What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-04 compared with 2022-05-06 · 131 added, 178 removed, 149 unchanged (67% of the section changed)

4 unchanged sentences

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.

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.

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

We target the enterprise and service provider 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, including through our webstores, 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

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.

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 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.

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 interface.

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 online retailers and direct to customers

through our webstores.

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 online 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.

1 unchanged sentence

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.

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 an outbreak occurs 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.

For example, in fiscal 2022, and the first quarter of fiscal 2023, we experienced reduced availability for certain 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.

We do not stockpile sufficient components, particularly the chipsets, 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.

2 unchanged sentences

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.

Refer to “Part II – Item IA.

Risk Factors” for a discussion of these factors and other risks.

Recent Developments

Russia-Ukraine Military Conflict - We are monitoring the military conflict between Russia and Ukraine, escalating tensions in surrounding countries, and associated economic sanctions.

While the impact to our operations in Ukraine and its surrounding countries has not been material to our business or results of operations as of the date hereof, the full impact of the military conflict on our business and results of operations remains uncertain.

While the impact on our operations in Ukraine and its surrounding countries has not been material to our business or results of operations as of the date hereof, the full impact of the military conflict on our business and results of operations remains uncertain.

The extent to which the conflict may impact our business or results of operations in future periods will depend on future developments, including the severity and duration of the conflict, its impact on regional and global economic conditions, as well as its impact on surrounding countries, including its impact on our operations in Ukraine and its surrounding countries, and its impact on global supply chains.

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

Refer to “Part II – Item IA.

Risk Factors” for a discussion of these factors and other risks.

China-Taiwan Tensions - We are monitoring the escalating tensions between China and Taiwan, and associated tensions between the U.S.

While the impact on our operations in Taiwan has not been material to our business or results of operations as of the date hereof, the full impact of the escalating tensions and potential military conflict on our business and results of operations remains uncertain.

The extent to which the conflict may impact our business or results of operations in future periods will depend on future

developments, including the severity and duration of the conflict, its impact on regional and global economic conditions, as well as its impact on China-U.S.

relations, including its impact on our operations in Taiwan, and its impact on global supply chains.

Refer to “Part II – Item IA.

Risk Factors” for a discussion of these factors and other risks.

Key Components of Our Results of Operations and Financial Condition

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.

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.

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:

3 unchanged sentences

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.

We sell our products and solutions globally to enterprises and service providers primarily through our extensive network of

distributors, and, to a lesser extent, through direct sales through our webstores.

Sales to distributors accounted for 67% of our revenues during the nine months ended March 31, 2022.

Direct sales accounted for 33% of our revenue during the nine months ended March 31, 2022.

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

Sales to distributors accounted for 61% of our revenues during the three months ended September 30, 2022.

Direct sales accounted for 39% of our revenue during the three months ended September 30, 2022.

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.

We currently operate warehouses located in the U.S.

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.

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., Europe and Asia Pacific.

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%.

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—

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—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.

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.

5 unchanged sentences

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

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

which we operate.

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.

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

To 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—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.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not

require management’s judgment in its application.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application.

In other cases, management’s judgment is required in selecting among available alternative accounting standards that provide for different accounting treatment for similar transactions.

9 unchanged sentences

Results of Operations

Comparison of Three and Nine Months Ended March 31, 2022 and 2021

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

2022 2021 2022 2021

Comparison of Three Months Ended September 30, 2022 and 2021

Three Months Ended September 30,

(In thousands, except percentages)

19 unchanged sentences

Total stock-based compensation $ 1,048 $ 810

Total revenues decreased $109.1 million, or 23%, from $467.2 million in the three months ended March 31, 2021 to $358.1 million in the three months ended March 31, 2022.

Total revenues decreased $171.7 million, or 12%, from $1420.2 million in the nine months ended March 31, 2021 to $1248.5 million in the nine months ended March 31, 2022.

The decline in revenue for the quarter ended March 31, 2022, as compared to the comparable prior year period, was primarily driven by decreases in revenue in both the Enterprise Technology and Service Provider Technology platforms.

The decline in revenue for the nine months ended March 31, 2022, as compared to the comparable prior year period, was primarily driven by a decrease in revenue in the Service Provider Technology platform.

Overall, revenues were significantly negatively impacted by our inability to fulfill demand due to the global component supply shortage and the continued outbreaks of COVID around the world.

Total revenues increased $39.2 million, or 9%, from $458.9 million in the three months ended September 30, 2021 to $498.1 million in the three months ended September 30, 2022.

The increase in revenues was primarily driven by our Enterprise Technology platform.

