Becky Herrick - IR Paul Arling - Chairman and CEO Bryan Hackworth - SVP and CFO.

Steven Frankel - Dougherty & Company Jason Ursaner - CJS Securities John Bright - Avondale Partners Josh Goldberg - G2 Investment Partners.

Good day, ladies and gentlemen, and welcome to the Universal Electronics' Third Quarter 2014 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the conference over to Becky Herrick of LHA. Ma'am, you may begin..

Thank you, Janice. Thank you all for joining us. By now, you should have received a copy of the press release. If you have not, please contact LHA at 415-433-3777. This call is being broadcast live over the Internet. A webcast replay will be available for one year at www.uei.com.

Also, any additional updated material nonpublic information that might be discussed during this call will be provided on the Company’s website where it will be retained for at least one year. You may also access that information by listening to the webcast replay. After reading a short Safe Harbor statement, I will turn the call over to management.

During the course of this conference call, management may make projections or other forward-looking statements regarding future events and the future financial performance of the Company, including the benefits anticipated by the Company due to the continued strength across its entire business and the expansion of its share of the markets it serves, including its core business in the smart device channel such as phones, tablets, TVs, IPTV devices, game consoles, and wearables; the continuation of the benefits the Company has experienced and anticipates due to the licensing of the Company’s technology and patents such as the Company’s QuickSet and Control Plus technologies and sales of higher margin products; the successes anticipated by management from the global growth expected in consumer electronics, particularly in the Asian mobile market; the continued adoption and selection of the Company’s technologies and products by the world’s largest companies in the home entertainment industries; the continued innovation of next-generation solutions that are accepted by the Company's customers and end users; management's continued ability to identify and execute on opportunities that maximize shareholder value, including the effects that repurchasing the Company's shares have on the Company's stock value; the continued sales and earnings growth as experienced in the past; management's ability to identify and execute upon growing trends in the market; and other factors described in the Company’s filings with the U.S.

Securities and Exchange Commission. The actual results the Company achieves may differ materially from any forward-looking statements due to such risks and uncertainties.

Management wishes to caution you that these statements are just projections and actual results or events may differ materially and the Company undertakes no obligation to revise or update these statements to reflect events or circumstances that may arise after today’s date.

For further detail on risk, management refers you to the press release mentioned at the onset of this call and the documents the Company files from time-to-time with the SEC, including the Annual Report on Form 10-K for the year ended December 31, 2013 and the periodic and quarterly reports filed since then.

These documents contain and identify various factors that could cause actual results to differ materially from those contained in management’s projections or forward-looking statements. Also, the Company references adjusted pro forma or non-GAAP metrics in this call.

These adjusted pro forma metrics are provided, because management uses them in making financial, operating and planning decisions and in evaluating the Company’s performance. The Company believes these measures will assist investors in assessing the Company’s underlying performance for the periods being reported.

Adjusted pro forma metrics exclude amortization expense relating to intangible assets acquired, depreciation expense relating to the increase in fixed assets from cost to fair market value resulting from acquisitions, other employee-related restructuring costs, stock-based compensation and certain costs incurred for years preceding the acquisition of Enson Assets Limited.

As a reminder, the results for the prior year periods have been adjusted to reflect the exclusion of stock-based compensation expense. In management’s financial remarks, it will reference adjusted pro forma metrics.

A full description and reconciliation of these adjusted pro forma measures versus GAAP is included in the Company’s press release that was issued after the close of market 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, and then Paul will return to provide closing remarks. It’s now my pleasure to introduce Paul Arling. Please go ahead, Paul..

Thank you, Becky and thanks everyone for joining us today. 2014 has been a great year so far for UEI. Operating income grew to 16.4 million in the third quarter, our highest level ever reported in a quarter.

Year-to-date operating income was 39.7 million, representing a 24% increase over the same period in 2013 and again, our highest third quarter year-to-date total ever. Our results reflect the solid performance in our core business as well as the growing contribution from sales in the smart device channel.

