Good day and thank you for standing by. Welcome to the Universal Electronics Second Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Kirsten Chapman, LHA Investor Relations. Ma'am, please go ahead.

Thank you, Lee, and thank you all for joining us for the Universal Electronics second quarter 2021 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 or visit the Investor Relations section of the website. This call is being broadcast live over the Internet. A webcast replay will be available for one year at www.uei.com. Any additional updated material non-public information that might be discussed during this call will be provided on the company's website where it will be retained for at least one year. You may also access that information by listening to the webcast replay. During this call management may make forward-looking statements regarding future events and future financial performance of the company and cautions you that these statements are just projections and actual results or events may differ materially from those projections. These statements include: the company's ability to timely develop and deliver new technologies and technology upgrades and related products that will be accepted by our existing customers and attract new customers, including the company's QuickSet family of products and technologies, the Apple TV remote control, Nevo Butler entertainment and Smart Home Hub and our voice-enabled AI-powered and other advanced wireless control products technologies and platforms; the positive traction that management is seeing in the various markets and industries in which it serves coming to fruition as expected by management; the continued successful collaboration with existing and new customers in developing and introducing next-generation products operating systems and technologies which result in increased sales opportunities for the company; the continued trend of industry toward providing customers with more advanced technologies by offering hybrid platforms, expanded smart home offerings and interactive services; management's ability to continue to manage its business via…

Good afternoon and thanks for joining us today. We are pleased to see demand increase in general, which bodes well for our business. However, due to semiconductor component shortages and some logistical challenges late in the second quarter, we were unable to fulfill all of our orders, causing our sales to be slightly lower than we expected. Despite these temporal challenges, our continued focus on technology innovation, strong customer relations and operational excellence expanded our operating profit to 10.5%. We delivered EPS of $0.98, a second quarter record for UEI that was above both guidance and consensus. Our ongoing commitment to innovation continues to broaden the use cases and diversify our customer base. The transition from traditional remotes to advanced devices continues to happen at different rates and degrees across the globe and our channels. For the US pay TV market, we continue to see adoption of newer more advanced platforms at most major operators. The penetration is rising, as customers upgrade to new systems. In addition, to amplify the stickiness of their offerings, broadband operators are increasingly introducing IP-only or streaming set-top boxes. Examples include our customers' products Comcast Flex, DIRECTV STREAM and TiVo Stream. International growth is also accelerating. In Europe, we are seeing increased penetration of voice-enabled systems with leading operators such as Liberty, Sky, Vodafone and Orange. In Latin America, we recently announced new design wins with Android remotes for Claro and Megacable. And momentum is also visible in Asia Pacific, where we expect to launch two more new voice remote deployments in Q3. Regarding our Apple TV remote for MVPDs, we are gaining traction. In Q2, we started shipping launch quantities to our first customers, including Deutsche Telekom. There are more customers shipping and preparing for launches planned later in 2021 as well as 2022.…

Thank you, Paul. First, I'll review the results for the second quarter of 2021 compared to the second quarter of 2020. Net sales were $150.6 million compared to $153.3 million for the second quarter of 2020. As expected the chip shortage did have an adverse effect on our top-line. What wasn't expected were unprecedented third-party logistical issues including delayed vessels, which led to missed shipments and sales falling below the low end of our guidance range. On a positive note as Paul outlined, we're starting to see an increase in demand for our products across multiple regions and various channels, which I'll quantify when I review our third quarter's guidance. Our gross profit was $45.9 million or 30.5% of sales compared to $43.7 million or 28.5% in the second quarter of 2020. Even with a weaker US dollar, we improved our gross margin rate year-over-year and maintained a level in excess of 30 points due to an increase in technology sales with licensing revenue having doubled. Our technology continues to be adopted by customers in multiple channels including the subscription broadcast and OEMs primarily in the TV space, as well as some in home automation. Operating expenses were $30.1 million compared to $29.2 million for the same period last year. SG&A expenses increased modestly to $22.7 million from $22.1 million in the prior year quarter. As we continue to place an emphasis on innovation R&D expenses increased to $7.4 million from $7.1 million in the prior year quarter. Operating income was $15.8 million or 10.5% of sales compared to $14.5 million or 9.5% of sales in the second quarter of 2020. Our effective tax rate was 15.8% compared to 12% in the prior year quarter. For the second quarter of 2021 net income was $13.6 million or a record $0.98…

