Ubiquiti Inc.

Thank you, operator, and thank you for joining us, everyone. I have here with me today Robert J.

Pera, Founder and Chief Executive Officer; 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 facts, including but not limited to, our strategy, estimates, projections of revenue and EPS. Forward-looking statements are statements of risks and uncertainties that could cause the result 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 the reconciliation of the non-GAAP and GAAP measures can be found in the press release that was issued this afternoon or on our website, on the IR section at www.ubnt.com.

Now, let me turn the call over to Robert J. Pera, Ubiquiti's Founder.

Robert?

Thanks for joining us. We are pleased with the quarter's results.

95% year-over-year revenue growth and 145% year-over-year earnings-per-share growth. I'll discuss some highlights of the quarter.

Our margin profile exceeded our long-term goal which demonstrates the profitability leveraged in our model. We saw greater diversity in our revenue mix this quarter, which is one of our long-term objectives as we add additional platforms.

We saw growth in our other systems category driven from customers using our legacy gear and continuing to expand older networks. This should not be surprising given the long product cycles of our products.

We continue to believe that our total addressable market for airMAX is best defined by weighing the number of global households that do not yet have fixed broadband access. Market research pegs this number at approximately 1 billion homes globally.

We also are benefiting from government and emerging markets funding the build out of 6 broadband wireless solutions. For example, in Thailand, the state-owned telecommunications operator which operates fixed broadband products to homes and businesses deployed a 100% airMAX network in less than 6 months, covering over 25,000 subscribers.

Their stated goal is to now expand their network to another 50,000 subscribers over more than 50,000 square kilometers.

In Q2, our new platform, UniFi and AirVision, contributed approximately $4.2 million in revenues for the quarter. The end markets for these products are seeing the values and having a fully featured enterprise wireless line solution and a fully featured IP video surveillance system at price points that were previously unavailable to them.

The order backlog for each of these platforms continues to grow significantly.

With the initial quarter of AirVision revenue behind us, our goal is to slowly ramp production while listening closely to early adopters feedback from our community for professional product and product improvement. It is this controlled ramping of production combined with real-time feedback from our loyal user community that allows our model to scale and is a key factor in our long-term success.

A new revolutionary radio platform will be introduced at our Ubiquiti World Conference in Chicago on March 23. Although the show is still about 2 months away, we have already booked a record number of attendees, making this our largest conference ever.

I wanted to briefly review how we think about new markets and connect to these technology platforms. In developing new platforms, we look for opportunities that have similar characteristics to the outdoor broadband wireless market we saw when creating airMAX, specifically structured market that have many small players and do not have a dominant integrated application to specific platforms.

We attack these opportunities leveraging our powerful management software and combined with disruptive price performance hardware. We then work with our user communities to further involve platforms for advanced features and reliability.

Now turning to our user community. It continues to grow as evident by our 115,000 members now just on our own official form.

Our ability to help new operators become profitable entrepreneurs attract the unique user to our community. One who has a vested interest in helping accelerate the development and improvement of our technology.

This relationship is mutually beneficial so we view it is a key factor in our success.

I'll now turn the call over to John Ritchie to go through the quarter in more detail.

Thanks, Robert, and thanks again, everyone, for joining us for on our second quarter conference call. I'll jump quickly to our results.

We saw a strongly continued growth in our second quarter revenues, they came in up 95% or up $42.7 million to $87.8 million, up from $45.1 million in the same period in the prior year. The increase in revenue was primarily driven by 103% increase in our Systems Products revenue, as well as 118% increase in our Antenna/Other category.

On a sequential basis, revenues increased 11% or up $8.7 million, from the $79.2 million we recorded in the September quarter. And from an EPS perspective, our EPS numbers went up from 11% -- $0.11 in the year-ago period to $0.27 today, and the current quarter, up 145%.

Our GAAP net income was $24.7 million and our non-GAAP net income for the quarter was $24.9 million.

But before I go through the quarter in more detail -- more revenue detail, I want to highlight some key milestones we achieved during the quarter. We again exceeded the high end of our long-term operating margin goal of 32% to 34%, with operating margins coming in at approximately 36% for the quarter.

Our operating margin goal still remains at 32% to 34% over the long term.

We just completed our seventh straight quarter of improved gross margins. Our new platforms, UniFi and AirVision, combined contribute $4.2 million in revenue for the quarter.

