Universal Electronics (UEIC) Q1 2022 Earnings Call Transcript

Universal Electronics (UEIC 0.62%)
Q1 2022 Earnings Call
May 05, 2022, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. Welcome to the Universal Electronics first quarter 2022 financial results conference call. At this time, all participants are in a listen-only mode. [Operator instructions] Please be advised that today's conference is being recorded.

[Operator instructions] I would now like to hand the conference over to Kirsten Chapman, LHA investor relations. Please go ahead.

Kirsten Chapman -- Investor Relations

Thank you, Catherine, and thank you all for joining us today for the Universal Electronics first quarter 2022 financial results conference call. By now you should have received a copy of the press release. If you've 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 www.uei.com. Any additional updated material nonpublic information that might be discussed during this call will be provided on the company's website, where it will be retained for at least one year. You may also access the 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 introduced this year, including our expanded software capabilities around our world-leading QuickSet platform, comprehensive suite of smart thermostats, and our groundbreaking line of ultralow power and energy harvesting remote controls designed for sustainability that will be accepted by our existing customers and attract new customers, our ability to manage the global supply chain issues, which includes material shortages that our industry has been dealing with, as well as lockdowns occurring in China due to the COVID-19 pandemic, both of which continue to have a direct and indirect impact on our sales, the continued successful collaboration with existing and new customers in developing and introducing new -- next-generation products, operating systems and technologies, which result in increased sales opportunities for the company, particularly during the second half of 2022, the continued trend of the industry toward providing consumers with more advanced technologies by offering hybrid platforms, expanded smartphone offerings, and interactive services, management's ability to manage its business and cash flows to achieve its net sales, margins and earnings and intrinsic value of all of our stock has guided, the impact of the company's financial results that it may experience stemming from those issues surrounding its Chinese workforce and inflationary pressures as we are experiencing due to the worldwide supply chain issues and weakening of the dollar against the Chinese yuan, and the continued effects that natural disasters and public health crises, including the COVID-19 pandemic, have on our business and our 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 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 filed with the SEC, including the annual report on Form 10-K. In management's financial remarks, adjusted non-GAAP metrics will be referenced. Management provides adjusted non-GAAP metrics because it uses them for budget planning purposes and for making operational and financial decisions, and believes that providing these non-GAAP financial measures to investors as a supplement to GAAP financial measures help investors evaluate UEI's core operating and financial performance and business trends, consistent with how management evaluates such performances and trends.

In addition, management believes these measures facilitate comparisons with the core operating and financial results and business trends as the 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. On the call today are chairman and chief executive officer, Paul Arling, who will deliver an overview; and chief financial officer, Bryan 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.

Paul Arling -- Chairman and Chief Executive Officer

Good afternoon and thanks for joining us. Driving toward our mission of creating smarter living, UEI continues to nurture a culture of innovation, to develop award-winning patented technology, and to leverage our strong financial foundation to support the company through all economic cycles. While supply chain headwinds have persisted, our team has worked hard to overcome them. During the first quarter, we continued collaborating with world-leading companies in all of the markets we serve to bring new innovative products and technologies to consumers.

Going forward, we expect to see incremental improvements in our supply chain, combined with increased demand from existing and new customers, particularly in HVAC, security, and home automation. We expect sales in the second half of 2022 to exceed any half year period since 2019. With that in mind, I will review the first quarter. We launched more home entertainment and automation control solutions.

We fostered relationships, yielding new projects in home automation that are expected to fuel revenue growth in late '22 and into 2023. And we controlled costs. We reported EPS of $0.47 with net sales of $132.4 million. Bryan will review the financials in greater detail in a moment.

Regarding innovation and product development, we started the year strong, unveiling many of our latest products at CES in January. We continue to lead the industry by creating solutions to help our customers differentiate themselves. We supply the user experience. We create whole home coverage across ecosystems and protocols.

And most recently, we introduced technology to foster sustainability. I'll reviews some examples. Our latest control platform, Eterna and its related technologies are a groundbreaking line of ultra-low power control solutions that reduce energy use and eliminate battery waste. By using ultra-low power connectivity systems on a chip, our control solutions harvest energy already present in consumers homes, such as radio frequencies from wireless devices and natural and artificial lights.

