NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1—BUSINESS AND BASIS OF PRESENTATION
Business
— Ubiquiti Networks, Inc. and its wholly owned subsidiaries (collectively, “Ubiquiti” or the “Company”) develop high performance networking technology for service providers, enterprises, and consumers globally.
The Company operates on a fiscal year ending June 30. In this Quarterly Report, the fiscal year ending
June 30, 2019
is referred to as “fiscal
2019
” and the fiscal year ended
June 30, 2018
is referred to as “fiscal
2018
”.
Basis of Presentation
— The Company's consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) related to interim financial statements based on applicable Securities and Exchange Commission (“SEC”) rules and regulations. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. These consolidated financial statements reflect all adjustments, which are, in the opinion of the Company, of a normal and recurring nature and those necessary to state fairly the statements of financial position, results of operations and cash flows for the dates and periods presented. The
June 30, 2018
balance sheet was derived from the audited financial statements as of that date. All significant intercompany transactions and balances have been eliminated.
These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended
June 30, 2018
, included in its Annual Report on Form 10-K, as filed with the SEC on
August 24, 2018
(the “Annual Report”). The results of operations for the
three months ended
September 30, 2018
are not necessarily indicative of the results to be expected for any future periods.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies are disclosed in its audited consolidated financial statements for the year ended
June 30, 2018
, included in the Annual Report. Except as noted below, there have been no changes to the Company’s significant accounting policies as discussed in the Annual Report.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which has been codified as Accounting Standards Codification 606 (“ASC 606”). ASC 606 requires the Company’s revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. ASC 606 outlines a five-step model to make the revenue recognition determination and requires enhanced financial statement disclosures. We adopted the updated guidance in the first quarter of fiscal 2019 using the modified retrospective method, which did not have a material impact on the consolidated financial statements. Additional information and disclosures required by this new standard are contained in note 3 of Notes to Consolidated Financial Statements.
Recent Accounting Pronouncements Not Yet Effective
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” (“ASU 2016-02”), which establishes a new lease accounting model for lessees. The updated guidance requires an entity to recognize assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. In addition, interest on lease liabilities is to be recognized separately from the amortization of right-of-use assets in the statement of operations. Further, payments of the principal portion of lease liabilities are to be classified as financing activities while payments of interest on lease liabilities and variable lease payments are to be classified as operating activities in the statement of cash flows. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements, which provides an additional (and optional) transition method whereby the new lease standard is applied at the adoption date and recognized as an adjustment to retained earnings. The amendments have the same effective date and transition requirements as the new lease standard. We expect the adoption of the issued lease guidance will result in an increase in the assets and liabilities on our consolidated balance sheets, and we are currently evaluating the extent of this increase.
NOTE 3—REVENUES
On July 1, 2018, we adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) to all contracts not completed as of the date of adoption using the modified retrospective method. As a result of our adoption of this standard, there was no adjustment recorded to the opening balance of retained earnings as there was no cumulative effect of adoption of the new revenue standard. As we elected the modified retrospective method of adoption, comparative information from prior periods has not been restated and continues to be reported under the ASC 605, “Revenue Recognition”. Accordingly, the adoption of the new revenue standard did not have a material impact to our results of operations or financial position, equity of cash flows as of the adoption date or for the three months ended September 30, 2018.
The Company has made the following accounting policy elections and elected to use certain practical expedients, as permitted by the FASB, in applying Topic 606: (1) the Company accounts for amounts collected from customers for sales and other taxes, net of related amounts remitted to tax authorities; (2) the Company does not adjust the promised amount of consideration for the effects of a significant financing component because, at contract inception, the Company expects the period between the time when the Company transfers a promised good or service to the customer and the time when the customer pays for that good or service will be one year or less; (3) the Company expenses costs to obtain a contract as they are incurred if the expected period of benefit, and therefore the amortization period, is one year or less; (4) the Company accounts for shipping and handling activities that occur after control transfers to the customer as a fulfillment cost rather than an additional promised service and these fulfillment costs fall within cost of revenue; and (5) the Company does not disclose the transaction price allocated to unsatisfied performance obligations when the original expected contract duration is one year or less.
Revenue is primarily generated from the sale of hardware and management tools (products), as well as the related implied post contract services (“PCS”). The Company determines revenue recognition through the five step model under ASC 606 which includes i) identification of the contract, or contracts, with a customer, ii) identification of the performance obligation in the contract, iii) determination of the transaction price, iv) allocation of the transaction price to the performance obligation within the contract, v) recognition of revenue when, or as, a performance obligation is satisfied.
Contracts and Performance Obligations
The Company accounts for a contract with a customer when there is an approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of the consideration is probable. The Company's distinct performance obligations consist mainly of transferring control of its products identified in the contracts, purchase orders or invoices and implied PCS services.
Transaction price and allocation to performance obligations
Transaction prices are typically based on contracted rates. Generally, payment is due from customers within 60 days of the invoice date and the contracts do not have significant financing components or include extended payment terms. The Company is directly responsible for fulfilling its performance obligations in contracts with customers and does not rely on another party to fulfill its promise. We use observable prices to determine the stand-alone selling price of our performance obligation related to our products, and we utilize a cost plus margin approach to estimate the stand-along selling price of our implied PCS obligation. When our contracts contain multiple performance obligation, we allocate the transaction price based on the estimated standalone selling prices of the promised products or services underlying each performance obligation.
The expected costs associated with our base warranties continue to be recognized as an expense when the products are sold and is not considered a separate performance obligation.
Revenue Recognition
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Revenue is recognized when obligations under the terms of a contract with our customers are satisfied; generally, this occurs with the transfer of control of our products and PCS to our customers. Transfer of control to the customer for products generally occurs at the point in time when products have been shipped to our customer by third party carriers as this represents the point in time when the customer has a present obligation to pay and physical possession including title and risk of loss have been transferred to the customer. Revenue for PCS is recognized ratably over time over the estimated period for which implied PCS services will be delivered.
Disaggregation of Revenue
See note 14 of Notes to Consolidated Financial Statements “Segment Information” for disaggregation of revenue by product category and geography.
Contract Balances
The timing of revenue recognition, billing and cash collections results in billed accounts receivable, deferred revenue primarily attributable to PCS and customer deposits on the Consolidated Balance Sheets. Accounts receivable are recognized in the period the Company’s right to the consideration is unconditional. Our contract liabilities consist of advance payments (Customer deposits) as well as billing in excess of revenue recognized primarily related to deferred revenue. We classify customer deposits as a current liability, and deferred revenue as a current or noncurrent liability based on the timing of when we expect to fulfill these remaining performance obligations. The current portion of deferred revenue is included in other current liabilities and the noncurrent portion is included in other long-term liabilities in our consolidated balance sheets.
As of
September 30, 2018
, the Company’s customer deposits were
$0.7 million
.
As of
September 30, 2018
, the Company’s deferred revenue, included in current liabilities and noncurrent liabilities, was
$10.5 million
and
$5.6 million
, respectively.
Variable Consideration
The Company does provide for rights of return to certain customers on product sales and therefore records a provision for returns related to this variable consideration based upon its historical returns experience with these customers. The Company also provides certain customers with discounts that are recorded as a reduction of revenue in the period the related product revenue is recognized and are reflected as a reduction of outstanding accounts receivable. The Company’s contracts with customers generally do not contain other forms of variable consideration, however when additional variable consideration is included, the Company estimates the amount of variable consideration and determines what portion of that, if any, has a high probability of significant subsequent revenue reversal, and if so, that amount is excluded from the transaction price.
These reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contract. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company adjusts these estimates, which would affect net product revenue and earnings in the period such variances become known.
NOTE 4—FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to the accounting guidance for fair value measurements and its subsequent updates, fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The accounting guidance establishes a three-tier fair value hierarchy that requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. A financial instrument's classification within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:
Level 1
—Quoted prices in active markets for identical assets or liabilities;
Level 2
—inputs other than the quoted prices in active markets, that are observable either directly or indirectly;
Level 3
—Unobservable inputs based on the Company's own assumption.
The Company records securities available-for-sale at fair value on a recurring basis. We classify our investments within Level 1 or 2 because they are valued using either quoted market prices or inputs other than quoted prices which are directly or indirectly observable in the market, including readily-available pricing sources for the identical underlying security which may not be actively traded.
Our fixed income available-for-sale securities consist of high quality, investment grade securities from diverse issuers. The valuation techniques used to measure the fair value of our marketable securities incorporate bond terms and conditions, current performance data, proprietary pricing models, real time quotes from contributing dealers, trade prices and, other market data.
The Company began investing cash in various fixed income available-for-sale securities in the first quarter of fiscal 2019, therefore no comparative tables as of the fiscal year ending June 30, 2018 have been disclosed.
The Company held no Level 3 financial instruments as of
September 30, 2018
.
The following tables summarize the Company's financial instruments' adjusted cost, gross unrealized gains and losses, and fair value by significant investment category as of
September 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
Adjusted Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Cash and Cash Equivalents (1)
|
|
Short-Term Investments
|
|
Long-Term Investments
|
|
Level 1
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
Money market funds
|
$
|
50,896
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
50,896
|
|
|
$
|
50,896
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Subtotal
|
$
|
50,896
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
50,896
|
|
|
$
|
50,896
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
$
|
5,553
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,553
|
|
|
$
|
—
|
|
|
$
|
5,553
|
|
|
$
|
—
|
|
|
Corporate securities
|
113,724
|
|
|
8
|
|
|
(143
|
)
|
|
113,589
|
|
|
595
|
|
|
69,299
|
|
|
43,695
|
|
|
U.S agency securities
|
7,069
|
|
|
—
|
|
|
(7
|
)
|
|
7,062
|
|
|
—
|
|
|
7,062
|
|
|
—
|
|
|
US Government Bonds
|
22,878
|
|
|
—
|
|
|
(4
|
)
|
|
22,874
|
|
|
3,772
|
|
|
14,352
|
|
|
4,750
|
|
|
Subtotal
|
$
|
149,224
|
|
|
$
|
8
|
|
|
$
|
(154
|
)
|
|
$
|
149,078
|
|
|
$
|
4,367
|
|
|
$
|
96,266
|
|
|
$
|
48,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
200,120
|
|
|
$
|
8
|
|
|
$
|
(154
|
)
|
|
$
|
199,974
|
|
|
$
|
55,263
|
|
|
$
|
96,266
|
|
|
$
|
48,445
|
|
(1) Cash, which is included in cash and cash equivalents on the consolidated balance sheets, includes securities that have a maturity of three months or less at the date of purchase. The carrying amount approximates fair value, primarily due to the short maturity of cash equivalent instruments.
