Q4 2022 Universal Electronics Inc Earnings Call
Okay.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
[music].
Yeah.
Good day, and thank you for standing by and welcome to the Universal Electronics fourth quarter 2022 financial results conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session you'll need to press star one on your <unk>.
On the phone you will then hear an automated message advising your hand this race to withdraw your question. Please press star one again.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today.
Mr. Chapman L a to Investor relations. Please begin.
Thank you norm and thank you all for joining us for the Universal Electronics 2022 fourth quarter and full year financial results Conference call by now you Should've received a copy of the press release, if you've not please contact <unk>.
At 4154333777 or visit the Investor Relations section of the website.
This call is being broadcast live over the Internet webcast replay of this call, including any additional updated material nonpublic information that might be discussed during this call will be available on the company's website at <unk> com for one year.
During this call management may make forward looking statements regarding the future and future.
Our 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 introduced this year, including leveraging its wireless connectivity capabilities in the climate control of home automation security hospitality and HVAC channels.
And its ground breaking line of ultra low power and energy harvesting control products designed to address the growing demand for more sustainable solutions and electronic devices.
The continued successful collaboration with existing and new customers and developing and launching new generation products software solutions and technologies into existing and new and growing markets, which result in increased sales and market share for the company.
Management's ability to continue to manage its business inventories and casually is too cheap its net sales margins and earnings through financial discipline operational efficiency manufacturing diversification and footprint strategy.
Management.
The impact to the company's financial results that it may experience due to supply.
So semiconductor supply challenges and inflationary pressures and macroeconomic conditions.
Consumers are experiencing.
The direct and indirect impact the company may experience with respect to its business and financial results stemming from the continued economic uncertainty affecting consumers' confidence and spending natural disasters public health crises, including the continuation or resurgence of COVID-19 pin debit or governmental actions including war.
The company undertakes no obligation to revise or update these statements to reflect events or circumstances that may arise after today's date.
The press release mentioned at the outset of the call and the documents. The company has filed with the SEC, including its 2021 annual report on Form 10-K, and periodic reports filed since then.
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 a supplement to GAAP financial measures helps investors evaluate core operating in.
Actual 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.
Full description and reconciliation of these adjusted non-GAAP measures versus GAAP are included in the company's press release issued today.
On the call today are chairman and Chief Executive Officer, Paul Arlene, who will deliver an overview and chief Financial Officer, Bryan Hackworth, who will summarize the financials. Paul will then return to provide closing remarks, it's now my pleasure to introduce Paul Arlen. Please go ahead Paul.
Thank you for joining us today to review, our 2022 performance as well as our outlook for 2023.
As we have highlighted many times before our strong commitment to ongoing innovation product and technology design development and delivery and ongoing excellence in customer service continues to garner accolades our product designs received CES innovation awards in January and more importantly.
Our platforms and technology solutions earned customer recognition in the form of new product design wins throughout the back half of 2022 into 2023.
As a result, our share continues to grow in the markets we serve.
However, macroeconomic challenges and increased consumer uncertainty have impacted market dynamics, especially at the tail end of last year.
As a result, Q4 2022 performance was below expectations with net sales of $122 8 million and EPS of 44 cents.
We anticipate that impact will also be felt in the first quarter of 2023.
Regardless, our connected home solutions, which are sold in our higher growth markets that focus on climate control home automation and security.
<unk> gained momentum.
In fact product design wins secured 12 to 18 months ago in some cases in the connected home channel are starting to ship.
Giving us confidence net sales will improve starting in the second quarter of 2023 and build momentum into 2024.
For example, we are shipping our first advanced dermis staff with Mitsubishi Mitsubishi Electric train for the U S market towards the end of the first quarter of 2023 and have already been awarded our second smart thermostat with Mitsubishi that we expect to launch globally.
In addition, we won new thermostats and control platforms at one of the largest U S. HVAC system providers at the beginning of 2023.
