UBNT popped up on my one of my screens last week so I decided to take a look at it. The company develops networking technology for service providers and enterprise customers. Their business model is a bit unique, as they sell directly online to distributors, which means lower SG&A expenses and little capital needed to operate the business. This translates into high operating margins and high ROIC. It was founded by Robert J. Pera who still holds over 70% of stock. The interesting thing is, that he receives no salary or compensation as a CEO, so his only earnings come from selling stock as UBNT pays no dividends.
It sounds like a good story, but there are issues with operating cash flow and inventories. Revenue was up 23% in the last quarter and 30% over the past 6 months. The company expects $1-1.15 bil. in revenue for the year ending June 2018 or 27% growth over 2017. This looks promising but receivables are growing much faster, which suggests aggressive revenue recognition.
It sounds like a good story, but there are issues with operating cash flow and inventories. Revenue was up 23% in the last quarter and 30% over the past 6 months. The company expects $1-1.15 bil. in revenue for the year ending June 2018 or 27% growth over 2017. This looks promising but receivables are growing much faster, which suggests aggressive revenue recognition.
Below is the latest balance sheet. Receivables are up 67% and vendor deposits increased almost 80%. I was not able to find a description of what vendor deposits actually are. Managements sometimes create obscure items in the balance to hide a deteriorating condition of the business. Days sales outstanding (DSO) have increased to 58 days in 2017 from 40 days in 2015, another huge red flag. Inventories increased 150%, way out of line with current revenue growth and expected expansion in 2018. Days inventories on hand (DIH) are up to 142 from 41 in 2015, a huge increase.
All these balance sheet items have a negative impact on operating cash flow, which has now slipped below net income, a significant red flag. There is a growing divergence between these two metrics, which suggests earnings manipulation. If you buy inventory and later don't sell it, or you recognize sales but don't collect receivables, you are overstating income.
Source: https://stockrow.com/share/6487acd1916bee45148b6970c56f616d
I like their growth and ROIC numbers, also the fact that CEO owns such a sizable stake in the business. But the rapid increases in receivables and inventories might be a problem few quarters from now. I am not going to short the company, but I will certainly not buy their stock at this moment.
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