Ubiquiti Networks' (UBNT) CEO Robert Pera on Q4 2014 Results - Earnings Call Transcript

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 |  About: Ubiquiti Networks, Inc. (UBNT)
by: SA Transcripts

Ubiquiti Networks (NASDAQ:UBNT)

Q4 2014 Earnings Call

August 07, 2014 5:00 pm ET

Executives

Anne Fazioli -

Craig L. Foster - Chief Financial Officer, Principal Accounting Officer and Director

Robert J. Pera - Founder, Chairman and Chief Executive Officer

Analysts

Matthew S. Robison - Wunderlich Securities Inc., Research Division

Pierre Ferragu - Sanford C. Bernstein & Co., LLC., Research Division

Erik Suppiger - JMP Securities LLC, Research Division

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

Tavis C. McCourt - Raymond James & Associates, Inc., Research Division

Timothy J. Quillin - Stephens Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to Ubiquiti Networks Fiscal Fourth Quarter 2014 Q&A Conference Call. [Operator Instructions] And as a reminder, this conference call may be recorded.

I would now like to turn the conference over to Ms. Anne Fazioli, Vice President of Investor Relations. Ma'am, you may begin.

Anne Fazioli

Thank you, operator, and thank you, everyone, for joining us today. I'm Anne Fazioli, Vice President of Investor Relations for Ubiquiti Networks. I'm here with Robert J. Pera, Founder, CEO and Chairman of the Board at Ubiquiti Networks; and Craig Foster, our Chief Financial Officer.

Before get started, I'd like to review the Safe Harbor statement. Some of the statements we will make during this call constitute forward-looking statements, including perspectives on our future financial results, product, market conditions and competition. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call. Information on risk factors and uncertainties is contained in our most recent filing on Form 10-K with the SEC and our other SEC filings, which are available on the SEC's website at www.sec.gov. Forward-looking statements are made as of August 7, 2014, and we assume no obligation to update them.

We hope you've reviewed management's prepared remarks, which are posted as a transcript on the Events & Presentations and Quarterly Results sections of our Investor Relations website at ir.ubnt.com. This call will be a Q&A-only call. [Operator Instructions]

Operator, we are now ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Matt Robison from Wunderlich.

Matthew S. Robison - Wunderlich Securities Inc., Research Division

I wanted to -- a couple of things in your prepared remarks I wanted to touch on. I'll try to keep it to 2. The first is your guidance, you talked about, apparently, geopolitical issues that you think might have some constraint on your business. I'm hoping you can elaborate on that. For one, I noticed that EMEA was pretty strong, still down from the prior quarter, but still quite strong. And I'm wondering if you might have seen a certain amount of sale into that in preparation or would you expect that to stock down in the quarter? And the other point was, you talked about the stocking the shelves effect with your new products. Does that mean to say that with the new products, you really built that many of them that you stock the shelves? Because normally, you guys kind of ramp up slowly as you launch new products in the market is my expectation. So those are my 2 questions.

Craig L. Foster

Okay. So this is Craig. I'll start. So regarding the geopolitical, there's been a number of what I'll call, I mean, I don't want to get into a political commentary, but there's been a number of flareups in the world. And for us, we're tracking 5 situations right now, which constitutes the Russia-Ukraine situation; Israel has a problem that they're working on; and you have Argentina; and then you have what may turn out to be a civil war in Iraq. As we put out the guidance for the quarter, we've tried to normalize for what we think are -- there are some issues in those regions that, mostly in Iraq, we don't believe we're going to be able to ship into the region because of the issues that they're having with the ports and kind of ongoing skirmishes in the country. So our guidance is muted based on what we think is -- what we will be able to ship in our discussions with our distributors in the region. And then your second question was regarding the products inventory as it relates to the initial builds. I think, last quarter, our initial builds for products that we knew were going to have a high demand, which were -- and we had -- was things like airFiber5. And for airFiber5, we actually had done quite a bit of testing and market analysis, knowing that it was going to be a pretty big hit from day 1. So we prebuilt the inventory. For our other products that we've recently released, there's more of a steady buildup, so you won't see the big spike in inventory as we begin to see the market. It'll be a little bit more of a natural cadence.

Operator

And our next question comes from Pierre Ferragu from Bernstein.

