UBNT - Ubiquiti Networks

[scorpioncapital]

"Chief financial officers are responsible for planning the financial future of a company, while chief accounting officers handle the more day-to-day activities."

 

If you have a capital allocator/founder/CEO leader at the helm making financial planning, I have to agree all you really need is a CAO. And as a 70% shareholder, I can see where he's coming from. Almost running it like a private co.  I suppose he has the right to do whatever he wants within the basic rules.

[gjangal]

Generalizing a class of c suite people with such words is a sign of immaturity. All they care about is options and moving to the next company.  He said this on his twitter feed. That is definitely a sign of immaturity. Brilliant CEO but not the best choice of words

[watsa_is_a_randian_hero]

Valcont, He tweeted about it today. Apparently CFO's are only used to appease Wallstreet and serve themselves. He must salty after the last CFO. He likes his CAO.

 

I couldn't believe he said that, not a very mature comment by a CEO

 

did he delete this?  I looked last night, and again this morning; i couldnt find it

[Foreign Tuffett]

Valcont, He tweeted about it today. Apparently CFO's are only used to appease Wallstreet and serve themselves. He must salty after the last CFO. He likes his CAO.

 

I couldn't believe he said that, not a very mature comment by a CEO

 

did he delete this?  I looked last night, and again this morning; i couldnt find it

 

Yes, I believe he did delete it.

[DooDiligence]

Is this an example of bad optics obscuring good judgement?

 

I saw his Tweet about BRK only having 20 employees & it created the impression (in my mind) that this guy couldn't possibly be a good capital allocator (the cash piling up kinda agrees.)

 

I don't really understand the biz but thanks RKB 4 the anecdotal (it helps...)

 

Probably won't do anything but it's fun to look at!

[Foreign Tuffett]

Is this an example of bad optics obscuring good judgement?

 

I saw his Tweet about BRK only having 20 employees & it created the impression (in my mind) that this guy couldn't possibly be a good capital allocator (the cash piling up kinda agrees.)

 

I don't really understand the biz but thanks RKB 4 the anecdotal (it helps...)

 

Probably won't do anything but it's fun to look at!

 

The vast majority of their cash is overseas so "cash piling up" isn't a fair critique of Pera's capital allocation abilities. That said, Pera's inability to spell Warren Buffett's name correctly doesn't bode well for the next spelling bee he enters.   

 

If you want to learn about the business there are many good articles on Seeking Alpha that discuss the company's products and general strategy.

[Foreign Tuffett]

Unconcerned, none of the "evidence" seemed like anything more than silly conspiracy theory stuff.

 

Robert Pera's actions speak louder, share buybacks, low salary, all of this reflects very well on his long term belief in this companies future.

 

I agree. Pera's actions have been very different than what one would expect if UBNT was engaged in material and longstanding fraud. Pera hasn't taken any material compensation since 2013, he is extremely parsimonious with stock based comp, and has also been aggressive about repurchasing shares whenever the stock drops significantly. The recent stock sale notwithstanding, he has also sold far less shares than would be expected for a CEO engineering a fraud. Contra Left, almost every indication is that Pera thinks the stock is quite valuable. 

[plusalpha]

Contrary to the title, many good things about Ubiquiti.

https://seekingalpha.com/article/4108704-ubiquiti-time-run

not an indepth article but good comments to go thru.

 

[Dustin T]

Unconcerned, none of the "evidence" seemed like anything more than silly conspiracy theory stuff.

 

Robert Pera's actions speak louder, share buybacks, low salary, all of this reflects very well on his long term belief in this companies future.

 

I agree. Pera's actions have been very different than what one would expect if UBNT was engaged in material and longstanding fraud. Pera hasn't taken any material compensation since 2013, he is extremely parsimonious with stock based comp, and has also been aggressive about repurchasing shares whenever the stock drops significantly. The recent stock sale notwithstanding, he has also sold far less shares than would be expected for a CEO engineering a fraud. Contra Left, almost every indication is that Pera thinks the stock is quite valuable.

 

Exactly, if Robert Pera were smart enough to pull of that kind of fraud, it's unlikely he would be dumb enough to hide his ill gotten cash in the Memphis Grizzlies.

