UBNT inventory discussion

Guys,

I would urge all interested in UNBT to read/hear the conference call transcripts. There’s a lot of discussion surrounding this inventory build-up. Naturally, if you build inventory you would except there to be some ramp-up in revenues coming through, especially since they have a fair bit of inventory built up.

Looking through the questions and answers, it appears that management is trying to do some sort of ‘throw the kitchen sink’ solution to their ‘stockout’ problems. It appears Pera (CEO) got fed up with complaints from customers about lack of inventory and decided to just stock up! Now, I 'm not too sure if this is a good approach … it appears they had a supply side problem and it could be that their solution is not optimal. I 'm curious because the 1% sequential revenue growth just doesn’t make sense when they have been building inventory. My layman guess - they are trying this new approach and they really don’t know as yet if all that inventory will lead to higher sales because of fewer stock outs.

Here’s an interesting bit from the transcripts:
http://seekingalpha.com/article/2205113-ubiquiti-networks-ub…

Robert J. Pera - Founder, Chairman and Chief Executive Officer
Well, I think you got to look at it – it’s not a situation where we build inventory to orders and we’re sitting on inventory. It’s not like that at all. I told the operations guys, I don’t want to hear or see any more complaints in our customer community, where people are complaining about not being able to get stock of our products. These guys are operators. They’re installing on rooftops and they’re deploying. And they’re held back by a lack of supply. It hurts. It’s our brand name. It hurts our goodwill with the customers. And that’s what I want to protect from a long-term point of view. So whether the fault is with the distributors or whether the fault was with operations not being optimal, I told our guys that I don’t care. I just don’t want to see this bump. So we’re building inventory. And I’m perfectly fine using cash from our balance sheet. It goes to inventory so we have more than enough. Some of this inventory is at our warehouses in China. Some of it is even staying in to the local markets where we’re working with distributors to ensure all our operators worldwide don’t have any supply shortages. So it was, on my part, a long-term strategy to repair the goodwill. And yes, that was it.

Anirban

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It seems that they could have 2 problems here: a supply chain problem and a lack of good visibility into demand. Perhaps their supply chain problem is due to their distribution channel choices as well as the mix of geographic mix of sales being far from manufacturing. Specifically, if they manufacture in China, ship by container ship to the US then stock to distributors in EMEA then deliver to end. I stokers from there…

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But maybe, as they actually said, they had so much demand in the past that they were often out of stock. This meant delayed shipments and unhappy customers, so they decided to eliminate the problem.

On top of that they said that part of their increased inventory was new products they didn’t have before.

I mean, it’s clear that they didn’t have increased inventory due to the usual villain, inadequate sales, as sales were up 78%! I think stocks are going down, so even if someone does something sensible, like doing away with an out-of-stock problem, they get killed. I may be naive but it seems silly to me.

Saul

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Yeah I listened to the call as it was happening and it seemed pretty good to me. I thought Robert Pera’s answers about inventory made sense.

I’m a little surprised at the bloodbath today especially when INVN rebounded so quickly.

Keith

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I agree Saul. I do not think there is any other way to handle the kind of demand growth they have. If they don’t build it they can’t sell it.
And if they go to a rapid build to suit model the inventory will be in components…
Up 78% YoY and ONLY 7% QoQ, I would be happy for all my businesses to do “only” 7% a quarter…

Saul,

I agree - this doesn’t make any sense to me. Basically, UBNT said “demand is awesome and we expect it to get awesomer so we want to be ready for it. We’re also going to come out with a new product that will likely blow our customer’s socks off just like our previous ones”

The market said “momo stock, momo stock… sell, sell, sell”

Analysts have asked UBNT what they plan to do with their cash historically and Pera basically said “I don’t know yet”. Now, he’s figured out that since he has the cash and doesn’t have another use for it, he should use it to build out inventory to help alleivate supply chain pressure.

At least the firm where I have my brokerage account agrees with me. They think the selloff is overdone as well.

Haven’t decided whether I’m going to buy more yet or not.

Jason
Long UBNT

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Up 78% YoY and ONLY 7% QoQ, I would be happy for all my businesses to do “only” 7% a quarter… >/i>

Especially when I have a product that is installed outdoors during one of the worst winters we’ve had in 30 years.

We’re happy with out Ubiquiti service provider too. The speed has been amazing.

Analysts are worried about the inventory,which had been an issue for distributors and customers in the past. CEO has resolved it, and is focused on the customer.

