優比快 (UI) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ubiquiti Networks' second quarter 2015 question-and-answers conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Anne Fazioli, Vice President of Investor Relations. Ma'am, you may begin.

Thank you, Liz, and thank everyone for joining us today. I'm 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'd 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 Forms 10-Q with the SEC and other -- in our other SEC filings, which are available on the SEC's website at www.sec.gov. Forward-looking statements are made as of today, February 5, 2015, and we assume no obligation to update them.

We hope you have reviewed Management's prepared remarks which are posted as a transcript on the Events and Presentation and Financial Information sections of our Investor Relations website at ir.UBNT.com. This call will be Q&A only. Please limit yourself to two questions, and time permitting, we will allow for follow-up questions.

Operator, we're now ready for your questions.

(Operator Instructions)

Erik Suppiger, JMP Securities.

Thank you and congrats on a solid quarter. I'd like to start with the enterprise products. Can you give us a sense for -- you had very good strength.

Can you give us a sense for what -- whether the video products are becoming a meaningful contributor at this point? Or, how can we assess the, kind of, the various products within the enterprise products at this point?

So, UniFi Video, it's -- if you look back at the history, we first got into video, I believe, in early 2012. And, what we wanted to do is to -- we wanted to bridge the space between really high-end type of deployments like Telco and Sony, Panasonic, and to a lower extent, Axis. Which cost tens or thousands or hundreds of thousands of dollars for deployment. And, the consumer-grade products you see in stores.

And, what we wanted to do is create really high-end professional hardware with very powerful software that allows you -- to allow you to create scalable video security systems. And, we wanted to give the software away. Or, make it included with the hardware. Just like we do with airMAX and just like we do with UniFi.

And, one of the challenges we ran into is the software. The NVR. What they call the network video recorder software. The hardware requirements were quite heavy for -- to run the NVR. So, one of the obstacles to that product getting a lot of traction was people needed a really high-end x86 type of hardware to run the software on. And, it wasn't plug-and-play enough.

So, last year we released our NVR. It's a plug-and-play box for $300 or $400. And, that, kind of, revived momentum, the UniFi Video. So, we see it picking up again and I think this year we'll turn the corner.

We're going to release our third-generation hardware. We have made a lot of improvements to the user experience; to the software. So, I don't think it's a significant contributor to UniFi today, but I expect it to be, materially, very significant in the next two to three years.

So, can we think of the enterprise products as maybe being 90% plus wireless LAN? And, is that, kind of, a ballpark or would we be off on that?

When I say materially significant, I would say something that's 20% of the overall revenue. I expect UniFi Video to be 20% plus of the overall UniFi revenue in the next few years.

Okay.

So, it's very, very high expectations for that product line. I probably have the highest expectations for that product line out of anything we're doing right now.

Okay, that's very helpful. On the wireless LAN products, the UniFi wireless LAN products. A number of the traditional enterprise vendors have been stumbling and you guys are still putting up some good growth.

How much of that business do you think is market expansion, where the traditional vendors are not -- probably not in the right price point? And, how much of your growth do you think is coming from capturing share that might otherwise have gone to some of the traditional vendors?

I always like to use the analogy of hotels when talking about UniFi in the Enterprise Wi-Fi space. So, when you look at five-star hotels and the big-name ones like, I don't know, Mandarin Oriental or Ritz-Carlton. Or, those types of hotels that have big budgets for their infrastructure. You'll commonly see Aruba, Cisco, probably Ruckus, in there.

But, when you look at all the two, three, four star hotels. They don't have budget for Wi-Fi infrastructure. But the two, three, four stars in aggregate are much, much more. There's more numbers than the five-star hotels. And, that's what UniFi has. That's the market it's penetrated.

So, a lot of people see UniFi as going after the same market as Aruba and Cisco. And, it's not really going after the same market. It's the same, similar technology and it's solving the same problems. But, the price performance has enabled market share that nobody's captured yet. And, I think that's a big reason why you see the numbers growing faster.

Okay. So, it doesn't sound like you've seen an

incremental change in terms of you're getting more competition with some of those traditional guys. Is that correct?

