Q2 2020 Universal Electronics Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Universal Electronics Inc. second quarter 2020 earnings Conference call. At this time, all participants are not listen only mode. After the speakers presentation. All via question and answer session to ask a question. During this session. You want me to press Star then one on your telephone please be advised to today's conference is being.
Recorded.
If you require any further assistance. Please press star then zero.
I would now like to hand, the conference over to one of your speakers today Ms. Kirsten Chapman H.
Oh H eight Investor Relations Ma'am. Please go ahead.
Thank you Michelle and thank you all for joining.
Universal Electronic second quarter, 220, 20 financial results conference call by now you should have received a copy of the press release, if you've not please contact leaching investor relations at 4154333777 or visit the IR 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 dot com any additional opinion material nonpublic information that might be discussed during this call will be provided on the company's website world the routine for at least one year.
You may also axis 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 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 continue efficiently operating its factories full or near full capacity amid the economic and physical restraints, we faced due to the cobot 19 pandemic.
The company suppliers transportation transportation providers and customers continue to operate supply our raw materials and components provide our logistics needs and order our 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, including the company's quickset Quickset cloud Nivo Butler and voice enabled technology.
Changes in consumer lifestyles that will translate into new purchasing habits, resulting in increased sales opportunities for the company.
To continued trend of the industry toward providing consumers with it they have to technologies, including expanded smart home offerings in interactive services.
The returned to more normalized patterns of pay TV activations as anticipated by management.
Management's ability to continue to manage its business.
<unk> product mix adjustments increased licensing opportunities and an increase in operational and administrative efficiencies to corporate restructuring efforts to achieve its net sales margins and earnings as guided.
The effects that natural disasters and public health crises, including the Cobot 19 pandemic have on our business in management's ability to anticipate and mitigate those effects, including the duration severity in scope of the cobot 19 pandemic in restrictions that may be imposed on the company in its operations by federal state local and international public Health Gov.
Our mental authorities.
And the ability of management to manage the company's near and longer term cash flow in cash needs through its inventory and 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 the Companys press release mentioned at the onset of this call and the documents the company files with the SEC.
In management's remarks, adjusted non-GAAP metrics will be you referenced management provides adjusted non-GAAP metrics because it uses them for budget planning purposes, and 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 the ice core operating and financial performance and bid.
These trends consistent consistent with how management evaluate 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 gap is included in the company's press release issued today.
On the call today, our 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 is now my pleasure to introduce Mr. Paul Arling. Please go ahead Paul.
Good afternoon, and thanks for joining us today.
Over the past 35 years, our dedication to innovation customer service and effective operations has built.
Into a market leader with a strong financial foundation.
Today, we continue to develop industry, leading technology and leverage our strong leadership position supporting our customers now and paving the path for our profitable future.
I'll elaborate more on our expanding opportunities in a moment.
First regarding the second quarter of 2020 financially we performed as expected revenue was 153 million with EPS of 89 cents, reflecting our initiatives to become a more profitable company.
As a result for the six months ended June Thirtyth 2020 bps reached the highest in the history of.
At $1.70.
Our long term growth opportunities remain unchanged.
That said Cobot 19 continues to impact near term demand.
Primarily with our traditional home entertainment and security customers.
Due to the pandemic their ability or willingness to install hardware incomes in consumers' homes, whether it is to establish new service or to upgrade premises equipment has been disrupted for the time being.
Ironically this near term pressure is creating long term benefits customers are reinforcing or initiating advanced product development, including self install and voice capabilities, which gives us confidence in our long term growth and profitability.
To be fair, we have been referring to our core market as subscription broadcast for many years and that has led many to view our channel is being predominantly comprised of the traditional cable and satellite operators that have driven the growth of video entertainment consumption and millions of consumer homes around the world for many decades.
Today Entertainment content is no longer found exclusively at the end of the coax cable.
The introduction of on demand libraries video streaming apps live TV streaming and linear TV streams can be found at the end of any network connected device. This is more true today than ever before.
In 2020 alone for major New video Entertainment services were introduced by major cable entertainment content and technology brands.
