Universal Electronics Inc (UEIC) 2013 Q2 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 Second Quarter 2013 results conference call. All lines have been placed to mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

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

Thank you, operator and thank you all for joining us for the Universal Electronics Second Quarter 2013 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. 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 anticipated by the Company due to the continued strength of its core businesses. The continued expansion of the Company's technologies into smart devices, such as smartphones, tablets, smart TVs, IPTV devices, game consoles and over-the-top services; the Company's ability to attract and retain new and existing customers due to its continued innovation of products and technology solutions, such as Control Plus, QuickSet and any of our smart devices apps; the benefit the Company expects via the continued strength of its subscription broadcasting businesses, including the growth anticipated in Latin America; the benefit the Company expects as a result of the migration of its advanced technologies into mid-range priced OEM consumer electronics products and continued global general economic conditions.

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, 2012 and those periodic reports filed since that time. These documents contain and identify various factors that could cause actual results to differ materially from those contained in management's projections or forward-looking statements.

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 acquisitions, 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 cost to fair market value, other employee-related restructuring costs, additional tax reserves recorded resulting from a tax audit in Hong Kong for years preceding the acquisition of Enson Assets Limited.

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's now my pleasure to introduce Paul Arling. Please go ahead, Paul.

Thank you, Becky, and welcome everyone. Our second quarter financial results were better than anticipated. When comparing the second quarter of 2013 to the same period last year, net sales increased 17% and operating income grew 46%. Driving these results were two primary factors within our core business category. First, we experienced continued strength in subscription broadcasting. Consumers continued to upgrade and add new hardware and services, as new, more advanced technologies get introduced.

The Americas were a particularly strong region for subscription broadcasting this quarter and markets like Latin America are projected to have strong subscriber growth over the next few years. Market experts project that among the seven biggest markets of Latin America, the Pay TV market will total nearly 100 million subscribers by 2018. That's a penetration of nearly 70% of the total of homes with TV and will rival the size of the US market. This is just one of many examples of the growth opportunities that lie ahead of us, as world markets continue to develop great home entertainment options for consumers over the next decade.

The second contributor to our second quarter was growth in OEM or consumer electronics sales. Our OEM customers are building traditional home entertainment devices that now include more advanced technologies, such as Bluetooth-enabled remote controls, touchpads and microphones. This trend toward incorporating advanced features, traditionally reserved for high-end products, has migrated into mid-range products and is driving demand for a wide variety of UEI solutions.

We are working with leading companies in the home entertainment space on designs that efficiently integrate a variety of technologies into a single custom designed remote, with the ability to deliver new services, such as gesture control, voice navigation and automated universal remote set-up. Clearly, our core business remain strong and growing. In addition, we are more excited than ever before about what lies ahead of us in terms of our expanding market opportunity with smart devices, such as smartphones, tablets, game consoles, smart TVs and over-the-top services.

UEI has a large portfolio of technologies that transform these smart devices into simple-to-use and intuitive Universal remote controls that operate every entertainment device in the home, regardless of brand or connection protocol.

We continue to gain traction with some of the world's largest tablet and smartphone manufacturers and UEI QuickSet and Control Plus are just two of the many types of technologies that we bring to our customers that enable us to win new business.

UEI Control Plus is our latest control technology solution designed to completely eliminate remote control setup and effortlessly eliminates the age-old complications of input and mode confusion. This continues to be a focus for our development teams. The market and customer reaction to Control Plus has been very positive and we are actively working to bring this solution to market shortly.

UEI QuickSet, our embedded universal control setup technology for connected and Smart Devices continues to gain market share in the home and mobile entertainment space. UEI QuickSet in combination with our comprehensive worldwide device control database, initially deployed on many subscription broadcast, smart TVs and high-end mobile platforms, is now being rolled out on many new devices by several leading brands in the industry and is quickly becoming an industry standard.

We have recently contracted with some of the world's largest companies in the consumer electronics, mobile handset, and game console spaces, and we expect to launch several projects we have developed for these major customers late this year and into next year. We look forward to updating you in the months ahead.

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

Thank you, Paul. As a reminder, our results for the second quarter of 2013, as well as the same period in 2012 will reference adjusted pro forma metrics. Second quarter 2013 net sales were $136.1 million, up 17% compared to $116.7 million for the second quarter of 2012. Business category net sales were $124.2 million, compared to the second quarter of 2012 net sales of $103.9 million, as subscription broadcast remained strong, both domestically and in Latin America.

