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Universal Electronics Inc. (NASDAQ:UEIC)

Q1 2010 Earnings Call Transcript

May 6, 2010 4:30 pm ET

Executives

Kirsten Chapman – IR, Lippert/Heilshorn & Associates

Paul Arling – Chairman and CEO

Bryan Hackworth – SVP and CFO

Analysts

Scot Ciccarelli – RBC Capital Markets

Steve Frankel – Brigantine Advisors

John Bright – Avondale Partners

Ian Corydon – B. Riley & Co.

Jonathan Goldberg – Deutsche Bank

Operator

Good afternoon. My name is Natasha and I will be your conference operator today. At this time, I would like to welcome everyone to the UEI first quarter 2010 earnings 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 Instructions)

Thank you. Ms. Chapman, you may begin your conference.

Kirsten Chapman

Thank you, Tasha. Good afternoon, everyone and thank you for joining us for the Universal Electronics 2010 first quarter conference call. By now, you should have received a copy of the press release. If you have not, please contact Lippert/Heilshorn & Associates at 415-433-3777 and we will forward a copy to you.

This call is being broadcast live 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 replay in the U.S., please dial 800-642-1687 and internationally, please dial 706-645-9291. Enter access code 70364425.

Also, any additional updated material nonpublic information that might be disclosed 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 conference 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 its development and of new and innovative products and technologies, including the company's recently introduced QuickSet, XMP-2 and One-For-All smart control technologies.

The expected continued global growth in HDTVs and DVRs; the company's ability to successfully anticipate the needs and demands of the consumer with respect to new and more advanced products and technologies; the continued strong relationships with the company's existing customers; the company's ability to attract and obtain new customers, particularly in Asia; the strength of the company's financial position and the effects the company may experience due to the continued softness in the world markets due to the global economic environment.

Management wishes to caution you that these statements are just projections and actual events or results may differ materially. For further detail on risk, management refers you to the press release mentioned at the onset of this call and the documents the company files from time to time with the SEC, including the annual report on Form 10-K for the year ended December 31, 2009 and the periodic reports the company has 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. Bryan Hackworth, Chief Financial Officer, will summarize the financials. Then Paul will return to provide vision for 2010.

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

Paul Arling

Thank you, Kirsten and welcome, everyone. In the first quarter of 2010, we reported solid revenue of $71.4 million and improved earnings per share of $0.13. Our results are based on sound execution and innovations. Throughout our 20 year history, UEI has successfully cut through the complexity of the ever changing home entertainment experience to provide the kinds of technologies that make people's lives simpler.

A key to executing this strategy is mastering three important consumer needs to connect, to control and to interact. Our expertise in all things wireless, infrared and radio frequency, including protocols such as Bluetooth, R4CE and WiFi, enable us to provide consumers with customized technology solutions that connect virtually every device in their home.

Our global database of control codes provides consumers with the ability to control every device in their home. UEI has over 180 control patents and over 200 customers across the globe, including OEMs, subscription broadcasters and retailers.

In 2009, while the economy suffered, UEI continued executing on our strategy by introducing successful new products and technologies. An example of this kind of innovation is our XMP-2 technology, which is a two way protocol designed for interactive applications and services.

XMP-2 enables our QuickSet automated remote control setup solution, which is in use by both Onkyo and DIRECTV. QuickSet uses interactive onscreen menus to make setting up a universal remote control almost effortless. It also saves pre-programmed settings, enabling consumers to transfer configurations to a replacement remote, which translates into fewer service calls and lower operating costs for our customers.

Another example of our innovation is a recently introduced retail product, our One-For-All SmartControl. In addition to controlling all of the consumer's digital and high-definition equipment, SmartControl includes three pre-defined keys that enable one-button access to common user activities, watch TV, watch a movie and listen to music. The ultimate result is an intuitive, modeless home-theater-system control experience at an affordable price. But potentially the most important new feature in this product is UEI's SimpleSet, a simple three-step universal device setup that does not require a manual or a computer and can literally be set up in less than a minute.

