Earnings call: Universal Electronics focuses on connected home market

Universal Electronics (NASDAQ:) Inc. (UEI) has released its financial results for the first quarter of 2024, showcasing a strategic pivot towards the connected home sector. The company reported net sales of $91.9 million and a gross profit of $27.2 million, which constitutes 29.6% of sales.

Despite a decrease in second-quarter sales projections compared to the previous year, UEI is optimistic about its future profitability, driven by new ventures into climate control and home automation, as well as its continued dominance in home entertainment and consumer electronics.

Key Takeaways

• Universal Electronics’ Q1 2024 net sales stood at $91.9 million with a gross profit of $27.2 million.
• The company is shifting its focus to the connected home market, particularly in climate control and home automation.
• Six of the top ten HVAC OEM companies have secured new product designs with UEI.
• UEI expects to start deliveries of its TIDE Dial and TIDE Touch thermostats later in the year.
• Hisense has been added as a licensee for UEI’s Qterics digital rights management provisioning services.
• The company repatriated earnings, reducing its debt and repurchasing 95,000 shares.
• UEI forecasts Q2 2024 sales between $90 million and $100 million and anticipates a loss per share of $0.10 to breakeven.
• Chairman and CEO Paul Arling reported over $80 million in new business wins and a robust sales pipeline.

Company Outlook

• UEI is confident in achieving full-year profitability in 2024.
• The company is expanding into the connected home market, expecting to see continued customer wins.
• New product launches are planned for the second half of 2024 and into 2025.

Bearish Highlights

• UEI anticipates a Q2 2024 loss per share of $0.10 to breakeven, reflecting a potential downturn from a loss of $0.06 per share in Q2 2023.

Bullish Highlights

• UEI has won business exceeding $80 million in potential sales.
• The sales pipeline is robust, valued at several hundred million dollars.

Misses

• Q2 2024 sales projections are lower than Q2 2023’s $107.4 million.

Q&A Highlights

• Paul Arling addressed the company’s long-term sales opportunities, emphasizing the larger market size and positive changes in the HVAC industry.
• Projects in the qualification or quote stage are not yet secured, but UEI has a strong track record of winning such projects.
• Government incentives and a focus on energy efficiency are driving positive changes in the HVAC market where UEI is active.

Universal Electronics’ strategic shift towards the connected home market signifies an adaptation to the evolving technological landscape. With a series of new product designs and a commitment to innovation, UEI is laying the groundwork for sustained growth in the coming years.

The company’s proactive approach to debt reduction and share repurchase further illustrates its commitment to maintaining a strong financial position. As UEI continues to diversify its customer base and capitalize on emerging market opportunities, investors and stakeholders are watching closely to see if these strategic moves will translate into long-term financial success.

InvestingPro Insights

Universal Electronics Inc. (UEI) is navigating a pivotal year with its strategic shift towards the connected home market. As the company lays the groundwork for growth in this sector, the financial metrics and market performance provide a nuanced picture of its current standing.

InvestingPro Data highlights a market capitalization of $144.77 million, signaling a relatively modest size within the industry which may offer room for growth or make it a potential acquisition target. The adjusted P/E ratio for the last twelve months as of Q1 2024 stands at -4.26, indicating that the market currently values the company at a negative earnings multiple, which can be a common scenario for companies focused on growth or experiencing temporary setbacks. Despite a challenging revenue growth rate of -22.12% for the same period, an InvestingPro Tip notes that analysts predict the company will be profitable this year, suggesting potential for a turnaround in financial performance.

An important InvestingPro Tip for UEI is the strong return over the last three months, with a price total return of 29.71%. This could be reflective of investor confidence in the company’s strategic initiatives and new product launches. Additionally, the company’s liquid assets exceed short-term obligations, which is a positive sign for its short-term financial health and ability to invest in growth opportunities.

Investors eyeing UEI’s progress in the connected home sector can find more insights and tips on the company’s prospects with an InvestingPro subscription. There are additional InvestingPro Tips available that can provide a deeper understanding of UEI’s financial health and market potential. Use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, and unlock the full range of expert analysis and tips.

Full transcript – Universal Electro (UEIC) Q1 2024:

Operator: Good day, and thank you for standing by. Welcome to the Universal Electronics First Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s 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 our first speaker for today, Kirsten Chapman with LHA Investor Relations, a division of Alliance Advisors. Please go ahead.

Kirsten Chapman: Thank you, Krystal, and thank you all for joining us for the Universal Electronics 2024 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 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 the call, including any additional updated material non-public information that might be discussed during this call will be available on the company’s website at www.uei.com for 1-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 innovative solutions as anticipated by management. The acceptance of UEI TIDE 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 [ph] 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 disaster, 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 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 budget planning purposes and for making operational 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 the closing remarks. It’s now my pleasure to introduce Paul Arling. Please go ahead, sir.

