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Operator
Good day, thank you for standing by, and welcome to the first quarter 2021 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. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Tristan Chapman, LHA Investor Relations. Please go ahead.
Tristan Chapman
Thank you, Mary, and thank you all for joining us for the Universal Electronics First Quarter 2021 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. This call is being broadcast live over the Internet. A webcast replay will be available for one year at UEI.com. Any additional updated material, non-public 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. During this call, management may make forward-looking statements regarding future events and 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. These statements include the company's ability to timely develop and deliver new technologies and technology updates and related products that will be accepted by our existing customers and attract new customers, including the company's Kwikset family of products and technologies, Nevo Butler Entertainment and Smart Home Hub, and our voice-enabled, AI-powered, and other advanced wireless control products, technologies, and platforms. The positive traction that management is seeing in various markets and industries in which it serves coming to fruition as expected by management. The continued successful collaboration with existing and new customers in developing and introducing next generation products, operating systems, and technologies which result in increased sales and opportunities for the company. The continued trend of industry toward providing consumers with more advanced technologies by offering hybrid platforms. expanded smart home offerings and interactive services. Management's ability to continue to manage its business via new product development, product mix and deliveries, increased licensing opportunities, and operational and administrative efficiencies to achieve its net sales margins and earnings is guided. Interruptions in the company's supply and logistics change, including the impact that the global shortage of integrated circuits could have in causing delays in production and delivery of its products, And the continued effect of natural disasters and public health crises, including COVID-19 pandemic, have on our business and management's ability to anticipate and mitigate those effects, including the duration, severity, and scope of the COVID-19 pandemic and the actions and restrictions that may be imposed on the company and its operations by federal, state, local, and international public health and government authorities. The company undertakes no obligation to revise or update these statements to reflect any events or circumstances that may arise after today's date and refers you to the press release mentioned at the onset of this call and the documents the company files for the SEC. In management's financial remarks, adjusted non-GAAP metrics will be referenced. Management provides adjusted non-GAAP metrics because it uses them for budgeting 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 help investors evaluate UEI's core operating and financial performance and business trends consistent with how management evaluates such performance and trends. In addition, management believes these measures facilitate comparisons with the core operating and financial results and business trends of competitors and other companies. A full description and reconciliation of these adjusted non-GAAP measures versus GAAP is included in the company's press release issued today. Now, on the call with me 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 is now my pleasure to introduce Paul Arling. Please go ahead, sir.
Mary
Good afternoon, and thanks for joining us today. During the first quarter of 2021, we continued to leverage our strengths of technology innovation, strong customer relations, and operational excellence to deliver results as guided. Net sales were 150.7 million, gross margin was 31.4%, and EPS was 89 cents per share. In mid-March, many of you joined us for our Investor Day, during which we highlighted our core tenants and demonstrated our latest technology. The event was very well received. In case you missed it, we hosted a virtual mini-CES for our investors, analysts, and interested parties. During the event, we provided an overview of our business operations, reviewed go-to-market strategies and our primary sales channels, and provided in-depth product demonstrations and new feature capabilities that we will be introducing later this year. You can catch the webcast on our newly revamped website. I'll summarize the key takeaways and add in a few of the examples we showcased. UEI creates smarter living. Our wireless device innovation leads the industry, as evidenced by numerous accolades for our voice control, Quick Set, and other connectivity solutions. Last week, our Nevo Butler Entertainment and Smart Home Hub won a Red Dot Design Award. Other new products presented at the Investor Day included the Quick Set Widget, a turnkey connectivity solution that adds intelligence and Quick Set Cloud to connected products, and enables digital transformation of the customer experience. The UEI Comfort Family, an ambient-aware line of connected thermostats, and UEI Virtual Agent are AI-powered technology that enables self-help capabilities for device onboarding and troubleshooting on any screen. Our intellectual property has an increasing array of applications that continues to broaden potential use cases and enables us to diversify our market served, including providers of in-home entertainment, security, IoT, HVAC, hospitality, home automation, and any combination thereof. Many of our largest customers have embraced our product and technology roadmaps, and we continue to work alongside them to integrate our solutions into their next generation platforms. Such names as Samsung, LG, Sony, Comcast, AT&T, DISH, Liberty, Sky, and Charter, to name a few, have been working with us for years to ensure they continually delight their users. Some others are newer and or requested confidentiality. Regardless, when cable, satellite, consumer