Universal Electronics Inc. (UEIC) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Year End Universal Electronics Earnings Conference Call. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Ms. Kirsten Chapman, LHA, Investor Relations. Ma'am you may begin.

Thank you, Skyler, and thank you all for joining us for the Universal Electronics fourth quarter and full year 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. 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 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 the continued adoption of our voice remote control technologies by existing and new customers; the successful implementation of our QuickSet technologies including artificial intelligence, the continued and growth of our -- continued expectance of growth of our home security and control temperature controllers and automation and other technologies identified in this call; the continued success and growth of our Ecolink technologies and products, the successful integration of our newly acquired RCF business; the ability of the Company to achieve its sales growth as anticipated by management; the significant percentage of the Company's revenues attributable to a limited number of customers and particularly the sales growth and benefits with the Company's relationship with Comcast and it's syndicated partners; the timing of new product rollout orders from the Company's customers as anticipated by management; the continued trend in 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; and other factors described in the Company's filing with the U.S. Security 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 from those projections. 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 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, 2016, and the periodic reports filed thereafter. These documents, along with the risks identified on this call, 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 remarks, adjusted non-GAAP metrics will be referenced. Management provides adjusted non-GAAP metrics because it uses them in making financial, operating and planning decisions and in evaluating the Company’s performance. Management believes these measures will assist investors in assessing the Company’s performance for the period been reported. A full description and reconciliation of these adjusted non-GAAP measures versus GAAP is included in the Company’s press release issued today. In addition, management has elected to also exclude the effect of foreign currency fluctuations that are recorded above and below the operating line as well as the effect of the related hedges and its adjusted non-GAAP metrics. Management believes constant currency measures provide useful information to investors because they provide transparency to underline performance by excluding the effect that foreign currency exchange rates have on period to period comparability given volatility in the foreign currency exchange market. 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. Then Paul will return to provide closing remarks. It’s now my pleasure to introduce Paul Arling. Please go ahead, sir.

