What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-05-08 · 104 added, 130 removed, 162 unchanged (59% of the section changed)

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Factors that could cause or contribute to these differences include those discussed below and elsewhere in this quarterly report, particularly in Note 10 “Commitments and Contingencies” to our consolidated financial statements and Part II “Other Information”, Item 1-Legal Proceedings and 1A-Risk Factors, in this report.

We develop technology platforms for high-capacity distributed Internet access, unified information technology, and consumer electronics for professional, home and personal use.

The Company develops technology platforms for high-capacity distributed Internet access, unified information technology, and consumer electronics for professional, home and personal use.

We categorize our solutions in to three main categories:

high performance networking technology for service providers, enterprises and consumers.

We target the service provider and enterprise markets through our highly engaged community of service providers, distributors, value added resellers, systems integrators and corporate IT professionals, which we refer to as the Ubiquiti Community.

We target the service provider and enterprise markets through our highly engaged community of service providers, distributors, value added resellers, webstores, systems integrators and corporate IT professionals, which we refer to as the Ubiquiti Community.

We target consumers through digital marketing, retail chains and, to a lesser extent, the Ubiquiti Community.

The majority of our resources consist of entrepreneurial and de-centralized research and development (“R&D”).

The majority of our human capital resources consist of entrepreneurial and de-centralized research and development (“R&D”) personnel.

We do not employ a traditional direct sales force, but instead drive brand awareness through online reviews and publications, our website, our distributors and the Company’s user community where customers can interface directly with our R&D, marketing, and support teams.

Our technology platforms were designed from the ground up with a focus on delivering highly-advanced and easily deployable solutions that appeal to a global customer base market.

We offer a broad and expanding portfolio of networking products and solutions for operator-owners of wireless internet services (“WISP’s”), enterprises and smart homes.

Our operator-owner service provider-product platforms provide carrier-class network infrastructure for fixed wireless broadband, wireless backhaul systems and routing and the related software for WISP’s to easily control, track and bill their customers.

We offer a broad and expanding portfolio of networking products and solutions for operator-owners of wireless internet services (“WISPs”), enterprises and smart homes.

Our operator-owner service provider-product platforms provide carrier-class network infrastructure for fixed wireless broadband, wireless backhaul systems and routing and the related software for WISPs to easily control, track and bill their customers.

Our enterprise product platforms provide wireless LAN (“WLAN”) infrastructure, video surveillance products, switching and routing solutions, security gateways, and other complimentary WLAN products along with a unique software platform, which enables users to control their network from one simple, easy to use software interface.

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We distribute our products through a worldwide network of over 100 distributors and on-line retailers.

The Company has a very broad installed base with over 101 million devices sold in over 200 countries and territories around the world, since inception.

Recent Developments - The 2019 novel coronavirus (COVID-19), which the World Health Organization (“WHO”) characterized as a pandemic in March 2020, continues to disrupt global economies, and has spread to the major markets in which we operate, including the United States, Asia, Europe and South America.

COVID-19 Update - The 2019 novel coronavirus (COVID-19), which the World Health Organization (“WHO”) characterized as a pandemic in March 2020, continues to disrupt global economies, and has spread to the major markets in which we operate, including the United States, Asia, Europe and South America.

The COVID-19 pandemic has resulted in significant governmental measures being implemented to control the spread of the virus, including, among others, restrictions on travel, stay-at-home orders or work remote or from home conditions in many of the locations where we have offices.

As of the date hereof, we have taken and will continue to take temporary precautionary measures intended to help minimize the risk of COVID-19 to our employees.

While we have not yet experienced a significant disruption to the productivity of our employees as a result of the COVID-19 pandemic, if the stay-at-home orders or work remote or from home conditions in any of our facilities continue for an extended period of time, or if we have an outbreak in any of our facilities, we may, among other issues, experience delays in product development, a decreased ability to support our customers, disruptions in sales and an overall lack of productivity.

However, we have experienced a major disruption in our supply chain as a result of the COVID-19 pandemic, due to the COVID-19 related restrictions that have significantly impacted our suppliers’ ability to manufacture or provide key components or services.

These supply chain disruptions have caused, and could continue to cause, delays or reductions in our ability to manufacture and ship products to our customers.

Although we were able to mitigate this impact of these supply chain disruptions during the quarter through the sale of finished goods inventory on hand, we may not be able to mitigate continued or future disruptions to our supply chain.

If the costs charged by our suppliers increases, it may affect our margins and ability to maintain competitive pricing for our products.

