What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-03 compared with 2023-05-05 · 102 added, 140 removed, 141 unchanged (63% of the section changed)

8 unchanged sentences

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.

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 (“AI”), 5G and edge computing.

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.

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We commenced operations in 1993 and have been profitable every year since inception.

Our net income for the three months ended March 31, 2023 increased to $85.8 million from $77.0 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 also believe that we must continue to expand our software and customer service and support offerings, particularly as we increasingly focus on artificial intelligence/machine learning (“AI”/“ML”) applications and larger enterprise customers.

Additionally, we intend to continue to focus on developing our sales partners and distribution channels to further expand our market share.

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, central processing units (“CPU”) and graphics processing units (“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 microprocessor, GPU, memory 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.

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 2023 Form 10-Q | 33

Financial Highlights

The following is a summary of our financial highlights of the third quarter of fiscal year 2023:

• Net sales decreased by 5.3% in the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

• Gross margin increased to 17.6% in the three months ended March 31, 2023 from 15.5% in the three months ended March 31, 2022.

• Operating expense s increased by 5.2% as compared to the three months ended March 31, 2022 and were equal to 9.9% and 8.9% of net sales in the three months ended March 31, 2023 and 2022, respectively.

• Effective tax rate decreased to 11.1% in the three months ended March 31, 2023 from 17.4% in the three months ended March 31, 2022.

The following is a summary of our financial highlights of the first quarter of fiscal year 2024:

• Net sales increased by 14.4% in the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

• Gross margin de creased to 16.7% in the three months ended September 30, 2023 from 18.8% in the three months ended September 30, 2022.

• Operating expense s increased by 42.2% as compared to the three months ended September 30, 2022 and were equal to 8.5% and 6.9% of net sales in the three months ended September 30, 2023 and 2022, respectively.

• Effective tax rate decreased to 11.4% in the three months ended September 30, 2023 from 17.4% in the three months ended September 30, 2022 .

SMCI | Q1 2024 Form 10-Q | 27

Critical Accounting Policies and Estimates

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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.

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.

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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 2023 Form 10-Q | 34

Results of Operations

1 unchanged sentence

Three Months Ended

March 31, Nine Months Ended

2023 2022 2023 2022

September 30,

Net sales 100.0 % 100.0 %

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Research and development

6.0 % 5.2 % 4.5 % 5.7 %

Sales and marketing

2.0 % 1.6 % 1.7 % 1.9 %

General and administrative

1.9 % 2.0 % 1.5 % 2.1 %

Total operating expenses 8.5 % 6.9 %

4 unchanged sentences

Income tax provision (1.0) % (2.1) %

Share of income (loss) from equity investee, net of taxes (0.1) % — % (0.1) % — %

Share of loss from equity investee, net of taxes

Net income 7.4 % 10.0 %

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 systems and compute nodes sold and the average selling prices per system and node.

The number of nodes and systems shipped will vary each quarter depending on our customers specific server application or workload.

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 GPUs, SSDs and memory.

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.

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.

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 2024 Form 10-Q | 28

The following table presents net sales by product type for the three and nine months ended March 31, 2023 and 2022 (dollars in millions):

Three Months Ended March 31, Change Nine Months Ended March 31, Change

The following table presents net sales by product type for the three months ended September 30, 2023 and 2022 (dollars in millions):

Three Months Ended September 30, Change

2023 2022 $ %

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Subsystems and accessories are comprised of server-boards, chassis and accessories.

Comparison of Three Months Ended March 31, 2023 and 2022

The period-over-period increase in net sales of our server and storage systems was due to a 33.1% increase in the average selling price as a result of product mix such as demand for high-performance GPU based server and storage systems .

The period-over-period decrease in net sales for our subsystems and accessories of 42.9% was primarily due to the focus on allocating certain supply chain constrained components to build and ship server and storage systems rather than selling them as part of subsystems and accessories.

Comparison of Nine Months Ended March 31, 2023 and 2022

The period-over-period increase in net sales of our server and storage systems was due to both a 10.5% increase in the number of servers sold and a 38.9% increase in the average selling price.

The increase in the number of servers sold was primarily due to increased demand for our products, including GPU systems.

The period-over-period decrease in net sales for our subsystems and accessories of 30.7% was primarily due to the focus on allocating certain supply chain constrained components to build and ship server and storage systems rather than selling the constrained components as part of subsystems and accessories.

The following table presents net sales by geographic region for the three and nine months ended March 31, 2023 and 2022 (dollars in millions):

Three Months Ended March 31, Change Change Nine Months Ended March 31, Change Change

The period-over-period increase in net sales of our server and storage systems was primarily due to the strong demand from customers for GPU, 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").

