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(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
Commission File No. 001-35300
UBIQUITI NETWORKS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
32-0097377
(I.R.S. Employer
Identification No.)
2580 Orchard Parkway, San Jose, CA 95131
(Address of principal executive offices, Zip Code)
(408) 942-3085
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, $0.001 par value per share
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨
No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨
No ý
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ý
No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes ý
No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to Form 10-
K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
x
Accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨
No ý
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $865,142,102 based upon the
closing price of $31.69 of such common stock on the NASDAQ Global Select Market on December 31, 2015 (the last business day of the registrant’s most recently
completed second quarter). Shares of common stock held as of December 31, 2015 by each director and executive officer of the registrant, as well as shares held by
each holder of 5% of the common stock known to the registrant, have been excluded for purposes of the foregoing calculation. This determination of affiliate status
is not a conclusive determination for other purposes.
As of August 17, 2016 , 81,824,097 shares of Common Stock were issued and outstanding.
Portions of the registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the registrant’s 2016
Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein.
DOCUMENTS INCORPORATED BY REFERENCE:
Table of Contents
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Signatures
Exhibits, Financial Statement Schedules
PART IV
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Note About Forward-Looking Statements
UBIQUITI NETWORKS, INC.
PART I
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 continued growth, our gross margins, market
trends, our product development, 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 price reductions, our competitive
status, 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, the effects of government regulations, 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, our credit facility, future acquisitions of and investments in
complimentary businesses and the expected impact of various accounting policies and rules adopted by the Financial Accounting Standards Board. 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, factors affecting our quarterly results, 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 networking industry and fluctuations in general economic conditions, and the risks set forth throughout this Report, including under Item 1,
“Business” 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.
This Report also contains estimates and other information concerning our industry, including market size and growth rates, which are based on industry
publications, surveys and forecasts, including those generated by Cisco Systems, Inc. This information involves a number of assumptions and limitations, and you
are cautioned not to give undue weight to these estimates. These industry publications, surveys and forecasts generally indicate that their information has been
obtained from sources believed to be reliable. While we believe these industry publications, surveys and forecasts are reliable, we have not independently verified
such data. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described under Item 1A.
"Risk Factors."
Item 1. Business
Business Overview
Overview
Ubiquiti Networks develops high performance networking technology for service providers and enterprises. Our technology platforms focus on delivering highly-
advanced and easily deployable solutions that appeal to a global customer base in underserved and underpenetrated markets. Our differentiated business model has
enabled us to break down traditional barriers such as high product and network deployment costs and offer solutions with disruptive price-performance
characteristics. This differentiated business model, combined with our innovative proprietary technologies, has resulted in an attractive alternative to traditional
high touch, high cost providers, allowing us to advance the market adoption of our platforms for ubiquitous connectivity.
We offer a broad and expanding portfolio of networking products and solutions for service providers and enterprises. Our service provider product platforms
provide carrier-class network infrastructure for fixed wireless broadband, wireless backhaul systems and routing. Our enterprise product platforms provide wireless
LAN infrastructure, video surveillance products, switching and routing solutions and machine-to-machine communication components. We believe that our
products are highly differentiated due to our proprietary software protocol innovation, firmware expertise, and hardware design capabilities. This differentiation
allows our portfolio to meet the demanding performance requirements of video, voice and data applications at prices that are a fraction of those offered by our
competitors.
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In May 2016, we announced Ubiquiti Labs, a division focusing on research and development of consumer electronics. At the same time, we announced a new
consumer product platform, called AmpliFi, which is a Wi-Fi system solution designed to serve the demands of the modern connected home.
As a core part of our strategy, we have developed a differentiated business model for marketing and selling high volumes of carrier and enterprise-class
communications platforms. Our business model is driven by a large, growing and highly engaged community of service providers, distributors, value added
resellers, systems integrators and corporate IT professionals, which we refer to as the Ubiquiti Community. The Ubiquiti Community is a critical element of our
business strategy as it enables us to drive:
•
•
•
Rapid customer and community driven product development. We have an active, loyal community built from our customers that we believe is a
sustainable competitive advantage. Our solutions benefit from the active engagement between the Ubiquiti Community and our development engineers
throughout the product development cycle, which eliminates long and expensive multistep internal processes and results in rapid introduction and adoption
of our products. This approach significantly reduces our development costs and time to market.
Scalable sales and marketing model. We do not currently have, nor do we plan to hire, a direct sales force, but instead utilize the Ubiquiti Community to
drive market awareness and demand for our products and solutions. This community-propagated viral marketing enables us to reach underserved and
underpenetrated markets far more efficiently and cost-effectively than is possible through traditional sales models. Leveraging the information transparency
of the Internet allows customers to research, evaluate and validate our solutions with the Ubiquiti Community and via third party web sites. This allows us
to operate a scalable sales and marketing model and effectively create awareness of our brand and products. Word of mouth referrals from the Ubiquiti
Community generate high quality leads for our distributors at relatively little cost.
Self-sustaining product support. The engaged members of the Ubiquiti Community have enabled us to foster a large, cost efficient, highly-scalable and,
we believe, self-sustaining mechanism for rapid product support and dissemination of information.
By reducing the cost of development, sales, marketing and support we are able to eliminate traditional business model inefficiencies and offer innovative solutions
with disruptive price performance characteristics to our customers.
Our revenues were $666.4 million , $595.9 million and $572.5 million in the fiscal years ended June 30, 2016 , 2015 and 2014 , respectively. We reported net
income of $213.6 million , $129.7 million and $176.9 million in the fiscal years ended June 30, 2016 , 2015 and 2014 , respectively. In this Annual Report on Form
10-K, we refer to the fiscal years ended June 30, 2016 , 2015 and 2014 as fiscal 2016 , fiscal 2015 and fiscal 2014 , respectively.
Industry Overview
Internet traffic worldwide has grown rapidly in recent years, driven by an increase in the number of users, increasing mobility of those users and high bandwidth
applications, such as video, audio, cloud-based applications, online gaming and social networking. According to Cisco Visual Networking Index, global Internet
protocol, or IP, traffic is expected to increase from 72.5 exabytes per month in 2015 to 194.4 exabytes per month in 2020, representing an approximate 22%
compound annual growth rate, or CAGR, over that period. Additionally, it is estimated that there will be 3.4 networked devices per capita connected to IP networks
in 2020, up from 2.2 networked devices per capita in 2015. Wired networking solutions have traditionally been used to address increasing consumer and enterprise
bandwidth needs. However, the high initial capital requirements and ongoing operating costs and long market lead times associated with building and installing
infrastructure for wired networks has severely limited the widespread deployment of these networks in underserved and underpenetrated markets. Wireless
networks are emerging as an attractive alternative for addressing the broadband access needs of underserved and underpenetrated markets in both emerging and
developed countries.
Underserved and underpenetrated markets . There is a significant market opportunity in both emerging and developed economies. In “unconnected” emerging
markets, the lack of an established network infrastructure and the high initial deployment costs associated with traditional wired network infrastructure build-outs
have encouraged adoption of wireless networking infrastructure. In “under-connected” markets, bandwidth demand exceeds either the available capacity from
existing infrastructure or the affordable supply of new infrastructure, resulting in an attractive market opportunity for wireless systems to bolster connectivity.
Additionally, we believe there is a large market opportunity in connected markets serving customers that want to deploy reliable, scalable and customizable
wireless networks and whose primary buying criterion is based on price-performance characteristics.
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Increasing use of the unlicensed spectrum . In the absence of affordable broadband access in the licensed spectrum, the number of users of the unlicensed RF
spectrum has increased for communications equipment, as well as consumer devices such as cordless phones, baby monitors and microwave ovens. This increasing
use of unlicensed RF spectrum has made providing high quality wireless networking more challenging due to increasing congestion in the unlicensed spectrum.
The Federal Communications Commission continues to regulate use of unlicensed RF spectrum. Existing and contemplated regulations may affect the cost and/or
effectiveness of products that rely on access to such unlicensed RF spectrum.
Government incentives for broadband access . Governments around the world are increasingly taking both regulatory and financial steps to expand access to
broadband networks and increase availability of advanced broadband services to consumers and businesses.
Challenges facing incumbent solutions. To provide robust wireless networks that meet the price-performance needs of service providers and enterprises, vendors
of wireless networking solutions must address the problems facing incumbent solutions:
•
Poor performance . To deliver high performance, wireless networking solutions need to satisfy diverse performance requirements for video, voice and
data. The challenges of operating in the unlicensed RF spectrum, including spectrum noise and interference resulting from the proliferation of devices,
often result in difficulty establishing network connections and unreliable or poor performance. Additionally, the performance and reliability of existing
wireless networking solutions decline rapidly as the number of subscribers and range of service delivery increases. Lack of hardware and software
integration between products, technologies and vendor devices can diminish network performance significantly and increase the complexity of network
management, integration and expansion.
• High cost of ownership . Existing alternative solutions, such as fiber-to-the-premises, cable, digital subscriber line, or DSL, worldwide interoperability for
microwave access, or WiMAX, LTE and traditional backhaul, provide high capacity, high performance broadband access; however, these solutions can be
extremely costly, and often do not meet the demanding price-performance requirements of underserved markets.
•
•
Complexity . Existing alternative solutions are often difficult to deploy and manage and require skilled employees or high cost consultants to install and
operate. In addition, existing enterprise solutions often offer a large variety of features and functionalities that enterprise customers may find overwhelming
or unnecessary.
Lack of product support and customer-driven features. Product support and feedback for alternative suppliers’ wireless networking solutions are often
costly and ineffective. Existing wireless solutions are not accompanied by dynamic product support to assist customers in efficiently setting up and
troubleshooting their networks. Additionally, alternative suppliers generally lack an effective mechanism to communicate with their end-users and
incorporate feedback from usage into product roadmaps.
Market opportunity . Existing service provider wireless networking technologies have been developed to satisfy the increasing demand for broadband access,
support mobility and provide the performance and reliability demanded by customers. However, these existing solutions based upon wired, satellite or cellular
technologies, often fail to meet the price-performance requirements of fixed wireless networking in emerging markets, rural markets, or price-sensitive markets,
which in turn has led to low penetration of wireless broadband access and large populations of unaddressed users in these areas. Within the enterprise, existing
WLAN deployments are often relatively complex and costly, providing customers with a large number of non-critical features and functionalities at a high cost.
Given the growth in Internet connected devices, and the consumer’s desire for constant connectivity, there exists growing demand for WLAN solutions that
provide critical features at significantly lower cost than existing solutions.
Our Solutions
Our products and solutions enable both service providers and enterprises to cost effectively deploy the infrastructure for high performance, scalable and reliable
wireless networks. Our wireless networking solutions offer the following key benefits:
• High performance proprietary technology solutions. Our proprietary products and solutions include high performance radios, antennas, software,
communications protocols and management tools that have been designed to deliver carrier and enterprise class wireless broadband access and other
services primarily in the unlicensed RF spectrum. Our radios and antennas, which incorporate our innovative proprietary technologies and firmware, are
designed and field tested to deliver carrier-class network speeds, throughput, range and coverage, while simultaneously meeting the varying performance
requirements of video, voice and data traffic. Our products and solutions overcome significant performance challenges such as dynamic spectrum noise,
device interference, outdoor obstacles and unpredictable levels of video, voice and data performance. Importantly, we are able to utilize the Ubiquiti
Community to validate the
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•
•
•
effectiveness of our end user experience and focus our development efforts on those features and functionality that are critical to their requirements.
Price disruptive offering . Our products and solutions have been designed to enable service providers and enterprises to deliver high performance to their
users at highly disruptive price points. The deployment and operation of our solutions require a fraction of the capital expenditures, implementation
expenses and network maintenance costs of those associated with existing solutions.
Integrated and easy to deploy and manage . Our integrated products and solutions reduce the complexity associated with the installation, management and
expansion of wireless networks. Within each of our product families, products are based on firmware that is built on a common codebase. This allows us to
offer common features and functionality and leads to consistent usability across each product family. The integration between our products is designed to
enable service providers and enterprises to deliver wireless broadband access and other services that have high performance characteristics without
significant management, deployment costs or upgrade complexity.
Scalable community-led approach . Purchasing our proprietary products and solutions enables immediate access to the Ubiquiti Community, including
current and historical troubleshooting and technical information as well as best practices and deployment advice for our end users. Product support from the
Ubiquiti Community is self-sustaining and scales efficiently, with growth and relevance driven by the size and engagement of our customer base. This
scalable community-led approach to customer support contributes to the lower total cost of ownership of our products and solutions relative to incumbent
providers. Additionally, the Ubiquiti Community provides an effective channel for product feedback from our customer base.
We are growing our intellectual property portfolio to help protect the development of our proprietary software, hardware and complete solutions. We believe that
protecting the innovation and technology underlying our comprehensive wireless networking solutions is key to ensuring our continued ability to provide
customers with differentiated value .
Our Strategy
Our goal is to disrupt the market for communications technology with innovative solutions that provide leading performance at prices that are a fraction of those of
alternative solutions. Key elements of our strategy include the following:
•
•
Continue to deliver high performance characteristics at disruptive price points. We intend to expand the market opportunity for service providers by
continuing to provide products and solutions with disruptive price-performance characteristics. We also intend to expand the market and displace high-
priced alternative solutions in enterprise markets. We believe that we can sustain our disruptive strategy through our unique business model, focusing on
the features and functionalities most critical to customers and avoiding the fringe features, which add both cost and complexity.
Leverage our technologies and business model in adjacent markets. We intend to continue to leverage our technologies and business model to target
other large and growing markets that we believe are ripe for disruption such as video surveillance, machine-to-machine communications, routing, switching
and licensed microwave wireless backhaul markets. For the enterprise market, we enhanced our enterprise WLAN product line, UniFi, in fiscal 2015 and
fiscal 2016 and have experienced strong adoption by a largely new customer base. We believe we are well positioned to gain traction in these new
addressable markets and will continue to accelerate our innovation in these products.
• Maintain and extend our technological leadership . We intend to continue to develop innovative solutions for our target markets. We believe that our
continued focus on developing such technologies with customer-driven feedback from the Ubiquiti Community will allow us to deliver products and
solutions with disruptive price-performance characteristics that are specifically targeted to our markets. In addition, we believe our continued innovation is
key to the value our products and solutions provide, and is a critical component to achieving user lock-in.
•
Continue to grow our powerful user community. We believe our differentiated business model, powered by the Ubiquiti Community, provides us with a
significant and sustainable competitive advantage over competitors. The Ubiquiti Community facilitates streamlined and efficient product development
coupled with a highly efficient sales and distribution model that allows us to avoid the costs associated with expensive direct and channel organizations.
The self-sustaining product support aspect of the Ubiquiti Community simplifies the deployment process and provides a highly effective real-time support
system for customers.
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•
Continue to sell to our existing customers. We plan to continue to provide our customers with high performance, reliable, and cost-effective integrated
products and solutions. In particular, we believe our use of differentiated proprietary protocols and the scalability of our products position us to grow with
our customers as they build out their networks. Furthermore, we intend to cross-sell complementary solutions to our existing customers. For example, we
believe customers of our airMAX solutions can benefit significantly from the incremental deployment of our EdgeMAX and airFiber products.
Our Technology and Products
We offer products and solutions based on our proprietary technology with disruptive price-performance characteristics across multiple markets. Utilizing low cost
hardware, consumer chipsets and innovative software and firmware, we build price-performance solutions to address both service providers and enterprises. In
addition, our technology allows us to design our products for ease of manufacture. Our focus on cost efficiency, robust product design and high performance drives
the development of our technology, products and solutions.
Technology Platforms
Our current major service provider and carrier solutions include:
Base Station/Backhaul/Customer Premise Equipment (“CPE”)/Bridge—airMAX
We offer end-to-end solutions that incorporate our proprietary RF technology, antenna design and firmware technologies. These technologies simplify the adoption
and use of our products and provide our products and solutions with performance characteristics usually found only in the carrier-class wireless networking
solutions and solve significant performance, reliability, scalability and ease-of-use challenges in the unlicensed RF spectrum.
Our airMAX platform includes proprietary protocols developed by us that contain advanced technologies for minimizing signal noise. These proprietary protocols
help our products deliver carrier-class wireless networking performance for video, voice and data applications. airMAX is able to support a wireless network that
can scale to hundreds of clients per base station over long distances while maintaining low latency and high throughput. Unlike most systems using 802.11
standard protocols, which are primarily designed for indoor networks, our airMAX systems use a proprietary Time Division Multiple Access, or TDMA, protocol
to manage the sending and receiving of data over the network to maximize air time efficiency. Since the initial launch, we have expanded the airMAX product line
with significant improvements in performance, including the airMAX ac products.
A majority of our airMAX products and solutions can leverage multiple input multiple output, or MIMO, technology, which relates to the use of multiple antennas
at both the transmitter and receiver to improve performance. Most of our radios employ multiple independent transmitters and receivers to create independent
communication channels using the same frequency spectrum. We use advanced array signal processing techniques to combine our radios’ communications
channels into a single, higher data rate channel. Our high performance outdoor antennas are designed to amplify signal power, resulting in stronger signals and
better link quality, and to block noise. Our design produces a better signal-to-noise ratio for each channel and
simplified signal processing to combine the channels, which in turn effectively doubles the throughput of our antennas, when compared to single input single
output devices. Our devices support various WPA and WPA2 encryption protocols.
Network Routing Platform—EdgeMAX
Our EdgeMAX platform is a disruptive price-performance software and systems routing platform. EdgeMAX is powered by our full-featured EdgeOS operating
system that includes advanced QoS, firewall, dynamic routing and VPN functionality. Since the initial launch we have introduced a full series of routers and
switches that address our core markets.
Point-to-point Wireless Backhaul—airFiber
Our AirFiber platform is a point-to-point radio system. Components of the airFiber product, including the radio, were designed to provide low latency with high
throughput. Our airFiber product uses an integrated split antenna and a global positioning system to simultaneously send data packets from each side of the link.
We engineered proprietary communication protocols so that airFiber does not suffer from the traditional packet overhead associated with Wi-Fi based standards. In
February 2015, we introduced airFiber 5X, the first airFiber X radio with full 5GHz global 5GHz band operation. We believe the airFiber family of products offers
a compelling alternative to wired backhaul as airFiber is not easily susceptible to vandalism, copper theft, and fiber optic damage because only the endpoints need
to be secured. airFiber does not require physical infrastructure such as laying cable or fiber, and by utilizing unlicensed spectrum, customers achieve significantly
faster deployment.
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Solar Platform - sunMAX
In October 2015, we introduced sunMAX, an end-to-end, plug and play solar solution that offers simplified installations for reduced deployment time.
Our current major enterprise solutions include:
Enterprise WLAN—UniFi
Our UniFi Enterprise Wi-Fi System is a scalable Wi-Fi solution that includes Wi-Fi certified hardware with a software based management controller, targeting
enterprise customers. UniFi hardware utilizes MIMO technology, works with 802.11a/b/g/n and ac standards and uses a single cable for data transmission and
power-over-Ethernet. UniFi uses a virtual controller that allows for on-site management or remote management through the cloud, allowing customers to deploy
UniFi in both indoor and outdoor applications. Each UniFi access point can be managed centrally with the UniFi Controller software, which we provide free of
charge. The UniFi Controller enables enterprise WLAN managers to centrally configure and administer a UniFi network and individual access points. The UniFi
platform provides UniFi access point detection, firmware updates, real-time status, map loading, advanced security options and “zero handoff roaming,” our
proprietary innovation for seamless roaming for mobile devices. Since the initial launch, we have expanded our UniFi Enterprise system to include UniFi AC
products.
Video Surveillance—UniFi Video
Our line of UniFi Video IP cameras use a single cable for data transmission and power-over-Ethernet. Our management controller software can be used to manage
multiple UniFi Video IP cameras as well as manage digital video recorder devices. UniFi Video software is available for download at no cost on our website and
only manages Ubiquiti Network camera devices. Similar to our other network management products, UniFi Video can be accessed securely from any web browser,
provides detailed statistical reporting and advanced analytics and provides a management console with multiple views, versatile camera settings and customizable
event recordings. Since the initial launch, we have expanded the UniFi Video platform to include new products such as UniFi Video Camera G3 products, our
1080p cameras with infrared, and UniFi Video Micro products, our smaller 720p cameras.
UniFi Switch
Managed by the UniFi Controller software, UniFi Switches deliver performance, switching, and PoE+ support for enterprise networks. The UniFi Switches can
power UniFi AP's, and UniFi Video Cameras.
UniFi Security Gateway
The UniFi Security Gateway extends the UniFi enterprise solutions to provide cost-effective, reliable routing and advanced network security. Managed by the
UniFi Controller software, the UniFi Security Gateway offers advanced firewall, virtual network segments, a site-to-site VPN, QoS priority and other
functionalities.
Machine-To-Machine Communication—mFi
Our mFi platform includes hardware sensors, power devices, and management software that allows devices to be monitored and controlled remotely via Wi-Fi. For
example, mFi allows users to manage and monitor their building temperature and power consumption. The management controller software is IP based and can be
accessed from any browser locally or through the cloud. mFi software allows management to create rules to control numerous devices.
New product line introductions
In May 2016, we announced a new consumer product platform called AmpliFi, a cost-effective Wi-Fi system solution designed to serve the demands of the modern
connected home. More specifically, AmpliFi products are designed to excel in demanding homes serving multiple connected devices, high-quality video streaming,
and distributing fast Internet bandwidth ubiquitously while eliminating Wi-Fi dead zones. We started shipping AmpliFi products in the first quarter of fiscal 2017.
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The table below summarizes information about our major product platforms:
Name
Service Provider Products
airMAX
EdgeMAX
airFiber
Enterprise Products
UniFi
UniFi Video
UniFi Switch
mFi
Target Applications
Base station/Backhaul/CPE/Bridge
Routing/Switching
Wireless Backhaul
WLAN
IP Video Surveillance
Switching
Machine-To-Machine Communication
(1) MSRP listed is for one airFiber unit only, but is typically sold in pairs.
The Ubiquiti Community
Bands of
Operation (GHz)
0.9/ 2.4/ 3/ 5/10
N/A
MSRP
$49 - $499
$49 - $999
2.4/3/4/5/11/24
$399 - $3,000( 1)
2.4/5
N/A
N/A
2.4/5
$59 - $1,540
$23 - $679
$199 - $1,025
$8 - $99
We established the Ubiquiti forum, wiki and newsletter to foster a large, growing and engaged online community of service providers and distributors, customers
and employees among others. The Ubiquiti Community powers our business model by facilitating rapid introductions and development of customer-oriented
products. The Ubiquiti Community provides best practices, advice, troubleshooting and product feedback. It also acts as a source of product support and drives
viral marketing.
The following describes the key aspects of our sustainable business model that are powered by the Ubiquiti Community:
•
•
•
Rapid customer and community-driven product development . We seek to identify features and products that are, or are expected to be, needed or desired
by the majority of customers for that product. We rely on the Ubiquiti Community as a significant source of requests for features that we translate into new
product ideas and designs.
Scalable sales and marketing model . We rely on the Ubiquiti Community to drive market awareness and demand for our products and solutions. This
community-propagated viral marketing enables us to reach underserved and underpenetrated markets far more efficiently and cost effectively than is
possible through traditional sales models. For example, there have been many instances where members of the Ubiquiti Community, who happen to be on
online forums not affiliated with us, have strongly recommended that users of other wireless networking solutions try our products and solutions. We also
hold conferences as an effective way to introduce and promote our products and solutions to the global Ubiquiti Community.
Self-sustaining product support. Our service providers and IT professionals, who enthusiastically support each other through the Ubiquiti forum, as well
as other blogs and online groups, have fostered a large, scalable and, we believe, self-sustaining mechanism for rapid product support and dissemination of
information. The members of the Ubiquiti Community respond to user questions posted on our forum in a rapid manner. These responses are then rated by
other members of the Ubiquiti Community to help ensure that the users are receiving the best possible answers. Top answers to common questions are
stored in the Ubiquiti Networks Community Knowledge Base. In addition, our internal customer support organization provides feedback on critical product
issues, and augments the information in the Ubiquiti Community.
Research and Development
Our research and development organization is responsible for the design, development and testing of our products. Our engineering team has deep expertise and
experience in networking and antenna design, and we have a number of personnel with longstanding experience with network architecture and operation. We have
developed and intend to continue to develop our technology in part by operating with a relatively flat reporting structure that relies on individual contributors or
small development teams to develop, test and obtain feedback for our products. Our products and solutions benefit from the active engagement between the
Ubiquiti Community and our research and development personnel throughout the product development cycle, resulting in rapid introduction and adoption of new
products. Our research and development personnel evaluate the input from service providers, IT professionals and enterprises and respond to their needs by
modifying our products or developing new products based on the input received.
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As of June 30, 2016 , our research and development team consisted of 308 full time equivalent employees, including contractors, located in the United States,
Taiwan, China, Lithuania, Poland, China, the Czech Republic, Latvia and elsewhere. Our research and development operations work on product development of
new products and new versions of existing products. Our research and development expenses were $57.8 million , $54.6 million and $34.0 million for fiscal 2016 ,
fiscal 2015 and fiscal 2014 , respectively. We expect that the number of our research and development personnel will increase over time and that our research and
development expenses will also increase.
Manufacturing and Suppliers
We retain contract manufacturers to manufacture, control the quality of and ship our products. We primarily utilize contract manufacturers located in China. Our
relationships with contract manufacturers allow us to conserve working capital, reduce manufacturing costs and minimize delivery lead times while maintaining
high product quality and the ability to scale quickly to handle increased order volume. We make substantially all of our purchases from our contract manufacturers
on a purchase order basis. Over the long term, our contract manufacturers are not required to manufacture our products for any specific period or in any specific
quantity. We expect that it would take approximately three to six months to transition manufacturing, quality assurance and shipping services to new providers.
Our internal manufacturing organization consists of supply chain managers, logistics employees and contractors who supervise the manufacture of our products at
contract manufacturer sites and test engineers. We rely on our contract manufacturers and our internal quality assurance resources to implement quality assurance
programs designed to achieve high product quality and reliability. We believe that our low warranty expenses and product return rate to date reflect a high level of
product quality. We tightly integrate our research and development efforts with our supplier selection process. Once product manufacturing quality reaches a
satisfactory level, we move full scale production to the contract manufacturer site. We also evaluate and utilize other suppliers for components from time to time.
We rely on third party components and technology to build and operate our products, and we rely on our contract manufacturers to obtain the components,
subassemblies and products necessary for the manufacture of our products. While components and supplies are generally available from a variety of sources, we
and our contract manufacturers currently depend on a single or limited number of suppliers for several components for our products. We and our contract
manufacturers rely on purchase orders rather than long-term contracts with these suppliers. The majority of our product revenues are dependent upon the sale of
products that incorporate components from Qualcomm Atheros, Inc. ("Qualcomm Atheros"). We are party to a non-exclusive license agreement with Qualcomm
Atheros whereby we license certain technology that we incorporate into our products. This agreement automatically renews for successive one year periods unless
the agreement is terminated by written notice of nonrenewal at least 90 days prior to the end of its then-current term. The Company has not received a termination
notice as of the date of this Report. We depend on this license agreement to modify and replace firmware that Qualcomm Atheros provides with the chipsets with
our proprietary firmware. While our agreement with Qualcomm Atheros remains effective, in accordance with the current terms of the agreement, either party may
terminate the agreement without cause at the end of the annual contract term.
We do not stockpile sufficient chipsets to cover the time it would take to re-engineer our products to replace the Qualcomm Atheros chipsets which comprise the
raw materials for our product offerings. If we need to seek a suitable second source for Qualcomm Atheros in our products, there can be no assurance that we
would be able to successfully source our chipsets on suitable terms, if at all. In any event, our use of chipsets from multiple sources may require us to significantly
modify our designs and manufacturing processes to accommodate these different chipsets.
In addition to utilizing contract manufacturers, we outsource most of our logistics warehousing and order fulfillment functions, which are located primarily in
China, and to a lesser extent, Taiwan and United States. 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.
Sales and Distribution
Historically, we have not employed a direct sales force, nor do we plan to in the future. We sell our products and solutions globally to service providers and
enterprises primarily through our extensive network of distributors, and, to a lesser extent, direct customers. During fiscal 2016 , we sold our products to over 100
distributors and direct customers (collectively, “customers”) in over 60 countries. In fiscal 2014 , Flytec Computers Inc. represented 13% of our revenues. No
other customer accounted for 10% or more of our revenues in fiscal 2016 , fiscal 2015 or fiscal 2014 .
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A substantial majority of our sales are made to distributors outside the United States and we anticipate that non-U.S. sales will continue to be a significant portion
of our revenues. Sales in South America accounted for 13% , 16% and 19% of our revenues in fiscal 2016 , fiscal 2015 and fiscal 2014 , respectively. Sales in
Europe, the Middle East and Africa accounted for 39% , 40% , and 43% of our revenues in fiscal 2016 , fiscal 2015 and fiscal 2014 , respectively. Sales in Asia
Pacific accounted for 12% , 11% , and 13% of our revenues in fiscal 2016 , fiscal 2015 and fiscal 2014 , respectively. We do not have any visibility on the location
or extent of purchases of our products by individual network operators and service providers from our distributors. Information regarding financial data by
geographic areas is set forth in Item 7 and Item 15 of this Form 10-K. See Note 12 of Notes to Consolidated Financial Statements under Item 15.
