優比快 (UI) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ubiquiti Networks Q4 2012 conference call. At this time, all participants are in a listen-only mode. Later we will have a question-and-answer session, and instructions will follow at that time.

(Operator Instructions)

As reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Sean Deorsey. Sir, you may begin.

Thank you, operator, and thank you for joining us, everyone. I have here with me today Robert J. Pera, founder and Chief Executive Officer at Ubiquiti Networks, and John Ritchie, Chief Financial Officer. Before get started let me review the Safe Harbor statement. During the call, we will be making forward-looking statements that are statement other than statements of historical fact, including but not limited to our strategy, estimates, projections, revenues, and EPS.

Forward-looking statements are statements of risks and uncertainties that could cause results to differ materially or cause a materially 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 a reconciliation of non-GAAP and GAAP measures can be found in the press release that was issued this afternoon on our website at the IR section at www.ubnt.com. Now let me turn the call over to Robert Pera, Ubiquiti founder.

Hello. Thanks for joining the call. John Ritchie will break down the earnings results for the quarter and the fiscal year. Before that, I want to give my thoughts on how the Company is positioned for the future. Unlike traditional tech companies who compete in known markets with sales-centric business models, Ubiquiti is powered by a hyper efficiency model which allows us to profitably enter underserved markets, something traditional technology companies have difficulty achieving.

At the nucleus of our model is the dedication to the development of powerful communication software which we provide at no cost as well as a commitment to providing transparency between our engineering teams and our technology user community also at no additional cost. When paired with disruptive cost performance hardware and a focus on optimizing user experience, explosive customer demand can be realized without the need for traditional SG&A expenses.

In the case of airMAX, our broadband outdoor wireless Internet distribution platform, demand has skyrocketed and hardware sales have grown dramatically, even in the presence of incumbent competition. This is a credit to the inherent defensibility of our technology and our ownership of the end-user community relationship.

It is the same pervasive customer demand and market dominance which I believe has driven a group of terminated ex-distributors to such expense as to steal our intellectual property and set up counterfeit operations of our airMAX products. Although they have impacted our airMAX sales and have created confusion in some markets, we have been relentless in pursuing them through a comprehensive global litigation strategy.

Last month, we received a US court judgment issuing an injunction against the group leader as well as a freeze of his assets. Soon after, we received an additional injunction against his South American subsidiary from the Argentina courts. Last week, his partner in China was put back in prison where he awaits criminal trial. Along with our legal initiatives, we have also implemented sophisticated anti-counterfeit technology across all Ubiquiti product manufacturing to make it significantly more difficult to counterfeit our new platforms and new airMAX products.

Unfortunately, neither the negative impact of the counterfeiters nor the positive impact of our legal victories against them and our anti-counterfeit technology implementation can be reflected real time in our short-term sales performance. However, we believe our recent progress in minimizing their operations will be positively reflected in our long-term sales as airMAX demand today is stronger than ever.

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

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

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

Since Ubiquiti's humble beginnings from my apartment in 2005 through its first year to now achieving over $100 million earnings, it has been profitable every single quarter.

Because of the robustness of our hyper efficiency model, strong cash flows and solid balance sheet, we are in a position to take advantage of a unique opportunity to repurchase our stock, which I believe is substantially undervalued from a long-term growth perspective. With that in mind, we will be starting a stock repurchase action from Monday, August 13 for up to $100 million. With that, I will turn things over to John to review the quarter and fiscal year financials.

Thanks, Robert, and thank you all for joining us on our fourth-quarter earnings call. We'll discuss our Q1 guidance in more detail later in the call, but I wanted to make some initial comments on that. Although we are disappointed by the counterfeiting impact on our business, would like to stress that this is a short-term issue. And the Company's fundamental and competitive position remain the same.

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

Before I go into the detail on the numbers, I would like to highlight a few financial milestones that we achieved for the quarter. We saw strong growth in the fourth quarter of 2012 with revenues up 40% to $94.9 million from $67.6 million in the same period last year. On a sequential basis, revenues increased 3% or $3.2 million from the $91.7 million recorded in the March quarter.

On a year-over-year basis airMAX increased 41%. We saw a sizable increase in our new product category, which was up by 27% sequentially to $12.6 million driven by my externally strong demand for our UniFi platform. As a reminder, these new platforms such as UniFi, airFiber, mFi, and airVision contain our most advanced anti-counterfeiting measures.