Closing another global leader in the HVAC space with our new tied platform.
And home automation space, we continue to grow our business with control solutions at Hunter Douglas and sundry and.
And we have expanded our footprint with multiple sensors controllers and home automation products with U S security provider.
We expect these wins to contribute to our revenue starting next quarter.
Meantime, we have been taking additional actions to address the market dynamics.
First over the past few years as mentioned.
We have deliberately been shifting development spend on new products and technologies from our market challenged core video service provider channel to higher growth channels and the connected home space where.
Over the past years, we have seen growth.
To moderate fixed costs, we continue to move ongoing maintenance and development support activities to lower cost regions. We are also tasked our local innovation and development teams to create technologies that can scale across all our channels focusing on wireless connectivity interoperability sustainability and end user support.
Solutions that are key to differentiating our solutions in these growing markets.
Third we have already begun diversifying and optimizing our manufacturing base outside China with the construction of a new factory in Vietnam.
Which will be fully operational later this year.
While this will initially increase our overall production footprint the goal for the end of by the end of 2020 for us to right size, our global footprint, enabling manufacturing flexibility to serve our global customers to optimize cost efficiencies and to create a production footprint that is in line with our new higher growth product category.
Thanks.
Finally, our product development process continues to prioritize allocating global development resources to projects with the highest potential revenue.
Business impact.
This January our experience and customer reaction at CES was extremely positive confirming that our development of differentiated products is on the right track and offers ample proof that we are in a strong position to generate long term growth.
For almost 40 years, we have delivered industry, leading control solutions for our customers our inventions like quickset have become the de facto control standard for smart connected home entertainment devices.
As such leading brands from around the world increasingly turned to evi for finished products embedded <unk> and.
In software solutions to power, the sensing and control functions of their systems.
Our strategy of growing in new markets and our drive to consistently meet and surpass customer expectations will in time yield long term growth.
Our customers count on us to create innovative solutions focused on IP connectivity, greater home control automation, including better and more intuitive low power wireless control, resulting in a greater tie in with other smart home systems.
Since 2020 sales in our climate control security and home automation space have grown in 2022. These connected home solutions accounted for over 25% of our net sales and.
And these markets are already larger and are growing at a faster rate than home entertainment markets. So we expect their contribution to EBIT more meaningful going forward.
Our specific addressable market in climate control alone represents nearly $1 billion, which is growing at a 10% compound annual growth rate.
I will briefly review a few of the highlights from our product introductions at CES.
We demonstrated our expanded connectivity solutions for home wireless control with enhanced security sustainability and scalability.
We emphasized our contribution to a sustainable future by addressing the need for more energy efficiency in the home with <unk> tied smart thermostats and by reducing battery waste with U S E turn on energy harvesting remotes.
I am proud to announce that Aeterna was honored with the CES 2023 Innovation award amongst a pool of over 2100 applicants.
We demonstrated our smart home dashboard solution quickset five as a reference design currently shipping and millions of LG Smart Tvs worldwide as <unk>.
<unk> Tvs continue to evolve and features and functionality they need to embrace the full potential of the larger screen in the home to deliver a smart home control experience is becoming a reality.
Customers ranging from service providers and broadband platform owners to a growing list of smart TV brands reacted positively to our quickset smart home software solution.
This confirms the potential to scale, our enhanced quickset software and services offering that blends home entertainment and smart home experiences on a single screen.
In the area of interoperability, we embrace the emerging matter standard with the introduction of four new matter enhanced solutions across our portfolio, ensuring our customers can bridge between the existing smart home devices consumers have in their home and the new matter enabled devices they will buy in the future.
Due to the competitive nature of our customers' businesses.
I am once again limited by confidentiality requirements and cannot discuss specific customer and new design win opportunities.
What I can say is that our current design wins bid.
Bid opportunity pipeline and project backlog represent a significant number of new business opportunities for UBI. These.
