UBNT updates

Investment Analysis Clubs Saul’s Investing Discussions
#1

Yesterday, UBNT filed an 8K with their updated investor presentation. It is basically the same presentation that they used last time, but updated based on the year-end financials and the forecast for FY2018. See http://files.shareholder.com/downloads/AMDA-JI74R/4474431496……

As part of the presentation, they list a goal of 5-30% CAGR for Service sales and 30-50% CAGR for Enterprise sales with an overall CAGR of 15-40% over the next 2-3 years. The TAM for Enterprise is $10-15B and is growing at 10-15% annually. Given that Enterprise sales is $410M, there is a lot of room to grow. With Enterprise representing 47% of total 2017 revenue, this fast growing segment will now have a bigger impact on overall revenue leading to faster growing revenue for the company in 2018. This supports the 2018 guidance. However, given Pera mentioned during the call that the guidance was based on the existing products and that new products would be gravy. Pera has a history of low-balling the guidance, so I think the company will beat the 2018 guidance. One would hope that with UBNT beating 2018 guidance that was much higher than analyst forecasts, the company might finally start getting some respect and a higher valuation.

I follow Pera and UBNT on Twitter and it looks like a new platform will be rolled out on Tuesday (8/15). Here is what Pera posted on Twitter recently: https://twitter.com/RobertPera/status/895451577997180928

“Ubiquiti’s next platform: FrontRow -Details on 8/15- I put my heart into this one; the whole team did! Free product to top 3 closest guesses”

Also on Twitter, UBNT retweeted a customer’s recent order of several products: https://twitter.com/WillieHowe/status/895772968038658048

I know this is anecdotal, but it is always good to see customers posting their excitement about UBNT products.

There’s also a recent Seeking Alpha article that describes UBNT’s moat:

https://seekingalpha.com/article/4097238-ubiquiti-networks-m……

One moat is obviously the business model. Hire the best engineers for the money by getting them from lower cost locations in Asia and Eastern Europe instead of going after expensive silicon valley engineers. Work with your loyal community of customers who market the product and give feedback on making the products better. This allows for superior products at lower prices, while still making a lot of money for the company. The article talks about their biggest moat, which is Robert Pera himself. Just as an investment initially in Berkshire was a bet on Buffett, an investment today is largely a bet on Pera. Right now, betting on Pera is still cheap at 16 times forward earnings given the track record of growth.

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#2

Hey wouter28,

Thanks for all the info. I’d read the recent Seeking Alpha article and hadn’t considered their worldwide offices as an asset for hiring high quality, relatively low cost engineers. It makes a lot of sense and reminds me of EPAM who employs the same strategy. I don’t own EPAM but follow them to a degree.

I’ve always believed in Pera so the fact I hear, “An investment in UBNT is an investment in Pera,” only makes me smile assuming his good health going forward.

UBNT is a high quality company. I’m curious about the 8/15 announcement and thanks for posting that.

I believe there is good news brewing with this company. Just thinking about their new products, they are almost a 3x increase in price that still undermines competition with no license fees. It is a no brainer if the performance is on par.

The margins have been slightly compressed as they enter new markets and will grow as history has shown.

Take care,
A.J.

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#3

Hi A.J.,

Hiring highly qualified engineers in lower cost countries is a pretty big advantage IMO. Not only does it keep their R&D costs down while maintaining quality, it means they don’t need to offer large amounts of stock and stock options to their engineers as other companies hiring in silicon valley are required to do. Twitter, for example, has to give away a ton of stock to keep its quality employees (it was over $600M per year as of an article from September 2016). On the UBNT RB boards, I posted an analysis of UBNT’s stock comp which rounds down to zero:

During the 9 months ended 3/31/17, the company issued 72,023 RSUs with an avg share price of 55 for a total of $3.96M. Also, during the same period, there were no options granted. As such, it looks like the company’s stock is only around $4M per year (RSUs appear to be granted annually at the end of July). This is pretty immaterial for a $4B market cap company that reduced their share count by 1.8M shares (around $90M) between 10/19/16 and 5/2/17

I love their lack of dilution and it makes the stock buybacks more significant. I remember not that long ago, Pera owned 64% of the stock. With all the buybacks, his ownership stake increased to 71% without him buying any shares. Their stock buybacks have come at opportune times and Pera does not get enough credit for his capital allocation skills.

