What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-05 compared with 2021-05-07 · 175 added, 150 removed, 143 unchanged (69% 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.

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, 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 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 (“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.

Our consumer products, sold under the Ubiquiti Labs brand name, are targeted to the smart home and highly connected consumers.

We believe that our products are highly differentiated due to our proprietary software, firmware expertise, and hardware design capabilities.

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

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.

We have taken and will continue to take 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.

We have experienced a disruption in our supply chain and production as a result of the COVID-19 related restrictions and the global shortage of components.

The current environment has 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.

We develop technology platforms for high-capacity distributed Internet access, unified information technology, and consumer

electronics for professional, home and personal use.

We categorize our solutions into 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, 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.

In addition to Mr.

Pera, our founder, Chairman of the Board and Chief Executive Officer, who is central to our business, 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 our user community where customers can interface directly with our R&D, marketing, and support

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.

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, door access systems, 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

Our consumer products are targeted to the smart home and highly connected consumers.

We believe that our products are

differentiated due to our proprietary software, firmware expertise, and hardware design capabilities.

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

through our webstores.

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.

We have taken and will continue to take

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 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.

We have experienced a disruption in our supply chain and

production as a result of the COVID-19 related restrictions and the global shortage of components.

The current environment has

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.

For example, during fiscal 2022, we experienced reduced availability of components (including the chipsets) used to manufacture our products, which has impacted, and we expect will continue to impact our ability and costs to manufacture our products.

These supply shortages have resulted in increased component delivery lead times and increased costs to obtain components, particularly the chipsets, and may result in delays in product production, which shortages may be further exacerbated by increasing global shipping lead times and delays.

We do not stockpile sufficient components to cover the time it would take to re-engineer our products to replace the chipsets used to manufacture our products.

While we are continuing to work closely with our suppliers and contract manufacturers to minimize the potential adverse impacts of the supply shortage, there are many companies seeking to purchase the limited supply of chipsets and other components, many of which have greater resources and larger market share than we have, which may limit the effectiveness of our efforts.

We expect that

shortages of chipsets and other components will continue and may have an adverse impact on our ability to manufacture our products and meet demand for our products.

The extent to which the COVID-19 pandemic and the global availability of components 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.

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.

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We operate our business as one reportable and operating segment.

Further information, regarding Segments can be found in Note 15 to our Consolidated Financial Statements.

Further information regarding Segments can be found in Note 15

to our Consolidated Financial Statements.

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

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.

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:

Service Provider Technology and Enterprise Technology.

• Service Provider Technology includes the Company’s airMAX, EdgeMAX, UFiber, and airFiber platforms, as well as embedded radio products and other 802.11 standard products including base stations, radios, backhaul equipment and CPE.

• Service Provider Technology includes our airMAX, EdgeMAX, UFiber, 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.

• Enterprise Technology includes the Company’s UniFi platforms, including UniFi enterprise Wi-Fi, UniFi Protect, UniFi Access, UniFi switching and routing solutions and the Company’s 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, through direct sales.

Sales to distributors accounted for 85% of our revenues during the nine months ended March 31, 2021.

Direct sales accounted for 15% of our revenue during the nine months ended March 31, 2021.

For the nine months ended March 31, 2020, sales to distributors accounted for 95% of our revenues and direct sales accounted for 5% of our revenues.

• Enterprise Technology includes our UniFi platforms, including UniFi enterprise Wi-Fi, UniFi Protect, UniFi Access, UniFi-Talk, 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, through direct sales through our webstores.

Sales to distributors accounted for 72% of our revenues during the three months ended September 30, 2021.

Direct sales accounted for 28% of our revenue during the three months ended September 30, 2021.

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, 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.

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, 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 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.

Our operations organization consists of employees and consultants engaged in the management of our contract manufacturers, new product introduction activities, logistical support and engineering.

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, channel inventory levels, tariffs, pricing due to competitive pressure, production costs and global demand for electronic components.

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.

Our operations organization consists of employees and consultants

engaged in the management of our contract manufacturers, new product introduction activities, logistical support and engineering.

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, channel inventory levels, tariffs, pricing due to competitive pressure, production costs and global demand

for electronic components.

Although we procure and sell our products mostly 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 on to us, which could have a material impact on our future average selling prices and unit costs.

