Universal Electronics Inc (UEIC) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Year-end Universal Electronics Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Ms. Kirsten Chapman, LHA Investor Relations. Ma'am, you may begin.

Thank you, Skylar, and thank you all for joining us for the Universal Electronics Fourth Quarter and Full Year 2017 financial results 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 1 year at uei.com. 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 1 year. You may also access that information by listening to the webcast replay.

After reading a 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 future financial performance of the company, including 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 company's advanced control products, which include the continued adoption of our voice remote control technologies by existing and new customers; the successful implementation of our QuickSet technologies including Nevo, artificial intelligence; the continued and growth of our -- continued acceptance and growth of our home security and control temperature controllers and automation and other technology identified on this call; the continued success and growth of our Ecolink technologies and products; the successful integration of our newly acquired RCS business, the ability of the company to achieve its sales growth as anticipated by management; the significant percentage of the company's revenues attributable to a limited number of customers and particularly, the sales growth and benefits of the company's relationship with Comcast and its syndicated partners; 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; and other factors described in the company's filings with the U.S. Securities and Exchange Commission.

The actual results the company achieves may differ materially 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 other events may differ materially from those projections. The company undertakes no obligation to revise or update these statements or to reflect events or circumstances that may arise after today's date. 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 year ended December 31, 2016 and periodic reports filed thereafter. These documents along with the risks identified 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 remarks adjusted non-GAAP metrics will be referenced. Management provides adjusted non-GAAP metrics because it uses them in making financial, operating and planning decisions and in evaluating the company's performance. Management believes these measurements will assist investors in assessing the company's performance for the periods being reported. A full description and reconciliation of these adjusted non-GAAP measure versus GAAP is included in the company's press release issued today.

In addition, management has elected to exclude the effect of foreign currency fluctuations that are recorded above and below the operating line as well as the effect of the related hedges in its adjusted non-GAAP metrics. Management believes constant currency measures provide useful information to investors because they provide transparency to underlying performance by excluding the effect that foreign currency exchange rates have on period-to-period comparability given volatility in the foreign currency exchange markets.

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. Then Paul will return to provide closing remarks. It is now my pleasure to introduce Paul Arling. Please go ahead, sir.

Good afternoon, and thanks for joining us today. For the fourth quarter, net sales were $180.7 million, up 13% from the year-ago period. EPS was $0.60 this quarter compared to $0.74 in the year-ago quarter. For the full year, net sales were $696.5 million, up 6% compared to 2016 and full year EPS was $2.81 compared to $2.88.

As previously discussed, during 2017, we took action to improve our long-term manufacturing capabilities, which had a near-term negative impact on margins and the bottom line. These effects are temporal. We are seeing -- already seeing a lift in margins and believe we will see further improvement throughout 2018.

Before I get into the details, I'd like to begin by highlighting an award that recognizes our excellence and leadership in the industry. The National Academy of Television Arts & Sciences awarded UEI with the 2017 Technology and Engineering Achievement, Emmy, for our work related to voice navigation technologies for discovering and interacting with TV content. This accolade cites excellence in engineering and creativity that has materially affected the television viewing experience. On behalf of all the engineers and developers at UEI, I am honored that their work has been recognized by the industry as transformative, and truly reflects our mission to innovate and redefine what a remote is and what a remote is able to do.

Now I'll review details on our North American subscription broadcasting channel. In Q4, we began shipping Comcast next-generation voice remote control, the XR15, which provides enhanced usability and design improvements. We continue to see solid momentum in the market for Comcast's XFINITY syndicated program as Cox Communications came online last year and Shaw began shipping late last year. We will see other lunches and increased activity in this area throughout 2018.

We also launched the EchoStar DISH voice remote, which includes our award-winning technologies designed to deliver the best voice capture, compression and RF transmission capabilities. At the 2018 International Consumer Electronics Show in Las Vegas in January, we launched the new TiVo voice remote designed for the service provider channel, which is expected to be released in March of 2018. Some of the systems that currently deploy TiVo services include midsized operators such as RCN, Armstrong, Buckeye, GCI and Media Calm. The new TiVo voice remote supports standard UEI features such as a TiVo voice, which enables search through Netflix libraries; remote finder, an OTA with premium features such as QuickSet Cloud coming soon.

In EMEA, we are starting to see a nice uptick in sales in our subscription broadcasting channel as new product introductions and product rollouts continued at accounts such as Liberty Global, Virgin Media and Sky in Europe, MultiChoice in South Africa and Tata Sky in India. UEI is also supporting Sky U.K. in their IP service rollout using our Sky Q remote control. Looking ahead, we anticipate continued rollout of advanced voice remotes at major operators throughout Europe such as Vodafone and Orange expected in Q2 of 2018.

