優比快 (UI) 2014 Q4 法說會逐字稿

Welcome to Ubiquiti Networks' fiscal fourth quarter 2014 Q&A conference call.

(Operator Instructions)

As a reminder, this conference call may be recorded. I would now like to turn the conference over to Miss Anne Fazioli, Vice President of Investor Relations. Ma'am, you may begin.

Thank you, operator. 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 & 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 our future financial results, products, market conditions and competition. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call. Information on risk factors and uncertainties is contained in our most recent filing on Form 10-K with the SEC and our other SEC filings, which are available on the SECs website at www.SEC.gov.

Forward-looking statements are made as of August 7, 2014. We assume no obligation to update them. We hope you have reviewed management's prepared remarks, which are posted as a transcript on the Event and Presentation and Quarterly Results sections of our Investor Relations website at ir.ubnt.com. This call will be a Q&A-only call. Please limit yourself to two questions. Time permitting, we will allow for follow-up questions. Operator, we are now ready for questions.

(Operator Instructions)

Matt Robison, Wunderlich.

Congratulations on such a balanced quarter of improvement. I wanted to -- a couple of things on your prepared remarks that I wanted to touch on. I will try to keep it to two. The first is your guidance, you talk about apparently geopolitical issues that you think might have some constraint on your business. Hoping you can elaborate on that. For one, I noticed that EMEA was pretty strong still, down from the prior quarter but still quite strong.

I'm wondering if you might have seen a certain amount of sell into that in preparation? Or would you expect that to stock down in the quarter? The other point was that you talked about the stocking-the-shelves effect with your new products. Does that mean to say that with the new products, you really built that many of them that you stocked the shelves? Because normally, you guys kind of ramp-up slowly as you launch new products in the market, is my expectation. So, those are my two questions.

Okay. This is Craig, I will start. So regarding the geopolitical. There has been a number of, what I will call -- I don't want to get into a political commentary, but there has been a number of flare-ups in the world. For us, we're tracking five situations right now, which constitutes the Russia/Ukraine situation, Israel has a problem that they're working on, and you have Argentina, and then you have, what may turn out to be a civil war, in Iraq.

As we put out the guidance for the quarter, we've tried to normalize for what we think are -- there are some issues in those regions that -- mostly in Iraq. We don't believe we're going to be able to ship into the region because of issues that they're having with the ports and ongoing skirmishes in the country. So, our guidance is muted based on what we think is -- what we will be able to ship in our discussions with our distributors in the region.

Then your second question was regarding the products inventory as it relates to initial builds? Last quarter, our initial builds for products that we knew were going to have a high demand, which were -- we had, was things like airFiber 5. For airFiber 5, we actually had done quite a bit of testing and market analysis knowing that it was going to be a pretty big hit from day one. So we pre-built the inventory. For our other products that we've recently released, there is more of a steady build-up, so you won't see the big spike in inventory as we begin to seed the market. It will be a little bit more of a natural cadence.

Thank you very much.

Pierre Ferragu, Bernstein

My question is about your enterprise revenues. So I just want to clarify and I would like to make sure I get that right. I understand that most of your revenue growth sequentially was driven by UniFi, so your Wi-Fi product line, it was. So that's why it's most of what is up 17% sequentially and why it almost tripled year-over-year. So my first question would be, does that really reflect the evolution of your N demand? So did channel inventories from what you see, remain about stable as a percentage of revenue sequentially and year-on-year?

Then my second question is more about, the next, I would say, batch of products that you have in the enterprise space, in switching and voice, when you look at the addressable market of these products, it's likely to be much larger than Wi-Fi. So my question is, how should we think about the ramp-up of these products in the coming, let's say, the next 6 to 9 months? Should we expect a ramp-up -- as quick ramp-up as what we've seen for UniFi over the last 15 months? Or actually even faster? How are you going to evaluate demand for these new products as time goes over the next few quarters? Thank you.

Okay, So, I will start with the question on the UniFi inventory. Last quarter, certainly, we saw a massive resurgence in Ubiquiti -- in UniFi sales, which was really -- we saw almost a tripling of our AC sales for UniFi. That's the predecessor to what we see as great end market demand. We have seen -- as we continue to march down the road, we have seen quite a bit of uptake in just product adoption across the board. But the inventory levels in the channel still remain, actually, what we think is probably a little bit under where they should be. Then I'll hand it over to Robert to talk a little bit about some of the new products.

Sorry, specifically, what do you want to know about the new products?

