Universal Electronics [UEIC] Conference call transcript for 2022 q3
2022-11-06 12:06:09
Fiscal: 2022 q3
Operator: Welcome to the Universal Electronics Third Quarter 2022 Financial Results Conference Call. Please be advised that todayâs conference is being recorded. I would like to now hand it over to your speaker, Kirsten Chapman from LHA Investor Relations.
Kirsten Chapman: 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 companyâs 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 companyâs 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. Managementâs 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 companyâs financial results that it may experience due to supply chain constraints, semiconductor supply challenges and inflationary pressures in macroeconomic conditions and its customers are experiencing and the direct and indirect impact the company may experience with respect to its business and financial results stemming from natural disasters, public health crisis, including the continuation of resurgence of the COVID-19 pandemic or governmental actions, including OR. The company undertakes no obligation to revise or update these statements to reflect events or circumstances that may arise after todayâs date and refers you to the press release mentioned at the onset of this call and the documents the company has filed with the SEC, including its annual report on Form 10-K and the periodic reports filed since then. In managementâs financial remarks, adjusted non-GAAP metrics will be referenced. Management provides adjusted non-GAAP metrics because it uses them for budget planning purposes and for making operational and financial decisions and believes that providing these non-GAAP financial measures to investors as a supplement to GAAP financial measures helps investors evaluate UEIâs core operating and financial performance and business trends consistent with how management evaluates such performance and trends. In addition, management believes these measures facilitate comparisons with the core operating and financial results and business trends of competitors and other companies. A full description and reconciliation of these adjusted non-GAAP measures versus GAAP is included in the companyâs press release issued today. On the call are Chairman and Chief Executive Officer, Paul Arling, who will deliver an overview and Chief Financial Officer, Bryan Hackworth, who will summarize the financials. Paul will then return to provide closing remarks. It is now my pleasure to introduce Paul Arling. Please go ahead, sir.
Paul Arling: 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 consumersâ 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, itâs 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 to the point where many of our products and technologies are now considered the industry standard across the world. In consumer electronics, again, our focus, in fact, our obsession was to consistently improve the user experience with our solutions. Each year, over the past decade, our commitment to innovation has led to technologies that make setup and everyday use of your smart TV in easy and remarkably pleasant experience. This, too, did not happen overnight. But our teamâs dedication to enable these solutions and consumer products has consistently helped drive our market share growth, and we can now proudly boast that the top 3 TV brands in the world are using our technology in an ever-growing percentage of their smart TVs. Some years ago, we began a similar journey in the climate control, home automation and security channels. Again, our focus, in fact, our obsession is to consistently improve the user experience with our technology and solutions. Over the past few years, we have slowly built a 10% market share worldwide in the OEM HVAC channel, and we are just getting started. These newer markets for UEI together approach $2 billion in size, are growing at around 10% annually and most importantly, are embracing the smart or connected technologies in their new product portfolios. Starting with our demonstrated product and technology leadership and our long-standing relationship with Daikin, the largest HVAC company in the world, we have recently begun to win numerous new projects with the leading names in HVAC across the U.S. and Japan. In addition, over the past 3 years, we can count a growing list of new project wins at many of the leading companies in home automation and security, including Hunter Douglas, Somfy, Vivint and other brands we cannot name as their products are yet to be introduced. These customers are counting on us for a variety of innovations, including IP connectivity, greater home control automation, better and more intuitive low-power wireless control in the areas of the home that matter most and potentially a greater tie-in with other smart home systems, including the most relevant one to us, home entertainment. You might have noticed that I have communicated certain recurring themes at UEI, namely that we are active in markets that grow our share within those channels is growing, and we have not and will not rest. We will continue our commitment in fact, our obsession to bring customers continued innovation as well as product and technology solutions that help improve consumer experiences and enable our customers to grow their businesses. As I said at the outset, we continue to implement the same strategy that has made us successful many times before and will once again bring UEI to ever higher levels of success. During the third quarter, we secured several significant contracts that are expected to deliver revenue in 2023 and beyond. I will review some of them now. One of the top 5 video service providers in the world expanded our long-standing relationship by