Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We develop technology platforms for high-capacity distributed Internet access, unified information technology, and consumer electronics for professional, home and personal use. We categorize our solutions into three main categories: high performance networking technology for enterprises, service providers and consumers. We target the enterprise and service provider markets through our highly engaged community of service providers, distributors, value added resellers, webstores, systems integrators and corporate IT professionals, which we refer to as the Ubiquiti Community. We target consumers through digital marketing, retail
chains and, to a lesser extent, the Ubiquiti Community.
In addition to Mr. Pera, our founder, Chairman of the Board and Chief Executive Officer, who is central to our business, the majority of our human capital resources consist of entrepreneurial and de-centralized research and development (“R&D”) personnel. We do not employ a traditional direct sales force, but instead drive brand awareness through online reviews and publications, our website, our distributors and our user community where customers can interface directly with our R&D, marketing, and support teams. Our technology platforms were designed from the ground up with a focus on delivering highly-advanced and easily deployable solutions that appeal to a global customer base.
We offer a broad and expanding portfolio of networking products and solutions for operator-owners of wireless internet services (“WISPs”), 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 WISPs 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, door access systems, 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 are targeted to the smart home and highly connected consumers. We believe that our products are differentiated due to our proprietary software, firmware expertise, and hardware design capabilities.
We distribute our products through a worldwide network of over 100 distributors and online retailers and direct to customers through our webstores.
Supply Constraints and Risks – We have experienced significant supply constraints caused, in part, by the COVID-19 pandemic. Our efforts to mitigate these supply constraints have included, for example, increasing our inventory build in an attempt to secure supply and meet customer demand, paying higher component and shipping costs to secure supply and modifying our product designs to leverage alternate suppliers. Although these mitigation efforts are intended to optimize our access to the components required to meet customer demand for our products, we have limited visibility into future sales, which makes it difficult to forecast our future results of operations. These mitigation efforts have increased, and are expected to continue to increase, our inventory and vendor deposit balances. The increasing balances of inventories and vendor deposits significantly increase the risks of future material excess, obsolete inventory and related losses. We believe that we are taking the right actions to mitigate these continuing supply constraints, however, we recognize the associated risks.
Russia-Ukraine Military Conflict - We are monitoring the military conflict between Russia and Ukraine, escalating tensions in surrounding countries, and associated economic sanctions. While the impact on our operations in Ukraine and its surrounding countries has not been material to our business or results of operations as of the date hereof, the full impact of the military conflict on our business and results of operations remains uncertain. The extent to which the conflict may impact our business or results of operations in future periods will depend on future developments, including the severity and duration of the conflict, its impact on regional and global economic conditions, as well as its impact on surrounding countries, including its impact on our operations in Ukraine and its surrounding countries, and its impact on global supply chains. Refer to “Part I – Item IA. Risk Factors” for a discussion of these factors and other risks.
China-Taiwan Tensions - We are monitoring the escalating tensions between China and Taiwan, and associated tensions between the U.S. and China. While the impact on our operations in Taiwan has not been material to our business or results of operations as of the date hereof, the full impact of the escalating tensions and potential military conflict on our business and results of operations remains uncertain. The extent to which the conflict may impact our business or results of operations in future periods will depend on future developments, including the severity and duration of the conflict, its impact on regional and global economic conditions, as well as its impact on China-U.S. relations, including its impact on our operations in Taiwan, and its impact on global supply chains. Refer to “Part I – Item IA. Risk Factors” for a discussion of these factors and other risks.
Key Components of Our Results of Operations and Financial Condition
Revenues
We operate our business as one reportable and operating segment. Further information regarding Segments can be found in Note 13, "Segment Information, Revenues by Geography and Significant Customers," to our Consolidated Financial Statements. Our revenues are derived principally from the sale of networking hardware. Because we have historically included implied post-contract customer support (“PCS”) free of charge in many of our arrangements, we attribute a portion of our systems revenues to this implied PCS.
We classify our revenues into two primary product categories: Enterprise Technology and Service Provider Technology.
•Enterprise Technology includes our UniFi platforms, including UniFi Gateway Consoles, UniFi WiFi, UniFi Switches, UniFi Protect, UniFi Access, UniFi-Talk and our AmpliFi platform.
