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FORM 10-Q

Page
PART I – FINANCIAL INFORMATION
Item 1.Financial Statements (Unaudited)3
Consolidated Balance Sheets3
Consolidated Statements of Operations and Comprehensive Income4
Consolidated Statements of Cash Flows5
Notes to Consolidated Financial Statements6
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations18
Item 3.Quantitative and Qualitative Disclosures About Market Risk26
Item 4.Controls and Procedures27
PART II – OTHER INFORMATION
Item 1.Legal Proceedings28
Item 1A.Risk Factors28
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds47
Item 3.Defaults Upon Senior Securities48
Item 4.Mine Safety Disclosures48
Item 5.Other Information48
Item 6.Exhibits49
Signatures50
September 30, 2017June 30, 2017
Assets
Current assets:
Cash and cash equivalents$631,810
$604,198
Accounts receivable, net of allowance for doubtful accounts of $395 and $440 at September 30, 2017 and June 30, 2017, respectively128,589
140,561
Inventories122,263
142,048
Vendor deposits 69,542
54,082
Prepaid income taxes2,415
2,419
Prepaid expenses and other current assets8,039
9,026
Total current assets962,658
952,334
Property and equipment, net13,946
12,916
Long-term deferred tax assets5,133
5,133
Other long-term assets2,006
2,328
Total assets$983,743
$972,711
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$26,319
$49,008
Income taxes payable7,008
1,707
Debt - short-term14,743
14,743
Other current liabilities58,857
33,030
Total current liabilities106,927
98,488
Long-term taxes payable29,783
28,023
Debt - long-term283,135
241,821
Deferred revenues - long-term2,687
2,615
Total liabilities422,532
370,947
Commitments and contingencies (Note 8)

Stockholders’ equity:
Preferred stock—$0.001 par value; 50,000,000 shares authorized; none issued

Common stock—$0.001 par value; 500,000,000 shares authorized:
78,210,182 and 80,275,965 outstanding at September 30, 2017 and June 30, 2017, respectively78
80
Additional paid–in capital
525
Retained earnings561,133
601,159
Total stockholders’ equity561,211
601,764
Total liabilities and stockholders’ equity$983,743
$972,711
Three Months Ended September 30,
20172016
Revenues$245,868
$204,757
Cost of revenues134,212
106,453
Gross profit111,656
98,304
Operating expenses:
Research and development16,928
14,539
Sales, general and administrative7,665
8,863
Total operating expenses24,593
23,402
Income from operations87,063
74,902
Interest expense and other, net(1,361)(1,099)
Income before provision for income taxes85,702
73,803
Provision for income taxes10,777
2,015
Net income and comprehensive income$74,925
$71,788
Net income per share of common stock:
Basic$0.93
$0.88
Diluted$0.92
$0.86
Weighted average shares used in computing net income per share of common stock:
Basic80,135
81,812
Diluted81,748
83,854

Three Months Ended September 30,

2017
2016
Cash Flows from Operating Activities:


Net income$74,925

$71,788
Adjustments to reconcile net income to net cash provided by operating activities:


Depreciation and amortization1,655

1,541
Provision for inventory obsolescence324

80
(Recovery)/Provision for loss on vendor deposits376

(676)
Stock-based compensation912

927
Other, net103

135
Changes in operating assets and liabilities:


Accounts receivable12,017

(12,925)
Inventories19,421

(22,442)
Vendor deposits(15,836)
843
Prepaid income taxes4

(15)
Prepaid expenses and other assets1,288

807
Accounts payable(22,408)
(9,026)
Income taxes payable7,061

1,842
Deferred revenues1,376

466
Accrued liabilities and other current liabilities15,702

(576)
Net cash provided by operating activities96,920

32,769
Cash Flows from Investing Activities:


Purchase of property and equipment and other long-term assets(2,932)
(1,064)
Net cash (used in) investing activities(2,932)
(1,064)
Cash Flows from Financing Activities:


Proceeds from revolver loan45,000


Repayments of term loan(3,750)
(2,500)
Repurchases of common stock(107,997)
(6,483)
Proceeds from exercise of stock options722

682
Tax withholdings related to net share settlements of restricted stock units(351)
(791)
Net cash (used in) provided by financing activities(66,376)
(9,092)
Net increase in cash and cash equivalents27,612

22,613
Cash and cash equivalents at beginning of period604,198

551,031
Cash and cash equivalents at end of period$631,810

$573,644
Non-Cash Investing and Financing Activities:




Unpaid stock repurchases$8,765

$
Unpaid property and equipment and other long-term assets$178

$413
Three Months Ended September 30,
20172016
Numerator:
Net income and comprehensive income$74,925
$71,788
Denominator:
Weighted-average shares used in computing basic net income per share80,135
81,812
Add—dilutive potential common shares:

Stock options1,538
1,920
Restricted stock units75
122
Weighted-average shares used in computing diluted net income per share81,748
83,854
Net income per share of common stock:
Basic$0.93
$0.88
Diluted$0.92
$0.86
September 30, 2017June 30, 2017
Finished goods$121,567
$141,247
Raw materials10,580
10,361
Provision for inventory obsolescence(9,884)(9,560)
Total$122,263
$142,048
September 30, 2017June 30, 2017
Testing equipment$7,900
$7,587
Computer and other equipment5,877
5,740
Tooling equipment8,249
7,828
Furniture and fixtures1,634
1,528
Leasehold improvements7,878
6,424
Software5,752
5,601
Property and Equipment, Gross37,290
34,708
Less: Accumulated depreciation(23,344)(21,792)
Property and Equipment, Net$13,946
$12,916
September 30, 2017June 30, 2017
Intangible assets, net (1)$416
$437
Other long-term assets1,590
1,891
Total$2,006
$2,328
September 30, 2017June 30, 2017
Accrued expenses$11,283
$9,826
Accrued compensation and benefits2,269
2,467
Warranty accrual4,095
3,601
Deferred revenue - short term6,559
5,254
Customer deposits252
1,905
Reserve for sales returns3,708
3,600
Other payables30,691
6,377
Total$58,857
$33,030
Three Months Ended September 30,
20172016
Beginning balance$3,601
$2,236
Accruals for warranties issued during the period1,912
1,390
Changes in liability for pre-existing warranties during the period(100)
641
Settlements made during the period(1,318)(1,239)
Ending balance$4,095
$3,028
September 30, 2017June 30, 2017
Term Loan - short term$15,000
$15,000
Debt issuance costs, net(257)(257)
Total Debt - short term14,743
14,743
Term Loan - long term57,500
61,250
Revolver - long term226,000
181,000
Debt issuance costs, net(365)(429)
Total Debt - long term$283,135
$241,821
Interest Rate as of
Debt Payment ObligationsSeptember 30, 2017Rate Reset DateReset Rate
$69 Million Revolver2.80%10/3/20172.77%
$18 Million Revolver2.80%10/18/20172.78%
$16 Million Revolver2.82%11/15/2017*
$48 Million Revolver2.82%11/30/2017*
$30 Million Revolver2.82%12/15/2017*
$45 Million Revolver2.82%12/22/2017*
2018 (remainder)2019202020212022ThereafterTotal
Debt payment obligations$11,250
$15,000
$272,250
$
$
$
$298,500
Interest and other payments on debt payment obligations (1)6,395
8,101
5,288



19,784
Total$17,645
$23,101
$277,538
$
$
$
$318,284
Three Months Ended September 30,
2017
2016
Cost of revenues$245
$144
Research and development456
560
Sales, general and administrative211
223
$912

$927
Common Stock Options Outstanding
Number
of Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic
Value
(In thousands)
Balance, June 30, 20171,621,601
$1.76
1.55$81,413
Exercised(70,299)$10.27


Balance, September 30, 20171,551,302
$1.38
1.11$84,764
Vested as of September 30, 20171,551,302
$1.38
1.11$84,764
Vested and exercisable as of September 30, 20171,551,302
$1.38
1.11$84,764
Number of SharesWeighted Average Grant Date Fair Value Per Share
Non-vested RSUs, June 30, 2017180,373
$40.51
RSUs granted20,026
$52.77
RSUs vested(23,460)$36.44
RSUs canceled(3,988)$33.45
Non-vested RSUs, September 30, 2017172,951
$42.64
Service Provider Technology includes our airMAX, EdgeMAX, UFiber and airFiber platforms, as well as embedded radio products and other 802.11 standard products including base stations, radios, backhaul equipment and Customer Premise Equipment (“CPE”). Additionally, Service Provider Technology includes antennas and other products in the 0.9 to 6.0GHz spectrum and miscellaneous products such as mounting brackets, cables and power over Ethernet adapters.
Enterprise Technology includes our UniFi and mFi platforms, including UniFi enterprise Wi-Fi products, Unifi Video products, Unifi switching and routing solutions. Enterprise Technology also includes FrontRow and AmpliFi products and revenues that are attributable to PCS.
Three Months Ended September 30,
20172016
Service Provider Technology$119,915
49%$120,632
59%
Enterprise Technology125,953
51%84,125
41%
Total revenues$245,868
100%$204,757
100%
Three Months Ended September 30,
2017
2016
North America(1)$96,170