selecting our green extreme low-power technology for the foundation of its new ecological remote control design as the need to eliminate battery waste and to decarbonize premise equipment is growing, we expect more customers to follow this path. Another large and leading subscription broadcaster has selected UEI for their next-generation voice-enabled controller for their state-of-the-art video streaming service. Interestingly, the solution is part of a larger syndication program, meaning that our advanced controllers are likely to be adopted by several of their current systems. As mentioned in our Climate Control vertical, we have been winning new customers and new projects at some of the largest American and Japanese HVAC OEMs. After we announced the expansion of our Comfort thermostat platform earlier this year, we have multiple engagements with large customers, several of whom have committed to bringing semi-custom variants of our products to market next year and into 2024. And while timelines for mass market rollout may typically ramp over a period of several quarters, we feel confident that the first customer will start shipping in early 2023. In the home security and automation market, we are also seeing significant successes. Leading brands such as Vivint, Somfy and Hunter Douglas are expanding their relationship with us by awarding us new projects, and we continue to win new customers in both the Pro and DIY security that will bring exciting new solutions with mass market potential. Unfortunately, the nature of these deals does not allow us to reveal any details just yet. Finally, we are getting ready to showcase our latest solutions and technology at CES 2023. It promises to be an exciting event, where UEI once again leads innovation in home entertainment and smart home wireless control. I will preview some of the solutions we will exhibit. First, weâll be showcasing the latest generation of QuickSet Cloud, the worldâs leading control technology platform for discovery, setup and interaction with entertainment and smart home devices. We will demonstrate enhanced interoperability with a new smart home control standard called MATTER, a recently launched industry protocol that has been adopted by leading ecosystem brands such as Amazon, Google, Apple, Samsung and Comcast. We now provide television OEMs and pay TV operators an easy path to integrate smart home control capabilities into their video platforms as well as providing smart home a simple way to integrate their products into the big screen in the home. In addition, we showcased our cloud native, innovative smart thermostat platform Tide and all its enhanced control and sensory features. We will be demonstrating how the platform can help create more energy efficiency in the home as well as how our products can integrate with existing and new smart home systems and services. We also will be demonstrating our award-winning turn remote control platform and underlying sustainability technologies. This unique control solution harvest energy from indoor light sources and wireless RF â so you no longer need to replace the batteries in your remote control. The promise to eliminate the battery replacement cycle in low-power handheld electronic devices resonates very well with accounts that have an active sustainability agenda, which includes many of our Tier 1 customers. These are just a few examples of what our teams are working on to create solutions that address the control technology needs of the leading players in the markets we serve. Now, I will turn the call over to our CFO, Bryan Hackworth, for a review of the financials. Please go ahead, Bryan.
Bryan Hackworth: Thank you, Paul. First, Iâll 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 diluted share in the third quarter of 2021. Next, I will review our cash flow and balance sheet. We ended the quarter with cash, cash equivalents and term deposits of $61.9 million compared to $60.8 million at December 31, 2021. Cash flow from operations for the third quarter of 2022 was strong, yielding $17.2 million, and we expect continued strength in cash flow in the fourth quarter. Before I review our guidance, Iâd like to give an update on what we have dubbed ports and parts. For UEI, the ports or the logistics concerns are substantially resolved. However, the parts or the supply chain constraints remain a factor related mainly to procuring chips. As weâve said before, the semiconductor supply challenge will not resolve overnight, but instead, weâll improve part by part at each individual supplier over a period of time. Weâve already experienced some of the benefits as we have vendors who have indicated that theyâre able to return to a normalized state of more manageable lead times and ready to supply of parts, while other suppliers continue to maintain their long lead times and have put their customers on allocation impacting our ability to ship the current backlog of products. In 2023, we expect new supply will continue to come online, which will enable us to meet the current pent-up demand in some of our channels. Now turning to our guidance, traditionally, our third quarter sales were the highest of the year as OEMs ramp for the holiday season. We expect the same sales patterns this year. We have widened the sales range as the current environment remains uncertain with inflationary pressures and macroeconomic headwinds. For the fourth quarter 2022, we expect sales to range from $125 million to $140 million compared to $143.9 million in the fourth quarter of 2021. We expect EPS to range from $0.75 to $0.85 compared to $0.68 in the fourth quarter of 2021. We reiterate our long-term growth targets of sales between 5% and 10% and EPS between 10% and 20%. I would now like to turn the call back to Paul.