Good afternoon and thanks for joining us today. For the fourth quarter net sales were 180.7 million up 13% from the year ago period. EPS was $0.60 this quarter compared to $0.74 in the year ago quarter. For the full year net sales were $696.5 million up 6% compared to 2016 and full year EPS was $2.81 compared to $2.88. As previously discussed during 2017, we took action to improve our long term manufacturing capabilities which had a near term negative impact on margins and the bottom line. These effects are temporal. We are seeing -- already seeing a lift in margins and believe we will see further improvements throughout 2018. Before I get into the details, I'd like to begin by highlighting an award that recognizes our excellence and leadership in the industry. The National Academy of Television, Arts and Sciences awarded UEI with a 2017 technology and engineering achievement Emmy, for our work related to voice navigation technologies for discovering and interacting with TV content. This accolade cites excellence in engineering and creativity that has materially affected the television viewing experience. On behalf of all the engineers and developers at UEI I am honored that their work has been recognized by the industry as transformative and truly reflects our mission to innovate and redefine what a remote is and what a remote is able to do. Now I'll review details on our North American subscription broadcasting channel. In Q4 we began shipping Comcast next generation voice remote control the XR15, which provides enhance visibility and design improvements. We continue to see solid momentum in the market for Comcast XFINITY syndicated program as Cox Communications came online last year and Shaw began shipping late last year. We will see other launches and increased activity in this area throughout 2018. We also launched the EchoStar DISH voice remote which includes our award winning technologies design to deliver the best voice capture compression and RF transmission capabilities. At the 2018, International Consumer Electronics show in Las Vegas in January, we launched the new TiVo voice remote designed for the service provider channel, which is expected to get released in March of 2018. Some of the systems that current deploy TiVo services include mid size operators such as RCN, Armstrong, Bunkie, GCI and MediaCom. The new TiVo voice remote supports standard UVI features such as TiVo voice which enables search through Netflix libraries, remote finder and OTA with premium features such as QuickSet cloud coming soon. In EMEA, we’re starting to see a nice uptake in sales in our subscription broadcasting channel as new product introductions and product roll outs continue to add accounts such as Liberty Global, Virgin Media and Sky in Europe, MultiChoice in South Africa and Tata Sky in India. UEI is also supporting Sky UK in there IP service rollout using our Sky Q Remote control. Looking ahead, we anticipate continued rollout of advanced voice remotes at major operators throughout Europe such as Vodafone and Orange expected in Q2 of 2018. In our APAC business we continue to see a growing demand for Bluetooth enabled remote controls across all of our channels including smart TV as well as high ARPU operators in Malaysia, Australia, Korea and Thailand. At the International Consumer Electronics show earlier this year we announced several new products and technologies to drive new innovations to serve the market. In addition to show casing our next generation of QuickSet technology, we also announced a line of standard voice remote control platform design specifically for the android TV OS, as well as several new product concepts. If you recall QuickSet is an embedded and cloud delivered technology that enables automated discovery and control of devices and services on any entertainment device in the home. The latest version of QuickSet integrates UEI Control Plus engine with IP services. This feature is really exciting as it discovers any app on all connected devices UEIs innovation in the area of automatic discovery and set of devices that unmatched in the home and entertainment industry. Now we’re taking it one step further. Because now you can sit down and with one touch or with a simple voice command you can directly launch your desired app, such as Netflix, Hulu, HBO and many others regardless through which device these apps are available. Once again we're leveraging all of UEI proprietary control technologies to enable power and input control of any audio or video device connected to the content source. Another feature of our latest QuickSet solutions launched late last year is our Control Plus engine with RF4CE service that enables discovery and control of the newest RF4CE set top boxes without the line of site requirement of traditional IR enabled set top boxes, this technology is currently being integrated into the new 2018 Samsung QLED TVs equipped with QuickSet 4.0. We also announced Nevo AI a data driven personal assistant that leverages all the value of QuickSet and Control Plus, using a simple natural language interface eliminating the need for an arm screen graphical user interface. As stated on previous calls, our safety and security channel continues to show excellent growth. In addition to our strong performance at Comcast XFINITY Home platform, we added a smart security and central partner in the smart home space, our partner will be introducing these products later this year and we'll provide more details at that time. This segment of our business has performed above the expectations we set when we acquired this product category just over two years ago. In 2018, we expect this business to continue to grow strongly with new products and new customer announcements. Our home automation channel is also building momentum as we develop products for Daiken, Fujitsu and Mitsubishi, in the light goods segment for Aircon and other home control applications. These new products build on our experience in developing low power RF controllers using technology such as Wi-Fi, Bluetooth and ZigBee. This channel continues to exhibit strong performance and we see continued growth as we add to our products and customer base, we have shown our ability to succeed in the home control market well beyond home entertainment. The Ecolink business has grown six fold since we acquired it approximately 2.5 years ago. Further we have a significant business in HVAC and we're beginning to convert many of our traditional control products into smart connected products that are integral to a smart home experience. And the opportunity is growing. The global forecast for this smart home market is estimated to double over the next five years according to Zion market research. Additionally, according to IHS the worldwide install base for IoT connected devices is expected to more than triple over the next 10 years. Our opportunity here is clearly enormous and we intend to continue as we have consistently done in the past to develop industry leading products and technologies which will enable us to win business with the leaders in this exciting growth market. With that, I'll turn the call over to our CFO, Bryan Hackworth for a review of the financials.

Thank you, Paul. As a reminder our results for the fourth quarter 2017 as well as the same period in 2016 will reference adjusted non-GAAP metrics. Fourth quarter net sales were 180.7 million, compared to 160.1 million for the fourth quarter of 2016. Business category net sales were 163.8 million, compared to 144.9 million in the fourth quarter of 2016, representing strong growth of approximately 13%. This growth represents the continued transition to higher end platforms by subscription broadcasters and fee companies not only in the U.S. but also in Europe and Asia. We expect this trend to continue throughout 2018 as additional customers commence their rollout for advanced platforms. In addition, home security continues to be a growth driver as more households are electing to add security sensors to their network home. Consumer category revenue was 16.9 million compared to 15.2 million in the prior year quarter. Gross profit was 42.7 million or 23.6%, compared to 26.9%. As mentioned during our last earnings call November we expect our gross margin rate to be lower than normal due to the surge of complex products coupled with completing the transaction from our Southern China factory to our other factories in Japan and China. Improving our gross margin is a top priority and to accomplish this goal, we have implemented several measures including product rationalization and improvements in battery production. We expect our gross margin rates to expand sequentially which is embedded in our first quarter guidance and to continue to improve throughout the remainder of 2018. Operating expenses were $33.3 million compared to $29.1 million in the fourth quarter of 2016. R&D expenses of $5.4 million compared to $4.4 million in the fourth quarter of 2016 as we continue to invest in technology that enhance the user experience in their home. SG&A was $26.9 million compared to $24.7 million. Operating income was $10.4 million compared to $13.9 million. The effective tax rate was 11.6%, compared to 19.2%. Net income of $8.7 million or $0.60 per diluted share compared to $11 million or $0.74 per diluted share in the prior year period. For the full year 2017 net sales were $696.5 million, compared to $654.1 million in the same period last year. Gross margin were 25.6% compared to 26.2%. Operating expenses were $124.9 million compared to $117.8 million in 2016. Operating income of $53.4 million compared to $53.5 million. Net income of $41.1 million or $2.81 per diluted share compared to $42.5 million or $2.88 per diluted share in 2016. Next, I'll review our cash flow and balance sheet. At December 31, 2017, we ended the quarter with cash and cash equivalents of $62.4 million compared to $50.6 million at December 31, 2016. DSOs were approximately 75 days at December 31, 2017 compared to 70 days a year prior. Net inventory terms were approximately 3.6 turns at December 31, 2017 compared to 3.8 terms at the year prior. Now turning to our guidance for the first quarter of 2018, the first quarter of 2018 we expect net sales to range between $169 million and $177 million compared to $162.3 million in the first quarter of 2017. EPS for the first quarter of 2018 is expected to range from $0.60 to $0.70 compared to $0.62 in the first quarter of 2016. We remain confident in our long term financial outlook and we'll reflect average annual sales growth of 5% to 10% and average earnings per share growth of 10% to 20%. I would now like to turn the call back to Paul.

