Ubiquiti Networks, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2013, the first quarter of fiscal 2014. Comparisons are with the three months ended September 30, 2012 unless noted. Amounts are in U.S. dollars.
Business context and results
Ubiquiti develops networking products for service providers and enterprises. It sells primarily through distributors and relies on contract manufacturers and a community-led sales, product-development and support model. Distributors accounted for 98% of quarterly revenue.
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $129.7 million | $61.5 million | +111% |
| Gross profit / margin | $58.0 million / 45% | $25.0 million / 41% | Margin +4 percentage points |
| Operating income / margin | $45.9 million / 36% | $15.8 million / 26% | |
| Net income / margin | $40.5 million / 31% | $13.2 million / 21% | |
| Diluted EPS | $0.45 | $0.14 | |
| Operating cash flow | $51.9 million | $23.7 million | |
| Cash and equivalents, period-end | $279.7 million | $132.5 million | Year-over-year comparison |
Revenue mix and material changes
- Service Provider Technology revenue was $94.2 million, up 83%, and 73% of total revenue, compared with $51.6 million and 84% a year earlier.
- Enterprise Technology revenue was $35.5 million, up 258%, and 27% of total revenue, compared with $9.9 million and 16%. Management cited product expansion and further UniFi adoption.
- Management attributed growth to broader adoption in both markets and said counterfeit products and related customer uncertainty had hurt sales and contributed to distributor channel inventory buildup in the prior-year quarter.
- Gross margin increased to 45% from 41%, which management attributed to revenue growth, scale benefits and product mix. Operating expenses rose in dollars but declined as a share of revenue.
- Sales outside the United States represented 72% of revenue. Europe, the Middle East and Africa generated 41% of revenue.
Financial position, debt and liquidity
- At September 30, 2013, total assets were $343.4 million, current assets $334.9 million, and current liabilities $67.8 million.
- Debt totaled approximately $74.9 million: $5.0 million current and $69.9 million long-term. The company repaid $1.25 million of term-loan principal in the quarter. A $50 million revolving facility had $20 million available to borrow.
- Cash increased $51.9 million during the quarter. Investing cash outflow was $0.5 million and financing cash inflow was $0.5 million. Operating cash flow benefited in part from increases in accounts payable and accrued liabilities and taxes payable.
- Cash exceeded debt by approximately $204.8 million, but $253.8 million of cash was held outside the United States; management noted repatriating it would incur significant tax liabilities.
- The company said existing cash, operating cash flow and available borrowing capacity should cover working-capital and capital-expenditure needs for at least 12 months. It reported compliance with its credit-facility covenants.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management expects research and development and sales, general and administrative expenses to increase in absolute dollars as the business expands.
- OFAC continued reviewing the company’s voluntary export-compliance disclosure. The company had recorded a $1.6 million expense in fiscal 2010, but said additional losses were reasonably possible and could not be estimated. Potential consequences include fines, export restrictions or criminal referrals; the earlier OEE investigation had closed without penalty.
- A shareholder class action alleging misleading statements related to counterfeit products was pending; the company’s motion to dismiss decision was pending, and the company said it could not estimate possible losses.
- Warranty accruals rose to $3.2 million from $2.9 million at June 30, 2013. The filing also describes a prior Rocket Titanium product recall due to a manufacturing issue, which management said was rectified.
- Other principal risks include limited visibility into distributor demand and inventory, reliance on a small number of distributors and contract manufacturers, dependence on Qualcomm Atheros chipsets, counterfeit products, competition, intellectual-property claims, and export-control compliance. A 200-basis-point sustained increase in floating borrowing rates was estimated to reduce pretax income by more than $1.0 million over 12 months.
- Management reported disclosure controls were effective at the reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and improved gross margin persist, particularly given management’s explanation that prior-year sales were depressed by counterfeit products and channel inventory.
- Distributor sell-through, inventory levels and concentration: two customers each represented 10% of current-quarter revenue.
- Any outcome or further disclosure from OFAC regarding potential export-compliance penalties, and whether the recorded $1.6 million accrual remains adequate.
- Developments in the shareholder class action and any resulting financial exposure.
- Cash location and repatriation costs, debt repayment requirements, covenant compliance and floating-rate exposure.
- Supply continuity, warranty experience, and the company’s ability to control counterfeit activity and protect intellectual property.