Although we publish a manufacturer's suggested retail price, or MSRP, for our products, our distributors have control of pricing to the ultimate purchaser.
Historically, we have not provided our distributors with any substantial sales training or marketing materials; however, currently, we are expanding our product
education offerings for distributors, as well as increasing marketing support. Our agreements with our distributors do not limit their ability to carry products that
compete with ours. Our distribution agreements generally have a one year term, subject to automatic renewal unless cancelled by one of the parties. Our
distributors typically provide us with purchase orders for delivery within six weeks, which we use to forecast future demand and estimate desired inventory builds.
We have expanded the scope of our training certification program for distributors and other interested individuals through updated classroom curriculum and new
online courses. In fiscal 2016, Ubiquiti recertified 264 trainers across our various product platforms with more than 21,000 students enrolled in training.
The goal is for those completing the certification process to in turn educate and train service providers and enterprise customers on the effective deployment and
use of our products and solutions. We offer the training program to distributors and other interested individuals in different languages throughout the world.
Backlog
Our sales are primarily made through standard purchase orders for delivery of products. As we allow customers to cancel or change orders with limited advance
notice prior to shipment and because some orders remain in backlog due to concerns about the credit worthiness of the customer, we do not consider backlog to be
firm and do not believe our backlog information is a reliable indicator of our ability to achieve any particular level of revenue of financial performance.
Competition
The markets for networking solutions for service providers, enterprise WLAN, video surveillance, microwave backhaul and machine-to-machine communications
technology are highly competitive and are influenced by the following competitive factors, among others:
total cost of ownership and return on investment associated with the solutions;
simplicity of deployment and use of the solutions;
ability to rapidly develop high performance integrated solutions;
reliability and scalability of the solutions;
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• market awareness of a particular brand;
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ability to provide secure access to wireless networks;
ability to offer a suite of products and solutions;
ability to allow centralized management of the solutions; and
ability to provide quality product support.
We believe we compete favorably with respect to these factors. Although we are a recent entrant in the video surveillance, microwave backhaul, routing and
machine-to-machine communication markets, we believe our products compete favorably in these product categories. We have been successful in rapidly
developing high performance integrated solutions because we use individual contributors and small, experienced development teams that focus on the key needs of
underserved and underpenetrated markets. Our products and solutions are designed to meet the price-performance characteristics demanded by our customers to
achieve a strong overall return on their investment. Our products are designed to operate in growing networks without degradation in performance or operational
complexity.
In the backhaul market, our competitors include Cambium Networks, Ceragon Networks, DragonWave, Mikrotîkls, Mimosa, SAF Tehnika and Trango. In the CPE
market, our competitors include Cambium Networks, Mikrotîkls, Ruckus Wireless and TP-LINK Technologies. In the antenna market, we primarily compete with
PCTEL, ARC, ITELITE and Radio Waves. In the enterprise WLAN market, we primarily compete with Aerohive Networks, Aruba Networks, Ruckus Wireless
and Cisco. In the video surveillance market, we primarily compete with Axis Communications, HIKVISION, Mobotix and Vivotek. In the
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machine-to-machine communications market, we primarily compete with AlertMe.com, EnergyHub and Motorola. We expect increased competition from other
established and emerging companies if our market continues to develop and expand. As we enter new markets, we expect to face competition from incumbent and
new market participants.
Intellectual Property
We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and
protect our proprietary rights. These laws, procedures and restrictions provide only limited protection and the legal standards relating to the validity, enforceability
and scope of protection of intellectual property rights are uncertain and still evolving. Furthermore, effective patent, trademark, copyright and trade secret
protection may not be available in every country in which our services and products are available. We seek patent protection for certain of our key concepts,
components, protocols, processes and other inventions.
As of June 30, 2016 , we had 39 issued patents in the United States, 20 issued patents in foreign countries and over 130 pending U.S. and foreign patent
applications. These patent applications relate to various features embedded in certain of our products, including the integration of components in a microwave
system and certain performance improvements to radio receivers, and certain technologies in developments. We have filed, and will continue to file, patent
applications in the United States and other countries where we believe there to be a strategic technological or business reason to do so. Any patents issued to us
now or in the future may be challenged, invalidated or circumvented and may not provide sufficiently broad protection or may not prove to be enforceable in
actions against alleged infringers.
As of June 30, 2016 , we owned U.S. trademark registrations in Ubiquiti, Ubiquiti Networks, the U logo, the beam logo, UBNT, airMAX, airControl, airOS,
airFiber, airGateway, airGrid, airPRISM, airView, UniFi, mFi, EdgeMAX, Edgepoint, InnerFeed, Litebeam, NanoBeam, NanoStation, NanoBridge, PowerBeam,
PowerBridge, Poweroverfiber, Rocket, and a number of trademark applications and registrations in the United States and other countries.
We endeavor to enter into agreements with our employees and contractors and with parties with whom we do business in order to limit access to and disclosure of
our proprietary information. We cannot be certain that the steps we have taken will prevent unauthorized use or reverse engineering of our technology. Moreover,
others may independently develop technologies that are competitive with ours or that infringe on our intellectual property. The enforcement of our intellectual
property rights also depends on the success of our legal actions against infringers and counterfeiters, but these actions may not be successful, even when our rights
have been infringed.
Employees
As of June 30, 2016 , we employed and or contracted with 537 full time equivalent employees, which included 308 in research and development, 77 in sales,
general and administrative and 152 in operations. None of our employees are represented by a labor union or is a party to a collective bargaining agreement. We
consider our relations with our employees to be good.
Corporate Information
We were incorporated in the State of California in 2003 as Pera Networks, Inc., and we commenced our current operations in 2005 and changed our name to
Ubiquiti Networks, Inc. at that time. In June 2010, Ubiquiti Networks, Inc., a California corporation, changed its state of organization to Delaware by merging with
and into Ubiquiti Networks, Inc., a Delaware corporation. Our executive offices are located at 2580 Orchard Parkway, San Jose, California 95131, and our
telephone number is (408) 942-3085. Our website address is www.ubnt.com. The information on, or that can be accessed through, our website is not part of this
Annual Report on Form 10-K.
Unless the context requires otherwise, the words “we,” “us,” “our” “Company” and “Ubiquiti” refer to Ubiquiti Networks, Inc. and its subsidiaries as a whole.
Financial Information About Geographic Areas
Refer to Note 12 in our Notes to Consolidated Financial Statements included under Part IV, Item 15 of this report for financial information about our geographic
areas.
Available Information
The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to
Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), are filed with the U.S. Securities and Exchange Commission (the
“SEC”). Such reports and other
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information filed by the Company with the SEC are available free of charge on the Company’s website at http://ir.ubnt.com/sec.cfm when such reports are
available on the SEC website. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F
Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-
SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file
electronically with the SEC at www.sec.gov . The contents of these websites are not incorporated into this filing. Further, the Company’s references to the URLs
for these websites are intended to be inactive textual references only.
Item 1A. Risk Factors
This Report contains forward-looking statements that 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 risk factors set forth below. These risks and uncertainties are not the only ones we face. If any
event related to these known or unknown risks or uncertainties actually occurs, our business prospects, results of operation, and financial condition could be
materially adversely affected.
Fluctuations in our operating results could cause the market price of our common stock to decline.
Risks Related to Our Business and Industry
Our quarterly operating results fluctuate significantly due to a variety of factors, many of which are outside of our control and are difficult or impossible to predict.
We expect our operating results will continue to fluctuate. You should not rely on our past results as an indication of our future performance. If our revenues or
operating results fall below the expectations of investors or securities analysts, or below any estimates we may provide to the market, the price of our common
shares would likely decline substantially, which could have a material adverse impact on investor confidence and employee retention. Our common stock has
experienced substantial price volatility since our initial public offering. In addition, the stock market as a whole has experienced major price and volume
fluctuations that have affected the stock price of many technology companies in ways that may have been unrelated to these companies’ operating performance.
Factors that could cause our operating results and stock price to fluctuate include:
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varying demand for our products due to the financial and operating condition of our distributors and their customers, distributor inventory management
practices and general economic conditions;
shifts in our fulfillment practices including increasing inventory levels as part of efforts to decrease our delivery lead times;
failure of our suppliers to provide chips or other components;
failure of our contract manufacturers and suppliers to meet our demand;
success and timing of new product introductions by us, and our competitors;
increased warranty costs;
announcements by us or our competitors regarding products, promotions or other transactions;
costs related to legal proceedings or responding to government inquiries;
our ability to control and reduce product costs; and
expenses of our entry into new markets.
In addition, our business may be subject to seasonality, although our recent growth rates and timing of product introductions may have masked seasonal changes in
demand.
We have limited visibility into future sales, which makes it difficult to forecast our future operating results.
Because of our limited visibility into end customer demand and channel inventory levels, our ability to accurately forecast our future sales is limited. We sell our
products and solutions globally to network operators, service providers and others, primarily through our network of distributors. We do not employ a direct sales
force. Sales to our distributors have accounted for nearly all of our revenues. Our distributors do not make long term purchase commitments to us, and do not
typically provide us with information about market demand for our products. We endeavor to obtain information on inventory levels and sales data from our
distributors. This information has been generally difficult to obtain in a timely manner, and we cannot always be certain that the information is reliable. If we over
forecast demand, we may not be able to decrease our expenses in time to offset any shortfall in revenues. If we under forecast demand, our ability to fulfill sales
orders will be compromised and sales to distributors may be deferred or lost altogether.
We are subject to risks associated with our distributors’ inventory management practices.
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Our distributors purchase and maintain their own inventories of our products, and we do not control their inventory management. Distributors may manage their
inventories in a manner that causes significant fluctuations in their purchases from quarter to quarter, and which may not be in alignment with the actual demand of
end customers for our products. If some distributors decide to purchase more of our products than are required to satisfy their customers’ demand in any particular
quarter, because they do not accurately forecast demand or otherwise, they may reduce future orders until their inventory levels realign with their customers’
demand. If some distributors decide to purchase less of our products than are required to satisfy their customers’ demand in any particular quarter, because they do
not accurately forecast demand or otherwise, sales of our products may be deferred or lost altogether.
If our forecasts of future sales are inaccurate, we may manufacture too many or not enough products.
We may over or under forecast our customers’ actual demand for our products or the actual mix of our products that they will ultimately demand. If we over-
forecast demand, we may build excess inventory which could materially adversely affect our operating results. If we under-forecast demand, we may miss
opportunities for sales and may impair our customer relationships, which could materially adversely affect our operating results.
The lead times that we face for the procurement of components and subsequent manufacturing of our products are usually much longer than the lead time from our
customers’ orders to the expected delivery date. This increases the risk that we may manufacture too many or not enough products in any given period.
We may decide to increase or maintain higher levels of inventory.
With the use of third party logistics and warehousing providers, we may decide to increase or maintain higher levels of inventory of finished products or
components, which may expose us to a greater risk of carrying excess or obsolete inventory. Decisions to increase or maintain higher inventory levels are typically
based upon uncertain forecasts or other assumptions. If the assumptions on which we base these decisions turn out to be incorrect, our financial performance could
suffer and we could be required to write-off the value of excess products or components inventory.
We rely on a limited number of distributors, and changes in our relationships with our distributors or changes within our distributors may disrupt our sales.
Although we have a large number of distributors in numerous countries who sell our products, a limited number of these distributors represent a significant portion
of our sales. One or more of our major distributors may suffer from a decline in their financial condition, decrease in demand from their customers, or a decline in
other aspects of their business which could impair their ability to purchase and resell our products. Any distributor may also cease doing business with us at any
time with little or no notice. The termination of a relationship with a major distributor, either by us or by the distributor, could result in a temporary or permanent
loss of revenues. We may not be successful in finding other suitable distributors on satisfactory terms, or at all, and this could adversely affect our ability to sell in
certain geographic markets or to certain network operators and service providers.
We may not be able to enhance our products to keep pace with technological and market developments while offering competitive prices.
The market for our wireless broadband networking equipment is emerging and is characterized by rapid technological change, evolving industry standards,
frequent new product introductions and short product life cycles. The markets for enterprise networking equpment and consumer products possess similar
characteristics of rapid technological updates, evolving industry standards, frequent changes in consumer preferences, frequent new product introductions and short
and unpredictable product life cycles. Our ability to keep pace in these markets depends upon our ability to enhance our current products, and continue to develop
and introduce new products rapidly and at competitive prices. The success of new product introductions or updates on existing products depends on a number of
factors including, but not limited to, timely and successful product development, market acceptance, our ability to manage the risks associated with new product
production ramp-up, the effective management of our inventory and manufacturing schedule and the risk that new products may have defects or other deficiencies
in the early stages of introduction.Our ability to compete successfully will depend in large measure on our ability to maintain a technically skilled development and
engineering staff, to successfully innovate, and to adapt to technological changes and advances in the industry. Development and delivery schedules for our
products are difficult to predict. We may fail to introduce new versions of our products in a timely fashion. If new releases of our products are delayed, our
distributors may curtail their efforts to market and promote our products and our users may switch to competing products.
The markets in which we compete are highly competitive.
The networking, enterprise WLAN, video surveillance, wireless backhaul, machine-to-machine communications, solar and consumer markets in which we
primarily compete are highly competitive and are influenced by competitive factors including:
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our ability to rapidly develop and introduce new high performance integrated solutions;
the price and total cost of ownership and return on investment associated with the solutions;
the simplicity of deployment and use of the solutions;
the reliability and scalability of the solutions;
the market awareness of a particular brand;
our ability to provide secure access to wireless networks;
our ability to offer a suite of products and solutions;
our ability to allow centralized management of the solutions; and
our ability to provide quality product support.
New entrants seeking to gain market share by introducing new technology and new products may also make it more difficult for us to sell our products, and could
create increased pricing pressure. In addition, broadband equipment providers or system integrators may also offer wireless broadband infrastructure equipment for
free or as part of a bundled offering, which could force us to reduce our prices or change our selling model to remain competitive.
If there is a shift in the market such that network operators and service providers begin to use closed network solutions that only operate with other equipment from
the same vendor, we could experience a significant decline in sales because our products would not be interoperable.
We expect competition to continuously intensify as other established and new companies introduce new products in the same markets that we serve or intend to
enter, as these markets consolidate. Our business will suffer if we do not maintain our competitiveness.
A number of our current or potential competitors have longer operating histories, greater brand recognition, larger customer bases and significantly greater
resources than we do.
As we move into new markets for different types of equipment, our brand may not be as well-known as incumbents in those markets. Potential customers may
prefer to purchase from their existing suppliers rather than a new supplier, regardless of product performance or features. We expect increased competition from
other established and emerging companies if our market continues to develop and expand. As we enter new markets, we expect to face competition from
incumbent and new market participants.
Many of these companies have significantly greater financial, technical and other resources than we do and are better positioned to acquire and offer
complementary products and technologies.
Industry consolidation and other arrangements among competitors may adversely affect our competitiveness because it may be more difficult to compete with
entities that have access to their combined resources. These combinations may also affect customers’ perceptions regarding the viability of companies our size and,
consequently, affect their willingness to purchase our products.
The complexity of our products could result in unforeseen delays or expenses caused by undetected defects or bugs.
Our products may contain defects and bugs when they are introduced, or as new versions are released. We have focused, and intend to focus in the future, on
getting our new products to market quickly. Due to our rapid product introductions, defects and bugs that may be contained in our products may not yet have
manifested. We have in the past experienced, and may in the future experience, defects and bugs. If any of our products contain material defects or bugs, or has
reliability, quality or compatibility problems, we may not be able to promptly or successfully correct these problems. The existence of defects or bugs in our
products may damage our reputation and disrupt our sales. If any of these problems are not found until after we have commenced commercial production and
distribution of a new product, we may be required to incur additional development costs, repair or replacement costs and claims. Undetected defects or bugs may
lead to negative online Internet reviews of our products, which are increasingly becoming a significant factor in the success of our new product launches, especially
for our consumer products. If we are unable to quickly respond to negative reviews, including end user reviews posted on various prominent online retailers, our
ability to sell these products will be harmed.
Security vulnerabilities in our products, services and systems could lead to reduced revenues and claims against us.
The quality and performance of some of our products and services may depend upon their ability to withstand cyber attacks. Third parties may develop and deploy
viruses, worms and other malicious software programs, some of which may be designed to attack our products, systems, or networks. Some of our products and
services also involve the storage and transmission of users' and customers' proprietary information which may be the target of cyber attacks. Hardware and
software that we produce
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or procure from third parties also may contain defects in manufacture or design, including bugs and other problems, which could compromise their ability to
withstand cyber attacks.
We may have experienced cyber attacks in the past, and may experience cyber attacks in the future. As a result, unauthorized parties may have obtained, and may
in the future obtain, access to our systems, data or our users' or customers' data. Our security measures may also be breached due to employee error, malfeasance,
or otherwise. Third parties may also attempt to induce employees, users, or customers to disclose sensitive information in order to gain access to our data or our
users' or customers' data. Any such breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation, and a loss of
confidence in the security of our products and services. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems
change frequently, and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate
preventative measures.
The costs to us to eliminate or alleviate security vulnerabilities can be significant, and our efforts to address these problems may not be successful and could result
in interruptions, delays, cessation of service and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other critical
functions, as well as potential liability to the company. The risk that these types of events could seriously harm our business is likely to increase as we expand the
web-based products and services that we offer.
We may be unable to anticipate or fail to adequately mitigate against increasingly sophisticated methods to engage in illegal or fraudulent activities against us.
Despite any defensive measures we take to manage threats to our business, our risk and exposure to these matters remain heightened because of, among other
things, the evolving nature of such threats in light of advances in computer capabilities, new discoveries in the field of cryptography, new and sophisticated
methods used by criminals including phishing, social engineering or other illicit acts, or other events or developments that we may be unable to anticipate or fail to
adequately mitigate. In June 2015, we determined that we were the victim of criminal fraud known to law enforcement authorities as business e-mail compromise
fraud which involved employee impersonation and fraudulent requests targeting our finance department. The fraud resulted in transfers of funds aggregating $46.7
million held by a Company subsidiary incorporated in Hong Kong to other overseas accounts held by third parties. The Company recovered $8.1 million in fiscal
2015, resulting in a charge of $39.1 million in the fourth quarter of fiscal 2015, including additional expenses consisting of professional service fees associated
with the fraud loss. In fiscal 2016, the Company recorded a net recovery of an additional $8.3 million, comprised of an $8.6 million recovery less $0.3 million of
professional service fees associated with the recovery.
The Company is continuing to pursue the recovery of the remaining $30.0 million and is cooperating with U.S. federal and numerous overseas law enforcement
authorities who are actively pursuing a multi-agency criminal investigation. However, any additional recoveries are likely remote and therefore cannot be assured.
The Company may not be successful in obtaining any insurance coverage for this loss. While we do not expect the fraud to have a material impact on our business,
we have borne, and will continue to bear additional expenses in connection with the remediation and investigation of the fraud.
Our business and prospects depend on the strength of our brand.
Maintaining and enhancing our brand is critical to expanding our base of distributors and end customers. Maintaining and enhancing our brand will depend largely
on our ability to continue to develop and provide products and solutions that address the price-performance characteristics sought by end customers and the users
of our products and services, particularly in developing markets which comprise a significant part of our business. If we fail to promote, maintain and protect our
brand successfully, our ability to sustain and expand our business and enter new markets will suffer.
We rely on the Ubiquiti Community to provide our engineers with valuable feedback that is important in our research and development processes.
We rely on the Ubiquiti Community to provide rapid and substantive feedback on the functionality and effectiveness of our products. The insights, problems and
suggestions raised by the Ubiquiti Community enable our engineers to quickly resolve issues with our existing products and improve functionality in subsequent
product releases. If the members of the Ubiquiti Community were to become less engaged or otherwise ceased providing valuable, timely feedback, our internal
research and development costs and our time to market could increase, which could cause us to incur additional expenses or make our products less attractive to
customers.
We rely on the Ubiquiti Community to generate awareness of, and demand for, our products.
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We believe a significant portion of our growth to date has been driven by the diverse and actively engaged Ubiquiti Community, and our business model is
predicated on the assumption that the Ubiquiti Community will continue to provide these benefits. We do not have a direct sales force and we engage in limited
marketing expenditures. Although the Ubiquiti Community is central to the success of our business, the interactions within the Ubiquiti Community, and
participation levels, are largely outside of our control. Any negative information about us or our products in the Ubiquiti Community, whether or not justified,
could quickly and materially decrease the demand for our products.
We rely on the Ubiquiti Community to provide network operators and service providers with support to install, operate and maintain our products.
We rely on the Ubiquiti Community to provide assistance and other information to network operators and service providers for the installation, operation and
maintenance of our products. Because we do not generate or control all of the information provided through the Ubiquiti Community, inaccurate information
regarding the installation, operation and maintenance of our products could be promulgated through forum postings by members of the Ubiquiti Community.
Although we moderate and review many forum postings to learn of reported problems and assess the accuracy of advice provided by the Ubiquiti Community, we
may not devote sufficient time or resources to adequately monitor the quality of Ubiquiti Community information.
Inaccurate information in the Ubiquiti Community could lead to poor customer experiences or dissatisfaction with our products, which could negatively impact our
reputation and diminish our sales.
We may fail to effectively manage the challenges associated with our growth.
Over the past several years we have expanded, and continue to expand, our product offerings, the number of customers we sell to, our transaction volumes, the
number of our facilities, and the number of contract manufacturers that we utilize to produce our products. Failure to effectively manage the increased complexity
associated with this expansion, particularly in light of our lean management structure, would make it difficult to conduct our business, fulfill customer orders, and
pursue our strategies. We may also need to increase costs to add personnel, upgrade or replace our existing reporting systems, as well as improve our business
processes and controls as a result of these changes. If we fail to effectively manage any of these challenges we could suffer inefficiencies, errors and disruptions in
our business, which in turn would adversely affect our operating results.
We rely on a limited number of contract manufacturers to produce our products.
We retain contract manufacturers, located primarily in China, to manufacture our products. Any significant change in our relationship with these manufacturers
could have a material adverse effect on our business, operating results and financial condition. Our reliance on contract manufacturers for manufacturing our
products can present significant risks to us because, among other things, we do not have direct control over their activities. We significantly depend upon our
contract manufacturers to:
assure the quality of our products;
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qualify appropriate component suppliers;
ensure adequate supplies of components and materials;
deliver finished products at agreed upon prices and schedules; and
safeguard materials and finished goods.
The ability and willingness of our contract manufacturers to perform is largely outside our control.
We believe that our orders may not represent a material portion of our contract manufacturers’ total orders and, as a result, fulfilling our orders may not be a
priority in the event our contract manufacturers are constrained in their capacity. If any of our contract manufacturers experiences problems in its manufacturing
operations, or if we have to change or add additional contract manufacturers, our ability to ship products to our customers would be impaired.
We rely upon a limited number of suppliers, and it can be costly and time consuming to use components from other suppliers.
We purchase components, directly or through our contract manufacturers, from third parties that are necessary for the manufacture of our products. Shortages in
the supply of components or other supply disruptions may not be predicted in time to design-in different components or qualify other suppliers. Shortages or
supply disruptions may also increase the prices of components due to market conditions. While many components are generally available from a variety of sources,
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contract manufacturers currently depend on a single or limited number of suppliers for several components for our products. For example, we currently rely upon
Qualcomm Atheros as a single-source supplier of certain components for some of our products, and a disruption in the supply of those components would
significantly disrupt our business.
We and our contract manufacturers generally rely on short-term purchase orders rather than long-term contracts with the suppliers of components for our products.
As a result, even if components are available, we and our contract manufacturers may not be able to procure sufficient components at reasonable prices to build our
products in a timely manner. We may, therefore, be unable to meet customer demand for our products, which would have a material adverse effect on our business,
operating results and financial condition.
Not paying cash dividends to our stockholders, or repurchasing shares of our common stock pursuant to our previously announced stock repurchase program,
could cause the market price for our common stock to decline.
Our payment of cash dividends will be subject to, among other things, our financial position and results of operations, available cash and cash flow, capital
requirements, and other factors. These and other factors may also affect the continuation of, or activity under, our previously announced stock repurchase program.
Failure to pay cash dividends could cause the market price of our common stock to decline. The discontinuance of, or lack of activity under, our previously
announced stock repurchase program could also result in a lower market price of our common stock.
A general global economic downturn may negatively affect our customers and their ability to purchase our products. A downturn 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.
Since the middle of 2008, there has been global economic uncertainty, including reduced economic growth, reduced confidence in financial markets, bank failure
and credit availability concerns. In June 2016, the United Kingdom held a referendum in which voters approved an exit from the European Union, commonly
referred to as “Brexit”. As a result of the referendum, it is expected that the United Kingdom government will negotiate the terms of the United Kingdom’s future
relationship with the European Union. Although it is unknown what those terms will be, the Brexit could create global economic uncertainty and cause disruptions
in the markets that we serve.
Disruptions in the financial markets have had and may continue to have an adverse effect on the U.S. and world economies, which could adversely and materially
impact business spending patterns. Tightening of credit in financial markets could adversely affect the ability of our customers and suppliers to obtain financing for
significant purchases and operations and could result in a decrease in or cancellation of orders for our products.
Economic downturns may exacerbate some of the other risks that affect our business, results of operations and financial condition. A tighter credit market for
consumer, business, and service provider spending may have several adverse effects, including reduced demand for our products, increased price competition or
deferment of purchases and orders by our customers. Additional effects may include increased demand for customer finance, difficulties in collection of accounts
receivable and increased risk of counterparty failures.
Our business is susceptible to risks associated with operations outside of the United States.
Risks Related to Our International Operations
We have operations in China, Lithuania, Poland, Latvia, Canada, India, Taiwan, United States and elsewhere. We also sell to distributors in numerous countries
throughout the world. Our operations outside of the United States subject us to risks that we generally do not face in the United States. These include:
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the burdens of complying with a wide variety of foreign laws and regulations, and the risks of non-compliance;
fluctuations in currency exchange rates;
increasing labor costs, especially in China;
difficulties in managing the geographically remote personnel;
the complexities of foreign tax systems and changes in their tax rates and rules;
stringent consumer protection and product compliance regulations that are costly to comply with and may vary from country to country;
limited protection and enforcement regimes for intellectual property rights in some countries;
increased financial accounting and reporting burdens and complexity; and
political, social and economic instability in some jurisdictions.
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If any of these risks were to come to fruition, it could negatively affect our business outside the United States and, consequently, our operating results.
Additionally, operating in markets outside the United States requires significant management attention and financial resources. We cannot be certain that the
investment and additional resources required to establish, acquire or integrate operations in other countries will produce desired levels of revenues or profitability.
Our third party logistics and warehousing providers in China and elsewhere may fail to safeguard and accurately manage and report our inventory.
We use third party logistics and warehousing providers located in China to fulfill the majority of our worldwide sales. We also rely on our third party logistics and
warehousing providers to safeguard, and manage and report on the status of our products at their warehouse and in transit. These service providers may fail to
safeguard our products, fail to accurately segregate and report our inventory, or fail to manage and track the delivery of our products, which could have a material
adverse effect on our operating results and financial condition.
To the extent that we develop some of our own manufacturing capacity, we will be subject to various risks associated with such activities.
We invested in developing our own manufacturing capacity to support our product development and prototyping. To the extent that we may invest in and expand
these manufacturing capabilities, and increasingly rely upon such activities, we will face increased risks associated with:
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bearing the fixed costs of these activities;
directly procuring components and materials;
regulatory and other compliance requirements;
exposure to casualty loss and other disruptions;
quality control;
labor relations; and
our limited experience in operating manufacturing facilities.
Since these activities would be conducted in China, some of these risks may be more significant due to the less predictable legal and political environment.
Our business may be negatively affected by political events and foreign policy responses.
Geopolitical uncertainties and events could cause damage or disruption to international commerce and the global economy, and thus could have a material adverse
effect on us, our suppliers, logistics providers, manufacturing vendors and customers, including our channel partners. Changes in commodity prices may also cause
political uncertainty, and increase currency volatility that can affect economic activity. The foreign policies of governments may be volatile, and may result in
rapid changes to import and export requirements, customs classifications, tariffs, trade sanctions and embargoes that may prevent us from offering products or
providing services to particular entities or markets or may create delays and inefficiencies in our supply chain. For example, political unrests and uncertainties in
Eastern Europe and Middle East may lead to disruptions in commerce in those regions, which would in turn impact our sales to those regions. Furthermore, if the
U.S. government imposes new sanctions against certain countries or entities, such sanctions could sufficiently restrict our ability to market and sell our products
and may materially adversely affect our results of operations.
Our ability to introduce new products and support our existing products depends on our ability to manage geographically dispersed research and development
teams.
