Q3 2022 Universal Electronics Inc Earnings Call
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Welcome to the Universal Electronics third quarter 2022 financial results Conference call.
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I'd like to now hand, it over to your speaker Kirsten Chapman from LH, a investor relations.
Thank you chair. Thank you Teresa and thank you all for joining us for the Universal Electronics third quarter 2020 financial results Conference call by now you Should've received a copy of the press release, if you have not please contact <unk>.
<unk> Investor Relations at 400, 54333, 777 or visit the Investor Relations section of the website.
This call is being broadcast live over the Internet a webcast replay will be available for one year at www Dot Dot com.
Any additional updated material nonpublic information that might be discussed during this call will be provided on the companys website, where it will 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 the 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 introduced this year or during 2023, CES, including leveraging its wireless connectivity capabilities to climate control.
Security hospitality and HVAC channels, and it's groundbreaking line of ultra power Ultra low power and energy.
King remote controls design for sustainability that will be accepted by its existing customers and attract new customers.
The continued successful collaboration with existing and new customers and developing and introducing next generation products operating systems and technologies, which resulted in increased sales and market capture opportunities for the company.
Management's ability to continue to manage its business in inventories and cash flows to achieve its net sales and margins in earnings through financial discipline operational efficiency and product line management.
The impact to the company's financial results that it may experience due to supply chain constraints semiconductor supply challenges and inflationary pressures and macro economic conditions.
And its customers are experiencing and the direct and indirect impact the company may experience with respect to its business and financial results stemming from natural disasters public health crises.
Planning purposes, and for making operational and financial decisions that believes that providing these non-GAAP financial measures to investors as a supplement to get financial measures helps investors evaluate you guys core operating and financial performance and business trends consistent with how management evaluate such performance and trends.
In addition management believes these measures facilitate comparisons with the core operating and financial results of business trends of competitors in 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, our chairman and Chief Executive Officer, Paul Arlene, who will deliver an overview and chief Financial Officer, Brian Hackworth, who will summarize the financial Paul will then return to provide closing remarks is now my pleasure to introduce Paul R. Please go ahead Sir.
Thank you for joining us today.
Earlier. This afternoon, we reported very strong third quarter results proud.
Products with more advanced features and IP contributed significantly to net sales of 148.5 million.
That delivered gross margin of 30.8%.
Combined with strong financial discipline and product line management earnings per share reach one dollar <unk>.
Exceeding our bottom line guidance of 70 to 80 cents.
These results reflect our strategy to improve our sales mix with more highly differentiated products and expand our total addressable market by leveraging our comprehensive.
In some cases proprietary wireless control technology solutions to penetrate new markets and smart home control and automation.
Throughout our history you. We are has invested in the innovation to help our customers improve consumers' lives are.
Our commitment to R&D is steadfast and we continue to develop advanced technology solutions that carry higher margins are.
Our mission to apply our proven business model to enter and capture market share and high growth markets drives are long term growth.
To truly understand where we are going to be tomorrow is important to understand a little bit of our history culture and past successes that define who we are today and where we believe we can go.
Many years ago, we began making simple universal remote to make the consumer experience of home entertainment better.
We held a small share of the video service provider market, but we're dedicated in fact obsessed with making the experience of configuring and using these products better with each successive generation.
As the years unfolded, we develop truly universal products ones that were upgradable ones that had features no one else could offer.
Our share grew we never arrested we.
We develop voice enabled self configuring products that truly added value at the consumer end customer level.
None of this happened overnight.
But as the years progressed, our share grew to the point, where many of our products and technologies are now considered the industry standard across the world.
And consumer electronics again, our focus in fact, our obsession was too consistently improve the user experience with our solutions.
Each year over the past decade or commitment to innovation has led to technologies that makes setup in everyday use of your smart television.
Easy and remarkably pleasant experience.
This too did not happen overnight, but.
But our teams dedication to enable these solutions and consumer products has consistently helped drive our market share growth and we can now proudly boast that the top three TB brands in the world are using our technology and an ever growing percentage of their smart Tv's.
Some years ago, we began a similar journey and the climate control home automation and security channels.