In developing our embedded software solutions for smart devices, we anticipated the next evolution in home entertainment control. As this evolution gains traction, we are providing more and more to the world’s largest companies with solutions to their advanced wireless control needs.

Our QuickSet solution is a widely deployed technology already in over 100 million devices around the world, including set top boxes, televisions, game consoles, smartphones and tablets. QuickSet is the de facto solution for simplifying universal remote control setup and operation.

Complementing our QuickSet technology is our Control Plus solution which further simplifies set up and everyday uses by eliminating mode and input confusion.

Control Plus is a key component to our smart device technology solutions as the world’s leading home entertainment companies were allowed increasingly dynamic and complex devices that needed simplified and intuitive control solution.

In addition, a smart device integration feature automates the set up for universal controls for use with compatible second screen apps.

Put simply, we envision a day not far off where a consumer will be able to buy a TV, bring it home and a plug a couple of content devices into it and the TV and controller will be automatically configured to deliver an intuitive experience, with buttons such as watch TV or stream from your favorite online video source configured automatically with little no user input at all.

This configuration can be done through embedded software and can ultimately be accomplished through smart devices or through the traditional remote control. As such, we are using technology to redefine exactly what a remote control is and what a remote control is able to do.

With many of the leaders in home entertainment devices and services choosing our embedded software technology, our presence and reputation around the globe continues to grow.

Over the past two years we have established relationships with many companies in the mobile category that are rolling out smart devices and have chosen UEI solutions for their automated set up needs. We are continuing to build our licensing footprint through multiple opportunities with current and new customers domestically and internationally.

The mobile market in Asia represents a significant opportunity for UEI. According to IDC, China's smartphone market has tripled in size over the last three years to around 350 million units, making the country the world's largest smartphone market.

We recently launched QuickSet in several flagship smartphone models in the China market, including popular brands there like Huawei, Oppo and ZTE. While these brands are not widely known in the U.S., together they shipped over 120 million smartphones, primarily in the China market, for the 12 months ending June 2014.

To put these initial customer wins into context, Apple shipped slight over 160 million units worldwide over this same period.

There is significant opportunity for UEI globally as the technologies we have developed over the last decade translate to today's new and emerging devices such as television, set-tops, Internet streaming players, smartphones, game consoles and even smart watches.

Our focus on innovation ensures we will be poised to provide the functionality to power and control these devices within the home entertainment stack for years to come. With that, I will turn the call over to our CFO, Bryan Hackworth, to discuss the financial results..

Thank you, Paul. As a reminder, our results for the third quarter 2014 as well as the same period in 2013 will reference adjusted pro forma metrics. Third quarter 2014 net sales were 147.8 million, up approximately 4% compared to 142.4 million for the third quarter 2013.

Business category net sales were 135.2 million, an increase of approximately 4% from 129.7 million in the third quarter of 2013. The majority of our growth was derived from the OEM channels, specifically in the form of licensing arrangements and embedded chip technologies.

Our consumer category net sales were 12.6 million compared to 12.7 million in the third quarter of 2013. Gross profit for the third quarter was 45.4 million or 30.7% of sales compared to a gross margin of 28.6% in the third quarter of 2013.

The increase of 210 basis points was driven primarily by an increase in licensing revenue as well as an increase in embedded chip technology sales as more customers are adopting our technologies for smart devices such as phones, tablets, televisions, game consoles and wearables.

Total operating expenses were 28.9 million compared to 27.6 million for the third quarter of 2013. Breaking down our operating expenses, R&D expense was 4.2 million compared to 4.1 million in the third quarter of 2013. SG&A expenses were 24.8 million compared to 23.4 million in the third quarter of 2013.

Operating income was 16.4 million, an increase of 25% when compared to 13.2 million in the third quarter of 2013. Our operating income as a percentage of net sales moved in the double-digit territory at 11.1% for the third of 2014 compared to 9.2% in the same quarter last year.

