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Edited Transcript of UEIC earnings conference call or presentation 2-Aug-18 8:30pm GMT

Q2 2018 Universal Electronics Inc Earnings Call

CYPRESS Oct 18, 2018 (Thomson StreetEvents) -- Edited Transcript of Universal Electronics Inc earnings conference call or presentation Thursday, August 2, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bryan M. Hackworth

Universal Electronics Inc. - Senior VP & CFO

* Paul D. Arling

Universal Electronics Inc. - Chairman & CEO

* Ronald A. Parham

National Investor Relations Institute - Director

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Conference Call Participants

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* George Prince

RBC Global Asset Management (U.S.) Inc. - VP, Portfolio Manager, and Senior Equity Analyst

* Gregory John Burns

Sidoti & Company, LLC - Senior Equity Research Analyst

* Jeffrey Wallin Van Sinderen

B. Riley FBR, Inc., Research Division - Senior Analyst

* Steven Bruce Frankel

Dougherty & Company LLC, Research Division - Senior VP & Director of Research

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Universal Electronics' Second Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's presentation, Mr. Ron Parham. Sir, please begin.

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Ronald A. Parham, National Investor Relations Institute - Director [2]

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All right. Thank you, operator, and thank you all for joining us for Universal Electronics' Second Quarter 2018 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 or visit the Investor Relations section of the company's website at www.uei.com/investor-relations.

This call is being webcast and a replay will be available for 1 year at www.uei.com. And in addition, any additional updated material, nonpublic information that might be discussed during this call will be provided on the company's website where it will be retained for at least 1 year. You may also access that information by listening to the webcast replay.

After 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 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 control products, which include the continued adoption of our voice remote control and intuitive 2-way home entertainment technologies by existing and new customers; the continued incorporation of our QuickSet technologies into customers' products as expected by management; the continued acceptance and growth of the company's connected home products and technologies, including security and control, temperature controllers and automation and other technologies identified in this call; the timing of new product rollout orders from the company's customers as anticipated by management; the continued trend of the industry toward providing consumers with more advanced technologies; achieving the synergistic growth benefits as anticipated by the management; the ability to successfully identify and enter existing and new adjacent markets for our products and technologies; the ability to attract and obtain new customers for our products and technologies; management's ability to manage its business to achieve its revenue, margin and earnings as guided, including the impact to our business due to new or modified import or export restrictions and changes in trade regulations; and other factors described in the company's filings with the U.S. Securities and Exchange Commission.

The actual results the company achieves may differ materially from any forward-looking statement due to such risks and uncertainties. Management cautions that these statements are just projections and actual results or events may differ materially from those projections. The company undertakes no obligation to revise or update these statements to reflect events or circumstances that may arise after today's date.

For further detail on risk, management refers you to the press release mentioned at the onset of this call and the documents the company files from time to time with the SEC, including the annual report on Form 10-K for the year ended December 31, 2017, and the periodic reports filed thereafter. These documents contain and identify various factors, which, along with the risks identified on this call, could cause actual results to differ materially from those contained in management's projections or forward-looking statements.

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, and believes that providing these non-GAAP financial measures to investors as a supplement to GAAP financial measures helps investors evaluate UIE's -- UEI's core operating and financial performance and business trends consistent with how management evaluate such performance and trends.

Additionally, 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 today 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.

So it's now my pleasure to turn the call over to Paul Arling. Go ahead, Paul.

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Paul D. Arling, Universal Electronics Inc. - Chairman & CEO [3]

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Good afternoon, and thanks for joining us today. We're excited to speak with you. These are interesting times for UEI as we look back at our successes and look forward at the connected home market before us. I am pleased to say that the connected home is not just emerging, it has arrived and it is inevitable that devices throughout the home will all one day be connected using advanced 2-way wireless connectivity protocols and enabling the types of use cases that we saw in The Jetsons cartoons so many years ago.

Today, we are in the middle of a conversion as so many of the systems we use in our homes are evolving from traditional user-initiated control to smart system-enabled control. As we have shared with you before, our traditional AV delivery solutions are making way for smart entertainment systems, which includes 2-way cloud connected systems utilizing voice remote control front ends. Similarly, the traditional home control products that we use every day such as HVAC, lighting and safety and security, are experiencing a shift to smarter, more convenient and more efficient automation of our homes.

