UI Down Big After Earnings

Investment Analysis Clubs Saul’s Investing Discussions
1

I posted this on the paid board responding to a question about lower Service Provider revenues and am modifying it a bit for Saul’s board.

Saul used to be invested in Ubiquiti but got out a few years ago when he shifted his focus toward SaaS companies. I kept my shares at the time, primarily due to UI’s unique, no direct sales business model and their focus on providing the best product at the lowest price. Prior to the recent earnings release, UI has been one of my best performers, right up there some of our SaaS companies.

Now, UI is not a fast grower, which makes it almost off-topic for this board. But given the its history as a Saul stock, I’m sure Saul wouldn’t mind me posting this here.

This was my reply on the other board:

Well, Service Provider revenue was awful. In fact, it showed the worst performance since the March, 2016 quarter and the second worst since December, 2013. Recently, SP revenue has been pretty steady. But the performance this past quarter was ugly.


SPRev	Mar	Jun	Sep	Dec				
2013	75.5	90.1	94.2	111.5
2014	121.0	124.0	107.3	99.7
2015	106.2	104.8	103.4	109.6
2016	96.3	109.0	120.6	115.6
2017	104.7	114.7	119.9	119.9
2018	100.9	105.9	105.0	113.2
2019	109.4	100.9	115.9	97.7
				
Grth	Mar	Jun	Sep	Dec			
2013				
2014	60.3%	37.6%	13.9%	-10.5%
2015	-12.2%	-15.5%	-3.6%	9.9%
2016	-9.4%	4.0%	16.6%	5.5%
2017	8.7%	5.2%	-0.6%	3.7%
2018	-3.7%	-7.6%	-12.5%	-5.6%
2019	8.4%	-4.7%	10.5%	-13.7%

However, this could be a regional issue. Every region has shown growth, except EMEA, whose revenues decreased by 10.3%. Is there something about the Service Provider market in Europe that is fundamentally different? Is the European macro relative economic performance having an impact on the numbers? I don’t know, and Pera isn’t telling us.


NA	Mar	Jun	Sep	Dec		SA	Mar	Jun	Sep	Dec
2011	15.8	22.0	24.9	21.4		2011	13.7	18.3	19.8	24.3
2012	16.6	25.3	20.4	12.1		2012	27.7	16.6	10.2	17.1
2013	21.1	31.3	37.4	32.6		2013	18.5	19.9	20.8	28.0
2014	29.2	43.3	53.6	54.1		2014	25.1	35.8	31.1	22.2
2015	45.7	44.3	53.2	57.1		2015	17.9	25.9	22.1	23.8
2016	57.8	71.1	74.2	94.6		2016	15.5	23.9	24.2	19.3
2017	78.6	84.0	96.2	95.0		2017	27.8	34.3	31.1	20.7
2018	94.8	124.5	119.4	121.2		2018	19.9	20.6	14.2	20.9
2019	109.1	147.5	148.0	130.0		2019	23.0	20.7	19.8	24.9
										
										
Grth	Mar	Jun	Sep	Dec		Grth	Mar	Jun	Sep	Dec
2011						2011				
2012	5.2%	14.9%	-18.4%	-43.5%		2012	101.8%	-9.3%	-48.4%	-29.6%
2013	26.5%	23.8%	83.8%	169.0%		2013	-33.1%	20.3%	102.8%	63.9%
2014	38.6%	38.2%	43.1%	66.2%		2014	35.5%	79.3%	49.9%	-20.5%
2015	56.6%	2.4%	-0.6%	5.6%		2015	-28.7%	-27.6%	-28.9%	7.0%
2016	26.5%	60.5%	39.4%	65.6%		2016	-13.5%	-7.5%	9.3%	-19.0%
2017	36.0%	18.2%	29.6%	0.4%		2017	79.7%	43.2%	28.3%	7.6%
2018	20.7%	48.1%	24.1%	27.7%		2018	-28.4%	-40.0%	-54.3%	0.8%
2019	15.1%	18.5%	23.9%	**7.2%**	2019	15.6%	0.5%	39.5%	**19.1%**