The effective tax rate was 18.8% compared to 14.5% in the third quarter of 2013. Third quarter 2014 net income was 12.9 million or $0.80 per diluted share compared to 10.7 million or $0.68 per diluted share in the third quarter of 2013.

For the nine-month period ended September 30, 2014, net sales were 423.9 million, an increase of approximately 8% compared to 393.2 million in the same period of 2013. Gross margin for the first nine months of 2014 was 29.7% compared to 28.4% in the same period a year ago. Total operating expenses were 86.3 million compared to 79.6 million in 2013.

Operating income was 39.7 million, an increase of approximately 24% compared to 32 million in 2013. As a percent of net sales, operating income was 9.4% in the first nine months of 2014 compared to 8.1% in the same period last year.

Net income for the nine-month period was 29.8 million or $1.85 per diluted share compared to 23.6 million or $1.53 per diluted share in the prior year period. Next I'll review our cash flow and balance sheet at September 30, 2014. Cash and cash equivalents was 99 million at September 30, 2014 compared to 44.6 million a year prior.

During the third quarter we repurchased approximately 18,000 shares for $900,000, representing an average price of $49 per share. DSOs were approximately 65 days at both September 30, 2014 and September 30, 2013. Net inventory turns improved to approximately 4.5 turns at September 30, 2014 compared to four turns a year prior.

Now turning to our guidance. For the fourth quarter of 2014 we expect revenue between 134 million and 142 million compared to last year's fourth quarter revenue of 136.1 million. EPS for the fourth quarter is expected to range from $0.59 to $0.69 per diluted share compared to $0.55 recorded for the fourth quarter of 2013.

Lastly, I'd like to provide an update to our long-term outlook. For the past couple of years we've stated the long-term profile of our business is one with approximately 5% to 10% annual revenue growth and average earnings growth of between 10% and 15%.

However, given the success we’ve had in embedding our technology in multiple smart devices via pure licensing arrangements and/or embedded chip sales, our gross and operating income have expanded.

As a result, our profile has changed and we believe we can continue to grow our top line by an average of 5% to 10%, but we expect our earnings will grow by an average of 10% to 20%. I’d now like to turn the call back to Paul..

Thank you, Bryan. The best testament to the innovation we develop here at UEI is the customers who work with us to deploy it.

The list of leading home entertainment companies who are working with UEI on their industry leading solutions include such names as Samsung, LG, Sony, Panasonic, Comcast, DIRECTV, EchoStar, Sky, UPC, Virgin Media, Microsoft and many, many others. UEI has solidified its reputation as the providers of choice in wireless control technology.

As we continue to roll out new technologies, software and devices, we are more confident than ever in our ability to build our share in high growth global markets that we serve.

Going forward we remain focused on investing in innovation to support the simplification and enhancement of the home entertainment experience as well as supporting new trends in devices and content and deepening existing customer relationships while also adding new ones around the world. Stay tuned. I’d like to now open it up for questions.

Operator?.

Thank you. (Operator Instructions) And our first question comes from the line of Steven Frankel of Dougherty & Company. Your line is now open..

Paul, let’s start with the top line which was below your guidance and below where the street was. Was there anything particular in the quarter that didn’t come in the way you thought it would? And same in terms of the fourth quarter where the revenue guidance looks a little light..

Yes, this is Bryan. It was a mix change. We are a little wide on the real control, but we are heavy on the rich margin products like the licensing and the embedded software and the chips. So it’s a little bit of a mix change. So you're right, we fell a little bit short of our guidance range.

However, we’re still up 4% year-over-year for the quarter and as you can see by the $0.80, really the positive mix change actually contributed well through our bottom line as we grew the third party operating income by -- third quarter operating income by 25%..

And do you think this mix shift is something that's likely to continue for several quarters or is it a new way to look at the business where you are going to be doing more chips versus completed remotes?.

