優比快 (UI) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ubiquiti Networks fiscal Q2 2017 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 Laura Kiernan.

Thank you, Courtney, and thank you everyone for joining us today. I'm Laura Kiernan, the Senior Vice President of Investor Relations for Ubiquiti Networks. I'm here with Robert 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 our other SEC filings, which are available on the SEC's website at SEC.gov. Forward-looking statements are made as of today, February 9, 2017, and we assume no obligation to update them. We hope you've had a chance to review Management's prepared remarks, which are posted as a transcript on the events and presentations and financial information section of our investor relations website, ir.ubnt.com.

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

(Operator Instructions)

Our first question comes from Matt Robison from Wunderlich.

Thanks for taking my question. Pretty phenomenal growth again on the Enterprise side. In the past you guys have talked about UniFi being a gross margin driver. This quarter you talk about mix and, to a lesser extent, freight expediting as being a drag on gross margin. I was hoping you could give a little bit of color to what the mix factor is that impacted margins this time around? I have got a couple other follow-ups, too; start with that one.

First, I want to say that I'm very disciplined when it comes to fundamentals and margins. I'm really proud of our operating metrics, and I hold the Company really accountable to margin performance.

In this case, I should explain exactly why our margin has dropped this quarter. As you know, in the history of the Company we never drop prices, but we very aggressively go after new markets.

A few things happened this quarter. First of all, AmpliFi, our pricing was very aggressive out of the gate, but we also misexecuted the launch. We had to recover. We had some last-minute issues with design for production; we had a redesign.

I wanted to get it on the shelves because we had such great momentum in terms of our PR and marketing strategy that we had to fill the channel with stock. We took a hit on a lot of air shipping. But from a long-term perspective, it is incredibly important we establish this AmpliFi brand. It is not just Wi-Fi. It is going to be a family of products, and it's really important we hit the time window and we started carving out mind share in the market. So that was one issue.

I would say another issue was airMAX ac. We believe we finally have solved backwards compatibility issues, and now we are seeing a pretty nice uptick in airMAX ac sell-through. airMAX ac, we also were aggressive on particular SKUs to help drive adoption. Again, strategically it is very important that airMAX ac gets adopted for us.

The third thing is we have set up inventory centers, both in US and in the process of setting up in Europe, to really reduce the lead times. We do not have the most sophisticated channel in the world, especially on our operator community side. And we historically have had a lot of frustration with maintaining stock in the channel, which is very important for your operators and your deploying networks and picking up new customers. You need a reliable supply. So that's a big problem we are trying to solve.

Together, these things hit all at once. I wouldn't say long-term-wise I expect our EPS and margin profile to be more representative of, say, the past several quarters. But I do think the decisions we made, while impacting optics in the short term, were a necessary decision I had to make to drive future revenue growth and EPS.

My goal right now is we have to get this Company scaled. I do not want to be one of these networking companies stuck in purgatory without any acceleration. We have to get this thing to $1 billion of revenue as fast as we can, and beyond that. That has taken priority over, let's say, maintaining really good fundamentals and operating metrics I like to see.

While I got you, Robert, headcount accelerated a fair amount, and might've been your biggest quarterly increase in headcount. Can you give us a little bit of backdrop for that?

Sure. We have a lot going on, and there is a lot of big opportunities and growth drivers we see. Maybe to take a step back, I will talk about the three businesses. You have our Ubiquiti community of operators, which I guess you can call a service provider business. But it's not a service provider business in the sense that we are not selling to Tier 1s, we are not commoditized, focusing on standard DSL or cable modem hardware and participating on bids and getting squeezed on margins and having huge sales teams and custom engineering efforts. We are certainly not in that group.

Our service provider market is actually quite unique. It is a community we built. They consist of operators -- grassroots operators we've grown and built a community around. Our operator business, I would say, is more like the characteristics of a sticky enterprise business. But I think since it's considered operator and internet access, it gets labeled as a less valuable business.

In our operator business, we have three growth drivers for the future and they are coming up quick. The first one is, of course, airMAX ac and I believe we solved the issues. Along with airMAX ac, we really stepped up our software complementary pieces. We have everything from airLINK, which has really improved as a link planning simulation software, to a new version of airOS we are rolling out on the devices that have all kinds of neat new metrics to help operators.