Strong performance in the new product category was partially offset by a 5% decline in our airMAX product line. As Robert mentioned, we believe that the airMAX decline is due to counterfeiting issues, which we have swiftly addressed with legal action. Non-GAAP income for the June quarter was $27.9 million and GAAP income was higher at $28.5 million.

Our non-GAAP EPS was $0.30 per share, up 67% compared with the 18% -- I'm sorry -- $0.18 per share a year go. Very importantly, we generated $27.9 million in cash, approximating our non-GAAP net income number and bringing the total cash generation for the last two quarters to $57.2 million, highlighting the exceptionally strong cash flow characteristics of the business model. Despite a tough revenue environment, we also expect strong cash generation in the September quarter as well.

I will now go into each category in more detail, starting with our proprietary airMAX platform. Revenues came in at $59 million, up 41%, or up $17 million from the $43 million recorded in the same period last year. On a sequential basis, airMAX revenues saw a decrease of 5% or $3 million from the $62 million in the March quarter. Again, we believe the decrease is related to the previously discussed counterfeiting matter.

AirMAX revenues were 62% of total revenues for the quarter, down from 68% in the prior quarter and flat at 62% in the prior year. The new product category, which again consists of UniFi, airVision, and airFiber came in strong with revenues totaling $12.6 million, up $11 million from the $1.6 million recognized in this category in the year-ago period. They now represent 13% of our total revenues.

The last component of our systems category is our other systems products. These primarily consist of our non-airMAX outdoor, wireless product line. Revenues from this category contributed $10.8 million down slightly on a year-over-year basis and relatively flat on a sequential basis. Revenues for embedded radios, our original product line were $2 million, down $200,000 sequentially and down $2.1 million on the year-over-year period. As we have said in the last few earnings call, looking forward, we expect that this category to decline in an overall basis.

During the fourth quarter, our last category antenna/other -- those revenues were $10.5 million, up $1.9 million from the same period last year. On a sequential basis, this category saw revenues up $3.3 million. Revenues in this category are largely driven by sales of non-integrated stand-alone airMAX antenna and sales of brackets, cables, and other miscellaneous accessories.

Now looking to the geographic breakdown of our revenue, North American revenues came in very strong at $25.3 million, up 15% on the year-over-year basis and up 52% on a sequential basis. We believe that the North American market has not been impacted by the counterfeiting efforts. We believe that significant growth was driven by pent-up demand from our distributors, who, for several quarters, were limited by their account receivable balances. During the quarter, we were very pleased that the significant improvement we saw in these balances.

Moving on to South America. South American revenues decreased 40%, sequentially, and 9% on a year-over-year basis to $16.6 million. The decline in South America, which was responsible for the sequential decline in airMAX, again, we believe is a result of the counterfeiting issues. We expect continued weakness in this region in the first quarter. As we have proactively raised the profile of our anti-counterfeiting efforts, our end-user customers have held off on ordering products until they have more confidence they are buying genuine Ubiquiti products.

In the EMEA region, which has been our largest region for the past several quarters, we saw revenues increase 7% sequentially and 78% on a year-over-year basis. The EMEA region represented 41% of our revenues for the quarter. Looking forward, we expect this market to show some of the characteristics we have experienced in South America, where customers have been hesitant to purchase until the have more confidence they are buying genuine Ubiquiti products. In the Asia PAC area, revenues increased 160% on a year-over-year basis to $14.1 million were up 28% sequentially.

Moving on to gross margin, gross margin on a non-GAAP basis -- non-GAAP year-over-year basis, were up approximately 180 basis points to 43.3%, up from the 41.5% recorded in the prior period -- in the prior-year and 43.3% in the prior period of the March quarter. Helping our gross margins is our pricing policy.

We simply do not discount our products. When we enter a market, our price is constant, and stays constant during the lifecycle of the product. Hence, we do not experience the price decline related margin pressure that companies with more traditional business models experience.

Now moving on to expenses, Our non-GAAP expenses came in at $8.1 million, up from $6.8 million or up 18% on a sequential basis, And up from $5.1 million or 57% on a year-over-year basis, with OpEx coming in at 8.5% of revenue. As expected, the large component of the sequential increase relates to our intellectual property efforts to protect our IP, with the next largest component being increased R&D spending.

