Becky Herrick - Lippert/Heilshorn & Associates, IR Paul Arling - Chairman and Chief Executive Officer Bryan Hackworth - Senior Vice President and Chief Financial Officer.

Steven Frankel - Dougherty Greg Burns - Sidoti & Company.

Good day, ladies and gentlemen, and welcome to the Universal Electronics' Third Quarter 2016 Earnings 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] Also as a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference Becky Herrick from LHA. Ma'am, you may begin..

Thank you, Derrick [ph]. And thank you all for joining us today for the Universal Electronics' third quarter 2016 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. This call is being broadcast live over the Internet.

A webcast replay will be available for one year at www.uei.com. In addition any additional updated material, non-public information that might be discuss during this call will be provided on the Company's website where it will also 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 Company's ability to maintain and build its relationships with key customers; the Company's ability to anticipate the needs and wants of its customers and timely develop and deliver products and technologies that will meet those needs and wants including the QuickSet technologies, home security, home automation and other technologies identified in this call; the significant percentage of its revenues attributable to a limited number of customers and particularly the sales growth and benefits of the Company's relationships with Comcast; the timing of new product rollout orders from the Company's customers as anticipated by management; the continued trend of industry in providing consumers with more advanced technologies; management's ability to manage its business to achieve its revenue margins and earnings as guided; the continued ability to identify and execute on opportunities that maximize shareholder value, management facility successfully and profitably transition the company's manufacturing operations 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 from those projected.

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 risks, 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, 2015 and the periodic reports filed thereafter.

These documents along with the risks identified earlier on the call contain and identify various factors that could cause actual results to differ materially from those contained in management's projections or forward-looking statements. In management's financial remarks, adjusted pro forma metrics will be referenced.

Management provides adjusted pro forma metrics because it 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 performance for the periods being reported.

A full description and reconciliation of the adjusted pro forma 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, 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..

Thank Becky, and thank you all for joining us today. For the third quarter net sales were $170.3 million and EPS was $0.94 representing growth of 6% and 21% over last year respectively. These results reflect solid performance across the business.

While there are short-term training issues effecting our fourth quarter which I will review more in a moment. The positive impacts of the continued adoption of advanced control technologies by subscription broadcasters and OEMs around the world are long-term and substantial.

New entertainment platforms are incorporating features such as cloud connectivity in advanced to a remote, while also adding functionality like Home Safety and Security.

In providing the suite of solutions that interconnect this expanding list of new technologies we are doing what we have excel that for years helping our customers, address consumers need for more advance functionality while simplifying setup in everyday ease-of-use.

As remote controls and sensor technologies become increasingly advance it is imperative to ensure our worldwide manufacturing strategy evolves to support the growth of newer, more complex technologies and devices.

As such in September we announce the sale of Guangdong Province facility for approximately US$48 million, this sales transfers manufacturing to our newer facilities in China.

This is an important transition as it underscores our worldwide manufacturing strategy to invest in new facilities and equipment that can cost effectively support our growing market leadership position. The feature of the home entertainment and control environment is clearly expanding to include more advance technologies and connectivity protocols.

Our industry is undergoing a major technological change that brings great excitement for the consumer as more entertainment options will be available to them and accessing these options is easier than ever before.

These new and innovative devices and service require more complex design engineering and testing requirements which are often in order of magnitude more complex to develop then traditional products, thus development cycle can be subject to timing delays.

In fact over dozen new product introductions that were scheduled in the fourth quarter of 2016 haven delayed due to customer issues with readiness of their new more advance hardware and software systems or to component shortages.

It is important to note, that over the past 24 to 30 months we have been working with some of the biggest mains in our industry to bring innovative new products in market. Our customers are focused on making sure they deliver the optimum user experience and creating some of the breakthrough features requested by consumers.

As a results that may go through several design, feature and technology iterations including extensive user testing and validation before launch that platforms. These iterations are an essential part of the development process and are important element to the overall success of their platforms.

This is evidence by Comcast recent announcements highlighting the positive impact the Xfinity X1 platform has had on it subscriber retention and growth. While there are short term timing issues impacting the fourth quarter, the long-term opportunities in advanced control technologies cannot be denied.

We continue to be very confident that these advanced platforms will soon become common place in our industry, and we are well position, we continue to grow our market in this space.

We have been working on over 50 design wins in advanced and new product introductions in 2016 with many of those design wins being new products that will be introduced in 2017.

Looking ahead to next year we have a strong pipeline of new product introductions in higher growth categories such as air-conditioners and smart lighting systems featuring the Wi-Fi enabled controllers as well as Bluetooth low energy remote in over the top video delivery market such as China, Japan and Korea.

Adding to the strong pipeline we have nearly 40 new advanced control product proposals on which we are actively working. These represent all of the top consumer electronics computing, gaming and content provider platforms from around the world.

