Universal Electronics Inc.
Q4 2020 Earnings Call Transcript

Published: 18 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Fourth Quarter 2020 Universal Electronics Inc. Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. As a reminder, today’s program is being recorded. I would now like to introduce your host for today’s program, Kristen Chapman from LHA Investor Relations. Please go ahead.

[Kristen Chapman:]

Thank you, Jonathan. And thank you all for joining us for the Universal Electronics’ fourth quarter and year-end 2020 financial results conference call. By now you should have received a copy of the press release. If you have not, please contact LHA at 415-433-3777 or visit the Investor Relations section of the website.

[Paul Arling:]

Good afternoon and thanks for joining us today. We are excited to be speaking with you to review the most profitable year in our history, as well as to showcase one of the strongest opportunity landscapes we have ever enjoyed. As we all know, 2020 brought unprecedented challenges, immediately the UEI team took action to control what is controllable, prepare strategies to manage the unpredictable and as always invest for the continuing convergence of home entertainment and control devices. As discussed previously, our 2020 sales were impacted by elements outside of our control, including quarantines limiting truck rolls of new installations for home entertainment and security customers. However, this impact has been mitigated by careful execution of our long-term strategy to operate efficiently and free resources to invest in the future. As a company, we continue to focus on creating new innovation, ensuring product quality and building new customer relationships. Over the past several years, we have purposely implemented tactics to shift our mix toward more advanced higher margin solutions. Our work in these areas has expanded our gross and operating margins. In fact, our Q4 results beat the highs we achieved in Q3 and our full year margins reached nearly 31% for gross margin and 11% for operating margin. As a result, even with significantly lower sales, we delivered the most profitable year in our 35 plus year history. Even more exciting is where we are today and the opportunities it creates, our goal continues to be to develop the wireless control and sensing technologies of the future. In 2020, we saw a strong uptake of our advanced two-way voice-powered remote controls in our second largest market, EMEA. Over the past few years, we have been working closely with many of the biggest video service operators in Europe to help them launch their new video delivery platforms that combine linear and streaming services.

[Bryan Hackworth:]

Thank you, Paul. First, I will review the results for the fourth quarter of 2020 compared to the fourth quarter of 2019. Net sales met our expectations at $156.4 million. This compares to $174.8 million for the fourth quarter of 2019. As anticipated, sales continue to reflect the impact of COVID-19 on our subscription broadcast and security customers, specifically those without self-install capabilities. Partially offsetting this headwind was growth in high margin chip sales and royalties, as our technologies continue to gain traction in a few of the largest TV OEMs in the world. These technologies can be embedded in multiple devices, sold in various form factors and distributed through multiple channels. Our gross profit was $52.6 million or 33.6% of sales, compared to $51.2 million or 29.3% in the fourth quarter of 2019. This improvement is a direct result of our strategic investments in product innovation, which has generated a favorable sales mix with an increase in both chip sales and royalty revenue. Further, in the fourth quarter, we received a labor subsidy from the Chinese Government. These types of subsidies are common, but have typically been received evenly throughout the year versus concentrated in a given quarter. Operating expenses were $33.5 million, compared to $33.9 million in the fourth quarter of 2019. SG&A decreased to $25.3 million from $26.7 million in the prior year quarter, reflecting overall cost control and lower variable expenses. R&D expense increased to $8.2 million this year, compared to $7.2 million in the prior year quarter, an increase of 13% as we continue to utilize a portion of OpEx savings to fund the continued development of advanced technologies. Operating income was $19.1 million or 12.2% of sales, compared to $17.3 million or 9.9% of sales in the fourth quarter of 2019. Our effective tax rate was 15.5%, compared to 20.7% in the prior-year quarter. For the fourth quarter of 2020, we reported our highest quarterly bottomline in the company’s history. Net income was $16 million or $1.14 per diluted share, compared to $12.8 million or $0.90 per diluted share in the same period last year.

