Why I bought more UBNT

Investment Analysis Clubs Saul’s Investing Discussions
1

I am a little surprised by the continued selling pressure of UBNT and picked up some January 2018 55 calls at 5.8, which gives me a breakeven price of 60.8. It is a bit of short-term bet (a little over 4 months), but this selloff seems overdone in light of what I see as positive factors that I feel should help this stock. I believe Pera selling shares recently and the negative perception of FrontRow prospects are overblown and unduly hurting the stock. The factors that lead me to buy more are as follows:

  1. High insider ownership - Despite selling 1 million shares, Pera still owns 56,278K out of 81,478K shares or 69%. Given the stock buybacks over the last couple of years, Pera’s ownership percentage of the company has increased despite selling the 1 million shares. For me seeing higher ownership by the CEO is a positive.

  2. The company has net cash of $345M (cash of $601.7M minus debt of $256.6M). Having net cash gives the company flexibility (see KMI for debt can do to a company).

  3. Smart capital allocation – I don’t think Pera is given enough credit for his capital allocation skills. Some CEOs with cash on hand are quick to make bad acquisitions in an attempt to grow the company. Pera uses the cash wisely and buys back stock when the stock price is too low. Here is the recent share repurchase activity from the recent 10K filing:

On May 4, 2016, the Board of Directors of the Company approved a $50 million stock repurchase program. Under the stock repurchase program, the Company was authorized to repurchase up to $50 million of its common stock. During the fourth quarter of fiscal 2016, the Company repurchased 1,309,606 shares of its common stock at an average price per share of $38.18 for an aggregate amount of $50.0 million. This included unpaid stock repurchases of $6.5 million relating to repurchases executed on or prior to June 30, 2016 for trades that settled in the first quarter of fiscal 2017.

On August 3, 2016, the Board of Directors of the Company approved a $50 million stock repurchase program. Under the stock repurchase program, the Company may repurchase up to $50 million of its common stock. During the third quarter of fiscal 2017, the Company repurchased 1,014,956 shares of its common stock at an average price per share of $49.26 for an aggregate amount of $50 million.

On March 3, 2017, the Board of Directors of the Company approved a $50 million stock repurchase program. Under the stock repurchase program, the Company may repurchase up to $50 million of its common stock. The program expires on March 31, 2018. During the third quarter of fiscal 2017, the Company repurchased 917,455 shares of its common stock at an average price per share of $50.43 for an aggregate amount of $46.3 million. This included unpaid stock repurchases of $3.0 million relating to repurchases executed on or prior to March 31, 2017 for trades that settled in the fourth quarter of fiscal 2017. During the fourth quarter of fiscal 2017, the Company repurchased 50,000 shares of its common stock at an average price per share of $49.55 for an aggregate amount of $2.5 million. As of June 30, 2017, the Company had $1.3 million available under the stock repurchase program.

Here’s Pera on the recent earnings call about more potential buybacks: I’m always looking for ways to put our capital at work, and if I feel the stock is significantly undervalued we are going to continue to buy it back. And it is true, we are lending money onshore to buyback, but if we believed in the long-term story the Company which we do, I don’t think cash is going to be a problem over the long-term as the Company is going to generate a lot of cash.

  1. 2018 guidance is great – The company tends to be conservative in giving guidance, so I don’t think Pera gives this 2018 guidance lightly. 2018 revenue guidance is 1.0 to 1.15 Billion. 2017 revenue was $865M, so 2018 revenue is forecasted to increase 15.6% to 32.9%. 2018 diluted EPS is expected to be $3.70 - $4.30. 2017 diluted EPS was $3.09, so 2018 diluted EPS growth is forecasted to be 19.7% to 39.1%. Now this may not by overly impressive compared to companies like SHOP, but given the forward PE of 14.25 (see valuation point below), that’s outstanding growth. I also like to see the EPS growth come in at a higher percentage than the revenue growth. Given that the company tends to be conservative and that the contribution by new products are not factored in (see new products point below) to the forecasts, I think UBNT has a good chance to beat their guidance or at least come in at the high side of guidance.

