UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________________________
Form 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2013
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-33383
__________________________________________________________________________
Super Micro Computer, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 77-0353939 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
980 Rock Avenue
San Jose, CA 95131
(Address of principal executive offices, including zip code)
(408) 503-8000
(Registrant’s telephone number, including area code)
__________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $0.001 par value per share | The Nasdaq Stock Market LLC | |
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer x | |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b of the Exchange Act) Yes ¨ No x
The aggregate market value of the registrant’s Common Stock held by non-affiliates, based upon the closing price of the Common Stock on December 31, 2012, as reported by the Nasdaq Global Select Market, was approximately $331,423,204. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock, based on filings with the Securities and Exchange Commission, have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of September 6, 2013 there were 42,702,605 shares of the registrant’s common stock, $0.001 par value, outstanding, which is the only class of common stock of the registrant issued.
DOCUMENTS INCORPORATED BY REFERENCE
None
SUPER MICRO COMPUTER, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2013
TABLE OF CONTENTS
Page | ||
PART I | ||
Item 1. | ||
Item 1A. | ||
Item 1B. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II | ||
Item 5. | ||
Item 6. | ||
Item 7. | ||
Item 7A. | ||
Item 8. | ||
Item 9. | ||
Item 9A. | ||
Item 9B. | ||
PART III | ||
Item 10. | ||
Item 11. | ||
Item 12. | ||
Item 13. | ||
Item 14. | ||
PART IV | ||
Item 15. | ||
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology including “would,” “could,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of these terms or other comparable terminology. In evaluating these statements, you should specifically consider various factors, including the risks described below, under “Item 1A Risk Factors”, and in other parts of this Form 10-K as well as in our other filings with the SEC. These factors may cause our actual results to differ materially from those anticipated or implied in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We cannot guarantee future results, levels of activity, performance or achievements.
PART I
Item 1. Business
Overview
We are a global leader in high-performance, high-efficiency server technology and green computing innovation. We develop and provide advanced server Building Block Solutions to Data Center, Cloud Computing, Enterprise, Hadoop/Big Data, High Performance Computing, or HPC, and Embedded markets. Our solutions range from complete server, storage, blade, workstation and full rack solutions to networking devices and server management software, which can be used by distributors, original equipment manufacturers, or OEMs, and end customers. We offer our customers a high degree of flexibility and customization by providing what we believe to be the industry’s broadest array of server configurations. Our server systems, subsystems and accessories are architecturally designed to provide highest levels of reliability, quality and scalability, thereby enabling our customers' benefits in the areas of compute performance, density, thermal management and power efficiency to lower their overall total cost of ownership.
We perform the majority of our research and development efforts in-house, which increases the communication and collaboration between design teams, streamlines the development process and reduces time-to-market. We have developed a set of design principles which allow us to aggregate individual industry standard materials to develop proprietary components, such as serverboards, chassis, power supplies, networking and storage devices. This building block approach allows us to provide a broad range of SKUs, and enables us to build and deliver application-optimized solutions based upon customers’ requirements. Architecture innovations include Twin, FatTwin, SuperBlade, MicroCloud, Super Storage Bridge Bay, or SBB, Double-Sided Storage, Battery Backup Power, or BBP, modules, Universal I/O, or UIO, and WIO expansion technology. As of June 30, 2013, we offered over 5,200 SKUs, including SKUs for rackmount and blade server systems, serverboards, chassis and power supplies and other system accessories.
We conduct our operations principally from our headquarters in California and subsidiaries in Taiwan, the Netherlands, and China. We sell our server systems and server subsystems and accessories primarily through distributors, which include value added resellers and system integrators, and to a lesser extent to OEMs as well as through our direct sales force. During fiscal year 2013, our products were purchased by over 800 customers, most of which are distributors in 84 countries. None of our customers represent 10% or more of our net sales. We commenced operations in 1993 and have been profitable every year since inception. For fiscal years 2013, 2012 and 2011, our net sales were $1,162.6 million, $1,013.9 million and $942.6 million, respectively, and our net income was $21.3 million, $29.9 million and $40.2 million, respectively.
The Super Micro Solution
We develop and provide high performance server solutions based upon an innovative, modular and open-standard architecture. Our primary competitive advantages arise from how we use our integrated internal research and development organization to develop the intellectual property used in our server solutions. These have enabled us to develop a set of design principles and performance specifications that we refer to as Super SSI that meet industry standard SSI requirements and also incorporate advanced functionality and capabilities. Super SSI provides us with greater flexibility to quickly and efficiently develop new server solutions that are optimized for our customers’ specific application requirements. Our modular architectural approach has allowed us to offer our customers interoperable designs across all of our product lines. This modular approach, in turn, enables us to provide what we believe to be the industry’s largest array of server systems, subsystems and accessories.
Flexible and Customizable Server Solutions
We provide flexible and customizable server solutions to address the specific application needs of our customers. Our design principles allow us to aggregate industry standard materials to develop proprietary subsystems and accessories, such as serverboards, chassis and power supplies to deliver a broad range of products with superior features. Each subsystem and accessory is built to be backward compatible. We believe this building block approach allows us to provide a broad range of SKUs. As of June 30, 2013, we offered over 5,200 SKUs, including SKUs for rackmount and blade server systems, serverboards, chassis and power supplies and other system accessories.
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Rapid Time-to-Market
We are able to significantly reduce the design and development time required to incorporate the latest technologies and to deliver the next generation application optimized server solutions. Our in-house design competencies and control of the design of many of the components used within our server systems enable us to rapidly develop, build and test server systems, subsystems and accessories with unique configurations. As a result, when new products are brought to market we are generally able to quickly design, integrate and assemble server solutions with little need to re-engineer other portions of our solution. Our efficient design capabilities allow us to offer our customers server solutions incorporating the latest technology with a superior price-to-performance ratio. We work closely with the leading microprocessor vendors to coordinate the design of our new products with their product release schedules, thereby enhancing our ability to rapidly introduce new products incorporating the latest technology.
Improved Power Efficiency and Thermal Management
We leverage advanced technology and system design expertise to reduce the power consumption of our server, blade, workstation and storage systems. We believe that we are an industry leader in power saving technology. Our server solutions include many design innovations to optimize power consumption and manage heat dissipation. We have designed flexible power management systems which customize or eliminate components in an effort to reduce overall power consumption. We have proprietary power supplies that can be integrated across a wide range of server system form factors which can significantly enhance power efficiency. We have also developed technologies that are specifically designed to reduce the effects of heat dissipation from our servers. Our thermal management technology allows our products to achieve a superior price-to-performance ratio while minimizing energy costs and reducing the risk of server malfunction caused by overheating. We have also developed power management software that controls power consumption of server clusters by policy-based administration.
High Density Servers
Our servers are designed to enable customers to maximize computing power while minimizing the physical space utilized. We offer server systems with up to three times the density of conventional solutions, which allows our customers to efficiently deploy our server systems in scale-out configurations. Through our industry leading technology, we can offer significantly more memory and expansion slots than traditional server systems with a comparable server form factor. For example, we offer systems in a 2U configuration with features and capabilities generally offered by competitors only in a server with room for four racks or shelves, or a 4U server, configuration. Our 2U Twin² system contains four full feature DP compute nodes in a 2U chassis which are designed to address the ever-increasing efficiency, density and low total cost of ownership demands of today’s high performance computing clusters and data centers. Our TwinBlade, supporting 20 DP nodes and 5 switches in 7U enclosure, achieve even higher performance, density and efficiency and make it the greenest, most power-saving blade solution available. Our MicroCloud, supporting up to 12 nodes in a 3U enclosure, provides a compelling, cost-effective solution for hosting, searching, or cloud computing applications. In addition, our FatTwin solutions contain eight or four full feature DP hot-pluggable compute nodes in a 4U server. The 8-node configuration provides high density and computing power for those compute-demanding applications, while the 4-node configuration offers up to 8 hot-pluggable 3.5" HDDs per U for those applications that require high storage capacity within a compact setting. FatTwin is designed to operate at high temperatures up to 47 degrees Celsius ambient and delivers the highest performance with the most energy efficient technologies and cooling designs currently available on the market.
Strategy
Our objective is to be the leading provider of application optimized, high performance server solutions worldwide. Key elements of our strategy include:
Maintain Our Time-to-Market Advantage
We believe one of our major competitive advantages is our ability to rapidly incorporate the latest computing innovations into our products. We intend to maintain our time-to-market advantage by continuing our investment in our research and development efforts to rapidly develop new proprietary server solutions based on industry standard components. We plan to continue to work closely with Intel, AMD and Nvidia, among others, to develop products that are compatible with the latest generation of industry standard technologies. We believe these efforts will allow us to continue to offer products that lead in price for performance as each generation of computing innovations becomes available.
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Expand Our Product Offerings
We plan to increase the number of products we offer to our customers. Our product portfolio will continue to include additional solutions based on the latest Intel and AMD technologies as well as other technology vendors such as Nvidia. We plan to continue to improve the energy efficiency of our products by enhancing our ability to deliver improved power and thermal management capabilities, as well as servers and subsystems and accessories that can operate in increasingly dense environments. We have introduced and also plan to continue developing and in the future offer additional management software capabilities that are integrated with our server products and will further enable our customers to simplify and automate the deployment, configuration and monitoring of our servers.
Further Develop Existing Markets and Expand Into New Markets
We intend to strengthen our relationships with existing customers and add new distributors and OEM partners. We will continue to target specific industry segments that require application optimized server solutions including data center environments, financial services, oil and gas exploration, biotechnology, entertainment and embedded applications. We have begun manufacturing and service operations in the Netherlands and Taiwan in support of European and Asian customers and we plan to continue to increase our overseas manufacturing capacity and logistics capabilities and expand our reach geographically.
Strengthen Our Relationships with Suppliers and Manufacturers
Our efficient supply chain and combined internal and outsourced manufacturing allow us to build systems to order that are customized, while minimizing costs. We plan to continue leveraging our relationships with suppliers and contract manufacturers in order to maintain and improve our cost structure as we benefit from economies of scale. We intend to continue to source non-core products from external suppliers. We also believe that as our solutions continue to gain greater market acceptance, we will generate growing and recurring business for our suppliers and contract manufacturers. We believe this increased volume will enable us to receive better pricing and achieve higher margins. We believe that a highly disciplined approach to cost control is critical to success in our industry. For example, we continue to maintain our warehousing capacity in Asia through our relationship with Ablecom Technology, Inc., or Ablecom, one of our major contract manufacturers and a related party, so that we continue to deliver products to our customers in Asia and elsewhere more quickly and in higher volumes.
Advanced Blade Server Technology
To meet the emerging demand for blade servers, we have developed and continued to improve our high-performance blade server solutions, called SuperBlades. Our SuperBlades are designed to share a common computing infrastructure, thereby saving additional space and power. Our SuperBlades are self-contained servers designed to achieve industry leading density and superior performance per square foot at a lower total cost of ownership. The SuperBlade’s enclosure provides power, cooling, networking, various interconnects and system-level management and supports both Intel Xeon and AMD Opteron processors. By creating a range of unique blade server offerings, we provide our customers with solutions that can be customized to fit their needs. In addition, the SuperBlade power supplies provide 94%+ gold level or above efficiency, which is currently considered the highest AC power supply efficiency in today's blade solutions providing extreme electricity cost saving. We believe that our SuperBlade server system provides industry leading density, memory expandability, reliability, price-to-performance per square foot and energy saving. We also offer our TwinBlade SuperBlade configuration which includes two dual processor blades into one slot. The TwinBlade with the most current Infiniband fourteen data rate, or FDR, connection enables the new SuperBlade to achieve even higher performance, density and efficiency by doubling the number of dual-processor compute nodes per 7U enclosure from 10 to 20. In addition to its superior processing power, TwinBlade combines 94%+ power supply efficiency with our innovative and highly efficient thermal and cooling system designs making it the greenest, most power-saving blade solution available. Our Graphics Processing Units (GPU) SuperBlade, which supports up to 30 GPUs and 20 Central Processing Units (CPUs) in a single 7U blade enclosure, delivers maximum performance with the best CPU to GPU balance and optimized I/O.
Products
We offer a broad range of application optimized server solutions, including complete rackmount and blade server systems and subsystems and accessories which customers can use to build complete server systems.
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Server Systems
We sell server systems in rackmount, standalone tower and blade form factors. We currently offer a complete range of server options with single, dual and quad CPU capability supporting Intel Pentium and Xeon multi-core architectures in 1U, 2U, 3U, 4U, tower and blade form factors. We also offer complete server systems based on AMD single, dual and quad Opteron in 1U, 2U, 4U and blade form factors. As of June 30, 2013, we offered over 950 different server systems. For each system, we offer multiple chassis designs and power supply options to best suit customer requirements. We also offer multiple configurations based on our latest generation systems with most comprehensive selections of chassis and serverboards. A majority of our most common systems are also available in minimum 1U or 1/2 depth form factors which are approximately one half of the size of standard sized rackmount servers.
The figure below depicts a typical rackmount server and the different components that we typically optimize for our customers. The layout presented is for illustrative purposes only and does not represent the typical layout of all our servers.
A. | Chassis: Industry standard 1U rackmount chassis that allows server interoperability while efficiently housing key server components. |
B. | Power Supply: High efficiency, cost effective AC energy saving power supply. DC power supplies and Battery Backup Power BBP® modules are also available. |
C. | Memory: Scalable memory expansion capability. |
D. | Intelligent Platform Management Interface: Monitors onboard instrumentation for server health and allows remote management and KVM-over-LAN for the entire network via a single keyboard, monitor and mouse. |
E. | Processor: Programmable CPUs, Many Integrated Core (MIC) co-processors, and GPUs, that performs all server instructions and logic processing, plus some cache memory and I/O functions. Supermicro servers support single, dual, and quad multi core processors from major suppliers such as Intel, NVIDA, and AMD. |
F. | Expansion Modules: Allows increased functionality, I/O customization and flexibility. |
G. | Thermal Management: Pulse Width Modulated counter rotating and redundant fan controls that provide optimum cooling and energy saving and dissipation of server component heat. |
H. | Disk Drives: Storage medium for operating system, applications, and data. We offer “power-on” hot-swappable capability. |
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Below is a table that summarizes the most common server configurations purchased by our customers. We also design and build other customized systems using these and other building blocks to meet specific customer requirements.
Server System Model | CPU | Memory | Drive Bays | Form Factor | SKUs | |||||
5000 Series | Core 2 Duo, Core 2 Quad, Xeon, Core i7, Core i5, Core i3, E5-2600/1600, E3-1200, Atom, Celeron Pentium | Unbuffered DDR3, ECC Registered DDR3 | 1 to 8 drives | 1U, 2U, Mid-tower | 105 models | |||||
6000 Series | Dual Xeon (Dual/Quad/Six/Eight Core) | DDR3, ECC Registered DDR3 | 1 to 16 drives | 1U, 2U, 3U | 239 models | |||||
7000 Series | Dual Xeon (Dual/Quad/Six/Eight Core) | DDR3, ECC Registered DDR3 | 1 to 8 drives | 4U, Tower | 52 models | |||||
8000 Series | Quad Xeon (Quad/Six/Eight/Ten Core), MP Xeon (Quad/Six/Eight Core) | ECC Registered DDR3 | 1 to 48 drives | 1U, 2U, 4U, Tower | 17 models | |||||
FatTwin | Dual Xeon (Quad, Six, Eight Core) | ECC Registered DDR3 | 1 to 12 drives | 4U | 27 models | |||||
MicroCloud | Single Xeon, Core i3 & Pentium | Unbuffered DDR3, ECC Registered DDR3 | 1 to 4 drives | 3U | 5 models | |||||
SuperBlade | Dual Xeon (Quad/Six/Eight Core), Dual/Quad/MP Opteron (Quad Core/ Six/Eight/Twelve/Sixteen Core) | ECC Registered DDR3 | 1 to 6 drives | 7U | 65 models | |||||
SuperStorage | Dual Xeon (Quad/Six/Eight Core) | ECC Registered DDR3 | 12 to 72 drives | 2U, 3U, 4U | 16 models | |||||
We offer a variety of server storage options depending upon the system, with disk drive alternatives including small computer system interface, serial advanced technology attachment, or SATA, SATAII, or SAS, SASII and SAS3.0, Intelligent Drive Electronics, or IDE, and serial attached SCSI.
For our remote system management solutions, we offer server management utilities in addition to the standard features provided by the baseboard management controller, or BMC, through our Intelligent Platform Management Interface, or IPMI 2.0. BMCs, which are specialized processors that perform monitoring and control functions independently of the CPU, are sold as part of our server systems and as a standard for almost all our serverboards and server systems. Server management information from the BMC can be received through the built-in BMC Web User Interface, and standalone IPMI utilities. The IPMI solutions provide remote access for debugging, monitoring system health and administration functionality for our server platforms. Our IPMI solutions include key capabilities such as remote hardware status, failure notification, as well as the ability to power-cycle non-responsive servers and to manage the system through out-of-band network or KVM (keyboard, video and mouse) functionality over LAN. As a part of the system management solution, our BMC monitors onboard instrumentation such as temperature sensors, power status, voltages and fan speed, and provides remote power control capabilities to reboot and reset the server. It also includes remote access to the Basic Input/Output System, or BIOS, configuration and operating system console information.
Furthermore, Supermicro Power Management software, or SPM, Supermicro Command Manager, or SCM, Supermicro Update Manager, or SUM, and SuperDoctor 5, or SD5, have been designed for server farm or datacenters' system administration and management. These remote management software utilities provide the ability to manage large-scale servers and storage in an organization’s IT infrastructure. It includes optional modules as well as the capability of incorporating third-party plug-in software, which is connected within a common framework and enables communication between devices. SUM remotely updates BIOS, firmware and system settings through an Out-of-Band, or OOB, interface and can perform operations independent of the operating system environment. SD5 is the latest generation of SuperDoctor products and builds upon over 15 years of in-production service assisting our customers with their server system health monitoring. SPM is designed specifically for HPC/Data Center cluster deployment and management. The Command Line Interface, or CLI, which utilizes the Linux operating system, provides a convenient working environment for our system integrator or the cluster administrator
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to deploy, configure, control, and manage the HPC cluster. Our server management utilities mentioned above can leverage the existing IPMI solutions to integrate management functions.
Server Subsystems and Accessories
We believe we offer the largest array of modular server subsystems and accessories or building blocks in the industry that are sold off the shelf or built-to-order. These components are the foundation of our server solutions and span product offerings from the entry-level single and dual processor server segment to the high-end multi-processor market. The majority of the subsystems and accessories we sell individually are optimized to work together and are ultimately integrated into complete server systems.
Serverboards
We design our serverboards with the latest chipset and networking technologies. Each serverboard is designed and optimized to adhere to specific physical, electrical and design requirements in order to work with certain combinations of chassis and power supplies and achieve maximum functionality. For our rackmount server systems, we not only adhere to SSI specifications, but our Super SSI specifications provide an advanced set of features that increase the functionality and flexibility of our products.
The following table displays some of our most common serverboard configurations purchased by our customers including X10 Haswell (Intel's 4th generation Core i3 Dual and Quad Core Xeon E3-1200 v3 family), X9 Sandy Bridge (Intel’s generation of Dual, Quad and Eight Core Xeon E3-1200/E5 2600 family), X8 (Intel’s generation of Six and Eight Core, Dual and Quad Core Xeon 5600/5500/3600/3500 series) and H8 (AMD's generation of Six, Eight, Twelve, Sixteen, Dual and Quad Core Opteron 200, 800 and 6000 series). As of June 30, 2013, we offered more than 550 SKUs for serverboards.
