優比快 (UI) 2013 Q4 法說會逐字稿

Good day, everyone and welcome to the Ubiquiti Networks' fourth-quarter and physical 2013 Q&A only earnings conference call. This call is being recorded and at this time all participants are in a listen-only mode.

Now I would like to turn the call over to your host Vanessa Chan, with Investor Relations.

Thank you everyone for joining us today. I am Vanessa Chan, Investor Relations for Ubiquiti Networks, and I am here with Robert J. Pera, Founder, Chief Executive Officer and Chairman of the Board at Ubiquiti Networks; and Craig L. Foster, Chief Financial Officer.

Before we get started let me review the Safe Harbor statement. During the call we will be making forward-looking statements that are statements other than statements of historical fact, including but not limited to our strategy, estimates, projections, revenue, and EPS. Forward-looking statements are statements of risks and uncertainties that could cause results to differ materially or cause materially adverse effects on our results. Please refer to the risk factors discussed in our SEC filings and in the press release. We do not undertake to update in light of new information or future events.

In addition, references will be made to non-GAAP financial measures. Information regarding a reconciliation of non-GAAP and GAAP measures can be found in the press release that was issued this afternoon on the Investor Relations section of our website at www.ubnt.com.

We hope by now you have reviewed management's prepared remarks and commentary which are posted in both audio file form and text transcript on the Investor Relations section of our website. This call will be Q&A only. Please limit yourself to two questions for now, and time permitting we will allow for follow-up questions.

Operator, let's have Q&A instructions and open the line for questions.

(Operator Instructions)

Eric Suppiger with JMP.

First just on lead times in the quarter. You have been working towards getting those down. Obviously, you had some pretty good demand. What progress did you make on the lead time's reductions?

Well, in an area where we're having unprecedented expansion of the business, lead times are currently for last quarter were relatively flat. But going forward we continue to work on optimizing and finding ways to bring those down a little bit.

Okay. On the new platforms, you had highlighted UniFi. I presume that's your largest of the new platforms, but can you give us a sense for the other products within there? Can you at least prioritize or segment which ones are largest to smallest, or else can you give us a flavor for how the individual products are doing?

Well, I think airMAX is our largest contributor just because it has the most momentum, it's been out several years now. UniFi is really I'd say in its third year of shipping. It's catching up quick. I think the latest Gartner report placed us fourth in volume shipments.

I believe we can overtake Cisco next year to be number one in enterprise managed AP volume shipments. I think the next platform after that, airVision, I think that's going to have a big year next year. And our other platforms also will start contributing higher percentage with time. They just need more runway.

You mentioned the UniFi and reaching number one market share. What market share do you think you need to achieve in order to exceed Cisco? And are you assuming that pricing on that UniFi will stay consistent?

So my statement refers to volume shipments, right?

Yes.

So, UniFi in just a short period of time we've shipped hundreds of thousands of APs. It's very close to being I think 1 million total shipments. The last Gartner report places us fourth in volume shipments. And like I said, again, I believe in calendar year 2014 we will be the number one -- by the end of the calendar year we will be the number one volume enterprise management AP shipment vendor.

And is the assumption there that your pricing would stay relatively consistent with where it is right now?

I don't think UniFi's only driven by cost. There is lots of people that make cheap stuff. We don't make commodity products you find in stores like D'Link, Linksys, Net Gear, those brands.

UniFi, was, there is a lot of R&D into the user experience. The hardware, the software cohesion, the management software, the feature set, the reliability, the performance. And as a testament of the kind of the user strength and performance of the product, it's a small R&D team without any sales or largely any marketing budget, has come out of nowhere and we're in fourth place now. Like I said, if we can take the number one spot next year, I think it's kind of validates our model and how we attack markets.

And Eric, you mentioned what are we going to do with pricing. When we enter these markets we are focused on disrupting the market so that we can own the market. So in terms of our pricing that you see today, I don't see a monumental change from where it is.

Very good. Well, congratulations. Thank you.

Tal Liani, Bank of America.

I have a few questions that are at a high level and then some more product-specific. So first is what happened that drove up the numbers so much, including the guidance? Is it more macro related, or is it more something you have done to the channels that is driving up demand? I am just trying to get to the source of the positive surprise.

Maybe I can take this. The business has always been good. So I know the optics of our earnings reports, we had a dip last year and we went through a lot of adversity, largely with these legal issues, counterfeiting issues. And I pretty much more or less took the Company, the control of the Company back from some guys that didn't know what they were doing.

