The conference will begin shortly. To raise your hand during Q&A, you can dial star one one.
Welcome to The Universal Electronics Third Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You'll then hear an automated message advising that your hand is raised. Please be advised that today's conference is being recorded. I would like to now hand it over to your speaker, Kirsten Chapman from LHA Investor Relations. Kirsten?
Thank you, Therese, and thank you all for joining us for the Universal Electronics third quarter 2022 financial results conference call. By now, you should have received a copy of the press release. If you have not, please contact LHA Investor Relations 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 timely develop and deliver new technologies and technology upgrades and related products introduced this year and during the 2023 CES, including leveraging its wireless connectivity capabilities to climate control, home automation, security, hospitality, and HVAC channels, and its groundbreaking line of ultra-low power and energy harvesting remote controls designed for sustainability that will be accepted by its existing customers and attract new customers. The continued successful collaboration with existing and new customers in developing and introducing next-generation products, operating systems, and technologies which result in increased sales and market capture opportunities for the company.
Management's ability to continue to manage its business and inventories and cash flows to achieve its net sales and margins and earnings through financial discipline, operational efficiency, and product line management. The impact to the company's financial results that it may experience due to supply chain constraints, semiconductor supply challenges and inflationary pressures, and macroeconomic conditions it and its customers are experiencing. The direct and indirect impact the company may experience with respect to its business and financial results stemming from natural disasters, public health crises, including the continuation or resurgence of the COVID-19 pandemic or governmental actions, including war.
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 has filed with the SEC, including its Annual Report on Form 10-K and the periodic reports filed since then. In management's financial remarks, adjusted non-GAAP metrics will be referenced. Management provides adjusted non-GAAP metrics because it uses them for budget planning purposes and for making operational and financial decisions. It believes that providing these non-GAAP financial measures to investors as a supplement to GAAP financial measures helps investors evaluate UEI's core operating and financial performance and business trends consistent with how management evaluates such performance and trends.
In addition, management believes these measures facilitate comparisons with the core operating and financial results and business trends of competitors and other companies. A full description and reconciliation of these adjusted non-GAAP measures versus GAAP is included in the company's press release issued today. On the call are Chairman and Chief Executive Officer, Paul Arling, who will deliver an overview, and Chief Financial Officer, Bryan Hackworth, who will summarize the financials. Paul will then return to provide closing remarks. It is now my pleasure to introduce Paul Arling. Please go ahead, sir.
Thank you for joining us today. Earlier this afternoon, we reported very strong third quarter results. Products with more advanced features and IP contributed significantly to net sales of $148.5 million that delivered gross margin of 30.8%. Combined with strong financial discipline and product line management, earnings per share reached $1, exceeding our bottom line guidance of $0.70-$0.80. These results reflect our strategy to improve our sales mix with more highly differentiated products and expand our total addressable market by leveraging our comprehensive, in some cases proprietary, wireless control technology solutions to penetrate new markets in smart home control and automation. Throughout our history, UEI has invested in innovation to help our customers improve consumers' lives. Our commitment to R&D is steadfast, and we continue to develop advanced technology solutions that carry higher margins.
Our mission to apply our proven business model to enter and capture market share in high growth markets drives our long-term growth. To truly understand where we are going to be tomorrow, it's important to understand a little bit of our history, culture, and past successes that define who we are today and where we believe we can go. Many years ago, we began making simple universal remotes to make the consumer experience of home entertainment better. We held a small share of the video service provider market, but were dedicated, in fact, obsessed, with making the experience of configuring and using these products better with each successive generation. As the years unfolded, we developed truly universal products, ones that were upgradable, ones that had features no one else could offer. Our share grew. We never rested.
We developed voice-enabled, self-configuring products that truly added value at the consumer and customer level. None of this happened overnight, but as the years progressed, our share grew to the point where many of our products and technologies are now considered the industry standard across the world. In consumer electronics, again, our focus, in fact, our obsession, was to consistently improve the user experience with our solutions. Each year over the past decade, our commitment to innovation has led to technologies that make setup and everyday use of your smart TV an easy and remarkably pleasant experience.
