Ubiquiti has filed a form S-1 registration statement with the US Securities and Exchange Commission to raise $200 million by selling 39.5 million shares of common stock. The company plans to trade on NASDAQ under the symbol UBNT.
For those of you who are not familiar with Ubiquiti, the company has been mentioned many times in MuniWireless articles by our correspondents and wireless ISPs who have written to us about their deployments. Ubiquiti is a company that makes wireless equipment that many independent wireless ISPs (i.e. not carriers or telecom incumbents) use. Because Ubiquiti’s equipment is inexpensive (especially when compared to big brands like Cisco and Motorola) and delivers excellent performance (according to the ISPs we talk to), it is popular among wISPs in rural areas and developing countries. The price-performance ratio is very attractive to many integrators and providers. Ubiquiti prides itself on producing equipment that is easy to install and manage, scalable, and operates in unlicensed RF spectrum.
Although Ubiquiti may be a good buy if you are an ISP, it may not be a good investment for you. Therefore, you must read their registration statement carefully. You can view the UBNT S-1 Registration Statement on the SEC’s EDGAR online database. I have read it and pulled out a few details that caught my eye.
Interesting details in the Ubiquiti Form S-1 Registration Statement
In the registration statement, Ubiquiti describes itself as a wireless networking company that delivers “compelling price-performance characteristics” (meaning: inexpensive) to service providers primarily in developing countries, who don’t want (or can’t afford) to pay for carrier class products. Please note that “carrier class” as used here does not necessarily mean better performance; it means expensive, branded equipment sold usually by big brand names like Cisco and Motorola. As many wISPs will tell you, Ubiquiti’s products often perform much better than equipment from established wireless firms.
Here are some interesting details from the IPO registration statement about the risks of investing in Ubiquiti and the nature of their business.
(1) Crowd-sourced product development, marketing, and product support
Ubiquiti’s strength (and its greatest weakness) is its extreme dependence on advice and feedback from the Ubiquiti Community (over 60,000 registered members), which is a worldwide group of people who install and use their equipment. The company is completely dependent upon the Community to spread the word about their products and they have no control over what people say about them. The company does almost no advertising. In the registration statement, they say that advertising costs totaled $8,000 for the nine months ended 31 March 2010 and zero for 2011. Apparently, crowd-sourcing marketing, testing, and tech support is how Ubiquiti saves on costs and passes the savings on to their customers. So far, it has worked well for Ubiquiti.
(2) Revenues and profits
Because the company was created fairly recently (2005) it has a very short financial reporting history. The financials in the S-1 go back only as far as 2008. They point out positive financial results: in the 9 months ended 31 March 2011, revenues increased 35% to $130.3 million compared to $96.7 million in the nine months ended 31 March 2010. Likewise, revenues in fiscal 2010 increased 117% from $137 million from $63.1 million in fiscal 2009. Fiscal 2009 revenues increased 181% to $63.1 million from $22.4 million in fiscal 2008.
The losses in 2010 come from a compensation charge of $35.9 million relating to the repurchase of common stock and options in connection with the sale of Series A preferred stock, plus a $1.6M export compliance cost (for unwittingly exporting products to Iran via a distributor).
The Series A Preferred Stock sale: In 2010, they sold 13.5 million shares of preferred stock to Summit Partners, a private equity firm, for $100M. Simultaneously, they repurchased $100M worth of common stock (13,214,728 shares at $7.37 per share) from employees and consultants, most of which went to the founder, Robert Pera ($84M).
Gross margin is stable at 40% for the 9 months ended 31/3/2010 and 31/3/2011.
(3) 70% of Ubiquiti’s revenues comes from outside the US, mostly EMEA and Latin America
Ubiquiti’s sales are largely outside the United States. Here are the percentages of their total sales outside the US:
Given that emerging markets are growing much faster than the US (at least so far), this trend bodes well for Ubiquiti. I would like to see a breakdown of the market share in EMEA, that is, what percentage is from the Middle East? What percentage is European sales? Africa?
I do have a question: Why is Ubiquiti not selling as well in Asia? Are they suffering from too much competition in Asia from cheap, local wireless equipment makers? If that is the case, then why won’t this happen to them in other regions like Latin America where they seem to be increasing market share like crazy?
(4) Their plan to enter new areas of business — enterprise, government and utilities — could mean a radical departure from the way they have been doing business. Can they handle it?
