filings.toolsSuper Micro Computer 10-Q 2022-09-30
SMCI · CIK 1375365 · Form 10-Q · Period ended September 30, 2022 · Filed November 4, 2022
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Cover and table of contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________________________
Form 10-Q
__________________________________________________________________________
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-33383
__________________________________________________________________________
Super Micro Computer, Inc.
(Exact name of registrant as specified in its charter)
__________________________________________________________________________
| Delaware | 77-0353939 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
980 Rock Avenue
San Jose, CA 95131
(Address of principal executive offices, including zip code)
(408) 503-8000
(Registrant’s telephone number, including area code)
__________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
| Common Stock, $0.001 par value per share | SMCI | NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | x | Accelerated filer | ☐ | |||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 31, 2022 there were 52,922,886 shares of the registrant’s common stock, $0.001 par value, outstanding, which is the only class of common stock of the registrant issued.
SUPER MICRO COMPUTER, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022
TABLE OF CONTENTS
Unless the context requires otherwise, the words “Super Micro,” “Supermicro,” “we,” “Company,” “us” and “our” in this document refer to Super Micro Computer, Inc. and where appropriate, our wholly owned subsidiaries. Supermicro, the Company logo and our other registered or common law trademarks, service marks, or trade names appearing in this Quarterly Report on Form 10-Q are the property of Super Micro Computer, Inc. or its affiliates. Other trademarks, service marks, or trade names appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
| September 30, | June 30, | ||||||||||
| 2022 | 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 238,268 | $ | 267,397 | |||||||
| Accounts receivable, net of allowance for credit losses of $510 and $1,753 at September 30, 2022 and June 30, 2022, respectively (including accounts receivable from related parties of $10,249 and $8,398 at September 30, 2022 and June 30, 2022, respectively) | 736,312 | 834,513 | |||||||||
| Inventories | 1,736,055 | 1,545,606 | |||||||||
| Prepaid expenses and other current assets (including receivables from related parties of $34,551 and $24,412 at September 30, 2022 and June 30, 2022, respectively) | 169,245 | 158,799 | |||||||||
| Total current assets | 2,879,880 | 2,806,315 | |||||||||
| Investment in equity investee | 4,352 | 5,329 | |||||||||
| Property, plant and equipment, net | 290,752 | 285,972 | |||||||||
| Deferred income taxes, net | 89,155 | 69,929 | |||||||||
| Other assets | 37,144 | 37,532 | |||||||||
| Total assets | $ | 3,301,283 | $ | 3,205,077 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable (including amounts due to related parties of $94,029 and $87,355 at September 30, 2022 and June 30, 2022, respectively) | $ | 785,025 | $ | 655,403 | |||||||
| Accrued liabilities (including amounts due to related parties of $28,261 and $18,676 at September 30, 2022 and June 30, 2022, respectively) | 213,521 | 212,419 | |||||||||
| Income taxes payable | 68,411 | 41,743 | |||||||||
| Short-term debt | 101,173 | 449,146 | |||||||||
| Deferred revenue | 185,225 | 111,313 | |||||||||
| Total current liabilities | 1,353,355 | 1,470,024 | |||||||||
| Deferred revenue, non-current | 134,625 | 122,548 | |||||||||
| Long-term debt | 148,551 | 147,618 | |||||||||
| Other long-term liabilities | 39,549 | 39,140 | |||||||||
| Total liabilities | 1,676,080 | 1,779,330 | |||||||||
| Commitments and contingencies (Note 11) | |||||||||||
| Stockholders’ equity: | |||||||||||
| Common stock and additional paid-in capital, $0.001 par value | |||||||||||
| Authorized shares: 100,000; Outstanding shares: 52,851 and 52,311 at September 30, 2022 and June 30, 2022, respectively | |||||||||||
| Issued shares: 52,851 and 52,311 at September 30, 2022 and June 30, 2022, respectively | 497,183 | 481,741 | |||||||||
| Accumulated other comprehensive income | 514 | 911 | |||||||||
| Retained earnings | 1,127,339 | 942,923 | |||||||||
| Total Super Micro Computer, Inc. stockholders’ equity | 1,625,036 | 1,425,575 | |||||||||
| Noncontrolling interest | 167 | 172 | |||||||||
| Total stockholders’ equity | 1,625,203 | 1,425,747 | |||||||||
| Total liabilities and stockholders’ equity | $ | 3,301,283 | $ | 3,205,077 |
See accompanying notes to condensed consolidated financial statements.
