Market Overview

Ubiquiti Networks Reports First Quarter Fiscal 2019 Financial Results

Share:

~Revenues of $282.9 million and GAAP EPS of $1.16~

~Initiated new $200 million Stock Repurchase Program~

Ubiquiti Networks, Inc. (NASDAQ:UBNT) ("Ubiquiti" or the "Company")
today announced results for the first quarter fiscal 2019, ended
September 30, 2018.

First Quarter Fiscal 2019 Financial Highlights

  • Revenues of $282.9 million, increasing 15.1% year-over-year
  • GAAP diluted EPS of $1.16, increasing 26.1% year-over-year
  • Non-GAAP diluted EPS of $1.17, increasing 27.2% year-over-year

Additional Highlights

  • From July 1, 2018 through November 7, 2018, the Company repurchased
    and retired 3,260,811 shares of common stock for $293.4 million at an
    average price of $89.97 per share.
  • Initiated a new stock repurchase program, authorizing the Company to
    repurchase up to $200 million of its common stock, as disclosed in the
    Form 8-K filed on November 9, 2018.
  • The Company's Board of Directors declared a $0.25 per share cash
    dividend payable on November 26, 2018 to shareholders of record at the
    close of business on November 19, 2018.

Financial Highlights ($, in millions, except per share data)

Income statement highlights   F1Q19   F4Q18   F1Q18
Revenues 282.9 269.8 245.9
Service Provider Technology 105.0 105.9 119.9
Enterprise Technology 177.9 163.8 126.0
Gross profit 131.6 120.5 111.7
Gross Profit (%) 46.5% 44.7% 45.4%
Total Operating Expenses 32.0 32.4 24.6
Income from Operations 99.6 88.1 87.1
GAAP Net Income 85.7 70.1 74.9
GAAP EPS (diluted) 1.16 0.94 0.92
Non-GAAP Net Income 86.2 74.8 74.9
Non-GAAP EPS (diluted) 1.17 1.01 0.92
 
 

Ubiquiti Networks, Inc.
Revenues by Product Type
(In thousands)

(Unaudited)

      Three Months Ended September 30,
2018   2017
Service Provider Technology $ 104,957 $ 119,915
Enterprise Technology 177,948   125,953
Total revenues $ 282,905   $ 245,868
 
 

Ubiquiti Networks, Inc.
Revenues by Geographical
Area

(In thousands)
(Unaudited)

Three Months Ended September 30,
2018 2017
North America $ 119,371 $ 96,170
South America 14,176 31,053
Europe, the Middle East and Africa 124,931 93,314
Asia Pacific 24,427   25,331
Total revenues $ 282,905   $ 245,868
 

Income Statement Items

Gross Margins

During the first quarter fiscal 2019, GAAP gross profit was $131.6
million. This GAAP gross margin of 46.5% increased versus the prior year
GAAP gross margin of 45.4% and the prior quarter GAAP gross margin of
44.7%.

We expect to incur costs as a result of recently-announced tariffs on
certain products imported into the U.S. from China and therefore we
anticipate near-term gross margins to range between 42% and 45%.
However, we anticipate mitigating the effect of the tariffs in the
long-term and therefore our long-term gross margins are expected to
remain between 45% to 50%.

Research and Development

During the first quarter fiscal 2019, research and development (R&D)
expenses were $18.2 million. This reflects an increase versus the prior
year R&D expenses of $16.9 million and a decrease versus the prior
quarter R&D expenses of $19.5 million.

Increased costs in first quarter fiscal 2019 versus the prior year were
primarily driven by higher staffing levels. R&D expenses represented
6.4% of revenues in the first fiscal quarter 2019, which is in line with
the Company's target model range of 6% to 8%.

Sales, General and Administrative

The Company's selling, general and administrative ("SG&A") expenses for
the quarter were $13.8 million. This reflects an increase versus both
the prior year SG&A expenses of $7.7 million and the prior quarter SG&A
expenses of $12.9 million. The increase in SG&A costs are primarily
related to professional fees. SG&A expenses represented 4.9% of revenues
in the first quarter fiscal 2019, which is in line with the Company's
target model range of 3% to 5%.

