Earnings Call Transcript - UEIC Q3 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to the Universal Electronics Third Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the 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 comments over to your first speaker today, Kirsten Chapman at Alliance Advisors of Investor Relations. Please go ahead.

Kirsten Chapman, Investor Relations

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

Paul Arling, CEO

Thank you for joining us today. As projected, our customer product development and footprint optimization initiatives are beginning to deliver growth and profitability. Q3 2024 net sales were $102 million, solidly within guidance. Gross profit increased 380 basis points year-over-year, and our bottom line continued to improve with Q3 EPS reaching $0.10. We expect these positive trends to continue with top and bottom line growth over the prior year period for Q4 of 2024. Our outlook also includes continuing this successful trend of sales and earnings growth into the full year 2025 and beyond. I'll review some of the elements driving our optimism and supporting our outlook. In the Connected Home, we continue to foster relationships in climate control with many of the top OEM brands in North America, Europe, and Asia. The HVAC industry has not been as robust as prior years due to temporary challenges, such as lower housing starts and tempered government incentives, but it clearly has the potential for latent demand to build over the next few years. As the markets return, we expect to expand new product opportunities with our existing accounts. In the meantime, we are continually making progress to build our market share, working to qualify new product opportunities and build on our existing sales pipeline for 2026, 2027, and 2028, which accelerates future growth. In Q3, we continued to garner share. With Carrier, we began shipping our first advanced smart thermostat. We have been working collaboratively with Carrier to ensure our first product together delivers the full capabilities that their consumers demand. While we are excited about this new product launch, we are equally enthusiastic that Carrier has expressed a strong desire to expand our business, and we are already actively engaged in discussions about several new climate control products that they would like to add to their lineup. With Daikin, we continue to align our respective development roadmaps to support their product priorities and timeline. In 2024, we had a number of new and replacement products, which were previously on hold, released for development kickoff, including their next-generation WiFi adapters that deliver predictive maintenance capabilities for their authorized dealers, as well as several major new models with expanded features and functionalities. Many of these products will be released during 2025 and into 2026. Our TIDE platform continues to garner design wins. We are currently in the final stages of development for two of the top 10 global HVAC OEMs. These products are scheduled to launch early next year. Also, in combination with our TIDE BRIDGE, our TIDE DIAL smart thermostat is undergoing final user testing with a major European utility company. We expect this solution to be launched in 2025. Additionally, we have secured design wins for a smart hub Gateway with Hunter Douglas and two new wireless RF controllers with Somfy, a major motorized shade controller brand. We also recently introduced a Zigbee smart thermostat for a major North American security brand and have signed a national distribution agreement for our line of professional security sensors. Turning to the markets in general. There are many growth drivers increasing future opportunities. The global HVAC market is being driven by rising energy costs with increasing demand for energy-efficient solutions fueled by new government incentives. In the US, the expanding multi-dwelling unit market and the increasing consumer awareness of the significant energy efficiency and convenience benefits of smart thermostats are creating prospects. Also, government incentives, energy savings, technological advancements, and financing options are helping to make heat pumps more affordable and attractive to a growing number of homeowners. This market change in equipment and an associated change in control technology has fueled our business for decades, and we are positioned to benefit from this opportunity going forward. In home entertainment, we know OEMs can be cautious, as TV buying trends have fluctuated, yet we are increasing our traction with companies striving to differentiate their offerings. This includes customers with whom we have long-standing relationships, as well as new market entrants looking to disrupt traditional business models around television advertising. In Q3, we grew share with multiple telecom providers in the video space across North America and in Europe. Our QuickSet software continues to offer differentiation that enables us to secure product design wins for our entertainment remote controls with new customers worldwide. In Q3, we secured a major design win for our battery-free remote control that uses UEI's photovoltaic energy harvesting solution. Essentially, the device captures energy from ambient light and stores it in a built-in supercapacitor such that the remote can operate without the use of traditional replaceable batteries. This product will launch bundled with a video display platform in 2025 that will bring a unique video infotainment and advertising experience to US households. I think you'll be quite impressed with this solution when it is introduced early next year. In September, we exhibited at two major conferences. At the International Broadcasting Conference or IBC in Amsterdam, we demonstrated many of our latest hardware and software product solutions and presented proof-of-concept solutions that showcased our QuickSet device and service app discovery solution running on broadband gateways. Our solution was well received by multiple operators in North America and Europe and we look forward to a positive outcome for potential new design wins. At the IFA Consumer Technology trade event in Berlin, we launched our latest One For All category desktop and gaming TV mouse. Our new product line was well received, and the OFA team was able to secure orders from many of our retail partners for this new category. Overall, our retail business is showing positive growth momentum after several years of flat sales growth. Looking ahead, we will be exhibiting once again at the International Consumer Electronics Show or CES in January 2025 in Las Vegas, as well as the AHR or Air Conditioning Heating and Refrigerating show in Orlando. We will showcase new capabilities of our TIDE thermostats, including improved and private whole-home occupation detection, on-device occupancy-based automations, new energy utilization insights, and use cases around matter integrations. We will also showcase our next generation of QuickSet and Nevo AI with new personalization and engagement capabilities across entertainment and connected home applications. We will also provide key customers a sneak peek at our next-generation smart thermostat platform, built from the ground up on a new architecture optimized for an interconnected home, one that offers a comprehensive suite of smart managed services and features and the ability to support scaling across multiple distribution channels and customer applications. We're excited about what these innovations will bring to our customers' products and look forward to seeing you there. Now to the financials. Bryan, please go ahead.