  2. Wall Street has low expectations - Before the 2018 guidance was announced, analysts estimated 2018 revenue of $938.8M with EPS of 3.24. The stock popped over 20% when the earnings was announced for good reason given the guidance was well over what analysts expected. Now after the guidance has been given, analysts are only forecasting 1.01 Billion in sales and $3.61 EPS for 2018. This is definitely a show me stock. If UBNT continues to execute and grow the business, then we should expect more pops in the stock after earnings announcements. Hopefully, as they continue to beat analyst expectations, the valuation will eventually start to increase. I think this article highlights some of the factors that weigh on the stock: https://seekingalpha.com/article/4101521-7-reasons-ubiquiti-… Analyst perception can’t get much worse and I think Pera is doing a better job of dealing with the analysts by being less defensive on the earnings calls, updating the investor presentation on their IR page and hosting an investor update on 9/26.

  3. Low Stock Comp – The company does not issues any stock options and only a limited amount restricted shares to its employees. One of my concerns investing in most tech companies is the high dilution rate due to stock comp, but UBNT does not have this issue and has actually decreased its share count with the buybacks discussed above. See my post on stock comp on the RB board here: http://discussion.fool.com/1069/stock-comp-and-the-board-3271366…

  4. Low cost business model – This has been discussed in detail in other posts, so I won’t go into too much detail here, but Ubiquiti does a great job of minimizing its expenses. Its SG&A is tiny as a percent of revenue compared to most companies. SG&A for 2017 was only 36.8M, which is only 4.3% of revenue. It helps that Pera gets no compensation (other than free medical coverage) and there are only 3 independent Board members who are paid an annual fee of $200K. In addition, to a limited Board, there are only 3 executive officers, with Pera being 1 of these 3. Moore (VP of Business Development) and Kevin Radigan (CAO) are the 2 other officers. There is a very limited sales force as they utilize their community evangelism to spread the word on their products. This also leads to a community that new users can turn to for dealing with any issues that come up and less need to spend on customer service. Further, UBNT has very efficient R&D, utilizing lower cost countries to keep costs down and not having to compete for higher priced silicon valley engineers.

  5. Pera is a valuable asset to the company – With Pera owning the majority of the shares, he is driven by long-term valuation creation and is not as worried about meeting short-term quarterly metrics to get a bigger bonus or more stock options. This negatively impacts how analysts view the company, but should be good for long-term shareholders. See the following article that talks more about the value of Pera: https://seekingalpha.com/article/4097238-ubiquiti-networks-m…

  6. Low Valuation - As I write (UBNT trading around 57), the stock is at a forward PE of 14.25 using a midpoint EPS of $4 per share. If UBNT comes in at the high end of the EPS guidance of $4.3 per share, than the forward PE is 13.3. This is normally the type of valuation for a slow growing business; not a business that is expecting its earnings to grow by 19.7% to 39.1% this year. I think we are at the low end of UBNT’s historic PE ratio, which leads me to think now is a good time to buy.

  7. Prior controls issues have been addressed – In the past couple of years, UBNT has had multiple material weaknesses, one of which led to a $46.7M wire fraud. The company hired Kevin Radigan as the Chief Accounting Officer and he took charge of the accounting and SOX controls. He was the CFO for Tunstall Americas from January 2012 to March 2016, so he has good experience and has resolved all the material weaknesses as they were all remediated in the 2017 SOX audit. See more info about the prior weaknesses and the current status here:

We have in the past and may in the future fail to maintain adequate internal controls. For example, as reported in the Annual Reports on Form 10-K for the years ended June 30, 2015 and 2016, management of the Company determined that the Company did not maintain an effective control environment, which contributed to three material weaknesses in internal control over financial reporting.

