Q3 2021 Universal Electronics Inc Earnings Call
Good day, and thank you for standing by and welcome to the Universal Electronics' Q2, 2021 financial results conference call.
This time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question you or any of the session you will need to put a star one on your telephone please be advised that that he's going to France is being recorded if you require any further assist.
Vince Please press Star Zero I would now like behind the conference over to Kirsten Chapman of L. H eight Investor Relations. Please go ahead.
Thank you Mary and thank you all for joining us today for the Universal Electronics third quarter 2021 financial results Conference call by now you Should've received a copy of the press release and if you have not please contact <unk> Investor Relations at 4154333, 777 or visit the Investor Relations section of the website.
This call is being broadcast live over the Internet and a webcast replay will be available for one year at Www <unk>.
Dot com any additional updated material nonpublic information that may be discussed during this call will be provided on the company's website won't 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 and future financial performance of the company 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 products that will be accepted by our existing customers and attract new customers, including the company's quickset family of products and technologies, the Apple TV remote Knievel Butler Entertainment and Smart home hub Smart home automation.
And our voice enabled AI powered and other advanced technology control products.
And platforms.
The positive traction that management is seeing in the various markets and industries in which it serves coming to fruition as expected by management, including with respect to our H a V C.
Customers.
The continued successful collaboration with existing and new customers and developing and introducing new next generation.
<unk> products operating systems and technologies, which result in increased sales opportunities for the company.
The continued trend of industry moving toward providing consumers 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 slicing up opportunities and continued operational and administrative efficiencies to achieve its net sales margins and earnings as guided.
Interruptions in the company's supply and logistics change and change, including the impact that global shortage of integrated circuits and shipping interruptions and delays could have in causing delays in production and delivery of its products.
The impact of the company's financial results that it may experience stemming from issues surrounding its Chinese workforce.
And 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 severity and scope of the COVID-19 pandemic and its actions and restrictions that may be imposed on the company and its operations by <unk>.
Federal state local and international public health and government 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 outset of this call and the documents the company files with the SEC, including this quarter's report on Form 10-Q.
In management's 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 supplement to the GAAP financial measures help invest.
Cruise evaluate U S core operations and financial performance and business trends consistent with how management evaluates such performance and trends.
In addition management believes these measures facilitate comparisons with the core operating and financial results and business trends of competitors and other companies a full description and reconciliation of the adjusted non-GAAP measures versus GAAP is included in the company's press release today.
On the call today are chairman and Chief Executive Officer, Paul <unk>, who will deliver an overview and chief Financial Officer, Bryan Hackworth, who will summarize the financials then Paul will return to provide closing remarks is now my pleasure to introduce Paul <unk>. Please go ahead Sir.
Good afternoon, and thanks for joining us.
Today as always we are delighted to speak with investors.
The third quarter 2021 sales improved over those in 2020, however, they were impacted more than anticipated by shipping delays as well as ongoing component shortages. Nonetheless.
Nonetheless, this quarter, we maintained a strong product mix and delivered 34% gross margins, which combined with our continued cost controls yielded EPS.
<unk> and <unk>.
Third quarter record.
Our mission to create smarter living continues to guide our course of action focusing on creating products and technologies that help everyday people easily discover and interact with the devices and services in their home we continue to lead the industry with innovative breakthroughs.
Overall, we are pleased with the market acceptance of our product our new product initiatives.
That we have been working on over the past few years.
We are making great progress with our Apple TV for K series voice enabled search and control device. We designed specifically for multichannel video programming distributors, otherwise referred to as Mvpds.
In Europe already seven operators have launched the product, including major mvpds, such as Deutsche Telekom and free Telecom.
While other operators are set to launch their services with our controller over the course of the next few quarters.
Voice enabled remote controls continue to proliferate as a standard feature within operator platforms.
As we've said before many of these relationships restrict our ability to mention them by name. So we cannot.
However, one global operate global operator that we can mention is Astro Malaysia's leading content and consumer company, serving $5 7 million households across TV radio digital and e-commerce platforms.
Other customers, who are scaling their advanced platform services, our Claro in Latin America in Mexicali in Mexico, leveraging their newly introduced Android TV deployments.
