Ubiquiti files for IPO: interesting details about their business, risk factors

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.

ubiquiti revenues net income

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:

ubiquiti market share

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.

Comments

  1. John Doe says:

    Take a look at the FCC IDs used on Ubiquiti’s equipment and you will find that they re-use them on different models. Also note that there is an “option” to follow FCC rules in their web interface. Since when did Ubiquiti every care about following regulations? Other than when they get caught, that is.

  2. Bill Pascuzzi says:

    Ubiquiti doesnt sell in Asia, because it doesn’t work well in Asia; or any other place for that matter, that has geographic challenges, interference challenges, and atmospheric challenges. Ubiquiti started hot and heavy in Asia, and the partners and distis have lost interet over time due to lackluster performance, and its inability to overcome the aggressive environment. It’s not about the pricepoint- its about the trend toward better perfoming products. Asia is actually ahead of most of the world when it comes to really putting equipment through its paces, and this is a clear case of a product running its course from awareness, to becoming popular, to no living up to expectations and being dumped in favor of better performing products. Sorry to disagree with the price point issue- but I have been been watching these guys for a while here in Asia, and while it was a decent product a few years back, it’s fallen way to the back of the pack as compared with newer, more intelligent products that are out there (notice no mention of cheaper)

  3. Bill, with all due respect, I have no idea what you are talking about. How is the geography in Asia any different than the geography in any other country and what does atmospheric challenges even mean? I just came back from one of those Asian countries in a city with a very high-population density and other than just a different engineering challenge, it’s not any more difficult than anywhere else on the planet.
    If anything, Ubiquiti has a huge advantage over other vendors because the variety of products in the product line allow an optimized model for each area and the cost level is so low. Sorry Bill, I don’t know the answer and Ubiquiti may have gotten a bad reputation in the past for some reason, but it’s not because of product quality or lack of capability that other companies may magically have.

  4. Andrew James Villarose says:

    “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?”

    The answer here is that, few resellers are marketing UBNT products because they find stiff competition from distributors who also sells to individual with much lower price.

    “Just buy if you want” that is their attitude.

    They rather market other brands with better deals.

  5. Andrew James Villarose says:

    Bill..just concentrate with your Ruckus!!

    If UBNT addressed this issue with their distributor. You wont be eating dust because the dust has settled down before you know it.

    I know this because there are more clients who prefer to use UBNT than Ruckus. They’re eating a chunk of your cake slowly but surely!

    Andrew

  6. Let’s see, most of the Motorola WISPs are converting over and those guys are the most technically experienced operators on the planet in some of the more remote areas. I’ve had systems running for 3 years, some protecting high-value government facilities and recent installations support city-wide SCADA. Gosh, I wish I had know it didn’t work before I put it in.

  7. UBNT does not do a particularly proactive job managing its selling channel. There is really no money in selling Ubiquiti hardware for resellers in its discount structure.

    For creative engineering groups, consulting and design can be a profitable business … basically passing through the hardware at cost. But this is a different business model than for other wireless products.

    We have seen strong performance from UBNT products in challenging environments. Are they the absolute cutting edge of technological sophistication? No – there are some very high end radio products that will outperform them … at 10x the cost.

    It it the extraordinary VALUE proposition that makes UBNT interesting.

    I do think their management team is thin … and that is probably their greatest risk. However, it is very hard to argue with their success to date.

  8. Eric DaVersa says:

    Esme…many thanks on an excellent overview here…well done!

    In regards to the Asia market there may be a few elements at work there: Restrictions on spectrum, government-operated carrier networks (no WISP opportunity outside of India), limited distribution options, lack of local presence, government controls on website access (does Ubiquiti have Chinese language website?) and of course the “Buy Domestic” mandates like they have in China.

    Congrats to UBNT! This IPO news is only going to benefit investments in wireless. Between UBNT and developments in LTE this is certainly one of the most exciting times for the wireless industry.

  9. Cngratz UBNT!!

    Ubiquiti should improve or make a direct competition with Mikrotik router product section.

    Ubiquiti for life.

  10. Ubiquiti was succesful only because they can make low cost outdoor CPE. In terms of technology innovation there is nothing special about it. They also have a weak point because they management sucks! They don’t have a clue how to manage the channel. The distributors cannot make money selling their product. Their business is very weak as soon as some Asian competitor can launch similar products a much lower cost they will loose their revenues very fast. As for the new market they wish to target (carrier class). That is a long shot since they do not offer any tech support and they do not have any team to support this kind of product.

  11. I’ve been selling Ubiquiti products for 4 years so I know very well their products. I don’t see any potential for Ubiquiti because this is a company with very low technology innovation and their success was due to the low cost product they made. However the market is switching to more demanding technology and ubiquiti does not have any product for it. they cannot sell in Asia because it does not work well. They can only sell in emerging market because those market WISP only want to buy low cost equipment due to limited budget. Unless Ubiquti has a huge upgrade on their management team I don’t see how they can get into the carrier class channel and compete with Cisco, etc..

  12. Ubiquiti success is limited to emerging market WISP community. This market only wants to pay for low cost equipment. Ubiquiti does not offer any sales or after sales service. They do not have branches in main markets to support the business for carrier class industry. Their current channel is purely hardware distributors that works as box moving channel. If they want to compete against Cisco, Aruba, etc they need to double their current stuff of 80 employees (50% of those in Asia). They cannot expect to sell carrier grade products with the current channel and staff they have.

