優比快 (UI) 2016 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Ubiquiti Networks' question-and-answer session for Q4 2016 conference call. As a reminder the conference is being recorded. Thank you.

Now I would like to turn the call over to Anne Fazioli. You have the floor.

Thank you operator and 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 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.gov.

Forward-looking statements are made as of today August 4, 2016 and we assume no obligation to update them. We hope you've had time to review management's prepared remarks, which are posted as a transcript on the Events and Presentations and Financial Information sections of our Investor Relations website IR.UBNT.com.

This call will be a Q&A only. Operator, we are now ready for questions.

(Operator Instructions)

Tim Long with BMO Capital.

Thank you. Robert I was hoping you just give us a little color on the service provider business. It did pretty well in the quarter I'm guessing maybe South America bounced back nicely for you but if you could just give us a little color there.

And also for airMAX just once again on backwards compatibility a little bit on the timing. Do you think that really would have an impact a positive impact on the business it seems to be doing pretty well without it? And then I had a follow-up on the Wi-Fi side.

Okay. So service provider has slowed down in the past few years. There's a couple reasons for that, one, I think the markets gotten a little saturated. Two, we just haven't executed on the product side the past I'd say two or three years especially on the airMAX side, with airMAX ac.

But I think you'll see it return to pretty good growth over the next couple of years and there's going to be a few catalysts. First, airMAX ac looks like we finally solved a lot of the fundamental interoperability issues with the previous generation of [clips]. And you'll see over the next several months I hope we get it completely polished and you'll see airMAX ac take off and it's going to be a lot of I say network upgrades.

Another catalyst we're going to get into more services for the operators. And you saw that with sunMAX, which I know I get a lot of flack for solar, but if I had to do it again I would have done it again 100 times over. It's eventually going to be a good place to play for us it's a little ahead of its time.

But we're going to introduce more services for these operators. And a couple of them -- well I'll just say it we've had tens of millions of dollars in R&D investment for a couple of these things.

And nobody sees it and when it's introduced in the next couple of quarters I think it will surprise a lot of people. They are going to be immediately impactful materially to operator revenue and service provider revenue and I think you're going to see some growth in the service provider next year.

Okay, great. And then the consumer division if you could just talk a little bit about kind of opportunity and ramp time there and kind of cost of getting into that business? It sounds like it could be a pretty good opportunity for you.

For which business?

The consumer division -- the new consumer division.

Yes so this is one of the things we're really excited about. Ubiquiti Labs, so the foundation, software foundation for our AmpliFi base in Riga, Latvia. And I'd say just a little more than a year, we've taken that product from concept to shipping and they've done a great job. I think it is a fantastic product, the reviews have been great.

And that's part of a much larger vision you'll see unfold in the next I'd say couple quarters. We're going to have several more offerings under AmpliFi. And that is also AmpliFi in itself is just one offering from Ubiquiti Labs. And I think you'll see even more exciting things within the next year from Ubiquiti Labs.

I think we're really excited where the Company is right now. Operationally it's the healthiest it's ever been, we're back to just focusing on R&D. We have a lot of new teams, everybody's energetic and I think we've done a good job in the last year sitting a great foundation for the next stage of growth. So I hope -- to the engineers that are listening I know a lot of them do, this is a big opportunity I hope everybody steps up.

Okay. Thank you.

Your next question comes from Jess Lubert with Wells Fargo. Your line is open.

Hey, guys. This is Mike Carlin on for Jess. Just a question on the enterprise business. It looks like the growth there remains pretty strong can you talk about what you're seeing with the UniFi ac portfolio? And is the strength primarily Wi-Fi or you also starting to see some of the switches and other offerings start to become material?

UniFi started out of a gate very strong in the first few years and we got it to $100 million, $150 million business. And what we did was we made the managed wide-area Wi-Fi network application affordable and easy to set up for anyone. So we took Cisco, Aruba type solutions that can cost hundreds of thousands of dollars to install and we brought it down to $50 an AP without support, without service fees and plug-and-play.

