Good day, ladies and gentlemen, and welcome to the Universal Electronics' First Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Becky Herrick of LHA. Ms. Herrick, you may begin.

Thank you, Sherry, and thank you, all, for joining us for the Universal Electronics first quarter 2017 financial results conference call. By now you should have received a copy of the press release. If you have not, please contact LHA at (415) 433-3777. This call is being broadcast live over the internet. A webcast replay will be available for one year at www.uei.com. In addition, any additional updated material non-public information that might be 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. After reading a short safe harbor statement, I'll turn the call over to management. During the course of this conference call, management may make projections or other forward-looking statements, regarding future events and the future financial performance of the company, including the company's ability to build and maintain and build its relationships with its customers, including Comcast and its syndication partners, such as Cox and Shaw, DIRECTV, EchoStar, Dish Network, Charter, Sony, Samsung, Panasonic, Sky, Liberty Global, Vodafone, Microsoft and SK Broadband; the company's ability to anticipate the needs and wants of its customers and timely develop and deliver products and technologies that will meet those needs and wants, including the company's advanced AV control software and hardware solutions and technologies, which include the QuickSet and voice control, home security, temperature controllers and automation and other technologies identified in this call; the ability of the company to achieve its sales growth, as anticipated by management; the significant percentage of the company's revenues attributable to a limited number of customers and particularly, the sales growth and benefits of the company's relationship with Comcast; the timing of new product rollout orders from the company's customers…

Thank you, Becky, and thank you, all, for joining us today. For the first quarter of 2017, we delivered 7% growth in net sales and 30% growth in EPS over the same period last year. The business, as a whole, performed well, with the rollout of advanced remote control technologies and the proliferation of connected devices, supporting continued strength in our subscription broadcasting, consumer electronics OEM and wireless home security businesses. Within subscription broadcasting, as the industry transitions to more advanced technologies and connectivity protocols, our customers around the world are introducing new products, featuring UEI's advanced AV control software and hardware solutions. We continue to gain momentum in supplying our technology, and I'm pleased with our progress thus far. Comcast rollout of its X1 Entertainment Operating System, and XR11 Voice Remote to its subscriber base continues to grow and other syndication partners, such as Cox and Shaw have begun their product rollouts. As we have discussed before, the industry is moving toward new IP connected two-way platforms that will allow a dramatic improvement in home entertainment, as well as an expansion into other smart-home services. We are beginning to work with some of their earliest implementers on their second and third generation products for their new platforms, which enables us to further increase share with our customers into the months and years ahead. The long-term opportunity this trend represents is tremendous, as we are the de facto provider of next-generation control solutions, to industry leaders around the world. In the short-term, we anticipate seeing order volumes that are below-average from some of our customers, as they deplete existing inventories in advance of their new product rollouts. It is common in most industries, and ours is no different, for customers to burn through inventory prior to introducing new products. With…

Thank you, Paul. As a reminder, our results for the first quarter 2017, as well as the same period in 2016, will reference adjusted non-GAAP metrics. First quarter net sales were $162.3 million, compared to $151.5 million for the first quarter of 2016. Business Category net sales were $151.3 million, an increase of approximately 7%, compared to $141.5 million in the first quarter of 2016. This growth comes from the continued rollout of higher end platforms in North America and Europe, as well as increased market share in Latin America. In addition, sales of our home security products were nearly 5x that of Q1 2016. Consumer Category revenues were $11 million, compared to $10 million in the prior year quarter. Gross profit was $43.4 million, or 26.7%, compared to 25.6%. Operating expenses were $31.7 million, compared to $29.5 million in the first quarter of 2016. R&D expenses $5.4 million, compared to $5.1 million in the first quarter of 2016. We continue to invest in technologies and enhance the user experience in the home entertainment, home security, and with the recent acquisition of RCS, the HVAC control channels. SG&A expense was $26.3 million, compared to $24.4 million. Operating income was $11.8 million, compared to $9.4 million. The effective tax rate was 20.2%, compared to 25.7%. Net income was $9.5 million, or $0.65 per diluted share, an increase of 30% compared to $7.3 million or $0.50 per diluted share in the prior year period. Next I'll review our cash flow and balance sheet at March 31, 2017. We ended the quarter with cash and cash equivalents of $62.7 million, compared to $50.6 million at December 31, 2016. We have approximately 200,000 shares remaining on our share buyback program. Depending upon market conditions, we may buyback our shares over the next few months.…

