Universal Electronics Inc.

Good day and thank you for standing by. Welcome to the Universal Electronics Third Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Kristin Chapman at Alliance Advisors Investor Relations. Please go ahead.

Thank you, Julie. And thank you all for joining us for the Universal Electronics Third Quarter 2024 Financial Results Conference Call. By now, you should have received a copy of the press release. If you have not, please contact Alliance Advisors at -433-3777 or visit the Investor Relations section of the website. This call is being broadcast live over the internet. A webcast replay of this call, including any additional updated material, non-public information that might be discussed during this call will be available on the company's website at uei.com for one year. During this call, management may make forward-looking statements regarding future events and the future financial performance of the company and cautions you that these statements are just projections and actual results or events may differ materially from those projections. These statements include the company's ability to continue capturing design wins in the connected home and home entertainment markets, particularly the climate control, HVAC, and home automation markets through the development and delivery of unique innovative solutions, including the company's Tide platform and excellent customer service as anticipated by management. The continued growth of the company's business in the climate-controlled space by attracting OEM industry leaders to our products and technology offerings, management's ability to continue to manage its business through cost-saving initiatives and optimization of the company's manufacturing facilities and cash flows to achieve improved results as expected by management, the continued strategic expansion of the company's IP portfolio and monetization, including licensing of the company's technology, the company's ability to capture potential upside opportunities in traditional subscription broadcasting business due to its continued strong leading market share and the importance of the company's quick set differentiation and innovative remote control and one for all brand design wins, and the direct and indirect impact the company may experience with respect to its financial business results stemming from the continued economic uncertainty affecting consumers' confidence in spending, rising energy and freight costs, natural disasters, public health crises, governmental actions, including a reduction in providing incentives to businesses worldwide, the risk of doing business to, pardon, the risk of doing business or operating in certain parts of the world or political unrest, including war, terrorist activities or other hostilities. The company undertakes no obligation to revise or update these statements to reflect events or circumstances that may arise from after today's date and refers you to the press release mentioned at the onset of this call and the documents the company has filed with the SEC, including its 2023 annual report on form 10K and the periodic reports filed or furnished since then. In management's financial remarks, adjusted non-GAAP metrics will be referenced. Management provides adjusted non-GAAP metrics because it uses them for budgeted planning purposes and for making operational and financial decisions and believes that providing these non-GAAP financial measures to investors as a supplement to GAAP financial measures helps investors evaluate UEI's core operating and financial performance and business trends consistent with how management evaluates such performance and trends. In addition, management believes these measures facilitate comparisons with core operating and financial results and business trends of competitors and other companies. A full description and reconciliation of the adjusted non-GAAP measures versus GAAP are included in today's press release. The company will also, pardon me, the company will no longer exclude excess manufacturing overhead costs resulting from the continued transition of its global manufacturing footprint, specifically in Mexico and Vietnam, and depreciation related to the markup from the cost to fair value of fixed assets acquired in business combinations from its adjusted non-GAAP figures. This impact adjusted non-GAAP gross profit, gross margin, operating income or loss, income or loss before provision, benefit from or benefit from income taxes and net income or loss in the quarterly results for 2023 and 2024. There is no impact to GAAP results. A reconciliation of these measures is posted on the website in the quarterly results section. On the call today are chairman and chief executive officer Paul Arling, who will deliver an overview, and chief financial officer Brian Hackworth, who will summarize the financials. Paul will then return to provide closing remarks. It's now my pleasure to introduce Paul Arling. Please go ahead, sir.

