Universal Electronics Inc (UEIC) 2013 Q3 法說會逐字稿

Good afternoon. My name is Rebecca, and I'll be your conference operator today.

At this time, I would like to welcome everyone to the Universal Electronics third quarter 2013 results conference call. (Operator Instructions)

Ms. Becky Herrick, of LHA, you may begin your conference.

Thank you, operator. And thank you all for joining us for the Universal Electronics third 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. 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 anticipated by the Company due to the continued strength of its subscription broadcasting customers, both domestically and internationally, and its ability to add new customers; the continued leveraging of the Company's technologies and product innovations allowing for the entrance into new markets, the Company's continued ability to embed its technology into smart devices such as Smartphones, tablets, Smart TVs, IPTV devices, game consoles and over-the-top services, which are accepted by its customers and the marketplace; the continued growth in smart devices and advanced connectivity products, and the Company's ability to attract and retain new and existing customers due to its continuous innovation of new products and technology solutions.

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 31st, 2012 and those periodic reports filed since then. 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, employee-related restructuring costs, and certain costs incurred 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 is now my pleasure to introduce Paul Arling. Please go ahead, Paul.

Thank you, Becky. And welcome, everyone.

Our third quarter results represent a continued trend of sequential top- and bottom-line growth in 2013. Net sales of $142.4 million were up 14% over the third quarter of last year and represent a quarterly record for our company. Earnings per share reached $0.62 for the quarter, above expectations and also the highest EPS for any quarter in our company's history. We are the leader in the global remote control market, as we supply more than 1/3 of the remote control devices in the world today. And our core business continues to drive growth for the Company.

Our consumer electronics OEM business has exhibited strong growth this year, not only in the sales of remote controls but also a significant increase in embedded software and technologies in next generation Smart TVs.

Subscription broadcasting remains a strong performer, spurred by growth both domestically and internationally. Our subscription broadcasting customers include the world's premier pay TV providers, and we continue to deepen these relationships in addition to adding new customers around the globe.

With our core business of providing the Company's foundation, we're able to leverage our strengths in technology and product innovations to enter new markets. We have targeted smart devices and are seeing the initial results, with key wins in software embedded in game consoles, over-the-top platforms and mobile devices. While we are excited about the progress thus far, we are just getting started.

Innovation has always been and continues to be critical to our success. The innovative solutions that our team has developed over the last decade, our vast expertise and experience in AV control protocol, combined with our technical and patented protection of these novel methods of home entertainment control, are unparalleled. This powerful combination has us even more encouraged about our long-term prospects in penetrating these new growth platforms.

The growth trend in Smartphones, gaming consoles, tablets and other cloud-based products, as well as the growing popularity of advanced connectivity protocols such as Wi-Fi Direct and Bluetooth low energy, have created an enormous opportunity for us to implement our patented ease of setup and ease of use features.

Utilizing our Control Plus, QuickSet and other technologies, we can transform these smart devices in the universal remote controls that are automatically set up, simple to use; and can control all of the devices in the home entertainment center. Using our extensive device control databases, our technology addresses every component regardless of brand or connection protocol.

Our commitment to innovation is reflected in our ongoing research and development investments. This quarter, our R&D increased 19%, as we continued to anticipate the needs of the market and develop solutions to enable smart devices to communicate with all the components of the home entertainment system.

This is the future of home entertainment. And we have built a great position of strength in relationships, products, technologies and patents, to benefit from the evolution in our markets.

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

Thank you, Paul.

As a reminder, our results for the third quarter of 2013, as well as the same period in 2012, will reference adjusted pro forma metrics.

Third quarter 2013 net sales were a record $142.4 million, up 14% compared to $124.9 million for the third quarter of 2012. Driving this growth was strong sales into the subscription broadcasting market, where we continue to gain share both domestically and internationally; an increase in the sales in the OEM channel, as well as initial licensing revenue into the smart devices market.

