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UBIQUITI NETWORKS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
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 Part II, Item 1, Legal Proceedings and 1A, Risk Factors,
in this report.
Overview
We are a product driven company that leverages innovative proprietary
technologies to deliver networking solutions with compelling price-performance
characteristics to both start-up and established network operators and service
providers. Our products bridge the digital divide by fundamentally changing the
economics of deploying high performance networking solutions in underserved and
underpenetrated wireless broadband access markets globally. These markets
include emerging markets and other areas where individual users and small and
medium sized enterprises do not have access to the benefits of carrier class
broadband networking. Our business model has enabled us to break down
traditional barriers, such as high product and network deployment costs, which
are driven by business model inefficiencies and achieve rapid market adoption of
our products and solutions in previously underserved and underpenetrated
markets. Our business model and proprietary technologies provide us with a
significant and sustainable competitive advantage over incumbents, who we
believe are unable to respond effectively due to their higher cost business
models.
We offer a broad and expanding portfolio of networking products and solutions
and in the outdoor wireless, enterprise WLAN, video surveillance, wireless
backhaul and machine-to-machine communications markets. We began shipping
embedded radios in fiscal 2006. In fiscal 2008 we introduced a line of products
based on 802.11 standard protocols and in early fiscal 2010, we introduced a
number of new products based on our proprietary airMAX protocol, which have been
rapidly adopted by network operators and high-performance proprietary airMAX
service providers. Since the beginning of fiscal 2011, we have introduced UniFi,
airVision, airFiber, mFi and EdgeMAX, which are collectively referred to in this
report as our New Platforms. In both the three months ended September 30, 2012
and 2011, our systems revenue accounted for 83% of our revenues. In the future,
we expect sales of our airMAX platform and our new product platforms to continue
to represent a growing portion of our revenues and the portion of our revenues
derived from our 802.11 standard products to decline as a percentage of total
revenues.
Building on our leadership in the underserved and underpenetrated segments of
the wireless broadband access market, we intend to expand our product offerings
in our existing market and enter adjacent markets by relying on the combination
of our efficient business model and proprietary technologies. For example, we
have introduced products and solutions for the enterprise WLAN, video
surveillance, and since late fiscal 2011 licensed microwave wireless backhaul,
machine-to-machine communication and router markets. As we enter such new
markets, we plan to leverage existing distributor relationships and establish
engaged communities similar to that of the Ubiquiti Community to keep our
operating expenses in line with our current model and enable us to offer
products in these new markets with compelling price-performance characteristics.
Our revenues decreased 22% to $61.5 million in the three months ended
September 30, 2012 from $79.2 million in the three months ended September 30,
2011. We believe the overall decrease in revenues during the three months ended
September 30, 2012 was primarily driven by lost sales due to the proliferation
of counterfeit versions of our products, which has also created customer
uncertainty regarding the authenticity of their potential purchases. We had net
income of $13.2 million and $21.5 million in the three months ended
September 30, 2012 and 2011, respectively.
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Key Components of Our Results of Operations and Financial Condition
Revenues
Our revenues are derived principally from the sale of networking hardware and
management tools. In addition, while we do not sell maintenance and support
separately, 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 three product categories: systems, embedded radios
and antennas/other.
• Systems consists of three product categories:
• Our proprietary airMAX platform products for network operators and service providers;
• Our new platform products which include significant platforms
introduced in late fiscal 2011 and during 2012 which includes the
UniFi, airVision and airFiber, mFi and EdgeMAX platforms; and
• Other 802.11 standard products including base stations, radios,
backhaul equipment and CPE.
• Embedded radios consist of more than 25 radio products primarily for OEMs,
including both point to point and point to multipoint radios in the 2.0 to
6.0GHz spectrum, that are offered with a variety of features.
• Antennas/other consist of antenna products in the 2.0 to 6.0GHz spectrum, as well as miscellaneous products such as mounting brackets, cables and
power over Ethernet adapters. These products include both high performance
sector and directional antennas. This category also includes our
allocation of revenues to PCS.
We sell substantially all of our products through a limited number of
distributors and other channel partners, such as resellers and OEMs. Sales to
distributors accounted for 97% and 98% of our revenues in the three months ended
September 30, 2012 and 2011, respectively. Other channel partners, such as
resellers and OEMs, largely accounted for the balance of our revenues. We sell
our products without any right of return.
