UBNT - Ubiquiti Networks

[Dustin T]

Are you guys still holding at these prices? I posted a summary of my thoughts on Q2 here: https://seekingalpha.com/article/4124178-it-sounds-like-shorts-getting-nervous#comment-77410396

 

At its current price UBNT seems fairly valued to me, but I'd like to hear some opinions from traders on how the squeeze might pan out (I'm much more of a fundamentals guy myself).

 

I'm holding with no intentions to sell, I would trim the position if something more attractive was available but this market doesn't have a lot of great value options.

 

I would agree it's fairly valued though.

[chrispy]

Relatively small position for me that I am going to let go untouched.

 

Their ability to consistently create and develop new hardware, with minimal downside due to failure, makes me believe that a home run product could happen at anytime and there is no way to foresee it. Frontrow was not much of a hit, but Pera said the cost to develop such great technology was very cheap to them compared to an acqusition. One can think of the frontrow poor release results as acquiring great technology for very, very little.

 

Edit: with a majority of sales to international markets, the falling dollar is a tailwind along with repatriation.

[rkbabang]

Relatively small position for me that I am going to let go untouched.

 

Their ability to consistently create and develop new hardware, with minimal downside due to failure, makes me believe that a home run product could happen at anytime and there is no way to foresee it. Frontrow was not much of a hit, but Pera said the cost to develop such great technology was very cheap to them compared to an acqusition. One can think of the frontrow poor release results as acquiring great technology for very, very little.

 

Edit: with a majority of sales to international markets, the falling dollar is a tailwind along with repatriation.

 

+1.  Me as well.  It is a small position and I intend to just hold.  I like the company, the products, the CEO (who owns a ton of stock), the fact that they have been buying back the few shares that the CEO doesn't hold, and the fact that they seem to take a long term view rather than a quarter by quarter view as many companies who care about what wall street thinks.

[Grant]

Their ability to consistently create and develop new hardware, with minimal downside due to failure, makes me believe that a home run product could happen at anytime and there is no way to foresee it.

 

It's actually not hard to foresee their successes - just read the forums. Their products tend to ramp up slowly, so there's usually lots of time between when the community figures out a product will be a hit and when Wall Street does. Their two huge successes (AirMax and UniFi) were easy to spot.

[gjangal]

i am also in the fairly valued camp. But if growth continues like previous years for a few more years, it maybe still undervalued. It depends on growth

 

I had lent my shares out to the securities lending desk. They returned it around when it was 67. I thought it was a signal for a short squeeze. We may be in the midst of a short squeeze already

[gjangal]

Results are out , stock has taken a beating. i think writing down frontrow was a good thing. Enterprise still growing nicely. Cash net of debt is ~335 mn

 

http://ir.ubnt.com/sites/default/files/2018-02/UBNT%202QFY2018%20Earnings%20Management%20Prepared%20Remarks%20FINAL.pdf

[gjangal]

I just read the transcript , i agree with you, it’s a bad response. I was also surprised by how short the q&a session was , there was like 3 or 4 questions

[gjangal]

SEC subpoena

 

https://www.sec.gov/Archives/edgar/data/1511737/000165495418001671/0001654954-18-001671-index.htm

[pau_]

Apparently there's a company that does FOIA requests to discover undisclosed SEC probes. The tweets are vague probably because it's a subscription site and they're trying to sell their product. I'm long but considering getting out.

 

 

 

We’ve been tracking an undisclosed SEC probe at $UBNT since DEC-2016.

 

2/ Investors should ask: What changed to prompt disclosure of an SEC probe $UBNT management previously did not view as material enough to disclose?

 

3/ investors in $UBNT should also ask if the 13-Feb subpoena is the first ... or the latest???

[Dustin T]

Apparently there's a company that does FOIA requests to discover undisclosed SEC probes. The tweets are vague probably because it's a subscription site and they're trying to sell their product. I'm long but considering getting out.

 

 

 

We’ve been tracking an undisclosed SEC probe at $UBNT since DEC-2016.

 

2/ Investors should ask: What changed to prompt disclosure of an SEC probe $UBNT management previously did not view as material enough to disclose?

 

3/ investors in $UBNT should also ask if the 13-Feb subpoena is the first ... or the latest???

 

Looking at the history of the "probesreporter" tweets didn't lead me to think they had much in the way of unique knowledge. A bunch of vague innuendos about well known companies and some Trump rants.

