Ubiquiti Networks' (UBNT) CEO Robert Pera on Q1 2018 Results - Earnings Call Transcript

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

Ubiquiti Networks, Inc. (NASDAQ:UBNT) Q1 2018 Results Earnings Conference Call November 9, 2017 11:00 AM ET

Executives

Laura Kiernan - SVP, IR

Robert Pera - Chairman and CEO

Analysts

Erik Suppiger - JMP Securities

Woo Jin Ho - Bloomberg Intelligence

Tim Long - BMO Capital

Dan Bartus - Bank of America Merrill Lynch

Operator

Good morning and welcome to the Ubiquiti Networks First Quarter Fiscal 2018 Conference Call. [Operator Instructions]

I would now like to turn the conference over to Ms. Laura Kiernan. Please go ahead.

Laura Kiernan

Good morning, ladies and gentlemen, welcome. Thank you for joining our call today. I’m with Robert Pera, Chief Executive Officer and Chairman. And I would like to just remind you before we get started, of some of the Safe Harbor statements.

Some of the statements we will make during this call constitute forward-looking statements, including perspectives on our future financial results, products, 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 these risk factors and uncertainties is contained in our most recent filing on Form 10-K. And the forward-looking statements we’re making are as of today, November 9th, and we assume no obligation to update them.

We hope you’ve had a chance to review our management prepared remarks, which are posted on the Events and Presentations section of our website. And this call is Q&A-only. So, please limit yourself to two questions; time permitting, we will allow for follow-up questions.

Operator, we are now ready for questions.

Question-and-Answer Session

Operator

We will begin the question-and-answer session. [Operator Instructions] The first question today comes from Erik Suppiger with JMP Securities. Please go ahead.

Erik Suppiger

Thanks for taking the question. Couple of points here. Your outlook for the December quarter is for relatively flat revenues. I think seasonally, you see some uptick. Can you discuss a little bit about why we would see a seasonal uptick in the December quarter? And then, secondly, I’d be curious to understand, you’ve introduced warehouses that are starting to stock here inventory. Where do you think you are in terms of migrating your distributors to ordering from those warehouses and where do you think your distributors are in terms of adjusting their inventory levels so that they can reflect current the lead times that those warehouses provided?

Robert Pera

Thanks for the question. I’d like to say this quarter is probably the best quarter in our history. We’re executing really well on the R&D side, much better than in previous years. I think this is noticeable to our end users. As for quarter-to-quarter variation, I have always said and I will continue to say, drawing conclusions from quarter-to-quarter variations is not a good reflection of our long-term objects [ph] and opportunity. And because of that reason, we’re going to start removing quarterly guidance for next fiscal year. I think, this quarter was the best in our history and we have a lot of work to do. But, I’m pretty confident our best quarters are still ahead of us.

As for our logistics and supply chain and operations execution, if you take a step back, I look at our business in three -- I grade our business in three areas. So, first is our business model and vision. I think we’re at the top of our peer group in that area. The second area I would say is our R&D execution and our design capabilities. And we made huge strides in that area, and it’s responsible for our growth recently and our growth coming up in the future. The third area I would classify as our operations, our sales channel and our supply chain execution. There is -- it’s very obvious that’s the weakest area of our business. We still have a lot of work to do. I’m fully committed to improving that area. And I think once we address that area of the business, I think things become very interesting. I expect us to improve our margins, service the customer base better, and I think you’ll see a lot of these results to start matching our true sales demand.

And I think, when you look at some of these quarter-to-quarter variations, the reason why you can’t look at them with -- they create imperfect picture in my opinion because our operations, our supply chain, our sales channel is not perfect. And so, we still have a little bit of a mismatch between our quarter-to-quarter results and the true business demand. And I think we have to put our head down and we ought to improve operationally to bring those objects better in line with reality. And that’s probably priority number one, focus for me personally in this next year.

Erik Suppiger

When you say you feel like this was the best quarter in your history, are you referring to product introduction, the kind of your product cycle perspective or do you feel like you’re making improvements from the operational and supply chain that are getting you closer to where you want to be?

Robert Pera

Well, if you look at the numbers, the numbers are pretty good. We’re close to $1 billion run rate right now. We have back upto 10% operating expenses. We are just turning the corner I believe within our second phase of disruption in both the operator space with new technologies airMAX AC generation 2; LTU is about to pick up. We have GPON fiber. You look at the UniFi world, we’re starting to introduce higher end UniFi-ACs which is security gateways; software is rapidly evolving. We’re rounding out enterprise platform with new adjacent technologies, video is turning the corner. And then, Ubiquiti Labs, which was kind of a small bet a couple of years ago is now looking like it’s going to be a pretty good business.

Operator

The next question comes from Woo Jin Ho with Bloomberg Intelligence. Please go ahead.

Woo Jin Ho

Great, thanks Robert for taking my questions. And I think you addressed it in your last commentary. Just for clarification, are you reaffirming your $1 billion $1.15 billion guidance for the year?

Robert Pera

Yes. I believe we’ll still hit that range.