As with many technological conversions before, like analog to digital and standard definition to high definition, the path is typically not smooth. Our second quarter results and third quarter projections exemplify this conversion. As expected, second quarter sales were down. Adjusted non-GAAP net sales were $154.9 million. However, our third quarter sales guidance is expected to come in between $182 million and $190 million, representing the highest revenue quarter in our 30-plus year history.

These expectations are based on positive trends both in our core audio-video products and the increasing contribution from our home automation products. Our success in creating innovative AV system control products has enabled us to build core competencies that include: a best-in-class global control database and technology solution for infrared, radio frequency and IP control of legacy as well as connected smart home automation devices; a scalable cloud architecture to deliver automated discovery, setup and control of millions of AV and a large and growing number of IoT devices worldwide; and scale and low-power radio frequency design, development and manufacture that we have successfully translated to home automation and sensor devices.

Our strong market position in AV control is more important than ever today as our technologies address the number 1 use case in the home and represent an estimated 4 to 5 hours of consumer activity each and every day. As a result, we believe that our clear leadership position in intelligent AV control has and will continue to give us the competitive advantage to successfully expand in our other markets, including smart home automation and control.

With regard to our current markets, we continue to execute on a long list of entertainment voice control products working alongside the biggest names in their respective markets. We are also actively developing new products and services in other product categories such as climate control and safety and security that represent a significant growth opportunity over the next 3 to 5 years. As you know, over the past few years, we have continued our development of, and investment in, control and sensing technologies for the smart home.

However, you may not be aware of the magnitude of this business at UEI and our growth opportunities in this product category. This year, we expect revenues from home automation products and technologies to be more than $130 million. These revenues include our sizable business working with Daikin, a leading innovator and worldwide provider of advanced, high-quality air conditioning and heating solutions for residential, commercial and industrial applications.

Earlier this year, Daikin announced Fusion 20, their strategic management plan to invest in expansion of the air conditioning solutions business, capitalizing on widespread use of AI and IoT technologies and the strengthening of environmental technologies to continue to grow their business globally. We are pleased to be a key technology provider to Daikin as we help them deliver next-generation smart controllers that build on their strategic vision.

We have also seen sizable growth in our safety and security product category in part from sales to Comcast XFINITY Home business, which we announced last year.

Additionally, we have been working closely with Ring, a global home security company owned by Amazon. Ring manufacturers a range of security products that incorporate indoor and outdoor cameras and sensors. We deliver the wireless door and window contacts and motion sensors that make up the Ring all-in-one smart security system.

Our growing position in the home automation markets represents a great opportunity for us. Market experts predict that the smart home industry is expected to grow at a strong double-digit top line compound annual growth rate over the next 3 years, which bodes well for our long-term plans.

Earlier this year, we embarked on a major technology and product initiative to create a new hardware, software and services platform to bring together smart home functionality and AV control into a simple unified experience. Early indications suggest that our service providers and OEM customers see a significant potential in creating a product that brings value to consumers in their daily TV-watching activity, while introducing them to new smart home features such as lighting, climate control and security services that can grow and expand over time. We will share more on this initiative as this product develops and is introduced in 2019.

We anticipate our core entertainment control business will also benefit from this initiative as we integrate smart home capabilities into our existing QuickSet platform and enable our dual RF chip solutions to provide the in-home connectivity that helps drive smart home ecosystem interoperability.

The continued shift from traditional to advanced voice remotes continues to be a key driver in our entertainment control product category. The number of active voice enabled remote controlled development projects continues to be strong globally for new product introductions in the back half of this year and into 2019. As an example, TiVo's new voice remote and control platform for service provider delivered systems will launch in Q3, and we anticipate that by the end of this year, almost all of the over 20 TiVo operator customers will have a voice remote deployed.

In EMEA, the transition to voice remotes continues. For the back half of 2018, we expect to begin shipping voice remotes for Sky, Liberty Global, Vodafone and Orange, as well as 3 new Android TV remotes for mid-tier operators, Yes, Quickline and 1and1. During the quarter, we were awarded new Android remote business at operators in India that will launch early next year.

