filings.toolsSuper Micro Computer 10-Q 2024-03-31
SMCI · CIK 1375365 · Form 10-Q · Period ended March 31, 2024 · Filed May 6, 2024
8 sections, 219K characters. Original on sec.gov · Markdown · JSON
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 March 31, 2024
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 April 30, 2024 there were 58,556,527 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 MARCH 31, 2024
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.
The information contained on our website, or available by hyperlink from our website, is not incorporated into this Quarterly Report on Form 10-Q or other documents we file with, or furnish to, the SEC. We intend to use our website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Such disclosures will be included in the "Investor Relations" section of our website. Accordingly, investors should monitor that section of our website, in addition to following our press releases, investor presentations, SEC filings and public conference calls and webcasts.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value per share amounts)
(unaudited)
| March 31, | June 30, | ||||||||||
| 2024 | 2023 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 2,115,476 | $ | 440,459 | |||||||
| Accounts receivable, net of allowance for credit losses of $75 and $82 at March 31, 2024 and June 30, 2023, respectively (including accounts receivable from related parties of $1,110 and $5,473 at March 31, 2024 and June 30, 2023, respectively) | 1,650,153 | 1,148,259 | |||||||||
| Inventories | 4,124,587 | 1,445,564 | |||||||||
| Prepaid expenses and other current assets (including receivables from related parties of $30,249 and $27,732 at March 31, 2024 and June 30, 2023, respectively) | 173,716 | 145,144 | |||||||||
| Total current assets | 8,063,932 | 3,179,426 | |||||||||
| Property, plant and equipment, net | 385,566 | 290,240 | |||||||||
| Deferred income taxes, net | 330,248 | 162,654 | |||||||||
| Other assets | 83,035 | 42,409 | |||||||||
| Total assets | $ | 8,862,781 | $ | 3,674,729 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable (including amounts due to related parties of $102,582 and $89,134 at March 31, 2024 and June 30, 2023, respectively) | $ | 1,092,445 | $ | 776,831 | |||||||
| Accrued liabilities (including amounts due to related parties of $18,798 and $14,017 at March 31, 2024 and June 30, 2023, respectively) | 290,370 | 163,865 | |||||||||
| Income taxes payable | 20,021 | 129,166 | |||||||||
| Lines of credit and current portion of term loans | 81,566 | 170,123 | |||||||||
| Deferred revenue | 233,293 | 134,667 | |||||||||
| Total current liabilities | 1,717,695 | 1,374,652 | |||||||||
| Deferred revenue, non-current | 203,198 | 169,781 | |||||||||
| Term loans | 85,646 | 120,179 | |||||||||
| Convertible notes | 1,696,255 | — | |||||||||
| Other long-term liabilities | 65,831 | 37,947 | |||||||||
| Total liabilities | 3,768,625 | 1,702,559 | |||||||||
| Commitments and contingencies (Note 12) | |||||||||||
| Stockholders’ equity: | |||||||||||
| Common stock and additional paid-in capital, $0.001 par value | |||||||||||
| Authorized shares: 100,000; Issued and outstanding shares: 58,552 and 52,901 at March 31, 2024 and June 30, 2023, respectively | 2,805,008 | 538,352 | |||||||||
| Accumulated other comprehensive income | 549 | 639 | |||||||||
| Retained earnings | 2,288,436 | 1,433,014 | |||||||||
| Total Super Micro Computer, Inc. stockholders’ equity | 5,093,993 | 1,972,005 | |||||||||
| Noncontrolling interest | 163 | 165 | |||||||||
| Total stockholders’ equity | 5,094,156 | 1,972,170 | |||||||||
| Total liabilities and stockholders’ equity | $ | 8,862,781 | $ | 3,674,729 |
See accompanying notes to condensed consolidated financial statements.
SMCI | Q3 2024 Form 10-Q | 1
SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
| Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net sales (including related party sales of $25,804 and $9,188 in the three months ended March 31, 2024 and 2023, respectively, and $58,980 and $54,316 in the nine months ended March 31, 2024 and 2023, respectively) | $ | 3,850,066 | $ | 1,283,296 | $ | 9,634,662 | $ | 4,938,621 | |||||||||||||||
| Cost of sales (including related party purchases of $130,397 and $87,732 in the three months ended March 31, 2024 and 2023, respectively, and $355,948 and $283,010 in the nine months ended March 31, 2024 and 2023, respectively) | 3,252,698 | 1,056,937 | 8,119,281 | 4,027,305 | |||||||||||||||||||
| Gross profit | 597,368 | 226,359 | 1,515,381 | 911,316 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 116,226 | 77,515 | 336,077 | 222,458 | |||||||||||||||||||
| Sales and marketing | 49,691 | 25,312 | 133,775 | 83,120 | |||||||||||||||||||
| General and administrative | 53,137 | 24,450 | 123,241 | 71,351 | |||||||||||||||||||
| Total operating expenses | 219,054 | 127,277 | 593,093 | 376,929 | |||||||||||||||||||
| Income from operations | 378,314 | 99,082 | 922,288 | 534,387 | |||||||||||||||||||
| Other income (expense), net | 10,035 | (78) | 8,762 | 1,641 | |||||||||||||||||||
| Interest expense | (6,246) | (1,288) | (16,240) | (6,982) | |||||||||||||||||||
| Income before income tax provision | 382,103 | 97,716 | 914,810 | 529,046 | |||||||||||||||||||
| Income tax benefit (provision) | 19,983 | (10,857) | (61,735) | (79,364) | |||||||||||||||||||
| Share of income (loss) from equity investee, net of taxes | 373 | (1,013) | 2,347 | (3,253) | |||||||||||||||||||
| Net income | $ | 402,459 | $ | 85,846 | $ | 855,422 | $ | 446,429 | |||||||||||||||
| Net income per common share: | |||||||||||||||||||||||
| Basic | $ | 7.13 | $ | 1.61 | $ | 15.68 | $ | 8.42 | |||||||||||||||
| Diluted | $ | 6.56 | $ | 1.53 | $ | 14.53 | $ | 8.00 | |||||||||||||||
| Weighted-average shares used in the calculation of net income per common share: | |||||||||||||||||||||||
| Basic | 56,478 | 53,280 | 54,562 | 53,011 | |||||||||||||||||||
| Diluted | 61,431 | 56,233 | 58,889 | 55,796 | |||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
SMCI | Q3 2024 Form 10-Q | 2
SUPER MICRO COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
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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,” “probable of achievement,” 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, 2023 (the “2023 10-K”), which includes our condensed consolidated financial statements for the fiscal years ended June 30, 2023 and 2022.