It all depends on how much we sell to large customers. As kind what we’ve said last couple of quarters, we're doing well in the smart device channel. But if we continue to sell more to the large customers, then it put downward pressure on the total gross margin percentage. But right now we’ve raised our outlook.

Where we used to say we can grow the bottom line by 10% to 15%, we’re now raising it to 10% to 20% mainly because of the mix shift I just referenced..

And what about customer concentration?.

We had one 10% customer in the quarter..

And exactly what percentage?.

It was like 12.3%..

Was that the same large customer as last quarter?.

No, it was DIRECTV..

And what was behind the lower tax rate in the quarter?.

You know, we have the R&D credits in the U.S. which hasn’t been passed by Congress yet for 2014. While in China they have a similar program and basically we got approval in Q3, so we were able to take a benefit in the third quarter similar to last year as well.

That’s why both Q3s for 2013 and 2014, the essential tax rate is actually lower than the average..

And you should go back to normal in Q4?.

I will expect so, yes. It all depends. You could have -- Congress haven’t passed in the U.S., they don’t passed the federal R&D tax credit. So if they do in Q4, you'll actually see us take a dip as well..

Thank you. And our next question comes from the line of Jason Ursaner of CJS Securities. Your line is now open..

Just following up on a couple of Steven’s questions.

Was the growth rate in business category, was it balanced between the two main markets of OEM and MSO?.

No, I think more on the OEM..

And was there anything -- did you see anything different about the build cycle for the holiday season or anything different about the seasonal pattern going forward there from TV makers particularly?.

No, I didn't see any change from prior years..

And in the MSO side, obviously there has been a lot of headlines about some friction, DISH and CNN and HBO going all that.

But behind the scenes on the supplier side, is it more relative comment, are you still seeing the investment at a pretty healthy pace from your customers in new technologies and some of these things that are going into more of the advanced features and chipset?.

We’ve seen a great deal of investment by many of the major operator on next generation technology, next generation boxes, next generation control methodologies. I mean over the last couple of years it’s been pretty astonishing how much more focused the companies have become versus say, eight, 10 years ago. So we’ve seen a significant investment.

In terms of the programming and content issues that have arisen, we haven’t seen much of an impact on that..

And is this just more of a realization on their part that there is a much higher value proposition in what you guys are going? Besides, it’s not just a remote, it’s kind of part of their brand and part of how users really interact with the whole system.

Are you getting that anecdotally from customers when you talk with them pretty closely?.

I actually think they want to improve the user experience. I think it’s a highly competitive world.

Consumers are experiencing ease of use in a lot of different categories of product and I think the subscription broadcasting and consumer electronics companies recognize that the winning formula long-term is a company that can make things extremely easy for the consumer, particularly when they’re in a relaxed environment like those five hours a day when they want to relax in front of their TV.

They don’t want to be worked. They want it to be easy. So I think they recognize that and there are working many of them, leading companies are working on methods to accomplish that goal..

And in terms of hitting the new, the rate outlook on earnings growth, obviously a large part of that’s going to be the growth in embedded mobile as it comes in overtime.

Can you maybe just talk a little more about the revenue recognition for that part of the business? How has it been working so far in terms of getting paid and I guess really just measuring some of these, the things you’re providing there especially if it’s in a license form?.

We haven’t had any issues with collections so far, so that hasn’t been an issue. The revenue recognition varies by contract. It seems like each customer has a slight nuance in the contract and in general what you do is you recognize the revenue upon for a license deal when the OEM ships to your retailer is the general rule of thumb.

Sometimes we have better technologies, say a chip, in which case if we ship the chip to the OEM, then we recognize it upon shipment. But, so we have been consistent with that..

And in terms of kind of establishing the base now, you mentioned some big customers wins.

If you look at this quarter, I guess the customers that you've previously been able to disclose, were any of those not at a full run rate yet, relatively full run rate for the products that you kind of said you’re on and then the new customers that you mentioned today, obviously those were building from this quarter, I would imagine?.