[Paul Arling:]

Thanks, Bryan. Looking at 2020, UEI like many of our partners and customers in our industry had to deal with a difficult and unprecedented environment. I am proud to say that our team once again managed to perform brilliantly. Their performance demonstrated their winning attitude, creativity and ongoing focus on great business operations. As a result, while continuing to invest in the future, we were still able to deliver our most profitable year ever. I am able to repeat one of my favorite phrases, during tough times strong companies get stronger. Without a doubt we have accomplished that. Looking at our market, we have positioned the company incredibly well. Consumers have more choices than ever before. They can get content from over-the-top video streaming apps, live TV streaming, on-demand libraries, and linear TV broadcast. And the video provider pool continues to grow, including cable, satellite, telecom and new streaming service players. Content and technology brands are spending billions of dollars to create hybrid platforms, making it more competitive than ever to capture eyeballs. The abundance of choice continues to escalate and consumers want the quickest, easiest possible way to find their needle in the haystack. UEI provides that magic. As always, stay tuned. Operator, we can now open the call for questions.

[Operator:]

Certainly. Our first question comes from the line of Greg Burns from Sidoti & Company. Your question please.

[Greg Burns:]

Good afternoon. Just want to dig in a little bit on the guidance for the first quarter, you have roughly, I guess, flat revenue sequentially, but profitability down a little bit. Can you just walk us through what’s driving a little bit of a pullback in the margins into the first quarter from the fourth quarter?

[Paul Arling:]

Yeah. Sure. Greg, in Q4, what happened was, we had a labor subsidy that we received in the fourth quarter and this is common. But usually what the Chinese Government will do is they will submit these subsidies throughout the year. So usually get them over a three quarter or four quarter period where we got the majority of it in the fourth quarter of 2020. So it drove up the margin in the fourth quarter.

[Greg Burns:]

Okay. So aside from that...

[Paul Arling:]

We also had -- in the fourth quarter we also had -- we had success with the royalty revenue, like their technology, the TV, the TV channels done extremely well. So we licensed to three of the largest OEMs in the world and we expect that to continue. But in Q4 what was a little bit of an aberration was the fact that we did receive the majority of an annual subsidy in one quarter.

[Greg Burns:]

Okay. So it’s mainly coming from a little step back in the gross margin, any big changes on the -- in terms of operating expenses or kind of roughly staying where we were?

[Paul Arling:]

No. Yeah. It’s mainly driven by the -- by what I just mentioned, the margin rate.

[Greg Burns:]

Okay. Great. And then when we look at the year-over-year in terms of the revenue relative to the first quarter guidance. You talked about -- you had a bunch of announcements of new products that you are set to launch a couple of new European operators rolling out advanced platforms, the Apple Remote. So a lot going on, a lot seeming moving out of the pipeline, but not have much growth year-over-year in the first quarter. Do you expect growth to accelerate with some of these new things you are rolling out throughout the year as we look beyond the first quarter?

[Paul Arling:]

Yes. Yeah. We expect we would rolled out some of the platform is in the back half of 2020. We have got more slated for the front half of 2021. So we expect it to accelerate throughout the year. I mean, right now in Q1 that’s not a reflection of what we think will happen for the full 2021 versus 2020. We expect sales growth and it will occur. But it’s going to ramping up as opposed to being, I wouldn’t use Q1 as a harbinger, it will ramp up.

[Greg Burns:]

Okay. Great. And then just had a couple of questions on some of the new products you announced. In terms of the QuickSet Widget, I know you have embedded it in your own smart thermostat product. But what’s the pipeline look like there for other OEMs to begin embedding this into their products? Do you have a pipeline like set to rollout or is this something that you have to now go-to-market with and kind of educate customers on the benefits of these products, like what’s the view here as we look into 2021 on the adoption of QuickSet Widget?