Overview
We are a Silicon Valley-based provider of accelerated compute platforms that are comprised of application-optimized high performance and high-efficiency server and storage systems for a variety of markets, including enterprise data centers, cloud computing, artificial intelligence (“AI”), 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. In order to increase our sales and profits, we believe that we must continue to develop customized and application optimized server and storage solutions and be among the first to market with new features and products. We continue to expand our software, customer service and support offerings, as we increasingly focus on larger enterprise customers. 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, GPU 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, accelerators and storage technologies, and as a result, we monitor the product introduction cycles of Intel Corporation, NVIDIA 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 | Q3 2024 Form 10-Q | 33
Financial Highlights
The following is a summary of our financial highlights of the third quarter of fiscal year 2024:
-
Net sales increased by 200.0% in the three months ended March 31, 2024 as compared to the three months ended March 31, 2023.
-
Gross margin decreased to 15.5% in the three months ended March 31, 2024 from 17.6% in the three months ended March 31, 2023.
-
Operating expenses increased by 72.1% as compared to the three months ended March 31, 2023 and were equal to 5.6% and 9.9% of net sales in the three months ended March 31, 2024 and 2023, respectively.
-
Effective tax rate decreased to (5.2%) in the three months ended March 31, 2024 from 11.1% in the three months ended March 31, 2023.
-
Issued $1,695.8 million of convertible notes and issued 2,000,000 common shares for $1,731.5 million to fund the growth of our business.
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 on an on-going basis based on a) historical experience and b) assumptions we believe to be reasonable under the circumstances and are not readily apparent from other sources, the results of which form the basis for making judgments about the carrying values of assets and liabilities. 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 2023 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 | Q3 2024 Form 10-Q | 34
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 March 31, | Nine Months Ended March 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||
| Cost of sales | 84.5 | % | 82.4 | % | 84.3 | % | 81.5 | % | |||||||||||||||
| Gross profit | 15.5 | % | 17.6 | % | 15.7 | % | 18.5 | % | |||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 2.9 | % | 6.0 | % | 3.4 | % | 4.5 | % | |||||||||||||||
| Sales and marketing | 1.3 | % | 2.0 | % | 1.4 | % | 1.7 | % | |||||||||||||||
| General and administrative | 1.4 | % | 1.9 | % | 1.3 | % | 1.5 | % | |||||||||||||||
| Total operating expenses | 5.6 | % | 9.9 | % | 6.1 | % | 7.7 | % | |||||||||||||||
| Income from operations | 9.9 | % | 7.7 | % | 9.6 | % | 10.8 | % | |||||||||||||||
| Other income, net | 0.3 | % | — | % | 0.1 | % | — | % | |||||||||||||||
| Interest expense | (0.2) | % | (0.1) | % | (0.2) | % | (0.1) | % | |||||||||||||||
| Income before income tax provision | 10.0 | % | 7.6 | % | 9.5 | % | 10.7 | % | |||||||||||||||
| Income tax benefit (provision) | 0.5 | % | (0.8) | % | (0.6) | % | (1.6) | % | |||||||||||||||
| Share of income (loss) from equity investee, net of taxes | 0.0 | % | (0.1) | % | 0.0 | % | (0.1) | % | |||||||||||||||
| Net income | 10.5 | % | 6.7 | % | 8.9 | % | 9.0 | % |
Net Sales
Net sales consist of sales of our server and storage solutions, including systems and related services and subsystems and accessories. The prices for our server and storage systems range widely depending upon the configuration, as well as the level of integration of key components such as CPUs, GPUs, 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.
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 CPUs, GPUs, SSDs and memory.
The following table presents net sales by product type for the three and nine months ended March 31, 2024 and 2023 (dollars in millions):
| Three Months Ended March 31, | Change | Nine Months Ended March 31, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Server and storage systems | $ | 3,698.5 | $ | 1,163.7 | $ | 2,534.8 | 217.8 | % | $ | 9,100.7 | $ | 4,537.7 | $ | 4,563.0 | 100.6 | % | |||||||||||||||||||||||||||||||
| Percentage of total net sales | 96.1 | % | 90.7 | % | 94.5 | % | 91.9 | % | |||||||||||||||||||||||||||||||||||||||
| Subsystems and accessories | $ | 151.6 | $ | 119.6 | $ | 32.0 | 26.8 | % | $ | 534.0 | $ | 400.9 | $ | 133.1 | 33.2 | % | |||||||||||||||||||||||||||||||
| Percentage of total net sales | 3.9 | % | 9.3 | % | 5.5 | % | 8.1 | % | |||||||||||||||||||||||||||||||||||||||
| Total net sales | $ | 3,850.1 | $ | 1,283.3 | $ | 2,566.8 | 200.0 | % | $ | 9,634.7 | $ | 4,938.6 | $ | 4,696.1 | 95.1 | % |
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.
