By Gino Verza:
Ubiquiti Networks (NASDAQ:[[UBNT]]) provides service providers
and enterprises with networking gear for fixed wireless broadband,
wireless backhaul, routing, enterprise WiFi, video surveillance,
and machine to machine communication components. The company brings
broadband access to the un-connected regions of the world,
especially in emerging markets and rural areas. It delivers high
network performance at disruptive prices, where traditional
high-touch, high-cost solutions are too expensive and not easily
The business model is driven by a large community of service
providers, distributors, value added resellers, systems integrators
and information technology professionals who, along with the
company's engineers, are actively involved in product development
and product improvement. The community nurtures direct
communication, accelerated product adoption, and quick time to
market. Embedded in the model is technological leadership and
products with disrupting price-performance characteristics that
address customers' most critical features, without costly
high-touch relationship fringe features.
Leveraging the information access of the Internet allows
customers worldwide to achieve the features and functionalities
that are critical to their requirements. The community is cost
efficient and highly-scalable, and functions as a self-sustaining
eco-system for product feedback and innovation, product support,
information dissemination, and sale origination. It assumes the
role of a sales force for Ubiquiti and in fact allows the company
to function without one. The model by-passes the traditional roles
in sales development, marketing, and product support; and in so
doing eliminates legacy inefficiencies in favor of a value-driven
cost-effective and scalable model. The driving force behind the
model is Robert Pera, Founder and CEO, a self-styled product CEO,
who runs R&D and is the lead recruiter of technical staff in
Financially the model exhibits rapid revenue growth, a
competitive cost structure enabled by the role of the community and
contracted manufacturing, robust R&D, strong operating margins
(33% - 34%), low capital expenditures, and high ROIC.
Substantial resources are devoted to R&D. 111
full-time-employees were in R&D, or 61% of 183, total personnel
employed in the company (as of 6/30/13). Robert Pera, CEO, and
engineer by education and vocation, leads first-hand the
recruitment of engineers worldwide. Pera is pragmatic in his
particular focus; seeking, recruiting and retaining knowledgeable
R&D personnel, wherever is available. Ubiquiti's R&D
professionals are located in California, Illinois, New York,
Lithuania, Taiwan and Russia. R&D emphasizes small teams, a
flat reporting structure, and identifiable contributions. As
, he focuses on retaining "walkers", who contribute to positive
value and have the potential of making phenomenal contributions and
becoming "superstars". He dismisses "talkers", who contribute
negatively to the company.
Products and solutions benefit from the active engagement
between the community and the company's R&D personnel
throughout the product development cycle, resulting in rapid
introduction and adoption of new products. R&D personnel
evaluate the input from the community and respond to their needs,
modifying products and developing new products based on the input
received. Products and solutions are designed to reduce complexity
in installation, facilitate the expansion of wireless networks, and
enable high product performance at highly disruptive prices.
Manufacturing, logistics, and warehousing, is contracted with third
parties in China.
Progress and growth under CEO Pera have been nothing short of
spectacular. Pera holds a Bachelor and Master of Science degrees in
Electrical Engineering. In 2005 Pera left his Hardware Engineer job
in Apple to dedicate himself full-time to Ubiquiti. He set up a
$650 a month business office that doubled-up as Pera's home.
Bootstrap operations had no supporting infrastructure; no advisor,
or a board, or lawyers, or accounting support. An upfront customer
provided advance payment to fund first manufacturing and shipment.
IPO was in October, 2011.
Fast forward from early days. In fiscal year 2008 revenues were
$22.4 million, $320.8 in 2013, and expected to reach $568.0 million
in 2014. Products are sold in over 50 countries to service
providers and enterprises mostly through over 100 distributors, and
also original equipment manufacturers and enterprises. Some 2,300
distributors and interested parties worldwide have been trained in
Ubiquiti products and solutions.
