優比快 (UI) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ubiquity Networks first-quarter 2014 Q&A conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions)

I would now like to introduce your host for today's conference, Jason Gold, please proceed.

Thank you, Charlotte.

I am here with Robert Pera, Founder, CEO and Chairman of the Board at Ubiquity Networks; and Craig Foster, CFO. Before we get started I'd like to review the Safe Harbor statement. During the call, we will be making forward-looking statements including, but not limited to, our strategy and estimates and projections of revenue and EPS.

There is no assurance that we will achieve these projected results. Please refer to the risk factors assessed in our SEC filings, and in the press release we issued today. 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 the reconciliation of non-GAAP and GAAP measures can be found in the press release that was issued this afternoon, and can be found in the IR section of our website at ubnt.com. We hope you've had time to review management's prepared remarks, which are posted as a text transcript in the IR section of our website.

Today's call will be Q&A only. Please limit yourself to two questions. Time permitting, we will allow for follow-up questions at the end.

Charlotte, we'd now like to open up the line for questions.

(Operator Instructions)

Kip Clifton from Deutsche Bank.

Hi guys, thanks a lot for taking my question. You guys talked about strong demand for UniFi across all geographies, and I just wondered what the makeup, right now, of AC versus [N] was, net unit volume?

Well, we don't break out the N versus AC. But, I will tell you this, that for the quarter we had a tremendous uptick in demand for the AC products. And, I think we're actually well ahead of what our expectations were on the adoption of AC in the market.

Okay. How do you think that adoption curve adapts as you migrate the airMAX platform over to AC?

Well, I think AC is the Wi-Fi standard. For UniFi it's different than airMAX AC. So, we will be using 11 AC silicone in our airMAX solutions, but it's still our airMAX protocol.

It's going to provide performance benefits. It's going to be, I'd say, 30% faster. And, I think next year you'll start seeing, on the airMAX side, airMAX AC growing quite quickly.

So, is AC still on track for six months, say, launch?

Yes, it will be sometime next year, yes. Probably, yes, I feel most comfortable saying that.

Sometime next year, okay. And then, just another question on the Ubiquity World Network. The sense that it seems like you've got a pretty positive reaction just on the forums. Are things still on track for a January launch?

Yep, I think we're over on target for that. I think the response, as you said, has been really strong. We have had over 1,300 WISPs, based here in the US, already signed up of the program. So, I think that we're actually ahead of schedule in terms of what the adoption rate for people wanting to be part of this.

And all of those 1,300 will be included in the program or is it just you'll take target markets and go after it like that?

No, it's for the entire group.

Okay. And then the overall spend on the Ubiquity World Network in the upcoming year will be around what number?

Our estimates probably for the next nine months is about $3 million US.

$3 million, okay. And then just going on to the distributor base, can you give us a sense of the numbers of distributors added on the quarter, and the total?

We continue to do adding and subtracting on guys who are productive and who aren't. But, the number is not significant in terms of guys that we added. So, I would say less than 10 at the big distributor level.

Yes. And then that total number is now what?

Well, we have a little bit of a tiered component to this, right, so in total it's 250-ish.

Matt Robinson from Wunderlich securities.

Hi, gents, congratulations. So, let's talk a little bit about the mix. I mean it's phenomenal for the enterprise and new platforms in general, as previously stated. Can we talk, what do you think went on with airMAX and the sequential comparison there, and also South America?

And then the other question I have, I've got some housekeeping questions related to cash flow and CapEx, headcount depreciation, that kind of thing. But, I also wanted, I'm curious if you can comment on how you might get the distributors to prepare for the growth that can happen from the Ubiquity World Network campaign?

That's a pretty complex multi-part question. But, I will start out with CapEx-- (multiple speakers)

Well, I can ask them so after you answer each one, if you want. So, the first one was airMAX down sequentially, and South American flat?

