優比快 (UI) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ubiquiti Networks Fiscal Q4 2017 Question-and-Answer Conference Call. As a reminder, this conference is being recorded.

Now I would like to turn the call over to Laura Kiernan.

Good morning, and thank you, everyone, for joining us today. I'm here with Robert Pera, our Founder, CEO and Chairman of the Board at Ubiquiti Networks.

Before we get started, I'd like to review the safe harbor statement. Some of the statements we will make during this call constitute forward-looking statements, including perspectives on future financial results, products, market conditions and competition, et cetera. 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 financial Form 10-K with the SEC and other SEC filings, which are available on the SEC's website at sec.gov. Forward-looking statements are made as of today, August 3, and we assume no obligation to update them. We hope you have reviewed management's prepared remarks, which were posted as a transcript on the Events and Presentations and Financial section of our website at ir.ubnt.com. This call will be Q&A only. (Operator Instructions)

Operator, we are now ready to take your questions.

(Operator Instructions) Our first question comes from Tavis McCourt with Raymond James.

So 2 for you, Robert. I guess, as it relates to the full year guidance for fiscal '18, I presume that you're confident in the gross margins increasing back to at least the midpoint of the range. That seems to be what you would require to get to that earnings level, but I want to make sure that's kind of the assumption you're using. And then, secondly, on the recently announced fiber products, obviously, really interesting price points on products. I guess, help us understand the level of demand in the WISP end market for fiber connectivity because it doesn't -- it's not intuitive that there would be a substantial amount of Fiber To The Home deployments by WISP. So maybe some commentary around kind of early demand for those products and what you expect?

Okay, thanks. I'm going to take a step back with regards to your yearly guidance question. So I know we probably are getting a lot of attention right now with some potential long-term investors. I want to give them, like, my view of where the company stands and my vision for the future. So first of all, I believe up to this point in time, Ubiquiti, as a company, has been misunderstood by a lot of people. I feel we have a group of core competencies that gives us a great competitive advantage in the market. Specifically, our ability to target markets, our vision and being in markets a lot of times before others; of course, our business model, which revolves around touchless evangelism and pull; I would say how we allocate our resources and get great investment on our resource allocation; and finally, which we don't get enough credit for, is our design capabilities. And I believe, we're one of the few companies right now in the hardware space that could execute on beautiful technology, inside and out. For everywhere from industrial design to hardware design, mechanicals, mobile app, software, back-end software, front end -- beautiful front-end user interfaces and great user experiences. So together, those core competencies have given us a really unique, I think, competitive advantage in the market and has allowed us to weather a lot of storms and a lot of adversity. And it has been frustrating to see a lot of critics poke at our core competencies as something that's flawed. That's something that's short lived. And I believe, it's the strength of the company and our ability moving forward to grow and to become more profitable is a matter of improving our product development efficiency, and that will lead to more revenue growth, hopefully accelerated revenue growth from here on forward; and also, our operational efficiency, which is controlling our supply chain and our production, which we have a lot of room for improvement. So in a long-winded way of answering your question, yes, I do feel there's huge opportunities for margin expansion, as I specifically, and the company, focuses on operational efficiency. And I'm in Asia right now, and I'm going to be here a lot more. I feel our product development efficiency has made huge leaps in the past 2 years and it will continue to get better. And now, we're just getting started on operational efficiency. So whereas a lot of critics say our margins have peaked, I believe we have huge room to further expand margins. Okay, so your next point about GPON and fiber. I originally wanted to do GPON probably in 2012, 5 years ago. We started it. I had kind of some intuition it would be a big market for us, a good market for us, and we had a focus group from U.S. WISP that geared us towards active Ethernet. And so we switched from GPON to active Ethernet and it just kind of fizzled out. And I don't think we were really serious about it. We had one product and we called it FiberStation. That didn't really have much traction. And a couple of years ago, we had another focus group. This time from WISP in Brazil because we noted that, out of all our markets, Brazil seemed to be the one that just wasn't -- didn't have the same excitement we have seen around entrepreneurial WISP in other areas of the world, so we wanted to learn more. And in Brazil, it's interesting because the cost of digging fiber is pretty much irrelevant for these WISPs that are starting to get into fiber. They essentially hang the fiber cables and run them across the power lines. And so they have free runs to deliver GPON to end customers. And now that the unlicensed wireless LANs are becoming more and more crowded and the Internet applications, streaming videos specifically, demands faster and faster bandwidth, the WISPs are turning more towards from wireless to GPON and fiber. Now traditionally, fiber and these GPON networks, have been owned on what they call the optical line terminal, the access point side, by big companies like Huawei or ZTE or some smaller niche players in the U.S., like Calix and the ONUs, which are the [cheap] CPEs have been owned by, again, companies like ZTE or FiberHome in China. And they're very low-cost solutions, not so much unlike the WISP market in its infancy. And the OLTs tend to be very expensive, very complicated to set up. The ONUs, of course, are cheap, but the solution is -- as a whole, is intimidating, I would say, for new entrepreneurial fiber ISPs. So our strategy was, well let's pretty much take exactly what we did in the unlicensed wireless space where we created a plug-and-play, high-quality solution with price relevance. And we -- through that solution, we built in this community that evangelized and opened up a whole new market of new ISPs. And over time, we improved the performance, we dropped the pricing and we created this business, which is close to $0.5 million of our business now. And I think fiber has huge runway. It might take us a little while to figure it out. But I would say, in its first year and out of the gate, it's much more mature than say, our airMAX solution was at that time. We've already developed what we call Ubiquiti Network Management System, that gives you centralized control of the whole fiber network and allows you to set up the OLT, ONU in a number of minutes. And it's very intuitive. It adds great user experience. The ONUs themselves, we did something to differentiate the industrial design, which is tough to do with a commodity ONU. But it's got an LED screen that could tell you the SNR of the optical signal as well as give you live throughput of the ISPs feeds. And those are our first 2 products. Of course, eventually, we want to lower the price point down to something sub-$100, somebody could start setting up a GPON network with. And once we get there, I think we'll further democratize -- let's say, democratize, a GPON ISP industry, so that's the vision.