Thanks Bryan. We are encouraged by our strong start to 2017 and the outlook for UEI has never looked brighter. As advanced technology and connectivity quickly become the de facto standard in today's home entertainment environment and more and more devices become integrated into the home control landscape, consumers require increasingly sophisticated solutions that can keep their experiences positive and their entertainment enjoyable and simple. This is where UEI excels. We have been, and will continue to be, at the forefront of emerging trends in our industry to ensure we meet our customers and consumers evolving needs. Stay tuned. I'd like to now open up for questions. Operator?

Thank you. [Operator Instructions]. Our first question comes from Greg Burns with Sidoti & Co.

Good afternoon. Just want to touch on the guidance and the cadence of the rollouts. Should we expect that there will be a - the pendulum will swing in the other direction as they begin to fill the channel, there will be added sell-in in the back half as they start rolling out as they fill the channel with your advanced remotes, and could you possibly zero - is this something where you could zero-in on a handful of customers where this is happening, or is this just a blanket phenomenon that you're beginning to see? And then lastly, could you talk about what happened historically with Comcast? Is this the same activity that you saw when they began to rollout their advanced remotes? Thank you.

Okay, I'll try to address each of those pieces of the questions. In terms of the rollouts, some customers, not all, when they rollout will discover that they may have held, I guess, what I'll call, a little bit more safety stock or inventory that is in place to handle any of their forecasting variances that they hold on the old platform, and that's fine while the platform is going strong because they have it there to fill in if they should get 50,000 or 100,000 or 200,000 more installs than they had expected because product, unless it's air shipped can take weeks to get to the U.S., and of course we forward plan with them and they have to often pay to speedily ship, so instead there is stock that's held in the field. What happens at the end of a platform is some of our customers plan very well, and they plan for the dissolution or the sell-down of that inventory and their order patterns don't change very much at all. We do have some customers however, who may not plan this as well as one might like, if they were to look at this from a total logistic stream perspective, and thus their orders during a quarter or the time period prior to installation, will truncate somewhat because they don't want to buy the normal deployment amounts for that period because they want to run their inventory on the older product down to zero. Now the good news is the reason they don't want to keep very much of that inventory is because they are going to go more aggressively into the new platform. We've seen that with some of the customers that have already made the transition. They move aggressively to the new platform, which makes the inventory from the last platform more - less deployable, let's say. So you do go through this. I think it's not unique to our industry. I think a lot of industries go through this. We can see a truncation of orders. But as Bryan and I both said what happens in the next stage, and I think it was another part of your question, you'll then see them get back to normal ordering patterns, and sometimes, even higher ordering patterns, particularly if they've moved the share more towards us. On top of that, the ASPs of these next-generation products are usually higher than the prior generation for all the technical reasons that I mentioned earlier. Voice-enabled, two-way, IP-connected, different finishes, different backlighting. The products are far advanced from that which came before them, so typically the ASPs carry - they are higher than in the prior generation. So there is a lot of good news embedded in there, but over the short-term we do have a couple of customers that have logistics challenges and want to work through some inventory. So that's the story on that. Did I answer your entire question, Greg?

Yes, you did. Thanks. And some of your other comments, Paul, around the 140 million subs, I think that - prior you had talked about 110 million or 120 million, so I just wanted to bridge that gap. Have you been adding - over the last couple of quarters adding some new subscribers to get to that 140 million number? And then what you said about QuickSet being deployed with Liberty, Sky and Vodafone. Are they currently rolling out your advanced remotes or is that the precursor to them rolling out your advanced remotes, and then could you talk about your market share within those customers? Are they currently dual-sourced between you and another vendor? Thank you.

