Good day, ladies and gentlemen, and welcome to the Ubiquiti Networks Second Quarter 2015 Question-and-Answers Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference is being recorded. I would like to introduce your host for today’s conference, Anne Fazioli, Vice President of Investor Relations. Ma’am, you may begin.

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; and Craig Foster, our Chief Financial Officer. 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-Q with the SEC and our other SEC filings, which are available on the SEC’s website at www.sec.gov. Forward-looking statements are made as of today February 5, 2015, and we assume no obligation to update them. We hope you’ve reviewed management’s prepared remarks, which are posted as a transcript on the Events & Presentations and financial information sections of our Investor Relations website at ir.ubnt.com. This call will be a Q&A only call. Please limit yourself to two questions and time permitting, we’ll allow for follow-up questions. Operator, we’re now ready for questions

[Operator Instruction] Our first question comes from the line of Erik Suppiger with JPMorgan Securities. Your line is now open. Please go ahead

Thank you, and congrats on a solid quarter. I would like to start with the enterprise products. Can you give us a sense for -- you had very good strength. Can you give us a sense for what – whether the video products are becoming a meaningful contributor at this point, or how can we assess the, kind of, the various products within the enterprise products at this point?

So, unified video, if you look back at the history we first got into video I believe in early 2012. And what we want to do is we wanted to bridge the space between really high-end type of deployments like Telco and Sony, Panasonic and to a lower extent Axis, which cost tens or thousands or hundreds of thousands of dollars for deployment and the consumer rate products you see in stores. And what we wanted to do is create really high-end professional hardware with very powerful software that allows you to create scalable video security systems and we wanted to give the software way or make it included with the hardware just like we do with airMAX and just like we do with UniFi. And one of the challenges we ran into is the software, the NVR, what they called the Network Video Recorder software, the hardware requirements were quite heavy for to run the NVR. One of the obstacles to that product getting a lot of traction was people needed a really high end x86 type of hardware to run the software on and it wasn’t plug-and-play and not – so last year we released our NVR, it's a plug-and-play box for $300 or $400 and that kind of revived momentum, the UniFi Video so we see it picking up again and I think this year we’ll turn the corner, we are going to release our third-generation hardware. We have made a lot of improvements to the user experience to the software. So I don't think it's a significant contributor to UniFi today, but I expect it to be materially very significant in the next two to three years.

So can we think of the enterprise products as maybe being 90% plus wireless LAN? Is that kind of a ballpark or would we be off on that?

When I say materially significant I would say something that is 20% of the overall revenue. I expect UniFi Video to be 20% plus of the overall UniFi revenue in the next few years.

Okay.

But it's very, very high expectations for that product line. I probably have the highest expectations for that product line out of anything we are doing right now.

Okay, that’s very helpful. On the wireless LAN products, the UniFi wireless LAN products, a number of the traditional enterprise vendors have been stumbling and you guys are still putting up some good growth. How much of that business do you think is market expansion, where the traditional vendors are not – probably not in the right price point and how much of your growth do you think is coming from capturing share that might otherwise have gone to some of the traditional vendors?

I always like to use the analogy of hotels when talking about UniFi and the enterprise Wi-Fi space. So when you look at five-star hotels and the big name ones like I don’t know like Mandarin Oriental or Ritz-Carlton or those types of hotels that have big budgets for their infrastructure, you’ll commonly see Aruba, Cisco, probably ruckus in there. But when you look at all the two, three, four star hotels, they don't have budget for Wi-Fi infrastructure. But the two, three, four stars hotels in aggregate are much, much more. There is more numbers than the five-star hotels. And that is what UniFi has, that's the market it has penetrated. So a lot of people see UniFi as going after the same market as Aruba and Cisco and it's not really going after the same market, it is the similar technology involving the same problems. But the price performance has enabled market share that nobody has captured yet. And I think that's a big reason why you see the numbers growing faster

Okay. So it doesn't sound like you have seen a incremental change in terms of you are getting more competition with some of those traditional guys. Is that correct?

What you mean by more competition from traditional?

Well, I'm just wondering if maybe you're taking more share of their traditional markets than you had previously, because it does seem like some of these other vendors are stumbling a little and I'm wondering if that is a function of you guys herding them, or if that is something outside of your impact.

It could be. We don't track whether we're taking market share from say Aruba or Cisco because our volumes are at least volumes per revenue are much, much higher. So, at Cisco-Aruba deal, they could go after a big hotel and it might be a $2 million or $3 million deal. For us, it is far, far less than that. So, UniFi is always about numbers in volumes.