Eterna remotes use one-third of the energy of a typical remote, enabling more power-hungry features without compromising battery life and are capable of delivering as much as 10 times the battery life for similarly featured remotes. Ultimately, Eterna and the technology surrounding it reduce battery waste, making for a greener planet. We are confident that these technologies address an important industry trend to deliver on corporate environmental goals that will become the cornerstone of many global company mandates. Already, we have seen many industry leaders across the world engaging with us on this important goal.

Our white label smart thermostat platform, Comfort Line, delivers a whole home solution for wireless climate control and sensing for HVAC OEMs, as well as security and hospitality branded applications. While traditional thermostats are mounted on a wall, the Comfort Line of products enables mobility and places the user interface conveniently where the user is. The platform includes sensors and wireless adapters that extend the Comfort Line reach, once again emphasizing an optimized user experience. During the quarter.

We also upgraded several other technologies. Our flagship QuickSet platform delivers a complete smart home dashboard for discovery, set up and control of connected devices in homes across the world. In the first quarter of 2022, we commercially launched the fifth generation of our cloud platform on LG Smart TVs. With these additions.

The QuickSet cloud platform has scaled and now serves over 50 billion transactions in a single quarter. During the quarter, we also began shipping in limited quantities. Our wireless connectivity technologies inside connected home automation products for leaders in the smart home appliance market. These products are the first in a line of several customer projects that are planned to launch later this year and into 2023.

By improving user experiences, we capture the attention of industry leaders. By enabling device discovery, control and interoperability across major ecosystems and continually innovating, we foster long-term relationships as well as form new ones. In consumer electronics, three of our customers alone, Samsung, Sony, and LG, collectively represent about 40% of the world's televisions. In video entertainment, Comcast, Liberty Global, Vodafone and many, many others rank among the largest video service providers in their respective markets.

With many of them, we are deploying both voice remote controls for their advanced TV systems as well as self-configuring controllers for their growing streaming services. In climate control, we have been serving global HVAC market share leader Daikin for over 10 years. In addition, we are now working with other leading international HVAC brands to launch our new Comfort Line smart thermostats. Newer partners in our home automation and security segments include channel leaders such as Vivint, [Inaudible] and Hunter Douglas.

These customers represent another growth sector as we are actively engaged with them on several new projects across their product lines. As I noted earlier, we recently signed projects in the HVAC, security, and home automation channels that are expected to fuel revenue growth later this year and into 2023 and beyond. All of these and many more represent strong, long-term growth potential as their products and services gain market momentum. We are truly excited about the future.

I'll now turn the call over to our CFO, Bryan Hackworth, for a review of the financials. Please go ahead, Bryan.

Thank you, Paul. First, I'll review the results for the first quarter of 2022 compared to the first quarter of 2021. Net sales were lower than we expected, a $132.4 million, compared to $150.7 million for the first quarter of 2021. While we expected sales to be affected by global supply and logistics issues, we did not anticipate the lockdown in China that occurred during the last months of the quarter.

This lockdown caused a shortage of workers at our Southern China factory, resulting in a decrease of more than 50% in our utilization rate during the last two weeks of the quarter, yielding a loss of approximately $4 million of revenue. All of our lines at our Southern China factory factory were back to normal production rates in early April and labor issue caused by the lockdown has not resurfaced in the second quarter of 2022. Our gross profit was $38.3 million or 28.9% of sales, compared to $47.3 million or 31.4% in the first quarter of 2021. During the first quarter, we began phasing in price increases to offset inflationary pressures on component and logistics costs.

These prices -- these price increases will continue to be implemented through the second quarter, resulting in a partial impact for the first half of the year and a full impact for the back half. In addition, the U.S. dollar was weaker versus the Chinese yuan compared to the prior year. Operating expenses were $30.4 million, compared to $31.7 million in the first quarter of 2021.

SG&A expenses decreased to $23 million from $24.1 million in the prior year quarter. R&D expenses were consistent at $7.4 million, compared to $7.6 million in the prior year quarter. Operating income was $7.8 million or 5.9% of sales, compared to $15.7 million or 10.4% of sales in the first quarter of 2021. Our effective tax rate was 19.9%, compared to 19.5% in the prior year quarter.

