Good day, and thank you for standing by. Welcome to Universal Electronics Fourth Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kirsten Chapman, LHA Investor Relations, a division of Alliance Advisors. Please go ahead.

Thank you, Amy, and thank you all for joining us for the Universal Electronics 2023 Fourth Quarter and Year-End 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 of this call, including any additional updated material non-public information that might be discussed during this call will be available at the company's website at uei.com for at least one year. 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 may differ materially from those projected. These statements include the company's ability to timely develop and deliver new technologies and technology updates and related products introduced at this year's Consumer Electronics Show, including new products and technologies in climate control, smart home and security spaces, continuing to achieve new product development and design, near and longer-term successes as anticipated by management in the connected home space and particularly in the climate control market. The continued successful collaboration with existing and new customers in developing and launching next-generation products, software solutions and technologies into existing and new markets, which result in increased sales and share growth in new markets for the company; management's ability to continue to manage its business inventories and cash flows to achieve its net sales margins and earnings through financial discipline and cost-saving initiatives, operational efficiency, liquidity requirements, factory optimization strategy, R&D spend, product line and business management and other investment spending expectations, including our ability to execute on our stock repurchase programs; the company's continued ability to enforce its patented technology against review; the decline of the traditional subscription broadcasting business dissipating as management anticipated; the continued fluctuation in the company's market capitalization and the direct and indirect impact that the company may experience with respect to its business and financial results stemming from the continued economic uncertainty affecting consumers' confidence in spending, natural disasters, public health crises, government actions 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 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 2022 annual report on Form 10-K and the periodic reports filed 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 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 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 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 are 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, Paul.

Thank you for joining us today. Our vision to connect the home and our mission to create smarter living are coming to fruition. We are building for a better future and made significant progress transforming UEI during 2023. We continued our product expansion into the growing climate control and home automation markets. We executed footprint optimization, efficiency, and corporate restructuring initiatives, and recent public events, such as the affirmation of our patents, and our powerful CES 2024 showcase, combined with ongoing customer wins, have fortified our foundation to drive growth. Based on our improved foundation, our continued streamlining, and our outlook in customer and product shipment projections, we expect to be profitable for the full year of 2024. Confident in our strategy and long-term growth, we initiated a stock repurchase program in the fourth quarter, which we plan to continue in 2024. Bryan will review in greater detail our financial results, our progress in our footprint optimization and efficiency initiatives, and our 2024 outlook. Now I'd like to discuss our patents, our products and our customers. At UEI, we pride ourselves in providing the most innovative, highest level of quality products. Over the past 30 years, we have amassed over 500 issued patents with over 200 more pending, which create significant differentiation in the features and capabilities we offer our customers compared to our competitors, as evidenced by our strong and sustained gross margin delivery over the many years. We provide customers with advanced wireless control through finished goods, embedded technology and licenses for software and services. It is important to note that most of the leading home entertainment companies in the world have chosen to partner with us on these advanced solutions. When non-customers use our technology, we act. Our first path to compensation is licensing. If an agreement is not achieved, we vigorously protect our intellectual property. As we have communicated before, we have been in litigation regarding patent issues with Roku for quite a few years. Last month, the U.S. Court of Appeals for the Federal Circuit affirmed a prior ruling by the U.S. International Trade Commission confirming Roku's infringement of one of our QuickSet patents. This decision will strongly support our return to the U.S. District Court to request the case be reviewed for monetary damages regarding the infringing activities of Roku and its TV partners. We are confident in our position and look forward to moving ahead with the case to its positive conclusion. Also in January, we had a productive week at CES, which provides a once-in-a-year industry opportunity to connect with customers, expand our business partnerships and capture new opportunities. We demonstrated our latest products and technologies across all our business lines to a worldwide audience of customers, prospects and business partners. I'll review some of our CES product highlights. This year CES had the largest in-person presence since 2020, pre-COVID. At this show, we hosted over 340 visitors to our booth representing over 200 different companies. A third of those meetings were with new potential customers that we do not currently do business with. A testament to the strength of our overall product and technology offering. Continuing our expansion into the climate control space, we expanded our UEI tied portfolio of smart thermostats, with the addition of four new products to our product road map as well as two new HVAC system accessories designed to simplify and extend climate control installation and functionality. Our lineup now includes a wireless bridge that allows for portability of the thermostat controllers anywhere in the home, a bridge with a built-in Zigbee and Matter capabilities for whole home control, indoor air quality sensor integration with built-in control of in-room air purifiers, compatibility with the UEI supplied smart thermostatic radiator valve accessory for European households, and a C-Wire adapter for easy installation of low-voltage thermostats in older homes. Our customers are quite interested in these solutions as they improve the performance of existing systems in new ways, as well as create new systems that are more integral to the smart home. We also unveiled the full capabilities of our QuickSet widget and Nevo software running on a wireless UEI type platform. This product delivers a complete climate control and smart home controlled dashboard. It also enables unique control experiences between different brands and device categories without the need for an additional hub, all from the same Tide thermostat control interface. We showcased our family of UEI Butler smart control hubs powered by UEI's QuickSet, complemented by UEI's Zigbee sensors and accessories that deliver a tailored experience for increased interoperability with diverse brands and ecosystems for the smart home. As reviewed on recent calls, we have been growing the number of customers as well as increasing our level of engagement with them, especially in home automation, climate control, and security. During Q4, in our Hash channel, which is home automation, security and hospitality. We were awarded a new project for a smart door lock and added three new channel partners for our Tide Climate Control products in the multi-dwelling unit, energy and utilities, and custom integration space. We were also awarded two new product design wins for an existing motorized shade customer, and secured a new product win with a major DIY home security customer. We expect some of these products to begin shipping in late 2024 and into 2025. In the HVAC OEM channel, we are actively working on three new products for Daikin, our largest HVAC OEM customer. Two are targeted at the European market and the other is bringing connectivity to their existing footprint of HVAC systems worldwide. In addition, we have product and technology design proposals active at five other major HVAC OEM brands, leveraging the design, features, and architecture currently deployed in our Tide Climate Control products. In home entertainment, we are seeing a slight uptick in new product engagements with major customers in North America, EMEA and India. While the volumes on these new product opportunities are not huge, the shorter development cycles relative to new smart thermostat developments offer potential near-term revenue in the back half of 2024. Based on the growing backlog of active new product developments, we continue to be optimistic about our long-term revenue potential as these new products are introduced and begin to ramp.