The period-over-period increase in net sales for our subsystems and accessories of 10.1% 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 months ended September 30, 2023 and 2022 (dollars in millions):

Three Months Ended September 30, Change Change

2023 2022 $ %

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Total net sales $ 2,119.7 $ 1,852.1

The period-over-period increase in overall net sales is the result of higher ASP's, especially to large enterprise and data center customers.

United States sales experienced significant growth due to increased demand from data center customers for GPU, HPC, and rack-scale solutions.

The period-over-period decrease in Asia and Europe is mainly due to macro economic concerns and slower adoption of new product introductions, which has persisted in the three months ended September 30, 2023.

One customer accounted for 25.0% of the net sales for the three months ended September 30, 2023.

One customer accounted for 21.9% of the net sales for the three months ended September 30, 2022.

We had no customers with net sales over 10% for the year ended June 30, 2023, however, we expect to continue to have customers exceed 10% of net sales in future quarters.

SMCI | Q1 2024 Form 10-Q | 29

Comparison of Three Months Ended March 31, 2023 and 2022

The period-over-period decrease in overall net sales is primarily due to lower sales in Asia region, including China, Taiwan and Korea, partially offset by higher sales in the United States where the increase is primarily due to both high demand and the higher prices for our GPU based server and storage systems.

Net sales also increased in Europe, which is primarily driven by increased shipments to Germany, Netherlands, and UK.

Comparison of Nine Months Ended March 31, 2023 and 2022

The period-over-period increase in overall net sales is the result of increased selling prices led primarily by higher priced GPU based products and increased quantity of overall product shipments.

The increase in the United States is primarily due to higher sales driven by high demand for GPU based server and storage systems.

The increase of net sales in Europe was primarily due to increases in net sales in Netherlands, UK and Germany.

The decrease of net sales in Asia was primarily due to decreases in net sales in China, Taiwan and Korea partially offset by an increase in net sales in Singapore and Japan.

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 as well as efficiencies or leverage 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 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.

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 ASP's.

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 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 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 components, particularly power supplies.

Cost of sales and gross margin for the three and nine months ended March 31, 2023 and 2022 are as follows (dollars in millions):

Three Months Ended March 31, Change Nine Months Ended March 31, Change

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 months ended September 30, 2023 and 2022 are as follows (dollars in millions):

Three Months Ended September 30, Change

2023 2022 $ %

2 unchanged sentences

Gross margin 16.7 % 18.8 % (2.1) %

Comparison of Three Months Ended March 31, 2023 and 2022

The period-over-period decrease in cost of sales was primarily attributed to a decrease of $78.6 million in costs of materials, key component costs and contract manufacturing expenses, a $18.5 million decrease in freight costs, a $4.2 million decrease in inventory charges, all partially offset by a $13.5 million increase in overhead costs.

The period-over-period increase in the gross margin percentage was primarily due to a higher average selling price and a reduction in the cost of freight and certain key components.

These key components included memory, solid-state drives, motherboards and other components.

SMCI | Q3 2023 Form 10-Q | 37

Comparison of Nine Months Ended March 31, 2023 and 2022

The period-over-period increase in cost of sales was primarily attributed to an increase of $938.2 million in costs of materials and contract manufacturing expenses primarily related to the increase in net sales, a $55.0 million increase in overhead costs, a $17.8 million increase in inventory charges offset by a $31.7 million decrease in freight costs.

The period-over-period increase in the gross margin percentage was primarily due to a reduction in the cost of freight and certain key components as well as efficiencies or leverage gained from higher production volume in our facilities.

These key components included memory, hard disk drives, solid-state drives, motherboards and other components.

The period-over-period increase in cost of sales was primarily attributed to an increase of $279.4 million in costs of materials and contract manufacturing expenses primarily related to the increase in net sales volume, partially offset by a $11.0 million decrease in freight costs due to an improved supply chain, a $5.3 million decrease in inventory reserve charges and a $1.7 million decrease in overhead costs due to greater absorption of overhead in the ending inventory.

Certain materials used by us in the manufacturing of our products are available from a limited number of suppliers.

Shortages could occur in these materials due to an interruption of supply or increased demand in the industry.

The increase in concentration of total purchases from one of our suppliers to 55.1% of total purchases for the three months ended September 30, 2023 is as a result of the increase in the number of purchases of GPUs from such supplier to build our solutions for our customers.

We expect that this concentration in total purchases from this supplier will continue in the future.