This too did not happen overnight, but our team's dedication to enable these solutions in consumer products has consistently helped drive our market share growth, and we can now proudly boast that the top three TV brands in the world are using our technology in an ever-growing percentage of their smart TVs. Some years ago, we began a similar journey in the climate control, home automation, and security channels. Again, our focus, in fact, our obsession, is to consistently improve the user experience with our technology and solutions. Over the past few years, we have slowly built a 10% market share worldwide in the OEM HVAC channel, and we are just getting started.
These newer markets for UEI together approach $2 billion in size, are growing at around 10% annually, and most importantly, are embracing the smart or connected technologies in their new product portfolios. Starting with our demonstrated product and technology leadership and our long-standing relationship with Daikin, the largest HVAC company in the world, we have recently begun to win numerous new projects with the leading names in HVAC across the U.S. and Japan. In addition, over the past three years, we can count a growing list of new project wins at many of the leading companies in home automation and security, including Hunter Douglas, Somfy, Vivint, and other brands we cannot name as their products are yet to be introduced.
These customers are counting on us for a variety of innovations, including IP connectivity, greater home control automation, better and more intuitive low-power wireless control in the areas of the home that matter most, and potentially a greater tie-in with other smart home systems, including the most relevant one to us, home entertainment. You might have noticed that I have communicated certain recurring themes at UEI, namely that we are active in markets that grow, our share within those channels is growing, and we have not and will not rest.
We will continue our commitment, in fact, our obsession, to bring customers continued innovation as well as product and technology solutions that help improve consumer experiences and enable our customers to grow their businesses. As I said at the outset, we continue to implement the same strategy that has made us successful many times before and will once again bring UEI to ever higher levels of success. During the third quarter, we secured several significant contracts that are expected to deliver revenue in 2023 and beyond. I'll review some of them now. One of the top five video service providers in the world expanded our long-standing relationship by selecting our green, extreme low-power technology for the foundation of its new ecological remote control design.
As the need to eliminate battery waste and to decarbonize premise equipment is growing, we expect more customers to follow this path. Another large and leading subscription broadcaster has selected UEI for their next-generation voice-enabled controller for their state-of-the-art video streaming service. Interestingly, the solution is part of a larger syndication program, meaning that our advanced controllers are likely to be adopted by several of their current systems. As mentioned, in our climate control vertical, we have been winning new customers and new projects at some of the largest American and Japanese HVAC OEMs. After we announced the expansion of our comfort thermostat platform earlier this year, we have multiple engagements with large customers, several of whom have committed to bringing semi-custom variants of our products to market next year and into 2024.
While timelines for mass market rollout may typically ramp over a period of several quarters, we feel confident that the first customer will start shipping in early 2023. In the home security and automation market, we are also seeing significant successes. Leading brands such as Vivint, Somfy, and Hunter Douglas are expanding their relationship with us by awarding us new projects, and we continue to win new customers in both the pro and DIY security that will bring exciting new solutions with mass market potential. Unfortunately, the nature of these deals does not allow us to reveal any details just yet. Finally, we are getting ready to showcase our latest solutions and technology at CES 2023. It promises to be an exciting event where UEI once again leads innovation in home entertainment and smart home wireless control. I'll preview some of the solutions we will exhibit.
First, we'll be showcasing the latest generation of QuickSet Cloud, the world's leading control technology platform for discovery, setup, and interaction with entertainment and smart home devices. We will demonstrate enhanced interoperability with a new smart home control standard called Matter, a recently launched industry protocol that has been adopted by leading ecosystem brands such as Amazon, Google, Apple, Samsung and Comcast. We now provide television OEMs and pay TV operators an easy path to integrate smart home control capabilities into their video platforms, as well as providing smart home OEMs a simple way to integrate their products into the big screen in the home. In addition, we showcase our cloud-native, innovative Smart Thermostat Platform , Tide, and all its enhanced control and sensory features.
We will be demonstrating how the platform can help create more energy, more energy efficiency in the home, as well as how our products can integrate with existing and new smart home systems and services. We also will be demonstrating our award-winning Eterna remote control platform and underlying sustainability technologies. This unique control solution harvests energy from indoor light sources and wireless RF, so you no longer need to replace the batteries in your remote control.
