Universal Electronics Inc. (UEIC) Q4 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' Fourth Quarter and Year End 2012 Results Conference Call. [Operator Instructions] Thank you, I would now like to turn the conference over to Becky Herrick.

Thank you, operator, and thank you all for joining us for the Universal Electronics' 2012 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.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 retailed 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 anticipated by the company due to continued innovation of products and technologies such as solutions that address mode confusion; eliminate remote control setups and transform smart devices such as smartphones and tablets and gaming consoles into universal remote controls; the company's ability to gain market share by adding new customers and retaining current customers; the company's app technology being embedded in smart devices and game consoles as anticipated by management; the demand for smart devices and game consoles to grow as anticipated by management; the continued global general economic conditions and the benefits the company expects via the growth of new markets in certain geographic areas including Latin America, the Asia Pacific region and Eastern Europe. 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 that company files from time to time with the SEC, including the Annual Report on Form 10-K for the year ended December 31, 2011, and the periodic reports the company has filed since then. 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 period being reported continues. UEI to incur certain expenses as a direct result of its acquisitions, which we believe do not reflect its true operating results. Adjusted pro forma results excludes the following expenses: amortization expense relating to intangible assets acquired, depreciation expense relating to the increase in fixed assets from cost to fair market value, other employee related restructuring costs, one-time cost associated with moving the company's corporate headquarters from Cypress, California to Santa Ana, California and the write down of certain deferred tax assets resulting from tax log changes in China and the state of California.In its financial remarks, the company will reference adjusted pro forma metrics for reconciliation of these adjusted pro forma measures versus GAAP is included in the company's press release that was issued after the close of the 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 results for the fourth quarter of 2012 came in as expected with revenue of $117.8 million and adjusted pro forma earnings per share of $0.42. We ended the year with $463.1 million in revenue and adjusted pro forma earnings per share of $1.55.During the quarter, we achieved key customer wins as we made further advancements in the new markets. In January 2013, UEI announced LG has selected our technology, further establishing our embedded app technology in the smart device market. I'll discuss this relationship further in a moment. We have built our reputation on the depth and breadth of our device control technology, and in 2012, we proved the strength of our technology through its application in new and innovative areas. Smart devices represent a large and growing market for us as the introduction and adoption of smart TVs, tablets and smartphones continues to increase. The smartphone market alone is roughly triple the size of the market for TVs, with global shipments of approximately 700 million units worldwide in 2012.As I've stated before, in just a few short years, the overall margin opportunity for us in smartphones and tablets could equal or even exceed the opportunity in today's traditional audio-video market. Smartphones, tablets and game controllers are evolving rapidly to include home control capabilities. Our technology portfolio addresses this large and growing market. Our QuickSet, Nevo for smart devices and Control Plus platforms transform these smart devices into simple-to-use and intuitive universal remote controls that operate every entertainment device in the home regardless of brand or connection protocol. Our embedded app technologies are already available in select tablets. Recently, we proudly announced that LG became the latest smart device provider to select our QuickSet technology for its Optimus YouTube Q Remote app.The Q Remote, which launched late last year, uses our infrared blaster microcontroller technology along with QuickSet SDK for seamless setup and universal control. This technology transforms the LG smartphone into a comprehensive platform that can control all of the entertainment devices in the home, including setup boxes, AV equipment and other home appliances. Our array of embedded app technologies offer smartphone manufacturers a unique control solution that delivers the largest remote control protocol database in the industry to ensure compatibility with all of the consumers home entertainment devices. We are also implementing our technologies with major game console brands, helping them move beyond gaming consoles to comprehensive entertainment systems for the home. QuickSet transforms the game controller into a universal remote device, allowing consumers to quickly and easily access their gaming content and switch to and control a variety of increasingly popular, over-the-top services. We are actively involved in many development projects across the globe, and we are excited that our new technologies like QuickSet are quickly becoming a standard feature in industry leading home entertainment products. We now have more than 30 products, either shipping or in development, that will contain this exciting new feature. The 2013 International Consumer Electronics show in Las Vegas in January was another successful event for us as we demonstrated our innovative solutions to the largest ever crowd at this trade show. At CES, we unveiled the availability of our Control Plus platform, a groundbreaking technology that addresses a common frustration in home media control: mode confusion. As more devices are being added to the AB stack, users are frequently confused by which port their devices plugged into; which input the TV has to be on to view cable, satellite or other sources; and what mode the remote needs to be in to control a specific device. Put simply, if you have ever turned on your TV and faced a blank screen that said something like HDMI 3 or you were watching your DVR and found that your pause and fast forward buttons didn't seem to work, then you know what we define as mode confusion. Control Plus is an embedded software technology that addresses this mode confusion, providing a seamless and simplified home entertainment setup and control experience across all AV devices, including tablets, smartphones and other smart devices. A further benefit to our customers is that it reduces the number of related support inquiries. More specifically, Control Plus leverages our deep understanding of all controlled protocols, including traditional infrared, IP and HDMI CEC protocols, to enable the control of devices regardless of brand, implementation or into which HDMI port they are plugged. For the consumer, it just works. Hit a single button and you are watching what you want and the remote controls what you want it to control automatically. With the vast adoption of common control protocols, such as WiFi, in the average home, combined with our unique and innovative technologies, we believe that it's within our reach to eliminate the need for users to setup their devices on a remote control. We also believe that it's within our reach to implement home entertainment control technologies residing in traditional remote controls, smart devices and the AV device itself that can always lead the consumer to the content they wish to enjoy with the push of 1 button. It requires no setup at all and the system never becomes confused. We have worked hard over the past few years to produce excellent results in the very difficult global environment. We have continued to grow our footprint in the global remote control market to our continued investment in future technologies that further enhance the ease and intuition of the consumer's home entertainment control experience. Indeed we are very excited with the growth prospect of our business. With that I'd like to turn the call over to our CFO, Bryan Hackworth to discuss the financial results.