Well the, you -- what do you mean by more competition from traditional?

Well, I'm just wondering if, maybe, you're taking more share of their traditional markets than you had previously? Because it does seem like some of these others, vendors, are stumbling a little bit. And, I'm wondering if that's a function of you guys hurting them? Or, if that's something outside of your impact?

It could be. We don't track whether we're taking market share from, say, Aruba or Cisco. Because our volumes are -- at least volumes per revenue are much, much higher.

So, a Cisco Aruba deal, they could go after a big hotel and it might be a $2 million or $3 million deal. For us, it's far, far less than that. UniFi is all about numbers and volumes.

Okay, and last question on the service provider side. When do think you might find a bottom? I think the March quarter might be seasonably slow and then presumably, things get better. Would you expect that to start growing after that? Or, how are you looking at the trajectory for that business?

What I've learned, I think -- let's see, we've been in airMAX. We've introduced it 2010. So, it's about five years.

And, I think there is some seasonality in the winter months because of deployments are much more difficult in North America and Europe. Which are big markets for us. And, what I also see is the revenues tend to grow following a new technology introduction.

So, we first came out with airMAX and we saw a bump. And, I think you'll see with airMAX ac and our new airFiber products; I think there will be a bump in the next year.

Very good. Thank you very much.

Tavis McCourt, Raymond James.

Hey. Thanks. A couple of questions for Robert and then some housekeeping ones for Craig. Robert, in the prepared remarks, I think you talked about the -- in the service provider business, a lot of the year-over-year weakness was related to airFiber.

And, I know you launched, kind of, a new airFiber product just this last week. Run us through a background of airFiber. It seems like it's gotten a couple of false starts. It would seem like that's a pretty price-disruptive product in a relatively large existing market. In your mind, why is it going through fits and starts rather than, kind of, a breakaway success like the UniFi wireless LAN has been?

Yes, so, first of all, I think our current run rates of airFiber are somewhere in the tens of millions of dollars. So, any time you start a new platform and within a few years you're getting tens of millions dollars of revenue. Typically, that would count as a success. But, it is true, we are disappointed.

And, I don't see airFiber; it hasn't come close to meeting our expectations. One thing is, we have this vision about the five gigahertz bands, worldwide bands, becoming crowded. And, more operators looking to cleaner bands to run their infrastructure and their backhaul.

So, we first targeted 24 gigahertz as our first airFiber product. And, I think it's just ahead of its time. That product is phenomenal. A lot of people use it. But, I think there are some range limitations. It is a little bit higher in price.

And, I think the demand for that product will get -- will become greater in the coming years. But, I think it's just ahead of its time. airFiber 5 had some of the same, I'd say, drawbacks of airFiber 24. It's an integrated product. It has some range limitations. It's bulky.

But, one of the things we do at Ubiquiti is, we're very good at reading the market and adapting our strategy and adapting our product direction. So, airFiber X is -- symbolizes that. So, we just released it, or announced it this week. And, we'll have shipments coming up in the following weeks. I think that will be a hit product for airFiber. And, I think, in the next year that will drive airFiber sales more to what our expectations are.

Gotcha. And, my follow up question is related to, kind of, the consumer end market. I think you've, kind of, toyed around with airRouter in the past. And, I guess, what are your big picture thoughts on the consumer market as an opportunity for Ubiquiti. Or, are you, kind of, laser-focused on enterprise right now in terms of growth markets?

So, we have a lot of R&D building blocks. We've done a lot of hardware. We have a lot of software we could leverage. And, I'd really like to get into the consumer market.

The challenge is now that we're a $600 million plus run rate company, it's just as important to know what not to as it is to know what to do. So, there's tons and tons of opportunities we'd like to attack. And, we just have to be really disciplined with our resources so we could take the Company to the next level. I wouldn't rule out a consumer product line. But, it's still a little ways away.

Gotcha. And then, Craig, if you could give us the cash flow from operations and the CapEx in the quarter, that'd be great.

Yes, so, the CapEx we spent $4.9 million. Cash flow from operations was $32.7 million. And, if you get a chance, we've already published our 10-Q. So, all the data's out there.

