Q1 2024 Universal Electronics Inc Earnings Call

Participants

Kirsten Chapman; LHA Investor Relations; Universal Electronics Inc

Paul Arling; Chairman of the Board, Chief Executive Officer; Universal Electronics Inc

Bryan Hackworth; Chief Financial Officer, Senior Vice President; Universal Electronics Inc

Greg Burns; Analyst; Sidoti & Company

Bill Dezellem; Analyst; Tieton Capital Management, LLC

Benjamin Alexander; Analyst; Alexander Capital Management

Presentation

Operator

Good day, and thank you for standing by, and welcome to the Universal Electronics First Quarter 2024 financial results conference call. (Operator Instructions) Again please be advised that today's conference is being recorded I would now like to hand the conference over to our first speaker for today, Kirsten Chapman with LHA Investor Relations, a division of Alliance Advisors. Please go ahead.

Kirsten Chapman

Thank you, Crystal and thank you all for joining us for the Universal Electronics 2020 for our first quarter financial results conference call. By now, you should have received a copy of the press release. If you have not, please contact LHA at four one five four three three three seven seven seven or visit the Investor Relations section of the website.
This call is being broadcast live over the Internet and a webcast replay of the call, including any additional updated material nonpublic information that might be discussed during this call will be available on the company's website at www.uei.com for 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 or events may differ materially from those projected.
These statements include the Company's ability to penetrate the connected home space and particularly the climate control and home automation markets through the development and delivery of unique and innovation, innovative solutions as anticipated by management, the exception of UEI. tied family products in the global HVAC market, 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 savings 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 our stock repurchase program.
The Company's successful life-sustaining seeing of the Company's QuickSet technologies, the Company's ability to maintain its leading market share in the traditional subscription broadcasting business and the direct and indirect impact the Company may experience with respect to its business and financial results stemming from the continued economic uncertainty affecting consumers' confidence and spending natural disasters, public health crises, governmental 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 documents the Company files with the SEC, including its 2023 Annual Report on Form 10 K in the periodic reports filed or furnished In management's financial remarks, adjusted non-GAAP metrics will be referenced.
Management provides adjusted non-GAAP metrics because it uses them for budget planning purposes and for making operational financial decisions and believes that providing these non-GAAP financial measures to investors as a supplement to financial measures, help investors evaluate EA'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 the closing remarks is now my pleasure to introduce Paul Arling. Please go ahead.