Backing these services are billions of dollars of content creation spend to ensure uniqueness in their offerings and to appeal to the billions of consumers that enjoy their content.
Still to this day video consumption measured by hours of viewing time is dominated by the big screen TV with most of the video content being delivered either via set top box over that over the top streamer stick or access directly via our smart TV.
Furthermore, the lines defining content sources of blurred.
For several years now traditional cable and satellite operators have added over the top services to their hybrid platforms.
Over the top streaming services traditionally defined by their large video on demand libraries have added linear TV to their offerings.
More importantly for me, we eyes perspective, all these video entertainment providers, whether they be traditional content aggregators, such as Comcast and dish consumer electronics brands, such as Sony Samsung and LG or technology companies, such as Google are expanding their offerings across more than one of the key video consumption platts.
Forms television streamers and set top boxes.
To deliver content to as wide an audience as possible.
This is essentially creating a growing list of new projects with existing and new customers for you today and into the future.
While we cannot discuss many of the customers that we are correct that we are actively developing products and technology for we're excited to see the changes that are happening right now in home entertainment.
Additionally, I think it's important to review of couple of major trends in our industry and our strategy to capitalize on these trends.
The first one is the inevitable trend toward advanced IP enabled voice driven systems that can bind alive or linear content.
With subscription video on demand or over the top services.
These new systems are exactly what today's consumer wants.
The average American consumes almost six hours of video per day.
From both live TV subscriptions as well as services, such as Netflix Amazon Prime Hulu and you tube.
What consumers want is an easy way to choose from a seemingly infinite array of choices and get to what they want to watch quickly and easily.
They want to watch their favorite baseball team play live Tonight, followed by binge watching a favorite show on Netflix or another service.
These advanced IP enabled voice driven systems have already been introduced by some leading companies using our technology with great success.
But there are more to come from both traditional customers as well as some exciting new ones with whom we are working.
This is important because our business is driven particularly now and into the future.
Hi, this upgrade cycle, rather than the much more closely reported and followed subscriber numbers.
Another relevant trend that has been more recently reported by the media is subscriber loss or as some have characterized it cord cutting.
I think it's important to take a step back and explain a few terms.
Churn or terminations measure how many customers disconnect during a given period.
Activations represent the number of new customers, who have been added during that same period.
The net change which is now the most widely reported figure represents both elements of subscriber change that is churn plus activations.
As many of you are aware churn has been a part of the industry since the very beginning.
Activations or new subscriber ads, often offset the churn number that an operator experiences.
Data from the last few quarters, however would indicate that the net subscriber loss has to do more with lack of activations that it has with an increase in churn.
In fact, we are seeing evidence at some operators that churn has actually lowered slightly.
In many cases, the lack of Activations has been driven by operator policies that restrict new installations due to the risk of cobot to their installers, while in other cases consumers are reluctant to allow installers in their homes.
Either way the decline in subscriber count at traditional operators is in part driven by a decrease in professional installations and hence new activations.
As we have mentioned previously.
Our increasingly popular quickset feature which has enabled on many of the new advanced platforms offers our customers a greater potential for a self install system, while also helping to lower the overall install cost.
This in combination with a lack of live events, such as sports, which has led many operators to experience a significant decline in new connections, which in turn leads to a lower demand for our entertainment control solutions.
We anticipate that demand will pick up again as soon as live TV events, operator promotions and new in home installations restart.
Further as time progresses, new advanced Quickset enabled systems will replace traditional platforms, thus eliminating the need for professional installation.
Regarding the near term outlook. However, we believe our video entertainment business is for the large part affected by what we see as these temporary challenges.
Despite the effects of the pandemic industry trends are yielding solid prospects.
Consumers are captivated by the idea of an all encompassing voice enabled smartphone platform to make things easy they want to simplify access and control of content and services from one spot including content from traditional linear TV streaming apps hardware platforms that connect them such as TV speakers.
And set top or streaming boxes as well as the growing list of smart home devices applications and services.
This concept is becoming more mainstream in the us where some of the larger providers with scale have invested in platform development along with us.
However, it is important to note that globally. There are many providers who are still in development of their next generation platform.