The promise to eliminate the battery replacement cycle in low-power handheld electronic devices resonates very well with accounts that have an active sustainability agenda, which includes many of our tier one customers. These are just a few examples of what our teams are working on to create solutions that address the control technology needs of the leading players in the markets we serve. Now I'll turn the call over to our CFO, Bryan Hackworth, for a review of the financials. Please go ahead, Bryan.
Thank you, Paul. First, I'll review the results for the third quarter of 2022 compared to the third quarter of 2021. Net sales were $148.5 million, compared to $155.7 million for the third quarter of 2021. Squarely within guidance, sales in Q3, as was the case in Q2, reflect a quarter without a factory shutdown or logistical issues related to the COVID pandemic. Gross profit for the third quarter of 2022 was $45.7 million or 30.8% of sales, compared to 30.4% in the third quarter of 2021. Our investments and focus in developing leading technologies for home entertainment and for channels such as HVAC, security, and home automation are paying off as a higher percentage of our sales include advanced features, leading to an improved margin profile.
As the number of IP-enabled devices in a home continues to grow, so too does the need to control them. Operating expenses were $30.2 million, compared to $30.7 million in the third quarter of 2021. SG&A expenses decreased to $22.5 million from $23.6 million in the prior year quarter. R&D expenses increased to $7.7 million, compared to $7.1 million in the prior year quarter. A few years ago, we began in earnest to streamline corporate expenses to increase operational efficiency and to free resources for strategic investments. These internal investments have enabled us to consistently improve the user experience in our core markets, as well as gain market share in new channels.
Operating income was $15.5 million or 10.4% of sales, compared to $16.7 million or 10.7% of sales in the third quarter of 2021. Our effective tax rate was 14.8% for both the third quarter of 2022 and 2021, where the third quarter of 2022 net income was $12.6 million or $1 per diluted share, compared to $14.1 million or $1.03 per diluted share in the third quarter of 2021. Next, I'll review our cash flow and balance sheet. We ended the quarter with cash equivalents, and term deposits of $61.9 million, compared to $60.8 million at December 31, 2021.
Cash flow from operations for the third quarter of 2022 was strong, yielding $17.2 million, and we expect continued strength in cash flow in the fourth quarter. Before I review our guidance, I'd like to give an update on what we have dubbed ports and parts. For UEI, the ports or the logistics concerns are substantially resolved. However, the parts or the supply chain constraints remain a factor related mainly to procuring chips. As we've said before, the semiconductor supply challenge will not resolve overnight, but instead will improve part by part at each individual supplier over a period of time.
We've already experienced some of the benefits as we have vendors who have indicated that they're able to return to a normalized state of more manageable lead times and a ready supply of parts, while other suppliers continue to maintain their long lead times and have put their customers on allocation, impacting our ability to ship the current backlog of products. In 2023, we expect new supply will continue to come online, which will enable us to meet the current pent-up demand in some of our channels. Now turning to our guidance. Traditionally, our third quarter sales are the highest of the year as OEMs ramp for the holiday season. We expect the same sales pattern this year. We have widened the sales range as the current environment remains uncertain with inflationary pressures and macroeconomic headwinds.
For the fourth quarter of 2022, we expect sales to range from $125 million-$140 million, compared to $143.9 million in the fourth quarter of 2021. We expect EPS to range from $0.75-$0.85, compared to $0.68 in the fourth quarter of 2021. We reiterate our long-term growth target to sales between 5%-10% and EPS between 10%-20%. I would now turn the call back to Paul.
Thanks, Brian. While we are well aware that macroeconomic pressures of inflation, war, energy costs, and supply challenges have combined to create significant headwinds in the near term, we, as always, are focused on long-term growth. We keep innovating and delivering ease-of-use solutions that become industry mainstays and eventually essential to the consumer experience. As such, we gain market share, and we have tangible proof with our project wins and expanding customer base. When economic pressures subside and markets improve, we will benefit greatly. While our approach is simple, we have successfully proven its value in growing our business. We develop differentiated technology working with leading brands to capture a foothold in the market, embed our solutions in the home, and continue gaining share in a growing number of markets.
