Universal Electronics Inc. (UEIC) Q4 2011 Earnings Report, Transcript and Summary

Good afternoon. My name is Lashanda and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Electronics Fourth Quarter 2011 Results Conference Call. [Operator instructions] Thank you. Becky Herrick, you may begin your conference.

Thank you, operator, and good afternoon, everyone. Thank you for joining us for the Universal Electronics 2011 fourth quarter and year-end 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 and we'll send you a copy. This call is being broadcast live over the Internet. A webcast replay will be available for 1 year at www.uei.com. Also, any additional updated material non-public information that might be discussed during this call will be provided on the company's website, where it will be retained for at least 1 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 benefits the company anticipates as a result of its continued development of new and innovative products and technologies, including QuickSet 1.5, the Fusion remote control platform, as well as our solutions for smartphones and tablets that are accepted by and meet the needs of our customers and consumers, the adoption of the company's UAPI technology, 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 ability of the company to attract and retain new customers, the benefits the company's expects via the growth of new markets in certain geographic areas including Latin America and Brazil, the strength of the company's financial position and its ability to manage its operating expense initiatives and debt reduction strategies as planned by management, and the effects the company may experience due to the current global economic environment. Management wishes to caution you that these statements are just projections and actual results or events may differ materially. For further detail on risk, management refers you to the press release mentioned at the onset of this call and the documents the company files from time to time with the SEC, including the Annual Report on Form 10-K for the year ended December 31, 2010 and the periodic reports the company has filed thereafter. These documents contain and identify various factors that could cause actual results to differ materially from those contained in management's projections or forward-looking statements. Also, the company references adjusted pro forma or non-GAAP metrics in this call. These adjusted pro forma metrics are provided because management uses them in making financial, operating, and planning decisions and in evaluating the company's performance. The company believes these measures will assist investors in assessing the company's underlying performance for the periods being reported. UEI continues to incur certain expenses as a direct result of its acquisitions, which it believes do not reflect its true operating results. Adjusted pro forma results exclude the following expenses; amortization expense relating to intangible assets acquired, depreciation expense relating to the increase in fixed assets from costs to fair market value, and other employee-related restructuring costs. In the financial remarks, the company's fourth quarter 2011 and fourth quarter of 2010 results will reference adjusted pro forma metrics. A full reconciliation of these adjusted pro forma measures versus GAAP is included in the company's press release that was issued after the close of market today. On the call today are Chairman and Chief Executive Officer Paul Arling, who will deliver an overview; and Chief Financial Officer Bryan Hackworth, who will summarize the financials. And then Paul will return to provide closing remarks. It's now my pleasure to introduce Paul Arling. Please go ahead, Paul.

