優比快 (UI) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Ubiquiti Networks Q2 2013 conference call. At this time all participants will be in a listen-only mode. Later we will conduct a question-and-answer session, which instructions will be given at that time.

(Operator Instructions)

As a reminder, today's conference is being recorded. Now I would like to introduce your host for today, Amy Feng, Ubiquiti Networks Investor Relations.

Thank you, operator, and thank you everyone for joining us today. I'm here with Robert J. Pera, Founder, Chief Executive Officer and Chairman of the Board at Ubiquiti Networks; 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, revenues and EPS. Forward-looking statements are statements of risk and uncertainties that can 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 in the press release. We do not undertake to update in light of new information or future events.

In addition, references 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 Investor Relations section at www.UBNT.com. Now let me turn the call over to Robert Pera, Ubiquiti Networks Founder, CEO and Chairman.

Thank you, Amy. I would like to say I believe our financial results are encouraging. But more importantly, I feel the highlights of this past quarter were our progress in building out a new infrastructure that makes us a stronger Company overall, moving forward. Specifically, as we mentioned to you earlier, we have set up our third-party logistics center in China under our new operations leadership which has led to significantly reduced lead times and improved shipping linearity. In combination with tighter receivable controls we are starting to see the results, including our continued solid cash flow and significant reduction of days of sales outstanding.

We have also seen solid results from our legal infrastructure investments. Our litigation strategy in multiple countries has significantly reduced counterfeiting activities as well as established a firm precedent to deter future counterfeiting activities against our brand and technology. This in combination with our anti-counterfeiting manufacturing technology, now fully implemented across all of our product platforms, gives us confidence that we have much greater control over the counterfeiting problems moving forward. We've also developed and successfully executed on our intellectual property strategy by advancing our global trademark coverage as well as filing more than 20 new patent applications since our general counsel came on board March of last year. In addition to our operations and legal infrastructure investments, we're looking next at strengthening our branding and financial infrastructure. With the hiring of David Shea, formally from WebEx and Cisco, as our chief marketing officer and our new incoming CFO, we are committed to building the brand recognition and public image that are more reflective of Ubiquiti's strength as a technology leader and marketplace disruptor in the communications technology industry.

In today's ultra-fast evolving technology world, I believe the companies that are built to last are those that have an ability to adapt and reinvent themselves. For this reason I believe Ubiquiti has a very bright future. Just several years ago we started as a radio module supplier that evolved next to a wireless hardware company and now to a full technology diversified software and systems Company. I believe this ability to evolve our technology, combined with our unique business model which enables people and businesses around the world to take full advantage of the powerful transparency and social networking capabilities of the Internet, give this Company a great opportunity to scale. Now let's turn it over to for CFO commentary.

Thanks, Robert. And thank you all for joining us in our second quarter fiscal 2013 conference call. Before I go into the numbers in more detail, I'd like to highlight some significant milestones Ubiquiti achieved in the quarter. We generated $26.8 million in cash flow from operations, continuing our string of very strong cash flow quarters. In fact, our cash flow from operations have exceeded our net income now for four sequential quarters, highlighting our very high quality of earnings. And very importantly our airMAX revenues were up 52% on a sequential basis, showing the strong return on investment we have been seeing in our increased legal expenses.

Moving on to the results for the quarter, revenues came in at $74.9 million up 22%, or up $13.4 million, on a sequential basis and down 15% on a year-over-year basis. The sequential increase in revenue was driven by the sharp rebound in our airMAX product line. Our non-GAAP net income for the quarter was $18.3 million, up 26%, or up $4.8 million, sequentially and down 26% on a year-over-year basis. Our non-GAAP diluted EPS was $0.20 per share, up 33%, or up $0.05 per share, on a sequential basis and down $0.07 per share on a year-over-year basis.