SMCI | Q3 2024 Form 10-Q | 35
Comparison of Three Months Ended March 31, 2024 and 2023
The period-over-period increase in net sales of our server and storage systems was primarily driven by an increase in the demand from customers for GPU servers, high performance computing (“HPC"), and rack-scale solutions which are generally more complex and of higher value, resulting in an increase of average selling price ("ASP"). We expect net sales and ASPs to continue to increase in the near future, particularly in the United States and Asia, as demand from customers for these solutions continue to increase as a result of adoption of more advanced technologies including but not limited to liquid cooling solutions.
The period-over-period increase in net sales for our subsystems and accessories is primarily due to increased demand of accessories sold to data center customers as more accessories and spares were purchased in conjunction with the strong sales of full systems and servers.
Comparison of Nine Months Ended March 31, 2024 and 2023
The period-over-period increase in net sales of our server and storage systems was primarily driven by an increase in the demand from customers for GPU servers, HPC, and rack-scale solutions which are generally more complex and of higher value, resulting in an increase of ASP. We expect net sales and ASPs to continue to increase in the near future, particularly in the United States and Asia, as demand from customers for these solutions continue to increase as a result of adoption of more advanced technologies including but not limited to liquid cooling solutions.
The period-over-period increase in net sales for our subsystems and accessories is primarily due to increased demand of accessories sold to data center customers as more accessories and spares were purchased in conjunction with the strong sales of full systems and servers.
The following table presents net sales by geographic region for the three and nine months ended March 31, 2024 and 2023 (dollars in millions):
| Three Months Ended March 31, | Change | Change | Nine Months Ended March 31, | Change | Change | ||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| United States | $ | 2,685.2 | $ | 785.5 | $ | 1,899.7 | 241.8 | % | $ | 6,910.3 | $ | 3,172.5 | $ | 3,737.8 | 117.8 | % | |||||||||||||||||||||||||||||||
| Percentage of total net sales | 69.7 | % | 61.2 | % | 71.7 | % | 64.2 | % | |||||||||||||||||||||||||||||||||||||||
| Asia | $ | 764.6 | $ | 214.4 | $ | 550.2 | 256.6 | % | $ | 1,646.3 | $ | 815.1 | $ | 831.2 | 102.0 | % | |||||||||||||||||||||||||||||||
| Percentage of total net sales | 19.9 | % | 16.7 | % | 17.1 | % | 16.5 | % | |||||||||||||||||||||||||||||||||||||||
| Europe | $ | 297.7 | $ | 228.5 | $ | 69.2 | 30.3 | % | $ | 777.0 | $ | 776.1 | $ | 0.9 | 0.1 | % | |||||||||||||||||||||||||||||||
| Percentage of total net sales | 7.7 | % | 17.8 | % | 8.1 | % | 15.7 | % | |||||||||||||||||||||||||||||||||||||||
| Others | $ | 102.6 | $ | 54.9 | $ | 47.7 | 86.9 | % | $ | 301.1 | $ | 174.9 | $ | 126.2 | 72.2 | % | |||||||||||||||||||||||||||||||
| Percentage of total net sales | 2.7 | % | 4.3 | % | 3.1 | % | 3.6 | % | |||||||||||||||||||||||||||||||||||||||
| Total net sales | $ | 3,850.1 | $ | 1,283.3 | $ | 9,634.7 | $ | 4,938.6 |
Comparison of Three Months Ended March 31, 2024 and 2023
The period-over-period increase in overall net sales is driven by an increase in demand from customers for GPU servers, HPC, and rack-scale solutions which have higher ASPs, especially for large enterprise and data center customers from the United States and Asia sales where they have experienced significant growth. The period-over-period increase of net sales in Asia, Europe and other regions is mainly due to an increase in net sales in Singapore, Taiwan, Germany and South Africa.
Customer A accounted for 21.2% and customer B accounted for 16.8% of the net sales for the three months ended March 31, 2024. Customer A accounted for 10.7% of the net sales for the three months ended March 31, 2023. We expect to continue to have customers exceeding 10% of net sales in future quarters.
Comparison of Nine Months Ended March 31, 2024 and 2023
SMCI | Q3 2024 Form 10-Q | 36
The period-over-period increase in overall net sales is driven by an increase in demand from customers for GPU servers, HPC and rack-scale solutions which have higher ASPs, especially for large enterprise and data center customers from the United States. The period-over-period increase of net sales in Asia and other regions is mainly due to an increase in net sales in Taiwan, Singapore, Canada and South Africa.
Customer A accounted for 23.7% of the net sales for the nine months ended March 31, 2024. Customer C accounted for 11.8% of the net sales for the nine months ended March 31, 2023. We expect to continue to have customers exceeding 10% of net sales in future quarters.
Cost of Sales and Gross Margin
Cost of sales primarily consists of the costs to manufacture our products, which includes: the costs of materials, contract manufacturing, shipping, personnel expenses (salaries, benefits, stock-based compensation and incentive bonuses), equipment and facility expenses, warranty costs and inventory reserve charges. The primary factors that impact our cost of sales are the mix of products sold, changes in the cost of components, changes in logistic costs, changes in salary and benefits and overhead costs related to production as well as economies of scale gained from higher production volume in our facilities. Cost of sales as a percentage of net sales may increase or decrease over time if the changes in our costs are not matched by corresponding changes in our ASPs. Our cost of sales as a percentage of net sales is also impacted by the timing and extent to which we add to, and are able to efficiently utilize, our manufacturing capacity. Because we generally do not have long-term fixed supply agreements, our cost of sales is subject to frequent change based on the availability of materials and other market conditions. We expect inventory levels to continue to increase to support the future growth of our business. Certain materials used in the manufacturing of our products are available from a limited number of suppliers and we expect that this trend will continue in the future.