That was where we initially targeted, but we quickly wanted a vision similar to say Meraki was able to execute in Cisco and they did a fantastic job. Where we wanted one dashboard to control all kinds of equipment and we wanted with powerful enterprise features. And the team we had just was great getting that product to market.

If you look at it in terms of a 10 speed of a bicycle they were -- the initial team is fantastic running on gear one. But as you scale you need developers that can share, that are able to bring in new talent, move fast, iterate quickly and that just wasn't the team. And we struggled with the transition to the new team.

We finally got a new team so UniFi pretty much I'd say 90% of the team is all new developers in the past year, year and a half. And they are doing an incredible job on executing on the vision, which is to bring not just Wi-Fi access points but switches and security gateways and other devices we're also working on under one unified controller that you could also control multiple sites regardless of geography with zero cloud fees or zero subscription fees for life that anybody could use.

So we wanted to dominate this software defined networking world and our vision and what we want to do are way ahead of our capabilities. Now I feel the engineering teams can match where we want to our vision to go. And that's where you're seeing in the past year the rapid iteration in software control features, the wireless performance, the advanced wireless features, the user experience of the controller.

We have an incredible mobile app that just today I saw there's 40,000 concurrent users on our UniFi mobile app and every day it's getting better and better. So UniFi is going to be a monster. Right now I think it's early innings, we're trying -- we ship several hundred thousand devices now a month all total and I want to expand that number.

But once we get a larger and larger footprint and once our quality and feature set to start going up then look out because we can take those ASDs which are sub $100 right now and we can bring them up several hundred dollars. And people want higher end equipment we just haven't gotten there yet. So you'll see over the next year UniFi volumes I think they're going to expand rapidly.

But then what is really exciting is looking beyond that in the next couple of years once we get to 10 gigabit security gateways or UniFi threat management, multi-user MIMO, wave 2 APs with ways queue a piece with 802.11ac, 60 GHz which the next generation of phones will come out with, 10 gigabit switches. And it's exciting. I think that's going to be a great business for us.

Okay. And then just a last one on the expense side, I know FTI has been doing work for several quarters and it sounds like it's very healthy. At what point do you expect it to start to wind down and perhaps benefit SG&A? Or at this point should we just assume they're going to be working for much longer?

No so I think -- what was it the $8 million, $9 million in SG&A spend is extreme for us. I was a little frustrated with that number. As you can see I like to run robust operational model, especially when it comes to SG&A expenses, but I think that FTI was necessary.

We had a miserable culture operationally from the -- I guess the Summit Partner days where they filled their team, which was pretty much set up to pillage the Company after an IPO. And it left us with a complete mess and it took I think it took a lot of hard lessons and several years to sift through that mess. And I finally got the Company where the remnants of that experience is all gone.

And I think I am much more experienced I'm not as naive as I was and I think I'm capable to run a public Company and then we got -- we've pretty much built out a great accounting and financial team now. So the FTI is I think they're being transitioned out by the end of this year I believe they'll be completely transitioned out. And I have full confidence in the team we put together right now.

We didn't hire a Chief Financial Officer because I didn't feel our weak point was somebody that needs to go to investors. We've never needed funding. We've always been profitable. And what we needed is somebody to mind the fort and be defensive and have his eyes completely on accounting.

And plugging any areas of exposure as it comes to processes or systems in place to avoid things like the fraud incident from happening in the future. And I think that's what we did and that's the culture we have right now. And I think it's finally a very stable and healthy state.

All right thanks.

(Operator Instructions)

Your next question comes from Matt Robison with Wunderlich. Your line is open.

Hey Robert thanks. Congratulations on your accomplishments here. A couple questions about some of the press release items with the inventory expansion you commented about new launches. Should we associate that with AmpliFi? I've got a couple follow-ups.

