Super Micro Computer, Inc. — Form 10-Q Summary
Period clarification: The supplied filing covers the three and nine months ended March 31, 2020 (fiscal Q3 2020), not 2019 Q3. Financial statements are unaudited. Unless noted, amounts are U.S. dollars.
Business context and reporting period
Super Micro develops and sells server and storage systems, subsystems, accessories, and related services. It operates as one reportable segment. The filing reports fiscal Q3 and year-to-date results through March 31, 2020.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Net sales | $772.4 million | $743.5 million | $2,443.2 million | $2,646.1 million |
| Gross profit / margin | $133.4 million / 17.3% | $112.3 million / 15.1% | $402.7 million / 16.5% | $363.5 million / 13.7% |
| Operating income / margin | $15.5 million / 2.0% | $12.9 million / 1.7% | $76.2 million / 3.1% | $67.1 million / 2.5% |
| Net income | $15.8 million | $10.6 million | $65.9 million | $48.2 million |
| Diluted EPS | $0.29 | $0.21 | $1.26 | $0.94 |
- Q3 changes: Sales increased 3.9% year over year and net income rose to $15.8 million. Subsystems and accessories sales grew 33.4%, while server and storage systems sales fell 3.6%. Indirect-channel sales rose 56.9%; direct-customer and OEM sales declined 28.9%.
- Nine-month changes: Sales declined 7.7% year over year, mainly as server and storage systems revenue fell 13.0%; subsystems and accessories increased 16.2%. Gross margin improved 2.8 percentage points to 16.5%.
- Operating expenses rose 18.4% in Q3 to $117.8 million, including a $17.5 million accrual for a proposed SEC settlement. A $9.5 million settlement fee related to a canceled joint development agreement reduced R&D expense.
- Q3 tax benefit was $0.9 million, versus a $0.5 million provision a year earlier; the company attributed the change primarily to tax benefits from disqualified incentive stock option dispositions. Nine-month tax provision was $9.8 million.
Cash flow, balance sheet, and liquidity
- For the nine months, operating cash flow was $65.7 million, down from $180.7 million. Management attributed the decrease mainly to a $129.7 million increase in net working capital, including higher inventory and prepaid assets. Investing cash outflow was $34.1 million; financing cash inflow was $25.4 million.
- Cash and cash equivalents were $300.9 million at March 31, 2020, versus $248.2 million at June 30, 2019. Cash, cash equivalents, and restricted cash totaled $319.3 million.
- Inventory increased to $866.2 million from $670.2 million at June 30, 2019. Current assets were $1.648 billion and current liabilities $784.8 million.
- Short-term debt totaled $33.2 million, compared with $23.6 million at June 30, 2019. The company reported $243.6 million of available borrowing capacity under its Bank of America facility and $16.8 million available under the CTBC facility, subject to applicable conditions.
- Both credit facilities were due to mature June 30, 2020. The company was negotiating an extension of the Bank of America facility and expected to complete the process by the end of May 2020. Management said available cash, credit lines, and operating cash flows were generally sufficient for the following 12 months.
Outlook, risks, and unusual items
- COVID-19: The company continued operating as an essential business, built inventory of key components, and reported ongoing demand entering fiscal Q4. It cited supply-chain and shipping disruption, higher freight and labor costs, slower productivity in some locations, and possible customer payment delays. The ultimate financial impact was uncertain. Collectibility review delayed recognition of $3.4 million of revenue on orders shipped in Q3.
- Management expected COVID-related freight costs and employee inducements to pressure gross margins, with additional on-site employee costs potentially increasing R&D expense. No quantified financial guidance was provided.
- The company approved $25.3 million of one-time employee performance bonuses; after the share-price condition was achieved in April, it expected to pay the full amount in fiscal Q4. It also disclosed up to $8.5 million of additional executive and director bonuses contingent on specified conditions.
- The proposed SEC resolution, subject to final approval, includes a $17.5 million company penalty; that amount was accrued. The CEO’s proposed $2.122 million reimbursement to the company remained a contingent gain and was not recorded. A shareholder securities class action was re-amended after the court granted the company’s motion to dismiss with leave to amend; the company said it would defend the claims.
- Disclosure controls and procedures were deemed ineffective at March 31, 2020 because of material weaknesses in internal control over financial reporting. The company said remediation was ongoing.
- Supplier concentration and related-party reliance are notable: one supplier represented 27.9% of purchases for the nine-month period, and Ablecom manufactured about 95% of chassis in that period. The CEO and related individuals have relationships and interests involving Ablecom and Compuware.
Most important facts for investors to verify
- Confirm the intended period: this is fiscal Q3 2020, not Q3 2019.
- Track whether revenue growth and margin improvement persist, particularly amid weaker direct/OEM sales and lower nine-month total sales.
- Monitor inventory growth, operating cash flow, customer collections, and COVID-related supply, freight, and labor effects.
- Verify the outcome and payment timing of the SEC settlement, the class-action litigation, and contingent performance bonuses.
- Check renewal or replacement of the credit facilities maturing June 30, 2020, and progress in remediating material weaknesses in internal controls.