Thanks, Paul. As a reminder, our results for the fourth quarter and full year of 2012 as well as the same period in 2011 were referenced adjusted pro forma metrics. Fourth quarter 2012 net sales were $117.8 million compared to $117.6 million for the fourth quarter of 2011.Business category net sales were $102.8 million compared to the fourth quarter of 2011 net sales of $103.7 million. Our consumer category net sales are $15 million compared to the fourth quarter of 2011 net sales of $13.9 million. Gross profit for the fourth quarter is $36 million or 30.5% of sales compared to a gross margin of 28.6% in the fourth quarter of 2011. Total operating expenses were $27.1 million compared to $26.2 million in the fourth quarter of 2011.This increase was driven by our continued investment in product innovations and technologies as our R&D expense increased in $3 million in the fourth quarter of 2011 to $3.8 million in the fourth quarter of 2012.SG&A expenses remain relatively flat with the prior year at $23.3 million in the fourth quarter of 2012 compared to $23.2 million in the fourth quarter of 2011. Operating income was $8.9 million in the fourth quarter of 2012, up 20% compared to $7.4 million in the fourth quarter of 2011.The effective tax rate was 20.7% in the fourth quarter of 2012 compared to 16.5% in the fourth quarter of 2011. Net income in the fourth quarter of 2012 are $6.3 million or $0.42 per diluted share compared to $5.9 million or $0.40 per diluted share in the fourth quarter of 2011.For the full year of 2012, net sales were $463.1 million compared to $468.6 million in 2011. Gross margin for 2012 was 29.1% compared to 28% in 2011. Total operating expenses were $102.9 million compared to $100.2 million in 2011. Net income for 2012 was $23.4 million or $1.55 per diluted share compared to $23.6 million or $1.55 per diluted share in 2011.Next I'll review our cash flow and balance sheet at December 31, 2012. We ended the quarter with cash and cash equivalent of $44.6 million compared to $41.2 million at December 30, 2012. During the fourth quarter of 2012, we paid the remaining balance on the term loan of $4.8 million. Confidently, we are debt free at the year-end. During the fourth quarter, we returned approximately $2.8 million of our capital to our stockholders to our share repurchases at an average share price of $17.07. CSOs [ph] were 69 days at December 31, 2012, compared to 63 days the year prior.Net inventory turns were 3.9 turns at December 31, 2012, compared to 3.7 turns as of the end of 2011. Consistent with the prior year, we deliberately increased our inventory levels in the fourth quarter as a result of our factory shutting down during the Chinese New Year that began on February 10.Over the next couple of quarters, we expect our inventory levels to decrease and our inventory turns to return to the 4.5 range. Now turning to our guidance, for many years we've been the forefront of advancement to control technologies and solutions, which are now revolving to include smart devices. We are very pleased with our early successes of embedding our technologies inside gaming consoles, smartphones, tablets and smart TVs. Initial customer reaction and feedback has been quite positive. We're confident that we'll deliver solid growth in 2013 and that are our investments in these new areas carry significant, additional growth potentials. Longer term, we believe the profile of our business is one with approximately 5% to 10% average annual revenue growth and average earnings growth of between 10% to 15%.Because it's difficult to accurately predict the commencement, time of launch and magnitude of orders for specific new products across future quarters or within the current fiscal year, we've decided that going forward we will only provide detailed guidance for the upcoming quarter. For the first quarter of 2013, we expect revenue between $106 million and $112 million compared to last year's first quarter revenue of $103.7 million. EPS for the first quarter is expected to range from $0.20 to $0.26 per diluted share, compared to $0.19 recorded for the first quarter of 2012.I'd now like to turn the call back to Paul.

