優比快 (UI) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ubiquiti Networks Q3 2013 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. I would now like to turn the call over to your host, Amy Feng in Investor Relations. Please go ahead.

Thank you, operator and thank you, everyone, for joining us today. I am here with Robert J. Pera, Founder, Chief Executive Officer and Chairman of the Board at Ubiquiti Networks and Craig L. Foster, 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 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 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 J. Pera, Ubiquiti's Founder, CEO and Chairman.

Thanks for joining the call. I believe we are at an important inflection point of the Company. While we have always shown strong fundamentals driven by our innovative approach to R&D, our unique business model and ability to identify new market opportunities, only recently have we significantly upgraded our governing infrastructure, which has positioned us to be a much stronger public company.

Specifically, I have taken initiatives to overhaul our leadership in the areas of finance, legal, operations and corporate marketing and the results are just beginning to show. We have successfully deterred and limited counterfeit activities through an aggressive global litigation strategy. In parallel, we have implemented sophisticated antitheft manufacturing technologies and significantly expanded our global intellectual property filings.

As we return to stronger growth rates, we have been doing so with far more operational and financial discipline. Through better sales tracking, along with an established inventory hub and improved logistics strategies and tighter credit control, both our days sales outstanding and product leadtimes are at historic lows.

Now moving forward, my hope is that the unique strengths of this Company start to be widely and clearly understood. Specifically, I believe Ubiquiti's business model and R&D approach are the most disruptive forces in the advanced networking industry today. Contrary to traditional thought, customers today are not being rewarded with value. Instead, they are unknowingly propping up a dated and inefficient system filled with bloated executive sales and marketing teams supporting distributors, value-added retailers and integrators to push overly complicated and inferior solutions, which, in aggregate, make up a value drain of tens of billions of dollars per year.

Ubiquiti is only starting to expose these incredible inefficiencies. Through our focus on killer product design, disruptive economics and promoting transparent user community-based sales, we believe our business model is just in the very early stages of creating a paradigm shift in how advanced networking solutions are designed and marketed on a global scale.

As traditional networking companies experience a downcycle because of weak enterprise spending, service, provider capital slowdown and geographic challenges, Ubiquiti's product demand continues to grow right through it. I would like to now hand over the call to our new CFO, Craig Foster, who, in a short time, has brought phenomenal leadership and discipline to our financial team. And I believe the results speak for themselves.

All right, thanks, Robert. As everybody knows on the call, this is my first quarter as CFO of Ubiquiti. And I can just say at this point it has exceeded absolutely every expectation I had going into the position. And I am very proud to be part of what I would consider a technology insurgence.

Before I go into the numbers into detail, I would like to highlight some of the financial milestones we achieved this quarter. We achieved record low DSOs of 42 days, which, as we have discussed in the past, is really a proxy for the health of our distribution channel. We produced 25% net income margins, both on a GAAP and non-GAAP basis, which is a testament to the leverage of our differentiated business model. We recorded our second consecutive quarter of double-digit growth and finally, our airMAX revenues, which is our primary product, were up 14% on a sequential basis, which now marks three consecutive quarters of increasing airMAX sales.

Our financial performance continues to rebound as we quickly move past the operational challenges we faced in the last year. We are approaching the financial metrics we achieved prior to counterfeiting and our results show strong quarter-over-quarter growth. However, most of our results show a decline on a year-over-year basis.

Moving onto our results for the third quarter, as you can see from our press release of about an hour ago, our revenues were $83.2 million, up 11% quarter-over-quarter. The sequential revenue increase was driven by the continued rebound of our airMAX productline and growing traction of our WLAN unified platform. Our non-GAAP and net income for the quarter followed a very similar pattern.

Let's take a look at the revenue by category. For airMAX, we were up 14% for the quarter and airMAX represents about 67% of our revenues. Our new platforms category revenues were $11.8 million, which is flat on a sequential basis and represented about 14% of revenues for the quarter. The UniFi productline saw accelerating demand on a worldwide basis while the remainder of the platforms in the new platforms category will substitute a changing product mix within the quarter.

