Ladies and gentlemen, thank you for being here. Welcome to the Fourth Quarter 2020 Universal Electronics Inc. Earnings Conference Call. All participant lines are currently in a listen-only mode. After the presentations, we will have a question-and-answer session. Today's program is being recorded. I would now like to introduce your host for today's program, Kristen Chapman from LHA Investor Relations. Please proceed.

Thank you, Jonathan, and thanks to everyone for joining us for Universal Electronics' fourth quarter and year-end 2020 financial results conference call. You should have received a copy of the press release by now. If not, please reach out to LHA at 415-433-3777 or visit the Investor Relations section of our website. This call is being broadcast live online, and a webcast replay will be accessible for one year at www.uei.com. Any new material non-public information discussed will also be available on the company’s website for at least one year, and you can listen to the webcast replay for that information. During this call, management may share forward-looking statements about future events and the company's financial performance. Please note that these statements are projections and actual results or events may differ significantly. This includes our ability to develop and deliver new technologies that meet our current and prospective customers' needs, like the Apple TV remote QuickSet Widget, QuickSet Cloud, UEI virtual agent, UEI comfort, and other voice-enabled products and platforms. Additionally, we may see changes in consumer sales that lead to new purchasing habits and more sales opportunities for the company. The industry trend towards offering consumers advanced technologies, hybrid platforms, expanded smart home offerings, and interactive services continues. Our management will also strive to manage business through product development, product mix and deliveries, increased licensing opportunities, and operational efficiencies to maintain net sales, margins, and earnings as planned. Disruptions in our supply and logistics chains may cause production and delivery delays, and we will consider the impacts of natural disasters and public health crises, including the COVID-19 pandemic, on our operations and management's ability to handle those challenges. The company does not commit to revising or updating these statements based on future events or circumstances and refers you to the press release and SEC filings for more information. In our financial remarks, adjusted non-GAAP metrics will be mentioned. Management uses adjusted non-GAAP metrics for budgeting, planning, and operational and financial decisions, believing these metrics help investors assess UEI's core operating and financial performance. They also aid in comparing with competitors' results and trends. A detailed description and reconciliation of these adjusted non-GAAP measures against GAAP is included in the press release issued today. Present on the call are Chairman and Chief Executive Officer, Paul Arling, who will provide an overview, and Chief Financial Officer, Bryan Hackworth, who will review the financials. Paul will return to offer closing comments and open the floor for questions. It is now my pleasure to introduce Paul Arling. Please proceed, sir.

