All right, let's get started here. We are in the home stretch here of Sidoti's March Small Cap Conference. Thanks for joining us here for the Universal Electronics presentation. From the company, we have Bryan Hackworth, their CFO. He's going to run through a presentation, and then we'll get to some Q&A at the end. If you do have any questions, feel free to enter them through Zoom, and we'll get to as many of those as we can. With that, I'll hand it over to Bryan for the presentation.
All right, thanks, Greg. My name is Bryan Hackworth, and I've been the CFO here at Universal Electronics for about 20 years now, so it's been a while. I'm not going to read this full Safe Harbor statement. It would take up half the time. Basically, I'm going to make forward-looking statements, and there are risks associated with these forward-looking statements. Please read our public filings, 10-Qs, 10-Ks, with the associated risks. All right, our mission is to create smarter living. Essentially, it's to create and develop products and technologies that enable the user to control all the devices in their networked home.
There have been a lot of changes over the last several years in that when we first started, it was mainly the AV stack. We controlled everything in the AV stack, from a set-top box to a receiver to a Blu-ray player, you name it, we controlled it. You fast forward, devices have become more advanced. They become smarter. From a home automation perspective, there has been a proliferation of devices connected to the home network, including now you have blinds, you have sensors, you have thermostats. People want their devices to be smart, and they want them to work together.
That is our secret sauce. We have technology, software, specifically QuickSet, that enables us to control all the devices in the home network and have them work seamlessly together. UEI is a global leader in universal control solutions for the home. The way we have accomplished that is by investing in R&D. As you see here, we have over 540 engineers worldwide. We have tech centers in California. That is the main hub. However, we also have a hub in India, Bangalore specifically.
We have engineers in Europe, and we have some in mainland China. It is something that we pride ourselves on. We are about developing differentiating products. The way you do that is by investing in R&D. Now, a lot of you that have followed us over the last several quarters, actually more like a year and a half to two years, you will know that we have gone through restructuring both from a manufacturing side and also from an SG&A side, in that our factory footprint was built for about $750 million in sales. When our sales started to decline, we had to build and restructure our factory footprint to be commensurate with our new sales levels.
Our operations team has done a great job over the last 18-24 months in doing so. We ended up shutting down a factory in China. We ended up spinning a factory up in Vietnam. In Mexico, we reduced its size. That was all completed last quarter. It was a great effort. The reason I'm saying this is that we've attacked costs both on the manufacturing overhead side as well as SG&A. The one thing we didn't touch a great deal of is R&D. Now, we did reduce it a little bit, but it's the lifeblood of Universal Electronics. We still spend about $30 million a year on R&D.
We'll go into later what we've done with that spend, but it's definitely been worthwhile. We do control basically right here. These are the channels that we sell into. The entertainment is basically made up of subscription broadcasting, so cable, satellite. You also have consumer electronics, Sonys of the world, Samsung, LGs, and retail, which is primarily European retail. Now, climate, we'll talk more about this later, but we're making great headwinds or strides into the climate market where we have one project with eight of the top 10 worldwide HVAC players.
So we've made great progress with that. We'll talk a little bit about Q4 revenue where we're starting to see the revenue come to fruition. Then you have smart home, which is anything like we'll sell to Somfy, we'll sell to Hunter Douglas, anything like I referenced earlier from blinds, sensors, things of that nature. Now, sometimes you'll hear us refer to home entertainment channel and the connected home channel. Really, entertainment, that is the home entertainment channel. If you combine climate with smart home, that's what we refer to as connected home.
Sometimes we use these terms interchangeably. Here, this tells us basically how our sales occur. We've sell finished goods in full form factor and full remotes, thermostats. That's the lion's share of our sales. You're talking probably over 90% are in the finished good format. We also sell technology that's embedded in a chip, or we could sell just to have a pure license arrangement. We do all three, full form factors and remote controls, thermostats, etc., software embedded on a chip, or just a pure licensing arrangement.
Some of the business highlights, growing share in climate control and home automation. This is the growth engine for us. Climate control has a market of $1.8 billion, and it's growing at about 8%-10% rate. Home automation's market is about $1.7 billion, growing at about 6%-7% rate. Earlier, I referenced the R&D spend, and this is what we've been spending on. A higher percentage used to be allocated to home entertainment. Now, over the last few years, we still allocate funds to all three channels. However, over the last few years, a higher percentage of that R&D spend has been allocated to what we consider the growth channels, which are climate control and home automation.