During the three months ended
September 30, 2018
, we did not reclassify any amount to earnings from accumulated other comprehensive loss related to unrealized gains or losses.
The following table represents the Company's marketable securities that had been in continuous unrealized loss position for less than 12 months and for 12 months or greater as of
September 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
Continuous Unrealized Losses
|
|
|
Less than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
Fair Value of marketable securities
|
$
|
133,930
|
|
|
$
|
—
|
|
|
$
|
133,930
|
|
|
Unrealized Loss
|
$
|
(154
|
)
|
|
$
|
—
|
|
|
$
|
(154
|
)
|
Based on evaluation of securities that have been in a continuous loss position, we did not recognize any other-than-temporary impairment charges during the three months ended
September 30, 2018
.
The following table represents the adjusted costs and fair value of investment by contractual maturity as of
September 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-For-Sale
|
|
|
Adjusted Cost
|
|
Fair Value
|
|
Due within 1 year
|
$
|
151,603
|
|
|
$
|
151,529
|
|
|
Due after 1 year through 5 years
|
48,517
|
|
|
48,445
|
|
|
Total
|
$
|
200,120
|
|
|
$
|
199,974
|
|
For certain of the Company’s financial instruments, other than those presented in the disclosures above, including cash, accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate fair value due to their short maturities.
As of
September 30, 2018
and
June 30, 2018
, the Company had debt associated with its Second Amended & Restated Credit Agreement (See Note 8), which is carried at historical cost. The fair value of the Company’s debt disclosed below was estimated based on the current rates offered to the Company for debt with similar terms and remaining maturities and was a Level 2 measurement. As of
September 30, 2018
and
June 30, 2018
, the fair value of the Company's debt carried at historical cost was
$481.3 million
and
$487.5 million
, respectively.
NOTE 5—EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
Numerator:
|
|
|
Net income
|
$
|
85,703
|
|
|
$
|
74,925
|
|
|
Denominator:
|
|
|
Weighted-average shares used in computing basic earnings per share
|
73,774
|
|
|
80,135
|
|
|
Add—dilutive potential common shares:
|
|
|
|
|
Stock options
|
118
|
|
|
1,538
|
|
|
Restricted stock units
|
71
|
|
|
75
|
|
|
Weighted-average shares used in computing diluted net income per share
|
73,963
|
|
|
81,748
|
|
|
Net income per share of common stock:
|
|
|
Basic
|
$
|
1.16
|
|
|
$
|
0.93
|
|
|
Diluted
|
$
|
1.16
|
|
|
$
|
0.92
|
|
The Company excludes potentially dilutive securities from its diluted net income per share calculation when their effect would be anti-dilutive to net income per share amounts. The following table summarizes the total potential shares of common stock that were excluded from the diluted per share calculation as including them would have been anti-dilutive for the period (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
Restricted stock units
|
1
|
|
|
—
|
|
NOTE 6—BALANCE SHEET COMPONENTS
Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
Finished goods
|
$
|
134,854
|
|
|
$
|
96,747
|
|
|
Raw materials
|
5,072
|
|
|
5,473
|
|
|
Total
|
$
|
139,926
|
|
|
$
|
102,220
|
|
Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
Testing equipment
|
$
|
8,843
|
|
|
$
|
8,577
|
|
|
Computer and other equipment
|
6,465
|
|
|
6,265
|
|
|
Tooling equipment
|
9,807
|
|
|
9,594
|
|
|
Furniture and fixtures
|
1,897
|
|
|
1,890
|
|
|
Leasehold improvements
|
10,183
|
|
|
10,106
|
|
|
Software
|
6,067
|
|
|
6,032
|
|
|
Property and Equipment, Gross
|
43,262
|
|
|
42,464
|
|
|
Less: Accumulated depreciation
|
(29,791
|
)
|
|
(28,136
|
)
|
|
Property and Equipment, Net
|
$
|
13,471
|
|
|
$
|
14,328
|
|
Other Long-term Assets
Other long-term assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
Intangible assets, net
(1)
|
$
|
3,423
|
|
|
$
|
460
|
|
|
Other long-term assets
|
3,306
|
|
|
3,331
|
|
|
Total
|
$
|
6,729
|
|
|
$
|
3,791
|
|
(1) - Accumulated amortization was
$1.4 million
and $
1.3 million
as of
September 30, 2018
and
June 30, 2018
, respectively.
Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
Accrued expenses
|
$
|
15,471
|
|
|
$
|
18,241
|
|
|
Accrued compensation and benefits
|
3,240
|
|
|
3,091
|
|
|
Warranty accrual
|
4,094
|
|
|
3,840
|
|
|
Deferred revenue — short-term
|
10,455
|
|
|
8,509
|
|
|
Customer deposits
|
698
|
|
|
770
|
|
|
Reserve for sales returns
|
1,269
|
|
|
1,219
|
|
|
Other payables
|
25,455
|
|
|
32,943
|
|
|
Total
|
$
|
60,682
|
|
|
$
|
68,613
|
|
Other Long Term Liabilities
Other long-term liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
Deferred Revenue — long-term
|
$
|
5,635
|
|
|
$
|
4,275
|
|
|
Other long-term liabilities
|
1,688
|
|
|
1,567
|
|
|
Total
|
$
|
7,323
|
|
|
$
|
5,842
|
|
NOTE 7—ACCRUED WARRANTY
The Company offers warranties on certain products and records a liability for the estimated future costs associated with potential warranty claims. The warranty costs are reflected in the Company’s consolidated statements of operations and comprehensive income within cost of revenues. The warranties are typically in effect for
twelve months
from the distributor’s purchase date of the product. The Company assesses the adequacy of its accrued warranty liabilities and adjusts the amounts as necessary based on historical experience factors and changes in future estimates. Historical factors include product failure rates, material usage and service delivery costs incurred in correcting product failures. In certain circumstances, the Company may have recourse from its contract manufacturers for replacement cost of defective products, which it also factors into its warranty liability assessment.
Warranty obligations, included in other current liabilities, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
Beginning balance
|
$
|
3,840
|
|
|
$
|
3,601
|
|
|
Accruals for warranties issued during the period
|
1,699
|
|
|
1,912
|
|
|
Changes in liability for pre-existing warranties during the period
|
126
|
|
|
(100
|
)
|
|
Settlements made during the period
|
(1,571
|
)
|
|
(1,318
|
)
|
|
Ending balance
|
$
|
4,094
|
|
|
$
|
4,095
|
|
NOTE 8—DEBT
On January 17, 2018, Ubiquiti Networks, Inc., the Cayman Borrower and certain subsidiaries entered into an amended and restated credit agreement (the "Second Amended & Restated Credit Agreement") with Wells Fargo, the other financial institutions named as lenders therein, and Wells Fargo as administrative agent for the lenders, that provides for a
$400 million
senior secured revolving credit facility (the "Revolving Facility") and a
$500 million
senior secured term loan facility (the
"Term Facility", together with the Revolving Facility, the "Facilities"), with an option to request increases in the amounts of such credit facilities by up to an additional
$300 million
in the aggregate (any such increase to be in each lender's sole discretion). The maturity date of the Facilities is January 17, 2023.
The Term Facility was fully drawn at the closing of the Second Amended & Restated Credit Agreement, of which
$354.5 million
and
$68.9 million
was used to repay the prior revolver facility and term facility, respectively. The Company incurred
$4.6 million
of debt issuance costs which are capitalized and amortized as interest expense over the life of the facilities.
On June 29, 2018, Ubiquiti Networks, Inc., the Cayman Borrower and certain subsidiaries entered into the First Amendment to the Second Amended and Restated Credit Agreement and Joinder Agreement (the “Joinder Agreement”). The Joinder Agreement added certain subsidiary of Cayman Borrower to the loan documents as a guarantor.
Our Debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
|
Term Loan - short term
|
$
|
25,000
|
|
|
$
|
25,000
|
|
|
Debt issuance costs, net
|
(575
|
)
|
|
(575
|
)
|
|
Total Debt - short term
|
24,425
|
|
|
24,425
|
|
|
Term Loan - long term
|
456,250
|
|
|
462,500
|
|
|
Debt issuance costs, net
|
(1,997
|
)
|
|
(2,148
|
)
|
|
Total Debt - long term
|
$
|
454,253
|
|
|
$
|
460,352
|
|
The Revolving Facility includes a sub-limit of
$10.0 million
for letters of credit and a sub-limit of
$25.0 million
for swingline loans. The Facilities are available for working capital and general corporate purposes that comply with the terms of the Second Amended & Restated Credit Agreement, including to finance the repurchase of the Company's common stock or to make dividends to the holders of the Company's common stock. Under the Second Amended & Restated Credit Agreement, revolving loans and swingline loans may be borrowed, repaid and reborrowed until January 17, 2023, at which time all amounts borrowed must be repaid. The term loan is payable in quarterly installments of
1.25%
of the original principal amount of the term loan until December 31, 2019, thereafter increasing to
1.875%
until December 31, 2020, and thereafter increasing to
2.50%
of the original principal amount of the term loan. Revolving, swingline and term loans may be prepaid at any time without penalty.