Cost of Revenues
Our cost of revenues is comprised primarily of the costs of procuring finished
goods from our contract manufacturers and chipsets that we consign to certain of
our contract manufacturers. In addition, cost of revenues includes tooling,
labor and other costs associated with engineering, testing and quality
assurance, warranty costs, stock-based compensation and excess and obsolete
inventory.
We outsource our manufacturing and order fulfillment and utilize contract
manufacturers located primarily in China and, to a lesser extent, Taiwan. We
also evaluate and utilize other vendors for various portions of our supply chain
from time to time. Our manufacturing 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,
pricing due to competitive pressure, production costs, foreign exchange rates
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.
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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 stock-based compensation, for employees and costs for
contractors engaged in research, design and development activities, as
well as costs for prototypes, facilities and travel. Over time, we expect
our research and development costs to increase as we continue making
significant investments in developing new products and developing 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 trade shows, marketing programs,
promotional materials, bad debt expense, professional services,
facilities, general liability insurance and travel. As our product
portfolio and targeted markets expand, we may need to employ different
sales models, such as building a direct sales force. These sales models
would likely increase our costs. Over time, we expect our sales, general
and administrative expenses to increase in absolute dollars due to
continued growth in headcount, expand our registration and defense of trademarks and patents efforts and to support our business and operations
as a public company.
Deferred Revenues and Costs
In the event that collectability of a receivable from products we have shipped
is not probable, we classify those amounts as deferred revenues on our balance
sheet until such time as we receive payment of the accounts receivable. We
classify the cost of products associated with these deferred revenues as
deferred costs of revenues. At September 30, 2012 and June 30, 2012, we did not
have any revenue deferred for transactions where we lacked evidence that
collectability of the receivables recorded was reasonably probable.
Also included in our deferred revenues is a portion related to PCS obligations
that we estimate we will perform in the future. As of September 30, 2012 and
June 30, 2012, we had deferred revenues of $798,000 and $805,000 respectively,
related to these obligations.
Prepayments
We have historical agreements with certain contract manufacturers whereby we
prepay for a portion of the product costs to assure the manufacture and timely
delivery of our products. As of September 30, 2012 and June 30, 2012, we had
prepayment balances of $875,000 and $129,000, respectively.
Critical Accounting Policies
We prepare our condensed 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 condensed
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 on Form 10-K for the fiscal year ended June 30,
2012, as filed on September 28, 2012 with the SEC, or the Annual Report, and
there have been no material changes.
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Results of Operations
Comparison of Three Months Ended September 30, 2012 and 2011
Three Months Ended September 30,
2012 2011
(In thousands, except percentages)
Revenues $ 61,535 100 % $ 79,167 100 %
Cost of revenues(1) 36,515 59 % 46,154 58 %
Gross profit 25,020 41 % 33,013 42 %
Operating expenses:
Research and development(1) 4,711 8 % 3,369 4 %
Sales, general and administrative(1) 4,534 7 % 2,144 3 %
Total operating expenses 9,245 15 % 5,513 7 %
Income from operations 15,775 26 % 27,500 35 %
Interest expense and other, net (86 ) * % (634 ) (1 )%
Income before provision for income taxes 15,689 25 % 26,866 34 %
Provision for income taxes 2,510 4 % 5,373 7 %
Net income $ 13,179 21 % $ 21,493 27 %
* Less than 1%
(1) Includes stock-based compensation as follows:
Cost of revenues
$ 81 $ 6
Research and development 266 116
Sales, general and administrative 309 229
Total stock-based compensation $ 656 $ 351
Revenues
Revenues decreased $17.6 million, or 22%, from $79.2 million in the three months
ended September 30, 2011 to $61.5 million in the three months ended
September 30, 2012. We believe the overall decrease in revenues during the three
months ended September 30, 2012 was primarily driven by lost sales due to the
proliferation of counterfeit versions of our products, which has also created
customer uncertainty regarding the authenticity of their potential purchases,
and the effects of a buildup in channel inventory with our distributors. This
has had the most significant impact on our airMAX platform which decreased $17.8
million.
In the three months ended September 30, 2012, revenues from Distributor A
represented 15% of our revenues. In the three months ended September 30, 2011,
revenues from Distributor A and Distributor B represented 18% and 16% of our
revenues, respectively. No other distributor or customer represented more than
10% of our revenues in the three months ended September 30, 2012 or 2011.