These products will integrate the latest RF technologies, voice and interactive features that are required to drive today's advanced video delivery platforms. We will provide detail as these programs progress.

Many of our new solutions and devices will be on display at the International Consumer Electronic Show or CES January 5th to 8th in Las Vegas where UEI will celebrating its 30th anniversary.

We will be providing them also our QuickSet family of products which is currently deployed in nearly 400 million devices with the leading range in home entertainment worldwide. Our latest iteration of this solution, QuickSet cloud delivers benefits of QuickSet, but as a cloud service.

We are working on our first major customer launch of QuickSet cloud prior to CES with more to follow throughout 2017.

Also at CES we will be displaying some new design concepts from our design innovation showcase featuring our automated manufacturing processes that enable us to further our competitive differentiations through innovative yet cost effective design.

In addition, we have been working on our number of innovations in wireless, home security and monitoring. We will have samples of the sensors and remote controls both in our existing product range and new products that to be introduced later this year and early next year.

We will have a number of exciting announcements coming up that will provide more details about our plans at CES. With that, I'll now to have Bryan Hackworth, our CFO taking through the financial results..

Thanks, Paul. As a reminder, our results for the third quarter of 2016 as well as the same period in 2015 will reference adjusted pro forma metrics. Third quarter net sales were $170.3 million, an increase of approximately 6% compared to $160.5 million for the third quarter of 2015.

Business category net sales grew approximately 6.5% from our $148.6 million in the third quarter of 2015 to $158.3 million in the third quarter of 2016. Consumer category revenue despite a stronger U.S. dollar versus the British pound grew modestly to $12 million from $11.9 million from the prior year quarter.

Gross profit was 44.4 million or 26.1%, compared to 26.9%. Our gross margin percentage lower than last year and lower than we expected year to-date as a result of the incremental investments in personnel, infrastructure and capital equipment which have preceded the corresponding revenue.

These investments were necessary to meet original deadlines of an ever growing number of advanced platform projects. However as Paul mentioned for multiple reasons many of these projects has been delayed. We are opening an under utilization of these resources in this short run. Operating expenses were $28.9 million compared to $25.9 million.

R&D expense was $4.8 million compared to $4 million in the third quarter of 2015 reflecting our continued investments in the new products and technologies including the smart home market. SG&A was $24.1 million compared to $21.9 million. Operating income was $15.6 million compared to $17.2 million.

The effective tax rate was approximately 11% compared to 29%. Net income was $13.9 million or $0.94 per diluted share compared to $11.8 million or $0.78 per diluted share in the prior year period. For the first nine months of 2016, net sales were $494 million compared to $440.7 million in the same period last year.

Gross margins were 26%, compared to 27.5%. Operating expenses were $88.7 million compared to $81.5 million in the first nine months of last year. Operating income was $39.6 million, compared to $39.8 million. Net income was $32.5 million, or $2.20 per diluted share, compared to $30 million or $1.89 per diluted share in last year's nine months period.

Next, I will review our cash flow and balance sheet of September 30, 2016. We ended the quarter with cash and cash equivalents to $48.1 million compared to $53 million at December 31, 2015.

We have 500,000 shares available on our share buyback program depending on market conditions we may [Indiscernible] purchase our share in over market as a positive trends in our industry to support our long term outlook. DSOs were approximately 72 days at September 30, 2016 compared to 63 days a year prior.

Net inventory turns were approximately 4.2 turns at both September 30, 2016 and the prior year quarter. Now turning to our guidance. As Paul discussed over dozen of our new products introduced were expected in the fourth quarter of this year has been delayed till 2017.

Some of customers are experiencing tactical matters relating to validation and other platform readiness issues. These delays not only affect our top line but also our gross margin rate as our investments and incremental capacity are not currently utilize efficiently.

As a result for the fourth quarter 2016 we expect net sales to range between 160 million and 168 million compared to 162.1 million in the fourth quarter 2015. EPS for the fourth quarter is expected to range from$0.56 to $0.76 compared to $0.91 in the fourth quarter of 2015.

For the long term perspective the evolution within the home entertainment environment continues to present us with significant growth opportunities as such we are reaffirming our long term financial outlook. We expect average annual sales growth of 5% to 10% and average earnings per share growth of 10% to 20%.

I would now like to turn call back to Paul..

Thanks, Bryan. As we approach our 30th year anniversary at UEI there are number of successes we can celebrate. Most notably we have the majority share of control technology in the United States and by far the leading share of our market worldwide, yet the opportunity is to further grow our footprint remains significant.

Through all the evolutions and home entertainment including the recent movement towards smarter more advance remote control systems and the emergence of the smart home we have continued to enhance our leadership position by advancing the state-of-the-art in simple intuitive control systems for the new platforms being launched by the leading home entertainment companies across the world.

