UBNT 10K + Q4 14 notes & thoughts

Hi all,

I have been slowly working on a new project. My goal this year is to read the 10-K’s for all businesses where I have invested at least 1% or more of my investable capital. My project is inspired by David Kretzmann’s (TMFPencils) 10K write-ups for his Analyst Development Program projects. Here’s a link to David’s recent 10-K writeup for Rocket Fuel Inc:

I posted about AMBA about 12 hours ago. Writing about AMBA required a lot of time & effort as I hadn’t followed the story closely. You can see those notes here:

Below, I have notes on UBNT, which was easier to writeup as I have been following it rather closely. Its closer to what my work expertise as well … I am sharing these with the Foolish community for comments, thoughts, and feedback. Hopefully, you will find these notes useful.


Company, industry, sector

Industry: Communications equipments
Sector: Technology

Business overview

UBNT is a wireless networking company that develops high-performance networking technology for service providers and enterprises. It focuses on (a) network service providers, where UBNT provides carrier-grade fixed wireless broadband, wireless backhaul systems and routing, and (b) enterprise customers, where UBNT provides WLAN infrastructure, video surveillance, M2M communication platforms.

The service provider technologies from UBNT are aimed at providing broadband access to undeserved or under penetrated markets in developing and developed countries. The following from the 10-K best describes this space:
“In unconnected emerging markets, the lack of an established network infrastructure and the high initial deployment costs associated with traditional wired network infrastructure build-outs have encouraged adoption of wireless networking infrastructure. In “under-connected” markets, bandwidth demand exceeds either the available capacity from existing infrastructure or the affordable supply of new infrastructure, resulting in an attractive market opportunity for wireless systems to bolster connectivity.”
This is IMO a very good future thinking goal. Its pretty reasonable to assume that large swathes of the developing world are NOT going to go the wired route but will get connected through wireless networking technologies.

Company strengths and advantages

The company has a unique business model where it cultivates an active community (“fan base”) consisting of service providers, distributors, value added resellers, systems integrators and corporate information technology (“IT”) professionals. This community enables UBNT to have

  • Rapid customer and community driven product development
  • Community-driven viral marketing sans a traditional sales force
  • A large, cost efficient, highly-scalable, self-sustaining mechanism for rapid product support and dissemination of information
    By reducing the cost of development, sales, marketing and support, UBNT eliminates traditional business model inefficiencies and offers innovative solutions with disruptive price performance characteristics.

This is a big differentiator and feedback loop through the “community” serves to design better products, reduce time-to-market, and provide a scalable sales/support model. Like all network effects, once the network is large enough its very very hard to replicate this model and/or disrupt the business. Given UBNT is now delivering substantial, rapidly growing sales, with little to none marketing/sales support, I ‘m inclined to believe that this network is well beyond the initial phases where disruptive forces can displace them. Right now, it would appear that UBNT would fail only if there are serious execution issues (e.g., growing pains where UBNT doesn’t respond efficiently to the feedback of its community).

Related to the above point, UBNT focuses on meeting the price/performance sweet spot. Price sensitive markets will not use traditional broadband solutions because of cost issues. Here’s a quote from the 10-K that nicely sums up this point:
" However, these existing solutions based upon wired, satellite or cellular technologies, often fail to meet the price-performance requirements of fixed wireless networking in emerging markets, rural markets, or price-sensitive markets, which in turn has led to low penetration of wireless broadband access and large populations of unaddressed users in these areas. Within the enterprise, existing WLAN deployments are often relatively complex and costly, providing customers with a large number of non-critical features and functionalities at a high cost. Given the growth in Internet connected devices, and the consumer’s desire for constant connectivity, there exists growing demand for WLAN solutions that provide critical features at significantly lower cost than existing solutions."

UBNT’s strategy is to:

  1. continue to deliver technologically superior wireless networking at a price advantage
  2. leverage current technology and business model in adjacent markets (e.g., M2M communications, video surveillance, licensed microwave wireless backhaul)
  3. grow the UBNT “community”

Technology Solutions

Service provider and carrier solutions include:

  1. Base Station/Backhaul/Customer Premise Equipment (“CPE”)/Bridge—airMAX
  2. Network Routing Platform—EdgeMAX
  3. Point-to-point Wireless Backhaul—airFiber

Enterprise solutions include:
4) Enterprise WLAN—UniFi
5) Video Surveillance—UniFi Video
6) Machine-To-Machine Communication—mFi


UBNT’s 10K has a nice paragraph on the key competitors:
" In the integrated radio market, our competitors include Cambium Networks, TP-Link and Mikrotîkls. In the embedded radio market, our competitors include Mikrotîkls and Senao Networks. In the backhaul market, our competitors include Cambium Networks, Ceragon Networks, DragonWave and Mikrotîkls. In the CPE market, our competitors include Cambium Networks, Mikrotîkls, Ruckus Wireless and TP-LINK Technologies. In the antenna market, we primarily compete with PCTEL, ARC, ITELITE and Radio Waves. In the enterprise WLAN market, we primarily compete with Aerohive Networks, Aruba Networks, Ruckus Wireless and Cisco. In the video surveillance market, we primarily compete with Axis Communications, Mobotix and Vivotek. In the microwave backhaul market, we primarily compete with Cambium Networks, DragonWave, SAF Tehnika and Trango. In the machine-to-machine communications market, we primarily compete with AlertMe.com, EnergyHub and Motorola. We expect increased competition from other established and emerging companies if our market continues to develop and expand. As we enter new markets, we expect to face competition from incumbent and new market participants."


