Ubiquiti (UI) 10-Q2024 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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  ☒    No  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

UBIQUITI INC.

(In thousands, except share and per share data)

See accompanying notes to consolidated financial statements (unaudited).

UBIQUITI INC.

(In thousands, except per share amounts)

(Unaudited)

UBIQUITI INC.

(In thousands, except share data)

(Unaudited)

See accompanying notes to consolidated financial statements (unaudited).

See accompanying notes to consolidated financial statements (unaudited).

UBIQUITI INC.

(Unaudited)

NOTE 1—BUSINESS AND BASIS OF PRESENTATION

The Company operates on a fiscal year ending June 30. In these notes, Ubiquiti refers to the fiscal years ending June 30, 2024 and 2023, as fiscal 2024 and fiscal 2023, respectively.

These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended June 30, 2023, included in its Annual Report on Form 10-K, as filed with the SEC on August 25, 2023 (the “Annual Report”). The results of operations for the three and nine months ended March 31, 2024 are not necessarily indicative of the results to be expected for any future periods.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s significant accounting policies are disclosed in its audited consolidated financial statements for the fiscal year ended June 30, 2023, included in the Annual Report on Form 10-K. There have been no changes to the Company’s significant accounting policies as discussed in the Annual Report.

Use of Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and the accompanying notes. Those estimates and assumptions include, but are not limited to, revenue recognition and deferred revenue; sales return reserves; inventory valuation and vendor deposits; accounting for income taxes, including the valuation allowance on deferred tax assets and reserves for uncertain tax positions. We evaluate our estimates and assumptions based on historical experience and other assumptions that are believed to be reasonable under the circumstances. Actual results could differ materially from those estimates.

Recent Accounting Pronouncements Not Yet Effective

Segment Reporting

Income Taxes

funds received), with further disaggregation required for individual jurisdictions in which the income taxes paid exceed five percent of the Company's total income taxes paid. The provision for income taxes in the Company's statement of operations will also be required to be disaggregated by federal, state and foreign. The amendments in ASU 2023-09 will become effective for annual disclosures in the Company's fiscal year beginning July 1, 2025, with early adoption permitted. The FASB indicated ASU 2023-09 should be applied on a prospective basis, but retrospective application is permitted. We expect this ASU to only impact our disclosures with no impact to our results of operations, cash flows, and financial condition.

NOTE 3—REVENUES

Revenue is primarily generated from the sale of hardware as well as the related implied post contract services ("PCS").

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Revenue is recognized when obligations under the terms of a contract with our customers are satisfied; generally, this occurs with the transfer of control of our products and PCS to our customers. Transfer of control to the customer for products generally occurs at the point in time when products have been shipped to our customer as this represents the point in time when the customer has a present obligation to pay and physical possession including title and risk of loss have been transferred to the customer. Revenue for PCS is recognized ratably over time over the estimated period for which implied PCS services will be delivered.

Disaggregation of Revenue

See Note 13, "Segment Information, Revenues by Geography and Significant Customers" for disaggregation of revenue by product category and geography.

Contract Balances

The timing of revenue recognition, billing and cash collections results in billed accounts receivable, deferred revenue primarily attributable to PCS and customer deposits on the consolidated balance sheets. Accounts receivable are recognized in the period our right to the consideration is unconditional. Our contract liabilities consist of advance payments (Customer deposits) as well as billing in excess of revenue recognized primarily related to deferred revenue. We classify customer deposits as a current liability, and deferred revenue as a current or non-current liability based on the timing of when we expect to fulfill these remaining performance obligations. The current portion of deferred revenue is included in other current liabilities and the non-current portion is included in other long-term liabilities in our consolidated balance sheets.

As of March 31, 2024 and June 30, 2023, the Company’s customer deposits were $1.7 million and $1.2 million, respectively.

As of March 31, 2024, the Company’s deferred revenue, included in other current liabilities and other long-term liabilities, was $18.8 million and $11.1 million, respectively.

As of June 30, 2023, the Company’s deferred revenue, included in other current liabilities and other long-term liabilities, was $17.9 million and $7.8 million, respectively.

We expect the majority of our deferred revenue to convert to revenue in two years. For the three and nine months ended March 31, 2024 we recognized revenues amounting to $3.7 million and $14.7 million respectively from the deferred revenue balance as of June 30, 2023. For the three and nine months ended March 31, 2023, we recognized revenues amounting to $4.0 million and $17.6 million respectively from the deferred revenue balance as of June 30, 2022.