Paul Arling

Thank you, for joining us today. we are building for a better future shifting sales and product development resources to the connected home space, expanding our end market reach and implementing cost initiatives. These actions delivered Q1 2024 results as expected, with strong year-over-year gross margin improvements. More importantly, our customer wins, our global footprint optimization and our expense reductions position us for a profitable year as well as position us for consistent sales and earnings growth into 2025, 2026 and beyond.
The strengths we have built over the past decades, delivering true seamless interoperability, discovering, connecting and controlling all devices and all brands translate beautifully into the climate control and home automation channels. Our expertise in connectivity protocols from infrared to radiofrequency to IP and our ability to make those devices work better together gives us a competitive advantage that continues to create unique and differentiated solutions.
Our capability to design engineer and build solutions for the leading brands in the world that are interoperable and self configuring can help the next generation of products in the home automation and climate control markets become ever more integral to the smart home experience. We are confident in our success as our capabilities align well with the connected home market needs, as evidenced by our new customer activity in this space.
As always, the best testament to our success is the partners that choose to work with us on their product solutions. We have won new product designs with six of the top 10 HVACOEM. companies on the planet and are working on to more further. The market is growing and undergoing constructive change as climate control devices are getting smarter. For example, there is a transition underway, bringing more efficient product forms such as heat pumps into popularity.
Our ability to quickly address these opportunities is reminiscent to the early innings of our success in the home entertainment market. I'd like to highlight a few of our activities that support our outlook in climate control at the Consumer Electronics Show in January we unveiled new UEI tied family offerings, including products that bridge to indoor air quality sensors, built in air purifier control and additional accessories that broaden our control utility.
We also took the show on the road and demonstrated our full suite of innovative climate control solutions to our growing list of HVACOEM. customers in Japan, including Dynacin Toshiba Carrier, Fujitsu, LG and Panasonic. In March, we exhibited at one of the premier events for the HVAC. industry in Europe.
Our type family was once again extremely well received generating strong interest interest from leading brands in Europe. In fact, in a few short years, we have engaged 13 of the top 14 HVACOM. brands in Europe that collectively represent over 80% of that market already.
We have secured three active design wins with two of the top three European HVACOEM.s with a long lead times in this segment, which we have previously discussed. These products are expected to start shipping in 2025.
In home automation During Q1, we received our first standard type dial and type touch thermostat orders from a leading multi-dwelling unit integrator in North America. We expect to begin product deliveries later this year. Additionally, time dial is currently in consumer trials with a European utility provider. We expect to complete a successful trial and to begin shipping product to them in Q4.
In home entertainment and consumer electronics although the market has changed greatly over the last couple of years, we continued to capture market share with new product introductions at small and large operators. In Q1, we began shipping our sustainable remote control to Liberty Global.
We continue to add customers on our Android remote control line, including two telecom companies in India. Both have products in development that are expected to ship in Q3 of this year. We continue to see traction on the ZoomInfo platform across the Charter footprint and the Zillow TV branded platforms.
As this program continues to scale in the market. Regarding licensing our proprietary technology, we recently added high since as a licensee of our Q Teradata digital rights management provisioning services. The software services are currently used by Visio, TCL and numerous other TV OEMs to ensure secure delivery of digital rights management keys for streaming content services on their smart TV platforms.
Our QuickSet licensees in consumer electronics such as Samsung, LG and Sony all announced their 2024 smart TV product lines and will continue to ship versions of our QuickSet Cloud enabled software. Our latest version brings added value to our customers, giving them access to a better user experience, increased user engagement and reduced onboarding and troubleshooting challenges.
These long-term relationships built upon years of working together with these world leading home entertainment companies continued to be strengthened with these feature enhancements and give us further confidence in our success going forward.
Now to the financials. Brian, please go ahead.

Bryan Hackworth

Thank you all. First, I'll review the results for the first quarter of 2024. Compared to the first quarter of 2023. Net sales were $91.9 million within guidance. This compares to $108.4 million for the first quarter of 2023, reflecting cord cutting in the video service channel and in an environment where households for a variety of reasons are spending less on discretionary goods.
Gross profit for the first quarter of 2024 was $27.2 million or 29.6% of sales compared to 25.4% in the first quarter of 2023. For the past two years, our operations team has been focused on restructuring our manufacturing footprint and have executed well exceeding expectations.
These efforts have resulted in significant reduction of manufacturing overhead, the main driver of the improvement in our gross margin, our factory optimization plan is nearing completion. We closed 2023 strong, completing the first two phases commencing operations in our new Vietnam facility and closing our factory in southwestern China ahead of schedule.
Our Vietnam factory continues to scale and meet or exceed our expectations. We are currently streamlining our operations in Monterrey, Mexico, including moving into a smaller, more efficient facility that will supply product for certain North American customers remain on target for its completion in the second quarter of 2024. As we evolve as a company, we will continue to assess our global footprint and identify ways to operate more efficiently.
For the first quarter of 2024, operating expenses were $29.4 million compared to $31.2 million in the first quarter of 2023, reflecting the execution of our cost-savings initiatives. SG&A expenses decreased to $21.8 million compared to $23.1 million in the prior year quarter.
R&D expenses decreased to $7.6 million compared to $8.1 million in the prior year's quarter. Operating loss of $2.2 million compared to $3.6 million in the first quarter of 2023. Our first quarter 2023 effective tax rate was 20.6% compared to 19.9% for the first quarter of 2023. Net loss for the first quarter of 2024 was $2.5 million or $0.19 per share compared to $3.5 million or $0.28 in the first quarter of 2023.
Next, I'll review our cash flow and balance sheet at March 31st, 2024, cash and cash equivalents were $26.9 million compared to $42.8 million at December 31st, 2023. Cash flows used by operating activities were $2.8 million for the first quarter of 2024, which includes a $5 million security deposit relating to a legal matter.
This compares to $2 million cash used by operating activities in the prior year quarter. With interest rates at an elevated level, we repatriated foreign earnings, enabling us to reduce our outstanding debt from $55 million at December 31st, 2023 to $46 million at March 31st, 2024. We also repurchase approximately 95,000 shares in the open market for 843,000 shares.
Now turning to our guidance for the second quarter of 2024, we expect sales to range from $90 million to $100 million compared to $107.4 million in the second quarter of 2023, with such a range from a loss per share of $0.1 to breakeven compared to a loss of $0.06 per share in the second quarter of 2023.
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 yield bottom line growth and full year profitability.
I would now like to turn the call back to Paul.

