Deep Dive: Ubiquiti
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(Ryan) What they do: There are a ton of technical terms when you’re reading through this 10-K, so I’ll try to make it as simple as I can. Ubiquiti sells equipment for internet distribution (wifi hardware) and they supplement it by selling related software. And they have tons of different devices designed for enterprises or individual homes, they even sell cameras and phone systems as well as software catered for specific customers as well.
But they mostly sell through a community of service providers, resellers, and distributors. And they’ve sold devices in more than 200 countries. The software that’s sold is mostly network control software. And they’re all UniFi enterprise or UniFi protect, that kinda thing. But using UniFi you can map out the best places to put certain devices and monitor everything from a central destination that’s hosted on the cloud. There’s one for individual homes as well.
As you’d imagine, most of the operating expenses are all R&D related since a lot of the sales and marketing is done by that community of resellers.
(Ryan) History: The company starts and stops with Robert Pera (he owns 89.5% of all the common stock outstanding). So he actually started his first company in high school providing networking and database services but after high school he attended UCSD and mastered in electrical engineering and studied Japanese while he was there. After college he went and worked at Apple but within 10 months he left to start what is now Ubiquiti Networks. He used $30k in personal savings and credit card debt in order to fund the launch.
He basically started it by building his own low-cost, high performance wifi module in his apartment. That’s all it really started as and since they’ve dramatically expanded their product suite. And they IPO’d in 2011.
Biggest competitor is Cisco Systems, the behemoth in the industry \
Will be tough competition for Ubiquiti, but shows the opportunity out there
Other competitors include Netgear, D-Link (oof, tough name), Dell, Juniper Networks
Cisco does $50 billion in revenue a year for reference
Gartner has great “overlap” for competitors https://www.gartner.com/reviews/market/wired-wireless-lan-access-infrastructure/vendor/ubiquiti-networks/alternatives
(Ian) Management and Ownership:
Robert Pera is the founder, CEO, and chairman of the board
Formerly worked at apple
Owns 89.5% of shares outstanding
This is his company
No conference call since 2018
Very small board, 4 members including Pera
He is the owner of the Memphis Grizzlies
Market cap of $19.7 billion, ticker UI
EV of $20 billion (probably the relevant metric)
EV/sales of 11.5
EV/GP of 24
EV/OCF of 35 (some one time WC stuff made this look worse than it is)
EV/FCF slightly higher (minimal capex they outsource manufacturing)
Minimal stock dilution on deck and strong buyback program
TTM Revenue of $1.7B, up 38% YoY (The majority of revenue comes from enterprise clients)
Gross Margins of 48%, expanding slowly
$555M in FCF, up ~53% YoY
32% FCF Margin
Having some global supply issues w/ the shortage in chips (have to incur additional costs to expedite shipments and has had an inability to meet some orders)
.5% dividend yield (continuously increases dividend)
(Ian) Balance sheet and liquidity:
$144mm in cash
$670mm in debt
Majority term loan, but also aout $200mm on a revolver just under 2% interest rate, but it is a variable rate
Share count down almost 25% in last 4 years.
Product Experience/Anecdotal Evidence:
(Ryan) Worked at a wifi reseller. Certain resellers can favor certain providers due to specific incentives.
(Brett) None but great reviews, sleek looking products
Future growth opportunities:
(Ryan) AmpliFi. This is their connected home wifi system. If remote work is a lasting trend, finding a way to go DTC. I would imagine there will be less enterprise spend if companies pledge to go fully remote.
(Brett) Wi-Fi 6. This is the next level of Wi-Fi. Every upgrade cycle within Ubiquiti’s market segments gives them an opportunity to win customers from Cisco. This will be a slow process but opens up opportunities over time
(Ian) Connected devices. Secular trend toward Internet of Things (IOT). They also sell some devices to entreprise customers. Need better and better internet and new devices to connect
Highlights and lowlights:
(Ryan) Highlights: Exceptional execution since its founding. Pera’s ownership is also a huge vote of confidence. Lowlights: I’m typically not a fan of CEO’s who own sports teams or have some other affiliation where they exert a bunch of focus, but Pera’s seemed to do quite well. Very competitive market, especially in enterprise config. and can be susceptible to reseller favoritism. But that hasn’t slowed them down so far.
(Brett) Highlights: Robert Pera = Outsider. Their strategic plan of having a culture of great operational efficiencies and attacking the market with low cost solutions that work just as well as Cisco’s is working Lowlights: Commodity prices effect costs, hardware is always tough, but other than that it is very tough to find a lowlight to Ubiquiti’s business
(Ian) Highlights: Almost a 20-bagger since IPO, a lot of that in the last two years, but still a good performer prior to that. Recently had its best revenue YoY growth rate since 2014 in late 2020 Lowlights: Hard to find a lot of info. Entirely dependent on CEO, not a bad thing recently.
Best case/Worst case:
(Ryan) Best: Continued steady margin expansion. Best in class suite of products. Steal customers from Cisco and continue to add to that top line. Worst: Competition from all sides. Rising commodity prices, plus a bad tariff environment. Leads to stalled growth.
(Ian) Best: Significant buybacks as FCF continues to increase. Increasing dividend. Worst: Bought out by PE or a strategic buyer.
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Disclosure: The authors and podcast guests are not financial advisors. Brett Schafer and Ryan Henderson are portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this podcast.