Sure. Yes, well, as far as those customers are concerned, I can't give you a lot of details about their deployment. Just naming them can be a challenge sometimes. So just wanted to give a flavor for some of the names, add some additional names that prior to this we hadn't been able to talk about. As far as the number, it has changed. Last year we did disclose that we were at just over 110 million. I think we're at 112 million, are just under 20%. We've now moved that up to nearly 140 million. Remember that the entire world market for subscription broadcasting is about 600 million subscribers. So at nearly 140 million, you're approaching nearly one-quarter - companies representing nearly one-quarter of the entire world's subscription base. So anyone who were out there that was to think that only some of the operators are doing this as an experiment, I guess, I'm here to tell you that the number we gave before was high. The number we just gave today is even higher, which means our sales team has gone out and closed even more converse to these advanced products powered by QuickSet, and the home entertainment world is changing. They are putting out these advanced platforms with making entertainment easier to access than ever before. This is officially a trend towards that happening in the coming months and in the coming years.

Okay. I just wanted to go back just to understand, like for these European service providers, are you their sole source remote control supplier now, and if not, if they want to use QuickSet across all their remotes with all their subscribers, I mean, do they have to use a Universal Electronics remote, or can they still source from someone else that integrates QuickSet? Maybe you license to them or something, I just wanted to understand that.

Yes. Well, I guess, I'll say this. I can't give specific customer details but I will say this, that in more cases than not on advanced remotes, the operators typically are working with us and they do it with one vendor. The reasons for that are multiple, not the least of which is some of the technologies we employ are unique to us, and also it's quite a bit of work on an advanced product to bring along more than one vendor, not just for that vendor but for the company itself. So for our customer, it's difficult to bring along 16 vendors or even two because twice as much work. And because of the unique offerings that we have, I would say more often than not, the customers that are moving to the next-generation product have typically chosen one. In cases where they don't, however there are possibilities to do licenses or chips or other methods of incorporating the technology. So I can't tell you that every project in the future must incorporate UEI technology, but if they wish to have our differentiating factors, we usually work out a way by which they can buy hardware from us and then on other units license the technologies and/or software to enable our unique features.

Okay, thank you. And then one last one. Bryan, can you just give us the split on Comcast and DIRECTV?

Yes. Comcast was 26.2% of our sales and DIRECTV was 10.3%.

Okay. Thank you.

Sure.

Thank you. Our next question comes from Andrew D'Silva with B. Riley & Co.

Hi, good afternoon. Thanks for taking my questions. Couple quick ones here. Just following up on the customer concentration question. I think it - both of those partners upticked a little bit sequentially from a percent of total revenue, maybe a little context there as far as the reason for that? And then, as you start obtaining a greater tailwind from the secular drivers that you've previously mentioned, do you believe that customer concentration will decline somewhat?

Yes, in terms of the customer concentration. Comcast sales grew both remote control sales, as well as home security, so it's really those two items that drove it. So again it's both remote controls and the home security channel. DIRECTV, sometimes customers ebb and flow, their buying patterns. They don't buy the same on every quarter. So sometimes when you're in the 10% to 11% range, it doesn't take a lot to dip below that 10% threshold, so there is nothing really, I would say, for DIRECTV that's alarming. It's just - last quarter I think some people were asking questions about why they dipped and well - and again it doesn't take much to dip below 10% when you usually hover just above it. In terms of your other question, we can - the sales growth that we expect to happen to occur from all the products that Paul has mentioned will - should decrease the concentration risk, because as the other customers grow at a quicker rate, obviously mathematically you'll end up having a lower percentage of the customers we just named for sales.

Okay, great. Thank you there. And I think couple of quarters ago, you mentioned that you had some customer delays in last quarter, highlighted that you were getting back on track but there were still some that orders hadn't gone out yet. Has that been resolved yet or should we figure Q2 in the back half this year that there will be some, I guess, benefit due to that?

Well, the majority, I think, all but one actually. I think we said 12 was in Q3 that had been delayed, all but one has begun shipping. So it's just one customer that did not ship of the 12.

Okay. Thank you. And just last question. As far as this capacity that you have at your facility, you recently upgraded a couple, do you feel right now looking at the landscape that you're adequately positioned from a utilization and capacity standpoint to be able to address the end-markets?

