Q2 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to the Universal Electronics second quarter 2019 earnings Conference call.
At this time all participants on a listen only mode. Later, we will conduct a question and session and instructions will be given at that time, if anyone should require assistance. During the call. Please press Star then zero on your Touchtone telephone as a minus conference call is being recorded I'm going to introduce your host for today's call him is Kirsten Chapman from L.A.H.A. Ma'am you may begin.
Thank you Brenda and thank you all for joining us for the Universal Electronics second quarter 2019 financial results Conference call.
By now you should have received a copy of our press release, if youve not please contact LBJ investor relations at 4154333777 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 company's website, where it will be retained for at least one year. You may also access that information by listening to the webcast replay.
After reading a short safe Harbor statement I will turn the call over to management.
During the course of this conference call management may make projections or other forward looking statements regarding future events and the future financial performance of the company, including the company's ability to anticipate the needs and wants of its customers, new and existing and timely.
Develop and deliver products and technologies that will be accepted by our customers and enable the company to enter new markets.
This includes the adoption of the Companys advanced control products, such as the recently announced Nivo Butler Nivo.
Hi, digital assistant.
Voice remote control and intuitive to way home entertainment technologies as anticipated and expected by management.
The continued incorporation of our quickset technologies, including the quickset cloud into the customer's products as expected by management.
The continued acceptance and growth the company's connected home products and technologies, including security and control temperature controllers and automation and other sensing technologies.
The timing of new product rollout orders from the company's customers as anticipated by management.
The continued trend of the industrys toward providing consumers with more advanced technologies, the ability to successfully identify and enter existing and new adjacent markets for our products and technologies.
The ability to attract and obtaining new customers for our products and technologies.
Management's ability to manage its business to achieve its net sales margins and earnings as guided including management's ability to improve operating costs and efficiencies.
Acceptable levels through cost management efforts, including moving our administrative operations in manufacturing facilities to lower cost jurisdictions.
And the timely completion of the transition of a certain portion of the company's manufacturing operations to its Mexico facility.
The effects that changes in laws regulations and policies may have on our business, including the impact of trade regulations pertaining to the importation of our products and tariffs imposed on them.
And other factors as described in the Companys filings with the United States Securities and Exchange Commission.
Management wishes to caution you that these statements are just projections and actual results or events may differ materially from those projections. The company undertakes no obligation to revise or update these statements to reflect events or circumstances that says that may arise after today's date.
For future detail on risk management refers you to the press release mentioned at the onset of this call and the documents the company files from time to time with the SEC, including the annual report on Form 10-K for the year ended December 31, 2018, and periodic reports filed thereafter.
These documents contain and identify various factors, which along with the risks identify on this call could.
Cause actual results to differ materially from those contained in managements projections or forward looking statements.
In managements financial remarks, adjusted non-GAAP metrics will be referenced management provides adjusted non-GAAP metrics because it uses them from four 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.
Hi, guys core operating and financial performance and business trends consistent with how management evaluates such performance business trends.
In addition management believes these measures facilitate comparisons with the core operating and financial results and business trends of competitors in other companies.
A full description and reconciliation of these adjusted non-GAAP measures versus GAAP is included in the company's press release issued today.
Finally, please note that we are no longer including the effects of constant currency and.
ASCII 66 revenue recognition in our non-GAAP financial statements as a result, the prior year 2018, non-GAAP figures as previously reported have been adjusted to reflect these changes.
On the call today are chairman and Chief Executive Officer, Paul Arling, who will deliver an overview and vision for the company and Chief Financial Officer, Bryan Hackworth, who will summarize the financials. Paul will then rich or return to provide closing remarks is now my pleasure to introduce Paul Arling. Please go ahead Sir.
Good afternoon, and thanks for joining us today.
During the second quarter, we delivered record net sales of 193.4 million.
With growth in all of our markets and exceeded our bottom line expectations with EPS of 83 cents.
We are poised to deliver the strongest year in our history.