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):

The Company excludes potentially dilutive securities from its diluted net income per share calculation when their effect would be anti-dilutive to net income per share amounts.

NOTE 5—BALANCE SHEET COMPONENTS

Inventories

Inventories consisted of the following (in thousands):

Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):

Other Long-term Assets

Other long-term assets consisted of the following (in thousands):

Other Current Liabilities

Other current liabilities consisted of the following (in thousands):

Other Long-Term Liabilities

Other long-term liabilities consisted of the following (in thousands):

NOTE 6—ACCRUED WARRANTY

Warranty obligations, included in other current liabilities, were as follows (in thousands):

NOTE 7—DEBT

On March 30, 2021, the Company, as borrower and certain domestic subsidiaries, as guarantors (the "Domestic Guarantors"), entered into an amended and restated credit agreement (the “Third Amended and Restated Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), the other financial institutions named as lenders therein, and Wells Fargo as administrative agent and collateral agent for the lenders, that extended the $700 million senior secured revolving credit facility (the “Revolving Facility,” together with the Term Loan Facilities, as defined below, the "Facilities") and provided a $500 million senior secured term loan facility (the “Initial Term Loan Facility”), and extended the maturity of the Facilities to March 30, 2026. In addition, the Facilities include an option to request increases in the amounts of such credit facilities by up to an additional $500 million in the aggregate. The loans under the Initial Term Loan Facility are payable in quarterly installments of $6.25 million per quarter, commencing with the quarter ending June 30, 2021.

On April 3, 2023, the Company as borrower and the Domestic Guarantors entered into a first amendment (the “First Amendment”) to the Third Amended and Restated Credit Agreement (as amended, the “Amended Credit Agreement”) with the financial institutions named as lenders therein and Wells Fargo. The First Amendment added a new term loan facility in an aggregate principal amount of $250 million (the “First Amendment Term Loan Facility,” together with the Initial Term Loan Facility, the "Term Loan Facilities") which is payable in quarterly installments equal to $3.125 million, commencing with the quarter ended June 30, 2023, and has a maturity date of March 30, 2026. The obligations of the Company and certain domestic subsidiaries under the Amended Credit Agreement are required to be guaranteed by the Domestic Guarantors and are collateralized by substantially all assets (excluding intellectual property) of the Company and the Domestic Guarantors.

The Company's unamortized balance of debt issuance costs are $2.0 million as of March 31, 2024, which are amortized as interest expense over the life of the Facilities.

The Company's debt consisted of the following (in thousands):

The Revolving Facility includes a sub-limit of $25.0 million for letters of credit and a sub-limit of $25.0 million for swingline loans. The Facilities are available for working capital and general corporate purposes that comply with the terms of the Amended Credit Agreement, including to finance the repurchase of the Company’s common stock or to make dividends to the holders of the Company's common stock. Under the Amended Credit Agreement, revolving loans and swingline loans may be borrowed, repaid and reborrowed until March 30, 2026, at which time all amounts borrowed must be repaid. Loans under the Facilities may be prepaid at any time without penalty.

The revolving loans and term loans under the Initial Term Loan Facility bear interest, at the Company’s option, at either (i) a floating rate per annum equal to the Base Rate (as defined below) plus a margin of between 0.50% and 1.25%, depending on the Company’s consolidated total leverage ratio as of the most recently ended fiscal quarter or (ii) a floating per annum rate equal to the Adjusted

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 consolidated total 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 consolidated total 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 a maximum consolidated total leverage ratio of 3.50 to 1.00 and a minimum consolidated interest coverage ratio of 3.50 to 1.00. 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 Facilities

As of March 31, 2024, $425.0 million was outstanding on the Initial Term Loan Facility, $237.5 million was outstanding on the First Amendment Term Loan Facility, and $215.0 million was outstanding on the Revolving Facility, leaving $485.0 million available on the Revolving Facility.

Term Loan Facilities

During the nine months ended March 31, 2024, the Company made aggregate payments of $67.7 million under the Term Loan Facilities, of which $28.1 million was repayment of principal and $39.6 million was payment of interest.

Revolving Facility

Under the Amended Credit Agreement, during the nine months ended March 31, 2024, the Company made aggregate payments of $195.0 million under the Revolving Facility, of which $175 million was repayment of principal and $20.0 million was payment of interest.

