Ubiquiti Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2020; comparisons are with the periods ended December 31, 2019. Ubiquiti develops networking technology for service providers, enterprises and consumers. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended Dec. 31, 2020 | Year-over-year change | Six months ended Dec. 31, 2020 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $479.4 million | +56% | $953.0 million | +51% |
| Gross profit / margin | $230.7 million / 48.1% | Margin +1.0 percentage point | $458.8 million / 48.1% | Margin +1.2 percentage points |
| Operating income / margin | $190.8 million / 39.8% | Income +70% | $380.8 million / 40.0% | Income +64% |
| Net income | $159.7 million | +86% | $316.2 million | +72% |
| Diluted EPS | $2.54 | From $1.32 | $5.00 | From $2.75 |
| Operating cash flow | Not separately provided | — | $308.9 million | From $243.3 million |
Quarterly and six-month growth came from both product categories. Enterprise Technology generated 69% of quarterly revenue and grew 57%; Service Provider Technology grew 53%. For the six-month period, Enterprise grew 54% and Service Provider grew 44%. EMEA was the fastest-growing disclosed region, up 81% for the quarter and 61% for six months.
Cash, debt and capital allocation
- Cash and cash equivalents were $189.1 million at December 31, versus $142.6 million at June 30, 2020. Six-month cash increased $46.5 million.
- Six-month investing cash outflow was $10.9 million, principally $11.9 million for property, equipment and other long-term assets. Financing cash outflow was $251.5 million, including $152.6 million of share repurchases, $50.6 million of dividends and net debt repayments.
- Gross facility borrowings were $607.5 million: $462.5 million under the term facility and $145.0 million drawn on the revolver. The company reported $555.0 million of revolver availability. Facilities mature January 17, 2023 and require a maximum leverage ratio of 3.25:1 and minimum interest coverage of 3.5:1. Term-loan interest was 1.90% at quarter-end.
- The company repurchased $152.6 million of shares during the six months and had $385.2 million remaining under its $500 million authorization. It paid $0.80 per share in dividends during the half; a further $0.40-per-share dividend was announced for February 2021.
- Total liabilities exceeded assets, leaving a stockholders’ deficit of $181.8 million at December 31. Management said cash, operating cash flow and facility availability should cover working capital, planned repurchases, dividends and capital expenditures for the next 12 months, subject to assumptions and business conditions.
Changes, outlook and material risks
- Revenue growth outpaced cost growth, lifting gross margin to 48.1% from 47.1% in the quarter and 46.9% for the six-month comparison. Management attributed the improvement to revenue growth, product mix and lower indirect costs as a share of sales, partly offset by higher shipping costs and, for the half, tariffs.
- Operating expenses grew in dollars but declined as a share of revenue. Lower net interest expense also supported earnings.
- No numerical revenue or earnings guidance was provided. Management expects R&D and SG&A spending to rise over time and cautioned that historical gross margins may not indicate future margins.
- COVID-19 had not significantly disrupted employee productivity, but supply-chain interruptions continued and the company incurred added costs to expedite components. Management warned that further supply, demand, economic or operational effects remain difficult to predict.
- Supply commitments are substantial: recorded purchase-obligation liability was $7.6 million; additional component purchase obligations were estimated at $149.8 million to $617.6 million depending on order timing. Other obligations totaled $57.9 million. Inventory was $233.1 million, down from $285.9 million at June 30.
- Tax matters are significant contingencies. Hong Kong authorities sought an additional $67.8 million deposit relating to the 2015 tax year; the company protested and had already deposited $35.5 million, which it expects to be refunded after the audit. Separately, an IRS proposed adjustment could create about $50 million of incremental tax liability, excluding interest and penalties; the company has not recorded a reserve for either matter and believes its positions are supportable.
- In January 2021, the company learned that certain third-party-hosted IT systems were improperly accessed and source code and access credentials were compromised. It had received a threat to release the materials, had not paid, and said it could not gauge the precise impact, though it did not then expect a material adverse effect. The company was taking remediation steps.
- Two of three patents asserted in Vivato litigation had been invalidated and the decision was affirmed on appeal; the remaining case was stayed pending a court hearing. Ubiquiti separately settled its Cambium Networks litigation in December 2020; the case was dismissed in January 2021.
- Other key risks include reliance on distributors and a limited supplier/manufacturer base, tariffs on U.S. imports from China, product defects and cybersecurity threats, variable-rate debt exposure, and the founder-CEO’s majority voting control. Management reported disclosure controls effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How the January 2021 systems intrusion and compromised source code or credentials develop, including any operational, customer, legal or security consequences.
- Progress and potential cash exposure from the Hong Kong tax audit and IRS proposed adjustment, including whether reserves or deposits change.
- Whether component availability, elevated shipping costs, tariffs and large purchase commitments affect product delivery, inventory or margins.
- Ability to service and refinance the $607.5 million of gross facility borrowings before the January 2023 maturity while maintaining covenant compliance and funding dividends and repurchases.
- Whether rapid revenue growth persists, particularly given distributor concentration and limited visibility into end-customer demand and channel inventory.