Ubiquiti Shares Plunge on Struggles With Fake Products
08/10/2012| 02:07pm US/Eastern
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--Impact from knockoffs is expected to spread
--First-quarter sales are expected to drop 35% from the fiscal fourth quarter
--Inventory levels are still growing
(Adds comments from Kozumi attorney and Ubiquiti chief financial officer)
By Drew FitzGerald
Ubiquiti Networks Inc. (>> Ubiquiti Networks Inc) said Thursday that unauthorized copies of its communications gear were more widespread than previously disclosed and could cause its quarterly revenue to decline by as much as 35%.
The dire warning from the San Jose, Calif., company sent its 10-month-old shares Friday to their lowest level ever at $8.60, more than 40% below their close Thursday and the initial public offering price of $15. The stock had hit a high of $35.99 in May.
Ubiquiti, which Chief Executive Robert Pera launched in 2005 from his apartment after working as an engineer at Apple Inc. (>> Apple Inc.), has struggled to contain the fallout from counterfeit versions of its AirMax wireless gear as it says customers mistake the mislabeled products for its real devices.
Ubiquiti makes products designed to help Internet service providers deliver high-speed broadband access, often in emerging markets. The AirMax line makes up more than half of its revenue.
Chief Financial Officer John Ritchie said on Thursday that the fake gear will hurt sales "almost everywhere but North America" this quarter as the problem products spread undetected through sales channels--including the company's own distributors--from South America, where Ubiquiti said counterfeit products appeared most common.
Sales in South America slumped 40% in the latest quarter largely because of counterfeiting, the company said. Overseas sales are important to Ubiquiti because three-quarters of the company's revenue for the fiscal year ended June 30 came from outside of North America.
The counterfeit products not only have cut into Ubiquiti's sales, but they also have left the company's own inventories worryingly well-stocked. Days sales outstanding, a measure of the time it takes for a company to collect revenue from a sale, climbed to 72.5 days from 68 days in the previous quarter.
The company last month won a U.S. District Court injunction against one of its former equipment distributors that prevents the distributor from using Ubiquiti's trademark. Ubiquiti has accused the company, Kozumi USA Corp., of collaborating with a Chinese manufacturer to produce knock-off equipment, a charge denied by an attorney representing Kozumi.
"Kozumi's position on this is that it's being blamed for things ... that were left at its doorstep," the attorney, Robert Harkins, said Friday. "I don't know how much of a counterfeiting problem they do or don't have."
Mr. Ritchie told analysts on the company's Thursday conference call that Ubiquiti expects its legal victories against Kozumi and others to "significantly slow the flow of counterfeit inventory into our market."
"We believe that this is not a long-term issue," he said.
Ubiquiti's fiscal fourth-quarter results reported Thursday were roughly in line with analysts' expectations, but its current-quarter revenue outlook came 29% to 37% below Wall Street estimates. The low-end of the company's sales range represents a 35% sequential decline, an uncharacteristically steep drop for a young technology company.
UBS Investment Research downgraded the company to neutral from buy, saying it couldn't recommend the stock after the previously expanding business predicted a 17% year-over-year sales decline this quarter, compared with a 40% jump last quarter.
"Counterfeiters have weighed on business fundamentals the past few quarters, and with the recent legal victories Ubiquiti has had against them, it was our expectation that the counterfeiters' impact would soon start to diminish," the investment bank said. "Such was not the case."
Ubiquiti shares were down 42% at $8.74 in recent trading Friday.
Write to Drew FitzGerald at andrew.fitzgerald@dowjones.com
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