Many don't have internal engineering teams and will choose to outsource their platform architecture solutions whatever their path. There is no doubt these advanced platforms are coming.
And they will utilize sophisticated voice enabled control clearly our specialty.
All of which continues to fuel the long term opportunities for our technology.
In 2019, we also introduced Nivo Butler, our smart home hub with built in voice assistant that unifies entertainment and home automation with access and control.
While while we continue to evolve that platform with new features we're excited to announce that we have secured a leading telecommunications service provider, who will be our first customer to deploy our nivo Butler platform.
We're also actively engaged with other brands in the professional security and hospitality markets that are considering our turnkey Nivo Butler platform.
Or its ingredient technologies to integrate into their platforms.
There are certainly cause for optimism, especially as these channels emerge from the temporal effects of the cobot pandemic, we'll have more to share on these projects as the year goes on.
Regarding quickset in Quickset cloud, we continue to see growth on our cloud connected services fueled by an expanded set of smart home features and a wider penetration of our technology into smart Tvs advance set top boxes and smart speakers.
Additionally, our product and development teams are partnering with multiple customers and developing next generation generation products across all our entertainment and connected home product categories. We expect they will be announced and begin shipping in the next few quarters.
I'll now turn the call over to our CFO Bryan Hackworth for review of the financials. Please go ahead Brian.
Thank you Paul I'll review second quarter 2020, compared to the second quarter 2019.
Net sales met our expectations at 153.3 million. This compares to the second quarter of 2019 of $193.4 million, which at the time was a record quarter.
Our 2022nd quarter sales reflect the continued impact of cover 19 on our traditional home entertainment customers.
Especially those without self install capabilities.
Our gross profit was 43.7 million for 28.5% compared to 25.2% in the second quarter 2019.
Royalties continue to play a significant role in the rate improvement as were licensing our technology to multiple customers.
Including three of the largest Oems in the world.
These Oems are broadening the scope of their advanced features by increasing the number of products that incorporate our quickset technology.
Other factors contributing to the rise of our gross margin rate include opting out a low margin business and a stronger us dollar versus the Chinese won and Mexican peso.
Because a favorable product mix, including an increase in licensing revenue, we expect our third quarter gross margin rate to be higher in the second quarters.
Operating expenses were 29.2 million compared to 33 million in the second quarter of 2019.
Reflecting the lowest level since 2016.
R&D expense increased to 7.1 million from 6.9 million in the prior year quarter.
So in a decreased to 22.1 million from 26.1 million last year as a direct result of our corporate restructuring efforts as well the decrease in variable expenses.
Operating income of 14.5 million or 9.5% of revenue.
Pair to 15.8 million or 8.2% of revenue in the second quarter of 2019.
Our effective tax rate decreased to 12% from 21.2% in the prior year quarter due primarily to tax incentive refunds received in China.
Our corporate restructuring has enabled us to reallocate a portion of the savings from SG Nay to R&D.
Including additional investments and technologies that can be embedded in a number of devices sold and various form factors and distributed through multiple channels, yielding higher margins and greater profitability.
For this reason we were able to improve our bottom line on lower sales as net income increased to 12.6 million or 89 cents per diluted share from 11.7 million or 83 cents per diluted share in the prior year quarter.
The same is true for the six months ended June Thirtyth 2020, although sales were down our earnings per share of $1.70 for the first six months or the highest in the history of urea.
Next I'll review, our cash flow and balance sheet at June Thirtyth, 2020, cash and cash equivalents for 58.8 million compared to 58.9 million at March 30, Onest 2020.
Cash flow from operations for the three month ended June Thirtyth, 2020 was 12.8 million compared to 24.8 million in the prior year quarter.
Now turning to our guidance our factories in China, Mexico remain fully staffed and running that planned levels.
During raw materials and components remains a risk.
But our operations team has done a great job in mitigating supply issues.
However, because certain jurisdictions in the us and abroad continue to have restrictions, we expect third quarter sales to be adversely affected.
We expect third quarter net sales to range from 150 to 160 million.
Compared to 200.9 million in the third quarter of 2019.
And EPS range from 87 cents to 97 cents compared to one dollar one in the third quarter 2019.