Regarding the lack of sufficient, competent personnel necessary for effective financial reporting, we recruited and transitioned the leadership team within the finance organization by adding additional qualified and experienced personnel. We have updated our accounting policies and procedures documentation together with key process level documents. In conjunction with the recruitment efforts, we have clarified roles and responsibilities within the finance organization.

Regarding the ineffectively designed and maintained controls required for safeguarding of the Company’s funds and timely detection of improper transactions in the general ledger, we have implemented new policies and controls surrounding disbursement authorities and journal entry creation, including training on required supporting documentation.

Regarding the ineffectively designed and maintained controls over user access and transaction privileges to modify and post entries to the general ledger and subsidiary ledgers, the Company has reviewed and updated user access and transaction privileges to the general ledger and interfacing subsidiary systems through the implementation of automated and manual controls. Additionally, we have performed a segregation of duties analysis over general ledger access. Management has also developed policies to ensure that future system changes consider impacts to the general ledger, including transaction privileges and segregation of duties.

We have completed our testing of the controls discussed above and conclude that our previously reported material weaknesses in our internal controls over financial reporting have been satisfactorily remediated as of June 30, 2017.

  1. New products are not built into the 2018 guidance – Here is what Pera said in the recent earnings call when asked if guidance was dependent on unannounced products (as of August 3): The way I look at it is the unannounced products would be icing on the cake. But with what we have now between operators and segment and our UniFi segment I intend that we will be able to hit those estimates. FrontRow or any other new upcoming products do not need to be a hit. I follow FrontRow closely on social media and think their approach is pretty good (see my post on RB here: http://discussion.fool.com/1069/more-frontrow-32820054.aspx). FrontRow was recently sold out through Amazon and the reviews there were pretty good (4.5 out of 5 stars). With their low spend on advertising, I think FrontRow sales will start slowly, but if they build enough of a following, they could have a nice sales increase going into the holiday shopping season. Given that new product revenue is not part of the guidance, there is upside to the 2018 guidance if one of the new products is a hit.

  2. Better supply chain management – The company had issues managing product supply and dealing with its distributors. UBNT has learned from this and has built up inventory levels to allow for it to better meet distributor demand. They have also provided training to distributors, so they know the products more fully and are more engaged. See the following from the 10K: We have expanded the scope of our training certification program for distributors and other interested individuals through updated classroom curriculum and new online courses. In fiscal 2017, Ubiquiti had 294 certified trainers across our various product platforms with more than 50,000 students enrolled in training. UBNT is learning and maturing in how it manages its dealers and product distribution.

  3. The company keeps building out its IP portfolio – From the 10K: As of June 30, 2017 , we had 53 issued patents in the United States, 34 issued patents in foreign countries and over 100 pending U.S. and foreign patent applications. Nice to see that there are over 100 pending patent applications as they keep refining their product offerings and coming up with new products, which could lead to future growth.

  4. Enterprise growth – From my recent post discussing their updated investor presentation: 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. http://discussion.fool.com/1069/company-updates-32806031.aspx

There are more reasons to like UBNT and also reasons not to like UBNT (hardware business, a CEO who also owns a basketball team), but for me the positives outweigh the negatives. The day before the company came out with earnings, the stock was trading at 53.93 and popped to over 67. The stock has since erased most of these gains and is now only 6% above the pre-earnings price. Given how much higher the 2018 guidance was compared to expectations, I am surprised to see the stock back down to this level. I think it presents a buying opportunity.

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I enjoyed your summary, wouter28. I’ve been a big fan of the company for several years running for pretty much all the reasons you state. Not that long ago, I exited my position, selling my shares at $65+ to harvest profits. UBNT had been very good to me and I fully intended to buy those shares back at a discount. Consequently, I did what I do when I look for reasonable entry points: I check stock charts.

Here’s a favorite chart pattern I check practically each day for all my holdings. It’s a one month chart with the 50-DMA noted and the MACD (“Moving Average Convergence Divergence” – a trend-following momentum indicator). I check the RSI (Relative Strength Index) too, but I find the MACD more useful. What it shows me is the buying/selling strength and indicates whether shares are being accumulated or sold. Today’s UBNT chart shows that UBNT had been quite popular, with share prices rising over the last month. However, there’s been a marked change in sentiment, as shown by the MACD. There’s net selling and shares are being distributed rather than accumulated. The MACD signal is quite strong, such that I cancelled a GTC order to buy at $56. It looks as if the share price may fall farther still. Time will tell.

http://tinyurl.com/yd2z598o

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It looks as if the share price may fall farther still.

I’m already hungry and this is making me salivate like Pavlov’s dog.

This would be like In-n-Out burger selling double-doubles for a $1.
I’d probably buy five of them right now.
Sorry for those who aren’t aware of the California based chain.

But enough of the food references, I just believe the company offers a great value currently with high growth.

By the way, excellent write up wouter28.

AJ

6 Likes
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Hi wouter28,

What a fabulous post! Thanks a lot for sharing this detailed description with us.

I think we are at the low end of UBNT’s historic PE ratio, which leads me to think now is a good time to buy.

Actually, this is not true. In fact, we are pretty much a bit above the midpoint between the highs and lows since September, 2014. I’m not sure why I chose this date. But we did see P/E between 11.6 and 14.2 in about 2/3 of the quarters in this time period.

For September & December, 2017, the prices are based upon high and low P/Es since September, 2014.

Please ignore the second AEPS column. It’s a result of a formula in my spreadsheet that I’m too lazy to remove for the post.

Here are the data:


Month	EPS	AEPS	AEPS	YoY	TTMEPS	Hi	Lo	Close	P/E	P/EHi	P/ELo
Mar-11		0.13	0.13								
Jun-11		0.18	0.18								
Sep-11		0.23	0.23								
Dec-11		0.27	0.27		0.81	$23.04	$16.25	$18.23	22.5	28.4	20.1
Mar-12		0.30	0.30	131%	0.98	$33.97	$17.33	$31.63	32.3	34.7	17.7
Jun-12		0.30	0.30	67%	1.10	$35.99	$11.19	$14.25	13.0	32.7	10.2
Sep-12		0.15	0.15	-35%	1.02	$15.26	$7.80	$11.90	11.7	15.0	7.6
Dec-12		0.20	0.20	-26%	0.95	$13.15	$9.97	$12.14	12.8	13.8	10.5
Mar-13		0.24	0.24	-20%	0.89	$16.66	$11.39	$13.72	15.4	18.7	12.8
Jun-13		0.33	0.33	10%	0.92	$20.89	$12.81	$17.54	19.1	22.7	13.9
Sep-13		0.46	0.46	207%	1.23	$37.40	$17.17	$33.59	27.3	30.4	14.0
Dec-13		0.48	0.48	140%	1.51	$46.88	$33.61	$45.96	30.4	31.0	22.3
Mar-14	0.50	0.50	0.50	108%	1.77	$56.85	$37.50	$45.45	25.7	32.1	21.2
Jun-14	0.55	0.56	0.56	70%	2.00	$47.92	$30.50	$45.19	22.6	24.0	15.3
--------------------------------------------------------------------------------------------
Sep-14	0.42	0.48	0.48	4%	2.02	$50.00	$36.98	$37.53	18.6	24.8	18.3
Dec-14	0.52	0.53	0.53	10%	2.07	$37.92	$26.98	$29.64	14.3	18.3	13.0
Mar-15	0.46	0.47	0.47	-6%	2.04	$32.97	$25.67	$29.55	14.5	16.2	12.6
Jun-15	0.05	0.50	0.50	-11%	1.98	$34.28	$25.50	$31.31	15.8	17.3	12.9
Sep-15	0.61	0.51	0.51	6%	2.01	$37.10	$28.50	$33.89	16.9	18.5	14.2
Dec-15	0.57	0.58	0.58	9%	2.06	$35.96	$28.69	$31.69	15.4	17.5	13.9
Mar-16	0.62	0.63	0.63	34%	2.22	$35.00	$25.75	$33.27	15.0	15.8	11.6
Jun-16	0.69	0.69	0.69	38%	2.41	$41.21	$32.06	$38.66	16.0	17.1	13.3
Sep-16	0.86	0.79	0.79	55%	2.69	$54.73	$37.06	$53.50	19.9	20.3	13.8
Dec-16	0.72	0.72	0.72	24%	2.83	$59.43	$48.25	$57.80	20.4	21.0	17.0
Mar-17	0.77	0.78	0.78	24%	2.98	$64.62	$46.49	$50.26	16.9	21.7	15.6
Jun-17	0.74	0.75	0.75	9%	3.04	$53.27	$45.71	$51.97	17.1	17.5	15.0
============================================================================================
Sep-17			0.85	8%	3.10	$76.73	$35.96			24.8	11.6	
Dec-17			0.92	28%	3.30	$81.68	$38.28			24.8	11.6

