UBNT Thoughts

Ubiquiti reported on Thursday after the bell and was promptly escorted to the woodshed. Is there a structural problem in the business or did the precipitous fall present us with a nice buying opportunity?

Revenue increased 32% and EPS increased 24%.

What are the potential reasons for the big drop in price?

Expenses this quarter increased as the company needed to air ship its new AmpliFi product to meet demand, increased inventory & warehousing to meet future demand, and aggressive pricing on AirMax AC. All of this resulted in GM of 44.6%, a 420 bp drop versus the same quarter last year and EPS at the low end of their guidance (72 cents).

Another potential reason for the drop could be the question raised by an analyst on the call about being sued by Infosys. No further information was given on the call and a Google Search yields no results.

We learned during the call the company is focusing on higher end categories and performance. Could the market be concerned about this philosophical change? I may be looking for negatives at this point.

Likely the biggest concern arises out of the margin reduction this quarter. During the past two conference calls, we’ve heard about some poor execution primarily in the ramp of AmpliFi. For followers of the company, we are familiar with missteps. Are the current issues going to cause longer term problems or are they a mere hiccup? We’ve recently grown accustomed to 48% - 49% GM. The company has kept its long term target of 45% to 50%.

Let’s try to answer whether we feel the margin reduction is concerning at this point. First, the misexecution on AmpliFi only accounts for a portion of the margin reduction and I believe we can consider it a one time event. A late design change caused delays and the company chose to stock the channel quickly versus delay getting the product to consumers. I, for one, am happy with that as I received my AmpliFi very shortly after their release date (it works great). Secondly, the company increased inventory and is spending more on warehousing in Europe particularly in order to meet customer demands. Since revenues are again expected to increase 32% next quarter, I believe we can stand behind these expenses. Finally, the aggressive pricing on AirMax AC is a path Pera has taken before when entering new markets or releasing products. Should this persist due to competitive pressures, it could be a long term concern. It is just something to watch.

On to the Positives:

Enterprise revenues are on an absolute tear. This isn’t an apples to apples comparison from last year due to the addition of the AmpliFi line. So, we don’t know what portion of the 87% growth seen here is due to AmpliFi. It will be interesting to know when and if they start breaking that out. Regardless, the growth is great.

There could be bigger growth ahead here too. The company is increasing performance of their products and increasing ASP. The company just released their UniFi AC HD in January. Pera claims it will be their highest revenue product by the end of the year. The company claims this product offers the best performance at 1/5 of the price of competitors. If Pera’s vision is right, this will be a huge boost to revenues!

I can give you guys one data point you can look up. So our Ubiquiti Community around UniFi was originally built from maybe a lot of emerging markets, a lot of Ubiquiti operators, but as UniFi has scaled, you see an uptick in the amount of professional system integrators that are using it, especially in the U.S. And these traditional system integrators have been using brands like Cisco and Aruba and HP and more expensive brands. And if you go to Spiceworks, spiceworks.com, that’s one of the largest, I guess, third-party community for professional certified system integrators. And there’s topics covering UAP-AC-HD and the demand there is really solid and the reception of the product is really solid. And we’re also seeing that with orders. Orders are very healthy and we expect it to scale. I believe probably over this next year, UAP-AC-HD should be the highest revenue product, not only in UniFi but in the whole company.

I went to Spiceworks and searched under UAP AC HD. Indeed, the reviews are quite impressive. Reading the reviews, I found another interesting item. One of the previous knocks on the Ubiquiti brand was that, “It is so cheap, it must not work well.” Oddly, entering the higher ASP and performance universe could be just the thing the company needs.

The Service Provider side of the business seems solid, though nowhere near the heady growth in Enterprise. Solving the backwards compatibility issue appears to be a positive for the SP business as new AirMax AC (better performance) now works with the old AirMax allowing operators to incrementally upgrade their networks (this is my take as to why this is a positive and somewhat of a guess).

Ubiquiti is transitioning from primarily a provider to rural and emerging markets, to primarily an Enterprise hardware company along with their new foray into the consumers home. The new products have significantly increased the company’s TAM. The risk reward scenario seems exceptional here.