We have accomplished a lot with that. We have developed and launched UEI TIDE products. We have a strong pipeline of new product designs. Earlier, I referenced that over the last few years, we have got up to winning projects with eight customers, the top 10 HVAC customers worldwide. It has definitely been worthwhile, and we are making good headway. Just to reference the Q4 sales, we were at $110 million, which was 13% growth year- over- year.
A large part of that came from the HVAC channel where we had two customers specifically that increased their orders in the fourth quarter and resulted in strong sales. We are starting to see our hard work and innovation come to fruition. It has taken a little longer than we had hoped, but it is definitely taking place. We have a focus on technology, innovation, and sustainability. I think probably the best example of that is the QuickSet software where QuickSet, we have talked about this for years. We are on our sixth iteration now.
QuickSet has the ability to discover all devices in the home network, configure those devices, as well as control those devices. It all happens seamlessly behind the scenes. There is no more manual input or anything of that nature. It's been a great technology for us that we've been able to transition from not just the AV stack, but also to embed QuickSet technologies in any other connected device such as a thermostat. We have a global scale and reach. We're vertically integrated across design, development, and manufacturing.
I talked a little bit about that earlier. We have R&D teams in the U.S., Europe, China, and India. It's a strong focus of ours. We're globally diversified in manufacturing. As I mentioned, we spun up Vietnam in the second quarter of 2023. It's going very well. We've increased production there. The majority of our products that are destined for the North American market come from our Vietnam facility. We also have still a facility in China, a smaller facility in Mexico, as well as an assembly facility in Brazil.
We'll talk a little bit more about the customers later, but we got Fortune 500 customer base that we sell to. We have extensive experience with these large players. We're the leader in home entertainment control technologies, and that's helped us transition into connected home. A lot of people don't realize this, but outside the U.S., which most residential units and commercial units have central air, if you go to Asia or you go to Europe, there are a lot of split systems. People have wall units in their homes or in their businesses, individual wall units, and they control them with a remote control.
That's how we started to segue from home entertainment to climate control. From there, you start to transition to higher advanced thermostats. It's been a smooth transition for us, relatively speaking. Daikin, if you've been following us, has been a 10% customer now for a while, so we've made great headway. If you look at the markets in general, you look at home entertainment, it's $800 million. Climate control, as I mentioned earlier, is at $1.8 billion. It's going at an 8-10% clip. Home automation and security is at $1.7 billion at a 6-7% growth rate.
Combined, we're going after large markets and a total of about $4.3 billion in size. Overall, home entertainment is still a growth channel. I think a lot of people are probably a little surprised by this because they think of cord cutting. At the end of the day, people continue to watch TV. They're not going to stop watching TV in the U.S. The average household, they watch over five hours a day. I think Europe is getting close to that. People still watch TV. They're consuming it and receiving the content in a different manner.
Smart TV penetration is high now where you get smart TVs and you've got all the apps embedded. There's growth in streaming services, all the Netflixes and Hulus and HBO Maxes, etc. You've got an evolution in the hybrid set-top boxes, which people want. They want the linear TV, the live TV, but they also want the on-demand functionality of it. People want both aspects. The traditional TV market decline is showing signs of stabilization. We talked a little bit about this where you have cord cutting has been an issue for us over the last handful of years. On a positive note, we are starting to see signs of stabilization.
Starting to see customers year- over- year ordering patterns starting to stabilize, which is a positive sign for us. You have TV platform growth through OS syndication. You get the likes of LG that have webOS. They syndicate that OS system. There have been business model changes, especially in the U.S., where it's becoming more ad tech focused. That's how they're monetizing it. I think what they're doing now, even some of the cable operators are starting to act similar as consumer electronics do in that they're creating these operating systems and they're selling the hardware through a TV.
They're basically monetizing through ads. They're basically subsidizing the TVs. The TVs are getting very cheap. The money to be made is through the advertising. We believe that the TV is going to be the hub, the central point of the home in terms of all the devices. If you look at an advanced TV operating system, it's basically the service aggregator where you have all of the apps embedded. You can also have all the other devices as well. If you have an LG TV, it has our technology embedded in it. Any device connected to the home network, whether it's a sensor or blinds, anything connected to the home network, the thermostat, you can control from the TV.
