Ubiquiti Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended December 31, 2019; comparable periods ended December 31, 2018. Amounts are in U.S. dollars.
Business context
Ubiquiti develops networking products for service providers, enterprises and consumers. It operates as one reportable segment and sells primarily through distributors; distributor sales represented 96% of revenue in the six-month period. Enterprise Technology includes UniFi and AmpliFi products; Service Provider Technology includes airMAX, EdgeMAX, UFiber and airFiber products.
Key financial results
| Metric | Three months ended Dec. 31, 2019 | Year-over-year change | Six months ended Dec. 31, 2019 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $308.3 million | +0.3% | $631.6 million | +7% |
| Gross profit / margin | $145.1 million / 47% | Margin +1 percentage point | $296.5 million / 47% | Margin +1 percentage point |
| Operating income / margin | $112.0 million / 36% | Up from $91.7 million / 30% | $232.7 million / 37% | Up from $191.3 million / 32% |
| Net income | $85.8 million | +10% | $184.0 million | +13% |
| Diluted EPS | $1.32 | Up from $1.09 | $2.75 | Up from $2.25 |
| Operating cash flow | Not separately presented | — | $243.3 million | Up from $144.6 million |
Product and geography: Enterprise Technology revenue rose 9% in the quarter and 12% for six months, while Service Provider Technology revenue fell 14% and 2%, respectively. North America six-month revenue increased 16%; EMEA declined 5%. The United States generated $263.6 million of six-month revenue, up from $226.8 million.
Balance sheet and liquidity at December 31, 2019: Cash and cash equivalents were $100.0 million, with $27.6 million of investments, compared with cash of $238.1 million and investments of $101.5 million at June 30, 2019. Current assets were $529.4 million and current liabilities $204.7 million. Gross principal debt was $642.5 million, comprising $487.5 million of term debt and $155.0 million drawn on the revolver; $545.0 million of revolving capacity remained available. The company reported $639.5 million of debt net of issuance costs. Management said available liquidity and expected operating cash flows should cover needs for the next 12 months.
Cash uses and capital returns: Six-month financing cash outflow was $436.8 million, including $538.0 million of share repurchases and $40.1 million of dividends. Repurchases reduced shares outstanding to 64.9 million from 69.5 million at June 30; stockholders’ equity was a deficit of $292.1 million. Operating cash flow benefited from net income and working-capital inflows, including lower inventory and higher payables, partly offset by tax payments. Investing cash flow was positive $55.3 million, including net proceeds from investments and $15.0 million of aircraft deposits.
Material changes and unusual items
- Quarterly revenue was nearly flat, but operating income improved partly because the prior-year comparable period included an $18.0 million litigation settlement expense. No such expense was recorded in fiscal 2020’s first half.
- Gross margin improved to 47%, primarily on favorable product mix; tariffs, higher indirect costs and increased inventory reserves partly offset the improvement. Six-month inventory-obsolescence provision was $4.5 million, versus $0.9 million a year earlier.
- Research and development expense increased 20% for the quarter and 16% for six months, reflecting higher employee-related and development costs. SG&A declined, primarily due to lower professional fees.
- Interest expense and other, net increased to $12.1 million for the quarter and $16.7 million for six months. The company recorded a $5.0 million impairment of a cost-method investment during the quarter.
- The company adopted the new lease accounting standard on July 1, 2019, recognizing operating lease right-of-use assets and liabilities; it reported no material effect on earnings or cash flows.
Outlook, risks and contingencies
- No revenue or earnings guidance is provided. Ubiquiti expects R&D spending to increase over time and says tariffs have affected margins. On January 22, 2020, the U.S. announced a reduction of certain List 4A tariffs from 15% to 7.5%; the company cautioned that tariff effects and future trade actions remain uncertain.
- The Board approved a $0.30-per-share dividend payable in February 2020. The company intends to pay dividends of at least $0.30 per share for the remainder of fiscal 2020, subject to Board approval.
- The IRS issued an Acknowledgement of Facts proposing an approximately $50 million additional tax liability, excluding potential interest and penalties, for fiscal 2015 and 2016. Ubiquiti disputes the proposed adjustment and has not recorded a reserve; an adverse outcome could materially affect results and financial condition. Hong Kong tax examinations are also ongoing; the company has deposited $20 million and expects a refund, but cannot assure a favorable outcome.
- An SEC investigation is ongoing, and the company cannot predict its timing or outcome. Proposed settlements of securities class and derivative actions remained subject to court approval at filing; insurers agreed to fund the proposed class-action settlement and related attorneys’ fees. The Vivato patent case remained stayed, and the company said it could not estimate a possible loss.
- Purchase commitments with contract manufacturers were estimated at $142.8 million to $191.2 million, depending on order timing; $4.7 million was accrued for component commitments. Other obligations included a $7.5 million aircraft payment due. Aircraft deposits totaled $57.0 million for an aircraft expected to be delivered during calendar 2020; the CEO is expected to use it for business and personal travel.
- Principal risks include limited visibility into end-customer demand and distributor inventory, distributor and customer concentration, reliance on contract manufacturers and key component suppliers, product competition and defects, cybersecurity, and geopolitical and public-health disruptions. The filing specifically identifies the novel coronavirus outbreak as a potential supply-chain and business risk.
Important facts for investors to verify
- Whether Enterprise Technology growth can offset declining Service Provider Technology revenue and weak EMEA trends, given limited visibility into distributor inventories and end demand.
- How gross margins respond to tariffs, product mix, inventory reserves and the announced tariff reduction.
- The resolution and potential financial exposure from the IRS proposal, Hong Kong tax audit, SEC investigation and pending shareholder settlements.
- Debt repayment capacity and interest-rate exposure alongside continued repurchases and dividends; a 200-basis-point increase in floating rates was estimated to add about $13.0 million to pretax expense over 12 months.
- Execution and cash implications of aircraft commitments, contract-manufacturer purchase obligations, and the company’s dependence on concentrated distributors and suppliers.