Business category net sales were $129.7 million, compared to the third quarter 2012 net sales of $111.9 million. Our consumer category net sales were $12.7 million, compared to the third quarter 2012 net sales of $13 million. Gross profit for the third quarter was $40.7 million, or 28.6% of sales, compared to a gross margin of 29.4% in the third quarter of 2012. It's important to remember that last year's third quarter results included a lump sum payment of $2 million relating to our successful settling of a patent-infringement case.

Total operating expenses were $28.9 million, compared to $25.5 million in the third quarter of 2012. Breaking down our operating expenses -- R&D expense was $4.2 million, compared to $3.5 million in the third quarter of 2012. SG&A expenses were $24.7 million, compared to $22 million in the third quarter of 2012.

In addition to increased variable costs, such as delivery and freight, and bonus and commissions resulting from higher sales volume, we continue to invest in product innovations and technologies such as UEI QuickSet and Control Plus, as well as the sales support functions necessary to gain traction in the burgeoning smart device channel.

Operating income was $11.8 million in the third quarter of 2013 compared to $11.2 million in the third quarter of 2012. The effective tax rate was 12.5% in the third quarter of 2013, compared to $26.9% in the third quarter of 2012. The decrease in our effective tax rate was due primarily to a shift in income from higher-rate jurisdictions to lower-rate jurisdictions. Additionally, we realized a tax benefit on certain income earned in Hong Kong. For the fourth quarter of 2013, we expect our effective tax rate to approximate 22%.

Net income for the third quarter of 2013 was a record $9.7 million, or $0.62 per diluted share; compared to $8.1 million, or $0.54 per diluted share in the third quarter of 2012. For the nine-month period ended September 30th, 2013, net sales were $393.2 million, up 14% compared to $345.3 million in the same period of 2012.

Gross margin for the first nine months of 2013 was 28.4%, compared to 28.5% in the same period a year ago. Total operating expenses were $83.6 million, compared to $75.9 million in 2012. Net income for the nine-month period was $20.8 million, or $1.35 per diluted share; compared to $17.1 million, or $1.13 per diluted share in the prior-year period.

Next, I'll review our cash flow and balance sheet at September 30th, 2013. We end the quarter with cash and cash equivalents net of debt of $44.6 million, compared to $34.4 million at September 30th, 2012. DSOs were approximately 65 days at September 30th, 2013, compared to 67 days the year prior.

Net inventory turns were approximately 4 turns at September 30th, 2013, compared to 4.9 turns the year prior. Our inventory turns are typically lowest in the fourth quarter as we prepare for the Chinese new year that takes place in the first quarter of the following year. Consequently, for the fourth quarter, we expect inventory turns to range between 3.5 and 4 turns, compared to 3.9 turns the year prior.

Now, turning to our guidance -- for the fourth quarter of 2013, we expect revenue between $126 million and $134 million, compared to last year's fourth quarter revenue of $117.8 million. EPS for the fourth quarter is expected to range from $0.42 to $0.52 per diluted share, compared to $0.42 recorded for the fourth quarter of 2012.

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

Thanks, Bryan.

Our reputation for excellence in innovation and our proven track record of execution has positioned us as the global leader in wireless control technology. Our financial results for the first nine months of 2013 are a testament to that and demonstrate our continued growth opportunity. We reported net sales growth of 14% and grew operating income 24% during the period. UEI's success has been determined by our ability to anticipate the needs of our customers and consumers. And we are constantly pursuing new technologies that build upon the success we have created over the past 25 years.

Our strategy remains unchanged. We are focused on developing the innovative technologies that facilitate the simple control of the ever-changing home entertainment environment. This will expand our global market opportunity, deepen existing customer relationships, and allow us to win new ones. Stay tuned.

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

(Operator Instructions) Jason Ursaner, CJS Securities.

Congratulations on a strong quarter, guys.

Great, thank you.

Thanks.

In the TV market, in terms of volume -- I guess the year started off showing gains relative to last year. But some recent reports have been moderating quite a bit heading into the holiday season. So I guess I'm just wondering if you guys are seeing this trend in your results. And even if the market in Q4 isn't showing volume growth that maybe had been expected, would you still expect to grow through that because of the increased content from embedded technology in the actual TV as opposed to just the remote in prior years?

