Edgar Filing: Super Micro Computer, Inc.

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________________________________________________

Form 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2015



¨	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)

__________________________________________________________________________

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 (§232.405 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 whether the registrant is a large accelerated filer, an accelerated filer, 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 x		Accelerated filer ¨
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-2 of the Exchange Act). Yes ¨ No x

As of January 31, 2016 there were 47,756,966 shares of the registrant’s common stock, $0.001 par value, outstanding, which is the only class of common stock of the registrant issued.

Table of Contents

SUPER MICRO COMPUTER, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE SIX MONTHS ENDED DECEMBER 31, 2015

TABLE OF CONTENTS



		Page
PART I	FINANCIAL INFORMATION
ITEM 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of December 31, 2015 and June 30, 2015	1
	Condensed Consolidated Statements of Operations for the Thee and Six Months Ended December 31, 2015 and 2014	2
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended December 31, 2015 and 2014	3
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2015 and 2014	3
	Notes to Condensed Consolidated Financial Statements	4
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	32
ITEM 4.	Controls and Procedures	33
PART II	OTHER INFORMAITON
ITEM 1.	Legal Proceedings	34
ITEM 1A.	Risk Factors	34
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
ITEM 3.	Defaults upon Senior Securities	48
ITEM 4.	Mine Safety Disclosures	48
ITEM 5.	Other Information	48
ITEM 6.	Exhibits	48
	Signatures	49

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PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)



	December 31,			June 30,
	2015			2015
ASSETS
Current assets:
Cash and cash equivalents	$	169,892		$	95,442
Accounts receivable, net of allowances of $2,226 and $1,628 at December 31, 2015 and June 30, 2015, respectively (including amounts receivable from a related party of $6,484 and $13,186 at December 31, 2015 and June 30, 2015, respectively)	314,176			322,594
Inventory	486,531			463,493
Deferred income taxes-current	18,287			17,863
Prepaid income taxes	2,209			7,507
Prepaid expenses and other current assets	8,553			7,516
Total current assets	999,648			914,415
Long-term investments	2,633			2,633
Property, plant and equipment, net	173,192			163,038
Deferred income taxes-noncurrent	8,414			4,497
Other assets	8,751			5,226
Total assets	$	1,192,638		$	1,089,809
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable (including amounts due to a related party of $59,217 and $59,015 at December 31, 2015 and June 30, 2015, respectively)	$	321,232		$	299,774
Accrued liabilities	56,170			46,743
Income taxes payable	8,417			14,111
Short-term debt and current portion of long-term debt	94,233			93,479
Total current liabilities	480,052			454,107
Long-term debt-net of current portion	—			933
Other long-term liabilities	34,438			15,684
Total liabilities	514,490			470,724
Commitments and contingencies (Note 10)
Stockholders’ equity:
Common stock and additional paid-in capital, $0.001 par value
Authorized shares: 100,000,000
Issued shares: 48,175,592 and 47,873,744 at December 31, 2015 and June 30, 2015, respectively	257,776			247,081
Treasury stock (at cost), 445,028 shares at December 31, 2015 and June 30, 2015	(2,030		)	(2,030		)
Accumulated other comprehensive loss	(96		)	(80		)
Retained earnings	422,338			373,950
Total Super Micro Computer, Inc. stockholders’ equity	677,988			618,921
Noncontrolling interest	160			164
Total stockholders’ equity	678,148			619,085
Total liabilities and stockholders’ equity	$	1,192,638		$	1,089,809

See accompanying notes to condensed consolidated financial statements.

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SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)



	Three Months Ended December 31,						Six Months Ended December 31,
	2015			2014			2015			2014
Net sales (including related party sales of $2,492 and $10,879 in the three months ended December 31, 2015 and 2014, respectively, and $7,712 and $37,457 in the six months ended December 31, 2015 and 2014, respectively)	$	638,964		$	503,014		$	1,158,582		$	946,336
Cost of sales (including related party purchases of $71,451 and $57,513 in the three months ended December 31, 2015 and 2014, respectively, and $130,712 and $111,916 in the six months ended December 31, 2015 and 2014, respectively)	532,602			418,562			980,005			792,691
Gross profit	106,362			84,452			178,577			153,645
Operating expenses:
Research and development	30,264			25,465			58,590			46,974
Sales and marketing	16,461			11,158			30,710			22,160
General and administrative	10,511			4,944			18,711			10,000
Total operating expenses	57,236			41,567			108,011			79,134
Income from operations	49,126			42,885			70,566			74,511
Interest and other income, net	24			36			111			71
Interest expense	(400		)	(183		)	(724		)	(379		)
Income before income tax provision	48,750			42,738			69,953			74,203
Income tax provision	14,061			11,496			21,565			22,098
Net income	$	34,689		$	31,242		$	48,388		$	52,105
Net income per common share:
Basic	$	0.73		$	0.68		$	1.02		$	1.14
Diluted	$	0.67		$	0.61		$	0.94		$	1.03
Weighted-average shares used in calculation of net income per common share:
Basic	47,651			46,131			47,584			45,802
Diluted	51,489			51,091			51,405			50,567

See accompanying notes to condensed consolidated financial statements.

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SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)



	Three Months Ended December 31,					Six Months Ended December 31,
	2015		2014			2015			2014
Net income	$	34,689	$	31,242		$	48,388		$	52,105
Other comprehensive income, net of tax:
Foreign currency translation gains (losses)	2		(13		)	(16		)	(16		)
Unrealized gains (losses) on investments	—		—			—			—
Total other comprehensive gains (losses)	2		(13		)	(16		)	(16		)
Comprehensive income	$	34,691	$	31,229		$	48,372		$	52,089

See accompanying notes to condensed consolidated financial statements.

SUPER MICRO COMPUTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Six Months Ended December 31,
	2015			2014
OPERATING ACTIVITIES:
Net income	$	48,388		$	52,105
Reconciliation of net income to net cash provided by (used in) operating activities:
Depreciation and amortization	5,953			3,845
Stock-based compensation expense	7,882			6,161
Excess tax benefits from stock-based compensation	(355		)	(2,782		)
Allowance for doubtful accounts	805			(87		)
Provision for inventory	3,780			4,175
Exchange gain	(1,539		)	(1,305		)
Deferred income taxes	(4,380		)	121
Changes in operating assets and liabilities:
Accounts receivable, net (including changes in related party balances of $6,702 and $(517) during the six months ended December 31, 2015 and 2014, respectively)	7,613			(45,959		)
Inventory	(26,818		)	(97,543		)
Prepaid expenses and other assets	(4,259		)	793
Accounts payable (including changes in related party balances of $202 and $8,185 during the six months ended December 31, 2015 and 2014, respectively)	20,738			60,016
Income taxes payable, net	650			5,314
Accrued liabilities	9,715			4,795
Other long-term liabilities	18,749			1,664
Net cash provided by (used in) operating activities	86,922			(8,687		)
INVESTING ACTIVITIES:
Restricted cash	(404		)	(1		)
Investment in a privately held company	—			(661		)
Purchases of property, plant and equipment	(15,235		)	(11,031		)
Net cash used in investing activities	(15,639		)	(11,693		)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options	2,439			12,745
Minimum tax withholding paid on behalf of employees for restricted stock units	(504		)	—
Excess tax benefits from stock-based compensation	355			2,782
Proceeds from debt	14,400			5,200
Repayment of debt	(13,300		)	(14,400		)
Payment of obligations under capital leases	(86		)	(58		)
Advances (payments) under receivable financing arrangements	(18		)	918
Net cash provided by financing activities	3,286			7,187
Effect of exchange rate fluctuations on cash	(119		)	(478		)
Net increase (decrease) in cash and cash equivalents	74,450			(13,671		)
Cash and cash equivalents at beginning of period	95,442			96,872
Cash and cash equivalents at end of period	$	169,892		$	83,201
Supplemental disclosure of cash flow information:
Cash paid for interest	$	693		$	382
Cash paid for taxes, net of refunds	$	19,636		$	15,464
Non-cash investing and financing activities:
Equipment purchased under capital leases	$	127		$	336
Accrued costs for property, plant and equipment purchases	$	5,366		$	7,874

See accompanying notes to condensed consolidated financial statements.

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Organization

Super Micro Computer, Inc. (“Super Micro Computer”) was incorporated in 1993. Super Micro Computer is a global leader in server technology and green computing innovation. Super Micro Computer develops and provides high performance server solutions based upon an innovative, modular and open-standard architecture. Super Micro Computer has operations primarily in San Jose, California, the Netherlands, Taiwan, China and Japan.

Basis of Presentation

The condensed consolidated financial statements reflect the condensed consolidated balance sheets, results of operations, comprehensive income and cash flows of Super Micro Computer, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). All intercompany accounts and transactions have been eliminated in consolidation.

