, other employee related restructuring costs, one-time costs associated with moving the Company's corporate headquarters from Cypress, California, to Santa Ana, California, and the write down of certain deferred tax assets resulting from tax law changes in China and the state of California.

In its financial remarks the Company will reference adjusted pro forma metrics. 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 Chairman and Chief Executive Officer 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 is now my pleasure to introduce Paul Arling. Go ahead, Paul.

Thank you, Becky, and welcome, everyone.

Our results for the fourth quarter 2012 came in as expected, with revenue of $117.8 million and adjusted pro forma earnings per share of $0.42. We ended the year with $463.1 million in revenue and adjusted pro forma earnings of $1.55.

During the quarter we achieved key customer wins as we made further advancements into new markets. In January 2013 UEI announced LG had selected our technology, further establishing our embedded app technology in the smart device market. I will discuss this relationship further in a moment.

We have built our reputation on the depth and breadth of our device control technology, and in 2012 we proved the strength of our technology through its application in new and innovative areas. Smart devices represent a large and growing market for us as the introduction and adoption of smart TVs, tablets and smartphones continues to increase. The smartphone market alone is roughly triple the size of the market for TVs, with global shipments of approximately 700 million units worldwide in 2012.

As I have stated before, in just a few short years the overall margin opportunity for us in smartphones and tablets could equal or even exceed the opportunity in today's traditional audio-video market. Smartphones, tablets and game controllers are evolving rapidly to include home control capabilities. Our technology portfolio addresses this large and growing market. Our QuickSet, Nevo for smart devices, and Control Plus platforms transform these smart devices in the simple to use and intuitive universal remote controls that operate every entertainment device in the home regardless of brand or connection protocol.

Our embedded app technologies are already available in select tablets. Recently we proudly announced that LG became the latest smart device provider to select our QuickSet technology for the Optimus Vu II Q Remote app. The Q Remote, which launched last year, uses our infrared blaster microcontrol technology, along with QuickSet SDK for seamless set up and universal control.

This technology transforms the LG smartphone into a comprehensive platform that can control all of the entertainment devices in the home, including set-top boxes, AV equipment and other home appliances. Our array of embedded app technologies offers smartphones manufacturers a unique control solution that delivers the largest remote control protocol database to ensure compatibility with all of the consumer's home entertainment devices.

We are also implementing technologies with major game console brands, helping them move beyond gaming consoles to comprehensive entertainment systems for the home. QuickSet transforms the game controller into a universal remote device, allowing consumers to quickly and easily access their gaming content and switch to and control a variety of increasingly popular over the top services.

We are actively involved in many development projects across the globe, and we are excited that new technologies like QuickSet are quickly becoming a standard feature in industry leading home entertainment products. We now have more than 30 products either shipping or in development that will contain this exciting new feature.

The 2013 International Consumer Electronics Show in Las Vegas in January was another successful event for us, as we demonstrated our innovative solutions to the largest ever crowd at this trade show. At CES we unveiled the availability of our Control Plus platform, a ground breaking technology that addresses a common frustration in home media control, mode confusion.

As more devices are being added to the AV stack, users are frequently confused by which port their device is plugged into, which input the TV has to be on to view cable, satellite or other sources, and what mode the remote needs to be in to control a specific device. Put simply, if you have on your TV and faced a screen that said something like HDMI3, or watching your DVR and found your pause and fast-forward buttons didn't seem to work, then you know what we define as mode confusion.

Control Plus is an embedded software technology that addresses this mode confusion,providing a seamless and simplified home entertainment set up and control experience across all AV devices, including tablets, smartphones and other smart devices. A further benefit to our customers is that it reduces the number of related support inquiries.

More specifically, Control Plus leverages our deep understanding of all control protocols, including traditional infrared, IP and HDMI-CEC protocols to enable the control of devices regardless of brand, implementation or into which HDMI port they are plugged. For the consumer, it just works. Hit a single button and you are watching what you want, and the remote controls what you want it to control automatically.

