Universal Electronics Inc. (UEIC) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Universal Electronics Second Quarter 2015 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the conference over to our host for today’s call, Ms. Becky Herrick. You may begin.

Thank you, operator. And thank you all for joining us for the Universal Electronics second quarter 2015 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 one year at www.uei.com. Also, any additional updated material nonpublic information that might be discussed during this call will be provided on the company’s website, 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 future events and the future financial performance of the company including: the benefits anticipated by the company due to the continued strength across its entire business and the expansion of its share of the markets it serves, including its subscription broadcast business and the smart device channel; the continuation and expansion of benefits the company has experienced and anticipates due to the licensing of the company technologies and patents such as the company’s smart device in QuickSet technology; the continued adoption, selection and acceptance of the company’s technologies and products by the world’s largest companies in the home entertainment industries, such as Comcast XFINITY product; the successful closing of the transaction between UEI and Ecolink and integration of their respective business lines; the timely development, delivery and market acceptance of products and technologies such as home security, home automation, wireless sensors and other smart home and security technologies; the continued innovation of next generation solutions that are accepted by the company’s customers and end-users; management’s continued to ability to identify and execute on opportunities that maximize shareholder value, including the effects repurchasing the company’s share have on the company’s stock value; the continued sales and earnings growth as experienced in the past; management’s ability to identify and execute on growing trends and market; management’s ability to manage its cash and cash equivalents, and achieving its revenue and earnings as guided; and the other factors described in the company’s filings with the U.S. Securities and Exchange Commission. The actual results the company achieves may differ materially from any forward-looking statement due to such risks and uncertainties. Management wishes to caution you that these statements are just projections and actual results or events may differ materially and the company undertakes no obligation to revise or update these statements to reflect events or circumstances that may arise after today’s date. For further detail on risks, 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, 2014, and the periodic and quarterly reports 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. In management’s financial remarks it will reference adjusted pro forma metrics, a full description and 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. 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. Adjusted pro forma metrics exclude amortization expense relating to intangible assets acquired, depreciation expense relating to the increase in fixed assets from cost to fair market value resulting from acquisitions, other employee-related restructuring costs, and stock-based compensation. 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 thank you all for joining us today. Our second quarter financial results were in line with our expectations as we achieved net sales of $147.6 million, and EPS of $0.67 per share. It is important to note that 2014 represented the most successful year in UEI’s history making our 2015 results all the more impressive. However, we firmly believe this is just the beginning, as we remain committed to driving profitable growth for years to come. In fact, we announced earlier today that we signed an agreement to acquire Ecolink Intelligent Technology; a leading provider of wireless security, sensing, and home automation products and services. This transaction opens up access to an exciting opportunity for UEI in the emerging and rapidly expanding smart home market. Ecolink has extensive experience in the home security systems industry, developing universal wireless sensors, compatible with many of the most popular home security systems. Its comprehensive line of innovative patented products provides UEI with competitive advantage in the home security and automation space. Today’s home is becoming more connected, sensors and connected devices are being added throughout the house to alert monitoring stations and individual home owners, when a smock detector goes off or when the front door has been opened. These two examples of connected home use cases were rated by consumers as being among the most desirable features of a smart home. Today, Ecolink’s innovative products offer the underlying technology necessary to drive the features that consumers demand in their smart home environment. The acquisition of Ecolink enables UEI to support our existing service provider customers with the home security products and technologies they are beginning to introduce and offer to their subscribers. Ecolink’s product line mirrors the mission to which we have adhered for years, providing innovative solutions that simplify and connect the increasingly complex home environment. The smart home represents a significant opportunity for us. According to data from ABI Research, the global market for home safety and home security sensors and connected devices, is estimated to grow from $1.4 billion in 2015 to $4 billion in 2019. At the same time, Parks Associates estimates that over the past four years, cable and telco providers have successfully added home security and automation services to their offerings, gaining an estimated 14% share of professionally-monitored security systems in U.S. broadband households. In short, with our long history of innovation and success, and the anticipating trends in consumer home entertainment control, UEI will be at the forefront of providing unique and innovative products to help consumers interact with their security and home automation services. We are excited about the opportunities in this market and we expect to have more to share in the next few months. In fact, we are currently working on several new products in this space that we will introduce with our industry partners in 2016. As we innovate and expand our products and technologies in the new markets, we are also driving growth in our existing markets. Our embedded software solutions continue to be adopted by more of the world’s largest home entertainment companies. In fact, just last week we announced, we reached the new milestone, our QuickSet solution is now included in more than $150 million devices around the world, and accessed every time a consumer adds or replaces a new of piece of AV equipment. Industry-leading companies continue to adopt our products and technologies that they seek to provide consumers with an easier, more intuitive control interface or home entertainment control. The growing demand for more advanced control is complemented by an increasing desire for simplification. This is exactly where UEI provides the most value to our customers, as we can help them accomplish both objectives. In the past 12 months, we have seen a major shift in our industry, as advanced remote controls are becoming more broadly adopted throughout the world. Major players in the subscription broadcasting and consumer electronics industries are moving beyond infrared-only technologies, to also include two-way radio frequency protocols like Bluetooth low energy, RF4CE and even Wi-Fi, which enable a broader array of advanced features. For example, at the beginning of the year, Comcast chose UEI to supply its new XFINITY voice remote control. The new remote uses voice commands to help consumers find what they want quickly, yet still support the traditional functions of changing channels and raising or lowering the volume on their television. This remote is powered by our advanced control technology that enables easy home setup and configuration. Whilst initial shipments the Comcast commenced earlier this year, we are now shipping at higher volumes. In the first and second quarters, we saw below-average order volumes from some of our customers as they deplete existing inventories in advance of their new product rollouts. In the second-half of 2015, we expect to see the benefits of the new product rollouts as consumers, customers began to ramp into their new product releases. As mentioned previously, UEI is actively in development, or is in the designing stage with numerous customers looking to launch advanced intelligent controller platforms. Some we’ll launch in the coming months and some over the next 18 months. This is creating an interesting and exciting transition in our industry. While, these changes can bring short-term interruption in orders, as we’ve seen this quarter and last, and affect short-term movements in margin as larger customers sales increase as a percent of our overall mix, due to their aggressive rollout of these exciting new products. The overall positive trend is becoming clear. Our industry is moving toward advanced two-way intelligent controllers, as well as sensors and services that are making the smart home a reality. We have worked for years on the technologies and features that anticipated this trend, and our customers have now begun to implement the architecture that will support these advanced solutions. We stand uniquely positioned to capitalize on this exciting new trend in our industry and create new avenues of growth for our company. With that, I would like to now turn the call over to our CFO, Bryan Hackworth to discuss our financial results.