Product innovation and speed to market are strategic priorities
directed to addressing the needs of service providers and
enterprises worldwide. They are the engine enabling revenue
Products for service providers (over 80% of revenues):
, by far the most important contributor to revenues (over 60%),
was introduced in September, 2009. It enables wireless networking
for video, voice and data. airMax is able to support wireless
network traffic for hundreds of clients per base station over
long distances while maintaining low latency and high
, networking routing platform, was introduced in September,
- airFiber, point-to-point wireless backhaul, was introduced in
Enterprise products (shy of 20% of revenues):
- UniFi, enterprise WLAN, introduced in January, 2011, allows
WLAN managers to configure and administer a UniFi network from
any web browser.
- airVision, video surveillance, introduced in August, 2011,
allows management of camera and recording devices from any web
- mFi, machine to machine communication, introduced in June,
2012, allows devices to be monitored and controlled remotely
(building temperature, power consumption) via WiFi, from any web
CEO Pera's interest in the company aligns with the interest of
shareholders at large. The proxy statement, dated October 28, 2013,
shows that Pera owned 65.4% of the common stock. Further, the
statement shows that Pera was the only executive with no equity
awards, or unvested options, and with $1 in salary compensation in
2011, 2012 (and apparently 2013).
Underlying growth is the increase in the global use of the
internet, the opportunity available in underserved markets
including in emerging markets, the competitive advantage due to
comparatively higher investment requirements and long lead time
associated with building infrastructure for wired networks, and the
company's product competitive advantages including
price-performance. Industry sources estimate global internet
traffic growth for the 2001-2016 period to run at close to 30%
compounded annual growth rate. Meanwhile, aggregate end-user
spending on wireless networking equipment for Enterprise WLAN,
wireless broadband access, and LTE solutions, is expected to grow
at a rate of 32% to $41.3 billion during 2012-2017.
Table 1 shows selected value metrics for the last three years,
estimates for fiscal years 2014 and 2015, and the latest quarter's
year over year comparison.
|Table 1. Ubiquiti Networks Value
|(Amounts in millions of US$, unless otherwise
||FYE 6/14 (NYSE:[[E]])
|NOPAT / Revenues
|OC / Revenues
|ROIC = NOPAT / OC
|EVA = (ROIC - WACC) OC
|FCF (NOPAT - Inc. in OC)
|FCF / Revenues
|R&D / Revenues
|NOPAT (Net Operating Profit after
Taxes) = EBIT (1 - Tax Rate)
|OC (Operating Capital) = NOWC (Net
Operating Working Capital) + OLTA (Operating Long Term
|EVA (Economic Value Added) = (ROIC
- WACC) OC
|FCF (Free Cash Flow) = NOPAT -
(Changes in OC)
|EV (Enterprise Value) = Present
Value of prospective FCF, growing at g; discounted by WACC
- Three year average ROIC is 308%, well in excess of 10%,
estimated weighted average cost of capital (OTC:[[WACC]]).
Ubiquity creates substantial shareholder value by generating high
ROIC with investors' capital costing 10%. High EVA relative to
Operating Capital used is a corollary.
- Strong growth in revenues and in FCF, along with high ROIC,
are complementary conditions in the creation of Enterprise Value
and a strong stock price performance. Decrease in 2013 revenues
was due to the counterfeit products (principally airMax platform)
which preempted real-product sales, created uncertainty regarding
product authenticity, and caused a buildup in the distributors'
- Reflective of the characteristics of the model are high NOPAT
margins, low Operating Capital requirements, and high FCF
- Sustained and growing investment in R&D drives product
innovation, and growth in revenue and in FCF.
Business risk is discussed as the likelihood of FCF disruption
due to an unfavorable event. In my opinion, management maintains
risk-taking within the boundaries of knowledge in the broadband
access business. Consider the following:
Operations Risk. NOPAT is subject to operations risk; the risk
in the firm's commercial cycle (NOWC), which encompasses the
company's day-to-day relationships with stakeholders and entails
risks such as concentration with clients and suppliers and
dependence on partners and resellers for performance; and
geographic concentrations. Disruption in these relationships can
upset the commercial cycle and negatively impact on NOPAT and on
FCF. NOPAT is steady; NOPAT / Revenues ratio has averaged 20% in
the last three years.