electronics, home automation, and telecom providers want advanced wireless control technology, UEI is consistently selected as the preferred provider. Our operational prowess and strategic financial management yield significant benefits. Over the past few years, we have delivered improving gross and operating margins and enhanced our investment profile. With that, let's review some updates. We continue to expand our reach across home entertainment and smart home devices as momentum for these platforms continue to build. For example, we recently announced that LG's new WebOS platform will use QuickSet as its standard for device discovery and control. Having collaborated with LG for several generations on their industry-leading smart TV interface, LG knows and trusts UEI technology to provide a scalable solution for simplifying onboarding and control. As the global market continues to grow for smart TV platforms, LG is expanding its footprint through other TV manufacturing partners. Once again, UEI will help make this possible by enabling the discovery, setup, and control of entertainment and smart home devices and services on their TV dashboard. Now I'll review a few highlights on our commercial performance during the quarter. Subscription broadcasting, primarily outside North America, continues to show positive signs. as we rolled out new voice remote control products to customers in Latin America and Europe. Consumer electronics technology sales continue to grow as we deepen our penetration at the major smart TV brands, and those brands continue to experience market share growth as they roll out new features, services, and platforms. While hospitality remains at a relative standstill, we are seeing traction in our new in-room automation and energy management products as we go through testing, validation, and overall product qualification with major brands in the hospitality channel. This bodes well for our future. HVAC has also seen positive signs as our relationships with Daikin and Trane continue to grow, both at the product line level as well as market share penetration. We are also actively working on several new customer products that will launch later in the year and into 2022. I'll now turn the call over to our CFO, Brian Hackworth, for a review of the financials. Please go ahead, Brian.
Quick Set
Thank you, Paul. First, I'll review the results for the first quarter of 2021 compared to the first quarter of 2020. Net sales were 150.7 million compared to 152 million for the first quarter of 2020. Our focus increase in R&D spend over the past couple of years has favorably impacted our sales mix as both royalties and high margin ship sales have increased substantially over this time period, including Q1 2021 over the prior year quarter. Our technologies are sold to some of the world's largest TV OEMs and are embedded in multiple devices and distributed through multiple channels. We have, however, continued to be negatively impacted by COVID-19. As subscription broadcast and security customers, specifically those without self-install capabilities, are currently ordering less than during less constrained environments. Our gross profit was $47.3 million, or 31.4% of sales, compared to $47 million, or 30.9% in the first quarter of 2020. The strength of our technology sales enables us to earn 30-plus margins, despite the U.S. dollar being weaker than in the prior year. Operating expenses were $31.7 million compared to $32 million for the same period last year. SG&A expense decreased slightly to $24.1 million from $24.3 million in the prior year quarter. R&D expense was $7.6 million this quarter compared to $7.7 million in the prior year quarter. Operating income was $15.7 million or 10.4% of sales compared to $15 million or 9.8% of sales in the first quarter of 2020. Our effective tax rate was consistent at 19.5%, compared to 19.4% in the prior year quarter. For the first quarter of 2021, net income was $12.6 million, or $0.89 per diluted share, an increase of nearly 10%, compared to $11.5 million, or $0.81 per diluted share, in the same period last year. Next I'll review our cash flow and balance sheet. At March 31, 2021, cash and cash equivalents were $55.4 million, compared to $57.2 million at December 31, 2020. As is typical in the first quarter, we had cash outflows from operations of $6.7 million compared to $8.3 million in the prior year quarter. In the first quarter of 2021, we were able to capitalize on our share price trading at a level we believe to be below our intrinsic value by repurchasing over 190,000 shares for $11 million at an average price of approximately $57 per share. On April 28, 2021, our Board of Directors approved a plan to purchase up to an additional 300,000 shares contingent on share price over the next few months. Now turning to our guidance. As we stand today, we face an environment that, in addition to COVID-19, includes a worldwide supply shortage of integrated circuit components. To date, our operations team has done a great job working with vendors to procure components as well as customers to qualify product changes, yielding a minimal impact to sales. For the second quarter, however, this temporal supply issue will likely affect our ability to meet demand. We estimate the effect to our net sales for the second quarter to be $5 million and have adjusted our guidance accordingly. It's important to also note that our products are usually companion products in a total solution. Some of our customers have alerted us that supply constraints associated with some of their other vendors have affected their ability to implement their total solution, thus dampering their orders to us. We are unable to quantify this impact. We expect net sales to range from 153 to 163 million, compared to 153.3 million in the same quarter of 2020. We expect EPS to range from 87 cents to 97 cents. This compares to 89 cents in the second quarter of 2020. Keep in mind that in the second quarter of 2020, we recorded tax incentive refunds in China of $1.1 million, equating to a benefit of $0.08 per diluted share. We continue to believe in our long-term growth targets of sales between 5% and 10% and EPS between 10% and 20%. I would now like to turn the call back to Paul.
