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UBIQUITI NETWORKS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
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 Part II, Item 1, Legal Proceedings and 1A, Risk Factors,
in this report.
Overview
Ubiquiti Networks, Inc. ("Ubiquiti," "we," "us" or "our") is a product driven
company that leverages innovative proprietary technologies to deliver networking
solutions with compelling price-performance characteristics to both start-up and
established network operators and service providers. Our products bridge the
digital divide by fundamentally changing the economics of deploying high
performance networking solutions in underserved and underpenetrated wireless
broadband access markets globally. These markets include emerging markets and
other areas where individual users and small and medium sized enterprises do not
have access to the benefits of carrier class broadband networking. Our business
model has enabled us to break down traditional barriers, such as high product
and network deployment costs, which are driven by business model inefficiencies
and achieve rapid market adoption of our products and solutions in previously
underserved and underpenetrated markets. Our business model and proprietary
technologies provide us with a significant and sustainable competitive advantage
over incumbents, who we believe are unable to respond effectively due to their
higher cost business models.
We offer a broad and expanding portfolio of networking products and solutions
and we recently introduced products in the enterprise wireless local area
networks ("WLAN") and Internet Protocol ("IP") video surveillance markets. Our
solutions include systems, high performance radios, antennas and management
tools that have been designed to deliver carrier class performance for
networking and other applications in the unlicensed radio frequency ("RF")
spectrum. We began shipping embedded radios in fiscal 2006. In fiscal 2008 we
introduced a line of products based on 802.11 standard protocols and in early
fiscal 2010, we introduced a number of new products based on our proprietary
AirTechnologies, including our high-performance AirMax platform, which have been
rapidly adopted by network operators and high-performance proprietary AirMax
service providers. In the three and nine months ended March 31, 2012, our
systems revenue, which primarily consists of our AirMax platform, and to a
lesser extent 802.11 standard based systems, accounted for 90% and 86% of our
revenues, respectively. Although our AirMax platform has supplanted the demand
for some of our 802.11 standard products, we have not experienced a decline in
gross margin as we transition from 802.11 standard products to our AirMax
platform as they have similar margin profiles. In the future, we expect sales of
our AirMax platform products based on our other AirTechnologies to continue to
represent a growing portion of our revenues and the portion of our revenues
derived from our 802.11 standard products to decline as a percentage of total
revenues. Our embedded radios bear higher margins than our systems, but we
believe that systems present a larger market opportunity.
Building on our leadership in the underserved and underpenetrated segments of
the wireless broadband access market, we intend to expand our product offerings
in our existing market and enter adjacent markets by relying on the combination
of our efficient business model and proprietary technologies. For example, we
have introduced products and solutions for the enterprise WLAN, video
surveillance, and plan to introduce products into the supervisory control and
data acquisition ("SCADA") and licensed microwave wireless backhaul markets. As
we enter such new markets, we plan to leverage existing distributor
relationships and establish engaged communities similar to that of the large,
growing and engaged community of network operators, service providers and
distributors (collectively, the "Ubiquiti Community") to keep our operating
expenses in line with our current model and enable us to offer products in these
new markets with compelling price-performance characteristics.
Our revenues increased 79% to $91.7 million in the three months ended March 31,
2012 from $51.2 million in the three months ended March 31, 2011. Our revenues
increased 98% to $258.6 million in the nine months ended March 31, 2012 from
$130.3 million in the nine months ended March 31, 2011. We had net income of
$27.9 million and $13.0 million in the three months ended March 31, 2012 and
2011, respectively. We had net income of $74.1 million and $31.6 million in the
nine months ended March 31, 2012 and 2011, respectively.
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In July 2011, we repurchased an aggregate of 12,041,700 shares of our Series A
convertible preferred stock from entities affiliated with Summit Partners, L.P.,
one of our major stockholders, at a price of $8.97 per share for an aggregate
consideration of $108.0 million. Of the aggregate purchase price, $40.0 million
was paid in cash at the time of closing and the balance of the shares were paid
for through the issuance of convertible subordinated promissory notes in the
aggregate principal amount of $68.0 million. The $68.0 million was paid down
primarily using proceeds from the term loan we executed with East West Bank on
September 15, 2011 and funds raised upon the completion of our initial public
offering on October 19, 2011.
On October 19, 2011, we completed our initial public offering whereby we sold
2,395,328 shares and selling stockholders sold 4,642,902 shares of our common
stock. We received net proceeds of $30.5 million after deducting the
underwriting fees and commissions and estimated offering expenses payable by us.
Immediately prior to the closing of the initial public offering, all outstanding
shares of our Series A convertible preferred stock converted into 23,992,929
shares of our common stock.
Key Components of Our Results of Operations and Financial Condition
Revenues
Our revenues are derived principally from the sale of networking hardware and
management tools. In addition, while we do not sell maintenance and support
separately, because we have historically included it free of charge in many of
our arrangements, we attribute a portion of our systems revenues to this implied
post-contract customer support ("PCS").
We classify our revenues into three product categories: systems, embedded radios
and antennas/other.
• Systems consists of two product categories:
• Our proprietary AirMax platform products for network operators and service providers; and
• 802.11 standard products including base stations, radios, backhaul
equipment, customer premise equipment ("CPE") and the AirVision and
UniFi platforms.
• Embedded radios consist of more than 25 radio products primarily for
original equipment manufacturers ("OEMs"), including both point to point
and point to multipoint radios in the 2.0 to 6.0GHz spectrum, that are
offered with a variety of features.
• Antennas/other consist of antenna products in the 2.0 to 6.0GHz spectrum,
as well as miscellaneous products such as mounting brackets, cables and
power over Ethernet adapters. These products include both high performance
sector and directional antennas. This category also includes our
allocation of revenues to PCS.
We sell substantially all of our products through a limited number of
distributors and other channel partners, such as resellers and OEMs. Sales to
distributors accounted for 99% and 94% of our revenues in the three months ended
March 31, 2012 and 2011, respectively. Sales to distributors accounted for 98%
and 97% of our revenues in the nine months ended March 31, 2012 and 2011,
respectively. Other channel partners, such as resellers and OEMs, largely
accounted for the balance of our revenues. We sell our products without any
right of return outside of standard warranty rights.