Non-GAAP operating expenses, including -- excluding the impact of stock-based compensation which was about $0.5 million for the quarter and also excluded the benefit we have of a one-time gain related to the timing of a toy system's trademark agreement. Though overall expenses are relatively low, we continue to aggressively pursue the most talented engineers we can find to enhance our R&D efforts. We continue to expect R&D expenses to increase sequentially in absolute terms.

As you saw in our press release, our non-GAAP margins again are ahead of our long-term model of 32% to 34% with operating margins coming in at 35%, down from 36% last quarter and 34% in the year ago period. As we look to the fourth quarter, we expect to see an increase in operating expenses of approximately $0.5 million. The largest component of the sequential increase relates to our R&D cost, primarily related to a prototype built for the [next p] platforms that we expect to launch in the September and December quarter. Our SG&A, we expect that to be flat to modestly up.

Then moving on to the last item on the P&L, our effective tax rate. The effective tax rate for the June quarter was 16%. The 16% represents a catch-up adjustment to bring our year-to-date rate to 17.25%. For planning purposes, we think this rate will hold steady in 2013, and we're using the 17.25% rate. And as a reminder, the primary driver of our effective tax rate is the geographical mix of our product revenue.

Now turning over to the balance sheet, we had a very strong quarter with our cash balances growing $27.9 million, our cash generation approximated our non-GAAP net income number for the second quarter in a row, highlighting again be positive cash flow attributes of this very effective business model. As we have consistently done in the past, we expect to generate significant free cash flow going forward, with the majority of the cash generation occurring outside the US.

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

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

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

However, we believe that this is not a long-term issue, and that we are taking corrective actions, very swift and strong corrective actions, this quarter. As Robert mentioned, we have a scored a series of significant legal victories against the counterfeiters. And we believe that these -- this series of legal victories will significantly slow the flow of counterfeit inventory into our market.

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

The credit agreement consists of a $50 million term loan combined with a $50 million revolving line of credit. Now, before we open up the call for questions, we will turn it over to Robert for some closing remarks.

Good, thanks John. So before we start Q&A, I want to talk about another important aspect of our hyper efficiency model which I refer to as leverage. Behind our first technology platform, airMAX, are millions of radio shipments of hundreds of thousands of R&D hours invested into software development and wireless driver refinement. With our subsequent technology platforms UniFi and airFiber, we of leveraged much of our software R&D from airMAX as well as our economies to scale to disrupt new markets.

Likewise our latest platform, mFi, which is our machine-to-machine networking platform takes advantage of similar software R&D investments from UniFi and the same economies to scale that bring a revolutionary machine-to-machine networking technology platform to market. So, through this leverage and collaboration amongst our R&D teams, we are able to execute entirely new market opportunities by repositioning our IT building blocks.

Similarly, we are able to leverage our operator community to create initial demand with each new technology platform introduction. Whereas traditional technology companies have to increase SG&A spending to chase growth and increase R&D spending significantly to create new market opportunities, Ubiquiti is able to achieve growth and new market opportunities far more efficiently.

This inherent leverage in our R&D and our ownership of the user community is what I believe makes Ubiquiti's long-term growth opportunity unique and our long-term financial fundamentals potentially even more attractive. With that, let's start Q&A.

Certainly.

(Operator Instructions)

Brian Modoff, Deutsche Bank.

A few questions. First, it's your view that, with this policies you have in place, you are going to see it counterfeiting issue rear its head in the other markets, the other emerging markets you have so you will be dealing with this inventory issue for a couple of quarters? First question.

I think that's a fair assessment Brian.

Let me -- I want to explain the difference between what people interpret it as counterfeit and product cloning in our specific counterfeit problem. So, the problem we have is not counterfeit Nike shoes, or Gucci purses showing up in shopping areas where people know they are buying counterfeit goods. What we are facing are a group of very resourceful ex-distributors, who know our sales channel, who have managed to get our IP in China, set up world manufacturing facilities, and have basically placed our product in legitimate sales channels. And this is unknown to our customers who think they're using authentic products. So this is almost like identity theft in a way. So that's one thing to understand. Now we have made a lot of legal progress against these guys as I have said, and we also have put into place sophisticated anti-counterfeit security measures. So, what we're doing today is every product that runs through our manufacturing has a security hardware, security IC that is linked to a very secure cloud-based production authorization system. So it's very, very difficult to have a recurrence of this problem. So I think we have attacked this problem in two ways. We are attacking it at the source, and we are minimizing this specific group's impact on our sales channel. And then we have also implemented these anti-counterfeit technology production measures at the source to prevent a future problem like this from happening.

