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UEI Shares Fall as Questions Abound on Consumer Demand

Net sales at Universal Electronics Inc. fell to $139.1 million, from $150.5 million in the prior-year quarter, on chip shortages and macroeconomic conditions, said CEO Paul Arling on a Q2 earnings call Thursday. Consumers are being affected by rising food and fuel prices, leaving “less of consumers’ budgets for entertainment, merchandise and other discretionary items," Arling said.

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Revenue met expectations, and earnings per share of 66 cents were higher than expected, Arling said. UEI’s Q3 outlook calls for net sales of $145 million-$155 million vs. $155.6 million in Q2 2021. The stock closed 8.6% lower Friday at $25.86.

Arling referenced “difficult questions” UEI faced over the past several years, including when the chip shortage will end, when supply chain bottlenecks will ease, and when the economy will reach "an inflection point,” Arling said. Economic factors “continue to dampen near-term visibility,” he said, and timing of improvements “is elusive,” though logistics are improving each quarter, he said.

Chip shortages will persist well into 2023, Arling said, noting construction of semiconductor fabs in the U.S. and around the world. He referenced historical trends, saying “so much capacity” will be added that there will likely be overcapacity at some point, “but that’s a ways out.” Though UEI products use only a handful of semiconductors each, the TVs and other devices they pair with use “hundreds,” he said. “If they’re missing two parts they can’t make as many,” he said, leading to lower production.

On the impact of cord-cutting on UEI’s business, Arling said people aren’t watching less TV, but order patterns from TV makers fluctuate. The shift in viewing behavior to streaming isn’t “as dramatic as everybody may think” because customers are still viewing programming on a smart TV, the leading device for viewing streaming video, he said.

Chief Financial Officer Bryan Hackworth said UEI has “strong orders” for Q4, plus new customer wins, but there’s “a little bit more uncertainty today than there was this time last quarter,” citing waning consumer confidence. That’s “an uncertainty,” he said. If confidence continues to drop, “Do people start to order less in the retail space? Does that affect our consumer electronics channel, which ultimately winds up in the consumer space?”

Another unknown is whether UEI can fill demand for orders due to supply chain interruptions, Hackworth said. The company is seeing improvements, especially in transportation. It was able to buy more of a specific chip it needed in Q2, “but there are other chips we’re having difficulty getting,” Hackworth said. From an order perspective, “We look strong.” Trends are positive, “but can we fill all the orders, and will consumer confidence stay strong enough where it doesn’t affect orders in the fourth quarter?” he said.

Arling focused on growth areas for UEI, including HVAC and home automation, and noted the company’s recent announcement it would supply controls for Hunter Douglas automated shades (see 2208010027). He said UEI’s consumer One for All brand launched a streaming-centric remote control system “to address the growing challenge consumers face when they have multiple subscription streaming services on multiple streaming platforms.”

Home automation products have a longer design cycle than TVs, which go through a new cycle annually, Arling said. Home automation projects are “long to develop, but the benefit is long-lived,” he said. In HVAC and home automation markets, “once a design is won, the design can last for maybe a decade.” Wins sometimes take a year or more to get in, he said, because a control product is typically part of a system.

Commenting on patent litigation against Roku, Arling referenced UEI’s win at the International Trade Commission in December (see 2108060022) which said certain Roku remotes infringed a UEI QuickSet patent, leading to exclusion and cease-and-desist orders. In June, UEI “successfully defended ourselves against Roku’s retaliatory ITC action,” Arling said, saying two patents Roku asserted against UEI were found to be invalid “and that Roku failed to prove that it had established the requisite domestic industry in order to prevail.” UEI expects to win in related federal district court cases, he said.