The fact that we are able to do this while managing costs effectively ultimately leads to increased long-term profitability. As always, stay tuned. Operator, we can now open the call up for questions.
Thank you. At this time, we will conduct a question-and-answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster. Our first question comes from Jeff Van Sinderen from B. Riley Securities. Jeff?
I guess hi, everybody. You guys, maybe you could just help us understand how much of the guidance. Apologies for the background noise. They're testing the fire system here. How much of the guidance is reflecting the supply chain issues versus how much is sort of caution on the broader macro and overall demand? It sounded like you had some pent-up demand that you spoke to, so just trying to reconcile, I guess, all those three factors.
Sure. Yeah, I can address this, Jeff. Although, if that alarm's going off, please exit the building. I don't want you to get hurt.
Yes.
Don't want you to get caught up in a fire or something.
No, no.
Hopefully it was just a test. Yes-
It was.
It's really both. Obviously, as Brian alluded to, the semiconductor shortage, and we've talked about this before on these quarterly conference calls. We made this prediction, and it is happening. The semiconductor shortage problem is not going to just go from a big issue to the next quarter completely resolved. What is happening is that certain of our vendors, as Brian said, and unfortunately we can't name them, some of them have moved back to pre-shortage, pre-COVID operating principles of shorter lead times, somewhere in the neighborhood of 6-8 weeks, and actually indicating that they have ready supply of parts.
Meaning, if you have a quarter where you forecast that I need 1 million of this particular part, and you call them during the quarter and say, "I need an extra 100,000," they can actually get them for you. You won't be told the lead time is 60 weeks, and if you want those extra parts, you're gonna have to wait 60 weeks. There are other vendors who are still in the shortage mode, where the lead times are more than a year, and you're on allocation. If you need extra parts, you can sometimes get them, but it's a wrestling match with the vendor to.
Look, they're trying to help because they want the revenue too, but it's a struggle to get any extra parts you might need if you underforecasted a particular unit that you need more units on. Anyway, this has given just a little bit more color on that supply shortage. We're starting to see vendors that are improving. As we've forecasted before, and this will most certainly be true as time marches on, it's vendor by vendor, part by part. Eventually, you know, capacity is being added to the industry at a record pace. There's a fab up the street from here that's targeted to open within the next year or so.
you know, they'll reallocate capacity to parts like ours, and this problem will. We'll be back to a point where lead times are 6-8 weeks, and there's more ready supply of parts. It's taking a while, but we're not quite there yet. We do have orders during a quarter that we deliver as much as we can, but we're probably 10%, I would say.
Yeah, that's right.
It'd be 10% more if we could get all the parts that we would like to have. In addition, as Brian pointed out, and you probably have seen this from other companies that have reported already, anybody who's in the consumer markets today is just concerned because interest rates in the U.S. are at 20-year highs, and the inflation rate is still at 8%+. You know, middle-class families are probably struggling a little bit because they're paying more for gasoline and more for groceries. I think there's a little bit of, on our customer base, we don't sell a great deal of our products directly to consumers, but we do sell to companies who do.
You know, what we're hearing from them is they wanna be ready for demand because it's unpredictable right now as to how the consumer is exactly gonna react over the next three months. But again, long term, you know, these things do dissipate as time goes on. I can't predict exactly when, but these things do dissipate, and we wanna be ready with more designs, design wins and new product wins, increase our market share. We've done this before through prior recessions. The thing to do is to just keep winning with innovation, build better products for customers, raise the ASP because your products are better, gain market share during the difficult times, and then when things start to improve, you know, you're better positioned than you've ever been.
But we are seeing an effect from both of those things, Jeff. Long-winded answer, but the worry about the consumer probably affects it a little bit, and supply chain is still affecting us.
Okay. That kind of dovetails into my next question, which is, well, I mean, great to see the new generation products, a bigger part of the mix, and positively impacting your gross margin. I know you mentioned a number of new wins, some of those new products. And I know you can't name the customer necessarily, but as you look at those and you think about 2023, I realize it's really early, but what sort of contribution from all of those new products, new wins might we think about for 2023?