SMCI | Q1 2023 Form 10-Q | 1
SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Net sales (including related party sales of $25,055 and $30,922 in the three months ended September 30, 2022 and 2021, respectively) | $ | 1,852,130 | $ | 1,032,730 | |||||||||||||||||||
| Cost of sales (including related party purchases of $96,536 and $87,687 in the three months ended September 30, 2022 and 2021, respectively) | 1,504,595 | 894,591 | |||||||||||||||||||||
| Gross profit | 347,535 | 138,139 | |||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 74,243 | 65,143 | |||||||||||||||||||||
| Sales and marketing | 29,363 | 21,624 | |||||||||||||||||||||
| General and administrative | 23,806 | 22,244 | |||||||||||||||||||||
| Total operating expenses | 127,412 | 109,011 | |||||||||||||||||||||
| Income from operations | 220,123 | 29,128 | |||||||||||||||||||||
| Other income, net | 8,054 | 50 | |||||||||||||||||||||
| Interest expense | (3,938) | (804) | |||||||||||||||||||||
| Income before income tax provision | 224,239 | 28,374 | |||||||||||||||||||||
| Income tax provision | (38,934) | (3,325) | |||||||||||||||||||||
| Share of (loss) income from equity investee, net of taxes | (889) | 388 | |||||||||||||||||||||
| Net income | $ | 184,416 | $ | 25,437 | |||||||||||||||||||
| Net income per common share: | |||||||||||||||||||||||
| Basic | $ | 3.51 | $ | 0.50 | |||||||||||||||||||
| Diluted | $ | 3.35 | $ | 0.48 | |||||||||||||||||||
| Weighted-average shares used in the calculation of net income per common share: | |||||||||||||||||||||||
| Basic | 52,598 | 50,796 | |||||||||||||||||||||
| Diluted | 55,017 | 52,916 | |||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
SMCI | Q1 2023 Form 10-Q | 2
SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Net income | $ | 184,416 | $ | 25,437 | |||||||||||||||||||
| Other comprehensive loss, net of tax: | |||||||||||||||||||||||
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This section and other parts of this Quarterly Report contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology including “would,” “could,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of these terms or other comparable terminology. In evaluating these statements, you should specifically consider various factors, including the risks discussed under “Risk Factors” in Part II, Item 1A of this filing. These factors may cause our actual results to differ materially from those anticipated or implied in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We cannot guarantee future results, levels of activity, performance or achievements.
The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with our condensed consolidated financial statements and related footnotes included elsewhere in this Quarterly Report and included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 (the “2022 10-K”), which includes our condensed consolidated financial statements for the fiscal years ended June 30, 2022 and 2021.
Overview
We are a Silicon Valley-based provider of accelerated compute platforms that are application-optimized high performance and high-efficiency server and storage systems for a variety of markets, including enterprise data centers, cloud computing, artificial intelligence, 5G and edge computing. Our Total IT Solutions include complete servers, storage systems, modular blade servers, blades, workstations, full rack scale solutions, networking devices, server sub-systems, server management and security software. We also provide global support and services to help our customers install, upgrade and maintain their computing infrastructure.
We commenced operations in 1993 and have been profitable every year since inception. Our net income for the three months ended September 30, 2022 increased to $184.4 million from $25.4 million for the corresponding period in the prior year. In order to increase our sales and profits, we believe that we must continue to develop flexible and application optimized server and storage solutions and be among the first to market with new features and products. We must also continue to expand our software and customer service and support offerings, particularly as we increasingly focus on larger enterprise customers. Additionally, we must focus on development of our sales partners and distribution channels to further expand our market share. We measure our financial success based on various indicators, including growth in net sales, gross profit margin and operating margin. Among the key non-financial indicators of our success is our ability to rapidly introduce new products and deliver the latest application-optimized server and storage solutions. In this regard, we work closely with microprocessor and other key component vendors to take advantage of new technologies as they are introduced. Historically, our ability to introduce new products rapidly has allowed us to benefit from technology transitions such as the introduction of new microprocessors and storage technologies, and as a result, we monitor the introduction cycles of NVIDIA Corporation, Intel Corporation, Advanced Micro Devices, Inc., Samsung Electronics Company Limited, Micron Technology, Inc. and others closely and carefully. This also impacts our research and development expenditures as we continue to invest more in our current and future product development efforts.
SMCI | Q1 2023 Form 10-Q | 31
Financial Highlights
The following is a summary of our financial highlights of the first quarter of fiscal year 2023:
-
Net sales increased by 79.3% in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.
