Q1 2020 Earnings Call
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First call by now you Should've received a copy the press release, if you've not please contact L.A.J.F. for one five fourth retreat 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 Dot you Yahoo Dot com any additional updated material nonpublic information that might be discussed during this call will be provided on the company's website world 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 in the future financial performance of the company in 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 continue efficiently operating its factories at full or near full capacity amid the economic and physical constraints, we faced due to decode 19 pandemic.
The company suppliers transportation providers and customers continuing to operate supplier raw materials and components provide our logistics needs in order or products as anticipated by management.
The company's ability to timely develop and deliver new technologies and technology upgrades and related products that will be accepted by our customers.
Changes in consumer lifestyle that will translate into new purchasing habits, resulting in increased sales opportunities for the company.
The continued trend industry toward providing consumers with more advanced technologies.
Management's ability to continue to manage its business via product mix adjustments increased licensing opportunities and an increase in operational and administrative efficiencies to cheetahs net sales margins and earnings as guided.
Effects that natural disasters in public health crises, including the 'cause it 19 pandemic, how about our isn't isn't management's ability to anticipate and mitigate those effects, including the duration severity and scope of the coping Nike pandemic and restrictions that maybe imposed on the company and its operations by federal state local and international public health and government.
<unk> and the ability to manage the company's near and longer term cash flow in cash needs through inventory in cash conversion control activities.
The company undertakes no obligation to revise or update these statements to reflect events or circumstances that may arise. After today's date refers you to press release mentioned at the onset of this call and the documents the company files, yes. He see.
And then a chance 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 the buying these non-GAAP financial measures to investors as a supplement to GAAP financial measures helps investors evaluate you guys core operating and financial performance.
And business trends consistent with how management evaluate such performance and trends.
In addition management believes these measures facilitate comparisons with the core operating and financial results in the business trends of competitors and other companies.
A full description and reconciliation of these adjusted non-GAAP measures versus gap is included in the company's press release issued today.
On the call today, our chairman and Chief Executive Officer, Paul Arling, well, Jim liver and overview and Chief Financial Officer, Bryan Hackworth, who will summarize the financials. Paul will then return to the <unk> closing remarks is now my pleasure to introduce Paul Arling. Please go ahead Sir.
Good afternoon, and thanks for joining us today.
Over three decades experience, we have successfully managed and team numerous technolog technology transformations.
As well as several economic downturns and become stronger in the process. In 2019, we continued our ongoing technology development and implemented strategic initiatives to improve profitability.
We were pleased to enter 2020 in the strongest position and our company's history from a financial operational and product innovation perspective.
Which is serving us well as we navigate macro economic conditions related to cope with 19.
Year over year.
We continue to invest in securing our technology and product development Foundation.
Once again this bedrock is expected to yield competitive advantages.
For a company as well as our customers.
As discussed on our last call. It mid February we anticipated a supply issue in Q1 2020.
After the lunar new year celebration reopening of our manufacturing facilities in China was delayed.
Today, we are back to full capacity.
Mexico remains open and its operating efficiently.
Well there have been significant challenges to overcome related to delayed factory openings supply shortages and shipping constraints amongst others I'm proud of how our team is handled the setbacks. Once again, we rose to the occasion adjusting our production capabilities quickly to address customer demand.
Today, all of our production facilities are up and running at their requisite capacities and our guidance presumes that will continue.
Many of our customers are in the central industries, such as telecommunications broadcasting and H. back.
Our team continued to work on creative solutions to address challenges, we face in manufacturing supply chain and transportation.
However, as the pandemic spread worldwide, we've been face with shelter in place directives that have impacted our near term customer demand.
Two major factors are contributing to customer demand. During this time. Unfortunately, many consumer electronics retail outlets remain closed limiting consumers access to our customers products.
To online outlets, only where retailers have prioritized the central items and limited deliveries of consumer electronics goods. Additionally, our subscription broadcast customers, especially those who rely heavily on professional installation.
I have seen or operations limited.
These installations required truck rolls and consumers are reluctant to have installers and our homes, while practicing social distancing.