Cost of Revenues
Our cost of revenues is comprised primarily of the costs of procuring finished
goods from our contract manufacturers and chipsets that we consign to certain of
our contract manufacturers. In addition, cost of revenues includes tooling,
labor and other costs associated with engineering, testing and quality
assurance, warranty costs, stock-based compensation and excess and obsolete
inventory.
We outsource our manufacturing and order fulfillment and utilize contract
manufacturers located primarily in China and, to a lesser extent, Taiwan. We
also evaluate and utilize other vendors for various portions of our supply chain
from time to time. Our manufacturing organization consists of employees and
consultants engaged in the management of our contract manufacturers, new product
introduction activities, logistical support and engineering.
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Gross Profit
Our gross profit has been, and may in the future be, influenced by several
factors including changes in product mix, target end markets for our products,
pricing due to competitive pressure, production costs, foreign exchange rates
and global demand for electronic components. Although we procure and sell our
products in U.S. dollars, our contract manufacturers incur many costs, including
labor costs, in other currencies. To the extent that the exchange rates move
unfavorably for our contract manufacturers, they may try to pass these
additional costs on to us, which could have a material impact on our future
average selling prices and unit costs.
Operating Expenses
We classify our operating expenses as research and development and sales,
general and administrative expenses.
• Research and development expenses consist primarily of salary and benefit
expenses, including stock-based compensation, for employees and costs for
contractors engaged in research, design and development activities, as
well as costs for prototypes, facilities and travel. Over time, we expect
our research and development costs to increase as we continue making
significant investments in developing new products and developing new
versions of our existing products.
• Sales, general and administrative expenses include salary and benefit
expenses, including stock-based compensation, for employees and costs for
contractors engaged in sales, marketing and general and administrative
activities, as well as the costs of professional services, trade shows,
marketing programs, promotional materials, bad debt expense, facilities,
general liability insurance and travel. As our product portfolio and
targeted markets expand, we may need to employ different sales models,
such as building a direct sales force. These sales models would likely
increase our costs. Further, we anticipate that our expenses related to
the registration and defense of patents and trademarks will increase as we
expand product offerings. Over time, we also expect our sales, general and
administrative expenses to increase in absolute dollars as we continue to
actively promote our products and introduce new products and services. In
addition, we expect expenses to increase as we make additional investments
in information technology systems and personnel to support our anticipated
revenue growth and to comply with our public company reporting
obligations.
Employees
Our headcount increased from 102 at June 30, 2011 to 131 at March 31, 2012,
primarily related to increased investment in our research and development
activities.
Deferred Revenues and Costs
In the event that collectability of a receivable from products we have shipped
is not probable, we classify those amounts as deferred revenues on our balance
sheet until such time as we receive payment of the accounts receivable. The cost
of products associated with these deferred revenues is classified as deferred
costs of revenues. At March 31, 2012 and June 30, 2011, $1.7 million and $1.2
million, respectively, of revenue was deferred for transactions where we lacked
evidence that collectability of the receivables recorded was reasonably
probable. The related deferred cost of revenues balances were $921,000 and
$881,000, as of March 31, 2012 and June 30, 2011, respectively.
Also included in our deferred revenues is a portion related to PCS obligations
that we estimate we will perform in the future. As of March 31, 2012 and
June 30, 2011, we had deferred revenues of $780,000 and $497,000 respectively,
related to these obligations.
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Prepayments
We have historical agreements with certain contract manufacturers whereby we
prepay for a portion of the product costs to assure the manufacture and timely
delivery of our products. As of March 31, 2012 and June 30, 2011, we had
prepayment balances of $1.2 million and $5.3 million, respectively.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). In many
cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP and does not require management's judgment in its application.
In other cases, management's judgment is required in selecting among available
alternative accounting standards that provide for different accounting treatment
for similar transactions. The preparation of consolidated financial statements
also requires us to make estimates and assumptions that affect the amounts we
report as assets, liabilities, revenues, costs and expenses and affect the
related disclosures. We base our estimates on historical experience and other
assumptions that we believe are reasonable under the circumstances. In many
instances, we could reasonably use different accounting estimates, and in some
instances changes in the accounting estimates are reasonably likely to occur
from period to period. Accordingly, our actual results could differ
significantly from the estimates made by our management. To the extent that
there are differences between our estimates and actual results, our future
financial statement presentation, financial condition, results of operations and
cash flows will be affected. We believe that the accounting policies discussed
below are critical to understanding our historical and future performance, as
these policies relate to the more significant areas involving management's
judgments and estimates.
Recognition of Revenues
Revenues consist primarily of revenues from the sale of hardware and management
tools, as well as the related implied PCS. We recognize revenues when persuasive
evidence of an arrangement exists, delivery has occurred, the sales price is
fixed or determinable and the collectability of the resulting receivable is
reasonably assured. In cases where we lack evidence that collectability of the
resulting receivable is reasonably assured, we defer recognition of revenue
until the receipt of cash.
For substantially all of our sales, evidence of the arrangement consists of an
order from a distributor or customer. We consider delivery to have occurred once
our products have been shipped and title and risk of loss have been transferred.
For most of our sales, these criteria are met at the time the products are
transferred to the distributor. Our arrangements with distributors do not
include provisions for cancellation, returns, inventory swaps or refunds that
would significantly impact recognized revenues.
We record amounts billed to distributors for shipping and handling costs as
revenues. We classify shipping and handling costs incurred by us as cost of
revenues.
Deposit payments received from distributors in advance of recognition of
revenues are included in current liabilities on our balance sheet and are
recognized as revenues when all the criteria for recognition of revenues are
met.
Our multi-element arrangements generally include two deliverables. The first
deliverable is the hardware and software essential to the functionality of the
hardware device delivered at the time of sale. The second deliverable is the
implied right to PCS included with the purchase of certain products. PCS is the
right to receive, on a when and if available basis, future unspecified software
upgrades and features relating to the product's essential software as well as
bug fixes, email and telephone support.
We use a hierarchy to determine the allocation of revenues to the deliverables.
The hierarchy is as follows: (i) vendor-specific objective evidence of fair
value ("VSOE"), (ii) third-party evidence of selling price ("TPE"), and
(iii) best estimate of the selling price ("BESP").