Good afternoon and thank you for joining us today. We are thrilled to discuss the most profitable year in our history and highlight one of the strongest opportunity landscapes we have ever experienced. As we all know, 2020 presented unprecedented challenges, and the UEI team quickly took steps to manage what we could control, prepare strategies for the unpredictable, and invest in the ongoing convergence of home entertainment and control devices. Although our 2020 sales were affected by factors beyond our control, such as quarantines that limited new installations for home entertainment and security customers, we mitigated this impact through careful execution of our long-term strategy, allowing us to operate efficiently and allocate resources for future investment. We remain focused on driving innovation, ensuring product quality, and fostering new customer relationships. In recent years, we have strategically shifted toward more advanced, higher-margin solutions, which has expanded our gross and operating margins. In fact, our Q4 results surpassed the strong performance we achieved in Q3, and our full-year margins nearly reached 31% for gross margin and 11% for operating margin. Consequently, even with significantly lower sales, we achieved the most profitable year in our 35-plus-year history. Looking ahead, we are excited about our current position and the opportunities before us, with a continued goal to develop the future of wireless control and sensing technologies. In 2020, we saw significant adoption of our advanced two-way voice-powered remote controls in our second-largest market, EMEA. We have collaborated closely with leading video service operators in Europe to support the launch of new video delivery platforms that integrate linear and streaming services. Just like the growth we saw in North America, our European customers experienced solid subscriber uptake of these new platforms. Our pipeline for new customer engagements remains strong as customers in Latin America and India look to implement either our new custom solutions or our Android TV-powered control solutions, aiming to launch hybrid video platforms for their subscribers in 2021 and beyond. In late 2020, we introduced a new streaming service control solution for Apple TV, tailored for multi-channel video program distributors. This Apple TV remote control retains all original functionalities, including Siri, and adds features to simplify live TV viewing, such as keys for channel surfing and accessing the electronic program guide. This remote is the second M5 certified remote control available, following Apple's own Siri remote. While we cannot share specific details about customer engagements, we are actively collaborating with numerous current and new customers worldwide to launch this product throughout the year. Given the strong enthusiasm from our partners, we are confident in another successful launch in the MVPD channel. Another significant growth driver for our 2020 performance has been the robust momentum in TV sales and our expanding presence in that market. UEI QuickSet remains the leading licensed connectivity software and cloud service solution on television platforms globally, with the top three global OEM brands utilizing QuickSet. QuickSet has proven its long-term value on these platforms, including the addition of IoT device interoperability support on some of the newer LG TVs. Stay tuned, as we expect more of these platforms to evolve into successful smart home hubs with QuickSet’s assistance. Moving into 2021, we broke our tradition of attending the International Consumer Electronics Show in Las Vegas, opting instead to host our first virtual Universal Technology Summit. Our product and marketing teams created an engaging virtual experience, including short-format videos, live presentations, and demonstrations of our latest products and technologies. During this event, our team conducted over 60 meetings with hundreds of participants from leading companies in home entertainment, security, IoT, HVAC, hospitality, and home automation. I will now share highlights from our new product introductions. QuickSet Widget is a comprehensive connectivity solution that adds intelligence and QuickSet Cloud to connected products, driving digital transformation in customer experiences. This solution allows OEMs to modernize their product offerings to be connected, managed, and secured, while providing ongoing support and services in a cost-effective manner. QuickSet Widgets will be available with built-in Wi-Fi and Bluetooth low energy connectivity, facilitating interoperability and device management through QuickSet Cloud. We plan to launch QuickSet Widget later this year, starting with our new line of thermostats. The UEI comfort family, a pioneering ambient-aware connected thermostat line, leverages two decades of experience in delivering advanced control solutions to top HVAC brands. This line simplifies installation, daily use, and ongoing climate control support across residential, commercial, and hospitality settings. With various built-in sensing capabilities, the UEI comfort family tracks environmental factors like temperature, humidity, and CO2, as well as occupancy, to optimize comfort and minimize energy costs. The first product in this line will be available to OEMs in the latter half of 2021, with a hospitality-focused version to follow later in the year. We received strong interest in this platform from prospective customers during our event. As is the case with all our new product launches, we look forward to announcing new customer wins when we're permitted to do so. Another exciting new service we showcased last year and officially launched this year is our UEI Virtual Agent, which utilizes AI-driven technology to provide self-help capabilities across various screens, including TVs, phones, computers, and tablets. This integrated support framework improves user experience by addressing common challenges related to onboarding, feature discovery, and troubleshooting. Moreover, our agent reduces support costs for manufacturers and service providers managing a network of connected devices and can be seamlessly integrated into connected devices as well as into mobile apps and websites. The focus on in-device user support is especially relevant in light of COVID. This service has been developed and is actively utilized on our online global product support platform. Our team anticipates sharing portions of the Technology Summit at an upcoming analyst and investor event scheduled for March 19th. Please stay tuned for more details. All of these new products and many more that we will introduce in the coming months share a common theme of making it easier for consumers to enjoy their products and technologies at home. Increasingly, people are consuming more types of video content across multiple rooms and devices for longer durations than ever before. Amid this shift, one constant remains: home control is converging. Therefore, UEI continues to provide operators, OEM brands, and integrators with an extensive range of solutions centered on the convergence of home entertainment and home automation. Now, I will hand the call over to our CFO, Bryan Hackworth, to go over the financials. Please proceed, Bryan.