The last component of our systems category is other system products. These primarily consist of non-airMAX outdoor wireless productline and as we have stated in prior quarters, we continue to expect a steady decline in this category as a percentage of revenue as our customers continue to transition to our airMAX productline. We also expect revenues for the legacy embedded radio category do decline on absolute terms as we move forward, especially from this quarter's $1.7 million.

Moving into our last category, antennas and other, revenue in this category was up 26% sequentially on a quarter-over-quarter basis. Revenues in this category are driven largely by the sale of nonintegrated standalone airMAX antennas and the sales of brackets, cables and other miscellaneous accessories. Given that a large percentage of the sales in this category are accessories and spare parts, we expect that the revenues will continue to be lumpy and highly unpredictable.

I would like to move on to a geographic breakdown. Our North American revenues were up 74% on a sequential basis and represented approximately 25% of total revenue for the quarter. We believe the strengths seen in our North American revenue was a result of a few factors, which include better management of our North American channel, increased market awareness of our core products and a market shift towards products that display higher price to performance characteristics.

Moving to South America, revenues were up 8% sequentially and down year-over-year. The revenue increase for South America was driven by the continued rebound in our airMAX business. As we have mentioned over the last few quarters, we have significantly less credit exposure in this region. The South American region represented about 22% of revenues for the quarter.

The EMEA region declined this quarter with revenues of $31.6 million, down 12% sequentially. We believe the decline is a result of a timing of planned shipments into the region. We do not believe that there is any systematic weakness in the demand for our products within EMEA. Sales in EMEA represented about 38% of revenues for the quarter. And lastly, moving to Asia-Pacific region, sales were up 23% quarter-over-quarter.

Moving onto margins and we will start with gross margins, our non-GAAP gross margins improved 200 basis points and is consistent with the margin levels that we saw prior to the counterfeiting issues. Looking at the expense line, our non-GAAP operating expenses were up 19% on a sequential basis. This was driven by SG&A spending related to legal matters, which is consistent with what we talked about in the last quarter or two and increased headcount in R&D. Non-GAAP operating margins came in at 29%, up 100 basis points from the 28% of last quarter, but they are down from a year ago. The improvement in operating margins was primarily driven by a change in the product mix.

Now moving on to the last item in the P&L is our effective GAAP tax rate for the fiscal year. It was adjusted from 13% to 12.2%. The cumulative impact of this change resulted in a tax rate of approximately 11% for the third quarter. And as a reminder, our rate is largely driven by the composition of revenue by geography.

Turning to the balance sheet, we had another quarter of very healthy cash generation. Cash flows from operations were $35.2 million and our gross cash balances were $33.4 million to total $181.7 million for the quarter. As we have noted in the past, we expect to continue to generate significant free cash flow with a majority of that cash being generated and held outside the US.

We also, as Robert mentioned, have been revamping our distribution strategy and I think the results tell that it is working. We saw a meaningful improvement in our days sales outstanding for the quarter. For the third quarter, we achieved record DSOs of 42 days, a dramatic improvement from the 69 days from the prior quarter. The DSO improvement is a direct result of our improved shipping linearity and distribution channel.

For the quarter, our net inventory balances were $19.4 million, up from $14.6 million in the prior quarter. The expected increase was related to our continued deployment of a distribution hub in China. We believe that the inventory level has allowed us to significantly reduce leadtimes to our customers, which in turn more closely aligns our selling with our distributor sellthrough.

We implemented a number of account receivables controls during the quarter and will continue to improve credit and collection procedures. For the quarter, we saw a vast improvement in our accounts receivable with AR decreasing 31%, or $17.5 million, to $38.4 million from the prior quarter despite an 11% sequential increase in revenues.

Lastly, I would like to provide an update on the status of our buyback program. We did not repurchase any additional shares during the quarter ended March 31, 2013 and we still have approximately 45.6 million of our authorization available for further repurchases.

Lastly, I would like to talk about our guidance and our outlook for the next quarter. Our outlook is based on -- is a direct result of our strong global demand that we see in the service provider and enterprise markets and as a result of the operational improvements we have implemented. We expect revenues to be in the range of $90 million to $96 million and non-GAAP diluted earnings in the range of $0.26 to $0.29 per share. And with that, I will open it up for questions.

