優比快 (UI) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ubiquiti Networks second-quarter 2014 Q&A conference call.

(Operator Instructions)

As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Jason Gold, Investor Relations. Please go ahead, sir.

Thank you, Danielle. I'm here with Robert Pera, Founder, CEO and Chairman of the Board at Ubiquiti Networks; and Craig Foster, our Chief Financial Officer.

Before we get started, I would like to review the Safe Harbor statements. During the call, we will be making forward-looking statements that include our strategy, forecast and projections of revenue, EPS and other key metrics. There is no assurance that we will achieve these projected 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 the reconciliation of non-GAAP and GAAP measures can be found in the press release that we issued this afternoon. And can be found on the Investor Relations section of our website at UBNT.com.

We hope you have reviewed management's prepared remarks, which are posted as a text transcript in the Investor Relations section of our website. This call will be a Q&A-only call. Please limit yourself to two questions. Time permitting, we will allow for follow-up questions. Danielle, we are now ready for questions.

(Operator Instructions)

Matt Robison, Wunderlich.

Congratulations on the results. Robert, I am hoping that you can give us an update on some of the new products that you announced back in October.

But before that, Craig, can you comment a little bit on the inventory build? And to what degree you may be seeing any emerging markets' macro effects, such as what the stock market seems to be pretty concerned about?

I will start, and then I'll turn it over to Robert.

On inventory, obviously, we have made a major investment on inventory. We have had some constraints in the past on just being able to service and get inventory into the channel at the right speed. So we have had a lot of distributors over time that have had stock-outs for weeks at a time, and I just think that is unacceptable, given our -- we had an inability to deliver the right amount of inventory. So we made a very calculated investment in building out inventory. And our net balance in inventory increased about $17 million for the quarter.

With regard to the macro effects of what is happening, we haven't seen anything change from our business because of potential currency risk or anything else that is happening in the regions. All of our contracts are in US dollars, so we have a little bit of a natural hedge. But I think if there was some sort of global meltdown, we would be hit the same exact way as everybody else would.

And then, Robert, on new products?

The new products that we announced at the airMAX conference, NanoBeam is shipping now. airFiber 5 is going to be shipping very soon, and airMAX AP, also very soon.

Erik Suppiger, JMP Securities.

Congratulations.

Specifically, last quarter you had noted that the UniFi had seen some channel fill. You had mentioned that maybe it was in the range of $10 million of inventory that the channel is holding. Can you give us an update on how that was in the quarter? And can you give us a sense for what the sell-through might have been for the UniFi?

The effect that you saw last quarter on UniFi was -- yes, it was the first quarter that we had sold our 802.11ac product for a full quarter. And we had to get the -- distributors went from zero inventory to some inventory that they could sell to their end-customers. So, I think last quarter, you saw the effect of getting some of that to their end-customers and putting some inventory on the shelves.

As you look at what happened this quarter, we still had a strong quarter, even with the -- past the sell-in period, which was a one-quarter phenomenon. And so I think that gives you an indication of on how strong the sell-through has been.

Okay. Then on the Ubiquiti World Network, can you give us an update on what kind of sign-ups you have had from WISPs?

I think we have several hundred on board in the US. And our vision for the World Network is to encompass every country in the world eventually, or most countries in the world. I think the US is the first pilot, and it's off to a good start. But yes, I think World Network is going to have its growth ahead in the next couple of years.

Okay. And then, lastly, your guidance. If I do my math correctly on the guidance, it suggests that your OpEx might actually come down if I use the midpoint of your guided range.

Is my math correct on that? Or given the investments you are making in Ubiquiti World Network, why wouldn't we expect OpEx to increase from here?

We spent a little bit of extra money in the period. So I think OpEx over the next period will be relatively flat. And as we continue to increase our revenue, yes, as a percentage-wise, it has the potential to go down just a bit.

But the Ubiquiti World Network spend has already been built in. And we have had our legal cases on counterfeiting, and these other things have really wound down. So you have these offsetting effects.

