Super Micro Computer, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2015 (fiscal 2016 Q2); unaudited. The company develops and sells server systems, subsystems and accessories.
Financial performance
| Metric | Three months ended Dec. 31, 2015 | Year-over-year | Six months ended Dec. 31, 2015 | Year-over-year |
|---|---|---|---|---|
| Net sales | $639.0 million | +27.0% | $1,158.6 million | +22.4% |
| Gross profit / margin | $106.4 million / 16.6% | $84.5 million / 16.8% | $178.6 million / 15.4% | $153.6 million / 16.2% |
| Operating income | $49.1 million | $42.9 million | $70.6 million | $74.5 million |
| Net income | $34.7 million | $31.2 million | $48.4 million | $52.1 million |
| Diluted EPS | $0.67 | $0.61 | $0.94 | $1.03 |
- Quarterly sales growth was driven by server systems, up 50.1% to $453.7 million; subsystems and accessories fell 7.8% to $185.2 million. Server systems increased to 71.0% of quarterly sales, from 60.1%.
- Six-month net income declined despite higher sales. The company recorded a $9.3 million prior-period extended-warranty revenue correction in the quarter ended September 30, 2015, reducing six-month net income by $5.9 million. Management said six-month gross margin would have been 16.1% without the correction.
- Operating expenses rose 37.7% in the quarter and 36.5% for six months. Quarterly operating income nevertheless increased; six-month operating income declined.
- For the six months, operating cash flow was $86.9 million, compared with cash used of $8.7 million a year earlier. Investing cash outflow was $15.6 million and financing cash inflow was $3.3 million. Cash increased by $74.5 million to $169.9 million.
Balance sheet and liquidity
- At December 31, 2015, current assets were $999.6 million and current liabilities $480.1 million (current ratio approximately 2.1). Inventory was $486.5 million, up from $463.5 million at June 30; days inventory were 82 versus 83. DSO was 44 days versus 43.
- Total debt was $94.2 million, all classified as current, versus $94.4 million at June 30. The company reported $169.9 million of cash and cash equivalents and $2.6 million of long-term auction-rate securities; those securities are not currently liquid.
- Bank of America’s $65 million revolving facility was extended to February 15, 2016; $62.2 million was drawn at quarter-end, leaving $2.8 million available. CTBC maturities were also extended, with the revolving facility extended to March 31, 2016 after quarter-end. The company was negotiating renewals and reported compliance with Bank of America financial covenants.
- Management said cash on hand was sufficient to operate for at least 12 months. It expected continued growth in working-capital needs and capital expenditures, and anticipated investing approximately $26.5 million through November 2016 in a second manufacturing facility and office remodeling.
Changes, outlook and notable matters
- Growth reflected higher unit sales and average selling prices for server systems, especially complete systems optimized for OEM and cloud/data-center customers. U.S. sales grew to 63.7% of quarterly sales from 57.0%.
- One customer, identified in MD&A as SoftLayer, a division of IBM, accounted for 15.0% of quarterly sales and 12.8% of six-month sales. No formal numerical forward guidance is provided in the supplied filing text.
- Non-cancellable purchase commitments were $399.1 million, including approximately $160.9 million of hard-disk-drive commitments payable through December 2016. Inventory and component supply, product mix, pricing pressure, large-customer order timing and seasonality may affect results and margins.
- A material weakness in revenue-recognition controls was identified after extended-warranty revenue had been recognized at product sale rather than over the contract term. Prior periods were corrected in Q1; management implemented additional contract-review and monitoring controls, but concluded disclosure controls and internal control over financial reporting were ineffective as of December 31, 2015.
- Gross unrecognized tax benefits were $15.9 million, plus $1.2 million of accrued interest and penalties. IRS examination of federal tax years 2013–2014 and a Taiwan tax audit were ongoing; management did not expect resolution within 12 months.
- Management stated pending legal matters were not expected to materially affect financial condition, results or liquidity. Other significant risks include reliance on related-party supplier Ablecom, competition and component availability, international manufacturing expansion, ERP implementation, and customer concentration.
Important facts for investors to verify
- Progress and effectiveness of remediation for the material weakness, and whether revenue-recognition reporting remains reliable.
- Renewal and terms of the short-maturity Bank of America and CTBC credit facilities.
- Sustainability and margin impact of growth in complete server systems, including sales concentration in the largest customer.
- Inventory quality, supplier commitments and related-party exposure to Ablecom, including purchase terms and alternatives.
- Conversion of reported earnings into cash, planned facility spending, and the availability of liquidity excluding the illiquid auction-rate securities.