The revenue from the Service Provider Technology platform declined when compared to the comparable prior year period.

While revenues increased, our revenues continue to be negatively impacted by our inability to fulfill demand due to the global component supply shortage.

Revenues also continue to be impacted by our ability to build products across all platforms as we are allocated available components to certain products.

Revenues by Product Type

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

2022 2021 2022 2021

Three Months Ended September 30,

(in thousands, except percentages)

2 unchanged sentences

Total revenues $ 498,083 100 % $ 458,914 100 %

Enterprise Technology revenue decreased $19.9 million, or 6.3%, from $314.9 million in the three months ended March 31, 2021 to $295.0 million in the three months ended March 31, 2022 and increased $11.7 million, or 1%, from $960.5 million in the nine months ended March 31, 2021 to $972.2 million in the nine months ended March 31, 2022.

The decrease in Enterprise Technology revenue during the three months ended March 31, 2022, as compared to the same period in the prior year, was primarily due to decreased revenue in our UniFi technology platform across all geographic regions other than North America.

The increase in Enterprise Technology revenue during the nine months ended March 31, 2022, as compared to the same period in the prior year, was primarily due to increased revenue from our UniFi technology platform across all geographic regions other than EMEA.

Service Provider Technology revenue decreased $89.4 million, or 59%, from $152.4 million in the three months ended March 31, 2021 to $63.0 million in the three months ended March 31, 2022 and decreased $183.3 million, or 40%, from $459.7 million in the nine months ended March 31, 2021 to $276.4 million in the nine months ended March 31, 2022.

The decrease in Service Provider Technology revenue during the three and nine months ended March 31, 2022, as compared to the same periods in the prior year, was primarily due to decreased revenue in all of our product platforms across all geographic regions.

Enterprise Technology revenue increased $79.5 million, or 23%, from $346.8 million in the three months ended September 30, 2021 to $426.3 million in the three months ended September 30, 2022.

The increase in Enterprise Technology revenue during the three months ended September 30, 2022 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.

Service Provider Technology revenue decreased $40.3 million, or 36%, from $112.1 million in the three months ended September 30, 2021 to $71.8 million in the three months ended September 30, 2022.

The decrease in Service Provider Technology revenue during the three months ended September 30, 2022 as compared to the same period in the prior year, was primarily due to decreased revenue in all regions across all the platforms.

Revenues by Geography

We have determined the geographical distribution of our product revenues based on our customers’ ship-to destinations.

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, 2022 and 2021 (in thousands, except percentages):

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

2022 2021 2022 2021

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 months ended September 30, 2022 and 2021 (in thousands, except percentages):

Three Months Ended September 30,

(in thousands, except percentages)

5 unchanged sentences

Total revenues $ 498,083 100 % $ 458,914 100 %

(1) Revenue for the United States was $173.9 million and $193.2 million for the three months ended March 31, 2022 and 2021, respectively.

Revenue for the United States was $536.8 million and $582.1 million for the nine months ended March 31, 2022 and 2021, respectively.

(1) Revenue for the United States was $210.3 million and $190.6 million for the three months ended September 30, 2022 and 2021, respectively.

North America

Revenues in North America decreased $25.9 million, or 12%, from $209.5 million in the three months ended March 31, 2021 to $183.6 million in the three months ended March 31, 2022 and decreased $44.1 million, or 7%, from $623.8 million in the nine months ended March 31, 2021 to $579.7 million in the nine months ended March 31, 2022.

The decrease in North America revenues during the three and nine months ended March 31, 2022 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 North America increased $16.6 million, or 8%, from $209.1 million in the three months ended September 30, 2021 to $225.7 million in the three months ended September 30, 2022.

The increase in North America revenues during the three months ended September 30, 2022 as compared to the same period in the prior year, was primarily due to increased revenue from Enterprise Technology products offset in part, by decreased revenue from our Service Provider Technology products.

Europe, the Middle East, and Africa (EMEA)

Revenues in EMEA decreased $54.4 million, or 29%, from $189.6 million in the three months ended March 31, 2021 to $135.2 million in the three months ended March 31, 2022 and decreased $88.7 million, or 15%, from $587.5 million in the nine months ended March 31, 2021 to $498.8 million in the nine months ended March 31, 2022.

The decrease in EMEA revenues during the three and nine months ended March 31, 2022 as compared to the same periods in the prior year, was primarily due to decreased revenue from both our Service Provider Technology and Enterprise Technology products.

Revenues in the Asia Pacific region decreased $9.6 million, or 27%, from $36.1 million in the three months ended March 31, 2021 to $26.5 million in the three months ended March 31, 2022 and decreased $13.3 million, or 12%, from $115.5 million in the nine months ended March 31, 2021 to $102.2 million in the nine months ended March 31, 2022.

The decrease in Asia Pacific revenues during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 was due to decreased revenue from both our Service Provider Technology and Enterprise Technology products.

The decrease in Asia Pacific revenues during the nine months ended March 31, 2022 as compared to the nine months ended March 31, 2021 was primarily due to decreased revenue from our Service Provider products offset, in part, by increased revenue from our Enterprise Technology products.

Revenues in EMEA increased $27.5 million, or 16%, from $172.6 million in the three months ended September 30, 2021 to $200.1 million in the three months ended September 30, 2022.

The increase in EMEA revenues during the three months ended September 30, 2022 as compared to the same period in the prior year, was primarily due to increased revenue from Enterprise Technology products offset in part, by decreased revenue from our Service Provider Technology products.

Revenues in the Asia Pacific region increased $2.4 million, or 6%, from $42.9 million in the three months ended September 30, 2021 to $45.3 million in the three months ended September 30, 2022.

The increase in Asia Pacific revenues during the three months ended September 30, 2022 as compared to the same period in the prior year was primarily due to increased revenue from Enterprise Technology products offset in part, by decreased revenue from our Service Provider Technology products.

South America

Revenues in South America decreased $19.2 million, or 60%, from $32.0 million in the three months ended March 31, 2021 to $12.8 million in the three months ended March 31, 2022 and decreased $25.6 million, or 27%, from $93.4 million in the nine months ended March 31, 2021 to $67.8 million in the nine months ended March 31, 2022.

The decrease in South America revenues during the three months ended March 31, 2022 as compared to the same period in the prior year, was due to decreased revenue from both our Service Provider Technology and Enterprise Technology products.

The decrease in South America revenues during the nine months ended March 31, 2022 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 our Enterprise Technology products.

Revenues in South America decreased $7.4 million, or 22%, from $34.3 million in the three months ended September 30, 2021 to $26.9 million in the three months ended September 30, 2022.

The decrease in South America revenues during the three months ended September 30, 2022 as compared to the same period in the prior year was primarily due to decreased revenue from Service Provider Technology products offset in part by increased revenue from Enterprise Technology products.

Cost of Revenues and Gross Profit

Cost of revenues decreased $2.4 million, or 1%, from $244.5 million in the three months ended March 31, 2021 to $242.1 million in the three months ended March 31, 2022.

The decrease is mainly due to lower sales, offset by a change in mix of products, and higher shipping costs.

Cost of revenues increased $9.7 million, or 1%, from $738.7 million in the nine months ended March 31, 2021 to $748.4 million in the nine months ended March 31, 2022.

The increase is primarily due to a change in the mix of products sold and higher component costs, shipping costs and indirect overhead expenses.

Gross profit margin decreased to 32.4% in the three months ended March 31, 2022 compared to 47.7% in the three months ended March 31, 2021, and decreased to 40.1% in the nine months ended March 31, 2022 compared to 48.0% in the nine months ended March 31, 2021, primarily driven by a change in mix of products sold and higher component costs, shipping costs and indirect overhead expenses.General transportation costs have increased materially and we continue to incur additional costs on top of these general costs to expedite shipments.

Cost of revenues increased $77.2 million, or 31%, from $249.5 million in the three months ended September 30, 2021 to $326.7 million in the three months ended September 30, 2022.

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

Gross profit margin decreased to 34.4% in the three months ended September 30, 2022 compared to 45.6% in the three months ended September 30, 2021, primarily driven by changes in product mix, higher component costs and shipping costs.

Operating Expenses

Research and Development

Research and development (“R&D”) expenses increased $4.8 million, or 16%, from $30.5 million in the three months ended March 31, 2021 to $35.3 million in the three months ended March 31, 2022.

As a percentage of revenues, R&D expenses increased from 7% for the three months ended March 31, 2021 to 10% for the three months ended March 31, 2022.

R&D expenses increased $15.0 million, or 18%, from $85.2 million in the nine months ended March 31, 2021 to $100.2 million in the nine months ended March 31, 2022.

As a percentage of revenues, R&D expenses increased from 6% for the nine months ended March 31, 2021 to 8% for the nine months ended March 31, 2022.

The increase in R&D expenses in the three and nine months ended March 31, 2022, as compared to both comparable prior periods, was primarily driven by higher employee related costs, depreciation and amortization and prototype testing expenses.

Research and development (“R&D”) expenses increased marginally by $0.6 million, or 2%, from $32.1 million in the three months ended September 30, 2021 to $32.7 million in the three months ended September 30, 2022.

As a percentage of revenues, R&D expenses remained consistent at 7% for both periods.

Sales, General and Administrative

Sales, general and administrative (“SG&A”) expenses increased $4.9 million, or 37%, from $13.3 million in the three months ended March 31, 2021 to $18.2 million in the three months ended March 31, 2022.

As a percentage of revenues, SG&A expenses increased from 2.8% for the three months ended March 31, 2021 to 5.1% for the three months ended March 31, 2022.

SG&A expenses increased $13.7 million, or 38%, from $36.6 million in the nine months ended March 31, 2021 to $50.3 million in the nine months ended March 31, 2022.

As a percentage of revenues, SG&A expenses increased from 3% for the nine months ended

March 31, 2021 to 4% for the nine months ended March 31, 2022.

The increase in SG&A expenses in the three months and nine months ended March 31, 2022, as compared to both comparable prior periods, was primarily driven by increased marketing expenses, increased credit card processing fees and donations to humanitarian relief organizations addressing the military conflict between Russia and Ukraine, offset by lower professional and service fees and the benefit of the Business e-mail compromise (‘BEC’) recovery recognized in the quarter ending March 31, 2021.

Sales, general and administrative (“SG&A”) expenses increased $1.0 million, or 6%, from $15.7 million in the three months ended September 30, 2021 to $16.7 million in the three months ended September 30, 2022.

As a percentage of revenues, SG&A expenses remained consistent at 3% for both periods.

The increase in SG&A costs as compared to the comparable prior year period was primarily due to higher webstore credit card processing fees and professional fees, offset in part by lower marketing expenses.

Provision for Income Taxes

Our provision for income taxes decreased $19.0 million, or 68%, from $28.0 million for the three months ended March 31, 2021 to $9.0 million for the three months ended March 31, 2022.

Our effective tax rate decreased to 15.2% for the three months ended March 31, 2022 as compared to 16.1% for the three months ended March 31, 2021.

Our provision for income taxes decreased $31.3 million, or 37%, from $85.1 million for the nine months ended March 31, 2021 to $53.8 million for the nine months ended March 31, 2022.

Our effective tax rate increased to 15.8% for the nine months ended March 31, 2022 as compared to 15.5% for the nine months ended March 31, 2021.

The change in effective tax rates for the three and nine months ended March 31, 2022 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.

Our provision for income taxes decreased $7.5 million, or 29%, from $25.7 million for the three months ended September 30, 2021 to $18.2 million for the three months ended September 30, 2022.

Our effective tax rates were 16.3% for both periods.

Our effective tax rates for the three months ended September 30, 2022 as compared to the same period in the prior year was primarily driven by changes in the mix of the income earned in various tax jurisdictions negated by an increase in the Global Intangible Low-Taxed Income (GILTI) inclusion for the U.S.

taxable income.

The increase in GILTI is primarily attributable to the mandatory research and development capitalization rules under the 2017 Tax Cuts and Jobs Act that went into effect for the Company's period ending September 30, 2022.

Liquidity and Capital Resources

1 unchanged sentence

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.

Our principal uses for liquidity are to fund normal operations, to fund payments of the Company’s debt, dividends and stock repurchases, and to fund research and development expenses.

We had cash and cash equivalents of $144.3 million and $249.4 million as of March 31, 2022 and June 30, 2021, respectively.

We had cash and cash equivalents of $136.5 million and $136.2 million as of September 30, 2022 and June 30, 2022, 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)

Net cash provided by operating activities $ 41,984 $ 100,938

Net cash provided by (used in) investing activities (10,718) (15,080)

Net cash (used in) investing activities (8,662) (2,990)

Net cash (used in) financing activities (33,027) (81,436)

Net increase (decrease) in cash and cash equivalents $ (105,106) $ 120,174

Net increase in cash and cash equivalents $ 295 $ 16,512

Cash Flows from Operating Activities

Net cash provided by operating activities in the nine months ended March 31, 2022 consisted primarily of net income of $286.2 million partially offset by changes in operating assets and liabilities that resulted in net cash outflows of $9.3 million.

This net change consisted primarily of a $13.5 million increase in inventory, $34.8 million increase in vendor deposits, a $84.8 million decrease in accounts receivable, a $29.6 million decrease in net accounts payable and accrued liabilities, a $12.7 million decrease in taxes payable due to the timing of federal tax payments and a $5.9 million decrease in prepaid expense and other assets.

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 deposit, $3.8 million decrease in net accounts payable and accrued liabilities, a $45.2 million increase in accounts receivable due to higher revenue for the period, 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 three months ended September 30, 2022 consisted primarily of net income of $93.2 million partially offset by changes in operating assets and liabilities that resulted in net cash outflows of $56.6 million.

This net change consisted primarily of a $94.2 million increase in inventory, a $27.9 million increase in accounts receivable, a $1.7 million increase prepaid expense and other assets, a $34.2 million increase in net accounts payable and accrued liabilities, a $4.5 million increase in taxes payable due to the timing of federal tax payments and a $30.4 million decrease in vendor deposits.

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 deposit, $14.3 million increase in net accounts payable and accrued liabilities, a $1.6 million increase in accounts receivable, 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.

Cash Flows from Investing Activities

We used $10.7 million of cash in investing activities during the nine months ended March 31, 2022.

Our investing activities consisted primarily of $11.1 million of capital expenditures and $0.9 million purchase of investments, partially offset by maturities of investment securities of $1.2 million.

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

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

We used $8.7 million of cash in investing activities during the three months ended September 30, 2022.

Our investing activities consisted primarily of $8.7 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 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.

Cash Flows from Financing Activities

We used $394.7 million of cash in financing activities during the nine months ended March 31, 2022.

During the nine months ended

March 31, 2022, we used $231.3 million of net funds for repayments under the Company's credit facilities, $513.0 million related to the repurchase of our common stock and $111.8 million related to dividends paid on our common stock.

We 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, used $152.6 million related to the repurchase of our common stock and used $75.7 million related to dividends paid on our common stock.

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, as well as long-term liquidity requirements.

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.

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.

We used $33.0 million of cash in financing activities during the three months ended September 30, 2022.

During the three months ended September 30, 2022, we used $36.3 million related to dividends paid on our common stock and received $3.8 million (net) of funds under the Company's credit facilities.

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

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 the Facilities or other sources of liquidity to continue to meet our needs.

The COVID-19 pandemic and resulting global disruptions have caused and may continue to cause 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.

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.

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, public health problems, military conflicts and geopolitical tensions, which could adversely affect our business, results of operations and financial condition” for additional information.

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

12 unchanged sentences

The maximum amount of potential future indemnification is unlimited.

We have a Directors and Officers insurance policy that limits our potential exposure for our indemnification obligations to our directors, officers and certain other employees.

We have a Directors and Officers insurance policy that limits our potential exposure for our indemnification obligations to our directors, officers

and certain other employees.

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

We have not recorded any liabilities for these agreements as of March 31, 2022.

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, 2022.

We have not recorded any liabilities for these agreements as of September 30, 2022.

Based upon our historical experience and information known as of the date of this Quarterly Report on Form 10-Q, we do not believe it is likely that we will have material liability for the above indemnities as of September 30, 2022.

Contractual Obligations and Off-Balance Sheet Arrangements

4 unchanged sentences

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 March 31, 2022, 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 March 31, 2022.

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, 2022, we have recorded a purchase obligation liability of $7.7 million related to component purchase commitments.

There have been no other significant liabilities for cancellations recorded as of September 30, 2022.

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 $185.6 million to $1,294.2 million as of March 31, 2022, 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 $1,697.7 million to $2,362.8 million as of September 30, 2022, depending upon the timing of orders placed for these components by our contract manufacturers.

Transition Tax

The Company also had obligations of $76.4 million as of March 31, 2022, 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.

We have obligations of $67.4 million as of September 30, 2022, related to transition tax.

Payment of these obligations are expected to be $16.9 million for fiscal 2024, $22.5 million for fiscal 2025 and $28.0 million for fiscal 2026.

These obligations are included within Income tax payable and Long-term taxes payable on our consolidated balance sheets.

Other Obligations

The Company had other obligations of $3.1 million as of March 31, 2022, which consisted primarily of commitments related to raw materials and research and development projects.

We had other obligations of $6.7 million as of September 30, 2022, which consisted primarily of commitments related to raw materials and research and development projects.

Unrecognized Tax Benefits

As of March 31, 2022, we had $35.4 million of unrecognized tax benefits and an additional $4.2 million for accrued interest, classified as non-current liabilities.

As of September 30, 2022, we had $33.4 million of unrecognized tax benefits and an additional $3.6 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.

3 unchanged sentences

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 dividend, 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, the expected impact of various accounting policies and rules adopted by the Financial Accounting Standards Board and the impact of COVID-19 pandemic and the military conflict between Russia and Ukraine on our business and results of operations.

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, the expected impact of various accounting policies and rules adopted by the Financial Accounting Standards Board and the impact of COVID-19 pandemic and the military conflict between Russia and Ukraine on our business and results of operations.

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

4 unchanged sentences

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