I am just wondering how you see the ramp-up of your new products, like if I look at switching and voice, combined the addressable market for these products is actually larger than Wi-Fi. So I am wondering how should we expect like the first quarter in terms of revenues for these products? What are your ambitions over the next 6 to 12 months?

We released the EdgeSwitch, which is under our EdgeMAX product line, which is really meant for a variety of applications especially with our service providers. A lot of them are pairing them with airMAX, a lot of them are using them for video security deployments and just general small-medium business use. It is hard to say. I believe that will end up being a pretty significant material product line for us. I can't really say what the growth is going to look like over the next few quarters.

I will say though that, we will have in UniFi, which is our SDN platform for the enterprise, we will have a switching product line for UniFi. That becomes powerful because we have somewhere on the order of probably close to 2 million UniFi APs deployed in the world. We have a software defined networking centralized control plane. What you will see in our next version of UniFi 4.0, you'll see it become much more than just Wi-Fi. The system integrators will see how you could add switching to your Wi-Fi network, or add security gateways, or add video camera.

Because we have such a big deployed base of UniFi, once we bring our same switching technology under the UniFi SDN platform, I think you will see instant traction because we just have so many deployments out there. So when you factor in the UniFi switching combined with the EdgeMAX switching, in aggregate, I think switching will be a large material contribute for us. I think you'll see pretty good sales numbers. I would say calendar year 2015, definitely in the millions maybe in the tens of millions

Okay. Excellent, thank you. Maybe if I can, a very, very quick follow-up on your production facility that you started leasing recently. How big is that going to be over time as a percentage of your total production? Then eventually is that going to be like a facility that run at the very high utilization rate? Or is that going to be like pre-production phase where utilization will be a bit lumpy? I will leave it there, thank you.

I'm sorry, what is the topic of your question?

You have just listed some production space --

Production space. Okay, our new factory? Yes, for the time being, that's strictly to accelerate time-to-market. So some people -- or some companies look at expenses -- they look at their operating expenses and they look at their SG&A expenses. I see as expenses as lost opportunity costs. So when I see our product is three months delayed to market or four months delayed to market and that product has potential to do millions of dollars of revenue per month. I see millions of dollars we are wasting. So we're always looking at ways to get from concept of a new product to mass production. Having our own factory with some vertical integration, especially on the mechanical side and the prototype production stages of product development, hopefully, will shave off months to our time-to-market for a new product.

Great. Thank you.

Erik Suppiger, JMP.

Congratulations on a good quarter. First off, Robert, I would be interested to get your perspective on the restrictions that the SEC has been discussing? What impact or concerns that raises for you?

Right. So the SEC is considering new proposals that restrict, I guess, radiated power and in 5 gigahertz band. Potentially, that could reduce the range and the number of channels in the 5 gigahertz bands for our airMAX networks. I think, for the industry, it could hurt the industry overall. But from Ubiquiti's competitive advantage point of view, I don't see it as something that will hurt us. Because for the past several years, we have been investing heavily into R&D that makes our products more immune to noise and more spectrally efficient.

By extension, this would also allow us to kind of maybe neutralize any reduction in spectral -- in spectrum from a compliance environment -- from a more aggressive compliance environment. So I think if the new rules are implemented or not, I feel like our ability to grow our airMAX platform in the US and of course, you have got to look at it as, most of our growth right now is outside the US. So I think we are still in a good space in spite of that.

Is the impact largely on the airFiber? Or how much of the airMAX product would be affected by that?

I would say, if they have more stringent -- what they call band edge requirements, it is going to reduce the number of channels you have for transmitting high radiated power for long-distance links. So what's going to happen is guys are going to turn to more and more antenna gain and more spectrally efficient radios to overcome those radiated power limitations. That actually bodes well for us because if you look at all of our newer designs and especially our airFiber, we are moving toward radio technology and that is a lot more spectrally efficient. It has a lot more antenna gain and antenna performance to overcome, any kinds of limitations in transit talk.

Okay. Is this likely to have any near-term impact? Are they restricting the release of products? In terms of what --

As far as I know, there's rules proposed. They haven't been finalized yet. Even if they -- when they are finalized, it won't be in the near future.

Okay. Then, Craig, you had talked about basically, you are suggesting that in some of these regions where there is geopolitical issues, you are assuming reduced shipments. Are you assuming no shipments for most of those regions? Or can you give us a flavor for how much you have reduced your expectations for the 6% of revenue coming from those different regions?