In our APAC business, we continue to see a growing demand for Bluetooth-enabled remote controls across all of our channels including smart TVs as well as high ARPU operators in Malaysia, Australia, Korea and Thailand. At the International Consumer Electronic show earlier this, we announced several new products and technologies to drive new innovations to serve the market. In addition to showcasing our next generation of QuickSet technology, we also announced a line of standard voice remote control platforms designed specifically for the Android TV OS as well as several new product concepts.

If you recall, QuickSet is an embedded and cloud-delivered technology that enables automated discovery and control of devices and services on any entertainment device in the home. The latest version of QuickSet integrates UEI's Control Plus Engine with IP services. This feature is really exciting as it discovers any app on all connected devices. UEI's innovation in the area of automatic discovery and setup of devices is unmatched in the home entertainment industry. Now we are taking it one step further. Because now you can sit down and with one touch or with a simple voice command, you can directly launch your desired app such as Netflix, Hulu, HBO and many others regardless through which device these apps are available. Once again, we are leveraging all of UEI's proprietary control technologies to enable power and input control of any audio or video device connected to the content source.

Another feature of our latest QuickSet solution launched late last year is our Control Plus Engine with RF4CE services that enables discovery and control of the newest RF4CE set-top boxes without the line of sight requirement of traditional IR-enabled set-top boxes. This technology is currently being integrated into the new 2018 Samsung QLED TVs equipped with QuickSet 4.0. We also announced Nevo AI, a data-driven personal assistant that leverages all the value of QuickSet and Control Plus using a simple, natural language interface, eliminating the need for an on-screen graphical user interface.

As stated on previous calls, our safety and security channel continues to show excellent growth. In addition to our strong performance at Comcast XFINITY Home platform, we added a smart security and sensor retail partner in the smart home space. Our partner will be introducing these products later this year and we will provide more details at that time. This segment of our business has performed above the expectations we set when we acquired this product category just over 2 years ago. In 2018, we expect this business to continue to grow strongly with new products and new customer announcements.

Our home automation channel is also building momentum as we develop products for Daikin, Fujitsu and Mitsubishi in the white goods segment for AIRCOM and other home control applications. These new products build on our experience in developing low-power RF controllers using technology such as Wi-Fi, Bluetooth and ZigBee. This channel continues to exhibit strong performance and we see continued growth as we add to our product and customer base.

We have shown our ability to succeed in the home control market well beyond home entertainment. The Ecolink business has grown sixfold since we acquired it approximately 2.5 years ago. Further, we have a significant business in HVAC and we are beginning to convert many of our traditional control products into smart connected products that are integral to a smart home experience. And the opportunity is growing. The global forecast for the smart home market is estimated to double over the next 5 years according to Zion Market Research. Additionally, according to IHS, the worldwide installed base for IoT-connected devices is expected to more than triple over the next 10 years.

Our opportunity here is clearly enormous. And we intend to continue, as we have consistently done in the past, to develop industry-leading products and technologies, which will enable us to win business with the leaders in this exciting growth market. With that, I'll turn the call over to our CFO, Bryan Hackworth for a review of the our financials.

Thank you, Paul. As a reminder, our results for the fourth quarter 2017 as well as the same period in 2016 will reference adjusted non-GAAP metrics. Fourth quarter net sales were $180.7 million compared to $160.1 million for the fourth quarter 2016. Business Category net sales were $163.8 million compared to $144.9 million in the fourth quarter of 2016, representing strong growth of 13%. This growth represents the continued transition to higher-end platforms by subscription broadcasters and fee companies, not only in the U.S, but also in Europe and Asia. We expect this trend to continue throughout 2018 as additional customers commence their rollouts on advanced platforms.

In addition, home security continues to be a growth driver as more households are electing to add security sensors to their networked home. Consumer Category revenue was $16.9 million compared to $15.2 million in the prior year quarter. Gross profit was $42.7 million or 23.6% compared to 26.9%.

As mentioned, during our last earnings call in November, we expected our gross margin rate to be lower than normal due to the surge of complex products coupled with completing the transaction from our Southern China factory to our other factories in China.

Improving our gross margin is a top priority and to accomplish this goal, we have been implemented several measures including product rationalization and improvements in factory production. We expect our gross margin rate to expand sequentially, which is embedded in our first quarter guidance and to continue to improve throughout the remainder of 2018.

