Ubiquiti Networks ®
Ubiquiti Networks, Inc. (Form: 10-Q, Received: 05/04/2017 16:10:50)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File No. 001-35300
 
UBIQUITI NETWORKS, INC.
(Exact name of registrant as specified in its charter)
   
Delaware
 
32-0097377
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
2580 Orchard Parkway, San Jose, CA 95131
(Address of principal executive offices, Zip Code)
(408) 942-3085
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [x]
As of May 2, 2017 , 80,268,031 shares of Common Stock, par value $0.001, were issued and outstanding.


Table of Contents

UBIQUITI NETWORKS, INC.
INDEX TO
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2017
 
 
 
Page
 
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
Consolidated Statement s of Operations and Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 


2

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1.  Financial Statements
UBIQUITI NETWORKS, INC.
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)  
 
March 31, 2017
 
June 30, 2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
533,944

 
$
551,031

Accounts receivable, net of allowance for doubtful accounts of $578 and $48 at March 31, 2017 and June 30, 2016, respectively
125,341

 
82,790

Inventories
132,512

 
57,113

Vendor deposits
49,779

 
30,255

Prepaid income taxes
10,902

 
299

Prepaid expenses and other current assets
10,233

 
6,896

Total current assets
862,711

 
728,384

Property and equipment, net
13,345

 
12,953

Long-term deferred tax assets
4,038

 
4,195

Other long-term assets
1,937

 
1,576

Total assets
$
882,031

 
$
747,108

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
53,411

 
$
51,510

Income taxes payable
1,268

 
1,488

Debt - short-term
14,743

 
10,993

Other current liabilities
29,681

 
26,672

Total current liabilities
99,103

 
90,663

Long-term taxes payable
26,846

 
23,202

Debt - long-term
210,507

 
191,564

Deferred revenues - long-term
2,537

 
1,303

Total liabilities
338,993

 
306,732

Commitments and contingencies (Note 8)

 

Stockholders’ equity:
 
 
 
Common stock—$0.001 par value; 500,000,000 shares authorized:
 
 
 
80,313,029 and 81,667,129 outstanding at March 31, 2017 and June 30, 2016, respectively
80

 
82

Additional paid–in capital

 

Retained earnings
542,958

 
440,294

Total stockholders’ equity
543,038

 
440,376

Total liabilities and stockholders’ equity
$
882,031

 
$
747,108

See notes to consolidated financial statements.

3


UBIQUITI NETWORKS, INC.
Consolidated Statements of Operations and Comprehensive Income
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2017
 
2016
 
2017
 
2016
Revenues
$
218,359

 
$
167,433

 
$
636,652

 
$
480,719

Cost of revenues
119,273

 
84,940

 
344,123

 
245,681

Gross profit
99,086

 
82,493

 
292,529

 
235,038

Operating expenses:
 
 
 
 
 
 
 
Research and development
16,603

 
13,820

 
47,480

 
42,810

Sales, general and administrative
9,074

 
8,538

 
26,938

 
24,113

Business e-mail compromise (“BEC”) fraud loss/(recovery)

 
(3
)
 

 
(8,294
)
Total operating expenses
25,677

 
22,355

 
74,418

 
58,629

Income from operations
73,409

 
60,138

 
218,111

 
176,409

Interest expense and other, net
(1,038
)
 
(510
)
 
(3,307
)
 
(1,277
)
Income before provision for income taxes
72,371

 
59,628

 
214,804

 
175,132

Provision for income taxes
7,939

 
6,929

 
17,976

 
19,222

Net income and comprehensive income
$
64,432

 
$
52,699

 
$
196,828

 
$
155,910

Net income per share of common stock:
 
 
 
 
 
 
 
Basic
$
0.79

 
$
0.63

 
$
2.40

 
$
1.83

Diluted
$
0.77

 
$
0.62

 
$
2.35

 
$
1.80

Weighted average shares used in computing net income per share of common stock:
 
 
 
 
 
 
 
Basic
81,652

 
83,349

 
81,879

 
85,051

Diluted
83,317

 
84,685

 
83,694

 
86,433

See notes to consolidated financial statements.


4


UBIQUITI NETWORKS, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)  
 
Nine Months Ended March 31,
 
2017
 
2016
Cash Flows from Operating Activities:
 
 
 
Net income
$
196,828

 
$
155,910

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
5,330

 
4,685

Provision for inventory obsolescence
1,716

 
580

(Recovery)/Provision for loss on vendor deposits
(1,145
)
 
(96
)
Write off of software development costs

 
2,505

Stock-based compensation
2,093

 
2,866

Excess tax benefit from employee stock-based awards

 
(671
)
Deferred Taxes
156

 
(39
)
Other, net
855

 
629

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(43,081
)
 
(9,202
)
Inventories
(76,782
)
 
(5,873
)
Vendor deposits
(18,379
)
 
6,635

Prepaid income taxes
(10,603
)
 
2,566

Prepaid expenses and other assets
(3,829
)
 
1,612

Accounts payable
1,975

 
(13,954
)
Income taxes payable
3,424

 
3,931

Deferred revenues
3,050

 
374

Accrued liabilities and other current liabilities
4,287

 
(514
)
Net cash provided by operating activities
65,895

 
151,944

Cash Flows from Investing Activities:
 
 
 
Purchase of property and equipment and other long-term assets
(5,704
)
 
(4,820
)
Net cash (used in) investing activities
(5,704
)
 
(4,820
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from revolver loan
30,000

 
66,000

Repayments of term loan
(7,500
)
 
(7,500
)
Repurchases of common stock
(99,788
)
 
(150,003
)
Proceeds from exercise of stock options
1,396

 
778

Excess tax benefit from employee stock-based awards

 
671

Tax withholdings related to net share settlements of restricted stock units
(1,386
)
 
(922
)
Net cash (used in) provided by financing activities
(77,278
)
 
(90,976
)
Net increase (decrease) in cash and cash equivalents
(17,087
)
 
56,148

Cash and cash equivalents at beginning of period
551,031

 
446,401

Cash and cash equivalents at end of period
$
533,944

 
$
502,549

Non-Cash Investing and Financing Activities:
 
 
 
Unpaid stock repurchases
$
2,964

 
$

Unpaid property and equipment and other long-term assets
$
85

 
$

See notes to consolidated financial statements.

5


UBIQUITI NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1—BUSINESS AND BASIS OF PRESENTATION
Business — Ubiquiti Networks, Inc. was incorporated in the State of California in 2003 as Pera Networks, Inc. In 2005 , Pera Networks, Inc. changed its name to Ubiquiti Networks, Inc. and commenced its current operations. In June 2010, Ubiquiti Networks, Inc. was re-incorporated in Delaware.
Ubiquiti Networks, Inc. and its wholly owned subsidiaries (collectively, “Ubiquiti” or the “Company”) develop high performance networking technology for service providers and enterprises.
The Company operates on a fiscal year ending June 30. In this Quarterly Report, the fiscal year ending June 30, 2017 is referred to as “fiscal 2017 ” and the fiscal year ended June 30, 2016 is referred to as “fiscal 2016 .”
Basis of Presentation — The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) related to interim financial statements based on applicable Securities and Exchange Commission (“SEC”) rules and regulations. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. These consolidated financial statements reflect all adjustments, which are, in the opinion of the Company, of a normal and recurring nature and those necessary to state fairly the statements of financial position, results of operations and cash flows for the dates and periods presented. The June 30, 2016 balance sheet was derived from the audited financial statements as of that date. All significant intercompany transactions and balances have been eliminated. The Company has reclassified certain amounts reported in the previous period to conform to the current period presentation.
These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended June 30, 2016 , included in its Annual Report on Form 10-K, as filed with the SEC on August 22, 2016 (the “Annual Report”). The results of operations for the three and nine months ended March 31, 2017 are not necessarily indicative of the results to be expected for any future periods.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies are disclosed in its audited consolidated financial statements for the year ended June 30, 2016 included in the Annual Report. Except as noted below, there have been no changes to the Company’s significant accounting policies as discussed in the Annual Report.

New Accounting Updates Recently Adopted

Effective July 1, 2016, the Company adopted Accounting Standards Update (“ASU”) 2015-03 regarding simplifying the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Previously the Company reported these costs as assets on its balance sheet. The guidance is applied on a retrospective basis whereby prior-period financial statements must be adjusted to reflect the adoption of the new guidance.
The Company has reclassified $0.3 million from "prepaid expenses and other current assets" to "Debt - short-term", and $0.7 million from "Other long-term assets" to "Debt - long-term" on the June 30, 2016 consolidated balance sheet.
Effective July 1, 2016, the Company adopted ASU 2015-11 regarding simplifying the measurement of inventory. The guidance requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted this update prospectively, and it did not have a material impact on the Company's consolidated financial statements.
Effective July 1, 2016, the Company early adopted ASU 2016-09,"Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting," regarding the Improvements to Employee Share-Based Payment Accounting. The Company applied the guidance relating to accounting for excess tax benefits and the presentation of excess tax benefits in the consolidated statement of cash flows on a prospective basis; accordingly, prior period amounts have not been adjusted. During the three and nine months ended March 31, 2017 , the Company recognized the excess tax benefits of $0.2 million and $7.9 million , respectively, within the provision for income taxes rather than additional paid-in capital. The Company classified the excess tax benefits within cash flows from operating activities for the nine months ended March 31,

6


2017 rather than within cash flows from financing activities. In regards to the forfeiture policy election, we will continue to estimate the number of awards expected to be forfeited, rather than electing to account for forfeitures as they occur. No other terms of the adopted guidance resulted in an impact on the Company's consolidated financial statements.

Recent Accounting Standards or Updates Not Yet Effective

In May 2014, the FASB issued ASU 2014-09,  Revenue from Contracts with Customers , with amendments in 2015 and 2016, which creates new ASC Topic 606 (Topic 606) that will replace most existing revenue recognition guidance in GAAP when it becomes effective. Topic 606 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard will be effective for the Company’s first quarter of fiscal year 2019 and early application for the Company's first quarter of fiscal year 2018 is permitted. Topic 606 may be applied retrospectively to each prior period presented or with the cumulative effect recognized as of the date of initial application. The Company is still evaluating the impact of adopting Topic 606 on its consolidated financial statements and related financial statement disclosures and has not yet selected a transition method or determined if it will adopt this standard in fiscal 2018 or 2019. 
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize assets and liabilities on the balance sheet for leases with lease terms greater than twelve months and disclose key information about leasing arrangements. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years, with early application permitted. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses On Financial Instruments,” (“ASU 2016-13”). ASU 2016-13 implements a comprehensive change in estimating the allowances for loan losses from the current model of losses inherent in the loan portfolio to a current expected credit loss model that generally is expected to result in earlier recognition of allowances for losses. Additionally, purchase accounting rules have been modified as well as credit losses on held-to-maturity debt securities. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other Than Inventory," (“ASU 2016-16”). ASU 2016-16 eliminates the exception for all intra-entity sales of assets other than inventory. As a result, a reporting entity would recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, and early adoption is permitted but can only be adopted in the first interim period of a fiscal year. The Company is evaluating the impact that adoption of this new standard will have on its consolidated financial statements.


