Ladies and gentlemen, thank you for standing by and welcome to the Universal Electronics, Inc. Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to one of your speakers today Ms. Kirsten Chapman, LHA Investor Relations. Ma'am, please go ahead.

Thank you, Michelle, and thank you all for joining the Universal Electronics' Second 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 Investor Relations at 415-433-3777 or visit the IR section of the website. This call is being broadcast live over the Internet. A webcast replay will be available for one year at www.uai.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 face due to the COVID-19 pandemic. The company's suppliers, transportation providers and customers continue to operate, supply raw materials and components, provide our logistics needs and 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, including the Company's QuickSet Cloud, Nevo Butler and voice-enabled technologies, changes in consumer lifestyles 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 advanced technologies, including expanded smart home offerings and interactive services. The return to more normalized patterns of pay-TV activations as anticipated by management. Management's ability to continue to manage it's…

Good afternoon and thanks for joining us today. Over the past 35 years, our dedication to innovation, customer service, and effective operations has built UEI into a market leader with a strong financial foundation. Today, we continue to develop industry-leading technology and leverage our strong leadership position, supporting our customers now and paving the path for our profitable future. I'll elaborate more on our expanding opportunities in a moment. First, regarding the second quarter of 2020, financially, we performed as expected. Revenue was $153 million with EPS of $0.89, reflecting our initiatives to become a more profitable company. As a result for the six months ended June 30, 2020, EPS reached the highest in the history of UEI at a $1.70. Our long-term growth opportunities remain unchanged. That said, COVID-19 continues to impact near-term demand, primarily with our traditional home entertainment and security customers. Due to the pandemic, their ability or willingness to install hardware in consumers' homes, whether it is to establish new service or to upgrade premise equipment has been disrupted for the time being. Ironically, this near-term pressure is creating long-term benefits. Customers are reenforcing or initiating advanced product development, including self-install and voice capabilities, which gives us confidence in our long-term growth and profitability. To be fair, we have been referring to our core market as subscription broadcast for many years and that has led many to view our channel as being predominantly comprised of the traditional cable and satellite operators that have driven the growth of video entertainment consumption and millions of consumer homes around the world for many decades. Today entertainment content is no longer found exclusively at the end of a co-ax cable. The introduction of on-demand libraries, video streaming apps, live TV streaming and linear TV streams can be found at the…

Thank you, Paul. I'll review the second quarter 2020 compared to the second quarter of 2019. Net sales met our expectations at $153.3 million. This compares to the second quarter of 2019 of $193.4 million, which at the time was a record quarter. Our 2020 second quarter sales reflect the continued impact of COVID-19 on our traditional home entertainment customers, especially those without self-install capabilities. Our gross profit was $43.7 million or 28.50% compared to 25.2% in the second quarter of 2019. Royalties continue to play a significant role in the rate improvement as we're licensing our technology to multiple customers including three of the largest OEMs in the world. These OEMs are broadening the scope of their advanced features by increasing the number of products that incorporate our 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. Because of favorable product mix, including an increase in licensing revenue, we expect our third quarter gross margin rate to be higher in the second quarter. Operating expenses were $29.2 million compared to $33 million in the second quarter of 2019, reflecting the lowest level since 2016. R&D expense increased to $7.1 million from $6.9 million in the prior year quarter. SG&A decreased to $22.1million from $26.1 million last year as a direct result of our corporate restructuring efforts, as well as a decrease in variable expenses. Operating income of $14.5 million or 9.5% of revenue compared to $15.8 million or 8.2% of revenue in the second quarter of 2019. Our effective tax rate decreased to 12% from 21.2% in the prior year quarter due primarily to tax incentive refunds received in China. Our corporate restructuring has enabled us…

Thank you, Brian. While we have experienced lighter than normal revenue due to the pandemic and its effects, we are pleased with the actions we have taken to improve the profitability of our business. This positions us better for success as markets improve. Many positive trends outweigh some temporary challenges caused by lower activations impacting some of our customers. The convergence of traditional TV and streaming apps is driving demand for our technology based on what people want a single easy access, voice-enabled platform. Our customers are increasing their commitments to develop advanced products. Consistent with our history, we will have numerous products to pair with the next generation of content delivery. I'd like to leave you with this thought. The home entertainment world is clearly changing. In some cases dramatically. Classifying companies that exist within this market are companies that prior to this have been experimenting in it as static would be a mistake. We are seeing a substantial amount of technology development in the home entertainment market that will change the way people watch television and will certainly change the perception of the customers in our markets, both existing and new. We are proud to have invested in positioning ourselves as the clear leader in this area and to be working with these companies that are changing the world of home entertainment and smart home control. As always, stay tuned. Operator, we'd now like to open up the call for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Steve Frankel with Dougherty Securities. Your line is open. Please go ahead.

Good afternoon, Paul. So what do you think today your exposure is to these truck will customers?