These opportunities are strongly weighted to our newer higher higher growth markets, highlighting our ability to effectively penetrate these new markets and execute on our market diversification strategy.
Although the related sales are not expected until later in 2023 into 2024 and beyond.
These definitive wins underpin our long term growth projections.
Interestingly, while the connected home channel has exhibited signs of longer sales and development cycles in our traditional home entertainment channel. The benefits include significantly longer product life cycles.
This means that while major new product developments in climate control security and home automation are taking longer to launch these product platforms have significantly longer.
Revenue cycles that last five or seven times longer than the products developed and home entertainment.
In summary, our new innovative products were well received at CES and.
Our design wins continue to build the foundation for a strong future.
What is important now is that we successfully execute on the many new product introduced introductions that we already have been awarded by our customers.
We continue to secure new business on the outstanding bids, we will be addressing in the coming months and years and that we remain vigilant in executing our cost savings initiatives.
We will continue our commitment in fact, our obsession to bring customers continued innovation as well as product and technology solutions that help improve consumer experiences and enable our customers to grow their businesses.
We continue to implement the same strategy that has made US successful many times before and will once again bring you AI to ever higher levels of success now.
Now I'll turn the call over to our CFO Bryan Hackworth for a review of the financials go ahead Brian .
Thank you Paul first of all review the results for the fourth quarter of 2022 compared to the fourth quarter of 2021 net.
Net sales were $122 8 million below our expectations and compared to $143 9 million for the fourth quarter of 2021.
It was a great deal of uncertainty in the current economic environment, which has led to household spending less on discretionary goods and this is affecting our end user markets.
In turn certain customers, primarily in our video services channel submitted purchase orders that were lower than our previously submitted forecasts.
<unk> our fourth quarter.
Customers in the consumer electronics and climate control channels also reduced orders for the first quarter of 2023, which will be reflected in the guidance I will provide shortly.
These decreases in Nevada, resulting in fourth quarter production being lower than forecast youll be manufacturing inefficiencies as overhead was absorbed at a lower rate and unfavorable labor variances were incurred due to the inability in the short run to flex direct labor.
Although gross margin for the fourth quarter of 2022 of $37 7 million or 37% of sales increased compared to 28, 4% in the fourth quarter of 2021, it was lower than expected.
Operating expenses were $29 4 million compared to $30 2 million in the fourth quarter of 2021.
SG&A expenses were $21 7 million compared to $22 6 million in the prior year quarter.
R&D expenses were $7 7 million compared to $7 6 million in the prior year quarter.
Operating income was $8 3 million or six 8% of sales compared to $10 7 million or seven 5% of sales in the fourth quarter of 2021.
Our fourth quarter 'twenty to 2022 effective tax rate was 27, 3% compared to 16, 1% for the fourth quarter of 2021.
For the fourth quarter of 2022, net income was $5 6 million or <unk> 44 per diluted share.
Compared to $9 million or <unk> 68 cents per diluted share in the fourth quarter of 2021.
Next I'll review, our cash flow and balance sheet.
We ended 2022 with cash and cash equivalents of $66 7 million.
Compared to $6 8 million at December 31, 2021.
Cash flow from operations for the fourth quarter of 2022 was $10 8 million.
Before I provide guidance for the first quarter I'll comment on our plans to restructure our manufacturing footprint and.
And I think it's important to first provide a little context and history.
The majority of our goods are currently produced in three facilities two in mainland China and one in Mexico, Our Mexico facility was originally established as the refurbishment plan, but when the China tariffs were enacted in 2018, we quickly transitioned the facility into a full fledged manufacturing factory to produce goods destined.
For the North American market.
Today in an effort to lower our concentration risk in China. We're in the midst of operating apartment opening a manufacturing facility in Vietnam currently scheduled to commence operations later this year.
The expansion of our factory footprint over the past five years has been necessary given the changes, sometimes sudden and governmental policies as well as the overall global environment.