Yes. So I think really our primary focus is really on what is happening in Iraq. The other regions, despite what we're seeing with embargos and stuff like that, it doesn't affect our equipment or sales. But it's still something we are tracking. So to give you kind of a flavor of the magnitude, so for Iraq -- last quarter, Iraq was -- or the quarter we're reporting on right now was a top -- was a number 11 country for us in terms of sales. Then we also have some distribution partners from Saudi Arabia that are also selling into Iraq. So we think that probably the total impact would be around 2% to 2.5% of what we would -- we are basically forecasting that we will not be able to sell into those regions. It really depends on when our distributors are saying, hey, it's okay to sell. Our guidance is reflected in that.

Okay. Then last question, just more broadly, Europe, of your revenues coming out of Europe, how much of that is Eastern Europe versus Western Europe? Can you give us any sense for that?

It's at, like, 30% to 40% of it. But you also have Africa in there as well.

All right. 30% to 40% coming from --

Eastern Europe. Then blend in the Middle East.

All right, very good. Thank you very much.

Jess Lubert, Wells Fargo Securities.

Congratulations on a nice quarter. First, I was hoping you could comment on visibility in general? On the last call, you talked about wanting to build inventory to better meet customer demand heading into the seasonally stronger second half of the calendar year. So I was just hoping you could update us on, to what extent these efforts played a role on the strength of your reporting here? How you're feeling about channel inventories heading into the September quarter?

Yes. I think that we -- last quarter, we signaled that we were one, getting prepared for a busy season. Two, we had some new products that we hadn't released yet that were going to be selling pretty heavily into the channel. Certainly the $10 million to $12 million worth of inventory that we had of new products moved directly into the channel and off of our books. So I think that, we look at inventory. We say that, look, we're well-prepared. We are continuing to kind of keep on our 7 to 8 weeks of guidance for where we think inventory levels need to be on our books.

Okay. Then on the enterprise products, I was hoping to understand maybe where you are in building out that portfolio? If there is more products to come? What additional investments need to be made to complete the portfolio and drive awareness of these products? Perhaps you can help us understand to what extent the focus of these solutions will mostly be on the emerging versus the domestic markets?

Yes, I mentioned earlier, we have I think close to about 2 million UniFi APs deployed. We are number two in the enterprise wireless LAN AP space in volume shipments, behind Cisco. We did that in about three years. A lot of people see UniFi as just Wi-Fi and Wi-Fi APs today. I think we are at an inflection point coming up, where we are going to show that UniFi is really a full end-to-end software defined networking platform. Anything in your business closet whether it is a PBX, a security gateway, a power ethernet switch, a network attached storage, a network video recorder and everything will be able to be controlled through this UniFi software defined network and control plane.

So where we want to position UniFi is any small-medium business, school, hotel. They would just only need one vendor. It completes all their IT infrastructure needs. They can control all these IT boxes from one software control plane. They could also control multiple sites from the same control plane. We are doing this all at disruptive pricing, fractions of the cost of existing solutions, without any support or licensing fees. So I think we are really democratizing end-to-end technology for the enterprise side. So it is exciting. I think we are just at the beginning of where UniFi's headed.

Robert, do you believe the existing channel has the expertise to sell out these other products? Is the thought that any customer whose bought a UniFi Wi-Fi product would be interested in buying a switch or a Voice over IP system, a security gateway, et cetera?

Well, as I always say, I think the world is changing. If you came out with something like this 10 or 20 years ago, without any salespeople or without any channel connections, it doesn't matter if you have the best product in the world, you would fail. But you look the world we're living in today, it is so different. Information is disseminated between the consumers and between the system integrators so quickly that now it has become a product world, where the best product will win out. You look at our website, I think, I looked it is been within the Top 10,000 websites in the world.

To get huge traffic on a community there's, every day, more and more Ubiquiti fans that kind of come onboard. So I don't think you need -- you need a channel to kind of facilitate shipments to these system integrators and end users. But we are living in a time where if you have a disruptive product that is really great, people are going to find it. I think we have proven that. We didn't have any salespeople or marketing people or business development people around UniFi. In three years, we have become the number two volume shipment vendor for Wi-Fi APs in the enterprise space.

Robert had received any qualitative commentary from your partners that really drives this view that these products can really create a pretty big opportunity and drive this market awareness and interest that you're talking about?

So if you're talking about new channels or traditional channels to supplement our existing entrepreneurial channel that was kind of created through our airMAX product line, we are doing that. I think Craig is -- scan -- what are a few of them?

ScanSource and Ingram Micro.

We have a big one in China, we just signed up.

Yes, a couple more.

Yes. We're not -- we never pursued these relationships. These guys are just coming to us. They really want to represent our brand and sell our product. So yes, if people come to us and want to sell our product, of course, we will work with them.

All right. Keep up the good work.

