Q2 2021 Universal Electronics Inc Earnings Call
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Good day, and thank you for standing by welcome to the Universal Electronics second quarter, 2021 and financial results conference call. At this time, all participants and well listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session you will need to create.
Star 1 on your telephone if you require any further assistance. Please press star zero and I would now like to hand, the Congress over to Kirsten Chapman <unk> Investor Relations Ma'am. Please go ahead.
Thank you Lee and thank you all for joining us for the Universal Electronics second quarter 2021 financial results Conference call by now you should have received a copy of the press release. If you have not please contact <unk> at 41543337, and 7 and 7 or visit the Investor Relations section on the website.
This call is being broadcast live over the Internet a webcast replay will be available for 1 year at www Dot <unk> dot com any additional updated material nonpublic information that might be discussed during this call will be provided on the companys website, where it 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 future financial performance of the company and cautions you that these statements are just projections and actual results or events may differ materially from those projections.
These statements include the company's ability to timely develop and deliver new technologies and technology upgrades and related ducks that will be accepted by our existing customers and attract new customers, including the Companys quickset family of products and technologies, the Apple TV remote control.
Butler Entertainment and smart home hub.
And our voice enabled AI powered and other advanced wireless control products technologies and platforms.
The positive traction that management is seeing and the various markets and industries in which it serves coming to fruition as expected by management.
The continued successful collaboration with existing and new customers and developing and introducing new next generation products operating systems and technologies, which result in increased sales opportunities for the company.
The continued trend of industry toward providing customers with more advanced technologies by offering hybrid platforms expanded smart home offerings and interactive services.
Management's ability to continue to manage its business via new product development product mix and deliveries increased licensing opportunities and continued operational and administrative efficiencies to achieve its net sales margins and earnings as guided.
Interruptions in the Companys supply and logistics chains, including the impact that the global shortage of integrated circuits could have and causing delays and production and delivery of its products.
The successful defense protection and enforcement of our patents and other intellectual properties through licensing and our litigation and litigation efforts and the continued efforts.
Pardon me the continued effects that natural disasters and public health crises, including the COVID-19 pandemic have on our business and management's ability to anticipate and mitigate those effects, including the duration and severity and scope of the COVID-19 pandemic and the actions and restrictions that may be imposed on the compass.
<unk> and its operations by federal state local and international public health and governmental authorities.
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 files with the SEC.
And managements 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 help investors evaluate udi's and <unk>.
Our operating and financial performance and business trends consistent with how management evaluates such performance and trends and.
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 and the company's press release issued today on.
On the call are chairman and Chief Executive Officer, Paul Arlen, who will deliver an overview.
And Chief Financial Officer, Bryan Hackworth, Who'll summarize the financials and.
And then Paul will return to provide closing remarks, it's now my pleasure to introduce Paul <unk>. Please go ahead Sir.
Good afternoon, and thanks for joining us today.
We are pleased to see demand increase and general, which bodes well for our business.
However, due to semiconductor and component shortages and.
Some logistical challenges late in the second quarter, we were unable to fulfill all of our orders and causing our sales to be slightly lower than we expected.
Despite these temporary challenges our continued focus on technology innovation strong customer relations and operational excellence and expanded our operating profit to 10, 5%.
We delivered EPS of 98 cents.
<unk> quarter record for UGI.
That was above both guidance and consensus.
Our ongoing commitment to innovation continues to broaden the use cases and diversify our customer base. The transition from traditional remotes to advanced devices continues to happen at different rates and degrees across the globe and our channels.
For the U S pay TV market, we continue to see adoption of newer more advanced platforms at most major operators. The penetration is rising as customers upgrade to new systems.
In addition to amplify the stickiness of their offerings broadband operators are increasingly introducing IP only.
Our streaming set top boxes.
Examples include our customers products, Comcast Flex Directv stream and Tivo stream.
International growth is also accelerating in Europe, we are seeing increased penetration of voice enabled systems with leading operators such as Liberty Sky Vodafone and Orange.