<unk> rich product portfolio in this segment is well positioned having secured three new Android TV projects in the third quarter with new and existing customers across our global footprint.
In the U S market, we continue to grow our overall market and voice enabled remote by expanding distribution on some of our mvpds customer streaming service platforms.
In the TV market, we continue to improve the breadth and depth of our quick set deployments across the top three major TV brands globally.
<unk> cycles in this channel.
As our engineers are currently releasing new software to support 2022, TV models, while designing and developing next generation software features to support 2023 TV models for all our major customers.
The new features we are deploying.
Expand our software functionality beyond entertainment control offering new features and services to also enable discovery management and control of popular smart home devices.
As communicated previously we also began shipping knievel Butler to our first international telecommunication operator in Europe, where.
We're the official product launch is expected to occur around the end of November 2021.
The product will serve as a far field voice controller for their premium video Entertainment service.
We are extremely excited to see this product come to market and anticipate a very positive consumer reaction.
We hope this product introduction will represent an important reference design for other partners to follow.
Regarding smart home automation, we see strong evidence that our RF design and development expertise and knowledge of wireless connectivity and control our leverage will assets in this domain.
We're excited about our progress to date as we are gaining traction across new and existing customers.
In the third quarter, we secured multiple design wins with new HVAC customers as well as new brands in the home appliance segment.
Our design wins include smart thermostat, Walt controllers, smart home gateways switches sensors, and even shade controllers.
Typically these complex and interoperable development projects require longer design and development lead times with related revenues expected in late 2022 and into 2023.
Good news is that once introduced these home automation products have extremely long product life cycles.
That can last up to eight or 10 years.
Finally, with the new year, just around the corner, we're truly excited about CES 2022 at which we will be exhibiting in person in January in Las Vegas.
Consistent with prior years at next year's event, we will introduce a suite of new products and technologies across our home entertainment and connected home categories.
And our entertainment space, we will be highlighting our new connectivity products and technologies designed for the next generation of sustainable Smart home devices.
<unk>, a bluetooth smart chipset.
That is close to 10 times more energy efficient than currently available platforms when combined with our energy harvesting solutions, we can deliver an advanced remote control that doesn't need battery replacement.
While striving to create more sustainable products that our customers are asking for.
Can also enrich the user experience with a range of advanced power hungry features.
Such as hands free voice network connected and ambient aware back lighting.
It can run as efficiently as many of todays standard remote controls.
We are also extending the capabilities of our standard product platforms to support our latest generation of Quickset cloud.
Allowing for seamless control with both entertainment and smart home devices.
Powered by our virtual agent for automated self help when Onboarding where troubleshooting.
Any of our advanced remote controls thermostats and soon our security sensor lines.
And our connected home category will be demonstrating an expanded line of UI comfort smart thermostats and extended range of wireless sensors and the naval Butler interacting with smart home devices using matter.
Connectivity standard announced earlier this year and supported by the largest smart home ecosystem providers in the industry.
I'll now turn the call over to our CFO Bryan Hackworth for a review of the financials. Please go ahead, Brian. Thank you Paul first I'll review the results for the third quarter of 2021 <unk>.
<unk> to the third quarter of 2020.
Net sales were $155 7 million compared to $153 7 million for the third quarter of 2020.
We did grow however, sales fell below our expectations, we accurately forecast the impact of the chip shortage would have our production and sales, although we experienced additional logistical issues in the third quarter resulted in delayed shipments and mis revenue.
While we ultimately expect the situation to improve issues related to the transportation of goods such as port congestion were magnified in the third quarter. We also experienced the indirect effect of certain customers not receiving components or companion products on time.
Resulting in the pushout of orders originally scheduled for the third quarter.
Our gross profit was $47 4 million or 34% of sales compared to $46 1 million or 30% in the third quarter of 2020.
Continued strength in technology sales, mainly in the form of licensing revenue more than offset the effects of a weaker dollar and the onset of higher commodity and transportation costs.
We expect these inflationary pressures to continue and to have a larger impact on our fourth quarter results.
Operating expenses were $30 7 million compared to 29 million for the same period last year.
SG&A expenses increased to $23 6 million from $21 6 million in the prior year quarter with increased freight costs being the largest contributor.
R&D expenses were $7 1 million compared to $7 4 million in the prior year quarter.