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

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

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

First of all, we don't give discounts to customers. We have one --

I know you don't, they had it on their website.

Well, John?

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

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

It's not that it so good, in fact the quality is inferior. And that's another side effect of these guys, but I would say from the outside, it looked identical. So, yes, it was tricking customers.

Robert, given the issues around the counterfeiting and really just dealing with some of these challenges for the Company, are you still planning to purchase a basketball team, or are you going to focus on dealing with these issues with the company?

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

Okay. I'll pass it on to someone else

Brent Bracelin, Pacific Crest

Couple questions if I could, first one for Robert. Given some of the challenges you've seen with some of the former distributors and former manufacturers, have you given any thought to taking a new go-to-market approach to the business? Have you re-evaluated your manufacturing strategy? Can you give us just an update, given some of the challenges you have witnessed here and how it is actually impacting your business? What is the current thinking on go-to-market, and is there a thought process here to improve control of where the products are going?

Yes, so, I think it's important to keep in mind the context Ubiquiti was never a [VC] backed company in the early days. I started it from my apartment. It was bootstrapped. So I ran it very aggressively in the beginning. My goals were to survive and be very competitive. Now as we're looking forward, and we transition from being a $1 million company to $10 million to $50 million, and now we did excess of $300 million. Our philosophy is shifting from being more -- especially in our infrastructure, from being reactive to being more I guess predictive and proactive. You can see that in our infrastructure, for example, and you can see it how fast in the past couple of months we have scored legal victories against these guys. Which is pretty impressive considering the victories, some of them were in emerging markets without a strong court of law. And we also hired a Senior VP of Operations, and we're getting our operations and our lead times -- improving them. So, I think moving forward you'll see us look more like a traditional company with very strong infrastructure planning for the future. But the thing that will always remain intact is what I call our offense, which is our high-power R&D and our market strategies and our hyper-efficiency model.

Fair enough. A couple questions for John, obviously on the counterfeiting, it clearly impacted South America. If I assume South America is down another 50% sequentially that would still imply the other regions would be down about $20 million sequentially just to get to the midpoint of the guidance. So, should we assume that this counterfeiting is going to have a broader impact beyond just South America and that is essentially what you are guiding to?

Yes. To cut right to the chase, it's going to impact almost everywhere but North America. You see that very clearly on the geographical revenue breakdown. The process right now is rolling through South America, it could roll through EMEA, to slightly lesser expense, but I think your interpretation is spot on.

Okay, fair enough and relative to anti-counterfeiting technology measures that you now are implementing in every product, what is the impact to gross margin longer-term? Obviously you're adding some additional expenses there. Are you able to recoup that, or should we think about those 40% gross margin is the normal run rate we should assume going forward given you're adding some additional anti-counterfeiting technology to the platforms?

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

I want to -- I just wanted to circle back to some of the things that we are doing from a control perspective. And Robert touched on this -- driving down lead time is one of the things, you want to be much more responsive to our customers and not give counterfeiters an opportunity to be responsive to our customers. We also want to give them a better opportunity to manage their inventory. The faster we respond to their orders, the better control they will have over their material and their inventory management.

Great. My last question is really around the $100 million buyback, and again, you talked about the majority of the cash generation outside of the US. How much of the cash balance now is actually onshore versus overseas?

Sure, today we're sitting on -- when I say today, not the end of the quarter, as of an hour and a half ago, we're sitting on about $42 million in the US. That includes a draw down of some of our debt, and we also $50 million in an untapped revolver.

Okay, great, thank you.

Amitabh Passi, UBS.

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

I will take that one. If you look at a situation, we first learned about the counterfeiters maybe about a year ago. At that time, we didn't know the extent or scale of their operations, and they have been very discreet about how they are filling our sales channels with counterfeit product. So it's been very hard to get a handle on a. At the same time in the past year or two years you have seen this explosive growth in AirMax where the demand has far outstripped the supply and the lead times have been pushed pretty far out. So I like to compare it -- all those things together, it's kind of created an effect where we have, for analogy, a shower, where you turn the knob and the temperature of the shower doesn't react quickly to when the knob is turned. And so what you're seeing is this long delay. So the counterfeiters have been hitting us the last couple quarters, but we just haven't really seen it until it's culminated together now. At the same time, when you see the progress we're making against them, the legal victories and minimizing their operations, and also our implementation of anti-counterfeit measures, those things will also take time to reflect in the numbers. So, I believe they are having a very significant impact today, but unfortunately it doesn't reflect in the sales numbers real-time.