Again, our focus in fact, our obsession.
Is to consistently improve the user experience with our technology and solutions over.
Over the past few years, we have slowly build a 10% market share worldwide and the HVAC channel and we are just getting started.
These newer markets for <unk> together approach 2 billion in size are growing at around 10% annually and most importantly are embracing the smart or connected technologies and their new product portfolios.
Starting with our demonstrated product and technology leadership, and our long standing relationship with Daikon, the largest HVAC company in the World. We have recently begun to win numerous new projects.
With the leading names in H back across the U S and Japan.
In addition over the past three years.
We can count a growing list of new project wins at many of the leading companies and home automation and security.
Including 100, Douglas some fee Vivants and other brands, we cannot name as their products are yet to be introduced.
These customers are counting on us for a variety of innovations, including IP connectivity greater home control automation, better and more intuitive low power wireless control and the areas of the home that matter most and.
Potentially a greater tie in with other smart home systems, including the most relevant one to us home entertainment.
You might've noticed that I have communicated certain recurring themes that UBI, namely that we are active in markets that grow our share within those channels is growing and we have not and will not rest. We will continue our commitment in fact, our obsession to bring customers continued innovation as.
As well as product and technology solutions that help improve consumer experiences and enable our customers to grow their businesses.
As I said at the outset, we continue to implement the same strategy that has made US successful many times before and will once again bring UBI to ever higher levels of success.
During the third quarter, we secured several significant contracts that are expected to deliver revenue in 2023 and beyond.
I'll review some of them now.
One of the top five video service providers in the World expanded our longstanding relationship by selecting our green extreme low power technology for the foundation of its new ecological remote control design as.
Is the need to eliminate battery waste and two decarbonized premise equipment is growing we expect more customers to follow this path.
Another large and leading subscription broadcaster is selected for their next generation voice enabled controller for their state of the art video streaming service interestingly.
Interestingly the solution as part of a larger syndication program, meaning better advanced controllers are likely to be adopted by several of their current systems.
As mentioned in our climate control vertical we have been winning new customers and new projects at some of the largest American and Japanese HVAC Oems.
After we announced the expansion of our comfort thermostat platform earlier. This year, we have multiple engagements with large customers several of whom have committed to bringing semi custom variants of our products to market next year and into 2024.
And while timelines for mass market rollout may typically ramp over a period of several quarters, we feel confident that the first customer world's start shipping in early 2023.
And the home security and automation market. We're also seeing significant successes, leading brands such as vivid Chompy and Hunter Douglas are expanding their relationship with us by awarding us new projects and we continue to win new customers in both the pro and DIY security.
That will bring exciting new solutions with mass market potential. Unfortunately, the nature of these deals does not allow us to reveal any details just yet.
Finally, we are getting ready to showcase our latest solutions and technology at CES 2023, it promises to be an exciting event, where you once again leaves innovation in home Entertainment and smart home wireless control.
I'll preview some of the solutions, we will exhibit.
First will be showcasing the latest generation of Quicks at cloud the world's leading control technology platform for discovery setup and interaction with entertainment and smart home devices.
We will demonstrate enhanced interoperability with the new smart home controls standard called matter. A recently launched industry protocol that has been adopted by leading ecosystem brands, such as Amazon and Google Apple Samsung and Comcast.
We now provide television Oems and pay T V operators, an easy path to integrate smart home control capabilities into their video platforms as.
As well as providing smart home.
Mmm, a simple way to integrate their products into the big screen in the home.
In addition, we showcase our cloud native innovative smart thermostat platform tide.
And all it's enhanced controlling century features.
We will be demonstrating how the platform can help create more energy more energy efficiency in the home.
As well as how our products can integrate with existing and new smart homes systems and services.
We also will be demonstrating our award winning turnout remote control platform and underlying sustainability technologies. This unique control solution harvest energy from indoor light sources and wireless R. F. So.
So you no longer need to replace the batteries in your remote control the.
The promise to eliminate the battery replacement cycle and low power handheld electronic devices resonates very well with accounts that have an active sustainability agenda, which includes many of our tier one customers.