The connected home addressable HVAC market is, again, a billion eight, running at a 10% clip. It's how we're going to grow. We're proud of the progress we've made in this category. The one thing that we're seeing is similar dynamics to what happened in the home entertainment channel. If you go back years ago, if you wanted a DVR or if you wanted a universal remote control, you had to get it in the aftermarket through retail. Over time, the cable operators wanted this advanced functionality in their original equipment. The DVR became embedded in set-top boxes, and universal remote controls became packaged with the set-top box.
That is where we really made strides into the cable channel. The same thing we are starting to see, that same similar trend is happening in HVAC, where these advanced functionalities, a lot of times you had to go through retail if you wanted to get a Nest or an Ecobee. You went through retail. However, now the OEMs want that advanced functionality in their original equipment. This is where we come to play. We have decades of experience with consumer electronic companies. We are a great partner. What they're doing is they're partnering with us, but they have these technologies embedded in the original equipment.
We, side by side, are working with them during the design to make sure that these functionalities work seamlessly for the consumer. Because in the aftermarket, even if you have some of these products, it's difficult to have these products work with all the different brands seamlessly. There's too many protocols, too many platforms. It's common where it's going to work some features, but not all. The OEMs want these advanced features to work seamlessly for the consumer. I'm not going to go through all these. These are just a couple of our products. You can see you got the TIDE Dial as well as the TIDE Pro.
This slide basically I referenced this earlier where with QuickSet, we started off in the AV stack, but we've definitely migrated. You could actually have the QuickSet technology embedded in a thermostat. The thermostat could be a hub as well. The thermostat, anything that's IP related, anything that's in your home network from your thermostat with the QuickSet technology embedded, you're able to operate everything from lights to blinds to window sensors, etc. This chart illustrates where we've been and where we're going. We start off at home entertainment with remote controls.
That's the little red circle. The blue circle talks about where we've gone in terms of comfort and convenience, the HVAC systems, lighting, appliances. We also delve into safety and security. We're in all these channels and anything that requires control, anything that requires working together. For example, if you were to people want smart devices. And if you're in your home and you were to leave and you were to, say, set your alarm, your security, your air conditioning should act accordingly where it knows you're now out of the house. You shouldn't have to do it manually.
It should know, okay, this person left. You could have motion sensors where it knows you've left or through the alarm system that you've set and adjust your temperatures accordingly. All these things are important in terms of the devices interacting with each other and making your life easier. I'm not going to read through all this except just launched 2008, QuickSet will be deployed in over 600 million devices. So it's been disseminated worldwide, and it's something that we've honed our skills in. Again, we're on our generation. We partner with global channel leaders.
We deal with all the big players. If you look at the VSPs, everyone from Comcast to TiVo to Charter, Dish, Sling, these are all the big hitters. Same thing with CE. We deal with the large TV CE companies and Sony, LG, Samsung. Climate control, we've got Daikin, Panasonic, Toshiba, Hitachi. There's not a lot of customers that we don't have. From a national perspective, sales again in Q4, $110 million. I mentioned this earlier, but the growth was really driven by the HVAC channel. We had a couple of large customers that came in, and they increased their orders, and it got us to $110 million, which is a positive sign.
Now, for Q1, the midpoint of our sales is $92 million. That's flat with the prior year. Now, the one thing I won't go into too much detail on this because it gets a little technical on the accounting side, but we ended up having to recognize an additional $4 million in the fourth quarter from a technical accounting perspective because we had received orders related to HVAC of about $4 million. Now, the shipments did not occur until Q1, but we met all of the requisite requirements, and we ended up having to recognize that revenue.
If you put that $4 million into Q1, we still grow in Q4, and Q1 would be $4 million or as higher. You'd be looking at a midpoint of $96 million versus, say, $92 million in the prior year. Now, gross margins came in at mid 28 percentage points. Like I said, we've done a lot of work over the last couple of years to get the manufacturing footprint optimized, and we've done so. Now, I foreshadowed this in Q3, where for the fourth quarter, I expected the gross margins to be down a little bit because there's still issues in the Red Sea where you have elevated freight rates as a result of it.