Here is a table with various value points and the expected prices using analysts’ midpoint projections.

			Min	Max	Mid		
Period	TTM	$57.86 	11.6	24.8	18.2	20.0	22.5
Today	$3.04	19.0	$35.26	$75.25	$55.26	$60.80	$68.40
Sep-18	$3.10	18.7	$35.96	$76.73	$56.35	$62.00	$69.75
Dec-18	$3.30	17.5	$38.28	$81.68	$59.98	$66.00	$74.25

Here are the segment data:


SPRev	Mar	Jun	Sep	Dec		EntRev	Mar	Jun	Sep	Dec
2013	75.5	90.1	94.2	111.5		2013	7.7	11.1	35.5	27.0
2014	121.0	124.0	107.3	99.7		2014	27.3	32.0	42.8	53.4
2015	106.2	104.8	103.4	109.6		2015	41.2	40.5	48.0	52.3
2016	96.3	109.0	120.6	115.6		2016	71.1	76.7	84.1	98.0
2017	104.7	114.7				2017	113.6	114.0		
										
Grth	Mar	Jun	Sep	Dec		Grth	Mar	Jun	Sep	Dec
2014	60.3%	37.6%	13.9%	-10.5%		2014	256.0%	188.2%	20.7%	98.0%
2015	-12.2%	-15.5%	-3.6%	9.9%		2015	50.7%	26.5%	12.1%	-2.1%
2016	-9.4%	4.0%	16.6%	5.5%		2016	72.5%	89.5%	75.1%	87.3%
2017	8.7%	5.2%				2017	59.8%	**48.6%**

Enterprise revenue, which is growing really well, should overtake Service Provider revenue this quarter.

And EMEA is growing a faster than NA now (see below). Even South America is growing well albeit on a smaller base.

									
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				2017	27.8	34.3		
										
Grth	Mar	Jun	Sep	Dec		Grth	Mar	Jun	Sep	Dec
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%				2017	79.7%	43.2%		

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				2017	24.2	22.3		
										
Grth	Mar	Jun	Sep	Dec		Grth	Mar	Jun	Sep	Dec
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%				2017	15.8%	6.3%

Valuation is in large part a function of expectations. The expectations of Pera in the analyst community are pretty low. If we continue to see improvement in the business, we’ll eventually see expectations rise with the value of the stock to follow.

Perhaps the latest numbers are keeping the price down. Although there are good reasons for the deceleration in earnings growth in June, 2017 (Pera addressed these on the call and they’ve been provided in a number of your posts on this board), analysts may just see the 9% YoY number. They do, however, have them earning at 28% YoY growth in December.

