Why Ubiquiti Networks Is So Controversial

I’ve seen my share of controversial companies, but Ubiquiti Networks is one for the books.

Since coming public in October, it is one of the lesser-known (not to mention controversial) boom/busts of the IPO class of 2011. After more than doubling since going public, in the past month it has lost more than half its value amid concerns of slowing growth and more controversy.

The controversy started in its IPO prospectus, where the company conceded that some of its networking products had been shipped to Iran (which is banned by the U.S.) without its knowledge “by third parties.”

The Iran issue has plagued the company since, with Ubiquiti blaming a former Middle Eastern distributor for making the sales. In his own blog, the distributor — who has been sued by the company for not paying his bills — has claimed the company knew about the sales to Iran.

There also are questions swirling around legal issues in South America surrounding one of its largest distributors.

And in the past month or so there were reports circulating that the company had ties to the Chinese mafia — which, according to Forbes, Ubiquiti CEO Robert Pera denied in an internal memo.

Strip all of that way and there is the thing that counts most — its business, which CFO John Ritchie has described as selling “ high-performance communication platforms to developing emerging markets and underserved and underpenetrated markets.”

On the surface, even with growth showing signs of slowing, it looks like a winner: Fast-growing sales and earnings.

And therein lies the issue: It may not be quite what it appears.

Tech-focused Saratoga Research, which has had a long-term sell on the company, has focused on several earnings quality issues, including:

• The company’s reliance on selling to distributors, rather than to the end customer. Most of Ubiquiti’s sales go through distributors, with two distributors accounting for this “sell-in” method, which is considered aggressive and rarely used by hardware companies. Among the concerns: That it could lead to channel stuffing. By contrast, Cisco uses the “sell-through” method of recognizing revenue once an end customer has bought the product.
  
• An increase in account receivable days outstanding in recent months. Over the past few quarters they’ve been increasing. On last quarter’s earnings call the company blamed the increase on a number of things, including factory shutdowns in China associated with the Chinese New Year leading to a quarter that was more “back-end loaded.”

Ritchie hasn’t returned my call, but this is clear: Back-end loaded combined with recognizing revenue on the sale into distributors is always a red flag. And given the ubiquitousness of it so, it would appear in the case of Ubiquiti, is the controversy.

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