The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and include the accounts of the Company and its wholly-owned subsidiaries. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended June 30, 2015 included in its Annual Report on Form 10-K/A, as filed with the SEC (the “Annual Report”).

The unaudited condensed consolidated financial statements included herein reflect all adjustments, including normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. The condensed consolidated results of operations for the three and six months ended December 31, 2015 are not necessarily indicative of the results that may be expected for future quarters or for the fiscal year ending June 30, 2016.

The Company consolidates its investment in Super Micro Asia Science and Technology Park, Inc. as it is a variable interest entity and the Company is the primary beneficiary. The noncontrolling interest is presented as a separate component from the Company's equity in the equity section of the condensed consolidated balance sheets. Net income attributable to the noncontrolling interest is not presented separately in the condensed consolidated statements of operations and is included in the general and administrative expenses as the amount is not material for any of the fiscal periods presented.

Fair Value of Financial Instruments

The Company accounts for certain assets and liabilities at fair value. Accounts receivable and accounts payable are carried at cost, which approximates fair value due to the short maturity of these instruments. Cash equivalents and long-term investments are carried at fair value. Short-term and long-term debt is carried at amortized cost, which approximates its fair value based on borrowing rates currently available to the Company for loans with similar terms. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. The Company categorizes each of its fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:


•	Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;


•	Level 2 - Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and


•	Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Net Income Per Common Share

The Company's basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options and unvested restricted stock units (“RSUs”). The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities. Additionally, the exercise of employee stock options and the vesting of restricted stock units results in a further dilutive effect on net income per share.

Adoption of New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to revenue recognition. This new standard replaces all current U.S. GAAP guidance on revenue, eliminates all industry-specific guidance and provides a unified model in determining when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance can be applied either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Early adoption is permitted for annual periods beginning after December 15, 2016. The new standard is effective for the Company on July 1, 2018. The Company is currently evaluating the effect the guidance will have on the Company's financial statement disclosures, results of operations and financial position.

In April 2015, the FASB issued an amendment to the accounting guidance related to presentation of debt issuance costs. The amendment requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued an amendment to the accounting guidance related to presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. The amendment clarified that an entity may defer and present debt issuance costs associated with line-of-credit arrangements as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The amendment is effective for the Company on July 1, 2016. The Company is currently evaluating the effect the amendment to the guidance will have on the Company's financial statement disclosures, results of operations and financial position.

In July 2015, the FASB issued an amendment to the authoritative guidance related to inventory measurement. The amendment requires entities to measure inventory at the lower of cost and net realizable value thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The amendment is effective for the Company on July 1, 2017. The Company is currently evaluating the effect the amendment to the guidance will have on the Company's financial statement disclosures, results of operations and financial position.

In November 2015, the FASB issued an amendment to the accounting guidance related to balance sheet classification of deferred taxes. The amendment requires that all deferred tax assets and liabilities be classified as noncurrent in a classified balance sheet. Early adoption is permitted as of the beginning of an interim or annual reporting period. The amendment is effective for the Company on July 1, 2017. The Company is currently evaluating the effect the amendment to the guidance will have on the Company's financial statement disclosures, results of operations and financial position.

Note 2. Stock-based Compensation and Stockholders’ Equity

Equity Incentive Plan

The authorized number of shares that may be issued under the Company's 2006 Equity Incentive Plan (the "2006 Plan") automatically increases on July 1 each year through 2016, by an amount equal to (a) 3.0% of shares of stock issued and outstanding on the immediately preceding June 30, or (b) a lesser amount determined by the Board of Directors. The exercise price per share for incentive stock options granted to employees owning shares representing more than 10% of the Company at

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

the time of grant cannot be less than 110% of the fair value of the underlying share on grant date. Nonqualified stock options and incentive stock options granted to all other persons shall be granted at a price not less than 100% of the fair value. Options generally expire ten years after the date of grant. Stock options and restricted stock units vest over four years; 25% at the end of one year and one sixteenth per quarter thereafter. As of December 31, 2015, the Company had 1,360,495 authorized shares available for future issuance under the 2006 Plan.

Determining Fair Value

Valuation and amortization method—The Company's fair value of restricted stock units is based on the closing market price of the Company's common stock on the date of grant. The Company estimates the fair value of stock options granted using the Black-Scholes-option-pricing formula and a single option award approach. This fair value is then amortized ratably over the requisite service periods of the awards, which is generally the vesting period.

Expected Term—The Company’s expected term represents the period that the Company’s stock options are expected to be outstanding and was determined based on a combination of the Company's peer group and the Company's historical experience.

Expected Volatility—Expected volatility is based on a combination of the Company's implied and historical volatility.

Expected Dividend Yield—The Black-Scholes valuation model calls for a single expected dividend yield as an input and the Company has no plans to pay dividends.

Risk-Free Interest Rate—The risk-free interest rate used in the Black-Scholes valuation method is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the stock options.

Estimated Forfeitures—The estimated forfeiture rate is based on the Company’s historical forfeiture rates and the estimate is revised in subsequent periods if actual forfeitures differ from the estimate.

The fair value of stock option grants for the three and six months ended December 31, 2015 and 2014 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:



	Three Months Ended December 31,						Six Months Ended December 31,
	2015			2014			2015			2014
Risk-free interest rate	1.42		%	1.50		%	1.42% - 1.57%			1.50% - 1.76%
Expected term	5.31 years			5.44 years			5.31 - 5.33 years			5.44 years
Dividend yield	—		%	—		%	—		%	—		%
Volatility	49.46		%	49.31		%	47.06% - 49.46%			46.93% - 49.31%
Weighted-average fair value	$	11.50		$	11.64		$	11.54		$	11.69

The following table shows total stock-based compensation expense included in the condensed consolidated statements of operations for the three and six months ended December 31, 2015 and 2014 (in thousands):



	Three Months Ended December 31,						Six Months Ended December 31,
	2015			2014			2015			2014
Cost of sales	$	258		$	222		$	498		$	429
Research and development	2,472			1,997			4,874			3,893
Sales and marketing	435			414			839			779
General and administrative	841			548			1,671			1,060
Stock-based compensation expense before taxes	4,006			3,181			7,882			6,161
Income tax impact	(1,814		)	(785		)	(2,099		)	(1,392		)
Stock-based compensation expense, net	$	2,192		$	2,396		$	5,783		$	4,769

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The cash flows resulting from the tax benefits for tax deductions resulting from the exercise of stock options in excess of the compensation expense recorded for those options (excess tax benefits) issued or modified since July 1, 2006 are classified as cash provided by financing activities. Excess tax benefits for stock options issued prior to July 1, 2006 are classified as cash provided by operating activities. The Company had $878,000 and $5,003,000 of excess tax benefits recorded in additional paid-in capital in the six months ended December 31, 2015 and 2014, respectively. The Company had excess tax benefits classified as cash provided by financing activities of $355,000 and $2,782,000 in the six months ended December 31, 2015 and 2014, respectively, for options issued since July 1, 2006.

As of December 31, 2015, the Company’s total unrecognized compensation cost related to non-vested stock-based awards granted to employees and non-employee directors was $34,478,000, which will be recognized over a weighted-average vesting period of approximately 2.33 years.

Stock Option Activity

The following table summarizes stock option activity during the six months ended December 31, 2015 under all stock option plans:



	Options Outstanding		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value (in thousands)
Balance as of June 30, 2015 (7,208,475 shares exercisable at weighted average exercise price of $12.24 per share)	9,702,843		$	14.21
Granted (weighted average fair value of $11.54)	184,790		$	25.78
Exercised	(269,320	)	$	9.06
Forfeited	(25,878	)	$	19.11
Balance as of December 31, 2015	9,592,435		$	14.57	5.55	$	99,668
Options vested and expected to vest at December 31, 2015	9,420,529		$	14.41	5.49	$	99,053
Options vested and exercisable at December 31, 2015	7,663,628		$	12.91	4.86	$	89,777

The total pretax intrinsic value of options exercised was $2,113,000 and $4,854,000 during the three and six months ended December 31, 2015, respectively, and $16,721,000 and $22,070,000 during the three and six months ended December 31, 2014, respectively.

Restricted Stock Unit Activity

In January 2015, the Company began to grant restricted stock units to employees. The Company grants restricted stock units to certain employees as part of its regular employee equity compensation review program as well as to selected new hires. Restricted stock units are share awards that entitle the holder to receive freely tradable shares of the Company's common stock upon vesting and settlement.