As a result, we believe we are well-positioned to enjoy another 30 years of growth and success. Stay tuned. I now would like to open it up for questions.

Operator?.

Thank you. [Operator Instructions] And our first question comes from Steven Frankel from Dougherty. Your line is open..

Paul, let’s start with these delays. Obviously that’s a big negative surprise.

You talk about dozens of designs, is that dozens of customers or are we talking about multiple designs for customers? And it just seems like a lot of negative event all at once, maybe give us a little more insight into what’s happening and how long you think it takes to come out of the other end of this?.

Sure. Yes. I think without exception, they are all one project per customer. I can’t think of any that have two projects delayed. Typically in advanced product like this, they are only doing one at a time. So, it would be one per customer and it’s a variety of issues.

As we get closer to launch on some of these platforms, as I said in the comments, it’s an order of magnitude more complex than the generation of product that came before it. Most of these platforms are cloud connected.

If they have voice, they do processing through the remote, digital to analog or analog-to-digital conversion rather, send to the box and up to the head-end into a server process and back down to the box. You also have a new user interface on most of these products.

So the user experience people in most of these companies sometimes iterate that interface, which can again lead two weeks delays, sometimes even months and then have integration of multiple RF technologies and sometimes Wi-Fi along with Bluetooth, or Wi-Fi along with RF4CE or version of ZigBee, which can create some technical issues that they have to work through again.

They can take weeks. Sometimes can even take months to work through some of those issues. Whenever they redesign the interface, they then have to take it back to testing through user experience people again.

So these projects, when they tell us when the launch, what we found after the ones that we’re doing in Q4, unfortunately too many of them were delayed. Now if some of them have launched, we would’ve seen probably a surge in sales from some of them that would have offset the absence of others but we had too many.

Now in terms of the projects, none of them are canceled. All of these projects are critical and in some cases imperative for the companies that we are working with or at least they see them as imperative. So these projects are going to launch. It’s just a matter of how many weeks or how many months they get delayed.

The ones we have now for Q4 have been delayed some to Q1. Some may not even launch until April of next year but they will launch each and every one of them..

You anticipated launching some new customers in Q3.

Did you launch any new customers in Q3 or maybe tell us how many advanced remote customers you are currently shipping?.

We had a couple here in back half of the year that did begin shipping. So, some of the projects are on schedule with us and our customer. And again, I don’t want to -- I want to reiterate, some of the delays weren’t really with the remote control. They were more with the system because again these modern platforms aren’t really developed separately.

They are developed in concert. So the remote and the hardware piece, the set-top box, if you will and the head-ends, the server software, all of these things have to be knitted together in essence by the technical team here and at the operator or CE customer and sometimes there are other parties involved in this more complex system.

But they’re all being worked on. They are all -- we’ve seen demos, a lot of them are exciting platforms but they are in some cases delayed by months..

So to go back to the analysis you did earlier in the year, how many advanced remote projects are you currently shipping?.

Yes. We are probably somewhere in the neighborhood of 10. And we’ve got a multiple of that on the docket that are actually either done and waiting for other elements of the system to be completed before we can ship because remember, even though the remote is done, we can’t ship in volume until it’s deployed..

Right..

But there are other elements of the system that aren’t quite ready. We wait until the entire system is approved and ready for launch. So there’s no real volume until that occurs..

And then on Ecolink, I had anticipated that you’d start shipping more products in Q3, maybe you could tell us what happened there in the quarter and what you anticipate happening into Q4?.

Yes. It is Bryan. We are shipping the Ecolink product. The approval process takes a little longer than we expected but for most part it’s on track. So, we are shipping and continuing to ship through back half of the year..

And then what were your customer concentration numbers for Comcast and DTV in the quarter?.

Yes. Usual suspects, Comcast was 21% and DIRECTV was 11.6%..

Okay..

Very similar to Q2 numbers..

And this under absorption issue is that likely to impact gross margins for several quarters?.

It depends on the launches, Steve. In some cases what we’ve done, what we have at the facilities we are concentrating now, we call them GTY and GTQ, Yangzhou and Xinzhou, the two other factories.

GTY in particular, we’ve invested in people, new processes and new machinery to build these advanced platforms in a more automated or cost effective way than anyone in our industry has done before. When you invest in those things, they have to have the volume to offset.

We couldn’t very well not get it set up for operations with these programs getting ready for launch but the investments preceded the volume surge. So, assuming the volumes begin to ramp, the problem begins to eliminate itself. Under absorption or underutilization of those resources begins to eliminate itself. .

I appreciate you reiterating your long-term guidance.

Would you expect 2017 to be a normal year and in line with that long-term guidance?.

