Great Cross-Post from the UBNT board

Investment Analysis Clubs Saul’s Investing Discussions
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This was posted by jbonefish, in a discussion about how Pera seemed in a fog on the conference call, and is reposted with his permission.
Saul

"This is the final exchange / question in the call:

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division
So maybe just last one for me. I was hoping you could update us on how you’re thinking about the buyback, which expires in a few months. Do you plan to use what’s remaining here? Or should we expect you to let this expire at the end of the term? I think there’s $60 million left on it.

Robert J. Pera - Founder, Chairman and Chief Executive Officer
No comments there. I think if we get to a point where we feel it’s a good investment for the company, we’ll exercise that option. But other than that, I don’t have comments on that.

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division
I mean, Robert, the stock’s down pretty materially last year. It’s underperforming the market again pretty materially. Here, you’ve got a pretty healthy cash position. The board’s given you the authorization to use the buyback. Of the $75 million, I think you’ve only used $15 million. Any reason that you wouldn’t look to be more aggressive, if you think the business could triple over the next couple of years? I would think this would be a tremendous return on your money. How come, by your actions, you’re not thinking the same way?

Robert J. Pera - Founder, Chairman and Chief Executive Officer
Yes, you’re making some good points. Should we do it? What do you think?

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division
Well, if you believe what you’re telling us, yes. I think you should.

Robert J. Pera - Founder, Chairman and Chief Executive Officer
Okay. I’ll take it into account.

I have listened to the Amazon calls and they are pretty sterilized also. I actually don’t mind the information given / not given - it’s more the communication and knowledge. For instance, Pera says he can’t forecast quarter to quarter and he is concentrating on macro trends and new products … OK, totally agree with the approach. However (suggestions of) reasons for light revenue were given and he consistently deferred to follow up with Investor Relations for answers even though the IR lady was right there on the phone.

Pera basically said two things on this call (summarized):

1 - He is totally focused on his vision for the company and has changed his stance on profitability. He will invest everything he needs to invest to acheive his vision as soon as possible.

2 - He has no idea what’s happening at an operational level. He stated flat out that he wasn’t the one qualified to talk about what happened this quarter or what would happen next quarter with regard to distributors ordering, building or flushing inventory, stock outages from the west coast port situation, etc. He deferred all of those questions to IR.

This company desperately needs the ‘Tim Cook’ to Pera’s ‘Steve Jobs’. If that weren’t obvious before, it is glaringly obvious with flashing lights all over it now."

If you are reading this on our board, and are still invested in this company, I think it’s really worthwhile thinking about whether there aren’t better places for your money.
Saul

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Saul,

Good comments above. I listened to the last several conference calls. Pera will simply not talk about quarter to quarter at this point. He’s gone from talking about European and Mexican headwinds several calls ago to absolutely nothing business oriented. Ask a question about products and it is a different story. He’ll go on for quite some time.

This all sounds horrible doesn’t it? The analysts follow up questions to Pera’s responses about business activity quarter over quarter is downright comical at times. It is quite funny to see them struggle over having no idea what numbers to put in their spreadsheet models.

Now, I’m a bit of a contrarian at heart which is certainly not the investing style of this board I realize. But follow me here.

Pera is not interested in becoming a CEO that panders to Wall Street. He readily admits their business model gives them poor visibility to the next quarter. He is only interested in creating a hugely successful company via high quality products at unheard of prices.

The passage about stock buy backs (which I’ll get to in a second) was nothing compared to his flippant answers regarding ForEx effects and how they developed their next quarter’s guidance.

If I’m a betting man, we’ll see Pera buying back stock in spades at these levels. He was drifting at the end of the call like the kid too smart for the rest in school. I took his answer to be:
“Is that what you want me to do? Buy back some stock? Fine. I’ll be laughing to the bank.”

You either believe in Pera, their products and his business model or you do not. But keep in mind his message and their market opportunity. He has no interest in competing with the Cisco’s of the world who cater to the 5-star Ritz Carlton’s with incredibly high budgets. He wants the 1-star through 4-star businesses that are far more prevalent worldwide.

UBNT continues to pile on cash to their balance sheet. I hold my small position because Pera is different and has a different philosophy. There is a good risk/reward scenario that we will be surprised in my opinion and not much chance of further downward pressure as Wall Street hates this company.

I reserve the right to be totally wrong about all of the above, but that is where a small portion of my money is.

Take care,
A.J.

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Hi again AJ, I take a different view, as you know. I think a CEO, by definition, SHOULD know what’s going on with his company. Especially when their earnings have been flat for seven quarters with no growth. You think he’s figuring out wonderful things but keeping them up his sleeve. I think he spends all his time and energy on his basketball team and is bored by Ubiquiti.

Just a difference of opinion.

Saul

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Saul,

Agreed. I always want to hear the other side of the argument as well and certainly take no offense to a difference in opinion.

He may not care about making more money as he is, I’m sure, already rich beyond what many could imagine. He has his money where his mouth is in equity though.

Time will tell. Good or bad, I’ll be following an interesting story play out.

Take care,
A.J.

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Hello,

Pera basically said two things on this call (summarized):

1 - He is totally focused on his vision for the company and has changed his stance on profitability. He will invest everything he needs to invest to acheive his vision as soon as possible.

