After Q4 Results, What Are Ubiquiti's Long Term Prospects?

So much for the inventory concerns raised in May following Ubiquiti Networks' (NASDAQ: UBNT  )  third quarter results. The company -- a provider of network communication platforms -- reported fourth quarter results on Thursday, August 7, demonstrating impressive year-over-year growth, but more importantly putting inventory concerns to rest. 

Financial highlights of Ubiquiti's fourth quarter
Ubiquiti saw total sales for the quarter increase 54% year-over-year to $156 million, with GAAP net income growing 71% to $49.4 million ($0.55 per share). The company continues to prioritize research and development, as evidenced by a 71% year-over-year increase in R&D expenses for the quarter to $10.2 million.

Ubiquiti saw especially strong performance in its Enterprise Technology segment, which grew sales 188.3% year-over-year to $32 million (20.5% of overall sales). Inventories -- a prime concern Wall Street had after Ubiquiti reported third quarter results this spring -- fell quarter-over-quarter to $46.4 million from $66 million in the third quarter. Ubiquiti's inventory had quadrupled in the two quarters leading up to the third quarter this spring, causing concern among numerous Wall Street analysts who worried Ubiquiti had excess inventory and execution issues. These fourth quarter results, however, put investors minds at ease.  

On top of this strong sales growth, operating cash flow increased 20.8% year-over-year to $55.8 million. Ubiquiti now has $347.1 million in cash with $72.3 million in long-term debt, making for a net cash position of $274.8 million. 

An expanding product line 
Ubiquiti continues to branch out its product line of network communication platforms. During the fourth quarter, Ubiquiti launched: 

  • EdgeSwitch, which is "designed to offer superior performance and capability for a fraction of the cost of a traditional enterprise switch." (Switches are tools to interconnect parts of a network.)
  • UniFi Video, a new line of video surveillance camera control software, accompanied by a new generation of cameras. 
  • UniFi VoIP, a VoIP enterprise smart phone technology particularly geared toward businesses, schools, hotels, and other enterprises. 

"[W]e're living in a time where if you have a disruptive product that's really great, people are going to find it. And I think we've proven that," says Ubiquiti founder and CEO Robert Pera. "We didn't have any salespeople or marketing people or business development people around UniFi." Ubiquiti continues to utilize its growing community of fans to sell and market its products -- a special advantage enjoyed by very few companies. 

As Ubiquiti branches out its UniFi network -- which is specifically geared toward enterprise customers -- the company is helping ensure that these enterprises will only need one vendor (Ubiquiti) for their network needs. Speaking of UniFi and Ubiquiti's focus on enterprises, Pera explained the significance of these services and Ubiquiti's potential: 

"[I]t 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. And so it's exciting. I think we're just at the beginning of where UniFi is headed." 

Perhaps best of all, however, is how successful these product launches have been. The primary drivers of operating cash flow growth in the quarter were improvements in customer lead times and and "a reduction in inventory related to new products launched and sold at scale." In other words, these new products are selling strongly and should continue to drive growth in the quarters ahead. 

"We continue to ramp our R&D resources in an effort to accelerate the next phase of our long-term vision of democratizing end to end communications technology infrastructure for the unconnected," says Pera. These R&D efforts paid off this quarter with successful launches of several new products, helping push Ubiquiti's enterprise segment to make up more than a fifth of total sales for the quarter. 

"Several new product launches are driving revenue growth and we continue to make the strategic investments that we believe will help us not only expand our addressable market," says CFO Craig Foster, "but also preserve our company's vision."

Foolish bottom line 
In the upcoming first quarter of the 2015 fiscal year, management is projecting Ubiquiti to grow revenue year-over-year by approximately 20% to 24%. Diluted earnings per share in the upcoming quarter are projected to grow between roughly 13% and 18%. While these numbers wouldn't represent the breakneck growth we have grown accustomed to in Ubiquiti's 2014 fiscal year, it is important to remember that Ubiquiti continues to invest in product development and expansion. These efforts should drive growth for the long-term, exactly the kind of growth we like to see as patient investors. 

Founder and CEO Robert Pera -- who is just 36 years old and spent two years with Apple before founding Ubiquiti -- continues to hold 65% of all shares outstanding. Pera has a direct stake in growing this disruptive business for the long haul. Even with shares up more than 15% following this quarter's results, Ubiquti is trading at a trailing P/E ratio around 23. That strikes me as a very reasonable price for such an innovative business flush with cash, a determined (and invested) leader, and a tremendous market opportunity. 


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