(Operator Instructions). Matt Robison, Wunderlich Securities.

(technical difficulty) question and congratulations on such a wonderful performance here. Can you talk a little bit more about the new platforms? We have had some pretty dramatic expansion in those productlines and some pretty strong feedback from the field on several of them and I guess some recent versions have come out that were subsequent to the March quarter. So maybe that is part of the story, but seeing such a strong performance in North America and the flat sequential performance in new products, it seems like kind of -- it seems odd frankly.

Yes, thanks, Matt. For the new products, I wouldn't read too much into the sequential numbers. What I like to look at is the customer traction. I follow our community -- I follow a lot of the other sites on the Internet. What I can say is new products, especially UniFi, they are just starting to get kind of critical mass. So I am confident over the course of the next several quarters you are going to see significant growth in them.

Was airFiber a meaningful aspect of the ASP increase implied by Craig's comments?

I think what you will see with airFiber is our first product is just kind of scratching the surface of airFiber's potential. So when you look at airFiber as a platform, I want to look at it just as a 24 gigahertz product. We have purpose-built a completely new radio technology, which we can port to a number of different products and applications. And I think you will see us get huge leverage from that R&D investment in the next year and that productline will round out and we will see a significant increase in overall airFiber demand. But it is just at the very early stages right now.

And Matt, you need to -- I think you know this, but when you have a distribution channel like ours, there is a component of initial stocking that happens in the channel. So when we release a new product, we have instant turn on the faucet type demand and then it takes a couple quarters to kind of get steady state growth. But the first quarter that we launch a new product, and for airFiber, that was a little bit over two quarters ago, it will take a little bit of time to find out -- to understand the steady state and gain traction within the channel.

Most of these guys, they do pilot type of deployments and they wait to see how those go and then they place larger orders once their pilots go up.

Makes sense. So what is your sense of the channel and inventory at this point?

So we spend a lot of time working on what exactly the challenges are and from the reporting that we get from the channel, we are actually at record lows. And I think the testament of that is clearly the DSOs for the quarter, which we have always determined is really the proxy for the health of the channel. And so people are prepaying, people are paying on time and they are ordering more.

And so in the guidance, do we -- should we think in terms of a little shift in mix or is it just a continued wave of airMax that is driving the sequential growth?

I think it is going to be a combination of the product mix. I mean we have -- UniFi continues to grow at well past any what can be considered kind of the industry standard all over the world. And we continue to get traction with our other products. So we have -- I think that you will see improvement on the new products line over the next couple quarters.

That's great. Before I let you go, can you provide CapEx and depreciation so we can come up with free cash flow and EBITDA?

Yes. So CapEx for the quarter, we have kind of modeled out at about between $500,000 and $750,000. And the depreciation line, I will have to look it up, but I will call it out in a minute.

Okay. So the actual CapEx for the March quarter would be in the middle there or is that just what we should look for going forward?

Yes, I think that is kind of steady state in the middle there.

Okay. Thanks a lot.

Tavis McCourt, Raymond James.

I was wondering in terms of the guidance for June revenues, we have had kind of the new platforms business kind of being in a broad range, but broadly flat for the last four quarters. Do you expect for that to keep -- to start trending up, breaking out of this range, or is there still kind of so many moving parts, as you described earlier, Craig, in terms of digesting previous launches?

Well, I think that we are expecting it to go up. I think it is really a function of -- there is a lot of moving parts, unfortunately, from your perspective of what is happening in this space -- what is happening in the category. UniFi will continue to grow, as I said, faster than expected or at least faster than the market rate for the next quarter at least. airFiber, looking at what we are seeing for the near future, we think that that is going to continue to expand. We are relaunching our airVision product in the next quarter or so. And so we have kind of -- that product has kind of gone down to -- I'd say we are not actively pushing it in the channel right now. So I think that you'll see -- I think you'll continue to see that productline beat the category as a whole.