The following table summarizes the Company’s estimated debt and interest payment obligations as of March 31, 2024, for the remainder of fiscal 2024 and future fiscal years (in thousands):

NOTE 8—LEASES

The Company has entered into agreements under which we lease various real estate spaces in North America, Europe and Asia Pacific, under non-cancellable leases that expire on various dates through fiscal 2036. Some of our leases include options to extend the term of such leases for a period from 12 months to 60 months, and/or have options to early terminate the lease. As of March 31, 2024, we included such options in determining the lease terms for certain of our leases because we were reasonably certain that we would exercise the extension options. Most of our leases require us to pay certain operating expenses in addition to base rent, such as taxes, insurance and maintenance costs.

The operating lease costs in the table above include costs for long-term and short-term leases. Total short-term costs for the three and nine months ended March 31, 2024 and 2023, were immaterial. Variable lease costs primarily include maintenance, utilities and operating expenses that are incremental to the fixed base rent payments and are excluded from the calculation of operating lease liabilities and ROU assets. For the three months ended March 31, 2024 and 2023, cash paid for amounts associated with the Company's operating lease liabilities were approximately $4.3 million and $3.8 million, respectively. For the nine months ended March 31, 2024 and 2023, cash paid for amounts associated with the Company's operating lease liabilities were approximately $12.9 million and $11.4 million, respectively. Cash paid for amounts associated with the Company’s operating lease liabilities were classified as operating activities in the consolidated statement of cash flows.

The following table shows the Company’s undiscounted future fixed payment obligations under the Company’s recognized operating leases and a reconciliation to the operating lease liabilities as of March 31, 2024:

NOTE 9—COMMITMENTS AND CONTINGENCIES

Purchase Obligations

We subcontract with third parties to manufacture our products and supply key components. As of March 31, 2024, we had $949.5 million of purchase commitments with these third parties. 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. There have been no significant liabilities for current or anticipated cancellations recorded as of March 31, 2024. Our consolidated financial position and results of operations could be negatively impacted if we were required to compensate these third parties. In addition, we may be subject to additional purchase obligations to our contract manufacturers for supply agreements and components ordered by them based on manufacturing forecasts we provide them each month.

Transition Tax

We have an obligation of $50.6 million as of March 31, 2024, related to the mandatory transition tax on accumulated foreign earnings from the 2017 Tax Cuts and Jobs Act. We expect to make payments of $22.5 million and $28.1 million in the first quarter of fiscal 2025 and 2026, respectively, in relation to this obligation. This obligation is included within Income tax payable and Long-term taxes payable on our consolidated balance sheets.

Other Obligations

As of March 31, 2024, the Company has other obligations of $5.8 million which consisted primarily of commitments related to research and development projects.

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.

Vivato/XR

November 24, 2021, the Company and the remaining defendants in the Original Action filed a motion for judgment on the pleadings regarding the '231 Patent. On January 4, 2022, the Court granted defendants’ motion and dismissed Vivato’s claims based on the '231 Patent. The Federal Circuit Court of Appeals affirmed the invalidity of the '231 Patent on May 18, 2023. All claims asserted against the Company in the Original Action have been dismissed.

On July 28, 2022, Vivato voluntarily dismissed, with prejudice, its remaining claims related to the '728 patent, as well as claims 22-31 of the '376 Patent. On October 20, 2022, an IPR was instituted with respect to the asserted claims of the '376 Patent. On October 26, 2022, the court stayed the case pending completion of the IPR. On October 3, 2023, the IPR with respect to the '376 Patent was terminated after the petitioners entered into a settlement agreement with Vivato. On November 10, 2023, the Company filed a new IPR petition with respect to the '376 Patent and a motion to reopen the prior IPR proceeding, which remains pending. On December 4, 2023, the court lifted the stay. Trial is currently scheduled for June 25, 2024.

The Company plans to vigorously defend itself against these claims; however, there can be no assurance that the Company will prevail in the lawsuit. The Company cannot currently estimate the possible loss or range of losses, if any, that it may experience in connection with this litigation.

Network-1 Technologies, Inc.

Intellectual Ventures I LLC v. Ubiquiti Inc.

NOTE 10—COMMON STOCK AND TREASURY STOCK

Common Stock Repurchases

On May 3, 2022, the Board of Directors of the Company approved a $200 million stock repurchase program (the “2022 May Program”). Under the 2022 May Program, the Company was authorized to repurchase up to $200 million of common stock. The 2022 May Program expired on September 30, 2023, and the Company did not make any repurchases under the 2022 May Program.