  1. Ubiquiti relies on a limited number of suppliers for key components. Switching costs can be high if need arises. E.g.,
    " For example, we currently rely upon Qualcomm Atheros as a single-source supplier of
    certain components for some of our products, and a disruption in the supply of those components would significantly disrupt our business.”

  2. Ubiquiti has a significant chunk of sales from developing economies and some of these areas have geo-political risks associated with them. There’s also exchange rate risks.

  3. Counterfeit products are also a risk. This has been a problem in the past.

  4. There’s some regulation risk as well. Ubiquity uses “unlicensed radio frequency”, but these radio frequencies could come under government regulation.

Other observations

  • About 65% of the company is owned by CEO & founder Pera.

Thoughts on Q4 2014

Q4 2014 was impressive.

  • Revenues of $156.0 million, up 54% year-over-year
  • GAAP operating profit of $52.8 million, up 59% year-over-year
  • GAAP net income of $49.4 million, up 71% year-over-year
  • GAAP diluted EPS of $0.55 and non-GAAP diluted EPS of $0.56, with non-GAAP up 70% year-over-year
  • Average days sales outstanding (“DSO”) of 32 days

Ubiquiti launched a bunch of new products (including some on those so called “adjacent” markets). Key developments:

  • Launched UniFi Video, a new line of video surveillance camera control software and a new generation of cameras - the UVC, UVC-Dome, and UVC-Pro models - to join the Unifi family of products.
  • Launched EdgeSwitch™, the first switch of its price-to-performance class, designed to offer superior performance and capability for a fraction of the cost of a traditional enterprise switch.
  • Launched UniFi VoIP, a new VoIP enterprise smart phone technology to provide price/performance disruptive telephony solutions for business, schools, hotels, and more.
  • Extended the UniFi platform into a broad Software Defined Networking platform encompassing routing, switching, video security, VoIP, wireless and much more.

The CEO/CFO prepared remarks available from their IR webpages are really nice. Its worthwhile reading them.

Additionally, they have leased a manufacturing space, where they intend to start prototyping to bring new products quickly into the market. Eventually, they may turn this into a full fledged manufacturing operation. The manufacturing space is in China. They noted that this investment will eat into margins a bit in the short-term but should be great in the long-term.

Notes on Valuation and Concluding Thoughts

Based on Q4 2014, we have the following TTM numbers (dollar figures in Millions, except for per share data):

Revenue = $572.47
CFO = $195.95
EPS = $1.98 (non-GAAP)

Stock price as of Friday close was $38.55.
PE (TTM) = 19.5
PS (TTM) = 6
P/CFO (TTM) = 17.7

For Q1 15, UBNT has guided for revenue b/w $156 and $161M, with non-GAAP EPS b/w $0.52 and $0.54. Let’s take the mid-points, and assume that revenue would be $158M and EPS would be $0.53. This represents about 22% revenue growth over Q1 14 ($129M) and about 17.8% earnings growth over Q1 14 ($0.45). That’s pretty good growth rates and we are not paying that much for the growth.

UBNT is a company with a great purpose - that of connecting those who not get connected via wired networking infrastructure. I like businesses that are purpose driven because purpose brings in focus. The purpose, combined with the highly scalable “community” driven viral sales + support allows Ubiquiti to not spend a fortune on sales & marketing. The community has a strong network effect to it — today’s happy customers talk about the goods and bring in more customers and more people to support the community, and as the community grows Ubiquiti taps into their needs and demands to deliver the next generation of improved products. Once such network effects take hold, its very very difficult to disrupt the model from the outside. I also like the fact that Pera has his own wealth tied to the success of Ubiquiti.

The market is probably looking at the tensions in Eastern Europe and Middle East and thinking of slowdown in sales. The Q1 forecast from the company did note that their projections have been tempered by the ongoing geo-political tensions. However, there’s no denying the long runway for growth here (India, China, all of South East Asia, much of Africa can benefit from use of Ubiquiti’s technology). In a market where almost everything looks expensive, Ubiquiti is not and its a solid, well-run, purpose-driven, founder/CEO/majority owner led business.

I think I will buy some more shares in Ubiquiti!


Thank you Anirban!

I really appreciate your work on this project and find it quite useful for my investing research. Good stuff here.

Please forgive my ignorance, but there were two financial metrics that I did not understand. These were CFO = $195.95 and P/CFO (TTM) = 17.7. The part I am having trouble with is the CFO. Obviously not Chief Financial Officer, so I am stumped. If you could help enlighten this poor soul I would be grateful.

I hope that we have many more investments in common as I would love to see this type of research for all of the companies that I am invested in. Thank you again for your outstanding efforts!

Long Anirban

I recently purchase my first shares at $38.01. I’m happy with that price and may purchase more, especially if it goes down some more.

Thanks for the write up. You did a great job.



I really appreciate that you are sharing these as you write them.

Thank you,

Hi Bill,

CFO is cash flow from operations. Some people look at it as well. In general, it’s best to look at these metrics not in isolation but in conjunction with how they behaved in the past. I have a table where I look at changes to CFO, PE etc over the past several quarters. I didn’t post that table but I can if its of any interest.


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Thanks for the explanation. If it isn’t too much trouble, I would love to see the tables that you produced. It all is a lot clearer to me when I can look at things like that. I agree with your assessment, they need to be looked at in context and in conjunction with how they have behaved in the past. Thanks again for your help.


Hi Bill,

I have shared a Google spreadsheet:

You should be able to make a copy and play around with it. In addition to UBNT, the sheet has data on CAMP, LGF, PSIX, and WFM. Some may not be up-to-date but you can always make a copy and update it.