Clearly it'll be more. I can't give you an exact number today. We're putting together our budgets right now for 2023. What I do know is we've seen the wins with some pretty big names that would be recognizable. Again, it's not unlike the story I was telling about video service providers or subscription broadcasters and consumer electronics. You know, we start from a point, we become committed to, or as I said, obsessed with making the products that we build for them better than that which they bought before. We bring features that other vendors are not providing. We present those to customers, and typically, they begin allocating a larger part of their SKUs to us. We've done this multiple times.
We did it in video service provider many years ago, and just kept doing it, just kept building it, just kept innovating. As I said, we never rest. You know, when you win some business, you have to work harder to win more. You've got to figure out what the state of the art is and then move towards it, create the state of the art. We've done that on the controls side in the markets we've served, and we see the same opportunity in these markets. HVAC is probably further along right now 'cause we started in it first. We started in that before home automation and security. We see the same opportunity in all these. The products that are in them could probably use some improvement. We are bringing those improvements, and then we're using technology to make the products even better.
Self-configuring, bringing them features they never had before, and then you win business. The next year, you win more business, right? Each year, this is the story of consumer electronics. It's an annual cycle, and each year we kept winning more SKUs, and we kept improving the product, and that's why we won more SKUs. We're taking the same approach here. We've already had success. We're at that 10% level, which is pretty good, we think that there's no reason why, and you've probably heard me say this before, we shouldn't pursue our God-given right to all of it. Because again, we build better products, and we're gonna continue to be committed to that. It will account for of our business in 2023, 2024, 2025 into the future.
We see these markets because there's good growth in them, and our share can be increased.
Okay, fair enough. I can take the rest offline. Best of luck to the rest of Q4.
Thank you. Our next call is from Brian Ruttenbur from Imperial Capital.
Thank you guys very much. Yes, hopefully, I'm coming over. First question is on R&D. Can you give us any kind of a gauge or direction where R&D is going, at least in the fourth quarter or maybe if you can look into 2023 at all, give us an indication where you're taking R&D?
Yeah. We don't. I think it's gonna approximate the same percentage of sales. I mean, what we've done over the last few years, we made a concerted effort to reduce the SG&A to be able to reallocate those funds and be able to invest internally in, you know, different channels, different products, et cetera. The team, the product team has done a great job in doing that. You know, as Paul mentioned, he listed, you know, a lot of customer wins over the last couple quarters. This is all coming to fruition. I mean, it's definitely paying off. But I don't expect it to deviate too much from the current percentage of sales.
Okay. All right. Thank you for that color. In terms of, can you give us an update on where we are in the Roku Litigation?
Yeah, there's not much of an update from last quarter. We're in the midst now.
Okay.
Obviously, the ITC Cases have completed. We prevailed in both. We sued Roku and won an exclusion order in that one, and then the defensive one, we won as well. Now there are multiple district court cases that are stayed until such time as the IPRs are completed. We're still very confident. We've done very well on that front, and it's just a matter of time before those IPRs complete, and then the judge will unstay the case.
Okay. That's expected in the next 2 quarters, 3 quarters, 3 years?
Oh, no.
What kind of ballpark were you looking at?
Yeah, it won't be this year, likely not next year. It's difficult.
Okay
to predict exactly when because, again, the IPRs are, they have to be finalized.
Okay. A couple other questions. I know you can't talk about specific guidance in 2023. Do you guys anticipate giving guidance just one quarter at a time? I know that things are kinda cloudy out there to look, you know, further out. Do you anticipate giving yearly guidance, or is it going to be kinda moving forward at a one quarter per, you know, guidance clip?
