Chit Chat Stocks - Ubiquiti (UI) | Deep Dive

Episode Date: June 24, 2021

Ubiquiti develops internet technology designed for service providers, enterprises, and consumers. Essentially, the company produces the hardware that helps distribute high-capacity internet access. Listen in as Ian, Brett, and Ryan dive into the company and how it might grow from here. Enjoy the show! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Ian and check out his work on Twitter: https://twitter.com/IanGrayLive Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Email us: [e-mail] Timestamps Company Background | (2:22) Industry | (6:45) Management & Ownership | (8:00) Valuation | (10:11) Earnings | (12:10) Balance Sheet | (13:52) Our Analysis | (16:22) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. All right, welcome in. This is the Thursday Deep Dive episode. We have Ian Gray on as usual. Ian's wearing the button-up shirt. He is at his internship. We don't need to disclose what

company he's at, but he's making the big leap into the suit world, I guess. He's a professional man. He's a suit man. Yeah, I'm a business casual man. There we go. There you go. Yeah, you're not joining the full, the suit ranks, I guess, is the Wall Street bet. How the Wall Street bets people would describe it. Is it basketball shorts on the bottom?

No, not basketball shorts, but jeans today. There you go. Okay. There you go. There you go. All right. Well, we're going to be talking ubiquity, not networks, but I guess that's what some people call it.

That's what I heard him call, but it's Ubiquity Incorporated. I'll let Ryan introduce the company. But first, if you want to talk about our friends at Seven Investing, when this is coming out, it'll be very very close to when the price uh hike i guess what that's how i'd call it is going into effect in early july i'd call it flexing their pricing flexing their pricing power yes because the value is still very strong i guess that's not the best way to put it but yeah i mean if you want to get in while you can i don't ryan you want to talk yeah we talk about them all the time but i recently like last night was the first time i got the chance to look at uh the rex from

most recent month and i watched those videos it's nice to get like yeah that was a very helpful addition because you can kind of get the uh facial response from teammates and kind of you're getting a real presentation and sort of their verbal pitch which is nice yep and then we should probably mention the code so code ccm use it at their checkout or whenever you're on the website and you get ten dollars off your first month give you a little discount if you're going to try out the service. All right, Ryan, you want to introduce Ubiquity? Yeah. So if you're reading through the 10K, there are a ton of technical terms in here. So I'll try to make it as simple as I can. Just know that I don't understand all the terms either. Also, they don't do conference calls. So you

really got to do a lot of digging into the 10K stuff like YouTube videos to kind of get the gist of their offering. But they're basically selling equipment for internet distribution. So it's like wi-fi hardware and they sell to enterprises primarily well they don't actually sell directly to the enterprises but they sell through a distribution network essentially so it's service providers resellers distributors stuff like that and then they also sell related software to it so think about if you've got uh and they've they've sold devices in over 200 countries so if you've got a bunch of different uh modems or routers in different places you can manage that with the software or the it department can as kind of the command center to see like what's getting the most

uh internet access what has the best point uh where are the best access points stuff like that uh you can kind of map it out with security weakness who's strong who's you know yeah strong wi-fi signal stuff like that and there's several and they also have other devices too they have cameras phone systems and they have software for those uh offerings as well and every software offering that they have except for one is i think they're all like unify protect unify uh enterprise so it's always unify so if you see that just know it's probably attributed to ubiquity um as far as other stuff the actual business model they aren't selling direct to consumer i don't believe the 85 is reseller 15 is direct um sales okay the last number i saw and most

almost their most their largest operating expense is research and development they don't spend a lot on sales and marketing since their sales department is essentially the community of resellers for them yeah so they don't i think they actually mentioned that directly that they don't have any direct sales team what helps them make a lean operating um there's sgna expense but a lot of that's probably sort of back office stuff yeah it's very very low as a percentage of revenue if you check it out surprisingly low for a company like this and then history about the business. This is actually pretty fascinating. So the company starts and stops with its founder and the founder is Robert Pera. He owns, and Ian will probably touch on this. He owns 89 and a

