Ubiquiti Networks, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended December 31, 2011; comparisons are with the corresponding 2010 periods. The filing is for Ubiquiti Networks, Inc. (the request metadata shortens the name to Ubiquiti Inc.). Financial statements are unaudited and amounts below are in U.S. dollars.
Business context
Ubiquiti develops networking products for network operators and service providers, with most manufacturing outsourced. It reports one operating segment and sells primarily through distributors. Systems, especially its AirMax platform, drove growth; management also cited newer enterprise WLAN and video-surveillance offerings.
Financial performance
| Metric | Three months ended Dec. 31, 2011 | Year-over-year | Six months ended Dec. 31, 2011 | Year-over-year |
|---|---|---|---|---|
| Revenue | $87.8 million | Up 95% | $167.0 million | Up 111% |
| Gross profit / margin | $37.3 million / 42% | Margin up from 40% | $70.3 million / 42% | Margin up from 40% |
| Operating income / margin | $31.2 million / 35% | Up from $13.7 million / 30% | $58.7 million / 35% | Up from $23.1 million / 29% |
| Net income | $24.7 million | Up from $11.0 million | $46.2 million | Up from $18.6 million |
| GAAP diluted EPS attributable to common stockholders | $0.16 | Up from $0.06 | $(0.88) | Down from $0.12 |
| Operating cash flow | Not separately shown | — | $20.0 million | Down from $38.0 million |
Six-month GAAP net income was positive, but common-stockholder EPS was negative because of preferred-stock dividends and a large, one-time preferred-stock accretion charge associated with the pre-IPO period. The preferred shares converted to common stock immediately before the October 2011 IPO. Management also presented non-GAAP diluted EPS of $0.27 for the quarter and $0.50 for the six months; these figures exclude stock-based compensation, net of tax, and use a different share-count treatment.
Cash flow and liquidity: Cash and cash equivalents were $64.8 million at December 31, versus $76.4 million at June 30, 2011. Six-month investing cash use was $1.1 million, mainly capital expenditures; financing cash use was $30.4 million, including the preferred-stock repurchase. Current assets were $141.5 million and current liabilities $41.1 million. The balance sheet reported $33.1 million of debt, including $7.0 million current and $26.1 million long term. Management said existing cash should cover working capital and capital expenditure needs for at least 12 months.
Material changes versus the prior comparable period
- Revenue growth was led by systems: quarterly systems revenue rose to $75.4 million from $37.1 million; AirMax represented 60% of quarterly revenue, versus 57% a year earlier.
- Gross margin rose two percentage points to 42%, which management attributed to revenue growth over a largely fixed cost base and supply-chain cost management.
- Operating expenses increased in dollars but declined as a share of revenue. Research and development was $3.7 million for the quarter and SG&A was $2.4 million.
- Operating cash flow fell despite higher net income, principally as accounts receivable increased $22.2 million and inventory increased $3.8 million over the six-month period.
- The company completed its IPO in October 2011, raised $30.5 million net from its own share issuance, and converted all outstanding preferred stock into common stock. It also repurchased $108.0 million of preferred shares and entered a bank term loan facility.
- Distributor A accounted for 21% of quarterly revenue. Distributors accounted for 96% of quarterly sales, increasing the company’s exposure to channel demand and collections.
Outlook, risks and unusual items
- Outlook: No specific revenue or earnings guidance is provided. Management expects AirMax and other systems to continue gaining share; it expects embedded-radio revenue to decline relative to systems and operating expenses to rise in absolute dollars as the business expands.
- Export compliance: The Commerce Department’s OEE closed its investigation with a warning letter and no penalty. The Treasury Department’s OFAC review remained open. The company had recorded a $1.6 million expense for estimated exposure; it said additional losses could be higher but could not be reasonably estimated. Potential consequences include fines, export restrictions, or criminal referral.
- Supply and customer concentration: The company relies on a limited number of distributors, contract manufacturers, component suppliers, and Qualcomm Atheros chipsets. It disclosed no long-term manufacturing agreements and identified forecasting, inventory, and production-capacity risks.
- Overseas cash and taxes: $52.8 million of cash was held outside the United States; management said repatriating it would incur significant tax liabilities. The company reported $3.0 million of unrecognized tax benefits.
- Debt and commitments: The East West Bank term loan has floating-rate exposure, financial covenants, and security over substantially all assets, subject to exceptions. The company also reported $6.984 million of operating-lease payments under its contractual-obligations table, including a new San Jose headquarters lease.
- Other risks: Management highlighted competitive and technology risks, reliance on the Ubiquiti Community for awareness and support, international regulatory exposure, intellectual-property claims, and the costs of growth and public-company compliance. Management concluded disclosure controls were effective at a reasonable-assurance level; no material internal-control changes were reported for the quarter.
Important facts for investors to verify
- Track distributor sell-through, channel inventory, receivable collections, and the continuing concentration in Distributor A.
- Monitor OFAC’s decision and any change to the $1.6 million export-compliance accrual or its possible range of exposure.
- Review cash-flow conversion, receivables, inventory, and the amount and tax cost of cash held overseas.
- Check debt balances, floating interest rates, covenant compliance, and the company’s capacity to service debt.
- Assess AirMax and new-product demand, gross-margin sustainability, and dependence on key manufacturers and Qualcomm Atheros.
- Reconcile the filing’s six-month net-income figures: the financial statements report $46.184 million, while an MD&A table displays $46.164 million. The financial statements are used above; the discrepancy should be checked against the filed statements.