優比快 (UI) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by and welcome to the Ubiquiti Networks second quarter 2012 conference call. Currently, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time (Operator instructions). As a reminder, this conference may be recorded. Now it's my pleasure to turn the floor over to JoAnn Horne, Investor Relations for Ubiquiti Networks. Please go ahead.

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

Before we get started, let me review the Safe Harbor statement. During the call we will be making forward-looking statements that are statements other than statements of historical fact including but not limited to our strategy, estimates, projections of revenue and EPS. Forward-looking statements are statements of risks and uncertainties that could cause our results to differ materially or cause a material adverse effect on results. Please refer to the risk factors discussed in our SEC filings and the press release. We do not undertake to update in light of new information or future events.

In addition, reference will be made to non-GAAP financial measures. Information regarding the reconciliation of the non-GAAP and GAAP measures can be found in the press release that was issued this afternoon or on our website on the IR section at www.UBNT.com. Now let me turn the call over to Robert J. Pera, Ubiquiti's founder. Robert?

Thanks for joining us. We are pleased with the quarter's results, 95% year-over-year revenue growth and 145% year-over-year earnings per share growth. I will discuss some highlights of the quarter.

Our margin profile exceeded our long-term goal, which demonstrates the profitability leveraged in our model. We saw greater diversity in our revenue mix this quarter, which is one of our long-term objectives as we add additional platforms. We saw growth in our other systems category driven from customers using our legacy gear and continuing to extend older networks. This should not be surprising, given the long product cycles of our products.

We continue to believe that our total addressable market for AirMax is best defined by weighing the number of global households that do not yet have fixed broadband access. Market research pegs this number at approximately 1 billion homes globally.

We also are benefiting from governments in emerging markets funding the build-out of fixed broadband wireless solutions. For example, in Thailand, the state-owned telecommunications operator which offers fixed broadband products at homes and businesses deployed a 100% AirMax network in less than six months covering over 25,000 subscribers. Their stated goal is to now expand the network to another 50,000 subscribers over more than 50,000s square kilometers.

In Q2, our new platform, UniFi and AirVision, contributed approximately $4.2 million in revenues for the quarter. The end markets for these products are seeing the values in having a fully featured enterprise wireless line solution and a fully featured IP video surveillance system at price points that were previously unavailable to them. The order backlog for each of these platforms continues to grow significantly.

With an initial quarter of AirVision revenue behind us, our goal is to slowly ramp reduction while listening closely to early adopter feedback from our communities for potential product improvement. It is the controlled ramping of production combined with real-time feedback from our loyal user community that allows us to model this scale and is a key factor in our long-term success.

A new revolutionary radio platform will be introduced at our Ubiquiti World Conference in Chicago on March 23. Although the show is still about two months away, we have already booked a record number of attendees, making this our largest conference ever.

I wanted to briefly review how we think about new markets and connectivity technology platforms. In developing new platforms, we look for opportunities that have similar characteristics to the outdoor broadband wireless market we saw when creating AirMax, specifically, fractured markets that have many small players and do not have a dominant integrated applications-specific platform. We attack these opportunities leveraging our powerful management software and combined with disruptive price-performance hardware. We then work with our user community to further evolve platforms for advanced features and reliability.

Now turning to our user community, it continues to grow, as evidenced by our 115,000 members now just on our own official form. Our ability to help new operators become profitable entrepreneurs attracts a unique user to our community, one who has invested an interest in helping accelerate the development and improvement of our technologies. This relationship is mutually beneficial, so we view it as a key factor in our success.

I will now turn the call over to John Ritchie to go through the quarter in more detail.

Thanks, Robert, and thanks again, everyone, for joining us on our second-quarter conference call. I'll jump quickly to our results.

We saw strong and continued growth in our second-quarter revenues. They came in up to 95% or up $42.7 million to $87.8 million, up from $45.1 million in the same period in the prior year. The increase in revenue was primarily driven by a 103% increase in our systems products revenue as well as a 118% increase in our antenna/other category. On a sequential basis, revenues increased 11% or up $8.7 million from the $79.2 million we recorded in the September quarter. And from an EPS perspective, our EPS numbers went up from $0.11 in the year-ago period to $0.27 today in the current quarter, up 145%. Our GAAP net income was $24.7 million and our non-GAAP net income for the quarter was $24.9 million.