This reflects the efficacy of our long term strategy for over 30 years, we have been focused on being the technology leader in wireless control by investing in innovation and building valuable customer relationships by committing to excellent service.
As we know the one constant is change and technologies can continually shifts as in our core business with the evolution from DVD. The streaming standard definition to high definition and now to for Kate.
And local networks to cloud enabled smart homes.
Yeah, we I has been consistently at the forefront of using technology to control the connected home.
First in home Entertainment and now in home automation.
Our connected home technologies have often been ahead of their time and help meet shifts in the market.
Most recently, when we introduce voice enabled capabilities and auto configurations.
Consumers Love These advanced features.
Today, our customers are embracing new solutions and integrating them into their platforms more than ever before.
We are excited to note the industry continues to shift along this continue.
Clearly, we would have preferred a faster adoption.
However, the seismic transformation from one way infrared remotes to sophisticated two way voice enabled cloud connected systems with automated setup have led numerous players to completely redesigned their home entertainment and home control platforms.
I'm pleased to say our efforts over the past many years are gaining momentum in the marketplace.
First we have long been established as first to market provider, we have accumulated significant experience across the numerous platforms in which we have been involved.
This gives us an unmatched competitive advantage in the industry.
Some say urea is now the go to company to develop the control interface for these advanced products.
These attributes and our commitment to delivering full featured quality products on time.
Gives our customers confidence in selecting us to be their technology partner.
As such we are building stronger relationships with long term customers as well as winning new ones.
Second the technologies, we have developed over the years, including Quickset adaptive control in our proprietary dual RF and IR microcontroller.
I continue to be integrated on more and more advanced voice platforms.
This yields development and cost efficiencies and delivers higher value products to our customer driving higher asps and sales growth.
This is noteworthy as the current device evolution is relatively nascent.
Yielding significant opportunity as world leaders in the home entertainment industry adopt these sophisticated systems.
Today, our technology portfolio powers products capable of supporting all the advanced entertainment software platforms on the market.
Including open source platforms from Android and R&D Kay.
As well as Tivo and other proprietary platforms.
Over the coming years. These emerging platforms will begin to penetrate the market as home entertainment companies around the world, both small and large leverage available standards to launch their advanced entertainment and voice services.
In September we will exhibit at a couple of important trade shows in Amsterdam, We will participate for our 22nd year at the International Broadcasting conference or IVC, where we will showcase our latest entertainment control in I O T products, including our latest Android TV remotes, and our Nivo Butler platform, which continues to garner strong market interest at IVC, we plan to introduce our new premium Android TV remote control Codenamed, Fuji, which comes with rechargeable batteries adaptive control quickset and voice control.
A few weeks after IVC at cable Tec Expo in New Orleans.
We will be exhibiting more advanced control solutions with the launch of the Tivo Creek advanced voice remote designed for Tivo is Android TV certain software platform.
Supporting advanced features such as voice remote finder, and our industry, leading quickset technology.
Regarding Nivo Butler, we are pleased with the progress of this development effort. The platform is now in the initial stages of beta testing and we expect to begin to share product with customers for early development testing and technology integration later this year.
And our home control business, we continue see an evolution in product deployments enabled with our smart technologies, but again transformation is never overnight.
Key home control customers across the world continue to see success in their deployments, particularly in safety and security and a track.
These markets are exhibiting strong growth and we continue to see great near term and long term potential as consumers continue to adopt these advanced home control systems.
I'll now turn the call over to our CFO Bryan Hackworth for review of the financials. Thank you Paul as a reminder, our results for the 2019 in second quarter as well as the same period until than 18 will reference adjusted non-GAAP metrics.
Second quarter net sales grew 19% to a record $193.4 million from $162.4 million in the second quarter of 2018.
The growth in our top line reflects increases in multiple channels, notably insufficient broadcasting consumer electronics and home security.
Our advanced technologies simplify and enhance the user experience continues to be adopted employed by customers in these channels.
Gross profit was 48.8 million or 25.2% compared to 22.1% in the second quarter of 2018.
