Ubiquiti Networks (UI -1.04%) investors had an interesting ride this fall. After strong earnings in August and robust guidance, the stock climbed to $67, but in September, the company became the target of short-seller Citron Research, which called the company a "fraud," sending shares down to $50. Shares have since recovered to almost $65 as of this writing, so apparently Wall Street doesn't take Citron's claims very seriously. In addition, analysts Erik Suppiger of JMP Securities and Tavis McCourt of Raymond James both dismissed the fraud allegations. My colleagues recently dismissed Citron's even more recent attack on Shopify (SHOP 0.14%), and I don't believe there's much substance to Citron's attack on Ubiquiti, either.
Assuming you believe both analysts and management, investors should focus on, you know, the business, and we'll get an update on that in Thursday's earnings report. Here's what to look for.
Image source: Getty Images.
Can the service-provider segment grow?
Ubiquiti's revenues are currently evenly split between its service-provider and enterprise segments. The service-provider segment is the company's older one, having started selling its groundbreaking Airmax Wi-Fi radios roughly a decade ago. That segment has been stable, but it somewhat stagnated recently, growing only about 11% over the past two years. That compares with 130% growth in Enterprise over that time.
On the last call, CEO Robert Pera signaled that better times for the service-provider segment could be ahead. This year, the company unveiled its second generation of Airmax AC products, which have advanced features such as GPS sync and backward compatibility. That means service providers can replace older Airmax N radios one by one, instead of having to replace entire networks at once. The company believes these features will spur a bigger refresh cycle this year.
In addition, the company released a new product called uFiber, a gigabit passive optical network product for service providers. Management explained that the company was initially focusing on proving the technology in North America, before releasing the product internationally, especially in places like Brazil, where service providers can hang cables along telephone lines.
Last quarter, the company earned almost $115 million in the service-provider segment, so watch to see if that improves sequentially, and when uFiber will hit international markets.
Unifi acceptance?
Earlier this year, the company seriously upgraded its Unifi enterprise products. While Unifi had typically made "good enough" Wi-Fi access points for small businesses at extremely low prices, new additions to the Unifi lineup scored better on performance metrics than more expensive products from traditional enterprise vendors, such as Cisco Systems (CSCO 0.67%) and HP Enterprise (HPE 0.06%). The company also unveiled Unifi Elite, a subscription service that provides a high level of customer support, in an effort to penetrate higher-end enterprises.
On the last call, Unifi Elite didn't come up, and it remains unclear if Unifi can break into this new segment. Ubiquiti doesn't employ a traditional sales force and relies instead on word of mouth, so getting enterprises to switch to Unifi could take a long time. Still, Elite has been out for about 10 months now, so it's possible management may provide an update. The enterprise segment almost doubled year over year last quarter but was flat compared with the prior quarter, so investors should look to see if the segment returns to sequential growth.
Buybacks versus short-sellers
Finally, I don't expect management to comment on the short attack. Pera held an investor-day presentation on Sept. 26, where he dismissed the claims. Instead, the company is responding with its actions. The day after the accusations, Ubiquiti released updated guidance for the quarter of $240 million to $250 million, up from its previous range of $230 million to $250 million, and increased its buyback program by $100 million, on top of $50 million it had already authorized.
The company's October proxy statement revealed there are only 77.8 million shares outstanding, down from 80.3 million as of Aug. 22. Clearly, management has confidence in its performance and integrity, and it's taking advantage of the beaten-down stock price to repurchase shares.
Not only that, but the company also increased its credit facility with a bank consortium led by Wells Fargo (WFC 2.73%) from $300 million to $425 million on Nov. 1, which means the company could buy more shares in the near future. Since Ubiquiti's banks left the terms of the facility unchanged, the company's lenders don't seem worried about fraud, either. As of Oct. 13, almost 11 million shares are sold short, more than half of publicly available shares. If Ubiquiti says it plans to continue buying shares, it could be trying to force a massive short squeeze, so look for any commentary on further buyback plans.
