Earlier this year, with Ubiquiti Networks (NASDAQ:UBNT) trading in the low $60s, I wrote that the company could finish the year higher despite a 100% gain in 2016. That outlook looked foolish for the first half of the year, as Ubiquiti’s increased spending and lower margins scared off investors despite strong top-line growth. However, the company spiked 20% back into the mid-60s after its recent earnings report, and I think there’s more room to run.
Ubiquiti posted revenue of $228 million versus previous guidance of $215-$225 million and non-GAAP EPS of $0.75 versus guidance of $0.70-$0.75.
Gross margin, which I noted was an issue to watch, came in at 45.1%, down from 48.3% in the year-ago period. This was because growth came from new products, that currently have lower gross margins, but which are expected to increase over time as the volumes rise and the company achieves cost efficiencies. A one-time $4 million research and development milestone payment also cut EPS by roughly $0.04 per share.
While earnings were good, the main reason for the bump was Ubiquiti’s one-year forward guidance. Ubiquiti has typically only given guidance on the current quarter, but this was the first time the company had given a one-year forecast.
Revenues for the fiscal year of 2018 (Ubiquiti’s fiscal year ends June 30) are forecast to be $1.0 to $1.15 billion and EPS of $3.70-$4.30. Those midpoints would mean 24% revenue growth and 33% EPS growth, significantly higher than analyst estimates.CEO Robert Pera said those numbers would be driven by newly announced products, while unannounced products would be, “icing on the cake.”
New products — airMAX
As I had anticipated in my pre-earnings article, Ubiquiti’s new products got lots of lip-service on the earnings call. For airMAX, the new U Fiber offerings will add to wireless internet service providers’ (WISPs) toolkit.
Pera claimed this offering would be complementary to the company’s main wireless offerings, as the layout of the service providers coverage area (including the spacing of buildings) would determine the best choice for broadband.
Pera also discussed the new PrismStation access point as a catalyst for a big upgrade cycle. The company saw the start of that growth this quarter, as the service provider segment grew 5% year over year and 10% sequentially.
New products — UniFi
Moreover, Pera touched on two upcoming products: Security firewalls, and an upgraded video platform. The company is currently developing next-gen firewalls, which could go a long way toward satisfying requirements for large enterprise adoption. Moreover, Pera said that the existing UniFi Video camera segment had lots of room for improvement, and predicted that when the next generation is released, the company could go from selling hundreds of thousands of security cameras to selling millions per year.
Based on the company’s guidance, Ubiquiti still only trades at 16.5 times forward earnings. That is not a demanding multiple, given that management said that the potential of the products in the pipeline was not included in the guidance.
What might these unannounced products be? On the airMAX side, Pera has hinted at something called LTU, or “Long Term Ubiquiti,” built upon a custom-made application specific integrated chip, different from the traditional Wi-Fi chip used in the current airMAX line. It is hard to know the upside for this, but it could potentially allow wireless service providers to penetrate denser urban environments.
In addition, Pera gave a long-term vision for UniFi:
We also have more complimentary technologies set back to UniFi and I think what you will see in our vision is you go into a building one day and you will see UniFi running everything, everything from the automation to the lighting to the Wi-Fi piece to endorse security systems that the video security systems and more… we have teams working on all of that stuff.
Finally, Pera announced the Ubiquiti Labs segment will be releasing complementary consumer products to AmpliFi, the consumer Wi-Fi router the company released late last year.
Given the strength of the current offerings, reasonable forward multiple, and the company’s culture of innovation, I don’t think it’s too late to buy Ubiquiti, even up 20%.