Super Micro Computer, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2019. Comparisons are with the corresponding 2018 periods. The company develops server, storage and related technology. Its common stock was relisted on Nasdaq on January 14, 2020.
Financial performance
| Metric | Three months ended Dec. 31, 2019 | Prior-year quarter | Six months ended Dec. 31, 2019 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $870.9 million | $931.5 million | $1,670.7 million | $1,902.6 million |
| Gross profit | $138.4 million | $127.9 million | $269.3 million | $251.2 million |
| Gross margin | 15.9% | 13.7% | 16.1% | 13.2% |
| Operating income | $27.8 million | $25.7 million | $60.7 million | $54.2 million |
| Net income | $23.7 million | $18.2 million | $50.1 million | $37.6 million |
| Diluted EPS | $0.46 | $0.36 | $0.97 | $0.73 |
- Quarterly sales declined 6.5%; six-month sales declined 12.2%. Server and storage systems revenue fell 11.8% in the quarter and 16.6% for six months. Subsystems and accessories revenue rose 17.3% and 8.4%, respectively.
- Management attributed lower server-system revenue chiefly to lower average selling prices per compute node—about 20% in the quarter and 17% for six months—as memory and SSD prices fell. Quarterly compute-node shipments rose about 10%; the company said higher volumes did not offset lower prices.
- Gross margin improved as selling prices declined more slowly than component costs, with favorable customer, product and geographic mix also contributing. Operating expenses rose 8.2% in the quarter, including higher research and development spending; lower general and administrative expense reflected reduced professional fees tied to reporting remediation.
- Quarterly effective tax rate was 7.9%, down from 18.4%, primarily following the release of unrecognized tax benefits after settlement of a Taiwan tax audit. The filing reports a $1.6 million Taiwan tax adjustment, offset in the income statement by recognition of prior tax benefits.
Cash flow, liquidity and debt
- For the six months, operating cash flow was $87.2 million, versus $81.1 million a year earlier. Investing cash outflow was $23.3 million, including $24.1 million of property and equipment purchases; financing cash outflow was $2.1 million. Cash, cash equivalents and restricted cash increased $61.9 million to $324.1 million.
- At December 31, cash and cash equivalents were $309.0 million; current assets were $1,520.7 million and current liabilities $671.7 million. Total debt was $23.3 million, all classified as short-term, compared with $23.6 million at June 30, 2019.
- The company reported $243.6 million of available capacity under its Bank of America facility and $26.7 million available under its CTBC facility, subject to facility terms and borrowing limitations. The CTBC term loan was due under a facility maturing June 30, 2020. The Bank of America facility also matured June 30, 2020. The company reported covenant compliance.
- Management said existing cash, credit lines and operating cash flows should generally cover operations, remediation efforts, maturing debt and interest for the 12 months following issuance. Cash held outside the U.S. was $93.5 million.
Outlook, risks and unusual matters
- No specific revenue or earnings guidance is provided. Management described somewhat improved hyperscale public-cloud demand, offset by continued softness in enterprise data-center demand and falling component prices.
- The company expected one-time charges of $35 million to $40 million in fiscal Q3 or Q4 2020 to address residual matters from its extended blackout period; it said the charges would likely be settled in cash. It also expected continued spending on product development, U.S. and Taiwan manufacturing expansion, and remediation of internal-control weaknesses.
- Disclosure controls and procedures were deemed ineffective as of December 31, 2019 because of material weaknesses in internal control over financial reporting. Management nevertheless stated that the financial statements fairly present the company’s financial condition, results and cash flows in all material respects.
- The filing added the novel coronavirus outbreak as a risk, citing possible disruption to operations, manufacturers, customers, distribution and demand, particularly given the company’s China operations and extended business closures and travel restrictions.
- A securities class action alleging misstatements or omissions concerning revenue recognition remained pending on a motion to dismiss; the company said it considered the allegations without merit. The company also disclosed SEC subpoenas and investigations and said it was cooperating. Outcomes could not be predicted.
- Supplier and related-party concentration warrant attention: one supplier represented 28.6% of purchases in the six-month period; Ablecom manufactured about 95.4% of chassis incorporated in products sold. The company disclosed $579.2 million of noncancelable purchase commitments, including $134.0 million for related parties.
Important facts for investors to verify
- Whether revenue and gross-margin trends persist as component prices and average selling prices change, and as enterprise demand and channel mix evolve.
- Progress in remediating material weaknesses, the expected $35–$40 million cleanup charges, and any related cash or reporting impact.
- The effect of the coronavirus outbreak on China operations, suppliers, customers and demand, as well as the company’s ability to diversify its concentrated chassis supply.
- Renewal, repayment or refinancing of credit facilities maturing June 30, 2020, and continued compliance with borrowing terms.
- Developments in the securities litigation, SEC matters and uncertain tax positions, including the potential for outcomes or costs beyond current estimates.