Thanks a lot.

Rajesh Ghai, Macquarie Research Equities.

Yes. Thanks. I wanted to follow up on the questions around the strength in enterprise. That's been strong for two quarters now and has coincided with the strength in North America. Is it fair to say that most of the strength is coming from North America?

Or, there you are seeing strength in other markets too? And, also related to that, what gives you confidence that this isn't just a channel fill, but end-user demand? Given that you signed a few major distributors for the enterprise over the last two quarters.

So, I'll answer your first question which is about, where is the strength in UniFi. And, I think we're actually, very encouraged that the strength is very uniform around the world. So, it's not just a North American or Western Europe phenomenon.

But, we're seeing uptick in, surge in sales, really, around the globe. And then, you're -- what was your second question? It was --

Yes. Second question was that you -- given that signed up a few distributors over the last few quarters, we are focused on the enterprise, such as Avnet. What gives you the confidence that, the strength that you see in the enterprise is actually end user demand and not just channel fill?

Yes, well, when we bring on a new distributor, it's not like we send them $10 million worth of equipment. Actually, the initial orders are put-the-toe-in-the-water type orders. So, we're still in very much the ramp-up phase with the new distributors that we brought on. And, I think you're referring to, in particular, the ones we bought up in China and India?

Yes.

So, the numbers that we -- that we're looking towards and the ones reflected in last quarter don't really encapsulate a channel fill phenomenon.

Okay. As far as EMEA is concerned. Your performance was a lot better than I'd expected. Given the issues that we know about currency and the geopolitics. Just wanted to get more color on what really went down over there. How are you managed to get that 19% sequential growth in that geography that seems to be so troubled?

Yes, I mean, there's a couple phenomenons. Obviously, we're watching the currency situation very closely. But, for EMEA it was, kind of, all systems go for us for the quarter.

I think what we saw during the course of the quarter was, I'll call it, stabilization of some of the conflicted areas that we've talked about in the past. The situation in Russia and some of the things that were happening in Iraq. And, we have done some shipments into those regions.

Not at the levels we were doing before. But, we've seen, I'd say, some stabilization of the environment over there and I think that's been helpful for us.

All right. Very good. Thanks.

Jess Lubert, Wells Fargo Securities.

Hi, guys. Thanks for taking my questions. Also have a couple here. Maybe first, I was hoping to dig into the guidance. Because it seems like you seem confirming in the markets that hurt you last quarter.

New partners and products seem to be coming up to speed. Yet, you're guiding sales flat sequentially at the mid-point, and profitability lower. So, I was just hoping to better understand some of the key assumptions driving the cautious outlook. And, what may cause you to end up at the high-end versus the low-end. That's my first one.

Yes, I think that's a spot on question. I think, if you notice this quarter we widened the gap and I think that's, kind of, the genesis of your question. Since the history, since we've been public, we've had this pretty tight range that we work in. And, I don't think that, upon reflection, it really accurately reflected some of the volatility in the end markets that we participate in.

And so, as we took a look at that, we wanted to have a fair assessment. That, look, there's things happening in the macro world that we don't have control over. Whether it be wars or currency or whatever it is. And, we needed to risk adjust that in our guidance.

And so, what you've seen is, I think, an accurate reflection of our expanding business. And, trying to handicap, kind of, a high and low case for the things that can happen during the course of a quarter.

So, is it fair to assume that the outlook at the midpoint assumes that incremental sales from the ramp of some of these new distributors and uptake in new products is there, by offset, by some challenges in some of these geographies that are on edge; or currency fluctuations that could cause demand to be a little bit less?

Yes, I think it's fair to say it's a mixed bag. So, I think we have -- we've put together, kind of, our own risk matrix. And that's accurately reflected in the guidance.

And then, Robert, I was hoping you could comment on some of the early feedback you've received with respect to some of the new enterprise products such as, the phones and the switches? When you felt these products would become more widely available? And, how impactful you felt they could be over the next few quarters?

We have very high expectations for UniFi Voice-over-IP and UniFi switching, along with the Security Gateway. The challenge we have is, these are products we haven't manufactured before. And, especially the phones, they have challenges with Android and acoustics and new issues. Switches; pretty complex power supplies.

