UBNT - Ubiquiti Networks

[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.

 

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

 

I'm not questioning whether he founded it (he obviously did), i'm questioning whether he is a guy that legitimately built the company from $0 to $1b revenue in 15 years like their financial statements say. I listen to soo many founders talk about their business and its usually never a doubt that these folks have been in the trenches and grinded it out from the very beginning. With Pera theres just something off but I can't really pinpoint what is it. It might be something minor in the grand scheme here or it might be something major i dunno but i have little doubt there is something off here between the story that is told/portrayed publicly and the reality of what has actually gone on.

[Grant]

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."

 

As the USD drops, prices at distributors (and resellers) drop, increasing demand. This can be seen in Amazon data (camelcamelcamel.com). Also, some European distributors like eurodk.com offer pricing in USD, EUR and GBP. The USD price is (relatively) fixed while the others vary with exchange rates.

 

Historically the company has done better with a weaker dollar.

[Grant]

I'm not questioning whether he founded it (he obviously did), i'm questioning whether he is a guy that legitimately built the company from $0 to $1b revenue in 15 years like their financial statements say.

 

We know from various channel checks and simple Google searches that UBNT ships a lot of product. UniFi access points have been popping up everywhere since 2016. Suppose the books are cooked or channels are stuffed in a manner which doubles the real revenue from $500M to $1B this year. Maybe the company doesn't turn much of a profit, but it clearly makes something since growth has been organic.

 

Is this kind of fraud common? Pera is fabulously rich (and can afford to buy the Grizzlies) either way. He has no great reason to want the share price higher (most evidence indicates he wants it lower).

[Foreign Tuffett]

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."

 

As the USD drops, prices at distributors (and resellers) drop, increasing demand. This can be seen in Amazon data (camelcamelcamel.com). Also, some European distributors like eurodk.com offer pricing in USD, EUR and GBP. The USD price is (relatively) fixed while the others vary with exchange rates.

 

Historically the company has done better with a weaker dollar.

 

Good point. I stand (somewhat) corrected.

 

I still think it's noteworthy that, unlike a company like PM, UBNT's financials at a given level of sales and expenses won't be ravaged by currency fluctuations. Again from the 2017 10-K:

 

"A 10% appreciation or depreciation in the value of the U.S. dollar relative to the other currencies in which our expenses are denominated would result in a charge to our income before income taxes of approximately $3.2 million."

[oddballstocks]

What's the consensus on these guys?

 

I ask as someone who's considering some of their gear.  I need a 10GigE fiber switch, theirs is $550, a similar Cisco offering is $2500.

 

Looking at this: https://www.ubnt.com/unifi-switching/unifi-switch-16-xg/

 

The main rub on them is the support.  Support?  What's that?  When we buy Cisco gear the support contract usually costs 30%-50% of the purchase price, but that also means someone will be onsite and will remain until the issue is fixed within two or four hours 24/7/365. 

 

Seems like you need to buy a backup Ubiquiti everything if that's the case.  I'm not opposed to buying two switches at a time when they're 20% of the Cisco cost.

 

Does anyone have actual enterprise experience with these things?  I'm looking to push a few hundred Gbps through these things at once on dedicated machines in a datacenter.

 

I'll say this, if you head over to Spiceworks the IT managers on there LOVE these things as well.

 

I like Cisco's gear, but the prices make me cringe.  The other place Cisco gets you is licensing.  You buy a switch, you own the hardware.  But you aren't legally allowed to use the software unless you obtain a separate license from Cisco.  From there they turn on and off features based on what you'll pay.

 

The last Cisco switch I purchased the hardware itself was about 30% of the cost, the rest was SmartNet and licensing for features.

[oddballstocks]

Replying to myself...

 

Spent an hour reading networking forums on this stuff.  Seems like the Ubiquity stuff is junk for the enterprise.  Lots of reports of dead ports, needing to power cycle, recommendations to buy cold spares.

 

I will probably look for a late model Cisco switch and buy it refurbished.

 

I was hoping to save a lot!  But by the time I added up having to buy duplicates, plus the time to duplicate configs and create a process to manage that the cost savings disappeared.

 

Looks like people like their stuff for home routing?  That makes sense.  Unplugging a router is easy.  If anything of ours goes down sometimes has to drive to a location to fix it, minimum 1hr round trip.

[Grant]

@grant: Can you elaborate on what channel checks you are referring to?

 

Several of us longs track inventory levels at distributors like shopblt and streakwave. I used to track Amazon rankings until I discovered camelcamelcamel.com. There's plenty of discussion about this over on Seeking Alpha.

 

oddballstocks, yeah UniFi is most well known for its WAPs and controller. It's done very well in SMBs, but has not significant penetrated the enterprise (yet?). I have no experience deploying UniFi in an enterprise environment, but the impression I get is that non-UniFi switches and routers are often used with UniFi WAPs.

