Q3 2024 Universal Electronics Inc Earnings Call
Speaker Change: Good day and thank you for standing by. Welcome to the Universal Electronics Third Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session.
Speaker Change: To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised.
Speaker Change: To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Kirsten Chapman at Alliance Advisors Investor Relations. Please go ahead.
Kirsten Chapman: Thank you, Julie, and thank you all for joining us for the Universal Electronics 3rd Quarter 2024 Financial Results Conference Call. By now, you should have received a copy of the press release. If you have not, please contact Alliance Advisors at 415-433-3777.
Kirsten Chapman: or visit the Investor Relations section of the website. This call is being broadcast live over the Internet. A webcast replay of this call, including any additional updated material, non-public information that might be discussed during this call, will be available on the company's website at uei.com for one year.
Kirsten Chapman: During this call management may make forward-looking statements regarding future events and the future financial performance of the company and cautions you that these statements are just projections and actual results or events may differ materially from those projections.
Kirsten Chapman: These statements include the company's ability to continue capturing design wins in the connected home and home entertainment markets, particularly the climate control, HVAC, and home automation markets through the development and delivery of unique innovative solutions, including the company's Tide platform and excellent customer service as anticipated by management.
Kirsten Chapman: The continued growth of the company's business in the climate-controlled space by attracting OEM industry leaders to our products and technology offerings.
Kirsten Chapman: improved results as expected by management, the continued strategic expansion of the company's IP portfolio and monetization including licensing of the company's technology,
Kirsten Chapman: The company's ability to capture potential upside opportunities in traditional subscription broadcasting business due to its continued strong leading market share and the importance of the company's quick set differentiation and innovative remote control and one-for-all brand design wins.
Kirsten Chapman: and the direct and indirect impact the company may experience with respect to its financial
Kirsten Chapman: business results stemming from the continued economic uncertainty affecting consumers' confidence in spending, rising energy and freight costs, natural disasters, public health crises, governmental actions including a reduction in providing incentives to businesses worldwide.
Kirsten Chapman: the risk of doing business to Pardon the risk of doing business or operating in certain parts of the world or political unrest including war terrorist activities or other hostilities
Kirsten Chapman: The company undertakes no obligation to revise or update these statements to reflect events or circumstances that may arise from
Kirsten Chapman: After today's date, it refers you to the press release mentioned at the onset of this call and the documents the company has filed with the SEC, including its 2023 annual report on Form 10-K and the periodic reports filed or furnished since then.
In management's financial remarks, adjusted non-GAAP metrics will be referenced.
Kirsten Chapman: Management provides adjusted non-GAAP metrics because it uses them for budgeted 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 UEI's core operating and financial performance and business trends consistent with how management evaluates such performance and trends.
Kirsten Chapman: In addition, management believes these measures facilitate comparisons with 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 are included in today's press release.
Kirsten Chapman: excess manufacturing overhead costs resulting from the continued transition of its global manufacturing footprint
specifically in Mexico and Vietnam.
and depreciation related to the markup from the cost.
Kirsten Chapman: to fair value of fixed assets acquired in business combinations from its adjusted non-GAAP figures. This impact
Kirsten Chapman: Adjusted Non-Gap, Gross Profit, Gross Margin, Operating, Income or Loss, Income or Loss
Kirsten Chapman: before provision benefit or benefit from income taxes and net income or loss in the quarterly results for 2023 and 2024. There is no impact to gap results. A reconciliation of these measures is posted on the website in the quarterly results section.
Kirsten Chapman: On the call today are Chairman and Chief Executive Officer Paul Arling, who will deliver an overview, and Chief Financial Officer Brian Hackworth, who will summarize the financials. Paul will then return to provide closing remarks. It's now my pleasure to introduce Paul Arling. Please go ahead, sir.
Paul Arling: Thank you for joining us today. As projected, our customer product development and footprint optimization initiatives are beginning to deliver growth and profitability.
