UEIC
#Thank you, <UNK>, and thank you all for joining us today.
For the first quarter 2016, we reported record net sales of $151.5 million reflecting 14% growth over the same quarter last year.
We also reported EPS of $0.50 per share also a first-quarter record for UEI and reflecting a 9% growth over the first quarter of 2015.
UEI\
Thank you, <UNK>.
As a reminder, our results for the first quarter of 2016 as well as the same period in 2015 will reference adjusted pro forma metrics.
First-quarter 2016 net sales were $151.5 million, an increase of 14% compared to $132.7 million for the first quarter of 2015.
Business category net sales were $141.5 million compared to $121.5 million in the prior year.
This increase represents the continued transition of customers from the lower end platforms to the higher end platforms including features such as 2-way RF technology and voice control.
Consumer category net sales were $10 million compared to $11.2 million.
Gross profit was $38.9 million or 25.6% of sales compared to a gross margin of 28.4% in the first quarter 2015.
The largest impact to our gross margin rate is the result of a decrease in royalty revenue primarily in the mobile space relating to a significant brand name.
This created a difficult comp in the first quarter.
However, the year-over-year impact of royalties for the remaining quarters of 2016 is minimal.
Also affecting our gross margin rate is the fact that a higher percentage of our sales were made to large customers who received favorable pricing because of higher volumes.
As mentioned on our earnings call in February, we expect our gross margin rate to improve throughout 2016 as the previously discussed mix impact diminishes as the year progresses.
Total operating expenses were $29.5 million compared to $28.6 million in the first quarter 2015.
Breaking down our operating expenses, R&D expense was $5.1 million, an increase of approximately 17% compared to $4.3 million in the first quarter 2015 as we continued to develop technology that enhance the user experience in both the home entertainment and home security channels.
SG&A expenses were relatively flat at $24.4 million compared to $24.2 million.
Operating income was $9.4 million compared to $9.1 million in the first quarter 2015.
The effective tax rate was 25.7% compared to 21.1%.
Net income for the first quarter of 2016 was $7.3 million or $0.50 per diluted share compared to $7.4 million or $0.46 per diluted share in the first quarter of 2015.
Next, I will review our cash flow and balance sheet at March 31, 2016.
We ended the quarter with cash and cash equivalents of $56.1 million compared to $53 million at December 31, 2015.
During the first quarter, we repurchased approximately 33,000 shares for $1.7 million representing an average price of approximately $52 per share.
We have approximately 375,000 shares remaining on our share buyback program.
Depending upon market conditions, we may buy back our shares over the next two months.
DSOs were approximately 66 days at March 31, 2016 compared to 64 days the year prior.
Net inventory turns were approximately 3.8 turns at March 31, 2016 compared to 4 turns the year prior.
Now turning to our guidance.
In the second quarter of 2016 we expect net sales to range between $167 million and $175 million compared to $147.6 million in the second quarter of 2015.
EPS for the second quarter is expected to range from $0.71 to $0.81 compared to $0.67 in the second quarter of 2015.
As a result of the continued adoption of higher end platforms by domestic and international customers as well as the recent customer wins in the home security market, we expect our earnings growth to accelerate in the second half of 2016.
I would now like to turn the call back to <UNK>.
Thanks, <UNK>.
The trend toward easier setup and intuitive control of devices and services in your home plays right into UEI's core strengths.
For years we have redefined what a remote control is and what it is capable of doing.
The home is beginning to transform with a series of cloud connected two-way devices that will bring entertainment and services not available before.
We are leading the industry in creating the products and embedded technologies that make these new options easier to set up and use than ever before.
As I stated earlier, we have already elevated the state-of-the-art in the industry with our latest product and technology solutions but we are far from finished.
We are excited to play such a key role in the exciting evolution of home entertainment, home safety and home security and we believe the best is yet to come.
Stay tuned.
I would like to now open it up for questions.
Operator.
Yes, Comcast would actually be less than half of that I believe on the dataset we looked at.
First of all.
Second of all, a lot of the names still haven't allowed us to go public.
I guess the only one I could name that is public is Cox.
Cox is using a version of the X1 platform so that is the only one at this point that I can recognize publicly.
But together the operators that we have currently which is a few, total almost 10% of the market.
We have 10% more that are closed and will roll out later this year and into 2017.
No, I would say it is, many of the wins we have and there's over 10 of them that we haven't announced yet, many of them are outside the US.
I would say that it is mostly in the higher ARPU markets.
We have a lot of wins in Europe, there are some in Asia-Pacific region as well but clearly the US is a key market because of the high ARPU here.
So we think that this is a market where in the next few years this could become 100% of the market whereas other markets may move to 50% or more percent.
But it will take a long time for them to get to 100%.
I liken it to the advent of universal remotes, <UNK>, where when they first came out the markets that grew first were North America, then in Western Europe and major markets in the US Pacific region but it has spread from there to nearly 100% now.