Now going to revenue by category in more detail, starting with our proprietary airMAX platform. Revenues for this platform came in at $48.8 million, up 52%, or up $16.7 million from the $32.1 million recorded last quarter. airMAX revenues decreased 8% on a year-over-year basis. airMAX revenues represented 65% of total revenues for the quarter, up from 52% in the previous quarter and up from 60% of total revenues from the year-ago period. The new product category revenues came in at $11.9 million, down 24% on a sequential basis. However on a year-over-year basis they were up a significant, 182% or up $7.7 million. The category represented 60% of total revenues for the quarter. We believe the sequential decline in this category is related to the timing of shipments in the prior quarter. In the September quarter the majority of shipments occurred for this category occurred late in the period, depressing demand early in the December quarter. During the quarter we focused on the operational improvements Robert mentioned related to our shipment linearity. We saw significant improvements in this area in the December quarter and those improvements continue-- are continuing in the current quarter.

The last component of our systems category is our other systems products. These products primarily consist of our non-airMAX outdoor wireless product line. Revenues in this category contributed $4.8 million, up 28%, or up $1.1 million on a sequential basis. On a year-over-year basis it is down 74%. Longer term in this category we expect a steady decline as a percentage of revenue, as our customers continue to transition to our airMAX product line. Revenues for the embedded radio category were $1.5 million down $200,000 sequentially and down $1.1 million in the year-over-year basis. As we said previously in the last few earnings calls, this category is expected to decline in absolute terms going forward. In our last category antennas/other, revenue was $7.9 million, down 6% sequentially and down 17% on a year-over-year basis. Revenues in this category are driven largely by sales of non-integrated stand-alone airMAX antennas and sales of brackets, cables, bolts, other miscellaneous accessory items. Our revenues here tend to fluctuate as a large percentage of these sales in this category are the aforementioned accessories and spare parts.

Now moving on to our geographic breakdown. North American revenues were $12.1 million, down 41% on a sequential basis, and down 44% on a year-over-year basis. North American revenues represented 16% of total revenues for the quarter. We believe the decline in this geography was the result of a few factors, including a decline in the previously mentioned new products category which for certain products was skewed to the North American region. And also as we have done in the past, we correctly managed our credit exposure in North America, which limited sales in this region.

Now moving on to South America, revenues in this category -- in this geography were $17.1 million up $6.8 million, or up 67% on a sequential basis and down 30% on a year-over-year basis. The improvement resulted in the rebounding airMAX business. We continue to see positive signs in South America, including significant improvement in our credit exposure and continued improvement in the pace of payments that we're seeing out of this region. The South American region represented 23% of revenues for the quarter. The improvement in South America clearly indicates the effectiveness of our IP protection efforts.

Moving on to the EMEA region, which also reported very strong results with revenues coming in $35.9 million, up 55%, or up $12.8 million on a sequential basis and up 18% on a year-over-year basis. The results were driven again by the sharp rebound in our airMAX sales. Of the regions the EMEA region represented a total of 48% of revenues for the quarter. And lastly moving on to the Asia-Pac region, sales there were $9.8 million, up 26%, or up $2 million on a sequential basis and down 17% on a year-over-year basis.

Now looking at the income statements in the particular gross margins, our gross margins held steady at 40.8% on a sequential basis despite the significant headwinds of contracting the number of contract manufacturers we use as well as the costs associated with setting up our third-party logistics hub in China. On a year-over-year basis gross margins were down some 42.4%. Our non-GAAP expenses came in at 9.6% -- I'm sorry, $9.6 million up from $8.7 million, or up 10% on a sequential basis and up from the $5.8 million we recorded in the year-ago period. This was driven by SG&A spending related to legal matters and a modest increase in R&D spending.