 

I've actually enjoyed watching the short and distort crowd attack UBNT. Every day they post a new article, but nothing of substance, just cryptozoology level stuff.

[gjangal]

Q1 results out

 

http://otp.investis.com/clients/us/ubiquiti_networks_inc/usn/usnews-story.aspx?cid=2283&newsid=49695

 

Revs growing at 20%. Forecast revenue growth 15%. Enterprise segment  around  50% of revenue and growing at 50%

 

40-50% of float short for this company sound a unreasonable to me

[rkbabang]

I don't believe UBNT's numbers. I'm not even convinced that all of the reported cash exists.

 

If this belief is common that would explain the large amount of shorts. 

 

What is the basis for you thinking that this company is a fraud?  I know first hand that the products are real and work as advertized.

 

 

[Dustin T]

I don't believe UBNT's numbers. I'm not even convinced that all of the reported cash exists.

 

I believe cash is the hardest thing to falsify both to the auditors and the bankers who have lent them money. Both the auditors and the bankers involved are large and well known, I think the cash is almost certainly real. It would take incompetence or criminal complicity on the part of to many individuals for that story to be likely.

[Jerry Capital]

This is not good.

 

"Ubiquiti Community

 

As a result of a reporting error, the previously furnished Prior Investor Presentations and the investor presentation used by Company management dated as of May 2017 referenced 4 million registered users in the Ubiquiti Community, and the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017 reported that the Ubiquiti Community included over 4 million entrepreneurial operators and systems integrators. In actuality, as of December 31, 2016, the Ubiquiti Community included approximately 609,000 registered users, while there were approximately 4 million registered user sessions at https://community.ubnt.com during the calendar year ended December 31, 2016. The information on https://community.ubnt.com is not part of this Current Report on Form 8-K."

[Foreign Tuffett]

Speaking of buybacks, if you look at UBNT's cash flow statements, the company has repurchased more stock then excess cash generated, when considering the change in US cash balances. The company's Amended Credit Agreement is co-signed by the US and Cayman Islands subs and allows for unrestricted borrowing and repayment by either sub. However, the US uses a worldwide tax system and the credit agreement is invalid if UBNT is not fully compliant with all tax laws.

 

If all of the cash was rightfully generated in the US (as you'd hope) then it would appear as if there could be a gap in international cash generation and the cash balance reported. I want to be careful in my wording because I have not had a chance to speak to UBNT yet.

 

There has been instances in the past of balance confirmation issues (some very large):

https://www.accountingweb.com/aa/auditing/audit-fraud-the-confirmation-angle

https://attestationupdate.com/2013/08/05/3-bank-confirmation-frauds/

 

Would you be able to break down your math that leads you to these conclusions?

[Foreign Tuffett]

Here's one of the earliest examples I have. I've already archived and saved screenshots of all of the important websites, LinkedIn profiles, ect. Lets see how many getting deleted or changed from this point on :)

 

Flytec CEO says they had $3.3m in sales in 2011

https://www.linkedin.com/in/osniarruda 

 

$UBNT says Flytec had $39.6m in sales in 2011

 

This implies Flytec had an AR balance with UBNT of $6.17m to $6.57m. This is more than the claimed sales...

 

Why would the CEO under-sell his sales achievement by more than a magnitude? Who's lying here?

 

Here's some more info about Flytec Computers:

First, to go off the last post, so it's not just a LinkedIn profile as my only evidence. The below link also supports the $3.3m in revenue. I'm not sure when it was last updated but they have info from 2017 on there. The CEO of Flytec actually purchased the building at the below address in Doral, FL, yet the name of a courier business, Servientrega, is on the front of the building. Servientrega leases the majority of the building and Flytec operates out of a single unit within the building (as they have prior to the CEO purchasing the building).

 

Although circumstantial (this will be a pattern in my posts), what's interesting is the huge gap between the revenue UBNT says Flytec does and the sales everyone else (including Flytec) says Flytec does. Considering the private business revenue estimates are generally good at creating a range that includes the right number, one would guess that Flytec does roughly $3.3m - $20.0m in revenue. UBNT has stated that this number is much higher since they went public.