Ubiquiti relies on third party contractors for manufacturing,
warehousing, and distribution; and on third party components and
technology used in the company's products. The company also relies
on relationships with distributors, which account for virtually the
totality of annual revenues. The largest distributors can account
for as high as 10%-20% of annual revenues. Distributors purchase
products on a purchase order basis. They are not required to
promote Ubiquiti products and are free to promote and sell
Revenues are geographically diversified; North America 26%,
South America 21%, Europe, Middle East, Africa 40%, Asia Pacific
Financial Risk. Financial risk related to the use of debt ($72.4
million in 3/31/04) is minor relative to FCF available to service
Other Risks. Notwithstanding moderate risk assessment, there is
an abundance of risk events, other than those discussed, that can
upset business. Natural catastrophes, or the loss of key managers,
or technology theft, are examples of events that can disrupt
A track record free of major risk events does not preclude
negative events from occurring in the future. This discussion does
not cover all the conceivable risk events (internal, external, or
macro-economic risks, or those with low-probability-high-impact)
that could harm the business. Instead, the focus is in ascertaining
that activities in the ordinary course of business are in line with
Ubiquiti's business purpose and fall within management competence.
In my opinion benefits, as measured by ROIC or NOPAT / Revenues,
2014 and 2015
- Q3 2014 results showed a strong performance in revenues and
NOPAT (Table 1). However, concerns arose over increases in
Operating Capital (
) caused by a substantial inventory build (from $19.4 million in
Q3 2013 to $66.0 million in Q3 2014) which impacted FCF
negatively. Management explained (see
) that inventory was built up strategically to prevent a repeat
of shortages and delays in product delivery to distributors.
Inventory was also built-up in anticipation of shipment for
existing order backlog at the end of Q3 2014; and for new product
inventory (including airFiber 5 and AirVision security
- Q4 2014 estimates call for marginal sequential increases in
revenues and in operating income over Q3 2013.
- FY 6/14 estimates call for major improvement y-o-y, with
revenues growing to $568.0 million (77% increase), and operating
income increasing 104% to $196.0 million.
- Further improvement is expected in FY 6/15 with revenues
reaching $656.0 million in revenues (15% increase), and $216.0
million in operating income (10% increase).
Below are two estimates of the stock's fundamental value along
with the corresponding estimate inputs.
- $60.0/share value based on $182.0 million 2015 FCF growing at
12% per annum through 2017, 10% in 2018, and 5% thereafter in
perpetuity. WACC is 11% through 2017, 10% in 2018, and 9%
- $62.0/share value based on $182.0 million 2015 FCF growing at
14% per annum through 2017, 10% in 2018, and 5% thereafter in
perpetuity. WACC is as noted above.
- On May 29, 2014, the company announced its Board of
Directors' approval to repurchase up to $75 million worth in
common stock beginning on June 2, 2014. At that time the shares
traded around $36.0/share. Currently the stock trades at between
$39.0/share - $40.0/share.
The author is long UBNT. The author wrote this article themselves,
and it expresses their own opinions. The author is not receiving
compensation for it. The author has no business relationship with
any company whose stock is mentioned in this article.
The material presented here is for informational purposes only.
Nothing in this article should be taken as a solicitation or
recommendation to purchase or sell securities. Before buying or
selling any stock, you should do your own research and reach your
own conclusion. Views and opinions in this article may be wrong.
The analysis, including financial computations, presentation, and
views, do not necessarily conform to any sanctioned or accepted
standard. Presentation and computations entail a probability of
error, which is entirely possible. I am not an investment
management professional. Please do not rely on this material, do
your own due diligence.
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