And Latin America, we recently announced new design wins with Android remotes for Claro and Mega accomplice.
And momentum is also visible and Asia Pacific, where we expect to launch 2 more new voice remote deployments in Q3.
Regarding our Apple TV remote for Mvpds, we are gaining traction and Q2, we started shipping launch quantities to our first customers.
Deutsche Telekom.
There are more customers shifting and preparing for launches planned later in 2020, 1 as well as 2022.
Unfortunately, due to commercial contracts, we cannot share those names at this time.
Although we can't give specific numbers, we can say we have seen a healthy level of interest from both north American and Western European operators that have adopted the Apple video partner program.
The remote has been very well received and the press and with operators due to its unique features as well as its great design and usability as.
As such it is it is also expected to do well with customers that use the Apple TV platform.
Moving to consumer electronics, we see the same trend with increasing demand for advanced software and hardware and control solutions.
As many of you know our product and technology offering and consumer electronics is very broad.
For TV OEM brands, we supply finished goods.
And for Red RF, and voice enabled remote as well as technology integrated and the form of system on chips and quickset software licenses.
And this channel we continue to further penetrate the product families inside the core TV platforms that represent over 30% of global TV demand and growing including such major smart TV brands as Samsung LG and Sony.
As I shared on our last call. These brands continue to see market share brand growth across their TV lineups.
I'd like to provide and update on Nemo Butler, our voice enabled smart home and entertainment control hub.
First I want to reiterate that the legal Butler will be serving many different use cases across different sales channels to name a few and can serve as a far field voice solution for TV operators and.
As a voice enabled smart home gateway for security providers.
Whereas our room automation hub for hotels.
Also while it is and end to end White label solution. We also see growing interest in its ingredient features.
Such as the latest Quickset cloud services quick set widget interoperability as a service remote management service and virtual agent service to name a few.
1 such example is the implementation of Quickset and Lg's <unk> TV.
Which provides the platform for seamless home entertainment, and <unk> and smart home control capabilities.
And integrate several of the services initially introduced and Nebo Butler.
LG is now making its web OS television platform ecosystem available for more TV brands to adopt.
The first and and Knievel Butler implementation is currently in a field trial with a major European telco.
And we are working closely with our partner and creating a seamless experience with their voice assistant for video and TV and content search Dill.
Delivering a branded experience, including their own custom wake word.
We are preparing to ship initial quantities late in Q3 and expect to provide further details later this year.
Users' demand choice and flexibility to interact with their trusted services and voice assistance across devices and we are committed to making this future a reality.
<unk> has been actively involved with the voice interoperability initiative and last month at Alexa live event, we demonstrated how customers can use their preferred voice assistant on Nebo Butler.
Quickset continues to be the de facto solution for simplifying and universal discovery control and interaction of devices within the home.
Earlier in the year, we announced our quickset widget.
This turnkey multi protocol connectivity solution takes full advantage of our quick set services and delivering a complete Iot experience optimized for the home such as interoperability and remote management.
And our virtual agent.
The quality scalability flexibility as well as security of our services is what set our quickset widget apart from alternatives and.
And Q2, we won our first quickset widget project with 1 of our HVAC customers for shipments expected to start early next year.
Quickset widget is also used with our own within our own connected home solutions. It is integrated and our own comfort family of connected thermostats that we introduced earlier this year.
We are seeing strong interest and this platform from multiple HVAC customers, especially due to its smart capabilities and interoperability with legacy or non smart air conditioners.
As well as other smart devices currently found in the home.
The first model is in full development and is expected to begin shipping and volume early next year, we hope to share more details on this new customer win at that time.
We are confident more customer wins will follow later in the year.
Now I'd like to give a brief update on licensing and litigation.
As you are aware, we invest heavily and innovation and many of the leading companies and the industry, including Samsung LG and Microsoft among many.
And have licensed our IP.
Power unique ease of use features into their products.
When companies use our technology without a license we first attempt to work with them to either purchased products from us or become a licensee.