Similarly, we introduced new products in select Pay TV markets in Asia Pacific, namely QuickSet at Skylife in Korea and a new BoE remote control for Sky New Zealand. This quarter, our long-term consumer-electronics customer, Bose, launched their new product line including a new high-end universal remote control that includes UEI's latest QuickSet technology and integrates our latest intuitive control feature called adaptive control, a feature that changes the look and feel of the remote control interface and functionality depending on the active source device.

Our QuickSet product continues to be the de facto solution for the smart TV market, with accounts such as Samsung and Sony continuing to do well in their respective markets and the addition of another major account which will launch in 2019.

With that, I'll turn the call over to our CFO, Bryan Hackworth, for a review of the financials.

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Bryan M. Hackworth, Universal Electronics Inc. - Senior VP & CFO [4]

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Thank you, Paul. As a reminder, our results for the 2018 second quarter as well as the same period in 2017 will reference adjusted non-GAAP metrics.

Second quarter net sales were $154.9 million compared to $177.9 million for the second quarter of 2017. Business category net sales were $140.8 million compared to $164.8 million in the second quarter of 2017. As mentioned on the previous call, during the second quarter, we expected certain customers to reduce their orders to rebalance inventory levels, preserve capital and manage their platform transitions.

Consumer Category revenue was $14.1 million compared to $13.1 million in the prior year quarter. Gross profit was $38.7 million or 25% compared to 25.9% in the second quarter of 2017.

Operating expenses were $30.4 million compared to $30.2 million in the second quarter of 2017. R&D expense was $5.9 million compared to $4.8 million in the second quarter of 2017, reflecting our continued investment in technologies that enhance the user experience. SG&A decreased to $24.5 million compared to $25.4 million. Operating income was $8.3 million compared to $15.8 million. The effective tax rate was 23.4% compared to 25%. Net income was $5.4 million or $0.38 per diluted share compared to $11.4 million or $0.78 per diluted share in the prior year period.

During the second quarter, there were a couple of events that occurred that are not in our normal course of business. First, we went live with our Oracle ERP platform in all jurisdictions within Asia.

Secondly, we completed the sale of our Southern China factory. As a result, we incurred and excluded the following related charges to arrive at our adjusted non-GAAP metrics. We excluded the gain on sale of our China factory, which approximated $37 million. We excluded the $4.8 million write-down of assets associated with the closure and sale of our China factory, which we recorded as cost of goods sold. We excluded $4.2 million of manufacturing efficiencies as a result of having to cease operations for a week prior to the Oracle go-live date in early April as well as intermittently throughout the first couple of months of the second quarter.

Next, I'll review our cash flow and balance sheet at June 30, 2018. We ended the quarter with cash and cash equivalents of $59.4 million compared to $62.4 million at December 31, 2017. As previously mentioned, we completed the sale of our China factory, which yielded approximately $51 million in cash before tax and approximately $46 million post-tax. We used a portion of the proceeds to reduce our outstanding line of credit by $30 million bringing our balance down to $111 million at June 30, 2018.

Our cash conversion cycle, defined as days sales outstanding plus days in inventory plus days of payables outstanding, improved sequentially from approximately 118 days as of Q1 to 114 days at the end of Q2. We're working to reduce our cash conversion cycle by...

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Primarily by reducing inventories to a more efficient level as well as by negotiating better terms with our vendors. Ultimately, we plan to reduce our cash conversion cycle to approximately 90 days by this time next year.

In addition to our focus being placed on working capital, over the past several months, we've also been reviewing our overhead base to determine if it's properly aligned with our growth initiatives. Based on our review, we will implement cost efficiencies and reductions in certain areas, while maintaining our effectiveness and continuing to invest in promising new growth areas.

Overall, we believe we can maintain the same expense level by 2020 as we will have in 2018, while growing revenue annually in the 5% to 10% range, thus creating a substantial improvement in operating leverage.

Now turning to our guidance for the third quarter 2018. We expect third quarter net sales to improve sequentially as well as year-over-year as one of our customers in subscription broadcasting launched their new advanced platform towards the end of the second quarter.

In addition, we're also experiencing strong growth with customers in home automation space, specifically Ring for home security and Daikin for energy control. As a result, we expect sales for the third quarter to range between $182 million and $190 million. This compares to $175.5 million in the third quarter of 2017. EPS is expected to range from $0.65 to $0.75 compared to $0.81 in the third quarter of 2017.

I would now like to turn the call back to Paul.

