Good day, ladies and gentlemen, and welcome to your Ubiquiti Networks Q3 2012 Conference Call. [Operator Instructions] And as a reminder, today's conference is being recorded. And now I would like to introduce your host for today, JoAnn Horne, Investor Relations for Ubiquiti Networks.

Thank you, operator. And thank you for joining us, everyone. I have here with me today Robert J. Pera, Founder and Chief Executive Officer of Ubiquiti Networks, and John Ritchie, Chief Financial Officer. Before we get started, let me review the Safe Harbor statement. During the call, we'll be making forward-looking statements that are statements other than statements of historical fact including, but not limited to, our strategy, estimates, projections, revenues and EPS. Forward-looking statements are statements of risks and uncertainties that could cause the results to differ materially or cause a material adverse effect on results. Please refer to the risk factors discussed in our SEC filings and the press release. We do not undertake to update in light of new information or future events. In addition, reference will be made to non-GAAP financial measures. Information regarding a reconciliation of the non-GAAP and GAAP measures can be found in the press release that was issued this afternoon or on our website at the IR section at www.ubnt.com. Now, let me turn the call over to Robert Pera, Ubiquiti's Founder. Robert?

So thanks for joining us to review Ubiquiti Networks third quarter fiscal 2012 results. We are very pleased with our 79% revenue growth and 113% growth in net income, once again exceeding expectations while significantly outperforming our long-term model. AirMax delivered its 10th sequential quarter of revenue growth, while we also saw increasing demand for Unifi and AirVision, with revenue from these new platforms growing 135% on a sequential basis. Perhaps the most noteworthy development during the quarter was the introduction of our new AirFiber platform, which we formally introduced at our Ubiquiti World User Conference in Chicago. The event was attended by over 700 people, the largest gathering in Ubiquiti's history, and featured presentations covering all 4 of our announced platforms, AirMax, UniFi, AirVision and AirFiber, and presented by the very engineering teams that designed them. The approach of providing direct access to the R&D team is unlike most other gatherings in our industry. The accessibility and transparency we provide with our community of operators not only strengthens our bond with them, but also provides valuable feedback, which we leverage to gain a competitive advantage over our peers. AirFiber represents Ubiquiti's first proprietary in-house radio design effort that was purpose built for the wireless ISP industry. It operates in the license-free 24 gigahertz band with ultra low-latency up to 1.4 gigabits per second of proof of performance and a disruptive price point making it a key building block for next generation outdoor wireless broadband networks. As the name implies, it provides optical fiber network performance without the significant capital cost associated with fiber cable network deployment. The 24 gigahertz AirFiber radio uses an innovative system design which enables Frequency Division Duplex, Time Division Duplex and Ubiquiti's patent-pending Hybrid Division Duplex modes of operation. I recommend watching the AirFiber video…

Thanks, Robert. And thank you, all, for joining us on our third quarter call. Moving on to our results for the quarter, we saw strong continued growth in the third quarter of 2012 with revenues up 79%, or up $40.5 million to a total of $91.7 million, an increase from the $51.2 million recorded in the same period the prior year. The increase in revenue was primarily driven by a significant rebound in our AirMax product line, which showed 119% growth on a year-over-year basis and 17% growth on a sequential basis. We also saw sizable increases in our new products category, which consist of our AirVision and UniFi platforms. This category was up a large 135% on a sequential basis. This more than offset the expected decline in our other systems category. On a non-GAAP basis, net income for the quarter was $28.1 million and on a GAAP basis, it was $27.9 million. Our non-GAAP EPS was $0.30 per share, up 131%, compared to the $0.13 per share from the year-ago period. Now, before I go through the quarter in more detail, I wanted to highlight some key milestones we achieved during the quarter. We once again exceeded the high end of our long-range operating model goal of 32% to 34%, with operating margins of approximately 36%. This operating margin target still leaves us room to expand our R&D investments in both absolute terms, as well as a percentage of revenue. AirMax posted its 10th double -- its 10th growth -- sequential growth quarter. We recorded our 8th straight quarter of improved gross margins. Our new platforms contributed $9.9 million in revenue, growing 135% sequentially. We added $29.4 million to the balance sheet in terms of cash. And on a per share basis, that was $0.01 ahead of the…

Operator, we're ready to take questions now, please.