Serverboard Model | CPU | System Bus | Form Factor | Memory | SKUs | |||||
X10 Series | UP Xeon (Dual/Quad Core) | 1600MHz | Advanced Technology Extended (ATX), Micro Advanced Technology Extended (uATX), MicroCloud | Unbuffered DIMM, DDR3 | 13 models | |||||
X9 Series | DP/UP Xeon (Dual/Quad/Eight Core) | QPI up to 8.0 GT/s | Twin, WIO, ATX, uATX | ECC Registered DDR3, Unbuffered DIMM | 138 models | |||||
X8 Series | Dual Xeon (Dual/Quad/Six Core), UP Xeon (Dual/Quad/Six Core), MP Xeon (Quad/Six/Eight Core) | QPI up to 6.4 GT/s | Twin, UIO, Extended ATX (EATX), ATX | ECC Registered DDR3, Unbuffered DIMM | 110 models | |||||
C2, C7 Series | Pentium D (Dual/Quad/Six Core) | 1333/1066/800 MHz | ATX, uATX | Unbuffered DIMM, DDR3 | 28 models | |||||
H8 Series | Dual/Quad/MP Opteron (Dual/Quad/Six/Eight/ Twelve/Sixteen Core) | Hypertransport/HT3 | Twin, UIO, ATX, EATX | ECC Registered DDR3, Unbuffered DIMM | 80 models | |||||
Chassis and Power Supplies
Our chassis are designed to efficiently house our servers while maintaining interoperability, adhering to industry standards and increasing output efficiency through power supply design. We believe that our latest generation of power supplies achieves the maximum power efficiency available in the industry. In addition, we have developed a remote management system that offers the ability to stagger the startup of systems and reduce the aggregate power draw at system boot to allow customers to increase the number of systems attached to a power circuit. We design DC power solutions to be
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compatible with data centers that have AC, DC or AC and DC based power distribution infrastructures. We believe our unique power design technology reduces power consumption by increasing power efficiency up to 95%, which we believe is among the most efficient available in the industry. Our server chassis come with hot-plug, heavy-duty fans, fan speed control and an advanced air shroud design to maximize airflow redundancy. We have developed Battery Backup Power, or BBP, modules which provide the same dimension, output pin assignment and work with some existing AC hot swap redundant module models seamlessly. BBP can further increase datacenter power efficiency 5% to 15% by replacing existing datacenter UPS systems with BBP modules.
The table below depicts some of the most common chassis configurations purchased by our customers including 500-series (front I/O options and space constrained environments), 700-series (Tower, 4U rackmount servers and workstations), 800-series (most widely used for single, dual and quad processor servers and storage systems), 900-series (for high-density storage applications) and 100/200/400-series (for 2.5” hard disk drives server and ultra high density storage) chassis products. These chassis solutions offer redundant power, hold swap power supply, redundant cooling fan options and high efficiency AC and DC power combinations. As of June 30, 2013, we offered more than 700 SKUs for chassis and power supplies.
Chassis Model | CPU Support | Expansions | Drive Bays | Power Supply | Form Factor | SKUs | ||||||
SC100 Series | Xeon, Pentium, Opteron, Atom | Up to 5 slots | 4 to 10 drives (2.5” HDD) | 330W to 1800W – single/redundant | 1U, Mini- 1U, Box PC | 40 models | ||||||
SC200 Series | Xeon, Pentium, Opteron, Atom | Up to 7 slots | 8 to 26 drives (2.5” HDD) | 500W to 1800W – single/redundant | 2U | 47 models | ||||||
SC400 Series | Xeon, Pentium, Opteron, Atom | Up to 11 slots | 24 to 88 drives (2.5” HDD) | 1400W to 1800W – single/redundant | 4U | 6 models | ||||||
SC500 Series | Xeon, Pentium, Opteron, Atom | Up to 7 slots | 1 to 4 drives | 200W to 600W | Mini-1U, 2U | 52 models | ||||||
SC700 Series | Xeon, Pentium, Opteron, Atom | Up to 11 slots | 4 to 10 drives | 300W to 1600W – single/redundant | 4U, Tower, Mid-tower | 102 models | ||||||
SC800 Series | Xeon, Pentium, Opteron, Quad Processer, Atom | Up to 11 slots | 2 to 72 drives | 260W to 1800W – single/redundant | 1U, 2U, 3U, 4U | 328 models | ||||||
SC900 Series | Xeon, Pentium, Opteron, Atom | Up to 8 slots | Up to 16 drives | 550W to 1600W – single/redundant | 3U, 4U, Tower | 20 models | ||||||
Other System Accessories
As part of our server component offerings, we also offer other system accessories that our customers may require or that we use to build our server solutions. These other products include, among others, microprocessors, memory and disc drives that generally are third party developed and manufactured products that we resell without modification. As of June 30, 2013, we offered more than 3,000 SKUs for other system accessories.
Technology
We are focused on providing leading edge, high performance products for our customers. We have developed a design process to rapidly deliver products with superior features. The technology incorporated in our products is designed to provide high levels of reliability, quality, security and scalability. Our most advanced technology is developed in-house, which allows us to efficiently implement advanced capabilities into our server solutions. We work in collaboration with our key customers and suppliers to constantly improve upon our designs, reduce complexity and improve reliability.
Our rackmount and tower server solutions are based on our Super SSI architecture, which incorporates proprietary I/O expansion, thermal and cooling design features as well as high-efficiency power supplies. For example, our 1U servers now offer up to 5 I/O expansion slots with up to 32 DIMM slots to accommodate up to 1TB of memory, which, prior to Super SSI, was only possible in a 2U chassis. We also achieved higher memory densities by designing customized serverboards to include 16 memory slots without sacrificing I/O expansion capability. The result is what we believe to be a superior serverboard design
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that provides our customers with increased flexibility for their new and legacy add-on card support and the ability to keep up with the growing memory requirements needed to maintain system performance requirements.
Our latest chassis designs include advanced cooling mechanisms such as proprietary air shrouds to help deliver cool air directly to the hottest components of the system resulting in improved cooling efficiency and consequently increased system reliability. Our newest generation of power supplies incorporates advanced design features that provide what we believe to be the highest level of efficiency in the industry and therefore reduce overall power consumption. Our advanced power supply solutions include volume shipments of the industry’s first 1U chassis and servers with up to 95% power efficiency.
Our 1U Twin, 2U Twin, 2U Twin², 2U Twin3, TwinBlade and FatTwin product lines are optimized for density, performance and efficiency, and have been rapidly adopted by customers and other manufacturers. Our FatTwin line featuring superior architecture, high efficiency power supplies and an advanced thermal solution is optimized for customers' storage, HPC and cloud computing requirements. This line includes power saving system featuring 16% lower power consumption over the life of the system, HPC GPU/Xeon Phi system accommodating up to 12 GPU or Xeon Phi cards in 4U and Haddop Big/Data system accommodating up to 12 fixed 3.5" HDDs plus optional 2 fixed 2.5" HDDs in 4U. Our GPU/Xeon Phi optimized product line in 1U, 2U, 4U and blade platforms provides extreme performance in calculation intensive applications. Our Atom server line featuring low power, low noise and small form factor is optimized for embedded and server appliance applications. Our innovative double-sided storage provides high density with the ability of hot-plug from front and back sides. Our Super Storage Bridge Bay (SBB) is optimized for mission-critical, enterprise-level storage applications which can incorporate or bridge SATA, SAS, and FC storage solutions and provides hot-swappable canisters for all active components in the server.
We have developed standalone switch products, which include 1G Ethernet and 10G Ethernet for rack-mount servers. These switch products not only help us to up-sell our server products, but also generate additional revenues.
Our SuperRack product lines offer a wide range of flexible accessory options including front, rear and side expansion units to provide modular solutions for system configuration. Data center, high-performance Cloud Computing and server farm customers can use us as a one-stop shop for all of their IT hardware needs. Our SuperRack offers easy installation and rear access with no obstructions for hot-swap devices, user-friendly cabling and cable identification, and effortless integration of our high-density server, storage and blade systems.
Our MicroCloud product lines are high-density, multi-node UP servers with up to 12 hot-pluggable nodes and 16 hot-swappable HDDs in a compact 3U form factor. MicroCloud integrates advanced technologies within a compact functional design to deliver high performance in environments with space and power limitations. The entire system is designed with efficiency in mind from its ease of maintenance to is high-efficiency, redundant Platinum Level (94%+) power modules. These combined features provide a compelling, cost-effective solution for IT professionals implementing new hosting architectures for SMB and Public/Private Cloud Computing applications.
Research and Development
We have over 20 years of research and development experience in server subsystems and accessories design and in recent years, have devoted additional resources to the design of server systems. Our engineering staff is responsible for the design, development, quality, documentation and release of our products. We continuously seek ways to optimize and improve the performance of our existing product portfolio and introduce new products to address market opportunities. We perform the majority of our research and development efforts in-house, increasing the communication and collaboration between design teams to streamline the development process and reducing time-to-market. We are determined to continue to reduce our design and manufacturing costs and improve the performance, cost effectiveness and thermal and space efficiency of our solutions.
Over the years, our research and development team has focused on the development of new and enhanced products that can support emerging protocols while continuing to accommodate legacy technologies. Much of our research and development activity is focused on the new product cycles of leading chipset vendors. We work closely with Intel, AMD and Nvidia, among others, to develop products that are compatible with the latest generation of industry standard technologies under development. Our collaborative approach with the chipset vendors allows us to coordinate the design of our new products with their product release schedules, thereby enhancing our ability to rapidly introduce new products incorporating the latest technology. We work closely with their development teams to optimize chip performance and reduce system level issues. Similarly, we work very closely with our customers to identify their needs and develop our new product plans accordingly.
We believe that the combination of our focus on internal research and development activities, our close working relationships with chipset vendors and our modular design approach allow us to minimize time-to-market. Since 2007, we believe we were the first to introduce the following new technologies to the market:
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• | 1U Twin design, including two DP boards configured in a 1U chassis which increases the density and reduces the power consumption; |
• | The industry’s first 1U multiple-output silver-level certified power supply supporting our 2.5” HDD server / storage solutions; |
• | 2U Twin² design, including four DP boards configured in a 2U chassis with hot-plug servers and redundant power which increases the density and reduces the power consumption; |
• | The industry’s first optimized GPU 1U server providing extreme performance in graphics and computationally intensive applications; |
• | TwinBlade design, supporting up to 20 dual-socket server blades in a 7U enclosure with 56Gb/s Infiniband, or 10Gb Ethernet connectivity as options which provides the maximum density and reduces the power consumption by doubling the number of dual-processor compute nodes per 7U enclosure from 10 to 20; |
• | The industry’s first line of double-sided storage chassis enabling extra high-density storage with ability of hot-plug front and back sides; |
• | 2U Twin3 design, including eight UP nodes configured in a 2U chassis with hot-plug servers and redundant power which increases the density and reduces the power consumption particularly for Cloud Computing; |
• | The 8-way server, the first glueless design 5U including 8 CPUs with 80 cores, 2TB of memory and high-efficiency redundant platform-level power supplies. It’s ideal for enterprise mission critical and virtualization applications; |
• | MicroCloud design, supporting up to 12 UP nodes in a 3U enclosure with its high density and high efficiency features make it an optimized solution for hosting and cloud applications in an extremely low power consumption configuration; |
• | GPU SuperBlade, supporting 20 GPUs in a single 7U blade enclosure which delivers maximum performance with the design CPU to GPU balance and optimized I/O; |
• | Redundant BBP module design, using less than 1W at 99.9% power efficiency to maintain a full charge which provides maximum system protection against power disruption. It's ideal for environments with AC reliability issues or in need of backup power solutions; |
• | The 4-way MP server design, supporting up to 4 CPUs with 8 or 6 cores, 1TB of memory, up to 8 PCI-E 3.0 and dual 1Gbe or 10GBase-T interconnectivity which makes it ideal for mission critical and data-intensive applications; and |
• | FatTwin design, offering versatile configurations for HPC with multi-node models that support up to 135W processors, up to 8 hot-swap 3.5"HDDs in 1U and up to 8 dual-processor nodes in a standard 4U rackmount server while eliminating costly air-conditioning and cooling methods. With free-air cooling designs and an extreme operational temperature up to 47 degrees Celsius ambient, it helps Data Centers achieve the best power usage effectiveness. |
As of June 30, 2013, we had 660 employees and 4 engineering consultants dedicated to research and development. Our total research and development expenses were $75.2 million, $64.2 million, and $48.1 million for fiscal years 2013, 2012 and 2011, respectively. The increase in our research and development expenses in fiscal year 2013 and 2012 was primarily due to our growth in research and development personnel related to expanded product development initiatives in the United States and in Taiwan and an increase in development costs incurred for new products associated with the Intel's Sandy Bridge, Haswell, Ivy Bridge processors and our FatTwin products.
Sales, Marketing and Customer Service
Our sales and marketing program is primarily focused on indirect sales channels. As of June 30, 2013, our sales and marketing organization consisted of 191 employees and 27 independent sales representatives in 18 locations worldwide.
We work with distributors, including resellers and system integrators, and OEMs to market and sell customized solutions to their end customers. We provide sales and marketing assistance and training to our distributors and OEMs, who in turn provide service and support to end customers. We intend to leverage our relationships with key distributors and OEMs to penetrate select industry segments where our products can provide a superior alternative to existing solutions. For a more limited group of customers who do not normally purchase through distributors or OEMs, we have implemented a direct sales approach.
We maintain close contact with our distributors and end customers. We often collaborate during the sales process with our distributors and the customer’s technical point of contact to help determine the optimal system configuration for the customer’s needs. Our interaction with distributors and end customers allows us to monitor customer requirements and develop new products to better meet end customer needs.
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International Sales
Product fulfillment and first level support for our international customers are provided by our distributors and OEMs. Our international sales efforts are supported both by our international offices in the Netherlands, Taiwan and China as well as by our U.S. sales organization. Sales to customers located outside of the U.S. represented 45.8%, 41.8% and 41.7% of net sales in fiscal years 2013, 2012 and 2011, respectively.
Marketing
Our marketing programs are designed to inform existing and potential customers, the trade press, distributors and OEMs about the capabilities and benefits of using our products and solutions. Our marketing efforts support the sale and distribution of our products through our distribution channels. We rely on a variety of marketing vehicles, including advertising, public relations, participation in industry trade shows and conferences to help gain market acceptance. We also provide funds for cooperative marketing to our distributors. These funds reimburse our distributors for promotional spending they may do on behalf of promoting Supermicro products. Promotional spending by distributors is subject to our pre-approval and includes items such as film or video for television, magazine or newspaper advertisements, trade show promotions and sales force promotions. The amount available to each distributor is based on its amount of purchases. We also work closely with leading microprocessor vendors in cooperative marketing programs and benefit from market development funds that they make available. These programs are similar to the programs we make available to our distributors in that we are reimbursed for expenses incurred related to promoting the vendor’s product.
Customer Service
We provide customer support for our blade and rackmount server systems through our website and 24-hour continuous direct phone based support. For strategic direct and OEM customers, we also have higher levels of customer service available, including, in some cases, on site service and support.
Customers
For fiscal year 2013, our products were purchased by over 800 customers, most of which are distributors, in 84 countries. None of our customers accounted for 10% or more of our net sales in fiscal years 2013, 2012 and 2011. End users of our products span a broad range of industries.
Intellectual Property
We seek to protect our intellectual property rights with a combination of trademark, copyright, trade secret laws and disclosure restrictions. We rely primarily on trade secrets, technical know-how and other unpatented proprietary information relating to our design and product development activities. We have issued patents and pending patent applications in the U.S. We also enter into confidentiality and proprietary rights agreements with our employees, consultants and other third parties and control access to our designs, documentation and other proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. We cannot assure you that the steps taken by us will prevent misappropriation of our technology. We cannot assure you that patents will issue from our pending or future applications or that, with respect to our issued or any future patents, they will not be challenged, invalidated or circumvented, or that the rights granted under the patents will provide us with meaningful protection or any commercial advantage. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States, and many foreign countries do not enforce these laws as diligently as government agencies and private parties in the United States.
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. From time-to-time, third parties, including competitors, may assert patent, copyright, trademark or other intellectual property rights against us, our channel partners or our end-customers. Successful claims of infringement by a third party could prevent us from performing certain services or require us to pay substantial damages, royalties or other fees. Even if third parties may offer a license to their technology, the terms of any offered license may not be acceptable and the failure to obtain a license or the costs associated with any license could cause our business, operating results or financial condition to be materially and adversely affected. We typically indemnify our end-customers and distributors against claims that our products infringe the intellectual property of third parties.
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Manufacturing and Quality Control
We use several third party suppliers and contract manufacturers for materials and sub-assemblies, such as serverboards, chassis, disk drives, power supplies, fans and computer processors. We believe that selectively using outsourced manufacturing services allows us to focus on our core competencies in product design and development and increases our operational flexibility. Our manufacturing strategy allows us to quickly adjust manufacturing capacity in response to changes in customer demand and to rapidly introduce new products to the market. We use Ablecom, a related party, for contract design and manufacturing coordination support. We work with Ablecom to optimize modular designs for our chassis and certain of our other components. Ablecom coordinates the manufacturing of chassis for us. In addition to providing a larger volume of contract manufacturing services for us, Ablecom continues to warehouse for us a number of components and subassemblies manufactured by multiple suppliers prior to shipment to our facilities in the U.S., Europe and Asia.
Assembly, test and quality control of our servers are performed at our wholly-owned manufacturing facility in San Jose, California which Quality / Environmental Management System or, Q/EMS, has been certified according to ISO 9001 and ISO 14001 standards since 2001 and 2010, respectively. In fiscal year 2010, we began server integration operations in our Netherlands and Taiwan facilities to be closer to our key international customers and to reduce costs of shipping our products to our customers. The Q/EMS of these facilities have also been certified according to ISO 9001:2008 and ISO 14001:2004 standards. Consequently, our suppliers and contract manufacturers are required to comply with the same standards in order to maintain consistent product and service quality and continuous improvement of quality and environmental performances.
We seek to maintain sufficient inventory such that most of our orders can be filled within 14 days. We monitor our inventory on a continuous basis in order to be able to meet customer orders and to avoid inventory obsolescence. Due to our modular designs, our inventory can generally be used with multiple different products, further reducing the risk of inventory write-downs.
Competition
The market for our products is highly competitive, rapidly evolving and subject to new technological developments, changing customer needs and new product introductions. We compete primarily with large vendors of x86 general purpose servers and components. In addition, we also compete with a number of smaller vendors who specialize in the sale of server components and systems. We believe our principal competitors include:
• | Global technology vendors such as Dell Inc., Hewlett-Packard Company, International Business Machines Corporation, Cisco and Intel; |
• | Original Design Manufacturers, or ODMs, such as Quanta Computer, Inc. |
The principal competitive factors in our market include the following:
• | first to market with new emerging technologies; |
• | flexible and customizable products to fit customers’ objectives; |
• | high product performance and reliability; |
• | early identification of emerging opportunities; |
• | cost-effectiveness; |
• | interoperability of products; |
• | scalability; and |
• | localized and responsive customer support on a worldwide basis. |
We believe that we compete favorably with respect to most of these factors. However, most of our competitors have longer operating histories, significantly greater resources and greater name recognition. They may be able to devote greater resources to the development, promotion and sale of their products than we can, which could allow them to respond more quickly to new technologies and changes in customer needs.
