Okay. All right. Great. All right. My name is Laura Kiernan. I want to welcome all of you here today. Thank you for coming. We have about 60 people in the audience, a mix of buy-side and sell-side. Between everyone here in the audience and online, we have essentially 100% of our actively managed investment in the company participating. Thank you. Before I introduce Robert, I want to just mention the forward-looking statements. We're going to be making forward-looking statements today that are covered under the provisions of the Safe Harbor Agreement. You can read it there at your leisure. Now I would like to hand it over to Robert.
Thanks. Let's see. Is Hartley here? Hartley? Hey, are you sure this is Keynote? Because I have animations. If you convert it to PowerPoint, it's not going to show up.
100%.
Okay. All right. Okay. Thanks, everyone, for coming here today. I guess I'll start out. I put this presentation together this morning. I talked to my dad last night. He's also a public company CEO of Armanino Foods. It's Italian frozen foods. We're quite different. He's old school. I don't think he's ever owned a smartphone. He still uses a flip phone. He follows Ubiquiti. He follows my career. He knew I had this meeting tomorrow. His advice to me was, "Just try to explain your business as simple terms as possible anyone can understand." What I'm going to do is I'm not going to talk about the product lines. I assume all you guys have done due diligence. I'm not going to rehash the products we sell, our customers, what's coming up next.
I'm just going to try on a very high level to bring more understanding to how we operate and understanding the value in the way we operate. I'll start with understanding our operating profile, understanding how we scale, some of our business philosophies.
Okay. Great. Thank you. Thank you.
Understanding our operating profile, understanding how we scale, some of my business philosophies, and future focus. I know there's some analysts in the room and a lot of the investors, they take a look first at companies and their operating profile. This is probably an ideal operating profile for a company set up for future profitability. You have essentially a very low cost of goods, which implies defensibility. These could be software companies or SaaS or something with high margins. Then you have an OpEx that is a big percentage of your expenses.
The idea here is you're building out a brand. You're building out an infrastructure. Although the margin isn't significant or might even be losing a lot of money, it's not really relevant to the valuation because the future is what matters. That big OpEx, as the sales grow, is going to be a smaller percentage of the revenue. Another company profile might look something like this, where the cost of goods sold is quite high and it implies commoditization. The OpEx is somewhat significant, and it might imply peak efficiency. This type of profile, especially if it's not growing, you could conclude the valuation based on some multiple of its current earnings. Ubiquiti is a big departure from, I know, most of these operating profiles.
We have a cost of goods sold that isn't fantastic, but it's higher than a lot of the commodity businesses. Then we have a very efficient OpEx, and we make a lot of money. I know some people might be confused about this because you look at the level of OpEx and the level of margin combined with the cost of goods sold being relatively high. A lot of people applying traditional thought to this model will say something's wrong. Maybe this is not sustainable. Let's create analogies for these operating profiles. The first one could be like a super tanker. It takes a while to get going, but once it's going, it moves with a lot of force, and it has the potential in the future to generate a lot of profitability. The second operating profile might be a company that's fully mature.
There's not a lot of margin out of it. It's kind of a sitting duck. It does make money. And its value, intrinsic value, is based on a conservative multiple of their margin. Now, I don't see Ubiquiti as either one of these things. I see us as completely different. I see us as what I like to think is as a fleet of ships. That's how we scale. I could easily change this fleet of aggressive ships into a super tanker. We have, I believe, industry-best technology. If I wanted to, I could focus on hitting very high margins. I could increase OpEx and marketing and spending. I could keep the same margin.
This would very much look like a similar EPS profitability model, but with a cost of goods sold that implies we have industry-best defensible technology and an OpEx that implies there's expansion. I don't really think like that. I like the fleet of ships. I like how we're disruptive with markets. I like how we rely on customers to do our own marketing. I believe at the end of the day, all I care about is EPS and EPS growth. I don't really see cost of goods and operating expenses as distinct categories. Expenses are expenses. What can you bring to the bottom line, and how can you scale that bottom line? That's what I care about. When you look at Ubiquiti, the way we scale is we just keep adding these aggressive ships. They're all profitable. They have really great risk-reward return.
We are trying to build better ships, find better crew, find better synergy that overall gives us EPS expansion. How do we scale this fleet? One of the things that defines our company is we are decentralized. We do not have that many employees comparative to our revenue. We certainly do not have big offices. We have a lot of smaller offices. Those offices are strong entrepreneurial R&D teams. I think in today's age, that is the ultimate weapon to have very aggressive, nimble, energetic, entrepreneurial R&D teams. They are independent, but they do get synergies. We have pretty decent economies of scale. If we enable a new team, we could start out of the gate with really good cost advantages, vendor support. We have a community. An example of this is when we launched UniFi.
With UniFi, back in 2011, 2010, we did not have really any system integrators. We just had small entrepreneurial internet service providers. There was some overlap, not a lot. That was enough to give UniFi a start. It just spread from there. If you look at the UniFi market today, almost most of the market that deploys UniFi has never deployed an airMAX product before. That is an example of synergy that is really powerful as we enable new ships in the fleet. The other thing it gives is redundancy. I know maybe a misconception is this company is all about me and runs through me, and there is a lot of dependency. What you are seeing right now is I kind of provide a blueprint and guidance for design and team building.
A lot of these new initiatives, they're run by captains or product managers, product line managers. I handpick several of them. I take them under my wing, try to teach them everything I've known from past experiences, and empower them to recruit their own teams. I touched on this before, but the risk-reward profile is incredible. We could have failures that can make tens of millions of dollars in profit. Some of our biggest failures, whether it's mFi or sunMAX or VoIP P hones, even when there are failures, we still benefited. We leveraged the technology. The teams were small. We didn't lose much there in terms of investment. I think that's what makes this business model really powerful. We could slow down, or we could go through adversity, but it's very robust. We have a great floor, and we have an increasingly higher ceiling.
This is one of my favorite slides. I don't read all that much, but I listened to an interview with Reed Hastings on Master of None. He's a very sharp guy. I referenced this Netflix HR guide that was talked about. One of my favorite slides is, as a business gets more complex, the percentage of high-performance employees decline. I think this is a dilemma a lot of big companies face. To be innovative and drive great products, you can't have a lot of process. Great engineers don't want to be fenced in. They don't want to fill expense reports out all day. They don't want to argue for what they feel is right, get approvals by a lot of people. You need empowerment. You need light process to make great products. I'm convinced of that.
The challenge is, as these product lines get bigger and as the business becomes more complex, you can't keep up the pace of HR, especially the percentage of HR people that are A-player superstars. Inevitably, you're going to hire, and you're going to hire people that drop the ball, that make a lot of errors. To minimize their damage, you need process. If you invoke process, the guys that drive the real value are going to be turned off. One of the things I've learned over the past few years, it's working great, is when you feel like a business is getting or heading to a point of complexity that requires a lot of process on the R&D side, the best thing to do is to start independent teams in different locations and keep them small.
If you do it right, and you keep the businesses relatively simple, you could avoid this dilemma. I want to state clearly, when I talk about lack of process, it's on the R&D side. Finance, legal, operations, production, those, I've learned, have to be run like the military. Process-oriented, clocks run on time, great controls, great system, checks and balances. R&D side is different. Some business philosophies. I think a lot of you guys who have done due diligence, you know that since I took this private equity deal, it was in 2010, that put in motion the company to become a public company. I haven't taken salary. More importantly, I haven't taken equity compensation in any form, stock or options. I challenge anybody in the history of the public markets to find an executive who's not taken equity compensation.
Not this $1 a year BS. I'm talking about no options or no equity. Nobody talks about that. I don't really talk about that. I do it for a reason. I do it because I don't want to be the leader in the movies that sits up high in a castle and watches all of his soldiers who he feels expendable get killed off one by one. I want to be the guy leading by example. I want to be the guy on the battlefield. I think that top-down accountability is very important because when you have these small teams and something goes wrong, the worst thing for culture is somebody saying, "Well, that's not my job." If somebody sees a problem, they have to attack it. Just like I attack it, I don't consider myself above any job. I'll go into the forums.
I'll go into the lab. I'll rework products. I don't care. I want that culture. That's why I do the things I do. The second thing is we have very low operating expenses as a percentage of our revenue, but we are by no means cheap. I'm an efficiency addict. Whether it's money, whether it's my time, I want to see returns on investment. I'm by no means cheap. In fact, a lot of ways, I'm the opposite. If you look at our offices, and here's a couple in Riga, Latvia, Taipei, Taiwan, we rent space in the most expensive building in each of these cities. There's no other R&D, rarely will you see R&D companies in these locations.
The other thing is when you're talking about expenses, there's tangible expenses, like how much does a rent cost, how much is an employee's salary, how much will maybe some marketing expense cost. I look at intangible costs just as much as tangible. Maybe a $200,000 piece of equipment is expensive. If it gets you a month faster to market in a product line that eventually can sell $2 million a month, that's a good trade. Time is the most important. I try to identify intangible costs that can have time return on investment. Okay. Carter, I forget which fund you're from. Okay. From Arizona. He sent me a great book. I don't usually read, but I just broke this open one day, and I couldn't stop reading it. It's called The Outsiders.