half percent of all the common stock outstanding. So it really is a, you could say it's a one man ship. I think he has even has small, sort of a small team of directors. Board of directors, only four. Yeah. Yeah. So he really runs this business. And he actually started his first company in high school providing networking and database services. So he sounds like he's been kind of like a tech savvy, smart guy for a long time. And he was really into basketball in high school. We'll get into why that's relevant. But after high school, he attended UC San Diego, where he mastered in electrical engineering and studied Japanese while he was there. Sounds like a great life. And then after college, he went and worked at Apple, but within 10 months, he left

to start what is now Ubiquiti Networks or Ubiquiti Incorporated. And he used $30,000 in personal savings and credit card debt in order to fund the launch. And he basically started the business by building his own low-cost, high-performance Wi-Fi module in his apartment. Yeah, you guys probably haven't watched it,

but the show Halts and Catch Fire. It's basically the main character from that. I haven't seen it, no, but they IPO'd, they've obviously expanded their product suite since then, and they IPO'd in 2011, but he personally bought the Memphis Grizzlies in 2012. And so I believe he founded the company,

I might be getting this wrong, when he was 25. He's 42 now. Yeah, he's still pretty young, yeah. Very young. And basically his entire net worth is the net worth of the company. Yep. And Robert, if you're listening, let's move that team over to Seattle. Get that.

Yes. Get the team, what are the valuation of the team will go up. so if you want your network to go up you know let's get to get to talking yeah you're gonna become a season ticket holder to help them out yes yes we'll have to be uh i mean that's just a business expense everyone chit chat money corporate sponsorships yes exactly sweet he i mean if he hears that i mean there's no way he's not coming uh i'm in the climate change arena too with bezos i mean okay industry landscape okay uh i'll talk industry landscape competition and biggest competitor is Cisco Systems. If you know Ubiquity, when Ryan was describing the

business, it's very similar to a lot of products Cisco sells. I was, excuse me, was looking at the Gartner reviews and Cisco's products overlap 55% with Ubiquity. And it's really like all of Cisco's products, or sorry, all the products Ubiquity has, Cisco has a lot of those. And they're, you know, the behemoth in the industry, one of the biggest and best performing stocks of all time. They'll be tough competition, but it shows that, and the reason I'm talking about Cisco is it shows how large of an industry this is. A lot of people don't think about it, but they're really building the backbone of the internet. Other competitors will include Netgear. That's someone that people probably recognize, at least from a consumer standpoint. There's D-Link, which tough name,

if you think about it, tough name there. Then there's Dell and then Juniper Networks. And then for reference, Cisco does about $50 billion in revenue a year. I would check out the Gartner reviews for B2B businesses like this. There's a ton of good stuff on that website to kind of check out the competitive landscape. Yeah, I think that's it. Ian, do you want to talk management? Yeah, pretty simple today with Robert Parris. So he's the founder and CEO, chairman of the board, as Ryan was talking about. He formerly worked at Apple, has kind of an entrepreneurial past, owns 89 and a half percent of the shares outstanding so probably i'm like 90 sure maybe 89.5 sure that this is the highest insider ownership we've ever seen on a company we've done

especially this size this size right it's it's and you're going to get into this but this is a 20 billion dollar company so a very you know a large company and he owns basically all of it um they haven't done any conference calls since 2018 they keep things pretty close to the vest don't do a whole lot of press um small board as ryan was talking about four members including robert para so only three others and uh as we were joking about earlier he's the owner of the memphis grizzlies so he used to be out and about a little more often i think and doing some more interviews there wasn't as much uh recently on him but um but they just kind of keep their head down and go to work and and do their thing i guess like this is you know there's not there's

not a whole lot of extra information on his company he does not take a salary which is a good thing to see with as much ownership as he has he's not draining the company of cash but and i see ryan's three thousand dollars in compensation yes three thousand dollars in compensation from using it was uh not cash compensation he was given but for using the company's uh jet so right right okay that's pretty well for three thousand that's nothing that's like going from phoenix to tucson or something so um or anyways he's got memphis or memphis to seattle memphis to seattle maybe that's that that flight may even be too long for three thousand dollars though but who knows anyways he uh no real compensation no governance issues really to

