Super Micro Computer, Inc. — Form 10-K Summary
Period clarification: The request metadata says “2017 Q4,” but the supplied filing is the annual report for the fiscal year ended June 30, 2019. It also includes quarterly information, including the quarter ended June 30, 2019. The report was filed December 19, 2019.
Business context and reporting period
Supermicro designs and sells application-optimized server and storage systems, subsystems, accessories, software, and services for cloud, data center, enterprise, AI, HPC, edge, and IoT markets. It reported one operating segment. The company shifted its sales mix toward complete server and storage systems, which represented 81.7% of fiscal 2019 sales, versus 79.3% in fiscal 2018.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $3.500 billion | $3.360 billion |
| Gross profit / margin | $495.5 million / 14.2% | $430.0 million / 12.8% |
| Operating income / margin | $97.2 million / 2.8% | $94.7 million / 2.8% |
| Net income | $71.9 million | $46.2 million |
| Diluted EPS | $1.39 | $0.89 |
| Operating cash flow | $262.6 million | $84.3 million |
| Cash and cash equivalents at year-end | $248.2 million | $115.4 million |
| Working capital at year-end | $815.8 million | $719.3 million |
| Short-term debt at year-end | $23.6 million | $116.2 million |
Fiscal 2019 investing cash flow was an outflow of $24.8 million, primarily for manufacturing capacity; financing cash flow was an outflow of $95.8 million, primarily reflecting debt repayments. Total assets were $1.683 billion and stockholders’ equity was $941.2 million at June 30, 2019. The company reported no material off-balance-sheet arrangements.
Material changes versus prior comparable periods
- Sales grew 4.2% in FY2019, slowing from 35.2% growth in FY2018. Management attributed the slower growth to a market slowdown in the second half of FY2019 and said adverse publicity and the Nasdaq trading suspension may also have contributed.
- Server and storage systems sales rose 7.3% to $2.859 billion; subsystems and accessories sales fell 7.9% to $641.7 million. For systems, average selling price per compute node rose about 15%, while compute-node shipments fell about 6.5%.
- Gross margin improved 1.4 percentage points, attributed primarily to lower memory and SSD costs in the second half, favorable geographic mix, and higher-margin service revenue. Operating expenses rose 18.8%, including a substantial increase in general and administrative costs.
- Net income increased despite only modest operating-income growth, largely because the effective tax rate fell to 16.6% from 43.6%. FY2018’s rate included one-time tax-reform charges.
- Operating cash flow increased sharply, supported by improved working-capital management and lower component costs. Inventory declined to $670.2 million from $853.3 million.
- In the June 2019 quarter, sales were $854.2 million, compared with $981.7 million in the June 2018 quarter; net income was $23.7 million versus $26.3 million.
Outlook, commentary, risks, contingencies, and unusual items
- Outlook: The filing does not provide a clear numerical forecast for future revenue or earnings. Management’s stated priorities include continued product development, expanding software and service offerings, and increasing manufacturing and logistics capacity. It cautions that quarterly results can fluctuate and that it has often missed previously issued guidance.
- Reporting and controls: The company said its disclosure controls and internal control over financial reporting were ineffective as of June 30, 2019. Management and the auditor identified material weaknesses across all five COSO components, including revenue-recognition controls, IT access and change management, and segregation of duties. The auditor issued an adverse opinion on internal control, while issuing an unqualified opinion on the financial statements.
- SEC filing and listing status: The filing explains that prior reporting delays and restatements contributed to Nasdaq suspension in August 2018 and delisting in March 2019; shares traded on the OTC market. At the filing date, the September 2019 Form 10-Q remained delinquent. Management intended to file it by January 2020 and seek relisting after becoming current, but gave no assurance it could do so.
- Remediation costs and litigation: Professional fees related to investigating, assessing, and beginning remediation were approximately $67 million in FY2019 and $42 million in FY2018, with further costs expected. Securities class-action litigation alleging misstatements related to revenue recognition remained pending; the company said it would defend the claims. SEC subpoenas and investigations were also disclosed.
- Supply, tariffs, and related parties: Trade tariffs on certain China-origin components increased costs; the company began moving a substantial portion of subcontracted operations from China to Taiwan. One supplier accounted for 21.8% of raw-material purchases in FY2019. Related parties Ablecom and Compuware supplied significant manufacturing and design services; purchases from them totaled approximately $284.9 million in FY2019.
- Other notable exposures: The filing identifies risks from component availability and pricing, inventory obsolescence, customer demand and concentration, competition and margin pressure, cyber incidents, and international operations. It records a $28.5 million provision for excess and obsolete inventory in FY2019, plus a $2.7 million impairment of non-marketable equity investments. A $299.8 million purchase-commitment balance was disclosed, including $101.6 million relating to related parties.
- Liquidity and credit facilities: The Bank of America facility, with a stated capacity of up to $250 million, was extended to June 30, 2020. Conversion to a five-year facility of up to $400 million was conditional on meeting requirements including current SEC filings. The company reported $245.7 million of available capacity at June 30, 2019, subject to borrowing-base limits and other terms. CTBC facilities included a Taiwan term loan; the company reported $23.6 million total debt at year-end.
- Accounting change: ASC 606 was adopted July 1, 2018 using the modified retrospective method; prior periods were not recast. Adoption accelerated recognition for certain distributor and software sales, and the filing reports a $6.8 million opening retained-earnings transition adjustment.
Important facts for investors to verify
- Whether the company filed the delinquent September 2019 Form 10-Q on schedule, restored timely SEC reporting, and obtained national-exchange relisting.
- Progress in remediating internal-control weaknesses and whether future filings remain reliable and timely.
- Whether sales and shipments recover after the FY2019 slowdown, and whether gross-margin gains persist as component costs, pricing, tariffs, and product mix change.
- Inventory quality and reserve adequacy, particularly given the FY2019 obsolescence provision and large purchase commitments.
- Outcomes and potential costs of securities litigation and regulatory matters, and future expenses related to reporting and control remediation.
- Continued access to credit facilities, compliance with facility conditions, debt maturities, and the company’s cash and working-capital position.
- Related-party purchasing terms, dependence on Ablecom and Compuware, and the concentration of supplier exposure.