Okay. And last question on the service provider side, when do think you might find a bottom? I think the March quarter might be seasonably slow and presumably things will get better. Would you expect that to start growing after that or how are you looking at the trajectory for that business?

What I've learned I think, let's see we have been in airMax, we've introduced it 2010, so it's about five years. And I think there is some seasonality in the winter months because of deployments are much more difficult in North America and Europe, which are big markets for us. And what I also see is the revenues tend to grow following a new technology introduction. So, we first came out with airMax and we saw a bump. And I think you will see with airMax ac and our new airFiber products I think there will be a bump in the next year.

Very good. Thank you very much.

Our next question comes from the line of Tavis McCourt, Raymond James [ph]. Your line is now open. Please go ahead.

Hey. Thanks. A couple of questions for Robert and then some housekeeping ones for Craig. Robert, in the prepared remarks I think you talked about the service provider business a lot of the year-over-year weakness was related to airFiber and I know you launched kind of a new airFiber product just this last week. Kind of run us through a background of airFiber. It seems like it's gotten a couple of false starts. It would seem like that's a pretty price disruptive product in a relatively large existing market. In your mind, why is it going through fits and starts rather than kind of a breakaway success like the UniFi wireless LAN has been?

First of all, I think our current run rate of airFiber are somewhere in the tens of millions of dollars. So, any time you start a new platform and within a few years you're getting tens of millions dollars of revenue. Typically that would count as a success. But it is true, we are disappointed and I don't see airFiber, it hasn't come close to our expectations. One thing is we have this vision about the five-year advance, worldwide advanced becoming crowded, and more operators looking to cleaner bands to run their infrastructure and their backhaul. So we first targeted 24 gigahertz as our first airFiber product. And I think it’s just ahead of its time. That product is phenomenal. A lot of people use it, but I think there are some range limitations. It is a little bit higher in price, and I think the demand for that product will get -- will become greater in the coming years. But I think it’s just ahead of its time. AirFiber5 had some of the same; I'd say drawbacks of airFiber24. It's an integrated product, it has some range limitations. It’s bulky. And – but, one of the things we do at Ubiquiti is, we are very good at reading the market and adapting our strategy and adapting our product direction. So airFiber X is -- symbolizes that. So we just released it or announced it this week, and we will have shipments coming up in the following weeks. And I think – I think that would be a hit product for airFiber and I think in the next year that will drive airFiber sales more to what our expectations are.

Got you. And my follow-up question is related to kind of the consumer end market. I think you kind of toyed around with airRouter in the past. And I guess, what is your big picture thoughts on the consumer market as an opportunity for Ubiquiti or you kind of laser focused on enterprise right now in terms of growth markets?

We have a lot of R&D building blocks. We've done a lot of hardware. We have a lot of software, we could leverage. I'd really like to get into the consumer market. The challenge is now that we are $600 million plus run rate company, it’s just as important to know what not to do, as it is what to do. So there is tons and tons of opportunities we like to attack. And we just have to be really disciplined with our resources so we could take the company to the next level. So I want to rollout a consumer product line. But it's still a little ways away.

Got you. And then Craig if you could give us the cash flow from operations and the CapEx in the quarter that would be great.

Yes. So the CapEx we spent $4.9 million. Cash flow from operations was $32.7 million. And if you get a chance we’ve already published our 10-Q so all the data is out there.

Thanks a lot.

Thank you. Our next question comes from the line of Rajesh Ghai with Macquarie. Your line is now open.

Thanks. I wanted to follow-up on the questions around the strength in enterprise that's been strong for two quarters now and has coincided with the strength in North America. Is it fair to say that, most of its strength is coming from North America or there you are seeing strengths in other markets too? And also related to that then, what gives you confidence that, this isn't just channel fill, but end-user demand given that you signed a few major distributors of enterprise over the last two quarters?

Go ahead.

So I will answer your first question which is about where is the strength in UniFi and I think we are actually very encouraged that the strength is very uniform around the world. So it’s not just a North American or Western Europe phenomenon. But we are seeing uptick in surgeon sales really around the globe. And then what was your second question?

Second question was that given that you signed up a few distributors over the last few quarters, focused on the enterprise, what gives you the confidence that the strength that you see in the enterprise is actually end user demand and not just channel fill?