Hoovers: $15.576m

GovTribe: $3.3m

Owler: $65.7m (with 61 employees) - use with caution as this data is crowdsourced (unlike the others). However, notice the 3 guesses entered throughout the last 2 years.

Mantra: $20.02m

Credability: $10.5m

 

I will fully outline the importance of this disparity as I go. However, consider my quoted comment with respect to Flytec's CEO's LinkedIn and the GovTribe record . UBNT's 2011 income statement would certainly fit industry norms if $39.6m in revenue was removed, as opposed to UBNT reporting eye-popping margins that have been unfathomably consistent (zero operating leverage) despite revenue CAGR of 27.9% over that period!!! In addition, UBNT claimed that Flytec grew roughly in-line with UBNT from 2011-present. This implies a cumulative gap in UBNT's financials of $100's of millions.

 

Support for the above:

https://govtribe.com/vendor/flytec-computers-inc-miami-fl-dba-flytec-computers-usa

https://www.google.com/maps/place/3043+NW+107th+Ave,+Doral,+FL+33172/@25.8017374,-80.3691684,3a,75y,80.11h,90t/data=!3m6!1e1!3m4!1sbPpdyKkffJdA_lAPc7QlhA!2e0!7i13312!8i6656!4m5!3m4!1s0x88d9beb250962019:0x4f961e7c3739ab49!8m2!3d25.801749!4d-80.3690841

http://www.hoovers.com/company-information/cs/revenue-financial.flytec_computers_inc.e249956799377d7c.html

https://www.manta.com/c/mhw5v8t/flytec-computers-usa

https://www.owler.com/iaApp/1008717/flytec-computers-company-profile

https://credibility.com/computer-and-computer-peripheral-equipment-and-software-merchant-wholesalers/us-fl-doral/flytec-computers-inc

 

Everything said about Flytec basically says they are a terrible reseller, who sometimes ships orders with packaging or shipping labels from different distributors (which occasionally are other "official UBNT distributors"). Again, circumstantial, but UBNT's business model reminds me quite a bit of the specialty pharma industry (especially the "grey market" or wholesale specialty pharma industry). Products are often "sold to" other wholesale pharma companies until they finally exit this "grey market". See below for the FDA's presentation on the issue.

https://www.resellerratings.com/store/Flytec_Computers_Flytec_USA

https://www.fda.gov/downloads/aboutfda/workingatfda/fellowshipinternshipgraduatefacultyprograms/pharmacystudentexperientialprogramcder/ucm528194.pdf

 

 

 

 

More on the CEO:

The CEO is Osni Muccellin de Arruda, formerly "considered the largest computer products smuggler in Brazil"

http://www.gazetadopovo.com.br/vida-e-cidadania/presos-contrabandistas-de-computadores-9y279wkbtp9suvmgue19dwxn2

 

The Pacific Invest company is this one: http://www.pacificinvest.com.br/

 

The charges were ultimately dropped against Osni, though others did serve time. I'm not sure how Osni got the charges dropped. Again, circumstantial, what's interesting about the case is the money was laundered through Pacific Invest and one of the partners of the government-sanctioned currency exchange firm was involved.

http://www.justica.gov.br/central-de-conteudo/combate-a-pirataria/relatorios/iii_report_cncp.pdf (p.105/208)

 

This part of the story is interesting because my later posts will try to determine how UBNT moves cash around. For most of UBNT's history, Flytec was the largest customer and still is a very important customer to this day.

 

Despite Flytec's importance to UBNT's growth, they are not listed among the top "Distributors & Master Resellers" for UBNT (see pic).

 

Side note: Interestingly, P.W. Batna Magadalena Mucha (PW Batna), the distributor from Citron's report that does indeed operate out of a backyard tent, with a handful of employees (FB made it possible to find a couple - gotta love social media!), is not even listed as one of the 38 official Distributors & Master Resellers or as a Reseller. We will discuss PW Batna and Streakwave Wireless at a later time.

