Thank you all for joining us today. This is Kirsten Chapman of LHA Investor Relations. And you're joining the Universal Electronics' First Quarter 2020 Financial Results Conference Call. By now, you should have received a copy of the press release.

If you've 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 will be available for one year at www.uei.com.

Any additional updated material, non-public 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.

During this call, management may make forward-looking statements regarding future events and the 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 projections.

These statements include the company's ability to continue efficiently operating its factories at full or near-full capacity amid the economic and physical restraints we faced due to the COVID-19 pandemic; the company's suppliers, transportation providers, and customers continuing to operate supply of raw materials and components provide our logistics needs in order our products as anticipated by management; the company's ability to timely develop and deliver new technologies and technology upgrades and related products that will be accepted by our customers, changes in consumer lifestyle that will translate into new purchasing habits resulting in increased sales opportunities for the company; the continued trend of the industry toward providing consumers with more advanced technologies, management's ability to continue to manage its business via product mix adjustments, increase licensing opportunities and an increase in operational and administrative efficiencies to achieve its net sales, margins and earnings as guided; the effects that natural disasters and public health crisis, including the COVID-19 pandemic, have on our business and management's ability to anticipate and mitigate those effects, including the duration, severity and scope of the COVID-19 pandemic and restrictions that may be imposed on the company and its operations by federal, state, local and international public health and government authorities; and the ability to manage the company's near and longer-term cash flow and cash needs through its inventory and cash conversion control activities.

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 files with the SEC. 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 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 the business trends of competitors and other companies. A full description and reconciliation of these adjusted non-GAAP measures versus GAAP is included in the company's press release issued today.

On the call today are Chairman and Chief Executive Officer, Paul Arling, who'll deliver an overview; and Chief Financial Officer, Bryan Hackworth, who will summarize the financials. Paul will then return to provide closing remarks. It's now my pleasure to introduce Paul Arling. Please go ahead, sir..

Good afternoon. And thanks for joining us today. With over three decades' experience we have successfully managed and tamed numerous technology transformations, as well as several economic downturns and become stronger in the process.

In 2019, we continued our ongoing technology development and implemented strategic initiatives to improve profitability.

We were pleased to enter 2020 in the strongest position in our company's history, from a financial, operational, and product innovation perspective, which is serving us well as we navigate macro-economic conditions related to COVID-19. Year-over-year, we continue to invest in securing our technology and product development foundation.

Once again, this bedrock is expected to yield competitive advantages for our company, as well as our customers. As discussed on our last call in mid-February, we anticipated a supply issue in Q1 of 2020. After the Lunar New Year celebration, the reopening of our manufacturing facilities in China was delayed. Today, we are back to full capacity.

Mexico remains open and is operating efficiently. While there have been significant challenges to overcome related to delayed factory openings, supply shortages, and shipping constraints amongst others, I am proud of how our team has handled the setbacks.

Once again, we rose to the occasion adjusting our production capabilities quickly to address customer demand. Today, all of our production facilities are up and running at their requisite capacities and our guidance presumes that will continue. Many of our customers are in the central industries, such as telecommunications, broadcasting, and HVAC.

Our team continued to work on creative solutions to address challenges we face in manufacturing, supply chain, and transportation. However, as the pandemic spread worldwide, we've been faced with shelter-in-place directives that have impacted our near-term customer demand. Two major factors are contributing to customer demand during this time.

Unfortunately, many consumer electronics retail outlets remain closed, limiting consumers' access to our customers' products to online outlets only, where retailers have prioritized essential items and limited deliveries of consumer electronics goods.

Additionally, our subscription broadcast customers, especially those who rely heavily on professional installation, have seen their operations limited. These installations require truck rolls and consumers are reluctant to have installers in their homes while practicing social distancing.

While we believe these effects will be temporal, they have affected our near-term demand. Fortunately, many of our customers in the subscription broadcasting and over-the-top space are using our latest QuickSet and QuickSet Cloud features that contribute to a self-installed experience.

This helps reduce their dependence on professional installers at a time when consumers are actively looking for entertainment and information services that have become a must-have in today's consumer households.

Additionally, more people are watching TV and using wireless controls in their homes worldwide and that is helping drive long-term consumer desire for intuitive and voice-enabled control and a self-install experience. As technology upgrades continue, the bar has been set high for the types of products and services consumers want.

These products are our specialty, which will likely present incremental revenue opportunities for UEI. At a time like this, it's important to reflect on some examples of innovations that have been the hallmark of UEI and been adopted by customers throughout the years.