39%
$74,165

36%
South America31,053

13%
24,184

12%
Europe, the Middle East and Africa ("EMEA")93,314

38%
81,375

40%
Asia Pacific25,331

10%
25,033

12%
Total revenues$245,868

100%
$204,757

100%
(1)Revenue for the United States was $91.8 million and $70.6 million for the three months ended September 30, 2017 and 2016, respectively.
Percentage of RevenuesPercentage of Accounts Receivable
Three Months Ended September 30,September 30,June 30,
2017
201620172017
Customer A**11%*
Customer B**11%12%
Customer C12%10%17%18%
Rapid customer and community driven product development. We have an active, loyal community built by our customers, service providers, IT professionals, distributors and others that we believe is a sustainable competitive advantage. Our solutions benefit from the active engagement between the Ubiquiti Community and our development engineers throughout the product development cycle, which eliminates long and expensive multistep internal processes and results in rapid introduction and adoption of our products. This approach significantly reduces our development costs and time to market.
Scalable sales and marketing model. We do not currently have, nor do we plan to hire, a direct sales force, but instead utilize the Ubiquiti Community to drive market awareness and demand for our products and solutions. This community-
Self-sustaining product support. The engaged members of the Ubiquiti Community have enabled us to foster a large, cost efficient, highly-scalable and, we believe, self-sustaining mechanism for rapid product support and dissemination of information.
Service Provider Technology includes our airMAX, EdgeMAX, UFiber, and airFiber platforms, as well as embedded radio products and other 802.11 standard products including base stations, radios, backhaul equipment and CPE. Additionally, Service Provider Technology includes antennas and other products primarily in the 0.9 to 6.0 GHz spectrum and miscellaneous products such as mounting brackets, cables and power over Ethernet adapters.
Research and development expenses consist primarily of salary and benefit expenses, including stock-based compensation, for employees and costs for contractors engaged in research, design and development activities, as well as costs for prototypes, purchased Intellectual Property (“IP”), non-recurring engineering milestones, facilities and travel. Over time, we expect our research and development costs to increase as we continue making significant investments in developing new products in addition to new versions of our existing products.
Sales, general and administrative expenses include salary and benefit expenses, including stock-based compensation, for employees and costs for contractors engaged in customer support, marketing and general and administrative activities, as well as the costs of legal expenses, trade shows, marketing programs, promotional materials, bad debt expense, professional services, facilities, general liability insurance and travel. As our product portfolio and targeted markets expand, we may need to employ different sales models, such as building a direct sales force. These sales models would likely increase our costs. Over time, we expect our sales, general and administrative expenses to increase in absolute dollars due to continued growth in headcount, expansion of our efforts to register and defend trademarks and patents and to support our business and operations.
Three Months Ended September 30,
20172016
(In thousands, except percentages)
Revenues$245,868

100 %
$204,757

100 %
Cost of revenues (1)134,212

55 %
106,453

52 %
Gross profit111,656

45 %
98,304

48 %
Operating expenses:





Research and development (1)16,928

7 %
14,539

7 %
Sales, general and administrative (1)7,665

3 %
8,863

4 %
Total operating expenses24,593

10 %
23,402

11 %
Income from operations87,063

35 %
74,902

37 %
Interest expense and other, net(1,361)
(1)%
(1,099)
(1)%
Income before provision for income taxes85,702

35 %
73,803

36 %
Provision for income taxes (2)10,777

4 %
2,015

1 %
Net income and comprehensive income$74,925

30 %
$71,788

35 %
* Less than 1%






(1) Includes stock-based compensation as follows:






Cost of revenues$245



$144


Research and development456



560


Sales, general and administrative211



223


Total stock-based compensation$912



$927


(2) Includes the excess tax benefits resulting from the adoption of ASU 2016-09 Stock Compensation$(575)$(6,820)
Three Months Ended September 30,
20172016
(in thousands, except percentages)
Service Provider Technology$119,915
49%$120,632
59%
Enterprise Technology125,953
51%84,125
41%
Total revenues$245,868
100%$204,757
100%
Three Months Ended September 30,
20172016
North America(1)$96,170
39%$74,165
36%
South America31,053
13%24,184
12%
Europe, the Middle East and Africa ("EMEA")93,314
38%81,375
40%
Asia Pacific25,331
10%25,033
12%
Total revenues$245,868
100%$204,757
100%
(1)Revenue for the United States was $91.8 million and $70.6 million for the three months ended September 30, 2017 and 2016, respectively.
Three Months Ended September 30,
20172016
(In thousands)
Net cash provided by operating activities$96,920
$32,769
Net cash (used in) investing activities(2,932)(1,064)
Net cash (used in) provided by financing activities(66,376)(9,092)
Net increase in cash and cash equivalents$27,612
$22,613
2018 (remainder)2019202020212022ThereafterTotal
Operating leases$4,497
$3,656
$2,822
$1,701
$1,047
$604
$14,327
Debt payment obligations11,250
15,000
272,250



