Super Micro Computer, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2020, the company’s fiscal first quarter of 2021 (unaudited). The filing compares results with the three months ended September 30, 2019. Supermicro develops and sells server and storage systems, subsystems, and related services.
Financial performance
| Metric | Quarter ended September 30, 2020 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $762.3 million | $799.8 million | Down 4.7% |
| Gross profit / margin | $129.9 million / 17.0% | $130.9 million / 16.4% | Profit down 0.8%; margin up 0.6 percentage points |
| Operating expenses | $99.5 million | $98.1 million | Up 1.4% |
| Operating income / margin | $30.4 million / 4.0% | $32.9 million / 4.1% | Income down 7.4% |
| Net income | $26.6 million | $26.3 million | Up about 1.0% |
| Diluted EPS | $0.49 | $0.51 | Down 3.9% |
| Operating cash flow | $120.6 million | $5.6 million | Up $115.0 million |
Cash flow from operations was supported principally by working-capital changes, including collections of receivables and reductions in inventory and prepaid assets; the quarter’s cash generation should not be viewed as solely earnings-driven. Investing cash outflow was $11.9 million, primarily for property and capacity investments. Financing cash outflow was $19.3 million, including $28.5 million of repurchases, partly offset by $6.4 million of debt proceeds and $5.0 million from stock-option exercises.
At September 30, 2020, cash and cash equivalents were $300.1 million ($302.0 million including restricted cash), total debt was $36.0 million, and stockholders’ equity was $1,072.7 million. Working-capital balances included $773.9 million of inventory and $589.7 million of current liabilities. The company reported $243.6 million of available capacity under its Bank of America facility and approximately $26 million under CTBC facilities; the filing gives slightly different CTBC availability figures in separate sections.
Changes and business drivers
- Server and storage systems sales fell 2.9% to $617.8 million; subsystem and accessory sales fell 11.8% to $144.5 million. Management attributed the systems decline to 19.1% fewer compute nodes shipped, partly offset by a 20.0% increase in average selling price.
- U.S. sales rose 5.8% to $496.1 million, while Asia sales declined 21.6% to $126.7 million and Europe sales declined 12.5% to $112.1 million.
- Gross margin improved mainly because component costs declined faster than selling prices. Management also cited lower excess-and-obsolete inventory charges and reduced overhead costs.
- Research and development expense increased 10.5% to $54.8 million, principally reflecting higher personnel and product-development costs. General and administrative expense declined 13.8% to $24.4 million, including lower professional fees related to prior investigations and reporting remediation.
- The effective tax rate fell to 12.7% from 25.3%, primarily due to reduced reserves following tax-audit settlements and increased tax benefits from employee stock compensation.
Outlook, risks, and unusual items
- Outlook and COVID-19: Management reported continuing demand from customers, while noting logistics constraints, higher freight and direct-labor costs, and potential supply-chain and indirect customer risks. It could not predict the pandemic’s ultimate effect over the next 12 months. Management believed cash, available borrowing capacity, and operating cash flows would support operations and obligations for at least 12 months after issuance. No specific revenue or earnings guidance was provided.
- SEC settlement: The company paid a $17.5 million civil penalty in the quarter, recorded in general and administrative expense. The CEO separately reimbursed the company $2.122 million, recorded as a credit to that expense. The company agreed to cease and desist from specified securities-law violations, but otherwise neither admitted nor denied the SEC’s findings.
- Controls: Management concluded disclosure controls were not effective as of September 30, 2020 because an IT general-controls material weakness remained. Remediation work continued, but redesigned controls had not operated long enough to establish effectiveness; management said remediation depended on effective operation by June 30, 2021.
- Litigation: A securities class action related to alleged revenue-recognition misstatements remained pending; the company said it believed the claims were without merit. A derivative action naming current and former directors and officers was filed October 27, 2020. The filing says outcomes cannot be predicted.
- Repurchases and commitments: The company completed its $30 million repurchase authorization during the quarter. On October 31, 2020, the board approved a new program of up to $50 million through October 31, 2021. Remaining noncancelable purchase commitments were $119.7 million, including $33.1 million to related parties.
- Other risks: The company relied on a limited supplier base; one supplier accounted for 22.0% of purchases. Related parties Ablecom and Compuware manufactured substantial components, including approximately 93.6% of chassis included in products sold. The filing also describes tax-position uncertainty and an equity-method investment connected to a Chinese venture whose third-party parent was on a U.S. export-control list; the company said the venture itself was not restricted and recorded no investment impairment.
Key facts for investors to verify
- Whether the working-capital-driven cash-flow improvement is repeatable and whether revenue and shipment trends stabilize.
- Progress and independent evidence of effective remediation of the IT-controls material weakness by the stated target date.
- Potential financial and governance consequences of the SEC matter and pending class and derivative litigation.
- The precise CTBC borrowing availability, given differing figures in the filing, and the terms, covenants, and collateral supporting credit facilities.
- Whether component-supplier concentration, related-party transactions, and COVID-related logistics or cost pressures affect margins and product delivery.
- Execution of the new $50 million repurchase program alongside manufacturing investments, debt obligations, and purchase commitments.