Thank you, Paul. First, I'll review the results for the fourth quarter of 2023 compared to the fourth quarter of 2022. Net sales were $97.6 million within guidance. This compares to $122.8 million for the fourth quarter of 2022, reflecting core cutting in the video service channel in an environment where households are spending less on discretionary goods. Gross profit for the fourth quarter of 2023 was $29.5 million or 30.2% of sales compared to 30.7% in the fourth quarter of 2022. Our gross margin rate exceeding 30 points is a result of a more optimized factory footprint, a favorable product mix, and a strong U.S. dollar. I'll now take a moment to provide an update on our factory optimization plan. As mentioned on the previous call, we closed our Southwestern China factory in September after having gained confidence that our newly formed Vietnam facility was operating at the required level of efficiency. We're pleased with the progress our Vietnam factory has made to date, that has met or exceeded our expectations and we expect additional operating efficiencies to be achieved as it continues to scale. We're now executing the third phase of our plan, streamlining our operations in Monterrey, Mexico. We're on target to commence operations in the second quarter of 2024 in a smaller, more efficient facility that will supply products for certain North American customers. As we evolve as a company, we will continue to analyze our global footprint and identify ways to operate more efficiently. For the fourth quarter of 2023, operating expenses were $27.6 million compared to $29.4 million in the fourth quarter of 2022, reflecting the execution of our cost savings initiatives. SG&A expenses were reduced to $21.1 million compared to $21.7 million in the prior year quarter. R&D expenses were $6.5 million compared to $7.7 million in the prior year's quarter. Operating income was $1.8 million compared to $8.3 million in the fourth quarter of 2022. Our fourth quarter 2023 effective tax rate was 23% compared to 27.3% for the fourth quarter of 2022. Earnings per diluted share were $0.07 for the fourth quarter of 2023, compared to $0.44 in the fourth quarter of 2022. Next, I'll review our cash flow and balance sheet. At December 31, 2023, cash and cash equivalents were $42.8 million compared to $66.7 million at December 31, 2022. For full-year 2023, cash flows provided by operating activities were $25.2 million. With interest rates at an elevated level, we repatriated foreign earnings, enabling us to reduce our outstanding debt from $88 million at December 31, 2022 to $55 million at December 31, 2023. We also repurchased 100,000 shares in the open market in the fourth quarter for approximately $860,000 and plan to buy back additional shares in the first quarter of 2024. Now turning to our guidance. UEI continues to evolve as a company. While we remain committed to developing innovative solutions in the home entertainment space, in recent years, we've increased our focus in growth areas such as climate control and home automation. Paul mentioned several project wins in these channels with launches scheduled throughout the latter half of 2024 and 2025. We believe these project wins in the Connected Home channel, coupled with a more efficient factory footprint, will result in earnings growth and full-year profitability. For the first quarter of 2024, we expect sales to range from $86 million to $96 million, compared to $108.4 million in the first quarter of 2023. We expect loss per share to range from $0.27 to $0.17 compared to a loss of $0.28 per share in the first quarter of 2023.

