優比快 (UI) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ubiquiti Networks' Q1 FY17 question and answer conference call.

As a reminder the conference is being recorded.

Thank you. Now I would like to turn the call over to Anne Fazioli.

Thank you, Alex. 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 our 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 at the SEC's website at www.sec.gov. Forward-looking statements are made as of today November 3, 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 at ir.ubnt.com.

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

(Operator Instructions)

Meta Marshall, Morgan Stanley.

First question, is just really -- in the past you've talked about the service provider market being somewhat saturated and expectations for it to be flat. And then in the last couple of quarters, it's obviously done particularly well.

So, I just want to get a sense of how much of that is pent up demand versus how much of that is -- now that some of the compatibility issues are fixed versus how much is that market expanding. And the second question is just, early impressions with the AmpliFi product being out and how you feel that product it is being received? Thanks.

The WISP market has always been an interesting one for us. It's under the radar, it's in these emerging areas like south America and eastern Europe and Middle East. I remember we were doing maybe $50 million of revenue in service provider and we thought it was saturated. And then it went to $100 million, and we thought it was saturated. $200 million, we thought it was saturated. Now it's well over a $400 million run rate. So it continues to surprise us. So yes, last quarter I thought maybe we were reaching saturation points, but then in the last several months a lot of, I'd say, nice things are happening that give us confidence that we can grow that market quickly again.

So first of all, it's been talked about a lot where we struggled with backward compatibility for AirMax AC. So, AirMax AC has a lot of benefits over the original AirMax, both in scalability and speed. But we've been struggling for one or two years. Version 8 of AirOS was going to bring backwards compatibility with AirMax networks. The idea was you replace your base station or upgrade it with a AirMax AC base station and it instantly improved these guys' networks and over time they would replace their CPUs in the field. And if you figure we have tens of millions of AirMax CPUs in deployment, we'd benefit not only from growing with higher capacity equipment, but a lot of replacement revenue.

So, what's happened is we finally introduced a release candidate this week for Version 8, which has been a year in the making. It looks very promising. So, that's one trend. AirMax AC backward compatibility, we are looking to turn the corner.

The second thing we have going is Ubiquiti mobile, which is a mobile app for the service provider market. If you look from our unified mobile app, we have over a 0.5 million downloads, about 100,000 monthly active users, in less than a year. So, once we get a mobile experience for the service provider market, I think that's a big catalyst of growth.

Now the third thing we have, which we're really excited about, is we've been working off GPON networking for quite a while. The response has been overwhelming. So, we're going to add GPON technology platform, fiber technology platform, to our service provider market. So that's a huge boost.

Now finally, which we revealed on our show, the WISPA Show a month back, which people haven't known about, is we have an ASIC team inside Ubiquiti. And we've invested probably a significant amount of money. I don't want to say the exact amount. But we've built and an ASIC from the ground up which we're calling LTU. It's been well over three years in the making and we're going to launch in next year. It's going to be essentially airFiber multi point, but it's going to be light years ahead of anything in the market.

And at cost points relevant to AirMax we are going to price it higher, the margins are going to be a lot better for us. But we think that's going to be a really big difference here in the market. Those there's a lot of catalysts for the service provider market that I think should show acceleration -- reacceleration in the next couple of years.

Got it and just the AmpliFi early impressions in the market or reception.

Okay, so AmpliFi. AmpliFi was a totally new venture for us. We have a unique business model where we focus on R&D and we target, maybe markets people don't see and we grow these markets from the ground up. AmpliFi was a big change for us because we're entering a consumer market where there's established players.

But if you look at Ubiquiti's history, the markets we have entered we usually dominate. So, our thinking with consumer market is we want to compete in bigger markets. We believe our model and our ability on the R&D side to innovate is greater than a lot of company's in the consumer market. And we want to compete in those markets.

Now, AmpliFi from the ground up, we developed with a very lean team. They've done a phenomenal job. The result was great. On the PR side and the marketing side, I think we executed it really well. We pushed and got into reviews and I think we did pretty well for our first attempt in the consumer market.

