Super Micro Computer, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three months ended September 30, 2011, the first quarter of fiscal 2012. Super Micro develops server systems, subsystems and accessories. Results are unaudited and may not indicate full-year performance.
Key financial metrics
| Metric | Q1 FY2012 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $247.9 million | $207.2 million | +19.6% |
| Gross profit / margin | $39.6 million / 16.0% | $33.0 million / 15.9% | Profit +19.9%; margin +0.1 percentage point |
| Operating income / margin | $13.5 million / 5.5% | $12.0 million / 5.8% | Income +12.5%; margin down 0.3 percentage point |
| Net income | $8.5 million | $7.2 million | +17.7% |
| Diluted EPS | $0.19 | $0.17 | +$0.02 |
| Operating cash flow | $25.1 million | $16.9 million | +$8.2 million |
Revenue growth reflected higher server-system volume and average selling prices, alongside growth in subsystems and accessories. Server systems were 39.4% of sales, up from 35.7%. Operating expenses rose 24.2% to $26.1 million, mainly from increased R&D and staffing. R&D spending increased 32.3% to $13.8 million.
At September 30, cash and cash equivalents were $92.3 million; current assets were $388.9 million and current liabilities $150.3 million. Total debt was approximately $30.6 million. Inventory was $189.0 million, down from $192.7 million at June 30, while inventory days rose to 84 from 75. DSO increased to 32 days from 30. Capital expenditures were $8.0 million; cash increased $22.3 million to $92.3 million.
Material changes and unusual items
- Revenue growth lifted gross profit, but higher operating costs meant operating margin declined year over year.
- The company recorded a $2.4 million inventory-obsolescence provision, compared with a $0.1 million benefit in the prior-year quarter, primarily for older products affected by product transitions.
- Operating cash flow benefited from higher accounts payable and income-tax working-capital movements; management attributed the increase in payables partly to payment timing.
- Related-party supplier Ablecom accounted for $37.4 million of purchases. Amounts owed to Ablecom were $27.2 million at quarter-end, and outstanding purchase orders were $46.1 million.
Outlook, risks and contingencies
Management said cash on hand was sufficient to operate for the next 12 months and expected to fund growth through operating cash flow and borrowing. It planned approximately $7.0 million of construction through FY2012 for Taiwan facilities and the San Jose headquarters expansion, and expected interest expense to rise with additional financing. In October 2011, after quarter-end, the company amended its Bank of America facilities to provide a $40.0 million revolver and a $14.0 million term loan, and obtained an $11.2 million China Trust Bank revolver, of which $4.5 million was drawn.
Key operating risks include Thailand flooding and resulting hard-drive supply-chain disruption, possible customer order deferrals ahead of Intel’s next-generation server microprocessor, component availability and pricing, competitive pressure, and reliance on distributors and limited suppliers. Management identified Ablecom as a related-party contract manufacturer and disclosed potential conflicts and supply concentration. Auction-rate securities of $3.7 million remained illiquid; their valuation relies on significant unobservable inputs, and a future impairment is possible.
Non-cancelable supplier purchase commitments were $98.9 million, payable within one year. The company reported $7.2 million of unrecognized tax benefits and $0.7 million of related interest and penalties; it was under IRS and Netherlands tax audits, with no material impact expected in the next 12 months. Management said pending legal matters were not expected to materially affect results or liquidity. Disclosure controls were judged effective at a reasonable assurance level.
Important facts for investors to verify
- Whether growth in server systems and sales to OEMs/end customers is sustained, and how product mix affects margins.
- Whether inventory provisions, inventory days and customer returns remain elevated as products transition.
- The effects of Thailand-related supply disruption and Intel product timing on orders and fulfillment.
- Ablecom purchasing terms, related-party exposure, and the company’s ability to diversify manufacturing sources.
- Execution, financing and total costs of Taiwan and San Jose construction, including the terms and availability of post-quarter credit facilities.
- Liquidity and future valuation or impairment of auction-rate securities, and outcomes of tax examinations and uncertain tax positions.