Our consumer category net sales were $11.9 million, compared to the first quarter 2012 net sales of $12.8 million. Gross profit for the second quarter was $38.1 million or 28% of sales, compared to a gross margin of 28.5% in the second quarter of 2012.

Total operating expenses were $26.9 million compared to $25.5 million in the second quarter of 2012. This increase was driven primarily by our continued investment in product innovations and technologies, such as UEI QuickSet and Control Plus, as R&D spend has been increased by 18% compared to 3% for SG&A. These efforts are enabling us to gain traction in the burgeoning smart device channel, which includes mobile phones, tablets, smart TVs and game consoles.

Operating income was $11.2 million in the second quarter of 2013, up 46% compared to $7.7 million in the second quarter of 2012. The effective tax rate was 25% in the second quarter of 2013, compared to 18.2% in the second quarter of 2012. Net income for the second quarter of 2013 was $7.2 million or $0.47 per diluted share, compared to $6.2 million or $0.41 per diluted share in the second quarter of 2012.

For the six-month period ended June 30 2013, net sales were $250.8 million, compared to $220.4 million in the same period of 2012. Gross margin for the first six months of 2013 was 28.3% compared to 28.1% in the same period a year ago. Total operating expenses were $54.6 million, compared to $50.3 million in 2012. Net income for the six month period was $11.1 million or $0.73 per diluted share, compared to $9 million or $0.60 per diluted share in the prior year period.

Next I'll review our cash flow and balance sheet at June 30 2013. We ended the quarter with cash and cash equivalents, net of debt, of $49.7 million compared to $17.7 million at June 30, 2012. During the second quarter, we repurchased approximately 37,000 shares for $877,000 for an average price of $23.93 per share.

DSOs were approximately 59 days at June 30, 2013 compared to 66 days a year prior. Net inventory turns were approximately 3.9 turns at June 30, 2013, compared to 4.3 turns a year prior. We expect inventory turns to range from 4 to 4.5 turns by the end of the third quarter.

Now turning to our guidance; for the third quarter of 2013, we expect revenue between $136 million and $144 million compared to last year's third quarter revenue of $124.9 million. EPS for the third quarter is expected to range from $0.48 to $0.58 per diluted share, compared to $0.54 recorded for the third quarter or 2012. It's important to remember that last year's third quarter results included a lump sum payment of approximately $2 million related to our successful settling of a patent infringement case.

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

Thanks, Bryan. So far in the first six months of 2013, our sales are up approximately 14% and net income is up approximately 24%. Certainly we are proud of these results and we are on track for our most successful year ever. We continue to invest in research and development to produce the next generation of control solutions that translate into future growth. Innovation has long been and will continue to be UEI's specialty. In addition to having the world's largest database of control codes, we have a significant portfolio of intellectual property and embedded software and hardware designs to address the ever-changing needs of the market.

The home entertainment market has become very dynamic. Some of the world's largest and most established technology companies are interested in and are developing solutions for the home entertainment space, as consumers across the globe are spending more than three hours a day watching television. Similarly, game console makers see the same trend and wish to become the center of a consumers' home entertainment universe. The leaders in mobile, in their quest to become the device that drives the consumer's life, want to participate in this important area as well.

New, innovative, over-the-top players are entering the market and bringing great user interface to help the consumer find what they want to watch quickly and easily. And the existing players, both subscription broadcasters and consumer electronics companies are developing and bringing to market more entertainment options with better user interfaces than at any time in history. The one thing that most of these companies have in common is that they choose UEI to partner with and utilize our technology, IP and products to power these next-generation solutions.

With our market position, market approach and expanding market opportunity, we believe the future has never looked brighter. And I'm more excited than ever about the implications for our long-term success. Stay tuned.

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

(Operator Instructions) Steven Frankel, Dougherty & Co.

Good afternoon, Paul. Thanks for taking my question. Maybe we could start with your progress in the smartphone and tablet space. Could you tell us how many design wins you have there?

Yes, I don't have the exact count. Steve, but we're with multiple brands. We have announced, one brand has allowed us to do so, LG. We worked on their first generation and are now in their second-generation phones. I will tell you that there are other brands that are both going to ship very soon and are planning to ship product into next year. We don't like to get in front of our customers as far as product announcements, so we're going to keep that to ourselves. We're on multiple tablet platforms. So, my guess is if we counted SKUs, were in the dozens now at this point.