[Operator Instructions] And we'll take our first question coming from Brian Modoff from Deutsche Bank.

So Robert, on the -- in terms of the OpEx increase to defend your IP and such, how are you looking at that on a go-forward basis? Do you think that the amount you're allocating now is going to be kind of a consistent number? Or are you thinking you may have to get more aggressive in the future to help -- to deal with that issue?

Brian, maybe I'll let John answer that one.

So Brian, we're expecting kind of a big bump when we make our initial efforts in that area. But after this quarter, we expect that the legal expense to ebb down, but then it will be offset by our expected increases in the R&D spend area. So the point of giving the guidance of moving forward to expect OpEx in the kind of 8.5% to 9% range we think indirectly answered that question. Is that helpful?

And in -- go ahead.

No, I was just asking. I want to make sure I answered your question.

Yes, yes, you did. Okay. And then on the -- you've got some new products coming down the pipe. Can you talk about with regard to the AirFiber products, what's the feedback done? When do you expect to see revenue from that product? And then, what do we -- what's next on the list? Are you kind of looking at, "What else do I need -- we need to provide to give our customers a complete solution?" in terms of -- from the access point -- or the point of egress into the network back to the APs, in other words things like routers, those kinds of things? Or are you thinking about more along the lines of expanding out the areas you addressed like you did with the camera?

Yes, so if you look at how Ubiquiti started, it started as just making radio modules that went into other people's systems. Then we got into TPEs. And once we were successful in TPEs, we started to go closer to the core and get into base stations. And now the next step is wireless backhaul. And the wireless -- service providers, they need higher end backhauls. They need something with some millisecond latency that's very fast to support these growing AirMax networks. So I think AirFiber is kind of like the perfect solution. It's a key piece of what we're missing in the full system solution. And the field testing has been going great. And we think we're going to have some shipments coming up in this June quarter. They're probably not going to be material, but we expect after that, subsequent quarters it should ramp up.

Okay. And then finally, on your -- just kind of an update on last quarter, John, you had the issue with the distributor. Can you give us an update on how that's going now with regard to them working through the inventory? And then can you just briefly give us the number for other last -- for the new products last quarter? What was the revenue number on new products this last quarter, Q4 -- calendar Q4?

Yes, so for the December quarter, the other category was $4.2 million.

The new products was $4.2 million?

Yes. So the December quarter is $4.2 million, up 135% to $9.9 million in the current quarter.

Okay, great. And then on the distributor?

Yes, on the distributor, yes, I think I mentioned before, I'm really focused on the credit risk. Distributor's done a great job of bringing down their AR level. And I think if you look at the bounce we had, the rebound we had in AirMax, that gives you some indication that, that problem is a long way to resolving itself.

And we'll take our next question coming from Brent Bracelin from Pacific Crest.

Couple of questions for John and then one for Robert. Starting with John here, clearly U.S. down for 2 consecutive quarters here. I know you also talked a little bit about a change in where you're shipping product, but do you think we've kind of bottomed relative to shipments into the U.S. and we could start to see sequential growth from here or again with the change in where and how you're shipping, so we just not look at the U.S. segment and try to extrapolate given the change in how you're shipping there?

Well, we actually -- we think the U.S. as a percentage of our total revenues will move up a little bit in the current quarter. But longer term, we think the U.S. is going to be in the kind of 18% to 20% range of our total revenues. But the big driver there is not necessarily -- we don't believe it's necessarily -- the decline is not necessarily reflective of end-user demand in the U.S. We just think it's a more -- the change in shipping patterns, as we've said repeatedly in the past, we think that 50% of our U.S. product gets exported. Well, that number will decline and our North American revenues are going to become more consistent with North American demand.