NOTE 3—FAIR VALUE OF FINANCIAL INSTRUMENTS

Pursuant to the accounting guidance for fair value measurements and its subsequent updates, fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The accounting guidance establishes a three-tier fair value hierarchy that requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The fair value hierarchy prioritizes the inputs into three levels that may be used in measuring fair value as follows:
Level 1 —observable inputs which include quoted prices in active markets for identical assets or liabilities.
Level 2 —inputs which include observable inputs other than Level 1, such as quoted prices for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 —inputs which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Level 3 assets and liabilities include those whose fair value measurements are

7


determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.
For certain of the Company’s financial instruments, including cash, accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate fair value due to their short maturities. Additionally, as of March 31, 2017 , we held $511.8 million of our $533.9 million of cash and cash equivalents in accounts of our subsidiaries outside of the United States and we could incur material tax liabilities if we were to repatriate those amounts.
As of March 31, 2017 and June 30, 2016 the Company had debt associated with its Credit Agreement with Wells Fargo Bank (See Note 7). The fair value of the Company’s debt was estimated based on the current rates offered to the Company for debt with similar terms and remaining maturities and was a Level 2 measurement.
As of March 31, 2017 and June 30, 2016 , the fair value hierarchy of the Company’s debt carried at historical cost was as follows (in thousands):
 
March 31, 2017
 
June 30, 2016
 
Fair Value
 
Fair Value
Debt
$
226,000

 
$
203,500

NOTE 4—EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data):
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
Net income and comprehensive income
$
64,432

 
$
52,699

 
$
196,828

 
$
155,910

Denominator:
 
 
 
Weighted-average shares used in computing basic net income per share
81,652

 
83,349

 
81,879

 
85,051

Add—dilutive potential common shares:

 

 

 

Stock options(1)
1,579

 
1,264

 
1,704

 
1,282

Restricted stock units(1)
86

 
72

 
111

 
100

Weighted-average shares used in computing diluted net income per share
83,317

 
84,685

 
83,694

 
86,433

Net income per share of common stock:

 
 
Basic
$
0.79

 
$
0.63

 
$
2.40

 
$
1.83

Diluted
$
0.77

 
$
0.62

 
$
2.35

 
$
1.80


(1) Effective July 1, 2016, the Company early adopted ASU 2016-09 regarding the Improvements to Employee Share-Based Payment Accounting. During the three and nine months ended March 31, 2017 , the adoption increased the number of diluted stock options and restricted stock units by 635 thousand and 689 thousand shares, respectively.

The Company excludes potentially dilutive securities from its diluted net income per share calculation when their effect would be anti-dilutive to net income per share amounts.  The following table summarizes the total potential shares of common stock that were excluded from the diluted per share calculation as including them would have been anti-dilutive for the period (in thousands):
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2017
 
2016
 
2017
 
2016
Restricted stock units
29

 
16

 
10

 

 
29

 
16

 
10

 

NOTE 5—BALANCE SHEET COMPONENTS
Inventories
Inventories consisted of the following (in thousands):

8


 
March 31, 2017
 
June 30, 2016
Finished goods
$
122,809

 
$
50,987

Raw materials
9,703

 
6,126

Total
$
132,512

 
$
57,113


Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
 
March 31, 2017
 
June 30, 2016
Testing equipment
$
7,579

 
$
6,051

Computer and other equipment
5,399

 
4,857

Tooling equipment
7,442

 
5,801

Furniture and fixtures
1,525

 
1,325

Leasehold improvements
6,079

 
5,136

Software
5,687

 
2,488

Software in development

 
2,739

Property and Equipment, Gross
33,711

 
28,397

Less: Accumulated depreciation and amortization
(20,366
)
 
(15,444
)
Property and Equipment, Net
$
13,345

 
$
12,953


Other Long-term Assets
Other long-term assets consisted of the following (in thousands):
 
March 31, 2017
 
June 30, 2016
Intangible assets, net (1)
$
485

 
$
616

Other long-term assets
1,452

 
960

Total
$
1,937

 
$
1,576


(1) - Accumulated amortization was $1.2 million and $1.0 million as of March 31, 2017 and June 30, 2016 , respectively.

Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
 
March 31, 2017
 
June 30, 2016
Accrued expenses
$
5,344

 
$
5,749

Accrued compensation and benefits
1,707

 
1,589

Warranty accrual
4,212

 
2,236

Deferred revenue - short term
4,733

 
2,917

Customer deposits
330

 
856

Reserve for sales returns
3,479

 
2,820

Other payables
9,876

 
10,505

Total
$
29,681

 
$
26,672

NOTE 6—ACCRUED WARRANTY
The Company offers warranties on certain products and records a liability for the estimated future costs associated with potential warranty claims. The warranty costs are reflected in the Company’s consolidated statement of operations and comprehensive income within cost of revenues. The warranties are typically in effect for twelve months from the distributor’s purchase date of the product. The Company’s estimate of future warranty costs is largely based on historical factors including product failure rates, material usage, and service delivery cost incurred in replacing products. In certain circumstances, the Company may have recourse from its contract manufacturers for replacement cost of defective products, which it also factors into its warranty liability assessment.


9


Warranty obligations, included in other current liabilities, were as follows (in thousands):
 
Nine Months Ended March 31,
 
2017
 
2016
Beginning balance
$
2,236

 
$
2,750

Accruals for warranties issued during the period
6,555

 
1,574

Settlements made during the period
(4,579
)
 
(2,155
)
Ending balance
$
4,212

 
$
2,169

NOTE 7—DEBT

On March 3, 2015, Ubiquiti Networks, Inc. and Ubiquiti International Holding Company Limited (the “Cayman Borrower”) amended and restated its prior credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), the other financial institutions named as lenders therein, and Wells Fargo as administrative agent for the lenders. The Credit Agreement provides for a $200.0 million senior secured revolving credit facility ("Revolving Facility") and a $100.0 million senior secured term loan facility ("Term Facility", together with the Revolving Facility, the “Facilities”), with an option to request increases in the amounts of such Facilities by up to an additional $50.0 million in the aggregate (any such increase to be in each lender’s sole discretion). The Credit Agreement, matures on March 3, 2020. The Facilities replaced the Company’s $150.0 million senior secured revolving credit facility under its prior credit agreement. The $100.0 million term loan facility of the Credit Agreement was fully drawn at closing of the Credit Agreement, and $72.3 million was used to repay the outstanding balance under its prior credit agreement. The Facilities are available for working capital and general corporate purposes that comply with the terms of the Credit Agreement.

Our Debt consisted of the following (in thousands):
 
March 31, 2017
 
June 30, 2016
Term Loan - short term
$
15,000

 
$
11,250

Debt issuance costs, net (1)
(257
)
 
(257
)
Total Debt - short term
14,743

 
10,993

Term Loan - long term
65,000

 
76,250

Revolver - long term
146,000

 
116,000

Debt issuance costs, net (1)
(493
)
 
(686
)
Total Debt - long term
$
210,507

 
$
191,564


(1) On July 1 2016, the Company retrospectively adopted ASU 2015-03, which requires unamortized debt issuance costs to be included as a direct deduction from the related debt liability on the balance sheet. Under previous guidance, all unamortized debt issuance costs were reported as assets on the balance sheet. See Note 2 for information on the impact of the retrospective adoption of ASU 2015-03.

As of March 31, 2017 , the interest rate on the term loan was 2.65% . The table below shows the respective interest rates as of March 31, 2017 in addition to interest rate reset dates and rates as available for each revolver draw.
 
 
Interest Rate as of
 
 
 
 
Debt Payment Obligations
 
March 31, 2017
 
Rate Reset Date
 
Reset Rate
$15 Million Revolver
 
2.51%
 
4/10/2017
 
#
$18 Million Revolver
 
2.52%
 
7/18/2017
 
2.66%
$16 Million Revolver
 
2.53%
 
5/15/2017
 
*
$19 Million Revolver
 
2.50%
 
4/3/2017
 
#
$48 Million Revolver
 
2.55%
 
5/30/2017
 
*
$30 Million Revolver
 
2.93%
 
9/15/2017
 
*
* - Reset rate not available as of filing date.
# - Revolver repaid subsequent to March 31, 2017

The Revolving Facility includes a sub-limit of $10.0 million for letters of credit and a sub-limit of $25.0 million for swingline loans. Under the Credit Agreement, revolving loans and swingline loans may be borrowed, repaid and reborrowed until March

10


3, 2020, at which time all amounts borrowed must be repaid. The term loan is payable in quarterly installments of 2.50% of the original principal amount of the term loan until March 31, 2017, thereafter increasing to 3.75% of the original principal amount of the term loan, in each case plus accrued and unpaid interest. Revolving, swingline and term loans may be prepaid at any time without penalty.

Revolving and term loans bear interest, at the Company’s option, at either (i) a floating rate per annum equal to the base rate plus a margin of between 0.50% and 1.25% , depending on the Company’s leverage ratio as of the most recently ended fiscal quarter or (ii) a floating per annum rate equal to the applicable LIBOR rate for a specified period, plus a margin of between 1.50% and 2.25% , depending on the Company’s leverage ratio as of the most recently ended fiscal quarter. Swingline loans bear interest at a floating rate per annum equal to the base rate plus a margin of between 0.50% and 1.25% , depending on the Company’s leverage ratio as of the most recently ended fiscal quarter.

The Credit Agreement requires the Company to maintain during the term of the Facilities (i) a maximum leverage ratio of 2.50 to 1.00 and (ii) minimum liquidity of $225.0 million , increasing to $250.0 million in the event of an incremental increase in the size of the Facilities, which can be satisfied with unrestricted cash and cash equivalents and up to $50.0 million of availability under the Revolving Facility. In addition, the Credit Agreement contains customary affirmative and negative covenants and includes customary events of default. The occurrence of an event of default could result in the acceleration of the obligations under the Credit Agreement.

The obligations of Ubiquiti Networks, Inc. and certain domestic subsidiaries, if any, under the Credit Agreement are required to be guaranteed by such domestic subsidiaries (the “Domestic Guarantors”) and are collateralized by substantially all assets (excluding intellectual property) of Ubiquiti Networks, Inc. and the Domestic Guarantors. The obligations of the Cayman Borrower and certain foreign subsidiaries under the Credit Agreement are required to be guaranteed by certain domestic and material foreign subsidiaries (the “Guarantors”) and are collateralized by substantially all assets (excluding intellectual property) of the Cayman Borrower and the Guarantors.
During the three months ended March 31, 2017 , the Company made a payment of $3.0 million against the balance under the Term Facility, of which $2.5 million was a repayment of principal and $0.5 million was payment of interest. During the  nine months ended   March 31, 2017 , the Company made aggregate payments of  $9.0 million  against the balance under the Term Facility, of which  $7.5 million  was a repayment of principal and  $1.5 million  was payment of interest. 
During the three months ended March 31, 2017 , the Company made a payment of $0.7 million of interest under the Revolving Facility. During the nine months ended March 31, 2017 , the Company made aggregate payments of  $2.2 million of interest under the Revolving Facility.
On September 2, 2015, the Company accessed a letter of credit under its Revolving Facility in the amount of $0.2 million for the benefit of the landlord pursuant to a new lease of office space. The landlord can draw against the letter of credit in the event of a lease default by the Company. The letter of credit expires on September 2, 2017, subject to automatic renewal for additional one-year periods.
The following table summarizes our estimated debt and interest payment obligations as of March 31, 2017 , for the remainder of fiscal 2017 and future fiscal years (in thousands):
 
2017 (remainder)
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Debt payment obligations
$
3,750

 
$
15,000

 
$
15,000

 
$
192,250

 
$

 
$

 
$
226,000

Interest and other payments on debt payment obligations  (1)
1,516

 
5,820

 
5,418

 
3,468

 

 

 
16,222

Total
$
5,266

 
$
20,820

 
$
20,418

 
$
195,718

 
$

 
$

 
$
242,222


(1) - Interest payments are calculated based on the applicable rates and payment dates as of March 31, 2017 . Furthermore, two to three-month payment intervals on the revolving debt have been assumed, consistent with the Company's elections to date.