Well, just a quick follow-up on that, Robert. You mentioned specifically, Brazil. I think that these products have been in your Beta Store for a bit now. Are you seeing demand across all your geographies, or is it specific to South America?

At this time, we're really focused on the U.S., and we have several Beta customers and early adopters in the U.S. and -- to prove out the technology, we haven't started to get really cost disruptive in our designs yet, but the second generation will be. So we want, first, prove out the technology, make sure its performance is good before we get disruptive and roll it out globally. That's the plan.

Our next question comes from Woo Jin Ho with Bloomberg.

Just a question on the full year guidance. Can you just give us the mechanics on what the drivers of growth are? How much of it is from new products versus existing products? And then I have another question on EPS after you're done.

Sure. So we split the business now in 3 segments. We have -- if you go to our website, we have what we call Operator tab. And Operator consists of, of course, our airMAX technology, which has been the bread-and-butter. AirMAX is undergoing a shift. That should have happened before, but I guess, better late than never. We added airMAX ac, that's finally been working great from accounts in the field. We have backwards compatibility. We added GPS synchronization as well as a new family of what we call Generation 2 hardware, including what -- a Prismstation AP we call it, which I think blows away anything we've ever delivered in the airMAX world, in terms of capacity, noise resiliency and throughput performance. So I think you will see revenue increase, purely by a replacement cycle from airMAX ac, as well as new deployments with airMAX ac. So I would say that's one area of growth. The second area of growth is what we just talked about with GPON. And I would say the third area of growth, which is -- hopefully ships before the end of the year, we announced before as what we call LTU or long-term Ubiquiti wireless. And that is our own standard. It's completely created from scratch for the fixed outdoor unlicensed market. So we believe, it will deal with things like unlicensed band noise, point to multipoint scalability, maintaining low latency, far better than you can do with a WiFi chipset. So that's Beta. Let me continue. So that's all Beta segment. Then you have UniFi. And UniFi, I believe, is poised for much larger growth as it's being accepted now as not just a low-cost solution, I think a lot of people see it as the best solution in the industry. And best in terms of user experience, best in terms of hardware, best in terms of wireless performance. We're getting into high-density deployments. People are happy with the results. We're introducing higher-end hardware, the access points, 10-gig switching. We'll have Security Gateways coming in. We have a security team that's focused on next-generation firewall and universal threat management, intrusion prevention system and intrusion detection features, more advanced deep packet inspection. And so I think you'll see UniFi go upstream and have an opportunity for higher ASP success. In addition, we're rounding out the UniFi line. UniFi Video, when I talked about our product development efficiency increasing or -- actually improving a lot last couple of years. Video is a huge opportunity for us. Our solution isn't that good today. It still sells hundreds of thousands of cameras a year. Once it is fixed, the underlying issues are fixed, specifically our network video recording hardware, our NVR software and our camera hardware, which I believe we're in the process of coming out with some really good stuff. I think you'll see camera sales go from hundreds of thousands a year to millions a year. We also have more complementary technologies to add to UniFi, and I think what you'll see in our vision is, you go into a building one day and you'll see UniFi running everything. Everything from the automation, to the lighting, to the WiFi piece, to the door security systems, to the video security systems and more. And we have teams working on all of that stuff. Okay. Finally, we're talking about the third segment, Ubiquiti Labs. AmpliFi, it's actually -- did not meet my expectation at launch. We didn't execute well. That being said, it's growing, and it's growing in the absence of marketing spend, you see from competitive companies. And I think that validates when I say we have great design. And it just hasn't been appreciated yet. And I think AmpliFi picking up momentum reflects on our design. And people appreciate an inside-out total user experience design of AmpliFi. And we're going to add more products, not just to AmpliFi, but to Ubiquiti Labs and I think, in the next several months, hopefully we'll surprise a lot of people with some of these designs we're coming out with.