Significant parts of our research and development operations are conducted in geographically dispersed localities. Our success depends on the effectiveness of our
research and development activities. We must successfully manage these geographically dispersed teams in order to meet our objectives for new product
introduction, product quality and product support. It can be difficult to effectively manage geographically dispersed research and development teams. If we fail to
do so, we could incur unexpected costs or delays in product development.
Our contract manufacturers, logistics centers and certain administrative and research and development operations are located in areas likely to be subject to
natural disasters.
The manufacturing or shipping of our products at one or more facilities may be disrupted because our manufacturing and logistics contractors are all located in
southern China. Our principal executive offices are located in California. The risks of earthquakes, extreme storms and other natural disasters in these geographic
areas are significant. Any disruption resulting from
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these events could cause significant delays in product development or shipments of our products until we are able to shift our development, manufacturing or
logistics centers from the affected contractor to another vendor, or shift the affected administrative or research and development activities to another location.
Risks Related to Intellectual Property
We have limited ability to obtain and enforce intellectual property rights, and may fail to effectively obtain and enforce such rights.
Our success can depend significantly upon our intellectual property rights. We rely on a combination of patent, copyright, trademark, trade secret laws, and
contractual rights to establish, maintain and protect these intellectual property rights, all of which afford only limited protection. Our patent rights, and the
prospective rights sought in our pending patent applications, may not be meaningful or provide us with any commercial advantage and they could be opposed,
contested, circumvented or designed around by our competitors or be declared invalid or unenforceable in legal proceedings. In addition, patents may not be issued
from any of our current or future patent applications. Any failure of our patents or other intellectual property rights to adequately protect our technology might
make it easier for our competitors to offer similar products or technologies.
Confidentiality agreements with our employees, licensees, independent contractors and others may not effectively prevent disclosure of our trade secrets, and may
not provide an adequate remedy in the event of unauthorized use or disclosure of our trade secrets. We may also fail or have failed to obtain such agreements from
such persons due to administrative oversights or other reasons.
Monitoring unauthorized use of our intellectual property is difficult and costly. Unauthorized use of our intellectual property, such as the production of counterfeits
of our products, and unauthorized registration and use of our trademarks by third parties, is a matter of ongoing concern. The steps we have taken may not prevent
unauthorized use of our intellectual property. We may fail to detect infringements of, or take appropriate steps to enforce, our intellectual property rights. Our
competitors might independently develop similar technology without infringing our intellectual property rights. Our inability or failure to effectively protect our
intellectual property could reduce the value of our technology and could impair our ability to compete. Any inability or failure by us to meaningfully protect our
intellectual property could result in competitors offering products that incorporate our most technologically advanced features.
We have initiated and may continue to initiate legal proceedings to enforce our intellectual property rights. Litigation, whether we are a plaintiff or a defendant, can
be expensive and time-consuming, may place our intellectual property at risk of being invalidated or narrowed in scope, and may divert the efforts of our technical
staff and managerial personnel.
Enforcement of our intellectual property rights abroad, particularly in China and South America, is limited.
The intellectual property protection and enforcement regimes in certain countries outside the United States are generally not as comprehensive as in the United
States, and may not adequately protect our intellectual property. The legal regimes relating to the recognition and enforcement of intellectual property rights in
China and South America are particularly limited. Legal proceedings to enforce our intellectual property in these jurisdictions may progress slowly, during which
time infringement may continue largely unimpeded. Countries that have relatively inefficient intellectual property protection and enforcement regimes represent a
significant portion of the demand for our products. These factors may make it more challenging for us to enforce our intellectual property rights against
infringement. The infringement of our intellectual property rights, particularly in these jurisdictions, may materially harm our business in these markets and
elsewhere by reducing our sales, and diluting our brand or reputation.
Our contract manufacturers may not respect our intellectual property, and may produce products that compete with ours.
Our contract manufacturers operate in China, where the prosecution of intellectual property infringement and trade secret theft is more difficult than in the United
States. In the past, our contract manufacturers, their affiliates, their other customers or their suppliers have attempted to participate in efforts to misappropriate our
intellectual property and trade secrets to manufacture our products for themselves or others without our knowledge. Even if the agreements with our contract
manufacturers, and applicable laws, prohibit them from misusing our intellectual property and trade secrets, we may be unsuccessful in monitoring and enforcing
our intellectual property rights against them. We have in the past, and continue to discover, counterfeit goods being sold as our products or as other brands.
We operate in an industry with extensive intellectual property litigation.
Our commercial success depends in part upon us and our component suppliers not infringing intellectual property rights owned by others, and being able to resolve
intellectual property claims without major financial expenditures. Our key component suppliers are often targets of intellectual property claims, and we are subject
to claims as well.
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There are numerous patents and patent applications in the United States and other countries relating to communications technologies. It can be difficult or
impossible to conduct meaningful searches for patents relating to our technologies, or to approach third parties to seek a license to their patents. Even extensive
searches for patents that may be relevant to our products may not uncover all relevant patents and patent applications. We cannot determine with certainty whether
any existing or future third party intellectual property rights would require us to alter our technologies, obtain licenses or cease certain activities.
We have received, and may in the future receive, claims from third parties asserting intellectual property infringement and other related claims. As our revenues
grow and our profile increases, the frequency and significance of these claims may increase. Whether or not there is merit to a given claim, it can be time
consuming and costly to defend against, and could:
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adversely affect our relationships with our current or future users, customers and suppliers;
cause delays or stoppages in the shipment of our products;
cause us to modify or redesign our products;
divert management’s attention and resources;
subject us to significant damages or settlements;
require us to enter into costly licensing agreements; or
require us to cease offering certain of our products or services.
Some of our competitors may have substantially greater resources than we do and may be able to sustain the costs of complex intellectual property litigation to a
greater degree and for longer periods of time than we could. In addition, patent holding companies and other third-party non-practicing entities that focus on
extracting royalties and settlements by enforcing patent rights may target our component suppliers, manufacturers, us, our distributors, members of our sales
channels, our network operators and service providers, or other purchasers of our products. These companies typically have little or no product revenues and
therefore our patents may provide little or no deterrence against such companies filing patent infringement lawsuits against our component suppliers,
manufacturers, us, our distributors, members of our sales channels, network operators and service providers, or other purchasers of our products.
In addition to liability for monetary damages against us or, in certain circumstances, our network operators and service providers, we may be prohibited from
developing, commercializing or continuing to provide certain of our products unless we obtain licenses from the holders of the patents or other intellectual property
rights. We cannot assure you that we will be able to obtain any such licenses on commercially reasonable terms, or at all. If we do not obtain licenses, our business,
operating results and financial condition could be materially affected and we could, for example, be required to cease offering our products or be required to
materially alter our products, which could involve substantial costs and time to develop.
The production of counterfeit versions of our products may reduce our sales levels and damage our brand.
We have in the past and continue to discover counterfeit versions of our products. Although we have taken steps to combat counterfeiting, it is difficult or
impossible to detect or prevent all instances of counterfeiting. Particularly if the quality of counterfeit products is poor, damage could be done to our brand.
Combating counterfeiting is difficult and expensive, and may not be successful, especially in countries that have a relatively weak legal regime for the protection of
intellectual property.
We use open source software in our products that may subject source code to public release or require us to re-engineer our products.
We use open source software in certain of our products, and may use more open source software in the future.
There have been claims challenging the ownership of software against companies that use open source software in the development of their products. We could
become subject to claims regarding the ownership of what we believe to be our proprietary software.
Usage of open source software can also lead to greater risks than the use of third party commercial software, since open source licensors generally do not provide
warranties or controls on origin of the software.
Some open source licenses contain requirements that users make available and license the source code for the modifications or derivative works that they create
based upon the open source software. If we combine our proprietary software with open source software we could, in some circumstances, be required to release
our proprietary source code publicly or license such source code on unfavorable terms or at no cost. That could significantly diminish the value of some of our
products and negatively affect our business.
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We may lose the services of our founder and Chief Executive Officer, Robert J. Pera, or other key personnel.
Risks Related to Our Management and Structure
Our success and future growth depend on the skills, working relationships and continued services of our management team, and in particular our founder and Chief
Executive Officer, Robert J. Pera. Our future performance may also depend on our ability to retain other key personnel. We do not maintain any significant key
person insurance with regard to any of our personnel.
Our business model relies in part on leanly staffed, independent and efficient research and development teams. Our research and development teams are organized
around small groups or individual contributors for a given platform, and there is little overlap in knowledge and responsibilities. In the event that we are unable to
retain the services of any key contributors, we may be unable to bring our products or product improvements to market in a timely manner, if at all, due to
disruption in our development activities.
Our future success also depends on our ability to attract, retain and motivate skilled personnel. All of our employees work for us on an at will basis. Competition
for personnel is intense in the networking equipment industry, particularly for persons with specialized experience in areas such as antenna design and radio
frequency equipment. If we are unable to attract and retain the necessary personnel our business could be materially adversely affected.
We may fail to manage our growth effectively and develop and implement appropriate control systems.
We have substantially expanded our business and operations in recent periods, including increases in the number of our distributors, contract manufacturers,
headcount locations and facilities. This rapid expansion places a significant strain on our managerial, administrative, and operational resources. Our business model
reflects our decision to operate with streamlined infrastructure, with lower support and administrative headcount. That may increase the risks associated with
managing our growth, and we may not have sufficient internal resources to adapt or respond to unexpected challenges and compliance requirements.
Our profitability may decline as we expand into new product areas.
We receive a substantial majority of our revenues from the sale of outdoor wireless networking equipment and enterprise WLAN. As we expand into other
products and services, such as video surveillance equipment, wireless backhaul, solar, consumer electronics, and machine-to-machine communications, we may not
be able to compete effectively with existing market participants and may not be able to realize a positive return on the investment we have made in these products
or services. Entering these markets may result in increased product development costs, and our new products may have extended time to market relative to our
current products. If our introduction of a new product is not successful, or if we are not able to achieve the revenues or margins we expect, our operating results
may be harmed and we may not recover our product development and marketing expenditures.
We may also be required to add a direct sales force and customer support personnel to market and support new or existing products, which would cause us to
experience substantially lower product margins or increase our operating expenses. Adding a direct sales force or customer support personnel could reduce our
operating income and may not be successful.
Our operating expenses are increasing as we make expenditures to enhance and expand our operations.
Over the past several years, we have increased our expenditure on infrastructure to support our anticipated growth and as a result of our being a public company.
We are continuing to make significant investments in information systems, hiring more administrative personnel, using more professional services and expanding
our operations outside the United States. We intend to make additional investments in systems and personnel and continue to expand our operations to support
anticipated growth in our business. As a result, we expect our operating expenses to increase.
In addition, we may need in the future to build a direct sales force to market and sell our products or provide additional resources or cooperative funds to our
distributors. Such changes to our existing sales model would likely result in higher selling, general and administrative expenses as a percentage of our revenues.
Compliance with conflict mineral disclosure requirements will create additional compliance cost and may create reputational challenges.
Pursuant to Section 1502 of the Dodd-Frank Act, United States publicly-traded companies are required to disclose use or potential use of certain minerals and their
derivatives, including tantalum, tin, gold and tungsten, that are mined from the Democratic Republic of Congo and adjoining countries and deemed conflict
minerals.
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These requirements necessitate due diligence efforts to assess whether such minerals are used in our products in order to make the relevant required annual
disclosures. There are, and will be, ongoing costs associated with complying with these recent disclosure requirements, including diligence to determine the
sources of those minerals that may be used or necessary to the production of our products. We may face reputational challenges that could impact future sales if we
determine that certain of our products contain minerals not determined to be conflict free or if we are unable to verify with sufficient accuracy the origins of all
conflict minerals used in our products.
We rely on third party software and services to conduct our enterprise resource planning, financial planning and analysis, and financial reporting.
We currently use NetSuite and other software and services to conduct our order management and financial processes. The availability of this service is essential to
the management of our business. As we expand our operations, we expect to utilize additional systems and service providers that may also be essential to managing
our business. Although the systems and services that we require are typically available from a number of providers, it is time consuming and costly to qualify and
implement these relationships.
Our ability to manage our business would suffer if one or more of our providers suffer an interruption in their business, or experience delays, disruptions or quality
control problems in their operations, or we have to change or add additional systems and services. We may not be able to control the quality of the systems and
services we receive from third party service providers, which could impair our financial reporting and may negatively impact our operating results and financial
condition.
Our debt levels could adversely affect our ability to raise additional capital to fund our operations or limit our ability to react to changes in our industry or the
economy.
As of June 30, 2016 , our balance outstanding under our existing term loan and credit facility was $203.5 million . In the future we may need to raise additional
capital to fund our growth and operational goals. If additional financing is not available when required or on acceptable terms, we may not be able to expand our
business, develop or enhance our products, take advantage of business opportunities or respond to competitive pressures, which could result in lower revenues and
reduce the competitiveness of our products.
In addition, any potential debt level increases could have important consequences, including:
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requiring a substantial portion of cash flows from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing
our ability to use our cash flows to fund our operations and capital expenditures, and pursue business opportunities;
increasing our vulnerability to general industry and economic conditions;
limiting our ability to make strategic acquisitions or causing us to make non-strategic divestitures;
limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or
other purposes; and
limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to competitors who are less highly
leveraged or have access to more capital.
If we are unable to integrate future acquisitions successfully, our operating results and prospects could be harmed.
We may make acquisitions to improve or expand our product offerings. Our future acquisition strategy will depend on our ability to identify, negotiate, complete
and integrate acquisitions. These transactions involve numerous risks, including:
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difficulties in integrating and managing the operations, technologies and products of the companies we acquire, particularly in light of our lean
organizational structure;
diversion of our management’s attention from normal daily operation of our business;
our inability to maintain the key business relationships and the brand equity of the businesses we acquire;
our inability to retain key personnel of the acquired business, particularly in light of the demands we place on individual contributors;
uncertainty of entry into markets in which we have limited or no prior experience and in which competitors have stronger market positions;
our dependence on unfamiliar affiliates and partners of the companies we acquire;
insufficient revenues to offset our increased expenses associated with acquisitions;
our responsibility for the liabilities of the businesses we acquire, including those which we may not anticipate; and
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our inability to maintain internal standards, controls, procedures and policies, particularly in light of our lean organizational structure.
We may be unable to secure the equity or debt funding necessary to finance future acquisitions on terms that are acceptable to us. Completing acquisitions could
consume significant amounts of cash. If we finance acquisitions by issuing equity or convertible debt securities, our existing stockholders will likely experience
dilution, and if we finance future acquisitions with debt funding, we will incur interest expense and may have to comply with covenants and secure that debt
obligation with our assets.
Our Chief Executive Officer has control over key decision making as a result of his control of a majority of our voting stock.
Robert J. Pera, our founder, Chairman, and Chief Executive Officer, is able to exercise voting rights with respect to a majority of the voting power of our
outstanding stock and therefore has the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and
any merger, consolidation, or sale of all or substantially all of our assets. This concentrated control could delay, defer, or prevent a change of control, merger,
consolidation, or sale of all or substantially all of our assets that our other stockholders support, or conversely this concentrated control could result in the
consummation of such a transaction that our other stockholders do not support. This concentrated control could also discourage certain potential investors from
acquiring our common stock and might harm the trading price of our stock. In addition, Mr. Pera has the ability to control the management and major strategic
investments of our company as a result of his position as our Chief Executive Officer and his ability to control the election or replacement of our directors. In the
event of his death, the shares of our stock that Mr. Pera owns will be transferred to his successors. As a board member and officer, Mr. Pera owes a fiduciary duty
to our stockholders and must act in good faith in a manner he reasonably believes to be in the best interests of our stockholders. As a stockholder, even a
controlling stockholder, Mr. Pera is entitled to vote his shares in his own interests, which may not always be in the interests of our stockholders generally.
Risks Related to Regulatory, Legal and Tax Matters
We are subject to export control and economic sanctions laws in the United States and elsewhere which could impair our ability to compete in international
markets and subject us to liability if we do not comply with applicable laws.
A substantial majority of our sales are into countries outside of the United States. Sales of our products into certain countries are restricted or prohibited under U.S.
export control and economic sanctions laws. In addition, certain of our products incorporate encryption components that are subject to export control regulations.
In May 2011, we filed a self-disclosure statement with the U.S. Commerce Department, Bureau of Industry and Security’s (“BIS”) Office of Export Enforcement
(“OEE”) relating a review conducted by us regarding certain export transactions from 2008 through March 2011 in which products may have been later sold into
Iran by third parties. In June 2011, we also filed a self-disclosure statement with the U.S. Department of the Treasury’s Office of Foreign Asset Control (“OFAC”)
regarding these compliance issues. We resolved the matters described in our self-disclosures with the BIS and OFAC, and have taken significant steps towards
ensuring our compliance with export control regulations and embargoes. It is, however, possible that violations may occur in the future. If violations should occur
in the future, the response of regulators may be more severe in light of prior compliance concerns.
In addition to U.S. export regulations, various other countries regulate the import of certain encryption technology and products, and these laws could limit our
ability to distribute our products or our customers’ ability to implement our products in those countries. Changes in our products or changes in export and import
regulations may create delays in the introduction of our products in other countries, prevent our customers with international operations from deploying our
products or, in some cases, prevent the transfer of our products to certain countries altogether. Any change in export or import regulations or related legislation,
shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could
negatively impact our ability to sell our products to existing customers or the ability of our current and potential distributors, network operators and service
providers outside the United States.
New regulations or changes in existing regulations related to our products may result in unanticipated burdens, costs and liabilities.
Products that involve electromagnetic emissions are subject to regulation in the United States and the other countries in which we do business. In the United States,
various federal agencies including the Center for Devices and Radiological Health of the Food and Drug Administration, the Federal Communications
Commission, the Occupational Safety and Health Administration and various state agencies have promulgated regulations that concern the use of electromagnetic
emissions standards. Member countries of the EU and other countries have enacted similar standards concerning electrical safety and electromagnetic compatibility
and emissions standards. If any of our products becomes subject to new regulations or if any of our products becomes specifically regulated by additional
government entities, compliance with such regulations could become more
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burdensome, and we may be unable to ship our products or they may cost substantially more to produce, which would reduce our revenues and increase our cost of
revenues.
Government regulations designed to protect personal privacy may make it difficult for us to sell our products.
Our products may transmit and store personal information. The handling of such information is increasingly subject to regulations in numerous jurisdictions around
the world. These regulations are typically intended to protect the privacy and security of personal information that is collected, stored and transmitted in or from
the governing jurisdiction. In addition, because various foreign jurisdictions have different regulations concerning the storage and transmission of personal
information, we may face unknown requirements that pose compliance challenges in new geographic markets that we seek to enter. Our efforts to protect the
privacy of information may also fail if our encryption and security technology is inadequate or fails to operate as expected. The difficulties in complying with
privacy and data protection regulations could subject us to costs, delayed product launches, liabilities or negative publicity that could impair our ability to maintain
or expand our operations into some countries and therefore limit our future growth.
Our products rely on the availability of specific unlicensed radio frequency spectrum.
Our products operate in unlicensed radio frequency (“RF”) spectrum, which is used by a wide range of devices such as cordless phones, baby monitors, and
microwave ovens, and is becoming increasingly crowded. If such spectrum usage continues to increase through the proliferation of consumer electronics and
products competitive with ours, and others, the resultant higher levels of clutter and interference in the frequency bands used by our products could decrease the
usage by our products. Our business could be further harmed if currently unlicensed RF spectrum becomes subject to licensing in the United States or elsewhere.
Network operators and service providers that use our products may be unable to obtain licenses for RF spectrum at reasonable prices or at all. Even if the
unlicensed spectrum remains unlicensed, existing and new government regulations may require we make changes in our products. For example, to provide
products for network operators and service providers who utilize unlicensed RF spectrum, we may be required to limit their ability to use our products in licensed
RF spectrum. The operation of our products by network operators or service providers in the United States or elsewhere in a manner not in compliance with local
law could result in fines, operational disruption, or harm to our reputation. In addition, if new spectrums, either licensed or unlicensed, are made available by
government regulatory agencies for broadband wireless communication that may disrupt the competitive landscape of our industry and impact our business.
We could be adversely affected by unfavorable results in litigation.
We may be involved, from time to time, in a variety of claims, lawsuits, investigations, and proceedings relating to contractual disputes, intellectual property
rights, employment matters, regulatory compliance matters, consumer class-actions and other litigation matters relating to various claims that arise in the normal
course of business and otherwise. It can be difficult or impossible to predict the outcome of legal proceedings with any degree of certainty, particularly given that
laws may be ambiguous and factual findings can often be the result of incomplete evidence, opinions, varying standards or proof, and extraneous factors. If one or
more of the legal proceedings to which we may be or become a party are resolved against us, our results of operations and financial condition could be adversely
affected.
We may become subject to warranty claims, product liability and product recalls.
We have received, and may in the future receive, warranty or product liability claims that may require us to make significant expenditures to defend these claims or
pay damage awards. In the event of a successful warranty claim, we may also incur costs if we compensate the affected network operator or service provider. Such
claims may require a significant amount of time and expense to resolve and defend against, and could also harm our reputation by calling into question the quality
of our products. We also may incur costs and expenses relating to a recall of one or more of our products. The process of identifying recalled products that have
been widely distributed may be lengthy and require significant resources and we may incur significant replacement costs, contract damage claims and harm to our
reputation.
Our customers and the users of our products may expect us to indemnify them against claims for intellectual property infringement, defective products and
other losses.
Our customers, users and other parties may expect us to indemnify them for losses incurred in connection with our products, including as a result of intellectual
property infringement, defective products, and security vulnerabilities, even if our agreements with them do not require us to provide this indemnification. In some
instances we may decide to defend and indemnify them, irrespective of whether we believe that we have an obligation to do so. The expenses associated with
providing indemnification can be substantial. We may also reject demands for indemnification, which may lead to disputes with a customer or other party and may
negatively impact our relationships with them.
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If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial condition or results of operations or
safeguard our assets.
Section 404 of the Sarbanes-Oxley Act requires our management to furnish a report on, and our independent registered public accounting firm to attest to, the
effectiveness of our internal control over financial reporting. The applicable rules require us to disclose any material weaknesses in our internal control over
financial reporting. As initially reported in its Annual Report on Form 10-K for the year ended June 30, 2015, management determined that the Company did not
maintain an effective control environment, attributable to a lack of sufficient, competent personnel necessary for effective financial reporting. This resulted in the
lack of comprehensive and up-to-date accounting policies and procedures, skepticism on the part of key accounting personnel, internal control training, leadership
and adequate communication of roles and responsibilities. Growth in the complexity of the business without commensurate growth in the capabilities of the finance
and accounting organization contributed to this deficiency.
The Company’s failure to maintain an effective control environment contributed to a second deficiency in the form of ineffectively designed and maintained
controls required for safeguarding of the Company’s funds and timely detection of improper transactions in the general ledger. Specifically, the Company’s
disbursement authorization policies were not updated timely for changes in personnel and positions, nor were authorization requirements clearly stated, including
those for non-routine transactions.
The Company’s failure to maintain an effective control environment also contributed to a third deficiency in the form of ineffectively designed and maintained
controls over user access and transaction privileges to modify and post entries to the general ledger and subsidiary ledgers. In particular, the scope of user access
and transaction privileges to the general ledger and subsidiary ledgers is not sufficiently restricted to provide reasonable assurance of effective process and review
controls over postings to the general ledger. Additionally, general ledger changes were completed without due consideration of collateral impacts on segregation of
duties controls.
These control deficiencies could result in misstatements of accounts or disclosures that would each result in a material misstatement of the interim or consolidated
financial statements that would not be prevented or detected and, therefore, management has determined that these control deficiencies constitute material
weaknesses. However, management has determined that the foregoing material weaknesses did not result in a material misstatement in the consolidated financial
statements as of June 30, 2015 and 2016. Management has determined that the first two material weaknesses resulted in the Company’s inability to prevent and
timely detect the business e-mail compromise fraud discussed in Note 14 that caused a material misappropriation of Company assets. In light of these material
weaknesses, the Company’s Chief Executive Officer and Chief Accounting Officer concluded that the Company did not maintain effective internal control over
financial reporting as of June 30, 2016.
In the event that we fail to remediate these material weaknesses in our internal control over financial reporting, investor perceptions of our company may be
adversely affected and could cause a decline in the market price of our stock.
Failure to comply with the FCPA and similar laws could subject us to penalties and other adverse consequences.
We face significant risks if we fail to comply with the Foreign Corrupt Practices Act (“FCPA”) of the United States and other laws that prohibit improper payments
or offers of payment to foreign governments and their officials and political parties by us and other business entities for the purpose of obtaining or retaining
business. In many foreign countries, particularly in countries with developing economies, which represent our principal markets, it may be a local custom that
businesses operating in such countries engage in business practices that are prohibited by the FCPA or other laws and regulations. Although we have implemented
a company policy requiring our employees and consultants to comply with the FCPA and similar laws, there can be no assurance that all of our employees, and
agents, as well as those companies to which we outsource certain of our business operations, will not take actions in violation of our policies, for which we may be
ultimately held responsible. Any violation of FCPA or similar laws could result in severe criminal or civil sanctions and suspension or debarment from U.S.
government contracting, which could have a material and adverse effect on our reputation, business, operating results and financial condition.
We may suffer from unfavorable tax law changes, an unfavorable government review of our tax returns, or changes in our geographic earnings mix.
We are subject to periodic audits or other reviews by tax authorities in the jurisdictions in which we conduct our activities. Tax authorities could challenge our
assertions with respect to how we have conducted our business operations as might result in a claim for larger tax payments from us.
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In the ordinary course of our business, there are many instances where the determination of tax implications is uncertain. Our calculations of income taxes may be
based on our interpretations of applicable tax laws in the jurisdictions in which we file. The final determination of our income tax liabilities may be materially
different than what is reflected in our income tax provisions and accruals.
The legislative bodies in many jurisdictions regularly consider proposed legislation that, if adopted, could affect our tax rate in such jurisdictions, and the carrying
value of our deferred tax assets or our tax liabilities.
We conduct operations in multiple jurisdictions, and therefore our effective tax rate is influenced by the amounts of income and expense attributed to each such
jurisdiction. If such amounts were to change so as to increase the amounts of our net income subject to taxation in higher tax jurisdictions, or if we were to increase
our operations in jurisdictions assessing relatively higher tax rates, our effective tax rate could be adversely affected.
If we are required to bring cash into the United States to meet our future funding requirements, we may have to pay high tax rates or seek other available
funds.
We hold the substantial majority of our cash and cash equivalents in accounts of our subsidiaries outside of the United States, as our business is largely outside of
the United States. Our expenses in the United States could increase faster than we expect. If our cash held in the United States became insufficient to meet our
future funding requirements in the United States, we may transfer cash into the United States. If we decide to transfer earnings from our non-U.S. subsidiaries to
the United States, that could give rise to the imposition of potentially significant withholding taxes by the jurisdictions in which such amounts were earned, and we
may incur substantial tax liabilities in the United States. In addition, we may not receive the benefit of offsetting tax credits, which also could adversely impact our
effective tax rate.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters are located in San Jose, California consisting of approximately 64,512 square feet of space, which we lease through June 30, 2017.
Additionally, we lease approximately 93,000 square feet of space in Suzhou, China, which is being leased through June 16, 2017. These facilities house our
prototype manufacturing facility in China.
In addition, we also lease facilities around the world and within the facilities of certain suppliers for use as research and development facilities, business
development and support offices, warehouses and logistics centers and test facilities. The size and location of these properties change from time to time based on
business requirements. For our research and development and business development and support personnel, we also have leased offices in Taiwan, Lithuania,
Latvia, Poland, India, the Czech Republic, Canada, the Netherlands and various locations within China and the United States of America.We believe that our
existing properties are in good condition and suitable for the conduct of our business.
Item 3. Legal Proceedings
Information with respect to this item may be found in Note 8 in the Notes Consolidated Financial Statements included under Part IV, Item 15 of this report.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
PART II
Our shares of common stock are traded on the NASDAQ Global Select Market under the symbol “UBNT.” The following table shows, for the periods indicated,
the high and low intra-day sale prices for our common stock on the NASDAQ Global Select Market.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended June 30, 2016
High
Low
37.10 $
35.96 $
35.00 $
41.21 $
Year Ended June 30, 2015
High
Low
50.00 $
37.92 $
32.97 $
34.28 $
28.50
28.69
25.75
32.06
36.98
26.98
25.67
25.50
$
$
$
$
$
$
$
$
As of August 17, 2016 , the number of record holders of our common stock was 8. Because most of our shares are held by brokers and other institutions on behalf
of stockholders, we are unable to estimate the total number of beneficial stockholders represented by these record holders.
Stock Performance Graph
The following graph compares, for the period between October 14, 2011 (the date of our initial public offering) and June 30, 2016 , the cumulative total
stockholder return for our common stock, the NASDAQ Composite Index and the NASDAQ Computer Index. The graph assumes that $100 was invested on
October 14, 2011 in our common stock, the NASDAQ Composite Index and the NASDAQ Computer Index and assumes reinvestment of any dividends. The stock
price performance on the following graph is not necessarily indicative of future stock price performance. This performance graph shall not be deemed “filed” for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference into any of our filings under the
Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
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COMPARISON OF CUMULATIVE TOTAL RETURN*
Among Ubiquiti Networks, Inc., the NASDAQ Composite Index, and the NASDAQ Computer Index
*$100 invested on 10/14/11in stock or 9/30/11 in index, including reinvestment of dividends.
