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Ubiquiti Analysis



August 27, 2014 – Comments (0) | RELATED TICKERS: UBNT

Board: Value Hounds

Author: MonsterFluff

Normally try not to go into a long boring description of a company’s business any more, but Ubiquiti isn’t easily comprehended like a restaurant or retailer. To understand the business, you need to understand how wifi works for their service segment and then switch gears and try to get a grasp on the enterprise business. Mostly this is for my notes and records but thought I’d share.

Ubiquiti wants wireless where no connectivity has gone before (make it so)

Ubiquiti’s mission as a service business is to bring connections to the underserved in underpenetrated areas. Since a wide swathe of the world is not connected by cables and fiber optics and that last mile can be a lot more than a mile, there is room for an innovative cheap solution to get the internet to the back of beyond. the high initial capital requirements and ongoing operating costs and long market lead times associated with building and installing infrastructure for wired networks has severely limited the widespread deployment of these networks in underserved and underpenetrated markets. Wireless networks are emerging as an attractive alternative for addressing both the broadband access needs of underserved and underpenetrated markets in both emerging and developed countries.

The enterprise business involves products used to connect and monitor businesses, schools, hospitals etc. Products include networking platforms, cameras for surveillance and machine-to-machine connectivity.

They have what is called the Ubiquiti Community or Network and they rely on that to generate demand for products. Since they do next to no marketing, SG&A costs are low and margins are higher. In 2014 a mere 4% of revenue was spent on SG&A compared to 18% for Sierra wireless. Sierra has had negative operating margins for the last three years.

The Community also supports operators and service providers with help installing and operating products. Ubiquiti offers limited tech support. In some respects this may lead to misuse of the product and lack of understanding how to best apply platforms to a particular location. However, the network is pretty good with a lot of participation and instruction available. I have surfed quite a few of the presentations and they are reasonably good.

The Ubiquiti Community also gives feedback directly to engineers for research and development purposes. The insights, problems and suggestions raised by the Ubiquiti Community result in quick resolutions of performance issues with existing products and improve functionality in subsequent product releases.

What is wiFi?

WiFi is the solution for providing internet to customers that can’t get physical wired connectivity provided by cable companies—copper or fiber optic. Much of wifi is the 2.4 GHz but Ubiquiti sells equipment that connect riding on the 5GHz network. The 2.4 GHz is the one most typically used by a majority of wifi users and is crowded slowing speeds in excessively congested areas. 5GHz is less crowded but seems to be gaining users and may end up with congestion problems.

A lot 5GHz is used for building-to-building connectivity (UniFi) or within a single building wiFi transmission(also the provence of the UniFi line). Ubiquity is providing a way for WISPs to get service to from an antennae to customers over greater distances than just building-to-building. Much of the 5GHz spectrum is unlicensed. The number of users of the unlicensed radio frequency has increased for communications equipment, as well as consumer devices such as cordless phones, baby monitors and microwave ovens. This increasing use of unlicensed RF spectrum has made providing high quality wireless networking more challenging due to increasing congestion in the unlicensed spectrum.

The big difference between licensed and unlicensed bands is licensed bands are allowed to be used only by the company that licensed them, whereas the unlicensed bands are used by anyone who wants to use them. Unlicensed radio bands have been allocated to certain users by the government, but to be able to use and broadcast on these bands, you do not need to have a license; you only need to create devices to be used -— Ubiquiti does.
Regulations exist around these bands and using unlicensed radio bands is not a free-for-all. In the United States, the FCC regulates all the electromagnetic spectrum, but it has set aside several ranges for public use.

Some of the types of unlicensed radio bands are:

•Industrial, Scientific, Medical (ISM): This type includes several medical monitors and other devices that operate in the 900-MHZ, 2.4-GHz, and 5-GHz bands.

•Unlicensed National Information Infrastructure (U-NII): This type defines the specifications for the use of wireless devices such as WLAN access points and routers in the 5-GHz band.

•Unlicensed Personal Communications Services (UPCS): This type defines the specifications for devices operating in the 1.9-GHz band, where DECT6 cordless phones operate.

Overview of two segments –- service and enterprise

1) In service, Ubiquiti provides networking technology for WISPs and businesses. They tend to focus on the underserved markets that have few choices when it comes to connecting to the WWW. The equipment for 5GHz has typically been higher cost than the 2.4GHz equivalents and Ubiquiti’s mission is to keep prices at levels where the equipment is affordable.

The differentiated business model, combined with proprietary technologies, has resulted in a usable
alternative to traditional high touch, high-cost providers, market adoption UBNT platforms for ubiquitous connectivity.

They have 20 million devices sold over 180 countries.

Can you say dis/rup/shun?

Disruption is a buzzword at the Fool and disruptive companies can return an investor’s money multi-fold. Ubiquiti wants to disrupt.