NOTE 8—COMMITMENTS AND CONTINGENCIES
Operating Leases

11


Certain facilities and equipment are leased under non-cancelable operating leases. The Company generally pays taxes, insurance and maintenance costs on leased facilities and equipment. The Company leases its headquarters in San Jose, California and other locations under non-cancelable operating leases that expire at various dates through fiscal 2022 .
At March 31, 2017 , future minimum annual payments under operating leases for the remainder of fiscal 2017 and future fiscal years are as follows (in thousands):
 
2017 (remainder)
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Operating leases
$
1,851

 
$
5,752

 
$
3,120

 
$
2,203

 
$
1,356

 
$
560

 
$
14,842

Purchase Obligations
The Company primarily subcontracts with other companies to manufacture its products. During the normal course of business, the Company’s contract manufacturers procure components based upon orders placed by the Company. If the Company cancels all or part of the orders, it may still be liable to the contract manufacturers for the cost of the components purchased by them to manufacture the Company’s products. The Company periodically reviews the potential liability under its orders, and no significant accruals have been recorded as of March 31, 2017 . The Company had inventory purchase obligations of $40.7 million as of March 31, 2017 .
Other Obligations
The Company had other obligations of $9.8 million as of March 31, 2017 , which consisted primarily of commitments related to research and development projects.
Indemnification Obligations
The Company enters into standard indemnification agreements with many of its business partners in the ordinary course of business. These agreements include provisions for indemnifying the business partner against any claim brought by a third-party to the extent any such claim alleges that a Company product infringes a patent, copyright or trademark, or violates any other proprietary rights of that third-party. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is not estimable and the Company has not incurred any material costs to defend lawsuits or settle claims related to these indemnification agreements to date.
Legal Matters
The Company may be involved, from time to time, in a variety of claims, lawsuits, investigations, and proceedings relating to contractual disputes, intellectual property rights, employment matters, regulatory compliance matters and other litigation matters relating to various claims that arise in the normal course of business. The Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. The Company assesses its potential liability by analyzing specific litigation and regulatory matters using available information. The Company develops its views on estimated losses in consultation with inside and outside counsel, which involves a subjective analysis of potential results and outcomes, assuming various combinations of appropriate litigation and settlement strategies. Taking all of the above factors into account, the Company records an amount where it is probable that the Company will incur a loss and where that loss can be reasonably estimated. However, the Company’s estimates may be incorrect and the Company could ultimately incur more or less than the amounts initially recorded. The Company may also incur significant legal fees, which are expensed as incurred, in defending against these claims. The Company is not currently aware of any pending or threatened litigation that would have a material adverse effect on the Company's financial statements.

Shareholder Class Action Lawsuits
Beginning on September 7, 2012, two class action lawsuits were filed in the United States District Court for the Northern District of California against Ubiquiti Networks, Inc., certain of our current and former officers and directors, and the underwriters of its initial public offering, alleging claims under U.S. securities laws. On January 30, 2013, the plaintiffs filed an amended consolidated complaint. On March 26, 2014, the court issued an order granting a motion to dismiss the complaint with leave to amend. Following the plaintiffs’ decision not to file an amended complaint, on April 16, 2014, the court ordered the dismissal of the lawsuit with prejudice, and entered judgment in favor of the Company and the other defendants, and against the plaintiffs. On May 15, 2014, the plaintiffs filed a notice of appeal from the judgment of the court. The Ninth Circuit heard oral arguments on August 10, 2016. On October 24, 2016, the Ninth Circuit issued an unpublished opinion, reaffirming the district court’s dismissal of the alleged violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and reversing the district court’s dismissal of the alleged violations of Sections 11 and 15 of the Securities Act of 1933. The

12


Company filed a petition for rehearing with the Ninth Circuit, which the Ninth Circuit denied. The Company plans to vigorously defend itself against these claims; however, there can be no assurance that the Company will prevail in the lawsuit. The Company cannot currently estimate the possible loss, if any, that it may experience in connection with this litigation.

Synopsys
On February 3, 2017, Synopsys, Inc. (“Synopsys”) filed a complaint against the Company, one of our subsidiaries and certain employees in the United States District Court for the Northern District of California, alleging claims under the Digital Millennium Copyright Act (“DMCA”). On March 28, 2017, Synopsys filed an amended complaint alleging claims under the trafficking provisions of the DMCA and claims for fraud, civil RICO and negligent misrepresentation. The Company plans to vigorously defend itself against these claims; however, there can be no assurance that the Company will prevail in the lawsuit. The Company cannot currently estimate the possible loss or range of losses, if any, that it may experience in connection with this litigation.


NOTE 9—COMMON STOCK AND TREASURY STOCK
As of March 31, 2017 and June 30, 2016 , the authorized capital of the Company included 500,000,000 shares of common stock. As of March 31, 2017 and June 30, 2016 , there were 80,313,029 and 81,667,129 shares of common stock outstanding, respectively.

Common Stock Repurchases

On May 4, 2016 , the Board of Directors of the Company approved a  $50 million  stock repurchase program. Under the stock repurchase program, the Company was authorized to repurchase up to  $50 million  of its common stock. During the fourth quarter of fiscal 2016 , the Company repurchased 1,309,606 shares of its common stock at an average price per share of $38.18 for an aggregate amount of $50 million . This included unpaid stock repurchases of $6.5 million relating to repurchases executed on or prior to June 30, 2016 for trades that settled in the first quarter of fiscal 2017 .

On August 3, 2016 , the Board of Directors of the Company approved a $50 million stock repurchase program. Under the stock repurchase program, the Company was authorized to repurchase up to $50 million of its common stock. During the third quarter of fiscal 2017 , the Company repurchased 1,014,956 shares of its common stock at an average price per share of $49.26 for an aggregate amount of $50 million .

On March 3, 2017 , the Board of Directors of the Company approved a $50 million stock repurchase program. Under the stock repurchase program, the Company may repurchase up to $50 million of its common stock. The program expires on March 31, 2018 . During the third quarter of fiscal 2017 , the Company repurchased 917,455 shares of its common stock at an average price per share of $50.43 for an aggregate amount of $46.3 million . This included unpaid stock repurchases of $3.0 million relating to repurchases executed on or prior to March 31, 2017 for trades that settled in the fourth quarter of fiscal 2017 . As of March 31, 2017 , the Company has $3.7 million available under the stock repurchase program.
NOTE 10—STOCK BASED COMPENSATION
Stock-Based Compensation Plans
The Company’s 2010 Equity Incentive Plan and 2005 Equity Incentive Plan are described in its Annual Report. As of March 31, 2017 , the Company had 10,021,856 authorized shares available for future issuance under all of its stock incentive plans.
Stock-Based Compensation
The following table shows total stock-based compensation expense included in the Consolidated Statements of Operations for the three and nine months ended March 31, 2017 and 2016 (in thousands):

13


 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2017

2016
 
2017
 
2016
Cost of revenues
$
39

 
$
114

 
$
213

 
$
341

Research and development
421

 
566

 
1,362

 
1,770

Sales, general and administrative
141

 
202

 
519

 
755

 
$
601


$
882

 
$
2,094

 
$
2,866

Stock Options
The following is a summary of option activity for the Company’s stock incentive plans for the nine months ended March 31, 2017 :
 
Common Stock Options Outstanding
 
Number
of Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life (Years)
 
Aggregate
Intrinsic
Value
(In thousands)
Balance, June 30, 2016
2,125,307

 
$
2.03

 
2.65
 
$
77,850

Exercised
(496,800
)
 
$
2.81

 

 

Forfeitures and cancellations
(1,356
)
 
$
11.72

 

 

Balance, March 31, 2017
1,627,151

 
$
1.78

 
1.80
 
$
78,878

Vested and expected to vest as of March 31, 2017
1,627,150

 
$
1.78

 
1.80
 
$
78,878

Vested and exercisable as of March 31, 2017
1,626,889

 
$
1.78

 
1.80
 
$
78,869


During the three months ended March 31, 2017 and 2016 , the aggregate intrinsic value of options exercised under the Company’s stock incentive plans was $0.4 million and $1.3 million , respectively, as determined as of the date of option exercise. During the  nine months ended   March 31, 2017  and  2016 , the aggregate intrinsic value of options exercised under the Company’s stock incentive plans was  $24.6 and  $3.5 million , respectively, as determined as of the date of option exercise.

As of March 31, 2017 , the Company had unrecognized compensation costs of $1.3 thousand related to stock options which the Company expects to recognize over a weighted-average period of 0.2 years. Future option grants will increase the amount of compensation expense to be recorded in these periods.
The Company estimates the fair value of employee stock options using the Black-Scholes option pricing model. The fair value of employee stock options is amortized on a straight-line basis over the requisite service period of the awards. The Company did not grant any employee stock options during the three and nine months ended March 31, 2017 and 2016 .

Restricted Stock Units (“RSUs”)
The following table summarizes the activity of the RSUs made by the Company:
 
Number of Shares
 
Weighted Average Grant Date Fair Value Per Share
Non-vested RSUs, June 30, 2016
271,971

 
$
28.72

RSUs granted
72,023

 
$
55.33

RSUs vested
(109,124
)
 
$
24.71

RSUs canceled
(42,685
)
 
$
33.44

Non-vested RSUs, March 31, 2017
192,185

 
$
39.53

The intrinsic value of RSUs vested in the three months ended March 31, 2017 and 2016 was $1.9 million and $0.9 million , respectively. The intrinsic value of RSUs vested in the  nine months ended March 31, 2017  and  2016  was  $5.6 million  and  $3.7 million , respectively.
As of March 31, 2017 , there were unrecognized compensation costs related to RSUs of $8.1 million which the Company expects to recognize over a weighted average period of 3.2 years .
NOTE 11—INCOME TAXES

14


The Company recorded a tax provision of $7.9 million and $18.0 million for the three and nine months ended March 31, 2017 . The Company’s estimated fiscal year 2017 effective tax rate differs from the U.S. statutory rate primarily due to profits earned in jurisdictions where the tax rate is lower than the U.S. tax rate and in realization of share-based compensation excess tax benefit.
Effective July 1, 2016, the Company early adopted ASU 2016-09 regarding the Improvements to Employee Share-Based Payment Accounting. In accordance with the new guidance, for the three and nine months ended March 31, 2017 , the Company recognized excess tax benefits for share- based payments of $0.2 million and $7.9 million , respectively, as a discrete item within the provision for income taxes rather than additional paid-in capital. See Note 2 for information on the impact of the adoption of ASU 2016-09.
As of March 31, 2017 , the Company had approximately $26.9 million of unrecognized tax benefits, substantially all of which would, if recognized, affect its tax expense. The Company has elected to include interest and penalties related to uncertain tax positions as a component of tax expense. At March 31, 2017 , an immaterial amount of interest and penalties are included in long-term income tax payable. The Company recorded a net increase of its unrecognized tax benefits of $2.0 million and $4.0 million , respectively, for the three and nine months ended March 31, 2017 . The Company does not expect any significant increases or decreases to its unrecognized tax benefits in the next twelve months.
The Company files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The Company’s tax filings from fiscal year 2011 and onwards could be subject to examinations by tax authorities.
On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. On February 19, 2016, the U.S. Department of the Treasury filed a notice of appeal and has not withdrawn the requirement to include stock-based compensation from its regulations. On June 27, 2016, the U.S. Department of Treasury appealed the holding by filing its opening brief to the Ninth Circuit Court of Appeals. We have reviewed this case and its potential impact on Ubiquiti and concluded that no adjustment to the consolidated financial statements is appropriate at this time. We will continue to monitor ongoing developments and potential impacts to our consolidated financial statements.
NOTE 12—SEGMENT INFORMATION, REVENUES BY GEOGRAPHY AND SIGNIFICANT CUSTOMERS
Management has determined that the Company operates as one reportable and operating segment as it only reports financial information on an aggregate and consolidated basis to its Chief Executive Officer, who is the Company’s Chief Operating Decision Maker. Furthermore, the Company does not organize or report its costs on a segment basis. The Company presents its revenues by product type in two primary categories, including Service Provider Technology and Enterprise Technology.

Service Provider Technology includes the Company’s airMAX, EdgeMAX and airFiber platforms, as well as embedded radio products and other 802.11 standard products including base stations, radios, backhaul equipment and Customer Premise Equipment (“CPE”). Additionally, Service Provider Technology includes antennas and other products primarily in the 0.9 to 6.0 GHz spectrum and miscellaneous products such as mounting brackets, cables and power over Ethernet adapters. Service Provider Technology also includes solar products (sales of which have not been material to date) and revenues that are attributable to post-contract customer support (“PCS”).

Enterprise Technology includes the Company’s UniFi and mFi platforms, including UniFi Access Point (“UAP”) products, UniFi Video products, UniFi Voice Over IP (“VOIP”) phones and UniFi switch products. Enterprise Technology also includes AmpliFi products and revenues that are attributable to PCS.