One-For-All SmartControl began shipping in Europe and other international markets earlier this year. The North American version will be available through our retail partner, Audiovox Accessories Corporation, later this year.

As we continue to execute on our strategy to win new customers and deepen relationships with existing customers, we have grown our business both domestically and internationally. We recently started shipping universal remote controls to Astro All Asia Networks, Malaysia's largest subscription broadcaster and the only HD service provider in the country. We are providing remotes for its new direct-to-home satellite pay-TV service, which rolled out this year.

The evolution to new and more advanced technologies continues as consumer behaviors and spending trends support this movement. The transition from analog to digital, from non-DVR to DVR and from standard definition to high definition drives demand for new services and devices across the globe. It is our goal to be the interface with a rapidly changing, yet increasingly connected home entertainment experience.

With that, I'll 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 first quarter of 2010 were $71.4 million, compared to $71.1 million in the first quarter of 2009. Business category revenue was $60.2 million, consistent with the first quarter of 2009 revenue of $60.9 million. Our consumer category revenue was $11.2 million, an increase of 10% over the first quarter 2009 revenue of $10.2 million. Gross profit for the first quarter was $22.1 million or 30.9% of sales, compared to 30.1% in the first quarter of 2009.

Total operating expenses were $19.4 million, compared to $19.9 million in the first quarter of 2009. Breaking down our operating expenses, R&D expense was $2.8 million, compared to $2.1 million reported in the first quarter of 2009, reflecting our continued investment in innovation and future products. SG&A expenses were $16.6 million, compared to $17.8 million in the first quarter of 2009.

Operating income was $2.7 million in the first quarter of 2010, compared to $1.5 million in the first quarter of 2009. Interest income for the first quarter of 2010 was $83,000 compared to $139,000 in the first quarter of 2009, reflecting significantly lower interest rates.

The effective tax rate was 34.7% in the first quarter of 2010, compared to 39.1% in the first quarter of 2009. The decrease in our effective tax rate is due to our growth in pre-tax income, resulting in fixed costs such as interest expense being little more efficiently. Net income for the first quarter of 2010 was $1.8 million or $0.13 per diluted share, compared to $796,000 or $0.06 per diluted share, in the prior year's quarter.

Now, turning to our cash flow and balance sheet review. During the three-month period ended March 31, 2010 we generated $4.9 million in cash flow from operations and repurchased approximately 58,000 shares for $1.3 million. We ended the quarter with cash and cash equivalents of $79.4 million, compared to $78.3 million at December 31, 2009. DSOs were 71 days at March 31, 2010 compared to 69 days at March 31, 2009. Net inventory turns were 4.7 turns at March 31, 2010 and March 31, 2009.

And now for our guidance. For the second quarter of 2010, we expect revenue between $76.5 million and $79.5 million compared to last year's revenue of $78.3 million. We anticipate gross margins for the second quarter of 2010 will be approximately 32.5% of sales, plus or minus one point compared to 32.6% of sales in the second quarter of 2009.

We expect operating expenses for the second quarter of 2010 to range from $19.3 million to $19.9 million compared to operating expenses of $19.8 million in the second quarter of 2009. GAAP EPS is expected to range from $0.25 to $0.29 per diluted share. This compares to $0.27 per diluted share in the second quarter of 2009.

For the full year 2010, we continue to expect revenue to range between $325 million and $340 million, which represent growth of between 2% and 7% compared to last year's revenue of $317.6 million. As a result of our expected revenue growth coupled with our ongoing cost containment efforts, GAAP EPS is expected to range from $1.20 to $1.35 per diluted share or growth of 14% to 29% over the $1.05 per diluted share recorded for the full year 2009.

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

Paul Arling

Thanks, Bryan. UEI has a strong track record of providing the control solutions, connection technologies and interactive communication protocols that simplify the home entertainment experience. As home entertainment devices and content escalate and expand, we will continue to provide the intelligent and simple solutions that meet our customers and consumers future needs.