If they choose not to do so we need to protect our IP with litigation with the goal of either signing a license or ceasing use of our intellectual properties.
Unfortunately, we have reached this level with Roku and I have an update regarding our ongoing litigation.
We are pleased to report that we received a favorable initial determination and our ITC case against Roku.
This initial finding is determined that roku infringes <unk> intellectual property and.
And the judge has recommended the issuance of a limited exclusion and cease and desist orders.
This finding is currently under review by the full ITC and its final determination, including the issuance of the limited exclusion and cease and desist orders is.
As expected no later than November 10th of this year.
The patents at issue and the order cover innovations relating to <unk> patented quickset technologies.
And set issue or just a few of more than 600 patents and applications.
<unk> licenses across our products technologies and service platforms to companies and the video services consumer electronics security home automation and climate control and home appliance markets.
We are pleased with this decision as it represents a positive and key milestone and our ongoing litigation against Roku.
Since before this litigation began our view on this was and still is the same.
We have worked hard over the past decades to create truly unique technologies and features that enhance the user's home control experience we.
We are willing to reach a mutually acceptable agreement with anyone to allow the ongoing use of our patented technology on.
Our ultimate goal remains to ensure that we receive fair value for our innovations just as we have done broadly with other leading entertainment and home control companies across the world.
I'll now turn the call over to our CFO Bryan Hackworth for a review of the financials. Please go ahead Bryan. Thank you Paul first of all review the results for the second quarter of 2021 compared to the second quarter of 2020.
Net sales were $150.6 million compared to $153.3 million for the second quarter of 2020.
As expected the chip shortage did have an adverse effect on our top line.
Well it wasn't unexpected were unprecedented third party logistical issues, including delayed vessels, which led to missed shipments and sales falling below the low end of our guidance range.
On a positive note as Paul outlined we're starting to see and increase in demand for our products across multiple regions and various channels.
Which I'll quantify when I review, our third quarter's guidance.
Our gross profit was $45.9 million or 35% of sales compared to $43.7 million or 28, 28, 5% and the second quarter of 2020.
Even with a weaker U S. Dollar we improved our gross margin rate year over year and maintained a level and excess of 30 points due to an increase and technology sales with licensing revenue having double.
Our technology continues to be adopted by customers and multiple channels, including a sufficient broadcast and Oems primarily on the TV space as well as southern and home automation.
Operating expenses were $30.1 million compared to $29.2 million for the same period last year.
SG&A expenses increased month increased modestly to $22.7 million from $22.1 million and the prior year quarter.
As we continue to place an emphasis on innovation R&D expenses increased to $7.4 million from $7.1 million and the prior year quarter.
Operating income was $15.8 million or 10, 5% of sales compared to $14.5 million or 9.5% of sales and the second quarter of 2020.
Our effective tax rate was 15, 8% compared to 12% and the prior year quarter.
For the second quarter of 2021, net income was $13.6 million or a record 98 per diluted share above the high end of our guidance range, representing an increase of 10% when compared to $12.6 million or <unk> 89 cents per diluted share and the same period last year.
And next I'll review, our cash flow and balance sheet.
And the second quarter, our cash and cash equivalents of $67.7 million compared to $57.2 million at December 31, 2020.
Cash flow from operations for the second quarter was strong exceeding $23 million innate.
Enabling us to fully fund our stock repurchases for the quarter of 320000 shares at an average price of approximately $49 per share for a total of $15.7 million.
We continue to believe that the current market price of our stock is significantly below intrinsic.
Intrinsic value.
Given this and the fact, we expect continued strength and free cash flow on July 28, 2021, our board of directors approved a plan to repurchase an additional 400000 shares contingent on price over the next few months.
Now turning to our guidance, although I can't say, we're back to a normal environment. Yet we are starting to see an uptick and the demand for our products, indicating the start of a return to normalcy.
For the third quarter of 2021, and we expect sales to range from $160 million to $170 million and increase of 4% to 11% compared to $153.7 million and the third quarter of 2020.
