Universal Electronics Inc. (UEIC) Q1 2012 Earnings Report, Transcript and Summary

Good afternoon. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Electronics' First Quarter 2012 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Becky Herrick of LHA. Please go ahead.

Thank you, Stephanie, and good afternoon everyone. Thank you for joining us for the Universal Electronics' 2012 First Quarter 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 will forward 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 will 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 continued growth on average of TV sales and household TV viewing habits; the continued growth in a subscription broadcasting business; it's continued development of new and innovative products and technologies, including the UEI QuickSet technologies and its solutions for smartphones and tablets that are accepted by and meet the needs of its customers and consumers; 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 expects via the growth of new markets in certain geographic areas, including Latin America, Brazil, and Eastern Europe, including Russia; 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, 2011. 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 these financial remarks, the company 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, sir.

Thank you, Becky, and welcome everyone. There were several positive trends this quarter including the continued growth in subscription broadcasting, stronger sales from our consumer category, and our international expansion efforts. However, our first quarter 2012 results were impacted by lighter than expected sales to our consumer electronics customers. As a result, our revenue and adjusted pro forma net income were at the low range of our expectation. While consumer electronics products maybe going through a down period right now, throughout history, the face of television has evolved multiple times from black and white to color, from analog to digital, and from standard definition to high definition, all while keeping television as the nucleus of the home entertainment setup. I think it’s important at this point to address this specific issue regarding the future of television, which has been covered in the media over the past few months. The prediction forwarded in these reports is that television as we know it will cease to be as it is to be replaced by computers, tablets or other digital devices. First, for several years now, the average screen size of TVs sold across the world has grown. Just over the past 2 years, the average screen size globally has grown about 5% per year continuing, a long-term trend in consumer demand towards larger screen sizes. Given this trend of wanting to enjoy your entertainment on larger screen formats, it seems that laptops, tablets and the like will never replace, but rather supplement the consumers' media consumption needs. Further, consumers are watching more television now than at any time in history, despite predictions 10 years ago that TV watching would dramatically fall. Nielsen research shows that the average hours of TV watching in the U.S. has increased 4 hours per day per person in 1999 to over 5 hours per day in 2011. And this phenomenon is being replicated in global markets as the average citizen on the planet is watching more than 3.25 hours of television per day and exhibiting strong growth year-over-year across Europe and Asia. While we continue to face headwinds in the consumer electronics part of our business as sales of product such as televisions are down this year, we firmly believe in the long-term outlook for television and other AV products. Experts predict that the unit sales of TVs will be flat to down this year after experiencing a flat year in 2011. But history proves that while year-to-year growth in TV sales can vary widely, the average growth in TV sales in the U.S. averages 4% a year. This is true over the 10 years and in fact is true over the past 40 years. While TV sales will see a down year from time-to-time, there is always been an offsetting year or years that bring TV sales back to the average across economic cycles and technology upgrade cycles over the past 4 decades. Over the long-term, people continue buying televisions and are watching more content on their televisions, demonstrating how firmly entrenched television viewing habits are across the globe. We believe the challenge in the market will continue in the short-term or at least through the remainder of the year. However, we take a long-term approach to our business and we believe in the continued growth opportunities ahead of us in the markets we serve. We are more confident than ever in our ability to continue winning market share. In fact, this year we expect to meet a notable historical milestone shipping, our 1 billionth remote control. We believe this is just one example of the strong demand for UEI devices. While it has taken 25 years to reach this milestone, at the current rate we can probably reach the 2 billion mark in less than 5 more years. Shifting gears, our subscription broadcasting business has continued its solid growth. We are introducing innovations such as QuickSet to further enhance our customers' offerings and we continue adding new customers across the globe. Throughout UEI's history, we have successfully addressed the ever changing home entertainment experience by providing the kinds of technologies that make people’s lives simpler. Our strong track record of innovation continues in 2012 as we introduced new solutions. One great example of this is our next generation UEI QuickSet, which is non-screen programming function that enables an affordable, intuitive, step-by-step interface that simplifies the programming of the remote control. Through an HDMI cable, the TV sends data to the set-top