•Service Provider Technology includes our airMAX, EdgeMAX, UFiber, Wave, GPON and airFiber platforms, as well as embedded radio products and other 802.11 standard products including base stations, radios, backhaul equipment and CPE.
We sell our products and solutions globally to enterprises and service providers primarily through our extensive network of distributors and through direct sales through our webstores. Sales to distributors accounted for 64% and 65% of our revenues during the years ended June 30, 2023 and 2022, respectively. Direct sales accounted for 36% and 35% of our revenues during the years ended June 30, 2023 and 2022, respectively.
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 which include salary, benefits and share-based compensation, in addition to costs associated with tooling, testing and quality assurance, warranty costs, logistics costs, tariffs and excess and obsolete inventory write-downs.
We currently operate warehouses located in the U.S., Europe and Asia Pacific. In addition, we outsource other logistics warehousing and order fulfillment functions located in China and to a lesser extent in other countries. 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 mostly 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. The vast majority of our products that are imported into the U.S. from China are currently subject to tariffs that range between 7.5% and 25%. These tariffs have already affected our operating results and margins. For so long as such tariffs are in effect, we expect it will continue to affect our operating results and margins. As a result, our historical and current gross profit margins may not be indicative of our gross profit margins for future periods. Refer to “Part I — Item 1A. Risk Factors — Risks Related to Our International Operations — Our business may be negatively affected by political events and foreign policy responses” for additional information.
Operating Expenses
We classify our operating expenses as research and development, and sales, general and administrative expenses.
•Research and development expenses consist primarily of salary and benefit expenses, including share-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 share-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.
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. We must assess potential exposures and, where necessary, provide a reserve to cover any expected loss. To the extent that we establish a reserve, the provision for income taxes would be increased. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We record an additional charge in our provision for taxes in the period in which we determine that tax liability is greater than our original estimate. We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations and comprehensive income. Refer to “Part I —Item 1A. Risk Factors — Risks Related to Regulatory, Legal and Tax Matters — Changes in applicable tax regulations could negatively affect our financial results” for additional information.
Critical Accounting Policies and Estimates
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. As events continue to evolve our estimates may change materially in future periods. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Recognition of Revenues
Revenue consists of revenue from sales of hardware and the related essential software (“Products”) as well as related implied PCS. We recognize revenue when obligations under the terms of a contract with our customers are satisfied, generally, upon transfer of control of promised goods or services to customers, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services. We apply the following five-step revenue recognition model:
•Identification of the contract, or contracts with a customer
•Identification of the performance obligations in the contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract
•Recognition of revenue when, or as, we satisfy the performance obligation
Transfer of control to the customer for products generally occurs at the point in time when products have been shipped to our customer 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.
PCS is the right to receive, on a when-and-if available basis, future unspecified software upgrades and features relating to the product’s essential software as well as technical support and bug fixes.
We account 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. Our distinct performance obligations consist mainly of transferring control of our products identified in the contracts, purchase orders or invoices and implied PCS services.
Our contracts with the majority of our distribution customers do not include provisions for cancellations, returns, inventory swaps, or refunds that materially impact recognized revenue. Internet or Web based sales include regulatory provisions which allow customers to return the goods, generally within 30 days. We record a provision for returns related to this variable consideration based upon its historical returns experience with these customers.
We record amounts billed for shipping and handling costs as revenues. We classify shipping and handling costs incurred by us as cost of revenue. Deposits payments received from distributors in advance of recognition of revenues are included in current liabilities of our balance sheet and are recognized as revenues when all the criteria for recognition of revenues are met.
Transaction price and allocation to performance obligations
Transaction prices are typically based on contracted rates. Although payment terms vary, payment is generally due from customers within 60 days of the invoice date and the contracts do not have significant financing components or include extended payment terms. We are directly responsible for fulfilling the performance obligations in contracts with customers and do not rely on another party to fulfill our promise. We use observable list 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-alone selling price of our implied PCS obligation. When our contracts contain multiple performance obligations, 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.
Costs for research and development and sales and marketing are expensed as incurred. If the estimated life of the hardware product should change, the future rate of amortization of the revenues allocated to PCS could also change.