Aside from expanding the business in current geographic markets, Ubiquiti plans to use the proceeds to enter the following areas: enterprise WLAN, video surveillance, SCADA and licensed microwave wireless backhaul. That means they will really have to take on companies like Cisco, Aruba, Ceragon, Motorola, Alvarion, Radwin, and Redline Communications, among others. Ubiquiti claims that these areas are ripe for disruption. However, the company needs to recognize that selling into large government, utility and corporate departments is very different from their current model of crowd-sourcing product support and relying strictly on the Community for sales and marketing.
They are assuming (at least this is how I interpret what they said in the registration statement) that they can attack these markets via the crowdsourcing method, but I have serious doubts. A large number of people who work in these big enterprises (and who are responsible for buying decisions in public safety, SCADA, enterprise WLAN) follow the CYA (cover your ass) model of purchasing which means buying the big brands and their level of customer support.
(5) Risk factors mentioned in the UBNT registration statement
Aside from the standard risk factors you see in every tech IPO registration statement (dire warnings about IP theft, indemnity and liability issues, foreign currency risks, closure of factories in China and Japan due to natural disasters and other calamities), here are a few that are directly relevant to UBNT’s business:
- Because they have absolutely NO direct sales force, it is nearly impossible to forecast sales. It’s going to be interesting to see what they say during analyst calls when they are asked, “So what do you forecast to be your sales for next quarter, next year?”. They are entirely dependent on sales to distributors, which were 85% (2008), 83% (2009), 93% (2010) and 97% (9 months ended 31 March 2011) of their total sales. Sales to distributors are done on a purchase order basis and those distributors don’t communicate much information about market demand, projections, etc. Moreover, two of Ubiquiti’s distributors accounted for more than 10% of their revenues.
- They get all of their chips from Atheros, which was acquired recently by Qualcomm. Nobody knows the impact of the Qualcomm acquisition of Atheros on Ubiquiti. The license agreement between Atheros and Ubiquiti expires on 1 Sept 2011 and renews for successive one year periods, unless terminated prior to the end of the term.
- Extreme reliance on viral marketing by the members of the Ubiquiti Community which recommends their products, provides feedback and tech support: if at some point members of this community stop loving Ubiquiti’s products, the company’s sales will plunge and that’s basically the end of Ubiquiti. As long as they keep this group happy, they’ll do fine. The perception of their brand is utterly dependent on this community. Indeed, because Ubiquiti does not do any support, it is up to the community to install, operate and maintain the equipment. Can they use this same inexpensive way of running the company business as they push into new markets like enterprise WLAN, SCADA, public safety, etc.? Seems unlikely. So they will have to incur higher costs of selling their products, for example, hiring sales and marketing people.
- Exposure to US export control laws and economic sanctions: This is actually a fairly serious problem for a company like Ubiquiti which relies almost 100% on distributors based outside the US. In 2010, the company discovered that one of their distributors in the United Arab Emirates was selling their equipment to Iran. It is very flattering and lucrative for Ubiquiti to be loved as much in Iran as elsewhere, but selling to companies based in Iran constitutes a violation of US trade sanctions. The company admitted in their registration statement that their lack of familiarity with export control and sanctions laws was “largely due to our lean corporate infrastructure, the inexperience of our management team in these matters . . . “I am really surprised to hear something like this from people in the tech industry. Anyone who has ever seen a standard license agreement in hardware or software (including the shrink-wrap software licenses that have been circulating since the days of Windows 95), has seen the standard clauses that prohibit the licensee from sending the software or hardware to Cuba, Iran, and North Korea. I find it amazing and a bit unconvincing that Ubiquiti’s executives had no clue about this. However, the company says it has taken steps to try to prohibit the distribution of their products to the Axis of Evil. They even recorded an expense of $1.6M in 2010 for compliance (this is the estimated exposure to fines). Still, one hopes that when they raise money from this IPO, they can actually hire people who will pay attention to regulations.
- As they enter the sectors (e.g. SCADA, licensed wireless, public safety/video surveillance) dominated by the big brands, they will face intense competition. Here are some of the formidable competitors mentioned in the S-1:
- integrated radio market: Alvarion, Motorola, Trango Systems
- 900 MHz: Cisco, Proxim
- embedded radio market: Mikrotik, Senao
- backhaul: Ceragon, DragonWave, Microtik
- CPE: Mikrotik, Ruckus Wireless, TP-LINK
- antenna: Andrew Corp., PCTEL, Radio Waves
The biggest risk I see is the increasing commoditization of Wi-Fi base stations and access points, which is exactly the trend that Ubiquiti took advantage of when they took on the big guys like Cisco. Except now, Ubiquiti will be one of the big guys and someone will come along and sell equipment that’s even cheaper than theirs. I am very uneasy about the fact that they are not growing market share in Asia. Is that an indication of the commoditization trend eating up their market?
Please post your comments and responses below.