So the advanced remotes will probably follow the same path.
They will be more prominent in North America, Western Europe and major markets of Asia-Pacific.
Then we will grow from there.
The important thing though is that we are winning a lot of customers here.
I mentioned this before, I kind of want to put some numbers around it so people could get an idea of how this trend is progressing.
And it looks like right now UEI technology will be powering these next-generation platforms ever the next couple of years with 20% of the companies' representing 20% of the world subscribers.
The US market by the way is (multiple speakers) North America rather is between 110 and 115 million subs.
So the ones we've closed are about the size of the entire US market or equal to that size.
I think the ones we won were in Europe and a handful in the Asia-Pacific region.
Yes, I was probably a little aggressive on the forecast in terms of sales.
The earnings came right in at the midpoint at $0.50.
It was a little bit in Latin America.
Right now Latin America is in a tough environment.
So Brazil and Argentina are struggling a little bit compared to our forecast.
It was really small things.
We had a retailer go bankrupt in Australia.
That hurt the consumer business a little bit.
Europe fell short a little bit about $1 million.
But we thought we would grow 15% to 21% on the top line and we came in at 14% so I was a little bit short on the bottom end of the range but by 1 percentage point but again for the earnings, we came in at $0.50 right in the middle.
And as <UNK> just outlined, the year looks really good.
The number of customers that we have that we launched obviously we came out of the chute with one large customer, very large customer and we added three additional in Q4.
And as <UNK> just mentioned, we got 10 additional that we are in different stages with will get launched in 2016 and a few in 2017.
The year is really shaping up well so I am excited about it.
Yes, we talked about this before where the comp for Q1 over Q1 was difficult because the royalty that we received in Q1 of 2015 were still significant and it related to a mobile device manufacturer with a large brand name.
I can't say the name but that went away so that was a hole in Q1 which made the comp difficult from a gross margin rate.
Now as the year progresses, as I just mentioned, we came on the chute with a large customer with the higher end platform that because of the volumes that they purchase, the gross margin rate is lower than our company average.
But as these smaller customers adopt, the rate will be not as favorable which should put upward pressure on our margin which is good.
The other part that is going to help the margin rate is the home security channel which yields a higher gross margin than our company average as well.
So second half of the year we should ramp nicely in that category as we recently issued a press release stating one of the wins that we had.
So I expect the back half the gross margin rate will increase and the earnings will accelerate in the back half of the year.
Yes, I would say this that there was a major player who had this as a feature and has now dropped it.
So the overall volume is tougher but we have had a number of wins with smaller providers so it will be interesting to see how it unfolds as the next five to 10 years ago but one of the major companies in the industry dropped the feature so that is what caused our royalty to surge in Q1 of last year and have it be absent this year.
We understand the latest model does not have the feature.
Yes, Interlogix may not be the only company we work with.
They will be providing their third-party product provided by us.
There are others we could work within that industry and then of course as I outlined in the prepared remarks, there is ---+ our traditional customer base some of whom have already announced that they are in this market or are moving into it provides a huge opportunity because they are all putting in place an architecture within your home that would allow them to add this service relatively easily.
But the thing that they will need to do it are the products similar to what we make which are the sensing products.
Just like in video, they need to control products.
In safety and security, they need to provide sensing products, window sensors, door sensors, motion sensors, the keypad to control it, all of which are quite frankly similar in nature to the remotes that we make on the video side.
So we think that is also obviously a huge opportunity.
The Interlogix win though gives us volume and a big win in the traditional market which we have told people don't overlook that either.
There are growth opportunities there as well.
So after six months or more of being involved with Ecolink, we have made a lot of progress as far as market development is concerned.
And as I said earlier and we did in the press release on Comcast, XFINITY home, what they will also be working with us on these products as well.
I'm not going to give the numbers but if you look at the Q1 and Q2 sequentially, then Q3 and Q4 is going to accelerate even more than that.
As I mentioned, I think the driver behind it is going to be the most margin rate because as more customers are coming onboard, that is going to put upward pressure on the gross margin rate as well as the sales into the home security channel.
So it has played out well and the one thing I am pretty confident on is that the growth rate will accelerate from an EPS level.
Correct.
Yes, Comcast was 26% and DIRECTV was 11%.
No, compared to last year, we had a tax refund coming in Q1 so that is why year-over-year it is a little higher but for the full-year I still think they come in around 22% give or take a little bit.
It is just more of a timing thing.
But full-year I think it will be in the 22% range.
Well, the products will start shipping now but we will ramp as the year goes on because there are in some cases a qualification process that some of the products will still have to go through.
So it will ramp as the year progresses.
Well, as the products get qualified, we will become the only supplier of the product.
But I think the earlier question is how material is this.
I guess it depends on what we mean by material.