Revenues by product type are as follows (in thousands, except percentages):
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2017
 
2016
 
2017
 
2016
Service provider Technology
$
104,724

 
48
%
 
$
96,215

 
57
%
 
$
340,936

 
54
%
 
$
309,230

 
64
%
Enterprise Technology
113,635

 
52
%
 
71,218

 
43
%
 
295,716

 
46
%
 
171,489

 
36
%
Total revenues
$
218,359

 
100
%
 
$
167,433

 
100
%
 
$
636,652

 
100
%
 
$
480,719

 
100
%
Revenues by geography based on customer’s ship-to destinations were as follows (in thousands, except percentages):

15


 
Three Months Ended March 31,

Nine Months Ended March 31,
 
2017

2016

2017

2016
North America(1)
$
78,573


36
%

$
57,791


35
%

$
247,347


39
%

$
168,428


35
%
South America
27,770


13
%

15,450


9
%

71,240


11
%

61,123


13
%
Europe, the Middle East and Africa ("EMEA")
87,780


40
%

73,269


44
%

246,536


39
%

194,745


40
%
Asia Pacific
24,236


11
%

20,923


12
%

71,529


11
%

56,423


12
%
Total revenues
$
218,359


100
%

$
167,433


100
%

$
636,652


100
%

$
480,719


100
%
 
(1)
Revenue for the United States was $74.0 million and $54.6 million for the three months ended March 31, 2017 and 2016 , respectively. Revenue for the United States was $234.8 million and $158.8 million for the nine months ended March 31, 2017 and 2016 , respectively.

Customers with an accounts receivable balance of 10% or greater of total accounts receivable and customers with net revenues of 10% or greater of total revenues are presented below for the periods indicated:
 
Percentage of Revenues
 
Percentage of Accounts Receivable
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
March 31,
 
June 30,
 
2017

2016
 
2017
 
2016
 
2017
 
2016
Customer A
*
 
*
 
*
 
*
 
12%
 
11%
Customer B
*
 
*
 
*
 
*
 
*
 
13%
Customer C
10%
 
*
 
11%
 
*
 
17%
 
18%
Customer D
*
 
*
 
*
 
10%
 
*
 
*
 * denotes less than 10%
NOTE 13—RELATED PARTY TRANSACTIONS AND CERTAIN OTHER TRANSACTIONS

Aircraft Lease Agreement

On November 13, 2013, the Company entered into an aircraft lease agreement (the “Aircraft Lease Agreement”) with RJP Manageco LLC (the “Lessor”), a limited liability company owned by the Company’s CEO, Robert J. Pera. Pursuant to the Aircraft Lease Agreement, the Company may lease an aircraft owned by the Lessor for Company business purposes. Under the Aircraft Lease Agreement, the aircraft may be leased at a rate of $ 5,000 per flight hour. This hourly rate does not include the cost of flight crew or on-board services, which the Company purchases from a third-party provider. The Company recognized a total of approximately  $0.5 million and $1.7 million in expenses pursuant to the Aircraft Lease Agreement during the three and nine months ended March 31, 2017 , respectively.  The Company recognized a total of approximately $0.4 million and $1.0 million in expenses pursuant to the Aircraft Lease Agreement during the three and nine months ended March 31, 2016 , respectively. All expenses pursuant to the Aircraft Lease Agreement have been included in the Company’s sales, general and administrative expenses in the Consolidated Statements of Operations.
NOTE 14—BUSINESS EMAIL COMPROMISE FRAUD LOSS
As disclosed in June 2015 and 2016, the Company determined that it was the victim of a criminal fraud known to law enforcement authorities as business e-mail compromise fraud which involved employee impersonation and fraudulent requests targeting our finance department. The fraud resulted in transfers of funds aggregating $46.7 million held by a Company subsidiary incorporated in Hong Kong to other overseas accounts held by third parties. To date, the Company has recovered $16.7 million . The Company recovered $8.1 million in fiscal 2015, resulting in a charge of  $39.1 million  in the fourth quarter of fiscal 2015, including additional expenses consisting of professional service fees associated with the fraud loss. In fiscal 2016, the Company recorded a net recovery of an additional $8.3 million , comprised of the $8.6 million recovery less $0.3 million of professional service fees associated with the recovery. No additional recoveries were made during the three and nine months ended March 31, 2017 .

The Company intends to continue to pursue the recovery of the remaining $30.0 million . The Company is also continuing to cooperate with U.S. federal and numerous overseas law enforcement authorities, who are actively pursuing a multi-agency criminal investigation. Any additional recoveries of funds are likely remote and therefore cannot be assured.

16


NOTE 15 - SUBSEQUENT EVENTS
On April 14, 2017, the Company, the Cayman Borrower and certain of its subsidiaries entered in the First Amendment (the “First Amendment”) to the Credit Agreement (as amended by the First Amendment, the “Amended Credit Agreement”). The First Amendment increased the maximum aggregate amount of the Revolving Facility from $200.0 million to $300.0 million , but maintained the $100.0 million Term Facility under the Credit Agreement and the option to request increases in the amounts of such Facilities by up to an additional $50.0 million in the aggregate (any such increase to be in each lender’s sole discretion). The Amended Credit Agreement requires the Company to maintain during the term of the Facilities (i) a maximum leverage ratio of 2.50 to 1.00 and (ii) minimum liquidity of $250.0 million , which can be satisfied with unrestricted cash and cash equivalents and up to $50.0 million of availability under the Revolving Facility. All other material terms and provisions of the Amended Credit Agreement remain substantially identical to the terms and provisions in place immediately prior to the effectiveness of the First Amendment, other than the revision or inclusion of certain customary market provisions.
Pursuant to the $50 million stock repurchase program approved by the Board of Directors of the Company on March 3, 2017, the Company repurchased $3.0 million of its common stock in the fourth quarter of fiscal 2017 that were trades executed on or prior to March 31, 2017. Please see Note 9 of the notes to the consolidated financial statements and Part II “Other Information” - Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds” for more information.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read together with the financial statements and related notes that are included elsewhere in this quarterly report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this quarterly report, particularly in Note 8 “Commitments and Contingencies” to our consolidated financial statements and Part II “Other Information”, Item 1-Legal Proceedings and 1A-Risk Factors, in this report.

Overview
Ubiquiti Networks, Inc. develops high performance networking technology for service providers and enterprises. Our technology platforms focus on delivering highly-advanced and easily deployable solutions that appeal to a global customer base in underserved and underpenetrated markets. Our differentiated business model has enabled us to break down traditional barriers, such as high product and network deployment costs, and offer solutions with disruptive price-performance characteristics. This differentiated business model, combined with our innovative proprietary technologies, has resulted in an attractive alternative to traditional high touch, high cost providers, allowing us to advance the market adoption of our platforms for ubiquitous connectivity.
We offer a broad and expanding portfolio of networking products and solutions for service providers and enterprises. Our service provider product platforms provide carrier-class network infrastructure for fixed wireless broadband, wireless backhaul systems and routing. Our enterprise product platforms provide wireless LAN infrastructure, video surveillance products, switching and routing solutions and machine-to-machine communication components. We believe that our products are highly differentiated due to our proprietary software protocol innovation, firmware expertise, and hardware design capabilities. This differentiation allows our portfolio to meet the demanding performance requirements of video, voice and data applications at prices that are a fraction of those offered by our competitors.

In May 2016, we announced the creation of Ubiquiti Labs, a division focusing on research and development of consumer electronics. At the same time, we announced a new consumer product platform, called AmpliFi, which is a Wi-Fi system solution designed to serve the demands of the modern connected home.
As a core part of our strategy, we have developed a differentiated business model for marketing and selling high volumes of carrier and enterprise-class communications platforms. Our business model is driven by a large, growing and highly engaged community of service providers, distributors, value added resellers, systems integrators and corporate IT professionals, which we refer to as the Ubiquiti Community. The Ubiquiti Community is a critical element of our business strategy as it enables us to drive:
 
Rapid customer and community driven product development. We have an active, loyal community built by our customers that we believe is a sustainable competitive advantage. Our solutions benefit from the active engagement

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between the Ubiquiti Community and our development engineers throughout the product development cycle, which eliminates long and expensive multistep internal processes and results in rapid introduction and adoption of our products. This approach significantly reduces our development costs and time to market.

Scalable sales and marketing model. We do not currently have, nor do we plan to hire, a direct sales force, but instead utilize the Ubiquiti Community to drive market awareness and demand for our products and solutions. This community-propagated, viral marketing enables us to reach underserved and underpenetrated markets far more efficiently and cost-effectively than is possible through traditional sales models. Leveraging the information transparency of the Internet allows customers to research, evaluate and validate our solutions with the Ubiquiti Community and via third-party web sites. This allows us to operate a scalable sales and marketing model and effectively create awareness for our brand and products. Word-of-mouth referrals from the Ubiquiti Community generate high quality leads for our distributors at relatively little cost.

Self-sustaining product support.  The engaged members of the Ubiquiti Community have enabled us to foster a large, cost efficient, highly-scalable and, we believe, self-sustaining mechanism for rapid product support and dissemination of information.
By reducing the cost of development, sales, marketing and support, we are able to eliminate traditional business model inefficiencies and offer innovative solutions with disruptive price performance characteristics to our customers.
Key Components of Our Results of Operations and Financial Condition
Revenues
Our revenues are derived principally from the sale of networking hardware and management tools. In addition, while we do not sell maintenance and support separately, because we have historically included it free of charge in many of our arrangements, we attribute a portion of our systems revenues to this implied post-contract customer support (“PCS”).
We classify our revenues into two primary product categories: Service Provider Technology and Enterprise Technology.

Service Provider Technology includes our airMAX, EdgeMAX and airFiber platforms, as well as embedded radio products and other 802.11 standard products including base stations, radios, backhaul equipment and CPE. Additionally, Service Provider Technology includes antennas and other products primarily in the 0.9 to 6.0 GHz spectrum and miscellaneous products such as mounting brackets, cables and power over Ethernet adapters. Service Provider Technology also includes solar products (sales of which have not been material to date) and revenues that are attributable to PCS.

Enterprise Technology includes our UniFi and mFi platforms, including UniFi enterprise Wi-Fi, UniFi Video Products, UniFi switching and routing solutions. Enterprise Technology also includes AmpliFi products and revenues that are attributable to PCS.
We sell substantially all of our products through a limited number of distributors and other channel partners, such as resellers and Original Equipment Manufacturers (“OEMs”). Sales to distributors accounted for 99% of revenues during the three and nine months ended March 31, 2017 .
Cost of Revenues
Our cost of revenues is comprised primarily of the costs of procuring finished goods from our contract manufacturers and chipsets that we consign to certain of our contract manufacturers. In addition, cost of revenues includes labor and other costs associated with engineering, including salary, benefits and stock-based compensation in addition to costs associated with tooling, testing and quality assurance, warranty fees, logistics fees and excess and obsolete inventory.
In addition to utilizing contract manufacturers, we outsource most of our logistics warehousing and order fulfillment functions, which are located primarily in China, and to a lesser extent, Taiwan, Poland and the United States. We also evaluate and utilize other vendors for various portions of our supply chain from time to time. Our operations organization consists of employees and consultants engaged in the management of our contract manufacturers, new product introduction activities, logistical support and engineering.
Gross Profit

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Our gross profit has been, and may, in the future, be influenced by several factors, including changes in product mix, target end markets for our products, pricing due to competitive pressure, production costs and global demand for electronic components. Although we procure and sell our products in U.S. dollars, our contract manufacturers incur many costs, including labor costs, in other currencies. To the extent that the exchange rates move unfavorably for our contract manufacturers, they may try to pass these additional costs to us, which could have a material impact on our future average selling prices and unit costs.
Operating Expenses
We classify our operating expenses as research and development and sales, general and administrative expenses.
 
Research and development expenses consist primarily of salary and benefit expenses, including stock-based compensation, for employees and costs for contractors engaged in research, design and development activities, as well as costs for prototypes, purchased Intellectual Property (“IP”), non-recurring engineering milestones, facilities and travel. Over time, we expect our research and development costs to increase as we continue making significant investments in developing new products in addition to new versions of our existing products.