Our QuickSet Cloud platform, which is in its fifth generation, is a key ingredient to enabling a consumer-friendly self-install and helps reduce the dependence on truck rolls. This provides a huge benefit to our customers and the consumers, as they can avoid person-to-person contact in the user's home.

Our voice-enabled solutions require less tactile interaction with home entertainment devices and give consumers greater confidence in interacting with their home entertainment products and services and adoption of our advanced voice control solutions continues to gain traction.

Additionally, last year, we introduced our Nevo Butler platform that delivers touchless voice control for managing consumer interactions with multiple home control applications, including entertainment, security, home automation, and energy management.

I'm sure would not surprise you to learn that, in response to the pandemic, interest in product demonstrations and use-case workshops for these platforms has grown significantly, as the potential for consumer adoption of these types of control interfaces in the home is growing.

Our customers remain committed to their product development strategies while adapting to a fast changing environment. In fact, our engineers have continued to work with major customers on exciting new projects that we expect to formally unveil later this year and early in next year.

While the pandemic is still cause for near-term uncertainty, we believe that the situation is temporary and I'm confident our team will continue to deliver the latest products and services our customers have come to expect from us.

Our performance in Q1 reflects our continued focus on newer software-intensive technologies and licensing, which carry higher margin as well as prudent cost management.

We have continued our focus on enriching our product mix away from lower-end, lower margin products and toward more advanced, truly differentiated and, thus, more profitable solutions. Therefore, even with sales lower than last year, due to the current environment, we continue to be positioned to increase our profitability.

I'll now turn the call over to our CFO, Bryan Hackworth, for a review of the financials. Please go ahead, Bryan..

Thank you, Paul. I'll review first quarter 2020 compared to the first quarter 2019. Net sales were $152 million compared to $182.7 million in the first quarter of 2019.

At the time of our last call, we expected first quarter 2020 to have a lower run rate than last year, as we've opted out of low margin business and anticipated COVID-19 to impact our supply chain.

This disruption occurred as we were not able to procure certain components for products destined for Asian and European markets and local transportation issues in Asia resulted in not achieving our labor capacity until April instead of March. These factors, as expected, adversely affected sales by approximately $10 million.

What we didn't anticipate was that our demand would also be affected and reduce net sales, primarily in U.S. subscription broadcast. At the time of our last call, COVID-19 had yet to materially affect regions outside of Asia.

However, as the quarter progressed, the environment changed rapidly as other regions, including the U.S., began to shelter-in-place as mandated by the respective governments. In the month of March, we experienced a decrease in demand, especially for products that pair with platforms that require an installer to enter a household.

However, for reasons I'll take you through in a second, we were able to fall within the earnings guidance provided. Gross profit reached $47 million or 30.9%, compared to 25.8% in the first quarter of 2019.

Royalties played a significant role in this improvement as we're licensing our technology to multiple customers including three of the largest OEMs in the world, one of which commenced in the current year. These OEMs are broadening the scope of their advanced features by increasing the number of products that incorporate QuickSet technology.

Other factors contributing to the rise of our gross margin rate include opting out of low margin business and a stronger U.S. dollar versus the Chinese yuan and Mexican peso. Operating expenses were $32 million compared to $32.6 million in the first quarter of 2019.

R&D expense increased to $7.7 million this year from $6.6 million in the prior year quarter, reflecting our strategy to invest in technology and product development. SG&A was $24.3 million this year compared to $26 million last year reflecting savings from our corporate initiatives and a decrease in variable expenses.

Operating income was $15 million, up from $14.6 million in the first quarter of 2019. Operating margin increased to 9.8% compared to 8% in the prior year quarter. Our effective tax rate was 19.4% compared to 14.9% in the prior year quarter.

Net income was $11.5 million or $0.81 per diluted share, compared to $11.3 million or $0.82 per diluted share in the prior year quarter. Next, I'll review our cash flow and balance sheet at March 31, 2020. Cash and cash equivalents were $58.9 million compared to $74.3 million at December 31, 2019.

The decrease in cash relates primarily to the timing of accounts payable and accrued expenses. If COVID-19 were not a factor, our inventory levels would have decreased by a greater amount. However, given the current environment, we felt it prudent to carry excess raw materials and components in an effort to mitigate potential supply issues.

During the first quarter, we repurchased 169,000 shares for $6.3 million. Our cash conversion cycle approximated 115 days of the first quarter of 2020, compared to 119 days in the first quarter of 2019. Now turning to our guidance.

