優比快 (UI) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ubiquiti Network's question-and-answer session for Q2 2016 conference call.

(Operator Instructions)

As a reminder to the conference, this is being recorded. Now I would like to turn the call over to Anne Fazioli.

You have the floor.

Thank you, Brian.

Thank you, 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.

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 the 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.gov. Forward-looking statements are made as of today, February 4, 2016. And we assume no obligation to update them.

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

Brian, we are ready to take questions.

(Operator Instructions)

Erik Suppiger, JMP.

Congrats on a very solid quarter there. Your UniFi business was strong in the US. Can you comment a little bit about the competitive dynamics? In the past, you've talked a lot about how that's a lot of greenfield. Is that still the case, or do you feel like you are making more inroads into some of the traditional Wi-Fi vendor territories and displacing them any more?

I think UniFi has huge growth ahead of it. What stalled its growth was purely on the execution -- the development execution. So if you look when we launched UniFi in 2011/2012 when it started shifting the volume, there's nothing like it. It was a high-end managed Wi-Fi platform that was just a fraction of the cost of the guys like Cisco out there.

And in the past couple years, you have seen the growth kind of tail out because we've mis-executed on a number of fronts. We mis-executed on our AC strategy for the large part. We mis-executed on our switches and gateways along with general wireless stability and a lot of advanced controller features.

And we pretty much refreshed the whole development team in the past year and things are finally clicking. So I think with the introduction of AC, which looks good, and I think this year we will make a lot of good progress on the deficient areas. I think you'll see UniFi starting to return to its growth trajectory. And it's really unfortunate, we should be a billion-dollar company right now if we executed on UniFi. But all we can do is learn from mistakes and correct them.

Are you still trying to be number one in unit volumes on the UniFi product line?

Of course. I think Cisco is in the range. I don't have the current numbers, but I think that Cisco is in the range of shipping something like 3 or 4 million unit volume per year, and we're not too far off that mark. We should have surpassed it already. But I think over the next year or two years, we will definitely make a push. I think we can get there.

Okay. And secondly, can you give us an update on the solarMAX, where you are in terms of delivering that in the market, and how that's been received?

We just got inventory in the channel. The first deployments are taking place. Our training has been promising. There is a lot of obstacles around I guess compliance and registration, especially in the United States, for deploying these systems. And it's going to take a little longer than we thought.

The good news is I think our solar investment is really misunderstood by the investment community and you guys. It's really a drop in the bucket for us in terms of R&D. It's a small team. I think it's -- I don't know the exact numbers, but it's probably a few hundred thousand dollars a quarter of R&D investment.

And Ubiquiti, we're going to return to a lot more R&D investments, and we're going to start shooting out a lot more products. And if we come up with something radically different that's not as close to our -- what we have been successful in, it doesn't mean that our Company is distracted or we're leaking money.

We are in a fortune position where we have a very lean and efficient R&D model, where we can take a lot of bets without materially affecting our operating health. And over the next year, we're going to make some strong pushes in some new product releases.

Very good. Thank you.

Tavis McCourt, Raymond James.

Nice quarter, Robert. My question is -- my guess is AC is helping trends in both businesses right now, so I wonder if you could give us maybe a qualitative feel for the percentage of shipments, either in the December quarter or the March quarter, that may be AC in the UniFi business and in the airMAX business, how early are we in this transition?

I think we are still shipping a lot of legacy UniFi. I don't think it's really ramped up our UniFi AC sales completely yet. A lot of it is still the old AC, which we are trying to kind of get out of the replacing the channel with the new UniFi AC products that are performing much better, and we're encouraging the channel to take the new UniFi AC products.

The new UniFi AC platform in general has been well received and it looks promising so far. We will have to wait and make sure that's for real. On the airMAX side, it has been kind of a mess. We haven't executed well in backwards compatibility, which is what all operators are waiting for.