As of the close of business Friday, the PE is 18.9.

Take care,
A.J.

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Ubiquiti reported on Thursday after the bell and was promptly escorted to the woodshed. Is there a structural problem in the business or did the precipitous fall present us with a nice buying opportunity?

Great write-up Phoolio, Thanks!
Saul

1 Like

I enjoyed this post also.

UBNT’s price had declined again today, to near $50. I’m guessing the primary reason is this:

http://norcalrecord.com/stories/511081584-synopsis-claims-ub…

Having worked in a startup, I understand the allure of avoiding costs, which if you made me guess makes me think this more likely than not at some level (could just be a rogue employee or something bigger). Again just a guess (so 2 guesses in my post, sorry). But I have no way to value the lawsuit if true.

AJ does this story change your take? Thank you.

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Its like the company has two left feet and can’t keep out of its own way. First they have someone steal their technology, then they have someone rip them off, and now they are accused of stealing someone else’s technology and the CEO has to be involved in his basketball team. Great tech and a really interesting business plan but they just keep stumbling.

Andy
No position in UBNT

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AJ does this story change your take? Thank you.

Yes, it does. In my post, I mentioned not being able to find anything about the lawsuit. I had the company suing UBNT incorrect. So, yes, this certainly gives me pause.

I have no idea what to think of the situation and it certainly is a shame given the recent progress the company has made.

I was driving back home from an appointment and thought to myself, I bet today’s drop has something to do with the lawsuit mentioned on the call. It was the only reasonable explanation for the further drop…though I realize reason isn’t a sole determinant for price moves.

I hate legal issues, but they can present opportunities as well.

Take care,
A.J.
who wouldn’t be surprised if short sellers are behind the suit a la BOFI

Chris, I’m not a lawyer, but I have a couple of thoughts:

  1. As I read it, they are not wanting UBNT to quit making anything. They just want damages, in other words: “money”. So even if Ubiquiti loses this it doesn’t affect its business, and it has huge amounts of cash with which to pay a judgement.

  2. If Ubiquiti realizes it will lose a court case they’d probably posture a bit to get the settlement down, and then just go ahead and settle for some of that cash.

  3. Proving what they claim would be almost impossible unless they have a disgruntled Ubiquiti ex-employee who will testify (maybe they do).

  4. Even so, for a company that licenses their software, it would be hard to prove that they suffered any “damages” besides the loss of the licensing fee from unauthorized use, and even if they received three times the fee they should have received (triple damages), that’s very small potatoes.

But who knows, I may have it all wrong.

Saul

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While the margin reduction was likely a disappointment, on its own it does not seem meaningful enough to have sparked a sell-off. As you can see from the financials, the EBIT margin was still 33% – which is pretty much inline with where they’ve been for the last several years:
http://www.rocketfinancial.com/Financials.aspx?fID=206676&am…

The quarter was certainly nothing like the June 2015 one when they posted a sharp revenue decline and 5% EBIT margins.

So, UBNT disappointed the market…and in the short term, things have not been good for share price.
The CEO admits to some “misexecution” this past qtr but assures us that their long term thesis is intact.

Ubquity is expecting revenue and earnings for the current qtr to be above what analysts are predicting.

Am I willing to wait for better news and a subsequent recovery of the share price ?
And how long will it take ?.. Meanwhile would the money I have in this company
be better off somewhere else…

The stock is down over 20 %. My position since inception is now down 5.34% and is 5.23 % of my portfolio.
Is this a bottom ? who knows.

If only the crystal ball had been functioning a couple of days ago.
Still not functioning.

Frank

I think we’re ignoring the pros vs. the cons here (as much as I agree with all the cons, and there were quite a few correctly pointed out):

  1. Number of UBNT apps downloaded now 1million vs. 500K last august. That’s just phenomenal!

  2. The backwards compatibility of Airmax and the refresh of airmax products look solid, Pera said he was seeing uptake and sell through bump in service provider revenue.