The period-over-period decrease in the gross margin percentage was primarily due to product and customer mix, partially offset by an increase in capitalization of manufacturing overhead resulting from higher inventory level and mix, lower costs related to freight due to an improved supply chain, and inventory reserve charges.

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.

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.

1 unchanged sentence

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.

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

SMCI | Q1 2024 Form 10-Q | 30

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.

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, 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 and nine months ended March 31, 2023 and 2022 are as follows (dollars in millions):

Three Months Ended March 31, Change Nine Months Ended March 31, Change

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 months ended September 30, 2023 and 2022 are as follows (dollars in millions):

Three Months Ended September 30, Change

2023 2022 $ %

7 unchanged sentences

Percentage of total net sales 8.5 % 6.9 %

SMCI | Q3 2023 Form 10-Q | 38

Comparison of Three Months Ended March 31, 2023 and 2022

Research and development expenses.

The period-over-period increase in research and development expenses was due to a $11.4 million increase in personnel expenses primarily due to increase in headcount partially offset by a $3.4 million higher research and development credits provided from certain suppliers and customers for our development efforts and a $1.4 million decrease in product development costs.

Sales and marketing expenses.

The period-over-period increase in sales and marketing expenses was due to a $3.5 million increase in personnel expenses primarily due to an increase in headcount partially offset by a $0.6 million lower advertising and other expenses.

General and administrative expenses.

The period-over-period decrease in general and administrative expenses was primarily due to a $2.3 million decrease in legal and litigation settlement expenses and a decrease of $1.0 million in personnel related expenses and other expenses.

Comparison of Nine Months Ended March 31, 2023 and 2022

Research and development expenses.

The period-over-period increase in research and development expenses was due to a $31.7 million increase in personnel expenses primarily due to increase in headcount and equity awards offset by a $10.8 million higher research and development credits from certain suppliers and customers towards our development efforts.

The period-over-period increase in research and development expenses was primarily driven by a $39.1 million increase in compensation expenses due to salary increases, higher headcount and the cost of equity awards as we expanded our workforce and invested in key talent, and a $0.9 million increase in product development costs to support the development of next generation products and technologies, offset by a $3.2 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.

Sales and marketing expenses.

The period-over-period increase in sales and marketing expenses was primarily due to a $15.7 million increase in personnel expenses due to an increase in headcount and equity awards and an increase of a $1.5 million in advertising and other expenses.

The period-over-period increase in sales and marketing expenses was primarily driven by a $9.1 million increase in compensation expenses due to salary increases, higher headcount and the cost of equity awards offset by a $1.3 million decrease primarily due to an increase in marketing development funds to drive new sales opportunities for our products and customer support.

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 decrease in general and administrative expenses was primarily due to a $4.4 million decrease in legal and litigation settlement expenses partially offset by an increase of $0.5 million in personnel expenses and other expenses.

Interest Expense and Other (Expense) Income, Net

Other (expense) income, net consists primarily of interest earned on our investment and cash balances and foreign exchange gains and losses.

The period-over-period increase in general and administrative expenses was primarily due to a $8.5 million increase in compensation expenses associated with higher headcount and the cost of equity awards and a $0.6 million increase in professional and service fees.

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, 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 (expense) income, net for the three and nine months ended March 31, 2023 and 2022 are as follows (dollars in millions):

SMCI | Q1 2024 Form 10-Q | 31

Interest expense and other income, net for the three months ended September 30, 2023 and 2022 are as follows (dollars in millions):

Three Months Ended

March 31, Change Nine Months Ended

March 31, Change

September 30, Change

2023 2022 $ %

Other (expense) income, net $ (0.1) $ 4.7 $ (4.8) (102.1) % $ 1.6 $ 4.1 $ (2.5) (61.0) %

Other income, net

$ 6.6 $ 8.1 $ (1.5) (18.5) %

Interest expense (1.9) (3.9) 2.0 (51.3) %

Interest expense and other (expense) income, net $ (1.4) $ 3.2 $ (4.6) (143.8) % $ (5.3) $ 0.6 $ (5.9) (983.3) %

SMCI | Q3 2023 Form 10-Q | 39

Comparison of Three Months Ended March 31, 2023 and 2022

The change of $4.6 million in interest expense and other expense, net was primarily attributable to a $4.8 million increase in foreign exchange loss due to unfavorable currency fluctuations and a $0.2 million decrease in interest expense due to decrease in loan balances.