And then just a couple of follow-ups, John, can you remind us again the mechanics of the buyback? How quickly can you buy back the $100 million shares? Are there limitations? Maybe can just help us understand that. And then, Robert, I'm curious will you personally be buying back any shares?

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

To the mechanics, Amitabh, we are limited by the 10b-18 rules, you'll recall the 10b-18 rules it's 25% of the four-week moving average. In terms of when, we can do it Monday morning. So effective Monday morning, we are allowed to buy up to 25% of the daily average calculated over a four-week period.

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

The short answer is I think that the shorter the lead times, it obviously impacts visibility. If you could trade off their allowing our partners, responding quicker to our partners' demands, and giving them the opportunity to manage their inventory better, because of the shorter lead times it's well worth the trade-off. You always get suds. We are never going to get to a sell-through model. This gets us much closer to selling, being close to sell through. Now that's kind of a topic. In terms of where we are at today, right today we are approaching four weeks, and we're not stopping there. I can't tell you how long it will take, but we would like to get to faster and faster turnarounds. And I want to point you one of Robert's comments about opening up a distribution center in China, the goal there -- that's a couple quarters away at the earliest. But the goal there is to get to even faster turnaround times.

Okay. Thanks. I'll step back in queue.

Jonathan Kees, Capstone Investment.

I guess I will start before asking -- I'll start with a couple clarifications, housekeeping questions. How many 10% customers did you have for the quarter, any drop-off in that from the previous quarter?

In terms of our number of customers?

In terms of -- in terms of which customer. Were there any change in the 10% customer make up from the past?

Yes, without getting into specific customers, with the dramatic move we had away from South American revenue, clearly those customers obviously represent a smaller piece of our overall revenue pie.

Okay, so there is a change in makeup, okay, all right. How many 10% customers did you have for the quarter, not who but how many?

You know what, we will actually look back. We will find the answer to that, but if you want to jump to another question, we'll think about that.

Okay. Sure. Sounds fine. Did I hear correctly, you said OpEx is going to go up by $0.5 million next quarter from -- sequentially from this quarter in absolute dollars?

That is correct. Our intention is to continue investing in R&D. Our return on R&D investment far exceeds any other publicly traded company as far as we know. So we do not intend slowing down at this time.

All right. Still looking at the primers that you talked about in the past, about 9% or whatever? Max or whatever total OpEx? I guess for modeling purposes, how should we look at it?

Again, because we believe this is a short-term problem, and doesn't affect our long-term outlook, our long-term model remains intact, but to the extent that you do the math, we are going to spend $8.6 million, $8.7 million on, pick the midpoint of our range, you're going to get beyond 10%.

Okay, yes. Absolutely, that makes sense. All right. Moving on to -- I need to ask about the counterfeiting here. You arrested the leader of the gang, or filed legal charges, legal action against the leader of the gang, but the gang itself still without legal action? And still without any arrest or any restrictions? Infiltrating restrictions? Is that?

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

As Robert mentioned, we scored a number of victories in the court system on a number of jurisdictions. And the US Court order does prohibit the ringleader from aiding and abetting and working with anybody else and again and prohibiting all of them from any further counterfeiting or infringement activities.

Okay, so it does include the rest of the gang. The ringleader and the rest of the gang. Okay. All right. So, usually, what I've seen in the past, I guess more with the software is that it's a little bit difficult in terms of enforcement. You have the legal victories, and then after that you have to enforce it. What are you doing in that area in terms of follow-up on your legal victories?

I will talk about that. Yes. In the US, we got both an injunction and an asset freeze against the leader. And we got an additional injunction and a warehouse seizure in Argentina against the subsidiaries. And his partner in China, who was in jail, and released is, as of today, in jail awaiting criminal trial. So I think we have done a good job of not only getting legal victories, but also disarming these guys.

Okay. All right.

Let me circle back to your original question. In the fourth quarter, we have no 10% customers. In the prior quarter we had two.

Okay. Thanks for that. Last question, getting back to the enforcement of legal product there, you brought in a new general counsel and welcome aboard, Jessica. I guess you've got your hands full there. Are you expanding your team there? Are you increasing your legal teams overseas? Or are you doing this outside counsel and just hiring them when you need them?

