Good day, ladies and gentlemen, and welcome to the Universal Electronics Third Quarter 2017 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Becky Herrick of LHA. Ma’am, you may begin.

Thank you, Divya, and thank you all for joining us for the Universal Electronics Third Quarter 2017 Financial Results 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 uei.com. In addition, 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 company’s ability to anticipate the needs and wants of its customers and timely develop and deliver products and technologies that will meet those needs and wants, including the company’s advanced control products, which include QuickSet, adaptive control, voice control, home security and control, temperature controllers and automation, and other technologies identified in this call; the ability of the company to achieve its sales growth as anticipated by management; the significant percentage of the company’s revenues attributable to limited number of customers and particularly, the sales growth and benefits of the company’s relationship with Comcast; the timing of new product rollout orders from the company’s customers as anticipated by management; the continued trend of the industry in providing consumers with more advanced technologies; management’s ability to manage its business, to achieve its revenue, margin and earnings as guided; the company’s ability to continue to gain market share in certain geographic regions;…

Good afternoon, and thanks for joining us today. Our third quarter net sales were $175.5 million, up 3% from the year-ago period. EPS was $0.81 this quarter versus $0.93 in the year-ago quarter. Our sales in Q3 came in lighter than the expected due to softness in the U.S. subscription broadcasting market. With the rollout of advanced control products to some of our customers during Q4 and to many of our customers into 2018, we expect this affect to be temporal as we are finalizing advanced projects with a number of key customers and we’re beginning to see the shipments of those products ramp now. This is evident in our fourth quarter sales forecast, which reflects a 7% to 12% year-over-year growth rate. Our customers continue to adopt new platforms that include the latest in radio frequency and voice technologies, as well as a host of UEI-inspired features such as QuickSet, UAPI, One Touch View and adaptive control. In Q3 of this year, we began shipping a new voice remote control that works with new and current DISH Network set-top boxes already deployed in millions of U.S. households. This remote features the latest and advanced voice-recognition technology for the ultimate in content search and navigation. The remote is also fully featured for today’s connected digital subscriber with cutomizable button that enable users to create their own personalized experience to launch over-the-top services such as Netflix or YouTube. As well as backlit buttons for ease of operation in the middle of the dark lit room and even a remote locator function that is amongst the most highly demanded features by consumers. Similar to the U.S. market, European broadcasters continue to make solid investments in advanced TV services. Liberty Global announced growth in its premium video subscribers primarily by growth in its…

Thank you, Paul. As a reminder, all results for the third quarter 2017, as well as the same period in 2016 will reference adjusted non-GAAP metrics. Third quarter net sales were $175.5 million, compared to $170.3 million for the third quarter of 2016. Business category net sales were $162.9 million, compared to $158.3 million in the third quarter of 2016, representing growth of approximately 3%. Overall, sales were less than we expected. Sales in home security were nearly 5x that of the prior quarter. However, they still fall short of our expectations due to a new customer pushing their initial out to Q4. Consumer Category revenue was $12.6 million compared to $12 million in the prior year quarter. Gross profit was $46.2 million or 26.3%, compared to 26.1%. Operating expenses were $30.7 million compared to $28.9 million in the third quarter of 2016. R&D expense was $5.3 million compared to $4.8 million in the third quarter of 2016. SG&A was $25.5 million compared to $24.1 million. Operating income was $15.4 million compared to $15.6 million. The effective tax rate was 21.3% compared to 10.8%. As explained in the previous call, in Q3 2016, we received $1.8 million of tax refunds from the Chinese Government for various tax incentives that related to fiscal 2015. Net income was $11.9 million, or $0.81 per diluted share compared to $13.8 million or $0.93 per diluted share in the prior-year period. For the nine months of 2017, net sales were $515.8 million compared to $494 million the same period last year. Gross margins were 26.3% compared to 26%. Operating expenses were $92.6 million, compared to $88.7 million in the first 9 months of last year. Operating income was $43 million compared to $39.6 million. Net income was $32.4 million, or $2.21 per diluted share compared…

