Universal Electronics Inc (UEIC) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Universal Electronics third-quarter 2016 earnings call. (Operator Instructions) As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Becky Herrick from LHA. Ma'am, you may begin.

Thank you, Terrence, and thank you all for joining us today for the Universal Electronics' third-quarter 2016 financial results conference call. By now you should've 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. In addition, any additional updated material, nonpublic 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'll 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 Company's ability to maintain and build its relationships with key customers; the Company's ability to anticipate the needs and wants of its customers and timely develop and deliver products and technologies that will meet those needs and wants, including the QuickSet technologies, home security, home automation and other technologies identified in this call; the significant percentage of its revenue attributable to a limited number of customers, and particularly the sales growth and benefits of the Company's relationship with Comcast; the timing of new product rollout orders from the Company's customers as anticipated by management; the continued trend of the industry in providing consumers with more advanced technologies; management's ability to manage its business, to achieve its revenue margin and earnings as guided; the continued ability to identify and execute on opportunities that maximize stockholder value; management's ability to successfully and profitably transition the Company's manufacturing operations; and other factors described in the Company's filings with the US Securities and Exchange Commission.

The actual results of the Company may materially differ from any forward-looking statements due to such risks and uncertainties. Management wishes to caution you that these statements are just projections and actual results or events may differ materially from those projections. The Company undertakes no obligation to revise or update these statements to reflect events or circumstances that may arise after today's date.

For further detail on risks, 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, 2015, and the periodic reports filed thereafter.

These documents, along with the risks identified earlier on this call, contain and identify various factors that could cause actual results to differ materially from those contained in management's projections or forward-looking statements.

In management's financial remarks, adjusted pro forma metrics will be referenced. Management provides adjusted pro forma metrics because it eases 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 performance for the period being reported. A full description and reconciliation of these adjusted pro forma measures versus GAAP is included in the Company's press release issued 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. Paul will then return to provide closing remarks. It's now my pleasure to introduce Paul Arling. Please go ahead, Paul.

Thank you, Becky, and thank you all for joining us today. For the third quarter, net sales were $170.3 million and EPS was $0.94, representing growth of 6% and 21% over last year, respectively. These results reflect solid performance across the business.

While there are short-term timing issues affecting our fourth quarter, which I will review more in a moment, the positive impacts of the continued adoption of advanced control technologies by subscription broadcasters and OEMs around the world are long-term and substantial.

New entertainment platforms are incorporating features such as cloud connectivity and advanced two-way remotes while also adding functionality like home safety and security. In providing a suite of solutions that interconnect this expanding list of new technologies, we are doing what we have excelled at for years, helping our customers address consumers' need for more advanced functionality while simplifying setup and everyday ease-of-use.

As remote controls and sensor technologies become increasingly advanced, it is imperative to ensure our worldwide manufacturing strategy evolves to support the growth of newer, more complex technologies and devices.

As such, in September, we announced the sale of our Guangdong Province facility for approximately $48 million. This sale transfers manufacturing to our newer facilities in China. This is an important transition as it underscores our worldwide manufacturing strategy to invest in new facilities and equipment that can cost effectively support our growing market leadership position.

The future of the home entertainment and control environment is clearly expanding to include more advanced technologies and connectivity protocols. Our industry is undergoing a major technological change that brings great excitement for the consumer as more entertainment options will be available to them and accessing these options is easier than ever before.

These new and innovative devices and services require more complex design, engineering and testing requirements which are often an order of magnitude more complex to develop than traditional products, thus development cycles can be subject to timing delays.

In fact, over a dozen new product introductions that were scheduled in the fourth quarter of 2016 have been delayed due to customer issues with readiness of their new, more advanced hardware and software systems or to component shortages.

It is important to note that over the past 24 to 30 months, we have been working with some of the biggest names in our industry to bring innovative new products to market. Our customers are focused on making sure they deliver the optimal user experience in creating some of the breakthrough features requested by consumers.

As a result, they may go through several design, feature and technology iterations including extensive user testing and validation before launching their platforms. These iterations are an essential part of the development process and are an important element to the overall success of their platforms.

This is evidenced by Comcast's recent announcements highlighting the positive impact the Xfinity X1 platform has had on its subscriber retention and growth. While there are short-term timing issues impacting the fourth quarter, the long-term opportunities in advanced control technologies cannot be denied.

We continue to be very confident that these advanced platforms will soon become commonplace in our industry and we are well-positioned to continue to grow our market share in this space. We have been working on over 50 design wins in advanced and new product introductions in 2016 with many of those design wins being new products that will be introduced in 2017.

Looking ahead to next year, we have a strong pipeline of new product introductions in higher-growth categories such as air conditioners and smart lighting systems featuring Wi-Fi-enabled controllers as well as Bluetooth low energy remotes in over-the-top video delivery markets such as China, Japan and Korea.