(i) VSOE generally exists only when a company sells the deliverable separately
and is the price actually charged by the company for that deliverable.
Generally we do not sell the deliverables separately and, as such, do not
have VSOE.
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(ii) TPE can be substantiated by determining the price that other parties sell
similar or substantially similar offerings. We do not believe that there
is accessible TPE evidence for similar deliverables.
(iii) BESP reflects our best estimates of what the selling prices of elements
would be if they were sold regularly on a stand-alone basis. We believe
that BESP is the most appropriate methodology for determining the
allocation of revenues among the multiple elements.
We have allocated revenues between these two deliverables using the relative
selling price method which is based on the BESP for all deliverables. Revenues
allocated to the delivered hardware and the related essential software are
recognized at the time of sale provided the other conditions for recognition of
revenues have been met. Revenues allocated to the PCS are deferred and
recognized on a straight-line basis over the estimated life of each of these
devices which currently is two years. All costs of revenues, including estimated
warranty costs, are recognized at the time of sale. Costs for research and
development and sales and marketing are expensed as incurred. If the estimated
life of the hardware product should change, the future rate of amortization of
the revenues allocated to PCS would also change.
Our process for determining BESP for deliverables involves multiple factors that
may vary depending upon the unique facts and circumstances related to each
deliverable. For PCS, we believe our network operators and service providers
would be reluctant to pay for such services separately. This view is primarily
based on the fact that unspecified upgrade rights do not obligate us to provide
upgrades at a particular time or at all, and do not specify to network operators
and service providers which upgrades or features will be delivered. We believe
that the relatively low prices of our products and our network operators, and
service providers' price sensitivity would add to their reluctance to pay for
PCS. Therefore, we have concluded that if we were to sell PCS on a stand-alone
basis, the selling price would be relatively low.
Key factors considered by us in developing the BESP for PCS include reviewing
the activities of specific employees engaged in support and software development
to determine the amount of time that is allocated to the development of the
undelivered elements, determining the cost of this development effort, and then
adding an appropriate level of gross profit to these costs.
Inventory
Our inventories are primarily raw materials, which we have consigned to our
contract manufacturers, and to a lesser extent, finished goods. Our inventories
are stated at the lower of cost or market value on a first-in, first-out basis.
We reduce the value of our inventory for estimated obsolescence or lack of
marketability by the difference between the cost of the affected inventory and
the estimated market value. Allowances, once established, are not reversed until
the related inventory has been subsequently sold or scrapped.
Product Warranties
We offer warranties on certain products and record a liability for the estimated
future costs associated with potential warranty claims. These warranty costs are
reflected in our consolidated statement of operations within cost of revenues.
Our warranties are in effect for 12 months from the distributors' purchase date
of the product. Our estimates of future warranty costs are largely based on
historical experience of product failure rates, material usage and service
delivery costs incurred in correcting product failures. Our operating results
could be materially and adversely affected if future warranty claims exceed
historical experiences and we are not able to recover costs from our contract
manufacturers.
Allowance for Doubtful Accounts
We record an allowance for doubtful accounts for estimated probable losses on
uncollectible accounts receivable. In estimating the allowance, management
considers, among other factors, the aging of the accounts receivable, our
historical write-offs, the credit worthiness of each distributor based on
payment history and general economic conditions.
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Income Taxes
We account for income taxes in accordance with accounting guidance which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in our financial
statements or tax returns. Deferred tax assets and liabilities are determined
based on the temporary difference between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. We establish valuation
allowances when necessary to reduce deferred tax assets to the amount we expect
to realize. The assessment of whether or not a valuation allowance is required
often requires significant judgment including current operating results, the
forecast of future taxable income and ongoing prudent and feasible tax planning
initiatives.
In addition, our calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. We may be subject
to income tax audits in each of the jurisdictions in which we operate and, as a
result, must also assess exposures to any potential issues arising from current
or future audits of current and prior years' tax returns. Accordingly, we must
assess such potential exposures and, where necessary, provide a reserve to cover
any expected loss. To the extent that we establish a reserve, our provision for
income taxes would be increased. We review our potential liabilities
periodically and, if necessary, record an additional charge in our provision for
taxes in the period in which we determine that tax liability is greater than our
original estimate. If we ultimately determine that payment of these amounts is
unnecessary, we reverse the liability and recognize a tax benefit during the
period in which we determine that the liability is no longer necessary.
Stock-based Compensation
We record stock-based awards at fair value as of the grant date and recognize
expense ratably on a straight-line basis over the requisite service period,
which is generally the vesting term of the awards. We estimate the fair value of
stock option awards on the grant date using the Black-Scholes option pricing
model. Restricted stock units are valued based on the fair value of our common
stock on the date of grant. We adopted the above guidance using the modified
prospective transition method. Under this transition method, the new fair value
recognition provisions are applied to option grants on and after July 1, 2005.
We expense all stock-based awards granted or modified after July 1, 2005 on a
straight-line basis.
For grants made since January 1, 2010 through our initial public offering in
October 2011, we obtained contemporaneous valuation analyses prepared by an
unrelated third party valuation firm in order to assist us in determining the
fair value of our common stock. The initial contemporaneous valuation report
valued our common stock as of April 30, 2010 and we received the most recent
contemporaneous valuation report as of July 31, 2011. Prior to January 1, 2010,
we obtained retrospective analyses prepared by the same valuation firm in order
to assist us in determining the fair value of our common stock as of June 30,
2009. After January 1, 2010, our board of directors has considered these reports
when determining the fair value of our common stock and related exercise prices
of option awards on the date such awards were granted. These third party
valuations were also used for purposes of determining the Black-Scholes fair
value of our stock option awards and related stock-based compensation expense.