When we bring on a new distributor, it's not like we send them $10 million worth of equipment. Actually the initial orders are just put the toll in the water type orders. So we are still in very much the ramp-up phase with the new shippers that we brought on and I think you are referring to in particular the ones we bought in China and India.

Yes.

So the numbers that we -- that we are looking towards and the ones that reflect in last quarter don't really encapsulate a channel fill phenomenon.

Okay. And as far as EMEA is concerned, your performance was a lot better than I had expected given the issues that we know about currency and the geopolitics. Just wanted to get more color on what really went down over there. How you managed to get that 19% sequential growth in that geography that seems to be so troubled.

Yes, I mean, there is a couple of phenomenon, obviously we're watching the currency situation very closely but for EMEA it is kind of all systems go for us for the quarter. I think what we saw during the course of the quarter was, I will call it stabilization. Some of the conflicted areas that we talked about in the past, the situation in Russia and some of the things that were happening in Iraq and we have done some shipments into the regions, not at the levels we were doing before, but we have seen I'd say some stabilization of the environment over there and I think that's been helpful for us.

All right. Very good, thanks.

Thank you. Our next question comes from the line of Jess Lubert with Wells Fargo Securities. Your line is now open.

Hi, guys. Thanks for taking my questions. I also have a couple here. Maybe first I was hoping to dig into the guidance because it seems like you’ve been confirming in the markets that hurt to last quarter, new partners and products seem to be coming up to speed and you are guiding sales flat sequentially at the mid-point and profitability lower. So was just hoping to better understand some of the key assumptions driving the cautious outlook and what may cause you to end up at the high-end versus the low-end. That’s my first one.

Yes, I think that’s a spot on question. I think if you notice this quarter we widened the gap and I think that's kind of a genesis of your question. Since the history, since we have been public, we have had this pretty tight range that we work in and I don't think that upon reflection it really accurately reflected some of the volatility in the end markets that we participate in. And so as we took a look at that, we wanted to have a fair assessment that there are things happening in the macro world that we don't have control over whether it be wars or currency or whatever it is. And we needed to risk-adjust that in our guidance. And so what you've seen is, I think an accurate reflection of our expanding business and trying to handicap high-end case for the things that can happen during the course of the quarter.

So, is it fair to assume that the outlook at the midpoint assumes that incremental sales from the ramp of some of these new distributors are not taken products is there by offset by maybe some challenges in some of these geographies that are on edge or currency fluctuations that could cause demand to be a little bit less?

I think it's fair to say it's a mixed bag, so I think we have -- we put together kind of our own risk matrix and I think that's accurately reflected in the guidance.

And then Robert I was hoping you could comment on some of the early feedback you've received with respect to some of the new enterprise products, such as the phones and switches, when you felt these products would become more widely available and how impactful you felt they could be over the next few quarters.

We have very high expectations for UniFi voice-over-IP and UniFi switching along with the security gateway. The challenge we have is these are products we haven't manufactured before and especially the phones, they have challenges with Android and acoustics and new issues, switches, pretty complex power supplies. So, the ramp has been slower than we like, but it's turning the corner. I think we'll have expanded availability definitely this quarter. And we have high hopes for them this year.

That's helpful. Last one for me, Craig it looks like you bought $15 million worth of stock in the quarter which I believe leaves you with another $60 million remaining on the authorization. I was hoping to understand or hoping you could help us understand how you're thinking about the buyback and if we should expect you to be in the market this quarter.

To be honest I'm not sure if we're in a position to comment, but I mean we're continuing to evaluate where the stock is and where our buyback points are.

Thanks guys.

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

Hi guys. Thank you for taking my question. Robert, I was curious to -- on new IP telephony and switching products on the enterprise side, as this products ramp up, do you expect these products to follow really same channels as UniFi same distributor, same kind of end clients or do you think these product lines are actually going to have to build new channels and to find their market independently from what you have already in volumes in shares. Thanks.

Our plans for expanding UniFi is to pull sales through the existing UniFi users. One where we do this is our new UniFi 4.0 UI has a dashboard. So, even if you only have UniFi wireless AP on your dashboard, you'll see switches or phones or security gateways, you'll see on your dashboard that the option is available for those products. So, I think the attraction for UniFi is once you're controlling your APs, and if you use our switches, you use our phones, you use our security gateways; you don't have to deal with any other management of third party equipment. You essentially have UniFi control of your whole IT closet.

