Amid Market Shift, Universal Electronics Puts Hope in Replacement Remotes, Smart Home
Dougherty & Co. analyst Steven Frankel maintained a “buy” rating for Universal Electronics in a research note to investors Friday after Q4 earnings results that were above forecasts. Customer delays that plagued Universal in Q4 appear to have eased, said Frankel, putting the company in the early stage of a multiyear product cycle for its core subscription broadcast customers that are rolling out next-generation set-top boxes paired with advanced remote controls. Shares closed 5 percent higher Friday at $72.65.
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On the Thursday earnings call, management eased investor concerns over a slowing penetration of Comcast X1 remote controls, said Frankel. Comcast generated 23.6 percent of Q4 revenue, said Universal CEO Paul Arling. But cable replacement rates for remotes to cover churn and breakage -- 75-85 percent of their subscriber bases annually -- produce a consistent revenue stream, he said. Remotes live a “hard and dangerous life,” said Arling, noting hazards from liquids, kids, dogs, and sports fans throwing the devices “across the room." Replacement remotes are necessary to ensure continued use of a cable system “and do not affect the subscriber numbers that our customers report,” he said.
The replacement cycle is likely to remain unchanged as Universal’s customers go through technology shifts, Arling said, citing transitions from analog to digital, standard definition to HD and non-recording cable boxes to DVRs. Unit sales won't vary significantly, but as cable companies migrate to advanced two-way platforms, average selling prices for remotes will increase with the complexity of the devices, he said.
In new technologies, Universal announced in December that Comcast, in the X1, was the first provider to deploy its QuickSet cloud, which Arling said “solves the biggest challenge” in setting up and programming home entertainment devices for the first time. He called QuickSet the “most comprehensive database” that ensures almost all CE devices can automatically be recognized and controlled by a remote.
QuickSet is also being used with Sling Media’s AirTV player that combines live TV with streaming channels, and QuickSet 4.0, launched at CES in a Huawei smartphone, adds control of home entertainment and air conditioning systems via app, the CEO noted. Samsung and Sony were early adopters of QuickSet and they’re broadening the reach of the technology in the latest product cycle, said Arling. “We expect to be in more and more models” this year and in future years, he said.
Addressing concerns about product delays from Universal’s customers that affected revenue in Q4, Arling cited an “evolution” in the industry brought on by advanced technologies and connectivity protocols. Universal’s customers are launching new features and entertainment options that are “far more complex” than previous platforms, he said. During the transition, some partners’ development cycles have lengthened due to “extensive user testing and validation” before launching new platforms. Some products were delayed by weeks, and others by months, but all are going to ship, he said.
The company’s customers are launching smart home services and applications that weren’t possible a year ago, said Arling. “We are at the beginning stages of a major shift in home control.” Leading home entertainment device makers are introducing more advanced, connected entertainment and security products, he said. Universal’s place in the shift is in providing solutions that make the smart home products easier to set up and use, he said. He referenced home sensing, monitoring and control solutions for doors and windows, weather sensors and connected light switches. The company began shipping temperature controllers for HVAC partners in Q4, and will introduce more this year, he said.
Arling cited Universal’s existing relationships with major home entertainment companies including Comcast, AT&T's DirecTV, Dish Network, Charter Communications, Sony, Samsung, Panasonic, Sky, Liberty, Vodafone and Microsoft. On where cable operators are looking to generate additional sources of revenue beyond entertainment and security, Arling said Universal is working with “quite a few HVAC providers” and its customers are targeting other smart home applications as an enhancement to service.
Responding to an analyst question on the risk of application-based delivery of services through third-party set-top boxes -- such as Comcast’s Roku offering -- Arling said, “We do have customers that are doing that sort of product.” In some cases, Universal is getting a direct benefit from those solutions, but in other cases, “you could argue there’s a threat." None of those offerings affect forecasts, he said.
Q4 sales were $160.5 million, compared with $162.1 million in the year-ago quarter, and net income was $3.2 million, compared with $9.3 million, the company reported. For Q1, Chief Financial Officer Bryan Hackworth gave revenue guidance of $155 million to $163 million.