  3. $349 for the UNIFI HD vs. competitors at $1000-1500 is just great, especially with better performance. Reviews as mentioned above are great! The potential for ASP’s to move to $1000 is quite something. In addition we’re seeing higher ASP’s in switching. All this points to margin expansion in the long term, not contraction! If Unifi HD becames the largest revenue generator for UNIFI, as Pera believes, right now its UNIFI AC PRO at an estimate (looking at Ingram’s and SHOPBLT distributor data) 30% of sales. We could see a 50% bump in UNIFI revenue’s by the end of the year or early 2018.

  4. LTU and Fiber are setting UBNT up for some additional speculative revenue boost in addition to the ones I mentioned for service provider.

  5. Community engagement and traffic has increased 3 fold in the last 2 years (according to Alexa analytics).

  6. If the new FCC head Pai shows increased support for the WISP industry as the UBNT community believe, this could lead to significantly higher US sales.

  7. International revenue lagged, but given the exceptional sales in N. America, we can expect those markets to catch up as all the new products scale globally, in fact, YoY the revenue were up across the board, the FEB quarter is usually a weak one: unifi mesh, gigabite switches, cloud keys, Airmax AC 2 / LOCO, I expect them all to increase across the board across all geographies.

Pera believes that record revenues will be common place quarter to quarter. He has never been the one to over promise and under deliver. I feel this EPS miss was a short term issue, Pera judged worth taking the hit for the long term. He owns 70% of shares, I believe his interest are aligned with ours. I’ve left the ‘cons’ discussed above because I feel A) they were well dissected and B) they don’t shadow the potential upside and UBNT growth story.

What’s important for short term gains, is not important for Pera, he doesn’t play WallSt game, UBNT needs to communicate the long term growth strategy better to the street if he wants upside targets, raising inventory, margin contraction, all these things should have been presented better than just a “miss” on EPS and ‘trust me’ reversion to the mean will come back on the call. Pera should know better that the street has a short bias against him and that he can’t leave an iota of doubt or narrative to be spun against him.

UBNT doesn’t need Wallstreet, infact, Pera made it a point that UBNT doesn’t need a CFO because it doesn’t need to build a relationship to raise money or issue shares or do any business that requires a rolodex of Big Bank names. Obviously Pera doesn’t care about the short term fluctuations and long term investors like us, on which he has clearly states are his only concern, we should benefit from jumping in when these distortions between the street expectation and the long term vision split. Make no mistake, don’t let the price action scare you into thinking “what aren’t I seeing?” this was a great quarter for long term investors, UBNT is doing great, is still enormously profitable and taking risk to stay the leader of the small cap networking industry. Netgear reported a low margin quarter with lower guidance, but because they play the game and they buy back stock, their PE is allowed to remain at PE25. UBNT has a tiny hiccup and BOOM 25% margin compression–why? It’s heavily shorted and their is a huge interest in them failing. Also, the big banks have no benefit in advertising UBNT who is taking market share from their great costumers: CISCO, Aruba, HPE etc…

The analysts and the street can play their own game and pitch UBNT as a commodity business disguised in a hipster business model that can never scale. If anything this last year debunked that theory, and UBNT shown us that UBNT can adapt to merely being a low cost efficient beast at all cost, it can offer it’s business model in addition to providing a high end service like “UNIFI ELITE” and try to significantly under price and move up the value chain without giving up to much margin–that’s to see, but it’s good to see UBNT can adapt and think outside of its DNA. The short thesis on UBNT is not a price issue, its an existential bear case. Pera said in may he was on a mission to prove the shorts wrong and that he took all bets against UBNT personally.

Either you’re betting on Pera or you’re betting on the shorts and the Wallstreet analysts.

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Mr. Wiseguy,

Excellent case as to why the positives should outweigh the negatives. I wasn’t aware of the data points about the increase in community traffic and number of apps downloaded. Thanks for providing those stats and everything else.

Do you have any more to say about the FCC head? It seems you believe this could be a positive.

Thanks again,
A.J.