NOTE 11—SHARE-BASED COMPENSATION

Share-Based Compensation Plans

The Company’s 2020 and 2010 Equity Incentive Plans are described in the Company’s Annual Report.

As of March 31, 2024, the Company had 4,880,028 authorized shares available for future issuance under all of its stock incentive plans.

Share-Based Compensation

The following table shows total share-based compensation expense included in the consolidated statements of operations and comprehensive income for the three and nine months ended March 31, 2024 and 2023 (in thousands):

Stock Options

There were no options exercised under the Company’s stock incentive plans during the three months ended March 31, 2024 and 2023.

During the nine months ended March 31, 2024 and 2023, the aggregate intrinsic value of options exercised under the Company’s stock incentive plans was $0.0 million and $0.6 million, respectively, as determined as of the date of option exercise.

As of March 31, 2024, the Company had no unrecognized compensation costs related to stock options, and the Company did not grant any employee stock options during the three and nine months ended March 31, 2024, and 2023.

Restricted Stock Units (“RSUs”)

The following table summarizes the activity of the RSUs made by the Company:

The intrinsic value of RSUs vested in the three months ended March 31, 2024 and 2023 was $1.9 million and $3.1 million, respectively.

The intrinsic value of RSUs vested in the nine months ended March 31, 2024 and 2023 was $3.3 million and $5.8 million, respectively.

The total intrinsic value of all outstanding RSUs was $11.6 million as of March 31, 2024.

As of March 31, 2024, there were unrecognized compensation costs related to RSUs of $14.3 million which the Company expects to recognize over a weighted average period of 3.5 years.

NOTE 12—INCOME TAXES

The Company recorded tax provisions of $16.1 million and $56.1 million for the three and nine months ended March 31, 2024 as compared to $18.5 million and $58.3 million for the three and nine months ended March 31, 2023. Our effective tax rate increased to 17.4% for the three months ended March 31, 2024 as compared to 15.8% for the three months ended March 31, 2023. Our effective tax rate increased from 16.1% for the nine months ended March 31, 2023 to 18.6% for the nine months ended March 31, 2024.

The change in effective tax rates for the three and nine months ended March 31, 2024, as compared to the same periods in the prior year, was primarily driven by a combination of changes in the mix of the income earned in various tax jurisdictions, a one-time release

of a reserve for unrecognized tax benefit due to statute of limitation during the nine months ended March 31, 2023, as well as a one-time benefit for state income taxes recognized during the three and nine months ended March 31, 2024.

The Company’s estimated fiscal year 2024 effective tax rate, before discrete items, differs from the U.S. statutory rate primarily due to profits earned in jurisdictions where the tax rate is lower than the U.S. tax rate, partially offset by additional U.S. tax related to our non-U.S. operations under the Global Intangible Low-Taxes Income ("GILTI") rules.

As of March 31, 2024, the Company had approximately $35.9 million of unrecognized tax benefits, substantially all of which would, if recognized, affect its tax expense. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets. As of March 31, 2024, the Company had $5.0 million accrued interest related to uncertain tax matters.

In July 2018, the Company received a draft Notice of Proposed Adjustment (“Draft NOPA”) from the IRS proposing an adjustment to income for the fiscal 2015 and fiscal 2016 tax years based on its interpretation of certain obligations of the non-US entities under the credit facility. This Draft NOPA was superseded by an Acknowledgement of Facts (“AOF”) issued to the Company by the IRS on January 17, 2020. The IRS in its AOF continued to propose an adjustment to the Company’s income for its fiscal 2015 and fiscal 2016 tax years based on the IRS’ interpretation of certain obligations of the Company’s foreign subsidiaries under the Company’s credit facilities. On May 12, 2020, the IRS issued a final Notice of Proposed Adjustment to the Company with respect to the 2015/2016 tax years. The Company formally protested the adjustment and the case was moved from the Examination Division to the IRS Appeals Division where a formal review of the facts and the applicable law took place on May 9, 2022. The Appeals Officer issued a Notice of Deficiency on August 3, 2022, which upheld the position of the Examination Division. The Company filed a petition with the United States Tax Court seeking to have the Notice of Deficiency reversed. On November 8, 2023, the Company filed a Motion for Summary Judgment. The IRS responded to our Motion on December 26, 2023 and filed a Cross-Motion for Summary Judgment. On January 22, 2024, the judge assigned to this case rejected both Motions for Summary Judgment. As such, the Company is awaiting a trial date to be set which it currently expects to receive by the end of December 2024. The Company strongly believes the position of the IRS with regard to this matter is without merit. However, there can be no assurance that this matter will be resolved in the Company’s favor. Regardless of whether the matter is resolved in the Company’s favor, the final resolution of this matter could be expensive and time-consuming to defend and/or settle. We estimate the incremental tax liability associated with the income adjustment proposed in the AOF would be approximately $50.0 million, excluding potential interest and penalties, after adjusting for the impact of an adjustment on the amount of transition tax payable in future years by the Company. As the Company believes that the tax originally paid in fiscal 2015 and fiscal 2016 is correct, it has not provided a reserve for this tax uncertainty. However, an adverse outcome may have a material and adverse effect on the Company’s results of operations and financial condition.

Between fiscal years 2018 and 2023, the Company made payments totaling a combined amount of $60.4 million as deposits with the Hong Kong IRD in connection with extending the statute of limitation for income tax examinations currently under audit for 2010-2017 statutory tax years. On March 27, 2024, the Company received notification that the Hong Kong IRD is seeking an additional $0.8 million deposit covering the 2018 statutory tax year. The Company filed a formal protest in response to this notice and the Assessor's office agreed to a reduced deposit of $0.1 million covering the 2018 statutory tax year. The refundable deposits are included within other long-term assets on our Consolidated Balance Sheets. The IRD is examining the Company’s claims that its revenue is generated through activities performed wholly outside of the Hong Kong tax jurisdiction and are therefore exempt from Hong Kong tax. The Company is fully cooperating with the examination including submitting documentation in support of its position. The Company continues to believe that its tax positions filed with IRD are more likely than not to be sustained based on their technical merits and therefore no reserve has been provided for this tax uncertainty and we expect the $60.2 million (net of foreign currency impact) of deposits made with IRD to be refunded upon completion of the audit. However, there can be no assurance that this matter will be resolved in the Company’s favor and therefore it's possible that an adverse outcome of the matter could have a material effect on the Company’s results of operations and financial condition.

NOTE 13—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. The Company presents its revenues by product type in two primary categories: Service Provider Technology and Enterprise Technology.

Revenues by product type are as follows (in thousands, except percentages):

Revenues by geography based on customer’s ship-to destinations were as follows (in thousands, except percentages):

For the periods presented, there were no customers with an accounts receivable balance of 10% or greater of total accounts receivable or customers with net revenues of 10% or greater of total revenues.

NOTE 14—SUBSEQUENT EVENTS

Dividends

On May 7, 2024, the Company's Board of Directors approved a quarterly cash dividend of $0.60 per share payable on May 28, 2024 to shareholders of record at the close of business on May 20, 2024. Any future dividends will be subject to the approval of the Company’s Board of Directors.

The following discussion of our financial condition and results of operations should be read together with the financial statements and related notes that are included elsewhere in this quarterly report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this quarterly report, particularly in Note 9, “Commitments and Contingencies” to our consolidated financial statements and Part II “Other Information”, Item 1-Legal Proceedings and 1A-Risk Factors, in this report.

Overview

We develop technology platforms for high-capacity distributed Internet access, unified information technology, and consumer electronics for professional, home and personal use. We categorize our solutions into three main categories: high performance networking technology for enterprises, service providers and consumers. We target the enterprise and service provider markets through our highly engaged community of service providers, distributors, value added resellers, webstores, systems integrators and corporate IT professionals, which we refer to as the Ubiquiti Community. We target consumers through digital marketing, including through our webstores, retail chains and, to a lesser extent, the Ubiquiti Community.

In addition to Mr. Pera, our founder, Chairman of the Board and Chief Executive Officer, who is central to our business, the majority of our human capital resources consist of entrepreneurial and de-centralized research and development (“R&D”) personnel. We do not employ a traditional direct sales force, but instead drive brand awareness through online reviews and publications, our website, our distributors and our user community where customers can interface directly with our R&D, marketing, and support teams. Our technology platforms were designed from the ground up with a focus on delivering highly-advanced and easily-deployable solutions that appeal to a global customer base.