Operating expenses were $32.3 million, compared to $29.1 million in the fourth quarter of 2016. R&D expense is $5.4 million compared to $4.4 million in the fourth quarter of 2016 as we continue to invest in technologies that enhance the user experience in the home. SG&A was $26.9 million compared to $24.7 million. Operating income was $10.4 million compared to $13.9 million. The effective tax rate was 11.6% compared to 19.2%. Net income was $8.7 million or $0.60 per diluted share compared to $11 million or $0.74 per diluted share in the prior year period.

For the full year 2017, net sales were $696.5 million compared to $654.1 million in the same period last year. Gross margins were 25.6% compared to 26.2%. Operating expenses were $124.9 million compared to $117.8 million in 2016. Operating income was $53.4 million compared to $53.5 million. Net income was $41.1 million or $2.81 per diluted share compared to $42.5 million or $2.88 per diluted share in 2016.

Next, I'll review our cash flow and balance sheet at December 31, 2017. We ended the quarter with cash and cash equivalents of $62.4 million compared to $50.6 million at December 31, 2016.

DSOs were approximately 75 days at December 31, 2017, compared to 70 days the year prior. Net inventory turns were approximately 3.6 turns at December 31, 2017, compared to 3.8 turns a year prior.

Now I'll turn to our guidance for the first quarter of 2018. In the first quarter 2018 we expect net sales to range between $169 million and $177 million compared to $162.3 million in the first quarter of 2017. EPS for the first quarter of 2018 is expected to range from $0.60 to $0.70 compared to $0.62 in the first quarter of 2016.

We remain confident in our long-term financial outlook and will reflect 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. In 2017, we have once again fortified our foundation with technology and manufacturing improvements and are taking action to leverage our IP assets. We are more excited than ever before about the future. The home entertainment world continues to change. And we have, for years, invested in solutions that make the experience of home entertainment easier and more enjoyable.

We have not just made the activation of new devices easy, our goal is to make it automatic. Accessing the entertainment that you want to watch right now shouldn't have to include having to turn on devices, switch inputs and dive through a series of menus. It should be hitting one button or uttering a few words, like "I want to watch Stranger Things," or "I want to watch NCAA basketball," and your devices should switch to the appropriate service, launch the app or channel and take you directly to the desired entertainment. This description is not a dream or science fiction, it is a reality that we are working with customers to achieve.

This change is happening as we speak. While not as quickly as we would like, rest assured, we are working with our customers to revolutionize home entertainment.

As we at UEI have said before, the growth trajectory is never smooth, but we are quite confident in our long-term value to customers and shareholders.

We are setting and will continue to set the standard for what TV and home controls will be in the future. Stay tuned. Operator, I'd like to now open up the call for questions.

(Operator Instructions) Our first question comes from Jeff Van Sinderen with B. Riley FBR.

Paul, I wonder if you can speak a little bit more on, I guess, where you feel you are in getting the manufacturing of the new generation remotes where it needs to be and I guess, the challenges that you still face to getting there? I think you mentioned product rationalization and improvements in factory production as some of the things that you've worked on. And then also, your outlook embeds sequential improvement in gross margin, any more detail you can give us on the order of magnitude on that? And then also, any more color you could give us on what we should expect for the quarterly progression of gross margin this year, just wondering kind of order of magnitude there? And then I guess, kind of the follow-up to that would be particularly, when do you expect gross margin to inflect year-over-year? Is that something we should expect in second half?

Yes. Okay, there is a lot of elements to that question. On the numeric side, I'll in a few minutes let Bryan not answer your question about the future quarter numbers guidance. But I would say that the work on the improvement in margins on a variety of fronts, including the process of transitioning products, which is largely complete from one factory to another. The startup of new products, which is ongoing but we did have a lot of activity in Q4 and do in Q1 as well, probably into Q2 on new products, which is an exciting element of this change. But nonetheless, it can be mildly disruptive. And as Bryan said earlier, while he wasn't going to provide any detailed guidance, our expectation is that you'll see sequential improvements in gross margins. Q4 was particularly not good. It was bad compared to prior year and not a good quarter at all as far as gross margins were concerned. But a lot of work was done in Q4. Our team, our -- we've put more effort into this than ever in Q4 and into Q1. And results are already starting to be seen in our initial results so far in Q1. So you'll begin to see improvements. I think we said this last quarter that our guidance for Q4 was low but things will get better and they already are in Q1. And as Bryan said earlier, we expect to see a continued improvement as this year progresses.

Okay, that's all really helpful. And one follow-up, if I could. Just wondering, I guess, what your latest thoughts are on where the operators stand on the deployment of upgrades. And any feedback you're hearing from the operators in terms of customer satisfaction, maybe metrics in terms of -- any metrics that are available in terms of where they have deployed the new generation systems? And I guess, how you're thinking about the ramp in the upgrade cycle at this point?