That is great. And then maybe a similar question between your service provider business and your enterprise business. I'm still trying to figure out how much synergies you have between the two. Do you see companies -- like service providers actually selling to their clients and so your enterprise products? Do you see the products going to market together? And from a technology perspective do have commonalities between the two platforms?

There is some mobile app between our broadband operators and the enterprise UniFi products. But I think it's pretty minimal. One example is some of our service providers might bring a broadband connection to a hotel, and recommend UniFi or provide a UniFi installation for WiFi access in the hotel. But I think they are pretty much independent markets. So UniFi serves as a system integrator market and our airMAX technology serve a service provider market.

Great. Thanks for that.

Thank you. Our next question comes from the line of Matt Robison with Wunderlich Securities. Your line is now open.

Hey, thanks for taking the question. Robert I was wondering if we could get into a little bit of detail and dynamics of airFiber. I know it's a relatively big-ticket item and what you see as sort of the puts and takes with that business, where I can come back again. I'm also little bit sensitive that you have competitors for backhaul that maybe -- there maybe more breadth of competitors there. And my second question and it's a two-part question, first part of it is interested to know what the catalyst was for video improving in the quarter. And the second piece of it, Craig if you could talk about linearity a little bit that would be great. Those are my questions.

So airFiber first. I'll start by saying the whole airMAX phenomenon was driven by using WiFi chipsets and replacing the -- what they call the CSMA/CA which is a contention based protocol with our TDMA protocol which allow them to be used outdoors over long distances. But even when company's like Ubiquity alter the WiFi drivers to make radios work outdoors, there are still some limitations because those WiFi chipsets are inherently designed to work in an indoor environment and there are some things hardwired in these chipsets you just can't modify. So with airMAX we did a great job of making it work well enough and we leveraged all the economies of scale and the cost efficiency of WiFi chips to create this disruptively -- disruptive price-performance offering for the service provider industry. We kind of extended very quickly. But if you are going to design a product for outdoor use, the best way to do it is design it from scratch and that was the motivation for our airFiber Group, which we formed in 2010. And airFiber is far different from Wi-Fi chipset. It's purpose built from the ground floor up to work in outdoor long-distance links. So all the – I guess, the 802.11 standard interoperability overhead, all of it's gone, so the radio is much more efficient, and there's a lot of elements inside the signal processing and the media access control which makes it really great for outdoor unlicensed bands where it could – it has far better noise immunity compared to modified Wi-Fi chips. So, I think, moving forward, airMAX has a place for multi-point networks, where we leverage the Wi-Fi chipset cost savings for low-cost TPs. But I think moving forward what we’d like to see is a world where our operators are exclusively using airFiber technology in point-to-point links, where there is more room for price. They'll pay more for high-performance links. And I think airFiber 5 and airFiber 24 we proved the technology was superior in the market and I think with airFiber X what we're doing now is we're democratizing that technology. And I fully expect airFiber X to basically replace all Wi-Fi radio point-to-point links in the outdoor market.

That's interesting.

So what was the second question?

Well, I was asking about the catalyst for improvement on the video and commentary on linearity of shipments during the quarter.

Yeah. So, when we got into outdoor wireless in – I guess, when the company started, 2005, 2006, it took us a while to figure things out. And our first hit product was the NanoStation, which was three years later. And then, we finally came up with a full end-to-end system with airMAX in 2010. And video was completely new for us. I think it's a huge opportunity. And we started in, I guess, 2012, our first shipments and now we're looking at three years later. And I think over the past three years, we've definitely made some mistakes, some rookie mistakes, especially on the hardware side and the software side, but we've been pretty good at just fighting through the challenges and adapting. And I think we had – definitely had issues, the hardware platform we chose, what we call, the network video recording, the NVR architecture, and the user experience. And I think what you'll see this year is, our hardware, third-generation hardware is very, very good. Our NVR is greatly improved. And the final thing we're missing is user experience. So by user experience I mean something that’s plug-and-play. We have full iOS, Android app support for it. It's very powerful and feature-rich but extremely easy-to-use. And I think once we turned the corner with user experience, which I expect us to do over the course of this year, then I think that will be a monster platform for us. So I think you’re just seeing the beginning states of this turning around right now.

Okay.

And then, your last question was around linearity.

Yes.

Regarding shipments, I guess, in the quarter?

Yes.

