Ubiquiti Networks, Inc.

Transcription

1 January 07, 2015 Ubiquiti Networks, Inc. Current Recommendation Prior Recommendation Neutral Date of Last Change 01/07/ 2015 Current Price (01/06/15) $27.86 Target Price $25.00 UNDERPERFORM (UBNT-NASDAQ) SUMMARY We are downgrading our recommendation on Ubiquiti Networks to Underperform from Neutral, as earnings estimates were revised lower by analysts. The company reported lackluster first-quarter fiscal 2015 results, with adjusted earnings below both the Zacks Consensus Estimate and the year-ago figure. Worldwide revenues were hurt by a decline in demand from foreign customers. Also, the company spent heavily on its research and development (R&D) expenses, which weighed on its financials. Moreover, Ubiquiti Networks has been negatively impacted by political and economic instability in Eastern Europe and the Middle East. Given such factors, we do not see any significant turnaround in the stock for the near term. SUMMARY DATA 52-Week High $ Week Low $27.86 One-Year Return (%) Beta 2.31 Average Daily Volume (sh) 859,627 Shares Outstanding (mil) 88 Market Capitalization ($mil) $2,452 Short Interest Ratio (days) Institutional Ownership (%) 31 Insider Ownership (%) 69 Annual Cash Dividend $0.17 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 32.1 Earnings Per Share (%) N/A Dividend (%) N/A using TTM EPS 14.1 using 2015 Estimate 14.7 using 2016 Estimate 12.7 Zacks Rank *: Short Term 1 3 months outlook 4 - Sell * Definition / Disclosure on last page Risk Level * Above Avg., Type of Stock Mid-Growth Industry Wireless Equipm Zacks Industry Rank * 39 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Sep) (Dec) (Mar) (Jun) (Jun) A 75 A 83 A 101 A 321 A A 138 A 148 A 156 A 572 A A 155 E 163 E 171 E 639 E E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Sep) (Dec) (Mar) (Jun) (Jun) 2013 $0.14 A $0.20 A $0.23 A $0.32 A $0.89 A 2014 $0.45 A $0.47 A $0.49 A $0.55 A $1.96 A 2015 $0.47 A $0.44 E $0.47 E $0.51 E $1.89 E 2016 $2.20 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Headquartered in San Jose, CA, Ubiquiti Networks, Inc., along with its subsidiaries, offers a comprehensive portfolio of networking products and solutions for service providers and enterprises. Its service provider product platforms provide carrier-class network infrastructure for fixed wireless broadband, wireless backhaul systems and routing; while enterprise product platforms offer wireless LAN infrastructure, video surveillance products and machine-to-machine communication components. The company was formerly known as Pera Networks, Inc. before changing its name to Ubiquiti Networks, Inc. in Ubiquiti Networks offers high performance radios, antennas, software, communications protocols and management tools that are designed to deliver carrier and enterprise class wireless broadband access and other services primarily in the unlicensed radio frequency spectrum. The company offers various technology platforms, including airmax, which comprises protocols that contain technologies for minimizing signal noise; EdgeMAX, a disruptive price-performance software and systems routing platform; and airfiber, a 24 GHz point-to-point radio system; airfiber, a highperformance wireless backhaul device; UniFi, an enterprise Wi-Fi System that comprises Wi-Fi certified hardware with software-based management controller; and mfi, which comprises hardware sensors, power devices and management software that allows devices to be monitored and controlled remotely through Wi-Fi. Recently, the company also added UniFi Video and UniFi VoIP to its product offerings. UniFi Video comprises of video surveillance camera and camera control software whereas UniFi VoIP are the novel enterprise smartphone technology consisting of touch-screen phones powered by Android. Ubiquiti Networks markets and sells high volumes of carrier and enterprise-class communications platforms through a differentiated business model. Its business model is backed by a rapidly growing and highly engaged community of service providers, distributors, value-added resellers, systems integrators and corporate IT professionals, referred to as the Ubiquiti Community. Ubiquiti Networks classifies its revenues into three product categories: systems, embedded radios and antennas/other. Revenue by Product Categorty 3% 11% Systems Embedded radio Antennas/other 86% Equity Research UBNT Page 2