Secondly, on the airMax product, obviously, back to a nice growth trajectory on that. A lot of what we see obviously is probably impacted by digestion of channel inventory over the last several quarters. But from your guys' perspective, maybe taking the view of one of your distributors, what do you think the growth rate of the industry is and is there still share gains for airMax to take within the industry or do you think that the majority of the wireless ISPs globally now are on the airMax platform?

I will answer that. It is more of a complicated analysis. So before Ubiquiti airMax existed, there wasn't really much of a fixed broadband wireless service provider market. We have kind of created and driven this industry and we have shipped well over 10 million devices out there. So when you look at a number like 10 million and these are going on top of roofs, home and office roofs around the world every five minutes of every day, those are big numbers. But if you step back and you look at the US population, 7 billion and it is growing, it is a tiny fraction.

And what I think is the biggest opportunity in our market is, if you ask somebody just on the street if they have heard of say something like DIRECTV, everyone knows what DIRECTV us. Everyone knows it is a television broadcast technology you can get where there is no other solution. But if you ask somebody do you know what Ubiquiti is, do you know what a wireless ISP is, no one knows. There is no awareness for our markets. And I think as we evolve this solution and round it out and get it better and even more cost-effective, the other focus is on building awareness. And I think if we could build awareness, there is huge growth potential for airMax.

Brent Bracelin, Pacific Crest Securities.

Thank you. I guess, Craig, the first question I wanted to touch base with you is on the record low DSOs. How are you thinking about kind of channel inventory, managing what's out there? I mean should we anticipate DSOs to go down further? Should we expect DSOs to start to go up? How are you kind of managing that going forward and has there been kind of a change of philosophy on what the appropriate DSO number you would like to manage the business at?

I think that is a great question. So kind of the first thing that I tackled when I started was we need to get our handle and we need to be very aggressive about how we are going to manage DSOs going forward. So that is a combination of operational improvements in terms of when we are shipping things in the quarter. And we have talked quite a bit about kind of shipping linearity and how that affects our DSOs. And then changing our collection policies and our credit policies to better match what we think the credit profiles of our customers are.

So my predecessor had guidance of I believe 55 to 65 days of DSOs. Now we have only implemented and are working on the DSOs for one quarter. So it is a little bit early to guess what the steady state will be, but I think it will be below where the guidance was given before.

Okay, that's helpful color. And then as you think about kind of the China hub inventory, obviously, that makes sense; it is going up. What has been the response from some of the distributors relative to having that flexibility with you taking out some inventory? Are you considering adding an inventory hub in kind of US or South America?

Well, I think -- okay, so there is a couple things there. One, the behavior in the channel has changed actually quite a bit because we have implemented this third-party logistics hub. And what it has done is, before, we were shipping directly from the CMs and the CMs are working off of different leadtimes and it created -- when we are shipping people a wireless ISP ecosystem, ISP ecosystem and the radios show up in two weeks and the antennas show up in six weeks, it creates a lot of problems on the other end. As well as just having long leadtimes, the ordering behavior is not in the best interest of Ubiquiti. So what was happening was people were making large orders and then working through their inventory, making a huge order on a quarterly basis.

Because we have changed it, because we have been able to lower our leadtimes through the 3PL arrangement, we have cut leadtimes pretty much in half and there is still some room for operational improvement. So I think that what we are seeing in the channel is that people are making more incremental smaller orders, but on the aggregate because they have confidence that we are going to be able to deliver a product in a reasonable amount of time. It actually has created a lot of what I will call consumption smoothing.

I will add to that. Since I have been CEO of a public company now for about a year, I have set a tone now for the team and we are very different. We don't have huge sales and marketing guys with milestones and numbers and discounts in the channel and all those complex things to kind of financially engineer and forecast business. What we have is we have a phenomenal business with great demand.

And so what we want to do -- it is very tough for us to recognize sellthrough obviously because the sophistication isn't there for a lot of our channels. But what I want to do is lower the leadtimes as close to zero as possible, tighten up the DSOs and make sure whatever we report correlates as accurately as possible to the actual demand. And we have never discounted a product in the history of Ubiquiti. We will never do that. We don't have sales teams. We have a very disruptive product and we make killer technology, but my goal is to make sure whatever we report is as close to 100% correlated with demand.