The guidance provided and exclude the $10 million and sales as a direct result of the worldwide shortage of integrated circuits.
Select the supply issue to exist at least throughout the remainder of the year and we've adjusted our third quarter sales guidance Accordingly.
We expect EPS to range from a dollar to $1.10, compared to non <unk> and the third quarter of 2020.
Representing growth between 9% and 20%.
And I believe and 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.
Thanks Bryan.
We are keenly aware that the component shortages have and will continue to create a supply issue in 2021 and possibly into 2022.
Regardless, we are confident that these issues are temporal.
And we will manage these challenges as we as we have done in the past 35 years of our history.
It's very important to note.
We have worked hard to consistently create truly unique and innovative home control solutions.
These new products and technologies are powering the preponderance of next generation IP Entertainment and home control platforms of industry leaders across the world.
It's also important to note that despite any headwind we have faced or are now facing we have achieved the highest ever EPS and our company's history for the first half of this year.
And our guidance will have us at a year to date record EPS through Q3 as well.
Imagine what we can accomplish when the headwinds inevitably clear.
The fact is <unk>.
<unk> has led wireless device control for decades, overcoming numerous macroeconomic conditions.
And component shortages and tariffs or pandemics.
As resilient.
<unk> innovative <unk> technology trends in summary, UI creates smarter living.
We expect to continue to lead our industry 4.
For decades to come.
And as always stay tuned.
Operator, we can now open the call for questions.
Thank you.
And gentleman at this time, if you would like to ask a question. Please press star 1 on your telephone keypad again to ask a question simply press star 1 on your telephone keypad.
Yes.
And your first question comes from the line of Jeff Bryan Sundar and from B Riley and company. Your line is now open.
Hello. This is Richard Magnuson in for Jeff and syndrome. Thank you for taking our call I have a multipart question.
Can you speak more about what you are seeing and demand trends our truck rolls for in person and starts picking up and what is the outlook for demand on non self install products and Q3 and Q4 and then also what youre seeing in terms of demand for our newer generation self install platforms and what your customers are telling you about their timeframe from launching self install products.
Yes generally Richard.
What we're starting to see a self install platforms.
And have actually been doing okay, even through the pandemic.
And maybe not quite as well as they otherwise could have and a more.
A stronger economy, but still have done okay.
<unk>.
Traditional platforms or legacy platforms or the ones that were most.
Troubled or had a bigger falloff and volume what we're beginning to see is some lift.
And in those legacy or traditional platforms platforms that have been live for multiple years.
But we're also seeing the introduction by many of the companies and the industry, who recognized some time ago that pandemic or no pandemic.
They needed to begin to change their systems too.
Self install capable, but more importantly hybrid systems that combine.
We've said many times linear and what have historically been called over the top or <unk> and S. Vod apps.
Many of them are IP based from the very start.
But others are combo products or hybrids. So that activity continues we're seeing successful launches of those products, but we're also starting to see.
And thus the guidance that Bryan gave us a little up.
For Q3, we're starting to see some life and even the legacy products.
And despite the fact that theres about $10 million that we estimate due to component shortage that we cannot ship in Q3.
And the guidance is still up.
Alright, and then thank you and can you tell us more about the specifics youre seeing and supply chain, where the bottlenecks are.
And specifically for you and you.
Temporal challenges and and how are you on mitigating those and what you are hearing from your customers around the supply chain and what would you say that overall the supply chain picture is getting better or worse and when do you see supply chain and free up substantially from your business.
As far as materials, it's about the same it hasn't gotten worse, but it's still.
The difficult and it's difficult across the board.
And I'm sure that people on this call have spoken to other companies.
Don't think the situation.
And at least for us it hasnt gotten worse, but on the materials side.
It hasnt really gotten better yet either.
Working with vendors are people and particularly and the ops team are working really hard.
Meeting with vendors regularly more so than usual to ensure supply.
And.
Trying to get.
What they can to supply the products and that is of course embedded and our guidance.
And that Bryan gave earlier.
And.
