Feb 7, 2013
Executives
Amy Feng - IR Robert J. Pera - CEO John Ritchie - CFO
Analysts
Matt Robison - Wunderlich Kip - Deutsche Bank Sanjit Singh - Wedbush Securities Tavis McCourt - Raymond James Chelsea Shi - UBS Brent Bracelin - Pacific Crest Eric Suppiger - JMP Securities
Operator
Good day, ladies and gentlemen, and welcome to your Ubiquiti Networks Q2 2013 Conference Call. [Operator Instructions] And now I would now like to introduce your host for today, Amy Feng, Ubiquiti Networks investor relations.
Amy Feng
Thank you, operator, and thank you everyone for joining us today. I am here today with Robert J.
Pera, founder, chief executive officer, and chairman of the board at Ubiquiti Networks; and John Ritchie, chief financial officer. Before we get started, let me review the Safe Harbor statement.
During the call, we will 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 can cause results to differ materially or cause materially 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, references will be made to non-GAAP financial measures. Information regarding a reconciliation of non-GAAP and GAAP measures can be found in the press release that was issued earlier this afternoon on our website at the Investor Relations section at www.ubnt.com.
Now let me turn the call over to Robert Pera, Ubiquiti Network's founder, CEO, and chairman.
Robert Pera
Thank you, Amy. I’d like to say I believe our financial results are encouraging, but more importantly I feel the highlights of this past quarter were our progress in building out a new infrastructure that makes us a stronger company overall moving forward.
Specifically, as we mentioned here earlier, we have set up our third party logistics center in China under our new operations leadership, which has led to significantly reduced lead times and improved shipping linearity. In combination with tighter receivables controls, we are starting to see the results, including our continued solid cash flow and significant reduction of days sales outstanding.
We have also seen solid results from our legal infrastructure investments. Our litigation strategy in multiple countries has significantly reduced counterfeiting activities as well as established a firm precedent to deter future counterfeiting activities against our brand and technology.
This, in combination our anti-counterfeiting manufacturing technology, now fully implemented across all of our product platforms, gives us confidence that we have much greater control over the counterfeiting problem moving forward. We have also developed and successfully executed on our intellectual property strategy by advancing our global trademark coverage, as well as filing more than 20 new patent applications since our general counsel came onboard March of last year.
In addition to our operations and legal infrastructure investments, we are looking next at strengthening our branding and financial infrastructure. With the hiring of David [Shea], formerly from WebEx and Cisco, as our chief marketing officer and our new, incoming CFO, we are committed to building the brand recognition and public image that are more reflective of Ubiquiti’s strength as a technology leader and marketplace disruptor in the communications technology industry.
In today’s ultra-fast, evolving technology world, I believe that the companies that are built to last are those that have an ability to adapt and reinvent themselves. For this reason, I believe Ubiquiti has a very bright future.
Just several years ago, we started as a radio module supplier. That evolved next to a wireless hardware company, and now to a full technology diversified software and systems company.
I believe this ability to evolve our technology, combined with our unique business model, which enables people and businesses around the world to take full advantage of the powerful transparency and social networking capabilities of the internet gives this company a great opportunity to scale. Now let’s turn it over for CFO commentary.
John Ritchie
Thanks, Robert, and thank you all for joining us on our second quarter fiscal 2013 guidance call. Before I go into the numbers in more detail, I’d like to highlight some significant milestones Ubiquiti achieved in the quarter.
We generated $26.8 million in cash flow from operations, continuing our string of very strong cash flow quarters. In fact, our cash flow from operations have exceeded our net income now for four sequential quarters, highlighting our very high quality of earnings.
And very importantly, our AirMax revenues were up 52% on a sequential basis, showing the strong return on investment we’ve been seeing and our increased legal expenses. Now, moving on to the results, for the quarter, revenues came in at $74.9 million, up 22% or up $13.4 million on a sequential basis and down 15% on a year over year basis.
The sequential increase in revenue was driven by the sharp rebound in our AirMax product line. Our non-GAAP net income for the quarter was $18.3 million, up 26% or up $4.8 million sequentially and down 26% on a year over year basis.
Our non-GAAP diluted EPS was $0.20 per share, up $0.05 per share on a sequential basis and down $0.07 per share on a year over year basis. Now going to revenue by category in more detail, starting with our proprietary AirMax platform.