Pierre Ferragu - Sanford C. Bernstein & Co., LLC., Research Division

My question is about your enterprise revenues. So I just wanted to clarify, I'd like to make sure I get that right. I understand that most of your revenue growth sequentially was driven by UniFi, so your WiFi product line that was -- so that's why it's most of what is up 17% sequentially and what almost three-fold year-over-year. So my first question would be, does that really reflect the evolution of your end demand? So did channel inventories, from what you see, remain about stable as a percentage of revenue sequentially and year-on-year? And then my second question is more about the next, I would say, batch of product that you have in the enterprise space in switching and voice. When you look at the addressable market of these products, it's actually much larger than WiFi. So my question is, how should we think about the roundup of these products in the coming, let's say, next 6 to 9 months? Should we expect a roundup -- as quick a roundup as what we've seen for UniFi over the last 15 months, or actually even faster? And how are you going to evaluate demand for this new product as time goes over the next few quarters?

Craig L. Foster

Okay. So I'll start with the question on the UniFi inventory. Last quarter, certainly, we saw a massive resurgence in Ubiquiti -- in UniFi sales, which was really, we saw almost a tripling of our AC sales for UniFi. And that's -- I think that's a predecessor to what we see as great end-market demand. We've seen -- as we continue to march down the road, we've seen quite a bit of uptake in this product adoption across the board. But the inventory levels in the channels still remain, actually, what we think is probably a little bit under where they should be. And then I'll hand it over to Robert to talk a little bit about some of the new products.

Robert J. Pera

Pierre, specifically, what do you want to know about the new products?

Pierre Ferragu - Sanford C. Bernstein & Co., LLC., Research Division

I'm just wondering how you see the roundup of your new products. Like, if I look at switching and voice combined, the addressable market for these products is actually larger than WiFi. And so, I'm wondering how should we expect, like, the first quarter in terms of revenues for these products? Where are your ambitions over the next, maybe, 6 to 12 months?

Robert J. Pera

We released EdgeSwitch, which is under our EdgeMAX product line, which is really meant for a variety of applications, especially with our service providers. And a lot of them are pairing them with airMax, a lot of them are using them for video security deployments and just general small medium business use. It's hard to say. I believe that will end up being a pretty significant material product line for us. I can't really say what the growth is going to look like over the next few quarters. I will say, though, that we will have, in UniFi, which is our SDN platform for the enterprise, we will have a switching product line for UniFi. And that becomes powerful because we have somewhere on the order of probably close to 2 million UniFi APs deployed in the world, and we have a Software Defined Networking centralized control point. And what you'll see in our next version of UniFi 4.0, you'll see it become much more than just WiFi. And the system integrators will see how you could add switching to your WiFi network or add security gateways or add video cameras. And because we have such a big deployed base of UniFi, once we bring our same-switching technology under the UniFi SDN platform, I think you'll see instant traction because we just have so many deployments out there. So when you factor in the UniFi switching combined with the EdgeMAX switching, I think switching will be a large material contributor for us. And I think you'll see pretty good sales numbers, I'd say, calendar year 2015, definitely in the millions, maybe to tens of millions.

Pierre Ferragu - Sanford C. Bernstein & Co., LLC., Research Division

Okay, excellent. And maybe if I can have a very, very quick follow up on your production facilities that you started leasing recently. How big is that going to be over time as a percentage of your total production? And then, eventually, is that going to be like a facility that will run at a very high utilization rate? Or is that going to be like a preproduction phase, where utilization will be a bit lumpy? And I'll leave it there.

Robert J. Pera

I'm sorry, what's the topic of your question?

Pierre Ferragu - Sanford C. Bernstein & Co., LLC., Research Division

So you've just leased some production space...

Robert J. Pera

Oh, production space, okay. A new factory?

Pierre Ferragu - Sanford C. Bernstein & Co., LLC., Research Division

Yes.

Robert J. Pera

Yes, for the time being, that's strictly to accelerate time-to-market. So some people -- or some companies look at expenses, they look at their operating expenses, and they look at their SGA expenses. I see expenses as lost opportunity cost. So when I see our product is 3 months delayed to market or 4 months delayed to market, and that product has potential to do millions of dollars of revenue per month, I see millions of dollars we're wasting. So we're always looking at ways to get from concepts of a new product to mass production. And having our own factory with some vertical integration, especially on the mechanical side and the prototype production stages of project development, hopefully, will shave off months to our time-to-market for new products.