[Paul Arling:]

Yeah. I think the answer to that is, QuickSet has become extremely popular. As I said earlier, the three top brands in the world -- three top market share brands in the world are current licensers and use QuickSet in their product, and in fact, are increasing the number of products that they are putting this technology in. So we see these as further enhancements to the connected home experience for QuickSet. So QuickSet has ramped nicely over the last five years with these very important players, particularly on the TV side and we are continuing to advance the line by bringing new enhancements to it. Things like the virtual agent and QuickSet Widget, which would allow them to expand it even further. So we have a pipeline of customers, there was a lot of interest in these. Some of them -- virtual agent we have talked to people about before. So it’s probably nearer term, QuickSet Widget is relatively new. But again, these are things that we bring out at what used to be CES and now have become the technology summit, and which we will show later to investors and you, the analysts in March and we think these are further enhancements to this QuickSet family of products.

[Greg Burns:]

Okay. And then lastly, the comfort family, the smart connected thermostats rolling out, how does that differ from what we see in the market from maybe like a nest or some other these connected smart thermostats? And how is that, well, how is that being I guess delivered to market, are you going to be selling directly to the consumer or is it going to go through even more traditional channel like that?

[Paul Arling:]

Yeah. The biggest difference is that that most of those products that people would be most familiar with are things that they would see online or in a retail store that they buy as an aftermarket product and either install it themselves or hire somebody to come out and install. We view the future of these types of products particularly HVAC control as being commercially installed or sold as a part of the original compressor or unit. So our distribution strategy on this would be not necessarily to sell it as a consumer product, but to sell it commercially. And I can just give you a couple of small examples, a thermostat can be placed into a, let’s say, a lodging establishment. And let’s say, this is probably a bad example today because people aren’t traveling. But if we are ever to get back to traveling again, if you stay in a hotel multiple times and it notices that when you stay in a particular chain of hotels, you constantly put your thermostat to 73, while I put mine to 68. These are sensing and aware products that could modify themselves for a variety of people. So most of the features in the consumer products you have talked about our program for a family, but a hotel room would have potentially 365 different customers every year. Each of whom may have stayed in hotels before and it could have the ability to be able to customize itself for each individual consumer. So these products are a little bit different, and that again, they are sold with original units, more of an OEM sale or they are installed commercially. They can also sense whether the consumer...

[Greg Burns:]

Okay...

[Paul Arling:]

If a consumer, because some people do this, they turn their thermostat down to 66 and then they leave for the day. Well, this is not good for the hotel and not good for the energy grid. So what it could do is noticed that the room is empty and then tune itself to a more reasonable temperature, things like that. So it’s built around features for a more hospitality/commercial, and for consumers, but not in a direct way. In other words, we will sell directly to the HVAC company.

[Greg Burns:]

Okay. Great. Thank you.

[Paul Arling:]

Sure.

[Operator:]

Thank you. Our next question comes from the line of Steven Frankel from Colliers. Your question please.

[Steven Frankel:]

Hi. Thank you. Paul, can we start with this opportunity for the industry to move from custom software in their set-top box to these industry standard platforms like Apple TV and 4K, and focus on app development, which should be a quicker path?

[Paul Arling:]

Sure.

[Steven Frankel:]

And kind of size the pipeline for us there and with the pipeline that you have include some of those traditional customers that have been one of the headwinds you faced over the last couple of years, because they never seem to get to market with their custom developed set-top box, because the world is changing so quickly.

[Paul Arling:]

Yeah. I will address that. The market for these platforms is obviously all of the subscribers on this planet essentially. Because as time goes on, the home entertainment experience everywhere is going to be such that people want to watch live content, sports, The Bachelor, The Bachelorette, whatever your favorite reality show is. And those -- again those reality shows our like sports, there are things that the results of which you don’t want to -- you are not going to watch it three years later, so live television is here to stay through content like that, as I like to call it perishable content. But then you have SVOD, AVOD and the various other sources of content the world is moving into these hybrid platforms. Now large companies in the industry have the wherewithal the scale to build their own platform. So they can manage their own platform build it, build a voice engine behind it as it can be a very substantial development for them. But there is a vast array of companies that probably have a few hundred million subscribers that will probably either adopt a platform built by a larger entity, syndicated, right from a larger entity, or they will choose a platform built by a technology company like an Apple or others that will bring all of those entertainment options together. That market probably in time is larger, right, because the number of subscribers that are in the largest companies are, of course, huge, some of the companies have 20 million subscribers, but there is hundreds of millions of subscribers worldwide. So we think the market for these platforms either Android-based, the Apple TV product, et cetera, have a real good runway over the course of the next few years, because again they bring to a lot of smaller operators. And frankly even to some of the larger ones as you may have mentioned that have either chosen not to or have not successfully built these hybrid platforms. And by hybrid, I mean again, where you can get all the things you wish to watch, all the sports, all the reality shows watch live and then when they are over, you get to switch over to Netflix or Prime or Hulu or the Rugby channel, whatever channels you like to stream. I think it’s pretty well understood by everyone that those platforms are the future, because that’s what people want to watch, right? That combination and they want to get it -- get at it quickly. What we are doing is partnering with the people who are building those platforms to build the best control technology for them. And I think we have accomplished that with many of the partners we have and that market is still developing, but we think it’s got runway for the next number of years.

