Ubiquiti Networks, Inc. — Q2 FY2015 Form 10-Q
Reporting period: Three and six months ended December 31, 2014; fiscal year ends June 30. Amounts below are in U.S. dollars. The filing identifies the registrant as Ubiquiti Networks, Inc.
Business context and results
The company develops networking technology for service providers and enterprises. It operates as one reportable segment and sells nearly all products through distributors; sales to distributors represented 99% of revenue in the quarter and 98% in the six-month period.
| Metric | Three months ended Dec. 31, 2014 | Six months ended Dec. 31, 2014 |
|---|---|---|
| Revenue | $153.1 million; up 11% year over year | $303.2 million; up 13% |
| Gross profit / margin | $69.0 million / 45% | $130.1 million / 43% |
| Operating income / margin | $50.7 million / 33% | $94.4 million / 31% |
| Net income / margin | $46.3 million / 30%; diluted EPS $0.52 | $84.0 million / 28%; diluted EPS $0.94 |
| Operating cash flow | Not separately reported for the quarter | $79.6 million |
| Cash and cash equivalents | $388.6 million at Dec. 31 | $347.1 million at June 30, 2014 |
| Debt | $72.3 million, classified long-term | $72.3 million at June 30, 2014 |
Financial position and material changes
- For the six months, net income increased 2% year over year, while revenue grew 13%. Gross margin fell to 43% from 44%, and operating margin declined to 31% from 35%.
- Enterprise Technology revenue rose 98% in the quarter to $53.4 million and 54% for six months to $96.2 million, primarily on product expansion and UniFi adoption. Service Provider Technology revenue fell 11% in the quarter to $99.7 million, but was broadly flat for six months.
- Management attributed weaker service-provider demand outside North America to political and economic instability in some regions. North America revenue increased to 35% of quarterly sales from 24% a year earlier; EMEA contributed 39%.
- Six-month operating cash flow was approximately level with the prior year ($79.6 million versus $79.5 million). Investing used $8.4 million, mainly for capital expenditures, including machinery and equipment for a product-development and prototyping facility in China. Financing used $29.7 million, including $15.0 million for dividends and $15.0 million for share repurchases.
- Current assets were $536.6 million and current liabilities $70.3 million. Approximately $361.6 million of cash was held by non-U.S. subsidiaries; repatriation would incur significant tax liabilities.
- The $72.3 million debt is under a $150 million senior secured revolving facility expiring May 2019. It is secured by substantially all company and subsidiary assets other than intellectual property and is subject to leverage and interest-coverage covenants.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said existing cash, operating cash flow and available borrowing capacity should meet working-capital and capital-expenditure needs for at least 12 months; future capital needs depend on growth, product development, launches, market acceptance and economic conditions.
- Management expects research and development spending to rise as it invests in new and existing products. R&D increased 60% in the quarter and 71% for six months, reflecting higher headcount, broader development activity and one-time intellectual-property costs.
- Six-month cost of revenue included a non-recurring $5.5 million termination fee for cancellation of a purchase commitment. Management’s non-GAAP reconciliation excludes this charge and stock-based compensation; six-month non-GAAP net income was $90.5 million versus GAAP net income of $84.0 million.
- Key disclosed risks include limited visibility into distributor and end-market demand, reliance on a limited number of distributors and contract manufacturers, supply constraints (including a single-source component supplier), inventory forecasting and obsolescence, intense competition, product defects and cybersecurity threats, and political instability in certain markets.
- An appeal is ongoing in the Ninth Circuit concerning shareholder class-action litigation dismissed with prejudice in 2014. The company said it could not estimate any possible loss. It also reported approximately $17.0 million of unrecognized tax benefits and no expected significant change over the next 12 months.
- The company declared its first annual dividend of $0.17 per share, paid in October 2014, and repurchased approximately 530,000 shares during the quarter for $15.0 million. About $60.0 million remained under the one-year repurchase authorization as of Dec. 31.
Most important facts for investors to verify
- Whether enterprise growth, particularly UniFi adoption, can offset falling or uneven service-provider demand and sustain margins.
- Distributor sell-through and inventory levels, customer concentration, and exposure to political and economic disruption in international markets.
- Cash availability and potential tax cost of repatriating the substantial overseas cash balance; borrowing availability and compliance with credit-facility covenants.
- The sustainability of cash generation after capital spending, dividends and repurchases, and the assumptions behind the company’s non-GAAP adjustments.
- Developments in the shareholder-litigation appeal and tax examinations, including potential financial effects not currently estimable.