It has stories about Warren Buffett and Malone from TCI and Southwest Airlines, I think. This one is one of my favorites. It is from a company called Teledyne and a CEO named Singleton. He did something really incredible. When the market was not really high on his business and he had a really low multiple, he bought back and retired 90% of the stock. In the future, that essentially helped boost his earnings per share 40 times. Thanks, Carter. This actually helped me a lot even this past week. Whenever I got frustrated with people knocking down the multiple, I just stared at this and I said, "Hey, maybe they're working for us. Maybe they're working for long-term shareholders. You can buy back stock at discount." I know some of you guys were probably affected, and it has been a painful week.
I think what you've seen is we've had a big return on investment, or if you invested a dollar with us at our lowest point, and I don't see why that will stop. Thanks to these guys, we'll be able to increase the long-term EPS even more with the stock we're buying back. Okay. What's next? I talked about building a better fleet. As I've become more hands-off as a product line manager myself, I'm devoting more of my time to becoming a product line manager scout and product line manager builder. I'm trying to make more of me, under me. That's been my main focus probably the past year or so. One of the biggest regrets I have, and we've been addressing it the past year or two years, is our quality.
We had no reason to not invest early on to make our hardware, make our software, make our QA processes the best in the industry. It would have been a great place to put investment, and there is big room for improvement. I think if we could change our image and brand to becoming the best performance in the industry, which we are doing, we are already the best cost, and we could take it up a notch in terms of quality standards, everything from our outdoor access points, taking more lightning hits, ESD hits, being resilient, and minimizing any compatibility issues, interoperability issues with our Wi-Fi APs. Any new product we launch, make sure it works perfectly out of the gate. I know we can do that, and I know there is huge opportunity if we become the best in the industry in doing that. Production efficiency.
I kind of laugh when people talk about margins because they have no idea the opportunities we have on the production side. We're just starting to put together a competitive vendor environment, scalable systems. I think by the time we're done in the next four to eight quarters, I expect there to be significant margin improvement on the production side. The last thing is our community has been great, but I think we have a lot of work to do. If you look at UniFi, everybody that knows about UniFi, everybody that tries it, they love it. They're basically our long-term customer for life, I feel. Our challenge is, how do we get more people to learn about UniFi? There's so many young people out of school investing tens of thousands of dollars into archaic Cisco-type proprietary user interfaces to try to go into the IT industry.
That should not exist. UniFi has so much more value in getting these guys up to speed, giving them, in my opinion, better features and better performance and a much more efficient path to becoming successful IT integrators, entrepreneurs, or even inside companies. We have our work cut out for us. There is a lot we are leaving on the table right now. That is a big focus for me. That is all I got.
I'm going to go to Mike. If everybody could please move into the mic.
Yes.
Robert, the others that never came to stock would be Singleton, Buffett, and I think Robert Kierlin and Fastenal. So you're in great company.
Wow. Singleton, he had a 20+ year career, something like that?
28 years.
He never took single stock or options equity. Wow.
Buffett's been at it 50 years and never has.
Wow. Yeah.
You're ahead of his track.
That's impressive. Yeah. They're ahead of me. That's a lot more years. I'm impressed.
You'll get there.
Yeah. Just staying on the same kind of theme in terms of you talk about the entrepreneurial culture, stock compensation for people beyond your level within the company. You do not really charge a great deal versus other technology companies. Can you talk about how you are building that next set of leaders within Ubiquiti to drive for that entrepreneurial culture? What is it that you are telling them the end game for them is 5-1 0 years down the road in terms of how they really become successful?
Okay. I think the most important part to build good leaders is location and environment. Unfortunately, places like Silicon Valley, New York, or maybe even Seattle, they have big companies that could pay a lot of money. There's an abundance of startups looking for people at any cost because they have tons of money they have to put to work. The environment has become an extreme employee environment. You might be able to get somebody talented, but it becomes an extra burden to the company to give them whatever it's going to take to make them stick around and buy into the long-term vision. You're almost fighting wars on two fronts. You're fighting a war in the market with the competition, and then you're fighting a war to maintain your employees. It's very hard to fight a war on two fronts.
When you're fighting a war, there's going to be ups and downs. There's going to be adversities. There's going to be mistakes. There's going to be disagreements. You need to find people that stick with you through thick and thin, especially since my time I consider really, really valuable. When we open up these locations around the world, a lot of people think it's about, oh, slashing costs. It's nothing like that. It comes down to the point or the fact that if I'm going to put somebody under my wing and I see potential in them, they're going to have to be in this for the long term. The guys that want to see X amount of money, want to see a title, want to see a certain career path, those aren't the guys I want on my team.
It's very hard to win with teammates like that. I want the guys that are thrilled at the opportunity to work with me, are thrilled to be paid at the top of the market, and are constantly pushing themselves to do what's best for the company. They have trust that if they do well, they're going to get rewarded. We do reward the key guys. We make sure they're rewarded well enough so they're always at the peak performance. Yep.
One of the issues as an outsider, as a sales side analyst, one of the issues we have seen was turnover of managers, CFO, and others. How do you balance between your desire to bring in independent thinkers, the way you described it, and between maybe bringing in loyal followers that will manage the company the way you are? How do you explain the fact that there is turnover, high turnover of certain positions? Just what do you think about your management style? How do you describe your management style between the two camps of bringing people who are very independent and bringing people who will just follow your orders, if I can call it this way?
I would say the guys I want working for me and the guys that jump at the opportunity to work for me and work for Ubiquiti could care less about turnover with guys with high titles. If you present someone that's, let's say, in Eastern Europe that's worked in consulting companies, developing bank software for 5 or 10 years, getting paid a measly salary and they're super talented, and you lay out a plan and say, "I'm going to take you under my wing. I see potential. Let's build this product." Nothing else matters. They jump at the opportunity of building product. That's what drives value at the end of the day. I think where we can improve is we need better isolation and culture between accounting and legal and operations, things that have to run on railroad tracks, and they have to be heavy process-oriented.
We have to separate that from our R&D culture, which is a more freewheeling and relaxed process. The problem is it takes certain kinds of individuals to work for a company that places those executives below the R&D team. Now, legal, finance, operations, those are important. We have to be defensive, and we can't make mistakes. The reality is, if you don't have R&D and you don't have product in today's world, you can't drive value. I put those guys up top. In the past, I've hired people with egos, and animosities have been built, and it just wasn't a good culture fit. I think that's on me. I didn't do a good job of vetting guys and vetting the potential cultural mismatch. A lot of it was inherited. In 2010, I did this deal when we were a skeleton R&D company.
I didn't pick the board members. I didn't know what an analyst was. I didn't know what a DSO was. I didn't know what underwriters were. Nobody sat me down and explained the roles. They just threw me into this thing, and I had to figure it out. Once I did figure it out and took control of the situation, there was some animosity. I'm still dealing with that. I know I have a reputation for being difficult to deal with and so on. The reality is, guys that deliver value, I have fantastic relationships with. Guys that really deliver value, they've been around the company, some of them forever. The guys that have it in their mind that they're really important, they have huge egos, but in reality, they don't deliver the value, those are the guys I have problems with.
The solution is we just have to be better and better with our HR. I'll take responsibility. I brought the guys on. If I cut a lot of these guys to make the company stronger and there's been animosity and fallouts and they talk, that is part of the game. Just learn from it and move on. Just get tighter with HR and respect cultural fit or misfit consequences.
Maybe can I have one more question?
Sure.
Different topic. You touched on it. Some of your product launches were phenomenal, and some of them failed right off the bat. How do you improve the process? I have two questions. First, how do you decide which markets to go to? What kind of processes do you have in mind? What is the decision-making process, basically? Second, how do you improve it? Assuming you want to go into a new market, how do you make sure that the next product is not going to have issues versus the history?
Yeah. So one product comes to mind that really hurts. We did something called mFi. I had the idea in maybe 2009. I thought before IoT was a term, the Internet of Things did not exist. It was M2M. And it was this small company called Rabbit. There are several M2M products. And usually, they were 3G-type products for cars and transportation and utilities. I thought, "What if you could put devices on an IP network using Ethernet or using Wi-Fi?" I do not know the possibilities, but if you can provide a canvas, it could be huge. I recruited an architect to lead the platform. At that time, I knew hardware really well. I personally designed and tested and got into production a lot of different RF hardware, Wi-Fi products. I was not a software guy. I deferred to an architect.
I had a feeling he might be good, but it was just a mess and a wasted opportunity. I've had a few more of those experiences. The key to any of these things is the architect and the engineer, the lead, has to be fantastic. I did a talk to recruit some new engineers in Taiwan. I was actually proud of myself because I came up with a good analogy on the spot. A guy said, "Well, what makes a good engineering leader?" I said, "Well, engineers, at the end of the day, are problem solvers. The best engineers, they're not only good at executing on solutions, but they have great judgment. They know what solution to choose." I said, "Let's say I wanted pizza, and I have three engineers to carry out the task. One engineer is really proud of his ability.
He wants to go to the store. He wants to select everything. He wants to take it home. He wants to cook. He wants to show all his skills to solve this problem. He takes the whole day. He gives me a pizza. Yeah, it's pretty good. The second one, maybe he's not as good at executing solutions, but he has better judgment. He'll go to the store. He'll get a frozen pizza. He'll heat it up and just give it to me. Now, the third engineer, he'll go to Yelp. He'll research, "Okay, what's the best pizza in entire New York City?" He'll call up. He'll take 10- 15 minutes. He'll pick it up. He'll send it to me, and it'll say, "Here you go." Maybe it's the best pizza I've ever eaten in my life.