Revenues by Product Type
Three Months Ended September 30,
2012 2011
(in thousands, except percentages)
airMAX $ 32,057 52 % $ 49,835 63 %
New platforms 15,628 25 % 2,734 4 %
Other systems 3,784 6 % 12,765 16 %
Systems 51,469 83 % 65,334 83 %
Embedded radio 1,714 3 % 3,225 4 %
Antennas/other 8,352 14 % 10,608 13 %
Total revenues $ 61,535 100 % $ 79,167 100 %
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Systems revenues decreased $13.9 million, or 21%, from $65.3 million in the
three months ended September 30, 2011 to $51.5 million in the three months ended
September 30, 2012. As noted above, we believe the decrease in systems revenues
was primarily driven by lost sales due to the proliferation of counterfeit
versions of our products, in particular our airMAX product line. The decrease in
our airMAX product line was partially offset by increased sales in our new
platforms category, which includes significant platforms introduced since late
fiscal 2011. Our new platforms contributed $15.6 million and $2.7 million of
revenue the three months ended September 30, 2012 and 2011, respectively. Our
other systems revenue decreased $9.0 million during the three months ended
September 30, 2012 as compared to the three months ended September 30, 2011 due
primarily to our September 2011 quarter including a large order to a direct
customer.
Embedded radio revenues decreased $1.5 million from the three months ended
September 30, 2011 to 2012. We anticipate that embedded radio products will
decline as a percentage of revenues in future periods as sales of these products
are outpaced by sales of systems products.
Antennas/other revenues decreased $2.3 million, or 21% from $10.6 million in the
three months ended September 30, 2011 to $8.4 million in the three months ended
September 30, 2012. The decline in antennas/other revenues was primarily due to
the decreased sales of our systems platforms, which negatively impacted the
demand for associated antennas. Other revenues also include revenues that are
attributable to PCS. Antenna/other revenues may continue to increase in absolute
dollars in future periods but will decline as a percentage of total revenues due
to more rapid growth of systems revenues.
Revenues by Geography
We generally forward products directly from our manufacturers to freight
companies in Hong Kong, which have been retained by our distributors and who in
turn ship to other locations throughout the world. We have determined the
geographical distribution of our product revenues based on ship-to destinations.
A majority of our sales are to distributors who in turn sell to resellers or
directly to end customers. As a result of these factors, we believe that sales
to certain geographic locations might be higher or lower, as the ultimate
destinations are difficult to ascertain. Revenues in North Americas decreased
primarily due to a significant decline in orders from one of our distributors.
We believe the decrease in revenues in South American and Europe, the Middle
East and Africa was primarily driven by the proliferation of counterfeit
versions of our products, which has also created customer uncertainty regarding
the authenticity of their potential purchases. Revenues in the Asia Pacific
region tend to be volatile given the low levels of revenues. The following are
our revenues by geography for the three months ended September 30, 2012 and 2011
(in thousands, except percentages):
Three Months Ended September 30,
2012 2011
(In thousands, except percentages)
North America(1) $ 20,361 33 % $ 24,941 32 %
South America 10,243 17 % 19,835 25 %
Europe, the Middle East and Africa 23,144 37 % 24,783 31 %
Asia Pacific 7,787 13 % 9,608 12 %
Total revenues $ 61,535 100 % $ 79,167 100 %
(1) Revenue for the United States was $19.3 million and $24.4 million for the
three months ended September 30, 2012 and 2011, respectively.
Cost of Revenues and Gross Margin
Cost of revenues decreased $9.6 million, or 21%, from $46.2 million in the three
months ended September 30, 2011 to $36.5 million in the three months ended
September 30, 2012, primarily due to decreased revenues and to a lesser extent,
changes in product mix. Gross margin decreased from 42% in the three months
ended September 30, 2011 to 41% in the three months ended September 30, 2012,
reflecting an increase in variable operating costs.
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Operating Expenses
Research and Development
Research and development expenses increased $1.3 million, or 40%, from $3.4
million in the three months ended September 30, 2011 to $4.7 million in the
three months ended September 30, 2012. As a percentage of revenues, research and
development expenses increased from 4% in the three months ended September 30,
2011 to 8% in the three months ended September 30, 2012. The increase in
research and development expenses in absolute dollars was due to increases in
headcount as we broadened our research and development activities to new product
areas. As a percentage of revenues, research and development expenses increased
primarily due to our overall decrease in revenues. Over time, we expect our
research and development costs to increase in absolute dollars as we continue
making significant investments in developing new products and developing new
versions of our existing products.