We offer a broad and expanding portfolio of networking products and solutions for operator-owners of wireless internet services (“WISPs”), enterprises and smart homes. Our operator-owner service-provider-product platforms provide carrier-class network infrastructure for fixed wireless broadband, wireless backhaul systems and routing and the related software for WISPs to easily control, track and bill their customers. Our enterprise product platforms provide wireless LAN (“WLAN”) infrastructure, video

surveillance products, switching and routing solutions, security gateways, door access systems, and other complimentary WLAN products along with a unique software platform, which enables users to control their network from one simple, easy to use software interface. Our consumer products are targeted to the smart home and highly connected consumers. We believe that our products are differentiated due to our proprietary software, firmware expertise, and hardware design capabilities.

We distribute our products through a worldwide network of over 100 distributors and online retailers and direct to customers through our webstores.

Key Components of Our Results of Operations and Financial Condition

Revenues

We operate our business as one reportable and operating segment. Further information regarding the segment can be found in Note 13, "Segment Information, Revenues by Geography and Significant Customers" to our Consolidated Financial Statements (unaudited). Our revenues are derived principally from the sale of networking hardware. Because we have historically included implied post-contract customer support (“PCS”) free of charge in many of our arrangements, we attribute a portion of our systems revenues to this implied PCS.

We classify our revenues into two primary product categories: Enterprise Technology and Service Provider Technology.

We sell our products and solutions globally to enterprises and service providers primarily through our extensive network of distributors, and, to a lesser extent, through direct sales through our webstores. Sales to distributors accounted for 63% of our revenues during the nine months ended March 31, 2024. Direct sales accounted for 37% of our revenue during the nine months ended March 31, 2024.

Cost of Revenues

We currently operate warehouses located in the U.S., Europe and Asia Pacific. In addition, we outsource other logistics warehousing and order fulfillment functions located in Vietnam and to a lesser extent in other countries. 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, channel inventory levels, tariffs, pricing due to competitive pressure, production costs and global demand for electronic components. Although we procure and sell our products mostly 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. In June 2018, the Office of the United States Trade Representative announced new proposed tariffs for certain products imported into the U.S. from China. The vast majority of our products that are imported into the U.S. from China are currently subject to tariffs that range between 7.5% and 25%. These tariffs have affected our operating results and margins. For so long as such tariffs are in effect, we expect it will continue to affect our operating results and margins. As a result, our historical and current gross profit margins may not be indicative of our gross profit margins for future periods. Refer to “Part II—Item 1A. Risk Factors—Risks Related to Our International Operations—Our business may be negatively affected by political events and foreign policy responses” for additional information.

Operating Expenses

We classify our operating expenses as research and development and sales, general and administrative expenses. 

Provisions for Income Taxes

We use the asset and liability method to account for income taxes. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. In preparing the consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. We must assess potential exposures and, where necessary, provide a reserve to cover any expected loss. To the extent that we establish a reserve, the provision for income taxes would be increased. 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. We 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. We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations and comprehensive income. Refer to “Part II—Item 1A. Risk Factors—Risks Related to Regulatory, Legal and Tax Matters—Changes in applicable tax regulations could negatively affect our financial results” for additional information.

Critical Accounting Estimates

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. Our critical accounting policies are discussed in our Annual Report, filed with the SEC on August 25, 2023, and there have been no material changes other than that have been disclosed in Note 2, "Summary of Significant Accounting Policies" to our consolidated financial statements herein. As events continue to evolve our estimates may change materially in future periods. We believe that the accounting policies discussed in our Annual Report, are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Results of Operations

Comparison of Three and Nine Months Ended March 31, 2024 and 2023

The following table summarizes our consolidated results of operations for the periods indicated, expressed in dollars and as a percentage of total revenues (in thousands, except percentages):

Revenues

Total revenues increased $35.2 million, or 8%, from $457.8 million in the three months ended March 31, 2023 to $493.0 million in the three months ended March 31, 2024.

Total revenues decreased $28.4 million, or 2%, from $1,449.4 million in the nine months ended March 31, 2023 to $1,421.0 million in the nine months ended March 31, 2024.

Revenues by Product Type

Enterprise Technology revenue increased $40.8 million, or 11%, from $373.6 million in the three months ended March 31, 2023 to

$414.3 million in the three months ended March 31, 2024. Enterprise Technology revenue decreased $31.3 million, or 3%, from $1,217.3 million in the nine months ended March 31, 2023 to $1,185.9 million in the nine months ended March 31, 2024.