EMEA	Mar	Jun	Sep	Dec		AP	Mar	Jun	Sep	Dec
2011	17.1	21.9	24.8	30.4		2011	4.5	5.4	9.6	11.8
2012	36.4	40.0	23.1	35.9		2012	11.0	14.1	7.8	9.8
2013	31.6	37.2	52.9	58.8		2013	12.0	12.8	18.6	19.0
2014	77.9	57.4	50.6	60.1		2014	16.2	19.6	14.8	16.7
2015	66.8	56.9	60.5	61.0		2015	17.1	18.2	15.5	20.0
2016	73.3	69.7	81.4	77.4		2016	20.9	21.0	25.0	22.3
2017	87.8	87.9	93.3	102.0		2017	24.2	22.3	25.3	33.1
2018	113.7	102.3	124.9	134.4		2018	22.0	22.4	24.4	30.7
2019	125.7	92.3	125.8	120.6		2019	27.1	22.4	29.7	32.8
										
										
Grth	Mar	Jun	Sep	Dec		Grth	Mar	Jun	Sep	Dec
2011						2011				
2012	112.4%	82.7%	-6.6%	18.4%		2012	144.7%	160.3%	-19.0%	-16.9%
2013	-13.1%	-7.0%	128.4%	63.8%		2013	9.5%	-8.8%	139.0%	94.6%
2014	146.3%	54.5%	-4.3%	2.1%		2014	35.2%	52.7%	-20.7%	-12.4%
2015	-14.3%	-0.9%	19.6%	1.5%		2015	5.7%	-7.1%	5.2%	19.9%
2016	9.7%	22.4%	34.5%	26.9%		2016	22.2%	15.5%	61.0%	11.3%
2017	19.8%	26.2%	14.6%	31.8%		2017	15.8%	6.3%	1.3%	48.6%
2018	29.6%	16.3%	33.9%	31.7%		2018	-9.3%	0.6%	-3.6%	-7.1%
2019	10.5%	-9.7%	0.7%	_**-10.3%**_		2019	23.4%	0.0%	21.7%	**6.7%**

The share count continues to decrease (almost 9% YoY). This is one of the primary reasons the share price has has held up as good as it has. They reduced their share count by almost a third over the last 8 years and continue to buy more shares.


WA Shrs	Mar	Jun	Sep	Dec
2011	102.5	103.0	93.5	93.4
2012	94.2	94.2	92.9	90.1
2013	89.0	89.1	89.5	89.7
2014	89.8	89.8	89.9	89.7
2015	89.4	89.1	88.5	86.1
2016	84.7	83.8	83.1	82.2
2017	83.3	81.9	81.7	77.7
2018	78.0	74.3	74.0	71.4
2019	70.7	70.3	68.5	65.1

This has provided a lot of earnings leverage:


Month	EPS	AEPS	AEPS	YoY
Mar-11		0.13	0.13	
Jun-11		0.18	0.18	
Sep-11		0.23	0.23	
Dec-11		0.27	0.27	
Mar-12		0.30	0.30	131%
Jun-12		0.30	0.30	67%
Sep-12		0.15	0.15	-35%
Dec-12		0.20	0.20	-26%
Mar-13		0.24	0.24	-20%
Jun-13		0.33	0.33	10%
Sep-13		0.46	0.46	207%
Dec-13		0.48	0.48	140%
Mar-14	0.50	0.50	0.50	108%
Jun-14	0.55	0.56	0.56	70%
Sep-14	0.42	0.48	0.48	4%
Dec-14	0.52	0.53	0.53	10%
Mar-15	0.46	0.47	0.47	-6%
Jun-15	0.05	0.50	0.50	-11%
Sep-15	0.61	0.51	0.51	6%
Dec-15	0.57	0.58	0.58	9%
Mar-16	0.62	0.63	0.63	34%
Jun-16	0.69	0.69	0.69	38%
Sep-16	0.86	0.79	0.79	55%
Dec-16	0.72	0.72	0.72	24%
Mar-17	0.77	0.78	0.78	24%
Jun-17	0.74	0.75	0.75	9%
Sep-17	0.92	0.92	0.92	16%
Dec-17	-0.66	0.76	0.76	6%
Mar-18	1.32	0.98	0.98	26%
Jun-18	0.94	1.01	1.01	35%
Sep-18	1.16	1.17	1.17	27%
Dec-18	1.09	1.33	1.33	75%
Mar-19	1.25	1.26	1.26	29%
Jun-19	1.01	1.19	1.19	18%
Sep-19	1.43	1.44	1.44	23%
Dec-19	1.43	1.44	1.44	8%

Unfortunately, I’ve been a bit lazy following operating cash flows. For the most recent 6 months period (they don’t show 3 months on the SEC filing), it has increased from 144.6 million to 243.3 million YoY. A huge increase in inventories in prior period as well as significantly lower accounts payable offset each other. Assuming constant figures, operating cash flow would have improved by about 30 million.

