Super Micro Computer, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended December 31, 2018 (fiscal Q2 and first half of FY2019). The unaudited report was filed substantially late, on December 19, 2019. Prior-period figures are not fully comparable because the company adopted ASC 606 revenue guidance on July 1, 2018 and did not recast 2017 results.
Financial results
| Metric | Three months ended Dec. 31, 2018 | Year-over-year comparison | Six months ended Dec. 31, 2018 | Year-over-year comparison |
|---|---|---|---|---|
| Net sales | $931.5 million | Up 12.6% | $1,902.6 million | Up 23.2% |
| Gross profit / margin | $127.9 million / 13.7% | Margin up from 12.8% | $251.2 million / 13.2% | Margin up from 12.4% |
| Operating income | $25.7 million | Up from $22.7 million | $54.2 million | Up from $32.0 million |
| Net income (loss) | $18.2 million | Compared with a $0.8 million loss | $37.6 million | Compared with $5.3 million income |
| Diluted earnings per share | $0.36 | Compared with $(0.02) | $0.73 | Compared with $0.10 |
| Operating cash flow | Not separately presented for the quarter | $81.1 million | Compared with $16.2 million |
For the quarter, server and storage systems sales rose 21.1% to $762.6 million and made up 81.9% of sales; subsystems and accessories declined 14.4% to $168.9 million. Management attributed system-sales growth mainly to higher average selling prices, including higher memory and SSD costs and richer configurations. Compute-node shipments fell about 15% in the quarter, which management linked to softening demand and an overall market slowdown.
Quarterly operating expenses increased 23.1% to $102.2 million. General and administrative expense rose 43.5%, including $9.4 million of professional fees related primarily to investigating and remediating reporting issues. The effective tax rate was 18.4%, versus 98.2% a year earlier; the prior-year rate was affected by tax-reform-related items and employee stock-option tax deductions.
Cash, debt and liquidity
- At December 31, 2018, cash and cash equivalents were $109.8 million; cash, cash equivalents and restricted cash totaled $122.8 million. Total current assets were $1.491 billion and current liabilities were $708.2 million.
- Inventory was $829.2 million. The company recorded $12.6 million of excess and obsolete inventory provision in the first half, excluding a separate $1.5 million inventory valuation provision.
- Short-term debt was $48.2 million, down from $116.2 million at June 30, 2018. The company had $221.3 million of available Bank of America borrowing capacity, subject to borrowing-base limits and other terms.
- First-half investing cash outflow was $9.3 million, primarily capital expenditures; financing cash outflow was $69.3 million, mainly reflecting net debt repayments. Cash, cash equivalents and restricted cash increased by $2.4 million over the period.
- Management stated that cash, credit lines and internally generated cash flows should generally cover operating needs, remediation efforts, debt maturities and interest for the twelve months following issuance of the statements. The Bank of America facility restricts share repurchases and dividends.
Material developments, outlook and risks
- Reporting and listing: The company described extensive filing delays following restatements of certain earlier financial statements and said it did not intend to file separate FY2018 annual and quarterly reports. Its stock was suspended from Nasdaq in August 2018, delisted in March 2019, and quoted OTC as SMCI. The report also states the company had not filed all required reports when asked in its cover-page checkboxes.
- Controls: Management concluded disclosure controls were ineffective as of December 31, 2018 because of material weaknesses in internal control over financial reporting. It reported ongoing remediation efforts.
- Accounting comparability: ASC 606 adoption accelerated recognition for certain distributor and software sales and increased opening retained earnings by $6.8 million. For the December quarter, reported sales were $8.2 million lower than they would have been without adoption; first-half sales were $20.1 million lower. Comparative 2017 results were not recast.
- Concentration and related parties: One supplier represented 21.5% of first-half purchases. Related parties Ablecom and Compuware supplied components and services; Ablecom manufactured about 95.3% of chassis included in products sold in the first half. Outstanding purchase orders to these parties totaled $125.3 million at December 31, 2018.
- Legal and regulatory matters: A securities class action alleges misstatements or omissions concerning revenue recognition; the company’s motion to dismiss was pending and the company said it intended to defend the case. The company also disclosed SEC subpoenas and cooperation with SEC requests. It stated that outcomes could not be predicted and could adversely affect results or financial position.
- Commitments and taxes: Noncancelable purchase commitments were $329.8 million, including $125.2 million to related parties. Gross unrecognized tax benefits were $26.9 million. Management disclosed a subsequent Taiwan transfer-pricing adjustment resulting in $1.6 million of additional tax liability, expected to be paid in January 2020.
- Outlook: No specific revenue or earnings guidance was provided. Management emphasized product development and expansion in enterprise, data-center and cloud customers; it also noted softening demand. The filing cautions that interim results may not indicate full-year results.
Key facts for investors to verify
- Whether the material weaknesses have been remediated and whether subsequent filings and financial statements were timely and reliable.
- The basis and remaining effects of prior restatements, and the comparability of reported results following ASC 606 adoption.
- Progress in restoring listing access, and the status and potential financial impact of the securities litigation and SEC inquiries.
- Current liquidity, borrowing-base availability, facility maturity and covenant compliance, including the effect of continued filing delays.
- Exposure to supplier concentration, related-party transactions, inventory reserves and purchase commitments amid the reported demand slowdown.