While we believe these effects will be temporal they have affected our near term demand.
Fortunately many of our customers in the subscription broadcasting and over the top space.
Our using our latest quickset and quickset cloud features that contribute to a self installed experience.
This helps reduce their dependence on professional installers at a time when consumers are actively looking for entertainment and information services that have become a must have in today's consumer household.
Additionally, more people are watching TV and using wireless controls in their homes worldwide.
And that is helping drive long term consumer desire for intuitive and voice enabled control and the self install experience.
As technology upgrades continue the bar has been set high for the types of products and services consumers want.
These products are our specialty.
Which will likely present.
Incremental revenue opportunities for you.
At a time like this it's important to reflect on some examples of innovations that have been hallmark of you <unk> embedded adopted by customers throughout the years.
Our quickset cloud platform, which is in its fifth generation is a key ingredient to enabling a consumer friendly self install and helps reduce the dependence on truck rolls.
This provides a huge benefit to our customers and the consumers as they can avoid person to person contact in the users.
Our voice enabled solutions require less tactile interaction with home entertainment devices and give consumers greater confidence in interacting with their home entertainment products and services.
And adoption of our advanced voice control solutions continues to gain traction.
Additionally, last year, we introduced our Nivo Butler platform that delivers touchless voice control for managing consumer interactions with multiple home control applications, including Entertainment security home automation and energy management.
Im sure it would not surprise you to learn that in response to the pandemic interest in product demonstrations and use case workshops for these platforms has grown significantly as the potential for consumer adoption of these types of control interfaces in the home is growing.
Our customers remain committed to their product development strategies.
While adapting to a fast changing environment in fact, our engineers have continued to work with major customers on exciting projects that we expect to formally unveil later this year and early next year.
While the pandemic is still cause for near term uncertainty. We believed that the situation is temporary and I'm confident our team will continue to deliver the latest products and services our customers have come to expect from us.
Our performance in Q1 reflects our continued focus on newer software intensive technologies and licensing which carry higher margin.
As well as prudent cost management.
We have continued our focus on enriching our product mix away from lower and lower margin products.
And toward more advanced truly differentiated and thus more profitable solutions.
Therefore, even with sales lower than last year due to the current environment, we continue to be positioned to increase our profitability.
I'll now turn the call over to our CFO Bryan Hackworth for review of the financials. Please go ahead, Brian. Thank you Paul or view first quarter 2020, compared to the first quarter 2019.
Net sales were 152 million compared to 182.7 million in the first quarter 2019.
At the time of our last call. We expect to first quarter 2020 to have a lower run rate than last year as we've opted out of low margin business and anticipated cobot 19 to impact our supply chain.
This disruption occurred as we were not able to procure certain components for products destined for Asian and European markets.
And local transportation issues in Asia resulted in not achieving our labor capacity until April instead of March.
Factors as expected adversely affected sales by approximately 10 million.
Well, we didn't anticipate was that our demand would also be affected and reduced net sales primarily in U.S. subscription broadcast.
However, last call Coven 19 had yet.
Materially affect regions outside of Asia.
However, as the quarter progressed, the environment change rapidly as other regions, including the U.S. began to shelter in place as mandated by the respective governments.
In the month of March we experienced a decrease in demand, especially for products. The pair with platforms that require an install or to enter household.
However for reasons I'll take you through in a second we were able to fall within the earnings guidance provided.
Gross profit reached $47 million or 30.9% compared to 25.8% in the first quarter of 2019.
Royalties played a significant role in this improvement as were licensing our technology to multiple customers.
Including three of the largest Oems in the world one of which commenced in the current here.
These Oems are broadening the scope of their advanced features by increasing the number products that incorporate quickset technology.
Other factors contribute to the rise of our gross margin rate include opting out of low margin business and a stronger us dollar versus the Chinese want to have Mexican Tessa.
Operating expenses were 32 million compared to 32.6 million in the first quarter 2019.
R&D expense increased to 7.7 million this year from 6.6 million in the prior year quarter, reflecting our strategy to invest in technology and product development.
