Like many here, I bought UBNT near the close Friday. Thanks for all the great analysis here. With it growing so quickly, the PE ratio looks really low. I’m fine with the inventory buildup. Inventory of $66M is not that much compared to the quarterly sales of $148M and a market cap of $2.75B. The explanations for the increased inventory make total sense.
I just scanned through the 10Q and every thing looks good, but I did see one item that for me is a bit of a red flag:
NOTE 13—RELATED PARTY TRANSACTIONS AND CERTAIN OTHER TRANSACTIONS
On November 13, 2013, the Company entered into an aircraft lease agreement (the “Aircraft Lease Agreement”) with RJP Manageco LLC (the “Lessor”), a limited liability company owned by the Company’s CEO, Robert J. Pera. Pursuant to the Aircraft Lease Agreement, the Company may lease an aircraft owned by the Lessor for Company business purposes. Under the Aircraft Lease Agreement, the aircraft may be leased at a rate of $ 5,000 per flight hour. This hourly rate does not include the cost of flight crew or on-board services, which the Company will purchase from a third-party provider. The Company recognized a total of approximately $120,000 in expenses pursuant to the Aircraft Lease Agreement during the three months ended March 31, 2014 . All expenses pursuant to the Aircraft Lease Agreement have been included in the Company’s sales, general and administrative expenses in the Condensed Consolidated Statements of Operations.
I have not followed UBNT too closely before Friday. Do you know if this related transaction has been discussed before? I know the amount is pretty immaterial, but seeing that the CEO runs an aircraft lease company and that UBNT pays them makes me a little uncomfortable. I’m not uncomfortable enough to make me want to sell, but I am curious. Did any one else look into this?
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Did any one else look into this?
I didn’t, but I know that R&D expenses are going up, and SG&A expenses are not. There’s not a lot of money involved and it may be a competitive rate for all I know. As long as he does a great job with the company I’m satisfied. Just my opinion though.
Saul
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For a little perspective the amount of money involved was less than one one-thousanth of quarterly revenue and about one four-hundreth of net income.
Oh I agree completely that this amount of money is very immaterial. The amount is not the main issue. The thing that slightly concerns me is that the CEO could be distracted by his aircraft leasing business (not sure how much time he devotes to it) and using a vendor that is owned by the CEO is never a good practice even if we are talking about a minimal amount of cash. I am not overly concerned though as this was fully disclosed in the 10Q.I know this is not a CHBT situation. It’s the stuff that’s not disclosed that you have to worry about. Also, Seeing that they use PwC gives me a good amount of comfort that there are no material issues.
I just scanned through the 10Q and every thing looks good, but I did see one item that for me is a bit of a red flag:
NOTE 13—RELATED PARTY TRANSACTIONS AND CERTAIN OTHER TRANSACTIONS
On November 13, 2013, the Company entered into an aircraft lease agreement (the “Aircraft Lease Agreement”) with RJP Manageco LLC (the “Lessor”), a limited liability company owned by the Company’s CEO, Robert J. Pera.
All,
I am not at all worried about this. I have worked for large companies where the new CEO owned a jet. Like many of the super wealthy among us, they have their purchases making them money when they are not using them. I would bet dollars to donuts that he is contracting his jet out through one of the jet leasing companies, like the one Waren Buffet used to own. This is just a way for him to fly his own jet on company business instead of putting up with the hastle of flying on a comericial jet. His jet is probably flying all the time through these leasing agreements without him on it. I would highly doubt he spends more than a few minutes thinking about his jet company.
IMHO
Cheers,
Cooper
Long ubnt
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JBonefish published this on the UBNT board. Re-posted with his permission:
Another potential reason for inventory build … from the 2013 10-K:
Just thinking out loud …
"We are dependent on Qualcomm Atheros for chipsets for our products and do not have short-term alternatives if Qualcomm Atheros were to terminate its agreement with us, which could cause us to be unable to fulfill short-term demand and delay our ability to fulfill orders.
Substantially all of our products currently include chipsets from Qualcomm Atheros. Our license agreement with Qualcomm Atheros may be terminated for convenience at the end of the annual contract term which is September 1, 2014 upon 90 days prior written notice by either party."
It sounds like it’s just prudent on their part to build a 7 to 8 week inventory until June 1st at least, when they have to get their 90 day notice, or I presume the “annual contract” automatically renews.
Saul
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"We are dependent on Qualcomm Atheros for chipsets for our products and do not have short-term alternatives if Qualcomm Atheros were to terminate its agreement with us, which could cause us to be unable to fulfill short-term demand and delay our ability to fulfill orders.
Substantially all of our products currently include chipsets from Qualcomm Atheros. Our license agreement with Qualcomm Atheros may be terminated for convenience at the end of the annual contract term which is September 1, 2014 upon 90 days prior written notice by either party."
I don’t think this is really material Saul. They would have put the same thing in their 10Q even if it was Intel and they didn’t mention it in the CC. So I believe while they had to put it into the 10Q, if it was worrying them they would have mentioned it, or one of the Analyst’s would have brought it up. I believe the CEO when he says that he is ramping up the Inventory because he doesn’t want to have any customers complaining that they can not get the product.
Andy
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