Super Micro Computer, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2013 (fiscal 2014 first quarter). Financial statements are unaudited; comparisons are with the three months ended September 30, 2012 unless otherwise noted.
Business context and results
Super Micro develops high-performance server systems, subsystems and accessories for data center, cloud, enterprise and other markets. Revenue increased mainly because of higher sales and average selling prices of higher-density server systems. Management said growth remained strong despite competition and macroeconomic headwinds, although the first quarter is typically a softer period for IT capital spending.
Key financial metrics
| Metric | Q1 FY2014 | Prior-year quarter |
|---|---|---|
| Net sales | $309.0 million | $270.7 million |
| Gross profit / gross margin | $46.8 million / 15.1% | $35.0 million / 12.9% |
| Operating income / operating margin | $12.0 million / 3.9% | $1.7 million / 0.6% |
| Net income | $7.7 million | $0.9 million |
| Diluted EPS | $0.17 | $0.02 |
| Operating cash flow | $18.3 million | $(26.6) million |
Revenue grew 14.2%; server-system sales rose 34.1% to $143.3 million and represented 46.4% of sales, versus 39.5% a year earlier. Subsystems and accessories sales increased 1.1% to $165.7 million. Server-system units were approximately flat at 55,000, while average selling price increased 30% to about $2,600. Gross-margin improvement reflected a more favorable server-system mix, lower hard-drive costs and a sharply lower inventory provision ($4,000 versus $2.9 million). R&D expense increased 11.1% to $20.2 million, primarily due to personnel and product-development activity.
At September 30, cash and cash equivalents were $111.5 million; management reported cash, cash equivalents and investments of $114.2 million. Total debt was $34.7 million, comprising $13.7 million current and $21.1 million long-term. Current assets were $524.2 million and current liabilities $218.3 million. Inventory was $254.3 million. The company generated $18.3 million of operating cash, used $2.0 million in investing activities and received $1.8 million from financing activities.
Material changes and notable items
- Net income rose to $7.7 million from $0.9 million, primarily reflecting higher gross profit; the effective tax rate declined to 35.1% from 41.7%.
- Operating cash flow improved from a $26.6 million use to $18.3 million provided. The current-quarter cash generation included a $14.4 million decrease in receivables, partly offset by lower accounts payable and accrued liabilities.
- DSO increased to 42 days from 38 at fiscal year-end; DSI increased to 89 days from 84. Management attributed the DSO increase to late-quarter sales and the DSI increase to lower cost of goods sold.
- On October 31, 2013, the company completed a $30.1 million real-property purchase in San Jose. It expected to use additional credit-facility proceeds to finance the property.
- In November 2013, the company amended its CTBC Bank facility, extending it to November 30, 2014 and increasing its capacity; $18.7 million was available for future borrowing in November, with no additional borrowing then reported.
Outlook, risks and contingencies
No specific quarterly revenue or earnings guidance is provided in the supplied filing text. Management expects continued growth in working-capital needs and capital spending, plans to expand operations in California, Taiwan and the Netherlands, and said existing cash was sufficient to operate for at least the next 12 months. It expects to fund expansion with operating cash and potentially borrowings.
Key disclosed risks include volatile customer orders and quarterly results; competition and pricing pressure; component availability, costs and supplier concentration; demand, inventory obsolescence and product-mix changes; reliance on distributors and contract manufacturers; and execution risks from international expansion and planned ERP implementation. Hard-drive purchase commitments were approximately $113.0 million, included in $245.3 million of non-cancellable purchase commitments. Related-party supplier Ablecom accounted for $45.3 million of purchases in the quarter; amounts owed to Ablecom were $42.5 million, and outstanding purchase orders were $59.0 million.
The company held $2.6 million of auction-rate securities that remained illiquid; it could be unable to access these funds without a loss of principal and acknowledged possible future impairment. Gross unrecognized tax benefits were $8.5 million, with $0.9 million accrued for related interest and penalties; California tax years 2008–2010 were under examination. Management said pending legal matters were not expected to have a material adverse effect. Bank of America covenant compliance was reported as met at quarter-end. The filing states that disclosure controls were effective at a reasonable-assurance level and that no material change in internal control occurred during the quarter.
Important facts for investors to verify
- Whether revenue and margin gains persist, particularly the contribution from higher-density server systems and product mix.
- Whether receivables, inventory and cash conversion remain healthy as DSO and DSI increased from fiscal year-end.
- Funding and debt implications of the $30.1 million property purchase and the amended CTBC facility.
- Exposure to $245.3 million of purchase commitments, including hard-drive commitments, and to related-party supplier Ablecom.
- Recoverability and liquidity of auction-rate securities, and developments in tax examinations and unrecognized tax benefits.