speak of that are obvious um but it's just you're trusting in robert para if you're buying this company. Yeah. I mean, and Ryan will get into it with earnings. They run a light ship. I mean, the spending there is just, it's bare bones, which it's kind of worse for them. I guess it's part of their culture. I'll hit valuation quick. Market cap, $19.7 billion. Ticker is a UI, if you're interested in looking that up. Enterprise value is $20 billion. They have some debt. So this is probably the relevant metric and it's pretty standard debt. I think it's just traditional bond. Actually, no, it's a term loan. You don't get into the details, but yeah, very standard stuff on there. EV to sales is, oh, it's not 1.5. I believe it is 11.5. I wrote 1.5. I think it's

11.5. EV to gross profit is 24. EV to operating cashflow is 35. And they had some one-time working capital stuff the last few months that makes their operating cashflow look a little worse than what their operating income, I believe, would be. It was slightly higher. So that operating cash flow could grow quite a bit over the next few years if you average it out. EV to free cash flow, slightly higher. So they're minimal capex here.

Even though they are a hardware company for the most part, they outsource a lot of that manufacturing to different Asian countries. And no, they do a lot of it in the US too, I believe. So operating cash flow is probably a good metric here to track the company's profitability and obviously the cash generation. And then lastly, they have minimal stock dilution on deck and then a strong buyback program. So share count, if anything, will be a boost to returns

if they continue to do well with this business. There's not going to be any worries about share count growing at like 4% to 5% per year. No, what's his incentive to dilute? It's not like he has some tranche options package. If anything, if anything, there's going to be no more shares to buy back. I actually just be him. Yeah.

This is maybe a topic for another show, but I questioned how he bought the Grizzlies or like, Oh, it says, uh, it was in the 10 K he has 25% of his stock is collateral for loans. So that's why he did it. Yeah. Okay. Or how he did it. Uh, so I'll get into earnings.

The trailing 12 month revenue was $1.7 billion. That's up 38% year over year. the majority of that revenue comes from enterprise or the enterprise but that's kind of a big category they break it into two but they obviously have a lot of different products they serve a lot of different types of businesses um and then a lot of different areas as well but gross margins were 48 that's been expanding slowly um like brett said it's a lean business and i mean it's been linear growth for like the last decade it's quite impressive how how sustainable it's been but they had 555 million in free cashflow. That's up about 53% year over year, 32% free cashflow

margins. So on 48% gross margins to have 32% free cashflow margins, pretty impressive. This is what all SaaS investors and we're SaaS investors, so don't get insulted here. This is like what everyone dreams of when it's like, oh, 25 times sales, but 90% gross margins. Yet a lot of this hardware. This is the exception, not the rule. And it's hardware. Yeah. It's impressive what these margins are at. Yeah. And they are having some global supply issues with the shortage in chips. They made sure to mention that on the last earnings report. They have had to incur additional costs in order to expedite shipments. And they've also had an inability to meet some orders simply because they lack or they're unable to procure the supplies or components. And then they do have a dividend yield. I think it's 0.5%. I believe if anyone saw something else, feel free to let me know. Yeah, that's what I saw, yeah.

They've increased that incrementally each year, I think, for the last few years. So they continue to raise that as well. Yeah, all right. Ian, do you want to hit balance sheet to wrap things up? Yep, they've got $144 million in cash, $670 million in debt. And as Brett alluded to earlier,

the majority of that is a term loan. About 200 million is on a revolver, but both loans are at just under a 2% interest rate, about 1.9%. percent um both loans are also variable rate and so if interest rates were to rise that would impact the interest rate and impact the um the amount of interest they're having to pay each year obviously and so that service with as much which with as much debt as they have that that does have an impact on the business um part of the reason they have this debt it appears is

so that they can continue to buy a lot of shares because we don't have conference calls. We can't get that exact. We can't ask those types of questions on a conference call, but they make some reference to that in their 10K that by having debt, they can buy back more shares when they feel their stock is cheap and they can also issue dividends. And as Ryan was mentioning, the dividend has been increasing for multiple years in a row now. So pretty solid looking balance they do have debt but they're they've got the the business to support it for now yeah it seems like everything with this business is just set out like very meticulously like the debt isn't most businesses you look at they're like oh you had some random thing due in 2024 some random thing

due in 2027 this is like i forget what the exact numbers are but it's like 30 million this year 30 million next year 30 million next year so the stability of the growth has been uh exceptional And I'd also add that, I mean, they're generating $555 million in cash. That $670 million in debt isn't crazy. And maybe it's super lean. And I think that might just be because it might just be the CEO, I'm blanking on his name, Para. Is that what it is?

