Super Micro Computer, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2018 (fiscal Q1 2019). Financial statements are unaudited. The filing was signed December 19, 2019, following substantial reporting delays.
Business and financial results
Super Micro develops and sells server and storage systems, subsystems, accessories, software, and related services. It operates as one segment. Management attributed higher sales to increased product demand and a greater focus on enterprise, internet data center, cloud, and OEM customers.
| Metric | Q1 FY2019 | Prior-year quarter | Change / context |
|---|---|---|---|
| Net sales | $971.1 million | $716.7 million | Up 35.5% |
| Gross profit / margin | $123.2 million / 12.7% | $86.1 million / 12.0% | Margin up 0.7 percentage points |
| Operating expenses | $94.7 million | $76.7 million | Up 23.5%; G&A rose 74.0% |
| Operating income | $28.5 million | $9.3 million | Operating margin approximately 2.9%, versus 1.3% |
| Net income | $19.3 million | $6.1 million | Diluted EPS $0.37, versus $0.12 |
| Operating cash flow | $37.7 million | $11.8 million | Higher than prior year |
| Cash and cash equivalents | $105.8 million | $115.4 million at June 30, 2018 | Period-end balance |
| Short-term debt | $79.3 million | $116.2 million at June 30, 2018 | Declined during the quarter |
At September 30, current assets were $1.496 billion and current liabilities were $738.9 million. Management said cash, credit lines, and internally generated cash flows should generally cover operations, remediation efforts, and debt and interest payments for the 12 months following issuance of the statements. The company reported $209.4 million of available borrowing capacity under its Bank of America facility, subject to borrowing-base limits and other terms.
Changes, accounting, and management commentary
- Server and storage systems sales grew 48.6% to $805.9 million and rose to 83.0% of sales; subsystem and accessories sales fell 5.2% to $165.2 million. Management cited approximately 24% more compute nodes shipped and a 21% increase in average selling price per node.
- Management attributed improved gross margin to a more favorable geographic mix and higher service revenue, partly offset by higher component costs and inventory charges. Inventory provisions for excess, obsolescence, and net realizable value totaled approximately $9.5 million, versus $1.7 million in the prior-year quarter.
- G&A included a $13.9 million increase in professional fees, primarily for investigation, remediation, and work related to delayed SEC filings and restated financial statements. Management also cited increased bad-debt provisions related to certain international customer receivables.
- The company adopted ASC 606 on July 1, 2018 using the modified retrospective method; prior-year comparative figures were not recast. Adoption accelerated recognition for certain distributor and software sales, but the quarter’s reported sales were $11.9 million lower and net income $1.1 million lower than they would have been without adoption. The adoption increased opening retained earnings by $6.8 million.
- No specific revenue or earnings guidance is provided. Management notes that the quarter’s results are not necessarily indicative of future results.
Risks, contingencies, and unusual matters
- Reporting and controls: The filing explains that the company had delayed filings, restated certain previously issued financial statements, and did not file all required reports on time. Management concluded disclosure controls were ineffective as of September 30, 2018 because of material weaknesses in internal control over financial reporting. The company’s common stock was suspended from Nasdaq in August 2018 and delisted in March 2019; it was quoted on the OTC Market under SMCI.
- Legal and regulatory matters: A securities class action alleging misrepresentations or omissions regarding revenue recognition remained pending; the company’s motion to dismiss was pending. The company also disclosed SEC subpoenas and said it was cooperating with government requests. It stated the outcomes could not be predicted and could adversely affect its financial position or results.
- Supplier and related-party concentration: Ablecom manufactured approximately 95.7% of chassis in products sold in the quarter. A single supplier represented 19.7% of purchases. Ablecom and Compuware are related parties; purchase orders outstanding to them were $30.8 million and $110.0 million, respectively. Noncancelable purchase commitments totaled $382.8 million, including $140.8 million to related parties.
- Debt and liquidity terms: The Bank of America facility is secured by substantially all company assets, contains covenants, and restricts share repurchases and dividends. The company reported covenant compliance, while noting that facility terms and borrowing capacity are conditional. Much of its cash was held outside the United States.
- Tax and other exposures: Gross unrecognized tax benefits were $27.1 million. The filing also describes a $1.6 million Taiwan transfer-pricing adjustment accepted in October 2019, with the income-statement effect expected to be offset by recognition of previously unrecognized tax benefits.
Important facts for investors to verify
- Review the subsequent comprehensive annual report and restatement disclosures for the full scope of prior-period accounting issues and remediation progress.
- Confirm whether the material weaknesses in internal controls have been remediated and whether later filings and audits were completed on schedule.
- Assess the pending securities litigation and SEC inquiries, including any material developments or financial exposure.
- Evaluate the sustainability and cash conversion of sales growth, inventory levels and charges, customer collections, and dependence on key suppliers and related parties.
- Verify current debt-facility availability, borrowing-base constraints, covenants, maturity extensions, and liquidity needs; the balances and terms summarized here relate to the reported period and include later amendments described in the filing.