Thanks, Bryan. Overall in 2012, we demonstrated the many applications for our technology. We entered new markets by addressing consumers' evolving needs and fueling our customers' future innovation. Our ability to anticipate the changing trends in home entertainment enables us to continue to win new customers and deepen relationships with existing customers. As Bryan just said, we are confident that we will deliver solid growth in 2013. Our ongoing goal is to provide an easier, more intuitive control interface for the consumer, and it's beginning to come to fruition, with the average American watching 5 hours of TV per day and the average citizen on our planet having increased over 3 hours of TV watching per day. The providers of smart devices, over the top services and those in the gaming console business are joining ranks with subscription broadcasters and consumer electronics companies to take advantage of the enormous opportunity to serve this ever increasing worldwide demand for home entertainment. And our team at UEI couldn't be more excited. We feel we are better position than ever to prosper from the trends in our industry. Stay tuned. I'd like to now open it up for questions. Operator?

[Operator Instructions] Your first question comes from the line of Steven Frankel with Dougherty.

Yes, I'm trying to ask if you think that the gross margin level you saw on Q4 is something that you can sustain or even grow going forward?

Well, we can grow it. We typically have seen as you know, we don't give gross margin guidance. But what Paul is talking about, all the new smart devices there's typically a royalty aspect to that. So there is a chance that over time the gross margin rate will increase, but I wouldn't have necessarily factor that in too early. We had a great Q4 and everything went in the right direction for the gross margins. We produced -- the factory did an excellent job. They -- the number of total [ph] units they produce was greater than in Q4 2011, which increased the gross margin. We had favorable raw material pricing, and we even had a little bit of CapEx [ph] on our side. So really, we had everything went in the right direction, and going into 2013, I'm sure you're aware of this, the wage inflation in China is pretty significant. So the raw material pricing, their ability [ph] received in Q4 and ongoing will be somewhat offset by wage inflation. But we think we could hold still or even improve in the long run.

Okay. And then in terms of your subscription broadcast customers, what's your visibility into their inventory levels at this point, and maybe your anticipation on whether those customers will show growth in 2013?

Yes, Steve, that would obviously vary by region because every operator is a little different. Both in terms of visibility and their inventory levels, although we do have a pretty good idea of where they're at, we don't have direct access to many of their systems so we don't have real-time data on what their inventory levels are, but we talk to them daily in some cases, so we have a pretty good idea. We don't see any issue there. In terms of their forward plans, most of the major operators that we work with, we're at a point now in the relationship where we're talking 6, 12, 18 to 24-month out as far as new platforms and working with them on those next generation platforms. So we have pretty good visibility on the designs of those next generation products and in some cases are helping them on the control side of it to make a better experience. But in terms of the launch dates for those next generation platforms, if it's out 1 year from now or even to the end of this year, it could be 2 months earlier, could be 3 months later. That's just the way those projects go. But we have a pretty good visibility on the projects. In terms of the demand, usually have a pretty good view 2 to 3 months out and then beyond that, it's forecast that's submitted to us.

