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Universal Electronics Inc. (NASDAQ:UEIC)

Q4 2008 Earnings Call Transcript

February 19, 2009 at 4:30 pm ET

Executives

Paul Arling - Chairman and Chief Executive Officer

Bryan Hackworth - Senior Vice President and Chief Financial Officer

Kirsten Chapman - Investor Relations, Lippert/Heilshorn & Associates

Analysts

Scot Ciccarelli - RBC Capital Markets

Ian Corydon - B. Riley & Company

Tom Kucera - Avondale Partners, LLC

Andy Hargreaves - Pacific Crest Securities

Neal Goldman - Goldman Capital Management

Operator

Good afternoon. My name is Angelea and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Electronics fourth quarter and yearend 2008 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator's instruction) Thank you. Ms. Chapman, you maybe begin your conference.

Kirsten Chapman

Thank you, Angelea and good afternoon everyone. Thank you for joining us for the Universal Electronics 2008 fourth quarter and yearend earnings conference call. By now, you should have received a copy of the press release. If you have not, please contact Lippert/Heilshorn and Associates at 415-433-3777, and we will forward a copy to you. This call is being broadcast over the internet. A webcast replay will be available at www.uei.com for one year.

In addition, a telephone replay of this call will be made available for 48 hours beginning approximately two hours after the conclusion of this call. To listen to the call in the US, please dial 1-800-642-1687 and internationally, please dial 1-706-645-9291. Enter access code 83798059. Also, any additional updated material nonpublic information that might be discussed during this call will be provided on the Company's website at www.uei.com shortly after the call 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 call, management may make projections or other forward-looking statements regarding the future events and future financial performance of the Company, including the benefits the Company expects as a result of the just announced acquisition of Zilog Assets and the continued development and success of the products and technologies including new products and technologies and the Company's home connectivity line of products and software, relationships with new and existing customers including Maxim, EcoStar, Reliance and new market penetrations particularly Asia, the growth expected as a result of the digital-from-analog conversion, the expected growth in digital TVs and DVRs, the Company's continued sales, operating income, net income and EPS growth, the Company's ability to attract and obtain new customers, particularly in Asia, and the strength of the Company's financial position, the effects the Company may experience due to the continued softness in its worldwide market due the current economic environment and the Company's ability to finalize and realize benefits from the pending lease agreement.

Management wishes to caution you that these statements are just projections and actual results and events may differ materially. For further detail, 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, 2007, and the quarterly report on Form 10-Q 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.

On the call today are Paul Arling, Chief Executive Officer and Chairman, who will deliver an overview; and Bryan Hackworth, Chief Financial Officer, who will summarize results. Then Paul will return to provide a vision for 2009.

Now, it is my pleasure to turn the call over to Paul Arling. Please go ahead, sir.

Paul Arling

Thank you, Kirsten, and welcome everybody. I am excited to speak to you today about our ability to deliver record revenues in the fourth quarter and our acquisition announced this morning. First as you saw from our press release this morning by a three-way asset deal with Zilog and Maxim Integrated Products, we acquired Zilog's universal remote control chip business including its intellectual property, customers, sales personnel, full library of infrared codes and engineering facility located in India. As part of the deal, we hired Dr. Norman Sheridan, Zilog's Executive Vice President of Technology and Operations and Chief Technology Officer. We are excited to welcome to UEI Dr. Sheridan and all the personnel related to Zilog's universal remote control business in the United States and Asia.

In addition, the deal involves an agreement to source chips from Maxim. For the first year, we will be the exclusive sales agent of universal remote control chips for Maxim selling the Zilog designs to their current list of customers. We expect a small increase in UEI sales during 2009 as a result of this deal and it will be mildly accretive this year. Beginning in the second year, we will take over full sales and distribution ranks to the current roster of Zilog customers and we anticipate this position will lead to more significant levels of revenue and earnings going forward.

In summary, the acquisition expands both the breadth and depth of our customer base in subscription broadcasting and original equipment manufacturers. We are excited to begin working with some new customers and deepening relationships with existing customers through this transaction.

