Business context and reporting period
Ubiquiti Networks, Inc. develops networking products for service providers and enterprises, selling primarily through distributors. This Form 10-Q covers the three months ended September 30, 2014—the first quarter of fiscal 2015—and compares results with the three months ended September 30, 2013. Figures are unaudited.
Financial performance and position
| Metric | Q1 FY2015 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $150.1 million | $129.7 million | +16% |
| Gross profit / margin | $61.1 million / 40.7% | $58.0 million / 44.7% | Margin down 4.0 percentage points |
| Operating income / margin | $43.6 million / 29.1% | $45.9 million / 35.4% | Income down 5% |
| Net income / diluted EPS | $37.7 million / $0.42 | $40.5 million / $0.45 | Income down 7% |
| Operating cash flow | $46.9 million | $51.9 million | Down $4.9 million |
Service Provider Technology revenue rose 14% to $107.3 million; Enterprise Technology revenue rose 21% to $42.8 million. North America revenue increased to $53.6 million, while EMEA revenue declined to $50.6 million. Distributors accounted for 98% of revenue.
Cash and cash equivalents were $391.0 million at quarter-end, up from $347.1 million at June 30, 2014. Investing cash outflow was $3.5 million, primarily capital expenditures; financing cash flow was positive $0.4 million. The company reported $72.3 million of long-term debt and $82.0 million of current liabilities. Management said available cash, operating cash flow and borrowing availability should cover working capital and capital expenditure needs for at least 12 months. However, $330.8 million of cash was held in foreign subsidiaries, and repatriation would incur significant taxes.
Material changes, outlook and notable items
- Gross margin fell mainly because cost of revenue included a non-recurring $5.5 million charge for terminating a purchase commitment. The company’s non-GAAP presentation, which excludes this charge and stock-based compensation after tax effects, reported net income of $43.4 million and diluted EPS of $0.48, versus $41.2 million and $0.46 a year earlier.
- Research and development expense increased 86% to $11.7 million, reflecting higher headcount, broader development activity and one-time purchased IP costs. Management expects R&D and, over time, sales, general and administrative expenses to rise as the business expands.
- The company announced a new annual cash dividend policy and recorded its first dividend of $0.17 per share, totaling $15.0 million; it was paid October 28, 2014. Future dividends are subject to the board’s annual determination and the company’s financial position.
- The May 2014 Wells Fargo agreement provides a $150 million senior secured revolving facility, with an option to request up to $50 million more. $72.3 million was outstanding; the facility matures in May 2019 and is subject to leverage and interest-coverage covenants. A sustained 200-basis-point rate increase was estimated to add about $1.4 million to pretax expense over 12 months.
- The OFAC export-compliance matter was settled for $504,000 in March 2014. A shareholder class-action case was dismissed with prejudice, but plaintiffs appealed; the company could not estimate any possible loss. Unrecognized tax benefits were $15.7 million, substantially all of which would affect tax expense if recognized.
- Management identified no material change in internal control over financial reporting and concluded disclosure controls were effective. The filing gives no specific revenue or earnings guidance.
Key facts investors should verify
- Whether revenue growth continues and reflects end-customer demand rather than distributor ordering or inventory movements; the company reported limited visibility into end-market sales.
- Whether margins recover after the $5.5 million termination charge, and whether higher R&D investment produces successful products and returns.
- How much foreign-held cash is practically available for U.S. needs after potential repatriation taxes, and the terms, availability and covenant headroom of the credit facility.
- Progress of the shareholder-litigation appeal, the exposure associated with uncertain tax positions, and any developments in export compliance.
- Ongoing exposure to distributor concentration, contract manufacturers and limited component suppliers, including the potential for supply disruption, product defects, or excess and obsolete inventory.