 

I'm long UBNT and of course I find an SEC investigation as troubling as you, but I understand only 1 in 10 SEC investigations leads to proceedings and I would assume most often they lead to penalties and fines. I'm holding and watching.

[gjangal]

In this case it looks like they want to look at processes and internal controls. AFAIK if there is no ‘material’ weakness in internal controls and no falsification of accounts, UBNT may escape with a rap on the knuckles and a fine

 

Looks like they need a oversight layer in the company atleast.

 

 

[bci23]

Just listening to the CEO talk, something isn't right here. When he talks about how he built UBNT its way too generalized with buzzwords and lacking any sort of specifics to demonstrate that he actually went through the pain and struggles of starting a company. I dunno if its big enough to bring the whole thing down but there is clearly something wrong here imo.

 

[chrispy]

I had a small position and wasn't too concerned with Left but this is a little bit more concerning. Sold my shares at a slight profit this morning.

 

Probably was before and is definitely now out of my circle of competence...

[pau_]

I should add that I use their products, know people who are passionate about their products and install them, and know one person who used to work for them who speaks highly of their engineering. At least some of the product and community-channel story rings true to me. But yeah, Pera lacks polish. I cringed a bit when he said recently during a conference that he doesn't usually read but read this book called The Outsiders and it resonated with him. This after Valeant's implosion (not that that invalidates the book completely).

[bci23]

I should add that I use their products, know people who are passionate about their products and install them, and know one person who used to work for them who speaks highly of their engineering. At least some of the product and community-channel story rings true to me. But yeah, Pera lacks polish. I cringed a bit when he said recently during a conference that he doesn't usually read but read this book called The Outsiders and it resonated with him. This after Valeant's implosion (not that that invalidates the book completely).

 

I don't even think its polish thats the issue. I think a founder/CEO can be "unpolished" and still demonstrate knowledge, competence and authenticity but i don't get that feeling from Pera.

[Grant]

After having sold last month, I just went long again yesterday. I sold $50 Mar puts and bought $55 Jan 2019 calls. When the IV dropped today I bought my puts back. I may add to my calls later this week. Given there is now a greater chance of significant fraud having occurred, I feel calls offer a better risk/reward than shares.

 

However I still judge this chance to be very small. They recently repatriated $712 million in cash. If there's significant fraud, where did this money come from? Did someone loan it them, and if so who? Why did Wells Fargo just increase their line of credit for the second time since the Citron Report?

 

The SEC investigation into Citron's charges was expected and doesn't concern me. What does is that their subpoenas may have required a search warrant be granted from a judge, indicating a (relatively) neutral party found probable cause. If I'm wrong about this I'll buy more, but I can't find any good sources on this.

 

In the short term I'm very bullish. There's little chance of a Wells Notice being issued in the next month or two. Pera also has a mountain of cash and is willing to use most of it to repurchase stock. We know he bought back at an average of $54.98 last quarter, so he was probably willing to buy up until $58 or so. This quarter that number will probably be higher. At the current PPS he has enough cash to repuchase almost 60% of the float! Shorting here is suicide. If you're looking to sell UBNT, my advice is to wait a month or three.

 

Just listening to the CEO talk, something isn't right here. When he talks about how he built UBNT its way too generalized with buzzwords and lacking any sort of specifics to demonstrate that he actually went through the pain and struggles of starting a company. I dunno if its big enough to bring the whole thing down but there is clearly something wrong here imo.

There's far more information available on the community than he could present to investors, even if he wanted to. I would suggest reading his community blog posts on AirMax: https://community.ubnt.com/t5/Ubiquiti-Announcements-and-News/From-Integrated-Product-to-Challenging-Goliath/ba-p/1858930

And UniFi: https://community.ubnt.com/t5/Ubiquiti-Announcements-and-News/UniFi-The-Beginning-of-The-Higher-Market-Disruption/ba-p/1919286

Here's one on AirMax AC Gen 2: https://community.ubnt.com/t5/Ubiquiti-Announcements-and-News/Filtering-in-3-Domains-Why-PrismStation-is-the-Greatest-Product/ba-p/1961669

 

As you can see, Pera is rarely humble when discussing UBNT's future prospects. However he's often quite honest about past mistakes.

 

In times like this it's helpful to remember his quote from the investor's meeting:

 

...we just like to take what the market gives us. Look at the Teledyne and Singleton. If we can buy stock at fractions of a dollar, we feel it's undervalue, then we buy it back because it will only help our end goal of increasing long-term EPS. If we can retire more shares, our EPS long term is only going to be higher. So it's painful, but the way I look at it this long-term shareholders again getting paid off the pain.