Taxes

The GAAP effective tax rate was 11.7% for the first quarter fiscal 2019.
For long-term planning purposes, we assume a target effective tax rate
of 11% to 14%.

Net Income

During the first quarter fiscal 2019, GAAP net income was $85.7 million
and GAAP income per diluted share was $1.16. Non-GAAP net income during
the quarter was $86.2 million and non-GAAP income per diluted share was
$1.17. The 15.1% increase in non-GAAP net income, and 27.2% increase in
non-GAAP diluted EPS was driven primarily by a 15.1% increase in
revenues versus the prior year as well as a 7.2 million reduction in
non-GAAP diluted share count.

Balance Sheet Items

Cash and Investments

Total cash, cash equivalents and investments as of September 30, 2018
were $625.5 million, compared with $666.7 million as of June 30, 2018.
During the first quarter fiscal 2019, the Company repurchased 1,238,163
shares of common stock for $112.8 million at an average price of $91.07
per share and held $200.0 million in investments.

DSOs

This quarter the Company experienced a decline in days sales outstanding
in accounts receivable ("DSO") to 54 days, compared with 59 days in the
fourth fiscal 2018 quarter. The Company expects DSO's to increase as the
mix of the Company's distributors evolves toward larger volumes of
products moving through large distributors who qualify for credit terms.
Enabling these distributors to purchase higher volumes of products on
credit terms allows them to shorten the cash conversion cycle and has
helped enable Ubiquiti to significantly expand its market share while
maintaining a conservative customer credit profile.

Inventory

Ubiquiti continues to manage inventory levels to reduce lead times and
meet increasing demand and support the commensurate growth of the
Company's customers. The Company is committed to optimizing inventory to
correspond with end-market demand. Finished goods inventory at the end
of the quarter increased $38.2 million to $134.9 million, primarily
driven by the timing of production and expected growth in demand. The
Company expects to hold 8 to 12 weeks of previously introduced product
inventory in warehouses going forward, in addition to new product
inventory and selected raw materials.

Cash Flow Statement Items

The Company's net cash flow from operations for the first quarter fiscal
2019 was $93.9 million, compared with a net cash flow from operations of
$96.9 million for the first quarter fiscal 2018. The $3.0 million
decrease in operating cash flow during fiscal 2019 as compared with
fiscal 2018 was driven by increased investments in inventory, partially
offset by higher operating earnings. Capital expenditures and purchase
of intangibles for the first quarter fiscal 2019 were $4.0 million. The
Company used $131.7 million of cash related to financing activities,
which was driven by $106.7 million in stock repurchases, $18.5 million
in cash dividend payments and $6.3 million in debt repayments.

Outlook

Based on recent business trends, the Company believes that it will
achieve the guidance previously provided for the full fiscal year ending
June 30, 2019.

About Ubiquiti Networks

Ubiquiti Networks is focused on democratizing network technology on a
global scale — aggregate shipments of nearly 85 million devices play a
key role in creating networking infrastructure in over 200 countries and
territories around the world. Our professional networking products are
powered by our UNMS and UniFi software platforms to provide
high-capacity distributed Internet access and unified information
technology management, respectively.

Ubiquiti, Ubiquiti Networks, the U logo, UBNT, airMAX, airFiber, mFi,
EdgeMAX, UniFi, UNMS, AmpliFi and UFiber are registered trademarks or
trademarks of Ubiquiti Networks, Inc. in the United States and other
countries. For more information, please visit www.ubnt.com.

Safe Harbor for Forward Looking Statements

Certain statements in this press release are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Statements other than statements of historical fact including
words such as "look", "will", "anticipate", "believe", "estimate",
"expect", "forecast", "consider" and "plan" and statements in the future
tense are forward looking statements. The statements in this press
release that could be deemed forward-looking statements include
statements regarding expectations for financial results for the full
fiscal year 2019, and statements regarding expectations of the impact of
tariffs, expected impact of taxes on our liquidity and results of
operations, our cash position, expenses, DSOs, number of distributors
and resellers, shipments, the introduction of new consumer products,
Gross Margins, R&D, SG&A, tax rates, inventory turns, growth
opportunities, demand and long term global environment for our products,
new products, and financial performance estimates including revenues and
GAAP diluted EPS for the Company's full fiscal year 2019, and any
statements or assumptions underlying any of the foregoing.

