UI - NYSE

Anne Fazioli - Robert J. Pera - Founder, Chairman and Chief Executive Officer

Pierre Ferragu - Sanford C. Bernstein & Co., LLC., Research Division Ehud A. Gelblum - Citigroup Inc, Research Division Matthew S. Robison - Wunderlich Securities Inc., Research Division John Lucia - JMP Securities LLC, Research Division Meta A. Marshall - Morgan Stanley, Research Division Georgios Kyriakopoulos - SunTrust Robinson Humphrey, Inc., Research Division Kent Schofield - Goldman Sachs Group Inc., Research Division Rajesh Ghai - Macquarie Research Timothy Long - BMO Capital Markets Equity Research Nathaniel Cunningham - Guggenheim Securities, LLC, Research Division Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Ubiquiti Networks Third Quarter 2015 Question-and-Answer Conference Call. [Operator Instructions] . I would now like to introduce your host for today's presentation, Ms. Anne Fazioli. Ma'am, please begin.

Thank you, Howard, 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. 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 www.sec.gov. Forward-looking statements are made as of today, March 7, 2015 (sic) [ May 7, 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 & Presentations and Financial Information sections of our Investor Relations website at ir.ubnt.com. This call will be a Q&A-only call. [Operator Instructions] Howard, we are ready for questions.

Thanks, Pierre. So I think the shipping issues, might have affected some North America distributors, where shipments were held up, and we invoice them at the time they're shipped. And because they didn't have access to those shipments, it affected their ability to place new orders, because our credit limits have become stricter. So that could explain some of the dropoff in North America. But overall, I know we're going to get a lot of questions about quarter-to-quarter results and fluctuating -- fluctuations in regards to certain regions and certain platforms, enterprise or service provider. So I want to take a step back and just say Ubiquiti's model is quite unique. We don't follow the traditional telecom model, which revolves around big sales teams, big sales teams supporting big customers, with qualifications and high visibility. We're on the opposite end, where we've removed the economic barrier to entry for just about anybody to become an operator. So you can say we've democratized the service provider industry. And with that, there's great benefits. We have a very efficient business model that's highly profitable. One of the drawbacks is, we don't have the same visibility traditional companies with huge sales teams working with Tier 1 operators would have. So it's very hard for me to look at quarter-to-quarter fluctuations, region-to-region fluctuations on very small granularity levels. But I will say we're focused on products in our model. We believe the best products wins. So we're intensely focused on R&D and improving our product, our user experience and applying our R&D and business model to new industries. And I think over time, you'll see positive trends. In terms of a microanalysis, it's going to be difficult, and that's just the nature of our business model and our strategy.

Well, I think in our case, since a lot of our business comes from these emerging markets and when you factor in that a lot of these emerging markets also have value-added taxes added to the final price, the strength or weakness of the U.S. dollar is very important. So I think a weaker U.S. dollar definitely benefits us in areas like South America.

Okay, so we've been slower than I'd like to -- I wish I'd hoped we'd be in getting these certifications. I will tell you that it's been a big effort for the past several months, and we've been working very hard. airFiber X we launched with full 5 gigahertz band certification, and at sub-$400, it's a custom application-specific radio that provides far better spectral efficiency, noise immunity, than anything out in the market. And at sub-$400, it's in the same ballpark price as gaming routers, Wi-Fi gaming routers you see in Best Buy. So I think for any point-to-point links, airFiber X should be it. And we have full approval for the full band and it's incredibly clean TX spectral output and it's great for colocation as well. Now we do have a lot of frustration, justifiable frustration, from our community. We have been slow with airMAX UNI-1, 2, 3 certifications. We have just gotten some of these certifications trickling in, particularly the high-end products, so RocketM5, Rocket5 ac; and our PowerBeam, both 5AC and M5. We've gotten UNI-1, UNI-3 certifications. UNI-2 is largely dependent on the FCC. And also, we expect trickling in, in the next couple of months are the rest of the radios.

It's tough. We've been studying sell-through for the past 2 years, and it's been tough to get a handle on seasonal trends. Primarily because our operations performance is now much, much better than it was in say, 2 years ago. We're fulfilling orders much more quickly. Stock has been an issue. So I think moving forward, we have much better sell-through data to analyze to look at seasonal trends. But it's just hard to determine right now, especially with product mix and product application increasing. We have routing and switching lines now. We have the UniFi enterprise business. I -- the best I could say is definitely in the winter, there's probably slowdown in North America. And things like Carnival in February, we do see a hit in South America, particularly Brazil. Outside of that, it's hard to draw any conclusions.

