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Ubiquiti Networks Inc. (NASDAQ:UBNT)

Q4 2012 Earnings Call

August 09, 2012, 05:00 pm ET

Executives

Sean Deorsey - Corporate Controller

Robert J. Pera - CEO

John Ritchie - CFO

Jessica Zhou - General Counsel & VP, Legal Affairs

Analysts

Brian Madoff - Deutsche Bank

Brent Bracelin - Pacific Crest

Amitabh Passi - UBS

Jonathan Kees - Capstone Investments

Tavis McCourt - Raymond James

Sanjit Singh - Wedbush Securities

Matt Robison - Wunderlich Securities

Operator

Good day ladies and gentlemen and welcome to the Ubiquiti Networks Q4 2012 conference call. At this time, all participants are in a listen-only mode. Later we will have a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today Mr. Sean Deorsey. Sir you may begin.

Sean Deorsey

Thank you, operator and thank you for joining us everyone. I have here with me today Robert J. Pera, Founder and Chief Executive Officer at Ubiquiti Networks and John Ritchie, Chief Financial Officer.

Before we get started, let me review the Safe Harbor statement. During the call, we will be making forward-looking statements that are statements other than statements of historical facts including but not limited to our strategy, estimates, projections, revenues and EPS.

Forward-looking statements are statements of risks and uncertainties that could cause the results to differ materially or cause materially adverse effects on results. Please refer to the risk factors discussed in our SEC filings and the press release. We do not undertake to update in light of new information of future events.

In addition, reference will be made to non-GAAP financial measures. Information regarding the reconciliation of non-GAAP and GAAP measures can be found in the press release that was issued this afternoon on our website at the IR section at www.ubnt.com.

Now, let me turn the call over to Robert Pera, Ubiquiti Founder. Robert?

Robert J. Pera

Hello. Thanks for joining the call. John Ritchie will breakdown the earnings results for the quarter and fiscal year. Before that, I want to give my thoughts on how the company is positioned for the future.

Unlike traditional type companies who compete in known markets with sales centric business models, Ubiquiti is powered by a hyper efficiency model which allows us to profitably enter underserved markets; something traditional technology companies have difficult achieving.

As a nucleus of our model is dedication to the development of powerful communication software which we provide at no cost as well as the commitment to providing transparency between our engineering team and technology user community also at no additional cost.

When paired with disrupted cost performance hardware and a focus on optimizing user experience, explosive customer demand can be realized without the need for traditional SG&A expenses.

In the case of AirMax, our broadband outdoor wireless internet distribution platform demand has skyrocketed and hardware sales have grown dramatically even in the presence of incoming competition.

This is a credit to the inherent defensibility of our software technology and our ownership of the end user community relationship. It is the same pervasive customer demand and market dominance which I believe has driven a group of terminated ex-distributors to such expense as to steal our intellectual property and set up counterfeit operations of our AirMax products.

Although they have impacted our AirMax sales and have created confusion in some markets, we have been relentless in pursuing them to a comprehensive global litigation strategy.

Last month, we received a US Court judgment issuing an injunction against the group leader as well as a freeze of his assets. Soon after, we received an additional injunction against his South American subsidiary from the Argentina Court.

Last week, his partner in China was put back in prison where he awaits criminal trial. Along with our legal initiatives, we’ve also implemented sophisticated anti- counterfeit technology across all Ubiquiti product manufacturing to make it significantly more difficult to counterfeit our new platforms and new AirMax products.

Unfortunately, neither of the negative impact of the counterfeiters nor the positive impact of our legal victories against them and our anti-counterfeit technology implementation can be reflected real time in our short-term sales performance.

However, we believe our recent progress in minimizing their operations will be positively reflected in our long-term sales as AirMax demand today is stronger than ever.

While AirMax Networks continue to flourish, we have been building equally impressive technology platforms in adjacent markets. All of these new initiatives follow the same hyper efficiency model and business strategy. This physically powerful software technology at no cost, transparency between our engineers and our user community and disruptive hardware offerings focused on optimizing user experience.

The new technology platforms cover new opportunities including scalable wireless land systems, video surveillance, microwave backhauls and machine-to-machine networking. Our most mature new platform UniFi has been incredibly successful and is now following a rapid market adoption similar that of AirMax.

At the same time, Ubiquiti has been committed to building out legal and operational infrastructure that will be critical for our long-term growth. In March, we hired a new general counsel who has been building our legal teams in both the US and China, two among other things protects our brand name and strengthen our worldwide intellectual property portfolio. In May, we hired a new VP of Operations who has helped to further reduce order lead times and has started implementing a plan for an inventory facility in Asia.

Since Ubiquiti's humble beginning from my apartment in 2005 through its first year and now achieving over $100 million in earnings, it has been profitable every single quarter. Because of the robustness of our hyper efficiency model, strong cash flows and solid balance sheet, we are in a position to take advantage of a unique opportunity to repurchase our stock which I believe is substantially undervalued from a long-term growth perspective.

With that in mind, we will be starting a stock repurchase action from Monday, August 13; for up to a $100 million. With that, I will turn things over to John to review the quarter and fiscal year financials.