Comparison of Nine Months Ended March 31, 2023 and 2022

The change of $5.9 million in interest expense and other (expense) income, net was primarily attributable to a $2.5 million increase in foreign exchange loss due to unfavorable currency fluctuations and a $3.4 million increase in interest expense due to an increase in interest rates on outstanding balances.

Interest expense and other income, net

$ 4.7 $ 4.2 $ 0.5 11.9 %

The change of $0.5 million in interest expense and other income, net was primarily attributable to a $1.5 million decrease in other income driven by $2.7 million investment impairment and unrealized losses, offset by $1.2 million interest income and favorable foreign exchange gain.

The decrease in interest expense of $2.0 million was due to a decrease in outstanding loan balances.

Income Tax Provision

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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 and nine months ended March 31, 2023 and 2022 are as follows (dollars in millions):

Provision for income taxes and effective tax rates for the three months ended September 30, 2023 and 2022 are as follows (dollars in millions):

Three Months Ended

March 31, Change Nine Months Ended

March 31, Change

September 30, Change

2023 2022 $ %

2 unchanged sentences

Effective tax rate 11.4 % 17.4 %

Comparison of Three Months Ended March 31, 2023 and 2022

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, 2023, is lower than that for the three months ended March 31, 2022, primarily due to a significant increase in tax-deductible stock compensation expense in the three months ended March 31, 2023.

Comparison of Nine Months Ended March 31, 2023 and 2022

The income tax provision increased for the nine months ended March 31, 2023, compared to the nine months ended March 31, 2022, while the effective tax rate for the same period is lower than that of last year.

The primary reason for the higher income tax provision is the significant increase in income before tax for the nine months ended March 31, 2023, compared to the nine months ended March 31, 2022.

The income tax rate was lower due to higher deductible stock compensation expense for the nine months ended March 31, 2023 compared to the nine months ended March 31, 2022.

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.

SMCI | Q3 2023 Form 10-Q | 40

Share of (loss) income from equity investee, net of taxes for the three and nine months ended March 31, 2023 and 2022 are as follows (dollars in millions):

The effective tax rate for the three months ended September 30, 2023, is lower than that for the three months ended September 30, 2022, primarily due to a significant increase in tax-deductible stock compensation expense in the three months ended September 30, 2023.

Share of Loss from Equity Investee, Net of Taxes

Share of loss from equity investee, net of taxes represents our share of loss from the Corporate Venture in which we have 30% ownership.

Share of loss from equity investee, net of taxes for the three months ended September 30, 2023 and 2022 are as follows (dollars in millions):

Three Months Ended

March 31, Change Nine Months Ended

March 31, Change

September 30,

2023 2022 $ %

Share of (loss) income from equity investee, net of taxes $ (1.0) $ 0.3 $ (1.3) n/m (1)

Share of loss from equity investee, net of taxes

$ — $ (0.9) $ 0.9 n/m (1)

1 unchanged sentence

(1) n/m - Not meaningful

Comparison of Three Months Ended March 31, 2023 and 2022

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.

Comparison of Nine Months Ended March 31, 2023 and 2022

The period-over-period decrease of $4.2 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 2024 Form 10-Q | 32

The period-over-period decrease of $0.9 million in share of loss from equity investee, net of taxes was primarily due to a smaller net loss recognized by the Corporate Venture.

Liquidity and Capital Resources

We have financed our growth primarily with funds generated from increased profits from operations, in addition to utilizing borrowing facilities.

We draw on our credit facilities to fund working capital requirements due to the higher level of inventories and accounts receivable based on increasing sales as well as to finance the acquisition of property, plant and equipment.

We also receive funds from the exercise of employee stock options.

Our cash and cash equivalents were $362.8 million and $267.4 million as of March 31, 2023 and June 30, 2022, respectively.

Our cash in foreign locations was $210.7 million a nd $169.5 million as of March 31, 2023 and June 30, 2022, respectively.

We have financed our growth primarily with funds generated from operations, in addition to utilizing borrowing facilities.

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 $543.2 million and $440.5 million as of September 30, 2023 and June 30, 2023, respectively.

Our cash and cash equivalents in foreign locations was $263.2 million a nd $192.3 million as of September 30, 2023 and June 30, 2023, respectively.

Amounts held outside of the U.S.

8 unchanged sentences

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.

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 February 7, 2023, we also entered into a new Facility Letter (the “New Facility Letter”) with the Taiwan affiliate of HSBC Bank.

The New Facility Letter permits borrowings up to a combined aggregate limit of $50 million which may be comprised of borrowings under a New Taiwan Dollar revolving facility with a sub-limit of NTD300 million and an export/seller facility with a sub-limit of $50 million.