Okay, that's very helpful. And then secondly, obviously the new platforms are growing very fast now, north of 10% of revenue. As you think about the contribution from Unifi and AirVision, I know you're not breaking out, but sounds like demand is outstripping supply for Unifi based on our checks. Is the bulk of the increase tied to Unifi? I know you're not breaking that out, but could you just give a little more color on what drove the magnitude of increase that you saw in the new platforms side?

We're not going to break it out in any more detail other than to give you the kind of subjective answer that we're pleased with the growth in both -- both the products. Unifi continues to gain traction and AirCam/AirVision does -- has done very well for a product just recently out of the gate. I know it's not the objective answer you're looking for, but I don't want to get any more granular than the total new products revenue number we give.

That's fair, I had to ask. And then, Robert, on AirFiber just a follow-up here, you guys are taking preorders for that now on your website. Can you give us any sort of color based on the preorders that you're seeing for that, that would help gauge the interest level? Or again, is it just too early and this is a product that's going to have to be kind of tested in the field before you see a volume kind of shipment?

Yes, I think those preorders -- well they're limited. They're just U.S. customers and they're limited, I think, to 5 links per customers. It's healthy, but I don't think those shipments -- hopefully, we'll get them out in the June quarter. I don't think they'll be material.

Okay. Do you expect a material ramp in the September timeframe, or again is this, like your existing kind of AirMax product, it's going to take a while?

I would say our goal is to have some material revenue from AirFiber in the September quarter.

And we'll take our next question coming from Amitabh Passi from UBS.

John, my first question for you was the gross margin line continues to trend up, how should we think about that going forward? Is it simply the benefit of increasing volumes? Do you think it continues to trend higher?

I think it should stay stable at these levels. I think we're very pleased with how the team is executing in getting our costs down. But I think stable at these levels is the right way to view it.

And then just maybe if I could follow-up with you, John, on your accounts payable, did something funky happen because if I did the math right it seems like that also expanded by 14, 15 days sequentially?

Accounts payable pretty much well tracks our receivables, so you would expect a bump up in AP when you expect a bump up in AR.

Okay, fair enough. And then I was hoping if you could provide any more color in terms of were there any new geographies you managed to penetrate this quarter, any new distributors you added? Just any color in terms of where the strength came in both AirMax and also your new platforms.

I think one of the things we're pleased with right now is how the EMEA region's doing. We saw very good growth there. It's probably one of our more established markets. But we're seeing -- we're kind of seeing strength in the big markets, EMEA and South America.

So basically existing geographies, Poland, Brazil -- I'm just curious if there were any new markets you managed to add?

No, it's the same cast of characters. Czech Republic, Poland, Brazil, Argentina, those countries all continue to do well for us.

And then just a final one for me, antenna products. I was surprised that sales were as weak as they were given how strong AirMax was. Just trying to understand why we're seeing a bit of a decoupling between AirMax sales and your antenna product sales.

It's hard because we mix in the accessories other. So I wouldn't -- honestly, I wouldn't read much into that. It's a relatively-small portion of the overall revenue. You're going to see more volatility there. And that benefited the past couple of quarters with the rollout of our top cable product, so we had some inventory fill of that. But really, other than that, there's really not much going on there.

And we'll take our next question coming from Mark McKechnie from ThinkEquity.

John and Robert, can, I guess for John, talk about the visibility on your guidance here for June relative to what you had going in the last quarter.

I think in terms of visibility, we've shrunk our lead times. So I think we've said before, we were at 8- to 10-week lead times, we're at 6- to 8-week lead times. So we have the visibility that, that will provide.

Got you. Okay. And then I didn't quite understand your tax -- I understood the catch-up, but did you have a tax rate you expected for June and then for next fiscal year?

So yes, so just -- I'll just recap. The benefit we're seeing and it's kind of a fallout benefit from the introduction of the U.S.-only SKUs. As we're seeing our distributors ship product more directly to their end-user customers, because they have less ability now to consolidate inventory in one location because they can't have it in one location and send it all over the world, so they're putting it closer to the end-user demand, and again that's a fallout of the U.S. SKU issue. The more foreign direct ship-to addresses as the geographic mix of our product moves away from the U.S., it puts downward pressure on our effective tax rate. So we actually had to catch up based on our projected revenue mix in the quarter, which took the effective tax rate down to $0.14 -- I'm sorry, 14%, which we picked up about $0.02 of it -- on EPS because of that catch-up adjustment. Then going into -- and that caught us up to a rate of 17.75%. We expect that rate to hold in the June quarter. And as you look out, if you're doing multi-year forecasting, I would have a rate estimate anywhere between, somewhere between 18% and 20%, depending on where your models put the geographic revenue mix.

Okay, great. Now that's very clear. And then, maybe for Robert or for John, on that big uptick sequential on your new products, you're not really breaking out which one was which. But I recall last quarter, you had them essentially metered, right? You really weren't ready to push the button and ship them until you got a lot of the updates from the Ubiquiti community in there. I mean, am I looking at that right? Is that why you're -- did you basically just push the button on manufacturing on those because the products are ready for bigger distribution? And what should we think about for June and beyond in those -- in that group?

I'll answer the revenue piece, and I'll let Robert give you more insight into the feedback we're getting from the customers. Okay, so we're not going to give any sort of kind of specific guidance on, on product lines. In terms of kind of a ramp-up and where these products are, we just -- we're going to point you back to what happens with AirMax. And you -- the benefit of Ubiquiti is we're extremely transparent. You can see what our customers are saying about our product by going out to the forum. Unifi's clearly a more mature product than the AirVision product, which is exactly where we'd expect it to be. So in terms of where the products are, UniFi more mature than AirVision, but the feedback -- and I'll let Robert give you some more details on the feedback -- but the feedback we're getting is exactly the feedback we'd expect based on their level of maturity. Robert?

Yes, I would say UniFi right now has matured after about a year. We have the feature set pretty much complete. It's very stable, it's well-liked. I expect big things from UniFi in the next several quarters. AirVision, it's still -- it has a lot of room to growth -- for growth. It's doing okay now, but we have -- I think we still have a lot of improvement to go. AirFiber, we -- because it's not as, I'd say, software-intensive as UniFi and AirVision, it's FPGA-based and we've done a lot of QAs and reliability and field testings. I think that one will ramp-up, hopefully, my goal is quicker. So yes, all 3 platforms look -- they look promising.

And we'll take our next question from Matt Robison from Wunderlich Securities.

John, just first some housekeeping. Can you provide the cash flow from operation CapEx and depreciation? And while you're looking at that, I'll get some more interesting questions. What -- is there an update on the forthcoming product launches? I think we've got another 2 or 3 we're looking for this calendar year, right?

Yes. So our goal is -- we have 3 more technology platforms in the near-term and we -- our plan is to introduce one in each of the next quarter, subsequent quarters.

On your CapEx, free cash flow questions, we're filing our Q probably in the next 4 to 5 hours, so you'll be able to get that information quickly. On the CapEx, I think our CapEx this quarter was about $0.5 million.

Okay. What was the -- okay, I'll just get it off the Q, as far as, I was going to ask you what depreciation was, but I can wait. Did you say 8.5% to 9% OpEx for the out quarters?

Yes.

And, obviously, the denominator's a question there. Are you just talking about relative to the current kind of revenue run rates you've got?

That is roughly correct, yes.

Okay. And when should we expect -- I know you had this backloaded pattern because of the supply conditions. What -- should we expect you to get back into your range this quarter or will it take longer than that on the DSO?

We're hoping to get back into the high end of the range this quarter.

Okay, so dropping 2 or 3 days then?

Yes, somewhere in the mid-60s.

And our next question is coming from Tavis McCourt from Raymond James.

First, a bigger picture one for you, Robert. When you launch the new product lines, whether Unifi or AirVision or AirFiber, whatever's coming up next, to what degree do you think it's important to be able to expand the distribution beyond your core customers you have now versus you think there's enough room to run just with the market opportunity that exists with these customers buying these particular new product lines? And then I've got a follow-up financial one for John.

Okay, so my business philosophy is -- and engineering philosophy, everything I do is about leverage. So if you look at how we're architecting these new technology platforms, we're reusing what we've already developed and adding something new to it to apply it to a new market. And if you look at how we're creating addressable market, we're following a similar philosophy. So if you look at Unifi, for instance, so there was -- there's a lot of overlap between Unifi system integrators and AirMax wireless Internet service providers. And the overlap's not 100%, but it's significant. So right out of the gate, we got momentum with Unifi. And as we matured that product, we got a whole another independent group of addressable market. And if you look at AirVision, it's the same thing. So AirVision takes -- some Unifi guys will help on AirVision, and the AirVision product will also create new market in video surveillance system integrators. So everything is about leverage and expanding, using what we already have.

Understood. And I guess there's been some new satellite competition in Latin America for 2-way broadband Viasat and I think a couple of others are launching. Is that something that came up in any of your user groups? Does that create any new opportunities from equipment standpoint for you guys that your customers may need now?

I have not heard about the -- what you're talking about yet.

Yes, we've seen that in different -- in other markets -- competing technology in other markets. But what we find is that subscription price tends to be significantly higher than the subscription price being offered by our wisps [ph].

Yes, I would agree with that. I'm looking at the pricing right now. I just wondered if it created any equipment opportunities, but I guess we'll see. In terms of the gross margin, should we think about the new products launching at somewhat lower gross margin and then engineering costs out as time goes by? Or should we see -- or can you maintain it even with a growing percentage of new products as part of the mix over the next year?

So what we like to do is we like to disrupt markets, and cost is a big part of that. So to get momentum, we usually start off with lower gross margins. But over time, we like to expand those gross margins. So UniFi's an example of that. So we're introducing -- or we're going to start shipping this next quarter UniFi Pro, which is a lot more functionality. It's dual radio integrated, it's got gigabit Ethernet, it's got support for 802.3AF 48-volt POE switches, so it's a lot more functionality, but it's also much higher margin for us. And we're able to do that, and we have a lot of demand for that product because we already have the initial UniFi momentum. So I think the strategy of disrupting these markets, what you don't see at first is we see gross margin expansion in the long term once we build up momentum.

Makes sense. And then last question for you, John, how much of the cash right now is in the U.S. versus overseas? And how should we think about the timing of the remaining debt paydown?

So right now, roughly $12-ish million of the cash is in the U.S. That's like as of today. In terms of the debt paydown, the debt amortizes over 5 years with a monthly payment. Our preference clearly is to accelerate that, that's if the U.S. cash flows allow us to do that because we can only pay the debt with those cash flows, we will pay down quicker.

I would now like to turn the conference back to your host for any concluding remarks.

All right, I like to thank everyone, thank our Ubiquiti community and thank our shareholders that place their confidence in Ubiquiti and our unique business model. I want to again remind everyone of Ubiquiti's mission which is to bring industry-leading connectivity technology to the world in the most efficient way possible with platforms moving from the R&D lab to the end-users with minimum impedance. This efficiency allows us to provide disruptive high performance solutions to market that were previously underserved.

Thank you, all. Appreciate your attending.

Okay, ladies and gentlemen, this does conclude your conference. You may now disconnect, and have a great day.