Thank you, Paul. As a reminder, our results for the second quarter and first six months of 2015, as well as the same periods in 2014 will reference adjusted pro forma metrics. Second quarter 2015 net sales were $147.6 million, compared to $146.3 million for the second quarter of 2014. Business category net sales were $135.5 million, compared to $132.7 million. Consumer category net sales were $12.1 million, compared to $13.6 million. As a result of the stronger U.S. dollar versus the euro and British pound, consumer sales were adversely affected by $1.5 million. Gross profit was $40.5 million, or 27.5% of sales, compared to gross margin of 29.9% in the second quarter of 2014. The decrease in our gross margin rate is due primarily to the fact that a higher percentage of our sales were made to large customers who received favorable pricing as a result of higher volumes. As mentioned previously, the stronger U.S. dollar versus the euro and British pound negatively impacted sales and gross margin dollars by $1.5 million. In addition, we’ve also experienced a decrease in shipment royalty revenue associated with the TV and mobile device channels. Certain of our OEM customers in the TV market have been losing market share, and as a result, our sales have been adversely affected. We made progress in the mobile device channel in the current year, primarily in China. However, the loss of the program with the significant brand name has also negatively impacted our gross margin rate. Total operating expenses were $27 million, compared to $29.3 million in the second quarter of 2014. Breaking down our operating expenses, R&D expense was $4 million for both periods, reflecting our continued investment in new products and technologies. SG&A expenses were $23.1 million, compared to $25.3 million. Operating income was $13.5 million, compared to $14.5 million in the second quarter of 2014. The effective tax rate was 21.5%, compared to 24.6%. Net income for the second quarter of 2015 was $10.7 million, or $0.67 per diluted share, compared to $10.6 million, or $0.66 per diluted share in the second quarter 2014. For the six months ended June 30, 2015 compared to the same period in 2014, net sales were $280.3 million, compared to $276.2 million. Gross margin was 27.9%, compared to 29.2%. Total operating expenses were $55.6 million, compared to $57.3 million. Operating income was $22.6 million compared to $23.2 million. Net income was $18.2 million, or $1.13 per diluted share, compared to $17 million, or $1.5 per diluted share in the prior year period. Next, I’ll review our cash flow and balance sheet at June 30, 2015. We ended the quarter with cash and cash equivalents of $82.2 million, compared to $112.5 million at December 31, 2014. During the second quarter, we repurchased approximately 580,000 shares for $30.3 million representing an average price of approximately $52 per share. We expect to continue to buyback our shares over the next three months, particularly, at the recent trading range of our stock, as the promising trends in our industry and our growing market position support are positive long-term outlook. DSOs were approximately 63 days at June 30, 2015, compared to 66 days a year prior. Net inventory turns were approximately 4.1 turns at June 30, 2015, compared to 4.6 turns a year prior. Now, turning to our guidance. For the third quarter of 2015, we expect revenue between $164 million and $172 million, compared to last year’s third quarter revenue of $147.8 million. EPS for the third quarter is expected to range from $0.77 to $0.87 per diluted share, compared to $0.80 recorded for the third quarter 2014. It is important to note that we expect our seasonality of sales and our earnings this year will be different than in the past, because of the exciting platform transition that we’re in the midst of – with some of our customers, our fourth quarter sales and earnings are currently expected to be much stronger than in the prior year. Based on the aforementioned positive trends in our industry and our growing market position, we are reaffirming our long-term financial outlook. We expect average annual sales growth of 5% to 10% and average earnings growth of 10% to 20% over the next five years. I’d now like to turn the call back to Paul.

