Anne Fazioli - Vice President-Investor Relations Robert J. Pera - Chairman & Chief Executive Officer.

Joe Del Gaudio - Sanford C. Bernstein & Co. LLC Michael A. Kerlan - Wells Fargo Securities LLC John A. Lucia - JMP Securities LLC Meta A. Marshall - Morgan Stanley & Co. LLC Nate Cunningham - Guggenheim Securities LLC Matthew S. Robison - Wunderlich Securities, Inc. Georgios Kyriakopoulos - SunTrust Robinson Humphrey, Inc.

Rajesh Ghai - Macquarie Capital (USA), Inc..

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

Thank you, Peter. 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 other SEC filings which are available on the SEC's website, at www.sec.gov. Forward-looking statements are made as of today, August 6, 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 will be a Q&A-only call. Please limit yourself to two questions and time permitting we'll allow for follow-up questions.

Operator, we are now ready for questions..

Thank you. Your first question comes from the line of Pierre Ferragu with Bernstein. Your line is open..

Hey. Good afternoon. This is Joe Del Gaudio filling in for Pierre. A couple of questions. One is on overall view on growth going forward for the next 12 months. It seems like service provider is still below the peak of last year and enterprise is still up significantly.

I'd like some color as to what are the drivers you see in the next 12 months for further growth. And then a question on South America. It was up 45% sequentially. If you can add some color as to what is driving that. If it's enterprise versus service providers, if it's overall an economic recovery, what do you see there? Thank you..

Thanks. First part, highlights through (2:57) the next 12 months, I think we're at kind of a transition period to get to the next stage of revenue growth. The drivers in the service provider segment will be, of course, airMAX ac and airFiber.

airMAX ac right now is less than probably a few percent of our overall airMAX volume and it is 2x, 3x performance increase. The results we're seeing in the field are phenomenal. What's holding it back right now is a couple things. One is we haven't gone full force to market with low-cost CPE solutions for multi-points, networks.

And the other thing is backwards compatibility with older legacy airMAX equipment so operators could continue to build out their networks without creating completely different Point-to-Multipoint networks. And we're right at solving both of those issues, addressing both of those issues.

So I think you'll start seeing airMAX growth accelerating again towards the end of this year. On the UniFi side, we've poorly executed on our 802.11ac plan. To put it in perspective, the market leaders in enterprise wireless LAN, 802.11ac access points probably account for two-thirds or more of their total volume today.

In our case and in UniFi's case, it's very minimal. And what's amazing is we're shipping I guess around 2 million per year of vanilla 2.4 gigahertz 11 (4:55) access points, which is pretty phenomenal. So that shows you the strength of the UniFi brand and the user experience. Now, we're going to soon introduce a 11ac UniFi AP line.

We've taken our time with it. It's going to be ready this quarter and it's going to be far superior performance at the same or lower price points than UniFi today. So I think you also see an acceleration of UniFi revenues heading into next year.

In addition to those two main drivers, airMAX ac and UniFi ac, we have AirFiber picking up, EdgeMAX picking up and we have a wave of all new technologies I will talk about in our September conference. Okay, your next question about South America. So I think the exchange rates have been bad in South America.

And even though the sellthrough looks relatively more consistent than the sell-in, you are seeing fluctuations quarter to quarter depending on when our distributors feel it's a good time to spend money to restock their inventory.

Is there a third question?.

Yes, thank you..

Thanks..

Your next question comes from the line of Jeff Lubert with Wells Fargo. Your line is open..

Hey, guys. It's Mike Kerlan on for Jess. Just a couple of questions. Last quarter you mentioned some UniFi inventory was tied up in the U.S. ports. And this quarter looks like both North America and enterprise declined sequentially. So I guess I just wanted to understand what the status is at this point related to the U.S.

port issue and if you feel like your channel partners now have the inventory they need..

So, I don't have detailed information on that U.S. port issue. I'll let IR and our finance team handle that offline after the call..

Okay. And then, secondly, I noticed your head count declined sequentially this quarter. So I just wanted to understand, given all the new product initiatives, if you feel like you are able to hire the talent you need or if it's gotten more competitive and if you currently have the team in place you need to tackle all of these new product initiatives..