Revolving and term loans bear interest, at the Company’s option, at either (i) a floating rate per annum equal to the base rate plus a margin of between
0.50%
and
1.25%
, depending on the Company’s consolidated total leverage ratio as of the most recently ended fiscal quarter or (ii) a floating per annum rate equal to the applicable LIBOR rate (or replacement rate) for a specified period, plus a margin of between
1.50%
and
2.25%
, depending on the Company’s consolidated total leverage ratio as of the most recently ended fiscal quarter. Swingline loans bear interest at a floating rate per annum equal to the base rate plus a margin of between
0.50%
and
1.25%
, depending on the Company’s consolidated total leverage ratio as of the most recently ended fiscal quarter. Base rate is defined as the greatest of (A) Wells Fargo's prime rate, (B) the federal funds rate plus
0.50%
or (C) the applicable LIBOR rate (or replacement rate) for a period of one month plus
1.00%
. A default interest rate shall apply on all obligations during certain events of default under the Second Amended & Restated Credit Agreement at a rate per annum equal to
2.00%
above the applicable interest rate. The Company will pay to each lender a facility fee on a quarterly basis based on the unused amount of each lender's commitment to make revolving loans, of between
0.20%
and
0.35%
, depending on the Company's consolidated total leverage ratio as of the most recently ended fiscal quarter. The Company will also pay to the applicable lenders on a quarterly basis certain fees based on the daily amount available to be drawn under each outstanding letter of credit, including aggregate letter of credit commissions of between
1.50%
and
2.25%
, depending on the Company's consolidated total leverage ratio as of the most recently ended fiscal quarter, and issuance fees of
0.125%
per annum. The Company is also obligated to pay Wells Fargo, as agent, fees customary for a credit facility of this size and type. The Second Amended & Restated Credit Agreement requires the Company to maintain during the term of the Facilities (i) a maximum consolidated total leverage ratio of
3.25
to 1.00 and (ii) minimum liquidity of
$250.0 million
, which can be satisfied with unrestricted cash and cash equivalents and up to
$50.0 million
of availability under the Revolving Facility. In addition, the Second Amended & Restated Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the ability of the Company and its subsidiaries to, among other things, grant liens or enter into agreements restricting their ability to grant liens on property, enter into mergers, dispose of assets, change their accounting or reporting policies, change their business and incur indebtedness, in each case subject to customary exceptions for a credit facility of this size and type. The Second Amended & Restated Credit Agreement includes customary events of default that include, among other things, non-payment of principal, interest or fees, inaccuracy of representations and warranties, violation of covenants, cross default to certain other indebtedness, bankruptcy and insolvency events, material judgments, change of control and certain ERISA events. The occurrence of an event of default could result in the acceleration of the obligations under the Second Amended & Restated Credit Agreement. The obligations of Ubiquiti Networks, Inc. and certain domestic subsidiaries, if any,
under the Second Amended & Restated Credit Agreement are required to be guaranteed by such domestic subsidiaries (the "Domestic Guarantors") and are collateralized by substantially all assets (excluding intellectual property) of Ubiquiti Networks, Inc. and the Domestic Guarantors. The obligations of the Cayman Borrower and certain foreign subsidiaries under the Second Amended & Restated Credit Agreement are required to be guaranteed by certain domestic and material foreign subsidiaries (the "Guarantors") and are collateralized by substantially all assets (excluding intellectual property) of Ubiquiti Networks, Inc. and the Guarantors.
Second Amended & Restated Credit Agreement
Under the Second Amended & Restated Credit Agreement, during the
three months ended
September 30, 2018
, the Company made aggregate payments of
$14.5
million against the balance under the Term Facility, of which
$6.3
million was repayment of principal and
$8.2
million was payment of interest.
As of
September 30, 2018
, we had
no
outstanding borrowings on our
$400 million
Revolving Facility.
As of
September 30, 2018
, the interest rate on the Term Facility was
3.99%
. As of October 31, 2018, the most currently available reset date, the Term Facility has an interest rate of
4.05%
.
The following table summarizes our estimated debt and interest payment obligations as of
September 30, 2018
, for the remainder of fiscal
2019
and future fiscal years (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 (remainder)
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
|
Debt payment obligations
|
$
|
18,750
|
|
|
$
|
31,250
|
|
|
$
|
43,750
|
|
|
$
|
50,000
|
|
|
$
|
337,500
|
|
|
$
|
—
|
|
|
$
|
481,250
|
|
|
Interest and other payments on debt payment obligations
(1)
|
15,139
|
|
|
19,378
|
|
|
17,871
|
|
|
15,943
|
|
|
7,906
|
|
|
—
|
|
|
76,237
|
|
|
Total
|
$
|
33,889
|
|
|
$
|
50,628
|
|
|
$
|
61,621
|
|
|
$
|
65,943
|
|
|
$
|
345,406
|
|
|
$
|
—
|
|
|
$
|
557,487
|
|
(1) - Interest payments are calculated based on the applicable rates and payment dates as of
September 30, 2018
.
NOTE 9—COMMITMENTS AND CONTINGENCIES
Operating Leases
Certain facilities and equipment are leased under non-cancelable operating leases. The Company generally pays taxes, insurance and maintenance costs on leased facilities and equipment. The Company leases its headquarters in New York, New York and other locations under non-cancelable operating leases that expire at various dates
through fiscal 2024
.
As of
September 30, 2018
, future minimum annual payments under operating leases for the remainder of fiscal
2019
and future fiscal years are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 (remainder)
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
|
Operating leases
|
$
|
5,619
|
|
|
$
|
6,532
|
|
|
$
|
4,615
|
|
|
$
|
1,790
|
|
|
$
|
1,376
|
|
|
$
|
314
|
|
|
$
|
20,246
|
|
Purchase Obligations
We subcontract with third parties to manufacture our products. During the normal course of business, our contract manufacturers procure components and manufacture product based upon orders placed by us. If we cancel all or part of the orders, we may still be liable to the contract manufacturers for the cost of the components purchased by the subcontractors to manufacture our products. We periodically review the potential liability, and as of
September 30, 2018
, we have
$3.3 million
recorded purchase obligation liability related to FrontRow. There have been no other significant liabilities for cancellations recorded as of
September 30, 2018
. Our consolidated financial position and results of operations could be negatively impacted if we were required to compensate the contract manufacturers for any unrecorded liabilities incurred. The Company had inventory purchase obligations of
$37.5
million for finished goods and
$1.3
million for raw materials as of
September 30, 2018
. Additionally, we may be subject to additional purchase obligations for components ordered by our contract manufacturers based on manufacturing forecasts we provide them each month. We estimate the amount of these additional purchase obligation to range from
$147
million to
$244
million as of
September 30, 2018
, depending upon the timing of orders placed for these components by our manufacturers.
Other Obligations
The Company had other obligations of
$1.6 million
as of
September 30, 2018
, which consisted primarily of commitments related to research and development projects.
Indemnification Obligations
The Company enters into standard indemnification agreements with many of its business partners in the ordinary course of business. These agreements include provisions for indemnifying the business partner against any claim brought by a third-party to the extent any such claim alleges that a Company product infringes a patent, copyright or trademark, or violates any other proprietary rights of that third-party. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is not estimable and the Company has not incurred any material costs to defend lawsuits or settle claims related to these indemnification agreements to date.
Legal Matters
The Company may be involved, from time to time, in a variety of claims, lawsuits, investigations, and proceedings relating to contractual disputes, intellectual property rights, employment matters, regulatory compliance matters and other litigation matters relating to various claims that arise in the normal course of business. The Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. The Company assesses its potential liability by analyzing specific litigation and regulatory matters using available information. The Company develops its views on estimated losses in consultation with inside and outside counsel, which involves a subjective analysis of potential results and outcomes, assuming various combinations of appropriate litigation and settlement strategies. Taking all of the above factors into account, the Company records an amount where it is probable that the Company will incur a loss and where that loss can be reasonably estimated. However, the Company’s estimates may be incorrect and the Company could ultimately incur more or less than the amounts initially recorded. The Company may also incur significant legal fees, which are expensed as incurred, in defending against these claims. The Company is not currently aware of any pending or threatened litigation that would have a material adverse effect on the Company's financial statements.
Synopsys
On February 3, 2017, Synopsys, Inc. (“Synopsys”) filed a complaint against the Company, one of our subsidiaries and an employee in the United States District Court for the Northern District of California, alleging claims under the Digital Millennium Copyright Act (“DMCA”). On March 28, 2017, Synopsys filed an amended complaint alleging (i) additional claims under the DMCA, (ii) claims under the Anti-Counterfeiting Act, and (iii) claims for label trafficking, fraud, civil RICO and negligent misrepresentation. On April 11, 2017, the Company moved to dismiss all but the initial DMCA claim in the amended complaint and its subsidiary moved to dismiss for lack of personal jurisdiction and joined the Company’s motion to dismiss certain claims. On August 15, 2017, the court issued an order granting the Company’s motion to dismiss the Anti- Counterfeiting Act claim and certain of the predicate acts alleged under the civil RICO claim. The court denied the motion to dismiss the remaining claims, and denied the subsidiary’s motion to dismiss for lack of jurisdiction. On September 5, 2017, Synopsys filed a Second Amended Complaint. On September 19, 2017, the defendants answered, and Ubiquiti Networks International Limited (“UNIL”) filed counterclaims for (1) declaratory judgment under 17 U.S.C. § 1201, (2) violation of 18 U.S.C. § 1030, the Computer Fraud and Abuse Act, (3) violation of California Penal Code § 502, the Computer Data Access Fraud Act, (4) trespass to personal property and chattels, (5) conversion, (6) civil RICO pursuant to 18 U.S.C. § 1962(c), (7) RICO conspiracy pursuant to 18 U.S.C. § 1962(d), and (8) common law fraud. The Company also moved for leave to amend its existing counterclaims against Synopsys, for breach of contract and declaratory judgment under 17 U.S.C. § 1201, to include the counterclaims filed by UNIL. On October 3, 2017, Synopsys filed its opposition to the Company’s motion for leave to amend its counterclaims, as well as a motion to dismiss UNIL’s counterclaims and an anti-SLAPP motion to strike state law claims by both the Company and UNIL. On March 13, 2018, the Judge granted the motion to dismiss UNIL's counterclaims and denied the Company's request for leave to amend its counterclaims. On June 7, 2018, Synopsys filed a Third Amended Complaint. The Third Amended Complaint includes new allegations relating to alleged predicate acts for the RICO claims but it does not add any new causes of action beyond those that were included in the Second Amended Complaint. The Company answered the Third Amended Complaint on June 21, 2018. The Company plans to vigorously defend itself against these claims; however, there can be no assurance that the Company will prevail in the lawsuit. The Company cannot currently estimate the possible loss or range of losses, if any, that it may experience in connection with this litigation.