Turning to our performance, for the fourth quarter, we grew sales approximately 19% over the same period last year to a record $78.7 million and we recorded a record $287.1 million in sales for the full year. This is a significant accomplishment for the Company especially considering the state of the global economy. Looking at our category breakdown, in our business category, while sales came in slightly under our forecast, we grew approximately 35% over the prior year quarter. Our consumer category performed better than anticipated with European retail demonstrating some improvement from the last quarter.

During the quarter, we continued to expand existing customer relationships when new customers and regions we serve as well as furthered penetrate new regions even during these difficult times. A couple of examples include EcoStar and Reliance. We are excited to have started working with EcoStar, one of the world's largest digital media equipment company and a leader in the subscription broadcasting market. We began shipping small volumes to EcoStar during the third quarter with increasing shipment volume in the fourth quarter. We also began shipping small volumes to Reliance during the third quarter that grew in the fourth quarter. We see customer wins like Reliance and others in this region as important to our long-term success as most experts believe this region will exhibit substantial growth over the next five to ten years.

Overall, we believe our broad product portfolio, our solid reputation and the health of our business give us further leverage to bring on new business and stay several steps ahead of our competitors. In fact, our product diversity from basic remotes to mainstream customized devices to high end CD solutions serves us well during times like these. We recognize the challenges implicit in the economic downturn and accordingly, we have reduced headcount in SG&A and certain appropriate areas. Nonetheless, as always, we are committed to long-term growth and shareholder value. As such, we build for our customer's future needs and continue to invest in R&D and product development so that we are able to launch future products that improve our customer's differentiations. We are proud of our accomplishments during 2008 and the business we have built over the long term.

With that, I will turn the call over to Bryan Hackworth, our CFO, to lead us through the financial discussion. Bryan?

Bryan Hackworth

Thanks, Paul. Net sales for the fourth quarter of 2008 were a record $78.7 million, up 18.8% compared to $66.2 million in fourth quarter of 2007, but below our guidance. Business category revenue was $65.1 million, up 35.5% over the fourth quarter of 2007 revenue of $48.1 million but below our guidance due primarily to certain orders in the business category, both in the US and international, being delayed until 2009. Our consumer category revenue was $13.6 million, within our guidance but lower than the fourth quarter 2007 revenue of $18.2 million.

Gross profit for the fourth quarter was $25.3 million or 32.2% of sales, within guidance and compared to 37.2% of sales a year ago. R&D expense was $1.9 million, compared to $2.2 million in the fourth quarter of 2007. SG&A expenses were $15.6 million, which included approximately $300,000 in expenses related to M&A activities compared to $14.4 million in SG&A for the same period last year. Total operating expenses were $17.5 million for the fourth quarter of 2008, lower than our guidance due to a concerted effort to offset the shortfall in net sales and compared to $16.6 million in the fourth quarter of 2007.

The 2008 fourth quarter operating expenses included $733,000 of employee stock-based compensation expense compared to $703,000 in the fourth quarter of 2007. Interest income for the quarter was $368,000 compared to $905,000 in the fourth quarter of 2007 reflecting significantly lower interest rate.

The effective tax rate was 33.2%, slightly above our guidance of 30.5% to 32.5% due primarily to the lower than expected Federal R&D credits. Net income for the fourth quarter of 2008 was $5.8 million or $0.42 per diluted share, slightly lower than our guidance compared to $6.1 million or $0.40 per diluted share in the prior year's quarter.

Now for the twelve-month period ended December 31st, 2008, net sales were a record $287.1 million compared to $272.7 million in the same period of 2007, an increase of 5%. Gross profit was $96.2 million or 33.5% of sales compared to $99.4 million or 36.4% of sales a year ago. Net income was $15.8 million or $1.09 per diluted share compared to $20.2 million or $1.33 per diluted share in the prior year period.

Now, turning to our cash flow and balance sheet review. During the twelve-month period, we generated $30.2 million in cash flow from operations. We repurchased approximately 200,000 shares in the fourth quarter, bringing our twelve-month total to approximately 1.1 million shares. We are committed to leveraging our financial strength to generate value for our shareholders. We have 310,000 shares remaining in our repurchase plan and intend to continue to purchase share as appropriate.