This will yield an operating margin in excess of 10%.
Now, let's turn the call at all.
Thank you Brian.
While we have experienced lighter than normal revenue due to the pandemic and its effects. We're pleased with the actions we have taken to improve the profitability of our business.
This positions us better for success as markets improve.
Many positive trends outweigh some temporary challenges caused by lower activations impacting some of our customers.
The convergence of traditional TV and streaming apps is driving demand for our technology.
Based on what people want a single easy access voice enabled platform.
Our customers are increasing their commitment to develop advanced products.
Consistent with our history, we will have numerous products to pair with a next generation of content delivery.
I'd like to leave you with this thought.
The home Entertainment World is clearly changing.
In some cases dramatically.
Classifying companies that exist within this market or companies that prior to this have been experimenting in it as static.
Would be a mistake.
We are seeing a substantial amount of technology development in the home entertainment market.
That will change the way people watch television and we will certainly changed the perception of of the customers in our market both existing and new.
We are proud to have invested in positioning ourselves as the clear leader in this area and to be working with these companies that are changing the world of home Entertainment and Smart home control.
As always stay tuned.
Operator, we'd now like to open up the call for questions.
Thank you, ladies and gentlemen, if you wish to ask a question at this time. Please press Star then one on you touched on telephone. If your question has been answered I must remind yourself from the Q. Please press the pound key to prevent any background lanes. We ask that you. Please place your line on me. Once your question has been stated.
Our first question comes from the line Stefanko look higher Securities. Your line is open. Please go ahead.
Good afternoon, Paul So what do you think today your exposure is to these truck roll.
Customers.
Well, yes, the most of our customers some of our largest customers have converted to more of a self install architecture. So the exposure there is minimal.
They've had fewer issues with the pandemic as a result of the ability to.
Have a self install program, where the professional installers do not have to come to your house.
We still do have numerous customers here in the us and clearly abroad that.
Do not have.
Self install architecture.
Obviously, they did not planned for a pandemic.
So.
Some of them, we're developing a new platform.
But it was not quite ready.
Prior to the pandemic.
Slamming down on them. So they they've continued development in our ever more excited to get these programs done, but they were not prepared for it and as a result in some cases they have.
Of the ceased activations to two for the safety of their employees.
In other cases, they are doing it with a stringent protocol to protect the consumer but there is some consumer resistance to it.
So as I said earlier I think what's happening in the industry is churn is not actually the issue a lot of people want to report this subscribers have been down, but I think the bigger effect over the last six months has been.
A lack of activations that they haven't been able to install new systems churn spend with us since the beginning of the industry.
The cable and satellite companies have lost customers every quarter since I started at 20 plus years ago.
So its lack of activations.
This obviously is changing.
In a way as I said in the prepared remarks.
It's actually helping the selling point of quickset, one of the selling points, which is that it would allow a self install program and.
If you wherever we're to not be able to install again you can simply leave you can mailed the box to the consumer or leave it on their front doorstep and there is a simple set of as instructions.
Contained in the box.
To have the consumer installed themselves.
So the more and more of this happens the less impacted we would be by any future interruption due to a pandemic or other effect.
But we are suffering through it right now we do have numerous customers worldwide.
Including here in the us.
That had not moved to a complete self install system just yet.
Okay, and you talk in your script to battle.
No new projects.
Maybe if you could give us a little more insight into how many new projects do you think you launch in the back half of the year.
Our any of these.
In newer markets for you all away from the traditional set top box upgrade cycle.
Yes, the up.
Many of the bigger or more exciting ones are happening probably into Q4.
Or into Q1 of 2021 that would be the scheduled time.
And I guess.
The most broad thing I can say about this is there a variety of platforms in your home today.
And as my last statement said don't think of the world as static.
The the way that entertainment will be delivered will probably be across platforms. In some cases, you may see new platforms that will surprise you.
Given that where companies have historically been.
In their architecture.
So delivery of entertainment will probably come from televisions.
Sometimes with existing players, sometimes with some new ones that you wouldn't have expected.
The same in set top boxes, you may see.
The new players as well as existing players putting out new platforms.