As a result of these actions and the fact that our business has evolved over time, becoming less dependent on the video services channel, while experiencing strong growth in new channels, including climate control security and home automation.
Currently have more production capacity than needed.
Additionally, the average selling price in the climate control channel one of our strongest growth categories is significantly higher than our traditional products and the video service channel.
Therefore fewer units will need to be produced to achieve sales growth and less flat factory floor space will be required.
As such going forward, we plan to reduce our manufacturing footprint beginning in the second half of 2023.
With additional modifications to occur in 2020 for these changes will improve manufacturing efficiencies and ultimately make <unk> a more profitable company.
Now turning to our guidance for the first quarter of 2023, we expect sales to range from $100 million to $110 million.
Compared to a $132 4 million for the first quarter of 2022.
Our net loss ranging from 28 to 38 cents per share compared to EPS of <unk> 47 in the first quarter of 2022.
Looking past the first quarter of the current economic environment remains uncertain as inflation persists. However, unlike last year at this time customers have reflected the sentiment and their near term and long term forecast.
With Q1's revenue expected to be the low point of 2023.
Just on the expected timing of our new product introductions and customer forecast, we expect second quarters net sales to be sequentially higher than Q1.
And for both Q3, and Q4's net sales to exceed Q2s.
We have faced several headwinds over the past few years, but we believe the increase in R&D spend focused on the connected home will pay off in 2023 and beyond.
I would now like to turn the call back to Paul.
Thank you Brian .
Progress is not a straight path.
Companies have the opportunity to become stronger during times of uncertainty.
AI has repeatedly proven this outage, we expect to do that again.
Our business has been set with many challenges across the last few years as many have.
COVID-19, and its after effects supply chain issues semiconductor shortages to name just a few <unk>.
Industry shifts have caused many of our customers demand to lessen.
Recently, the continued impact of economic difficulties, such as higher interest rates and inflation has affected consumer spending patterns.
During this difficult period the team at <unk> has innovated like never before began a significant transition into the connected home market and increased our share in all the markets we serve.
Over the past 18 months, we have won significant projects and have many more opportunities in the pipeline.
While the near term results are not at all what we would like them to be.
We are taking action to improve them and very importantly, create an even better future for UGI.
Our track record supports our ability to navigate different pressures emerged stronger and drive shareholder value in the long term.
Based on our product development pipeline design win backlog our intellectual property.
Our traction in new markets and customer engagements. This is truly a new beginning.
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 withdraw your question. Please press star.
You seem to be announced please standby, while we compile the Q&A roster.
One moment for your first question.
And our first question comes from the line of Greg Burns with Sidoti. Your line is now open.
Good afternoon.
Can we just dig into the guidance I guess the revenue Miss for this quarter and the guidance for the first quarter.
Maybe some specific color on what's driving the magnitude of the decline.
Primarily coming from the traditional kind of.
<unk> channels or is it.
No more consumer centric channels.
And the automated home can you just help us understand what's driving the magnitude of the decline because if we look back to like.
The heart of the pandemic.
<unk> was was far higher here so what.
Far higher than what you're implying for the FERC regarding for the first quarter. So.
Can you just kind of let us know what what's.
Changed so dramatically different about this environment, that's driving the decline.
Sure, Yes, theres very defects and we we obviously, we don't sell a lot of our products directly to consumers, Greg as you know, but the customers that we sell to do because our products typically end up in homes, which obviously are the decision makers in those homes are consumers. So.
We rely upon the consumer markets and as you've probably seen from many companies.
And we would say.
To say the same because our customers are selling directly often directly or through the retail channel to.
To consumers so TV business as an example.
During the pandemic, they probably did okay, because people were at home and.
In fact, it was probably a flight to quality, where they were buying better Tvs during that period.
I think just a long term effect of the inflation higher interest rates has made middle class consumer is a little less reluctant.
More reluctant.
Less likely to go out and buy items.
Probably seen this as we have from other products in the consumer market category. There are exceptions to that but I think widely consumers just aren't.
Partnering with their dollars as easily and in many cases, it might just simply be because our middle income family.
<unk> more of your paycheck is going to.
Higher cost of food higher cost of gasoline and higher cost of utilities et cetera, there's less left over to spend.
So our customers are telling us that they're seeing.
Fewer orders and expect.
To see likeness of orders for a time here.
So we saw that in Q4 in fact during the quarter, we have some customers who had forecasted orders that then did not fulfill them because they saw lightness inventory build et cetera.
And of course other parts of our business have just seen.
Difficult.
<unk> patterns.
<unk> it.
It's been across the board I would say that.
Home automation security is a little easier only because again new projects our market share there is lower.
Much lower.
As you know in.
The video service provider channel our market share is quite high.
So there when the market's down were down because we can offset it with share gain.
Already got a relatively high share.
In markets like HVAC, our market share is respectable but still relatively low.
And we have great offerings, there, so we can offset weakness with growth.
The problem for the last few years has been that Mark that market was much smaller than our home entertainment business was so large that any shrink in it was hard to offset with growth growth from that smaller business as.
As we highlighted during the prepared comments.
Those that's smart home part of our business is now 25%. So we think it's getting to a level of scale. We win a few more skus, there and deliver them. It can begin to deliver some some growth for udi.
Despite any any home entertainment difficulties.
Okay.
But what percent.
I guess, the 10% customers can you just.
Our largest customer at 15, 5% and Comcast was our second largest at 11, 2% for the fourth quarter.
Okay.
So I.
I guess.
But <unk>.
Comcast, obviously thats indicative of I guess.
Decline there when you were talking about but.
So I understand like TV sales like a consumer electronics product sale declining, but this feels like there's more to it.
Traditional channels than just consumer.
Discretionary spending being lower like is there more of like a.
This is like the impacts of like cord cutting or more secular.
Issues beyond beyond that.
Yes, that's what that would certainly be part of it I mean, the demand from those customers has been lower for sure.
Okay.
And then with the.
<unk> footprint how.
How much of a benefit to margins will that be because I know you're excluding some of these expenses and your adjusted <unk>.
Number so does that just go away at some point in time like how should we think about the benefit of this footprint rationalization because you already are excluding some numbers from your your adjusted number some expenses from your adjusted.
Numbers, so what's the impact going to be yes, that's correct.
We do when we transitioned our Mexico facility from a reverse and flat to a full fledged manufacturing facility and increased our capacity. So what I did was I said.
Okay.
The design of today, we have excess capacity, so what would it look like what's happening now.
As with was us trying to Derisk.
Concentration risk.
In China, and we're spending up Vietnam, we're going to have even more capacity than needed. So right now with.
The shortfall in demand, we just have too much capacity and so there's just kind.
Kind of looking at two layers, one youre right I do pro forma piece of it but the amount that that potential savings is actually greater than that so when eventually.
When we restructure everything.
And we're currently analyzing it all the savings are going to exceed what's currently being included in the pro forma so there's more savings to be had is probably the simple way to say it.
Okay alright, thank you.
Thank you one moment for our next question. Please.
Our next question comes from Jeff Van <unk> with B Riley. Your line is now open.
Hi, everybody.
Just wanted to touch on the supply chain for a minute didn't speak much about that Im wondering what youre seeing there I know that's been sort of a thematic thing.
Until now.
Theres been some pressure there just wondering if.
That's improving Roe.
Where are we as far as getting to normalization on supply chain, maybe touch on the gross margin outlook as far as you can see around that or is it maybe.
Maybe not as relevant now that we're looking at sort of different.
Use around.
Factory capacity capacity utilization and so forth.
As far as supply chain Geoff this is Paul.
The situation has improved.
We have vendors now that are back to a more normalized pattern where in semiconductors.
Specifically.
Typically lead times, there are somewhere between six to eight weeks in a normalized environment.
And they have more ready supply, meaning if you if your forecast is off.
You can usually.
Get the parts.
So long as you are not doubling or tripling you can usually get extra parts.
And in real time.
And in a normalized situation.
For a while there lead times were up with some vendors to 80 weeks and if you didn't order. It you werent getting it. So if you had any flex and you needed. Another 10% of parts you are going to have to fight for them.
And usually wouldn't get them.
We're getting back to more of that we have vendors now back to the six to eight week lead time with ready supply.
We do have other vendors. Unfortunately on some projects that we've jointly chosen with customers.
We're still at 40 weeks and.
It's getting better and I do think that they'll return they've shown us plans for capacity expansion on their part.
But unfortunately I think this problem is starting to also improve because not just with us but with.
Cross industry, I think youre, starting to see demand come down we thought that this problem with solve through capacity expansion, which would take longer and probably part of the solution, making it come faster is that demand has dropped not for us although that has happened but for the entire electronics industry.
So.
The good news in that is that it probably makes the semiconductor shortage.
Go away faster.
And we're seeing them, we're starting to see that problem dissipate is not back to normal, but its getting much closer to that and probably I would guess will be this year.
Back to normal where vendors have ready supply.
Six week 878 week lead time, and we're back to a more normalized situation.
Not there yet, but we're getting very close to it.
Okay.
So fair to say that it's not at this point its getting better its not preventing you from shipping product or is it preventing you from shipping product and if so how much.
It is less than before I don't know the exact figure it's billions, but its not tens of millions at this point.
We have some products that there has been demand for that we've had a difficult time getting the parts, but it's getting easier to get them. So I think that number will continue to reduce.
Okay.
And then if we can maybe turn back to the manufacturing situation.
There's a process there maybe you can just.
Delve a little bit more into the plans to handle that going for that time frame around it I know you mentioned 23 and 'twenty four.
And at what point do you think we can begin to see our achieve efficiencies.
Well, it's going to be it's going to be a process. I mean currently we're evaluating everything and the first thing we have to do is we have to get Vietnam up and running and that's that's scheduled for the second quarter. So that's the first thing we have to do it.
In the short run you get.
Startup issues it takes a little while to get that running.
Efficiently once that occurs where we expect to do is in the in the fourth quarter latter part of 2023 is to is to basically shut down a factory and then take the goods that are produced at that factory and put them into Vietnam and into maybe some of the other remaining factories subsequent to that going into 2020.
Four we then have to continue to evaluate and figure out can we reduce it can we streamline another factory or can we potentially shut one down and go from well at one point before factories down to potentially two or two and.
<unk>.
One smaller one so we're currently evaluating everything but I think it's going to it's going to be a process. So you can see the efficiencies over time, but it's something that we're addressing right now because.
As I mentioned in the prepared remarks, the what's hurting us and what hurt us in Q4, and what's it going to continue to hurt us in Q1 is the fact that the volumes down we have too much capacity and im not pro forming all of it I pro forma a little bit but the the effectiveness is greater than that and that is what's falling to the bottom line and that's why our margins.
Our <unk> are lower in Q4 than expected and the same is true for Q1.
And when do you think I mean, just based on what Youre looking at now realize there is if there is.
A process as you said, but.
When do you think we can start to see margins overall margins begin to improve.
Well, there's a lot of variables that go into the gross margin. So this is the manufacturer and how is the biggest piece. It's the thing that we need to address the most but then it's hard for me to predict Q2, Q3, Q4 with a margin rate will be because there's other factors like FX and commodity pricing and I'm talking about chipset as more capacity comes on.
Probably come down and things of that nature mix royalties et cetera, just a list a mile long that that play a role in the gross margin rate. So.
It's going to take.
We can start to see improvement from a manufacturing perspective by the end of the year, because we're going to do is I just.
Articulated.
But trying to figure out Q2's margin rates through the rest of the year are difficult just because of these other factors.
Okay Alright.
Alright fair enough.