That's a difference between leaders, great leaders, and commonly engineers considered good but are terrible leaders with terrible judgment. The judgment is important. When you're trying to solve a problem, especially in the software world, you don't want to reinvent and recode some module that's open source or something you could buy for $10,000. You want to take the quickest, most efficient path from point A to point B and just deliver the solution with great judgment. That's, I think, what I've improved. Over the years, it's being able to determine leaders with good judgment and entrust them with these new ideas. I think if you look at the track record, it's starting to get better. I haven't studied these big companies too much. I'm in awe of how some of them operate, being so massive and so big.
I guarantee you what separates somebody like Jeff Bezos' Amazon from other entrepreneurs, his HR instincts must be off the charts. I bet you he must have some magical ability within a few minutes to size up a person and say, "Okay, does this guy have judgment that I can trust and can execute on big, big-scale opportunities?" I do not know. Room for improvement. One thing I do well, and I think the company does well, is we adapt. We face adversity. We get through adversity. We learn from lessons. We improve. As long as we're improving relative to the rest of the market, improving, we're in good shape. Yep.
Hi. First, just one quick question. First, thanks for doing the analyst. I really appreciate it. A couple of questions. You said that six, seven years ago, DSOs were a new thing and learning that, and you're up the curve now. Maybe you could speak to what is the right level of inventory for a particular product line, and then who is assigned to keeping on top of that and managing it, number one? If I have question number two, can you speak to your consumer product strategy and thinking? What is the plan longer term on the consumer side? Thanks.
Okay. Let's see. I think you got to look at DSOs in a context. If I'm Netgear and I have new products rolling out every year with refreshed models, high amounts of inventory are very dangerous because you could be on the hook for them. If you look at UniFi, if you look at airMAX, airFiber, Edge Routers, video cameras, some of these products, their life cycles are incredible. NanoStation M5, we still sell many, many thousands. I don't know the exact number after seven years of launching. And UniFi APs, even the legacy 11N, we're going to sell hundreds of thousands even six or seven years after launching.
When you have these new mature products that you know are solid in the field, you know they have long product life cycles, and you're sitting on a mountain of cash, why wouldn't you err on the conservative side? We haven't had the best distributors in the past in terms of keeping inventory. They tend to run out of stock, request more inventory, and then we have several weeks sometimes where we're out of stock. I gave the mandate a year or two years ago. I put my foot down with the guys. I said, "We have all this cash. We have still chronic inventory complaints." It's worse because five years ago, we could get away with it. We were the only game in town. We have a target on our back now. There are a lot of companies that want our business. They're being more aggressive.
They're trying to close the gap in terms of features and quality. Why would we want to give away the business? I don't know. I didn't look into the inventory situation in detail, but to me, I'm not worried about it because when you're looking at our product life cycles and you look at the fact that we have a big Utah warehouse that can now almost eliminate the chronic availability issues, I think it's okay. I expect it to come down to lower levels over time. Those guys did what I told them to do, which is make sure the problem's solved. Maybe they didn't optimize it. Maybe it could be lower, and I think it's going to go lower. It was a consequence of my mandate. Yep. All right. Laura, you can pick.
Hi.
Okay.
Yeah. Hi. Woo Jin Ho from Bloomberg Intelligence. Just a couple of questions. Number one, would you help me reconcile your commentary in terms of giving the freedom of flexibility for your R&D folks to innovate? Later, in your prepared remarks, you mentioned something along the lines of trying to have your margins improve, I'm assuming gross margins. How do you reconcile giving the funds for your R&D guys to innovate and the gross margin improvement, number one? Number two, from a longer-term product strategy perspective, as it relates to your service provider around WISP business, how should we think about the product innovations that should be coming along, especially given the advent of 5G potentially being a competitor to the WISP, as well as LTE being a viable alternative to your Wi-Fi products?
All right. About the margin discussion, as I showed in my presentation, to me, I do not differentiate cost of goods sold, operating expenses. I see operating expenses as a whole, and I see operating margins. To me, who cares how you turn the knobs as long as you get EPS, you scale EPS, and you make your EPS defensible? I am not going to run a business that is targeting a certain gross margin profile. I will run a business that is targeting an EPS profile and is trying to scale EPS. That being said, I will say I do not think we have focused on improving our supply chain, especially creating a competitive environment for vendors to bid. I do think there is some expansion there. Your next question is more along the lines of how do we control budgets for R&D?
The next question was more along the lines of your product portfolio, your next-generation service provider product portfolio for your WISP customers in light of potentially fixed wireless 5G coming on the horizon, LTE potentially being a viable alternative to Wi-Fi to your WISP customers.
Yeah. I know LTE, like CPEs and LTE consumer-type service, home consumer-type service, has been around for a while. I do not see it impacting. We really are a cable modem replacement or DSL modem replacement. People are going to always want, in my opinion, a hard line that is unlimited capacity where they could download and run Netflix continuously and not worry about overage charges. The big carriers also have expensive overhead. They have to pay for the spectrum. They have to pay for truck rolls. airMAX, from an economics perspective, is really bare bones. You have sub-$100 APs. You have CPEs we are selling into the channel for as low as sub-$40. You have entrepreneurs that are willing to roll up their sleeves and deploy all the infrastructure.
We target a lot of areas in rural areas where a lot of these big operators do not want to make the investment. Maybe they will hit the and we are also diversified throughout in different geographies of the world. It is quite possible they will start taking market share. I think what slowed down airMAX was we used to have an incredible dominance of the market, maybe something like DJI has with drones. We must have been—I am just guessing—but we must have been something like 80% of the market. We got complacent. We did not pay as much attention to quality as we should have. We did not execute on advanced features. We did not come out with better designs. I think we lost market share. It is a testament to the strength of the business because we did not execute how we should have, and we kind of stayed steady.
I will say the past year or so, we've been on a tear in airMAX. Our generation two hardware is the best stuff we've ever done. The software, UIs, U Mobile, mobile app, UNMS, Ubiquiti Network Management System, all that stuff is top-notch. We got GPS working now. We got backwards compatibility. UNMS is going to be kind of like what UniFi controller is, the UniFi world. You'll be able to—well, already you're able to manage your Edge routers, airMAX devices, your fiber equipment. We're just starting with U Fiber. I'm excited about it. I think Fiber Home is something like a $3 billion revenue business, and several hundred million is international to WISP-type smaller operators. The product sucks. I think we've built a really good product. Once we drive down the cost, I think there's going to be expansion there.
LTU is going to be great. The early responses in the beta forms are very positive. There's not going to be much like that on the market. It looks like it's going to be capable of doing 4096 QAM. It's kind of like a Rolls-Royce that we spent a lot of money doing the ASIC development, and we got the ASIC cost down. Chipset cost is like $5 or $6 . It's actually cheaper than Wi-Fi. And we're going to target that at a higher-end market. It's faster. It's more scalable. I think there's a lot of growth drivers in operator. I still don't like it as much as UniFi. UniFi, I think, is just scratching the surface. If we get to put together better marketing, I think it could grow multiples. That's part of the—when I said next steps, what I'm focusing on.
Okay.
Hey, Robert. That's exactly what I was going to ask. I have two. First, to your fleet analogy, do you think there's a point in scale where you might need another layer where you just have too many of these small teams or too many products between you and them? Do you think there'll be more infrastructure needed at some certain level of scale? To your point on marketing, particularly as you move to consumer, can you talk a little bit about your philosophy there? It sounds like it will, as a department, not with engineering, but probably above some of the other more mechanical parts of the company. When you think about it, your expertise and the infrastructure of the company, do you need to add talent there? Do you have it in-house? Do you need to add infrastructure there on the marketing side? I know you're early phases of getting into it, so thank you.
Yes. That's a valid point. As we add more fleets, do we need more infrastructure? I will make the point of we haven't ever acquired a company before. I am always looking to acquire companies, and we've gotten into talks of acquiring companies. Once you get into the talks of, you know, there's investors, there's executives, there's another culture, I have come to the conclusion, I could just recruit some guys and do it faster myself. I think as long as we have our culture and we have our leverage between our centralized hardware engineering teams, our centralized community, our centralized software strategy, whether it's UniFi controller or whether it's UNMS on the operator side, as long as we have those common elements and we could continue to bring guys in to work within our culture and we have these great tools like Slack is awesome. I love it.
I think we should be okay. What will happen, though, is as these platforms become bigger, like a UniFi, and I think UniFi Video is going to reach an inflection point here pretty soon, we're going to have to start separating them out into smaller ships. If the ship becomes too big, which we've already done in the case of UniFi Video, not only do we have our product line manager on the software side, but product line manager on the hardware side. I think the key is we got to protect the culture. We got to protect the cultural fits. If you could do your job upfront on the HR side, it could run smooth. If you don't do your job on the HR side, then one team can wreak havoc and can be more time-consuming than 10 teams that work great.
The key to scalability is HR.
Just the marketing.
Oh, marketing. Yeah. I'm going to try to shift my focus to marketing. I think that's the next opportunity in UniFi. If we can come up with more of a scalable strategy to recruit more system integrators or convince more system integrators to use UniFi, I think there would be huge benefits. The existing UniFi system integrator bases, they love the product. They're buying more and more of it. They're sharing their use cases. We have to find a strategy to get the next generation of system integrators, the ones spending tens of thousands of dollars a year on Cisco CCNA certifications. I got an idea, just starting to work on it. You guys will probably see it first half of next year. Oh, and technical marketing, yes. My focus is technical marketing hires. If we can throw—I'm really the main technical marketing person in the company.