In June 2018, the Office of the United States Trade Representative announced new proposed tariffs for certain products imported into the 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 on to us, which could have a material impact on our future average selling

prices and unit costs.

In June 2018, the Office of the United States Trade Representative announced new proposed tariffs for certain

products imported into the U.S.

The vast majority of our products that are imported into the U.S.

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

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.

from China are

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

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.

Refer to “Part II—Item 1A.

Risk Factors—Risks Related to Our International Operations—Our business may be negatively affected by political events and foreign policy responses” for additional information.

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—

Risk Factors—Risks Related to Our International Operations—Our business may be negatively affected by political events

and foreign policy responses” for additional information.

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, licensed or purchased intellectual property, facilities and travel.

• 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.

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 traditional direct sales force.

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We use the asset and liability method to account for income taxes.

Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets.

In preparing the consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate.

The Company must assess such potential exposures and, where necessary, provide a reserve to cover any expected loss.

To the extent that the Company establishes a reserve, its provision for income taxes would be increased.

If the Company ultimately determines that payment of these amounts is unnecessary, it reverses the liability and recognizes a tax benefit during the period in which it determines that the liability is no longer necessary.

The Company records an additional charge in its provision for taxes in the period in which it determines that tax liability is greater than its original estimate.

The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations and comprehensive income.

Refer to “Part II—Item 1A.

Risk Factors—Risks Related to Regulatory, Legal and Tax Matters— Changes in applicable tax regulations could negatively affect our financial results ” for additional information.

Significant management judgment is required in determining

the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax

In preparing the consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in

which we operate.

We must assess such potential exposures and, where necessary, provide a reserve to cover any expected loss.

the extent that we establish a reserve, the provision for income taxes would be increased.

If we ultimately determine that payment of

these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the

liability is no longer necessary.

We record an additional charge in our provision for taxes in the period in which we determine that

tax liability is greater than our original estimate.

We recognize interest and penalties related to unrecognized tax benefits on the

income tax expense line in the accompanying consolidated statement of operations and comprehensive income.

Refer to “Part II—

Risk Factors—Risks Related to Regulatory, Legal and Tax Matters—Changes in applicable tax regulations could

negatively affect our financial results” for additional information

Critical Accounting Policies

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Our critical accounting policies are discussed in our Annual Report, filed with the SEC on August 27, 2021, 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.

Additionally, as the COVID-19 pandemic continues to develop and supply chain constraints on the global supply of components, particularly the chipsets, we use to manufacture our products persists, many of our estimates could require increased judgment and carry a higher degree of variability and volatility.

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

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Results of Operations

Comparison of Three and Nine Months Ended March 31, 2021 and 2020

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

2021 2020 2021 2020

Comparison of Three Months Ended September 30, 2021 and 2020

Three Months Ended September 30,

(In thousands, except percentages)

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Total stock-based compensation 810 740

Total revenues increased $129.8 million, or 38%, from $337.4 million in the three months ended March 31, 2020 to $467.2 million in the three months ended March 31, 2021.

Total revenues increased $451.2 million, or 47%, from $969.0 million in the nine months ended March 31, 2020 to $1.4 billion in the nine months ended March 31, 2021.

While the Company's revenue year over year increased, revenue for the three months ended March 31, 2021 declined compared to the three months ended December 31, 2020.

This was primarily due to the disruption in our supply chain as a result of the COVID-19 pandemic and the global availability of components.

The current environment has impacted our suppliers' ability to manufacture or provide key components and services and as a result the lack of available inventory limited our ability to meet customer orders.

In addition, we continue to incur additional costs to expedite deliveries of components and services.

During the three and nine months ended March 31, 2021, 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.

Total revenues decreased $14.6 million, or 3%, from $473.5 million in the three months ended September 30, 2020 to $458.9 million in the three months ended September 30, 2021.

The decline in revenue was primarily associated with our Service Provider category.

Overall, revenues for both periods were negatively impacted by distributor ordering patterns and our inability to fulfill demand due to the global component supply shortage and increasing logistics delays.

Revenues by Product Type

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

2021 2020 2021 2020

Three Months Ended September 30,

(in thousands, except percentages)

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Total revenues $ 458,914 100 % $ 473,533 100 %

Service Provider Technology revenue increased $45.9 million, or 43%, from $106.4 million in the three months ended March 31, 2020 to $152.4 million in the three months ended March 31, 2021 and increased $139.6 million, or 44%, from $320.1 million in the nine months ended March 31, 2020 to $459.7 million in the nine months ended March 31, 2021.

The increase in Service Provider Technology revenue during the three and nine months ended March 31, 2021 as compared to the same periods in the prior year, was primarily due to increased revenue in all regions across all the platforms.

Enterprise Technology revenue increased $83.9 million, or 36%, from $231.0 million in the three months ended March 31, 2020 to $314.9 million in the three months ended March 31, 2021 and increased $311.6 million, or 48%, from $648.9 million in the nine months ended March 31, 2020 to $960.5 million in the nine months ended March 31, 2021.

The increase in Enterprise Technology revenue during the three months ended March 31, 2021 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.

The increase in Enterprise Technology revenue during the nine months ended March 31, 2021 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, except South America.

Service Provider Technology revenue decreased $45.3 million, or 29%, from $157.5 million in the three months ended September 30, 2020 to $112.1 million in the three months ended September 30, 2021.

The decrease in Service Provider Technology revenue during the three months ended September 30, 2021 as compared to the same periods in the prior year, was primarily due to decreased revenue in all regions across all the platforms.

Enterprise Technology revenue increased $30.7 million, or 10%, from $316.1 million in the three months ended September 30, 2020 to $346.8 million in the three months ended September 30, 2021.

The increase in Enterprise Technology revenue during the three months ended September 30, 2021 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, 2021 and 2020 (in thousands, except percentages):

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

2021 2020 2021 2020

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 months ended September 30, 2021 and 2020 (in thousands, except percentages):

Three Months Ended September 30,

(in thousands, except percentages)

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Total revenues $ 458,914 100 % $ 473,533 100 %

(1) Revenue for the United States was $193.2 million and $125.4 million for the three months ended March 31, 2021 and 2020, respectively.

Revenue for the United States was $582.1 million and $389.0 million for the nine months ended March 31, 2021 and 2020, respectively.

(1) Revenue for the United States was $190.6 million and $209.8 million for the three months ended September 30, 2021 and 2020, respectively.

North America

Revenues in North America increased $75.6 million, or 56%, from $133.9 million in the three months ended March 31, 2020 to $209.5 million in the three months ended March 31, 2021 and increased $212.0 million, or 51%, from $411.8 million in the nine months ended March 31, 2020 to $623.8 million in the nine months ended March 31, 2021.

The increase in North America revenues during the three and nine months ended March 31, 2021 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.

Revenues in North America decreased $11.8 million, or 5%, from $220.9 million in the three months ended September 30, 2020 to $209.1 million in the three months ended September 30, 2021.

The decrease in North America revenues during the three months ended September 30, 2021 as compared to the same periods in the prior year, was primarily due to decreased revenue from our Service Provider Technology products offset, in part, by increased revenue from Enterprise Technology products.

Europe, the Middle East, and Africa (EMEA)

Revenues in EMEA increased $30.1 million, or 19%, from $159.4 million in the three months ended March 31, 2020 to $189.6 million in the three months ended March 31, 2021 and increased $181.6 million, or 45% from $405.9 million in the nine months ended March 31, 2020 to $587.5 million in the nine months ended March 31, 2021.

The increase in EMEA revenues during the three and nine months ended March 31, 2021 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.

Revenues in the Asia Pacific region increased $9.9 million, or 38%, from $26.2 million in the three months ended March 31, 2020 to $36.1 million in the three months ended March 31, 2021 and increased $26.7 million, or 30%, from $88.8 million in the nine months ended March 31, 2020 to $115.5 million in the nine months ended March 31, 2021.

The increase in Asia Pacific revenues during the three and nine months ended March 31, 2021 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.

Revenues in EMEA decreased $6.5 million, or 4%, from $179.2 million in the three months ended September 30, 2020 to $172.6 million in the three months ended September 30, 2021.

The decrease in EMEA revenues during the three months ended September 30, 2021 as compared to the same periods in the prior year, was primarily due to decreased revenue from our Service Provider Technology products offset, in part, by increased revenue from Enterprise Technology products.

Revenues in the Asia Pacific region increased $1.0 million, or 2%, from $41.9 million in the three months ended September 30, 2020 to $42.9 million in the three months ended September 30, 2021.

The increase in Asia Pacific revenues during the three months ended September 30, 2021 as compared to the same periods in the prior year was primarily due to increased revenue from our Enterprise Technology products offset, in part, by a decreased revenue from Service Provider Technology products.

South America

Revenues in South America increased $14.2 million, or 79%, from $17.8 million in the three months ended March 31, 2020 to $32.0 million in the three months ended March 31, 2021 and increased $30.9 million, or 49%, from $62.5 million in the nine months ended March 31, 2020 to $93.4 million in the nine months ended March 31, 2021.

The increase in South America revenues during the three months ended March 31, 2021 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 the nine months ended March 31, 2021 as compared to the same periods in the prior year was primarily due to increased revenues from our Service Provider Technology products, partially offset by decreased revenues from our Enterprise Technology products.

Revenues in South America increased $2.7 million, or 9%, from $31.5 million in the three months ended September 30, 2020 to $34.3 million in the three months ended September 30, 2021.

The increase in South America revenues during the three months ended September 30, 2021 as compared to the same period in the prior year was primarily due to increased revenue from our Enterprise Technology products offset, in part, by a decreased revenue from Service Provider Technology products.

Cost of Revenues and Gross Profit

Cost of revenues increased $66.7 million, or 38%, from $177.8 million in the three months ended March 31, 2020 to $244.5 million in the three months ended March 31, 2021.

The increase is primarily due to cost increase associated with an overall increase in revenue and higher shipping costs, partially offset by lower other indirect costs and lower tariffs.

Cost of revenues increased $225.8 million, or 44%, from $512.9 million in the nine months ended March 31, 2020 to $738.7 million in the nine months ended March 31, 2021.

The increase is primarily due to cost increases associated with an overall increase in revenue, higher tariff-related costs and shipping costs, partially offset by lower other indirect costs.

Gross profit margin increased to 47.7% in the three months ended March 31, 2021 compared to 47.3% in the three months ended March 31, 2020.

Gross profit margin increased to 48.0% in the nine months ended March 31, 2021 compared to 47.1% in the nine months ended March 31, 2020.

The increase in gross profit margin during the three months ended March 31, 2021 was primarily driven by higher revenue and favorable changes in product mix, tariffs and other indirect cost being lower as a percentage of overall revenue partially offset by higher shipping costs as a percentage of revenue.

The increase in gross profit margin during the nine months ended March 31, 2021 was primarily driven by higher revenue and favorable changes in product mix, and other indirect cost being lower as a percentage of overall revenue partially offset by higher shipping costs and higher tariff-related costs as a percentage of revenue.

Cost of revenues increased $4.0 million, or 2%, from $245.4 million in the three months ended September 30, 2020 to $249.5 million in the three months ended September 30, 2021.

The increase is primarily due to higher shipping costs, tariffs and component costs.

Gross profit margin decreased to 45.6% in the three months ended September 30, 2021 compared to 48.2% in the three months ended September 30, 2020, primarily driven by changes in product mix and higher shipping costs, tariffs and component costs.

General transportation costs have increased dramatically and we continue to incur even higher cost to expedite shipments.

The Company continues to absorb these costs and has not made any significant changes to its pricing.

Operating Expenses

Research and Development

Research and development (“R&D”) expenses increased $8.8 million, or 41%, from $21.7 million in the three months ended March 31, 2020 to $30.5 million in the three months ended March 31, 2021.

As a percentage of revenues, R&D expenses increased from 6% for the three months ended March 31, 2020 to 7% for the three months ended March 31, 2021.

R&D expenses increased $19.2 million, or 29%, from $66.0 million in the nine months ended March 31, 2020 to $85.2 million in the nine months ended March 31, 2021.

As a percentage of revenues, R&D expenses decreased from 7% for the nine months ended March 31, 2020 to 6% for the nine months ended March 31, 2021.

The increase in R&D expenses in absolute dollars for both the three and nine months ended March 31, 2021 as compared to the same periods in the prior year was primarily due to higher employee related expenses and other costs to support the increase in development activities.

Research and development (“R&D”) expenses increased $6.3 million, or 25%, from $25.8 million in the three months ended

September 30, 2020 to $32.1 million in the three months ended September 30, 2021.

As a percentage of revenues, R&D expenses increased from 5% for the three months ended September 30, 2020 to 7% for the three months ended September 30, 2021.