So, the ramp has been slower than we like, but it's turning the corner. I think we'll have expanded availability definitely this quarter. And, we have high hopes for them this year.

That's helpful. Last one for me. Craig, it looks like you brought $15 million worth of stock in the quarter. Which I believe, leaves you with another $60 million remaining on the authorization. So, I was hoping to understand, or, hoping you could help us understand how you're thinking about the buyback. And, if we should expect you to be in the market this quarter.

To be honest, I'm not sure if we're in a position to comment. But, I mean, we're continuing to evaluate where the stock is and where our buyback points are.

Thanks, guys.

Pierre Ferragu, Bernstein.

Hi, guys. Thank you for taking my question. Robert, I was curious to -- on your new IP telephony and switching products on the enterprise side. As these products ramp up, do you expect these products to follow release in the same channels as UniFi? Same distributor? Same kind of end clients?

Or, do you think these product lines are actually going to have to build new channels? And, to find their market independently from what you have already in volumes in shares? Thanks.

Our plan for expanding UniFi is to pull sales through the existing UniFi users. One way we do this is our new UniFi 4.0 UI has a dashboard. So, even if you only have UniFi wireless AP, on your dashboard you'll see switches or phones or security gateways. You'll see on your dashboard, that the option's available for those products.

So, I think the attraction for UniFi is, once you're controlling your APs; and if you use our switches, you use our phones, you use our security gateways, you don't have to deal with any other management of third-party equipment. You essentially have unified control of your whole IT closet.

That's great. And then, maybe, a similar question between your, like, service provider business and your enterprise business. I'm still trying to figure out how much synergies you have between the two. Do you see like, companies, like service providers, actually selling to their clients.

Also, your enterprise products. Do you see the products going to market together? And, from a technology perspective, do you have commonalities between the two platforms?

There is some mobile app between our broadband operators and the enterprise UniFi products. But, I think it's pretty minimal. One example is, some of our service providers might bring a broadband connection to a hotel. And, recommend UniFi or provide a UniFi installation for Wi-Fi access in the hotel. But, I think they're pretty much independent markets. So UniFi serves a system integrator market. And, airMAX and our airMAX technology serve a service provider market.

Great, thanks for that.

Matt Robison, Wunderlich Securities.

Great. Thanks for taking the question. Robert, I was wondering if we could get into a little bit of detail and dynamics of airFiber. I know it's a relatively big-ticket item.

And, what you see as, sort of, the puts and takes for that business. So, whether it can come back again. I'm also a little bit sensitive that you have competitors for backhaul that there may be more breadth of competitors there.

And, my second question and it's a two-part question. First part of it is the -- was interested to know what the catalyst was for video improving in the quarter? And, the second piece of it, Craig, if you could talk about linearity a little bit? It'd be great. Those are my questions.

So, airFiber first. I'll start by saying the whole airMAX phenomenon was driven by using Wi-Fi chipsets. And, replacing the -- what they call the CSMA/CA, which is a contention-based protocol, with our TDMA protocol. Which allowed them to be used outdoors over long distances.

But, even when companies like Ubiquiti alter the Wi-Fi drivers to make radios work outdoors, there are still some limitations. Because those Wi-Fi chipsets are inherently designed to work in an indoor environment. And, there's some things hardwired in these chips that you just can't modify.

So, with airMAX we did a great job of making it work well enough. And, we leveraged the -- all the economies of scale and the cost efficiency of Wi-Fi chips to create this disruptively - disruptive - price-performance offering for the service provider industry. We, kind of, expanded very quickly.

But, if you're going to design a product for outdoor use, the best way to do it, is to design it from scratch. And, that was the motivation for our airFiber group. Which we formed in 2010. And, airFiber is far different from a Wi-Fi chipset. It's purpose-built from the ground floor up to work in outdoor, long-distance links.

All the -- I guess, the 802.11 standard interoperability overhead; all of it's gone. So, the radio's much more efficient. And, there's a lot of elements inside the signal processing and the media access control. Which makes it really great for outdoor unlicensed bands. Where it could -- it has far better noise immunity compared to modified Wi-Fi chips.