Key factors considered by the Company in developing the estimated cost in the cost plus margin approach for PCS include reviewing the activities of specific employees engaged in support and software enhancements to determine the amount of time that is allocated to the development of the undelivered elements, determining the cost of the development effort, and then adding an appropriate level of gross profit to these costs.
Inventory and Inventory Valuation
Our inventories are primarily finished goods and, to a lesser extent, raw materials. Inventories are stated at the lower of actual cost, computed using the first-in, first-out method, or net realizable value (NRV). NRV is based upon an estimated average selling price reduced by the estimated costs of disposal. The determination of NRV involves numerous judgments including estimating average selling prices based upon recent sales, industry trends, existing customer orders, and seasonal factors. Should actual market conditions differ from our estimates, future results of operations could be materially affected. We reduce the value of our inventory for estimated obsolescence or lack of marketability by the difference between the cost of the affected inventory and the NRV. Write-downs are not reversed until the related inventory has been subsequently sold or scrapped.
The valuation of inventory also requires us to estimate excess and obsolete inventory. The determination of excess or obsolete inventory is estimated based on a comparison of the quantity and cost of inventory on hand to our forecast of customer demand which is dependent on various factors and requires us to use judgment in forecasting future demand for its products. We also consider the rate at which new products will be accepted in the marketplace and how quickly customers will transition from older products to newer products. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required, which would have a negative impact on our gross margin. If we ultimately sell inventory that has been previously written down, our gross margins in future periods would be positively impacted.
We capitalize manufacturing overhead expenditures as part of inventory costs. Capitalized costs primarily include management’s best estimate of the indirect labor, tariffs, shipping and logistics costs incurred related to inventory acquired or produced but not sold during the respective period. Manufacturing overhead costs are capitalized to inventory and are recognized as cost of revenues in future periods based on when the inventory is sold or written-down.
Income Taxes
We account for income taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our financial statements or tax returns. Deferred tax assets and liabilities are determined based on the temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We establish valuation allowances when necessary to reduce deferred tax assets to the amount we expect to realize. The assessment of whether or not a valuation allowance is required often requires significant judgment including current operating results, the forecast of future taxable income and ongoing prudent and feasible tax planning initiatives.
In addition, our calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws. We may be subject to income tax audits in each of the jurisdictions in which we operate and, as a result, must also assess exposures to any potential issues arising from current or future audits of current and prior years’ tax returns. Accordingly, we must assess such potential exposures and, where necessary, provide a reserve to cover any expected loss. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on our financial condition and operating results. We reflect changes in recognition or measurement in the period in which our change in judgment occurs.
We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheet.
Results of Operations
Comparison of Years Ended June 30, 2023 and 2022
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended June 30, |
| | 2023 | | 2022 |
| | (In thousands, except percentages) |
| Revenues | $ | 1,940,512 | | | 100 | % | | $ | 1,691,692 | | | 100 | % |
Cost of revenues (1) | 1,179,781 | | | 61 | % | | 1,021,880 | | | 60 | % |
| Gross profit | 760,731 | | | 39 | % | | 669,812 | | | 40 | % |
| Operating expenses: | | | | | | | |
Research and development (1) | 145,172 | | | 7 | % | | 137,689 | | | 8 | % |
Sales, general and administrative (1) | 70,993 | | | 4 | % | | 69,859 | | | 4 | % |
| Total operating expenses | 216,165 | | | 11 | % | | 207,548 | | | 12 | % |
| Income from operations | 544,566 | | | 28 | % | | 462,264 | | | 28 | % |
| Interest expense and other, net | 58,224 | | | 3 | % | | 17,815 | | | 1 | % |
| Income before income taxes | 486,342 | | | 25 | % | | 444,449 | | | 27 | % |
Provision for income taxes | 78,701 | | | 4 | % | | 65,792 | | | 4 | % |
| Net income | $ | 407,641 | | | 21 | % | | $ | 378,657 | | | 23 | % |
| | | | | | | |
| (1) Includes share-based compensation as follows | | | | | | | |
| Cost of revenues | $ | 73 | | | | | $ | 74 | | | |
| Research and development | 3,541 | | | | | 2,541 | | | |
| Sales, general and administrative | 1,120 | | | | | 901 | | | |
| Total share-based compensation | $ | 4,734 | | | | | $ | 3,516 | | | |
Revenues
Total revenues increased $248.8 million, or 15%, from $1,691.7 million in fiscal 2022 to $1,940.5 million in fiscal 2023. The increase in revenue was primarily driven by an increase in revenue in the Enterprise Technology platform. During fiscal year ended June 30, 2023, there were no material price changes in our products sold. Overall, our fiscal 2023 revenue benefited from our improved ability to secure components and produce products. We have also experienced an increase in direct sales through our webstore which has a higher average selling price compared to sales to our distribution partners and we continue to introduce new products which may have average selling prices and margins different than our legacy products.
