Ubiquiti - Earnings Call - Q2 2018

Transcript

Operator (participant)

Please note, this event is being recorded. I would now like to turn the conference over to Ms. Laura Kiernan. Please go ahead, ma'am.

Laura Kiernan (SVP of Investor Relations)

Thank you, Jake, and thank you, everyone, for joining us today. I'm here with Robert Pera, 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 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 8, 2018, and we assume no obligation to update them.

We hope you have reviewed management's prepared remarks, which are posted on the Events and Presentations and Financial Information sections of our website, irubnt.com. This call will be a Q&A-only call. Please limit yourself to one question each. Jake, we are now ready for your questions.

Operator (participant)

We will begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we'll pause momentarily to assemble our roster. We'll hear first from Woo Jin Ho with Bloomberg. Go ahead, please.

Woo Jin Ho (Senior Analyst)

Making my questions. Robert, can you just talk about the second half guidance and the second half outlook? I'm just trying to get a better understanding of what the sales dynamics may be to bring your full-year sales towards the lower end of the range. How do I think about it from the enterprise side, and how do I think about it from the service provider side? Thanks.

Robert Pera (Founder, CEO, and Chairman of the Board)

Service providers looking strong. We have a number of catalysts that are just at the early stages. If you look at airMAX, we have our airMAX AC Gen2. And by many accounts, it's by and far the best-performing system in the WISP industry now. We have an excellent, what we call, Prism Technology in the base station that greatly mitigates noise, effects of noise in the 5 GHz spectrum. It allows for much higher throughput, much higher capacity. On the client side, we have a number of great solutions. We just released a $49 NanoStation Loco 5AC that we think is going to lead to a lot more upgrades of networks. Where we really shine, I think, right now is our software suite. If you look at our airOS software, the airMAX performance, I think it's as good as it's ever been.

We also have great, what we call, Ubiquiti Network Management System, both consisting of a mobile app and a controller, as well as a free, what we call, UCRM. It is a complete which allows service providers to manage their complete businesses. It is a complete end-to-end software suite. Combined hardware and software, I think airMAX AC is in fantastic shape. I fully expect to see growth return in the airMAX world. At the same time, we have our very ambitious five, six-year in the making project we call LTU, which is our long-term Ubiquiti vision. That is another price-performance disruption for the WISP industry. We are essentially taking what used to be very high-end, maybe WiMAX-type base station equipment that costs thousands or tens of thousands of dollars, or LTE equipment, base station equipment. We are lowering that price to something pretty much jaw-dropping.

There is a number of enhancements in that technology. The spectral efficiency is better than 22 bits per second per hertz. We have support for 4096 QAM modulation. It is like a Rolls-Royce engine at a commoditized price point. Lastly, we have UFiber, which is early. It is starting from a small base, but I think it is going to grow quickly. We have a very low-cost, aggressive ONU customer equipment coming out. Operator, I think, will finally return to some significant growth after a two to three-year lull. On the UniFi side, we are also excited about UniFi. I guess in the past two years, we have really solidified UniFi as a top performer in enterprise Wi-Fi in terms of the Wi-Fi driver. What you will see over the course of the next year is some big improvements, especially in the user experience.

We have a new wave of hardware that will make it much easier for anyone to install a UniFi system. I think that will expand our operator base. We also have deep investments in security, intrusion prevention, intrusion detection systems that typically have cost thousands, tens of thousands of dollars. We're pretty much giving these powerful features free of charge in UniFi security gateways. Lastly, another big catalyst in the UniFi world is video. We've overhauled the team and the R&D strategy about two years ago. I think what you'll see in the later half of this calendar year is UniFi video turning the corner, much like UniFi did in 2016, 2017. We're on our fourth generation of UniFi video technology. We're going to significantly reduce the pricing and significantly increase the performance and the user experience.

That is all going to start in the next few months with the release of UniFi Video 4. Of course, with things like Ubiquiti Labs, we are always looking to make big bets. I believe you always have to be aggressive in this day and age. If you are not moving, if you are not adapting and trying new things, then you are going to get beat. We are always trying to move faster than the competition. AmpliFi, I think, considering our level of marketing investment infrastructure relative to the competitors, has done extremely well and is a profitable business. I think you will see it continue to grow. The early days' trajectory is similar to what we had in UniFi in the first year to two years.

Operator (participant)

We'll now move to our next question, which will come from Eric Suppiger with JMP Securities.

Eric Suppiger (Senior Research Analyst)

Yeah, thanks for taking the question. You had refinanced your debt agreement earlier in the quarter. Can you comment why you felt the need to take up access to capital when you also have the opportunity to repatriate the offshore cash? Why you need access to so much capital?

Robert Pera (Founder, CEO, and Chairman of the Board)

When we started that process, it wasn't a sure thing we'd be able to repatriate the cash, one. Second, it takes a while to get financing that lined up. When you're looking at the market, and I believe that things are in a bubble right now. Also, when opportunities come up, you want to be able to jump on them. I think the benefits of having that cash ready, it's a good thing to have.

Operator (participant)

We will move to our next question, and that will come from Al Biani with Bank of America Merrill Lynch.

Kayla Brooks (Equity Research Associate)

Hi, thanks for taking my question. This is Kayla Brooks on Vertal. I was wondering if you've seen any change in your North American service provider market after AT&T started to more aggressively roll out fixed wireless access in many rural areas. Thanks.

Robert Pera (Founder, CEO, and Chairman of the Board)

Yeah, this one is tough to really get a handle on. For years, there have been carriers that have launched initiatives to get to the more rural areas of the country with licensed frequencies. I'm still of the belief that the economics of community wireless broadband or these independent entrepreneurs, we call the wireless internet service provider industry, I'm of the belief for this community internet-type model to get broadband to these disparate areas of the world is by far and away the most efficient way to solve that problem. Big companies have licensed frequency overhead. They have a lot of, I'd say, high-end standardized technologies, base station overhead. They have the infrastructure, the truck rolls. I think it could have some impact, but I also believe that our operator market in the larger wireless internet service provider industry will continue to grow.

One of the things we've done to give us, I'd say, to maybe reduce our exposure just on the wireless side is to get into things like fiber and high-end switching and carrier routing like we do with our EdgeMAX technology. I think our diversified operator technology portfolio should still grow even if these new initiatives from big tier one carriers eat into some of the WISP market.

Operator (participant)

With that, ladies and gentlemen, this does conclude our question and answer session, and we'll bring the conference to a conclusion. We do thank you for your attendance, and you may now disconnect.