Adding to this strong pipeline, we have nearly 40 new advanced control product proposals on which we are actively working. These represent all of the top consumer electronics, computing, gaming and content provider platforms from around the world.

These products will integrate the latest RF technologies, voice and interactive features that are required to drive today's advanced video delivery platforms. We will provide details as these programs progress. Many of our new solutions and devices will be on display at the international Consumer Electronics Show, or CES, January 5th through 8th in Las Vegas where UEI will be celebrating its 30th anniversary.

We will be providing demos of our QuickSet family of products, which is currently deployed in nearly 400 million devices with the leading names in home entertainment worldwide. Our latest iteration of this solution, QuickSet Cloud, delivers benefits of QuickSet but as a cloud service.

We are working on our first major customer launch of QuickSet Cloud prior to CES with more to follow throughout 2017.

Also at CES, we will be displaying some new design concepts from our Designovation showcase featuring our automated manufacturing processes that enable us to further our competitive differentiation through innovative yet cost-effective design.

In addition, we have been working on a number of innovations in wireless home security and monitoring. We will have samples of the sensors and remote controls both in our existing product range and new products set to be introduced later this year and early next year. We will have a number of exciting announcements coming up that will provide more details about our plans at CES.

With that, I'd now like to have Bryan Hackworth, our CFO, take you through the financial results.

Thank you, Paul. As a reminder, our results for the third quarter 2016 as well as the same period in 2015 will reference adjusted pro forma metrics.

Third-quarter net sales were $170.3 million, an increase of approximately 6%, compared to $160.5 million from the third quarter of 2015. Business category net sales grew approximately 6.5% from $148.6 million in the third quarter of 2015 to $158.3 million in the third quarter of 2016.

Consumer category revenue, despite a stronger US dollar versus the British pound, grew modestly to $12 million from $11.9 million in the prior year quarter. Gross profit was $44.5 million or 26.1% compared to 26.9%.

Our gross margin percentage is lower than last year and lower than we expected year to date as a result of incremental investments in personnel, infrastructure and capital equipment, which had preceded the corresponding revenue. These investments were necessary to meet the original deadlines in an ever-growing number of advanced platform projects.

However, as Paul previously mentioned, for multiple reasons, many of these projects have been delayed resulting in the underutilization of these resources in the short run. Operating expenses were $28.9 million, compared to $25.9 million.

R&D expense was $4.8 million compared to $4 million in the third quarter of 2015 reflecting our continued investments in new products and technologies including the smart home market. SG&A was $24.1 million compared to $21.9 million. Operating income was $15.6 million compared to $17.2 million. The effective tax rate was approximately 11% compared to 29%.

Net income was $13.9 million or $0.94 per diluted share compared to $11.8 million or $0.78 per diluted share in the prior year period. For the first nine months of 2016, net sales were $494 million compared to $440.7 million in the same period last year.

Gross margins were 26% compared to 27.5%. Operating expenses were $88.7 million compared to $81.5 million in the first nine months of last year. Operating income was $39.6 million compared to $39.8 million. Net income of $32.5 million or $2.20 per diluted share compared to $30 million or $1.89 per diluted share in last year's nine-month period.

Next I'll review our cash flow and balance sheet at September 30, 2016. We ended the quarter with cash and cash equivalents of $48.1 million compared to $53 million at December 31, 2015. We have 500,000 shares available on our share buyback program. Depending on market conditions, we may aggressively repurchase our shares in the open market as the positive trends in our industry support our long-term outlook.

DSOs were approximately 72 days at September 30, 2016, compared to 53 days at year prior. Net inventory turns were approximately 4.2 turns at both September 30, 2016, and the prior year quarter.

Now turning to our guidance. As Paul discussed, over a dozen of our new product introductions expected in the fourth quarter of this year have been delayed until 2017 as some of our customers are experiencing technical matters related to validation testing and other platform (inaudible) issues.

These delays not only affect our top line but also our gross margin rate as our investments in incremental capacity are not currently being utilized sufficiently. As a result, for the fourth quarter 2016, we expect net sales to range between $160 million and $168 million compared to $162.1 million in the fourth quarter 2015.

EPS for the fourth quarter is expected to range from $0.66 to $0.76 compared to $0.91 in the fourth quarter of 2015. From a long-term perspective the evolution within the home entertainment environment continues to present us with significant growth opportunities. As such, we are reaffirming our long-term financial outlook. We expect average annual sales growth of 5% to 10% and average earnings per share growth of 10% to 20%.

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

Thanks, Bryan. As we approach our 30th-year anniversary at UEI, there are a number of successes we can celebrate. Most notably, we have the majority share of control technology in the United States and by far the leading share of our market worldwide. Yet the opportunity to further grow our footprint remains significant.