Thanks, Bryan. As you know, our business has been greatly affected by cable and satellite operators purchasing far less volume than in prior periods. This yields two important questions: When does the subscription broadcasting market begin to stabilize? And when do the connected home channels produce sufficient revenue growth to offset any remaining weakness? While we will not venture to forecast the precise occurrence of either of these developments, we are confident that the actions we have taken in all areas of the business, cost management, and, most importantly, product and customer development, will yield sales and profitability improvements. We believe that the decline of our traditional subscription broadcasting business is gradually dissipating. We expect in 2024, the level of slowdown to be at its lowest level in four years. While some customers continue to be light, new projects in hybrid and streaming services are providing an offset. As we have highlighted before, over the past two years, we have shifted our product and customer development focus towards connected home markets. Projects that we won last year and frankly, the year before, are finalizing development and test this year, and we expect to begin enjoying revenue from these projects as this year progresses. We have secured tangible wins that see growth in the second half of 2024 and into '25, '26, and beyond. We are adding new customers and new product design wins every quarter. In addition, we are working with customers to secure long-term future business in these new product categories and our pipeline of new project opportunities, just counting the connected home space, exceeds $200 million in potential annualized revenue. Just as our ability to layer new customer and new product design wins helped us achieve dominance in home entertainment control, we are replicating this approach to achieve long-term success in these new markets. Bottom line is that our innovative products and technology solutions are driving our ability to capture new customers and design wins, which is helping to create new revenue streams. Our long-term opportunities are plentiful. Confident in this growth strategy and our long-term success, we are investing in our future. As always, stay tuned. Operator, we can now open up the call for questions.

And our first question comes from Steven Frankel with Rosenblatt Securities.

These insights are really helpful. But maybe first, let's start with the guidance and the numbers. You did institute some cost savings, but is that fully reflected in Q4? Or should we expect OpEx to come down a little more as we go through 2024?

Most of it's incorporated, Steve. The OpEx component, if you look at the 2023 total OpEx versus 2022, it came down by about $5 million. So a lot of what we plan to execute, we actually executed in 2023. Now there is a little more that will carry over to 2024, but the team did a good job from an operating expense perspective, and we executed pretty quickly in the last fiscal year.

Okay. And so that implies some gross margin pressure in Q1. Would you expect gross margins to bounce back as these new products shipped in the back half of the year?

Yes. When discussing gross margin pressure, I believe the gross margin is performing well. The operations team has executed effectively. As mentioned earlier, we initiated operations in Vietnam in June successfully, allowing us to close down GTQ ahead of schedule. The next step is to streamline operations in Mexico, which we anticipate will happen in the second quarter. Gross margins for the fourth quarter were 30.2%. Some of the expected savings from the factory are tied to unabsorbed overhead, but I have been cautious in my estimates. One reason for the increase in margins is that the team's actual savings have exceeded my conservative projections. I expect similar outcomes in Mexico, where I am again being conservative. Although many factors affect gross margins, I see some potential upside with Mexico. However, several elements will influence the gross margin rate, including foreign exchange. Currently, we have a strong U.S. dollar, and I hope that trend continues, but there are many variables involved.

Okay. And then while I have the floor for a couple of more questions, significant customers in Q4?

Daikin, 10.7%.

And then Paul, kind of where do you think the mix of the business is today roughly between this new world, home control security, hospitality and the traditional CE business?

Yes, the majority of our business is still in home entertainment and consumer electronics related to it, but we anticipate this will change over time. I'm not sure if it will fully shift this year, but the HVAC market alone is already larger than home entertainment, not even considering home automation, security, or hospitality. Years ago, our market share in home entertainment was just 4%, and later it approached 100% in certain periods. We see a similar potential for growth in this area. There are many products required for controlling homes, and we believe there are numerous opportunities to enhance them, making them more sophisticated, much like how home entertainment controls evolved from basic functionalities to advanced features. We expect significant innovation in this sector, and we believe we are at the forefront of it. At various trade shows, we've showcased many innovations, and customers seem impressed. They're eager for solutions that integrate better into smart homes and enhance existing systems. We are introducing new protocols, designs, and capabilities that have generated a lot of interest. We are beginning to achieve successes similar to those we experienced in home entertainment years ago. As we strengthen these relationships, we foresee this segment becoming a much larger part of our business. In essence, we believe that connected home solutions will eventually dominate our revenue streams. While home entertainment remains a valuable market, subscription broadcasting has diminished and likely won't recover to its previous levels. Nonetheless, home entertainment continues to play an important role in our operations, even as television viewing decreases. Ultimately, we believe most of our revenue will come from connected home customers.