[Grant]

They recently repatriated $712 million in cash.

 

No, they didn't.

 

What am I mis-reading? Per the 10Q they paid 15.5%  in "Repatriation Tax" totaling $110.5 million. $110.5M / 15.5% = $713M. I assumed this was for repatriated cash. The latest 10Q states "as of December 31, 2017, we held $676.0 million of our $823.8 million of cash and cash equivalents in accounts of our subsidiaries outside of the United States" but does not mention cash balances at a more recent date (though the older filings don't either).

 

Are you saying U.S.-based companies are taxed on the cash holdings of their subsidiaries, even if they don't repatriate the cash?

[Foreign Tuffett]

Apparently there's a company that does FOIA requests to discover undisclosed SEC probes. The tweets are vague probably because it's a subscription site and they're trying to sell their product. I'm long but considering getting out.

 

 

 

We’ve been tracking an undisclosed SEC probe at $UBNT since DEC-2016.

 

2/ Investors should ask: What changed to prompt disclosure of an SEC probe $UBNT management previously did not view as material enough to disclose?

 

3/ investors in $UBNT should also ask if the 13-Feb subpoena is the first ... or the latest???

 

Looking at the history of the "probesreporter" tweets didn't lead me to think they had much in the way of unique knowledge. A bunch of vague innuendos about well known companies and some Trump rants.

 

I'm long UBNT and of course I find an SEC investigation as troubling as you, but I understand only 1 in 10 SEC investigations leads to proceedings and I would assume most often they lead to penalties and fines. I'm holding and watching.

 

I don't think he (it's run by a guy in Minnesota) has any particularly unique knowledge either. The Probes Reporter site lists "132 US Companies" as having undisclosed SEC Probes as of the first of this year. Insofar as I can tell, he's just sending out Freedom of Information requests on every large publicly traded company and then looking for anything that comes back Exemption (b)(7)(A). That's it.

[Foreign Tuffett]

Just listening to the CEO talk, something isn't right here. When he talks about how he built UBNT its way too generalized with buzzwords and lacking any sort of specifics to demonstrate that he actually went through the pain and struggles of starting a company. I dunno if its big enough to bring the whole thing down but there is clearly something wrong here imo.

 

You don't think Pera founded UBNT? I think even the most hyperbolic short case would grant that Pera founded the company.

[Foreign Tuffett]

I am long UBNT, but am selling $70 covered calls. I have near-term concerns; mostly I don't think UBNT will hit its FY2018 mid-point revenue guidance. I rarely mind exiting such a volatile stock at an all-time high. Who knows what'll happen with such a high short interest though?

 

The trouble with building a case based on unusual incidents is that this is an unusual company. You'll find lots smoke regardless of whether or not fire exists. This is especially true when looking at South American distributors, who are necessarily shady. I wouldn't trust anything Flytec self-reports, for obvious reasons. I wouldn't be surprised if Flytec Inc. did $3.3M in 2011, but I'm fairly certain Flytec SA did far more.

 

I have little interest in Flytec because they do not expose any data I can scrape. However they've been an UBNT distributor for years, and it'd seem fairly safe to trust them to keep paying their bills. Corruption is simply a fact of life in many foreign countries, and does not necessarily indicate a problem for the supplier.

 

In the latest 10-Q I'm fairly certain "Customer C" is Ingram Micro. This means Flytec could have a maximum A/R contribution of 11%. Since South America was 13% of revenues, I highly doubt Flytec was more than 6%.

 

Frankly I think the fraud shorts are asking the wrong questions. Do they really think KPMG and Wells Fargo are being fooled? After Andrew Left more or less claimed UBNT's cash horde is fake on CNBC?

 

The right questions are all R&D related and perhaps outside the short's areas of expertise. I worry neither LTU or AirMax AC seem to have MU-MIMO APs in their pipeline. I worry LTU won't be all it's hyped up to be, and the future of fixed outdoor wireless may actually be standards-compliant LTE gear. I worry the new uFiber products won't catch on. There's tons of optionality in UBNT, but also quite a bit of risk. Fortunately with a little technical knowledge it's easy to figure out how their products will do long before the market does.

 

I would add that, after UBNT was defrauded out of almost $50 million, they retained FTI Consulting "to provide an Interim Chief Accounting Officer and other resources" (quote is from the FY 2015 10-K). So whoever inside Ubiquiti is pulling off this fraud also managed to hoodwink FTI Senior Managing Director (and former UBNT Interim CAO) Mark Spragg.