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Results of Operations
Comparison of the Three and nine Months Ended March 31, 2012 and 2011
Three Months Ended March 31, Nine months ended March 31,
2012 2011 2012 2011
(In thousands, except percentages)
Revenues $ 91,665 100 % $ 51,151 100 % $ 258,649 100 % $ 130,320 100 %
Cost of revenues(1) 52,006 57 % 30,047 59 % 148,687 57 % 77,545 60 %
Gross profit 39,659 43 % 21,104 41 % 109,962 43 % 52,775 40 %
Operating expenses:
Research and development(1)
4,619 5 % 2,938 6 % 11,671 5 % 8,038 6 %
Sales, general and administrative(1) 2,484 3 % 1,884 3 % 7,059 3 % 5,307 4 %
Total operating expenses 7,103 8 % 4,822 9 % 18,730 8 % 13,345 10 %
Income from operations 32,556 35 % 16,282 32 % 91,232 35 % 39,430 30 %
Interest income (expense) and other, net (190 ) * % 9 *
(1,136 ) * % 50 * %
Income before provision for income taxes 32,366 35 % 16,291 32 % 90,096 35 % 39,480 30 %
Provision for income taxes
4,446 5 % 3,258 7 % 15,992 6 % 7,888 6 %
Net income $ 27,920 30 % $ 13,033 25 % $ 74,104 29 % $ 31,592 24 %
* Less than 1%
(1) Includes stock-based compensation as follows:
Cost of revenues $ 41 $ 8 $ 74 $ 20
Research and development 133 85 365 191
Sales, general and administrative 156 164 593 465
Total stock-based compensation $ 330 $ 257 $ 1,032 $ 676
Revenues
Revenues increased $40.5 million, or 79%, from $51.2 million in the three months
ended March 31, 2011 to $91.7 million in the three months ended March 31, 2012.
Revenues increased $128.3 million, or 98%, from $130.3 million in the nine
months ended March 31, 2011 to $258.6 million in the nine months ended March 31,
2012. During the three and nine months ended March 31, 2012, the increase in
revenues was due to higher unit volumes shipped, primarily attributable to the
success of our systems products, most notably our AirMax platform.
In the three months ended March 31, 2012, revenues from Distributor A and
Distributor B represented 20% and 10% of our revenues, respectively. In the
three months ended March 31, 2011, revenues from Distributor A and Distributor C
represented 23% and 15% of our revenues, respectively. In the nine months ended
March 31, 2012, revenues from Distributor A and Distributor C represented 19%
and 10% of our revenues, respectively. In the nine months ended March 31, 2011,
revenues from Distributor A and Distributor C represented 20% and 14% of our
revenues, respectively. No other distributor or customer represented more than
10% of our revenues in the three or nine months ended March 31, 2012 or 2011.
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Revenues by Product Type
Three Months Ended March 31, Nine months ended March 31,
2012 2011 2012 2011
(in thousands, except percentages)
AirMax $ 61,978 68 % $ 28,324 55 % $ 164,752 64 % $ 71,041 55 %
New platforms 9,914 11 % 926 2 % 16,874 6 % 930 1 %
Other systems 10,308 11 % 10,568 21 % 41,327 16 % 33,545 25 %
Systems 82,200 90 % 39,818 78 % 222,953 86 % 105,516 81 %
Embedded radio 2,232 2 % 4,174 8 % 8,024 3 % 10,669 8 %
Antennas/other 7,233 8 % 7,159 14 % 27,672 11 % 14,135 11 %
Total revenues $ 91,665 100 % $ 51,151 100 % $ 258,649 100 % $ 130,320 100 %
Systems revenues increased $42.4 million, or 106%, from $39.8 million in the
three months ended March 31, 2011 to $82.2 million in the three months ended
March 31, 2012. Systems revenues increased $117.4 million, or 111%, from $105.5
million in the nine months ended March 31, 2011 to $223.0 million in the nine
months ended March 31, 2012. The increase in systems revenues was primarily
driven by rapid adoption of our AirMax platform, which we introduced in early
fiscal 2010. Our new platforms category, which includes significant platforms
introduced in late fiscal 2011, contributed $9.9 million and $16.9 million of
revenue in the three and nine months ended March 31, 2012, respectively. Our
other systems revenue remained relatively flat in the three months ended
March 31, 2012 as compared to the three months ended March 31, 2011. Our other
systems revenue increased $7.8 million during the nine months ended March 31,
2012 as compared to the nine months ended March 31, 2011, primarily due to a
specific customer network expansion during the quarter ending December 31, 2011.
Embedded radio revenues decreased $1.9 million, or 47% from $4.2 million in the
three months ended March 31, 2011 to $2.2 million in the three months ended
March 31, 2012. Embedded radio revenues decreased $2.6 million, or 25% from
$10.7 million in the nine months ended March 31, 2011 to $8.0 million in the
nine months ended March 31, 2012. We anticipate that embedded radio products
will decline in future periods in absolute dollars and as a percentage of sales
as sales of these products are outpaced by sales of systems products.
Antennas/other revenues remained relatively flat in the three months ended
March 31, 2011 compared to the three months ended March 31, 2012. Antennas/other
revenues increased $13.5 million, or 96% from $14.1 million in the nine months
ended March 31, 2011 to $27.7 million in the nine months ended March 31, 2012. A
primary driver of growth in antennas/other revenues in the nine months ended
March 31, 2012 was the broadening of our systems platforms, which drove demand
for associated antennas. Antennas/other revenues also increased due to the
growing sales of accessories purchased in connection with deployment of new
systems, such as cables. Other revenues also include revenues that are
attributable to PCS. We anticipate that antenna/other revenues will continue to
increase in absolute dollars in future periods but will decline as a percentage
of total revenues due to more rapid growth of systems revenues.
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Revenues by Geography
We generally forward products directly from our manufacturers to freight
companies in Hong Kong, which have been retained by our distributors and who in
turn ship to other locations throughout the world. We have determined the
geographical distribution of our product revenues based on ship-to destinations.
A majority of our sales are to distributors who in turn sell to resellers or
directly to end customers. As a result of these factors, we believe that sales
to certain geographic locations might be higher or lower, as the ultimate
destinations are difficult to ascertain. The increase in revenues in absolute
dollars across all regions was primarily driven by the success of our systems
products, most notably our AirMax platform. The following are our revenues by
geography for the three and nine months ended March 31, 2012 and 2011 (in
thousands, except percentages):
Three Months Ended March 31, Nine months ended March 31,
2012 2011 2012 2011
North America(1) $ 16,647 18 % $ 15,829 31 % $ 63,028 24 % $ 39,910 30 %
South America 27,666 30 % 13,711 27 % 71,751 28 % 32,546 25 %
Europe, the Middle East and Africa 36,398 40 % 17,135
33 % 91,537 35 % 46,431 36 %
Asia Pacific 10,954 12 % 4,476 9 % 32,333 13 % 11,433 9 %
Total revenues $ 91,665 100 % $ 51,151 100 % $ 258,649 100 % $ 130,320 100 %
(1) Revenue for the United States was $14.9 million and $15.4 million for the
three months ended March 31, 2012 and 2011, respectively. Revenue for the
United States was $60.0 million and $38.8 million for the nine months ended
March 31, 2012 and 2011, respectively.