The successful launch of AirVision marks another step with our long-term objective of being recognized as a broad-based telecommunications technology provider.

And moving to the revenue in more detail. I want to give you -- remind you of the categories that we currently report our revenue in.

We have 2 line items in our Systems category. AirMax and our Other Systems.

Included with thinner Other Systems category are our new products, specifically AirVision and UniFi. The 2 remaining categories, are Embedded Radios and lastly, our Antenna/Other category.

As a reminder, the Antenna/Other category primarily consists of non-integrated airMAX antennas and to a lesser extent, spare parts and other accessories, such as cables, mounting brackets, et cetera.

Note that once a new product or new platform reaches a significant revenue level, we'll break that up that separately much as we've done with the airMAX product line.

Now diving a little deeper into each category, starting with our proprietary airMAX platform. Revenues came in at $52.9 million, up 106%, or up $27.3 million from the $25.6 million recognized in the same period last year.

On a sequential basis, airMAX revenues increased 6% or $3.1 million from the $49.8 million recognized in the September quarter.

Our Other Systems category, which includes our legacy BGM products, as well as revenue from our UniFi and AirVision platforms. These revenues contributed $22.5 million for the quarter, up 96% and up $11 million from the same period last year.

On a sequential basis, Other Systems increased 45%, or were up $7 million from the $15.5 million reported in the September quarter. A large component of both the year-over-year and sequential growth was from the sales of these newer platforms.

Moving forward, we expect this category -- we expect modest gains in this category, with UniFi and AirVision growth being offset by slower growth than the BGM product lines.

Revenues for our Embedded products, our original product line, were $2.6 million, down $700,000 sequentially and $900,000 on a year-over-year basis. Moving forward, we expect this category to account for a contracting percentage of our overall revenues.

During the quarter, our Antenna/Other category, revenues came in at $9.8 million, up 118% and up $5.3 million from the $4.5 million revenue recognized in the same period last year. On a sequential basis, revenue in this category was down approximately $800,000.

Again, revenue in this category is driven largely by sale of nonintegrated standalone airMAX antennas.

Now moving on to the breakdown of our revenues. North America revenues were $21.4 million, up 54% sequentially and down 14% -- up 54% on a year-over-year basis and down 14% on a sequential basis.

The sequential decline which related to a North American distributor, who is transitioning from a single SKU that could be shipped across the globe on a worldwide basis, to SKUs that are only shippable in the U.S. This contributed to higher inventory levels at this particular distributor.

As we move forward, we expect to return to our historic geographical revenue split with North America comprising roughly 30% of our total revenues.

South America revenues increased 22% sequentially, and 169% on a year-over-year basis to a total of $24.3 million. This region continues to benefit from government spending on infrastructure build out, focusing on increasing Internet access for the population.

Moving now to EMEA. Revenues here also increased 22% on a sequential basis and 59% on a year-over-year basis for a total of $30.4 million.

Revenue for this region is largely concentrated with distributors in Eastern Europe, and to a lesser extent, the Middle East, with minimal exposure to Western Europe and some of the current difficulties in the Western European economies.

And lastly, our smallest region, Asia Pac/rest of the world, those revenues increased 23% sequentially and 280% on a year-over-year basis.

Now move on to our gross margins. Our gross margins were up on a year-over-year basis 250 basis points, growing from 40% to 42.5%.

This gross margin improvement was primarily driven by increased supply chain management, and to a lesser extent, the scale we benefit from with increased revenues. Sequentially, gross margins were up 80 basis points from 41.7% in the September quarter.

Again, as we mentioned before, this is our seventh consecutive quarter of gross margin improvement, very pleased with those results.

Now moving on to our non-GAAP expenses. They came in at $5.8 million, up from $5.2 million, or up 12% on a sequential basis, and up from $4.1 million, or up 40% on a year-over-year basis, deflecting our focus on increased R&D spend as well as expanding our infrastructure.

As a reminder, our non-GAAP operating expenses exclude the impacts of stock-based compensation expense.

Though our expense levels are relatively low, we continue to aggressively pursue and hire the most talented engineers we can find in any location globally. As such, we continue to expect our R&D expenses to move up on an absolute basis.