So, I think moving forward, airMAX has a place for multi-point networks. Where we leverage the Wi-Fi chipset cost savings for low cost CPs. But, I think moving forward what we'd like to see is a world where our operators are exclusively using airFiber technology in point-to-point links. Where there is more room for price. They'll pay more for high-performance links.

And, I think airFiber 5 and airFiber 24; we've proved the technology was superior in the market. And, I think with airFiber X, what we're doing now is, we're democratizing that technology. And, I fully expect airFiber X to basically replace all Wi-Fi radio point-to-point links in the outdoor market.

That's interesting.

So, what was the second question?

Well, I was asking about the catalyst for improvement on video. And, the commentary on linearity of shipments during the quarter.

When we got into outdoor wireless in 2000, when the Company started, in 2005 or 2006, it took us awhile to figure things out. And, our first hit product was the NanoStation. Which was three years later. And then, we finally came up with a full end-to-end system with airMAX in 2010. And, video was completely new for us.

I think it's a huge opportunity. And, we started in, I guess, 2012; our first shipments. And now, we're looking at three years later. And, I think over the past three years, we've definitely made some mistakes, some rookie mistakes. Especially on the hardware side and software side.

But, we've been pretty good at just fighting through the challenges and adapting. And, I think we had -- definitely had issues. The hardware platform we chose. What we call the network video recording, the NVR architecture, and the user experience. And, I think what you'll see this year is our hardware, our third-generation hardware, is very, very good. Our NVR is greatly improved.

And, the final thing we're missing is user experience. So, by user experience, I mean something that's plug-and-play. We have full IOS Android app support for it. It's very powerful and feature-rich, but, extremely easy-to-use. And, I think once we turn the corner with user experience, which I expect us to do over the course of this year. Then, I think that will be a monster platform for us.

But, you're just seeing the beginning stages of this turning around right now.

Okay.

And then, your last question was around linearity.

Yes.

Regarding shipments, I guess, in our quarter?

Yes, sir.

Okay, yes. So, I mean, our plan from an operational standpoint is to ship those: a third, a third, a third. But, going into every quarter we risk adjust for holiday seasons like we have coming up. Chinese New Year, which -- and we ship a majority of our products out of China. So, we have it -- we coordinate our shipping plan based on that. Our plan is for: one third, one third, one third.

Is that what we should assume that happened in the December quarter?

Yes, I think, the last week of December is pretty light. But, for the most part, it was pretty evenly weighted.

Thanks a lot.

(Operator Instructions)

Tim Quillin, Stephens, Inc.

Hey, thank you for taking my question. So, the enterprise sequential growth has been very strong over the past three quarters. Is it fair to think that you expect sequential growth again in the enterprise business? Or, is there something unusual where you may have to come off of that level little bit?

No. I think it, kind of, feels like all systems go. Plus we -- I think Robert's touched on a couple points. But, some of the new products are, kind of, in the very early stages. So, I think we're fairly optimistic over the next year on where the enterprise is going.

So, is the variability around the guidance in both sides of the business then?

Yes, that's correct.

Okay. And then, I'll squeeze in one-and-a-half questions. But, the half question is, I just want to follow up on the mix at enterprise. And, Robert, I think you talked about long term you'd like to see video be 20% plus. But, currently, is the UniFi Wi-Fi product, the 90% of the vast majority of revenue? Is that, kind of, where we are?

And then, my fuller question, second question is, if you could comment on the Point-to-MultiPoint airMAX ac product introduction? Which I thought was long-awaited and pretty interesting and revolutionary in the industry. And so, I'm surprised as it's introduced, we're not seeing more of a pickup in service provider revenue.

I know there's a little bit of seasonality. But, why isn't there more of a pent-up demand for that product? Thank you.

So, your UniFi question, yes. As of today, the majority of the sales are from the Wi-Fi APs. But, our hope is in the future it's going to be diversified between switching and VoiceoverIP and Security Gateways, video, and more things to come.