Cost of Revenues and Gross Margin
Cost of revenues increased $22.0 million, or 73%, from $30.0 million in the
three months ended March 31, 2011 to $52.0 million in the three months ended
March 31, 2012. Cost of revenues increased $71.1 million, or 92%, from $77.5
million in the nine months ended March 31, 2011 to $148.7 million in the nine
months ended March 31, 2012. Gross margin increased from 41% in the three months
ended March 31, 2011 to 43% in the three months ended March 31, 2012. Gross
margin increased from 40% in the nine months ended March 31, 2011 to 43% in the
nine months ended March 31, 2012. The increase in gross margins in both the
three and nine month periods reflected a high level of revenue growth across a
non-inventory cost of sales base that only saw a slight increase, and an
increased focus on managing supply chain costs.
Operating Expenses
Research and Development
Research and development expenses increased $1.7 million, or 57%, from $2.9
million in the three months ended March 31, 2011 to $4.6 million in the three
months ended March 31, 2012. However, as a percentage of revenues, research and
development expenses decreased from 6% in the three months ended March 31, 2011
to 5% in the three months ended March 31, 2012. Research and development
expenses increased $3.6 million, or 45%, from $8.0 million in the nine months
ended March 31, 2011 to $11.7 million in the nine months ended March 31, 2012.
However, as a percentage of revenues, research and development expenses
decreased from 6% in the nine months ended March 31, 2011 to 5% in the nine
months ended March 31, 2012. The increases in research and development expenses
in absolute dollars in both the three and nine month periods were due to
increases in headcount and related expenses as we broadened our research and
development activities to new product areas. As a percentage of revenues,
research and development expenses decreased in both the three and nine month
periods due to our overall revenue growth. Over time, we expect our research and
development costs to increase in absolute dollars as we continue making
significant investments in developing new products and developing new versions
of our existing products.
Sales, General and Administrative
Sales, general and administrative expenses increased $600,000, or 32%, from $1.9
million in the three months ended March 31, 2011 to $2.5 million in the three
months ended March 31, 2012. As a percentage of revenues, sales,
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general and administrative expenses remained flat in the three months ended
March 31, 2012 as compared to the three months ended March 31, 2011. Sales,
general and administrative expenses increased $1.8 million, or 33%, from $5.3
million in the nine months ended March 31, 2011 to $7.1 million in the nine
months ended March 31, 2012. As a percentage of revenues, sales, general and
administrative expenses decreased from 4% in the nine months ended March 31,
2011 to 3% in the nine months ended March 31, 2012. Sales, general and
administrative expenses increased slightly in both the three and nine month
periods due to increased personnel costs and increased costs associated with our
being and the preparation to become a public company. However, as a percentage
of revenues sales, general and administrative expenses decreased slightly in the
nine month periods ended March 31, 2012 and 2011 due to our overall revenue
growth. Over time, we expect our sales, general and administrative expenses to
increase in absolute dollars due to continued growth in headcount, expand our
registration and defense of trademarks and patents efforts and to support our
business and operations as a public company.
Interest Income (Expense) and Other, Net
Interest income (expense) and other, net was ($190,000) for the three months
ended March 31, 2012, representing a decrease of $199,000 from interest income
(expense) and other, net of $9,000 for the three months ended March 31, 2011.
Interest income (expense) and other, net was ($1.1) million for the nine months
ended March 31, 2012, representing a decrease of $1.2 million from interest
income (expense) and other, net of $50,000 for the nine months ended March 31,
2011. The decrease in both the three and nine month periods was primarily due to
interest expense accrued on our convertible subordinated promissory notes issued
as part of the repurchase of Series A convertible preferred stock from entities
affiliated with Summit Partners, L.P. in July 2011 and interest expense accrued
on our term loan agreement with East West Bank which we entered into in
September 2011.
Provision for Income Taxes
Our provision for income taxes increased $1.2 million, or 36%, from $3.3 million
for the three months ended March 31, 2011 to $4.4 million for the three months
ended March 31, 2012. Our provision for income taxes increased $8.1 million, or
103%, from $7.9 million for the nine months ended March 31, 2011 to $16.0
million for the nine months ended March 31, 2012. Our effective tax rate
decreased to 14% and 18% for the three and nine months ended March 31, 2012,
respectively, as compared to 20% for both the three and nine months ended
March 31, 2011 as percentages of sales in foreign tax jurisdictions increased.
We do not expect any significant increases or decreases to our unrecognized tax
benefits in the next twelve months.
Liquidity and Capital Resources
Sources and Uses of Cash
Since inception, our operations primarily have been funded through cash
generated by operations. Cash, cash equivalents and short-term marketable
securities increased from $76.4 million at June 30, 2011 to $94.2 million at
March 31, 2012.
Consolidated Cash Flow Data
The following table sets forth the major components of our condensed
consolidated statements of cash flows data for the periods presented:
Nine months ended March 31,
2012 2011
(In thousands) Net cash provided by operating activities $ 51,703 $ 54,662
Net cash used in investing activities (1,617 ) (440 )
Net cash used in financing activities (32,247 ) (11,148 )
Net increase in cash and cash equivalents $ 17,839 $ 43,074
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Cash Flows from Operating Activities
Net cash provided by operating activities in the nine months ended March 31,
2012 of $51.7 million consisted primarily of net income of $74.1 million offset
by changes in operating assets and liabilities. These changes consisted
primarily of a $29.4 million increase in accounts receivable due to our overall
revenue growth, a $12.4 million increase in taxes payable, a $4.0 million
increase in inventories, a $4.8 million decrease in prepaid expenses and other
current assets, a $1.9 million increase in accounts payable and accrued
liabilities and an increase of $700,000 in deferred revenues and deferred cost
of revenues. Additionally, our net income included non-cash adjustments due to
stock-based compensation, depreciation and amortization, adjustments to our
provisions for doubtful accounts and inventory obsolescence and an excess tax
benefit from stock-based awards. The net of these non-cash adjustments resulted
in a reduction of our net cash provided by operating activities of $8.8 million.
