Welcome to the Universal Electronics Third Quarter 2022 Financial Results Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would like to now hand it over to your speaker, Kirsten Chapman from LHA Investor Relations.

Thank you, Therese and thank you all for joining us for the Universal Electronics third quarter 2022 financial results conference call. By now, you should have received a copy of the press release. If you have not please contact LHA Investor Relations 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 1 year at www.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 1 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 the 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 introduced this year and during the 2023, CES, including leveraging its wireless connectivity capabilities to climate control, home monetization, security hospitality and HVAC channels and its groundbreaking line of ultra low power and energy harvesting remote controls design for sustainability that will be accepted by its existing customers and attract new customers, the continued successful collaboration with existing and new customers in developing and introducing next-generation products, operating systems and technologies, which results in increased sales and market capture opportunities for the company. Management’s ability to continue to manage its business and inventories and cash flows to achieve its net sales and margins and earnings through financial discipline, operational efficiency, and product line management; the impact to the company’s financial results that it may experience due to…

Thank you for joining us today. Earlier this afternoon, we reported very strong third quarter results. Products with more advanced features and IP contributed significantly to net sales of $148.5 million that delivered gross margin of 30.8%. Combined with strong financial discipline and product line management, earnings per share reached $1, exceeding our bottom line guidance of $0.70 to $0.80. These results reflect our strategy to improve our sales mix with more highly differentiated products and expand our total addressable market by leveraging our comprehensive in some cases, proprietary wireless control technology solutions to penetrate new markets in smart home control and automation. Throughout our history, UEI has invested in innovation to help our customers improve consumers’ lives. Our commitment to R&D is steadfast, and we continue to develop advanced technology solutions that carry higher margins. Our mission to apply our proven business model to enter and capture market share in high-growth markets drives our long-term growth. To truly understand where we are going to be tomorrow, it’s important to understand a little bit of our history, culture and past successes that define who we are today and where we believe we can go. Many years ago, we began making simple universal remotes to make the consumer experience of home entertainment better. We held a small share of the video service provider market, but were dedicated in fact, obsessed with making the experience of configuring and using these products better with each successive generation. As the years unfolded, we developed truly universal products, ones that were upgradable, ones that had features no one else could offer. Our share grew. We never rested. We developed voice-enabled self-configuring products that truly added value at the consumer and customer level. None of this happened overnight. But as the years progressed, our share grew…

Thank you, Paul. First, I’ll review the results for the third quarter of 2022 compared to the third quarter of 2021. Net sales were $148.5 million compared to $155.7 million for the third quarter of 2021. The Squarely within guidance, sales in Q3, as was the case in Q2 reflected a quarter without a factory shutdown or logistical issues related to the COVID pandemic. Gross profit for the third quarter of 2022 was $45.7 million or 30.8% of sales compared to 30.4% in the third quarter of 2021. Our investments in focus in developing leading technologies for home entertainment and for channels such as HVAC, security and home automation are paying off as a higher percentage of our sales include advanced features, leading to an improved margin profile. As the number of IP-enabled devices in a home continues to grow, so too does the need to control them. Operating expenses were $30.2 million compared to $30.7 million in the third quarter of 2021. SG&A expenses decreased to $22.5 million from $23.6 million in the prior year quarter. R&D expenses increased to $7.7 million compared to $7.1 million in the prior year quarter. A few years ago, we began in earnest to streamline corporate expenses to increase operational efficiency and to free resources for strategic investments. These internal investments have enabled us to consistently improve the user experience in our core markets as well as gain market share in new channels. Operating income was $15.5 million or 10.4% of sales compared to $16.7 million or 10.7% of sales in the third quarter of 2021. Our tax rate was 14.8% for both the third quarter of 2022 and 2021. For the third quarter of 2022, net income was $12.6 million or $1 per diluted share compared to $14.1 million or $1.03 per…

Thanks, Brian. While we are well aware that macroeconomic pressures of inflation, war, energy costs and supply challenges have combined to create significant headwinds in the near term. We, as always, are focused on long-term growth, we keep innovating and delivering ease-of-use solutions that become industry mainstays and stay and eventually essential to the consumer experience. As such, we gained market share and we have tangible proof with our project wins and expanding customer base. Then when economic pressures subside and markets improve, we will benefit greatly. While our approach is simple, we have successfully proven its value in growing our business. We develop differentiated technology, working with leading brands to capture a foothold in the market, embed our solutions in the home and continue gaining share in a growing number of markets. The fact that we are able to do this while managing costs effectively ultimately leads to increased long-term profitability. As always, stay tuned. Operator, we can now open the call up for questions.

Thank you. [Operator Instructions] Our first question comes from Jeff Van Sinderen from B. Riley. Jeff?