With the vast adoption of common control protocols such as Wi-Fi in the average home, combined with our unique and innovative technologies, we believe it is within our reach to eliminate the need for users to set up their devices on a remote control. We also believe it is within our reach to implement home entertainment control technologies residing in remote controls, smart devices and the AV device itself that can always lead the consumer to the content they wish to enjoy with the push of one button. Requires no set up at all, and the system never becomes confused.

We have worked hard over the past few years to produce excellent results in a difficult global environment. We have continued to grow the footprint in the global remote control market through our investment in future technologies that further enhance the ease and intuition of the consumer's home entertainment control experience. Indeed, we are very excited with the growth prospects of our business.

With that I would like to turn the call over to our CFO, Bryan Hackworth, to discuss the financial results.

Thanks, Paul. As a reminder, our results for the fourth quarter and full year 2012, as well as the same periods in 2011, will reference adjusted pro forma metrics.

Fourth quarter 2012 net sales were $117.8 million, compared to $117.6 million for the fourth quarter 2011. Business category net sales were $102.8 million, compared to the fourth quarter 2011 net sales of $103.7 million.

Our consumer category net sales were $15 million, compared to the fourth quarter 2011 net sales of $13.9 million. Gross profit for the fourth quarter was $36 million or 30.5% of sales, compared to a gross margin of 28.6% in the first quarter of 2011.

Total operating expenses were $27.1 million, compared to $26.2 million in the fourth quarter of 2011. This increase was driven by our continued investment in product innovations and technologies, as our R&D expense increased $3 million in the fourth quarter of 2011 to $3.8 million in the fourth quarter of 2012. SG&A expenses remain relatively flat with the prior year at $23.3 million in the fourth quarter 2012, compared to $23.2 million in the fourth quarter of 2011.

Operating income was $8.9 million in the fourth quarter 2012, up 20% compared to $7.4 million in the fourth quarter 2011. The effective tax rate was 27.7% in the fourth quarter of 2012, compared to 16.5% in the fourth quarter 2011.

Net income in the fourth quarter of 2012 is $6.3 million or $0.42 per diluted share compared to $5.9 million or $0.40 per diluted share in the fourth quarter of 2011. For the full year 2012 net sales were $461.3 million, compared to $468.6 million in 2011. Gross margin for 2012 was 29.1%, compared to 28% in 2011.

Total operating expenses were $102.9 million, compared to $100.2 million in 2011. Net income for 2012 was $23.4 million or $1.55 per diluted share, compared to $23.6 million or $1.55 per diluted share in 2011.

Next I will review cash flow and balance sheet December 31, 2012. We ended the quarter with cash and cash equivalence of $44.6 million, compared to $41.2 million December 30, 2012. During the fourth quarter of 2012 we paid the remaining balance on the term loan of $4.8 million. Consequently we are debt free as of year end.

During the fourth quarter we returned approximately $2.8 million of our capital to our stockholders through share repurchases at an average share price of $17.07.

DSOs were 69 days December 31, 2012, compared to 63 days the year prior. Net inventory turns were 3.9 turns at December 31, 2012, compared to3.7 turns as of the end of 2011. Consistent with the prior year, we deliberately increased inventory levels in the fourth quarter as a result of our factory shutting down during the Chinese New Year that began on February 10. Over the next couple quarters we expect inventory levels to decrease and our inventory turns to the 4.5 range.

Now turning to our guidance. For many years we have been at the forefront of advancements in control technologies and solutions, which are now evolving to include smart devices. We are pleased with our early successes of embedding our technologies inside gaming consoles, smartphones, tablets and smart TVs. Initial customer reaction and feedback have been quite positive.

We are confident that we will deliver solid growth in 2013 and that our investment in these new areas carry significant additional growth potential. Longer term, we believe the profile of our business is one with approximately 5% to 10% average annual revenue growth and average earnings growth of between 10% and 15%. Because it is difficult to accurately predict the commencement, timing of launch and magnitude of orders for specific new products across future quarters or within the current fiscal year, we decided that going forward we will only provide detailed guidance for the upcoming quarter.