The increase in R&D expenses as compared to prior quarter and the comparable prior year period was primarily driven by higher employee related expenses, higher depreciation and amortization expense and higher professional and service related fees.

Sales, General and Administrative

Sales, general and administrative (“SG&A”) expenses increased $2.6 million, or 25%, from $10.6 million in the three months ended March 31, 2020 to $13.3 million in the three months ended March 31, 2021.

As a percentage of revenues, SG&A expenses decreased from 3.1% for the three months ended March 31, 2020 to 2.8% for the three months ended March 31, 2021.

SG&A expenses increased $6.5 million, or 22%, from $30.1 million in the nine months ended March 31, 2020 to $36.6 million for the nine months ended March 31, 2021.

As a percentage of revenues, SG&A expenses decreased from 3.1% for the nine months ended March 31, 2020 to 2.6% for the nine months ended March 31, 2021.

The increase in SG&A expenses in absolute dollars for three months ended March 31, 2021 as compared to the same period in the prior year was primarily due to higher professional and service fees and higher depreciation expense, partially offset by lower payroll expense and a business e-mail compromise recovery received in the third quarter fiscal 2021.

The increase in SG&A expenses in absolute dollars for the nine months ended March 31, 2021 as compared to the same period in the prior year was primarily due to higher professional and service fees and higher depreciation expense offset, in part by legal settlement received in the second quarter fiscal 2021, a business e-mail compromise recovery received, lower employee related expenses and lower marketing expense.

Sales, general and administrative (“SG&A”) expenses increased $3.4 million, or 27%, from $12.4 million in the three months ended September 30, 2020 to $15.7 million in the three months ended September 30, 2021.

As a percentage of revenues, SG&A expenses increased from 2.6% for the three months ended September 30, 2020 to 3.4% for the three months ended September 30, 2021.

The increase in SG&A costs as compared to the comparable prior year period was primarily due to webstore related service fees, higher marketing and travel and entertainment expenses.

Provision for Income Taxes

Our provision for income taxes increased $11.0 million, or 64.7%, from $17.0 million for the three months ended March 31, 2020 to $28.0 million for the three months ended March 31, 2021.

Our effective tax rate increased to 16.1% for the three months ended March 31, 2021 as compared to 14.1% for the three months ended March 31, 2020.

Our provisions for income taxes increased $36.0 million, or 73%, from $49.1 million for the nine months ended March 31, 2020 to $85.1 million for the nine months ended March 31, 2021.

Our effective tax rate increased to 15.5% for the nine months ended March 31, 2021 as compared to 14.6% for the nine months ended March 31, 2020.

The change in effective tax rates for the three and nine months ended March 31, 2021 as compared to the same periods in the prior year was primarily due to the increase in overall taxable income in jurisdictions with higher tax rates.

Our provision for income taxes decreased $3.8 million, or 13%, from $29.5 million for the three months ended September 30, 2020 to $25.7 million for the three months ended September 30, 2021.

Our effective tax rate increased to 16.3% for the three months ended September 30, 2021 as compared to 15.9% for the three months ended September 30, 2020.

The change in effective tax rates for the three months ended September 30, 2021 as compared to the same periods in the prior year was primarily driven by changes in the mix of the income earned in various tax jurisdictions.

Liquidity and Capital Resources

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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 $262.8 million and $142.6 million as of March 31, 2021 and June 30, 2020, respectively.

We had cash and cash equivalents of $265.9 million and $249.4 million as of September 30, 2021 and June 30, 2021, 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, 2021 consisted primarily of net income of $462.3 million partially offset by changes in operating assets and liabilities that resulted in net cash outflows of $36.2 million.

This net change consisted primarily of a $60.8 million decrease in inventory offset by $3.6 million increase in vendor deposits, a $45.2 million increase in accounts receivable due to higher revenue for the period, a $3.8 million decrease in net accounts payable and accrued liabilities, a $26.2 million decrease in taxes payable due to the timing of federal tax payments and a $27.1 million increase in prepaid expense and other assets.

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 deposit, $8.4 million increase in net accounts payable and accrued liabilities, $3.4 million decrease in prepaid expense and other assets, a $17.8 million increase in accounts receivable and a $25.4 million decrease in taxes payable due to the timing of federal tax payments.

Net cash provided by operating activities in the three months ended September 30, 2021 consisted primarily of net income of $132.2 million partially offset by changes in operating assets and liabilities that resulted in net cash outflows of $38.7 million.