Revenues by Product Type | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended June 30, |
| 2023 | | 2022 |
| (in thousands, except percentages) |
| Enterprise Technology | 1,621,426 | | | 84 | % | | 1,316,685 | | | 78 | % |
| Service Provider Technology | $ | 319,086 | | | 16 | % | | $ | 375,007 | | | 22 | % |
| Total revenues | $ | 1,940,512 | | | 100 | % | | $ | 1,691,692 | | | 100 | % |
Enterprise Technology revenues increased $304.7 million, or 23%, from $1,316.7 million in fiscal 2022, to $1,621.4 million in fiscal 2023 primarily due to increased revenue from our Enterprise Technology platform across all geographic regions. During fiscal 2023 we were able to procure components and manufacture products at a level far above fiscal 2022.
Service Provider Technology revenues decreased $55.9 million, or 15%, from $375.0 million in fiscal 2022, to $319.1 million in fiscal 2023, primarily due to decreased revenues in our Service Provider Technology platform across all geographic locations.
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 fiscal 2023 and fiscal 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended June 30, |
| | 2023 | | 2022 |
| (in thousands, except percentages) |
North America (1) | $ | 922,230 | | | 48% | | $ | 790,809 | | | 47% |
| Europe, the Middle East and Africa | 759,405 | | | 39% | | 675,306 | | | 40% |
| Asia Pacific | 148,502 | | | 8% | | 134,961 | | | 8% |
| South America | 110,375 | | | 5% | | 90,616 | | | 5% |
| Total revenues | $ | 1,940,512 | | | 100% | | $ | 1,691,692 | | | 100% |
(1) Revenue for the United States was $855.3 and $734.5 in fiscal 2023 and fiscal 2022, respectively.
North America
Revenues in North America increased $131.4 million, or 16.6%, from $790.8 million in fiscal 2022 to $922.2 million in fiscal 2023. The year-over-year increase was primarily due to increased revenue from Enterprise Technology products, partially offset by decreased revenue from Service Provider Technology products.
Europe, the Middle East, and Africa (“EMEA”)
Revenues in EMEA increased $84.1 million, or 12.5%, from $675.3 million in fiscal 2022 to $759.4 million in fiscal 2023. The year-over-year increase was due to increased revenues from Enterprise Technology products, partially offset by decreased revenue from Service Provider Technology products.
Asia Pacific
Revenues in the Asia Pacific region increased $13.5 million, or 10.0%, from $135.0 million in fiscal 2022 to $148.5 million in fiscal 2023. The year-over-year increase was due to increased revenues from Enterprise Technology products, partially offset by decreased revenue from Service Provider Technology products.
South America
Revenues in South America increased $19.8 million, or 21.8%, from $90.6 million in fiscal 2022 to $110.4 million in fiscal 2023. The year-over-year increase was due to increased revenues from Enterprise Technology products, partially offset by decreased revenue from Service Provider Technology products.
Gross Profit
Gross profit margin decreased to 39.2% in fiscal 2023 from 39.6% in fiscal 2022. The decline in gross profit margin for fiscal 2023 as compared to fiscal 2022 was primarily driven by changes in product mix and higher component costs, partially offset by lower shipping costs.
Operating Expenses
Research and Development
R&D expenses increased $7.5 million, or 5.4%, from $137.7 million in fiscal 2022 to $145.2 million in fiscal 2023. As a percentage of revenues, R&D expenses decreased from 8% in fiscal 2022 to 7% in fiscal 2023. The increase in R&D expense for fiscal 2023 versus fiscal 2022 was primarily driven by higher employee-related expenses and facility costs.
