Business context and reporting period
Super Micro Computer, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2021, the third quarter of fiscal 2021. The company develops and sells application-optimized server and storage systems, subsystems, and related services. It reports one operating segment.
Financial performance
Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Net sales | $895.9 | $772.4 | $2,488.4 | $2,443.2 |
| Gross profit / margin | $123.0 / 13.7% | $133.4 / 17.3% | $389.0 / 15.6% | $402.7 / 16.5% |
| Operating income / margin | $17.1 / 1.9% | $15.5 / 2.0% | $84.9 / 3.4% | $76.2 / 3.1% |
| Net income | $18.4 | $15.8 | $72.7 | $65.9 |
| Diluted EPS | $0.35 | $0.29 | $1.35 | $1.26 |
- Quarterly sales grew 16.0%, led by server and storage systems, up 21.4%; systems represented 77.4% of sales. Nine-month sales rose 1.9%.
- Quarterly gross margin fell 3.6 percentage points. Management attributed the decline to component costs rising faster than sales prices and higher freight costs. Cost of sales increased 21.0% in the quarter, faster than sales.
- Quarterly operating expenses declined 10.0%, mainly because general and administrative expense fell 43.4% as professional fees related to investigations, remediation, and delayed filings declined. Research and development expense increased 16.7%.
- For the nine months, operating income and net income increased despite lower gross profit, supported in part by lower operating expenses and a lower effective tax rate.
Cash flow, balance sheet, debt, and capital allocation
- For the nine months, operating cash flow was $59.4 million, versus $65.7 million a year earlier; investing cash outflow was $44.6 million, mainly property and equipment purchases, versus $34.1 million. Financing cash outflow was $48.4 million, compared with $25.4 million of inflow, largely reflecting $118.0 million of share repurchases.
- Cash, cash equivalents, and restricted cash totaled $179.1 million at March 31, 2021, down $33.3 million since June 30, 2020. Cash and cash equivalents alone were $177.9 million, versus $210.5 million at June 30, 2020.
- Total debt was $85.4 million, up from $29.4 million at June 30, 2020. Debt included $57.5 million classified as short-term/current and $27.9 million long-term. The company reported $243.6 million of available capacity under its Bank of America facility, subject to borrowing-base and other terms, plus availability under Taiwan facilities.
- Current assets were $1,639.7 million and current liabilities $782.0 million at March 31, 2021. Inventory was $903.9 million, up from $851.5 million at June 30, 2020.
- The company repurchased and retired $120.7 million of shares in the first nine months. A separate $200 million program approved in January 2021 remained active; the filing’s quarterly repurchase table reported $159.3 million available at March 31. It also disclosed $9.3 million of additional repurchases after quarter-end.
Outlook, risks, contingencies, and unusual items
- No specific revenue, earnings, or margin guidance is provided. Management said cash, available borrowing capacity, and internally generated cash flow should support operations, remediation work, and debt and interest payments for the 12 months following issuance of the statements.
- Management described continuing COVID-19-related supply-chain and logistics challenges, higher freight and direct labor costs, and uncertainty about the pandemic’s future effects. It had built inventory of critical components to address shortage risk.
- Supplier concentration and related-party reliance are notable: one supplier represented 21.1% of purchases for the first nine months of FY2021; related party Ablecom manufactured about 92.5% of the chassis in products sold during that period. Noncancelable purchase commitments totaled $306.4 million, including $79.5 million for related parties.
- Disclosure controls were deemed ineffective at March 31, 2021 because an IT general-controls material weakness remained. Remediation and testing were ongoing, and management said sufficient repeatable operation was needed to assess effectiveness.
- The company paid a $17.5 million SEC civil penalty in the first quarter of FY2021, recorded in general and administrative expense; the CEO separately paid the company $2.122 million as reimbursement of profits from certain stock sales. A securities class action continued against the company, its CEO, and former CFO after partial dismissal motions were denied; derivative litigation was also pending. A further derivative suit was filed May 5, 2021.
- CEO cash performance bonuses could total up to $8.1 million. Share-price targets for both tranches were reached during the quarter, but the first tranche remained subject to a determination that the company had made adequate progress remediating its material weakness. The company expected to pay the bonus within the next year if applicable conditions were met.
- The Bank of America facility was scheduled to mature June 30, 2021, and the E.SUN facility September 18, 2021; the filing describes these maturities as preceding the expected LIBOR phaseout.
Important facts for investors to verify
- Whether gross-margin pressure from component prices, freight, and product mix persists, and whether pricing or cost actions offset it.
- Whether operating cash generation can support elevated inventory, planned manufacturing investment, repurchases, and debt obligations.
- Renewal, replacement, or repayment plans for credit facilities maturing in 2021, and compliance with facility terms and covenants.
- Progress and independent evidence of remediation of the IT control material weakness, including the implications for reporting reliability.
- Developments in pending securities and derivative litigation, tax contingencies, and the CEO bonus conditions.
- Supplier availability and related-party manufacturing exposure, particularly Ablecom’s role in chassis supply.