And we got a lot of pressure. We got to do it. Every day counts. So that's the primary focus in the Company. AirMAX AC backwards compatibility is in beta trials, and we have got to find a way to close it out and get it stable here in the next few months. That's a major focus in the Company right now.

And so the increase in the service provider business in the quarter, if it wasn't a material increase in airMAX AC sales, what else went right in the quarter?

Well, that service provider is also includes EdgeMAX, and that team and platform has been very strong, airFiber as well. That team, that platform, the performance has been very strong. So I think just -- and the market is definitely not done growing yet. So I think it's growing marginally just probably because of the strength of the other technologies grouped in that category.

Great. Thanks a lot.

Pierre Ferragu, Bernstein.

Thanks for taking my question. So there are three areas where I would love to hear a quick update and you know those areas I care a lot about. The first one is your new enterprise product things that are like beyond UniFi, so video, Voice over IP, your secure gateway, your switches, the mFi pipeline. I'd love to hear how do you think -- how [much are] these things are in the quarter and what is the early learnings from ramping up these products?

And then the other one is just like kind of getting a status update on what happened to the [seminar] your incident in Asia. I would love to hear how much you have recovered in terms of money and where the process is. Then in terms of reparations, I imagine after what happened you've been reviewing all internal processes and looking at the strengthening operations. I would love to hear you on that one.

And then the last one is your in terms [euro] mark in terms of [coal] is he at times deal with it at some point. You will have in front of investors or did you wait for like your permanent hire before getting there? Thanks a lot.

Okay. So the question I guess the first part is about complementary technologies around our UniFi Wi-Fi ACs. We always have new ideas to expand UniFi. One of the examples was the UniFi Voice over IP phones. The hardware was fantastic. The idea was fantastic. And that is another instance where we just didn't execute well.

So yes, we are going to continue to bring more ideas and products to market. But the focus this year is to upgrade our engineering teams and execute better. A lot of people are frustrated. I am the most frustrated in the Company at the lack of execution on the R&D side. There's been a lot of changes this year, and we're going to make changes until things improve.

I guess the next part of your question I heard about the CFO. Yes, we are actively searching, not only for a CFO, but to form a general strong general finance functions so we can phase out our temporary contractors, which are very expensive. But we want to make the right fit.

We have had now two CFO turnovers in the past four years. And I want somebody long term, and I want stability. So we filled a couple of those positions. But we still have to fill out the rest of the team and that includes a leader on the finance side as well.

Okay. And on the review of your internal process for what happened over the summer, like the money you lost, how is that progressing? Do you feel like you have like a safe internal process now and that kind of incident cannot happen again anymore? Or are you still in the process of fixing operations in finance?

Yes. So we originally had a SOX control system in place. We did an investigation on why that system broke down, and we put in the appropriate measures to do everything we can so it doesn't break down again. That's about all I can say.

Thanks.

(Operator Instructions)

Matt Robison, Wunderlich.

Thanks for taking my question. Robert, would you say that the backwards compatibility of development is your biggest challenge at this point?

AirMAX AC backwards compatibility, yes. That's the number-one priority in the Company right now.

What would you say is your biggest accomplishments in the December quarter?

I think our biggest accomplishments are on the R&D side, which you won't see for the next, I don't know, probably for another three or four quarters. Everything kind of has a lag, so everything we do in terms of operations success during this execution doesn't show up real time.

Okay. On the product side, were there any significant production constraints relative to demand for the new AC products and UniFi?

Whenever we announce or launch a new product like airMAX AC, there is always pent-up demand, and we try to control shipments to ensure initial quality is good. In the case of UniFi and airMAX AC, those are pretty sophisticated products with a lot of functionality. That means a lot of things that could also go wrong. So we have been controlling our initial shipments to channel. But yes, there is a lot of growth ahead of it.

Was that their strong gross margins a function of mix to EdgeMAX and airFiber or what other things might have been a factor there? I know you said cost reductions in the materials.