[Steven Frankel:]

Okay. And where do you think you are today in terms of mix, advanced remotes are what percentage of the remote controls you sell today?

[Paul Arling:]

I don’t have a precise calculation for that, Steve, but I would guess at this point, it’s got to be half or more of our business. Probably about 22% to 25% of our business is non-AV at this point and well over half of the AV business would be in these advanced platforms. Now remember that the part that isn’t the advanced platforms, maybe more units and what happens when people make the transition to advanced platforms, the ASP goes up. So it -- there is a growth opportunity there. Because the older product that was a simple IR controller is not as sophisticated or as expensive as a two-way Bluetooth Low Energy or RF or CE device that has a voice capability built-in. Those are much more sophisticated products and have a higher price point. So as the world transitions to these platforms, there is a certain upward momentum on growth for us, as the world slowly turns to those applications.

[Steven Frankel:]

Okay. And you have made tremendous progress on cash flow generation and paid your debt down significantly. How do you think about capital allocation over the next couple of years in terms of using that cash to buy more stock, put in a dividend, make acquisitions kind of what’s on the menu to the extent you are willing to share that?

[Paul Arling:]

Yeah. Well, our approach we can certainly share and that would be that, obviously, any cash we hold is the shareholders. They expect a certain return on it. When we invest it in our own business, we get a good return on it. I think we have proven that as far as our -- the returns we can gain on the capital. If we have those investments to make internally and they produce the types of equity returns that our shareholders would expect, we would of course make them. Our own stock as its price does move up or down can provide an opportunity. We look at it like that. We don’t buy shares just to be buying them. We look at our own valuation of them as if we were going to buy the company, right? We look at our forecast and value our company based on that each quarter and then discuss this as a capital allocation procedure both internally and with our Board to determine the level at which we would buy the stock based on its value at this moment, right? So when we see a large spread there, we are a little bit more aggressive in buying it and when we see that spread shrink we buy less. And then the third would be to look externally, but we look in the same way. Again, every dollar we have, we know the shareholder wishes to get a certain level of return from it and if we can find investments that provide that type of value when combined with us, we can really drive that business to a good valuation and again a good return on the value we have paid for it, then we will look at that as well. And we look at it every quarter and we look at -- because each of those can change each quarter, right, the internal investments, the external investments and the buying of our own stock. And if we find one of them to have a really good return at any specific moment then we will allocate more capital toward it. If we can’t find any of those that can get equity rates of return then we would consider giving it to the money back to people who can, right, because if we can’t generate that equity level return on it then we would consider returning it. But it’s...

[Steven Frankel:]

Okay. And then...

[Paul Arling:]

I think it’s a sound financial approach that says, we are shepherds of that capital we can use it to get good returns. If we can’t then we would consider giving it back to someone who can.

[Steven Frankel:]

Okay. And just one last quick question, customer concentration during the quarter, Comcast and any other similar customers?

[Bryan Hackworth:]

No. Comcast was the only customer exceeding 10% and they were at 18.3%.

[Steven Frankel:]

I am sorry, 18?

[Bryan Hackworth:]

3 -- 18.3%.

[Steven Frankel:]

3%. Thanks, Bryan, and thank you, Paul.

[Paul Arling:]

Sure.