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

Just a little bit more on the gross margin. Can you pick apart the quarter itself? Have we seen any impact from sales into smartphone market or any of those new market? And in terms of the consumer versus business, was there any significant change or were the things that you refer to affects [ph] impact, good mix of internal applied across both categories?

Yes, Q4 is typically, you've been with us for a while, Andy, Q4 is typically our highest gross margin quarter because of the holiday season. So consumer, which yields a higher gross margin than our business category, pushes it up. The reasons I gave previously are really the main drivers of the gross margins, and the factories [ph] did a great job. They're very efficient, so it pushed up the margin. And you got consumers up versus the prior year. We had raw material favorability and pricing, so these are all positive. So it really led to a great quarter in terms of a gross margin percentage and a good quarter overall.

Yes, and then just in general, I mean, you mentioned that we shouldn't expect anything, any significant impact I guess from software sales or royalty sales. But it sounds like, I mean, if things come together, that, that could start to have a fairly significant impact in the second half. Do you guys think about that as essentially a 100% incremental to the existing business, or is there a chance that there is a swap favorable at the gross profit and earnings level but can negatively impact revenue?

Yes, we don't really see it as eating into the other parts of our business. In most cases with smart devices, even game consoles, they're additional market that we don't really see it impacting the core business. As far as the -- there's 3 risks going forward for our forecast: one is the commencement of a program, as we call it internally. The agreement by customer to launch a specific product. How you would do that, that's one. Number two is the date of launch of that product because when you're early in the year and a customer is targeting a September launch, it could go in August or it could go in November. So you've got that risk, and then the third one is the velocity of sale after that product launches. Near term, it's a little easier because, again, our forecasts include -- the commencement risk is gone, the projects are already going and the launch date in every case is already set. It's either something that's already been shipping or it is guaranteed to launch during the quarter. So near term, the forecast are more solid. The only risk left would be again the velocity of sale. We've got a lot of projects right now that are either commenced, which means that first risk is done, but we have launch dates out in July, August, September, October for some of these products. Those can move around. They can either be pulled up or pushed out. And then again if they're new products -- if it's a reiteration of the product that's already been shipping, you have a pretty good idea of what the demand is going to be at launch. If it's a new product like an over the top service with the new provider, it's sometimes difficult to know. So that's kind of what we are dealing with on these. But again, we view it as the customers that we're working with are the existing customers. So obviously, it wouldn't be detrimental to the business we're already doing because it is part of the business we're already doing. And when its new customers, it's typically in a new market that we don't think affects the core subscription broadcasting CE market.

And is pricing on all of that stuff going to be on a [indiscernible] basis, or would it be on a fix fee deals or any other structure?

Yes, the rare exception would be a one-time license. Almost always it's a per unit because there's both value conveyed in the database itself, which needs to be updated or will be updated, and a lot of the products we're talking about for the future would be cloud-based, so they could updated in real-time. And then there's IP around a lot of it as well, so typically it's a per unit license.

And then last question, can you give us any help of what your CapEx expectations are for the year, and how is the return rate of employees in China coming out of Chinese New Year?

Yes, this last year CapEx was about $10 million. I expect it to be a little less than that, probably in the $8 million to $9 million range. And then in terms of the employees coming back, we're still in the middle of coming back. Last year, Chinese New Year was a couple weeks earlier. So the time we had the call we knew exactly where we stood. As of now, I think it's descent, but we're still - some of the employees are still returning.

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

Just to follow up on the embedded mobile technology. I just want to make sure I understand the comment that there are 30 products that are either shipping or in development. That number is purely for that embedded mobile Nevo solution or is that also including things like Control Plus?