box and the QuickSet software automatically picks up that data and programs the remote almost effortlessly. We have implemented QuickSet already across multiple products with 5 major consumer electronics brands, 2 major subscription broadcasters with one to follow, and 3 tablet brands currently in the market. We are in discussion with a major game console brand as well. Many customers are at various stages of implementing QuickSet and we will be rolling out this latest innovation with customers this year. More recently, Google signed an agreement to distribute UEI QuickSet in their next generation Google TV reference design, which is due to launch later this year. We are actively discussing commercial licenses with several of our current customers as well as new global customers to use UEI QuickSet in their branded product. UEI continues to accumulate a list of customers that include the largest companies in subscription broadcasting, consumer electronics, and retail across the globe. The key to our ability to expand our customer relationships and add new ones is our expansion into new markets. Latin America is a great example of our market expansion progress. According to market forecast, Pay TV subscribers in Latin America are anticipated to reach $73.2 million by the end of 2016, up 68% from 2012. In response to the growing demand for our products in that region, we recently expanded our Manaus, Brazil plant capacity to meet demand. Our sales in this region have grown significantly over the past 18 months, and given the growth dynamics mentioned previously, we expect growth from this region going forward. Over the past year, we have been actively working on new product developments with the major Korean TV manufacturers. This year, those investments will pay-off as our customer will introduce several new TV models that integrate key UEI technologies ranging from UEI QuickSet to a custom developed TV application. Demonstrating our growing global reach, earlier this year, we began shipping remotes to Rostelecom, the largest cable operator in Russia. This account signals our continued push in the Eastern Europe and adds to our current list of Pay TV operators in the region. We are excited about the potential this region represents to our future subscription broadcasting business. The global demand for our products remains high and we continue to evaluating opportunities to expand our presence across the globe. 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 first quarter 2012 and first quarter 2011 results will referenced adjusted pro forma metrics. First quarter 2012 net sales were $103.7 million compared to $105.7 million for the first quarter of 2011. Business category net sales were $92.4 million compared to the first quarter of 2011 net sales of $95.3 million. Our consumer category net sales were $11.3 million compared to the first quarter of 2011 net sales of $10.4 million. Gross profit for the first quarter was $28.6 million or 27.6% of sales compared to the gross margin of 26.4% in the first quarter of 2011. As a reminder, in the first quarter 2011, we experienced a temporal shortage of labor at our factories in China, which resulted in manufacturing inefficiencies as well as fewer units produced internally versus by third-party manufactures. This issue is rectified in the second quarter of 2011 and has subsequently not been an issue. Total operating expenses were $24.8 million compared to $24.4 million in the first quarter of 2011. Breaking down our operating expenses, R&D expense was $3.5 million compared to $3.2 million in the first quarter of 2011. SG&A expenses were $21.3 million compared to $21.2 million in the first quarter of 2011. Operating income was $3.8 million in the first quarter of 2012 compared to $3.4 million in the first quarter of 2011. The effective tax rate was 18% in the first quarter of 2012 compared to 22.1% in the first quarter of 2011. Net income for the first quarter of 2012 was $2.8 million or $0.19 per diluted share compared to $2.6 million or $0.17 per diluted in the first quarter of 2011. Now turning to our cash flow and balance sheet review. At March 31, 2012, we ended the quarter with cash and cash equivalents of $24.3 million compared to $29.4 million at December 31, 2011. Our term debt balance was reduced to $12.2 million at March 31, 2012 and $14.4 million 2 months earlier. DSOs were 64 days at March 31, 2012, compared to 66 days a year prior. Net inventory turns were 2.5 turns at March 31, 2012, compared to 4.8 turns a year ago. As planned in the first quarter of 2012, we've lowered our inventory balance by approximately $6 million compared to the prior year end, so we continue to expect inventory turns to be in the 4.5 range by the end of the third quarter. And now for our guidance, as Paul mentioned earlier, we experienced growth in the first quarter of subscription broadcasting and we expect this trend to continue throughout the remainder of the year. We also expect continued growth in our consumer category. However, sales for our consumer electronic customers were lower than expected in the first quarter and certain of these customers have recently made significant reductions to their 2012 forecast. Accordingly, we have adjusted our full year projections. For the second quarter of 2012, we expect revenue between $113 million and $119 million compared to last year's second quarter revenue of $121.7 million. EPS is expected to range from $0.33 to $0.43 per diluted share compared to $0.46 recorded for the second quarter of 2011. For the full year 2012, we expect revenue between $465 million and $485 million compared to the last year's revenue of $468.8 million. EPS is expected to range from $1.55 to a $1.75 per diluted share compared to a $1.55 recorded for the full year 2011. I’ll now like to turn the call back to Paul.