And the only other thing that popped up this quarter as we began to see for the first time and my 25 years here.
Some logistical challenges at the ports.
And it caused a few million dollars of orders to slip because vessels weren't available our vessels were stacked up and a port and couldnt be unloaded and therefore, the shipments couldnt be made.
And the time period again, we think this is temporal.
But.
It is something that affected us and the quarter I think that 1 probably and this is a projection solves faster because materials shortages due to semiconductors can sometimes take a while to solve as fabs needs to be built and there is a lead time on that.
But.
Shortages and logistics can usually be solved a little bit quicker, but then.
Supply shortages of things like semiconductors.
Alright, Thank you and I'll jump back into the queue.
Thank you. Your next question comes from the line of Greg Burns from Sidoti and company. Your line is now open.
Good afternoon.
In terms of the.
The Roku and litigation.
And what is the effect of that ruling is there like a.
Product embargo, where they can't ship their Tvs and.
And streaming devices into the U S and.
And I think Theres. Another also another kind of Avenue to this litigation.
But maybe you can just.
Help us frame kind of what the outcome on the ruling could potentially be.
And what the other avenues are as part of this litigation.
Yes.
Officially this is 1 of 3 cases that we filed against Roku. So it is just the first of of.
<unk> 3.
This one's in ITC.
And essentially.
Put in plain English.
<unk> happen.
If the initial determination is upheld and the final determination in November.
Is the products that contain that.
And the IP.
Will be there'll be a cease and desist order so they will not be able to import those products to the United States.
And unless day, either come to agreement with us or remove the features remove the offending properties.
And again, we don't know what we don't know yet exactly what that will be but likely while we what we do know is that final determination. If the initial determination is upheld and the final determination that is what will happen.
Okay, and then in terms of Monotype.
Sorry, yes in terms of monetization and ITC there isn't a monetary award that will be there are 2 pending district court cases.
And I believe Theres 14 patents across those 2 cases.
And those are delayed.
While we wait for the outcome of the IPR.
Because roku filed I think it was 20 <unk> across the 14 patents.
It's probably important to note 18 of them have been decided and the way the <unk> works as U S.
Essentially apply for a review.
11 of the 18 that have been decided or not instituted.
What that means is the party did not provide and essence sufficient evidence.
To even have the patents validity reviewed.
So the <unk> denied the request or did or did not institute.
But we have to wait for the IPR is to finalize that will take a little bit of time once they have been the judge will then likely.
Put the case back on the calendar and the district Court cases can proceed.
Okay. So the litigation expenses running through the P&L.
That can be.
It's about $2 million to $3 million a quarter is that what we're looking at for the next I don't know how long how long do you expect this to Ron.
And it varies Greg.
And on a given quarter it could be that it can be a little less you can be a little more and it just depends on the amount of work that's being required sometimes it comes and a concentrated period of time and sometimes it's a little more straight line. So it really varies.
Okay.
And then in terms of the day.
And the component and so.
Sure.
Both of those orders that Couldnt ship quarter, I'm, assuming you're expecting they're part of your third quarter guidance.
And then.
And on that.
And youre not going be able to fill and just kind of a permanent state.
<unk> now for the foreseeable future, where youre demands outstripping your ability to.
The supply by about 10 and $10 million a quarter.
Think about it yes, youre kind of breaking up a bit but I think I get your question I mean youre right.
Last quarter, we said, we had to reduce our demand forecast by $5 million. So there's a little bit of give and take but what happened in Q3, we end up having to reduce it by the demand forecast by $10 million, So right now and as Paul mentioned.
On the component shortages and it takes some time right. It's not a it's not an easy fix and we expected that to continue throughout the remainder of the year and possibly into 2022, I, just don't know yet, but probably more likely the remainder of the year. So as of the end of the.
Guidance for Q3, we had to reduce it by our demand forecast by by $10 million, because we just don't and we don't think were going to look to fill all the orders so and.
Easy way to look at a simpler way to look at as we gave guidance between 160 and $170 million. If there were no component shortages and the and.