While we do not yet know and cannot quantify specific impacts that the COVID-19 pandemic may have on our business, operations, financial condition, results of operation or liquidity due to numerous evolving factors, we may be negatively affected if we encounter further manufacturing or supply chain problems, reductions in demand due to disruptions in the operations of our customers or their end customers, disruptions in local and global economies, volatility in the global financial markets, overall reductions in demand, restrictions on the export or shipment of our products or other COVID-19 ramifications.

For a further discussion of the uncertainties and business risks associated with the COVID-19 pandemic, refer to “Part II-Item 1A.

Risk Factors – Risks Related to Our Business and Industry - Our contract manufacturers, logistics centers and certain administrative and research and development operations, as well as our customers and suppliers, are located in areas likely to be subject to natural disasters and public health problems, which could adversely affect our business, results of operations and financial condition ” for additional information.

We have taken and will continue to take precautionary measures intended to help minimize the risk of COVID-19 to our employees.

our facilities, we may, among other issues, experience delays in product development, a decreased ability to support our customers, disruptions in sales and an overall lack of productivity.

We have experienced a disruption in our supply chain as a result of the COVID-19 related restrictions that have impacted our suppliers’ ability to manufacture or provide key components or services, and we have incurred, and continue to incur, additional cost to expedite deliveries of components and services.

While our ability to procure components and services has improved, the disruptions in our supply chain have not been fully remediated.

The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous evolving factors we cannot reliably predict, including further disruptions to our supply chain, reductions in demand due to disruptions in the operations of our customers or their end customers, disruptions in local and global economies, volatility in the global financial markets, overall reductions in demand, restrictions on the export or shipment of our products or other COVID-19-related events.

This uncertainty also affects management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions.

Refer to Risk Factors (Part II, Item 1A of this Form 10-Q) for a discussion of these factors and other risks.

Key Components of Our Results of Operations and Financial Condition

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Our revenues are derived principally from the sale of networking hardware.

Because we have historically included implied post-contract support (“PCS”) free of charge in many of our arrangements, we attribute a portion of our systems revenues to PCS.

Because we have historically included implied post-contract customer support (“PCS”) free of charge in many of our arrangements, we attribute a portion of our systems revenues to this implied PCS.

We classify our revenues into two primary product categories:

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• Enterprise Technology includes our UniFi platforms, including UniFi enterprise Wi-Fi, UniFi Protect, UniFi switching and routing solutions and our AmpliFi platform.

We sell our products and solutions globally to service providers and enterprises primarily through our extensive network of distributors, and, to a lesser extent, direct customers.

Sales to distributors accounted for 95% of our revenues during the nine months ended March 31, 2020.

We sell our products and solutions globally to service providers and enterprises primarily through our extensive network of distributors, and, to a lesser extent, through direct sales.

Sales to distributors accounted for 89% of our revenues during the three months ended September 30, 2020.

Direct sales accounted for 11% of our revenue during the three months ended September 30, 2020.

Cost of Revenues

Our cost of revenues is comprised primarily of the costs of procuring finished goods from our contract manufacturers and certain key components that we consign to certain of our contract manufacturers.

In addition, the cost of revenues includes labor and other costs, which includes salary, benefits and stock-based compensation in addition to costs associated with tooling, testing and quality assurance, warranty costs, logistics fees, tariffs and excess and obsolete inventory costs.

In addition, cost of revenues includes labor and other costs which include salary, benefits and stock-based compensation, in addition to costs associated with tooling, testing and quality assurance, warranty costs, logistics costs, tariffs and excess and obsolete inventory write-downs.

We currently operate warehouses located in the U.S.

and the Czech Republic.

In addition, we outsource other logistics warehousing and order fulfillment functions primarily located in China.

In addition, we outsource other logistics warehousing and order fulfillment functions located in China and to a lesser extent in other countries.

We also evaluate and utilize other vendors for various portions of our supply chain from time to time.

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from China are currently subject to tariffs that range between 7.5% and 25%.

On January 22, 2020, the United States of Trade Representative announced it will reduce Section 301 List 4A additional tariffs from 15% to 7.5% and the List 4B tariffs would not go into effect.

On January 22, 2020, the Office of the United States Trade Representative announced it will reduce Section 201 List 4A and additional tariffs from 15% to 7.5% and the List 4B tariffs would not go into effect.

These tariffs have already affected our operating results and margins.

For so long as such tariffs are in effect, we expect it will continue to affect our operating results and margins.

As a result, our historical and current gross profit margins may not be indicative of our gross profit margins for future periods.

As a result, our historical and current gross profit margins may not be indicative

of our gross profit margins for future periods.

Refer to “Part II—Item 1A.

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Operating Expenses

We classify our operating expenses as research and development, sales, general and administrative 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, licensed or purchased intellectual property, facilities and travel.

