優比快 (UI) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ubiquiti Networks Fiscal Q3 2017 Question-and-answer Conference Call. As a reminder, the conference call is being recorded. Thank you. Now I would like to turn the call over to Laura Kiernan.

Thank you, Valerie, 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, our founder, CEO and Chairman of the Board of Ubiquiti Networks. Before I get started, I would like to review the Safe Harbor statements. 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 are contained in our most recent filing on Form 10-K with the SEC and other SEC filings, which are available on SEC's website at www.sec.gov.

Forward-looking statements are made as of today, May 4, 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 Presentations of our Financial Information section of our website at ir.ubnt.com.

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

(Operator Instructions) Our first question comes from Matt Robison of Wunderlich.

Couple of questions, mostly financial, I'd have to say. I'm curious what types of products we should think of as exhibiting the early stage of learning curve variance on margin?

And then the other question is, you have a little over 14 weeks of inventory. And I understand that that's a competitive weapon, particularly for the enterprise side. And I was interested to know if you could help us understand where you think we're going to get to before you start to decide we're stocked up enough to be competitive?

Sure. I'll start with margin. So as people who follow the company know, in the history we've never once lowered the price of our product. A lot of our most popular products, especially in operator UniFi markets, they have 5-, 6-, 7-year life cycles. And traditionally, what we have done is to enter a market disruptively. We'll make premium products and we'll price them lower. And a lot of times we'll leave cash on the table, because my goal is to grab market share and establish defensibility. Over time, we've shown a history of improving the margin. And if you remember, when we went public we had margin in the low 40s, and then over time it went up to the high 40s, to almost 50%. And that was largely due to products like the original airMAX series, the 11 and UniFi series, which, over time, we've improved the margin. And I think right now we're at an inflection point of growth.

So on multiple fronts, if you look at the airMAX side, we've finally improved airMAX AC and we've launched Generation 2 products. Some of those, the lower cost CPEs, we have come in very aggressively, because I think by doing so it will lead to greater revenue and EPS opportunities. We've done the same thing with UniFi. We didn't have to price our UniFi AC series as low as we did. Things like UniFi Mesh at $99, UniFi AC In-Wall at $99, we didn't have to price them that low, but we do that because -- for long-term revenue, long-term EPS and establish defensibility in the market it's what we've always done. And over time we've proven we leverage incredible value out of that strategy.

So just to -- for the long-term shareholders, we know what we're doing. I wouldn't say to draw conclusions by a quarter-to-quarter variation to margin. The name of the game is EPS growth and how fast you can get that growth from a long-term standpoint. And that's how I'm running the company.

And I understand, for short-term traders, they're going to draw and extrapolate off these quarter-to-quarter and margin variations, but I really think where we stand today is stronger than we've ever been positioning-wise. UniFi is a train that's moving very quickly. Operator, we're reloaded with Generation 2 airMAX. We're launching Fiber to a lot of acclaim this quarter. We've had our own ASIC development, which many people I don't think understand the significance of. Work on LTU, which is airFiber Multi-Point. That's for a higher end, higher performance market. And so I think those things, just in the Operator alone, is going to reaccelerate growth.

And then turning to Ubiquiti Labs, what you see with AmpliFi, yes, the margins are not as good in AmpliFi because we wanted to make a super high-end product at an affordable price. And if you look at AmpliFi, we don't have the marketing spend of the 12 other participants in the mesh Wi-Fi market. There's companies that have huge dedicated teams just to marketing and sales and buying, marketing, display end caps. And they can't make a business out of it. They get sales but where's the earnings?

And I'm proud of what we've done with AmpliFi because we planted a seed that shows, with very little marketing sales spend, we're able to replicate what we've done in operator and enterprise. And that's just starting with AmpliFi. We're going to have a number of technologies under the brand. And we're going to have another brand, a completely new brand under Ubiquiti Labs. And I think we're in position to execute that well based on the AmpliFi experience. So -- and maybe that's a lot to take into account, but I mainly wanted to put that out there for our long-term shareholders.

And to your point about inventory, so traditionally we've always have problems with channel inventory. And it's really critical for us, especially with our service providers and in the UniFi market, because the system integrators and operators, if they can't get product to extend their networks, so they can't get products to complete their projects, they're going to move to other vendors. And that's just horrible. That's the worst. So if we have hundreds of millions of dollars in cash, we have -- are almost obligated, we've got to spend that to solve the inventory problem. And I think we could have done it maybe more efficiently. But I think it's a big step in the right direction. So I look at the increased inventory and our establishment of U.S. and Europe logistic centers as a key accomplishment and something that should be looked upon positively, in contrast to how the company was previously run.

Our next question comes from Erik Suppiger of JMP.

Can you talk about which individual products did well of the new products, how the AmpliFi did and which specific ones did well in the quarter?

And then secondly -- well, let me get that and then I'll follow up.

