Q3 2020 Universal Electronics Inc Earnings Call

Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby and thank you for your patience.

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To manage the companies near in longer term cashflow in cash needs as anticipated.

The company undertakes no obligation to revise or update these statements to reflect events or circumstances that may arise. After today's date and refers you to the press release mentioned at the onset of this call and the documents the company filed with the SEC.

And management's remarks, adjusted non-GAAP metrics will be referenced management provides adjusted Don gap 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 get financial measures helps investors evaluate <unk> core operating.

And financial performance and business trends consistent with how management evaluates such performances and trends.

In addition management believes these measures facilitate comparisons with the core operating and financial results emphasis trent's 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 issue today.

On the call today, our chairman and Chief Executive Officer, Paul Arlene, who will delivered overview and Chief Financial Officer, Brian Hackworth will summarize the financials. Paul will then return to provide closing remarks. It is now my pleasure to introduce call Arlene. Please go ahead Paul.

Good afternoon, and thanks for joining us today.

We continue to leverage are incredibly strong foundation of innovation customer service and effective operations over.

Over the past two years, we've purposely focused on enriching our product one and managing expenses.

Two way voice powered IP connected home entertainment platforms around the world.

Our work to design develop and integrate our control solutions on more platforms continues.

As does our commitment to develop and bring to market. The next generation technologies needed to power emerging entertainment and home automation control platforms.

I would like to share more details on the groundbreaking platforms. We are preparing to introduce for competitive reasons, our customers prefer to keep their projects confidential.

One recent public announcement that exemplifies our work came from Liberty Global one of the world's leading video broadband and communications companies with over 11 million customers in Europe.

Having a long term collaborative relationship Liberty Global chose us for our proven technology high quality and shared commitment to sustainability.

The majority of the advanced technology projects in development are designed with our proprietary quickset platform to improve the user experience next.

Next generation devices offer automated setup ease of everyday use and voice driven control to enable consumers to search for content across all entertainment platforms from a single device.

This is noteworthy EPS convergence continues to be the underpinning trend in our industry.

The number of people watching video just keeps growing as does the number of hours that they are watching video EPS.

Everyday consumers have more content available from on demand libraries over the top video streaming apps live TV streaming and linear TV broadcast.

They also have increasing sources of content with major cable entertainment content and technology brands that are spending billions of dollars to continue to expand their presence.

While some of the new streaming service providers are adding linear TV services traditional cable and satellite operators likewise are creating hybrid platforms that integrate their linear TV with their own video on demand.

As well as popular over the top services.

Major companies in the home Entertainment space are moving in this direction for one simple reason this is the type of platform.

That consumers want.

They crave and easy way to choose from an almost infinite array of options and to get to what they want to watch quickly and easily there.

They want to watch their favorite sports team play live Tonight, followed by binge watching a favorite show on Netflix Peacock, Apple TV, plus Disney plus Hulu prime or another service.

Other changes in home entertainment or even more dramatic a substantial amount of technology development is aimed at altering how people watch television, which will modify who our customer is.

As noted we are working on confidential designs for new and existing relationships.

We believe this is just the beginning of our next phase in the market evolution.

And you guys well positioned to capture these new opportunities and grow by delivering the overall control experience in the coming weeks months and over the next year, we will provide more details on these exciting new developments.

Regarding market pressures, we continue to leverage our strengths to manage external challenges for the past decade, we have been discussing cord cutting and its potential impact to the video service provider industry.

And our business.

On our last quarter's call we discussed in detail the components of subscriber changes, we outlined that during the pandemic there have been fewer terminations or lower subscriber churn.

However, due to operator and consumer reluctance for professional home installation.

I've been even fewer activations, resulting in net subscriber declines, particularly for operators.

Without self installation capabilities.

Also well before 2020 operators began shifting to self installation systems, because they are less expensive than those that require truck rolls and they offer a better consumer experience with an easy plug and play set top box and in the mail no appointment needed.