Operator

Our next question comes from Erik Suppiger from JMP.

Erik Suppiger - JMP Securities LLC, Research Division

First off, Robert, I'd be interested to get your perspective on the restrictions of the SEC has been discussing and what impact or concerns that raises for you.

Robert J. Pera

Right. So SEC is considering new proposals to restrict, I guess, radiated power in the 5-gigahertz band. Potentially, that could reduce the range and the number of channels in the 5-gigahertz band for our airMax networks. I think for the industry, it could hurt the industry overall. But from Ubiquiti's competitive advantage point of view, I don't see it as something that will hurt us, because for the past several years, we've been investing heavily into R&D that makes our products more immune to noise and more especially efficient. And by extension, this would also allow us to kind of maybe neutralize any reduction in spectral -- in spectrum from a compliance environment, from a more aggressive compliance environment. So I think if the new rules are implemented or not, I still like our ability to grow our airMax platform in the U.S. And of course, you got to look at it, as most of our growth right now is outside the U.S. So I think we're still in a good space inside of that.

Erik Suppiger - JMP Securities LLC, Research Division

Is the impact largely on the airFiber? Or how much of the airMax product would be affected by that?

Robert J. Pera

I would say, if they have more stringent, what they call, band edge requirements, it's going to reduce the number of channels you have for transmitting high-radiated power for long-distance links. So what's going to happen is the guys are going to turn to more and more antenna gain and more spectrally efficient radios to overcome those radiated power limitations. And that actually bodes well for us, because if you look at all our newer designs and especially our airFiber, we're moving towards radio technology that's a lot more spectrally efficient, and has a lot more antenna gain and antenna performance to overcome any kind of limitations in transit power.

Erik Suppiger - JMP Securities LLC, Research Division

Okay. And is this likely to have any near-term impact? Are they restricting the release of products?

Robert J. Pera

As far as I know, there's rules proposed and they haven't been finalized yet. And even if they -- when they are finalized, it won't be in the near future.

Erik Suppiger - JMP Securities LLC, Research Division

Okay. And then, Craig, you had talked about, basically, you're suggesting that in some of these regions where there's geopolitical issues, you're assuming reduced shipments. Are you assuming no shipments for most of those regions? Or can you give us a flavor for how much you've reduced your expectations for the 6% of revenue coming from those different regions?

Craig L. Foster

Yes. So I think, really, our primary focus is really on what's happening on Iraq. The other regions, despite what we're seeing with some embargoes and stuff like that, it doesn't affect our equipment our sales, but it's still something we're tracking. So to give you kind of a flavor of the magnitude, so for Iraq last quarter, Iraq was -- or the quarter where we're reporting on right now was a top -- was #11 country for us in terms of sales. And then, we also have some distribution partners from Saudi Arabia that are also selling into Iraq. So we think that probably the total impact would be around 2% to 2.5% of what we would, and we're basically forecasting that we will not be able to sell into those regions. And it really depends on what our distributors are saying, "Hey, it's okay to sell," and our guidance is reflected in that.

Erik Suppiger - JMP Securities LLC, Research Division

Okay. And then last question. Just more broadly, Europe, your revenues coming out of Europe, how much of that is Eastern Europe versus Western Europe? Can you give us any sense for that?

Craig L. Foster

It's like 30%, 40% of it, but you also have Africa in there as well.

Erik Suppiger - JMP Securities LLC, Research Division

All right. 30%, 40% coming from...

Craig L. Foster

Eastern Europe...

Erik Suppiger - JMP Securities LLC, Research Division

Eastern Europe, okay.

Craig L. Foster

And then blended in the Middle East.

Operator

And our next question comes from Jess Lubert from Wells Fargo Securities.

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

First, I was hoping if you could comment on visibility in general. And on the last call, you talked about wanting to build inventory to better meet customer demand heading into the seasonally stronger second half of the calendar year. So I was just hoping you could update us on to what extent these efforts played a role in the strength that you're reporting here, and how you're feeling about channel inventories heading into the September quarter.

Robert J. Pera

Yes, I think that we -- I mean, last quarter, we signaled that we were, one, getting prepared for a busy season; two, we had some new products that we hadn't released yet that we're going to be selling pretty heavily into the channel. And certainly, the $10 million to $12 million worth of inventory that we have of new products moved directly into the channel and off of our books. And so I think that we look at inventory and we say that, look, I think that we're well-prepared. And we're continuing to kind of keep on our 7 to 8 weeks of guidance for where we think inventory levels needed to be on our books.