Forward-looking statements are subject to certain risks and
uncertainties that could cause our actual future results to differ
materially or cause a material adverse impact on our results. Potential
risks and uncertainties include, but are not limited to, the impact of
U.S. tariffs on results, fluctuations in our operating results; varying
demand for our products due to the financial and operating condition of
our distributors and their customers, and distributors' inventory
management practices; political and economic conditions and volatility
affecting the stability of business environments, economic growth,
currency values, commodity prices and other factors that may influence
the ultimate demand for our products in particular geographies or
globally; impact of counterfeiting and our ability to contain such
impact; our reliance on a limited number of distributors; inability of
our contract manufacturers and suppliers to meet our demand; our
dependence on Qualcomm Atheros for chipsets without a short-term
alternative; as we move into new markets competition from certain of our
current or potential competitors who may be more established in such
markets; our ability to keep pace with technological and market
developments; success and timing of new product introductions by us and
the performance of our products generally; our ability to effectively
manage the significant increase in our transactional sales volumes; we
may become subject to warranty claims, product liability and product
recalls; that a substantial majority of our sales are into countries
outside the United States and we are subject to numerous U.S. export
control and economic sanctions laws; costs related to responding to
government inquiries related to regulatory compliance; our reliance on
the Ubiquiti Community; our reliance on certain key members of our
management team, including our founder and chief executive officer,
Robert J. Pera; adverse tax-related matters such as tax audits, changes
in our effective tax rate or new tax legislative proposals; whether the
final determination of our income tax liability may be materially
different from our income tax provisions; the impact of any intellectual
property litigation and claims for indemnification; litigation related
to U.S. Securities laws; and economic and political conditions in the
United States and abroad. We discuss these risks in greater detail under
the heading "Risk Factors" and elsewhere in our Annual Report on Form
10-K for the year ended June 30, 2018, and subsequent filings filed with
the U.S. Securities and Exchange Commission (the "SEC"), which are
available at the SEC's website at www.sec.gov.
Copies may also be obtained by contacting the Ubiquiti Networks Investor
Relations Department, by email at IR@ubnt.com
or by visiting the Investor Relations section of the Ubiquiti Networks
website, http://ir.ubnt.com.

Given these uncertainties, you should not place undue reliance on these
forward-looking statements. Also, forward-looking statements represent
our management's beliefs and assumptions only as of the date made.
Except as required by law, Ubiquiti Networks undertakes no obligation to
update information contained herein. You should review our SEC filings
carefully and with the understanding that our actual future results may
be materially different from what we expect.

 

Ubiquiti Networks, Inc.
Condensed Consolidated
Statement of Operations and Comprehensive Income

(In
thousands, except per share data)

(Unaudited)

  Three Months Ended September 30,
2018   2017
Revenues $ 282,905 $ 245,868
Cost of revenues 151,299   134,212  
Gross profit 131,606   111,656  
Operating expenses:
Research and development 18,222 16,928
Sales, general and administrative 13,766   7,665  
Total operating expenses 31,988   24,593  
Income from operations 99,618 87,063
Interest expense and other, net (2,527 ) (1,361 )
Income before income taxes 97,091 85,702
Provisions for income taxes 11,388   10,777  
Net income $ 85,703   $ 74,925  
Net income per share of common stock:
Basic $ 1.16   $ 0.93  
Diluted $ 1.16   $ 0.92  
Weighted average shares used in computing net income per share of
common stock:
Basic 73,774   80,135  
Diluted 73,963   81,748  
 
Other comprehensive income (loss):
Unrealized (loss) on available-for-sale securities $ (146 ) $  
Comprehensive income $ 85,557   $ 74,925  
 
 

Ubiquiti Networks, Inc.
Reconciliation of GAAP Net
Income to Non-GAAP Net Income

(In thousands, except
per share data)

(Unaudited)

    Three Months Ended

September 30,
2018

 

June 30, 2018

 