The pandemic is simply accelerating the March to self installation powered by quickset.

New home Entertainment architectures, however, can take six to 18 months for our customers to design build and refine.

So while this change continues and is inevitable it takes time.

As adoption increases and drive sales growth. These.

These more complex systems also carry higher asps.

Further regardless of the content delivery platform set top box streamer stick or smart TV, the big screen TV remains the predominant viewing choice and consumers continue to need in advanced controller.

Yes, Hi has long been the global industry leader in control technology for these different type different device types and over the years our differentiation from competitors has further widened.

Yes, hi has anticipated that the convergence among home entertainment devices of all kinds will lead to growth in home automation as well.

As mentioned earlier this year, a major telecommunication provider has selected Nivo Butler.

As its branded voice enabled digital assistant for blending entertainment and smart home control we.

We are on track to deliver this solution into select markets early next year.

In summary, we are actively working with many of our existing and new customers from video entertainment consumer electronics home automation and hospitality to bring new products and services to market the.

The products are at various points in the development cycle and give us confidence in our long term growth and sustainable profitability.

Ill now turn the call over to our CFO Bryan Hackworth for a review of the financials. Please go ahead, Brian. Thank you Paul I'll review the results for the third quarter of 2020 compared to the third quarter of 2019.

Net sales met our expectation that a 153.7 million. This compares to the third quarter of 2019 of $200.9 million.

As expected our third quarter sales reflect the impact of over 19 on our traditional home entertainment customers.

Specifically those without self install capabilities our.

Our gross profit was 46.1 million or 30% of sales compared to 26.8% in the third quarter of 2019.

Our strategic investments in R&D have resulted in technologies and products that yield higher gross margins.

These technologies can be embedded in multiple devices sold and various form factors and distributed through multiple channels.

Currently license our technology to three of the largest Oems in the world.

And as these Oems expand their portfolio of products that incorporate our technology, our licensing revenue will continue to grow.

We expect these positive trends to continue and for our fourth quarter's gross margin rate to exceed the 30 points achieved in the third quarter.

Operating expenses were $29 million compared to $35.1 million in the third quarter of 2019.

Reflecting the level last achieved in 2016.

R&D expenses 7.4 million this year compared to $7.6 million in the prior year quarter.

SGT decreased to 21.6 million from $27.5 million in the prior year quarter as a result of overall cost control and a decrease in variable expenses.

Operating income of $17 million or 11.1% of sales exceeding the 10% operating margin milestone.

This compares to $18.7 million or 9.3% of sales in the third quarter of 2019.

Our effective tax rate was 21.4% compared to 21% in the prior year quarter.

Net income was $13.1 million or 92 cents per diluted share compared.

Compared to $14.3 million or one dollar one per diluted share in the prior year period.

Because of the efforts made to improve profitability, including investments in R&D to develop higher margin products.

And a corporate restructuring to reallocate and reduce operating expenses.

For the nine months ended September Thirtyth 2020, we were able to achieve an operating margin of 10.1% of sales compare.

Compared to 8.5% of sales in the same period last year. We also report the same level of net income $37.3 million with $118 million less in sales.

Next I'll review, our cash flow and balance sheet Septemberthirty 2020.

Cash and cash equivalents were $67.1 million compared to $58.8 million at June Thirtyth 2020.

Cash flow from operations continues to be strong as cash inflows were $39.3 million for the current quarter.

This enabled us to reduce our sales Atlantic credit by $23 million during the quarter, resulting in an ending balance of $50 million.

We also repurchased 91000 shares for $3.4 million.

We believe the future is bright of urea is very bright Paul noted, we have advanced technology products scheduled to be launched in late 2020 and into the fall of 2021.

Sales growth expected to return in 2021, and we are becoming a more profitable company with higher gross margins lower operating expenses and strong free cash flow.

We believe you guys currently undervalued and our best use of cash is to repurchase our shares in the open market.

Therefore, our board of directors has approved a plan to purchase up to 500000 shares contingent on share price over the next few months.

