01—Abstract
Summary
Summary of the 10-K filed August 31, 2020. Cited figures are marked; the original filing is the authoritative source.
Super Micro Computer, Inc. (Nasdaq: SMCI) filed its Form 10-K for the fiscal year ended June 30, 2020.
Net sales declined 4.6% to $3.34 billiona from $3.50 billion, while gross margin improved to 15.8% from 14.2% and net income rose to $84.3 million from $71.9 million. The improvement in net income was driven largely by a lower effective tax rate of 3.4%, compared with 16.6% in fiscal 2019. Server and storage systems sales fell 8.3% to $2.62 billion, while subsystems and accessories rose 12.0% to $718.5 million.
Indirect sales channel revenue grew 28.7% and now accounts for 53.1% of net sales, compared with 39.3% a year earlier. The filing discloses a material weakness in IT general controls, so management concluded that internal control over financial reporting was not effective as of June 30, 2020, and Deloitte issued an adverse opinion on internal control. The company recorded a $17.5 millionb accrual for its SEC settlement, which resolves the investigation into its accounting for fiscal years 2014 to 2017 and other matters.
Cash and cash equivalents fell to $210.5 millionc from $248.2 million, and operating cash flow was negative $30.3 million, primarily because inventories increased by $181.3 million. The company also disclosed pending securities class action litigation, with a motion to dismiss the further amended complaint scheduled for hearing on September 23, 2020.
In August 2020, the Board approved a share repurchase program of up to $30.0 milliond, effective until December 31, 2020. The filing also reports that the company's stock was relisted on the Nasdaq Global Select Market in January 2020 after a suspension and delisting that began in 2018.
02—Key points
Key Highlights
- Net sales were $3,339.3 million in fiscal 2020, down 4.6% from $3,500.4 million in fiscal 2019.
- Gross margin rose to 15.8% from 14.2%, primarily due to lower component prices and higher services and software revenue.
- Net income increased to $84.3 million from $71.9 million, helped by an effective tax rate of 3.4% versus 16.6% a year earlier.
- Indirect sales channel revenue rose 28.7% to $1,771.6 million and reached 53.1% of net sales, compared with 39.3% in fiscal 2019.
- Management and Deloitte concluded internal control over financial reporting was not effective due to a material weakness in IT general controls.
- A $17.5 million SEC civil penalty was accrued, resolving the investigation into the company's financial accounting for fiscal years 2014 to 2017.
- Operating cash flow was negative $30.3 million, mainly due to a $181.3 million increase in inventories, and cash fell to $210.5 million.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2020, Super Micro Computer kept $0.03.
- Revenue$3.34B100.0%
- Cost of revenue−$2.81B84.2%
- Gross profit$526.2M15.8%
- Operating costs−$440.6M13.2%
- Operating income$85.7M2.6%
- Interest, other & tax−$1.3M0.0%
- Net income$84.3M2.5%
Where FY2020 revenue went
$3.34B- Cost of revenue: $2.81B, 84% of revenue
- Net income: $84.3M, 2.5% of revenue
- R&D: $221.5M, 6.6% of revenue
- Other operating costs: $219.1M, 6.6% of revenue
Kept 2.5% as net incomeNet income $84.3M · 2.5%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2020filed August 31, 2020Financial Statements
FY2020 against FY2019
| Line item | FY2020FY2019 | Change |
|---|---|---|
| Revenue | $3.34B$3.50B | −4.6% |
| Cost of Revenue | $2.81B$3.00B | −6.4% |
| Gross Profit | $526.21M$495.52M | +6.2% |
| R&D Expenses | $221.48M$179.91M | +23.1% |
| Operating Expenses | $440.56M$398.29M | +10.6% |
| Operating Income | $85.65M$97.23M | −11.9% |
| Interest Expense | $2.24M$6.69M | −66.6% |
| Net Income | $84.31M$71.92M | +17.2% |
| EPS (Basic) | $1.65$1.44 | +14.6% |
| EPS (Diluted) | $1.60$1.39 | +15.1% |
| Shares Outstanding (Basic) | 50.99M49.92M | +2.1% |
| Shares Outstanding (Diluted) | 52.84M51.72M | +2.2% |
05—Questions
Frequently Asked Questions
How did Super Micro's revenue and profitability trend in fiscal 2020?
Net sales declined 4.6% to $3.34 billion, but gross margin improved to 15.8% from 14.2% and net income rose to $84.3 million from $71.9 million. The net income increase was largely attributable to a much lower effective tax rate of 3.4% compared with 16.6% in fiscal 2019.
What is the material weakness the company disclosed?
The company identified deficiencies in IT general controls that aggregated to a material weakness. These include broad user access to the primary accounting system without adequate monitoring, access control and change management deficiencies on other relevant systems, and internally developed systems that lack tracking capabilities. As a result, management and Deloitte concluded internal control over financial reporting was not effective as of June 30, 2020.
What are the main legal and regulatory matters affecting the company?
The company agreed to a cease-and-desist order with the SEC and a $17.5 million civil money penalty, which was accrued in fiscal 2020. The CEO agreed to reimburse $2,122,000 in profits from certain stock sales, recorded as a contingent gain. A securities class action filed in February 2018 remains pending, and the company's motion to dismiss the further amended complaint is scheduled for hearing on September 23, 2020.
Why did cash decline and what is the company doing with capital?
Cash and cash equivalents fell to $210.5 million from $248.2 million. Operating cash flow was negative $30.3 million, mainly because inventories rose by $181.3 million. The company invested $44.3 million in property and equipment, and financing activities provided $23.8 million, largely from stock option exercises. In August 2020, the Board approved a share repurchase program of up to $30.0 million running through December 31, 2020.
How concentrated are the company's customers and suppliers?
No single customer accounted for 10% or more of net sales in fiscal 2020, 2019 or 2018. One supplier accounted for 26.8% of total raw material purchases in fiscal 2020. Related parties Ablecom and Compuware together accounted for 10.1% of cost of sales, and the company's purchase commitments totaled $193.6 million, including $68.9 million to related parties.
06—Continue