Ubiquiti Inc. — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended December 31, 2022; fiscal second quarter. Amounts below are in U.S. dollars. Ubiquiti develops networking technology for service providers, enterprises and consumers and reports one operating segment.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Revenue | $493.6M | $431.6M | $991.7M | $890.5M |
| Gross profit / margin | $197.6M / 40.0% | $174.7M / 40.5% | $368.9M / 37.2% | $384.2M / 43.1% |
| Operating income / margin | $145.2M / 29% | $125.4M / 29% | $267.2M / 26% | $287.1M / 32% |
| Net income | $112.2M | $103.6M | $205.4M | $235.8M |
| Diluted EPS | $1.86 | $1.66 | $3.40 | $3.78 |
| Operating cash flow | — | — | $2.3M | $196.1M |
- Quarterly revenue grew 14% year over year, principally from Enterprise Technology, up 26% to $417.4M. Service Provider Technology fell 25% to $76.2M.
- For the six-month period, revenue rose 11%, but net income declined 13%. The lower year-to-date gross margin reflected product mix and higher component and shipping costs.
- Cash from operations was sharply lower year over year, mainly because inventory increased $388.1M and accounts receivable increased $32.3M. Inventory stood at $644.1M, compared with $262.4M at June 30, 2022.
- Cash and cash equivalents were $159.5M at December 31, 2022, versus $136.2M at June 30. Current assets were $1,044.7M and current liabilities $514.6M. Investing cash outflow was $13.5M; financing provided $34.4M, including net borrowing under the credit facilities.
- Debt carrying value was $894.3M, comprising $456.3M outstanding under the term facility and $440.0M under the revolver before debt issuance costs. The revolver had $260M available. Borrowing rates were approximately 6.04%–6.13% and variable; management estimated a sustained 200-basis-point increase would add about $17.9M to pretax expense over 12 months.
- Total liabilities exceeded assets, leaving a stockholders’ deficit of $248.0M. The company paid $72.5M in dividends during the six months; there were no share repurchases. The board approved a further $0.60-per-share dividend after quarter-end.
Outlook, risks and contingencies
- No quantified revenue, earnings or margin guidance is provided. Management said cash, operating cash generation and available credit should be sufficient for working capital, dividends, repurchases and capital expenditures over the next 12 months, while noting that this depends on assumptions and may require greater reliance on credit.
- Supply constraints persisted. The company increased inventory, paid higher component and shipping costs, and modified designs to use alternate suppliers. Management warned that elevated inventory raises the risk of excess, obsolete inventory and write-downs. Estimated additional component and supply purchase obligations ranged from $440.6M to $916.5M, depending on order timing.
- Management cited U.S. tariffs of 7.5%–25% on most U.S.-imported products from China as an ongoing pressure on results and margins. Russia-Ukraine conflict and China-Taiwan tensions had not materially affected operations as of the filing date, but future effects were uncertain.
- Tax matters include $33.5M of unrecognized tax benefits and a Hong Kong tax audit. The company had deposited $60.3M with Hong Kong’s tax authority and expects a refund, but disclosed that an adverse outcome could materially affect results and financial condition. In an IRS dispute concerning fiscal 2015–2016, the company estimated approximately $50M of incremental tax, excluding possible interest and penalties, and recorded no reserve; the matter was pending in U.S. Tax Court.
- The company reported no pending or threatened litigation it believed would materially adversely affect its financial statements. In the Vivato patent litigation, the remaining case was stayed pending patent review; the company said it could not estimate a possible loss.
- Disclosure controls were judged effective as of December 31, 2022; no material changes in internal control over financial reporting were reported for the quarter.
Most important facts for investors to verify
- Whether the large inventory build converts into sales, and whether inventory obsolescence provisions or write-downs increase.
- Whether component availability and shipping costs improve, and whether gross margins stabilize after the year-to-date decline.
- How operating cash flow develops as inventory, receivables and payables change; the six-month $2.3M inflow was far below net income.
- Debt balances, variable interest costs, covenant headroom and the company’s capacity to sustain dividends alongside working-capital needs.
- Developments in the IRS and Hong Kong tax matters, including potential cash exposure beyond recorded liabilities and deposits.