It might just be his habits. I mean, he started the business with $30,000 in personal savings. Maybe he's just a frugal person. I just read Cable Cowboy. this reminds me of what they were describing TCI and the, they were the biggest cable operator in the world. And John Malone just had them in some creaky little office building in Denver for a lot of the time.

But Ian, you had something I think, do you want to add? No, you guys covered it. So, okay, well,

that's going to do it then for the first half, let's take an ad break and we'll get back for the second half of the show. New format. Hopefully it'll be fun. So, so don't leave us. cox panoramic wi-fi includes advanced security to help protect all your connected devices

you'll get real-time alerts oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the Panoramic Wi-Fi app. Restrictions apply. All right. Welcome back in. Next up, we're going to hit anecdotal evidence, but I think I should mention here, we're going to do a different format. We're taking up competitive advantages, rolling that into highlights and lowlights because we've understood that it's gotten cliche. There's only so many companies

with competitive advantages. So we're going to do anecdotal evidence, future growth opportunities, highlights and lowlights, and then we're going to close things out with bull case and bear case. So each of us are going to say, all right, what's going to happen for this stock to do? well, what could happen for this stock to do bad? We'll explain it more when we get there. But first one is anecdotal evidence. Ian, any thoughts here? I know it's a B2B, so it's kind of tough.

Not much. My only, and we'll get into this more later, I think with some of the, some other discussions, but we actually at my house are having to replace our Wi-Fi system right now. And it's just always a pain, you know, to have to like replay. You just want your internet to work.

And so someone who can actually provide something that makes your internet work i think is a valuable uh it can be a valuable business whether it's b2b or b2c um because everybody just at this day and age everyone expects internet just to work right just be yeah and if it works you're not switching that's the other part um and that's kind of what uh netgear is a smaller competitor but a lot of people at least maybe it's me don't have a good perception of netgear kind of tacky products ubiquity might be the opposite they're like more sleek uh work a lot better stuff like that yeah i worked at basically one of these resellers i don't think we used ubiquity i don't think we sold ubiquity products but there is

something to be said here because they go through a distribution network like that where they have these resellers um there are times when certain resellers can favor certain suppliers just due to incentives so that's cisco or something yeah like in our case we aruba networks we had a really good partnership with them i think there might be better i wasn't really cued in since i was the intern uh on the details behind it but they kind of push those products when they're talking to an end customer or an end business yeah um so that relationship with the resellers is important and they tout that on the 10k that they have a big distribution network so just worth paying attention to and i'd also as someone who had to make cold calls people don't want to switch their

wi-fi if it works uh they're gonna stick with it it's gonna be yeah there's gonna be the lock in there um i'll hit mine i mean i got none personally there's great reviews online the gardener stuff is a kind of a resource i found that's been really uh i think helpful for this for these type of B2B businesses, sleek looking products though. I think if I was going to buy something for a small business of say, we had a little office space, we'd probably look at them. They seem a lot cheaper than the other options out there. So I guess that's kind of a good point, but it's tough. It's tough to know what, until you get into like the IT department, you know, who's best and whatnot. I think also, I mean, they have an expense, expansive product suite

with the camera network and the camera software and then the phone systems, that kind of thing. So if you've had success with Wi-Fi products or their modems, routers, that kind of thing, it probably incentivizes you to use the rest of their items as well if you're looking for them. Definitely, definitely. All right. We got future growth opportunities. Ian, what do you have for Ubiquiti? Ryan's last point leads perfectly into it because I think a great future growth opportunity for this company is to continue to push into more and more connected devices. They sell security cameras, door locking systems, things like that for enterprise customers. So for businesses to monitor their warehouses and workstations and

