Ubiquiti’s first US$1bn quarter came with a 38% operating margin

01Where the quarter came from

Its Enterprise Technology line, which holds UniFi, grew 43.2% to US$941.3m; Service Provider Technology (radios and fibre gear for internet operators) grew 10.8% to US$84.9m. North America rose 41.5% to US$541.7m and Europe, the Middle East and Africa 43.7% to US$378.1m. Gross margin rose to 47.3% from 46.0%, which the company puts down to lower indirect costs, partly offset by higher component costs.¹

02How a hardware maker spends 9% on running itself

Ubiquiti explains the model in its annual report: “We do not employ a traditional direct sales force, but instead drive brand awareness through online reviews and publications, our website, our distributors and the Company’s user community where customers can interface directly with our R&D, marketing, and support teams.”³ On 30 June it counted 1,818 full-time equivalents, contractors included: 1,321 in research and development, 370 in operations and 127 in sales, general and administrative. Its fiscal-year revenue of US$3.27bn works out at about US$1.8m per person (our arithmetic).³ Webstores, where it sells direct, were 44% of revenue in the quarter and distributors 56%.⁴ Its pitch to buyers is infrastructure “without licenses or subscriptions”.¹

Ubiquiti earns far less at the gross level than Arista or Cisco, and the gap narrows or reverses by the operating line, because research takes 5.2% of revenue and selling and administration 4.0%. At Arista those are 13.3% and 5.4%; at Cisco 14.1% and 21.0%.¹⁵⁶ The company itself names the trade-off as a risk: it says it may have to add a traditional sales force and customer support staff, which “would cause us to experience substantially lower product margins or increase our operating expenses”.³

03What to watch

The release gives no forecast, and it warns that “component costs may continue to rise, and availability may remain constrained”, which could pressure gross margin and limit sales.¹ The annual report adds that selling through distributors leaves it “limited visibility into end customer demand and channel inventory levels”.³

Few shares are in public hands. Robert Pera, the founder and chief executive, beneficially owned 56,278,181 of the 60,479,485 shares outstanding on 5 November: 93%, leaving about 4.2 million in other hands.⁴ The shares closed 15.3% higher at US$592.84 on 6 November, the day of the results, after falling 8.3% the day before.⁷