During the second quarter 2019 as planned we transition additional products destined for the us market from our China factories to our manufacturing facility in Mexico.
The increase in the number of skews produced in Mexico increased significantly from Q1, resulting in a greater amount of inefficiencies compared to the first quarter.
We experienced a similar effect in Asia, when we sold our southern China factory.
Resulting in our two remaining batteries in China absorbing the production units.
Subsequent to the initial disruption these two factories continue to improve and within a relatively short period of time.
Reached expected production levels, we anticipate the same over a factory in Mexico.
Operating expenses were $33 million compared to $31.2 million in the second quarter of 2018, reflecting an increase in R&D as we continue to invest in innovation.
Enabling us to provide our customers with top notch solutions separate ourselves from the competition as the clear leader in wireless control.
R&D expense was $6.9 million, an increase of 18%.
Compare to $5.8 million in the second quarter 2018.
As you know it was $26.1 million or 13.5% of revenue.
Compare to $25.4 million or 15.6% of revenue.
Operating income was $15.8 million up from 4.6 million in the prior year.
Our effective tax rate was 21.2% compared to 23.4% for the prior year quarter.
Net income was $11.7 million or 83 cents per diluted share compared to $2.6 million or 18 cents per diluted share in the prior year period.
Next I'll review, our cash flow and balance sheet at June 32019.
Cash and cash equivalents were $49.6 million.
Compare to 44.9 million at March 30, Onest 2019.
Net cash provided by operating activities was $24.8 million, enabling our outstanding debt balance to be reduced to $95 million at June Thirtyth two other 19.
A decrease of 11.5 million for last quarter.
Our cash conversion cycle approximated 108 days of the second quarter 2019, compared to 114 days in the second quarter of 2018.
Now turning to our guidance for the third quarter 2019, we expect sales to range between a 188 and $198 million.
Compared to a 182.7 million in the third quarter of 2018.
EPS is expected to range from 85 cents to 95 cents.
Compared to 80 cents in the third quarter of 2018.
While we only provide detailed guidance for the next quarter, we would like to make a few general comments on our outlook for the remainder of 2019.
We expect sales in the back half of the year to follow typical seasonality with sales in Q3 greater than Q4.
Our gross margin goal for the year is in the 26% range plus or minus a point.
Our expense efficiencies should continue however, as we have said before we will continue to invest in technology and product development to continue our longstanding leadership and bringing differentiated solutions to the market.
As well as investing in the people that help us succeed.
Our actions to reduce overhead costs, maybe offset by these important investments as well as the variable costs associated with sales growth.
We'll take extra tax rates may vary quarter to quarter, we expect the effective tax rate for the year to be in the low 20% range.
I would now turn the call back to Paul.
Thank you Brian our success in home Entertainment is the result of years and years of hard work developing innovative technologies and building relationships.
Our sophisticated two way voice enabled cloud connected systems with automated configuration lead the industry.
They have been very well received since their introduction and we are very excited that our customers both existing and new have begun to embrace these systems as the future of home entertainment.
This growth is complemented by steady success in our home automation business.
This transformation within the home is really just beginning.
Building home entertainment systems that automatically configure devices, allowing consumers to watch whatever they want whenever they want through any service or device they want.
Through only a short verbal command or an intuitive touch is no small task.
Building systems that protect your home and family as well as control your home's environment and functions in ways that were only imagine a few short years ago is no small task either.
We are well on our way to achieving this.
As such we continue to invest in our innovation and our future.
We are excited that we are positioned to deliver the best year in our over 30 year history.
Overall, we believe our continued focus on growth through technology innovation and best in class product quality and delivery should result in continued growth.
And increased profitability and shareholder value.
Stay tuned.
Operator, we now like to open up the call for questions.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press star one on your Touchtone telephone question has been answered your question moves us from the queue. Please press the pound key one moment please.
Our first question comes from Jeff.
Van Sinderen from.
B. Riley your line is open.
Hi, Good afternoon, let me first say congratulations on the strong performance in Q2.