Thank you for joining us today. As projected, our customer product development and footprint optimization initiatives are beginning to deliver growth and profitability. Q3, 2024 net sales were 102 million solidly within guidance. Gross profit increased 380 basis points year over year. And our bottom line continued to improve with Q3 EPS reaching 10 cents. We expect these positive trends to continue with top and bottom line growth over the prior year period for Q4 of 2024. Our outlook also includes continuing this successful trend of sales and earnings growth into the full year 2025 and beyond. I'll review some of the elements driving our optimism and supporting our outlook. In the connected home, we continue to foster relationships and climate control with many of the top OEM brands in North America, Europe, and Asia. The HVAC industry has not been as robust as prior years due to temporal challenges, such as lower housing starts and tempered government incentives. But it clearly has the potential for latent demand to build over the next few years. As the markets return, we expect to expand new product opportunities with our existing accounts. In the meantime, we are continually making progress to build our market share, working to qualify new product opportunities and build on our existing sales pipeline for 2026, 2027, and 2028, which accelerate future growth. In Q3, we continued to garner share. With Carrier, we began shipping our first advanced smart thermostat. We have been working collaboratively with Carrier to ensure our first product together delivers the full capabilities that their consumers demand. While we are excited about this new product launch, we are equally enthusiastic that Carrier has expressed strong desire to expand our business. And we are already actively engaged in discussions about several new climate control products that they would like to add to their lineup. With Deichen, we continue to align our respective development roadmaps to support their product priorities and timeline. In 2024, we had a number of new and replacement products, which were previously on hold, released for development kickoff, including their next generation Wi-Fi adapters that deliver predictive maintenance capabilities for their authorized dealers, as well as several major new models with expanded features and functionalities. Many of these products will be released during 2025 and into 2026. Our Tide platform continues to garner design wins. We are currently in the final stages of development for two of the top 10 global HVAC OEMs. These products are scheduled to launch early next year. Also in combination with our Tide Bridge, our Tide Dial smart thermostat is undergoing final user testing with a major European utility company. We expect this solution to be launched in 2025. Additionally, we have secured design wins for a smart hub gateway with Hunter Douglas and two new wireless RF controllers with SOMPHY, a major motorized shade controller brands. We also recently introduced a Zigbee Spark thermostat for a major North American security brand and have signed a national distribution agreement for our line of professional security sensors. Turning to the markets in general, there are many growth drivers increasing future opportunities. The global HVAC market is being driven by rising energy costs with increasing demand for energy efficient solutions fueled by new government incentives. In the US, the expanding multi-dwelling unit market and the increasing consumer awareness of the significant energy efficiency and convenience benefits of smart thermostats are creating prospects. Also, government incentives, energy savings, technological advancements, and financing options are helping to make heat pumps more affordable and attractive to a growing number of homeowners. This market change in equipment and an associated change in control technology has fueled our business for decades and we are positioned to benefit from this opportunity going forward. In home entertainment, we know OEMs can be cautious as TV buying trends have fluctuated. Yet, we are increasing our traction with companies striving to differentiate their offerings. This includes customers with whom we have longstanding relationships as well as new market entrants looking to disrupt traditional business models around television advertising. In Q3, we grew share with multiple telecom providers in the video space across North America and in Europe. Our Quickset software continues to offer differentiation that enables us to secure product design wins for our entertainment remote controls with new customers worldwide. In Q3, we secured a major design win for our battery-free remote control that uses UEI's photovoltaic energy harvesting solution. Essentially, the device captures energy from ambient light and stores it in the built-in super capacitor such that the remote can operate without the use of traditional replaceable batteries. This product will launch bundled with a video display platform in 2025 that will bring a unique video infotainment and advertising experience to US households. I think you'll be quite impressed with this solution when it is introduced early next year. In September, we exhibited at two major conferences. At the International Broadcasting Conference, or IBC, in Amsterdam, we demonstrated many of our latest hardware and software product solutions and presented proof of concept solutions that showcased our Quickset device and service app discovery solution running on broadband gateways. Our solution was well received by multiple operators in North America and Europe, and we look forward to a positive outcome for potential new design wins. At the IFA Consumer Technology Trade Event in Berlin, we launched our latest -for-all category, desktop and gaming TV mounts. Our new product line was well received, and the OFA team was able to secure orders from many of our retail partners for this new category. Overall, our retail business is showing positive growth momentum after several years of flat sales growth. Looking ahead, we will be exhibiting once again at the International Consumer Electronics Show, or CES, in January 2025 in Las Vegas, as well as the AHR, or Air Conditioning, Heating and Refrigerating Show, in Orlando. We will showcase new capabilities of our Tide thermostats, including an improved and private whole home occupation detection, on-device occupancy-based automations, new energy utilization insights, and use cases around matter integrations. We will also showcase our next generation of Kwikset and Nevo AI, with new personalization and engagement capabilities across entertainment and connected home applications. We will also provide key customers a sneak peek at our next generation smart thermostat platform, built from the ground up on a new architecture optimized for an interconnected home, one that offers a comprehensive suite of smart managed services and features, and the ability to support scaling across multiple distribution channels and customer applications. We're excited about what these innovations will bring to our customers' products, and look forward to seeing you there. Now to the financials. Brian, please go ahead.