Yesterday was 24.3 million this year compared to 26 million last year, reflecting savings from our corporate initiatives and a decrease in variable expenses.
Operating income of 15 million up from 14.6 million in the first quarter of 2019.
Operating margin increased to 9.8% compared to 8% in the prior quarter.
Our effective tax rate was 19.4% compared to 14.9% in the prior quarter.
Net income was 11.5 million or 81 cents per diluted share.
Compared to 11.3 million or 82 cents per diluted share in the prior quarter.
Next I'll review, our cash flow and balance sheet at March 30, Onest 2020.
Cash cash equivalents for 58.9 million compared to 74 point Threemillion at December 30, Onest sales in my team.
The decrease in cash was primarily to the timing of accounts payable and accrued expenses.
Covert 19 were not a factor our inventory levels would have decreased by greater amount.
However, given the current environment, we felt it prudent to carry excess raw materials and components in an effort to mitigate potential supply issues.
During the first quarter, we repurchased 106 9000 shares for 6.3 million.
Our cash conversion cycle approximated 115 days of the first quarter 2020, compared to 119 days in the first quarter of 2019.
Now turning to our guidance and amongst that we as an intensely watching the cover 19 crisis, we have learned much.
But there's still a great deal we don't know.
While our guidance today, obviously presumes effect Dakota 19 were also presuming a stabilization that is there will be no more significant events on either the demand or supply side that will change our current forecast.
While this is still guesswork to some extent, we know one thing with confidence this will pass.
Our factories in China, and Mexico are fully staffed and running up planned levels.
We try and raw materials and components remain a risk or operations team has done a great job preparing us and limiting the overall risk and having supply issues.
Although some jurisdictions are beginning to open their economies there are restrictions attached in many areas within the U.S. as well as globally.
Yet to committed to a date.
Consequently, we expect demand to continue to be affected we expect second quarter net sales to range from 150 to 160 million.
Compared to 193.4 million in the second quarter of 2019.
EPS range from 84 cents to 94 cents.
Pair to 83 cents in the second quarter of 2019.
Our corporate initiatives over the past several years from investing in technologies that can be embedded in a number of devices sold and various form factors and.
And distributed through multiple channels.
Our corporate restructuring efforts have enabled us to become a more profitable company.
Therefore, while we expect our sales were down for the first half the year, we're guiding for profits to be up compared to last year I.
I would now to the color Paul.
Thanks, Brian.
Over the years, we have executed strategies to deliver advanced wireless control solutions that differentiate our customers products and services and delight consumers.
While unforeseen events have caused a near term impact on the market, we're well prepared to address the challenges that arise.
More importantly, with our technology, we have continued to arm our customers with innovative solutions to bring to market.
In fact, our customers remain committed to their product development, which we believe is just one signed in the potential long term market demand.
We will manage issues in the near term as we always have.
While the past few years have presented many challenges last year ended as the most successful year in our history.
This year of course present unexpected challenges certainly different and maybe greater than ever before.
Our team has worked very hard over many years to create the best home control products and technologies in the world.
Today manufacturing is up to speed engineering continues to develop more differentiated products.
Major customers continue to plan to launch new projects later this year and into next year.
And our actions, particularly to enrich our product mix and manage our expenses have made our company more profitable.
In fact, despite the difficult environment the bottom line for the first half of 2020 is expected to be greater than it was for the first half of 2019, a record year for our company.
Our enthusiasm is no less diminished as we continue to pursue our long term business potential.
Stay tuned.
Operator, we'd like to now open the call for questions.
As a reminder to ask a question you will need to press Parwan telephone do we try your question press the pound and cash.
Please standby are we compile that came in a roster.
Your first question comes from the lending Steven Frankel from bottom line is now open.
Good afternoon, Paul maybe can we start with some context around the Q2 revenue guidance.
How much of this is the impact you talked about of.
Customers that rely on truck rolls.
Versus maybe other things that are impacting demand like cord cutting or.
Moving away from some of these lower margin products.