Sales, General and Administrative
Sales, general and administrative (“SG&A”) expenses increased $1.1 million, or 1.6%, from $69.9 million in fiscal 2022 to $71.0 million in fiscal 2023. As a percentage of revenues, SG&A expenses remained consistent at 4% for both fiscal 2022 and 2023. The increase in fiscal 2023 SG&A expenses as compared to fiscal 2022 was primarily driven by increased fees associated with webstore credit card processing, partially offset by lower professional fees and marketing expenses.
Interest Expense and Other, net
Interest expense and other, net ("I&O") expenses increased $40.4 million, or 226.8%, from $17.8 million in fiscal 2022 to $58.2 million in fiscal 2023. As a percentage of Revenue, I&O expense increased from 1% in fiscal 2022 to 3% in fiscal 2023. The increase in I&O expense for fiscal 2023 as compared to fiscal 2022 was primarily driven by higher interest expense due to incremental borrowings and increased interest rates.
Provision for Income Taxes
Our provision for income taxes increased 19.6% from $65.8 million for fiscal 2022 to $78.7 million for fiscal 2023. Our effective tax rate increased to 16.2% in fiscal 2023 as compared to 14.8% for fiscal 2022. The change in effective tax rates for fiscal 2023 as compared to fiscal 2022 was primarily driven by a change in the mix of the income earned in various jurisdictions as well as an increase in current U.S. taxes as a result of mandatory capitalization and amortization of R&D expenditures incurred in fiscal year 2023, as required by the Tax Cuts and Jobs Act of 2017 ("TCJA"), and its interplay with global intangible low-taxes income ("GILTI"). There is no offsetting deferred benefit due to our election to treat GILTI as a period cost.
Comparison of Year Ended June 30, 2022 and 2021
Pursuant to Regulation S-K item 303, a detailed review of our fiscal 2022 performance compared to our fiscal 2021 performance is set forth in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, filed with the SEC on August 26, 2022.
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 (as defined herein) and short-term investments. We had cash and cash equivalents of $114.8 million and $136.2 million at June 30, 2023 and 2022, respectively.
Consolidated Cash Flow Data
The following table sets forth the major components of our consolidated statements of cash flows data for the periods presented (in thousands):
| | | | | | | | | | | |
| | Year ended June 30, |
| | 2023 | | 2022 |
| Net cash (used in) provided by operating activities | $ | (145,428) | | | $ | 370,259 | |
| Net cash (used in) investing activities | (20,934) | | | (11,180) | |
| Net cash provided by (used in) financing activities | 144,964 | | | (472,273) | |
| Net increase (decrease) in cash and cash equivalents | $ | (21,398) | | | $ | (113,194) | |
Cash Flows from Operating Activities
For fiscal 2023 the net cash used in operating activities was $145.4 million, primarily due to a significant increase in inventory and to a lesser extent, increases in vendor deposits and accounts receivable. The key uses of cash resulting in the net cash outflow from operations was a $487.9 million increase in inventory, a $39.5 million increase in vendor deposits and a $48.2 million increase in accounts receivable, partially offset by $407.6 million of net income. The increase in inventories is a result of the strategic decision to secure inventory while components were available in an effort to increase product availability. The increase in account receivable is a result of higher sales.
Net cash provided by operating activities in fiscal 2022 consisted primarily of net income of $378.7 million, partially offset by changes in operating assets and liabilities that resulted in net cash outflows of $38.1 million. This net change consisted primarily of $29.6 million increase in inventory, $79.0 million increase in vendor deposits, and a $10.3 million decrease in taxes payable due to the timing of federal tax payments, offset by $52.7 million decrease in accounts receivable due to lower revenue for the period, a $1.8 million decrease in prepaid and other assets, and a $29.9 million increase in accounts payable, accrued and other liabilities.
Cash Flows from Investing Activities
We used $20.9 million of cash in investing activities during fiscal 2023. Our investing activities consisted primarily of $20.9 million of capital expenditures and purchase of intangible assets.
We used $11.2 million of cash in investing activities during fiscal 2022. Our investing activities consisted primarily of $13.5 million of capital expenditures and purchase of intangible assets, offset by $2.3 million net proceeds from sales and maturities of our available-for-sale securities.