Vivato/XR
On April 19, 2017, XR Communications, LLC, d/b/a Vivato Technologies (“Vivato”), filed a complaint against the Company in the United States District Court for the Central District of California, alleging that at least one of the Company’s products infringes United States Patent Numbers 7,062,296 (the “’296 Patent”), 7,729,728 (the “’728 Patent”), and 6,611,231 (the “’231 Patent and, collectively, the “Patents-in-Suit”). The ‘296 and ‘728 Patents are entitled “Forced Beam Switching in Wireless Communication Systems Having Smart Antennas.” The ‘231 Patent is entitled “Wireless Packet Switched Communications Systems and Networks Using Adaptively Steered Antenna Arrays.” Vivato amended its complaint on June 23, 2017 and again on July 6, 2017. According to the complaint, the products accused of infringing the Patents-in-Suit include Wi-Fi access points and routers supporting MU-MIMO, including without limitation access points and routers utilizing the IEEE 802.11ac-2013 standard. Vivato has also filed nine other lawsuits asserting the same patents against other defendants in the Central District of California. On October 2, 2017, the ten cases were consolidated into a single action for all purposes except trial. On March 19,
2018, the Company and the remaining defendants in the consolidated action moved to stay the case (the “Motion to Stay”) pending completion of certain inter partes review proceedings before the Patent Trial and Appeal Board. On April 9, 2018, the Court held a hearing on the Motion to Stay, and, on April 11, 2018, the Court granted the motion. On October 22, 2018, the Court maintained the stay pending a status conference scheduled for February 11, 2019.
The Company plans to vigorously defend itself against these claims; however, there can be no assurance that the Company will prevail in the lawsuit. The Company cannot currently estimate the possible loss or range of losses, if any, that it may experience in connection with this litigation.
SEC Subpoena
As previously disclosed on the Form 8-K filed by the Company on February 20, 2018, on February 13, 2018, the Securities and Exchange Commission (the “SEC”) issued subpoenas to the Company and certain of the Company’s officers requesting documents and information relating to a range of topics, including metrics relating to the Ubiquiti Community, accounting practices, financial information, auditors, international trade practices, and relationships with distributors and various other third parties. The Company is in the process of responding to the requests and intends to cooperate fully with the SEC. As the SEC’s investigation is ongoing, we cannot currently predict the timing or the outcome of such investigation.
Shareholder Class Actions
On February 21, 2018, a purported class action, captioned Paul Vanderheiden v. Ubiquiti Networks, Inc. et al., No. 18-cv-01620 (the "Vanderheiden Action"), was filed in the United States District Court for the Southern District of New York against the Company and certain of its current and former officers. The Vanderheiden Action complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making false and/or misleading statements, including purported overstatements of the Company’s online community user engagement metrics and accounts receivable. On February 28, 2018 and March 13, 2018, substantially similar purported class actions, captioned Xiya Qian v. Ubiquiti Networks, Inc. et al., No. 18-cv-01841 (the “Qian Action”) and John Kho v. Ubiquiti Networks, Inc. et al., No. 18-cv-02242 (the "Kho Action", together with the Vanderheiden Action and the Qian Action, the “Class Actions”), respectively, were filed in the United States District Court for the Southern District of New York. On October 24, 2018, the court consolidated the Class Actions and appointed lead plaintiff and lead counsel (the “Consolidated Class Action”). The deadline for lead plaintiff to file an amended and consolidated complaint (the “Amended Complaint”) is December 26, 2018. Defendants will have 60 days from the date on which the Amended Complaint is filed in which to respond.
While the Company believes that the Consolidated Class Action is without merit and plans to vigorously defend itself, there can be no assurance that the Company will prevail. The Company cannot currently estimate the possible loss or range of losses, if any, that it may experience in connection with this litigation.
Shareholder Derivative Action & Section 220 Demand
On March 13, 2018, Anthony Franchi filed a shareholder derivative complaint in the Superior Court of the State of California, County of San Mateo against the Company’s directors, and certain of its officers (the "Franchi Action"). The Company is named as a nominal defendant. The complaint asserts claims against all individual defendants for breach of fiduciary duty for disseminating false and misleading information and failure to maintain internal controls and unjust enrichment. Additional claims are asserted against Robert Pera for breach of fiduciary duty for insider selling and misappropriation of information, as well as the violation of California Corporations Code § 25402. The allegations in support of these claims are similar to the allegations made in the Class Actions. Plaintiff seeks a judgment on behalf of the Company for all damages incurred or that will be incurred as a result of the alleged breaches of fiduciary duty by the individual defendants, a judgment ordering disgorgement of all profits, benefits, and other compensation obtained by the individual defendants, a judgment directing the Company to reform its governance and internal procedures, and attorneys’ fees and other costs. The Company moved for a stay of the derivative action pending resolution of the Consolidated Class Action. The court denied the Company's motion, but stayed discovery until the resolution of any motion to dismiss the Consolidated Class Action. On August 27, 2018, the individual defendants and nominal defendant Ubiquiti demurred to dismiss the Franchi Action. Plaintiff filed an omnibus response on October 5, 2018 and defendants filed replies on October 22, 2018. Oral argument on the motions to dismiss is presently scheduled for November 30, 2018.
On June 4, 2018, alleged Ubiquiti stockholder Richard Gericke served a demand to inspect the Company’s books and records pursuant to Section 220 of the Delaware General Corporation Law. The Company commenced its production of documents responding to Mr. Gericke’s requests for records on August 22, 2018 and completed its production on October 10, 2018. In addition to serving his Section 220 demand, Mr. Gericke has moved for leave to intervene in the Franchi Action. Oral argument on Mr. Gericke’s motion to intervene is currently scheduled for November 30, 2018.
On June 1, 2018, a second shareholder derivative complaint was filed in the Supreme Court of the State of New York, County of New York by Eric Carlson against the Company’s directors and certain of its officers. The Company was named as a nominal defendant. The complaint asserted claims against all defendants for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. As with the complaint in the Franchi Action, the allegations in support of these claims were similar to the allegations made in the Class Actions. Plaintiff sought a declaration that the individual defendants had breached and/or aided and abetted the breach of their fiduciary duties to the Company, a judgment on behalf of the Company of the damages sustained by the individual defendants’ alleged wrongdoing, a declaration that the Company and individual defendants take action to reform and improve corporate governance and internal procedures, an award to the Company of restitution from the individual defendants, and an award to Plaintiff of the costs and disbursements of the action, including attorneys’ fees. On September 11, 2018, Plaintiff voluntarily dismissed the action in its entirety without prejudice.
NOTE 10—COMMON STOCK AND TREASURY STOCK
Common Stock Repurchases
On March 13, 2018, the Board of Directors of the Company approved a
$200 million
stock repurchase program (the "March Repurchase Program"). Under the March Repurchase Program, the Company is authorized to repurchase up to
$200 million
of its common stock.
On May 8, 2018, the Board of Directors of the Company approved a new
$200 million
stock repurchase program (the "May Repurchase Program"). Under the May Repurchase Program, the Company is authorized to repurchase up to an additional
$200 million
of its common stock, along with any remaining balances under the March Repurchase Program. During the third and fourth quarters of fiscal 2018, the Company repurchased and retired
757,219
and
586,924
shares of common stock at an average price of
$69.48
and
$70.11
for an aggregate amount of
$52.6 million
and
$41.1 million
respectively. Both the March and May Repurchase Programs expire on June 30, 2019.
During the first quarter of fiscal 2019, the Company repurchased and retired an additional
1,238,163
shares of common stock at an average price of
$91.07
for an aggregate amount of
$112.8 million
. This included unpaid stock repurchases of
$6.0 million
relating to repurchases executed on or prior to September 30, 2018 for trades settled in the second quarter of fiscal 2019. As of
September 30, 2018
, there was no remaining balance available for share repurchases under the March Repurchase Program and
$193.5 million
available for repurchases under the May Repurchase Program.
On November 6, 2018, the Board of Directors of the Company approved a new
$200 million
stock repurchase program ("November Repurchase Program"). Under the November Repurchase Program, the Company is authorized to repurchase up to
$200 million
of its common stock. The November Repurchase Program expires on December 31, 2019. See note 16 of Notes to Consolidated Financial Statements for additional information.
NOTE 11—ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income consists of two components, net income and other comprehensive income (loss). Other comprehensive income (loss) refers to gains and losses that are recorded as an element of stockholders' equity but are excluded from net income pursuant to GAAP. As of
September 30, 2018
, the Company's accumulated other comprehensive income includes
$0.1 million
of net unrealized loss from our available-for-sale securities.
NOTE 12—STOCK BASED COMPENSATION
Stock-Based Compensation Plans
The Company’s 2010 Equity Incentive Plan and 2005 Equity Incentive Plan are described in its Annual Report. As of
September 30, 2018
, the Company had
10,570,839
authorized shares available for future issuance under all of its stock incentive plans.