Woo Jin Ho

Okay. And then, I understand that you’ve hit record revenues for the quarter. But, based on your guidance, you need to hit 19% second half growth over first half growth. And that’s probably the best you’ve ever done since 2013. And the Company dynamics is a lot different than what it was back then -- today than what it was back then. I mean, how should we think about the second half growth drivers? You touched upon it just a moment ago, but should we start thinking about this hockey stick ramp up from new products or from existing products, umber one, or is there some sort of pricing dynamic that’s going to drive that as well?

Robert Pera

I think it’s combination. If we didn’t introduce a new product in the UniFi world, I think you would see expansion just because UniFi continues to be picked up by new system integrators. And it’s a -- it’s really becoming almost the standard small, medium business, hotel deployments, and it’s starting to get some serious credibility in the upper markets and the enterprise. Of course, we’re pretty stacked with new products. And I think that’s icing on the cake, if they start to click. It’s very early in things like UFiber. We introduced our initial product; it’s pretty high priced; it’s not competitive. But, we have a follow-on, very aggressive product, we’re going to ship before the end of the year. Same goes for airMAX gen 2 and LTU. And even in the UniFi world, we have a really -- probably our most disruptive cost performance AP that we plan to release before the end of the year. So, it’s a combination. I think we benefit from system integrator and operator expansion, and then also product expansion.

Woo Jin Ho

Okay. And then for my follow-on, in the 8-K filing this morning, it looks like you substantially reduced the number of registered users for the Ubiquiti Community board from 4 million to 609,000. Could you help me align or help me understand the alignment between the number of registered users to how I should start thinking about the revenue, especially given that you are just starting to deliver $1 billion in revenue?

Robert Pera

Yes. It sounds like you’re shorts are getting nervous. So, I don’t think that number is really that critical of an observation. Our IR people mixed up user sessions and total users. But regardless, our user community is more engaged than ever. We have more stories, requests for more features, more -- just excitement overall. And if you compare it to say two or three years back where our R&D wasn’t executing it at nearly as higher level, it’s a huge improvement in my opinion, in the quality of the community engagement.

Woo Jin Ho

Okay. I have more questions, but I’ll leave the floor for others.

Robert Pera

Sure.

Operator

The next question comes from Mike Kobin [ph] with Raymond James. Please go ahead.

Unidentified Analyst

Hi. Thanks for taking my question. This is Mike Kobin [ph] on for Tavis McCourt. Just two kind of -- I just want to make sure I understood. You said, you still feel good about that revenue range. Is that -- do you feel the same way, are you confident in the EPS numbers you’ve given out as well?

Robert Pera

Next question?

Unidentified Analyst

And…

Operator

The next question comes from Tim Long with BMO Capital.

Tim Long

Thank you. Two if I could, Robert. First, could you talk a little bit about the move up to -- you mentioned that doing a little bit better with some of the larger accounts. Could you talk about whether it’s product or go-to-market or just more internal investment? What does it take for you to continue to move up in that market? And then, secondly, just give us an update on the engineering side? Obviously, you’ve gone to more of a distributed model, less focus on Silicon Valley area. Can you talk about access to talent and how you think that’s working out with product pipeline? Thank you.

Robert Pera

Sure. Good questions. I’ll start with UniFi first. We launched UniFi several years ago and we just had low cost APs. And the performance is okay, the price is great and we gave the capability to manage them centrally as in one control plane. And that’s what gave UniFi its first breakout. And we struggled for a few years, improving the performance in going upstream. But I think we turned the corner in the last few years and we did a couple of things I think really well. So, we were able to expand the offering from just APs to pretty high-end PoE switches and then the added UniFi Security Gateway and we solved our I guess cloud shortcoming with something I think serves the market really well, it’s called the hybrid cloud technology. And we have something called the Cloud Key which disguise as a really small device that could plug in to a switch or a gateway and it’s really embedded computers running the control locally. And we’ve used some software fabric in the cloud that’s a very light weight that gives you the remote access capability of a cloud platform without having to really -- or without having a requirement of exposing your whole network to the cloud. And we also removed all the cloud fees and all the support fees.

And I think that really took us to the next level. We added 11 ACAPs and we really improved the performance, the wireless driver performance of those 11 ACAPs. And the past year, we’re now being talked about not just as this disruptive low cost solution but regardless of cost, maybe the best performing solution in the industry.

So, we’re at a very interesting place now where we could add, I believe higher end products, targeted towards things like stadiums and maybe even data centers. And we could add services we’re working on in addition to these products. And I think we have a very nice opportunity for both, service expansion, higher margin expansion, and just overall taking our UniFi evangelism to new levels. And so that’s a UniFi going upstream. I am sorry your second question, can you remind me again?

Tim Long

Around engineering and the distributive model and access to talent and how that’s going?

Robert Pera

Okay. So, this is really a good question. And, in my opinion, competing in the technology space is a little bit like going to war. It’s like sports or competition, and it’s hard. And you’re going to go through adversity, you’re going to have differences of opinion, and you need guys that are in it for the long run. And when myself or other leaders in the Company invest their time into building teams, we need to make sure we build out our teams and invest in teams that are going to weather the storm and going to be in for the long run. And in places like Silicon Valley, it’s very tough to do that because I think -- I believe we’re in a bubble right now and there is a lot of money going around, and it’s not an employer’s market, it’s an employee’s market. And it’s very rare to find guys in the Valley that aren’t, I guess, distracted by all the opportunities and are able to really sit down, weather the storm go through adversity and be committed to something long-term.