For the first quarter of 2013 we expect revenue between $106 million and $112 million, compared to last year's first quarter revenue of $103.7 million. EPS for the first quarter is expected to range from $0.20 to $0.26 per diluted share, compared to $0.19 recorded for the first quarter of 2012.

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

Thanks, Bryan.

Overall in 2012 we demonstrated the many applications for our technology. We entered new markets by addressing consumers' evolving needs and fueling our customers' future innovations. Our ability to anticipate the changing trends in home entertainment enables us to continue to win new customers and deepen relationships with existing customers. As Bryan just said, we are confident that we will deliver solid growth in 2013.

Our ongoing goal is to provide an easier, more intuitive and control interface for the consumer, and it is beginning to come to fruition. With the average American watching five hours of TV per day and the average citizen on our planet having increased to over three hours of TV watching per day, the providers of smart devices, over the top services and those in the gaming console business are joining ranks with subscription broadcasters and consumer electronics companies to take advantage of the enormous opportunity to serve this ever increasing worldwide demand for home entertainment.

And our team at UEI couldn't be more excited. We feel we are better positioned than ever to prosper from the trends in our industry. Stay tuned.

I'd like to now open it up for questions. Operator?

(Operator Instructions). Your first question comes from the line of Steven Frankel with Dougherty & CompanySteven, your line is open.

Yes, I'm trying to ask if we think -- if you think that the gross margin level you saw in Q4 is something that you can sustain or even grow going forward?

Well, we can grow it. We typically, Steve, as you know, we don't give gross margin guidance, but what Paul is talking about, all of the new smart devices, there is typically a royalty aspect to that. So there is a chance that over time the gross margin rate will increase, but I wouldn't necessarily factor that in too early.

We had a great Q4, andeverything went in the right direction for the gross margins. We produced -- the factory did an excellent job. They -- the number of internal units they produced was greater than in Q4 2011, which increased the gross margin.

We had favorable raw material pricing, and we even had a little bit of the FX on our side. So really we had -- everything went in the right direction. Going into 2013, I'm sure you are aware of this, but there's -- the wage inflation in China is pretty significant. So the raw material pricing variability that we received in Q4 and ongoing will be somewhat offset by wage inflation, but wethink we could hold them still or even improve in the long run.

Okay. And then in terms of your subscription broadcast customers, what's your visibility into their inventory levels at this point, and maybe your anticipation of whether those customers will show growth in 2013?

Yes, Steve, that would obviously vary by region, because everyoperator is a little different,both in terms of visibility and their inventory levels. Although we do have a pretty good idea of where they are at, we don't have direct as success to many of their systems.

So we don't have real-time data on what their inventory levels are, butwe talk to them daily, in some cases, so we have a pretty good idea. We don't see any issue there. In terms of their forward plans, most of the major operators we work with, we're at a point now in the relationship where we are talking 12, 16, 18, to 24 months out as far as new platforms, and working with them on those next generation platforms.

So we have pretty good visibility on the designs of those next generation products and in some cases are helping them on the control side of it to make a better experience. But in terms of the launch dates for those next generation platforms, if it is out a year from now or even to the end of this year, it could be two months early, or itcould be three months later.

That is just the way the projects go,but we have pretty good visibility on the projects. In terms of the demand, you have a pretty good view two to three months out, and then beyond that it is a forecast to us.

Okay, great. Thank you.

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

Hey, guys. Thanks. Just a little bit more on the gross margin. Can you pick apart the quarter itself? I mean, have we seen any impact from sales into the smartphone market or any of those new markets? And in terms of the different mixes, the consumer versus business, was there any significant change, or were the things you referred to - FX impact, good mix of internal -- applied across both categories?