Through all the evolutions in home entertainment, including the recent movement toward smarter, more advanced remote control systems and the emergence of the smart home, we have continued to enhance our leadership position by advancing the state-of-the-art in simple, intuitive control systems for the new platforms being launched by the leading home entertainment companies across the world.

As a result, we believe we are well-positioned to enjoy another 30 years of growth and success. Stay tuned. I'd now like to open it up for questions. Operator?

(Operator Instructions) Steven Frankel, Dougherty.

Paul, let's start with these delays. Obviously, that's a big negative surprise. You talk about dozens of designs -- is that dozens of customers or are we talking about multiple designs for customers and it just seems like a lot of negative events all at once.

Maybe give us a little more insight into what's happening and how long you think it takes to come out the other end of this.

Sure. Yes, I think without exception they are all one project per customer. I can't think of any that are -- have two projects delayed. Typically an advanced product like this, they're only doing one at a time, so it would be one per customer, and it's a variety of issues.

As you get closer to launch on some of these platforms, as I said in the comments, it's an order of magnitude more complex than the generation of product that came before it. Most of these platforms are cloud connected. If they have voice, they do processing through the remote, digital-to-analog -- or analog-to-digital conversion, rather, sent to the box, sent up to the headend, into a server, processed and back down to the box.

You also have a new user interface on most of these products, so the user experience people in most of these companies sometimes iterate that interface, which can again lead to weeks delays, sometimes even months. They then have integration of multiple RF technologies, sometimes Wi-Fi along with Bluetooth or Wi-Fi along with RF4CE, or a version of ZigBee, which can create some technical issues that they have to work through. Again they can take weeks, sometimes can even take months to work through some of those issues.

Whenever they redesign the interface, they then have to take it back through testing, through user experience people again; so these projects, when they tell us when they'll launch, what we found for the ones that we are doing in Q4, unfortunately, too many of them were delayed.

Now, if some of them have launched, we would have seen probably a surge in sales from some of them that would have offset the absence of others, but we had too many. Now in terms of the projects, none of them are canceled. All of these projects are critical and in some cases imperative for the companies that we're working with, or at least they see them as imperative.

So these projects are going to launch; it's just a matter of how many weeks or how many months they get delayed. The ones we have now for Q4 have been delayed some to Q1. Some may not even launch until April of next year, but they will launch, each and every one of them.

You had anticipated launching some new customers in Q3. Did you launch any new customers in Q3? Or maybe tell us how many advanced remote customers you are currently shipping?

We had a couple here in the back half of the year that did begin shipping, so some of the projects are on schedule with us and our customer.

And, again, I don't want to -- I want to reiterate, some of the delays weren't really with the remote control; they were more with the system, because again, these modern platforms aren't really developed separately. They are developed in concert, so the remote and the hardware piece, the set-top box, if you will, and the headends, the server software, all of these things have to be knitted together, in essence, by the technical team here and at the operator or CE customer and sometimes there are other parties involved in this more complex system, so -- but they are all being worked on.

They are all -- we've seen demos, a lot of them; they are exciting platforms but they are, in some cases, delayed by months.

So to go back to the analysis you did earlier in the year, how many advanced remote projects are you currently shipping?

Yes, we're probably somewhere in the neighborhood of 10, and we've got a multiple of that on the docket that are actually either done and waiting for other elements of the system to be completed before we can ship, but because -- remember, even though the remote is done, you can't ship in volume until it's deployed.

Right.

So if there are other elements of the system that aren't quite ready, we wait until the entire system is approved and ready for launch. So there's no real volume until that occurs.

And then on Ecolink, I had anticipated that you'd start shipping more product in Q3. Maybe you could tell us what's happened there in the quarter and what you anticipate happening into Q4?

Yes, Steve; it's Bryan. We are shipping the Ecolink product. The approval process took a little longer than we expected, but we're -- for the most part, it's on track. So we're shipping it and continue to ship through the back half of the year.

And what were your customer concentration numbers for Comcast and DTV in the quarter?

Yes, usual suspects, Comcast was 21% and DIRECTV was 11.6%.

Okay.

Very similar to Q2.

And, this under-absorption issue, is that likely to impact gross margins for several quarters?

It depends on the launches, Steve. In some cases, what we've done -- we have at the facilities we're concentrating now, we call them GTY and [GTQ], Yangzhou and Qinzhou, the two other factories. GTY, in particular, we've invested in people, new processes and new machinery to build these advanced platforms in a more automated or cost effective way than anyone in our industry has done before.

When you invest in those things, they have to have the volume to offset. We couldn't very well not get it set up for operation with these programs getting ready for launch, but the investments preceded the volume surge, so as soon as the volumes begin to ramp, the problem begins to eliminate itself, or the under-absorption or underutilization of those resources begins to eliminate itself.