Q3 2024 net sales were $102 million, solidly within guidance.
Gross profit increased 380 basis points year-over-year.
Paul Arling: And our bottom line continued to improve with Q3 EPS reaching 10 cents.
Paul Arling: We expect these positive trends to continue with top and bottom line growth over the prior year period for Q4 of 2024.
Paul Arling: Our outlook also includes continuing this successful trend of sales and earnings growth into the full year 2025 and beyond.
Paul Arling: I'll review some of the elements driving our optimism and supporting our outlook.
Paul Arling: In the Connected Home, we continue to foster relationships in climate control with many of the top OEM brands in North America, Europe, and Asia.
Paul Arling: The HVAC industry has not been as robust as prior years due to temporal challenges, such as lower housing starts and tempered government incentives.
Paul Arling: but it clearly has the potential for latent demand to build over the next few years.
Paul Arling: As the markets return, we expect to expand new product opportunities with our existing accounts.
Paul Arling: In the meantime, we are continually making progress to build our market share.
Paul Arling: working to qualify new product opportunities and build on our existing sales pipeline for 2026, 2027, and 2028 which accelerate future growth.
Paul Arling: In Q3, we continued to garner share. With Carrier, we began shipping our first advanced smart thermostat. We have been working collaboratively with Carrier to ensure our first product together delivers the full capabilities that their consumers demand.
Paul Arling: While we are excited about this new product launch, we are equally enthusiastic that Carrier has expressed strong desire to expand our business, and we are already actively engaged in discussions about several new climate control products that they would like to add to their lineup.
Paul Arling: With Daikin, we continue to align our respective development roadmaps to support their product priorities and timeline.
Paul Arling: In 2024, we had a number of new and replacement products, which were previously on hold, released for development kickoff.
Paul Arling: including their next-generation Wi-Fi adapters that deliver predictive maintenance capabilities for their authorized dealers as well as several major new models with expanded features and functionalities.
Paul Arling: Many of these products will be released during 2025 and into 2026.
Paul Arling: Our tied platform continues to garner design wins. We are currently in the final stages of development for two of the top ten global HVAC OEMs.
These products are scheduled to launch early next year.
Paul Arling: Also, in combination with our Tide Bridge, our Tide Dial smart thermostat is undergoing final user testing with a major European utility company.
We expect this solution to be launched in 2025.
Paul Arling: Additionally, we have secured design wins for a smart hub, Gateway.
Paul Arling: with Hunter Douglas and two new wireless RF controllers with Somphe, a major motorized shade controller brand.
Paul Arling: We also recently introduced a Zigbee Spark Thermostat for a major North American security brand and have signed a national distribution agreement for our line of professional security sensors.
Paul Arling: Turning to the markets in general, there are many growth drivers increasing future opportunities.
Paul Arling: The global HVAC market is being driven by rising energy costs with increasing demand for energy efficient solutions fueled by new government incentives.
Paul Arling: In the U.S., the expanding multi-dwelling unit market and the increasing consumer awareness of the significant energy efficiency and convenience benefits of smart thermostats are creating prospects.
Paul Arling: Also, government incentives, energy savings, technological advancements, and financing options are helping to make heat pumps more affordable and attractive to a growing number of homeowners.
Paul Arling: This market change in equipment and an associated change in control technology has fueled our business for decades.
Paul Arling: and we are positioned to benefit from this opportunity going forward.
Paul Arling: In home entertainment, we know OEMs can be cautious as TV buying trends have fluctuated.
Paul Arling: Yet, we are increasing our attraction with companies striving to differentiate their offerings.
This includes customers with whom we have long-standing relationships.
Paul Arling: as well as New Market Entrance, looking to disrupt traditional business models around television advertising.
Paul Arling: In Q3, we grew share with multiple telecom providers in the video space across North America and in Europe. Our quick set software continues.
Paul Arling: to offer differentiation that enables us to secure product design wins for our entertainment remote controls with new customers worldwide.