I’ve been holding my shares for quite a long time now and bought additional shares at very low valuation points a few years back. I refrained from selling, because the business has performed really well, and I really like Pera’s focus on providing the best quality and the company’s “no direct sales” business model.

However, I sold a bit more than a ¼ of my shares after the earnings release. It’s not because I think the company’s situation has changed. It is due to the fact that I wanted more exposure to some other companies that are growing very fast (CRWD, DDOG and even more AYX). I will keep the rest of my shares. UI has provided me with some diversification to my SaaS growth companies, which make up over 80% of my portfolio.

Unless there is something seriously wrong with the business, I think we are not too far away from a bottom. Pera’s timely purchase of shares and the company’s ability to increase margins softens the downside blow we would have experienced otherwise. The problem is that it’s not easy to determine if there is something wrong with the business. Pera has been telling us to look at the company on a three years time horizon. I am willing to keep some of my portfolio invested in him and Ubiquiti.

DJ

24 Likes
2

Responding to DJ’s note on Ubiquiti.

I have Ubiquiti equipment and use it. I like the advanced features it gives the user w/o the huge cost of companies like Cisco, Juniper and Aruba.

I follow their forums a decent amount of the time and there are a few common complaints.

  1. A number of posters on Ubiquiti’s forums are consultants working with their clients to set up a WiFi network (often a good size, anything from 50 users to many hundreds). Their access points are quite good for the money. The big problem is that Ubiquiti has yet to set up any kind of dedicated customer support for those type of clients. Instead you have to rely on online chat support which often doesn’t resolve anything in real time or posting things in their forums. That works ok for the advanced home user who is getting a bargain for the equipment but not for a client that needs near 100% up time. They rather pay a lot more for Cisco equipment and get the phone support.

  2. They seem to be releasing a lot of software as beta and then not upgrading it. Often when something doesn’t work their people will say “turn off the beta advanced threat protection” (or whatever feature it is). At some point items need to stop being beta and need to be a fully supported feature (or deleted).

  3. Calling home. They have received a lot of complaints about the fact that the devices call home and there are no options to turn that “feature” off. They don’t seem inclined to do anything except allow you to prevent personal data from being transmitted but I think even that requires jumping through some hoops to do so.

  4. They seem to be branching into more and more lines of products which I’m not sure is good. People get confused with Unifi, Dream Machine, Amplifi, EdgeMax, etc. Their web page states “Simplifying IT” but with all of those products it gets confusing quickly. And mixing the lines often results in some features not working.

For a techie person, I think their equipment is really good. You get all kinds of features that are not available in most consumer equipment. I can do things such as:
A. Create my own firewall rules
B. Set up 4 distinct wifi networks and prevent any access originating from any/all of those into my private network (i.e., isolate those smart home devices)
C. See which devices are on my network, when they connect/disconnect
D. View my network usage stats down to how often I use Amazon Prime Video vs. Netflix

For the “I want no hassle” person, a simple mesh system like Google’s works fine and requires little knowledge (I think the Amplifi and the DreamMachine are the result of trying to do something simpler for that market). For those that want more, Ubiquiti is nice since it isn’t all that expensive. I think I spent $500 (router, 8 port switch, AP and a management controller).

I haven’t followed the stock but can believe it was nice to own for a while. Now I’d like to see what their vision is for the next 3-5 years (streamline products, provide better support, etc.).

If this is off topic, feel free to delete.

Rich

11 Likes
3

For Ubiquiti it is futile looking at quarter to quarter revenue. Pera doesn’t care about it. Company doesn’t work on optimizing it for Wall Street (I sometimes suspect they actually like it as they can buy back shares for cheap). Pera cares only about the log term trajectory. Long term so far UI has done fine.

2019, revenue 1.2 billion, eps 4.77
2018, revenue 1.01 billion, eps 3.69
2017, revenue 865 million, eps 3.09
2016, revenue 666 million, eps 2.41
2015, revenue 595 million, eps 1.97
2014, revenue 572 million, eps 2.00
2013, revenue 320 million, eps 0.92
2012, revenue 353 million, eps 0.12
2011, revenue 197 million, eps 0.07

I believe this quarter the service provider revenue was impacted due to impending release of next generation LTU technology. Investing in this company is about keeping faith in Pera, and it can be pretty frustrating. There are no conference calls. You just have to believe they will keep coming out with great products (and so far they have)and sales will double over next 3-4 years.

6 Likes
4

2 questions perhaps for those who have followed this company for a while (given Pera’s typical lack of detail in communications with the market).

  1. Do you have any sense of the impact the China/US trade tariffs? See comments pasted below from the 10Qs. You will see that the level of tariffs have been varying over time, and there are different buckets of tariffs (some products are affected by one bucket, some by another). The company is a black box so it is very hard to understand what is the impact of these. Conceptually, it seems these could be affecting the current numbers. Bucket 4B was meant to start in December 2019 but has now been cancelled. Bucket 4A has been reduced from 15% to 7.5%. But bucket 301 is still very high (25%). Depending on the product mix this could mean different things e.g. if they are mostly selling products in Bucket 4B, we could expect results to improve. But if they are mostly 301, we could expect pressures to continue.

I have been trying to get my head around this but it is difficult. Also, as OP mentioned, the weakness in the Q seems mostly led by Europe, which I would (simplistically) expect not to be affected by tariffs. Unless UI is selling to US customers who have operations in Europe. Or whether they ship a certain component from the US which means that tariffs are affecting Europe purchases for a “non-obvious” reason.

  1. I noticed the word “smart home” started appearing in the Annual Report from 2018. It has never been mentioned previously. I also note that R&D employees increased from c.200 to c.650 over the same period. This seems like Pera might be planning something - a new product launch perhaps. He pivoted from WISPs to wifi. A third pivot into other connected devices would make a lot of sense. Does anyone who is active on the UI user forums have any rumours which might inform this? The company has always been very lean. This sudden ramp in R&D employees seems like a departure from their playbook. I can’t believe Pera is making this investment unless he has a long term plan.

Thanks is advance
-exfortisd

P.23 of 2Q20
“The vast majority of our products that
are imported into the U.S. from China are currently subject to tariffs that range between 15% and 25%. On January 22, 2020,
the United States of Trade Representative announced it will reduce Section 301 List 4A additional tariffs from 15% to 7.5% and
the List 4B tariffs would not go into effect. These tariffs have already affected our operating results and margins. For so long as
such tariffs are in effect, we expect it will continue to affect our operating results and margins. As a result, our historical and
current gross profit margins may not be indicative of our gross profit margins for future periods”

p.6 of 4Q19
“In June 2018, the Office of the United States Trade Representative announced new proposed tariffs for certain products imported into the U.S. from China. As of September 24, 2018, these tariffs were
implemented with an initial rate of 10% impacting a portion of our products. On May 10, 2019, the Office of the U.S. Trade Representative increased tariffs on certain imported goods from China to
25%. On May 13, 2019, the U.S. Trade Representative released a list of Chinese-origin products with an annual trade value of approximately $ 300 billion on which the U.S. proposed to impose Section
301 tariffs of up to 25%, which covered almost all remaining imports from China that are not already subject to Section 301 tariffs. On June 29, 2019 President Trump announced that trade negotiations
with China are resuming and the proposed Section 301 tariffs on $300 billion worth of Chinese goods, first announced on May 13, 2019, were place on hold. On August 13, 2019, it was announced the
Section 301 tariffs on $300 billion would go into effect in two parts. “List 4A” on September 1, 2019 at 10% and “List 4B” on December 15, 2019 at 10%.”

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5

I also wonder if anyone has any insight why the changed the listing from NASDAQ to NYSE recently? Is this a something to do with trading volumes? Or is it a technical finance thing, maybe around take-private rules? Given Pera’s high ownership % and the big share buyback program. Seems like the long-term goal for this guy could be to take the company private again. I wonder whether the listing somehow helps this playbook, or whether it is some completely unrelated technical reason which I know nothing about.

Apologies for spamming the board with 2 separate posts.