  13. I predict their revenues will drop 20% by end of this year. There are already many Asian manufacturers that are producing similar technology as Ubiquti for much lower cost that will be launched in the next couple of months. They won’t be able to grow like previous year as their product are too entry level.
    Also it doesn’t help that their distributors can only make 5~10% margins and they will jump to others brands that can give them more profits as soon as they have it.

  14. Their best selling items are basically 80% the same product just repackaged with some small differences.

    NSM5, NSM2,ROCKETM2, ROCKETM5, LOCOM5, LOCOM2 (ALL USE THE SAME PCBA BOARD DESIGN)

    AIRGRID, NANOBRIDGE, BULLET (USE THE SAME BOARDS). That covers all the best selling products (basically they could grow the previous 2 years because no other supplier paid attention to the WISP community in EMEA and Latin American market yet)

  15. Many of the comments concerning Ubiquiti’s inability to grow are apparently missing the fact that they have diversified into all the accessories in addition to the radios. Simultaneously, they are staying ahead of the Asian vendors with features and capacity. A good example of this would be someone like Bloomtech how ported 802.11g down to 900MHz when Ubiquiti is already into 2×2 MIMO. Microtik just recently added a much faster AP for Ubiquiti antennas but it doesn’t support GPS and it’s the same price. On the other hand, I don’t see Ubiquiti standing still and I would expect them to be in other companies core markets pretty soon.

    It’s a lot easier for Ubiquiti to move up in the market than it is for Cisco and many other companies to move down into theirs.

  16. Tim Morrison says:

    UBNT sells price only. Management sucks, warranty is garbage and when co-alocated with a Motorola Canopy solution in a same region, the performance drops dratically. Crazy are the ones that give up on Motorola Canopy for UBNT…In Latim America UBNT is called as Motorola Canopy Generic…
    Don´t be fooled by UBNT…

  17. Binty Paul says:

    Frankly speaking, I’m thinking of distributing Ubiquiti in my country.
    But, after reading all the comments, I just felt thumb down on that brand.
    I don’t know the product quality for long run. But it’s very impressive for the first time of use.

    Anyhow, can anyone help me get a suggestion of what are the most popular items (the most consume by customers) from Ubiquiti product lines?

    Hope I got some clue…
    Thank you guys in advance.

  18. If you plan to distribute Ubiquiti you must prepare to face the fact that this company does not offer any sales service, you can only expect them to take orders by email. Expect frequent delays on your orders. Expect they will ask you to prepaid money in advance as deposit without confirming you when they can deliver your order. Expect to make very low margins as their price policiy does not protect their distributors… If you are OK with that then you will be OK selling Ubiquti.

  19. Works great out here in rural America…this is exactly what we needed, and lets us go head to head with cable & DSL providers. 20M and faster service plans are quite possible with this gear, and we have customers 15 miles from our towers, who are getting that rate. I’m personally hoping that Ubiquiti gets involved with Reardon’s DIDO technology and puts out whitespace-band gear using DIDO back-end processing techniques.

  20. I know almost all the brands in networking and I know most of todays products, the answer to the question why is not Ubiquiti sucesfull in Asia is simple, Asians prefer their own equipment, what they can copy – they produce, only what they cant copy they buy from other countries. Ubiquiti HW is already copied, ist nothing special, but what is important and makes Ubiquiti so strong is the SW and some small but intelligent innovations that pushes them ahead of their competitors. If they keep it up, they will not fall, if they start complicating and start to act like Cisco, that will be their downfall. Simplicity, originality, cost-effectivity and good will is the key to sucess, and I hope that Ubiquti team will keep up the good work ! all the best from EMEA

  21. Larry Goldfield says:

    Somehow the many negative comments I’m reading here are at odds with the success Ubiquiti has shown in the last 6 years. I’ve been following the company since it’s inception, & the bottom line is that it has shown innovation in developing a strong product line, and a marketing program that has put them in a great position within the marketplace. They currently have strong market share, and I believe with the infusion of cash from the IPO, they can be aggressive in product development. To say the company has poor management certainly belies the evidence of their balance sheet. Personally, I think Robert Pera has shown pure genius in the way he’s developed the product line, and the way he’s steered it through the difficult waters of lightning fast growth.

  22. Ubiquiti basically created a product line of Wireless Legos coupled with WalMart prices. If you deploy it using the old Tower-Centric Model and try to compete with products that are 5 years more mature and 10 times more expensive they lose. However, antenna gain is cheaper he s/n ratios and at $100 for a base station with no training needed to deploy, it’s a game changer. If you use one of the myriad of design options I’ve written in all the articles, your financial models change signficantly to your advantage. It’s hard to argue with $150 million dollars or more in sales over the last fiscal year.

  23. Hi Everyone. I was their distributor in UAE. Funny thing is they blamed everything on us while i have 1000+ emails where they want us to sell to IRAN. Once i asked Robert Pera clearly about this and he said that UBNT is a Hongkong based company (where they ask every disty to send payments).

    Strange thing is i can still prove they’re selling to Iran and have found a way around that :)

    Anyone willing to know just visit x-concepts website and send email to me and i can show.

    Last October UBNT’s Robert visisted me and ask me to shut down company cause i have lots of their dark secrets (plans include opening office in UAE to avoid taxes etc. Now he has promised he will spend US$100M just to destroy my company :)

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