Fiscal year ending June 30.
Issuer Purchases of Equity Securities
On August 4, 2015, the Board of Directors of the Company authorized the Company to repurchase up to $100.0 million of its common stock. The program was set
to expire on June 30, 2016. In the first quarter of fiscal 2016 , the company repurchased 1,872,469 shares of its common stock at an average price per share of
$33.79 for an aggregate amount of $63.3 million . In the second quarter of fiscal 2016 , the Company repurchased 1,074,749 shares of its common stock at an
average price per share of $34.12 for an aggregate amount of $36.7 million .
On November 3, 2015, the Board of Directors of the Company approved a $50 million stock repurchase program where the Company was authorized to repurchase
up to $50 million of its common stock. The program was set to expire on September 30, 2016.During the third quarter of fiscal 2016, the Company
repurchased 1,765,523 shares of its common stock at an average price per share of $28.30 for an aggregate amount of $50.0 million.
On May 4, 2016, the Board of Directors of the Company approved a new $50 million stock repurchase program. The program was set to expire on March 31, 2017.
Under the new stock repurchase program, the Company was authorized to repurchase up to $50 million of its common stock. During the fourth quarter of fiscal
2016, the Company repurchased 1,309,606 shares of its common stock at an average price per share of $38.18 for an aggregate amount of $50.0 million. This
included unpaid stock repurchases of $6.5 million relating to repurchases executed on or prior to June 30, 2016 for trades that settled after June 30, 2016.
Effective August 3, 2016, the Board of Directors of the Company approved a $50 million stock repurchase program. Under the new stock repurchase program, the
Company may repurchase up to $50 million of its common stock. The program expires on September 30, 2017.
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Common stock repurchase activity under the share repurchase program during the fourth quarter ended June 30, 2016 was as follows (in thousands, except share
and per share amounts):
Period
April 1, 2016 - April 30, 2016
May 1, 2016 - May 31, 2016
June 1, 2016 - June 30, 2016
Total
Dividends
Total Number
of Shares
Purchased
Average Price
Paid per Share
—
765,328
544,278
1,309,606
$
$
$
$
—
37.99
38.44
38.18
Estimated remaining balance
available for share repurchase
—
$
$
$
$
20,923
—
—
We declared an annual dividend of $0.17 per share on September 30, 2014. The aggregate amount of $15.0 million was paid on October 28, 2014 to stockholders
of record on October 17, 2014. The Company currently has no plans to pay a cash dividend at this time or at any time in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
Information regarding the securities authorized for issuance under our equity compensation plans can be found under Item 12 of this Annual Report on Form 10-K.
Unregistered Securities Sold During fiscal 2016
We did not sell any unregistered securities during fiscal 2016 .
Item 6. Selected Financial Data
The selected consolidated statement of operations and comprehensive income data for the fiscal years ended June 30, 2016 , 2015 and 2014 and the consolidated
balance sheet data as of June 30, 2016 and 2015 are derived from our audited consolidated financial statements included elsewhere in this report. The selected
consolidated statement of operations and comprehensive income data for the fiscal years ended June 30, 2013 and 2012 and the consolidated balance sheet data as
of June 30, 2014 , 2013 and 2012 are derived from our audited consolidated financial statements which are not included in this report. Historical results are not
necessarily indicative of future results and should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and the consolidated financial statements, related notes, and other financial information included in this report.
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In thousands, except per share data
Consolidated Statements of Operations and Comprehensive Income Data:
2016
2015
2014
2013
2012
Years Ended June 30,
$
666,395
$
595,947
$
Revenues
Cost of revenues (1)(2)
Gross profit
Operating expenses:
Research and development (1)
Sales, general and administrative (1)(3)(4)
Business e-mail compromise ("BEC") fraud (recovery) loss
Total operating expenses
Income from operations
Interest income (expense) and other, net
Income before provision for income taxes
Provision for income taxes
Net income and comprehensive income
Preferred stock cumulative dividend and accretion of cost of preferred stock
Net income (loss) attributable to common stockholders
Net income (loss) per share of common stock:
Basic
Diluted
Weighted average shares used in computing net income (loss) per share of common
stock:
Basic
Diluted
Cash dividends declared per common share
(1) Includes stock-based compensation as follows:
Cost of revenues
Research and development
Sales, general and administrative
Total stock-based compensation
(2) Includes purchase commitment termination fee
(3) Includes a gain on reversal of change for an export compliance matter
(4) Includes gain from a trademark coexistence agreement
$
$
$
$
$
$
$
$
$
341,600
324,795
57,765
33,269
(8,294)
82,740
242,055
(2,115)
239,940
26,324
213,616
333,760
262,187
54,565
21,607
39,137
115,309
146,878
(1,130)
145,748
16,085
129,663
—
—
213,616
$
129,663
$
572,464 $
318,997
253,467
33,962
23,560
—
57,522
195,945
(1,334)
194,611
17,674
176,937
—
176,937 $
320,823 $
185,489
135,334
20,955
21,775
—
42,730
92,604
(851)
91,753
11,263
80,490
—
80,490 $
2.53
2.49
$
$
1.47
1.45
$
$
2.02 $
1.97 $
0.91 $
0.89 $
84,402
85,784
88,008
89,569
87,772
89,715
88,314
90,259
— $
0.17
$
— $
0.18 $
448
$
601
$
2,296
975
3,719
$
— $
— $
— $
2,854
1,537
4,992
5,500
$
$
— $
— $
590 $
2,423
1,893
4,906 $
— $
(1,121) $
— $
446 $
1,433
1,497
3,376 $
— $
— $
— $
353,517
202,514
151,003
16,699
9,012
—
25,711
125,292
(1,269)
124,023
21,434
102,589
(112,431)
(9,842)
(0.12)
(0.12)
83,460
83,460
—
117
542
834
1,493
—
—
(1,500)
In thousands
Consolidated Balance Sheet Data:
Cash and cash equivalents
Working capital
Total assets
Debt – short-term
Debt – long-term
Total stockholders’ equity
2016
2015
June 30,
2014
2013
2012
$
551,031
$
446,401
$
637,721
748,051
11,250
192,250
440,376
511,212
600,572
10,000
87,500
422,154
347,097 $
413,409
476,151
—
72,254
335,264
227,826 $
224,053
292,340
5,013
71,116
147,436
122,060
155,462
213,736
6,968
22,623
130,951
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Ubiquiti Networks develops high performance networking technology for service providers and enterprises. Our technology platforms focus on delivering highly-
advanced and easily deployable solutions that appeal to a global customer base in underserved and underpenetrated markets. Our differentiated business model has
enabled us to break down traditional barriers such as high product and network deployment costs and offer solutions with disruptive price-performance
characteristics. This differentiated business model, combined with our innovative proprietary technologies, has resulted in an attractive alternative
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to traditional high touch, high cost providers, allowing us to advance the market adoption of our platforms for ubiquitous connectivity.
We offer a broad and expanding portfolio of networking products and solutions for service providers and enterprises. Our service provider product platforms
provide carrier-class network infrastructure for fixed wireless broadband, wireless backhaul systems and routing. Our enterprise product platforms provide wireless
LAN infrastructure, video surveillance products, switching and routing solutions and machine-to-machine communication components. We believe that our
products are highly differentiated due to our proprietary software protocol innovation, firmware expertise, and hardware design capabilities. This differentiation
allows our portfolio to meet the demanding performance requirements of video, voice and data applications at prices that are a fraction of those offered by our
competitors.
As a core part of our strategy, we have developed a differentiated business model for marketing and selling high volumes of carrier and enterprise-class
communications platforms. Our business model is driven by a large, growing and highly engaged community of service providers, distributors, value added
resellers, systems integrators and corporate IT professionals, which we refer to as the Ubiquiti Community. The Ubiquiti Community is a critical element of our
business strategy as it enables us to drive:
•
•
•
Rapid customer and community driven product development. We have an active, loyal community built from our customers that we believe is a
sustainable competitive advantage. Our solutions benefit from the active engagement between the Ubiquiti Community and our development engineers
throughout the product development cycle, which eliminates long and expensive multistep internal processes and results in rapid introduction and adoption
of our products. This approach significantly reduces our development costs and time to market.
Scalable sales and marketing model. We do not currently have, nor do we plan to hire, a direct sales force, but instead utilize the Ubiquiti Community to
drive market awareness and demand for our products and solutions. This community-propagated viral marketing enables us to reach underserved and
underpenetrated markets far more efficiently and cost-effectively than is possible through traditional sales models. Leveraging the information transparency
of the Internet allows customers to research, evaluate and validate our solutions with the Ubiquiti Community and via third party web sites. This allows us
to operate a scalable sales and marketing model and effectively create awareness of our brand and products. Word of mouth referrals from the Ubiquiti
Community generate high quality leads for our distributors at relatively little cost.
Self-sustaining product support. The engaged members of the Ubiquiti Community have enabled us to foster a large, cost efficient, highly-scalable and,
we believe, self-sustaining mechanism for rapid product support and dissemination of information.
By reducing the cost of development, sales, marketing and support we are able to eliminate traditional business model inefficiencies and offer innovative solutions
with disruptive price performance characteristics to our customers.
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 two primary product categories, Service Provider Technology and Enterprise Technology.
•
•
Service Provider Technology includes our airMAX, EdgeMAX and airFiber platforms, as well as embedded radio products and other 802.11 standard
products including base stations, radios, backhaul equipment and Customer Premise Equipment (“CPE”). Additionally, Service Provider Technology
includes antennas and other products in the 0.9 to 6.0GHz spectrum and miscellaneous products such as mounting brackets, cables and power over
Ethernet adapters. Service Provider Technology also includes solar products (sales of which have not been material to date) and revenues that are
attributable to PCS.
Enterprise Technology includes our UniFi and mFi platforms, including UniFi enterprise Wi-Fi products, Unifi Video products, and Unifi switching and
routing solutions. Enterprise Technology also includes revenues that are attributable to PCS.
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We sell our products and solutions globally to service providers and enterprises primarily through our extensive network of distributors, and, to a lesser extent,
direct customers. Sales to distributors accounted for 99% of our revenues in the year ended June 30, 2016 . Other channel partners, such as resellers, largely
accounted for the balance of our revenues.
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, logistics related fees and excess and obsolete inventory.
In addition to utilizing contract manufacturers, we outsource most of our logistics warehousing and order fulfillment functions, which are located primarily in
China, and to a lesser extent, Taiwan and United States. 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, pricing
due to competitive pressure, production costs 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.
Operating Expenses
We classify our operating expenses as research and development, sales, general and administrative expenses and expense related to the business email compromise
fraud loss.
•
•
•
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, 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 stock-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 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.
Business e-mail compromise fraud (recovery)loss - In June 2015, we determined that we were the victim of criminal fraud known to law enforcement
authorities as business e-mail compromise fraud which involved employee impersonation and fraudulent requests targeting our finance department. The
fraud resulted in transfers of funds aggregating $46.7 million held by a Company subsidiary incorporated in Hong Kong to other overseas accounts held by
third parties, of which we recovered $8.1 million in fiscal 2015. As a result, we recorded a charge of $39.1 million in the fourth quarter of 2015, including
additional expenses consisting of professional service fees associated with the fraud loss. In fiscal 2016 , the Company recorded a net recovery of an
additional $8.3 million, comprised of an $8.6 million recovery less $0.3 million of professional service fees associated with the recovery. The Company is
continuing to pursue the recovery of the remaining $30.0 million and is cooperating with U.S. federal and numerous overseas law enforcement authorities
who are actively pursuing a multi-agency criminal investigation. However, any additional recoveries are likely remote and, therefore, cannot be assured.
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Deferred Revenues
We recognize revenues when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and the collectability of
the resulting receivable is reasonably assured. In cases where we lack evidence that all of these criteria have been met, we defer recognition of revenue. Included in
our deferred revenues is a portion related to PCS obligations that we estimate we will perform in the future. As of June 30, 2016 and 2015 , we had deferred
revenues of $4.2 million and $3.5 million , respectively, related to these obligations.
Critical Accounting Policies
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. We believe that the accounting policies discussed below are critical to understanding our historical and future
performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Recognition of Revenues
Revenues consist primarily of revenues from the sale of hardware and management tools, as well as the related implied PCS. We recognize revenues when
persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and the collectability of the resulting receivable is
reasonably assured. In cases where we lack evidence that collectability of the resulting receivable is reasonably assured, we defer recognition of revenue until the
receipt of cash.
For our sales, evidence of the arrangement consists of an order from a customer. We consider delivery to have occurred once our products have been shipped and
title and risk of loss have been transferred. For our sales, these criteria are met at the time the products are transferred to the customer's shipping agent. Our
arrangements with customers do not include provisions for cancellation, returns, inventory swaps or refunds that materially impact recognized revenues.
We record amounts billed to distributors for shipping and handling costs as revenues. We classify shipping and handling costs incurred by us as cost of revenues.
Deposit payments received from distributors in advance of recognition of revenues are included in current liabilities on our balance sheet and are recognized as
revenues when all the criteria for recognition of revenues are met.
Our multi-element arrangements generally include two deliverables. The first deliverable is the hardware and software essential to the functionality of the hardware
device delivered at the time of sale. The second deliverable is the implied right to PCS included with the purchase of certain products. PCS is the right to receive,
on a when and if available basis, future unspecified software upgrades and features relating to the product’s essential software as well as bug fixes, email and
telephone support.
We use a hierarchy to determine the allocation of revenues to the deliverables. The hierarchy is as follows: (i) vendor-specific objective evidence of fair value
(“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“BESP”).
(i) VSOE generally exists only when a company sells the deliverable separately and is the price actually charged by the company for that deliverable.
Generally we do not sell the deliverables separately and, as such, do not have VSOE.
(ii) TPE can be substantiated by determining the price that other parties sell similar or substantially similar offerings. We do not believe that there is accessible
TPE evidence for similar deliverables.
(iii) BESP reflects our best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. We believe that BESP is
the most appropriate methodology for determining the allocation of revenues among the multiple elements.
We have allocated revenues between these two deliverables using the relative selling price method which is based on the BESP for all deliverables. Revenues
allocated to the delivered hardware and the related essential software are recognized at the time of sale provided the other conditions for recognition of revenues
have been met. Revenues allocated to the PCS are deferred
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and recognized on a straight-line basis over the estimated period for which services will be delivered to support each of these devices which, currently, is two
years. All costs of revenues, including estimated warranty costs, are recognized at the time of sale. Costs for research and development and sales and marketing are
expensed as incurred. If the estimated life of the hardware product should change, the future rate of amortization of the revenues allocated to PCS would also
change.
Our process for determining BESP for deliverables involves multiple factors that may vary depending upon the unique facts and circumstances related to each
deliverable. For PCS, we believe our network operators and service providers would be reluctant to pay for such services separately. This view is primarily based
on the fact that unspecified upgrade rights do not obligate us to provide upgrades at a particular time or at all, and do not specify to network operators and service
providers which upgrades or features will be delivered. We believe that the relatively low prices of our products and our network operators, and service providers’
price sensitivity would add to their reluctance to pay for PCS. Therefore, we have concluded that if we were to sell PCS on a stand-alone basis, the selling price
would be relatively low.
Key factors considered by us in developing the BESP for PCS include reviewing the activities of specific employees engaged in support and software development
to determine the amount of time that is allocated to the development of the undelivered elements, determining the cost of this development effort, and then adding
an appropriate level of gross profit to these costs.
Inventory and Inventory Valuation
Our inventories are primarily finished goods and, to a lesser extent, raw materials. Our inventories are stated at the lower of actual cost (computed on a first-in,
first-out basis), or market value. Market value is based upon an estimated average selling price reduced by the estimated costs of disposal. The determination of
market value involves numerous judgments including estimating average selling prices based upon recent sales, industry trends, existing customer orders, and
seasonal factors. Should actual market conditions differ from our estimates, our future results of operations could be materially affected. We reduce the value of
our inventory for estimated obsolescence or lack of marketability by the difference between the cost of the affected inventory and the estimated market value.
Write-downs are not reversed until the related inventory has been subsequently sold or scrapped.
The valuation of inventory also requires us to estimate excess and obsolete inventory. The determination of excess or obsolete inventory is estimated based on a
comparison of the quantity and cost of inventory on hand to our forecast of customer demand. Customer demand is dependent on many factors and requires us to
use significant judgment in our forecasting process. We also make assumptions regarding the rate at which new products will be accepted in the marketplace and at
which customers will transition from older products to newer products. If actual market conditions are less favorable than those projected by management,
additional inventory write-downs may be required, which would have a negative impact on our gross margin. If we ultimately sell inventory that we have
previously written down, our gross margins in future periods will be positively impacted.
Product Warranties
We offer warranties on certain products and record a liability for the estimated future costs associated with potential warranty claims. These warranty costs are
reflected in our consolidated statement of operations and comprehensive income within cost of revenues. Our warranties are in effect for 12 months from the date
of purchase. Our estimates of future warranty costs are largely based on historical experience of product failure rates, material usage and service delivery costs
incurred in correcting product failures. Our operating results could be materially and adversely affected if future warranty claims exceed historical experiences and
we are not able to recover costs from our contract manufacturers. In the future, we may introduce certain products with longer warranty periods.
Allowance for Doubtful Accounts
We record an allowance for doubtful accounts for estimated probable losses on uncollectible accounts receivable. In estimating the allowance, management
considers, among other factors, the aging of the accounts receivable, our historical write offs, the credit worthiness of each distributor based on payment history
and general economic conditions.
Income Taxes
We account for income taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our
financial statements or tax returns. Deferred tax assets and liabilities are determined based on the temporary difference between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. We establish valuation
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allowances when necessary to reduce deferred tax assets to the amount we expect to realize. The assessment of whether or not a valuation allowance is required
often requires significant judgment including current operating results, the forecast of future taxable income and ongoing prudent and feasible tax planning
initiatives.
In addition, our calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We may be subject to income tax
audits in each of the jurisdictions in which we operate and, as a result, must also assess exposures to any potential issues arising from current or future audits of
current and prior years’ tax returns. Accordingly, we must assess such potential exposures and, where necessary, provide a reserve to cover any expected loss. To
the extent that we establish a reserve, our provision for income taxes would be increased. We review our potential liabilities periodically and, if necessary, 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. 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.
Stock-based Compensation
We record stock-based awards at fair value as of the grant date and recognize expense, net of forfeitures, ratably on a straight-line basis over the requisite service
period, which is generally the vesting term of the awards. We estimate the fair value of stock option awards on the grant date using the Black-Scholes option
pricing model. The determination of the fair value of a stock-based award on the date of grant using the Black-Scholes option-pricing model is affected by our
stock price on the date of grant as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price
volatility over the expected term of the award, actual and projected employee stock option exercise behaviors, the risk-free interest rate for the expected term of the
award and expected dividends. Restricted stock units are valued based on the fair value of our common stock on the date of grant. Since our initial public offering
on October 14, 2011, the fair value of our common stock is determined using the closing market price of our common stock as of the date of grant.
Results of Operations
Comparison of Years Ended June 30, 2016 and 2015
Revenues
Cost of revenues (1)(2)
Gross profit
Operating expenses:
Research and development (1)
Sales, general and administrative (1)
$
2016
666,395
341,600
324,795
57,765
33,269
Years Ended June 30,
(In thousands, except percentages)
100 % $
51 %
49 %
9 %
5 %
Business e-mail compromise ("BEC") fraud (recovery) loss
(8,294)
(1)%
Total operating expenses
Income from operations
Interest expense and other, net
Income before provision for income taxes
Provision for income taxes
Net income and comprehensive income
* Less than 1%
(1) Includes stock-based compensation as follows:
Cost of revenues
Research and development
Sales, general and administrative
Total stock-based compensation
(2) Includes purchase commitment termination fee
82,740
242,055
(2,115)
239,940
26,324
213,616
448
2,296
975
3,719
—
13 %
36 %
*
36 %
4 %
32 % $
$
$
$
$
$
$
$
37
100%
56%
44%
9%
4%
6%
19%
25%
*
24%
3%
21%
2015
595,947
333,760
262,187
54,565
21,607
39,137
115,309
146,878
(1,130)
145,748
16,085
129,663
601
2,854
1,537
4,992
5,500
Table of Contents
Revenues
Revenues increased $70.4 million , or 12% , from $595.9 million in fiscal 2015 to $666.4 million in fiscal 2016 . The increase in revenues during fiscal 2016 was
driven by increased adoption of our enterprise technologies products which represented 37% of our total revenue in fiscal 2016 . Service provider products revenue
were flat year over year and represented 63% of our total revenue in fiscal 2016 .
No distributor or customer represented more than 10% of our revenues in fiscal 2016 or fiscal 2015 .
Revenues by Product Type
Service Provider Technology
Enterprise Technology
Total revenues
Years Ended June 30,
2016
2015
(in thousands, except percentages)
$
$
418,346
248,049
666,395
63% $
37%
100% $
418,021
177,926
595,947
70%
30%
100%
Service Provider Technology revenues remained flat in fiscal 2016 , as the increase in sales in North America, Europe, the Middle East, and Africa ("EMEA") and
Asia Pacific were largely offset by the decrease in sales in South America.
Enterprise Technology revenues increased $70.1 million , or 39% , during fiscal 2016 , primarily due to product expansion and further adoption of our UniFi
technology platform.
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 in turn sell to resellers or directly to end customers, which may be in different countries than the initial ship-to destination. The following are our revenues by
geography for fiscal 2016 and fiscal 2015 (in thousands, except percentages):
North America(1)
South America
Europe, the Middle East and Africa
Asia Pacific
Total revenues
Years Ended June 30,
2016
239,526
85,036
264,404
77,429
666,395
36% $
13%
39%
12%
100% $
2015
197,693
97,118
234,383
66,753
595,947
33%
16%
40%
11%
100%
$
$
(1) Revenue for the United States was $225.6 million and $187.3 million in fiscal 2016 and fiscal 2015 , respectively.
North America
Revenues in North America increased $41.8 million , or 21% , from $197.7 million in fiscal 2015 to $239.5 million in fiscal 2016 . The increase in revenues in
North America in fiscal 2016 compared to fiscal 2015 was due to increased adoption of our Service Provider and Enterprise Technologies.
South America
Revenues in South America decreased $12.1 million , or 12% , from $97.1 million in fiscal 2015 to $85.0 million in fiscal 2016 . We believe the decrease in
revenues in South America in fiscal 2016 compared to fiscal 2015 was primarily due to decreased demand for our Service Provider Technologies due in part to
economic instability and partially as a result of a strong U.S. Dollar.
Europe, the Middle East, and Africa ("EMEA")
Revenues in EMEA increased $30.0 million , or 13% , from $234.4 million in fiscal 2015 to $264.4 million in fiscal 2016 . The increase in revenues in EMEA in
fiscal 2016 compared to fiscal 2015 was due to increased adoption of our Service Provider and Enterprise Technologies.
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Asia Pacific
Revenues in the Asia Pacific region increased $10.7 million , or 16% , from $66.8 million in fiscal 2015 to $77.4 million in fiscal 2016 . The increase in revenues
in the Asia Pacific region in fiscal 2016 compared to fiscal 2015 was primarily due to increased adoption of our Service Provider Technologies and Enterprise
Technologies.
Cost of Revenues and Gross Profit
Cost of revenues increased $7.8 million , or 2% , from $333.8 million in fiscal 2015 to $341.6 million in fiscal 2016 . The increase in cost of revenues in fiscal
2016 was primarily due to increased volume and to a lesser extent, changes in product mix. Gross profit as a percentage of revenue increased to 49% in fiscal 2016
compared to 44% in fiscal 2015 .The improvement in gross profit percentage in fiscal 2016 was in large part due to product mix, benefit of higher sales volume and
coverage of fixed overhead cost, and less inventory related obsolescence and purchase commitment charges.
Operating Expenses
Research and Development
Research and development expenses increased $3.2 million , or 6% , from $54.6 million in fiscal 2015 to $57.8 million in fiscal 2016 . As a percentage of
revenues, research and development expenses remained flat at 9% in both fiscal 2016 and fiscal 2015 . This increase in absolute dollar expenditures is primarily
driven by a $2.5 million impairment charge for capitalized software and software in development costs recognized in the second quarter of fiscal 2016 due to the
cancellation of the commercial launch of certain software in development. Over time, we expect our research and development costs to continue to increase in
absolute dollars as we continue making investments in developing new products in addition to new versions of our existing products.
Sales, General and Administrative
Sales, general and administrative expenses increased $ 11.7 million , or 54% , from $21.6 million in fiscal 2015 to $33.3 million in fiscal 2016 . As a percentage of
revenues, sales, general and administrative expenses increased to 5% in fiscal 2016 , compared to 4% in fiscal 2015 . The increase in sales, general and
administrative expenses in absolute dollars and as a percentage of revenues was due to higher consulting fees incurred to support the finance team and to assist
with material weakness remediation, higher legal costs, and an increase in headcount in the business development organization. During fiscal 2017, we expect our
sales, general and administrative expenses to stabilize as we anticipate lower consulting related fees. However, as the business grows, additional costs will be
necessary to support this business, to register and defend trademarks and patents and to support our business and operations.
Business e-mail compromise fraud (recovery) loss
In June 2015, we determined that we were the victim of criminal fraud known to law enforcement authorities as business e-mail compromise fraud which involved
employee impersonation and fraudulent requests targeting our finance department. The fraud resulted in transfers of funds aggregating $46.7 million held by a
Company subsidiary incorporated in Hong Kong to other overseas accounts held by third parties. The Company recovered $8.1 million in fiscal 2015 and recorded
a charge of $39.1 million in the fourth quarter of fiscal 2015, including additional expenses consisting of professional service fees associated with the fraud loss. In
fiscal 2016 , the Company recorded a net recovery of an additional $8.3 million, comprised of an $8.6 million recovery less $0.3 million of professional service
fees associated with the recovery.
The Company is continuing to pursue the recovery of the remaining $30.0 million and is cooperating with U.S. federal and numerous overseas law enforcement
authorities who are actively pursuing a multi-agency criminal investigation. However, any additional recoveries are likely remote and therefore cannot be assured.
Provision for Income Taxes
Our provision for income taxes increased $10.2 million from $16.1 million for fiscal 2015 to $26.3 million for fiscal 2016 . Our effective tax rate remained flat at
11% in both fiscal 2016 and fiscal 2015 because the Company's ratio of domestic and foreign income remained relatively constant for fiscal 2015 and fiscal 2016 .
Overall, the rate benefit is due to income in foreign jurisdictions that have lower tax rates than the U.S.
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Table of Contents
Comparison of Years Ended June 30, 2015 and 2014
Revenues
Cost of revenues (1)(2)
Gross profit
Operating expenses:
Research and development (1)
Sales, general and administrative (1)(3)
Business e-mail compromise ("BEC") fraud (recovery) loss
Total operating expenses
Income from operations
Interest expense and other, net
Income before provision for income taxes
Provision for income taxes
Net income and comprehensive income
* Less than 1%
(1) Includes stock-based compensation as follows:
Cost of revenues
Research and development
Sales, general and administrative
Total stock-based compensation
(2) Includes purchase commitment termination fee
(3) Includes gain on reversal of charge for an export compliance matter
Revenues
Years Ended June 30,
2015
(In thousands, except percentages)
595,947
333,760
262,187
54,565
21,607
39,137
115,309
146,878
(1,130)
145,748
16,085
129,663
601
2,854
1,537
4,992
5,500
—
100% $
56%
44%
9%
4%
6%
19%
25%
*
24%
3%
21% $
$
$
$
$
100%
56%
44%
6%
4%
—%
10%
34%
*
34%
3%
31%
2014
572,464
318,997
253,467
33,962
23,560
—
57,522
195,945
(1,334)
194,611
17,674
176,937
590
2,423
1,893
4,906
—
(1,121)
$
$
$
$
$
Revenues increased $23.5 million , or 4% , from $572.5 million in fiscal 2014 to $595.9 million in fiscal 2015 . We believe the overall increase in revenues during
fiscal 2015 was driven by increased adoption of our enterprise technologies, partially offset by a decrease in sales of our Service Provider Technologies due to
lower demand from our service provider customers outside of North America, including as a result of political and economic instability in some of those regions.
In fiscal 2014 , Flytec Computers Inc. represented 13% of our revenues. No other distributor or customer represented more than 10% of our revenues in fiscal
2015 or fiscal 2014 .
Revenues by Product Type
Service provider technology
Enterprise technology
Total revenues
Years Ended June 30,
2015
2014
(in thousands, except percentages)
$
$
418,021
177,926
595,947
70% $
30%
100% $
450,663
121,801
572,464
79%
21%
100%
Service Provider Technology revenues decreased $32.6 million, or 7%, during fiscal 2015. The decline in revenues from Service Provider Technologies was
primarily due to lower demand from our service provider customers outside of North America, including as a result of political and economic instability in some of
those regions and the strength of the US Dollar during the fiscal year compared to some of the currencies in these regions.