Just like we've created product line managers, if we could create technical marketing leads, I think it'd be really powerful. Incredible, potentially incredible risk-reward, huge reward. Yep.
Thanks, Robert. First question is, maybe give an example of a product that didn't work as well in its first iteration, but then really became a home run in the second iteration. The one that pops to mind is UniFi AC. When you first launched that a few years ago, it wasn't a big hit right away. I think you launched the second generation about this time last year, and it has become—what was the difference there? What changed, and what did you learn from that? On your comments about quality, where are you in that journey of quality improvement?
Okay. Another example of a failure leading to success, I've blogged about it. It was the Power Station. That was the very first product I oversaw the design of, and I was super proud of it and went around the world to try to get interest, set up sales channels, and nobody liked it. I looked at Motorola Canopy that was selling well, and I thought, "Okay. They have the right idea. It's super low cost. It's weatherproof. Why not take a page out of that and reference that design?" I did not think it was going to sell well. I thought it was much lower antenna gain. I thought it would be for niche employments. I was hoping this was 2008 to finish the year with $25 million in revenue. The first month was $200,000 in revenue, and I was depressed.
We launched NanoStation in March and finished the year, that calendar year, at $50 million revenue. It was supply constrained. I'm a big believer in you got to get something out to market, and it might lead to something great. It might lead to a pivot or transferring the technology to some new application. In the case of UniFi AC, we just did not have a great culture when that product came out. I'm to blame. I was more hands-off. I tried to empower people, and we just did not have the same hardware discipline or software discipline. We turned over the entire UniFi team in 2015. Maybe two out of the 20-plus guys stayed. I stepped back in. We built a whole new team.
I stepped back in, built new hardware leaders, oversaw the hardware, and we just executed very well with a high attention to quality. I think it's not perfect. It's night and day when it was two years ago, but it's not perfect. I think it cost us because early on, people were excited to buy anything with Ubiquiti label on it. I remember the days in 2000, maybe following airMAX and UniFi 2010, 2011 with something like mFi or we'd announced something in millions of stores. People were like, "If Ubiquiti's name is on it, I want it." I didn't do a good enough job protecting that. If we had invested, and we could have done it, we could have just invested in top-notch quality guys. We could have protected that brand name, and it would have accelerated our EPS. We just try to recover.
We're getting better and better all the time. The other thing about QA I learned is it's very typical to have career QA guys. This might be giving too much away to competitors, but career QA guys usually aren't the best QA guys. Because if they were career QA guys, if they were sharp, they wouldn't be career QA guys. The best way to do QA is you want ambitious younger guys with great judgment that are going to push all different scenarios and test the product from a user perspective instead of just blindly running through a test plan. You want to bring those guys up to the organization. That's one of the things we implemented that's really turned the quality culture around.
Just a quick question. You've obviously been very successful. I'd just be curious at this juncture, what motivates you? What are you trying to accomplish? I have a second question.
I think my personality, I'm very competitive. I get depressed if I lose at something. I've always been wired that way. I love the feeling of putting in work, competing, and winning. I'm very competitive. I've also been very kind of creative. I love design. I love nice things. I love designing or producing nice-looking technology, good user experience. This job is like my dream job because I get to compete, and I get to design and create. The other thing I like is I like puzzles and optimizing efficiency. I have all these variables to play with to come up with solutions. That's what gives me personal satisfaction. Also, a benefit is just seeing everybody using these products. I could travel around to different countries in Europe or South America, Asia.
I just look on the roofs, and I say, "Oh, okay. Cool. Ubiquiti's there. Inside Ubiquiti's here." Sometimes people come up to me and say, "I created a profitable system integrator business or internet service provider business using your products," and thank, really thankful. Those are good rewards too. I think what keeps me going is I'm just wired. I got to exercise my mind. If I take a day or two days off to do nothing, I just get depressed. There are ups and downs and adversity. It's not much fun when you go through the adversity, but when you get through it and you come out stronger, it's a good feeling.
Maybe just as a follow-on, you'd referenced in the past that ASIC design at the company was underappreciated. Maybe you could give us a little history on that, what you're trying to do, and what the impact to the business might be.
Okay. Here's kind of how I learned my lessons in business. I started in my apartment. I left Apple. This is 2005. I designed a mini PCI Wi-Fi card. And it's total commodity. All I did was flip out some RF components. Somebody could do it in a day. It was the right kind of niche at the right time where people needed these cards to replace expensive amplifiers for outdoor links. I did that for six months or so, and then China competitors copied me. I learned, "Shoot. I don't want to be in the hardware commoditization business. This sucks. I want to build something defensible or motes or whatever you call it." I got into software, and that was a little more defensible. We made complete Wi-Fi products for these wireless ISPs, but there was one problem.
Once these ISPs deployed our products, they worked on Wi-Fi. A cheaper company could still come in, and they could still deploy Wi-Fi and interoperate. It could still be kicked out. It's not defensible. We went to the next stage and said, "Okay. Let's build base station antenna portfolio, but more importantly, let's make a TDMA protocol that replaces the Wi-Fi protocol." This was airMAX. That was key because we were able to improve the performance of the products and the system. More importantly, it wasn't Wi-Fi standard. Now we had defensibility. In fact, in 2008, when NanoStation was taking off, that was our Wi-Fi product, and we did $50 million. I was scared to death. I was thinking like, "Okay. We grew our revenue 5X, but it's totally exposed.
Anybody can come out and copy us and lower the price, and we're screwed. Right when I saw that success happen, I said, "We better work on a lockout mechanism." That is how we got to airMAX and its proprietary. It has been great because once the operators build out their APs and maybe they set up 20 towers and they have 200 clients, if they want to expand to 2,000, 3,000 clients, they are locked into airMAX. It gives us a great defensibility. airMAX came along in 2010, 2011, and started to take off. A lot of companies were envious of our business. A lot of companies started to do similar things. They started to build TDMA protocol, complete base station CPEs, undercut us on price, aggressively market out to our customers. Even worse, they are using the same chipsets from Qualcomm.
Qualcomm was actively kind of working to bring our features and our performance to the competitors, right? Because semiconductor companies, they do not want one company to control an application. They want competition in an application that will lower the cost and drive more volume. There is interest mismatch. I saw this happening in 2012 to 2013. I said, "Shoot. This game is all about competitive advantage." Now the competitive advantage is not as great as it once was. I thought, "Okay. The key to this whole thing is Wi-Fi has inherent limitations to scalability in outdoor networks. It does not handle noise well. It has a lot of overhead to support backwards clients. The media access control is just not really built for fixed wireless high capacity." I saw an opportunity around 2012, 2013. I thought, "Okay. We have volumes.
We're selling millions of these airMAX devices. Let's start investing in our own semiconductor chip. Then we can market it as proprietary. It's not 802.11, and we don't have to worry about a semiconductor vendor enabling competition and shrinking our competitive advantage in the market. We were in a good position because we recruited in Chicago the airFiber team, and they've been working in radio design, outdoor radio design for, I don't know, 30 years. They came out with some of the first stuff in Motorola. They didn't have ASIC design experience, but they were really good system designers with a wealth of applicable knowledge. I started to look for an ASIC team I could bring on to match them to be the system designers and some to implement with ASIC design experience. I started to look at small cells.
Around this time, 2012, 2013, there was this buzz around LTE small cells. I never really believed it. There were several struggling startups, and one of the startups was running out of money. We tried to talk and get a deal done. We could not. Eventually, when they were almost done, one of the leaders of the team reached out to me and said, "Hey, we want to do something." We acquired them kind of, and we got going. The Chicago team drove the spec and the system design, and they drove the ASIC design. It has been three or four years in the making, tens of millions of dollars, which are already paid for, by the way, in our OpEx, which people say is already really low, but that is in there too on the R&D side. It is in beta testing.
Our first product is airFiber 5X HD, which takes our airFiber 5X, which is a popular point-to-point product, takes the performance from 500 Mb to, I believe, something like 1.2- 1.3 Gb per second. You are going to see once we get into multipoint at the end of the year, you are going to see by far the best stuff on the market. We have excellent cost structures. We will probably drive margin from that product because we do not want to market it or have customers mistake it as a Wi-Fi radio. We will market it on the high end, but it is going to eat the lunch of any of these other companies that are marketing towards enterprise and more advanced deployments. Yep.
Could you speak a bit about your inspiration for Front Row and maybe your vision for it, and maybe a little bit about how intensive the R&D was to develop it?
Okay. Maybe I'll start with my experience. I studied in Japan, 1999, 2000. At that time in the U.S., nobody had phones. Oh, very few. Most of the phones, they didn't really have screens. They had single-bar LCD screens. I went to Japan in the summer of 1999, and I was impressed because they had these phones with these big screens. Nobody called people on the phones there. Everybody's texting. I was like, "Wow, this is crazy." I think NTT Docomo, they marketed it as iMode, but the other carriers followed. That experience is what drove me to go back to UCSD and study digital communications and RF circuit design. I just saw a trend. People were texting, and that became the messaging of the future. In recent years, I saw these phones and these LTE networks become faster.