Net cash provided by operating activities in the nine months ended March 31,
2011 of $54.7 million consisted primarily of net income of $31.6 million offset
by changes in operating assets and liabilities. Changes in operating assets and
liabilities consisted primarily of a $14.0 million increase in accounts payable
and accrued liabilities, a $4.7 million decrease in accounts receivable, a $2.1
million increase in income taxes payable, a $2.7 million decrease in prepaid
expenses and other current assets, a net decrease of $892,000 in deferred
revenues and deferred cost of revenues and a $739,000 increase in inventories.
Cash Flows from Investing Activities
Our investing activities consist solely of capital expenditures. Capital
expenditures for the nine months ended March 31, 2012 and 2011 were $1.6 million
and $440,000, respectively.
Cash Flows from Financing Activities
In July 2011, we repurchased an aggregate of 12,041,700 shares of our Series A
preferred stock from entities affiliated with Summit Partners, L.P., one of our
major stockholders, at a price of $8.97 per share for an aggregate consideration
of $108.0 million. Of the aggregate purchase price, $40.0 million was paid in
cash at the time of closing and the balance of the shares were paid for through
the issuance of convertible subordinated promissory notes in the aggregate
principal amount of $68.0 million. The $68.0 million was paid down primarily
using proceeds from the term loan we executed with East West Bank on
September 15, 2011 and funds raised upon the completion of our initial public
offering on October 19, 2011.
On September 15, 2011, we entered into a Loan and Security Agreement with East
West Bank, (the "EWB Loan Agreement"). The EWB Loan Agreement consists of a
$35.0 million term loan facility and a $5.0 million revolving line of credit
facility. The term loan matures on September 15, 2016 with principal and
interest to be repaid in 60 monthly installments. We used $34.0 million of the
term loan to repay a portion of our outstanding convertible subordinated
promissory notes held by entities affiliated with Summit Partners, L.P. During
the nine months ended March 31, 2012, we paid down the loan balance by $3.5
million.
On October 19, 2011, we completed our initial public offering whereby we sold
2,395,328 shares and selling stockholders sold 4,642,902 shares of our common
stock. During the nine months ended March 31, 2012, we received net proceeds of
$32.4 million after deducting the underwriting fees and commissions and other
offering expenses. During the nine months ended March 31, 2011, we paid $231,000
of costs related to our initial public offering.
During the nine months ended March 31, 2012, we had an excess tax benefit from
stock-based awards of $11.4 million.
During the nine months ended March 31, 2011, we entered into a stock purchase
agreement to repurchase 2,975,590 shares of common stock from three stockholders
for total consideration of $7.3 million. Additionally, we paid a dividend on our
Series A convertible preferred warrants of $3.0 million and paid $896,000 in
costs related to third party consulting services associated with the offering
described in our Prospectus filed pursuant to Rule 424(b)(4), as filed
October 14, 2011 with the SEC.
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Liquidity
We believe our existing cash and cash equivalents will be sufficient to meet our
working capital and capital expenditure needs for at least the next 12 months.
Our future capital requirements may vary materially from those currently planned
and will depend on many factors, including our rate of revenue growth, the
timing and extent of spending to support development efforts, the timing of new
product introductions, market acceptance of our products and overall economic
conditions. As of March 31, 2012, we held $84.4 million of our $94.2 million of
cash and cash equivalents in accounts of our subsidiaries outside of the United
States and we will incur significant tax liabilities if we decide to repatriate
those amounts.
Commitments and Contingencies
In January 2011, the U.S. Department of Commerce's Bureau of Industry ("BIS")
and Security's Office of Export Enforcement ("OEE") contacted us to request that
we provide information related to our relationship with a logistics company in
the United Arab Emirates ("UAE") and with a company in Iran, as well as
information on the export classification of our products. As a result of this
inquiry we, assisted by outside counsel, conducted a review of our export
transactions from 2008 through March 2011 to not only gather information
responsive to the OEE's request but also to review our overall compliance with
export control and sanctions laws. We believe our products have been sold into
Iran by third parties. We do not believe that we directly sold, exported or
shipped our products into Iran or any other country subject to a U.S. embargo.
However, until early 2010, we did not prohibit our distributors from selling our
products into Iran or any other country subject to a U.S. embargo. In the course
of this review we identified that two distributors may have sold Ubiquiti
products into Iran. Our review also found that while we had obtained required
Commodity Classification Rulings for our products in June 2010 and November
2010, we did not advise our shipping personnel to change the export
authorizations used on our shipping documents until February 2011. During the
course of our export control review, we also determined that we had failed to
maintain adequate records for the five year period required by the EAR and the
sanctions regulations due to our lack of infrastructure and because it was prior
to our transition to our system of record, NetSuite. See "Risk Factors-We are
subject to numerous U.S. export control and economic sanctions laws and a
substantial majority of our sales are into countries outside of the United
States. Although we did not intend to do so, we have violated certain of these
laws in the past, and we cannot currently assess the nature and extent of any
fines or other penalties, if any, that U.S. governmental agencies may impose
against us or our employees for any such violations. Any fines, if materially
different from our estimates, or other penalties, could have a material adverse
effect on our business and financial results."
In May 2011, we filed a self-disclosure with OEE and, in June 2011 we filed one
with U.S. Department of the Treasury's Office of Foreign Asset Control ("OFAC"),
regarding the compliance issues noted above. The disclosures address the above
described findings and the remedial actions we have taken to date. However, the
findings also indicate that both distributors continued to sell, directly or
indirectly, our products into Iran during the period from February 2010 through
March 2011 and that we received various communications from them indicating that
they were continuing to do so. Since January 2011, we have cooperated with OEE
and, prior to our disclosure filing, we informally shared with the OEE the
substance of our findings with respect to both distributors. From May 2011 to
August 2011, we provided additional information regarding our review and our
findings to OEE to facilitate its investigation and OEE advised us in
August 2011 that it had completed its investigation of us. In August 2011, we
received a warning letter from OEE stating that OEE had not referred the
findings of our review for criminal or administrative prosecution of us and
closed the investigation of us without penalty.