Hi everybody. So you guys – maybe you could just help us understand how much of the guidance input is strong. Apologies for the background there testing the fire system here. How much of the guidance is reflecting the supply chain issues versus how much is sort of caution on the broader macro and overall demand? It sounded like you had some pent-up demand that you spoke to. So just trying to reconcile, I guess, all those three factors?

Sure. Yes, I can address this, Jeff. Although if that alarm is going off, please exit the building. I don’t want you to get hurt. When we got up in a fire or something, I hope we use to test. But it’s really both. Obviously, as Brian alluded to, the semiconductor shortage, and I – we’ve talked about this before on these quarterly conference calls and we made this prediction, and it is happening. The semiconductor shortage problem is not going to just go from a big issue to the next quarter completely resolved. What is happening is that certain of our vendors, as Brian said, and unfortunately, we can’t name them. Some of them have moved back to pre-shortage pre-COVID operating principles of shorter lead times, somewhere in the neighborhood of 6 to 8 weeks and actually indicating that they have ready supply of parts, meaning if you have a quarter where you need – where you forecasted, I need 1 million of this particular part, and you call them during the quarter and say, I need an extra $100,000, they can actually get them for you. You won’t be told the lead time is 60 weeks. And if you want those extra parts, you’re going to have to wait 60 weeks. There are other vendors who are still in the shortage mode, where the lead times are more than a year and you’re on allocation. So if you need extra parts, you can sometimes get them, but it’s a wrestling match with the vendor to – and look, they are trying to help because they want the revenue too, but they – it’s a struggle to get any extra parts you might need. If a forecast was, if you underforecasted particular unit that you need more units. So…

Okay. And that kind of dovetails into my next question, which is – I mean, great to see the new generation products, the bigger part of the mix and positively impacting your gross margin. I know you mentioned a number of new wins, some of those new products. And I know you can’t name the customer necessarily. But as you look at those and you think about 2023, I realize it’s really early, but what sort of contribution from all of those new products, new wins might we think about for 2023?

Clearly, it will be more. I can’t give you an exact number today. We’re putting together our budgets right now for ‘23. But what I do know is we’ve seen the wins with some pretty big names that would be recognizable. And again, it’s not unlike the story I was telling about video service providers or subscription broadcasters and consumer electronics. We start from a point, we become committed to or, as I said, obsessed with making the products that we build for them better than that, which they bought before. We bring features that other vendors are not providing. We present those to customers. And typically, they begin allocating a larger part of their SKUs to us. We’ve done this multiple times. We did it in video service provider many years ago and just kept doing it, just kept building it, just kept innovating. We never – as I said, we never rest when you win some business you have to work harder to win more. And you’ve got to figure out what the state of the art is and then move towards it, create the state of the art. And we’ve done that on the control side in the markets we’ve served, and we see the same opportunity in these markets. HVAC is probably further along right now because we started in it first. We started that before home automation and security, but we see the same opportunity in all these. The products that are in them could probably use some improvement. We are bringing those improvements and then we’re using technology to make the product even better, self-configuring, bringing them features they never had before and then you win business. And then the next year, you win more business, right? Each year, this is the story of consumer electronics. It’s an annual cycle. And each year, we kept winning more SKUs, and we kept improving the product, and that’s why we won more SKUs. So we’re taking the same approach here. We’ve already had success. We’re at that 10% level, which is pretty good. And – but we think that they is no reason why – and you’ve probably heard me say this before, we shouldn’t pursue our God-given right to all because, again, we build better products, and we’re going to continue to be committed to that. So it will account of our business in ‘23, ‘24, ‘25. Into the future, we see these markets because they is good growth in them and our share can be increased.

Okay, fair enough. I can take the rest offline. Best of luck for the rest of Q4.

Thank you. Our next call is from Brian Ruttenbur from Imperial Capital.

Thank very much. Hopefully, I’m coming over. First question is on R&D. Can you give us any kind of a gauge or direction where R&D is going at least in the fourth quarter? And maybe if you can look into 2023 at all, give us an indication where you’re taking R&D?

Yes. We don’t – I think it’s going a approximate the same percentage of sales. I mean what we’ve done over the last few years, we made a concerted effort to reduce the SG&A to be able to reallocate those funds and be able to invest internally in different channels, different products, etcetera, and the team, the product team has done a great job in doing that. As Paul mentioned, he listed a lot of customer wins over the last couple of quarters. So this is all coming to fruition. So I mean, it’s definitely paying off. But I don’t expect to deviate too much from the current percentage of sales.

Okay. Thank you for that. And then in terms of – can you give us an update on where we are in the Roku litigation?

Yes. They is not much of an update from last quarter. We’re in the midst now. Obviously, the ITC cases have completed. We prevailed in both the we sued Roku and won an exclusion order in that one and then the defensive one we won as well. And now there are multiple district court cases that are stayed until such time as the IPRs are completed. We’re still very confident. We’ve done very well on that front. And it’s just a matter of time before those IPRs complete, and then the judge will unstate the case.