298,500
Interest and other payments on debt payment obligations6,395
8,101
5,288



19,784
Purchase obligations24,944





24,944
Other obligations4,023





4,023
Total$51,109
$26,757
$280,360
$1,701
$1,047
$604
$361,578
varying demand for our products due to the financial and operating condition of our distributors and their customers, distributor inventory management practices and general economic conditions;
shifts in our fulfillment practices including increasing inventory levels as part of efforts to decrease our delivery lead times;
announcements by us or our competitors regarding products, promotions or other transactions;
our ability to rapidly develop and introduce new high performance integrated solutions;
the price and total cost of ownership and return on investment associated with the solutions;
Additionally, any or all of the following could either limit supply or increase costs, directly or indirectly, to us or our contract manufacturers:
reservation of manufacturing capacity at our contract manufactures by other companies, inside or outside of our industry; and
industry consolidation occurring within one or more component supplier markets, such as the semiconductor market.
the burdens of complying with a wide variety of foreign laws and regulations, and the risks of non-compliance;
stringent consumer protection and product compliance regulations that are costly to comply with and may vary from country to country;
limited protection and enforcement regimes for intellectual property rights in some countries;
adversely affect our relationships with our current or future users, customers and suppliers;
requiring a substantial portion of cash flows from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flows to fund our operations and capital expenditures, and pursue business opportunities;
limiting our ability to make strategic acquisitions or causing us to make non-strategic divestitures;
limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; and
limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to competitors who are less highly leveraged or have access to more capital.
difficulties in integrating and managing the operations, technologies and products of the companies we acquire, particularly in light of our lean organizational structure;
our inability to maintain the key business relationships and the brand equity of the businesses we acquire;
our inability to retain key personnel of the acquired business, particularly in light of the demands we place on individual contributors;
uncertainty of entry into markets in which we have limited or no prior experience and in which competitors have stronger market positions;
our responsibility for the liabilities of the businesses we acquire, including those which we may not anticipate; and
our inability to maintain internal standards, controls, procedures and policies, particularly in light of our lean organizational structure.
PeriodTotal Number of Shares PurchasedAverage Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced ProgramsEstimated Remaining Balance Available for Share Repurchases
July 1, 2017 - July 31, 2017
$

$1,254
August 1, 2017 - August 31, 2017
$

$1,254
September 1, 2017 - September 30, 20172,148,832
$54.34
2,148,832
$34,492
Total2,148,832
$54.34
2,148,832
$34,492
Exhibit
Number
Incorporated by
Reference from Form
Incorporated by
Reference from
Exhibit Number
Date FiledFiled Herewith
31.1Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.X
31.2Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.X
32.1Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.X
101.INS(1)XBRL Instance Document
101.SCH(1)XBRL Taxonomy Schema Linkbase Document
101.CAL(1)XBRL Taxonomy Calculation Linkbase Document
101.DEF(1)XBRL Taxonomy Definition Linkbase Document
101.LAB(1)XBRL Taxonomy Labels Linkbase Document
101.PRE(1)XBRL Taxonomy Presentation Linkbase Document
(1)In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections.
UBIQUITI NETWORKS, INC.
Dated: November 9, 2017By:/s/ Robert J. Pera
Robert J. Pera
Chief Executive Officer and Director(Principal Executive Officer)
Dated: November 9, 2017By:/s/ Kevin Radigan
Kevin Radigan
Chief Accounting Officer(Principal Financial Officer)
Exhibit
Number
Incorporated by
Reference from Form
Incorporated by
Reference from
Exhibit Number
Date FiledFiled Herewith
31.1Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.X
31.2Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.X
32.1Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.X
101.INS(1)XBRL Instance Document
101.SCH(1)XBRL Taxonomy Schema Linkbase Document
101.CAL(1)XBRL Taxonomy Calculation Linkbase Document
101.DEF(1)XBRL Taxonomy Definition Linkbase Document
101.LAB(1)XBRL Taxonomy Labels Linkbase Document
101.PRE(1)XBRL Taxonomy Presentation Linkbase Document
(1)In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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