-
Gross margin increased to 18.8% in the three months ended September 30, 2022 from 13.4% in the three months ended September 30, 2021.
-
Operating expenses increased by 16.9% as compared to the three months ended September 30, 2021 and were equal to 6.9% and 10.6% of net sales in the three months ended September 30, 2022 and 2021, respectively.
-
Effective tax rate increased to 17.4% in the three months ended September 30, 2022 from 11.7% in the three months ended September 30, 2021.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses. We evaluate our estimates and assumptions on an ongoing basis, and base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for the judgments we make about the carrying value of assets and liabilities that are not readily apparent from other sources. Because these estimates can vary depending on the situation, actual results may differ from these estimates. Making estimates and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on our results of operations, financial position and statement of cash flows.
There have been no material changes to our critical accounting policies and estimates as compared to those disclosed in our 2022 10-K. For a description of our critical accounting policies and estimates, see Part I, Item 1, Note 1, "Summary of Significant Accounting Policies" in our notes to condensed consolidated financial statements in this Quarterly Report.
SMCI | Q1 2023 Form 10-Q | 32
Results of Operations
The following table presents certain items of our condensed consolidated statements of operations expressed as a percentage of revenue.
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Net sales | 100.0 | % | 100.0 | % | |||||||||||||||||||
| Cost of sales | 81.2 | % | 86.6 | % | |||||||||||||||||||
| Gross profit | 18.8 | % | 13.4 | % | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 4.0 | % | 6.3 | % | |||||||||||||||||||
| Sales and marketing | 1.6 | % | 2.1 | % | |||||||||||||||||||
| General and administrative | 1.3 | % | 2.2 | % | |||||||||||||||||||
| Total operating expenses | 6.9 | % | 10.6 | % | |||||||||||||||||||
| Income from operations | 11.9 | % | 2.8 | % | |||||||||||||||||||
| Other income, net | 0.4 | % | — | % | |||||||||||||||||||
| Interest expense | (0.2) | % | (0.1) | % | |||||||||||||||||||
| Income before income tax provision | 12.1 | % | 2.7 | % | |||||||||||||||||||
| Income tax provision | (2.1) | % | (0.3) | % | |||||||||||||||||||
| Share of income (loss) from equity investee, net of taxes | — | % | — | % | |||||||||||||||||||
| Net income | 10.0 | % | 2.5 | % |
Net Sales
Net sales consist of sales of our server and storage solutions, including systems and related services and subsystems and accessories. The main factors that impact net sales of our server and storage systems are the number of compute nodes sold and the average selling prices per node. The main factors that impact net sales of our subsystems and accessories are units shipped and the average selling price per unit. The prices for our server and storage systems range widely depending upon the configuration, including the number of compute nodes in a server system as well as the level of integration of key components such as SSDs and memory. The prices for our subsystems and accessories can also vary widely based on whether a customer is purchasing power supplies, server boards, chassis or other accessories.
A compute node is an independent hardware configuration within a server system capable of having its own CPU, memory and storage and that is capable of running its own instance of a non-virtualized operating system. The number of compute nodes sold, which can vary by product, is an important metric we use to track our business. Measuring volume using compute nodes enables more consistent measurement across different server form factors and across different vendors. As with most electronics-based product life cycles, average selling prices typically are highest at the time of introduction of new products that utilize the latest technology and tend to decrease over time as such products mature in the market and are replaced by next generation products. Additionally, in order to remain competitive throughout all industry cycles, we actively change our selling price per unit in response to changes in costs for key components such as CPU/GPU, memory and storage.
SMCI | Q1 2023 Form 10-Q | 33
The following table presents net sales by product type for the three months ended September 30, 2022 and 2021 (dollars in millions):
| Three Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||||||
| Server and storage systems | $ | 1,713.1 | $ | 849.9 | $ | 863.2 | 101.6 | % | |||||||||||||||||||||||||||||||||||||||
| Percentage of total net sales | 92.5 | % | 82.3 | % | |||||||||||||||||||||||||||||||||||||||||||
| Subsystems and accessories | $ | 139.0 | $ | 182.9 | $ | (43.9) | (24.0) | % | |||||||||||||||||||||||||||||||||||||||
| Percentage of total net sales | 7.5 | % | 17.7 | % | |||||||||||||||||||||||||||||||||||||||||||
| Total net sales | $ | 1,852.1 | $ | 1,032.8 | $ | 819.3 | 79.3 | % |
Server and storage systems constitute an assembly and integration of subsystems and accessories and related services. Subsystems and accessories are comprised of server-boards, chassis and accessories.
