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Ubiquiti Networks Slips After a Perfectly Good Quarter

Steve Symington, The Motley Fool

Ubiquiti Networks (NASDAQ: UBNT) announced strong fiscal third-quarter results early Friday, this time including solid growth from both its service provider and enterprise technology segments. The networking tech leader followed by suggesting its full-year results will arrive near the high end of its existing guidance range.

Shares had dropped nearly 11% by the time the markets closed for the weekend, leaving some investors scratching their heads to find out why. Let's dig in to get a better understanding of what Ubiquiti Networks had to say and why the stock slumped in response.

Ubiquiti Networks wireless hardware plugged into an electrical outlet in a contemporary kitchen.

IMAGE SOURCE: UBIQUITI NETWORKS

Ubiquiti Networks results: The raw numbers

Metric

Fiscal Q3 2019*

Fiscal Q3 2018

Year-Over-Year Growth

Revenue

$284.9 million

$250.4 million

13.8%

GAAP net income (loss)

$88.3 million

$102.7 million

(14%)

GAAP earnings (loss) per share

$1.25

$1.32

(5.3%)

DATA SOURCE: UBIQUITI NETWORKS. *For the quarter ended March 31, 2019. GAAP = generally accepted accounting principles.

What happened with Ubiquiti Networks this quarter?

  • On an adjusted (non-GAAP) basis, which excludes items like stock-based compensation, net income was $88.9 million, or $1.26 per share, up 28.6% from $0.98 per share in the same year-ago period.
  • Ubiquiti Networks doesn't provide specific quarterly financial guidance. So while we don't usually pay close attention to Wall Street's demands, these results were technically mixed relative to consensus estimates for lower adjusted earnings of $1.10 per share and slightly higher revenue of $286 million.
  • Gross margin expanded 90 basis points year over year, to 46.6%, driven by favorable product mix and above management's near-term target range of between 42% and 45%. As Ubiquiti mitigates the impact of Chinese tariffs, it reiterated its longer-term target for gross margin to remain between 45% and 50%.
  • Service provider technology revenue -- including airMAX, airFiber, EdgeMAX, and uFiber products -- returned to growth (after declining 5.6% year over year last quarter), climbing 8.4%, to $109.4 million.
  • Enterprise technology segment revenue -- including UniFi, mFi, AmpliFi, and FrontRow products -- grew 17.4%, to $175.5 million.
  • By geography, North American revenue grew 15.1%, to $109.1 million, South American revenue rose 15.6%, to just under $30 million, EMEA (Europe, the Middle East, and Africa) increased 10.5%, to $125.7 million, and Asia-Pacific revenue climbed 23.4%, to $27.1 million.
  • Ubiquiti repurchased 91,249 shares of common stock for $9 million, or an average price of $98.63 per share.

Looking forward

Ubiquiti Networks doesn't typically hold quarterly conference calls with investors, and this quarter was no different. But based on its performance through the first three quarters of the fiscal year, it now expects full-year results to arrive at the high end of its previous outlook range. As a reminder, that guidance was initiated last November, more recently reaffirmed in February, and called for revenue of $1.1 billion to $1.2 billion with earnings of $4.00 to $4.80 per share. 

So what's the problem? 

For one, it didn't help that a U.S. tariff rate hike (from 10% to 25%) took effect today on hundreds of billions of dollars in goods imported from China -- even though, as I pointed out above, Ubiquiti Networks insists it should be able to largely mitigate this headwind.

In addition, this was Ubiquiti Networks' fifth-straight quarter of exceeding earnings expectations, leaving the stock up more than 90% in the year leading up to today's report. Perhaps it should be no surprise, then, that most analysts were already modeling full fiscal-year revenue and earnings near the high end of that old guidance range.

It likely would have taken an absolute blowout report today to convince the market to bid up Ubiquiti's shares even more.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ubiquiti Networks. The Motley Fool has a disclosure policy.