In the months that we have been intensely watching the COVID-19 crisis, we have learned much, but there is still a great deal we don't know.

While our guidance today obviously presumes the effect of COVID-19, we are also presuming a stabilization, that is, there will be no more significant advance on either the demand or supply side that will change our current forecast. While this is still guesswork to some extent, we know one thing with confidence, this will pass.

Our factories in China and Mexico are fully staffed and running at planned levels. Procuring raw materials and components remain at risk. Our operations team has done a great job preparing us and limiting the overall risk of having supply issues.

Although some jurisdictions are beginning to open their economies, there are restrictions attached in many areas within the U.S., as well as globally, have yet to commit to a date. Consequently, we expect demand to continue to be affected.

We expect second quarter net sales to range from $150 million to $160 million, compared to $193.4 million in the second quarter of 2019, and EPS to range from $0.84 to $0.94, compared to $0.83 in the second quarter of 2019.

Our corporate initiatives over the past several years, from investing in technologies that can be embedded in a number of devices, sold in various form factors and distributed through multiple channels to our corporate restructuring efforts, have enabled us to become a more profitable company.

Therefore, while we expect our sales to be down for the first half of the year, we are guiding for profits to be up, compared to last year. I would now like to turn the call back to Paul..

Thanks, Bryan. Over the years, we have executed strategies to deliver advanced wireless control solutions that differentiate our customers' products and services and delight consumers. While unforeseen events have caused a near-term impact on the market, we are well-prepared to address the challenges that arise.

More importantly, with our technology, we have continued to arm our customers with innovative solutions to bring to market. In fact, our customers remain committed to their product development, which we believe is just one sign of the potential long-term market demand. We will manage issues in the near-term as we always have.

While the past few years have presented many challenges, last year ended as the most successful year in our history. This year, of course, presents unexpected challenges, certainly different and maybe greater than ever before. Our team has worked very hard over many years to create the best home control products and technologies in the world.

Today, manufacturing is up to speed. Engineering continues to develop more differentiated products. Major customers continue to plan to launch new projects later this year and into next year. And our actions, particularly to enrich our product mix and manage our expenses, have made our company more profitable.

In fact, despite the difficult environment, the bottom line for the first half of 2020 is expected to be greater than it was for the first half of 2019, a record year for our company. Our enthusiasm is no less diminished as we continue to pursue our long-term business potential. Stay tuned. Operator, we'd like to now open the call for questions..

[Operator instructions]. Your first question comes from the line of Steven Frankel from Dougherty. Your line is now open..

Good afternoon. Paul, can we start with some context around the Q2 revenue guidance. How much of this is the impact you talked about of customers that rely on truck rolls versus maybe other things that are impacting demand like cord-cutting or moving away from some of these lower margin products? Just a little context on that..

Sure. Yes, I can't give you a precise quantification on some of these things because they're impossible to be precise on. For instance, the lower margin products that we've moved away from, some of them have continued through their life cycle, others have been replaced by other products.

So it's difficult to know exactly, again, the precise number that comes from that, but there we have, over the last few years actually, pursued a strategy of upgrading the product and moving more upscale in terms of the solutions that we provide.

It's difficult to compare year-over-year on that very front, but I would tell you that the product line has definitely moved up the differentiation ladder.

As far as the -- with customers, we're seeing that customers that adopted in architecture, that was more self-install capable and some of our customers have done this over the years, and it's beyond QuickSet.

But QuickSet is certainly an important element of it, because it can -- the box or the service can essentially be left at the consumer's front door or mailed to them and there is a small instruction card inside that leads them through a couple of simple steps to configure and then they're often running.

So what we're generally seeing is the customers that have adopted that sort of architecture, their volumes are okay because they are able to add subscribers or upgrades or other things without having to enter people's homes.

As soon as a customer adopts an architecture where it will require somebody to come in to install, we're seeing a little bit lighter demand in those areas for obvious reasons. Either the company does not wish to have their employees entering the home or they're willing to do it, but the consumer isn't.

The consumer is not calling them to come out to install things in their home, at least not in the current time. So we're seeing a little bit of lightness of demand from that.

So I think it's primarily attributed to that, the drop-offs we've seen, because when we look at customer-by-customer what we see is almost universally that people that have an architecture that's less conducive to self-install, their volumes are more -- have dropped a little bit more and those that have self-install have dropped less..

Okay.

