Ubiquiti - Earnings Call - Q4 2018

Transcript

Operator (participant)

If you are on the webcast and would like to ask a question, you may submit it via the Ask a Question box below the player. Time permitting, we'll address your questions on the call. Please note this event is being recorded. I would now like to turn the conference over to Ms. Laura Kiernan. Please go ahead.

Laura Kiernan (SVP of Investor Relations)

Thank you, Ann, 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 the 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 today's call. Information on these risk factors and uncertainties is contained in our most recent Form 10-K filed with the SEC and our other filings, which are available on the SEC website at sec.gov. Forward-looking statements are made as of today, August 24, 2018, and we assume no obligation to update them. This call will be a Q&A call only.

Please limit yourself to one question. Operator, we are now ready for questions.

Operator (participant)

Thank you. Again, if you would like to ask a question, you may press Star one on your touchtone phone. If you are 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 take our first question from Tim Long with BMO Capital Markets.

Tim Long (Senior Equity Analyst)

Thank you. Robert, real strong performance in North America and in enterprise in the quarter. I'm sure they're related. Could you just talk a little bit about what was behind that strong performance this quarter? I'm assuming UniFi was strong, but was there anything, any other color you can give us maybe on kind of the unit ASP dynamic or other products that might have contributed to that strength? That would be great. Thank you.

Robert Pera (Chairman and CEO)

Sure. Thanks for the question. I think it was maybe a couple of main things. First, UniFi is expanding fast from just being known as Wi-Fi to being a, well, unified networking solution with ping and network security, and we continue to add advanced features. The second thing is our supply chain is still pretty inefficient, and our sales channel and their ability to stock is still very inefficient. We set up a big facility in the U.S., an inventory facility, that kind of plugs the weaknesses of the sales channel to date, keeping product in stock. We're still not there yet, but I think those are the two key things with UniFi moving forward. We continue to expand the application use and get into more verticals, and then we need to continue improving our operations to just meet the demand, which we're not doing yet.

Operator (participant)

We'll go next to Eric Suppiger with JMP Securities.

Eric Suppiger (Managing Director and Senior Equity Research Analyst)

Yeah, thanks for taking the question. I had two if I could. One, on the tariff front, can you tell us, are you expecting those to take effect? If you are, would you consider raising prices to pass through some of the cost or the tax? Secondly, on the warehouse inventory, your inventories are approaching, your finished good inventories are approaching 8-12 weeks right now. How much of your shipments are actually coming from inventory that has been through your warehouse?

Robert Pera (Chairman and CEO)

I believe a decent percentage of our U.S. revenue is now flowing through our inventory center. Outside the U.S., largely, we ship directly out of Asia.

Eric Suppiger (Managing Director and Senior Equity Research Analyst)

That suggests that there's still going to be a considerable addition of finished goods as you expand warehouse inventory, or is it at a level that you think you'll maintain at this point?

Robert Pera (Chairman and CEO)

My primary priority is we're trying to find a way to meet demand. Right now, we have still chronic stockouts on key items, and that's what's going to drive my business decisions, not inventory level on the balance sheet.

Operator (participant)

We'll take a follow-up question from Tim Long with BMO Capital Markets.

Tim Long (Senior Equity Analyst)

Thanks a lot. I just wanted to ask, Robert, on the gross margin, it sounds like there was obviously an impact from expedited shipping costs this quarter, that would go away longer-term, particularly with what you're doing on the inventory front. You made some comments about new products having higher margins and some cost reduction actions that you continually take on the products. Can you just give us a little color on that new product front? Are you addressing some newer areas, or why would they have higher margin profiles and the cost reduction actions? Should we think of that really focused on across the portfolio, or is that mostly UniFi? Where would that be targeted most?

Robert Pera (Chairman and CEO)

We're continuously making good cost reductions, but we're also planning to be aggressive on new product introductions. For example, video security is something I think we should have a much larger market share of, and we're going to be very aggressive with UniFi Video over the next couple of years. You have a product mix that could bring margins down in the short term, but you also have some material efficiency, cost efficiency capture on mature products. I think long-term, our core margins should remain relatively steady. Where we have to improve is everything else that goes into those margins, specifically our shipping logistics efficiency. We've been very inefficient on delivering parts of the channel and meeting demand, and as a result, we've had a lot of excessive costs due to last-minute air shipping.

I think as our operations continue to mature, you're going to see significant margin improvement from that.