Business context and reporting period
Super Micro Computer, Inc. develops and sells high-performance server systems, subsystems and accessories for data center, enterprise, cloud, HPC and related markets. This unaudited Form 10-Q covers the quarter and six months ended December 31, 2016, the second quarter of fiscal 2017; comparisons are with the corresponding 2015 periods unless noted.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2016 | Three months ended Dec. 31, 2015 | Six months ended Dec. 31, 2016 | Six months ended Dec. 31, 2015 |
|---|---|---|---|---|
| Net sales | $652.0m | $639.0m | $1,180.9m | $1,158.6m |
| Gross profit / gross margin | $93.4m / 14.3% | $106.4m / 16.6% | $173.4m / 14.7% | $178.6m / 15.4% |
| Operating income | $31.8m | $49.1m | $52.0m | $70.6m |
| Net income | $22.0m | $34.7m | $35.5m | $48.4m |
| Diluted earnings per share | $0.43 | $0.67 | $0.69 | $0.94 |
- Six-month operating cash flow was negative $54.9m, compared with positive $86.9m a year earlier. Investing cash use was $17.7m, primarily for property and equipment; financing provided $20.8m.
- Cash and cash equivalents were $128.8m at Dec. 31, 2016, down from $181.0m at June 30, 2016. Cash plus investments was reported as $131.5m. Management stated it had sufficient cash to operate for at least 12 months.
- At Dec. 31, total debt was $127.5m gross, or $127.2m net of issuance costs, versus $93.6m at June 30. Current debt, net of issuance costs, was $92.4m; long-term debt was $34.7m. The company reported compliance with Bank of America financial covenants.
- Total current assets were $1,113.8m and current liabilities $509.8m at Dec. 31. Accounts receivable was $366.9m; inventory was $599.3m, up from $449.0m at June 30. DSO was 49 days, versus 50 days at fiscal year-end; inventory days were 91, versus 87.
Material changes versus prior periods
- Revenue rose 2.0% in the quarter and 1.9% for six months, driven by subsystems and accessories, while server-systems revenue declined 2.1% and 1.0%, respectively. Server-system compute-node sales increased, but average selling price per node fell 9.9% in the quarter and 7.6% for six months.
- Profitability weakened: quarterly gross margin fell 2.3 percentage points and six-month gross margin 0.7 points. Management attributed the pressure mainly to memory and SSD shortages, mature-generation products and more competitive pricing in Asia. Higher operating expenses, including compensation and R&D investment, also contributed to lower income.
- Sales mix shifted toward distributors and toward Europe and Asia; the U.S. share declined. No customer represented 10% or more of sales in the 2016 periods, compared with one customer representing 15.0% of quarterly and 12.8% of six-month sales in the prior-year periods.
- Operating cash use reflected a $156.7m inventory increase and a $78.3m increase in receivables, partly offset by a $96.8m increase in accounts payable. The company cited component-shortage stocking and the Asia Lunar New Year shutdown as factors in higher inventory and payables.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expects working-capital needs and capital expenditures to continue growing, anticipates further bank financing for working capital, and plans approximately $7.0m of additional spending through April 2017 to complete a second Green Computing Park manufacturing facility in San Jose.
- After quarter-end, the company drew $10.0m under a Bank of America revolving line in February 2017 and $8.0m under a CTBC revolving line in January 2017 to support growth and Netherlands expansion.
- Remaining non-cancellable purchase commitments were $402.2m, up from $334.0m at June 30; contractual obligations totaled $550.7m. These commitments heighten the importance of inventory management and demand forecasts.
- The company repurchased 888,097 shares for $18.5m during the six-month period under a $100m, 12-month authorization; no open-market purchases occurred in the December quarter. $81.5m remained available at Dec. 31.
- Ablecom, a related-party contract manufacturer linked by family and ownership ties to the company’s CEO, supplied 11.4% of six-month cost of sales. Amounts payable to Ablecom were $54.3m and outstanding purchase orders were $104.6m at Dec. 31. The filing identifies potential pricing, supply, and conflict-of-interest risks.
- The company reported $18.8m of noncurrent unrecognized tax benefits, including related interest and penalties. The IRS was examining the 2012 and 2013 federal returns, with no adjustment proposed as of Dec. 31; management expected about $1.9m of foreign uncertain tax benefits to reverse after completion of the Taiwan audit.
- Management said pending legal matters were not expected to materially affect financial condition, results or liquidity. Disclosure controls were assessed as effective; a previously identified revenue-recognition material weakness was reported as remediated by June 30, 2016. Management noted that the results of this interim period are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether component availability and pricing improve, and whether gross margins recover despite lower server-system selling prices and competitive pressure.
- Whether inventory, receivables and purchase commitments convert into sales and cash without material write-downs or further working-capital strain.
- Debt availability, borrowing costs, covenant headroom and the company’s ability to fund expansion while operating cash flow is negative.
- Related-party transaction terms, Ablecom supply dependence, and exposure from outstanding balances and purchase orders.
- Progress on the Green Computing Park construction, international manufacturing expansion, and the expected timing and funding of associated investment.
- Developments in the IRS examination, uncertain tax positions, and continued effectiveness of financial reporting controls.