Employees
As of June 30, 2013, we employed 1,564 full time employees and 31 consultants, consisting of 660 employees in research and development, 191 employees in sales and marketing, 134 employees in general and administrative and 579 employees in manufacturing. Of these employees, 1,084 employees are based in our San Jose facility. We consider our highly qualified and motivated employees to be a key factor in our business success. Our employees are not represented by any
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collective bargaining organization and we have never experienced a work stoppage. We believe that our relations with our employees are good.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act are available free of charge, on or through our website at www.supermicro.com, as soon as reasonably practicable after we electronically file such reports with, or furnish those reports to, the Securities and Exchange Commission. Information contained on our website is not incorporated by reference in, or made part of this Annual Report on Form 10-K or our other filings with or reports furnished to the Securities and Exchange Commission.
Item 1A. Risk Factors
Risks Related to Our Business and Industry
Our quarterly operating results will likely fluctuate in the future, which could cause rapid declines in our stock price.
As our business continues to grow, we believe that our quarterly operating results will be subject to greater fluctuation due to various factors, many of which are beyond our control. Factors that may affect quarterly operating results in the future include:
• | unpredictability of the timing and size of customer orders, since most of our customers purchase our products on a purchase order basis rather than pursuant to a long term contract; | ||
• | fluctuations in availability and costs associated with key components and other materials needed to satisfy customer requirements; | ||
• | variability of our margins based on the mix of server systems, subsystems and accessories we sell; | ||
• | the timing of the introduction of new products by leading microprocessor vendors and other suppliers; | ||
• | our ability to address technology issues as they arise, improve our products’ functionality and expand our product offerings; | ||
• | changes in our product pricing policies, including those made in response to new product announcements and pricing changes of our competitors; | ||
• | mix of whether customer purchases are of full systems or subsystems and accessories and whether made directly or through indirect sales channels; | ||
• | fluctuations based upon seasonality, with the quarters ending March 31 and September 30 typically being weaker; | ||
• | the effect of mergers and acquisitions among our competitors, suppliers or partners; | ||
• | general economic conditions in our geographic markets; and | ||
• | impact of regulatory changes on our cost of doing business. | ||
Accordingly, it is difficult to accurately forecast our growth and results of operations on a quarterly basis. If we fail to meet expectations of investors or analysts, our stock price may fall rapidly and without notice. Furthermore, the fluctuation of quarterly operating results may render less meaningful period-to-period comparisons of our operating results, and you should not rely upon them as an indication of future performance.
We may fail to meet publicly announced financial guidance or other expectations about our business, which would cause our stock to decline in value.
We typically provide forward looking financial guidance when we announce our financial results from the prior quarter. We undertake no obligation to update such guidance at any time. Frequently in the past, and in particularly during the last two
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fiscal years, our financial results have failed to meet the guidance we provided. There are a number of reasons why we might fail, including, but not limited to, the factors described in the preceding Risk Factor.
Our cost structure and ability to deliver server solutions to customers in a timely manner may be adversely affected by volatility of the market for core components and materials for our products.
Prices of materials and core components utilized in the manufacture of our server solutions, such as serverboards, chassis, central processing units, or CPUs, memory and hard drives represent a significant portion of our cost of sales. We generally do not enter into long-term supply contracts for these materials and core components, but instead purchase these materials and components on a purchase order basis. Prices of these core components and materials are volatile, and, as a result, it is difficult to predict expense levels and operating results. In addition, if our business growth renders it necessary or appropriate to transition to longer term contracts with materials and core component suppliers, our costs may increase and our gross margins could correspondingly decrease.
Because we often acquire materials and core components on an as needed basis, we may be limited in our ability to effectively and efficiently respond to customer orders because of the then-current availability or the terms and pricing of materials and core components. Our industry has experienced materials shortages and delivery delays in the past, and we may experience shortages or delays of critical materials in the future. From time to time, we have been forced to delay the introduction of certain of our products or the fulfillment of customer orders as a result of shortages of materials and core components. For example, we were unable to fulfill certain orders at the end of the quarter ended June 30, 2010 due to component shortages and our net sales were adversely impacted in fiscal year 2012 and 2013 by disk drive shortages resulting from the flooding in Thailand. If shortages or delays arise, the prices of these materials and core components may increase or the materials and core components may not be available at all. In addition, in the event of shortages, some of our larger competitors may have greater abilities to obtain materials and core components due to their larger purchasing power. We may not be able to secure enough core components or materials at reasonable prices or of acceptable quality to build new products to meet customer demand, which could adversely affect our business and financial results.
We may incur additional expenses and suffer lower margins if our expectations regarding long term hard disk drive commitments prove incorrect.
Notwithstanding our general practice of not entering into long term supply contracts, as a result of severe flooding in Thailand during the first quarter of fiscal year 2012, we have entered into purchase agreements with selected suppliers of hard disk drives in order to ensure continuity of supply for these components. The hard disk drive purchase commitments totaled approximately $132.1 million as of June 30, 2013 and will be paid through December 2014. Higher costs compared to the lower selling prices for these components incurred under these agreements contributed to our lower gross profit in fiscal year 2013 and will likely impact our gross profit in the future. This and any other similar future supply commitments that we may enter into expose us to risk for lower margins or loss on disposal of such inventory if our expectations of customer demand are incorrect and the market price of the material or component inventory decline.
We may lose sales or incur unexpected expenses relating to insufficient, excess or obsolete inventory.
As a result of our strategy to provide greater choice and customization of our products to our customers, we are required to maintain a high level of inventory. If we fail to maintain sufficient inventory, we may not be able to meet demand for our products on a timely basis, and our sales may suffer. If we overestimate customer demand for our products, we could experience excess inventory of our products and be unable to sell those products at a reasonable price, or at all. As a result, we may need to record higher inventory reserves. In addition, from time to time we assume greater inventory risk in connection with the purchase or manufacture of more specialized components in connection with higher volume sales opportunities. We have from time to time experienced inventory write downs associated with higher volume sales that were not completed as anticipated. For example, we recorded a reserve in the quarter ended March 31, 2013 and the quarter ended June 30, 2013 relating to specialized inventory purchased for one customer. We expect that we will experience such write downs from time to time in the future related to existing and future commitments. If we are later able to sell inventory with respect to which we have taken a reserve at a profit, it may increase the quarterly variances in our operating results. Additionally, the rapid pace of innovation in our industry could render significant portions of our existing inventory obsolete. Certain of our distributors and OEMs have rights to return products, limited to purchases over a specified period of time, generally within 60 to 90 days of the purchase, or to products in the distributor's or OEM's inventory at certain times, such as termination of the agreement or product obsolescence. Any returns under these arrangements could result in additional obsolete inventory. In addition, server systems, subsystems and accessories that have been customized and later returned by those of our customers and partners who have return rights or stock rotation rights may be unusable for other purposes or may require reformation at additional cost to be made ready for sale to other customers. Excess or obsolete inventory levels for these or other reasons could result in
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unexpected expenses or increases in our reserves against potential future charges which would adversely affect our business and financial results. For example, during fiscal years 2013, 2012 and 2011, we recorded inventory write-downs charged to cost of sales of $9.7 million, $8.6 million and $3.4 million, for lower of cost or market and excess and obsolete inventory. For additional information regarding customer return rights, see “Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies-Revenue Recognition.”
If we do not successfully manage the expansion of our international manufacturing operations, our business could be harmed.
Since inception we have conducted substantially all of our manufacturing operations near our corporate headquarters in California. We have recently begun significant manufacturing operations in Taiwan and more limited manufacturing operations in the Netherlands. The commencement of new manufacturing operations in new locations, particularly in other jurisdictions, entails additional risks and challenges. If we are unable to successfully ramp up these operations we may incur unanticipated costs, difficulties in making timely delivery of products or suffer other business disruptions which could adversely impact our results of operations.
We may not be able to successfully manage our planned growth and expansion.
Over time we expect to continue to make investments to pursue new customers and expand our product offerings to grow our business rapidly. We expect that our annual operating expenses will continue to increase as we invest in sales and marketing, research and development, manufacturing and production infrastructure, and strengthen customer service and support resources for our customers. Our failure to expand operational and financial systems timely or efficiently could result in additional operating inefficiencies, which could increase our costs and expenses more than we had planned and prevent us from successfully executing our business plan. We may not be able to offset the costs of operation expansion by leveraging the economies of scale from our growth in negotiations with our suppliers and contract manufacturers. Additionally, if we increase our operating expenses in anticipation of the growth of our business and this growth does not meet our expectations, our financial results will be negatively impacted.
If our business grows, we will have to manage additional product design projects, materials procurement processes, and sales efforts and marketing for an increasing number of SKUs, as well as expand the number and scope of our relationships with suppliers, distributors and end customers. If we fail to manage these additional responsibilities and relationships successfully, we may incur significant costs, which may negatively impact our operating results. Additionally, in our efforts to be first to market with new products with innovative functionality and features, we may devote significant research and development resources to products and product features for which a market does not develop quickly, or at all. If we are not able to predict market trends accurately, we may not benefit from such research and development activities, and our results of operations may suffer.
We may encounter difficulties with our ERP Systems.
We have been in the process of planning for the implementation of a new enterprise resource planning, or ERP, System. We have incurred and expect to continue to incur additional expenses to prepare for the implementation and when we commence the implementation. Many companies have experienced delays and difficulties with the implementation of new or changed ERP systems that have had a negative effect on their business. Any disruptions, delays or deficiencies in the design and implementation of a revised or new ERP system could result in potentially much higher costs than we had anticipated and could adversely affect our ability to develop new products, provide services, fulfill contractual obligations, file reports with the SEC in a timely manner and/or otherwise operate our business, or otherwise impact our controls environment. Any of these consequences could have an adverse effect on our results of operations and financial condition.
The market in which we participate is highly competitive, and if we do not compete effectively, we may not be able to increase our market penetration, grow our net sales or improve our gross margins.
The market for server solutions is intensely competitive and rapidly changing. Barriers to entry in our market are relatively low and we expect increased challenges from existing as well as new competitors. Some of our principal competitors offer server solutions at a lower price, which has resulted in pricing pressures on sales of our server solutions. We expect further downward pricing pressure from our competitors and expect that we will have to price some of our server solutions aggressively to increase our market share with respect to those products, particularly for datacenter customers. If we are unable to maintain the margins on our server solutions, our operating results could be negatively impacted. In addition, if we do not develop new innovative server solutions, or enhance the reliability, performance, efficiency and other features of our existing server solutions, our customers may turn to our competitors for alternatives. In addition, pricing pressures and increased
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competition generally may also result in reduced sales, lower margins or the failure of our products to achieve or maintain widespread market acceptance, any of which could have a material adverse effect on our business, results of operations and financial condition.
Our principal competitors include global technology companies such as Dell, Inc., Hewlett-Packard Company, IBM, Cisco and Intel. In addition, we also compete with a number of other vendors who also sell application optimized servers, contract manufacturers and original design manufacturers, or ODMs, such as Quanta Computer Incorporated. ODMs sell server solutions marketed or sold under a third party brand.
Many of our competitors enjoy substantial competitive advantages, such as:
• | greater name recognition and deeper market penetration; |
• | longer operating histories; |
• | larger sales and marketing organizations and research and development teams and budgets; |
• | more established relationships with customers, contract manufacturers and suppliers and better channels to reach larger customer bases and larger sales volume allowing for better costs; |
• | larger customer service and support organizations with greater geographic scope; |
• | a broader and more diversified array of products and services; and |
• | substantially greater financial, technical and other resources. |
As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Competitors may seek to copy our innovations and use cost advantages from greater size to compete aggressively with us on price. Certain customers are also current or prospective competitors and as a result, assistance that we provide to them as customers may ultimately result in increased competitive pressure against us. Furthermore, because of these advantages, even if our application optimized server solutions are more effective than the products that our competitors offer, potential customers might accept competitive products in lieu of purchasing our products. The challenges we face from larger competitors will become even greater if consolidation or collaboration between or among our competitors occurs in our industry. In addition, in recent periods there has been substantial speculation regarding the future plans of Hewlett-Packard and Dell. A substantial change by either with respect to their strategy in the server market could have a significant impact on the market and impact our results of operations. For all of these reasons, we may not be able to compete successfully against our current or future competitors, and if we do not compete effectively, our ability to increase our net sales may be impaired.
As we increasingly target larger customers, our customer base may become less diversified, our cost of sales may increase, and our sales may be less predictable.
We expect that as our business continues to grow, we will be increasingly dependent upon larger sales to maintain our rate of growth and that selling our server solutions to larger customers will create new challenges. However, if certain customers buy our products in greater volumes, and their business becomes a larger percentage of our net sales, we may grow increasingly dependent on those customers to maintain our growth. If our largest customers do not purchase our products at the levels or in the timeframes that we expect, our ability to maintain or grow our net sales will be adversely affected.
Additionally, as we and our distribution partners focus increasingly on selling to larger customers and attracting larger orders, we expect greater costs of sales. Our sales cycle may become longer and more expensive, as larger customers typically spend more time negotiating contracts than smaller customers. Larger customers often seek to gain greater pricing concessions, as well as greater levels of support in the implementation and use of our server solutions. These factors can result in lower margins for our products.
Increased sales to larger companies may also cause fluctuations in results of operations. A larger customer may seek to fulfill all or substantially all of its requirements in a single order, and not make another purchase for a significant period of time. Accordingly, a significant increase in revenue during the period in which we recognize the revenue from the sale may be followed by a period of time during which the customer purchases none or few of our products. A significant decline in net sales in periods following a significant order could adversely affect our stock price.
We must work closely with our suppliers to make timely new product introductions.
We rely on our close working relationships with our suppliers, including Intel, AMD and Nvidia, to anticipate and deliver new products on a timely basis when new generation materials and core components are made available. Intel, AMD and Nvidia are the only suppliers of the microprocessors we use in our server systems. If we are not able to maintain our
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relationships with our suppliers or continue to leverage their research and development capabilities to develop new technologies desired by our customers, our ability to quickly offer advanced technology and product innovations to our customers would be impaired. We have no long term agreements that obligate our suppliers to continue to work with us or to supply us with products.
Our suppliers’ failure to improve the functionality and performance of materials and core components for our products may impair or delay our ability to deliver innovative products to our customers.
We need our material and core component suppliers, such as Intel, AMD and Nvidia, to provide us with core components that are innovative, reliable and attractive to our customers. Due to the pace of innovation in our industry, many of our customers may delay or reduce purchase decisions until they believe that they are receiving best of breed products that will not be rendered obsolete by an impending technological development. Accordingly, demand for new server systems that incorporate new products and features is significantly impacted by our suppliers’ new product introduction schedules and the functionality, performance and reliability of those new products. If our materials and core component suppliers fail to deliver new and improved materials and core components for our products, we may not be able to satisfy customer demand for our products in a timely manner, or at all. If our suppliers’ components do not function properly, we may incur additional costs and our relationships with our customers may be adversely affected.
As our business grows and if the economy does not improve, we expect that we may be exposed to greater customer credit risks.
Historically, we have offered limited credit terms to our customers. As our customer base expands, as our orders increase in size, and as we obtain more direct customers, we expect to offer increased credit terms and flexible payment programs to our customers. Doing so may subject us to increased credit risk, higher accounts receivable with longer days outstanding, and increases in charges or reserves, which could have a material adverse effect on our business, results of operations and financial condition. Likewise, if there is no sustained economic recovery, we could be exposed to greater credit risk.
Economic conditions could materially adversely affect us.
Our operations and performance depend significantly on worldwide economic conditions. Uncertainty about current global economic conditions poses a risk as consumers and businesses may continue to postpone spending in response to tighter credit, unemployment, negative financial news and/or declines in income or asset values, which could have a material negative effect on demand for our products and services.
In addition, economic uncertainty concerns over the sovereign debt situation in certain countries in the European Union, as well as continued turmoil in the geopolitical environment in many parts of the world, have, and may continue to, put pressure on global economic conditions, which has led, and could continue to lead, to reduced demand for our products, to delays or reductions in IT expansions or infrastructure projects, and/or higher costs of production. Economic weakness may also lead to longer collection cycles for payments due from our customers, an increase in customer bad debt, restructuring initiatives and associated expenses, and impairment of investments. Furthermore, continued weakness and the sovereign debt situation in certain countries in the European Union, may adversely impact the ability of our customers to adequately fund their expected capital expenditures, which could lead to delays or cancellations of planned purchases of our products or services. In addition, our operating expenses are largely based on anticipated revenue trends and a high percentage of our expenses is, and will continue to be, fixed in the short and medium term.
Uncertainty about future economic conditions also makes it difficult to forecast operating results and to make decisions about future investments. Future or continued economic weakness, failure of our customers and markets to recover from such weakness, customer financial difficulties, increases in costs of production, and reductions in spending on IT maintenance and expansion could have a material adverse effect on demand for our products and consequently on our business, financial condition, and results of operations. Uncertainty about current global economic conditions could also continue to increase the volatility of our stock price.
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Our ability to develop our brand is critical to our ability to grow.
We believe that acceptance of our server solutions by an expanding customer base depends in large part on increasing awareness of the Supermicro brand and that brand recognition will be even more important as competition in our market develops. In particular, we expect an increasing proportion of our sales to come from sales of server systems, the sales of which we believe may be particularly impacted by brand strength. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to develop reliable and useful products at competitive prices. To date, we have not devoted significant resources to building our brand, and have limited experience in increasing customer awareness of our brand. Our future brand promotion activities, including any expansion of our cooperative marketing programs with strategic partners, may involve significant expense and may not generate desired levels of increased revenue, and even if such activities generate some increased revenue, such increased revenue may not offset the expenses we incurred in endeavoring to build our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses in our attempts to promote and maintain our brand, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and as a result our operating results and financial condition could suffer.
We principally rely on indirect sales channels for the sale and distribution of our products and any disruption in these channels could adversely affect our sales.
Historically, a majority of our revenues have resulted from sales of our products through third party distributors and resellers, which sales accounted for 56.3%, 54.4% and 56.1% of our net sales in fiscal years 2013, 2012 and 2011, respectively. We depend on our distributors to assist us in promoting market acceptance of our products and anticipate that a majority of our revenues will continue to result from sales through indirect channels. To maintain and potentially increase our revenue and profitability, we will have to successfully preserve and expand our existing distribution relationships as well as develop new distribution relationships. Our distributors also sell products offered by our competitors and may elect to focus their efforts on these sales. If our competitors offer our distributors more favorable terms or have more products available to meet the needs of their customers, or utilize the leverage of broader product lines sold through the distributors, those distributors may de-emphasize or decline to carry our products. In addition, our distributors’ order decision-making process is complex and involves several factors, including end customer demand, warehouse allocation and marketing resources, which can make it difficult to accurately predict total sales for the quarter until late in the quarter. We also do not control the pricing or discounts offered by distributors to end customers. To maintain our participation in distributors’ marketing programs, in the past we have provided cooperative marketing arrangements or made short-term pricing concessions.
The discontinuation of cooperative marketing arrangements or pricing concessions could have a negative effect on our business. Our distributors could also modify their business practices, such as payment terms, inventory levels or order patterns. If we are unable to maintain successful relationships with distributors or expand our distribution channels or we experience unexpected changes in payment terms, inventory levels or other practices by our distributors, our business will suffer.
We may be unable to accurately predict future sales through our distributors, which could harm our ability to efficiently manage our resources to match market demand.