OFAC is still in the early stages of reviewing our voluntary disclosure. In our
submission, we have provided OFAC with an explanation of the activities that led
to the sales of our products in Iran and the failure to comply with the EAR and
OFAC sanctions. Although our OFAC and OEE voluntary disclosures covered similar
sets of facts, which led OEE to resolve the case with the issuance of a warning
letter, OFAC may conclude that our actions resulted in violations of U.S. export
control and economic sanctions laws and warrant the imposition of penalties that
could include fines, termination of our ability to export our products and/or
referral for criminal prosecution. Any such fines may be material to our
financial results in the period in which they are imposed. The penalties may be
imposed against us and/or our management. The maximum civil monetary penalty for
the violations is up to $250,000 or
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twice the value of the transaction, whichever is greater, per violation. Also,
disclosure of our conduct and any fines or other action relating to this conduct
could harm our reputation and indirectly have a material adverse effect on our
business. We cannot predict when OFAC will complete its review or decide upon
the imposition of possible penalties.
Based on the facts known to us to date, we recorded an expense of $1.6 million
for this export compliance matter in fiscal 2010, which represents management's
estimated exposure for fines in accordance with applicable accounting
literature. Should additional facts be discovered in the future and/or should
actual fines or other penalties substantially differ from our estimates, our
business, financial condition, cash flows and results of operations would be
materially negatively impacted.
Warranties and Indemnifications
Our products are generally accompanied by a 12 month warranty, which covers both
parts and labor. Generally the distributor is responsible for the freight costs
associated with warranty returns, and we absorb the freight costs of replacing
items under warranty. We record a warranty accrual when we believe it is
estimable and probable based upon historical experience. We record a provision
for estimated future warranty work in cost of goods sold upon recognition of
revenues and we review the resulting accrual regularly and periodically adjust
it to reflect changes in warranty estimates.
We may in the future enter into standard indemnification agreements with many of
our distributors and OEMs, as well as certain other business partners in the
ordinary course of business. These agreements may include provisions for
indemnifying the distributor, OEM or other business partner against any claim
brought by a third party to the extent any such claim alleges that a Ubiquiti
product infringes a patent, copyright or trademark or violates any other
proprietary rights of that third party. The maximum amount of potential future
indemnification is unlimited. The maximum potential amount of future payments we
could be required to make under these indemnification agreements is not
estimable.
We have agreed to indemnify our directors, officers and certain other employees
for certain events or occurrences, subject to certain limits, while such persons
are or were serving at our request in such capacity. We may terminate the
indemnification agreements with these persons upon the termination of their
services with us but termination will not affect claims for indemnification
related to events occurring prior to the effective date of termination. The
maximum amount of potential future indemnification is unlimited. We have a
director and officer insurance policy that limits our potential exposure. We
believe the fair value of these indemnification agreements is minimal. We had
not recorded any liabilities for these agreements as of March 31, 2012 or
June 30, 2011.
Based upon our historical experience and information known as of the date of
this report, we do not believe it is likely that we will have significant
liability for the above indemnities at March 31, 2012.
Contractual Obligations and Off-Balance Sheet Arrangements
We lease our headquarters in San Jose, California and other locations worldwide
under noncancelable operating leases that expire at various dates through fiscal
2017.
In July 2011, we entered into an agreement to lease additional office space for
our research and development offices in Taiwan. The lease term is from July 14,
2011 through July 15, 2016. The premises consist of approximately 10,000
rentable square feet of space. The lease has been categorized as an operating
lease, and the total lease obligation is approximately $1.6 million.
In December 2011, we entered into an agreement to lease approximately 64,512
square feet of office and research and development space located in San Jose,
California, which will be used as our corporate headquarters. The lease term is
from April 1, 2012, though June 30, 2017. The lease has been categorized as an
operating lease, and the total estimated lease obligation is approximately $4.9
million.
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The following table summarizes our contractual obligations as of March 31, 2012:
Payments Due by June 30,
2012
(remainder) 2013 2014 2015 2016 Thereafter Total
(In thousands)
Operating leases $ 231 $ 1,225 $ 1,381 $ 1,396 $ 1,428 $ 1,122 $ 6,783
We subcontract with other companies to manufacture our products. During the
normal course of business, our contract manufacturers procure components based
upon orders placed by us. If we cancel all or part of the orders, we may still
be liable to the contract manufacturers for the cost of the components purchased
by the subcontractors to manufacture our products. We periodically review the
potential liability and to date no accruals have been recorded. Our consolidated
financial position and results of operations could be negatively impacted if we
were required to compensate the contract manufacturers for any unrecorded
liabilities incurred.
As of March 31, 2012, we had $4.3 million of unrecognized tax benefits,
substantially all of which would, if recognized, affect our tax expense. We have
elected to include interest and penalties related to uncertain tax positions as
a component of tax expense. We do not expect any significant increases or
decreases to our unrecognized tax benefits in the next twelve months.
As of March 31, 2012, we have no off-balance sheet arrangements as defined in
Item 303(a)(4) of the SEC's Regulation S-K other than the indemnification
arrangement discussed above.
Recent Accounting Pronouncements
Effective January 1, 2010, we adopted the Financial Accounting Standards Board's
("FASB's") updated authoritative guidance on fair value measurements and
disclosures. The updated guidance requires additional disclosures regarding fair
value measurements, amends disclosures about postretirement benefits plan assets
and provides clarification regarding the level of disaggregation of fair value
disclosures by investment class. This guidance became effective for interim and
annual reporting periods beginning after December 15, 2009, except for certain
Level 3 activity disclosure requirements that became effective for reporting
periods beginning after December 15, 2010. Accordingly, we adopted the updated
guidance beginning January 1, 2010, except for the additional Level 3
requirements, which we adopted beginning January 1, 2011. Level 3 assets and
liabilities are those whose fair value inputs are unobservable and reflect
management's best estimate of what market participants would use in pricing the
asset or liability at the measurement date. The adoption of this guidance did
not have a material impact on our consolidated financial statements.