Just a little context on that sure yes, I can't give you a precise quantification on some of these things because they are impossible to be precise on.
Instance.
The lower margin products that we've moved away from some of them have continued through their lifecycle others have been replaced by other products. So it's difficult to know exactly yeah again, the precise number that comes from that but there we have over the last few years actually.
Pursued a strategy of upgrading the product and.
Moving more upscale in terms of the solutions that we provide.
Difficult to compare year over year on that on that very front, but I would tell you that the product lines definitely moved up.
The differentiation ladder.
As far as the.
With customers.
We're seeing that customers that adopted in architecture.
That was.
More self install capable and some of our customers have done this over the years.
It's important to note that the consumer channel we have a consumer.
Business.
But part of our be to be sales our business category sales.
Utilize the consumer channel.
So not all of our business category sales are two subscription broadcasters or M.V.P.D.'s or cable and satellite operators as they go by various names by different people that we also sell to <unk> and other customers of ours, who then utilized.
Consumer channels retail channel.
Either online or physically in stores.
And some of those customers products have seen as a <unk> you know a slight drop the simply because the stores were.
Closed.
So as a result people are more buying absolutely what they need rather than traveling through a store and buying things.
So we've seen a little bit of a drop off on that as well.
Those are the two effects the the inability for certain of our customers to enter homes or.
They'll drop in demand for people to install by entering homes and a bit of a drop on the on the consumer side.
<unk> pretty much across most of the world.
Okay and with the the man declined you're seeing with the the subscription broadcast or they just working through there like one of their inventory levels like are they just working through your inventory not placing new orders and maybe.
You know once they start opening up yeah, they might have to.
<unk> replenished like how how do you foresee that.
I can.
Positive scenario, where things start opening up in the back at the year you know playing out for you what the man maybe recovering in this channel.
Well I think a couple things one obviously, if we get back to a point where consumers feel more comfortable with people entering their homes because the the fact is a home entertainment the demand for home Entertainment is not dropped at all.
If people are probably watching I haven't seen the more recent statistics, but my guess is the typical five hours a day of the average American then I typically quote is probably slightly higher than that now.
Oh for obvious reasons, so I think people being informed and entertained in their home there's no lowering of demand for that I I think just now because of the social distancing and some of the things that have happened that will likely with time pass.
You know, we'll probably see a return to more normal behavior. In addition, though what we're also seeing and have four years now is customers that are again as I mentioned in the prepared remarks.
Opting in architecture.
Which lends itself more to self install.
Now obviously, no one did that because of a pandemic. They they did it because it is just easier it's easier for them, it's easier for the consumer.
And quickset and Quickset cloud are an important element of that.
All of the new designs were seeing are adopting more of of those technologies.
So as we roll out more of these platforms, which as I said the customers are still working on.
As they roll them out one of the benefits of it longer term would be that if there ever were in interruption like this again.
They would be the customers that have adopted this architecture would be less impacted.
Because again, if consumer calls and said look I I'm watching and a lot of T.V. now I'd like to put a T.V. and the den with with a service on it they would simply either put a box.
On the front on the front step or mail it to that consumer and there'd be a small card inside that would say please follow the instructions on this card plug it into the wall plug in your devices and follow the instructions on the screen.
And it's really quite that simple okay.
Hi, <unk>, 1% of your revenue is.
<unk> or license based yeah, maybe you know how fast zapping wrong.
We don't disclose that but it's been growing the royalties I've grown nicely over the last year as I said that prepared remarks, we used to.
We're up to three <unk>, we have more arrangements than three but from things like my largely on this where we have three and even within those three they're starting to broaden their you know.
Product line in terms of deploying our technology and more of their skews. So <unk>, we're seeing growth for like a customer perspective, but also even within the customer. So it's it's growing nicely.
Yeah. Thank you.
Yeah next question comes from the line of <unk>, then send your name from being mainly yeah lanes, though.
First let me say congratulations on the strong profitability in gray margins.
Just to clarify my first question is really the lower demand to hear experiencing does not appear to be due to court cutting but rather do to pro installed delays and it closed consumer channel due to covert is that correct.