People are not sending texts anymore. As much, they are communicating a lot of times through their cameras and photos and stories. I saw Snapchat taking off. I saw these live streaming applications taking off. I did not really study the potential of Front Row. I just looked at different camera products in the market, and the user experience was really bad. They are very hard to get up and running, to integrate media into the social networking, into live. I thought it was interesting. I knew that you needed more than technology. You needed a killer brand. I thought, "You know what? I want to try this." We design a lot of stuff at Ubiquiti that goes on roofs. It is inside buildings. If somebody asked me what I do, I describe it to them, and nobody cares.
As a designer, one of the frustrations is I know the UniFi stuff and our airMAX stuff and other products that are really cool. The software, we spend a lot of time. The product design, there are really cool design elements, but it is not really appreciated. I think Front Row kind of fulfilled a couple of my, I do not know, interests. I wanted to make a product that the company could get excited about. Every employee was excited about Front Row. They wanted to use it. Their families, their friends, everybody can give it to them and see what we do as a company. Although the demand is not and the reviews are not what I thought they would be, they are a little disappointing.
Anybody that takes that product and tries it out, it becomes very clear we have a top-notch engineering team from everything: the industrial design, the build quality, mechanicals, the firmware, battery life, the UI design, mobile app integration. We have some cloud Dropbox and a cloud controller that's coming out soon. It's a beautiful product. I just believe in those technology building blocks. Maybe Front Row isn't this first product isn't the one, but I really like the idea of having embedded Android expertise, Android development expertise, consumer product design, battery, camera, optics, hardware knowledge, going through experience of building and manufacturing a product like this with very high tolerances, much more challenging than anything we do in UniFi and airMAX world. Also all the video and the transcoding for streaming. There's so much good stuff there.
Where technology is headed, all this augmented reality, video, embedded devices, cloud streaming, transcoding, optics, all this stuff, there's going to be opportunities. We're good at finding ways to frame technology and determine markets. That's an example of people, they look at it and they say, "Wow, this is a bust. This is a stupid camera on a necklace or this and that." There's a lot more to that product and a lot more potential. In my opinion, we stole it at a bargain price. We produced that product and the associated technology building blocks and even the brand for relatively nothing.
Robert, would you like to take a break now? We have a scheduled break, or we can keep going. Do you want to take a break?
I can keep going. It's fine.
Okay. Let's keep going.
Yeah. You choose.
Thanks so much for doing this. It's great to hear your inspiration and all the work you've been doing. I've been following some of the changes in spectrum, and the 3.5 GHz CBRS spectrum seems like it's a really interesting opportunity for you and would like to hear your thoughts on that.
I used to be big on these special frequencies. We had down-converted 900 MHz airMAX, 3.5 GHz. We did a 3.3 GHz for Europe. We did, I think it was 6 GHz special product for Russia. The problem with a lot of these telecom companies is you got to decide whether you're a services engineering consulting company or you're a product company. If you concentrate on products that could self-scale and drive volumes, you could see margin and EPS like we do. If you focus on these niche opportunities with high-maintenance customers, you're not going to see any EPS. You might see revenue. It's going to be very cost-intensive revenue, and it might disappear one day. You see them all. You've seen the same movie over and over again, whether it's DragonWave or Redline or Alvarion or Ceragon or Airspan. No, thanks.
Yeah. I guess I was thinking more of the I think I thought there was some license where WISP customers could get a license in 3.5 GHz for just a very small geographic area. That is what I was thinking would be more relevant to you. Certainly not selling to T-Mobile or Verizon or somebody like that.
I think the opportunity for the WISP is the bandwidth requirements with all these next-generation applications just are exploding. People pretty soon, even from a wireless connection, they're going to want to see 100, 200 Mb. Then you have 5 GHz radios and a spectrum also super crowded. The key is how do you build a system that runs on 5 GHz that could deliver lots of throughput and is immune to noise as much as possible? There is a big opportunity there, maybe involving AI and searching for a spectrum. Sometimes these things are a blessing because at the end of the day, your success isn't based on how good your product is. It's how good it is relative to others. If everybody has great products, that isn't good from a business perspective.
You want the technical obstacles to become more and more difficult if you believe you have the best technical capabilities because that's an opportunity for competitive advantage expansion. There is a long way of saying, "No, I wouldn't put resources in supporting a niche frequency band that's probably going to have smaller volume and a higher cost of goods." I'd spend resources on a mainstream product that has a lower cost of goods that you could invest in solving these technical obstacles to gain more defensible EPS.
Hi, Robert. A couple of questions. First off, do you have executive leadership positions that you're looking to fill? What are you trying to find right now in terms of some of your executive staff, if you are? Secondly, last week, there were comments around the Ubiquiti user community, the registrations and whatnot. When you look at the current status of your user community and the registrations, do you feel like the health of that community is strong? Do you feel like you're growing? Do you feel like you're getting a good volume of activity and dialogue still? Where do you think that community is right now?
Okay. First question, executive leadership. I know from an optics standpoint, we don't spend time making optics look great. We do spend time cultivating strong leadership. And these leaders, they don't advertise titles. Maybe we have a Chief Accounting Officer. I call him a Chief Accounting Officer. He is basically a Chief Financial Officer. I just wanted to make it clear that this role is responsible for controls and process. I don't want him spending time worrying about analysts, worrying about investors. We're in this for the long term, and we got to plug in any holes we have. So I call him Chief Accounting Officer. Some people say, "Oh, why don't you have a Chief Financial Officer?" It's a matter of arguing semantics. As for leadership, we do have leaders.
I don't like the idea of having a vice president of this, a vice president of that, a vice president of the other thing. When I started the company, I didn't even have CEO on my card for years. I just put engineer or electrical engineer. I don't think titles make a company, well, our company and our culture stronger. It's a meritocracy. You come through, you deliver. Once you're empowered, you get increased responsibility. It's very rare when I get so many increased responsibility. I don't need people flashing around fancy titles. If that hurts or people poke holes in it from an optics standpoint, so be it. I care about the culture, and I'm going to run the company how I want to, how I feel it's going to put us in the best position long term. What was your second question?
How do you look at your user community? Do you feel like the health is robust? Do you feel like it's growing the way you'd like? How has it evolved in terms of the way you engage with the community?
are two ways I look at user community. It is not just the activity or post number because if you have all kinds of problems, you will have tons of forum activity. That is not good. What you are looking for is the quality of the activity. Good quality activity is things like sharing stories, sharing how great a product is, sharing new applications, seeing new members talking about themselves starting up a business. Bad quality is maybe we have some quality issue, some defect or software bug, and you have people jumping on it left and right complaining. I think if you look at our forum activity, our community activity over the past one or two years, it is definitely increasing, but more than the percentage increase is the qualitative improvement.
I think our community now is far less about issues as it was a few years ago and more about excitement, new products, new features, and much more valuable content.
A couple of follow-ups. First, I think a couple of weeks ago, you sold stock for the first time since I think it's been public, since you've been public. Do you expect further stock sales? Is that all we should expect from your stock sale activity? One of the cost advantages you've always had is I think you're really targeting a do-it-yourself installer on UniFi. To go after Cisco, etc., the systems integrators make a lot of money selling their products, right? How do you crack that nut? How do you get them incented and more excited to sell UniFi?
What I can tell about this stock sale is it kills me to sell stock. I don't want to sell stock, but I'm faced with, and the money's not going to buy a yacht or buy some luxury things. It's to put me in a better position in a personal venture outside of Ubiquiti so I don't get taken advantage of. Sorry, it's unfortunate, but I'm dealing with it the best I can. It really kills me to sell. Yeah. What was the next part?
On the system, how do you get systems integrators more incented to sell UniFi?
Oh, right, right, right.
Because obviously, they can make a lot of money to sell HP and Cisco, and that's part of the price advantage.
Right, right, right. I've been saying this for years. If you look at business 10 years ago, 20 years ago, pre-internet, pre-people connected, I do not think the product quality mattered as much. The relationships and the incentives mattered a lot more. Like 20 years ago, I would imagine if you had the best product in the world, the only way you could sell it is if you get past the gatekeepers, which are the distributors and integrators and so on. It was a relationship business. Product was second. I think it has flipped completely now. You could launch if you have the right product, the right brand, and it gets into the right people and word spreads, you could break through a lot of the gatekeepers and the obstacles. It will just take time.
I think if UniFi gets to the point where every single IT person on the planet deploying Cisco knows UniFi exists and most customers who are paying for network installations knows UniFi exists, then I do not think they will be able to block it. Our job is to accelerate customer awareness. I think Amazon did a terrific job of this. They just looked at the customer, said, "Okay, let's do everything we can to benefit the customer and forget everything else." They played all the vendors beautifully. Nobody likes to do business today with Amazon. They are horrible. They squeeze for all kinds of margins and things left and right. He should. He did a fantastic job. He bought all the properties on Monopoly board, and he could charge whatever he wants. I think we are not Amazon.
We don't distribute products, and I don't know if we'll ever be that scale. It's pretty remarkable. I think there's stuff we can do or maybe strategies we can do on UniFi to really accelerate awareness and adoption. I'm going to try it out.
Marketing becomes more important, right?
Yes.
Hey, Robert. Thanks. I'd like to echo the thanks for doing the presentation. The one product line that I thought had huge potential when you brought it out a few years ago was the security camera. It seems to me that's a market where there's some of the same elements in play where there's extremely high-priced professional security cameras and then you have stuff from Netgear that's more consumer-facing. Is that still a market that you're focusing on? Could you talk about the potential there if it's still of interest?