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Our critical accounting policies are discussed in our Annual Report, filed with the SEC on August 21, 2020, and there have been no material changes other than that have been disclosed in Note 2 to our consolidated financial statements herein.

Additionally, as the COVID-19 pandemic continues to develop, many of our estimates could require increased judgement and carry a higher degree of variability and volatility.

As events continue to evolve our estimates may change materially in future periods.

We believe that the accounting policies discussed in our Annual Report, are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Results of Operations

Comparison of Three and Nine Months Ended March 31, 2020 and 2019

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

2020 2019 2020 2019

Comparison of Three Months Ended September 30, 2020 and 2019

Three Months Ended September 30,

(In thousands, except percentages)

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12,350 3 % 10,450 3 %

Litigation settlement — — % — — % — — % 18,000 2 %

Total operating expenses 38,163 8 % 30,702 9 %

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Total stock-based compensation 740 689

Total revenues increased $52.5 million, or 18.4%, from $284.9 million in the three months ended March 31, 2019 to $337.4 million in the three months ended March 31, 2020.

Total revenues increased $93.9 million, or 10.7%, from $875.1 million in the nine months ended March 31, 2019 to $969.0 million in the nine months ended March 31, 2020.

During the three and nine months ended March 31, 2020, there were no material price changes in the Company’s products sold.

Total revenues increased $150.3 million, or 46%, from $323.3 million in the three months ended September 30, 2019 to $473.5 million in the three months ended September 30, 2020.

During the three months ended September 30, 2020, there were no material price changes in the Company’s products sold.

However, the Company continues to introduce new products which may have average selling prices and margins different than our legacy products.

Revenues by Product Type

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

2020 2019 2020 2019

Three Months Ended September 30,

(in thousands, except percentages)

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Total revenues $ 473,533 100 % $ 323,277 100 %

Service Provider Technology revenue decreased $2.9 million, or 3%, from $109.4 million in the three months ended March 31, 2019 to $106.4 million in the three months ended March 31, 2020.

Service Provider Technology revenue decreased $7.5 million, or 2%, from $327.6 million in the nine months ended March 31, 2019 to $320.1 million in the nine months ended March 31, 2020.

The decrease in Service Provider Technology revenue during the three months ended March 31, 2020 as compared to the same period in the prior year, was primarily due to decreased revenue in South America and Asia Pacific, partially offset by an increase in revenue in North America and EMEA.

The decrease in Service Provider Technology revenue during the nine months ended March 31, 2020 as compared to the same period in the prior year, was primarily due to decreased revenue in South America, EMEA and Asia Pacific, partially offset by an increase in revenue in North America.

Enterprise Technology revenue increased $55.4 million, or 32%, from $175.5 million in the three months ended March 31, 2019 to $231.0 million in the three months ended March 31, 2020.

Enterprise Technology revenue increased $101.4 million, or 19%, from $547.5 million in the nine months ended March 31, 2019 to $648.9 million in the nine months ended March 31, 2020.

The increase in Enterprise Technology revenue during the three and nine months ended March 31, 2020 as compared to the same periods in the prior year, was primarily due to product expansion and further adoption of our UniFi technology platform across all regions.

Service Provider Technology revenue increased $41.5 million, or 36%, from $115.9 million in the three months ended September 30, 2019 to $157.5 million in the three months ended September 30, 2020.

The increase in Service Provider Technology revenue during the three months ended September 30, 2020 as compared to the same period in the prior year, was primarily due to increased revenue in all regions across all platforms.

Enterprise Technology revenue increased $108.7 million, or 52%, from $207.4 million in the three months ended September 30, 2019 to $316.1 million in the three months ended September 30, 2020.

The increase in Enterprise Technology revenue during the three months ended September 30, 2020 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

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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, 2020 and 2019 (in thousands, except percentages):

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

2020 2019 2020 2019

The following are our revenues by geography for the three months ended September 30, 2020 and 2019 (in thousands, except percentages):

Three Months Ended September 30,

(in thousands, except percentages)

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Total revenues $ 473,533 100 % $ 323,277 100 %

(1) Revenue for the United States was $125.4 million and $105.1 million for the three months ended March 31, 2020 and 2019, respectively.

Revenue for the United States was $389.0 million and $331.9 million for the nine months ended March 31, 2020 and 2019, respectively.

(1) Revenue for the United States was $209.8 million and $141.9 million for the three months ended September 30, 2020 and 2019, respectively.

North America

Revenues in North America increased $24.8 million, or 23%, from $109.1 million in the three months ended March 31, 2019 to $133.9 million in the three months ended March 31, 2020.

