Hi, and welcome to Needham's 26th Annual Growth Conference. I'm Ryan Koontz. I follow the broadband and cloud networking sectors here at Needham, and I'm really pleased to have Universal Electronics with us today for a presentation. We've got Paul Arling, Chairperson and CEO. Welcome, Paul. Hello. Great. Well, enjoy the presentation, and if you have any questions, I'll be moderating those if you wanna submit them via the web interface. With that, Paul, let's take it away. All right. Good afternoon, everybody. I need to warn you, although you don't have to read this whole thing, I am going to make some forward-looking statements, both in the presentation and probably if there are questions asked. There are risks. Be careful. Read our SEC documents for a full disclosure or as good a disclosure as we can make about the risks embedded in those forward-looking statements. Our mission as a company is to create smarter living. You see somebody here using one of our voice-enabled products. We create products and technologies that help everyday people easily discover and interact with the devices and services in their home. So the main application of this historically has been home entertainment, the most used system in your home. The average American is watching somewhere just under five hours of television a day. If you're using your other home systems more than five hours a day, you either have mental or health problems, but your home entertainment system is the most used in the home. However, as other devices and other systems have been developed for safety and security, for climate control and other purposes, we have also, as those systems have converged in technology with home entertainment systems, 'cause that's something that has happened over the last decade, where these systems are starting to converge in technology, IP technology, as well as others, we have gotten involved with many systems within the home, which we'll talk about throughout this presentation. We're the global leader in wireless control solutions for home entertainment and smart home devices. We ship over 100 million units a year in the areas of consumer electronics, subscription broadcast, security, home automation, hospitality, and climate control, as I mentioned. We do control. You'll see some familiar ones here on the left there. Probably looks similar to your remote at home. This is one of our standard designs for home entertainment. HVAC controllers, this is a depiction of our TIDE Dial product, which we have many newly won projects on, and whole home automation, where we can touch and discover, configure, and control multiple systems within your home, which we'll talk about throughout the presentation. We do it in a variety of ways. One is to embed the technology with a chip or a license. We do this in numerous markets, the biggest one in units being televisions. Some of the major brands use a chip or the QuickSet Cloud technology within their TV. Examples of this are Samsung, LG, and Sony. We also obviously make finished goods, which are depicted here, and then we have software and services, where we do not actually embed a chip. We do, in some cases, simply license the technology and the data in the cloud behind it. That's how we sell our products. We're the market share leader in connected home control. More than three decades experience in this market. The worldwide leader by far in entertainment control, but also a broad portfolio of connected sensing and control products for other applications. Our focus is on differentiation or on technology, product innovation, and sustainability. We have a lot of too many to mention here, but a lot of differentiated technologies that we've either patented or have on a proprietary basis for better control of these devices. Global scale and reach. The major brands in the world that use us are a who's who, which we'll get to in a few minutes. We're vertically integrated. We go all the way from raw materials all the way to finished goods shipping to customers. We have R&D teams across the world. Most of our advanced R&D people are here in the U.S., but we do have employees in Europe, China, and India as well. Diversified manufacturing base in China, Mexico, Brazil, and now Vietnam. And again, a top-tier customer base. Importantly, I wanna point out here, we are now either selling to or developing products for six of the top 10 HVAC companies in the world, climate control companies in the world. We're working on number seven, as of this last week at CES, so I hope to update that to seven soon. But many of the major companies in the world are either working with us or have awarded us business in this area of climate control. The connected home is made up of multiple markets. Again, our historically strongest market has been home entertainment. We were the originator here decades ago. It is now a slower to low growth market. Of course, the subscription broadcasting part of it has actually shrunk over the last couple of years. TV is still a strong market, though. With most of the technologies being embedded into TVs, pretty much making up the future of that home entertainment market. That market is below $1 billion, $825 million, we estimate here with low growth. Climate control, however, is $1 billion in size, larger than home entertainment already, and it's growing at an 8%-10% pace. This is obviously embedded in most households across the world because we need