Ubiquiti Networks Reports Second Quarter Fiscal 2019 Financial Results

~Record Revenues of $307.3 million~

NEW YORK–(BUSINESS WIRE)–lt;a href=”https://twitter.com/search?q=%24UBNT&src=ctag” target=”_blank”gt;$UBNTlt;/agt; lt;a href=”https://twitter.com/hashtag/dividends?src=hash” target=”_blank”gt;#dividendslt;/agt;–Ubiquiti Networks, Inc. (NASDAQ: UBNT) (“Ubiquiti” or the “Company”)
today announced results for the second quarter fiscal 2019, ended
December 31, 2018.

Second Quarter Fiscal 2019 Financial Highlights

• Revenues of $307.3 million, increasing 22.5% year-over-year
• GAAP diluted EPS of $1.09
• Non-GAAP diluted EPS of $1.33, increasing 75.0% year-over-year

Additional Highlights

• The Company repurchased and retired 356,576 shares of common stock for
  $34.7 million at an average price of $97.31 per share between November
  8, 2018 and February 7, 2019.
• The Company has $178.2 million of availability remaining under the
  $200 million share repurchase program announced on November 9, 2018.
• The Company’s Board of Directors declared a $0.25 per share cash
  dividend payable on February 25, 2019 to shareholders of record at the
  close of business on February 18, 2019.

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

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

Ubiquiti Networks, Inc.
Revenues by Geographical Area
(In
thousands)
(Unaudited)

Income Statement Items

Gross Margins

During the second quarter fiscal 2019, GAAP gross profit was $140.2
million. GAAP gross margin of 45.6% increased versus the comparable
prior year period GAAP gross margin of 38.6% and decreased versus the
prior quarter GAAP gross margin of 46.5%. Second quarter fiscal 2018
GAAP gross margin included $18.6 million in provisions for obsolete
inventory, vendor deposits and loss on purchase commitments. On a
sequential basis, margins were negatively impacted by higher tariffs on
products sold in the U.S.

We incur tariff costs on certain products imported into the U.S. from
China and we expect our costs to increase if additional tariffs are
imposed on such imports. We therefore anticipate near-term gross margins
to range between 42% and 45%. However, we anticipate mitigating the
effect of the tariffs in the long-term and therefore our long-term gross
margins are expected to remain between 45% to 50%.

Research and Development

During the second quarter fiscal 2019, research and development (R&D)
expenses were $20.0 million. This reflects a decrease versus the R&D
expenses of $20.5 million in the comparable prior year period and an
increase sequentially versus the prior quarter R&D expenses of $18.2
million.

Increased costs in second quarter fiscal 2019 versus the prior quarter
were primarily driven by higher staffing levels. R&D expenses
represented 6.5% of revenues in the second fiscal quarter 2019, which is
in line with the Company’s target model range of 6% to 8%.

Sales, General and Administrative

The Company’s selling, general and administrative (“SG&A”) expenses for
the second quarter were $10.6 million versus the SG&A expenses of $10.4
million in the comparable prior year period and the prior quarter SG&A
expenses of $13.8 million. The decrease in SG&A costs versus the prior
quarter are primarily related to lower professional fees. SG&A expenses
represented 3.4% of revenues in the second quarter fiscal 2019, which is
in line with the Company’s target model range of 3% to 5%.

Litigation Settlement

On February 3, 2017, Synopsys, Inc. (“Synopsys”) filed a complaint
against the Company, one of our subsidiaries and an employee in the
United States District Court for the Northern District of California,
alleging claims under the Digital Millennium Copyright Act. On January
17, 2019, the Company and Synopsys entered into a settlement pursuant to
which the Company paid $18 million to Synopsys and agreed to a permanent
injunction to prevent any unlicensed use of Synopsys’s software. As a
result of the settlement, the litigation with Synopsys was dismissed.
The settlement does not contain any admission of liability, wrongdoing,
or responsibility by any of the parties.

Taxes

The GAAP effective tax rate was 12.0% for the second quarter fiscal
2019. For long-term planning purposes, we assume a target effective tax
rate of 11% to 14%.

Net Income

During the second quarter fiscal 2019, GAAP net income was $77.8 million
and GAAP income per diluted share was $1.09. Non-GAAP net income during
the quarter was $95.1 million and non-GAAP income per diluted share was
$1.33. Comparing the second quarter fiscal 2019 with second quarter
fiscal 2018, the 59.6% increase in non-GAAP net income and 75% increase
in non-GAAP diluted EPS was primarily driven by a 22.5% increase in
revenues, lower inventory obsolescence charges, as well as a 7.4 million
reduction in non-GAAP diluted share count.

Balance Sheet Items

Cash and Investments

Total cash and cash equivalents were $293.3 million as of December 31,
2018 compared with $666.7 million as of June 30, 2018. In addition, as
of December 31, 2018, we held $145.8 million in available-for-sale
securities. During the second quarter fiscal 2019, the Company
repurchased 2,287,975 shares of common stock for $206.3 million at an
average price of $90.17 per share.

DSOs

This quarter the Company experienced a decline in days sales outstanding
in accounts receivable (“DSO”) to 52 days, compared with 54 days in the
first quarter fiscal 2019. The Company expects DSO’s to fluctuate as the
mix of the Company’s distributors evolves.

Inventory

Finished goods inventory at the end of the quarter increased by $155.0
million to $251.7 million on a year-over-year basis and increased $116.8
million from the prior quarter. Finished goods inventory increased
versus the prior year and prior quarter primarily due to the timing of
production delivery and expected growth in demand. We will continue to
manage inventory levels to reduce lead times, secure supply and meet
demand.

Cash Flow Statement Items

The Company’s net cash flow from operations for the six months ended
December 31, 2018 was $144.6 million, compared with a net cash flow from
operations of $165.7 million for the same period last year. The $21.1
million decrease in operating cash flow for the six months ended
December 31, 2018 as compared with the same period last year was
primarily driven by the net impact of increased inventory and the
corresponding payables. For the six months ended December 31, 2018, the
Company used $361.8 million of cash related to financing activities,
which was driven by $313.1 million in stock repurchases, $36.1 million
in cash dividend payments and $12.5 million in debt repayments.

Outlook

Based on recent business trends, the Company expects to achieve results
within the guidance range previously provided for the full fiscal year
ending June 30, 2019.

About Ubiquiti Networks

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

Ubiquiti and the U logo are trademarks or registered trademarks of
Ubiquiti and/or its affiliates in the United States and other countries.
For more information, please visit www.ubnt.com.

Safe Harbor for Forward Looking Statements

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

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

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

Ubiquiti Networks, Inc.
Condensed Consolidated Statements
of Operations and Comprehensive Income (Loss)
(In thousands,
except per share data)
(Unaudited)

Ubiquiti Networks, Inc.
Reconciliation of GAAP Net Income
to Non-GAAP Net Income
(In thousands, except per share data)
(Unaudited)

Use of Non-GAAP Financial Information

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

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

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

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

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

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

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

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

Usefulness of Non-GAAP Financial Information to Investors

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

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

Ubiquiti Networks, Inc.
Condensed Consolidated Balance
Sheets
(In thousands, except share amounts)
(Unaudited)

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

Ubiquiti Networks, Inc.
Condensed Consolidated Cash Flows
(In
thousands)
(Unaudited)

Contacts

Investor Relations
Laura Kiernan
SVP,
Investor Relations
Ubiquiti Networks, Inc.
laura.kiernan@ubnt.com
Ph.
1-914-598-7733

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