Paul Arling: In Q3, we secured a major design win for our battery-free remote control that uses UEI's photovoltaic energy harvesting solution.
Paul Arling: Essentially, the device captures energy from ambient light and stores it in the built-in supercapacitor such that the remote can operate without the use of traditional replaceable batteries.
Paul Arling: This product will launch bundled with a video display platform in 2025 that will bring a unique video infotainment and advertising experience to U.S. households.
Paul Arling: I think you'll be quite impressed with this solution when it is introduced early next year.
In September, we exhibited at two major conferences.
at the International Broadcasting Conference, or IBC, in Amsterdam.
Paul Arling: We demonstrated many of our latest hardware and software product solutions.
Paul Arling: presented proof-of-concept solutions that showcased our Kwikset device and service app discovery solution running on broadband gateways.
Paul Arling: Our solution was well-received by multiple operators in North America and Europe, and we look forward to a positive outcome for potential new design wins.
Paul Arling: At the IFA Consumer Technology Trade Event in Berlin, we launched our latest one-for-all category, desktop and gaming TV mounts.
Paul Arling: Our new product line was well received and the OFA team was able to secure orders from many of our retail partners for this new category. Overall, our retail business is showing positive growth momentum after several years of flat sales growth.
Paul Arling: Looking ahead, we will be exhibiting once again at the International Consumer Electronics Show, or CES, in January 2025 in Las Vegas, as well as the AHR, or Air Conditioning, Heating, and Refrigerating Show, in Orlando.
Paul Arling: We will showcase new capabilities of our tied thermostats, including an improved and private whole home occupation detection.
Paul Arling: on-device occupancy based automations, new energy utilization insights, and use cases around matter integrations.
Paul Arling: We will also showcase our next generation of Kwikset and Nevo AI with new personalization and engagement capabilities across entertainment and connected home applications.
Paul Arling: We will also provide key customers a sneak peek at our next generation smart thermostat platform.
Paul Arling: Built from the ground up on a new architecture optimized for an interconnected home. One that offers a comprehensive suite of smart managed services and features.
Paul Arling: and the ability to support scaling across multiple distribution channels and customer applications.
Paul Arling: We're excited about what these innovations will bring to our customers' products and look forward to seeing you there.
Now to the financials. Brian, please go ahead.
Brian Hackworth: Thank you, Paul. I'll review the results for the third quarter of 2024 compared to the third quarter of 2023.
Brian Hackworth: As noted last quarter, our adjusted non-GAAP financial statements no longer exclude excess manufacturing overhead costs resulting from our factory footprint transition.
Brian Hackworth: and depreciation related to the markup from cost to fair value of fixed assets acquired in business combinations.
Brian Hackworth: These changes are reflected in the year-to-date 2024 financials as well as the corresponding prior periods.
These adjustments have no effect on our GAAP financials.
Brian Hackworth: For the third quarter ending September 30, 2024, costs associated with the aforementioned items amounted to $1.1 million.
Brian Hackworth: Equivalent to 110 basis points of gross margin, or $0.07 per share. For the third quarter of 2023, costs for these items were $2.2 million, equivalent to 210 basis points of gross margin, or $0.13 per share.
Brian Hackworth: Please keep these figures in mind when reviewing our quarterly results.
Brian Hackworth: For the third quarter of 2024, net sales were $102.1 million within guidance, compared to $107.1 million in the third quarter of 2023.
Brian Hackworth: Although we are still facing headwinds from cord cutting and less consumer spending on discretionary durable goods, the negative effect on year-over-year comparisons has been waning.
Brian Hackworth: As a matter of fact, we expect sales in the fourth quarter to grow year over year, but more on this later.
Brian Hackworth: Gross profit for the third quarter of 2024 was $30.8 million, or 30.1% of sales, compared to 26.3% in the third quarter of 2023.
Brian Hackworth: This significant improvement reflects the successful execution of our manufacturing footprint optimization plan over the past two years.
