Ubiquiti Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2019, Ubiquiti’s fiscal 2020 first quarter (filed November 8, 2019). The filing describes a business developing networking technology for service providers, enterprises and consumers, with sales primarily through distributors.
Financial performance
| Metric | Q1 FY2020 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $323.3 million | $282.9 million | +14% |
| Gross profit / margin | $151.4 million / 47% | $131.6 million / 47% | Profit +15%; margin flat |
| Operating income / margin | $120.7 million / 37% | $99.6 million / 35% | +21% |
| Net income / margin | $98.1 million / 30% | $85.7 million / 30% | +15% |
| Diluted EPS | $1.43 | $1.16 | +23% |
| Operating cash flow | $119.7 million | $93.9 million | +27% |
Enterprise Technology revenue grew 17% to $207.4 million; Service Provider Technology grew 10% to $115.9 million. North America revenue rose 24% to $148.0 million, while EMEA was nearly flat at $125.8 million. The United States accounted for $141.9 million.
Gross margin remained at 47%: favorable product mix offset higher tariffs and indirect costs. R&D rose 11% to $20.3 million; sales, general and administrative expense fell 24% to $10.5 million, primarily due to lower professional fees. The effective tax rate increased to 15% from 12%, partly reflecting higher estimated GILTI inclusion.
Cash, debt and liquidity
- Cash and cash equivalents were $119.7 million at September 30, down from $238.1 million at June 30. Short- and long-term investments totaled $52.0 million; cash plus investments was approximately $171.7 million.
- Operating cash flow was $119.7 million. Investing activities provided $31.6 million, mainly from net investment sales, partly offset by $15.0 million in aircraft deposits. Financing used $269.7 million, including $396.6 million of share repurchases and $20.7 million of dividends, partly offset by net borrowing.
- Credit-facility borrowings totaled $648.8 million principal ($645.5 million net of unamortized issuance costs on the balance sheet): $493.8 million term loan and $155.0 million revolver. The company had $545.0 million of revolver capacity available. Facility maturity is January 2023; borrowings bear floating rates. The company reported a 3.79% term-loan rate at quarter-end and required leverage and interest-coverage covenants.
- Total assets were $750.6 million and total liabilities were $990.0 million, producing a $239.4 million stockholders’ deficit. Current assets were $600.8 million versus current liabilities of $227.3 million.
Material changes, outlook and risks
- Revenue growth was led by Enterprise Technology and broad North American growth. Management attributed Enterprise growth to product expansion and broader adoption of UniFi. Sales to distributors represented 97% of revenue, creating exposure to distributor ordering and inventory patterns.
- Management said existing cash, operating cash generation, investments and available credit were expected to cover working capital, planned repurchases, dividends and capital expenditures for the next 12 months, but cautioned that assumptions could prove incorrect. No revenue or earnings guidance was provided.
- The company adopted ASC 842 leases on July 1, recognizing approximately $23.3 million of operating lease assets and $24.0 million of liabilities at adoption; there was no opening-retained-earnings adjustment and no material effect on results or cash flows.
- U.S. tariffs of 15%–25% on most Ubiquiti products imported from China had affected margins; additional 15% tariffs were scheduled for December 15, 2019. Management warned that tariff and trade developments could further affect results.
- Tax exposures include approximately $32.0 million of unrecognized tax benefits and $4.9 million accrued interest. An IRS draft proposed an approximately $50 million tax adjustment, excluding interest and penalties, for fiscal 2015–2016; the company disputed the position and had not recorded an additional reserve. Hong Kong tax examinations for 2010–2016 continued; the company had deposited $20.0 million and expected a refund, but acknowledged an adverse outcome could be material.
- Legal and regulatory matters include an ongoing SEC investigation; patent litigation stayed pending review proceedings; and shareholder class-action and derivative matters with proposed settlements still subject to documentation and court approval. Insurers had agreed to fund the proposed class-action settlement and attorneys’ fees; the derivative proposal included governance changes.
- Capital allocation was significant: the company repurchased 3.64 million shares for $396.6 million in the quarter and paid a $0.30-per-share dividend. After quarter-end it repurchased a further 995,495 shares for $119.6 million and approved a new $200 million repurchase program. It intended to pay dividends of at least $0.30 per share for the remainder of FY2020, subject to board approval.
- Aircraft-related commitments are notable: deposits totaled $57.0 million toward an aircraft expected in 2020, with $7.5 million still due. The company also reported $0.5 million of quarterly expense under an aircraft lease with an entity owned by the CEO.
Key facts for investors to verify
- Whether revenue growth and distributor sell-through continue, given limited visibility into end-customer demand and concentration in distribution channels.
- How tariffs, supply-chain costs and product mix affect gross margins, and whether the scheduled tariff changes took effect.
- Debt levels, variable-rate exposure, covenant headroom and the effect of further borrowing or capital returns on liquidity.
- Developments and potential financial consequences of the IRS and Hong Kong tax matters, SEC investigation, and pending litigation settlements.
- Execution and governance implications of the aircraft purchase, related-party aircraft lease, and substantial share repurchases and dividends.