Okay. And that’s expected in the next two quarters, three quarters, 3 years and what kind of ballpark are we looking at?

Yes. It won’t be this year, likely not next year, but it’s difficult to predict exactly when because the – again, the IPRs are – they have to be finalized.

Okay. A couple of other questions. I know you can’t talk about specific guidance in 2023. Do you guys anticipate giving guidance just one quarter at a time. I know that things are kind of cloudy out there to look further out. Do you anticipate given yearly guidance or is it going to be kind of moving forward at a one quarter for guidance clip?

Yes. For years now, we’ve guided one quarter forward. While we realized it would be good to guide further out in today’s environment, that would seem a difficult thing to do with all the things that have been happening over the last couple of years with viruses and supply chain shortages and interruptions of factories, interest rate rises, inflation or it’s just been very – it’d be difficult to be able to predict out. On the good side, if things in the economy improve, we’re just looking for a lack of headwind. We don’t need a trailing breeze at this point. We just need a lack of headwind. That would be nice for a while. But again, it’s difficult to predict how those things are going to move. If we knew that, we wouldn’t be in wireless control we’d be an investment company. So we’re – I think, withholding these headwinds quite well. We’ve enriched the product mix. We’re winning projects and when we get that lack of headwind, we think we’re going to be better positioned than ever.

Great. Well, thank you very much.

Sure.

Thank you. Our next question comes from Steven Frankel. Steven?

Thanks. Paul, let’s talk for a couple of minutes about this low power remote win. What’s the margin in ASP profile, this new class of products? Are they accretive to both ASPs and margin?

Yes. I can’t talk about a specific customer’s margin. But I will say that this product generally because of its architecture carries a slightly higher ASP than a traditional product for obvious reasons. We’re putting technology into the product that didn’t exist before. So the ASP is higher. So it’s similar to advanced remotes, voice-enabled products that are self-configuring. The architecture of those products is different. They bring great value to the user, but they do cost more, same here. This brings value in that – the user won’t have to change their batteries, which has a benefit to them, but it also provides, obviously, an environmental benefit that there’ll be fewer batteries pulled out of remotes and put into a landfill. Customers with sustainability agendas will probably tune in on this and say, this is a good thing for us to be doing. We pay a small premium for the product because the architecture is advanced but we’re helping the consumer by not having them be upset because if you’ve ever sat in front of your TV during something wanted to change the channel and your remote didn’t work, you got to get up and find batteries and put them in. It’s not that bad, but we do have to do that. This won’t be done as frequently or if ever, and they won’t be throwing batteries out into landfills.

I had to change batteries this week, so I know that pain point. But just to clarify, this remote, is a voice remote as well as being energy harvesting or this particular win. Okay. So it’s advanced remote…

Yes. These remotes can be fully featured just like the fully featured remotes the most modern architectures can be used voice, QuickSet enabled, again, self-configuring all of those features plus be much more battery and power efficient than the previous generation was

Okay. And then to go back to the supply chain and demand issue, in midyear, you expressed some confidence that the back half would be one of the stronger back half you’ve had. And you did have a very strong Q3, but the Q4 step down is pretty sharp. How much of that is inability to ship product versus the demand picture keeps changing and getting worse?

Yes. As I said earlier, it’s really both. The customers have voice concern about where consumers are going to be the season, this holiday season, November, December. TV is usually strong in January as well. They is been some concern and we’re probably not the first to report this. So I think a lot of larger companies out there have expressed this that they are concerned about the attitude of consumers given the level of economic headwind that the consumer is feeling right now. But we still, as we – as Brian said earlier, we are starting to see the beginning of the solution to the semiconductor shortage because we do have vendors now who have returned to pre shortage operating principles, shorter lead times and more ready supply, but we still have other vendors who are, again, more than a year in lead time. And when you need extra parts, it’s difficult to get them. We do believe that all of our vent will reach the point of pre-shortage pre-COVID operating principle because capacity is being added, it will occur, but it hasn’t yet. So in Q4, we will – we still have products that we had demand for that we will not be able to supply all of because we can’t get the parts to make the products.

Okay. And I don’t want Bryan to feel left out. So if you could tell us about 10% customers in the quarter.

Yes. We had two. Comcast was at 17.8% and Daikin was at 14.4%.

Alright. That’s it for me. Thank you.

Okay. Thanks, Steve.

Thank you. [Operator Instructions] And at this time, I’d like to turn it back to our speakers and Paul Arling for final comments.

Okay. Thank you all for joining us today and for your continued support of UEIC, we plan to present at Imperial’s Annual Security Investor Conference in December and Needham’s Annual Growth Conference in January. As mentioned earlier, we will also be exhibiting at CES in January, and we hope to see some or all of you there, if you can make it. Have a great day. Thank you

Thank you, everybody, for your participation. This does conclude the program, and you may now disconnect. Have a great day.