Yes, I think you pointed out 2 key issues. I think a strengthening dollar definitely slows down the amount equipment our operators can buy, specifically in the emerging markets. And the second thing is, we've relaunched -- or we have a refresh of our airMAX line, it's airMAX ac, which has been phenomenal. And -- but it's primarily used for point-to-point now. And we are -- we do have some customers deploying it in multi-point, but a lot of them are waiting for backwards compatibility, so they could mix and match with their existing networks, their existing deployments. And we're working on that, and we are close to solving it. So I think in the next, I don't know, let's say, within the next year, I think you'll see an inflection point with airMAX ac, where it boosts the service provider segment, because of both new applications it enables and replacement of existing networks.

So new distributors, we have applications, I believe, many every day for new distributors. And of course, we want to be loyal to distributors who have worked with us early on, and who have stocked our products and done a good job of distributing it. So depending on the market and the region, we do have pretty hefty requirements for new distributors to come on board. Now we're always looking for distributors to provide products or distribute products in areas where it's very -- we don't have great accessibility to the end customers.

Well, my expectations are to get the same kind of return you've seen on things like airMAX and things like UniFi. So my expectation is to bring on new teams that could create product lines that do hundreds of millions of revenue per year.

Our next question or comment comes from the line of Rajesh Ghai from Macquarie.

I had a couple of product questions. Robert, you mentioned UniFi Video seems to be turning the corner. Can you give us some sense of what makes you think that is the case. And as far as the airFiber X is concerned, you seem to be very excited by the product. Apart from the fact that it's got a very appealing price, can you give us some other indications that suggest it may not -- it does not have the same fate as the airFiber, which was launched last year with quite a bit of excitement?

Sure. So starting with video, the biggest improvement we made is in the user experience, and the -- what we call transcoding, which is the streaming of multiple cameras. Before, the user experience, in terms of the setup of the network video recorder and the overall software experience, the look and feel, was just not -- it was buggy. It was slow. It wasn't sharp and clean and zippy. And we've improved that dramatically. I think as a NVR and controller, it's as good as -- in my opinion, as software that costs thousands of dollars per license per year. The next thing we've done is on the hardware side. We're now on our third generation of camera hardware, and it's gotten remarkably better with each generation. Our first camera in the third-generation line has been -- the UVC-Micro, which is about the size of a golf ball, and that's a pretty phenomenal design. It's 1/3 the volume of, say a Dropcam. And it runs full HD. It has multimedia speaker, microphone. It has infrared. It even has a 15-foot very thin cable. So you could professionally deploy it inside of walls or run it alongside of walls. It's Wi-Fi, so you don't need to run a wire back to the switch, and it's $99. And you could buy a 100 of them for $99, and spend some $10,000 and you have, along with our NVR and software, you now have a professional system that supports multiple streaming, and it's stable. It's a great user interface and great user experience. So it's very much analogous to what we did on the Wi-Fi side, where we brought price performance, just -- we disrupted it in the enterprise Wi-Fi space. Once you see new features that we're adding to the software this year, along with follow-on third-generation cameras, I think it's going to turn the corner. Your next question about airFiber. AirFiber has been successful. If you look at airFiber 24 and airFiber5, we had higher hopes for those, but they -- it still sold tens of thousands of radios through the channel. And when you consider the team, which is a pretty small team we recruited out of Motorola that has combined, I don't know, hundreds of years of experience, and built the very first outdoor broadband unlicensed band radios. I think it hasn't been the success we hoped for, but it was still a success. And now when you throw in airFiber X, I think you're going to see some pretty incredible return on R&D.

Okay. And my last question is essentially around the UNI-1, UNI-2 DFS certifications. You said there was a lot of frustration in the community as far as the certification is concerned. I was just surprised that you didn't call that out as one of the reasons why you've seen some weakness in service provider in North America. Is that -- has that not been a factor at all? Or how are you thinking about that?