2 - He has no idea what’s happening at an operational level. He stated flat out that he wasn’t the one qualified to talk about what happened this quarter or what would happen next quarter with regard to distributors ordering, building or flushing inventory, stock outages from the west coast port situation, etc. He deferred all of those questions to IR.

I do not believe these are accurate representations of what was communicated during the call. As to profitability-Pera was clear that while he was willing to increase R & D to support his vision (even to the extent of having no upper limit) it was within the context of “And I’m willing to spend in – unlimited, our R&D hedge is unlimited, provided we spend it on the right resources and with the same efficiency we’re used to in our R&D. And as long as we can do that, I am aggressively looking at ways to accelerate the vision. And so if you look at our R&D today, a very small portion of it is supporting shipping revenue products. Most of it is dedicated to very ambitious, entirely new undertakings that the public doesn’t know about yet. And so I hope this R&D investment will have similar returns to our R&D investments to-date in the company. What was the next question?”

In my opinion, it does not sound like Pera has given up on profitability. As far as not knowing what is happening on an operational level, again here is Pera quoted directly from the call:
“Thanks, Pierre. So I think the shipping issues, might have affected some North America distributors, where shipments were held up, and we invoice them at the time they’re shipped. And because they didn’t have access to those shipments, it affected their ability to place new orders, because our credit limits have become stricter. So that could explain some of the dropoff in North America. But overall, I know we’re going to get a lot of questions about quarter-to-quarter results and fluctuating – fluctuations in regards to certain regions and certain platforms, enterprise or service provider. So I want to take a step back and just say Ubiquiti’s model is quite unique. We don’t follow the traditional telecom model, which revolves around big sales teams, big sales teams supporting big customers, with qualifications and high visibility. We’re on the opposite end, where we’ve removed the economic barrier to entry for just about anybody to become an operator. So you can say we’ve democratized the service provider industry. And with that, there’s great benefits. We have a very efficient business model that’s highly profitable. One of the drawbacks is, we don’t have the same visibility traditional companies with huge sales teams working with Tier 1 operators would have. So it’s very hard for me to look at quarter-to-quarter fluctuations, region-to-region fluctuations on very small granularity levels. But I will say we’re focused on products in our model. We believe the best products wins. So we’re intensely focused on R&D and improving our product, our user experience and applying our R&D and business model to new industries. And I think over time, you’ll see positive trends. In terms of a microanalysis, it’s going to be difficult, and that’s just the nature of our business model and our strategy.”

This was the first question on the call and yet analysts asked several more questions trying to get answers on various elements of effects of the shipping strike, currency valuation changes, geographical changes in mix, etc. He did specifically answer a question about flushing-“John Lucia - JMP Securities LLC, Research Division
I had a couple here. So you noted the shipment of backlog was stalled in Q3 due to products that were embargoed on the West Coast. Is some or all that backlog still embargoed on the West Coast? Or has that flushed through at this point?
Robert J. Pera - Founder, Chairman and Chief Executive Officer
I’ve been told it’s flushed through.
John Lucia - JMP Securities LLC, Research Division
Okay. So flushed through in Q4?
Robert J. Pera - Founder, Chairman and Chief Executive Officer
Q4, yes. Correct.”

I will have some other comments about Pera and UBNT later in this thread.

Best regards,

Mike

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Hello A. J.,

I agree with just about everything in your post and especially want to repost this:

You either believe in Pera, their products and his business model or you do not. But keep in mind his message and their market opportunity. He has no interest in competing with the Cisco’s of the world who cater to the 5-star Ritz Carlton’s with incredibly high budgets. He wants the 1-star through 4-star businesses that are far more prevalent worldwide.

Best regards,

Mike

1 Like
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Hello Saul,

Hi again AJ, I take a different view, as you know. I think a CEO, by definition, SHOULD know what’s going on with his company. Especially when their earnings have been flat for seven quarters with no growth. You think he’s figuring out wonderful things but keeping them up his sleeve. I think he spends all his time and energy on his basketball team and is bored by Ubiquiti.

There are opinions here and also potential facts. Certainly, a CEO should know what’s going on with his business. Some have opined that Pera does not, some believe that he does. Saying that his earnings have been flat for seven quarters is not factual. (although it would be close to say that the past quarter’s eps has not grown much from six quarters ago) It is also accurate to state that eps grew sequentially the first three quarters following Q1 of FY14 and has declined the past three quarters. The last sentence about Pera’s time and energy is not only inaccurate but preposterous. He not only displays much energy and excitement talking about his company but made the statement in this last call that he looked for revenues to triple over the next three years in response to a question about where he was trying to take the company. He is investing for growth, but makes it very clear that this growth must be profitable. The increase in R & D the past 6 quarters have cost the company around 6.5 cents per share in the last quarter’s earnings. During the past 6 quarters, with declining earnings the past three quarters, UBNT increased its cash from 280 million to 451 million.
During the past year, UBNT earned better than 35% on shareholders equity. There can be no argument that currency fluctuations have hurt revenues the past year. Pera admits that they have made some errors in introduction of new products. He is sanguine that they are solving those issues and sees growth ahead. I have a small position (less than 1%) which I will hold to force me to follow this company that has much potential. (My opinion) Saul, basketball season will be over for several months very soon. Just kidding,

Mike

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