I am sticking with Pera’s 3 years message, regardless of what the analysts say. If we get blowout earnings for a few quarters over the next couple of years, which most likely has as high of a probability as just having good earnings or not so good earnings, we’ll see Ubiquiti do very well.

Since doing this analysis, understanding the company and emerging myself in the boards (especially your great posts), I’ve been able to consistently add more shares at decent value points. And for Ubiquiti, I think we have a hidden gem that could grow for a while under the radar.

Now, if I could bring myself to the point where I can have as much conviction in my investments as Saul, I’d be doing a lot better. Somehow, I held on to Infinera and Buffalo Wild Wings too long, and I still own quite a lot of Chipotle, which was for years my most successful investment. With the exception of Chipotle, I was not rigorous enough in my analysis and resulting conclusions and have paid the price.

Hopefully, I’ll get there.

DJ

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Here’s Pera on the recent earnings call about more potential buybacks: I’m always looking for ways to put our capital at work, and if I feel the stock is significantly undervalued we are going to continue to buy it back. And it is true, we are lending money onshore to buyback, but if we believed in the long-term story the Company which we do, I don’t think cash is going to be a problem over the long-term as the Company is going to generate a lot of cash.

Sure, I like that confidence, but anyone who can create a great startup has truckloads of confince. So when someone like Aubry McLendon of Chesapeake energy was buying tons of his stock, everyone thought is was great. But he was leveraging up and when the tides turned get got margin calls, which caused the stock to fall, so he got margin calls. His confidence did not translate well for investors. As a side note, his corrupt board tried to make him whole with stock options, again not good for the shareholders.

I believe Sam Waxel of Imclone was super positive, and in the end he was right, but it was a rough ride in between.

Startup people have huge egos and confidence, don’t put too much stock in it. That said, I am about to be a buyer.

1 Like
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Thanks DJ for the great post and going over the numbers.

At a price of 55, UBNT is very cheap and I hope management is using this opportunity to buy back shares. The company had $51.25M authorized to buy back stock as of September 5. If they use that all and buy back at an average of 57 per share, that is 900K shares that can be retired and would reduce outstanding shares from 81.5M to 80.6M. This would increase Pera’s ownership of 56.2M shares from the current 68.96% to 69.73%. More importantly, the midpoint 2018 EPS guidance was $4 per share and reducing the share count by 900k would increase that same amount of earnings to 4.045 per share. Note a huge increase but every cent helps.

On the day before the most recent earnings was announced, the stock closed at 53.93 but had an intraday high of 55.88. The next day the stock popped hitting a high of 67.8, up 25.7% from the previous day’s close. With the stock closing at 54.95, it is now only up 1.9% from the day before the earning’s announcement and actually below the intraday high from that day. So basically, the great earnings release with 2018 earnings guidance that was 23% higher than analyst forecasts (EPS of $4 vs $3.24) and caused the stock to pop 25% has now totally been discounted.

It is difficult to understand how the stock can be driven lower and totally discount the much better than expected 2018 guidance. I try to avoid confirmation bias (not easy) and look for reasons to sell the stock, but just don’t see good reasons. They have cleaned up their accounting issues as they got a clean bill of health in their recent audit as seen in the 10K issued last month (We have completed our testing of the controls discussed above and conclude that our previously reported material weaknesses in our internal controls over financial reporting have been satisfactorily remediated as of June 30, 2017). The increase in inventory and Days Sales Outstanding (DSO) could be a concern but this has been explained and is actually pretty positive. The reason they have increased inventory levels is because they are using bigger distributors, which require more inventory and should allow for increased sales. Bigger distributors have better credit risk and expect more favorable credit terms, which increases the DSO. There has been concern that margins are not sustainable, but hat has been disproven by their continued execution and delivering good margins. Note that there was a slight dip in margins due to the release of new products, but that was not overly significant and guidance shows margins going back up to normal levels. I think the following article does a good job looking at potential short cases and pointing out the flaws in their argument: https://seekingalpha.com/article/4104561-ubiquiti-networks-m…

The concern over Pera selling 1M shares should be muted by the recent 50M share buyback announcement. Also, his sale was less than 2% of his ownership stake and the rationale related to needing to put more money into the Memphis Grizzlies has been well documented.