We end the quarter with cash and cash equivalents of $75.2 million compared to $86.6 million at December 31st, 2007. DSOs were 68.4 days at December 31st, 2008 compared to 81.7 days at December 31st, 2007. Net inventory churns were 4.9 churns at December 31st, 2008 compared to 4.8 churns at the same time last year.

And now for our guidance, this quarter guidance covers a number of factors. First, we expect our recently announced acquisition in Zilog Assets and our agreement with Maxim will be mildly accretive immediately in the first year. Overall, we recognize the difficult level in economic environment. As a result, our sales estimate assumes a continued sluggish retail market. We expect our business category sales to continue to be strong and grow in 2009 as a result of customer wins that took place in the second half of 2008 having a full year impact in 2009 and due to the recently announced acquisitions.

Regarding operating expenses, as Paul mentioned, we recently analyzed organization and processes which resulted in headcount reduction. Outside of a long-term protracted economic downturn, we do not expect to implement any dramatic changes to our current customers. For the first quarter of 2009 compared to the first quarter of 2008, we expect revenue of between $63.5 million and $66.5 million, growth of between 4% and 9%. We anticipate gross margins for the first quarter of 2009 will be approximately 32% of sales plus or minus one point compared to 35.5% of sales in the first quarter of 2008.

The decrease in our gross margin percentage in the first quarter of 2009 compared to the first quarter of 2008 is due primarily to the strengthening of the US dollar versus the British pound and the euro, lower contribution from the consumer category which yield a higher gross margin in our business category and consumers turning to value oriented products that yield lower gross margins. Although our gross margins are currently under pressure, we do expect our gross margins to improve in 2009 as we have identified cost-saving initiatives we expect to implement throughout 2009.

In addition, we have pending licensing agreement that we expect to close during the year. We expect operating expenses for the first quarter of 2009 to range from $20 million to $20.5 million including employee stock-based compensation charges of approximately $840,000 as well as approximately $800,000 to $1 million deal expenses related to our recent acquisition.

The 2008 first quarter operating expenses were $19.1 million including approximately $1 million in employee stock-based compensation charges. GAAP EPS is expected to range from a $0.01 to $0.05 per diluted share. This compares to $0.17 per diluted share in the first quarter of 2008. For the full year of 2009 compared to full year of 2008, we expect total revenue to grow from 0% to 5% over 2008 revenue of $287.1 million. We expect GAAP EPS to grow from 0% to 8% from the $1.09 per diluted share recorded in 2008.

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

Paul Arling

Thanks, Bryan. We are continuing to focus on building a great company. We are expected about our transaction with Zilog as it significantly increases our position in the universal remote control market and further solidifies our position as the technology leader within the industry. We will continue to prudently invest in the future. As we have done during economic downturns in the past, we remain devoted to providing the innovative solutions and tools that serve the ever-changing trends in the industry whether it is the switch from analog-to-digital, non-DVR to DVR or standard television to high definition, UEI will be there.

In fact during these particularly trying times, UEI will confidently pursue its goal of growth adding new customers and investing in and introducing new technologies. We have stayed and will continue to stay true to our strategic vision to become the leader in wireless control technology, stay tuned.

I will now open up the call for Q&A. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Scot Ciccarelli - RBC Capital Markets.

Scot Ciccarelli - RBC Capital Markets

Couple of questions here. Can you guys highlight some of the key technologies and customers that you guys will be obtaining with the Zilog deal and what did the deal cost?

Bryan Hackworth

I will tell you the deal cost; the deal cost approximately $9.5 million of cash.

Paul Arling

In terms of the technologies that we will be acquiring, the Zilog has long been a competitor in the infrared database side of the equation and the universal remote control market. They have held a number of customers across the years. They have done a very good particularly in certain regions, Asia in particular. They have an engineering center there where they perform software, firmware and capture services in India and they have done a fantastic job there. They have got relationships with major OEMs, major consumer electronics companies and subscription broadcasters mainly through some of the remote control factories in the industry so we will be taking those over.

Some of these are current customers of ours that will build on the relationship with and others will be new customers but we are very excited about adding their portfolio of technology to our own with this deal.