Since a significant portion of our sales are made through domestic and international distributors, our financial results, quarterly product sales, trends and comparisons are affected by fluctuations in the buying patterns of end customers and our distributors, and by the changes in inventory levels of our products held by these distributors. We generally record revenue based upon a “sell-in” model which means that we generally record revenue upon shipment to our distributors. For more information regarding our revenue recognition policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies.” While we attempt to assist our distributors in maintaining targeted stocking level of our products, we may not consistently be accurate or successful. This process involves the exercise of judgment and use of assumptions as to future uncertainties including end customer demand. Our distributors also have various rights to return products which could, among other things, result in our having to repurchase inventory which has declined in value or is obsolete. Consequently, actual results could differ from our estimates. Inventory levels of our products held by our distributors may exceed or fall below the levels we consider desirable on a going-forward basis. This could adversely affect our distributors or our ability to efficiently manage or invest in internal resources, such as manufacturing and shipping capacity, to meet the demand for our products.
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Any failure to adequately expand or retain our sales force will impede our growth.
We expect that our direct sales force will grow as larger customers increasingly require a direct sales approach. Competition for direct sales personnel with the advanced sales skills and technical knowledge we need is intense. Our ability to grow our revenue in the future will depend, in large part, on our success in recruiting, training, retaining and successfully managing sufficient qualified direct sales personnel. We have traditionally experienced greater turnover in our sales and marketing personnel as compared to other departments and other companies. New hires require significant training and may take six months or longer before they reach full productivity. Our recent hires and planned hires may not become as productive as we would like, and we may be unable to hire sufficient numbers of qualified individuals in the future in the markets where we do business. If we are unable to hire, develop and retain sufficient numbers of productive sales personnel, sales of our server solutions will suffer.
Our direct sales efforts may create confusion for our end customers and harm our relationships with our distributors and OEMs.
Though our direct sales efforts have historically been limited and focused on customers who typically do not buy from distributors or OEMs, we expect our direct sales force to grow as our business grows. As our direct sales force becomes larger, our direct sales efforts may lead to conflicts with our distributors and OEMs, who may view our direct sales efforts as undermining their efforts to sell our products. If a distributor or OEM deems our direct sales efforts to be inappropriate, the distributor or OEM may not effectively market our products, may emphasize alternative products from competitors, or may seek to terminate our business relationship. Disruptions in our distribution channels could cause our revenues to decrease or fail to grow as expected. Our failure to implement an effective direct sales strategy that maintains and expands our relationships with our distributors and OEMs could lead to a decline in sales and adversely affect our results of operations.
If we are required to change the timing of our revenue recognition, our net sales and net income could decrease.
We currently record revenue based upon a “sell-in” model with revenues generally recorded upon shipment of products to our distributors. This is in contrast to a “sell-through” model pursuant to which revenues are generally recognized upon sale of products by distributors to their customers. This requires that we maintain a reserve to cover the estimated costs of any returns or exercises of stock rotation rights, which we estimate primarily based on our historical experience. If facts and circumstances change such that the rate of returns of our products exceeds our historical experience, we may have to increase our reserve, which, in turn, would cause our revenue to decline. Similarly, if facts and circumstances change such that we are no longer able to determine reasonable estimates of our sales returns, we would be required to defer our revenue recognition until the point of sale from the distributors to their customers. Any such change may negatively impact our net sales or net income for particular periods and cause a decline in our stock price. For additional information regarding our revenue recognition policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies.”
The average selling prices for our existing server solutions are subject to decline if customers do not continue to purchase our latest generation products, which could harm our results of operations.
As with most electronics based products, average selling prices of servers typically are highest at the time of introduction of new products, which utilize the latest technology, and tend to decrease over time as such products become commoditized and are ultimately replaced by even newer generation products. As our business continues to grow, we may increasingly be subject to this industry risk. We cannot predict the timing or amount of any decline in the average selling prices of our server solutions that we may experience in the future. In some instances, our agreements with our distributors limit our ability to reduce prices unless we make such price reductions available to them, or price protect their inventory. If we are unable to decrease per unit manufacturing costs faster than the rate at which average selling prices continue to decline, our business, financial condition and results of operations will be harmed.
If our limited number of contract manufacturers or suppliers of materials and core components fail to meet our requirements, we may be unable to meet customer demand for our products, which could decrease our revenues and earnings.
We purchase many sophisticated materials and core components from one or a limited number of qualified suppliers and rely on a limited number of contract manufacturers to provide value added design, manufacturing, assembly and test services. We generally do not have long-term agreements with these vendors, and instead obtain key materials and services through purchase order arrangements. We have no contractual assurances from any contract manufacturer that adequate capacity will be available to us to meet future demand for our products.
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Consequently, we are vulnerable to any disruptions in supply with respect to the materials and core components provided by limited-source suppliers, and we are at risk of being harmed by discontinuations of design, manufacturing, assembly or testing services from our contract manufacturers. We have occasionally experienced delivery delays from our suppliers and contract manufacturers because of high industry demand or because of inability to meet our quality or delivery requirements. For example, in the past we experienced delays in the delivery of printed circuit board material as a result of the loss of two of our five printed circuit board vendors which resulted in a reduction of net sales for the quarter in which it occurred. More recently, the 2011 floods in Thailand disrupted the global supply chain for hard disk drives manufactured in Thailand. In addition, if our relationships with our suppliers and contract manufactures are negatively impacted by late payments or other issues, we may not receive timely delivery of materials and core components.
If we were to lose any of our current supply or contract manufacturing relationships, the process of identifying and qualifying a new supplier or contract manufacturer who will meet our quality and delivery requirements, and who will appropriately safeguard our intellectual property, may require a significant investment of time and resources, adversely affecting our ability to satisfy customer purchase orders and delaying our ability to rapidly introduce new products to market. Similarly, if any of our suppliers were to cancel, materially change contracts or commitments to us or fail to meet the quality or delivery requirements needed to satisfy customer demand for our products, whether due to shortages or other reasons, our reputation and relationships with customers could be damaged. We could lose orders, be unable to develop or sell some products cost-effectively or on a timely basis, if at all, and have significantly decreased revenues, margins and earnings, which would have a material adverse effect on our business.
Our focus on internal development and customizable server solutions could delay our introduction of new products and result in increased costs.
Our strategy is to rely to a significant degree on internally developed components, even when third party components may be available. We believe this allows us to develop products with a greater range of features and functionality and allows us to develop solutions that are more customized to customer needs. However, if not properly managed, this reliance on internally developed components may be more costly than use of third party components, thereby making our products less price competitive or reducing our margins. In addition, our reliance on internal development may lead to delays in the introduction of new products and impair our ability to introduce products rapidly to market. We may also experience increases in our inventory costs and obsolete inventory, thereby reducing our margins.
Our research and development expenditures, as a percentage of our net sales, are considerably higher than many of our competitors and our earnings will depend upon maintaining revenues and margins that offset these expenditures.
Our strategy is to focus on being consistently rapid-to-market with flexible and customizable server systems that take advantage of our own internal development and the latest technologies offered by microprocessor manufacturers and other component vendors. Consistent with this strategy, we spend higher amounts, as a percentage of revenues, on research and development costs than many of our competitors. If we can not sell our products in sufficient volume and with adequate gross margins to compensate for such investment in research and development, our earnings may be materially and adversely affected.
Our failure to deliver high quality server solutions could damage our reputation and diminish demand for our products.
Our server solutions are critical to our customers’ business operations. Our customers require our server solutions to perform at a high level, contain valuable features and be extremely reliable. The design of our server solutions is sophisticated and complex, and the process for manufacturing, assembling and testing our server solutions is challenging. Occasionally, our design or manufacturing processes may fail to deliver products of the quality that our customers require. For example, in the past a vendor provided us with a defective capacitor that failed under certain heavy use applications. As a result, our product needed to be repaired. Though the vendor agreed to pay for a large percentage of the costs of the repairs, we incurred costs in connection with the recall and diverted resources from other projects.
New flaws or limitations in our server solutions may be detected in the future. Part of our strategy is to bring new products to market quickly, and first-generation products may have a higher likelihood of containing undetected flaws. If our customers discover defects or other performance problems with our products, our customers’ businesses, and our reputation, may be damaged. Customers may elect to delay or withhold payment for defective or underperforming server solutions, request remedial action, terminate contracts for untimely delivery, or elect not to order additional server solutions, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or subject us to the expense and risk of litigation. We may incur expense in recalling, refurbishing or repairing defective server solutions. If we do not properly address customer concerns about our products, our reputation and relationships with our customers may be
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harmed. For all of these reasons, customer dissatisfaction with the quality of our products could substantially impair our ability to grow our business.
Conflicts of interest may arise between us and Ablecom Technology Inc., one of our major contract manufacturers, and those conflicts may adversely affect our operations.
We use Ablecom, a related party, for contract design and manufacturing coordination support. We work with Ablecom to optimize modular designs for our chassis and certain of other components. Our purchases from Ablecom represented 17.9%, 19.9% and 19.6% of our cost of sales for fiscal years 2013, 2012 and 2011, respectively. Ablecom’s sales to us constitute a substantial majority of Ablecom’s net sales. Ablecom is a privately-held Taiwan-based company.
Steve Liang, Ablecom’s Chief Executive Officer and largest shareholder, is the brother of Charles Liang, our President, Chief Executive Officer and Chairman of the Board. Charles Liang, and his spouse, Chiu-Chu (Sara) Liu Liang, our Vice President of Operations, Treasurer and director, jointly own 10.5% of Ablecom’s outstanding common stock, while Mr. Steve Liang and other family members own 35.9% of Ablecom’s outstanding common stock. Mr. and Mrs. Charles Liang, as directors, officers and significant stockholders of the Company, have considerable influence over the management of our business relationships. Accordingly, we may be disadvantaged by their economic interests as stockholders of Ablecom and their personal relationship with Ablecom’s Chief Executive Officer. We may not negotiate or enforce contractual terms as aggressively with Ablecom as we might with an unrelated party, and the commercial terms of our agreements may be less favorable than we might obtain in negotiations with third parties. If our business dealings with Ablecom are not as favorable to us as arms-length transactions, our results of operations may be harmed.
If Steve Liang ceases to have significant influence over Ablecom, or if those of our stockholders who hold shares of Ablecom cease to have a significant amount of the outstanding shares of Ablecom, the terms and conditions of our agreements with Ablecom may not be as favorable as those in our existing contracts. As a result, our costs could increase and adversely affect our margins and results of operations.
Our relationship with Ablecom may allow us to benefit from favorable pricing which may result in reported results more favorable than we might report in the absence of our relationship.
Although we generally re-negotiate the price of products that we purchase from Ablecom on a quarterly basis, pursuant to our agreements with Ablecom either party may re-negotiate the price of products for each order. As a result of our relationship with Ablecom, it is possible that Ablecom may in the future sell products to us at a price lower than we could obtain from an unrelated third party supplier. This may result in future reporting of gross profit as a percentage of net sales that is in excess of what we might have obtained absent our relationship with Ablecom.
Our reliance on Ablecom could be subject to risks associated with our reliance on a limited source of contract manufacturing services and inventory warehousing.
We continue to maintain our manufacturing relationship with Ablecom in Asia. In order to provide a larger volume of contract manufacturing services for us, Ablecom will continue to warehouse for us an increasing number of components and subassemblies manufactured by multiple suppliers prior to shipment to our facilities in the U.S. and Europe. We also anticipate that we will continue to lease office space from Ablecom in Taiwan to support the research and development efforts we are undertaking and continue to operate a joint management company with Ablecom to manage the common areas shared by us and Ablecom for our separately constructed manufacturing facilities in Taiwan.
If we or Ablecom fail to manage the contract manufacturing services and warehouse operations in Asia, we may experience delays in our ability to fulfill customer orders. Similarly, if Ablecom’s facility in Asia is subject to damage, destruction or other disruptions, our inventory may be damaged or destroyed, and we may be unable to find adequate alternative providers of contract manufacturing services in the time that we or our customers require. We could lose orders and be unable to develop or sell some products cost-effectively or on a timely basis, if at all.
Currently, we purchase contract manufacturing services primarily for our chassis and power supply products from Ablecom. If our commercial relationship with Ablecom were to deteriorate or terminate, establishing direct relationships with those entities supplying Ablecom with key materials for our products or identifying and negotiating agreements with alternative providers of warehouse and contract manufacturing services might take a considerable amount of time and require a significant investment of resources. Pursuant to our agreements with Ablecom and subject to certain exceptions, Ablecom has the exclusive right to be our supplier of the specific products developed under such agreements. As a result, if we are unable to obtain such products from Ablecom on terms acceptable to us, we may need to identify a new supplier, change our design and
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acquire new tooling, all of which could result in delays in our product availability and increased costs. If we need to use other suppliers, we may not be able to establish business arrangements that are, individually or in the aggregate, as favorable as the terms and conditions we have established with Ablecom. If any of these things should occur, our net sales, margins and earnings could significantly decrease, which would have a material adverse effect on our business.
Our growth into markets outside the United States exposes us to risks inherent in international business operations.
We market and sell our systems and components both domestically and outside the United States. We intend to expand our international sales efforts, especially into Asia and are expanding our business operations in Europe and Asia, particularly in Taiwan, the Netherlands and China. In particular, we have and continue to make substantial investments for the purchase of land and the development of new facilities in Taiwan to accommodate our expected growth. Our international expansion efforts may not be successful. Our international operations expose us to risks and challenges that we would otherwise not face if we conducted our business only in the United States, such as:
• | heightened price sensitivity from customers in emerging markets; |
• | our ability to establish local manufacturing, support and service functions, and to form channel relationships with resellers in non-U.S. markets; |
• | localization of our systems and components, including translation into foreign languages and the associated expenses; |
• | compliance with multiple, conflicting and changing governmental laws and regulations; |
• | foreign currency fluctuations; |
• | limited visibility into sales of our products by our distributors; |
• | laws favoring local competitors; |
• | weaker legal protections of intellectual property rights and mechanisms for enforcing those rights; |
• | market disruptions created by public health crises in regions outside the U.S., such as Avian flu, SARS and other diseases; |
• | difficulties in staffing and managing foreign operations, including challenges presented by relationships with workers’ councils and labor unions; and |
• | changing regional economic and political conditions. |
These factors could limit our future international sales or otherwise adversely impact our operations or our results of operations.
We have in the past entered into plea and settlement agreements with the government relating to violations of export control and related laws; if we fail to comply with laws and regulations restricting dealings with sanctioned countries, we may be subject to future civil or criminal penalties, which may have a material adverse effect on our business or ability to do business outside the United States.
In 2006, we entered into certain plea and settlement agreement with government agencies relating to export control and related law violations for activities that occurred in the 2001 to 2003 time frame. We believe we are currently in compliance in all material respects with applicable export related laws and regulations. However, if our export compliance program is not effective, or if we are subject to any future claims regarding violation of export control and economic sanctions laws, we could be subject to civil or criminal penalties, which could lead to a material fine or other sanctions, including loss of export privileges, that may have a material adverse effect on our business, financial condition, results of operation and future prospects. In addition, these plea and settlement agreements and any future violations could have an adverse impact on our ability to sell our products to United States federal, state and local government and related entities.
Any failure to protect our intellectual property rights, trade secrets and technical know-how could impair our brand and our competitiveness.
Our ability to prevent competitors from gaining access to our technology is essential to our success. If we fail to protect our intellectual property rights adequately, we may lose an important advantage in the markets in which we compete. Trademark, patent, copyright and trade secret laws in the United States and other jurisdictions as well as our internal confidentiality procedures and contractual provisions are the core of our efforts to protect our proprietary technology and our brand. Our patents and other intellectual property rights may be challenged by others or invalidated through administrative process or litigation, and we may initiate claims or litigation against third parties for infringement of our proprietary rights. Such administrative proceedings and litigation are inherently uncertain and divert resources that could be put towards other business priorities. We may not be able to obtain a favorable outcome and may spend considerable resources in our efforts to defend and protect our intellectual property.
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Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our products are available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate.
Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property and using our technology for their competitive advantage. Any such infringement or misappropriation could have a material adverse effect on our business, results of operations and financial condition.
Resolution of claims that we have violated or may violate the intellectual property rights of others could require us to indemnify our customers, resellers or vendors, redesign our products, or pay significant royalties to third parties, and materially harm our business.
Our industry is marked by a large number of patents, copyrights, trade secrets and trademarks and by frequent litigation based on allegations of infringement or other violation of intellectual property rights. Third-parties have in the past sent us correspondence regarding their intellectual property or filed claims that our products infringe or violate third parties’ intellectual property rights. In addition, increasingly non-operating companies are purchasing patents and bringing claims against technology companies. We have been subject to several such claims and may be subject to such claims in the future. Successful intellectual property claims against us from others could result in significant financial liability or prevent us from operating our business or portions of our business as we currently conduct it or as we may later conduct it. In addition, resolution of claims may require us to redesign our technology, to obtain licenses to use intellectual property belonging to third parties, which we may not be able to obtain on reasonable terms, to cease using the technology covered by those rights, and to indemnify our customers, resellers or vendors. Any claim, regardless of its merits, could be expensive and time consuming to defend against, and divert the attention of our technical and management resources.
If we lose Charles Liang, our President, Chief Executive Officer and Chairman, or any other key employee or are unable to attract additional key employees, we may not be able to implement our business strategy in a timely manner.
Our future success depends in large part upon the continued service of our executive management team and other key employees. In particular, Charles Liang, our President, Chief Executive Officer and Chairman of the Board, is critical to the overall management of our company as well as to the development of our culture and our strategic direction. Mr. Liang co-founded our company and has been our Chief Executive Officer since our inception. His experience in running our business and his personal involvement in key relationships with suppliers, customers and strategic partners are extremely valuable to our company. We currently do not have a succession plan for the replacement of Mr. Liang if it were to become necessary. Additionally, we are particularly dependent on the continued service of our existing research and development personnel because of the complexity of our products and technologies. Our employment arrangements with our executives and employees do not require them to provide services to us for any specific length of time, and they can terminate their employment with us at any time, with or without notice, without penalty. The loss of services of any of these executives or of one or more other key members of our team could seriously harm our business.
To execute our growth plan, we must attract additional highly qualified personnel, including additional engineers and executive staff. Competition for qualified personnel is intense, especially in San Jose, where we are headquartered. We have experienced in the past and may continue to experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications. In particular, we are currently working to add personnel in our finance, accounting and general administration departments, which have historically had limited budgets and staffing. If we are unable to attract and integrate additional key employees in a manner that enables us to scale our business and operations effectively, or if we do not maintain competitive compensation policies to retain our employees, our ability to operate effectively and efficiently could be limited.
Backlog does not provide a substantial portion of our net sales in any quarter.
Our net sales are difficult to forecast because we do not have sufficient backlog of unfilled orders to meet our quarterly net sales targets at the beginning of a quarter. Rather, a majority of our net sales in any quarter depend upon customer orders that we receive and fulfill in that quarter. Because our expense levels are based in part on our expectations as to future net sales and to a large extent are fixed in the short term, we might be unable to adjust spending in time to compensate for any shortfall in net sales. Accordingly, any significant shortfall of revenues in relation to our expectations would harm our operating results.
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Our business and operations are especially subject to the risks of earthquakes and other natural catastrophic events.
Our corporate headquarters, including our most significant research and development and manufacturing operations, are located in the Silicon Valley area of Northern California, a region known for seismic activity. We have also established significant manufacturing and research and development operations in Taiwan which is also subject to seismic activity risks. We do not currently have a comprehensive disaster recovery program and as a result, a significant natural disaster, such as an earthquake, could have a material adverse impact on our business, operating results, and financial condition. Although we are in the process of preparing such a program, there is no assurance that it will be effective in the event of such a disaster.