keep track of who's coming in and out, as well as all the Wi-Fi. I think there's going to be a secular trend towards more Internet of Things. And I know we've been hearing that for like 10 years plus, but I think the Internet of Things is going to be real at some point. And it's going to require like ubiquity can benefit on two two fronts one from actually selling some of those internet of things products some of these connected devices that they're selling today but also as there's more and more of those products into the market people are going to need faster and faster wi-fi and presumably some of this the equipment that's out there today is going to become outdated and i know um you're going to get into this a little bit brett but there should be some opportunity

to upsell people on new Wi-Fi devices as well. Now, I just thought of this too. This plays into that, the infrastructure bill. That's a tough way to form an investment pieces because you don't want to flip a coin on whether the Congress and the president make a decision on that this year or something like that. But that would probably benefit them as well.

There's probably a lot of spending to be allocated to Wi-Fi infrastructure, stuff like that, broadband infrastructure in that bill. So Ryan, what do you have here? Mine's Amplify. So this is their connected home Wi-Fi system. So they do sell some just consumer-facing Wi-Fi systems, not only on the hardware front, but also on the software. So, I mean, if remote work is a lasting trend, I think they have to find a way to go direct to the consumer. Because let's say businesses go completely remote, they're probably not going to be paying up for reconfiguration or installation of a really comprehensive internet. But some of that spending might go out to people's homes because they might need better security, you know, stuff like that.

Yeah, potentially that as well. So just focusing on the home Wi-Fi kind of thing. And I think they're probably going to do that. But the thing that shocks me is that enterprise revenue did so well this year. I think it was up 36%. It was a bit puzzling, yeah. It didn't make any sense to me. And they don't really break it out.

And they don't have a conference call. So I didn't have the answers to why that happened. But if anyone knows, yeah. If anyone knows, let us know. It's a bit of a black box over there. It's a black box that has done well. But you don't have much access into what they're thinking of currently. I'll hit my future growth opportunity. It is Wi-Fi 6. This is the next level of Wi-Fi.

I have no idea what the difference is between 6 and 5. I assume it's some sort of frequency. But every upgrade cycle within any of Ubiquity's market segments gives them this opportunity to win customers from Cisco. So it's going to be a slow process over time. And as Ryan mentioned, the incentives to switch from your current network are huge. And I guess that's the Cisco investment thesis from the 90s and stuff like that. And that's why it's been one of the best performing stocks of all time. But if Ubiquity is going to win, they're going to have to steal market share here. It's not like this is a blue ocean, new market opportunity that they're building themselves. They really have to be better than the current players in there.

And it's a large opportunity, but it's going to be slow over time. All right. Highlights and lowlights. Ian, what do you like and not like about Ubiquity? Well, I just thought of one more highlight that I hadn't thought about before, but it's a little bit of a pushback against your last point that there may be some blue ocean strategy available here with international markets. And we keep hearing about just how much the rest of the world and Latin America and Africa and some of these countries are going to have this rapid Internet growth in their populations. and like we've said this whole thing there's not a whole lot of information on ubiquity so i'm not sure what their strategy is relative to international or how much they sell internationally um i may be able to get a number on that by the end they broke it out in the 10k i forget that this i forget the uh percentages of geographic distribution but it was not mainly it was not

just north america ryan you had a numbers they're in 200 countries they've sold devices in 200 countries yeah yeah i was trying to remember because i remembered seeing that number somewhere but I couldn't remember what it was. So I'll get that by the end of the show. But so that's one potential highlight is just the growth in the internet market across the world. But a couple more highlights. It's almost a 20 bagger since IPO. A lot of that's been in the last two years, but it was still like a four or five bagger, maybe a six bagger before the last two years. So pretty impressive returns and just gives you a little bit more faith in the management team since we don't have a lot of say in the business. Um, and then it also recently had