Operating income was $16 7 million or 10, 710, 7% of sales compared to $17 million or 11, 1% of sales in the third quarter of 2020.
Our effective tax rate was 14, 8% compared to 21, 4% in the prior year quarter.
For the third quarter of 2021, net income was $14 1 million or a third quarter record of $1 three per diluted share.
Compared to $13 1 million or <unk> 92 cents per diluted share in the same period last year.
Representing an increase in EPS of 12%.
Next I'll review, our cash flow and balance sheet. We ended the third quarter with cash and cash equivalents of $58 8 million compared to $57 2 million at December 31, 2020.
Cash flow from operations for the three months ended September 32021 was $6 4 million.
We repurchased 348000 shares of our stock at an average price of approximately $50 per share for a total cost of $17 5 million.
We continue to believe that the current market price of our stock is significantly below intrinsic value given this and the fact, we expect continued strength in free cash flow on October 20th 2021.
Our board of directors approved a plan to repurchase an additional 300000 shares contingent on price over the next few months.
Now turning to our guidance the current macroeconomic pressures specifically related to the shortage of chips and transportation issues throughout the supply chain.
We've created an uncertain environment.
We continue to receive forecasts from our customers, which are discounted because of the supply issues.
Unable to discern what these forecast would have been in a normal environment.
Once we receive our customers forecast, we can estimate the effect the chip shortage has on our production and our sales. However, we're unable to quantify the potential customer push outs caused by shipping delays for their companion products or park shortages from other suppliers.
In addition, logistical issues throughout the supply chain, ranging from trucking and warehousing and port congestion have complicated matters.
As the situation is growing worse.
We've experienced for example delays in vessels the past few quarters, which have resulted in missed shipments for the respective quarters.
Taking all factors into consideration for the fourth quarter of 2021, we expect sales to range from $143 million to $158 million.
Compared to a $156 4 million in the fourth quarter of 2020.
We expect EPS to range from 65 to 80 cents compared to a $1 14 in the fourth quarter of 2020.
We continue to believe in our long term growth targets of sales between five and 10% and EPS of 10% to 20%.
I would now like to turn the call back to Paul.
Thanks, Brian.
It is true that today, many industries are facing headwinds due to the parks ports and even potential inflation. We believe these are temporary conditions.
I have been leading control device technology for over 35 years, we faced these pressures before.
We are prepared to continue navigating these near term challenges.
What is most important is that we continue to see long term demand for innovative control solutions in our home entertainment and connected home markets.
It is difficult in this environment for any company that relies on semiconductor supply or movement of goods across the world to meet their growth objectives.
But we know that these challenges are temporary.
Semiconductor companies have already committed more than $100 billion to capacity expansion and are well into the process of building it.
While shipping delays have persisted for the past couple of quarters. This too should ease as capacity expands to meet demand.
Our job remains to continue to build and fulfill long term demand for our innovative solutions and we believe we are succeeding and we will continue to succeed on that front.
We are excited to see that smart home automation control is on the cusp of mass adoption and we are committed to replicate the successful model that yielded our leadership in home entertainment to achieve the same in connected home automation control.
As always our vision remains focused on our long term growth potential and we are confident that we have the technological innovation operational prowess and financial strength.
Lead the industry.
Udi continues to create smarter living and we plan to lead our industry for decades to come.
As always stay tuned.
Operator, we can now open up the call for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to reach all your question press the pound key please standby, while we compile the Q&A roster.
Your first question comes from the line of Jeff.
Vince and Darrin <unk> from B Riley Your line is now open.
Hi, everyone.
Wow, that's supply chain.
Yes, it's challenging out there.
So can you maybe just is there a way I know this is hard to do I mean, you got different buckets, one bucket of Youre getting your own <expletive> adds when you're looking at what are their customers.
Getting components, but.
Is there a way to give us a sense of how much revenues were impacted by your ability to get your own chips and components in Q3.
How much youre anticipating in Q4 and is it really just kind of a logistics imports and shipping that have gotten worse or is it also component availability from manufacturers.
Yes, Jeff I.
I think we were accurate in Q3 with the amount that we embedded in the forecast last quarter, we said $10 million I think from a from our perspective once we get the forecast, we're able to predict with accuracy.