Okay. I mean, our plan from the operational standpoint is to shift as – you know a third, a third, a third. But going into every quarter we risk adjust for holiday season like we have coming up, Chinese New Year which -- we shipped the majority of our products out of China. So we coordinate our shipping plan based on that. But our plan is for one third, one third, one third.

Is that what we should assume that happened in the December quarter?

I think, the last week of December is pretty light. But I think for the most part it was pretty evenly weighted.

Thanks a lot.

[Operator Instruction] Tim Quillin with Stephens Incorporated. Your line is now open.

Hey, thank you for taking my question. So the enterprise sequential growth has been very strong over the past three quarters is it fair to think that you expect sequential growth again in the enterprise business or is there something unusual where you may have to come off of that level a little bit?

I think it kind of feels like all systems go plus, we – I think Robert has touched on a couple points, but some of the new products are kind of in the very early stages. So, I think we are fairly optimistic over the next year on where the enterprise is going.

So is the variability around the guidance in both sides of the business then?

Yes. That is correct.

Okay. And then I will squeeze in one and half questions, but the half question is that, I just follow-up on the mix enterprise and Robert I think you talked about long-term you would like to see video be 20% plus? But currently is the UniFi WiFi products -- 90% of the vast majority of revenue is that kind of where we are? And then my fuller question, second question is, if you could comment on the point to multipoint airMax ac product introduction, which I thought was long awaited and you know pretty interesting and revolutionary in the industry. And so, I am surprised that as it's introduced we are nothing more of a pickup in service provider revenue. I know there is little bit of seasonality, but why isn't there more of a pent-up demand for that product? Thank you.

So your UniFi question yes. As of today the majority of the sales are from the WiFi it is, but our hope is in the future it's going to be diversified between switching and voice-over-IP and security gateway video and more things to come. For airMax ac, it is still really early. So we've gotten our airMAX ac point-to-point software stable. So airMAX ac point-to-point is now shipping in volume. airMAX ac multipoint, isn't really out in the market in volume. And we do have a lot of instances of successful deployment. So we do have some edge cases. We are trying to work through to get the firm more solid. And this follows the same paths we’ve seen with prior products, prior platforms. For instance, airMAX when we first released took some time to get settled and robust before it took off same thing with UniFi. airMAX ac from early indications it looks a lot better than we thought. It is getting essentially double the throughput – double the performance of our previous generation airMAX. So we expect good things from it this year.

Thank you.

Thank you. Our next question comes from Tal Liani with Bank of America. Your line is now open.

Hi, guys. DSOs went up, if you can discuss this -- the reasons because you said that the quarter was kind of linear and then also when we spoke before about the outlook for the company, we had expectations of the Point-to-MultiPoint would be a big area given that it’s your bread-and-butter and historical space etcetera. Here on the call we are emphasizing the Wi-Fi space and not be Point-to-MultiPoint and I'm wondering if it's just – that I’m interpreting it in a wrong way? Is it early on or is it that it’s just not becoming as big as you saw them. Just I’m trying to understand the potential for Point-to-MultiPoint? Thanks.

I’ll start with the DSO question and ask Robert. So DSOs I guess they have increased but I think that’s – I don't think the right way to look at it is reflecting on our linearity of shipping which is been pretty consistent for the last year since we have made a number of improvements in our operations. But I think its more happenstance of our bringing on some larger distributors. And then we've had traditionally a set of distributors that have been on a prepaid situation and we’ve moved some of them to credit. And so they’ve demonstrated over a long period of time that they are creditworthy and we have implemented some new credit processes to keep them in check. And so I think you add those two things together and our DSOs have come up but if you look at anybody in the competitive space I think we are still substantially lower than they are.

I’m sorry. What was your question specifically about MultiPoint?

Yeah the Point-to-MultiPoint – six months ago when we spoke about it, nine months ago when we spoke about it the expectations were that this could potentially be a very big cycle for you and when I look at it now, we were more emphasizing Wi-Fi and less to Point-to-MultiPoint and I'm wondering if it's just turned out to be smaller than you originally thought or is it more about timing and maybe we just didn’t put the right emphasis on the call so far. So I’m just trying to understand the environment for Point-to-MultiPoint based on ac?

I think there might be some seasonality like I alluded to earlier in the call in the winter months for North America and Europe and then referencing the prior question, our airMAX ac MultiPoint platform is just getting off the ground. Its not really shipping in volume yet but I think what you'll see over the next year is I believe the market is still growing and on top of that we should have some pretty good replacement or upgrade revenue through airMAX to airMAX ac subscribers being upgraded. So, I'm optimistic on the service provider business in the coming year.