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

Okay. And then on the enterprise products, I was hoping to understand maybe where you are in building out their portfolio, if there's more products to come, what additional investments need to be made to complete the portfolio and drive awareness of these products? And perhaps, you can help us understand to what extent the focus of these solutions will mostly be on the emerging versus the domestic markets.

Robert J. Pera

Yes, so I mentioned earlier, we have I think close to about 2 million UniFi APs deployed. We're #2 in the enterprise wireless LAN AP space. And volume shipments behind Cisco, we did that in about 3 years. And a lot of people see UniFi as just WiFi and WiFi APs today. And I think we're at in an inflection point coming up where we're going to show that UniFi's a really a full end-to-end software-defined networking platform. So anything in your business closet, whether it's a PBX, a security gateway, a power you're using as switch, a network attached storage, a network video recorder, and everything will be able to be controlled through this UniFi Software Defined Network and control point. So where we won a position unifies any small medium business, school, hotel. They would just only need one vendor. And it completes all their IT infrastructure needs, and they can control all of these IP boxes from one software control point, and they could also control multiple sites from the same control point. And we're doing this all at disruptive pricing fractions of the cost of existing solutions without any support or licensing fees. So I think we're really democratizing end-to-end technology for these -- for our enterprise side. And so it's exciting. I think we're just at the beginning of where UniFi is headed.

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

Robert, do you believe the existing channel has the expertise to sell all these other products? And is the thought that any customer who's bought a UniFi WiFi product would be interested in buying a switch or a Voice-over-IP system, a security gateway, et cetera?

Robert J. Pera

Well, as I always say, I think the world is changing. If you came out with something like this 10 or 20 years ago, without any salespeople or without any channel connections, it doesn't matter if you have the best product in the world, you would fail. But if you look at the world we're living in today, it's so different. Information is disseminated between the consumers and between the system integrators so quickly that now, it's become a product war, where the best product will win out. You look at our website, I think I looked at it spending within the top 10,000 websites in the world. We get huge traffic on the community. Every day, more and more Ubiquiti fans are kind of come on board. And so I don't think you need a channel to kind of facilitate shipments to these system integrators and end-users. But we're living in a time where if you have a disruptive product that's really great, people are going to find it. And I think we've proven that. We didn't have any salespeople or marketing people or business development people around UniFi. And in 3 years, we've become #2 volume shipment vendor for WiFi APs and enterprise space.

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

Robert, have you received any qualitative commentary from your partners that really drives this view that these products can really create a pretty big opportunity and drive this market awareness and interest that you're talking about?

Robert J. Pera

So if you're talking about new channels or traditional channels to supplement our existing entrepreneurial channel that was kind of created through our airMax product line, we are doing that. I think Craig has scanned what are few of them.

Craig L. Foster

[indiscernible] and Ingram Micro.

Robert J. Pera

And we have a big one in China we just signed up.

Craig L. Foster

Yes, and a couple more.

Robert J. Pera

Yes, so -- and we're not -- we never pursued these relationships. So these guys are just coming to us, and they really want to represent our brand and sell our products. So yes, we'll look -- if people come to us and want to sell the product, of course, we'll work with them.

Operator

Our next question comes from Tavis McCourt from Raymond James.

Tavis C. McCourt - Raymond James & Associates, Inc., Research Division

Robert, first, I wonder if you can give us an update on the timeline for the point to multi-point version of airMAX AC. And then, secondly, is there a way to quantify the benefit of adding the 2 big North American distributors this year? In other words, have you tracked the number of new resellers that are selling your products versus basically existing resellers that have been going to smaller distributors just moving over to larger distributors?

Robert J. Pera

Yes. So the first question, airMax AC point-to-point is shipping. The first customers did receive their radios and there's links set up and they're reporting performance in our forms, and it's been excellent. Multi-point is in the field right now. We're going to officially, probably, be shipping in the next, well let's say, at the latest before the end of the year. As for your other question regarding new resellers, new distributors, I'm not really involved in that area. I'm focused on the R&D because I believe, at the end of the day, the R&D will pull more revenue into the company. But I do know we have something like 250 to 300 e-mail requests everyday coming into our sales account, unsolicited, that just want to represent us and resell our product.