No. The new technology launches would be associated with our service provider business. So I see the Company in three businesses now, right? We have service provider, which is airMAX, airFiber, EdgeMAX. We have enterprise, which is UniFi and UniFi Video. And we have Ubiquiti Labs which will be several consumer platforms.

What was the catalyst for Video growth. It seems like it's been gradually expanding over the last several years but this is the first time you really highlighted it as a driver in a press release.

I think the problems we had with the UniFi Video were very similar to UniFi, the problems we had with UniFi. In fact when we launched UniFi Video and I've been trying to do video since 2007, as embarrassing as that sounds, we've been at this since 2007. And before I really knew software or knew anything about software I should say, we chose the path using an open source program. And it was -- it was a really bad move and so we spent years trying to Band-Aid that fundamental issue.

And what's -- what kind of I guess -- what's kind of disappointing about UniFi Video is we had the right idea. In 2010 or end of -- I'd say okay it's 2011 when we launched that platform, we had I think 150,000 orders in cameras before anybody touched it. And we were there before I'd say before Hikvision and a couple of the other dominant China players today.

And we were there with a complete user experience from hardware to software to network video recording at a really disruptive price point. And everybody wanted that product and if we executed it probably be I don't know hundreds of millions of dollars of revenue today. We just didn't do it and we missed the time window.

But like we did with UniFi, we pretty much evolved the team or replaced the team over the past year, year and a half, two years. And we've made some fundamental changes to the controller. And you're seeing now it's more stable the hardware is on generation three, it's better.

So there's been a quick uptick to generation three. But we're not done I think by the let's say the end of this year I think we're going to make a pretty big step in Video that's going to boost its growth a lot more.

Service provider obviously not the year over year growth of enterprise, but sequentially it grew more. Was that a regional factor or -- obviously I can see the regions on the press release, but was there a product aspect there?

I think it's hard to draw conclusions quarter to quarter. We don't have a team that financial -- does financial engineering and smoothes out bookings and shipments to meet nice trends. We use the ship at the channel demands. I don't know for whatever reasons, we try to help these distributors, but maybe their ordering cycles are staggered.

And so maybe some regions are up one quarter or down one quarter, but if you look at it with a smoother granularity, the trends are up overall. Now one macro type of trend that you see in our financials is Europe and US are definitely increasing. And that coincides to UniFi and enterprise being more of our business. The enterprise customers tend to be based in the Western world and the service providers tend to be based in South America and Eastern Europe and Middle East.

And I think what's positive about that shift you're seeing in the US and Europe in enterprise revenue is those customers have deeper pockets, they have money and they tend to be stickier once they like a solution like UniFi they're going to stick with it. And there's a lot more potential for that market to increase the ASPs and they want more expensive equipment. We just haven't gone there yet, but we will and so that's what I'm really excited about.

Last thing. Gross margins really strong again, but a little drop sequentially on a percentage basis was that just the mix shift to service provider?

I don't know. What did we grow 6% year over year so overall our gross margin expansion is due to efficiencies. So we've never dropped the price of any product ever. So that kind of is -- kind of a good point of our strategy and our brand. We never discount or we never have to get rid of inventory. We don't have salespeople calling guys up to take products.

We make stuff people want. And in the background that gives us time to cost reduce so in the future I might -- to kind of jumpstart new markets we might get disruptive because we can. And we might take a hit in the short term to buy market share, but we know in the back end -- in the background we can constantly leverage on materials and pricing and eventually get good margins.

I think we might have dips here and there depending on how aggressive we went to be with new product introductions. But overall I think you'll see margins expand. For sure they will expand in enterprise, service provider probably at least the same. Consumer might be a little lower margin, but I think with time it's also going to be a very, very nice business.

Thanks a lot.

Your next question comes from Meta Marshall with Morgan Stanley. Your line is open.

