Ubiquiti Counterfeiting Crisis DeepensBy John Honovich, Published Aug 14, 2012, 08:00pm EDT
It started off with a bizarre seemingly staged 'mob hit', got worse a few months later and now has become a major crisis. One of the most powerful companies in wireless networking and a growing force in the surveillance market, Ubiquiti, has been rocked again, with its stock dropping more than 40% in a single day and now down a total of ~75% since the 'mob hit' accusations in May. In this note, we examine the key drivers, geographical regions and product lines impacted.
The cause of this most recent plunge is Ubiquiti acknowledging [link no longer available] that counterfeited products are significantly hurting overall sales. While growth was up 40% year over year, that's a steep decline from their historical near 100% growth rate. More importantly, Ubiquiti projected that the amount of counterfeited goods and the extent of the problem is so significant that it will "impact [their] business outlook for the next two fiscal quarters." Indeed, for the next quarter ending 9/31/2012, Ubiquiti is only projecting "revenues of $62 million to $70 million", far below the company's revenue a year ago, a stunning fall.
AirMax the Main Problem
AirMax, Ubiquiti's main product line, is the one being counterfeited. One of their oldest lines, AirMax counts for over 60% of Ubiquiti's total revenue (~$60 million for the most recent quarter).
The counterfeiting appears massive, with Ubiquiti further acknowledging that lost revenue to counterfeit Ubiquiti products could be in the tens of millions of dollars this year. For a sense of comparison, just the counterfeit sales are roughly equal to Firetide and Fluidmesh's total annual revenue combined. At this rate, it is likely hundreds of thousands units will be counterfeited - indicating the scale and organization involved.
The problem started in South America but will likely extend everywhere except North America, says Ubiquiti. They note that, "South American revenues decreased 40% sequentially" due to counterfeiting efforts and expect further, deepening impact later this year throughout the world.
Ubiquiti's engaged numerous countermeasures:
- New lines are "adding anti-counterfeit security to [their] hardware."
- They are pursuing various litigation and criminal charges against the ringleaders.
- Authorized a $100 million share repurchase program [link no longer available] to demonstrate commitment in the company's future. This is fairly sizeable since the company's market capitalization is now under $800 million.
The Battle Against Distribution
Several signs point to an underlying fight between Ubiquiti and some of their disgruntled distributors. For instance, in the Call transcript [link no longer available], Ubiquiti's CEO explains:
"So these middlemen who [used to] control the end user relationships and control the sales margins suddenly they are for lack of better word commoditized, and so all the customers know Ubiquiti, all of them have access to our engineering team. We give them complete transparency and there is pervasive demand in the market for Ubiquiti product.... We’re so pervasive and so dominant that the only way for these guys to get back in the game and compete and make money was to resort to these measures."
Interestingly, the anti Ubiquiti blog basically touches on the same themes, from the opposite perspective:
"[Ubiquiti's CEO] behavior was changing with all his distys. It came to a point that he said clearly that you (distys) need me i don't need you. I can replace you like i change girls."
The former distributor continues:
"As volumes were growing everyone started complaining that their are no profits (the whole chain of disty/reseller etc).... UBNT keeping all the honey and giving just leftovers to distys."
Now perhaps the distributors are being unreasonable and its not simple to balance competing demands of the channel. However, if Ubiquiti is to rebound from this long term, distributors will need to be somewhat happy. The fact that tens of millions of dollars of counterfeit Ubiquiti products are moving throughout the world indicates that a lot of resellers are in on this, many likely knowingly.
Given the sophistication of the counterfeits, it is not likely that one can detect this by simply looking at the units (as you might with a fake handbag or sneakers). Ubiquiti recommends that customers purchase through authorized channels (documented here) and email them with any questions or concerns.
If you are a Ubiquit AirMax user, be very careful that what you are getting is not counterfeit. Ubiquiti previously said they will support them but obviously getting stuck with counterfeits increases risk.
Recent events show that this is a very serious issue that is threatening the future of a company that was a run away success story until a few months ago. And in the midst of this is the surreal deal for Ubiquiti's CEO to buy an NBA team, at the very least incredibly bad timing if not a dangerous lack of judgment.
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