Super Micro Computer, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2017; filed May 10, 2017. The request metadata labels this “2016 Q3,” but the filing covers fiscal 2017 Q3.
Business context
Super Micro develops and sells server systems, subsystems and accessories for cloud, data-center, enterprise, HPC and other markets. It reported one operating segment. Management attributed sales growth to storage, accelerated-computing, MicroBlade and high-density Twin systems, with stronger demand in Asia, particularly Greater China.
Financial results
| Metric | Three months ended Mar. 31, 2017 | Year-over-year | Nine months ended Mar. 31, 2017 | Year-over-year |
|---|---|---|---|---|
| Net sales | $631.1 million | +18.5% | $1,812.0 million | +7.1% |
| Gross profit / margin | $88.3 million / 14.0% | $79.2 million / 14.9% | $261.8 million / 14.4% | $257.7 million / 15.2% |
| Operating income / margin | $22.4 million / 3.6% | $24.4 million / 4.6% | $74.4 million / 4.1% | $95.0 million / 5.6% |
| Net income | $16.7 million | $16.7 million | $52.2 million | $65.1 million |
| Diluted EPS | $0.32 | $0.32 | $1.01 | $1.26 |
- Quarterly sales growth included server systems up 18.6% and subsystems/accessories up 18.1%. Nine-month growth was 5.2% and 11.7%, respectively.
- Gross margin fell in both comparison periods. Management cited memory and SSD shortages, lower-margin mature processor systems and more competitively priced Asian sales. Nine-month operating expenses rose 15.2%, including higher compensation and development spending.
- Cash from operations was negative $90.3 million for the nine months, versus positive $92.8 million a year earlier. Working-capital uses included inventory up $201.5 million and receivables up $103.0 million, partly offset by payables up $103.8 million.
- Cash and cash equivalents were $107.8 million at March 31, down from $181.0 million at June 30, 2016. Cash plus investments was reported as $110.5 million. Capital expenditures were $23.3 million; financing activities provided $40.5 million, including net borrowings and $18.5 million of share repurchases.
- Total debt was $145.8 million gross ($145.5 million net of issuance costs), compared with $93.6 million at June 30, 2016. Current liabilities were $534.5 million and current assets $1,156.7 million. Inventory was $642.3 million, up from $449.0 million; DSO was 54 days and days inventory 103, versus 50 and 87 at fiscal year-end.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management said it had sufficient cash to operate for at least 12 months, while anticipating continued working-capital and capital-spending needs and intending to use operating cash and bank financing.
- Management cited memory and SSD shortages as affecting cost and inventory; inventory was built to support new product lines and the seasonally strong quarter ending June 30, 2017. Non-cancellable purchase commitments were $412.5 million, all due within one year in the contractual-obligations table.
- In May 2017, after quarter-end, Bank of America increased the company’s revolving facility from $45 million to $85 million, extended relevant maturities to October 31, 2018, and the company drew $20 million. The CTBC facility was due to mature May 31, 2017; renewal negotiations were ongoing. At March 31, the company reported no remaining CTBC availability and only $1.8 million unused under Bank of America lines.
- Management reported compliance with Bank of America financial covenants at March 31. Routine legal proceedings were not expected by management to have a material adverse effect. The company had $17.3 million of gross unrecognized tax benefits and stated that federal returns for 2012–2013 were under IRS examination, with no adjustment proposed as of March 31.
- Related-party supplier Ablecom accounted for 11.5% of cost of sales in the quarter and nine-month period. Amounts owed to Ablecom were $50.4 million; outstanding purchase orders were $102.5 million. The filing describes potential conflicts of interest and supplier dependence.
- The company recorded a $6.65 million deferred gain from contributing technology rights to a 30%-owned China venture; it will be recognized as license revenue over time. The venture’s equity-method results were immaterial in the quarter.
- Disclosure controls were deemed effective at a reasonable assurance level. The filing notes a prior revenue-recognition material weakness relating to extended warranties, reported remediated as of June 30, 2016.
Most important facts for investors to verify
- Whether working-capital pressure eases: inventory, receivables, payables, DSO and inventory days, alongside the next quarter’s operating cash flow.
- Whether component shortages and product/geographic mix continue to compress gross margin and whether warranty costs remain elevated.
- Availability, renewal and terms of bank facilities, covenant headroom, and how the May borrowing and facility amendment affect liquidity and debt.
- Execution against $412.5 million of purchase commitments and the risk of excess or obsolete inventory.
- Related-party transaction terms and exposure to Ablecom, including purchase orders and amounts payable.
- Progress and financial reporting for the China venture, including timing of deferred-gain recognition.