Revenues for this platform came in at $48.8 million, up 52% or up $16.7 million from the $32.1 million recorded last quarter. AirMax revenues decreased 8% on a year over year basis.
AirMax revenues represented 65% of total revenues for the quarter, up from 52% in the previous quarter and up from 60%of total revenues from the year ago period. The new product category revenues came in at $11.9 million, down 24% on a sequential basis.
However, on a year over year basis, they were up a significant 182%, or up $7.7 million. The category represented 60% of total revenues for the quarter.
We believe the sequential decline in this category is related to the timing of shipments in the prior quarter. In the September quarter, the majority of shipments for this category occurred late in the period, depressing demand early in the December quarter.
During the quarter, we focused on the operational improvements Robert mentioned related to our shipment linearity. We saw significant improvements in this area in the December quarter, and those improvements are continuing in the current quarter.
The last component of our systems category is our other systems products. These products primarily consist of our non-AirMax outdoor wireless product line.
Revenues in this category contributed $4.8 million, up 28%, or up $1.1 million on a sequential basis. On a year over year basis, it’s down 74%.
Longer term, in this category we expect a steady decline as a percentage of revenue, as our customers continue to transition to our AirMax product lines. Revenues for the embedded radio category were $1.5 million, down $200,000 sequentially and down $1.1 million on a year over year basis.
As we’ve said previously in the last few earnings calls, this category is expected to decline in absolute terms going forward. In our last category, antennas/other, revenue was $7.9 million, down 6% sequentially and down 17% on a year over year basis.
Revenues in this category are driven largely by sales of nonintegrated standalone AirMax antennas and sales of brackets, cables, bolts, other miscellaneous accessory items. Our revenues here tend to fluctuate as a large percentage of these sales in this category are the aforementioned accessories and spare parts.
Now moving on to our geographic breakdown, North American revenues were $12.1 million, down 41% on a sequential basis, and down 44% on a year over year basis. North American revenues represented 16% of total revenues for the quarter.
We believe that the decline in this geography was a result of a few factors, including a decline in the previously mentioned new product category, which, for certain products, was skewed to the North American region, and also, as we’ve done in the past, we’ve proactively managed our credit exposure in North America, which limited sales in this region. Now moving on to South America, revenues in this geography were $17.1 million, up $6.8 million, or up 67% on a sequential basis, and down 30% on a year over year basis.
The improvement resulted in the rebounding AirMax business. We continue to see positive signs in South America including significant improvement in our credit exposure with continued improvement in the pace of payments that we’re seeing out of this region.
The South American region represented 23% of revenues for the quarter. The improvement in South America clearly indicates the effectiveness of our IP protection efforts.
Moving on to the EMEA region, which also reported very strong results, with revenues coming at $35.9 million, are up 55%, or up $12.8 million on a sequential basis, and up 18% on a year over year basis. The results were driven, again, by the sharp rebound in our AirMax sales.
This region, the EMEA region, represented a total of 48% of revenues for the quarter. And lastly, moving on to the Asia-Pac region, sales there were $9.8 million, up 26%, or up $2 million on a sequential basis, and down 17% on a year over year basis.
Now looking at the income statement, and in particular gross margin, our gross margins held steady at 40.8% on a sequential basis, despite the significant headwinds of contracting the number of contract manufacturers we use as well as the costs associated with setting up our third-party logistics hub in China. On a year over year basis, gross margins were down from 42.4%.
Our non-GAAP expenses came in at $9.6 million, up from $8.7 million, or up 10% on a sequential basis, and up from the $5.8 million we recorded in the year ago period. This was driven by SG&A spending related to legal matters and a modest increase in R&D spending.
The total non-GAAP opex as a percentage of revenue declined from 14.1% down to 12.8% for the quarter. Our non-GAAP operating expenses exclude the impact of stock based compensation, which was approximately $900,000 for the quarter.
Our non-GAAP operating margin showed improvement, moving up to 28%, an improvement over the 27% that we reported last quarter. And these improvements are obviously directly correlated to our improved revenue picture.
Our effective GAAP tax rate for the year to date came in at 13%, resulting in a catch up adjustment for Q2 which resulted in a Q2 rate of about 11%. We are currently anticipating that the 13% GAAP rate will hold for the balance of the year.