Enterprise Technology revenues increased $56.1 million, or 46%, during fiscal 2015, primarily due to product expansion and further adoption of our UniFi
technology platform.
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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 in turn sell to resellers or directly to end customers, which may be different countries than the initial ship-to destination. The following are our revenues by
geography for fiscal 2015 and fiscal 2014 (in thousands, except percentages):
North America(1)
South America
Europe, the Middle East and Africa
Asia Pacific
Total revenues
Years Ended June 30,
2015
197,693
97,118
234,383
66,753
595,947
33% $
16%
40%
11%
100% $
2014
142,438
109,584
247,009
73,433
572,464
25%
19%
43%
13%
100%
$
$
(1) Revenue for the United States was $187.3 million and $136.6 million in fiscal 2015 and fiscal 2014, respectively.
North America
Revenues in North America increased $55.3 million, or 39%, from $142.4 million in fiscal 2014 to $197.7 million in fiscal 2015. The increase in revenues in North
America in fiscal 2015 compared to fiscal 2014 was due to increased adoption of our Service Provider Technologies and Enterprise Technologies.
South America
Revenues in South America decreased $12.5 million, or 11%, from $109.6 million in fiscal 2014 to $97.1 million in fiscal 2015. We believe the decrease in
revenues in South America in fiscal 2015 compared to fiscal 2014 was primarily due to decreased demand for our Service Provider Technologies due in part to
economic instability and partially as a result of a strong U.S. Dollar.
EMEA
Revenues in EMEA decreased $12.6 million, or 5%, from $247.0 million in fiscal 2014 to $234.4 million in fiscal 2015. The decrease in revenues in EMEA in
fiscal 2015 compared to fiscal 2014 was primarily due to decreased demand for our Service Provider Technologies, due in part to economic instability in this
region and partially as a result of a strong U.S. Dollar. The decrease was partially offset by increased adoption of our Enterprise Technology platforms.
Asia Pacific
Revenues in the Asia Pacific region decreased $6.7 million, or 9%, from $73.4 million in fiscal 2014 to $66.8 million in fiscal 2015. The decrease in revenues in
the Asia Pacific region in fiscal 2015 compared to fiscal 2014 was primarily due to decreased demand for our Service Provider Technologies, partially offset by
increased adoption of our Enterprise Technology platforms.
Cost of Revenues and Gross Profit
Cost of revenues increased $14.8 million, or 5%, from $319.0 million in fiscal 2014 to $333.8 million in fiscal 2015. The increase in cost of revenues in fiscal 2015
was primarily due to increased revenues and to a lesser extent, changes in product mix. Gross profit as a percentage of revenue remained flat at 44% in both fiscal
2015 and fiscal 2014.
Operating Expenses
Research and Development
Research and development expenses increased $20.6 million, or 61%, from $34.0 million in fiscal 2014 to $54.6 million in fiscal 2015. As a percentage of
revenues, research and development expenses increased to 9% in fiscal 2015, compared to 6% in fiscal 2014. The increase in research and development expenses
in absolute dollars and as a percentage of revenue was due to increases in headcount to support our strategy as we broadened our research and development
activities to new product areas and certain one-time costs incurred for intellectual property licensed or purchased for use in our products.
Sales, General and Administrative
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Sales, general and administrative expenses decreased slightly, from $23.6 million in fiscal 2014 to $21.6 million in fiscal 2015. As a percentage of revenues, sales,
general and administrative expenses remained flat at 4% in both fiscal 2014 and fiscal 2015.
Business e-mail compromise fraud (recovery) loss
In June 2015, we determined that we were the victim of criminal fraud known to law enforcement authorities as business e-mail compromise fraud which involved
employee impersonation and fraudulent requests targeting our finance department. The fraud resulted in transfers of funds aggregating $46.7 million held by a
Company subsidiary incorporated in Hong Kong to other overseas accounts held by third parties, of which we recovered $8.1 million in fiscal 2015. As a result, we
recorded a charge of $39.1 million in the fourth quarter of 2015, including additional expenses consisting of professional service fees associated with the fraud
loss.
Provision for Income Taxes
Our provision for income taxes decreased $1.6 million, or 9%, from $17.7 million for fiscal 2014 to $16.1 million for fiscal 2015. Our effective tax rate increased
to 11% for fiscal 2015 as compared to 9% fiscal 2014. The higher effective tax rate in fiscal 2015 was primarily due to increased sales in the United States and the
decreased profit before taxes of Hong Kong due to the $39.1 million BEC Fraud loss, which decreased the tax benefit from foreign tax rate differential.
Liquidity and Capital Resources
Sources and Uses of Cash
Since inception, our operations primarily have been funded through cash generated by operations. We had cash and cash equivalents of $551.0 million , $446.4
million and $347.1 million at June 30, 2016 , 2015 and 2014 , 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:
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Net increase in cash and cash equivalents
Cash Flows from Operating Activities
2016
Years Ended June 30,
2015
(In thousands)
197,508 $
134,547 $
(6,248)
(86,630)
104,630 $
(12,724)
(22,519)
99,304 $
$
$
2014
121,327
(4,045)
1,989
119,271
Net cash provided by operating activities in fiscal 2016 consisted primarily of net income of $213.6 million partially offset by net changes in operating assets and
liabilities that resulted in net cash outflows of $27.1 million . This net change was primarily driven by outflows arising from a $20.0 million increase in inventory,
and a $9.3 million increase in vendor deposits due to our strategic efforts to reduce lead times and maximize order fulfillments, a $16.7 million increase in accounts
receivable due to our overall increase in revenue. These outflows were offset by changes in operating assets and liabilities resulting in cash inflows, including a
$11.0 million increase in accounts payable and accrued liabilities due to the timing of payments with our vendors, a $7.0 million net increase in taxes payable and
decrease in prepaid income taxes due the timing of federal tax payments, a $0.7 million increase in deferred revenue due to additional PCS revenue deferrals
during the year and a $0.2 million decrease in prepaid expenses and other current assets due to timing of deposit payments with our suppliers. Overall, cash inflows
from operating activities were driven by our net income, which included non-cash adjustments due to stock-based compensation, depreciation and amortization,
increases to our provision for inventory obsolescence, decreases to our provision for losses on deposits with our vendors, decreases in our allowance for doubtful
accounts and taxes. The net of these non-cash adjustments resulted in an increase of our net cash provided by operating activities of $11.0 million .
Net cash provided by operating activities in the fiscal 2015 consisted primarily of net income of $129.7 million partially offset by net changes in operating assets
and liabilities that resulted in net cash outflows of $11.7 million . These changes consisted primarily of a $22.0 million increase in prepaid expenses and other
current assets due to timing of deposit payments with our suppliers, an $11.3 million increase in accounts receivable due to our overall increase in revenue, a $9.1
million increase in accounts payable and accrued liabilities due to the timing of payments with our vendors, a $7.0 million decrease in inventory
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due to our efforts to optimize our inventory levels and a $5.8 million net increase in taxes payable and prepaid income taxes due the timing of federal tax payments.
Additionally, our net income included non-cash adjustments due to stock-based compensation, depreciation and amortization, increases to our provision for
inventory obsolescence, increases to
our provision for losses on deposits with our vendors, decreases in our allowance for doubtful accounts and taxes. The net of these non-cash adjustments resulted in
an increase of our net cash provided by operating activities of $16.6 million .
Net cash provided by operating activities in the fiscal 2014 consisted primarily of net income of $176.9 million partially offset by net changes in operating assets
and liabilities that resulted in net cash outflows of $62.9 million. These changes consisted primarily of a $33.8 million increase in inventory due to our efforts to
build warehouse stock levels and ultimately decrease lead times, an $18.3 million increase in accounts receivable due to our overall increase in revenue, a $9.6
million increase in prepaid expenses and other current assets due to timing of deposit payments with our suppliers, a $6.9 million decrease in accounts payable and
accrued liabilities due to the timing of payments with our vendors, a $3.9 million net increase in taxes payable and prepaid income taxes due the timing of federal
tax payments, and a $1.9 million increase in deferred revenues and related costs. Additionally, our net income included non-cash adjustments due to stock-based
compensation, depreciation and amortization, increases to our provision for doubtful accounts and write-downs for 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 $7.3 million.
Cash Flows from Investing Activities
We used $6.2 million of cash in investing activities during fiscal 2016 . Our investing activities consist of capital expenditures and purchases of intangible assets.
Capital expenditures for fiscal 2016 , fiscal 2015 and fiscal 2014 were $5.9 million , $12.7 million and $3.8 million , respectively. Additionally, we had cash
outflows related to intangible assets of $306,000 , $46,000 and $219,000 during fiscal 2016 , fiscal 2015 and fiscal 2014 , respectively, consisting primarily of legal
costs associated with trademark applications and acquisition of domain names.
Cash Flows from Financing Activities
We used $86.6 million of cash in financing activities during fiscal 2016 , primarily driven by repurchasing $193.5 million of our common stock. We also made
repayments of $10.0 million on our outstanding term loan debt and $14.0 million revolver loan under the Amended Credit Agreement. These cash outflows were
offset by financing cash inflows, including the draws made under the revolver facility of our Amended Credit Agreement totaling $130.0 million . Additionally,
cash inflows from financing activities included $1.1 million of cash proceeds received from the exercise of stock options in addition to $1.0 million of excess tax
benefit from employee stock-based awards, partially offset by tax withholdings related to net share settlements of restricted stock units totaling $1.2 million .
We had $22.5 million of cash provided by financing activities during fiscal 2015, primarily from cash received from our term loan with Wells Fargo Bank of
$100.0 million, offset by repayments of our prior Original Credit Agreement with Wells Fargo Bank of $74.8 million. Additionally, during fiscal 2015 we paid
$15.0 million for dividends on our common stock, paid $34.7 million for repurchases of our common stock and had tax withholdings related to net share
settlements of restricted stock units of $1.8 million. Other cash inflows from financing activities included cash received for stock option exercises of $1.7 million
and an excess tax benefit from employee stock-based awards of $2.1 million.
We had $2.0 million of cash provided by financing activities during fiscal 2014, consisting of cash received from our Original Credit Agreement with Wells Fargo
Bank of $72.3 million, offset by repayments on our Loan and Security Agreement with EastWest Bank of $76.3 million. Additionally, during fiscal 2014 we had
cash inflows from an excess tax benefit from employee stock-based awards of $5.9 million and cash received for stock option exercises of $2.1 million, and cash
outflows from tax withholdings related to net share settlements of restricted stock units of $2.0 million.
Liquidity
We believe our existing cash and cash equivalents, cash provided by operations and the availability of additional funds under our loan agreements will be sufficient
to meet our working capital and capital expenditure needs for at least the next twelve months. 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. 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 June 30, 2016 , we held
$524.3 million of our $551.0 million of cash and cash equivalents in
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accounts of our subsidiaries outside of the United States and we will incur significant tax liabilities if we decide to repatriate those amounts.
We believe that the combination of our existing United States cash and cash equivalent balances and future United States operating cash flows are sufficient to
meet our ongoing United States operating expenses and debt repayment obligations for at least the next twelve months.
We earn a significant amount of our operating income outside the United States, which is deemed to be indefinitely reinvested in foreign jurisdictions. As a result,
a significant portion of our cash and short-term investments are held by foreign subsidiaries. We currently do not intend nor foresee a need to repatriate these
funds. We expect existing domestic cash and short-term investments and cash flows from operations to continue to be sufficient to fund our domestic operating
activities and cash commitments for investing and financing activities, such as regular quarterly dividends, debt repayment, and capital expenditures, for at least
the next 12 months and thereafter for the foreseeable future.
If we should require more capital in the United States than is generated by our domestic operations, for example to fund significant discretionary activities such as
business acquisitions and share repurchases, we could elect to repatriate future earnings from foreign jurisdictions or raise capital in the United States through debt
or equity issuances. These alternatives could result in higher effective tax rates, increased interest expense, or dilution of our earnings. We could also elect to
borrow funds domestically, which we have done in the past and continue to believe we have the ability to do so at reasonable interest rates.
Contractual Obligations and Off-Balance Sheet Arrangements
The following table summarizes our contractual obligations as of June 30, 2016 :
Year 1
1-3 Years
3-5 years
Over 5 years
Total
Payments Due by Period
$
4,883 $
7,746 $
1,460 $
(In thousands)
11,250
4,802
27,402
8,512
192,250
11,510
—
—
—
—
—
—
$
56,849 $
211,506 $
1,460 $
— $
—
—
—
—
— $
14,089
203,500
16,312
27,402
8,512
269,815
Operating leases
Debt payment obligations
Interest payments on debt payment obligations
Purchase obligations and vendor deposits
Other obligations
Total
Operating Leases
We lease our headquarters in San Jose, California and other locations worldwide under non-cancelable operating leases that expire at various dates through 2022 .
Debt and Interest Payment Obligations
On March 3, 2015, we entered into the Amended Credit Agreement, that provides for a $200.0 million senior secured revolving credit facility and a $100.0 million
senior secured term loan facility, with an option to request increases in the amounts of such credit facilities by up to an additional $50.0 million in the aggregate
(any such increase to be in each lender's sole discretion). Please see Note 7 of the Notes to the Consolidated Financial Statements for more information. We have
calculated estimated interest payments for our debt based on the applicable rates and payment dates. Although our interest rates on our debt obligations may vary,
we have assumed the most recent available interest rates for all years presented. Also included are estimated bank fees to be paid for unused portions of our
revolving credit facility.
Purchase Obligations
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 liabilities for cancellations 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. We had inventory purchase obligations of $27.4 million as of June 30, 2016 .
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Other Obligations
We had other obligations of 8.5 million as of June 30, 2016 , which consisted primarily of commitments related to research and development projects.
Unrecognized Tax Benefits
As of June 30, 2016 , we had $21.5 million and an additional $1.7 million for gross interest classified as non-current liabilities. At this time, we are unable to make
a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities; therefore, such amounts are not included in the
above contractual obligation table.
Commitments and Contingencies
In May 2011, we filed a self-disclosure statement with the U.S. Commerce Department, Bureau of Industry and Security’s (“BIS”) Office of Export Enforcement
(“OEE”) relating a review conducted by us regarding certain export transactions from 2008 through March 2011 in which products may have been later resold into
Iran by third parties. In June 2011, we also filed a self-disclosure statement with the U.S. Department of the Treasury’s Office of Foreign Asset Control (“OFAC”)
regarding these compliance issues. 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 and closed the investigation of us without penalty. Based upon its review of the matter, OFAC identified certain apparent
violations (“Apparent Violations”) of the Iranian Transactions and Sanctions Regulations by us during the period of in or about March 2008 through in or about
February 2011. On March 4, 2014, we entered into a settlement agreement with OFAC resolving this administrative matter. Pursuant to the terms of the settlement
agreement, we agreed to make a one-time payment to the U.S. Department of the Treasury in the amount of $504,000 in consideration of OFAC agreeing to release
and forever discharge us from any and all civil liability in connection with the Apparent Violations. We previously accrued a reserve of $1.6 million relating to this
matter in fiscal 2010 and, accordingly, reversed the excess of the accrual of $1.1 million as of the effective date of the settlement agreement.
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”), 450-20, 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 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. We believe the fair value of these
indemnification agreements is minimal. We had not recorded any liabilities for these agreements as of June 30, 2016 or 2015 .
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 as of June 30, 2016 .
Off-Balance Sheet Arrangements
As of June 30, 2016 and 2015 , we had no off-balance sheet arrangements other than those indemnification agreements described above.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, refer to Note 2 to the Consolidated Financial Statements.
45
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
Our revolving and term loans bear interest, at our option, at either (i) a floating rate per annum equal to the base rate plus a margin of between 0.50% and 1.25%,
depending on our leverage ratio as of the most recently ended fiscal quarter or (ii) a floating per annum rate equal to the applicable LIBOR rate for a specified
period, plus a margin of between 1.50% and 2.25%, depending on our leverage ratio as of the most recently ended fiscal quarter. Swingline loans bear interest at a
floating rate per annum equal to the base rate plus a margin of between 0.50% and 1.25%, depending on our leverage ratio as of the most recently ended fiscal
quarter. Base rate is defined as the greatest of (A) Wells Fargo's prime rate, (B) the federal funds rate plus 0.50% or (C) the applicable LIBOR rate for a period of
one month plus 1.00%. A default interest rate shall apply on all obligations during certain events of default under the Amended Credit Agreement at a rate per
annum equal to 2.00% above the applicable interest rate. The Company will pay to each lender a facility fee on a quarterly basis based on the unused amount of
each lender's commitment to make revolving loans, of between 0.20% and 0.35%, depending on the Company's leverage ratio as of the most recently ended fiscal
quarter. The Company will also pay to the applicable lenders on a quarterly basis certain fees based on the daily amount available to be drawn under each
outstanding letter of credit, including aggregate letter of credit commissions of between 1.50% and 2.25%, depending on the Company's leverage ratio as of the
most recently ended fiscal quarter, and issuance fees of 0.125% per annum. The Company is also obligated to pay Wells Fargo, as agent, fees customary for a
credit facility of this size and type. Based on a sensitivity analysis, as of June 30, 2016 , an instantaneous and sustained 200-basis-point increase in interest rates
affecting our floating rate debt obligations, and assuming that we take no counteractive measures, would result in a charge to our income before income taxes of
approximately $4.1 million over the next 12 months.
We had cash and cash equivalents of $551.0 million and $446.4 million as of June 30, 2016 and 2015 , respectively. These amounts were held primarily in cash
deposit accounts. The fair value of our cash equivalents would not be significantly affected by either a 10% increase or decrease in interest rates due mainly to the
short-term nature of these instruments.
Foreign Currency Risk
Our sales are denominated in U.S. dollars, and therefore, our revenues are not directly subject to foreign currency risk. Certain of our operating expenses are
denominated in the currencies of the countries in which our operations are located, and may be subject to fluctuations due to changes in foreign currency exchange
rates, particularly changes in the Chinese Yuan, Euro, and Taiwan Dollar. A 10% appreciation or depreciation in the value of the U.S. dollar relative to the other
currencies in which our expenses are denominated would result in a charge to our income before income taxes of approximately $2.9 million.
Item 8. Financial Statements and Supplementary Data
The response to this Item is submitted as a separate section of this Form 10-K. See Item 15.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management, with the participation of the Company’s Chief Executive Officer and Chief Accounting Officer, evaluated the effectiveness of our disclosure controls
and procedures as of June 30, 2016. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed
by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in
the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to
be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management,
including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes
that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Based on the
evaluation of our disclosure controls and procedures as of June 30, 2016, our Chief Executive Officer and Chief Accounting Officer concluded that, as of such
date, as a result of the material weaknesses in internal control over financial reporting that are described below in Management's Report on Internal Control Over
Financial Reporting, our disclosure controls and procedures were not effective.
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Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-
15(f) and 15d-15(f). A company’s internal control over financial reporting is a process designed by, or under the supervision of, its Chief Executive Officer and
Chief Accounting Officer, and effected by such company's board of directors, management and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
(i)
(ii)
(iii)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a
timely basis.
Management, with the participation of our Chief Executive Officer and Chief Accounting Officer, has conducted an evaluation of the effectiveness of our internal
control over financial reporting as of June 30, 2016, based on the framework set forth in Internal Control-Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has concluded that the Company did not maintain
effective internal control over financial reporting as of June 30, 2016 due to the material weaknesses described below.
Material Weaknesses in Internal Control over Financial Reporting
As initially reported in its Annual Report on Form 10-K for the year ended June 30, 2015, Management determined that the Company did not maintain an effective
control environment, attributable to a lack of sufficient, competent personnel necessary for effective financial reporting. This resulted in the lack of comprehensive
and up-to-date accounting policies and procedures, skepticism on the part of key accounting personnel, internal control training, leadership and adequate
communication of roles and responsibilities. Growth in the complexity of the business without commensurate growth in the capabilities of the finance and
accounting organization contributed to this deficiency.
The Company’s failure to maintain an effective control environment contributed to a second deficiency in the form of ineffectively designed and maintained
controls required for safeguarding of the Company’s funds and timely detection of improper transactions in the general ledger. Specifically, the Company’s
disbursement authorization policies were not updated timely for changes in personnel and positions, nor were authorization requirements clearly stated, including
those for non-routine transactions.
The Company’s failure to maintain an effective control environment also contributed to a third deficiency in the form of ineffectively designed and maintained
controls over user access and transaction privileges to modify and post entries to the general ledger and subsidiary ledgers. In particular, the scope of user access
and transaction privileges to the general ledger and subsidiary ledgers is not sufficiently restricted to provide reasonable assurance of effective process and review
controls over postings to the general ledger. Additionally, general ledger changes were completed without due consideration of collateral impacts on segregation of
duties controls.
These control deficiencies could result in misstatements of accounts or disclosures that would each result in a material misstatement of the interim or consolidated
financial statements that would not be prevented or detected and, therefore, management has determined that these control deficiencies constitute material
weaknesses. However, management has determined that the foregoing material weaknesses did not result in a material misstatement in the consolidated financial
statements as of June 30, 2015 and 2016. Management has determined that the first two material weaknesses resulted in the
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Company’s inability to prevent and timely detect the business e-mail compromise fraud discussed in Note 14 that caused a material misappropriation of Company
assets. In light of these material weaknesses, the Company’s Chief Executive Officer and Chief Accounting Officer concluded that the Company did not maintain
effective internal control over financial reporting as of June 30, 2016.
The effectiveness of our internal control over financial reporting as of June 30, 2016 has been audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report which appears herein.
Remediation Efforts and Status of Material Weaknesses
During the period covered by this Annual Report on Form 10-K, our remediation efforts were ongoing and significant progress towards the ongoing remediation of
the material weaknesses has been made. We have taken, and continue to take, the actions described below to remediate the identified material weaknesses. As we
continue to evaluate and work to improve our internal control over financial reporting, our senior management may determine to take additional measures to
address control deficiencies or determine to modify the remediation efforts described in this section. Until the remediation efforts discussed below, including any
additional remediation efforts that our senior management identifies as necessary, are completed, the material weaknesses described above will continue to exist.
Regarding the lack of sufficient, competent personnel necessary for effective financial reporting, we recruited and transitioned the leadership team within the
finance organization by adding additional qualified and experienced personnel. We have updated our accounting policies and procedures documentation together
with key process level documents. In conjunction with the recruitment efforts, we have clarified roles and responsibilities within the finance organization.
Regarding the ineffectively designed and maintained controls required for safeguarding of the Company’s funds and timely detection of improper transactions in
the general ledger, we have implemented new policies and controls surrounding disbursement authorities and journal entry creation, including training on required
supporting documentation.
Regarding the ineffectively designed and maintained controls over user access and transaction privileges to modify and post entries to the general ledger and
subsidiary ledgers, the Company has reviewed and updated user access and transaction privileges to the general ledger and interfacing subsidiary systems through
the implementation of automated and manual controls. Additionally, we have performed a segregation of duties analysis over general ledger access. Management
has also developed policies to ensure that future system changes consider impacts to the general ledger, including transaction privileges and segregation of duties.
Based upon testing in the fourth quarter of fiscal 2016, we continue to refine and implement controls to address the above material weaknesses. While we continue
to progress with the testing of the newly implemented and redesigned controls, additional time is needed to support the operating effectiveness of such controls.
Due to the nature of the remediation process and the need to allow adequate time after implementation to evaluate and test the effectiveness of the controls, no
assurance can be given as to the timing of achievement of remediation. Management believes that the processes and controls discussed above will remediate the
material weaknesses in our internal controls over financial reporting and we expect to be substantially completed in fiscal 2017.
Changes in Internal Control Over Financial Reporting
There were no material changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2016 that materially affected, or that
are reasonably likely to materially affect, our internal control over financial reporting.
Notwithstanding the ineffectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K
and the material weakness in our internal control over financial reporting that existed as of that date, management believes that (i) this Annual Report on Form 10-
K does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which they were made, not misleading with respect to the period covered by this Annual Report on Form 10-K and (ii) the audited Consolidated Financial
Statements, and other financial information, included in this Annual Report on Form 10-k fairly present in all material respects in accordance with GAAP our
financial condition, results of operations and cash flows as of, and for, the dates and periods presented.
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Item 9B. Other Information
Not applicable.
Item 10. Directors and Executive Officers and Corporate Governance
PART III
The information required by this Item 10 is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting of Stockholders (to be filed with the
Securities and Exchange Commission within 120 days of our June 30, 2016 fiscal year end) under the headings “Election of Directors – Executive Officers and
Directors,” “Corporate Governance,” and “Section 16(a) Beneficial Ownership Reporting Compliance.”
Item 11. Executive Compensation
The information required by this Item 11 is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting of Stockholders (to be filed with the
Securities and Exchange Commission within 120 days of our June 30, 2016 fiscal year end) under the headings “Executive Compensation,” “Proposal One
Election of Directors—Directors’ Compensation” and “Corporate Governance—Compensation Committee Interlocks and Insider Participation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 with respect to security ownership of certain beneficial owners and management is incorporated by reference to our Proxy
Statement for the 2016 Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission within 120 days of our June 30, 2016 fiscal year
end) under the headings “Security Ownership of Certain Beneficial Owners and Management Related Stockholder Matters.”
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting of Stockholders (to be filed with the
Securities and Exchange Commission within 120 days of our June 30, 2016 fiscal year end) under the headings “Certain Relationships and Related Party
Transactions” and “Corporate Governance—Committees of the Board of Directors.”
Item 14. Principal Accounting Fees and Services
The information required by this Item 14 is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting of Stockholders (to be filed with the
Securities and Exchange Commission within 120 days of our June 30, 2016 fiscal year end) under the headings “Proposal Two Ratification of the Appointment of
Independent Registered Public Accounting Firm—Audit and Non-Audit Fees” and “—Audit Committee Pre-Approval Policies.”
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Item 15. Exhibits, Financial Statement Schedules
(a) 1. Financial Statements
PART IV
The financial statements filed as part of this report are identified in the Index to Consolidated Financial Statements on page 54 of this Form 10-K.
2. Financial Statement Schedules
See Item 15(c) below.
3. Exhibits
See Item 15(b) below.
(b) Exhibits
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Securities and Exchange Commission. Ubiquiti
Networks, Inc. (the “Registrant”) shall furnish copies of exhibits for a reasonable fee (covering the expense of furnishing copies) upon request.
Exhibit
Number
Description
Incorporated by
Reference from Form
Incorporated by
Reference from
Exhibit Number
Date Filed
Filed
Herewith
3.1
3.2
4.1
4.2
4.3
10.1
10.2#
10.3#
10.4#
10.5#
10.6#
S-1
S-1
S-1
S-1
S-1
S-1
S-1
S-1
S-1
S-1
Form of Third Amended and Restated Certificate of
Incorporation of Ubiquiti Networks, Inc.
Form of Amended and Restated Bylaws of Ubiquiti
Networks, Inc.
Specimen Common Stock Certificate of Ubiquiti Networks,
Inc.
Registration Agreement, dated March 2, 2010, between
Ubiquiti Networks, Inc. and certain holders of Ubiquiti
Networks, Inc.’s capital stock named therein.
Investor Rights Agreement, dated as of March 2, 2010,
between Ubiquiti Networks, Inc. and certain holders of
Ubiquiti Networks, Inc.’s capital stock named therein.
Form of Indemnification Agreement between Ubiquiti
Networks, Inc. and its directors and officers.
Amended and Restated 2005 Equity Incentive Plan and
forms of agreement thereunder.
Amended and Restated 2010 Equity Incentive Plan and
forms of agreement thereunder.
Employment Agreement, dated as of February 10, 2011,
between Ubiquiti Networks, Inc. and Benjamin Moore.
Employment Agreement, dated as of May 1, 2010, between
Ubiquiti Networks, Inc. and John Sanford.
Employment Agreement, dated as of , between Ubiquiti
Networks, Inc. and Kevin Radigan.
50
3.2
3.4
4.1
4.2
4.3
June 17, 2011
June 17, 2011
October 3, 2011
June 17, 2011
June 17, 2011
10.1
October 3, 2011
10.2
June 17, 2011
10.3
June 17, 2011
10.5
June 17, 2011
10.7
June 17, 2011
X
Table of Contents
Exhibit
Number
Description
Incorporated by
Reference from Form
Incorporated by
Reference from
Exhibit Number
Date Filed
Filed
Herewith
10.7
10.8
10.9
10.10†
10.11
10.12
10.13
10.14
Non-Residential Property Lease Agreement, dated as of
May 28, 2009, between UAB “Devint” and Tomas
Grébliúnas, Tomas Skučas, and Vygante Skučiené.
Jinyong Ji Investment Taiwan Lease, dated as of March 16,
2010, between Ubiquiti Networks, Inc. and Jinyong Ji
Investment Co., Ltd.
Lease, dated as of July 9, 2010, between Ubiquiti Networks,
Inc. and The Welsh Office Center LLC.
Amended Technology License Agreement, dated as of
September 1, 2010, between Ubiquiti Networks, Inc. and
Atheros Communications, Inc.