These are just a few examples of what our teams are working on to create solutions that address the control technology needs of the leading players in the markets we serve.
Now turn the call over to our CFO , Brian awkward for review of the financials. Please go ahead, Brian . Thank you Paul first of all review the results for the third quarter of 2022 compared to the third quarter of 2021.
Net sales were $148 5 million compared to $155 $7 million for the third quarter of 2021.
Squarely within guidance sales in Q3 as was the case in queue to reflect a quarter without a factory shutdown or logistical issues related to the COVID-19 pandemic.
Gross profit for the third quarter of 2022 with $45.7 million or 38% of sales <unk>.
Compared to 34% in the third quarter of 2021.
Our investments and focus on developing Lady technologies for home entertainment and for channels, such as Aidsvax security and whole motivation are paying off.
As a higher percentage of our sales includes advanced features leading to an improved margin profile.
At the number of IP enabled devices in our home continues to grow so too does the need to control them.
Operating expenses are $32 million compared to $30.7 million in the third quarter of 2021.
SG&A expenses decreased to $22.5 million from $23.6 million in the prior year quarter.
R&D expensive increase to $7.7 million compared to $7.1 million in the prior year quarter.
A few years ago, we began.
An earnest to streamline corporate expenses to increase operational efficiency and to free resources for strategic investments.
These internal investments have enabled us to consistently improve the user experience in our core markets as well as gain market share and new channels.
Operating income of $15.5 million or $10 four per cent of sales.
Pair to $16.7 million or 10.7 per cent of sales in the third quarter of 2021.
Or a <unk> tax rate was 14.8% for both the third quarter of 2022 and 2021.
Or the third quarter of 2022, net income was $12.6 million or one dollar per diluted share.
Compared to $14.1 million or one dollar three per diluted share in the third quarter of 2021.
Next I'll review, our cash flow and balance sheet, we ended the quarter with cash cash equivalents and turn deposits of $61.9 million.
Compared to 60.8 million at December 31, 2021.
Cash flow from operations for the third quarter of 2022 was strong you'll be $17.2 million.
And we expect continued strength in cash flow in the fourth quarter.
Before I review, our guidance I would like to give an update on what we have dubbed ports and parts for.
<unk> the ports or the logistics concerns are substantially resolved however, the parts or the supply chain constraints remain a factor related mainly cheaper carrying chips.
As we've said before the semiconductor supply challenge will not resolve overnight, but instead will improve part by part at each individual supplier over a period of time.
We've already experienced some of the benefits as we have vendors who have indicated that they are able to return to a normal life state more manageable lead times and ready ready supply of parts.
While other suppliers continue to maintain their long lead times and I've put their customers on allocation impacting our ability to ship the current backup backlog of products.
In 2023, we expect new supply will continue to come on line, which will enable us to meet the current pent up demand and some of our channels.
Now I'll turn into our guidance traditionally our third quarter sales are the highest of the year is oem's ramp for the holiday season, we expect the same sales patterns of this year.
We have widen the sales range at the current environment remains uncertain with inflationary pressures and macroeconomic headwinds.
For the fourth quarter of 2022, we expect sales range from $125 million to $140 million <unk>.
Compared to $143.9 million in the fourth quarter of 2021.
Expect EPS range from 75 to 85000 compared to 68 10 for the fourth quarter of 2021.
We read rate, our long term growth targets, a sale between five and 10% and EPS between 10 and 20 per cent.
I would now except for the call back to Paul.
Thanks, Brian .
We are well, while we are well aware that macroeconomic pressures of inflation or energy costs and supply challenges have combined to create significant headwinds in the near term. We as always are focused on long term growth.
We keep innovating and delivering ease of use solutions that become industry mainstays and essentially and eventually essential to the consumer experience.
As such we gained market share.
And we have tangible proof with our project wins and expanding customer base.
Then when economic pressures subside in markets improve we will benefit greatly.
While our approach is simple we have successfully proven its value and growing our business, we develop differentiated technology working with leading brands to capture a foothold in the market and better solutions in the home and continue gaining share and a growing number of markets.
