Super Micro Computer, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2012 (fiscal 2012 third quarter), with nine-month results compared with the periods ended March 31, 2011. The filing’s financial statements are unaudited. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Quarter ended Mar. 31, 2012 | Prior-year quarter | Nine months ended Mar. 31, 2012 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $240.2 | $234.3 | $738.0 | $682.3 |
| Gross profit / margin | $40.7 / 17.0% | $37.9 / 16.2% | $123.0 / 16.7% | $111.1 / 16.3% |
| Operating income / margin | $9.6 / 4.0% | $15.2 / 6.5% | $36.8 / 5.0% | $44.1 / 6.5% |
| Net income / diluted EPS | $7.1 / $0.16 | $10.7 / $0.25 | $24.3 / $0.55 | $29.5 / $0.69 |
| Operating cash flow | $(17.9) | $(22.7) | $19.0 | $(1.8) |
Quarterly sales rose 2.5%, while net income fell about 34%. For the nine-month period, sales increased 8.2% and net income declined about 17%. Higher operating expenses—especially research and development—more than offset gross-profit growth. R&D expense increased 41% for the quarter to $17.2 million, reflecting expanded development activity and preparation for the Sandy Bridge launch.
Server-system sales increased 56% in the quarter to $116.4 million and accounted for 48.5% of revenue, versus 31.8% a year earlier. Subsystems and accessories revenue declined 22.5% to $123.8 million. The company attributed the mix shift and supply constraints in part to Thailand flooding’s impact on hard-drive availability.
Balance sheet, cash flow and liquidity
- At March 31, cash and cash equivalents were $88.9 million; cash plus investments was reported as $92.2 million. Total assets were $548.1 million.
- Inventory was $228.9 million, up from $192.7 million at June 30, 2011. Management reported days inventory on hand of 97, compared with 75 at fiscal year-end; days sales outstanding rose to 35 from 30.
- Total borrowings were $36.1 million, including $10.1 million of short-term debt. Cash exceeded borrowings by approximately $52.7 million. The company reported compliance with Bank of America loan covenants.
- For the first nine months, operating cash flow of $19.0 million was offset by $16.8 million used in investing activities, including facility and property spending. Financing activities provided $16.3 million.
- Unused revolving credit was $26.9 million under the Bank of America facility and $1.0 million under the China Trust Bank facility. Management stated that available cash was sufficient for at least the next 12 months.
Material changes and management commentary
- Gross margin improved year over year, reflecting a greater share of higher-margin server systems. Operating margin nevertheless contracted as operating expenses rose to $31.1 million from $22.7 million in the quarter.
- The Thailand hard-drive supply disruption constrained sales and affected customer system integration. The company said it expected the impact to improve during fiscal Q4 2012 and fiscal 2013–2014; this was not quantified guidance.
- To secure hard-drive supply, purchase commitments increased to $438.1 million from $91.8 million at fiscal year-end; approximately $276.3 million related to hard drives, payable through March 2014. Commitments are not the same as funded debt.
- Capital investment expanded facilities in Taiwan and the San Jose headquarters. Net property, plant and equipment increased to $96.3 million from $74.4 million at June 30, 2011.
- Ablecom, a related-party contract manufacturer, supplied a significant portion of manufacturing services. Purchases from Ablecom were $40.2 million for the quarter and $115.9 million for the nine months. The filing describes family and ownership ties to company leadership and outstanding purchase orders of $62.5 million.
Outlook, risks and contingencies
The filing gives no formal numerical revenue or earnings forecast. Management expected continued working-capital and capital-spending needs as the business and overseas operations expanded, and anticipated funding expansion from operations and available borrowing, while noting that future financing availability could not be assured.
- Key operating risks include continuing hard-drive or other component supply disruptions, supplier concentration, inventory obsolescence, warranty costs, volatile product mix and pricing, and the timing and market acceptance of new products.
- The company recorded $5.7 million of inventory provisions for the nine months, versus $1.6 million a year earlier. Warranty provisions were $8.3 million, versus $7.0 million; management cited higher claims and servicing costs.
- Approximately $3.3 million of auction-rate securities remained illiquid and were classified as long-term investments. Management considered the unrealized loss temporary but noted that access to the funds could require a loss of principal and future impairment was possible.
- Unrecognized tax benefits were $8.2 million, with $0.7 million of accrued interest and penalties. The IRS had begun a pre-examination of 2007–2009 federal returns; management did not expect resolution within 12 months and did not expect a material near-term impact.
- Non-cancellable supplier and inventory purchase commitments totaled $438.1 million. Management considered pending legal matters unlikely to have a material adverse effect. Disclosure controls were deemed effective as of March 31, 2012.
Important facts for investors to verify
- Whether hard-drive supply recovered as expected, and whether the large supplier commitments resulted in appropriate demand, inventory levels and margins.
- Whether inventory, days inventory on hand and receivables improve, and whether operating cash flow remains positive after working-capital needs.
- Whether the increase in R&D and other operating costs supports product growth without further pressure on operating margins and earnings.
- Related-party purchasing terms, Ablecom dependence and exposure under outstanding orders, given the disclosed ownership and family relationships.
- Liquidity and valuation developments for the auction-rate securities, and the outcome of tax examinations and any changes in uncertain tax liabilities.