[Foreign Tuffett]

IMO this is back to a level that approximates fair value (around 16X TTM operating profits).

[Foreign Tuffett]

IMO this is back to a level that approximates fair value (around 16X TTM operating profits).

 

How do you arrive at 16x EBIT as the appropriate level?

 

They have no recurring revenue and are dependent on illicit sales tactics from the Flytec's of the world. They were just subpoenaed for financials, accounting practices, audits, 3rd party relationships, and distributor practices (and likely a separate misleading/false statements in SEC filings investigation, but whatever).

 

If this happened to any other company, given what is already publicly known about their business practices, wouldn't we at least be prepared for the company to restate prior financials (based on the scope of the subpoenas alone)?

 

 

Days' Payable currently stands at 7 days. Down from 38 days six months prior and 55 days 1.5 years ago.

 

The Cash Conversion Cycle was 1 day in FY2013. It's now 109 days.

 

Schwab711 you've clearly been following UBNT for some time and in some detail. I understand your skepticism, but I think you're missing the forest for the trees.

 

All or nearly all of the actions Pera has taken indicate that he thinks the UBNT's stock is very valuable. If the company is fraudulent in a material way, Pera is either (1) unaware of it (2) in complete denial. I think both these possibilities are exceedingly unlikely. Also, unlike most stock frauds, Pera isn't promotional. Quite the opposite in fact. as he's very quick to note when he and his company have made mistakes and missed opportunities. Have you watched the IR day video?

 

Does UBNT have poor corporate controls? Yes. Is the company materially fraudulent? No (although it's very difficult to prove a negative, so there's always room for doubt here).

 

Disclosure: I just finished selling out of my position in UBNT today, but may buy back in at any time.

[oddballstocks]

An update to my previous post.  I spent a long time investigating their actual products.  They are alluringly cheap.

 

I think for home use, or maybe a small lab these are appropriate devices.  But I wouldn't put these in an enterprise environment. 

 

They overcommit each port, and the switches don't have enough bandwidth to support full line rate switching.  If you plug servers into all ports you'll experience a rash of dropped packets.  Solutions are "don't use all the ports" to "expect dropped packets, these are cheap" etc. 

 

You can replicate their products if you're interested.  They use a Linux switching package/platform.  If you Google you can find switch chassis that you can install anything you want on.  So you can buy your own blank hardware, install the same linux and voila, you have a custom switch.  It's a LOT cheaper, but you need knowledge and time.

 

In the end I just paid the Cisco-tax.  Took eight minutes to configure the switch and I'm on my way.  I expect this to run issue-free for years in a datacenter, out of sight and out of mind.

 

They are really pushing the envelop on prices.  If they could develop something rock solid stable then they'd have a significant shot in the enterprise market.  I'm sure someone would even create a company to provide paid support.  That could be a good market, problem is people buy for price when they buy Ubiquiti, and it's unlikely they'll buy support too.  Double edge sword.

 

[Dustin T]

 

The IR day is part of what makes me so uncomfortable with Pera. He didn't want to talk about accounting specifics during the IR day, despite that being the reason for Citron's claims and setting up the IR day. He doesn't care about the differences between COGS and SG&A. Most of the questions were softballs that didn't resolve outstanding concerns. I've listened to it in entirety a few times and I still don't understand why they had the event or what I was supposed to be comforted by from it.

 

 

I would like to clarify that the IR day was set up in advance of Andrew Left's claims and refuting Citron was not the purpose of the IR day. You can read into it what you will as to whether he should have used that forum to refute those claims, but if you read through them they were far from a well thought out case. I am certain you can make a more convincing short case than Andrew Left.

[Grant]

I'm really fascinated with how resilient UBNT's investor base is.

 

Many of UBNT's retail investors are WISPs and networking professionals who have made a lot of money with UBNT gear. They aren't the sort of people prone to believe UBNT is a fraud, or pay much heed to Wall Street. Also, the SEC investigation seems to simply be a follow-up on Citron's allegations. While it's not good news, it's not entirely unexpected.

 

They have no recurring revenue and are dependent on illicit sales tactics from the Flytec's of the world. They were just subpoenaed for financials, accounting practices, audits, 3rd party relationships, and distributor practices (and likely a separate misleading/false statements in SEC filings investigation, but whatever).

 

If this happened to any other company, given what is already publicly known about their business practices, wouldn't we at least be prepared for the company to restate prior financials (based on the scope of the subpoenas alone)?

 

I wouldn't expect this, no. The SEC subpoenas marked the transition from an informal investigation to a formal one. They are voluntary, and did not indicate a warrant was issued (meaning no judge looked at this and found probable cause). Also, the data I've seen (https://www.cornerstone.com/Publications/Articles/Disclosures-of-SEC-Investigations-Resulting-in-Wel.pdf) indicates very few SEC investigations result in Wells Notices.

 

Additionally, the company repurchased shares at an average price of $57.28 last quarter. My guess is they'll buyback until ~$62 this quarter. SEC investigations aren't known for their speed. Longs know this, and probably saw little near-term downside to purchasing under $65. I bought $55 2019 calls on the recent dip. I'm holding them until we see at least $75. I would not consider shorting UBNT under this price.

 

Note the timing of the SEC subpoena disclosure: a week after it was received, and the first day the company could resume buybacks after their ER. Disclosing SEC investigations are also completely voluntary. IMO what happened on Feb 20th was a short trap, which worked flawlessly. Assuming UBNT is repurchasing up to $62, by my estimation they should have been able to retire 1.1M shares.

 

All or nearly all of the actions Pera has taken indicate that he thinks the UBNT's stock is very valuable.

 

This. When we aren't sure if we can trust what someone says, we should look at their actions to determine their motive. I do believe Robert issued aggressive FY2018 guidance and held the investor day so he could sell stock at a higher price, and I also believe he thinks the shares are very valuable.

 

I'm continually baffled by the determination of shorts to bet against an insider with seemingly limitless buyback funds at his disposal. How exactly do they think they'll win? If you're going to short UBNT, do it at a price far above where Pera is willing to repurchase shares!

 

oddballstocks, in addition to your points, UBNT is currently experiencing a shortage of almost all of their switches.* This is not the sort of problem enterprise users want! As I've said before, if UBNT penetrates the enterprise it'll probably be the WAPs leading the way. Their switches have never been as compelling of products.

 

* I'm not sure how much of this is due to low supply or high demand, but it's at least partially due to the Chinese New Year.

[Grant]

I really appreciate the stats but your Wells Notice sample includes a large portion of pre-GFC subpoenas that faded during the crisis. I suspect that specific 5y period is quite the outlier. Especially with the current enforcement regime (which I commend, this far).

 

Between 2003 and 2007 (post-Sarbox) there were 4,520 investigations initiated by the SEC. In this same time period there were 114 Wells Notices issued. Yes it'd be nice to have more recent data, but these numbers suggest nothing will come of this.

 

Also, the average length of time between disclosure of a formal investigation and a Wells Notice was slightly longer than a year. Moveover, the SEC likely has its hands full with a smorgasbord of crypto-scams. This is one reason why I say UBNT is a terrible short here.

 

If someone had of posted they shorted at $80+ I would not have objected. I got out of all my UBNT long positions in Jan.

 

Buying back stock with borrowed money is easy for desperate folks. Not saying it must be so, but UBNT should be repatriating funds at their first chance. Let's see if they do.

 

If they don't repatriate a lot of their cash and I see a plausible explanation of how UBNT could be fooling auditors and bankers, I'll sell my calls. Otherwise I plan to hold them at least until we see how well LTU and uFiber Gen 2 is selling.

 

That's illegal, but par for the course.

 

I can't speak to the legality of it, but I was glad to get decent guidance regardless of the motivation. "Analyst" guidance has always been crap, especially for longer time periods. I think their low-end guidance being no new product line successes was fairly accurate, but obviously the FrontRow debacle threw a wrench into this. We could still hit the low-end targets though.

 

Like for example: selling +$61million UBNT stock @ lower prices than it trades today.

 

Yes. He sold at an ATH. I can't blame the guy for wanting to diversify (insider buys are more predictive than insider sells for reasons like this). At the time no one knew the Citron squeeze was coming.

[Grant]

Evidently UBNT has hired a team of wireless engineers from Ruckus: https://wirednot-wordpress-com.cdn.ampproject.org/c/s/wirednot.wordpress.com/2018/03/07/ubiquiti-gets-serious-about-hospitality-market/amp/

 

Having used and liked Ruckus products in the past, I think this could be great news. It reminds me of Pera poaching the AirFiber team from Motorola. The problem with Ruckus gear was always its cost, so if their talent can be combined with UBNT's cost structure, great things could be done.

[gjangal]

https://finance.yahoo.com/news/ubiquiti-networks-reports-third-quarter-123000032.html

 

The most important thing i was looking for was the repatriation of cash. That sends the best signal to shorts

 

Let’s see what the market says

[chrispy]

The overseas cash was the only significant question I had... Very impressive numbers.

[Foreign Tuffett]

The overseas cash was the only significant question I had... Very impressive numbers.

 

I actually didn't think they were that good. Revenue growth is getting more-and-more difficult to come by. This is the first quarter since at least early 2016 where revenue didn't grow Q/Q. The Service Provider segment, which I think is the "moat-ier" part of their business, isn't growing at all, and may even be shrinking.