Sales, General and Administrative
Sales, general and administrative expenses increased $2.4 million, or 111%, from
$2.1 million in the three months ended September 30, 2011 to $4.5 million in the
three months ended September 30, 2012. As a percentage of revenues, sales,
general and administrative expenses increased from 3% in the three months ended
September 30, 2011 to 7% in the three months ended September 30, 2012. Sales,
general and administrative expenses increased due largely to increased legal
expenses associated with our anti-counterfeiting litigation, increased marketing
and tradeshow activity and bad debt expense. As a percentage of revenues sales,
general and administrative expenses increased primarily due to our overall
revenue decrease in revenues. Over time, we expect our sales, general and
administrative expenses to increase in absolute dollars due to continued efforts
to protect our intellectual property and growth in headcount to support our
business and operations.
Interest Expense and Other, Net
Interest expense and other, net was $86,000 for the three months ended
September 30, 2012, representing an increase of $548,000 from $634,000 for the
three months ended September 30, 2011. During the three months ended
September 30, 2011, we incurred interest expense on our convertible subordinated
promissory notes issued as part of the repurchase of Series A convertible
preferred stock from entities affiliated with Summit Partners, L.P. in July
2011. The convertible subordinated promissory notes were repaid in full in
October 2011.
Provision for Income Taxes
Our provision for income taxes decreased $2.9 million, or 53%, from $5.4 million
for the three months ended September 30, 2011 to $2.5 million for the three
months ended September 30, 2012. Our effective tax rate decreased to 16% for the
three months ended September 30, 2012 as compared to the three months ended
September 30, 2011 due to a larger percentage of our overall profitability
occurring in foreign jurisdictions with lower income tax rates.
Liquidity and Capital Resources
Sources and Uses of Cash
Since inception, our operations primarily have been funded through cash
generated by operations. Cash, cash equivalents and short-term marketable
securities increased from $122.1 million at June 30, 2012 to $132.5 million at
September 30, 2012.
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Consolidated Cash Flow Data
The following table sets forth the major components of our condensed
consolidated statements of cash flows data for the periods presented:
Three Months Ended
September 30,
2012 2011
(In thousands) Net cash provided by operating activities $ 23,695 $ 15,719
Net cash used in investing activities (2,349 ) (205 )
Net cash used in financing activities (10,920 ) (39,299 )
Net increase (decrease) in cash and cash equivalents $ 10,426 $ (23,785 )
Cash Flows from Operating Activities
Net cash provided by operating activities in the three months ended
September 30, 2012 of $23.7 million consisted primarily of net income of $13.2
million and by net increases in operating assets and liabilities of 9.0 million.
These changes consisted primarily of a $14.3 million decrease in accounts
receivable due to decreased revenues, a $6.4 million decrease in accounts
payable and accrued liabilities due to decreased overall business activity, a
$2.3 million increase in taxes payable due the timing of federal tax payments
and a $1.3 million increase in prepaid expenses and other current assets due
primarily to increased deposits with our vendors. Additionally, our net income
included non-cash adjustments due to stock-based compensation, depreciation and
amortization, adjustments to our provisions for doubtful accounts and inventory
obsolescence and an excess tax benefit from stock-based awards. The net of these
non-cash adjustments resulted in an increase of our net cash provided by
operating activities of $1.5 million.
Net cash provided by operating activities in the three months ended
September 30, 2011 of $15.7 million consisted primarily of net income of $21.5
million offset by net decreases in operating assets and liabilities of $6.3
million. Changes in operating assets and liabilities consisted primarily of an
$8.3 million increase in accounts receivable due to our overall revenue growth,
a $2.9 million increase in taxes payable, a $2.7 million increase in
inventories, a $1.3 million increase in accounts payable and accrued liabilities
and an increase of $488,000 in deferred revenues and deferred cost of revenues.
Cash Flows from Investing Activities
Our investing activities consist solely of capital expenditures and purchases of
intangible assets. Capital expenditures for the three months ended September 30,
2012 and 2011 were $1.6 million and $205,000, respectively. Additionally, we had
cash outflows related to the purchase of intangible assets of $748,000 during
the three months ended September 30, 2012.
Cash Flows from Financing Activities
On August 7, 2012, we entered into a Loan and Security Agreement (the "Loan
Agreement") with U.S. Bank, as syndication agent, and East West Bank, as
administrative agent. The Loan Agreement replaces the EWB Loan Agreement as
discussed below. The Loan Agreement provides for (i) a $50.0 million revolving
credit facility, with a $5.0 million sublimit for the issuance of letters of
credit and a $5.0 million sublimit for the making of swingline loan advances
(the "Revolving Credit Facility"), and (ii) a $50.0 million term loan facility
(the "Term Loan Facility"). We may request borrowings under the Revolving Credit
Facility until August 7, 2015. On August 7, 2012, we borrowed an additional
$20.8 million of term loans under the Term Loan Facility.
On August 9, 2012, we announced that our Board of Directors authorized us to
repurchase up to $100 million of our common stock. The share repurchase program
commenced August 13, 2012. During the three months ended September 30, 2012 we
repurchased 3,171,914 shares for a total cost of $31.3 million.
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In July 2011, we repurchased an aggregate of 12,041,700 shares of our Series A
preferred stock from entities affiliated with Summit Partners, L.P., one of our
major stockholders, at a price of $8.97 per share for an aggregate consideration
of $108.0 million. Of the aggregate purchase price, $40.0 million was paid in
cash at the time of closing and the balance of the shares were paid for through
the issuance of convertible subordinated promissory notes in the aggregate
principal amount of $68.0 million. On September 15, 2011, $34.0 million was paid
against the notes reducing the aggregate principal amount outstanding to $34.0
million.
On September 15, 2011, we entered into a Loan and Security Agreement with East
West Bank, (the "EWB Loan Agreement"). The EWB Loan Agreement consisted of a
$35.0 million term loan facility and a $5.0 million revolving line of credit
facility. The term loan was scheduled to mature on September 15, 2016 with
principal and interest to be repaid in 60 monthly installments. During the three
months ended September 30, 2011, we used $34.0 million of the term loan to repay
a portion of our outstanding convertible subordinated promissory notes held by
entities affiliated with Summit Partners, L.P. The EWB Agreement was replaced by
the Loan Agreement on August 7, 2012 as discussed above.
Liquidity
We believe our existing cash and cash equivalents will be sufficient to meet our
working capital and capital expenditure needs for at least the next 12 months.
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. As of September 30, 2012, we held $118.1 million of our $132.5
million of cash and cash equivalents in accounts of our subsidiaries outside of
the United States and we will incur significant tax liabilities if we decide to
repatriate those amounts.
Commitments and Contingencies
In January 2011, the U.S. Department of Commerce's Bureau of Industry and
Security's Office of Export Enforcement ("OEE") contacted us to request that we
provide information related to our relationship with a logistics company in the
United Arab Emirates ("UAE") and with a company in Iran, as well as information
on the export classification of our products. As a result of this inquiry we,
assisted by outside counsel, conducted a review of our export transactions from
2008 through March 2011 to not only gather information responsive to the OEE's
request but also to review our overall compliance with export control and
sanctions laws. We believe our products have been sold into Iran by third
parties. We do not believe that we directly sold, exported or shipped our
products into Iran or any other country subject to a U.S. embargo. However,
until early 2010, we did not prohibit our distributors from selling our products
into Iran or any other country subject to a U.S. embargo. In the course of this
review we identified that two distributors may have sold Ubiquiti products into
Iran. Our review also found that while we had obtained required Commodity
Classification Rulings for our products in June 2010 and November 2010, we did
not advise our shipping personnel to change the export authorizations used on
our shipping documents until February 2011. During the course of our export
control review, we also determined that we had failed to maintain adequate
records for the five year period required by the EAR and the sanctions
regulations due to our lack of infrastructure and because it was prior to our
transition to our system of record, NetSuite. See "Risk Factors-We are subject
to numerous U.S. export control and economic sanctions laws and a substantial
majority of our sales are into countries outside of the United States. Although
we did not intend to do so, we have violated certain of these laws in the past,
and we cannot currently assess the nature and extent of any fines or other
penalties, if any, that U.S. governmental agencies may impose against us or our
employees for any such violations. Any fines, if materially different from our
estimates, or other penalties, could have a material adverse effect on our
business and financial results."