to control heat and cooling of an environment to make it comfortable for humans to live in. As many of you in the north are finding out, heat is very important this time of year. This market is changing. It's getting much smarter. The products of the past were typically wired four-wired product, typically, with a simple display and up and down arrows. That's simply not gonna do for the consumer, either today or in the future. And we are innovating in ways here that is very attractive to these climate control companies, which is why we have won many of the top customers in the world on projects that we're developing now. Home automation and security is another large market, $1.7 billion, growing about 6% or 7% a year. We also have developed a lot of customer relationships here in blinds, security. Vivint is a relatively new customer of ours. So a lot of product development in this market as well. Those two markets together are almost $3 billion in size with growth, and, you know, we see that as the future growth potential of our company. The foundation of it is the things at the bottom, the technology, SoCs, and protocols that we've built, interoperability, mainly through QuickSet Cloud, which I'll describe later, innovation, and we also manufacture and distribute all the products to our customers. The entertainment control market has changed pretty dramatically. The future here is the subscription broadcasting market has weakened, but what it's led to is a popular movement towards the TV itself as the delivery platform. We're working with many of the major companies here, which we'll get to in a second. But North America has been down in pay TV. This has affected us, but still only 30% of that market has an advanced system, which is changing, particularly globally. There's been a move to streaming services, which many of you know. You've probably done it yourself. And these services are being combined with live TV, sports, onto one platform. So that's the movement we've seen. We've won a lot of business in this arena, particularly recently with Xumo, and others on the TV side. Building our QuickSet Cloud to be compatible with the OSes of the future, many of which were developed last year, and many more this year. Ad tech opportunity is creating this. Many of these companies, instead of just talking about units now, are talking about ARPU. And we have many innovations in our QuickSet system that are going to help with that ARPU generation, which is, again, why we're winning a fair amount of business in this TV entertainment market. Climate opportunity, climate control opportunity is large, as I said earlier, over $1 billion and growing. There's a lot of innovation occurring here. You'll see some things here you may not be familiar with here in the U.S. Most of the world uses what is known as a split system, typically controlled by this depicted handheld controller, which looks strangely like a remote control. This is actually how we got into the business many years ago. Across most of the world, they use these split systems with a display-type device that looks like a remote. They're much more efficient than the central air systems that are used here in the U.S., which is why recent regulations in the U.S. are actually incentivizing building of new buildings and remodels to use this type of system. They're much more energy efficient than the historic central systems that had been used prior to that. You'll also see a depiction here of an older programmable thermostat, which are still being sold, and then, of course, a smart thermostat, which is connected not just to a phone, but also connected to other devices within the home, which we think we have a unique differentiation on. So there's a lot of industry dynamics here that are going on. The companies here are looking for relevance in the connected home, and, you know, we're helping. That's, again, why we've won five of the top eight in the world and are working on the sixth of the top eight, and think we'll have great success here in the coming years. This is just a depiction of what we do here. We have a TIDE UI, which is basically a UI for these climate control products. We also then turn those into products, the TIDE Dial, TIDE Touch. The TIDE Bridge is actually what this would allow you to do is move your thermostat from the wall or remove it from the wall and have a bridge. Because essentially, the thermostats of the future will be connected and essentially gateways, so they're wired products, and therefore, the control point can be anywhere, not just in your phone, but even the device itself. And then we have Universal Modular Pack. This probably doesn't mean much to consumers, except that once you've wired it once, you could snap the front on again and again. Meaning, once you've gone through the painful install of the wires, all you'd need to do is snap a new front on to bring new features, which we think is an important thing for installers and consumers alike, to be able to get through the most painful part of this, which is installing it. If you've ever put in a smart thermostat, you probably know what I mean. So we have a complete lineup here, all the way from the technical design of the product, all the way through the hardware. We also connect these to really pretty much any other system in your home. We're currently doing blinds for such the two leading companies in the world, Hunter Douglas and Somfy. There's