The video experience has been one of my most painful of the entire career. So frustrating. As soon as we did wireless, even before we launched airMAX, it was back in 2007. I thought, "Man, this video is a huge, huge opportunity." You have these guys like Telco and Sony and Toshiba, Panasonic with milestone software and system integrators, consultants charging crazy amounts of money. You had smaller guys at the time like Axis, also very expensive. You had the consumer brands that had zero software or user experience. We could have been a big, big player in video, as big as UniFi. I started in 2007 and just had bad luck. I did not have experience in video. We went through iterations of the hardware. I tried to take a shortcut. There was an open-source software called ZoneMinder.
We built our first platform off that. It was a really, really bad idea. We incurred a lot of technical debt. I think we were off the mark on the hardware. We just struggled for years and years and years. The crazy thing is I think we probably sold upwards of a million cameras, if not more, which kind of shows you the power of the Ubiquiti name. Companies like Dahua and Hikvision in China, huge monster companies, billions and billions and billions of revenue. They pretty much executed, not with as much style, but functionally, they executed on what I wanted to do. We just blew it. It's never going to be like, I do not know if the opportunity is still there to be a billion-dollar type video camera business unit like UniFi, I think, has the potential to be.
I think we could pick up a lot of revenue from these guys. Dahua and Hikvision, they're really good in terms of cost and function and complete offering. I think we could do a lot better on the user experience at relevant pricing. In 2015, Travis talked about the UniFi AC access points. We had a new team, and we executed really well. UniFi Video, I think, will be next. We have a whole new team. It was maybe a year lagging UniFi. Next year, I think we finally got it right. We're going to have some great stuff.
Can I ask one financial follow-on?
Yeah.
The international cash has built up a lot. Obviously, people have made points. There's not much yield on it. If you can't use it for M&A because culturally it's not a good fit and usually you like to develop organically, how do you envision the international cash eventually being used? I know it would be painful to pay repatriation, bring it back, and buy back stock. To the point of that slide on the deck, if you bring your share count down substantially, it's likely value will accrete either way. Your thought?
A couple of thoughts. If the biggest critique of the business now is we're not getting fractions of more % on our cash balance, I'll take that, right? I think one thing people might not notice is I believe we have financing on the US side because we can't use our cash overseas to buy back stock. We need more money locally onshore to buy back stock. I think since that summit transaction, I don't know the exact share count. It must have been more than 20 million shares retired. That's a lot of stock. We've used that as collateral, I think, to finance a stock buyback. In that context, I think we've gotten incredible returns on it. You're right. If things go to plan pretty soon, that cash is going to be it's going to grow and grow and grow.
One of the things I'd like to do, I think I might be good at, is finding startups, especially in places like Eastern Europe, and vetting the CEOs and the leaders and investing that cash. It's something I want to get to. It's just not at the top of the priority list right now. Maybe next year. Yep.
You spoke about margins before. What do you like from it? You spoke about margins before. Do you think as you go into more consumer electronics, the margin structure could be different? Is there any difference between the way you operate today versus consumer electronics operation?
Right. I like to use cost as a way to improve EPS and long-term EPS. Like I presented, I do not view margins and operating expenses as separate. Bottom line is how much margin are you driving? If I can turn the knob, sure. What's interesting about the consumer space, especially in the networking equipment category, I remember in the early days in 2008, 2009, when we were selling airMAX products, I would go to Fry's Electronics or Best Buy, and I would see routers on sale for like $19.99 and $29.99. I got depressed because the same stuff, the guts were in these products selling so cheap. I thought, "What a miserable business." Then I saw something. Maybe it was the Apple effect where people started paying money for designs. Now, a lot of people are paying $300, $400, $500 for a Wi-Fi router solution.
They're paying a few hundred dollars for thermostats, a couple hundred dollars for wristbands, a couple hundred dollars for headphones. I don't think it's talked enough about, but the ASPs and the high ASP consumer products, the volume's been taking off. I've seen it firsthand too. When we launched Amplify, we had kind of a light version that was $199, and an LR version that was $299, and a high-density $349. Nobody wanted the low-end stuff. Everybody said, "Okay, we just want the high-end stuff." That kind of gave me some confidence where if you have the right solution, you could charge premium and maybe you can move volume, and we're in a good spot as we can leverage all our economies of scale. I think it's a good place for us to play.
If we could put together small teams and we could use our existing Ubiquiti customer overlap to get a jumpstart and build communities around these brands, I think it's relatively low risk, high reward. I think the risk is my time. I think I have to stay focused on things like UniFi that just have the potential to be huge. If we can find competent leaders, I think consumer is a decent enough place for us to play.
Robert, you mentioned an interesting point about interference earlier and dealing with providing technology that can survive in it. When you look out further in the future in environments like 5G, where discussion about LTE type technologies being used on licensed spectrum or more use of licensed spectrum or fixed all the way to the consumer, how do you navigate that? Some people think that the unlicensed spectrum and the utility of it is an existential issue for your company. Do you look at just continuing to drive the solution with tolerance of interference? Do you look at expanding into licensed spectrum, or do you more look at going to ground with fiber like you've already started to do? How should we expect you to navigate as we move through into 5G over the next few years?
I've seen Google had a hot air balloon project. It wasn't somebody launching satellites, solar airplanes. Yeah, there's been talk of WiMAX, LTE, 5G. I think the overhead for any of these initiatives, the infrastructure overhead is really, really expensive. If you look at our WISP industry, collectively, you have tens of thousands of gritty, aggressive entrepreneurs deploying tens of millions of radios around the world, and they have established networks. I think it's really diversified. Maybe over time, something like that can start slowing the growth. It's so hard to say. I always tell people when I thought airMAX was like a $100 million business, I thought, "Okay, how many more radios can you sell?" It just kept increasing, $200 million, and now $300 million, now it's $400 million. I do believe we lost market share.
I think if we were on top of our game, I think you'd still see consistent 10% growth, maybe more. I think hopefully with LTU and the airMAX improvements, we're going to regain market share. I do think the overall market is growing. Like you said, fiber is a good opportunity for us. There's a big part of the WISP market, especially in Brazil and some in Eastern Europe, that have converted to fiber, especially in Brazil where regulations are not as strict and it's easier to deploy the fiber. The fiber is really attractive to the WISP because when the WISP installs a customer, they're still going to have competition from other WISP or maybe from other cable providers or so on. Once they have a fiber line into the home or the customer, it's theirs for life.
I think there's a good opportunity in fiber for us if we could educate the WISP on how to use it, how to deploy it. At first, the margins might not be so good, but I think there's margin expansion. The overall goal, like I always say, is how do you grow EPS? I see that as additive. Yeah.
I have a tough question.
Okay.
You had six resignations from the audit committee. Why? You do not have a CFO also. For us who are analyzing the stock and we are used to certain structure, we are concerned. What does it mean about controls over the company? I know you have different views. Can you elaborate on your views, why you do not need a CFO, what kind of things you can gain from having a CFO versus kind of pros and cons, and also discuss the audit committee? This is a question I am often getting, and I just do not know the answer.
Yeah. I told you when the company first I did that first private equity investment, and we were pushed into an IPO. I was really naive to understand the game. Those board members were never going to be long-term board members. They were put in there by the private equity company to get compensation. They got significant stock, and they were basically in it for their own. At the same time, we did not have a good infrastructure or a good story. I did not know anything about short sellers. I did not know what a short seller was. We went public with 90-something employees. We did not have IR. We did not have PR. I was a sitting duck. I held my stance. I fought through it. If you are a board member that has equity that is vesting, why would you stick around and face that storm, right?
Now, somebody with integrity should. Everybody has their different codes and different principles. The board members I put together recently, Ron Sege, he's been around for a long time. I chose him. Michael Hurlston has been around for a long time. I chose him. Rafael is the audit committee member. I even checked up on these guys throughout this week. I said, "Hey, are you guys okay?" They're like, "Oh, no, we're tough. This is all BS. We're here. We're in it for the long run." I think it just came down to the choice of board members. They weren't my guys. They didn't feel they had my back. They didn't want to take on any risk or they didn't feel accountable. I know the optics don't look good, but I can't do anything about the past.
I had to learn this game. I had to face adversity, get through it. I can only look to the future, right?
CFO.
CFO. Okay. Maybe I should have just called him CFO so everybody would shut up. CAO, CFO, whatever you want to call it. He's in charge of the finances. He signs the books. Maybe that was my mistake. Maybe we should just call him a CFO. How about I hyphen CAO, CFO? Would that resolve everything?
No, don't change it.
Don't change it? All right.
Hey, Robert. Thanks for doing this. I was hoping for my first question, if you could just sort of paint the picture of how your R&D centers work, what they look like, where they are, how many engineers, how they differ from what you would consider a typical R&D operation.
Shoot. I could answer this, but how am I supposed to know a lot of competitors and startups aren't watching this presentation? I'm trying to think what can I say to investors that doesn't give away hard-learned lessons to competitors. Okay. I will say different regions of the world have different strengths, especially on the software side. There's some areas of the world that are great at board support, packaging, and drivers, board bring-up. There's some areas of the world that are great at DSP. Some areas of the world that are very creative, they're great at design and UI design and user experience. There's some areas of the world that are great on backend.
I think the key to these offices is you kind of what we do is we recognize talent pools in different areas, and we try to match or give a suitable, let's say, ship to the captain and crew we have at each office. It is just one of those optimizing problems to maximize success, efficiency, maximize risk-reward. That is not a very good answer, but I am just sensitive about giving away everything I have learned in the past few years. It is painful, painful lessons.