Mary
Thanks, Brian. Consumer entertainment and smart living choices continue to grow, expanding home entertainment and home automation markets, as well as creating the opportunity for the convergence of the two. Our ongoing strategic investment in product development, innovation, and intellectual property continually broadens our advanced technologies, which will fuel both our product and technology licensing opportunities. We know the path to growth has twists and turns, and in our 35 plus years of operation, we have definitely managed all headwinds that came our way. There is no doubt we will do so again. What's critical is that we have established protocols and an experienced team that can quickly address challenges to mitigate short-term impacts. Importantly, we maintain our focus on the future, and we are confident we will continue to exceed customer and end consumer expectations to drive long-term stakeholder value. Many leading home control companies, particularly in HVAC, have adopted our platforms for their next generation products. Most of the leading home entertainment companies on this planet have chosen our products and technologies for configuration, control, and ease of everyday use within their new advanced hybrid platforms. Given the leadership position we have achieved within our industry, we've never been more excited about our future prospects. As always, stay tuned. Operator, we can now open up the call for questions.
Operator
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touchtone telephone. If your question has been answered or you wish to redraw your question, press the found key. Please stand by while we compile the Q&A roster. First question comes from the line of Jeff Van Sinderen of B. Riley and Company. Your line is now open.
Brian
Yes, hi. I guess, first of all, let me say terrific work on the bottom line for the quarter. I guess... If there's any more you can give us on what you're experiencing in supply chain for components, it sounds like it didn't impact your business for Q1, but that there are two elements impeding sales relevant to supply. For Q2, it sounds like both for you and then for some of the customers that you supply. I guess, what is the outlook, do you think, for relief or improvement in component supply in And then finally, do you think that the tight supply will be limited to the current component shortages, or are there other components that aren't being impacted currently that are of concern going forward? There's a lot in that.
Quick Set
Yeah, no problem. This is A. Jeff. This is Brian. You're correct in that in Q1, the component shortage issue didn't really affect us very much at all. But the component issue, it's fluid. It's changing sometimes week to week. I think our ops team continues to work closely with suppliers, and they've taken several steps to mitigate the issue, such as qualifying more suppliers. They're providing forecasts for the remainder of the year. They're spot buying, and they're working with customers to qualify substitute parts. They've done a great job. As of today, I don't think the effect on the back half of the year will be appreciably different than what we mentioned for Q2. I mean, it's fluid. We're playing it, you know, day by day, but right now I don't see anything or any reason why, you know, the back half would be much different than the effect we said will take place, that we think will take place in the second quarter.
Brian
Okay, fair enough. And then any other color you can give us on how you're thinking about just overall the I mean, you gave a little bit there, but kind of, you know, thinking beyond as far as the quarterly revenue and margin progression, there are other components we need to think about as far as gross margin for remainder of the year based on what you can see today. I guess I'm just wondering, do you think that Q3, given the component tightness, do you think that Q3 will still ramp? Do you think that's your largest revenue quarter of the year, or how should we think about it?