Revenues in North America increased $62.1 million, or 18%, from $349.7 million in the nine months ended March 31, 2019 to $411.8 million in the nine months ended March 31, 2020.

The increase in North America revenues during the three and nine months ended March 31, 2020 as compared to the same periods in the prior year, was primarily due to increased revenues from both our Enterprise Technology products and Service Provider Technology products.

Europe, the Middle East, and Africa (EMEA)

Revenues in EMEA increased $33.8 million, or 27%, from $125.7 million in the three months ended March 31, 2019 to $159.4 million in the three months ended March 31, 2020.

Revenues in EMEA increased $20.9 million, or 5% from $385.0 million in the nine months ended March 31, 2019 to $405.9 million in the nine months ended March 31, 2020.

The increase in EMEA revenues during the three months ended March 31, 2020 as compared to the same period in the prior year, was primarily due to increased revenues from both our Enterprise Technology products and Service Provider Technology products.

The increase in EMEA revenues during the nine months ended March 31, 2020 as compared to the same period in the prior year was primarily due to increased revenues from our Enterprise Technology products, partially offset by decreased revenues from our Service Provider Technology products.

Revenues in the Asia Pacific region decreased $0.9 million, or 3%, from $27.1 million in the three months ended March 31, 2019 to $26.2 million in the three months ended March 31, 2020.

Revenues in the Asia Pacific region increased $6.4 million, or 8%, from $82.3 million in the nine months ended March 31, 2019 to $88.8 million in the nine months ended March 31, 2020.

The decrease in Asia Pacific revenues during the three months ended March 31, 2020 as compared to the same period in the prior year was primarily due to decreased revenues from our Service Provider Technology products, partially offset by increased revenue from our Enterprise Technology products.

The increase in Asia Pacific revenues during the nine months ended March 31, 2020 as compared to the same period in the prior year was primarily due to increased revenues from our Enterprise Technology products, partially offset by decreased revenues in Service Provider Technology products.

Revenues in North America increased $72.9 million, or 49%, from $148.0 million in the three months ended September 30, 2019 to $220.9 million in the three months ended September 30, 2020.

The increase in North America revenues during the three months ended September 30, 2020 as compared to the same period in the prior year, was due to increased revenues from our Enterprise Technology products and Service Provider Technology products.

South America

Revenues in South America decreased $5.1 million, or 22%, from $23.0 million in the three months ended March 31, 2019 to $17.8 million in the three months ended March 31, 2020.

Revenues in South America increased $4.4 million, or 8%, from $58.1 million in the nine months ended March 31, 2019 to $62.5 million in the nine months ended March 31, 2020.

The decrease in South America revenues during the three months ended March 31, 2020 as compared to the same period in the prior year was primarily due to decreased revenues from our Service Provider Technology products, partially offset by increased revenues from our Enterprise Technology products.

The increase in South America revenues during the nine months ended March 31, 2020 as compared to the same period in the prior year was primarily due to increased revenues from our Enterprise Technology products, partially offset by decreased revenue from our Service Provider Technology products.

Revenues in South America increased $11.8 million, or 59%, from $19.8 million in the three months ended September 30, 2019 to $31.5 million in the three months ended September 30, 2020.

The increase in South America revenues during the three months ended September 30, 2020 as compared to the same period in the prior year, was due to increased revenues from our Enterprise Technology products and Service Provider Technology products.

Europe, the Middle East, and Africa (EMEA)

Revenues in EMEA increased $53.3 million, or 42%, from $125.8 million in the three months ended September 30, 2019 to $179.2 million in the three months ended September 30, 2020.

The increase in EMEA revenues during the three months ended September 30, 2020 as compared to the same period in the prior year was due to increased revenues from our Enterprise Technology products and Service Provider Technology products.

Revenues in the Asia Pacific region increased $12.2 million, or 41%, from $29.7 million in the three months ended September 30, 2019 to $41.9 million in the three months ended September 30, 2020.

The increase in Asia Pacific revenues during the three months ended September 30, 2020 as compared to the same period in the prior year, was due to increased revenue from our Enterprise Technology and Service Provider Technology products.

Cost of Revenues and Gross Profit

Cost of revenues increased $25.7 million, or 17%, from $152.1 million in the three months ended March 31, 2019 to $177.8 million in the three months ended March 31, 2020.

The increase is primarily due to costs increases associated with an overall increase in revenue, higher indirect costs and higher tariffs, partially offset by decreased inventory reserves.

Cost of revenues increased $42.4 million, or 9%, from $470.4 million in the nine months ended March 31, 2019 to $512.9 million in the nine months ended March 31, 2020.