Taiwan Lease, dated as of July 20, 2011, between Jin
Yeoung Ji Co., Ltd. and Ubiquiti Networks International
Limited, Taiwan Branch.
Office Lease, dated as of December 8, 2011 and executed on
December 22, 2011, by and between Ubiquiti Networks,
Inc. and Carr NP Properties, L.L.C.
Credit Agreement, dated as of May 3, 2014, by and among
Ubiquiti Networks, Inc. and Ubiquiti International Holding
Company Limited, as Borrowers, the Lenders referred to
therein, as Lenders and Wells Fargo Bank, National
Associate, as Administration Agent
Amended and Restated Credit Agreement, dated as of
March 3, 2015, by and among Ubiquiti Networks, Inc. and
Ubiquiti International Holding Company Limited, as
Borrowers, the Lenders referred to therein, as Lenders, and
Wells Fargo Bank, National Association, as Administrative
Agent.
S-1
S-1
S-1
S-1
10.9
June 17, 2011
10.10
June 17, 2011
10.11
June 17, 2011
10.12
June 17, 2011
10-Q
10.15
November 14, 2011
10-Q/A
10.16
March 20, 2012
10-Q
10.1
May 9, 2014
8-K
10.1
March 6, 2015
10.15
Aircraft Lease Agreement between Ubiquiti Networks, Inc.
and RJP Manageco LLP, dated November 13, 2013
10-Q
10.1
February 7, 2014
21.1
23.1
24.1
31.1
31.2
List of subsidiaries of Ubiquiti Networks, Inc.
Consent of independent registered public accounting firm
Power of Attorney (contained in the signature page to this
Form 10-K)
Certification of Principal Executive Officer Required Under
Rule 13a-14(a) and 15d-14(a) of the Securities Exchange
Act of 1934, as amended.
Certification of Principal Financial Officer Required Under
Rule 13a-14(a) and 15d-14(a) of the Securities Exchange
Act of 1934, as amended.
51
X
X
X
X
X
Description
Incorporated by
Reference from Form
Incorporated by
Reference from
Exhibit Number
Date Filed
Filed
Herewith
Table of Contents
Exhibit
Number
32.1~
Certification of Principal Executive Officer and Principal
Financial Officer Required Under Rule 13a-14(b) of the
Securities Exchange Act of 1934, as amended, and 18
U.S.C. §1350.
101.INS(*)
XBRL Instance Document
101.SCH(*)
XBRL Taxonomy Schema Linkbase Document
101.CAL(*)
XBRL Taxonomy Calculation Linkbase Document
101.DEF(*)
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB(*)
XBRL Taxonomy Labels Linkbase Document
101.PRE(*)
XBRL Taxonomy Presentation Linkbase Document
X
X
X
X
X
X
X
# Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
†
~
Portions of the exhibit have been omitted pursuant to an order granted by the Securities and Exchange Commission for confidential treatment.
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over
Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibit 32.1 hereto are deemed to accompany this
Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into
any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
(*) XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or
12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not otherwise
subject to liability under these Sections.
(c) Financial Statement Schedules.
Schedules not listed above have been omitted because they are not applicable or required, or the information required to be set forth therein is included in the
Consolidated Financial Statements or Notes thereto.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: August 22, 2016
Ubiquiti Networks, Inc.
/s/ Robert J. Pera
Robert J. Pera
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Kevin Radigan
Kevin Radigan
Chief Accounting Officer
(Principal Financial and Accounting Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert J. Pera and Kevin Radigan and each
of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signature
/s/ Robert J. Pera
Robert J. Pera
/s/ Kevin Radigan
Kevin Radigan
/s/ Ronald A. Sege
Ronald A. Sege
/s/ Rafael Torres
Rafael Torres
m
Michael E. Hurlston
Title
Date
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Accounting Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
53
August 22, 2016
August 22, 2016
August 22, 2016
August 22, 2016
August 22, 2016
Table of Contents
UBIQUITI NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
54
Page
55
56
57
58
59
60
Table of Contents
To the Board of Directors and Stockholders of
Ubiquiti Networks, Inc.
Report of Independent Registered Public Accounting Firm
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income, of stockholders’
equity and of cash flows present fairly, in all material respects, the financial position of Ubiquiti Networks, Inc. and its subsidiaries at June 30, 2016 and June 30,
2015, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2016 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over
financial reporting as of June 30, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) because material weaknesses in internal control over financial reporting related to control environment,
including safeguarding of the Company’s funds and timeliness of detecting improper transactions, and related to the maintenance of user access and transaction
privileges to modify and post entries to the general ledger and subsidiary ledgers existed as of that date. A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial
statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management's Report on Internal
Control over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests
applied in our audit of the 2016 consolidated financial statements, and our opinion regarding the effectiveness of the Company's internal control over financial
reporting does not affect our opinion on those consolidated financial statements. The Company's management is responsible for these financial statements, for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
management’s report referred to above. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial
reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
San Jose, California
August 22, 2016
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Assets
Current assets:
UBIQUITI NETWORKS, INC.
Consolidated Balance Sheets
(In thousands, except share data)
June 30,
2016
2015
Cash and cash equivalents
$
551,031 $
446,401
Accounts receivable, net of allowance for doubtful accounts of $48 and $1,071 respectively
Inventories
Vendor deposits
Current deferred tax assets
Prepaid income taxes
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Long-term deferred tax assets
Other long–term assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Income taxes payable
Debt - short-term
Other current liabilities
Total current liabilities
Long-term taxes payable
Debt - long-term
Deferred revenues - long-term
Total liabilities
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock—$0.001 par value; 50,000,000 shares authorized; none issued
Common stock—$0.001 par value; 500,000,000 shares authorized:
81,667,129 and 87,413,777 outstanding at June 30, 2016 and June 30, 2015, respectively
Additional paid–in capital
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to consolidated financial statements.
56
82,790
57,113
30,255
—
299
7,153
728,641
12,953
4,195
2,262
748,051 $
51,510 $
1,488
11,250
26,672
90,920
23,202
192,250
1,303
307,675
—
82
—
440,294
440,376
748,051 $
66,104
37,031
19,998
1,535
2,566
7,711
581,346
15,602
1,515
2,109
600,572
43,856
1,108
10,000
15,170
70,134
19,810
87,500
974
178,418
—
87
—
422,067
422,154
600,572
$
$
$
Table of Contents
Revenues
Cost of revenues
Gross profit
Operating expenses:
UBIQUITI NETWORKS, INC.
Consolidated Statements of Operations and Comprehensive Income
(In thousands, except per share amounts)
Years Ended June 30,
2016
2015
2014
$
666,395 $
595,947 $
341,600
324,795
333,760
262,187
57,765
33,269
(8,294)
82,740
242,055
(2,115)
239,940
26,324
54,565
21,607
39,137
115,309
146,878
(1,130)
145,748
16,085
$
$
$
$
213,616 $
129,663 $
2.53 $
2.49 $
1.47 $
1.45 $
84,402
85,784
88,008
89,569
— $
0.17 $
572,464
318,997
253,467
33,962
23,560
—
57,522
195,945
(1,334)
194,611
17,674
176,937
2.02
1.97
87,772
89,715
—
Research and development
Sales, general and administrative
Business e-mail compromise ("BEC") fraud (recovery) loss
Total operating expenses
Income from operations
Interest expense and other, net
Income before provision for income taxes
Provision for income taxes
Net income and comprehensive income
Net income per share of common stock:
Basic
Diluted
Weighted average shares used in computing net income per share of common stock:
Basic
Diluted
Cash dividends declared per common share
See notes to consolidated financial statements.
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UBIQUITI NETWORKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
In thousands , except share data
Common Stock
Amount
Shares
87,213,803 $
Additional
Paid-In
Capital
Amount
$ 134,982 (44,238,960) $(123,864) $ 136,231 $
Retained
Earnings
Amount
Treasury Stock
Amount
Shares
Total
Stockholders’
Equity
Balances at June 30, 2013
Net income and comprehensive income
Stock options exercised
Restricted stock units issued, net of tax withholdings
Stock-based compensation expense
Tax impact of employee stock transactions
Balances at June 30, 2014
Net income and comprehensive income
Stock options exercised
Restricted stock units issued, net of tax withholdings
Retirement of treasury shares
Payment of common stock cash dividends
Repurchases of common stock
Stock-based compensation expense
Tax impact of employee stock transactions
Balances at June 30, 2015
Net income and comprehensive income
Stock options exercised
Restricted stock units issued, net of tax withholdings
Payment of common stock cash dividends
Repurchases of common stock
Stock-based compensation expense
Tax impact of employee stock transactions
Balances at June 30, 2016
—
849,635
116,010
—
—
88,179,448
—
299,034
130,792
—
—
(1,195,497)
—
—
87,413,777
—
171,263
104,436
—
(6,022,347)
—
—
87
—
1
—
—
—
88
—
—
—
—
—
(1)
—
—
87
—
—
—
—
(6)
—
—
—
1,686
(1,798)
—
2,089
(2,013)
4,906
5,908
—
—
—
—
—
145,872 (44,238,960)
—
—
—
(138,864) 44,768,739
—
(529,779)
—
—
—
—
—
—
—
—
—
—
—
(13,967)
4,992
2,079
—
—
1,106
(1,223)
—
(4,606)
3,719
1,004
—
—
—
—
—
(123,864)
—
—
—
138,864
—
(15,000)
—
—
—
—
—
—
—
—
—
—
— $ 440,294 $
176,937
—
—
—
—
313,168
129,663
—
—
—
(15,020)
(5,744)
—
—
422,067
213,616
—
—
—
(195,388)
—
—
Amount
147,436
176,937
2,090
(2,013)
4,906
5,908
335,264
129,663
1,686
(1,798)
—
(15,020)
(34,712)
4,992
2,079
422,154
213,616
1,106
(1,223)
—
(200,000)
3,719
1,004
440,376
81,667,129 $
82
$
—
— $
See notes to consolidated financial statements.
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Table of Contents
UBIQUITI NETWORKS, INC.
Consolidated Statements of Cash Flows
(In thousands)
Cash Flows from Operating Activities:
Net income and comprehensive income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Provision for inventory obsolescence
Provision for loss on vendor deposits
Write-off of software development costs
Deferred taxes
Excess tax benefit from employee stock-based awards
Stock-based compensation
Other adjustments
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Vendor Deposits
Deferred cost of revenues
Prepaid income taxes
Prepaid expenses and other assets
Accounts payable
Taxes payable
Deferred revenues
Accrued liabilities and other
Net cash provided by operating activities
Cash Flows from Investing Activities:
Purchase of property and equipment and other long-term assets
Net cash used in investing activities
Cash Flows from Financing Activities:
Issuances of debt
Proceeds from revolver loan
Repayments of debt
Payments on credit facilities
Repurchases of common stock
Payment of common stock cash dividends
Proceeds from exercise of stock options
Excess tax benefit from employee stock-based awards
Tax withholdings related to net share settlements of restricted stock units
Net cash (used in) provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental Disclosure of Cash Flow Information:
Income taxes paid, net of refunds
Interest paid
Non-Cash Investing and Financing Activities:
Unpaid stock repurchases
Unpaid property and equipment and other long-term assets
See notes to consolidated financial statements.
Years Ended June 30,
2016
2015
2014
$
213,616
$
129,663 $
176,937
6,294
747
(973)
2,505
(1,145)
(1,004)
3,719
823
(16,685)
(20,012)
(9,285)
—
2,267
190
7,720
4,777
709
3,245
197,508
(6,248)
(6,248)
—
130,000
(10,000)
(14,000)
(193,517)
—
1,106
1,004
(1,223)
(86,630)
104,630
446,401
$
$
$
$
$
551,031
$
18,531
2,351
6,483
406
$
$
$
$
4,971
2,288
5,827
—
(911)
(2,079)
4,992
1,526
(11,339)
7,030
—
1,279
690
(21,969)
9,735
5,152
(1,678)
(630)
134,547
(12,724)
(12,724)
100,000
—
(74,754)
—
(34,712)
(15,020)
1,686
2,079
(1,798)
(22,519)
99,304
347,097
446,401 $
2,819
3,295
—
—
2,087
(5,908)
4,906
74
(18,329)
(33,764)
—
(94)
(3,256)
(9,644)
(2,326)
7,150
1,989
(4,609)
121,327
(4,045)
(4,045)
72,254
—
(76,250)
—
—
—
2,090
5,908
(2,013)
1,989
119,271
227,826
347,097
12,797 $
1,290 $
14,007
1,650
— $
— $
—
—
59
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UBIQUITI NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1—BUSINESS AND BASIS OF PRESENTATION
Business — Ubiquiti Networks, Inc. was incorporated in the State of California in 2003 as Pera Networks, Inc. In 2005 the Company changed its name to Ubiquiti
Networks, Inc. and commenced its current operations. In June 2010, the Company was re-incorporated in Delaware.
Ubiquiti Networks, Inc. and its wholly owned subsidiaries (collectively, “Ubiquiti” or the “Company”) is a product driven company that leverages innovative
proprietary technologies to deliver networking solutions to both startup and established network operators and service providers.
The Company operates on a fiscal year ending June 30. In these notes, Ubiquiti refers to the fiscal years ended June 30, 2016 , 2015 and 2014 as fiscal 2016 , fiscal
2015 and fiscal 2014 , respectively.
Basis of Presentation — The Company’s consolidated financial statements and accompanying notes are prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) and include the accounts of Ubiquiti and its wholly owned subsidiaries. The Company has wholly
owned subsidiaries in Lithuania, Hong Kong, China, Latvia, Poland, India and the Cayman Islands. The Company’s Hong Kong subsidiary also operates a branch
office in Taiwan. All intercompany transactions and balances have been eliminated. The Company has reclassified certain amounts reported in the previous period
to conform to the current period presentation.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. On an ongoing basis, the Company evaluates these estimates, including those related to allowance for doubtful accounts, inventory valuation,
vendor deposits, warranty costs, stock-based compensation and income taxes, among others. The Company bases estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances. Actual results may differ materially from these estimates.
Segments
Management has determined that it operates as one reportable and operating segment as the Company's Chief Executive Officer, who is the Company's chief
operating decision maker, does not make decisions about resources to be allocated or assess performance on a segment basis. See Note 12.
Recognition of Revenues
Revenues consist primarily of revenues from the sale of hardware and management tools, as well as the related implied post contract customer support (“PCS”).
The Company recognizes revenues when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and the
collectability of the resulting receivable is reasonably assured. In cases where the Company lacks evidence that collectability of the resulting receivable is
reasonably assured, it defers recognition of revenue until the receipt of cash.
For the Company’s sales, evidence of the arrangement consists of an order from a customer. The Company considers delivery to have occurred once its products
have been shipped and title and risk of loss have been transferred. For the Company’s sales, these criteria are met at the time the products are transferred to the
customer. The Company’s arrangements with customers do not, in most cases, include provisions for cancellation, returns, inventory swaps or refunds that would
materially impact recognized revenues.
The Company records amounts billed to distributors for shipping and handling costs as revenues. The Company classifies shipping and handling costs incurred by
it as cost of revenues.
Deposit payments received from distributors in advance of recognition of revenues are included in current liabilities on the Company’s balance sheet and are
recognized as revenues when all the criteria for recognition of revenues are met.
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A portion of the Company's revenues related to PCS are deferred. This relates to the Company’s multi-element arrangements, which generally include two
deliverables. The first deliverable is the hardware and software essential to the functionality of the hardware device delivered at the time of sale. The second
deliverable is the implied right to PCS included with the purchase of certain products. PCS is this right to receive, on a when and if available basis, future
unspecified software upgrades and features relating to the product’s essential software as well as bug fixes, email and telephone support.
The Company uses a hierarchy to determine the allocation of revenues to the deliverables. The hierarchy is as follows: (i) vendor-specific objective evidence of fair
value (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“BESP”).
(i) VSOE generally exists only when a company sells the deliverable separately and is the price actually charged by the company for that deliverable.
Generally the Company does not sell the deliverables separately and, as such, does not have VSOE.
(ii) TPE can be substantiated by determining the price that other parties sell similar or substantially similar offerings. The Company does not believe that there
is accessible TPE evidence for similar deliverables.
(iii) BESP reflects the Company’s best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. The
Company believes that BESP is the most appropriate methodology for determining the allocation of revenue among the multiple elements.
The Company allocates revenues between these two deliverables using the relative selling price method which is based on the estimated selling price for all
deliverables. Revenues allocated to the delivered hardware and the related essential software are recognized at the time of sale provided the other conditions for
recognition of revenues have been met. Revenues allocated to the PCS are deferred and recognized on a straight-line basis over the estimated period for which
services will be delivered to support each of these devices which, currently, is two years . If the estimated life of the hardware product should change, the future
rate of amortization of the revenues allocated to PCS would also change. All cost of revenues for the delivered hardware and the related essential software,
including estimated warranty costs, are recognized at the time of sale. Costs for research and development and sales and marketing are expensed as incurred. Costs
for PCS are recognized as they are incurred.
The Company’s process for determining BESP for deliverables involves multiple factors that may vary depending upon the unique facts and circumstances related
to each deliverable. For PCS, the Company believes its network operators and service providers would be reluctant to pay for such services separately. This view is
primarily based on the fact that unspecified upgrade rights do not obligate the Company to provide upgrades at a particular time or at all, and do not specify to
network operators and service providers which upgrades or features will be delivered. The Company believes that the relatively low prices of its products and its
network operators’ and service providers’ price sensitivity would add to their reluctance to pay for PCS. Therefore, the Company has concluded that if it were to
sell PCS on a standalone basis, the selling price would be relatively low.
Key factors considered by the Company in developing the BESP for PCS include reviewing the activities of specific employees engaged in support and software
development to determine the amount of time that is allocated to the development of the undelivered elements, determining the cost of this development effort, and
then adding an appropriate level of gross profit to these costs. As of June 30, 2016 and 2015 , the Company had deferred revenues of $4.2 million and $3.5 million
, respectively, related to these obligations.
Cash and Cash Equivalents
The Company considers investments purchased with a maturity period of three months or less at the date of purchase to be cash equivalents. Cash and cash
equivalents are stated at cost which approximates fair value. The Company deposits cash and cash equivalents with financial institutions that management believes
are of high credit quality. The Company’s cash and cash equivalents consist primarily of cash deposited in U.S. dollar denominated interest-bearing deposit
accounts.
Concentration of Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. The
Company limits its exposure by primarily placing its cash in interest-bearing deposit accounts with high credit quality financial institutions.
The Company derives its accounts receivable from revenues earned from customers located worldwide. The Company bases credit decisions primarily upon a
customer’s past credit history. The Company’s standard credit terms are net 30 to 60 days, and up to 120 days for solar customers.
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The Company subcontracts with other companies to manufacture most of its products. The Company relies on the ability of these contract manufacturers to
produce the products sold to its distributors. A significant portion of the Company’s products are manufactured by a few contract manufacturers.
Inventory and Inventory Valuation
The Company's inventories are primarily finished goods and, to a lesser extent, raw materials, which have been either consigned to the Company's contract
manufacturers or are held by the Company. Inventories are stated at the lower of actual cost (computed on a first-in, first-out basis), or market value. Market value
is based upon an estimated average selling price reduced by the estimated costs of disposal. The determination of market value involves numerous judgments
including estimating average selling prices based up recent sales, industry trends, existing customer orders, and seasonal factors. Should actual market conditions
differ from the Company's estimates, future results of operations could be materially affected. The Company reduces the value of its inventory for estimated
obsolescence or lack of marketability by the difference between the cost of the affected inventory and the estimated market value. Write-downs are not reversed
until the related inventory has been subsequently sold or scrapped.
The valuation of inventory also requires the Company to estimate excess and obsolete inventory. The determination of excess or obsolete inventory is estimated
based on a comparison of the quantity and cost of inventory on hand to the Company's forecast of customer demand. Customer demand is dependent on many
factors and requires the Company to use significant judgment in our forecasting process. The Company also makes assumptions regarding the rate at which new
products will be accepted in the marketplace and at which customers will transition from older products to newer products. If actual market conditions are less
favorable than those projected by management, additional inventory write-downs may be required, which would have a negative impact on the Company's gross
margin. If the Company ultimately sells inventory that has been previously written down, the Company's gross margins in future periods would be positively
impacted.
In fiscal 2016, the Company began capitalizing manufacturing overhead expenditures as part of inventory costs. Capitalized
costs primarily include management’s best estimate of the direct labor and materials costs related to inventory produced but not
sold during the period. As of June 30, 2016 , the Company capitalized $1.2 million of manufacturing overhead costs.
Manufacturing overhead costs are capitalized to inventory and are recognized as cost of revenues in the following quarter,
consistent with the Company's historical inventory turnover.
Deferred Cost of Revenues
Deferred cost of revenues consist of the cost of product shipped to distributors for which the rights and obligations of ownership have passed to the distributor but
revenues have not yet been recognized primarily because the collectability criterion for revenue recognition has not been fulfilled. The Company classifies these
amounts as deferred cost of revenues. All deferred costs of revenues are stated at cost. The Company periodically assesses the recoverability of deferred cost of
revenues and writes down the deferred cost of revenues balances to establish a new cost basis when recovery of deferred cost of revenues is not reasonably assured.
The Company evaluates recoverability based on various factors including the length of time the product has been held at the distributor’s site and the financial
viability of the distributor.
Product Warranties
The Company offers warranties on certain products, generally for a period of one year , and records a liability for the estimated future costs associated with
potential warranty claims. The warranty costs are reflected in the Company’s consolidated statement of operations and comprehensive income within cost of
revenues. The warranties are typically in effect for 12 months from the distributor’s purchase date of the product. The Company’s estimate of future warranty costs
is largely based on historical experience factors including product failure rates, material usage, and service delivery cost incurred in correcting product failures. In
certain circumstances, the Company may have recourse from its contract manufacturers for replacement cost of defective products, which it also factors into its
warranty liability assessment.
Allowance for Doubtful Accounts
The Company records an allowance for doubtful accounts for estimated probable losses on uncollectible accounts receivable. In estimating the allowance,
management considers, among other factors, (i) the aging of the accounts receivable, (ii) the Company’s historical write offs, (iii) the credit worthiness of each
distributor based on payment history and (iv) general economic conditions. In cases where the Company is aware of circumstances that may impair a specific
distributor’s ability to meet its obligations to the Company, the Company records a specific allowance against amounts due from the distributor, and thereby
reduces the net recognized receivable to the amounts it reasonably believes will be collected.
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The allowance for doubtful accounts activity was as follows (in thousands):
Beginning balance
Charged to (released from) expenses
Bad debt write-offs
Ending Balance
Fair Value of Financial Instruments
Years Ended June 30,
2016
2015
2014
$
$
1,071 $
(1)
(1,022)
48 $
1,395 $
106
(430)
1,071 $
2,200
(658)
(147)
1,395
Pursuant to the accounting guidance for fair value measurements and its subsequent updates, fair value is defined as the price that would be received from selling
an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based
measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The accounting guidance
establishes a three-tier fair value hierarchy that requires the Company to use observable market data, when available, and to minimize the use of unobservable
inputs when determining fair value. The fair value hierarchy prioritizes the inputs into three levels that may be used in measuring fair value as follows:
Level 1 —observable inputs which include quoted prices in active markets for identical assets of liabilities.
Level 2 —inputs which include observable inputs other than Level 1, such as quoted prices for similar assets or liabilities, quoted prices for identical or similar
assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term
of the asset or liability.
Level 3 —inputs which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset
or liability. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or
similar valuation techniques, as well as significant management judgment or estimation.
Long Lived Assets
The Company evaluates its long lived assets including property and equipment for impairment whenever events or changes in circumstances indicate that the
carrying value of these assets may not be recoverable. An impairment loss is recognized when the net book value of such assets exceeds the estimated future
undiscounted cash flows attributable to the assets or asset group. If impairment is indicated, the asset is written down to its estimated fair value. The Company
recorded a $2.5 million impairment charge for capitalized software development costs due to the cancellation of the commercial launch of certain software in
development during fiscal 2016 . The Company did not recognize any significant impairment losses for fiscal 2015 and 2014 .
Property and Equipment
Furniture, fixtures and equipment are recorded at cost. The Company also capitalizes certain costs of software developed for internal use. Capitalized costs
primarily include payroll and payroll-related costs and facilities costs. During fiscal 2016 , the Company capitalized $1.3 million of software development costs,
respectively, which is included as property and equipment on the Company's consolidated balance sheet as of June 30, 2016 .
The Company computes depreciation or amortization using the straight line method over estimated useful lives, as follows:
Testing equipment
Computer and other equipment
Furniture and fixtures
Software
Leasehold improvements
Estimated Useful Life
3 to 5 years
3 to 5 years
3 to 5 years
up to 3 years
shorter of lease term or useful life
Upon retirement or disposition, the asset cost and related accumulated depreciation are removed with any gain or loss recognized in the statement of operations.
Expenditures for maintenance and repairs are charged to operations as incurred.
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Intangible Assets
The Company’s intangible assets consist primarily of legal costs associated with application for and registration of the Company’s trademarks. The Company
amortizes all definite-lived intangible assets that are subject to amortization over the estimated useful life based on economic benefit, which is generally 5 years.
All patent filing and defense costs are expensed as incurred, however to date these costs have not been significant.
Leases
The Company leases its facilities under cancelable and noncancelable operating leases. For leases that contain rent escalation or rent concessions provisions, the
Company records the total rent expense during the lease term on a straight line basis over the term of the lease. The Company records the difference between the
rent paid and the straight line rent as a deferred rent liability on the consolidated balance sheets.
Advertising Costs
The Company expenses all advertising costs as incurred.
Income Taxes
The Company accounts for income taxes in accordance with accounting guidance which requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in its financial statements or tax returns. Deferred tax assets and liabilities are determined based on the
temporary difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered
or settled. The Company establishes valuation allowances when necessary to reduce deferred tax assets to the amount it expects to realize. The assessment of
whether or not a valuation allowance is required often requires significant judgment including current operating results, the forecast of future taxable income and
ongoing prudent and feasible tax planning initiatives. In addition, the Company’s calculation of its tax liabilities involves dealing with uncertainties in the
application of complex tax regulations. The Company may be subject to income tax audits in all of the jurisdictions in which it operates and, as a result, must also
assess exposures to any potential issues arising from current or future audits of current and prior years’ tax returns. Accordingly, the Company must assess such
potential exposures and, where necessary, provide a reserve to cover any expected loss. To the extent that the Company establishes a reserve, its provision for
income taxes would be increased. If the Company ultimately determines that payment of these amounts is unnecessary, it reverses the liability and recognizes a tax
benefit during the period in which it determines that the liability is no longer necessary. The Company records an additional charge in its provision for taxes in the
period in which it determines that tax liability is greater than its original estimate. The Company recognizes interest and penalties related to unrecognized tax
benefits on the income tax expense line in the accompanying consolidated statement of operations. Accrued interest and penalties are included on the related tax
liability line in the consolidated balance sheet.
Stock-based Compensation
The Company records stock-based awards at fair value as of the grant date and recognize expense, net of forfeitures, ratably on a straight-line basis over the
requisite service period, which is generally the vesting term of the awards. The Company estimates the fair value of stock option awards on the grant date using the
Black-Scholes option pricing model. The determination of the fair value of a stock-based award on the date of grant using the Black-Scholes option-pricing model
is affected by the Company's stock price on the date of grant as well as assumptions regarding a number of complex and subjective variables. These variables
include the Company's expected stock price volatility over the expected term of the award, actual and projected employee stock option exercise behaviors, the risk-
free interest rate for the expected term of the award and expected dividends. Restricted stock units are valued based on the fair value of the Company's common
stock on the date of grant. Since the Company's initial public offering on October 14, 2011, the fair value of our common stock is determined using the closing
market price of the Company's common stock as of the date of grant.
Commitments and Contingencies
The Company periodically evaluates all pending or threatened contingencies and any commitments, if any, that are reasonably likely to have a material adverse
effect on its results of operations, financial position or cash flows. The Company assesses the probability of an adverse outcome and determines if it is remote,
reasonably possible or probable. If information available prior to the issuance of the Company’s financial statements indicates that it is probable that an asset had
been impaired or a liability had been incurred at the date of the Company’s financial statements, and the amount of the loss, or the range of probable loss can be
reasonably estimated, then such loss is accrued and charged to operating expenses. If no accrual is made for a loss
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contingency because one or both of the conditions pursuant to the accounting guidance are not met, but the probability of an adverse outcome is at least reasonably
possible, the Company discloses the nature of the contingency and provides an estimate of the possible loss or range of loss, or states that such an estimate cannot
be made.
Foreign Currency Remeasurement
The functional currency of the Company and its subsidiaries is the U.S. dollar. For foreign operations, local currency denominated monetary assets and liabilities
are remeasured at the period end exchange rates, and revenues, costs and expenses are remeasured at the average exchange rates during the fiscal year. Foreign
exchange gains and losses have been immaterial to the Company’s results of operations to date.