Additionally, in May 2011 the FASB further amended its guidance related to fair
value measurements in order to achieve common fair value measurements between
U.S. GAAP and International Financial Reporting Standards. The amendments in the
updated guidance explain how to measure fair value. They do not require
additional fair value measurements and are not intended to establish valuation
standards or affect valuation practices outside of financial reporting. The
amendments change the wording used to describe many of the requirements in U.S.
GAAP for measuring fair value and for disclosing information about fair value
measurements. For many of the requirements, the updated guidance should not
result in a change in the application of previous fair value measurement
guidance. The updated guidance is effective during interim and annual periods
beginning after December 15, 2011. The adoption of the amended guidance on
January 1, 2012 did not have an impact on our consolidated financial statements.
In June 2011, the FASB updated its guidance related to the presentation of
comprehensive income. Under the updated guidance, an entity has the option to
present the total of comprehensive income, the components of net income, and the
components of other comprehensive income either in a single continuous statement
of comprehensive income or in two separate but consecutive statements. In both
choices, an entity is required to present each component of net income along
with total net income, each component of other comprehensive income along with a
total for other comprehensive income, and a total amount for comprehensive
income. The updated
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guidance eliminates the option to present the components of other comprehensive
income as part of the statement of changes in stockholders' equity. The
amendments in the updated guidance do not change the items that must be reported
in other comprehensive income or when an item of other comprehensive income must
be reclassified to net income. In December 2011, the FASB further amended its
guidance to defer changes related to the presentation of reclassification
adjustments indefinitely as a result of concerns raised by stakeholders that the
new presentation requirements would be difficult for preparers and add
unnecessary complexity to financial statements. The updated guidance, other than
the portion related to the presentation of reclassification adjustments, will be
effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2011, with early adoption permitted. The updated
guidance must be applied retrospectively. We do not expect the adoption of the
guidance on July 1, 2012 to have an impact on our consolidated financial
statements.
Non-GAAP Financial Measures
Regulation G, conditions for use of Non-Generally Accepted Accounting Principles
("Non-GAAP") financial measures, and other SEC regulations define and prescribe
the conditions for use of certain Non-GAAP financial information. To supplement
our condensed consolidated financial results presented in accordance with GAAP,
we use Non-GAAP financial measures which are adjusted from the most directly
comparable GAAP financial measures to exclude certain items, as described below.
Management believes that these Non-GAAP financial measures reflect an additional
and useful way of viewing aspects of our operations that, when viewed in
conjunction with our GAAP results, provide a more comprehensive understanding of
the various factors and trends affecting our business and operations. Non-GAAP
financial measures used by us include net income or loss and diluted net income
or loss per share.
Our Non-GAAP measures primarily exclude stock-based compensation, net of taxes
and other special charges and credits. Management believes these Non-GAAP
financial measures provide meaningful supplemental information regarding our
strategic and business decision making, internal budgeting, forecasting and
resource allocation processes. In addition, these Non-GAAP financial measures
facilitate management's internal comparisons to our historical operating results
and comparisons to competitors' operating results.
We use each of these Non-GAAP financial measures for internal managerial
purposes, when providing our financial results and business outlook to the
public and to facilitate period-to-period comparisons. Management believes that
these Non-GAAP measures provide meaningful supplemental information regarding
our operational and financial performance of current and historical results.
Management uses these Non-GAAP measures for strategic and business decision
making, internal budgeting, forecasting and resource allocation processes. In
addition, these Non-GAAP financial measures facilitate management's internal
comparisons to our historical operating results and comparisons to competitors'
operating results.
The following table shows our Non-GAAP financial measures:
Three Months Ended March 31, Nine months ended March 31,
2012 2011 2012 2011
(In thousands, except per share amounts)
Non-GAAP net income $ 28,118 $ 13,187 $ 74,723 $ 31,998
Non-GAAP diluted net income per
share of common stock $ 0.30 $ 0.13 $ 0.80 $ 0.31
We believe that providing these Non-GAAP financial measures, in addition to the
GAAP financial results, are useful to investors because they allow investors to
see our results "through the eyes" of management as these Non-GAAP financial
measures reflect our internal measurement processes. Management believes that
these Non-GAAP financial measures enable investors to better assess changes in
each key element of our operating results across different reporting periods on
a consistent basis and provides investors with another method for assessing our
operating results in a manner that is focused on the performance of our ongoing
operations.
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The following table shows a reconciliation of GAAP net income to non-GAAP net
income (in thousands, except per share amounts):
Three Months Ended March 31, Nine months ended March 31,
2012 2011 2012 2011
Net income $ 27,920 $ 13,033 $ 74,104 $ 31,592
Stock-based compensation:
Cost of revenues 41 8 74 20
Research and development 133 85 365 191
Sales, general and administrative 156 164 593 465
Tax effect of non-GAAP adjustments (132 ) (103 ) (413 ) (270 )
Non-GAAP net income $ 28,118 $ 13,187 $ 74,723 $ 31,998
Non-GAAP diluted income per share (1) $ 0.30 $ 0.13 $ 0.80 $ 0.31
Weighted-average shares used in
non-GAAP diluted income per share (1) 94,177 102,451 93,667 103,057
(1) Non-GAAP diluted net income per share of common stock is calculated using
non-GAAP net income excluding stock-based compensation, net of taxes and
weighted-average shares outstanding as if Series A preferred stock is treated
as common stock for the periods presented.
The following table shows a reconciliation of weighted-average shares used in
computing net loss per share of common stock-diluted to weighted-average shares
used in computing non-GAAP diluted net income per share of common stock (in
thousands):
Three Months Ended March 31, Nine months ended March 31,
2012 2011 2012 2011
(Inthousands)
Weighted average shares used in
computing net income (loss) per share
of common stock- diluted 94,177 66,416 80,648 67,022
Weighted average dilutive effect of
stock options and restricted stock
units - - 2,895 -
Weighted average shares of Series A
preferred stock outstanding - 36,035 10,124 36,035
Weighted-average shares used in
computing non-GAAP diluted income per
share of common stock 94,177 102,451 93,667 103,057
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