John Ritchie

Thanks Robert and thank you all for joining us on our fourth quarter earnings call. We will discuss our Q1 guidance in more detail later in the call, but I wanted to make some initial comments on that.

Although, we are disappointed by the counterfeiting impact on our business, we would like to stress that this is a short-term issue and the company's fundamental and competitive position remains the same.

In fact, we feel so strongly about the company's long-term prospects and our continued strong cash generation that as Robert mentioned, we are immediately from the first available opportunity going to begin our stock repurchase program for our maximum of $100 million.

Before I go into the detail of the numbers, I would like to highlight a few financial milestones that we achieved for the quarter. We saw strong growth in the fourth quarter of 2012 with revenues up 40% and $94.9 million and $67.7 million in the same period last year.

On a sequential basis, revenues increased 3% or $3.2 million from the $91.7 million reported during the March quarter. On a year-over-year basis, AirMax increased 41%. We saw a sizeable increase in our new product category which was up 27% sequentially to $12.6 million driven by extremely strong demand for our UniFi platform.

As a reminder, these new platforms such as UniFi, airFiber, mFi, and airVision contain our most advanced anti-counterfeiting measures. Stock performance in the new product category was partially offset by a 5% decline in our AirMax product line.

As Robert mentioned, we believe that the AirMax decline is due to counterfeiting issues which we have swiftly addressed with legal action. Non-GAAP income for the June quarter was $27.9 million and GAAP income was higher at $28.5 million. Our non-GAAP EPS were $0.30 per share up 67% compared with $0.18 per share a year ago.

Very importantly we generated $27.9 million in cash, approximately a non-GAAP net income number and bringing the total cash generation for the last two quarters to $57.2 million, highlighting the exceptionally strong cash flow characteristics of this business model. Despite a tough revenue environment, we also expect strong cash generation in the September quarter as well.

I'll now go into each category in more detail, starting with our proprietary AirMax platform. Revenues came in at $59 million, up 41% or up $17 million from the $43 million recorded in the same period last year. On a sequential basis, AirMax revenues saw a decrease of 5% or $3 million from the $62 million in the March quarter.

Again, we believe this decrease is related to the previously discussed counterfeiting matter. AirMax revenues were 62% of the total revenues in the quarter down from 68% in the prior quarter and flat at 62% in the prior year.

The new product categories which again consist of UniFi, airVision, airFiber came in strong with revenues totaling $5.6 million up $11 million from the $1.6 million recognized in this category a year ago period.

They now represent 13% of our total revenue. The last component of our systems category is our other systems products. These primarily consist of our non-AirMax outdoor wireless product line.

Revenues from this category contributed $10.8 million, down slightly on a year-over-year basis and relatively flat on sequential basis. Revenues for embedded radios, our original product line were $2 million down $200,000 sequentially and down $2.1 million on a year-over-year period.

As we have said in the last few earnings calls, we are looking forward, we expect this category to decline in over all basis. During the fourth quarter, our last category antenna/other those revenues were $10.5 million up $1.9 million in the same period last year.

On a sequential basis, this category saw revenues up $3.3 million. Revenues in this category are largely driven by sales of non-integrated standalone AirMax antenna and sales of brackets, cable and other miscellaneous accessories.

Now looking for the geographic breakdown of our revenues, North America revenue came in very strong at $25.3 million up 15% on the year-over-year basis and that’s 52% on sequential basis. We believe that the North American market is not being impacted by counterfeiting efforts.

We believe this significant growth is driven by pent-up demand from our distributors who for several quarters were limited by their account receivable balances. During the quarter, we were very pleased with the significant improvement we saw in these balances.

Moving on to South America, South American revenues decreased 40% sequentially and 9% on a year-over-year basis to $16.6 million. A decline in South America which was responsible for the sequential decline in AirMax again we believe is a result of the counterfeiting issues.

We expect continued research in this region in the first quarter, as we have proactively raised the profile of the anti-counterfeiting efforts, our end user customers have held up on ordering products until they have more confidence they are applying in genuine Ubiquity products.

In the EMEA region, which has been our largest region for the past several quarters. We saw revenues increased 7% sequentially and 78% on a year-over-year basis. The EMEA regions represented 41% of our revenues for the quarter.

Looking forward, we expect this market to show some of the characteristics we experienced in South America where customers has been hesitant to purchasing so they are more confident. They are buying genuine Ubiquiti products.

And lastly in the Asia Pacific area, revenues increased by 160% on a year-over-year basis to $14.1 million and were up 28% sequentially. Moving on to gross margins, gross margins on a non-GAAP basis and non-GAAP year-over-year basis were up approximately 180 basis points to 43.3%, up from the 41.5% reported in the prior period, in the prior year and 43.3% in the prior periods of March quarter.

Helping our gross margin is our pricing policy. We simply do not discount our products. When we enter our market our price is constant, it stays constant during the life cycle of the product. Hence we do not experience a slight decline related to the margin pressure that companies with more traditional business model experienced.

Now moving on to expenses, our non-GAAP expenses came in at $8.1 million up from $6.8 or up 18% on a sequential basis and up from $5.1 million or 57% on a year-over-year basis with OpEx coming in at 8.5% of revenues.