Then we have airMobile, which is very key for us. We have over 1 million downloads and over 100,000 active users with UniFi Mobile App, and we are just starting Ubiquiti Mobile, which is for the airMAX world. Then we also have airControl, which helps you manage all the networks. On top of that, we're making great traction now on UCRM, which is a free software which allows you to completely manage and bill and account for all your customers in your network.

That solution together I think is as strong as it's ever been. I'm looking for a good renewal in airMAX growth driven by that increased software solution, and new airMAX ac software and firmware and hardware.

The second thing we are going to launch, probably this next quarter, is Ubiquiti Fiber. For a long time, people have been asking us to do a GPON fiber solution in areas like South America and Eastern Europe. Fiber is now being deployed not by just the big operators but a lot of the smaller operators, and the solutions out there are very difficult to use, very antiquated. The upfront cost investments for what they call the OLT, which is the infrastructure to run the fibers, is very expensive.

We're going to take a page out of the airMAX playbook where we make simple, very easy-to-use solutions that don't require training. We are going to minimize the upfront investment to get started, and we're going to leverage our community of operators to evangelize the solution. We are very excited about that. Like I said, this coming quarter we are going to start shipments.

The third thing I have talked about in the past, we had really heavy investments in is this airFiber multi-point we are calling LTU. That solution is custom made for outdoor wireless. It's custom made for scalability, for low latency, for very, very high spectral efficiency and great noise immunity, so all the things these operators need to support the next generation of bandwidth requirements and also be resilient to the more and more crowded spectrum outdoors. That is going to be released within the next couple of quarters, is what we are targeting. Field trials start next quarter. So that's the operator business.

Now, if we move on to the enterprise business, UniFi, and you talked about margin, we just started our strategy to move upstream in terms of increasing ASP. You have seen that with the announcement for what they call UAP-AC-HD, and we are really excited about this product. We think it is the most important product we have probably ever released. The demand is very strong. And unlike other products, we put a serious team on this product and we spent probably 1 to 2 years developing, soaking it, making sure it is super reliable, very high quality. And I believe, with this product it's going to change the perception of UniFi of being a value leader to being a performance leader. So we finally have something now where we test against the big brand names, and we can beat them in performance labs.

We still maintain our disruptive cost. It is $349, which is 1/5 the price of competing solutions, but our performance is higher, it's better, and I believe the software is better. When I look at UniFi now, people think, oh, it is low cost, but in my mind, there is no doubt it is now the highest performance solution in the market and way more usability. That will start a trend and you'll see us -- we're going to have -- this year we'll have APs that cost, by the end of the year, $1,000, and I think you will see people also buy those and have interest in them.

Along with a higher ASP strategy, we also are in beta of what we call UniFi Elite. UniFi Elite is a paid hosting and increased support solution, and the idea is we host networks for people. Instead of running their local controller, we run it in our cloud. We have dedicated high-end technical phone support, lifetime warranty, advanced RMA, everything customers in the higher markets need for piece of mind. Maybe before these customers hesitate in buying Ubiquiti or UniFi because we lack professional support and now we're going to offer it, and of course, we're going to charge for it and that's going to be the start of our service [revenue].

That's UniFi, and now on to consumer in Ubiquiti labs. Like I said, it's very important this quarter to do whatever we could at any cost to make sure we get this AmpliFi brand into new channels. We met the initial demand, or captured some of it. We didn't get all of it because of the fumble.

But like I said, that is going to be a family of products to improve the modern home, and you will see at least two more big launches around -- or we hope to see at least two more big launches, completely different technologies but complementary to Wi-Fi and the AmpliFi suite this year, as well as we have plans for more consumer brands that I think have a lot of potential. Hopefully to long-term investors, that gives you the long-term vision and strategy we are going to use to scale the Company.

That's a lot to do. I can see why you had to add a few folks. If Hartley's on the call, this might be a question for him. In your 10-Q that was just released, you talk about not being aware of any material litigation that could affect the financial statements. It's been a matter of some public awareness that Synopsis may have a claim on you guys or filed a suit. Can you comment on how that 10-Q language might relate to that suit?

Unfortunately, I can't provide more information than that concerning pending litigation. And I'm probably not the guy that's going to be able to get you the most details on it, if I could, so probably you want to follow up after the call.

Thank you very much, Robert.