Yes. I think this is another thing misunderstood by you guys. We have never dropped the price of a product in the history of the Company. When we go in to new markets and we see opportunities, we will purposely price the product much lower in a lot of -- in some cases, we leave money on the table, but we do that to ensure a position for long-term opportunity.

And I think what you are seeing is that strategy playing out where with our disruptive pricing we secured a position for long-term opportunity, and because that price has never changed and because our product life cycles are so long, we had a lot of time in the background to make the materials production costs more efficient. I think that's what you're seeing now.

Is there a time frame later this year when the power requirements for airMAX in the US will cause you to have to de-rate the power on the legacy M series airMAX products?

I think you're talking about the switch between what they call the DTS rules for the FCC and it's switching to the U-NII rules, and I believe we have until June of this year to make the change and lock down all our shipments of 5-gigahertz products to U-NII rules.

We've already certified all the products for U-NII rules. With our new software upgrades, the products are switching over to U-NII rules, and we are in a position by the deadline to ship everything moved over to those U-NII rules. So I think we are okay.

Okay. One last question from me. Can you operate indefinitely with FTI, or do you envision maybe having to change some of your recruiting objectives to land a CFO sooner rather than later?

I've already made my comments concerning this.

So basically it's -- obviously the Company is performing just fine with FTI. We can expect that as a status quo, you can continue that way, if necessary, until you find the right guy or gal?

Yes. I've already commented on this question.

Thanks.

Rajesh Ghai, Macquarie.

I wanted to understand your views on the currency impact. Obviously, after five quarters of a run rate in the 150s, you seem to have broken that 150 [mam margin] per quarter barrier and move to the 160 and very above that. Is it fair to say that the currency impacted your [semi slider] business, especially in the developing world as the strength of the dollar continued to go up, and now you're probably used to steady state where currency probably doesn't matter as much, or do you still see some impact on currency going forward and right now?

Sorry, the question is about how currency -- (multiple speakers) -- overall business.

Has the impact of currency become a steady state? It probably impacted your [earnings] over the last six quarters? Now it's kind of reached a point where the channel, as well as your customers, are kind of used to a stronger dollar. The fact that in a developing world and in Latin America and in Eastern Europe, it's more expensive to buy Ubiquiti just because of the stronger dollar. Has that reached a steady state at this point in time?

Absolutely. A weaker dollar is better for our business. A lot of the emerging markets -- Brazil is a good example, VAT taxes are heavy. So whenever you have a strong dollar, not only is it more expensive to import the products, but you add VAT tax on top of that and it amplifies the problem.

But we've been through cycles of weak dollar and strong dollar, and I think if the dollar returns to a weaker value, we will get some benefits from that. But it's nothing we can control.

And your success this quarter, how much of that had to do with the new UniFi products as video and Voice over IP and airFiber versus the traditional UniFi Wi-Fi and airMAX?

I think our earnings press release broke down the revenue by enterprise and broadband. So you can refer to that.

No. What I was talking about was the new enterprise of the [UniFi] products. It was video, Voice over IP, UniFi security, how much of that was contributed to the success?

All right. Next question.

Okay.

Jess Lubert, Wells Fargo Securities.

Hello, Robert. A couple questions as well here. Just first with respect to UniFi AC, you mentioned that you had been controlling volume. So would it be fair to say you expect them to ramp up over the next couple of quarters? Are there any constraints there at the moment from a supply perspective?

You are talking about UniFi?

Yes, UniFi AC.

No constraints from a supply perspective, and yes, shipments will ramp up.

And then I was hoping maybe you could provide us with a little bit of insight into how you are thinking about seasonality at this point in time. In the past, I feel like you guys have suggested that the business would be stronger in the summer months, weaker in the winter months because of weather factors. Is that still the right way to think about things?

And to what degree do you believe CAF II funding will help you? I think WISPS were able to apply for it. Any kind of thoughts there?