The increase in Enterprise Technology revenue during the three months ended March 31, 2024, as compared to the same period in the prior year, was primarily due to an increase in revenue from our Enterprise Technology platform across all regions. The decrease in Enterprise Technology revenue during the nine months ended March 31, 2024 as compared to the same period in the prior year, was primarily due to decline in revenue in the EMEA and Asia Pacific regions.

Service Provider Technology revenue decreased $5.5 million, or 7%, from $84.2 million in the three months ended March 31, 2023 to $78.7 million in the three months ended March 31, 2024. Service Provider Technology revenue increased $2.9 million, or 1%, from $232.1 million in the nine months ended March 31, 2023 to $235.1 million in the nine months ended March 31, 2024.

The decrease in Service Provider Technology in the three months ended March 31, 2024 as compared to the same period in the prior year was primarily due to decline in revenues in all regions except North America. The increase in Service Provider Technology revenue during the nine months ended March 31, 2024 as compared to the same period in the prior year, was primarily due to increased revenue in the EMEA and North America regions.

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 either sell to resellers or directly to end customers, who may be located in different countries than the initial ship-to destination. The following are our revenues by geography for the three and nine months ended March 31, 2024 and 2023 (in thousands, except percentages):

North America

Revenues in North America increased $11.8 million, or 5%, from $230.7 million in the three months ended March 31, 2023 to $242.5 million in the three months ended March 31, 2024 and increased $9.2 million, or 1%, from $683.9 million in the nine months ended March 31, 2023 to $693.2 million in the nine months ended March 31, 2024.

The increase in North America revenues during the three and nine months ended March 31, 2024 as compared to the same periods in the prior year, was due to increased revenue from both our Enterprise Technology products and our Service Provider Technology products.

Europe, the Middle East, and Africa (EMEA)

Revenues in EMEA increased $27.4 million, or 16%, from $173.3 million in the three months ended March 31, 2023 to $200.7 million in the three months ended March 31, 2024 and decreased $22.5 million, or 4%, from $568.5 million in the nine months ended March 31, 2023 to $546.0 million in the nine months ended March 31, 2024.

The increase in EMEA revenues during the three months ended March 31, 2024 as compared to the same period in the prior year, was primarily due to increased revenue from our Enterprise Technology products, offset in part by decreased revenue from our Service Provider Technology products. The decrease in EMEA revenues during the nine months ended March 31, 2024 as compared to the same period in the prior year, was primarily due to decreased revenue from our Enterprise Technology products offset in part by an increase in revenue from our Service Provider Technology products.

Asia Pacific

Revenues in the Asia Pacific region decreased $0.4 million, or 2%, from $26.9 million in the three months ended March 31, 2023 to $26.5 million in the three months ended March 31, 2024 and decreased $20.3 million, or 18%, from $116.2 million in the nine months ended March 31, 2023 to $95.8 million in the nine months ended March 31, 2024.

The decrease in Asia Pacific revenues during the three months ended March 31, 2024 as compared to the same period in the prior year was primarily due to decreased revenue from our Service Provider Technology products, offset in part by increased revenue from our Enterprise Technology products. The decrease in Asia Pacific revenues during the nine months ended March 31, 2024 as compared to the same period in the prior year was due to a decrease in revenue from both our Enterprise Technology products and our Service Provider Technology products.

South America

Revenues in South America decreased $3.5 million, or 13%, from $26.9 million in the three months ended March 31, 2023 to $23.4 million in the three months ended March 31, 2024 and increased $5.2 million, or 6%, from $80.9 million in the nine months ended March 31, 2023 to $86.1 million in the nine months ended March 31, 2024.

The decrease in South America revenues during the three months ended March 31, 2024 as compared to the same period in the prior year was due to decreased revenue from our Service Provider Technology products, partially offset by an increase in revenue from our Enterprise Technology products. The increase in South America revenues during the nine months ended March 31, 2024 as compared to the same period in the prior year was due to increased revenue from our Enterprise Technology products, partially offset by a decrease in revenue from our Service Provider Technology products.