As expected, the large component of the sequential increase relates to our intellectual property efforts to protect our IP with the next largest component being increased R&D spending. Non-GAAP operating expenses excluding the impact of stock based compensation which was about $0.5 million for the quarter, and also excluded the benefit we have of our one-time gain related to the timing of toy's systems trademark agreement.

The overall expenses are relative low, we continue to aggressively pursue the most talented engineering we can find to enhance our R&D efforts. We continue to expect R&D expenses to increase sequentially in absolute terms.

As you saw in our press release, our non-GAAP margins again ahead of our long-term model of 32% to 34% with operating margin coming in at 35%, down from 36% last quarter and 34% in year ago period.

As you look to the fourth quarter, we expect to see an increase in operating expense of approximately $0.5 million dollar. The largest component of the sequential increase relates to our R&D cost, primarily related to the prototype built platform that we expect to launch in the September and December quarter. For SG&A we expect that to be flat to modestly up.

Now moving on to the last significant item on the P&L our effective tax rate. The effective tax rate for the June quarter was 16%, with 16% represents a catch-up adjustments to bring our year-to-date rate to 17.25%. For planning purpose, we think this rate will hold steady in 2013 and reducing the 17.25% rate. And as a reminder, the primarily driver of our effective tax rate is a geographical mix of our product revenues.

Now turning over to the balance sheet, we had a very strong cash quarter with our cash balances growing $27.9 million, our cash generation approximated our non-GAAP net income number for the second quarter in a row, highlighting again the positive cash flow attributes of this very effective businesses model.

As we've consistently done in the past, we expect to generated significant free cash flow, going forward with the majority of the cash generation occurring outside of the US.

Moving on to inventory, both balances declined $1.4 million to $7.7 million compared to the $9.1 million from the year ago period. Accounts receivable increased $7.1 million to $75.6 million up from $68.5 million at the end of the third quarter. Our DSOs came in at 72.5 days an increase from 68 days on a sequential basis.

Now moving on to our Q1 guidance, we expect gross margins to come -- we expect revenues of $62 million to $70 million. We expect gross margins to come in at 40% driven by the lower revenue levels and also driven by the lower gross margins we experienced in the early production runs with airFiber. We expect non-GAAP earnings per share as well as GAAP earnings per share up $0.14 to $0.17 per share.

Now let me add some color around our guidance. As I mentioned several times in my script, we believe the amount of counterfeited goods combined with the impact it has on our distributors inventories as well as the purchasing patterns of our customers will cause the substantial fall in Q1 revenue.

However, we believe that this is not a long-term issue and that we are taking corrective actions very strong and swift collective actions this quarter, as rather mention we have series of significant legal victories against the counterfeiters and we believe that these series of legal victories will significantly slow the flow of counterfeit inventories into our market.

Given this high level of confidence we have in our long-term process and again a consistently high level of cash generation, we are pleased to announce a $100 million share repurchase program. We are financing the repurchase program with cash on hand combined with an amended credit agreement which will increase our foreign capacity from $30 million up to a $100 million. The credit agreement consisted of $50 million term loans combined with a $50 million revolving line of credits.

Now before we open up the call for questions, we are going to turn it over to Robert for some closing remarks.

Robert J. Pera

Before we start Q&A, I want to talk about another important aspect of hyper efficiency model which I refer to as leverage. Behind our first technology platform AirMax are millions of radio shipments and hundreds of thousands of R&D hours invested in software development and wireless driver refinement. With our subsequent technology platform UniFi and airFiber, we have leveraged much of our software R&Ds from AirMax as well as their economies at scale to disrupt new markets.

Likewise our latest platform, M5 which is our machine-to-machine networking platform takes advantage of similar software R&D investments from UniFi and the same economy of scale that bring a revolutionary machine-to-machine networking technology platform to market.

So through this leveraging and collaboration amongst our R&D teams, we are able to execute entirely new market opportunity by repositioning our IT building blocks. Similarly, we are able to leverage our operator community to create initial demand with each new technology platform introduction.

Whereas traditional companies have to increase SG&A spending to chase growth and increased R&D spending significantly to create new market opportunities. Ubiquiti is able to achieve growth and new market opportunities far more efficiently.

This inherent leverage in our R&D and our ownership of the user community is what I believe is Ubiquiti's long-term growth opportunity unique and our long-term financial fundamental potentially even more attractive.

With that let's start Q&A

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Brian Madoff from Deutsche Bank. Your line is open.

Brian Madoff - Deutsche Bank

A few questions, first so its your view that with the policies you have in place you are going to see the counterfeiting issue where its headed into the other markets, the other emerging markets you have so you will be dealing with this inventory issue for a couple of quarters. First question.

John Ritchie

Yeah I think that's for Robert.

Robert J. Pera

Yeah so let me take this, I want to explain the difference between what people interpret it as counterfeit and product cloning in our specific counterfeit problem. So the problem we have is not like counterfeit Nike shoes or Gucci purses showing up in shopping areas where people know they are buying counterfeiter.

