Ubiquiti Inc. (Ubiquiti Networks, Inc.) — Form 10-Q
Reporting period: Three months ended September 30, 2017, the first quarter of fiscal 2018. The company develops networking technology for service providers, enterprises and consumers. Comparisons below are with the three months ended September 30, 2016, unless stated otherwise.
Financial performance and position
| Metric | Q1 FY2018 | Prior-year quarter | Change / context |
|---|---|---|---|
| Revenue | $245.9 million | $204.8 million | Up 20% |
| Gross profit / margin | $111.7 million / 45% | $98.3 million / 48% | Margin down 3 percentage points |
| Operating income / margin | $87.1 million / 35% | $74.9 million / 37% | Income up 16%; margin down 2 points |
| Net income | $74.9 million | $71.8 million | Up 4% |
| Diluted EPS | $0.92 | $0.86 | Up 7% |
| Operating cash flow | $96.9 million | $32.8 million | Higher largely alongside more favorable working-capital movements |
| Cash and cash equivalents | $631.8 million | $604.2 million at June 30, 2017 | Quarter-end balance; $597.3 million held outside the U.S. |
| Debt | $298.5 million principal | $256.0 million principal at June 30, 2017 | Includes $226.0 million drawn on revolver; carrying value was approximately $297.9 million |
Enterprise Technology revenue rose 50% to $126.0 million, representing 51% of revenue, with management citing product expansion and broader UniFi adoption. Service Provider Technology revenue declined 1% to $119.9 million. Revenue was geographically diversified by ship-to destination: North America 39%, EMEA 38%, South America 13% and Asia Pacific 10%. Sales to distributors accounted for 99% of revenue.
Gross margin fell as product mix shifted and, to a lesser extent, shipping, overhead and direct labor costs increased. R&D expense rose 16% to $16.9 million as headcount and development activity increased; sales, general and administrative expense declined 14% to $7.7 million, primarily due to lower advisory-services costs.
Liquidity, cash flow and capital allocation
- Cash increased $27.6 million during the quarter. Operating activities provided $96.9 million; investing used $2.9 million; financing used $66.4 million.
- Financing included $108.0 million of cash share repurchases, $45.0 million of revolver borrowings and $3.8 million of term-loan principal repayments. The company repurchased 2.15 million shares for $116.8 million, including $8.8 million unpaid at quarter-end.
- At September 30, the credit agreement had a $300 million revolving facility and $100 million term facility, maturing March 2020. It required a maximum leverage ratio of 2.50:1.00 and minimum liquidity of $250 million. On October 31, 2017, the revolving commitment was increased to $425 million; other material terms were described as substantially unchanged.
- Management said existing cash, operating cash flow and available credit should meet working-capital and capital-expenditure needs for at least 12 months. Repatriating offshore cash could result in material taxes. The filing does not provide a numeric earnings or revenue forecast.
Outlook, risks and unusual items
- Management expects R&D spending to increase over time as it develops new products and versions of existing products. It also cautions that results fluctuate and that quarterly results are not necessarily indicative of future performance.
- Key disclosed business risks include dependence on distributors and limited visibility into end-customer demand and channel inventory; competition and product-transition risks; reliance on contract manufacturers and limited-source components; and product quality, cybersecurity, intellectual-property and international regulatory risks.
- The company reported $28.8 million of unrecognized tax benefits and $2.1 million of accrued interest related to uncertain tax matters. The quarterly effective tax rate was 12.6%, versus 2.7% a year earlier, chiefly because the prior-year period included a larger discrete share-based compensation tax benefit.
- A proposed $6.8 million settlement of a shareholder class action, funded largely by insurers, was subject to court approval. The company also described Synopsys, Vivato and shareholder actions; it said it could not estimate possible losses for the identified ongoing litigation.
- The filing reiterates a 2015 business-email-compromise fraud involving $46.7 million in transfers. The company had recovered $16.7 million in total through fiscal 2016; it reported no further recoveries through September 30, 2017 and said additional recoveries were remote and not assured.
- Disclosure controls were assessed as effective at September 30, 2017, and no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether enterprise-product growth continues and whether the service-provider business stabilizes, while monitoring product mix and gross-margin recovery.
- How much of operating cash flow reflects sustainable earnings versus quarter-to-quarter working-capital changes.
- Use of the expanded revolving facility, debt repayment capacity, covenant headroom and the tax cost of accessing offshore cash.
- Share-repurchase pace and funding: the quarter’s repurchases materially exceeded operating cash flow, while revolver borrowing increased.
- Developments and potential financial exposure in the shareholder settlement and the Synopsys, Vivato, Gericke and Klein matters.
- Changes in uncertain tax positions, including the $28.8 million unrecognized tax benefits, and any cash-tax effects from repatriation or tax examinations.