Bryan Hackworth, CFO

Thank you, Paul. I'll review the results for the third quarter of 2024 compared to the third quarter of 2023. As noted last quarter, our adjusted non-GAAP financial statements no longer exclude excess manufacturing overhead costs resulting from our factory footprint transition and depreciation related to the markup from cost to fair value of fixed assets acquired in business combinations. These changes are reflected in the year-to-date 2024 financials as well as the corresponding prior year periods. These adjustments have no effect on our GAAP financials. For the third quarter ending September 30, 2024, costs associated with the aforementioned items amounted to $1.1 million, equivalent to 110 basis points of gross margin or $0.07 per share. For the third quarter of 2023, costs for these items were $2.2 million, equivalent to 210 basis points of gross margin or $0.13 per share. Please keep these figures in mind when reviewing our quarterly results. For the third quarter of 2024, net sales were $102.1 million, within guidance compared to $107.1 million in the third quarter of 2023. Although we are still facing headwinds from cord-cutting and less consumer spending on discretionary durable goods, the negative effect on year-over-year comparisons has been waning. As a matter of fact, we expect sales in the fourth quarter to grow year-over-year, but more on this later. Gross profit for the third quarter of 2024 was $30.8 million or 30.1% of sales compared to 26.3% in the third quarter of 2023. This significant improvement reflects the successful execution of our manufacturing footprint optimization plan over the past two years. The final phase of our plan is near completion and involves our Monterrey, Mexico factory, where we are transitioning to a smaller, more efficient facility. For the third quarter of 2024, operating expenses were $28.2 million compared to $27.5 million in the third quarter of 2023. SG&A expenses increased to $21.1 million from $20.1 million in the prior year quarter. R&D expenses decreased to $7.1 million for the third quarter of 2024 compared to $7.4 million in the prior year quarter. Operating income was $2.6 million compared to $645,000 in the third quarter of 2023. Net income for the third quarter of 2024 was $1.4 million or $0.10 per diluted share compared to a net loss of $658,000 or $0.05 per share in the third quarter of 2023. Next, I'll review our cash flow and balance sheet. At September 30, 2024, cash and cash equivalents were $26.3 million compared to $42.8 million at December 31, 2023. For the nine months ending September 30, 2024, net cash provided by operating activities was $8.3 million which includes approximately $4 million remaining on a security deposit relating to a contract dispute with a former labor agency in China. Year-to-date, we reduced our outstanding line of credit by over $15 million, resulting in a net debt position at September 30, 2024 of only $13.6 million. Now turning to our guidance. In addition to our improved cost structure, we are starting to see positive signs in terms of top line growth. Several projects won over the past couple of years, specifically in the connected home channel, are beginning to ship. While the home entertainment channel still faces headwinds, we are starting to see ordering patterns stabilize. From a gross margin perspective, it's important to note our forecast and ultimately our earnings per share guidance include elevated freight rates related to measures taken to avoid cargo risk in the Red Sea. Utilizing alternative routes has resulted in increased freight costs and lead times. With that, for the fourth quarter of 2024, we expect sales to range from $99 million to $109 million compared to $97.6 million in the fourth quarter of 2023. This projected sales growth marks the first quarterly year-over-year growth since 2021. We expect diluted earnings per share to range from $0.10 to $0.20 compared to a loss of $0.04 per share in the fourth quarter of 2023.

Paul Arling, CEO

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

Operator, Operator

Thank you. At this time we will conduct a question-and-answer session. Our first question comes from the line of Steven Frankel of Rosenblatt Securities. Your line is now open.