Stock-Based Compensation
The following table shows total stock-based compensation expense included in the Consolidated Statements of Operations for the
three months ended
September 30, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
Cost of revenues
|
$
|
33
|
|
|
$
|
245
|
|
|
Research and development
|
467
|
|
|
456
|
|
|
Sales, general and administrative
|
275
|
|
|
211
|
|
|
|
$
|
775
|
|
|
$
|
912
|
|
Stock Options
The following is a summary of option activity for the Company’s stock incentive plans for the
three months ended
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2018
|
137,491
|
|
|
$
|
9.15
|
|
|
3.62
|
|
$
|
10,390
|
|
|
Exercised
|
(17,378
|
)
|
|
$
|
11.17
|
|
|
|
|
|
|
Forfeitures and cancellations
|
(1,980
|
)
|
|
$
|
11.09
|
|
|
|
|
|
|
Balance, September 30, 2018
|
118,133
|
|
|
$
|
8.83
|
|
|
3.24
|
|
$
|
10,636
|
|
|
Vested as of September 30, 2018
|
118,133
|
|
|
$
|
8.83
|
|
|
3.24
|
|
$
|
10,636
|
|
|
Vested and exercisable as of September 30, 2018
|
118,133
|
|
|
$
|
8.83
|
|
|
3.24
|
|
$
|
10,636
|
|
During the
three months ended
September 30, 2018
and
2017
, the aggregate intrinsic value of options exercised under the Company’s stock incentive plans was
$1.3 million
and
$3.9 million
, respectively, as determined as of the date of option exercise.
As of
September 30, 2018
, the Company had
no
unrecognized compensation costs related to stock options.
The Company did not grant any employee stock options during the
three months ended
September 30, 2018
and
2017
.
Restricted Stock Units (“RSUs”)
The following table summarizes the activity of the RSUs made by the Company:
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Grant Date Fair Value Per Share
|
|
Non-vested RSUs, June 30, 2018
|
144,100
|
|
|
$
|
53.24
|
|
|
RSUs granted
|
25,759
|
|
|
$
|
85.38
|
|
|
RSUs vested
|
(10,131
|
)
|
|
$
|
41.90
|
|
|
RSUs canceled
|
(2,841
|
)
|
|
$
|
43.11
|
|
|
Non-vested RSUs, September 30, 2018
|
156,887
|
|
|
$
|
59.44
|
|
The intrinsic value of RSUs vested in the
three months ended
September 30, 2018
and
2017
was
$0.9 million
and
$1.3 million
, respectively. The total intrinsic value of all outstanding RSUs was
$15.5 million
as of
September 30, 2018
.
As of
September 30, 2018
, there were unrecognized compensation costs related to RSUs of
$6.7 million
which the Company expects to recognize over a weighted average period of
3.7 years
.
NOTE 13—INCOME TAXES
The Company recorded a tax provisions of
$11.4 million
for the
three months ended
September 30, 2018
as compared to
$10.8 million
for the
three months ended
September 30, 2017
. The increase is primarily related to a change in pre-tax profit mix from jurisdiction with lower tax rates to higher tax rate jurisdictions for the
three months ended
September 30, 2018
as compared to the three months ended September 30, 2017.
The Company’s estimated fiscal year
2019
effective tax rate differs from the U.S. statutory rate primarily due to profits earned in jurisdictions where the tax rate is lower than the U.S. tax rate, excess tax benefit from stock-based compensation and the impact of the 2017 Tax Act.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued by the SEC to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. Because the Company is still in the process of analyzing certain provisions of the 2017 Tax Act, in accordance with SAB 118, the Company has determined that the adjustments to its deferred taxes and its estimated Transition Tax remain at
September 30, 2018
, as the company continues to refine its computations of earnings and profits and related tax pools. Additionally, the 2017 Tax Act creates a new requirement that certain income (i.e., GILTI) earned by controlled foreign corporations (“CFCs”) after July 1, 2018, must be included currently in the gross income of the CFCs’ U.S. shareholders. The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Since the Company is not yet able to reasonably estimate the effect of this provision of the 2017 Tax Act, the Company has not made a policy decision regarding whether to record deferred taxes on GILTI.
As of
September 30, 2018
, the Company had approximately
$29.3
million of unrecognized tax benefits, substantially all of which would, if recognized, affect its tax expense. The Company recorded a net increase of its unrecognized tax benefits of
$0.1 million
for the three months ended September 30, 2018. The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying Consolidated Statement of Operations and Comprehensive Income. Accrued interest and penalties are included within the related tax liability line in the Consolidated Balance Sheet.
As of
September 30, 2018
, the Company had
$3.4
million accrued interest related to uncertain tax matters. The Company, or one of its subsidiaries, files income tax returns in the United States federal jurisdiction, and various state, local, and foreign jurisdictions and is currently undergoing income tax examinations by the U.S. Internal Revenue Service and the Hong Kong Inland Revenue Department. All material consolidated federal income tax matters have been concluded for years through 2014. All material state and local income tax matters have been concluded through 2014. The majority of the Company’s foreign jurisdictions have been concluded through 2014, with the exception of Hong Kong which has been reviewed through 2009. The Company believes that within the next twelve months, it is reasonably possible that a decrease of up to
$3.2 million
in unrecognized tax benefits may occur due to settlements with tax authorities or statute lapse.
In July 2018, the Company received a draft Notice of Proposed Adjustment (“NOPA”) from the Internal Revenue Service (IRS) proposing an adjustment to income for the fiscal 2015 and 2016 tax years based on its interpretation of certain obligations of the non-US entities under the credit facility. The incremental tax liability associated with the income adjustment proposed in the draft NOPA would be approximately
$50 million
, excluding interest and penalties. The Company strongly believes the position of the IRS with regard to this matter is inconsistent with the provisions of the credit facility and applicable tax laws. However, there can be no assurance that this matter will be resolved in the Company’s favor. Regardless of whether the matter is resolved in the Company’s favor, the final resolution of this matter could be expensive and time-consuming to defend and/or settle. While the Company believes that the tax originally paid in fiscal 2015 and 2016 is correct, it has not provided an additional reserve for this tax uncertainty. However, there is still a possibility that an adverse outcome of the matter could have a material effect on the Company’s results of operations and financial condition.
On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued a decision related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement, holding that the Treasury Regulations under which the compensation was mandatorily included as costs were invalid. On June 27, 2016, the Internal Revenue Service (IRS) appealed the court's decision to the Ninth Circuit Court of Appeals. On July 24, 2018 the Ninth Circuit Court of Appeals overturned the U.S. Tax Court's decision reversing in favor of the IRS, and holding that the Regulations were valid. On August 8, 2018, the Ninth Circuit Court of Appeals withdrew this decision, and assigned a new panel to consider the appeal. We will continue to monitor ongoing developments and potential impacts of this case on our consolidated financial statements, and intercompany arrangements.
NOTE 14—SEGMENT INFORMATION, REVENUES BY GEOGRAPHY AND SIGNIFICANT CUSTOMERS
Management has determined that the Company operates as
one
reportable and operating segment as it only reports financial information on an aggregate and consolidated basis to its Chief Executive Officer, who is the Company’s Chief Operating Decision Maker. Furthermore, the Company does not organize or report its costs on a segment basis. The Company presents its revenues by product type in
two
primary categories, including Service Provider Technology and Enterprise Technology.
|
|
|
|
•
|
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.
|
|
|
|
•
|
Enterprise Technology
our UniFi and mFi platforms, including UniFi enterprise Wi-Fi, UniFi Video
|
Products, UniFi switching and routing solutions, including AmpliFi.
Revenues by product type are as follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
Service Provider Technology
|
$
|
104,957
|
|
|
37
|
%
|
|
$
|
119,915
|
|
|
49
|
%
|
|
Enterprise Technology
|
177,948
|
|
|
63
|
%
|
|
125,953
|
|
|
51
|
%
|
|
Total revenues
|
$
|
282,905
|
|
|
100
|
%
|
|
$
|
245,868
|
|
|
100
|
%
|
Revenues by geography based on customer’s ship-to destinations were as follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
North America
(1)
|
$
|
119,371
|
|
|
42
|
%
|
|
$
|
96,170
|
|
|
39
|
%
|
|
South America
|
14,176
|
|
|
5
|
%
|
|
31,053
|
|
|
13
|
%
|
|
Europe, the Middle East and Africa ("EMEA")
|
124,931
|
|
|
44
|
%
|
|
93,314
|
|
|
38
|
%
|
|
Asia Pacific
|
24,427
|
|
|
9
|
%
|
|
25,331
|
|
|
10
|
%
|
|
Total revenues
|
$
|
282,905
|
|
|
100
|
%
|
|
$
|
245,868
|
|
|
100
|
%
|
(1)
Revenue for the United States was
$112.3 million
and
$91.8 million
for the three months ended
September 30, 2018
and
2017
, respectively.
Customers with an accounts receivable balance of
10%
or greater of total accounts receivable and customers with net revenues of
10%
or greater of total revenues are presented below for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Revenues
|
|
Percentage of Accounts Receivable
|
|
|
Three Months Ended September 30,
|
|
September 30,
|
|
June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2018
|
|
Customer A
|
10%
|
|
*
|
|
11%
|
|
12%
|
|
Customer B
|
12%
|
|
12%
|
|
16%
|
|
15%
|
*
denotes less than
10%
NOTE 15—RELATED PARTY TRANSACTIONS AND CERTAIN OTHER TRANSACTIONS
Aircraft Lease Agreement
On November 13, 2013, the Company entered into an aircraft lease agreement (the “Aircraft Lease Agreement”) with RJP Manageco LLC (the “Lessor”), a limited liability company owned by the Company’s CEO, Robert J. Pera. Pursuant to the Aircraft Lease Agreement, the Company may lease an aircraft owned by the Lessor for Company business purposes. Under the Aircraft Lease Agreement, the aircraft may be leased at a rate of $
5,000
per flight hour. This hourly rate does not include the cost of flight crew or on-board services, which the Company purchases from a third-party provider. The Company recognized a total of approximately
$0.4 million
and
$0.4 million
in expenses pursuant to the Aircraft Lease Agreement during the
three months ended
September 30, 2018
and
2017
, respectively. All expenses pursuant to the Aircraft Lease Agreement have been included in the Company’s sales, general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income.