Thanks.

Tavis McCourt, Raymond James.

Robert, at first, I wonder if you could give us an update on the timeline for the point to multi-point version of airMAX AC. Then secondly, is there a way to quantify the benefit of adding the two big North American distributor's this year? In other words, have you tracked the number of new resellers that are selling your products versus basically, existing resellers that had been going to smaller distributors just moving over to larger distributors?

Okay. So the first question, airMAX AC point-to-point is shipping. The first customers did receive their radios. There's links set up. They're reporting performance in our forums. It is been excellent. Multi-point is in the field right now. We are going to officially probably be shipping in the next -- well, let say, at the latest before the end of the year. As to your other question regarding new resellers, new distributors, I am not really involved in that area. I am focused on the R&D because I believe that at the end of the day, the R&D will pull more revenue into the Company. But I do know, we have something like 250 to 300 e-mail requests every day coming into our sales account, unsolicited that just want to represent us and resell our product

Okay. Let me ask you a follow-up R&D related. In terms of turning UniFi into a software defined networking vision, I suspect that is kind of your plans from the beginning, there just didn't used to be an acronym or a phrase for it. But in terms of the underlying software, where are you in the product development of that? Or is it really just now getting all the other endpoint devices to market and the underlying platform is essentially commercialized already?

The transition point is UniFi, what we call, the software version 4.0. So we are just in like a private beta of 4.0. It will be public beta soon. It will definitely be out in the next month or two months to the public, hopefully, before the end of the year. 4.0 supports Voice over IP. It supports the security gateway. It will also support a lot of other functionality coming up. So I think once 4.0 hits, you will start -- that should, I think, it will be an inflection point where you will see a rapid release of new hardware over the next year to fill in the puzzle.

Great. Thanks, Robert.

All right. Hold on everyone, he's having a bit of technical difficulty. I'm going to go ahead and announce the last question that we have time for. It's Tim from Stephens.

I don't think I've ever had a call where we've lost an operator. (laughter) So that's a new one. So I understand that you expect enterprise to grow faster than service provider long-term. But I'm wondering how you are thinking about first quarter revenue? You faced a relatively challenging year-over-year comparison in enterprise. Do you expect year-over-year growth in enterprise? Or should we think about maybe more just quarter-over-quarter growth but not year-over-year?

So, you're asking, are we going to have year-over-year growth in enterprise?

In the first quarter?

We had a pretty substantial -- we had a big sell-in for UniFi last year. But I think with the launch of the new products and kind of where we are with UniFi right now, I think it (multiple speakers)

What was the last, say, Q1?

Q1 of last year?

$35.5 million?

We just did $32 million. I think we will be at par at least.

Be at par year-over-year?

Yes.

Okay.

But continue to grow throughout -- past that.

Right. Then as you grow the enterprise business faster, is there any difference in margin profile that you would expect on the enterprise business? Then if I might just sneak in a quick question for Robert, do you have any early take on the Mimosa Networks backhaul radios? How they competitively compare? I know they're not out in the market yet, but I just wondered what your quick take was? Thank you.

Okay. So first on the margins. We have a pretty diverse set of SKUs through enterprise and through the service provider. So, actually if you look at a blended rate, there is really not a major material difference between the two different categories that we report. Then, Robert, for Mimosa.

Well, I will give you my honest take on Mimosa. I don't know where they play because we have a point-to-point AC solution that is pretty low cost. Then we have a airFiber 5 solution, which is -- from the ground floor up, it's a purpose-built FPGA radio, where we implemented our own MAC and Fi, our own antenna system. It's full duplex, which means that the latencies are a microsecond. It could -- it has speeds of well over 1 gigabit per second. So that is a very special, unique radio. So Mimosa's radio is coming in at a price point similar to airFiber 5, but it is really a hacked together Wi-Fi radio.

It's not even 4x4. It's two bonded 2x2 radios, each 80 megahertz channel, the size of the channel. They need 200 megahertz of continuous spectrum to reach those speeds. Not only that, but only one of the chains is doing DFS radar detection. So it is impossible for them to be compliant anywhere in the world and have that contiguous 200 megahertz spectrum channel. So I see them pretty much as an alternative to our airMAX AC point-to-point solution. But the airMAX AC point-to-point solution is essentially one-fourth the cost. Again I think they are very good at branding. They are very good at hype. But at the end of the day, they put lipstick on a Wi-Fi pig.

(laughter) Thank you for the candid thoughts.

Thank you. Ladies and gentlemen, that is all the time we have today for question-and-answer. This concludes our program. You may all disconnect. Have a wonderful day.