Steven Frankel, Analyst

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

Paul Arling, CEO

Yes. Good question, and it's a combination therein. There are many projects that we're working on, which we're thankful for that customers have placed their trust in us. Some of them were delayed by them for a variety of reasons, resources, or other things on their end but they've reengaged on those projects. So that obviously helps because in one month's time – some number of months' time we can complete the project, get it launched, and have it in the revenue stage. We also, of course, have won projects, some of which we've won almost two years ago, that not because of our development path but our joint development path with customers and testing has taken 1.5 years, in some cases maybe even a little longer, but they eventually again make it to the revenue stage. And we are seeing in home entertainment a tapering, while we still won't say that there are parts of it that won't continue to wane. The level of wane, I guess you could say is lessening. So – and of course it would because the number was once so large that – the shrinkage was large until it got a lot smaller. So the percentage at this point that it can shrink is beginning to taper and our growth efforts can then pay off because the projects that we're putting out can overwhelm any continued flat or shrinking volumes that we have from specific customers.

Steven Frankel, Analyst

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

Bryan Hackworth, CFO

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

Paul Arling, CEO

Yes. I think it’s important to note that home entertainment remains a substantial market with numerous participants exploring new models due to significant industry changes, and we are engaged with them. I mentioned one on the call, although I can't disclose names or many details yet. We will be able to do that early next year. There are both existing and new companies looking at updated versions of their products that leverage streaming, presenting appealing concepts for consumers. One of these projects should be ready within the next six to eight months, and I believe it will impress people. It aligns with the ongoing trends in television involving streaming and advertising-driven products. Home entertainment is still a vibrant market with viewership at high levels. We are also working on transitional products that could help counterbalance the impact of cord-cutting, indicating that home entertainment remains an active sector.

Steven Frankel, Analyst

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

Bryan Hackworth, CFO

I am very pleased with our current position and the progress we have made with the gross margin rate, which exceeded 31 points in the third quarter. I anticipate Q4 will be slightly lower, around 30.1% for Q3. However, the recent increase in freight rates due to the Red Sea situation is causing a temporary adverse effect. Overall, I am satisfied with our progress. When we completed our transition over the last two years, I believed we would maintain a margin in the 30-point range, and we are staying within that expectation. I believe this level is sustainable despite the temporary challenges from the Red Sea. We continuously aim for improvement, and I am confident we can achieve it. From a revenue perspective, royalties contribute significantly, which can increase pressure on margins. We are also focused on optimizing our manufacturing footprint to improve efficiencies. Currently, we are performing as we expected in the 30-point range, and I maintain that we can continue to enhance our performance.

Steven Frankel, Analyst

Okay. And the last question, customer concentration in the quarter?

Bryan Hackworth, CFO

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

Greg Burns, Analyst

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

Bryan Hackworth, CFO

We no longer record the excess manufacturing overhead. I mentioned them just to provide context, but they are not included in the financials. We stopped that in the last quarter. All the numbers we present do not include anything related to excess manufacturing. I only mentioned the figures for comparison purposes.

Greg Burns, Analyst

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

Bryan Hackworth, CFO

We're nearing completion. From a physical standpoint, we have moved into the smaller facility in Monterrey, Mexico. I would say we will be finished by the end of this year. We are in the very final days of this two-year-long project.

Greg Burns, Analyst

Okay. And then in the fourth quarter, is it going to be like a $1 million number or something similar to this third quarter?

Bryan Hackworth, CFO

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

Greg Burns, Analyst

Yes. When we consider the growth outlook for next year, especially regarding the pipeline of new projects reaching the revenue recognition or production stage, will the growth be steady, or is it likely to be more concentrated towards the end of the year? Do you have insight into the timing of when these projects will hit the market, particularly regarding their progression throughout 2025?

Bryan Hackworth, CFO

We are cautious about providing forward guidance, especially as we are in November. We have projects lined up for launch throughout next year, across all quarters, and even some planned for 2026. As the year progresses, we will monitor the status of each project and determine if any will ship early or late. Therefore, we hesitate to give specific guidance. However, we have several projects coming, some earlier in the year and others later. Typically, when a project is introduced, it generates revenue upon its first shipment and often leads to recurring orders each quarter. This means that as we introduce new projects, they build on each other over time. Historically, in our home entertainment growth, we have seen this pattern where winning projects and customers added layers of revenue, including replacement products or derivatives. This has continued to generate revenue as long as we retain those customers, which we usually do. We believe we are now in a position where these projects can start to yield returns. We see positive developments in home entertainment, which can help mitigate some of the declines we’ve experienced. We anticipate that our Q4 results will surpass those of last year. Our guidance, even at its lowest point, reflects growth, with the midpoint indicating decent growth and the high end demonstrating a strong year-over-year increase. Earnings are also on the rise. Unlike last year, when we recorded a loss in Q4, we are now aiming for profitability.

Operator, Operator

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

Paul Arling, CEO

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

Operator, Operator

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