Well, yeah, it's difficult for us to know obviously when somebody if we have a customer that again has a a non self install a related architecture.
When they give us their orders for the quarter and they're 10% off.
They don't say well 7.2% of that.
Is due to lack of self install in 2.8% of it is court cutting.
However, I will tell you that cord cutting has been something that has been talked about four.
I can't remember, how many years now, but it's quite a few.
And yet last year, we saw demand increase so I'm not sure I can't give you a precise number on that for the reasons I just mentioned, but I think that the main change between say queue for of last year or Q3 of last year and today would be.
Mainly that lack of self install architecture the inability.
For either the company to send their employees in for the consumer not wanting to have those those installers enter their home.
That would be the biggest change between two three or four of last year and now.
Oh, Okay. Because you said the board cutting maybe part of that it wasn't really affecting us last year, I'm, not saying it isn't affecting us at all.
But it wasn't effect in the past and we were still growing share and our sales were still accelerating so.
And again the remember we're part of some of these over the top platforms. We're not just tied to one or the other any type of entertainment product that under your home, maybe a customer of ours. So.
You know court cutting is something that is certainly out there, but I think the bigger effect in the near term the due to the covert 19 is this idea that you know people don't want installers entering their home that would be the biggest change between two three or four of last year and now.
Right and and it would stand to reason right up your business was up you know.
Actually last year sorta makes cord cutting less relevant.
And I think you also said that you were seeing relatively stronger demand or the south install type products correct. We are yeah, and we have a lot more interest for obvious reasons and of customers even customers who hadn't adopted it yet are now.
He interested in it.
<unk> not just due to <unk> I mean, there's <unk>, there's an obvious selling point, it's easy it's easy for your installer, it's easier for the consumer you could move to a more self install architecture. If you utilize it.
Even forgetting about the pandemic, it's it's a better solution I think this just hastens, it's adoption when you face something like this it it helps well yeah.
The <unk> pandemic doesn't help the the selling of this feature is aided by this the these times.
Mhm.
And then you you mentioned on the consumer side, where retails closed you're sitting a slower demand. There is that for T.V.'s are which products are involved.
It doesn't appear T.V.'s have been hit quite as hard, but any other product could be because again consumers just aren't the obviously, they're not physically in stores. So volumes clearly in our consumer business, which is less than 10% of our company, but still there that that is.
You know going going to be a little bit.
Lower as a result of people not being out in about shopping and retail stores. There there's simply shot across most of the that M- M- all of Europe, and the U.S. have felt those effects.
At the end of Q1, and Indic you too.
Okay.
It can you give us any more color on some of the new programs that you mentioned you press release the year. They you see driving growth. Perhaps later this year and into next year.
Yeah, the only color I can give you on them, because obviously and <unk> I know we've talked about this before and I've talked about it with all of you guys that are our customers of course in front of their introductions do not want for us to talk about them.
And we hold true to that.
The only thing I guess I could say is that these are advanced platforms. Obviously.
They are usually voice driven.
If not all.
Some of them are <unk> of what people have done in the past.
Many of them are upgrades meeting people, who are moving from the older architecture to the newer architecture.
As we talked about for a long time to way.
P enabled devices that are now technologically capable of things like self install utilizing quickset and quickset cloud.
Many of them reach out to other devices in the home that will actually connect and control other devices in the home.
Many of them are with the leaders in the industry in the world.
Some of them are with new customers.
But again I can't Unfortunately, I can't mention names, but that'll be something as we said in a prepared remarks that we can unveil as the quarters progressed.
Okay. Good Dear, Thanks, and best of luck I keep.
I went shopping now Frank I question about this time I was now like to change the conference back.
Okay. Thank you for joining us today in your continued support of Universal Electronics, we will present at two upcoming virtual conferences.
The need 'em annual technology and media conference on May 20th.
And Baird's global consumer Technology and services conference on June 2nd.
Hope to hear from you at some or <unk> I guess, we won't see you, but hear from you at those conferences, thanks, very much and have a wonderful day.
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