Super Micro Computer, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended December 31, 2021; comparison is with the corresponding periods ended December 31, 2020 unless otherwise noted. Amounts are in U.S. dollars.
Business context and results
The company develops and sells application-optimized server and storage systems, subsystems, accessories, and related services. It operates as one segment. Q2 revenue growth was led by server and storage systems, supported by higher compute-node shipments and average selling prices.
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net sales | $1,172.4 million | $830.3 million | $2,205.1 million | $1,592.6 million |
| Gross profit / margin | $163.7 million / 14.0% | $136.1 million / 16.4% | $301.9 million / 13.7% | $266.0 million / 16.7% |
| Operating expenses | $112.7 million | $98.7 million | $221.7 million | $198.2 million |
| Operating income / margin | $51.0 million / 4.4% | $37.4 million / 4.5% | $80.2 million / 3.6% | $67.8 million / 4.3% |
| Net income | $41.9 million | $27.7 million | $67.4 million | $54.3 million |
| Diluted EPS | $0.78 | $0.52 | $1.27 | $1.00 |
Material changes and financial position
- Q2 net sales rose 41.2%; server and storage system sales rose 53.4% to $986.1 million, while subsystem and accessory sales edged down 0.6% to $186.4 million. For the six months, sales increased 38.5%.
- Q2 gross margin fell 2.4 percentage points. Management attributed the decline to sales prices rising more slowly than costs, including higher freight, materials, contract manufacturing, and direct labor costs. It expected elevated pandemic-related costs to continue while the pandemic persisted.
- Cash and cash equivalents were $247.4 million at December 31, 2021, versus $232.3 million at June 30, 2021. Total debt increased to $315.9 million from $98.2 million; reported cash less debt was approximately negative $68.5 million. Debt included $174.1 million classified as short-term and $139.0 million long-term.
- For the six months, operating cash flow was negative $187.7 million, compared with positive $183.8 million a year earlier. The principal driver was a $356.4 million inventory build, alongside higher receivables and other working-capital needs. Investing cash outflow was $24.3 million; financing cash inflow was $227.2 million, primarily reflecting borrowing activity.
- Current assets were $2.29 billion and current liabilities $1.20 billion. Inventory rose to $1.39 billion from $1.04 billion at fiscal year-end. Management said cash, available borrowing capacity, and internally generated cash flows should cover operating needs, debt maturities, and interest for the 12 months following issuance.
Outlook, risks, and unusual items
- No consolidated revenue or earnings guidance was provided in the supplied filing text. Management anticipated approximately $20–$25 million of capital expenditures for the remainder of FY2022, mainly for manufacturing capabilities, tooling, IT, and facility upgrades.
- Management cited COVID-19, the omicron variant, supply constraints, logistics disruption, and increased freight and labor costs as ongoing uncertainties. It had built inventory of key components to support customer orders and mitigate shortages.
- Supplier concentration is material: one supplier represented 26.9% of purchases in Q2 and 23.1% for the six-month period. Related party Ablecom manufactured approximately 88.3% of chassis included in products sold in Q2; the company said replacing Ablecom quickly could be difficult.
- Noncancelable inventory and non-inventory purchase commitments totaled $816.0 million, including $100.3 million for related parties. Outstanding purchase orders to Ablecom and Compuware were $49.4 million and $50.9 million, respectively.
- The company reported securities class-action and derivative litigation concerning prior revenue recognition and internal-control disclosures. The class action remained active, with a class-certification hearing scheduled for April 2022; outcomes and potential impacts were uncertain. The company had previously paid a $17.5 million SEC civil penalty in FY2021.
- The company entered a related-party tripartite agreement to pursue a 33.33% share of a Taiwan land purchase, estimated at approximately $28.3 million. As of quarter-end, due diligence and government discussions continued and no installment payments had been made.
- The Board reduced a CEO cash bonus to approximately $2.0 million; the payout occurred during the quarter. A $1.6 million liability reduction was recognized as a benefit in Q1 FY2022. The filing also reported $2.9 million of Q2 expense for the CEO performance stock option.
- Management concluded disclosure controls were effective at a reasonable-assurance level as of December 31, 2021, and reported no material quarter-over-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether elevated inventory converts into shipments and cash, and whether working-capital outflows moderate.
- Whether gross margins recover as component, freight, and labor costs evolve.
- Available borrowing capacity, debt terms and maturities, and compliance with facility covenants; the filing reported covenant compliance at quarter-end.
- Progress on supplier diversification and the company’s operational and financial exposure to related-party manufacturers.
- Developments in the active litigation and any material outcome or liability.
- Completion, funding, and related-party terms of the proposed Taiwan land transaction.