For taking my questions and best of luck I'll jump back in the queue. Thanks, Jeff.
Thank you.
One moment for our next question comes from the line of Steven Frankel from with Rosenblatt. Your line is now open.
Good afternoon can we start with kind of sizing the home control business in 2021, so did it.
Grow when the rest of the business shrank or did you just shrink less in 'twenty two.
No.
It's been growing.
The last few years, it's grown.
It just again it hasnt had the size.
Our home Entertainment business was much larger it was the majority of.
Vast majority of our company.
But that business has grown.
Over the last couple of years.
It's growth, though hasnt, yet been able to offset any difficulties we've had due to any number of things supply chain shortages COVID-19.
Slower demand in certain parts of it.
Now consumer affecting the consumer electronics business the consumer sentiment.
But we think we're getting closer to that that the growth in that business, because it's now 25% of our revenue.
And again as I said in the prepared remarks, a lot of our development resource over the last few years has gone to these areas.
We are engaging the largest players in the world.
Some of which we've already won projects with in as this year progresses, we will be shipping products to them.
I guess, the best way to say it is that we see this business like we did home entertainment.
A decade or more ago, where our market share was still relatively low we had better solutions.
The competitors here did not then we would go to these customers who are very happy to work with us because we had great solutions for their market and our market share grew substantially in a growing market.
And Thats, what we see here so it's taking a little bit of time, because some of these projects.
They will take 18 months after you have won them.
To begin shipping not because it takes us that long to build the product, but sometimes the the companion product it takes that long to develop and get done.
But once it starts.
As I said the good news is often these products will have five seven year lives, whereas in some of our consumer electronics business is it's an annual cycle you have to win the business every year and each year. They revisit it in the summer for the next year.
So it has longevity.
And it also ties back to the factory footprint, Brian was just talking about some of these products will carry an ASP that is.
Six times seven times, maybe even 10 times, what a remote control would sell for.
Now they are more complex products, but they probably won't require as much factory footprint per dollar of sales.
Is that which it replaces.
Right, so as the mix shifts the footprint will change.
So we're factoring that into our factory changes as well.
But that business is growing.
And we're getting it to a size now where its growth will be.
Meaning for.
To our results.
And.
Just been through a lot over the last industry shifts.
And all the other effects we've talked about.
But we think that that business our market share is as high as it's ever been in that business. We've looked at it by customer and figured out it isn't really that we've lost anything in these markets we.
Our market share in some cases is higher than it was before.
They're just going through a difficult time.
The television business is probably a 4% growth business.
Over the long term and sometimes youll see it go up 10.
Sometimes youll see it shrink by six.
In fact, we've looked at this once all the way back for decades, and not just for us, but the industry itself.
And some years, it's better and some years its not.
The connected home stuff is growing.
Climate control is going through a transformation much like.
Much like home Entertainment did some years ago when it made the transition from analog to digital.
And then the HD boom.
That market is going through a transition and we think we're uniquely positioned to help these customers.
Their devices smart home connect them to other systems in the home bring new features to them that they didn't have before.
We're presenting that to them in house, and particularly at CES and Theres a lot of interest.
Our our bid pipeline is our wins.
Should help us fuel growth some growth later this year and then our bid pipeline is quite strong in these areas.
Let me zero in on that last statement when you say some growth or youre talking about sequential growth or do you think you can get to a.
Quarter in 2023, where your revenue was up year over year.
Well right now what I said in the room.
<unk> is that I think Q2.
Our Q1 with a low point in Q2 will be greater than Q1, and then both Q3 and Q4, both will be greater than Q2 is my expectation.
And Brian just to try to understand how you got to the bottom line.
Number four.
For guidance give us a feel for what the Opex.
It's going to be the.
The Opex run rate is no I'd say, it's a normalized run rate.
But what's affecting Q1 is the gross margin rate.
This basically.
The manufacturing overhead.
Lack of absorption the volumes at are at a point, where we can and you understand that.
