Super Micro Computer, Inc. — Form 10-Q Summary
Reporting period: The filing covers the three and nine months ended March 31, 2013, the third quarter of fiscal 2013 (fiscal year ends June 30). Although the request metadata says “2012 Q3,” the filing itself reports fiscal 2013 Q3. Financial statements are unaudited.
Business context and financial performance
The company develops high-performance server systems, subsystems and accessories. Most sales are through distributors; subsystems and accessories generated the larger share of revenue. Management attributed sales growth primarily to subsystems and accessories, including hard drives and memory, and sales of newer server configurations.
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $278.0 million, up 15.8% from $240.2 million | $840.2 million, up 13.9% from $738.0 million |
| Gross profit / margin | $38.9 million / 14.0%; prior year $40.7 million / 17.0% | $114.0 million / 13.6%; prior year $123.0 million / 16.7% |
| Operating income | $5.4 million, versus $9.6 million | $14.7 million, versus $36.8 million |
| Net income | $7.0 million, versus $7.1 million | $12.9 million, versus $24.3 million |
| Diluted earnings per share | $0.16, unchanged | $0.29, versus $0.55 |
For the nine-month period, operating cash flow was $13.6 million, down from $19.0 million. Investing cash use was $4.5 million, mainly property and equipment purchases; financing provided $4.1 million. Cash and cash equivalents were $94.0 million at March 31, up from $80.8 million at June 30, 2012; cash plus long-term investments was approximately $96.6 million. Current assets were $499.8 million and current liabilities $229.1 million, or approximately $270.7 million of working capital.
Total debt was $36.0 million ($28.7 million current and $7.2 million long-term), compared with $32.8 million at June 30, 2012. The company had $29.1 million available on its Bank of America revolving facility and reported compliance with its financial covenants. Management stated that available cash was sufficient for at least the next 12 months.
Material changes and management commentary
- Revenue increased, but gross margin contracted as sales mix shifted toward lower-margin subsystems and accessories, including hard drives and memory, and component costs exceeded selling prices. Management said subsystem profitability improved from the prior quarter as hard-drive pricing stabilized and expected more stable pricing to have less impact in following quarters.
- Nine-month R&D expense rose 19.3% to $55.7 million, reflecting product development and staffing. Management cited Sandy Bridge, Ivy Bridge and FatTwin-related development.
- Inventory declined to $257.3 million from $276.6 million at June 30; inventory days fell to 94 from 100. Receivables days rose to 39 from 33, which management attributed to late-quarter sales and longer payment terms.
- The nine-month effective tax rate was 10.2%, versus 33.0%. The period included approximately $2.9 million of U.S. R&D tax-credit benefits and a $2.0 million benefit from resolution of IRS audits for fiscal 2008–2010. The Q3 tax provision was a $1.7 million benefit.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management expected continued working-capital and capital-expenditure needs as the business expands, and planned to fund growth through operations and borrowing. It also stated that results are not necessarily indicative of future periods.
- Purchase commitments totaled $315.9 million as of March 31, primarily supplier and manufacturing commitments. Hard-drive commitments were about $183.2 million; a May 2013 amendment reduced them to $179.3 million and extended terms to December 2014.
- Key risks include volatile component costs and supply, inventory excess or obsolescence, pricing and product-mix pressure, reliance on distributors and suppliers, and execution of international expansion and new product introductions. The company recorded $8.7 million of inventory provisions over nine months, including a $0.7 million reserve for specialized inventory associated with one customer.
- Auction-rate securities of $2.65 million remained illiquid; access before recovery could require a loss of principal. Management considered the unrealized loss temporary but noted future impairment was possible.
- Ablecom, a related-party contract manufacturer, accounted for 18.3% of nine-month cost of sales. Amounts owed to Ablecom were $40.5 million; outstanding purchase orders represented $59.9 million of stated potential exposure. The filing describes ownership and family relationships between Ablecom and company leadership.
- Management said pending legal matters were not expected to have a material adverse effect. Bank of America’s revolving facility was scheduled to mature June 15, 2013, and the China Trust Bank term loan July 31, 2013; the filing does not specify the outcome of any subsequent refinancing or renewal.
Important facts for investors to verify
- Whether improved hard-drive pricing and subsystem profitability persist, and whether gross margins recover from the reported year-over-year decline.
- Progress on the near-term debt maturities and continued compliance with credit-facility covenants.
- How the company fulfills its substantial purchase commitments and manages inventory, customer demand and receivables collection.
- The realized effect of tax credits and audit settlements versus recurring tax expense.
- Related-party purchasing terms, supplier concentration and the company’s ongoing reliance on Ablecom.