The total non-GAAP Ex -- non-GAAP OpEx as a percentage of revenue declined from 14.1% down to 12.8% for the quarter. Our non-GAAP operating expenses exclude the impact of stock-based compensation, which was approximately $900,000 for the quarter. Our non-GAAP operating margin showed improvement, moving up to 28%, an improvement over the 27% that we reported last quarter. These improvements are obviously a direct -- directly correlated to our improved revenue picture. Our effective GAAP tax rate for the year to date came in at 13% resulting in a catch-up adjustment for Q2 which resulted in the Q2 rate of about 11%. We are currently anticipating that the 13% GAAP rate will hold for the balance of the year. As a reminder, our rate is largely driven by the geographic revenue splits.

Now turning to the balance sheet. As I mentioned, very strong cash quarter for us. Cash flows from operations coming in at $26.8 million. Our gross cash balances grew by $15.8 million to a total of $148.3 million for the quarter. We expect to continue to generate significant free cash flows as we move forward. For the quarter, our net inventory balances were $14.6 million, up from $7.6 million in the prior quarter. This expected increase was related to our plan to set up a distribution hub in China. We believe that the increased level of inventory has allowed us to reduce our lead times to customers which will more closely align our sell-in with our distributor sell-through. For the quarter we saw significant improvements in our receivables, with absolute AR declining $5 million to $55.9 million, this despite a 22% increase in revenues for the quarter. We also saw significant improvement in our DSOs, which improved to 69 days from 91, an improvement of 22 days for the quarter. The DSO improvement is a direct result of the improved shipping linearity which was one of the goals we had with setting up the Chinese distribution center.

Lastly, I would like to provide an update and status of our stock buyback program. As of December 31, we had repurchased 5.2 million shares for approximately $54.4 million. Now for the third quarter outlook. We are expecting revenues in the range of $76 million to $84 million and we're expecting non-GAAP earnings in the range of $0.20 to $0.24. With that I will turn it over to questions.

(Operator Instructions)

Matt Robison from Wunderlich.

John, can you talk a little bit about where you think channel inventory has gone and how it relates to your lead times at this point?

Sure. We think channel inventory has improved and I think one of the reasons it has improved is one of the outcomes of the Chinese distribution hub is much faster lead times. So we're at four weeks with the goal clearly of getting to better lead times. We're also seeing indications with the significant improvements in the DSOs. We think our DSOs are directly tied to our distributors' financial health which is directly tied to their ability to turn their inventory and their inventory being at more manageable levels. We're also being much more proactive in terms of using credit terms and credit limits and limiting our exposure to any one distributor. We don't want to give them the credit limits that will allow them to build excess inventory. So I think we've been very successful in all those areas. And then the proof point that we're having that success is basically the improvement you are seeing in AR and DSO.

I had the impression at least that a year ago even six months ago distributors were stocking out three months and do you think that destocking process has proceeded? How far into that process do think we are now?

I think ultimately to get a precise answer, Matt, going to be impossible to give you. But we clearly communicated to all of our customers the improved lead times. They went through it last quarter. They saw that improved lead time. They saw the improvements in our shipping linearity in the quarter. I would say we're more than halfway through it, maybe substantially more, but we are clearly not in the beginning phases of this transition.

Do you have any concentration with distributors like you once had?

We have two customers that were greater than 10%. I believe we have one at 13% and one on 14%. One of those is new to that -- to be in the -- the high end of the lead table. I think in general our concentration, when you look back at the year-over-year basis, our concentration is down.

You guys, on a portfolio basis, tracking pretty well here. But the internals are pretty volatile. You talked about the new products and the GOs. First of all, with the -- there's a new distributor, one that's particularly correlated with [EMEA], but-- the new one that is in the double-digit percentage range?

Let me be clear. That's not a new distributor but it's their -- first time they have been at the high end of the lead table. We have had this relationship for a while. They're in the EMEA region, that's correct.

How should we think about the end market demand for the new platforms? You had, from at least a qualitative check, a pretty solid launch for airFiber? And yet we've got this sequential decline which I guess you attribute to the US and I would presume that that product is more US oriented since the unlicensed spectrum it uses is a little different overseas. But can you talk about -- I know you don't like to break out the different platforms but just give us a little bit of a flavor for end market demand for the major new platforms?