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Paul D. Arling, Universal Electronics Inc. - Chairman & CEO [5]

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Thanks, Bryan. We believe our technology is the backbone that powers the next phase in the smart home entertainment evolution. Our position as the leader in smart home entertainment voice-activated control is the springboard that enables us to deliver a broader array of products and services, both in AV entertainment and home automation control.

Everyday devices in the home are getting progressively smarter: our TVs, our set-top boxes, our thermostats, lights, fans and beyond. UEI is ideally positioned as the technology, design and manufacturing partner to help make our existing and new customers' devices smarter.

Today, UEI it has a dominant lead in enabling home entertainment systems to connect and control other connected devices in home. UEI is also at the center of home automation control systems encompassing safety, security, HVAC and lighting and we are working with many of the leaders in this space such as Ring and Daikin. We are still at the early stages of the transformation of home entertainment to smarter systems.

Home automation is not just an interesting concept, it is here, and as I outlined earlier, it will generate more than $130 million in revenue for us this year. And these home automation and entertainment control systems are beginning to converge, and we expect to have exciting product and customer announcements to make in this area over the next few quarters.

We will continue to innovate, create more industry-leading technology and improve our operations. All of which will contribute to enhance shareholder value over the long term. Stay tuned.

Operator, we'd like to now open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question or comment comes from the line of Jeff Van Sinderen from B. Riley FBR.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [2]

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Great to see the business is picking up in Q3. Wondering if you could give us a little more color on the advanced platform launch that's underpinning your guidance or at least part of your guidance for Q3? Maybe give us a sense of the size of that customer and what the outlook is for their launch in terms of how lengthy it might be? How we should think about this level of ordering? Do think it's -- do we get back to more linear? Just, I guess, trying to get a sense of whether you think Q2 is just an anomaly at this point? And how likely it is that you think your revenues might return to a more linear pathway?

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Bryan M. Hackworth, Universal Electronics Inc. - Senior VP & CFO [3]

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Yes. First of all, the growth from this customer that I referenced, the customer in subscription broadcasting, that's not the only thing that's driving Q3 because we have home automation, we mentioned Ring and Daikin. So the launch of the customer in subscription broadcasting is not the only driver. But unfortunately, I can't name their name, but they're a pretty good sized customer. They're not a 10% customer, but they're top 10. So we're happy they launched. They're one of the customers that the launch was delayed originally, so it went off. Now the question of it is to how they distribute it: do they distribute it across the board to all new subscribers or to existing subscribers, to certain regions, right now, we're seeing how that's going to play out. So we need some time on that, but the way they ordered in Q3 is definitely promising.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [4]

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Okay, great. And then, maybe if we could shift to home automation for a moment. You mentioned several customers there increasing orders. I think that's part of the home control and sensor segment that you talked about, at about $130 million this year. Can you give us a better sense of the scope of the customers and their programs? I know you mentioned Daikin and Ring, and just, I guess, trying to get a better sense of that, and what sort of growth rate do you think is feasible for that business segment going forward?

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Paul D. Arling, Universal Electronics Inc. - Chairman & CEO [5]

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Yes. I'll answer that. There is a variety of products here that encompass all different types of home control applications. Obviously, there's safety and security. So customers, even on the do-it-yourself side, are plugging in sensors and they're able to monitor on their own cell phone as well as to have a service backdrop to that. And on the other side, you've got HVAC control. Daikin is a world-leader in HVAC, of course, and are -- we're working with them on numerous products, control products and others that make them smarter, meaning that they connect them, they give IP connectivity to the main system in your home. And we're work -- we've been working with them for a while. Daikin is a long-term customer. I think it's probably important to note that by the end of this year, we'll have at least 2 customers in our top 10 that do not buy AV control products from us at all. They're simply home control customers, buying HVAC, safety, security, lighting and other home control type products. So this is a -- is growing to be a significant business for us. As I stated in the prepared comments, smart home growth is projected to be in the 25% to 30% range over the next couple of years. This is a high-growth area. And for us, this has been a growing business and we think that will continue. So it supplements the AV part of our business because the main activity that people perform in their homes, recent data from the U.S, I just saw from it Nielsen, says that the average person is now consuming -- the average American is now consuming close to 6 hours of video a day, almost 5 of which is coming from their live TV and DVR sources. This is actually up from 2 quarters ago. So this is the number 1 activity in the homes of today, but it's a natural progression for people to connect the other systems in their home as they become smarter. HVAC control for their environment, lighting, of course and, of course, safety and security, things that make their homes more secure. So we think there's a natural progression for our customers, some of them new and some of them existing, to extend into these new areas, and we think we have a great platform to do it because again, we're the #1 use case in the home.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [6]

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It's good to hear. So your business is really sort of evolving in terms of the mix.