Yes, those market parts are probably generally true. It's difficult to forecast into the fourth quarter. Most of our -- even though we're in it, the sales through on the first shipments hasn't been proven out yet. But our expectations are as they are for the year. Most of the orders are already in.

We've also been seeing, as I mentioned during my earlier comments, some share shift [in] some embedded technology sales that have increased our position with specific customers, without regard to the growth or shrinkage in the market. But overall this year, the TV market has been better. Last year was probably a low over the last five years. So things have returned to be a little bit better this year.

Okay. And how much content does the embedded technology in Smart TVs and the actual TV add relative to what's just in a remote? Is it essentially two remotes shipping -- one for the actual remote and the TV? Or it's pretty different content?

Well, typically, the technology we embed will relate to the controlling of other devices. So it's remote control-related. But we'll embed software in a television, for instance, with QuickSet, where it'll aid the user in setting up the original remote or remotes, because we do have some TVs that are being shipped with multiple remotes. That'll help the user set up those remotes automatically or nearly automatically. And that's an embedded sale, where we will actually embed technology in the chip inside the TV that goes along with the remote that was shipped with the TV.

Okay.

And you previously talked about the inclusion of your embedded mobile technology in at least one of the major game consoles. So with both of those launching in Q4, without needing to discuss any specific customer, what magnitude of revenue from that market have you guys embedded in your Q4 guidance?

We've just presumed again the initial shipment volumes for the units we're in. And we can't talk a lot about what's happening there yet. But there's some sales embedded in both Q3 and Q4 for the platform.

So without talking about the forecasted volume, can you give a general range on your dollar content?

No, Jason, we're not going to provide that just yet. We're just giving the top-level -- the total sales, which we said between $126 million and $134 million.

Okay. I guess I'm just trying to get some type of better quantification of the opportunity there, short term and long term, given that it's essentially starting to be priced into the share price by investors. So just trying to get some better detail.

Well, it's something that's just beginning now. In terms of giving any sort of granular detail on it, unfortunately we can't. Obviously, there's only a few companies on earth that make game consoles. We don't want people to back into any forecast of those companies based on any forecasts that we give. So unfortunately, we at this point can't disclose who we're with or any sort of granularity on the units and/or pricing

Thanks. Appreciate those details. And look forward to seeing you guys at the conference in January.

Great, thank you.

Steven Frankel, Dougherty & Company.

I want to dig into the smart device market for a minute. Would you care to share either the revenue contribution from smart devices in the quarter or maybe just the number of SKUs or customers you have in software sales today?

Steve, it's Bryan. We don't break out the detail of revenue by license. And we definitely don't do a by customer, unless they're a 10% customer. We've never done that, and we're not going to begin right now.

Yes, the only granularity I'd give there, Steve, is that we're also probably going to over time have to redefine what "smart device" means. Because I think to the general public it means phones and tablets. But what we're seeing is a lot of the consumer electronics companies are making all of their devices, quote-unquote, smart.

TVs are becoming smart, Blu-ray players are becoming smart. AV receivers are smart, over-the-top platforms are smart. Tablets and phones, mobile phones, are obviously all smart devices. All these cloud-based products, products that can be connected to an IP network, are becoming more intelligent and, as a result, are helping (technical difficulty) both our technical and patented properties to be able to make them easier to use and set up. Because as they're connected to each other in many cases, they can self-discover, and not only set themselves up but configure the inputs and menus for the user automatically.

So to name names -- name a major consumer electronics company, and they probably have one or more SKUs in their portfolio that were working on either an embedded app, an embedded chip or an embedded technology, or combination thereof; to enable a smarter AV control experience for the user. And then you have, of course, the traditional smart devices, tablets and Smartphones that we're also being embedded in. And every major provider of those -- on the Android side, anyway -- have one or more SKUs that have an embedded app that eases the user's experience with AV.