Scot Ciccarelli - RBC Capital Markets

Would you expect their financial structure to be similar to yours just in terms of when we are trying to figure out impact margins, etc?

Paul Arling

Well, somewhat. We have, again in the first year, the sales agency relationship with Maxim and then the second year, we will take over full sales and distribution rights. So they reported I think sometime last year that this part of their business was doing approximately plus or minus $20 million in sales. During our first year, we will do obviously less than that with the sales agency relationship but longer term; we will become a full sales and distribution agent for the Zilog business.

Scot Ciccarelli - RBC Capital Markets

Okay, that is helpful. And then you guys mentioned some delays in the business category. Just given what is going on in the environment, how comfortable are you that they are indeed delays and not something more ominous?

Bryan Hackworth

I think the biggest reason in fact here, Scot, is that we guidance between $81 million and $85 million and we came just a couple of million short of the low end of our range. We were off quite much more in that that I am slightly concern but at the end of the any quarter, sometimes we get some push outs, sometimes we get pull ins and sometimes they offset. This time we happen to have a little more couple of million dollars to sit through but again if you look at it, it is only a couple of percent off of our range of $81 million to $85 million. So I do not think that is a sign of the future. We are optimistic in the future of the business categories.

Scot Ciccarelli - RBC Capital Markets

No, but it almost sounded like you were referencing some specific deal or deals and what I am trying to figure out is, is that something that you are comfortable you will recognize in the first quarter or is it just a typical course of business and given the environment, there were just more that slipped in, came in.

Bryan Hackworth

We are comfortable we will recognize this in 2009 so again, it is only off by couple of percent and for me, it is not a big deal. It happens. Sometimes we get pull out, sometimes we get pull ins. But I am not worried about that.

Operator

Your next question comes from the line of Ian Corydon - B. Riley & Company.

Ian Corydon - B. Riley & Company

Just a follow up on the Zilog question, in year one, are you sort of getting a commission from Maxim and then how does that switch in year two and do you anticipate you will be primarily selling chips or will that get converted to remote sales?

Paul Arling

Well at the core of the deal is the fact that we will be a sales agent. We will be responsible for all the customers from day one, from this day forward but the financial range that we have with Maxim, we are not disclosing the exact details of it. They will remain a vendor of ours. We have a longer term arrangement with them to buy chips from them. They are a current vendor of ours by the way, this is not new. Maxim is a current silicone vendor to us.

So the deal includes us working together on this particular business for the next year and then after the first year, we take on full sales and distribution rights to all of the, what was formally Zilog business.

Ian Corydon - B. Riley & Company

And looking at fiscal 2009, could you talk about what your growth expectations are for international versus domestic?

Paul Arling

Actually we do not disclose international versus domestic and actually this year, as we have always said, the most difficult forecast during the year is the full year guidance after Q4 because the market had been so volatile and it is very unpredictable. What we are doing is we are staying away from even giving guidance on the business versus consumer categories and we are giving guidance overall which we provided because we think we are going to grow 0% to 5% of the top line and 0% to 8% on the bottom line.

Ian Corydon - B. Riley & Company

Okay and I did not catch, did you buyback any stock in the fourth quarter?

Paul Arling

We did. We bought back about 200,000 shares in the fourth quarter.

Ian Corydon - B. Riley & Company

Okay and then last is just, in 2009, the interest income in the fourth quarter is at about reflective of what you think you will get on your cash in 2009 and then what are you looking at for the tax rate?

Paul Arling

Well I think the interest rate is actually a little lower than they were in the Q4 so I would say it is not reflective and actually right now, we are actually staying away from giving guidance anything in between the top line and the bottom line so I am not going to provide a tax rate.

Operator

Your next question comes from the line of Tom Kucera - Avondale Partners.

Tom Kucera - Avondale Partners, LLC

This is Tom Kucera for John Bright. Few questions I wanted to follow up on Zilog. First, when did the acquisition close?

Paul Arling

Yesterday.

Tom Kucera - Avondale Partners, LLC

Okay and just to understand the customers a little better, so we are talking I guess customers that are going to fit, they are going to fit into the consumer category basically not so much subscription broadcast business.