Yes, it includes all of them, so most of the projects are QuickSet enabled; Control Plus is another iteration, essentially another iteration or add on to QuickSet, because Control Plus would include a QuickSet application but what it includes also is the embedded app in the device that allows the user to not have to worry about which port the device is plugged into or anything else. They can just hit a button and it will take them to their TV. Because actually our subscription broadcasters get a lot of calls on this where a user will turn the television on and get the HDMI 3 logo because somebody switched the input on the television. What we're doing there is 1 button Control Plus application where you just hit a button and it will take you back to your subscription, your TV watching. So a simple implementation, we also have a multi-device, but the 30 projects revolve around mainly QuickSet and in the future Control Plus.

Okay. And the number of projects that are really just geared towards that embedded mobile phone tablet, not necessarily using your interface layer with Nevo, but just in that space, you talk about the unit volume opportunity. I'm just wondering how many projects are sort of in development.

Yes, that's not 30. It's a handful at this point. But I guess I will disclose today that we're getting a lot of interest in this. And if you name somebody in the mobile space, either tablet or smartphone, it is probably somebody that at some level of communication to us on these features. We've seen a lot of positive reaction to it. Again, I think the entire world sees the facts that the average American is watching 5 hours of TV a day and the average global citizen is watching 3.25 and growing. What better app to have on a device then something that helps them do something more easily that they're already doing for somewhere between 3 and 5 hours a day. So I think the pitch is pretty easy. I think most of the device maker see it. That's why there's a lot of money going into investment in this home entertainment space.

And the first announced commercial program with LG, the hybrid phone tablet really hasn't been designed for the U.S. market, but it does appear like it's in pretty solidly in Korea. So you mention the strength in that partnership, you are getting positive feedback. Can you just talk about, I guess, really what type of feedback you are receiving so far and how you're embedded classic [ph] layer is meeting the goal that they're looking for? And then, also have you got any indication on whether their end-customers are actually using the Q Remote app or whether it's just sort of a feature that was available to them?

First of all, the first is getting the project commenced. The second is the product reviews have been extremely positive. On this particular product, it's mentioned as a key feature in the product in the market it's been launched in. So it's been very favorably reviewed, not just by our customer but by the public, by the product reviewers in the market. So we think it gains traction, can't speak specifically about when it will launch in other countries, either on their platform or others, but we're excited about the fact that the product works very well. Obviously, we have the leading device protocol database in the world, so the product works in any country they want to take it to, whether it be their home country or any region in the world. We've done major implementations across the 4 corners of the earth, so we're real confident that the app will work anywhere they want to launch their phone.

Okay. And then, Bryan, you mentioned the Chinese New Year occurring later this year than last year. Just looking at the inventory number on the balance sheet, it's down year to year. I guess, should we be looking at that as a real operational improvement to cash flow, or is that actually just more related to the timing of the new year [ph]?

No, I think it's actually an improvement in the operation. They've done a god job, and we're just running more efficiently. So the dealt [ph] is due to us operating better.

Okay. And then I guess just last question, just an update on the share repurchase strategy. Doesn't look like the company was particularly active on its buyback during the quarters. So, I guess, what are the thoughts now that the debt has, I guess, been paid down in full, and you do a lot of cash at this point?

Yes, I think that's something that is in ongoing analysis, Jason, quarter to quarter. Obviously, it's dependent on the price of the stock, just like it would be for any buyer. So I mean, we did buy just under a couple of 100 shares and paid just over $17, so I think we did a pretty good job in Q4.And again, price dependent going forward, we do have plenty of cash on the balance sheet. It may very well be a good use of cash, but it's of course dependent on the announcements we make, people's believe in our business and how they reflect it on our stock price. And if it doesn't respond, we may see an opportunity to buy more of it. If the price accelerates, then we may buy a little less of it. It would be dependent on a lot of moving parts that we don't have the visibility to -- like what our stock price would be next week or next month.

Can you just say again what you did buy in Q4? I didn't catch it.

Yes, we purchased $2.8 million worth and its 154,000 shares.

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

Okay, everybody, thank you for joining us today and for your continued interest in UEI. We'll be presenting at the 14th Annual B. Riley Investor Conference in Southern California in May, between May 20 and 22; we'll give you an update on that probably on the next conference call. We hope to see you there or during the quarter. Thank you very much for participating, and I will talk to you later.

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