We use several suppliers and contract manufacturers to design and manufacture subsystems in accordance with our specifications, with most final assembly and testing generally 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 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 certain components, particularly power supplies.
Cost of sales and gross margin for the three and nine months ended March 31, 2024 and 2023 are as follows (dollars in millions):
| Three Months Ended March 31, | Change | Nine Months Ended March 31, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Cost of sales | $ | 3,252.7 | $ | 1,056.9 | $ | 2,195.8 | 207.8 | % | $ | 8,119.3 | $ | 4,027.3 | $ | 4,092.0 | 101.6 | % | |||||||||||||||||||||||||||||||
| Gross profit | $ | 597.4 | $ | 226.4 | $ | 371.0 | 163.9 | % | $ | 1,515.4 | $ | 911.3 | $ | 604.1 | 66.3 | % | |||||||||||||||||||||||||||||||
| Gross margin | 15.5 | % | 17.6 | % | (2.1) | % | 15.7 | % | 18.5 | % | (2.8) | % |
Comparison of Three Months Ended March 31, 2024 and 2023
The period-over-period increase in cost of sales was primarily attributed to an increase of $2,172.7 million in costs of materials and contract manufacturing expenses primarily related to the increase in net sales volume, $9.4 million increase in inventory reserve charges, a $8.5 million increase in overhead cost and a $5.2 million increase in freight costs.
The period-over-period decrease in the gross margin percentage was primarily due to competitive pricing to win new design wins, product and customer mix, partially offset by higher efficiency in manufacturing operational costs.
Comparison of Nine Months Ended March 31, 2024 and 2023
The period-over-period increase in cost of sales was primarily attributed to an increase of $4,090.5 million in costs of materials and contract manufacturing expenses primarily related to the increase in net sales volume, a $10.1 million increase in overhead costs partially offset by a $5.3 million decrease in freight costs due to an improved supply chain and a $3.3 million decrease in inventory reserve charges.
The period-over-period decrease in the gross margin percentage was primarily due to competitive pricing to win new design wins, product and customer mix, partially offset by higher efficiency in manufacturing operational costs.
SMCI | Q3 2024 Form 10-Q | 37
Operating Expenses
Research and development expenses consist of personnel expenses including salaries, benefits, stock-based compensation and incentive bonuses 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 reimbursed costs 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 for our sales and marketing personnel, cost for trade shows, 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 reimbursed costs 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.
General and administrative expenses consist primarily of general corporate costs, including personnel expenses such as salaries, benefits, stock-based compensation and incentive bonuses 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 and nine months ended March 31, 2024 and 2023 are as follows (dollars in millions):
| Three Months Ended March 31, | Change | Nine Months Ended March 31, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Research and development | $ | 116.2 | $ | 77.5 | $ | 38.7 | 49.9 | % | $ | 336.1 | $ | 222.4 | $ | 113.7 | 51.1 | % | |||||||||||||||||||||||||||||||
| Percentage of total net sales | 2.9 | % | 6.0 | % | 3.4 | % | 4.5 | % | |||||||||||||||||||||||||||||||||||||||
| Sales and marketing | $ | 49.7 | $ | 25.3 | $ | 24.4 | 96.4 | % | $ | 133.8 | $ | 83.1 | $ | 50.7 | 61.0 | % | |||||||||||||||||||||||||||||||
| Percentage of total net sales | 1.3 | % | 2.0 | % | 1.4 | % | 1.7 | % | |||||||||||||||||||||||||||||||||||||||
| General and administrative | $ | 53.1 | $ | 24.5 | $ | 28.6 | 116.7 | % | $ | 123.2 | $ | 71.4 | $ | 51.8 | 72.5 | % | |||||||||||||||||||||||||||||||
| Percentage of total net sales | 1.4 | % | 1.9 | % | 1.3 | % | 1.3 | % | |||||||||||||||||||||||||||||||||||||||
| Total operating expenses | $ | 219.1 | $ | 127.3 | $ | 91.8 | 72.1 | % | $ | 593.1 | $ | 376.9 | $ | 216.2 | 57.4 | % | |||||||||||||||||||||||||||||||
| Percentage of total net sales | 5.6 | % | 9.9 | % | 6.1 | % | 7.6 | % |
SMCI | Q3 2024 Form 10-Q | 38
Comparison of Three Months Ended March 31, 2024 and 2023
Research and development expenses. The period-over-period increase in research and development expenses was driven by a $36.2 million increase in employee related costs primarily due to stock-based compensation increases of $16.8 million, salary increases and higher headcount as we expanded our workforce and invested in key talent, a $3.6 million increase in product development costs to support the development of next generation products and technologies offset by a $1.1 million increase in research and development credits received from certain suppliers and customers. We believe that research and development expenses will continue to increase as we continue to expand our workforce and invest in key talent to stay at the forefront of development of next generation products and technologies.
Sales and marketing expenses. The period-over-period increase in sales and marketing expenses was driven by a $19.5 million increase in employee related costs primarily due to stock-based compensation increases of $3.8 million, salary increases and higher headcount as we expanded our workforce and invested in key talent, a $6.1 million increase in advertising and other expenses and a $1.2 million decrease in marketing development funds received. We believe that sales and marketing expenses will continue to increase as we continue to expand our workforce and invest in key talent.
General and administrative expenses. The period-over-period increase in general and administrative expenses was driven by a $23.2 million increase in employee related costs primarily due to stock-based compensation increases of $19.9 million, salary increases and higher headcount as we expanded our workforce and invested in key talent and a $5.4 million increase in professional and service fees and other expenses. We believe that general and administrative expenses will continue to increase as we continue to expand our workforce and invest in key talent.