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Paul D. Arling, Universal Electronics Inc. - Chairman & CEO [7]

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Correct.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [8]

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Let me ask you this, just one from me and then I'll jump off. Where do you stand on the new-generation remote production in the China factory? Just wondering where we are there and how we should think about gross margin at this point.

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Bryan M. Hackworth, Universal Electronics Inc. - Senior VP & CFO [9]

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Yes. We made good progress from a manufacturing perspective. From a gross margin percentage point of view, we are facing some headwinds, though. I mean, right now, the number 1 headwind is the -- we've had price increases for some of our key components. And I don't think that's news to anybody, I think a lot of companies mentioned that, and it's -- unfortunately, we're -- it's affecting us as well. So that's really the number 1 headwind for us is just trying to offset the pricing pressure on the components side.

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Operator [10]

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Our next question or comment comes from the line of Steve Frankel from Dougherty & Company.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [11]

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The detail around this home automation opportunity, could you tell us what that business was last year with the comp still $130 million?

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Paul D. Arling, Universal Electronics Inc. - Chairman & CEO [12]

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Yes. I don't have the exact number, Steve, but it was less than $100 million.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [13]

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Okay. And then, on these -- we've got 1 -- at least 1 major launch in Q3. On those customers that were delayed, that caused the poor performance in Q2, could you kind of give us some commentary on where those other customers are in getting to production?

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Paul D. Arling, Universal Electronics Inc. - Chairman & CEO [14]

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Yes. You mean in terms of products that haven't yet been launched?

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [15]

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Right.

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Paul D. Arling, Universal Electronics Inc. - Chairman & CEO [16]

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Yes. They're all on track at this point. So we don't see any reason to project any great delays, but I will just warn that in the past, sometimes projects get 9/10 of the way done and then there's a delay of a month or 2 or 4. So it's always possible that some of the customers that are working through the last levels of technical sophistication or finalizing their product in the UI, can experiencing some delays in the software, so it is possible. But we're pretty confident in the guidance we gave for the quarter out, which is the only guidance we give.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [17]

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Okay. And what was Comcast in the quarter?

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Bryan M. Hackworth, Universal Electronics Inc. - Senior VP & CFO [18]

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18.2%.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [19]

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Okay. And I understand the commentary about component prices increasing, and that's some pressure on gross margin. So does that mean we ought to expect gross margin to be kind of flat here? Or it's really just impacting your ability to ramp it between now and the end of the year?

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Bryan M. Hackworth, Universal Electronics Inc. - Senior VP & CFO [20]

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Yes. We don't give guidance on the gross margin line, but it's going to depend on ramping. I mean the headwinds are pretty strong with certain components like the capacitors and resistors, but on the plus side, I think we're doing a good job improving on the manufacturing side. So it's going to come down to mix, but I wouldn't forecast anything drastically different.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [21]

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Okay. And where are you on these cost reductions; is this moving people to lower-cost geographies? What kinds of things are you contemplating to keep your costs flat?

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Bryan M. Hackworth, Universal Electronics Inc. - Senior VP & CFO [22]

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Yes, that's -- we're looking at everything. I mean, we're looking at potentially what you just mentioned. We're looking at freight, carriers. We're looking at everything across the board, and I don't want to get into too many specifics on that, but we feel confident that we can continue to grow the top line, while over the next 2 years, basically maintaining our expense level at where it will be in 2018. If we can do that, it's going to drive significant operating margin leverage.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [23]

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And how quickly can you institute these changes? Are these things that will go into effect in early next year? Or will you be able to accomplish it this year?

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Paul D. Arling, Universal Electronics Inc. - Chairman & CEO [24]

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No, we'll start this quarter and we'll act on this over the course of next year or 1.5 year.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [25]

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Okay. And just because we don't want Bryan to not answer boring accounting questions. On the GAAP to non-GAAP sales calculation that we saw this quarter, I don't remember 606 being that material last quarter. Is this a short-term phenomenon? Or is this something at this magnitude we might see every quarter, so that the non-GAAP sales in Q3 are going to be even higher than what you guided to?