Yes, Matt, I will handle that one. Let's start with airFiber. AirFiber is very well received. You can go to our forums, people are raving about it. It's a pretty unique product because it operates in the 24 gigahertz unlicensed band but a 24 gigahertz band is pretty clear so it's almost like a licensed performing product -- licensed and performing product. It's the first product of its kind in that it runs FDD, Frequency Division Duplex, on the actual same spectrum. So it's running 100 megahertz spectrum both with TX and RX channels simultaneously through a really innovative antenna system. People love that product. And I think it has a bright future. But the launch wasn't perfect.

We had some quality issues in the launch we are ironing out and a lot of that has to do with the fact that we used mass production design and manufacturing in applying it to a 24 gigahertz microwave radio product, which I don't think has been done before. So the future is really bright for that product but I don't think you can conclude sequential -- any kind of sequential performance right now indicative as the scalability of that product. I think that same goes for UniFi. UniFi, if you look at our forums and other forums on the Internet, UniFi is also scaling pretty nicely. I don't think there's anything really like it which is a world-class enterprise scalable Wi-Fi system at basically consumer price points. And again, as our operations, we're going through a transition here. And so you'll see our local market, distribution is improving, our AR controls are getting tighter, we're doing much better on shipping linearity. So I think it's very hard to draw conclusions on numbers in the new product platforms in the short term but over the long term, over the next several quarters, I believe the results will be very good.

While I got you, Robert, you mentioned in terms of the CFO succession, it sounds like something is imminent there. Did you mean to drop a hint there or can you provide us an update there? Also related to UniFi, Version 3 is due. Has it happened yet?

Thanks for mentioning UniFi 3.0 will be a big step in UniFi. We will have several new technologies including multi-site support. So now if you have UniFi networks geographically located in various places of the world, now with 3.0 you can manage them all through a single unified control point. So that's going to be launching soon, some time this quarter.

As for the CFO search, we have it narrowed down to a couple final candidates. And I think very soon you'll see an announcement from us.

Brian Modoff from Deutsche Bank.

It's Kip on the line here. I just want to follow-up on the CFO transition. John, how long are you planning to stay on to make sure this transition runs smoothly? I know that I thought that it would be maybe the end of this month or end of March.

The plan right now, what we said publicly is, here through the end of February. The success of Ubiquiti is very important to me personally so whatever Robert and the Board wants to do in terms of helping for the transition, totally up to them. I'm very flexible.

Going to new platforms, I know you guys said that was down just because the sense that you got a lot of orders at the end of last quarter. I'm guessing that had a lot to do with airFiber. It seems like there are still delays on airFiber. You had a couple week delay there and then with TOUGHSwitch, you are looking three to four months out with the new TOUGHSwitch platform. I'm just wondering when some of these things, the investments that you have made, when do see them catching up in terms of the inventories actually reaching the end customer?

Actually TOUGHSwitch has been on the market for a while. We have a few different flavors. I think the one that has been delayed is our EdgeMAX and EdgeRouter platform. We have an EdgeRouter light product, which is the first product in EdgeMAX. We just launched it, and we only have a couple thousand maybe out in the field. I think if you look at the history of Ubiquiti, we haven't always gotten things smoothly or correct when we first launched them the first time. But I think the strength of us is we really listen to the community feedback and we quickly evolve the product to match what our user base wants. If you look at airMAX, right? airMAX was the result -- it was really our third-generation wireless product. We originally had a first product we called PowerStation and then the second generation was NanoStation and then the third-generation we rounded it out as a systems solution platform was airMAX.

You can look at UniFi as it's really on the first generation and I feel like this year we will introduce a second generation of airMAX. But for all the other technology platforms like EdgeMAX and airFiber, and mFi and airVision, a lot of these are just starting to evolve. The good news is across the board we're on the first generation. And most of them will be at least at the second generation by the end of this year. But I believe a couple of those platforms have even better potential than airMAX did. I think just be patient, and we are on the right path.

