Super Micro Computer, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended June 30, 2016. The request metadata says “2015 Q4,” but the supplied filing is the FY2016 annual report; its fourth-quarter figures are for the three months ended June 30, 2016. Unless otherwise noted, financial amounts below are in U.S. dollars.
Business context
Super Micro designs and sells configurable server, storage, networking and related technology solutions for cloud, data center, enterprise, HPC and IoT markets. It reported one operating segment. Sales growth increasingly came from complete server systems and OEM/direct customers.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net sales | $2,215.6 million | $1,991.2 million | +11.3% |
| Gross profit / margin | $331.5 million / 15.0% | $320.2 million / 16.1% | Profit +3.5%; margin down 1.1 points |
| Operating income / margin | $106.9 million / 4.8% | $146.7 million / 7.4% | Income down 27.2% |
| Net income | $72.0 million | $101.9 million | Down 29.3% |
| Diluted EPS | $1.39 | $2.03 | Down 31.5% |
| Operating cash flow | $107.5 million | $(44.6) million | Improved |
- Sales mix: Server systems revenue rose 25.7% to $1,525.6 million and reached 68.9% of sales, compared with 60.9% in FY2015. Subsystems and accessories revenue fell 11.3% to $690.0 million. Server-system units rose 13.7% and average selling price increased 10.6%.
- Cash and working capital: Cash and cash equivalents were $181.0 million at year-end, versus $95.4 million; cash plus investments was reported as $183.7 million. Working capital was $574.4 million, compared with $460.3 million. Inventory was $449.0 million, down from $463.5 million; inventory days rose to 87 from 84, and receivable days to 50 from 48.
- Debt: Total debt was $93.6 million, compared with $94.4 million. At June 30, 2016, $53.6 million was current and $40.0 million long-term. Interest expense increased to $1.6 million from $1.0 million.
- Investment and cash flows: Investing cash outflow was $35.1 million, including $34.1 million of property and equipment purchases. Financing cash inflow was $13.1 million. Management said cash on hand was sufficient for at least 12 months.
- Fourth quarter: For the quarter ended June 30, 2016, sales were $524.3 million and net income was $7.0 million, versus $573.6 million and $26.7 million, respectively, in the prior-year quarter.
Material changes versus FY2015
- Revenue growth was driven primarily by higher sales of complete systems to OEM/direct and cloud/data-center customers. OEM/direct customers contributed 55.2% of sales, up from 49.7%; distributors contributed 44.8%, down from 50.3%.
- Gross margin declined due to weaker subsystem/accessory margins, lower manufacturing-capacity utilization and a $9.3 million extended-warranty revenue correction, partly offset by increased sales of higher-margin complete systems. Management said FY2016 gross margin would have been 15.3% without that correction.
- Operating expenses rose 29.5% to $224.7 million. R&D increased 23.7% to $124.0 million, sales and marketing increased 28.6% to $62.8 million, and general and administrative expense increased 55.2% to $37.8 million.
- Operating cash flow recovered from a $44.6 million use in FY2015, when inventory and receivables absorbed substantial cash. FY2016 cash generation included lower receivables, partly offset by a $54.3 million decrease in accounts payable.
Outlook, management commentary, risks and unusual items
- Outlook: No specific forward-year revenue or earnings guidance is provided in the supplied filing text. Management expects continued investment in product development, sales, manufacturing capacity and support, with working capital and capital expenditures remaining significant cash uses. It planned approximately $17 million of further property development spending through April 2017 and expected to finance expansion with operating cash and additional bank borrowing.
- Revenue-recognition correction and controls: The company found that extended-warranty revenue had been recognized at product sale rather than deferred over the warranty term. In FY2016 it recorded a $9.3 million reduction to sales and a $5.9 million reduction to net income for prior-period errors. The deferred warranty revenue is to be recognized through FY2019. Management reported the related material weakness remediated as of June 30, 2016; the auditor gave an unqualified opinion on internal control over financial reporting.
- Customer concentration: SoftLayer, an IBM division, represented 10.9% of FY2016 sales, up from 10.1%. Large orders can be irregular, competitive and margin-sensitive.
- Supplier and related-party exposure: Purchases from related-party supplier Ablecom were $241.8 million, or 12.8% of cost of sales; amounts payable to Ablecom were $39.2 million at year-end. The CEO and his spouse have ownership interests in Ablecom, and the filing cautions that the relationship may create conflicts or affect commercial terms. One supplier, not identified in the supplied excerpt, represented 35.2% of total purchases.
- Commitments and tax matters: Non-cancellable purchase commitments totaled $334.0 million, including $110.5 million of hard-drive commitments payable through December 2016. The company reported $19.4 million of gross unrecognized tax benefits; IRS examinations and Taiwan tax assessments/appeals were ongoing. Management said pending ordinary-course legal matters were not expected to materially affect financial condition, results or liquidity.
- Other risks: The filing highlights component availability and pricing, inventory obsolescence, competition and pricing pressure, international expansion and tax exposure, ERP implementation, cybersecurity, and reliance on key personnel. In July 2016, after year-end, the board authorized up to $100 million in share repurchases; the company reported buying approximately $10.3 million of shares that month.
Important facts for investors to verify
- Whether sales growth in complete systems can continue while restoring gross margin and controlling operating-expense growth.
- Whether the warranty revenue deferral and related controls remain accurate and effective after remediation.
- The sustainability of cash conversion, particularly inventory levels, receivable days and supplier payment patterns.
- Exposure to SoftLayer and major suppliers, including Ablecom’s related-party terms and the unnamed supplier accounting for 35.2% of purchases.
- Use of new borrowing, the $334.0 million purchase commitments and planned facility spending, alongside the post-year-end share repurchases.
- Potential outcomes of tax examinations and appeals, and the financial effect of changes in international tax or operating arrangements.