01—Abstract
Summary
Summary of the 10-K filed August 26, 2016. Cited figures are marked; the original filing is the authoritative source.
Super Micro Computer, Inc. (Nasdaq: SMCI) reported fiscal year 2016 (ended June 30, 2016) net sales of $2,215.6 milliona, up from $1,991.2 million in fiscal 2015, and net income of $72.0 million, down from $101.9 million.
The filing attributes the net income decline mainly to higher operating expenses from headcount growth and a $9.3 millionb out-of-period adjustment to extended warranty revenue recorded in the quarter ended September 30, 2015. Gross margin was 15.0% versus 16.1% in fiscal 2015, and income from operations fell to $106.9 million from $146.7 million. Server systems grew to $1,525.6 million (68.9% of net sales) while subsystems and accessories fell to $690.0 million.
Management reported that the material weakness related to extended warranty revenue recognition identified in November 2015 was remediated as of June 30, 2016, and Deloitte & Touche LLP gave an unqualified opinion on internal control. Balance sheet and liquidity improved over the year. Cash and cash equivalents rose to $180.96 millionc from $95.44 million, operating cash flow was $107.5 million versus negative $44.6 million in fiscal 2015, and total debt was $93.6 million.
The company disclosed a new $100 milliond share repurchase program adopted in July 2016, under which it bought 513,194 shares for approximately $10.3 million. Customer concentration and related-party exposure remain significant: one customer (SoftLayer, a division of IBM) represented 10.9% of net sales, and Ablecom, a related party controlled by the family of the CEO, accounted for 12.8% of cost of sales.
02—Key points
Key Highlights
- Net sales rose 11.3% to $2,215.6 million, driven by server systems, which grew 25.7% to $1,525.6 million and reached 68.9% of net sales.
- Net income fell to $72.0 million from $101.9 million, reflecting higher operating expenses and a $9.3 million out-of-period extended warranty revenue adjustment.
- Gross margin declined to 15.0% from 16.1%; the filing states it would have been 15.3% excluding the out-of-period adjustment.
- Operating cash flow was $107.5 million, compared with negative $44.6 million in fiscal 2015, and cash and cash equivalents increased to $181.0 million.
- Management reported that the extended warranty revenue material weakness identified in November 2015 was remediated as of June 30, 2016.
- A $100 million share repurchase program was adopted in July 2016; 513,194 shares were bought in July 2016 for approximately $10.3 million.
- Concentration risk persists: one customer represented 10.9% of net sales, and Ablecom, a related party, accounted for 12.8% of cost of sales.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, Super Micro Computer kept $0.03.
- Revenue$2.22B100.0%
- Cost of revenue−$1.89B85.1%
- Gross profit$330.5M14.9%
- Operating costs−$223.0M10.1%
- Operating income$107.5M4.9%
- Interest, other & tax−$35.4M1.6%
- Net income$72.1M3.3%
Where FY2016 revenue went
$2.22B- Cost of revenue: $1.89B, 86% of revenue
- Net income: $72.1M, 3.3% of revenue
- R&D: $124.2M, 5.6% of revenue
- Other operating costs: $89.3M, 4.0% of revenue
- Interest, other & tax: $35.4M, 1.6% of revenue
Kept 3.3% as net incomeNet income $72.1M · 3.3%Interest, other & tax $35.4M · 1.6%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed August 26, 2016Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $2.22B$1.95B | +13.4% |
| Cost of Revenue | $1.89B$1.65B | +15.0% |
| Gross Profit | $330.50M$306.58M | +7.8% |
| R&D Expenses | $124.22M$101.40M | +22.5% |
| Operating Expenses | $223.01M$173.94M | +28.2% |
| Operating Income | $107.49M$132.65M | −19.0% |
| Interest Expense | $1.59M$965K | +65.2% |
| Net Income | $72.08M$92.56M | −22.1% |
| EPS (Basic) | $1.50$1.99 | −24.6% |
| EPS (Diluted) | $1.39$1.85 | −24.9% |
| Shares Outstanding (Basic) | 47.92M46.43M | +3.2% |
| Shares Outstanding (Diluted) | 51.84M50.09M | +3.5% |
05—Questions
Frequently Asked Questions
Why did net income decline despite higher revenue?
The filing attributes the decline primarily to higher operating expenses from headcount growth to support business expansion, and to a $9.3 million out-of-period adjustment relating to extended warranty revenue recorded in the quarter ended September 30, 2015. Research and development expense rose to $124.0 million from $100.3 million, and general and administrative expense rose to $37.8 million from $24.4 million.
Is the company's cash position and liquidity stronger than in the prior year?
Yes. Cash and cash equivalents increased to $180.96 million at June 30, 2016 from $95.44 million a year earlier, and operating activities provided $107.5 million compared with a use of $44.6 million in fiscal 2015. Total debt was $93.6 million, and the filing states that management believes it has sufficient cash to operate for at least the next 12 months.
What is the status of the internal control weakness disclosed earlier?
Management identified a material weakness in November 2015 related to revenue recognition for contracts with extended product warranties and states it was remediated as of June 30, 2016. Deloitte & Touche LLP issued an unqualified opinion that the company maintained effective internal control over financial reporting as of that date.
How dependent is the company on a few customers and related-party relationships?
One customer, SoftLayer (a division of IBM), accounted for 10.9% of fiscal 2016 net sales. Ablecom, a related party whose chief executive is the brother of the company's CEO, supplied 12.8% of cost of sales, and the filing notes that the company has an exclusive supply arrangement with Ablecom for certain products and that the family's influence over Ablecom could affect negotiation terms.
Is the company returning capital to shareholders?
The company has never paid cash dividends and does not expect to in the foreseeable future. In July 2016 its board adopted a program to repurchase up to $100 million of common stock over the next twelve months, and in July 2016 it purchased 513,194 shares at a weighted average price of $19.97 for approximately $10.3 million.
06—Continue