Paul Arling

Thanks, Brian. Our expansion into the connected home is broadening our market served and expanding our customer base. Our unique and innovative solutions supported by years of experience in bringing Connected Home configuration and control to major global brands, make our offerings attractive in these markets. As a result, our sales team and products are gaining traction as the leading brands are increasing their design awards with us.
This process can take time but as we experienced in home entertainment, one project leads to the next. As we work more closely with these accounts and innovate to improve their product offering, they award more and more of their business to us. As noted, we have secured tangible wins that seat growth in the second half of 2024 and importantly, into 2025, 2026 and beyond.
We are very encouraged by numerous customer wins and are confident of many more to come. Based on our design wins and our customers' planned shipping schedules. We are also very encouraged by our customers' strong interest in our product roadmaps.
The systems in our homes today, entertainment, climate control, health, safety, security and others are becoming increasingly interconnected. This brings great convenience functionality and value to consumers worldwide. Our customers, both current and potential are very aware and interested in this change.
Given our substantial experience in helping make these systems interconnected and interoperable. We continue to see significant interest from world leading brands in the markets we serve. As such, we will continue to invest to support the evolution of wireless home control with our mounting project wins, along with our cost initiatives and global footprint optimization, we expect to be profitable for 2024.
We believe our best years are ahead of us and our employees around the world remain hard at work to make this a reality as always, stay tuned.
Operator, we can now open up the call for questions.

Question and Answer Session

Operator

Thank you all for your time, we will conduct a question and answer session. (Operator Instructions)
Greg Burns, Sidoti.

Greg Burns

Good afternoon. I guess could we just start with the 10% customers for the quarter?

Bryan Hackworth

We had two customers that exceeded the 10% threshold. First wanted to dig in at 13.2% and the second company's Charter Communications had 11.1%.

Greg Burns

Okay, good to see, I guess, the cable customer problem back on there. So maybe that leads me to my second question was, what are you seeing in the cable market? Are you seeing signs of stabilization, maybe improvements in order patterns there. What's what's the view on the kind of the near-term results and the view on the cable market?

Paul Arling

Yes. Our view is that there's obviously change platforms are either have or are changing our hybrid platforms, some of which are delivered to set-top box, some to the TV directly. And we are fully supporting our customers in these changes.
As far as the future of the traditional method, we would, of course, not have as part of our plan, our growth to have a huge return to the historical pattern of set-top boxes with remotes. We do think that is still there and it frankly can't shrink at the pace it has the last four years. So that is clearly just mathematically, I think it is going to level out somewhat, but there's a change underway.
They're powering new televisions with with some o S's. We're part of that, particularly with the Zuma and others and that that will allow people to get these hybrid platforms, linear content, news, sports, et cetera, alongside all the apps they love and all through that, easy-to-use interface, which we power through QuickSet Cloud.
So that's the change that's occurring in home entertainment will be around for the foreseeable future, both here at UEI and generally with people, people aren't watching less television is just the way that it's being delivered is changing and we're changing alongside that.
So the home entertainment business is still good. The licensing business has been okay. We saw a drop off last year due to sales of TVs, but that's temporal TVs grow at a constant rate of single digits. So over time, that will still be true some home entertainment is going to be here for a while. It's a good basis, a good foundation for our business.
But the connected home segments are growing. They're growing fast they're changing. And we have capabilities, as I said in the prepared remarks that are unmatched in that market to help these customers interconnect and make products inter-operable with directly with the OEMs, we think we'll power the market into the long-term future.