Okay. And then on the inventory build, this is second quarter in a row that we've seen inventory build. Is this for products to be shipped in the back half or this is a timing issue with some of your larger customers that just aren't taking product in the way you may have thought when you were building it up?

Yes, this is Brian. Steve. It's the latter. We have one large customer in particular that they had us build inventory for them. They delayed a launch of a higher running product. So, we're still holding inventory, it's supposed to ship in Q3, which we are confident it will. So, the inventory is not -- it's not a risk area at all. It's just we're carrying about $5 million of that inventory currently. So that should go down in the short-term.

Okay. And then do you think you've seen the bottom of the TV business on the OEM side?

Well, it depends on your perspective. If we go out 20 years, maybe not.

Obviously, given what we've seen in the last year, you think it's --

Yeah. I think it's picked up a little bit, it's not back to red hot levels, but the companies that we work with seem to be doing pretty well. I would say that it's better today than it was even 12 months ago.

And you had a mission there to kind of cross-sell some of your traditional product into some of the Japanese OEM customers that come along with that acquisition. Could you update us on how that's going?

Yes, it's gone very well. In fact, what we're doing is cross selling UEI technologies for -- as I mentioned in the call, we have customers doing voice-activated remotes, obviously with embedded microphones, touchpads to navigate new interfaces that they placed on the TV for a lot of new entertainment options. So there's been a lot of movement as far as new designs that those new relationships or those relationships develop through the acquisition a couple of years ago have helped us with pretty substantially. So, yes, we are using those relationships to build advanced remotes for some of the leading names in the TV market.

Okay, great. Thank you.

Jason Ursaner, CJS Securities.

Good afternoon. Just given the restructuring and severances in SG&A, how should investors be thinking about an SG&A run rate going forward and what's the variable component of that that would be tied to revenue?

Yes, the restructuring cost, we actually back out in the pro forma. So, as you know, we don't provide individual guidance on OpEx, we just provide the topline and the bottom line.

So, what would the seasonal components of SG&A be?

You're looking at, basically, freight. I mean you're looking at freight and delivery. You're looking at commissions, potentially bonus are the three main components.

Okay. So then, looking at the guidance, it seems to be implying fairly down gross margin environment. Normally this builds into the holiday season, as you get some leverage on revenue. So I'm just trying to understand why that wouldn't be the case this year?

Yeah, I think your assumption is incorrect. We're not assuming a downfall in the -- downturn in the gross margin rate in the back half of the year. You're correct, in the back half, you especially sort of get into a little bit of the retail season that yields a higher gross margin in our business category. It's less than 10% of our total business nowadays, but still that just pushed the gross margin up a little bit, pulled it north.

Okay. And the reason you guys didn't provide full year guidance initially was this wild card of the embedded technology. Now as you're moving towards launch on some of these, can you try to detail any of the economics, given that it's an increasingly important part of the growth story?

Sorry, can you repeat that Jason?

Just as you have some better visibility on launches, without getting into specific customers or specific launches, just what the economics of the technology you're providing would be on either unit basis or some type of individual project launch basis that it could impact the financials?

Yeah. Well, typically, it's unit basis. I would say that the vast majority of the agreements are based on some form of either hardware sale with a margin or a strict royalty. Sometimes we split that out and sell a product along with the royalty, so it can be parsed, but that's how those go.

Now in terms of the timing, as we discussed earlier in the year, there's commencement of the project, which is whether or not you're going to be in the product that we will typically know, hopefully, at least three months in front of launch, sometimes many months more than that. But then you've got to time the launch, because obviously we're an element in some of these products, just one element of many. So, whether the product will launch on August 28 or November 1 is a question at times. And then the sales pace of the product, in some cases, we would know that because if there is an existing product, we could use that as a model. So there are a lot of variables in it, but the general economics of it are license. So, probably a little bit higher margin in terms of those wins, because the less hardware we sell, typically the higher the percentage on the gross margin. The lower the dollar ring, typically, but the higher the gross margin percentage.

And on a licensing one, in terms of a range, I mean is it cents, is it dollars, how does it relate to some of the remotes that you'd be selling?

Well, again, it all depends on the solution. It could be cents if it's a very huge contract, in terms of the unit volumes, but we've had licenses here at UEI that have ranged from cents, dimes to $5. Now typically they would be lower; not at the $5 range, but we've had some substantial ones. And again, it depends on what the customer is trying to do. If it is a raw database license, it's less. If it's something where they wish to have a cloud-based serving of that database, which has additional cost to it and also is part of our IP portfolio. So, it all depends on the features that are specced out by the customer how we would price it.

