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
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, including through our webstores, 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 since 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 caused our inventory and vendor deposit balances to increase in the past, and they may cause such increases in the future. These mitigation efforts therefore 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 II – 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 II – 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 the segment can be found in Note 13, "Segment Information, Revenues by Geography and Significant Customers" to our Consolidated Financial Statements (unaudited). 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 Cloud Gateways, UniFi WiFi, UniFi Switches, UniFi Protect, UniFi Access, UniFi Talk, UniFi Connect 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, to a lesser extent, through direct sales through our webstores. Sales to distributors accounted for 64% of our revenues during the six months ended December 31, 2023. Direct sales accounted for 36% of our revenue during the six months ended December 31, 2023.
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 Vietnam 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 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 II—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 II—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 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. Our critical accounting policies are discussed in our Annual Report, filed with the SEC on August 25, 2023, and there have been no material changes other than that have been disclosed in Note 2, "Summary of Significant Accounting Policies" to our consolidated financial statements herein. As events continue to evolve our estimates may change materially in future periods. We believe that the accounting policies discussed in our Annual Report, are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Results of Operations
Comparison of Three and Six Months Ended December 31, 2023 and 2022
The following table summarizes our consolidated results of operations for the periods indicated, expressed in dollars and as a percentage of total revenues (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | | | % of Revenues | | | | % of Revenues | | | | % of Revenues | | | | % of Revenues |
| Revenues | $ | 464,954 | | | 100 | % | | $ | 493,571 | | | 100 | % | | $ | 928,032 | | | 100 | % | | $ | 991,654 | | | 100 | % |
Cost of revenues (1) | 287,307 | | | 62 | % | | 296,010 | | | 60 | % | | 566,510 | | | 61 | % | | 622,725 | | | 63 | % |
| Gross profit | 177,647 | | | 38 | % | | 197,561 | | | 40 | % | | 361,522 | | | 39 | % | | 368,929 | | | 37 | % |
| Operating expenses: | | | | | | | | | | | | | | | |
Research and development (1) | 36,911 | | | 8 | % | | 33,765 | | | 7 | % | | 73,194 | | | 8 | % | | 66,424 | | | 7 | % |
Sales, general and administrative (1) | 19,634 | | | 4 | % | | 18,643 | | | 4 | % | | 38,923 | | | 4 | % | | 35,339 | | | 4 | % |
| | | | | | | | | | | | | | | |
| Total operating expenses | 56,545 | | | 12 | % | | 52,408 | | | 11 | % | | 112,117 | | | 12 | % | | 101,763 | | | 11 | % |
| Income from operations | 121,102 | | | 26 | % | | 145,153 | | | 29 | % | | 249,405 | | | 27 | % | | 267,166 | | | 26 | % |
| Interest expense and other, net | 18,262 | | | 4 | % | | 11,272 | | | 2 | % | | 39,486 | | | 4 | % | | 21,923 | | | 2 | % |
| Income before income taxes | 102,840 | | | 22 | % | | 133,881 | | | 27 | % | | 209,919 | | | 23 | % | | 245,243 | | | 24 | % |
| Provisions for income taxes | 20,724 | | | 4 | % | | 21,676 | | | 4 | % | | 40,053 | | | 4 | % | | 39,856 | | | 4 | % |
| Net income | $ | 82,116 | | | 18 | % | | $ | 112,205 | | | 23 | % | | $ | 169,866 | | | 19 | % | | $ | 205,387 | | | 20 | % |
| (1) Includes share-based compensation as follows: | | | | | | | | | | | | | | | |
| Cost of revenues | 35 | | | | | 13 | | | | | 69 | | | | | 24 | | | |
| Research and development | 1,161 | | | | | 813 | | | | | 2,295 | | | | | 1,581 | | | |
| Sales, general and administrative | 310 | | | | | 275 | | | | | 642 | | | | | 543 | | | |
| Total share-based compensation | $ | 1,506 | | | | | $ | 1,101 | | | | | $ | 3,006 | | | | | $ | 2,148 | | | |
Revenues
Total revenues decreased $28.6 million, or 6%, from $493.6 million in the three months ended December 31, 2022 to $465.0 million in the three months ended December 31, 2023.
Total revenues decreased $63.6 million, or 6%, from $991.7 million in the six months ended December 31, 2022 to $928.0 million in the six months ended December 31, 2023.
The decline in revenues for the three months ended December 31, 2023 as compared to the same period in the prior year was primarily driven by a decrease in revenue from both our Enterprise Technology platform and Service Provider Technology platform. The decline in revenue for the six months ended December 31, 2023 as compared to the same period in the prior year was primarily driven by a decrease in revenue from our Enterprise Technology platform, partially offset by an increase in revenue from our Service Provider Technology platform.