Thank you, Becky, and welcome, everyone. Our fourth quarter 2011 results demonstrate a solid quarter for UEI, revenue was within expectations at $117.6 million, reflecting an increase of 15% over the fourth quarter of 2010, and earnings were at the higher end of our expectations at $0.40 per share. During the fourth quarter and the full year 2011, we focused on improving our operational footing by introducing new, innovative products and technologies to gain market share and build the business. A key factor in our success over the years has been our ability to anticipate the needs of both our customers and consumers, introducing innovative solutions to the ever-changing home entertainment environment. As the face of remote control technology expands to include additional tools, we are developing remotes that bring new functionality, enhanced applications, and automated setup to the user's control experience. Our patented QuickSet remote control technologies are a great example of our ability to simplify the increasingly complex products and content in home entertainment as QuickSet is designed to require no user configuration at all. Our recently introduced QuickSet 1.5 utilizes a connected HDMI cable to automatically program the user's remote by simply reading the brand and model information from the TV. We are currently in development with several customers throughout this technology this year. Next-generation QuickSet development is already underway and will include the control of IR powered devices through your home network and integration of smart devices with absolutely zero configuration. Our QuickSet technology roadmap has a simple goal; to make the set-up of a remote not just, easy but automatic. With each new iteration of the technology, we are getting closer to the day when the remote sets itself up with no effort from the user. At the International Consumer Electronics Show, we showcased several of our innovative yet simple-to-use technologies. We announced our new Fusion remote control platform, which addresses the increasing availability and adoption of IP-based set-top boxes. According to In-Stat, shipments of IP set-top boxes in North America will grow 48% in 2012. Fusion features a QWERTY keyboard and is an ideal solution for digital set-top boxes that need new navigation and text entry functionality for advanced search functions, web browsers or integrated social applications. The Fusion remote employs both UEI QuickSet 1.5 for complete automated set-up and UEI's universal remote control application programming interface technology or UAPI for seamless integration and scalability of advanced navigation and control features on the target platform. Put simply, as IP-connected devices enter the home entertainment market, there are many potential applications for them, some not yet envisioned. UAPI allows our customers to confidently enter this world knowing that as they change the functions and features of their control devices, they can implement these changes quickly and easily with far less investment than in the past. We also announced the integration of ultra-low power, low-cost Wi-Fi Direct technologies in UEI's connected remote control platforms. Wi-Fi has become the standard for Internet connectivity in the home. It has nearly -- pervasively penetrated mobile and tablet platforms and is growing quickly in consumer electronics and entertainment delivery platforms. More recently, a new industry standard, Wi-Fi Direct has been developed and certified by the Wi-Fi Alliance. Wi-Fi Direct brings a number of benefits not available before in the home entertainment space. It requires less power than traditional Wi-Fi. Thus it is ideal for battery-powered devices such as remote controls. It is also significantly less expensive than traditional Wi-Fi, bringing it to a much wider group of products. In addition, because Wi-Fi Direct is a software add-on, there is no additional cost to the platform manufacturers over basic Wi-Fi. And it further expands the usability of Wi-Fi by offering backward compatibility with existing Wi-Fi certified devices in the market. As a result, Wi-Fi Direct is gaining rapid adoption, highlighted by a range of recent announcements, including Google's Android 4.0 and Microsoft Windows 8. According to In-Stat, the number of Wi-Fi Direct enabled devices shipped in 2011 was estimated to be 173 million and they forecast that every PC, CE device and mobile phone that ships in 2014 with Wi-Fi silicon will be Wi-Fi Direct-enabled. Through Wi-Fi Direct, UEI's connected remotes will be able to wirelessly connect to tablets and add them to the control ecosystem, providing a simpler, more user-friendly TV viewing experience in today's -- to today's connected consumers. Traditional remote control devices continue to be a mainstay in consumers' home entertainment arsenal. This will remain true for the foreseeable future. Looking forward, however, UEI is expanding remote control technology to include multiple new product platforms such as smart devices that allow new applications to improve the home entertainment control experience. An estimated 70% of tablet users use their tablets while watching television, according to Nielsen and 30% of the total hours spent using those tablets are spent in front of the TV. Our connected remote provide consumers with both the lean forward control experience when a tablet is used while watching television and the more common and traditional lean back experience with the connected remote when a tablet is put down or removed from the room. These product concepts and others continue UEI's long-term tradition of technology leadership in home entertainment control. We continue to develop the practical, affordable solutions that solve real consumer needs. We are proud to be at the forefront of building the solutions that foresee the needs of customers tomorrow, while continuing to satisfy their mainstream control needs today. With that, I'll turn the call over to Bryan Hackworth, our CFO, to lead us through the financial discussion. Bryan?

Thanks, Paul. As a reminder, our fourth quarter of 2011 and fourth quarter of 2010 results will reference adjusted pro forma metrics. Fourth quarter of 2011 net sales came in as we expected, reached $117.6 million compared to $102.5 million for the fourth quarter of 2010. Business category net sales were $103.7 million compared to the fourth quarter of 2010 net sales of $89.1 million. Our consumer category net sales were $13.9 million compared to the fourth quarter of 2010 net sales of $13.4 million. Gross profit for the fourth quarter was $33.6 million or 28.6% of sales compared to a gross margin of 29.7% in the fourth quarter of 2010. Total operating expenses were $26.2 million compared to $22.4 million in the fourth quarter of 2010. Breaking down our operating expenses, R&D expense was $3 million compared to $2.8 reported in the fourth quarter of 2010. SG&A expenses were $23.2 million compared to $19.6 million in the fourth quarter of 2010. Operating income was $7.4 million in the fourth quarter of 2011 compared to $8 million in the fourth quarter of 2010. The effective tax rate was 16.5% in the fourth quarter of 2011 compared to 22% in the fourth quarter of 2010. Net income for the fourth quarter of 2011 was $5.9 million or $0.40 per diluted share compared to $6.6 million or $0.45 per diluted share in the fourth quarter of 2010. For the 12-month period ended December 31, 2011 net sales were $468.6 million compared to $331.8 million in 2010. The gross margin for 2011 was 28% compared to 31.8% in 2010. Total operating expenses were $100.2 million compared to $81 million in 2010. Net income for the 12-month period was $23.6 million or $1.55 per diluted share compared to $17.9 million or $1.27 per diluted share in the prior-year period. Now, turning to our cash flow and balance sheet review at December 31, 2011. We ended the quarter with cash and cash equivalents of $29.4 million compared to $32 million at September 30, 2011. Our term debt balance was reduced to $14.4 million at December 31, 2011 from $18.4 million 3 months earlier. DSOs were 62.9 days at December 31, 2011 compared to 75.8 days 1 year prior. Net inventory turns were 3.7 turns at December 31, 2011 compared to 4.5 turns a year ago. We are currently working on lowering our inventory levels and we expect inventory turns to be in the 4.5 range by the end of Q3 of this year. And now, for our guidance. For the first quarter of 2012, we expect revenue between $104 million and $110 million compared to last year's first quarter revenue of $105.7 million. EPS is expected to range from $0.19 to $0.25 per diluted share compared to $0.17 recorded for the first quarter of 2011. For the full year 2012, we expect revenue between $500 million and $520 million compared to last year's revenue of $468.8 million. EPS is expected to range from $1.65 to $1.85 per diluted share compared to $1.55 recorded for the full year 2011. I'd now like to turn the call back to Paul.