If we are unable to favorably assess the effectiveness of our internal control over financial reporting, or if our independent auditors are unable to provide an unqualified attestation report on our internal control over financial reporting, our stock price could be adversely affected.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, our management is required to report on the effectiveness of our internal control over financial reporting in our annual reports. In addition, our independent auditors must attest to and report on the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex, and require significant documentation, testing and possible remediation. As a result, our efforts to comply with Section 404 have required the commitment of significant managerial and financial resources. As we are committed to maintaining high standards of public disclosure, our efforts to comply with Section 404 are ongoing, and we are continuously in the process of reviewing, documenting and testing our internal control over financial reporting, which will result in continued commitment of significant financial and managerial resources. Although we strive to maintain effective internal controls over financial reporting in order to prevent and detect material misstatements in our annual and quarterly financial statements and prevent fraud, we cannot assure that such efforts will be effective. If we fail to maintain effective internal controls in future periods, our operating results, financial position and stock price could be adversely affected.
Our operations involve the use of hazardous and toxic materials, and we must comply with environmental laws and regulations, which can be expensive, and may affect our business and operating results.
We are subject to federal, state and local regulations relating to the use, handling, storage, disposal and human exposure to hazardous and toxic materials. If we were to violate or become liable under environmental laws in the future as a result of our inability to obtain permits, human error, accident, equipment failure or other causes, we could be subject to fines, costs, or civil or criminal sanctions, face third party property damage or personal injury claims or be required to incur substantial investigation or remediation costs, which could be material, or experience disruptions in our operations, any of which could have a material adverse effect on our business. In addition, environmental laws could become more stringent over time imposing greater compliance costs and increasing risks and penalties associated with violations, which could harm our business.
We also face increasing complexity in our product design as we adjust to new and future requirements relating to the materials composition of our products, including the restrictions on lead and other hazardous substances applicable to specified electronic products placed on the market in the European Union (Restriction on the Use of Hazardous Substances Directive 2002/95/EC, also known as the RoHS Directive). We are also subject to laws and regulations such as California’s “Proposition 65” which requires that clear and reasonable warnings be given to consumers who are exposed to certain chemicals deemed by the State of California to be dangerous, such as lead. We expect that our operations will be affected by other new environmental laws and regulations on an ongoing basis. Although we cannot predict the ultimate impact of any such new laws and regulations, they will likely result in additional costs, and could require that we change the design and/or manufacturing of our products, any of which could have a material adverse effect on our business.
Risks Related to Owning Our Stock
The trading price of our common stock is likely to be volatile, and you might not be able to sell your shares at or above the price at which you purchased the shares.
The trading prices of technology company securities historically have been highly volatile and the trading price of our common stock has been and is likely to continue to be subject to wide fluctuations. Factors, in addition to those outlined elsewhere in this filing, that may affect the trading price of our common stock include:
• | actual or anticipated variations in our operating results; |
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• | announcements of technological innovations, new products or product enhancements, strategic alliances or significant agreements by us or by our competitors; |
• | changes in recommendations by any securities analysts that elect to follow our common stock; |
• | the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; |
• | the loss of a key customer; |
• | the loss of key personnel; |
• | technological advancements rendering our products less valuable; |
• | lawsuits filed against us; |
• | changes in operating performance and stock market valuations of other companies that sell similar products; |
• | price and volume fluctuations in the overall stock market; |
• | market conditions in our industry, the industries of our customers and the economy as a whole; and |
• | other events or factors, including those resulting from war, incidents of terrorism or responses to these events. |
Future sales of shares by existing stockholders could cause our stock price to decline.
Attempts by existing stockholders to sell substantial amounts of our common stock in the public market could cause the trading price of our common stock to decline significantly. All of our shares are eligible for sale in the public market, including shares held by directors, executive officers and other affiliates, sales of which are subject to volume limitations under Rule 144 under the Securities Act. In addition, shares subject to outstanding options and reserved for future issuance under our stock option plans are eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements. If these additional shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our common stock could decline.
If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline.
The research and reports that industry or financial analysts publish about us or our business likely have an effect on the trading price of our common stock. If an industry analyst decides not to cover our company, or if an industry analyst decides to cease covering our company at some point in the future, we could lose visibility in the market, which in turn could cause our stock price to decline. If an industry analyst downgrades our stock, our stock price would likely decline rapidly in response.
The concentration of our capital stock ownership with insiders will likely limit your ability to influence corporate matters.
As of September 6, 2013, our executive officers, directors, current five percent or greater stockholders and affiliated entities together beneficially owned 41.1% of our common stock, net of treasury stock. As a result, these stockholders, acting together, will have significant influence over all matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.
Provisions of our certificate of incorporation and bylaws and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, as a result, depress the trading price of our common stock.
Our certificate of incorporation and bylaws contain provisions that could discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:
• | establish a classified board of directors so that not all members of our board are elected at one time; |
• | require super-majority voting to amend some provisions in our certificate of incorporation and bylaws; |
• | authorize the issuance of “blank check” preferred stock that our board could issue to increase the number of outstanding shares and to discourage a takeover attempt; |
• | limit the ability of our stockholders to call special meetings of stockholders; |
• | prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; |
• | provide that the board of directors is expressly authorized to adopt, or to alter or repeal our bylaws; and |
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• | establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings. |
In addition, we are subject to Section 203 of the Delaware General Corporation Law, which, subject to some exceptions, prohibits “business combinations” between a Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock for a three-year period following the date that the stockholder became an interested stockholder. Section 203 could have the effect of delaying, deferring or preventing a change in control that our stockholders might consider to be in their best interests.
These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and cause us to take corporate actions other than those stockholders desire.
We do not expect to pay any cash dividends for the foreseeable future.
We do not anticipate that we will pay any cash dividends to holders of our common stock in the foreseeable future. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our principal executive offices, research and development center and production operations are located in San Jose, California where we own approximately 552,000 square feet of office and manufacturing space subject to existing mortgage loan and line of credit with $20.2 million remaining outstanding as of June 30, 2013. We lease approximately 247,000 square feet of warehouse in Fremont, California under a lease that expires in 2015 and lease approximately 25,000 square feet of office space in San Jose, California under a lease that expires in 2016. Our European headquarters for manufacturing and service operations is located in Denbosch, the Netherlands where we lease approximately 58,000 square feet of office space under four leases, which expire in 2016. In Asia, our manufacturing facilities are located in Taoyuan County, Taiwan where we own approximately 211,000 square feet of office and manufacturing space on 7.0 acres of land. These manufacturing facilities are subject to existing term loan with $14.9 million remaining outstanding as of June 30, 2013. Our research and development center and service operations in Asia are located in an approximately 52,000 square feet facility in Taipei, Taiwan under four leases that expire at various dates through 2016. In addition, we lease approximately 3,000 square feet of office space in Shanghai and Beijing, China under two leases that expire at various dates through 2014 for sales and service operations. We believe that our existing properties, including both owned and leased, are in good condition and are suitable for the conduct of our business.
Item 3. Legal Proceedings
From time to time, we have been involved in various legal proceedings arising from the normal course of business activities. We defend ourselves vigorously against any such claims. In management's opinion, the resolution of any pending matters will not have a material adverse effect on our consolidated financial condition, results of operations, or liquidity.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock has been traded on The Nasdaq Global Select Market under the symbol “SMCI” since our initial public offering on March 28, 2007. The following table sets forth for the periods indicated the high and low sale prices of our common stock as reported by The Nasdaq Global Select Market.
High | Low | ||||||
Fiscal Year 2012: | |||||||
First Quarter | $ | 16.35 | $ | 12.36 | |||
Second Quarter | $ | 16.52 | $ | 11.59 | |||
Third Quarter | $ | 17.71 | $ | 15.73 | |||
Fourth Quarter | $ | 18.31 | $ | 14.67 | |||
High | Low | ||||||
Fiscal Year 2013: | |||||||
First Quarter | $ | 16.36 | $ | 11.73 | |||
Second Quarter | $ | 12.12 | $ | 7.90 | |||
Third Quarter | $ | 12.72 | $ | 9.98 | |||
Fourth Quarter | $ | 11.29 | $ | 9.41 | |||
Holders
As of September 6, 2013, there were 35 registered stockholders of record of our common stock. Because most of our shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial stockholders represented by these record holders.
Dividend Policy
We have never declared or paid cash dividends on our capital stock and do not expect to pay any dividends in the foreseeable future.
Equity Compensation Plan
Please see Part III, Item 12 of this report for disclosure relating to our equity compensation plans.
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Stock Performance Graph
This performance graph shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or incorporated by reference into any filing of Super Micro Computer, Inc. under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.
The following graph compares our cumulative five-year total stockholder return on our common stock with the cumulative return of the Nasdaq Computer Index and the Nasdaq Composite Index, which both include our common stock, for the comparable period.
The graph reflects an investment of $100 (with reinvestment of all dividends, if any) in our common stock, the Nasdaq Computer Index and the Nasdaq Composite Index, on June 30, 2008 and its relative performance tracked through June 30, 2013. The stockholder return shown on the graph below is not necessarily indicative of future performance, and we do not make or endorse any predictions as to future stockholder returns.
6/30/2008 | 6/30/2009 | 6/30/2010 | 6/30/2011 | 6/30/2012 | 6/30/2013 | |||||||||||||
Super Micro Computer, Inc. | 100.00 | 103.79 | 182.93 | 218.02 | 214.91 | 144.17 | ||||||||||||
Nasdaq Composite Index | 100.00 | 80.03 | 91.99 | 120.96 | 128.00 | 148.42 | ||||||||||||
Nasdaq Computer Index | 100.00 | 82.78 | 99.01 | 129.84 | 147.07 | 150.36 | ||||||||||||
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
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Item 6. Selected Financial Data
The following selected consolidated financial data is qualified by reference to, and should be read in conjunction with, our Consolidated Financial Statements and notes thereto in Part II, Item 8 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7, of this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results to be expected in any future period.
Fiscal Years Ended June 30, | |||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
(in thousands, except per share data) | |||||||||||||||||||
Consolidated Statements of Operations Data: | |||||||||||||||||||
Net sales | $ | 1,162,561 | $ | 1,013,874 | $ | 942,582 | $ | 721,438 | $ | 505,609 | |||||||||
Cost of sales | 1,002,508 | 848,457 | 791,478 | 606,446 | 416,899 | ||||||||||||||
Gross profit | 160,053 | 165,417 | 151,104 | 114,992 | 88,710 | ||||||||||||||
Operating expenses: | |||||||||||||||||||
Research and development | 75,208 | 64,223 | 48,108 | 37,382 | 34,514 | ||||||||||||||
Sales and marketing | 33,785 | 33,308 | 26,859 | 20,458 | 17,119 | ||||||||||||||
General and administrative | 23,902 | 21,872 | 17,444 | 15,318 | 13,824 | ||||||||||||||
Provision for litigation loss | — | — | — | 1,089 | — | ||||||||||||||
Total operating expenses | 132,895 | 119,403 | 92,411 | 74,247 | 65,457 | ||||||||||||||
Income from operations | 27,158 | 46,014 | 58,693 | 40,745 | 23,253 | ||||||||||||||
Interest and other income, net | 48 | 54 | 66 | 103 | 476 | ||||||||||||||
Interest expense | (610 | ) | (717 | ) | (686 | ) | (383 | ) | (930 | ) | |||||||||
Income before income tax provision | 26,596 | 45,351 | 58,073 | 40,465 | 22,799 | ||||||||||||||
Income tax provision | 5,317 | 15,498 | 17,860 | 13,550 | 6,692 | ||||||||||||||
Net income | $ | 21,279 | $ | 29,853 | $ | 40,213 | $ | 26,915 | $ | 16,107 | |||||||||
Net income per share | |||||||||||||||||||
Basic | $ | 0.50 | $ | 0.72 | $ | 1.04 | $ | 0.73 | $ | 0.46 | |||||||||
Diluted | $ | 0.48 | $ | 0.67 | $ | 0.93 | $ | 0.65 | $ | 0.41 | |||||||||
Shares used in per share calculation | |||||||||||||||||||
Basic | 41,992 | 40,890 | 38,132 | 35,883 | 34,218 | ||||||||||||||
Diluted | 43,907 | 44,152 | 42,396 | 40,735 | 38,596 | ||||||||||||||
Stock-based compensation: | |||||||||||||||||||
Cost of sales | $ | 953 | $ | 783 | $ | 812 | $ | 573 | $ | 578 | |||||||||
Research and development | 6,527 | 5,542 | 4,077 | 3,106 | 2,608 | ||||||||||||||
Sales and marketing | 1,541 | 1,469 | 1,077 | 880 | 826 | ||||||||||||||
General and administrative | 2,340 | 2,458 | 2,090 | 1,898 | 1,649 | ||||||||||||||
Total stock-based compensation | $ | 11,361 | $ | 10,252 | $ | 8,056 | $ | 6,457 | $ | 5,661 | |||||||||
__________________________
As of June 30, | |||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
(in thousands) | |||||||||||||||||||
Consolidated Balance Sheet Data: | |||||||||||||||||||
Cash and cash equivalents | $ | 93,038 | $ | 80,826 | $ | 69,943 | $ | 72,644 | $ | 70,295 | |||||||||
Working capital | 281,528 | 261,404 | 228,975 | 158,982 | 130,987 | ||||||||||||||
Total assets | 632,257 | 589,103 | 464,620 | 370,762 | 283,135 | ||||||||||||||
Long-term obligations, net of current portion(1) | 16,869 | 30,244 | 36,716 | 8,186 | 15,482 | ||||||||||||||
Total stockholders’ equity | 373,724 | 338,351 | 287,257 | 224,701 | 178,622 | ||||||||||||||
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__________________________
(1) | $6.5 million, $9.3 million, $27.6 million and $9.7 million of our long-term obligations, net of current portion consisted of building loans at June 30, 2013, 2012, 2011 and 2009, respectively. $18.6 million of our short-term debt related to building loans at June 30, 2010 was refinanced to long-term debt at June 30, 2011. |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and related notes which appear elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly under the heading “Risk Factors.”
Overview
We are a global leader in high-performance, high-efficiency server technology and green computing innovation. We develop and provide advanced server Building Block Solutions to Data Center, Cloud Computing, Enterprise, Hadoop/Big Data, HPC and Embedded markets. Our solutions range from complete server, storage, blade, workstation, and full rack solutions to networking devices and server management software, which can be used by distributors, OEMs and end customers. For fiscal years 2013, 2012 and 2011, net sales of optimized servers were $501.9 million, $447.0 million and $351.3 million, respectively, and net sales of subsystems and accessories were $660.7 million, $566.9 million and $591.3 million, respectively. The increase in our net sales in fiscal year 2013 compared with fiscal year 2012 was primarily due to increased sales in subsystems and accessories and server systems with Intel's Sandy Bridge processors including Twin, storage, MicroCloud, GPU and Blade server solutions. Fiscal year 2013 was a challenging year in terms of soft IT spending: challenging component pricing for hard disk drive and memory and continued economic weakness in Europe. However, we performed strongly and outperformed the industry and our competition. In addition, our Taiwan facility during its first full year of operation helped our Asia region revenue grow 35.1%.
We commenced operations in 1993 and have been profitable every year since inception. For fiscal years 2013, 2012 and 2011, our net sales were $1,162.6 million, $1,013.9 million and $942.6 million, respectively, and our net income was $21.3 million, $29.9 million and $40.2 million, respectively. Our decrease in net income in fiscal year 2013 was primarily attributable to a decrease in our gross profit resulting primarily from higher sales of subsystems and accessories which contain higher content of lower margin hard disk drives and memory and higher research and development expenses partially offset by a tax benefit of $3.7 million related to the U.S. federal R&D tax credit, of which $1.5 million related to fiscal year 2012 and the recognition of $2.0 million benefit related to our resolution during the three months ended March 31, 2013 of IRS audits for all outstanding items covering fiscal year 2008 through 2010.
We sell our server systems and subsystems and accessories primarily through distributors and to a lesser extent to OEMs as well as through our direct sales force. For fiscal years 2013, 2012 and 2011, we derived 56.3%, 54.4% and 56.1%, respectively, of our net sales from products sold to distributors, and sold the remaining net sales to OEMs and end customers. None of our customers accounted for 10% or more of our net sales in fiscal years 2013, 2012 and 2011. For fiscal years 2013, 2012 and 2011, we derived 54.2%, 58.2% and 58.3%, respectively, of our net sales from customers in the United States.
We perform the majority of our research and development efforts in-house. For fiscal years 2013, 2012 and 2011, research and development expenses represented 6.5%, 6.3% and 5.1% of our net sales, respectively. Our increase as a percentage of sales in fiscal year 2013 was primarily attributable to our increase in headcount and prototype material expenses relating to new product introductions, particularly related to the introduction of new products for technology launches such as Intel's Sandy Bridge and Haswell processor as well as our FatTwin solutions and product development expenses for Ivy Bridge processor as we drove innovation in our product portfolio to increase performance in density and power. Our increase as a percentage of sales in fiscal year 2012 was primarily attributable to our increased expenses relating to new product introductions, particularly related to the introduction of Intel's Sandy Bridge processor as well as net sales which were lower than we had anticipated in fiscal year 2012.
We use several suppliers and contract manufacturers to design and manufacture components in accordance with our specifications, with most final assembly and testing performed at our manufacturing facility in San Jose, California. During fiscal year 2013, we continued to invest in expanding our operations both in San Jose, California and our subsidiaries in Taiwan and the Netherlands in order to support our growth. We have increased manufacturing and service operations in Taiwan and the Netherlands to support our Asia and European customers and we have increased our utilization of our overseas manufacturing
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capacity in fiscal year 2013. One of our key suppliers is Ablecom, a related party, which supplies us with contract design and manufacturing support. For fiscal years 2013, 2012 and 2011, our purchases from Ablecom represented 17.9%, 19.9% and 19.6% of our cost of sales, respectively. The decrease as a percentage of cost of sales in fiscal year 2013 was attributable to our increased purchases from other suppliers. Ablecom’s sales to us constitute a substantial majority of Ablecom’s net sales. We continue to maintain our manufacturing relationship with Ablecom in Asia in an effort to reduce our product costs. In addition to providing a larger volume of contract manufacturing services for us, Ablecom continues to warehouse for us a number of components and subassemblies manufactured by multiple suppliers prior to shipment to our facilities in the United States and Europe. We typically negotiate the price of products that we purchase from Ablecom on a quarterly basis; however, either party may re-negotiate the price of products with each order. As a result of our relationship with Ablecom, it is possible that Ablecom may in the future sell products to us at a price higher or lower than we could obtain from an unrelated third party supplier. This may result in our future reporting of gross profit as a percentage of net sales that is less than or in excess of what we might have obtained absent our relationship with Ablecom.
In order to continue to increase our net sales and profits, we believe that we must continue to develop flexible and customizable server solutions and be among the first to market with new features and products. We measure our financial success based on various indicators, including growth in net sales, gross profit as a percentage of net sales, operating income as a percentage of net sales, levels of inventory, and days sales outstanding, or DSOs. In connection with these efforts, we monitor daily and weekly sales and shipment reports. Among the key non-financial indicators of our success is our ability to rapidly introduce new products and deliver the latest application optimized server solutions. In this regard, we work closely with microprocessor and other component vendors to take advantage of new technologies as they are introduced. Historically, our ability to introduce new products rapidly has allowed us to benefit from the introduction of new microprocessors and as a result we monitor the introduction cycles of Intel, AMD and Nvidia carefully. This also impacts our research and development expenditures. For example, in fiscal year 2012 and in prior years, our results have been adversely impacted by customer order delays in anticipation of the introduction of the new lines of microprocessors and research and development expenditures necessary for us to prepare for the introduction.
Other Financial Highlights
The following is a summary of other financial highlights of fiscal year 2013:
• | Net cash provided by operating activities was $13.6 million, $16.5 million and $8.5 million in fiscal year 2013, 2012 and 2011, respectively. Our cash and cash equivalents, together with our investments, were $95.7 million at the end of fiscal year 2013, compared with $83.8 million at the end of fiscal year 2012. The increase in our cash and cash equivalents, together with our investments at the end of fiscal year 2013 was primarily due to $13.6 million of cash generated from our operating activities and $2.6 million of borrowings, net of repayments, offset in part by $5.0 million of purchases of property and equipments. |
• | Days sales outstanding in accounts receivable (“DSO”) at the end of fiscal year 2013 was 39 days, compared with 33 days at the end of fiscal year 2012. The increase in our DSO was primarily due to an increase in sales to customers with net payment terms and a decrease in sales to customers with telegraphic transfer ("TT") payment terms. |
• | Our inventory balance was $254.2 million at the end of fiscal year 2013, compared with $276.6 million at the end of fiscal year 2012. Days sales of inventory (“DSI”) at the end of fiscal year 2013 was 95 days, compared with 100 days at the end of fiscal year 2012. The decrease in our inventory balance at the end of fiscal year 2013 was in part due to a decrease in hard disk drives and memory as supply for hard disk drives have become more stable since the end of fiscal year 2012. |
• | Our purchase commitments with contract manufacturers and suppliers were $249.0 million at the end of fiscal year 2013 and $355.6 million at the end of fiscal year 2012. Included in the above non-cancellable commitments are hard disk drive purchase commitments totaling approximately $132.1 million, which have terms expiring through December 2014. See Note 12 of Notes to our Consolidated Financial Statements in Item 8 of this Form 10-K for a discussion of purchase commitments. |
Fiscal Year
Our fiscal year ends on June 30. References to fiscal year 2013, for example, refer to the fiscal year ended June 30, 2013.
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Revenues and Expenses
Net sales. Net sales consist of sales of our server solutions, including server systems, subsystems and accessories. The main factors which impact our net sales are unit volumes shipped and average selling prices. The prices for server systems range widely depending upon the configuration, and the prices for our subsystems and accessories vary based on the type. As with most electronics-based products, average selling prices typically are highest at the time of introduction of new products which utilize the latest technology and tend to decrease over time as such products mature in the market and are replaced by next generation products.
Cost of sales. Cost of sales primarily consists of the costs to manufacture our products, including the costs of materials, contract manufacturing, shipping, personnel and related expenses, equipment and facility expenses, warranty costs and inventory excess and obsolete provisions. The primary factors that impact our cost of sales are the mix of products sold and cost of materials, which include raw material costs, shipping costs and salary and benefits related to production. Cost of sales as a percentage of net sales may increase over time if decreases in average selling prices are not offset by corresponding decreases in our costs. Our cost of sales, as a percentage of net sales, is generally lower on server systems than on subsystems and accessories. Because we do not have long-term fixed supply agreements, our cost of sales is subject to change based on market conditions.
Research and development expenses. Research and development expenses consist of the personnel and related expenses of our research and development teams, and materials and supplies, consulting services, third party testing services and equipment and facility expenses related to our research and development activities. All research and development costs are expensed as incurred. We occasionally receive non-recurring engineering, or NRE funding from certain suppliers and customers. Under these programs, we are reimbursed for certain research and development costs that we incur as part of the joint development of our products and those of our suppliers and customers. These amounts offset a portion of the related research and development expenses and have the effect of reducing our reported research and development expenses.
Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries and incentive bonuses for our sales and marketing personnel, costs for tradeshows, independent sales representative fees and marketing programs. From time to time, we receive cooperative marketing funding from certain suppliers. Under these programs, we are reimbursed for certain marketing costs that we incur as part of the joint promotion of our products and those of our suppliers. These amounts offset a portion of the related expenses and have the effect of reducing our reported sales and marketing expenses. Similarly, we from time to time offer our distributors cooperative marketing funding which has the effect of increasing our expenses. The timing, magnitude and estimated usage of our programs and those of our suppliers can result in significant variations in reported sales and marketing expenses from period to period. Spending on cooperative marketing, either by us or our suppliers, typically increases in connection with significant product releases by us or our suppliers.
General and administrative expenses. General and administrative expenses consist primarily of general corporate costs, including personnel expenses, financial reporting, corporate governance and compliance and outside legal, audit and tax fees.
Interest and other income, net. Interest and other income, net represents the net of our interest income on investments or interest expense on the building loans or line of credit for our owned facilities offset by interest earned on our cash balances.
Income tax provision. Our income tax provision is based on our taxable income generated in the jurisdictions in which we operate, currently primarily the United States, the Netherlands and Taiwan and to a lesser extent, China. Our effective tax rate differs from the statutory rate primarily due to research and development tax credits and the domestic production activities deduction and lower taxes in foreign jurisdictions which were partially offset by the impact of state taxes and stock option expenses. A reconciliation of the federal statutory income tax rate to our effective tax rate is set forth in Note 11 of Notes to Consolidated Financial Statements.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. We evaluate our estimates on an on-going basis, including those related to allowances for doubtful accounts and sales returns, cooperative marketing accruals, investment valuations, inventory valuations, income taxes, warranty obligations and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making the
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judgments we make about the carrying values of assets and liabilities that are not readily apparent from other sources. Because these estimates can vary depending on the situation, actual results may differ from the estimates.
We believe the following are our most critical accounting policies as they require our more significant judgments in the preparation of our financial statements.
Revenue recognition. We recognize revenue from sales of products, when persuasive evidence of an arrangement exists, shipment has occurred and title has transferred, the sales price is fixed or determinable, collection of the resulting receivable is reasonably assured, and all significant obligations have been met. Generally this occurs at the time of shipment when risk of loss and title has passed to the customer. Our standard arrangement with our customers includes a signed purchase order or contract, 30 to 60 days payment terms, Ex-works terms, except for a few customers who have free-on-board destination terms or customer acceptance provisions, for which revenue is recognized when the products arrive or are accepted at the destination. We generally do not provide for non-warranty rights of return except for products which have “Out-of-box” failure, where customers could return these products for credit within 30 days of receiving the items. Certain distributors and OEMs are also permitted to return products in unopened boxes, limited to purchases over a specified period of time, generally within 60 to 90 days of the purchase, or to products in the distributor’s or OEM’s inventory at certain times (such as the termination of the agreement or product obsolescence). To estimate reserves for future sales returns, we regularly review our history of actual returns for each major product line. We also communicate regularly with our distributors to gather information about end customer satisfaction, and to determine the volume of inventory in the channel. Reserves for future returns are adjusted as necessary, based on returns experience, returns expectations and communication with our distributors.
In addition, certain customers have acceptance provisions and revenue is deferred until the customers provide the necessary acceptance. At June 30, 2013 and 2012, we had deferred revenue of $1.0 million and $0.9 million and related deferred product costs of $0.7 million and $0.8 million, respectively, related to shipments to customers pending acceptances.
Probability of collection is assessed on a customer-by-customer basis. Customers are subjected to a credit review process that evaluates the customers’ financial position and ability to pay. If it is determined from the outset of an arrangement that collection is not probable based upon the review process, the customers are required to pay cash in advance of shipment. We also make estimates of the uncollectibility of accounts receivables, analyzing accounts receivable and historical bad debts, customer concentrations, customer-credit-worthiness, current economic trends and changes in customer payment terms to evaluate the adequacy of the allowance for doubtful accounts. On a quarterly basis, we evaluate aged items in the accounts receivable aging report and provide an allowance in an amount we deem adequate for doubtful accounts. If management were to make different judgments or utilize different estimates, material differences in the amount of our reported operating expenses could result. We provide for price protection to certain distributors. We assess the market competition and product technology obsolescence, and make price adjustments based on our judgment. Upon each announcement of price reductions, the accrual for price protection is calculated based on our distributors’ inventory on hand. Such reserves are recorded as a reduction to revenue at the time we reduce the product prices.
We have an immaterial amount of service revenue relating to non-warranty repairs, which is recognized upon shipment of the repaired units to customers. Service revenue has been less than 10% of net sales for all periods presented and is not separately disclosed.
Product warranties. We offer product warranties ranging from 15 to 39 months against any defective product. We accrue for estimated returns of defective products at the time revenue is recognized, based on historical warranty experience and recent trends. We monitor warranty obligations and may make revisions to our warranty reserve if actual costs of product repair and replacement are significantly higher or lower than estimated. Accruals for anticipated future warranty costs are charged to cost of sales and included in accrued liabilities. The liability for product warranties was $6.5 million as of June 30, 2013, compared with $5.5 million as of June 30, 2012. The provision for warranty reserve was $13.4 million, $12.2 million and $9.6 million in fiscal years 2013, 2012 and 2011, respectively. Our estimates and assumptions used have been historically close to actual. The change in estimated liability for pre-existing warranties was ($1,000), $0.7 million and ($0.9) million in fiscal years 2013, 2012 and 2011, respectively. As a result of our increase in cost of servicing warranty claims from our increase in net sales in fiscal year 2013, the provision for warranty reserve increased $1.2 million compared to fiscal year 2012. As we experienced an increase in warranty claims and cost of servicing warranty claims from our increase in net sales in fiscal year 2012, the provision for warranty reserve increased $2.6 million compared to fiscal year 2011. If in future periods, we experience or anticipate an increase or decrease in warranty claims as a result of new product introductions or change in unit volumes compared with our historical experience, or if the cost of servicing warranty claims is greater or lesser than expected, we intend to adjust our estimates appropriately.
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Inventory valuation. Inventory is valued at the lower of cost or market. We evaluate inventory on a quarterly basis for lower of cost or market and excess and obsolescence and, as necessary, write down the valuation of units to lower of cost or market or for excess and obsolescence based upon the number of units that are unlikely to be sold based upon estimated demand for the following twelve months. This evaluation takes into account matters including expected demand, anticipated sales price, product obsolescence and other factors. If actual future demand for our products is less than currently forecasted, additional inventory adjustments may be required. Once a reserve is established, it is maintained until the product to which it relates is sold or scrapped. If a unit that has been written down is subsequently sold, the cost associated with the revenue from this unit is reduced to the extent of the write down, resulting in an increase in gross profit. We monitor the extent to which previously written down inventory is sold at amounts greater or less than carrying value, and based on this analysis, adjust our estimate for determining future write downs. If in future periods, we experience or anticipate a change in recovery rate compared with our historical experience, our gross margin would be affected. Our provision for inventory was $9.7 million, $8.6 million and $3.4 million in fiscal years 2013, 2012 and 2011, respectively.
Accounting for income taxes. We account for income taxes under an asset and liability approach. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax reporting purposes, net operating loss carry-forwards and other tax credits measured by applying currently enacted tax laws. Valuation allowances are provided when necessary to reduce deferred tax assets to an amount that is more likely than not to be realized.
We recognize the tax liability for uncertain income tax positions on the income tax return based on the two-step process. The first step is to determine whether it is more likely than not that each income tax position would be sustained upon audit. The second step is to estimate and measure the tax benefit as the amount that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. Estimating these amounts requires us to determine the probability of various possible outcomes. We evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on the consideration of several factors, including changes in facts or circumstances, changes in applicable tax law, settlement of issues under audit and new exposures. If we later determine that our exposure is lower or that the liability is not sufficient to cover our revised expectations, we adjust the liability and effect a related change in our tax provision during the period in which we make such determination. See Note 11 of Notes to Consolidated Financial Statements for the impact on our consolidated financial statements.
Stock-based compensation. We measure and recognize the compensation expense for all share-based awards made to employees and non-employee members of the Board of Directors including employee stock options and restricted stock awards based on estimated fair values. We are required to estimate the fair value of share-based awards on the date of grant. The value of awards that are ultimately expected to vest is recognized as an expense over the requisite service periods. Compensation expense for options and restricted stock awards granted to employees was $11.4 million, $10.3 million and $8.1 million for the years ended June 30, 2013, 2012 and 2011, respectively.
As of June 30, 2013, the total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options granted since July 1, 2006 to employees and non-employee members of the Board of Directors, was $19.2 million, which is expected to be recognized as an expense over a weighted-average period of approximately 2.41 years. See Note 10 of Notes to our Consolidated Financial Statements for additional information.
We estimated the fair value of stock options granted using a Black-Scholes option-pricing model and a single option award approach. This model requires us to make estimates and assumptions with respect to the expected term of the option, the expected volatility of the price of our common stock and the expected forfeiture rate. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
The expected term represents the period that our stock-based awards are expected to be outstanding and was determined based on an analysis of the relevant peer companies’ post-vest termination rates and exercise behavior for the stock options granted prior to June 30, 2011. For stock options and restricted stock awards granted after June 30, 2011, expected term is based on a combination of our peer group and our historical experience. The expected volatility is based on a combination of the implied and historical volatility of our relevant peer group for the stock options granted prior to September 30, 2009. For stock options and restricted stock awards granted after September 30, 2009, expected volatility is based solely on our historical volatility. In addition, forfeitures of share-based awards are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest.
Variable interest entities. We have concluded that Ablecom and its subsidiaries ("Ablecom") is a variable interest entity in accordance with applicable accounting standards and guidance; however, we are not the primary beneficiary of
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Ablecom and therefore, we do not consolidate Ablecom. In performing our analysis, we considered our explicit arrangements with Ablecom including the supplier and distributor arrangements. Also, as a result of the substantial related party relationship between the two companies, we considered whether any implicit arrangements exist that would cause us to protect those related parties’ interests in Ablecom from suffering losses. We determined that no implicit arrangements exist with Ablecom or its shareholders. Such an arrangement would be inconsistent with the fiduciary duty that we have towards our stockholders who do not own shares in Ablecom.
In May 2012, we and Ablecom jointly established Super Micro Business Park, Inc. ("Management Company") in Taiwan to manage the common areas shared by us and Ablecom for our separately constructed manufacturing facilities. Each company contributed $168,000 and own 50% of the Management Company. Although the operations of the Management Company are independent of us, through governance rights, we have the ability to direct the Management Company's business strategies. Therefore, we have concluded that the Management Company is a variable interest entity of us as we are the primary beneficiary of the Management Company. As of June 30, 2013, the accounts of the Management Company have been consolidated with our accounts, and a noncontrolling interest has been recorded for Ablecom's interests in the net assets and operations of the Management Company. In fiscal year 2013, $13,000 of net income attributable to Ablecom's interest was included in our general and administrative expenses in the consolidated statements of operations.
Results of Operations
The following table sets forth our financial results, as a percentage of net sales for the periods indicated:
Years Ended June 30, | ||||||||
2013 | 2012 | 2011 | ||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||
Cost of sales | 86.2 | 83.7 | 84.0 | |||||
Gross profit | 13.8 | 16.3 | 16.0 | |||||
Operating expenses: | ||||||||
Research and development | 6.5 | 6.3 | 5.1 | |||||
Sales and marketing | 2.9 | 3.3 | 2.8 | |||||
General and administrative | 2.1 | 2.2 | 1.9 | |||||
Total operating expenses | 11.5 | 11.8 | 9.8 | |||||
Income from operations | 2.3 | 4.5 | 6.2 | |||||
Interest and other income, net | — | — | — | |||||
Interest expense | (0.1 | ) | — | — | ||||
Income before income tax provision | 2.2 | 4.5 | 6.2 | |||||
Income tax provision | 0.4 | 1.6 | 1.9 | |||||
Net income | 1.8 | % | 2.9 | % | 4.3 | % | ||
Comparison of Fiscal Years Ended June 30, 2013 and 2012
Net sales. Net sales increased by $148.7 million, or 14.7%, to $1,162.6 million from $1,013.9 million, for fiscal year 2013 and 2012, respectively. This increase was due primarily to an increase in unit volumes of our subsystems and accessories and to a lesser extent an increase in the average selling price of our server systems offset by a decrease in unit volumes of server systems as we sold more higher density server systems on a processing node basis in fiscal year 2013 compared to fiscal year 2012.
For fiscal year 2013, the number of server system units sold decreased 2.9% to 232,000 compared to 239,000 for fiscal year 2012. The average selling price of server system units increased 15.8% to $2,200 in fiscal year 2013 compared to $1,900 in fiscal year 2012. The average selling prices of our server systems increased primarily due to higher average selling prices of MicroCloud, FatTwin servers, storage and SuperBlades servers with Intel's Sandy Bridge processors which offered higher density computing and more memory and hard disk drive capacity. Sales of server systems increased by $54.9 million or 12.3% from fiscal year 2012 to fiscal year 2013, primarily due to higher sales of Twin, storage, MicroCloud, GPU/Xeon Phi and SuperBlade servers solutions and complete integrated-high-end servers solutions to OEM and end customers partially offset by lower sales of rack solutions. Sales of server systems represented 43.2% of our net sales for fiscal year 2013 compared to 44.1% of our net sales for fiscal year 2012.
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For fiscal year 2013, the number of subsystems and accessories units sold increased 3.6% to 4.5 million compared to 4.3 million for fiscal year 2012. Sales of subsystems and accessories increased by $93.8 million or 16.6% from fiscal year 2012 to fiscal year 2013, primarily related to higher sales of hard disk drives, chassis, memory and serverboards to our distributors and system integrators who purchased additional accessories from us and completed the final assembly themselves. Sales of subsystems and accessories represented 56.8% of our net sales for fiscal year 2013 as compared to 55.9% of our net sales for fiscal year 2012.
For fiscal year 2013 and 2012, we derived 56.3% and 54.4%, respectively, of our net sales from products sold to distributors and we derived 43.7% and 45.6%, respectively, from sales to OEMs and to end customers. For fiscal year 2013, customers in the United States, Europe and Asia accounted for 54.2%, 22.7% and 20.5%, of our net sales, respectively, as compared to 58.2%, 21.8% and 17.4% of our net sales, respectively, for fiscal year 2012.
Cost of sales. Cost of sales increased by $154.1 million, or 18.2%, to $1,002.5 million from $848.5 million, for fiscal year 2013 and 2012, respectively. Cost of sales as a percentage of net sales was 86.2% and 83.7% for fiscal year 2013 and 2012, respectively. The increase in absolute dollars of cost of sales was primarily attributable to the increase in net sales, an increase of $1.2 million in provision for warranty reserve and an increase of $1.1 million in provision for inventory reserve. The higher cost of sales as a percentage of net sales was primarily due to higher costs of hard disk drives as a result of our HDD supply agreement and memory bundled with our server solutions and higher mix of subsystem and accessories sales. In general, we have higher margins in server systems than in subsystems and accessories. In fiscal year 2013, we recorded a $13.4 million expense, or 1.2% of net sales, related to the provision for warranty reserve as compared to $12.2 million, or 1.2% of net sales, in fiscal year 2012. The increase in the provision for warranty reserve was primarily due to higher cost of servicing warranty claims from higher net sales in fiscal year 2013. If in future periods we experience or anticipate an increase or decrease in warranty claims as a result of new product introductions or change in unit volumes compared with our historical experience, or if the cost of servicing warranty claims is greater or lesser than expected, our gross margin would be affected. In fiscal year 2013, we recorded a $9.7 million expense, net of recovery, or 0.8% of net sales, related to the inventory provision as compared to $8.6 million, or 0.8% of net sales, in fiscal year 2012. The increase in the inventory provision was primarily for older products as a result of product transitions.