So now I am in charge. Things are -- we have addressed our deficiencies and we are going to kick butt here. I'm focused on growth.

Is this -- so when you say good execution, can you be more specific? What are the areas?

Is it more about how to manage the sales process or the channels, or is it -- I'm trying to understand the drivers. And try to distinguish between the availability of new products we spoke about enterprise WiFi. So between products versus go to market or channels?

Okay. It's across the board. Look at what we've done in the last year. The management team has been revamped. We have a new discipline in operations.

We have inventory hubs. We've shrunk the lead times down so our selling is more correlated with sell through. We have -- finally, we have discipline now in how we treat accounts receivables.

Our day sales outstanding is at a record low 32. We've went on a very aggressive tear on the litigation side. We have largely confined the counterfeiters who were putting together global IP strategy. And, all those things added up just makes us a much stronger Company.

And I think our brand and our momentum, our customers, how they are applying the technology, nothing has changed. Everything is still the same. It's just we just cleaned up and plugged the holes and we're returning to being more aggressive and proactive instead of reactive in the past year. Trying to plug the holes.

Okay. Second question is, can you give us some -- can you discuss gross margins? Gross margins came out much better than I thought, and I'd like to just understand the puts and takes. Volumes versus mix, et cetera.

Yes. To be honest with you, it's a combination of both. We work with contract manufacturers. So there is some leverage that we get because of our flexible model with them.

And then the product mix also changes. So, this quarter we had a great quarter across the board. But, airMAX had pretty much its all-time high. And as we've discussed in the past, more of our mature products have a little bit higher gross margin profiles.

Last question is to understand the outlook for products. When you look at the next few quarters, maybe up to two years, what is going to drive up growth on the product side? Not anything else you are doing.

What is going to drive up growth in your view? What do you plan for product launches? Again, if you can give us the specifics maybe just to understand the logic or your thinking about product launches.

Well, I'm not going to give any specifics. But I will say one thing about this Company that's very unique. We have a community of operators that are in the tens of thousands on a global basis and they're growing.

And these guys aren't carriers. They are very ambitious, hungry entrepreneurs in developing areas of the world, who are bridging social inequality at a very fast pace. We have well over 10 million subscriber stations on roofs around the world, bringing connectivity to people that -- in underserved markets.

And these guys are very aggressive, and they want to grow their businesses. And what we have to do is feed them. So we're going to come up with new technology platforms and new applications for them to get bigger, and we are going to grow this community further and faster. And we have some strategy to do that, and I think it will be interesting over the next year, two, three years to see the growth.

I think also a coupled with that there is also technology refresh cycle that's happened with 802.11ac. And clearly we have a big stake in that refresh cycle going forward.

Last question about -- the last two questions kind of summarize. How is the -- how will the gross margin profile change with all the changes you spoke about? So new products, some refresh cycle for AC, higher volumes. Does it change the gross margin, or can we just make the assumption that higher revenues equals higher margins?

Well, another unique thing about this Company is we never dropped the price of a single product in the history of the Company. So we go into markets and we disrupt the markets. And there hasn't been a need to drop pricing. And so as we scale and volumes increase and the operations costs as a percentage of costs of goods becomes smaller, I think you'll see a overall improvement in gross margins. What are we at now, Craig? 40 --?

44 gross margin

44, yes. And that's up a few points, right, over a few quarters ago?

Excellent, thank you.

Matt Robison, Wunderlich.

I want to start off by asking a little bit -- for a little more detail in the WISP-industry because it's stunningly strong here both with airMAX and antennas and other products. Can we start -- is it getting to the point where you can start to characterize the size of top customers? Or is it still so fragmented we don't really have too much ability to characterize what a relatively mature and successful WISP looks like?

Well if you go to our forum, everything is transparent. We have a couple hundred thousand members in our forum and most of the operators are exchanging messages. And we have -- across the gamut we have guys that are just starting with maybe tens of customers and we have guys that have gone from tens to hundreds and guys that are now hundreds to thousands.

And I think there is quite a number now with thousands or low tens of thousands of subscriber stations out there. In aggregate, these numbers become pretty big.

Yes. So obviously the forum is a wonderful resource for that. Do you have any that are, say, north of 2% or 3% of revenue in a given quarter?

No.

Okay. And the other -- so next question is on the new platform, still have not exceeded the level achieved back in the first quarter on the new platforms, which kind of surprising given all the progress that has been made. Is that because version 3 has taken a while to ramp up and airVision really hasn't been reflected yet? You know, nice sequential pattern, obviously in the June quarter, but can you comment a little bit on when we -- what the factors are that are keeping it from getting to the level you already achieved on the new platforms?