Where do you have a factory portion of fixed costs. If you have units through the factory here, just not absorbing the overhead efficiently and thats whats going on right now so.
If youre looking at Q1, the Opex as a normalized run rate and the gross margin rate as the difficult position right now.
Okay.
New World where.
Yes.
Pay TV business is not going to come back to where it was although you have opportunities to do things like cell.
Green remotes to them, which maybe gives you some growth.
Okay.
Need to take Opex down a level is there.
<unk> been holding tight for the last couple of years. This is kind of the operating.
Run rate expenses.
Of the business and you can't get any more out of it.
Well I wouldn't say that depending on what happens.
There's never a time, where we'd say there is nothing more that can be gotten out of it our operating expenses have come down over the last couple of years.
Not as much.
Due to labor inflation. So what's happened is the head count has been reduced more than the expense.
But in order to retain the.
Talented people you need to differentiate your products and get all your projects done.
As you know because you've probably seen this in other companies the labor inflation over the last few years has been unprecedented Lehigh.
Right. So you have to use that as an offset.
Any head count reduction you may have.
But we.
Watch over this pretty closely in even good times, good times and bad we want to make sure that we have.
The right level of people to get the work done in every part of our business not just let it flex up when we're doing well.
Because when things.
Arent going as well you've got to make sure you have the people to produce the.
<unk> differentiated products to help you grow.
And so that's what we'll assess but to your point, maybe if certain parts of our business.
Aren't doing as well then it might mean that there are resources, there that arent as necessary.
So that is true in any.
Great I'll jump back in the queue. Thank you.
Thank you.
One moment for our next question.
Okay.
Brian <unk> with Imperial capital Your line is open.
Yes. Thank you very much a couple of quick questions interest expense.
What you experienced in the fourth quarter, I think was around $1 million.
That a good number to use going forward or was there anything onetime in nature.
It's.
A good number to use in the future I mean, right now interest rates have been rising so it could go up a little bit in terms of.
From a rate.
But I think on average that's that's a good number to use.
Okay.
<unk>.
A question like that and litigation expense that was about $2 million in the fourth quarter, which.
With that from previous periods, but maybe you can give us a number going forward, what we should be looking for.
Terms of litigation.
Yes.
That's a difficult one.
Up and down based on activities during the quarter.
Some quarters are obviously going to be greater than others.
Difficult one to predict on that.
How about for first quarter.
Since you've given guidance already.
What kind of litigation.
Do you have factored in there.
I would say, it's similar to Q4.
Okay.
Great.
And then just.
There's been a lot of questions already about <unk>.
Revenues, but gross margins I assume will will drop.
Sequentially from fourth quarter to first quarter is that a correct assumption.
Yes.
Okay.
So it should drop maybe in the ballpark below 25% is that the right ballpark.
No that's too low you could back into it based off of the.
The Opex I'll, let you do the math it won't be below 25.
Okay.
And then as the quarters get a little bit better on the gross margins recover from first quarter to second quarter third quarter to fourth quarter ballpark ish.
Well again.
It's difficult to go beyond a quarter because there's just too many variables that go into gross margin rates. So the factory, we're going to start to address the factory issue immediately or we have been we're analyzing everything but from a from a shutdown of the.
A factory that's going to occur in the back half of the year now.
Now FX rates play out how sales mix, including royalties play out commodity pricing.
A lot of variables that go into the gross margin rate. So it's just difficult for me to predict beyond one quarter.
Great Alright, thank you very much.
Thank you.
Thanks, Steve.
The conference back over to Mr. Paul.
Hello, Mark.
Okay. Thank you for joining us today and for your continued support of Universal electronics.
We plan to present at Sidoti March small cap virtual conference I hope to see some or some of you there.
Thanks for participating today have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your patience.
Everyone have a great day.
Okay.
The conference will begin shortly two reasons lower Johan during Q&A, you can dial star one one.
[music].
Okay.
[music].
Okay.