On September 28, 2023, our company through our Taiwan subsidiary, entered into a new agreement pursuant to which our Taiwan subsidiary and CTBC Bank agreed to a ggregate borrowings under all the New CTBC Credit Lines of up to $105.0 million .

We continue to evaluate financing options that may be required to support the growth of our business, if it occurs more rapidly than anticipated.

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.

We repurchased 1,553,350 shares of common stock for $150 million during the three months ended March 31, 2023 under this program and had $50.0 million of remaining availability as of March 31, 2023.

SMCI | Q3 2023 Form 10-Q | 41

We repurchased 1,553,350 shares of common stock for $150 million during the fiscal year ended June 30, 2023 under this program and have $50.0 million of remaining availability as of September 30, 2023.

Our key cash flow metrics were as follows (dollars in millions):

Nine Months Ended

March 31, Change

Net cash provided by (used in) operating activities $ 672.9 $ (415.7) $ 1,088.6

Three Months Ended

September 30, Change

Net cash provided by operating activities

$ 270.5 $ 313.6 $ (43.1)

Net cash used in investing activities

Net cash (used in) provided by financing activities $ (547.3) $ 466.4 $ (1,013.7)

Net increase in cash, cash equivalents and restricted cash $ 94.7 $ 15.1 $ 79.6

$ (7.6) $ (10.7) $ 3.1

Net cash used in financing activities

$ (159.9) $ (331.2) $ 171.3

Net increase (decrease) in cash, cash equivalents and restricted cash

$ 102.7 $ (29.8) $ 132.5

Operating Activities

Net cash provided by operating activities increased by $1,088.6 million for the nine months ended March 31, 2023 as compared to the nine months ended March 31, 2022.

The increase was primarily due to an increase in net income of $302.1 million, an increase of $383.0 million from the collection of accounts receivables from higher sales, an increase of $535.2 million related to lower levels of inventory needed from an improved supply chain, offset by a decrease of $101.7 million in other working capital items and a decrease of $30.0 million in various non-cash items in the nine months ended March 31, 2023.

Net cash provided by operating activities decreased by $43.1 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

The decrease was primarily due to higher cash used to purchase inventory by $416.8 million, a decrease in net income of $27.4 million, offset by an increase of $207.4 million from the collection of accounts receivables, an increase of $145.4 million from other working capital items, an increase of $46.4 million in stock based compensation expense and an increase of $1.9 million in various other non-cash items.

Investing Activities

Net cash used in investing activities decreased by $6.7 million for the nine months ended March 31, 2023 as compared to the nine months ended March 31, 2022 primarily due to decrease in purchases of property, plant and equipment in the nine months ended March 31, 2023.

Net cash used in investing activities decreased by $3.1 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 primarily due to a decrease of $8.1 million in purchases of property, plant and equipment offset by an investment of $5.0 million made in the three months ended September 30, 2023.

SMCI | Q1 2024 Form 10-Q | 33

Financing Activities

Net cash used in financing activities for the nine months ended March 31, 2023 was $547.3 million while net cash provided by financing activities for the nine months ended March 31, 2022 was $466.4 million.

The change in cash flows from financing activities of $1,013.7 million was primarily due to a decrease of $773.7 million in proceeds from borrowings, an increase of $89.7 million in repayment of debt and stock repurchases of $146.5 million.

Net cash used in financing activities was $171.3 million lower in the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 primarily due to a lower repayment of borrowings of $196.7 million, offset by a higher withholding tax payment for equity compensation related activities of $25.4 million in the three months ended September 30, 2023.

Other Factors Affecting Liquidity and Capital Resources

2 unchanged sentences

We anticipate our capital expenditures for the remainder of fiscal year 2024 will be in range of $102.0 million to $112.0 million, relating primarily to costs associated with our manufacturing capabilities, including tooling for new products, new information technology investments, and facilities upgrades.

We evaluated an expansion of our manufacturing into Malaysia, and during the second quarter of fiscal year 2023 entered into a letter of understanding to acquire land in Malaysia.

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 are obtaining early access to such land prior to acquisition, and we anticipate additional future capital expenditures for the remainder of fiscal year 2023 of $6 million (included in the above range) for such initiative.

We are obtaining early access to such land prior to the acquisition, and we anticipate additional capital expenditures for the remainder of fiscal year 2024 of $31.0 million (included in the above range) for such initiative.

In addition, we will continue to evaluate new business opportunities and new markets.

3 unchanged sentences

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.

SMCI | Q3 2023 Form 10-Q | 42

Recent Accounting Pronouncements

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis