Super Micro Computer, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2015; statements are unaudited. The filing covers fiscal 2015 Q3, notwithstanding the request metadata’s “2014 Q3.”
Business context and performance
The company develops and sells server systems, subsystems and accessories. Growth was driven chiefly by higher sales of complete, higher-priced server systems, including storage and Twin systems. Server systems rose to 64.1% of quarterly sales from 50.1% a year earlier.
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $471.2 million; +26.1% year over year | $1,417.6 million; +36.4% |
| Gross profit / margin | $76.8 million / 16.3%, versus 15.3% | $230.5 million / 16.3%, versus 15.3% |
| Operating income / margin | $31.4 million / 6.7%, versus $21.5 million / 5.7% | $106.0 million / 7.5%, versus $53.7 million / 5.2% |
| Net income | $23.1 million, versus $16.6 million | $75.2 million, versus $37.6 million |
| Diluted EPS | $0.44, versus $0.35 | $1.47, versus $0.82 |
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $9.1 million, down from $12.5 million, despite higher net income. A $119.0 million inventory increase was the main use of operating cash; management linked inventory and purchasing partly to anticipated June-quarter growth and delivery timing affected by the West Coast port strike.
- Investing cash outflow was $25.7 million, including $24.6 million of property, plant and equipment purchases. Financing cash inflow was $30.0 million. Cash and equivalents were $109.2 million at March 31, versus $96.9 million at June 30, 2014.
- Inventory increased to $430.4 million from $315.8 million; accounts receivable was $221.6 million. DSO was 46 days, compared with 42 at fiscal year-end; DSI rose to 96 days from 77.
- Total debt was $46.5 million, of which $44.8 million was classified current. The company reported compliance with Bank of America financial covenants. It drew an additional $10.0 million on that facility in April 2015, after quarter-end.
- Non-cancellable purchase commitments totaled $491.2 million, including $237.4 million for hard disk drives. Management said cash on hand was sufficient for at least the next 12 months.
Material changes, outlook and risks
- Quarterly server-system unit volume increased 6.9%, while average selling price rose 50.0%; year-to-date volume increased 19.5% and average selling price rose 40.7%. Management attributed higher average prices primarily to product mix and higher-capacity configurations.
- Gross margin improved with scale and a larger mix of complete systems. Operating expenses rose in dollars, notably R&D and sales and marketing, but were lower as a percentage of sales year to date.
- No specific financial guidance is stated in the provided filing text. Management described the June quarter as seasonally strong and planned development of five San Jose manufacturing buildings through fiscal 2016, with approximately $26.3 million of costs anticipated through July 2015, funded by operating cash and additional bank borrowing.
- Key exposures include quarterly sales volatility and customer concentration (one customer represented 13.9% of quarterly sales and 12.5% year to date), component availability and pricing, inventory obsolescence, and substantial purchase commitments. The filing also highlights related-party dependence on Ablecom: purchases were $58.0 million in the quarter, and $51.9 million was payable to Ablecom at period-end.
- The $2.6 million auction-rate securities investment remained illiquid and classified as long-term. The company reported $11.7 million of gross unrecognized tax benefits and $0.8 million of related accrued interest and penalties. Management said pending legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the shift toward higher-priced complete server systems and the margin improvement can continue, and how sensitive results are to pricing and product mix.
- Whether inventory and receivables convert to cash as expected; monitor DSI, DSO, and operating cash flow relative to earnings.
- Whether the company can meet its $491.2 million purchase commitments, particularly hard-drive commitments, without excess inventory or margin pressure.
- Customer concentration, Ablecom-related transactions and exposure, and the terms and availability of short-term credit facilities.
- Progress and funding needs for the San Jose manufacturing expansion, including the post-quarter $10.0 million borrowing.