Yes, I like to think of measuring the success of the company by platforms. So as you know, airMAX, we trade our own proprietary protocol, so it's sticky. And once our operators build out an airMAX, they're encouraged to continue to build up their networks using airMAX-compatible devices. So I would say, for this quarter, airMAX AC Gen2 looks promising. It's growing very fast off a smaller base. We're trying to ramp that up quickly. And as we ramp that up, you're going to see growth in this operator segment.

Looking at UniFi, of course UniFi HD is doing exceptionally well. We're ramping that up. And that's a key data point because it proves our strategy with UniFi, which was to establish a high-volume base of brand awareness and later leverage more margin and profitability through higher ASP products. And UAP HD was the first of that higher ASP strategy at $349 MSRP. And it looks like we could probably go higher with higher end products. AmpliFi, we reduced the AmpliFi sku, so we really just have AmpliFi HD. And of course we have the MeshPoint HD we sell standalone. Both of those are doing well and growing.

Okay. Then second, on the channel inventory buildup, where are you on that front? Do you feel like you've gotten it where you need it?

I think it's a step in the right direction. The inventory centers, in shortening the lead times for our products is key. I think we could do a better job of improving our material management. As we switch to build more inventory, I want our guys to have some margin benefit in doing that. And I think that hasn't been my primary focus. My primary focus has been strictly R&D, how do we put places -- seeds in place that can scale from -- to get us to the billion dollars next fiscal year. And then beyond that, right? We want to one day be a multibillion revenue company. And I think we've done a fantastic job with the R&D and the hiring and the re-org within the company to put us in a position to do that.

Now the secondary priority which I'm just starting on now, of course, is margins. But I have confidence. We should have -- margins definitely should go up as you see all these new products get out and mature in their life cycles.

Can you give us some context around what impact the channel inventory efforts have had on gross margin versus the impact that the new product ramp has had on new products?

Well, I would put it this way. You're building more inventory and you're purchasing more materials. You should absolutely get margin benefit from your economies of scale. We haven't captured that benefit nearly well enough. We've got a lot of work to do. And in terms of new products it's -- like I said before, we purposely will leave money on the table if we think it could spur evangelism. We're always looking at ways to build long-term brand awareness, evangelism, defensibility in markets.

Similarly, if you look at Amazon, one of the key drivers of Amazon growth is they had very small margin and they gave away free shipping. And in the short term, they didn't make any money. But now that they have the whole Monopoly board, they're starting to monetize and extract value. It's a very similar strategy. It's long-term profitability point versus a short-term mentality, and everything we do is long term, with a long-term mentality.

Our next question comes from Woo Jin Ho of Bloomberg.

I have a couple. Can you just talk about how large the AmpliFi business is today? And given your strategy with AmpliFi going forward and possibly -- potentially a smart home effort from that business, how large do you think that business can be for the full year?

Okay, so we haven't talked -- spoken about this before, but I expect AmpliFi to ramp like UniFi. So let's see. If I remember correctly, UniFi was something like 20 its first year and then went to 50 and then went to something like 100. And within close to 5, 6 years it's been to a $0.5 [billion] business. I expect the same from AmpliFi.

Okay. And then my follow-up is, with regards to your inventory, what is the construct of the inventory right now? Is it primarily -- I understand it's a new approach. Is it primarily the UniFi product that's in there? Or how should we think about what's in that inventory today?

So the way we want to build inventory is we look at the highest-moving-volume products. And we should build or stock inventory in relation to the product movement. So a very fast-moving product like, let's say, our LiteBeam in the airMAX world, we want to make sure we have that in stock, because if we don't have that in stock, then operators might move to another vendor or their deployments might check out. So we're very aggressive on high-moving products that are critical to, I'd say, customer retainment.

And then if we have [MPI] products like we're launching, like UniFi HD, we're very cautious and we want to protect quality. So we're not going to build tons out of the gate. We're going to take our time and build a slower ramp, and then once we're confident that the quality is really good, then we're going to stock -- start stocking inventory. So it really depends product per product, but definitely inventory right now is more heavily skewed towards our proven airMAX and UniFi products.

Our next question comes from Matt Robison of Wunderlich.

Seems like there's been quite a few new products in the beta store. And I noticed in your comments that you're expecting a pretty -- another pretty big uptick in R&D related to NRE and milestones. Should we expect to see even a broader wave of new products coming out? And maybe if you can talk about disciplines you've put in place to ensure execution on so many fronts? I know there's been quite a learning curve over the last 5 years in that regard, and it seems like you are operating in a lot of spaces right now. How are you managing the execution?

No, I thought about this. I'd love to say what we're doing now to scale but I don't want to give secrets away, because this is something I struggled with for the past at least 2 years, is finding out the right organization to scale within our business model. And I think we found it. But I don't want to give away the recipe.