Okay. Same question on the Wi-Fi just the other way around. There are some quarters where the Wi-Fi business is really strong and some quarters just recently that it wasn't that strong, and now suddenly it’s reaccelerating. What causes these starts and stops in the market in the Wi-Fi space?

That's a good question. I wish I had answers. It's very hard to draw conclusions on small granularity. What I try to focus on is how do things look year-over-year or two years back or three years. What do things look like in the next three years? That's what I focus on.

Got it. Thanks.

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

This is Meta Marshall for James. A couple of quick questions. One, if you could just kind of speak to what’s happening with the Latin American market. Just results there were, kind of, disproportionately underperforming to the rest? Second, just with regards to kind of the gross margin uptick this quarter, is that more – can we draw any patterns thus far, because the enterprise products having better gross margins than service provider products, or is it just kind of a blend of factors? And then third, just have you run into kind of Ruckus' Xclaim product anywhere as they kind of made a lot of noise in the last quarter about trying to kind of compete with you guys? Thank you.

So, I’ll take the part of the question about gross margins. Ubiquity additionally has been a very lean company. And you look at our metrics revenues; the profitability for employee is much higher than typical company's, and I think one area that was kind of not optimizing the company was material management. So just recently we've put together material management team, and I'm leading that team and we’re trying to drive material cost reduction. So hopefully what you saw this quarter is the start of better things to come when we are talking about peer gross margins. Next question, Xclaim, I heard about it. And we've tried the product in the lab with competitors you can't really control what competitors are doing. But we have a vision and we just – if we believe – we believe in our vision, so we just put our heads down and we try to get through accelerate what we're doing as fast as we can that’s what we’re doing with UniFi. I think you're less question was on Latin America?

Yeah.

And there is some seasonality to the Latin American market. So as we look at the data for the quarter, you get into the holiday season in Latin America, as the gross generalization takes the entire month off of December. And so we kind of pin that against the sum of the seasonality that we saw, and their currency has been under some pressure. And so we kind of combine those two things together and we say more seasonality than anything. And so we’re tracking the situation closely, but somewhat expected based on past trends.

Great. Thank you. Operator: Thank you. Our next question comes from the line of Kent Schofield with Goldman Sachs. Your line is now open.

Thank you. I wanted to ask a little bit about airFiber X. Can you talk a little bit about how that differs from the previous products? Should we think about it as a replacement of that or addition to the network? And then when we look at the pricing, I mean, at least relative to the previous versions, it seems aggressive. So can you talk a little bit about any sort of potential gross margin impacts from the ramp of that product set?

So the name airFiber X was inspired of using Uber, and I looked at – they had a new offering, uberX, which was – it provides the same services at a much lower price to appeal to a much larger market. So that’s what airFiber X is about. It doesn’t have the same performance as airFiber 5. It’s not full duplex. They can’t do a full gigabit per second, but it’s light-years ahead of any of the Wi-Fi chipsets trying to masquerade themselves as point-to-point carrier links. And it’s very versatile. It’s a compact form factor. It could be interchangeable with a variety of antennas. There is no range limitation. It could go beyond 200 kilometers. So it’s really like – I think it will be the de facto product for outdoor operators for point-to-point links.

And as we think about the pricing side of things, is there anything we should think about from a gross margin standpoint?

Margins for airFiber X should be in line, if not better than the rest of airFiber, compared to the rest of the airFiber products.

Okay. Great. And on the airMAX AC side of things, I appreciate the granularity in terms of the rollout. But when you finally start to ramp, I mean, is that something where you expect to see North America kind of take that product set first and deploy en masse? Will it take some time for some of the developing countries to adopt it as well or how do you think about that?

I think – I don’t think one markets gets a head start on another one in terms of adopting a new platform. But if you look at our community, the majority or just about everybody on that community is English speaker. So it gives you the impression that the early adopters are all in the U.S. But I think it’s pretty geographically dispersed – the early airMAX AC adopters right now.

Thank you.

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

Yeah. Thank you. I have a couple of questions more on the overall business strategy. First of all, you’ve done very well growing market share quickly in the Wi-Fi markets, thanks to your flash model. The question is how can you move upmarket and challenge some inventors in any of your addressable markets but remain committed to your go-to-market model?