So, let's start with airMAX. AirMAX, it does look like it's down sequentially, but actually our backlog is really, really strong. So, really it's more of the timing of shipping, than it is something happening in the market at a macro level.

And then when we go to South America, I think that what you can see from us is that we are being very judicious about how we are allocating product out into the field. So, I think this is one of the first quarters where you can actually see this is where we're controlling where we think product needs to be, and that's what's happening with South America.

Is that the function of the seasonality they have down below the equator? Or what your take is on the channel condition that?

Well, I think the channel is very, very hot. I mean, they are still up 4%, quarter over quarter, so I think, for a normal company, that's like a home run. But, I think that we have a certain number of products that we can get out into the channel, and I think we felt they were better served being in other parts of the world.

Okay. Then what is your thought process for staging for the ad campaign. AirMAX being down actually doesn't surprise me that much, I mean I forecasted more.

But, the tone I was getting for the checks was the WISPs weren't able to get enough product. And so, it looks like the distributors didn't really take enough. It's not exactly what I'm hearing from you, but it seems a little bit that way.

(multiple speakers) -- with the campaign? What's that?

So, I think first off, we have a lot a the product in transit right down into the channel, and we have a very strong backlog, as I said before. As it relates to preparing for what we think will be a vast increase in sales in those product categories, is we've done a lot of work on the operations side to increase manufacturing capacity and distribution capacity across the board.

So, from where we are today, from where we were a year ago, we've more than doubled the warehouse capacity that we have available. And, that translates directly into how many shipments, and the size of shipments that we can do. And, we've vastly increased the manufacturing capacity with our own contract manufacturers.

Okay. So, it's basically we're looking at the shipping lead time essentially. You're still talking about warehouses in Asia, right?

Yes. Correct.

Can you give us the cash flow from operation depreciation, CapEx and headcount?

CapEx is $402,000. Depreciation is $555,000, and headcount is 199, and of that 124 are in R&D.

And the cash flow from operations?

I'm going to pull that up for you, so I'll get back to you, okay?

Very good. Thanks.

(Operator Instructions)

Erik Suppiger from JMP Securities.

Okay. First, I just wanted to make sure I understand. In terms of what you were saying about managing the inventory in South America. It sounds like you were managing down the inventory. Why would that be the case? I can understand if airMAX was growing sequentially, but why was it that you managed it down so that the revenue would come down? I'm just trying to understand how that works.

Well, again, it's more about timing of shipping. I think you need to take these two things apart, right. So, the timing of shipments, we have a big backlog walking into -- after September 30, and we have somewhat of a capacity on how much we can ship and where we can go.

So, we chose, over the period of the quarter, that we would delay some of the shipments in South America, and the actually shipped in September. So, it's just a couple of days here, a couple of days there.

And then, with respect to allocation of where we're sending stuff into the channel, part of our diligence is to make sure that the channel has the right amount of inventory in the different regions. And, I think that this quarter is one where you can see us actually being very detailed oriented in that manner.

Okay, very good. So, on the wireless LAN front, that's become a pretty significant portion of your revenue in a fairly short period. Can you give us a flavor for how much of your new products is now represented by UniFi?

And secondly, you've talked about targeting number one market share in unit volume by the end of next year. Do you have a sense of whether this might position you as the number two player by volume? If I do my math correctly, it looks like you could've tripled. Any thoughts in terms of where this might position you?

Yes, I mean we look at, based on our discussions with Gartner, I think that we will probably be, when the report comes out, number two in the market. And, quarter over quarter, I think we're looking at a probably a 10% gain in market share. So, I think we've made a tremendous amount of progress towards our aspirations of being number one.

Am I correct that the service provider of new product revenue does not include any wireless LAN? And, so it's just the enterprise wireless LAN. How do you account for any of the wireless LAN products that service providers buy and deploy?

Are you talking about UniFi?

Yes, UniFi.

So, UniFi is in the enterprise bucket in its entirety. Now, there will be service providers that will buy it, but we think it's better represented, and generally the use case is for the enterprise.

