Ubiquiti Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2011 (fiscal first quarter), compared with the three months ended September 30, 2010. Financial amounts below are in U.S. dollars; income-statement and cash-flow amounts are for the quarter, while balance-sheet amounts are as of the stated date.
Business context and performance
Ubiquiti develops networking products for network operators and service providers, primarily selling through distributors. Strong adoption of its AirMax systems drove significant growth. Systems accounted for 83% of quarterly revenue; sales to distributors were 98% of revenue.
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Revenue | $79.2 million | $34.1 million |
| Gross profit / margin | $33.0 million / 42% | $13.6 million / 40% |
| Operating expenses | $5.5 million | $4.2 million |
| Operating income / margin | $27.5 million / 35% | $9.5 million / 28% |
| Net income | $21.5 million | $7.6 million |
| Operating cash flow | $15.7 million | $19.8 million |
Revenue rose 132%, largely from higher unit shipments of AirMax. AirMax revenue increased to $49.8 million from $17.1 million; antennas/other revenue increased to $10.6 million from $2.5 million. Gross margin improved by two percentage points. Management attributed this to revenue growth against a relatively stable non-inventory cost base, as well as product mix.
Profit, cash flow, debt and liquidity
Important earnings distinction: Despite $21.5 million of net income, GAAP net loss attributable to common stockholders was $81.2 million, or $1.30 per share. The principal reason was a $101.9 million non-cash accretion of the preferred stock’s redemption value, not an operating loss. The company also reported non-GAAP net income of $21.7 million and non-GAAP diluted EPS of $0.23, using an adjusted share calculation that treats preferred stock as common stock.
Operating cash flow was $15.7 million, down from $19.8 million. Higher receivables (up $8.3 million) and inventory (up $2.7 million) absorbed cash as the business grew. Capital expenditures were $0.2 million. Cash and cash equivalents declined from $76.4 million at June 30 to $52.6 million at September 30.
At September 30, total assets were $119.3 million and current assets were $115.2 million, compared with current liabilities of $49.5 million. Total reported debt was approximately $68.9 million: $7.0 million short-term and $61.9 million long-term. This included bank borrowing and the remaining preferred-stock-repurchase promissory notes. The East West Bank facilities comprised a $35 million term loan and a $5 million revolving facility; no revolving borrowings are identified in the filing. The term loan bears floating-rate interest and is secured by substantially all assets, subject to exceptions, with financial covenants.
After quarter-end, the October 19 IPO generated $30.5 million of net proceeds for the company. The outstanding preferred shares converted to common stock, and the company used IPO proceeds and existing cash to repay the remaining $34 million promissory notes. The filing says management believed available cash would meet working-capital and capital-expenditure needs for at least 12 months, while noting that $43.2 million of quarter-end cash was held outside the United States and repatriation could trigger significant taxes.
Changes, outlook and material risks
- Capital transactions: In July, Ubiquiti repurchased 12.0 million Series A preferred shares for $108 million, funded partly with cash and partly with promissory notes. It subsequently borrowed under the East West Bank facility and, after quarter-end, repaid the remaining notes using IPO proceeds and cash.
- Management outlook: No specific revenue or earnings guidance was provided. Management expected AirMax and other AirTechnologies products to represent a growing revenue share, and expected 802.11 products to decline as a share. It said gross margins had largely stabilized and did not expect substantial further declines in networking-product margins. Management also expected R&D and SG&A to rise in absolute dollars, including investment in new products, infrastructure and public-company compliance. It cautioned that historic growth rates were not expected to continue.
- Export compliance: Ubiquiti disclosed past export-control and sanctions compliance failures involving possible indirect sales into Iran and export classifications and shipping documentation. The Commerce Department’s export-enforcement office closed its investigation without penalty after issuing a warning letter. The Treasury Department’s OFAC review remained open; potential outcomes could include material fines, export restrictions or criminal referrals. The company had recorded a $1.6 million estimate in fiscal 2010, but could not estimate any additional possible loss.
- Concentration and operating risks: Two distributors generated 18% and 16% of quarterly revenue. The company relied heavily on contract manufacturing, primarily in China, and substantially all products used Atheros chipsets; it had no long-term manufacturing contracts and warned that a supplier disruption could affect delivery and costs. Forecasting and limited visibility into distributor demand and inventories also create volatility risk.
- Other risks and contingencies: Competition, product defects and warranty claims, intellectual-property disputes, foreign operations, and the company’s dependence on its engaged user community could affect results. The company disclosed no material litigation, but noted possible future claims. It reported that disclosure controls were effective at a reasonable-assurance level and that no material change in internal control occurred during the quarter; it also described prior control weaknesses as remediated, while noting that public-company control requirements remained ahead.
Important facts for investors to verify
- Reconcile reported net income with the much larger common-stockholder loss and assess the effect of preferred-stock accretion and the post-quarter conversion on per-share comparisons.
- Confirm the post-IPO debt position, including repayment of the $34 million promissory notes, remaining bank debt, floating interest costs and covenant compliance.
- Monitor OFAC’s unresolved export-compliance review, possible penalties and progress in strengthening distributor controls and compliance procedures.
- Track distributor concentration, channel inventory and receivables, and whether AirMax-led growth and the 42% gross margin are sustainable.
- Assess exposure to overseas cash repatriation taxes and dependence on contract manufacturers and Atheros chipsets.