Great. Thanks. A couple of questions just as you guys have Ubiquiti Labs and I just wanted to get a sense of whether the design objective is still the same as what it has been traditionally? Which is like finding big markets and a way to disrupt them from a price level with a better product.

I guess I ask that just because the consumer market tends not to have that same pricing premium where you can come in at a disruptive price and so just getting a sense of the whether that is the same design objectives. And then second question is just an update on kind of the switch in Board members. Thanks.

Okay. So I will say Ubiquiti Labs is something that's very, very important to me and I'll tell you why it's important. We started this Company selling or making technology for these service providers in these emerging market. And I think to date we've sold probably 40 million radios.

And when you think about these connections they are serving multi-family homes or businesses, so if you extrapolate that 40 million connections we've connected hundreds of millions of people in areas of the world that didn't have Internet connectivity. And you see Amazon and Facebook talking about hot air balloons and drones and solar planes to connect the next billion people, well we've already connected hundreds of millions.

And we've done it I think as efficiently as anyone could have. People I think don't give us credit for that and they make -- they look at our financials and they think okay this thing has to be a scam because they're selling to service providers. And we don't know these service providers, they're in emerging markets we can't track.

That's pretty frustrating. Then we took our same business model and what we do which is basically disruption on R&D and sales through community-based evangelism and we applied it to an enterprise market. If you look on Spiceworks we're probably the top trending vendor these days. So many people in the Cisco and Aruba world and Ruckus and what have you they're starting to jump on UniFi.

So we've applied our same business model to the enterprise. But then people tell us all, yet Ubiquiti they probably just got lucky. And that is also very frustrating so now we're going to consumer with Ubiquiti Labs and we're going to do the same thing we've done to the service provider at market to the enterprise market. And now we're doing it to a consumer market when so many people would say oh, Ubiquiti doesn't have any salespeople, they don't know how to distribute, they don't know how to create channels, they will never be successful in consumer.

And we want to stick it to these guys. Were going to come out very, very aggressively in consumer market and we feel wireless is our game. We've done Wi-Fi and we've shipped tens of millions of radios using Wi-Fi in all kinds of applications from proprietary multi-[hundred] kilometer links to these managed Wi-Fi networks. And the consumer Wi-Fi market should be ours that should be -- belong to us.

You look at the consumer Wi-Fi market today there is a shift maybe 20 years ago or let's call it 15 years ago when you first went into a Best Buy, you saw Wi-Fi routers and card bus cards for hundreds of dollars because it was a new technology. Then all of a sudden over the next several years, you saw Wi-Fi routers and client modules they just got completely commoditized. Where you'd go into a store and it was a race to the bottom.

And nobody wanted to touch Wi-Fi in consumer products or business because the ASPs were so low and the business was so crummy. There was no differentiation because the Internet connections were slow, most homes only had one PC. So it was very hard to differentiate between a good router and a bad router.

Now fast forward today some things interesting is happening where you have fiber connections doing gigabit per second. You have homes, connected homes with Nest thermostat's and door locks and doorbells and all kinds of IOT devices. And Netflix boxes in tablets and laptops and phones so these connected homes are having 10, 20, sometimes 30 devices.

And so people are seeing the difference now in a good router and a bad router. And so what you're seeing now is the router is becoming a really important piece of technology to these homes and people are looking to pay more and more money. And you see some of these startups have rightfully so saw an opportunity to get into this problem in these high-priced ASPs on the routers.

And with AmpliFi we're gunning for that market first, but we also have a larger vision around it. Yes we will be aggressive, but if you look at what we did with AmpliFi that product is beautiful. We didn't take any compromises on the hardware. So the hardware is super high-end, the look, feel, finish is super high-end.

And the price for what you're getting I think is incredible. And the reviews have been great so we're going to push that aggressively and we want to prove a lot of people wrong.

Got it. And then just an update on the Board members. Current hunt for Board members.

Yes, we added -- we added a Board member so we are in compliance now.

Okay. Thanks.

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.