its best year over year revenue growth rate since 2014. And that was the number reported in late 2020. So they, they've been like the business has gotten rejuvenated a little bit. And I don't like we were talking, we're not sure exactly why that is. Um, and maybe we're, maybe someone would tell us and it would make sense to us, but we just, we don't have a lot of info there. And that leads into my low light is it's just hard to find a lot of info which can both be a good thing and a bad thing um but then we're in and convert uh in addition to that we're entirely dependent on the ceo which also has not been a bad thing recently but um there's just it's things to keep in mind we're always at the the um mercy of management teams when we're investing in public

equities but in this case it's even more so right there's no there's really no investor recourse for any, for any outcomes. And that's been okay for the last 10 years, but something to keep in mind if you're looking to invest in this one. Yeah. Or if Para decides, you know, I'm going to retire, you know, we've done well for the last 20 years, you know, that that's a risk. There's a definite key man risk with investing in ubiquity. Ryan, do you want to do your highlights and lowlights? Yeah, that kind of leads into my, what would have been a potential low light, which is I'm not typically a fan of ceos who own like sports teams or have some huge outside affiliation that's like diverting a lot of their attention but he's been in that business for almost 10 years now and it

hasn't seemed to have any bearings on the business uh or on ubiquity at all at least they didn't name a stadium that's the big red flag yeah i guess that that that's usually worse but um other low lights is it's a really competitive market especially in the enterprise configuration stuff and you are kind of susceptible to reseller relationships um or reseller favoritism to other stuff uh i would i mean highlights it's they've had exceptional execution and they run a really tight ship and robert perrin uh seems to be doing all the right things i don't like the lack of information uh that's something that frustrates me and maybe it's it's kind of google-esque you could say but i i just i prefer to see a lot of information yeah it's it's a i don't know there's

pros and cons because for one if there's so much information out there you kind of think that the stock is just going to be way more efficient but then if there's companies like i mean you probably argue back in the 80s and this is it might be the exception to the rule that berkshire Hathaway probably wasn't giving much information about an extremely complicated ownership structure. There's family members on the board and you're like, what's going on here, guys? Give us some info. You're writing one little letter a year starting whenever in the 80s. But I mean, there are some points here you're kind of left out of any of their strategic plans. Yeah. I mean, there's not even letters. It's just earnings released in 10K. Yeah. And there's no

like, all right, we're moving into this market next year. You know, this is where we're making a lot of headwinds or, uh, headway, you know, stuff like that. Uh, highlights. I mean, same as you guys, I think Robert Parra could be like described as an outsider. Um, if you know that book, you know, the modern outsiders could probably be like Bezos, potentially Daniel Eck, Robert Parra, I think probably lines up there too. Uh, I love their, their buyback, history, their track record with buybacks. It shows that they're not just, and this is a problem with a ton of companies, just buying it no matter what. They're doing it very, very- Methodically.

Methodically. Yeah. They actually have a strategy with it and it seems like they have an investment mindset with it. And a lot of companies honestly buy high, sell low on themselves and don't buy back stock. So I love that too. I also like how they have a plan of having a culture with just a ton of operational efficiencies and then attacking the market with low cost solutions that will work just as well as Cisco's. But with Cisco, you could argue there's a lot of bloat. They probably have thousands and thousands of employees, way more than Ubiquiti, and their pricing is a lot higher. so that is something that it's tough for cisco to kind of like come down to where ubiquity's at and that kind of leads into what i would have was going to have for competitive advantages you'd

argue that cisco would probably have a competitive advantage like ryan mentioned earlier there's a lot of lock-in with this stuff and there's economies of scale and there's high switching costs but ubiquity seems like a prime candidate for the you know innovators dilemma where if they can execute, if they have a better value proposition than Cisco, it's going to be tough for Cisco to disrupt themselves and then get to ubiquity's level. But that's tough. It's a tough market and it's not like Cisco's doing bad. Okay. Best case, worst case. This is our first time doing this. Ian, you want to start? Yep. So my best case, and you're going to get into what leads to this, Ryan, but my best case is that they continue the significant buybacks