Thanks, Bryan. While there are short-term challenges, our long-term outlook is positive. We continue to focus on our strategy to invest in innovation. We are confident in our ability to introduce the products and technologies that apply to the many changing options and features in home entertainment devices and content. We will also continue to expand and invest in regions that show promising market opportunities. Our efforts are aligned to our ultimate mission to supply the technologies and solutions that simplify and connect the increasingly complex and ever changing home entertainment environment. Stay tuned. I will now open the call up for Q&A. Stephanie?

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

Just looking at the full year sales guidance reduction, you talked about a lot of positive things. So I guess, what is it about -- I’m assuming it's the consumer electronic side -- but what have you seen that is worse than where we were sort of at the end of the year when you provided the original range?

Well, the sales of the consumer electronics product, the forecast we’re hearing from customers are less than what we had predicted or what we were in discussions with them, and again, we talked about this in the past. We use macroeconomic forecasts as well as micro forecasts from customers and what we’re hearing now is that the expectation of sales throughout this year is going to be worse. Particularly in consumer-centric economies, places like Japan where it will be particularly bad -- the forecast is anyway -- U.S. and Western Europe. So the sale of consumer electronic products -- again, this is being somewhat offset by growth in subscription broadcast. We’ve actually taken in some new customers and the demand there seems to be pretty steady and good. And the consumer business, while small here at UEI, also has picked up. So the -- every part of the business was a bright spot with the exception of the consumer electronics, and the forecast from our customers and from the market have gotten worse than they were 3 months ago.

Okay. And just for Bryan, you guys paid down a little bit of the debt. What’s the plan for the rest of the debt at this point?

Yes, I mean we could pay it out tomorrow if we wanted. I'd have to repatriate some funds, but for right now the interest rate's so low. As I mentioned on the previous call, right now we're looking at different options and one in particular is potentially starting a different factory -- another factory in Asia. So right now we're -- with the interest rates so low that -- we like the flexibility of having cash.

Okay. And did you guys repurchase any stock in the quarter? And what do you have left on the authorization?

Very little. Yes, very little.

And just last question from me. Were there any legal expenses I guess atypical embedded in SG&A?

Yes, the legal expenses are embedded in SG&A and in the forecast and they are - I would say atypical. But we’ve got some lawsuits going on right now and it’s relatively expensive. The run rate in 2012 is much higher than that in 2011.

Can you -- I mean, can you quantify it at all?

I'd say it was $300,000 to $400,000 higher in Q1 2012 versus Q1 of 2011.

Okay. And is there any update on the litigation with the 2 offices?

No.

[Operator Instructions] Your next question comes from the line of Corey Barrett with Pacific Crest Securities.

I really just have 2 questions. First, you mentioned the inclusion of UEI tech in next gen of Google TV or the Google TV software. I was hoping you could provide a little more detail there, And then secondly provide perhaps a greater detail on your strategy in Brazil and how that’s developing, and sort of how incrementally you could see that going forward and potentially in 2013?