The following table summarizes restricted stock unit activity during the six months ended December 31, 2015 under the 2006 Plan:

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)



	Restricted Stock Units Outstanding		Weighted Average Grant-Date Fair Value per Share		Aggregate Intrinsic Value (in thousands)
Balance as of June 30, 2015	303,324		$	36.02
Granted	445,750		$	28.76
Vested	(52,006	)	$	34.34
Forfeited	(27,606	)	$	31.18
Balance as of December 31, 2015	669,462		$	31.51	$	16,409

The total pretax intrinsic value of restricted stock units vested was $811,000 and $1,358,000 for the three and six months ended December 31, 2015, respectively. In the three and six months ended December 31, 2015, upon vesting, 31,807 and 52,006 shares of restricted stock units were partially net share-settled such that the Company withheld 12,089 and 19,321 shares with value equivalent to the employees' minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities, respectively. The total shares withheld were based on the value of the restricted stock units on their respective vesting dates as determined by the Company's closing stock price. Total payments for the employees' tax obligations to taxing authorities were $308,000 and $504,000 during the three and six months ended December 31, 2015, respectively, and are reflected as a financing activity within the condensed consolidated statements of cash flows. These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company. Pursuant to the terms of the 2006 Plan, shares withheld in connection with net-share settlements are returned to the 2006 Plan and are available for future grants under the 2006 Plan.

Note 3. Net Income Per Common Share

The following table shows the computation of basic and diluted net income per share for the three and six months ended December 31, 2015 (in thousands, except per share amounts):



	Three Months Ended December 31,				Six Months Ended December 31,
	2015		2014		2015		2014
Numerator:
Net income	$	34,689	$	31,242	$	48,388	$	52,105

Denominator:
Weighted-average shares outstanding	47,651		46,131		47,584		45,802
Effect of dilutive securities	3,838		4,960		3,821		4,765
Weighted-average diluted shares	51,489		51,091		51,405		50,567

Basic net income per share	$	0.73	$	0.68	$	1.02	$	1.14
Diluted net income per share	$	0.67	$	0.61	$	0.94	$	1.03

For the three and six months ended December 31, 2015 and 2014, the Company had stock options and restricted stock units outstanding that could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net income per share in the periods presented, as their effect would have been anti-dilutive. The anti-dilutive common share equivalents resulting from outstanding equity awards were 1,329,000 and 1,291,000 for the three and six months ended December 31, 2015, respectively, and 707,000 and 470,000 for the three and six months ended December 31, 2014, respectively.

Note 4. Balance Sheet Components

The following tables provide details of the selected balance sheet items (in thousands):

Inventory:



	December 31, 2015		June 30, 2015
Finished goods	$	352,971	$	384,647
Work in process	57,933		23,214
Purchased parts and raw materials	75,627		55,632
Total inventory	$	486,531	$	463,493

The Company recorded a provision for lower of cost or market and excess and obsolete inventory totaling $2,062,000 and $3,780,000 in the three and six months ended December 31, 2015, respectively, and $2,515,000 and $4,175,000 in the three and six months ended December 31, 2014, respectively.

Property, Plant, and Equipment:



	December 31, 2015			June 30, 2015
Land	$	70,454		$	63,962
Buildings	71,665			51,959
Building and leasehold improvements	10,201			8,323
Buildings and leasehold improvements construction in progress (1)	3,656			25,572
Machinery and equipment	45,919			40,689
Furniture and fixtures	10,059			7,421
Purchased software	11,162			3,343
Purchased software construction in progress (2)	2,305			8,567
	225,421			209,836
Accumulated depreciation and amortization	(52,229		)	(46,798		)
Property, plant and equipment, net	$	173,192		$	163,038

(1) In connection with the purchase of property located in San Jose, California for the Company's Green Computing Park, the Company continues to engage several contractors for the development and construction of improvements on the property. The first manufacturing building at this location was completed in August 2015. In the six months ended December 31, 2015, the Company also engaged a contractor for the construction of improvements on leasehold property located in the Netherlands, which was completed in October 2015.

(2) The Company completed its implementation of a new enterprise resource planning, or ERP, system for its U.S. headquarters on July 5, 2015 and has capitalized the costs of the new ERP software and certain expenses associated directly with the development of the ERP system as of July 4, 2015. The Company began to depreciate these costs in the six months ended December 31, 2015. In the six months ended December 31, 2015, the Company also started its implementation of the ERP system for its subsidiaries in Taiwan and the Netherlands and has capitalized the development costs of the ERP system, which was completed in January 2016.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Other Assets:



	December 31, 2015		June 30, 2015
Long-term deferred service costs	$	2,717	$	1,490
Prepaid royalty license	872		997
Investment in a privately held company	1,411		1,411
Restricted cash	1,229		840
Deposit	2,377		265
Others	145		223
Total other assets	$	8,751	$	5,226

Restricted cash consists primarily of certificates of deposits pledged as security for one irrevocable letter of credit required in connection with a warehouse lease in Fremont, California, one deposit to an escrow account required by the Company's worker's compensation program, one deposit required for the Company's bonded warehouse set up in Taiwan and bank guarantees in connection with office leases in the Netherlands. During the six months ended December 31, 2015, the Company made multiple deposits totaling $1,535,000 for the ongoing development and construction of improvements on the property in San Jose, California.

Accrued Liabilities:



	December 31, 2015		June 30, 2015
Accrued payroll and related expenses	$	18,619	$	15,141
Customer deposits	6,949		6,314
Accrued warranty costs	6,116		7,700
Accrued cooperative marketing expenses	7,300		5,690
Deferred service revenue	9,416		4,085
Others	7,770		7,813
Total accrued liabilities	$	56,170	$	46,743

Product Warranties:



	Three Months Ended December 31,						Six Months Ended December 31,
	2015			2014			2015			2014
Balance, beginning of period	$	7,545		$	7,077		$	7,700		$	7,083
Provision for warranty	4,678			3,304			8,544			6,960
Costs charged to accrual	(2,854		)	(3,305		)	(6,673		)	(6,770		)
Change in estimated liability for pre-existing warranties	(1,592		)	(116		)	(1,794		)	(313		)
Balance, end of period	7,777			6,960			7,777			6,960
Current portion	(6,116		)	(6,960		)	(6,116		)	(6,960		)
Long-term portion	$	1,661		$	—		$	1,661		$	—

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 5. Long-term Investments

As of December 31, 2015 and June 30, 2015, the Company held $2,633,000, of auction-rate securities (“auction rate securities”), net of unrealized losses, representing its interest in auction rate preferred shares in a closed end mutual fund invested in municipal securities; such auction rate securities were rated AA2 at December 31, 2015 and AA2 at June 30, 2015. 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 the securities were not salable in the auction, thereby losing the short-term liquidity previously provided by the auction process. As a result, as of December 31, 2015 and June 30, 2015, $2,633,000 of these auction rate securities have been classified as long-term available-for-sale investments.

The Company has used a discounted cash flow model to estimate the fair value of the auction rate securities as of December 31, 2015 and June 30, 2015. The material factors used in preparing the discounted cash flow model are (i) the discount rate utilized to present value the cash flows, (ii) the time period until redemption and (iii) the estimated rate of return. As of December 31, 2015, the discount rate, the time period until redemption and the estimated rate of return were 1.99%, 3 years and 0.50%, respectively. Management derives the estimates by obtaining input from market data on the applicable discount rate, estimated time to redemption and estimated rate of return. The changes in fair value have been primarily due to changes in the estimated rate of return and a change in the estimated redemption period. The fair value of the Company's investment portfolio may change between 1% to 3% by increasing or decreasing the rate of return used by 1% or by increasing or decreasing the term used by 1 year. Changes in these estimates or in the market conditions for these investments are likely in the future based upon the then current market conditions for these investments and may affect the fair value of these investments. On a quarterly basis, the Company reviews the inputs to assess their continued appropriateness and consistency. If any significant differences were to be noted, they would be researched in order to determine the reason. However, historically, no significant differences have been noted. The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the auction rate securities. Movement of these inputs would not significantly impact the fair value of the auction rate securities.

Based on this assessment of fair value, the Company determined that there was no changes in fair value of its auction rate securities during the three and six months ended December 31, 2015 and 2014. There was a cumulative total decline of $117,000 as of December 31, 2015 and June 30, 2015. That amount has been recorded as a component of other comprehensive income. As of December 31, 2015 and June 30, 2015, the Company has recorded an accumulated unrealized loss of $70,000, net of deferred income taxes, on long-term auction rate securities. The Company deems this loss to be temporary as it will not likely be required to sell the securities before their anticipated recovery and the Company has the intent and financial ability to hold these investments until recovery of cost.

Although the investment impairment is considered to be temporary, these investments are not currently liquid and in the event the Company needs to access these funds, the Company will not be able to do so without a loss of principal. The Company plans to continue to monitor the liquidity situation in the marketplace and the creditworthiness of its holdings and will perform periodic impairment analysis. In the three and six months ended December 31, 2015 and 2014, there were no auction rate securities redeemed or sold.