no reason why your HVAC system can't be connected to those to help, again, regulate temperature within your house and make it smarter. To interconnect with your security system, so that it knows when you're away, and when you've come home and disabled or turned off your security system. There's a lot of these applications that will know where you are in the home, whether you're home or not, where you are in the home, and can control other devices automatically for you, thus making them smart, and this is where we truly differentiate from other companies in this market. Big opportunity for us to develop and grow here. We again probably have about a 10% market share in this market, and there's a lot of opportunities that I've mentioned before. Window and door sensing, occupancy sensing, blinds control, lighting control, media control. We showed this at CES this year, that these devices can also be used, either carried around or mounted on your wall, to even do media control, as it is a gateway to the house. So a lot of interesting applications to make them more relevant in today's connected home. We have the expertise to bring these product lines together in multiple ways. Of course, that red circle there is home entertainment. That's been a strong... We're number one in the world there. But these things are beginning to intersect, both in technology, the protocols used for today's modern remote controls are typically low-power RF protocols. I won't bore this audience with the technical definitions of those. If you have any questions, you can always call me separately to talk about that. But many of the protocols that are being used in today's home entertainment devices are also used in safety and security devices and comfort and convenience devices, which allows us to a unique proposition to be able to bridge all of these categories together. We're doing this... I'll just give a couple of examples. One is, LG TVs today with QuickSet Cloud reach out into the comfort and convenience area and safety and security area. They discover, configure, and control anything that is in your home in those device categories. So when you buy your new TV, you plug it in, you plug in any devices you have for home entertainment, but it also goes out into your network and finds any other devices and asks you if you wish to configure them and control them through that device. We can do so on the other side as well. Through a safety and security device or a comfort and convenience device, we can do the same thing because we have the shared protocols across all of these devices. We're also making HVAC devices today that have sensors for which room are the people in, therefore, they can direct air and save energy to only cool or heat the areas that the consumer is actually in. This makes for a much smarter, much more efficient system and many, again, are interested in these ideas. QuickSet delivers that interoperability. It started as an AV configuration software launched in 2008 publicly. It was worked on before then. It's been deployed in 600 million devices, and again, it helps configure devices automatically. So it's a self-configuring software that detects the presence of other devices, AV devices, home entertainment devices, or smart home devices, discovers them, again, configures them, and then will allow control of them automatically. All the consumer has to say is, "Yes," and it will do all of those things. Many unique fingerprints, you can read this through our investor presentation, 1 million devices from over 1,200 brands, et cetera, et cetera. It's pretty much an all-seeing software that can again discover, configure, and control devices and services within your home. The testament to our success of our company is more based on the names that we're associated with. We haven't included all the names here, because most of the major video service providers in the world have used our technology or products across the years. We've put a couple of the bigger ones here, Liberty in Europe, Charter, Comcast, Sky, et cetera. There's many more than this, but a leading company in that for years. Consumer electronics, the two biggest names, LG and Samsung, but we also work with other brands, Panasonic, Philips, Sharp. We've done work with, Microsoft on the Xbox, Sony, et cetera. Consumer accessories, some of the major retailers in the world. Importantly, this bottom row is what we would generally refer to as connected home. That's why they're a slightly different color. Climate control, the largest HVAC company in the world, is Daikin, and they are now our largest customer. But we also have won projects with some of the names listed here. Again, the leaders in climate control in the world. Home security, Vivint, UTI, SimpliSafe, Ring, we've done work with. Home automation, Hunter Douglas, Somfy, TOTO, LIXIL, and others. So, pretty broad breadth of leading companies in the world that have either bought control technologies or products or configuration software from us, or are currently working on projects to do that very thing within the next 12-18 months. Design wins represent nearly 70% of the HVAC market. This, what this means is that the companies that we've won business with represent about that much of the market, so again, the leaders in the market. Some of the things we've announced are METUS, which is Mitsubishi, Mitsubishi Electric, Trane, which is a joint venture. They have done the TIDE