Comparison of Nine Months Ended March 31, 2024 and 2023
Research and development expenses. The period-over-period increase in research and development expenses was driven by a $108.8 million increase in employee related costs primarily due to stock-based compensation increases of $62.5 million, salary increases and higher headcount as we expanded our workforce and invested in key talent, a $5.5 million increase in product development costs to support the development of next generation products and technologies offset by a $0.6 million increase in research and development credits received from certain suppliers and customers. We believe that research and development expenses will continue to increase as we continue to expand our workforce and invest in key talent to stay at the forefront of development of next generation products and technologies.
Sales and marketing expenses. The period-over-period increase in sales and marketing expenses was driven by a $43.5 million increase in employee related costs primarily due to stock-based compensation increases of $11.5 million, salary increases and higher headcount as we expanded our workforce and invested in key talent, a $9.6 million increase in advertising and other expenses and a $2.4 million decrease in marketing development funds received. We believe that sales and marketing expenses will continue to increase as we continue to expand our workforce and invest in key talent.
General and administrative expenses. The period-over-period increase in general and administrative expenses was driven by a $39.6 million increase in employee related costs primarily due to stock-based compensation increases of $31.8 million, salary increases and higher headcount as we expanded our workforce and invested in key talent and a $12.2 million increase in professional and service fees and other expenses. We believe that general and administrative expenses will continue to increase as we continue to expand our workforce and invest in key talent.
Interest Expense and Other Income (Expense), 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.
SMCI | Q3 2024 Form 10-Q | 39
Interest expense and other income, net for the three and nine months ended March 31, 2024 and 2023 are as follows (dollars in millions):
| Three Months Ended March 31, | Change | Nine Months Ended March 31, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Other income (expense), net | $ | 10.0 | $ | (0.1) | $ | 10.1 | (10,100) | % | $ | 8.8 | $ | 1.6 | $ | 7.2 | 450.0 | % | |||||||||||||||||||||||||||||||
| Interest expense | (6.2) | (1.3) | (4.9) | 376.9 | % | (16.2) | (6.9) | (9.3) | 134.8 | % | |||||||||||||||||||||||||||||||||||||
| Interest expense and other income (expense), net | $ | 3.8 | $ | (1.4) | $ | 5.2 | (371.4) | % | $ | (7.4) | $ | (5.3) | $ | (2.1) | 39.6 | % |
Comparison of Three Months Ended March 31, 2024 and 2023
The increase of $5.2 million in interest expense and other income (expense), net was primarily attributable to a $10.1 million increase in other income (expense) driven by an increase in foreign currency exchange gain of $7.7 million due to a strong US dollar, and an increase of $3.9 million in interest income, offset by $1.5 million investment loss in marketable securities and a $4.9 million higher interest expense due to higher borrowing during the period.
Comparison of Nine Months Ended March 31, 2024 and 2023
The decrease of $2.1 million in interest expense and other income (expense), net was primarily attributable to a $9.3 million increase in interest expense due to higher borrowing during the period, offset by a $7.2 million increase in interest income and other income (expense) driven by an increase of $6.9 million in interest income and other income, an increase in foreign currency exchange gain of $4.4 million due to a strong US dollar, offset by $4.1 million investment loss in marketable securities.
Income Tax (Benefit) Provision
Our income tax (benefit) 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.
Income tax (benefit) provision for income taxes and effective tax rates for the three and nine months ended March 31, 2024 and 2023 are as follows (dollars in millions):
| Three Months Ended March 31, | Change | Nine Months Ended March 31, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Income tax (benefit) provision | $ | (20.0) | $ | 10.9 | $ | (30.9) | (283.5) | % | $ | 61.7 | $ | 79.4 | $ | (17.7) | (22.3) | % | |||||||||||||||||||||||||||||||
| Percentage of total net sales | (0.5) | % | 0.8 | % | 0.6 | % | 1.6 | % | |||||||||||||||||||||||||||||||||||||||
| Effective tax rate | (5.2) | % | 11.1 | % | 6.7 | % | 15.0 | % |
Comparison of Three Months Ended March 31, 2024 and 2023
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 effective tax rate for the three months ended March 31, 2024, is lower than that for the three months ended March 31, 2023, primarily due to the significant increase in stock-based compensation tax deduction, and research and development tax credits.
Comparison of Nine Months Ended March 31, 2024 and 2023
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 effective tax rate for the nine months ended March 31, 2024, is lower than that for the nine months ended March 31, 2023, primarily due to the significant increase in stock-based compensation tax deduction, and research and development tax credits.
SMCI | Q3 2024 Form 10-Q | 40
Share of Income (Loss) from Equity Investee, Net of Taxes
Share of income (loss) from equity investee, net of taxes represents our share of income (loss) from the Corporate Venture in which we have 30% ownership.
Share of income (loss) from equity investee, net of taxes for the three and nine months ended March 31, 2024 and 2023 are as follows (dollars in millions):
| Three Months Ended March 31, | Change | Nine Months Ended March 31, | Change | ||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | ||||||||||||||||||||||||||||||||||||||||
| Share of income (loss) from equity investee, net of taxes | $ | 0.4 | $ | (1.0) | $ | 1.4 | n/m (1) | $ | 2.3 | $ | (3.3) | $ | 5.6 | n/m (1) | |||||||||||||||||||||||||||||||||
| Percentage of total net sales | — | % | (0.1) | % | — | % | (0.1) | % |
(1) n/m - Not meaningful
Comparison of Three Months Ended March 31, 2024 and 2023
The period-over-period increase of $1.4 million in share of income from equity investee, net of taxes was primarily due to improvement in profitability of the Corporate Venture.
