Business context and reporting period
Super Micro Computer, Inc. develops and sells server systems, subsystems, and accessories. This unaudited Form 10-Q covers the three and six months ended December 31, 2013 (fiscal Q2 and first half of fiscal 2014); comparisons are with the same periods in 2012. Fiscal year-end is June 30.
Financial performance
| Metric | Three months ended Dec. 31 | Six months ended Dec. 31 |
|---|---|---|
| Net sales | $356.4 million, up 22.3% | $665.4 million, up 18.4% |
| Gross profit / margin | $55.1 million / 15.5% (prior: 13.8%) | $101.9 million / 15.3% (prior: 13.4%) |
| Operating income / margin | $20.2 million / 5.7% (prior: $7.6 million / 2.6%) | $32.2 million / 4.8% (prior: $9.3 million / 1.7%) |
| Net income | $13.3 million (prior: $4.9 million) | $21.0 million (prior: $5.8 million) |
| Diluted earnings per share | $0.30 (prior: $0.11) | $0.47 (prior: $0.13) |
| Operating cash flow | Quarterly amount not clearly shown in the cash flow statement; MD&A reports $0.1 million | $18.4 million (prior: $5.6 million) |
At December 31, cash and cash equivalents were $89.9 million; total assets were $708.7 million and stockholders’ equity was $405.8 million. Total debt was $42.3 million, including $37.2 million classified as current. Current assets were $567.6 million and current liabilities $286.6 million. The $2.6 million auction-rate securities investment is classified as long-term and is not currently liquid.
Material changes versus the prior comparable period
- Revenue growth was led by server systems: Q2 server-system sales rose 38.0% to $174.1 million, while subsystems and accessories grew 10.2% to $182.3 million. Management cited higher-priced, higher-density systems, including Twin/FatTwin, storage, GPU/Xeon Phi and rack solutions, and new products based on Intel Ivy Bridge.
- Gross margin improved as server systems made up a larger share of sales, manufacturing utilization in Taiwan increased, purchasing power improved, and inventory provisions declined. Q2 inventory provision was $1.5 million versus $3.4 million; first-half provision was $1.5 million versus $6.3 million.
- First-half operating cash flow increased, but working-capital movements were significant: inventory rose by $38.3 million and accounts receivable by $12.9 million, partly offset by a $32.0 million increase in accounts payable. Inventory at period-end was $290.9 million, up from $254.2 million at June 30; DSI was 83 days versus 84 days. DSO was 38 days, unchanged from fiscal Q4.
- Investing cash outflow was $34.0 million, versus $2.5 million in the prior first half, chiefly reflecting $30.2 million for San Jose real property purchased in October. Property, plant and equipment, net, increased to $128.1 million from $95.9 million at June 30.
Outlook, risks and unusual items
- The filing gives no quantified forward guidance. Management said it expects ongoing working-capital needs and capital expenditures as the business expands, intends to fund growth through operating cash and credit or other debt, and believes cash on hand is sufficient to operate for at least 12 months. It cautioned that future financing may not be available on favorable terms or at all.
- Non-cancellable purchase commitments were $257.7 million, including approximately $89.8 million of hard-drive commitments payable through December 2014. Management noted that demand or market-price changes could lead to lower margins, losses, or inventory write-downs.
- Related-party manufacturer Ablecom supplied $54.4 million of products in Q2 and $99.7 million in the first half. Amounts payable to Ablecom were $48.2 million at period-end; outstanding purchase orders were $63.4 million. The filing describes the family and ownership relationships and potential conflicts of interest.
- CTBC credit facilities were amended in November 2013, with maturity extended to November 30, 2014; the company drew additional funds for working capital. Bank of America facilities included a revolving line maturing August 15, 2014. The company reported compliance with Bank of America financial covenants at December 31.
- Other risks include quarterly seasonality and order volatility, competition and pricing pressure, dependence on suppliers and contract manufacturers, inventory and component availability, international expansion, and reliance on distribution channels. Management said pending legal matters were not expected to have a material adverse effect. The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
- The effective tax rate was 33.5% for Q2 and 34.1% for the first half. Gross unrecognized tax benefits were $9.2 million, with $0.9 million of related interest and penalties accrued. The filing also disclosed $18.8 million of unrecognized stock-based compensation cost expected to be recognized over approximately 2.39 years.
Important facts for investors to verify
- Whether revenue growth and improved margins continue, particularly the mix shift toward higher-margin server systems and the contribution from new products.
- Inventory levels, receivables, payables, and operating cash conversion; the inventory increase was attributed partly to preparation for the Lunar New Year shutdown.
- The scale and timing of purchase commitments, especially hard-drive obligations, and whether demand supports those purchases without additional reserves or margin pressure.
- Ablecom-related purchasing, balances, order exposure, and arm’s-length pricing and governance safeguards.
- Liquidity and refinancing needs around the 2014 credit-facility maturities, covenant headroom, and the availability of alternative financing.
- The recoverability and liquidity of auction-rate securities, and developments in unrecognized tax benefits and related examinations.