Investor's Business Daily
Switch To HDTV Drives Sales Of Remotes

Marilyn Alva

Your sister bought one a couple of years ago. Last week, it was your best friend.
Now your interior decorator insists you buy one to put in a groove in the freshly painted lime-green wall in your living room.

 Suddenly, it seems, everyone you know has a flat-panel TV. Not only is the quality better than it was a few years ago, but the prices also have dropped sharply.

"It's getting to a point 20hat mass retailers are merchandising dozens in their stores," said one early adopter, Paul Arling.

Arling isn't just an average, tuned-in consumer who has a passing interest in what he calls "the revolution in flat-panel TVs."

He heads up Universal Electronics, which sells remote controls for flat-panel TVs and other home entertainment devices. The firm also sells remotes for set-top boxes from cable and satellite operators.

The way he sees it, the more flat-panel TVs that fly off the shelves, the more remote controls Universal (NasdaqGS:UEIC - News) will sell. The Cypress, Calif.-based company's revenue has grown nearly 25% annually on average the last two years, while profit has jumped nearly 30% on average over the same time.

First-quarter sales rose 22% from last year, to $66 million. Earnings more than doubled, to 31 cents a share.

Fast Growth

"Certainly at the core of it is the flat-panel revolution," Arling said.

Industry researchers estimate that sales of flat-panel TVs are growing nearly 40% annually. They figure about 100 million units will be sold worldwide by 2009, up from just 13 million in 2004. Congress has set the switch to digital TV for April 7, 2009.

But it's not only flat-panel TVs driving growth at Universal. Its One for All and other high-end remotes can be used for a whole gamut of entertainment devices in the home.

So it's well-positioned to benefit from what analysts call the "digitization of the living room" and the clutter it generates from multiple remotes.

"The options keep getting more interesting, but the control environment keeps getting worse," Arling said. "Our technology solution brings order to that chaos in the living room. Once you bring in ours, the others can go in the trash or cabinet."

Universal's remotes can operate your TV, DVD, digital video recorder, home theater system and more.

The firm holds a number of patents on remote functions and a huge database of software codes for audio and visual devices that can be linked to remotes.

"They have the most comprehensive library of digital codes in the marketplace," said analyst Scot Ciccarelli of RBC Capital Markets. Universal even licenses its library and sells chip sets to some of its rivals.

Rivals include privately owned Universal Remote Control and Japan-based SMK.

Most of Universal Electronics' revenue comes from business customers such as U.S. cable operators, satellite TV service providers, set-top TV makers and TV manufacturers. It has about a 75% share of the U.S. remote-control cable market.

Its top two customers -- cable company Comcast (NasdaqGS:CMCSA - News) and top U.S. satellite firm DirecTV (NYSE:DTV - News) -- account for about 30% of revenue.

"The two current growth drivers for Universal's core business are chips that go into remotes for flat-panel TVs as well as the upgrades at cable and satellite companies to digital (from analog)," said John Bright, an analyst at Avondale Partners.

Analyst Steven Frankel of Canaccord Adams says Comcast is an especially solid customer. Comcast is only halfway through its conversion from analog to digital cable, he says. What's more, "still a small percentage" of its installed base have high-end services such as HDTV and digital video recorders, Frankel said.

Universal sells TV makers chips and remotes. One of its newest TV customers, Vizio, touts quality flat-screen TVs at value prices. Panasonic, Pioneer and Mitsubishi also buy from Universal.

Cable and satellite business is fueled by the growing number of subscribers who are adding HDTV service to go with their new HD flat-panel TVs, analysts say. New set-top boxes are needed to handle the higher signals, and remotes are typically bundled with them.

The number of U.S. HDTV cable subscribers is growing more than 50% a year, according to industry sources.

Meanwhile, TV broadcasters are adding more HD content, which gives consumers more reason to buy a HD flat-panel TV.

High-End Model

Universal's high-end Nevo remote goes hand in hand with digital video recorders such as TiVos and other cutting-edge audio and visual products such as home theater systems. Home automation systems such as lights and air conditioning can also make use of Universal's high-end remotes.

On the retail side, which makes up some 25% of revenue, Universal is the leading provider of One for All-branded remotes in Europe. In its smaller U.S. retail business, it licenses technology and its One for All brand name to CompuTime, which sells directly to major U.S. retailers such as Wal-Mart (NYSE:WMT - News).

Universal also licenses technology that Logitech (NasdaqGS:LOGI - News) embeds in its Harmony remotes. And it sells RadioShack (NYSE:RSH - News) private-label remotes.

The company intends to expand business of all types in Asia, where it now has only a small presence. And with $78 million in extra cash sitting around, it's looking to acquire a business that would expand its product line or geographic reach.

Most of Universal's growth drivers are in "the early innings," Frankel said. Analysts seem to concur. Those polled by Thomson Financial estimate that this year's earnings will climb 40% to $1.32 a share and go up another 17% next year.