 

Of course, bulls can point to aspects of the short case that have been debunked: The cash is real! The Grizzlies ownership situation has been resolved!

[chrispy]

I wasn't comfortable with holding and sold out but am cheering Pera on. The Enterprise numbers have increased

[Guest Schwab711]

Very impressive that they repatriated. I was clearly wrong in that regard. I'm not sure I can add much else at the moment. Congrats to the longs!

[gjangal]

i do appreciate the comments everyone made on this thread.

 

My whole thesis was only one point that this was a real business with real cash in the bank. Such a business doesn’t warrant 40% of float to be short. I m still HODL ing as i think the shorts will be forced to buyback. At lower prices this was undervalued but not so much anymore

 

Brokers were ready to offer a lending rate of 14% to holders of this stock . Wonder what rate they lent to short sellers

[Grant]

I actually didn't think they were that good. Revenue growth is getting more-and-more difficult to come by. This is the first quarter since at least early 2016 where revenue didn't grow Q/Q. The Service Provider segment, which I think is the "moat-ier" part of their business, isn't growing at all, and may even be shrinking.

 

I don't think it actually shrunk. All my indicators say demand for AirMax AC 2 is increasing. UBNT revenues are based on shipments and can sometimes be lumpy. It's also possible WISPs are deferring purchases until LTU PtMP is available.

 

That said, a collapse of the Service Provider segment is my worst fear with UBNT. 5 GHz gear faces increasing competition from 60 GHz and LTE technology, neither of which are offered by UBNT. It's quite possible AirMax revenues will head towards zero over the next 5-10 years. Hopefully uFiber and LTU will succeed.

 

Of course, bulls can point to aspects of the short case that have been debunked: The cash is real! The Grizzlies ownership situation has been resolved!

 

Yup, for those who missed it:

 

On May 8, 2018, the Nominating and Governance Committee of the Board determined in accordance with the Company’s Insider Trading Policy and Guidelines with Respect to Certain Transactions in Securities that Mr. Robert Pera be permitted to pledge up to 28% of the shares of the Company’s common stock that he beneficially owns to secure one or more loans with financial institutions, provided that the principal amount outstanding under all such loans would be significantly less than the value of the pledged shares under such loans. See Item 1A, Risk Factors in Part II of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018 for additional information on these loans.

 

I'm very bullish in the short term because of the huge short interest. Without the fraud thesis or Pera selling to buy the Grizzlies, there's no reason to keep paying 27% borrow fees on this stock.

[Grant]

Looks like Facebook is dragging lots of tech down. I'm glad I got out last week:

[gjangal]

https://finance.yahoo.com/news/ubiquiti-networks-reports-fourth-quarter-113600656.html

 

Regular dividend of 0.25 a share announced.

 

Revenue growth 18% YOY

[Guest Schwab711]

Boy, was I wrong here. The results look strong, the new credit agreement makes more sense, and the dividend was a smart move. I would hope they get hit with a fine on Reg FD violations but it's not going to effect operations.

 

This article almost certainly refers to UBNT, in case anyone was wondering why I was so negative:

https://www.pogo.org/investigation/2018/05/pwc-whistleblower-alleges-fraud-in-audits-of-silicon-valley-companies

 

First, its controller was duped by an email phishing scam. The controller wired money as directed by a phony email despite the fact that company policy required two signatures for such wire transfers—and despite the fact that the party the controller paid wasn’t on the company’s vendor list.

 

Second, the company neglected to disclose to the auditors its close relationship with a business “entity” that shared its address and performed research and development at its direction. The entity was not included in the company’s financial statements until auditors raised the issue, he wrote. (Keeping the entity off the company’s books would have reduced the company’s reported expenses, Botta explained to POGO.)

 

Third, as Botta reported, the company apparently failed to notice that, when it sold a shipment of products, the buyer had a contractual right to return thousands of them. (That could affect the company’s ability to record revenue from the sale, Botta clarified for POGO.)

 

Botta told the SEC that he proposed stating in PwC’s audit report that the company had “a material weakness” in “the skill and competence of the finance department.” Botta wrote that, in response, he “was put under significant pressure” by superiors at PwC and was told that if he pursued that path, it was unlikely he would be promoted to partner.

[Grant]

Schwab711, I read the complaint the article refers to a few months ago. If I recall correctly, two of the four anonymous companies cited could've been Ubiquiti, but it wasn't clear either was. I hope the SEC does find something, that'll give me (and Pera's buybacks) another entry point. I haven't had a position since I sold my calls in July.

 

It seems like tariffs are the next major catalyst. Unfortunately they're something I'm completely unfamiliar with.