We continue to invest in innovation. In many ways, our success over the years has been driven by it, but new technologies and applications are only valuable if they deliver valuable solutions to our customer and ultimately, to consumers. We are working on breakthrough solutions that solve everyday problems for consumers. While continuing to support ease of use and minimizing the pain of mode confusion, we are moving beyond that as well.

We are aiming to make setup automatic and completely eliminate mode confusion. We believe with the combination of the technologies we have available to us, combined with our own ingenuity, we can achieve such goals. And we believe the results for our consumers, our customers and ultimately our shareholders will follow. Stay tuned.

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

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Scot Ciccarelli with RBC Capital Markets.

Scot Ciccarelli – RBC Capital Markets

Hey, guys. It's Scot Ciccarelli.

Paul Arling

Hi, Scot.

Scot Ciccarelli – RBC Capital Markets

First question is what was the – is there any way to size the sales impact in the quarter from the dual sourcing of the major customer that you cited last quarter?

Paul Arling

No. What we did say on the last call, Scot, was that we expected to impact the full year by about $25 million.

Scot Ciccarelli – RBC Capital Markets

Right. And I guess what I'm trying to figure out is should we assume that's kind of pro-rata throughout the course of the quarter? Like what's the best way to kind of estimate the first quarter impact, Bryan?

Bryan Hackworth

I would say the first – it leans more towards the first half, because we had nearly 100% of the business during the first half of the year. The back half of the year it's started to win a little bit, so the comps are more difficult in the first half of the year than they will be in the second half.

Scot Ciccarelli – RBC Capital Markets

Okay. That's helpful. And then I guess, I'm kind of looking at the mix and retail was not a lot, but a little bit more of a percentage of the total. So I guess I would have expected gross margins to be a little bit better and then maybe SG&A a little bit higher and yet it was the opposite. Am I missing something in terms of the gross margin and SG&A or can I not really interrelate them like that?

Bryan Hackworth

No, as far as SG&A is concerned, we actually have a pretty strong hold on expenses. We have some cost containment efforts in place, so we're running a pretty tight ship. So we came in at the low end, which is good. In terms of your assumptions on the gross margins, you're correct. Typically, when you have a higher percentage of consumers, it's going to push up the margins. What we did have in Q1 2010, which we haven't had in a while, is we actually had a bit of air freight and what happened was we had a factory that extended our lead times on a product and we ended up depleting some of our safety stocks and the demand was still strong and we ended up having to air ship to meet the customer service levels. And that happened throughout the quarter pretty much ratably. Now, we have that under control. My understanding is in mid May, that the air shipments should stop, but we tooled up at another factory but it did adversely affect the gross margins.

Scot Ciccarelli – RBC Capital Markets

How much of a heads up do you get when it comes to you're going to have to air ship during the course of the quarter? Because over the last couple years, it happens to pop up at least one quarter a year and I'm just wondering if there's any way for us to get a better handle on when that may happen or what's the right way to track it.

Bryan Hackworth

Yes. It's tough to predict. To be honest with you, we didn't – it's not as if we knew, the lead time that we get in terms of our factories telling us that they're extending their lead time isn't much, so sometimes we, unfortunately are surprised as well. But we try to react quickly. Like I said, we've tooled up at another factory and to try and mitigate the air shipments. Because the last thing we want to do is adversely affect our customers. So we want to keep the customer service level high, which we do.

Scot Ciccarelli – RBC Capital Markets

Okay. Great. Thanks a lot, guys.

Operator

Thank you. Your next question comes from the line of Steve Frankel with Brigantine Advisors.

Steve Frankel – Brigantine Advisors

Now, let me follow up on Scot's question. If I look at guidance for the second quarter and combine that with Q1, the growth you're talking about for the year is basically back half driven. Is the growth a function of easier compares because of this second source issue or is there something else that's going to happen in the second half that's going to begin to make the comparisons to look better?