And the third quarter it would have been raised.
And 170 to 180, so it would have been $10 million higher.
Okay.
And then.
And that's dollar and.
And the gross margin and how much on <unk>.
And <unk> of operators and the pipeline for this remote or with a number of just covered by the the operators kind of and 1.
1 here any any way to quantify the the.
The opportunity without you know talking directly.
Our naming customers directly now understood and I I know that you and others would like to have us give that but unfortunately can all I can say it is the first time we've disclosed.
And.
There are.
Dozens of companies that we're talking to.
About this product and as we've said many times this.
The future of of this of this particular business and Mvpds or subscription broadcasting as we've called it.
Is are these types of platforms.
So they all recognize all the operators the largest ones and the world the medium sized ones and the small ones. All now understand that the consumer wants that combination of everything and they want to watch they want to watch the and Chicago. They want to watch the White Sox game Tonight, and then they want to watch a reality show there.
Favorite reality show and then they want to go to Netflix to binge watch their favorite show on Netflix or prime or Hulu or name your favorite service.
This is what the consumer wants and it's what the consumer is going to get 1 way or another.
Consumers going to get what they want.
Okay, and I guess I'll I'll, just keep on going.
<unk>.
Quickset widget.
And you know it sounds like you have your your first.
Customer and betting that into their own product, what's the opportunity there like in terms of.
A number of devices and.
That you think you could or hurdle for the quick set where do you feel like whats the pipeline that you see there in terms of the opportunity for <unk>.
Where Oems to start and betting your your quickset widget and tour.
Their home control devices.
We think it is.
We've seen a lot of interest and it. So we think the opportunity is certainly quite big and the interest to date has been and the wins, we have both with the comfort line.
And the widget technology itself.
Separately.
Has been and HVAC and and essentially.
This will provide is.
At a first level IP enablement.
Of these products because a lot of companies are looking to add their device.
Their application.
2 the home control arena so.
Just first enabling it through through and IP control.
But then they look to figure out how can I make it smarter by connecting to other home systems.
Which is essentially what we do very efficiently for them and obviously because of our background and working with all of the home entertainment companies and also having the ability to discover and configure and control.
The other home applications, which were doing right now and the LG Tvs.
We can help those companies add themselves to the smart home ecosystem and a very efficient way.
Thats, what theyre looking for us to do a lot of people don't really recognize this very much but our HVAC business has been long term and we're not new to it and we're working with some of the leading companies and the world including Geiken.
The biggest HVAC company and the world and 1 of our largest customers.
And there is a lot of players and this market that are looking to again make their devices smart at the first level and then to make them smarter by connecting them to other home.
Systems like security systems or <unk>.
And our other control systems and the home.
So that's what the opportunity with which it is we've seen a lot of interest and it and already have 2 wins, 1 with our comfort line and 1 with a straight.
License and product relationship.
And the economic growth.
License and product selling clicks at which it does that flow to the economics.
With the TV manufacturers.
Manufacturers.
The margin profile.
Yes.
The revenue and margin profile of that product.
Well, yes, since we're speaking about a few customers here and rather not speak on the margin profile, but generally when we.
When we're licensing software.
There are less.
Materials involved and and our business the fewer materials the higher the margin from.
And we make full products the margin profile is lower.
But when we're doing licenses or or software solutions and the margin lifts.
Okay, and then lastly, Bryan who the 10% customers on the quarter.
And we had to Comcast at $16.4 and.
And <unk> for the second consecutive quarter at 10, 9%.
Okay perfect. Thanks.
Thank you I'm showing no further question at this time I would now like to hand, the conference back over to Mr. Paul <unk> for any closing remarks.
Okay. Thank you all for joining us today.
And for your interest and <unk> and your continued support of Universal Electronics, We hope to see you at several upcoming investor events in September we plan to present at Colliers, 2020, 1 institutional Investor Conference and.
And Sidoti Fall Investor Conference.
So I hope to see you there have a great rest of your day.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation and have a wonderful day you may now disconnect.
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