Before I go through the quarter in more detail -- more revenue detail, I want to highlight some key milestones we achieved during the quarter. We again exceeded the high end of our long-term operating margin goal with 32% to 34% with operating margins coming in at approximately 36% for the quarter. Our operating margin goal still remains at 32% to 34% over the long-term.

We just concluded our seventh straight quarter of improved gross margins. Our new platforms, UniFi and AirVision combined, contributed $4.2 million in revenue for the quarter. The successful launch of AirVision marks another step in our long-term objective of being recognized as a broad-based telecommunications technology provider.

Now moving to the revenue in more detail, let me give you a -- remind you of the categories that we currently report revenue in. We have two line items in our systems category, AirMax and our other systems. Included within our other systems category are our new products, specifically AirVision and UniFi. The two remaining categories are embedded radios and, lastly, our antenna/other category. As a reminder, the antenna/other category primarily consists of nonintegrated AirMax antennas and, to a lesser extent, spare parts and other accessories, such as cables, mounting brackets, etc.. Note that once a new product or a new platform reaches a significant revenue level, we will break that out separately, much as we have done with the AirMax product line.

Now delving little more deeper into each category, starting with our proprietary AirMax platform, revenues came in at $52.9 million, up 106% or up $27.3 million from the $25.6 million recognized in the same period last year. On a sequential basis, AirMax revenues increased 6% or $3.1 million from the $49.8 million recognized in the September quarter.

Our other systems category, which includes our legacy BGM products as well as revenue from our UniFi and AirVision platforms -- these revenues contributed $22.5 million for the quarter, up 96% and up $11 million from the same period last year. On a sequential basis, other systems increased 45% and were up $7 million from the $15.5 million reported in the September quarter. A large component of both the year-over-year and sequential growth was from the sales of these newer platforms. Moving forward, we expect this category -- we expect modest gains in this category with UniFi and AirVision growth being offset by slower growth than the BGM product lines.

Revenues for our embedded products, our original product line, were $2.6 million, down $700,000 sequentially and $900,000 on a year-over-year basis. Moving forward, we expect this category to account for a contracted percentage of our overall revenues.

During the quarter, our antenna/other category, revenues came in at $9.8 million, up 118% and up $5.3 million from the $4.5 million in revenue recognized in the same period last year. On a sequential basis, revenue in this category was down approximately $800,000. Again, revenue in this category is driven largely by the sale of non-integrated stand-alone AirMax antennas.

Then moving onto the geographical breakdown of our revenues, North American revenues were $21.4 million, up 54% sequentially and down 14% a year over -- up 54% on a year-over-year basis and down 14% on a sequential basis. The sequential decline was related to a North American distributor who is transitioning from a single SKU that could be shipped across the globe on a worldwide basis to SKUs that are only shippable in the US. This contributed to higher inventory levels at this particular distributor. As we move forward, we expect to return to our historical geographical revenue split with North America comprising roughly 30% of our total revenues.

South America revenues increased 22% sequentially and 169% on a year-over-year basis to a total of $24.3 million. This region continues to benefit from government spending on infrastructure buildout focused on increasing Internet access for the populations.

Moving onto EMEA, revenue share also increased 22% on a sequential basis and 59% on a year-over-year basis to a total of $30.4 million. Revenue for this region is largely concentrated with distributors in Eastern Europe and, to a lesser extent, the Middle East with minimal exposure to Western Europe and some of the current difficulties in Western European economies.

Lastly, our smallest region, Asia Pac/rest of the world -- those revenues increased 23% sequentially and 280% on a year-over-year basis.

Now I will move onto our gross margins. Our gross margins were up on a year-over-year basis 250 basis points, going from 40% to 42.5%. This gross margin improvement was primarily driven by improved supply chain management and, to a lesser extent, the scale we benefit from with increased revenues. Sequentially, gross margins were up 80 basis points from 41.7% in the September quarter. Again, as we mentioned before, this is our seventh consecutive quarter of gross margin improvement -- very pleased with those results.

Now moving onto our non-GAAP expenses, they came in at $5.8 million, up from $5.2 million or up 12% on a sequential basis and up from $4.1 million or up 40% on a year-over-year basis, reflecting our focus on increased R&D spend as well as expanding our infrastructure. As a reminder, our non-GAAP operating expenses exclude the impacts of stock-based compensation expense.