Comparison of Three Months Ended September 30, 2022 and 2021
The period-over-period increase in net sales of our server and storage systems was due to a 36.2% increase in the number of units of compute nodes sold and a 50.4% increase in the average selling price.
The period-over-period decrease in net sales for our subsystems and accessories of 24.0% is primarily due to recent supply chain constraints and higher sales of complete systems.
The following table presents net sales by geographic region for the three months ended September 30, 2022 and 2021 (dollars in millions):
| Three Months Ended September 30, | Change | Change | |||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 1,295.5 | $ | 560.9 | $ | 734.6 | 131.0 | % | |||||||||||||||||||||||||||||||||||||||
| Percentage of total net sales | 69.9 | % | 54.3 | % | |||||||||||||||||||||||||||||||||||||||||||
| Asia | $ | 270.0 | $ | 263.1 | $ | 6.9 | 2.6 | % | |||||||||||||||||||||||||||||||||||||||
| Percentage of total net sales | 14.6 | % | 25.5 | % | |||||||||||||||||||||||||||||||||||||||||||
| Europe | $ | 235.1 | $ | 179.7 | $ | 55.4 | 30.8 | % | |||||||||||||||||||||||||||||||||||||||
| Percentage of total net sales | 12.7 | % | 17.4 | % | |||||||||||||||||||||||||||||||||||||||||||
| Others | $ | 51.5 | $ | 29.0 | $ | 22.5 | 77.6 | % | |||||||||||||||||||||||||||||||||||||||
| Percentage of total net sales | 2.8 | % | 2.8 | % | |||||||||||||||||||||||||||||||||||||||||||
| Total net sales | $ | 1,852.1 | $ | 1,032.7 |
Comparison of Three Months Ended September 30, 2022 and 2021
The period-over-period increase in overall net sales is the result of increased selling prices, led by higher GPU based products and quantities of product shipments. The increase in the United States is primarily due to higher sales driven by high demand of GPU based server and storage systems. The increase of net sales in Europe was primarily due to increases in net sales in the Netherlands, UK and Germany.
SMCI | Q1 2023 Form 10-Q | 34
Cost of Sales and Gross Margin
Cost of sales primarily consists of the costs to manufacture our products, including the costs of materials, contract manufacturing, shipping, personnel expenses, including salaries, benefits, stock-based compensation and incentive bonuses, equipment and facility expenses, warranty costs and inventory excess and obsolescence provisions. The primary factors that impact our cost of sales are the mix of products sold and cost of materials, which include purchased parts and material costs, shipping costs, salary and benefits and overhead costs related to production. Cost of sales as a percentage of net sales may increase or decrease over time if the changes in average selling prices are not matched by corresponding changes in our costs. Our cost of sales as a percentage of net sales is also impacted by the extent to which we are able to efficiently utilize our expanding manufacturing capacity. Because we generally do not have long-term fixed supply agreements, our cost of sales is subject to change based on the cost of materials and market conditions.
We use several suppliers and contract manufacturers to design and manufacture subsystems in accordance with our specifications, with most final assembly and testing performed at our manufacturing facilities in the same region where our products are sold. We work with Ablecom, one of our key contract manufacturers and also a related party to optimize modular designs for our chassis and certain of other components. We also outsource to Compuware, also a related party, a portion of our design activities and a significant part of the manufacturing of components, particularly power supplies.
Cost of sales and gross margin for the three months ended September 30, 2022 and 2021 are as follows (dollars in millions):
| Three Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | $ | 1,504.6 | $ | 894.6 | $ | 610.0 | 68.2 | % | |||||||||||||||||||||||||||||||||||||||
| Gross profit | $ | 347.5 | $ | 138.1 | $ | 209.4 | 151.6 | % | |||||||||||||||||||||||||||||||||||||||
| Gross margin | 18.8 | % | 13.4 | % | 5.4 | % |
Comparison of Three Months Ended September 30, 2022 and 2021
The period-over-period increase in cost of sales was primarily attributed to an increase of $583.8 million in costs of materials and contract manufacturing expenses primarily related to the increase in net sales volume, a $19.4 million increase in overhead costs, a $6.2 million increase in excess and obsolete inventory charges and a $0.6 million increase in freight costs.
The period-over-period increase in the gross margin percentage was primarily due to sales price increases and recent price drop in key components. Throughout the COVID-19 pandemic, we experienced an increase in costs of sales, logistics costs as well as direct labor costs to retain our employees. For the quarter ended September 30, 2022, the cost of freight and some components started to decrease.