NOTE 16 - SUBSEQUENT EVENTS
Repurchase Program
On November 6, 2018, the Board of Directors of the Company approved a new
$200 million
stock repurchase program ("November Repurchase Program"). Under the November Repurchase Program, the Company is authorized to repurchase up to
$200 million
of its common stock. The November Repurchase Program expires on December 31, 2019.
Subsequent to September 30, 2018, the Company repurchased and retired an additional
2,022,648
shares of common stock at an average price of
$89.30
for an aggregate amount of
$180.6 million
. As of November 7, 2018, the Company had
$12.9
million and
$200 million
available under the May Repurchase Program and November Repurchase Program, respectively.
Dividends
On November 9, 2018, the Company announced that its Board of Directors had approved a quarterly cash dividend of
$0.25
per share payable on November 26, 2018 to shareholders of record at the close of business on November 19, 2018. The Company intends to pay regular quarter cash dividends of at least
$0.25
per share for the remainder of fiscal year 2019. Any future dividends will be subject to the approval of the Company's Board of Directors.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read together with the financial statements and related notes that are included elsewhere in this quarterly report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this quarterly report, particularly in Note 9 “Commitments and Contingencies” to our consolidated financial statements and Part II “Other Information”, Item 1-Legal Proceedings and 1A-Risk Factors, in this report.
Overview
The Company develops technology platforms for high-capacity distributed Internet access, unified information technology, and next-generation consumer electronics for home and personal use. We categorize our solutions into three main categories: high performance networking technology for service providers, enterprises and consumers.
The majority of the Company’s resources consist of entrepreneurial and de-centralized research and development teams ("R&D"). Ubiquiti does not employ a traditional direct sales force, but instead drives brand awareness through online reviews and publications, its website, its distributors and the company’s user community where customers can interface directly with R&D, marketing, and support. Our technology platforms are designed from the ground up with a focus on delivering highly-advanced and easily deployable solutions that appeal to a global customer base in underserved and underpenetrated markets. Our differentiated business model, we believe has enabled us to break down traditional barriers such as high product and network deployment costs and offer solutions with disruptive price-performance characteristics. We strive to offer solutions that provide an ecosystem which simplifies the users experience and the deployment process of additional hardware.
The Company maintains an industry leading financial profile by leveraging its unique business model. This differentiated business model, combined with our innovative, proprietary technologies, has resulted in an attractive alternative to traditional high touch, high cost providers, allowing us to advance the market adoption of our platforms for ubiquitous connectivity. As a result, our technology has enabled hundreds of millions of people throughout the world to stay connected.
We offer a broad and expanding portfolio of networking products and solutions for operator-owners of wireless internet services (WISP's), enterprises and smart homes. Our operator-owner service provider -product platforms provide carrier-class network infrastructure for fixed wireless broadband, wireless backhaul systems and routing and the related software for WISP's to easily control, track and bill their customers. Our enterprise product platforms provide wireless LAN (WLAN) infrastructure, video surveillance products, switching and routing solutions, security gateways, and other complimentary WLAN products along with a unique software platform, which enables users to control their network from one simple, easy to use software interface. Our consumer products, sold under the Ubiquiti Labs brand name, are targeted to the smart home and highly connected consumers. We believe that our products are highly differentiated due to our proprietary software protocol innovation, firmware expertise, and hardware design capabilities. This differentiation allows our product portfolio to meet the demanding performance requirements of video, voice and data applications at prices that are a fraction of those offered by our competitors.
As a core part of our strategy, we have developed a differentiated business model for marketing and selling high volumes of carrier and enterprise-class communications platforms. Our business model is driven by a large, growing and highly engaged community of service providers, distributors, value added resellers, systems integrators and corporate IT professionals, which we refer to as the Ubiquiti Community. The Ubiquiti Community is one element of our business strategy as it enables us to drive:
|
|
|
|
•
|
Rapid customer and community driven product development.
We have an active, loyal community built from our customers 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 maintain the traditional direct sales force as compared to some of our competitors, but instead utilize digital marketing and the Ubiquiti Community to drive market awareness and demand for our products and solutions. We believe this community-propagated viral marketing enables us to reach underserved and underpenetrated markets far more efficiently and cost-effectively than is possible through traditional sales models. Leveraging the information transparency of the Internet allows customers to research, evaluate and validate our solutions with the Ubiquiti Community and via third party web sites. This allows us to operate a scalable sales and marketing model and effectively create awareness of our brand and products.
|
By reducing the cost of development, sales, marketing and support we are able to offer innovative solutions with disruptive price performance characteristics to our customers.
Key Components of Our Results of Operations and Financial Condition
Revenues
We operate our business as one reportable and operating segment. Further information can be found in Note 14 of Notes to Consolidated Financial Statements. Our revenues are derived principally from the sale of networking hardware and management tools. Because we have historically included it free of charge in many of our arrangements, we attribute a portion of our systems revenues to this implied post-contract customer support (“PCS”).
We classify our revenues into two primary product categories: Service Provider Technology and Enterprise Technology.
|
|
|
|
•
|
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.
|
|
|
|
|
•
|
Enterprise Technology
includes our UniFi and mFi platforms, including UniFi enterprise Wi-Fi, UniFi Video Products, UniFi switching and routing solutions, including AmpliFi.
|
We sell our products and solutions globally to service providers and enterprises primarily through our extensive network of distributors, and, to a lesser extent, direct customers. Sales to distributors accounted for 97% of our revenues during the
three months ended
September 30, 2018
.
Cost of Revenues
Our cost of revenues is comprised primarily of the costs of procuring finished goods from our contract manufacturers and certain key components that we consign to certain of our contract manufacturers. In addition, cost of revenues includes labor and other costs associated with engineering, including salary, benefits and stock-based compensation in addition to costs associated with tooling, testing and quality assurance, warranty costs, logistics fees and excess and obsolete inventory reserves.
We operate a warehouse located in Utah and outsource other logistics warehousing and order fulfillment functions located primarily in China, and to a lesser extent, Poland. We also evaluate and utilize other vendors for various portions of our supply chain from time to time. Our operations organization consists of employees and consultants engaged in the management of our contract manufacturers, new product introduction activities, logistical support and engineering.
Gross Profit
Our gross profit has been, and may in the future be, influenced by several factors including changes in product mix, target end markets for our products, channel inventory levels, tariffs, pricing due to competitive pressure, production costs and global demand for electronic components. Although we procure and sell our products in U.S. dollars, our contract manufacturers incur many costs, including labor costs, in other currencies. To the extent that the exchange rates move unfavorably for our contract manufacturers, they may try to pass these additional costs on to us, which could have a material impact on our future average selling prices and unit costs. In June 2018, the Office of the United States Trade Representative announced new proposed tariffs for certain products imported into the U.S. from China. As of September 24, 2018, these tariffs were implemented, and will impact a portion of our products. As a result, we expect our near-term margins to be negatively impacted as we explore alternatives to mitigate the tariffs.
Operating Expenses
We classify our operating expenses as research and development, sales, general and administrative expenses.
|
|
|
|
•
|
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, licensed or purchased intellectual property, 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 sales, 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 traditional 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.
|
Deferred Revenues
We recognize revenues when performance obligations under the terms of a contract with our customers are satisfied. Our deferred revenues are primarily comprised of remaining performance obligation attributable to implied PCS that we expect to fulfill in the future. As of
September 30, 2018
, and
June 30, 2018
, we had deferred revenues of
$15.9 million
and
$12.7 million
, respectively, related to these obligations.
Provisions for Income Taxes
We use the asset and liability method to account for income taxes. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. In preparing the consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. The Company must assess such potential exposures and, where necessary, provide a reserve to cover any expected loss. To the extent that the Company establishes a reserve, its provision for income taxes would be increased. If the Company ultimately determines that payment of these amounts is unnecessary, it reverses the liability and recognizes a tax benefit during the period in which it determines that the liability is no longer necessary. The Company records an additional charge in its provision for taxes in the period in which it determines that tax liability is greater than its original estimate. The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. In other cases, management’s judgment is required in selecting among available alternative accounting standards that provide for different accounting treatment for similar transactions. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the amounts we report as assets, liabilities, revenues, costs and expenses and affect the related disclosures. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. In many instances, we could reasonably use different accounting estimates, and in some instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, our actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. Our critical accounting policies are discussed in our Annual Report, and there have been no material changes other than that have been disclosed in Note 2 to our consolidated financial statements herein.
Results of Operations
Comparison of
Three Months Ended
September 30, 2018
and
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
|
(In thousands, except percentages)
|
|
Revenues
|
$
|
282,905
|
|
|
100
|
%
|
|
$
|
245,868
|
|
|
100
|
%
|
|
Cost of revenues
(1)
|
151,299
|
|
|
53
|
%
|
|
134,212
|
|
|
55
|
%
|
|
Gross profit
|
131,606
|
|
|
47
|
%
|
|
111,656
|
|
|
45
|
%
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
(1)
|
18,222
|
|
|
6
|
%
|
|
16,928
|
|
|
7
|
%
|
|
Sales, general and administrative
(1)
|
13,766
|
|
|
5
|
%
|
|
7,665
|
|
|
3
|
%
|
|
Total operating expenses
|
31,988
|
|
|
11
|
%
|
|
24,593
|
|
|
10
|
%
|
|
Income from operations
|
99,618
|
|
|
35
|
%
|
|
87,063
|
|
|
35
|
%
|
|
Interest expense and other, net
|
(2,527
|
)
|
|
*
|
|
(1,361
|
)
|
|
*
|
|
Income before income taxes
|
97,091
|
|
|
34
|
%
|
|
85,702
|
|
|
35
|
%
|
|
Provisions for income taxes
|
11,388
|
|
|
4
|
%
|
|
10,777
|
|
|
4
|
%
|
|
Net income
|
$
|
85,703
|
|
|
30
|
%
|
|
$
|
74,925
|
|
|
30
|
%
|
|
* Less than 1%
|
|
|
|
|
|
|
|
|
(1) Includes stock-based compensation as follows:
|
|
|
|
|
|
|
|
|
Cost of revenues
|
$
|
33
|
|
|
|
|
$
|
245
|
|
|
|
|
Research and development
|
467
|
|
|
|
|
456
|
|
|
|
|
Sales, general and administrative
|
275
|
|
|
|
|
211
|
|
|
|
|
Total stock-based compensation
|
$
|
775
|
|
|
|
|
$
|
912
|
|
|
|
Revenues
Total revenues
increased
$37.0 million
, or
15%
, from
$245.9 million
in the
three months ended September 30, 2017
to
$282.9 million
in the
three months ended September 30, 2018
.
