Ubiquiti Earnings Preview

Ubiquiti is set to announce fiscal Q1 2015 earnings on November 6th after market close. Here are my notes as a refresher of where things stand coming into earnings.

  • UBNT had a big counterfeiting problem in 2013, and management has said they lost a lot of sales due to customer uncertainty about the authenticity of product. 2014 showed an excellent rebound, but it’s hard to know if 2014 figures reflected, in part, pent-up demand from deferred 2013 sales. 2015 figures should begin to give us insight into the company’s actual growth trajectory. Comps will almost certainly be tougher this year.

  • Company’s guidance for the quarter:

  • Revenue of $156-$161 million
  • Non-GAAP Diluted EPS of $0.52-$0.54
  • Management says revenue guidance already reflects adjustments due to geopolitical developments.

  • Ubiquiti has opened up a new prototyping facility in China, which management believes will help get products to market faster. In the near term, they expect a small reduction in gross margins while the facility ramps up.

  • The company launched a number of new products in Q4 2014 that started being sold-in to distributors in Q1 2015: I believe the new EdgeSwitch enterprise switches in the Service Provider segment, and the new VOIP phones and software-defined networking products in the Enterprise Technology segment. Part of the build-up in inventory — about $10-$12 million according to management — was due to the launch of these new products, and management has said that’s already off their books. The market was not happy with decision to build up inventory, but early signs are that it was a good move.

  • The company has authorized up to $75 million of share repurchases, but had not actually repurchased any shares as of yet. I’ll be curious to see if they repurchased any during the market correction. I assume the bulk of repurchases will be funded from debt, as the majority of the company’s cash is overseas.

  • The company began issuing an annual dividend in fiscal 2015. They did a special dividend back in 2012 as well, so this isn’t the first time, but it will now be a regular occurrence going forward. It’s worth noting that this is being paid out of U.S. cash flow, so it’s likely this dividend will remain relatively small compared to the company’s total cash balance (at $0.17 per share, this fiscal 2015 dividend will be around $15 million).

  • Ubiquiti has seen tremendous success with its disruptive, capital-light business model that leverages its community to drive significant product design, sales, and support in its traditional WISP business (“Service Provider Technology” segment). A big part of the future growth story is repeating this success in adjacent product categories, so it’ll be interesting to see how the Enterprise Technology segment is doing, where these adjacent product categories tend to live. If Ubiquiti can replicate its success in these areas, it will be a hugely disruptive force with tremendous potential. (As a side-note, there would also likely be more domestic demand for these products, and more domestic cash flow would probably translate to reduced reliance on debt and better future dividend growth.) This will be the first quarter for the new VOIP phones and software-defined network products.

  • The company recently announced a new distribution agreements with a major tech distributor in China (ECS) and the largest tech distributor in India (Redington). This is great news, as the Asia-Pacific region accounted for only 13% of fiscal 2014 revenue. We may not see the fruit of this in Q1, but it represents a great long-term opportunity going forward.

Neil
Long UBNT

24 Likes