In terms of what you were just saying, is the focus now to upgrade existing new platforms and upgrade airMAX and to make sure that these products are getting smoothly to customers rather than launching more platforms throughout the year?

Yes. We're like an R&D lab and incubator. So we always have new things we're working on. But I would say you are right. The past two years the general theme was diversifying our technology and creating new platforms. I think for the next year, our focus will be on maximizing the potential of each platform. And I think there's a lot of potential, especially if you just look at how airFiber and UniFi are taking off, just those two alone. Not to mention the other three we have that are just about to take off.

Now, John, just in terms of North America, it was quite a bit of a drop-off and I know you said that you are managing credit exposure there and also with the new products as well contributing to a slowdown there. But I'm wondering if you are feeling any sort of sense of saturation in the North American geography?

Again, I don't think we could really draw conclusions of end market demand based on these sequential numbers because we are going through such a significant operational infrastructure and transition. So I think we just have to look at how the next few quarters play out before we can make any conclusions about demand. But if you look at what's available and the internet is very transparent and our customers are very transparent, you can see that across the board -- geographically and across the board, across all our platforms, there seems to be at least very active and increased talk and praise about all our platforms.

Sanjit Singh from Wedbush Securities.

I wanted to talk a little bit about the guidance and specifically recovery on airMAX. How much of that was maybe pent-up demand given some of the supply chains improvements you have made versus what is a pretty good guidance. Do you expect core airMAX to be the driver here or -- and new products still to take a while to ramp?

Yes, I will take that. Like I said, drawing conclusions on these last couple quarters and sequential trends, I think is very difficult since we have -- we're going through this huge business and operational infrastructure transition. And I will say, determining airMAX and it's potential for how much scale it has left, it's very tough to say. I do believe it is growing. And I think as we move forward, if you look at all of our new product platforms, I think that's the real story of Ubiquiti. We have three elements that I believe are very powerful in this Company. The first is we disrupt on economics. The second thing is we are very good at designing complete systems, inside and out, software and hardware and user experience. And the third thing is we take advantage of the transparency of the internet and social networking to get this kind of community and evangelism effect.

I think those three things together are very powerful and those three things together, when you apply them to different industries, you could disrupt multiple industries. I think we have proven it through airMAX in the [list] market but if you look at how UniFi is taking off I think that is a big potential area to disrupt. And UniFi market I believe can be even larger than the addressable market for airMAX. And next if you look at -- we will have a new airVision. We're revamping that platform and the security market is a big market. Routing and switching with EdgeMAX is another big market. Machine to machine networking also is -- I believe is a huge market moving forward. I think if you are looking at Ubiquiti as an investment, I think what you want to -- what I would like to highlight and the reason why I am a long-term shareholder is because of the unique business model and its ability to [port] and apply that business model to multiple industries, which we are just in the beginning phases of doing.

I appreciate the answer, Robert. A follow up on -- maybe, John, you could help out here, in terms of the visibility going into the next quarter. What is driving that visibility with your relatively solid guidance? Is it the improvement in lead times? What is giving you the confidence?

First of all, we give our -- we have our conference calls this late for a reason, so we have good visibility to the quarter. If you look -- irrespective of what the revenue guidance numbers have been, if you look at our revenue guidance, we have done a great job of attaining that since we have become a public Company. In general we've had a very high degree of confidence in the numbers you're given on our call. Specifically, we're seeing -- it's the strength we are seeing across the board I think ultimately which gives us the confidence in the guidance.

Tavis McCourt from Raymond James.

A couple ones for you, John, first. The gross margins were flat quarter over quarter. I'm wondering, as the revenues scale back, assuming they scale back, should we expect those gross margins to tick up? In other words, was this quarter -- to what degree was it negatively impacted by some of the operational things you are doing?

We're not going to break it down in terms of a percentage. But clearly there was costs associated with the consolidation of contract manufacturers and costs associated with moving to a third-party logistics center. And some of those are one-time costs that were behind us. So there would be a bias toward improved margins but that's about as far as I think we will go in terms of projecting where gross margins could go.

In the prepared script there was some talk about some success on some of the operational improvements you've made and that has led to increased OpEx over the last couple of quarters. Where are we in that cycle? Should we think about OpEx now growing more coincident with revenues or are there still big step-ups you have to do?

I think if you look at the last quarter or two quarters, we have made real significant investments in legal and operational infrastructure, more so than I ever thought we would have. I think over the past year, what I learned in being in this position as a public company CEO is we have to make these investments for the long-term as we scale. I think what you are seeing with these investments, they are definitely not going to scale one to one with revenue. We made some pretty big investments upfront that should serve us well as we scale. So I think as a percentage of revenue growth, they're going to decline significantly assuming we can scale.

In terms of trying to measure where are you in the transition to lower lead times, inventories are up a lot this quarter which is to be expected. Would you expect another tick up in inventories next quarter or is that transition behind us as well?

Here is the challenge and what I have learned. I know the -- investing is all about visibility and seeing how the Company's prospects look. And I know everyone would like to see a sell-through model and I myself would like to see a sell-through model. But the problem is we are dealing in these emerging markets and we have a growth -- a grassroots channel and distributors. And most of these guys, they don't have sophisticated enough systems, so it's real -- and we don't take any returns for our sales agreements. So it's impossible for us to go by a sell-through model.

What we want to do though is we want to tighten the feedback as tightly as possible between our sell in and sell-through. And what we concluded is the way we do this is we tighten up the AR controls as much as we can and we get the lead times down to as close to zero as we can. I think implementing this kind of inventory hub in Asia and greatly reducing the lead times is the key to getting us more invisi -- more visibility and making our investors more comfortable with the Company. I think we have done a great job with that but you are going to see inventory increase as you move to this model. But it is working, right? You can see the lead times are definitely down. The DSOs are definitely down and the cash flow looks good.

That's a great explanation. Final question is on the share buyback. Can you remind us how much you have left on that? And where are you in terms of the draw down of the line of credit?

I will let John answer the specific amounts, what we have left. As for the motivation for share buybacks, as the biggest shareholder and a long-term shareholder in the Company, I believe just the stock was incredibly undervalued. Normally, I don't believe in a share buyback. I think a company should put their capital to use, largely through acquisitions or investments in R&D, which we are doing. But the price of the stock last quarter I felt was so undervalued that we owed it to the shareholders to proceed with the buyback. For the amounts, John, can you give him those?

Sure. We have completed about $55 million of our $100 million authorization, leaving $45 million to go. And we have $20 million, or approximately $20 million left on our facilities, our credit facilities.

How much of the cash is in the US right now?

Of $180 million, about $7 million of that is in the US.

Amitabh Passi from UBS.

This is Chelsea Shi on behalf of Amitabh Passi. First, congratulations on the quarter, very solid quarter. My question is a follow-up to clarify about the strength in EMEA. Is that, the strength in EMEA, almost a $30 million self Q over Q growth, mostly driven by one customer? Or it is it broad-based?

Looking at the customer detail, it's really not driven by one customer. It's not really driven by one country inside the EMEA region. Our big countries in that continue to be the Czech Republic, Poland, UAE and Dubai. They have been our big countries there. And they continue to be our big countries within those regions. So nothing really exceptional there.

Is there any kind of 10% customer distributors or maybe close to 10% customers or distributors there, not specifically in EMEA, just global-wise?

We have two customers -- and we will be filing our [sent to caller Q] tomorrow so you will see more detail. But we're in the mid-teens. We have two distributors in the mid-teens and we have a couple distributors in the high single digits, then it falls off after that.

In terms of setup the distribution center in China, just trying to understand will we see the increase in labor costs in China. Basically, they're trying to reset the benchmark early part of the year. Would you see this will be -- will have some kind of impact to the gross margin going forward or just more visible impact going forward?

Yes, I would say assuming our volume scales, the labor contribution -- the manufacturing labor contribution is not significant compared to the materials and cost leverage. I don't think that will impact operations costs.

Could you remind us in terms of percentage of COGS, how much of the COGS was composed by labor costs?

I don't think we break that down.

It's not particularly material for us.

We pay our contract manufacturers -- our two biggest ones are Foxconn and Liteon. They're close to us. They have their own manufacturing labor built into those quotes. We don't know what it is.

Just to add to that, the labor that we add in the process, our [opt T] as a labor component is not particularly material.

Lastly, for the mFi, just trying to understand where most of the tractions came from so far. Like what kind of applications or customer interest [seen] and going forward, when would you expect meaningful profit contribution from mFi?

MFi right now is just in its infancy. We did shift our first couple products which are the mPorts. And we have our mPower devices. They're going to start to ship this quarter. We have also launched our cloud service for mFi. So if you go to mFi.ubnt.com you could sign up for a free account. You could register your devices, and you can control them virtually through the internet no matter where you are located from any device. That is in a beta program right now. We have a lot of enthusiasm around that platform. And I think some of the things you see in mFi are -- can give you an indication where overall Ubiquiti is going as a Company, the technology strategy for the future.

Brent Bracelin from Pacific Crest Securities.

I apologize. Actually I hopped on the call a little late here. I did have a couple questions I wanted to ask and I apologize again if you have answered some of these. If I look at North America and South America shipments the last six months it looks like those shipments basically are down about one third from where they were about a year ago in the first half of last fiscal year. As we think about anecdotal evidence of inventory, do feel like inventory levels now and specifically in North America and South America are at a pretty low level? Any sign that you're starting to hear some clamoring for product within those two markets? Any color there would be helpful and I have a couple follow-ups.

Yes, I will answer that. As I mentioned earlier, I think there are several reasons for not being able to make conclusions based on recent quarter data. And those reasons include improved shipping linearity, improved AR controls, better local market distribution in some areas which have limited exports in other areas and also our great progress in slowing down and deterring counterfeiting activities. I would be hesitant to make any conclusions based on sequential data in the short-term. What I think is more indicative of the overall Ubiquiti demand is our customer base, who is completely transparent. You can look at our forum. We have 150,000 members, 100's of posts every day on our forum as well as various forums in local languages internationally. And the overall consensus is airMAX demand is still very strong. UniFi and airFiber are -- people love those products and there's a lot of promise in our other platforms. So I think over the next year or so, I think we can probably make stronger conclusions from financial results because we have our infrastructure much more in order.

And then on the outlook, obviously your guiding to now the second quarter of sequential growth here. As we think about how you were able to drive sequential growth here, it sounds like it was largely driven by a large new distributor in Europe. As you think about growing sequentially again in the March quarter, do you think it's going to be a little more diverse geographically or do think there could be still some lumpiness where you see one or two large distributors take some product or do think it's going to be a little more broad based? I'm trying to understand as you think about growing sequentially here in the March quarter.

I think what you've got to look at, the Ubiquiti sales model. We don't rely on distributors to push our products. We -- our whole sales is built on evangelism and pull from our customers. So we ship product into distribution but the real people that are pulling the sales is the actual community and the customer base. I always look at customer response and activity to our products and platforms. I never look at which distributors are buying what or dependency on which distributors. I just don't look at -- that's -- I don't look at things that way in our sales model.

One thing to clarify, it wasn't a new distributor that we picked up, it was just a distributor that saw sequential improvement in their business that put them in the 10% category. It wasn't a brand new distributor.

Was that driven by a couple large orders there or you think it was pretty broad-based in Europe, the strength that that one distributor you saw a big spike was broad-based driven recovery?

