May 9, 2013
Executives
Amy Feng Robert J. Pera - Founder, Chairman and Chief Executive Officer Craig Foster - Chief Financial Officer
Analysts
Matthew S. Robison - Wunderlich Securities Inc., Research Division Tavis C.
McCourt - Raymond James & Associates, Inc., Research Division Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division Ameet Prabhu - RBC Capital Markets, LLC, Research Division Sanjit Singh - Wedbush Securities Inc., Research Division Amitabh Passi - UBS Investment Bank, Research Division Kip Clifton - Deutsche Bank AG, Research Division
Operator
Good day, ladies and gentlemen, and welcome to the Ubiquiti Networks Q3 2013 Conference Call. [Operator Instructions] I would now like to turn the call over to your host, Amy Feng, in Investor Relations.
Please go ahead.
Amy Feng
Thank you, operator, and thank you, everyone, for joining us today. I am here with Robert J.
Pera, founder, Chief Executive Officer and Chairman of the Board at Ubiquiti Networks; and Craig L. Foster, 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 could cause results to differ materially or cause a materially adverse effect on results. Please refer to the risk factors discussed in our SEC filings in 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 this afternoon on our website at the Investor Relations section at www.ubnt.com. Now, let me turn the call over to Robert J.
Pera, Ubiquiti's founder, CEO and Chairman.
Robert J. Pera
Thanks for joining the call. I believe we are at an important inflection point of the company.
While we have always shown strong fundamentals driven by our innovative approach to R&D, a unique business model and an ability to identify new market opportunities, only recently have we significantly upgraded our governing infrastructure, which has positioned us to be a much stronger public company. Specifically, I have taken initiatives to overhaul our leadership in the areas of finance, legals, operations and corporate marketing.
And the results are just beginning to show. We have successfully deferred and limited counterfeit thefts activities through an aggressive global litigation strategy.
In parallel, we have implemented sophisticated anti-theft manufacturing technology and significantly expanded our global intellectual property filings. As we return to stronger growth rates, we have been doing so with far more operational and financial discipline.
With better sales tracking, along with an established inventory hub, improved logistics strategies and tighter credit controls, both our day sales outstanding and product lead times are at historic lows. Now moving forward, my hope is that the unique strength of this company starts to be widely and clearly understood.
Specifically, I believe Ubiquiti's business model and R&D approach are the most disruptive forces in the advanced networking industry today. Contrary to traditional thought, customers today are not being rewarded with value.
Instead, they are unknowingly propping up outdated and inefficient systems, filled with bloated executive sales and marketing teams and supporting distributors, value added retailers and integrators to push overly complicated and inferior solutions, which in aggregate, make up a value drain of tens of billions of dollars per years. Ubiquiti is only starting to expose these incredible efficiencies -- inefficiencies.
Through our focus on killer product design, disruptive economics and promoting transparent user community-based sales, we believe our business model is just in the very early stages of creating a paradigm shift in how advanced networking solutions are designed and marketed on a global scale. As traditional networking companies experience the down cycle because of weak enterprise spending, service, provider capital slowdown and geographic challenges, Ubiquiti's product demand continues to grow right through it.
I'd like to now hand over the call to our new CFO, Craig Foster, who in a short time, has brought phenomenal leadership and discipline to our financial team. And I believe the results speak for themselves.
Craig Foster
All right. Thanks, Robert.
As everybody knows on the call, this is my first quarter as CFO of Ubiquiti. And I can just say at this point, it's exceeded absolutely every expectation I had going into the position.
And I'm very proud to be part of what I would consider a technology insurgence. Before I go on to the numbers, into detail, I'd like to highlight some of the financial milestones we achieved this quarter.
We achieved record low DSOs of 42 days, which, as we've discussed in the past, is really a proxy for the health of our distribution channel. We produced 25% net income margins, both on a GAAP and non-GAAP basis, which is a testament to the leverage over differentiated business model.
We recorded our second consecutive quarter of double-digit growth. And finally, our AirMax revenues, which is our primary product, were up 14% on a sequential basis, which now marks 3 consecutive quarters of increasing AirMax sales.
Our financial performance continues to rebound as we quickly move past the operational challenges we faced in the last year. We're approaching the financial metrics we achieved prior to counterfeiting and our result shows a strong quarter-over-quarter growth.
However, most of our results show a decline in year-over-year basis. Moving on to our results for the third quarter.
As you can see from our press release of about an hour ago, our revenues were $83.2 million, up 11% quarter-over-quarter. The sequential revenue increase was driven by the continued rebound of our AirMax product line and growing traction of our WiLan unified platform.
Our non-GAAP and net income for the quarter followed a very similar pattern. Let's take a look at the revenue by category.