Yes, I mean, we're actually feeling a little better about it now. We've actually had some projects come in almost right on schedule. And not from our perspective but again, our customers'. So we have had projects in the past, we had a few last year that got delayed because our customers were refining them. But what we're now seeing is that people are beginning to bring these projects out. Some of the delayed ones are coming out now as well as some that were already planned to be launched in '18. They were never planned for '17 they were always planned for '18. And they appear to be making good progress and getting ready to launch. So it seems to be -- as we've said for a long time, anyone who thinks that these projects aren't going to come to completion just is going to be wrong. The home entertainment industry is changing. The participants in this industry realize that they have to bring a better experience to consumers because their competition is also working on bringing those enhancements to the UI and more entertainment options than ever before and making them easier to get at. This is going on constantly and all of the industry participants that we work with realize this and are working very hard to get these programs done. So we feel -- still feel like we always have about this. There have been delays, we've grown inpatient at times. But they are readying these platforms, many of which we've announced and are either already out. As far as the results, I can't give you any specifics there because if customers share with us any metrics they get on the success of their program, they don't want us to share those outside of our 4 walls. But I will say, to date, we haven't had any that haven't been met with strong, critical acclaim and positive reactions. Consumers, their customers become more engaged with these services once they're put out. People generally, and those on this call have experienced some of these voice platforms can probably attest to this, that they do change the way that you watch TV. They actually really do improve the UI of your TV viewing experience. So all the effects of that or all the reviews that have come from consumers, their subscribers and our customers themselves have been very positive on these platforms.

Our next question comes from Steven Frankel with Dougherty.

Going back to the gross margin issue one more time and maybe help us understand kind of what you've learned having more people on the ground now this quarter that gives you confidence that it will ramp through the year? Is it just time or did you make specific tweaks that are helping drive these margin improvements?

It's both, Steve. The -- first of all, the time -- the one that takes time was just the transition. The movement of products, I think we've explained this in some detail before, when you're moving from one factory to the other, they were not new products at the old factory but they are at the new one. And new products in the factory are always -- the cost curve on them is always a little bit higher the first times -- the first time or two that you run the product, because the process is new to the new location. We probably underestimated the disruptive factor of that. But that is certainly true. And the only solution to that is time. You need to get the product in, you need to get the new factory up and running on that -- the process by which that new product is made. And once that happens, the cost comes down to the mean, it regresses to the mean of what you would expect the cost of that product to be. But the first runs are going to be more expensive than, unfortunately -- we do this every quarter, we'll have new products. We just had an abnormally high number of new products. Not just new products sold to new customers or existing customers but new products at the factory. So that one is a time-related one. As we go through this, we are finding a lot of things as we normally would, things we can improve, processes at the factory that we can simplify. Some of the new products will have 7 tests that get performed versus a traditional product would have only had 2. When we first put that in, we have those 7 tests but we now are working on ways to simplify that process. So it's just like anything, once you start doing it, you'll figure out how to make it more efficient. And I think the team that we have in place there now and we continue to improve it is finding these opportunities and taking advantage of them. But the simplification, the process flow being improved, improving the cost on each individual product. And that's the other thing we've done as we've gone through -- we have a few thousand different products and we've done a rationalization of that and figured out some of the parts or processes we need to change, that we need to re-cost. So there's been a lot of detailed work that the team has done both here and, importantly, in Asia to work on this. And I think, again, as Q1 will attest and future quarters, we're starting to see some effect of this.

And the customers that are coming on later, have you raised prices a bit to help make up for the margin pressure that you've been under?

Well, all of our products are fairly priced. So to any of our customers that are listening to this call, they're always fairly priced. I would say that there may be situations where certain components within our products which have had price increases, there may be certain specific SKUs in our mix that we may change price in as a result of cost, cardboard, certain components in the product, resin there's -- any number of cost factors that we would need to reflect with certain of our customers. But generally, again, we try to make that all implicit in the price we offer to the customer in the first place. There may be cases where we would need to change and we will do that.

And just a couple to keep Bryan from feeling left out. Significant customers as percentage of revenue and an update on the sale of the factory.

Yes. Usual suspects in terms of customer concentration. Actually, Comcast was this quarter, they came in at around 20.9%, so just under 21%. Actually that -- for this quarter that was it, it was Comcast. In terms of the sale of GTC, it's going -- it's coming along, we finished -- we're going through due diligence with them. We're in the resolution phase of their items and we're currently with the government to resolve a couple of them. So that is -- I believe that's imminent. But whenever you're dealing with the government, it's hard to predict exactly when it will close. But right now, I think things are progressing. And again we're trying to resolve some of the due diligence items that are pending. So overall, I feel pretty good about that and I think it should happen relatively soon.