What we are facing are a group of very resourceful distributors who know our sales channel, who have managed to get our IP in China, set up rogue manufacturing facilities and have basically placed our products in legitimate sales channel, and this is unknown to our customers who think they are using authentic products.

So this is almost like identity theft in a way. So that's one thing to understand. Now we've made a lot of legal progress against these guys as I've said and we also implemented to place sophisticated anti-counterfeit security measures. So what we are doing today is every product that runs through manufacturing has a security hardware, security IC that's linked to a very secure file base for production authorization system. So, it is very, very difficult to have a reoccurrence of this form.

So I think we detach this form in two ways. We are attacking it at the source and we’re minimizing the specific groups' impact on our sales channel and then we've also implemented these anti-counterfeits technology production measures at the source to prevent a future form like this from happening.

Brian Madoff - Deutsche Bank

And so you're indicating the first because Latin America was down year-on-year 10%. You are noting Latin America was the first market you were seeing this impact significantly?

Robert J. Pera

Correct. So the leader of counterfeit group, his presence is largest in South America. So that’s where we see his most presence.

Brian Madoff - Deutsche Bank

What about your relationship with Slytech. We noted that in certain cases they had access to product, at 20% discounts where other of your distributors couldn't even get access to it there was on backlog. How is that relationship and how are they involved in anyway with this counterfeiting?

Robert J. Pera

First of all, we don’t give discount to customers. We have one.

Brian Madoff - Deutsche Bank

I know you don’t that’s why everything they had it on their website.

Robert J. Pera

Well, John you want to.

John Ritchie

They have a lot of flexibility on how they sell their products, but I think just getting right to the core of your question do we think any of our major distributors are actively participating with the counterfeiters at this point, we don’t. I can’t speak to your specific question of why they decided to advertise the product at 20% less except that they do have a certain amount f freedom on the pricing of product but we don’t believe that I again don’t want to emphasize. You don’t believe at this point any of our major distributors are participating actually we are working with them in terms of education programs out to them, explaining to them their own ways that they can avoid and their customers can avoid getting counterfeit products.

Brian Madoff - Deutsche Bank

What you are saying Robert you are implying some of the stuff are so good they didn’t, even your distributors didn’t realize they had counterfeit products?

Robert J. Pera

Well it’s not that it’s so good, in fact the quality inferior and that’s another side effect of these guys but I would say from the outside it looks identical. So yes, it was tricking customers.

Brian Madoff - Deutsche Bank

And Robert so given the issues around the counterfeiting and you are really just dealing with some of these challengers for the company. Are you still planning to purchase a basketball team or are you going to focus on dealing with distributor of the company.

Robert J. Pera

Well regardless I can’t talk about the deal, but regardless whether that happens or not it’s not going to make a difference on affecting my dedication to Ubiquiti, I feel like my goal with this company is I want to grow in the next year. Unfortunately, things from quarter-to-quarter I don’t have always control over it but we correct the problems looking forward and I think we have an awesome plan in place that’s going to show significant growth over the course for the next several years.

Operator

Thank you. Our next question comes from Brent Bracelin with Pacific Crest. Your line is open.

Brent Bracelin - Pacific Crest

Couple of questions if I could, first one for Robert given some of the challenges you have seen with some of the former distributors and former manufacturers, have you give any thought to kicking in a new go-to-market approach to the business, have you reevaluated your manufacturing strategy, can you give us just an update given some of the challenges you've witnessed here and how its actually impacting your business, what's the current thinking on go-to-market and is there a thought process here to improve control from where the products are going.

Robert J. Pera

Yeah, so I think it's important to our keep in mind the context Ubiquiti was never a [VT] backed company in the early days. I thought in my apartment it was bootstrapped so I did, you know I ran it aggressively in the beginning and my goals were to survive and be very competitive. Now as we are looking forward and we've transitioned from being a millionaire company to $10 million to $50 million to now we did excess of $300 million, our philosophy is shifting from being more especially in our infrastructure from reactive to being more I guess predictive and proactive.

So you can see that in our infrastructure for example and you could see how fast in the past couple of months we scored legal victories against these guys which is pretty impressive considering the victories some of them where in emerging markets without a strong quarter loss.

So and we've also hired a Senior VP of Operations and we are getting our operations and our lead times improving them. So I think moving forward you will see it look more like a traditional company with very strong infrastructure planning for the future but the thing that will always remain intact is what I call office which is our high power R&D and our market strategies and our hyper efficiency model.

Brent Bracelin - Pacific Crest

Fair enough. Couple of questions for John, obviously on the counterfeiting clearly impacted South America, if I assume South America is down another 50% sequentially that would still imply the other regions would be down about $20 million sequentially just to get to that point of guidance. So should we assume that this counterfeiting is going to have a broad impact beyond South America and that’s essentially what you're guiding to?

John Ritchie

Yeah so cut right to the chase it's going to impact almost everywhere besides North America you see that very clearly on the geographic revenue breakdown. So in the process right now is rolling through South America it could roll through EMEA to may be slightly lesser extent. I think your interpretation is spot on.