Okay. Regarding HVAC, you mentioned in previous quarters a significant North American win. Is that still scheduled for shipment this year? Additionally, you mentioned having a large portion of the top 10 players globally. Can you provide an update on how many of those companies you have secured wins with so far?

There are good sized projects that are coming. Many projects we do are smaller, always have been, even in home entertainment. But there are large ones out there that help more. There is one this year, that's above average size that we expect to ship in the probably Q3 around that time frame. There are more projects, as I alluded to, there's more than $200 million, it's closer to $230 million in the pipeline. We haven't won the projects yet, but there's that much potential. In that $230 million, there's a few projects even bigger than the one I just mentioned. So a lot of potential out there in this arena, and we're winning projects here at a pretty good clip, racking them up just like again, we did years ago in home entertainment. So our share will increase. We'll continue to improve the products because it's a tireless effort, just like it was in home entertainment. And as we improve the functionality of these products, it makes it easier. It's never easy, but it makes it easier to sell these customers on these projects.

Our next question comes from the line of Greg Burns with Sidoti.

Bryan, I'd like to revisit the first question regarding the first quarter guidance. Can you explain the difference between the high end of the revenue range, which is similar to what you reported for the fourth quarter, and the projected loss of $0.17 when you earned $0.07 in the fourth quarter? Is there a significant drop in gross margin for the first quarter or new expenses that we need to be aware of?

Yes. If you're comparing Q1 2024 versus Q4 2023, operating expenses will be a little higher sequentially because in Q1, you've got CES, you've got wage increases, merit increases, and then you've got fringe rate benefits that reset, things of that nature. So Q1 '24 versus Q4 '23 will increase. That might be part of the gap you're looking at.

Okay. And then that first quarter is kind of a good run rate to build the rest of the year off of them?

Not necessarily. I think Q1 is going to be a little high because of the reasons I just mentioned.

Okay. Regarding Roku, is the monetary settlement potentially for back damages related to products that are currently on the market? Are they still infringing? How should we evaluate the potential size of the settlement for you?

Yes. They have long been infringing these patents, although they would likely argue otherwise. The ITC disagrees, having confirmed their infringement. There has been significant prior infringement, as they have been infringing these patents for years, which will be the basis of our arguments in the case. We believe our current arguments to lift the stay on this case are quite strong. Eventually, there will come a time when a case cannot be stayed indefinitely. We are confident there are valid reasons to unstay the case now, allowing us to present our case in court regarding their infringement of these patents.

Do you have an estimate of how many devices are in the market that infringe on your patents? Is it their streaming devices? Is it their TVs? Like if you have a sense of what the number is?

It's both, and I don't have that number because, again, I don't know that they disclose unit volumes, but as you'd imagine, it's quite a few. We presume millions, tens of millions over that time frame. I don't have the exact number on that, though, and I couldn't disclose it anyway. I don't know our volumes are, but people could do their own math on how many they've sold over the last many years. It's a lot of units. Let's just put it that way. And again, it's all their product categories. Their controllers, their sticks, their boxes, their televisions.

Okay. Are current or new products still currently infringing? Or have they worked around your patents?

Well, that's a good question. There are many patents in this lawsuit. So I can't go through each patent. Some of the patents would apply not to the televisions but only to the set-top boxes, etc. So it's a little bit more complex than just saying that all of them violate all. But again, if you violated the IP at any point, you're liable for damages.

Okay. And then the $200-plus million pipeline. I think last quarter, you had also set a number, I think it was $80 million around what you've actually won. What is actually in the process? Has that number changed at all? Has that gotten any bigger?

Yes, there have been additional wins in that area. These projects are currently under development and will go through testing with customers before being launched at a later date. As I mentioned earlier, these wins were actually secured not last year, but the year before, and they have been in development since then. The goal is to introduce these products this year.

Okay. And then, I guess, the list of new products and customer wins you announced for the fourth quarter. Those are all net new for the fourth quarter, not just updates on that previous $80 million group of...