Okay. And tax rate, no change. And gross margin: any thoughts on what gross margin might do?

I think we are comfortable with the range. The gross margin is really subject to product mix.

And so last quarter you saw, last quarter being our Q1, you saw the mix of -- UniFi was greatly increased, and airMAX was a lower percentage. And then you saw that switched this quarter, with airMAX having a blowout quarter and UniFi being a little bit less because of the sell-in that I had talked about before.

It is just going to be subject to product mix. So I think we are at our -- somewhere between the 44% and 44.5%. That is the range you will see these things flop around.

Okay, good. Okay, thank you very much.

Tal Liani, Bank of America.

I have two questions. First is, when it comes to Ingram Micro, you announced it this quarter. Are you working on expanding the distribution additionally beyond Ingram's the same class of distributors? On this topic also, I missed the first three, four minutes of your call, and I don't know if you discussed it. But how is the revenue reorganization happening with the shipments to Ingram? Is it sell-in or sell-through? And can you discuss if you already started shipping products into that? So this is about Ingram.

The second question is about UniFi. You have a tremendous difference in pricing, almost three times the price between N and AC. So when you talk about UniFi, can you give us the perspective of what was -- there was some decline this quarter because of the great growth last quarter. What is the dynamics in units versus dynamics in price? Meaning -- or AC versus N? Meaning, is this representing a very big decline in units, but pricing of AC offset the declining units, et cetera? Just give us a little bit more color.

Thanks.

Okay. So I will start with the Ingram Micro. Are we looking at other distributors of the same class that are similar? Absolutely.

But I think the one thing that was good for us with the Ingram Micro relationship is, we don't have to -- the terms that Ingram Micro came to market with us is very close or similar to exactly what everybody else in the channel has. So no volume discounts, none of the other things that really trip up -- egregious terms on when their payables are due, things like that.

And so the one thing that changed for us as we talked to Ingram Micro is that they're willing to make some concessions that fit better into our long-term and how we manage our distribution. So we have a number of conversations. There is nothing imminent that is going to happen in the next quarter or two. But we continue to think that those might be additive in certain regions under certain circumstances.

In terms of the revenue recognition, the revenue recognition is selling. So it is along the lines of what we are doing today anyways.

And then on UniFi.

Okay, so UniFi is priced higher than our entry-level UniFi APs. But there are substantial spec differences. Our entry-level UniFi ACs are 2.4 gigahertz, 11 and 2 x 2 MIMO radios. The UniFi 11AC AP SKU is dual-radio concurrent, 3 x 3 gig of the Ethernet 8023f power Internet. And so it's priced higher. And I think the model to compare it to is our UniFi AP-Pro, which I believe might be the biggest contributor in UniFi, from a revenue perspective. And that one's doing really well. That's priced in the $150 to $200 range.

So when we priced UniFi AC, we looked at the success of the UniFi AP-Pro, combined with we were first to market of enterprise vendors with 11ac products. So the pricing, I think, makes sense.

Right. Sorry, my question was -- it's a device that makes sense, I absolutely agree with you. But the question is, when we see increase or decline, we close the prices at least two times higher, $150 versus $299 or so. We need to consider units versus price. Meaning, when we see growth in UniFi, we need to understand if it is just because it is the same units that you sold last time. But because of the higher price of ac, greater proportion of ac, that is why you are growing? Or because, really, units are growing?

So my question was, can you give us a little bit color of what is happening now when it comes to the breakdown between AC and N? What is the growth, what is the source of the growth? Is it more units or more ASP list? That was my question.

I think it is tough to analyze quarter over quarter. Because when we introduce new products, we typically have a stocking quarter, followed by, let's say, a deployment quarter. And if the product is good, you will see a bump up in later quarters.

So I think if you look at year over year, what would double or triple. So I think my expectation is next year, I want to see double or triple again. And to do that, it is going to be an increase in both volumes and ASP.

But I think all the trends are pointing that we are going to do that. And one of the things that is really compelling about UniFi is, we have -- not only do we have a market that nobody is addressing right now. But we are actually eating into the other enterprise vendors.

And there's quite a few examples where some system integrators rip competitive enterprise Wi-Fi deployments and replace it with ours. And it is cheaper to replace the network with ours than it is to pay one year of licensing and support fees to the competitive vendors.

So I just don't understand how these enterprise vendors keep ripping off customers and charging them tens of thousands of dollars, or hundreds of thousands of dollars, just for support or licensing or hosting fees. So I think independent of our UniFi AP pricing, the SKU pricing, you've got to really look at the cost to service and support our networks, which is zero. And I think that is the major disrupter as we move forward.

And maybe if I can take just two more seconds of your time. How is the -- just general question about the market.

How is the take-up rate for the ac? Are we there, that customers are demanding ac? Or is it still mostly n and ac is in the future?

I think right now because of the price points, I think the 11n volumes are going to be dominant until you see the silicon vendors, such as Broadcom and Qualcomm, have a second wave of integration, where they reduce the cost of the chip sets to 11n levels. When that happens, we will probably have new 11ac APs priced at our current 11n models, and you'll see 11ac take over.

That is probably going to be -- my guess is second half of 2015. And not just us, but probably industry-wide that will happen.

Tavis McCourt, Raymond James.

Craig, a couple for you, and then a follow-up for Robert. In the prepared comments, you indicate DSOs should probably start trending back to the low 40s. I think you indicated that last quarter, as well.

So I am wondering, is that a longer-term commentary? Or should we expect anything dramatic in the near-term?

And then, the same kind of question with the inventory levels. Are those at a place now where we should expect some stabilization, now that this supply chain transition has worked its way through? Or is there still more ramp in ending inventory that you would like to do to secure the supply chain?

Okay, so first on the DSOs. Yes, I did say last quarter that we were going to try -- you should expect to creep up. And then surprisingly enough, it actually went down. So we have done a really good job of managing the channel credit situation. And I think we have got everyone lined up like we need them to be.

Going forward, yes, I don't think 24, 25 -- it's just not sustainable when we have people that are paying on net 30 terms. So it should creep up. It's not going to happen overnight, but it should happen over the next couple of quarters.

And then on the inventory, if you look at our terms on inventory, it is out of this world how fast we are turning over inventory. But I think that we did a substantial build that put us to five weeks of inventory or so. And I think that we are going to try to hold it in the five to six weeks going forward. So, I think we're pretty close to what our target is.

Got you. And then, Robert, the -- it looks like you hired quite a few engineers this quarter, if the prepared remarks were correct. I think that 17% increase was sequential quarter to quarter. I think that's bigger than you have done in the past.

And big picture, are these adding to existing product teams? Or are you hiring new teams for new product categories?

It definitely -- it's both. And I would say that the first year we went public and I was a public CEO, I really liked -- I was very proud of our financial fundamentals. So I looked at, we had this model of 7 points of OpEx. And we had this incredible efficiency I was very proud of. So my first year, I really wanted to keep that intact.

And now that I am seeing the companies that do well in the public markets are ones with much larger visions and growth stories. Like an Amazon, for example. So I changed my mindset. And what I want to go after is hyper-growth without really holding myself to a sub-10-point OpEx model.

We -- probably in the last year, we've had our most aggressive R&D expansion, and that is going to continue. I will say, as far as I know, I am probably the only CEO that does not take cash or equity compensation. So these quarter-to-quarter results are nice. But I'm in it to build something much bigger. So all the decisions I am making on R&D are looking at long-term. I think we will continue to aggressively ramp up R&D, both for new initiatives and just really expanding the function set and the power of our enterprise and operator platforms.

Right. And can you remind me also, in terms of the airMAX upgrade and transition to a base AC chip set on the airMAX platform. How impactful do you expect that to be to the service provider business?

Is this something that we should expect to quickly rip and replace, or just build for new networks, or go through what you expect to happen when the new generation of airMAX comes out.

When we first started designing our airMAX AC platform, I didn't think it would be that impactful in the market. The reason being, the special efficiency going from our current airMAX line based on 11n, to airMAX based on 11ac silicone is only about 30%. Because we still only can use 2 x 2 MIMO. We have few degrees or fog analyses in line of sight with vertical-horizontal polarization of the antenna.

And so really what we are gaining is a modulation from -- we go from 64 CLAM to 256 CLAM with 11ac. That is only usable in certain conditions with very high signal strength. And so I didn't think too much of 11ac -- the move to 11ac when we first started development. However, in the past year, there has been some new development.

So our airMAX AC platform now has a dedicated processor that runs our airMAX protocol. And the timers are much more granular. And we are seeing huge improvements in multi-point networks. So I think airMAX AC will be a game changer. We are seeing two to three times performance improvements in our field testing. So we are really excited about that.

In addition, we have a new technology launching with airMAX AC called air prism. We talked about that in our airMAX conference show in October.

That is going to significantly improve the selectivity of our base station radios. And they are going to perform significantly better in high-noise environments.

And as more and more radios get deployed, that becomes increasingly more important. So I think I'm very excited about airMAX AC this year.

Okay, that's helpful, Robert. And one follow-up on the balance sheet. The cash is obviously really piling up. I suspect most of that is overseas.

And I am wondering in terms of options to put that cash to use, you have got a bit of a unique model. So I suspect acquisitions don't make sense. But if you could talk about what the future plans for that cash could be, that would be helpful. Thanks.

I can't talk about what we're going to do with that cash. But we do have a very specific and ambitious plan to use that cash in the next couple of years.

Jess Lubert, Wells Fargo Securities.

Congratulations. A couple questions.

First, I was hoping you could talk a little bit about your backlog and visibility coming into the March period. It seems like you have built quite a bit of inventory this quarter. But you're guiding for a much slower sequential increase during the March period then we have seen over the last few quarters.

I was curious to understand to what degree you are being conservative here? Or do you expect the March quarter to be a bit of a digestion period for channel inventory? Anything that you have seen that has been a change from the last few quarters.

That was actually the worst pronunciation of your last name I have ever heard. In terms of the sequential quarter over quarter, we are substantially ahead of where the street had us, in terms of what we were going to do from this quarter to last. It just happens that we had a fantastic December and brand.

I built up the inventory in preparation for the impact that Ubiquiti World Network will have over a period of time. Now, does that happen in the next quarter? Or is it next couple of quarters? Or next three quarters? Time will tell, as we are starting to just get in the early analytics of how the campaign has been working.

But I think that we are very happy with where the growth is right now. And I think that we are achieving and exceeding all of our internal targets in terms of where we wanted to be.

Okay. And then, I wanted to follow up on Robert's comment regarding the commitment to additional R&D, and understand if we should expect this to -- this increase to be funded by growth. And can we feel pretty comfortable that operating margins are likely to remain in the mid-35% range, even as you make some of these incremental R&D investments?

Thank you. And our --

I'll answer that. So increasing your R&D capability. My philosophy is probably different than most companies. At Ubiquiti, we don't have recruiting teams, we don't have specific open recs we are looking to fill. We don't just believe in adding headcount to R&D to get more productivity. We believe -- and we have a very high selectivity for who we bring on.

And we are always looking for top talent. Sometimes we get waves of talent, and sometimes we go through a tough patch. So, it is unpredictable how much we will add in R&D each month for the next year.

But I can tell you, I am being as aggressive as possible. And most of our growth is probably outside of Silicon Valley, for sure, and outside the US.

Tim Long, BMO Capital Markets.

Two questions, if I could. First, just looking at the regions here. It looks like Latin America had a pretty nice breakout this quarter. And it seems like the first one since the issues of a year, year-and-a-half ago. So just curious on your take on that important the region, if you think this is the beginning of a trend. Or just maybe a little bit of catch-up there.

And then the second question, on the Ubiquiti World Network. Craig, I was a little surprised to see that the SG&A was down in the quarter. Am I right to assume that means the legal costs came down more than the initial spend for Ubiquiti World Network?

And to follow on Jess Lubert's question there, your answer about potential inventory for Ubiquiti World Network. Should we take that to assume that you probably have not yet seen any impact of stocking for any demand that would come with the Ubiquiti World Network? So there was none of that embedded in the numbers in the December quarter?

Thanks.

Okay, so I will start with the -- you've got an echo there (inaudible).

Sorry.

Some of the Ubiquiti World Network has been (inaudible) we have offsetting us. We've got an echo here. Okay.

We have offsetting costs that have a -- against our legal spend that was outsized over the last year. And I think the Ubiquiti World Network, we put together a budget. We are executing to that. And I think it's -- the spend is going to be relatively flat after you net those two things together.

With regard to the inventory, yes, the channel did not start ordering inventory anticipation. I think they have taken a let's see what happens on our end. We did prepare. And we've localized some of the inventory across the region so that we actually can respond to demand as it grows. And people don't have to deal with longer lead times, so that we can service their end-customers faster.

And then -- can you remind me of your first question? I think we lost him.

Danielle, let's move on to the next question.

Sanjit Singh, Wedbush.

Robert, I just want to ask you a conceptual question on service contracts. You talked a little bit about that a couple of minutes ago. I wanted to get your sense -- as you try and penetrate the enterprise market. If you have customers that potentially have unique or difficult deployments, what is Ubiquiti's role in terms of aiding them and helping them with that deployment?

Is that something that you push to the channel? Or is there -- if there's not a service contract in place, what is the enterprise customer's insurance policy for a situation like that?

This is the biggest misconception regarding Ubiquiti. People say we do not have support or we don't have great support. We do. I would say our support is as good, if not better, than any of the competitive enterprise wireless LAN vendors.

What we don't have is phone support. I don't believe in phone calls. I never take phone calls. I think it is incredibly inefficient. So we do everything through e-mail. We have a pretty substantial e-mail support team that resolves issues in record times. Our internal ratings are very high.

And then we also have this very rich community that has 1,000-plus posts per day, and hundreds of thousands of numbers that take pride into helping each other out. And it is fully transparent, with the very R&D development engineers that are working on the product.

So I think we have a very high level of support and engagement with the actual design team behind the product of the Company's [know how]. So I don't know who is spreading this kind of misconception that we don't have support, or our support is inferior. Because I do not believe that is the case at all.

Is that something that is contractually obligated by Ubiquiti, if there is a question out there from a customer? Is there a service-level agreement, where you are able to respond by a certain period of time? Or what practices do you have in place for a situation like that?

A contractual obligation?

Well, like if a customer has a problem with the deployment, and they need someone right away or within 24 hours, is that --

I will say this. We have an incredible amount of goodwill and participation on our forum, despite being a completely transparent Company. So we have had a number of issues in the history of the Company, with software, major software bugs, major hardware defects. And the fact that we have such a great goodwill within our community and fanatical Ubiquiti users is a testament to how we have taken care of customers over the years.

So the people that have used Ubiquiti products know us as a Company that gives the customer unbelievable transparency, to the developers behind the products. And also a great level of willingness to make things right. Whether it is replacing products, whether is fixing bugs quickly.

And I think our model is the future model. We have cut out all the middlemen, which I believe are impedances to delivering value and satisfaction to end-users.

Thanks for the explanation, Robert. One last follow-up question. Outside of UniFi and airMAX, which of the new product platforms, say, 2015s, could emerge as maybe the third major driver of growth? Is it EdgeMAX? Or the new NanoBeam? Or airFiber or airVision? Which are the ones that you internally feel most optimistic about?

I think all of them have very good growth potential this year. The video security platform is going to become something very big once we really solve the remaining issues with the network video controller. And we are very close to doing that.

EdgeMAX, the routing platform, has very big potential. And I think what you will see is, UniFi is going to evolve into something much larger than just wireless LAN.

Thank you. Ladies and gentlemen, that is all the time we have for questions today. 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.