Some of these things as time goes on May surprise people, but what they have in common is this and it's what I mentioned in the call. They all understand and this is why they've been moving this direction that consumers want to watch the baseball game Tonight or golf or some other live event a reality their favorite reality show that they can't Miss.
And then when it's done they want to switch over to watch Netflix or prime or another popular service over the top and they want one interface.
Within which to watch all of that and they want to be able to get to those two different things or six different things quickly and easily.
Thats what these platforms have in common.
The method of delivery will change, but thats exactly what they'll bring.
Live auctions plus over the top or ESCO de options.
All in one easy to use interface typically if not always voice driven.
And they want them to be self installed so they could simply mail them to people have them open the box plug it in.
Plug in the devices.
And the software takes over.
And can you give us any more details on this nivo Butler win.
Well other than to say it when it is announced its a household name.
Yeah.
I think I've already given huff clues, but we're working with a.
A large telecommute telecommunications provider.
It will probably be Q4 again, maybe Q1.
The development schedule is in final, but they've they've said that their target is late Q4 fourth early Q1.
Okay and.
Because I don't want Brian to feel left out could you give us the customer concentration numbers for the core.
Sure we had two customer that exceeded 10%.
Comcast and 19.3%.
And daikon at 10.7%.
Okay, and then lastly, fall and then I'll pass the Baton.
Are there any implications for your home security business.
Google Eightseventy announcement earlier in the week.
Not really no.
I look I think theres a increased activity in on that front I've heard over the last couple of months at first in the pandemic it had dropped pretty significantly because of the professional installation.
Element to it but it but I'm hearing that is beginning to come back due to security concerns of people.
With the current environment there there.
Looking to have more secure homes.
Okay, great. Thank you.
Thank you and again, ladies and gentlemen, if you have a question at this time. Please press Star then one.
Our next question comes from the line of Jeff Van Sinderen with B. Riley. Your line is Ofer. Please go ahead.
Hi, This is I can I actually sitting in for Jeff I've got one quick question.
Given positive video subscription trend that some msos plus the infinite Xfinity flex box deployment at Comcast and launch Peacock can you give us your latest thoughts on how current adoption trends potentially can impact your business and also how you're thinking about the return of sports as it relates to your business.
Well, yes, certainly any compelling live content that returns to the screen, obviously helps because people will fuel as of the something they must have right on television for a few months. There there was very little compelling live content.
Because shows were off season in sports were not being played or televised so there was a less compelling need to connect or reconnect live television. So the more live.
The.
Content that comes on particularly sports because it can be quite compelling to certain parts of the population.
Or even reality shows that people don't want to Miss there in some ways like sports they have outcomes and social media will be ringing right. After the show has has put.
Put out has been put on the air So people, who wish to watch live or nearly live.
All of that content is compelling for live TV as as it returns with force obviously live TV becomes critically important to average user there's still the majority of time they spend watching television.
The other question part of your question on these platforms.
This is an example of what I was talking about don't.
And some of them are now public don't view the world is static leading companies.
In the industry.
Including ones, you've mentioned, we don't talk about specific customers and their product plans, obviously, but.
You did mention Comcast or a good example, they're leading company in the industry. They are out there and they're doing the most interesting things in the industry.
And you'll probably see more from them and others over time as far as change.
The way they are changing how people will watch television and through its devices or technologies they'll watch it through.
So I think theres, a continual thinking within the industry, particularly amongst the leading companies about that topic and you're going to see things change.
Exciting new platforms, they won't abandoned the platforms. They have because they are great platforms, but they'll move to new ones to attract new customers.
Yes.
Alright. Thank you appreciate your insight.
Yeah. Good luck.
Thank you and I'm showing no further questions at this time and I would like to turn the conference back over to Mr., Paul Arling for any further remarks, okay. Thank you for joining us today and your continued supportive of Universal electronics.
We will be presenting at the Collyer securities.
And this adobe fall virtual investor conferences in September.
Hope to hear from newer Cu online.
And those conferences have a wonderful day.
Thank you.
Ladies and gentlemen, this does conclude today's conference call. Thank you for participating you may now disconnect everyone have a great.
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