On UBNT and changes in trading

Investment Analysis Clubs Saul’s Investing Discussions
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Someone wrote recently on the board (sorry, I don’t remember who) that computer trading has added to all these wild swings in price. The computer reads “Revenue misses” or “Earnings miss” and immediately sells vast amounts of stock (or buys on a reverse scenario).

I was thinking that this must account for some of what has recently gone on with Ubiquiti. Put the figures I’m about to give you in the context that this company lost 20% of its market capitalization in a day or two after posting the following results:

Their revenues were $213.5 million. This was UP, not down, and up from $162 million the year before. This was organic gain, not due to an acquisition, and was up 32% from that $162 million. And on the basis of this Ubiquiti lost 20% of its market capitalization.

Well its earnings must have been way down? Actually it made 72 cents. This was UP, not down, and up from 58 cents the year before. This was up 24%, not down anything! And on the basis of this it lost 20% of its market capitalization.

And its gross margins fell from 48% to 44%…ooooh! for one time reasons the CEO enumerated and spelled out clearly. And on the basis of this Ubiquiti lost 20% of its market capitalization.

Well maybe its guidance was terrible? Well its revenue guidance was $210 to $220 million. That’s pretty terrible, right? Well they year before they had $167 million. And on the basis of this it lost 20% of its market capitalization.

Earnings guidance must have been way down then? They guided to 73 to 79 cents. Awful! Let’s see, the year before they had 63 cents. That’s down… Oh no, it’s UP 20.6% at the mid-point and up 25% at the top of the range. And we all know that they put it up as a value that they know they’ll beat. And on the basis of these terrible results, and horrible guidance, Ubiquiti lost 20% of its market capitalization.

Does that make any sense to you? Really?

Just wondering…

Saul

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Good points Saul

Frank

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Does that make any sense to you? Really?

Just wondering…

Those are some of the reasons I pay a lot of attention to dividend distribution in the securities I own. I believe the income derived from securities can be stabilizing. Yes there are stocks that pay dividends than do drop in price sometimes drastically. Many times it can be telegraphed by a drop in the dividend. Sometimes dividends are increased while stocks drop with the market. Sometimes insiders add to holdings when prices drop and dividends are increased.

Paying a dividend or raising a dividend has to be done with real money. It can’t be manipulated by shareholders that are guessing or analysts that expect too much and they miss by a penny or so. The public shareholders ask the questions you asked and some might sell just because others have sold already.

b&w

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Does that make any sense to you? Really?

When such air holes start to appear after a long uptrend in the stock market, it can be indicative that the trend is about to shift.
Is it just Ubiquiti or are similar things happen to other stocks as well?

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Anyone’s thoughts on how this will affect the stock (until it’s resolved in the court)

http://norcalrecord.com/stories/511081584-synopsis-claims-ub…

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Does that make any sense to you? Really?

Well yes if the market was expecting more (of the same) growth which caused the stock to double in a year. Hopefully we will not have the equivalent movements with SHOP today

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Anyone’s thoughts on how this will affect the stock (until it’s resolved in the court)

Hi LakeDaisy,
I responded to this question about the court case a week or so back. Briefly, I don’t think it’s any big deal. Every tech company is suing and getting sued. Here’s what I wrote then:

I’m not a lawyer, but I have a couple of thoughts:

  1. As I read it, they are not wanting UBNT to quit making anything. They just want damages, in other words: “money”. So even if Ubiquiti loses this it doesn’t affect its business, and Ubiquiti has huge amounts of cash on hand with which to pay any judgement.

  2. If Ubiquiti realizes it will lose a court case they’d probably posture a bit to get the settlement down, and then just go ahead and settle for some of that cash.

  3. Proving what the suing company claims would be almost impossible for the suing company unless they have a disgruntled Ubiquiti ex-employee who will testify (maybe they do).

  4. Even so, for a company that licenses their software, it would be hard to prove that they suffered any actual “damages” above the loss of the licensing fee from unauthorized use, and even if they received three times the fee they should have received (triple damages), that’s very, very small potatoes for Ubiquiti.

But who knows, I may have it all wrong.

Saul

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None of it makes any sense at all.

However, when it comes to the market always remember…

it can remain irrational a lot longer than you can remain solvent.

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based on the earlier article, the suit is not about intellectual property. They have chip design software that they are accusing UNBT of using without a license. If found guilty I’d expect UBNT to pay for what they used + perhaps some penalty. If UBNT was illegally using Synposis tools, either unintentional or on purpose, I would of thought they would of already settled up. Weird.

But Synposis does also have some chip IP stuff, so if that’s what the suit is about, it makes more sense

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Does that make any sense to you?

If you buy into the efficient market theory (which I don’t completely, but I think it does have some good elements to it), you are looking at the wrong thing. It’s not the comparison to the prior year or prior quarter that’s important, it’s the comparison to estimates.