Now turning to our guidance typically third quarter sales, including holiday spikes is greater than fourth quarter sales. However, this year, we expect fourth quarter net sales to approximate third quarters and range between $150 million to $160 million compared.

Compared to $174.8 million in the prior year.

As mentioned previously we expect our gross margin rate to exceed the 30 points achieved in third quarter.

Leading to an expected record fourth quarter EPS, ranging from 93 cents to one dollarsthree.

Compared to 90 cents in the fourth quarter of 2019.

We are reiterating our long term growth targets of sales between five and 10% and EPS between 10 and 20%.

I would now like turn call back to Paul.

Stay tuned.

Operator, we know like to open up the call for questions.

Thank you Sir.

As a reminder, ladies and gentlemen to ask a question you'll need to put a star one on your telephone truth grow. Your question. Please press the pound key standby as he compiled the Q&A roster.

Oh first question come from Jeff Van syndrome of B Riley security.

But you'll serial line is open.

Hello, This is Richard Magnusson and for different syndrome. Thank you for taking our call. It seems that a number of developments have been pushed off of 2021. So can you give us an idea of how strong 2021 could be assuming the overall environment, including the pandemic continues along the current path and also what is the potential for an evil Butler as we move into 2021.

Could be very positive for Nivo Butler is that correct.

Well, we are Nivo Butler, we'll we'll see an introduction.

In certain markets early next year, yes, right. After the first of the year and that technology as well as some other programs working on it's not just Nivo Butler. There are other programs that we're working on that we think are going to be quite exciting to the.

To the market.

Okay and then.

You mentioned the light you spoke a little bit of a licensing revenue.

Thank you.

Our next question comes from Greg Burns of Sidoti and company. Sir Your line is open.

Good afternoon, I'm just to follow up on the last questions about Nivo baldor, let's see the the economic model. There is a a onetime sale or is there you know any kind of recurring service components or returning service component to the Nivo Butler and how.

How do you how is the the telco partner going to be distributing this are they going to be like giving it away or selling it into their installed base yes.

Yes, Greg I can't speak to the particulars of this is we don't give any economics.

Or units for an individual customer but.

But I, but I will say this is a product.

That will bridge entertainment with other control mechanisms. So it's it goes beyond Avi control into other areas.

That I can say.

And it typically in knees, it's not a one time.

Sales.

We obviously are going to sell units to them.

So they'll be buying Nivo Butler hardware in this case.

Okay. I mean is it a hardware only a hardware harbor only sale or is there any kind of recurring backend platform elements to what we'll be able to talk more about that potentially on the next call.

Okay.

And Brian what will who are the 10% customers this quarter.

We had a comcast at 21.2%.

And then we had Sony at 10.4%.

Okay great.

All right and then in terms of the.

Liberty Global.

What's your I guess allowed to announce or talk about is that a new as I go.

Kind of a net new win for you or is that an existing customer and they are rolling out a new product. It sounded like it was very similar to maybe what Comcast is doing with flex maybe you could just talk about the nature of that relationship and what exactly.

The Liberty Global platform.

Is that they're rolling out sure yeah, it's it's a well featured.

Again, as we we spoke of earlier IP connected.

Advanced platform so and.

I speak of new and existing customers they would be listed in the existing customer category.

We have some new ones that are coming along but liberty. We've had a very good relationship with for some number of years now so.

Could you give us a forecast for 2021.

But I do think that will will continue to to expand the operating margin line.

Okay. I mean, so so as these projects roll out I mean, it's not gonna require much incremental.

Spending on.

Oh, it's just you know we we've invested in R&D. So a lot lot of spend is occurring it has occurred and.

And as we mentioned a lot of these investments that we've made are are are paying off nicely. So you see to the the expansion of the gross margin lines. So there to answer your question now there's not a lot of Incrementals fan so as a sales come in it's.

Incremental profit is nice.

Okay, alright, great. Thanks.

Thank you.

And I've seen no further questions in the queue.

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