Super Micro Computer, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended March 31, 2014, the third quarter of fiscal 2014 (fiscal year ends June 30). This differs from the request metadata’s “2013 Q3.” Financial statements are unaudited.
Business context and results
The company develops and sells server systems, subsystems and accessories. Management attributed growth to stronger sales of integrated, higher-end server systems, particularly to internet data center customers, and to new products and the processor technology transition. Server systems rose to 50.1% of quarterly sales from 41.8% a year earlier.
| Metric ($ millions, except per-share data) | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Net sales | 373.8 | 278.0 | 1,039.1 | 840.2 |
| Gross profit | 57.3 | 38.9 | 159.1 | 114.0 |
| Gross margin | 15.3% | 14.0% | 15.3% | 13.6% |
| Operating income | 21.5 | 5.4 | 53.7 | 14.7 |
| Operating margin | 5.7% | 2.0% | 5.2% | 1.8% |
| Net income | 16.6 | 7.0 | 37.6 | 12.9 |
| Diluted EPS | $0.35 | $0.16 | $0.82 | $0.29 |
Cash flow, financial position and liquidity
- Quarterly operating cash flow was negative $5.9 million, versus positive $8.0 million a year earlier. For the nine months, operating cash flow was $12.5 million versus $13.6 million.
- Nine-month capital expenditures were $36.8 million, including $30.2 million for San Jose property purchased in October 2013. Operating cash flow less capital expenditures was approximately negative $24.3 million, calculated from reported figures.
- Cash and cash equivalents were $101.7 million at March 31, 2014. Management reported $104.4 million of cash, cash equivalents and investments, including $2.6 million of illiquid auction-rate securities.
- Total debt was $46.6 million, of which $42.1 million was classified as current. The company reported unused borrowing capacity of $22.3 million under its Bank of America line and $11.1 million under its CTBC facility. It was in compliance with Bank of America’s financial covenants.
- Current assets were $610.8 million and current liabilities $292.5 million. Inventory was $295.1 million, up from $254.2 million at June 30, 2013; accounts receivable were $182.0 million, up from $149.3 million.
- Management said available cash was sufficient to fund operations for at least the next 12 months, while anticipating continued working-capital needs and capital spending.
Material changes and management commentary
- Quarterly sales increased 34.4%; nine-month sales increased 23.7%. For the quarter, server-system unit volume grew 33.3% and average selling price rose 23.8%. For nine months, unit volume rose 12.4% and average selling price rose 28.6%.
- Margins improved year over year, which management linked to product mix, purchasing power, improved manufacturing utilization in Taiwan and lower inventory provisions. These benefits were partly offset by sales to data center customers, which generally carry lower gross margins.
- Research and development spending increased in dollars but declined as a percentage of sales. Management cited personnel growth, expanded development activity and prototype/testing costs for new products.
- DSO was 41 days, compared with 38 days at fiscal year-end; management attributed the increase to sales late in the quarter. DSI was 83 days, compared with 84 days at fiscal year-end.
Outlook, risks and unusual items
- The filing provides no specific numeric quarterly or annual earnings guidance. Management described continued expansion and investment in product development, sales, manufacturing and infrastructure, and expects working capital and capital expenditures to remain material uses of cash.
- Purchase commitments totaled $271.2 million, including approximately $72.4 million of hard-disk-drive commitments payable through December 2014. Management noted that demand or market-price changes could expose the company to excess inventory or lower margins.
- Ablecom, a related-party contract manufacturer connected to the CEO’s family, supplied $145.1 million of products during the nine months. Amounts payable to Ablecom were $42.2 million; outstanding purchase orders were $64.0 million. The company disclosed potential pricing, supply and conflict-of-interest risks.
- The $2.6 million auction-rate securities investment remains illiquid; access before recovery could require a loss of principal. Management considered the impairment temporary but stated there is no assurance of when the market will permit liquidation.
- The nine-month effective tax rate was 29.4%, versus 10.2% a year earlier. Management cited higher income and expiration of the federal research and development tax credit; the prior period included tax-credit and IRS-audit benefits. Gross unrecognized tax benefits were $9.4 million, with $0.8 million of accrued interest and penalties.
- Management said ordinary-course legal proceedings were not expected to materially affect financial condition, results or liquidity. The filing identifies risks including quarterly volatility, component availability and pricing, competition, inventory exposure, growth execution, international operations, and dependence on key suppliers and personnel.
- Disclosure controls were assessed as effective at a reasonable assurance level; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether strong sales and margin gains persist, particularly as product and customer mix changes.
- Whether receivables, inventory and payables convert into sustainable operating cash flow after the substantial capital investment.
- Near-term debt maturities, renewal or refinancing of credit facilities, and ongoing covenant compliance.
- Exposure to Ablecom, including related-party terms, outstanding balances and purchase commitments.
- Demand and pricing assumptions underlying inventory levels and the $72.4 million hard-drive commitments, along with liquidity and valuation of auction-rate securities.