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Ubiquiti Networks Reports Fourth Quarter Fiscal 2018 Financial Results

August 24, 2018

NEW YORK--(BUSINESS WIRE)--Aug 24, 2018--Ubiquiti Networks, Inc. (NASDAQ: UBNT) (“Ubiquiti” or the “Company”) today announced results for its fourth quarter fiscal 2018 ended June 30, 2018.

Fourth Quarter Fiscal 2018 Financial Summary

Revenues of $269.8 million, increasing 18.0% year-over-year GAAP diluted EPS of $0.94, increasing 27.3% year-over-year Non-GAAP diluted EPS of $1.01, increasing 34.7% year-over-year Repurchased 586,924 shares of common stock at an average price of $70.11 per share As of June 30, 2018, the Company had $306.2 million in availability remaining under authorized repurchase programs

Full Fiscal 2018 Financial Summary

Revenues of $1,016.9 million, increasing 17.5% year-over-year GAAP diluted EPS of $2.51, decreasing 19% year-over-year Non-GAAP diluted EPS of $3.69, increasing 21.4% year-over-year Repurchased 7,162,312 shares of common stock at an average price of $62.13 per share

Announcement of Dividend Policy and Dividend Declaration

The Company’s operating performance and cash flows have provided more than sufficient capital to operate and grow its business while maintaining a war chest for strategic opportunities and financing a stock repurchase program. The Company seeks to complement its existing capital return efforts through the initiation of this dividend policy. The Company’s Board of Directors (the “Board”) declared a $0.25 per share cash dividend payable on September 10, 2018 to shareholders of record at the close of business on September 4, 2018. The Company intends to pay regular quarterly cash dividends of at least $0.25 per share for the remainder of fiscal year 2019, although all subsequent dividends, and the establishment of record and payment dates, are subject to final determination by the Board each quarter after its review of the Company’s financial performance and results of operations, available cash and cash flow, capital requirements, applicable corporate legal requirements, and other factors.

Income Statement Items

Gross Margins

During the fourth quarter fiscal 2018, GAAP gross profit was $120.5 million. This GAAP gross margin of 44.7% decreased versus the prior year GAAP gross margin of 45.1% and the prior quarter GAAP gross margin of 45.7%. The decrease on both a sequential and year-over-year basis was driven primarily by the Company incurring higher than normal shipping expenses to expedite the delivery of products.

On a full year basis, fiscal 2018 GAAP gross profit was $443.6 million. This GAAP gross margin of 43.6% decreased versus fiscal 2017 GAAP gross margin of 45.7%. Fiscal 2018 GAAP gross margin included $18.6 million in provisions for obsolete inventory, vendor deposits and loss on purchase commitments during the second quarter fiscal 2018.

Our long-term gross margin projection remains at 45% to 50% because we expect operational improvements to alleviate the costs associated with expedited product delivery and because we expect the margins on our newer products to expand as we implement cost reduction strategies while maintaining our selling prices. However, 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. It is expected that these tariffs will be finalized after a public comment period ending in early September 2018. The majority of our products are among the products to be subject to the additional tariffs. In the event the tariffs are implemented, or we are unable to execute on our plans to mitigate the tariffs, we estimate that our gross margins for fiscal year 2019 will decline to around 40%.

Research and Development

During the fourth quarter fiscal 2018, research and development (R&D) expenses were $19.5 million. This reflects a decrease versus the prior year R&D expenses of $21.6 million and an increase versus the prior quarter R&D expenses of $17.4 million.

On a full year basis, fiscal 2018 R&D expenses were $74.3 million versus $69.1 million in fiscal 2017. Increased costs in fiscal 2018 versus 2017 were primarily driven by higher staffing levels offset, in part, by lower non-recurring engineering (NRE) payments in fiscal 2018 versus 2017. R&D expenses represented 7.3% of revenues in fiscal 2018, 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 $12.9 million. This reflects an increase versus both the prior year SG&A expenses of $9.9 million and the prior quarter SG&A expenses of $12.2 million. On a full year basis, SG&A expenses were $43.1 million in fiscal 2018 as compared to $36.9 million in fiscal 2017. The increase in SG&A costs are primarily related to professional fees. SG&A expenses represented 4.2% of revenues in fiscal 2018, which is in line with the Company’s target model range of 3% to 5%.

Taxes

The GAAP effective tax rate was 17.2% for the fourth quarter of fiscal 2018 and includes an incremental $3.8 million of previously-unaccrued tax expense related to the recently enacted tax reform legislation as we continue to update our estimate of the transition tax under SAB 118. Both GAAP and non-GAAP effective rates were negatively impacted by the higher percentage of revenue and profits experienced in the United States in the fourth quarter as compared to prior quarters. For long-term planning purposes, we assume a target effective tax rate of 11% to 14%.