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Bryan M. Hackworth, Universal Electronics Inc. - Senior VP & CFO [26]

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Actually, the magnitude was similar. So year-to-date, there's little effect but the -- what happened was in Q1, the GAAP sales were less than pro forma, and then in Q2, it reversed for nearly the equal amount. So it actually was the same magnitude. I think it was $7 million in sales in Q1; I think it was $6 million in Q2. So it was pretty close. So year-to-date, there's very little effect. The problem is, I'm trying to compare apples to apples so that people don't get confused because the new rules are -- they go against everything that we've done in the last 100 years where the new rules allow you to recognize certain revenue on certain finished goods that are still in your warehouse, you haven't even shipped them yet. So in order to compare apples to apples, I'm trying to -- I'm pro forming it this year so that we have a good comparison.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [27]

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Okay. But to be clear, the guidance is, for that -- you guided to non-GAAP sales?

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Bryan M. Hackworth, Universal Electronics Inc. - Senior VP & CFO [28]

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Correct. Yes, correct.

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Operator [29]

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Our next question or comment comes from the line of Greg Burns from Sidoti & Company.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [30]

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Was there any other 10% customers besides Comcast?

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Bryan M. Hackworth, Universal Electronics Inc. - Senior VP & CFO [31]

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No. It was just Comcast.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [32]

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And your guide for the third quarter, does that contemplate Comcast rebounding to kind of more normalized levels? Like, are they adjusted their order patterns back to kind of normal rates?

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Bryan M. Hackworth, Universal Electronics Inc. - Senior VP & CFO [33]

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Yes, I don't -- we don't speak to any particular customer in the guidance. But I can say, for example, Comcast, we haven't lost any share with them or any of that nature. So I mean for -- it's -- they're just ordering less right now. So it's -- fortunately for us, we have a pretty strong customer base and, as I mentioned previously, one of our customers launched their new platform, Paul mentioned those, launched higher-end remote. We've got strong growth with Ring in the security business, and Daikin is doing very well. Daikin's been a good customer for years but they continue to grow and these advanced platforms just aren't with subscription broadcasting at all, so with the home automation channel and that's helping us as well. So we have a lot of good news to offset any -- potentially a temporary shortfall in one particular customer.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [34]

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Okay. That's good. And I know, I guess you mentioned some input cost inflation. But can you just talk more broadly about how tariffs on Chinese imports might affect your business?

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Paul D. Arling, Universal Electronics Inc. - Chairman & CEO [35]

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Sure. Yes, we are closely monitoring and evaluating impact of the tariffs, the additional tariffs that have been recently imposed, and those that have been proposed on our products that are manufactured in China. From an operational perspective, we're developing plans to mitigate the cost of the tariffs by gradually shifting manufacturing of our highest priority or highest volume products to U.S. customers out of China and into existing facilities that we have in Mexico or Brazil, and exploring Vietnam as a manufacturing alternative. We do anticipate the process will take months to complete, which means that we may incur additional costs during the transition as we expect some of these additional tariffs to be implemented somewhere in late September, probably into October, although, it's difficult to know. The tariff situation is obviously fluid, and we expect to react appropriately and as quickly as we can. You should know, however, that no matter how this plays out over the next few months or over the next year, we can, and if necessary, will, transition our production to jurisdictions where we can cost-effectively serve our customers over the long term. Then obviously, we'll share more on this topic as its impact on our business becomes clearer.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [36]

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Okay. And then in terms of -- you've called out a lot of customers by name that are kind of keeping up to rollout, particularly, the large European operators. Can you give us a sense of -- do you have a sense of, I guess, how their plans on the rollouts? Is it going to be like a Comcast, getting it in everyone's hands as quick as possible? Or more measured approach? And historically, have you seen picked up shares as they're rolling out these advance remotes, like are they going to like a more -- a sole-sourced model where now you're supplying all the remotes, where, in the past, it might have been a dual source situation?