September 30,
2017

Net Income $ 85,703 $ 70,085 $ 74,925
Stock-based compensation:
Cost of revenues 33 36 245
Research and development 467 520 456
Sales, general and administrative 275 228 211
Net Tax Benefits related to Equity Awards Exercises and Vesting 50 (575 )
SEC Related Matters 492
Tax Reform Transition Tax 3,774
Tax effect of Non-GAAP adjustments (240 ) (396 ) (365 )
Non-GAAP net income $ 86,238   $ 74,789   $ 74,897  
Non-GAAP diluted EPS $ 1.17   $ 1.01   $ 0.92  
 
Shares outstanding (Diluted) 73,963 74,307 81,748
Share adjustment (ASU 2016-09 Adoption)   (50 ) (616 )
Weighted-average shares used in Non-GAAP diluted EPS 73,963   74,257   81,132  
 

Use of Non-GAAP Financial Information

To supplement our condensed consolidated financial results prepared
under generally accepted accounting principles, or GAAP, we use non-GAAP
measures of net income and earnings per diluted share that are adjusted
to exclude certain costs, expenses and gains such as stock-based
compensation expense, net tax benefits related to equity awards
exercises and vesting, the SEC related inquiry, Tax Reform Transition
Tax and the tax effects of these non-GAAP adjustments.

Reconciliations of the adjustments to GAAP results for the periods
presented are provided above. In addition, an explanation of the ways in
which management uses non-GAAP financial information to evaluate its
business, the substance behind management's decision to use this
non-GAAP financial information, material limitations associated with the
use of non-GAAP financial information, the manner in which management
compensates for those limitations, and the substantive reasons
management believes that this non-GAAP financial information provides
useful information to investors is included under the paragraphs below.

A reconciliation of non-GAAP guidance measures to corresponding GAAP
measures is not available on a forward-looking basis due to the high
variability and low visibility with respect to the charges which are
excluded from these non-GAAP measures. For example, share-based
compensation expense is impacted by the Company's future price at which
the Company's stock will trade in those future periods. The items that
are being excluded are difficult to predict and a reconciliation could
result in disclosure that would be imprecise or potentially misleading.
Material changes to any one of these items could have a significant
effect on our guidance and future GAAP results. Certain exclusions, such
as share-based compensation expenses, are generally incurred each
quarter, but the amounts have historically and may continue to vary
significantly from quarter to quarter.

About our Non-GAAP Net Income and Non-GAAP
Earnings per Diluted Share

We believe that the presentation of non-GAAP net income and non-GAAP
earnings per diluted share provides important supplemental information
regarding non-cash expenses, significant items that we believe are
important to understanding our financial, and business trends relating
to our financial condition and results of operations. Non-GAAP net
income and non-GAAP earnings per diluted share are among the primary
indicators used by management as a basis for planning and forecasting
future periods and by management and our board of directors to determine
whether our operating performance has met specified targets and
thresholds. Management uses non-GAAP net income and non-GAAP earnings
per diluted share when evaluating operating performance because it
believes that the exclusion of the items described below, for which the
amounts or timing may vary significantly depending upon the Company's
activities and other factors, facilitates comparability of the Company's
operating performance from period to period. We have chosen to provide
this information to investors so they can analyze our operating results
in the same way that management does and use this information in their
assessment of our business and the valuation of our Company.

Use and Economic Substance of Non-GAAP Financial Measures used by
Ubiquiti Networks

We compute non-GAAP net income and non-GAAP earnings per diluted share
by adjusting GAAP net income and GAAP earnings per diluted share to
remove the impact of certain adjustments and the tax effect of those
adjustments. Items excluded from net income are:

  • Stock-based compensation expense
  • Net Tax Benefits related to Equity Awards Exercises and Vesting
  • SEC related matters
  • Tax Reform Transition Tax
  • Tax effect of non-GAAP adjustments, applying the principles of ASC 740

Usefulness of Non-GAAP Financial Information to Investors

These non-GAAP measures are not in accordance with, or an alternative
to, GAAP and may be materially different from other non-GAAP measures,
including similarly titled non-GAAP measures used by other companies.
The presentation of this additional information should not be considered
in isolation from, as a substitute for, or superior to, net income or
earnings per diluted share prepared in accordance with GAAP. Non-GAAP
financial measures have limitations in that they do not reflect certain
items that may have a material impact upon our reported financial
results.