Sales, general and administrative expenses include salary and benefit expenses, including stock-based compensation, for employees and costs for contractors engaged in sales, marketing and general and administrative activities, as well as the costs of legal expenses, trade shows, marketing programs, promotional materials, bad debt expense, professional services, facilities, general liability insurance and travel. As our product portfolio and targeted markets expand, we may need to employ different sales models, such as building a direct sales force. These sales models would likely increase our costs. Over time, we expect our sales, general and administrative expenses to increase in absolute dollars due to continued growth in headcount, expansion of our efforts to register and defend trademarks and patents and to support our business and operations.
Deferred Revenues
We recognize revenues when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and the collectability of the resulting receivable is reasonably assured. In cases where we lack evidence that all of these criteria have been met, we defer recognition of revenue. We classify the cost of products associated with these deferred revenues as deferred costs of revenues.
Included in our deferred revenues is a portion related to PCS obligations that we estimate we will fulfill in the future. As of  March 31, 2017  and June 30, 2016 , we had deferred revenues of  $7.3 million and  $4.2 million , respectively, related to these obligations.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. In other cases, management’s judgment is required in selecting among available alternative accounting standards that provide for different accounting treatment for similar transactions. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the amounts we report as assets, liabilities, revenues, costs and expenses and affect the related disclosures. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. In many instances, we could reasonably use different accounting estimates, and in some instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, our actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. Our critical accounting policies are discussed in our Annual Report, and there have been no material changes that have not been disclosed in Note 2 herein.

19

Table of Contents

Results of Operations
Comparison of Three and Nine Months Ended March 31, 2017 and 2016
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except percentages)
Revenues
$
218,359


100
 %

$
167,433


100
%
 
$
636,652

 
100
 %
 
$
480,719

 
100
 %
Cost of revenues(1)
119,273


55
 %

84,940


51
%
 
344,123

 
54
 %
 
245,681

 
51
 %
Gross profit
99,086


45
 %

82,493


49
%
 
292,529

 
46
 %
 
235,038

 
49
 %
Operating expenses:
 






 
 
 
 
 
 
 
 
Research and development(1)
16,603


8
 %

13,820


8
%
 
47,480

 
7
 %
 
42,810

 
9
 %
Sales, general and administrative(1)
9,074


4
 %

8,538


5
%
 
26,938

 
4
 %
 
24,113

 
5
 %
Business e-mail compromise (“BEC”) fraud loss/(recovery)

 
*

 
(3
)
 
*

 

 
*

 
(8,294
)
 
(2
)%
Total operating expenses
25,677


12
 %

22,355


13
%
 
74,418

 
12
 %
 
58,629

 
12
 %
Income from operations
73,409


34
 %

60,138


36
%
 
218,111

 
34
 %
 
176,409

 
37
 %
Interest expense and other, net
(1,038
)

 %

(510
)

*

 
(3,307
)
 
(1
)%
 
(1,277
)
 
*

Income before provision for income taxes
72,371


33
 %

59,628


36
%
 
214,804

 
34
 %
 
175,132

 
36
 %
Provision for income taxes (2)
7,939


4
 %

6,929


4
%
 
17,976

 
3
 %
 
19,222

 
4
 %
Net income and comprehensive income
$
64,432


30
 %

$
52,699


31
%
 
$
196,828

 
31
 %
 
$
155,910

 
32
 %
*       Less than 1%







 
 
 
 
 
 
 
 
(1)    Includes stock-based compensation as follows:







 
 
 
 
 
 
 
 
Cost of revenues
$
39




$
114



 
$
213

 
 
 
$
341

 
 
Research and development
421




566



 
1,362

 
 
 
1,770

 
 
Sales, general and administrative
141




202



 
519

 
 
 
755

 
 
Total stock-based compensation
$
601




$
882



 
$
2,094

 
 
 
$
2,866

 
 
(2) Includes the excess tax benefits resulting from the adoption of ASU 2016-09 Stock Compensation
$
(179
)
 
 
 
$

 
 
 
$
(7,859
)
 
 
 
$

 
 
Revenues
Total revenues increased $51.0 million , or 30% , from $167.4 million in the three months ended March 31, 2016 to $218.4 million in the three months ended March 31, 2017 . Total revenues  increased   $156.0 million , or  32%  from  $480.7 million  in the nine months ended   March 31, 2016  to  $636.7 million  in the nine months ended March 31, 2017
The drivers of both increases are discussed in further detail below. During the three and nine months ended March 31, 2017 , there were no material price changes in the Company's products sold. During these periods there were changes in product mix, including a higher mix of Enterprise Technology products sold as compared to the three and nine months ended March 31, 2016 .
Revenues by Product Type
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except percentages)
Service provider Technology
$
104,724

 
48
%
 
$
96,215

 
57
%
 
$
340,936

 
54
%
 
$
309,230

 
64
%
Enterprise Technology
113,635

 
52
%
 
71,218

 
43
%
 
295,716

 
46
%
 
171,489

 
36
%
Total revenues
$
218,359

 
100
%
 
$
167,433

 
100
%
 
$
636,652

 
100
%
 
$
480,719

 
100
%

Service Provider Technology revenue increased $8.5 million , or 9% , from $96.2 million in the three months ended March 31, 2016 to $104.7 million in the three months ended March 31, 2017 . Service Provider Technology revenue

20


increased   $31.7 million , or  10% , from  $309.2 million  in the nine months ended   March 31, 2016  to $340.9 million in the nine months ended March 31, 2017 .

The increase in Service Provider Technology revenue during the three months ended March 31, 2017 as compared to the same period in the prior year was primarily due to increased revenues in North America and South America and offset by a decline in Service Provider Technology revenues in Europe, the Middle East and Africa ("EMEA") and Asia Pacific. The increase in Service Provider Technology revenue during the nine months ended March 31, 2017 as compared to the same period in the prior year was primarily due to increased revenues for Service Provider Technology products in all regions except EMEA.
Enterprise Technology revenue increased $42.4 million , or 60% , from $71.2 million in the three months ended March 31, 2016 to $113.6 million in the three months ended March 31, 2017 . Enterprise Technology revenue increased   $124.2 million , or  72% , from  $171.5 million  in the nine months ended   March 31, 2016  to  $295.7 million  in the nine months ended   March 31, 2017 . The increase in Enterprise Technology revenue during the three months ended March 31, 2017 as compared to the same period in the prior year was primarily due to product expansion and further adoption of our UniFi technology platform across all regions. Similarly, the increase in Enterprise Technology revenue during the nine months ended   March 31, 2017  as compared to the same period in the prior year was primarily due to product expansion and further adoption of our UniFi technology platform across all regions.
Revenues by Geography
We have determined the geographical distribution of our product revenues based on our customers’ ship-to destinations. A majority of our sales are to distributors who either sell to resellers or directly to end customers, who may be located in different countries than the initial ship-to destination. The following are our revenues by geography for the three and nine months ended March 31, 2017 and 2016 (in thousands, except percentages):   
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2017
 
2016
 
2017
 
2016
North America(1)
$
78,573

 
36
%
 
$
57,791

 
35
%
 
$
247,347

 
39
%
 
$
168,428

 
35
%
South America
27,770

 
13
%
 
15,450

 
9
%
 
71,240

 
11
%
 
61,123

 
13
%
Europe, the Middle East and Africa ("EMEA")
87,780

 
40
%
 
73,269

 
44
%
 
246,536

 
39
%
 
194,745

 
40
%
Asia Pacific
24,236

 
11
%
 
20,923

 
12
%
 
71,529

 
11
%
 
56,423

 
12
%
Total revenues
$
218,359

 
100
%
 
$
167,433

 
100
%
 
$
636,652

 
100
%
 
$
480,719

 
100
%
 
(1)
Revenue for the United States was $74.0 million and $54.6 million for the three months ended March 31, 2017 and 2016 , respectively. Revenue for the United States was $234.8 million and $158.8 million for the nine months ended March 31, 2017 and 2016 , respectively.
North America
Revenues in North America increased $20.8 million , or 36% , from $57.8 million in the three months ended March 31, 2016 to $78.6 million in the three months ended March 31, 2017 .  Revenues  increased   $78.9 million , or 47% , from  $168.4 million  in the nine months ended   March 31, 2016  to  $247.3 million in the nine months ended   March 31, 2017 . The increase in North American revenues during both the three and nine months ended March 31, 2017 as compared to the same periods in the prior year was primarily due to increased revenue for both our Service Provider Technology products and Enterprise Technology products.

South America
Revenues in South America increased $12.3 million , or 79% , from $15.5 million in the three months ended March 31, 2016 to $27.8 million in the three months ended March 31, 2017 . Revenues  increased   $10.1 million , or  17% , from  $61.1 million  in the nine months ended   March 31, 2016  to  $71.2 million  in the nine months ended   March 31, 2017 . The increase in South American revenues during the three and nine months ended March 31, 2017 as compared to the same periods in the prior year was primarily due to increased revenue for both our Service Provider Technology products and Enterprise Technology products.

21


Europe, the Middle East, and Africa (EMEA)
Revenues in EMEA increased $14.5 million , or 20% , from $73.3 million in the three months ended March 31, 2016 to $87.8 million in the three months ended March 31, 2017 . Revenues  increased   $51.8 million , or  27% , from  $194.7 million  in the nine months ended March 31, 2016  to  $246.5 million in the nine months ended March 31, 2017 . The increase in EMEA revenues during the three and nine months ended March 31, 2017 as compared to the same periods in the prior year was primarily due to increased revenues from Enterprise Technology products offset, in part, by a decline in revenues from Service Provider Technology products.
Asia Pacific
Revenues in the Asia Pacific region increased $3.3 million , or 16% , from $20.9 million in the three months ended March 31, 2016 to $24.2 million in the three months ended March 31, 2017 . Revenues  increased   $15.1 million , or  27% , from  $56.4 million  in the nine months ended   March 31, 2016  to  $71.5 million  in the nine months ended   March 31, 2017 . The increase in Asia Pacific revenues during the three and nine months ended March 31, 2017 as compared to the same periods in the prior year was primarily due to increased revenues from Enterprise Technology products offset, in part, by a decline in revenues from Service Provider Technology products.
Cost of Revenues and Gross Profit
Cost of revenues increased $34.4 million , or 41% , from $84.9 million in the three months ended March 31, 2016 to $119.3 million in the three months ended March 31, 2017 . Cost of revenues  increased   $98.4 million , or  40% , from  $245.7 million  in the nine months ended March 31, 2016  to  $344.1 million  in the nine months ended   March 31, 2017 . The increase during both the three and nine months ended March 31, 2017 was primarily due to our overall increase in revenues and to a lesser extent, an increased cost associated with fulfillment operations, warranty accruals and inventory reserves.
Gross profit margin decreased to 45% in the three months ended March 31, 2017 compared to 49% in the three months ended March 31, 2016 and decreased to 46% in the nine months ended March 31, 2017 compared to 49% in the nine months ended March 31, 2016 . The decrease during both the three and nine months ended March 31, 2017 was primarily due to change in mix of products sold and to a lesser extent, an increase in shipping cost and warranty accruals.
Operating Expenses

Research and Development
Research and development (“R&D”) expenses increased $2.8 million , or 20% , from $13.8 million in the three months ended March 31, 2016 to $16.6 million in the three months ended March 31, 2017 . As a percentage of revenues, research and development expenses remained flat at 8% for the three months ended March 31, 2016 and 2017 . R&D expenses  increased   $4.7 million , or 11% , from  $42.8 million  in the nine months ended March 31, 2016  to  $47.5 million  in the nine months ended   March 31, 2017 . As a percentage of revenues, R&D expenses decreased  from  9%  in the nine months ended   March 31, 2016 to  7%  in the nine months ended   March 31, 2017 .
The increase in research and development expenses in absolute dollars during both the three and nine months ended March 31, 2017 was primarily due to increases in headcount and development activities and offset, in part, by the $2.5 million impairment charge for capitalized software development cost recognized in the nine months ended March 31, 2016 . The increase in headcount and development cost reflects the increased efforts to broaden our research and development activities to introduce new products and new versions of existing products. As a percentage of revenues, R&D expenses decreased primarily due to our overall increase in revenues.  