Thank you. Our next question comes from Jess Lubert from Wells Fargo.

Hey, guys, it is Mike Kerlan on for Jess. I'll just follow up on two product items here. You have provided a lot of detail here. It's appreciated. Just to get back to AmpliFi, just to clarify, is the gross margin profile of AmpliFi, how does that compare to the corporate average? And do you expect shipping costs tied to AmpliFi as you ramp it to drive gross margin below the long-term target of 45% to 50% for a few more quarters, or does it snap back to that range pretty quickly?

If you look at our history, I believe, when we became a public company, our margin was in the low 40%s and we were able to expand the margins all the way up to the high 40%s. We have a strategy that seems to work well, where we don't ever drop the price of a product in the market, but we'll do what we feel to be aggressive in capturing market share or mind share out of the gate. There could be instances where we are leaving money on the table, pricing so aggressively. But the way I look at it is the long-term value of capturing mind share or capturing a market is much more valuable than any short-term profits.

I guess to directly answer your question, AmpliFi is incredibly high-end hardware. Anybody that's bought the system and opened up the box immediately can see it is high-end hardware, and we wanted to price it pretty much lowest, or near the lowest in the market. So we're going for super high end at aggressive pricing.

AmpliFi strategy is much like UniFi strategy in that I believe that, over time, the modern home technologies will cater or will support much higher ASPs. If you look at the prices of expensive homes, it could be hundreds of thousands of dollars or millions of dollars, and if you could buy technology that increases the value of that home and makes it high tech or high end, I think people will pay money for it, if it's a good solution.

AmpliFi, we believe, has a lot of margin expansion for us. The first way, of course, is once we drive volume, we're going to focus on cost reduction, which we have not done yet. The second thing is, AmpliFi, we have a plan also to drive up higher-end ASPs and you will see that, I hope, by the end of the year.

So to answer your question, yes, there is going to be margin expansion over time. We don't intend to keep the same margins we're seeing now on AmpliFi.

Okay. And sort of in the same vein, with UniFi, as you get the Elite service off the ground and it starts to see uptake, how does that impact the margin profile, because you now have more headcount servicing the customer base?

With UniFi Elite, yes, we will have phone tech support, but if you look at it as a factor of overall UniFi revenue and growth, I don't think it will be material to impacting our margins.

Okay, thanks.

(Operator Instructions)

Our next question comes from John Lucia from JMP Securities.

Thanks for taking my questions. The first one is on UniFi. I wanted to ask you, what gives you the confidence to move upmarket here? It sounds like you're changing your strategy a little bit on UniFi. Are you starting to see UniFi right now being sold into more traditional enterprise resellers or you're seeing some evidence of adoption there? What is giving you the confidence to make this change, and move more upmarket with higher-end APs and also introducing a support offering?

I can give you guys one data point you can look up. Our Ubiquiti community around UniFi was originally built from maybe a lot of emerging markets, a lot of Ubiquiti operators. But as UniFi has scaled, you see an uptick in the amount of professional system integrators that are using it, especially in the US. These traditional system integrators have been using brands like Cisco and Aruba and HP and more expensive brands. If you go to spiceworks.com -- that is one of the largest, I guess, third-party communities for professional certified system integrators -- there's topics covering UAP-AC-HD, and the demand there is really solid and the reception of the product is really solid.

We're also seeing that with orders. Orders are very healthy and we expect it to scale. I believe, probably over this next year, UAP-AC-HD should be the highest revenue product, not only in UniFi, in the whole Company.

Wow, okay. When did you introduce that? That was recent, right?

Yes, officially we started shipping probably late last month, late January. We had a really expensive field trial process that lasted several months. We wanted to be absolutely sure what we released was the highest-end product in the market.

Okay. Who were those field trials with? Was it just resellers or larger customers or how can we think about that?

They were with hundreds of both Ubiquiti community members, and many of those consisted of these professional system integrators you'll typically see hanging out on spiceworks that are very familiar and typically use the higher-end brands, so that -- I shouldn't say higher end now. Let's say more traditional, expensive brands.

Okay. Last question, I don't know if this is the best forum for it, but I wanted to ask a question on gross margin. Do you know the magnitude of the impact from the product mix versus the shipping charge? Was it an equal impact, or how can I think about the impact on gross margin product mix versus the shipping charge?