As a reminder, our rate is largely driven by the geographic revenue splits. Now turning to balance sheet, as I mentioned, versus cash quarter for us.
Cash flow from operations coming at $26.8 million. Our gross cash balances grew by $15.8 million to a total of $148.3 million for the quarter.
We expect to continue to generate significant free cash flows as we move forward. For the quarter, our net inventory balances were $14.6 million, up from $7.6 million in the prior quarter.
This expected increase was related to our plan to set up the distribution hub in China. We believe that the increased level of inventory has allowed us to reduce our lead times to customers, which will more closely align our sell-in with our distributions sell-through.
For the quarter, we saw significant improvements in our receivables, with absolute A/R declining $5 million to $55.9 million. This despite a 22% increase in revenues for the quarter.
We also saw significant improvement in our DSOs, which improved to 69 days from 91, an improvement of 22 days for the quarter. The DSO improvement is a direct result of the improved shipping linearity, which was one of the goals we had with setting up the Chinese distribution center.
Lastly, I’d like to provide an update on the status of our stock buyback program. As of December 31, we have repurchased 5.2 million shares, for approximately $54.4 million.
Now for the third quarter outlook, we’re expecting revenues in the range of $76 million to $84 million, and we’re expecting non-GAAP earnings in the range of $0.20 to $0.24. With that, I’ll turn it over to questions.
Operator
[Operator instructions.] We’ll take our first question from Matt Robison from Wunderlich.
Please go ahead.
Matt Robison - Wunderlich
John, can you talk a little bit about where you think channel inventory has gone and how it relates to your lead times at this point?
John Ritchie
We think channel inventory has improved. And I think one of the reasons it’s improved, one of the outcomes of the Chinese distribution hub, is much faster lead times.
So we’re at four weeks with the goal, clearly, of getting to better lead times. We’re also seeing indications with the significant improvements in the DSOs.
We think our DSOs are directly tied to our distributors’ financial health, which is directly tied to their ability to turn their inventory, and their inventory being at more manageable levels. And we’re also being much more proactive in terms of using credit terms and credit limits in limiting our exposure to any one distributor.
We don’t want to give them the credit limit to allow them to build excess inventory. So I think we’ve been very successful in all those areas.
And then the proof point that we’re having that success is basically the improvement you’re seeing in A/R and DSOs.
Matt Robison - Wunderlich
I had the impression that a year ago, even six months ago, distributors were stocking out three months. Do you think that destocking process has proceeded?
How far into that process do you think we are now? Adapted to the lead times.
John Ritchie
I think ultimately, to give a precise answer, Matt, is going to be impossible to give you. But we’ve clearly communicated to all of our customers the improved lead time.
They went through it last quarter. They saw that improved lead time.
They saw the improvements in our shipping linearity in the quarter. So I would say we’re more than halfway through it, maybe substantially more.
But we’re clearly not in the beginning phases of this transition.
Matt Robison - Wunderlich
And do you have any concentration with distributors like you once had?
John Ritchie
We had two customers that were greater than 10%. I believe we have one at 13% and one at 14%.
One of those is new to being head of the [unintelligible] table. But I think in general our concentration, when you look back at the year over year basis, our concentration is down.
Matt Robison - Wunderlich
You guys, on a portfolio basis, are kind of tracking pretty well here. But the internals are pretty volatile.
You talked about the new products and the geos. I guess first of all, is the new distributor particularly one that’s correlated with EMEA?
The new one that’s in the double digit percentage range?
John Ritchie
Let me be clear, that’s not a new distributor. It’s the first time that they’ve been at the high end of the [lead] table, but we’ve had this relationship for a while.
They’re in the EMEA region, that’s correct.
Matt Robison - Wunderlich
And how should we think about the end-market demand for the new platforms? Have you had, from at least a qualitative check, a pretty solid launch for AirFiber?
And yet we’ve got this sequential decline, which I guess you attribute to the U.S. And I would presume that that product is more U.S.
oriented, since the unlicensed spectrum it uses is a little different overseas. I know you don’t like to break out the different platforms, but just give us a little bit of a flavor for end-market demand for the major new platforms?
Robert Pera
Let’s start with AirFiber. AirFiber is very well received.
You can go to our forums. People are raving about it.
It’s a pretty unique product, because it operates in the 24 GHz unlicensed band. But a 24 GHz band is pretty clear, so it’s almost like a licensed band performing product.
And it’s the first product of its kind, in that it runs FDD, frequency division duplex, on the actual same spectrum. So it’s running 100 MHz spectrum, both with TX and RX channels simultaneously, through a really innovative antenna system.
So people love that product. And I think it has a bright future, but the launch wasn’t perfect.
So we had some quality issues in the launch we’re ironing out, and a lot of that has to do with the fact that we used mass production design and manufacturing and applying it to a 24 GHz microwave radio product, which I don’t think has been done before. So the future is really bright for that product.
But I don’t think you can conclude any kind of sequential performance right now indicative of the scalability of that product. I think the same goes for UniFi.
UniFi, if you look at our forums and other forums on the internet, UniFi is also scaling pretty nicely. I don’t think there’s anything really like it, which is a world-class enterprise, scalable wifi system at basically consumer price points.
And again, as our operations are going through a transition here, and so you’ll see our local market distribution is improving. Our A/R controls are getting tighter.
We’re doing much better on shipping linearity. So I think it’s very hard to draw conclusions on numbers on the new product platforms in the short term.
But over the long term, over the next several quarters, I believe the results will be very good.
Matt Robison - Wunderlich
While I’ve got you, you mentioned in terms of the CFO succession, it sounds like something’s imminent there. Did you mean to drop a hint there?
Can you provide us an update there? And also, related to UniFi, version 3 is due.
Has it happened yet?
Robert Pera
Yeah, UniFi 3.0 will be a big step, and UniFi will have several new technologies, including multi-site support. So now if you have UniFi networks, geographically located in various places in the world, now with 3.0 you can manage them all through a single unified control point.
So that’s going to be launching soon, sometime this quarter. As for the CFO search, we have it narrowed down to a couple of final candidates, and I think very soon you will see an announcement from us.
Operator
And we’ll take our next question from Brian Modoff from Deutsche Bank.
Kip - Deutsche Bank
Hi guys, it’s Kip on the line here. I just want to follow up on the CFO transition.
John, how long are you planning to stay on to make sure this transition runs smoothly? I thought that it would be maybe the end of this month?
Or end of March?
John Ritchie
The plan right now, what we’ve said publicly, is here through the end of February. But the success of Ubiquiti is very, very important to me personally, so whatever Robert and the board want to do in terms of helping with the transition.
It’s totally up to them. I’m very flexible.
Kip - Deutsche Bank
And then just going to new platforms. I know you guys said that was down, just because of a sense that you got a lot of orders at the end of last quarter.
I’m guessing that had a lot to do with AirFiber. It seems like there’s still delays on AirFiber.
You’ve got a couple week delay there. And then with Tough Switch, you’re looking three to four months out with the new Tough Switch platform.
I’m just wondering when some of the investments that you’ve made, when do you see them catching up in terms of the inventories actually reaching the end customer?
Robert Pera
Actually, Tough Switch has been on the market for a while. We have a few different flavors.
I think the one that’s been delayed is our Edge Max and Edge Router platform. So we have an edge router lite product, which is the first product in Edge Max, we just launched.
And we only have a couple thousand maybe out in the field. I think if you look at the history of Ubiquiti, we haven’t always gotten things smoothly or correct when we first launched them, the first time.
But I think the strength of us is we really listen to the community feedback. And we quickly evolve the product to match what our user base wants.
So If you look at AirMax, AirMax was really our third generation wireless product. We originally had a first product we called Power Station, and then the second generation was Nano Station, and then the third generation we rounded out as a system solutions platform with AirMax.
So you could kind of look at UniFi as it’s really on the first generation, and I feel like this year we’ll introduce a second generation of AirMax. But for all the other technology platforms, like Edge Max and Air Fiber, and mFi and Air vision, a lot of these are just starting to evolve.
Now, the good news is, across the board we’re on the first generation. And most of them will be at least at the second generation by the end of this year.
But I believe a couple of those platforms have even better potential than AirMax did. So I think just be patient, and we’re on the right path.
Kip - Deutsche Bank
In terms of what you were just saying, is the focus now to upgrade existing new platforms and upgrade AirMax, and to make sure that these products are getting smoothly to customers rather than launching more platforms throughout the year?
Robert Pera
We’re kind of like an R&D lab, an incubator, so we always have new things we’re working on. But I would say you’re right.
The past two years, the general theme was diversifying our technology and creating new platforms. I think for the next year, our focus will be on maximizing the potential of each platform.
And I think there’s a lot of potential, especially if you just look at how Air Fiber and UniFi is kicking off, just those two alone, not to mention the other three we have that are just about to take off.
Kip - Deutsche Bank
John, just in terms of North America, it was quite a bit of a drop-off, and I know you said that you’re managing credit exposure there. And also with the new products as well contributing to a slowdown there.
But I’m wondering if you’re feeling any sort of sense of saturation in the North American geography?
Robert Pera
Again, I don’t think we could really draw conclusions and market demand based on these sequential numbers, because we’re going through such a significant operational infrastructure transition. So I think we just kind of have to look at how the next few quarters play out before we can make any conclusions about demand.
But if you look at what’s available, and the internet’s very transparent, and our customers are very transparent, you can see that across the board and geographically, and across all our platforms, there seems to be at least very active and increased talk and praise about all our platforms.
Operator
And we’ll take our next question from Sanjit Singh from Wedbush Securities.
Sanjit Singh - Wedbush Securities
I wanted to talk a little bit about the guidance. And specifically on the recovery on AirMax.
How much of that was maybe pent up demand given some of the supply chain improvements you’ve made versus what is a pretty good [unintelligible]? Do you expect core AirMax to be the driver here, and new products still to take a while to ramp?
Robert Pera
Like I said, drawing conclusions on these last couple of quarters, and sequential trends, I think is very difficult, since we’re going through this huge business and operational infrastructure transition. And I will say, determining AirMax and its potential for how much scale it has left, it’s very tough to say.
I do believe it is growing. And I think as we move forward, if you look at all our new product platforms, I think that’s the real story of Ubiquiti.
We have three elements that I believe are very powerful in this company. The first is we disrupt on economics.
The second thing is we’re very good at designing complete systems, inside and out, software and hardware and user experience. And the third thing is we take advantage of the transparency of the internet and social networking to get this kind of community and evangelism effect.
And I think those three things together are very powerful. And those three things together, when you apply them to different industries, you could disrupt multiple industries.
So I think we’ve proven it through AirMax and the [unintelligible] market, but if you look at how UniFi is taking off, I think that’s a big potential area to disrupt. And the UniFi market, I believe, can be even larger than the addressable market for AirMax.
And next, we’ll have a new Air Vision. We’re revamping that platform, and the security market is a big market.
Routing and switching, with Edge Max, is another big market. Machine to machine networking is also, I believe, a huge market moving forward.
So I think if you’re looking at Ubiquiti as an investment, I think what I would like to highlight, and the reason why I’m a long term shareholder, is because of the unique business model and its ability to port and apply that business model to multiple industries, which we’re just in the beginning phases of doing.
Sanjit Singh - Wedbush Securities
In terms of the visibility going into the next quarter, what’s driving that visibility with your relatively solid guidance? Is it the improvement in lead times?
What’s giving you that confidence?
John Ritchie
First of all, we have our conference calls this late for a reason, so we have good visibility to the quarter. Irrespective of what the revenue guidance numbers have been, if you look at our revenue guidance, we’ve done a great job of attaining that since we’ve become a public company.
So I think in general we’ve had a very high degree of confidence in the numbers we’ve given on our call. Now, specifically, it’s the strength we’re seeing across the board, I think ultimately, which gives us the confidence in the guidance.
Operator
And we’ll take our next question from Tavis McCourt from Raymond James.
Tavis McCourt - Raymond James
The gross margins were flat quarter-over-quarter. And I’m wondering, as the revenues scale back, assuming they scale back, should we expect those gross margins to pick up?
In other words, this quarter, to what degree was it negatively impacted by some of the operational things you’re doing?
John Ritchie
We’re not going to break it down in terms of a percentage. But clearly there was cost associated with the consolidation of contract manufacturing, costs associated with moving to a third-party logistics center.
And some of those were one-time costs that are behind us. So there would be a bias toward improved margins, but that’s about as far as I think we’ll go in terms of projecting where gross margins could go.
Tavis McCourt - Raymond James
And in the prepared script, there was some talk about some success on some of the operational improvements you’ve made and that has led to the increased opex over the last couple of quarters. Where are we in that cycle?
Should we think about opex now growing kind of more coincident with revenues? Or are there still big step ups you have to do?
Robert Pera
I think if you look at the last quarter or two, we’ve made real significant investments in legal and operational infrastructure, more so than I ever thought we would have. And I think of the past year, what I learned being in this position as a public company CEO is we have to make these investments for the long term as we scale.
And I think what you’re seeing with these investments, they’re definitely not going to scale one to one with revenue. We made some pretty big investments up front that should serve us well as we scale.
So I think as a percentage of revenue growth, they’re going to decline significantly, assuming we can scale.
Tavis McCourt - Raymond James
And in terms of trying to measure where are you in the transition to lower lead times, inventories were up a lot this quarter, which is to be expected. Would you expect another tick up in inventories next quarter?
Or is that transition behind us as well.
Robert Pera
So here’s kind of the challenge, and what I’ve learned. Investing is all about visibility, and seeing how the company’s prospects look.
And I know everyone would like to see a sell-through model. And I myself would like to see a sell-through model.
But the problem is we’re dealing in these emerging markets, and we have kind of a grass roots channel, and distributors. And most of these guys, they don’t have sophisticated enough systems.
And we don’t take any returns for our sales agreements. So it’s impossible for us to go by a sell-through model.
So what we want to do, though, is we want to tighten the feedback as tightly as possible between our sell-in and sell-through. And what we concluded is the way we do this is we tighten up the A/R controls as much as we can, and we get the lead times down to as close to zero as we can.
So I think implementing this kind of inventory hub in Asia and greatly reducing the lead times is the key to getting us more visibility and making our investors more comfortable with the company. And I think we’ve done a great job with that, but you’re going to see inventory increase as we move to this model.
But it’s working, right? You can see the lead times are definitely down.
The DSOs are definitely down, and the cash flow looks good.
Tavis McCourt - Raymond James
That’s a great explanation. And final question is on the share buyback.
Can you remind us how much you have left on that? And where are you in terms of the drawdown of the line of credit?
Robert Pera
I’ll let John answer the specific amounts, what we have left. As for the motivation for share buybacks, as the biggest shareholder and a long term shareholder in the company, I believe the stock was incredibly undervalued.
So normally, I don’t believe in a share buyback. I think a company should put their capital to use, largely through acquisitions or investments in R&D, which we are doing.
But the price of the stock last quarter I felt was so undervalued that we owed it to the shareholders to proceed with the buyback. For the amounts that John can give you.
John Ritchie
Sure. We’ve completed about $55 million of our $100 million authorization, leaving $45 million to go.
And we have approximately $20 million left on our credit facilities.
Tavis McCourt - Raymond James
And how much of the cash is in the U.S. right now?
John Ritchie
Of the $100 million, about $7 million of that is in the U.S.
Operator
And we’ll take our next question from Amitabh Passi from UBS. Please go ahead.
Chelsea Shi - UBS
Thank you, this is actually Chelsea Shi on behalf of Amitabh. My question is kind of a follow up to clarify about the strength in EMEA.
Is that basically almost $30 million quarter-over-quarter growth mostly driven by one customer? Or is it kind of broad-based?
John Ritchie
Looking at the customer detail, it’s really not driven by one customer. And it’s not really driven by one country inside the EMEA region?
Our big countries in that continue to be the Czech Republic, Poland, UAE and Dubai, and they’ve been our big countries there. And they continue to be our big countries within those regions.
So nothing really exceptional there.
Chelsea Shi - UBS
Is there any kind of 10% customer distributors or maybe close to 10% customers or distributors there? Not specifically in EMEA, just global-wise?
John Ritchie
We have two customers… And we plan to file our Q tomorrow, so you’ll see more detail. But we’re in the mid-teens.
We have two distributors in the mid-teens, and we have a couple of distributors in the high single-digits, and it falls off after that.
Chelsea Shi - UBS
And also, in terms of the distribution center in China, just trying to understand, will you see the increase in labor costs in China? Basically, they’re trying to reset the benchmark early part of the year?
Would you say this will have some kind of impact to the gross margin going forward? or just more visible impact going forward?
Robert Pera
Yeah, I would say assuming our volume scales, the labor contribution, the manufacturing labor contribution, is not significant compared to the materials and costs leverage. So I don’t think that will impact operations costs.
Chelsea Shi - UBS
Could you remind us, in terms of percentage of COGS, how much of the COGS was composed of labor costs?
Robert Pera
I don’t think we’ve [set that down].
John Ritchie
It’s not particularly material for us.
Robert Pera
We pay our contact manufacturers - our two biggest ones are Foxconn and [Lidon], and their quotes to us, they have their own manufacturing labor that goes into those quotes. We don’t know what it is.
John Ritchie
And just to add to that, the labor that we add in the process, our operations team, the labor component is not particularly material.
Chelsea Shi - UBS
And also, lastly, for the mFi, just trying to understand where most of the traction came from so far, like what kind of applications or customer interest [unintelligible], and going forward, what would you expect meaningful profit contribution from mFi?
Robert Pera
mFi right now is just in its infancy. We did ship our first couple of products, which are the mPorts.
And we have our mPower devices. They’re going to start to ship this quarter.
We’ve also launched our cloud service for mFi. So if you go to mfi.ubnt.com, you could sign up for a free account.
You could register your devices, and you can control them virtually through the internet, no matter where you’re located, from any device. And so that’s in a beta program right now.
And we have a lot of enthusiasm around that platform. And I think some of the things you see in mFi can give you an indication where overall Ubiquiti is going as a company, the technology strategy for the future.
Operator
And we’ll take our next question from Brent Bracelin from Pacific Crest. Please go ahead.
Brent Bracelin - Pacific Crest
If I look at kind of North America and South America shipments, the last six months, it looks like those shipments basically are down about a third from where they were about a year ago, the first half of last fiscal year. As we think about anecdotal evidence of inventory, do you feel like inventory levels now, specifically in North America and South America, are at pretty low levels?
Any sign that you’re starting to hear some clamoring for product within those two markets? Any color there would be helpful.
Robert Pera
As I mentioned earlier, I think there’s several reasons for not being able to make conclusions based on recent quarter data, and those reasons include improved shipping linearity, improved A/R controls, better local market distribution in some areas, which have limited exports in other areas, and also our great progress in slowing down and deterring counterfeiting activities. So I would be hesitant to make any conclusions based on sequential data in the short term.
What I think is more indicative of the overall Ubiquiti demand is our customer base, who is completely transparent. You could look at our forum.
We have 150,000 members, hundreds of posts every day on our forum, as well as various forums in local languages internationally. And the overall consensus is AirMax demand is still very strong.
UniFi and AirFiber, people love those products. And there’s a lot of promise in our other platforms.
So I think over the next year or so, we can probably make stronger conclusions from financial results because we have our infrastructure much more in order.
Brent Bracelin - Pacific Crest
And then on the outlook, obviously your guidance, and now the second quarter of sequential growth here, as we think about kind of how you were able to drive sequential growth here, it sounds like it was largely driven by a large new distributor in Europe. As you think about growing sequentially again in the March quarter, do you think it’s going to be a little more diverse geographically?
Or do you think there could be still some lumpiness where you see one or two large distributors take some product? Or do you think it’s going to be a little more broad-based?
Trying to understand, as you think about growing sequentially here in the March quarter.
Robert Pera
I think you’ve got to look at the Ubiquiti sales model. We don’t rely on distributors to push our products.
Our whole sales is built on evangelism and pull from our customers. So we ship product into distribution, but the real people that are pulling the sales is actually the community and the customer base.
So I always look at customer response and activity to our products and platforms. I never look at which distributors are buying what, or dependency on which distributors.
I just don’t look at things that way in our sales model.
John Ritchie
One thing to clarify, it wasn’t a new distributor that we picked up. It was just a distributor that saw sequential improvement in their business that put them in the 10% category.
So it wasn’t a brand new distributor.
Brent Bracelin - Pacific Crest
And was that driven by a couple of large orders? Or do you think it was pretty broad-based in Europe, the strength of that one distributor was a broad-based driven recover?
John Ritchie
I’d say it was broad-based.
Brent Bracelin - Pacific Crest
And then last question, obviously you’ve had lots of issues around counterfeiters in the last six months. Hopefully it sounds like they’re becoming less of an issue.
Have you seen any changes in the competitive environment, specifically with [Cambien] and any other legitimate competitors that you would consider in the marketplace?
Robert Pera
I think not just AirMax, but all of our technology platforms follow a similar theme. So the first thing we do is disrupt on economics, the second thing, like I said, is we have great understanding of complete product design, from mechanical, ID, to firmware, to hardware and application software development.
It really completes system design. And usually, everything we do has some proprietary lock-in.
So if you look at AirMax, AirMax is our own protocol. Once operators start building out AirMax networks, they have to continue to use AirMax, right?
And the UniFi controller is proprietary, so once you have 50 devices in your controller, if you want to scale to thousands of devices, you have to stay with UniFi. And the same thing for AirVision and mFi.
And then the third thing we do is, like I said, we use this community approach and evangelism. And I think those three elements together work really well to give us a defensibility in the market.
And I always like to use the word “disruptive.” I think this model is very disruptive.
And you look at competitors, maybe like Cambien, and yeah, they could have a good solution, but they don’t necessarily have the evangelism aspects or the disruptive economics. And if you look at companies from Asia, yeah, they have low cost, and economics, but they don’t really understand the product side, nor do they have the community and the evangelism aspect.
So Ubiquiti’s strength is we have these three points. When used together they’re very powerful.
Operator
We’ll take our next question from Eric Suppiger from JMP Securities. Please go ahead.
Eric Suppiger - JMP Securities
First, just trying to get my hands around, with some of the changes you’re making in logistics, what is the timeframe in terms of when you’d be able to get your lead times down to a target level?
Robert Pera
I think this past quarter, our operational performance in terms of lead times was probably the best it’s been. And I think so far this quarter, it’s looking even better.
So I think this year, definitely. I think we should be at our targets for lead times, which is generally within four or five weeks.
Eric Suppiger - JMP Securities
On the counterfeit front, it sounds like that’s getting under control. Have you seen any evidence of it expanding in any areas?
Did you drop any distributors in the quarter? Or could that have been an issue in the Americas business?
Robert Pera
From what we know, the counterfeit activities, we always investigate, and we’re always looking for information. But we’re always limited to what we know, and what we know is that in North America there aren’t really any significant counterfeit incidents.
Most of it is in other parts of the world. And we’re making great progress in both Asia and the U.S.
in our litigation, and we have second hand information that our aggressive activities are actually deterring other counterfeiters from attempting to do these things. And I think moving forward, we can’t say we’ll 100% eliminate the counterfeit activities, but between our really aggressive litigation strategies, and our anti-counterfeit manufacturing technology for new platforms, I’m more confident than I’ve ever been that it should be a problem we have well under control long term.
Eric Suppiger - JMP Securities
And then in terms of the Americas, it was down. Was that in line with your expectations as you came into the quarter?
Robert Pera
No, like I said before, there’s a number of factors at work, including the tighter A/R controls, the shipping linearity, and the improved local market distribution, which has decreased exports in some markets, possibly the U.S. So I think it’s very difficult to make any conclusions based on those sequential numbers.
I think we have to really wait and see how the long term results over the next year play out now that our infrastructure has been vastly improved. And I think we’ll be in a better position to draw conclusions from financial results as this next year develops.
Operator
And I’m showing just one final question at the moment, from Matt Robison from Wunderlich. Please go ahead.
Matt Robison - Wunderlich
John, can you just tell me what the capex was, and how you expect that trend to be, and if there was a meaningful amount of incremental for setting up your warehouse in China?
John Ritchie
Capex for the quarter was not particularly meaningful. It was $1.1 million.
Matt Robison - Wunderlich
So that’s kind of the sustainable level then?
John Ritchie
Yeah, I think on a quarterly basis, that’s probably a little on the high side, but if you’re modeling, it’s a good a number as any.
Operator
And I’m showing no further questions in the queue at this time. I’d like to turn the conference back to your hosts for any concluding remarks.
Robert Pera
Thanks guys. So I’d just like to reiterate that I believe Ubiquiti’s strengths are our incredibly skilled R&D team, our understanding of how to engineer great products, our disruptive economics, and our ability to engage the community to evangelize our products.
And I believe long term we’re in a great position to disrupt future markets, and I believe this company has a bright future.