I appreciate you reiterating your long-term guidance. Would you expect 2017 to be a normal year and in line with that long-term guidance?

Well, while we don't want to provide any guidance for 2017, when you do have years that are below the average, of course, you're going to have to have years that are above to offset the years that were below that average.

Okay, and we're -- hopefully only characterizing 2016 as one below that average?

Yes. Right now, yes.

Okay. I'll let somebody else ask some questions. Thanks.

Greg Burns, Sidoti & Company.

Hi, I just wanted to just follow-up on the last line of questioning in regards to the number of advanced remote opportunities you currently have. I think in the past you had mentioned 10 to 15 or so carriers encompassing, I think, 112 million total subs. Has that number moved at all? Is that the same or have you added incremental on top of that?

We probably added a little bit but not significant. It's more about executing the projects across those 20% of the world's subscribers.

And -- sorry, go ahead.

Go ahead.

I was just going to ask, what is your market share in Western Europe versus the US? I'm assuming its lower, and if so, why don't you have more comparable market share? They seem like very similar markets and what maybe can you do to close that gap?

Yes, it's a good question. I think the natural consequence of us starting here in the US is that our entry into the US subscription broadcasting market began earlier, so the relationships there were built up over multiple decades, whereas the strategic entry into Europe happened a little bit later, so -- and it takes time to convert through successive product generations to get higher and higher share; it can take years to build.

The share position we have here in the US is quite high. The share -- you are correct -- the share position in Europe is lower. The way that you do it and the big opportunity for us is, as I mentioned in the prepared remarks, the differentiation of the solutions that we provide allow us to not only retain the customers that we currently have, but in some cases, are helping us close next generation products with customers that we have not traditionally had.

So it's helping with both market share within accounts, meaning they are getting a much higher share of that particular accounts business -- in some cases 100% of it -- but also closing on new projects with customers we didn't have prior to that.

Okay, and the charge for the manufacturing, I guess [just] looking at overhead, is there any other changes you're making to your manufacturing footprint or is that the last we'll see of those charges?

Well, no, what we're doing is we're -- there was a press release that came out, I think, probably about four or five weeks ago about the sale of our southern factory which, as Paul mentioned, GTC. That's going to take a while to consummate, but for the most part, that is -- the large transition is we're closing that factory down; we're moving the majority of the volume up north and then a little bit to Southwest facility at GTQ, so that's the one main transition.

Okay, thanks.

Steven Frankel.

Just to try to flesh out the Q4 guide a little more, just to make you uncomfortable. Would we expect operating expenses to grow at a similar rate that they have the last couple of quarters?

Not necessarily.

Okay. so it's much more of a gross margin step down than it is an op expense growth?

That's correct. If you're looking at Q4 versus Q4, it's more of a gross margin issue where, as Paul mentioned, you were -- what's going to help us significantly is when the products launch and therefore you're increasing your production at these facilities so you're able to absorb the incremental overhead that we put into place.

That was absolutely necessary to hit the original launch date, so we had to do it, but because it got pushed out, you kind of get hit both ends; not only do you not get the sale but then now your factory isn't operating as efficiently as you thought it would. So that's going to affect Q4 currently.

But obviously, shorter-term, Steve, or over the next few quarters, these things self correct because as the products launch, as the volumes ramp, the machinery, new process, new personnel that we hired to do these new products get fully absorbed and the margins are better.

And how much of an impact, if any, was seen in Q3 from this layering on of additional capacity expense?

Yes, there was some -- there was definitely some impact. I don't quantify it, at least not publicly, but it's -- there was definitely an impact to the Q3 margin rate.

Okay, and what kind of tax rate would you assume in Q4 or is baked into your guidance assumption?

Yes, Q3 was very low because we got a couple of cash refunds in China which -- we have tax incentives there and we treat it on a cash basis, but both of them just happened to come in in Q3, so I would use more like a Q2 rate and that would probably be a good approximation of the Q4 rate.

Okay. And again, go back to Ecolink one more time. I know we talked about ramping shipments. Did that include shipments to Comcast in Q3?

We are working with Comcast on these products so we can't specifically speak to the volumes there, Steve, but we are working with them with Xfinity Home on a variety of products, not just one, a series of products for their service. That will ship and in the near term into next year have a nice ramp on those products.

Okay, thank you.

(Operator Instructions) At this time I am showing no further questions. I would like to turn the call back to Paul Arling for closing remarks.

Okay. Thank you for joining us today and for your continued interest in UEI. As we mentioned on the call, we will be celebrating our 30th anniversary at CES in Las Vegas from January 5th through 8th.

Following that, the next week we will be presenting at the 19th Annual Needham Growth Conference held January 10th through the 12th in New York City. We look forward to seeing you at one or both of these events.

Thanks very much for being on the call today and goodbye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.