Like Robert mentioned, we are committed in building our legal infrastructure to strengthen the defensibility of our long-term success. We've already been working on building the US team and the China team. We've set a good foundation of a solid legal team as is evidenced by our successes against the counterfeiters. And the Company has always been and will be hiring top talent, and our legal team is no exception.

Okay, great, thanks a lot guys, good luck.

Tavis McCourt, Raymond James.

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

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

Not in the channel but being shipped?

As for the shipments, it is hard to say. Our intelligence says it is significantly diminished.

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

Yes, I think it is, but you've got a keep in mind what I said about the AirMax demand stripping -- outgrowing supply, kind of overnight. Our lead times being traditionally very long to fill that demand, and then these counterfeiters, either through our own sales channel and alternative resellers that are serving the same customer base have slipped in, it's created this effect and my analogy was the shower head., right? We have been shipping through to our orders, and our own sales channel has also been putting our orders according to demand and suddenly over time, this thing has shifted and we see the aftereffects of it. So --

I understand. I just wanted to make sure my math was at least somewhat in the ballpark in terms of the scale of the issue you believe actually is that large on a dollar amount basis.

Yes.

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

That's the simplest form of cash flow, that's the change in our cash balances.

Do have the cash flow from Ops or not yet?

We don't have the cash flow from Ops, we don't have the number yet.

And you have the cash that was in the USA quarter and?

The cash that was in the US the quarter end you mean? The majority of the cash was in the US.

You said you had $42 million of the cash balance as of today is in --

I want to be clear that that $42 million included the $20 million proceeds we had from our term loan. So before that we had about $20 million of US-based cash.

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

I think we want to emphasize that we have taken extraordinary measures to prevent our new product line from being impacted by the counterfeiters. So the falloff will be AirMax-focused.

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

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

Final question for Robert in terms of the -- some of the technology you're putting into the new platforms to prevent counterfeiting or make it more difficult, how does that impact the AirMax line? Are you going to be re-launching some new AirMax hardware and how long well that take to seed the market with?

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

You are not doing a re-design of the existing AirMax product line, though?

No, from a product perspective, we think a lot of those products such as our NanoStation and Rocket and Bullets, there pretty much optimum -- optimally designed for the user experience.

Okay, great. Thanks a lot.

Sanjit Singh, Wedbush Securities.

What would give you the sense on the timing? You're talking about two quarters to resolve this issue. I wanted to understand your visibility into the length of the counterfeiting issue and for sales to snap back. And then secondly, why haven't some of your competitors whether it's Microtik or other people, other players in this space, why haven't they been exposed to some of these counterfeiting issues like you have?

I will take that. If you look at Ubiquiti and AirMax, before we became -- we came into the picture in the '90s and early part of this decade, the outdoor wireless space in these emerging markets was one that was relationship and middlemen driven. There was a lot of segmented hardware solutions that were sold to people who knew how to source them out of Asia, and they controlled the end-user relationship and the sales and the margins that came with that. No, when Ubiquiti introduced AirMax, we had something so incredibly disruptive that at first, people thought it was too good to be true, and then they used it, and then it spread like wildfire. And so right now you have a situation in the industry where although Microtik, they have traditionally been very popular in the WISP market, today they're really used as a routing site -- and what you have on the wireless side of all the radio links in the wireless side of the industry is complete total dominance of Ubiquiti branding.

These middlemen who traditionally could control the end-user relationship and their sales margin suddenly they are, for lack of a better word, commoditized. So all the customers know Ubiquiti. All of them have access to our engineering team, we give them complete transparency and there's this pervasive demand in the market for Ubiquiti products. Now, when you take that kind of phenomenon and you couple it with some not so honest ex-distributors that we terminated for violations of our agreement, that were also resourceful and had ways to get our IP and knew our sales channel, it was just the perfect storm, right? Where these guys came in and were able to do this to our brand. So I think it is a testament that Ubiquiti really doesn't have anybody that is touching our market share, and we are so pervasive and so dominant that the only way for these guys to get back in the game and compete and make money was to resort to these measures.

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

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

I appreciate that. My last question relates to your two major distributors, Streakwave and Slytech, is there any thought there about expanding your presence to other major distributors? How do you view those two distributors as a percentage of sales going forward?

I think for AirMax, those guys are perfect distributors because they serve these wireless Internet service providers and they have a deep knowledge and contacts and a history being connected to that industry. As we move forward with new technology platforms, if you look at UniFi for example, UniFi, some of our biggest customers is in England, in the UK, and even though AirMax doesn't have much of a present there UniFi is helping us getting into new distributors in more evolved markets. You look at this not as Ubiquiti and the partners we select, it's going to be the Ubiquiti platforms and the applicable partners for those platforms.