This net change consisted primarily of a $27.6 million increase in inventory, $20.3 million increase in vendor deposits, a $1.6 million increase in accounts receivable, a $14.3 million increase in net accounts payable and accrued liabilities, a $17.4 million increase in taxes payable due to the timing of federal tax payments and a $17.7 million increase in prepaid expense and other assets.

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 deposit, $25.9 million decrease in net accounts payable and accrued liabilities, a $53.9 million increase in accounts receivable due to overall higher revenue for the period, 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.

Cash Flows from Investing Activities

We used $15.1 million of cash in investing activities during the nine months ended March 31, 2021.

Our investing activities consisted primarily of $16.0 million of capital expenditures and purchase of intangible assets, partially offset by maturities of investment securities of $0.9 million.

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 cash outflows of $28.8 million of capital expenditures.

We used $3.0 million of cash in investing activities during the three months ended September 30, 2021.

Our investing activities consisted primarily of $3.0 million of capital expenditures and $0.6 million purchase of investments, partially offset by maturities of investment securities of $0.6 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.

Cash Flows from Financing Activities

The Company used $312.5 million of cash in financing activities during the nine months ended March 31, 2021.

During the nine months ended March 31, 2021, we used $80.0 million of net funds for repayments under the Facilities, $152.6 million related to the repurchase of our common stock, $75.7 million related to dividends paid on our common stock and $3.3 million of debt issuance costs related to the amended and restated credit agreement.

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 $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 Company's credit 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.

The Company used $81.4 million of cash in financing activities during the three months ended September 30, 2021.

During the three months ended September 30, 2021, we used $6.3 million of funds for repayments under the Company's credit facilities, $36.8 million related to the repurchase of our common stock and $37.5 million related to dividends paid on our common stock.

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

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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 Facilities and overall economic conditions.

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

markets and the domestic and global economy.

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.

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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, 2021.

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, 2021.

We have not recorded any liabilities for these agreements as of September 30, 2021.

Contractual Obligations and Off-Balance Sheet Arrangements

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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.

The following table summarizes the Company’s contractual obligations as of March 31, 2021 for the remainder of fiscal 2021 and future fiscal years (in thousands):

2021 (remainder) 2022 2023 2024 2025 Thereafter Total

Operating leases 2,466 9,343 8,258 7,820 7,265 8,020 43,172

Debt payment obligations 6,250 25,000 25,000 25,000 25,000 468,750 575,000

Interest and other payments on debt payment obligations 2,654 10,391 9,983 9,601 9,167 6,590 48,386

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

Other obligations 6,212 20,000 20,000 6,667 — — 52,879

Total $ 17,582 $ 73,738 $ 72,245 $ 65,970 $ 63,941 $ 511,496 $ 804,972

Purchase Obligations

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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 March 31, 2021, we have recorded a purchase obligation liability of $8.3 million related to component purchase commitments.

There have been no other

significant liabilities for cancellations recorded as of March 31, 2021.

We periodically review the potential liability, and as of September 30, 2021, we have recorded a purchase obligation liability of $7.8 million related to component purchase commitments.

There have been no other significant liabilities for cancellations recorded as of September 30, 2021.

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 obligations to range from $150.3 million to $756.5 million as of March 31, 2021, depending upon the timing of orders placed for these components by our contract manufacturers.

We estimate the amount of these additional purchase obligations to range from $176.9 million to $919.4 million as of September 30, 2021, depending upon the timing of orders placed for these components by our contract manufacturers.

Transition Tax

The Company also had obligations of $85.5 million as of March 31, 2021, related to Transition Tax.

The Company also had obligations of $76.4 million as of September 30, 2021, related to transition tax., which represent future cash tax payments associated with the one-time U.S.

transition tax on accumulated earnings of foreign subsidiaries as a result of the Tax Cuts and Jobs Act (“the Tax Act”).

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 $52.9 as of March 31, 2021, which consisted primarily of commitments related to raw materials and research and development projects.

The Company had other obligations of $2.7 million as of September 30, 2021, which consisted primarily of commitments related to raw materials and research and development projects.

Unrecognized Tax Benefits

As of March 31, 2021, we had $34.0 million and an additional $4.6 million for accrued interest, classified as non-current liabilities.

As of September 30, 2021, we had $33.3 million and an additional $3.8 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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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