Though our expense levels are relatively low, we continue to aggressively pursue and hire the most talented engineers we can find in any location globally. As such, we continue to expect our R&D expenses to move up on an absolute basis. In addition, we also expect to continue building out our infrastructures and expect to see some increase in SG&A as well.

As you saw in the press release, our non-GAAP operating margins are ahead of our long-range model of 32% to 34%. Operating margins came in at a record 36% compared to 31% in the prior year and up from 35% sequentially. The primary driver of this sizable improvement in operating margins was a relatively modest increase in OpEx coupled with significant revenue growth. As I mentioned last quarter, over the long haul we expect operating margins in the 32% to 34% range which leaves us room to grow our R&D expenses in both absolute terms as well as percentage of revenue terms.

Specific to the third quarter, we are expecting operating margins to come in at approximately 35%, still ahead of our long-term model.

Now moving on to below the operating income line, we had approximately $300,000 of expense for the quarter. This interest expense is primarily related to our outstanding $35 million loan agreement with East-West Bank. At today's interest rates, we expect expenses to remain in this $300,000 level for the March quarter.

Now, the last item on our P&L, the effective tax rate for our December quarter was 20%. And as reminder, the primary driver of our effective tax rate is the geographical mix of products. Assuming a return to this geographical mix of 70/30, 70 being non-North American sales, we expect that 20% effective rate to continue.

Moving on to the balance sheet, in the second quarter our cash balances grew $12.3 million. As a reminder, the proceeds from our IPO were $30.5 million, and we recognized that during the quarter. In addition, in the quarter we also reduced our outstanding debt by $35.5 million. This $35.5 million reduction in outstanding debt related to the payoff of the $34 million balance of our convertible note and a reduction of the principle of our East-West loan of about $1.5 million. We expect to generate -- as we move forward, we expect to continue to generate significant free cash with the majority of the cash generation occurring outside the US.

For the quarter, our inventory balance was $9 million, an increase of about $600,000 compared to the prior quarter. The vast majority of our inventory is raw materials in the form of chipsets, and we hold very little in the way of finished goods inventory.

Moving on to the accounts receivable levels, accounts receivable increased $13.3 million to $61.4 million from $48.1 million at the end of the last quarter. The increase was partially driven by an approximately $8.7 million increase in revenues on a sequential basis and shipping linearity in the quarter when compared to the prior quarter. Our DSOs decreased to 64 days from 65 days in the same quarter last year. On a sequential basis, they increased from 56 days. DSOs remained within our target range of mid-50 to mid 60 -- the mid-50 to mid-60-day levels.

Looking forward to the third quarter, our outlook -- we currently expect revenues in the range of $89 million to $91 million, representing a 74% to 76% year-over-year growth. And we expect non-GAAP EPS coming in at $0.27 to $0.28.

Now, with that, we will turn it over to the operator for questions.

(Operator instructions) Brian Modoff, Deutsche Bank.

A couple of questions -- one, can you talk a little bit about the North American distributor, kind of the change in product selection, a little more detail on that? And you said, did you expect North America as a percent of your revenues to return to around 30% in the following quarter?

So not the following quarter, we expect that it will take at least a couple quarters to get back. On the specific SKUs, I'll give you a high-level nontechnical answer. We shipped SKUs that were user definable in terms of how they could be set. Now we have switched from only shipping SKUs in the US that can be defined for the US market. I'll let Robert shed some more light on that.

So, previously, we shipped an international product where the end operator would select a country code and it would give them a list of frequencies that could be used that are approved for that country. The US -- the FCC implemented new rules that require wireless devices to be locked, so only the US country code and the US SEC frequencies. So from last year, we implemented a new set of SKUs that were locked to the US country code only for the US.

So I think what John is talking about is our distributors who ship internationally and also sell within the US now have to stock two sets of SKUs, one for international shipment and one for sales within the US.

Okay, and then second question around -- thanks for the color -- around the new products, obviously, you said $4.2 million of your revenues in that category were the new product. Can you break them out a little bit more? And then talk about what you expect to see sequentially, particularly for AirVision. And then can you give us a little bit of -- you've got a new product launch coming up, I think in about a month. Can you talk a little more about that as well?

So we're going to break that into two pieces. Robert will talk about the announcement around the conference.

In terms of new products, moving forward we are going to combine and give a single number for the new product category and not get any more granular than that. But ultimately, I think the question is, what are we -- I'm going to define your question is -- what do we see in terms of growth? We expect that category to move up next quarter, and we expect all the components to move up individually. So we expect UniFi to be greater than UniFi was this quarter and we expect AirVision to be greater than AirVision was this quarter.