 

Luckily for me, Flytec is Florida corporation so we are able to learn a little more about them. Flytec is the only Florida-based company registered to Osni. The filing introduces us to Osni's right-hand man, Denis Figueiro, who is the registered agent and VP of Flytec. I believe Flytec has 4-9 employees in the US, though I've only found 6 (one of them seems to work as a salesmen for both Comcast and Flytec?). To be fair, Relationship Science reports 25 employees worldwide

 

 

Flytec's Florida data:

http://search.sunbiz.org/Inquiry/CorporationSearch/SearchResultDetail?inquirytype=OfficerRegisteredAgentName&directionType=Initial&searchNameOrder=ARRUDAOSNIMUCCELIN%20P070000990601&aggregateId=domp-p07000099060-4d7b2e47-1065-43c8-a599-44a2adb0faae&searchTerm=Arruda%20%20%20%20%20%20%20%20%20%20%20%20%20%20Osni%20Muccelin&listNameOrder=ARRUDAOSNIMUCCELIN%20P070000990601

 

 

A final side note: A company called Mikrotik, a listed competitor of UBNT, has an extremely similar growth trajectory and project margins, and almost every important UBNT reseller specializes in selling UBNT and/or Mikrotik products and generally nothing else.

 

 

To summarize, all of this is for one distributor. I am attempting to detail various facts about them that will ultimately be used to show that claims made by UBNT are unlikely to be true. You can see why it's going to take me awhile to detail everything I know about UBNT and their distributors/partners. I don't think it's an accident that UBNT looks so internally chaotic or that they don't have a COO or CFO.

 

I took 15 minutes and looked into a few of the claims you've made here. I stumbled onto the following almost immediately:

 

1) Flytec and Servientrega do not appear to be in the same building in Doral, FL. Servientrega is across the street from Flytec (3043 vs. 3047). Assuming Flytec occupies and operates in the entire building (which it seems to based on signage clearly visible using Google Street View), claims about Flytech doing only $3 million in annual revenue look almost laughably low. Also note that the building looks exactly like the building featured in a video on Flytec's "About Us" webpage on its website.

 

Also, based on the same video Flytec clearly has more than the "4 - 9 employees" US-based employees that you estimate. What do you mean when you say that you've "only found 6" employees? Do you think every last warehouse worker and secretary in America can be tracked down on the internet via their employer?

 

2) You bring up the specialty pharmacy industry like it's some sort of spectre haunting Flytec's business model, but I think you are missing the obvious. Flytec's Doral, FL building looks to be within a few miles of the Miami International Ariport. Miami is a well-known conduit for goods to move from the US to Latin America. It's likely that a big part of Flytec's business model is to ship wireless networking equipment via air freight to Latin America. This may be why the name of the company is what is it:  F-L-Y  T-E-C-[H]

[Grant]

In addition to what Foreign Tuffett said,

 

Flytec Computers Inc. (https://www.flyteccomputers.com/) has always been listed as a reseller in the U.S., and Flytec Computers SA (http://www.flytec.com.py/) has always been listed as a distributor in Latin America. Osni founded both. As a multinational, I don't believe UBNT distinguishes between the the two different entities in its reporting.

 

Per the S-1, a distributor used to take delivery of product at a U.S. address for sale in SA, greatly throwing off the geographic revenue figures. This stopped or began to stop 2011Q3. I believe this distributor was Flytec.

 

Flytec claims to have six employees and $3.3M in revenue as late as 2017. I don't think they should be taken seriously as their videos, office space and parking lot clearly show at least a dozen employees.

 

PW Batna is listed as a European distributor.

 

I scrape data from two (soon to be five) UBNT distributors, and have generally found my results consistent with UBNT's reported figures. The flat guidance this quarter was no surprise.

 

MikroTik is UBNT's closest competitor, but they're unfortunately not public.

 

UBNT recently increased the size of its revolving loan with Wells Fargo, with no increase in interest rates or fees. To me this indicates they're confident the cash (flows) are real. Given the simplicity of UBNT's balance sheet, I would be extremely surprised if they managed to fool Wells Fargo and KPMG. Verifying bank statements and cash balances is fairly easy.

 

The forum user count is a classic example of UBNT screwing up because they don't spend any money on management or controls.