2) Ubiquiti targets growth in enterprise markets ripe for disruption

• video surveillance
• machine-to-machine communications
• licensed microwave wireless backhaul markets

UniFi (unify --clever) was the 6th largest global provider of enterprise WLAN coordinated access points in 2012. UniFi connects devices across a work place with It’s a scalable wiFi solution that includes hardware with a software based management controller that links phones, surveillance cameras and wifi (computers). UniFi hardware works with 802.11a/b/g/n and ac standards and uses a single cable for data transmission and power-over-Ethernet. Unlike other enterprise Wi-Fi systems that utilize a costly hardware Wi-Fi switch, UniFi uses a virtual controller that allows for on-site management or remote management through the cloud.

airVision, is Ubiquiti’s IP camera management system including AirCam H.264 megapixel IP cameras and airVision management software controller. The H.264 cameras use a single cable for data transmission and power-over-Ethernet. The airVision management controller software can be used to manage multiple airCam H.264 IP cameras as well as manage digital video recorder devices. airVision can be accessed securely from any web browser, provides detailed
statistical reporting and advanced analytics and provides a management console with multiple views, versatile camera settings and customizable event recordings.

Machine-To-Machine platform products are included in UniFi and are hardware sensors, power devices, and management software that allow devices to be monitored and controlled remotely via WiFi. For example, UniFi allows users to manage and monitor their building temperature and power consumption. The management controller software is IP based and can be accessed from any browser

Personal anecdote vis a vis internet service

I use the airMax system to connect to the internet through a local WISP so am familiar with the capabilities and limitations. Until a couple of months ago we were using a 2011 or possibly older version. We have the dish and radio, the WISP has a line of site antennae up on a guys barn about 7 miles from us. The quality was barely acceptable to poor. Streaming was nearly impossible for most HD signals. Netflix was OK if you were streaming during nonpeak hours. Downloads could take forever. It was exquisitely sensitive to overload and nights and weekends would leave us unable to do much except use the internet at frustratingly slow speeds more often than not. Finally, it quit working completely this summer around Memorial Day

Fast forward to the new airMax and speeds are as advertised by the WISP instead of 1/10 as fast We are now capable of streaming HD and downloads are fast. The difference between the old and new equipment is light years apart and if this is the result of Ubiquiti modifications on product lines then they are showing growth and huge potential. Next up for modification will be the antenna sitting on the guys barn.

Outdoor antennas are designed to amplify signal power, resulting in stronger signals and better link quality, and to block noise. The Ubiquiti design produces a better signal-to-noise ratio for each channel and simplified signal processing to combine the channels, that effectively doubles the throughput when compared to single input single output devices. When they change out the old antenna this fall I will be looking for even more awesome internet. May even be able to play games.

Too much information and some reasons for growth

A lot of information and in a tech area that is not as intuitively obvious as some businesses if you are tech-impaired like moi. Ubiquiti is interesting with its non-conformist approach to sales and it’s equipment that has a specialty niche in non-licensed RF. Services is the biggest part of the business, but management is expecting more growth from the local networking business that includes Unifi. In fact, they have been doing a rapid ramp in UniFi products the last few quarters that (along with the 2013 slowdown) skewed inventory to the high side and probably resulted in some selling pressure in May.

From the CC Ubiquiti is predicting faster growth in enterprise that is still a small part of the business.

Yes, so I mentioned earlier, we have I think close to about 2 million UniFi APs deployed. We're #2 in the enterprise wireless LAN AP space. And volume shipments behind Cisco, we did that in about 3 years. And a lot of people see UniFi as just WiFi and WiFi APs today. And I think we're at in an inflection point coming up where we're going to show that UniFi's a really a full end-to-end software-defined networking platform.

So anything in your business closet, whether it's a PBX, a security gateway, a power you're using as switch, a network attached storage, a network video recorder, and everything will be able to be controlled through this UniFi Software Defined Network and control point. So where we won a position unifies any small medium business, school, hotel. They would just only need one vendor. And it completes all their IT infrastructure needs, and they can control all of these IP boxes from one software control point, and they could also control multiple sites from the same control point. And we're doing this all at disruptive pricing fractions of the cost of existing solutions without any support or licensing fees. So I think we're really democratizing end-to-end technology for these -- for our enterprise side.

Growth will come from:

• Demand for airFiber 5 and airMAX (service wifi)

• Strong momentum in Enterprise Technology, primarily due to product expansion and further adoption of the UniFi technology platform

• Strong sales of the recently launched EdgeSwitch for a fraction of the cost of a traditional enterprise switch

• Newly launched UniFi Video surveillance camera control software and a new generation of cameras

• UniFi VoIP, a new scalable VoIP enterprise smart phone technology to provide price/performance disruptive telephony solutions for business, schools, hotels, etc

Geographic diversity will provide growth. The US has dense infrastructure in high population centers but the rest of the world is less physically connected

Ubiquiti has a broad global reach and because of its emphasis on sales to underserved and unconnected regions, a lot of the business is done in countries that lack infrastructure. As such, the US is a smallish part of the business.

[See Post for Tables]

Because growth is organic and the company produces positive free cash flow, share dilution is kept low and debt/capital is only 17%.
The one ugly number remains inventory and if they don’t start to move it, Ubiquiti may see more downward market pressure ala 2013 on shares in 2015.

Ubiquiti is a tech growth story at the beginning of the story. Their somewhat eccentric strategy of no direct sales force and limited tech support (margin enhancing) isn't hampering growth thus far. The emphasis on the unlicensed 5GHz RF spectrum is an unusual place to set up shop and may prove to be visionary if the government doesn’t meddle. The choice to move into areas that are wifi remote gives them a somewhat narrow moat for now that will attract competition if Ubiquiti keeps showing how lucrative it is. Like the story but have no idea how much to pay for shares. Anyone have some targets? Would appreciates some feedback.


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