In addition, we also expect to continue building out our infrastructures, so we expect to see some increase in SG&A as well.

As you saw on the press release, our non-GAAP operating margins are ahead of our long-range model of 32% to 34%. Operating margins came in at a record 36%, compared to 31% in the prior year, and up from 35% sequentially.

The primary driver of this sizable improvement in operating margins was a relatively modest increase in OpEx, coupled with significant revenue growth. As I mentioned last quarter, over the long haul, we expect operating margins in the 32% to 34% range, which leaves us room to grow our R&D expenses in both absolute terms, as well as percentage of revenue terms.

Specific to the third quarter, we're expecting margins -- operating margins to come in at approximately 35%, still ahead of our long-term model.

Now moving onto below the operating income line. We have approximately $300,000 of expense for the quarter.

This shift in interest expense is primarily related to our outstanding $35 million loan agreement with EastWest Bank. At today's interest rates, we expect expenses to remain in this $300,000 k [ph] level for the March quarter.

Now the last item on our P&L, the effective tax rate for December quarter was 20%, and as a reminder, the primary driver of our effective tax rate is the geographical mix of products. Assuming a return to this geographical mix of 70/30, 70 being non-North American sales, we expect that 20% effective rate to continue.

Moving on to the balance sheet. In the second quarter, our cash balances grew $12.3 million.

As a reminder, the proceeds from our IPO were $30.5 million and we recognized that during the quarter. In addition, in the quarter, we also reduced our expanding debt by $35.5 million.

This $35.5 million reduction is related to the payoff over the $34 million balance of our convertible notes, and the reduction in the principle of our EastWest loan of about $1.5 million. We expect to generate -- as we move forward, we expect to continue to generate significant free cash with the majority of the cash generation occurring outside the U.S.

For the quarter, our inventory balance was $9 million, an increase of about $600,000 compared to the prior quarter. The vast majority of our inventory is raw materials in the form of chipsets and we hold very little in the way of finished goods inventory.

Moving on to the accounts receivable levels. Accounts receivable increased $13.3 million to $61.4 million from $48.1 million at the end of the last quarter.

The increase was partially driven by an approximately $8.7 million increase in revenues on a sequential basis and shipping linearity in the quarter when compared to the prior quarter. Our DSO decreased to 64 days from 65 days in the same quarter last year.

On a sequential basis, they increased from 56 days. DSOs remain within our targeted range of mid-50 to mid-60 day levels.

Looking forward to the third quarter, our outlook, we currently expect revenues in the range of $89 million to $91 million, representing a 74% to 76% year-over-year growth. And we expect non-GAAP EPS coming in at $0.27 to $0.28.

Now with that, we'll turn it over to the operator for questions.

A couple of questions. One, can you talk a little bit about the North American distributor, kind of the change in product selection?

A little more detail on that. And you said did you expect North America's percent of your revenues to return to around 30% in the following quarter?

So this is John, speaking. So not the following quarter.

We expect that it will take a couple of quarters, at least a couple of quarters to get back. On the specific SKUs, I'll give you kind of a high-level non-technical answer.

We shipped SKUs that were user definable in terms of where they could -- how they could be set. Now we have switched from only shipping SKUs in the U.S.

that can be defined for the U.S. market.

I'll let Robert shed some more light on that.

So previously, we shipped international product with the end operator with select a country code and it would give them a list of the frequencies that could be used or approved for that country. The U.S., the FCC implement new rules that require wireless devices to be locked to only the U.S.

country code and the U.S. SPG frequencies.

So from last year, we implemented a new set of SKUs that were locked for the U.S. country code, only for the U.S.

So, I think what John is talking about is our distributors who shipped internationally and also sell within the U.S. now have to stock 2 sets of SKUs: 1 for international shipment and 1 for sale within the U.S.

Okay. And then, second question around the new products.

Obviously, you said $4.2 million of your revenues in that category were the new products, can you kind of break them out a little more? And then talk about what you expect to see sequentially, particularly for AirVision.

And then can you give us a little bit -- you've got a new product launch coming up, I think, in about a month, can you talk a little more about that as well?

So we're going to break that into 2 pieces. Robert will talk about the announcement around the conference.

In terms of new products, moving forward, we're going to combine and give a single number for the new product category and not get any more granular than that. But ultimately, I think the question is where do we -- let me kind of define the question, what do we see in terms of growth?

We expect that category to move up next quarter and we expect all the component to move up individually. So we expect UniFi to be greater than UniFi was this quarter and we expect AirVision to be greater than AirVision was this quarter.

Any quantification of what you mean by greater?

No. We're not -- we're going to stay away from giving revenue guidance in the 4 line items that we report the revenue in.

And then the question on the new product, Robert.

Great. So we're going to launch a new platform at our show in Chicago on March 23.

I can't really say much more than we already shared, but we'll share every single detail at the show and officially launch the platform.

Okay. Well, maybe you can kind of talk a little bit about what you're seeing in obviously, AirVision, what the product that you got a lot of feedback from your customer base on the terms of can you add a camera to Wi-Fi?

What else are you getting a lot of feedback from the customer on? Can you do this for us?

Can you maybe talk along those lines?

Well, everything is out on the forum. There's hundred of messages every day.

So kind of the key is to take the user feedback and filter which ones has a large adjustable market, which once we can do efficiently, leveraging our core IP. And then which ones are appropriate for how we sell, which is the -- we use a user commit -- community to rally the marketing and share between the customers.

So I think we're always looking for new platforms, but we're not just going to do anything. It's got to fit into our strengths.

John, quick first question for you here. It looks like DSO is kind of creeped up a little bit, 8 days sequentially.

Can you talk a little bit about linearity in the quarter and kind of backlog pipeline, kind of going into the March quarter?

Sure. So, very specifically, if I compare the linearity in the 2 quarters, the change in linearity cost is about 3 days in DSOs.

And that relates to our fulfillment capabilities, not necessarily the spillage [ph] or the -- how we receive the orders themselves. So it's all about order fulfillment, we controlled it.

We should do a better job going forward. But that linearity wasn't based on the receipt of orders, because we had those orders in hand.

It was based -- the slippage on linearity was based on our ability to facilitate the orders. Now in terms of the backlog as it is today, we are telling our customers, 8 to 10 weeks lead time.

Most of our customers are within that. And we base our guidance based on that, but I can't give you any more granularity than that.

Okay, that's helpful. And then I guess I want to just follow-up on the North American distributor.

Clearly, North America was strong in the September quarter, up about 13% sequentially, did the North American distributor add inventory in September and then now they have this inventory they need to work down based now on 2 SKUs versus 1 SKU? And is that what cause the sequential decline in North American potential headwind in the March and potentially, June quarters, is that the right way to think about it?

Or I'm just trying to understand if the inventory build occurred in September and now you're seeing the slowdown in December.

So it occurred between the September quarter and the current quarter. But I think the thing to keep in mind, it wasn't a matter of just going from 1 SKU to 2 SKUs.

It was a matter of -- and I think this is factual. It was a matter of our SKUs doubling.

So if they were carrying 50 SKUs, they're now carrying 100 SKUs. And that's what gave them the inventory issue.

Okay. I'll follow up off my own that [ph].

And then I guess my last question, outside of North America, Asia Pac look like that's on fire, South America really strong, what countries in Asia Pac and South America kind of drove the upside? And then obviously, if you look at product lines, is that still largely airMAX only or you're starting to see some international orders for UniFi and AirVision?

I think -- I'll answer the last question first. We're seeing international orders across the board for all the product line.

And in terms of the big hitters in each of the regions, they're consistent with the prior quarter with the exception of Asia. India, India moved up this quarter, but the other big hitters in Latin America remain Brazil, Paraguay, Argentina, those are the big countries down there.

John, just trying to understand the guidance for the March quarter. You had quite a few quarters of sequential double-digit growth, it seems like you're now guiding to 2.5%, at the midpoint of your range for the March quarter.

Just trying to understand the puts and takes, I mean, why the extended deceleration that you're guiding to?

Well, I think we're looking at it as -- notwithstanding your point on the sequential numbers, I think we're guiding 74% to 76% on a year-over-year basis. I think that's significant growth.

On a sequential basis, I think as we move forward, and if you look at our long-term models, 25% to 28%, revenue will eventually slow down when we start to approach those levels and again, that's the long-term guidance. I think we're looking at the quarter, we expect to see the new products improve.

We expect to see airMAX show strength. We expect to slow down on some of the older products.