Paul Arling

No, actually most of these customers wind up in the business category.

Tom Kucera - Avondale Partners, LLC

But maybe more the OEM side of business.

Paul Arling

Yes.

Tom Kucera - Avondale Partners, LLC

Okay and also if you could provide anything more in terms of profitability, you said mildly accretive. Is it fair to say maybe $0.00 to $0.03 that kind of range?

Paul Arling

Yes, I would rather stay away from giving the exact numbers. I will say that is like, we are not going to make an investment unless we believe that the return will be great on our cost of capitals.

Tom Kucera - Avondale Partners, LLC

Okay and also, could you maybe give a headcount number and also say how much headcount you are taking on from Zilog?

Paul Arling

Yes, at the end of 2008, we had about 430 employees and with the acquisition of Zilog which we add about 115 employees.

Tom Kucera - Avondale Partners, LLC

Okay and also, about how many of those in India?

Paul Arling

The majority of them.

Tom Kucera - Avondale Partners, LLC

Okay, actually few other questions here. One, I do not know if you could talk about some of the cost-saving measures you are aiming for in gross margins.

Paul Arling

They are across the board and throughout the year, some of the, the oil price has went up throughout the year and now they have come down so we are going to come back to go back to our factories and our vendors and try to get some of that increase back. We are pretty confident we will get it back. You should see that throughout the rest of 2009.

Tom Kucera - Avondale Partners, LLC

Okay and also any comments on the consumer category, how that has trended within the US and for example what kind of traction you have seen outside remotes as drawing those through Audiovox?

Paul Arling

Well, we had not begun our US distribution of that product yet. The product has done well thus far. In Q4, we distributed in Europe and had some good success with it but it was only in the fourth quarter because the product shifts late in Q4. As far as the US is concerned, we have not distributed that product here yet. There were announcements made around CES that we will be distributing it with Audiovox in the United States and that will come a little bit later this year.

Tom Kucera - Avondale Partners, LLC

Alright and last question, Bryan I guess there is an other income line, was that an FX gain?

Bryan Hackworth

That is correct and some related to hedging.

Operator

(Operator's instruction) Your next question comes from the line of Andy Hargreaves - Pacific Crest Securities.

Andy Hargreaves - Pacific Crest Securities

Just a follow up, Bryan, I am wondering what your estimate to your cost to capital is.

Bryan Hackworth

I cannot give that either. You are trying to figure a way to back into that.

Andy Hargreaves - Pacific Crest Securities

I was trying to do average in this. Is the $9.5 million you guys paid comparable to I think it was $38 million that you had offered a year and a half ago or a little over a year ago? I mean are you getting the same assets?

Paul Arling

No, it is not the exact same deal but we were focused on the universal remote control market before and we are again, this is the three-way deal between us, Maxim and Zilog so it is probably not comparable to any deal we have proposed in the past.

Andy Hargreaves - Pacific Crest Securities

Okay and then on the high margin licensing agreement you are expecting to close, is that just database licensing or is it something else?

Paul Arling

It could self database and/or patent.

Andy Hargreaves - Pacific Crest Securities

Okay, wondering, two questions just if you can take quantitative or qualitative but within your guidance, how much are you accounting or how much are you assuming for the MSO digital-to-analog converted boxes?

Paul Arling

I am not going to give you a specific number, Andy. What we did was we bring everything to business category obviously. As I mentioned, one of the drivers of the growth in the back half of the quarter and for 2009 is the fact that we had some pretty good wins in the back half of 2008 which we evaluated to going back in 2009.

Andy Hargreaves - Pacific Crest Securities

Okay and then also just if you can talk qualitatively about this one but in the guidance, how much growth are you expecting within the existing customer base versus acquisition of new customers? I know when you guys originally gave guidance last year; you were assuming some customer win. Are you assuming new customer wins this year or you are pretty much assuming you are going to run with the customers that you have?

Paul Arling

We are always looking for new customers wins but like I said already, the wins in the later half of last year will give a full year impact in 2009 so that is the picture I know.

