Overall, revenues and earnings have flatlined. There is promise for future growth, but they have said that before. They announced they discovered a fraud and are bringing in a consulting firm to clean up the finance department. The Audit Committee does feel that the internal controls around finance is not effective, so that’s not good. In the meantime they continue to look for a CFO.
They stated they bought back $20M shares recently and authorized a new buyback program of $100 million (about 12% of the float or 3.6% of outstanding shares assuming they buy around $31 per share).
The call was fairly short. Pera admitted the financial performance was disappointing due to execution issues, but he thinks there should be improvement over the next year. When asked about the next 12 months he stated:
I think we’re at kind of a transition period to get to the next stage of revenue growth. The drivers in the service provider segment will be, of course, airMAX ac and airFiber. airMAX ac right now is less than probably a few percent of our overall airMAX volume and it is 2x, 3x performance increase. The results we’re seeing in the field are phenomenal.
What’s holding it back right now is a couple things. One is, we haven’t gone full force to market with low-cost CPE solutions for multi-point networks. And the other thing is backwards compatibility with older legacy airMAX equipment so operators could continue to build out their networks without creating completely different Point-to-Multipoint networks. And we’re right at solving both of those issues, addressing both of those issues. So I think you’ll start seeing airMAX growth accelerating again towards the end of this year.
On the UniFi side, we’ve poorly executed on our 802.11ac plan. To put it in perspective, the market leaders in enterprise wireless LAN, 802.11ac access points probably account for two-thirds or more of their total volume today. In our case and in UniFi’s case, it’s very minimal. And what’s amazing is we’re shipping I guess around 2 million per year of vanilla 2.4 gigahertz 11 access points, which is pretty phenomenal. So that shows you the strength of the UniFi brand and the user experience.
Now, we’re going to soon introduce a 11ac UniFi AP line. We have taken our time with it. It’s going to be ready this quarter and it’s going to be far superior performance at the same or lower price points than UniFi today. So I think you will also see an acceleration of UniFi revenues heading into next year.
In addition to those two main drivers, airMAX ac and UniFi ac, we have AirFiber picking up, EdgeMAX picking up and we have a wave of all new technologies I will talk about in our September conference.
More on UniFi:
To your question regarding UniFi, it’s been pretty disappointing. That business is $150 million, $200 million a year business right now, it should be $0.5 billion plus. And we just mis-executed. You look at the controller features, we moved far too slow. The ac strategy we had was a complete trainwreck.
And we’ve worked hard in the past six months. I’ve personally led this team in the past six months and the hope is, starting within the next quarter, you should see a big turnaround with that UniFi AC platform, with UniFi in general. And it shouldn’t be a matter of looking at what regions are up versus down in UniFi. The whole thing should accelerate. And if it doesn’t, I’m going to be really disappointed.
On UniFi voice and video:
I think the vision of both of those products is dead on. If you look at the Voice-over-IP market today, I think it’s 30-million-plus phones per year and they’re dinosaurs like Polycom, Cisco, Avaya, with mechanical push button phones dominate that market. There should be no reason why if you have a disruptive, very high-end user experience Android-based solution, there’s no reason why it shouldn’t take a significant percentage of that market.
And I think the reason it started off slow is because we tried to create our own solution completely, which was a little too ambitious. We tried to be become with our own PBX on a proprietary platform. And that wasn’t executed well.
So we took a step back and we said, okay, well, let’s just offer the Android phones and let’s offer management for the Android phones but allow it to interoperate with third-party PBXs. And I think under that market strategy, it will do very well, but we are missing critical features that are needed for provisioning with these third-party PBXs, like redirect servers and TR-069 is a big standard in provisioning.
And we’ve been working really hard to implement those and we are going to re-launch with something even more disruptive for Voice-Over-IP. I know that’s a big market and I know we’re going to get it right eventually. The same goes for video. We’re really, really close. We’ve been at this for, I don’t know, five years or six years. Three generations of hardware, three generations of software and controllers. And the stuff we have now is great. I don’t think there’s anything on the market at the price points with the features and the power and scalability. It’s just not completely polished and packaged and I think you’ll see that within the next quarter or two quarters.
So to answer your question, no, they’re not contributing materially up to now. But next year, I feel very confident they’re going to materially contribute.
On the fraud:
So, first of all, it’s an embarrassing situation. I’ve been through stages of denial, disbelief, frustration. It hits me probably the hardest of anyone.
And just some facts about it. We discovered it on June 5. Initial losses, $46.7 million. We took a accounting loss of $39.1 million, which takes into account our recovery to-date. And we believe we’ll recover a lot more of that.
The results of the investigation. We concluded it July 17. There was no criminal involvement or fraud from internal employees. There’s no evidence of that. It seems to be an isolated incident that basically a couple individuals within the accounting group displayed incredibly poor judgment and incompetence. We’re taking it really seriously. It’s embarrassing.
All I can say is everybody knows how big of an issue it is. I’ve inserted myself into the finance team and I will have more presence there moving forward to make sure that this can’t happen again.
Well, after an incident like this, you’ve got to really question the overall culture and accountability of our finance group in general. So I think the responsible move was to bring in independent experienced accounting consultants to audit the group internally and look at our controls and help establish a better culture and more accountability moving forward.
On India and China:
Yeah, China and India, they’re growing slowly. We definitely can do a lot better. And I think we need to look into some kind of country-specific strategy with potentially a country leader or a general manager to drive a business plan for those markets. They are a little more special than, say, areas like South America or Eastern Europe, where we just were able to organically grow without a single person on the ground just because our products were disruptive.
In India and China, I believe you can use this disruption and evangelism approach. There are companies like Xiaomi or Flipkart in India that have used this approach and bypassed traditional relationships. But it does take more, let’s say, it does take some hand-holding, more hand-holding than I thought. So I think we could benefit by having local guys on the ground there. I’m looking into it right now.
Guidance for Q1:
Revenues of between $145 million and $155 million
GAAP diluted EPS of $0.46 - $0.51
Non-GAAP diluted EPS of $0.47 - $0.52