Thanks, Bryan. We are proud of our performance so far in 2015, while we’re even more excited about the opportunities ahead. As we get closer and closer to the day, where home entertainment control is completely automated and intuitive and incorporates more and more features, UEI is becoming integral to providing the innovations that support the world’s largest consumer electronics, subscription broadcasting, smart device and smart home companies in implementing this transition. In fact, as more and more products, technologies, and services are introduced within the home, UEI becomes even more integral to providing the connection and control capabilities to some of the world’s leading companies who are making the smart home reality. No matter, the type of device whether it’s embedded in the TV, set-top box or now home safety and security systems, or whether it’s being controlled by a traditional universal remote control or a smart device, UEI is at the forefront of creating these new ways to simultaneously enhance and simplify the home experience. Stay tuned. I would like to now open it up for questions. Operator?

Certainly. [Operator Instructions] And our first question comes from Steven Frankel of Dougherty & Company. Your line is open.

Good afternoon. Paul, maybe we’ll start with the acquisition you announced today. When you talk about developing products, this is something you would be delivering in conjunction with your subscription broadcast customers?

Well, the answer is, yes. It goes beyond that. But certainly, our subscription broadcasting customers are interested with the infrastructure that they’ve now have placed in your home, the IP backbone, IP connected boxes, and of course, cable modems, routers, et cetera, as well as the RF power of those nodes becomes relatively easy for them to add other services on top of that architecture. And that’s something that we’ve been discussing with the major customers and we’ll have more to talk about on that as time goes on. It’s actually how we got to know Ecolink, because we’ve been working with them on some of these projects.

And today, the subscription broadcasters, are they doing this, are they doing that through the set-top box, or they doing that through another piece of equipment today and you’re going to offer more of an integrated package?

Well, they’re actually doing it through the entire architecture. They – again, they have an IP backbone, the boxes have a flavor of ZigBee or RF4CE, which we’ve embedded in our remotes. We’re actually one of the world’s largest purchasers of that type of chip because of the number of remotes we’re doing with various providers of RF4CE. So we’ve gotten a pretty strong position in that market. The new services are actually already being implemented. We already have some wins in this area, as I alluded to in the prior remarks. We’ll be talking more about that as time goes on. But we’re working with some major players in the industry. I don’t want to underestimate though also the existing market for home security, which as we outlined in the call is quite sizeable. And the company that we have acquired, the people there have a great deal of extensive experience, decades of experience in building the products and expertise in the protocols that are necessary in that market. And also to translate from older sensors while window, door sensors, our PIR motion detectors for security systems that they have a real expertise in those products and can convert the proprietary protocols of yesterday, the sub-gig protocols, into things that can be understood by the networks of today and the networks instituted by our customer base: cable, satellite and telco operators. So, I think there is a real good fit here for growth with these products. And as I said, we’ve already been working with these guys on projects that are active today.

And could you give us a rough idea of what their revenue will be in 2015, and whether this is going to be accretive or dilutive earnings?

Yes, less than $10 million this year. Their sales, it will be accretive, mildly accretive at first, but of course the forecast is for it to be increasingly accretive as time goes on. But it’s been an accretive deal.