Paul Arling: 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.
Operator: Thank you. Our first question comes from Jeff Van Sinderen from B. Riley. Jeff?
Jeff Van Sinderen: Hi everybody. So you guys â 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?
Paul Arling: Sure. Yes, I can address this, Jeff. Although if that alarm is going off, please exit the building. I donât want you to get hurt. When we got up in a fire or something, I hope we use to test. But itâs really both. Obviously, as Brian alluded to, the semiconductor shortage, and I â weâve 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 canât 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 â 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 wonât be told the lead time is 60 weeks. And if you want those extra parts, youâre 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 youâre on allocation. So if you need extra parts, you can sometimes get them, but itâs a wrestling match with the vendor to â and look, they are trying to help because they want the revenue too, but they â itâs 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 anyway, this has given â just a little bit more color on that supply shortage. Weâre starting to see vendors that are improving. And as weâve forecasted before, and this will most certainly be true as time marches on, itâs vendor by vendor, part by part, but eventually, capacity is being added to the industry at a record pace. There is a fab up the street from here thatâs targeted to open within the next year or so. And they will reallocate capacity to parts like ours and this problem will be back to a point where lead times are 6 to 8 weeks and they is more ready supply of parts. Itâs taking a while, but weâre not quite there yet. So we do have orders during a quarter that we deliver as much as we can, but weâre probably 10%, I would say. Thatâd be 10% more if we could get all the parts that we would like to have. In addition, as Brian pointed out, and you probably have seen this from other companies that have reported already, anybody whoâs in the consumer markets today is just concerned because interest rates in the U.S. are at 20-year highs and the inflation mark is still at 8% plus. Families â Middle-class families are probably struggling a little bit because they are paying more for gasoline and more for groceries. And so I think they is a little bit of â on our customersâ base. We donât sell a great deal of our products directly to consumers, but we do sell to companies who do. And what weâre hearing from them is they want to be ready for demand because itâs unpredictable right now as to how the consumer is exactly going to react over the next 3 months. But again, long-term, these things do dissipate as time goes on. I canât predict exactly when, but these things do dissipate and we want to be ready with more design, design wins and new product wins, increase our market share. Weâve done this before through prior recessions. The thing to do is to just keep winning with innovation, build better products for customers, raise the ASP because your products are better, gain market share during the difficult times. And then when things start to improve, youâre better positioned than youâve ever been. But we are seeing an effect from both of those things, Jeff. Long-winded answer, but the worry about the consumer probably affects it a little bit and supply chain is still affecting us.
Jeff Van Sinderen: Okay. And that kind of dovetails into my next question, which is â 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 canât name the customer necessarily. But as you look at those and you think about 2023, I realize itâs really early, but what sort of contribution from all of those new products, new wins might we think about for 2023?
Paul Arling: Clearly, it will be more. I canât give you an exact number today. Weâre putting together our budgets right now for â23. But what I do know is weâve seen the wins with some pretty big names that would be recognizable. And again, itâs 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. Weâve 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 â as I said, we never rest when you win some business you have to work harder to win more. And youâve got to figure out what the state of the art is and then move towards it, create the state of the art. And weâve done that on the control side in the markets weâve 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 weâre 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. Itâs an annual cycle. And each year, we kept winning more SKUs, and we kept improving the product, and thatâs why we won more SKUs. So weâre taking the same approach here. Weâve already had success. Weâre at that 10% level, which is pretty good. And â but we think that they is no reason why â and youâve probably heard me say this before, we shouldnât pursue our God-given right to all because, again, we build better products, and weâre going to continue to be committed to that. So it will account of our business in â23, â24, â25. Into the future, we see these markets because they is good growth in them and our share can be increased.