And I made decision several years ago, I was going to strategically take areas to invest in R&D where I could be rest assured that these guys are in it for the long run. And I could invest my time into them. And I think it was the right move. And you take something like AmpliFi. Now, AmpliFi wasn’t executed all that well, we could have done it a lot better, but it was a 7% or 8% team. And I was just looking at something like the Android downloads. And we’re -- it appears we’re even selling at a higher than eero, which is a startup company, which is incredible in my opinion because they have 200 employees and tens of millions of dollars of funding. And we have eight guys and we stuck with our Ubiquiti business model blueprint and we’ve gotten incredible leverage.

And so, we’ve applied this business model to the operator market, we applied it to the enterprise market, and I think we’re just in the early innings of proving it again in the consumer market. And we could really scale things, I believe, if we do our upfront work with HR. And I run a tough ship and it’s not so easy to work at Ubiquiti. I have very high standards. I believe things should be done a certain way. I have very high product standards. And we have to do a better job of selecting engineers that fit our culture. But, as long as we can do that, I think the future is very bright.

Operator

Thank you. The next question comes from Paulina Liani, with Bank of America Merrill Lynch. Please go ahead.

Dan Bartus

Hey, it’s Tal Liani with Bank of America, but this Dan Bartus on behalf of Tal. Hey, Robert. Thanks for taking the questions. I have two product related questions and then more a clarification. So, first, I did want to ask about airCube; it looks like an interest product. So, maybe you can just walk through what your WISP customers are currently doing there? And if this is a completely incremental opportunity, in your mind?

Robert Pera

Sure. So, airCube is a good opportunity for us because the WISP today, they have a problem with to deploy Wi-Fi inside their customer’s house or apartment. And we have tens of millions of airMAX CPEs, customer-premises equipment that are on top of rooftops around the world. And Ethernet essentially -- these airMAX CPEs bridge our proprietary airMAX wireless signal to Ethernet which goes inside the house to a Wi-Fi AP. Now, the operators have a dilemma because if a leave the customer to select the Wi-Fi AP on their own and they select one that’s not stable and has locks up and house problem, it becomes the operator’s responsibility, whether they like it or not.

And so, these WISPs really want a solution that they could monitor as part of their service provider network. And we tried to do this several years ago with something call airGateway, which was a really cool concept to my opinion. It plugged into any power supply that went along with airMAX CPE, and I thought it was going to be a monster hit. And unfortunately, it did okay but most operators didn’t deploy it because they felt that the wireless range, the Wi-Fi range wasn’t good enough for their customers. And furthermore, a lot of the operators put these power supplies into closets and so further diminished the Wi-Fi range. And airCube is our second attempt and we’re getting very cost aggressive, it benefits from our amplified design experience. I think we hit the right feature set, price point, integration with what we call Ubiquiti Network Management System, UNMS. And I think it should be a volume runner for us. Hard to say now, but I think it could be a tens of millions of dollar per year opportunity. We’ll have to see how it goes.

Dan Bartus

Sounds good. And on the UniFi AC cycle, it’s being strong for a while now. So, I’m just trying to get my hands around what’s kind of the next big growth driver for that. So, we’ve seen that -- for instance, we’ve seen the ASP increases. Do you think that that is going to continue, even with that new kind of cost disruptive product that’s coming out end of the year?

Robert Pera

The opportunity I see for UniFi AC is -- we’ve got it to a point with GPS with backward compatibility that it definitely improves existing networks by just switching out the AP. Now, if we can get operators to upgrade their individual CPEs, which I believe a lot of them have to do because of the bandwidth demands of the new internet and the applications being used, I think it’s opportunity to greatly expand revenue. Because essentially having -- we’ll have networks being built out at slightly higher ASP -- higher ASP products but we’ll also have replacements going on, which is a huge opportunity because we have tens of millions of radios out there. And it’s been a challenge. I think at the point where we’ve finally improved the airMAX AC protocol and it’s very robust. So, you’ll see us introduce, probably, I think this is right, our lowest cost airMAX CPE and it will be in ACCP and specifically targets towards replacements.

In addition, we believe we have a very good system now with UNMS and UMobile where these new CPEs can be essentially cloned and deployed in the field within seconds or maybe couple of minutes. And we’re going to rally some evangelism around that is the plan in the next few months. And so, I’m excited about that opportunity.

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Dan Bartus

Okay. And just quick clarification on the guidance plans. Are you going to be giving full year targets and then just not getting quarterly guidance or is it…

Robert Pera

Correct. So, at the end of this fiscal year, we’ll stop quarterly guidance and from that point forward, we’ll just be giving the next fiscal year guidance.

Dan Bartus

Okay. All right, thanks.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Robert Pera for any closing remarks.

Robert Pera

No remarks from me.

Laura Kiernan

Thank you.

Robert Pera

Thank you.

Operator

This conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.