Quick Set
From revenue, it's difficult to tell. Right now, we're still seeing, lockdown still has effects. I know certain places and certain jurisdictions are opening up, but as we mentioned in the prepared remarks that currently in North America, we still see operators that are on the old system, they're just ordering less. So trying to predict exactly when things will accelerate is difficult right now. I mean, I think, as Paul mentioned, Things are going well in different parts of the business where in Europe, we've launched some new platforms that are going well. APAC with the TV OEMs is going extremely well. So there's definitely some pluses in the business. Right now, I think from a North American standpoint, we're going to open up. Things are going to get back to normal. But right now, it's hard for me to predict exactly when that acceleration will take place. From a gross margin perspective, we've That's always difficult to predict. I don't like to quantify that specifically. I think right now you always have pluses and minuses when it comes to gross margin. You've got fluctuations in foreign currency rates. You've got commodity pricing, but then you also have favorability and royalties growing. There's pluses and minuses throughout the throughout the gross margin line. And so far, I think we've done a great job in keeping that 30-plus margin. So I think we're still in good shape.
Brian
Okay. Thanks for taking my questions, and good luck for the rest of the quarter. Thank you. Thanks.
Operator
Again, to ask a question, that's star 1 on your touchstone telephone. Your next question comes from the line of Greg Prince, Obsidoti & Company. Your line is now open.
Greg Prince
Yeah, June. The component supply shortage, is that in any one particular product or with any one particular customer? Was it localized or just kind of broad-based across the company?
Quick Set
Yeah, I wouldn't say it's a specific customer. It's basically the integrated circuit components and some ancillary products, like you get some boosters and accelerometers and things of that nature. But it's basically the integrated circuits that there's a worldwide shortage on. We went through something similar to this a couple of years ago with the capacitor issue. You probably remember where we had to, you know, there was a worldwide shortage. We had to go out and we had to bid for products. So this isn't the first time this has happened. We'll get through this. There'll be eventually supply over equal demand. But in the short term, you know, there's a little bit of an issue we have to navigate. But like I mentioned a few minutes ago, I think our our operations team has done a very good job in doing everything they can to mitigate the effect.
Greg Prince
Okay. And is this limiting or delaying any projects being rolled out? Is it impacting existing customers, existing programs, or is it also kind of delaying the rollout of some of these projects you've talked about in the past?
Quick Set
No, it hasn't delayed the launch dates or projects at all. It's just sometimes we'll get the orders in, and because of the supply shortage, like I said, for Q2, I think our best guess is that we're going to maybe be short about $5 million on sales relative to the demand forecast. But it hasn't adversely affected the launch dates or any projects to date.
Greg Prince
Okay. And then maybe you can give us an update on – Some of the projects you've talked about in the past, sounds like you're making some progress in the hospitality market. I know you've talked about having an Apple TV customer or two preparing to roll out. Maybe you can just give us an update on some of these advanced control technology projects you've talked about in the last couple of quarters, the timing and the progress you're making in terms of rollout there, and then your view on maybe the rest of the year in terms of converting some more projects into your pipeline? Thank you.