For the first quarter of 2022, net income was $6.1 million or $0.40 per diluted share, compared to $12.6 million or $0.89 per diluted share in the first quarter of 2021. Next, I'll review our cash flow and balance sheet. We ended the quarter cash and cash equivalents and term deposits of $62.2 million, compared to $60.8 million at December 31, 2021. As is typical, we expect cash flows from operations to increase in the second quarter and be strong for the remainder of 2022.

During the first quarter, we purchased 225,000 shares for $7.4 million. As of March 31, 2022, we had 125,000 shares remaining on our authorized share repurchase plan. Now turning to our guidance. The current macro economic pressures, specifically relating to the shortage of chips and transportation issues throughout the supply chain, continue to persist.

Some of our vendors have indicated that we should start to see some relief in the back half of the year at a time when orders from certain existing customers are scheduled to increase, as evidenced by their most recent forecasts, and several of our new customer and product wins in the AV and home automation space are scheduled to begin their initial rollout. These products include our traditional two-way IP connected voice remotes in the subscription broadcast channel, sensors, and home security and products that control devices ranging from HVAC to lighting and blinds. Although we expect current headwinds to continue to put pressure on sales in the second quarter, our current forecast reflects sales for the back half of the year to be greater than any two successive quarters since 2019. In the second quarter of 2022, we expect sales to range from $133 million to $143 million, compared to $150.6 million in the second quarter of 2021.

We expect EPS to range from $0.53 to $0.63, compared to $0.98 in the second quarter of 2021. We reiterate 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.

Thank you, Bryan. I'm excited about our opportunities and what lies ahead for UEI in 2022. Even though supply chain constraints, logistical challenges, and most recently unanticipated lockdowns have dampened our ability to achieve our near-term sales targets, our foundation for our long term growth is strong. We are an industry innovator that is consistently selected by leaders in the industries we serve.

Our products and services are repeatedly recognized by our customers and industry associations for their usefulness and ingenuity. This long-standing leadership in innovation has led to an enviable market position in the industries we serve. It is important to remember that we have been through challenging times before and each and every time we have emerged from them stronger than ever. We remain committed to building innovative solutions for an ever smarter home.

We remain committed to building strong, long-term customer relationships and building some new ones. We are committed to remaining true to these principles, empowering through any short-term challenges to create an ever more successful company. I am also proud of our team and their perseverance. They are dedicated to solid cost management, working hard to tame the supply chain crisis, building new and deeper customer relationships, and continuing to raise the bar by developing new, innovative solutions.

We are confident that all of these actions will yield positive results. We expect that increased demand from existing and new customers combined with anticipated incremental improvements in supply to positively impact sales. In fact, as Bryan stated, we are forecasting the second half of 2022 to be the strongest half year since 2019. As always, stay tuned.

We now like to open it up for questions.

Questions & Answers:

Operator

[Operator instructions] And we have our first question from Jeff Van Sinderen with B. Riley. You may ask your question.

Jeff Van Sinderen -- B. Riley Securities -- Analyst

OK. Hi, everyone. It's Jeff Van Sinderen. We got the name a little messed up there, which is not unusual.

But in any event, I wanted to ask you about gross margin. Great to hear that it looks like the second half is looking up pretty substantially. Wondering sort of what your gross margin expectations are, order of magnitude, as far as you can see out, particularly as we're getting into second half, whether we should see gross margin expansion there.

Bryan Hackworth -- Chief Financial Officer

Well, as you know, Jeff, we don't we don't provide a guidance on gross margin rates, specifically, even in the given quarter, let alone the outer quarters. But I will say that there is definitely potential for expansion. Right now you're looking at, as I mentioned, we've got price increases that are rolling out through the second quarter, which should take a full effect in the back half of the year. And currently the U.S.

dollar is strengthening versus the Chinese yuan, which helps us. So there's definitely some positives going our way right now. But gross margin has a lot of variables to it. I don't want to make a prediction, but it's definitely possible for expansion in the back half.

Jeff Van Sinderen -- B. Riley Securities -- Analyst

OK. And then I know you also said second half sales, you anticipate to be the strongest since 2019 second half, I believe, is what you said. Are you anticipating year-over-year growth in both Q3 and Q4 for sales?