The fact that we were able to do this while managing cost effectively ultimately leads to increased longterm profitability.
As always stay tuned.
Operator, we can now open the call up for questions.
Thank you.
At this time, we will conduct a question and answer session. As a reminder to ask a question you will need to <unk> one one on your telephone and wait for her name to be announced.
Please stand by while we <unk>.
Our first question comes from.
Jeff Van syndrome from be Riley.
Oh, I guess I everybody. So you guys, maybe you could just help us understand how much of the guidance.
Input.
Apologies for the marathon.
Fire system.
How much of the [noise].
Guidance is reflecting the supply chain issues versus how much is sort of caution.
On the broader macro and overall demand it sounded like you you had some pent up demand that you spoke to so just trying to reconcile I guess all those three factors sure yeah I can address this.
Although if that alarms going off please exit the building I don't want you to get hurt [laughter], yes caught up in a fire or something.
Oh wait we used to test.
It's it's it's it's really both obviously as Brian alluded to the semiconductor a shortage and I've. We've talked about this before armies the quarterly conference calls and we made this prediction and it is happening.
Semiconductor shortage problem is not going to just go from.
From a big issue to the next quarter completely resolved.
What what is happening is that certain of our vendors as Brian said and unfortunately can't name them.
Some of them have moved back to pre shortage pre COVID-19 operating principles of shorter lead times somewhere in the neighborhood of six to eight weeks.
And actually indicating that they have ready supply of parts, meaning.
If you have a quarter, where you need where you forecast that I need a million dollars of this particular part and you call them during the quarter and say I need an extra 100000.
They can actually get them for you.
You won't be told the lead time is <unk>.
60 weeks and if you want those extra parts are going to have to wait 60 weeks.
There are other vendors, who are still in the shortage mode, where the lead times or more than a year.
And you're on allocation. So if you need extra parts you can sometimes get them, but it's a wrestling match with the vendor to look they're trying to help because they want the revenue to but they.
It's a struggle to get any extra parts you might need if a forecast was if you under forecast in our particular unit that you need more units on so anyway. This is given a it's just a little bit more color on that supply shortage, we're starting to see vendors that are improving and as we forecasted before and this will most certainly be true as time Mark.
Is on its vendor by vendor part by part but eventually.
Capacity is being added to the industry at a record pace.
There's a fab up the street from here that's targeted open within the next year or so.
And you know they'll re allocate capacity the parks like ours and this problem will will be back to a point, where lead times or six to eight weeks and there's more ready supply of parts.
It's taking a while but we're not quite there yet.
So we do have orders during a quarter that we.
<unk> deliver as much as we can but we're probably 10% I would say yeah, that's right that'd be 10% more if we could get all the parts that we would like to have.
In addition, as Brian pointed out and you probably have seen this from other companies that have reported already anybody who's in the consumer markets. Today is just concerned because interest rates and the U S are at 20 year highs and the inflation Mark is still at 8% plus.
Families that middle class families are probably struggling a little bit because they're paying more for gasoline and more for groceries and so I think there is a little bit of on our customers base, we don't sell a great deal of our our our products directly to consumers, but we do sell to come.
Denise who do.
And what we're hearing from them as they want to be ready for a demand because it's unpredictable right now.
As to how the consumer is exactly going to react over the next three months.
But again longterm these.
These things do dissipate as time goes on.
I can't predict exactly when but these things do dissipate and we want to be ready with more designs.
Design wins in new product wins increase our market share we've done this before through prior recessions.
Thing to do is to is to just keep winning with innovation build better products for customers raise the ASP because your products are better gain market share during the difficult times and then when things start to improve.
You're better position than you've ever been but.
But we are seeing an effect from both of those things, Jeff long winded answer but the.
Worry about the consumer properly effects, it a little bit and supply chain is still affecting us.
Okay and that kind of Dove dovetails into my next question, which is.
Really great to see the new generation products, the bigger part of the mix.
And positively impact and your gross margin.
Mentioned, a number of new wins some of those new products.
And I know you can't name the customer necessarily but.