Great. And then, Brian mentioned that we’re not going to have the normal sequential decline in revenue in Q4. What kind of sequential ramp in revenue might we think about?

Yes. We’re not going to quantify that much, Steve. I thought it’s important to make a comment about it, because as you know it has grown for years and typically Q4 take a dip versus Q3. And if you look – what I’m basically telling you is, the growth for Q4 over last year’s Q4 should be strong. So, I wanted to take the past history and apply it to this year’s Q4.

Okay. And could you give us the customer concentration in the quarter?

Yes. We had two 10% customers, Comcast was at little over 20%, and DirecTV was about 12%.

Okay. I’ll pass the baton. Thank you.

Our next question comes from Mike Olson of Piper Jaffray. Your line is open.

Hey, good afternoon. So, just a quick clarification on the Q4, I understand you’re saying Q4 year-over-year growth will be strong. Are you also, in fact, saying that it’ll be up sequentially or just saying it will be strong year-over-year?

Yes. I’m not saying it – I’m not making any specifics on that. And I’m not saying it will be up, and I’m not saying it’s going to be down necessarily. All I’m saying is you’re not going to see the dip that you typically see as you’ve seen in prior years. If you take the prior years, you’ll see a decent size dip from Q3 to Q4 and that won’t – that shouldn’t happen this year.

Got it, understood. Okay. And then, Paul, you talked about events, remote controls being increasingly adopted and the Comcast deployment volume is increasing, so that sounds good. I would imagine that Comcast is a great reference customer to have. And other service providers look to them as a leader in the space. Are you saying that, you actually have deals in place for next-gen remotes with other service providers that will result in shipments still this year? And generally, what’s kind of the pace of deployment that you see from service providers or does it really vary significantly depending on each one?

Yes, there’s a lot embedded in that. The Comcast obviously is a leader so, operators across the world look at what is happening here in the U.S. and in particularly with Comcast and see the success their having and with this program, so are very interested. It’s a very high profile project, so that certainly has helped. There are a number of projects at various stages of development. Some will probably launch this year, others won’t. They will launch early next year, into the middle of next year. I mean, I guess, the real point to make here is we literally have at least a dozen that we’re working on. And again, not all of them are completed that they’ll be introduced. Some of them are still at the RFQ or design stage, so they’ll probably won’t come until the middle of next year, maybe even towards the end of next year. And again, even varies by operator. Some of them can have these projects done in six months, others take at least 12. So it varies customer by customer. But, suffice it to say, there is a lot of activity in this area. They’re not all doing the same things. But what is common to all of them is that they’re typically on an IP backbone. They have connected cloud-based system with two-way utilized in some way. Typically RF, Bluetooth, Bluetooth low energy, Bluetooth Smart, RF4CE, some form of two-way radio frequency which allows us to do a lot of things that we weren’t able to do three years ago with these products, including QuickSet and QuickSet 3.0, but also other services that they can provide, thus Ecolink. So I think there’s a lot – really a lot of interesting things going on right now in our industry. Comcast has been a leader here, but Liberty has been in Europe. There are a lot of companies here that haven’t just been waiting for Comcast. They’ve actually been working on their own and are either about to introduce or will introduce early next year to the middle of next year, a new platform.

All right, thanks a lot.

Sure.

Our next question comes from Les Sulewski of Sidoti & Company. Your line is open.

Good afternoon, guys. Thanks for taking my questions.

Hi, Les.

Hi, just to follow-up on the Ecolink. Is there an installation or – and a customer service component to this?

Well, typically, that’s done by the operator or the service provider. But the products are unique, the products that we’re doing. There is a not service, if you’re asking if there is a service revenue component, don’t think there’s any substantial service revenue component to it.

And then also, I guess, just to follow-up on that, and then, what got you attracted to that acquisition, is it mostly technology or was there a sort of a price points component to the end-user?

Well, it’s a little of all those. I mean, we think that we can provide some benefits to them, and that, obviously, the distribution path with some of these products, we have great relationships for, so we can accelerate their growth. We also have a great cost position on some of the common parts that are required for these next-generation services that provide some value. They have a lot of experience in this market and have a lot of innovative ideas, many of which are covered under patent for things like Universal Translators is the best way to call it or as we used to call them the one for all of security systems, where there are a lot of homes that have wireless sensors already installed, they operate on a sub-gig frequency, and we can build translators to utilize those existing sensors to remove another barrier to sale for these security providers. If the customer doesn’t want new window and door sensors installed, we can implement a translation utility for them. These guys have mastered all of those protocols. So there was a lot of technology and patents involved in what they were doing. They’re an innovative group, a small company, but a very innovative group of people, and again similar in culture to UEI, where they’re solving problems and coming up with innovative new ideas to solve issues that exist in these safety and security systems just like we’ve done in home entertainment since the start. So I think there was also a good fit there.