I don't know that we have in our forecast any specific security customer becoming a 10% customer of UEI in the short term because with annual sales in excess of $600 million, it is unlikely that any of these customers will become a 10% customer this year.
However, we do expect significant growth in this business over a relatively small number annualized from last year, a number as we said when we purchased Ecolink that was below $10 million.
We expect a significant growth and an enormous growth rate over that level of sales from the prior year.
But we are gaining traction in this business and it will have some significant growth this year.
No, ADT could buy from others.
This is a deal with Interlogix.
So we are utilizing their ---+ I think it is about 60 sales representatives nationwide to sell this to obviously the channel that actually comes out to your house to install and they provide service so they are competitors.
Oh no.
There is a lot of things that we are working on as are our customers because they are ---+ some of them, the world's leading home entertainment companies are focused on bringing in ever better user experience and ever better entertainment experience to your home.
Many of them, if not most of them have shared some of their plans with us and we are working on next-generation products to make ---+ and technologies to be embedded into their products, their converters, set-top boxes, TVs, etc.
, to make the experience even better, which is the core focus of UEI.
We are seeing a lot of traction as we announced on the call.
You've probably seen the reviews of the Samsung product.
But we think that there is still more innovation in this area to come.
I think that the rollout however just of the ones we are doing now provide a significant impetus for growth because these companies who represent 20% of the world's subscribers, it will take some time months and years, to fully turn over their subscriber base to these new technologies.
This isn't something that they do in a month.
It will take time which provides growth over a multiyear period.
Then you focus on the next 20% which we are not done there yet either with other customers that are going to see what is going on with the leaders in the industry and say we want to have this as well.
Again, as I said earlier, it does remind me of many decades ago the advent and popularity of the universal remote itself.
It comes out.
The leaders implement it, others see it and slowly but surely it becomes the de facto standard.
I think that is what is becoming of these cloud connected two-way platforms that allow things like QuickSet to occur.
Because it is difficult to argue that things like QuickSet aren't what people want.
To be able to plug-in your TV in the simplest instance and have it automatically be recognized and the remote automatically set up.
It is kind of difficult for people to argue no, that is not what people want.
So I think these products at reasonable cost which is what we have, we can implement this technology reasonably, I think it is beginning to take hold which is why we are winning the leaders in the industry 10%, companies representing 10% of the subscribers have also closed on 10% more and we don't think it stops there.
So there is multi-years we think of rollout, of wins and rollout that are in front of us.
Sure.
Yes, I mean I think they see the success and how aggressively Comcast has rolled this out and that is all public knowledge now.
We don't like to talk about specific customers but it is very public what is going on at Comcast and I think that not just here in the US either, I think other companies worldwide are aware of what is going on here, have seen the platform, have seen how great it is.
And have seen how integrated the remote control experience has become to the overall home entertainment experience and how it can make it better.
So yes, I think this is a good example of how things can be and I think the Samsung TV, the one that I mentioned on call is another example of how great things can be.
So it does affect the others in the industry, other potential customers of ours or current customers who have debated whether or not to upgrade to this type of technology sometimes are pushed to action by seeing what others are doing.
Sure, we don't like to talk specifically about the growth rate of any specific customer but I suppose that we have announced that we are involved with the X1 and are making what we refer to as the XR 11, are working on successor products.
We are also working on other products for the XFINITY home platform rolled out to the Comcast subscriber base.
The warrant agreement does call for predefined milestones that go as high as $170 million a year to receive the full or the last tranche of warrants.
We are not going to give a forecast for the customer but I think if you look at the types of numbers that are in the warrant agreement, it might give you an idea of what they may be contemplating, how deep this relationship could go as far as an ongoing multiyear agreement.
It was three two-year agreements for a total of six years with very similar sales milestones in it.
So we won't venture to forecast for Comcast.
If they would like to release a forecast they can.
But I do think the intent of the agreement is to have us deepen the partnership over a six-year timeframe.
Yes, I am not going to give a specific number but I think back half of the year we will get to a more normalized rate of 27+.
It could be above that as well.
I think we said in Q4 we were higher than that so I think it is not a stretch to think that we will approximate that this year.
We are not providing forward guidance for Q3 and Q4.
Year-over-year earnings growth should ---+ we expect it according to our forecast to improve as the year progresses.
As the year progresses.
This quarter it was 9.
We gave guidance for Q2 which as you pointed out (multiple speakers) 15.
So that is the numeric guidance we are providing.
Okay, thank you for joining us today and for your continued interest in the Company.
We will be participating in the 17th Annual B.
Riley Investor Conference on May 25 in Hollywood; the Robert W.
Baird Global Consumer Technology and Services Conference on June 7 in New York City; and the Citi 2016 Small and Mid-Cap conference on June 9 also in New York the same week.
We hope to see you at one or all of these events.
Thanks for being on the call today and talk to you next quarter.
Goodbye.