Dial, which I showed earlier. Other recent awards, LG, Daikin, Toshiba, Carrier, et cetera. More than 10 customer-initiated development project kicked off just in this area. And again, the success is reminiscent of our early home entertainment remote control growth. Many years ago, when I joined, our market share in home entertainment was probably 3%. We declared our God-given right to a 100% market share, and then set about to achieve that. While we never got quite to a 100%, in some areas of the world and in some markets, we got very close to that. And it was again an obsession with making better products, better solutions for the consumer, better solutions for our customers, and then delivering on that year in and year out. Not just designing and making them, but improving them every year. Getting to the point where the products basically configured themselves, through the software development we've done. We've achieved that in home entertainment, and are setting about to achieve that in other markets and have early success to prove that we're on our way towards that. That includes home automation and security, which we mention here, and QuickSet is part of that. QuickSet is not just for TVs, it's a whole home configuration software that can again discover, control, and interact between devices. Our numbers recently have not been good. We've suffered through a shrinkage in essentially our home entertainment market, driven by mostly subscription broadcasters. You know, we've taken action on that. Most of our development in the last year or two has been in the area of connected home, which are these growth markets I described earlier, which has us winning new business that is expected to build revenues throughout 2024. We'll see some of the effects of this as we go through 2024. I've mentioned on our last conference call, we've won more than 30 projects that have more than $80 million of annualized business associated with those projects. And we'll start to see the fruition or the delivery of those products as we work through 2024. We've optimized the manufacturing footprint. We've closed a facility in China, opened a new one in Vietnam. Both from a tariff perspective and a efficiency perspective, this was a good move for us. We're gonna streamline the operations in Mexico, which is where we were making a lot of our U.S. product before. We've done some corporate restructuring. Our CFO has implemented a program with the operations team to take out about between $15 million and $18 million. That's underway. We'll see the last stage of that in the front half of 2024 to achieve the entire cost savings. We believe strongly in the future of the company. The board last quarter initiated a 1 million share buyback beginning in Q4. Our balance sheet is good. We have $60 million in cash and equivalents. And we've generated positive cash flow. So, I think our net debt position is about $15 million, with $125 million of capability. So, the balance sheet is good. We're transitioning the company to a stronger growth market. Home entertainment is still strong on the TV side, and, you know, we think we have a real bright future ahead of us, beyond the current turmoil. Thank you. That's the entire presentation. We can open it up for questions if anybody has any. That was great. That was great, Paul. Great to get the update. Last we talked was a while ago, and, you know, great to see the transition over to smart home is really going well. Yeah. It sounds like a really exciting opportunity. You know, it's just, so those new industries are not very modernized, I'm sure, and so I'm sure you know, while there's some disruptors in there, probably from the big cloud type of guys, I kind of wonder how you position yourselves in kind of the smart home against, you know, the Googles and the Amazons and the Apples of the world- Right ... and how you view them as friend or foe or coopetition, or how do you really position yourself there? Yeah, it's more coopetition. I wouldn't say that we don't work or won't work alongside of those companies, so I wouldn't count that out as a possibility. Our approach, though, is... And again, it was similar in home entertainment. If you go back a number of years, it's hard for many of us to remember this, but our TV remote used to be really bad. It was typically a dedicated remote where it turned the TV on and off. It might have changed channels, if you even had channel changing on your television. It had a volume key, right? Yeah. A volume up and down, and then you typically had to use more than one remote. We've changed that. Part of our technology, and the way we did it wasn't at first, we did it by going through the aftermarket, through retail- Yeah ... and we would make consumers buy an additional product after they had bought the original product. 