How much it's going to affect us because we know what ships we have on hand, and then we can make a pretty good estimate as to what we're going to receive in the next coming months. So that was accurate what makes it difficult is you have customers that are discounting their forecasts, but sometimes they don't discount them enough. So what happened in Q3.
We had more than one situation where customers pushed out orders because they did not receive parts components or companion products, such as a set top box on time, so they called US and said listen we don't have the companion product, we need to push out the orders.
Until the next quarter, so that that's happened multiple times now and in the other factor is just not knowing really what if you take a step back as you look at our forecast we're receiving how much is that being discounted like how much were the forecasts have been.
Had there not if there were not the current situation with chip shortages and port congestion. It's just there's just a myriad of things going on right now that are complicating things and I, just it's really difficult to tell what our forecast would have been had had we been in a normal environment.
Okay and then just.
But putting that aside for a moment my sense in your prepared comments is that you do not believe that there is any change in the overall long term demand picture is that.
Correct.
Yes, that's correct I think right now what we're doing is I think there could be.
The compounding effect of people, saying, okay I've been burned.
To take down our forecast I'm, referring to like say.
Our customer forecast to us and then we're looking at it saying, Okay. We've had.
We've been burned a couple of times now with port congestion and vessels not showing up on time.
So I wanted to perhaps be a little conservative so it's just.
I think right now you're having layers of complications and its making it very difficult.
Two to really predict what the revenue is going to be for a given quarter is why its why I expanded the range of that you normally would do a $10 million range. We noticed this quarter I expanded to 15, just because it's definitely a more difficult environment and I feel it's prudent to expand it by $5 million.
Yes, it's difficult because right now it's just pervasive throughout the system and you right on this call have all seen it even the largest companies in the world I believe Apple said that their revenue is going to be impacted in Q4. They are the largest.
The company probably in the world.
They are having difficulty getting enough parts to make their products to fully fulfill their demand.
Our customers often have multiple products that they institute or deploy into a household and they have to rely on the supply chain of multiple companies.
So they have their planners, obviously are having a difficult time, because they have to predict the supply chain for each of those vendors.
And then as Brian said, they they come to the end of the quarter and if there are few thousand or 500000 or 50000 short from one vendor.
They probably want a short 50000 on the other vendor because why have the inventory for one part when you can't deploy the other parts.
So it's created this sort of flow through impact, but I think it's important as I said during the prepared remarks for everybody to remember what we've seen this before maybe not quite as acutely as now, but we've seen it before semiconductor shortages have occurred.
My many years here.
And what happens is the industry response and.
There are multiple vendors out there spending enormous amounts of money there are already well into building the capacity. It is going to take a little bit of time this isn't going to ease in the next three months.
It's probably going to take towards the end of next year. We do have specific providers that I can't share with you that or have told us that they think that their supply will begin to increase late next year and then I think again the industry gets back to a normalized pattern, where this where these again the demand and the supply start to equate.
Obviously, they want to supply the chip companies because it's revenue.
Now theres revenue loss in their case, because they cant build enough to meet demand.
So there'll be somebody who wants to build that capacity to fulfill that demand and it will happen.
Just in semiconductors. It takes time, so we're dealing with that we have redesigned some products. We switch vendors on a few where we could we could economically switched to a new vendor who had some supply.
That's offset a little bit.
But in today's world.
It's short and so many places.
The semiconductor industry that.
There is no way to completely avoid it.
And then you couple that with the port.
Slowdowns.
Which again, we think will clear, but it's it's taking time its taking longer than we would've thought.
But once that clears, we will get back to a more normalized pattern.
But for right now it's difficult it's difficult on supply chain it's difficult.
And parts and ports as I'd like to short handed.
And we're doing our best we I think the team is doing a good job managing it but right now it's just.
And again I don't think we're the only company that is facing this I think any company as I said that is using semiconductors in their products or moving product across the world.
Is experiencing this this issue.
Right, yes, it is extremely widespread.
And I just wanted to follow up a little bit because I know you've made some comments on sort of.
Cost pressures can you, maybe just give us a little more color on what youre seeing and anticipating in terms of inflationary cost pressures and I guess, how youre thinking about the impact to gross margins going forward there.