So it's becoming a growing trend in both the CE side of the house as well as mobile to make their devices smart. And they're looking for app developers and people with embedded technology like us to help [out them].

And I know there were some announcements around KitKat last week. And it talked about remote controls. But that's kind of plumbing below what you do, correct? It's not anything in the operating system that's trying to replace your IP?

No. No, what it does is it'll allow our properties to be used more easily by the app developer or the device maker.

Okay --

And then they're further enabling through the OS the use of AV control. But the AV control libraries and apps, and setup routines and all of the other things that we do, are not being embedded; they're being done by again the app developer or the hardware maker, or both.

And while we're on that subject, any update on Peel?

There's no current update. The matter is still before us, and we don't have anything to report on that just yet.

Okay.

And a high-level question -- where do you think your major subscription broadcast customers are today in terms of next-generation set-top rollouts? Is there a lot of new product coming next year? Or next year is a year of kind of further penetrating in the market with the innovations we've seen this year?

Well, it varies by operator. Obviously, they're usually in a design cycle. So when they finish the design, they usually will go through a rollout over the court of at least a year. And then they begin work on the next one, of course, once the first one launches.

So they're all at various levels of implementation of next-generation boxes. And quite frankly, again, like I just said, once they finish one, they begin work on the next one. So they're in a constant cycle of improvement, upgrade, and developing next-generation applications for the new box.

So we work alongside of them really closely. Again, some of those relationships are very long term. And we've powered their devices for, in many cases, more than a decade. And I would say some pretty exciting things are happening there. I think the over-the-top threat, the opportunity for the current incumbent subscription broadcaster is pretty big. And they recognize that and are developing some pretty interesting things to be unveiled next year, and really the year after that.

You commented last quarter that you saw your core CE customers migrating to more sophisticated solutions. Has that trend continued into Q3 and Q4 as you look forward?

Yes. I think what's happening is they are doing more sophisticated, particularly on the control side and for other things. And then, what happens typically is those features then migrate down the product line. So they start typically at the higher end of their product line and then migrate their way to the midline of their product.

Great. That's all I have for now, thank you.

Okay.

(Operator Instructions) Corey Barrett, Pacific Crest Securities.

My first question pertains to the last, which is sort of the mix shift to more feature-rich remotes. Can you comment on what you're seeing there on the service provider front?

Yes. Look, I think that they're all looking at remotes that are more intelligent, easier to set up. They understand the value of that to both the consumer and their own service providers. Again, many of them receive calls from consumers, so they would love to see a reduction in those calls. So the easier we can make the install, the easier we can make the setup, the easier we can make the configuration of the inputs on the television or the AV receiver; all the better for them and the consumer.

So we're seeing a lot of interest in these features we're bringing out. So they're bringing out more sophisticated product than your traditional three-device, set it up with a code type of product. Many -- or I would say most of them are looking at those next-generation designs to be better.

Okay, thanks.

And then, on the operating expense side -- the rate of growth that we've seen through the first nine months of the year -- should we expect a similar rate of growth through 2014 as you continue to pursue the mobile or connected device opportunity?

I would say no. Because we got this new smart channel, we did have to invest in engineering and even sales support functions, which is more from a technical support position. So we did have to invest. Through Q3, we're up about 60 basis points. But next year, especially with the traction we're getting in the licensing revenue -- I'm not going to provide guidance for 2014. But to answer your question, the leverage should be greater in 2014 than in 2013.

Okay, thank you.

And then, Latin America in Q2 was very strong. Can you comment on, or can you say how much revenue was from Latin America in the quarter? Or if not, comment on growth there?

Yes, we don't break that out specifically. But we're doing well in Brazil. A couple years ago, we opened up an entity in Brazil. And we've got approximately 100 people working in Brazil, which is basically an assembly plant. And it's done really well. It's grown on a percentage basis significantly over the last couple years.

Okay. And would that help benefit gross margin long term, or the units they're assembling sort of lower ASP, and so it offsets there?