And you look at those you think about 2023 I realize it's really early but.
What sort of contribution from all of those new products new wins.
We think about or 2023.
Clearly it will be more I can't give you an exact number today, we're putting together a budget right now for 423.
But but what I do know is we've we've seen the wins with some pretty big names that would be recognizable.
And again, it's not unlike the story I was telling about video service providers are subscription broadcasters and consumer electronics, we start from a point.
We become committed to or as I said obsessed with making the products that we build for them better than that which they bought before we bring features that other vendors are not providing.
We present, those the customers and typically they begin allocating a larger part of their skews to us we've done this multiple times, we did it in video service provider many years ago.
And just kept doing it just kept building it just kept innovating we never as I said, we never rest when.
When you win some business you have to work harder to win more and you've got to figure out what the state of the art is and then move towards it create the state of the art.
And we've done that on the control side in the markets, we observed and we see the same opportunity in these markets HVAC is probably further along right now because we started and at first we started in that before home automation and security, but we see the same opportunity and all these.
The products that are in them could probably use some improvement we are bringing those improvements and then we're using technology to make the product even better self configuring, bringing them features they never had before and.
And then you win business and then the next year you win more business right. Each year. This is the story of consumer electronics, it's an annual cycle and each year, we kept winning more skews.
And we kept improving the product and that's why we won more skews. So we're taking the same approach here. We've already had success, we're at that 10% level, which is pretty good and.
But we think that there's no reason why and you've probably heard me say this before we should pursue our god given right and all of them.
Because again, we build better products.
And we're going to continue to be committed to that so it will account of our business in 23, 24 25 into the future. We see these markets because there's good growth in them and our share can be increased.
Okay Fair enough I can take the rest off line best of luck for the rest of the <unk>.
Thank you.
Our next call is from Brian <unk> from Imperial capital.
Thank you very much yeah, hopefully I'm coming over first question is on R&D can you give us any kind of a.
Gauge our direction, where R&D is going at least in the fourth quarter of maybe if you can look into 2023 at all give us an indication where you're taken R&D.
Yeah, we we don't I think it's comprised approximate the same percentage of sales I mean, what we've done over the last.
Few years, we made a concerted effort to reduce the SG&A to be able to reallocate those funds and be able to invest.
Internally and a different channels different products et cetera, and the team the product. He has done a great job in doing that.
Mentioned he listed.
A lot of customer wins over the last couple of quarters. So this is all coming to fruition. So I mean, it's definitely paid off but I I.
I don't expect to deviate too much from the current percentage of sales.
Okay, Alright, thank you for that color and then in terms of.
Can you give us an update on where we are in the broker litigation.
There's not much of an update from last quarter. We're in the midst now obviously the.
ITC cases of completed we prevailed in both the.
What we sued roku in one Ah Ah an exclusion order in that one and then the defense of one we one as well.
And now there are multiple district court cases that are stayed until such time as the the ipr's are completed.
We're still very confident we've done very well on that front and it's just a matter of of time before those IPR is complete and then the judge will on stay the case.
Okay, and that's expected in the next two quarters three quarters three years, what kind of ballpark, where you're looking at yeah, I won't be there won't be this year.
Likely not next year.
But it's difficult to predict exactly when because the again.
The the.
The IP ours are.
They have to be finalized.
Okay.
A couple of other questions I I know you can't talk about specific guidance in 2023 do you guys anticipate giving guidance just one quarter at a time I know that things are kind of cloudy out there to look further out do you anticipate given yearly guidance or is it going to be kind of moving forward at a <unk>.
One quarter for guidance clip.
Yeah four years now we've guided one quarter forward.
While we realized that it would be good to guide further out in today's environment that would seem a difficult thing to do.
With all the things that have been happening over the last couple of years with.
Viruses and supply chain shortages and interruptions in factories interest rate rises inflation.
Or it's just been very.
It would be difficult to be able to predict out.
You know on the good side, if things in the economy improve we're just looking for a lack of headwind.
We don't need trailing breeze at this point, we just need a lack of headwind that.
That would be nice for awhile.
But you know again, it's difficult to predict how those things are going to move.