I’m going with the CEO, and bought more on the sale today.

Inventory is always a balancing act, and distributors are always happy to let the manufacturer do the work of maintaining stock. UBNT as a small company is doing the right thing, and I believe over time with put more pressure on distributors to carry their share. Having more large distributors will help, and I think this was discussed somewhat on the call.

Looking forward to hearing about their new products.

Iain

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Haven’t decided whether I’m going to buy more yet or not.

Jason,
For what it’s worth I just bought a bunch more UBNT at $32.30 or so. I just figure that by this time next year that’s going to seem like an unbelievable price. It doesn’t mean you should buy some. It’s just what I did.

Saul

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OK from Andy’s last page post we were all expecting a big increase in inventory this quarter. So that is not surprising at all (thanks Andy!). What is surprising for me is the revenue guidance for next quarter. I didn’t really expect it to be flat sequentially. I’m not an expert on this company but I would have really thought that revenue for next quarter would have been a decent chunk higher then this last one simply because the inventory problem should be at least partially solved.

I do see that quarter over quarter revenue growth is going to still be huge (at around 50%), which is great of course, but for whatever reason I thought with management tackling their inventory problem that we see at least similar growth sequentially as this last quarter.

The last 4 quarter’s worth of sequential growth has been

Q313->Q413 21.7%
Q413->Q114 27.7%
Q114->Q214 6.7%
Q214->Q314 7.1%

Next quarter’s guidance, flat 0% growth sequentially.

Maybe I’m grasping at straws here, but is this decrease in sequential revenue growth a trend? Overall UBNT has grown massively in the last 6 quarters (after the Chinese counterfeit problems), and Q over Q things look good. Sequentially though, maybe they don’t look that great. I guess this is what Wall Street sees today.

I’m down over 42% on my UBNT position, so this one hurts a bit. I’m glad I at least didn’t add before earnings. Seems like a great quarter to me overall and I continue to think about adding.

Also here is Andy’s page post 1 for reference
http://discussion.fool.com/ubnt-page-post-1-31145186.aspx?sort=w…

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Going back further to 2012 before the counterfeit problems we see sequential growth of 10% from Q112->Q212, and then 3-4% from Q212->Q312 and Q312->Q412.

So maybe that is more normal. More normal then the 21% and 27% we saw just a few quarters ago.

Of course maybe I’m just focusing on the wrong things here. We all seem to agree they had a great quarter in basically every metric. Inventory was up, but that was expected and was done to tackle a problem, not because product wasn’t selling.

Next quarter’s guidance, flat 0% growth sequentially.

My mistake, they are guiding 147 to 153m revenue for next quarter. That would be roughly 0% to 3.4% growth sequentially. Mid point would be 1.4% growth sequentially.

That is much more in line with how growth was playing out in 2012. So perhaps we are just returning to the norm here.

I agree with Saul. Based on what I’ve read this morning on this and other boards, I pulled out some cash reserves and doubled my stake.

This inventory issue seems more like a forecasting issue. There could be some impact to margins over subsequent quarters, but with their growth outlook…heck, who cares?

Yep. Unfortunately I added some yesterday. I added again today at $32.75 and $31.75. Total position size is now 8.5%. We should remember that Q4 is just about 1/2 over so their guidance for Q4 is likely fairly accurate. Historically, they’ve had Q1 and Q2 as their biggest quarters.

For what it’s worth I just bought a bunch more UBNT at $32.30 or so. I just figure that by this time next year that’s going to seem like an unbelievable price. It doesn’t mean you should buy some. It’s just what I did.

Thanks for letting me know, Saul. I think you buying already and me on the fence is a function of where we are in our investing life cycles. You’ve seen this type of thing many times before while it’s still relatively new to me. A 20% move is big and I’m trying to figure out whether or not I’m simply missing something obvious.

I definitely appreciate you letting me know where you stand though - it helps a lot!

Jason

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I picked up more UBNT today. The sell off seems very overdone.

Still, UBNT is a painful drop from 55 to 31. For anyone in in Feb at 50 u r down 38% or 17K on a 50000$ investment in 2.5 months.

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Went long Jan 15 30 Calls.

I added a bunch few minutes back at $31.18. The 20% haircut appears like an overreaction. The quarter was solid, there’s demand for their products, and they jab built up inventory. So while it may not show up in Q4 I 'm betting it will show up in Q1. Here I think what Saul and Chris are saying makes sense to me.

Anirban.

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I am with so many of you, I doubled my position on UBNT today also.