Ubiquiti Networks, Inc. — Q2 FY2014 Form 10-Q
Reporting period: Three and six months ended December 31, 2013; fiscal year ends June 30. The company develops networking technology for service providers and enterprises. Financial statements are unaudited.
Financial performance and position
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Revenue | $138.4 million | $74.9 million | $268.1 million | $136.4 million |
| Gross profit / margin | $61.0 million / 44% | $30.5 million / 41% | $119.0 million / 44% | $55.5 million / 41% |
| Operating income / margin | $47.1 million / 34% | $20.1 million / 27% | $93.0 million / 35% | $35.9 million / 27% |
| Net income / diluted EPS | $41.8 million / $0.47 | $17.8 million / $0.20 | $82.3 million / $0.92 | $31.0 million / $0.34 |
| Operating cash flow | Not presented by quarter | $79.5 million | $50.5 million |
- Management attributed growth to increased adoption of service-provider and enterprise products, continued wireless infrastructure build-outs, and UniFi expansion. It also said prior-year sales were affected by counterfeit-product concerns and resulting channel inventory buildup.
- Service Provider Technology was 81% of Q2 revenue, up 63% year over year; Enterprise Technology was 19%, up 301%. Enterprise revenue grew particularly quickly but remained the smaller segment.
- Operating cash flow rose year over year, while inventory increased to $32.3 million from $15.9 million at June 30, 2013, primarily as the company built stock to reduce lead times. Investing cash outflow was $2.0 million; financing provided $0.2 million. Cash increased $77.7 million to $305.6 million.
- At December 31, cash was $305.6 million and total debt was approximately $73.6 million, including $5.6 million current and $68.0 million long-term. The company had $20 million available under its revolving facility and reported compliance with debt covenants. Most cash—$285.9 million—was held outside the United States, and repatriation could incur significant taxes.
- Current assets were $382.6 million and current liabilities $73.1 million. No cash dividend was declared; management said it did not anticipate dividends in the foreseeable future.
Changes, outlook, and risks
- Compared with the prior-year quarter, revenue increased 85%, net income more than doubled, and gross margin expanded 3 percentage points. For the six-month period, revenue increased 97% and net income increased to $82.3 million from $31.0 million.
- No numerical revenue or earnings guidance was provided. Management expects research and development spending to rise as it develops new products, and expects absolute SG&A costs to increase with headcount, operations, and intellectual-property work. It believes cash, operating cash flow, and available borrowing capacity will meet working-capital and capital-expenditure needs for at least 12 months.
- Sales remain highly channel-dependent: distributors accounted for 98% of revenue, and one customer represented 17% of Q2 revenue. Management cautioned that limited visibility into distributor demand and inventory makes forecasting difficult.
- Export compliance: OFAC’s review of the company’s prior export-control and Iran-related disclosures remained open. OEE had closed its investigation without penalty in 2011; OFAC could still impose fines, export restrictions, or other penalties. The company had recorded a $1.6 million estimated exposure but said additional loss was reasonably possible and not estimable.
- Litigation: A shareholder class action concerning alleged statements about counterfeit products remained pending, with a dismissal decision outstanding; the company could not estimate potential loss. The company also described ordinary-course IP and other legal risks. Its anti-counterfeiting suit against Kozumi ended in a 2013 settlement and permanent injunction.
- Other exposures: Risks include counterfeit products, competition, reliance on contract manufacturers and Qualcomm Atheros chipsets, supply and logistics disruptions, product defects and warranty claims, and uncertain distributor demand. The company accrued $3.6 million for warranty obligations. It disclosed a related-party aircraft lease with the CEO’s company at $5,000 per flight hour, plus third-party crew and service costs; the audit committee approved it.
- Management concluded disclosure controls were effective at the reasonable-assurance level as of December 31, 2013; no material change in internal control over financial reporting was reported for the quarter.
Key facts for investors to verify
- Whether rapid revenue growth is sustained and reflects end-customer demand rather than distributor inventory changes; monitor customer and distributor concentration.
- Inventory growth, product obsolescence provisions, lead times, and the company’s ability to convert reported earnings into cash.
- Any development or quantified outcome in the pending OFAC review and shareholder litigation, including whether recorded reserves remain adequate.
- Cash accessibility and tax consequences of repatriating overseas funds, as well as debt amortization, interest-rate exposure, and covenant compliance.
- Future margins and operating costs as the enterprise business expands, product investment rises, and supply-chain and counterfeit risks evolve.
- Terms, utilization, and total costs of the CEO-related aircraft lease.