Yes, Q4 is typically -- you have been with us for awhile, Andy -- Q4 is typically our highest gross margin quarter because of the holiday season. So consumers, which yields a higher gross margin than the business category, pushes it up. So it's -- I mean, the reasons I gave previously are the main drivers of the gross margin. The factories did a great job. They were very efficient, so itpushed up the margin.

You have got -- consumer was up versus the prior year. We had raw material favorability in pricing. These are all positives, so itreally led to a great quarter in terms of gross margin percentage. And a good quarter overall.

And then just in general, I mean, you mentioned that we shouldn't expect any thing -- significant impact, I guess, from software sales or royalty sales, but it sound like, if things come together that could start to have a fairly significant impact in the second half. Do you guys think about that as essentially 100% incremental to the existing business,or is there a chance that there is a swap favorable at the gross profit and earnings level but can negatively impact revenue?

We don't really see it as eating into the other parts of our business. In most cases with smart devices, even game consoles, there are additional -- it is an additional market we don't see impacting the core business.

As far as the -- there are three risks going forward for our forecast. One is the commencement of a program, as we call it internationally. The agreement by a customer to launch a specific product. That's how you would view that. That's one.

Number two is the date of launch of that product. Because when you are early in the year and a customer is targeting a September launch, it could go in August or it could go in November, so you have that risk. And then the third one is the velocity of sale after that product launches.

Near term it is a little easier, because again, ourforecast includes -- the commencement risk is gone. The projects are already going. And the launch date in every case is already set. It is either something that has already been shipping, or it is guaranteed to launch during the quarter. So near term the forecasts are more solid.

The only risk left would be the velocity of sale. We've got a lot of projects right now that have either commenced, which means the first risk is done, but we have launch dates out in July, August, September, October for some of these products. Those can move around. They can either be pulled up or pushed out.

And then again if they are new products -- if it is a reiteration of a product that has been shipping, you have a pretty good idea of what the demand is going to be at launch. If it is a new product like an over the top service with a new provider, it is sometimes difficult to know.

So that's kind of what we are dealing with on these, but again,we view it as the customers we are working with are either existing customers, so obviously it wouldn't be detrimental to the business we are already doing, because it is part of the business we are already doing. And when it is new customers, it is typically in a new market that we don't think affects the core subscription broadcasting CE market.

Is pricing on all of that stuff going to be on a per unit basis, or will it be fixed fee deals or any other structure?

Yes, it's almost -- rare exception would be a one-time license. Almost always is a per unit. Because thereis both value conveyed in the database itself, which needs to be updated -- will be updated, and a lot of the products we are talking about for the future are cloud based, so they could be updated in real-time. And then there is IP around it as well. So typically it is a per unit license.

And then last question, can you give us any help with what your CapEx expectations are for the year, and how was the return rate of employees in China coming out of Chinese New Year?

This last year CapEx was about $10 million. I expect it to be a little less than that. It will probably be in the $8 million to $9 million range.

And then in terms of employees coming back, we are still in the middle of them coming back. Last year Chinese New Year was a couple of weeks earlier, so at the time we had the call we knew where we stood. As of now, I think it is decent, but we're still -- some of the employees are still returning.

Thank you.

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

Good afternoon. Just to follow-up on the embedded mobile technology, I just wanted to make sure I understand the comment that there are 30 products that are either shipping or in development. That number is purely for that embedded mobile Nevo solution? Or is that also including things like Control Plus?

It includes all of them. So it is -- most of the projects are QuickSet enabled. Control Plus is another iteration -- essentially another iteration or add on to QuickSet. Because Control plus would include a quick set application, but what it includes also is an embedded app in the device that allows the user to not have to worry about which port the device is plugged into or anything else. They can hit a button, and it will take them to their TV.

Because our -- actually our subscription broadcasters get a lot of calls on this where the user will turn the television on and get the HDMI3 logo because somebody has switched the input on the television. What we are doing there is a one button Control Plus application where you hit a button and it will take you back to your subscription broad -- your TV watching.