Thank you, Paul. I'll review the results for the third quarter of 2024, compared to the third quarter of 2023. As noted last quarter, our adjusted non-GAAP financial statements no longer exclude excess manufacturing overhead costs, resulting from our factory footprint transition, and depreciation related to the markup from cost to fair value of fixed assets acquired in business combinations. These changes are reflected in the year to date 2024 financials, as well as the corresponding prior year periods. These adjustments have no effect on our GAAP financials. For the third quarter ending September 30th, 2024, costs associated with the aforementioned items amounted to 1.1 million, equivalent to 110 basis points of gross margin, or seven cents per share. For the third quarter of 2023, costs for these items were 2.2 million, equivalent to 210 basis points of gross margin, or 13 cents per share. Please keep these figures in mind when reviewing our quarterly results. For the third quarter of 2024, net sales were 102.1 million within guidance, compared to 107.1 million in the third quarter of 2023. Although we are still facing headwinds from core cutting, and less consumer spending on discretionary durable goods, the negative effect on year over year comparisons has been waning. As a matter of fact, we expect sales in the fourth quarter to grow year over year, but more on this later. Gross profit for the third quarter of 2024 was 30.8 million, or .1% of sales, compared to .3% in the third quarter of 2023. This significant improvement reflects the successful execution of our manufacturing footprint optimization plan, over the past two years. The final phase of our plan is near completion, and involves our Monterey, Mexico factory, where we are transitioning to a smaller, more efficient facility. For the third quarter of 2024, operating expenses were 28.2 million, compared to 27.5 million in the third quarter of 2023. SG&A expenses increased to 21.1 million from 20.1 million in the prior year quarter. R&D expenses decreased to 7.1 million for the third quarter of 2024, compared to 7.4 million in the prior year quarter. Operating income was 2.6 million, compared to 645,000 in the third quarter of 2023. Net income for the third quarter of 2024 was 1.4 million, or 10 cents per diluted share, compared to a net loss of 658,000, or 5 cents per share in the third quarter of 2023. Next, I'll review our cash flow and balance sheet. At September 30th, 2024, cash and cash equivalents were 26.3 million, compared to 42.8 million at December 31st, 2023. The nine months ending September 30th, 2024, net cash provided by operating activities was 8.3 million, which includes approximately 4 million remaining on a security deposit, relating to a contract dispute with a former labor agency in China. Year to date, we reduced our outstanding line of credit by over 15 million, resulting in a net debt position at September 30th, 2024 of only 13.6 million. Now turning to our guidance. In addition to our improved cost structure, we are starting to see positive signs in terms of top line growth. Several projects won over the past couple of years, specifically in the connected home channel, are beginning to ship. While the home entertainment channel still faces headwinds, we are starting to see ordering patterns stabilize. From a gross margin perspective, it's important to note our forecast and ultimately our earnings per share guidance include elevated freight rates related to measures taken to avoid cargo risk in the Red Sea. Utilizing alternative routes has resulted in increased freight costs and lead times. With that, for the fourth quarter of 2024, we expect sales to range from 99 to 109 million compared to 97.6 million in the fourth quarter of 2023. This projected sales growth marks the first quarterly year over year growth since 2021. We expect diluted earnings per share to range from 10 to 20 cents compared to a loss of 4 cents per share in the fourth quarter of 2023. I would now like to turn the call back to Paul.