Thanks, Bryan. The growing adoption rates for our advanced controlled products and technologies provides us with an expanding customer base, supporting our long-term path to continued growth. To ensure we are building the business ahead of this growth, we continue to make operational and structural changes, such as; the relocation of our Southern Chinese factory, the monetization of the facilities and processes at our other two factories in China and the much larger than average movement of projects between them. In addition, the exciting transformation of our industry from simple, one-way control products to advanced two-way products with new communication protocols begins an era where consumers will no longer struggle to set up their new systems, nor will they have any challenge in finding exactly what program they want to watch right now. These products are quite simply better. Yet much more complex to design and build than they were before, and require a much greater amount of work by both us and our customers to ensure that they will work first the right – the first time and every time. These new products and processes can, at times, take longer than expected and the initial work may cost more than anticipated. While there may be short-term impacts to margins, the long-term positive impact of these changes is clear. This will be proved out in the months and years ahead. We are more excited than ever about the future prospects for our company as the home entertainment and home control markets continue to evolve. Stay tuned. Operator, we would now like to open up the call for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Andrew D’Silva with B. Riley FBR. Your line is now open. Andrew D’Silva: Hey, guys, thanks for taking my call. Just a couple of quick questions here. When we are looking at gross margins. Is it still appropriate for us to expect you to, by the middle of next year, hit that 27%, 28% range or is that now a little bit too aggressive when we start thinking about everything that’s going on with the factory change?

Yes. This is Bryan, Andy. I expect the gross margins to improve upon what we have embedded in our Q4 guidance. I don’t think going to 27%, which I’ve mentioned previously is out of reach. We came in at 26.3% this quarter. We’re right now in the fourth quarter, I think it’s sort of an anomaly where you got – we have issues with – in terms of manufacturing efficiently with the transition. There is a layering effect where we have been transitioning for about a year now and you – what we keep learning on these new products. So the burden becomes heavier obviously for the northern factory. And with this is good news, you layer on, on top of that the fact that we’ve – we’re starting to ship these new advanced projects and we got a number of projects in the queue. It’s putting a lot of pressure on the factory. So right now, I do expect the gross margins to improve in 2018 upon – above what we’ve embedded in Q4. So I don’t think 27% is unrealistic, but we are going to have to make some improvements to get there. Andrew D’Silva: Okay. Absolutely. And I can think an even bigger picture and the greater percent of total technologies are advanced remotes or Ecolink products. What is the potential range that margins could improve? Are we seeing things in the low 30% or are we getting capped in the high 20s?

Well, if you’re talking about product. I will say Ecolink the home security products yield a higher gross margin than our company average, depending on who we are shipping to. If you’re shipping to a large customer that may not be true. But overall, as I said before, if we start to ship more to smaller customers, that should help our rate on an overall basis because they’re not going to get the purchasing power of a larger company. Andrew D’Silva: Right. Absolutely. And as far as sticking with the next generation technology theme, previously you’ve mentioned about a 70% reorder rate annually. Is that still carrying over now with new remotes and other Internet of Things type products that you are launching now or is there any variance in that relative to previous – what you’ve previously seen?

No. That ratio remains true with the higher advanced projects as well. Andrew D’Silva: Okay. Just lastly, with CES coming up in the beginning of next year. Is that typically when you guys expect a lot of announcements related to some of the operators rolling out new platforms officially? Is that a good backdrop for us to start thinking about, as a catalyst of these from an announcement standpoint in your opinion?

Yes. There may very well be announcements around CES. Certainly, around the consumer electronics market for certain, because that is the annual show for them to unveil new product. However, as you probably well know, a lot of the operators are also very active at the show and do sometimes new product announcements around it. So it’s a pretty good time of year to unveil their plans for 2018. And will be doing a fair bit of that as well. Andrew D’Silva: Okay. That’s probably a good way for us to kind of figure out the lay of land from perhaps a penetration rate assumption with new remotes on the total subscriber base that you’re touching at this point – or able, you’re working with. Okay, perfect. Great, thank you very much.

Sure.

Thank you. Our next question comes from the line of Steven Frankel of Dougherty. Your line is now open.

Good afternoon. So Paul, a quarter ago, you seemed fairly confident that volumes were going to ramp and that you were getting your arms around these manufacturing issues. Now it looks like it has gotten worse. Could you give us some specifics on where you’re finding these challenges and what has to be done to get margins going north again?