Research and Development Costs
Research and development expenses are expensed as incurred and consist primarily of payroll and payroll-related costs and facilities costs. Research and
development expenses associated with software development are typically expensed as incurred as our software is usually released to end customers immediately
after technological feasibility has been established. However, the Company capitalizes development costs when material costs are incurred subsequent to
technological feasibility but prior to commercial release.
Earnings Per Share
The Company applies the two-class method for calculating and presenting earnings per share (“EPS”). Under the two-class method, net income is allocated
between shares of common stock and other participating securities based on their participating rights. Participating securities are defined as securities that
participate in dividends with common stock according to a pre-determined formula or a contractual obligation to share in the income of the entity. Basic EPS is
computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the period.
Diluted EPS is computed by dividing the amount of net income available to common stockholders outstanding plus income allocable to participating securities, to
the extent they are dilutive, by the weighted average number of shares of common stock and potential dilutive shares outstanding during the period if the effect is
dilutive. The Company’s potentially dilutive common securities include outstanding stock options and restricted stock units.
Recent Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board, or FASB, issued a new accounting standard update on revenue from contracts with customers. The core
principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following
steps:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and
cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and
any assets recognized from the costs to obtain or fulfill a contract. The guidance was to be effective for annual and interim reporting periods beginning after
December 15, 2016. However, in July 2015, the FASB deferred the effective date by one year, to December 15, 2017, to provide adequate time to effectively
implement the new standard, though the early adoption as of the original effective date is allowed. The Company is currently assessing the impact of this new
guidance.
In April 2015, the FASB issued an accounting standard update on simplifying the presentation of debt issuance costs. The updated guidance requires that debt
issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent
with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the updated guidance. The guidance will be effective
for the Company beginning July 1, 2016. The guidance will result only in a reclassification on the Company's balance sheet.
In July 2015, the FASB issued an accounting standards update on simplifying the measurement of inventory. The updated guidance requires an entity to measure
inventory at the lower of cost and net realizable value. Net realizable value is the
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estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement
is unchanged for inventory measured using LIFO or the retail inventory method.
The guidance will be effective for the Company beginning July 1, 2017. The Company is currently assessing the impact of this new guidance.
In November 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-17, Balance Sheet Classification of Deferred Taxes. ASU 2015-17
simplifies the presentation of deferred taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet. ASU 2015-17 is
effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. We early adopted
ASU 2015-17 during the fourth quarter of fiscal 2016 on a prospective basis. The adoption did not have a material impact on the consolidated financial statements.
No prior reporting period was retrospectively adjusted.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize assets and liabilities on the
balance sheet for leases with lease terms greater than twelve months and disclose key information about leasing arrangements. ASU 2016-02 is effective for annual
periods beginning after December 15, 2018, including interim periods within those fiscal years, with early application permitted. The Company is evaluating the
impact that adoption of this new standard will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606) Principal versus Agent Considerations (Reporting Revenue
Gross versus Net),” (“ASU 2016-08”). ASU 2016-08 further clarifies principal and agent relationships within ASU 2014-09. The amendment is effective
beginning after December 14, 2017, including interim reporting periods within that reporting year. The Company is evaluating the impact that adoption of this new
standard will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment
Accounting,” (“ASU 2016-09”). ASU 2016-09 is intended to simplify several aspects of accounting for share-based payment awards. The guidance will be
effective for the Company beginning July 1, 2017. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial
statements.
In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing." This
ASU addresses certain implementation issues that have surfaced since the issuance of ASU 2014-09 in May 2014. The ASU provides guidance in identifying
performance obligations and determining the appropriate accounting for licensing arrangements. The effective date and transition requirements for the amendments
in this update are the same as the effective date and transition requirements for ASU 2014-09. The Company is in the process of assessing the impact that adoption
of this new standard will have on its consolidated financial statements.
In May 2016, the FASB issued ASU No. 2016-12 (“ASU 2016-12”), “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and
Practical Expedients”. ASU 2016-12 will affect all entities that enter into contracts with customers to transfer goods or services (that are an output of the entity’s
ordinary activities) in exchange for consideration. The amendments in this update affect the guidance in ASU 2014-09 which is not yet effective. The amendments
in this update also affect narrow aspects of Topic 606 including among others: assessing collectability criterion, noncash consideration, and presentation of sales
taxes and other similar taxes collected from customers. The effective date and transition requirements for the amendments in this update are the same as the
effective date and transition requirements for ASU 2014-09. The Company is evaluating the impact that adoption of this new standard will have on its consolidated
financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (TOPIC 326): Measurement of Credit Losses On Financial Instruments”.
ASU 2016-13 implements a comprehensive change in estimating the allowances for loan losses from the current model of losses inherent in the loan portfolio to a
current expected credit loss model that generally is expected to result in earlier recognition of allowances for losses. Additionally, purchase accounting rules have
been modified as well as credit losses on held-to-maturity debt securities. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and early
adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company is in the process of assessing the impact that adoption of
this new standard will have on its consolidated financial statements.
NOTE 3—FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company’s financial instruments, including cash, accounts receivable, accounts payable, and other current liabilities, the carrying amounts
approximate fair value due to their short maturities, and are therefore excluded from the fair value tables below. Additionally, as of June 30, 2016 , we held $524.3
million of our $551.0 million of cash and cash
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equivalents in accounts of our subsidiaries outside of the United States, and we would incur significant tax liabilities if we were to repatriate those amounts.
As of June 30, 2016 and 2015 , the Company had outstanding debt associated with its Amended Credit Agreement with Wells Fargo Bank (See Note 7). The fair
value of the Company’s debt was estimated based on the current rates offered to the Company for debt with similar terms and remaining maturities and was
classified as Level 2 measurement.
As of June 30, 2016 and 2015 , the fair value hierarchy for the Company’s financial liabilities was as follows (in thousands):
Liabilities:
June 30, 2016
June 30, 2015
Fair
Value
Level 1
Level 2
Level 3
Fair
Value
Level 1
Level 2
Level 3
Debt (1)
$
(1) Debt is carried at historical cost on the Company's consolidated balance sheet.
203,500 $
— $
203,500 $
— $
97,500 $
— $
97,500 $
—
NOTE 4—EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data):
Numerator:
Net income and comprehensive income
Denominator:
Years Ended June 30,
2016
2015
2014
$
213,616 $
129,663 $
176,937
Weighted-average shares used in computing basic net income per share
84,402
88,008
Add—dilutive potential common shares:
Stock options
Restricted stock units
Weighted-average shares used in computing diluted net income per share
Net income per share of common stock:
Basic
Diluted
1,275
107
85,784
$
$
2.53
2.49
$
$
1,392
169
89,569
1.47 $
1.45 $
87,772
1,696
247
89,715
2.02
1.97
The Company excludes potentially dilutive securities from its diluted net income per share calculation when their effect would be antidilutive to net income per
share amounts. The following table summarizes the total potential shares of common stock that were excluded from the diluted per share calculation, because to
include them would have been anti-dilutive for the period (in thousands):
Restricted stock units
NOTE 5—BALANCE SHEET COMPONENTS
Inventories
Inventories consisted of the following (in thousands):
Finished goods
Raw materials
Provision for inventory obsolescence
Prepaid Expenses and Other Current Assets
67
Years Ended June 30,
2016
2015
2014
8
2
36
June 30,
2016
2015
55,694 $
8,500
(7,081)
57,113 $
39,986
3,445
(6,400)
37,031
$
$
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Prepaid expenses and other current assets consisted of the following (in thousands):
BEC Recovery receivable
Other current assets
Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
Testing equipment
Computer and other equipment
Tooling equipment
Furniture and fixtures
Leasehold improvements
Software (1) (2)
Software in development (1) (2)
Less: Accumulated depreciation (3)
June 30,
2016
2015
— $
7,153
7,153 $
June 30,
2016
2015
6,051 $
4,857
5,801
1,325
5,136
2,488
2,739
28,397
(15,444)
12,953 $
1,376
6,335
7,711
4,816
4,458
4,073
1,239
4,789
3,268
2,700
25,343
(9,741)
15,602
$
$
$
$
(1) - In the year ended June 30, 2016 , the Company recorded a $2.5 million impairment charge in research and development
expense for capitalized software development costs due to the cancellation of the commercial launch of certain software in development. No impairment charges
were recorded for the year ended June 30, 2015 .
(2) - We capitalized $1.3 million and $4.0 million for software development in fiscal 2016 and 2015 , respectively.
(3)- Depreciation expense was $5.7 million , $4.7 million and $2.6 million in fiscal 2016 , 2015 and 2014 , respectively.
Other Long-term Assets
Other long-term assets consisted of the following (in thousands):
Intangible assets, net (1)
Debt issuance costs, net (2)
Other long-term assets
June 30,
2016
2015
616 $
686
960
2,262 $
575
943
591
2,109
$
$
(1) - Accumulated amortization was $955 thousand and $690 thousand as of June 30, 2016 and June 30, 2015 , respectively.
(2) - Accumulated amortization was $341 thousand and $84 thousand as of June 30, 2016 and June 30, 2015 , respectively.
Other Current Liabilities
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Accrued liabilities consisted of the following (in thousands):
Accrued compensation and benefits
Accrued expense
Warranty accrual
Deferred revenue - short term
Customer deposits
Reserve for sales returns
Other payables
NOTE 6—ACCRUED WARRANTY
Warranty obligations, included in other current liabilities, were as follows (in thousands):
Balance at June 30, 2014
Accruals for warranties issued during the period
Settlements made during the period
Balance at June 30, 2015
Accruals for warranties issued during the period
Settlements made during the period
Balance at June 30, 2016
69
$
$
June 30,
2016
2015
1,589 $
5,749
2,236
2,917
856
2,820
10,505
26,672 $
$
$
2,142
5,540
2,750
2,538
63
1,227
910
15,170
2,850
3,643
(3,743)
2,750
2,597
(3,111)
2,236
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NOTE 7—DEBT
On May 5, 2014, the Company and certain of its subsidiaries entered into a credit agreement (the “Original Credit Agreement”) with Wells Fargo Bank, National
Association (“Wells Fargo”), the financial institutions named as lenders therein, and Wells Fargo as administrative agent for the lenders, that provided for a $150.0
million senior secured revolving credit facility, with an option to request an increase in the amount of the credit facility by up to an additional $50.0 million (any
such increase to be in each lender’s sole discretion).
On March 3, 2015, the Company and Ubiquiti International Holding Company Limited (the “Cayman Borrower”) amended and restated the Original Credit
Agreement (the "Amended Credit Agreement") with Wells Fargo, the other financial institutions named as lenders therein, and Wells Fargo as administrative agent
for the lenders. The Amended Credit Agreement provides for a $200.0 million senior secured revolving credit facility and a $100.0 million senior secured term
loan facility (collectively, the "Facilities"), with an option to request increases in the amounts of such credit facilities by up to an additional $50.0 million in the
aggregate (any such increase to be in each lender's sole discretion), and matures on March 3, 2020. The term loan facility was fully drawn at closing, $72.3 million
of which was used to repay the outstanding balance under the Original Credit Agreement. During fiscal 2016, the Company drew $130 million against the
revolving credit facility. As of June 30, 2016 , $87.5 million was outstanding on the term loan and $116 million on the revolver, leaving $84 million available on
the revolver. As of June 30, 2016 , the interest rate on the term loan was 2.13% . The table below shows the respective interest rates as of June 30, 2016 in addition
to interest rate reset dates and rates (as available) for each revolver draw.
Debt Payment Obligations
$15 Million Revolver
$18 Million Revolver
$16 Million Revolver
$19 Million Revolver
$48 Million Revolver
* - Reset rate not available as of filing date.
Interest Rate as of
June 30, 2016
2.13%
2.13%
2.13%
2.13%
2.48%
Rate Reset Date
July 8, 2016
July 18, 2016
August 12, 2016
July 1, 2016
November 30, 2016
Reset Rate
2.42%
2.48%
2.71%
2.41%
*
The revolving credit facility includes a sub-limit of $10.0 million for letters of credit and a sub-limit of $25.0 million for swingline loans. The Facilities replaced
the Company's $150.0 million senior secured revolving credit facility under the Original Credit Agreement. The Facilities are available for working capital and
general corporate purposes that comply with the terms of the Amended Credit Agreement. Under the Amended Credit Agreement, revolving loans and swingline
loans may be borrowed, repaid and reborrowed until March 3, 2020, at which time all amounts borrowed must be repaid. The term loan is payable in quarterly
installments of 2.50% of the original principal amount of the term loan until March 31, 2017, thereafter increasing to 3.75% of the original principal amount of the
term loan, in each case plus accrued and unpaid interest. Revolving, swingline and term loans may be prepaid at any time without penalty. Revolving and term
loans bear interest, at the Company's option, at either (i) a floating rate per annum equal to the base rate plus a margin of between 0.50% and 1.25% , depending on
the Company's leverage ratio as of the most recently ended fiscal quarter or (ii) a floating per annum rate equal to the applicable LIBOR rate for a specified period,
plus a margin of between 1.50% and 2.25% , depending on the Company's leverage ratio as of the most recently ended fiscal quarter. Swingline loans bear interest
at a floating rate per annum equal to the base rate plus a margin of between 0.50% and 1.25% , depending on the Company's leverage ratio as of the most recently
ended fiscal quarter. Base rate is defined as the greatest of (A) Wells Fargo's prime rate, (B) the federal funds rate plus 0.50% or (C) the applicable LIBOR rate for
a period of one month plus 1.00% . A default interest rate shall apply on all obligations during certain events of default under the Amended Credit Agreement at a
rate per annum equal to 2.00% above the applicable interest rate. The Company will pay to each lender a facility fee on a quarterly basis based on the unused
amount of each lender's commitment to make revolving loans, of between 0.20% and 0.35% , depending on the Company's leverage ratio as of the most recently
ended fiscal quarter. The Company will also pay to the applicable lenders on a quarterly basis certain fees based on the daily amount available to be drawn under
each outstanding letter of credit, including aggregate letter of credit commissions of between 1.50% and 2.25% , depending on the Company's leverage ratio as of
the most recently ended fiscal quarter, and issuance fees of 0.125% per annum. The Company is also obligated to pay Wells Fargo, as agent, fees customary for a
credit facility of this size and type.
The Amended Credit Agreement requires the Company to maintain during the term of the Facilities (i) a maximum leverage ratio of 2.50 to 1.00 and (ii) minimum
liquidity of $225.0 million , increasing to $250.0 million in the event of an incremental increase in the size of the Facilities, which can be satisfied with unrestricted
cash and cash equivalents and up to $50.0 million
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of availability under the revolving credit facility. In addition, the Amended Credit Agreement contains customary affirmative and negative covenants, including
covenants that limit or restrict the ability of the Company and its subsidiaries to, among other things, grant liens or enter into agreements restricting their ability to
grant liens on property, enter into mergers, dispose of assets, change their accounting or reporting policies, change their business and incur indebtedness, in each
case subject to customary exceptions for a credit facility of this size and type. The Amended Credit Agreement includes customary events of default that include,
among other things, non-payment of principal, interest or fees, inaccuracy of representations and warranties, violation of covenants, cross default to certain other
indebtedness, bankruptcy and insolvency events, material judgments, change of control and certain ERISA events. The occurrence of an event of default could
result in the acceleration of the obligations under the Amended Credit Agreement.
The obligations of the Company and certain domestic subsidiaries, if any, under the Amended Credit Agreement are required to be guaranteed by such domestic
subsidiaries (the "Domestic Guarantors") and are collateralized by substantially all assets (excluding intellectual property) of the Company and the Domestic
Guarantors. The obligations of the Cayman Borrower and certain foreign subsidiaries under the Amended Credit Agreement are required to be guaranteed by
certain domestic and material foreign subsidiaries (the "Guarantors") and are collateralized by substantially all assets (excluding intellectual property) of the
Company and the Guarantors.
During fiscal 2016 , the Company made aggregate payments of $11.9 million against the term loan facility balance under the Amended Credit Agreement, of
which $10.0 million was for repayments of principal and $1.9 million was for payments of interest. During fiscal 2016 , the Company made aggregate payments of
$14.5 million against the revolving loan facility under the Amended Credit Agreement, of which $14.0 million was for repayments of principal and $0.5 million
was for payments of interest. As of June 30, 2016 , the Company has classified $11.3 million and $192.3 million of short term and long-term debt, respectively, on
its consolidated balance sheet related to the Amended Credit Agreement.
On September 2, 2015, the Company accessed a letter of credit under its revolving credit facility in the amount of $237 thousand for the benefit of the landlord
pursuant to a new lease of office space. The landlord can draw against the letter of credit in the event of default by the Company. The letter of credit expires on
September 2, 2016, subject to automatic renewal
for additional one-year periods.
The following table summarizes our debt payment obligations as of June 30, 2016 (in thousands):
Fiscal Year
Debt payment obligations
Interest payments on debt payment
obligations
Total
$
$
2017
2018
2019
2020
Thereafter
11,250 $
15,000
$
15,000
$
162,250
$
— $
Total
203,500
4,802
4,564
4,245
2,701
16,052 $
19,564 $
19,245 $
164,951 $
—
16,312
— $
219,812
NOTE 8—COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its headquarters in San Jose, California and other locations worldwide under non-cancelable operating leases that expire at various dates
through 2022 .
At June 30, 2016 , future minimum annual payments under operating leases are as follows (in thousands):
Fiscal Year
Operating leases
2017
2018
2019
2020
2021
Thereafter
Total
$
4,883 $
3,539 $
2,478 $
1,729 $
1,085 $
375 $
14,089
Rent expense under operating leases was $5.0 million , $3.6 million and $2.3 million for fiscal 2016 , fiscal 2015 and fiscal 2014 , respectively.
Purchase Obligations
The Company primarily subcontracts with other companies to manufacture its products. During the normal course of business, the Company’s contract
manufacturers procure components based upon orders placed by the Company. If the Company cancels all or part of the orders, it may still be liable to the contract
manufacturers for the cost of the components purchased by them to manufacture the Company’s products. The Company periodically reviews the potential liability
and to date no significant accruals have been recorded. The Company had inventory purchase obligations of $27.4 million as of June 30, 2016 .
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Indemnification Obligations
The Company enters into standard indemnification agreements with many of its business partners in the ordinary course of business. These agreements include
provisions for indemnifying the business partner against any claim brought by a third party to the extent any such claim alleges that a Company product infringes a
patent, copyright or trademark, or violates any other proprietary rights of that third party. The maximum potential amount of future payments the Company could
be required to make under these indemnification agreements is not estimable and the Company has not incurred any material costs to defend lawsuits or settle
claims related to these indemnification agreements to date.
Legal Matters
The Company may be involved, from time to time, in a variety of claims, lawsuits, investigations, and proceedings relating to contractual disputes, intellectual
property rights, employment matters, regulatory compliance matters and other litigation matters relating to various claims that arise in the normal course of
business. The Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be
reasonably estimated. The Company assesses its potential liability by analyzing specific litigation and regulatory matters using available information. The
Company develops its views on estimated losses in consultation with inside and outside counsel, which involves a subjective analysis of potential results and
outcomes, assuming various combinations of appropriate litigation and settlement strategies. Taking all of the above factors into account, the Company records an
amount where it is probable that the Company will incur a loss and where that loss can be reasonably estimated. However, the Company’s estimates may be
incorrect and the Company could ultimately incur more or less than the amounts initially recorded. The Company may also incur significant legal fees, which are
expensed as incurred, in defending against these claims. The Company is not currently aware of any pending or threatened litigation that would have a material
adverse effect on the Company's financial statements.
Shareholder Class Action Lawsuits
Beginning on September 7, 2012, two class action lawsuits were filed in the United States District Court for the Northern District of California against Ubiquiti
Networks, Inc., certain of its officers and directors, and the underwriters of its initial public offering, alleging claims under U.S. securities laws. On January 30,
2013, the plaintiffs filed an amended consolidated complaint. On March 26, 2014, the court issued an order granting a motion to dismiss the complaint with leave
to amend. Following the plaintiffs’ decision not to file an amended complaint, on April 16, 2014, the court ordered the dismissal of the lawsuit with prejudice, and
entered judgment in favor of the Company and the other defendants, and against the plaintiffs. On May 15, 2014, the plaintiffs filed a notice of appeal from the
judgment of the court. The appeal is ongoing before the U.S. Court of Appeals for the Ninth Circuit. There can be no assurance that the Company will prevail in
the appeal proceeding. The Company cannot currently estimate the possible loss or range of possible loss, if any, that it may experience in connection with this
litigation.
Export Compliance Matters
In May 2011, the Company filed a self-disclosure statement with the U.S. Commerce Department, Bureau of Industry and Security’s (“BIS”) Office of Export
Enforcement (“OEE”) relating to a review conducted by the Company regarding certain export transactions from 2008 through March 2011 in which products may
have been later resold into Iran by third parties. In June 2011, the Company also filed a self-disclosure statement with the U.S. Department of the Treasury’s Office
of Foreign Asset Control (“OFAC”) regarding these compliance issues. In August 2011, the Company received a warning letter from OEE stating that OEE had not
referred the findings of the Company’s review for criminal or administrative prosecution and closed the investigation of the Company without penalty. Based upon
its review of the matter, OFAC identified certain apparent violations (“Apparent Violations”) of the Iranian Transactions and Sanctions Regulations by the
Company during the period of on or about March 2008 through on or about February 2011. On March 4, 2014, the Company entered into a settlement agreement
with OFAC resolving this administrative matter. Pursuant to the terms of the settlement agreement, the Company agreed to make a one-time payment to the U.S.
Department of the Treasury in the amount of $504,000 in consideration of OFAC agreeing to release and forever discharge the Company from any and all civil
liability in connection with the Apparent Violations. The Company previously accrued a reserve of $1.6 million relating to this matter in fiscal 2010 and,
accordingly, reversed the excess of the accrual of $1.1 million as of the effective date of the settlement agreement.
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NOTE 9—COMMON STOCK AND TREASURY STOCK
As of June 30, 2016 and 2015 , the authorized capital of the Company included 500,000,000 shares of common stock. As of June 30, 2016 and 2015 , 81,667,129
and 87,413,777 shares of common stock were outstanding, respectively.
Treasury Stock Retirement
In February 2015, we retired 44,768,739 shares of the Company's treasury stock. These retired shares are now included in the Company’s pool of authorized but
unissued shares. The retired stock had a carrying value of $138.9 million . The Company’s policy upon the formal retirement of treasury stock is to reflect the
excess over par value as a deduction from Additional Paid-in Capital until the balance is reduced to zero , then the Company records any additional excess directly
to retained earnings.
Common Stock Repurchases
On August 4, 2015, the Board of Directors authorized the Company to repurchase up to $100.0 million of its common stock. All common stock repurchased by the
Company is immediately retired, and is recorded consistent with the treasury stock policy discussed above. The share repurchase program has been funded from
existing cash on hand in addition to draws on the revolving credit facility of the Amended Credit Agreement. In the first quarter of fiscal 2016 , the company
repurchased 1,872,469 shares of its common stock at an average price per share of $33.79 for an aggregate amount of $63.3 million . In the second quarter of fiscal
2016 , the Company repurchased 1,074,749 shares of its common stock at an average price per share of $34.12 for an aggregate amount of $36.7 million .
On November 3, 2015, the Board of Directors of the Company approved a $50 million stock repurchase program where the Company was authorized to $50
million of its common stock. During the third quarter of fiscal 2016, the Company repurchased 1,765,523 shares of its common stock at an average price per share
of $28.30 for an aggregate amount of $50.0 million.
On May 4, 2016, the Board of Directors of the Company approved a $50 million stock repurchase program. Under the stock repurchase program, the Company
was authorized to repurchase up to $50 million of its common stock. During the fourth quarter of fiscal 2016, the Company repurchased 1,309,606 shares of its
common stock at an average price per share of $38.18 for an aggregate amount of $50 million . This included unpaid stock repurchases of $6.5 million relating to
repurchases executed on or prior to June 30, 2016 for trades that settled after June 30, 2016.
On August 3, 2016, the Board of Directors of the Company approved a $50 million stock repurchase program. Under the new stock repurchase program, the
Company may repurchase up to $50 million of its common stock. The program expires on September 30, 2017 .
Dividend Distribution
On September 30, 2014, the Company announced that its Board of Directors had approved an annual dividend. The Company declared the dividend of $0.17 per
share on September 30, 2014. The aggregate amount of $15.0 million was paid on October 28, 2014 to stockholders of record on October 17, 2014. The Company
currently has no plans to pay a cash dividend at this time or at any time in the foreseeable future.
NOTE 10—STOCK BASED COMPENSATION
Stock-Based Compensation Plans
2010 Equity Incentive Plan
In March 2010, the Company’s Board of Directors and stockholders approved the 2010 Equity Incentive Plan (the “2010 Plan”). The 2010 Plan replaced the 2005
Equity Incentive Plan (the “2005 Plan”), and no further awards will be granted pursuant to the 2005 Plan. Under the terms of the 2010 Plan, nonstatutory stock
options, stock appreciation rights, restricted stock, and restricted stock units (“RSUs”) may be granted to employees or non-employee service providers. Incentive
stock options may be granted only to employees.
The maximum aggregate number of shares that may be awarded under the 2010 Plan as of June 30, 2016 was 8,000,000 shares, plus any shares subject to stock
options or similar awards granted under the 2005 Plan that expire or otherwise terminate without having been exercised in full and shares issued pursuant to awards
granted under the 2005 Plan that are forfeited to (but not repurchased by) the Company.
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The 2010 Plan is administered by the Company's Board of Directors or a committee of the Company’s Board of Directors. Subject to the terms and conditions of
the 2010 Plan, the administrator has the authority to select the persons to whom awards are to be made, to determine the number of shares to be subject to awards
and the terms and conditions of awards, and to make all other determinations and to take all other actions necessary or advisable for the administration of the 2010
Plan. The administrator is also authorized to adopt, amend or rescind rules relating to administration of the 2010 Plan. Options and RSUs generally vest over a four
year period from the date of grant and generally expire five to ten years from the date of grant. The terms of the 2010 Plan provide that an option price shall not be
less than 100% of fair market value on the date of grant.
2005 Equity Incentive Plan
With the adoption of the 2010 Plan, no additional awards may be granted under the 2005 Plan. In February 2005, the Company’s Board of Directors and the
stockholders approved the 2005 Plan, which was amended and restated in March 2006. The 2005 Plan provided for the issuance of stock options, restricted stock
and stock bonuses to employees, consultants, advisors, directors and officers of the Company. The terms of the options granted under the 2005 Plan were
determined at the time of grant. The Company made use of different vesting schedules through fiscal 2009, but subsequent new grants generally vested as to 25%
on the first anniversary of the date of grant and monthly thereafter over the next three years and generally have a term of 10 years from the date of grant.
As of June 30, 2016 , the Company had 10,022,225 authorized shares available for future issuance under all of its stock incentive plans.
Stock-based Compensation
The following table shows total stock-based compensation expense included in the Consolidated Statements of Operations and Comprehensive Income for fiscal
2016 , 2015 and 2014 (in thousands):
Cost of sales
Research and development
Sales, general and administrative
Stock Options
Years Ended June 30,
2016
2015
2014
$
$
448 $
2,296
975
3,719
$
601 $
2,854
1,537
4,992 $
590
2,423
1,893
4,906
The following is a summary of option activity for the Company’s stock incentive plans for fiscal 2016 , 2015 and 2014 :
Common Stock Options Outstanding
Balance, June 30, 2013
Exercised
Forfeitures and cancellations
Balance, June 30, 2014
Exercised
Forfeitures and cancellations
Balance, June 30, 2015
Exercised
Forfeitures and cancellations
Balance, June 30, 2016
Vested and expected to vest as of June 30, 2016
Vested and exercisable as of June 30, 2016
Number
of Shares
Weighted
Average
Exercise
Price
3,614,262 $
(849,635) $
(107,485) $
2,657,142 $
(299,034) $
(56,964) $
2,301,144 $
(171,263) $
(4,574) $
2,125,307 $
2,124,757 $
2,088,860 $
74
3.07
2.46
10.55
2.96
5.64
12.14
2.38
6.46
13.82
2.03
2.03
1.87
Weighted
Average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic
Value
(In thousands)
6.17 $
52,330
5.11 $
112,215
3.82 $
67,969
2.65 $
2.65 $
2.59 $
77,850
77,836
76,858
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Additional information regarding options outstanding as of June 30, 2016 is as follows :
Range of Exercise Prices
$0.01 - $1.91
$1.92 - $11.74
$11.75 - $18.48
$18.49 - $19.98
$19.99 - $26.28
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise
Price
1.76 $
5.53 $
6.31 $
5.46 $
5.50 $
0.05
7.90
13.55
18.56
22.09
Weighted
Average
Exercise
Price
0.05
7.70
13.59
18.56
22.09
Number of
Options
1,637,160 $
397,911 $
49,830 $
3,209 $
750 $
2,088,860
Number of
Options
1,637,160
424,998
59,190
3,209
750
2,125,307
During fiscal 2016 , 2015 and 2014 , the aggregate intrinsic value of options exercised under the Company’s stock incentive plans was $4.9 million , $9.2 million ,
and $30.5 million , respectively, as determined as of the date of option exercise.