During the
three months ended
September 30, 2018
, there were no material price changes in the Company's products sold. However, the Company continues to introduce new products which may have average selling price and margins different than our legacy products.
Revenues by Product Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
|
(in thousands, except percentages)
|
|
Service Provider Technology
|
$
|
104,957
|
|
|
37
|
%
|
|
$
|
119,915
|
|
|
49
|
%
|
|
Enterprise Technology
|
177,948
|
|
|
63
|
%
|
|
125,953
|
|
|
51
|
%
|
|
Total revenues
|
$
|
282,905
|
|
|
100
|
%
|
|
$
|
245,868
|
|
|
100
|
%
|
Service Provider Technology revenue
decreased
$14.9 million
, or
12%
, from
$119.9 million
in the
three months ended September 30, 2017
to
$105.0 million
in the
three months ended September 30, 2018
.
The decrease in Service Provider Technology revenue during the
three months ended
September 30, 2018
as compared to the same period in the prior year, was primarily due to decreased revenue in South America, North America and Asia Pacific, partially offset by an increase in revenue in Europe, the Middle East and Africa ("EMEA").
Enterprise Technology revenue
increased
$51.9 million
, or
41%
, from
$126.0 million
in the
three months ended September 30, 2017
to
$177.9 million
in the
three months ended September 30, 2018
.
The increase in Enterprise Technology revenue during the
three months ended
September 30, 2018
as compared to the same period in the prior year, was primarily due to product expansion and further adoption of our UniFi technology platform across all regions except for South America, which had a slight decline in our UniFi technology platform.
Revenues by Geography
We have determined the geographical distribution of our product revenues based on our customers’ ship-to destinations. A majority of our sales are to distributors who either sell to resellers or directly to end customers, who may be located in different countries than the initial ship-to destination. The following are our revenues by geography for the
three months ended
September 30, 2018
and
2017
(in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
|
(in thousands, except percentages)
|
|
North America
(1)
|
$
|
119,371
|
|
|
42
|
%
|
|
$
|
96,170
|
|
|
39
|
%
|
|
South America
|
14,176
|
|
|
5
|
%
|
|
31,053
|
|
|
13
|
%
|
|
Europe, the Middle East and Africa ("EMEA")
|
124,931
|
|
|
44
|
%
|
|
93,314
|
|
|
38
|
%
|
|
Asia Pacific
|
24,427
|
|
|
9
|
%
|
|
25,331
|
|
|
10
|
%
|
|
Total revenues
|
$
|
282,905
|
|
|
100
|
%
|
|
$
|
245,868
|
|
|
100
|
%
|
(1)
Revenue for the United States was
$112.3 million
and
$91.8 million
for the
three months ended September 30, 2018
and
2017
, respectively.
North America
Revenues in North America
increased
$23.2 million
, or
24%
, from
$96.2 million
in the
three months ended September 30, 2017
to
$119.4 million
in the
three months ended September 30, 2018
.
The increase in North America revenues during the
three months ended
September 30, 2018
as compared to the same period in the prior year, was primarily due to increased revenue from our Enterprise Technology products partially offset by a slight decrease in revenue from Service Provider Technology products.
South America
Revenues in South America
decreased
$16.9 million
, or
54%
, from
$31.1 million
in the
three months ended September 30, 2017
to
$14.2 million
in the
three months ended September 30, 2018
.
The decrease in South America revenues during the
three months ended
September 30, 2018
as compared to the same period in the prior year was primarily due to decreased revenue for both our Service Provider Technology products and Enterprise Technology products.
Europe, the Middle East, and Africa (EMEA)
Revenues in EMEA
increased
$31.6 million
, or
34%
, from
$93.3 million
in the
three months ended September 30, 2017
to
$124.9 million
in the
three months ended September 30, 2018
.
The increase in EMEA revenues during the
three months ended
September 30, 2018
as compared to the same period in the prior year was primarily due to increased revenue for both our Enterprise Technology products and Service Provider Technology products.
Asia Pacific
Revenues in the Asia Pacific region
decreased
$0.9 million
, or
4%
, from
$25.3 million
in the
three months ended September 30, 2017
to
$24.4 million
in the
three months ended September 30, 2018
. The decrease in Asia Pacific revenues during the
three months ended
September 30, 2018
as compared to the same period in the prior year was primarily due to decreased revenue from Service Provider Technology products, offset in part by a slight increase in revenue from Enterprise Technology products.
Cost of Revenues and Gross Profit
Cost of revenues
increased
$17.1 million
, or
13%
, from
$134.2 million
in the
three months ended September 30, 2017
to
$151.3 million
in the
three months ended September 30, 2018
.
The increase during the
three months ended
September 30, 2018
was primarily due to cost increases associated with an overall increase in revenue and an increase in indirect costs.
Gross profit margin
increased
to
47%
in the
three months ended September 30, 2018
compared to
45%
in the
three months ended September 30, 2017
. The increase during the
three months ended September 30, 2018
was primarily driven by changes in product mix and to lesser extent the benefit of product cost reduction strategies, partially offset by an increase in indirect costs.
Operating Expenses
Research and Development
Research and development (“R&D”) expenses
increased
$1.3 million
, or
8%
, from
$16.9 million
in the
three months ended September 30, 2017
to
$18.2 million
in the
three months ended September 30, 2018
. As a percentage of revenues, R&D expenses
decreased
from
7%
for the
three months ended September 30, 2017
to
6%
for the
three months ended September 30, 2018
.
The increase in research and development expenses in absolute dollars during the
three months ended
September 30, 2018
was primarily due to costs associated with increased headcount.
Sales, General and Administrative
Sales, general and administrative expenses
increased
$6.1 million
, or
79%
, from
$7.7 million
in the
three months ended September 30, 2017
to
$13.8 million
in the
three months ended September 30, 2018
. As a percentage of revenues, sales, general and administrative expenses increased from
3%
for the
three months ended September 30, 2017
to
5%
for the
three months ended September 30, 2018
.
The increase in sales, general and administrative expenses in absolute dollars during both the
three months ended
September 30, 2018
was primarily related to professional fees and costs associated with increased headcount.
Provision for Income Taxes
Our provision for income taxes
increased
$0.6 million
or
6%
, from
$10.8 million
for the
three months ended September 30, 2017
to
$11.4 million
for the
three months ended September 30, 2018
. Our effective tax rate
decreased
to
12%
for the
three months ended September 30, 2018
as compared to
13%
for the
three months ended September 30, 2017
.
The lower effective tax rate was primarily due to a lower domestic tax rate due to the change in US tax law, partially offset by a decrease in excess tax benefit from stock-based compensation for the
three months ended September 30, 2018
as compared to the to the same period in the prior year.
Liquidity and Capital Resources
Sources and Uses of Cash
Our principal sources of liquidity are cash and cash equivalents, cash generated by operations, the availability of additional funds under the Facilities and short and long term investments. We had cash and cash equivalents of
$480.8 million
and
$666.7 million
as of
September 30, 2018
and
June 30, 2018
, respectively. Cash and cash equivalents includes securities that have a maturity of three months or less at the date of purchase.
During the first quarter of fiscal year ended 2019, the Company began investing cash in various fixed income available-for-sale securities. As of
September 30, 2018
, we held
$200.0 million
in total investments of which
$55.8 million
is recorded in cash and cash equivalents. Our securities investment portfolio consists of high quality, investment grade securities from diverse issuers.
Consolidated Cash Flow Data
The following table sets forth the major components of our consolidated statements of cash flows data for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
|
Net cash provided by operating activities
|
$
|
93,941
|
|
|
$
|
96,920
|
|
|
Net cash (used in) investing activities
|
(148,119
|
)
|
|
(2,932
|
)
|
|
Net cash (used in) financing activities
|
(131,691
|
)
|
|
(66,376
|
)
|
|
Net (decrease) increase in cash and cash equivalents
|
$
|
(185,869
|
)
|
|
$
|
27,612
|
|
Cash Flows from Operating Activities
Net cash provided by operating activities in the three months ended September 30, 2018 consisted primarily of net income of
$85.7 million
, in addition to the changes in operating assets and liabilities that resulted in net cash inflows of
$6.1 million
. This net change was primarily driven by inflows arising from a
$9.6 million
increase
in taxes payable due to the timing of federal tax payments, a
$12.7 million
increase
in net accounts payable and accrued liabilities, and
$9.3 million
decrease
in accounts
receivable due to increased cash receipts in the period. These inflows were partly offset by a
$37.9 million
increase
in inventory, as a result of increased stock level to meet customer demand, partially offset by
$6.8 million
decrease
in vendor deposits.
Net cash provided by operating activities in the three months ended September 30, 2017 consisted primarily of net income of $74.9 million, in addition to the changes in operating assets and liabilities that resulted in net cash inflows of $18.6 million. This net change was primarily driven by inflows arising from a $12.0 million decrease in accounts receivable due to increased cash receipts in the period, a $7.1 million increase in taxes payable due to the timing of federal tax payments as well as a $19.4 million decrease in inventory which were partially offset with $15.8 million increase in vendor deposits and a $6.7 million net decrease in accounts payable and accrued liabilities.