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Paul D. Arling, Universal Electronics Inc. - Chairman & CEO [37]

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Yes. There's a number of things on that. So I'll try to answer each one. In terms of their -- the aggressiveness of their rollout plans, unfortunately, I can't share that with you obviously by customer because they -- in some cases, they don't have the program out yet. So they won't want us to, of course, go in front of them announcing how aggressively or -- they'll roll these out. We've said many times before though, that there may be some that will be as aggressive as Comcast, but the norm will probably be to not be as aggressive as Comcast was. They rolled out the X1 platform as aggressively as any has ever been rolled out in the history of cable, I think, so to expect every operator to rollout as aggressively as Comcast did would probably be a bad idea. Is it possible that they can get to that? Maybe, but I think that to predict how that mix will roll out would be a little bit less aggressive than Comcast was because they were at the far edge of aggressive on that rollout. In terms of market share, typically, these products are sufficiently complex, and the work involved in getting it done is sufficiently long, even for the vendor, that they have often not qualified more than one vendor at the outset for these products because again, it's not just a lot of work for the vendor or us, it's a lot of work for the customer to actually work alongside somebody because these are not simple products. They are systems and they have to integrate very tightly with the other elements of the system, which means that it's more difficult to just swap things out. So the benefit of that is -- the negative of it is, it takes more time with that customer and that integration effort. The good news is, it typically leads to a higher share of that customer, in fact, often, a sole-source-type relationship. Does that answer all the elements of your question?

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [38]

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Yes.

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Paul D. Arling, Universal Electronics Inc. - Chairman & CEO [39]

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Okay.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [40]

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(technical difficulty)

Some pretty large operators you're talking about in Europe, I mean, do you think any of these or one or two of them might be or become a 10% customer over the next 1 to 2 years [of that] rollout?

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Paul D. Arling, Universal Electronics Inc. - Chairman & CEO [41]

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Well, yes, I don't want to predict 10% customer status, but obviously, the names that we've listed are the largest operators in Europe. They may not quite be the size of a Comcast. Comcast would probably be the largest purchaser of these types of products in the world. So I don't know if they would reach that high, but they are -- these are significant names in the industry. And obviously, it's more than one. So this concept of smart AV control paired with IP-connected set-top boxes is obviously something that is going to become commonplace. And the reason we believe that is not just because we are predicting that, again, if you look at the list of names that are implementing this, it's the leading companies in the markets that we serve. So this is becoming more and more commonplace each quarter and each year, and we think that trend is going to continue. As I said in the prepared remarks, there will be a day in the not-too-distant future, where every home that has these types of services are going to have these types of products: 2-way, self-configuring, indirectly IP-connected control devices and voice, that will help the user get to the entertainment they want to get to quicker. This is going to be commonplace. It's not there yet. We're still in the early innings of it, but this is happening. And the names that we've mentioned are just more proof that this has become an international phenomenon transitioning the home entertainment market forward.

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Operator [42]

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Our next question or comment comes from the line of George Prince from RBC.

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George Prince, RBC Global Asset Management (U.S.) Inc. - VP, Portfolio Manager, and Senior Equity Analyst [43]

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Congratulations. Nice quarter and nice guidance.

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Paul D. Arling, Universal Electronics Inc. - Chairman & CEO [44]

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Thank you.

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George Prince, RBC Global Asset Management (U.S.) Inc. - VP, Portfolio Manager, and Senior Equity Analyst [45]

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So Paul, you mentioned Ring, and if I remember right, Ring was bought by Amazon. Is it possible that the Googles, Amazons, Apples of the world are becoming more aware of the importance of the RF device to turn on the TV and the knowledge of all the codes and the common sense of having the TV remote being the center device for the entire home? Is it possible that there's more awareness of this now?

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Paul D. Arling, Universal Electronics Inc. - Chairman & CEO [46]

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No doubt. Yes, they're aware of it. I think most people who are in or around the industry are aware of it. Again, calling back on statistics, some statistics that we've been talking about for some years now, the average consumer -- maybe not the people on this phone call today, but the average person is watching live and time-shifted TV in America nearly 5 hours a day. They're consuming video for 6 hours a day. This is the center of what people's lives are when they go home. They are often focused around this home entertainment system, and what better place to launch other applications, other services, the ordering of products, if that's your business goal, controlling your fan, controlling your HVAC, controlling your lighting, controlling your blinds. I mean all of these applications are best placed in the place where the consumer already is, which is typically when they come home, in front of that AV, home entertainment system. Now again, all the new technologies are making those AV systems, their home entertainment systems easier and easier to use, but it will also bring about the technologies that will allow them to control their home much more easily. So I think all these companies see this, our traditional customers, the consumer electronics companies that we talk to, the subscription broadcasters, clearly. Some of them are already developing these things, already have introduced some of these things, and I'm sure that other companies see it as well. So it is happening. This is clear. And I think they're addressing the consumer where they're at, which is typically in front of that AV system.