And maybe characterize for us the volume or the significance of new programs that are potentially ramping in the back half of the year? And have you seen any material delays on those time schedules given lockdown?.

Yes. In terms of the projects, we have a number of them, a number of ones we are both bidding on or architecting that probably would be by earliest late this year, probably into next year. We have some that we're already working on that would be for later this year. And there really hasn't been any slowdown on that.

Our engineers remain very engaged with customers, regular, having meetings, obviously not in person but through the use of technology.

Our engineering group is as busy as it's ever been working on both early stage projects, meaning, ones that are just being architected, which, again, have a longer development trail and those that we've already been awarded and have targeted introduction dates for either again later in this year and into next year.

So the point we made during the prepared remarks is that, our customers don't seem to have fallen off at all in terms of their plans to re-architect the home entertainment and in some cases beyond the home entertainment coupled with other home automation applications, doesn't seem to have changed much at all.

The way in which the projects are getting done has because obviously there's no physical travel to the customer, but the development path has not changed..

Okay.

And have we seen peak gross margins or if volumes begin to grow again, is there room for gross margin expansion from here?.

Paul Arling:.

30.9%:.

Okay.

And then, Bryan, can you give us the customer concentration for the quarter?.

Yes. It's Comcast at 21.7%. They were the only customer above 10..

Your next question comes from the line of Greg Burns from Sidoti. Your line is now open..

Yes. So just to go back to the revenue guide, you'd kind of also called out some of the consumer channels being closed.

Is there any way to delineate kind of the impact of the consumer channel versus the cable broadband market or is it majority cable and the consumer is not really that large of a component?.

It's -- well it's -- because a large percentage of our business has been through subscription broadcasting, whatever effect has occurred there of course contributes strongly toward the revenue guide.

But it's important to note that the consumer channel -- we have a consumer business, but part of our B2B sales, our business category sales, utilize the consumer channel.

So not all of our business category sales are to subscription broadcasters or MVPDs or cable and satellite operators as they go by various names by different people, we also sell to OEMs and other customers of ours who then utilize the consumer channel, retail channel, either online or physically in stores.

And some of those customers' products have seen a slight drop simply because the stores were closed. So, as a result, people are more buying absolutely what they need rather than traveling through a store and buying things. So we've seen a little bit of a drop off on that as well. Those are the two effects.

The inability for certain of our customers to enter homes or the drop in demand for people to install by entering homes and a bit of a drop on the consumer side because it's closed, it's pretty much across most of the world..

Okay.

And with the demand decline you're seeing with the subscription broadcast, are they just working through their -- like, what are their inventory levels like? Are they just working through their inventory and not placing new orders and maybe once things start opening up, they might have to replenish? Like, how do you foresee this in a positive scenario where things start opening up in the back half of the year, playing out for you with demand may be recovering in this channel?.

Yes. Well, I think a couple of things. One, obviously, if we get back to a point where consumers feel more comfortable with people entering their homes because the fact is -- home entertainment -- the demand for home entertainment has not dropped at all.

People are probably watching -- I haven't seen the more recent statistics, but my guess is the typical five hours a day of the average American that I typically quote is probably slightly higher than that now for obvious reasons. So I think people being informed and entertained in their home, there's no lowering of demand for that.

I think just now because of the social distancing and some of the things that have happened, that will likely with time pass. We'll probably see a return to more normal behavior.

In addition, though, what we're also seeing and have for years now is customers that are, again as I mentioned in the prepared remarks, adopting an architecture which lends itself more to self-install. Now, obviously, no one did that because of a pandemic, they did it because it is just easier.

It's easier for them, it's easier for the consumer and QuickSet and QuickSet Cloud are an important element of that. All of the new designs we're seeing are adopting more of those technologies.

So as we roll out more of these platforms, which as I said, the customers are still working on, as they roll them out, one of the benefits of it, longer-term, would be that if there ever were an interruption like this again, they would be -- the customers that have adopted this architecture would be less impacted because, again, if a consumer calls and said, look, I'm watching a lot of TV now, I'd like to put a TV in the den with the service on it, they would simply either put a box on the front step or mail it to that consumer and there'd be a small card inside that would say, please follow the instructions on this card, plug it into the wall, plug in your devices and follow the instructions on the screen.

It's really quite that simple..

Okay. All right.

Then lastly, what percent of your revenue is chip or license-based? And maybe how fast has that been growing?.

We don't disclose that, but it's been growing. The royalties have grown nicely over the last year. And as I said in the prepared remarks, we used to -- we're up to three large OEMs. We have more arrangements than three. But from -- when you're talking about large OEMs, we have three.