EMT roughly says that the price of the stock is a reflection of everything known about the stock. That would include the estimates of current operating results as published by the various analysts that follow the stock. When a piece of information about the stock changes, the price of the stock will change.

In this particular case, two days ago, investors thought they knew what sales and earnings were going to be for the quarter. It didn’t matter whether those estimated figures were up or down or sideways. That was the information incorporated into the stock price. Then when the actual results were made public, that known information changed.

Before the earnings announcement, the market thought the company was on some particular growth curve. Once the announcement was made, it became clear the company was on a different growth curve, specifically one that is a bit lower.

So looking at things through an EMT filter, it makes sense that the stock price went down and went down decisively. The vast majority of the value of a stock is in the earnings of the company well down the road. If it looks at all like that road isn’t going to the previously thought heights, the price will fall.

The question for an investor in UBNT then becomes what to do about this most recent price drop. Is it a buying opportunity? Have the company’s long-term prospects changed significantly? Is this a sign that the company is no longer a good investment? Everyone will have to make their own decisions on that. From what you’ve said about the actual comparisons to previous results, this certainly doesn’t sound like a company that’s failing. It sounds more like a company that might have gotten a bit overheated in price and is now swinging back to (or perhaps past) a more logical value. Then again, I didn’t know UBNT existed until I read the post to which I’m replying. So take my comments about UBNT specifically with large doses of salt. (A grain of salt is simply too little in this case!)

The most important take away from this is that very short term price movements - the movements from minute to minute and day to day - are pretty much irrational. Focus on longer term price movements - the price over many months to several years. That price trend is far more affected by the reality of operating results than investor sentiment.

–Peter

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The complaint filed by Synopsys does fall into my area of expertise. The charges are very serious – they allege that Ubiquiti illegally accessed Synopsys software upwards of 39,000 times using hacked passwords. If true this reflects extremely poorly on Ubiquiti’s business ethics. The complaint seeks $2,500 per violation as statutory damages, apparently counting each of the 39,000 access occurrences as a violation, for a total of nearly $100 million. If the allegations of the complaint are proven that Ubiquiti accessed Synopsys software this many times using hacked passwords, it is certainly not out of the realm of possibilities that Synopsys could recover something approaching the full amount it is seeking. This would seem to be a significant number to Ubiquiti, and I doubt that the lawsuit is going to be resolved by Ubiquiti simply buying the licenses that Synopsys alleges that Ubiquiti should have bought in the first place. The complaint also seeks to have Ubiquiti disgorge its profits attributable to the alleged wrongful conduct. This disgorgement would normally only be allowed if it was not duplicative of damages awarded on some other basis, such as the statutory $2,500/violation amount, so I am not sure this represents a significant additional threat. The only injunction sought appears to be against further wrongful access of the Synopsys software, not against Ubiquiti’s marketing of its own products.

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Does that make any sense to you? Really?

I have no idea about this company. Here are some concerns listed by credit suisse analyst Kulbinder Garcha.

  1. Margins are at peak, GM are at 45% and OM at 33% is more normal. As they pursue growth the margins will continue to be pressured, especially as they ramp up spending in R&D.
  2. synopsys lawsuit, synopsys claims 39,000 times counterfeit keys are used by the company and this could lead to $100M claim vs onshore cash of $40M
  3. the company is without a CFO from April 2015
  4. Last year audit was changed post material weakness in controls

Lastly the multiples (PE) are 3 year high and higher compared to peers. If you apply historical PE of 15 on FY18 EPS (CS estimate) 2.95 they derive target price of $44.

What are your thoughts on these concerns?

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Thanks for posting Rundog999, that gives me a much better perspective of this lawsuit is all about.

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The charges are very serious – they allege that Ubiquiti illegally accessed Synopsys software upwards of 39,000 times using hacked passwords. If true this reflects extremely poorly on Ubiquiti’s business ethics. The complaint seeks $2,500 per violation as statutory damages, apparently counting each of the 39,000 access occurrences as a violation, for a total of nearly $100 million.

Usually for engineering or simulation software of the kind that Synopsis makes, a company buys yearly or perpetual licenses for their internal use. Once the license is bought, the download can happen any number of times. I buy an expensive design software for my company. I pay the software lease annually, but me and others whom I have engaged may end up downloading the software several times. So to seek damages for every download does seem a bit too much.

Ubiquiti has about 500 to 800 employees, so if every employee used a seat of this niche software (impossible), that will still not be 39000 !! It is very unlikely the pricing of this software is per download.

I checked up Synopsis website. The kind of software they are talking about is usually niche engineering software. Niche engineering software is what my own startup is focused on (though not chip design). The usual budgets for this software that even the largest of companies (The Apple, Caterpillar, Boeings of the world) pay rarely exceed a few million dollars. So a claim of 100 million dollars does seem outlandish.

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LakeDaisy and all,

Anyone’s thoughts on how this will affect the stock

I bought UBNT last night while doing an near all-nighter on a project deadline. Today I was asking “What were you thinking?” Or not thinking. I don’t know how this will affect the stock. But that misses the point. My thesis for not being in UBNT was the lack of adult leadership. I was seduced by the new products and the post earnings stock price damage. “Fat pitch”, I thought.

My take is, the engineers used the software maybe 39,000. In an adult company, wouldn’t someone in management know that the software was 1) needed, and 2) being used, and 3) wasn’t licensed (or at least inquire of someone about the license)? Now, maybe this is part of the Valley culture. Hurry, hurry, get the design done, the product out there. Can’t wait for the suits to buy the license. Doesn’t matter anyway… I don’t know what,specifically in this instance, “hack” means. Just a bootleg copy? A real hack of Synopsis? But if UBNT used the software 39,000 times, one would think that it ought (from a management and organizational standpoint) to have been in the engineering toolbox at Ubiquiti.

Whether this affects the stock or not, this situation reinforces my previous reason for not owning UBNT. It is just a mosquito waiting for a windshield because of a lack of internal controls and real management. It is an engineers’ playground wherein the do neat stuff but no one is minding the store. A place where stuff happens. Just my feeling, my observation from afar and without any experience in how things work in San Jose.

Tonight when the market opens, if I can stay awake that long, I’m selling.

KC, who did BTW, make the post on robo trading and the volatility.

KC

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Lastly the multiples (PE) are 3 year high and higher compared to peers. If you apply historical PE of 15 on FY18 EPS (CS estimate) 2.95 they derive target price of $44.

Their piers probably aren’t growing nearly as fast.

There has been only one quarter since December, 2011 during which the high P/E hasn’t reached 15 (see the table below). Alternatively, there have been 7 quarters during which the low P/E hasn’t gone down to 15. Since March, 2013, there have been only 3 quarters during which the P/E didn’t hit at least 17. At $50, the P/E is 17.3 based upon next quarter’s guidance.

Considering this, we can see the price rise or fall a lot still and be within a normal range. I’d say that the market volatility should give us some chances to buy at decent value points as long as Pera and company keep growing the business. If we get a market correction, Ubiquiti could easily drop 20%. But after looking at the numbers and listening to the conference call, I give Pera a lot of credit for being focused on long term success of the business.

I’ll be buying more shares if we get down to $40 with the comfort of knowing that, given the price ranges and earnings growth, we’ll have a good chance of seeing prices back up in the upper $50s or $60s not too far off in the future.

DJ


Month	EPS	AEPS	TTM EPS	QoQ Gr	Hi	Lo	Close	P/E	P/E Hi	P/E Lo	1Yr.Peg
Mar-11		0.13									
Jun-11		0.18									
Sep-11		0.23									
Dec-11		0.27	0.81		$23.04	$16.25	$18.23	22.5	28.4	20.1	
Mar-12		0.30	0.98	130.8%	$33.97	$17.33	$31.63	32.3	34.7	17.7	
Jun-12		0.30	1.10	66.7%	$35.99	$11.19	$14.25	13.0	32.7	10.2	
Sep-12		0.15	1.02	-34.8%	$15.26	$7.80	$11.90	11.7	15.0	7.6	
Dec-12		0.20	0.95	-25.9%	$13.15	$9.97	$12.14	12.8	13.8	10.5	0.74
Mar-13		0.24	0.89	-20.0%	$16.66	$11.39	$13.72	15.4	18.7	12.8	-1.68
Jun-13		0.33	0.92	10.0%	$20.89	$12.81	$17.54	19.1	22.7	13.9	-1.17
Sep-13		0.46	1.23	206.7%	$37.40	$17.17	$33.59	27.3	30.4	14.0	1.33
Dec-13		0.48	1.51	140.0%	$46.88	$33.61	$45.96	30.4	31.0	22.3	0.52
Mar-14	0.50	0.50	1.77	108.3%	$56.85	$37.50	$45.45	25.7	32.1	21.2	0.26
Jun-14	0.55	0.56	2.00	69.7%	$47.92	$30.50	$45.19	22.6	24.0	15.3	0.19
Sep-14	0.42	0.48	2.02	4.3%	$50.00	$36.98	$37.53	18.6	24.8	18.3	0.29
Dec-14	0.52	0.53	2.07	10.4%	$37.92	$26.98	$29.64	14.3	18.3	13.0	0.39
Mar-15	0.46	0.47	2.04	-6.0%	$32.97	$25.67	$29.55	14.5	16.2	12.6	0.95
Jun-15	0.05	0.50	1.98	-10.7%	$34.28	$25.50	$31.31	15.8	17.3	12.9	-15.81
Sep-15	0.61	0.51	2.01	-4.2%	$37.10	$28.50	$33.89	16.9	18.5	14.2	-34.06
Dec-15	0.57	0.58	2.06	5.2%	$35.96	$28.69	$31.69	15.4	17.5	13.9	-31.84
Mar-16	0.62	0.63	2.22	34.0%	$35.00	$25.75	$33.27	15.0	15.8	11.6	1.70
Jun-16	0.69	0.69	2.41	38.0%	$41.21	$32.06	$38.66	16.0	17.1	13.3	0.74
Jun-16	0.69	0.69	2.59	35.3%	$41.21	$32.06	$38.66	14.9	15.9	12.4	0.52
Sep-16	0.86	0.72	2.73	32.5%	$54.73	$37.06	$53.50	19.6	20.0	13.6	0.60
Dec-16	0.72	0.72	2.82	27.0%	$59.43	$48.25	$57.80	20.5	21.1	17.1	0.76
===============================================================================================
Mar-17	0.75*	0.76*	2.89	19.9%	$60.91	$33.52	$50.00	__17.3	21.1**	11.6**__	0.87
*guidance midpoint
**based upon highs and lows since December, 2013
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“The usual budgets for this software that even the largest of companies (The Apple, Caterpillar, Boeings of the world) pay rarely exceed a few million dollars. So a claim of 100 million dollars does seem outlandish.”