Now if we have an up quarter or a down quarter, that is going to be up to the business and that is my job to make sure demand is always going up and we hit the right markets and we grow. But we always want to make sure that we are just accurately reflecting demand in all areas of reporting moving forward.

Helpful. And then shifting gears to kind of gross margin, obviously, nice little uptick this quarter, but you did have a little bit of a mix shift to the accessories kind of other productline. As we think about kind of the margins on airMax, I know you have added some anti-piracy kind of technology there, what is the kind of gross margins on airMax? Is that still above the corporate average and as we think about the airMax mix potentially mixing up this quarter in June, could you also see a healthy lift in overall gross margin? How should we think about gross margin trends there?

So my hope is, as the Ubiquiti brand name gets more say goodwill and larger credibility for being a technology leader in the market, it will present us opportunities to make higher-end, higher margin products. You are starting to see this, right, products like airFiber, products like UniFi, [11ac]. These are products that do have much higher margins and they are still disruptively priced.

And so my goal is, as our economies of scale continue to increase, as Ubiquiti's brand recognition as the technology leader continues to increase, my hope is we see some leverage in gross margins. But we will never be a company that tries to extract profitability from customers. We will never make them pay millions of dollars in support and service fees and create complicated solutions that require training and specialized consultants. Our mission is to pass value onto the customer, not extract profitability. That is the big difference between us and everyone else out there.

Very helpful. My last question is really around kind of seasonality of business. Obviously, we are kind of entering the fiscal year-end and as we think about modeling the September quarter, last year obviously was down sequentially pretty meaningful obviously for other reasons. But as we think about kind of modeling purposes, how should we think about September? Should we assume some summer seasonality and the business could be down potentially sequentially or is it just too early to say at this point?

So we have taken a look at this historically and it is a little bit hard to model seasonality when you are kind of in high-growth mode, but if you think about the core of our business, we have people that are -- a lot of our business happens when people are climbing up on towers and installing devices. And there is a little bit of that that is weather-related, but we operate kind of -- we are all over the world and we are above and below the equator. So we kind of see that as pretty much an offsetting effect. And we are not really part of the general IT US buying cycle either. So it is kind of like -- I think we are a little bit insulated from a lot of the secular trends that might affect what we call seasonality.

Okay, great. Thank you.

Mark Sue, RBC Capital Markets.

This is [Amit Kumar] calling on behalf of Mark Sue. Just to follow-up on the seasonality thing just in terms of trying to understand some of the drivers behind the results and guidance, especially in the environment and I guess a lot of that alludes to the fact that you don't see a lot of the secular trends that you mentioned. But just in terms of the competitive environment, could you maybe address how the competitive environment is out there right now?

I'll take it. I don't see specific competitors. What I see is we are kind of -- we represent -- Matt from Wunderlich, I believe, in his words -- we are in an insurgence. So our competitor is the traditional system, the dated system, which I have talked about, which revolves around relationships and sales people, marketing, high paid executives, working with distributors and value-added resellers, engineering overcomplex, overcomplicated to learn inferior technologies and extracting profitability from the end customer.

And as you see with the Internet and bringing transparency in social networking and you see technologies, networking technologies once exotic now commoditized and understood by a lot of -- commonly understood by people, I think Ubiquiti is in an excellent position to expose all these inefficiencies and kind of act as a paradigm shift to this whole market.

And if you see some of the competitor companies in the market, they have all had down quarters. The future looks brighter than ever for us. We are growing right through it and if you look at a product like UniFi, we are shipping hundreds of thousands of UniFi APs. Sometime pretty soon, we will get to our millionth UniFi AP. That product has -- in my mind, it is superior to anything else out there, but it is $50. There is no licensing, there is no support, there's none of those things.

Now if we sell $1 million worth of UniFi products and say we take marketshare, we are taking $10 million plus of marketshare from the competitor potentially. So to answer your question, we are competing against a system, a clearly inefficient system and I think nobody really sees this yet. It is very, very obvious to me. So over the next few years, we are going to prove it, prove it out.