Any quantification of what you mean by greater?

No, we are going to stay away from giving revenue guidance in the four line items that we report the revenue in.

And then the question on the new product, Robert.

So we're going to launch a new platform at our show in Chicago on March 23. I can't really say much more than we already shared, but we will share every single detail at that show and officially launch that new platform.

Okay, well, maybe you can talk a little bit about what you are seeing in -- obviously, AirVision with the product that you get a lot of feedback from your customer base on in terms of can you add a camera to Wi-Fi. What else are you getting a lot of feedback from the customers on, can you do this for us? Can you maybe talk along those lines?

Well, everything is out on the forum; there's hundreds of messages every day. So kind of the key is to take the user feedback and filter which ones have a large addressable market, which ones we can do efficiently, leveraging our core IP and then which ones are appropriate for how we sell, which is we use a user community to rally the marketing and share between the customers. So I think we are always looking for new platforms, but we're not just going to do anything. It's got to fit into our strengths.

Okay, I'll pass it on to the next caller, thanks.

Brent Bracelin, Pacific Crest.

John, quick first question for you here -- it looks like DSOs kind of creeped up a little bit, eight days sequentially. Can you talk a little bit about linearity in the quarter and backlog, pipeline going into the March quarter?

Sure. So very specifically, if I compare the linearity in the two quarters, the change in linearity cost us about three days in DSOs. And that relates to our fulfillment capabilities, not necessarily the speed at which or how we receive the orders themselves. So it was all about order fulfillment. We controlled it. We should do a better job going forward, but that linearity wasn't based on the receipt of orders, because we have those orders in hand. The slippage in linearity was based on our ability to fulfill the orders.

Now, in terms of the backlog as it is today, we are telling our customers 8 to 10 weeks lead time. Most of our customers are within that. And we base our guidance based on that, but I can't give you any more granularity than that.

That's helpful. And then I guess I wanted to just follow up on the North America distributor. Clearly, North America was strong in the September quarter, up 13% sequentially. Did the North American distributor add inventory in September, and then now they have this inventory they need to work down, based now on two SKUs versus one SKU? And is that what caused the sequential decline in North America and potential headwind in the March and potentially June quarters? Is that the right way to think about it, or -- I'm just trying to understand if the inventory build occurred in September, and now you are seeing the slowdown in December.

It occurred between the September quarter and the current quarter. But I think the thing to keep in mind -- it wasn't a matter of just going from one SKU to two SKUs. It was a matter of, you know, I think of -- this is factual. It was a matter of our SKUs doubling. So if they were carrying 50 SKUs, they are now carrying 100 SKUs. And that's what gave them the inventory issue.

Okay, I'll follow-up off line with that. And then I guess my last question -- outside of North America, Asia Pac looked like that's on fire, South America really strong. What countries in Asia Pac and South America drove the upside? And then, obviously, if you look at product lines, is that still largely AirMax only, or are you starting to see some international orders for UniFi and AirVision?

I think I'll answer the last question first. We are seeing international orders across the board for all the product line. And in terms of the big hitters, in each of the regions they are consistent with the prior quarter, with the exception of Asia. India -- India moved up this quarter, but the other big hitters in Latin America remain Brazil, Paraguay, Argentina. Those are the big countries down there.

Thank you.

Amitabh Passi, UBS.

John, just trying to understand guidance for the March quarter. You've had quite a few quarters of sequential double-digit growth. It seems like you are now guiding to 2.5%, at the midpoint of your range for the March quarter. Just trying to understand the puts and takes. Why the extent of deceleration that you're guiding to?

Well, I think we are looking at it as -- notwithstanding your point on the sequential numbers, I think we are guiding 74% to 76% on a year-over-year basis. I think that's significant growth. On a sequential basis, I think as we move forward and if you look at our long-term models, 25% to 28%, the revenue will eventually slow down when we start to approach those levels. And, again, that's the long-term guidance.

I think we are looking at the quarter. We expect to see the new products improve. We expect to see AirMax show strength, we expect to slow down in some of the older products. So we look at the guidance, especially relative to the consensus numbers out there, is very bullish.

And then maybe I could just qualify on the other systems, particularly the older products, what drove the tremendous strength? I don't know if you are putting your Rocket GPS products in this category. Just trying to understand the uptake. And then do you expect this entire category to be down sequentially from December to March?