Research and development expenses. Research and development expenses increased by $11.0 million, or 17.1%, to $75.2 million from $64.2 million, for fiscal year 2013 and 2012, respectively. Research and development expenses were 6.5% and 6.3% of net sales for fiscal year 2013 and 2012, respectively. The increase in absolute dollars was primarily due to an increase of $9.2 million in compensation and benefits including higher stock-based compensation expense, resulting from growth in research and development personnel related to expanded product development initiatives in the United States and in Taiwan, a decrease of $0.8 million in non-recurring engineering funding from certain suppliers and customers and an increase of $0.6 million in VAT expenses related to research and development service fees paid to our subsidiary in Taiwan. The increase as a percentage of sales was due to increased headcount and prototype material expenses relating to new product introductions, particularly related to the introduction of new products for technology launches such as Intel's Sandy Bridge and Haswell processor as well as our FatTwin solutions and product development expenses for Ivy Bridge processor as we drove innovation in our product portfolio to increase performance in density and power.
Research and development expenses include stock-based compensation expense of $6.5 million and $5.5 million for fiscal year 2013 and 2012, respectively.
Sales and marketing expenses. Sales and marketing expenses increased by $0.5 million, or 1.4%, to $33.8 million from $33.3 million, for fiscal year 2013 and 2012, respectively. Sales and marketing expenses were 2.9% and 3.3% of net sales for fiscal year 2013 and 2012, respectively. The increase in absolute dollars was primarily due to an increase of $2.4 million in compensation and benefits resulting from growth in sales and marketing personnel, including higher stock-based compensation expense and an increase of $0.5 million in advertising, promotional and trade show expenses offset in part by an increase of $1.3 million in cooperative marketing funding received from vendors to promote the new product launches and a decrease of $1.0 million in cooperative marketing funding to our customers.
Sales and marketing expenses include stock-based compensation expense of $1.5 million for both fiscal year 2013 and 2012.
General and administrative expenses. General and administrative expenses increased by $2.0 million, or 9.3%, to $23.9 million from $21.9 million, for fiscal year 2013 and 2012, respectively. General and administrative expenses were 2.1% and 2.2% of net sales for fiscal year 2013 and 2012, respectively. The increase in absolute dollars was primarily due to an increase of $1.1 million in compensation and benefits, including higher stock-based compensation expense, in part to support
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the expansion of our operations at our headquarters and operations in Taiwan, an increase of $0.7 million in bad debt expense, an increase of $0.6 million in payroll tax audit reserve, a decrease of $0.2 million in rental income, an increase of $0.3 million in miscellaneous expense relating to the settlement payment of one patent claim offset in part by a decrease of $0.4 million in foreign currency transaction loss, a decrease of $0.4 million in moving expenses and a decrease of $0.4 million in legal fees.
General and administrative expenses include stock-based compensation expense of $2.3 million and $2.5 million for fiscal year 2013 and 2012, respectively.
Interest and other expense, net. Interest and other expense changed by $(0.1) million, to $0.6 million of expense from $0.7 million of expense, for fiscal year 2013 and 2012, respectively, which included $0.6 million and $0.7 million of interest expense for fiscal year 2013 and 2012, respectively.
Provision for income taxes. Provision for income taxes decreased by $10.2 million, or 65.7%, to $5.3 million from $15.5 million, for fiscal year 2013 and 2012, respectively. The effective tax rate was 20.0% and 34.2% for fiscal year 2013 and 2012, respectively. The lower provision for income taxes and effective tax rate for fiscal year 2013 were primarily attributable to our lower net income, a tax benefit of $3.7 million related to the U.S. federal R&D tax credit, of which $1.5 million related to fiscal year 2012, and the recognition of a $2.0 million benefit related to our resolution of IRS audits for all outstanding items covering fiscal year 2008 through 2010, offset in part by an increase of $0.8 million in stock option expense.
Comparison of Fiscal Years Ended June 30, 2012 and 2011
Net sales. Net sales increased by $71.3 million, or 7.6%, to $1,013.9 million from $942.6 million, for fiscal year 2012 and 2011, respectively. This increase was due primarily to an increase in the average selling price of our server systems and an increase in unit volumes of our server systems.
For fiscal year 2012, the number of server system units sold increased 8.1% to 239,000 compared to 221,000 for fiscal year 2011. The average selling price of server system units increased 18.8% to $1,900 in fiscal year 2012 compared to $1,600 in fiscal year 2011. The average selling prices of our server systems increased primarily due to an increase in average selling prices of hard disk drives caused by the flooding in Thailand, higher average selling prices of complete integrated-high-end server solutions to OEM and end customers, rack solutions and SuperBlades offset in part by declines in average selling prices of 6000 Series configuration of servers. Sales of server systems increased by $95.7 million or 27.2% from fiscal year 2011 to fiscal year 2012, primarily due to higher sales of complete integrated-high-end server solutions to OEM and end customers and higher sales of rack, storage and SuperBlades server solutions. Sales of server systems represented 44.1% of our net sales for fiscal year 2012 compared to 37.3% of our net sales for fiscal year 2011.
For fiscal year 2012, the number of subsystems and accessories units sold decreased 5.4% to 4.3 million compared to 4.6 million for fiscal year 2011. Sales of subsystems and accessories decreased by $24.4 million or 4.1% from fiscal year 2011 to fiscal year 2012, primarily related to lower sales of subsystems and accessories, such as memory and serverboards as a result of the flooding in Thailand and the effects on hard disk drive supply chain which prevented our system integrators from purchasing memory and serverboards and completing the final assembly of server solutions. Sales of subsystems and
accessories represented 55.9% of our net sales for fiscal year 2012 as compared to 62.7% of our net sales for fiscal year 2011.
For fiscal year 2012 and 2011, we derived 54.4% and 56.1%, respectively, of our net sales from products sold to distributors and we derived 45.6% and 43.9%, respectively, from sales to OEMs and to end customers. For fiscal year 2012, customers in the United States, Europe and Asia accounted for 58.2%, 21.8% and 17.4%, of our net sales, respectively, as compared to 58.3%, 21.4% and 16.9%, respectively, for fiscal year 2011.
Cost of sales. Cost of sales increased by $57.0 million, or 7.2%, to $848.5 million from $791.5 million, for fiscal year 2012 and 2011, respectively. Cost of sales as a percentage of net sales was 83.7% and 84.0% for fiscal year 2012 and 2011, respectively. The increase in absolute dollars of cost of sales was primarily attributable to the increase in net sales, an increase of $2.6 million in provision for warranty reserve, an increase of $5.2 million in provision for inventory reserve and an increase of $1.5 million in freight-in charges. The lower cost of sales as a percentage of net sales was primarily due to an increase in net sales of server solutions which typically have higher margins. In fiscal year 2012, we recorded a $12.2 million expense, or 1.2% of net sales, related to the provision for warranty reserve as compared to $9.6 million, or 1.0% of net sales, in fiscal year 2011. The increase in the provision for warranty reserve was primarily due to higher warranty claims and higher cost of servicing warranty claims in fiscal year 2012. If in future periods we experience or anticipate an increase or decrease in warranty claims as a result of new product introductions or change in unit volumes compared with our historical experience, or if the cost of servicing warranty claims is greater or lesser than expected, our gross margin would be affected. In fiscal year 2012, we recorded a $8.6 million expense, or 0.8% of net sales, related to the inventory provision as compared to $3.4 million,
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or 0.4% of net sales, in fiscal year 2011. The increase in the inventory provision was primarily for older products as a result of product transitions.
Research and development expenses. Research and development expenses increased by $16.1 million, or 33.5%, to $64.2 million from $48.1 million, for fiscal year 2012 and 2011, respectively. Research and development expenses were 6.3% and 5.1% of net sales for fiscal year 2012 and 2011, respectively. The increase in absolute dollars was primarily due to an increase of $11.9 million in compensation and benefits including higher stock-based compensation expense, resulting from growth in research and development personnel related to expanded product development initiatives in the United States and in Taiwan, an increase of $1.6 million in development costs associated with the Sandy Bridge launched in March 2012 and a decrease of $0.5 million in non-recurring engineering funding from certain suppliers and customers. The increase as a percentage of sales was due to increased expenses relating to new product introductions, particularly related to the introduction of Intel's new Sandy Bridge processor and net sales which were lower than we had anticipated.
Research and development expenses include stock-based compensation expense of $5.5 million and $4.1 million for fiscal year 2012 and 2011, respectively.
Sales and marketing expenses. Sales and marketing expenses increased by $6.4 million, or 24.0%, to $33.3 million from $26.9 million, for fiscal year 2012 and 2011, respectively. Sales and marketing expenses were 3.3% and 2.8% of net sales for fiscal year 2012 and 2011, respectively. The increase in absolute dollars was primarily due to an increase of $4.7 million in compensation and benefits resulting from growth in sales and marketing personnel, including higher stock-based compensation expense, an increase in advertising, promotional and trade show expenses of $0.7 million and an increase of $0.7 million in freight out expenses to customers. The increase as a percentage of sales was due to increased expenses in anticipation of higher net sales which were lower than we had anticipated.
Sales and marketing expenses include stock-based compensation expense of $1.5 million and $1.1 million for fiscal year 2012 and 2011, respectively.
General and administrative expenses. General and administrative expenses increased by $4.4 million, or 25.4%, to $21.9 million from $17.4 million, for fiscal year 2012 and 2011, respectively. General and administrative expenses were 2.2% and 1.9% of net sales for fiscal year 2012 and 2011, respectively. The increase in absolute dollars was primarily due to an increase of $1.9 million in compensation and benefits, including higher stock-based compensation expense, in part to support the expansion of our operations at our headquarters and operations in Taiwan, an increase of $1.3 million in foreign currency transaction loss and an increase of $0.9 million in tax expenses.
General and administrative expenses include stock-based compensation expense of $2.5 million and $2.1 million for fiscal year 2012 and 2011, respectively.
Interest and other expense, net. Interest and other expense changed by $43,000, to $0.7 million of expense from $0.6 million of expense, for fiscal year 2012 and 2011, respectively, which included $0.7 million of interest expense for both fiscal year 2012 and 2011.
Provision for income taxes. Provision for income taxes decreased by $2.4 million, or 13.2%, to $15.5 million from $17.9 million, for the fiscal year 2012 and 2011, respectively. The effective tax rate was 34.2% and 30.8% for fiscal year 2012 and 2011, respectively. The effective tax rate was higher for fiscal year 2012 primarily due to the expiration of Federal research and development tax credits as of December 31, 2011 and an increase in stock option expenses which were partially offset by a decrease of state taxes due to election of the California single sales factor apportionment and the domestic production activity deduction.
Liquidity and Capital Resources
Since our inception, we have financed our growth primarily with funds generated from operations and from the proceeds of our initial public offering. In addition, we have utilized borrowing facilities, particularly in relation to the financing of real property acquisitions. Our cash and cash equivalents and short-term investments were $93.1 million and $80.9 million as of June 30, 2013 and 2012, respectively. Our cash in foreign locations was $16.6 million and $6.5 million at June 30, 2013 and 2012, respectively. It is management's intention to reinvest the undistributed foreign earnings indefinitely in foreign operations.
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Operating Activities. Net cash provided by operating activities was $13.6 million, $16.5 million and $8.5 million for fiscal years 2013, 2012 and 2011, respectively.
Net cash provided by our operating activities for fiscal year 2013 was primarily due to our net income of $21.3 million, a decrease in inventory of $12.7 million, stock-based compensation expense of $11.4 million, provision for inventory of $9.7 million, depreciation expense of $7.8 million, an increase in net income taxes payable of $4.5 million and an increase in accrued liabilities of $4.4 million, which were partially offset by an increase in accounts receivable of $48.3 million, deferred income taxes of $7.0 million and a decrease in accounts payable of $2.2 million.
Net cash provided by our operating activities for fiscal year 2012 was primarily due to our net income of $29.9 million, an increase in accounts payable of $61.3 million, stock-based compensation expense of $10.3 million, an increase in net income taxes payable of $9.0 million, provision for inventory of $8.6 million, depreciation expense of $7.1 million, and an increase in accrued liabilities of $5.0 million, which were partially offset by an increase in inventory of $92.5 million and an increase in accounts receivable of $17.2 million.
Net cash provided by our operating activities for fiscal year 2011 was primarily due to our net income of $40.2 million, an increase in accounts payable of $16.9 million, stock-based compensation expense of $8.1 million, an increase in net income taxes payable of $5.7 million, depreciation expense of $5.5 million, an increase in accrued liabilities of $5.3 million, which were partially offset by an increase in inventory of $60.5 million and an increase in accounts receivable of $12.5 million.
The increase for fiscal year 2013 in accounts receivable was primarily due to an increase in sales to customers with net payment terms and a decrease in sales to customers with TT payment terms. The decrease for fiscal year 2013 in inventory and accounts payable was mainly due to lower hard disk drive and memory inventory. The increase for fiscal year 2013 in accrued liabilities was in part due to timing of payments to our vendors and in part due to support our growth and our increasing manufacturing activities in Taiwan. We anticipate that accounts receivable, inventory and accounts payable will increase to the extent we continue to grow our product lines and our business.
The increase for fiscal year 2012 in accounts receivable was primarily due to higher net sales in the fourth quarter of fiscal year 2012 to customers with net payment terms. The increase for fiscal year 2012 in inventory was in part due to support the anticipated level of growth in net sales in fiscal year 2012, to increase inventory relating to the Sandy Bridge processors launched by Intel in the third quarter of fiscal year 2012 and to address the disruption in the hard disk drive supply chain as a result of the flooding in Thailand in 2011. The increase for fiscal year 2012 in accounts payable and accrued liabilities was in part due to timing of payments to our suppliers and in part due to support our growth and our increasing manufacturing activities in Taiwan. We anticipate that accounts receivable, inventory and accounts payable will continue to increase to the extent we continue to grow our product lines and our business.
The increase for fiscal year 2011 in accounts receivable was primarily due to higher net sales during fiscal year 2011. The increase for fiscal year 2011 in inventory, accounts payable and accrued liabilities was in part due to an increase in demand for our products resulting from a recovering economy, in part to support our growth and in part due to our increasing manufacturing activities in the Netherlands and Taiwan.
Investing activities. Net cash used in our investing activities was $5.1 million, $19.7 million and $24.8 million for fiscal years 2013, 2012 and 2011, respectively. In fiscal year 2013, $5.0 million was related to the purchase of property, plant and equipment and $0.4 million was related to the additional certificate of deposit pledged as security for value added tax examination required by tax authority of Taiwan. This was offset by the redemption at par of investments in auction rate securities of $0.3 million.
In fiscal year 2012, $22.0 million was related to the purchase of property, plant and equipment net of land deposit refund primarily related to the construction of facilities in Taiwan and the headquarters office expansion in San Jose, California. The purchase of the land in Taiwan, consisting of approximately 2.2 acres, was finalized and closed in December 2011. We also completed the construction of facilities in Taiwan and the headquarters expansion in San Jose, California in December 2011. This was offset by the redemption at par of investments in auction rate securities of $2.5 million.
In fiscal year 2011, $16.2 million was related to the purchase of property, plant and equipment including $6.1 million related to the land purchased in Taiwan in August 2010 and $9.2 million was related to a deposit made in March 2011 for land in Taiwan. This was offset by the redemption at par of investments in auction rate securities of $1.5 million.
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Financing activities. Net cash provided by our financing activities was $3.8 million, $13.8 million and $13.6 million for fiscal years 2013, 2012 and 2011, respectively. In fiscal year 2013, we received $1.8 million related to the proceeds from the exercise of stock options. We withheld shares and paid the minimum tax withholding mainly on behalf of one executive officer for his restricted stock awards of $1.0 million in fiscal year 2013. Further, we obtained a new term loan of $15.0 million from China Trust Bank, borrowed $5.6 million of our revolving line of credit from Bank of America, N.A., and repaid $18.1 million in loans in fiscal year 2013. In fiscal year 2012, we received $8.5 million related to the proceeds from the exercise of stock options. We withheld shares and paid the minimum tax withholding on behalf of one executive officer for his restricted stock awards of $1.1 million in fiscal year 2012. Further, we obtained a new term loan of $14.0 million from Bank of America, N.A., borrowed $19.7 million of our revolving line of credit and repaid $28.9 million in loans in fiscal year 2012. In fiscal year 2011, we received $10.3 million related to the proceeds from the exercise of stock options. We withheld shares and paid the minimum tax withholding on behalf of several executive officers and an employee for their stock options and restricted stock awards of $8.4 million for fiscal year 2011. Further, we obtained a new term loan of $13.9 million and borrowed $9.9 million of our revolving line of credit. We repaid $14.1 million in loans for fiscal year 2011. In fiscal year 2013, 2012 and 2011, $0.9 million, $2.0 million and $2.4 million was related to the excess tax benefits from stock-based compensation, respectively.
We expect to experience continued growth in our working capital requirements and capital expenditures as we continue to expand our business. Our long-term future capital requirements will depend on many factors, including our level of revenues, the timing and extent of spending to support our product development efforts, the expansion of sales and marketing activities, the timing of our introductions of new products, the costs to ensure access to adequate manufacturing capacity and the continuing market acceptance of our products. We intend to fund this continued expansion through cash generated by operations and by drawing on the revolving credit facility or through other debt financing. However we cannot be certain whether such financing will be available on commercially reasonable or otherwise favorable terms or that such financing will be available at all. We anticipate that working capital and capital expenditures will constitute a material use of our cash resources and that we will either extend our current credit facilities or obtain alternative credit facilities. Assuming we are successful in extending our credit facility or entering into alternative facilities, we have sufficient cash on hand to continue to operate for at least the next 12 months.
Other factors affecting liquidity and capital resources
Activities under Revolving Lines of Credit and Term Loans
Bank of America
In October 2011, we entered into an amendment to our existing credit agreement with Bank of America, N.A. ("Bank of America") which provided for (i) a $40.0 million revolving line of credit facility through June 15, 2013 and (ii) a five-year $14.0 million term loan facility. The term loan is secured by the three buildings purchased in San Jose, California in June 2010 and the principal and interest are payable monthly through September 30, 2016 with an interest rate at the LIBOR rate plus 1.50% per annum. In June and August 2013, we extended the revolving line of credit to mature on August and September 15, 2013, respectively, and we are currently negotiating with Bank of America to renew the revolving line of credit.
The line of credit facility provided for borrowings denominated both in U.S. dollars and in Taiwanese dollars. For borrowings denominated in U.S. dollars, the interest rate for the revolving line of credit is at the LIBOR rate plus 1.25% per annum. The LIBOR rate was 0.19% at June 30, 2013. For borrowings denominated in Taiwanese dollars, the interest rate for the revolving line of credit is equal to the lender's established interest rate which is adjusted monthly.
As of June 30, 2013 and 2012, the total outstanding borrowings under the Bank of America term loan was $9.3 million and $12.1 million, respectively. The total outstanding borrowings under the Bank of America line of credit was $10.9 million and $10.6 million as of June 30, 2013 and 2012, respectively. The interest rates for these loans ranged from 1.23% to 1.69% per annum at June 30, 2013 and 1.29% to 1.81% per annum at June 30, 2012, respectively. As of June 30, 2013, the unused revolving line of credit under Bank of America was $29.1 million.
