UBNT Q2 thoughts

Saul is not excited about UBNT based on the overall flatlined performance of the business. I listened to the conference call and I’ve had a chance to look at the numbers in the prepared comments. Here’s what I think.

Yes, the revenue looks flat.

Q3 2014: $148.3
Q4 2014: $156
Q1 2015: $150.1
Q2 2015: $153.1
Q3 2015: $152 midpoint of guidance

This does not look like a growing business at all. And, yes, the adjusted EPS looks even worse with the range between 46 cents to 56 cents of the past 7 quarters. Midpoint of guidance is 47.5 cents for Q3 2015. No growth as Saul pointed out.

The P/E is now 13.5 (based on a $28 share price). The P/E will be 13.7 in May if they hit the midpoint of their EPS guidance.

However, I don’t think this tells the whole story. There are a few reasons why shareholders might have reason to be optimistic (or hopeful). Here they are:

If you break out the revenue into their 2 business segments, Service Provider and Enterprise, you get the following:


Quarter SP      SP%     Ent    Ent%    UBNT%
Q12013	51.6		9.9		
Q22013	68.2		6.7		
Q32013	75.5		7.7		
Q42013	90.1		11.1		
Q12014	94.2	83%	35.5	259%	111%
Q22014	111.4	63%	27	303%	85%
Q32014	121	60%	27.3	255%	78%
Q42014	124	38%	32	188%	54%
Q12015	107.3	14%	42.8	21%	16%
Q22015	99.7	-11%	53.4	98%	11%

Now, you have 2 businesses; one in decline and one in rapid growth. So for the Enterprise business it is growing sales rapidly (98% last quarter). Management said they are seeing strong growth in all geographies. They recently introduced their VOIP product which hasn’t gained traction yet. In 2 years Enterprise could be bigger than Service Provider. What P/E would you give a business growing that fast?

On the other hand the Service Provider business is in decline. Can it be revived? They just introduced airFiber AC with about a 60% price reduction. Pera says it’s specifically designed for point to point radio applications whereas as the old airFiber products were jerryrigged chipsets to work. The price was already low and now with a 60% price reduction, customers in emerging markets may scoop up the product despite the week dollar. With airFiber AC be able to revive the stalling Service Provider business? Pera thinks so.

The stock is up 20% today and the analyst upgrades are in. The guidance for the March quarter doesn’t look good. If they hit the midpoint of guidance they will get 47.5 cents per share in adjusted EPS and $2.045 TTM EPS versus $2.07 now.

I had a 10% position in UBNT and I sold 10% of it today so I’m left with a 9% position. I also sold covered calls against half my shares and so I’m planning on reducing my position to around 5%. I want to be convinced that the Service Provider business will resume its growth. If it does, the stock will look cheap at $30. If it does not and the Enterprise business continues its rapid growth, it will take a couple of years for the value to be in today’s stock price.

Chris

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Very nice analysis, Chris. Great summary of the key points raised in the conference call. I’m comfortable with my current stake, mainly because I began buying shares after the price began to plunge (still bought too early - very typical for me). I’m now showing profit on some lots, small losses in others. I may add a bit depending on price/performance developments. I find the company interesting…and I’m patient.

Thanks Chris for sharing your notes.

I am encouraged by the Enterprise reports and the jury is still out on the Service Provider component.

For anyone interested in an overview about AirFiber, this video interviewing the developers of AirFiber and describing its attributes was enlightening to me (scroll down a bit for the video).

http://www.ubnt.com/airfiber/airfiber24/

The stock may be flat for a quarter or two but I am holding for the long term.

Fool on!
J.
Long on UBNT
SuperNova Explorer

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Chris,

Excellent review of UBNT.

I just wanted to say a bit for those of us who are long UBNT and why I plan on increasing my stake slightly.

It’s a rarity you run across a company that has incredible long term growth prospects with an insanely low PE, minuscule debt, generating cash, paying a small dividend and buying back shares.

I don’t know what will happen in the future, but there are many reasons I believe UBNT has great long term growth ahead. And I want to emphasize long term meaning the next 3-5 years.

UBNT is starting from a solid foundation with a disruptive cost structure allowing for disruptive pricing. They have simply scratched the surface of the market while continually improving upon and releasing new products. They spend money on hiring the best people and on R&D - two good things when focusing on long term growth. Further, Pera has a huge stake in the company.

Yes, UBNT is guiding fairly flat for the next quarter. If I had the ability to time when to get into the stock over the next year, I would do that. Instead, I’m going to increase my stake soon and wait.

This speaks to my investing philosophy. When I see a company with great prospects that is currently as cheap as UBNT, I’m happy to wait.

I feel the same way about GILD currently. Insanely low PE, I’m happy to wait.

Take care,
A.J.

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Chris,
Thanks ever so much - once again the financial stuff often eludes me because I never know what’s truly important and significant (for example, I see something like FCF of $45M for a $1B company, is that good? What else to consider in order to make a determination? Beats me).

Anyway, I sold some but not all my UBNT due to discussion on this board, just prior to the recent spurt in the stock - typical timing for me. Almost without fail the stock will fall shortly after I purchase and rise shortly after I sell.

Anyway, no regrets, I redeployed to AIOCF, also due to discussions here. I think holding smaller UBNT and some AIOCF is not at all a bad place to be.

Hi J,

Thanks for the video suggestion.

For anyone interested in an overview about AirFiber, this video interviewing the developers of AirFiber and describing its attributes was enlightening to me (scroll down a bit for the video).

Kept buying during the dip and didn’t expect a turnaround for another quarter, so I was pleasantly surprised, and rewarded with this quarters results.

My memory of the call is that during the q&a Pera said they were planning a refresh of the service provider components.

Also encouraged with the enterprise market.

http://www.ubnt.com/airfiber/airfiber24/

Thanks TMFPennyWise for the link to the video. It is very impressive and gives me a good idea of what theya re trying to accomplish.

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