You know, I think UniFi demand is increasing very fast. And if you look at the DSO number of 32, it is very low, which is good. But we need to ship faster, right? That's not a healthy number for high growth, right?

We'd like to see it more in the 40s. And I think a lot of that is to film it with UniFi. So I think over the next few quarters we are going to have to execute a lot better in ramping up to meet UniFi demand. And I think when we do that you will see pretty strong increases in -- particularly in UniFi growth.

And just as a point, the one quarter that you are referring to, that was the quarter that we introduced airVision. So when we do bring a new product, given the size of our distribution network, there is a stocking up component that happens here.

Fair enough. Now, I guess back to airMAX a little bit. I think the airMAX product lines a little over four years old now. Outdoor equipment like that you tend to think of a refresh cycle on around five years or something like that.

And Craig, you mentioned AC. So should we be expecting something along those lines sometime during fiscal 2014?

Yes. What's the product cycle for airMAX with AC.

Oh, airMAX with AC? We launched UniFi AC. We are shipping it now. AirMAX AC, I think you'll see it before the end of the year.

Okay. And --.

From the end of the calendar year.

Very good. And then a couple weeks ago, maybe three weeks ago you started a store for US customers for UniFi and airFiber. Maybe give us a little flavor as to how that fits in with the strategy and then I'll let somebody else ask some questions.

So the store, I think our airMAX distributors overall, they've done really well in serving the WISP market. But as we move to newer platforms in different markets with different system integrator's we felt that having the store would be advantageous to kind of jump-starting sales and demand. If you notice our store, we don't have airMAX on there. Right now it's just UniFi, and airFiber and as we launch new platforms, we will make it available in the store.

The store is US only. We actually had a store before, so it's not like this is a change of strategy, because we were selling airFiber before on our store.

Yes, yes. I remember back in June of last year that's how that got cranked up. So we brought the store on as sort of enhance the distribution. It seems almost like you are maybe challenging some of your distributors to step up a little bit to it. Is that part of the takeaway here?

I wouldn't read too much into that. Like I said, we set up the store to help jump start new product platforms in new markets because we have such great traffic through our website and our community.

Okay. Thanks a lot.

Tavis McCourt, Raymond James.

Robert, a couple for you and then a couple financial ones for Craig. First, in terms of the WISP market there appear to be at least one or two competitors now with at least on PowerPoint slides similar products to airMAX and price points. It's not the market that it may have been three years ago where it was you versus Wimax, but obviously that doesn't appear to be really impacting your trends at all.

I'd love your opinion on how much of this was really just a LAN grab that you won over the last several years in terms of your WISP partners really choosing just a single platform? Or do you think there is a risk that WISP partners could use two platforms at some point? What do you think, how will the competitive dynamic change now that airMAX is becoming a bigger, more successful business?

Good question. So if you remember when we launched airMAX, we launched it in very early 2010, so it's over three years out in the field. And over the course of those three years we are constantly finding issues and improving it and improving it and adding to the driver and making it more scalable, making it more noise resilient. And outdoor wireless, especially in the unlicensed band, with so much interference, it's very tricky.

Every deployment can have unique challenges. So, airMAX is really evolved into a great solution over time. And not only the driver, but we've added this great antenna portfolio. Very cohesive hardware and software approach and plug and play system with supporting applications and device management software.

To top that off we built this huge community of followers that interact and help each other. So, yes, there might be some similar solutions on the market. But just if they look on similar on paper, I don't know if they are necessarily a threat, right, until they are deployed in the field and they get approval.

Got you. And then you talked about before, dot-ac serving as a catalyst for the airMAX business as well. I wonder if you can quantify that a little bit?

Obviously, we are kind of aware of the throughput benefits in an enterprise setting. But talk a little bit about what that might mean to your WISP customers in terms of is it replacing existing airMAX systems with AC or just do you think it will just be new networks or new sites that are built with the dot-ac version of airMAX?

Yes. So from a technical perspective airMAX was based on 11n, and we took advantage of MIMO signal processing, multi-facetime coding using antenna polarization to get basically two multiplex two data streams in the same frequency spectrum.

Now, moving to 11ac it's kind of -- it's at a point of diminishing returns from a spectral efficiency standpoint. You do get a higher modulation. They upped from 64 clam to 256 clam, which gives you about 30% better spectral efficiency, but you do need pretty high signal to noise ratios, which aren't common on average links. And then the other boost you get from 11ac is from widening the spectral channels.