Yeah, so sometimes when you have ambitious R&D goals and you ramp up, sometimes you lose productivity. And it's an illusion. More resources don't equate to faster speed or more productivity. So I cut out a lot of inefficiencies and I consider it as addition by subtraction.

But we're still very aggressive in looking for talent and, like I said, we're going to hire anybody we feel could increase R&D productivity and accelerate our vision..

Okay. Maybe just – this will be the last one. Just happened to notice on your website you guys trademarked the name sunMAX. And we've see in the past wireless companies, like Meraki, have tried to leverage solar energy to power access points.

So I guess I was just wondering if you could offer any insight into the plans here and if we should expect Ubiquiti to move into solar as a complementary capability to the wireless portfolio or perhaps something different all together. Thanks..

So what I can say is the biggest strength of Ubiquiti is the unique business model and the unique community. We have 30 million-plus internet connections deployed around the world. That's a lot of rooftops. We have tens of thousands of independent operators around the world.

I think it's probably the largest independent service provider company of its kind. And right now, up until now they've been deploying internet. So our vision is for them to become service providers and provide many different services. Internet could be one, solar could be one, there might be others.

And that's going to be a big part of our vision over the next couple years. I encourage anyone interested, they can go to our conference in September, we'll go through a lot of the plans of this vision in more detail..

Okay. Thanks..

Your next question comes from the line of John Lucia with JMP Securities. Your line is open..

Hey, guys. Thanks for taking my questions. You guys shipped several new products in the quarter, including airFiber X and switches. I just wanted to understand if any of those products meaningfully contributed to the results in the quarter.

And then also how much of a sales there of those new products were channel fill versus backorders?.

I would say airFiber X has been doing very well. I can't give numbers. I expect the airFiber line to be material for sure over the next year. You see a big upgrade cycle happening now with airMAX in the field, Point-to-Point links being upgraded to airFiber X.

In terms of the backfill orders versus immediate sellthrough, I think I'll have our finance and IR people handle that offline after the call..

Okay, that makes sense. And then on the airFiber X, I just wanted to get a sense for the market size relative to airMAX.

And I guess the question there would be how many Point-to-Point products are sold for every Point-to-Multipoint product? How big is that market relative to the airMAX?.

I think airMAX was probably 10 to 15 to 1. So for every access point, we sell 10 or 15 stations. With airMAX ac, since the performance and capacity are greater, I'd expect it to be probably double that. So I'd say 20 to 30 stations per AP.

So you could think of it, if our airMAX volume is several million per year and airFiber X, the potential is to be in every single Point-to-Point link, you're talking in the hundreds of thousands per year for sure is airFiber's potential, hundreds of thousands of units..

Okay. Thank you very much..

Your next question comes from the line of James Faucette with Morgan Stanley. Your line is open..

Hi. This is Meta Marshall in for James Faucette. A quick question on enterprise. It looks like it was still up kind of a good amount year-over-year. Traditionally that had been a little more tied to North American results.

Are there markets where you feel like enterprise is being taken up outside of North America now? And then second question of just this note about some of the South America revenue flowing through, now all flowing through South America instead of North America.

Is that due to kind of a change in pricing? Is that now South American products are sold in local currencies? Or just what caused that switch by those distributors? Thanks..

So from my point of view, South America, -- there's currency exchange issues. EMEA, I think Europe has been consistently strong. Middle East, we haven't seen much because of the political turmoil. To your question regarding UniFi, it's been pretty disappointing.

That business is $150 million, $200 million a year business right now, it should be $0.5 billion plus. And we just mis-executed. You look at the controller features, we moved far too slow. The ac strategy we had was a complete trainwreck. And we've worked hard in the past six months.

I've personally led this team in the past six months and the hope is, starting within the next quarter, you should see a big turnaround with that UniFi AC platform, with UniFi in general. And it shouldn't be a matter of looking at what regions are up versus down in UniFi. The whole thing should accelerate.

And if it doesn't, I'm going to be really disappointed..

Got it. Thank you..

Your next question comes from the line of Ryan Hutchinson with Guggenheim. Your line is open..

Hey, Robert. This is Nate Cunningham on for Ryan.

Can you give us any updates on the UniFi voice and video and what kind of contribution they made to enterprise revenue in the quarter?.

Far less than I would have hoped. Again, I think the vision of both of those products is dead on. If you look at the Voice-over-IP market today, I think it's 30-million-plus phones per year and they're dinosaurs like Polycom, Cisco, Avaya, with mechanical push button phones dominate that market.