Okay, then lastly, just on the competitive front on the UniFi, is there a particular vendor or any particular segment, where you think, I mean aside from it being a tremendous quarter, where are you seeing that strength, and who do you think you're taking share from?

Well, I think we're taking some market share, but most of the revenue is coming from industry or a market we are creating, right? What Ubiquity does is we make powerful networking solutions affordable to the masses. What you're seeing with UniFi is, I like to use the analogy of hotels.

So, the five-star hotel can afford Cisco and Aruba and expensive solutions. But, for every five-star hotel there is thousands of four-, three-, two-star hotels that still need a high level of information technology infrastructure, and Ubiquity has been able to provide high level information technology at very disruptive prices.

So, you're seeing the results of that in the numbers on a global basis, right? We're making pretty good strides.

Congratulations. Thank you.

Kiera Kilkowski from Bank of America Merrill Lynch.

Hi, guys. I just have a few quick questions for you. First, following on what you were just talking in LAN strategy, can you tell us, maybe, some verticals that you've been gaining share in with the UniFi product? Second, if you could provide an update on airVision. There was comment, prior to this call, that it would be a big year this year and next year for that, and I was just curious if you could give us an update on that? Thanks.

Sure, okay. So, for UniFi I think the biggest applications are education, hospitality and then small, medium businesses.

Okay.

For airVision, I think the concept of airVision is dead on. So, what we're trying to accomplish is a cohesive and powerful hardware- software integrated IP video security solution using the same Ubiquity [element] switches, a very powerful solution at disruptive economics. And airVision started out of the gate when we launched it two years ago with great traction.

But, we made some mistakes in the design architecture, the decisions largely my mistakes, and we've corrected them. And we're on airVision 2, which is the second generation of the software, and its gaining traction again. And, we will be releasing even a newer revision of software and new hardware in the coming year. So, I think, my hopes is you'll see a similar trajectory in our IP video security solution growth as you've seen with UniFi in the past couple of years.

Thank you and good luck.

Tim Long from BMO Capital Markets.

Thank you, two questions here. First, on airMAX, a lot of new products were announced at the trade show a few weeks ago. Maybe if you could just give us a sense of what the initial feedback has been to you from customers in the channel, and do you think there is any risk that customers might wait for some of the new products, that we would see a pause before that?

And, secondly, Craig, I would love to get your view on margins. Obviously, a huge operating margin this quarter and gross margin. Do we see more leverage in that gross margin line? And obviously, the guidance for December implies a lower operating margin. So, do we think this is a good steady state rate, mid-thirties for the operating margin? Thank you.

Your first question is whether our customers will hold off after previewing the new products we're coming out with in the coming months? I think we've always been very transparent with our customers, and we try to give them a heads up on what's coming out just so they can plan their networks.

The products we announced, the new NanoBeam CPE, specifically, and the airFiber 5 backhaul, yes, there could be some providers who will wait on those products. But, we've done things the same way all along for the past several years. So, I don't think it will affect our growth in these coming quarters.

And then just Robert, do you have a sense of folks, how excited they are about those products. Do think they'll represent a good upgrade for customers?

I think so. Recently, we've hit a hot streak on designs. So, I think our engineering team and our product definition is getting stronger and stronger. So, I anticipate both of those products will be big hits.

Okay great, thanks. And then the margin-- (multiple speakers)

Yes, so gross margin line, I think we're getting towards the upper end. We're always looking for that extra dollar or two on the bottom. But, we don't have a ton of room to move around on the margin, so I think we're a steady state, we're probably where we're at today.

On the operating margin side, like SG&A. We talked about there's going to be some slight incremental spend on our Ubiquiti World Network project. And we're always looking to invest in R&D. So, last quarter we added a number of people to our R&D headcount, and we've got a number of new people that we'll be adding as well. They fit into the Ubiquity model. And so, I think steady state you'll see as a percentage, you'll see it will be pretty close to where they are today, so in the 30% net income margin range.