For AirMax, we were up 14% for the quarter. And AirMax represents about 67% of our revenues.
Our new platforms category, our revenues were $11.8 million, which is flat on a sequential basis, and represented about 14% of revenues for the quarter. The UniFi product line saw accelerating demand on a worldwide basis, while the remainder of the platforms in the new platforms category was subject to the changing product mix within the quarter.
The last component of our systems category is Other System products. These primarily consist of non-airMax outdoor wireless product line.
And as we've stated in prior quarters, we continue to expect the steady decline in this category as a percentage of revenue, as our customers continue to transition to our AirMax product line. We also expect revenues for the legacy Embedded radio category to decline on absolute terms as we move forward, especially from this quarter's $1.7 million.
Moving into our last category, Antennas/other. Revenue in this category was up 26% sequentially on a quarter-over-quarter basis.
Revenues in this category are driven largely by the sale of nonintegrated stand-alone AirMax antennas and the sales of brackets, cables and other miscellaneous accessories. Given that a large percentage of the sales in this category are accessories and spare parts, we expect that the revenues will continue to be lumpy and highly unpredictable.
From -- I'd like to move on to a geographic breakdown. Our North American revenues were up 74% on a sequential basis and represented approximately 25% of total revenue for the quarter.
We believe the strength seen in our North American revenue was a result of a few factors, which include better management of our North American channel, increased market awareness of our core products and a market shift towards products that display a higher price to performance characteristics. Moving to South America.
Revenues were up 8% sequentially and down year-over-year. The revenue increase from South America was driven by the continued rebound in our AirMax business.
As we have mentioned over the last few quarters, we have significantly less credit exposure in this region. The South American region represented about 22% of revenues for the quarter.
The EMEA region declined this quarter with revenues of $31.6 million, down 12% sequentially. We believe the decline is a result of a timing of planned shipments into the region.
We do not believe that there is any systematic weakness in the demand for our products within EMEA. Sales in EMEA represented about 38% of revenues for the quarter.
And lastly, moving to Asia-Pacific region. Sales were up 23% quarter-over-quarter.
Moving on to margins. And we'll start with the gross margins.
Our non-GAAP gross margins improved 200 basis points and is consistent with the margin levels that we saw prior to the counterfeiting issues. Looking at the expense line, our non-GAAP operating expenses were up 19% on a sequential basis.
This was driven by SG&A spending related to legal matters, which is consistent with what we talked about in the last quarter or two, and increased headcount in R&D. Non-GAAP operating margins came in at 29%, up 100 basis points from the 28% of last quarter.
They're down from a year ago. Improvement in operating margins was primarily driven by a change in the product mix.
Now moving on to the last item in the P&L, is our effective GAAP tax rate for the fiscal year. We've adjusted from 13% to 12.2%.
The cumulative impact of this change resulted in a tax rate of approximately 11% for the third quarter. And as a reminder, our rate is largely driven by the composition of revenue by geography.
Turning to the balance sheet. We had another quarter of very healthy cash generation.
Cash flows from operations were $35.2 million and our gross cash balances were $33.4 million, to total $181.7 million for the quarter. As we've noted in the past, we expect to continue to generate significant free cash flow, with the majority of that cash being generated and held outside the U.S.
We've also, as Robert mentioned, have been revamping our disposition strategy. And I think the results tell that it's working.
We saw a meaningful improvement in our day sales outstanding for the quarter. For the third quarter we achieved record DSOs of 42 days, a dramatic improvement from the 69 days from the prior quarter.
The DSO improvement is a direct result of our improved shipping linearity and distribution channel. For the quarter, our net inventory balances were $19.4 million, up from $14.6 million in the prior quarter.
The expected increase was related to our continued deployment of a distribution hub in China. We believe that inventory level has allowed us to significantly reduce lead times to our customers, which in turn, more closely aligns our sell-in with our distributor sell-through.
We implemented a number of account receivables controls during the quarter and we'll continue to improve credit and collection procedures. For the quarter, we saw a vast improvement in our accounts receivable, with AR decreasing 31% or $17.5 million, to $38.4 million from the prior quarter, despite an 11% sequential increase in revenues.
Lastly, I'd like to provide an update on the status of our buyback program. We did not repurchase any additional shares during the quarter ended March 31, 2013.
And we still have approximately $45.6 million of our authorized -- authorization available for further repurchases. Lastly, I'd like to talk about our guidance for and our outlook for the next quarter.
Our outlook is based on -- is a direct result of our strong global demand that we see in the service provider and enterprise markets and as a result of the operational improvements we've implemented. We expect revenues to be in the range of $90 million to $96 million and non-GAAP diluted earnings in the range of $0.26 to $0.29 per share.
And with that, I'll open it up for questions.