Comparison of Nine Months Ended March 31, 2024 and 2023
The period-over-period increase of $5.6 million in share of income from equity investee, net of taxes was primarily due to improvement in profitability of the Corporate Venture.
Liquidity and Capital Resources
We have financed our growth primarily with funds generated from operations, in addition to utilizing borrowing facilities and selling our common stock. Our recent drivers of liquidity changes have included an increase in the need for working capital due to higher levels of inventory required by growing revenues and to a lesser extent, longer supply chain lead times on certain key components. Our cash and cash equivalents were $2,115.5 million and $440.5 million as of March 31, 2024 and June 30, 2023, respectively. Our cash and cash equivalents in foreign locations were $262.1 million and $192.3 million as of March 31, 2024 and June 30, 2023, 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 filing of this Quarterly Report on Form 10-Q. We continue to evaluate financing options that may be required to support the growth of our business.
On December 5, 2023, we completed a public offering of 2,415,805 shares of the our common stock at $262.00 per share, with 2,315,105 shares sold by us and 100,700 shares sold by selling stockholders.
We received net proceeds of approximately $582.8 million, after deducting underwriting discounts and commissions and offering expenses payable by us. We did not receive any proceeds from the sale of the shares of common stock by the selling stockholders. We intend to utilize the proceeds to support our operations, including working capital needs, manufacturing capacity expansion and increased R&D investments.
SMCI | Q3 2024 Form 10-Q | 41
On February 16, 2024, our Taiwan subsidiary entered into a new general agreement for omnibus credit lines with CTBC Bank, which increased the aggregate total borrowings from time to time under the various individual credit arrangements with CTBC Bank from $105.0 million to $185.0 million. Our Taiwan subsidiary intends to use borrowings under the increased CTBC credit lines in connection with financing of eligible accounts receivable and accounts payable (vendor invoices).
On February 27, 2024, we issued $1,725.0 million aggregate principal amount of 0.00% Convertible Senior Notes due 2029 (the “Convertible Notes”) in a private offering. The Convertible Notes, which are our senior unsecured obligations, will mature on March 1, 2029. They may be repurchased, redeemed, or converted in accordance with their terms before that date. The Convertible Notes do not bear regular interest, and the principal amount of the Convertible Notes will not accrete. The net proceeds from the issuance of the Convertible Notes were $1,553.7 million, net of debt issuance costs of $29.2 million and the related capped call transactions of $142.1 million. The Convertible Notes and capped call transactions are discussed further in Part I, Item 1, Note 7, “Convertible Notes". As of March 31, 2024, none of the conditions permitting the holders of the Convertible Notes to convert their notes early had been met.
On March 22, 2024, we completed a public offering of 2,000,000 shares of our common stock at $875.00 per share. We received net proceeds of approximately $1.73 billion, after deducting underwriting discounts and commissions and offering expenses payable by us.
Our key cash flow metrics were as follows (dollars in millions):
| Nine Months Ended March 31, | Change | |||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||||
| Net cash (used in) provided by operating activities | $ | (1,844.2) | $ | 672.9 | $ | (2,517.1) | ||||||||||||||||||||
| Net cash used in investing activities | $ | (132.0) | $ | (28.6) | $ | (103.4) | ||||||||||||||||||||
| Net cash provided by (used in) financing activities | $ | 3,652.8 | $ | (547.3) | $ | 4,200.1 | ||||||||||||||||||||
| Net increase in cash, cash equivalents and restricted cash | $ | 1,675.0 | $ | 94.7 | $ | 1,580.3 |
Operating Activities
Net cash provided by operating activities decreased by $2,517.1 million for the nine months ended March 31, 2024 as compared to the nine months ended March 31, 2023. The decrease was primarily due to an increase in net cash required for net working capital of $2,978.8 million to manufacture products in order to meet customer demand and support expected business growth and a $62.2 million decrease in non-cash items. These decreases are partially offset by increase in net income of $409.0 million and stock-based compensation expense of $114.9 million. The key changes in net working capital of $2,978.8 million includes an increase in inventory of $2,652.8 million, and an increase in accounts receivable of $705.2 million offset by an increase in accounts payable of $318.7 million.
Investing Activities
Net cash used in investing activities increased by $103.4 million for the nine months ended March 31, 2024 as compared to the nine months ended March 31, 2023 primarily due to an increase in purchases of property, plant and equipment of $82.0 million made in the nine months ended March 31, 2024 and an increase in investments of $21.4 million in the nine months ended March 31, 2024. Increase in property, plant and equipment is primarily related to the acquisition of previously leased real estate in San Jose, California, for $80 million.
Financing Activities
Net cash provided by financing activities increased by $4,200.1 million for the nine months ended March 31, 2024 as compared to the nine months ended March 31, 2023. The increase was primarily due to proceeds of $2,314.0 million from our offerings of common stock, net of issuance costs, $1,695.8 million of proceeds from the sale of our Convertible Notes, net of debt issuance costs, an increase of $285.4 million in proceeds from borrowings, net of repayment, and stock repurchases of $146.5 million in the nine months ended March 31, 2023, offset by $142.1 million entering into capped call transactions related to our 2029 Convertible Notes and a higher withholding tax payment for equity compensation related activities of $99.5 million in the nine months ended March 31, 2024.
SMCI | Q3 2024 Form 10-Q | 42
Other Factors Affecting Liquidity and Capital Resources
Refer to Part I, Item 1, Note 6, “Lines of Credit and Term Loans,” in our notes to condensed consolidated financial statements in this Quarterly Report on Form 10-Q for further information on our outstanding bank debt.