Bryan Hackworth -- Chief Financial Officer

Well, what we're saying is the back half. I'm not specifying Q3 versus Q3 or any quarter, Q4 versus Q4 or any prior quarter. I'm saying the back half of the year is going to be -- we expect to be greater than any two successive quarters since 2019. So any rolling two quarters since the 2019 time period, whereas you remember 2019 was a very strong year for sales, 2020 and '21 were lighter and we're starting to see some positives coming through with all the product wins that we have, as Paul mentioned.

And we've got we got orders and forecast coming from customers with -- from existing customers that are increasing. We've got product wins in the new categories from HVAC to home security, to home automation that are scheduled to launch in the back half of the year. So I mean, things right now I know are a little rough, but the back half is looking very promising.

Jeff Van Sinderen -- B. Riley Securities -- Analyst

OK. And then maybe can you guys, just if I can squeeze in one more. Can you tell a little bit more into the HVAC and home automation products, where you're seeing traction, you're seeing pretty good adoption, it sounds like there. Maybe just touch on those and how we should think about contribution to the P&L as the remainder of this year unfolds and then into 2023? And any order of magnitude or progression, thoughts you have around that.

Paul Arling -- Chairman and Chief Executive Officer

Yeah, I can answer that, Jeff. These markets, without exception, HVAC, security, home automation, all of these markets have good growth rates, double digit growth rates as far as markets are concerned. Our share, it -- our share is very high, as you know, in home entertainment. It was our original business that we dedicated ourselves to innovation in and have built a very strong position.

But I think our market position there, if you take all of our competitors combined and add them up, it doesn't add up to our position because we've just done a very good job of innovation, customer development, building long-term customer relationships, etc. We see that same opportunity in these other markets. We've already began that in HVAC some time ago, as I mentioned in the in the remarks. Daikin, which is the No.

1 HVAC company in the world as far as market share, has been a long-term customer of ours and we are now working with others, some of which we have not announced yet because their products aren't out. But we'll in time do that, and they are looking for better solutions. And I'll say generally that these -- all of these areas, home automation, HVAC, are all converging in some ways on protocol. In the old days, it used to be that the AV system, the home entertainment system, ran on infrared, and these other systems worked in many cases in a wired fashion.

What's happening now is there's a lot of low cost, two-way, very energy efficient radio frequency methods, Bluetooth, low energy, Zigbee, etc., and they're being shared across these various market areas. So today's remote control isn't vastly different technologically. Physically, they're very different, but technologically they aren't extremely different than sensors or the traffic controllers or other things in the home. So we think that the technologies and the capabilities we've built in this area transfer to these other markets, and we're beginning to see customer traction, where they see the same thing, and we're also including it on both sides.

So, for instance, the newest technology or the newest versions of software we're doing on the TV side are incorporating these home control applications, where we can link them together. The user can configure lighting and can configure HVAC control. And all of these other devices, they can be identified, discovered, configured, and controlled through that home entertainment device. So there's a lot of convergence going on here, and we were part of the leadership of that and we see a lot of potential here.

And we're going to start to see -- we've invested quite a bit over the last couple of years. More of our development dollars have moved into this new area over the last couple of years. Of course, we're still developing a lot of home entertainment devices, but more than ever before has moved in these new directions, HVAC, security, home automation, and we're going to start to see those products launch. We've already launched a couple in small quantities, but we'll see growth from that again as this year progresses and into next year.

Jeff Van Sinderen -- B. Riley Securities -- Analyst

OK. Great to hear. Thanks for taking my questions. I'll take the rest off line.

Paul Arling -- Chairman and Chief Executive Officer

Sure.

Operator

[Operator instructions] And we now have our next question from Greg Burns with Sidoti and Company. You may ask your question.

Greg Burns -- Sidoti and Company -- Analyst

Good afternoon. Can you just start off with the 10% customers for the quarter?

Paul Arling -- Chairman and Chief Executive Officer

Sure. Comcast was at 15% and Daikin was at 12.9%.

Greg Burns -- Sidoti and Company -- Analyst

Thanks. And then when we think of the traditional cable market, during the pandemic, I guess, the -- thought was, they couldn't get access to houses and that was part of the reason sales were being impacted. But now, are they just ordering less more? Like what -- or is it strictly supply chain or is any kind of demand dynamic changed in the industry? Because my understanding was that there is kind of a natural flow and the amount of orders -- amount of remotes that they ordered in any given year, given the number of subscribers they had, but I don't know if that's changed at all. But can you just talk about maybe the dynamic there and maybe some of the back end is like some of the pent-up demand there coming through.