But to your other questions about R&D, I'll give you

(technical difficulty)

our total spend as a percentage of revenue. And that couldn't be further from the truth. Our R&D is, I believe it's the most efficient in the world. And one of the reasons it is so efficient

(technical difficulty)

holding everybody accountable, making sure everybody contributes. So we don't have a lot of inefficiencies. At the same time, we have a very good creative process that

(technical difficulty)

Pardon me, Mr. Robison, your line is breaking up.

[Technical Difficulty]

Thanks. I'll just -- just put me on mute. I'll listen to the rest of the call.

Our next question comes from the line of Woo Jin of Bloomberg.

Robert, just a follow-up. With regards to your UniFi business, I believe you mentioned on the last call, with the HD product, you were trying to go upmarket to go after the low-end enterprise, just above your SMB business. Is that something that's feasible with your current sales structure? And if so, what gives you confidence that you can do this with your current sales force and your distribution channel versus what is typically a -- I guess a higher touch sales methodology versus your competitors?

Yes, so if you look at Ubiquiti through the lens of a traditional enterprise sales model, you're not going to understand how we succeed. So let me take you through the UniFi story. So first, we targeted this industry that had very high price, $1,000 Aruba, $1,000 Cisco against APs. And the cost of goods on the hardware wasn't much different than consumer. Maybe consumer APs at the time cost $60. And the same hardware from Aruba and Cisco may cost $1,000.

And you ask yourself, well, how was Cisco and Aruba able to command $1,000 an AP? And it's because of a few reasons. Well, first, they did have some IT. The software on these APs did work a little better. They did have some credible management software. A lot of the reason, though, of why they succeeded is because that's just how things are done. You have sales people, you have reps, you have people inside companies making decisions. And there's a mentality where, oh, you have to go with an enterprise vendor, you have to pay 20x the cost because that's what everybody does and that's how it's done.

And I saw an opportunity to disrupt just the whole sales cycle of this industry. And yes, we started with UniFi. We priced it at (inaudible) an AP. It grew very fast. And we never got to the more professional or higher end companies. We got to people that were using consumer Wi-Fi APs in these managed Wi-Fi applications. And if you went to 2-, 3-, 4-star hotels, you would see 1,000 or 100 SSIDs. And UniFi kind of appealed to those customers because it was a very cost-affordable system. They could get it up and running and it solved their problems. And so we did very well in this kind of untapped market segment.

And over time, we've evolved a feature set. We've improved, we've improved, we've improved. And the volumes have just been significant. I think, as of now, we should be higher volume than Cisco Meraki, Cisco's 3 platforms -- Meraki, Airespace and Aironet -- combined. That tells you an idea of the volume.

Now in the past 2 years, we've really turned the corner with UniFi. It's become more than just a Wi-Fi system. We've added switches, we've added gateways. Our controller is incredible. The latest AP performance we're showing outperforms anyone in the industry, including the vendors I just mentioned. And even -- and we still don't have a sales and marketing team.

But if you look now, there's interesting things that are going on. A lot of the traditional system integrators who use Aruba and Cisco, they were turned off by UniFi. They didn't acknowledge it as a true enterprise solution. But if you look over the past year, the tide is completely turning. If you go to third-party communities like Spiceworks, the same operators, the same integrators that are using these high-end enterprise solutions are also now considering UniFi and they're jumping on board to UniFi.

So this is great for us. Because from a brand awareness perspective, I believe UniFi has more awareness than traditional enterprise companies. And our ASPs are probably only 10%, probably 1/10. And we don't have any licensing or any subscription charge. So to me UniFi represents just an ocean of possibility for us. We're still in the phases of driving volume and driving brand awareness. Our website I think is 6,000th or 7,000th in the world by traffic, which is incredible since it's not consumer facing. And so we're getting to the point where everybody who's using Cisco's and Aruba's Wi-Fi application knows Ubiquiti, that we're on the map. So if we can continue to execute our R&D, which I have confidence we will, not only will we expand ASPs in the Wi-Fi segment in adjacent areas, like switching and routing, but it opens up everything.

If you look at Cisco, 5% of Cisco's business is wireless but 30% of their business is switching. And -- but wireless is the key to leveraging their other markets. If you look at all their catalyst switching materials front and center, they advertise powering Wave 2 wireless technology.

So I think, to answer your question, UniFi and Wi-Fi is just the beginning of UniFi's platform potential. And it's more than just about technology. It's about changing how all of this IT enterprise sales cycle works. We're basically cutting out the middleman.

But a follow-up -- follow-on to that, can UniFi HD find success to the low-end enterprise, and let's just say the mid-tier enterprise, without professional Spiceworks...

Why are you asking me? Go to Spiceworks. Do some homework. It's already happening.

(Operator Instructions) At this time, I'm showing there's no further questions. Thank you, ladies and gentlemen, for participating in today's conference call. This does conclude the question-and-answer session, and you may all disconnect. Everybody, have a wonderful day.