Cash Flows from Financing Activities
We had cash inflows of $145.0 million from financing activities during fiscal 2023. During fiscal 2023, in order to support the increase in inventories we borrowed a net of $291.9 million under our facilities, we also paid $145.0 million for dividends on our common stock and debt issuance costs of $1.2 million. During fiscal 2023 we increased the size of our facility to include an additional $250.0 million term loan. The proceeds from this new term loan were used to repay a portion of the outstanding revolver loans under the revolving facility. See Note 7 – Debt of the Notes to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K for additional information regarding the Facilities.
We used $472.3 million of cash in financing activities during fiscal 2022. During fiscal 2022, we used $618.1 million related to repurchase of common stock, $148.1 million related to dividends paid on our common stock, and received net proceeds from our borrowings of $295.0 million. See Note 7 – Debt of the Notes to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K for additional information regarding the Facilities.
Liquidity
We believe our existing cash and cash equivalents, in addition to the ability to draw cash under the Revolving Facility, if needed, will be sufficient to meet our near-term working capital requirements, future stock repurchases, dividends, and capital expenditure needs for the next twelve months, as well as long-term liquidity requirements in the event that the cash from operations is not adequate to meet our cash needs. A key objective for liquidity in the next twelve months is to reduce inventories and debt levels. 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 or need to rely more heavily on the Facilities or other sources of liquidity to
continue to meet our needs. 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, the availability of additional funds under the Facilities and overall economic conditions. The COVID-19 pandemic and resulting global disruptions have caused and may continue to cause significant volatility in financial markets and the domestic and global economy. This disruption can contribute to potential payment delays or defaults in our accounts receivable, affect asset valuations resulting in impairment charges, and affect the availability of financing credit as well as other segments of the credit markets. For a further discussion of the uncertainties and business risks associated with the COVID-19 pandemic, refer to “Part I-Item 1A. Risk Factors – Risks Related to Our Business and Industry - Our contract manufacturers, logistics centers and certain administrative and research and development operations, as well as our customers and suppliers, are located in areas likely to be subject to natural disasters, public health problems, military conflicts and geopolitical tensions, which could adversely affect our business, results of operations and financial condition” for additional information. We expect to continue to maintain financing flexibility in the current market conditions. However, due to the rapidly evolving global situation, it is not possible to predict whether unanticipated consequences of the pandemic are reasonably likely to materially affect our liquidity and capital resources in the future.
Warranties and Indemnifications
Our products are generally accompanied by a twelve to twenty-four 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 June 30, 2023 or 2022.
Based upon our historical experience and information known as of the date of this Annual Report on Form 10-K, we do not believe it is likely that we will have material liability for the above indemnities as of June 30, 2023.
Contractual Obligations and Off-Balance Sheet Arrangements
Our contractual obligations represent material expected or contractually committed future payment obligations. We believe that we will be able to fund these obligations through our existing cash and cash equivalents, cash generated from operations and the availability of additional funds under the Facilities.
Purchase Obligations
We subcontract with third parties to manufacture our products and supply key components. As of June 30, 2023 we had $1,136.7 million of purchase commitments with these third parties. 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. There have been no significant liabilities for current or anticipated cancellations recorded as of June 30, 2023. Our consolidated financial position and results of operations could be negatively impacted if we were required to compensate these third parties. In addition, we may be subject to additional purchase obligations to our contract manufacturers for supply agreements and components ordered by them based on manufacturing forecasts we provide them each month. See Note 9 – Commitments and Contingencies of the Notes to our Consolidated Financial Statements, included in Part IV, Item 15, of this Annual Report on Form 10-K for future payment
commitments under purchase commitments as of June 30, 2023.
Transition Tax
We have obligations of $67.5 million as of June 30, 2023, related to transition tax. Payment of these obligations are expected to be $16.9 million for fiscal 2024, $22.5 million for fiscal 2025 and $28.1 million for fiscal 2026. These obligations are included within Income tax payable and Long-term taxes payable on our consolidated balance sheets.
Other Obligations
As of June 30, 2023, we have other obligations of $5.9 million which consisted primarily of commitments related to research and development projects.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, refer to Note 2 to the Consolidated Financial Statements.