You can essentially double them from 40 megahertz to 80 megahertz. But typically in our networks you want to use narrow spectrum channels as they have better noise immunity characteristics.

So overall I don't think 11ac will be a huge boost on the multi-point side. On the point to point side there will be a lot of applications taking advantage of the increased channel width to double and maybe potentially triple throughput. So I see 11ac for airMAX, it will be very well received in point to point applications. Probably not as significant in multi-point applications.

That's helpful. Thanks.

Craig, as I look at the balance sheet this quarter I'm guessing ideally you probably would have wanted to (technical difficulty) inventory on your balance sheet. That looked like it was down a bit. And so I'm wondering, are (technical difficulty)?

Tim Long, BMO Capital Markets.

I'll follow on where Tavis is going, it was on my list as well. So maybe just talk a little bit about, obviously you've done a lot to get the lead times down and inventory went down last quarter, but you're looking at another pretty significant uptick in revenue. Just give us your sense as to your comfort around, ability to ship and hit those numbers coming in with a little bit less inventory than you probably had from a coverage standpoint in prior quarters?

Yes. I mean, the game for us, obviously, is that we need to continue to build appropriate buffer so we can meet our -- what I would consider unprecedented demand for the Company. We're adding capacity in all factions of the business. And so there is a supply chain component to that. There is contract manufacturing and there is our shipping through a -- warehousing, et cetera.

So the infrastructure that we have in place is actually quite flexible, which plays to us. Now, last quarter we ended inventory a little bit lower than I'd like to be. But more of that's just we have a lot of stuff that's, planned production for the quarter. So I don't see any real hiccups for us in terms of being able to meet our demand going forward.

Okay. Somewhat related when you look at some of the measures you've put in place to help you with visibility into your shipments, looks like that's gotten a little bit better. Can you talk about that and maybe just give us an update on how you feel about visibility and how far you think you can see into the demand that the WISPs are seeing? That would be helpful, also.

Yes. So we work very closely with our distributors to get information from them in terms of what their sell-through is. So we have roughly 90% of our revenue we know where or distributors, we know where their inventory levels are, what we are shipping to them and what they have sold over the quarter.

In terms of -- so we have a good deal of visibility in kind of what's happening in the channel at a very micro level. As we look to further projects, what we've done is we've implemented a program in place where we're actually more integrated into the forecasting system of our key distributors who are working with the WISPs and service providers. So we are extending beyond just the visibility into the distributor and trying to work with -- understand what's happening in the end market channel.

Okay. And just a last quick one if I could just follow up on the gross margin. I get the volume benefit going forward is part of the strategy, and you're not going to share what new categories you may go into. But is part of the strategy or vision that a higher percentage of the new categories that you enter will have higher gross margin, or is that fully dependent on what happens with the direction the Company goes?

Well, I think it's really entirely dependent on the actual market that we're participating in. So it's when you have high-volume, lower-cost items like UniFi, there is a margin profile that fits for that. And then if you look at items that we have like airFiber, which is $3,000 per link, there is a different margin profile for that. So it's kind of a balance of volume and price disruption.

Okay.

So each -- we are going to get to evaluate each one of those separately. But the one thing that's constant is every market we are going to come into, we are going to attack it with disruptive pricing.

Okay. I'll pass it. Love the format of the call, guys.

Sanjit Singh, Wedbush.

A couple quick questions on airMAX. You've now reached the levels of the high that you achieved last year before some of the legal and counterfeiting issues. So just going forward in terms of what you expect out of airMAX, is it more just coming out of the hole, or does the growth profile kind of sustain the growth profile that you had done prior to the issues from last year?

I see it as a combination. I think we're recovering some of the revenue that was taken from the counterfeiters. But there is also significant growth going on.

Great. And I want to talk a little bit about the geographies. The US had a pretty amazing quarter, I would say, nice sequential growth -- and in South America, as well.

What drove the -- what was the driver for the US improvement this quarter? Was it the store that you set up? And did you see any impact for some of the challenges that were going on I think with the protests and stuff in South America, since that's a particularly important region for you guys?

Okay. So in terms of the store impact, the store is somewhat irrelevant in terms of our financial profile. And we only started selling UniFi in the store post-quarter. So it's not really a part of the financials you see in front of you today.

In terms of the regions, something I mentioned last quarter is that we were going to spend more time in terms of understanding what the right product levels needed to be in different regions. And that's something we worked really hard on last quarter.

So if you remember from three quarters ago, four quarters ago we would have three regions up and one region down, two regions up, two regions down. And it was just poor management of inventory levels within the different regions. So I think what you saw this quarter is it's not like there was a surprise in demand. It was us better managing what the inventory levels need to be in different regions.