Thank you.
So upgrade programs that started in Q2 that you can I know you can't name them, but maybe you touched on kind of some of the dynamics around those.
Programs that will start in Q3, we expect to contribute to revenues or is it ongoing demand from program had been underway.
Well, it's a little of both we did have a programs that began.
One one I can think of that we can't name all of these players, but one in Q4, we had another one in Q1.
Some of the growth in Q2.
What's contributed to buy just those.
Programs growing.
In deployment.
We also have some new programs that we're coming along as well. So it's a it's a layering effect we did have.
A few of these programs, but some of them Didnt launch in Q2, they launched one of which I could think of was in Q4, but it's grown.
Since Q4, so it's layering impact.
Do we see more of these.
Yes, there's probably some more that are coming.
Both the remainder of this year and into next because there's.
There is almost a constant redesign of these programs and obviously, there's a lot of players who haven't introduced our next generation quite yet.
But are working on it. So we think this is something that will occur over the course of the next many years.
Okay, Great and then.
Regarding the Mexico production gains.
More about where you are in terms of the Brian's inefficiencies versus where you are right.
Right.
I guess, just trying to get a sense of how.
Optimization.
Yes.
Hi, Jeff It's Brian .
As far as Mexico is concerned we from a unit perspective, we've transferred and by far the majority the units that were going to transfer by the end of Q2. We started in Q4, we move more units in Q1, and then in Q2, we layered on probably another 50% approximately so.
The pace that were transition in Mexico is accelerated versus what we did in China. Initially so it's we've put together an aggressive schedule, but but we need to so from an efficiency standpoint, we're not where we need to be and it's something where.
We know that and we're working to to improve the same effect happened actually in China. When we sold the southern factory, we moved the production to the remaining two factories.
Yes, there was a point in time you start moving more units and then you hit a point, where you struggle a bit and then you you get better and we're kind of in that point right now with Mexico, where I expect Q3.
Significant improvement over Q2, and Q4 as well.
Okay, but yet you're still I mean can you put up a pretty substantial increase in gross margin from about would be.
Contributing from Mexico.
But it sounds like there's more games to comment a little later, but it.
Yeah, I would I don't guide to gross margin, but I do expect gross margin to improve Q3 versus Q2.
Okay.
And then.
Okay Vince.
If I could throw in one Ron could you update us on the progress around your brother I know you mentioned this in your prepared comments would be data.
I guess, just wondering kind of what the next milestones are well.
Yeah, David Bartlett sounds right.
Good reception.
Maybe how the msos are evolving their thinking around and.
Yes, where we're at now is is in the beta.
Early.
I wouldn't build the only thing I'd correct I wouldn't.
Just say MSR goes so while there is interest on the.
Subscription broadcasting.
Side, I would say more broadly in home entertainment.
And even home control, we have a number of parties who are interested in in this level of integration of both an IP connected system.
To bring control across your home either through voice or through touch.
As well as mobile for some systems not necessary for home entertainment, but for other other applications. So we have a lot of interest in the platform.
The next step will be for us too.
Work with customers by delivering some product for testing and then ultimately the integration because the customer will first want to prove out the system.
And then work on a software integration with other products that they may wish to to two obviously integrate with this product.
So it may take some time, we don't have this obviously is not embedded in our Q3.
Guidance.
And as we've said all along that this.
While it may affect.
This year's on probably not it's more of a 2020 and beyond.
System with some customers this could take.
Quarter's months or in some cases, maybe even a year.
Or more depending on how they wish to utilize this this product.
Okay, great. Thanks.
I was brought in.
Thanks for taking my questions.
Thank you.
Our next question comes from Greg Burns from Sidoti Your line is open.
Yes, Sir.
Can you just give us the 10%.
Customers in the quarter on what was Comcast and any others.
We had 110% customer it was Comcast and they are at 16.2%.
Okay.
Thanks.
And then.
In terms of the upgrade cycle in the cable broadband markets historically.