For more information on the non-GAAP adjustments, please see the table
captioned "Reconciliation of GAAP Net Income to Non-GAAP Net Income"
included in this press release.

 

Ubiquiti Networks, Inc.
Condensed Consolidated
Balance Sheets

(In thousands, except share amounts)
(Unaudited)

  September 30, 2018   June 30, 2018 (1)
Assets
Current assets:
Cash and cash equivalents $ 480,812 $ 666,681
Investments — short-term 96,266
Accounts receivable, net 165,294 174,521
Inventories 139,926 102,220
Vendor deposits 33,045 39,029
Prepaid expenses and other current assets 16,403   18,901
Total current assets 931,746 1,001,352
Property and equipment, net 13,471 14,328
Deferred tax assets — long-term 3,106 3,106
Investments — long-term 48,445
Other long-term assets 6,729   3,791
Total assets $ 1,003,497   $ 1,022,577
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 43,071 $ 14,098
Income taxes payable 23,982 5,780
Debt — short-term 24,425 24,425
Other current liabilities 60,682     68,613
Total current liabilities 152,160 112,916
Income taxes payable — long-term 119,122 127,719
Debt — long-term 454,253 460,352
Other long-term liabilities 7,323   5,842
Total liabilities 732,858   706,829
Stockholders' equity:
Common Stock 73 74
Additional paid–in capital 393
Accumulated other comprehensive income (loss) (146 )
Retained earnings 270,712   315,281
Total stockholders' equity 270,639   315,748
Total liabilities and stockholders' equity $ 1,003,497   $ 1,022,577

(1) Derived from audited consolidated financial statements as of and
for the year ended June 30, 2018.

 

Ubiquiti Networks, Inc.
Condensed Consolidated Cash
Flows

(In thousands)
(Unaudited)

  Three Months Ended September 30,
2018   2017
Cash Flows from Operating Activities:
Net income $ 85,703 $ 74,925
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,794 1,591
Amortization of debt issuance costs 281 64
Premium amortization and (discount accretion), net (127 )
Provision for inventory obsolescence 252 324
Provision/(recovery) for loss on vendor deposits (855 ) 376
Stock-based compensation 775 912
Other, net (21 ) 103
Changes in operating assets and liabilities:
Accounts receivable 9,287 12,017
Inventories (37,948 ) 19,421
Vendor deposits 6,838 (15,836 )
Prepaid income taxes 4
Prepaid expenses and other assets 2,393 1,288
Accounts payable 29,086 (22,408 )
Income taxes payable 9,605 7,061
Deferred revenues 3,306 1,376
Accrued and other liabilities (16,428 ) 15,702  
Net cash provided by operating activities 93,941   96,920  
Cash Flows from Investing Activities:
Purchase of property and equipment and other long-term assets (4,035 ) (2,932 )
Purchase of investments (147,934 )
Proceeds from sale of investments 3,850    
Net cash (used in) investing activities (148,119 ) (2,932 )
Cash Flows from Financing Activities:
Proceeds from borrowing under the Amended Credit Facility- Revolver 45,000
Repayment against Amended Credit Facility- Term (3,750 )
Repayment against Second Amended & Restated Facility- Term (6,250 )
Repurchases of common stock (106,764 ) (107,997 )
Payment of common stock cash dividends (18,506 )
Proceeds from exercise of stock options 194 722
Tax withholdings related to net share settlements of restricted
stock units
(365 ) (351 )
Net cash (used in) financing activities (131,691 ) (66,376 )
Net (decrease) increase in cash and cash equivalents (185,869 ) 27,612
Cash and cash equivalents at beginning of period 666,681   604,198  
Cash and cash equivalents at end of period $ 480,812   $ 631,810  
Supplemental Disclosure of Cash Flow Information:
Income taxes paid, net of refunds $ 1,929 $ 3,524
Interest paid $ 8,204 $ 1,792
Non-Cash Investing and Financing Activities:
Unpaid stock repurchases $ 6,000 $ 8,765
Unpaid property and equipment and other long-term assets $ 30 $ 178
Unpaid investment purchases $ 646 $
 

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