Thank you for that color. And regards to your inventory, there’s some build out during the quarter. How can we look at that, especially, looking at COGS over the second quarter? Are we expecting little bit of a higher margin profile moving into with third and fourth quarter?

Yes, we don’t give specific guidance on the margins. But the main reason for the increase in the inventory levels is because of the increase in the sales for the back-half of the year. And these – the platform transition is going very well. As Paul mentioned, we have a number of customers transitioning over and require us more capital, require us more inventory to meet the demand.

Is there any possibility of a write-down from, maybe still inventory or inventory that’s in a move?

No, no. The good news is the increase in inventory is because we have POS. So it’s not anything to be alarmed about in terms of you know [ph]. I mean, we always have some sort of – throughout the year, but it’s not going to be related to the platform transition.

Got it. Okay, great. And then perhaps last one, I know, you – perhaps guidance on CapEX for the full-year?

Yes, we’ll look into. I think we’re going to look, this year is a little bit of anomaly because of the – it’s a good news, we have a lot of customers coming on board. And, again, as I mentioned previously, it requires capital. So this year is a little bit of anomaly. We’re probably looking the low- to mid-twenty-millions for 2015, which last year, I think was $18 million.

Great. Thank you.

Sure.

And our next question comes from the Ian Corydon of B. Riley & Company. Your line is open.

Thank you. Just another clarification on the Q4 guidance. Revenue supposed to be up significantly year-over-year and earnings as well, whereas in the third quarter, at least, at the mid-point of guidance earnings won’t be up much despite sales being up 11% to 16%. Can we assume that the Q4 increase in earnings is more due to leveraging operating expenses versus some kind of gross margin change from Q3 to Q4?

Yes, I think, you can say that. I mean, I don’t want to get to specifics in between the lines, we just don’t do that. But I think for Q4 what’s going to drive is really the top line. We’re going to be able to leverage it in the sales of – are going very well with the platform transition. So we’ll be able to lever that and we’re confident that we can deliver a stronger bottom line.

Okay. Understanding that Ecolink is small, can we assume that the guidance does include that? And then if you can, can you talk about the margin profile and the seasonality of that business.

Yes, by default if the guidance does include it, as Paul mentioned, we expect it to be mildly accretive in the first year and then grow thereafter. So, you can technically say it’s included. And right now, we’re not going to give margin profiles on Ecolink.

For seasonality?

Yes, it’s not highly seasonal business.

Yes, it’s not seasonal.

Okay, thanks.

Currently, it’s less than $10 million.

Got it. Thank you.

[Operator Instructions] And our next question comes from [Daniel Schenier of Nlist-Estika Capital] [ph].Your line is open.

Thanks, real close. Hey, guys, thanks so much for taking the question. Actually I think you partially answered it with the last question. I was just wondering if you quantity how much of the Q3 top line guidance, is it something that’d be coming from Ecolink?

It’s minimal. Right now currently for the full-year, it’s less than $10 million, so it’s minimal.

Got it. Thank you.

And our last question comes from Steve Frankel, Senior Analyst. Your line is open.

Paul, on the smart device category, is there any update on your mission to try to get attached to more smartphones, especially, in China?

Yes. Well, we’ve actually had a good year there, I mean, in terms of the number of models. I don’t have the exact number. But what typically happens is, we start with a customer where they put it in one model or maybe two, and then as time goes on, they increase that number. We’ve had that experience with most of our customers, including those in China. So, there’s still good results there. The sales affect is smaller than some of the advanced remote work we’re doing and even as we would forecast for sensor work we’re doing on the smart home side of things, for safety and security products, the revenues there are just much greater, which is why we spent a lot of time discussing that. But still good results there. The only negative was the lost of the major program this year, which did affect us.

Okay, great. Thank you.

Sure.

I’m showing no further questions at this time. I would now like to turn the conference back over to Mr. Paul Arling.

Okay. Well, thank you everybody for joining us today and for your continued interest in UEI. Coming up next month we will be participating in the 6th Annual Credit Suisse Small & Mid Cap Conference in New York on September 16. So we hope to see some or all of you there. Thanks very much, and goodbye.