Thanks, Bryan. In 2012, we remain focused on building our leadership position in the markets we currently serve by leveraging our innovative remote control technology to drive growth. Our efforts to expand our global reach in the fast-growing regions continue. For instance, in Latin America, the pay-TV sector is projected to exhibit strong growth over the next several years. We are currently working with several significant customers in Latin America, including Sky Brazil, Telefonica, and Embratel. We will continue to stay ahead of emerging trends by anticipating the needs of both customers and consumers, just as we have with IP-based set-top boxes, over-the-top services, smart TVs, and smart devices. Our market share is significant, as UEI accounts for approximately 1/3 of all remote controls shipped annually on this planet. As always, there are many opportunities for us to increase our market presence by adding new customers, expanding relationships with current customers, and expanding our position in new regions. We are confident in our strategy to do just that, and we look forward to providing you with updates on these developments throughout this year. Stay tuned. And now, I'd like to open up the call to Q&A. Operator?

[Operator instructions] Your first question comes from the line of Jason Ursaner with CJS Securities.

Can you walk through how you developed the revenue growth in your fiscal year '12 guidance and maybe do a bottoms-up demand picture by geography and category? You mentioned Latin America, maybe touch on some of the other categories and places?

Yes. Jason, this is Bryan. We did the forecast like we always do. It's a very detailed bottoms-up process where we involve our customer sales reps, and our VPs of sales; we deal with our customers as well and we develop a bottoms-up process by sales channel. So subscription broadcasting, OEM, retail, et cetera, and we also do it by region. So it's really no different this year than any other year. In terms of the geography, this year what we're excited about is we see growth in all regions this year, but primarily in Latin America and in Asia. But as I said -- as you point out, Latin America is actually the -- is one of the things that -- it's a big driver for us in -- again, in Latin America, specifically, Brazil. It's not just one channel, we are looking at sales growth in Latin America through subscription broadcasting, OEM, and even a little bit of retail, where we are entering the retail market in Brazil.

Okay. And what's the tax rate assumption for next year guidance?

It's going to be higher. I don't give it specifically, but it's going to be higher because in one of our jurisdictions, in China, tax holiday expired in 2011. So it's going to bump it up and I'm not going to get the R&D tax credit in California in 2012 like I did in 2011, so it's going to be a little higher.

Okay. And for Q1, how do you plan to deal with the issue of migrant labor in China? I know you had an issue last year. I mean, have you done anything different and inventory level, is this in response to that or is it cushioned to maybe not repeat some of the problems that happened last year?

Well, we had some inventory. We did build some inventory towards the year-end in preparation for Chinese -- for the Chinese New Year holiday. But we put some programs in place with employees where I'm happy to report that during the first quarter, we are seeing a higher retention level, more in line with what we saw in -- with what C.G. and Enson saw in prior years. Last year, it looks to have been an exception and this year's retention rates are higher.

Okay. And then just, I know you guys have thrown out in the past double-digit operating margin. Is that still an achievable long-term target do you think or are resources stuck in this mid-single digit range for the foreseeable future?

No, we see that as a realistic viewpoint on where we can get, and I think in the current environment, it's difficult with the demand patterns of customers and how they've run over the last 9 months, in particular. But we definitely think it's achievable over the long term.

Your next question comes from the line of Ian Corydon with B. Riley & Co.

Can you just talk about the health of the inventory level and then, as you work to get your turns up, do you anticipate any negative impact on gross margin?