Note 6. Fair Value Disclosure

The financial assets of the Company measured at fair value on a recurring basis are included in cash equivalents and long-term investments. The Company’s money market funds are classified within Level 1 of the fair value hierarchy which is based on quoted market prices for the identical underlying securities in active markets. The Company’s long-term auction rate securities investments are classified within Level 3 of the fair value hierarchy which did not have observable inputs for its auction rate securities as of December 31, 2015 and June 30, 2015. Refer to Note 1 for a discussion of the Company’s policies regarding the fair value hierarchy. The Company’s methodology for valuing these investments is the discounted cash flow model and is described in Note 5.

The following table sets forth the Company’s cash equivalents and long-term investments as of December 31, 2015 and June 30, 2015 which are measured at fair value on a recurring basis by level within the fair value hierarchy. These are classified based on the lowest level of input that is significant to the fair value measurement (in thousands):

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)



December 31, 2015	Level 1		Level 2		Level 3		Asset at Fair Value
Money market funds	$	312	$	—	$	—	$	312
Auction rate securities	—		—		2,633		2,633
Total	$	312	$	—	$	2,633	$	2,945

June 30, 2015	Level 1		Level 2		Level 3		Asset at Fair Value
Money market funds	$	310	$	—	$	—	$	310
Auction rate securities	—		—		2,633		2,633
Total	$	310	$	—	$	2,633	$	2,943

The above table excludes $169,362,000 and $94,901,000 of cash and $1,506,000 and $1,130,000 of certificates of deposit held by the Company as of December 31, 2015 and June 30, 2015, respectively. There were no transfers between Level 1, Level 2 or Level 3 securities in the three and six months ended December 31, 2015 and 2014.

The following table provides a reconciliation of the Company’s financial assets measured at fair value on a recurring basis, consisting of long-term auction rate securities, using significant unobservable inputs (Level 3) for the three and six months ended December 31, 2015 and 2014 (in thousands):



	Three Months Ended December 31,				Six Months Ended December 31,
	2015		2014		2015		2014
Balance as of beginning of period	$	2,633	$	2,647	$	2,633	$	2,647
Total realized gains or (losses) included in net income	—		—		—		—
Total unrealized gains or (losses) included in other comprehensive income	—		—		—		—
Sales and settlements at par	—		—		—		—
Transfers in and/or out of Level 3	—		—		—		—
Balance as of end of period	$	2,633	$	2,647	$	2,633	$	2,647

The following is a summary of the Company’s long-term investments as of December 31, 2015 and June 30, 2015 (in thousands):



	December 31, 2015
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
Auction rate securities	$	2,750	$	—	$	(117	)	$	2,633

	June 30, 2015
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
Auction rate securities	$	2,750	$	—	$	(117	)	$	2,633

The Company measures the fair value of outstanding debt for disclosure purposes on a recurring basis. As of December 31, 2015 and June 30, 2015, short-term and long-term debt of $94,233,000 and $94,412,000, respectively, are reported at amortized cost. This outstanding debt is classified as Level 2 as it is not actively traded and is valued using a discounted cash flow model that uses observable market inputs. Based on the discounted cash flow model, the fair value of the outstanding debt approximates amortized cost.

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 7. Short-term and Long-term Obligations

Short-term and long-term obligations as of December 31, 2015 and June 30, 2015 consisted of the following (in thousands):



	December 31,			June 30,
	2015			2015
Line of credit:
Bank of America	$	62,199		$	59,699
CTBC Bank	9,700			9,700
Total line of credit	71,899			69,399
Building term loans:
Bank of America	2,333			3,733
CTBC Bank	20,001			21,280
Total building term loans	22,334			25,013
Total debt	94,233			94,412
Current portion	(94,233		)	(93,479		)
Long-term portion	$	—		$	933

Activities under Revolving Lines of Credit and Term Loans

Bank of America

In June 2015, the Company entered into an amendment to the existing credit agreement with Bank of America N.A. ("Bank of America") which provided for (i) a $65,000,000 revolving line of credit facility that would have matured on November 15, 2015 and (ii) a five-year $14,000,000 term loan facility. The term loan is secured by the three buildings located in San Jose, California 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 November 2015, the Company extended the revolving line of credit to mature on February 15, 2016, and the Company is currently negotiating with Bank of America to renew the revolving line of credit.

The line of credit facility provides 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 0.24% at December 31, 2015. For borrowings denominated in Taiwanese dollars, the interest rate is equal to the lender's established interest rate which is adjusted monthly.

As of December 31, 2015 and June 30, 2015, the total outstanding borrowings under the Bank of America term loan were $2,333,000 and $3,733,000, respectively. The total outstanding borrowings under the Bank of America line of credit were $62,199,000 and $59,699,000 as of December 31, 2015 and June 30, 2015, respectively. The interest rates for these loans ranged from 0.89% to 1.74% per annum at December 31, 2015 and from 0.79% to 1.68% per annum at June 30, 2015, respectively. As of December 31, 2015, the unused revolving line of credit with Bank of America was $2,801,000.

CTBC Bank

In November 2015, the Company entered into an amendment to the existing credit agreement with CTBC Bank Co., Ltd ("CTBC Bank", formerly, China Trust Bank) to extend the maturity date to January 31, 2016. The amendment provides for (i) a 12-month NT$700,000,000 or $22,017,000 U.S. dollar equivalents term loan secured by the land and building located in Bade, Taiwan with an interest rate equal to the lender's established NTD interest rate plus 0.25% per annum which is adjusted monthly and (ii) a 12-month revolving line of credit up to 80.0% of eligible accounts receivable in an aggregate amount of up to $17,000,000 with an interest rate equal to the lender's established USD interest rate plus 0.30% per annum which is adjusted monthly. The total borrowings allowed under the credit agreement are capped at NT$1,000,000,000 or

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

$30,340,000 U.S. dollar equivalents. In January 2016, the Company further extended the revolving line of credit to mature on March 31, 2016, and the Company is currently negotiating with CTBC Bank to renew the credit agreement.

The total outstanding borrowings under the CTBC Bank term loan are denominated in Taiwanese dollars and were translated into U.S. dollars of $20,001,000 and $21,280,000 at December 31, 2015 and June 30, 2015, respectively. The total outstanding borrowings under the CTBC Bank revolving line of credit were $9,700,000 in U.S. dollars at December 31, 2015 and June 30, 2015. The interest rate for this loan ranged from 0.79% and 1.14% at December 31, 2015 and 0.82% and 1.16% per annum at June 30, 2015. At December 31, 2015, NT$21,025,000 or $639,000 U.S. dollar equivalents were available for future borrowing under this credit agreement. The Company is currently negotiating with CTBC Bank to renew the credit agreement.

Covenant Compliance

The credit agreement with Bank of America contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its 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;



	•		The Company’s 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;



	•		The Company’s unencumbered liquid assets, as defined in the agreement, held in the United States shall have an aggregate market value of not less than $30,000,000, measured as of the last day of each fiscal quarter and the last day of each fiscal year.

As of December 31, 2015 and June 30, 2015, total assets of $1,148,460,000 and $1,045,408,000, respectively, collateralized the line of credit with Bank of America which represents 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 December 31, 2015 and June 30, 2015, total assets collateralizing the term loan with Bank of America were $17,239,000 and $17,354,000. As of December 31, 2015, the Company was in compliance with all financial covenants associated with the credit agreement with Bank of America.

As of December 31, 2015 and June 30, 2015, the land and building located in Bade, Taiwan with a value of $26,939,000 and $27,047,000, respectively, collateralized the term loan with CTBC Bank. There are no financial covenants associated with the term loan with CTBC Bank at December 31, 2015.

Note 8. Related-party and Other Transactions

Ablecom Technology Inc.—Ablecom, a Taiwan corporation, together with one of its subsidiaries, Compuware (collectively “Ablecom”), is one of the Company’s major contract manufacturers. Ablecom’s ownership of Compuware is below 50% but Compuware remains a related party as Ablecom still has significant influence over its operations. Ablecom’s chief executive officer, Steve Liang, is the brother of Charles Liang, the Company’s President, Chief Executive Officer and Chairman of the Board of Directors. Ablecom owns approximately 0.6% of the Company’s common stock. Charles Liang and his wife, also an officer of the Company, collectively own approximately 10.5% of Ablecom, while Steve Liang and other family members own approximately 36.0% of Ablecom at December 31, 2015.

The Company has product design and manufacturing services agreements (“product design and manufacturing agreements”) and a distribution agreement (“distribution agreement”) with Ablecom.

Under the product design and manufacturing agreements, the Company outsources a portion of its design activities and a significant part of its manufacturing of components such as server chassis to Ablecom. Ablecom agrees to design products according to the Company’s specifications. Additionally, Ablecom agrees to build the tools needed to manufacture the products.

