Ubiquiti Inc.
Q3 2017 Earnings Call Transcript

Published: 5 May 2017

[Operator:]

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.

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

[Operator:]

Thank you. Our first question comes from Matt Robison of Wunderlich. Your line is open.

[Matthew S. Robison:]

Hey. Thanks for the question. Robert, a couple of questions, most of these financial, I 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 had a little over 14 weeks of inventory, and I understand that that's a competitive weapon particularly for the enterprise side. And (02

[Robert J. Pera:]

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 them are most popular products especially in Operator or UniFi markets. They have five-, six-, seven-year life cycles. And traditionally what we've 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 40%s, and then over time it went up to the high 40%s to almost 50%. And that was largely due to products like the original airMAX series, the 11n UniFi series, which over time we've improved the margin. And I think right now we're at an inflection point of growth 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 CPUs (03

[Matthew S. Robison:]

Okay. Thanks. I'll follow up with my third question but we have to queue again.

[Operator:]

Thank you. Our next question comes from Erik Suppiger of JPM (sic) [JMP]. Your line is open.

[Erik L. Suppiger:]

Yeah. Thanks. 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 I'll follow up.

[Unknown Speaker:]

Yeah. I like to think of measuring the success of a company via platforms. So, as you know, airMAX, we created our own proprietary protocol so it's sticky. And once our operators build out airMAX, they are encouraged to continue to build out 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, and then we'll try to ramp that up quickly. And as you ramp that up, you then 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. It's reporting on MSRP. And it looks like we could probably go higher with higher-end products. AmpliFi, we reduced the AmpliFi SKUs (10

[Erik L. Suppiger:]

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?

[Robert J. Pera:]

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 seeds in place that can scale from – get us to $1 billion in the 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 on the R&D and the hiring and the reorg 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 the margins. So that adds confidence. We should have – margins definitely should go up as you see all these new products get out and mature in their life cycles.

[Erik L. Suppiger:]

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

[Robert J. Pera:]

Well, I will 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 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 the 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 viewpoint versus a short-term mentality. And everything we do is long term, with a long-term mentality.

[Erik L. Suppiger:]

Very good. Thank you.

[Operator:]

Thank you. Our next question comes from Wu Jian Hao (13

[Unknown Speaker:]

Hey, thank you for taking my question. 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?

[Robert J. Pera:]

Okay. So we haven't 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 million its first year and then went to $50 million, and then went to something like $100 million, and within close to five, six years it's been a $0.5 billion business. I expect the same from AmpliFi.

[Unknown Speaker:]

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 newer product. Is it primarily the UniFi product that's in there or how should we think about what's in that inventory today?

[Robert J. Pera:]

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 shut down. So we're very aggressive on high-moving products that are critical to, I'd say, customer retainment. And then if we have MTI 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 start stocking inventory. So it really depends product per product, but definitely our inventory right now is more heavily skewed towards our proven airMAX and UniFi products.

[Unknown Speaker:]

Okay. I'll cede the floor.

[Operator:]

Thank you. Our next question comes from Matt Robison of Wunderlich. Your line is open.

[Matthew S. Robison:]

Yeah, thanks for the taking the second question. It seems like there's been quite a few new products in the base store. And I noticed in your comments that you're expecting 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 some disciplines you've put in place to ensure that execution on so many fronts. I know that's been quite a learning curve over the last five years in that regard and it seems like you are operating in a lot of spaces right now. How are we managing the execution?

[Robert J. Pera:]

Yeah. I thought about this. I'd love to share what we're doing now to scale, but I don't want to give secrets away because this is something I struggled with over the past at least two 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 question about R&D, I'll give you (17

[Operator:]

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

[Matthew S. Robison:]

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

[Operator:]

Thank you. Our next question comes from Wu Jian (18

[Unknown Speaker:]

Great. Thank you. Robert, just to follow up, with regards to your UniFi business, I believe you mentioned on the last call that with the HD product, you were trying to go up market 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, I guess, a higher-touch sales methodology versus your competitors?

[Robert J. Pera:]

Yeah. 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 with the SAP, and the cost of goods in the hardware wasn't much different than consumer. Maybe consumer APs at the time cost $50, and the same hardware from Aruba and Cisco they cost $1,000. And you ask yourself, well, how were Cisco and Aruba able to command a $1,000 an AP? And it's because of a few reasons. Well, firstly, it 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 why they succeeded is because that's just how things are done. You have salespeople, you have reps, you have people inside companies making decisions, and there is a mentality where, oh, you have to go with an enterprise vendor, you have to pay 20 times 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 $20 (20

[Unknown Speaker:]

Okay. And then thank you...

[Robert J. Pera:]

We're basically cutting out the – we're cutting out the (24

[Unknown Speaker:]

Right. And thank you for that detailed answer. But a 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 sales force?

[Robert J. Pera:]

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

[Unknown Speaker:]

Okay. Okay got it. Okay. Thanks.

[Operator:]

Thank you. Okay. At this time, I'm showing 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. Thank you.