Revenues by Product Type
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| (in thousands, except percentages) | | (in thousands, except percentages) |
| Enterprise technology | $ | 391,492 | | | 84 | % | | $ | 417,408 | | | 85 | % | | $ | 771,586 | | | 83 | % | | $ | 843,706 | | | 85 | % |
| Service provider technology | 73,462 | | | 16 | % | | 76,163 | | | 15 | % | | 156,446 | | | 17 | % | | 147,948 | | | 15 | % |
| Total revenues | $ | 464,954 | | | 100 | % | | $ | 493,571 | | | 100 | % | | $ | 928,032 | | | 100 | % | | $ | 991,654 | | | 100 | % |
Enterprise Technology revenue decreased $25.9 million, or 6%, from $417.4 million in the three months ended December 31, 2022 to
$391.5 million in the three months ended December 31, 2023. Enterprise Technology revenue decreased $72.1 million, or 9%, from $843.7 million in the six months ended December 31, 2022 to $771.6 million in the six months ended December 31, 2023.
The decrease in Enterprise Technology revenue during the three months ended December 31, 2023, as compared to the same period in the prior year, was primarily due to decline in revenue from our Enterprise Technology platform in the EMEA and Asia Pacific regions. The decrease in Enterprise Technology revenue during the six months ended December 31, 2023 as compared to the same period in the prior year, was primarily due to decline in revenue across all regions except South America.
Service Provider Technology revenue decreased $2.7 million, or 4%, from $76.2 million in the three months ended December 31, 2022 to $73.5 million in the three months ended December 31, 2023. Service Provider Technology revenue increased $8.5 million, or 6%, from $147.9 million in the six months ended December 31, 2022 to $156.4 million in the six months ended December 31, 2023.
The decrease in Service Provider Technology in the three months ended December 31, 2023 as compared to the same period in the prior year was primarily due to decline in revenues in North and South America. The increase in Service Provider Technology revenue during the six months ended December 31, 2023 as compared to the same period in the prior year, was primarily due to increased revenue in all regions except South America.
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 and six months ended December 31, 2023 and 2022 (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| (in thousands, except percentages) | | (in thousands, except percentages) |
North America(1) | $ | 225,858 | | | 49 | % | | $ | 227,452 | | | 46 | % | | $ | 450,642 | | | 49 | % | | $ | 453,165 | | | 46 | % |
| Europe, the Middle East and Africa (“EMEA”) | 172,951 | | | 37 | % | | 195,098 | | | 40 | % | | 345,345 | | | 37 | % | | 395,241 | | | 40 | % |
| Asia Pacific | 33,270 | | | 7 | % | | 43,946 | | | 9 | % | | 69,356 | | | 7 | % | | 89,278 | | | 9 | % |
| South America | 32,875 | | | 7 | % | | 27,075 | | | 5 | % | | 62,689 | | | 7 | % | | 53,970 | | | 5 | % |
| Total revenues | $ | 464,954 | | | 100 | % | | $ | 493,571 | | | 100 | % | | $ | 928,032 | | | 100 | % | | $ | 991,654 | | | 100 | % |
(1) Revenue for the United States was $210.4 million and $209.4 million for the three months ended December 31, 2023 and 2022, respectively. Revenue for the United States was $419.6 million and $419.7 million for the six months ended December 31, 2023 and 2022, respectively.
North America
Revenues in North America decreased $1.6 million, or 1%, from $227.5 million in the three months ended December 31, 2022 to $225.9 million in the three months ended December 31, 2023 and decreased $2.5 million, or 1%, from $453.2 million in the six months ended December 31, 2022 to $450.6 million in the six months ended December 31, 2023.
The decrease in North America revenues during the three months ended December 31, 2023 as compared to the same period in the prior year, was primarily due to decreased revenue from our Service Provider Technology products, offset in part by increased revenue from our Enterprise Technology products. The decrease in North America revenues during the six months ended December 31, 2023, as compared to the same period in the prior year, was primarily due to decreased revenue from our Enterprise Technology products partially offset by increased revenue from our Service Provider Technology products.
Europe, the Middle East, and Africa (EMEA)
Revenues in EMEA decreased $22.1 million, or 11%, from $195.1 million in the three months ended December 31, 2022 to $173.0 million in the three months ended December 31, 2023 and decreased $49.9 million, or 13%, from $395.2 million in the six months ended December 31, 2022 to $345.3 million in the six months ended December 31, 2023.
The decrease in EMEA revenues during the three and six months ended December 31, 2023 as compared to the same periods in the prior year, was primarily due to decreased revenue from our Enterprise Technology products, offset in part by increased revenue from our Service Provider Technology products.