Yes. In terms of the health of the inventory, it's very healthy. The -- we are up on inventory, I'd say, probably about $6 million higher than we like to be and all that excess inventory is -- it's -- they're higher running products. So the health is very strong, not an issue in terms of bad inventory. In terms of it affecting the gross margin, that's not an issue as well either. Again, it's -- they're high running products. The one thing we've been maybe throughout the last year or so, we may have been too conservative in maintaining our inventory levels to prevent air freight. I mean, the good news is we haven't had airfreight in a long time, which is very costly. I think the one thing we do have to go back and take a look at is maybe we've been a little too conservative, and now we've got to -- it takes up cash flow and has a carrying cost to it. So we have to reevaluate it, but I think by the end of Q3, we'll be back to normalized inventory turn rate of about 4.5.

Okay. And when do you plan to pay down the remaining debt and then, how are you looking at potential use of the free cash flow after that?

Yes, the debt -- originally, we were expecting to pay it off this year and what we did was about mid-year when the stock price dipped, we ended up buying back -- for the full-year 2011, we bought back just under $10 million worth. And I think it was about $7 million in the back-half of the year. So originally, I was going to pay it off but we ended up buying -buy back stock when our price dipped. And I think -- as we've always done, Ian, we've always looked at the best use of our cash and currently for 2012, we are looking at different things. For instance, we might open up a third factory in China and if we do that, we have to deploy capital. So I expect the debt to be paid off in 2012, but exactly when, I don't know, because it depends on where our stock price is, if we're going to open up a third factory, things of that nature.

Okay. Are there acquisition opportunities out there of any size that you're looking up?

Yes, there definitely are. And as those present themselves, we -- as we have in the past, we'd look at them. If they are a good use of the cash versus the internal investment as Bryan pointed out or the repurchase of our stock, which Bryan pointed out, or the use of it to invest in our future through acquisitions, we are also looking at that, and there are opportunities.

Your next question comes from the line of Andy Hargreaves with Pacific Crest.

Maybe just following up on the last question, you guys already have a third of the remote market. What kind of opportunities would it be in the same product lines or in some tangential products?

Well, I think the answer, Andy, is both. I think, we -- as I've always said, we are pursuing our god-given right to 100% market share. So we're only at 30%, just under 1/3, just about 33%. So there is still room for us in this market. I would say that the other opportunity is, as I said in the prepared remarks, as the face of the remote control changes, there is a lot of things that can be done there. I think over the next probably 1 to 10 years, there's going to be changes in the way that remote controls are performed and we feel we are at the forefront of that. You saw some of that at -- and those who attended CES saw some of that -- some of that at the booth, but we are working on a lot of things there. And there may be some things we can do there in terms of M&A or additional investments. So, we are looking at all those opportunities on a real-time basis.

And just in terms of your guy’s outlook, is there anything unusual in linearity this year or are you expecting a pretty normal seasonal progression?

I think it's pretty normal. I think last year was the anomaly, where Q1 was very strong and then after the tsunami and all the world events, it really tapered off in Q2 in the back half of the year. But I think in 2012, I'm expecting a more normalized rate, if you look at the last, say, 5, 6 years.

Yes. Last year, to put it simply, the period of where the demand was strongest was where we had the capacity issue in Q1. So our timing last year wasn't so great. The -- as we explained a year ago on the conference call, we had capacity issues with the retention of workers in Q1, yet it was probably seasonally the strongest quarter compared to prior years.

Okay. [indiscernible].

As the capacity situation sorted out and we had plenty of capacity, demand was less than we expected starting in Q2, but really in Q3.

Okay. And then lastly, just on gross margins. Were there any meaningful changes in the segments on a quarter-to-quarter basis? And then, can you give us what your expectations are roughly looking into the first part of next year or this year, I guess?

Well, in terms of the gross margin, it really helped out the operations, probably did a really good job in Q4 and we were able to produce the number of units internally, which obviously helps the -- helps our gross margin as opposed to going to the third party. So that helped out overall in Q4, and I expect that to continue into 2012. But we don't give guidance for gross margins, Andy. So all I'd say is we expect it to be relatively strong.

[Operator instructions] Your next question comes from the line of Steve Frankel with Dougherty.

Good afternoon, Paul. One of the thoughts when you bought C.G. was you might have an opportunity to cross-sell product into some of their TV manufacturer companies in Japan that you're not doing business with. Now that we're a few months past all the troubles there, what kind of dialog do you have going on with those customers, and how do you rate your chance of success in being able to successfully cross-selling to those customers?