The increase is primarily due to cost increases associated with an overall increase in revenue, higher tariffs and higher indirect costs.

Gross profit margin increased to 47.3% in the three months ended March 31, 2020 compared to 46.6% in the three months ended March 31, 2019.

Gross profit margin increased to 47.1% in the nine months ended March 31, 2020 compared to 46.2% in the nine months ended March 31, 2019.

The increase in gross profit margin during the three months ended March 31, 2020 was primarily driven by favorable changes in product mix and decreased inventory reserves, in part offset by an increase in tariffs and higher indirect costs.

The increase in gross profit margin during the nine months ended March 31, 2020 was primarily driven by favorable changes in product mix, partially offset by an increase in tariffs and higher indirect costs.

Cost of revenues increased $73.5 million, or 43%, from $171.9 million in the three months ended September 30, 2019 to $245.4 million in the three months ended September 30, 2020.

The increase in cost of revenue during the three months ended September 30, 2020 was primarily due to cost increase associated with an overall increase in revenue, higher tariffs-related costs, expedited shipping costs and inventory write-offs.

Gross profit margin increased to 48.2% during the three months ended September 30, 2020 as compared to 46.8% during the three months ended September 30, 2019, primarily driven by higher revenue and favorable product mix, partially offset by higher tariff-related costs, expedited shipping costs and inventory reserves.

Operating Expenses

Research and Development

Research and development (“R&D”) expenses increased $0.3 million, or 2%, from $21.3 million in the three months ended March 31, 2019 to $21.7 million in the three months ended March 31, 2020.

As a percentage of revenues, R&D expenses decreased from 7% for the three months ended March 31, 2019 to 6% for the three months ended March 31, 2020.

R&D expenses increased $6.4 million, or 11%, from $59.5 million in the nine months ended March 31, 2019 to $66.0 million in the nine months ended March 31, 2020.

As a percentage of revenues, R&D expenses remained flat at 7% for the nine months ended March 31, 2020 and 2019.

The increase in R&D expenses in absolute dollars for the three months ended March 31, 2020 as compared to the same period in the prior year was primarily due to higher expenses related to development activities, partially offset by lower employee related expenses.

The increase in R&D in absolute dollars for the nine months ended March 31, 2020 as compared to the same period in the prior year was primarily due to higher employee related expenses and development activities.

Research and development (“R&D”) expenses increased $5.6 million, or 27%, from $20.3 million in the three months ended September 30, 2019 to $25.8 million in the three months ended September 30, 2020.

As a percentage of revenues, R&D expenses decreased from 6.3% for the three months ended September 30, 2019 to 5.5% for the three months ended September 30, 2020.

The increase in R&D expenses in absolute dollars for both the three months ended September 30, 2020 as compared to the same period in the prior year was primarily due to higher employee related expenses and development activities.

Sales, General and Administrative

Sales, general and administrative (“SG&A”) expenses increased $1.3 million, or 13%, from $9.4 million in the three months ended March 31, 2019 to $10.6 million in the three months ended March 31, 2020.

As a percentage of revenues, SG&A expenses remained relatively flat at 3% for the three months ended March 31, 2020 and 2019.

SG&A expenses decreased $3.7 million, or 11%, from $33.7 million in the nine months ended March 31, 2019 to $30.1 million for the nine months ended March 31, 2020.

As a percentage of revenues, SG&A expenses decreased from 4% for the nine months ended March 31, 2019 to 3% for the nine months ended March 31, 2020.

The increase in SG&A expenses in absolute dollars for three months ended March 31, 2020 as compared to the same period in the prior year was primarily due to higher marketing expenses.

The decrease in SG&A expenses in absolute dollars for the nine months ended March 31, 2020 as compared to the same period in the prior year was primarily due to lower professional fees offset, in part by higher marketing expenses.

Litigation Settlement

On February 3, 2017, Synopsys, Inc.

(“Synopsys”) filed a complaint against the Company, one of our subsidiaries and an employee in the United States District Court for the Northern District of California, alleging claims under the Digital Millennium Copyright Act.

During fiscal year 2019, the Company and Synopsys entered into a settlement pursuant to which the Company paid $18 million to Synopsys and agreed to a permanent injunction to prevent any unlicensed use of Synopsys’s software.

As a result of the settlement, the litigation with Synopsys was dismissed.

The settlement does not contain any admission of liability, wrongdoing, or responsibility by any of the parties.

Sales, general and administrative expenses increased $1.9 million, or 18%, from $10.5 million in the three months ended September 30, 2019 to $12.4 million in the three months ended September 30, 2020.

As a percentage of revenues, sales, general and administrative expenses decreased from 3.2% for the three months ended September 30, 2019 to 2.6% for the three months ended September 30, 2020.

The increase in sales, general and administrative expense in absolute dollars during the three months ended September 30, 2020 as compared to the same period in the prior year was primarily due to higher depreciation expense and higher professional and service fees offset, in part, by lower employee-related costs, lower marketing expenses and lower bad debt expense.

Provision for Income Taxes

Our provision for income taxes increased $6.6 million, or 64%, from $10.4 million for the three months ended March 31, 2019 to $17.0 million for the three months ended March 31, 2020.

Our effective tax rate increased to 14.1% for the three months ended March 31, 2020 as compared to 10.5% for the three months ended March 31, 2019.

Our provisions for income taxes increased $16.6 million, or 51%, from $32.4 million for the nine months ended March 31, 2019 to $49.1 million for the nine months ended March 31, 2020.

Our effective tax rate increased to 14.6% for the nine months ended March 31, 2020 as compared to 11.4% for the nine months ended March 31, 2019.

The change in effective tax rates for the three and nine months ended March 31, 2020 as compared to the same periods in the prior year, was primarily driven by a change in tax regulation and the GILTI inclusion under section 951A.

Our provision for income taxes increased $11.6 million or 65%, from $17.9 million for the three months ended September 30, 2019 to $29.5 million for the three months ended September 30, 2020.

Our effective tax rate increased to 16% for the three months ended September 30, 2020 as compared to 15% for the three months ended September 30, 2019.

The change in effective tax rate for the three months ended September 30, 2020 as compared to the same period in the prior year was primarily due to the increase in overall taxable income in higher tax jurisdictions.

Liquidity and Capital Resources

Sources and Uses of Cash

Our principal sources of liquidity are cash and cash equivalents, cash generated by operations, the availability of additional funds under the Facilities and short-term and long-term investments.

We had cash and cash equivalents of $77.8 million and $238.1 million as of March 31, 2020 and June 30, 2019, respectively.

In fiscal year 2019, the Company began investing cash in various fixed income available-for-sale securities.

As of March 31, 2020, and June 30, 2019, we held $12.6 million and $103.3 million, respectively, in available-for-sale securities.

Our securities investment portfolio consists of high quality investment grade securities from diverse issuers.

Refer to “Part II—Item 1A.

Risk Factors—Risks Related to Our Business and Operations—We may experience risks in our investments due to changes in the market, which could adversely affect the value or liquidity of our investments.” for additional information.

Our principal source of liquidity are cash and cash equivalents, cash generated by operations, the availability of additional funds under the Facilities and short-term and long-term investments.

We had cash and cash equivalents of $128.4 million and $142.6 million as of September 30, 2020 and June 30, 2020, respectively.

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,

Three Months Ended September 30,

(In thousands)

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Cash Flows from Operating Activities

Net cash provided by operating activities in the nine months ended March 31, 2020 consisted primarily of net income of $287.7 million, in addition to the changes in operating assets and liabilities that resulted in net cash inflows of $25.3 million.

This net change consisted primarily of a $53.3 million decrease in inventory and $2.4 million decrease in vendor deposits, a $17.8 million increase in accounts receivable, a $8.4 million increase in net accounts payable and accrued liabilities, a $25.4 million decrease in taxes payable due to the timing of federal tax payments and a $3.4 million decrease in prepaid expense and other assets.

Net cash provided by operating activities in the nine months ended March 31, 2019 consisted primarily of net income of $251.8 million partially offset by changes in operating assets and liabilities that results in net cash outflows of $106.5 million.

This net change was primarily driven by outflows arising from a $180.7 million increase in inventory, partially offset by $16.2 million decrease in vendor deposit, and $3.5 million increase in prepaid income taxes.

These outflows were partly offset by $4.3 million increase in taxes payable due to the timing of federal tax payments and $38.3 million increase in net accounts payable and accrued liabilities.

Net cash provided by operating activities in the three months ended September 30, 2020 consisted primarily of net income of $156.5 million, partially offset by changes in operating assets and liabilities that resulted in net cash outflows of $46.9 million.

This net change consisted primarily of a $30.0 million decrease in inventory and $0.6 million decrease in vendor deposits, a $53.9 million

increase in accounts receivable due to overall higher revenues for the period, a $25.9 million decrease in net accounts payable and accrued liabilities, a $3.2 million increase in taxes payable due to the timing of federal tax payments and a $3.9 million increase in prepaid expense and other assets.

Net cash provided by operating activities in the three months ended September 30, 2019 consisted primarily of net income of $98.1 million in addition to the changes in operating assets and liabilities that results in net cash inflows of $15.6 million.

