Citron exposes Ubiquiti Networks
They didn’t want Citron to Expose Another Fraud, So Guess What We’re Going to do?? EXPOSE ANOTHER FRAUD
Does Ubiquiti Networks (NASDAQ:UBNT) actually have real products that sell to consumers? Of course! So did Valeant and WorldCom, but that does not stop its financials from having every indication of being completely fraudulent.
Citron will detail a series of alarming red flags and detail how Ubiquiti Networks is deceiving the investing public.
Brief History
Ubiquiti Networks is a hardware company that focuses on network routers and has moved into consumer electronics. The company is controlled by a bright and brash, yet unsophisticated, CEO named Robert Pera. While Ubiquiti started out serving the WISP market with unique wireless networking products, its business quickly became commoditized. As its product lines have advanced Ubiquiti finds itself competing in the home network/access point space with the likes of Netgear, Cisco, and Google.
Believe it or not the company’s lack of ingenuity has led to its latest offering which is a wearable camera – think GoPro….talk about chasing a loser.
Ubiquiti first came on Citron’s radar five years ago when CEO Robert Pera described his mid-level engineering job at Apple by stating:
“Apple is a great company, but I realized I wanted to have more success faster.”
https://www.forbes.com/forbes/2012/0116/entrepreneurs-robert-pera-computer-hardware-apple.html
To Citron, these words exemplify someone more interested in the trappings of wealth than changing society with transformative technology.
It was the same “focus on money” behavior that led Pera to become the major owner of an NBA team less than 1 year after his IPO. While Pera should have been busy building a team in Silicon Valley, he instead built a team on the hardwood in Memphis.
CNBC analysts Herb Greenberg immediately commented on this bizarre purchase.
https://www.cnbc.com/video/2012/06/12/another-ubiquiti-controversy.html
Last month marked Citron Research’s 17th year of publication. We have used that experience to compile a list of red flags, which lead us to believe without a doubt that Ubiquiti Networks is a FRAUD.
#1. CEO used the fraud “death word” on last conference call
On Ubiquiti’s last conference call, Pera responded to critics by saying
“I believe up to this point in time, Ubiquiti, as a company, has been misunderstood by a lot of people. I feel we have a group of core competencies that gives us a great competitive advantage in the market.” Aug 2017
https://seekingalpha.com/article/4094445-ubiquiti-networks-ubnt-ceo-robert-pera-q4-2017-results-earnings-call-transcript?part=single
This reminds Citron of the statements made by Valeant and Enron, in which executives stated:
Mr. Pearson conceded that Valeant’s business model was not fully understood by all investors but insisted the company had “nothing to be ashamed of”.
–Michael Pearson, Valeant CEO, Interview with the Financial Times
It is unfair to us and unethical if you don’t take the time to understand our business… we are doing it purely right… people who raise questions are people who have not gone through our business in detail.”
–CEO Jeff Skilling, phone call with Fortune, 2/14/2001
What Pera calls “misunderstood,” we call corporate fraud. These warnings are obvious not just to a savvy investor but to any reader capable of critical thought.
Red Flag #2: Operating Metrics
Whenever a company seems too good to be true, it probably is. Citron has exposed more corporate fraud than any non-government agency based on this premise alone.
Citron has not “cherry picked” these metrics, the below charts come from this naively bullish Motley Fool article
https://www.fool.com/investing/2017/08/21/what-is-ubiquiti-networks-competitive-advantage.aspx
These 2 charts tell us one of the following has to be true — either Robert Pera is the best CEO in networking equipment, or Ubiquiti is committing FRAUD.
While other network equipment makers are struggling to sell into a commoditized market, Ubiquiti seems to shine.
To illustrate how ridiculous the notion that investors can rely on the claims of Robert Pera, let’s just look at the closest competitor: Netgear.
Netgear CEO Patrick Lo worked at HP as a senior executive for over 10 years. Lo then founded Netgear and has been CEO for 15 years. He has also surrounded himself by a “top team.”
https://www.netgear.com/about/management/default.aspx
On the other hand, Robert Pera, with no hardware experience, no CFO, no CTO and a home grown COO with no real business experience is blowing the doors off Netgear.
Ubiquiti does not even have a leadership page on its website.
Red Flag #3: The “Secret Sauce”
Frauds often claim some “operational advantage” over competitors to justify their outsized margins. This was common in the 2011 Chinese RTO scandals.
It is also common that the secret sauce turns out to be total bullshit once some light is shined on it.
In the case of Ubiquiti, the sauce is the “Ubiquiti Community” or as Pera has frequently described it: the “evangelical community”.