Thanks Brian. In 2017, we have once again fortified our foundation with technology and manufacturing improvements and are taking action to leverage our IT assets. We are more excited than ever before about the future. The home entertainment world continues to change and we have for years investing in solutions that make the experience of home entertainment easier and more enjoyable. We have not just made the activation of new devices easy, our goal is to make it automatic. Accessing the entertainment that you want to watch right now shouldn't have to include having to turn on devices, switch inputs and dive through a series of menus. It should be hitting one button or ordering a few words like I want to watch stranger things, or I want to watch NCAA Basketball. And your devices should switch to the appropriate service, launch the app or channel and take you directly to the desired entertainment. This description is not a dream or science fiction it is reality that we are working with customers to achieve. This change is happening as we speak. While not as quickly as we would like, rest assured we are working with our customers to revolutionize home entertainment. As we at UEI had said before the growth trajectory is never smooth, we’re quite confident in our long term value to customers and shareholders. We’re setting and will continue to set this standard for what TV and home controls will be in the future. Stay tuned. Operator, like to now open up the call for questions.

[Operator Instructions] Our first question comes from the line of Jeff Van Sinderen with B. Riley FBR. Your line is now open.

Paul, I wonder if you can speak a little bit more on I guess where you feel you're in getting manufacturing of the new generation more towards needs to be, and I guess the challenges that you still face to getting there? I think you mentioned product rationalization and improvements in factory production and some of the things that you worked on, and then also looking bed sequential improvement in gross margin, any more detail you can give us on the order of magnitude on that? And then also any more color you could give us on what we should expect for the quarterly progression of gross margin this year, just wondering kind of order magnitude there? And then I guess kind of the follow up to that would be particularly when do you expect gross margin to inflect year-over-year, is that something that we should expect in second half?

Okay, there is a lot of elements to that question, on the numeric side, I will in a few minutes let Brian not answer your about that, future quarter numbers guidance, but I would say that the work on improvement in margins on a variety of fronts including the process of transitioning products which is largely complete, from one factory to another. The startup of new products which is ongoing, but we did have a lot of activity in Q4 and do in Q1 as well, probably in the Q2 on new products which is an exciting element of this change but nonetheless it can be mildly disruptive. And as Brian said earlier, while he wasn’t going to provide any detailed guidance, our expectation is that you will see sequential improvements in gross margins. Q4 was particularly not good and it was bad compare to prior year and not a good quarter overall, as far as gross margins were concerned but a lot of work was done in Q4. Our team we've put more effort into this than ever in Q4 and into Q1 and results are already starting to be seen in our initial results so far in Q1. So you will begin to see improvements, I think we said this last quarter, that our guidance for Q4 was low but things will get better and they already are in Q1 and as Brian said earlier, we expect to see a continued improvement as this year progresses.

Okay that’s all really helpful and one follow-up, if I could. Just wondering, I guess we have related thoughts on where the operators stand on the deployment of upgrades? And any feedback you're hearing from the operators in terms of customer satisfaction may be metrics in terms of any metrics that are available in terms of where they have deployed, the new generation system? And I guess how you're thinking about the ramp in the upgrade cycle at this point.

Yes, I mean we're actually feeling a little better about it now, we've actually had some projects come in almost right on schedule, not from our perspective but again our customers, so we have had projects in the past, we had a few last year that got delayed because our customers were refining them. But we're -- what we're now seeing is that people are beginning to bring these projects out, something to delayed ones are coming out now, as well as some that were already planned to be launched in '18, they were never planned for '17, they were always planned for '18. And they appear to be making good progress and getting ready to launch, so it seems to be as we've set for a long time, anyone who thinks that these projects aren't going to come to completion is just going to be wrong, the home entertainment industry is changing, the participants in this industry realize that they have to bring a better experience to consumers because their competition is also working on bringing those enhancements to the UI and more entertainment options than ever before and making them easier to get them, this is going on constantly and all of the industry participants that we work with realize this and are working very hard to get these programs done, so we feel, still feel like we always had about this there have been delays, we've grown impatient at times, but they are readying these platforms many of which we've announced and are either already out. As far as the results I can't give you any specifics there because customers share with us any metrics they get on the success of their program, they don't want us to share those outside of our four walls, but I will say today we haven't had any that hasn't then that with strong critical acclaim and positive reactions, consumers, their customers become more engaged with these services once they're put out, people generally and those on this call with experience on these voice platforms can probably attest to this that they do change the way that you watch TV, they actually really do improve the UI of your TV viewing experience, so all the effects of that or all the reviews that have come from consumers that are subscribers, and our customers themselves have been very positive on these platforms.

Our next question comes from Steven Frankel with Dougherty. Your line is now open.

Just going back to the gross margin issue one more time, and maybe help us understand kind of what you've learned having more people on the ground now this quarter that gives you confidence, that it will ramp through the year? Is it just time or did you make specific tweaks that are helping drive these margin improvement?

It's both Steve. First of all the time the one that takes time was just the transition, the movement of products I think we had explained this in some detail before, when you're moving from one factory to the other, there were not new products at the old factory but they are at the new one. And new products in the factory are always -- the cost curve on them is always a little bit higher the first time or two that you run the product, because the process is new to the new location. We probably underestimated the disruptive factor of that, but that is certainly true. And the only solution to that is time. You need to get the product in, you need to get the new factory up and running on that the process by which that new product is made. And once that happens, the cost comes down to the mean. It regresses to the mean of what you would expect the cost of that product to be. But the first runs are going to be more expensive than unfortunately we do this every quarter, we'll have new products, we just had a normally high number of new products not just new product sold to new customers, or existing customers, but new products at the factory. So that one is a time related one. As we go through this we are finding a lot of things as we normally would. Things we can improve processes at the factory that we can simplify. Some of the new products will have 7 test that get performed versus the traditional product would have only have 2. When we first put that in, we have those 7 tests, but we now working on ways to simplify that process. So it's just like anything once you start doing it you'll figure out how to make it more efficient. And I think that we have in place there now and we continue to improve it is finding these opportunities and taking advantage of them, that the simplification the process flow being improved improving the cost on each individual product. And that's the other thing we've done as we gone through we have a few thousand different products and we've done a rationalization of that. And figured out some of the parts or processes we need to change that we need to re-cost. So there is going to a lot of detailed work that the team has done, both here and importantly in Asia to work on this. And I think again, as Q1 will test and future quarters, where we're starting to see some effect on this.

And the customers that are coming on later, have you raised prices a bit to help make up for the market impression where that you've been under?

Well, all of our products are fairly priced. So to any of our customers that are listening in this call are, we're always fairly priced. I would say that there may be situations where certain components within our products which have had price increases, there may be certain specific skews in our mix that we may changed pricing as a result of cost. Cardboard, certain components in the products, whereas there is any number of cost factors that we would need to reflect with certain of our customers. But generally again we try to make that all implicit in the price we offer to the customer in the first place. There may be cases where we would need to change, and we will do that.

And just a couple to keep Bryan from feeling left out, significant customers as percentage of revenue and an update on the sale of the factory?

Yes, usual suspect in terms of customer concentration. Actually, Comcast was this quarter -- they came in about 20.9% so just under 21%. Actually that -- for this quarter that was it, was Comcast. In terms of sale GTC, that's going -- it's coming along we finished or we're going through due diligence with them. We're in the resolution phase of their items and we’re currently working with the government to resolve a couple of them. So that is, I believe that’s eminent, but whenever you're dealing with the government, it's hard to predict exactly when it will close. But right now I think things are progressing and again we’re trying to resolve from the items that are pending. So overall feel pretty good about that and I think it should happen relatively there.