And just in terms of, by the UniFi, were you referring to UniFi 3 and just in terms of what the response has been to that.

Well, I think the numbers speak for themselves, right? Like we have put together a very small team, a very talented R&D team. I was involved in crafting and marketing and designing a lot of that hardware. In just a couple of years, what is it, nearly 4% of the wireless LAN market, enterprise wireless LAN market. We did that without a single salesperson.

And here is the thing you have to understand about UniFi. So I came up with that name a couple, a few years back when we launched it. And you look at the trends in the enterprise networking market and people talk about cloud, people talk about software-defined networking where you have all these different appliances and you want a unified virtual control point. Well, that is what's UniFi. That is why I called it UniFi. It is a play on the word WiFi, but it is -- the vision behind that product is to have unified device management over all kinds of geographic diverse locations and all kinds of networking devices over one control plan at disruptive economics supported by community evangelism. So I think that is -- watch out for UniFi in the next couple of years. I think the developments will be interesting.

Okay, great. Thank you and good luck, gentlemen.

Sanjit Singh, Wedbush Securities.

Thank you for taking my questions and Craig, congrats on your first quarter as new CFO. I wanted to get some insight into the OpEx. Robert, you mentioned you boosted the infrastructure at the Company. How much more is there to go? And I wanted to ask a follow on to Robert's comments about kind of evangelizing Ubiquiti. What are the tools and the strategies to get -- to build the brand? If you could just follow up on those two items, that would be great.

Okay, so infrastructure, over the course of the past year, I have had to learn on the fly this whole public markets thing. So I have pretty much built my own team now. We have Craig as CFO, we have Jessica in legal, Sandy Ro is in operations. Recently, we brought in David Hsieh, Chief Marketing Officer. So that is pretty much the team that was built in the past year. I think the results kind of speak for themselves. Everybody is on the same page. We kind of lock things down. Our IP filings, our intellectual property strategy is in a good place. We have got a handle on this counterfeit nonsense.

You have seen Craig. He has done a phenomenal job both in understanding the sales tracking and implementing controls that should have been implemented in the first place. So I think we have kind of plugged all the holes. Now if we want to take this Company to the next level and the next level of scale, we are going to have to start looking at the future. So I think we have caught up. Now we have got to shift from reactive to kind of a predictive mindset and try to put in place what we need moving forward. What was the second part of your question? Evangelism?

Yes. How are we going to build the brand? You mentioned -- you were giving us the example of DIRECTV and how they had good brand rec. What are you thinking in terms of developing the brand given that you are a salesforce light company?

Right, right, right. So I got a couple good tricks up my sleeve, but I can't tell you about them now for competitive advantage reasons, but I think it's two or three quarters away. I think you will like it.

Great. And then a follow-up for Craig. Craig, on the gross margins, we have been talking about for -- there's been a couple of questions on it, but the mix shift, could you give us more color on that, like what specific products are driving the higher gross margins this quarter and just your view on the sustainability of gross margins?

Yes, so we are subject to -- we have, in kind of the history or the way that products have been developed traditionally, I will give you just a two-second history is generally, as you know, we price all of our products very disruptively and then let's take the case of UniFi. We came out with UniFi and then we created a UniFi Pro and then we created a UniFi Outdoor and now we have the UniFi AC product. And what you will see, as we continue to innovate and create new products in those lines, in general, what you will see is that there is a shift to higher margin products.

And that is part of streamlining the development and economies of scale and understanding the opportunity to cut out costs while providing more functionality. And so I think you'll see that across all of our productlines as a general trend is that as we continue to introduce new products and they gain traction, you'll see that the margins will continue to increase.

Got it. Thank you very much.

Okay, there was a question earlier about depreciation, it was 510 for the quarter.

Amitabh Passi, UBS

Hi, thank you. I guess I just wanted to follow up on that last point, Craig, on gross margins. How should we think about leverage on the OpEx -- sorry -- on the operating margin line. Do you think you will continue to invest more on the OpEx front both from an SGA and an R&D perspective or as margins continue to expand on the gross margin level, that you will see a reasonable dropthrough?

Well, I think there is going to be -- clearly, there is going to be leverage. We will start with the SG&A line. So we know there is going to be leverage as we move past some of the legal expenses that we are currently involved in. So we know that there is kind of a steady state that is much -- several points lower than where we are today. And that will continue to decrease to kind of what we gave as guidance quite a while back, which is kind of the 3% to 4% over the long-term model.

In the case of R&D, Robert kind of said it best. We are going to continue to invest in R&D to help accelerate some of the projects we have undergoing and some of the opportunities that we think we see in the market. So I think I would say, over the next couple quarters, that you could see our R&D spend increase. We are going to add heads and we will probably add up to 5% to 10% of our headcount in R&D, will increase. But we think the leverage you get out of -- the return you get out of the R&D function is astronomical. So it is an incredible investment for us.

And I just wanted to follow up on the DSO commentary as well. I recognize you said that you will probably be targeting a level below the 55 to 60, but I wanted to clarify, as we move into next quarter, do you anticipate an increase in DSOs from the levels you are at or do you think you'll hold them steady at this level or even drop them further?

Wow. We worked so hard to get to 42.

I know, I know.

I thought we were killing it. Look, I think that as orders increase and as our -- and you saw our guidance of 90 to 96, as you continue to see our orders increase, a lot of those orders are coming from credit customers and the terms vary from 15 days net to 60 plus days net. So it is kind of a mixed bag.

I think operationally our goals are to try to keep the DSOs as low as possible, but again I only have one quarter of operating data on kind of the new direction of our AR and our operational improvements, but I think that we can do better than the guidance that was given maybe two or three quarters ago.

Okay. Yes, I wasn't trying to take anything away from the accomplishment. I was just trying to get a sense in terms of as we think about cash flow. Just on South America, where do you think we are with respect to when business sort of normalizes there relative to where you were a year ago and would that have any bearing on your DSOs? As the international mix grows, is that a factor we ought to think about?

Well, I think, on the DSO and the other front, I think that our credit -- half of our customers are on a prepaid basis or close to and for our credit customers, obviously, they are the larger end of the customers. So I think in terms of the DSOs and the mix in terms of regions, I don't think it will have a material impact on what our DSOs look going forward. I would say it is pretty normalized across all regions in terms of how people are paying and their behavior.

Got it. And Robert, just for you, one, on the airMax strength, are you able to give us any metric in terms of where the strength is coming from? Is it within your existing customer base, any metrics in terms of how many new customers you have added? I am just trying to get a sense of the breadth of the strength that you are seeing in airMax, how much of it is from your existing customers versus new customers as you expand your footprint?

I would say it is a combination existing customers and new customers. You can go to our community, our forum, everything's transparent. All the customers talk, you can see what is going on.

And then the strength you are seeing right now, is it related to any big builds or again would you say it is broad-based?

No, our service provider carrier market play is very different from traditional plays. So there has been tons of service provider companies in the wireless access and edge and the same movie plays over and over. You have guys like Airspan and Alvarion and DragonWave and Ceragon and Proxim and Aviat Networks and it all starts off great with a lot of hype. They get a big carrier customer and they have a new technology whether it is mesh or whether it is WiMAX or whether it is cellular offload and they think they have this explosive growth and this huge leverage in the future.

But when you are dealing with carriers, they dictate what you make. They dictate your gross margins in the end because they want you focused on standards and commodity technology so they can pit vendors against each other. SG&A doesn't have leverage. You pick up one carrier to go after another carrier, you have got to spend again and worse, the sales don't have any leverage. You sell to one carrier, they brand it under their network; nobody knows about it.

So inevitably, in my strong opinion, these companies, they kind of converge to pressure gross margin business with very high SG&As and as they scale, they are not profitable. Ubiquiti takes a very different approach to service providers and carriers. So collectively, we have tens of thousands of these operators. But by making this kind of community evangelism effect, we have basically unlimited leverage as it kind of viral markets and supports itself, our SG&A is pretty much fixed and we have unlimited leverage. And since it is our own technology, we are not focused on a standard, we have a great lock-in effect. (inaudible). I guess those are a few of my thoughts.

Okay, all right. I appreciate it. Thank you.