This evangelical community – a fanatical user base that is devoted to Ubiquiti – allegedly allows them to eliminate advertising and customer service. It’s “a core competitive advantage” emphasized in IR presentations and mentioned tirelessly by management on conference calls:
Before we go into statistics and proof that the community is bullshit, lets introduce some logic.
Are people so passionate about their home router that they are telling all of their friends and staying up at night helping other people set up their routers? Do people get “evangelical” about their access point in their homes?
Apple has the most evangelical of all user bases — why wouldn’t Apple just close its genius bar?
The concept is ridiculous and the numbers Ubiquiti claims are just as ridiculous.
Citron has done the extra work to prove that the stats about this “alleged community” are manipulated.
Click here to for detailed info…
While we do believe that at six or seven years ago Ubiquiti may have had an engaged WISP community, the story is now as implausible as the rest of the bullshit UBNT tells Wall Street.
The “fake community” as first exposed by blogger @unemon1 is mostly composed of bots:
Red Flag #4: Shady Distributors
Just like Philidor was a fatal “tell” that Valeant was hiding something rotten behind the curtains, relying on a distributor network invites a company to obfuscate its true financials, especially when it is overseas, and doing business in sanctioned countries and jurisdictions notorious for money laundering.
Here is a sample of Ubiquiti’s major distributors:
Flytec Computers–founded by Osni Arruda
Flytec was Ubiquiti’s largest customer in 2011, 2012, 2013, and 2014. Since then Ubiquiti has not named its biggest customer. Arruda was arrested in Brazil in 2006 for “alleged crimes of embezzlement, forgery of private documents, misrepresentation, use of false documents and conspiracy.”
More detail has been provided in this previous research report. https://www.altresearch.com/downloads/UBNT-April-2-2012.pdf
While this does not prove the company is obfuscating financials, it goes into the mosaic of a story that just doesn’t make sense.
Batna/Anteny 24 (Poland)
Ubiquiti’s sales to Batna are not disclosed in the 10-K, but Batna is constantly a top three accounts receivable distributor for UBNT.
This leads Citron to believe Batna/Anteny24 is one of Ubiquiti’s largest customers.
Batna/Anteny24 appears to be run out of a tent in the back of a house. Thanks to Google earth, Citron was able to provide this due diligence without having to go to Poland.
Most importantly, Ubiquiti’s financials don’t reconcile with its distributors. A report by financial blogger “Unemon” revealed that the Ubiquiti’s disclosed recievables don’t match its distributors disclosed payables. In the case of Batna the analysis “show a discrepancy of at least 236%”
We encourage all to read Unemon’s report here.
Citron notes that Ubiquiti’s big markets are money laundering havens. The Bankers Association or Finance, and Trade (BAFT) published a paper on money laundering Red Flags.
Click Here for Ubiquiti’s money laundering red flags document
Red Flag #5: The Cash
Like many of the frauds that Citron has uncovered in the past, the cash balances claimed by Ubiquiti do not generate reconcilable interest income. While Pera is supposed to be the most efficient allocator of capital on Wall Street- his cash tells a different story. What is wrong with these graphs?
$$$$$$$$
Ubiquiti chooses not disclose any profit or EBIT margins by region. However, applying for analysis purposes a simple assumption that the overall company profit margin is the same worldwide, below we see profits “generated” in the US do not reconcile with the cash.
The green line below includes adjustments for buybacks (done with U.S. cash), dividends, and debt issuances. For illustrative purposes the U.S. cash should be the around the green line. The chart below shows it is far from.
The only explanation for this would be much lower profit margins in the U.S. for Ubiquiti.
This is unlikely! Profit margins in the U.S. should be much higher.
The largest expense for Ubiquiti is manufacturing the product (Cost of Revenue) ~55% of revenue. The manufacturing of Ubiquiti products is done by contract manufacturers exclusively outside the U.S. Also, logistics/fulfillment is “primarily in China, and to a lesser extent, Taiwan and United States.” In addition, roughly 2/3 of UBNT’s workforce is outside the U.S.
So we are expected to believe that Ubiquiti generates nearly all its cash in Hong Kong and U.S. cash balances have not grown, despite the fact that most its expenses are offshore, it has been profitable every quarter since its IPO, and roughly one-third of its revenues are from the U.S. market. Where is the growth in U.S. cash?
Red Flag #6: Corporate Turnover
Despite claiming to be the most efficient operator in its space, UBNT has more corporate turnover than Citron has ever seen in a public company—especially in its finance and audit departments.
This mysterious cash theory is supported by Ubiquiti’s inability to keep a CFO (haven’t had one for two years). Yet, they do have a European CFO who is based in Lithuania. Oddly enough her LinkedIn profile does not even have her real name.
https://www.linkedin.com/in/ingrida-bl-0b61b873/?ppe=1
Without any notice this year their longtime CTO John Sanford left the company without any disclosure or replacement.