Thanks Bryan. We are keenly aware that the component shortages have and will continue to create a supply issue in 2021 and possibly into 2022. Regardless, we are confident that these issues are temporal and we will manage these challenges as we have done in the past 35 years of our history. It's very important to note that we have worked hard to consistently create truly unique and innovative home control solutions. These new products and technologies are powering the preponderance of next-generation IP entertainment and home control platforms of industry leaders across the world. It's also important to note that, despite any headwind we have faced or are now facing, we have achieved the highest ever EPS in our company's history for the first half of this year and our guidance will have us at a year-to-date record EPS through Q3 as well. Imagine, what we can accomplish when the headwinds inevitably clear. The fact is UEI has led wireless device control for decades overcoming numerous macroeconomic conditions be it component shortages tariffs or pandemics. UEI is resilient, UEI is innovative, UEI sets technology trends. In summary, UEI creates smarter living. We expect to continue to lead our industry for decades to come. As always stay tuned. Operator we can now open the call for questions.

[Operator Instructions] And your first question comes from the line of Jeff Van Sinderen from B. Riley & Co.

This is Richard Magnusen in for Jeff Van Sinderen. Thank you for taking our call I have a multipart question. Can you speak more about what you are seeing in demand trends? Are truck rolls for in-person installs picking up? And what is the outlook for demand on non self-install products in Q3 and Q4? And then also what you're seeing in terms of demand for newer generation self-install platforms and what your customers are telling you about their time frames for launching self-install products.

Yes. Generally Richard the -- what we're starting to see is self-install platforms have actually been doing okay even through the pandemic maybe not quite as well as they otherwise could have in a more a stronger economy, but still have done okay. The traditional platforms or legacy platforms were the ones that were most troubled or had a bigger falloff in volume. What we're beginning to see is some lift in those legacy or traditional platforms, platforms that have been alive for multiple years. But we're also seeing the introduction by many of the companies in the industry, who recognized some time ago that pandemic or no pandemic, they needed to begin to change their systems to self-install capable, but more importantly hybrid systems that combine as we've said many times linear and what have historically been called over-the-top or AVOD and SVOD apps. Many of them are IP-based from the very start, but others are combo products or hybrids. So that activity continues. We're seeing successful launches of those products but we're also starting to see and thus the guidance that Bryan gave is a little up for Q3. We're starting to see some life in even the legacy products. And despite the fact that there's about $10 million that we estimate due to component shortage that we cannot ship in Q3 the guidance is still up.

And then can you tell us more about the specifics you're seeing in supply chain where the bottlenecks are specifically for you any temporal challenges? And then how you are mitigating those and what you are hearing from your customers around the supply chain? And would you say that overall, the supply chain picture is getting better or worse? And when do you see supply chain free up substantially for your business?

Well as far as materials, it's about the same. It hasn't gotten worse, but it's still difficult and it's difficult across the board. I'm sure the people on this call have spoken to other companies. It's -- I don't think the situation at least for us it hasn't gotten worse, but on the material side, it hasn't really gotten better yet either. We're working with vendors. Our people in particularly in the ops team are working really hard, meeting with vendors regularly more so than usual to ensure supply, and trying to get what they can to supply the products, and that is of course, embedded in our guidance that Bryan gave earlier. The only other thing that popped up this quarter is we began to see for the first time in my 25 years here some logistical challenges at the ports and it caused a few million of orders to slip, because vessels weren't available or vessels were stacked up in a port and couldn't be unloaded. And therefore, the shipments couldn't be made in the time period. Again, we think this is temporal, but it is something that affected us in the quarter. I think that one probably and this is a projection solves faster, because material shortages due to semiconductors can sometimes take a while to solve, as fabs need to be built and there's a lead time on that. But shortages in logistics can usually be solved a little bit quicker than supply shortages of things like semiconductors.

All right. Thank you. And I’ll get back into the queue.

Thank you. Your next question comes from the line of Greg Burns from Sidoti & Company. Your line is now open.

Yes. In terms of the Roku litigation, what is the effect of that ruling? Is there like a product embargo where they can't ship their TVs and streaming devices into the US? And I think there's another, also another avenue to this litigation. But maybe you could just help us frame what the outcome of the ruling could potentially be? And what the other avenues are as part of this litigation?

Yes. Well, officially this is one of three cases that we filed against Roku. So it's just the first of three. This one's in ITC, and essentially put in plain English what will happen if the initial determination is upheld in the final determination in November is the products that contain the IP will be there'll be a cease and desist order. So they will not be able to import those products to the United States, unless they either come to agreement with us or remove the features, remove the offending properties. And again, we don't know yet exactly what that will be, but likely, what we do know is that if the final determination if the initial determination is upheld in the final determination that is what will happen.

Okay. And then in terms of monetization?

Yes. In terms of monetization at ITC, there isn't a monetary award. That will be there are two pending district court cases. I believe there's 14 patents across those two cases, and those are delayed, while we wait for the outcome of the IPRs, because Roku filed I think it was 20 IPRs across the 14 patents. It's probably important to note 18 of them have been decided, and the way the PTAB works is you essentially apply for a review, 11 of the 18 that have been decided were not instituted. What that means is the party did not provide in essence sufficient evidence to even have the patent's validity reviewed. So the PTAB denied the request, or did not institute. But we have to wait for the IPRs to finalize that will take a little bit of time. Once they have been, the judge will then likely put the case back on the calendar and the district court cases can proceed.

Okay. So the litigation expense is running through the P&L, I mean, do you expect that to be about $2 million to $3 million a quarter? Is that what we're looking at for the next I don't know how long do you expect this to run?

It varies Greg. Sometimes in a given quarter, it could be that -- it could be a little less, it could be a little more. It just depends on the amount of work that's being required. Sometimes it comes in a concentrated period of time, sometimes it's a little more straight line. So it really varies.

Okay. And then in terms of the component and supply chain or those orders that couldn't shift in the quarter, I'm assuming you're expecting they're part of your third quarter guidance. Then the $3 [ph] million in orders that you assume you're not going to be able to fulfill is this kind of a permanent state operations now for the foreseeable future where your demand is outstripping your ability to supply by about $10 million a quarter? Is that how we should think about it?

Yes. You're kind of breaking up a bit, but I think I got your question. I mean, you're right that last quarter we said we had to reduce our demand forecast by $5 million. So there's a little bit of give and take, but what happened in Q3, we ended up having reduced it by the demand forecast by $10 million. So right now, as Paul mentioned, the component shortage is going to take some time, right? It's not an easy fix. We expect it to continue throughout the remainder of the year and possibly into 2022, I just don't know yet, but probably more than likely the remainder of the year. So as of the end of the our guidance for the Q3, we had to reduce it by -- our demand forecast by $10 million, because we just don't -- we don't think we're going to be able to fill all the orders. So -- and the easy way to look at it, a simpler way to look at it is we gave guidance between $160 million and $170 million, if there were no component shortages in the third quarter it would have been raised to $170 million to $180 million. So it would have been $10 million higher.

Okay. And then as mentioned US dollar -- the gross margin, how much of headwind was FX on the -- margin?

Well, it was about if I give you percentage like from the dollar devalued versus the Chinese yuan by about 10% and about 15% versus the Mexican peso. So it has an effect. But fortunately we were able to offset it with all the technology sales. And as Paul mentioned throughout the prepared remarks, we're selling into a lot of OEMs in the TV space and beyond that. So not only are we increasing our customers, but even within a customer the penetration is increasing. So from 2019 to 2020, the royalties increased now from 2020 to 2021, they've doubled year-to-date. So, fortunately we're driving that and it's more than offsetting the effect on foreign currency.

Okay. And lastly in terms of the Apple Remote, Paul, you mentioned Deutsche Telekom as I guess the first customer. Is that the first time you publicly kind of named that customer? And then secondly, is there any way you could quantify maybe the number of operators in the pipeline for this remote or the number of services covered by the operators that are kind of in the pipeline here? Any way to quantify the opportunity without talking directly or naming customers directly.

No understood. And I know that you and others would like to have us give that. But unfortunately, I can't. All I can say it is the first time we've disclosed a name. There are dozens of companies that we're talking to about this product. And as we've said many times, this -- the future of this particular business in MVPDs or subscription broadcasting as we've called it, is -- are these types of platforms. So they all recognize all the operators, the largest ones in the world, the medium-sized ones and the small ones, all now understand that the consumer wants that combination of everything they want to watch. They want to watch the -- in Chicago they want to watch the White Sox game tonight and then, they want to watch a reality show, their favorite reality show and then they want to go to Netflix to binge-watch their favorite show on Netflix or Prime or Hulu or name your favorite service. This is what the consumer wants and it's what the consumer is going to get. One way or another, the consumer is going to get what they want. And the five hour a day person here in America that's what they want. So the operators across the world understand this and they're looking at a variety of methods of providing that to customers. Again, one of them is to build their own, which the largest in the world certainly have done and have done a great job of it. But medium to smaller-sized companies probably will find it better to borrow one of the other industry platforms. As some have done, as you may know, Cox did this with Comcast's X1. So utilize a platform that's been built or they can use Android or they can use Apple or they can use Tivo. And again, we're involved with all of them, all of those platforms. So this is a movement that's underway. It's still going on. We've had introductions this year with medium, I guess I'd say, medium-sized operators across the world and it will continue as time goes on.

It’s a great. Thanks.

Thank you. [Operator Instructions] And we have Greg Burns. A follow-up question from Mr. Greg Burns from Sidoti & Company. Your line is now open.

Okay. I guess I’ll just keep on going. The QuickSet widget, it sounds like you have your first customer embedding that into their own product. What's the opportunity there like in terms of number of devices that you think you could -- or the QuickSet would be? Like what's the pipeline that you see there in terms of the opportunity for OEMs to start embedding your QuickSet widget into their home control devices?

Yes. We think it's -- we've seen a lot of interest in it. So we think the opportunity is certainly quite big. The interest to-date has been and the wins we have both with the comfort line and the widget technology itself separately, has been in HVAC. And essentially, what this will provide is at a first level IP enablement of these products, because a lot of companies are looking to add their device or their application to the home control arena. So, just first enabling it through an IP control. But then, they look to figure out, how can I make it smarter by connecting to other home systems, which is essentially what we do very efficiently for them. And obviously because of our background in working with all of the home entertainment companies and also having the ability to discover configure and control, the other home applications which we're doing right now in the LG TVs, we can help those companies add themselves to this smart home ecosystem in a very efficient way. So that's what they're looking for us to do. A lot of people don't really recognize this very much, but our HVAC business has been long-term. We're not new to it and we're working with some of the leading companies in the world including Daikin, the biggest HVAC company in the world and one of our largest customers. And there's a lot of players in this market that are looking to again, make their devices smart at the first level and then to make them smarter by connecting them to other home systems, like security systems or other control systems in the home. So that's what the opportunity with widget is. We've seen a lot of interest in it, and already have two wins, one with our comfort line and one with a straight license and product relationship.

Is the economics -- with the license and product selling the QuickSet widget, is that part of the economics with the TV manufacturers? Like what's the margin profile, the revenue margin profile of that product?

Well, yes, since we're speaking about a few customers here, I'd rather not speak on the margin profile. But generally, when we're licensing software, there are less materials involved and in our business, the fewer materials the higher the margin. When we make full products, the margin profile is lower but when we're doing licenses or software solutions the margin lifts.

Okay. And then, lastly Bryan, who are the 10% customers in the quarter?

We had two; Comcast at 16.4% and Daikin for the second consecutive quarter at 10.9%.

Okay. Perfect. Thanks.

Thank you. I'm showing no further questions at this time. I would now like to hand the conference back over to Mr. Paul Arling for any closing remarks.

Okay. Thank you all for joining us today for your interest in UEI and your continued support of Universal Electronics. We hope to see you at several upcoming investor events. In September, we plan to present at Collier's 2021 Institutional Investor Conference and Sidoti's Fall Investor Conference. So I hope to see you there. Have a great rest of your day.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may now disconnect.