Ubiquiti Networks, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter 2013, the three months ended September 30, 2012. Comparative figures are for the three months ended September 30, 2011 unless otherwise noted. Financial statement amounts below are in U.S. dollars; millions abbreviated as “m.”
Business context and results
Ubiquiti develops networking products for network operators and service providers, relying largely on distributors and outsourced manufacturing. Systems products generated 83% of revenue in both periods. Management attributed the quarter’s revenue decline principally to counterfeit products and distributor channel-inventory buildup, with airMAX most affected.
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Revenue | $61.5m | $79.2m |
| Gross profit / gross margin | $25.0m / 40.7% | $33.0m / 41.7% |
| Operating expenses | $9.2m | $5.5m |
| Operating income / margin | $15.8m / 25.6% | $27.5m / 34.7% |
| Net income / net margin | $13.2m / 21.4% | $21.5m / 27.2% |
| GAAP diluted EPS | $0.14 | $(1.30) |
| Non-GAAP diluted EPS | $0.15 | $0.23 |
| Cash from operating activities | $23.7m | $15.7m |
Revenue fell 22% year over year. airMAX revenue declined to $32.1m from $49.8m; new-platform revenue increased to $15.6m from $2.7m, partially offsetting that decline. Gross margin narrowed by about 1 percentage point. R&D expense rose 40% to $4.7m, and sales, general and administrative expense more than doubled to $4.5m, reflecting product-development expansion, anti-counterfeiting legal costs, marketing and trade-show activity, and bad-debt expense.
The 2011 GAAP EPS comparison is affected by a $102.7m preferred-stock cumulative dividend and accretion charge that reduced income attributable to common stockholders, despite reported net income of $21.5m. Non-GAAP EPS excludes stock-based compensation, net of tax, and treats preferred shares as common shares for the comparative calculation.
Cash flow, balance sheet and financing
- Cash and cash equivalents were $132.5m at September 30, up $10.4m from June 30. Operating cash flow was $23.7m; investing activities used $2.3m, including capital expenditure and intangible-asset purchases; financing activities used $10.9m.
- Accounts receivable fell to $60.9m from $75.6m, contributing to operating cash flow. Inventory was $7.6m. Total assets were $211.2m and current liabilities were $45.0m.
- Total debt was approximately $49.9m ($5.0m short-term and $44.8m long-term), versus $29.6m at June 30. The August 2012 loan agreement provides a $50m term facility and a $50m revolving facility; the company borrowed an additional $20.8m under the term facility. The revolving facility was available through August 7, 2015; term debt matures August 7, 2017. The facilities carry financial covenants and are secured by substantially all company assets, excluding intellectual property.
- The company repurchased 3.17m shares for $31.3m during the quarter at an average $9.83 per share, under a program authorizing up to $100m. Approximately $68.7m remained authorized at September 30.
- Management said existing cash should meet working-capital and capital-expenditure needs for at least 12 months. About $118.1m of cash was held in foreign subsidiaries; repatriation would incur significant tax liabilities.
Outlook, commentary and material risks
- No specific revenue or earnings guidance was provided. Management expects R&D and SG&A to rise over time as it develops products, protects intellectual property, grows headcount, and supports public-company obligations. It expects new platforms to become a larger share of sales and embedded-radio products to decline as a share.
- Management cautioned that sales are difficult to forecast because distributor inventory and end-market demand are not readily visible. Distributors accounted for 97% of revenue, and one distributor represented 15% of quarterly revenue. Management does not expect historical growth rates to continue.
- Counterfeiting and associated customer uncertainty, channel inventory, distributor concentration, competition, product execution, and reliance on contract manufacturers and Qualcomm Atheros chipsets are key operating risks. The company reported active anti-counterfeiting litigation.
- OFAC continued reviewing the company’s voluntary disclosure relating to past export-control and sanctions compliance issues, including distributor sales into Iran. OEE had closed its investigation with a warning letter and no penalty; OFAC could still impose fines, restrict exports, or refer the matter for criminal prosecution. The company had recorded a $1.6m estimated exposure, but could not estimate additional potential losses.
- Two shareholder class-action complaints filed in September 2012 seek damages and other relief; the company disputes the allegations and could not estimate potential loss. The filing also describes purchase commitments with contract manufacturers for which potential cancellation liabilities were not quantified, and $8.4m of unrecognized tax benefits.
- Management assessed disclosure controls as effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether counterfeit-product measures and channel-inventory normalization restore sales, particularly in airMAX, and whether new-platform growth continues.
- Distributor sell-through, inventory levels, credit quality, and concentration, given limited visibility and the quarter’s revenue decline.
- Progress and outcomes in the OFAC review and shareholder litigation, including any changes to recorded exposures or potential penalties.
- Debt balances, borrowing costs, covenant compliance, and the effect of continued share repurchases on liquidity and leverage.
- The availability of Qualcomm Atheros chipsets and the company’s ability to manage outsourced production, product quality, and supply-chain commitments.
- Cash accessibility and tax consequences associated with funds held outside the United States.