UBNT Q1 review

During the quarter, the company added 27.6M to their ending cash balance despite spending a lot of money on share buybacks. Breaking it down, the company generated $97M in cash from operations (partly aided by a decrease in inventory) and only increased debt by $41M while using $108M to buy back stock. As of the end of September, UBNT had $632M of cash ($597M outside the US) and net cash of $334M (taking out $298M in debt) which is down only $14M from last quarter despite spending $108M in stock buybacks. I’m impressed that the company could buy back so much in shares and have only a marginal decline in net cash. In terms of the debt, the company only pays about 2.80% in interest per year, so obviously Wells Fargo does not see UBNT as risky and have likely verified the foreign held cash that is used as collateral.

Speaking of buybacks, they breakout as follows:

  • During the quarter, they purchased 2,148,832 shares of common stock at an average price per share of $54.34 for an aggregate amount of $116.8 million. Note that this number is $8.8M higher than the $108M I discussed above in the cash flows because repurchases of $8.8 million that were executed on or prior to 9/30 were settled after the quarter ended. As of the end of September, the Company had $34.5 million available under the stock repurchase program.

  • During the second quarter (10/1 – 12/31), the Company repurchased and retired 602,192 shares of its common stock at an average price per share of $57.28 using the remaining authorization amount of $34.5 million. We know this happened between 10/1 and 10/6 as there was no remaining balance available for share repurchases under the $150M buyback authorization as of 10/6. The company then authorized another $50M authorization as of 11/8.

  • In total between 7/1 and 10/6, they repurchased 2,751,024 shares of common stock at an average price per share of $54.98.

Seeing that the company generated over $90M in cash flow, they could easily afford to put the vast majority of that cash into buybacks. Unlike companies like AMZN and SHOP, UBNT does not need to invest all their cash flow into the company to keep growing. Their R&D spend is expensed and is included in the $97M in positive cash flow from operations. If you look at investing activities, the company invested $2.9M into property, plant & equipment, so these type of investments are only a minor burden to cash flow. Seeing that the company purchased $34.5M shares at an average price of 57.28 makes me think the company will likely use their $50M buyback authorization soon with the stock price in the low 60s. With their cash flow and minimal need for investment spend, they could very easily buy back $50M in shares per quarter.

Continuing to buy back shares will continue to shrink the float, which is now 21.5M shares (only considering Pera’s shares). If they buy back at an average of today’s $62 share price, they would take out another 800K shares and bring the float down to 20.7M shares. If this keeps up every quarter and the price stays around 62, they could take out 3.2M shares per year and in 1 year be down to a float 18.3M shares. That would certainly make things more difficult for the 10.25M shares short (as of 10/31). I would imagine that as the float gets smaller, the share price will be squeezed higher.

Some people are disappointed in the Q2 revenue guidance of $240-250M and EPS guidance of 85 – 92 cents. Pera has consistently been conservative with his guidance as the actuals results are usually at the high end of the range. Also with weighted outstanding shares of 77.8M this quarter instead of 80.1M for Q1, I expect EPS to be higher than the range given. They earned diluted EPS of .92 with $246M in revenue and expect to keep margins the same for Q2. With just the reduction of shares, the EPS should be about 3% higher. I also expect revenue to be around $250M given the history of coming in at the high end of guidance, which should generate around 95 cents EPS.

In terms of the Q1 revenue, enterprise now made up the slight majority of total revenue at $126M and service revenue coming in at $119.9M. Enterprise revenue grew 49.8% from last year and 10.6% from last quarter. Enterprise makes up 51% of revenue vs 49% for service. For Q1 last year, enterprise revenue made up 41% of total revenue while service made up 59%. Now that enterprise makes up the bigger piece of revenue, I would expect overall revenue to increase at a faster rate as service revenue makes up a smaller part of the overall revenue. This leads me to believe that UBNT should have no problem of hitting $1B in sales this fiscal year and could push closer to $1.15B. UBNT also has the new products (LTU, AirCube, etc) to keep driving revenue higher.

I think the company continues to improve as Pera gains more experience as a CEO. He has shown that he can make improvements to the company while keeping costs low. He has largely fixed the problem with their accounting and financial controls. He is in the process of addressing the supply chain by moving to bigger distributors and carrying more inventory. I suspect they may start using their big Utah warehouse to start bypassing some of the distributors and improve margins further. I suspect that Pera will only get better as he focuses on ways to improve running the company. As I have said before, a bet on UBNT is largely a bet on Pera. That’s a bet I am willing to make.

38 Likes

Wouter,

Can you briefly list the components of Enterprise revenue? Same for Service revenue? Is any of either recurring or subscription based?

Thanks, Bear

Can you briefly list the components of Enterprise revenue? Same for Service revenue? Is any of either recurring or subscription based?

Bear,

The short answer is virtually no revenue is recurring for either category. If there is any recurring revenue currently, it isn’t worth mentioning.

The Enterprise division is made up of their WiFi Access Points, routers, switches, etc…It also includes the consumer products from Ubiquiti Labs. The Service Provider revenue is made up of equipment sold to Wireless Internet Service Providers (WISP). All of the above equipment carries zero licensing fees and support fees. In fact, that is the model the company is trying to disrupt.

So, no real recurring revenue. The company has talked about a Premium type of service in the past that would carry some recurring revenue, but if it has been implemented, it is too small of a piece to be worth thinking about.

The company is currently valued at just under a 20 PE. The Enterprise space (which does include consumer too) is growing like gangbusters. I don’t have a great feel for the potential for growth in the Service Provider space currently.

Best regards,
A.J.

6 Likes

Thanks AJ. Who buys the Enterprise products?

And what are WISPs? Like AT&T, Charter, etc?

Do they have any customers on either side that account for more than 10% of total revenue?

Thanks again,
Bear

the company only pays about 2.80% in interest per year

This is high. I pay less than that on margin account with IB.

, so obviously Wells Fargo does not see UBNT as risky and have likely verified the foreign held cash that is used as collateral

Wells fargo has suspended coverage on UBNT due to analyst departure in August. Even earlier, I have not seen any comment about foreign cash from WFC. So it is not clear how you are drawing up the above conclusion?

2 Likes

The short answer is virtually no revenue is recurring for either category

No support revenue? So who provides support for their equipment and software?

Hi Bear,

The vast majority of their products are sold through distributors (over 100) in both Enterprise and SP. The consumer products are starting to sell through on-line retailers and on-shelves, but that is immaterial right now.

A good end user example in the Enterprise space would be a hotel operator. For instanced, the UniFi products can handle wireless internet service and video surveillance with free software to control everything.

When you think of WISPs, think of smaller, local, independent providers of internet service in underserved/remote areas. These areas may not be supported through fiber so wireless service is necessary. There are WISPs that compete in urban environments, but that isn’t how I think of them generally.

For the first time, there was one customer in 2017 who represented 11% of sales.

Hope this helps.

Take care,
A.J.

3 Likes

No support revenue? So who provides support for their equipment and software?

Nope. No support revenues to speak of. Support is handled via their on-line community. In the case of their consumer product (AmpliFi) support is handled via a chat feature in their app. That is an expense to the company as it is free to the consumer.

Regards,
A.J.

3 Likes