Thanks, Brian. We're in the best position we have been in for a couple of years. Our persistence, quality, service, and innovation continue to foster strong relationships. The work we did 12 to 24 months ago is beginning to yield new product revenue, and we tirelessly continue to focus on developing technology-driven features to attract new customers, as we have consistently done for decades. Our recent efforts in footprint optimization are certainly helping, but the most important thing we have always done and will continue to do is create great products with innovative features that improve the user's experience and enhance our customers' business. As we have done in the past, this is paving a path for future sales growth and improved profitability. We believe we are reaching a turning point. As I said when I opened the call and Brian provided in our guidance, we expect Q4 2024 to be stronger than Q4 of 2023, and we expect this growth trend to continue into 2025 and beyond. As always, stay tuned. Operator, we can now open up the call for questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by, we'll be compiled a Q&A roster. Our first question comes from the line of Stephen Frankel of Rosenblatt Securities. Your line is now open.

Paul, congratulations on the return to growth. I'm just trying to get a feel for how much of this is driven by, let's call it an unlocking of frozen designs, and you talked a little bit about that, versus a combination of a bottoming pay TV business and some new momentum and end demand that's driving higher volumes.

Yeah, good question, and it's a combination therein. There are many projects that we're working on, which is we're thankful for, that customers have placed their trust in us. Some of them were delayed by them for a variety of reasons, resources, or other things on their end, but they've re-engaged on those projects, so that obviously helps, because in some number of months time, we can complete the project and get it launched and have it in the revenue stage. We also, of course, have one project, some of which we've won almost two years ago, that not because of our development path, but our joint development path with customer and testing, has taken a year and a half, in some cases, maybe even a little longer, but they eventually again make it to the revenue stage. And we are seeing in home entertainment a tapering. While we still won't say that there are parts of it that won't continue to wane, the level of wane, I guess you could say, is lessening. And of course it would, because the number was once so large that the shrinkage was large until it got a lot smaller. So the percentage at this point that it can shrink is beginning to taper, and our growth efforts can then pay off, because the projects that we're putting out can overwhelm any continued flat or shrinking volumes that we have from specific customers.

Okay, and then from a high level, kind of how does the business split this year between your legacy home entertainment businesses and this new smart device world?

Yeah, we don't break that out, but I will say that the growth that we're starting to experience is primarily in the connected home channel. So going from year over year, it's primarily all connected home, and as Paul talked about, the home entertainment business, it's still, we still are experiencing some decline is starting to wane, but there is decline. So the growth really, from a connected home perspective, is even greater, because you're offsetting, not only are you offsetting the decline in the home entertainment channel, but we're still growing.

Yeah, and I think it's probably important to state here, Steve, that home entertainment is clearly still a very sizable market, and it's still there, and there are a lot of players there that are looking at interesting new models, because the industry has changed pretty significantly, and we're involved with them. I did mention one on the call, unfortunately, I can't give names yet, and a lot of detail. We'll be able to do that early next year, but there are companies of both existing customers and some new ones that are looking at new versions of their products that take advantage of streaming more, but are interesting concepts that will be very attractive to consumers, one of which we're working on and should be out within the next six to eight months, I believe, and is a really interesting concept. I think people will be impressed with what the company has done, and it's along the lines of what has been happening in television for some time now with streaming and ARPU-driven advertising, ARPU-driven products. So that's about all I can say about it, but home entertainment is still a pretty thriving market. People are watching as much TV as they ever have, and I think we're working on transition products there as well that could bring some offset to the shrink in any court cutting as it's been known for a long time now, such that home entertainment is still a very active market.

Okay, and on gross margins, obviously, very impressive progress. From here, should we expect any material improvement to require a step up in volume, or are there other things that might help grow gross margins, like mix, even if we don't see sales kind of lift materially off Q4 levels?

Yeah, I think I'm really happy where we're at and the progress we've made with the gross margin rate. We were over 31 points in the third quarter. Now Q4, I expect it to be a little less than that because we were at 30.1, I'm sorry, for Q3. Now Q4, as I mentioned, with the increased rates, freight rates related to the Red Sea issues, it is causing an adverse effect temporarily. But overall, I'm really happy where we're at. From the get-go, I felt like when we completed the transition over the last two years, we were going to be in that 30-point range, and that's where we're at, and I think it's sustainable. Again, we have temporary issues with the Red Sea, but I think the 30 points is sustainable, and we're always striving to improve. So I would never say we can't continue to improve. I think we can from a mix perspective. If, as you know, we have royalties as part of our revenue stream, and that becomes a higher mix than it could put northbound pressure on the margins, and then we're always looking to rebalance between jurisdictions to maximize efficiencies from a manufacturing footprint perspective. So we're always looking to improve, but right now, we're at where we expected to be in that 30-point range, and again, I would never say we can't improve. We're always striving to.