Brian Hackworth: The final phase of our plan is near completion and involves our Monterey, Mexico factory, where we are transitioning to a smaller, more efficient facility.
Brian Hackworth: SG&A expenses increased to $21.1 million from $20.1 million in the prior year quarter. R&D expenses decreased to $7.1 million for the third quarter of 2024 compared to $7.4 million in the prior year quarter.
Brian Hackworth: Operating income was $2.6 million compared to $645,000 in the third quarter of 2023.
Brian Hackworth: Net income for the third quarter of 2024 was $1.4 million, or $0.10 per diluted share, compared to a net loss of $658,000, or $0.05 per share, in the third quarter of 2023.
Next, I'll review our cash flow and balance sheet.
Brian Hackworth: At September 30, 2024, cash and cash equivalents were $26.3 million, compared to $42.8 million at December 31, 2023.
Brian Hackworth: The nine months ending September 30th, 2024, net cash provided by operating activities was $8.3 million, which includes approximately $4 million remaining on a security deposit relating to a contract dispute with a former labor agency in China.
Brian Hackworth: Year-to-date, we reduced our outstanding line of credit by over $15 million, resulting in a net debt position at September 30, 2024 of only $13.6 million.
Now turning to our guidance.
Brian Hackworth: In addition to our improved cost structure, we are starting to see positive signs in terms of top-line growth.
Brian Hackworth: Several projects won over the past couple of years, specifically in the Connected Home Channel, are beginning to ship.
Brian Hackworth: While the home entertainment channel still faces headwinds, we are starting to see ordering patterns stabilize.
Brian Hackworth: From a gross margin perspective, it's important to note our forecast and ultimately our earnings per share guidance include elevated freight rates related to measures taken to avoid cargo risk in the Red Sea.
Brian Hackworth: Utilizing alternative routes has resulted in increased freight costs and lead times.
Brian Hackworth: With that, for the fourth quarter of 2024, we expect sales to range from $99 to $109 million.
compared to 97.6 million in the fourth quarter of 2023.
Brian Hackworth: This projected sales growth marks the first quarterly year-over-year growth since 2021.
Paul Arling: I would now like to turn the call back to Paul.
Thanks, Brian.
Paul Arling: We're in the best position we have been in for a couple of years. Our persistence, quality, service, and innovation continue to foster strong relationships.
Paul Arling: The work we did 12 to 24 months ago is beginning to yield new product revenue, and we tirelessly continue to focus on developing technology-driven features to attract new customers, as we have consistently done for decades.
Our recent efforts in footprint optimization are certainly helping.
Paul Arling: But the most important thing we have always done, and will continue to do, is create great products with innovative features that improve the user's experience and enhance our customers' business.
Paul Arling: As we have done in the past, this is paving a path for future sales growth and improved profitability.
We believe we are reaching a turning point.
Speaker Change: As I said when I opened the call and Brian provided in our guidance, we expect Q4 2024 to be stronger than Q4 of 2023. And we expect this growth trend to continue into 2025 and beyond.
As always, stay tuned.
Operator, we can now open up the call for
questions.
Speaker Change: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced.
Speaker Change: To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster.
Speaker Change: Our first question comes from the line of Stephen Frankel of Rosenblatt Securities. Your line is now open.
Speaker Change: Paul, congratulations on the return to growth. I'm just trying to get a feel for.
Speaker Change: How much of this is driven by, let's call it an unlocking of frozen designs, and you talked a little bit about that.
Speaker Change: versus a combination of a bottoming pay TV business and some new momentum and end demand that's driving.
higher volumes.
Speaker Change: Yeah, good question and it's a combination therein. There are many projects that we're working on which is we're thankful for that customers have placed their trust in us.
Speaker Change: Some of them were delayed by them for a variety of reasons, resources or other things on their end.
Speaker Change: but they've reengaged on those projects so that obviously helps because in a month's time, some number of months time, we can complete the project and get it launched and have it in the revenue stage.