There should be no reason why if you have a disruptive, very high-end user experience Android-based solution, there's no reason why it shouldn't take a significant percentage of that market. And I think the reason it started off slow is because we tried to create our own solution completely, which was a little too ambitious.

We tried to be become ring central with our own PBX on a proprietary platform. And that wasn't executed well. So we took a step back and we said, okay, well, let's just offer the Android phones and let's offer management for the Android phones but allow it to interoperate with third-party PBXs.

And I think under that market strategy, it will do very well, but we are missing critical features that are needed for provisioning with these third-party PBXs, like redirect servers and TR-069 is a big standard in provisioning.

And we've been working really hard to implement those and we are going to re-launch with something even more disruptive for Voice-Over-IP. I know that's a big market and I know we're going to get it right eventually. The same goes for video. We're really, really close. We've been at this for, I don't know, five years or six years.

Three generations of hardware, three generations of software and controllers. And the stuff we have now is great. I don't think there's anything on the market at the price points with the features and the power and scalability. It's just not completely polished and packaged, and I think you'll see that within the next quarter or two quarters.

So to answer your question, no, they're not contributing materially up to now. But next year, I feel very confident they're going to materially contribute..

Okay. And on the email fraud, I know there's limited information you can disclose right now.

But is there anything else you can give us on what exactly happened and how long it was going on?.

Yeah, I'm surprised I got this far through the call without a question on that. So, first of all, it's an embarrassing situation. I've been through stages of denial, disbelief, frustration. It hits me probably the hardest of anyone. And just some facts about it. We discovered it on June 5. Initial losses, $46.7 million.

We took a accounting loss of $39.1 million, which takes into account our recovery to-date. And we believe we'll recover a lot more of that. The results of the investigation. We concluded it July 17. There was no criminal involvement or fraud from internal employees. There's no evidence of that.

It seems to be an isolated incident that basically a couple individuals within the accounting group displayed incredibly poor judgment and incompetence. We're taking it really seriously. It's embarrassing. All I can say is everybody knows how big of an issue it is.

I've inserted myself into the finance team and I will have more presence there moving forward to make sure that this can't happen again..

Okay. Thanks..

Your next question comes from the line of Matt Robison with Wunderlich. Your line is open..

Thanks for taking the question, or two questions. Robert, why did you FTI Consulting for your interim services? And just an update about the lower UNII band, the airMAX ac products for North America – or U.S.

rather, when they're going to come out and be available?.

Well, after an incident like this, you've got to really question the overall culture and accountability of our finance group in general.

So I think the responsible move was to bring in independent experienced accounting consultants to audit the group internally and look at our controls and help establish a better culture and more accountability moving forward. Next question about DFS. I know you guys check our community forums a lot and you're in tune with our U.S.

market, which is probably somewhere in terms of deployments around 15%, 20% of our overall operator deployments. So it's an important market, but it's a sub-set of our overall global market. In terms of DFS, what people refer to when they talk about DFS is they're talking about essentially the new 5 gigahertz rules which open up more spectrum.

All of these operators want more spectrum. And to get the additional spectrum, specifically the low-end 5 gigahertz band and the mid 5 gigahertz band, requires compliance to a new set of rules called the UNII Rules that the FCC implemented.

Now, previously the FCC operated over a set of rules called DTS, which were much more forgiving in terms of effective radiated power. And it allows you to link over long distances and have larger multi-point network cell sizes.

So getting our products reclassified under these new rules has been a little complex because we wanted to make sure we did everything possible to get the most compliance performance for our user base. That's why it has taken so long so to-date.

We finally rolled out the new UNII channel plans with our new firmware upgrade for the airMAX, the M5 series. That was done this week. And that opens up the extended spectrum with the UNII-1 and UNII-3 bands. Now the DFS portion of the new UNII plan is a mid-band, the UNII-2. That requires on-site FCC testing in Washington.

And we have been in the queue for a long time. We're finally doing that on-site testing this month. So I hope within the next quarter, it will all be wrapped up and we'll have provided all the spectrum possible to our U.S. operators..

Regarding the CFO searches, are you putting that on hold until you get through the forensics with Mr.

Sprague, or are we talking about a timeframe?.