Most of our customers - some of our largest customers have converted to more of a self-install architecture so the exposure there is minimal. They've had fewer issues with the pandemic as a result of the ability to have a self-install program where professional installers do not have to come to your house. We still do have numerous customers here in the U.S. and clearly abroad that do not have a self-install architecture. Obviously, they did not plan for a pandemic. So some of them were developing a new platform but it was not quite ready prior to the pandemic slamming down on them. So they have continued development and are ever more excited to get these programs done, but they were not prepared for it. As a result, in some cases, they have ceased activations for the safety of their employees. In other cases, they are doing it with stringent protocol to protect the consumer, but there is some consumer resistance to it. So as I said earlier, I think what's happening in the industry is churn is not actually the issue. A lot of people want to report this. Subscribers have been down but I think the bigger effect over the last six months has been a lack of activations. They haven't been able to install new systems. Churn has been with us since the beginning of the industry. Cable and satellite companies have lost customers every quarter since I stared at UEI 20 plus years ago. So it's lack of activations. This obviously is changing in a way, as I said in the prepared remarks. It's actually helping the selling point of QuickSet, one of the selling points, which is that it would allow a self-install program. If you ever were to not be able to install again you can simply leave - you can mail the box to the consumer or leave it on their front doorstep and there is a simple set of instructions contained in the box to have the consumer install themselves. So the more and more of this happens, the less impacted we would be by any future interruption due to a pandemic or other effect. But we are suffering through it right now. We do have numerous customers worldwide including here in the U.S. that had not moved to a complete self-install system just yet.

Okay. You talked in your script about new projects. Maybe if you could give us a little more insight into how many new projects do you think you'll launch in the back half of the year? Are any of these in newer markets for you away from the traditional set-top box upgrade cycle?

Yes, many of the bigger or more exciting ones are happening probably in Q4 or in the Q1 of 2021. That would be the scheduled time. The most broad thing I can say about this is there are a variety of platforms in your home today, and as my last statement said, don't think of the world as static. The way that entertainment will be delivered, will probably be across platforms. In some cases, you may see new platforms that will surprise you, given where companies have historically been in their architecture. So delivery of entertainment will probably come from televisions, sometimes with existing players, sometimes with some new ones that you wouldn't have expected. The same in set-top boxes. You may see new players as well as existing players putting out new platforms. Some of these things as time goes on may surprise people, but what they have in common is this, and it's what I mentioned in the call. They all understand and this is why, they've been moving in this direction that consumers want to watch the baseball game tonight or golf or some other live event, their favorite reality show that they can't miss and then when it's done, they want to switch over to watch Netflix or Prime or another popular service over the top and they want one interface within which to watch all of that and they want to be able to get to those two different things or six different things quickly and easily. That's what these platforms have in common. The method of delivery will change, but that's exactly what they'll bring. Live TV options plus over the top or SVOD options all in one easy to use interface, typically if not always voice-driven. They want them to be self-installed so they could simply mail them to people, have them open the box, plug it in, plug in the devices and the software takes over.

Can you give us any more details on this Nivo Butler ware?

Well, other than to say when it is announced, it's a household name. I think I've already given enough clues but we're working with a large telecommunications provider. It will probably be Q4, again, maybe Q1. The development schedule is in final, but they've said that their target is late Q4 or early Q1.

Okay. Because I don't want Brian to feel left out. Could you give us the customer concentration numbers for the quarter?

Sure. We had two customers that exceeded 10% Comcast and 19.3% and Daikin at 10.7%.

Then lastly, Paul and then I'll pass it on. Are there any implications for your home security business from the Google AT&T announcement earlier in the week?

Not really, no. Look, I think there is increased activity on that front. I've heard over the last couple of months. At first in the pandemic, it had dropped pretty significantly because of the professional installation element to it but I'm hearing that it's beginning to come back due to security concerns of people. With the current environment, they are looking to have more secure homes.

Okay, great. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Jeff Van Sinderen with B. Riley. Your line is open. Please go ahead.

Hi, this is [indiscernible] actually sitting in for Jeff. I've got one quick question. Given positive video subscription trends at some MSOs plus the Xfinity Flexbox deployment at Comcast and launch of Peacock, could you give us your latest thoughts on how current adoption trends potentially can impact your business? Also how you're thinking about the return of sports as it relates to your business?

Well, yes, certainly any compelling live content that returns to the screen obviously helps because people view it as something they must have right on television. For a few months, there was very little compelling live content because shows were offseason and sports were not being played or televised. So there was less compelling need to connect or reconnect the live television. So the more live content that comes on particularly sports because it can be quite compelling to certain parts of the population or even reality shows that people don't want to miss. They are in some ways like sports. They have outcomes and social media will be ringing right after the show has as put on the air. So people wish to watch live or nearly live. All of that content is compelling for live TV as it returns with force. Obviously live TV becomes critically important to average user. Still the majority of time they spent watching television. The other part of your question on these platforms. This is an example of what I was talking about and some of them are now public. Don't view the world static. Leading companies in the industry including once you've mentioned we don't talk about specific customers and their product plans, obviously, but you did mention Comcast a good example they are leading company in the industry. They are out there and they are doing the most interesting things in the industry and you'll probably see more from them and others over time as far as change. The way they are changing, how people will watch television and through which devices or technologies they'll watch it through. So I think there is a continual thinking within the industry, particularly amongst the leading companies about that topic and you're going to see things change exciting new platforms. They won't abandon the platforms they have because they're great platforms, but they'll move to new ones to attract new customers.

All right, thank you. Appreciate your insight. Good luck.

Thank you. And I'm showing no further questions at this time. I would like to turn the conference back over to Mr. Paul Arling for any further remarks.

Thank you for joining us today and your continued support of Universal Electronics. We will be presenting at the Colliers Securities and the Sidoti Fall Virtual Investor Conferences in September. Hope to hear from you or see you online during those conferences. Have a wonderful day. Thank you.

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may all disconnect. Everyone, have a great day.