Seasonality, the more experience we have in this business, the less I think it has to do with weather. We do have weaker quarters around -- well, December quarter and probably the March quarter looks like weaker than the two other quarters due to like vacations. People, especially in Europe, tend to take long vacations near the end of the year. And that does affect the product consumption. Sorry. What was your second question?

CAF II funding. Is that helping at all? Do you think that's a catalyst for 2016?

Do you mean like offering funding to our operators?

No. The government Connect America Funds that WISPS can take to deploy broadband equipment.

Yes. I really don't understand how that stuff works. I remember there was an $8 billion broadband stimulus package a few years back. If you bought Ubiquiti equipment with that, you could probably connect every home in the country. So I don't know where all that money goes, but we're definitely not aware of what's going on.

And then maybe just last one. It looks like you completed the last buyback authorization. Are there plans to issue another one, or should we not expect buybacks at this point in time?

I think if the stock looks like it's -- we think it's undervalued, we are always going to look to buy it back.

All right. Thanks.

James Faucette, Morgan Stanley.

Thanks a lot. So a couple questions from me. First, I guess going back on the enterprise product lineup and talking about the ramp there. It seemed like at least versus [RS misfit] enterprise was maybe a little weaker.

Do you think that was just the availability of new products ramping and that should self resolve over the next one or two quarters, or were you seeing any change in buying behavior from your enterprise customers during the course of the quarter?

Like I mentioned before, UniFi's growth has been -- I am convinced it's completely limited by our development execution. If we address the areas of efficiency, it's got a huge runway ahead of us. So I think even if you see it picking up a little as a result of the progress we have made in probably the last half year, things like we now have a simple way to install the controller with our cloud key and provide remote connectivity.

We greatly improved the AC solution with greatly improved wireless stability. We are starting to introduce advanced wireless features now, like band steering and spectral scanning and airtime fairness. And our controller we're starting to get into more advanced usability in a better format. So I think the UniFi growth is going to closely correlate to how quickly we can solve the areas of deficiency in the [popcorn] and we still have a long ways to go.

Got it. And then my second question was just when you look at I guess your plan that you had laid out a couple of quarters ago. You seemed to have indicated at the time that you thought that you would be ramping research and development spending pretty aggressively.

It seems like that really -- like the rate of spend hasn't changed that much. I just was wondering if you could talk about if there had been a change in your plans and thinking that resulted in kind of that increase in R&D not materializing, or is it still something that we should expect to come down the road?

So I think in the past six months to one year, we've probably done as much hiring on the R&D side as we've ever done and we've also done the most firing that we have ever done. So I think our R&D is greatly improved in the past year by a combination of we brought in new blood. That's so far it looks like they are working out, and we did a lot of addition by subtraction.

Got it, and so it sounds like you were able to just turn over your heads rather than have to increase R&D rather than any change in product development plans.

Yes. Our R&D spend is limited by our ability to find talent and that's tough. It's not something a lot of companies have headcounts and positions to fill and they throw money at building R&D. If you want good returns in R&D, you can't throw money at the problem. You've got to find the right people that generally have passion about building the products, are accountable.

They don't play politics or want job titles or looking for the next thing. They see this as a stopping point. So that's the most difficult part of scaling and strengthening the R&D group, and you can't really control how fast you can build those things. It's got to be organic.

And when I talk about our mis-execution on a number of fronts, especially with UniFi, that's what happened. We built up the team way too aggressively. The quality of the engineers dropped and we just -- it just made things a lot worse. So we pressed the reset button probably about a year ago. And I think we are on a much better track. And like I said, results aren't real time, but over the next few quarters, hopefully, we will show the results of what we have been doing.

Great. Thanks a lot.

Thank you, ladies and gentlemen, for participating in today's conference. This does conclude the question-and-answer session and you may all disconnect. Everybody have a wonderful day.