Operator
[Operator Instructions] Our first question comes from Matt Robison with Wunderlich Securities.
Matthew S. Robison - Wunderlich Securities Inc., Research Division
Can you talk a little bit more about the new platforms? You've had a -- some pretty dramatic expansion in those product lines and some pretty strong feedback from the field on several of them and some, I guess, some recent versions that have come out that were subsequent to the March quarter.
So maybe that's part of the story. But seeing such a strong performance in North America and the flat, sequential performance in new products seems like kind of -- that seems odd, frankly.
Craig Foster
Yes, thanks, Matt. For the new products, I wouldn't read it much into the sequential numbers.
What I like to look at is the customer traction, I follow our community, I followed a lot of the other sites on the Internet. And what I can say is, new products, especially UniFi, they're just starting to get kind of a critical mass.
So I'm confident, over the course of the next several quarters, you're going to see a significant growth in them.
Matthew S. Robison - Wunderlich Securities Inc., Research Division
Was AirFiber a meaningful aspect to the ASP increase implied by Craig's comments?
Craig Foster
I think what you'll see with AirFiber is our first product is just kind of scratching the surface of AirFiber's potential. So when you look at AirFiber, it's a platform, I wouldn't look at it just as a 24 gigahertz product.
We've purpose-built a completely new radio technology, which we can port to a number of different products and applications. And I think you'll see us get huge leverage from that R&D investment in the next year.
And that product line will round out and we'll see a significant increase in overall AirFiber demand. But it's just at a very early stages right now.
Robert J. Pera
And Matt, you need to -- I think you know this, but when you have a distribution channel like ours, there is a component of initial stocking. It happens in the channel.
So when we release a new product, we have instant turn-on-the-faucet-type demand. And then it takes a couple of quarters to kind of get steady-state growth.
But the first quarter that we launch a new product, and for AirFiber that was a little bit over 2 quarters ago, it'll take a little bit of time to find out, to understand the steady-state and gain traction within the channel.
Craig Foster
Some of these guys, they do pilot-type of deployments, right? And they wait to see how those go and then they place larger orders once their pilots go up.
Matthew S. Robison - Wunderlich Securities Inc., Research Division
Yes. It makes sense.
And so what's your sense of the channel inventory at this point?
Robert J. Pera
So we spend a lot of time working on what exactly the channel's heard. And from the reporting that we get from the channel, we're actually at record loads.
And I think that, that the testament to that is clearly that DSOs for the quarter. Which we've always determined is really the proxy for the health of the channel.
And so people are prepaying, people are paying on time and they're ordering more.
Matthew S. Robison - Wunderlich Securities Inc., Research Division
And so in a guidance, do we think in terms of a little shift in mix, or is it just a continued wave of AirMax that's driving the sequential growth?
Craig Foster
I think it's going to be a combination of the product mix. I mean, we have -- UniFi continues to grow at well past any what would -- can be considered a kind of the industry-standard all over the world.
And we continue to get traction with the other products, so we have, I think that you'll see improvement on the new products line in the next -- over the next couple of quarters.
Matthew S. Robison - Wunderlich Securities Inc., Research Division
That's great. Before I let you go, can you provide CapEx and depreciation, so we can come up with free cash flow in EBITDA?
Craig Foster
Yes. So CapEx for the quarter, we've kind of modeled it out at about between $500,000 and $750,000.
And the depreciation, I now have to look it up, but I'll call it in a minute.
Matthew S. Robison - Wunderlich Securities Inc., Research Division
Okay. So the actual CapEx for the March quarter would be in the middle there, or is that just what we should look for going forward?
Craig Foster
Yes. I think that's kind of steady-state, in the middle there.
Operator
The next question comes from Tavis McCourt with Raymond James.
Tavis C. McCourt - Raymond James & Associates, Inc., Research Division
I was wondering, in terms of the guidance for June revenues, you've had kind of the new platforms business, kind of being in a broad range but broadly flat for the last 4 quarters. Do you expect for that to keep -- to start trending up, breaking out of this range?
Or is there still kind of so many moving parts, as you described earlier, Craig, in terms of digesting previous launches?
Craig Foster
Well, I think that we're expecting it to go up. I think it's really a function of -- there's a lot of moving parts, unfortunately, from your perspective of what's happening in the space, what's happening in the category.
UniFi will continue to grow, as I said, faster than expected, or at least faster than the market rate for the next quarter, at least. AirFiber, looking at what we're seeing for the near future, we think that, that is going to continue to expand.
We're relaunching our AirVision product in the next quarter or so. And so we've kind of -- that product has been kind of gone down to -- let's say we're not really -- we're not actively pushing in the channel right now.
So I think that you'll see, I think you'll continue to see that product line, the category grow as a whole.