Okay, great. Appreciate that.

Yeah.

(Operator Instructions) Andy Hargreaves, Pacific Crest.

Thanks. Just kind of following up on that previous question, is there incremental investment going on in Q3 or higher tax rate or something, because it definitely seems like there has got to be some increase sequentially in cost somewhere?

Yeah, there is a little bit. We have been investing, like I said in the script, for Q2 we're investing in R&D and these products that Paul has been mentioning, the QuickSet, the Control Plus, these all take -- it takes engineering time and dollars. So we've been investing. We believe we've invested wisely. The R&D is up 17%, 18% for Q2, where SG&A is up only 3%. So, it's actually, we think, we're getting our bang for a buck with our investments.

Okay. And then just on -- going back to the Q2 results on the gross margin --

Yeah. There's one more thing. When Jason asked the previous question, I wasn't sure he meant sequentially or compared to the prior year, but if he has compared the prior year, we did have a settlement of our patent lawsuit and it was $2 million in Q3. So, I mean, if you're comparing versus the prior year that would be true. We had a $2 million pop last year in Q3 of 2012.

Yeah. I was looking sequentially as well, but thank you. Looking back to Q2, can you just walk us through a little bit of the components of the gross margin change from Q1?

Yeah, it decreased by about 0.5 percentage point. I mean, there are lot of things that go into the gross margin. I mean, if you're looking at -- the [gross margin] are moving half a point, it doesn't really take a whole lot. So you're looking at -- you got mix between lines, mix within lines, you've got FX rates, you've got -- I can list off 20 things. So, really the one item that I would say stands out from Q1 to Q2 in terms of it going down, we did have a lot of sales to large customers. So, whenever you have that they've got some pricing power, so it's going to push down the gross margin a little bit.

Okay. And then last from me is just, can you comment, I mean you mentioned functionality going up on the CE side. Is it fair to assume that that means that ASP trends are fairly good on that side as well?

Yes, that's correct, yes, because typically there is always downward pressure, but the higher-end product, it does -- it is a countervailing force against margin erosion, right. When higher-end features are being brought down to the mid-range product that will typically mean putting a little bit more value in the control device and usually driving up ASPs.

Sorry. And just one last one, what was the other expense, the $1.6 million in other this quarter?

It was basically FX loss. The FX loss is [felt] by the recent quarterly average due to significant exchange rate moves that took place in the quarter. We do hedge our exposures, if the cost to do so makes economic sense. We currently have hedges in place going forward, and right now we believe that a return to the recent quarterly average is likely.

Okay, thank you.

(Operator Instructions) John Bright, Avondale Partners.

Thank you, Paul and Bryan, good afternoon. On the business segment, the strength there, talk about how much of that was the market share gain, how much of that might have been related to non-traditional type customers with new offerings, first of all?

Yes, John, it's Paul. I can't give you a precise percentage for each of those, but they obviously all affected it. We had new wins that affected the -- so market share gains in terms of why the number was better. We had, I guess what you could call, mix shift, because within OEM, in particular, they have many more products than our subscription broadcasters would have. So, the typical subscription broadcaster would only have a few products in their line that make up the bulk of their shipments. Whereas a TV AV receiver, Blu-ray manufacturer may have hundreds. So what happens in those cases, again, as we mentioned, when they upgrade the middle range of the line, it's not technically a market share gain, but it is a value gain within that customer. And if we've kicked out a competitor, it's a double win, where we're getting a market share gain in units, as well as a gain in value. There aren't a lot of market tracking services, so I can't give you exact percentages, but I would say that what's happening is, we've developed a lot of industry-leading technologies with QuickSet, Control Plus, we're helping a lot of our customers choose between flavors of RF, RF for CE, Bluetooth, WiFi Direct, WiFi, we provide a lot of advice and counsel, we build products with all these technologies.

So we have a lot of credibility as they move towards these new areas, which all of them are doing. All of these, as I mentioned a little earlier, the customers want to move their products upscale, they want to differentiate and we're helping them do that. So there's a lot of market share gain, both currently and we would project longer term.

Well, that's exactly where I was going, Paul, in the QuickSet and Control Plus, this is something you've been seeding for quite some time.

Right.

Talk to us about the stickiness associated with that with these market share gains, because we may have seen over the years you've gotten some market share gains and then the customer wanted to right size to make sure that they weren't overly dependent upon you. Talk to the stickiness, the value proposition of QuickSet and Control Plus, as we look over the, not only the near term, but the next year, two years.