Or in the past Youve, maybe give us and given us some some numbers around.
Maybe then the number of.
Msos that have deployed or the number of subs that are covered on their platform.
Under.
The number of subs covered by your advanced platforms is there any.
Numbers, you could update us with on terms in terms of that front on on how far along the upgrade cycle is thank you.
Yes, I can't give you an exact number of how many subs are covered.
But that number probably has grown a little bit when we disclose that prior we had said that they were.
Between 150, and there was 150 million plus subscribers covered.
By the companies that were working with us on an advanced platform.
That that number probably has gone up a little bit obviously that that.
Is a huge number worldwide, obviously that number is greater than the entirety of the United States market.
So.
We're working on deployment with.
That set of customers.
And again, you're beginning to see the effect of it in our in our numbers.
These advanced platforms.
Bring a higher value add to the customer.
There are two way voice driven as I said in the prepared remarks and.
Just implementing the ones that we currently have.
Is a.
Major accomplishment for us.
That number's, probably gone up we haven't measured it recently, but it's it's gone up.
It's probably not over 200 million, though.
Okay, and you know like or can you share with us what what percent of that 150 is actually in deployment versus maybe still in the pipeline.
Well, Unfortunately, I cant that most of our customers don't.
If we know they won't let us disclose it unless they have.
I think Comcast has made public comments on that they are the furthest along.
And I think today, they're probably about 60.
Percent of their subs, but they started.
They were the first to to go through this and that was I think about four years ago now.
So we're at the early stages of this with with obviously a number of people who are starting it we started as maybe late last year or last year.
Or are starting this year.
There is a ways to go in their deployment.
They don't obviously, they don't get it out to a 100% there is no one would get about 200 Bucks presented subscribers in.
In three months.
It it will take years for them to look at that.
Okay.
And then and so Brian some of your commentary around maybe some of the investments need to make in the back half Msos is should we take that to mean, we should expect.
Opex to trend higher sequentially over the next.
Quarter, or two or how should we view that versus the run rate you've been at for the first half of the year. Thanks.
Yes, I don't when I made that comment I mean in general it depends on the projects because we were talking about from a long term perspective, where we may have were going through cost efficiencies here, we have one of them being moving from.
California to Arizona from.
Hong Kong to mainland China for a number of employees.
So that was a big cost savings initiatives for us at all I'm, saying is that there could be a time, where you have projects in place. If somebody comes up with this has had this could help fuel growth and in any given quarter.
We'll we'll make the decision potentially to make that investment so.
I don't line investing in R&D when it when it yields positive sales growth so or.
SP expansion. So that's what we mean by that comment.
Okay. Thank you.
Our next question comes from Steven Frankel from Dougherty. Your line is open.
Good afternoon, thanks for the opportunity.
You know Paul there's been a ton of focus domestically on the uptick in.
Churn among.
Vmoso customer base.
And you can kind of think of that doing one or two things that could cause those customers to pull back or it could cause those customers to accelerate their next Gen plan. So my first question is.
What do you think that uptick in churn goes to the customers you're already working with or have in the pipeline and secondly.
What's the.
What's the pipeline look like international customers versus domestic like are we looking.
Are we obviously earlier in the international launches and do you have multiple international launches still to come or in the early days.
Yes, we still have a number of them.
To come because the.
Essentially what's happened I'll answer the first part of your question first the churn.
Has always been.
A common term use for subscription broadcasters.
Since the beginning of of cable.
And.
And particularly over the last couple of decades.
The the churn increase is probably driven by when there are good viable alternatives from others.
It will potentially raise churn.
So I think what's happened is.
Companies in home Entertainment.
Our viewing that these platforms are not just interesting they're becoming.
The price of entry because the the if consumers have alternatives, obviously and they are great. They give you automated setup.
We will control all of the media you wish wish to watch whatever you want to watch through whatever service you wish to watch it and you can get it through the simple utterance of a command.
And then another system has a one way remote control, where you have to use a guide.
And peruse through 360 channels by hitting page down 35 times.
