Although the quarter was definitely not great, I think the strong USD probably hurt them. It looks like Pera went out of his way to avoid questions about sales by region and focused more on the long-term trend of the company. He is definitely not focused on the quarterly sales and thinks that over the longer term, the company will do really well. Reading through the call made me feel better after being slightly disappointed after reading through the initial press release. I pasted some interesting Pera quotes below:
So first of all, I want to say, Ubiquiti’s service provider market is focused on the emerging markets. It’s a great opportunity. I think if you look at the Internet and the users, 2/3 come from these emerging markets. The penetration for fixed broadband is probably only 10% globally. So the service provider segment, we see huge runway for the – in the future, and we think we’re in the early innings of the game.
So it’s very difficult to look at this company and say, “Okay. Well, they did such and such revenue last quarter, and they’re down 5% this quarter. And what will they be the next quarter?” If you look at from our IPO, I think, we’ve tripled up to this point within 3 years, and I – my aim is to triple the service provider business again in the next few years.
We’ve introduced UniFi, which is our enterprise solution, a few years back. And that’s growing very fast, and we’re expanding it, and we think it’s probably about 30% of our business right now. And long term, we think it’s going to be close to an equal split between enterprise and service provider.
Well, if you look at things like our forum, and the level of engagement, an traffic and the new customers and evangelism, it’s going very fast. I think the total time spent in activity in our community has doubled year-over-year. So the trends I will get to evaluate the business are all positive.
But if you look at from 3 years back to today, it’s been impressive growth, and I think when you look at 3 years and the future, then you look at – today, you’re going to see at least the same type of impressive growth.
I’m going to consistently say you have to look at – especially with the service provider business, you have to look at long-term trends in drawing conclusions, and I think the long-term trends have been very good in the past, and there’s no reason, I believe, they won’t continue to be very good in the future.
Yes, I would say we’re – we’ve been conservative. So when you look at this 1.5 years or 6, 7 quarters, we always beat – I think for a run, we beat expectations. So yes, we want to be as conservative as possible. But I expect in the long-term, which is several quarters or in the next several years, I’m always thinking about how to get this company from hundreds of millions of – in revenue to billions and ultimately, tens of billions, and you can’t do that by putting your resources around financially engineering quarter-to-quarter numbers, and so – and reported revenue. You do that by – you’ve got to really concentrate on R&D and make bets and big bets in R&D and have vision, and look at long-term results. That’s what this company is focused on.
To be honest, I haven’t checked the stock. I’m in this for the long term, but I’ll – by this week, I’ll or next week, I’ll check it. And definitely, if it’s attractive, yes, we’ve got to buy it back.
So I think India and China are huge opportunities for us, and we haven’t captured much of it yet. One of the challenges we have in India and China is there’s more of a – in areas like U.S. and South America, there’s a lot of information transparency. The best product wins out. In China and India, there’s more, I’d say, political barriers to entry in terms of finding partners and there’s more of a traditional business model, but it’s changing. And I think you’ve seen even in China, like Alibaba and Xiaomi are great examples of companies that have just break in (sic)[broken] the traditional business model apart in China, where Xiaomi has evangelized their brand and sold direct. And I think we have to apply ourselves a lot better in creating localized communities in a lot of these areas of the world, especially China and India, and in evangelizing our brand. And that’s definitely one of our priorities right now, and we’re putting in investment into a strategy for those markets.
Okay. There was a write down for excess – or canceled material, so that relates to our service provider business. And one of the materials was end-of-life, and we placed a big order, and it – to move to the new material was significant software development. We didn’t think we would be done with the software development as early as we did, and the cost delta between the new chip and the end-of-life chip was more than the cancellation charge of the old material. So even though it looks like it’s a onetime loss on a per unit basis, it’s a net margin benefit.
We have a big presence on a IT website called Spiceworks, and I think we’re picking up popularity fast there. The new channels and distribution definitely helped. And I think you’re right, as that UniFi platform becomes more compelling, we’re going to have to become much more aggressive in expanding the channels. In the case of our service provider, we’ve never really called up someone to carry the product before. We’ve been spoiled. We have – we’re inundated with constant requests to carry that product.
We have a very phenomenal, energetic, active community that’s evangelizing the brand. And we significantly upgraded our R&D team, and we’re quickly adding advanced features and expanding the product line. And I think for an incumbent to come in and compete against us, they’re going to have to be all in and they’re going to have to find some way to disrupt us. And I look at disruption as you need incredible price and you need incredible performance. And so price-wise, I don’t think we leave too much on the table. It’s very hard for a traditional company to compete with our margins and our operating structure. And then if they want to compete on performance, we’re going after these companies, and we want to be the best performer in the space, not just looked at as a little cost solution. We want to be – yes, we’re a low cost solution, but we want to be the absolute best product in the space. And for a company to have a side project and feature-limit and not put their best stuff out under except for a brand name, I don’t know if they can be effective at this point in time against something like UniFi.
we’re going to have to deal with the quarter-to-quarter ebbs and flows due to difficulties with things like fluctuating currency exchange rates, logistic issues, political maybe uncertainty, and the fact that we have a new product adoption and qualification cycle in the service provider market. So like I said, quarter-to-quarter granularity, it’s very hard to get to the bottom of what exactly is causing it, especially when you’re talking about very small percentage points on a sequential basis. But if you look at the overall long-term trends in the history of the company, they’ve been positive, and I believe the next few years ahead will be the most impressive yet.
I think we got to go deeper and we got to create localized communities in areas like India and China, and do a much better job of evangelizing the brand, and then expanding your channel makes your product more available. But everything we’re going to do is going to be focused on pool and brand evangelism.