Okay. Thank you, very much.

Tavis McCourt from Raymond James.

Thanks for taking my question. Two questions. One, qualitatively could you talk about the supply demand balance, now? Obviously, this is yet another quarter you've had trouble shipping to full demand.

Is it the December quarter we can expect finally catch up, or March, or is it just a moving target that's tough to get to? And then, secondly, a bigger picture question, Robert. Like UniFi has been out a couple of years, why now, why this quarter? Why are we all of a sudden seeing it, although it had some nice growth off very small numbers, all of the sudden it's just very meaningful? What are your thoughts on that? Is it some marketing campaigns you've done with your distributors? Is it just working out some new software patches? Just anything to explain how this is gone from single-digit millions to $35 million relatively quickly here, even though it was launched a couple of years ago?

So, that's a very good question. And, our Company and our business model is very unique. We don't use a sales team or a marketing team.

Up until this World Network initiative, we didn't really invest in any kind of marketing. And so, we generate demand by just disrupting markets with hit after hit product. When you generate hit after hit product, it creates evangelism. And, it's hard to predict the trajectory of that evangelism.

Sometimes it's a steady growth. Sometimes it just rockets, and I think with UniFi, we're at a point where the need for these wide-area Wi-Fi systems is at maybe a all-time high, and the awareness of UniFi as the best solution, I wouldn't even say it's the best value solution, I think it's the best performance solution. And it just happens to disrupt the economics. I think the awareness and the demand for the application, just in the past several months, has just really skyrocketed. So, I think that's where the numbers come from.

And then Travis, on the supply and demand balance. Like I said before, we're spending a lot of money to get more supply. To be able to build more, and our expectations of that will be closer to where it needs to be by the end of December. But again, when you have, they're high-class problems, because we've had like unprecedented demand across pretty much all of our product lines. So, we continue to play a little bit of catchup.

Got you. And a follow-up for you, Robert, on the new product categories. At the WISPAPALOOZA conference, the crowd was especially, I think, impressed with the new airFiber backhaul, and the price points there. Is there a way to quantify the percentage of your WISP space that may have been relevant for the current version of airFiber versus the relevant market of that WISP space that's relevant for the microwave version?

Right. So, we have two versions of airFiber. We have airFiber the 24 gigahertz version, and we have the upcoming 5 gigahertz version. The 24 gigahertz version, the limiting factor is the range. So, because it operates at such high frequency, the free space path loss is pretty severe, and things like rain or snow could further affect the link. So, it 's effective probably within a 5-mile range, or maximum, maybe a 10-mile range.

But, in these list networks, I would say the majority of the backhaul links are much greater than 5 or 10 miles. So, I think airFiber 5, the volumes will be significantly higher than airFiber 24.

And, I think moving forward, what you'll see is airFiber 5 will be used in backhaul service provider applications, and I think airFiber 24 also has room to grow, but it's going to become very popular in things like building-to-building applications and short links. And, they both have their benefit, right?

But, 24 gigahertz, there's not a lot of devices there, the signals, the propagations die out quickly. So, to get a high-performance gigabit-plus full-duplex link in that band, airFiber 24 is very, very attractive. And, I think it will just take time and awareness. Not a lot of people know that solution exists. So, as Ubiquity in general, as the name brand grows and gets more awareness, I think it will help all our products including airFiber and airFiber.24.

Great, thanks.

Sanjit Singh from Wedbush.

Congrats, Robert and Craig on nice results. Two questions for you.

One, given the WISPAPALOOZA event in Las Vegas, have you been hearing any anecdotes about some of your WISP service providers taking share from either traditional cable operators or Verizon or AT&T in developed high-density markets in maybe big cities? Typically, we hear about them in the share gain story in rural markets, but are you seeing any momentum in some of the more developed parts of North America?