Investors are to believe that Pera is helming the company with industry busting margins and with longtime #2 man Benjamin Moore. Mr. Moore has no previous experience besides Ubiquiti and he is a graduate of the esteemed Utah Valley University (Acceptance rate 100%- something we have never seen).
The canary in the coalmine was when respected VC Bill Gurley joined the board of UBNT and resigned 9 months later.
Ubiquiti has yet to bring a “grown up” to either the board or management. All the makings of a FRAUD
Red Flag #7: The Most Important of All — Corporate Culture
What we learned from Enron, Valeant, and Madoff is that an underbelly of corrupt corporate culture existed and were signs of trouble. While none of these individually is enough to make the statement of corporate fraud, when put into a mosaic it becomes clear what we are dealing with.
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Arrest Warrant for Pera’s “right hand man”
Yu-Cheng (Believe) Lin ran Ubiquiti’s Taiwan operations and had signing power for the company in Taiwan.
Robert J. Pera, Director of Ubiquiti Networks International Limited [Hong Kong], does hereby authorize Believe Lin, Senior Operations Director of Ubiquiti Networks International Limited Taiwan Branch (the “Taiwan Branch”), to sign on behalf of the Taiwan Branch the office lease rental agreement “Lease Contract” with the lessor for the premises at 105 Songren Road, Taipei.
This year he was charged with insider trading of Ubiquiti stock. He is now a fugitive as Taiwan does not have an extradition treaty with the US. https://www.sec.gov/litigation/litreleases/2017/lr23862.htm
Click Here to Read the Synopsis Lawsuit
Synopsys develops software applications for the semiconductor industry. It is the leading company by sales in the Electronic Design Automation industry. Ubiquiti met with Synopsis to license Synopsis software all the while Ubiquiti was counterfeiting licenses and using hacker websites to circumvent payment.
This was perpetrated by senior management especially Ching-Han Tsai
According to the lawsuit:
“Ubiquiti and its Hong Kong unit, Ubiquiti International Ltd., have used counterfeit keys at least 39,000 times with 15 different usernames, circumventing Synopsys’ license key access control system, according to the suit. Tsai personally used a counterfeit key to work around the paid system at least 66 times, Synopsys said.”
The Synopsis lawsuit gives us insight into corporate ethics from the top down.
- The mysterious case of the missing money
In 2015, in an often forgotten story, Ubiquiti reported it had lost $46 million of company cash. How did the company not even realize that $46 million was missing from the company? Why did the FBI have to inform the company that it had been “robbed”? Who is minding the ship?
Citron believes Ubiquiti story is unraveling as we write!
Next month Robert Pera’s option to buy the remaining part of the Memphis Grizzlies that he does not own expires if not exercised. If he chooses to complete the transaction (and he has never given any public indication that he will not), he will need over $200 million for which he will have to tap into his stock and the NBA will have to approve it. We believe that the NBA will take a more detailed look at the financial stability of Mr. Pera.
On the other hand, if Pera does not exercise his option, this would be another pretty good indication that Mr. Pera’s “game” is in the fourth quarter and time is running out.
Ubiquiti has become a “company on the run”
Ask shareholders where Ubiquiti is based and you will hear San Jose. WRONG. Two months ago without any notice Ubiquiti vacated its San Jose office. This is what the lobby looks like now (just three months ago the photo on left was filled with office furniture and people)…with an empty parking lot in the middle of the day
Where is this company?? Draper, Utah? New York City? Latvia? Lithuania?
It is no longer making sense…….
So much so that just last month Morgan Stanley dropped coverage on Ubiquiti.
After posting a “stellar quarter” Morgan Stanley decided to drop coverage of what allegedly is the best-operated company in networking hardware. To Citron this means behind closed doors even the analysts have concluded
“We just can’t make sense of this thing anymore!!”
Despite being a CEO that should be revered by Wall Street and the media for creating a phenomenal company that sells hardware at software margins and just destroys its competition – Robert Pera has never appeared on CNBC or Bloomberg.
Google Search for “Robert Pera Interview”
When we think of a business leader who outpaces the competition but is media shy and won’t do interviews – one name comes to mind – MADOFF.
Conclusion
The end is now for the Ubiquiti Fraud. What was once a company with unique products in a fragmented space has turned into a company that sells products in highly competitive markets where they are the last mover. The holes in their story are expanding daily and it is only time before the SEC launches the formal investigation and Ubiquiti will go down in infamy amongst the many other Wall Street Frauds.
“Cautious Investing To All”
**** For anyone who reads this report and still thinks that Robert Pera could be the best CEO in networking hardware, we encourage you to watch this new video of Pera introducing Ubiquiti’s new FrontRow camera. This video is more valuable than anything we can write