Sales, General and Administrative
Sales, general and administrative expenses increased $0.6 million , or 7% , from $8.5 million in the three months ended March 31, 2016 to $9.1 million in the three months ended March 31, 2017 . As a percentage of revenues, sales, general and administrative expenses decreased from 5% in the three months ended March 31, 2016 to 4% in the three months ended March 31, 2017 . Sales, general and administrative expenses increased $2.8 million , or  12% , from  $24.1 million  in the nine months ended March 31, 2016  to  $26.9 million  in the nine months ended   March 31, 2017 . As a percentage of revenues, sales, general and administrative expenses  decreased  from  5%  in the nine months ended   March 31, 2016  to  4%  in the nine months ended   March 31, 2017 .
Increases in sales, general and administrative expenses in absolute dollars during both the three and nine months ended March 31, 2017 as compared to the same period in the prior year are primarily due to an increase in headcount in the

22


business development organization and the overall increases in business development initiatives and offset, in part, by lower cost for interim management and advisory services to remediate internal control weaknesses. As a percentage of revenues, sales, general and administrative expenses decreased primarily due to our overall increase in revenues. 
Provision for Income Taxes
Our provision for income taxes increased $1.0 million or 15% , from $6.9 million for the three months ended March 31, 2016 to $7.9 million for the three months ended March 31, 2017 . Our effective tax rate decreased to 11.0% for the three months ended March 31, 2017 as compared to 11.6% for the three months ended March 31, 2016 . The lower effective tax rate in the three months ended March 31, 2017 was primarily due to return-to-provision tax benefit, partially offset by taxes on increased sales in the U.S. Our provision for income taxes  decreased   $1.3 million , or  7% , from $19.2 million  for the nine months ended   March 31, 2016  to  $17.9 million  for the nine months ended   March 31, 2017 . Our effective tax rate decreased to 8.4% for the nine months ended   March 31, 2017 as compared to 11.0% for the nine months ended March 31, 2016 . The decrease in the nine months ended   March 31, 2017 was primarily due to return-to-provision tax benefit of $0.7 million and the recognition of the excess tax benefits of $7.9 million as a result of the adoption of ASU 2016-09 partially offset by taxes on increased sales in the U.S. See Note 2 for information on the impact of the adoption of ASU 2016-09. 
Liquidity and Capital Resources

Sources and Uses of Cash
Since inception, our operations primarily have been funded through cash generated by operations and proceeds from our various debt agreements. Cash and cash equivalents decreased from $551.0 million at June 30, 2016 to $533.9 million at March 31, 2017 .
Consolidated Cash Flow Data
The following table sets forth the major components of our consolidated statements of cash flows data for the periods presented:
 
Nine Months Ended March 31,
 
2017
 
2016
 
(In thousands)
Net cash provided by operating activities
$
65,895

 
$
151,944

Net cash (used in) investing activities
(5,704
)
 
(4,820
)
Net cash (used in) provided by financing activities
(77,278
)
 
(90,976
)
Net increase (decrease) in cash and cash equivalents
$
(17,087
)
 
$
56,148

Cash Flows from Operating Activities
Net cash provided by operating activities in the nine months ended March 31, 2017 of $65.9 million consisted primarily of net income of $196.8 million partially offset by changes in operating assets and liabilities that resulted in net cash outflows of $139.9 million . These changes consisted primarily of a $6.3 million increase in accounts payable and accrued liabilities due to the timing of payments, a $43.1 million increase in accounts receivable due to overall higher revenues for the period, a $18.4 million increase in vendor deposit and a $76.8 million increase in inventory due to increase in warehouse stock levels in order to better support customers and reduce lead times, a $3.8 million increase in prepaid expense and other assets primarily due to the increase of non-trade accounts receivable, a $10.6 million increase in prepaid income taxes and a $3.4 million increase in taxes payable due to the timing of federal tax payments. Overall, cash inflows from operating activities were driven by our net income for the period, which included non-cash adjustments primarily due to stock-based compensation, depreciation and amortization, increases to our provision for inventory obsolescence, and decreases to our provision for vendor deposits. The net of these non-cash adjustments resulted in an increase to our net cash provided by operating activities of $9.0 million .

Net cash provided by operating activities in the nine months ended March 31, 2016 of $151.9 million consisted primarily of net income of $155.9 million and net changes in operating assets and liabilities that resulted in net cash outflows of $14.4 million. This net change was primarily driven by outflows arising from a $14.5 million decrease in accounts payable and accrued liabilities, a $9.2 million increase in accounts receivable due to overall higher revenues for the period, and a $5.9 million increase in inventory to fulfill expected future sales orders. These outflows were offset by changes in operating assets and liabilities resulting in cash inflows, including a $6.6 million decrease in vendor deposits due to consumption of raw material backed by vendor deposits, a $3.9 million increase in taxes payable due to increases in the income tax provision,

23


a $2.6 million decrease in prepaid taxes due to the timing of federal tax payments, a $374 thousand increase in deferred revenue due to additional PCS revenue deferrals during the period, and a $1.6 million decrease in prepaid expenses and other current assets. Overall, cash inflows from operating activities were driven by our net income for the period, which included non-cash adjustments primarily due to stock-based compensation (net of excess tax benefit), depreciation and amortization, write-off of previously capitalized software development costs, increases to our provision for inventory obsolescence due to consumption of inventory previously reserved, and increases to our provision for sales returns. The net of these non-cash adjustments resulted in an increase to our net cash provided by operating activities of $10.5 million.
Cash Flows from Investing Activities
We used $5.7 million of cash in investing activities during the nine months ended March 31, 2017 . Our investing activities consist of capital expenditures for machinery and equipment related to product development and prototyping activities in addition to purchases of intangible assets. Capital expenditures for the nine months ended March 31, 2017 and 2016 were $5.7 million and $4.8 million , respectively.
Cash Flows from Financing Activities
We used $77.3 million of cash in financing activities during the nine months ended March 31, 2017 . During the nine months ended March 31, 2017 , we paid $99.8 million for repurchases of our common stock. We also made repayments of $7.5 million on our outstanding term loan debt under the Term Facility. These cash outflows were offset by financing cash inflows of $30.0 million related to one draw made under the revolver facility of our Credit Agreement. Additionally, cash inflows from financing activities included $1.4 million of cash proceeds received from the exercise of stock options partially offset by tax withholdings related to net share settlements of restricted stock units totaling $1.4 million .

We used $91.0 million of cash in financing activities during the nine months ended March 31, 2016. During the nine months ended March 31, 2016 we paid $150.0 million for repurchases of our common stock. We also made repayments of $7.5 million on our outstanding term loan debt under the Credit Agreement. These cash outflows were offset by financing cash inflows, including four draws made under the Revolving Facility totaling $66.0 million that were used, in part, for the repurchases of our common stock discussed above. Additionally, cash inflows from financing activities included $778 thousand of cash proceeds received from the exercise of stock options in addition to $671 thousand of excess tax benefit from employee stock-based awards, partially offset by tax withholdings related to net share settlements of restricted stock units totaling $922 thousand.
Liquidity
We believe our existing cash and cash equivalents, cash provided by operations and the availability of additional funds under the Facilities will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending to support development efforts, the timing of new product introductions, market acceptance of our products and overall economic conditions. As of March 31, 2017 , we held $511.8 million of our $533.9 million of cash and cash equivalents in accounts of our subsidiaries outside of the United States and we could incur material tax liabilities if we decide to repatriate those amounts.
Warranties and Indemnifications
Our products are generally accompanied by a twelve-month warranty from date of purchase, which covers both parts and labor. Generally the distributor is responsible for the freight costs associated with warranty returns, and we absorb the freight costs of replacing items under warranty. In accordance with the Financial Accounting Standards Board’s (“FASB’s”), Accounting Standards Codification (“ASC”), 450-20, Loss Contingencies, we record an accrual when we believe it is reasonably estimable and probable based upon historical experience. We record a provision for estimated future warranty work in cost of goods sold upon recognition of revenues, and we review the resulting accrual regularly and periodically adjust it to reflect changes in warranty estimates.
We have, and may in the future enter into standard indemnification agreements with many of our distributors and OEMs, as well as certain other business partners in the ordinary course of business. These agreements do, and may in the future include provisions for indemnifying the distributor, OEM or other business partner against any claim brought by a third-party to the extent any such claim alleges that a Ubiquiti product infringes a patent, copyright or trademark or violates any other proprietary rights of that third-party. The maximum amount of potential future indemnification is unlimited. The maximum potential amount of future payments we could be required to make under these indemnification agreements is not estimable.

24


We have agreed to indemnify our directors, officers and certain other employees for certain events or occurrences, subject to certain limits, while such persons are or were serving at our request in such capacity. We may terminate the indemnification agreements with these persons upon the termination of their services with us, but termination will not affect claims for indemnification related to events occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited. We have a Directors and Officers insurance policy that limits our potential exposure. We believe the fair value of these indemnification agreements is minimal. We have not recorded any liabilities for these agreements as of March 31, 2017 .
Based upon our historical experience and information known as of the date of this report, we do not believe it is likely that we have a material liability for the above indemnities at March 31, 2017 .
Contractual Obligations and Off-Balance Sheet Arrangements
The following table summarizes our contractual obligations as of March 31, 2017 for the remainder of fiscal 2017 and future fiscal years (in thousands):
 
2017 (remainder)
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Operating leases
$
1,851

 
$
5,752

 
$
3,120

 
$
2,203

 
$
1,356

 
$
560

 
$
14,842

Debt payment obligations
3,750

 
15,000

 
15,000

 
192,250

 

 

 
226,000

Interest and other payments on debt payment obligations
1,516

 
5,820

 
5,418

 
3,468

 

 

 
16,222

Purchase obligations
40,661

 

 

 

 

 

 
40,661

Other obligations
9,808

 

 

 

 

 

 
9,808

Total
$
57,586

 
$
26,572

 
$
23,538

 
$
197,921

 
$
1,356

 
$
560

 
$
307,533

Operating Leases
We lease our headquarters in San Jose, California in addition to other locations worldwide under non-cancelable operating leases that expire at various dates through fiscal 2022.
Principal, Interest and Other Debt Payment Obligations
On March 3, 2015, we entered into the Credit Agreement, that provides for a $200.0 million senior secured revolving credit facility and a $100.0 million senior secured term loan facility, with an option to request increases in the amounts of such credit facilities by up to an additional $50.0 million in the aggregate (any such increase to be in each lender’s sole discretion). Please see Note 7 of the notes to the consolidated financial statements for more information. Although interest rates on our debt obligations will likely vary over time, we have assumed our interest rates as of March 31, 2017 as the interest rates for all fiscal years presented. Furthermore, the interest payment intervals on our revolving debt are determined at the Company's election pursuant to the Credit Agreement, and may change over time. For purposes of the table above, we have assumed two to three-month payment intervals on our revolving debt, consistent with our elections to date. Also included are estimated bank fees to be paid for unused portions of our Revolving Facility.
Purchase Obligations
We subcontract with third parties to manufacture our products. During the normal course of business, our contract manufacturers procure components and manufacture product based upon orders placed by us. Component and product inventory held by our contract manufacturers or our third-party logistics providers is not recorded on our balance sheet until legal title passes to the Company. If we cancel all or part of the orders, we may still be liable to the contract manufacturers for the cost of the components they purchased and for manufacturing and other costs related to these components. We periodically review the potential liability, and no significant liabilities for cancellations have been recorded for the nine months ended March 31, 2017 . Our consolidated financial position and results of operations could be negatively impacted if we were required to compensate the contract manufacturers for any unrecorded liabilities incurred. The Company had inventory purchase obligations of $40.7 million as of March 31, 2017 .
Other Obligations
We had other obligations of $9.8 million as of March 31, 2017 , which consisted primarily of commitments related to research and development projects.
Unrecognized Tax Benefits

25


As of March 31, 2017 , we had $26.9 million of unrecognized tax benefits. This amount has not been included in the above table as the settlement period for the unrecognized tax benefits, including related accrued interest and penalties, cannot be determined.
Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, refer to Note 2 to the consolidated financial statements.
Note About Forward-Looking Statements
When used in this Report, the words “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions and negatives of those terms are intended to identify forward-looking statements. These are statements that relate to future periods and include statements about our future results, sources of revenue, our continued growth, our gross margins, market trends, our product development, technological developments, the features, benefits and performance of our current and future products, the ability of our products to address a variety of markets, the anticipated growth of demand for connectivity worldwide, our growth strategies, future price reductions, our competitive status, our dependence on our senior management and our ability to attract and retain key personnel, dependency on and concentration of our distributors, our employee relations, current and potential litigation, the effects of government regulations, our compliance with laws and regulations, our expected future operating costs and expenses and expenditure levels for research and development, selling, general and administrative expenses, fluctuations in operating results, fluctuations in our stock price, our payment of dividends, our future liquidity and cash needs, our credit facility, future acquisitions of and investments in complimentary businesses and the expected impact of various accounting policies and rules adopted by the Financial Accounting Standards Board. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, factors affecting our quarterly results, our ability to manage our growth, our ability to sustain or increase profitability, demand for our products, our ability to compete, our ability to rapidly develop new technology and introduce new products, our ability to safeguard our intellectual property, trends in the networking industry and fluctuations in general economic conditions, and the risks set forth throughout this Report, including under Part II “Other Information”, Item 1-Legal Proceedings and Item 1A- Risk Factors. These forward-looking statements speak only as of the date hereof. Except as required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
Our revolving and term loans bear interest, at our option, at either (i) a floating rate per annum equal to the base rate plus a margin of between 0.50% and 1.25%, depending on our leverage ratio as of the most recently ended fiscal quarter or (ii) a floating per annum rate equal to the applicable LIBOR rate for a specified period, plus a margin of between 1.50% and 2.25%, depending on our leverage ratio as of the most recently ended fiscal quarter. Swingline loans bear interest at a floating rate per annum equal to the base rate plus a margin of between 0.50% and 1.25%, depending on our leverage ratio as of the most recently ended fiscal quarter. Base rate is defined as the greatest of (A) Wells Fargo’s prime rate, (B) the federal funds rate plus 0.50% or (C) the applicable LIBOR rate for a period of one month plus 1.00%. A default interest rate shall apply on all obligations during certain events of default under the Credit Agreement at a rate per annum equal to 2.00% above the applicable interest rate. The Company will pay to each lender a facility fee on a quarterly basis based on the unused amount of each lender’s commitment to make revolving loans, of between 0.20% and 0.35%, depending on the Company’s leverage ratio as of the most recently ended fiscal quarter. The Company will also pay to the applicable lenders on a quarterly basis certain fees based on the daily amount available to be drawn under each outstanding letter of credit, including aggregate letter of credit commissions of the LIBOR rate plus a margin of between 1.50% and 2.25%, depending on the Company’s leverage ratio as of the most recently ended fiscal quarter, and issuance fees of 0.125% per annum. The Company is also obligated to pay Wells Fargo, as agent, fees customary for a credit facility of this size and type. Based on a sensitivity analysis, as of March 31, 2017 , an instantaneous and sustained 200-basis-point increase in interest rates affecting our floating rate debt obligations, and assuming that we take no counteractive measures, would result in an incremental charge to our income before income taxes of approximately $4.5 million over the next twelve months.
We had cash and cash equivalents of $533.9 million and $551.0 million as of March 31, 2017 and June 30, 2016 , respectively. These amounts were held primarily in cash deposit accounts in U.S. dollars. The fair value of our cash and cash equivalents

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would not be significantly affected by either a 10% increase or decrease in interest rates due mainly to the short-term nature of these instruments.
Foreign Currency Risk
Our sales are denominated in U.S. dollars, and therefore, our revenues are not directly subject to foreign currency risk. Certain of our operating expenses are denominated in the currencies of the countries in which our operations are located, and may be subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Chinese Yuan, Euro, and Taiwan Dollar. Our financial position or results of operations would not be significantly affected by a 10% appreciation or depreciation in the value of the U.S. dollar relative to the other currencies in which our expenses are denominated.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management, with the participation of the Company’s Chief Executive Officer and Chief Accounting Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2017 . The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Based on the evaluation of our disclosure controls and procedures as of March 31, 2017 , our Chief Executive Officer and Chief Accounting Officer concluded that, as of such date, our disclosure controls and procedures were not effective due to the fact that certain material weaknesses in our internal control over financial reporting previously identified and disclosed in our Item 9A of our Annual Report on Form 10-K, as filed with the SEC on August 22, 2016 (the “Annual Report”) continued to exist at March 31, 2017 .

Notwithstanding the ineffectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q and the material weaknesses in our internal control over financial reporting that existed as of that date, management believes that (i) this Quarterly Report on Form 10-Q does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this Quarterly Report on Form 10-Q and (ii) the unaudited Condensed consolidated financial statements, and other financial information, included in this Quarterly Report on Form 10-Q fairly present in all material respects in accordance with GAAP our financial condition, results of operations and cash flows as of, and for, the dates and periods presented.

Remediation of Previously Disclosed Material Weakness

We have taken actions to remediate the material weakness associated with the ineffectively designed and maintained controls over user access and transaction privileges to modify and post entries to the general ledger and subsidiary ledgers including (i) reviewed and updated user access and transaction privileges in the general ledger and interfacing subsidiary systems, (ii) implemented systematic and manual controls to monitor the effectiveness of user access and transaction privileges, (iii) enhanced the design of our periodic segregation of duties review, and (iv) developed and communicated policies designed to consider impacts to the general ledger when updating system configurations, including transaction privileges and segregation of duties. Based on these changes, in addition to testing performed, management believes that the material weakness related to user access and transaction privileges in the general ledger was remediated as of September 30, 2016, and as reported in our Form 10-Q for the quarterly period ended September 30, 2016.

Status of Previously Disclosed Material Weaknesses

We have taken certain remediation steps to address the material weaknesses referenced above that continue to remain as of March 31, 2017 , including:



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Regarding the lack of sufficient, competent personnel necessary for effective financial reporting, we recruited and transitioned the leadership team within the finance organization by adding additional qualified and experienced personnel. We have updated our accounting policies and procedures documentation together with key process level documents. In conjunction with the recruitment efforts, we have clarified roles and responsibilities within the finance organization.

Regarding the ineffectively designed and maintained controls required for safeguarding of the Company’s funds and timely detection of improper transactions in the general ledger, we have implemented new policies and controls surrounding disbursement authorities and journal entry creation, including training on required supporting documentation.

The above remediation efforts have been ongoing and were substantially completed as of March 31, 2017 . While we continue to progress with the testing of the newly implemented and redesigned controls, additional time is needed to support the operating effectiveness of such controls. Due to the nature of the remediation process and the need to allow adequate time after implementation to evaluate and test the effectiveness of the controls, no assurance can be given as to the timing of achievement of remediation.
Changes in Internal Control over Financial Reporting

During the first and second quarter of fiscal 2017 and continuing through the three months ended March 31, 2017 , we have implemented (i) systematic and manual controls to monitor user access and transaction privileges and (ii) systematic controls over disbursements. There were no other changes in our internal control over financial reporting that occurred during the three months ended March 31, 2017 that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION
Item 1. Legal Proceedings

Please see Part I, Item 1, Note 8 of the notes to consolidated financial statements for a discussion of our legal proceedings.
Item 1A. Risk Factors
This Report contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, the risk factors set forth below. These risks and uncertainties are not the only ones we face. If any event related to these known or unknown risks or uncertainties actually occurs, our business prospects, results of operation, and financial condition could be materially adversely affected.
Risks Related to Our Business and Industry
Fluctuations in our operating results could cause the market price of our common stock to decline.
Our quarterly operating results fluctuate significantly due to a variety of factors, many of which are outside of our control and are difficult or impossible to predict. We expect our operating results will continue to fluctuate. You should not rely on our past results as an indication of our future performance. If our revenues or operating results fall below the expectations of investors or securities analysts, or below any estimates we may provide to the market, the price of our common shares would likely decline substantially, which could have a material adverse impact on investor confidence and employee retention. Our common stock has experienced substantial price volatility since our initial public offering. In addition, the stock market as a whole has experienced major price and volume fluctuations that have affected the stock price of many technology companies in ways that may have been unrelated to these companies’ operating performance.
Factors that could cause our operating results and stock price to fluctuate include: 
varying demand for our products due to the financial and operating condition of our distributors and their customers, distributor inventory management practices and general economic conditions;
shifts in our fulfillment practices including increasing inventory levels as part of efforts to decrease our delivery lead times;
failure of our suppliers to provide chips or other components;

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failure of our contract manufacturers and suppliers to meet our demand;
success and timing of new product introductions by us, and our competitors;
increased warranty costs;
announcements by us or our competitors regarding products, promotions or other transactions;
costs related to legal proceedings or responding to government inquiries;
our ability to control and reduce product costs; and
expenses of our entry into new markets.
In addition, our business may be subject to seasonality, although our recent growth rates and timing of product introductions may have masked seasonal changes in demand.
We have limited visibility into future sales, which makes it difficult to forecast our future operating results.
Because of our limited visibility into end customer demand and channel inventory levels, our ability to accurately forecast our future sales is limited. We sell our products and solutions globally to network operators, service providers and others, primarily through our network of distributors. We do not employ a direct sales force. Sales to our distributors have accounted for nearly all of our revenues. Our distributors do not make long-term purchase commitments to us, and do not typically provide us with information about market demand for our products. We endeavor to obtain information on inventory levels and sales data from our distributors. This information has been generally difficult to obtain in a timely manner, and we cannot always be certain that the information is reliable. If we over forecast demand, we may not be able to decrease our expenses in time to offset any shortfall in revenues. If we under forecast demand, our ability to fulfill sales orders will be compromised and sales to distributors may be deferred or lost altogether.
We are subject to risks associated with our distributors’ inventory management practices.
Our distributors purchase and maintain their own inventories of our products, and we do not control their inventory management. Distributors may manage their inventories in a manner that causes significant fluctuations in their purchases from quarter to quarter, and which may not be in alignment with the actual demand of end customers for our products. If some distributors decide to purchase more of our products than are required to satisfy their customers’ demand in any particular quarter, because they do not accurately forecast demand or otherwise, they may reduce future orders until their inventory levels realign with their customers’ demand. If some distributors decide to purchase less of our products than are required to satisfy their customers’ demand in any particular quarter, because they do not accurately forecast demand or otherwise, sales of our products may be deferred or lost altogether.
If our forecasts of future sales are inaccurate, we may manufacture too many or not enough products.
We may over or under forecast our customers’ actual demand for our products or the actual mix of our products that they will ultimately demand. If we over-forecast demand, we may build excess inventory which could materially adversely affect our operating results. If we under-forecast demand, we may miss opportunities for sales and may impair our customer relationships, which could materially adversely affect our operating results.
The lead times that we face for the procurement of components and subsequent manufacturing of our products are usually much longer than the lead time from our customers’ orders to the expected delivery date. This increases the risk that we may manufacture too many or not enough products in any given period.
We may decide to increase or maintain higher levels of inventory.
With the use of third-party logistics and warehousing providers, we may decide to increase or maintain higher levels of inventory of finished products or components, which may expose us to a greater risk of carrying excess or obsolete inventory. Decisions to increase or maintain higher inventory levels are typically based upon uncertain forecasts or other assumptions. If the assumptions on which we base these decisions turn out to be incorrect, our financial performance could suffer and we could be required to write-off the value of excess products or components inventory.
We rely on a limited number of distributors, and changes in our relationships with our distributors or changes within our distributors may disrupt our sales.
Although we have a large number of distributors in numerous countries who sell our products, a limited number of these distributors represent a significant portion of our sales. One or more of our major distributors may suffer from a decline in their financial condition, decrease in demand from their customers, or a decline in other aspects of their business which could impair their ability to purchase and resell our products. Any distributor may also cease doing business with us at any time with little or no notice. The termination of a relationship with a major distributor, either by us or by the distributor, could result in a temporary or permanent loss of revenues. We may not be successful in finding other suitable distributors on satisfactory terms,

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or at all, and this could adversely affect our ability to sell in certain geographic markets or to certain network operators and service providers.
We may not be able to enhance our products to keep pace with technological and market developments while offering competitive prices.
The market for our wireless broadband networking equipment is emerging and is characterized by rapid technological change, evolving industry standards, frequent new product introductions and short product life cycles. The markets for enterprise networking equipment and consumer products possess similar characteristics of rapid technological updates, evolving industry standards, frequent changes in consumer preferences, frequent new product introductions and short and unpredictable product life cycles. Our ability to keep pace in these markets depends upon our ability to enhance our current products, and continue to develop and introduce new products rapidly and at competitive prices. The success of new product introductions or updates on existing products depends on a number of factors including, but not limited to, timely and successful product development, market acceptance, our ability to manage the risks associated with new product production ramp-up, the effective management of our inventory and manufacturing schedule and the risk that new products may have defects or other deficiencies in the early stages of introduction. Our ability to compete successfully will depend in large measure on our ability to maintain a technically skilled development and engineering staff, to successfully innovate, and to adapt to technological changes and advances in the industry. Development and delivery schedules for our products are difficult to predict. We may fail to introduce new versions of our products in a timely fashion. If new releases of our products are delayed, our distributors may curtail their efforts to market and promote our products and our users may switch to competing products.
The markets in which we compete are highly competitive.
The networking, enterprise WLAN, video surveillance, wireless backhaul, machine-to-machine communications, solar and consumer markets in which we primarily compete are highly competitive and are influenced by competitive factors including:
our ability to rapidly develop and introduce new high performance integrated solutions;
the price and total cost of ownership and return on investment associated with the solutions;
the simplicity of deployment and use of the solutions;
the reliability and scalability of the solutions;
the market awareness of a particular brand;
our ability to provide secure access to wireless networks;
our ability to offer a suite of products and solutions;
our ability to allow centralized management of the solutions; and
our ability to provide quality product support.
New entrants seeking to gain market share by introducing new technology and new products may also make it more difficult for us to sell our products, and could create increased pricing pressure. In addition, broadband equipment providers or system integrators may also offer wireless broadband infrastructure equipment for free or as part of a bundled offering, which could force us to reduce our prices or change our selling model to remain competitive.
If there is a shift in the market such that network operators and service providers begin to use closed network solutions that only operate with other equipment from the same vendor, we could experience a significant decline in sales because our products would not be interoperable.
We expect competition to continuously intensify as other established and new companies introduce new products in the same markets that we serve or intend to enter, as these markets consolidate. Our business will suffer if we do not maintain our competitiveness.
A number of our current or potential competitors have longer operating histories, greater brand recognition, larger customer bases and significantly greater resources than we do.
As we move into new markets for different types of equipment, our brand may not be as well-known as incumbents in those markets. Potential customers may prefer to purchase from their existing suppliers rather than a new supplier, regardless of product performance or features. We expect increased competition from other established and emerging companies if our market continues to develop and expand. As we enter new markets, we expect to face competition from incumbent and new market participants.
Many of these companies have significantly greater financial, technical and other resources than we do and are better positioned to acquire and offer complementary products and technologies.

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Industry consolidation and other arrangements among competitors may adversely affect our competitiveness because it may be more difficult to compete with entities that have access to their combined resources. These combinations may also affect customers’ perceptions regarding the viability of companies our size and, consequently, affect their willingness to purchase our products.
The complexity of our products could result in unforeseen delays or expenses caused by undetected defects or bugs.
Our products may contain defects and bugs when they are introduced, or as new versions are released. We have focused, and intend to focus in the future, on getting our new products to market quickly. Due to our rapid product introductions, defects and bugs that may be contained in our products may not yet have manifested. We have in the past experienced, and may in the future experience, defects and bugs. If any of our products contain material defects or bugs, or has reliability, quality or compatibility problems, we may not be able to promptly or successfully correct these problems. The existence of defects or bugs in our products may damage our reputation and disrupt our sales. If any of these problems are not found until after we have commenced commercial production and distribution of a new product, we may be required to incur additional development costs, repair or replacement costs and claims. Undetected defects or bugs may lead to negative online Internet reviews of our products, which are increasingly becoming a significant factor in the success of our new product launches, especially for our consumer products. If we are unable to quickly respond to negative reviews, including end user reviews posted on various prominent online retailers, our ability to sell these products will be harmed.
Security vulnerabilities in our products, services and systems could lead to reduced revenues and claims against us.
The quality and performance of some of our products and services may depend upon their ability to withstand cyber attacks. Third parties may develop and deploy viruses, worms and other malicious software programs, some of which may be designed to attack our products, systems, or networks. Some of our products and services also involve the storage and transmission of users’ and customers’ proprietary information which may be the target of cyber attacks. Hardware and software that we produce or procure from third parties also may contain defects in manufacture or design, including bugs and other problems, which could compromise their ability to withstand cyber attacks.
We may have experienced cyber attacks in the past, and may experience cyber attacks in the future. As a result, unauthorized parties may have obtained, and may in the future obtain, access to our systems, data or our users’ or customers’ data. Our security measures may also be breached due to employee error, malfeasance, or otherwise. Third parties may also attempt to induce employees, users, or customers to disclose sensitive information in order to gain access to our data or our users’ or customers’ data.  Any such breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation, and a loss of confidence in the security of our products and services. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.
The costs to us to eliminate or alleviate security vulnerabilities can be significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other critical functions, as well as potential liability to the Company. The risk that these types of events could seriously harm our business is likely to increase as we expand the web-based products and services that we offer.
We may be unable to anticipate or fail to adequately mitigate against increasingly sophisticated methods to engage in illegal or fraudulent activities against us.
Despite any defensive measures we take to manage threats to our business, our risk and exposure to these matters remain heightened because of, among other things, the evolving nature of such threats in light of advances in computer capabilities, new discoveries in the field of cryptography, new and sophisticated methods used by criminals including phishing, social engineering or other illicit acts, or other events or developments that we may be unable to anticipate or fail to adequately mitigate. In June 2015, we determined that we were the victim of a criminal fraud known to law enforcement authorities as business e-mail compromise fraud which involved employee impersonation and fraudulent requests targeting our finance department. The fraud resulted in transfers of funds aggregating $46.7 million held by a Company subsidiary incorporated in Hong Kong to other overseas accounts held by third parties. To date, the Company has recovered $16.7 million . The Company recovered $8.1 million in fiscal 2015, resulting in a charge of  $39.1 million  in the fourth quarter of fiscal 2015, including additional expenses consisting of professional service fees associated with the fraud loss. In fiscal 2016, the Company recorded a net recovery of an additional $8.3 million , comprised of the $8.6 million recovery less $0.3 million of professional service fees associated with the recovery. No additional recoveries were made during the nine months ended March 31, 2017 .

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The Company intends to continue to pursue the recovery of the remaining $30.0 million. The Company is cooperating with U.S. federal and numerous overseas law enforcement authorities, who are actively pursuing a multi-agency criminal investigation. However, any additional recoveries are likely remote and therefore cannot be assured.

The Company may not be successful in obtaining any insurance coverage for this loss. While we do not expect the fraud to have a material impact on our business, we have borne, and will continue to bear additional expenses in connection with the remediation and investigation of the fraud.
Our business and prospects depend on the strength of our brand.
Maintaining and enhancing our brand is critical to expanding our base of distributors and end customers. Maintaining and enhancing our brand will depend largely on our ability to continue to develop and provide products and solutions that address the price-performance characteristics sought by end customers and the users of our products and services, particularly in developing markets which comprise a significant part of our business. If we fail to promote, maintain and protect our brand successfully, our ability to sustain and expand our business and enter new markets will suffer.
We rely on the Ubiquiti Community to provide our engineers with valuable feedback that is important in our research and development processes.
We rely on the Ubiquiti Community to provide rapid and substantive feedback on the functionality and effectiveness of our products. The insights, problems and suggestions raised by the Ubiquiti Community enable our engineers to quickly resolve issues with our existing products and improve functionality in subsequent product releases. If the members of the Ubiquiti Community were to become less engaged or otherwise ceased providing valuable, timely feedback, our internal research and development costs and our time to market could increase, which could cause us to incur additional expenses or make our products less attractive to customers.
We rely on the Ubiquiti Community to generate awareness of, and demand for, our products.
We believe a significant portion of our growth to date has been driven by the diverse and actively engaged Ubiquiti Community, and our business model is predicated on the assumption that the Ubiquiti Community will continue to provide these benefits. We do not have a direct sales force and we engage in limited marketing expenditures. Although the Ubiquiti Community is central to the success of our business, the interactions within the Ubiquiti Community, and participation levels, are largely outside of our control. Any negative information about us or our products in the Ubiquiti Community, whether or not justified, could quickly and materially decrease the demand for our products.
We rely on the Ubiquiti Community to provide network operators and service providers with support to install, operate and maintain our products.
We rely on the Ubiquiti Community to provide assistance and other information to network operators and service providers for the installation, operation and maintenance of our products. Because we do not generate or control all of the information provided through the Ubiquiti Community, inaccurate information regarding the installation, operation and maintenance of our products could be promulgated through forum postings by members of the Ubiquiti Community.
Although we moderate and review many forum postings to learn of reported problems and assess the accuracy of advice provided by the Ubiquiti Community, we may not devote sufficient time or resources to adequately monitor the quality of Ubiquiti Community information.
Inaccurate information in the Ubiquiti Community could lead to poor customer experiences or dissatisfaction with our products, which could negatively impact our reputation and diminish our sales.
We may fail to effectively manage the challenges associated with our growth.
Over the past several years we have expanded, and continue to expand, our product offerings, the number of customers we sell to, our transaction volumes, the number of our facilities, and the number of contract manufacturers that we utilize to produce our products. Failure to effectively manage the increased complexity associated with this expansion, particularly in light of our lean management structure, would make it difficult to conduct our business, fulfill customer orders, and pursue our strategies.  We may also need to increase costs to add personnel, upgrade or replace our existing reporting systems, as well as improve our business processes and controls as a result of these changes. If we fail to effectively manage any of these challenges we could suffer inefficiencies, errors and disruptions in our business, which in turn would adversely affect our operating results.
We rely on a limited number of contract manufacturers to produce our products.

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We retain contract manufacturers, located primarily in China, to manufacture our products. Any significant change in our relationship with these manufacturers could have a material adverse effect on our business, operating results and financial condition. Our reliance on contract manufacturers for manufacturing our products can present significant risks to us because, among other things, we do not have direct control over their activities. We significantly depend upon our contract manufacturers to:
assure the quality of our products;
manage capacity during periods of volatile demand;
qualify appropriate component suppliers;
ensure adequate supplies of components and materials;
deliver finished products at agreed upon prices and schedules; and
safeguard materials and finished goods.
The ability and willingness of our contract manufacturers to perform is largely outside our control.
We believe that our orders may not represent a material portion of our contract manufacturers’ total orders and, as a result, fulfilling our orders may not be a priority in the event our contract manufacturers are constrained in their capacity. If any of our contract manufacturers experiences problems in its manufacturing operations, or if we have to change or add additional contract manufacturers, our ability to ship products to our customers would be impaired.
We rely upon a limited number of suppliers, and it can be costly and time consuming to use components from other suppliers.
We purchase components, directly or through our contract manufacturers, from third parties that are necessary for the manufacture of our products. Shortages in the supply of components or other supply disruptions may not be predicted in time to design-in different components or qualify other suppliers. Shortages or supply disruptions may also increase the prices of components due to market conditions. While many components are generally available from a variety of sources, we and our contract manufacturers currently depend on a single or limited number of suppliers for several components for our products. For example, we currently rely upon Qualcomm Atheros as a single-source supplier of certain components for some of our products, and a disruption in the supply of those components would significantly disrupt our business.
We and our contract manufacturers generally rely on short-term purchase orders rather than long-term contracts with the suppliers of components for our products. As a result, even if components are available, we and our contract manufacturers may not be able to procure sufficient components at reasonable prices to build our products in a timely manner. We may, therefore, be unable to meet customer demand for our products, which would have a material adverse effect on our business, operating results and financial condition.
Not paying cash dividends to our stockholders, or repurchasing shares of our common stock pursuant to a stock repurchase program, could cause the market price for our common stock to decline.
Our payment of cash dividends will be subject to, among other things, our financial position and results of operations, available cash and cash flow, capital requirements, and other factors. These and other factors may also affect the continuation of, or activity under, our previously announced stock repurchase program. Failure to pay cash dividends could cause the market price of our common stock to decline. The discontinuance of, or lack of activity under, our previously announced stock repurchase program could also result in a lower ma