Brent Bracelin - Pacific Crest

Okay, fair enough. And then relative to the anti-counterfeiting technology measures that you are now implementing in every product, what's the impact of gross margin long-term obviously you are adding some additional expenses there are you able to regroup that or should we kind of think about this 40 % gross margin as kind of the normal kind of run rate we should assume going forward given you are adding some additional anti-counterfeiting technology to the platforms?

Robert J. Pera

Yes, so if we were a typical tech company in the networking space, shipping tens of thousand and hundreds of thousand units they might affect gross margin but in our case we had pretty significant economy to scale. We’re buying materials in millions or even tens of millions per year. So adding anti-counterfeit security to our hardware is immaterial for the gross margin.

John Ritchie

So I just want to circle back to some of the things that we’re doing from a control perspective. You know Robert touch on this driving down lead times is one of the things. Who want to be much more responsive to our customers and not give counterfeiters an opportunity to be responsive to our customers and we also want to give them better opportunities to manage their inventory, but that will be responsive in their orders to better control to have over their material or their employee management.

Brent Bracelin - Pacific Crest

And my last question is a around kind of the $100 million buyback and again you talked about the majority of the cash generation outside of the US; how much the cash balance now exactly onshore versus kind of overseas?

John Ritchie

Sure; so today we are sitting on – when I say today not in the quarter, went out a hour and half ago; we are sitting on about $42 million in the US and that includes the drawn down of some of our debt and we also have $50 million in untapped revolver.

Operator

Our next question comes from the line of Amitabh Passi from UBS. Your line is open

Amitabh Passi - UBS

Guys I am still a little confused about this counterfeiting issue; you know you have been dealing with it for about two or three quarters, so I am just a little confused why we think the dramatic impact in this September quarter when you sort of managed that over last couple of quarters. So maybe you can help me understand again why $30 million sequential drop is it all counterfeiting, is it sort beyond that in terms of the macro environment having some impact?

Robert J. Pera

So if you look at the situation, we first learned about the counterfeiters maybe about a year ago. At that time, we didn’t know the extent or scale of their operations and they have been you know very discreet about how they are filling our sales channels with counterfeit products. So it’s been very hard to get a handle on it.

At the same time, in the past year or two as you have seen this explosive growth in AirMax where the demand has far outstripped the supply and the lead times have been pushed pretty far out. So I like to compare all those things together; it’s kind of creating an effect where we have for an analogy a shower where you turn the knob and you know the temperature of the shower doesn't react quickly till when the knob is turned. And so what you are kind of seeing is this long delay. The counterfeiters have been hitting us the last couple of quarters that we just haven't really seen it until its culminated together now.

And at the same time, when you see the progress we are making against them, the legal victories and minimizing their operations and also our implementation of anti-counterfeit measures, those things will also take time to reflect in the numbers. So I believe they are having a very significant impact today, but unfortunately it doesn't reflect in the sales numbers real time.

Amitabh Passi - UBS

And then just a couple of follow-ups; John, can you remind us again just the mechanics of the buyback, like how quickly can you buyback the 100 million shares, are there limitations, maybe you can just help us understand that? And then, Robert I am curious will you personally be buying back any shares?

Robert J. Pera

I can't talk about that, but it crossed my mind.

John Ritchie

To the mechanics, so we are limited by the 10b-18 rules; if you recall 10b-18 rules that 25% before moving average. In terms of one we can do it Monday morning. So effective Monday morning we are about to buy up to 25% of the daily average calculated over a four week period.

Amitabh Passi - UBS

And I just have a couple of quick ones as well. Just you talked about reducing lead times, can you give us a sense of where lead times are now and is that also partially limiting your visibility into the September quarter?

John Ritchie

Well, the short answer is, I think the shorter the lead time there is obviously impact visibility. The trade off there was allowing our partners responding quicker to our partners’ demand and giving them the opportunity to maybe make inventory better, because of the shorter lead times as well work the tradeoff. You know it gets us. We are never going to get to a sell-through model, we get this much closer to selling, being close to sell through, you know that’s kind of atopic.

In terms of where we are at today, today we’re approaching four weeks and we’re not stopping there; you know, I can’t tell you how long it will take, but we would like to get faster and faster turnaround and one point to one of Robert’s comment about opening up a distribution center in China. The goal would there be – that’s a couple of quarters away at the earliest, but the goal there is to get to even faster turnaround times.

Operator

Thank you. Our next question comes from Jonathan Kees from Capstone Investments. Your line is open.

Jonathan Kees - Capstone Investments

I guess I'll start before asking, also just a couple of clarification housekeeping questions. How many 10% customers did you have for the quarter and any drop off in that from the previous quarter?

John Ritchie

In terms of our number of customers?

Jonathan Kees - Capstone Investments

In terms of which customer; were there any change in the 10% customer make up from the past?

John Ritchie

So without getting in to specific customers with the dramatic move we had away from South America revenue, clearly those customers you know obviously represented a large piece of our overall revenue.

Jonathan Kees - Capstone Investments

Okay, so there is no change in makeup. Okay alright, how many 10% customers do you have for the quarter, not who, but how many?

John Ritchie

You know we actually look back, we’ll find the answer to that; and do you want to jump to another question?