And even within those three, they're starting to broaden their product line in terms of deploying our technology and more of their SKUs. So here we're seeing growth from a customer perspective, but also even within the customer. So it's growing nicely..

Your next question comes from the line of Jeff Van Sinderen from B. Riley. Your line is now open..

First, let me say congratulations on the strong profitability and the great margins.

Just to clarify, my first question is really the lower demand that you're experiencing does not appear to be due to cord-cutting but rather due to pro install delays and a close consumer channel due to COVID; is that correct?.

Well, yes, it's difficult for us to know obviously when somebody -- if we have a customer that again has a non-self-install related architecture, when they give us their orders for the quarter and they're 10% off, they don't say, well, 7.2% of that is due to lack of self-install and 2.8% of it is cord-cutting.

However, I will tell you that cord-cutting has been something that has been talked about for -- I can't remember how many years now but it's quite a few and yet last year we saw demand increase. So I'm not sure.

I can't give you a precise number on that for the reasons I just mentioned, but I think that the main change between, say, Q4 of last year or Q3 of last year and today would be mainly that lack of self-install architecture, the inability for either the company to send their employees in or the consumer not wanting to have those installers enter their home.

That would be the biggest change between Q3 or Q4 of last year and now..

Okay. Because you said the --.

Well -- or cord-cutting may be part of that. It wasn't really affecting us last year. I'm not saying it is not affecting us at all, but it was in effect in the past, and we were still growing share, and our sales were still accelerating. And again, remember, we're part of some of these over-the-top platforms. We're not just tied to one or the other.

Any type of entertainment product that enters your home may be a customer of ours. So cord-cutting is something that is certainly out there. But I think the bigger effect in the near-term due to the COVID-19 is this idea that people don't want installers entering their home, that would be the biggest change between Q3 or Q4 of last year and now..

Right. And would stand to reason that if your business was up substantially last year, it sort of makes cord-cutting less relevant..

Yes..

And I think you also said that you were seeing relatively stronger demand for the self-install type products, correct?.

We are, yes. And we have a lot more interest, for obvious reasons, of customers. Even customers who hadn't adopted it yet are now very interested in it. Not just due to COVID, I mean there's an obvious selling point. It's easy. It's easier for your installer. It's easier for the consumer.

You could move to a more self-install architecture if you utilize it. Even forgetting about the pandemic, it's a better solution. I think this just hastens its adoption. When you face something like this, it helps. Well, the pandemic doesn't help. The selling of this feature is aided by this -- these times..

And then you mentioned on the consumer side, where retail's closed, you're seeing a slower demand there; is that for TVs or which products are involved?.

It doesn't appear TVs have been hit quite as hard, but any other product could be because, again, consumers just aren't -- obviously they're not physically in stores.

So volumes -- clearly in our consumer business, which is less than 10% of our company, but still there, that is going to be a little bit lower as a result of people not being out and about shopping in retail stores. They're simply shut across most of the -- all of Europe and the U.S. have felt those effects at the end of Q1 and into Q2..

Okay.

And then -- and can you give us any more color on some of the new programs that you mentioned in your press release that you see driving growth perhaps later this year and into next year?.

Yes. The only color I can give you on them, because obviously -- and I know we've talked about this before, and I've talked about with all of you guys, that our customers, of course, in front of their introductions do not want for us to talk about them and we hold true to that.

The only thing, I guess, I could say is that these are advanced platforms, obviously. They are usually voice driven, if not all. Some of them are iterations of what people have done in the past.

Many of them are upgrades, meaning, people who are moving from the older architecture to the newer architecture, as we talked about for a long time, two-way, IP-enabled devices that are now technologically capable of things like self-install utilizing QuickSet and QuickSet Cloud, many of them reach out to other devices in the home that will actually connect and control other devices in the home, many of them are with the leaders in the industry in the world, some of them are with new customers.

But again, I can't -- unfortunately, I can't mention names, but that will be something, as we said in the prepared remarks, that we can unveil as the quarter is progressing..

I am showing no further questions at this time. I would now like to turn the conference back to Paul..

Okay. Thank you for joining us today and your continued support of Universal Electronics. We will present at two upcoming virtual conferences, the Needham Annual Technology and Media Conference on May 20, and Baird's Global Consumer Technology and Services Conference on June 2.

Hope to hear from you at some or see -- I guess we won't see you, but hear from you at those conferences. Thanks very much. And have a wonderful day..