As of June 30, 2016 , the Company had unrecognized compensation cost of $290,000 related to stock options which the Company expects to recognize over a
weighted-average period of 0.6 years . Future option grants will increase the amount of compensation expense to be recorded in these periods.
The Company estimates the fair value of employee stock options using the Black-Scholes option pricing model. The fair value of employee stock options is being
amortized on a straight-line basis over the requisite service period of the awards. The Company did not grant any stock options during fiscal 2016 , fiscal 2015 , or
fiscal 2014 .
Forfeiture rate. The Company estimates its forfeiture rate based on an analysis of its actual forfeitures and will continue to evaluate the adequacy of the forfeiture
rate based on actual forfeiture experience, analysis of employee turnover behavior and other factors. The impact from a forfeiture rate adjustment will be
recognized in full in the period of adjustment, and if the actual number of future forfeitures differs from that estimated, the Company may be required to record
adjustments to stock-based compensation expense in future periods.
Cash received from stock option exercises during fiscal 2016 , 2015 and 2014 was $1.1 million , $1.7 million and $2.1 million , respectively.
Restricted Stock Units (“RSUs”)
The following table summarizes the activity of the RSUs made by the Company:
Non-vested RSUs, June 30, 2013
RSUs granted
RSUs vested
RSUs canceled
Non-vested RSUs, June 30, 2014
RSUs granted
RSUs vested
RSUs canceled
Non-vested RSUs, June 30, 2015
RSUs granted
RSUs vested
RSUs canceled
Non-vested RSUs, June 30, 2016
Number of Shares
Weighted Average Grant
Date Fair Value
744,906 $
209,032 $
(170,197) $
(234,039) $
549,702 $
182,865 $
(182,507) $
(149,425) $
400,635 $
132,746 $
(141,159) $
(120,251) $
271,971 $
14.74
37.87
15.59
16.18
22.65
32.47
21.27
24.84
26.95
31.38
23.54
31.84
28.72
The intrinsic value of RSUs vested in fiscal 2016 , 2015 and 2014 was $4.6 million , $6.4 million and $6.1 million , respectively. The total intrinsic value of all
outstanding RSUs was $10.5 million as of June 30, 2016 .
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As of June 30, 2016 , there was unrecognized compensation costs related to RSUs of $8.5 million which the Company expects to recognize over a weighted
average period of 2.9 years.
NOTE 11—INCOME TAXES
For financial reporting purposes, the components of income before provision for income taxes were as follows (in thousands):
Domestic
Foreign
Years Ended June 30,
2016
2015
2014
$
$
60,073 $
179,867
239,940 $
44,743 $
101,005
145,748 $
44,551
150,060
194,611
The components of the Company’s provision for income taxes consisted of the following (in thousands):
Current
Foreign
Federal
State
Current tax expense
Deferred
Foreign
Federal
State
Deferred tax expense
Provision for income taxes
Years Ended June 30,
2016
2015
2014
$
1,983 $
909 $
25,635
(149)
27,469
—
(1,116)
(29)
(1,145)
15,786
299
16,994
—
(856)
(53)
(909)
$
26,324 $
16,085 $
Significant components of the Company’s deferred tax assets and liabilities consisted of the following (in thousands):
Deferred tax assets
Reserves and Allowances
Stock-based compensation
Accrued expenses
Research and development credits
State tax
Other
Total deferred tax assets
Deferred tax liabilities
Basis difference for fixed assets
Total deferred tax liabilities
Valuation allowance
Net deferred tax assets
June 30,
2016
2015
$
1,539 $
998
363
146
925
482
4,453
(112)
(112)
(146)
4,195 $
$
2,451
16,516
109
19,076
—
(1,507)
105
(1,402)
17,674
836
1,168
446
595
824
399
4,268
(623)
(623)
(595)
3,050
As of June 30, 2016 , the Company had California research tax credit carry-forwards, net of ASC 740-10 unrecognized tax benefits, of approximately $693
thousand . The California research credits can be carried forward indefinitely.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax
assets. In the fourth quarter of fiscal 2016, the Company determined that it is more likely than not that our deferred tax asset for California research credits will not
be realized as for the foreseeable future the
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Company is expecting to generate credits in excess of its ability to use such attributes. As a result, the Company has provided a valuation allowance of $146
thousand for the amount of California deferred tax assets that may not be realized as of June 30, 2016 .
As a result of certain realization requirements of ASC 718, Compensation - Stock Compensation , the table of deferred tax assets and liabilities shown above does
not include certain deferred tax assets as of June 30, 2016 , that arose directly from (or the use of which was postponed by) tax deductions related to equity
compensation that are greater than the compensation recognized for financial reporting. Stockholders equity will be increased by approximately $468 thousand if
and when such deferred tax assets are ultimately realized.
The effective tax rate differs from the applicable U.S. statutory federal income tax rate as follows:
Statutory rate
Stock-based compensation
State tax expense
Tax rate differential, foreign income
Federal research and development credits
Other permanent items
Effective tax rate
Years Ended June 30,
2016
2015
2014
35.0 %
35.0 %
35.0 %
0.3
(0.1)
(24.4)
(0.6)
0.8
0.6
0.1
(23.2)
(1.1)
(0.4)
0.4
—
(25.3)
(0.3)
(0.7)
11.0 %
11.0 %
9.1 %
The Company’s effective tax rate remained flat at 11.0% in both fiscal 2016 and fiscal 2015 , because the Company's ratio of domestic and foreign income
remained relatively constant for fiscal 2016 and fiscal 2015 . Overall, the rate benefit is due to income in foreign jurisdictions that have lower tax rates than the
U.S.
It is the intention of the Company to indefinitely reinvest the earnings of its foreign subsidiaries in non-U.S. operations. As of June 30, 2016 , the Company has not
made a provision for U.S. or additional foreign withholding taxes on approximately $616.2 million of the excess of the amount for the financial reporting over the
tax basis of its investments in foreign subsidiaries that is indefinitely reinvested outside of U.S. This amount would become subject to U.S. tax upon repatriation or
other circumstances. It is not practicable to estimate the amount of deferred tax liability related to investments in these foreign subsidiaries.
While management believes that the Company has adequately provided for all tax positions, amounts asserted by tax authorities could be greater or less than the
recorded position. Accordingly, the Company's provisions on federal, state and foreign tax-related matters to be recorded in the future may change as revised
estimates are made or the underlying matters are settled or otherwise resolved.
A reconciliation of the beginning and ending balances of the unrecognized tax benefits during the years ended June 30, 2016 2015 and 2014 consists of the
following (in thousands):
Unrecognized benefit—beginning of year
Gross increases—current year tax positions
Gross decreases—prior year tax positions
Gross decreases - prior year tax positions due to statute lapse
Unrecognized benefit—end of year
2016
Years Ended June 30,
2015
(In thousands)
2014
$
19,590 $
14,914 $
3,879
—
(618)
4,960
—
(284)
$
22,851 $
19,590 $
11,455
3,871
(213)
(199)
14,914
Included in the gross unrecognized tax benefits balance as of June 30, 2016 are $21.5 million of tax positions which would affect income tax expense if
recognized. The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying
Consolidated Statement of Operations and Comprehensive Income. Accrued interest and penalties are included within the related tax liability line in the
Consolidated Balance Sheet. As of June 30, 2016 , the Company had $1.7 million accrued interest related to uncertain tax matters. The Company believes that it is
reasonably possible that a decrease of up to $1.7 million in unrecognized tax benefits may occur due to settlements with tax
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Table of Contents
authorities or statute lapses.The Company files income tax returns in the United States, various states and certain foreign jurisdictions. Tax years 2013 through
2016 are subject to examination by the U.S. federal tax authorities. Tax years 2012 through 2016 are subject to examination by the state tax authorities. Tax years
2010 through 2016 are generally subject to examination by certain foreign tax authorities. There are no income tax examinations currently in process.
On July 27, 2015, in Altera Corp. vs. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of stock-based compensation expense in an
intercompany cost-sharing arrangement. On February 19, 2016, the Internal Revenue Service filed a notice of appeal and has not withdrawn the requirement to
include stock-based compensation from its regulations; and on June 27, 2016, the Internal Revenue Service appealed the court's decision to the Ninth Circuit Court
of Appeals. We have reviewed this case and its potential impact on Ubiquiti and concluded that no adjustment to the consolidated financial statements is
appropriate at this time. We will continue to monitor ongoing developments and potential impacts to our consolidated financial statements.
As discussed in Note 2, in November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. We early adopted ASU 2015-17
during the fourth quarter of fiscal 2016 on a prospective basis; no prior reporting period was retrospectively adjusted.
NOTE 12—SEGMENT INFORMATION, REVENUES BY GEOGRAPHY AND SIGNIFICANT CUSTOMERS
Management has determined that the Company operates as one reportable and operating segment as the Company's Chief Executive Officer, who is the Company's
chief operating decision maker, does not make decisions about resources to be allocated or assess performance on a segment basis. Furthermore, the Company does
not organize or report its costs on a segment basis.
Revenue
Revenues by product type were as follows (in thousands, except percentages):
Service Provider Technology
Enterprise Technology
Total revenues
Years Ended June 30,
2016
$
$
418,346
248,049
666,395
63% $
37%
100% $
2015
418,021
177,926
595,947
2014
70% $
450,663
30%
121,801
100% $
572,464
Revenues by geography based on customer's ship-to destinations were as follows (in thousands, except percentages):
Years Ended June 30,
North America(1)
South America
Europe, the Middle East and Africa
Asia Pacific
Total revenues
2016
239,526
85,036
264,404
77,429
666,395
$
$
36% $
13%
39%
12%
100% $
2015
197,693
97,118
234,383
66,753
595,947
33% $
16%
40%
11%
2014
142,438
109,584
247,009
73,433
100% $
572,464
100%
79%
21%
100%
25%
19%
43%
13%
(1) Revenue for the United States was $225.6 million , $187.3 million and $136.6 million for fiscal 2016 , 2015 and 2014 , respectively.
Customers with an accounts receivable balance of 10% or greater of total accounts receivable and customers with net revenues of 10% or greater of total revenues
are presented below for the periods indicated:
Customer A
Customer B
Customer C
Customer D
* denotes less than 10%
Percentage of Revenues
Years Ended June 30,
Percentage of Accounts Receivable
June 30,
2016
2015
2014
2016
2015
*
*
*
*
*
*
*
*
78
13%
*
*
*
*
11%
13%
18%
13%
12%
12%
*
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NOTE 13—RELATED PARTY TRANSACTIONS AND CERTAIN OTHER TRANSACTIONS
Aircraft Lease Agreement
On November 13, 2013, the Company entered into an aircraft lease agreement (the "Aircraft Lease Agreement") with RJP Manageco LLC (the "Lessor"), a limited
liability company owned by the Company’s Chief Executive Officer, Robert J. Pera. Pursuant to the Aircraft Lease Agreement, the Company may lease an aircraft
owned by the Lessor for Company business purposes. Under the Aircraft Lease Agreement, the aircraft may be leased at a rate of $5,000 per flight hour. This
hourly rate does not include the cost of flight crew or on-board services, which the Company will purchase from a third-party provider. The Company recognized a
total of approximately $1,305,000 , $434,000 and $258,000 in expenses pursuant to the Aircraft Lease Agreement during fiscal 2016 , fiscal 2015 and fiscal 2014 ,
respectively. All expenses pursuant to the Aircraft Lease Agreement have been included in the Company's sales, general and administrative expenses in the
Condensed Consolidated Statements of Operations.
NOTE 14—BUSINESS EMAIL COMPROMISE FRAUD LOSS
As disclosed in June 2015 , the Company determined that it was the victim of criminal fraud known to law enforcement authorities as business e-mail compromise
fraud which involved employee impersonation and fraudulent requests targeting our finance department. The fraud resulted in transfers of funds aggregating $46.7
million held by a Company subsidiary incorporated in Hong Kong to other overseas accounts held by third parties. As of June 30, 2015 , the Company recovered
$8.1 million . As a result, the Company recorded a charge of $39.1 million in the fourth quarter of fiscal 2015 , including additional expenses consisting of
professional service fees associated with the fraud loss. In fiscal 2016 , the Company recorded a net recovery of $8.3 million , comprised of the $8.6 million
recovery less $0.3 million of professional service fees associated with the recovery.
The Company is continuing to pursue the recovery of the remaining $30.0 million and is cooperating with U.S. federal and numerous overseas law enforcement
authorities who are actively pursuing a multi-agency criminal investigation. Any additional recoveries are likely remote and therefore cannot be assured.
NOTE 15—SUPPLEMENTARY DATA (UNAUDITED)
The following table presents the Company’s unaudited consolidated statements of operations data for each of the eight quarters during fiscal 2016 and 2015 . In
management’s opinion, this information has been presented on the same basis as the audited consolidated financial statements included in a separate section of this
report, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts below to state fairly the unaudited
quarterly results when read in conjunction with the audited consolidated financial statements and related notes. The operating results for any quarter should not be
relied upon as necessarily indicative of results for any future period.
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Table of Contents
In thousands, except per share data
Net revenue
Gross profit
Income from operations
Net income and comprehensive income
Net income per share of common stock:
Basic
Diluted
Net revenue
Gross profit
Income from operations (1)
Net income and comprehensive income
Net income per share of common stock:
Basic
Diluted
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal 2016
$
151,415 $
161,871 $
167,433 $
73,504
59,835
53,759
0.62 $
0.61 $
$
$
79,041
56,436
49,452
0.58 $
0.57 $
Fiscal 2015
82,493
60,138
52,699
0.63 $
0.62 $
185,676
89,757
65,646
57,706
0.70
0.69
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
150,087 $
153,137 $
147,456 $
61,051
43,634
37,743
69,021
50,723
46,265
65,977
45,231
41,137
$
$
0.43 $
0.42 $
0.52 $
0.52 $
0.47 $
0.46 $
145,267
66,138
7,290
4,518
0.05
0.05
(1) During the fourth quarter of fiscal 2015, the Company experienced a BEC fraud loss. For further details, see Note 14.
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Exhibit Index
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Securities and Exchange Commission. Ubiquiti
Networks, Inc. (the “Registrant”) shall furnish copies of exhibits for a reasonable fee (covering the expense of furnishing copies) upon request.
Exhibit
Number
Description
Incorporated by
Reference from Form
Incorporated by
Reference from
Exhibit Number
Date Filed
Filed
Herewith
3.1
3.2
4.1
4.2
4.3
10.1
10.2#
10.3#
10.4#
10.5#
10.6#
10.7
10.8
10.9
Form of Third Amended and Restated Certificate of
Incorporation of Ubiquiti Networks, Inc.
Form of Amended and Restated Bylaws of Ubiquiti
Networks, Inc.
Specimen Common Stock Certificate of Ubiquiti Networks,
Inc.
Registration Agreement, dated March 2, 2010, between
Ubiquiti Networks, Inc. and certain holders of Ubiquiti
Networks, Inc.’s capital stock named therein.
Investor Rights Agreement, dated as of March 2, 2010,
between Ubiquiti Networks, Inc. and certain holders of
Ubiquiti Networks, Inc.’s capital stock named therein.
Form of Indemnification Agreement between Ubiquiti
Networks, Inc. and its directors and officers.
Amended and Restated 2005 Equity Incentive Plan and
forms of agreement thereunder.
Amended and Restated 2010 Equity Incentive Plan and
forms of agreement thereunder.
Employment Agreement, dated as of February 10, 2011,
between Ubiquiti Networks, Inc. and Benjamin Moore.
Employment Agreement, dated as of May 1, 2010, between
Ubiquiti Networks, Inc. and John Sanford.
Employment Agreement, dated as of , between Ubiquiti
Networks, Inc. and Kevin Radigan.
Non-Residential Property Lease Agreement, dated as of
May 28, 2009, between UAB “Devint” and Tomas
Grébliúnas, Tomas Skučas, and Vygante Skučiené.
Jinyong Ji Investment Taiwan Lease, dated as of March 16,
2010, between Ubiquiti Networks, Inc. and Jinyong Ji
Investment Co., Ltd.
S-1
S-1
S-1
S-1
S-1
S-1
S-1
S-1
S-1
S-1
S-1
S-1
Lease, dated as of July 9, 2010, between Ubiquiti Networks,
Inc. and The Welsh Office Center LLC.
S-1
10.10†
Amended Technology License Agreement, dated as of
September 1, 2010, between Ubiquiti Networks, Inc. and
Atheros Communications, Inc.
S-1
3.2
3.4
4.1
June 17, 2011
June 17, 2011
October 3, 2011
4.2
June 17, 2011
4.3
June 17, 2011
10.1
October 3, 2011
10.2
June 17, 2011
10.3
June 17, 2011
10.5
June 17, 2011
10.7
June 17, 2011
X
10.9
June 17, 2011
10.10
June 17, 2011
10.11
June 17, 2011
10.12
June 17, 2011
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Table of Contents
10.11
10.12
10.13
10.14
10.15
21.1
23.1
24.1
31.1
31.2
32.1~
Taiwan Lease, dated as of July 20, 2011, between Jin
Yeoung Ji Co., Ltd. and Ubiquiti Networks International
Limited, Taiwan Branch.
Office Lease, dated as of December 8, 2011 and executed on
December 22, 2011, by and between Ubiquiti Networks,
Inc. and Carr NP Properties, L.L.C.
Credit Agreement, dated as of May 3, 2014, by and among
Ubiquiti Networks, Inc. and Ubiquiti International Holding
Company Limited, as Borrowers, the Lenders referred to
therein, as Lenders and Wells Fargo Bank, National
Associate, as Administration Agent
Amended and Restated Credit Agreement, dated as of
March 3, 2015, by and among Ubiquiti Networks, Inc. and
Ubiquiti International Holding Company Limited, as
Borrowers, the Lenders referred to therein, as Lenders, and
Wells Fargo Bank, National Association, as Administrative
Agent.
10-Q
10.15
November 14, 2011
10-Q/A
10.16
March 20, 2012
10-Q
10.1
May 9, 2014
8-K
10.1
March 6, 2015
Aircraft Lease Agreement between Ubiquiti Networks, Inc.
and RJP Manageco LLP, dated November 13, 2013
10-Q
10.1
February 7, 2014
List of subsidiaries of Ubiquiti Networks, Inc.
Consent of independent registered public accounting firm
Power of Attorney (contained in the signature page to this
Form 10-K)
Certification of Principal Executive Officer Required Under
Rule 13a-14(a) and 15d-14(a) of the Securities Exchange
Act of 1934, as amended.
Certification of Principal Financial Officer Required Under
Rule 13a-14(a) and 15d-14(a) of the Securities Exchange
Act of 1934, as amended.
Certification of Principal Executive Officer and Principal
Financial Officer Required Under Rule 13a-14(b) of the
Securities Exchange Act of 1934, as amended, and 18
U.S.C. §1350.
101.INS(*)
XBRL Instance Document
101.SCH(*)
XBRL Taxonomy Schema Linkbase Document
101.CAL(*)
XBRL Taxonomy Calculation Linkbase Document
101.DEF(*)
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB(*)
XBRL Taxonomy Labels Linkbase Document
101.PRE(*)
XBRL Taxonomy Presentation Linkbase Document
82
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X
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X
X
X
X
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Table of Contents
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Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
Portions of the exhibit have been omitted pursuant to an order granted by the Securities and Exchange Commission for confidential treatment.
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal
Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibit 32.1 hereto are
deemed to accompany this Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be
deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically
incorporates it by reference.
XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of
Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, and is not otherwise subject to liability under these Sections.
(*)
83
Exhibit 10.6
CONFIDENTIAL
March 1, 2016
Dear Kevin Radigan,
On behalf of Ubiquiti Networks, Inc. (the " Company "), I am pleased to extend to you an offer to join the Company. This letter sets forth the basic
terms and conditions of your prospective employment with the Company.
1. Position: Chief Accounting Officer.
2. Primary Work Location : New York, New York.
3. Start Date : April 1, 2016.
4. Salary : $350,000 on an annual basis, paid in accordance with the Company's ordinary payroll policies.
5. Annual Bonus : You will have the opportunity to earn an annual bonus (the " Annual Bonus ") equal to $100,000. For the period beginning on the
start date and ending on the last day of the fiscal year ending June 30, 2016, you shall be eligible to receive a prorated Annual Bonus
(calculated as the Annual Bonus that would have been paid for the entire fiscal year multiplied by a fraction the numerator of which is equal to
the number of days you worked in the applicable fiscal year and the denominator of which is equal to the total number of days in such year).
6. Employee Benefits. You will be eligible to participate in Company-sponsored benefits programs in accordance with Company policies. The
Company reserves the right to modify, change, cease or begin these benefits or new benefits in the future.
7. Taxes and Withholding. All amounts payable to you will be subject to and net of all applicable payroll deductions and taxes as required by law or
the policies of the Company.
8. Severance. If your employment with the Company is terminated without Cause (as defined below), or if you terminate your employment with the
Company for Good Reason (as defined below), then the Company will, subject to the other provisions of this paragraph, continue to pay you as
severance your then-effective base salary for the Severance Period (as defined below), less applicable withholding and deductions.
Notwithstanding anything herein to the contrary, you shall not receive the severance payments set forth above unless and until you execute a
general release in a form and of substance reasonably satisfactory to the Company (the "Release") and the Release becomes effective and can
no longer be revoked by you under its terms. You shall forfeit your right to receive the severance payments set forth above if you fail to (a)
return to the Company all Company property, (b) comply with the provisions of the Release, or (c) comply with the terms of the Company's
Confidential Information and Invention Assignment Agreement. The amounts payable pursuant to this paragraph 8 shall be reduced by the
amount of any compensation earned or received by you from any person other than the Company during the Severance Period in connection
with the performance of any services by you. Upon request from time to time, you shall furnish the Company with a true and complete certificate
specifying any such compensation earned or received by you while receiving any payments or other benefits pursuant to this paragraph 8.
" Cause " shall mean that your employment is terminated for any of the following reasons: (i) intentional and material dishonesty in the
performance of your duties for the Company; (ii) conduct (including conviction of or plea of nolo contendere to a felony) which has a direct and
material adverse effect on the Company or its reputation; (iii) material failure to perform your reasonable duties or comply with your obligations
under this letter or the Company's Confidential Information and Invention Assignment Agreement after receipt of written notice specifying the
failure, if you do not remedy that failure within 10 days of receipt of written notice from the Company, which notice will state that failure to
remedy such conduct may result in termination for Cause or (iv) an incurable material breach of the Company's Confidential Information and
Invention Assignment Agreement, including, without limitation, theft or other misappropriation of the Company's proprietary information.
"Good Reason" shall mean, without your express written consent, (i) a material reduction of your duties, position or responsibilities; (ii) a more
than 10% reduction by the Company in your base salary as in effect immediately prior to such reduction (other than temporary reductions
generally applicable to senior executives of the Company); (iii) any material breach of this letter by the Company; or (iv) any office relocation to
a location that is more than 50 miles further from your primary residence. Your termination shall be for "Good Reason" if you provide written
notice to the Company of the Good Reason within sixty (60) days of the initial existence of the condition constituting Good Reason, upon such
notice you provide the Company with a period of thirty (30) days to remedy the condition constituting Good Reason, the Company fails to cure
the Good Reason within that period, and the termination of employment occurs within 60 days of the expiration of the cure period.
"Severance Period" shall mean a period of six (6) months beginning on the date the Release becomes effective and may no longer be revoked
by you under its terms.
9. Term of Employment. At all times, your employment with the Company will be "at-will," which means you or the Company may terminate or
change the terms of your employment at any time, for any reason or no reason, with or without cause or notice; provided, however, that as
described in paragraph 8 above, you may be entitled to severance benefits depending upon the circumstances of the termination of your
employment. Nothing in this letter shall be construed to create a promise of employment for any specific period of time. In addition, the
Company reserves the right to modify your position, duties and reporting relationship to meet business needs and to use its managerial
discretion in deciding on appropriate discipline. However, the "at will" nature of your employment may only be changed in an express written
agreement signed by you and a duly authorized officer of the Company. If you accept this offer, you represent and warrant that: (a) you are
under no contractual commitments inconsistent with your obligations to the Company, and (b) you will not bring to the Company's offices, or use
or disclose, any confidential information belonging to any third party that the Company would not have the right to use without restriction. At all
times, you will be subject to the Company's policies, procedures and practices, including those in any employee handbook. You also agree that
while employed by the Company, you will not engage in any employment, business or activity that may conflict with your employment at the
Company without its written consent nor will you assist any person or organization in competing with the Company, in preparing to the compete
with the Company or in hiring any of its employees.
10. Eligibility to Work. This offer of employment with the Company is contingent upon (a) your ability to provide appropriate proof of your identity and
eligibility to work in the United States; (b) your employment not requiring an export license for you to work with the Company's technology or
products; (c) your references and any background check being satisfactory to the Company; and (d) your returning a signed copy of this letter to
the Company. On or before your first day, you will be required to complete and sign a Form 1-9 providing sufficient documentation establishing
your employment eligibility in the United States, and provide the Company with satisfactory proof of your identity as required by law.
11. Standard Agreements and Policies. The commencement of your employment with the Company is contingent upon our receipt, prior to your
start date, of your signature on certain agreements and acknowledgments that you will comply with policies of the Company, including the
Company's Confidential Information and Invention Assignment Agreement and its code of conduct.
Company's Confidential Information and Invention Assignment Agreement and its code of conduct.
12. Representations and Warranties of Employee. You represent and warrant to the Company that the performance of your duties will not violate
any agreements with or trade secrets of any other person or entity, and that you are not in breach of any legal or contractual duty or
agreement, including any agreement concerning trade secrets or confidential information, owned by any other person or entity. You represent
that you have not relied on any agreements or representations, express or implied, with respect to your employment that are not expressly set
forth in this letter. You agree to indemnify, defend, and hold harmless the Company and its employees from any claim relating to any false
representation made by you in hereunder.
13. Miscellaneous. This letter supersedes any agreements, promises or representations (whether oral or written) regarding the offered terms of
your prospective employment with the Company that are not explicitly stated in this letter. If any term herein is held to be invalid, void or
unenforceable, the remainder of these terms shall remain in full force and effect and shall in no way be affected; and, the parties shall use their
best efforts to find an alternative way to achieve the same result. The terms of this letter can only be modified by a writing signed by you and a
duly authorized representative of the Company.
To indicate your acceptance of the Company's offer on the terms and conditions set forth in this letter, please sign and date one copy of this letter
and return it to me within five days after the date of this letter (absent which this offer shall be expired). Please then immediately email a scanned
copy to hr@ubnt.com along with your full contact information. In reply, you will receive documents referred to above that will need to be completed
before the commencement of your employment.
We look forward to your joining our organization!
Sincerely,
UBIQUITI NETWORKS, INC.
/s/ Robert J. Pera
By: Robert J. Pera
Title: Chief Executive Officer
********
I have read this letter agreement in its entirety, and agree to accept the terms and conditions of employment stated above.
Dated: March 2, 2016
By: /s/ Kevin Radigan
Kevin Radigan
Subsidiaries of Ubiquiti Networks, Inc.*
Exhibit 21.1
Ubiquiti Networks International Limited
Hong Kong
Ubiquiti International Holding Company Limited
Cayman Islands
*Pursuant to Item 601(b)(21)(ii) of Regulation S-K, the names of other subsidiaries of Ubiquiti Networks, Inc. are omitted because, considered in the aggregate,
they would not constitute a significant subsidiary as of the end of the year covered by this report.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 333-193793, 333-185958 and 333-177310) of Ubiquiti
Networks, Inc. of our report dated August 22, 2016 relating to the consolidated financial statements, which appears in this Form 10-K.
Exhibit 23.1
/s/ PricewaterhouseCoopers LLP
San Jose, California
August 22, 2016
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
RULE 13A-14(A) AND 15D-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Robert J. Pera, certify that:
1. I have reviewed this annual report on Form 10-K of Ubiquiti Networks, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter
(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
August 22, 2016
/s/ Robert J. Pera
Robert J. Pera
Chief Executive Officer and Director
(Principal Executive Officer)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
RULE 13A-14(A) AND 15D-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Kevin Radigan, certify that:
1. I have reviewed this annual report on Form 10-K of Ubiquiti Networks, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a–15(e) and 15d–15(e)) over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter
(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
August 22, 2016
/s/ Kevin Radigan
Kevin Radigan
Chief Accounting Officer
(Principal Financial Officer)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
I, Robert J. Pera, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of
Ubiquiti Networks, Inc. on Form 10-K for the fiscal year ended June 30, 2016 fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial
condition and results of operations of Ubiquiti Networks, Inc.
Date: August 22, 2016
By:
Name:
Title:
/s/ Robert J. Pera
Robert J. Pera
Chief Executive Officer and Director
(Principal Executive Officer)
I, Kevin Radigan, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of
Ubiquiti Networks, Inc. on Form 10-K for the fiscal year ended June 30, 2016 fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial
condition and results of operations of Ubiquiti Networks, Inc.
Date: August 22, 2016
By:
Name:
Title:
/s/ Kevin Radigan
Kevin Radigan
Chief Accounting Officer
(Principal Financial Officer)