Yeah. For years now, we've guided one quarter forward. While we realize it, you know, would be good to guide further out in today's environment, that would seem a difficult thing to do, with all the things that have been happening over the last couple of years with viruses and supply chain shortages and interruptions at factories, interest rate rises, inflation, war. It's just been very. It'd be difficult to be able to predict out. You know, on the good side, if things in the economy improve, we're just looking for a lack of headwind. We don't need-
Right
A tailwind at this point. We just need a lack of headwind. That would be nice for a while. You know, again, it's difficult to predict how those things are going to move. If we knew that, we wouldn't be in wireless control. We'd be an investment company. We're weathering these headwinds quite well, I think. You know, we've enriched the product mix. We're winning projects, you know. When we get that lack of headwind, you know, we think we're gonna be better positioned than ever.
Okay. Great. Well, thank you very much.
Sure.
Thank you. Our next question comes from Steven Frankel. Steven?
Thanks. Paul, let's talk for a couple minutes about this low power remote win. What's the margin in ASP profile of this new class of products? Are they accretive to both ASPs and margins?
Yeah. I can't talk about a specific customer's margin. I will say that this product generally, because of its architecture, carries a slightly higher ASP than a traditional product, for obvious reasons. We're putting technology into the product that didn't exist before, so the ASP is higher. It's similar to, you know, advanced remotes, voice-enabled products that are self-configuring. The architecture of those products is different. They bring great value to the user, but they do cost more. Same here. This brings value in that, you know, the user it won't have to change their batteries, which has a benefit to them, but it also provides, obviously, an environmental benefit, that there'll be fewer batteries pulled out of remotes and put into a landfill.
And, and are these w-
Customers with sustainability agendas will probably tune in on this and say, "You know, this is a good thing for us to be doing. We pay a small premium for the product because the architecture is advanced, but we're, you know, helping the consumer by not having them be upset." 'Cause if you've ever sat in front of your TV during something and wanted to change the channel and your remote didn't work, you gotta get up and find batteries and put them in. It's not that bad, but you do have to do that. This won't be done as frequently or if ever, and they won't be throwing batteries out into landfills.
I had to change batteries this week, so I know that pain point. Just to clarify, this remote is a voice remote as well as being energy harvesting or-
Yeah
This particular win is okay. It's an advanced remote.
Yeah
with the next set of features.
Well, yeah, these remotes can be fully featured, just like the fully featured remotes. The most modern architectures can be used, voice, QuickSet enabled, again, self-configuring, all of those features plus be much more battery power efficient than the previous generation was.
Then to go back to the supply chain and demand issue, you know, at midyear, you expressed some confidence that the back half would be, you know, one of the stronger back halves you've had. You did have a very strong Q3, but the Q4 step down is pretty sharp. How much of that is inability to ship product versus the demand picture keeps changing and getting worse?
Yeah, as I said earlier, it's really both. The customers have voiced concern about where consumers are going to be this season, this holiday season, November, December. TV is usually strong in January as well. There's been, you know, some concern, and we're probably not the first to report this. I think a lot of larger companies out there have expressed this, that they're concerned about the attitude of consumers given the level of economic headwind that the consumer is feeling right now. But we still, as Bryan said earlier, we are starting to see the beginning of the solution to the semiconductor shortage because we do have vendors now who have returned to pre-shortage operating principles, shorter lead times and more ready supply.
We still have other vendors who are, again, more than a year in lead time. When you need extra parts, it's difficult to get them. We do believe that all of our vendors will reach the point of pre-shortage, pre-COVID operating principle. Because capacity is being added, it will occur. It hasn't yet. In Q4, we'll still have products that we had demand for that we will not be able to supply all of because we can't get the parts to make the products.
Okay. I don't want Bryan Hackworth to feel left out. If he could tell us about 10% customers in the quarter.
We had two. Comcast was at 17.8%, and Daikin was at 14.4%.
All right. That's it for me. Thank you.
Okay. Thanks, Steve.
Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone. Please stand by. At this time, I'd like to turn it back to our speakers and Paul Arling for final comments.
Okay. Thank you for all for joining us today and for your continued support of UEI. We plan to present at Imperial's Annual Securities Investor Conference in December and Needham's Annual Growth Conference in January. As mentioned earlier, we will also be exhibiting at CES in January, and we hope to see some or all of you there, if you can make it. Have a great day. Thank you.
Thank you everybody for your participation. This does conclude the program, and you may now disconnect. Have a great day.