Well, for the U.S. market, and there -- it tends to be a more advanced market than the rest of the world, meaning that the operators have more experience in -- also access to more finance vehicles. I think the price point of the airFiber X at sub-$400 gives them the absolute best price-performance backhaul that's ever existed. And that product has been shipping with full, 5 gigahertz, UNI-1, UNI-2, UNI-3 certifications from the start. So anybody in the market can deploy a new backhaul link, I don't think there's any reason to choose anything else than an airFiber X. Now we have been later than I hoped, in getting UNI-1, UNI-2, UNI-3 certifications for our existing airMAX radios, but that's a little more complicated because those radios have a prior set of rules. They were certified under what's called DTS. And it's not so easy to go back and take a DTS-certified device and then certify it for UNI-1, UNI-2, UNI-3. And to do that for a multiple family of products, but we have, and those, especially the RocketM5, and the PowerBeam, the high-end multi-point products, have already been certified. So we have been making progress, and I hope to have it all buttoned up in the next, well, let's say the next couple of months. But you also got to take a step back, and we have a global certification effort. In Europe for example, there is a new band that opened up, 57.25 to 58.75 for multi-point. And we've been rushing to get those certifications done, and those are just as important to the Europe market. But because the U.S. market is under a microscope, that's what you guys see. But the takeaway I want everybody to know is, yes, we're not happy with our progress in getting our airMAX family UNI-1, -2 to -3 certified, and it's not because we're being lazy. It's just -- it's a big task. And it's tackling a lot of products at once to go through this process. Some of it is under our control, some of it isn't. For example, the UNI-2 certifications have to sit in a queue with the FCC. That could be weeks or months sometimes.

Our next question or comment comes from the line of Tim Long from BMO Capital Markets.

Two questions for me. On the UniFi side, Robert, if you could just give us a little update. It sounded like AC is still moving along. Could you just give us a sense as to how the move towards AC in the UniFi portfolio went in the quarter? And do you think you're maybe more or less competitive when you look at AC relative to the prior generations? And then the second one, you went through video and switching as some of the new products earlier in the call. If maybe you could just give us an update on IP phones and Edge Routers, and what you think -- what you're hearing from early stages of those new products as well, that would be helpful.

Great. So the UniFi, we were one of the first in the enterprise space to launch our UniFi AC radio. And we did that with very early silicon. It was a big effort to get it to market. And unfortunately, the cost structure, manufacturing cost structure of that UniFi AC SKU was not in line with the rest of our UniFi line -- UniFi AC. So that's a higher-priced product. And we've been working to find a way to bring essentially a UniFi AC refresh, while keeping our price points. So that's what we've been focused on. There will be a refresh of that line. It's going to be soon. It's going to definitely be this year. And we're hoping that will be a big boost for the UniFi platform. The phones, the phones -- the product itself, in many ways, has been really well done. The UI, the user experience, the industrial design, the price point, I think are all incredible. I don't think there's another product like that in the Voice over IP market. The misstep was probably trying to tackle the challenge of creating our own PBX to support along with the phones. And so I wanted to create a closed system, where people could buy our phones, our UniFi Security Gateway and have their home PBX and create a closed proprietary system. And I think, in hindsight, that was a mistake, because third-party PBXs on the market, whether it's FreeSWITCH-based ones or Asterisk-based ones, or now this push to cloud-based PBXs, with the RingCentral as being a popular option. I think the third-party PBX world has a lot of momentum. And we should have, from the beginning, had a strategy of creating a Voice over IP phone that can work with any third-party PBX seamlessly. And the reason I didn't want to do that is because I didn't want to be in a position of commoditization, where we made a product for a third-party PBX and we're ultimately replaced. Everything we do, we want to build some defensibility around. But I think we found a good middle ground, where we could provide management features for the Android software, say a mass UniFi Voice over IP deployment, but at the same time, make it compatible with third-party PBXs. So we're working hard on that. And we also have future generations of the UniFi Video Phone in development. So I think the potential is still big. I expect that to be a material contributor, but it's going to be a rocky next couple of quarters solving these problems.

So the CFO leaving, I don't really want to comment on that, other to say that the real inherent value of this company is in the R&D and the business model. And the people that are instrumental in the R&D and the business model haven't gone anywhere. And I'm hopeful we can find a more than adequate CFO and will be successful in finding one. The second part of the question was?

Why was South America down more than EMEA?

Yes, so it -- I'll stick by my original answer earlier in the conference call, because it's very hard for me to find good reasons or conclude why certain regions are up and down, and why -- particularly, quarter-to-quarter. UniFi, for example, has been up and down for the past 2 years, if you look on a quarter-to-quarter basis. But overall, it's grown several hundred percent over the 2 to 3 years. So I want to make sure we'll -- our focus is looking at macro trends and driving R&D and focus on product development. And hopefully, as our operations continues to improve -- and we'll have more predictable results. But until then, you got to just take into account our business model is very unique. We're dealing with a lot of entrepreneurial operators, and it's just kind of the nature of the business, where we're going to have short-term fluctuations.

Okay. I'll take it into account.