Capital Expenditure Requirements
We anticipate our capital expenditures for the remainder of fiscal year 2024 will be in range of $55.0 million to $65.0 million, relating primarily to costs associated with our manufacturing capabilities, including tooling for new products, new information technology investments, and facilities upgrades and expansion. During the second quarter of fiscal year 2023, we entered into a letter of understanding to acquire land in Malaysia to expand our manufacturing operations. A definitive agreement to acquire such land, subject to various conditions, was subsequently executed in January 2023. We obtained early access to such land prior to the acquisition, and we anticipate additional capital expenditures for the remainder of fiscal year 2024 of $24.0 million (included in the above range) for such initiative. In addition, in February 2024, we consummated the purchase of real estate comprising approximately 19.72 acres of land and 293,906 square feet of buildings and improvements located in proximity to the Company’s headquarters space in San Jose, California “as is” for an aggregate purchase price of $80.0 million. We will also 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 2024 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 and investments in our office facilities and our IT system infrastructure.
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 | Q3 2024 Form 10-Q | 43
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 March 31, 2024, 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 1.3% to 7.5% at March 31, 2024 and 1.20% to 7.08% at June 30, 2023. Based on the outstanding principal indebtedness of $167.2 million under our credit facilities as of March 31, 2024, 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. Realized and unrealized foreign exchange gain for the three months ended March 31, 2024 was $6.5 million and realized and unrealized gain for the nine months ended March 31, 2024 was $4.1 million. Realized and unrealized foreign exchange loss for the three months ended March 31, 2023 was $1.2 million and realized and unrealized loss for the nine months ended March 31, 2023 was $0.4 million.
SMCI | Q3 2024 Form 10-Q | 44
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 March 31, 2024. 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 March 31, 2024.
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 March 31, 2024, 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 | Q3 2024 Form 10-Q | 45
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 “Legal proceedings and indemnifications” in Part I, Item 1, Note 12 “Commitments and Contingencies” of our notes to condensed consolidated financial statements included in this quarterly report.
Due to the inherent uncertainties of 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 2023 10-K. There have been no material changes in our risk factors as described in such documents, except as set forth below. The following supplemental risk factors are as a result of the offering of Convertible Note that we completed in February 2024.
Our indebtedness and liabilities could limit the cash flow available for our operations, expose us to risks that could adversely affect our business, financial condition and results of operations and impair our ability to satisfy our obligations under the notes.
As of March 31, 2024, we had approximately $3.8 million of consolidated indebtedness, including $1.725 million principal amount of additional indebtedness incurred in February 2024 as a result of our issuance of the Convertible Notes. We may also incur additional indebtedness to meet future financing needs. Our indebtedness could have significant negative consequences for our security holders and our business, results of operations and financial condition by, among other things:
–increasing our vulnerability to adverse economic and industry conditions;
–limiting our ability to obtain additional financing;
–requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, which will reduce the amount of cash available for other purposes
–limiting our flexibility to plan for, or react to, changes in our business;
–diluting the interests of our existing stockholders as a result of issuing shares of our common stock upon conversion of the Convertible Notes; and
–placing us at a possible competitive disadvantage with competitors that are less leveraged than us or have better access to capital.
Our business may not generate sufficient funds, and we may otherwise be unable to maintain sufficient cash reserves, to pay amounts due under our indebtedness, including the Convertible Notes, and our cash needs may increase in the future. In addition, our existing loan facilities from various banks, in particular our Bank of America credit facilities, contain, and any future indebtedness that we may incur may contain, financial and other restrictive covenants that limit our ability to operate our business, raise capital or make payments under our other indebtedness. If we fail to comply with these covenants or to make payments under our indebtedness when due, we would be in default under that indebtedness, which could, in turn, result in that and our other indebtedness becoming immediately payable in full.
We may be unable to raise the funds necessary to repurchase the Convertible Notes for cash following a fundamental change, or to pay any cash amounts due upon conversion, and our other indebtedness limits our ability to repurchase the Convertible Notes or pay cash upon their conversion.
Noteholders may require us to repurchase their Convertible Notes following a fundamental change (as defined in the indenture for such notes) at a cash repurchase price generally equal to the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid special and additional interest, if any. In addition, upon conversion, we will satisfy part or all of our conversion obligation in cash unless we elect to settle conversions solely in shares of our common stock. We may not have enough available cash or be able to obtain financing at the time we are required to repurchase the Convertible Notes or pay any cash amounts due upon conversion. In addition, applicable law, regulatory authorities and the agreements governing our other indebtedness may restrict our ability to repurchase the Convertible Notes or pay any cash amounts due upon conversion.
SMCI | Q3 2024 Form 10-Q | 46
Our failure to repurchase Convertible Notes or pay any cash amounts due upon conversion when required will constitute a default under the indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our other indebtedness, which may result in that other indebtedness becoming immediately payable in full. We may not have sufficient funds to satisfy all amounts due under the other indebtedness and the Convertible Notes.
Provisions in the indenture could delay or prevent an otherwise beneficial takeover of us.
Certain provisions in the Convertible Notes and the indenture could make a third-party attempt to acquire us more difficult or expensive. For example, if a takeover constitutes a fundamental change, then noteholders will have the right to require us to repurchase their Convertible Notes for cash. In addition, if a takeover constitutes a make-whole fundamental change (as defined in the indenture), then we may be required to temporarily increase the conversion rate. In either case, and in other cases, our obligations under the Convertible Notes and the indenture could increase the cost of acquiring us or otherwise discourage a third party from acquiring us or removing incumbent management, including in a transaction that noteholders or holders of our common stock may view as favorable.
The capped call transactions entered into in connection with the issuance of the Convertible Notes may affect our common stock.
In connection with the offering of the Convertible Notes, we entered into privately negotiated capped call transactions with the capped call counterparties. The capped call transactions are expected generally to reduce the potential dilution to our common stock upon any conversion of the Convertible Notes and/or offset any potential cash payments we are required to make in excess of the principal amount of converted Convertible Notes, as the case may be, with such reduction and/or offset subject to a cap. The capped call counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the Convertible Notes (and are likely to do so during any observation period related to a conversion of Convertible Notes or following any repurchase of the Convertible Notes by us to the extent we elect to unwind a corresponding portion of the capped call transactions in connection with such repurchase). This activity could also cause or avoid an increase or a decrease in the market price of our common stock.
In addition, if any capped call counterparties or their respective affiliates unwind their hedge positions with respect to our common stock, it could adversely affect the value of our common stock. We do not make any representation or prediction as to the direction or magnitude of any potential effect that the transactions described above may have on the price of our common stock. In addition, we do not make any representation that the capped call counterparties will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
We are subject to counterparty risk with respect to the capped call transactions, and the capped call transactions may not operate as planned.
The capped call counterparties are, or are affiliates of, financial institutions, and we will be subject to the risk that they might default under the capped call transactions. Our exposure to the credit risk of the capped call counterparties will not be secured by any collateral. Global economic conditions have from time to time resulted in the actual or perceived failure or financial difficulties of many financial institutions. If a capped call counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under our transactions with that capped call counterparty. Our exposure will depend on many factors, but, generally, the increase in our exposure will be correlated with increases in the market price or the volatility of our common stock. In addition, upon a default by a capped call counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of any capped call counterparty.
In addition, the capped call transactions are complex, and they may not operate as planned. For example, the terms of the capped call transactions may be subject to adjustment, modification or, in some cases, renegotiation if certain corporate or other transactions occur. Accordingly, these transactions may not operate as we intend if we are required to adjust their terms as a result of transactions in the future or upon unanticipated developments that may adversely affect the functioning of the capped call transactions.
Conversion of our Convertible Notes may dilute the ownership interest of existing stockholders or may otherwise depress the price of our common stock.
SMCI | Q3 2024 Form 10-Q | 47
Despite the entry into the capped call transactions, the conversion of some or all of the Convertible Notes, to the extent we deliver shares upon conversion, will dilute the ownership interests of existing stockholders. Any sales in the public market of the Convertible Notes or our common stock issuable upon conversion of the Convertible Notes could adversely affect prevailing market prices of our common stock. In addition, the existence of the Convertible Notes may encourage short selling by market participants because the conversion of the Convertible Notes could be used to satisfy short positions, or anticipated conversion of the Convertible Notes into shares of our common stock could depress the price of our common stock.
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 and nine months ended March 31, 2024, 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 was effective until January 31, 2024. We repurchased 1,553,350 shares of common stock for $150 million during the fiscal year ended June 30, 2023 under this program and had $50.0 million of remaining availability at the time the program expired on January 31, 2024.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Rule 10b5-1 Trading Plans
During the three months ended March 31, 2024, none of the Company’s executive officers or directors entered into trading plans pursuant to Rule 10b5-1(c) of the Securities Exchange Act of 1934, as amended, no pre-existing trading plans intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) were terminated or modified by the Company’s executive officers and directors, and no other written trading arrangements not intended to qualify for the Rule 10b5-1(c) affirmative defense were adopted, modified, or terminated by the Company’s executive officers and directors.
SMCI | Q3 2024 Form 10-Q | 48
Item 6. Exhibits
(a) Exhibits.
| Exhibit Number | Description | |||||||||||||
| 4.1 | Indenture, dated February 27, 2024 between Super Micro Computer, Inc. and U.S. Bank Trust Company, National Association, as trustee (Incorporated by reference to Exhibit 4.1 from the Company’s Current Report on 8-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on February 28, 2024) | |||||||||||||
| 4.2 | Form of Note, between Super Micro Computer, Inc. and U.S. Bank Trust Company, National Association, as trustee (included within Exhibit 4.1) | |||||||||||||
| 10.1 | General Agreement for Omnibus Credit Lines dated as of February 16, 2024 between Super Micro Computer, Inc. Taiwan and CTBC Bank Co., Ltd. (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 February 20, 2024) | |||||||||||||
| 10.2 | Summary of Short-Term Credit Facilities dated as of January 23, 2024 (Incorporated by reference to Exhibit 10.3 from the Company’s Current Report on Form 8-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on February 20, 2024) | |||||||||||||
| 10.3 | Seventh Amendment to Loan and Security Agreement, dated as of February 21, 2024, by and among the Company, as Borrower, the Lenders party thereto and Bank of America, N.A., as administrative agent for the Lenders. (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 February 22, 2024) | |||||||||||||
| 10.4 | Form of [Base][Additional]Capped Call Confirmation (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 February 28, 2024) | |||||||||||||
| 10.5 | Super Micro Computer, Inc. 2020 Equity and Incentive Compensation Plan, as further amended and restated, effective January 22, 2024 (Incorporated by reference to Exhibit 10.1 from the Company’s Current Report on Form 8-K (Commission File No. 001-33383) filed with the Securities and Exchange Commission on January 25, 2024) | |||||||||||||
| 10.6 | Purchase and Sale Agreement, dated as of January 26, 2024, between Caracol Property Owner LLC and Super Micro Computer, Inc. (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 February 1, 2024) | |||||||||||||
| 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 | Q3 2024 Form 10-Q | 49
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: | May 3, 2024 | /s/ CHARLES LIANG | |||||||||
| Charles Liang President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer) |
| Date: | May 3, 2024 | /s/ DAVID WEIGAND | |||||||||
| David Weigand Senior Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) |
SMCI | Q3 2024 Form 10-Q | 50