Ubiquiti Networks (UBNT, Financial) has a very lean business model. The company focuses on design and innovation but outsources manufacturing and does not engage in direct sales. The company has a third-party network of distributors spanning 160 countries.
Accordingly, it is free from all the capital intensive manufacturing activities and associated costs, as well as costs involved with direct marketing. Around 62% of its staff of 400 is involved in research and development and the company holds about 70 patents.
Ubiquity posted third-quarter fiscal 2015 results that did not please the investors, and the stock tanked after the results. However, it has recovered since then, and investors are sitting on year-to-date gains of around 7%. Let’s take a look at the results and future prospects.
Third-quarter numbers and prospects
During the recently reported quarter, consolidated sales declined 0.5% year-over-year to $147.5 million, well below Street’s expectations. Negative sales growth across all geographies except North America resulted in a decline in the top line.
However, the management believes that on the strength of its diversified product portfolio and the launch of new products, it will be able to bounce back in the long run.
Recent estimates say in three years India could have the second-largest Internet user population in the world. The rural population accessing the internet is projected to grow from 28% in 2013 to 35% by 2018, representing huge growth opportunity in the long run. Internet penetration in rural China is also no different from India. Emerging markets and growth in rural India and China will be a significant growth driver for Ubiquity in the long run.
The company’s lean structure allows it to have a stable gross profit margin. Gross margin for the recently reported quarter inched up 50 basis points year-over-year to 44.7%.
Adjusted earnings per share came in at $0.46, similar to what analysts had expected.
Healthy balance sheet
Ubiquity’s unique business model helps it to maintain a low debt-to-equity ratio. The company exited the third quarter with cash and cash equivalents of $451.1 million, and long-term debt of $90 million. The company also has a healthy current ratio of 8.08, signifying that it can manage short-term debts efficiently.
Innovative products to drive growth
Ubiquity has an active portfolio of products which is refreshed with new additions from time to time. The company released new products like UniFi Video Camera Micro and UniFi Video software during the quarter. Also, it is planning to launch innovative products like Gigabit Ethernet router, EdgeRouter X, and others as the year progresses. These new additions will be growth drivers in the long run.
The router and switches market is dominated by Cisco (CSCO). However, within a short span of two years, Ubiquity has gained around 3.3% of the router market share.
The enterprise segment of the company, which includes routers and switches, has grown around 96% year-over-year, accounting for nearly 20% of its revenue. To stem competition, Ubiquity may be an attractive takeover target for Cisco.
Wrapping up
The growth of the internet in China and India can be a significant tailwind for Ubiquity. The company has a healthy balance sheet, and it can buy back stock to fuel bottom-line growth. Also, product innovations will drive growth.
Going forward, earnings for the fourth quarter is expected to be in the range of $0.43 to $0.48 per share on top of sales of $140–$150 million. Given the high growth prospects in emerging markets, especially China, and India, I would recommend a buy.