In May 2011, we filed a self-disclosure with OEE and, in June 2011 we filed one
with U.S. Department of the Treasury's Office of Foreign Asset Control ("OFAC"),
regarding the compliance issues noted above. The disclosures address the above
described findings and the remedial actions we have taken to date. However, the
findings also indicate that both distributors continued to sell, directly or
indirectly, our products into Iran during the period from February 2010 through
March 2011 and that we received various communications from them indicating that
they were continuing to do so. Since January 2011, we have cooperated with OEE
and, prior to our disclosure filing, we informally shared with the OEE the
substance of our findings with respect to both distributors. From May
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2011 to August 2011, we provided additional information regarding our review and
our findings to OEE to facilitate its investigation and OEE advised us in
August 2011 that it had completed its investigation of us. In August 2011, we
received a warning letter from OEE stating that OEE had not referred the
findings of our review for criminal or administrative prosecution of us and
closed the investigation of us without penalty.
OFAC is still reviewing our voluntary disclosure. In our submission, we have
provided OFAC with an explanation of the activities that led to the sales of our
products in Iran and the failure to comply with the EAR and OFAC sanctions.
Although our OFAC and OEE voluntary disclosures covered similar sets of facts,
which led OEE to resolve the case with the issuance of a warning letter, OFAC
may conclude that our actions resulted in violations of U.S. export control and
economic sanctions laws and warrant the imposition of penalties that could
include fines, termination of our ability to export our products and/or referral
for criminal prosecution. Any such fines may be material to our financial
results in the period in which they are imposed. The penalties may be imposed
against us and/or our management. The maximum civil monetary penalty for the
violations is up to $250,000 or twice the value of the transaction, whichever is
greater, per violation. Also, disclosure of our conduct and any fines or other
action relating to this conduct could harm our reputation and indirectly have a
material adverse effect on our business. We cannot predict when OFAC will
complete its review or decide upon the imposition of possible penalties.
Based on the facts known to us to date, we recorded an expense of $1.6 million
for this export compliance matter in fiscal 2010, which represents management's
estimated exposure for fines in accordance with applicable accounting
literature. Should additional facts be discovered in the future and/or should
actual fines or other penalties substantially differ from our estimates, our
business, financial condition, cash flows and results of operations would be
materially negatively impacted.
Warranties and Indemnifications
Our products are generally accompanied by a 12 month warranty, 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"), 450-30, Loss
Contingencies, we record an accrual when we believe it is 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 may in the future enter into standard indemnification agreements with many of
our distributors and OEMs, as well as certain 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
director and officer insurance policy that limits our potential exposure. We
believe the fair value of these indemnification agreements is minimal. We had
not recorded any liabilities for these agreements as of September 30, 2012 or
2011.
Based upon our historical experience and information known as of the date of
this report, we do not believe it is likely that we will have significant
liability for the above indemnities at September 30, 2012.
Contractual Obligations and Off-Balance Sheet Arrangements
We lease our headquarters in San Jose, California and other locations worldwide
under noncancelable operating leases that expire at various dates through fiscal
2017.
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In December 2011, we entered into an agreement to lease approximately 64,512
square feet of office and research and development space located in San Jose,
California, which will be used as our corporate headquarters. The lease term is
from April 1, 2012, though June 30, 2017. The lease has been categorized as an
operating lease, and the total estimated lease obligation is approximately $4.9
million.
On August 7, 2012, we entered into the Loan Agreement with U.S. Bank, as
syndication agent, and East West Bank, as administrative agent. The Loan
Agreement provides for (i) a $50.0 million revolving credit facility, with a
$5.0 million sublimit for the issuance of letters of credit and a $5.0 million
sublimit for the making of swingline loan advances, and (ii) a $50.0 million
Term Loan Facility. We may request borrowings under the Revolving Credit
Facility until August 7, 2015. On August 7, 2012, we borrowed an additional
$20.8 million of term loans under the Term Loan Facility.
The following table summarizes our contractual obligations as of September 30,
2012:
2013
(remainder) 2014 2015 2016 2017 Thereafter Total
Operating leases $ 1,078 $ 1,384 $ 1,396 $ 1,428 $ 1,122 $ - $ 6,408
Debt payment obligations 3,750 5,000 6,875 9,375 10,000 15,000 50,000
Interest payments on debt
payment obligations 914 1,110 973 777 531 172 4,477
Total $ 5,742 $ 7,494 $ 9,244 $ 11,580 $ 11,653 $ 15,172 $ 60,885
We subcontract with other companies to manufacture our products. During the
normal course of business, our contract manufacturers procure components 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 to date no significant accruals have been recorded. 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.