like they've done over the past four years. They've bought back about 25% of their stock. And if they continue to pay similar to that, we should see free cash flow continue to increase. And there's a lot of potential for just a lot of big gains in the stock just by reducing the share count. And also, as we mentioned earlier, best case scenario looks like increasing the dividend and perhaps even to a more substantial level than a half percent yield as it is today. the worst case i think is and i think this is this is a in some ways actually a bull case for the stock and it's it's a little too probably optimistic to call this the worst case but i think that this is the type of business that has a floor that it would be bought out by a pe firm

or strategic buyer because of how much concentrated ownership there is and just the um free cash flow that it generates and even if this business were to decline or stop growing its revenue that free cash flow with the huge margin it has should remain and there should be someone who wants to buy this company and like i said i think that provides a little bit of floor on this company all right all right ryan what are your thoughts bull case bear case i mean best case is they keep doing exactly what they're doing right now um they kind of skate where the puck is going they have best-in-class products margins continue to expand incrementally slow or slowly uh and then the top line continues to take up and the the other thing that

And this is part of the bear case for me is that they have, well, I mean, there are some short-term problems that they're going to have, rising commodity prices, any potential tariffs. They've talked about that as a risk. Yeah, I would think those are going away, but that was something over the last few years, that old tariff bill. Yeah, the problem would be, I don't know if I'll get this at a crazy multiple because it seems like the kind of business where, you know how Buffett liked to keep Berkshire close to his estimate of intrinsic value. and if it was if it dropped below he'd go in and buy it that's basically what they've installed here where if it drops to something they consider below intrinsic value they're going to buy it so uh there might not be as many times where it's a screaming buy yeah looking at historical eb to free cash flow we're looking at 11 31 20 15 37 i mean it's a little lumpy uh 20 46 27

And yeah, I guess it's, it's, it's, uh, their free cashflow is a little bit lumpy, but because they have a lot of working capital stuff, but yeah, I mean, like you're saying, this hasn't been training at like 10 times earnings or anything like that. I'm not, yeah. I'm not sure there's a huge, uh, scary worst case scenario here. They already have the lock-in with a lot of customers, uh, that enjoy the products. I can't imagine that there's a lot they could do to ruin that. Yeah.

It's, I mean, that is the bull case is to keep doing what they're doing, but you have to, I think, assume a high rate of revenue growth because I think if you're being honest with yourself, this is something that probably deserves to trade at around a market multiple. I don't know what people think that would be, but you got to kind of, yeah, maybe it's their best in class, a little bit of above. So with the current free cashflow multiple, it's slightly high, but you gotta, I think, assume that they're going to grow revenue at a high rate. Yeah. Maybe they'll be able to juice away buybacks, but I think one of the low lights here, or I guess it's different than low light or, um, worst case scenarios is that the valuation just continues to

stay high, uh, which may not make sense, uh, but you don't have the opportunity to buy back your stock with a good rate of return. Uh, last year they were probably able to buy it back at, I don't know, a lot lower relative to their intrinsic value. I think another part of the bear case could be the... Okay, so there's a lot of stories out there about people in China, in Asia, and in Africa, and I guess Latin America too, not really going the Western route with internet and going straight to mobile. Now, I know they probably have equipment that they're selling to the people that are building out these 3G, 4G, or 5G networks, but that might, say the super optimistic bull case on 5G works out, there might not be the need for at-home

Wi-Fi. That could be a lot of years out, but that's some sort of terminal risk that they'd have as well. I don't know. This one is different because it's not as volatile. It seems so consistent that it seems like a high floor, but what you're worrying about investing here is, okay, what kind of rate of return can I get here? Is it going to be better than the market at this multiple over the next decade or something like that? Ian, you have anything else? Yeah, I was just going to add, as you were talking about international, I promised some numbers. So North America, this is geographic revenue numbers. North America accounted for 45% of revenue. Europe, the Middle East and Africa accounted for 40% of revenue. And