Some are. Some of the projects have started up recently. Many of the major customers have run for multiple months, so it varies by customer. But it's like any quarter, every new win, every new skew will add to any specific quarter.

So if you’re doing three projects with a customer and then you add a fourth and fifth, the first three were in the run rate from the prior quarter and then next two begin this quarter or begin last quarter and will fully affect this quarter.

So I mean we literally have hundreds, probably thousands actually of projects that are going on in any given time at various stages of the lifecycle..

Thank you. And our next question comes from the line of John Bright of Avondale Partners. Your line is now open..

Paul, with the growth in the operating margin improvement, on order of magnitude, how should investors think about pricing for QuickSet and for Control Plus for modeling purposes?.

Well, again, we don’t disclose the specific prices by customer. But clearly, things like QuickSet and Control Plus are unique features of UEI's that are both technically protected, difficult to replicate and in some cases patent protected, in each of those cases patent protected.

So their unique features to UEI and as with most companies when you differentiate on features and sell products or technologies or embedded software that contains those unique features that are not easily gained either internally by those companies or externally through the competitors, there is going to be a little bit of ability to price.

So the margins that we receive on licenses and the chips in the embedded technology are on average higher than they are for product. And when it's embedded in product, you'd typically see a little bit of ability to price a little bit of extra premium into the product..

Bryan, in addition to the revenue mix changing the long-term model for the earnings growth, is this ability improving as well?.

I think the same. The visibility hasn't changed much over the years..

On the tax rate, what would have been the EPS benefit associated with that?.

It was about $500,000, a couple of cents on the tax. However, we also had a -- keep in mind that below the operating income line, we also had an FX loss of an equal amount. So those two mitigated each other. The fact that we came at the upper end of the guidance is really driven by operating income..

Thank you. And our next question comes from the line of Edison Chu of G2 Investments. Your line is now open..

It's Josh Goldberg for Edison. I just wanted to ask a couple of things. First, your last comment in the press release that you feel comfortable that you can grow 5% to 10% over the long-term and now instead of -- I think you said now 10% to 20% versus -- or 10% to 20% versus 10% to 15%.

Can you help me understand -- obviously every year is different, but if we were to look at 2015, why wouldn't that be kind of let’s say the first sort of stab at 2015? So assuming you can grow your top line 6%, 7%, which is what you're going to grow this year, and you remain closer to 15% next year? And I have a follow up to that..

Josh, we just want to make sure everybody understands. As Bryan said, this is long-term guidance. We are not providing guidance about the year 2015 or '16, or '17. We're providing guidance about a long-term average annual growth rate. What we changed was not the sales. The sales had a range of 5% to [24%], it still does.

But we widened the guidance on earnings from 10% to 15% to 10% to 20% and that's a recognition that we have -- as the sales mix has changed, gross margins have stepped up slightly.

We also through expense control, through a leveraged business model have been able to raise the operating margins and we think a long-term average of 5% to 10% would yield a earnings growth of 10% to 20%..

Absolutely. I guess what I am saying is, in the midpoint of your guidance for '14, your revenue will grow only about 6%, but your earnings are going to grow almost 25%. So it seems like a little bit of level of conservatism in terms of just 10% to 20% on the earnings side.

Obviously you are going to spend some more in R&D and everything else, but your incremental margin dollars are really flowing to the bottom line in a big way, it's almost 50% flowing through to the bottom line at this point..

I think if you do that again, you will see the sales growth last year and this year were between 5% and 10%. I think they were 6% to 7%. And if you do use the midpoint of the range, and again Brian has given a range, not a number.

But if you use the midpoint of the range for Q4, EPS growth in '13 and '14 will be in the 15% to 20% range, closer to 20%, 19% I think. So they are a testament to those ranges of 5% to 10% and 10% to 20%.

We have fallen within those ranges in the last year and will this year and we think this is the type of model one should build on average over the next number of years..