Andy Hargreaves - Pacific Crest Securities

Okay and then last, just wondering on your payables why it jumped in the quarter and if it has something that is sustainable.

Paul Arling

The payables, probably if you look at inventory levels, inventories went up $12 million year-over-year and then it went up to $15 million. So they are approximately offset so we did, I think we did a pretty good job at vendor management throughout the year.

Operator

Your next question comes from the line of Neal Goldman - Goldman Capital Management.

Neal Goldman - Goldman Capital Management

First on that inventory question, is it higher than you would like it and what comes when you take out of that in the course of this year?

Bryan Hackworth

I would not say it is higher than expected. Our inventory churns are pretty much flat with the prior year. It is negative 4.9 churns kind of this year and it is 12.8 when we look at our last year. So it is probably around 5 which is pretty typical for us.

Neal Goldman - Goldman Capital Management

What was the actual share count at yearend?

Bryan Hackworth

It was 13.9 million dilutive.

Neal Goldman - Goldman Capital Management

Okay. How much did stock-based comp costs us in terms of per share for 2008?

Bryan Hackworth

I think for the year, it is about 2.8 million.

Neal Goldman - Goldman Capital Management

Is that $0.20 or that is pre-tax?

Bryan Hackworth

That is pre-tax that we calculated.

Neal Goldman - Goldman Capital Management

So it is about…

Bryan Hackworth

I think the actual number is about 3.8 million in stock-based compensation for 2008. Or it is about 900,000 in the quarter, $2.6 million.

Neal Goldman - Goldman Capital Management

That is after tax or pre-tax?

Bryan Hackworth

Pre-tax.

Neal Goldman - Goldman Capital Management

So it will be about $2.6 million, right, after tax?

Bryan Hackworth

Probably.

Neal Goldman - Goldman Capital Management

So it is about $0.18 a share, right?

Paul Arling

On 14 million shares.

Neal Goldman - Goldman Capital Management

Okay, what was the overall effect of currency this past year given the decline in the pound and what kind of assumptions you are making for the new year?

Bryan Hackworth

For Q4, I am going to look here, I think it was about $2 million on the top line and as far as what we expect in the current year, I do not know. I cannot predict that.

Neal Goldman - Goldman Capital Management

You are projecting that in your yearend earnings estimates, right?

Bryan Hackworth

Yes. We do a budget, we assume the current rate.

Neal Goldman - Goldman Capital Management

Okay, in terms of the Zilog deal, what were you buying more on the first year than you are now because you would basically looking for the remote part of the business, right?

Bryan Hackworth

Yes, we are still able to acquire most, actually everything that we really wanted. The one thing that we were looking at on the first go round was the entire remote control business including the management of the fab and the chip design. In this deal we are not or not doing that. We are taking over the, what I guess I would call the front stage, the software, former design, the design of the database so the software design that is embedded on the chip which UEI currently does and the customer relationships which UEI currently does as well.

So what we have done is structure the deal with gives us exactly what was strategically important to us. Also we gave Maxim what was strategically important to them because they are obviously a business engaged in the design of those types of parts and the whole variety of other parts and the management of the fab which they are fantastic at. So I think this deal was structured very well strategically to match with each companies best points, ours being the customer relationships and that later value add on the chip, patents, firmware, software and database codes which we have been doing here for years.

So I think in the end, what we ended up with what is exactly what best fit us strategically.

Neal Goldman - Goldman Capital Management

So it was a significantly better deal. I forgot the actual numbers but in terms of A, what you wanted to buy and also the price you pay, correct?

Bryan Hackworth

Yes, we cut a very good deal here to work for us and for everyone really. This is the exact business we wanted to get at we believe to be a very good price.

Operator

(Operator's instruction) There are no further questions at this time. I would now like to turn the call back over to Mr. Paul Arling.

Paul Arling

Okay, thanks everybody for joining us today. We wholeheartedly believe and have proven before that during challenging times, strong company get stronger. We are focused on earning new business positioning our Company for long-term growth and providing long term value to both our customers and our shareholders. We look forward to talking to you all soon. Thanks very much for tuning in and we will talk to you next time.

Operator

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

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