Speaker Change: We also, of course, have one project, some of which we've won almost two years ago that...
Speaker Change: not because of our development path, but our joint development path with customer and testing has taken a year and a half in some cases, maybe even a little longer, but they eventually again make it to the revenue stage.
Speaker Change: and we are seeing in home entertainment a tapering. While we still won't say that there are parts of it that won't continue to wane, the level of wane I guess you could say is lessening.
so
Speaker Change: And of course it would because the number was once so large that the shrinkage.
is beginning to taper.
Speaker Change: And our growth efforts can then pay off because the projects that we're putting out can overwhelm any continued flat or shrinking volumes that we have from specific customers.
businesses and this new smart device world.
Speaker Change: Yeah, we don't break that out, but I will say that the growth that we're starting to experience is primarily in the Connected Home Channel.
So, going from...
Speaker Change: year over year, it's primarily all connected home. And as Paul talked about,
Speaker Change: the home entertainment business, it's still, we still are experiencing some decline, it's starting to wane, but there is decline. So the growth really from a Connected Homes perspective is even, is even greater because you're offsetting, not only you're offsetting the decline in the home entertainment channel, but you're, we're still growing.
Speaker Change: You know, I think it's probably important to state here, Steve, that home entertainment is clearly still a very sizable market And it's it's still there and there are a lot of players there. They're looking at interesting new models
Speaker Change: Because the industry has changed pretty significantly, and we're involved with them. I did mention one on the call, unfortunately I can't give names yet, and a lot of detail. We'll be able to do that early next year, but there are companies of both existing customers
Speaker Change: and some new ones that are looking at new versions of their products that take advantage of streaming more but are interesting concepts.
Speaker Change: that will be very attractive to consumers, one of which we're working on and should be out within the next six to eight months.
Speaker Change: I believe, and it is a really interesting concept. I think people will be impressed with what the company has done, and it's along the lines of what has been happening in television for some time now.
with streaming and ARPU-driven advertising, ARPU-driven products.
Speaker Change: So that's about all I can say about it. But home entertainment is still a pretty thriving market. People are watching as much TV as they ever have. And I think we're working on transition products there as well.
that could bring.
Speaker Change: some offset to the shrink in any cork cutting as it's been known.
for a long time now.
such that home entertainment is still a very active market.
And on close margins, obviously, very impressive progress.
From here.
Speaker Change: Should we expect any material improvement to require a step up in volume or are there other things that might help?
Speaker Change: grow gross margins like mix even if we don't see sales kind of lift materially off Q4 levels.
Speaker Change: Now, Q4, I expect it to be a little less than that, because we are at 30.1, I'm sorry, for Q3. Now, Q4, as I mentioned, with the increased rates, freight rates, related to the Red Sea issues.
Speaker Change: It's going to, it is causing an adverse effect temporarily, but overall I'm really happy where we're at.
Speaker Change: For the Gecko, I felt like when we completed the transition over the last two years, we were going to be in that 30-point range.
Speaker Change: And that's where we're at, and I think it's sustainable. Again, we have some temporary issues with the Red Sea, but...
Speaker Change: I think the 30 points is sustainable and we're always striving to improve. So I would never say we can't continue to improve, I think we can from a mixed perspective.
Speaker Change: We sell, we have royalties as part of our revenue stream, and that becomes a higher mix than it could put, you know, northbound pressure on, on the
Speaker Change: on the margins and then we're always looking to rebalance between jurisdictions to maximize efficiencies from a manufacturing footprint perspective.
Speaker Change: So we're always looking to improve, but right now we're at where we expected to be in that 30 point range.
Speaker Change: Again, I'd never say we can't improve, we're always striving to.
Okay, and the last question, customer concentration in the quarter.
Speaker Change: Customer concentration, Daikin and Sony. Daikin was at 12.4% and Sony was at 10.6%.
Great, thank you.
Thank you.