 

http://www.fticonsulting.com/our-people/mark-c-spragg

 

 

Schwab711, you are clearly skeptical of Ubiquiti. What's the short case as you see it? What aspect of the company or its operations is fraudulent?

 

 

Disclosure: While I've been long UBNT in the past, I don't currently have a position.

[Grant]

Previously, foreign generated cash could be indefinitely reinvested overseas so there was no need to book a liability representing the future tax payable. Now that there is a finite window to defer taxes on foreign income (8 years) so a credit was required.

 

They haven't paid the $110.5m yet. It was a non-cash event. It is also not a tax on the cash balance, just for clarification. The $110.5m represents taxes that UBNT owed, but never paid, at the present repatriation rate.

 

Thanks! I clearly misunderstood how this works. I'm much better at analyzing technology than finance and SEC filings. With this in mind I won't be adding to my position.

 

I don't think he (it's run by a guy in Minnesota) has any particularly unique knowledge either. The Probes Reporter site lists "132 US Companies" as having undisclosed SEC Probes as of the first of this year. Insofar as I can tell, he's just sending out Freedom of Information requests on every large publicly traded company and then looking for anything that comes back Exemption (b)(7)(A). That's it.

 

After seeing UBNT on Probes Reporter I filed a FoA request with the SEC. I did indeed get that response: "We are withholding records that may be responsive to your request under 5 U.S.C. § 552(b)(7)(A), 17 CFR § 200.80(b)(7)(i)..."

[Grant]

There is something of a conspiracy theory floating around: these short attacks are perpetrated by Steve Kaplan, founder of Oaktree capital, who wants controlling share of the Grizzlies. He commissioned Left for the initial attack, and pressured the SEC into starting a formal investigation.

 

I never put much stock in this, but the timing of this investigation is odd. With all the crypto-currency scams like RIOT, LFIN and a good portion of all ICOs, one would think the SEC would have better things to do than investigate what is at the least a real and profitable company.

[Grant]

Just listening to the CEO talk, something isn't right here. When he talks about how he built UBNT its way too generalized with buzzwords and lacking any sort of specifics to demonstrate that he actually went through the pain and struggles of starting a company. I dunno if its big enough to bring the whole thing down but there is clearly something wrong here imo.

 

You don't think Pera founded UBNT? I think even the most hyperbolic short case would grant that Pera founded the company.

 

Yeah, unless you think a lot of WISPs are in on the scam, there's no question he founded Ubiquiti. Pera's original idea of using 802.11 gear for fixed outdoor wireless is what enabled the WISP industry as it exists today. The original AirMax was wildly successful, which is why so many have copied it (chiefly Cambium's ePMP line). For the history behind AirMax, see the story I posted earlier (which is sadly missing pictures): https://community.ubnt.com/t5/Ubiquiti-Announcements-and-News/From-Integrated-Product-to-Challenging-Goliath/ba-p/1858930

 

Here's Pera talking to some engineering students in Taiwan about FrontRow: https://www.youtube.com/watch?v=QHxGWALMvxA

[Grant]

Schwab711, What about UBNT is a black-box to you?

 

They have historically not done a lot of business in China. TPLink cloned an older version of UniFi, so it's probably preferred for people who want to spend less money and don't mind using what amounts to state-sponsored networking hardware. Last quarter they saw a big jump in Asia revenues, which might be related to Tencent's recent adoption of UniFi.

 

I would not call Ubiquiti extremely sophisticated. It's mostly a bunch of engineers. They make lots of elementary errors on their less-successful product lines which can probably be traced back to their lack of oversight. Confusing user sessions with user count was unfortunately par for the course.

[Foreign Tuffett]

Relatively small position for me that I am going to let go untouched.

 

Their ability to consistently create and develop new hardware, with minimal downside due to failure, makes me believe that a home run product could happen at anytime and there is no way to foresee it. Frontrow was not much of a hit, but Pera said the cost to develop such great technology was very cheap to them compared to an acqusition. One can think of the frontrow poor release results as acquiring great technology for very, very little.

 

Edit: with a majority of sales to international markets, the falling dollar is a tailwind along with repatriation.

 

The bolded is incorrect.

 

From UBNT's most recent 10-K: "Our sales are denominated in U.S. dollars, and therefore, our revenues are not directly subject to foreign currency risk."