No, we're doing both in parallel. So FTI is working with us on a temporary basis, and in parallel we're looking for outstanding financial accounting people to enhance the team..

With Rohit leaving, who is going to provide the continuity for Mr.

Sprague regarding controls?.

I think for that level of granularity, I'm most comfortable with our guys answering those questions offline..

Okay. Thanks..

Your next question comes from the line of Georgios Kyriakopoulos with SunTrust. Your line is open..

Great. Thank you. Robert, the U.S. market remained challenged and you were down 15% year-over-year. And also based on the guidance, it seems to remain at around the same level next quarter.

Can you help us understand what's happening there? Is it just a product transition to airMAX ac and airFiber X? Or is the overall market affected by macro issues? Maybe competition has increased. Any color would be helpful..

I think what's holding us back right now is R&D execution. So if you take the example of UniFi, that's been on the market for about five years and it hasn't evolved to the level I expected it to. We don't have any compelling 802.11ac strategy. And if you look at the big players in enterprise, wireless, most of the revenues today come from 11ac.

The Internet applications and the bandwidth requirements for them is increasing. And if you don't have a compelling strategy or a compelling ac platform, you can't be expected to continue to double and triple growth. So that's definitely the case in UniFi.

And I believe there's a lot of that also in the airMAX world with our kind of slow execution on airMAX ac..

Okay. And then some time ago, you entered into distribution agreements with Redington and the ECS in India and China just to help you gain traction in these countries.

What's your progress there and when you might expect market upside in the APAC region?.

Yeah, China and India -- they're growing slowly. We definitely can do a lot better. And I think we need to look into some kind of country-specific strategy with potentially a country leader or a general manager to drive a business plan for those markets.

They are a little more special than, say, areas like South America or Eastern Europe, where we just were able to organically grow without a single person on the ground just because our products were disruptive. In India and China, I believe you can use this disruption and evangelism approach.

There are companies like Xiaomi or Flipkart in India that have used this approach and bypassed traditional relationships. But it does take more, let's say, it does take some hand-holding, more hand-holding than I thought. So I think we could benefit by having local guys on the ground there. I'm looking into it right now..

Okay. Thank you..

Your next question comes from the line of Rajesh Ghai with Macquarie. Your line is open..

Yes, thanks.

On the accounting issues that you're having, do anticipate closing the books on time this quarter or how deep is this investigation is going to be and how long could it take?.

Yes, so just to reiterate, there's no material impact on ability to fund working capital, capital expenditures, other liquidity requirements of ongoing operations. There's no impact on compliance under our credit agreement and there shouldn't be any problem with closing the books this quarter..

Okay, good.

And as far as we know DFS certification is concerned, a two-part question, if you have customers who have procured product in the past and they cannot use it, is there a chance you may have to do a recall for that product in case you have to do something more drastic like build a new box? And given that I guess (29:00) have been talking about their products being certified, is that impacting business at all in North America?.

Okay, so we ship our products in the 5 gigahertz band under DTS rules, which allow for higher ERP in the 5.7 to 5.8 high 5-gigahertz band. That's how we advertise it and on our data sheets. That's what people expect when they buy it.

The fact that we're going and retesting all these products under the new UNII Rules and increasing the spectrum available and allowing these operators in the field to upgrade that CCID on their units and take advantage of the new channel plan is something we're giving to them.

There shouldn't be any expectation of this functionality when they originally bought the product. To add to that, the DTS rules will be in effect through July of next year, July 2016. Anything that's in the field can be grandfathered and operate at the higher powers in the high 5-gigahertz band.

Anything after that we ship will have the new UNII-1, 2, 3 channel plan. To your question about competitors taking market share, I don't think in Point-to-Point they have taking market share. airFiber has been really compelling, especially airFiber 5X, you guys can see the reviews. That has full 5 gigahertz band operation capability.

There is potential we have lost market in the multipoint segment because we have not opened up the lower UNI band. But I also think it is a little misleading because our existing products we have been shipping, including the Rocket M5 and NanoBridges, did have the old mid-band DTS DFS band. And I know that gets confusing.

But we do have products and we have been shipping products all this time that do have DFS-capable operation. It's just that a sub-set in our newer products did not have it..

All right. Thank you so much..

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes the Q&A section. You may now disconnect. Everyone, have a wonderful day..