Sure. First, on the Google, we -- our QuickSet and associated data are being embedded in the reference standard. We are working with or are talking to a number of customers who are going to be implementing that platform. And I can’t give a lot of details obviously, because the customers would appreciate us not talking about their future products. But we will be embedded in it. We're not building a product, we're embedding our technology in the next platform. So it will be adopted as a control mechanism within those future Google TV products. As far as Brazil is concerned, we are set up in Brazil. We've closed a number of operators in that region. And we -- the projections -- the market projections of growth and the growth we've seen down there are pretty substantial. So we are fully a player down there. We've worked pretty hard over the last couple of years to set ourselves up there appropriately and are currently providing customers there, subscription broadcasters and potentially consumer electronics companies, product, remote control solutions in that region.

Your next question comes from the line Jason Ursaner with CJS Securities.

Quick follow-up on the last question. You mentioned embedded in there, and I know in the past you've talked a little bit about -- if there is a change in the implementation of media control, how does your revenue differ when you are getting a royalty versus actually selling a tangible device with the TV or some other type of media device?

Well, the revenue changes. The revenue of course with a license is typically lower, although I've seen cases in the past where the average license is actually higher than a lot of the products we sell. It all depends on the solution. But remember in this case, what we are embedding is the control methodology, both 2-way and dataset for the control codes of the various devices that will be in the consumers' AV stack. What this potentially gives us is an opportunity to not only embed the technology, but to sell products built around that technology. If our technology is embedded in the product, the target product, it makes it much simpler for somebody to implement a remote control with us as well. So I wouldn’t think of this as just an opportunity to license, although it is. It's also an opportunity for us to sell full control products with our technology embedded in the system. It’s the best way to put it.

Those would be third-party remotes that work with a device?

Well, they could be the product that ships with the device itself. To the extent they want to have text entry-type capabilities, pointing capabilities, we can build a variety of products that would allow all of those types of functionality within the control device. But what we are doing here is embedding some of our technology in the target device as well, which again, gives us a potential to sell the remote control device, the hardware side as well. So we have embedded technology in the target side and then an opportunity to sell the remote control device with a variety of new capabilities, text entry, again, pointing technology, et cetera.

And if you didn’t ship the device, would whoever who made that device need to also license yours to I guess interact with the target device or is that not -- am I not thinking of it the right way?

No, you are. There is an opportunity for us there as well for a license opportunity depending on the capabilities of the products that would get designed into those. But I would say in more cases what we’re working on is the design of the actual control device, the design and sale of the actual control device that ships with the product.

[Operator Instructions] At this time, there are no further questions. I would like to turn the conference back over to Paul Arling for closing remarks.

Okay. I have a couple of remarks I want to make. One issue I'd like to address is the rumor of Apple's entry into the TV market. As we've been asked this a number of times, I felt it would be appropriate to make a statement on this. It's important to note that Apple's been in the home entertainment business for over 5 years already with its current Apple TV product, which UEI is incorporated into our library along with tens of thousands of other products. To date, the product -- that product, the Apple TV, has had little impact on our industry. While Apple may or may not introduce a different kind of product such as a TV monitor, we believe that they, like other successful companies across the globe that have introduced industry-leading home entertainment products, will be a potential customer or licensee of UEI Technology. Over the years, the most successful companies in our industry have utilized the UEI technology to innovate in control technology as they advance the state-of-the-art in home entertainment. Examples of this include Sony, Panasonic, Samsung, Mitsubishi, Denon, JVC, Toshiba, DirecTV, Comcast, Echostar, Sky, Microsoft, Google, and many others. It’s important to note that over UEI’s history, new entrants into the subscription broadcasting or consumer electronics market that brought distinct new innovation or differentiation also brought new growth to the industry. The competitive response was fast, dynamic, and led to increased product introductions requiring new forms of control causing a bloom in our business. As we always have, we look forward to exciting new home entertainment products to be introduced by existing and new players to the industry, to better -- to prompt better solutions for consumers. This has fueled our growth across the years. Thanks for joining us today. We’ll be meeting with investors at the 13th Annual B. Riley Investor Conference on May 22 in Santa Monica, California. We look forward to seeing many of you there and speaking with you again on our second quarter results call in a couple of months. Thanks, very much, and we’ll talk to you soon. Bye-bye.

Thank you. This concludes today’s conference. You may now disconnect.