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Ubiquiti Inc. (UI) Q4 2018 Earnings Report, Transcript and Summary

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Ubiquiti Inc. (UI)

Q4 2018 Earnings Call· Fri, Aug 24, 2018

$589.13

+1.27%

Ubiquiti Inc. Q4 2018 Earnings Call Key Takeaways

Ubiquiti's Q4 2018 call was Q&A-only with no prepared remarks; management highlighted strong North America enterprise demand but flagged chronic stock-outs and air-freight costs pressuring margins.

The Numbers

  • Finished goods inventory approaching 8 to 12 weeks on hand, with a meaningful share of U.S. revenue now flowing through the domestic inventory center7
  • No revenue, EPS, or segment figures were stated on this call — management conducted a Q&A-only format with results available separately in filings2

What Worked

  • UniFi expanding beyond WiFi into a unified networking platform with network security and advanced features, driving North America and enterprise outperformance5
  • New U.S. inventory facility partially plugged channel stock gaps, improving product availability domestically5
  • Cost reductions on mature products are ongoing and expected to partially offset new-product margin pressure13

What Concerned

  • Chronic stock-outs on key items persist; management acknowledged demand is not yet being met10
  • Excessive last-minute air shipping costs are compressing margins; logistics described as "very inefficient"13
  • New product categories (e.g., UniFi Video) expected to pressure product mix margins in the short term13

Forward Signals

  • UniFi Video flagged as a major strategic push over the next couple of years, targeting a significantly larger market share in video security13
  • Supply chain and logistics maturation expected to drive "significant margin improvement" as operations scale13
  • UniFi platform will continue expanding into more verticals and use cases beyond its current footprint5

Q&A Worth Noting

  • **Tariff Pass-Through:** Question raised on whether tariffs would trigger price increases; Pera did not directly answer, pivoting instead to inventory and demand priorities7
  • **Gross Margin Trajectory:** Pera expects long-term gross margins to remain "relatively steady" with cost efficiencies on mature products offsetting aggressive new product launches, and meaningful upside from fixing air-freight inefficiencies13
  • **Inventory Strategy:** Pera stated his primary business driver is meeting demand and eliminating stock-outs — not managing balance sheet inventory levels — signaling continued finished goods build10

Stock Price Reaction to Ubiquiti Inc. Q4 2018 Earnings

Same-Day

+2.38%

1 Week

+8.01%

1 Month

+18.04%

vs S&P

+17.21%

Ubiquiti Inc. Q4 2018 Earnings Call Transcript

Operator

Operator

Good morning and welcome to the Ubiquiti Networks Fourth Quarter Fiscal 2018 Conference Call. All participants are in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Laura Kiernan. Please go ahead.

Laura Kiernan

Analyst

Thank you, Ann and thank you everyone for joining us today. I am here with Robert Pera, Founder, CEO and Chairman of the Board at Ubiquiti Networks. Before we get started, I would like to review the Safe Harbor statement. Some of the statements we will make during this call constitute forward-looking statements, including the 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 today’s call. Information on these risk factors and uncertainties is contained in our most recent Form 10-K filed with the SEC and our other filings, which are available on the SEC website at sec.gov. Forward-looking statements are made as of today, August 24, 2018 and we assume no obligation to update them. This call will be a Q&A call only. Please limit yourself to one question. Operator, we are now ready for questions.

Operator

Operator

Thank you. [Operator Instructions] We will take our first question from Tim Long with BMO Capital Markets.

Tim Long

Analyst · BMO Capital Markets

Thank you. Robert, real strong performance in North America and in enterprise in the quarter, I am sure they are related. Could you just talk a little bit about what was behind that strong performance this quarter? I am assuming UniFi was strong, but was there anything – any other color you can give us maybe on kind of the unit ASP dynamic or other products that might have contributed to that strength that would be great? Thank you.

Robert Pera

Analyst · BMO Capital Markets

Sure. Thanks for the question. I think it was maybe a couple of main things. First, UniFi is expanding fast from just being known as WiFi to being a unified networking solution with getting in network security and we continue to add advanced features. The second thing is our supply chain is still pretty inefficient and our sales channel and their ability to stock is still very inefficient and we setup some – a big facility in the U.S., inventory facility that kind of plugged the weaknesses of the sales channel to-date keeping product and stock. And we are still not there yet, but I think those are the two key things with UniFi. Moving forward, we continue to expand the application use and get into more verticals and then we need to continue improving our operations to just meet the demand, which we are not doing yet.

Operator

Operator

We will go next to Erik Suppiger with JMP Securities.

Erik Suppiger

Analyst

Yes, thanks for taking the question. I have two if I could. One, on the tariff front, can you tell us are you expecting those to take effect and if you are, would you consider raising prices to pass through some of the cost or the tax? And then secondly on the warehouse inventory, your inventories are approaching your – your finished good inventories are approaching 8 to 12 weeks right now, how much of your shipments are actually coming from inventory that has been through your warehouse?

Robert Pera

Analyst · BMO Capital Markets

I believe a decent percentage of our U.S. revenue is now flowing through our inventory center. Outside the U.S. largely we ship directly out of Asia.

Erik Suppiger

Analyst

That suggests that there is still going to be a considerable addition of finished goods as you expand warehouse inventory or is it at a level that you think you will maintain at least at this point?

Robert Pera

Analyst · BMO Capital Markets

My primary priority is we are trying to find a way to meet demand. Right now, we have still chronic stock-outs on key items and that’s what’s going to drive my business decisions not inventory level on the balance sheet.

Operator

Operator

We will take a follow-up question from Tim Long with BMO Capital Markets.

Tim Long

Analyst · BMO Capital Markets

Thanks a lot. Just wanted to ask Robert on the gross margin, it sounds like there is obviously an impact from expedited shipping cost this quarter, but longer term that would go away, particularly with what you are doing on the inventory front. But you made some comments about new products having higher margins and some cost reduction actions that you continually take on the products. Can you just give us a little color on that new product front? Are you addressing some newer areas and why would they have higher margin profiles? And the cost reduction actions would that – should we think of that really focused on across the portfolio or is that mostly UniFi or where would that be targeted most?

Robert Pera

Analyst · BMO Capital Markets

So, we are continuously making good cost reductions, but we also plan to continue to be aggressive on new product introductions. For example, video security is something I think we should have a much larger market share of and we are going to be very aggressive with UniFi video over the next couple of years. And so you have a product mix that could bring margins down in the short-term, but you also have some material efficiency, cost efficiency capture on mature products. So, I think long-term, our peer margins should remain relatively steady. Now, where we have to improve is everything else that goes into those margins, specifically, our shipping logistics efficiency. We have been very inefficient on delivering product to the channel and meeting demand and as a result, we have had a lot of excessive cost due to last minute air shipping. So, I think as our operations continue to mature you are going to see significant margin improvement from that.

Operator

Operator

And this does conclude today’s conference. We thank you for your participation. You may now disconnect.