Now, what we didn't do well, which I'm really frustrated about is we didn't execute on the production side. We had demand for tens of thousands of units out of the gate and we've just been slow to get these out. And it's really accountability problem.

Everything from vendor quality control, mechanical design for manufacturing, production, quality assurance, it's just a cultural accountability issue. That's what I'm focused on right now. If we can clean up our production execution so we can get products from development to shelves efficiently, it's going to put us in position to grow a consumer strategy, as well it's going to greatly enhance our competitive advantage in the service provider and enterprise markets.

Right now I have mixed feelings. On one side, I'm really upset and frustrated at certain members of our team. And I think they let a lot of the Company down and I'm addressing that right now. On the other hand, if you look at our execution, our success, over the past few quarters and you say, well this Company is not even clicking yet and it's growing. That's a very positive picture, because it says that, okay, if we can clean up our areas of exposure, we should see -- if people are impressed by this growth the past few quarters, it should be nothing compared to what we should be able to do in the next couple of years, if we clean up and plug our areas of exposure.

Thank you.

Matt Robison, Wunderlich.

Robert, phenomenal results. Congratulations on that. Even though you're not completely satisfied, that's remarkable just the same.

You talked about inventory. You talked about lead times and it looks like you are looking to stock more yourselves rather than the distributors. Your inventory went up a fair amount, more than the guidance is above what you delivered for the September quarter. Should we look at that as picking up the slack for the distributors, or is there a product initiative that you're stocking for that's incremental?

I wouldn't look at that as all finished goods inventory we are sitting on and waiting for the sales channel to sell through. It's more like you look at our product lifecycle. We're not a Netgear or Linksys or some Company that has to introduce and end-of-life a product all within 24 months. Most of our products, because we [can use] enterprise and service provider markets, you look at our original NanoStation introduced in 2008. People are still using it, it's been eight years.

You look at our airFiber 24 we introduced in early 2012. It's getting to the end of 2016 and that's just picking up steam. It's just finally starting to show some growth.

So, there's no reason for us not to buy components in bulk quantities and get as good a cost as possible and get margin leverage. There's no point in having hundreds of millions of dollars in the bank, and if you're not going to use it to improve your business, right?

Agreed. Okay, another question I had on LTU, one of the things that I hear when I talk to some of the ISPs, especially in the domestic market, is there's been a value proposition where they've been able to offer cable-like speeds for much better economics.

So, with DOCSIS 3 and DOCSIS 3.1 coming out, it's a little tougher to keep up and clearly a lot of WISPs for your business model is open field running, where there is maybe no cable or alternatives. When we look at LTU, are you going to be able to raise your game so you can keep up with some of the other terrestrial technologies?

Yes, so how I look at it, and I know it goes against the conventional understanding or thought process of analyst communities. You look at our WISP market. You are talking about tens of thousands of independent operators, 40 million, 50 million deployed radios, all in probably just about every country in the world. There are just so many guys to track and they're all in these remote regions and with different situations.

And I think it's really hard to apply macro understanding to this market and say, okay, LTU is going to take it over. I think as long as we keep improving our technology, making it more usable, making the capacity better, making it so it's plug-n-play and smarter, works better in interference mitigation, as long as we can do those things, I think our fixed wireless platform is going to be around for a long time and continue to grow.

Now, there is some interesting things going on in fiber networking with these same smaller carriers. I always have the misconception that fiber is not going to be popular with our operators because they have to spend a lot of money to deploy the infrastructure, to dig up land and deploy the cables. What I found in a lot of these emerging markets, they are free to layout the fiber cable along the power lines and it's really cheap to do.

I think we were a little late to the fiber market. If you look it FiberHome, they're a multi-billion dollar company. And we should have taken a big piece of that two or three years ago. So we are playing catch-up right now.