I think – a lot of people have asked this question. With regard to the Ubiquiti business and business model is how do we compete against incumbents and big players in the enterprise like Cisco? And I always go back to that hotel, example. We are not trying to win the business of five star hotels. We are going after two, three, four star hotels. Our mission is to democratize advanced network technology for the masses. So we are going after big volume and we are going after all the opportunities that are shut out because of economics and price performance. So we don’t believe we have to take incumbent market share to grow. We think there is enough Greenfield opportunities where we could -- we have huge growth ahead without looking at incumbents.

Then again if you look at the markets that are serving it's quite big, much bigger than the Greenfield opportunities. Why not say, build yourself or maybe sacrifice a few points of margin, but then open up significant revenue opportunities for you?

Here's the problem with that. If you take an example of University WiFi deployment which might be for Cisco, it might be a $3 million deal. Well Cisco can afford to have -- if they're making 70% margin they could afford a huge sales and marketing staff to run 30%, 40% of their revenues. They could afford to pay system integrated and distributors and they could play that game and -- but with our technology, we could cause the same problem and maybe it only cost the end user $100,000. Now, we don't have the margin in there to higher huge sales team and play the same game that Cisco is playing. But I believe that if the end user in the end market becomes aware that our technology is price-performance much more valuable than the incumbent, then they will choose us every time. So, the key to our strategy is to focus on R&D and driving price-performance, democratizing the technology and using our community and evangelism to bring the brand awareness to the end market.

Sounds good.

So, I guess I'm saying I want the same thing you're talking about, but how to get there we have to be smart about it.

Okay. And then my last question is around R&D investments. You've been investing in R&D and you have clearly released a number of products in a very short period of time. At what point you look back at the portfolio and say that you have entered many markets, stabilize spending and perhaps focus more on how to grow your existing products and probably say that you have a target number of end markets you're trying to go after.

I think we have proven our business model in the outdoor wireless service provider market. I believe now that we are at essentially $200 million run rate in the enterprise market which we have done within three or four years. I think we have proven our business model in that market and a lot of people said we wouldn't. I believe there is a lot of other places we could take our business model. So what we're trying to do now is trying to identify billion or multibillion-dollar opportunities for the future to try our business model in.

Thank you, guys.

Thank you. Our next question comes from the line of Ehud Gelblum with Citi Research. Your line is now open.

Thanks. This is actually [indiscernible] calling in for Ehud. I wanted to ask you within the enterprise business just about the 802.11 AC mix and pricing dynamics on this market. When do you think the pricing especially with your products will get to the Ubiquity like disrupting pricing levels that we have seen before where you are on the end product? And then just following up on the last question that was asked about the business model, it's actually interesting that your enterprise business grew this quarter sequentially, but the SG&A spending went down. So at some point understanding that you are not Cisco and you don't have that scale, does that line grow as you get deeper in enterprise and more products out there again to your point, evangelize the market, does that cost more to evangelize the market and your products at some point.

So, SG&A, I don't know if it will grow or not. But it definitely will not grow from hiring salespeople or marketing people or traditional strategies. We just don't do those here. If we find a way -- creative way that can bring more evangelism to our brand and I definitely invest if there is something that brings a return on investment that meets our expectations. As for -- okay, your other question about airMAX AC, I believe once this fully matures, the economics of airMAX AC should be in line with our existing airMAX products.

And just to ask about the UniFi AC products as well, those kind of question there. What are the price points that get you higher adoption in the enterprise of AC. If you can mentioned the mix that you have of AC versus and unified products on the enterprise and what is the gap in pricing that you think between yourselves and your competitors that will potentially give you that same boost that you had initially with an -- when you started to grow well in the market and then I have a follow-up. Just a housekeeping question.

I think airMAX -- I'm sorry, UniFi wireless is definitely due for a refresh. And I think if we can maintain the same price points and improve technology to the latest and greatest standards, it should help continue the growth trajectory for UniFi. So we are fully concentrating on that right now.

Thanks. And just a housekeeping -- deferred revenue went down quarter-over-quarter. And aside from that the prepaid expenses jumped a little bit. Can you just help us with those two items? Thank you.

Yes. So for the prepaid, I think that's Robert alluded to a sourcing strategy that we've taken on. And part of the strategy is that, we are working with kind of our top suppliers and putting some cash to secure volumes and pricing. And what was the other part you asked?

The deferred revenue trended down quarter-for-quarter.

Yes. Just standard cleanup stuff.

Thank you.