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.