This net change consisted primarily of a $19.6 million decrease in inventory and 3.8 million decrease in vendor deposits, a $18.7 million increase in accounts receivable due to overall higher revenues for the period, a $25.2 million increase in net accounts payable and accrued liabilities, a $7.2 million decrease in taxes payable due to the timing of federal tax payments and a $8.0 million increase in prepaid expense and other assets.

Cash Flows from Investing Activities

Net cash provided by investing activities in the nine months ended March 31, 2020 was $60.4 million.

Our investing activities consisted primarily of cash inflows of $89.2 million net proceeds from our available-for-sale securities offset, in part by $28.8 million of capital expenditures.

The Company used $114.0 million of cash in investing activities during the nine months ended March 31, 2019.

For the nine months ended March 31, 2019, our investing activities consisted of net purchases of available-for-sale securities of $101.3 million, purchase of private equity investment of $5.0 million, and capital expenditures and purchase of intangible assets of $7.7 million.

We used $4.9 million of cash in investing activities during the three months ended September 30, 2020.

Our investing activities consisted of $2.8 million of capital expenditures, $2.5 million loan advanced to a third party, partially offset by maturities of investment securities of $0.4 million.

Net cash provided by investing activities in the three months ended September 30, 2019 was $31.6 million.

Our investing activities consisted primarily of cash inflows of $49.9 million net proceeds from our available-for-sale securities, partially offset by cash outflows of $18.3 million of capital expenditures.

Cash Flows from Financing Activities

The Company used $556.1 million of cash in financing activities during the nine months ended March 31, 2020.

During the nine months ended March 31, 2020, we generated $188.8 million of net funds from borrowing and repayments under the Facilities, which were more than offset by financing cash outflows of $681.2 million related to the repurchase of our common stock, $59.6 million related to dividends paid on our common stock and $3.1 million of debt issuance costs related to the Third Amendment.

See Note 8- Debt of the Notes to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding the Facilities.

The Company used $400.7 million of cash in financing activities during the nine months ended March 31, 2019.

During the nine months ended March 31, 2019, we had financing cash outflows of $328.1 million related to the repurchase of our common stock, $53.8 million related to dividends paid on our common stock and $18.8 million repayment on our term loan under the Facilities.

We believe our existing cash and cash equivalents, cash provided by operations and the availability of additional funds, under our credit facilities will be sufficient to meet our working capital, future stock repurchases, dividends, and capital expenditure needs for the next twelve months.

However, this estimate is based on a number of assumptions that may prove to be wrong and we could exhaust our available cash and cash equivalents earlier than presently anticipated.

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, the availability of additional funds under our credit facilities and overall economic conditions.

The COVID-19 pandemic and resulting global disruptions have caused significant volatility in financial markets.

This disruption can contribute to potential defaults in our accounts receivable, affect asset valuations resulting in impairment charges, and affect the availability of financing credit as well as other segments of the credit markets.

We used $126.2 million of cash in financing activities during the three months ended September 30, 2020.

During the three months ended September 30, 2020, we had financing outflows of $83.9 million related to the repurchase of our common stock, $25.5 million related to dividends paid on our common stock and $16.3 million of repayments under the Company’s credit facilities.

We used $269.7 million of cash in financing activities during the three months ended September 30, 2019.

During the three months ended September 30, 2019, we generated $151.3 million of net funds from borrowing and repayments under the Company's credit facilities offset, in part by financing cash outflows of $396.6 million related to the repurchase of our common stock, $20.7 million related to dividends paid on our common stock $3.1 million of debt issuance costs.

We believe our existing cash and cash equivalents, cash provided by operations and the availability of additional fund, under our Facilities will be sufficient to meet our working capital, future stock repurchases, dividends, and capital expenditure needs for the next twelve months.

However, this estimate is based on a number of assumptions that may prove to be wrong and we could exhaust our available cash and cash equivalents earlier than presently anticipated or need to rely more heavily on our Facilities or other sources of liquidity to continue to meet our needs.

The COVID-19 pandemic and resulting global disruptions have caused significant volatility in financial markets and the domestic and global economy.

This disruption can contribute to potential payment delays or defaults in our accounts receivable, affect asset valuations resulting in impairment charges, and affect the availability of financing credit as well as other segments of the credit markets.

For a further discussion of the uncertainties and business risks associated with the COVID-19 pandemic, refer to “Part II-Item 1A.

We expect to continue to maintain financing flexibility in the current market conditions.

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We believe the fair value of these indemnification agreements is minimal.