As of September 30, 2012, we had $8.4 million of unrecognized tax benefits,
substantially all of which would, if recognized, affect our tax expense. We have
elected to include interest and penalties related to uncertain tax positions as
a component of tax expense. We do not expect any significant increases or
decreases to our unrecognized tax benefits in the next twelve months.
Recent Accounting Pronouncements
We do not believe there have been any recent accounting pronouncements that
would have a significant impact on our financial statements.
Non-GAAP Financial Measures
Regulation G, conditions for use of Non-Generally Accepted Accounting Principles
("Non-GAAP") financial measures, and other SEC regulations define and prescribe
the conditions for use of certain Non-GAAP financial information. To supplement
our condensed consolidated financial results presented in accordance with GAAP,
we use Non-GAAP financial measures which are adjusted from the most directly
comparable GAAP financial measures to exclude certain items, as described below.
Management believes that these Non-GAAP financial measures reflect an additional
and useful way of viewing aspects of our operations that, when viewed in
conjunction with our GAAP results, provide a more comprehensive understanding of
the various factors and trends affecting our business and operations. Non-GAAP
financial measures used by us include net income or loss and diluted net income
or loss per share.
Our Non-GAAP measures primarily exclude stock-based compensation, net of taxes
and other special charges and credits. Management believes these Non-GAAP
financial measures provide meaningful supplemental information regarding our
strategic and business decision making, internal budgeting, forecasting and
resource allocation processes. In addition, these Non-GAAP financial measures
facilitate management's internal comparisons to our historical operating results
and comparisons to competitors' operating results.
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We use each of these Non-GAAP financial measures for internal managerial
purposes, when providing our financial results and business outlook to the
public and to facilitate period-to-period comparisons. Management believes that
these Non-GAAP measures provide meaningful supplemental information regarding
our operational and financial performance of current and historical results.
Management uses these Non-GAAP measures for strategic and business decision
making, internal budgeting, forecasting and resource allocation processes. In
addition, these Non-GAAP financial measures facilitate management's internal
comparisons to our historical operating results and comparisons to competitors'
operating results.
The following table shows our Non-GAAP financial measures:
Three Months Ended
September 30,
2012 2011
(In thousands, except per
share amounts)
Non-GAAP net income $ 13,572 $ 21,704
Non-GAAP diluted net income per share of common stock $ 0.15 $ 0.23
We believe that providing these Non-GAAP financial measures, in addition to the
GAAP financial results, are useful to investors because they allow investors to
see our results "through the eyes" of management as these Non-GAAP financial
measures reflect our internal measurement processes. Management believes that
these Non-GAAP financial measures enable investors to better assess changes in
each key element of our operating results across different reporting periods on
a consistent basis and provides investors with another method for assessing our
operating results in a manner that is focused on the performance of our ongoing
operations.
The following table shows a reconciliation of GAAP net income to non-GAAP net
income:
Three Months Ended
September 30,
2012 2011
(In thousands, except per
share amounts)
Net Income $ 13,179 $ 21,493
Stock-based compensation:
Cost of revenues 81 6
Research and development 266 116
Sales, general and administrative 309 229
Tax effect of non-GAAP adjustments (263 ) (140 )
Non-GAAP net income $ 13,572 $ 21,704
Non-GAAP diluted net income per share of common stock
(1)
$ 0.15 $ 0.23
Weighted-average shares used in computing non-GAAP
diluted net income per share of common stock (1)
92,925 93,467
(1) Non-GAAP diluted net income per share of common stock is calculated using
non-GAAP net income excluding stock-based compensation, net of taxes and
weighted-average shares outstanding as if Series A preferred stock is treated
as common stock for the periods presented.
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The following table shows a reconciliation of weighted-average shares used in
computing net loss per share of common stock-diluted to weighted-average shares
used in computing non-GAAP diluted net income per share of common stock:
Three Months Ended
September 30,
2012 2011
(In thousands)Weighted average shares used in computing net loss per share
of common stock- diluted
92,925 62,717
Weighted average dilutive effect of stock options and
restricted stock units
- 3,877
Weighted average shares of Series A preferred stock
outstanding
- 26,873
Weighted-average shares used in computing non-GAAP diluted
income per share of common stock
92,925 93,467
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