China Trust Bank
In October 2011, we obtained an unsecured revolving line of credit from China Trust Bank totaling NT$300.0 million Taiwanese dollars or $9.9 million U.S. dollars equivalents. In July 2012, we increased the credit line to NT$450.0 million Taiwanese dollars or $14.9 million U.S. dollars equivalents. The credit facility provides for a one-year term loan and in July 2013, we extended the credit facility to mature on September 30, 2013. The term loan is secured by the land and building located in Bade, Taiwan with an interest rate at the lender's established interest rate plus 0.3% which is adjusted monthly. The total outstanding borrowings under the China Trust Bank term loan was denominated in Taiwanese dollars and was translated
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into U.S. dollars of $14.9 million and $10.1 million with the interest rate at 1.20% and 1.41% per annum as of June 30, 2013 and 2012, respectively. We are currently negotiating with China Trust Bank to renew our loan.
Covenant Compliance
The credit agreement with Bank of America contains customary representations and warranties and customary affirmative and negative covenants applicable to us and our subsidiaries. The credit agreement contains certain financial covenants, including the following:
• | Not to incur on a consolidated basis, a net loss before taxes and extraordinary items in any two consecutive quarterly accounting periods; | ||
• | Our funded debt to EBITDA ratio (ratio of all outstanding liabilities for borrowed money and other interest-bearing liabilities, including current and long-term debt, less the non-current portion of subordinated liabilities to EBITDA) shall not be greater than 2.00; | ||
• | Our unencumbered liquid assets, as defined in the agreement, held in the United States shall have an aggregate market value of not less than $30.0 million. | ||
As of June 30, 2013, our total assets of $586.7 million collateralized the line of credit with Bank of America and were all of the assets of the Company except for the three buildings purchased in San Jose, California in June 2010 and the land and building located in Bade, Taiwan. As of June 30, 2013, total assets collateralizing the term loan with Bank of America were $17.8 million. As of June 30, 2013, the Company was in compliance with all financial covenants associated with the term loan and line of credit with Bank of America.
As of June 30, 2013, the land and building located in Bade, Taiwan collateralizing the term loan with China Trust Bank was $27.7 million. There are no financial covenants associated with the term loan with China Trust Bank at June 30, 2013.
Contract Manufacturers
In fiscal year 2013, we paid our contract manufacturers within 60 to 72 days of invoice and Ablecom between 67 to 95 days of invoice. Ablecom, a Taiwan corporation, is one of our major contract manufacturers and a related party. As of June 30, 2013 and 2012 amounts owed to Ablecom by us were approximately $50.4 million and $51.5 million, respectively.
Auction Rate Securities Valuation
As of June 30, 2013, we held $2.6 million of auction rate securities, net of unrealized losses, representing our interest in auction rate preferred shares in a closed end mutual fund invested in municipal securities; the auction rate security was rated AAA or AA2 at June 30, 2013. These auction rate preferred shares have no stated maturity date.
During February 2008, the auctions for these auction rate securities began to fail to obtain sufficient bids to establish a clearing rate and were not saleable in the auction, thereby losing the short-term liquidity previously provided by the auction process. As a result, as of June 30, 2013, $2.6 million of these auction rate securities have been classified as long-term available-for-sale investments. Based on our assessment of fair value at June 30, 2013, we have recorded an accumulated unrealized loss of $0.1 million, net of deferred income taxes, on long-term auction rate securities. The unrealized loss was deemed to be temporary and has been recorded as a component of accumulated other comprehensive loss. In fiscal year 2013, 2012 and 2011, $0.3 million, $2.5 million and $1.5 million of auction rate securities were redeemed at par, respectively.
Contractual Obligations
The following table describes our contractual obligations as of June 30, 2013:
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Payments Due by Period | |||||||||||||||||||
Less Than 1 Year | 1 to 3 Years | 3 to 5 Years | More Than 5 Years | Total | |||||||||||||||
(in thousands) | |||||||||||||||||||
Operating leases | $ | 3,066 | $ | 3,708 | $ | 108 | $ | — | $ | 6,882 | |||||||||
Capital leases, including interest | 37 | 51 | 37 | — | 125 | ||||||||||||||
Long-term debt, including interest (1) | 28,783 | 5,738 | 937 | — | 35,458 | ||||||||||||||
License arrangements | 372 | 228 | — | — | 600 | ||||||||||||||
Purchase commitments (2) | 200,094 | 48,911 | — | — | 249,005 | ||||||||||||||
Total | $ | 232,352 | $ | 58,636 | $ | 1,082 | $ | — | $ | 292,070 | |||||||||
__________________________
(1) | Amount reflects total anticipated cash payments, including anticipated interest payments based on the interest rate at June 30, 2013. |
(2) | Amount reflects total gross purchase commitments under our manufacturing arrangements with third-party contract manufacturers or vendors. Our purchase obligations included $132.1 million of hard disk drive purchase commitments, which will be paid through December 2014. See Note 12 of Notes to our Consolidated Financial Statements in Item 8 of this Form 10-K for a discussion of purchase commitments. |
(3) | The table above excludes liabilities for deferred revenue for warranty services of $3.6 million and unrecognized tax benefits and related interest and penalties accrual of $8.1 million. We have not provided a detailed estimate of the payment timing of unrecognized tax benefits due to the uncertainty of when the related tax settlements will become due. See Note 11 of Notes to our Consolidated Financial Statements in Item 8 of this Form 10-K for a discussion of income taxes. |
We expect to fund our remaining contractual obligations from our ongoing operations and existing cash and cash equivalents on hand.
Adoption of New Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board ("FASB") issued amended authoritative guidance associated with comprehensive income, which requires companies to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. We have adopted the provisions of this standard on a retrospective basis. This adoption did not have an impact on our results of operations or financial position, but resulted in the presentation of a separate consolidated statement of comprehensive income.
In February 2013, the FASB issued authoritative guidance associated with reporting of amounts reclassified out of accumulated other comprehensive income, which requires companies to present significant reclassifications out of accumulated other comprehensive income in their entirety in the statement of operations or in a separate footnote to the financial statements. For amounts that are not required to be reclassified in their entirety to net income, the standard requires companies to cross-reference to related footnoted disclosures. The new disclosure requirements are effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those years, beginning after December 15, 2012 and early adoption is permitted. The adoption of this guidance will not have a material impact on our results of operations or financial position.
In July 2013, the FASB issued authoritative guidance associated with the presentation of unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. It requires a liability related to unrecognized tax benefit to offset a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if a settlement is required or expected in the event the uncertain tax position is disallowed. We early adopted this presentation requirement in fiscal year 2013. The adoption did not have a material impact on our results of operations or financial position.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
41
Item 7A. Qualitative and Quantitative Disclosure About Market Risk
Interest Rate Risk
The primary objectives of our investment activities are to preserve principal, provide liquidity and maximize income without significantly increasing the risk. Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the fair value of the investment to fluctuate. To minimize this risk, we maintain our portfolio of cash equivalents and short-term investments in money market funds and certificates of deposit. Our long-term investments include auction rate securities, which have been classified as long-term due to the lack of a liquid market for these securities. Since our results of operations are not dependent on investments, the risk associated with fluctuating interest rates is limited to our investment portfolio, and we believe that a 10% change in interest rates would not have a significant impact on our results of operations. As of June 30, 2013, our investments were in money market funds, certificates of deposits and auction rate securities (see Liquidity Risk below).
We are exposed to changes in interest rates as a result of our borrowings under our term loan and revolving lines of credit. The interest rates for the term loans and the revolving lines of credit ranged from 1.20% to 1.69% at June 30, 2013 and 1.29% to 1.81% at June 30, 2012, respectively. Based on the outstanding principal indebtedness of $35.2 million under our credit facilities as of June 30, 2013, we believe that a 10% change in interest rates would not have a significant impact on our results of operations.
Liquidity Risk
As of June 30, 2013, we held $2.6 million of auction rate securities, net of unrealized losses, representing our interest in auction rate preferred shares in a closed end mutual fund invested in municipal securities; the auction rate security was rated AAA or AA2 at June 30, 2013. These auction rate preferred shares have no stated maturity date. During February 2008, the auctions for these auction rate securities began to fail to obtain sufficient bids to establish a clearing rate and were not saleable in the auction, thereby losing the short-term liquidity previously provided by the auction process. As a result, as of June 30, 2013, $2.6 million of these auction rate securities have been classified as long-term available-for-sale investments. Based on our assessment of fair value at June 30, 2013, we have recorded an accumulated unrealized loss of $0.1 million, net of deferred income taxes, on long-term auction rate securities. The unrealized loss was deemed to be temporary and has been recorded as a component of accumulated other comprehensive loss. During fiscal year 2013, 2012 and 2011, $0.3 million, $2.5 million and $1.5 million of auction rate securities were redeemed at par, respectively.
Although we have determined that we will not likely be required to sell the securities before the anticipated recovery and we have the intent and ability to hold our investments until successful auctions occur, these investments are not currently liquid and in the event we need to access these funds, we will not be able to do so without a loss of principal. There can be no assurances that these investments will be settled in the short term or that they will not become other-than-temporarily impaired subsequent to June 30, 2013, as the market for these investments is presently uncertain. In any event, we do not have a present need to access these funds for operational purposes. We will continue to monitor and evaluate these investments as there is no assurance as to when the market for these investments will allow us to liquidate them. We may be required to record impairment charges in periods subsequent to June 30, 2013 which respect to these securities and, if a liquid market does not develop for these investments, we could be required to hold them to market recovery.
Foreign Currency Risk
To date, our international customer and supplier agreements have been denominated primarily in U.S. dollars, and accordingly, we have limited exposure to foreign currency exchange rate fluctuations from customer agreements, and do not currently engage in foreign currency hedging transactions. However, the functional currency of our operations in Netherlands and Taiwan is the U.S. dollar and our local accounts including financing arrangements are denominated in the local currency in the Netherlands and Taiwan, respectively, and thus we are subject to foreign currency exchange rate fluctuations associated with re-measurement to U.S. dollars. Such fluctuations have not been significant historically. Foreign exchange gain (loss) for fiscal years 2013, 2012 and 2011 was $(0.1) million, $(0.5) million and $0.8 million, respectively.
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Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Super Micro Computer, Inc.
San Jose, California
We have audited the accompanying consolidated balance sheets of Super Micro Computer, Inc. and subsidiaries (the “Company”) as of June 30, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Super Micro Computer, Inc. and subsidiaries as of June 30, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2013, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 9 to the consolidated financial statements, the Company has significant purchases from and sales to a related party.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of June 30, 2013, based on the criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 11, 2013 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
San Jose, California
September 11, 2013
44
SUPER MICRO COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
June 30, | June 30, | ||||||
2013 | 2012 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 93,038 | $ | 80,826 | |||
Accounts receivable, net of allowances of $1,966 and $1,106 at June 30, 2013 and 2012, respectively (including amounts receivable from a related party of $974 and $1,036 at June 30, 2013 and 2012, respectively) | 149,340 | 102,014 | |||||
Inventory | 254,170 | 276,599 | |||||
Deferred income taxes-current | 15,786 | 12,638 | |||||
Prepaid income taxes | 4,039 | 3,478 | |||||
Prepaid expenses and other current assets | 6,819 | 6,357 | |||||
Total current assets | 523,192 | 481,912 | |||||
Long-term investments | 2,637 | 2,923 | |||||
Property, plant and equipment, net | 95,912 | 97,419 | |||||
Deferred income taxes-noncurrent | 7,275 | 3,459 | |||||
Other assets | 3,241 | 3,390 | |||||
Total assets | $ | 632,257 | $ | 589,103 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable (including amounts due to a related party of $50,448 and $51,470 at June 30, 2013 and 2012, respectively) | $ | 172,855 | $ | 173,991 | |||
Accrued liabilities | 34,122 | 30,401 | |||||
Income taxes payable | 6,049 | 2,754 | |||||
Short-term debt and current portion of long-term debt | 28,638 | 13,362 | |||||
Total current liabilities | 241,664 | 220,508 | |||||
Long-term debt-net of current portion | 6,533 | 19,395 | |||||
Other long-term liabilities | 10,336 | 10,849 | |||||
Total liabilities | 258,533 | 250,752 | |||||
Commitments and contingencies (Note 12) | |||||||
Stockholders’ equity: | |||||||
Common stock and additional paid-in capital, $0.001 par value | |||||||
Authorized shares: 100,000,000 | |||||||
Issued shares: 42,744,500 and 42,034,416 at June 30, 2013 and 2012, respectively | 157,712 | 143,806 | |||||
Treasury stock (at cost), 445,028 shares at June 30, 2013 and 2012 | (2,030 | ) | (2,030 | ) | |||
Accumulated other comprehensive loss | (69 | ) | (76 | ) | |||
Retained earnings | 217,930 | 196,651 | |||||
Total Super Micro Computer, Inc. stockholders’ equity | 373,543 | 338,351 | |||||
Noncontrolling interest | 181 | — | |||||
Total stockholders’ equity | 373,724 | 338,351 | |||||
Total liabilities and stockholders’ equity | $ | 632,257 | $ | 589,103 | |||
See accompanying notes to consolidated financial statements.
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SUPER MICRO COMPUTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years Ended June 30, | |||||||||||
2013 | 2012 | 2011 | |||||||||
Net sales (including related party sales of $13,805, $12,229 and $11,017 in fiscal years 2013, 2012 and 2011, respectively) | $ | 1,162,561 | $ | 1,013,874 | $ | 942,582 | |||||
Cost of sales (including related party purchases of $179,735, $168,744 and $155,430 in fiscal years 2013, 2012 and 2011, respectively) | 1,002,508 | 848,457 | 791,478 | ||||||||
Gross profit | 160,053 | 165,417 | 151,104 | ||||||||
Operating expenses: | |||||||||||
Research and development | 75,208 | 64,223 | 48,108 | ||||||||
Sales and marketing | 33,785 | 33,308 | 26,859 | ||||||||
General and administrative | 23,902 | 21,872 | 17,444 | ||||||||
Total operating expenses | 132,895 | 119,403 | 92,411 | ||||||||
Income from operations | 27,158 | 46,014 | 58,693 | ||||||||
Interest and other income, net | 48 | 54 | 66 | ||||||||
Interest expense | (610 | ) | (717 | ) | (686 | ) | |||||
Income before income tax provision | 26,596 | 45,351 | 58,073 | ||||||||
Income tax provision | 5,317 | 15,498 | 17,860 | ||||||||
Net income | $ | 21,279 | $ | 29,853 | $ | 40,213 | |||||
Net income per common share: | |||||||||||
Basic | $ | 0.50 | $ | 0.72 | $ | 1.04 | |||||
Diluted | $ | 0.48 | $ | 0.67 | $ | 0.93 | |||||
Weighted-average shares used in calculation of net income per common share: | |||||||||||
Basic | 41,992 | 40,890 | 38,132 | ||||||||
Diluted | 43,907 | 44,152 | 42,396 | ||||||||
See accompanying notes to consolidated financial statements.
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SUPER MICRO COMPUTER, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Years Ended June 30, | |||||||||||
2013 | 2012 | 2011 | |||||||||
Net income | $ | 21,279 | $ | 29,853 | $ | 40,213 | |||||
Other comprehensive income, net of tax: | |||||||||||
Foreign currency translation loss | (1 | ) | — | — | |||||||
Unrealized gains on investments | 8 | 128 | — | ||||||||
Total other comprehensive income | 7 | 128 | — | ||||||||
Comprehensive income | $ | 21,286 | $ | 29,981 | $ | 40,213 | |||||
See accompanying notes to consolidated financial statements.
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SUPER MICRO COMPUTER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
Common Stock and Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Non-controlling Interest | Total Stockholders’ Equity | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||
Balance at June 30, 2010 | 37,493,534 | $ | 100,350 | (445,028 | ) | $ | (2,030 | ) | $ | (204 | ) | $ | 126,585 | $ | — | $ | 224,701 | ||||||||||||
Exercise of stock options, net of taxes | 3,065,405 | 3,281 | — | — | — | — | — | 3,281 | |||||||||||||||||||||
Issuance of restricted stock awards | 168,623 | (1,434 | ) | — | — | — | — | — | (1,434 | ) | |||||||||||||||||||
Stock-based compensation | — | 8,056 | — | — | — | — | — | 8,056 | |||||||||||||||||||||
Tax benefit resulting from stock option transactions | — | 12,440 | — | — | — | — | — | 12,440 | |||||||||||||||||||||
Net income | — | — | — | — | — | 40,213 | — | 40,213 | |||||||||||||||||||||
Balance at June 30, 2011 | 40,727,562 | 122,693 | (445,028 | ) | (2,030 | ) | (204 | ) | 166,798 | — | 287,257 | ||||||||||||||||||
Exercise of stock options | 1,211,070 | 8,549 | — | — | — | — | — | 8,549 | |||||||||||||||||||||
Issuance of restricted stock awards, net of taxes | 95,784 | (1,109 | ) | — | — | — | — | — | (1,109 | ) | |||||||||||||||||||
Stock-based compensation | — | 10,252 | — | — | — | — | — | 10,252 | |||||||||||||||||||||
Tax benefit resulting from stock option transactions | — | 3,421 | — | — | — | — | — | 3,421 | |||||||||||||||||||||
Unrealized gains on investments | — | — | — | — | 128 | — | — | 128 | |||||||||||||||||||||
Net income | — | — | — | — | — | 29,853 | — | 29,853 | |||||||||||||||||||||
Balance at June 30, 2012 | 42,034,416 | 143,806 | (445,028 | ) | (2,030 | ) | (76 | ) | 196,651 | — | 338,351 | ||||||||||||||||||
Exercise of stock options | 612,034 | 1,845 | — | — | — | — | — | 1,845 | |||||||||||||||||||||
Issuance of restricted stock awards, net of taxes | 98,050 | (1,034 | ) | — | — | — | — | — | (1,034 | ) | |||||||||||||||||||
Stock-based compensation | — | 11,361 | — | — | — | — | — | 11,361 | |||||||||||||||||||||
Tax benefit resulting from stock option transactions | — | 1,734 | — | — | — | — | — | 1,734 | |||||||||||||||||||||
Unrealized gains on investments | — | — | — | — | 8 | — | — | 8 | |||||||||||||||||||||
Translation adjustments | — | — | — | — | (1 | ) | — | — | (1 | ) | |||||||||||||||||||
Investment in noncontrolling interest | — | — | — | — | — | — | 168 | 168 | |||||||||||||||||||||
Net income | — | — | — | — | — | 21,279 | 13 | 21,292 | |||||||||||||||||||||
Balance at June 30, 2013 | 42,744,500 | $ | 157,712 | (445,028 | ) | $ | (2,030 | ) | $ | (69 | ) | $ | 217,930 | $ | 181 | $ | 373,724 | ||||||||||||
See accompanying notes to consolidated financial statements.
48
SUPER MICRO COMPUTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended June 30, | |||||||||||
2013 | 2012 | 2011 | |||||||||
OPERATING ACTIVITIES: | |||||||||||
Net income | $ | 21,279 | $ | 29,853 | $ | 40,213 | |||||
Reconciliation of net income to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 7,835 | 7,071 | 5,453 | ||||||||
Stock-based compensation expense | 11,361 | 10,252 | 8,056 | ||||||||
Excess tax benefits from stock-based compensation | (865 | ) | (2,047 | ) | (2,401 | ) | |||||
Allowance for doubtful accounts | 929 | 217 | 499 | ||||||||
Provision for inventory | 9,725 | 8,579 | 3,353 | ||||||||
Loss on disposal of property, plant and equipment | — | &# | |||||||||