Super Micro Computer, Inc. — Q2 FY2021 Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended December 31, 2020. Comparisons are with the corresponding periods ended December 31, 2019, unless otherwise noted. Dollar amounts are in U.S. dollars.
Business context and financial performance
Super Micro develops and sells application-optimized server and storage systems, subsystems, accessories, and related services. It reports one operating segment.
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $830.3 million | $870.9 million | $1,592.6 million | $1,670.7 million |
| Gross profit / margin | $136.1 million / 16.4% | $138.4 million / 15.9% | $266.0 million / 16.7% | $269.3 million / 16.1% |
| Operating income / margin | $37.4 million / 4.5% | $27.8 million / 3.2% | $67.8 million / 4.3% | $60.7 million / 3.6% |
| Net income | $27.7 million | $23.7 million | $54.3 million | $50.1 million |
| Diluted EPS | $0.52 | $0.46 | $1.00 | $0.97 |
Quarterly sales declined 4.7%, while net income rose 16.7%. For the six-month period, sales declined 4.7% and net income increased 8.4%. Gross margin improved in both comparisons. Quarterly operating expenses fell 10.8% to $98.7 million; lower general and administrative expenses, including reduced professional fees related to prior investigations and reporting remediation, were a major contributor.
- Quarterly server and storage system sales decreased 4.5% to $642.7 million; subsystem and accessory sales fell 5.3% to $187.6 million. Management attributed the systems decline to a 17.1% reduction in compute-node shipments, partly offset by a 16.0% increase in average selling price.
- U.S. sales fell 12.2% in the quarter, partly offset by growth in Europe and other regions. Management attributed the gross-margin improvement chiefly to component costs declining faster than selling prices.
- Six-month other expense was $3.4 million, versus other income of $1.2 million a year earlier, primarily reflecting increased foreign-exchange losses and lower interest income. Six-month interest expense was $1.2 million.
Cash flow, balance sheet, debt, and liquidity
- Cash and cash equivalents were $315.6 million at December 31, 2020, compared with $210.5 million at June 30, 2020. Cash, cash equivalents, and restricted cash totaled $317.5 million.
- For the six months, operating cash flow was $183.8 million, compared with $87.2 million; investing cash outflow was $25.6 million, primarily for manufacturing capacity and facilities; financing cash outflow was $53.7 million, including $74.8 million of share repurchases.
- Total debt was $45.5 million, including $24.9 million current and $20.6 million long-term, up from $29.4 million at June 30, 2020. The company reported no borrowings on its Bank of America revolver and $243.6 million of available capacity, subject to borrowing-base and other terms.
- Management said cash, available borrowing capacity, and internally generated cash flow should be sufficient for operating needs, debt service, and continued remediation of the internal-control weakness for the 12 months following issuance of the statements.
- Capital commitments included $248.3 million of remaining noncancelable purchase commitments, of which $52.3 million involved related parties.
Material changes, outlook, risks, and unusual items
- COVID-19 and operations: The company reported continuing demand from customers, but cited supply-chain and logistics challenges, higher freight and direct labor costs, and uncertainty about the pandemic’s further effects. It had built inventory of critical components to support customer orders and said the duration and overall impact remained difficult to predict.
- No specific financial guidance: The filing provides no numerical revenue or earnings guidance. Management emphasized continued product development, timely technology launches, service and support, and expansion of sales channels.
- Internal controls: Disclosure controls were deemed ineffective at December 31, 2020 because of a material weakness in IT general controls, particularly privileged-access controls. Remediation work and testing were underway, but controls had not operated long enough to establish effectiveness; management said remediation depended on effective operation by June 30, 2021.
- SEC settlement: The company paid a $17.5 million civil penalty in the first quarter of FY2021, recorded in general and administrative expense. The CEO paid the company $2.122 million as reimbursement of profits from certain stock sales, recorded as a credit to that expense.
- Repurchases: The company repurchased $74.8 million of shares during the six months. A further $200 million repurchase authorization was approved January 29, 2021.
- Litigation and contingencies: A securities class action and a derivative action remained pending; the company said it intended to defend the securities claims. A construction dispute was settled after quarter-end; a $1.6 million liability had been recorded at December 31, 2020. Outcomes of legal proceedings remain uncertain.
- Supplier and related-party exposure: Ablecom manufactured 91.6% of chassis in products sold during the quarter. The filing also describes significant related-party purchasing and distribution relationships involving Ablecom and Compuware, entities connected to company executives and directors.
- Debt maturities: The Bank of America facility was due to terminate June 30, 2021; the CTBC credit facility and E.SUN facility were also scheduled to expire in 2021. The filing describes covenants, collateral, and borrowing-base limits applicable to certain facilities.
Key facts investors should verify
- Whether sales volumes and compute-node shipments recover, and whether improved gross margins persist amid freight, component, and labor costs.
- Progress and independent evidence of effective remediation of the IT general-control material weakness by the stated target date.
- Liquidity and refinancing plans around 2021 credit-facility expirations, as well as the effect of the $200 million repurchase authorization on cash and capital allocation.
- Developments in the pending securities and derivative litigation and completion of the construction-settlement dismissal.
- Ongoing reliance on related-party manufacturers, especially Ablecom, and concentration in key component suppliers.
- Changes in COVID-19-related supply, logistics, customer demand, and foreign-exchange exposure.