3 REASONS TO SELL Ubiquiti Networks reported lackluster first-quarter fiscal 2015 results, with adjusted earnings of 47 cents a share, missing the Zacks Consensus Estimate by 9.6% and the year-ago figure by 2.2%. This was due to lower worldwide revenues, hurt by decline in demand from foreign customers. Following the meek results, analyst sentiments were down as evident by downward earnings estimate revisions. The Zacks Consensus Estimate for 2015 tumbled 11.5% over the last 60 days to $1.85. Also, for 2016, it moved south by 12% to $2.20 during the same time frame. With persisting political and economic instability in Eastern Europe and the Middle East countries, we believe that the shares would shy away from making any turnaround in the near term. Ubiquiti Networks functions in an extremely competitive environment comprising big multinational wireless telecom service providers as well as newly established companies. Hence, the company has to maintain competitive selling prices and production costs and, enhance its Enterprise products offering as well as networking technology. Although these expenses will raise its financial base in the emerging markets and attract customers in the long term, they weigh heavily on the company s bottom line. During the first quarter of fiscal 2015, the company spent heavily on its R&D expenses, which hurt its financials. Also, going forward, Ubiquiti Networks expects its R&D expenses to account for 6% to 8% of the revenues. Ubiquiti Networks businesses, dispersed across the globe, are more prone to be impacted by international political and economic conditions, such as the prevalent geopolitical crisis in regions like Russia, Ukraine, Israel, Argentina and especially Iraq. Although the last quarter did not see any substantial impact on the company s financials, Ubiquiti s business is still highly susceptible to the continued turmoil in these regions, which generate about 6% of its total sales. In addition, currency translation also continues to bother the company s financials. RISKS The smartphone market is growing at a rapid pace, which in turn, is driving mobile broadband usage. Also, wireless networks are emerging as an attractive alternative for addressing the broadband access needs of underserved and under-penetrated markets in both emerging and developed countries. Ubiquiti Networks is focusing on cashing in on this opportunity as operators seek to expand network coverage and network upgrades for higher speed and capacity. This strategic approach may boost the future prospects of the company. Ubiquiti Networks has been focused on developing novel technological solutions for its customers. In the first quarter of fiscal 2015, Ubiquiti Networks launched a number of products including airmax ac, UniFi Video, EdgeSwitch and UniFi VoIP. Apart from this, the company broadened its UniFi platform to include the Software Defined Networking technology. Moreover, it has launched a wireless Internet platform, Ubiquiti World Network (UWN). All these can augur well for its long-term growth prospects. Ubiquiti Networks follows a cost-effective strategy and primarily markets through its Ubiquity Community. The community propagates viral marketing, which enables it to reach underserved and under-penetrated markets far more efficiently and cost-effectively than is possible through traditional sales. Further, the company encourages direct contracts between the Ubiquiti Community and its development engineers throughout the product development cycle, which eliminates expensive multistep internal processes and results in rapid introduction and adoption of products. Equity Research UBNT Page 3

4 RECENT NEWS Ubiquiti Networks Q1 Earnings Miss Estimates, Sales Up Y/Y Nov 6, 2014 Ubiquiti Networks Inc. reported first-quarter fiscal 2015 adjusted earnings of $0.47 a share lagging the Zacks Consensus Estimate of $0.52 a share by 9.6%. On a GAAP basis, the company reported net income of $37.7 million or $42 per share, compared with the prior-year quarter s tally of $40.5 million or $0.45 a share. Earnings were impacted by a significant increase in R&D expenses in the quarter. Quarterly Details Revenues for the quarter totaled $150.1 million, exhibiting a robust 15.7% rise from $129.7 million in the year-earlier quarter. The growth was supported by strong performance across both the segments. However, on a sequential basis, revenues declined 3.8% from $156 million. Revenues also fell short of the Zacks Consensus Estimate of $157 million. Revenues in the Service Provider Technology segment grew 13.9% year over year to $107.3 million. Segmental revenues benefited from the rising demand for its key products like airfiber5, airmaxac and EdgeMAX. Enterprise Technology segment revenues for the quarter scaled up 20.7% year over year to $42.8 million. The growth was driven by the strength in the company s UniFi technology platform coupled with a robust product expansion strategy. Geographically, the company s business in North and South America remained strong but weakness in regions like Europe, the Middle East and Africa along with Asia Pacific deterred growth. Margins Gross profit for the quarter grew 5.2% year over year to $61.1 million but gross margin declined 400 basis points (bps) to 40.7%. Operating margin slipped 630 bps year over year to 29.1% in the quarter. Other Financial Details Ubiquiti Networks ended the quarter with cash and cash equivalents of $391 million, long-term debt of $72.3 million and shareholders equity of $359.8 million. Net cash flow from operations for the quarter was $46.9 million. Outlook Ubiquiti Networks provided guidance for the second quarter of fiscal Revenues for the quarter are expected in the range of $147 million to $153 million while GAAP earnings are forecasted to be in the range of cents a share. Non-GAAP earnings are expected in the band of cents a share. Equity Research UBNT Page 4

5 VALUATION Currently, Ubiquiti shares are trading at 14.1X TTM earnings, a discount to the peer group average of 28.1X and the S&P 500 average of 18.6X. Over the last five years, shares have traded in the range of 13.1X to 39.4X trailing 12-month earnings. Therefore, the stock is currently trading in the middle of its historical range. We currently have an Underperform recommendation on the stock and expect it to perform lower than the broader market with a price target of $ Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Ubiquiti Networks Inc. (UBNT) Industry Average S&P ARUBA Networks, Inc. (ARUN) N/A Mitel Networks Corporation (MITL) 7.8 N/A N/A 19.4 N/A Sierra Wireless Inc. (SWIR) 58.7 N/A N/A InterDigital, Inc. (IDCC) 36.9 N/A N/A TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Ubiquiti Networks Inc. (UBNT) Industry Average S&P Equity Research UBNT Page 5

6 Earnings Surprise and Estimate Revision History Equity Research UBNT Page 6

7 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of UBNT. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1143 companies covered: Outperform %, Neutral %, Underperform 5.7%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research UBNT Page 7