Can you talk a little bit more about your opportunities in licensing? Obviously I think a lot of investors are excited about that part of the business, not the traditional remote business, which currently has been a profit machine for you. But it sounds like you've made some really good strides on the licensing side in the last few months.

And maybe if you can discuss a little bit about what's going on with the PL technology as well?.

Well, look, the licensing is an exciting area. We think that the solution we've put together, the SDK and API for people to build their app on in the smart device area or the embedded technology on TV, set-top boxes and other products, other AV products are quire compelling.

As I said in my comments earlier, we do envision a day not far off, because the technologies required to implement what I described in the call are already available. We need any changeover in TV technologies or set top box technologies or mobile phone technologies to implement that vision.

It's simply a question of embedding the software into products and consumers can experience a day where they bring a TV home, plug a couple of things in or automatically discover, it will automatically suggest activities like watch TV or watch your streaming device. Those buttons could appear either on a remote or on a smartphone.

So we think this is pretty compelling. As we would tell customers, the average person is watching over three hours a day of TV, the average person on this planet. The average person in the U.S.

is watching more than five hours and who does not want that feature? Who doesn’t want a TV that does that? It's kind of hard to argue that people don’t want something that's that simple to setup and operate for something they are doing between three and five hours a day. So I think that’s why we’re getting traction.

We’ve got a really good solution for it. As we mentioned on the call, there is a lot of names, major names in China that are now embedding flat chip models on this idea. Now as far as appeal goes, I don’t really have any comment on it. The case is ongoing. Not speaking specifically about them. UEI is an innovative company.

We’ve been thinking of different features and things to put into these products for our entire history, quite frankly. Some of the ideas that we have in this arena are 10 to 15 years old and we have in force our creations. So that’s what we’re doing with Peel and with anybody else out there who would violate that IP without paying us for it..

And then maybe Bryan if you could just touch upon the top line. Was there one area, maybe a region that came in a little less that you expected or was it a certain segment? Obviously the consumer business was down year-over-year. So, just touch upon what kind of, what did you see overall in that area..

The Americas were down a little bit versus our forecast. But like I said earlier, the flip side was we had more sales than expected in the licensing and embedded chip technologies which is primarily in Asia. So those two basically offset. But it shifted towards more profitable sales dollars..

Thank you. (Operator Instructions) And our next question comes from the line of Steve Frankel of Dougherty & Company. Your line is now open..

Paul, I'd like to drill down a little bit on Control Plus.

What’s the pipeline look like in terms of potential design wins for that? And are these things, we could expect to come to market in 2015 or it's further out than now?.

The designs wins are in the pipeline. As you know, the products are being worked on. It isn’t always clear that the specific products are going come out or exactly on what time frame. My expectation though would be that you’ll start to see things in the year 2015..

And would you care to share any number in terms of the number of products that are kind of in the funnel versus where it was six or nine months ago..

Yes, it’s increased. But again, when you’re in the early development stage, it's not clear that the product is going to actually have the feature. It may just have quick set not with the Control Plus feature added. So I don’t want to venture to say exactly how many projects. But we’ve got a lot of them in the pipeline.

There's extreme amount of interest in this feature, for obvious reasons, as I mentioned to Josh earlier. It's kind of difficult to say people don’t want to have that sort of automated experience, it’s just a question of having it built into the product.

So our expectation would be that they’ll be products introduced next year with Control Plus embedded..

And that interest cuts across both the OEM in and the MSO..

And also mobile, because it is tied to mobile..

Thank you. And I’m showing no further questions at this time. I would like to turn the conference back over to Mr. Paul Arling for any further remarks..

Okay. Thanks everybody for joining us today and for your continued support of our company. As you probably all know, in January we’ll be displaying new solutions at the CES show, or the Consumer Electronics Show in Las Vegas. We'll be presenting at the Needham Annual Growth Conference in New York City in January as well.

So we hope to see you either at CES or at a growth conference or elsewhere. Thanks for participating and good bye..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day everyone..