Release Date: August 08, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Gross margin increased by 580 basis points year-over-year, indicating improved profitability.
- The company has secured design wins with seven of the top nine climate control providers, showcasing strong market penetration.
- UEIC's Vietnam facility has successfully scaled operations and received high compliance recognition.
- Operating expenses decreased, reflecting effective cost-saving initiatives.
- UEIC has a strong pipeline of new product introductions in smart home automation, indicating future growth potential.
Negative Points
- Net sales decreased from $107.4 million in Q2 2023 to $90.5 million in Q2 2024, reflecting a decline in revenue.
- Certain customers pushed out orders from Q2 to Q3, impacting quarterly performance.
- Net loss for Q2 2024 was $1.2 million, compared to $3.1 million in Q2 2023, indicating ongoing financial challenges.
- Cash and cash equivalents decreased significantly from $42.8 million at the end of 2023 to $23.1 million at the end of Q2 2024.
- The company is still facing headwinds from cord-cutting in the video service channel and reduced consumer spending on discretionary durable goods.
Q & A Highlights
Q: Paul, I want to dig in on the comments you made about inventory issues. I think that was in HVAC and tie that to your comments in the last couple of quarters about a back-half ramp in some of these new design wins for Smart Thermostat. So kind of where are we and what's the outlook for that next couple of quarters with those products?
A: A couple of elements to that question. One, on existing designs that we have out, we have seen -- and I think any inventory that they have, may have been, for them, forecasting a better second half than they're seeing. We have seen in certain parts of the world some of the incentives for these new energy-efficient technologies drawn back a little bit. We and our customers who have experienced this do not think it's long term. These incentives are typically put in place -- not to get into more detail than we should here, but the heat pumps and other energy-efficient technologies are typically more expensive to the consumer. So governments across the world have incentivized them. We've even done some of that here in the US because they want to incentivize the movement towards these products. They do not -- they can cool your home and heat your home without using any fossil fuels at all or natural gas. So essentially, they're incentivized. Those incentivized were drawn back, so some of our customers feel that that will be impacting demand as we go through the rest of the year. But they don't think it's long term because, again, the movement towards these technologies has been happening for some years and will probably continue into the next decade or two. All of the companies, as I said in the prepared remarks, are spending a great deal of time and effort and money on R&D in making these heat pumps even more efficient, even more affordable, and maybe even get them to the point where they could replace, even in the northern climates, the combination of AC and furnace, which is really what they're attempting to do long term. So those incentives are also being put in place. There's another one in Europe that's coming -- I think it's at the end of 2025 or into 2026. I think it's called the Super Climate Fund. It's about EUR90 billion to help this transition to these more energy-efficient technologies. So it's things like this that they, our customers, see as a real prompting for demand. They may see temporal shortfalls or drawdowns of inventory or buildup of inventory. That can affect us for a quarter or two. But I think the movement in this market is like movements we've seen in others, where the movement of technology forward happens. Sometimes it's bumpy, but it will happen over a 1- to 10-year period, with bumps along the way, but it's a movement that is underway.
Q: Of your seven HVAC partners, with how many of those are you in market today with product?
A: I don't think we're with all of them yet. With the majority of them, we are. Of course, with Daikin, it's a long-term relationship, so we've been in the market with them for quite a long time. Many of the other customers in the regions of the world, like the US and Europe, we are brand new. So those projects are still on track. Some of them got delayed by months. The testing regimens for these products are both more stringent and take longer. So we have seen some month-long or a few-month delays in those testing regimens for those companies, but it doesn't affect our long-term view. Two months on a product is -- we don't like it, but it doesn't affect our long-term view of either that product or our relationship with that customer. Most of them, we do have some projects on a few of them that haven't launched yet. So they're still at the early stage of this customer development, where typically, as I was saying, customers start with one, maybe two SKUs or projects, then you go through lessons learned with them, just like we did in home entertainment. And then what happens is you -- if you do well, which we have been so far, with each of these customers, they typically will award you more of their portfolio of business. It happened in consumer electronics with televisions that happened in subscription broadcasting. In that regard, it's not that dissimilar here.
Q: In the script, Bryan talked about some orders that were pushed from Q2 to Q3. Were those in HVAC space or was that in another part of your business?
A: It was a little bit of both to see if that transfer from Q2 to Q3.
Q: To understand this new gross margin accounting treatment, you're basically now the only thing that comes out of gross margin or things like stock-based comp and did your EPS guidance for the quarter contemplate this change? Or was it done under the prior method?
A: Q2 guidance was done under the old method. And if not, for -- we were -- we ended up with a new method at a $0.09 loss. Now the to quantify the effect of the excess manufacturing overhead, it was equivalent to $0.09. So I'll let you do the math. And then for Q3, obviously, we took into consideration of the new -- the guidance includes the new methodology. So this quarter, Steve, the guidance did not include this effect. But going forward, as it is our new method, the guidance is provided on the new method.
Q: Is that $0.09 kind of the number we should think about adjusting our models? Or do we think about will take where the gross margin is now and just say, okay, you made a comment that it's going to hit 30 and sometime in early 2025 -- draw a line between those two points?
A: Yes, more of the latter. I think we're at 2.7% in the second quarter. I expect Q3 to be slightly better than that, and then I expect Q1 to be better than that. So what we're seeing is, especially since we're not including the excess manufacturing overhead, every -- in the pro forma on a go-forward basis, any improvement we see as the factor you're seeing drop them to the bottom line. So right now, we're pretty far through the transition. We spun up Vietnam, we shut down GTQ, we streamlined Mexico. We're doing some rebalancing now. So we're probably 80%, 90% through the transition of the manufacturing footprint optimization. So we're probably a couple of quarters away from getting to the full call it, 30 points that we expect to be at.
Q: Just to follow-up on the orders that were pushed out from the second quarter. Could you quantify the amount -- that was delayed?
A: That's few.
Q: Paul, I think in the past a couple of quarters ago, maybe you quantified the pipeline of HVAC and home automation opportunity. And I think the number was
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