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The Company has agreed to pay for Ablecom's cost of chassis and related product tooling and engineering services and will pay for those items when the work has been completed.

Under the distribution agreement, Ablecom purchases server products from the Company for distribution in Taiwan. The Company believes that the pricing and terms under the distribution agreement are similar to the pricing and terms of distribution arrangements the Company has with similar, third party distributors.

Ablecom’s net sales to the Company and its net sales of the Company’s products to others comprise a substantial majority of Ablecom’s net sales. The Company purchased products from Ablecom totaling $71,451,000 and $130,712,000, and sold products to Ablecom totaling $2,492,000 and $7,712,000 for the three and six months ended December 31, 2015, respectively. The Company purchased products from Ablecom totaling $57,513,000 and $111,916,000, and sold products to Ablecom totaling $10,879,000 and $37,457,000 for the three and six months ended December 31, 2014, respectively.

Amounts owed to the Company by Ablecom as of December 31, 2015 and June 30, 2015 were $6,484,000 and $13,186,000, respectively. Amounts owed to Ablecom by the Company as of December 31, 2015 and June 30, 2015 were $59,217,000 and $59,015,000, respectively. For the three and six months ended December 31, 2015, the Company paid Ablecom the majority of invoiced dollars between 46 and 89 days of invoice date. For the three and six months ended December 31, 2015, the Company paid $1,736,000 and $2,898,000, respectively, for tooling assets and miscellaneous costs to Ablecom. For the three and six months ended December 31, 2014, the Company paid $2,495,000 and $4,497,000, respectively, for tooling assets and miscellaneous costs to Ablecom.

The Company’s exposure to loss as a result of its involvement with Ablecom is limited to (a) potential losses on its purchase orders in the event of an unforeseen decline in the market price and/or demand of the Company’s products such that the Company incurs a loss on the sale or cannot sell the products and (b) potential losses on outstanding accounts receivable from Ablecom in the event of an unforeseen deterioration in the financial condition of Ablecom such that Ablecom defaults on its payable to the Company. Outstanding purchase orders with Ablecom were $70,717,000 and $67,261,000 at December 31, 2015 and June 30, 2015, respectively, representing the maximum exposure to loss relating to (a) above. The Company does not have any direct or indirect guarantees of losses of Ablecom.

In May 2012, the Company and Ablecom jointly established Super Micro Asia Science and Technology Park, Inc. ("Management Company") in Taiwan to manage the common areas shared by the Company and Ablecom for their separately constructed manufacturing facilities. Each company contributed $168,000 and owns 50% of the Management Company. Although the operations of the Management Company are independent of the Company, through governance rights, the Company has the ability to direct the Management Company's business strategies. Therefore, the Company has concluded that the Management Company is a variable interest entity of the Company as the Company is the primary beneficiary of the Management Company. The accounts of the Management Company are consolidated with the accounts of the Company, and a noncontrolling interest has been recorded for the Ablecom's interests in the net assets and operations of the Management Company. In the three and six months ended December 31, 2015, $6,000 and $4,000 of net loss attributable to Ablecom's interest was included in the Company's general and administrative expenses in the condensed consolidated statements of operations. In the three and six months ended December 31, 2014, $10,000 and $7,000 of net loss attributable to Ablecom's interest was included in the Company's general and administrative expenses in the condensed consolidated statements of operations.

Note 9. Income Taxes

The Company recorded provisions for income taxes of $14,061,000 and $21,565,000 for the three and six months ended December 31, 2015, respectively, and $11,496,000 and $22,098,000 for the the three and six months ended December 31, 2014, respectively. The effective tax rate was 28.8% and 30.8% for the three and six months ended December 31, 2015, respectively, and 26.9% and 29.8% for the the three and six months ended December 31, 2014, respectively. The effective tax rate for the three and six months ended December 31, 2015 is estimated to be lower than the federal statutory rate primarily due to the reinstatement of the U.S. federal research and development ("R&D") tax credit partially offset by the impact of stock option expenses and additional tax accrual related to foreign operations.

On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 extended the U.S. federal R&D tax credit permanently from January 1, 2015. As of December 31, 2015, the Company projected a total net tax benefit of $3,873,000 for fiscal year 2016, and $2,770,000 reinstated for fiscal year 2015.

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

As of December 31, 2015, the Company had a liability for gross unrecognized tax benefits of $15,851,000, substantially all of which, if recognized, would affect the Company's effective tax rate. During the the three and six months ended December 31, 2015, there were no material changes in the total amount of the liability for gross unrecognized tax benefits. The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for taxes on the condensed consolidated statements of operations. As of December 31, 2015, the Company had accrued $1,157,000 of interest and penalties relating to unrecognized tax benefit.

The Company is subject to U.S. federal income tax as well as income taxes in many state and foreign jurisdictions. In August 2015, the Company met with the Internal Revenue Service in connection with its examination of the Company's federal income tax returns for tax years 2013 and 2014. The Company is also under audit in Taiwan for tax year ended June 30, 2014. The Company does not expect a resolution to be reached regarding either matter during the next twelve months. While management believes that the Company has adequate reserves for all uncertain tax positions, amounts asserted by tax authorities could be greater or less than the Company's current position. Accordingly, the Company's provision on federal, state and foreign tax related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved. The federal statute of limitations remain open in general for tax years 2012 through 2015. The state statute of limitations remain open in general for tax years 2010 through 2015. The statute of limitations in major foreign jurisdictions remain open for examination in general for tax years 2009 through 2015.

Note 10. Commitments and Contingencies

Litigation and Claims— The Company is involved in various legal proceedings arising from the normal course of business activities. The Company defends itself vigorously against any such claims. In management’s opinion, the resolution of any matters will not have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity.

Purchase Commitments— The Company has agreements to purchase certain units of inventory and non-inventory items through fiscal year 2017. As of December 31, 2015, these remaining non-cancellable commitments were $399,120,000 compared to $378,341,000 as of June 30, 2015.

Included in the above non-cancellable commitments are hard disk drive purchase commitments totaling approximately $160,930,000, which will be paid through December 2016. The Company has entered into purchase agreements with selected suppliers of hard disk drives in order to ensure continuity of supply for these components. The agreements provide for some variation in the amount of units the Company is required to purchase and the suppliers may modify the purchase price for these components due to significant changes in market or component supply conditions. Product mix for these components may be negotiated quarterly and the purchase price for these components will be reviewed quarterly with the suppliers. The Company has been negotiating the purchase price with the suppliers on an ongoing basis based upon market rates.

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Note 11. Segment Reporting

The Company operates in one operating segment that develops and provides high performance server solutions based upon an innovative, modular and open-standard architecture. The Company’s chief operating decision maker is the Chief Executive Officer.

International net sales are based on the country and region to which the products were shipped. The following is a summary for the three and six months ended December 31, 2015 and 2014, of net sales by geographic region (in thousands):



	Three Months Ended December 31,				Six Months Ended December 31,
	2015		2014		2015		2014
Net sales:
United States	$	407,038	$	286,748	$	745,734	$	530,126
Europe	114,134		91,588		200,960		181,145
Asia	88,394		78,575		163,051		167,013
Other	29,398		46,103		48,837		68,052
	$	638,964	$	503,014	$	1,158,582	$	946,336

The following is a summary of long-lived assets, excluding financial instruments, deferred tax assets, other assets, goodwill and intangible assets (in thousands):



	December 31,		June 30,
	2015		2015
Long-lived assets:
United States	$	131,151	$	124,292
Asia	38,849		37,695
Europe	3,192		1,051
	$	173,192	$	163,038

The following is a summary of net sales by product type (in thousands):



	Three Months Ended December 31,								Six Months Ended December 31,
	2015				2014				2015				2014
	Amount		Percent of Net Sales		Amount		Percent of Net Sales		Amount		Percent of Net Sales		Amount		Percent of Net Sales
Server systems	$	453,747	71.0	%	$	302,256	60.1	%	$	809,958	69.9	%	$	557,865	58.9	%
Subsystems and accessories	185,217		29.0	%	200,758		39.9	%	348,624		30.1	%	388,471		41.1	%
Total	$	638,964	100.0	%	$	503,014	100.0	%	$	1,158,582	100.0	%	$	946,336	100.0	%

Subsystems and accessories are comprised of serverboards, chassis and accessories. Server systems constitute an assembly of subsystems and accessories. One customer represented 15.0% and 12.8% of the Company's total net sales in the three and six months ended December 31, 2015 and one customer represented 15.1% and 11.9% of the Company’s total net sales for the three and six months ended December 31, 2014, respectively. No country other than the United States represents greater than 10% of the Company’s total net sales in the three and six months ended December 31, 2015 and 2014. One customer represented 10.7% of the Company's accounts receivable as of December 31, 2015 and no customer accounted for 10% or more of the Company's accounts receivable as of June 30, 2015.

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SUPER MICRO COMPUTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 12. Prior Period Adjustment Recorded in Current Period

In November 2015, the Company identified errors related to revenue which was recognized prior to meeting US GAAP revenue recognition criteria which impacted fiscal years 2013, 2014 and 2015. The Company determined that certain contracts for extended warranties on products were recorded as revenue at the time of sale of the product in prior periods instead of being deferred and amortized over the contractual warranty period. The cumulative impact of this error pertaining to prior periods through June 30, 2015 was to overstate net sales and net income by $9,259,000 and $5,926,000, respectively. To compute the amount of the error, the Company determined a best estimated selling price for the extended warranty contracts based on prices charged to customers for these contracts when sold separately. This error was corrected in the first quarter ended September 30, 2015 by reducing net sales by $9,259,000 and net income by $5,926,000, respectively.

The Company assessed the materiality of these errors on each of the fiscal years ended June 30, 2013, 2014 and 2015, and concluded that the errors were not material to any of these periods. The Company also concluded that recording an out-of-period correction would not be material to the six months ended December 31, 2015. Consequently, the accompanying condensed consolidated statement of operations for the six months ended December 31, 2015 have been corrected.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This section and other parts of this Form 10-Q contain “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 under “Risk Factors” below and in other parts of this Form 10-Q 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.

Overview

We are a global leader in high performance, high efficiency server technology and innovation. We develop and provide end-to-end green computing solutions to the cloud computing, data center, enterprise IT, big data, HPC and embedded markets. Our solutions range from complete server, storage, blade and workstations to full racks, networking devices, server management software and technology support and services. Our net sales were $639.0 million and $1,158.6 million for the three and six months ended December 31, 2015, respectively, and $503.0 million and $946.3 million for the three and six months ended December 31, 2014, respectively. The increase in our net sales in the three and six months ended December 31, 2015 compared with the three and six months ended December 31, 2014 was primarily due to increased sales of our server systems optimized for OEM and cloud/internet data center computing. Net sales of optimized servers were $453.7 million and $810.0 million for the three and six months ended December 31, 2015, respectively, and $302.3 million and $557.9 million for the three and six months ended December 31, 2014, respectively, and net sales of subsystems and accessories were $185.2 million and $348.6 million for the three and six months ended December 31, 2015, respectively, and $200.8 million and $388.5 million for the three and six months ended December 31, 2014, respectively. In the three and six months ended December 31, 2015, we experienced strong growth in sales of our complete systems including ultra, storage, data center optimized servers and Twin family of servers. The percentage of our net sales represented by sales of complete server systems increased to 71.0% and 69.9% in the three and six months ended December 31, 2015 from 60.1% and 58.9% in the three and six months ended December 31, 2014, respectively.

We commenced operations in 1993 and have been profitable every year since inception. Our net income was $34.7 million and $48.4 million for the three and six months ended December 31, 2015, respectively, and $31.2 million and $52.1 million for the three and six months ended December 31, 2014, respectively. Our increase in net income in the three months ended December 31, 2015 was primarily attributable to an increase in our gross profit resulting primarily from higher sales of our server systems, partially offset by higher operating and income tax expenses. Our decrease in net income in the six months ended December 31, 2015 was primarily attributable to the recording of a $9.3 million out-of-period adjustment relating to extended warranty revenue in the three months ended September 30, 2015. This deferred revenue will be recognized through fiscal year 2019. The impact on net income from this out-of-period adjustment was $5.9 million.

We sell our server systems and subsystems and accessories through distributors and OEMs as well as through our direct sales force. We derived 58.1% and 56.4% of our net sales from products sold to OEMs and to end customers and 41.9% and 43.6% from products sold to distributors for the three and six months ended December 31, 2015, respectively. We derived 50.0% and 47.2% of our net sales from products sold to OEMs and to end customers and 50.0% and 52.8% from products sold to distributors for the three and six months ended December 31, 2014, respectively. Sales to SoftLayer, a division of IBM Corporation, represented 15.0% and 12.8% of our net sales in the three and six months ended December 31, 2015, and represented 15.1% and 11.9% of our net sales in the three and six months ended December 31, 2014. We derived 63.7% and 64.4% of our net sales from customers in the United States for the three and six months ended December 31, 2015, respectively, and 57.0% and 56.0% for the three and six months ended December 31, 2014, respectively.

We perform the majority of our research and development efforts in-house. Research and development expenses represented 4.7% and 5.1% of our net sales for the three and six months ended December 31, 2015, respectively, and 5.1% and 5.0% of our net sales for the three and six months ended December 31, 2014, respectively.

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 2016, we have continued to increase manufacturing and service operations in Taiwan and the Netherlands primarily to support our Asian and European customers and we have improved our utilization of our overseas manufacturing capacity.

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One of our key suppliers is Ablecom, a related party, which supplies us with contract design and manufacturing support. For the three and six months ended December 31, 2015, our purchases from Ablecom represented 13.4% and 13.3% of our cost of sales, respectively, compared to 13.8% and 14.1% of our cost of sales for the three and six months ended December 31, 2014, respectively. 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 cost of sales. 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 must also continue to expand our software and customer service and support offerings, particularly as we increasingly focus on larger enterprise sales. 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.

Other Financial Highlights

The following is a summary of other financial highlights of the second quarter of fiscal 2016:

•

Net cash provided by (used in) operating activities was $86.9 million and $(8.7) million during the six months ended December 31, 2015 and 2014, respectively. Our cash and cash equivalents, together with our investments, were $172.6 million at the end of the second quarter of fiscal year 2016, compared with $98.1 million at the end of fiscal year 2015. The increase in our cash and cash equivalents, together with our investments at the end of the second quarter of fiscal year 2016 was primarily due to $86.9 million of cash provided by our operating activities and $1.1 million of borrowings, net of repayments offset in part by $15.2 million of purchases of property and equipment, of which $4.9 million was related to property and equipment installed at our Green Computing Park in San Jose, California, and $2.3 million was related to the implementation of a new ERP system for the U.S. headquarters and our subsidiaries.


•	Days sales outstanding in accounts receivable (“DSO”) at the end of the second quarter of fiscal year 2016 was 44 days, compared with 43 days at the end of fiscal year 2015.


•	Our inventory balance was $486.5 million at the end of the second quarter of fiscal year 2016, compared with $463.5 million at the end of fiscal year 2015. Days sales of inventory at the end of the second quarter of fiscal year 2016 was 82 days, compared with 83 days at the end of fiscal year 2015.

•

Our purchase commitments with contract manufacturers and suppliers were $399.1 million at the end of the second quarter of fiscal year 2016 and $378.3 million at the end of fiscal year 2015. Included in the above non-cancellable commitments are hard disk drive purchase commitments totaling approximately $160.9 million, which have terms expiring through December 2016. See Note 10 of Notes to our Condensed Consolidated Financial Statements for a discussion of purchase commitments.

Fiscal Year

Our fiscal year ends on June 30. References to fiscal year 2016, for example, refer to the fiscal year ending June 30, 2016.

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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, but generally higher in the case of sales of server systems to internet data system customers. Because we generally 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 expense, net. Interest and other expense, net represents interest expense on our term loans and line of credit, offset by interest earned on our investment and 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, Taiwan, the Netherlands, and to a lesser extent, China and Japan. Our effective tax rate differs from the statutory rate primarily due to research and development tax credits, 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. In recent years, our effective tax rate from period to period has been significantly impacted by delays in the approval of extensions of the U.S. research and development tax credit.

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Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated 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, 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 judgments we make about the carrying values of assets and liabilities that are not readily apparent from other sources. 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, for which revenue is recognized when the products arrive at the stated 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. We have an immaterial amount of deferred revenue and costs related to shipments to customers pending acceptance as of December 31, 2015 and June 30, 2015.

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 concentration, 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. Our provision (recovery) for bad debt was $707,000 and $805,000 in the three and six months ended December 31, 2015, respectively, and $(33,000) and $(87,000) in the three and six months ended December 31, 2014, respectively. If a major customer's creditworthiness deteriorates, if actual defaults are higher than our historical experience, or if other circumstances arise, our estimates of the recoverability of amounts due to us could be overstated, and additional allowances could be required, which could have an adverse impact on our reported operating expenses. 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 on-site service, extended warranty and non-warranty repairs. Revenue for on-site service, and extended warranty is recognized over the contracted service period, and revenue for non-warranty repair service 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

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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 $7.8 million as of December 31, 2015, compared with $7.7 million as of June 30, 2015. The provision for warranty reserve was $4.7 million and $8.5 million in the three and six months ended December 31, 2015, respectively, and $3.3 million and $7.0 million in the three and six months ended December 31, 2014, respectively. The change in estimated liability for pre-existing warranties was ($1.6) million and $(1.8) million for the three and six months ended December 31, 2015, respectively, and $(0.1) million and $(0.3) million for the three and six months ended December 31, 2014, respectively. The change in estimated liability for pre-existing warranties decreased due to our decrease in warranty claims in the three and six months ended December 31, 2015. The provision for warranty reserve increased $1.4 million and $1.6 million compared to the three and six months ended December 31, 2014, respectively, primarily due to the increase in our net sales partially offset by our decrease in warranty claims. 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 accordingly.