Yes. That we are seeing the ramp. Obviously, the Q4 sales guidance is 7% to 12%. Take the midpoint of that if you’d like. I mean that’s fair – fairly good growth rate. With these new products coming on, we’re starting to see the effect of the work we’ve done for quite some time to get some of these projects launched, and we do expect going into 2018 that there will be even more of them because again we’re currently working on these products. Some of them are scheduled to launch early next year and we’ll keep people updated on that. But one thing we know for sure and we’ve said this for a while, these projects are all going to launch, it’s just a matter of which week and which month. Sometimes they get delayed by weeks or months, but they all launch eventually. It’s just an iteration between testing. Sometimes it goes into an initial launch and then they discover that they want to make some changes to the UEI, so they bring it back into development, they perform that development and then it goes back into testing and then into initial rollout. So they reiterate a bit on these, which causes delay in volume shipments. But again, eventually they get to volume shipments. So it’s only matter of fact…

I kind of – but I want to dig in on why in a product cycle where you should be making, hey your gross margins are going down not up. What’s going on specifically in China and how do you address it?

A couple of effects. With the eventual closing of the southern factory which we have now done, you then have to transfer the hundreds of products that were made at that factory into a new factory. One thing about the factories is that, the first runs of any product are usually the lowest margin or the highest cost runs. Because when you first set up a product at the factory, they are not used to the process of making that particular product. Particularly if it is a, what we would call internally a complex project.

Wasn’t that a phenomenon that we suffered through last quarter? I’m wondering just why that it…

We are suffering through it this quarter, but again, this will diminish because the factory in the South – the last transitions are occurring this quarter. But the initial runs of those projects are typically the lowest margin runs. And we’ve transferred in – well, this year, in – the two prior years we have a internal measurement of projects which we call complex. The maximum number of complex projects we’ve done in prior years is 10. This year, we’ve done 25 and on top of that, we’ve transitioned 10 from the southern factory, which means the two factories have absorbed 35 complex products. On top of that, we’ve layered in hundreds of new products from the GTC factory, from the southern factory. So when you layer these things together what happens is you’ve got a lot of new projects at the factory. Now to the company, those hundreds of transfers are not new. But they are to the factory they are now being run at. And again as I said, the first runs of a product at a new factory are the highest cost runs and thus the lowest margin runs. You layer on top of that the new products, which – the complex products typically, a simple product in our company will probably have two testing steps. A complex product may have seven. So that product at the new factory has to go through a process of getting perfected. The real answer to this question, Steve, is that what we need is time because as these orders come in, once you do the first run, then the second run, then you go to the third run. At each successive run, the factory gains more experience in the product and can be more labor efficient, less overhead is spent…

Okay. Let’s switch gears a little bit. You talked about subscriber weakness and I know Comcast and other talked about higher churn in Q3. Maybe give us your customer concentrations in Q3 for Comcast and DIRECTV? And have these companies or your larger subscription broadcast customers dialed back their forecasts for Q4 and beyond because of what they saw in Q3?

Yes. The customer concentrations, Steve, Comcast was at 21%, which is consistent with where they were in Q3 of 2016 and DIRECTV with 11.5%.

Okay. And then Paul, what’s your sense on how these companies are reacting to Q3? Are they pulling back on their build plans, which might impact your growth rate in 2018?

Well. They haven’t shared with us, I mean obviously, their complete forecast for 2018 yet. But I would say that the customers over time will go through periods where they will order less, and then they will make changes to their offering and then they will order more. So this has been true for at least the last 20 years. I think that we’re going to see customers that will have a less aggressive order pattern. But we have new customers that have extremely aggressive order plans. And typically these offset, right? We do have customers that probably – for I won’t mention any specifics about future forecasts of any particular customers, but we do have customers that in Q4 will probably buy less than they did in a prior year. But yet, we have offsets to that where we have some of our customers who are more aggressively ordering. And then we have new customers layered on top of that. And then we have other customers who are probably buying about the same number of units, but they are transitioning to an advanced product which carries a higher ASP, which will lead to sales growth with that account but their unit volumes have not changed. So even if their subscriber growth is nil, they are still ordering – the revenue effect to us is still better, because again, they’re upgrading that offering to these advanced two-way products with voice, some form of RF, RF4CE or Bluetooth with other features, then the ASP goes up.

And given where you are competitively and given the challenges at producing these products and obviously, with your largest customer, you don’t have a lot of pricing flexibility. Do you think you’ve price products appropriately for the rest of the customer base?