I expect our gross margin for the year to still be strong, be higher than 28.4%. The back half is usually higher than the front half because you've got more TV sales gearing up for the Christmas season, which we receive royalties. The retail channel, obviously, the same reason, increases and retail higher gross margin percentage than our company average. For those reasons, I expect a gross margin percentage to lift in the back half of the year. From a debt position, at the end of the year, we're at net debt position of only $10 million. Over the last year, we repatriated funds from overseas.
We paid down the debt. Debt was only $36 million at the end of the year, and we had cash of about $26 million for net debt position of $10 million. I feel like we're really well positioned from a balance sheet perspective and from a growth perspective. I love the way that we restructured. I like the gross margin where we're at. We're back to normalized rates. The OpEx, we've contained. We've done some restructuring in that aspect. The balance sheet is shored up with only a net debt position of $10 million. I really like the position we're at. UEI investment rationale, targeting attractive, growing, connected home markets in that $4.3 billion total market that we talked about.
We're expanding our product portfolio and growing climate control and home automation markets. That's our focus. We continue to focus on technology. That's why we're investing in R&D. We haven't cut very much in that R&D realm. We have over 730 issued and pending US patents as a result of it. We're going to continue to invest. We continue to deliver efficiencies in improving our financial position. That's about it. I'll open it up for questions.
All right. Great. Thanks, Bryan. If you do have questions, just put them through the Q&A function. We'll get to those, but I'll kick it off. I know you had this like the accounting dynamic between the Q4 and Q1 in terms of revenue recognition. How should we think about the remainder of the year playing out? Do you expect Q1 to be the low point? Given maybe your outlook for some of these projects coming to market, how should we think about kind of the pipeline of these new connected home HVAC projects rolling out and how that might impact revenue this year?
Yeah. Yeah. That's a good question. We only give guidance one quarter out, as you know. We don't give annual guidance. I think the important thing to focus on is just the fact that we are continuing to win projects. And these projects are starting to—you're starting to see it turn into revenue. You saw that in Q4. It's difficult to predict sometimes in terms of the offtake. It was a little more predictable on the cable side because we were able to—if we won a project on the cable side within three to six months, we'd be shipping. And the revenue is more predictable because it was a function of their subbase.
It's a little more difficult in the HVAC space because the lead time is much longer. Instead of four to six months, it's more like 18 to 24 months. It is definitely a more rigorous process, or at least a timely process, I should say. They are both rigorous. Sometimes it is difficult to predict on that front. I think what we focus on is just winning these projects, hitting the target dates at that point, and then shipping. If it takes—it has been a little frustrating because sometimes in the past, it has taken a little longer than we had hoped. At the end of the day, we continue—we are starting to ship. I expect to have growth for 2025. Now, whether it gets a little lumpy, it is hard to predict, but I do expect growth in 2025.
Okay. Can you maybe size the project pipeline then? Maybe the revenue opportunity or what it could lead to?
I mean, I think a while back, Paul had mentioned that we had won $80 million of projects at an annualized rate of $80 million. Of that amount, we probably started shipping maybe a quarter of those. There is still a ways to go on that. You have got additional projects that are scheduled to ship in Q1, Q2, Q3, Q4. They are starting to layer. I think that is basically our goal, to have them layer to the point where you may win a project with a consumer electronic company or an HVAC player, and you may get one SKU. Let's just hypothetically say they have 20 SKUs.
You start off with one, and then over time, you just layer. You layer. Instead of having one, you end up with 10. That is how the revenue builds. That's how it's worked out for us over the last several years. It happened with Daikin. When we first acquired Enson Assets , which you may remember, right, back in 2010, and Daikin was a customer of theirs. They were small. They were low to mid single-digit millions in revenue. We just continued to prove ourselves. We went from a couple of SKUs to several SKUs. Now they're over a $50 million customer. We are going to take that same strategy and apply it to all these new wins, new customers.
Yep. All right. That makes sense. Can you just maybe, since we're in this kind of transition period where you have these growthier parts of the business that are kind of taking over and going to drive growth this year, potentially, can you just frame the relative sizes of HVAC, connected home versus maybe subscription broadcast? Because TVs are still growing. I know that gets lumped in with home entertainment, but there are growth elements within that home entertainment channel. Maybe if we could just size the revenue buckets for everyone.
You're talking about our revenues? You're not talking about the markets. You're talking about our.
Yeah. Yeah. Your revenues. What percent comes from?
Yeah. If you take home entertainment, I would say that's probably approximately two-thirds of our sales. Now, again, home entertainment, that's comprised of subscription broadcasting, consumer electronics, and retail. Then you've got the connected home, which is probably about a third.