'Cause it Our view those many years ago was, "Why don't we fix the problem from the start? Yeah, in device. When you buy the TV, why isn't the remote that comes with it capable of controlling everything? And why isn't it capable of auto-configuring everything? Yeah. We have since achieved that. If I had told you that 20 years ago, by the way, that that was gonna be possible, you'd have told me I was crazy. Uh-uh. Well, we weren't crazy. This has happened. So, in HVAC, the solutions to date to solve the problem or to improve the system have typically been similar to what home entertainment was those decades ago, which is to buy something in the aftermarket. Yeah. Why not go to the original equipment maker and solve the problem out of the box? Yeah. Why not have it integrated with all the advanced features? Not to get too much into the tech of HVAC, 'cause I'm certainly not a worldwide HVAC expert as far as designing systems, but many of the modern systems are dual fuel, right? They need a different fuel for really cold temperatures, but they can use heat- Mm ... pumps down to a certain temperature. Right. Many of them now have variable fan speeds, much like your car does. Whenever you get in your car in the middle of summer down here in Phoenix, it's hot, so the fans are really spinning quickly until the temperature comes down close to what you set it at, and then they slow down, right? Right. Well, home systems now have these features. The control of them is much more complex, and then if you wanna tie it in with other home systems, again, simple things like blinds or security systems, you need to be able to do that. You need to be able to have a configurable product that's not just IP connected, but will begin to do things for you that are smart. Yeah. We happen to think that just connecting a device doesn't make it smart. So- It's cool that it has a new interface on your phone, on this thing, right? Can't see it. Okay. On this, it's great that it has an up and down button, or you can set the temperature. That's fine, and I'm not saying that's bad, but that's just entry stakes to make it connected. Now what you have to do is make it do things. How about again, here, the sun is beaming in. I have solar cells on my battery pack that drives those blinds. Why isn't it sensing the sun is coming in, my windows are wide open, it's making it hotter in the room, right? Why don't they... And it knows I'm not home. Yeah. I'm not in my office. Yeah. Why doesn't it close the blinds? Those are still legacy- Wouldn't those- ... industries, right? Those are the stuff they- Yeah. Wouldn't those blinds be smart if they did that? I would call them smart. They shut at the right time when I... even before I asked them. That means they're smart. Mm-hmm. So it's just little things. I hate to pick on these little things, but I think that and many other things are what makes a smart home smart. It starts to do things, just like we did in TV. When you bring your new TV home and you plug it in, and then you plug a couple things into it and it automatically configures it, you'd say, "Wow, that's smart. How did it know that I just plugged in an Apple TV and an Xbox? Mm-hmm. I've never seen that before." Now, it's becoming more common because we innovated this some years ago. I think similarly here, HVAC products are in for a big improvement and change, and we can be a big part of that because of our experience in this home protocol area. That's right. It's probably also- Right ... a testament to why five of the top eight in the world have chosen us, and why we're working on the sixth, because I think that a lot of these companies can really benefit from our expertise, and- Yeah ... build better products. ... Neat. Yeah, makes a lot of sense. We had a question from an investor from the audience here, about, you know, can you kinda walk us through the downturn in the home entertainment market, and why you think it's stable, from here on out in terms of the shift away from subscription to- Sure ... to TVs, and and just kinda what's transpired over the last, you know, whatever, three to five years in- Yeah ... in the entertainment market? Sure. Yeah, I'll give some perspective on that. I can't give precise numbers, not because I have them and won't tell you, but it's difficult to know exactly how much of the changes over the last four years were COVID-driven back in 2020. Right. There's just- A lot changed. Yeah, there's just been a lot of change. But, I would give this perspective: 10 years ago, subscription broadcasters always lost customers. So whenever I talk to people, and they say, "Well, everybody's, you know, disconnecting," what I always react to that by saying, "Well, they always have." If a company had 10 million subscribers 10 years ago, 2 million of them left every year. Every year. Wow. True. Now, what they would do is they would promote and add back 2.2 million, and then report that our subscribers grew 2% from 10 to 10.2. Yeah. What was happening is people move, people move within town, they move states. They disconnect, because one company had a promotion where they offer three months free, and I switch over to them, and I use them for a year, and then I switch back. Yeah. Now, a lot of people on this call may not do that, but some do, right? To save money. So anyway, they would lose on average 2-2.5 million customers a year, and then add them all back. Each one of those customers in the United States was taking about 2.5 of our products, because people don't have one TV in their house, not in the U.S. anyway. Right. So again, you do the math on this. This is... You know, this is 6 million units a year just from the new connects. Now, you have on top of that another maybe 1 million or 2 million of just maintenance. Yeah. The beauty of remotes, and I've said this for many years, we love dogs and children, but not for the same reason other people do. Yeah. Dogs like to chew remotes. Children like to take them, 'cause Daddy uses it a lot, and take it in the other room and stuff it under the sofa. You