So what drove that was, very specifically, a large direct customer we have in India who was expanding their network. I think I touched on that when I touched on India being up from a geographic standpoint. And the Rocket products are indeed included -- the Rocket products are included in the other systems category. Did I get to all your questions?

Yes, I think you did. And then just finally, maybe for Robert, I think on the last earnings call you talked about probably four new products in calendar year 2012. Are you still on track? Is there a chance that you could introduce more than four? Just maybe an update in terms of your new product rollout plans.

Yes, I think we are on track for what we said last call, which was to have everything out we talked about by the end of this calendar year.

Okay, thanks, I'll jump back in queue.

Todd Koffman, Raymond James.

Can you give any color on your customer breakout of 10% customers or a combination of some of your largest customers of the combined over 10%?

So, from a distributor standpoint, we have two or three distributors that are over 10%, but from an end-user basis we think that's the beauty of this model is we have no customer concentration below that. So I think, unlike most of the other players in the telecom space, we don't have anywhere near that level of customer concentration. Our best guess is less than 0.5%, somewhere between 1% and 0.5%, and that's only an estimate. Even the large rollout that was mentioned in Robert's prepared remarks, even that large rollout probably represents less than 1% of revenues for us.

Is it true, John, that those two or three large distributors represent about a third of the business, or has there been a change in the concentration?

(inaudible) amounts -- our top two or three distributors balance between 25% and 35% of revenue.

You said the linearity issue, you had some fulfillment, I guess, issues you were grappling with. Was that related to the new products, the AirVision product, or was that older products that you were having some issues?

So I wouldn't confuse my comments about how we chose to fulfill the orders with necessarily having issues, that we're scheduling multiple CMs with multiple credit product lines. I was just the products on a linearity basis. In terms of shipping linearity, we had a difference one quarter to another. Literally, that's why we give a range. I think -- let me be very clear that what we define as a healthy range for DSOs, the mid-50s to mid 60s. But when we said that we've mentioned that the variability within that range would be related to linearity, hence the reason we brought it up. But please don't take that as we had problems; that wasn't the point of bringing that up.

You called out the contribution of UniFi and the AirVision of $4.2 million. Do both those products still seem to have as big a wide-open opportunity, or has the reception in the marketplace -- or is it not yet widely available amongst your distributors? Maybe you could just give some color on how you think those new products are moving out.

Sure. So I'll go first, because I look at it from a bookings perspective, but Robert has a much better sense of -- how the end users. Those products are very well-received. The level of excitement around those products, and you can see yourself by looking in the community, is exceeding our expectations. I'll let Robert add more color.

So I think, yes, if you search on the Internet about Ubiquiti UniFi, everybody loves that product. And so we are in the phases right now of just adding features to it, getting it more stable. And then what you will see in subsequent quarters is we will start introducing higher-priced, more advanced products. And I think you'll see a lot more revenue growth in the future. And AirVision is very similar. So AirVision we launched -- it has issues we are attacking and we are improving it every day. But the early adopters, a lot of them love it. So both of those platforms we are excited about. They have a lot of potential and they are very analogous to where we started with AirMax.

So when we first attacked the broadband wireless market, we went through several quarters before we understood it and mastered development. And that kind of coincided with our AirMax launch, which was really our second-generation system, and it took off from there. So I see UniFi and AirVision as we are kind of in its first-generation mode right now. And I think UniFi -- in a couple of quarters, you'll see it mature quite a bit, and AirVision will be right behind it.

Backlog continues to grow. Again, from a financial standpoint these products are performing very well.

Just one last question, Robert. The new radio platform that you said you're going to introduce in mid-to late March -- would that be an upgrade for existing Ubiquiti customers as well as new deployments, or it's not necessarily addressed to upgrade existing equipment?

I think the majority will be new independent revenue. It's going to be a very, very high end -- it's going to be our highest-end product we've ever brought to market.

Thank you very much.

Mark McKechnie, ThinkEquity.

So a couple questions here -- one is on UniFi and AirVision. I did a lot of checks throughout the quarter. It seemed like it was kind of tight, tough to get products throughout the quarter. First, I just wanted to check and make sure that I'm right with that assessment, and second, if you get the sense that you will see sequential growth. Is there a supply chain or just a production issue that you are having trouble keeping up with demand, or how should I look at that? And then I've got some others.