Gross Profit

Gross profit margin decreased to 35.3% in the three months ended March 31, 2024, compared to 41.2% in the three months ended March 31, 2023 and decreased to 37.7% in the nine months ended March 31, 2024, compared to 38.5% in the nine months ended March 31, 2023. The decrease in gross profit margin for the three months ended March 31, 2024, as compared to the comparable prior year period was driven by incremental excess and obsolete inventory charges, unfavorable product mix and higher shipping costs, offset in part by lower tariffs. The decrease in gross profit margin for the nine months ended March 31, 2024, as compared to the comparable prior year period was driven by incremental excess and obsolete inventory charges and unfavorable product mix, partially offset by lower shipping costs and lower tariffs.

Operating Expenses

Research and Development

Research and development (“R&D”) expenses increased by $4.3 million, or 11%, from $38.2 million in the three months ended March 31, 2023 to $42.5 million in the three months ended March 31, 2024. As a percentage of revenues, R&D expenses increased from 8% for the three months ended March 31, 2023 to 9% for the three months ended March 31, 2024.

R&D expenses increased by $11.1 million, or 11%, from $104.6 million in the nine months ended March 31, 2023 to $115.7 million in the nine months ended March 31, 2024. As a percentage of revenues, R&D expenses increased from 7% for the nine months ended March 31, 2023 to 8% for the nine months ended March 31, 2024

The increase in R&D expenses during the three and nine months ended March 31, 2024 as compared to the comparable prior year periods was primarily driven by higher employee-related expenses and prototype-related expenses.

Sales, General and Administrative

Sales, general and administrative (“SG&A”) expenses increased $3.6 million, or 22%, from $16.7 million in the three months ended March 31, 2023 to $20.4 million in the three months ended March 31, 2024. As a percentage of revenues, SG&A expenses remained flat at 4% for the three months ended March 31, 2023 compared to the three months ended March 31, 2024.

SG&A expenses increased $7.2 million, or 14%, from $52.1 million in the nine months ended March 31, 2023 to $59.3 million in the nine months ended March 31, 2024. As a percentage of revenues, SG&A expenses increased from 3% for the nine months ended March 31, 2023 to 4% for the nine months ended March 31, 2024.

The increase in SG&A costs for the three months ended March 31, 2024 as compared to the comparable prior year period was primarily due to higher fees associated with webstore credit card processing, higher travel expenses, professional fees, higher

employee-related expenses, and marketing expenses. The increase in SG&A for the nine months ended March 31, 2024 as compared to the comparable prior year period was primarily due to higher marketing expenses, higher employee-related expenses, professional fees, and higher fees associated with webstore credit card processing.

Interest Expense and Other, net

Interest expense and other, net ("I&O") expenses increased $2.4 million, or 14% from $16.5 million in the three months ended March 31, 2023 to $18.9 million in the three months ended March 31, 2024. As a percentage of revenue, I&O increased from 3% for the three months ended March 31, 2023 to 4% for the three months ended March 31, 2024.

I&O expenses increased $20 million, or 52%, from $38.4 million in the nine months ended March 31, 2023 to $58.4 million in the nine months ended March 31, 2024. As a percentage of revenues, I&O expenses increased from 3% for the nine months ended March 31, 2023 to 4% for the nine months ended March 31, 2024.

The increase in I&O expenses during the three and nine months ended March 31, 2024 as compared to the comparable prior year periods was primarily due to higher interest expense driven by increased interest rates.

Provision for Income Taxes

Our provision for income taxes decreased $2.4 million, or 13%, from $18.5 million for the three months ended March 31, 2023 to $16.1 million for the three months ended March 31, 2024. Our effective tax rate increased to 17.4% for the three months ended March 31, 2024 as compared to 15.8% for the three months ended March 31, 2023.

Our provision for income taxes decreased $2.2 million, or 4%, from $58.3 million in the nine months ended March 31, 2023 to $56.1 million in the nine months ended March 31, 2024. Our effective tax rate increased from 16.1% for the nine months ended March 31, 2023 to 18.6% for the nine months ended March 31, 2024.

The change in effective tax rates for the three and nine months ended March 31, 2024, as compared to the same periods in the prior year, was primarily driven by a combination of changes in the mix of income earned in various tax jurisdictions as well as varying one time discrete benefits during the three and nine months ended March 31, 2024 and 2023.

Liquidity and Capital Resources

Sources and Uses of Cash

Our principal source of liquidity are cash and cash equivalents, cash generated by operations, the availability of additional funds under the Facilities and short-term investments. We had cash and cash equivalents of $102.5 million and $114.8 million as of March 31, 2024 and June 30, 2023, respectively.

Consolidated Cash Flow Data