Bryan Hackworth

Well, it's both. We do have growth in existing customers. If you take a look at Q1, as I was mentioning previously, the loss that we got in terms of one of our large customers going to a dual source arrangement, affected Q1 pretty heavily, yet we still maintained our sales levels. We still are consistent with prior year's Q1. So that was obviously made up for in other areas, which is basically growth in existing customers as well as obtaining new customers. And we expect that to continue in the back half of the year, plus the fact that, as I previously mentioned, the orders started to wane in the back half of last year, which does make the comparison for the current year easier on the back half.

Steve Frankel – Brigantine Advisors

And assuming the air freight problem goes away in the back half, should you have better gross margins in the back half of the year than you do in the front half of the year?

Bryan Hackworth

Yes.

Steve Frankel – Brigantine Advisors

And that's all the questions I have for now. Thank you.

Operator

Thank you. Your next question comes from the line of John Bright with Avondale Partners.

John Bright – Avondale Partners

Thank you. Paul, you talked about in your prepared remarks the SmartControl deployment in Europe began earlier this year, any feedback from that deployment? And then also, when is the deployment expected this year in the North American market?

Paul Arling

Yes. On the first question, we've rolled it out. It's received a lot of favorable reviews in the market, both from the press and from the trade. Obviously, it's important to get it from the trade. The product is selling well. It's again, it's very simple to utilize. It's got your favorite activity keys, watch TV for the vast majority of users, whoever relatively simple setup, you have TV set-top box and sometimes an AV receiver. And this thing can be set up in a minute. So right out of the box, pop the batteries in, set it up and just hit the watch TV button and the system configures itself. So it's getting favorable reviews, sold at a relatively inexpensive price point and it's selling quite well. In terms of the introduction in the U.S., I can't give you an exact date yet, but our expectation is it'll be later this year, probably the back half of the year.

John Bright – Avondale Partners

Got you. And when you talked about the price point for the product order of magnitude, because we seem to see maybe the Harmony brand from Logitech coming down in price points to try to compete, are you seeing more of that, A? And then, B, is this a price point that will compete against that, bump up against it?

Paul Arling

Well, depending on what exactly the price point here is in the U.S., I can't really disclose that yet, but we're looking at something in the neighborhood of probably $50 U.S. And eventually, when rolled out in the U.S., far less than that.

John Bright – Avondale Partners

Got you. What about on the subscriber side? Two next generation, if you will or stair steps beyond the analog, digital, et cetera., HD seems to be getting a lot of discussion or multi-room DVDs capability and Internet TV. Are you seeing that and designing for the next generation remotes and are these both instances where UEI could see some opportunity?

Paul Arling

Yes. We are in discussions with most of the operators that are rumored to be doing these things or have announced that they are working on these types of technologies. We typically get in at the design stage because they wish to have, obviously, a tight integration between the services and the controller, which is typically our universal remote. And, so, yes, all that is under way.

John Bright – Avondale Partners

Is that something that's a 2010 calendar thing that we'll see in the holiday season this year?

Paul Arling

Well, I think you'll see some of it. I don't know that it will be – it's not clear yet, exactly how big that will be. We're not counting on it being big this year, but usually these things have a design lead time of anywhere from 6 months to 18 months to 2 years, depending on what technology it is we're talking about, so we get in early, as Bryan and I both said, spend some money on the innovation here, on innovative new products, control features that are for these new boxes or new services that are being rolled out and then typically see the design win and the implementations anywhere from 6 months 2 years later.

John Bright – Avondale Partners

Bryan, two follow-up questions, one on the tax rate. Albeit it somewhat low or a little bit lower this quarter, 37 is probably a good number to use for the year?

Bryan Hackworth

I would look at last year's. I would say 34%, 35%.

John Bright – Avondale Partners

Okay. And on the gross margins, you seem to consistently give 32.5% as gross margin, plus or minus one percentage point, other than product mix and air freight, anything else that we should think about that goes into that equation?