I'll take that one. So with the momentum the Ubiquiti name has globally in these emerging markets, almost anything we launch is going to have huge demand. So with AirVision and UniFi, we have purposely limited production because we want to work with early adopters and we want to get the product as stable as possible and not as many features as we can.

I think with UniFi it will release the range a little bit. So you should see more revenue growth with that one. AirVision -- we are still a little tight with production because there are some issues I want to see worked out before we let it go.

I think one of the key things to remember is we have a model, and this is -- we are applying the same model to these products as we roll them out. So UniFi -- we have a successful model with AirMax. The same process we went through with rolling out AirMax we did with UniFi and we are doing with AirVision. So it's all about replicating the model that works.

Okay, great. And in terms of the uptick in gross margin, you've seen a -- seven sequential quarters. Do any of your products -- is there any mix-related benefit that you are seeing, perhaps older systems versus AirMax, or you've got the UniFi products? Or is it really your gross margin is pretty standard across the board?

So we are not seeing any significant switch in mix; it's not driving it. Right now, what's driving it is a procurement team that's executing very well. One of the things that was a tweak in the prepared remarks and the prepared script is prior to the quarter, we've talked about the benefits of scale and the benefits of significant revenue growth driving gross margin improvements. This quarter, we saw a switch from it being scale to it being just much more aggressive on the procurement side.

Okay, got you. And the next question is on inventory levels at your distributors. I think we understand what happened here in the US; that makes a lot of sense. Do you track inventory levels on a broader scale? And could you talk about where you might have low levels of inventory or higher levels of inventory geographically?

So we -- with several distributors, we get some inventory reporting. Our rev rec isn't sell-in, so we don't have standard inventory reporting from our distributors, although we have put in place a new agreement that we are going to be a little bit more pushed in terms of getting that information from them as we go forward.

As we've said before, cash collections, credit, where someone stands in terms of their absolute AR levels and DSOs are the healthiest indicator. So if you were to step back and look at the extension of DSO you've seen in the last quarter, those are more extended in North America, and it's, I think, for the reasons we just described. I think the rest of the world using those indicators is -- are using DSOs and AR levels as an indication of health, the rest of the world seems to be in okay shape.

Okay, and do you have a metric, do you have a sense, is there, on average, a month of inventory in a broad base, or a half month? Or where do you see them standing out there, where you have the checks?

So keep in mind that at any given point in time, there's 30 days worth of material on the water. Our customers own the product in Hong Kong. So at a minimum, there's four weeks and they could be up to four weeks on the customer's shelf, so roughly eight weeks of inventory.

Okay, got you. Yes, that's consistent. And finally, I'm going to try on this product announcement at your user conference. I guess you are talking about it being a high-end product. Robert, anything else you can give us? I'm assuming this product -- it's a new radio, it's -- is it going to be part of your AirMax overall on? Or anything you could say there, Robert, will be helpful.

So it's an independent platform; it's not AirMax. We sent out a newsletter to all the members that had a picture on it which hinted at the speed, and I think that's all we can share. But everything -- we'll go through everything at the show, even introduce people on the team that created it.

Great, okay, thank you very much.

Matt Robison, Wunderlich.

Thanks for taking the question. Most of my fun product questions, I guess mine are kind of mundane now. You have filed an 8-K for a facilities expansion, so I wonder if you could talk a little bit about that, and your headcount, what your headcount plants are. And then, John, if you could maybe give us what the operating cash flow and free cash flow was.

I'll start off with headcount. Healthcare went from 102 heads to 118 heads, the vast majority of that increase being R&D. I can't emphasize enough that going forward that's where we're going to have the most amount of heads. R&D heads have actually grown on a year-over-year basis 50%, gone from 52 to just under 80. On the building itself, we are moving to a facility that's not far from where we are at here. We think we got a good deal. We picked the building -- we got into the building at the right point in the market because the market here is heating up. So we signed a five-year lease, 64,000 square feet, significantly larger than the 20,000-ish that we've outgrown where we are at. The majority of that increased space is going to be allocated to basically lab space. So don't interpret the fact that the building is over twice as big as what we are in, that we are going to double headcount. We're just going to make more room, provide more laboratory space for the engineering teams to help them become more productive.

Now, on your cash flow question -- so I think if you look at -- if you take a look at the cash we generated, the $12.3 million, when we had our roughly $5 million-ish reduction in our debt, free cash flow came in around $17 million-$17 million plus.