I understand. I also wanted to ask if you care to do it. Would you like to address the recent short report as generally or specifically as you like? Do you have any plans to put out anything, or is this just something that time will?
First, it's kind of hard to tell someone the sky is really blue. What am I going to do? Tell them, "Look up, the sky is blue," and then people are shouting, "No, the sky is red." How do you argue with that? That is one. The second thing is we just like to take what the market gives us. Look at the Teledyne's Singleton. If we can buy stock at fractions of a dollar, we feel it's undervalued, then we buy it back because it will only help our end goal of increasing long-term EPS. If we could retire more shares, our EPS long-term is only going to be higher. It's painful, but the way I look at it is long-term shareholders are getting paid off the pain.
Yeah. Robert, you have a goal, a target out there for over $1 billion, good growth in fiscal 2018. You're working through the inventory, kind of a new distribution model with the Utah warehouse, and you're doing some warehousing in Poland or Europe as well. How should investors interpret the risk or visibility in terms of how your distributors are going to reduce their lead times in contrast to your target for good growth in fiscal 2018? Is the reduced, is it better availability offsetting the lead time reduction, or how should we think about your growth prospects through that transition?
The inventory centers were a step in the right direction. Historically, I don't think our operations in general have been very good. I think one of the problems with a hardware business, especially one that we ship internationally to a lot of different distributors, is you want to run a business where your sell-in reflects your sell-through. We don't want to set targets and be racing the last few days to meet the target and work quarter by quarter. No. Our job is to make sure what we're shipping to the channel reflects the sell-through demand. If the demand, if we ship lower, tough. If we ship higher, great. The business is the business. One of the challenges to get that tight feedback between your shipping and your sell-through demand is the distributors have to have supply.
Historically, one of the things that's happened was if the distributors aren't responsible with stocking supply, you'll have maybe they place their orders not proactively, reactively. You have these distributors placing orders reactively. You have one that runs out of supply. They go to a next distributor who runs out of supply, and then a third. Pretty soon, you have all these guys throwing in double and triple bookings, and you have an operations team or management that's not quite in tune that's saying, "Great, our business is going fantastic." That's a recipe for disaster. I think one of the reasons we're executing much better is because we erred on the side of caution with inventory. We have a sizable Utah warehouse. The distributors that are reactive, they don't cause as much harm as we're able to get them products.
Our orders and our payments and our shipping, everything looks very tightly controlled and in feedback. I know a big knock on us is visibility. I believe our business is very stable, very visible. We're not making video games and movies where we live hit by hit like consumer electronic companies. We have lifetime customers. We have WISP that consistently build their networks. We have UniFi System Integrators that consistently build our networks. I think a lot of this with the instability or perceived visibility is a consequence of us and our distributors not handling stock reliably. I think a lot of people point at this inventory issue. Maybe it's higher than it should have been. I put a mandate out that let's clean up operations. Let's make sure there's no availability issues. Let's make our sell-in tightly correlate with demand and sell-through.
I think it's done a great job. I'm not worried about the inventory. The levels might be high, but you're dealing with long lifecycle products. It's not like we're going to be stuck with airMAX equipment and UniFi equipment they've been selling for years and years and years. I think once we have a handle on this, which it looks like we'll do, I think you'll see these inventory numbers decrease to a more conservative number of % of revenue.
Do you believe your distributors have reduced their inventory to an optimal level, or will it be at that level after the September quarter?
That I don't have insight into. I assume they have because our U.S. sell-through definitely has benefited. We believe at least part of the sell-through increase in the U.S. has been as a result of better availability.
Can you speak to any specific organizational or structural changes that came about from FTI Consulting being involved in the company?
I think the best thing FTI did was it allowed us to reset our culture. Like I talked about before, the way we run our company is the R&D is appreciated and sits on top of the company. Everybody knows I give preferential treatment to R&D and drivers and value makers. I think there was some animosity with the financial team. A lot of them came from that private equity event. It was just bad. It has kind of gotten cancerous. I think that event, it was unfortunate. The FTI coming in, it just allowed us to reset the culture, get new people in that were a much better cultural fit, that knew their roles, that were supportive of the best interests of the company. I would say the biggest impact was culturally.
Hey, Robert. As somebody who reads an awful lot of proxies, I'd say your board oversight is top decile. I don't see you handing out a whole lot of options and RSUs for a lack of performance, which is something we all frequently see on the buy side. Congratulations there. In terms of the product roadmap on the UniFi side, you have the UAPHD out there for almost a year. The SHD, you've kind of done a reveal on the 10-gig security gateway. Could you maybe just fill us in on how you feel about the early introductions we've done? I think the security gateway went to the beta store in the last few days. What we might see over the next year or two as well.
Okay. UniFi, in the past couple of years, we've executed at a very high level on the wireless performance. A lot of reports benchmarking our wireless performance against Meraki, Aruba, Ruckus. It has access points like UAPHD as clearly top. I think the team has done an incredible job in a short time where we were considered a low-cost player that had okay performance to now the low-cost player with clearly superior performance. At the same time, the user experience and the feature set of the controller has rounded out nicely. The switching is growing fast. Where we need to improve is the security gateway. We need to get into things like intrusion prevention, intrusion detection, antivirus, endpoint security, more powerful routing hardware. I think if we can do that and we complete the end-to-end UniFi solution, there's going to be more opportunities to start moving upstream.
You could already see it with HD. We will have HD versions of access points and switches and gateways and XG. XG is coming online, 10-Gb versions of access points and switches and gateways. Once we button those things up, which probably sometime next year, I expect, the big push will be on how do we get the new generation of system integrators that are going through Cisco certification, spending a lot of money. How do we change the messaging of you never get fired for buying Cisco? How do we get beyond that? One idea I had is you might get that promotion for buying UniFi. We have some marketing strategies. The other opportunity in UniFi is the brand is so strong that video, if we can execute, has huge runway.
are a lot of enterprise IoT applications, I believe, that are very interesting that could be growth drivers. Whereas airMAX and Operator is a good business for us, and it could very well start growing again at 10%, UniFi, if we tweak some things, I think there are a few more levels of growth ahead. That is what I am worried about. We have to take advantage of that opportunity. We have a lot of work to do in the next year.
One short-term and one longer-term financial question. In terms of your tightening of the guidance to the upper end of the range, what were the main drivers to your revenue guidance? Was it more on the enterprise side or the service supplier side that's driving the business in the current quarter? One follow-up on the longer term.
I don't know. Where's Hartley? Have I gotten in trouble yet, or are we okay?
We're fine.
All right.
Your follow-up?
Yep. On the longer-term side, you have the $1 billion-$1.15 billion revenue guidance. Given the level of visibility, just walk us through your level of visibility, number one. How much of it is going to be reliant on the existing product line versus the newer product line, as well as the unannounced products that are in the pipeline? What will take you to the upper end of that range, to the $1.15 billion guidance?
I feel comfortable at least meeting the minimum if we do not have revenue contribution from new products. To hit that maximum, we are going to have to have some uptake on our second generation of GPON or our fourth generation of video or LTU or our second generation of airMAX AC that we are shipping some new products. What else? We have some more Ubiquiti Labs products. We have at least one or two new UniFi technology platform segments. There is a lot of optionality. I expect if we are just looking at existing UniFi, largely UniFi and Operator World current products, we could hit those minimum. Yep.
Now that we've sort of comfortably hit the low end of the revenue guidance range, my question is more to do with, as Ubiquiti grows from a billion to, say, a $1.5 billion company. To some extent, you'll have to have success maybe in enterprise, maybe in consumer. These markets have different expectations around service, support, etc., etc. Can you address the issue of Ubiquiti as it grows and it tries to build its brand about quality and reliability, whether is service and support good enough? Can the integrators really take up that slack to get you to that $1.5 billion sort of revenue a couple of years out?
I think there's analogy to scaling and the importance of HR. Like I said, I could bring on 10 new teams where the HR is done perfectly and they're a great fit, and I give them objectives and lay out a blueprint, and they execute. Or I could pick one team and one leader and create a huge mess and a huge distraction. I view support as analogy in the support world is user experience. If you do your homework on user experience and you make the thing absolutely dummy-proof and test all the edge cases out of the box, your support burden is going to be really reduced. I think if you want to scale, user experience becomes increasingly more important. You have to nail user experience so your support burden is reduced.
That's easier to do in UniFi World because a lot of the guys are technically savvy. In the consumer world, it's tougher, but not impossible. I think overall, Ubiquiti support is top-notch. I think we have a competitive advantage in terms of support. What gives us a bad rap is we don't talk on the phone. You could go to a chat, usually 24/7. You could go to our community, our own engineers answer. You could talk with other experts. There are a lot of support options, both in technical depth and responsiveness. Where I see an opportunity is as we go to higher-end customers. Higher-end customers don't like the idea of free support because free support implies that there's no obligation on behalf of the vendor to support the customer if they get into trouble.
I think low-hanging fruit is coming up with almost a solution that's like a peace of mind to these higher-end customers, where you pay 5% or 10% per year for the equipment, but they know the company's obligated to support them because they're paying. I think that will help with distributors who are selling to higher-end customers and overall help our upstream, going upstream strategy, particularly with UniFi. We're working on it. It should have been done earlier, but better late than ever.