Well, I like to compare airMAX, and the wireless ISP industry, I like to draw an analogy to DirecTV. So, DirecTV is a broadcast TV solution in areas that do not have any alternative, and it's also used as a superior option in areas with alternatives. That's why you see DirecTV dishes even in urban cities. And, the same is true with airMAX, and some of our wireless ISPs. ¶

The problem is awareness, no one knows about these solutions or these services. So, we use an airMAX link in our Silicone Valley office, and it's the best thing out there in terms of performance and latency and economics. And, we know about it.

Now, the question is if everyone, and all the companies in Silicone Valley knew about the wireless ISPs industry and the solutions, how much could you grow in these urban and developing markets? I think the answer is a lot. So, that's the whole motivation behind this World Network Initiative, is to build awareness for all of these service providers and airMAX technology.

Great. And my follow-up question is back on UniFi. So, just given the broad-based growth across most of these geographies, how are you thinking about these deals? Are these customer-inbound requests at the website, or are your channel partners and distributors a helping source of these deals?

Okay, so, I would say this is probably the most difficult thing, or the most misunderstood area or aspect of the Ubiquity business model. We are not project based. We don't necessarily know where this stuff is going, and that's a great thing.

If we were a traditional company with a sales force bidding on different deals, what you'd have is a model that can't scale. As your revenue scales, you need more and more infrastructure to support more projects, and you have a problem with transparency.

You have so many people and middlemen and things touching in between the technology and the customer, that it becomes incredibly inefficient. So, what we do is we build these disruptive technology platforms very efficiently, and we transfer them to the customers, our operators and system integrators, very efficiently and this translates into immense value.

We don't know where these tens of thousands of operators are going, and what projects they're doing. We just concentrate on R&D, and keep making more and more of these disruptive-type technology solutions in different adjacent markets, and that's how, I believe, we grow.

And people have been telling me, when we were at $50 million in revenue, oh, you can't scale doing this. You get to $100 million, oh, you can't scale. We're at a $0.5 billion, now, you can't scale. But, it is very scalable, the accounts are intuitive. And, as our revenue scales you'll see more and more drop to the bottom line.

I think it's going to be interesting, over the next quarter, next several quarters, the next several years. I keep telling you guys this over and over again, we haven't gotten credit for it. So, it's going be very interesting over the next few years to prove it out.

Thanks, guys.

Brent Bracelin from Pacific Crest.

Thank you, obviously, I have a couple of follow-up questions for you here on the enterprise side. You did more revenue in one quarter than you did all of last year. So, my question really is regards to the sustainability of that.

As you look at the enterprise business this quarter, obviously, I assume the bulk of that is UniFi driven. Is it large deals? Is it is seasonal? Obviously, if you look at wireless LAN, education typically is a very strong vertical in September. Do you think there is some element of seasonality here? Help us understand, as you look at the momentum you had in this current quarter, how sustainable is that?

Well, I think we're in the midst or in the very early cycles of a technology refresh in this area, with the AC product. And so, we didn't have a product in the market two years ago period.

Yep.

And now we've gone through the full generation cycle of N, and now we're starting to see the uptick of AC. And, I think everyone predicted that AC would be a common phenomenon in the next 18 months, 24 months, et cetera. And, we've seen a vast acceleration of that in the market very, very quickly. And, I'd say the majority of it is driven through our differentiated price and performance.

In terms of seasonality in projects, I mean, we're seeing this, it's not just a US phenomenon. It's a global phenomenon. So, we're seeing it pretty well dispersed, especially here in the US, especially in Western Europe where the infrastructure build-outs are already pretty solid.

And, we don't attribute anything to like a seasonality tick in a specific vertical, but I will say that this is really the first quarter where there hasn't been a significant amount of selling and sell through for us. So, there is a little bit of stocking of the shelves for this quarter.

Perfect. And then, if you look at the $35.5 million in the quarter, what percentage of that, ballpark, would be driven by to live in AC, is it half of the mix now? Is it more than half of the mix?