Well look, I think there’s probably always opportunity to improve that, but I would say that yes, competitively we have. In cases, where the product is greatly differentiated, there’s probably an opportunity as time goes on to improve on that front for certain. As these properties that we have, QuickSet, Control Plus and others become more popular features and they are unique to us. I think there is an opportunity there. Certainly with all customers, but particularly, medium- to small sized customers for certain because their volumes are lower, and if they want that special product, then they will probably have to pay a small premium over what they would pay a competitor. So that’s our strategy, has been for long time and I think we’re successfully implementing that. We just need to now get as we are starting to see in Q4, a bit of a sales growth, again 7% to 12%. As we go into next year I think as more of these platforms get out. As the operation of these new services get more common place across the world, it becomes a competitive imperative for the others to adopt it. And I think that benefits us greatly as time goes on.

All right. One last one if I might. You’ve occasionally updated us on, in essence, your penetration. What percentage of description broadcast market is your customer base addressing? Did you make any material headway in Q3 in terms of new customer additions?

Yes, Steve, I didn’t update it. I mean, we’re obviously still over the 25% that we were last quarter. I think right now we’re more focused on getting the transitions done, getting these new advanced products launched and that alone in the coming quarters over the next year, will provide us the incentive for growth that we need.

Okay, thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Greg Burns with Sidoti & Company. Your line is now open.

Good afternoon. In terms of the – some of the new products you mentioned, one was the OEM, TV manufacturer, some of the other OTT providers in Asia. The controls for those types of solutions, how do they measure in terms of ASPs relative to what you ship into the cable broadcast market?

Well, it depends upon the customer. Again, typically it’s on unit volume. So if a customer is buying 30 million units a year, they are certainly going to get a probably a sharper ASP than someone who is only doing 1 million units. So, I can’t disclose obviously, customer specific prices or volumes, but generally, if you look at an operator who has a lower subscriber base, typically their unit volumes will be lower and therefore, their ASPs will be higher.

Okay. But I was just trying to get not exact numbers, but are the ASPs comparable for those types of solutions to what you ship on average into the cable provider market?

They are. Yes. They are similar, but again based on volume. Some of the largest subscription broadcasters on Earth are here in the U.S. Their pricing would be probably a little bit lower on the similar product just simply because they are buying more than 10 million units a year.

Okay. And it looks like Comcast was down sequentially. Was there anything in particular? Was it just pulling back on orders? Was it more in the home security? What was driving that?

No. They were down – I mean they were at 12%, but if you the last year as well, actually last couple of years for some reason Q3 is particularly their lowest quarter. Last year they were at 21%, in the previous quarters they were in the 23% and 24% range and the same thing happened this year. So I don’t think it’s anything usual for them, or representative of anything that’s going to happen in the future.

Okay. And just in terms of the weakness you saw this quarter, in the past, you talked about some product rollout delays and also sometimes you saw a customer with some inventory issues that they are working through. Was there anything specific or did you see similar type problems this quarter? Was it a inventory issue? Was it a project rollout issue or was it just generally lower order flow from customers?

Well, it’s a little of both. I mean I supposed some of these customers as they were moving into launch of a product, before they launched the product, they would’ve truncated orders. And then sometimes what happens is they’ll launch a new one during the quarter and the initial orders on it will be strong. So it begins to offset any weakness they had earlier in the quarter. And then the next quarter, they may order greater than average of volumes. So it certainly, as we go through this with literally dozens of customers, there will be cases where they will truncate before and as soon as they go to the new product, they’ll accelerate. Some of that nothing major in the quarter, but some of the major customers did drawback a little bit, but there’s no sign of long-term weakness. Cable operators, satellite providers sometimes drawback to purchases, over the long-term they buy to deployment. So they usually have quarters last and other quarters where they’ll order more.

Okay, thank you.

Thank you. Our next question comes from the line of Steven Frankel with Dougherty. Your line is now open.

Hi. Bryan, what tax rate is implied in your Q4 guidance? I know in the past that Q4 tax rate has tended to be different than the other quarters?

Yes. I embedded it. I would use a typical rate for us would be in low 20s.

Okay, great. Thank you.

Thank you. [Operator Instructions] And I’m sure no further questions into queue at this time. I would like to turn the conference back over to Paul Arling for closing remarks.

Okay. Thank you for joining us today and for your continued support of Universal Electronics. We’ll be at – as we mentioned before at the International Consumer Electronics Show in Vegas on January 9 through 12. And we’ll also be presenting at the 20th Annual Needham Growth Conference held January 17 to 18 in New York. We look forward to seeing you at one or both of these events. Thank you for joining us today and good bye.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Everyone have a great day.