Okay. Within that two-thirds, that's home entertainment. What percent is subscription broadcast? I think that's the piece that probably investors are more interested in.
It's the majority. Yeah. It's the largest piece of that pie. The SBR still is. Even with the shrinkage, it still is.
Okay. Comcast popped up again as a 10% customer this last quarter, I think. I don't know if that was just timing on orders, but is that showing some level of stability in that market relative to what we've seen over the last year?
Yeah. I think it's indicative of that. They're not the only ones in terms of showing stability. I agree. The fact that they showed up as a 10% customer, I think, is a good indication that things are starting to level off. Now, I'm not saying that core cutting is done, but the rate of decline is definitely slowing, which is favorable for us.
Okay. Maybe we could just talk about the HVAC opportunity a little bit in more detail. What kind of products are you supplying? Is it traditional remotes for those split-level units? Is it your new TIDE Smart controllers, smart thermostats? What are you supplying into the market? How do you see that opportunity evolving for you over time?
Yeah. It's both. It's split systems, and it's more advanced thermostats. As I was mentioning in the prepared remarks, it was a nice segue for us to go from remote controls controlling anything in your AV stack to remote controls controlling split units, individual wall units. That enabled us to transition into also selling higher-end SKUs, which would be the thermostats. Now, what we produce, manufacture are differentiated products. The QuickSet technology is what separates us from other competitors, that our technology is able to work all the devices, and they're able to work together in the home.
It's like the example I gave about if you were to leave your house and you were to have sensors where it realizes there's nobody home, it should adjust your thermostats accordingly. That is what we bring to the table, is the ability for all these devices to work together seamlessly.
Okay. The projects you have with the eight of the top 10 HVAC customers, are those for all smart thermostat projects, or is it a blend of?
Primarily, yeah. There could be some split systems in there as well, but it's primarily more advanced.
Okay. What is the deal with the other two? Why can't we get those?
Yeah. I got to talk to Rick Taylor.
All right.
We're making good progress, though. We've been giving updates on this. A few quarters ago, it was six, and now we've got it up to eight. We're making headway. Paul's always said, "We are God-given right to 100% market share." In the cable side, we got up to probably 80-85% market share, if not higher, in the U.S. We have that same mentality for the HVAC market. These are big markets for us. That's how we're going to grow. I mean, we're still investing in home entertainment. It's still an important channel for us, no doubt. When you're talking about a $1.8 billion market in HVAC and another $1.7 billion in security and basically home automation, these are markets, this is how we're going to grow.
Okay. All right. Maybe we can just finish off on the you mentioned your factory consolidation. I think you're around 20.5% on the gross margin line in the fourth quarter. Is there potential upside to your gross margin? I think kind of a low 30% target maybe is what you talked about in the past. Is that where you see the business operating this year?
It could be. I mean, I don't want to predict exactly. I think on the last call, I said I could see it being at 30. I expect it to be at 30% plus or minus a point. Just because there's a lot of factors that flow into the gross margin rate. You got FX. It's that. I like where we're at, the fact that the factory has been right-sized. If you compare to what our GAAP margins were a year and a half ago, they've improved by four or five percentage points at least. With the royalties that usually pick up in the back half of the year, as well as European retail, I expect the margins to lift the back half.
Okay. The more diverse manufacturing footprint, does that mute the impact of tariffs? Do you feel like you have enough flexibility to kind of work around the short-term impact there?
Yeah. I mean, right now, anything that's basically destined for the North American market, at least the majority of it, is manufactured in Vietnam. Knock on wood. I haven't heard much about tariffing Vietnam yet. I guess the good news and bad news is the bad news is we've had to deal with this in the past. The good news is we've become very adept at reacting. It's one of the situations where I don't have a crystal ball as to what's going to happen with the tariffs. You just have to react accordingly. I think we've proven that we're very good at that.
Yep. No. Makes sense. All right. We are at the end of our allotted time. I do not know if you have any parting comments, but if not, we can just wrap it up.
No. I don't. That's about it. If anybody has questions or if they ever want to reach out to me, they can always reach out, and I'll take their call.
All right. All right. Great. Thanks, Bryan, for the presentation. Thanks to everyone else for listening in. With that, we'll wrap it up.
All right. Thanks, Greg .