Yes, I think that is obviously still the strategy. I think our chances of success there are relatively high because we've proven on both sides about those mainstream product or companies, or our combined companies' ability to supply those in a fast, flexible, and high quality -- on a fast, flexible, and high-quality basis and then our experience on building those advanced applications that I spoke of in the prepared remarks and that you saw at CES. I think customers are interested in those applications. And I think they see the combined power of what we now have as being very positive. So I would rate that highly. The thing about the consumer electronics OEM market though is that it works in -- sometimes the product development lead times are long; they can sometimes take as much as a year. So you'll see things from us over the coming months and years on this very topic of up-selling, selling the mainstream products, but then alongside of it, doing text entry, relative pointing, advanced navigation, and with embedded QuickSet in some of the major OEMs. That's something that I think we are very confident in.

Okay. And what's your visibility these days into your key U.S. subscription partners and their inventory levels, and your sense for demand over the next couple of quarters?

Yes, I don't want to make predictions for them going forward. They probably wouldn't appreciate us making those comments. I can tell you that they do plan with us -- material plan with us, so we do have a good glimpse into it. I will say that over the last year it has been a relative source of strength. The OEM or consumer electronics world has been much more difficult. The consumer facing businesses that UEI -- OEM, as we call it, and consumer have been tougher, subscription broadcasting has run pretty well. And when I say that, I mean globally, because of course our footprint in subscription broadcasting is now global. We have quite a bit of installations in Asia, as Bryan pointed out, Latin America, here in the U.S., and of course in Europe. So there has been some weaknesses with certain operators, not caused by us but by their account, but overall, it's been pretty good. That part of our business has not been off of expectations.

And are most of your key customers progressing forward in terms of technology so those -- as they roll out new set-top boxes you have the opportunity to up-sell as well and give them something more sophisticated?

That's definitely true. I've said this before that in my 15 years here, I don't think I've ever seen a period where there has been as much time and money being devoted to those next-generation applications with our customers. They are all very interested. I think they can bring a lot of value to consumers by bringing these new services and they are doing all the right things, I think, developing those next-generation platforms, spending the time thinking about how they are going to do it, and working with us in most cases -- in many cases to work on the control technology that will help power it. So that is happening.

And we do have a follow-up question from the line of Jason Ursaner with CJS Securities.

I was just wondering if you could talk a little bit about what legal expenses were during the year and maybe any type of update on where you're sitting with Logitech? And then just more generally, for Paul, as devices integrate and over time, remotes may look different than today's implementation. Where do you really see the strength of your IP and have you seen this be challenged by customers with their own patent applications or is your position really being embraced by the industry at this point?

Yes, I'll answer the first part. In terms of the legal expenses, we don't give specifics, but needless to say, because we are in litigation defending our patents, it's definitely going to be up a considerable amount, especially percentage-wise. And that really started to ramp up a little bit in 2011 and then it's going to continue into 2012. And again, as far as the status of Logitech, I can't comment on that -- the actual lawsuit.

Okay. And Paul?

In terms of your question on the new platforms, new tools, there is a lot of things we are doing. Again, at CES, we showed the Wi-Fi Direct solution with both lean forward and lean back. We have applications running on the tablet and the user can go back and forth between lean forward. As I said in the prepared remarks, 30% of the hours spent on tablets are in front of the TV. So we envision consumers sitting in front of their TV, playing games, checking email, downloading apps on to their tablet, but after a while when the game gets interesting they put the tablet down and they're going to want a lean back application. We think that's -- connected remote gives them the best of both worlds. They can have control of all their devices while they are on the tablet or on the remote. As far as IP around that, we have a number of patents with many, many plans around these ideas. In terms of peoples' applications, I mean, I can't speak to their applications because they're just that, applications. We have issued patents, some of which date back some number of years where these ideas came to us many years ago when we were issued U.S. patent on them. So I think our IP position here is pretty strong. We don't sell on the basis of the IP. We sell on the basis of -- we can deliver the product and the technology all at one good system level price for the customer; and I think in most cases, they are interested in working with us on this without regard to the IP. But in some cases, we do have to use our IP and I think we are proving with recent actions that in cases where we feel that people aren't respecting our IP, we will enforce it.

[Operator instructions] There are no further questions. I will now hand the call back over to your host, Paul Arling, for closing remarks.

Okay, great. I want to thank everybody for being on the call today. We really appreciate the time you take and the questions you have. We look forward to speaking to you as time goes on and certainly next quarter, and thank you for joining us today. Good-bye.

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