For airMAX ac. It's still really early. We've gotten our airMAX ac point-to-point software stable. So, airMAX ac Point-to-point is now shipping in volume. airMAX ac Multipoint isn't really out in the market in volume. And, we do have a lot of instances of successful deployment.

But, we do have some edge cases we're trying to work through to get the firmware solid. And this follows, kind of, the same paths we've seen with prior products, prior platforms. For instance, airMAX, when we first released, took some time to get settled and robust before it took off. Same thing with UniFi.

airMAX ac, from early indications, it looks a lot better than we thought. It's getting essentially double the throughput, double the performance of our previous generation airMAX. So we have -- we expect good things from it this year.

Thank you.

Tal Liani, Bank of America.

Hi, guys. DSOs went up. If you can discuss this. The reasons. Because you said that the quarter was kind of, linear.

And then, also, when we spoke before about the outlook for the Company. We had expectations that the Point-to-MultiPoint will be a big area. Given that it's your bread-and-butter and, kind of, historical space, etc. And, here on the call, we are emphasizing the Wi-Fi space, and not the Point-to-Multipoint.

And, I'm wondering if it's just that I'm interpreting it in the wrong way? Is it early on? Or, is it that it's just not becoming as big as you thought. I'm just trying to understand the potential for Point-to-Multipoint. Thanks.

I'll start with the DSO question and I'll hand it off to Robert. So, as far as DSOs. Yes, they have increased. But, I think that's -- I don't think the right way to look at it is reflecting on our linearity of shipping. Which has been pretty consistent for the last year. Since we've made a number of improvements in our operations. But, I think it's more happenstance of our bringing on some larger distributors.

And then, we've had traditionally, a set of distributors that have been on a pre-pay situation. And, we've moved some of them to credit. And so, they've demonstrated over a long period of time that they're creditworthy. And we've implemented some new credit processes to keep them in check.

And so, I think you add those two things together and our DSOs have come up. But, if you look at anybody in the competitive space, I think we're still substantially lower than they are. And, then, for the point --

I'm sorry. So, what was your question specifically about MultiPoint?

Yes, the quest -- the Point-to-Multipoint. Six months ago, when we spoke about it. Nine months ago, when we spoke about it, the expectations were, that this could potentially be a very big cycle for you. And, when I look at it now, we are more emphasizing Wi-Fi and less the Point-to-Multipoint.

And, I'm wondering if it just turned out to be smaller than you originally thought. Or, is it more about timing? And, maybe, we just didn't put the right emphasize on the call so far. So, I'm just trying to understand the environment for Point-to-Multipoint based on ac.

I think there might be some seasonality. Like I alluded to earlier in the call. In the winter months for North America and Europe.

And then referencing the prior question. Our airMAX ac Multipoint platform is just getting off the ground. It's not really shipping in volume yet. But, I think what you'll see over the next year, is, I believe the market's still growing. And, on top of that, we should have some pretty good replacement or upgrade revenue through airMAX to airMAX ac subscribers being upgraded. So, I'm optimistic on the service provider business in the coming year.

Okay. Now, same question on the Wi-Fi. Just, the other way around. There are some quarters where the Wi-Fi business is really strong.

And, some quarters, just recently, that it wasn't that strong, and now suddenly it is re-accelerating. What causes these starts and stops in the market, in the Wi-Fi space?

That's a good question. I wish I had answers. It's very hard to draw conclusions on small granularity. What I try to focus on is how do things look year over year. Or, two years back. Or, three years. What do things look like in the next three years? That's what I focus on.

Got it. Thanks.

James Faucette, Morgan Stanley.

This is Meta Marshall for James. A couple of quick questions. One, if you could just speak to what's happening with the Latin American market. Just since results there were disproportionately underperforming to the rest. Second, just with regards to the gross margin uptick this quarter. Is that more -- like, can we draw any patterns thus far? As kind of, the enterprise products having better gross margins than service provider products? Or, is it just a blend of factors? And then, third, have you run into Ruckus' Exclaim product anywhere? As they've, kind of, made a lot of noise in the last quarter about trying to compete with you guys? Thank you.