Got it, that's really helpful. On UniFi, how much of the sales are to your non-WISP customers? I saw a lot of big university wins this quarter. I saw a promotion out there where you are giving out a trial access point for a Cisco or a rivet access point. What is the penetration like at this stage to the non-WISP part of the market?

That's where I think a majority of the people that are using UniFi are non-WISP customers. We built a brand-new market, but we are using the same distribution, same leverage points that we have built into the model.

On a sales process when you sell to some of these larger universities, what is the sales process like? Is the end customer, hypothetically if it's a university, is there some sort of bake-off that's going on [rivo] versus you guys or [neck year] or something like that? How does that win happen?

So for us when we win these opportunities we're not directly involved. So we have a service provider, and usually the service provider bids on the contract and then they have an underlying technology or they provide a series of underlying technology propositions. And then as we know and especially in the education market, it's very price sensitive. So as you look to price to performance, those are easy wins for us.

Got it. Thank you so much, guys.

Amitabh Passi, UBS.

Robert, I just wanted to maybe see if you can help clarify some of the dynamics again. A lot of strength in airMAX and again the big reasons they recovered were North America, EMEA.

I am just trying to get a sense, is it basically you selling more product to your existing customer base? Do you think that footprint of your customers is expanding? Is there any incremental insight you can give us just in terms of the dynamics and the fixed broadband access market, fixed wireless broadband access, sorry?

I can't give you specific data points, but I can say just across the board our community traffic is up. We're gaining more and more entrepreneurial WISP operators. New platforms. UniFi is increasing significantly, the demand. So overall things are just trending up.

Okay. I guess I'm just surprised because I know in your opening comments you also talked about eventually the goal is to penetrate a lot of the emerging markets. But it's interesting that most of the strength seems to be coming from your developed geographies. So, I was trying to get a sense --?

Yes. So I think one thing we can say is Brazil is doing very well for us. Eastern Europe, areas like Czech and Poland and Hungary and the Baltics, Russia is starting to get more penetration. I think Africa we're starting to get more penetration. I think the big opportunities are India and China for us over the next several years.

And we're very different. We're not a relationship Company, right? We break down relationships and we deliver technology value. So those areas of the region -- areas of the world that want to bridge or improve social inequality with technology value are perfect fits for those areas.

Other areas of the world that are more political just need more time to break down these relationship impedances and realize that our stuff is the best thing for those areas. And it takes time, but I'm fully confident in several years we'll be a huge brand also in those areas as well. So the world is trending that way, right, with the Internet and transparency.

It's very hard to keep these compartmentalized information and build out these collusion forces when the world is having access to everything on the Internet. The best products will win out. The best value is going to win out. That's I think why we are positioned well for the future.

Actually, Craig, I had a couple for you just on the income statement and your balance sheet. How do we think about your OpEx? You are down to about $10 million a quarter. Should that as a percent of sales continue to trend down or should we think about it in absolute dollars? And then any thoughts on use of cash?

So let's start with the OpEx stuff. We are going to continue to invest in R&D. And so we have a pretty optimized R&D spend. You know, I think it will continue to creep up for us, and the value that we get from our R&D spend is off the charts.

At the SG&A line, last quarter we made some improvements. Some of our legal stuff is winding down a bit on the counterfeiting cases. And so, I think flat to slightly down is probably where we'll be.

And then on the uses of cash, we continue to have quite a bit of cash overseas, and we spend quite a bit of money with our contract manufacturers and our team overseas. In fact, over a third of our Company is actually located overseas. We continue to look for ways to optimize the cash just on a return. We continue to evaluate different opportunities to increase our margin profiles. But we don't have anything definitive right now.

And maybe just one more on your working capital metric. I think your cash conversion cycle was zero this quarter. I am just thinking how do we think about AR days? Do they normalize into the 40 day range? Do you intend to hold them here?

Your payables have also expanded pretty nicely. I am just trying to get some sense of what's normal in terms of your working capital metrics?

Yes. So I think our says sales outstanding, I think it's too low. We have had -- our demand has just been incredible. So, when you have high demand and you're a challenger then people tend to pay their bills early and on time to reserve their spot.

I think the natural spot for us is somewhere in the kind of 45 range for DSOs. But we've done a really good job in terms of consolidating what our credit profile looks like for our customers. And then on the AP, I think we're kind of at the tail end of kind of the optimization we can make there.

Okay. All right. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect and everyone have a great day.