Cash Flows from Investing Activities
We used
$148.1 million
of cash in investing activities during the three months ended
September 30, 2018
. For the three months ended September 30, 2018, our investing activities consist of net purchases of available-for-sale securities of
$144.1 million
and capital expenditures and purchase of intangible assets of
$4.0 million
. For the three months ended September 30, 2017, our investing activities consisted of capital expenditures of $2.9 million.
Cash Flows from Financing Activities
We used
$131.7 million
of cash in financing activities during the three months ended September 30, 2018. During the three months ended September 30, 2018, we had financing cash outflows of
$106.8 million
related to the repurchase of our common stock,
$18.5 million
related to dividends paid on our common stock and
$6.3 million
repayment on our term loan under our credit facility.
We used $66.4 million of cash in financing activities during the three months ended September 30, 2017. During the three months ended September 30, 2017 we had financing cash outflows of $108.0 million related to the repurchases of our common stock and $3.8 million repayment against our outstanding term loan under the Amended Credit Facility, offset in part by cash inflows of $45.0 million related to a draw on our revolver under our credit facility.
Liquidity
We believe our existing cash and cash equivalents, cash provided by operations and the availability of additional funds, under the Facilities and short and long term investments, will be sufficient to meet our working capital, future stock repurchases, dividends, and capital expenditure needs for the next twelve months. However, this estimate is based on a number of assumptions that may prove to be wrong and we could exhaust our available cash and cash equivalents earlier than presently anticipated. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending to support development efforts, the timing of new product introductions, market acceptance of our products and overall economic conditions.
Warranties and Indemnifications
Our products are generally accompanied by a twelve-month warranty from date of purchase, which covers both parts and labor. Generally, the distributor is responsible for the freight costs associated with warranty returns, and we absorb the freight costs of replacing items under warranty. In accordance with the Financial Accounting Standards Board’s (“FASB’s”), Accounting Standards Codification (“ASC”), 450-20, Loss Contingencies, we record an accrual when we believe it is reasonably estimable and probable based upon historical experience. We record a provision for estimated future warranty work in cost of goods sold upon recognition of revenues, and we review the resulting accrual regularly and periodically adjust it to reflect changes in warranty estimates.
We have entered and may in the future enter into standard indemnification agreements with certain distributors as well as other business partners in the ordinary course of business. These agreements may include provisions for indemnifying the distributor, OEM or other business partner against any claim brought by a third-party to the extent any such claim alleges that a Ubiquiti product infringes a patent, copyright or trademark or violates any other proprietary rights of that third-party. The maximum amount of potential future indemnification is unlimited. The maximum potential amount of future payments we could be required to make under these indemnification agreements is not estimable.
We have agreed to indemnify our directors, officers and certain other employees for certain events or occurrences, subject to certain limits, while such persons are or were serving at our request in such capacity. We may terminate the indemnification agreements with these persons upon the termination of their services with us, but termination will not affect claims for indemnification related to events occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited. We have a Directors and Officers insurance policy that limits our potential exposure for our
indemnification obligations to our directors, officers and certain other employees. We believe the fair value of these indemnification agreements is minimal. We have not recorded any liabilities for these agreements as of
September 30, 2018
.
Based upon our historical experience and information known as of the date of this report, we do not believe it is likely that we have a material liability for the above indemnities as of
September 30, 2018
.
Contractual Obligations and Off-Balance Sheet Arrangements
The following table summarizes our contractual obligations as of
September 30, 2018
for the remainder of fiscal
2019
and future fiscal years (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 (remainder)
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
|
Operating leases
|
$
|
5,619
|
|
|
$
|
6,532
|
|
|
$
|
4,615
|
|
|
$
|
1,790
|
|
|
$
|
1,376
|
|
|
$
|
314
|
|
|
$
|
20,246
|
|
|
Debt payment obligations
|
18,750
|
|
|
31,250
|
|
|
43,750
|
|
|
50,000
|
|
|
337,500
|
|
|
—
|
|
|
481,250
|
|
|
Interest and other payments on debt payment obligations
|
15,139
|
|
|
19,378
|
|
|
17,871
|
|
|
15,943
|
|
|
7,906
|
|
|
—
|
|
|
76,237
|
|
|
Purchase obligations
|
38,848
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
38,848
|
|
|
Repatriation Tax
|
—
|
|
|
8,844
|
|
|
8,844
|
|
|
8,844
|
|
|
8,844
|
|
|
66,325
|
|
|
101,701
|
|
|
Other obligations
|
1,567
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,567
|
|
|
Total
|
$
|
79,923
|
|
|
$
|
66,004
|
|
|
$
|
75,080
|
|
|
$
|
76,577
|
|
|
$
|
355,626
|
|
|
$
|
66,639
|
|
|
$
|
719,849
|
|
Operating Leases
The Company leases its headquarters in New York, NY and other locations worldwide under non cancelable operating leases that expire at various dates through 2024.
Debt and Interest Payment Obligations
On January 17, 2018, Ubiquiti Networks, Inc., the Cayman Borrower and certain subsidiaries entered into an amended and restated credit agreement (the "Second Amended & Restated Credit Agreement") with Wells Fargo, the other financial institutions named as lenders therein, and Wells Fargo as administrative agent for the lenders, that provides for a
$400 million
senior secured revolving credit facility (the "Revolving Facility") and a
$500 million
senior secured term loan facility (the "Term Facility", together with the Revolving Facility, the "Facilities"), with an option to request increases in the amounts of such credit facilities by up to an additional
$300 million
in the aggregate (any such increase to be in each lender's sole discretion). The maturity date of the Facilities is January 17, 2023.
The Second Amended & Restated Credit Agreement replaced the Company's existing
$425 million
senior secured revolving facility and
$100 million
senior secured term facility.
The Second Amended & Restated Credit Agreement requires the Company to maintain during the term of the Facilities (i) a maximum consolidated total leverage ratio of
3.25
to
1.00
and (ii) minimum liquidity of
$250.0 million
, which can be satisfied with unrestricted cash and cash equivalents and up to
$50.0 million
of availability under the Revolving Facility. Please see Note 8 of the Notes to the Consolidated Financial Statements for more information. We have calculated estimated interest payments for our debt based on the applicable rates and payments dates. Although our interest rates on our debt obligations may vary, we have assumed the most recent available interest rates for all years presented.
Purchase Obligations
We subcontract with third parties to manufacture our products. During the normal course of business, our contract manufacturers procure components and manufacture product based upon orders placed by us. If we cancel all or part of the orders, we may still be liable to the contract manufacturers for the cost of the components purchased by the subcontractors to manufacture our products. We periodically review the potential liability, and as of
September 30, 2018
we have
$3.3 million
recorded purchase obligation liability related to FrontRow. There have been no other significant liabilities for cancellations recorded as of
September 30, 2018
. Our consolidated financial position and results of operations could be negatively impacted if we were required to compensate the contract manufacturers for any unrecorded liabilities incurred. The Company had inventory purchase obligations of
$37.5
million for finished goods and
$1.3
million for raw materials as of
September 30, 2018
. Additionally, we may be subject to additional purchase obligations for components ordered by our contract manufacturers based on manufacturing forecasts we provide them each month. We estimate the amount of these additional purchase obligation to range from
$147
million to
$244
million as of
September 30, 2018
, depending upon the timing of orders placed for these components by our manufacturers. The Company expects to consume these materials within the next twelve months in the
normal course of business and therefore may not result in component purchase obligations. For that reason, the estimate amount of these additional purchase obligations have been excluded from the table above.
Transition Tax
The Company also had obligations of
$101.7 million
as of
September 30, 2018
, related to Repatriation Tax as further described in Note 13. These obligations are included within Income taxes payable and Long-term taxes payable on our Consolidated Balance Sheets.
Other Obligations
We had other obligations of
$1.6 million
as of
September 30, 2018
, which consisted primarily of commitments related to tooling research and development projects.
Unrecognized Tax Benefits
As of
September 30, 2018
, we had
$29.3
million and an additional
$3.4
million for accrued interest, classified as non-current liabilities. At this time, we are unable to make a reasonably reliable estimate of timing of payments in individual years in connection with these tax liabilities; therefore, such amounts are not included in the above contractual obligation table.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, refer to Note 2 to the consolidated financial statements.
Note About Forward-Looking Statements
When used in this Report, the words “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions and negatives of those terms are intended to identify forward-looking statements. These are statements that relate to future periods and include statements about our future results, sources of revenue, our continued growth, our gross margins, market trends, our product development, our introduction of new products, technological developments, the features, benefits and performance of our current and future products, the ability of our products to address a variety of markets, the anticipated growth of demand for connectivity worldwide, our growth strategies, future price reductions, our competitive status, our dependence on our senior management and our ability to attract and retain key personnel, dependency on and concentration of our distributors, our employee relations, current and potential litigation, the effects of government regulations, the impact of tariffs, the expected impact of taxes on our liquidity and results of operations, our compliance with laws and regulations, our expected future operating costs and expenses and expenditure levels for research and development, selling, general and administrative expenses, fluctuations in operating results, fluctuations in our stock price, our payment of dividends, our future liquidity and cash needs, our credit facility, future acquisitions of and investments in complimentary businesses and the expected impact of various accounting policies and rules adopted by the Financial Accounting Standards Board. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, the impact of U.S. tariffs on results, factors affecting our quarterly results, our ability to manage our growth, our ability to sustain or increase profitability, demand for our products, our ability to compete, our ability to rapidly develop new technology and introduce new products, our ability to safeguard our intellectual property, trends in the networking industry and fluctuations in general economic conditions, and the risks set forth throughout this Report, including under Part II: "Other Information", Item 1, “Legal Proceedings” and under Item 1A, “Risk Factors.” These forward-looking statements speak only as of the date hereof. Except as required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