Mary
Sure, yeah. As far as some of the projects are concerned, hospitality, which you were asking about, we have a lot of great ideas on features in products for that segment for environment control and, of course, AV control. Obviously that industry went into a real difficult spot during COVID. So it is slowly emerging. They are beginning to engage on their futures. And frankly, some of the ideas we have actually help on that front for touchless control and smart control of your home away from home, which is the lodging industry. So there's a lot of traction there with designs. It probably won't affect much as far as our financials this year, but we think it's an important. Hotels will come back ultimately, and they are your home away from home. Your home has gotten a lot smarter over the last 10 years. The hotel rooms that you stay in, you probably haven't stayed in one in a while, but they're the technology that was in your home often 10 years ago. So the lodging industry will transform over the course of the next years to give you a smarter experience, and we have a lot of product that will bring that about in that area. As far as the Apple project is concerned, we can't talk about a lot of details there. There are many customers engaged on that product, and You'll see results on that this year. Just generally, this whole movement towards hybrid platforms, Apple has built, as always, a brilliant product here that bridges the gap between linear TV, live TV, and all of the SVOD or AVOD apps that people enjoy, the Netflix, Prime, et cetera, and an easy-to-use interface through which to use all of that. and are working with MVPDs across the world to implement this as a solution. So you'll see some activity on that as this year progresses. We're already shipping units, but you'll see more on this as larger and larger customers go into launch on this very product. At that point, we are hoping to be able to talk about a little bit more detail, but of course we have to let our customers lead the way on that. We also will have Nebo Butler out this year. We're working with a, as we've said before, a major telecom. They're still working on the technical development, but it's getting closer to the date of launch. And, again, we'll have more on that as time progresses. So a lot of interesting things going on. There's obviously a lot of operators that have been working on advanced platforms, hybrid platforms, voice-driven. IP-enabled that we've launched this year. And we've had a lot of success, as I mentioned earlier, in Europe with some of the major players there launching those products. So that's helped a little bit.
Greg Prince
Okay. So, you know, Brian, you talked about kind of the North American market still being a little bit impacted by COVID. You know, my thought was always, you know, you had these these incremental projects kind of rolling out to pick up that slack and, you know, the momentum on those will build throughout the year and kind of help to offset that. Is that kind of, you know, still a valid view for how the year can progress? I mean, with these kind of newer projects rolling out, gaining some momentum as the year progresses, you know, should we expect the back end of the year to be stronger than the first half, you know, component shortages aside?
Mary
Yeah, Greg, that would be our expectation. You know, obviously any operator in any of the high ARPU markets here in North America, in Europe, et cetera, many of the major markets in Asia, anybody who's in those markets that wishes to grow into the future is building these hybrid platforms. The platforms we're talking about that have been struggling during COVID are not the modern hybrid platform. They're typically a point-to-point solution, many times IR-controlled, infrared-controlled, with no IP backdrop. So these products are difficult to install, so they require a human to come into your home typically. I mean, I suppose it's possible for a consumer to install them, but that would be about 1% of consumers. 99% of people will not attempt to install these systems. And they've struggled. So as those companies move to these advanced platforms, it will bring with it the ability to self-install. So these products can essentially be put on your front doorstep, and you could take them in the house, plug them into the wall, plug the devices into each other and software takes over, including Kwikset and Kwikset Cloud. So there are implementations of that that are have yet to be seen. And, you know, we're working with customers to get that done. And as that happens, more and more of these platforms will be unaffected by things like COVID. Because, again, as soon as a consumer can self install, It's simple for them to do themselves. But we've had that issue for the last year during COVID, and as Brian highlighted, while it seems we are beginning to emerge from the difficulty of COVID-19, we haven't completely opened up yet. Many consumers are still reluctant. So I don't think we're back to normal yet. We're not back to 2019 environment yet. Do we think we'll get there? Well, of course. I don't think this lasts forever. I think it will take time. But in the meantime, we're going to design programs where it won't matter. We're going to design products with customers where none of that will matter. And that's what we're doing.
Greg Prince
Okay, great. And Brian, can you just give us the 10% customers?
Quick Set
Yeah, Comcast with 18.1% and Daikin... this quarter with 11.6%, so two 10% customers.
Greg Prince
Okay. Great. Thank you.
Operator
Again, to ask a question, that's star followed by one on your touchtone telephone. There are no further questions on the queue. Paul Arling, you may continue.
Mary
Okay. Thank you for joining us today. and for your continued support of Universal Electronics. We hope to see you at several investor events. On May 19th, we will participate in Needham's annual Virtual Technology and Media Conference, and in June at Baird's Global Consumer Technology and Services Conference. We'll give more details on those as time goes on, but again, Needham's on the 19th of May, and Baird's in June. Thank you again, and have a great day.
Operator
This concludes today's conference call. Thank you for your participation. You may now disconnect and have a good day.
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