Operating Expenses
Research and development expenses consist of personnel expenses, including salaries, benefits, stock-based compensation and incentive bonuses, and related expenses for our research and development personnel, as well as product development costs such as materials and supplies, consulting services, third-party testing services and equipment and facility expenses related to our research and development activities. All research and development costs are expensed as incurred. We occasionally receive non-recurring engineering funding from certain suppliers and customers for joint development. Under these arrangements, we are reimbursed for certain research and development costs that we incur as part of the joint development efforts with our suppliers and customers. These amounts offset a portion of the related research and development expenses and have the effect of reducing our reported research and development expenses.
Sales and marketing expenses consist primarily of personnel expenses, including salaries, benefits, stock-based compensation and incentive bonuses, and related expenses for our sales and marketing personnel, cost for tradeshows, independent sales representative fees and marketing programs. From time to time, we receive marketing development funding from certain suppliers. Under these arrangements, we are reimbursed for certain marketing costs that we incur as part of the joint promotion of our products and those of our suppliers. These amounts offset a portion of the related expenses and have the effect of reducing our reported sales and marketing expenses. The timing, magnitude and estimated usage of these programs can result in significant variations in reported sales and marketing expenses from period to period. Spending on cooperative marketing, reimbursed by our suppliers, typically increases in connection with new product releases by our suppliers.
SMCI | Q1 2023 Form 10-Q | 35
General and administrative expenses consist primarily of general corporate costs, including personnel expenses such as salaries, benefits, stock-based compensation and incentive bonuses, and related expenses for our general and administrative personnel, financial reporting, information technology, corporate governance and compliance, outside legal, audit, tax fees, insurance and bad debt reserves on accounts receivable.
Operating expenses for the three months ended September 30, 2022 and 2021 are as follows (dollars in millions):
| Three Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||||||
| Research and development | $ | 74.2 | $ | 65.1 | $ | 9.1 | 14.0 | % | |||||||||||||||||||||||||||||||||||||||
| Percentage of total net sales | 4.0 | % | 6.3 | % | |||||||||||||||||||||||||||||||||||||||||||
| Sales and marketing | $ | 29.4 | $ | 21.6 | $ | 7.8 | 36.1 | % | |||||||||||||||||||||||||||||||||||||||
| Percentage of total net sales | 1.6 | % | 2.1 | % | |||||||||||||||||||||||||||||||||||||||||||
| General and administrative | $ | 23.8 | $ | 22.2 | $ | 1.6 | 7.2 | % | |||||||||||||||||||||||||||||||||||||||
| Percentage of total net sales | 1.3 | % | 2.2 | % | |||||||||||||||||||||||||||||||||||||||||||
| Total operating expenses | $ | 127.4 | $ | 109.0 | $ | 18.4 | 16.9 | % | |||||||||||||||||||||||||||||||||||||||
| Percentage of total net sales | 6.9 | % | 10.6 | % |
Comparison of Three Months Ended September 30, 2022 and 2021
Research and development expenses. The period-over-period increase in research and development expenses was primarily due to a $7.6 million increase in personnel expenses and a higher headcount, a $1.4 million increase in product development costs and $0.1 million lower research and development credits from certain suppliers and customers towards our development efforts.
Sales and marketing expenses. The period-over-period increase in sales and marketing expenses was primarily due to a $5.6 million increase in personnel expenses and a higher headcount and a $2.2 million increase in advertising and other expenses.
General and administrative expenses. The period-over-period increase in general and administrative expenses was primarily due to a $1.6 million increase in personnel expenses and a higher headcount.
Interest Expense and Other Income, Net
Other income, net consists primarily of interest earned on our investment and cash balances and foreign exchange gains and losses.
Interest expense represents interest expense on our term loans and lines of credit.
Interest expense and other income, net for the three months ended September 30, 2022 and 2021 are as follows (dollars in millions):
| Three Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||||||
| Other income, net | $ | 8.1 | $ | 0.1 | $ | 8.0 | 8,000.0 | % | |||||||||||||||||||||||||||||||||||||||
| Interest expense | (3.9) | (0.8) | (3.1) | 387.5 | % | ||||||||||||||||||||||||||||||||||||||||||
| Interest expense and other income, net | $ | 4.2 | $ | (0.7) | $ | 4.9 | (700.0) | % |
SMCI | Q1 2023 Form 10-Q | 36
Comparison of Three Months Ended September 30, 2022 and 2021
The change of $4.9 million in interest expense and other income, net was primarily attributable to a $8.0 million increase in foreign exchange gain due to favorable currency fluctuations offset by a $3.1 million increase in interest expense due to increase in average loan balances and interest rates.
