Universal Electronics Inc. (NASDAQ:UEIC) Q4 2023 Earnings Call Transcript February 15, 2024
Universal Electronics Inc. beats earnings expectations. Reported EPS is $0.07, expectations were $-0.01. Universal Electronics Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: 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. [Operator Instructions] 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.
Kirsten Chapman: 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 look product 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 crisis, 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 were 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 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 help 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.
Paul Arling: 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 support strongly 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 vowel 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.
An engineer testing an RF remote control in a secure laboratory.
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.
Now to the financials, Bryan, please go ahead.
Bryan Hackworth: 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, 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 product 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 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 view 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. I would now like to turn the call back to Paul.
Paul Arling: 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.