Jonathan Kees - Capstone Investments

Okay, sure. Okay, sounds fine. And did I hear correctly you said OpEx is going to up by $0.5 million next quarter from sequentially from this quarter in absolute dollars?

John Ritchie

That is correct, our intention is continue investing in R&D; I mean our return on R&D investment far exceeds any other publicly traded company as far as we know, so we do not intend slowing down this segment.

Jonathan Kees - Capstone Investments

So it’s still within at the parameters that you talked about in the past about 9% or whatever the maths or whatever total OpEx I guess from modeling purposes; how should we look at it?

John Ritchie

So again, because we believe this is a short-term problem and doesn’t affect our long-term outlook; our long-term model remains intact. But to the extent if you do the math, if we are going to spend 8.6, 8.7 on pick the midst of the range we are going to get beyond 10%.

Jonathan Kees - Capstone Investments

Moving onto yes, I guess I need to ask about the counterfeiting here, you arrested the leader of the gang, but or I guess have filed legal charges, against legal action against the leader of the gang, but the gang itself is still without legal actions and still without any arrest or any I guess restrictions, imposed any restrictions?

Robert J. Pera

I want to have our General Counsel Jessica Zhou comment on that a little bit.

Jessica Zhou

Well, as Robert mentioned for the number of which we in the court system and the number of jurisdictions and the US court order does prohibit the ringleader from aiding and abetting and working with anybody else and again and prohibiting all from any further counterfeiting or infringement activity.

Jonathan Kees - Capstone Investments

Okay, so this includes the rest of the gang; the ringleader and the rest of gang ok alright. So do you really where you have seen in the past this I guess one with the software is that, it’s a little bit difficult in terms of enforcements, so you have the legal victories and then after that you have to enforce it; what are you doing in that area in terms of follow up on your legal victories?

Robert J. Pera

Okay, so I will talk about that. Well in the US we are at both in injunction and an asset freeze against the leader and we got an additional injunction and a warehouse seizure in Argentina against its subsidiaries and its partner in China who is in jail or at least as of today in jail awaiting criminal file. So I think we have done a good job of not only getting legal victory, but also disarming these guys.

Jonathan Kees - Capstone Investments

Okay.

John Ritchie

So let me circle back to your original question, so we are in the fourth quarter we have no 10% customers; in the prior quarter we had two.

Jonathan Kees - Capstone Investments

I guess last question, you've actually, through the enforcement of legal parts there, I mean you brought in a new General Counsel, and welcome aboard Jessica, and I guess you've got your hands full there, are you expanding your team there, are you increasing your legal teams overseas or you do want just outside counsel, just hiring them when you need them?.

Jessica Zhou

Like Robert mentioned, we are committed in building our legal infrastructure to strengthen the defense of early of our long term success. We've already been working on certain US teams and the China teams; we've set a good foundation of solid legal teams as is elegant by our successes against the counterfeiter and the company has always been and will be having top talent and our legal team is no exception.

Operator

Our next question comes from Tavis McCourt from Raymond James. Your line is open.

Tavis McCourt - Raymond James

Robert, I guess a clarification on the counterfeiting issue, as of today is there still counterfeit product being shipped into your channel as far as you know?

Robert J. Pera

Well, there is definitely counterfeit product in the channel today.

Tavis McCourt - Raymond James

Not in the channel, being shipped?

Robert J. Pera

As for the shipments, it’s hard to say, our intelligence says it’s significantly diminished.

Tavis McCourt - Raymond James

So the issue is the counterfeiting products in the channel and just to size the issue if we presume that it impacted last quarter’s results a bit and this quarter’s results a bit and is the primary reason that you are guiding so low sequentially, you get to a number that's like $40 million to $50 million worth of counterfeiting product; is that something that's reasonable to you, do you think the scale of the issue is that large?

Robert J. Pera

Yeah, I think it is, but you got to keep in mind what I said about the AirMax demand stripping -- outgrowing supply kind of overnight. Our lead times being traditionally very long to fulfill that demand and then these counterfeiters either through our own sales channel and alternative retailers that are submitting customer base has kind of slipped in; it created this effect and my analogy was the shower head, right; where we had been shipping to our orders and our own sales channel has also been putting orders according to demand and suddenly overtime this thing has shifted and we see the after effects of it.

Tavis McCourt - Raymond James

I understand I do want to make sure my math was – whether we’re somewhat in the ballpark in terms of the scale of the issue you believe actually is that large on dollar amount?

Robert J. Pera

Yeah.

Tavis McCourt - Raymond James

Okay, and then some detail questions for you John. You mentioned cash flow $27.9 million, was that the GAAP cash flow from operations in the cash flow statement quarter?

John Ritchie

That’s the simplest from of cash flow. That didn’t change in our cash balances.

Tavis McCourt - Raymond James

Do you have the cash flow from ops or not yet?

John Ritchie

We don’t have the cash flow from ops, not the number yet.

Tavis McCourt - Raymond James

And do you have the cash that was in the U.S. at quarter end?

John Ritchie

Yeah, I mean the cash that was in the U.S. at quarter end, even the majority of the cash, yes.

Tavis McCourt - Raymond James

You said that you had $42 million of the cash balance as of today……?

John Ritchie

I want to be clear that that $42 million included the $20 million proceeds we had from our term loan, so before that we had about $20 million of U.S. based cash.

Tavis McCourt - Raymond James

Okay that’s what I was looking for. And then in terms of the down tick that we should expect over the next two quarters should that be AirMax specific or should we expect some impact from the other revenue lines as well?

John Ritchie

Well no I think we want to emphasize that we have taken extraordinary measures to prevent our new product lines from being impacted by the counterfeiters, so the fall off will be AirMax focused.

Tavis McCourt - Raymond James

And then in terms of the DSOs, when do you expect those to stabilize or come down to -- I think you had mentioned last quarter kind of mid 60s being the goal to operate at?

John Ritchie

Yeah, I think in a moment I will be able to give you a concise sense on that; I think we have to get through this issue and once we are through this issue we should be able to see it come down. But we have to get through this issue first. Actually, think relative to what we are seeing, DSOs today are about seven days, 7.5 days greater than we would like to see them; I think DSOs are actually not in bad shape right now, but I think again it will take us getting through this counterfeiting issues before they get to a normalized level.

Tavis McCourt - Raymond James

And final question is for Robert in terms of some of the technology putting into the new platforms to prevent counterfeiting or make it more difficult. How does that impact the AirMax line; are you going to be relaunching some new AirMax hardware and how long will that take to kind of see the market risk?

Robert J. Pera

Yeah so, we always are releasing new AirMax hardware, so we recently announced our Rocket Titanium which is our higher end bay station problem and that is security protected. It was just launched and starting shipping now. And then as you see the new standards evolve, the WiFi standards 802.11ac, of course, we will have a new generation of AirMax based on that, so yeah.

Tavis McCourt - Raymond James

So you are not going to redesign of the existing AirMax product line though?

Robert J. Pera

No, from a product perspective, we think a lot of those products such as our nano-station and rockets and bullets they are pretty much optimally designed for the user experience.

Operator

Thank you. Our next question comes from Sanjit Singh from Wedbush Securities. Your line is open.

Sanjit Singh - Wedbush Securities

What would give you the sense on the timing, you are talking about two quarters to resolve this issue, I wanted to understand your visibility to the length of the counterfeiting issue and for sales sort of snap back? And then secondly why haven’t some of your competitors whether its MicroTech or other people and other parties in this space, why haven't they been exposed to some of these counterfeiting issues like you have?

Robert J. Pera

If you look at Ubiquiti and AirMax, before we came in the picture in the 90s and early part of this decade, the outdoor wireless space in these emerging markets was one that was I guess relationship and middlemen driven. So there was a lot of segmented hardware solutions that was sold to people who knew how to force them out of Asia and they controlled the end user relationships and the sales and the margin that came with that.

Now when Ubiquiti introduced AirMax we had something so incredibly disruptive that at first people thought it was too good to be true and then they used it and it spread like wildfire and so right now you a situation in the industry where although MicroTech they have traditionally been very popular in this market, today they are really used at routing site and what you have on the wireless side of all the radio links and the WiFi in the industry is complete total dominance of Ubiquiti branding.

So these middlemen who control the end user relationships and control the sales margins suddenly they are for lack of better word commoditized, and so all the customers know Ubiquiti, all of them have access to our engineering team. We give them complete transparency and there is pervasive demand in the market for Ubiquiti product

Now when you take that kind of phenomenon and you couple it with some, not so on it, at distributors that we terminated for violations of our agreement, that were also resourceful and had ways to get our IP and knew our sales channel it was just the perfect storm, right; where these guys came in and were able to do this to our brand. So I think its kind of a testament that Ubiquiti really doesn’t have anybody touching our market share and we’re so pervasive and so dominant that the only way for these guys to get back in the game and compete and make money was to resort to these measures.

Sanjit Singh - Wedbush Securities

And then on the length of why would be just two quarters?

Robert J. Pera

So you know, I don't know if you look at when these counterfeiter started, it was about a year ago and they have made for three or four quarter that culminated into a situation we have now. So I think to reverse out it, the problem we see it similar way; I don’t know if it is quarter, two quarter, three quarters, it’s definitely short term and I think if you look at Ubiquiti in year or two years, you’ll see AirMax sales reflecting the actual strong growth in the market combined with our reapplication of our hyper efficiency model to all kinds of new market opportunities; UniFi for example is off to an incredible start and that’s our second most mature platform after AirMax; once we have four or five more of those following it’s going to get interesting.

Sanjit Singh - Wedbush Securities

I appreciate my last question relates to your two major distributors Streakwave and Slytech; is there any thought about extending your presence to other major distributors; how do you read those two distributors as a percentage of sales going forward?

Robert J. Pera

So I think for AirMax those guys are perfect distributors because they serve these wireless and internet service providers and they have deep knowledge and contacts and history being connected to that industry. As we move forward with new technology platforms, if it would be UniFi for example; UniFi’s some biggest customers is in England, in the UK and even though AirMax is having much of a presence there. So UniFi is something that’s getting into new distributors and more of markets. So I think you look at the not as by Ubiquiti and the partners we select, it’s going to be the Ubiquiti platforms and the applicable partners for those platforms.

John Ritchie

And just one other comment, going back to what we said earlier, that revenue diversification you already seen the fact that we have no 10% customers this quarter.

Operator

Thank you. Our next question comes from Matt Robison from Wunderlich Securities. Your line is open.

Matt Robison - Wunderlich Securities

Let me understand the mechanics first, so you typically have a distribution tier and a reseller tier and then the end customers for AirMax, as well as ISPs. So it seems like the distributors should be buying directly from you, is there some sort of way that they found them, they were thinking they were buying from you and in fact buying from counterfeiters at the first tier level?

Robert J. Pera

Yeah, so correct, at the first tier level we believe that our first tier level is not engaged with the counterfeiters who are buying that product. The problem comes into the reseller level where the resellers have more attractive pricing and can bypass our direct distributors to get product. So we believe that the firm is really the second tier, the retailer level as well as maybe other outside distributors and retailers that want to work with us that maybe can’t meet the minimum order commitment.

Matt Robison - Wunderlich Securities

So what we are seeing here then and it sounds like based on that I think it’s a fairly key point that so sort of (inaudible) effect here where you know we've known about this for a while, but we are not feeling it until fiscal 2013 so much is that that reseller portion of the second tier was usually stopped by your counterfeiters and now you have to see that inventory disobey before you can start to sell through and to what degree do you have the ability to discipline the end market and say, hold on wait and lets make sure you buy a good product or users have no control over that and it just the nature as to run its course and into tenant of your products and the end market?

Robert J. Pera

I think your understanding is correct. There is a delay between when these counterfeiters kind of did their damage in the market and to the time we actually see the impact on the demand overall. To your second point, since we kind of raised the profile of our litigation against these guys, we’ve had many customers come to us the actual end user operators and asked us to check the hardware piece that is counterfeit because they had (inaudible). So the customers that care about getting original product, I think we’ve done a good job of alerting them.

The second thing we have done is we collected all the evidence and contact information and we sent out a distributor and resellers newsletters in fact we have sent one just this week that can be found on our website; I think in the newsletter archive. And we basically are offering anyone whose worked with the counterfeiters or have been tricked amnesty and I believe Jessica, does that amnesty last for the next month?

Jessica Zhou

Yeah.

Robert J. Pera

Yeah, in which case once we get discovery through our litigation, we will go after anyone who has been working with these guys under the knowledge they have been buying counterfeit products.

Matt Robison - Wunderlich Securities

So the uptick, John you mentioned, I am not sure if you had mentioned, but you said something to imply that airFiber contributed to revenue in the June quarter is that in fact true or is that?

John Ritchie

Yeah, it was deminimus; it wasn’t a significant number of units, but we are committed to having airFiber shipped in the June quarter and we met that commitment.

Matt Robison - Wunderlich Securities

So the June quarter uptick in North America is much greater than the new platforms increase, so presumably there was a reasonable acceleration in AirMax in the North America. Now is that partly because that channel is now addressing some of the overseas business where those overseas resource may not have the liquidity to purchase products to deliver to the end users?

John Ritchie

No I don’t think so, I think that that’s a channel that one of our – as I think I said in the past calls, one of the things we are talking about is credit risk and that channel of revenue still down in that channel probably because our products we are managing the credit risk in the North American market, that credit risk eased significantly in the June quarter, so we were able to kind of open up the shipments to customers that were constrained.

Matt Robison - Wunderlich Securities

Okay, so that goes back to the last year’s SEC ruling and …..

John Ritchie

North American market is in very good shape.

Matt Robison - Wunderlich Securities

So just a couple of housekeeping items; I heard you, you don’t have the cash flow for operations number; do you have CapEx and depreciation?

John Ritchie

Our CapEx and depreciation numbers are not material, our largest single CapEx investment was our move to our new building and that’s the largest investment the company has made in, I think since its inception and our cost here was $1.3 million in build out and 300, 400 grand in furniture, so we are just not a capital intensive business, it’s just not material to us.

Operator

Thank you. That concludes the Q&A segment of the call. I would like turn the conference back to Mr. Robert Pera for closing remarks.

Robert J. Pera

Yes thanks. So I guess what I want to conclude the call with is that I want to reiterate that we have made solid progress in disarming the counterfeiters and look forward to AirMax sales numbers returning to reflect the platform’s strong growth in the market.

But we are most excited about the new technology platforms. So if you look at our new technology platforms, we have UniFi which is our scalable wireless LAN platform which is the most mature after AirMax and it’s enjoying an incredible adoption rate.

Then we have airFiber which was a huge R&D effort and our goal there is to redefine the microwave platform market. And we are just starting early shipments and early customers that have had rave reviews. Recently, we launched M5 which is our machine-to-machine networking platform, which also has a lot of excitement around it and we are starting initial shipments this month on M5 products. And next month we’ll have exciting new platform announcement and one more before the year-end.

And so thanks for joining the call and I guess we’ll see you next earnings call.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This does conclude the program and you may now disconnect at this time.

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