Ubiquiti - Earnings Call - Q3 2018

Transcript

Operator (participant)

Please note this event is being recorded. At this time, I'd like to turn the conference over to Ms. Laura Kiernan, SVP Investor Relations. Please go ahead.

Laura Kiernan (SVP of Investor Relations)

Thank you, Ryan, and thank you, everyone, for joining us today. I'm here with Robert Pera, our Founder, CEO, and Chairman of the Board of 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 SEC's website at sec.gov. Forward-looking statements are made as of today, May 10th, 2018, and we assume no obligation to update them.

We hope you've had a chance to review management's prepared remarks, which were posted as a transcript on the events and presentations and financial information sections of our website at ir.ui.com. This call will be Q&A only. Please limit yourself to one question. Operator, we are now ready for questions.

Operator (participant)

Thank you. We'll now begin the question and answer session. To ask a question, you may press star one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, press star two. At this time, we'll pause momentarily to assemble our roster. We'll go first to Tim Long with BMO Capital Markets.

Tim Long (Senior Equity Analyst)

Thank you. I'll try two if I can. First, Robert, could you talk a little bit about products in the quarter and in the pipeline? I know a few more were announced during the quarter. Could you talk about any products that stood out outside of our airMAX and UniFi, where you're seeing traction, and from the newly announced products, where you're most excited? Secondly, if you could just touch on South American business, a little bit of weakness there, and as well in the service provider. I'm assuming those two are linked. Anything other than just the standard lumpiness there, is there anything else you would attribute that performance to in the quarter? Thank you very much.

Robert Pera (Founder, CEO, and Chairman)

Sure. I can start with new products. We have two main businesses right now. One, of course, is UniFi. UniFi started off as Wi-Fi. We expanded it to power through Ethernet switching and security gateways and a whole portfolio of different APs. Now video is picking up. We are taking it into adjacent markets, and we are trying to create a complete collection of technology, all consolidated within the one UniFi control platform. I think you will see UniFi over time become more and more diversified. It was largely Wi-Fi APs when we started. Now I think it is a pretty good mix of everything from our Cloud Keys, Security gateways, PoE switches, and APs. I think our next generation of video we finally got right.

I hope we will see a nice ramp-up in our video products to match the quantities of switches and APs we sell. On the service provider side, traditionally, we sold airMAX as our dominant platform, but we are also adding new technologies to service provider, including things like UFiber. Our long-term strategy right now for Operator is shaping up nicely. It is following a similar trend to what we did with UniFi, where we are trying to integrate all these technologies into one management controller, which is our Ubiquiti Network Management System, UNMS. UNMS, the installations and the active users on the mobile app, has really grown significantly over the past half year or so. I think you will see service provider start to show some growth over the long term.

Now, back to your question about service provider being down and South America being down, it's really hard to draw conclusions on our business quarter to quarter. Our channel is imperfect. Our supply chain is far from perfect. That is one of the reasons we're going to move away from quarterly guidance. I think they create a misrepresentation of the strength of our business. There are also opportunities there. I think if we could make our channel more efficient, make our supply chain more efficient, we should see increased scale and hopefully more consistency.

Operator (participant)

We will go next to Woo Jin Ho with Bloomberg Intelligence.

Woo Jin Ho (Senior Analyst)

Great. Thank you for taking my questions. Robert, can you just talk about—just to dig into the international segments—can you just talk a little bit more about EMEA? EMEA has been fairly strong. Seven out of the last eight quarters, you're growing 20% plus. Just help us understand the growth dynamics and the demand dynamics there. Just to follow on that, we're slowly approaching the 802.11ac cycle. Given the mis-execution issues—I'm sorry, the AX cycle—given the mis-execution of your first triad AC, have you put steps in place to ensure a smoother rollout for your AX products in the future?

Operator (participant)

Pardon the interruption. This is the operator. We are here in silence at this time. I do show all speakers are still connecting.

Laura Kiernan (SVP of Investor Relations)

Okay. Just a moment. We're going to see if we can get Mr. Pera to dial back in.

Robert Pera (Founder, CEO, and Chairman)

Sorry about that.

Laura Kiernan (SVP of Investor Relations)

Do you need for Woo to repeat?

Robert Pera (Founder, CEO, and Chairman)

Yeah. Sorry, Laura. Did I answer that question or not? I was trying to keep my phone on mute while people were asking the question. I think I didn't unmute. I can answer that question again. Should I answer it again?

Woo Jin Ho (Senior Analyst)

Yes, please.

Robert Pera (Founder, CEO, and Chairman)

Okay. Starting the first part of your question about introducing AX, you have a great point. The AC introductions in UniFi and in airMAX both did not go well. I think they negatively impacted the brand and hurt the trust of our customers to adopt our new products and new releases into production. The R&D today, our R&D leadership and our culture is much more disciplined, and we are going to make sure we perfect any new platform before it is released officially to market moving forward. I think we have demonstrated much better discipline in that area in the past couple of years. To the next part of your question about EMEA, I think it is largely due to UniFi, especially in Western Europe.

We see it just people in the system integrator community are becoming aware of UniFi, the powerful performance, the superior user experience, and the great value compared to traditional vendors. It is seeing some network effects in scaling right now.

Operator (participant)

We'll go next to Eric Suppiger with JMP.

Erik Suppiger (Managing Director and Senior Research Analyst)

Yeah. Thanks for taking my call on my question. I want to ask a few questions. One on the buyback. You've spent about $750 million on the buyback or more than that. You just authorized another $200 million. You've talked about your interest in Teledyne, where they bought back 90% of their shares. Can you give us an update on what your goals are for your buyback? You've been very aggressive there in how you're measuring your returns on that buyback.

Robert Pera (Founder, CEO, and Chairman)

My goal is to use our cash, our capital efficiently. I think as demonstrated by our past share buyback performance, it's been a much better return on investment versus leaving the cash in the bank. We're also always looking at acquisitions. The problem with acquisitions is we have such a unique culture that it's going to be difficult to devote resources to cultural integration. We're much faster, in my opinion, growing new technology and new businesses organically. It leaves, I guess, a good opportunity for us. We have cash on hand, and if we feel the stock's undervalued and we believe in our long-term prospects, it's an easy decision to use that cash to retire shares and improve our future EPS.

Operator (participant)

We will go next to Talani with Bank of America Merrill Lynch.

Dan Bartus (VP of Software & Cybersecurity Equity Research)

Yeah. Hey, Robert. This is Dan Bartus on for Tal. Thanks for taking my questions. First, I just wanted to ask about AmpliFi. Just generally, are you happy with where it's at right now? Is it growing within your expectations, and when do you think it moves the needle? Just briefly on professional fees and the SG&A, if you know about it. SG&A is up quite a bit. I was wondering what those fees are related to. Thanks.

Robert Pera (Founder, CEO, and Chairman)

Sure. AmpliFi, it's doing okay. It's tens of millions of dollars of revenue rate. It could be a lot better. I think in consumer markets, your timing and first-to-market is critical. I think we could have executed Amplifi better. At the same time, I think relative to competitors and our investment, marketing, and sales investment relative to our competitors, it's done really well. I think it has kind of validated our business model and our R&D model, where we can apply this model to different markets and see similar returns on investments. Sorry. Second part of your question was?

Operator (participant)

This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now.