Income Tax Provision
Our income tax provision is based on our taxable income generated in the jurisdictions in which we operate, which primarily include the United States, Taiwan, and the Netherlands. Our effective tax rate differs from the statutory rate primarily due to research and development tax credits, certain non-deductible expenses, tax benefits from foreign derived intangible income and stock based compensation.
Provision for income taxes and effective tax rates for the three months ended September 30, 2022 and 2021 are as follows (dollars in millions):
| Three Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||||||
| Income tax provision | $ | 38.9 | $ | 3.3 | $ | 35.6 | 1,078.8 | % | |||||||||||||||||||||||||||||||||||||||
| Percentage of total net sales | 2.1 | % | 0.3 | % | |||||||||||||||||||||||||||||||||||||||||||
| Effective tax rate | 17.4 | % | 11.7 | % |
Comparison of Three Months Ended September 30, 2022 and 2021
Our quarterly effective income tax rate is based on the estimated annual income tax rate forecast and discrete tax items recognized in the period. The income tax provision and effective tax rate for the three months ended September 30, 2022 is higher than that for the three months ended September 30, 2021, primarily due to a significant increase in annual forecasted taxable income while the deductible expenses and the quarter discrete items kept at a much lower rate of growth.
Share of (Loss) Income from Equity Investee, Net of Taxes
Share of (loss) income from equity investee, net of taxes represents our share of income from the Corporate Venture in which we have 30% ownership.
Share of (loss) income from equity investee, net of taxes for the three months ended September 30, 2022 and 2021 are as follows (dollars in millions):
| Three Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||||||||||||||||||||||||||
| Share of (loss) income from equity investee, net of taxes | $ | (0.9) | $ | 0.4 | $ | (1.3) | (325.0)% | ||||||||||||||||||||||||||||||||||||||||
| Percentage of total net sales | — | % | — | % |
Comparison of Three Months Ended September 30, 2022 and 2021
The period-over-period decrease of $1.3 million in share of (loss) income from equity investee, net of taxes was primarily due to less net income recognized by the Corporate Venture.
SMCI | Q1 2023 Form 10-Q | 37
Liquidity and Capital Resources
We have financed our growth primarily with funds generated from operations, in addition to utilizing borrowing facilities. The credit facilities were related to an increase in the need for working capital due to increasing sales, longer supply chain manufacturing and delivery times as well as the financing of property, plant and equipment acquisitions. We also received funds from the exercise of employee stock options. Our cash and cash equivalents were $238.3 million and $267.4 million as of September 30, 2022 and June 30, 2022, respectively. Our cash in foreign locations was $128.2 million and $169.5 million as of September 30, 2022 and June 30, 2022, respectively.
Amounts held outside of the U.S. are generally utilized to support non-U.S. liquidity needs. Repatriations generally will not be taxable from a U.S. federal tax perspective but may be subject to state income or foreign withholding tax. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is to keep cash balances outside of the U.S. and to meet liquidity needs through operating cash flows, external borrowings, or both. We do not expect restrictions or potential taxes incurred on repatriation of amounts held outside of the U.S. to have a material effect on our overall liquidity, financial condition or results of operations.
We believe that our current cash, cash equivalents, borrowing capacity available from our credit facilities and internally generated cash flows will be sufficient to support our operating businesses and maturing debt and interest payments for the 12 months following the issuance of these consolidated financial statements. In August 2022, we entered into a new general credit agreement with E.SUN Bank. This New E.SUN Bank Credit Facility permits borrowings of up to (i) NTD 1.8 billion ($61.0 million U.S. dollar equivalent) and (ii) US$30.0 million in loans that will support the growth of our Taiwan business.
On August 3, 2022, after the expiration of a prior share repurchase program on July 31, 2022, a duly authorized subcommittee of our Board approved a new share repurchase program to repurchase shares of our common stock for up to $200 million at prevailing prices in the open market. The share repurchase program is effective until January 31, 2024 or until the maximum amount of common stock is repurchased, whichever occurs first.
Our key cash flow metrics were as follows (dollars in millions):
| Three Months Ended September 30, | Change | |||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| Net cash provided by (used in) operating activities | $ | 313.6 | $ | (134.6) | $ | 448.2 | ||||||||||||||||||||
| Net cash (used in) investing activities | $ | (10.7) | $ | (11.9) | $ | 1.2 | ||||||||||||||||||||
| Net cash (used in) provided by financing activities | $ | (331.2) | $ | 184.3 | $ | (515.5) | ||||||||||||||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (29.8) | $ | 37.8 | $ | (67.6) |
Operating Activities
Net cash provided by operating activities increased by $448.2 million for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. The increase was primarily due to an increase of net income of $160.2 million offset by $9.2 million of unrealized gain and $6.8 million of various non-cash items, faster collection of accounts receivable as well as the prepayment by customers for products.
Investing Activities
Net cash used in investing activities increased by $1.2 million for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 due to an investment made in a privately held company in the three months ended September 30, 2021.
Financing Activities
Net cash used by financing activities for the three months ended September 30, 2022 was $331.2 million while net cash provided by financing activities for the three months ended September 30, 2021 was $184.3 million. The change in cash flows from financing activities was primarily due to a decrease of $190.7 million in proceeds from borrowings and a decrease of $325.3 million in repayment of debt.
SMCI | Q1 2023 Form 10-Q | 38
Other Factors Affecting Liquidity and Capital Resources
Refer to Part I, Item 1, Note 6, “Short-term and Long-term Debt,” in our notes to condensed consolidated financial statements in this Quarterly Report on Form 10-Q for further information on our outstanding debt.
Capital Expenditure Requirements
We anticipate our capital expenditures for the remainder of fiscal year 2023 will be approximately $35 million, relating primarily to costs associated with our manufacturing capabilities, including tooling for new products, new information technology investments, and facilities upgrades. We will continue to evaluate new business opportunities and new markets. As a result, our future growth within the existing business or new opportunities and markets may dictate the need for additional facilities and capital expenditures to support that growth. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment.
We intend to continue to focus our capital expenditures in fiscal year 2023 to support the growth of our operations. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced software and services offerings, the investments in our office facilities and our systems infrastructure, the continuing market acceptance of our offerings and our planned investments, particularly in our product development efforts, applications or technologies.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our condensed consolidated financial statements, see Part I, Item 1, Note 1, “Summary of Significant Accounting Policies,” to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
SMCI | Q1 2023 Form 10-Q | 39
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk
The primary objectives of our investment activities are to preserve principal, provide liquidity and maximize income without significantly increasing the risk. Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the fair value of the investment to fluctuate. To minimize this risk, we maintain our portfolio of cash equivalents and short-term investments in money market funds and certificates of deposit, all of which are held for purposes other than trading. Our investment in an auction rate security has been classified as non-current due to the lack of a liquid market for these securities. Since our results of operations are not dependent on investments, the risk associated with fluctuating interest rates is limited to our investment portfolio, and we believe that a 10% change in interest rates would not have a significant impact on our results of operations. As of September 30, 2022, our investments were in money market funds, certificates of deposits and auction rate securities.
We are exposed to changes in interest rates as a result of our borrowings under our term loans and revolving lines of credit. The interest rates for the term loans and the revolving lines of credit ranged from 0.95% to 4.03% at September 30, 2022 and June 30, 2022. Based on the outstanding principal indebtedness of $249.7 million under our credit facilities as of September 30, 2022, we believe that a 10% change in interest rates would not have a significant impact on our results of operations.
Foreign Currency Risk
To date, our international customer and supplier agreements have been denominated primarily in U.S. dollars and accordingly, we have limited exposure to foreign currency exchange rate fluctuations from customer agreements, and do not currently engage in foreign currency hedging transactions. The functional currency of our subsidiaries in the Netherlands and Taiwan is the U.S. dollar. However, certain loans and transactions in these entities are denominated in a currency other than the U.S. dollar, and thus we are subject to foreign currency exchange rate fluctuations associated with re-measurement to U.S. dollars. Such fluctuations have not been significant historically. Realized and unrealized foreign exchange gain for the three months ended September 30, 2022 and 2021 was $7.8 million and $0.1 million, respectively.
SMCI | Q1 2023 Form 10-Q | 40
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision, and with the participation, of our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), we evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2022. Based on this evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2022.
Changes in Internal Control over Financial Reporting
Under applicable SEC rules (Exchange Act Rules 13a-15(d) and 15d-15(d)), management is required to evaluate, with the participation of our CEO and CFO, any changes in internal control over financial reporting that occurred during each fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. There were no changes in our internal control over financial reporting during the quarter ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting can only provide reasonable, not absolute, assurances that its objectives will be met. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but we cannot assure that such improvements will be sufficient to provide us with effective internal control over financial reporting.