Yes, we have the capacity. The challenge was when we moved from our southern factory to our northern factory, it's a big task. You're moving, what, probably 1,500 miles away and you're starting up a whole - we had an existing factory but we added a significant amount of volume into that factory, so you have to train people, et cetera. So it was a big challenge. It's still a challenge. I think we're making improvements each and every day. But as far as the capacity in being able to handle the demand, absolutely - it's why we increased the headcount. We increased machinery equipment. We actually expanded the factory to accommodate this growth. So being able to handle the demand isn't the issue. I think we just - I think we made progress in terms of an efficiency standpoint but we still have other ways to go with that. But again, each - we're learning each and every day and that's a continuous improvement.

Awesome. Thank you very much. Good luck throughout the rest of the year.

Thank you.

Thank you. [Operator Instructions]. Our next question comes from Steve Frankel with Dougherty.

Good afternoon, Paul. I want to go into this guidance issue again. So you've got a couple of customers that are going through inventory transitions and given the last comment by Bryan, that the dozen or so that you had delayed, most of those are in the process of shipping, so were these the next wave of customers? And after this transition, which looked like it hits Q2, are their customers in the pipeline where this issue might recur again, or are we getting to smaller customers where any inventory reduction would be less of an issue?

Yes, that is a good question, Steve. I think that obviously as you just pointed out, the larger the customer, the more risk there is on this. I will say that again some of our larger customers actually have been very good at this, this transition. We have some in our list of top 10 that have moved to a next generation product with little to no unit volume droppage or slip as they move to the next generation product, precise inventory management, good forward planning, et cetera. So it is possible that it will happen with other customers. You're right to note that some of the customers we're talking about for this quarter were relatively large, which causes the problem. Even smaller customers could have such an issue but the expectation would be that as you go forward, if you have a few small customers that go through this, but at the same time you have the surge of orders from - and the higher ASPs from other customers that go through it, it more than offsets it and it becomes somewhat irrelevant to the overall number. It still happens but it's somewhat overall to the number. I will say though that, to be fair longer term, as I noted in my prepared comments, I think a lot of people think that these new platforms are one - are sort of a one and done thing, where they do it and then they deploy and then you just track the deployment of that next one or that new platform and then that's the end of it. What we're seeing now is that we have customers that are working on second, and in some cases, third generation of accessory products around these platforms because the platform, the IP-enabled platform with two-way low-cost radio frequency protocol is capable of doing a lot more things than the first generation achieved and the customers are very aware of this. So they are working on those next-generation products.

So to follow-up on that, is there a pipeline of potential customers beyond Comcast in subscription broadcast that might be interested in Ecolink or RCS?

And/or other AV products that we could be adding to - so the answer is yes to those two, but there may be other products that you'll begin to see from subscription broadcasters that would apply not just to one of them but potentially all of them. AV control products that we're working on, and what I would call, second or third generation products to the platform, that once the subscription broadcaster goes through the first iteration and perfects their AV, their initial AV implementation, there is a lot of other things that their engineering teams and we can work together to add to their system. And these will be proven because we've done them with the early adopters or the initial implementers, right.

Okay. And one last thing…

We'll see some of that in 2017, but we'll see it also in '18 and '19.

Okay. And following up on the factory utilization question. Once we get through this inventory collection, are we - are you positioned to start to get leverage in terms of growth and operating margins without forcing you to forecast, but just position-wise, should you now start to see some benefits of the new more efficient factory?

Yes, the more units you put in the factory, the better you're going to absorb your overhead. So the answer is yes.

Okay, great. Thank you.

Thank you. Speakers I'm showing no further questions at this time. I'll turn the call back over to you, Mr. Arling.

Okay. Thank you, everybody, for joining us today and for your continued interest in our company. Just a couple of announcements. We will be presenting at the B. Riley 2017 Institutional Investors Conference on May 25 in Los Angeles and the Baird Global Consumer Technology and Services Conference on June 7 and the Citi Small & Mid Cap Conference on June 8, so two days in a row in New York both of those conference. So we look forward to seeing you at one or more of these events. Thanks for participating today and goodbye.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may all disconnect, and have a wonderful day.