I also am looking forward to the 8/15 announcement. In addition, I am looking forward to the 9/26 investor presentation. Pera is starting to realize that it does benefit him to throw the analysts a bone. Participating in an investor presentation makes me think that he may provide meaningful updates for investors. I don’t think he would participate in it, if it did not help the company and long-term shareholders.

In the August presentation, it said the Enterprise sales would grow 30-50% annually for the next 2-3 years. If we take the midpoint and assume Enterprise sales of $410M grows at a compounded 40% rate, that would mean $1.1B in sales just for the Enterprise market in 3 years. As this business gets bigger, it should demonstrate to bigger companies that it makes sense to use UBNT products both from a cost and performance perspective.

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#4

Hiring highly qualified engineers in lower cost countries is a pretty big advantage IMO.

It’s pretty common practice for Silicon Valley based companies to have off-shore engineering, whether direct or via contracting companies. India, of course, but as that’s gotten more expensive, now there are Romania, Hungary, Russia, etc.

For it to work, you need the type of work that can be well specified in advance, and then you need additional infrastructure at home to manage and track the remote engineering. This is typically better suited to hardware and firmware, rather than software/application development. So, it makes sense that Ubiquity can do this while Twitter doesn’t (not that Twitter’s the best example, they have lots of problems).

Having managed remote teams myself, sometimes the difficulties aren’t obvious. Whether it’s a remote QA team in a country whose culture discourages direct conflict and so they’re actually hesitant to report bugs as bugs, or they just have different standards of what a “good” user interface is (many people in China, for example, like having what many in the US would call a “too busy” screen). In addition, separation of design from development from QA by thousands of miles and many time zones makes co-ordination difficult or more time consuming, especially if there’s any sort of iterative process involved. And that’s before you even get to the communication (language and accent) issues.

One place at which I worked had a rule of thumb that remote engineers had to paid 1/2 to 1/3 less in order for “off-shoring” to be overall beneficial due to the additional personnel needed, larger travel budgets, etc. Typically, you find a less experienced talent pool in other countries. So you end up needing to hire in the US for the necessary senior roles. Sometimes senior engineers in the US don’t want to stay up at midnight or wake up before the crack of dawn to have meetings with the remote team - the really talented ones may go somewhere else where they can work with local teams instead, or you pay them even more.

Anyway, it’s not a “moat” because any company can do it. The real question is whether Ubiquity has the right management structure in place to make managing remote engineering not only cost effective, but not have penalties of time and quality. And then as the complexity and number of products grows, is this something that can scale?

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#5

My Ubiquiti position is sitting at 6.75% of my portfolio in my taxable account. I think with that announcement coming on Tuesday (8/15), I may buy some September calls on Monday (8/14) in case the share price gets a decent bump with the announcement…maybe a $70 or $75 strike (closed at $65.12 yesterday 8/11).

#6

Anyway, it’s not a “moat” because any company can do it. The real question is whether Ubiquity has the right management structure in place to make managing remote engineering not only cost effective, but not have penalties of time and quality. And then as the complexity and number of products grows, is this something that can scale

Good post Smorgasbord and thanks for the commmentary. These are concerns to consider and I’m not sure how Pera manages the various teams in various locales throughout the world. I do know he has no residence and is constantly traveling to them. My guess is the offices are pods working on specific items that Pera directs and one assumes each has a leader of sorts. The ability to hire engineers outside of Silocon Valley in various parts of the world and domestically should be a real advantage for them if they can keep them on task. I don’t get the sense they are hiring anyone who can write software at 1/3 the rate of the US rate. I get the sense they are hiring smart engineers who are looking to work at home and make a great living. A company can do that at decent prices compared to Silicon Valley and it makes sense for individuals who don’t have the crazy high cost of living there.

Maybe today having separate teams throughout the world working together is easier. That is what Atlassian seems to be trying to accomplish anyway.

Take care,
A.J.