Super Micro Computer, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the three and nine months ended March 31, 2022 (Supermicro fiscal 2022 Q3), not 2021 Q3. All financial amounts below are in U.S. dollars; millions are used unless noted.
Business context and reporting period
Supermicro develops and sells application-optimized server and storage systems, subsystems, and related services for enterprise data centers, cloud computing, AI, 5G, and edge computing. The unaudited filing compares fiscal Q3 and the first nine months of fiscal 2022 with the corresponding 2021 periods.
Key financial metrics
| Metric | Three months ended March 31, 2022 | Year-over-year change | Nine months ended March 31, 2022 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $1,355.5 | +51.3% | $3,560.6 | +43.1% |
| Gross profit / margin | $210.8 / 15.5% | +71.4%; margin up 1.8 percentage points | $512.7 / 14.4% | +31.8%; margin down 1.2 points |
| Operating income / margin | $89.8 / 6.6% | Up from $17.1 / 1.9% | $170.0 / 4.8% | Up from $84.9 / 3.4% |
| Net income | $77.0 | Up from $18.4 | $144.3 | Up from $72.7 |
| Diluted EPS | $1.43 | Up from $0.35 | $2.70 | Up from $1.35 |
| Operating cash flow | Not separately presented here | — | $(415.7) | Down from $59.4 |
| Capital expenditures | Not separately presented here | — | $34.2 | Down from $44.6 |
Q3 server and storage systems sales rose 65.3% to $1,145.9 million, driven by 19.7% more compute-node units and a 41.0% increase in average selling price. Subsystems and accessories increased 3.5%. The U.S. contributed 56.2% of Q3 sales; Asia sales grew 49.6% year over year.
At March 31, 2022, cash and cash equivalents were $247.4 million, total debt was $547.5 million, and net debt was approximately $300.0 million. Current assets were $2,678.7 million and current liabilities $1,496.2 million, implying working capital of approximately $1,182.6 million. Inventory was $1,588.5 million, up from $1,041.0 million at June 30, 2021. Total assets were $3,071.2 million and stockholders’ equity was $1,273.9 million.
Material changes versus comparable periods
- Q3 gross margin improved year over year as higher product pricing more than offset increased costs; for the nine-month period, margin declined because selling prices rose more slowly than costs.
- Q3 operating expenses increased 14.2%, slower than sales growth, and fell to 8.9% of sales from 11.8%. R&D expense rose 22.5%, principally from higher personnel costs.
- Nine-month operating cash flow turned negative, primarily reflecting a $552.5 million increase in cash required for net working capital. Accounts receivable used $216.5 million of cash and inventory used $561.5 million, partly offset by higher accounts payable and deferred revenue.
- Financing provided $466.4 million in the first nine months, versus $48.4 million used in the prior-year period, mainly reflecting increased net borrowing. Debt increased from $98.2 million at June 30, 2021.
Outlook, commentary, risks, and unusual items
- Management expects supply-chain disruption and longer lead times to continue for the foreseeable future and expects to carry elevated inventory. It cited component shortages, higher freight and labor costs, and the possibility of continued inflationary pressure. No revenue or earnings guidance is provided in the supplied filing.
- Management expects approximately $10–$15 million of capital expenditures for the remainder of fiscal 2022, primarily for manufacturing capabilities, tooling, IT, and facilities. It believes cash, available borrowing capacity, and internally generated cash flows will cover operations and debt service for the following 12 months.
- Q3 inventory obsolescence provision was $10.2 million, versus $2.9 million a year earlier. Nine-month provision was $13.9 million, versus $4.6 million.
- A proposed securities class-action settlement was recorded at $18.25 million, with $16.25 million of expected recovery and a net $2.0 million charge. The settlement remained subject to court approval; a preliminary-approval hearing was scheduled for June 2, 2022.
- Supermicro paused sales to Russia, Belarus, and restricted areas of Ukraine. Management noted potential indirect effects from sanctions, supplier sourcing, logistics, and inflation.
- Supplier concentration and related-party exposure are notable: Ablecom manufactured 88.8% of chassis included in products sold during Q3. Ablecom and Compuware are related parties; combined related-party purchases were $95.5 million in Q3, and outstanding noncancelable purchase orders to them totaled $82.8 million.
- Debt includes substantial short-term borrowing; scheduled principal payments for fiscal 2022 were $378.0 million. The company reported compliance with Bank of America facility covenants and $108.5 million of available borrowing capacity under that facility, subject to borrowing-base limits and other terms. Other facilities also have covenant, collateral, maturity, and acceleration provisions.
- Management concluded disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2022; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Confirm the reporting-period mismatch in the request: this filing covers fiscal 2022 Q3, ended March 31, 2022.
- Track whether elevated inventory converts to sales and cash, and whether receivables, inventory, and operating cash flow improve.
- Assess the sustainability of improved Q3 gross margin given nine-month margin contraction, freight and labor inflation, and component availability.
- Review short-term debt maturities, borrowing-base availability, facility covenants, and the company’s capacity to refinance or repay debt.
- Check the court outcome and final economics of the securities settlement, and monitor other litigation and tax contingencies.
- Evaluate related-party transactions and dependence on Ablecom and Compuware, including purchase commitments and alternative-supplier readiness.