Super Micro Computer, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2014 (second quarter of fiscal 2015; fiscal year ends June 30). Unaudited consolidated financial statements.
Business context
The company develops and sells high-performance server systems, subsystems, and accessories. Growth was driven chiefly by higher sales and average selling prices for complete servers using Intel’s DP Haswell processor, launched in September 2014, and by higher-density Twin and storage servers.
Financial results and position
| Metric | Three months ended Dec. 31, 2014 | Year-over-year | Six months ended Dec. 31, 2014 | Year-over-year |
|---|---|---|---|---|
| Net sales | $503.0 million | +41.2% | $946.3 million | +42.2% |
| Gross profit / margin | $84.5 million / 16.8% | Margin: 15.5% prior year | $153.6 million / 16.2% | Margin: 15.3% prior year |
| Operating income / margin | $42.9 million / 8.5% | Margin: 5.7% prior year | $74.5 million / 7.8% | Margin: 4.8% prior year |
| Net income | $31.2 million | $13.3 million prior year | $52.1 million | $21.0 million prior year |
| Diluted EPS | $0.61 | $0.30 prior year | $1.03 | $0.47 prior year |
Cash flow: Operating cash flow was negative $8.7 million for the six months, versus positive $18.4 million a year earlier. Cash and cash equivalents declined to $83.2 million from $96.9 million at June 30, 2014. Cash use reflected increases in inventory ($97.5 million) and receivables ($46.0 million), partly offset by higher payables, net income, and other items. Investing cash outflow was $11.7 million, including $11.0 million of property and equipment purchases. Financing cash inflow was $7.2 million.
Liquidity, debt, and working capital: At December 31, current assets were $781.7 million and current liabilities were $373.1 million. Total debt was $35.8 million, down from $46.3 million at June 30; $33.5 million was current. Inventory rose to $409.2 million from $315.8 million, and accounts receivable to $258.8 million from $212.7 million. Management reported cash and investments of $85.9 million at quarter-end and stated that available cash was sufficient for at least the next 12 months. The $2.6 million auction-rate securities investment is classified as long-term and is not currently liquid.
Material changes and management commentary
- Server-system sales increased 73.6% in the quarter and 75.8% for the six-month period; complete server systems grew to 60.1% and 58.9% of sales, respectively, from 48.8% and 47.7% a year earlier.
- Management attributed improved gross margins to scale, product mix, and higher utilization of Taiwan manufacturing facilities. Operating expenses declined as a share of sales despite higher R&D and sales and marketing spending.
- Inventory days rose to 83 from 77 at fiscal year-end; days sales outstanding were 41 days versus 42. Management said inventory was built to support the Haswell product transition.
- The effective tax rate fell to 26.9% for the quarter and 29.8% for six months, versus 33.5% and 34.1%. The retroactive extension of the federal R&D credit produced a $2.8 million tax benefit, including $1.8 million related to fiscal 2014.
Outlook, risks, and contingencies
- No specific forward revenue or earnings guidance is provided in the supplied filing text. Management anticipated approximately $19.6 million of San Jose Green Computing Park development costs in fiscal 2015’s third and fourth quarters, with funding from operating cash flow and additional bank borrowing; it expected financing cash flows to increase during fiscal 2015.
- In January 2015, after quarter-end, the company drew an additional $15.0 million on its Bank of America credit line. It had reported $35.3 million of unused capacity on that line at December 31. The company was in compliance with Bank of America financial covenants at quarter-end.
- Non-cancellable purchase commitments rose to $564.6 million from $211.1 million at June 30, including $294.3 million of hard-drive commitments payable through January 2017. The filing identifies demand, pricing, and obsolescence as risks to these commitments.
- Customer concentration increased: one customer represented 15.1% of quarterly sales, 11.9% of six-month sales, and 22.1% of receivables at December 31. The company also relies on distributors and key component suppliers.
- Ablecom, a related-party contract manufacturer, supplied $111.9 million of products in the six months and owed the company $57.2 million at quarter-end; the company owed Ablecom $57.2 million. The filing discusses potential conflicts of interest and supply dependence.
- Inventory provisions were $4.2 million for the six months. Other risks include product and component availability, rapid technology and pricing changes, execution of the ERP implementation, international expansion, and foreign-exchange exposure. Management said pending legal matters were not expected to materially affect financial condition, results, or liquidity.
Most important facts for investors to verify
- Whether the Haswell-driven growth and improved margins persist as product mix and average selling prices change.
- Whether inventory, receivables, and operating cash flow normalize, and whether the expanded purchase commitments convert into sales without excess or obsolete stock.
- Customer concentration, including the major customer’s sales and receivables exposure, and the company’s dependence on distributors and component suppliers.
- Related-party pricing, outstanding balances, and operational reliance on Ablecom.
- Funding and execution of planned facility expansion, including subsequent borrowing, available credit, and compliance with loan covenants.
- Recoverability and liquidity of auction-rate securities, and potential changes in tax benefits or uncertain tax positions.