And given tax reform, what tax rate do you think you will have on your non GAAP?

Yes, the question. I don’t think we’re going to be materially affected by it. I think our structure -- I think we're pretty well structured from an effective tax rate prospective. So whenever you have a rate reduction, it helps. We did have a lot of pretax income in the U.S. So it's not going to effect as materially there is a lot of other new onsets to the tax reform that I won't bore you with. But overall from a rate prospective, I don’t think we're going to be materially affected by it in 2018. And one thing that I think will become positively from this is that the industry, there is a piece that on a go forward basis 2018 and beyond, but there is also the 2017 effects where you have to improve for foreign earnings abroad and it's kind of repatriation tax essentially. And we’re fortunate that we had a number of foreign tax credits as well as federal R&D credit that we can utilize to offset the cash impact, so right now we’re looking at about $2 million to $3 million liability from a cash prospective that we could pay over next 10 years, so from a cash prospective it's not a significant impact but the good news is we will be able to bring back from earnings on a go forward basis for pipes and time without much incremental hacks federally and we're still working through the state impact because we're trying to figure out the states are going to react but so far it looks good in bottom line, I think it will contribute to repatriate foreign earnings in 2018 and beyond without significant amount of tax. So it will be more flexible with will be much more flexible with their cash balance.

And will that include the proceeds from the factory sell or that’s a separate tax item.

No that will be included as well, so call it $40 million to $50 million of cash of which the majority of the -- the bad news is that we had a pay -- a lot of the expenditures were paid upfront so and in the cash payment will come in the end. The good news is that’s what left. So we're going to get an influx of cash and I don’t believe that the tax rate on that will be very high. So we will be able to repatriate and again we refer various things from acquisitions to potentially stock buy backs if the price is right excreta. So it will give us more flexibility then we had in the past.

[Operator Instructions] Your next question comes from Greg Burns with Sidoti. Your line is open.

The new Comcast remote that you mentioned, is that placing the XR11? And is there any significant difference in terms of margins or ASP on that handset?

Yes, I would be generally, Greg, it'd be a direct replacement for the XR11 and upgrade to it and again we wouldn’t give any specifics about price or margin on that but I wouldn’t presume any significant change as a result of it.

And the Tivo voice remote you mentioned some of the carriers I guess are using the TiVo platform, that would be launching that remote but just so can you give us a sense of maybe the total install base of carriers that are using the TiVo platform that might be taking this remote?

Well I can't -- well I wouldn't give you the number of subscribers, you could look to TiVo for that, if they want to answer that question, we don't like to do that, very often with customers. They are here in the U.S., they're obviously as far as product sales for instance remotes, they're not doing business with the Comcast DIRECTV of the world, DISH, etc., the larger operators, but as I said in the call there's many mid tier operators that are using their platform. And I think the other opportunity here is as the world moves forward and the home entertainment is changing. There may be quite a few smaller or mid tier operators that the investment to bring about these advanced platforms can be much more significant, than the generation of product that came before it, and therefore some may chose to use a platform like TiVo to bring these features. It may be more efficient for them to just simply adopt an advanced platform -- and advance to a platform of voice, IP connection etc., from a provider like TiVo. So we're really happy to be a partner with them, because I think there success in that area, mid to smaller operators not just here in the U.S. but elsewhere could be significant.

And then do you have a sense of -- are the carriers like the number of carriers that have opted into take the new remoter platform or I am just trying to get a sense of maybe how the rollout might come in those mid -- with those mid tier operators, is it going to be on a case by case basis in terms of the timing of when they may adopt that remote?

Yes, there will be, as time goes on, in Q2, Q3, as time rolls on, and again we may be able to disclose some of that, TiVo would also be a good source for that to ask them about the launches they're doing with various partners.

And Bryan any major change in the run rates for operating expenses in the first quarter?

No, Q1 should reflect Q4 to a large extent.

At this time I am showing no further questions, I'd like to turn the call back over to Paul for closing remarks.

Okay, I just want to thank everybody for participating in the call today, and for your continued support of our company. I am sure we'll be talking to some or all of you as the next hours, days or weeks or months proceed and look forward to seeing you again next quarter on this very call. Thanks very much.

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