SMCI | Q1 2023 Form 10-Q | 41
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this item is incorporated herein by reference to the information set forth under the caption “Litigation and Claims” in Part I, Item 1, Note 11 “Commitments and Contingencies” of our notes to condensed consolidated financial statements included in this quarterly report.
Due to the inherent uncertainties of such legal proceedings, we cannot predict the outcome of the proceedings at this time, and we can give no assurance that they will not have a material adverse effect on our financial position or results of operations.
Item 1A. Risk Factors
Important risk factors that could affect our operations and financial performance, or that could cause results or events to differ from current expectations, are described in Part I, Item 1A “Risk Factors” of our 2022 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
During the three months ended September 30, 2022, we did not repurchase shares of our common stock.
On August 3, 2022, after the expiration of a prior share repurchase program on July 31, 2022, a duly authorized subcommittee of our Board approved a new share repurchase program to repurchase shares of our common stock for up to $200 million at prevailing prices in the open market. The share repurchase program is effective until January 31, 2024 or until the maximum amount of common stock is repurchased, whichever occurs first.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
SMCI | Q1 2023 Form 10-Q | 42
Item 6. Exhibits
(a) Exhibits.
| Exhibit Number | Description | |||||||||||||
| 10.1 | General Credit Agreement dated as of August 9, 2022, between Super Micro Computer, Inc. Taiwan and E.SUN Bank (Incorporated by reference to Exhibit 10.1 from the Company’s Current Report on 8-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on August 12, 2022) | |||||||||||||
| 10.2 | Notification and Confirmation of Credit Conditions, dated as of August 9, 2022 between Super Micro Computer, Inc. Taiwan and E.SUN Bank (Incorporated by reference to Exhibit 10.2 from the Company’s Current Report on 8-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on August 12, 2022) | |||||||||||||
| 10.3 | First Amendment to Loan Agreement dated as of August 17, 2022 by and between Cathay Bank and Super Micro Computer, Inc. (Incorporated by reference to Exhibit 10.58 from the Company’s Annual Report on 10-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on August 29, 2022) | |||||||||||||
| 10.4+ | Second Amendment to Loan Agreement dated as of October 13, 2022 by and between Cathay Bank and Super Micro Computer, Inc. | |||||||||||||
| 10.5+ | Agreement for Individually Negotiated Terms and Conditions dated as of October 3, 2022 between Super Micro Computer, Inc. Taiwan and CTBC Bank Co., Ltd. (supersedes the Agreement for Individually Negotiated Terms and Conditions dated as of July 20, 2021 between Super Micro Computer, Inc. Taiwan and CTBC Bank Co., Ltd. previously filed as Exhibit 10.6 to the Company’s Quarterly Report on 10-Q (Commission File No. 001-33383) filed with the Securities and Exchange Commission on February 4, 2022) | |||||||||||||
| 31.1 | Certification of Charles Liang, President and Chief Executive Officer of the Registrant pursuant to Section 302, as adopted pursuant to the Sarbanes-Oxley Act of 2002 | |||||||||||||
| 31.2 | Certification of David Weigand, Chief Financial Officer of the Registrant pursuant to Section 302, as adopted pursuant to the Sarbanes-Oxley Act of 2002 | |||||||||||||
| 32.1 | Certification of Charles Liang, President and Chief Executive Officer of the Registrant pursuant to Section 906, as adopted pursuant to the Sarbanes-Oxley Act of 2002 | |||||||||||||
| 32.2 | Certification of David Weigand, Chief Financial Officer of the Registrant pursuant to Section 906, as adopted pursuant to the Sarbanes-Oxley Act of 2002 | |||||||||||||
| 101.INS+ | XBRL Instance Document | |||||||||||||
| 101.SCH+ | XBRL Taxonomy Extension Schema Document | |||||||||||||
| 101.CAL+ | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||
| 101.DEF+ | XBRL Taxonomy Extension Definition Linkbase Document | |||||||||||||
| 101.LAB+ | XBRL Taxonomy Extension Label Linkbase Document | |||||||||||||
| 101.PRE+ | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||||
| 104+ | The cover page from this Quarterly Report on Form 10-Q, formatted in Inline XBRL |
+ Filed herewith
SMCI | Q1 2023 Form 10-Q | 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SUPER MICRO COMPUTER, INC.
| Date: | November 4, 2022 | /s/ CHARLES LIANG | |||||||||
| Charles Liang President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer) |
| Date: | November 4, 2022 | /s/ DAVID WEIGAND | |||||||||
| David Weigand Senior Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) |
SMCI | Q1 2023 Form 10-Q | 44