Okay, and the last question, customer concentration in the quarter.

Customer concentration, Diken and Sony. Diken was at 12.4%, and Sony was at 10.6%.

Great, thank you.

Thank you. Our next question comes from the line of Greg Burns of Sudoti. Your line is now open.

Good afternoon. At what point do you expect to not be recording any of these excess manufacturing costs, and what is contemplated in the guidance for the fourth quarter? Is it a similar, like, $1 million number?

We no longer record the excess manufacturing overhead. I only stated in my remarks to let you know what they were, but they're not included in the financials. We stopped that last quarter, and we made a right track. Okay. So they're not in our financial statements. All the numbers we read do not include, like, included in the UPS number, do not include anything related to excess manufacturing. I only stated what they were just so you could compare.

Right, well, I guess I meant to ask then, at what point do they go away? So when are we going to converge between kind of the adjusted and the gap number?

Well, basically, we're near completion. From a physical standpoint, we moved into the smaller facility in Monterey, Mexico. I would say at the end of this year, we're done. So we're in the final, the very final days of this -year-long project.

Okay, and then in the fourth quarter, is it going to be like a million dollar number or something similar to this third quarter?

Well, there'll be some charges coming through. I don't have the exact number yet because we're still working through that. But there'll be some charges coming through.

Okay. And when we look at kind of the outlook for growth next year, when you're looking at the pipeline of some of these new projects that are getting to the revenue recognition stage or the production stage, is it going to be kind of rattleable? Is it more back-end loaded? Do you have visibility on kind of the timing of when some of this stuff is going to be coming to market, maybe in terms of the cadence throughout the 25?

We do. We're always careful though to not provide it and forward guidance, Greg, because we're sitting now in November. We have projects scheduled to launch throughout next year, Q1, Q2, Q3 and Q4. In fact, we have some scheduled for 26 already with customers. And as we go through the year, obviously, we look at status of each project and will some of them ship early, will some of them ship late? So we're reluctant to provide guidance on that. But there are quite a few projects, as I mentioned in the prepared remarks, that are coming, some early in the year, some later. And as these things go, each layer, each project, as many of them get introduced, they'll introduce revenue in the period their first shift and then they typically order every quarter. So every new project that comes on provides another layer of revenue. So as time goes on, these new projects usually layer on top of one another. In our historic growth in home entertainment, that's exactly what happened. As we won each project and each customer with multiple projects, the layers just kept building. And then we would win what we call replacement products or derivatives. You win those and the revenue just continues. So layer after layer, you build it. And that's where we're at now. Q4 is partially the result of the projects. And sometimes they're small projects, sometimes they're slightly larger. But every quarter, the customer, then once they start ordering, they continue to order on those projects. And as long as you don't lose them, which we typically do not, they layer on top of each other. So we think that we're in a place now where these projects can start to pay off. And, you know, like I said, we're not done in home entertainment. There's some interesting things happening there. We have growth areas to offset some of the shrinkages we've had. And, you know, we think we're at a point now where Q4 over last year's Q4 will be up, our guidance, even the lowest end of our guidance range is a growth. The midpoint is a decent growth. And the high end of our range is a pretty good growth rate for a year over year quarter. And earnings obviously are up. Last year, we lost money in Q4. This year, we're targeting a profit.

Okay. All right. Great. Thank you.

I'm showing no further questions at this time. I would now like to turn it back to Paul Arling, CEO, for closing remarks.

Okay. Thank you for joining us today. Thanks for your continued interest and support of Universal Electronics. As we said in the prepared remarks, we will be at CES. I hope at least some of you will be able to come. If you do reserve time early with us, because we'll be pretty busy at the show. Major customers from all of our different business lines will be there. But look forward to seeing you there, I hope. And you can see some of the new stuff that we're going to be introducing. Otherwise, thanks and have a great day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.