It was broad based.

Last question. Obviously you've had lots of issues around counterfeiters in the last six months. Hopefully, it sounds like they're getting -- becoming less of an issue. Have you seen any change in the competitive environment specifically with Cambian and any other legitimate competitors that you would consider in the marketplace?

Yes, I think not just airMAX, but all of our technology platforms follow a similar theme. The first thing we do is disrupt on economics. The second thing, like I said, is we have great understanding of complete product design from mechanical IB to firmware to hardware and application software development --a really complete system design. Usually everything we do has some proprietary lock-in. If you look at airMAX -- airMAX is our own protocol. Once operators start building out airMAX networks, they have to continue to use airMAX, right? And UniFi, the UniFi controller is proprietary. So once you have 50 devices in your controller if you want to scale to 1,000's of devices you have to stay with UniFi. And the same thing for airVision and mFi.

And then the third thing we do is, like I said, we use this community approach and evangelism. I think those three elements together work really well to give us a defensibility in the market. And I always like to use the word disruptive. I think that model -- this model is very disruptive. And you look at competitors, maybe like Cambian and, yes, they could have a good solution, but they don't necessarily have the evangelism aspects or the disruptive economics. And if you look at companies from Asia, yes, they have low cost and economics but they don't really understand the product side nor do they have the community and evangelism aspects. Ubiquiti's strength is we have these three points. When used together they are very powerful.

Erik Suppiger from JMP Securities.

First, just trying to get my hands around -- with some of the changes you are making in logistics. What is the timeframe in terms of when you would be able to get your lead times down to a target level?

I think this quarter -- this past quarter, our operational performance in terms of lead times is probably the best it has been and I think so far this quarter it is looking even better. I think this year, definitely, I think we should be at our targets for lead times which is generally within four or five weeks.

On the counterfeit front, it sounds like that is getting under control. Have you seen any evidence of it expanding in any areas? Did you drop any distributors in the quarter or could that have been an issue in the US -- or in the Americas business?

Yes, from what we know, right, the counterfeit activities we always investigate and we're always looking for information. But what we know -- we're always limited to what we know, and what we know is that in North America there aren't really any significant counterfeit incidents. Most of it is done in other parts of the world. We are making great progress in both Asia and the US in our litigation and we have secondhand information that our aggressive activities are actually deterring other counterfeiters from attempting to do these things. And I think moving forward, we can't say we'll 100% eliminate the counterfeit activities, but between our really aggressive litigation strategies and our anti-counterfeit manufacturing technology for new platforms, I feel -- I am more confident than I have ever been that it should be a problem we have well under control long term.

In terms of the Americas, it was down. Was that in line with your expectations as you came into the quarter?

Like I said before, there is a number of factors at work including the tighter AR controls, the shipping linearity and the improved local market distribution, which is decreased exports in some markets, possibly the US. So I think it's very difficult to make any conclusions based on those sequential numbers. I think we have to really wait and see how the long-term results over the next year plays out now that our infrastructure has been vastly improved and I think we can draw -- we will be in a better position to draw conclusions from financial results as this next year develops.

Matt Robison from Wunderlich.

A follow-up, John, can you tell me what the CapEx was and how you expect that trend to be and if there was a meaningful amount of incremental for setting up your warehouse in China?

CapEx for the quarter was not particularly meaningful. It was $1.1 million.

That's the sustainable level?

Yes, I think on a quarterly basis, that's probably a little more on the high side but if you are modeling, it's as good a number as any.

I'm showing no further questions in the queue at this time. I'd like to turn the conference back to your hosts for any concluding remarks.

Thanks, guys. I would just like to reiterate that I believe Ubiquiti's strengths are our incredibly skilled R&D team and our understanding of how to engineer great products, our disruptive economics, and our ability to engage the community to evangelize our products. And I believe long-term we are in a great position to disrupt future markets and I believe this Company has a bright future.

Okay, ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.