Okay. Robert, just to follow-on on the revenue side. Is it fair to say that some of your growth is dependent on unannounced products?

The way I look at it is, the unannounced products would be icing on the cake. But with what we have now between operators in segment -- in our UniFi segment, I intend that we'll be able to hit those estimates.

Okay. And then, in terms of your EPS targets for 2018, you guys have done a good job in taking down share count through buybacks since 2015. Are buybacks accounted for as part of your EPS target for the year? And if so, given how much of your cash is offshore, how are you going to fund those buybacks?

I'm always looking for ways to put our capital to work. And if I feel the stock is significantly undervalued, we're going to continue to buy it back. And it is true, we're lending money onshore to buy back, but if we believe in the long-term story of the company which we do, I don't think cash is going to be a problem over long term, as the company is going to generate a lot of cash.

Our next question comes from Tom Long with BMO Capital.

It's Tim. Two of them if I could. First, on the service provider business. You mentioned the advances -- the technology advances you've done with airMAX. But at the same time, with fiber you're seeing some of your customers just want that as an alternative, maybe for some of the higher bandwidth type of applications. So could you talk a little bit about what you think the longer-term impact will be on the airMAX business from the potential for a broader WISP rollout of fiber, or you think it's fully complementary? And then, on the enterprise side, if you could just talk a little bit about, it sounds like you're getting more dense deployments. So I'm just curious if maybe deal sizes are getting bigger or you're getting into larger accounts, win rate. Anything you can talk about on how that business is scaling better with enterprise customers.

Sure. So I think fiber is going to be largely complementary. There are areas and terrain where wireless works really well, and it's not practical to roll out fiber. There's some areas without infrastructure, where apartments or housing or space, really close together, and fiber makes great sense. So I like to think of fiber is expanding our overall TAM of our operator business. Now to your UniFi question; I think this has been a function purely of our product quality. And before a couple of years ago, our UniFi fees were decent in handling smaller capacity loads, but quite frankly they weren't the best in the industry. If you compared them to Aruba or Meraki, Cisco, Ruckus, Aerohive, I would say 2 years ago, we were worst. And the team has done a fantastic job and they've done such a great job that if you looked at the performance of our latest hardware, it will beat those guys in a lot of tests. And especially, tests involving high-density video streaming, lower latency, and it's been reconfirmed in the field by system integrators that also use those higher-end brands. So I think UniFi is in an interesting point in its story right now. It has been seen as the cheap brand that's not really enterprise. Now it's seen as the low-cost leader and the performance leader. And I think we have to just really step on the pedal and gain some distance from these guys and make it known that we're the standard. And that's the plan over the next year.

Our next question comes from Vijay Bhagavath with Deutsche Bank.

This is Brian Yun on for Vijay. I actually have 2. So first, could you just give us a refresher on how long the typical product cycle refresh lasts in both your enterprise and service provider solutions? And second, can you maybe give us an update on how the AmpliFi rollout is trending? I know it's a small part of the business now, but any update on your retail distribution strategy would be helpful.

So I think refresh cycle is dependent on the complexity of the product. If you take something like UniFi, where guys are changing from 11n AP to an 11ac AP. In the case of UniFi, each deployment kind of happens in a vacuum. The 11ac access points were lower cost than the 11n access points. And we did a great job of qualifying the performance in the overall product quality prior to release. So you saw the UniFi AC refresh cycle happen very fast. In the case of airMAX, we're dealing with a different animal. There's a lot more variables in outdoor fixed wireless. We already had 2 previous generations of airMAX. These deployments don't happen in a vacuum. Usually, people have big multipoint network, and they need to piecemeal upgrades. And we took a lot of time to get things right and make sure that the airMAX AC technology worked in a variety of applications and backward compatibility considerations. And it's just been a long road. What's positive right now, is it looks like it's finally been concluded and the upgrade cycle is starting.

Great. And just an update on the AmpliFi product rollout and the retail side of things?

So AmpliFi was a good experience for us. We botched the launch. We had great momentum, I believe, in May and June of 2016. We had designed for mass production issues and production QA issues and it cost us about 6 months. And by that time, you had a lot of players come in and -- including Google WiFi, and I think we lost a big brand awareness opportunity to be the first there. Eero was there, but I think we had some advantages especially on the design side to Eero. Now, the positives about AmpliFi; we do have good reporting tools. So generally, it's not a 100% accurate. Generally, we can see new install turnons by new customers that plug in the device at home and turn it on for the first time. And it's trending up, which is positive because it's trending up in spite of us essentially turning off marketing spend. And whereas competitors constantly have to pay maybe for shelf space promotions and advertising and big sales teams and constantly push, what we did with AmpliFi is we were able to essentially retain our standard Ubiquiti business operating model and come up with a product that was high priced, but we focused on what we do best, which is design a user experience. And organically it seems to be picking up steam. And I think that's great for us because we got a valuable learning -- a lesson out of it that's going to help us with future products across the whole company. And I think it's a very nice setup now when we add -- when we introduce add-on products, I believe, they have a chance to sell quite well.

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.