That's correct. They are new. Projects in our system go through different categories. There are qualification projects and quotes, and that's progressing towards what we call won. Qualification is the first stage where you begin to work on the product to align it with the customer's interest. Quote means you've moved to that stage where the customer has expressed interest in the product and wants you to provide a quote, along with specifications and pricing. Sometimes it’s competitive, and other times it isn't, especially with innovative products. Customers might be deciding between your new product and the one they currently sell. So don’t view quotes as an active bidding process with other vendors; it may just be that they're interested in your innovation. Then there’s won, meaning we’ve successfully secured the project. The $80 million we discussed earlier was won. The $200-plus million, which is actually higher than that, is currently in the qualification and quote stage, meaning we haven't won them yet; however, once they reach the quote stage, our win rate exceeds 50%.

Our next question comes from the line of Jeff Van Sinderen with B. Riley.

I guess just if we can circle back to Roku for a minute. I'm just curious what do you think the probability is that Roku might sign a license with you. It’s not too late, I guess? And then also, are there any other companies that are infringing in a similar way?

Yes, regarding Roku, I can’t speak for them as that’s a decision they need to make, and we would need to come together on that. From the beginning of this process many years ago, our primary goal has been to ensure that they use our properties while paying a fair market-based license for them. We have consistently communicated this desire to them and anyone else who inquires. This has been our stance from the start, two years ago, three years ago, and it remains the same now. We will continue to pursue this until it is realized. If they are open to having a reasonable discussion to achieve this, we are more than willing to engage. We are not looking for litigation; rather, we have developed unique ideas in this marketplace, features, and products that were unprecedented and which we have patented. We expect to be compensated for them. As I mentioned in my prepared remarks, many leading companies in home entertainment are using these features in their products and they have acknowledged this by licensing from us, purchasing chips, or buying products that incorporate these features. We simply want to be paid for what they have developed. If they are ready to discuss this, we have been open to that from the beginning.

Right.

There may be some exceptions, but not many, as most major companies are our customers who are purchasing products or licensing from us in some manner.

Okay. That's fair enough. Let's hope Roku comes to their senses and decides to sign a license. Can you speak to what you think the growth rate of the HVAC and hash business, if you kind of look at those together this year, what that growth rate might be looking at all the new projects you're taking on that will start to ramp later in the year and so forth?

I can't provide the exact growth rate as it will be influenced by many factors, including the timing of shipments this year. However, I can say it's similar to what we experienced in home entertainment years ago. The growth rate in HVAC is probably around 8% to 10%. In home entertainment, it was around 5%, but our growth was higher, typically 5% to 10%, due to gaining market share. If the market grew by 3% in a year, we might grow by 8% because we were winning business with superior products and attracting new customers. We're adopting a similar strategy now. We expect the growth rate to be 8%, with plans to outperform that as we replace existing products from other vendors with our advanced offerings. We've already secured projects with five of the top eight HVAC companies globally, including Daikin, our largest customer. We are close to finalizing a deal with a sixth company. This is how our journey begins; winning a few projects sets the stage for future successes. You won't capture all projects at once, but with well-executed work and great products, we aim to secure more contracts over time, and we are already making progress towards that goal.

Okay. So just to clarify that, it sounds like you will have six of the eight. Is there any reason you couldn't get the other two and have all eight?

Correct. We can. That will be the goal. Again, as you probably have heard me say many years ago in home entertainment, I used to say this when our market share was 4%. We are pursuing our God-given right to 100% market share.

Right, okay. And just then...

People thought I was crazy when we only had 4%. However, through product innovation, we've developed a superior solution in certain parts of the world. We were dedicated to this process and often incorporated unique features that are patented. We also possess the unique capability, through our data, expertise, and intellectual property, to create a better product than any competitor. We are starting to apply this approach in the Climate Control market. While many products in this space are decent, some fall short. The current vendors provide only average offerings, and we believe we can collaborate with these companies to develop improved products that offer more features and better integration with home systems, making them more essential to the smart home. This is our ongoing effort, evident at events like CES and AHR trade shows, where we engage directly with customers. Currently, five of the top eight companies are working with us on projects or purchasing from us. We're optimistic about securing the sixth partnership, and as you mentioned, there's no reason the other two companies wouldn't recognize the same potential.

Showing no further questions at this time. I would now like to turn the conference back to Paul for closing remarks.

All right. Thank you for joining us today and for your continued support of UEI. We plan to present at Sidoti’s virtual Small Cap Conference in March. We look forward to seeing you there. If you could be there. Have a great day.

And this concludes today's conference call. Thank you for participating. You may now disconnect.