I have to imagine that the vast majority of that was Europe. Asia Pacific accounted for 9% of revenue and south america only uh accounted for six percent of revenue so potentially some um opportunities caveated with what brett was just saying um and those emerging markets yeah and it's you can't just bank i don't think you can just bank on them just continuing to take market share from cisco you know you're not going to just underwrite all right they're going to get all of cisco's revenue of whatever it is 50 billion dollars a year but that is a large opportunity for them to go after and it could help them grow revenue at a double-digit rate for a long, long time. Yeah. Well, and you never know where the technology is going to go either

and whether there's going to be a new company that comes along and starts, you know, someone else in their garage starts a new company and starts taking a piece of the pie as well. So not something I think to be super concerned about, but I think that probably it, because the rest of the business is so steady, that's one of the risks to consider is, is their technology ever going to become less important and also like obsolete is a strong word, but you know, trending towards obsolete, is that ever going to happen? Um, because I think that's one of the things you have to kind of come to terms with investing in this company. Yeah. Yeah. With businesses that are high tech like this, that, that definitely is a risk. All right, let's wrap things up more

or less interested in you go first. As I was kind of alluding to in that last point, i'm less interested not because i think it's a bad business but i think i don't know where this business is going i don't understand the tech well enough i hate even dealing with wi-fi on my own um and so i just i don't understand it well enough it's it's kind of in my too hard pile and the business not because the business is super difficult to understand but just the tech and the secular trends i don't know where it's going where the industry is going yeah that makes sense ryan you're nodding i assume it's similar same for me i'll make it quick i'm less interested it goes in the too hard pile for the same reason ian just

mentioned uh not because the business model is difficult to understand but you don't know what the future looks like uh is there some crazy event that could happen that could make the tech obsolete i don't know um and then also what does competition look like i'm not super up to date on the industry at large. Yeah. The, that'll make sense. I would push back slightly and say the tech obsolete thing seems very, very low probability, but I mean, it's, it's something to consider. I would generally agree with you. I don't think that's, it's kind of weird with this business because it seems so steady. And so that may be the, like the most concerning thing about the business to me, but it on most businesses, it would be like, it's a very

low level of concern relatively um you know what i mean does that make sense yeah yeah all right um i'm more interested i'll make the argument it's not i don't think it's a hard business to understand guys compared to a lot of the other stuff i know it is a hurdle i don't understand it that well but i think it's something that is you know you put in some work it's not biotech i think you can it's understandable um but right now the valuation is high um it's not crazy I love management. I love the lean structure that they're running. I just think that sets up a culture to want to achieve high profitability, to run a lean operation, to keep costs low. And they're able to be the low cost provider and have 33% free cash flow margins. There's something to say about that. Um, I mean, yeah, I'm definitely more interested in this, but there would be some more things to learn about. You'd have to look at management. You really, I mean, without their, any of their

disclosures, you're really making a bet on management. I don't know him well enough right now. And yeah, it really comes down to valuation and stuff like that. You know, there's not many fat pitches in this market and maybe there's no fat pitches in this market right now, this is definitely not a fat pitch at all. All right. We have stock for next week and that is Ryan's turn. So Ryan, what do you got for us? Global E-Online. They are some sort of e-commerce player recommended by Brian Farole. They're not recommended, but he mentioned it to me. So got to take a look at that. Nice. Nice. Is it a new IPO? Something like that? Brian's checking out. I believe so. Yeah. Recent to the public markets. All right. Well, that should be fun.

SaaS company, I'm thinking, maybe. I'm not sure. I really am not. Not sure. All right. Well, that's going to do it for this episode then. Thank you all for listening. I guess this is coming out.

Never mind. We should have mentioned at the beginning of the show that this is pre-recorded by like two or three weeks. But remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Again, thank you all for listening.

We'll see you next week. Starring Tom Hardy, Pierce Brosnan, and Helen Mirren. Do I have to do everything myself? You want to vote? I'll give you a vote! Mobland. New season hits September 18th on Paramount+. Going on vacation? We're here for it. With kids?

Who turn the backseat into a courtroom drama over whose tablet is louder, whose charger is faster, and why watching the same cartoon for the hundredth time is a human right? Yep, we totally have vehicles to handle that. Because whether it's a road trip or a business trip, where your flight's delayed, your phone's at 2% and your dinner is, whatever's open, yeah, here for that too. Enterprise. We're here for it.