So we look at the guidance, especially relative to the consensus numbers out there, is very bullish.

And then maybe I could just clarify, in the Other Systems, particularly the older products, what drove the tremendous strength, I don't know if you're putting your rocket GPS products in this category -- just trying to understand sort of the uptake. And then, do you expect this entire category to be down sequentially from December to March?

So what drove that was very specifically a large direct customer we have in India who was expanding their network. I think I touched on that when I touched on India being up from a geographic standpoint.

And the rocket products are indeed included. The rocket products are included in the Other Systems category.

Did I get all your questions?

Yes, I think you did. And then just finally, maybe for Robert.

I think the last earnings call , you talked about probably 4 new products in calendar year '12, are you still on track? Is there a chance that you could introduce more than 4?

Just maybe an update in terms of your new product roll-out plans?

Yes, I think we're on track for what we said last call, which was to have everything out. We talked about by the end of this calendar year.

Can you give any color on your customer breakout of 10% customers or a combination of some of your largest customers of the combined over 10%?

So from the distributor standpoint, we have 2 or 3 distributors that are over 10%, but from an end-user basis, we think that's the beauty of this model is we have low customer concentration below that. So I think unlike most of the other players in the telecom space, we don't have anywhere near that level of customer concentration.

Our best guess is less than 0.5%, somewhere between 1% and 0.5%, and that's only an estimate. Even the large rollout that was mentioned in Robert's prepared remarks, even that large rollout probably represents less than 1% of revenue spread.

Is it true, John, that those 2 or 3 large distributors represent about 1/3 of the business or has there been a change in the concentration?

Our top 2 or 3 distributors bounce between 25% and 35% of revenue.

On the -- you said the linearity issue, you had some fulfillment, I guess, issues you're grappling with, was that related to the new products, the AirVision product? Or is that older product that you're having some issues?

So I wouldn't confuse my comments about how we chose the facility orders, but that's fairly having issues. We're scheduling multiple CMs with multiple product lines.

They will ship [ph] the products on a linearity basis. In terms of shipping linearity we have a difference 1 quarter to another.

Literally, that's why we gave a range, I think we've been very clear that what we define is a healthy range for DSOs of mid-50s to mid-60s, but when we said that, we've mentioned that the variability within that range could be related to linearity, hence the reason we brought it up. But please don't take that as we have problems.

That wasn't the point of bringing that up.

You've called out the contribution of UniFi and the AirVision of $4.2 million, do both those product still seem to have as big -- a wide open opportunity or has the reception in the marketplace -- or is it not yet widely available amongst your distributors? Maybe you can just give some color on how you think those new products are moving out.

Sure. So I'll go first because I look at it from a bookings perspective, but Robert has a much better sense of the -- how the end users.

As our products are very well received, the level of excitement around those products, and you could see yourself by looking at the community, is exceeding our expectations. I'll let Robert add more color.

Well, I think, yes, if you search on the Internet about Ubiquiti UniFi, everybody loves that product. And so we're in the phases right now of just adding more features to it, getting it more stable.

And then what you'll see in subsequent quarters is we'll start introducing a higher price, more advanced products. And I think you'll see a lot more revenue growth in the future.

And AirVision is very similar. So AirVision, we launched, it has issues, we're attacking and we're improving it every day.

But the early adopters, a lot of them love it. So both of those platforms, we're excited about.

They have a lot of potential. And they're very analogous to where we started with airMAX.

So when we started, we first attack the broadband wireless market, we went through several quarters before we kind of understood it and mastered development. And that kind of coincided with our airMAX launch which was really our second generation system, and it's a call from there.

So I kind of see UniFi and AirVision as -- we're kind of this first generation mode right now. And I think UniFi, in a couple of quarters, you'll see it mature quite a bit, and AirVision will be right behind it.

Backlog continues to grow. I mean again, from a financial performance standpoint, these products are performing very well.

Just one last question, Robert. The new radio platform that you said you're going to introduce in mid to late March, would that be an upgrade for existing Ubiquiti customers, as well as new deployments or would it -- it's not necessarily addressed to upgrade existing equipment?

I think the majority will be new independent revenue. It's going to be a very, very high end.

It's going to be our highest-end product we have ever brought to market.

So a couple of questions here. One is on UniFi and AirVision, I did a lot of checks.

Throughout the quarter, it seemed like it was kind of tight, tough to get products throughout the quarter. First, I just want to check and make sure I'm right with that assessment.

And second, to get the sense that you'll see sequential growth. Is there a supply-chain or just a production issue that you're having trouble keeping up with demand, or how should I look at that?

And then I got some others.

I'll take that one. So with the momentum the Ubiquiti name has globally in these emerging markets, almost anything we launch is going to have huge demand.

So with AirVision and UniFi, we've kind of purposely limited production because we want to work with early adopters and we want to get the product to stable as possible and add as many features as we can. I think with UniFi, we'll release the range a little bit, so you should see more revenue growth with that one.

AirVision, we're still holding it -- we're still little tight with production because of some issues I want to see worked out before we let it go.

I think the key things to remember is we have a model, and this is -- we're applying the same model to these products as we roll them out. So UniFi, we have a successful model with airMAX.

The same process we went through in rolling out airMAX we did UniFi and we're doing with AirVision. So it's all about replicating the model that works.

Okay, great. And in terms of the uptick in gross margin, you've seen 7 sequential quarters.

Any of that -- any of your products, is there any mix-related benefit that you're seeing, perhaps the older systems versus airMAX or the UniFi products, or is it really purely [ph] the gross margins pretty standard across the board?

So we're not seeing any significant switch in mix. It's not driving it.

Right now, what's driving it is the procurement team that's executing very well. I mean, the one other thing, it was a tweak in the prepared remarks -- in the prepared script, is prior to this quarter, we've talked about the benefits of scale and the benefits of significant revenue growth, driving gross margin improvement.

This quarter, we saw a switch from it being scale to it just being much more aggressive on the procurement side.

Okay. Got you.

And then the next question is on inventory level at your distributors. I think we understand what happened here in the U.S., that makes a lot of sense.

Do you track inventory levels in a broader -- on a broader scale? And could you talk about where you might have low levels of inventory or higher levels of inventory geographically?

So we -- with several distributors, we get some inventory reporting. Our RevRec is in selling [ph] so we don't have standard inventory reporting from our distributors.

Although, we even put in place a new agreements that we're going to be able to more pushy in terms of getting that information from them as we go forward. The -- as we said before, cash collection, credit where someone stands in terms of their absolute AR levels and DSOs are the healthiest indicator.

So if you're going to step back and look at the expression of DSOs you've seen in the last quarter, those are more extended in North America and it's, I think, the reasons we just described. I think the rest of the world using those indicators are using DSOs and AR levels as an indication of health.

The rest of the world seems to be in okay shape.

Okay, good. Is there -- do you have a metric -- I mean, do you have a sense, is there, on average, a month of inventory in a broad-based or 1/2 month or where do you see them standing out there where you have the checks?

So keep in mind, at any given point of time, there's 30 days worth of material on the water. Our customers own the product, act [ph] in Hong Kong.

So at a minimum, there's 4 weeks and they could be up to 4 weeks in the consumer shelf. So roughly, 8 weeks of inventory.

Okay. Got you.

Yes, that's consistent. And then, finally, I'm going to try on this product announcement to user conference.

I guess, you're talking about it being a high-end product. Robert, anything else you can give us?

Is it -- I'm assuming this product, it's a new radio, is it going to be part of your airMAX overall line? Or anything you can say there Robert would be helpful.

So it's an independent platform. It's not airMAX.

We send out a newsletter to all the members that had a picture on it, which kind of hinted that a bit. And I think that's all we could share.

But everything -- we'll go through everything at the show, even introduce people of the team that created it.

Mark got most of my fun product questions, I guess. So mine are kind of mundane now.

You probably made a case [ph] for a facilities expansion, so I was wondering if you can talk a little bit about that, your headcount, where your headcount plans are? And then John, if you could maybe give us what the operating cash flow and free cash flow is?

So let's start with headcount. Headcount went from 102 heads to 118 heads, the vast majority of that increase being R&D.

Can't emphasize enough that -- and going forward, that's where we're going to add the most amount of heads. R&D heads have actually grown on a year-over-year basis 50%, we've gone from 52 to just under 80.

On the building itself, we're moving to a facility that's not far from where we're at here. We think we got a good deal.

We think the building -- we got into the building at the right point in the market because the market here is heating up. So we signed a 5-year lease, 64,000 square feet.

Significantly larger than the 20,000-ish that we've outgrown where we're at. The majority of that increased space is going to be allocated to basically lab space, so don't interpret the fact that the building is over twice as big as what we're in, that we're going to double headcount.

We're just going to make more room to provide more laboratory space for the engineering teams to help them become more productive.

Now, on your cash flow question, so I think if you look at -- if you look at the cash we generated, the $12.3 million and we have roughly $5-ish million reduction in our debt, free cash flow came in around $17 million, $17 million-plus?

Okay. Just trying to sort out the depreciation and the CapEx.

So we're going to be filing our Q tomorrow, so you'll be able to get all the infinite detail. But we're not -- we were up -- we did -- CapEx moved up this quarter.

But again, relative to the size of organization, not by an equal amount of money.

Okay. So I guess following up on some of Mark's questions on the UniFi, it looks a lot of your distributors run out of stock earlier this month, and some of them seemed to think they're going to get some this week or next.

That's basically just a function of the reins, as Robert mentioned, and you're going to -- we'll see a significant flow here in the next few weeks?

Well, it's clearly a function of it being metered. We're not going to get into -- I mean, I don't want to get into a level we're telling you what weekly shipments are.

But this is a very metered planned approach. New product comes to market, you seed the market, you get early feedback, you get into this kind of virtuous loop where immediately respond to the questions the community put forward and you add features, you fix issues for them very, very quickly, you generate more goodwill, which results in higher order levels.

And so again, the same methodology we use for airMAX, we're just repeating it as we roll out these new platforms.

I saw the email regarding the new product that you're talking about. So will that -- when you announce that and formalize it, will that be when that product starts to ship or we wait -- how long will we have to wait for that?

So that should be our first shipment from the date can be anywhere from 0 to 6 months. We've been -- our product announcements are based around getting early feedback from customers on the product.

Getting -- ramping up production. But we've typically been, once an announcement is made, anywhere from the kind of 0 to 6 months range.

Okay. And then I think there's been a fair amount of dialogue about a router product, which is not what's described so far.

Is that something that you've discussed the timing about yet?

It's definitely going to launch some time this calendar year.

I guess for each of you guys. Just wondering, how do you weigh the proprieties for calendar year '12 relative to product expansions versus geographic expansions, any thoughts in terms of any critical geographies that you intend to expand in terms -- I'm just trying to understand how your set of priorities have been allocated vis a vis the geographic expansion versus new product platforms?

We actually -- there is no -- they're two different animals, right? We're not prioritizing one above the other.

We're constantly looking at making sure we have the appropriate distributors and the right region. We think our products have a global appeal.

So with our particularly roll-out products, I think our revenue mix speaks to the fact that the products have a global appeal. I'll have Robert talk about how he prioritizes the R&D effort, but then whoever runs our shelves and distribution, they're separate.

I mean, the team works together clearly, but these are separate skill sets and separate goals for each of the organizations. Robert, you want to touch on how you prioritize the goal of the R&D?

Yes. So typically we launch a new platform.

We try to come out with cost disruptive -- a base cost disruptive hardware. For example, you have the UniFi.

We came out with our UniFi AP first, which is at $50 cost of distribution, a very disruptive platform. And we try to get as much momentum, and to get it into -- in hands of as many potential users as possible.

And we work with these users to evolve the product feature set and improve the reliability. Once that is underway, we work hard to develop maybe more advanced higher-priced products, which we will see with an upcoming UniFi Pro, which is dual radio, Gigabit Ethernet, 3x3 MIMO, 802.3af Power V ethernet and's we'll charge instead of $50, it might be closer to $200 product, but it's still cost disruptive and it provides a lot more functionality and it's significantly higher margin for us.

So that's the strategy we take as part of the development. We try to hit the market with disruption and then follow it up with higher margin and higher more full-featured products.

So John talked about gross margin expansion we're getting from operations. I believe as this calendar progresses, I want to see gross margin expansion from the contribution of higher-margin products.

Thank you. So in closing, I would like to thank our Ubiquiti community and thank our shareholders who have shown their confidence in Ubiquiti and our unique business model.

I also like 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-user with minimum impedence. This efficiency allows us provide disruptive price performance solutions to markets that were previously underserved.

Thank you.