The concern over FrontRow not generating a lot of sales and being a distraction is also not a great short argument. Pera said on the August 3 earnings call that “the way I look at it is the unannounced products would be icing on the cake. But with what we have now between operators and segment and our UniFi segment I intend that we will be able to hit those estimates.”Even if FrontRow is a total flop, it should not negatively impact earnings. Also, they have separate engineers working on consumer products (part of Ubiquiti Labs), so that engineers working on core products like UniFi are not distracted. Having engineers pulled from one project onto other projects used to be a concern, but this has gotten better according to the following post from the UBNT community:

Yes, but there are new people being brought on line all the time. Developing complex devices and software takes time, and we all want things now, but the reality is that these and everything else will get done eventually. I’m aware of at least 2 new UBNT lines that most people don’t even know exist where the dev team is 100% new hires, so you should see people being pulled off other things less and less. https://community.ubnt.com/t5/Upcoming-Products/Who-Green-li…

UBNT is expanding and Pera mentioned that there would be multiple new products coming out (all not baked into guidance) and the above post appears to show this with the reference to 2 new product lines that are not yet public.

Looking at FrontRow, they have continued to improve the product. The recently upgraded the firmware with a stopwatch app and a translation app. See here: https://community.frontrow.com/topic/139/firmware-update-v1-…

The translation app is pretty cool: https://twitter.com/Latinvixen/status/908508885056618499

I don’t think I would buy FrontRow for myself, but using it for travel would be a tempting reason to buy it. You can enjoy the experience without having to pull out your phone/camera to take a pic. See this article about benefits of travelling with FrontRow: https://emwng.com/frontrow-camera/

FrontRow is getting more attention. Even Jamie Foxx (the actor with 5M followers on Twitter) was spotted with one: https://twitter.com/FrontRowCam/status/908454649740509184/

This post by rapper Rae Sremmurd has gotten 140K views: https://www.instagram.com/p/BYyV9GKHPVc/

Also the positive review by Jonathan Morrison has over 353K reviews: (https://www.youtube.com/watch?v=7wGu96MzOzw&feature=yout…)

And more reviews keep coming out: https://arstechnica.com/gadgets/2017/09/frontrow-camera-revi…

They keep developing the product with more apps coming out like Spotify and send product to reviewers and people with large social media presences so they can demonstrate the product to potential buyers at a low marketing spend. The product has been out for a month and they have already made improvements and are incorporating feedback. The reviews have overall been pretty positive (4.6 out of 5 stars out of 16 reviews on Amazon). The product is expensive, but if they keep adding more value with a translation app, Spotify app, etc, people will see it as more than just a $400 camera. People don’t mind shelling out $1,000 for the iPhone X, so paying $400 for FrontRow is not that unrealistic. They have not yet opened it up to internationally and they will start selling a rose colored version in October. Hopefully the publicity will keep growing as we get closer to the holiday shopping season. I could see this being a good Christmas gift and could have a positive impact to Q2 earnings.

Meanwhile wall street continues to underestimate Pera (https://www.chaffeybreeze.com/2017/09/16/ubiquiti-networks-i…). I am hoping that the Pera has some surprises in store at the 9/26 investor event. It would be great to get an update on FrontRow and see if there are any new product announcements. Given that 9/26 is right at the end of the quarter, it would be a great time to preannounce expected revenue and earnings. In early November when the earnings are announced, I would expect the stock to pop if still trading at this range, assuming they meet their forecast for Q1 earnings. Buying short terms options are always risky, but I have been buying January and March calls the last couple of days.

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