come home, it's not there. You call up, and you get a new one. So, then there's beer, there's teams losing. Remotes are thrown. Remotes live a hard life. Yeah. So, it's the most used device in the home, right? You never touch your set-top box or your television. You touch that, that controller. Yeah. So anyway, there's a maintenance business there, too. I don't think that's significantly changed. Mm. It's probably come down a little because the subs have, but it's probably not that different than it was before. Remotes still get abused. They get the stuff spilled on them, dogs and kids, et cetera. There's a maintenance business. The new connects still are occurring. Everybody has this thesis that everybody's just leaving. What is happening is more people are leaving than are signing up, so the new connects are dramatically down. So that business, over the last four years, has shrunk by more than half. Huh. Most of the sales downdraft in our company has come from that. Now, TV is a totally different story. Yeah. TV, we saw a boom in it for the COVID year. Huh. Again, I don't have data on this, but it makes just logical sense. When people were trapped at home. Sure ... what did they spend their money on? Yeah. They bought the nicest, biggest TV they could find. Right ... because they wanted to watch more... They gamed more, they watched more- Yeah ... television. Movies. They were telling their employer they were working from home, but it's funny how all the services saw a big boom during that time, the entertainment services. Yeah. So anyway, TVs boomed. I would say the last year, they've been hurt not just by that boom, right, and the aftereffect, but- The pull forward, yeah ... the economy. Mm. Most of the people on this call are wealthy, so this hasn't affected them as much, but a middle-class household that's suffering through 10% inflation- Yeah ... probably is spending a little less money on discretionary items than they would have four years before that, right? Yeah. But what we know is these things all change. I'm not making any political statements here. What I will make is a business statement, that that will change, right? And TVs are... If you look at TVs since 1947, they average a 4% growth per year. Mm. Some years they'll grow 10% or 12%, some years they'll shrink 10%. Last year they shrank. Yeah. So that hurt our home entertainment business, but- Yeah ... I don't, I see that as temporal. Right. But the TV is the future of the home. People are going to be able to buy TVs, they can now, where they can enjoy all of their live broadcast sports, linear TV, all the apps, Netflix, Prime, Hulu, Disney Plus, whatever your favorite apps are, all in one easy-to-use interface. If you don't believe me, look at all the major companies that have invested here. Google, Amazon, Comcast, and Charter are now in it. TiVo, Roku. I mean, there's a lot, there's been a rush because they all know that that big TV in your house, and the network of those TVs in your house, are gonna be used forever. People wanna entertain themselves on high big screens, high refresh rate, deeper blacks, brighter brights. Right. They don't wanna watch the Super Bowl on their iPhone. Yeah. So, anyway— Replacement, for sure. Yeah, it is, and it suffered through a bad year last year. Yeah. That won't last. TVs will grow again. Subscription's back, though. Linear- Linear- Subscription broadcasting, though, that one will be tougher. Yeah, linear- We've shrunk to a point where I think the diminishment of that business will slow. It mathematically will have to, right? Because it's shrunk to a point where it can't diminish at the pace that it has, in dollars, indefinitely, lest it be less than zero. Yeah. We're starting to see a leveling with some of our customers. Yeah. They're, they're more at maintenance mode. They probably aren't going to go back to where they were five years ago, but they're also not gonna go to zero. Yeah. So when we see that leveling, and we couple that with the growth that we're working hard and achieving... Again, the 30-plus projects that have $80 million of annualized revenue, I also announced on our last conference call that there's hundreds of millions that are in our hopper, that are in either qualification or quote, which means they're in our system. We're talking to interested customers. Will we win all of that business? The answer is probably not, but our win rate is pretty good. When we get to quote, it's usually two-thirds of them, we win. Yeah. So, you know, $a few hundred million in the hopper will mean a significant amount of wins- Yeah ... over the next year. Will they affect 2024? Maybe, but they clearly will affect 2025, 2026. So anyway, we, we have big opportunity in front of us. We've outlined some in this presentation. Yeah. We have a lot of leads and a lot of better than leads. We have interested parties on the other side talking to us about either us building a new product for them or replacing a current one with a better solution. Sure. You know, we feel very positively about how the market will develop for us in the next 36 months. Outstanding. That was a really great. Yeah ... conversation and presentation, Paul. It's always a nice pleasure to talk to you. I think we're just about out of time, but it's great to see you. Yeah. Yeah, thanks, thanks so much for joining us today. Thank you. Thank Thank you to Needham and you, Ryan. Thank you very much, Paul. Okay, bye.