I don't have that detail. I know airMAX ac, AmpliFi, and the shipping charges all impacted. I don't know exactly how much each contributed. Maybe you can follow up after the call.

Will do. Okay, thank you.

Our next question comes from Tavis McCourt from Raymond James.

Thanks for taking my question. A couple questions, first on the AmpliFi line, I think it's online only, and in pretty limited distribution online. Can you talk about your willingness to move into more traditional retail, if at all, and what investments you would have to make for that?

Traditional retail, I take it you mean on the shelves, like Best Buy, Target?

Yes.

Okay. If you look at the AmpliFi design and you look at all the very quickly crowded market of high-end scalable consumer Wi-Fi systems, whether it is Eero, Linksys, NETGEAR, Google, and then a couple more start-up companies, AmpliFi, we designed, or I made the decision to design to be on shelves. And if you look at that product, it shows very well. It has some local UI. It has a scream; it kind of speaks to you. It looks very compelling next to traditional, boring boxes without personality.

We designed that product and we put additional cost into making it look great on a shelf in a traditional consumer channel. Our strategy is to get it on shelves. The problem is we have been supply constrained, as I talked about, with the mis-execution out of the gate and we're trying to ramp up. We invested significantly into relationships, and we hope to have that product on actual shelves, both in the US and in a variety of international locations, all this year.

Great. Is there any meaningful operational infrastructure that you have to build to get on high-volume retail shelves like that, whether it is customer support, or is it all within the investment guidelines that you have for the Business?

We already set up a lot of the infrastructure to support technical support. We have an office in India, probably around 50 support guys that deal with entry-level issues. For our advanced technical support, both for UniFi Elite and maybe things like AmpliFi, we've built these resources in the US. We also have significant dedicated international team that's on the ground that's in dialogue with major shelf retailers on AmpliFi. A lot of that investment has been made, and the effort is well under way, for some time.

And then a follow up, you addressed some of the inventory changes previously to a question, but the dollar amount of inventory obviously was up a lot this quarter. Is that an indication that the local warehousing strategy is fully baked or will that inventory number still be creeping up after this quarter?

I think, if we scale, and my hope is we have some of our best revenue growth quarters over the near term in these next several quarters, yes, my hope is it will scale to support the Business.

Similar question on the receivables and DSOs, you made some comments in the prepared remarks about the DSOs being up because of, I think, enterprise distribution partners. Have you changed your policy or terms with your service provider-centric distributors or is this all related to the North American enterprise distributors specifically wanting better terms as the volume scales?

I would say the majority of it is from the uptick in the system integrators like Ingram or ScanSource that have longer payment terms. And I think it's important that we pick up momentum with those distributors because it is key to our strategy of getting into higher-end markets on UniFi and starting service revenue component, but the exact breakdown in details, you should probably follow-up call.

Got you. Last question, Robert, on LTU, which you mentioned previously, I assume that's like a fresh scratch or kind of a de novo network for a WISP that there's not going to be an attempt at backwards compatibility there, right?

Correct.

Okay, cool. Thanks a lot.

Thank you. Our next question comes from Meta Marshall with Morgan Stanley.

Hi, it is Yuugi Anderson on for Meta. Thanks for taking my question. Just two really quick ones. One, did you see an effect from the stronger dollar, perhaps in your service provider business? Number two, I was hoping we could get an update on your plans with the cash on the balance sheet, particularly perhaps maybe you would be interested in M&A activity, for example? Thanks.

The currency fluctuations aren't something that I think about. You should follow-up call with our financial group.

The cash on the balance sheet is a good question. We are always open to acquisitions. We always look at companies and we are always in the search of ways to use that cash to improve the Business. Most recently over the past year I've told our procurement team, saying, use that cash to improve our margins and so we have done some of that.

The problem with acquisitions is, if you look at our revenues now approaching, it should be close to $1 billion here soon on a run rate, and we are doing that with about $50 million or less in R&D. It's very tough to find a match or a company that can meet those metrics such that it's not dilutive to our focus and my focus to integrate those teams or integrate those businesses. We are really good at organically building new products and addressing new markets. It's hard to find a match that can do better than we can do organically and that isn't dilutive to our focus. But, yes, I continue to look, and we'll definitely be aggressive if we find a fit.

Great, thank you.

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.