The complaint is not at all clear how Synopsys came up with 39,000 or if it intends to (much less legally can) claim statutory damages on the basis of multiplying 39,000 times $2,500. The complaint just leaves the allegations hanging, letting the reader come to his or her own conclusion. You may be right that $100 million would be outlandish in any normal case.

However, what really strikes me as outlandish is the notion that Ubiquiti’s employees would use hacked passwords to access the software, particularly if a license was available as cheaply as you say. Synopsys’s attorneys are highly reputable, and I seriously doubt they would file a complaint making such an allegation without a reasonable basis. After all, it is hard to see how it could be factually disputed whether Ubiquiti had a license or accessed the software without a license. This is not the kind of thing that a reputable company does. This gives me more pause about Ubiquiti than the amount of damages possibly being sought by Synopsis.

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However, what really strikes me as outlandish is the notion that Ubiquiti’s employees would use hacked passwords to access the software, particularly if a license was available as cheaply as you say.

I never said license was available cheaply. But 100 million for any engineering, design or simulation software is outlandish by every stretch - that much I can say with the fullest conviction. (I have seen closely few enterprise level agreements for the entire suite of software)

However, what really strikes me as outlandish is the notion that Ubiquiti’s employees would use hacked passwords to access the software, particularly if a license was available as cheaply as you say.

Outlandish yes, but I do not believe the company did it willingly. It is very likely that someone just put instructions on how to use or download the software on sharepoint. A typical engineer would never bother to check the validity of the license key and it probably just got overlooked.

This is not the kind of thing that a reputable company does.
This is one of the few companies where GAAP and non-GAAP earnings are the same or close to same quarter over quarter, because the management does not reward itself at the cost of other shareholders by insane stock based compensation. Most other very reputable professionally companies run by mature adults in silicon valley do that. I do not know about others, but for me that is more important. I am more than willing to give them the benefit of doubt.

Of greater concern to me is they do not have recurring revenue. Not that it is a necessity - but the revenues for this company are prone to be lumpy and will be quarters where price takes a hit. In the end what is more important is this company run by a rebel who does not go by accepted norms of wall street - routinely gets out great products at fraction of a price of their more professional and larger peers, and continues to have a fanatical fan following for its wares. As long as they stick to that basics they would eventually do fine.

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that much I can say with the fullest conviction.

Outside of arbitration, in a court case scenario $100M is very much in the ball park. You are confusing what you pay when you are buying a license vs what damages are. They are different.

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“It is very likely that someone just put instructions on how to use or download the software on sharepoint. A typical engineer would never bother to check the validity of the license key and it probably just got overlooked.”

Hmmm. Engineers charged with designing products that require access to software such as offered by Synopsys, yet have no idea what software, if any, Ubiquiti has a license to? So, they just go avail themselves of Synopsys software on their own, and no one within Ubiquiti supervises, corrects them, or controls what they do? All I can say is good luck with that one in front of a judge or jury. If Ubiquiti had taken out a license from anyone to provide its engineers with this or a similar design capability, I cannot imagine the engineers were not told so and what and how to access it. As I said, I don’t think this speaks well of Ubiquiti.

Has anyone seen any press release or public statement by Ubiquiti responding to the lawsuit?

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