So, I'll take the part of the question about gross margins. So, Ubiquiti's traditionally has been a very lean company. And, you can look at our metrics, revenues, profitability per employees is much higher than typical companies.

And, I think one area that was not optimized the Company was material management. So, the past -- just recently, we put together a material management team and I'm leading that team. And, we're trying to drive material cost reduction. So, hopefully, what you saw this quarter is the start of better things to come when we're talking about pure gross margins.

Next question, Exclaim. I've heard about it. And, we've tried the product in the lab. With competitors, you can't really control what competitors are doing.

But, we have a vision. And we just -- if we believe in our vision. So, we just put our heads down and try to get to accelerate what we're doing as fast as we can. That's what we're doing with UniFi.

I think you're last question was around Latin America.

Yes.

And, there is some seasonality to the Latin American market. So, as we look at the data for the quarter, you get into the holiday season in Latin America. It's a gross generalization. Takes the entire month off of December.

And so, we pin that against some of the seasonality we saw and their currency has been under some pressure. We, kind of, combine those two things together and we say, more seasonality than anything. So, we're tracking the situation closely. But, somewhat expected, based on past trends.

Great. Thank you.

Kent Schofield, Goldman Sachs.

Thank you. Wanted to ask a little bit about airFiber X. Can you talk a little bit about how that differs from the previous products? Should we think about it as a replacement of that? Or, an addition to the network?

And then, when we look at the pricing, I mean, at least relative to the previous versions. It seems aggressive. So, can you talk a little bit about any sort of potential, like, gross margin impacts from the ramp of that product set?

So, the name airFiber X is inspired; I was using Uber. And, I looked at -- they had a new offering, Uber X. Which was -- it provides the same services at a much lower price to appeal to a much larger market. So, that's what airFiber X is about.

It doesn't have the same performance as airFiber 5. It's not full duplex. They can't do a full gigabit per second. But, it's light years ahead of any of the Wi-Fi chipsets trying to masquerade themselves as point-to-point carrier links.

And, it's very versatile. It's a compact form factor. It can be interchangeable with a variety of antennas. There's no range limitation. It can go beyond 200 kilometers. So, it's really like -- I think it will be the de facto product for outdoor operators. For point-to-point links.

And, as we think about the pricing side of things. Is there anything we should think about from a gross margin standpoint?

Margins for airFiber X should be in line, if not better, than the rest of airFiber. Compared to the rest of the airFiber products.

Okay, great. And, on the airMAX ac side of things they ought to appreciate the granularity in terms of the rollout.

But, when you finally start to ramp, do -- I mean, is that something where you expect to see North America take that product set first and deploy en masse? Will it take some time for some of the developing countries to adopt it as well? Or, how do you think about that?

I don't think one market gets a head start on another one in terms of adopting a new platform. But, if you look at our community, the majority, or just about everybody on that community, is English speaker. So, it gives you the impression that the early adopters are all in the U.S. But, I think it's pretty geographically dispersed, the early airMAX ac adopters, right?

Thank you.

Georgios Kyriakopoulos, SunTrust.

Okay. Thank you. I have a couple of questions more on the overall business strategy. First of all, you've done very well growing market share quickly in the WISP and Wi-Fi markets. Thanks to your price model.

The question is, how can you move upmarket and challenge incumbent vendors in any of your addressable markets? But, remain committed to your go-to-market model?

I think -- so, a lot of people have asked this question. With regard to the Ubiquiti business and business model. Is, how do we compete against incumbents and big players in the enterprise like Cisco?

And, I always go back to that hotel example. We're not trying to win the business of five-star hotels. We are going after two-, three-, four-star hotels. Our mission is to democratize advanced network technology for the masses.

So, we're going after big volume and we're going after all the opportunities that are shut out because of economics and price performance. So, we don't believe we have to take incumbent market share to grow. We think there's enough greenfield opportunities where we could -- we have huge growth ahead without looking at incumbents.

Well, then again if you look at the markets that the incumbents are serving. It's quite big. Much bigger than the greenfield opportunities. Why not, let's say, build yourself first and maybe sacrifice a few points of margin. But, then open up significant revenue opportunities for you?