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 based upon the number of units that are unlikely to be sold based upon estimated demand for the following twelve months as well as historical usage and sales activity. This evaluation takes into account matters including expected demand, historical usage and sales, 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 $2.1 million and $3.8 million in the three and six months ended December 31, 2015, respectively, and $2.5 million and $4.2 million in the three and six months ended December 31, 2014, 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 9 of Notes to Condensed Consolidated Financial Statements for the impact on our condensed 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 our Board of Directors including employee stock options and restricted stock units. 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. The fair value of our restricted stock units is based on the closing market price of our common stock on the date of grant. 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 and the expected volatility of the price of our common stock. 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 a combination of our peer group and our historical experience. The expected volatility is based on a combination of our implied and 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

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estimate pre-vesting option and restricted stock unit forfeitures and record stock-based compensation expense only for those awards that are expected to vest.

Compensation expense for options and restricted stock units granted to employees was $4.0 million and $7.9 million for the three and six months ended December 31, 2015, respectively, and $3.2 million and $6.2 million for the three and six months ended December 31, 2014, respectively. As of December 31, 2015, the total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options and restricted stock units to employees and non-employee members of our Board of Directors, was $34.5 million, which is expected to be recognized as an expense over a weighted-average period of approximately 2.33 years. See Note 2 of Notes to our Condensed Consolidated Financial Statements for additional information.

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 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 Asia Science and Technology 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 December 31, 2015, 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 the three and six months ended December 31, 2015, $6,000 and $4,000, respectively, of net loss attribute to Ablecom's interest was included in our general and administrative expenses in the condensed consolidated statement of operations. In the three and six months ended December 31, 2014, $10,000 and $7,000, respectively, of net loss attributable to Ablecom's interest was included in our general and administrative expenses in the condensed consolidated statements of operations.

Results of Operations

Net Sales

The following table presents net sales by product type for the three and six months ended December 31, 2015 and 2014 (dollars in millions):



	Three Months Ended December 31,						Change					Six Months Ended December 31,						Change
	2015			2014			$			%		2015			2014			$			%
Server systems	$	453.7		$	302.3		$	151.4		50.1	%	$	810.0		$	557.9		$	252.1		45.2	%
Percentage of total net sales	71.0		%	60.1		%						69.9		%	58.9		%
Subsystems and accessories	185.2			200.8			(15.6		)	(7.8	)%	348.6			388.5			(39.9		)	(10.3	)%
Percentage of total net sales	29.0		%	39.9		%						30.1		%	41.1		%
Total net sales	$	639.0		$	503.0		$	136.0		27.0	%	$	1,158.6		$	946.3		$	212.2		22.4	%

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The following table presents unit sales and average selling price by product type for the three and six months ended December 31, 2015 and 2014 (units in thousands):



	Three Months Ended December 31,				Change		Six Months Ended December 31,				Change
	2015		2014		%		2015		2014		%
Server systems:
Unit sales	102		78		30.8	%	189		135		40.0	%
Average selling price	$	4,449	$	3,875	14.8	%	$	4,285	$	4,132	3.7	%
Subsystems and accessories:
Unit sales	1,092		1,155		(5.5	)%	2,008		2,289		(12.3	)%
Average selling price	$	169	$	174	(2.9	)%	$	173	$	170	1.8	%

Comparison of Three Months Ended December 31, 2015 and 2014

The increase in our net sales in the three months ended December 31, 2015 compared with the three months ended December 31, 2014 was primarily due to continued increased sales of our products optimized for OEM and cloud/internet data center computing who increasingly are purchasing complete server systems from us. The year-over-year growth in net sales of our server systems in the three months ended December 31, 2015 was due primarily to an increase in unit volumes of server systems and an increase in the average selling price of our server systems. The average selling prices of our server systems increased primarily due to higher sales of our complete server systems which offer higher density computing and more memory and hard disk drive capacity. The increase in the sales of these complete systems include our ultra, storage, data center optimized servers and Twin family of servers.

The year-over-year decrease in net sales and unit sales of our subsystems and accessories in the three months ended December 31, 2015 was primarily due to lower sales of hard disk drives and memory bundled with our server solutions to our distributors and system integrators who are purchasing accessories from us and completing the final assembly themselves.

Comparison of Six Months Ended December 31, 2015 and 2014

The increase in our net sales in the six months ended December 31, 2015 compared with the six months ended December 31, 2014 was primarily due to continued increased sales of our products optimized for OEM and cloud/internet data center computing who increasingly are purchasing complete server systems from us offset in part by a $9.3 million out-of-period adjustment relating to extended warranty revenue which was recognized in the three prior fiscal year period ended June 30, 2015 and deferred in the three months ended September 30, 2015. The year-over-year growth in net sales of our server systems in the six months ended December 31, 2015 was due primarily to an increase in unit volumes of server systems and to a lesser extent an increase in the average selling price of our server systems. The average selling prices of our server systems increased primarily due to higher sales of our complete server systems which offer higher density computing and more memory and hard disk drive capacity. The increase in the sales of these complete systems include our ultra, storage, data center optimized servers and Twin family of servers.

The year-over-year decrease in net sales and unit sales of our subsystems and accessories in the six months ended December 31, 2015 was primarily due to lower sales of hard disk drives and memory bundled with our server solutions to our distributors and system integrators who are purchasing accessories from us and completing the final assembly themselves.

The following table presents the percentages of net sales from products sold to distributors and OEMs and to end customers for the three and six months ended December 31, 2015 and 2014:



	Three Months Ended December 31,				Change		Six Months Ended December 31,				Change
	2015		2014		%		2015		2014		%
Distributors	41.9	%	50.0	%	(8.1	)%	43.6	%	52.8	%	(9.2	)%
OEMs and end customers	58.1	%	50.0	%	8.1	%	56.4	%	47.2	%	9.2	%
Total net sales	100.0	%	100.0	%			100.0	%	100.0	%

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The following table presents percentages of net sales by geographic region for the three and six months ended December 31, 2015 and 2014:



	Three Months Ended December 31,				Change		Six Months Ended December 31,				Change
	2015		2014		%		2015		2014		%
United States	63.7	%	57.0	%	6.7	%	64.4	%	56.0	%	8.4	%
Europe	17.9	%	18.2	%	(0.3	)%	17.4	%	19.2	%	(1.8	)%
Asia	13.8	%	15.6	%	(1.8	)%	14.0	%	17.6	%	(3.6	)%
Others	4.6	%	9.2	%	(4.6	)%	4.2	%	7.2	%	(3.0	)%
Total net sales	100.0	%	100.0	%			100.0	%	100.0	%

Cost of Sales and Gross Margin

Cost of sales and gross margin for the three and six months ended December 31, 2015 and 2014 are as follows (dollars in millions):



	Three Months Ended December 31,						Change				Six Months Ended December 31,						Change
	2015			2014			$		%		2015			2014			$		%
Total cost of sales	$	532.6		$	418.6		$	114.0	27.2	%	$	980.0		$	792.7		$	187.3	23.6	%
Total gross profit	106.4			84.5			$	21.9	25.9	%	178.6			153.6			$	24.9	16.2	%
Total gross margin	16.6		%	16.8		%			(0.2	)%	15.4		%	16.2		%			(0.8	)%

Comparison of Three Months Ended December 31, 2015 and 2014

The quarter-over-quarter increase in absolute dollars of cost of sales in the three months ended December 31, 2015 compared to the three months ended December 31, 2014 was primarily attributable to the increase in net sales. In the three months ended December 31, 2015, we recorded a $2.1 million expense, net of recovery, or 0.3% of net sales, related to the inventory provision as compared to $2.5 million, or 0.5% of net sales, in the three months ended December 31, 2014.

In the three months ended December 31, 2015, we recorded a $4.7 million expense, or 0.7% of net sales, related to the provision for warranty reserve as compared to a $3.3 million expense, or 0.7% of net sales, in the three months ended December 31, 2014. The increase in the provision for warranty reserve was primarily due to higher net sales partially offset by the decrease in warranty claims in the three months ended December 31, 2015. 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.

Gross margin percentage was 16.6% and 16.8% for the three months ended December 31, 2015 and 2014, respectively, as higher sales of complete server systems such as ultra and storage servers which have higher gross margin, offset by lower gross margins from sales of cloud/internet data center sales and our subsystem and accessories. In addition, with the growth of our business, we have been able to achieve greater economies of scale which has in part offset the increasing percentage of our sales represented by lower margin cloud/internet data center sales.