[Operator:]

Thank you. Our next question comes from the line of Jeff Van Sinderen from B. Riley. Your question please.

[Jeff Van Sinderen:]

Good afternoon, everyone. First, let me say congratulations on Q4 profitability. Well done there.

[Paul Arling:]

Thanks.

[Jeff Van Sinderen:]

Regarding the legacy non-self-installed platforms, what are you seeing and hearing from the MSOs regarding truck rolls for new installations? Just wondering if you are getting any feedback there, are they seeing anything open up with COVID starting to ease a little bit in some areas and I guess any thoughts around pent-up demand on those kind of roles?

[Paul Arling:]

Yeah. I -- not -- we are not seeing a huge difference, like, I think, the order patterns would show that the customers that have not adopted a self-install platform, while they may improve a little, we haven’t seen a huge improvement. So I think the effects of the pandemic either it -- either because of quarantines or shutdowns, or just consumer attitude of having strange people in their house. If the customer doesn’t have a self-install platform, you would have to invite somebody into your home to -- a service person into your house to install. So, yeah, there is still -- but look, I think, each of those operators completely understands this. And as I said earlier, I think the market for -- forgetting even about the pandemic for a minute I think most industry participants here understand what I explained earlier that, consumers are watching a variety of things. They want to watch their over-the-top services. They want their live content. The five-hour a day person here in the U.S. is watching all of it. They are watching the live stuff. They are watching the over-the-top stuff. They are watching five hours a day. So the consumer needs to get what they want and you can charge them well for that which you give them. So the world is moving in this direction. These platforms are coming. It may take longer than what most people would have thought it would, but it’s coming. And so even those that have an architecture that is not self-install are beginning to move in that direction.

[Jeff Van Sinderen:]

Okay. Good. And then you spoke to this a bit around some specific new products, I am just wondering what you expect to be kind of the primary growth drivers for the ramp you anticipate revenues this year, is it more legacy type platforms that require truck rolls, is it more self-install new products like Apple TV, maybe some more international? I know you spoke to that in India and some other areas.

[Paul Arling:]

Yeah. I think it’s a few of those. Again, internationally, we have seen a good amount of growth, with new platforms and we are continuing to see that. So many of the operators are companies we have worked with. Some of them are new, which is obviously a good growth driver. Some of them are existing customers, but that are moving toward more advanced platform. We have seen real good traction on that in other countries. So we see that continuing this year. And I think it’s just an overall trend, moving to these platforms. I don’t expect that the non-self-install, the professionally installed platforms, we are not counting on some huge magic wand to be waved and those will explode in growth again. That isn’t in our expectation.

[Jeff Van Sinderen:]

Okay. Okay. Good. And then just a follow-up on the Widget product, that appears to be a system on a chip if I am not mistaken. I guess I am just wondering if your thinking around that is that it could be a transformational product to drive broader adoption of your IP?

[Paul Arling:]

Yeah. I mean, look, I think, any enhancements to the QuickSet family of products, makes it more compelling, but also can drive value for our customer, of course, and thus for us. So we continue to work on enhancements to the platform that can bring compelling value to the customer and then potentially bring us more value or even maybe a different business model in time. We are not prepared to talk a lot about that yet. But we see that as part of this strategy within QuickSet.

[Jeff Van Sinderen:]

Okay. Thanks for taking my questions and continued success.

[Paul Arling:]

Sure. Thank you.

[Operator:]

Thank you. This does conclude the question-and-answer session of today’s program. I would like to hand the program back to Paul Arling, Chief Executive Officer.

[Paul Arling:]

Okay. Thank you for joining us today and your continued support of Universal Electronics. As I said earlier, on March 19th, please mark your calendar and please join us for our virtual Analyst and Investor Day. This is the first time we have done this. We will take you through portions of the virtual room, provide demos and host Q&A for you to discuss products and strategies with our team, so that you too can get a deeper look into UEI’s latest technologies. Later in March, in addition, we will present at the Sidoti Investor Conference. Again, thank you for participating today and have a wonderful day.

[Operator:]

Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.