Tavis C. McCourt - Raymond James & Associates, Inc., Research Division

Let me ask you a follow-up, R&D-related. In terms of the -- turning UniFi into kind of a Software Defined Networking vision, I suspect that's kind of your plan from the beginning, there just didn't use to be an acronym or a phrase for it. But in terms of the underlying software, where are you in the product development of that? Or is it really just now getting all the other endpoint devices to market, and the underlying platform is essentially commercialized already?

Robert J. Pera

So the transition point is UniFi, what we call the software version 4.0. So we are just in like a private data of 4.0. It will be public data soon. And it'll definitely be out in the next month or 2 months to the public, hopefully before the end of the year. And 4.0 supports Voice-over-IP. It supports the security gateway, and it will also support a lot of other functionality coming up. So I think once 4.0 hits, you'll start -- that should -- I think it will be an inflection point where you'll see a rapid release of new hardware over the next year to fill in the puzzle.

Anne Fazioli

Operator? Operator, are you there? All right. Hold on, everyone, he's having a bit of a technical difficulty.

[Technical Difficulty]

Anne Fazioli

I'm going to go ahead and announce the last question that we have. It's Tim from Stephens.

Timothy J. Quillin - Stephens Inc., Research Division

So I understand that you expect enterprise to go faster than service provider long term. But I'm wondering how you're thinking about first quarter revenue, you faced a relatively challenging year-over-year comparison in enterprise. Do you expect year-over-year growth in enterprise? Or should we think about maybe more of just quarter-over-quarter growth but not year-over-year?

Robert J. Pera

So you're asking, are we going to have year-over-year growth in enterprise?

Timothy J. Quillin - Stephens Inc., Research Division

In the first quarter.

Robert J. Pera

We had a pretty substantial -- we had a big sell-in for UniFi last year. But I think with the launch of the new products and kind of where we are with UniFi right now, I think it's...

Craig L. Foster

What was last year Q1? Let's take a look.

Anne Fazioli

Q1 of last year?

Robert J. Pera

$35.5 million?

Craig L. Foster

Well, we just did $32 million.

Robert J. Pera

Yes, I think we'll be at par at least.

Timothy J. Quillin - Stephens Inc., Research Division

At par year-over-year?

Robert J. Pera

Yes.

Timothy J. Quillin - Stephens Inc., Research Division

Okay...

Robert J. Pera

But continuing to grow throughout past that.

Timothy J. Quillin - Stephens Inc., Research Division

Right. And then, as you grow the enterprise business faster, is there any difference in margin profile that you would expect on the enterprise business? And then if I might just sneak in a quick question for Robert. Do you have any early take on the Mimosa Networks' backhaul radios and how they competitively compare? I know they're not out in the market yet, but I just wondered what your quick take was.

Craig L. Foster

Okay. So first, on the margins, we have a pretty diverse set of SKUs through enterprise and through the service provider. So actually, if you look at the blended rate, there's really not a major material difference between the 2 different categories that we report. And then, Robert, for Mimosa?

Robert J. Pera

Well, I'll give you my honest take on Mimosa, I don't know where they play because we have a point-to-point AC solution that's pretty low-cost and then we have a airFiber5 solution, which is from the ground floor up, it's a purpose-built FPGA radio where we implemented our own Mac and Fi, our own antenna system and it's pro-duplex [ph], which means that the latencies are microsecond. And it could -- it has speeds of well over 1 gigabit per second. And so that's a very special unique radio. So Mimosa's radio is coming in at a price point similar to airFiber5, but it's really a hack-together WiFi radio. And it's not even 4x4, it's 2 bonded 2x2 radios each 80 megahertz channel, size of channel. And then you need 200 megahertz of continuous spectrum to reach those speeds. And not only that, but only one of the chains is doing DSS radar detection, so it's impossible for them to be compliant to anywhere in the world and have that contiguous 200-megahertz spectrum channel. So I see them pretty much as an alternative to our airMax AC point-to-point solution, but the airMax AC point-to-point solution is essentially 1/4 the cost. So again, I think they're very good at branding, they're very good at hype. But at the end of the day, they put lipstick on a WiFi tape [ph].

Operator

And ladies and gentlemen, that is all the time we have today for the question and answer. This concludes our program. You may all disconnect, and have a wonderful day.

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