If we knew that we wouldn't be in wireless control.
We'd be an investment company.
We we.
We are we are I think withholding these headwinds quite well.
We have rich the product mix, we're winning projects.
And when we get that lack of headwinds.
We think we're going to be better positioned than ever.
Okay, great well, thank you very much church.
Thank you.
Alright next question comes from Stephen Franco.
He didn't.
Thanks, Paul it's talking for a couple of minutes about this willpower remote <unk>, what's the margin and E. S. P profile.
This new class of products are they accretive to both Aspd's in March.
Mmm, Yeah, I can't talk about a specific customers margin.
But I will say that this product generally because of its architecture carriers.
Slightly higher Aspie then.
Traditional product.
For obvious reasons, we're putting technology into the product that didn't exist before so the ASP is higher.
So it's similar to advanced remotes voice enabled.
Products that are self configuring the architecture of those products is different they bring great value to the user but they do cost more.
Same here this brings value and that the user.
Won't have to change their batteries, which has a benefit to them, but it also provides obviously and environmental benefits.
That there'll be fewer batteries pulled out of remotes and put into a landfill.
And are these weird.
Customers with sustainability agenda as well.
We'll we'll probably tune in on this and say this is a good thing for us to be doing we pay a small premium for the product because the architecture is advanced but we're we're we're helping the consumer by not having them be upset.
Because if you've ever sat in front of your television during something you wanted to change the channel and your remote didn't work.
You Gotta get up and find batteries and put them in it's not that bad but you do have to do that this won't be done as frequently or if ever.
And they won't be throwing batteries into landfills.
Okay I had to change batteries. This week, so I know that pain point, but just to clarify this remote is a voice remote as well as being energy harvesting or this particular win.
So it's an advanced remote with about the next galaxy treat these remarks can be fully featured just like with the fully featured remotes. The most modern architectures can be used voice.
<unk> enabled against self configuring all of those features plus be much more battery power efficient.
Then the previous generation was.
Okay, and then to go back to the supply chain and demand issue.
[noise] mid year.
You can express some confidence that the back half would would be one of the stronger Backpass, you've had and and you did have a very strong Q3, but the queue for stepped down as it is pretty sharp how much of that is inability to ship product.
Versus.
The demand picture keeps changing and getting worse.
Yeah as I said earlier, it's really both the customer.
Customers have voiced concern about where consumers are going to be this this season this holiday season.
November December T.
T V is usually strong in January as well.
There's been.
Some concern and we're probably not the first report this I think a lot of larger companies out there have expressed this that.
They are concerned about the attitude of consumers given the level of economic headwinds that the consumer is feeling right now.
But we still as we as Brian said earlier, we are starting to see the beginning.
The beginning of the solution to the semiconductor shortage, because we do have vendors now who have returned to pre shortage operating principles shorter lead times.
And more ready supply.
We still have other vendors, who are again more than a year and and lead time.
And when you need extra parts, it's difficult to get them.
We do believe that.
Will reached the point of pre shortage pre COVID-19.
Operating principle, because capacity is being added it will occur.
But it hasn't yet so in queue for will we still have products that we had demand for that we will not be able to supply all of.
Because we can't get the parts to make the products.
Okay, and I don't want Brian to feel left out. So if you could tell us about 10 per cent customers in the quarter.
We had to Comcast is a 17.8% and bacon.
Bacon was at 14.4%.
[noise] alright, that's it for me thank you.
Thanks to you.
Yeah.
As a reminder to ask a question you will need to press star one one on your telephone.
Please stand by.
And at this time I'd like to turn it back to our speakers and Paul Alley for final comment okay.
Thank you for all for joining us today and for your continued support of <unk>.
We plan to present at Imperial's annual security Investor confidence in December .
And Needham's annual growth conference in January .
As mentioned earlier, we will also be exhibiting at CES in January and we hope to see some or all of you. There if you can make it.
Have a great day.
Thank you.
Thank you for your participation. This does conclude the program and you may now disconnect have a great day.
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The conference will begin shortly to raise your hand doing <unk>.
<unk> one one.
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