Okay, just trying to sort out the depreciation and the CapEx.

So we are going to be filing our Q tomorrow, so you will be able to get all the infinite detail. But we are not -- we were up -- we did -- CapEx moved up is quarter, but again, relative to the size of the organization, not by a meaningful amount of money.

Okay, so following up on some of Mark's questions on the UniFi -- it looks like a lot of your distributors ran out of stock earlier this month. And some of them just seem to think they're going to get some this week or next. Is that basically just a function of the range, as Robert mentioned, and we will see a significant flow here in the next few weeks?

Well, it's clearly a functioning of it being metered. We're not going to get into this -- I don't want to get into a level where we are telling you what weekly shipments are. But this is very metered, planned approach. The product comes to market, you seed the market, you get early feedback, you get to this kind of virtuous loop where you immediately respond to the questions the community puts forward and you add features, you fix issues for them very, very quickly, you generate more goodwill, which results in higher order levels.

And so, again, the same methodology we used for AirMax, we are just repeating it as we roll out these new platforms.

I saw the e-mail regarding the new product that you are talking about. So will that -- when you announce that and you formalize it, will that be when that product starts to ship, or will we wait -- how long will we have to wait for that?

So that should be -- our first shipment from the date can be anywhere from zero to six months. Our product announcements are based around getting early feedback from customers on the product, getting -- ramping up production. But we've typically been, once an announcement is made, anywhere from kind of the zero to six month range.

Okay, and I think there's been a fair amount of dialogue about a router product which is not what's described so far. Is that something that you've discussed the timing about yet?

It's definitely going to launch sometime in the calendar year.

Fair enough, thanks a lot. Congratulations.

Amitabh Passi.

I guess, for either of you guys, just wondering how do you weigh the priorities for calendar year 2012 relative to product expansions versus your graphic expansions? Any thoughts in terms of any critical geographies that you intend to expand into? I'm just trying to understand how your sort of priorities are being allocated vis-a-vis geographic expansion versus new product platforms.

We actually -- there is no -- they are two different animals. Right? We are not prioritizing one above the other. We are constantly looking at making sure we have the appropriate distributors in the right regions. We think our products have a global appeal. So we don't particularly roll out products, and I think our revenue mix speaks to the fact that the products have a global appeal. I'll let Robert talk about how he prioritizes the R&D effort. But then whoever runs our sales and distribution, you know, they are separate. The team works together, clearly, but these are separate skill sets and separate goals for each of the organizations. Robert, do you want to touch on how you prioritize the -- roll out the R&D?

Yes. So typically, we launch a new platform, we try to come out with cost-disruptive -- a base cost-disruptive hardware. For example, you look at UniFi, we came out with our UniFi E first, which is a $50 cost of distribution, very disruptive platform. And we try to get as much momentum and to get it into the hands of as many potential users as possible. And we work with these users to evolve the product feature set and improve the reliability.

Once that is underway, we work very hard to develop maybe more advanced, higher-priced products, which you will see with an upcoming UniFi E Pro, which is a dual radio, gigabit Ethernet, 3-by-3 MIMO, 802.3 F power over Ethernet. And we'll charge that -- instead of $50, it might be closer to a $200 product, but it's still cost disruptive and it provides a lot more functionality. And it's a significantly higher margin for us.

So that's the strategy we take with product development. We try to hit the market with disruption and then follow it up with higher-margin and higher, more full-featured products.

So John talked about gross margin expansion we are getting from operations. I believe, as this calendar progresses, I want to see gross margin expansion from the contribution of higher-margin products.

Okay, thanks.

Thank you, sir. And there appears to be no additional questions in the queue. I would like to turn the program back over to Robert J. Pera, founder and CEO.

Thank you. So in closing, I would like to thank our Ubiquiti community and thank our shareholders who have shown their confidence in Ubiquiti and our unique business model. I also would like to again remind everyone of Ubiquiti's mission, which is to bring industry-leading connectivity technology to the world in the most efficient way possible with platforms moving from the R&D lab to the end-user with minimum impedance. This efficiency allows us to provide disruptive price performance solutions to markets that were previously underserved.

Thank you.

Thank you, sir. Ladies and gentlemen, this does conclude today's program. Thank you for your participation, and have a wonderful day. Attendees, you may now disconnect.