Is it the Chinese labor issue, you announced some changes which could does that leave you here post that.
Big holiday short on workers at that facility or you haven't adequate labor pool.
Ever got the components you need it to really ramp up production, what's the labor situation like today in your Chinese factory.
Yes.
The agency that had provided a workers from the Xinjiang region. It accounted for about 10% of the labor at that one plant.
We have had to move quickly to move projects.
Which we've done and so we can we can work with that sort of it was.
Disruptive, but it's something that we can move to.
Ah.
Handle in our supply chain, either through subcontractors or moving to new plants retooling, our moving tools to our new plan.
Or even within the same plant.
With with obviously a different set of workers.
Okay, and Brian and what where is the customer concentration numbers in the quarter.
Two customers that exceeded 10% Comcast and daikon.
Cost was 14, 5% and Daikon was 13, 2%.
Okay.
How 'bout, Paul and an update on your <unk>.
H Bac hospitality.
Efforts.
Is there a pipeline there that.
<unk> sales in the next couple of quarters or do you think that.
<unk> product ramp is a little further out.
Okay.
Yes, we may start to see some in the next few quarters, but more.
Probably more dramatically over time.
We have one.
Over the last.
Couple of years, maybe not even two years now.
We began a very concerted effort worldwide.
This.
You here with.
The Android or Apple TV boxes as opposed to the traditional set top boxes made by folks like Commscope, which is talking about all of the added supply chain was on a conference call.
Yeah, well I think there are certain of our products, we don't want to get too specific but there are certain products, where obviously the semiconductors involved may not be in as quite a short supply and it was either due to prior planning.
That we bought as much as we needed.
And even though the lead times are longer today and supply a shorter we have sufficient.
Parts and some areas.
Do have parked in certain areas, where we can absorb upward momentum, meaning if the if the forecast is slightly greater than I'm sorry, the actual sales are slightly greater than the forecast we could supply. It other areas frankly, if even if the demand were up it would be difficult to supply because the parts are are short.
And it would be difficult to scratch out an extra five or 10% of those parks.
But I can't speak on the specific products you are mentioning but I would say that there are certain products that.
We have enough supply to be able to absorb a little bit of extra momentum in those in those areas.
Okay, and you talked about some incremental cost pressures.
I think I was going to impact Q4.
One assumes at least the early part next year.
Does this prevent you from sustaining.
30%.
Gross margin.
You should assume that.
Until those cost pressures that needs, it's going to be.
Be difficult to get to that level.
Great. Thanks, Brian.
Thanks, Paul.
Yeah.
Your next question comes from the line of Greg Burns from Sidoti <unk> Co. Your line is open.
Good afternoon.
Yeah.
This quarter Comcast rolled out a new global streaming platform and they are getting set to launch their own smart Tvs are you.
Involved in any of those projects.
We can't confirm involvement in projects until such time as our customers would allow us to do that so we can't comment on that right now.
Okay.
And then.
Knievel Butler deployment is there a pipeline behind that that one customer that's getting set to roll out or do you see that as kind of being a.
A like a use case a proof case for the product and then maybe you know it will stimulate demand beyond that yes. There are other customers that are looking into it we don't have any launch projects yet.
This will be the first.
As most of these things go if I look back in time at new developments like this it typically goes this way the first party, particularly if it's a relatively large company and this is.
Will.
We'll we'll do this implementation.
Others will look with great interest.
And as it progresses those that have been talking to us about these designs already.
We will probably become more favorably disposed to it.
We actually saw this on the original voice remotes as well that that there was a lot of.
Development work being done on it but no firm commitments to projects.
And then as soon as the first customer comes out and they see the effect of it.
Everything takes place after that so this may be similar to that that's our hope and.
As they put this out they have.
Plans to launch.
We'll probably at some point be able to talk about it more.
And then what.
We'll take it from there.
Can you talk about how theyre planning on using it is it like whole home control or just.
Placement for remote controls.
Controlling how do they envy.
In vision.
January and we'd be delighted to see you.
Please contact lahat Investor relations to arrange a meeting if you if you happen to be in Vegas.
In January for CES.
Thank you and have a great day.
Fios Complicities conference call. Thank you for participating you may now disconnect.
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