It's less than half.

Less than half, okay. If I were to compare the ramp, I know, Robert, you've talked about using airMAX, and the ramp in airMAX, three, four years ago, as a proxy. It took a couple a couple of years for airMAX to really take off. It went from, I think, $37 million in one year to more than doubled in one to over $100 million the next year, and then over $200 million the next year. A lot of that growth was driven by taking it internationally.

What's your sense on UniFi? If you compare the ramp that you saw in airMAX in 2010 to compare to the UniFi and what you are seeing now, is UniFi on that same type of trajectory, or is it just a completely different product, and it's not a fair proxy?

Well, we're looking pretty prophetic right now, right? You compare it to the first few years of airMAX, it should be pretty close. (multiple speakers) My expectation is that it will be bigger than airMAX. UniFi will be bigger than airMAX. Give it two years.

Give it two years, okay. Obviously, different product, different market, but it is following a similar type of trajectory.

And, my last question here is really appetite for M&A. Obviously, you guys are an R&D driven company. You guys are now generating a ton of cash, $280 million on the balance sheet right now. Is there interest, do you have an appetite to looking at acquiring small technology companies out there that potentially could accelerate your penetration in new markets? Essentially buying engineering teams, or is that not in the plan at this point?

So, here's the challenge. You have less than 200 employees, close to 70% are engineers. What, north of $0.5 million revenue in run rate, 30-point net income or whatever we're doing.

How are you going to acquire a company that has twice as many people as you and one-tenth the revenue, and maybe not make any money? So, what I'm saying, is it's almost impossible for us, I don't see us making a typical acquisition. The way we've grown our engineering and R&D teams has always been through actual hires, and we're going to continue to do that.

And, I think we can grow still, very quickly, organically. There might be some opportunities for acquisitions overseas, but they would not be traditional acquisitions. They would be more out-of-the-box type of things.

Okay, fair enough. I'll cede the floor. Thank you.

Mark Sue from RBC Capital Markets.

Yes, this is Ameet Prabhu calling on behalf of Mark Sue. You talked about your focus on growth, and some adjusted growth targets. Could you maybe rank order products, region, where you expect the most growth? By product segment versus the enterprise, and even the regions, even by a broad level, that would be very helpful.

Maybe, I could just send you the workbook, that would help. Just kidding. I think that the biggest growth regions for us, I mean, we're very under penetrated in areas in the APAC region. And we've got a number of projects under way to help penetrate and help localize the way that we sell in those markets. We think there's a lot of upside in markets. We have done very, very little in India. We've done very, very little in China. We're just starting to see a ramp up in Russia. And so, we're very optimistic about that.

Now, in all of these contries they have both problems. They have, one, they can't solve the last mile, and that's where we come in. They have very regional challenges from CapEx to just efficiency of their own internal markets. And, then once they get this efficiency, they're having difficulty propagating it throughout a building, throughout the campus, throughout a corporation.

So, I think that's going to be a star for us in the near to long-term. And then, our other markets continue to grow at a very steady pace.

Okay. So, UniFi and airMAX have driven most of the growth in the quarter, and most regions, except EMEA where you saw a strong demand for airFiber. Can you maybe talk about what drove airFiber demand specifically in that region?

Yes, I mean, we're looking at the numbers. I think what's happening in EMEA, our pickup of airFiber, is they're finding a lot of what we consider nontraditional uses for it. So, we're seeing a lot of building-to-building or campus-to-campus communication, instead of the traditional, hey, the backhaul connection links. So, people are setting up rings of connectivity, and they're using airFiber as the transmission.

Very good, thank you, and good luck folks.

Okay, I had one more from Matt Robinson, you for cash flow from operations. It was $51.9 million for the quarter.

At this time, I'm not showing any further questions.

All right. Thank you, Charlotte. Thanks, everybody, for participating.

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