Net Income

During the fourth quarter fiscal 2018, GAAP net income was $70.1 million and GAAP income per diluted share of $0.94 included $3.8 million of previously-unaccrued tax expense related to the recently enacted tax reform legislation. Non-GAAP net income during the quarter was $74.8 million and non-GAAP income per diluted share was $1.01.

For the full year fiscal 2018, GAAP net income of $196.3 million and GAAP income per diluted share of $2.51 includes $116.6 million of expense related to the recently enacted tax reform legislation, a $27.4 million net benefit related to equity award exercises and an $18.6 million inventory and obsolescence provision. This compares to fiscal 2017 GAAP net income of $257.5 million and GAAP income per diluted share of $3.09.

Fiscal 2018 non-GAAP net income was $287.4 million and non-GAAP income per diluted share was $3.69. These amounts include the foregoing $18.6 million inventory and obsolescence provision which was not eliminated from non-GAAP net income and non-GAAP income per diluted share. This compares to fiscal 2017 non-GAAP net income of $251.2 million or $3.04 non-GAAP income per diluted share.

The 14% increase in full year non-GAAP net income, and 21% increase in full year non-GAAP diluted EPS was driven primarily by a 17.5% increase in revenues in fiscal 2018 versus the prior year as well as a reduction in share count driven by the repurchase of 7.2 million shares during the year.

Balance Sheet Items

Cash

Total cash and cash equivalents as of June 30, 2018 were $666.7 million, compared with $604.2 million as of June 30, 2017, representing an increase of over 10%. During the fourth quarter, the Company repurchased 586,924 shares of common stock at an average price of $70.11 per share. As of June 30, 2018, the Company had $306.2 million in availability under authorized repurchase programs.

DSOs

This quarter the Company experienced an increase in days sales outstanding in accounts receivable (“DSO”) to 59 days, compared with 57 days in the third fiscal 2018 quarter. DSO’s have increased over time and the Company expects this increase to continue 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 year decreased $37.1 million to $96.7 million, primarily driven by increased revenue. 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

Our net cash flow from operations for fiscal 2018 was $332.0 million, compared with a net cash flow from operations of $112.0 million for fiscal 2017. The $220.0 million increase in operating cash flow during fiscal 2018 as compared with fiscal 2017 was driven by reduced investments in working capital, and higher operating earnings. Capital expenditures for fiscal 2018 were $9.1 million. The Company used $260.4 million of cash related to financing activities, which was primarily related to stock repurchases, debt servicing costs, and the settlement of equity awards, and was offset in part by additional borrowings.

Outlook

As previously stated, and in line with the Company’s focus on long-term shareholders, it will transition from providing quarterly and annual guidance during fiscal 2018 to annual guidance only beginning in fiscal 2019. Based on recent business trends, the Company believes the demand environment in its end markets supports the following forecast for the Company’s fiscal year ending June 30, 2019:

Revenues of $1.1 billion to $1.2 billion; and Diluted EPS of $4.00 to $4.80, provided that if the proposed tariffs are implemented, the low-end of our EPS may decline to $3.65 or lower.

Conference Call Information

Ubiquiti Networks will host a Q&A-only call to discuss the Company’s financial results at 11:00 a.m. Eastern Time today. Earnings releases can be found on the Investor Relations section of the Ubiquiti Networks website, http://ir.ubnt.com/financial/quarterly-results. To listen to the Q&A call via telephone, dial 1-800-239-9838 (U.S. toll-free) or 1-323-794-2551 (International). Participants should dial in 10 minutes prior to the start of the call.

Investors may also listen to a live webcast of the Q&A conference call by visiting the Investor Relations section of the Ubiquiti Networks website at  http://ir.ubnt.com. A recording of the Q&A call will be available for replay at  http://ir.ubnt.com.

About Ubiquiti Networks

Ubiquiti Networks, Inc. was founded by Robert Pera in 2005. The Company sells equipment, and provides the related software platforms, worldwide through a network of over 100 distributors and on-line retailers. The Company has a very broad installed base with over 70 million devices sold in over 200 countries and territories around the world. Ubiquiti aims to connect everyone to everything, everywhere.

The Company develops technology platforms for high-capacity distributed Internet access, unified information technology, and next-generation consumer electronics for home and personal use. The Company categorizes solutions into three main categories: high performance networking technology for service providers, enterprises and consumers.

The majority of the company’s resources consist of entrepreneurial and de-centralized R&D teams.

Ubiquiti, Ubiquiti Networks, the U logo, UBNT, airMAX, airFiber, mFi, EdgeMAX, UniFi, AmpliFi and UFiber are registered trademarks or trademarks of Ubiquiti Networks, Inc. in the United States and other countries.

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 the expected impact of taxes on our liquidity and results of operations, our cash position, expenses, DSO, number of distributors and resellers, shipments, the roll-out of our consumer retail channel, 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 proposed impact of US 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.

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