Right. Well, I mean the stickiness is easy to understand. I mean, rather than talking to customers or having them focus on how dependent they might be on a vendor, we like to talk to them about how likely is it that your consumer, when they bring the device home, would they like to plug it in the wall, plug in the HDMI cable, connecting the set-top box in the TV, for instance, and have the remote automatically set itself up. How important is that to the user experience, the out-of-box experience for your product. And I think once you focus on that, I mean we're all consumers, everyone who works at UEI, as well as all you guys, as well as all of our customers. They understand that this has long been a somewhat painful process and UEI has spent a lot of time and a lot of money, as you pointed out, over the last number of years on QuickSet. Control Plus is relatively new, but QuickSet has been worked on for a while now and we've come up with ways that make these devices simply work. You bring them home, you plug them in. There might be a confirmatory step, a dialog box on the screen that says, hey, you just plugged in this brand of TV, would you like me to set it up? You say yes, it's done. There's not a lot of complication.

So, we view that as pretty sticky and not focusing so much. I think our customers like this idea and maybe we'll be less concerned about how much business they're giving to somebody, particularly when the person bringing them this type of innovation is UEI.

And it's something that's going to be very defendable, and if they move away from that, you do see success there, the competitor is not going to be able to offer that because it's something that you've got IP on, is that correct?

Well, correct. I think, importantly, these things are not as easy to do. Simply copying onto an 8-bit microcontroller, a database that is technically not extremely difficult. On a scale of one to ten in terms of difficulty, that's a three. Coming up with some of these cloud-based versions of our product, there aren't that many companies on earth, frankly, who could do it. So, there are competitors, are not capable in many cases of doing it. Now there are companies who are, but then you pointed out the second barrier, which is we thought of many of these ideas years ago and obviously have IP around some of these concepts. But we don't like to sell on that basis. The selling point is that we want to make the consumer experience extremely simple and we want our customers to not have to focus on this at all. We do the work for them. We sell them the product, we sell them the service behind it and they don't have to focus on this area, because we'll handle it for them and we're getting the receptive audience on all these technologies, because they see this as an age-old problem with AV products.

Talk to us about any, if you can, and I know you don't want to lead your customers, but any non-traditional customers that have emerged in this pending fight we're seeing for the living room. And I don't know, does your traditional 10% plus customers, has that changed meaningfully at all in the quarter?

Yeah, we had one 10% customer in the quarter, as well as year-to-date, it's the same customer.

And what about on the margin, anything that you can talk to us about regarding non-traditional customers coming to the marketplace that you're seeing for this, shall we say, battle emerging?

Oh, sure. Yeah, well, I mean not any that haven't already been in the press, as to being either in or rumored to be coming in this market. I mean major technology companies, you guys read the business press. Many of them, if not all of them are, how do I say, either considering or working on solutions here for a better AV experience, as I mentioned in the earlier comments. Mobile device makers, many of whom, as I pointed out many conference calls ago, about half of the world's televisions are made by the same companies that make half of the world's smartphones. So there is an overlap there and some of them are seeing the tie-in between these devices and potentially using into the future technologies that will connect the two. Again, envision a TV that has say a technology like QuickSet. If the TV has already been set up with the many devices connected to it, as soon as you connect your mobile device to the network, the setup packet could be transferred over, such that when you launch the AV app, it's already set up. There is no set up. It's already been done. It was done within the TV when you bought it.

So, I mean we're envisioning things like this into the future, as you and I pointed out earlier, we do have the technical capability to build these. We know this, because we are the ones who have built them and we also have IP protection on many of the concepts they're in. So we feel really good about how the world is moving, how these connected devices are becoming more connected and how many of the companies, I mentioned mobile device makers, these new innovative over-the-top companies, the existing players, consumer electronics companies and subscription broadcasters are on to this and are developing next-generation products that are very interesting. They're probably spending more time and money than ever before than in their history, working on this type of stuff. So we think it's a very exciting place to be right now.

Thank you.

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

Okay, I want to thank everybody today for joining us and for your continued interest in UEI. We'll be presenting at the Credit Suisse Small & Mid Cap Conference held in New York City, September 17 and 18. We hope to see some or all of you there. Thanks very much for participating today and goodbye.

Thank you. This concludes today's conference. You may now disconnect. Speakers, please hold the lines.