Brian Modoff, Deutsche Bank.

Hi, guys. This is Kip Clifton filling in for Brian. Thanks for taking my question. I guess firstly, I am just trying to figure out -- because there are a bunch of stockouts with NanoBridge throughout the quarter. And so I am wondering, Craig, in terms of the consumption smoothing, how are you balancing this without hurting growth? Because it seems like there were pretty consistent stockouts throughout the quarter and so I am wondering how much that affected it and how much this moderation you see going forward because as good as North America was, it almost seems like it could have been better had the products been in the channel.

Sounds like you have been doing your homework. Yes, I think, look, the inventory -- so we track very closely almost on a distributor by distributor basis what their holding cycle is for our products. And what we have seen in kind of the last quarter, in the last two quarters really is there has been an acceleration of those numbers getting lower in terms of what they have from leadtimes.

So something that we're working on is -- working on very hard in the current quarter is to try to work better -- work a little bit closer with our distributors and make sure that we have regional supply because I think in the past, orders come in and then we were just working as hard as we could to get them out in an orderly fashion as quickly as possible on an as-needed basis because we have such a high demand for certain productlines.

And so we are working very hard to kind of understand and make sure that product is available within the region. And so part of that is kind of the ebbs and flows of what you see just on a regional basis for us. It is like every quarter for us in the past has been three regions up, one region down, three regions up, one -- and there is no rhyme or reason why one specific region might be up or down. So that is something that we are actively engaged and working on for the current quarter and I think that we will see some improvements.

Now the problem is that, as fast as we get things out, there is sometimes -- these things sit on a boat and sometimes it takes three or four weeks to get from port to port. And so what we see is a lot of these things, when there are stockouts, it is really product in transition and so as we continue to lower leadtimes, I think we will alleviate a lot of that.

Robert, just with airFiber, it seems like some of the feedback has been around the traffic visibility. What are you doing to improve that within that product?

I'm sorry, the feedback has been in the what?

The traffic visibility in the sense that it is very hard to discern what is actually happening compared to competitive products. Like when you set the links up, it is hard to know what exactly is happening with the flow of traffic.

I don't know what that means.

Okay. So compared to -- if you just set up a P2P link and you could figure out what was actually happening with the traffic flow, it is hard to discern that with airFiber has been our feedback from this. And so I am just wondering what you guys are doing to improve that.

What is traffic? I have no idea what that means.

Okay. Well, I will move onto the next question then. Just quickly in terms of the cash held in North America, how much cash do you guys have onshore?

A little over $11 dollars.

Okay. And then the tax rate for the upcoming quarter?

We would normalize it at about 12.5%.

12.5%? Okay, great. Thanks so much. No further questions. I appreciate it, guys.

Matt Robison, Wunderlich Securities.

Thanks for taking a follow-up. Just a couple housekeeping items, but before that, debt payback. I heard the answer to the US cash. Do we have any thinking there how we are going to go about that or given that you have got to pay it back with US money?

Are you talking about for the long term or for the -- I mean these are --

Well, yes, either.

-- a couple years out? So one is a term loan and one is a revolver. For the term loan, we will continue to make the payments just like we did this quarter. And I think if you see our -- as our business continues to grow, because we generate so much cash, we are well above any risk area of not being able to pay this in the future. And if something was to -- there is always opportunities to refinance, etc., etc. So we feel like -- it is not even really top of mind at this point because we are generating so much money.

Yes, fair answer and obviously, you can repatriate if you absolutely had to, I suppose and take the tax hit to do it. So you are just going to let it ride until it's convenient.

I think for the time being, that is a safe assumption.

And just -- headcount and 10% customers, if any.

Yes. So we have -- for the quarter, we ended with 170 people in the Company.

That is up 15, right?

What's that?

Up 15, is that right?

I believe so. And your second question was --?

10% customers, if any.

We have one 10% customer in South America.

I presume that is a distributor?

That is correct.

Thank you.

This concludes our Q&A session. I will pass it back to Robert Pera, CEO, for closing remarks.

Thanks for joining. Looking forward to the next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This call has concluded. You may all disconnect.