So a simple implementation. We also have the multi device, but the 30 projects revolved around mainly QuickSet and, in the future, Control Plus

Okay. And the number of projects that are really just geared toward that embedded mobile phone tablet, not necessarily using your interface layer Nevo, but just in that space. You talked about the unit volume opportunity. I'm just wondering how many projects are in development [at one] --

Oh, yes, that's not 30. It is a handful at this point. But I will -- I guess I will disclose today we are getting a lot of interest in this, and ifyou name somebody in the mobile space, either tablet or smartphone, it is probably somebody that is at some level of communication to us on these features.

We have seen a lot of positive reaction to it. Again, I think the entire world sees the fact that the average American is watching five hours of TV a day and the average global citizen is watching 3.25 and growing. What better app to have on a device than something that helps them do something more easily that they are already doing for somewhere between three and five hours a day this.

So I think the pitch is pretty easy. I think most of the device makers see it. That's why there is a lot of money going into investment in this home entertainment space.

And the first announced commercial program with LG, the hybrid phone tablet really hasn't been designed for the USmarket, but it does appear like it's pretty solidly in Korea. So you mentioned the strength in that partnership, and you are getting positive feedback. Can you just talk about I guess really what type of feedback you are receiving so far, and how you are embedded logic layer is meeting the goal they are looking for ? And then also have you gotten any indication on whether their end customers are actually using the Q Remote app, or whether it is just a feature that was available to them?

No, the product -- first of all, the first is getting the project commenced. The second is the product reviews have been extremely positive. On this particular product it is mentioned as a key feature in the product in the markets it has been launched in. So it has been very favorably reviewed, not just by our customer, but by the public, by the product reviewers in the market.

So we think it gains traction. Can't speak specifically on whether it will launch in other countries, either on their platform or others, but weare excited about the fact that the product works very well.

Obviously we have the leading device code protocol database in the world, sothe product worksin any country they want to take it to, whether it be their home country or any region of the world. We have done major implementations across the four corners of the earth, so we are confident the app will work anywhere they want to launch their phone.

And then, Bryan, you mentioned the Chinese New Year occurring later this year than last year. Just looking at the inventory number on the balance sheet, it is down year to year. I guess, should we be looking at that as a real operational improvement to cash flow, or is that actually just more related to the timing of the Lunar New Year?

No, I think it is actually an improvement in the operations. They have done a good job, and we're just running more efficiently. So the delta is due to operating better.

Okay. And then I guess just last question, just an update on the share repurchase strategy. It doesn't look like the Company was particularly active on its buyback during the quarter, so I guess what are the thoughts now that the debt has I guess been paid down in full and you do have a lot of cash at this point?

I think that is something that is an on going analysis, Jason, quarter to quarter. It obviously is dependent on the price of the stock, just like it would be for any buyer. We did buy just under a couple hundred thousand shares and paid just over $17, so I think we did a pretty good job in Q4. And again, price dependent, going forward we do have plenty of cash on the balance sheet. It may very well be a good use of cash.

But it is of course dependent on the announcements we make, people's belief in our business, and how they reflect it in our stock price. And if it doesn't respond we may see an opportunity to buy more of it. If the price accelerates, then we may buy a little less of it. It will be dependent on a lot of moving parts that we don't have visibility to, like what our stock price will be next week or next month.

Can you just say again what you did buy in Q4? I didn't catch that.

Yes, we purchased $2.8 million worth. It was 164,000 shares.

Okay. Appreciate it. Thanks, guys.

(Operator Instructions). At this time there are no additional questions. I would like to turn the call back over to Paul Arling for closing remarks.

Okay, everybody, thank you for joining us today and for your continued interest in UEI. We will be presenting at the 14th Annual B. Riley Investor Conference in Southern California in May, between May 20 and 22. We will give you an update on that probably on the next conference call. We hope to see you there or during the quarter. Thank you very much for participating, and we'll talk to you later.

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