Greg Burns

Okay. Thank you.

Operator

Bill Dezellem, Tieton Capital Management.

Bill Dezellem

Thank you. I have a couple of questions related to your comment that you will be profitable this year. Is that on an adjusted basis or on a GAAP basis adjusted? And then how do you anticipate kind of that Q3 and Q4 unfolding? Would you anticipate that both of them would be profitable or that Q3 would essentially be breakeven and then Q4 would have a level of profitability that would override the losses in the first part of the year?

Bryan Hackworth

Yes. I'm not going to give a guidance for Q3 and Q4 specifically. Basically right now, our forecast for the full year is for us on an adjusted basis to be profitable.

Bill Dezellem

And then I may have a little bit more fun and trying to continue this, if I may, Brian, relative to '25, do you anticipate that whatever the the business level is in Q4, but that will continue as a run rate into it into '25 that you then build off of or are you anticipating that there will be some seasonality that will lead to the Q4 being higher. And then you'll have a step back as the as you move into '25 and then build from there.

Bryan Hackworth

So I'll answer that generally with all the projects will win is there's going to be there's a layering effect. And as they layer, I expect the sale to continue to grow now if you're comparing Q4 to Q1, so that's Q1 could have a drop-off. But in general general, I expect sales start to ramp.
I mean, I know it's small, but sequentially you're seeing it go from just under $92 million in Q1, and we expect the midpoint to be $95 million . So that growth is mainly driven by the project wins that we have. So I expect that to continue the projects we'll layer. And I think when you get into '25, I think we're going to be in good shape and I expect that '25 to be a very good year.

Bill Dezellem

Great. That is that is helpful. Thank you for taking the questions.

Operator

Benjamin Alexander, Alexander Capital Management.

Benjamin Alexander

Thank you, a good afternoon, Paul and Brian. I wanted to ask you about the business that you have actually once you've called out that number in the past as well as the is potential opportunities that you're looking at, which is another number you called out on prior calls?

Paul Arling

Right. Yes, the one business exceed $80 million of the potential as we now call the sales two rather than funnel is in excess of a few hundred million. Now, again, everyone has to remember that the one projects enter the system, they're not one until the end.
Once they're one, we then develop them fully and then ship them. So the one projects are almost universally assured the ones that are in qualification or quote are not yet. We win many of our quotes once they proceed to that level, but we don't win all of them.
So the few hundred million will get converted into business, but not completely. In other words, some of those projects will be either considered by the customer and not move forward on. And that's typically what happens when they don't move forward. But there's a lot of business out there.
This is a very large market, each back alone exceeds by almost two times the size of the home entertainment control market. So it's a very large market and growing. And there's, as I said, in the prepared remarks, constructive change taking place their technologies in both the units themselves and the control units is changing the world on this topic, heat pumps are becoming more popular.
They're much more energy efficient, less fossil fuel, of course, and that changes underway. Governments are beginning to on and off, put incentives in place for consumers to buy these and install these systems because again, they they use much less energy.
So there's a change underway. This is the same thing that said, our home entertainment market from analog to digital from non-HDD to HD. from non-DVR to DVR.
There's a change underway and we're there to help them power it and make these systems smarter than ever. And that's why we're getting the traction we are with project wins and a lot of projects entering ours, our sales process.
So we're very confident we're very excited about what's going to happen in not just the coming quarters. But the coming years, because the lead time on these projects is, unfortunately, sometimes 1.5, two years, some of them can even stretch more than two years once you've won them.
But once you've won them, it provides a layer of sales that usually stays with you for a while. And by the way, it's not that different than home entertainment these projects last four years. So we're confident that what we're doing, where we've rightsized our manufacturing footprint in contemplation of this business change to more of these types of products, our overhead. We've taken our development money towards these product lines and we're winning projects.

Operator

Thank you so much for your question at this time. That does conclude our question and answer session. I would now like to turn the call back over to the Chairman and CEO, Paul Arling.

Paul Arling

I just want to thank everybody for joining us today. And for your continued support of Universal Electronics. Hope to talk to you soon. Have a great day.

Operator

This does conclude today's conference. You may now disconnect.