Yes, it's similar to what we have now. [I want to say] (multiple speakers) --

Okay.

Thanks. That's all I got.

Ian Corydon, B. Riley Company.

Just to follow up on that last question -- I wonder if you could just talk about the subscription broadcast market, and the kind of growth rates you're seeing in the US versus South America versus Europe and Asia; and then, how the growth breaks down in those markets between subscriber adds versus increased revenue per unit.

Yes, there were a number of questions in there. I think what we've seen is growth across all markets. Some, the percentage growth has been higher. Latin America's been a strong grower for us for the last couple years in terms of percentage growth. The Americas overall, including the US and Canada, actually have been a very good growth this year.

In terms of the number of subscriber adds -- the net subscriber adds are nil. So what's happening is we're actually garnering both more market share, up-selling to higher-value products; and also increasing the product sales to these customers -- so gaining higher share of their total dollar spend. So it's been share gain, it's been some market growth. We still do get a lot of gain hear from churn. So we look more at gross subscribers than net.

And there's a lot of repair and replacement. That's the other thing about our business that's different from other hardware providers to the subscription broadcasting market. Remotes have a life of their own, and they get thrown against the wall when your team is losing, or chewed up by your dog, or thrown away by your children. We love dogs and children, by the way. So there's a lot of use and abuse of remotes that need to be repaired and replaced.

So we've seen a good growth year in both turnover of boxes -- any time you see upgrades in boxes to HD, DVR or now over-the-top type services, you're going to see higher sales of remotes. And we've seen it again in every region. I don't know of a region that we have that's not growing right now. Differentially, in percentage; but they're all growing.

That's perfect. Thank you.

Jason Ursaner, CJS Securities.

Realize you don't want to provide any specific update on the Peel litigation. But just qualitatively, your consumer electronic customers -- what's their response been to the announcement of the litigation? Were some of the OEMs even fully aware of your IP portfolio in mobile?

It's a good question. I can't really speak to their full awareness. If they weren't before, they're probably more so now. The general reaction we've gotten -- remember, most of the companies that we sell to that are our major customers or potential customers are all very large companies who have a fair respect for patents. Many of them have their own patent portfolios themselves. They usually don't overlap with our patent portfolio , which is very strong in the area of AV control. So they're very respectful of the fact that we're protecting our property and our assets, just like they would.

So the reaction we've gotten from them has been positive. No negative was felt from it as far as customer reaction to our filing of a patent lawsuit.

Okay. And have you seen it lead to more inquiries on what your technology could do from the inventive space?

Sure, it helps. Because again, once they look up the IP portfolio we have -- remember, when we sell products to people, usually the features that are embedded therein or the features in the product that we sell it for -- often there's a grant of a necessary use rights license to our IP portfolio as a result of the sale of our product. So they value the relationship with UEI. And as they become a large customer, they can gain access to a lot more features in their product that are part of what we offer, both technically -- and many of those technologies are covered under our patents. So they get access to that as well, as they are a customer of ours.

Great. Appreciate that.

Yes.

(Operator Instructions)

At this time, there are no further questions. I would like to turn the call back over to Paul Arling for the closing remarks.

Okay. Thank you, everybody, for joining us on the call today and for your continued interest in our company.

I think it's important for us to note that we'll be participating in three conferences this winter. Soon we'll be at the Deutsche Bank Small and Midcap Conference in Florida on November 19th. We'll be at the CJS Securities New Ideas for the New Year Conference in New York on January 15th. And we'll also be at the UBS One-on-One Symposium in Boston on February 11th. So all three of those are before our next call that'll be scheduled for mid- to late February, after our year end.

Also, if you're attending CES this year, we'll be hosting a booth from January 7th to 10th, where we'll be demoing and displaying many of our technology and products. So to the extent any of you can make it there, it'd be great to see you at our booth, so we can demo some of our newest and greatest stuff. We hope to see you at one or more of these events.

Thanks for being on the call today, and goodbye.

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