Asia Pacific
Revenues in the Asia Pacific region decreased $10.7 million, or 24%, from $43.9 million in the three months ended December 31, 2022 to $33.3 million in the three months ended December 31, 2023 and decreased $19.9 million, or 22%, from $89.3 million in the six months ended December 31, 2022 to $69.4 million in the six months ended December 31, 2023.
The decrease in Asia Pacific revenues during the three and six months ended December 31, 2023 as compared to the same periods in the prior year was primarily due to decreased revenue from our Enterprise Technology products, offset in part by increased revenue from our Service Provider Technology products.
South America
Revenues in South America increased $5.8 million, or 21%, from $27.1 million in the three months ended December 31, 2022 to $32.9 million in the three months ended December 31, 2023 and increased $8.7 million, or 16%, from $54.0 million in the six months ended December 31, 2022 to $62.7 million in the six months ended December 31, 2023.
The increase in South America revenues during the three and six months ended December 31, 2023 as compared to the same periods in the prior year was due to increased revenue from our Enterprise Technology products, partially offset by a decrease in revenue from our Service Provider Technology products.
Gross Profit
Gross profit margin decreased to 38.2% in the three months ended December 31, 2023, compared to 40.0% in the three months ended December 31, 2022 and increased to 39.0% in the six months ended December 31, 2023, compared to 37.2% in the six months ended December 31, 2022. The decrease in gross profit margin for the three months ended December 31, 2023, as compared to the comparable prior year period was driven by product mix and product-related costs, offset in part by lower shipping costs. The increase in gross profit margin for the six months ended December 31, 2023, as compared to the comparable prior year period was driven by lower shipping costs, offset in part by product mix.
Operating Expenses
Research and Development
Research and development (“R&D”) expenses increased by $3.1 million, or 9%, from $33.8 million in the three months ended December 31, 2022 to $36.9 million in the three months ended December 31, 2023. As a percentage of revenues, R&D expenses increased from 7% for the three months ended December 31, 2022 to 8% for the three months ended December 31, 2023.
R&D expenses increased by $6.8 million, or 10%, from $66.4 million in the six months ended December 31, 2022 to $73.2 million in the six months ended December 31, 2023. As a percentage of revenues, R&D expenses increased from 7.0% for the six months ended December 31, 2022 to 8.0% for the six months ended December 31, 2023
The increase in R&D expenses during the three and six months ended December 31, 2023 as compared to the comparable prior year periods was primarily driven by higher employee-related expenses and prototype-related expenses.
Sales, General and Administrative
Sales, general and administrative (“SG&A”) expenses increased $1.0 million, or 5%, from $18.6 million in the three months ended December 31, 2022 to $19.6 million in the three months ended December 31, 2023. As a percentage of revenues, SG&A expenses remained flat at 4% for the three months ended December 31, 2022 compared to the three months ended December 31, 2023.
SG&A expenses increased $3.6 million, or 10%, from $35.3 million in the six months ended December 31, 2022 to $38.9 million in the six months ended December 31, 2023. As a percentage of revenues, SG&A expenses remained flat at 4% for the six months ended December 31, 2022 compared to the six months ended December 31, 2023.
The increase in SG&A costs as compared to the comparable prior year periods was primarily due to higher employee-related expenses, marketing expenses and professional fees.
Interest Expense and Other, net
Interest expense and other, net ("I&O") expenses increased $7.0 million, or 62% from $11.3 million in the three months ended December 31, 2022 to $18.3 million in the three months ended December 31, 2023. As a percentage of revenue, I&O increased from
2% for the three months ended December 31, 2022 to 4% for the three months ended December 31, 2023.
I&O expenses increased $17.6 million, or 80%, from $21.9 million in the six months ended December 31, 2022 to $39.5 million in the six months ended December 31, 2023. As a percentage of revenues, I&O expenses increased from 2% for the six months ended December 31, 2022 to 4% for the six months ended December 31, 2023.
The increase in I&O expenses during the three and six months ended December 31, 2023 as compared to the same periods in the prior year, was primarily due to higher interest expense due to incremental borrowings and increased interest rates.
Provision for Income Taxes
Our provision for income taxes decreased $1.0 million, or 4%, from $21.7 million for the three months ended December 31, 2022 to $20.7 million for the three months ended December 31, 2023. Our effective tax rate increased to 20.2% for the three months ended December 31, 2023 as compared to 16.2% for the three months ended December 31, 2022.
Our provision for income taxes increased $0.2 million, or 0.5%, from $39.9 million in the six months ended December 31, 2022 to $40.1 million in the six months ended December 31, 2023. Our effective tax rate increased from 16.3% for the six months ended December 31, 2022 to 19.1% for the six months ended December 31, 2023.
The change in effective tax rates for the three and six months ended December 31, 2023, as compared to the same period in the prior year, was primarily driven by a combination of changes in the mix of the income earned in various tax jurisdictions and a one-time release of a reserve for unrecognized tax benefit due to statute of limitation during the three and six months ended December 31, 2022.