We have not recorded any liabilities for these agreements as of March 31, 2020.

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 as of March 31, 2020.

We have not recorded any liabilities for these agreements as of September 30, 2020.

Contractual Obligations and Off-Balance Sheet Arrangements

Our contractual obligations represent material expected or contractually committed future payment obligations.

We believe that we will be able to fund these obligations through our existing cash and cash equivalents, cash generated from operations and the availability of additional funds, under the Facilities and short-term and long-term investments.

As of March 31, 2020, our principal commitments consist primarily of obligations under leases for various real estate spaces, purchase commitments with our contract manufacturers and suppliers, and debt and interest obligations.

See Note 8- Debt , Note 9- Leases and Note 10- Commitments and Contingencies of the Notes to our Consolidated Financial Statements, included in Part I, Item 1, of this Quarterly Report on Form 10-Q for future payment commitments under leases, purchase commitments and debt obligations as of March 31, 2020, respectively.

The following table summarizes the Company’s other contractual obligations as of March 31, 2020 for the remainder of fiscal 2020 and future fiscal years (in thousands):

The following table summarizes the Company’s contractual obligations as of September 30, 2020 for the remainder of fiscal 2021 and future fiscal years (in thousands):

2021 (remainder) 2022 2023 2024 2025 Thereafter Total

Operating Leases 5,999 5,097 4,322 4,130 3,705 5,484 28,737

Debt Payments 18,750 25,000 595,000 — — — 638,750

Interest and other payments on debt payment obligations 10,106 13,091 7,002 — — — 30,199

Transition Tax — 9,004 9,004 16,882 22,509 28,136 85,535

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Total $ 52,414 $ 72,192 $ 635,328 $ 27,679 $ 26,214 $ 33,620 $ 847,447

Purchase Obligations

We subcontract with third parties to manufacture our products and have purchase commitments with key component suppliers.

During the normal course of business, our contract manufacturers procure components and manufacture products based upon orders placed by us.

If we cancel all or part of the orders, we may still be liable to the contract manufacturers for the cost of the components purchased by the subcontractors to manufacture our products.

We periodically review the potential liability, and as of September 30, 2020, we have recorded a purchase obligation liability of $5.2 million related to component purchase commitments.

There have been no other significant liabilities for cancellations recorded as of September 30, 2020.

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.

We may be subject to additional purchase obligations for supply agreements and components ordered by our contract manufacturers based on manufacturing forecasts we provide them each month.

We estimate the amount of these additional purchase obligation to range from $148.7 million to $427.0 million as of September 30, 2020, depending upon the timing of orders placed for these components by our manufacturers.

Transition Tax

The Company has obligations of $94.5 million as of March 31, 2020, related to Transition Tax.

The Company also had obligations of $85.5 million as of September 30, 2020, related to Transition Tax.

These obligations are included within Income taxes payable and Long-term taxes payable on our Consolidated Balance Sheets.

Other Obligations

The Company had other obligations of $83.7 as of March 31, 2020, which consisted primarily of commitments related to raw materials and research and development projects.

As of September 30, 2020, the Company has other obligations of $64.2 million which consisted primarily of commitments related to raw materials and research and development projects.

Unrecognized Tax Benefits

As of March 31, 2020, we had $32.4 million and an additional $5.0 million for accrued interest, classified as non-current liabilities.

As of September 30, 2020, we had $32.7 million and an additional $5.0 million for accrued interest, classified as non-current liabilities.

At this time, we are unable to make a reasonably reliable estimate of timing of payments in individual years in connection with these tax liabilities;

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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, our introduction of new products, 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, current or potential indemnification liabilities, the effects of government regulations, the impact of tariffs, the expected impact of taxes on our liquidity and results of operations, 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, and the adequacy of and our reliance on our sources of liquidity to meet such needs, our Facilities, 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.

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, our introduction of new products, 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, current or potential indemnification liabilities, the effects of government regulations, the impact of tariffs, the expected impact of taxes on our liquidity and results of operations, 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, and the adequacy of and our reliance on our source of liquidity to meet such needs, our Facilities, 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 and the impact of COVID-19 pandemic on our business.

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, the impact of U.S.

tariffs on results, 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, the impact of COVID-19 pandemic on our business, results and liquidity, volatility in our short-term investments, and the risks set forth throughout this Report, including under Part II:

tariffs on results of operations, 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, the impact of COVID-19 pandemic on our business, results and liquidity, volatility in our short-term investments, and the risks set forth throughout this Report, including under Part II:

“Other Information”, Item 1, “Legal Proceedings” and under Item 1A, “Risk Factors.” These forward-looking statements speak only as of the date hereof.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis