優比快 (UI) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ubiquiti Networks Q3 2014 Q&A conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to introduce your host for today's call, Anne Fazioli. Ms. Fazioli, you may begin.

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

Before we get started, I would like to review the Safe Harbor statement. Some of the statements we will make during this call constitute forward-looking statements, including perspectives on 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 risk factors and uncertainties is contained in our most recent filing on Form 10-K with the SEC and other SEC filings, which are available on the SEC's website at www.SEC.com. Forward-looking statements are made as of May 8, 2014, and we assume no obligation to update them.

We hope you have reviewed management's prepared marks, which are posted in the transcript, on the Events and Presentations and quarterly Results sections of our Investor Relations website at IR.UBNT.com.

This will be a Q&A only call. Please limit yourself to two questions. With time permitting, we will allow for follow-up questions. Andrew, we are ready for questions.

(Operator Instructions)

Keira Kulikowski from Bank of America.

Hi guys. This is Keira on behalf of Tal Liani. I just had two quick questions for you. It looks like again this quarter there was a strong investment in engineers, which is obviously important for your business. Will these additional engineers be working predominantly on existing products in the pipeline? Or are the new products you referenced totally new to Ubiquiti?

And then second, if you could talk about some of the dynamics you are seeing in the competitive environment in your different product lines, that would be great. Thanks so much.

I'll take the first one. Most of the R&D hiring, if not all the R&D hiring, is focused on new initiatives, mainly in [power]. The second part of your question, can you repeat?

Yes. If you could just give us an update on the different competitive dynamics you are seeing in your different product lines, given the fact that there's been some recent IPOs, et cetera.

Can you just be more specific? Which --

Yes, like specifically in the wireless LAN market, there's been some new companies that have been making some strides in terms of different verticals that they have been targeting and stuff. And I'm just wondering if that is impacting you at all, or what you're seeing in the dynamics.

I think our messaging is the same now as it's been for the past couple years. The way we see wireless LAN -- professional wireless land solutions is, customers largely are getting ripped off by overpriced solutions built on relationships and traditional business models. We are focused on R&D, and bringing to market superior performance products at disruptive price points, and enabling markets these guys don't see. On a volume basis, our volumes are much greater than traditional wireless LAN companies.

And I don't -- we are not focused on taking market share from these companies. It's not really material, because we are a volume player. But over time, you will see us taking market share from these guys. I think it is starting now. And what that represents is really a validation of our technology.

People are going to say our technology is inferior, and I strongly believe that's not the case. We are an R&D-focused Company. I'm a product CEO. I run R&D; I take great pride in that. Our focus is in R&D.

And I think over time, we will take market share from those traditional brands, and it will validate that we are a technology Company. But it's not our focus. Like I said, we are focused on driving and creating new markets that people haven't been getting. Our team, our [caption].

Got it. Thanks, and good luck.

John Lucia from JMP Securities.

Hi, guys, thanks for taking the question. In the prepared remarks, you said you increased inventory dramatically this quarter to account for strength in the back half of the year. Yet you are only forecasting for 1% sequential growth in Q4. Can you walk us through the reasoning behind that? Does the modest growth in the outlook reflect a buildup of inventory in the channel, or what is going on there?

Okay, so there's a couple things happening. This is Craig. First of all, that we have lead times [like going] to our shipping. So for a majority of the next quarter, it is really shipping off the backlog that we created in the last quarter, which is the quarter we just completed. And knowing that -- there's two dynamics to the inventory build up. One is, yes, we do believe that there is a strong second half of the year that will materialize for existing products and for new products.

And going into the quarter, we were -- right at the last couple weeks, we were just beginning to sell our new airFiber 5 product line. But we had to build a significant amount of inventory so that we could be prepared for the onslaught of deliveries coming up.

So the inventory is mostly airFiber?

No. We built about $20 million of inventory of existing products, and about $10 million extra of inventory for new products -- one of them being airFiber -- that hadn't shipped yet.

Okay, that is helpful. And then, I just wanted to get into the enterprise side. It only grew 1% sequentially. I was expecting at least 10% sequentially in that business. Can you just walk us through why it only grew 1% this quarter?

Yes. Actually, the volumes were up. What really changed, primarily the -- inside that line it's primarily UniFi. And the product mix changed for the quarter. So we actually ship in volumes, collectively, across UniFi. It actually increased a significant amount for us. But the change in the dynamics was -- and it has a decrease in ASPs because the cost of an AC device is about one-fourth the cost of our end-devices.

Thank you --

The cost -- okay.

Do you have the number [for that]?

What's that?

I think what Craig means is, we had an early adoption period with AC. AC products are priced significantly higher. And the volume overall has increased in UniFi, but the initial heating of the market of AC subsided a little. But I think you'll see that grow, just as our higher-end UniFi products that are higher-end products across the Company grow after initial heating and deployments.

I always say, you can't draw conclusions looking sequential quarter to quarter. I think you've really got to take a year-over-year view.

Okay. Just so I understand, the volumes for -- in the pipeline increased or -- if the volume --

The actual volumes increased. But the ASP went down. Because of the mix between AC and [end].

So you were selling -- the mix for AC, or the AC products -- $300 list price, right? And as AD -- so, if you sold more AC, how would that bring the ASPs down?

[You're in] opposite. And [chain].

Okay. And then one last question, just on the geographic mix. Just generally, the Americas business was down 10% sequentially, and EMEA was doing really well. Can you just talk about just generally how that worked out, and what the geographies looked like?

Yes, I think it has more to do with the philosophy of how we are shipping products into the channel. And a big [change] we had in the last year was, we started to analyze a lot of -- we grabbed a lot of data from our channel, and we analyzed it. We want to make sure the channel has the right amount of inventory.

The discipline that we show is that we are not going to ship into regions that we believe has adequate inventory. And for regions that don't have that adequate inventory, based on our [subpastics], we are going to increase the volume space. So it's not a question of the order demand; it's really a question of discipline, in terms of how we are shipping into these different regions.

Okay, thank you.

Jess Lubert from Wells Fargo.

Hi, guys. A couple quick ones. First on the inventory. Is it fair to assume that you would expect that to steadily edge lower over the next few quarters, now that airFiber 5 is shipping and you've got the ScanSource and Ingram Micro relationship up and ramping?

Yes, I think that's correct. We are giving guidance that we should be holding inventory at around six to eight weeks.

Okay.

You'll see us moving to those levels kind of [a lot of this club].

Okay, and then I was hoping you could touch upon the early market reception for airFiber 5 and the airMAX AC products. What you are hearing from customers. How impactful those products can be over the next few quarters?

airFiber 5 is receiving outstanding performance reviews. You could go to a forum or other sites on other community forums on the Internet, IT forms. And I think it's going to be a -- well, it is a big hit. It's going to grow.

And then, last one for me, just on the OpEx -- 10% sales in the quarter. I was hoping you could touch upon how you are thinking about hiring going forward. If this is the level we should be thinking about.

And if you can help us understand from an absolute dollar perspective in Q4 how we should be thinking about R&D versus SG&A. I would imagine some of the marketing dollars come down. Does R&D continue to grow from here, or does a level off, in absolute dollars? That would be helpful.

I can't tell you [for term]. Like I've said in previous calls, I have -- or the Company has an ambitious vision, and R&D is what's going to accelerate that vision. So we are looking to grab every R&D resource we can find that can accelerate that vision.

I'm the lead recruiter of technical talent in the Company. I can't predict whether we are going to find 5 guys that fit our criteria next quarter, or we find 100 guys or 200 guys. But if they are there, I'm going to grab all of them. It's not like we are filling [recs]. I think it's a function of how we can recruit these talents and [win] the opportunity to us.

And then just a follow-up to that. On the SG&A side, I think it's going to be -- you are probably going to see it come down a little bit, as the advertising from the Ubiquiti World Network subsides a little bit.

And then on the R&D side, you're going to see -- a lot of our R&D hires are actually happening overseas. We are seeing incredible talent overseas. When we think about the numbers of people that we potentially would be hiring, they come at a lower full-time employee cost than the traditional. So we can [valley purchase].

Yes, I was just going to make a note about that. I would think we recruit internationally because of talent over location. A lot of companies recruit in established offshore developing offices because of cost over location.

So yes, it's a nice side effect that maybe we get some cost savings hiring internationally, instead of within Silicon Valley. But that's not our intention. If we hire outside the US, it's because we find very unique, talented developers and we build around them in those areas, as a rule.

All right, thanks, guys.

Tim Long from BMO Capital Markets.

Thank you. A few here. I will go one by one. Craig, first for you. I hate to go back to the inventory, but last quarter I think your comment was, you thought the inventory level was about optimized in that low-$30 million. So I'm just curious what has changed over the three months. Is something in the outlook changed, or is something in the product road map changed? And then I will come back with another.

I think that as we look forward -- in the past we had some problems with supply, and we had some capacity constraints. And we feel like it's necessary to make some major investment to roll that forward and have enough inventory so that we can get into the channel properly. If you look back a year ago, we were having problems in the channel, like we were having massive stock-outs.

And the channel does have a decent amount of volatility. We need to be prepared, especially for the second half, to be able to fill that volatility without any disruption in supply. I see this as an insulating de-risking of the supply chain that we have. And ultimately what this is going to do is, it's going to bring down lead times for our distributors [hal] for the right amount of inventory.

A few years ago, we were selling out -- we were sending everything to our distribution on a monthly basis. And as of last week, 70% of our orders are either weekly or biweekly for our distribution channel. I think that's a major change in terms of the way that we are thinking about how to fulfill and how to better service the channel with a steady supply of goods.

Okay. And can you walk us through both combined Ingram and ScanSource -- a little bit larger distributors -- just walk us through your timing on when you think they could become meaningful to distribution and potential benefits from those relationships?

ScanSource, we just announced it last week, and they placed at their first order, I believe, this week. It will be -- our expectation is, they are not going to be a top-five distributor in the next three quarters or so. But I think that given their substantial outreach, at least here in the US, that, that would potentially be a top one or two distributor here in the US. But it's going to take some time.

Okay, and then just the last one. This is probably tough to put numbers on, but just curious. The service side of business has done well again, and I know you are in the early stages of Ubiquiti World Network. But do you have any sense as to the return on investment you're getting there? It seems like the initial feedback is really positive. Anything that you can point to as far as tangible revenue benefits from that yet? And then I am done. Thank you.

I think, Tim, it is super early. So this is only -- as of the time we reported, we were only seven weeks into the program. In our press release, we actually put out a couple links to some -- I guess you would call them video testimonies. But some early feedback of early adopters of the Ubiquiti World Network.

And guys are getting -- one of them -- somebody put in $18,000 of advertising. And their return on that is -- they are going to get $220,000 back in revenue. That's their expectation. So I think there is going to be some tangible results. It's just going to take some time for total adoption across the entire WISP market.

Okay, great, thank you.

Matt Robison from Wunderlich.

Great. Thanks for taking the question. First on -- I'll belabor the inventory a little bit more. You guys introduced UniFi video software a few weeks ago. And I haven't seen -- unless something happened in the last couple days, I haven't seen much about new cameras. I was wondering if perhaps -- you mentioned airFiber 5, which has started to ship. In that $10 million for new products, should we be thinking that some of that was for airVision or UniFi video, whichever you are going to be calling it going forward?

Yes, I think that's a fair assessment.

Any color on when we might be able to start seeing those products come into the market?

I think you'll see -- I'll just say that you will see an announcement from us very soon.

And I think one of the earlier callers asked about airMAX AC. Is that -- that we've seen some indication that's been through some degree of FCC approval testing. And what should we be thinking about for timing there?

I think it's the very soon category, as well.

Then a little bit after the new cameras, is that the way we should look at it?

Yes, I think that's right.

You mentioned second-half several times. I think one of the other callers was focusing on the fact that we are halfway through the second half on a fiscal basis. Were you talking about calendar second-half when you were talking about positive seasonality?

Yes. Sorry. Having a [630] year-end doesn't help, but yes, there is more than a calendar year, back half.

Okay. Thanks for that question.

And that coincides with some of the weather and some of the other things that are stronger months for us.

And it doesn't look like you have had a lot of trouble with the geopolitical issues in Eastern Europe, at least not during the quarter. Has anything changed on that front since these numbers came through?

Not really, but I think we should ask Mr. Putin what his plans are. We're monitoring the -- right now there's no embargo. The ports are open. It seems like [profit] we need to track. And right now, that's not in the cards for what they're talking about from sanctions, but that could change. But I think its fair to say -- and I'll just say it now, is that our total exposure in terms of direct shipments into Ukraine or Russia is up 2% of our revenue.

You've got a cadre of distributors from other countries that ship into that region too, though, I imagine, right?

We know that there's a couple of other guys that are -- that more than likely moved some product into Russia, but I don't think it's -- it's not 4% total exposure, by any means.

Thanks a lot.

Rajesh Ghai from Macquarie.

Thanks, congratulations on the strong results. Just wanted to delve a little deeper into airFiber 5, if I could. You mentioned there is some strong initial activity. Wondering if that activity in standalone backhaul [buckle you] use cases, or is it [tapping] out your WISP customers trying to expand [reinvest] services or they can provide or arrange other area that they can drive services to.

airFiber 5 is a special product, so it works on the worldwide [some license in]. It's a true frequency division duplex radial, which means it has micro second latency, which is far better than any of our airMAX devices or any other device within [fox]. And at a price point of under $2,000 a link, it makes it applicable to a lot of different applications. WISP backhaul is one. Cellular backhaul. Potentially, building-to-building communications.

And I think in airFiber 24's case, it was limited. It had a lot of range limitations. airFiber 5 we're seeing it deployed in links of beyond 50 miles, I believe, and it has speeds -- some people have links beyond one gigabit per second. It's a pretty phenomenal product. And I think you'll see it take off over the next quarters.

And on the guidance, if you could provide color on what directly you see for revenues in both segments and -- or on gross margins? Thank you.

Yes, so we -- the segments are really dependent on the product mix. And it continues to clock around a little bit. But I think that we will probably do about 20% to 22% in the enterprise segment, and the rest in the service writer. And gross margins, we continue to reiterate and say that our gross margins will -- it's dependent on product mix, and it will be between 43.5% and 44.5%.

Do you expect enterprise to decline sequentially?

I think it will start to increase.

Increase. Okay, thank you.

Tavis McCourt from Raymond James.

Hey, guys, thanks for taking my question. Robert, I just had one. Just a clarification on the airMAX AC product line. And in terms of the -- not just the timing, but how we should expect that to roll out. So in other words, there is the infrastructure side -- and I don't know if there is a CPE side to that upgrade as well. And then obviously there's different geographies.

So is that an upgrade that we should expect to roll out reasonably quickly all in one quarter? Or will it be a little bit more structured across geography at different times, or different parts of the network at different times?

I think it's going to be structured by different product introductions within the family. The first product we will release will be point-to-point airMAX AC. And then subsequently, we will release multi-point AC.

And I think what you will see is very similar to what we call airMAX and [aleve] products. Overtime, you'll see people replacing their legacy products and their legacy stations to our new standard, and the performance is going to be significantly better.

And have you decided on a price point strategy there? Obviously in the wireless LAN business, you passed through a lot of that cost, obviously. Is that something you intend to do in the airMAX business? Or is that to be determined?

Every product we release we try to set a new standard for price performance, airMAX AC will be no different.

And does both the Point-to-Point and the Point-to-Multipoint have the air prism technology, or is that just going to be on one?

Our plans are to use air prism in both Point-to-Point and Point-to-Multipoint applications for airMAX AC. We will have lower-cost non air prism options, however.

Got you. Thanks a lot.

Sanjit Singh from Wedbush.

All right, thank you for taking my questions. In regards to the Wi-Fi business and the mix shift to [end] versus AC, was there anything from an end-market standpoint -- was there particular types of customers?

Was the shift in that, that would drive more end versus AC? Or are people just looking for basic connectivity where it's [fine] enough? I'm trying to understand why would someone be looking at end at this point in the Wi-Fi cycle, given that AC has been around for a good amount of time now.

I think that answers -- there is [evening] answer that. If you look at the markets that we're growing and building, a lot of that is happening outside the US or outside of North America. And their walking into situations where they are going from no Wi-Fi to -- no access to Wi-Fi to a wide LAN solution. And the better price entry point is in the end space.

Got it. And then, try to take some of Robert's comments on the R&D investments. And then your long-term financial profile -- as your growth rates converts to the 25% revenue growth target you've set long-term, is there anything on the margin side that's changed? Is your long-term margin profile lower? Or is what Robert's comments just kind of opportunistic hiring? Is there any change in outlook over your long-term margin profile?

I'll repeat what I said last call. When we first entered the public market, I was very proud of our financial margin profile. I've shifted my focus on accelerating a vision at the sacrifice of that financial profile. That doesn't mean the financial profile will be any worse. It could get a lot better. It just means I'm completely focused on accelerating the vision.

Great, thank you so much.

Kulbinder Garcha from Credit Suisse.

Thanks for the questions. I have just a couple and they are both inventory-linked, I'm afraid. I just want to understand one thing. So you have had this significant ramp in inventory, but not much of that revenue is going to come through in the next quarter. Yet you are confident that in the back half. I should understand, that's the dynamic.

And what was the reason for the inventory build upon existing products? The new products I kind of understand because you have to launch some of them yet. On the existings, I'm not sure.

And the second part of my question is just on channel inventory. I think you mentioned in the prepared remarks they were roughly within normal range. What is a normal range? Does it vary a lot by region? Or does it vary a lot by region currently? I would just be curious about that. Thanks.

I will start with your last question first about what the right amount of inventory is in the channel. It's more on a global basis, and then we look at it by distributor [region]. Some of our distributors are better capitalized than others. But on an average, our -- the distributors are holding inventory for four to five weeks. And that goes across all regions.

In North America, our distributors are better capitalized and they are able to carry more inventory and they prefer to. And in some of the far reaches of the world, some of our distributors are carrying two to three weeks. And then --

Sorry, Craig -- would be fair to say that they are all in a two- to five-week range, and that has not really changed?

Yes. Nothing has changed in there. And that's how we are trying to manage it. But we are managing on a global basis; we are managing on a regional basis; and then we are managing it by distributor, based on their past behavior.

Okay.

And then your question on the inventory. I think I said a little bit of this before, but this concept that we have had stock-outs and we have had a massive mismatch in supply and demand, has potentially cost us sales in the past.

And one of the things that we are trying to alleviate, especially since we do have cash to spend on inventory and our inventory doesn't expire like food or newspapers or some business like that. It's okay for us to build inventory, because if there is a run, or as we continue to accelerate into the later half of the year, I want to be able to fulfill that demand without any interruption in supply. And so --

The question is, Craig, could you have phased it more? Because it's not coming through in the next quarter. I guess that's what's surprising. I get your point. You don't want to have stock-outs; you want to fulfill customer demand. You don't want to be caught short and miss out on revenues and those kind of things. But it all seems to have spiked up fairly significantly now, but it's not necessarily being -- taking your revenues meaningfully into the June quarter.

Going into the end of the quarter, I said, we had some build up of some products that hadn't shipped yet.

Right.

And then towards the last half of the quarter we just completed, we had a few new products that we also built on the airMAX line that we had to build some extra inventory for. And we're looking at six- to eight-week lead time. So looking what's going to happen in June-July-August, we need to make sure that we're ready for it.

I think you've got to look at this -- it's not a situation where we built inventory to orders and we are sitting on inventory. It's not like that at all. I told the operations guys I don't want to hear or see any more complaints in our customer community where people are complaining about not being able to get stock of our products.

These guys are operators, they are installing on rooftops and they are deploying, and if they're held back by a lack of supply, it hurts. It hurts our brand name; it hurts our goodwill with customers. And that's what I want to protect from a long-term point of view. Whether the fault is with the distributors or whether the fault is with our operations not being optimal, I told our guys -- I don't care, I just don't want to see us [wrong].

So we are building inventory, and I'm perfectly fine using cash on our balance sheet to build inventory so we have more than enough. Some of this inventory is at our warehouses in China. Some of it is even sitting and has made it into the local markets, where we are working with distributors to ensure all our operators [won't like] don't have any supply shortages. So it was, on my part, a long-term strategy to repair the goodwill.

Thank you.

Thank you. That is all the time that we have for questions today. I would now like -- ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone have a great day.