While we don’t provide any guidance for 2017, when you do have years that are below the average. Of course, we are going to have to have years that are above to offset the years that were below that average..

Okay.

Hopefully, only characterizing 2016 as one below that average?.

Yes. Right now, yes..

Okay. I’ll let somebody else ask some questions. Thanks..

Thank you. And our next question comes from Greg Burns from Sidoti & Company. Your line is open..

Hi. I just wanted to just follow-up on the last part of the question in regards to the number of advanced remote opportunities you currently have.

I think in the past you had mentioned 10 to 15 or so barriers, encompassing I think a $112 million total subs, is that number moved at all or is that the same or have you added incremental on top of that?.

We probably added a little bit but not significant. It’s more about executing the projects across those -- the 20% of the world’s subscribers..

Okay. All right. Go ahead..

Go ahead..

I was going to ask, what is your market share in Western Europe versus the U.S.? So, I’m assuming it’s lower and if so, why don’t you have more comparable market share? They seem like very similar markets and what may be can you do to close that gap?.

That’s a good question. I think the natural consequence of our starting year in the U.S. is that our entry into the U.S. subscription broadcasting market began earlier.

So the relationships there will build up over multiple decades, whereas strategic entry in Europe happened a little bit later so and it takes time to convert through successive product generations to get higher and higher share. It can take years to build. The share position we have here in the U.S. is quite high.

Our collective share position in Europe is lower. The way that you do it and the big opportunity for us is, as I mentioned in the prepared remarks, the differentiation of the solutions that we provide allow us to not only retain the customers that we currently have.

But in some cases are helping us close next-generation products with customers that we have not traditionally had. So it’s helping with both market share within accounts meaning we are getting a much higher share of that particular accounts business.

In some cases a 100% percent of it but also closing on new projects with customers we didn’t have prior to that..

Okay.

And the charge for the manufacturing, I guess duplicated overhead, is there any other changes you are making to your manufacturing footprint or is that kind of last we are seeing those types of charges?.

What we are doing is -- there is a press release that come out I think probably about four, five weeks ago about the sale of our southern factory which is as Paul mentioned GTC. That’s going to take a lot of consummate. But for the most part that is the large transition.

As we are closing that factory down, we will move the majority of the volume up north and then a little bit to southwest facility at the GTQ. So that is the one main transition..

Okay. Thanks..

And we have a follow-up question from Steven Frankel. Your line is open..

Just to try to flesh out the Q4 guide a little more, just trying to make you uncomfortable.

Would we expect operating expenses to kind of grow at a similar rate that they have over the last couple of quarters?.

Not necessarily..

Okay. So, it’s much more of a gross margin step down than it is an op expense growth..

Okay. That’s correct. If you are looking at Q4 versus Q4, it’s more of a gross margin issue where as Paul mentioned you were -- what’s going to help significantly as when the products launch, and therefore you are increasing your production at these facilities. So, you are able to absorb the incremental overhead that we put into place.

That was absolutely necessary to hit the original launch date. So, we had to do it but because they got pushed out, you kind of get hit both ends, not only do you not get the sale but now your factory isn’t operating efficiently as you thought it was. So that’s going to affect Q4 currently..

Shorter-term, Steve, over the next few quarters, these things self correct because as the products launch, as the volumes ramp, the machinery, new process, new personnel that we hire to do these products get fully absorbed and the margins are better..

And how much of an impact if any was seen in Q3 from this layering on of additional capacity expense?.

Yes. There were definitely some impacts. I don’t quantify it, at least not publically. But there was definitely an impact to the Q3 margin rate..

Okay.

And what kind of the tax rate would you assume in Q4, or is it -- is baked into your guidance assumption?.

Yes. Q3 was very low because we got a couple of cash refunds in China, which for -- we have tax incentives here and we treat it on a cash basis but both of those happened to come in Q3. So, I would use more like a Q2 rate in that environment, good approximation of the Q4 rate..

Okay. And again, go back to Ecolink one more time I know we talked about ramping shipments.

Did that data include shipments to Comcast in Q3?.

We are working with Comcast on these products. So, we can’t specifically speak to the volumes there, Steve. But we are working with them with XFINITY home on a variety of products, not just one, a series of products for their service. That will ship in the near term in the next year. Have a nice ramp on those products..

Okay. Thank you..

[Operator Instructions] And at this time I’m showing no further questions. I would like to turn the call back to Paul Arling for closing remarks..

Okay. Thank you for joining us today and for your continued interest in UEI. As we mentioned on the call, we will be celebrating our 30th anniversary at CES in Las Vegas from January 5th to 8th. Following that, the next week, we will be presenting at the 19th Annual Needham Growth Conference held January 10th to 12th in New York City.

We look forward to seeing you at one or both of these events. Thanks very much for being on the call today and goodbye..

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Everyone have a great day..