Bryan Hackworth

FX rates play a part, as well. We sell – in Europe, we sell in euros as well as British pounds, yet the cost of goods are in dollars, so as the dollar strengthens and weakens versus those two currencies it could – it can help or hinder our gross margin range.

John Bright – Avondale Partners

Got you.

Bryan Hackworth

Now, there's also a natural hedge on the operating expense side because we have – our expenses are in euros in Europe, so on the bottom line, I'm not saying it's a perfect hedge, but there is a natural hedge there.

John Bright – Avondale Partners

Got it. Thank you.

Operator

Thank you. Our next question comes from the line of Ian Corydon with B. Riley & Company.

Ian Corydon – B. Riley & Co

Paul, did you say that the SmartControl remotes would start at a $50 price point in the U.S.?

Paul Arling

No, it'll probably be below $50, but we're not disclosing that yet, that has to be worked out through our distribution partner, Audiovox.

Ian Corydon – B. Riley & Co

Okay.

Paul Arling

Yes. But our European price is around that level.

Ian Corydon – B. Riley & Co

And that would be, what – significantly higher margin than a standard remote, I would think?

Paul Arling

We typically don't give margin levels by product, but it's a slightly higher priced product than the average.

Ian Corydon – B. Riley & Co

Okay. And do you have any update on the QuickSet remotes with MSOs? Do you have any wins there? Do you have any feedback on the rollouts that are happening?

Paul Arling

Yes. Well, there are a lot of discussions going on, but we don't have anything to publicly report yet, on that. We've implemented and shipped to DIRECTV, but beyond that, we have nothing to report at this time.

Ian Corydon – B. Riley & Co

Okay. Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Jonathan Goldberg with Deutsche Bank.

Jonathan Goldberg – Deutsche Bank

Paul, I was wondering if you could just give us some more color on what you're seeing among your major U.S. pay-TV customers. How are they treating you? How does the industry look? Any color you could give there would be appreciated.

Paul Arling

Sure. Because some of them may be listening on the call, they treat us just fine. Yes. I mean, the relationships there are strong, in many cases, we are speaking with them about platforms that are, like I said earlier, a year out. We're brought in early to talk about control mechanisms or control solutions that can be utilized to leverage the new services that they wish to put out with these new designs. We obviously can't really talk much about those on this call or until they become more public or are released by those customers, but our relationships there are very strong. In many cases, we have decade long relationships with these customers. We've been technology providers to them for quite sometime. I would say the relationships now are as strong as they've ever been and they – no they treat us well and we treat them well. We build them a great product, deliver it on time. Sometimes we have to airship a little bit of it, but that keeps the relationship strong. And so I think it's – this part of our business has been good for some time and will remain so. Even during the downturn, to be fair, I mean, they were still moving forward. I would say that if I look back 10 years, they're investing as much in innovation and new technology today than they ever have been. So despite the economic trends, they're looking forward at new applications, new services and ways to enhance the entertainment experience and we're alongside them working on new technologies to help support that.

Ian Corydon – B. Riley & Co

Okay. And then to what extent did the air freight urgency arise because of sort of surprise orders? Was it a supply problem or a demand problem is what I'm asking?

Paul Arling

There were no surprise orders.

Ian Corydon – B. Riley & Co

Okay.

Paul Arling

Yes. That's why I say it happened ratably throughout the – the air freight was incurred ratably throughout the quarter.

Ian Corydon – B. Riley & Co

Okay. Great. Thank you.

Operator

(Operator Instructions). There are no further questions at this time. I would now like to turn the call back to management for closing remarks.

Paul Arling

Okay. Thank you for joining us today. We'll be participating at the NCTA Cable Show next week showcasing some of our new technology and solutions. Bryan and I will be presenting at the B. Riley & Company Investor Conference on May 26 and also the RBC Consumer and Retail Conference in early June. We look forward to seeing some or all of you there. Thanks for participating today and goodbye.

Operator

Thank you. This concludes today's conference call. You may now disconnect your line.

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