Thank you, Paul. First, I will review the results for the fourth quarter of 2020 compared to the fourth quarter of 2019. Net sales met our expectations at $156.4 million. This compares to $174.8 million for the fourth quarter of 2019. As anticipated, sales continue to reflect the impact of COVID-19 on our subscription broadcast and security customers, specifically those without self-install capabilities. Partially offsetting this headwind was growth in high margin chip sales and royalties, as our technologies continue to gain traction in a few of the largest TV OEMs in the world. These technologies can be embedded in multiple devices, sold in various form factors and distributed through multiple channels. Our gross profit was $52.6 million or 33.6% of sales, compared to $51.2 million or 29.3% in the fourth quarter of 2019. This improvement is a direct result of our strategic investments in product innovation, which has generated a favorable sales mix with an increase in both chip sales and royalty revenue. Further, in the fourth quarter, we received a labor subsidy from the Chinese Government. These types of subsidies are common, but have typically been received evenly throughout the year versus concentrated in a given quarter. Operating expenses were $33.5 million, compared to $33.9 million in the fourth quarter of 2019. SG&A decreased to $25.3 million from $26.7 million in the prior year quarter, reflecting overall cost control and lower variable expenses. R&D expense increased to $8.2 million this year, compared to $7.2 million in the prior year quarter, an increase of 13% as we continue to utilize a portion of OpEx savings to fund the continued development of advanced technologies. Operating income was $19.1 million or 12.2% of sales, compared to $17.3 million or 9.9% of sales in the fourth quarter of 2019. Our effective tax rate was 15.5%, compared to 20.7% in the prior-year quarter. For the fourth quarter of 2020, we reported our highest quarterly bottom line in the company’s history. Net income was $16 million or $1.14 per diluted share, compared to $12.8 million or $0.90 per diluted share in the same period last year. One of our goals beginning in late 2018 was to restructure corporate overhead, so we could reallocate capital to promising new growth areas, such as security and home automation. Fast forward a couple of years and our successful efforts have yielded additional investments in future products, technologies and markets, resulting in higher gross margins and a much improved financial profile. For the full year 2020, even with pandemic related headwinds contributing to a reduction of sales of $136 million from the prior year, we delivered earnings of $3.76 per diluted share. The highest in our company’s history, compared to $3.55 in 2019. Technology-driven product sales resulted in a gross margin rate, exceeding 30 points, 30.8% to be specific, compared to 26.7% in the prior year. Operating expenses were reduced to $123.8 million from $134.7 million and our operating margin exceeded 10%, increasing from 8.8% in 2019 to 10.7% in 2020. Next, I will review our cash flow and balance sheet. At December 31, 2020, cash and cash equivalents were $57.2 million, compared to $67.1 million at September 30, 2020. Cash flow from operations yielded nearly $30 million for the current quarter. We paid down our debt from $50 million to $20 million, while repurchasing over 180,000 shares for $7.9 million at an average price of approximately $43 per share. For the full year, our improved financial model resulted in cash flow from operations of over $73 million, enabling us to reduce our debt by $48 million, while repurchasing over 440,000 shares for $17.7 million at an average price of approximately $40 per share. We believe the future of UEI is very bright. We launched innovative products in the latter half of 2020 and have additional products scheduled to be launched in the first half of 2021. With sales growth expected to return this year, and the fact, UEI has become a more profitable company with strong free cash flow we believe UEI is currently undervalued. Therefore, our Board of Directors has approved an additional plan to purchase up to 300,000 shares, contingent on share price over the next few months. Now turning to our guidance. In the first quarter of 2021, we expect net sales to range from $150 million to $160 million, compared to $152 million in the same quarter of 2020. We believe our investments in R&D will continue to yield gross margins exceeding 30 points in the first quarter, but lower than the rate achieved in the fourth quarter. We also expect EPS to range from $0.83 to $0.93, compared to $0.81 in the first quarter of 2020. We continue to believe in our long-term growth target of sales between 5% and 10%, and EPS between 10% and 20%. I would now turn the call back to Paul.

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

Our first question comes from Greg Burns from Sidoti & Company. Please go ahead with your question.

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

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

Okay. So aside from that...

In the fourth quarter, we experienced success with royalty revenue, particularly with our technology and TV channels, which performed exceptionally well. We licensed our technology to three of the largest OEMs in the world, and we anticipate that this trend will continue. However, a notable anomaly in Q4 was that we received the majority of our annual subsidy in that quarter.

Okay. So it’s mainly coming from a slight decline in the gross margin. Were there any significant changes in operating expenses or are they roughly the same as before?

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

Okay. Great. When we assess the year-over-year revenue compared to the first quarter guidance, you've mentioned several announcements for new products and the launch of advanced platforms with new European operators, including the Apple Remote. There's a lot happening and a lot moving through the pipeline, yet there's not much growth year-over-year in the first quarter. Do you anticipate growth to pick up with these new initiatives rolling out throughout the year as we move past the first quarter?

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

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

QuickSet has gained significant popularity. As I mentioned earlier, the top three brands in the world that hold the largest market shares are current licensees using QuickSet in their products, and they are actually increasing the number of products that incorporate this technology. We see these developments as enhancements to the connected home experience through QuickSet. Over the last five years, QuickSet has expanded steadily with these key players, especially in the TV segment, and we are continuing to innovate by introducing new features. Innovations like the virtual agent and QuickSet Widget will allow for even greater expansion. We have a solid pipeline of interested customers, and some of them have previously been engaged with the virtual agent. The QuickSet Widget is a newer offering. We will showcase these innovations at what was formerly CES and is now the technology summit, and we plan to present them to investors and analysts in March. We believe these will further enhance the QuickSet product lineup.