Speaker Change: Our next question comes from the line of Greg Burns of Sidoti. Your line is now open.
Afternoon.
Speaker Change: At what point do you expect to not be recording any of these excess manufacturing costs and what is...
Speaker Change: Contemplated in the the guidance for the fourth quarter. Is it a similar like one one million dollar number? We no longer
Speaker Change: I only stated in my remarks to let you know what they were, but they're not included in the financials. We stopped that last quarter.
Speaker Change: And we made it so that they're not in our financial statements. All the numbers we read do not include, like included in the EPS number, do not include anything related to excess manufacturing. I only stated what they were just so you could compare.
Speaker Change: Right. Well, I guess I meant to ask then, at what point do they go away? So when are we going to converge between kind of the adjusted and the gap number? Basically, we're near completion. From a physical standpoint, we moved into the smaller facility in Monterey, Mexico. I would say at the end of this year, we're done.
Speaker Change: So we're in the final, the very final days of this two year long project.
Speaker Change: Okay and then in the fourth quarter is it going to be like a million dollar number or something similar to this third quarter? Well there'll be some there'll be some charges coming through I don't have the exact number yet because we're still working through that.
but there'll be some some charges coming through.
Thank you.
Speaker Change: Okay and when we look at kind of the outlook for growth next year when you're looking at the pipeline of some of these new projects that are
Um,
Speaker Change: getting to the revenue recognition stage or the production stage. Is it going to be kind of ratable? Is it more back-end loaded? Do you have visibility on kind of the timing of when when some of this stuff is going to be?
Speaker Change: coming to market, maybe in terms of the cadence throughout the 25?
Speaker Change: We do. We're always careful though to provide, not provide it and forward guidance, Greg, because we
Speaker Change: As many of them get introduced they will introduce revenue in the period their first shift and then they typically order every quarter.
Speaker Change: So every new project that comes on provides another layer of revenue.
Speaker Change: So as time goes on these new projects usually layer on top of one another.
Speaker Change: In our.
Speaker Change: The historic growth in home Entertainment, that's exactly what happened as we want to each project and each customer with multiple projects the layers just kept building.
Speaker Change: And then we would win what we call replacement products or derivatives.
Speaker Change: You win those and the revenue just continues right. So yes layer after layer you build it and Thats where were at now Q4 is partially the result of the.
Speaker Change: The projects that sometimes they're small projects, sometimes theyre slightly larger but every quarter. The customer then once they start ordering they continue to order on those projects and as long as you don't lose them, which we typically do not.
Speaker Change: They layer on top of each other so we think that we're in a place now where these projects can start to pay off.
Speaker Change: And like I said, we're not done in home entertainment Theres, some interesting things happening there.
<unk> areas.
Speaker Change: To offset some of the shrinkage as we've had.
Speaker Change: And we think we're at a point now where.
Speaker Change: Q4.
Speaker Change: Last year's Q4 will be up our guidance.
Speaker Change: Even the lowest end of our guidance range as a growth.
Speaker Change: The midpoint is a decent growth in the high end of our range is a pretty good growth rate for.
Speaker Change: Year over year quarter.
Speaker Change: And earnings obviously are up.
Speaker Change: Last year, we lost money in Q4 this year, we are targeting.
Speaker Change: A.
Speaker Change: Profit so.
Speaker Change: Okay, Alright, great. Thank you.
Speaker Change: Yeah.
Speaker Change: I am showing no further questions at this time I would now like to turn it back to Paul Arlene CEO for closing remarks, okay. Thank you for joining US today. Thanks for your continued interest and support of Universal electronics.
Paul Arling: As we said in the prepared remarks, we will be at CES I hope at least some of you will be able to comp if you do.
Paul Arling: Reserve time early with us because we'll be pretty busy at the show major customers from all of our <unk>.
Paul Arling: Different business lines will be there but.
Paul Arling: But look forward to seeing you there I hope and you can see some of the new stuff that we're.
Paul Arling: We're going to be introducing.