Comparison of Six Months Ended December 31, 2015 and 2014

The year-over-year increase in absolute dollars of cost of sales in the six months ended December 31, 2015 compared to the six months ended December 31, 2014 was primarily attributable to the increase in net sales. In the six months ended December 31, 2015, we recorded a $3.8 million expense, net of recovery, or 0.3% of net sales, related to the inventory provision as compared to $4.2 million, or 0.4% of net sales, in the six months ended December 31, 2014.

In the six months ended December 31, 2015, we recorded a $8.5 million expense, or 0.7% of net sales, related to the provision for warranty reserve as compared to a $7.0 million expense, or 0.7% of net sales, in the six months ended December 31, 2014. The increase in the provision for warranty reserve was primarily due to higher net sales partially offset by the decrease in warranty claims in the six months ended December 31, 2015. If in future periods we experience or anticipate an

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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.

Gross margin percentage was 15.4% and 16.2% for the six months ended December 31, 2015 and 2014, respectively. The year-over-year decrease in gross margins in the six months ended December 31, 2015 was mainly due to a $9.3 million out-of-period adjustment relating to extended warranty revenue which was recognized in the three fiscal year period ended June 30, 2015. Gross margin percentage would have been 16.1% without this out-of-period adjustment.

Operating Expenses

Operating expenses for the three and six months ended December 31, 2015 and 2014 are as follows (dollars in millions):



	Three Months Ended December 31,						Change				Six Months Ended December 31,						Change
	2015			2014			$		%		2015			2014			$		%
Research and development	$	30.3		$	25.5		$	4.8	18.8	%	$	58.6		$	47.0		$	11.6	24.7	%
Percentage of total net sales	4.7		%	5.1		%					5.1		%	5.0		%
Sales and marketing	16.5			11.2			5.3		47.5	%	30.7			22.2			8.6		38.6	%
Percentage of total net sales	2.6		%	2.2		%					2.7		%	2.3		%
General and administrative	10.5			4.9			5.6		112.6	%	18.7			10.0			8.7		87.1	%
Percentage of total net sales	1.6		%	1.0		%					1.5		%	1.1		%
Total operating expenses	$	57.2		$	41.6		$	15.7	37.7	%	$	108.0		$	79.1		$	28.9	36.5	%
Percentage of total net sales	8.9		%	8.3		%					9.3		%	8.4		%

Comparison of Three Months Ended December 31, 2015 and 2014

Research and development expenses. Research and development expenses increased by $4.8 million, or 18.8% in the three months ended December 31, 2015 compared to the three months ended December 31, 2014. Research and development expenses were 4.7% and 5.1% of net sales for the three months ended December 31, 2015 and 2014, respectively. The increase in absolute dollars was driven primarily by an increase of $4.5 million in compensation and benefits including stock-based compensation expense.

Research and development expenses include stock-based compensation expense of $2.5 million and $2.0 million for the three months ended December 31, 2015 and 2014, respectively.

Our compensation and benefit expense in research and development increased from annual salary increases and growth in research and development personnel related to expanded product development initiatives in the United States and in Taiwan. We continue to believe that investments in research and development are critical to our future growth and competitive position in the marketplace. As such, we expect to continue to spend on current and future product development efforts.

Sales and marketing expenses. Sales and marketing expenses increased by $5.3 million, or 47.5% in the three months ended December 31, 2015 compared to the three months ended December 31, 2014. Sales and marketing expenses were 2.6% and 2.2% of net sales for the three months ended December 31, 2015 and 2014, respectively. The increase in absolute dollars was primarily due to an increase of $2.5 million in compensation and benefits resulting primarily from growth in sales and marketing personnel, a decrease of $1.3 million in marketing co-op funding from certain suppliers and an increase of $1.2 million in advertising, marketing promotional and trade show expenses.

Sales and marketing expenses include stock-based compensation expense of $0.4 million and $0.4 million for the three months ended December 31, 2015 and 2014, respectively.

General and administrative expenses. General and administrative expenses increased by $5.6 million, or 112.6% in the three months ended December 31, 2015 compared to the three months ended December 31, 2014. General and administrative expenses were 1.6% and 1.0% of net sales for the three months ended December 31, 2015 and 2014, respectively. The increase in absolute dollars was primarily due to an increase of $1.9 million in compensation and benefits including stock-based

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compensation expense, an increase of $1.3 million in foreign currency transaction loss, an increase of $1.2 million in legal, audit and accounting expenses, and an increase of $0.7 million in bad debt expense.

General and administrative expenses include stock-based compensation expense of $0.8 million and $0.5 million for the three months ended December 31, 2015 and 2014, respectively.

Comparison of Six Months Ended December 31, 2015 and 2014

Research and development expenses. Research and development expenses increased by $11.6 million, or 24.7% in the six months ended December 31, 2015 compared to the six months ended December 31, 2014. Research and development expenses were 5.1% and 5.0% of net sales for the six months ended December 31, 2015 and 2014, respectively. The increase in absolute dollars was driven primarily by an increase of $9.1 million in compensation and benefits including stock-based compensation expense and a decrease of $1.9 million refund of value added taxes on research and development expenses.

Research and development expenses include stock-based compensation expense of $4.9 million and $3.9 million for the six months ended December 31, 2015 and 2014, respectively.

Sales and marketing expenses. Sales and marketing expenses increased by $8.6 million, or 38.6% in the six months ended December 31, 2015 compared to the six months ended December 31, 2014. Sales and marketing expenses were 2.7% and 2.3% of net sales for the six months ended December 31, 2015 and 2014, respectively. The increase in absolute dollars was primarily due to an increase of $4.3 million in compensation and benefits resulting primarily from growth in sales and marketing personnel, an increase of $2.4 million in advertising, marketing promotional and trade show expenses and a decrease of $1.1 million in marketing co-op funding from certain suppliers.

Sales and marketing expenses include stock-based compensation expense of $0.8 million and $0.8 million for the six months ended December 31, 2015 and 2014, respectively.

General and administrative expenses. General and administrative expenses increased by $8.7 million, or 87.1% in the six months ended December 31, 2015 compared to the six months ended December 31, 2014. General and administrative expenses were 1.5% and 1.1% of net sales for the six months ended December 31, 2015 and 2014, respectively. The increase in absolute dollars was primarily due to an increase of $3.9 million in compensation and benefits including stock-based compensation expense, an increase of $3.1 million in legal, audit and accounting expenses and an increase of $0.9 million in bad debt expenses.

General and administrative expenses include stock-based compensation expense of $1.7 million and $1.1 million for the six months ended December 31, 2015 and 2014, respectively.

Interest and Other Expense, Net

Interest and other expense, net for the three and six months ended December 31, 2015 and 2014 are as follows (dollars in millions):



	Three Months Ended December 31,						Change					Six Months Ended December 31,						Change
	2015			2014			$			%		2015			2014			$			%
Interest and other income, net	$	—		$	—		$	—		N/M*		$	0.1		$	0.1		$	—		N/M*
Interest expense	(0.4		)	(0.2		)	(0.2		)	118.6	%	(0.7		)	(0.4		)	(0.3		)	91.0	%
Interest and other expense, net	$	(0.4	)	$	(0.2	)	$	(0.2	)	155.8	%	$	(0.6	)	$	(0.3	)	$	(0.3	)	99.0	%

*Not meaningful

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Comparison of Three Months Ended December 31, 2015 and 2014

Interest and other expense, net. Interest and other expense, net increased by $0.2 million in the three months ended December 31, 2015 compared to the three months ended December 31, 2014. The increases were primarily due to higher interest expense on debt.

Comparison of Six Months Ended December 31, 2015 and 2014

Interest and other expense, net. Interest and other expense, net increased by $0.3 million in the six months ended December 31, 2015 compared to the six months ended December 31, 2014. The increases were primarily due to higher interest expense on debt.

Provision for Income Taxes

Provision for income taxes and effective tax rates for the three and six months ended December 31, 2015 and 2014 are as follows (dollars in millions):



	Three Months Ended December 31,						Change				Six Months Ended December 31,						Change
	2015			2014			$		%		2015			2014			$			%
Provision for income taxes	$	14.1		$	11.5		$	2.6	22.3	%	$	21.6		$	22.1		$	(0.5	)	(2.4	)%
Percentage of total net sales	2.2		%	2.3		%					1.8		%	2.3		%
Effective tax rate	28.8		%	26.9		%					30.8		%	29.8		%

Comparison of Three Months Ended December 31, 2015 and 2014

Provision for income taxes. Provision for income taxes increased by $2.6 million, or 22.3% in the three months ended December 31, 2015 compared to the three months ended December 31, 2014. The effective tax rate was 28.8%