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

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

Okay...

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

Okay. Great. Thank you.

Sure.

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

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

Sure.

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

I will address that. The market for these platforms consists of all the subscribers globally. Over time, the home entertainment experience will evolve to a point where people will seek to watch live content, such as sports and reality shows. These types of content are transient; you don’t typically revisit them years later, so live television will remain relevant due to this perishable content. Additionally, there are subscription-based video-on-demand, ad-supported video-on-demand, and other content sources as the world transitions into hybrid platforms. Large companies have the resources to develop their own platforms, enabling them to manage everything from the content to voice engines, which can be significant for them. However, there are numerous companies with a few hundred million subscribers that may either adopt a platform created by a larger corporation, source it from them, or opt for a platform designed by a technology company like Apple, which integrates various entertainment options. The market for these platforms is likely to grow because, while some companies have millions of subscribers, there are hundreds of millions of subscribers worldwide. We believe that platforms like those based on Android or the Apple TV will have substantial growth potential in the coming years, particularly for smaller operators and also for some larger ones that have not effectively built their hybrid platforms. By hybrid, I mean platforms that allow viewers to access everything they want to watch—sports, reality shows, and then switch to streaming services like Netflix, Prime, Hulu, or others. It’s generally accepted that these platforms represent the future since they align with what viewers want and how quickly they want access. Our focus is on partnering with those who are developing these platforms to create the best control technology for them. We have made significant progress with many of our partners, and we believe this market is still evolving with strong prospects for the upcoming years.

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

I don’t have an exact figure, but I would estimate that advanced platforms make up at least half of our business. Currently, around 22% to 25% of our business is from non-AV products, while the majority of our AV business is in these advanced platforms. Keep in mind that the portion not within advanced platforms may account for more units sold, and as we transition to advanced platforms, the average selling price tends to increase. This presents a growth opportunity for us. The older products, such as simple IR controllers, are less sophisticated and priced lower compared to two-way Bluetooth Low Energy or RF devices with built-in voice capabilities, which are more advanced and come at a higher price point. As the industry shifts toward these platforms, we are likely to experience positive growth momentum as the market gradually embraces these applications.

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

Our approach to capital allocation is certainly focused on benefiting our shareholders. They expect a certain return on the cash we hold. When we invest in our own business, we see a strong return, which we have demonstrated through our capital gains. If there are internal investments that can deliver returns in line with shareholder expectations, we will pursue those. We view our stock purchases strategically, as if we were considering an acquisition. Each quarter, we assess our valuation and forecast, which guides our capital allocation discussions with our Board. If we identify a significant disparity in stock value, we tend to be more aggressive in our buying, and if that disparity narrows, we scale back. We also look externally for investment opportunities with similar criteria; we are keenly aware that shareholders expect a good return on every dollar. If we find investments that can enhance our valuation and yield solid returns, we will take them into consideration. We review our options quarterly, recognizing that the opportunities for internal investment, external investment, and stock purchases can vary. Should we identify any opportunity with a particularly favorable return, we will allocate more capital towards it. If none of these avenues can provide the desired equity returns, we would contemplate returning cash to shareholders, as it's important to maintain that level of return.

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

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

I am sorry, 18?

Comcast was the only customer exceeding 10% and they were at 18.3%.

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

Sure.

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

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

Thanks.

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

We are not noticing a significant change in order patterns among customers who have not adopted a self-install platform. While there may be minor improvements, they aren’t substantial. The impact of the pandemic, whether due to quarantines, shutdowns, or consumer hesitance about having strangers in their homes, still influences this. When a customer lacks a self-install option, they need to invite a technician into their home for installation. That said, operators are aware of these challenges. Beyond the pandemic, it’s clear that consumers want to access a variety of content. They are engaging with both live broadcasts and on-demand services, collectively watching for around five hours a day in the U.S. This indicates a demand for diverse viewing options that consumers are willing to pay for. The industry is gradually shifting towards these self-install platforms. Though it might take longer than expected, progress is being made, and even those with non-self-install systems are starting to adapt.

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

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

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

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

Okay. Thanks for taking my questions and continued success.

Sure. Thank you.

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

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

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