Okay, and given tax reform, what tax rate do you think you'll have on your non-GAAP?

Yes. Good question. I don't think we're going to be materially affected by it. I think our structure -- I think we're pretty well structured from an effective tax rate perspective. So the -- whenever you have a rate reduction in the U.S, it helps. We didn't have a lot of pretax income in the U.S. So it's not going to affect us materially. There are a lot of nuances to the tax reform that I won't bore you with. But overall, from a rate perspective, I don't think that we're going to be materially affected by it in 2018. The one thing that I think will come out positively from this is that is the -- and there's really 2 pieces to it. There's a piece that, on a go-forward basis, 2018 and beyond, but there is also the 2017 effect where you had to actually accrue for foreign earnings abroad. And it's kind of the repatriation tax, essentially. And we are fortunate now that we had a number of foreign tax credits as well as federal R&D credits that we could utilize to offset the cash impact. So right now, we're looking at probably about $2 million to $3 million liability from a cash perspective that we could pay over the next 8 years. So from a cash perspective, it's not a significant impact. But the good news is we'll be able to bring back from the foreign earnings on a go-forward basis for quite some time without much incremental tax federally. And then we're still working through the state impact because we're trying to figure out how the states are going to react. But so far, it looks good. The bottom line is, I think, we'll be able to repatriate foreign earnings in 2018 and beyond without a significant amount of tax. So it'll be more flexible with our -- we'll be much more flexible with our cash balance.

And will that include the proceeds from this factory sale? Or that's a separate tax item?

No, that will be included as well. So the, call it, $48 million to $50 million of cash, of which the majority of the -- the bad news is we had to pay -- a lot of the expenditures were paid upfront so -- and then the cash payment will come in the end. And the good news is that's what's left. So we're going to get an influx of cash. And I don't believe that the tax rate on that will be very high. So we'll be able to repatriate it. And again, be able to use it for various things from acquisitions to maybe potentially stock buybacks if the price is right, et cetera. So it will give us more flexibility than we've had in the past.

(Operator Instructions) Your next question comes from Greg Burns with Sidoti.

The new Comcast remote that you mentioned, is that replacing the XR11? And is there any significant difference in terms of margins or ASPs on that handset?

Yes. It would be -- generally, Greg, it'd be a direct replacement for the XR11, an upgrade to it. And again, we wouldn't give any specifics about price or margin on that. But I wouldn't presume any significant change as a result of it.

Okay. And the TiVo voice remote, you mentioned some of the carriers, I guess, that are using the TiVo platform, that would be launching that remote. But is there -- can you give us a sense of maybe the total installed base of carriers that are using the TiVo platform that might be taking this remote?

Yes, I can't -- I wouldn't give you the number of subscribers, you could look to TiVo for that if they want to answer that question, we don't like to do that very often with customers. They are here in the U.S. they're -- obviously, as far as product sales, for instance remotes, they're not doing business with the Comcast direct TVs of the world, DISH, et cetera, the larger operators. But as I said in the call, there's many mid-tier operators that are using their platform. And I think that other opportunity here is, as the world moves forward and as home entertainment is changing, there may be quite a few smaller or mid-tier operators that the investment to bring about these advanced platforms can be much more significant than the generation of product that came before it. And therefore, some may choose to use a platform like TiVo to bring these features, it may be more efficient to them to just simply adopt an advanced 2-way platform with voice IP connection, et cetera from a provider like TiVo. So we're real happy to be a partner with them. Because I think their success in that area of mid to smaller operators, not just here in the U.S. but elsewhere, could be significant.

Okay. Then and do you have a sense of -- are the carriers like the number of carriers that have opted into take the new remote or platform or -- I'm just trying get a sense of maybe how the rollout might come in those mid-tier operators. Is it going to be on a case-by-case basis in terms of the timing of when they may adopt that remote?

Yes, it will be. As time goes on, Q2, Q3, as time rolls on. And again, we may be able to disclose some of that. TiVo would also be a good source for that to ask them about the launch that they're doing with various partners.

Okay. And Bryan, any major change in the run rate for operating expenses in the first quarter?

No. Q1 should reflect Q4 to a large extent.

At this time I'm showing no further questions. I'd like to turn the call back over to Paul for closing remarks.

Okay, I just want to thank everybody for participating in the call today, and for your continued support of our company. I'm sure we'll be talking to some or all of you as the next hours, days or weeks or months proceed. And look forward to seeing you again next quarter on this very call. Thanks very much.

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