Tavis C. McCourt - Raymond James & Associates, Inc., Research Division
Secondly on the AirMax products. Obviously, back to a nice growth trajectory on that.
A lot of what we see, obviously, is probably impacted by digesting of channel inventory over the last several quarters. But from your guy's perspective, maybe taking the view of one of your distributors, what do you think the growth rate of the industry is?
And is there still share gains for AirMax to take within the industry, or do you think that the majority of the wireless ISPs globally now are on the AirMax platform?
Robert J. Pera
I'll answer that. It's more of a complicated analysis.
Before Ubiquiti, AirMax existed, there wasn't really much of a fixed broadband wireless service provider market. We've kind of created and driven this industry.
And we've shipped well over 10 million devices out there. So when you look at a number like 10 million and these are going on top of roofs, home and office, roofs around the world, every probably minute of every day, right?
Those are big numbers. But if you step back and you look at the U.S.
population, 7 billion and it's growing, it's a tiny fraction. And what I think is the biggest opportunity in our market is, if you ask somebody just on the street, if they've heard of, say something like DirecTV, everyone knows what DirecTV is, everyone knows it's a television, broadcast technology you can get, where it isn't all [ph] that solution.
But if you ask somebody, do you know what Ubiquiti is, do you know what a wireless IP is? No one knows.
There's no awareness for our markets. And I think, as we evolve the solution and round it out and get it better and even more cost effective, the other focus is on building awareness.
And I think if we could build awareness, there's huge growth potential for AirMax.
Operator
Our next question comes from Brent Bracelin with Pacific Crest Securities.
Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division
I guess, Craig, first question I wanted to touch base with you is on the record low DSOs. I mean, how are you thinking about kind of channel inventory, managing, what's out there?
I mean, should we anticipate DSOs to go down further, should we expect DSOs to start to go up? How are you kind of managing that going forward.
And has there have been kind of a change of philosophy on what the appropriate DSO number you'd like to manage the business at?
Craig Foster
Yes. I think that's a great question.
So kind of the first thing that I tackled when I started was we need to get our handle and we need to be very aggressive about how we're going to manage DSOs going forward. So that's a combination of operational improvements, in terms of when we're shipping things in the quarter.
And we've talked quite a bit about kind of shipping linearity and how that effects our DSOs. And then changing our collection policies and our credit policies to better match the -- what we think the credit profiles of our customers are.
So my predecessor had guidance of, I believe, 55 to 65 days of DSOs. Now we've only implemented and working on the DSOs for 1 quarter.
So it's a little bit early to guess what the steady-state will be. But I think it will be below where the guidance was given before.
Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division
Okay. That's helpful color.
And then, as you think about kind of the China hub inventory, obviously, that makes sense, it's going up. What's been the response to -- from some of the distributors relative to having that flexibility with you taking out some inventory, are you considering adding an inventory hub in kind of U.S.
or South America?
Robert J. Pera
Well, I think -- okay, so there's a couple of things there. One, the behavior in the channel has changed, actually, quite a bit, because we've implemented this third-party logistics hub.
And what it's done is, before we were shipping directly from the CMs and the CMs were working off of different lead times and it created -- when we're shipping people wireless ISP ecosystem, ISP ecosystem, and the radios show up in 2 weeks and the antennas show up in 6 weeks, it creates a lot of problems on the other end. As well as just having long lead times, the ordering behavior is not in the best interest of Ubiquiti.
So what was happening was, people were making large orders and then working through their inventory, making a huge order on a quarterly basis. Because we've changed it, because we've been able to lower our lead times through the 3PL arrangement, we've cut lead times more, pretty much in half and there's still some room for operational improvement.
So I think that what we're seeing in the channel is that people are making more incremental, smaller orders. But on the aggregate, because they have confidence that we're going to be able to deliver a product in a reasonable amount of time, it actually has created a lot of, what I'd call consumptions moving.
Robert J. Pera
I'll add to that. Since I've been CEO of a public company up for about a year, I've set a tone now for the team.
And we're very different. We don't have huge sales and marketing guys with milestones and numbers and discounts in the channel and all those complex things to kind of financially engineer and forecast business.
What we have is, we have a phenomenal business with great demand. And so what we want to do -- it's very tough for us to recognize sell-through, obviously, because the sophistication isn't there for a lot of our channels.
But what I want to do is lower the lead times, as close to 0 as possible, tighten up the DSOs. And make sure whatever we report correlates as accurately as possible to the actual demand, right?
And we've never discounted a product in the history of Ubiquiti. We'll never do that.
We don't have sales teams, right? We have a very disruptive product and we make killer technology.
And but my goal is to make sure whatever we report is as close to 100% correlated with demand. Now if we have an up quarter or a down quarter, that's going to be up to the business.
And that's my job, to make sure demand's always going up and we hit the right markets and we grow. But we always want to make sure that we're just accurately reflecting demand in all our reporting, moving forward.
Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division
Helpful. And then shifting gears to kind of gross margin, obviously, nice little uptick this quarter, but you did have a little mix shift to the accessories, kind of other product line.
As we think about kind of the margins on AirMax, I know you've added some anti-piracy kind of technology there, what's the kind of gross margins on AirMax? Is that still above the corporate average and as we think about the AirMax mix potentially mixing up this quarter, in June, could you also see a healthy lift in the overall gross margin?
How should we think about gross margin trends there?
Robert J. Pera
So my hope is, as the Ubiquiti brand name gets more, say, goodwill and larger credibility for being a technology leader in the market, it will present us opportunities to make higher-end, higher-margin products. You starting to see this, right?
Products like AirFiber, products like UniFi, 11ac, these are products that do have much higher margins and they're still disruptively priced. And so my goal is, as our economies of scale continue to increase, as Ubiquiti's brand recognition as a technology leader continues to increase, my hope is we see some leverage in gross margins.
But we'll never be a company that tries to extract profitability from customers. We'll never make them pay millions of dollars in support, in service fees and create complicated solutions that require training and specialized consultants.
Our mission is to pass value onto the customer, not extract profitability. That's the big difference between us and everyone else out there.
Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division
Very helpful. My last question's really around kind of seasonality of business.
Obviously, we're kind of entering the fiscal year-end. As we think about modeling the September quarter, last year, obviously, it was down sequentially, pretty meaningful, obviously, for other reasons.
But as we think about kind of modeling purposes, how should we think about September? We should -- should we assume some summer seasonality and the business could be down, potentially sequentially, or is it just too early to say at this point?
Craig Foster
Well, so we've taken a look at this historically and it's a little bit hard to model seasonality when you're kind of in high-growth mode. But if you think about the core of our business, we have people that are -- a lot of our business happens when people are climbing up on towers and installing devices.
And there is a little bit of that, that's weather-related. But we operate, kind of -- we're all over the world and we're above and below the equator, so we kind of see that as pretty much an offsetting effect.
So and we're not really a part of the general IT U.S. buying cycle either.
So it's kind of like, I think, we're a little bit insulated from a lot of the kind of secular trends that might affect what we call seasonality.
Operator
Our next question comes from Mark Sue with RBC Capital Markets.
Ameet Prabhu - RBC Capital Markets, LLC, Research Division
This is Ameet Prabhu calling on behalf of Mark Sue. Just to follow up on the seasonality thing.
So just in terms of, just trying to understand some of the drivers behind the results in guidance, especially in the environment and, I guess, a lot of alludes to the fact that here you don't see a lot of the secular trends that you mention. But just in terms of a competitive environment, could you maybe address how the competitive environment is out there right now?
Robert J. Pera
I'll take it. I don't see specific competitors.
What I see is, we're kind of -- we represent in -- Matt from Wunderlich, I believe, in his words, we're an insurgence. So our competitor is the traditional system, the dated system which I talked about, which has -- revolves around relationships and salespeople, marketing, high paid executives, working with distributors and value-added resellers, engineering, overcomplex, overcomplicated to learn inferior technology and extracting profitability from the end customer.
And as you see, with the Internet and bringing transparency and social networking and you see technologies, networking technologies, once exotic, now commoditized and understood by a lot of -- commonly understood by people, I think Ubiquiti is in an excellent position to expose all these inefficiencies and kind of act as a paradigm shift to this whole market. And if you see some of the competitor companies in the market, they've all had down quarters.
Well, we're -- the future looks brighter than ever for us. We're going right through it.
And if you look at a product like UniFi, we're shipping hundreds of thousands of UniFi IPs, we'll, sometime pretty soon, we'll get to a millionth UniFi IP. That product has -- in my mind, it's superior to anything else out there.
But it's $50. There's no licensing.
There's no support. There's any of those -- none of those fees.
Now if we sell $1 million worth of UniFi products and, say, we take market share, we're taking $10 million plus in market share from a competitor, potentially. So to answer your question, we're competing against a system, a clearly inefficient system.
And I think nobody really sees us yet. It's very, very obvious to me.
Over the next few years we're going to prove it. Move it up.
Ameet Prabhu - RBC Capital Markets, LLC, Research Division
And just in terms of -- by the UniFi, were you referring to UniFi 3? And just in terms of what the response has been to that.
Robert J. Pera
Well, I think the numbers speak for themselves, right? Like we put together a very small team, a very talented R&D team.
I was involved in crafting and marketing and designing a lot of that hardware. And in just a couple of years, what is it, nearly 4% of the wireless LAN market, enterprise wireless end market, we did that without a single salesperson.
And here's the thing you have to understand about UniFi. So I came up with that name a couple -- a few years back, when we launched it.
And you look at the trends in the enterprise networking market and people talk about cloud, people talk about software-defined networking, where you have all these different appliances and you want a unified virtual control point, right? Well that's what UniFi, that's what I called it UniFi.
It's a play on the word Wi-Fi. But it's -- the vision behind that product is to have unified device management over all kinds of geographic, diverse locations, in all kinds of networking devices, over one control plan, at disruptive economics, supported by a community evangelism.
So I think that's -- watch out for UniFi in the next couple of years. I think the developments will be interesting.
Operator
Our next question comes from Sanjit Singh with Wedbush Securities.
Sanjit Singh - Wedbush Securities Inc., Research Division
I wanted to get the -- some insight onto the OpEx. Robert, you mentioned you boosted the infrastructure of the company.
How much more is there to go? And I wanted to ask a follow-on to Robert's comments about kind of evangelizing Ubiquiti.
What are the tools and strategies to get to build the brand? If you could just follow-up on those 2 items, that would be great.
Robert J. Pera
Okay. So infrastructure, over the course of the past year, I've had to learn on the fly this whole public markets thing.
So I pretty much built my own team now, right? We have Craig, CFO, we have Jessica in Legal, Sandy Ro is in Operations.
Recently we've brought in David Hsieh, Chief Marketing Officer. So that's pretty much the team that was built in the past year.
And I think the results kind of speak for themselves. Everybody's on the same page.
We've kind of locked things down. Our IP is in a good -- our IP filings, our intellectual property strategy, is in a good place.
We've got a handle on this counterfeit nonsense. You've seen Craig, he's done a phenomenal job, both in understanding the sales tracking and implementing controls that should've been implemented in the first place.
So I think we've kind of plugged all the holes. Now if we want to take the company to the next level, on the next level of scale, we're going to have to start looking at the future.
So I think we've caught up, now we got to shift from reactive to kind of a predictive mindset, right? And try to put in place what we need moving forward.
What is the second part of your question? Evangelism?
Sanjit Singh - Wedbush Securities Inc., Research Division
Yes. How are we going to build the brand?
You mentioned, you're giving us an example of DirecTV and how they have good brand rec. What are you thinking in terms of developing the brand, given that you are a sales force light company?
Robert J. Pera
Right, right, right. So I got a couple of good tricks up my sleeve but I can't tell you about them now, for competitive advantage reasons.
But I think it's 2 or 3 quarters away. I think you'll like it.
Sanjit Singh - Wedbush Securities Inc., Research Division
Great. And then a follow-up for Craig.
Craig, on the gross margins, we've been talking about it for -- there's been a couple of questions on it. But the mix shift, could you give us more color on that, like what specific products for driving the higher gross margin this quarter.
And just your view on the sustainability of gross margins.
Craig Foster
Yes. So we are subject to -- we have, in the kind of the history or the way that the products have been developed traditionally, I'll give you just a 2-second history.
Generally, as you know, we price all of our products very disruptively. And then let's take the case of UniFi.
We came out with UniFi and then we created the Unifi Pro and then we created a UniFi Outdoor and now we have the UniFi AC product. And what you'll see as we continue to innovate and create new products in those lines, in general, what you'll see is that there's a shift to higher-margin products.
And that's part of streamlining the development and the economies of scale and understanding the opportunity to cut out costs while providing more functionality. And so I think you'll see that across all of our product lines as a general trend, is that as we continue to introduced new products and they gain traction, you'll see that the margins will continue to increase.
Okay. There was a question earlier about depreciation.
It was $510 million for the quarter.
Operator
Our next question comes from Amitabh Passi with UBS.
Amitabh Passi - UBS Investment Bank, Research Division
I guess I just I wanted to follow-up on that last point, Craig, on gross margins. How should we think about leverage on the OpEx -- sorry, on operating margin line?
Do think you'll continue to invest more in the OpEx front, both from a SG&A and a R&D perspective, or as margins continue to expand at the gross margin level, that you'll see a reasonable drop through?
Craig Foster
Well, I think there's going to be, clearly, there's going to be leverage. We'll start with the SG&A line, right?
So we know that there's going to be leverage as we move past some of the legal expenses that we're currently involved in. So we know that there's kind of a steady-state, that's much -- several points lower than where we are today.
And that will continue to decrease to kind of what we gave this guidance quite a while back, which was kind of the 3 to 4% over the long-term model. In the case of R&D, I -- Robert kind of said it best, it's like we're going to continue to invest in R&D to help accelerate some of the projects that we have undergoing in some of the opportunities that we think that we see in the market.
So I think, I would say, over the next couple of quarters, that you could see our R&D spend increase. We're going to add heads and you may -- we'll probably add up to 5% to 10% of our headcount in R&D.
We'll increase. But we think that the leverage you get out of -- the return you get of the R&D function is astronomical.
So it's an incredible investment for us.
Amitabh Passi - UBS Investment Bank, Research Division
And I just wanted to follow up on the DSO commentary as well. I recognize you said that you'll probably be targeting a level below the 55 to 60.
But I wanted to clarify, as you move into next quarter, do you anticipate an increase in DSOs from the levels you're at? Or do you think you'll hold them steady at this level, or even drop them further?
Craig Foster
Wow. We worked so hard to get to 42.
I thought we were killing it. Look, I think that as orders increase and as our -- and you saw our guidance of 90 to 96, as you continue to see our orders increase, a lot of those orders are coming from credit customers.
And the terms vary from 15 days net to 60 plus days net. So it's kind of a mixed bag.
I think our -- operationally, our goals are to try to keep the DSOs as low as possible. But again, I only have one quarter of operating data on kind of a new direction of our AR and our operational improvements.
But I think that we can do better than the guidance that was given in maybe 2 or 3 quarters ago.
Amitabh Passi - UBS Investment Bank, Research Division
Okay. Yes.
I wasn't trying to take anything away from the accomplishment. I was just trying to get a sense in terms of, as we think about cash flow.
Just on South America. Where do you think we are with respect to when business sort of normalizes there relative to where you were a year ago?
And would that have any bearing on your DSOs, as the international mix grows, is that a factor we ought to think about?
Craig Foster
Well, I think on the DSO and Other front, I think that our credit -- half of our customers are on a prepaid basis or close to. And for our credit customers, obviously, they're the larger end of the customers.
So I think that in terms of the DSOs and the mix in terms of regions, I don't think it'll have a material impact on what our DSOs look, going forward. Because our -- I think it's pretty normalized across all regions in terms of how people are paying in their behavior.
Amitabh Passi - UBS Investment Bank, Research Division
Got it. And Robert, just for you, one, on the AirMax strength.
Are you able to give us any metric in terms of where the strength is coming from? Is it within your existing customer base, any metrics in terms of how many new customers you've added?
I'm just trying to get a sense of the breadth of the strength that you're seeing in AirMax, how much of it is from your existing customers versus new customers as you expand your footprint.
Robert J. Pera
I would say it's a combination of existing customers and new customers. You can go to our community, our forum, everything's transparent.
All the customers talk. You could see what's going on.
Amitabh Passi - UBS Investment Bank, Research Division
And then the strength you're seeing right now, is it related to any big bills, or again, would you say it's broad-based?
Robert J. Pera
No. Our service provider carrier market, it plays very different from traditional play.
So there's been tons of service provider companies in the Wireless access and the Edge and the same movie plays over and over, right? You have guys like AirSpin and Alverian and Dragonwave and Carragon and Proxend and Navi at Network.
And it all starts up great, with a lot of hype, they get a big carrier customer and as they have a technology, whether it's mesh or whether it's WiMAX or whether it's cellular offload. And they think they have this explosive growth and this huge leverage in the future.
But when you're dealing with carriers, they dictate what you make. They dictate your gross margins in the end, right?
Because you're -- they want you focused on standards and commodity technology, so they can put vendors against each other. SG&A doesn't have leverage.
You pick up one carrier, to go after another carrier, you got to spend again. And worse, the sales don't have any leverage.
You sell to one carrier, they brand it under their network, nobody knows about it. So inevitably, in my strong opinion, these companies, they kind of converge to a pressure gross margin business with very high SG&As and as they scale, they're not profitable.
Ubiquiti takes a very different approach to service providers and carriers. So collectively, we have tens of thousands of these operators.
But by making this kind of community evangelism effect, we have basically unlimited leverage. As it kind of viral markets and supports itself, our SG&A is pretty much fixed and we have unlimited leverage.
And since it's our own technology, we're not focused on a standard, we have a great lock-in effect.
Operator
Our next question comes with Brian Modoff with Deutsche Bank.
Kip Clifton - Deutsche Bank AG, Research Division
This is Kip Clifton filling in for Brian. I guess firstly, I'm just trying to figure out, because there were a bunch of stock-outs with NanoBridge throughout the quarter.
And so I'm wondering, Craig, in terms of the consumption smoothing, how are you balancing this without hurting growth? Because it seems like they were pretty consistent stock-outs throughout the quarter and so I'm wondering how much that affected it and how much this moderation you see going forward.
Because as good as North America was, it almost seems like it could have been better, had the products been in the channel.
Craig Foster
Sounds like you've been doing your homework. Yes.
I think, look, the inventory, so we track very closely on a -- almost on a distributor-by-distributor basis, what their holding cycle is for our products. And what we've seen in kind of the last quarter, in the last 2 quarters, really, is there's been an acceleration of those numbers getting lower in terms of what they have from lead times.
So something that we're working on is -- working on very hard in the current quarter, is to try to work better, work a little bit closer with our distributors and make sure that we have regional supply. Because I think in the past, orders come in and then we were just working as hard as we could to get them out in an orderly fashion as quickly as possible, on an as-needed basis, because we have such a high demand for certain product lines.
And so we're working very hard to kind of understand and make sure that product is available within the region. And so part of that is kind of the ebbs and flows of what you see just on a regional basis for us.
It's like every quarter for us in the past has been 3 regions up, 1 region down. 3 regions up, 1 -- and there's no rhyme or reason why one particular region might be up or down.
So that's something that we're actively engaged in working on for the current quarter. And I think that we'll see some improvements.
Now the problem is, is that as fast as we get the things out, there's -- sometimes these things sit on a boat and sometimes it takes 3 to 4 weeks to get from port to port. And so what we see is, a lot of these things when there are stock-outs it's really product in transition.
So as we continue to lower lead times, I think we'll alleviate a lot of that.
Kip Clifton - Deutsche Bank AG, Research Division
Robert, just with AirFiber, it seems like that some of the feedback has been around the traffic visibility. What are you doing to improve that within that product?
Robert J. Pera
I'm sorry, the feedback has been in the what?
Kip Clifton - Deutsche Bank AG, Research Division
The traffic visibility, in the sense that it's very hard to discern what is actually happening, compared to competitive products. Like when you set the links up, it's hard to know what exactly is happening with the flow of traffic.
Robert J. Pera
I don't know what that means.
Kip Clifton - Deutsche Bank AG, Research Division
Okay. So compared to, if you just set up a P2P link and you could figure out what was actually happening with the traffic flow, it's hard to discern that with AirFiber, has been our feedback from this.
And so I'm just wondering what you guys are doing to improve that.
Robert J. Pera
What is traffic? I have no idea what that means.
Kip Clifton - Deutsche Bank AG, Research Division
Okay. Well, then, I'll move on to the next question then.
Just quickly in terms of the cash held in North America. How much cash do you guys have onshore?
Craig Foster
$11 million, a little over $11 million.
Kip Clifton - Deutsche Bank AG, Research Division
Okay. And then the tax rate for the upcoming quarter?
Craig Foster
It would be normalized at about 12.5%.
Kip Clifton - Deutsche Bank AG, Research Division
12.5%?
Craig Foster
Yes.
Operator
Our next question comes from Matt Robison with Wunderlich Securities.
Matthew S. Robison - Wunderlich Securities Inc., Research Division
Just a couple of housekeeping items. But before that, debt payback, I heard the answer to the U.S.
cash. What -- do we have any thinking there of what -- how we're going to go about that?
Or given that, I see you've got to pay it back with U.S. money.
Craig Foster
Are you talking about the long-term or for the -- I mean they're several years out. So I think one is a term loan and one is a revolver.
For the term loan, we'll continue to make the payments, just like we did this quarter. And I think if you see our -- as our business continues to grow, because we generate so much cash, we're well above any risk area of not being able to pay this in the future.
And if something was to -- there's always opportunities to refinance, et cetera, et cetera. So we feel like it's not even really top of mind at this point, because we're generating so much money.
Matthew S. Robison - Wunderlich Securities Inc., Research Division
Yes. A fair answer.
And obviously, you could -- you can repatriate if you absolutely had to, I suppose, and pay that -- take the tax hit to do it. So you're just going to let it ride until it's convenient, it sounds like.
Craig Foster
I think for the time being, that's a safe assumption.
Matthew S. Robison - Wunderlich Securities Inc., Research Division
And just a headcount and 10% customers, if any, or...
Craig Foster
Yes. So we have -- for the quarter, we ended with 170 people in the company.
Matthew S. Robison - Wunderlich Securities Inc., Research Division
That's up 15, right?
Craig Foster
And -- what's that?
Matthew S. Robison - Wunderlich Securities Inc., Research Division
Up 15, is that right?
Craig Foster
I believe so. And your second question was?
Matthew S. Robison - Wunderlich Securities Inc., Research Division
10% customers, if any?
Craig Foster
Oh, we have one 10% customer in South America.
Matthew S. Robison - Wunderlich Securities Inc., Research Division
I presume that's a distributor?
Craig Foster
That is correct.
Operator
This concludes our Q&A session. I'll pass it back to Robert Pera, CEO, for closing remarks.
Robert J. Pera
Thanks for joining. Looking forward to the next quarter.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This call has concluded.
You may all disconnect.