Super Micro Computer, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended September 30, 2014 (fiscal 2015 first quarter), compared with the three months ended September 30, 2013. Super Micro develops high-performance server solutions, subsystems and accessories. Growth was led by higher sales of integrated, higher-density server systems.
Financial results and liquidity
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $443.3 million | $309.0 million |
| Gross profit / margin | $69.2 million / 15.6% | $46.8 million / 15.1% |
| Operating income / margin | $31.6 million / 7.1% | $12.0 million / 3.9% |
| Net income | $20.9 million | $7.7 million |
| Diluted earnings per share | $0.42 | $0.17 |
| Operating cash flow | $27.0 million | $18.3 million |
Revenue increased 43.5%; server-system sales rose 78.4% to $255.6 million and grew from 46.4% to 57.7% of sales. Server units sold increased 29.1% to 71,000, while average selling price rose 38.5% to $3,600. Subsystems and accessories sales increased 13.3% to $187.7 million.
Gross margin improved 0.5 percentage points, primarily from product mix, purchasing power and higher utilization of Taiwan manufacturing, partly offset by lower-margin internet data center sales. Operating expenses were $37.6 million versus $34.7 million, but declined to 8.5% of sales from 11.2%. Effective tax rate was 33.7%, down from 35.1%.
At September 30, 2014, cash and cash equivalents were $117.5 million; the filing separately cites $120.2 million of cash and investments. Current assets were $685.1 million and current liabilities $314.0 million. Total debt was $37.5 million ($34.4 million current); debt was reduced by $8.5 million during the quarter. Operating cash flow included a $27.4 million inventory increase. Capital expenditures were $2.8 million. Inventory was $341.5 million, up from $315.8 million at June 30; DSI rose to 81 days from 77, while DSO remained 42 days.
Material changes and unusual items
- Net income rose substantially, supported by sales growth, improved gross margin and operating leverage.
- Management attributed part of the year-over-year earnings improvement to a $1.9 million refund of value-added taxes on R&D expenses. Higher inventory provisions—$1.7 million versus $4,000—partly offset the improvement.
- Related-party sales to Ablecom increased to $26.6 million from $3.5 million; purchases from Ablecom were $54.4 million versus $45.3 million. Amounts payable to Ablecom were $45.1 million at quarter end.
- Non-cancellable purchase commitments were $226.5 million, including $29.2 million of hard-drive commitments payable through December 2014.
Outlook, risks and contingencies
No specific quarterly or annual revenue or earnings guidance is provided in the supplied filing text. Management said inventory was built to support anticipated fiscal 2015 growth and the transition to Intel Haswell DP products. It expects about $22.1 million of fiscal 2015 spending on San Jose manufacturing buildings and anticipates using operating cash flow and additional bank financing. Management stated cash on hand was sufficient to operate for at least 12 months.
The Bank of America revolving facility, with $9.9 million drawn and $30.1 million unused, was due to mature November 15, 2014; renewal negotiations were ongoing. The CTBC agreement was due to mature November 30, 2014; renewal negotiations were also ongoing. The company reported compliance with Bank of America financial covenants. Key exposures include demand and quarterly-result volatility, component availability and pricing, inventory obsolescence, competitive pricing pressure, execution of international manufacturing expansion and ERP implementation, and dependence on related-party supplier Ablecom. Auction-rate securities of $2.6 million remain illiquid; the company warns they may not be readily sold without loss and could require future impairment. Management judged ordinary-course legal proceedings not likely to have a material adverse effect. The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether both revolving credit facilities were renewed on acceptable terms before their November 2014 maturities.
- Whether sales growth and the shift toward complete server systems persist without eroding gross margin.
- Inventory levels, DSI, inventory reserves and the effect of the Haswell product transition on demand and obsolescence.
- Cash conversion and working-capital needs, including the large purchase commitments and planned manufacturing investment.
- Related-party transaction terms and operational reliance on Ablecom.
- Liquidity and valuation developments for auction-rate securities, and any changes in tax uncertainties or contingencies.