But I think if you combine fiber with AirMax AC, finally coming to fruition and a whole new AirMax AC product line hitting over the next couple of quarters, combined with LTU that we hope to have out next year, I think the service provider maker overall is going to see some growth.

Very good. I appreciate it. Thank you.

(Operator Instructions)

Jess Lubert, Wells Fargo.

This is Mike Kerlan on for Jess. Nice results as well, and it looks like strength is fairly broad-based on a geographic basis.

That said, zeroing in on Europe, sales in the region have been accelerating on a year-over-year basis the last few quarters. And were particularly strong this quarter. I'm just curious, what's driving the strength there? Is it more distribution? Is it a better macro environment or something else?

I do these calls for long-term shareholders that believe in the story and where we are heading and what we have in the R&D pipeline. I could speak really well on those things. To be honest with you, I don't spend my time looking at quarter to quarter variations in specific geographies. If you want those answers, it's best to follow up the 10-Q, which we will be filing soon or off-line with our financial team after the call.

Okay. Maybe just a product one for you. As far as the enterprise UniFi business goes, can you just talk about the mix of how much of the businesses is Wi-Fi versus switches or is something else within the portfolio. And within the Wi-Fi business, how is the transition going to the newer AC products and how do you see the transition to the Mesh products fitting into the strategy?

Okay, I like these questions. UniFi, I think, is our biggest growth driver over the next, let's say year to two years. Let's look at why UniFi has grown almost 100% year-over-year. I think it's been a couple things right now.

First, we've dramatically improved the user experience. The original UniFi was a clunky server installation, pretty clunky controller and UI. And over the past year and a half with the introduction of Cloud Key, with the introduction of UniFi [fiber] controller, we totally revamped the user experience. It's super cool, it's zippy. It's loaded with features and combine that with, we had UniFi AC, a relatively decent execution on UniFi AC, at price -- performance disruptive access points. Those two things combined, the user experience of the new controller, fiber controller, with the decent execution on the AC wireless access points, explode this growth.

The user experience, also what it led to is security gateways and switches also picking up, because people saw this great UI that was loaded with features and was really slick, and they thought, okay, I am using UniFi Wi-Fi and I love the experience. Now they have switches and gateways available, I'm going to buy those too. And so maybe in the past when we first introduced the switches and security gateways, they didn't get any traction because we had fundamental issues with the user experience and the controller.

Now that those are solved, you are seeing switches and security gateways pickup. I don't know what percentage of the business they are, but I think in their own right, those are tens of millions of dollars per year run rate right now. And it's going to keep increasing.

Now, what's exciting about UniFi is [ASPs] are really low. If you look at Cisco Meraki, if you look at Aruba, if you look at -- and maybe even Ruckus, most of their ASPs are probably going to fall in between $500 and $1,000 for an [AP]. Plus you have service revenue, licensing support, all those things. The strategy we've done with UniFi is we wanted to just drive volume.

So, we've been really aggressive with price points. We have new PoE switches at $99. We have new Mesh APs at $99. We have AC APs at $80, pretty much, much lower cost than even consumer gear, but you're getting the whole software-defined networking experience with tons of enterprise features. And our mission has been to drive volume, increase the brand awareness. And I think it's working.

Now, the weaknesses are in UniFi, is the -- I'd say the quality of supporting high density, maybe networks, our QA. Like I said, with AmpliFi, our ability to get products from completed development into the sales channel, those things we have to improve. And we are improving them right now. And my hope is, next year, the story for UniFi will be a couple things.

First, it will be expansion of ASPs. We are about to release a slew of products that are going to be much higher ASPs. Still less expensive than Cisco and Aruba, but compared to UniFi ASPs, they're going to be very high. And I think there's a big part of our market that will love those products.

Now, along with that, we're going to offer increased support, hosted controllers, and that's going to contribute to service reps. I think if we can execute on these increased ASP products and a service revenue strategy, I think UniFi goes from being a nice business to a phenomenal business. That's the strategy we have for UniFi over the next one or two years.

Okay, thanks.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.