Jeff Van Sinderen: Okay, fair enough. I can take the rest offline. Best of luck for the rest of Q4.
Operator: Thank you. Our next call is from Brian Ruttenbur from Imperial Capital.
Brian Ruttenbur: Thank very much. Hopefully, Iâm 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 youâre taking R&D?
Paul Arling: Yes. We donât â I think itâs going a approximate the same percentage of sales. I mean what weâve 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, itâs definitely paying off. But I donât expect to deviate too much from the current percentage of sales.
Brian Ruttenbur: Okay. Thank you for that. And then in terms of â can you give us an update on where we are in the Roku litigation?
Paul Arling: Yes. They is not much of an update from last quarter. Weâre 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. Weâre still very confident. Weâve done very well on that front. And itâs just a matter of time before those IPRs complete, and then the judge will unstate the case.
Brian Ruttenbur: Okay. And thatâs expected in the next two quarters, three quarters, 3 years and what kind of ballpark are we looking at?
Paul Arling: Yes. It wonât be this year, likely not next year, but itâs difficult to predict exactly when because the â again, the IPRs are â they have to be finalized.
Brian Ruttenbur: Okay. A couple of other questions. I know you canât 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?
Paul Arling: Yes. For years now, weâve guided one quarter forward. While we realized it would be good to guide further out in todayâs 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 itâs just been very â itâd be difficult to be able to predict out. On the good side, if things in the economy improve, weâre just looking for a lack of headwind. We donât need a trailing breeze at this point. We just need a lack of headwind. That would be nice for a while. But again, itâs difficult to predict how those things are going to move. If we knew that, we wouldnât be in wireless control weâd be an investment company. So weâre â I think, withholding these headwinds quite well. Weâve enriched the product mix. Weâre winning projects and when we get that lack of headwind, we think weâre going to be better positioned than ever.
Brian Ruttenbur: Great. Well, thank you very much.
Paul Arling: Sure.
Operator: Thank you. Our next question comes from Steven Frankel. Steven?
Steven Frankel: Thanks. Paul, letâs talk for a couple of minutes about this low power remote win. Whatâs the margin in ASP profile, this new class of products? Are they accretive to both ASPs and margin?
Paul Arling: Yes. I canât talk about a specific customerâs 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. Weâre putting technology into the product that didnât exist before. So the ASP is higher. So itâs 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 â the user wonât have to change their batteries, which has a benefit to them, but it also provides, obviously, an environmental benefit that thereâll 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 weâre helping the consumer by not having them be upset because if youâve ever sat in front of your TV during something wanted to change the channel and your remote didnât work, you got to get up and find batteries and put them in. Itâs not that bad, but we do have to do that. This wonât be done as frequently or if ever, and they wonât be throwing batteries out into landfills.
Steven Frankel: 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 itâs advanced remoteâ¦
Paul Arling: 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
Steven Frankel: 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 youâve 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?
Paul Arling: Yes. As I said earlier, itâs 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 weâre 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 â 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, itâs 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 hasnât yet. So in Q4, we will â we still have products that we had demand for that we will not be able to supply all of because we canât get the parts to make the products.
Steven Frankel: Okay. And I donât want Bryan to feel left out. So if you could tell us about 10% customers in the quarter.
Bryan Hackworth: Yes. We had two. Comcast was at 17.8% and Daikin was at 14.4%.
Steven Frankel: Alright. Thatâs it for me. Thank you.
Bryan Hackworth: Okay. Thanks, Steve.
Operator: Thank you. And at this time, Iâd like to turn it back to our speakers and Paul Arling for final comments.
Paul Arling: Okay. Thank you all for joining us today and for your continued support of UEIC, we plan to present at Imperialâs Annual Security Investor Conference in December and Needhamâs 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
Operator: Thank you, everybody, for your participation. This does conclude the program, and you may now disconnect. Have a great day.
