Super Micro Computer, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2012; financial statements are unaudited. The company develops and sells server systems, subsystems and accessories. Comparisons below are with the three months ended September 30, 2011 unless otherwise noted.
Financial performance and position
| Metric | Quarter ended September 30, 2012 | Prior-year quarter / comparison |
|---|---|---|
| Revenue | $270.7 million | $247.9 million; up 9.2% |
| Gross profit and margin | $35.0 million; 12.9% | $39.6 million; 16.0% |
| Operating income and margin | $1.7 million; 0.6% | $13.5 million; 5.5% |
| Net income | $0.9 million | $8.5 million |
| Diluted EPS | $0.02 | $0.19 |
| Cash flow from operations | $(26.6) million | $25.1 million provided |
- Revenue growth reflected higher server-system average selling prices and increased subsystem and accessory sales. Server-system unit sales fell 3.5%, while average selling price rose 17.6%; subsystem and accessory unit sales rose 6.5%.
- Profitability weakened as cost of sales rose faster than revenue, including pressure from hard-drive and memory costs, higher warranty and inventory provisions, and increased operating expenses. R&D expense rose 31.8% to $18.2 million; operating expenses totaled $33.3 million versus $26.1 million.
- Net cash used in operations chiefly reflected a $34.7 million reduction in accounts payable and a $10.9 million increase in receivables, partly offset by a $10.5 million inventory reduction. DSO was 37 days versus 33 at June 30, 2012; DSI was 105 days versus 100.
- At September 30, cash and cash equivalents were $58.3 million, down from $80.8 million at June 30. The company also held $2.9 million of auction-rate securities that were not currently liquid.
- Total debt was approximately $38.1 million, including $11.3 million drawn on a $40 million Bank of America revolver; $28.7 million of that facility remained unused. The company reported compliance with Bank of America financial covenants.
- Current assets were $458.1 million and current liabilities $204.4 million. Inventory was $263.2 million. Stockholders’ equity totaled $342.5 million.
Material changes, outlook and risks
- Sales mix shifted geographically: U.S. sales were 49.8% of revenue versus 62.1% a year earlier, while Europe and Asia increased to 23.4% and 23.9%, respectively.
- Management expected hard-drive and memory pricing to be more stable and to have less impact on net income in following quarters. The filing provides no specific numerical earnings or revenue guidance. Management expected continued investment in R&D and expansion in the U.S., Netherlands and Taiwan, and said existing cash was sufficient for at least the next 12 months.
- Non-cancellable purchase commitments were $286.9 million, including approximately $180.5 million of hard-drive commitments payable through March 2014. These supply commitments may expose the company to excess inventory or reduced margins if demand, component prices or product mix move adversely.
- Ablecom, a related-party contract manufacturer connected to the CEO’s family, supplied $49.3 million of purchases during the quarter; $47.9 million was payable to Ablecom at quarter-end. The company identified reliance on Ablecom and potential non-arm’s-length terms as risks.
- Warranty provision was $3.1 million versus $2.2 million a year earlier, reflecting higher claims and servicing costs. Inventory provisions were $2.9 million versus $2.4 million.
- The company reported $9.2 million in gross unrecognized tax benefits and $1.1 million accrued for related interest and penalties. The IRS had begun a pre-examination of 2007–2009 federal returns; management said resolution could occur within 12 months and did not expect a material change in unrecognized tax benefits over that period.
- Management said pending ordinary-course legal matters were not expected to materially affect financial condition, results or liquidity. Disclosure controls were judged effective; no material change in internal control was reported.
- Other stated risks include quarterly sales volatility, component supply and pricing, competition and margin pressure, product transitions, international expansion, customer credit and distributor inventory, and the illiquidity or possible impairment of auction-rate securities.
Key facts for investors to verify
- Whether gross margin and operating profitability recover after the sharp year-over-year decline, and whether hard-drive and memory costs stabilize as management expects.
- Whether operating cash flow improves as supplier payments, receivables and inventory fluctuate; monitor DSO, DSI and cash balances.
- Whether the company can fulfill its $286.9 million purchase commitments without excess or obsolete inventory or further margin erosion.
- The terms and ongoing exposure of the Ablecom relationship, including related-party balances and dependence on this supplier.
- Debt maturities, revolver availability and covenant compliance, alongside the liquidity constraints on the $2.9 million auction-rate investment.
- Developments in warranty claims, inventory reserves and the IRS review and unrecognized tax positions.