Here's the problem with that. If you take an example of university Wi-Fi deployment. Which might be, for Cisco, it might be a $3 million deal.

Well, Cisco can afford to have -- if they're making 70% margins, they can afford a huge sales and marketing staff to run 30%, 40% of their revenues. They could afford to pay system integrators and distributors. And, they could play that game and -- but, with our technology we could solve the same problem and maybe it only cost the end user $100,000.

Now, we don't have the margin in there to hire huge sales teams and play the same game Cisco's playing. But, I believe, that if the end user in the end market becomes aware that our technology is price-performance, much more valuable than the incumbent, then they'll choose us every time.

So, the key to our strategy is to focus on R&D in driving price-performance, democratizing the technology, and using our community and evangelism to bring the brand awareness to the end market.

Sounds good. And then --

So, I guess I'm saying, I want the same thing you're talking about. But, how to get there we have to be smart about it.

And then, my last question is around R&D investments. You've been investing heavily in R&D and you have clearly, released a number of products in a very short period of time.

At what point, you look back at your product portfolio, and say, that you've entered many markets. Let's stabilize the spending and perhaps focus more on how to grow your existing products. And then having said that, do you have a target number of end markets you are trying to go after?

Well, I think we've proven our business model in the outdoor wireless service provider market. I believe, now that we are at essentially $200 million run rate in the enterprise market, which we've done within three or four years. I think we've proven our business in that market. And, a lot of people said we wouldn't.

I believe there's a lot of other places we could take our business model. So, what we're trying to do now is trying to identify billion-dollar or multi-billion-dollar opportunities for the future to buy our business model.

All right. Thank you, guys.

Ehud Gelblum, Citi Research.

Thanks. This is actually Stan Kovler calling in for Ehud. I wanted to ask you within the enterprise business, just about the 802.11 ac mix. And pricing dynamics in this market. When do you think the pricing will, especially with your products, will get to the Ubiquiti, like, disrupting pricing levels that we've seen before. Where you are on, kind of, the end product.

And then, just following up on the last question that was asked about the business model. It's actually interesting that your enterprise business grew this quarter sequentially. But, the SG&A spending went down. So, at some point, understanding that you're not Cisco, and you don't have that scale. Does that line grow as you get deeper in enterprise and more products out there?

Again, to your point, evangelize the market. Does that cost more to evangelize the market? And, your products at some point?

So, SG&A, I don't know if it will grow or not. But, it definitely will not grow from hiring salespeople or marketing people or traditional strategies. We just don't do those here. If we find a way, a creative way that can bring more evangelism to our brand. And, I'm -- I'd definitely invest if there is something that brings the return on investment that meets our expectations. As for, okay, your other question about airMAX ac. I believe once it's fully mature, the economics of airMAX ac should be in line with our existing airMAX products.

And, just to ask about the UniFi ac products as well. Those kind of -- the question there. What are the price points that get you higher adoption in the enterprise of ac?

If you can mention the mix that you have of ac versus N, UniFi products in the enterprise. And, what is the gap in pricing that you think, between yourselves and your competitors, that will potentially give you that same boost that you had initially with N, when you started to grow well in the market?

And then, I have a follow up. Just a housekeeping question.

I think airMAX -- I'm sorry, UniFi wireless, is definitely due for a refresh. And, I think if we can maintain the same price points and improve technology to the latest and greatest standards, it should help continue the growth trajectory for UniFi. So, we're fully concentrating on that right now.

Thanks and just a housekeeping. Deferred revenue went down quarter over quarter. And, aside from that, the prepaid expenses jumped a little bit. Can you just help us with those two items? Thank you.

Yes. So for the prepaid, I think that's -- Robert alluded to a sourcing strategy that we've taken on. And part of the strategy is that we are working with our top suppliers. And, putting some cash to secure volumes and pricing. And, on -- what was the other part you asked?

The deferred revenue trended down quarter over quarter.

Yes, just standard cleanup stuff.

All right. Thank you.

Thank you. And, ladies and gentlemen, that is all the time we have today for our question-and-answer. This concludes the program and you may now disconnect. Everyone have a great day.