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 6 of the top 10 HVAC OEM. 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 TIDE 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 HVAC OEM customers in Japan, including Daikin, Toshiba (OTC:) Carrier, Fujitsu, LG and Panasonic (OTC:). In March, we exhibited at one of the premier events for the HVAC industry in Europe. Our TIDE family was once again extremely well received generating strong interest from the leading brands in Europe. In fact, in a few short years, we have engaged 13 of the top 14 HVAC OEM brands in Europe that collectively represent over 80% of that market. Already, we have secured three active design wins with two of the top-3 European HVAC OEMs. 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 TIDE Dial and TIDE Touch thermostat orders from a leading multi-dwelling unit integrator in North America. We expect to begin product deliveries later this year. Additionally, TIDE Dial is currently in consumer trials with 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 (NASDAQ:). 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 Xumo platform across the Charter footprint and the Xumo TV branded platforms, as this program continues to scale in the market. Regarding licensing our proprietary technology, we recently added Hisense as a licensee of our Qterics digital rights management provisioning services. These software services are currently used by Vizio, 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 (KS:), LG and Sony (NYSE:) 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. Bryan, please go ahead.

Bryan Hackworth: Thank you, Paul. 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 2 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. We 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 was $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 31, 2024, cash and cash equivalents were $26.9 million compared to $42.8 million at December 31, 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 31, 2023 to $46 million at March 31, 2024. We also repurchased approximately 95,000 shares in the open market for 843,000. 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. We expect to a range from a loss per share of $0.10 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, Bryan. 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, and 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 seek 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.

Operator: Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from the line of Greg Burns of Sidoti. Your line is now open.

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

Bryan Hackworth: Yeah, we had two customers that exceeded the 10% threshold. First one is Daikin at 13.2% and the second company is Charter Communications (NASDAQ:) at 11.1%.

Gregory Burns: Okay. Good to see, I guess, a cable customer popping back on there. So maybe that leads me to my second question, what are you seeing in the cable market? Are you seeing signs of stabilization, maybe improvements in order patterns there? What’s the near-term results in the view on the cable market?

Paul Arling: Yes. Our view is that there’s obviously change, platforms either have or are changing to 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 of growth to have a huge return to the historical pattern of set-top boxes with remotes. We do think that is still there. It frankly can’t shrink at the pace it has the last 4 years. So that is clearly just mathematically going to level out somewhat, but there’s a change underway. They’re powering new televisions with OSs, we’re part of that, particularly with the Xumo and others. And 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. 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. 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 interoperable with directly with the OEMs. We think we’ll power the market into the long-term future.

Gregory Burns: Okay. Great. Thank you.

Operator: Thank you for your question. [Operator Instructions] Please stand by for our next question. Our next question comes from the line of Bill Dezellem of Tieton Capital Management. Your line is now open.

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?

Bryan Hackworth: Adjusted.

Bill Dezellem: 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: Yeah. 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 try to continue this, if I may, Bryan. Relative to 2025, do you anticipate that whatever the business level is in Q4, that will continue as a run rate into 2025 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 you move into 2025 and then build from there?

Bryan Hackworth: Bill, I’ll answer that generally. With all the projects we’re winning, there’s going to be a layering effect. And as they layer, I expect the sale to continue to grow. Now, if you’re comparing Q4 to Q1, sometime Q1 could have a drop-off. But in general, I expect sales to 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 2025, I think we’re going to be in good shape and I expect that 2025 to be a very good year.

Bill Dezellem: Great. That is helpful. Thank you for taking the questions.

Operator: Thank you for your question. Please stand by for our next question. Our next question comes from the line of Benjamin Alexander of Alexander Capital Management. Your line is now open.

Benjamin Alexander: Thank you. Good afternoon, Paul and Bryan. I wanted to ask you about the business that you have actually won. You’ve called out that number in the past as well as the potential opportunities that you’re looking at, which is another number you called out on prior calls?

Paul Arling: Right. Yeah, the one business exceeds $80 million of the potential, as we now call the sales tube 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. 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. HVAC alone exceeds by almost 2x 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 there. 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 change is underway. Governments are beginning to on and off, put incentives in place for consumers to buy these and install these systems because, again, they use much less energy. So there’s a change underway. The same thing that’s at our home entertainment market from analog to digital from non-HD 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 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, 2 years, some of them can even stretch more than 2 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 4 years. So we’re confident that what we’re doing. 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. 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: Yeah, 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.

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