Ubiquiti - Earnings Call - Q1 2016
November 5, 2015
Transcript
Operator (participant)
I would now like to introduce your host for today's presentation, Ms. Anne Fazioli. Ma'am, please begin.
Anne Fazioli (VP of Investor Relations)
Thank you, Nicole, and 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. Parra, 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'll 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 10Q with the SEC and our other SEC filings, which are available on the SEC's website at www.sec.gov. Forward-looking statements are made as of today, November 5, 2015, and we assume no obligation to update them.
We hope you've reviewed 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 will be a Q&A-only call. Please limit yourself to two questions, and time permitting, we'll allow for follow-up questions. Nicole, we are now ready for your questions.
Operator (participant)
At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of Matt Robinson from Wunderlich. Your line is open.
Matt Robinson (Analyst)
Hey, thanks for taking the question. Can you give us a little bit of background on the gross margin performance, and especially the new guidance for margin and the small amount of capitalization you had, and whether or not you include the solar energy initiative in your guidance, or if we might be thinking about that as something that might change things as it got to become a meaningful amount of revenue?
Robert J. Pera (Founder, CEO, and Chairman of the Board)
Gross margins, we improved it just with better supply chain and material management, better efficiency. Moving forward, I don't know if they will be that high, but they should definitely be improved from past history.sunMAX, it hasn't been material yet. Next, probably, this quarter, end of this month or early next month, we'll have initial product in the channel, but I don't expect it to be material to revenue next quarter.
Matt Robinson (Analyst)
Yeah, I guess, Robert, the context was the guidance range went from 44%-47% from a prior range of 43%-45%. And so it was just I get the fact that you've already shown that you can hit the new guidance range without sunMAX. When you start, if you start producing that in volume, do you think you'll still be in this range, or are we just going to wait and see and gauge that as it comes?
Robert J. Pera (Founder, CEO, and Chairman of the Board)
Yeah, let's wait and see.
Matt Robinson (Analyst)
Okay.
Operator (participant)
Your next question comes from the line of James Fossett from Morgan Stanley. Your line is open.
Meta Marshall (Managing Director)
This is Meta Marshall for James Fossett. Quick question on kind of the continued weakness in South America. Now it's been kind of down year over year for about four quarters with kind of the explanation of macro and currency headwinds. What kind of gets demand moving back there? Is it just currency, or is it something else? If you could just kind of speak to initial reactions you guys have heard in the channel to the new AirMax and UniFi refreshes, that would be helpful. Thanks.
Robert J. Pera (Founder, CEO, and Chairman of the Board)
South America, from what we've heard, is there's currency exchange issues which are compounded in areas where the VAT is really high in countries like Brazil. That makes it more difficult for operators to come up with capital to expand. At the same time, I think we just need to have a better plan of introducing new services. You saw us, we're entering the market with solar, but we have a couple more coming up next year. As for UniFi AC, I think is your question, what you're referencing. We have not started seeing significant volume yet. Maybe there's several thousand in the channel, but we're pretty aggressively going to ramp up production. Initial reports have been very good, and we expect it to pick up a lot of momentum over the next few quarters.
Meta Marshall (Managing Director)
Great. Just one last question on the search for a new board member or a new CFO. I know you commented you're searching, but is there kind of a timeline you guys are hoping to get to, or just an update on that would be helpful?
Robert J. Pera (Founder, CEO, and Chairman of the Board)
I think we've had more turnover than we'd like, and I think that's just because we just had bad fits in those positions. We are taking our time. We want to fill those positions as soon as we can, but we want to make sure we have the right fit so it's a long-term pairing.
Meta Marshall (Managing Director)
Thanks.
Operator (participant)
Your next question comes from the line of Joe del Gaudio from Bernstein. Your line is open.
Joe del Gaudio (Senior Equity Analyst)
Hi, Robert. Just a question on ProMix. What has helped your margins this quarter? Was there a specific shift in terms of the enterprise portfolio? Can you also comment on your UniFi Switch, if you have any traction yet?
Robert J. Pera (Founder, CEO, and Chairman of the Board)
Margin improvements, probably a combination. We've become more efficient on the material side. As you've seen, we're introducing higher-end or higher-priced SKUs with improved margin, especially airFibers have been picking up. We have things like UniFi Switches, higher-priced products you mentioned. UniFi Switches, the volume is decent, but I think what's holding it back is we just haven't developed a lot of the advanced Layer 3 switching features that a lot of the competitors have. We're working on that. Overall, there's no question UniFi, in general, has been a huge disappointment. We didn't execute overall on the platform. Last quarter, let's see, $48 million we got from UniFi. If we did our job the past couple of years, it should be double that at least.