This could lead to greater churn because the systems. These new systems competitive systems are great. So I think.
In the prepared remarks, we said that they see this as the future of Horner on entertainment.
We're we're seeing this fairly widely both here.
Domestically, but also in most of the if not all of the high ARPU markets of the World Western Europe .
Major countries within Asia.
We're seeing this movement towards these.
Two way voice enabled systems that bring entertainment to people much easier than they've ever gotten it before and there's more of them come out.
It becomes the price of entry because your competitor.
The person who you may have lost those customers to in churn.
Have those systems and that might be partially why those customers are leaving you to go to the new one.
So I think.
This is generally what's happened to the companies that are introducing these realized that.
This is where they need to go it pleases the customer it makes them potentially more loyal to you.
Less likely that you're going to find a competitor's product that you truly like because you now truly like the one you have.
And I think they recognize that many are doing it.
We've been working on as you know we've been working on some of these for a while some of them took maybe a little bit longer than we expected, but nonetheless these companies are committed.
To this business and want to.
Maintain those customers so.
We see this happening over the course of the.
Next number of years.
Okay, and you mentioned, some new product activity at Ibcs give us just a little more detail on whats the incremental innovations that you're going to have customers focus on at IVC.
Yes, well, we're working on platforms for four or systems for all the different software platforms. We do see some emerging platforms that will probably be more popular among the medium sized to smaller sized operators.
As you know major operators typically will build their own.
Interface, but some of the medium size the smaller will rather use an open source or third party interface.
So weve built product that will run perfectly voice enabled two way IP connected platforms that will run on those and bring.
The more common now features voice.
We have another one called adaptive control, where its context sensitive based on what's on the screen the button functions can change.
So in one function that is up down left right in another function. It may be page up page down.
On the cables I'm, sorry, the buttons can actually relabeled themselves based on the.
What's on the screen at the time.
So we're bringing new features like that and of course, all powered by quickset and the other innovations that we brought about.
So the products you will see both at IVC and on the Avi control side at IVC and.
In here in the U.S will be based on those technologies.
Okay and on the.
Nice recovery in free cash flow.
To what extent is that kind of systematic now that you've moved production in Mexico is this.
Improved free cash flow.
Something we should expect for the next few quarters versus maybe any onetime factors that that happened in Q2 that that led us there.
For the rest of the year, Steve I expect to have positive cash flow from operations and I wouldn't bank on $24 million at each of the quarters and Q2 accounts payable went up a decent amount so but I do expect the back half of 2019 to have positive cash flow.
I think we're on the right track.
Okay and then just.
Big picture that shifted viewing volume to Mexico.
What does that save you in dollars of inventory year.
By not having to have it on the water via we'll turn it faster.
And I think we should be able to get our churns and the.
Four to four and a half range when when all said and done the movie with the move to Mexico.
Okay and.
Other than.
Doing kind of what happened in China, which is just need more experience running on all these skews to get the gross margin up is there anything you need to do to the facility or anything else that needs to happen to get to.
As you get to normalized margins out of Mexico.
No I think it's similar to China, where we made the comment is his time time and experience. So.
I guess I said previously we went through this.
Similar situation in China, and we had there was some bumps in the road and.
And we improve the right now we are we are manufacturing very efficiently and in China. So I expect the same in Mexico is just going to take all the time, but we have the right equipment and we havent staffed.
We're putting the right people in place, but right now I think that the variable right now is going to be a time and I expect us to improve in Q3, and then Q4.
Great. Thank you.
Ladies and gentlemen, if you have a question at this time. Please press star one on your Touchtone telephone one moment. Please.
I'm showing no further questions at this time I will now turn call back over to Paul Arling for closing remarks.
Okay. Thank you for joining us today and your continued support of the Universal electronics.
In September we will present at the Doherty 2019, institutional Investor Conference in Minneapolis.
And in October we will be at the B. Rileys consumer and media conference in New York.
I hope to see some or all of you there.
Have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may disconnect and have a wonderful day rate.
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