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George Prince, RBC Global Asset Management (U.S.) Inc. - VP, Portfolio Manager, and Senior Equity Analyst [47]

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Can you remind me or give me an update on how -- what you think your market share is in the U.S. and in the world?

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Paul D. Arling, Universal Electronics Inc. - Chairman & CEO [48]

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Of the home entertainment?

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George Prince, RBC Global Asset Management (U.S.) Inc. - VP, Portfolio Manager, and Senior Equity Analyst [49]

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Just the remote controls for TVs.

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Paul D. Arling, Universal Electronics Inc. - Chairman & CEO [50]

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Yes, well, it depends. On the -- overall, for TVs or for the entirety of home entertainment, it probably isn't 50% yet. I would say though that on the advance platforms, if you were to take that subset, the market share would be far greater than 50%.

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George Prince, RBC Global Asset Management (U.S.) Inc. - VP, Portfolio Manager, and Senior Equity Analyst [51]

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Is that globally or U.S?

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Paul D. Arling, Universal Electronics Inc. - Chairman & CEO [52]

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Globally.

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George Prince, RBC Global Asset Management (U.S.) Inc. - VP, Portfolio Manager, and Senior Equity Analyst [53]

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And in the U.S, it's like 80% now, right?

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Paul D. Arling, Universal Electronics Inc. - Chairman & CEO [54]

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Correct. That's right.

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George Prince, RBC Global Asset Management (U.S.) Inc. - VP, Portfolio Manager, and Senior Equity Analyst [55]

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All right. So when we do our research here, we can't find anything comparable for the price. So these other companies must be coming aware that this is a pretty darn good value for the money, for the $8, $9 or $10, whatever you end up pricing it at, to be able to control the whole house?

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Paul D. Arling, Universal Electronics Inc. - Chairman & CEO [56]

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Sure. They very well should see it as a good value. That is true. It's part of what's led us to the market share we have. We provide the best solution in the world, in our opinion by far, and I think our customers would attest to that, given the customer list we've gotten over the years. So yes, I think that our solution is -- and we obviously, never rest. Our solution still isn't good enough. It will continue to improve and separate us even further from anyone else who is -- would desire to get into this. We're completely committed to having an ever-better controller for not just your AV system, but ultimately, for your entire home control experience.

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Operator [57]

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(Operator Instructions) We have a follow-up question from Mr. Steve Frankel from Dougherty & Company.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [58]

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Paul, from a high level, what's the margin -- gross margin profile of home automation controllers relative to your typical cable controller?

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Paul D. Arling, Universal Electronics Inc. - Chairman & CEO [59]

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Yes. We typically don't talk, Steve, about gross margin by product category. So I can't really give you a precise number on that. I would say that, generally, the industry estimates of margins in those areas are, typically, a little bit higher than AV control.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [60]

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So it's a logical assumption that it's higher than your AV business, and certainly, you don't have the customer concentration issues, that will also help, correct?

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Paul D. Arling, Universal Electronics Inc. - Chairman & CEO [61]

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Yes. And as time wears on, we'll see. But yes, I think as time goes on, this is something that is -- today, it's a higher margin category than our traditional AV control.

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Operator [62]

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I'm showing no additional questions in the queue. I'd like to turn the call back over to Mr. Paul Arling for any closing remarks.

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Paul D. Arling, Universal Electronics Inc. - Chairman & CEO [63]

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Okay. Thank you for joining us today and your continued support of Universal Electronics. I'd like to note, in the next month or so, we'll be at several conferences. We'll be at the Piper Jaffray Tech Select conference, Dougherty's Institutional Investor Conference, Deutsche Bank's Technology Conference and B. Riley's Annual Consumer and Media Conference. All of these will take place between now and our next conference call and we look forward to seeing you there. Thanks for participating today and we'll see you later.

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Operator [64]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.