We have some new leadership on that platform, and I think the last several months have been probably better than the past couple of years in terms of our R&D productivity and execution. I expect UniFi, you'll see better growth over this next year.
Joe del Gaudio (Senior Equity Analyst)
Okay, thanks.
Operator (participant)
Again, if you have a question, press star one on your telephone keypad. Your next question comes from the line of Jeff from Wells Fargo. Your line is open.
Hey, guys. It's Mike calling on for Jeff. Just following up on the UniFi question, it sounds like you're still getting the new AC lineup out the door. Was the strength primarily driven by the older 11N portfolio?
Robert J. Pera (Founder, CEO, and Chairman of the Board)
No, like I said two questions ago, we haven't shipped much UniFi at all. Let's see if I could find some numbers here. On UniFi CQ this quarter, less than 10,000 units shipped. So it's not even material.
Okay. So.
Much less than $1 million.
The strength is with the older access points?
Yes.
Okay.
Everything except AC.
All right, great. The service provider business was a little bit soft again this quarter. Last call, you mentioned that kind of two factors might benefit this portfolio going forward. You talked about bringing to market a lower-cost CPE and improving the interoperability between 8 AC-1 AC, AirMax AC rather, and the older portfolio, the interoperability between the two. Can you maybe just provide an update on those two factors and if we should start to see that benefiting service provider sales moving forward?
Okay. Service provider AirMax business has always surprised me. Every time I think it's completely saturated, it keeps going up steps. Now we're at roughly, what, $400 million plus a year run rate, and we ship several million radios a year. It could be saturated, but I've been wrong before. Even if it's saturated, I think there's still growth from essentially replacement, network replacement, because AirMax AC is three times faster. airFiber is at least that, and in some cases, much even faster. Up to this point, with AirMax AC, we didn't have backwards compatibility. Operators would have to deploy completely new networks, which is not where replacement revenue comes from, right? Replacement revenue comes from upgrading their existing customers.
In order to do that, they can't replace all their customers at once because a lot of these networks, they have hundreds of thousands of subscribers. What we referred to in our conference last month was next event was this idea of backwards compatibility where they could essentially replace the base station with an AirMax AC base station, and that would instantly boost up their network. For further performance enhancement, they could replace their stations one at a time. That's the feature we've been working on for quite a while. It's in beta right now. We've resolved a lot of issues. We're down to what we believe are the final issues. We hope an official release of AirMax AC with backwards compatibility will be out by the end of the year.
I believe that's where you'll see some growth in the service provider business. At the same time, we've been aggressive in R&D in the last few years to come up with new services. Solar is one you saw, and we have a couple more coming up. I think that's the key for us. We have a great collection of entrepreneurial operators that are deploying internet. As you can see with companies like, say, Vivint, they sell all kinds of services, right? They're solar, alarm services. They've recently tried internet. There's no reason why our operators can't upsell new services to their existing customers. That's what we're trying to do, build technology to support them with more service offerings.
Okay, thanks.
Operator (participant)
Your next question comes from the line of Ryan Hutchinson from Guggenheim. Your line is open.
Nate Cunningham (Analyst)
Hi, Robert. This is Nate Cunningham on for Ryan. My question's on sunMAX. Can you give us some detail around the resources you plan on providing for WISPs to get the requisite state licensing for solar installation, and then what kind of incremental costs that'll incur for the business?
Robert J. Pera (Founder, CEO, and Chairman of the Board)
We have a simulator, we call it. It's at sunlink.ubnt.com, and you could enter the sign in, and you have an account as an operator. You can enter in the address. It will simulate. You could deploy a sunMAX power system, and it will output your complete bill of materials. In addition, we have an application process with a team of professional engineers that will pretty much work with operators and their local government or authorities to get the application processed and the installation started. It is really a turnkey solution for someone without any experience to become essentially a solar provider. In addition, we have a community with a couple hundred thousand members, and a lot of them are active in the sunMAX forum. We have a training session online, all kinds of videos and tutorials explaining solar power, the application process, things like rebates, and installations.
Nate Cunningham (Analyst)
You think all the infrastructure is essentially in place already?
Robert J. Pera (Founder, CEO, and Chairman of the Board)
For the U.S., it looks good. We're still learning. Outside the U.S., there's going to be a lot more work to do.
Nate Cunningham (Analyst)
Okay, thanks.
Operator (participant)
Ladies and gentlemen, thank you for participating in today's conference. This concludes the Q&A section. You may now disconnect. Everyone have a wonderful.