Liquidity and Capital Resources
Sources and Uses of Cash
Our principal source of liquidity are cash and cash equivalents, cash generated by operations, the availability of additional funds under the Facilities and short-term investments. We had cash and cash equivalents of $97.6 million and $114.8 million as of December 31, 2023 and June 30, 2023, 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: | | | | | | | | | | | |
| | Six Months Ended
December 31, |
| | 2023 | | 2022 |
| | (In thousands) |
| Net cash provided by operating activities | $ | 146,263 | | | $ | 2,333 | |
| Net cash used in investing activities | (6,877) | | | (13,468) | |
| Net cash (used in) provided by financing activities | (156,611) | | | 34,416 | |
| Net (decrease) increase in cash and cash equivalents | $ | (17,225) | | | $ | 23,281 | |
Cash Flows from Operating Activities
Net cash provided by operating activities in the six months ended December 31, 2023 consisted primarily of net income of $169.9 million, a $50.1 million decrease in inventory, partially offset by other changes in operating assets and liabilities that resulted in net cash outflows of $48.6 million. This net change consisted primarily of a $53.6 million decrease in net accounts payable and accrued liabilities, a $29.3 million decrease in taxes payable, and a $17.0 million increase in vendor deposits.
Net cash provided by operating activities in the six months ended December 31, 2022 consisted primarily of net income of $205.4 million, partially offset by changes in operating assets and liabilities that resulted in net cash outflows of $219.1 million. This net change consisted primarily of a $388.1 million increase in inventory, a $32.3 million increase in accounts receivable, a $8.9 million increase in prepaid expense and other assets, a $221.5 million increase in net accounts payable and accrued liabilities, a $24.4 million decrease in taxes payable due to the timing of federal tax payments and a $15.0 million decrease in vendor deposits.
Cash Flows from Investing Activities
We used $6.9 million of cash in investing activities during the six months ended December 31, 2023. Our investing activities consisted primarily of $6.9 million of capital expenditures.
We used $13.5 million of cash in investing activities during the six months ended December 31, 2022. Our investing activities consisted primarily of $13.5 million of capital expenditures.
Cash Flows from Financing Activities
We used $156.6 million of cash in financing activities during the six months ended December 31, 2023. During the six months ended December 31, 2023, we repaid $83.8 million under the Company's credit Facilities and used $72.5 million related to dividends paid on our common stock.
We used $34.4 million of cash in financing activities during the six months ended December 31, 2022. During the six months ended December 31, 2022, we used $72.5 million related to dividends paid on our common stock and received $107.5 million (net) of funds under the Company’s credit 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, 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. 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, management of inventory and vendor deposits, the availability of additional funds under the Facilities and overall economic conditions. The COVID-19 pandemic and resulting global disruptions and inflation have caused and may continue to cause significant volatility in financial markets and the domestic and global economy. This volatility 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, refer to "Part II-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" and "Part II-Item 1A. Risk Factors – Risks Related to Our Business and Industry – General global economic downturns and macroeconomic trends, including inflation or slowed economic growth, may negatively affect our customers and their ability to purchase our products. A downturn or such other trends may decrease our revenues and increase our costs and may increase credit risk with our customers and impact our ability to collect account receivable and recognize revenue," 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, global economic downturns and macroeconomic trends 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 December 31, 2023.
Based upon our historical experience and information known as of the date of this Quarterly Report on Form 10-Q, we do not believe it is likely that we will have material liability for the above indemnities as of December 31, 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 December 31, 2023, we had $1,045.0 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 December 31, 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.
Transition Tax
We have obligations of $50.6 million as of December 31, 2023, related to transition tax. Payment of these obligations are expected to be $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
We had other obligations of $5.5 million as of December 31, 2023, which consisted primarily of commitments related to research and development projects.
Unrecognized Tax Benefits
As of December 31, 2023, we had $34.7 million of unrecognized tax benefits and an additional $4.3 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.
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 dividend, 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 prices, our competitive status, our efforts to mitigate shortages of components (including chipsets) used to manufacture our products, 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, current or potential indemnification
liabilities, 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, and the adequacy of and our reliance on our source of liquidity to meet such needs, the Facilities (as defined herein), future acquisitions of and investments in complimentary businesses, the expected impact of various accounting policies and rules adopted by the Financial Accounting Standards Board ,the military conflict between Russia and Ukraine and the escalating tensions between China and Taiwan on our business and results of operations. 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 the global shortage of components (including chipsets) and pricing inflation associated therewith, the impact of U.S. tariffs on results of operations, our ability to procure products, 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 markets that we compete and fluctuations in general economic conditions, the military conflict between Russia and Ukraine and the escalating tensions between China and Taiwan on our business, results and liquidity, 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.
