Super Micro Computer, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2021 (first quarter of fiscal 2022). Comparative period is the three months ended September 30, 2020. The company develops and sells high-performance server and storage systems, subsystems, accessories, and related services.
Financial results
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $1,032.7 million | $762.3 million | +35.5% |
| Gross profit / margin | $138.1 million / 13.4% | $129.9 million / 17.0% | Profit +6.3%; margin down 3.6 percentage points |
| Operating expenses | $109.0 million | $99.5 million | +9.5% |
| Operating income / margin | $29.1 million / 2.8% | $30.4 million / 4.0% | Income down about 4.3% |
| Net income / diluted EPS | $25.4 million / $0.48 | $26.6 million / $0.49 | Net income down 4.4% |
| Operating cash flow | $(134.6) million | $120.6 million | Down $255.2 million |
| Investing cash flow | $(11.9) million | $(11.9) million | No change |
| Financing cash flow | $184.3 million | $(19.3) million | Up $203.6 million |
- Revenue growth came from server and storage systems sales, up 37.6% to $849.9 million, and subsystems and accessories, up 26.6% to $182.9 million. Server-system compute-node volume increased 25.5% and average selling price increased 11.8%.
- Asia sales grew 107.7% to $263.1 million and Europe sales grew 60.3% to $179.7 million; U.S. sales rose 13.1% to $560.9 million.
- Gross margin declined as selling prices rose more slowly than product costs. Management cited higher materials and contract manufacturing costs, freight, labor, and inventory obsolescence charges.
- Research and development expense rose 18.8% to $65.1 million; sales and marketing rose 6.4% to $21.6 million. General and administrative expense fell 9.0% to $22.2 million, primarily reflecting lower professional fees related to prior reporting and remediation work.
Balance sheet and liquidity
- At September 30, 2021, cash and cash equivalents were $270.0 million (total cash, cash equivalents, and restricted cash: $271.2 million), versus $232.3 million in cash and equivalents at June 30, 2021.
- Total debt was $278.8 million, up from $98.2 million at June 30; it included $233.7 million of short-term debt and $45.1 million of long-term debt. Cash and cash equivalents were therefore slightly below total debt.
- Current assets were $2,037.0 million and current liabilities $1,101.5 million. Inventory rose to $1,184.6 million from $1,041.0 million.
- Operating cash use principally reflected a $147.1 million increase in inventory and working-capital investment to support demand and mitigate supply-chain risk. Borrowings provided $269.8 million, partly offset by $89.5 million in debt repayments.
- Management said available cash, borrowing capacity, and internally generated cash flows should cover operations and debt and interest payments for the 12 months following issuance. Bank of America and CTBC facilities had $89.8 million and $11.7 million, respectively, available at quarter-end, subject to facility terms and borrowing limits.
Material developments, outlook, and risks
- Management expects capital expenditures of approximately $11 million for the remainder of fiscal 2022, mainly for manufacturing capacity, product tooling, IT, and facilities. The filing provides no specific revenue or earnings guidance.
- COVID-19-related component shortages, longer lead times, freight costs, and labor costs remained pressures; management expected elevated freight and direct labor costs to continue during the pandemic. The company increased key-component inventory to protect fulfillment capability.
- Debt facilities were renewed or expanded during the quarter, including CTBC and E.SUN facilities and a new Mega Bank facility. A Chang Hwa Bank facility of up to approximately $36 million was entered into after quarter-end. The company reported compliance with applicable financial covenants at September 30.
- Supplier concentration is significant: one supplier represented 20.1% of purchases. Related parties Ablecom and Compuware supplied 92.5% of chassis used in products sold and are involved in other manufacturing; outstanding purchase orders to them totaled $124.5 million. Management cautioned that losing Ablecom could disrupt chassis supply.
- Noncancelable purchase commitments were $508.2 million, including $124.4 million for related parties. These obligations, elevated inventory, and dependence on suppliers are relevant liquidity and execution risks.
- The board reduced the CEO’s first-tranche cash performance bonus to approximately $2.0 million; the company recorded a $1.6 million benefit in the quarter and paid the $2.0 million after quarter-end.
- Shareholder securities litigation remained pending, with class-certification proceedings scheduled for January 2022; a related derivative action was stayed, and another derivative case was moving toward dismissal subject to court process. The company stated it could not predict litigation outcomes. The SEC matter was resolved in 2020; the company paid a $17.5 million penalty in the prior-year quarter.
- Management reported disclosure controls effective at a reasonable-assurance level as of September 30, 2021, and no material quarter-over-quarter change in internal control over financial reporting. The board had determined that adequate progress had been made in remediating prior material weaknesses.
Most important facts for investors to verify
- Whether gross-margin pressure from component costs, freight, and labor persists, and whether revenue growth translates into improved operating profit.
- Inventory levels, cash conversion, and the ability to fund working capital without materially increasing short-term borrowing.
- Availability and covenant terms of credit facilities, along with debt maturities and refinancing needs.
- Supplier concentration and related-party purchasing exposure, including the company’s ability to qualify alternate suppliers.
- Developments in the securities and derivative litigation, and the status of internal-control remediation.