 

Starting with a conclusion isn't a sound way to conduct an investigation.

[gjangal]

the short case is getting very interesting

 

Total diluted shares - 79.1mn

Insiders. - 57.6mn

 

Edgepoint - 6.3mn

Akre - 2.3mn

 

This leaves about 14 mn shares float.Of which 10.2mn are short as of Oct 31. Securities lending rates for UBNT are between 10-14%. Shorts could get squeezed here

 

[rkbabang]

the short case is getting very interesting

 

Total diluted shares - 79.1mn

Insiders. - 57.6mn

 

Edgepoint - 6.3mn

Akre - 2.3mn

 

This leaves about 14 mn shares float.Of which 10.2mn are short as of Oct 31. Securities lending rates for UBNT are between 10-14%. Shorts could get squeezed here

 

 

I just bought some more.  I can't find anyone with a real reason to think this is fraud other than a gut feeling they seem to have.  I'm not convinced. It doesn't make sense that insiders would own so much stock yet run the company into the ground making their assets worthless.  If Robert Pera starts unloading his shares in a big way I'll start getting nervous.  In the meantime I'm waiting for the squeeeeeze.

 

[chrispy]

Agree.

[Grant]

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.

[Dustin T]

I appreciate your thoughts on this Schwab, it's a good sized position for me and most of the bear cases I've seen have been essentially slinging mud trying to drive the price down. Nothing very coherent just lots of innuendo and minor criticism about board size and using words like "misunderstood"

 

If I understand what your numbers allude to above, it's that the money they make in the U.S. and overseas doesn't seem to match up with the taxes they pay and that they are either quite aggressive in tax avoidance or are possibly engaging in tax evasion? Or are you also suggesting that some of the cash isn't there?

 

They have been audited and granted a clean financial bill of health by two of the big four auditing firms. Does that cover the taxes being paid correctly too? I don't assume it's impossible to fool an auditor, but I'm trying to learn more about what all constitutes an audit and how far a company might have to go to fool an auditor.

 

 

[Grant]

Schwab, if you want good feedback I'd suggest sharing your spreadsheet. Perhaps it's my background in engineering and not finance, but I cannot follow your math and logic at all. How do specific distributor A/Rs affect maximum possible U.S.-based assets? Why ignore the largest distributors, Ingram Micro and Streakwave?

 

They have 78 distributors listed on their website, but ">100" listed in their latest investor presentation. I know of at least one distributor (Amazon) that isn't listed on their site, so the 100+ figure seems possible.

 

Dustin T, from what I understand their auditors would check foreign bank account balances and bank statements. Wells Fargo probably would as well, as they lend to UBNT using the foreign cash as collateral. Given the simplicity of UBNT's balance sheet, PwC, FTI And KPMG would surely focus on the foreign cash in their auditing. In order to fool these audits I think you'd need to either collude with your audited bank(s) or have another line of credit secretly feeding cash into them.

[Grant]

What balance sheet metric did I misrepresent?

 

You did say you were "attempting to detail various facts about them that will ultimately be used to show that claims made by UBNT are unlikely to be true". I read this to mean you wanted to show your work. If not, my apologies.

[Grant]

I just bought some more.  I can't find anyone with a real reason to think this is fraud other than a gut feeling they seem to have.  I'm not convinced. It doesn't make sense that insiders would own so much stock yet run the company into the ground making their assets worthless.  If Robert Pera starts unloading his shares in a big way I'll start getting nervous.  In the meantime I'm waiting for the squeeeeeze.

I'm not an experienced enough trader to guess at the likelihood of a big squeeze, but in normal conditions I wouldn't be thrilled to buy at these prices. UBNT is extremely volatile. Every six months to a year there's usually some big scare which pushes the price down. Last Feb it was contracting margins, last Sept it was fraud, etc. In 2014 the stock fell 33% after earnings because of an increase in inventory.

 

UniFi is showing great international growth and likely still has some domestic growth ahead of it, but it's entirely possible for UBNT's fixed outdoor wireless revenue to continue to stagnate. We'll know more in the upcoming months, as AirMax GPS sync gets refined and LTU ptmp enters beta.

[Grant]

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).