I think one reason why people might be focusing on the CFO a lot is I think for a lot of companies, you use the ship analogy. It's sort of like the captain and the first mate. I guess who is the person that challenges you the most within the organization if, say, there's a disagreement on strategic direction or you come up with a new product idea? Is there someone there with a strong enough voice to really, I guess, make it into a debate? Or is it clearly you have the visionary CEO at Ubiquiti, which is you, but do you have a strong sort of lieutenant that is providing you that pushback? And who would that be?
For some reason, I have this reputation of my way or the highway, micromanage every decision. I'm definitely not like that. I want to defer to experts. I don't want to be, I don't want to know every legal rule out there. I want to defer to a legal group. I don't want to get involved in things like inventory and manufacturing management and vendor management. I want a top-notch operations team that takes care of that or a top-notch financial team. I don't really want to make decisions on every little aspect of user experience. I'd love to find people that we see on the same page, and they just run with things. At the same time, there's prioritization of your time. There's some decisions that are very important that you should be spending time on.
are little decisions here and there that you should not be spending your time on. I try to give, even if I disagree with engineering teams, any low-impact decision, I usually give it to them, even if I disagree. The reason I do this is because if they believe it is their product and they own the product and they treat it as theirs and they are invested in the product, it is going to be a much better product. You never want a culture where people do not believe in the direction, and they are just doing it as a job, just following somebody's orders. If that is how things worked at Ubiquiti, we could not scale. You would not see the quality of products we have today. It is actually very collaborative. Where I draw a hard line in the sand is risk-reward.
are some areas of the company where if you make a bad decision or you make the wrong decision, the risk can be the downside can be huge. If you make the right decision, the reward maybe is not that great. I do put my foot down on any decisions or events that I feel can threaten what we built. Has any good leadership? Yep.
Historically, you've had some success or had a lot of success in taking the business model or at least elements of the business model and applying it to new product spaces with new customer bases. I was wondering if you could envision a future, whether it's a decade from now or more, where there's a meaningfully reduced hardware component to the business, where you move into a space that, I guess, is a little less adjacent.
I think there's something to be said about looking at technology, massive shifts in technology, and what it means for the future of opportunities. For example, desktop computing had a massive shift to mobile phones. Apple was the leader there. They put their flag down on mobile computing before anyone else, and they control the profits. You saw LTE networks. All these speeds become faster and faster. The benefit of those were companies that focused on video and photo and high bandwidth sharing using mobile phones. A lot of companies profited there. Everybody be connected. There's a shift to more transactions online. Amazon, of course, benefited there. You have this whole idea of cloud computing and the infrastructure players planted their flag, and there's huge opportunity there.
It seems like whenever there's these technology shifts, there's a lot of companies that try it. There's always one company that somehow gets it right, whether there's a lot of smartphones, but iPhone got it right. There's a lot of social networking, but Facebook kind of got it right. They're not the first. They're the ones to get it right. Apple also did it with these MP3 players and iPod. Part of the reason I like to diversify and create so much optionality in technology is I want to at least be in the game when these next shifts happen, where I have the resources to take a shot at it. When I first started Ubiquiti, it was just a component RF card. I was a hardware engineer. I went to a small factory, got the product to market.
If you look at how much we've grown now, all the different engineering disciplines, we can build a product from concept or even from an ASIC completely to end-to-end software and hardware technology. I guess to answer your question, I think if with low risk and without stretching our focus too much, if we can continue to pick up high-quality technology building blocks, I think our best opportunities are ahead of us. The power of why I believe the business and myself and the power of the business model isn't because we started off selling to WISP, or maybe we go to UniFi, and maybe we're starting to get into Cisco or we're going to consumer.
I don't know what it is, but as long as we keep improving our improvement and our technology building blocks relative to the rest of the market, I want to be in a position to pounce. I don't know what the next big opportunity is. I look at a lot of the big successful companies as they just catch the right wave. I remember watching Shark Tank, and I think they had the Ring doorbell guy on there. Nobody liked that product. They said, "Okay, you answer a doorbell from your smartphone, whatever." Amazon came along, and people were getting packages stolen from their front door, and everybody started installing these things. It turned into a multi-hundred million dollar revenue business. You never know how big the wave is going to become.
If you're in the right position at the right time to catch it, you got a chance at building a big business. A lot of it is luck and timing and having the right resources.
Robert, in a meritocracy, you have respectful dissension. How do you encourage that among your engineers?
We do have instances of that problem. I think you need high visibility and a lot of transparency. Early on, if two engineers, they have problems or they're arguing, you got to be able to squash that. I think tools like Slack are really good because I think one-to-one communication silos, in my opinion, never lead to good things. One-to-one communication silos have the benefit of minimizing accountability. Right? If something goes wrong, people can say, "Well, I talked to this person. I talked to this person. I talked to this person. Okay, where'd you guys talk? Oh, we had phone calls. Okay." I almost enforce everybody to publicly post all correspondences in something like Slack, at minimum, using email. When you backtrack, you can always see who is accountable for what.
I think to prevent animosity, whether it's between individual members and teams or team to team, the key is transparency and accountability. You got to define areas of ownership. When things go wrong, it's got to be commonly understood who dropped the ball.
Hello. As you address the enterprise market, does it make a difference whether companies like Cisco go to subscription models? Does that affect you at all?
I think about this a lot. I think there's tons of power in cloud infrastructure and subscription model. Many businesses inevitably will go to subscription models. I don't know where hardware plays into this. I think what you'll have is you'll have big enterprises maybe paying a lot of money to have their security appliances somewhere in the cloud because all the rest of their software infrastructure is ultimately in the cloud. It's going to be expensive, but it's probably the right way to do it. In terms of profitability, it's much more attractive to the companies. I always thought for small, medium businesses or places like hotels, it's kind of ridiculous to put the control plane onto the internet. I think about it. Cisco and Meraki, they charge a couple hundred dollars per year.
You have the benefit of resetting your router or changing a channel. Even then, why would you want to expose these devices to an internet server? To me, it boggles my mind. To answer your question, the high-end functionality of IT, I think, is headed to cloud and subscription model. The lower-end, small, medium business that do not have huge budgets and is much focused on scalability and big features, I think what we are doing with UniFi is the right way to go. In our case, we created something called the Cloud Key technology. It is insignificant cost. It is just a piece of hardware. It gives you the benefits of cloud. You can remotely access it from anywhere in the world through our web browser. You could shut it off so you have security if you do not want it available to the outside world.
There is no recurring subscription. Why would you pay a couple hundred dollars per AP per year when you could get the equivalent remote access function for free and have complete control over that? I do agree we have to look into more investment into cloud infrastructure for the future. I just do not know how it plays yet into things like UniFi. Or even video, for example. I am not crazy about 4K video streams, multiple of them, going back and talking to a cloud server and paying monthly fees on all of that. I am not sure that has a benefit over low-cost and zippy local storage. If you can solve the remote accessibility problem, which we did through much lower complexity turn servers, I think from a value proposition and user experience performance, it is superior.
To expand on that, I think there's some companies that architect businesses for profitability. Then there's some companies that architect businesses to maximize customer value. In the short term, with a big sales team, I believe there's benefits of architecting a company built for profit. In the long term, with all the trends that are going on, I don't see any chance that the companies that are focusing on customer value first can lose. I think they're only going to get more and more momentum behind them. This whole idea of recurring revenue for hardware that sits in your data closet, it's good for the company. I don't see how that's good for the customer.
First off, you had some pretty good hiring in fiscal 2017. What are your thoughts in terms of just headcount growth as you go into fiscal 2018? Are you going to continue to keep the hiring relatively aggressive? I got a second question after that.
Our employee count, I think we have a Suzhou, China prototype factory. We have an India live chat support center. I believe there are well over 100 employees between those two offices. Our main core R&D team has expanded, but I do not know if it has expanded as much as those numbers, which appear inflated because we staffed up those two areas in the past couple of years. I think it is all opportunity-based. If there is a cool startup project that has potential but the business model is broken and I see promise in the team, I will bring them on. A couple of years ago, maybe I said R&D budget is unlimited. That was probably poor messaging. Of course, it is not going to be unlimited. I only have so much time and focus. We are always looking. I do not like to hire headcounts.
I like to hire just special cultural fits. They're hard to find. Sorry. If you showed me 50 of them, I'd hire all 50 of them overnight. They're tough to find. I don't.
On the consumer products, I think you'd talked about expecting roughly $20 million in the first year, which I think was based on what UniFi had done in the first year. Now that you're looking at your second year, how do you feel you're doing on the consumer products? How do you think that'll do in the second year?
I would say there's good news and bad news. Bad news is I had higher expectations. Good news is organically, without much marketing spend, it continues to increase the installation count every week. We could actually see it reports back every new install. So it's trending right. Amplify has a lot of momentum, a lot of people that like the product. We're going to introduce a couple new products before the end of the year. I don't know the exact number, but it's definitely in the ballpark you talked about, which isn't bad. It's profitable for sure.
Over the coming 12 months?
Oh, like a revenue estimate?
Yeah. Just what kind of growth or ballpark that we might want to think about consumer products?
Ubiquiti Labs, consumer. I will say the number of products in the next 12 months, it should triple. We have a lot of things that we pretty much put the development in. They're in the testing phases. We have some cool stuff on Front Row.
Okay. I think we're going to wrap it up. I just want to thank everyone for coming. We had over 700 people on the webcast. Anyway, thank you very much. Call me if you have any questions.