But I just wanted to better understand the demand dynamics in the cable industry a little bit.

Paul Arling -- Chairman and Chief Executive Officer

Sure, yeah. It's a mixed situation. So -- and we can't speak about specific customers, but we have seen -- you're definitely right. During the 2020 timeframe, even into 2021, there were companies that had not yet gone to a self-configuring system were probably hurt more than those who didn't.

Because obviously when you have a self configuring system, you could still market your service and have it delivered to consumers without having to have any human being enter their home because that's the very definition of a self configuring system. It could be placed on your front doorstep and you could bring it in the house and connect it yourself. And companies that did that, we saw this during the pandemic. Customers that had adopted that, their volumes may have been hurt a little bit, not as much as companies that had systems that needed to be manually configured.

What we're seeing now is, of course, there's -- here in the U.S. anyway, there's opening up. But you've now got the complexity of supply chain, not just for us, but for companion products. So we have had some customers tell us that while they would -- while their demand is a little greater than what they forecasted, they are not forecasting more because another vendor was unable to get them the quantities they would like to have.

Now, it doesn't mean they've been zeroed out, but they, they may not be getting 100% of what they were forecasting from that other vendor. And as we are a companion product, they won't order as much because they -- it won't do them any good to have the companion product when they don't have the other product. So we've continued to see that a little bit beyond the pandemic. And as we've gotten into the supply chain issues.

We are seeing, though, that many customers -- many more than before, look to be recovering. So as we talk to them about their orders for the remainder of this year, they are forecasting greater volumes either because some of the supply chain issues that they're having with other vendors are clearing up and their demand is good and therefore they are forecasting to us greater volumes in Q3 and 4.

Greg Burns -- Sidoti and Company -- Analyst

OK. Thanks for that color. And then the -- I guess, just the commentary around the second half. You're not saying that you're going to get back to '19 levels.

We're just going to be somewhere in between '19 and kind of the highest you've seen over the last two years? Is that --

Paul Arling -- Chairman and Chief Executive Officer

Yeah. If you take '20, '21 and so far in '22, disregarding '19, which was a record year for us. That was a long time ago, pre-pandemic, as we all vaguely remember. But as you go into 2021 and thus far in '22, our forecast today would be that the back half will be the highest level of sales that we've had in any six-month period since 2019.

Greg Burns -- Sidoti and Company -- Analyst

Got it. OK. All right. Thanks.

And then lastly, any update on Nevo Butler, progress there or feedback from the customers that have launched it?

Paul Arling -- Chairman and Chief Executive Officer

Yeah, we've -- it's gone well so far. It's only in a limited area that one customer so far has launched. The results have been good so far. So we'll probably talk more about that as time goes forward.

Greg Burns -- Sidoti and Company -- Analyst

That customer, are they are they giving it out, like -- or is it an add-on service that the customers --  

Paul Arling -- Chairman and Chief Executive Officer

Yeah, it's for a premium subscriber. Yes.

Greg Burns -- Sidoti and Company -- Analyst

All right. Thank you.

Paul Arling -- Chairman and Chief Executive Officer

Yeah.

Operator

And speakers, there are no more questions on queue. I will now turn the call over back to Paul Arling for closing comments.

Paul Arling -- Chairman and Chief Executive Officer

OK. Thank you for joining us today and your continued support of UEI.  A couple of logistical things we plan to present at B. Riley's Annual Investor -- Institutional Investor Conference in L.A. in May.

So look for announcements on that. And our Annual Meeting of Stockholders is scheduled for June 7th in Scottsdale. Hope to see you soon. Everybody, have a great day.

Operator

[Operator signoff]

Duration: 33 minutes

Call participants:

Kirsten Chapman -- Investor Relations

Paul Arling -- Chairman and Chief Executive Officer

Jeff Van Sinderen -- B. Riley Securities -- Analyst

Bryan Hackworth -- Chief Financial Officer

Greg Burns -- Sidoti and Company -- Analyst

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