Just one other comment, going back to what we said earlier, that revenue diversification, your already see in the back -- in the no 10% customers this quarter.

Thank you.

Matt Robison, Wunderlich Securities.

Let me understand the mechanics a little the better first, though. You typically have a distribution tier and then a reseller tier and then the end customers, which for AirMax, are wireless ISPs. Is it fair? Should we -- it seems like your distributors should be buying directly from you. Is there some sort of way they found that they were thinking they were buying from you and in fact buying from counterfeiters? At the first tier level?

Yes, correct. At the first tier level, we believe that our first tier level is not engaged with the counterfeiters that are buying their products. The problem comes into the reseller level, where the resellers have more attractive pricing and can bypass our direct distributors to get products. We believe the problem is really the second tier, the reseller level, as well as maybe other outside distributors or resellers that want to work with us that maybe can't meet the minimum order commitment.

Okay, so what we're seeing here then, and it sounds like, based on that -- I think is a fairly key point, the sort of historesis affect here, where we have known about this for a while but we are not feeling it until fiscal 2013 so much. That reseller portion of it, the second-tier, got hugely stuffed by your counterfeiters and now you have to see that inventory dissipate before you can start to sell through? And to what degree do you have the ability to discipline the end market and say hold on, wait, let's make sure you buy a good product. Or do you have no control over that, and it is just nature has to run its course independent of your influence on the end market?

I think your understanding is correct. There is a delay between when these counterfeiters did their damage in the market, and to the time we actually see the impact on the demand, overall. To your second point, since we raised the profile of our litigation against these guys, we have had many customers come to us, the actual end-user operators and asked them -- and asked us to check their hardware to see if it was counterfeit because they had quality failures. So the customers that care about getting original products, I think we have done good job of alerting them. The second thing we have done is we have collected all the evidence and contact information, and we sent out distributor and reseller newsletters. In fact, we have -- sent one just this week that can be found on our website, I think in the newsletter archives. And we basically are offering anyone who has worked with the counterfeiters or have been tricked, amnesty. And I believe Jessica -- that amnesty lasts for the next month?

Yes.

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

The uptick John, you mentioned, I'm not sure if you meant to mention it, you mentioned -- you said something to imply that AirFiber contributed to revenue in the June quarter? Is that in fact true or is that --

It was -- it was de minimus, right. It wasn't a significant number of units. But we -- we have committed to having AirFiber ship in the June quarter, and we met that commitment.

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

I don't think so, I think that's a channel that one of our -- as I think I've said in past calls, one of the things they focus on is credit risk. And that channel, revenue slowed down in that channel, partly because of us proactively managing the credit risk in the North American market. That credit risk eased significantly in the June quarter, so we were able to open up the shipments to customers that were constrained.

Okay, that goes back to last year's SEC ruling --

North American market is in very good shape.

Okay, so just a couple housekeeping items. I heard you don't have the cash flow for operations number. Do you have CapEx and depreciation?

Our CapEx and depreciation numbers are not material. The largest -- our largest single CapEx investment was our move to our new building. That's the largest investment the Company has made I think since its inception. And our cost here was $1.3 million in build out and $300,000, $400,000 in furniture. So, we're just not a capital intensive business. It's just not material to us.

I think a number of us on the call like to keep track of free cash flow and that sort of thing. I understand your perspective, just was hoping to get some of the numbers while we are at it here. Thanks.

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

Yes, thanks. I guess what I want to conclude the call with is that I want to reiterate that we have made solid progress in disarming the counterfeiters and look forward to AirMax sales numbers returning to reflect the platform's strong growth in the market. But we are most excited about our new technology platforms. If you look at our new technology platforms, we have UniFi which is our scalable wireless LAN platform, which is the most mature after AirMax and having it's enjoying an incredible adoption rate. And then we have AirFiber, which was a huge R&D effort. And our goal there is to redefine the microwave back haul market, and we are just starting early shipments. And early customers have had rave reviews. Recently we have launched mFi, which is our machine to machine networking platform, which also has a lot of excitement around it. And we are starting initial shipments this month on mFi products. And next month, we will have another exciting new platform announcement and one more before the year end. Thanks for joining the call. I guess we will see you next earnings call.

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